The Effect of Management Contract Terms on the Value of Hotels

The increasing pressure on hotels to maximize profits is forcing owners to focus more attention on the importance of property management. Management companies have responded to this need by negotiating more sophisticated contracts that call for both basic and incentive fees. Appraisers must be famil...

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Bibliographic Details
Published in:The Appraisal journal 1988-10, Vol.56 (4), p.482
Main Author: Hennessey, Sean F
Format: Article
Language:English
Subjects:
Cash flow statements
Contracts
Debt service
Effects
Fees
Fees & charges
Hotels & motels
Operating companies
Property management
Property values
Real estate appraisal
Techniques
Valuation
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Summary:The increasing pressure on hotels to maximize profits is forcing owners to focus more attention on the importance of property management. Management companies have responded to this need by negotiating more sophisticated contracts that call for both basic and incentive fees. Appraisers must be familiar with management contract terms because certain factors can influence property values. Current appraisal techniques either omit incentive management fees entirely or include them as fixed expenses. Neither of these methods warrants widespread application for full-service commercial hotels. A model is developed that uses the typical hotel cash flow statement and in which the normal lender requirements are applied to arrive at supportable debt service and a total loan amount. The property then can be valued by considering the payment of any incentive fees subordinate to debt service. This technique more closely reflects the owner's final return.
ISSN:0003-7087