Hotel Management Agreement Reporting and Performance Tests | Part 2

A smart hotel management agreement should do more than appoint a manager. It should create accountability, require useful reporting, establish performance standards, and give the owner practical termination rights when the manager does not meet agreed expectations.

In Part 2 of this hotel management agreement series, Randy Efron of Skylatus Property Capital explains how hotel owners can use reporting requirements, performance hurdles, and termination provisions to protect the asset while still giving the hotel manager room to operate.

This article is written for hotel owners, hospitality investors, and commercial real estate sponsors who want to understand how management agreements can influence property performance, lender confidence, and long-term real estate value.

Why Reporting Matters in a Hotel Management Agreement

A hotel does not generate revenue the same way a leased commercial property does. A hotel depends on daily operating performance, room demand, pricing decisions, labor management, food and beverage execution, group business, banquet activity, guest experience, brand standards, and expense control.

Because of that, hotel owners need regular visibility into what is happening at the property. A smart hotel management agreement should require the hotel management company to provide written reports to the owner at predetermined time periods.

Randy explains that when he was managing hotels, he required written reports every month. Those reports created a formal evaluation cycle. The manager knew performance was being reviewed, and the owner had the information needed to contribute strategically instead of reacting too late.

What Should Be Included in the Monthly Reporting Package?

The monthly reporting package should give the owner a clear picture of financial performance, operating trends, sales activity, market positioning, and capital spending.

Based on Randy’s hotel asset management experience, a strong monthly reporting package may include:

• An income statement showing monthly and year-to-date actual results versus budget and reforecast
• Smith Travel Research, or STR, reports
• General manager commentary
• Group pace reports
• Banquet pace reports
• Food and beverage statistics
• Segmentation reports
• Capital expenditure updates
• Other property-specific reports that help the owner understand performance

These reports should not be treated as paperwork for the file. They should help the owner and manager identify what is working, what is not working, and where the business plan needs adjustment.

Annual Budgets and Mid-Year Reviews

Monthly reporting is important, but it should not be the only reporting requirement. Randy also notes that his management agreements required a mid-year review report and an annual budget report.

The annual budget helps establish the operating plan for the year. The mid-year review gives the owner and manager a chance to evaluate whether the original budget still makes sense based on market conditions, property performance, staffing, rate strategy, group pace, CapEx timing, or other operating realities.

For hotel owners, this matters because the budget is not just a forecast. It becomes part of the accountability framework for the manager.

Owner Calls With Key Management Personnel

A smart hotel management agreement should not rely only on written reports. Randy also structured his agreements to give the hotel owner the right to have calls with key management personnel at least once per week, at the owner’s option.

That does not mean the owner needs to interfere with every operational decision. It means the owner should have a formal right to communicate with the people responsible for executing the business plan.

Hotel managers are often focused on the daily details of operating the property. The owner usually brings a higher-level perspective on strategy, capital planning, investment objectives, lender expectations, and long-term asset value. When those perspectives are combined, the owner and manager are more likely to make better decisions.

Performance Tests and Termination Rights

Reporting requirements help the owner understand performance. Performance tests help the owner act when performance does not meet agreed standards.

A hotel management agreement should include performance hurdles for the manager. If those hurdles are not met, the owner should have the right to terminate the management agreement without paying termination fees or liquidated damages, subject to the negotiated terms of the agreement.

Randy gives an example of a performance termination clause based on two possible measures:

• The manager fails to meet a predetermined percentage of budgeted gross operating profit, or GOP
• The hotel fails to achieve a predetermined RevPAR Index against an agreed-upon competitive set for a predetermined number of consecutive periods

The exact metrics, percentages, time periods, cure rights, and termination mechanics are negotiable. The important point is that the agreement should include objective standards that allow the owner to evaluate whether the manager is performing.

RevPAR Index and GOP Performance Hurdles

RevPAR stands for Revenue Per Available Room. It is one of the most common performance metrics in the hotel industry.

Randy gives a simple example. If a hotel has 100 rooms and 365 days in the year, it has 36,500 available room nights. If the hotel generates $2 million of rooms revenue, then RevPAR equals $54.79.

A RevPAR Index compares the hotel’s RevPAR performance against a competitive set. That can be useful because it evaluates the hotel relative to market peers rather than in isolation.

Gross operating profit, or GOP, is also important because it focuses on operating profitability. A manager may produce revenue, but the owner also needs to understand whether that revenue is translating into operating profit after expenses.

Why the Budget and Competitive Set Should Remain Flexible

Managers will often prepare a pro forma that is attached to the hotel management agreement. That pro forma can help both parties establish initial expectations.

However, Randy notes that hotel owners may want the ability to base a GOP termination test on an annual budget rather than only the initial pro forma. That can be important because hotel performance expectations may change as market conditions, operating conditions, and capital plans evolve.

The same concept applies to the competitive set. A competitive set is usually established when the management agreement is signed. Over time, the market may change. New hotels may open, competing properties may renovate, brands may shift, or demand patterns may change. The agreement should address whether and how the competitive set can be amended.

Additional Termination Protections

Performance tests are important, but they should not be the only termination rights in the hotel management agreement.

Randy identifies several additional termination provisions that hotel owners should consider:

• Termination for failure to meet brand standards
• Termination for manager bankruptcy or insolvency
• Termination for change in key management company personnel
• Termination for brand deterioration or insolvency of the brand
• Termination for failure to obtain financing
• Termination related to the inability to restore the hotel after a disaster, such as a hurricane

These provisions matter because hotel value can be affected by issues beyond a single month’s operating performance. Brand standards, financing, key personnel, disaster recovery, and management company stability can all affect the owner’s risk profile.

For hotel owners evaluating both management structure and capital strategy, these issues can also connect to broader hotel financing considerations.

Transition Provisions When the Manager Changes

The hotel management agreement should also address what happens if the manager is terminated or replaced.

A manager transition can create operational, employee, vendor, accounting, guest service, brand, and liability issues. Randy notes that the agreement should discuss what happens upon transition and that certain steps should be followed to help avoid unexpected liabilities during the handoff.

For hotel owners, this means the agreement should not only define when termination can occur. It should also define how the transition will be handled after termination.

Practical Takeaways for Hotel Owners

Hotel owners should view reporting and performance provisions as central parts of the agreement, not secondary details.

• Require monthly reporting packages that show actual results versus budget and reforecast
• Include STR reports, GM commentary, pace reports, segmentation, F&B statistics, and CapEx updates where relevant
• Require annual budget reports and mid-year review reports
• Preserve the owner’s right to speak with key management personnel
• Include objective performance tests tied to GOP, RevPAR Index, or other negotiated metrics
• Negotiate termination rights if performance tests are not met
• Address additional termination events, including brand standards, financing issues, insolvency, key personnel changes, and disaster recovery
• Include transition protocols before a manager change occurs

Hotel owners should work with experienced hospitality counsel before signing or revising a hotel management agreement. The business terms, legal rights, operational reporting, financing issues, and transition mechanics should all be reviewed together.

Conclusion

A smart hotel management agreement should give the manager enough authority to operate the property while giving the owner the reporting, performance standards, and termination rights needed to protect the asset.

Monthly reports, annual budgets, mid-year reviews, weekly calls, GOP tests, RevPAR Index hurdles, and transition provisions all help create a more accountable owner-manager relationship.

For experienced hotel owners, these provisions are not just legal points. They are part of the asset management framework that connects operations, capital planning, lender confidence, and long-term real estate value.