Bridging the Gap Between Hotel Real Estate Owners and Brands: The Strategic Role of Advisors in HMA and Franchise Negotiations

In the hospitality industry, the success or failure of a hotel often hinges on decisions made long before the property opens its doors. These decisions are embedded in the Hotel Management Agreement (HMA) or Franchise Agreement—contracts that define the operational framework, financial structures, and strategic alignment between hotel real estate owners and brands. When these agreements are well-structured, they create a partnership that drives operational excellence and financial performance. However, when misaligned, they lead to underperforming assets, strained relationships, and sometimes, failed investments.

As the industry continues to evolve, the approach to HMA and Franchise negotiations must adapt as well. This article explores the strategic role that hospitality advisors play in bridging the gap between owners and brands to create lasting, value-driven partnerships.

Rethinking the Traditional HMA Model: From Rigid to Adaptive Agreements

Historically, Hotel Management Agreements (HMAs) followed a fairly standard model, particularly in the luxury segment. It was common for contracts to span 20 to 25 years, offering brands long-term stability to establish themselves and maintain operational consistency, without any capital exposure. However, as the industry evolves, owners are challenging this rigidity, seeking shorter terms — typically between 10 and 15 years — to provide more flexibility. Shorter contracts allow owners to evaluate the property’s performance against market conditions and, if necessary, switch brands or exit the agreement altogether. Furthermore, owners are looking for terms that ensure the Operator’s financial reward is aligned with their own to keep ‘skin in the game.’

At Stirling Hospitality Advisors, we have been able to align both sides’ goals to construct agreements that strike a balance between long-term stability for the brand and flexibility for the owner. Instead of locking both parties into an inflexible structure, we recommend tiered agreements with initial shorter terms, followed by options for renewal based on performance benchmarks. For instance, an initial 10-year contract may include options to extend for five or ten years, contingent on the property achieving specific Gross Operating Profit (GOP) or RevPAR metrics. This approach ensures that the brand remains committed to delivering financial returns while giving the owner the freedom to adjust their business model and positioning based on the property’s actual results.

Adaptive agreements also offer risk mitigation for both parties. If the property underperforms, owners can renegotiate terms without being tied to decades-long contracts. On the other hand, brands are incentivised to maintain high standards to secure contract renewals. This flexibility is increasingly crucial in a rapidly changing market.

The Hidden Costs of Misaligned Interests: Protecting Owners from Financial Risk

While the visible costs in HMA or Franchise negotiations — such as base management fees, incentive fees, and marketing fees — are typically well understood, there are often hidden costs when the interests of owners and brands are not fully aligned. These costs may not be apparent in the initial negotiations but can emerge over time, particularly in areas like operational decisions, CapEx planning, administrative or IT costs and marketing budgets.

For instance, a brand may prioritise its regional marketing strategy or portfolio expansion over the specific financial health of an individual property. This could lead to inflated marketing expenses that don’t generate sufficient local demand. Similarly, CapEx decisions driven by the brand’s need to maintain its global standards — such as significant renovations — can impose excessive costs on the owner, especially when these upgrades do not result in a proportional increase in asset value.

Hospitality advisors will identify these potential misalignments early in the negotiation process, ensuring that fee structures, operational strategies, and CapEx plans are mutually beneficial. They ensure the brand and operator outline all costs associated with opening and running the hotel giving the owner full visibility. Moreover, they protect the owner’s financial interests while ensuring that the brand has the resources needed to maintain its standards.

By addressing these hidden costs upfront, issues that could lead to conflict or financial strain down the line are prevented, ensuring that both parties are fully aligned on how the property will be managed and operated.

Performance-Based HMAs: Driving Accountability and Success

A major development in today’s hospitality market is the shift toward performance-based HMAs. Traditionally, performance clauses focused almost exclusively on financial metrics such as GOP or RevPAR. While these remain important, today’s agreements increasingly incorporate non-financial metrics such as guest satisfaction, sustainability goals, and brand reputation management. This broader scope reflects the growing complexity of hotel operations and the heightened expectations of modern travelers.

Furthermore, sustainability has become a critical consideration for both owners and brands. Many guests are now prioritising environmentally responsible properties, and performance clauses that link incentive fees to energy efficiency, waste reduction, or water conservation can drive meaningful improvements. By tying financial incentives to broader performance metrics, owners can ensure that brands are fully invested in the hotel’s overall success, not just its bottom line.

Fee Structures Overview: Key Terms in HMA and Franchise Negotiations

A well-structured fee arrangement aligns both owners and brands on performance goals. Understanding common terms is essential, though each project requires customization based on unique goals and market conditions.

• Base Management Fees: Typically, 1%-3% of total revenue for luxury hotels and 1.5%-2.5% for midscale/upscale properties. Fees often start at 2% and rise incrementally with property maturity.
• Incentive Fees: Based on Gross Operating Profit (GOP), these range from 8%-12% for luxury hotels and 6%-10% for midscale/upscale. Tiered structures are common, with percentages increasing as GOP targets are met (e.g., 5% at 25% GOP, 8% at 50%).
• Marketing Fees: Usually 1%-2% of total revenue to fund global and regional marketing efforts, with budgets tailored to the property’s market.
• Technical Service Fees: These cover pre-opening support, with higher fees for luxury properties. Negotiating upfront provides cost control and ensures adequate brand support in early stages.

Fees are estimates from Stirling’s internal data and may vary by project. Stirling Hospitality Advisors tailors each agreement to the property's specific operational and financial goals.

Bridging the Gap for Long-Term Success

In an industry as dynamic as hospitality, the way we approach HMA and Franchise negotiations must evolve. By helping owners and brands navigate this changing landscape by creating flexible, performance-driven agreements that align with both parties' long-term goals. By focusing on fee structures, operational control, and tailored solutions, we ensure that each agreement serves as a solid foundation for long-term success.

As the industry continues to develop, those who adapt their approach to HMA and Franchise negotiations will be best positioned to lead the way in building lasting, profitable relationships.