Our friends at HVS recently published an article entitled, “Hotel Management Companies and Equity Contributions: Benefits and Risks” that does a fine job of quantifying how money flows from hotel operations to ownership under a variety of (stated) scenarios, including that where the hotel manager invests in the project.
Unfortunately, the quantification of the results tends to miss the critical point that HVS touches on, but only too briefly. It includes in the statement of risks (listing four with limited commentary) this gem: Equity from operator may come with strings attached.
Yes, it very well may. Other than a reference to the challenge of terminating one’s equity partner as the other non-quant risk, not another word about how a manager might view its equity investment in the hotel. As I have stated before, it’s “we bought it, we paid for it, it’s ours.”
HVS also repeats the so-often repeated statement about a manager’s equity investment “bring[ing] the management company’s interests more into alignment with the owner’s or developer’s interests.” We hear it so frequently that it is viewed as gospel; the terms used – and I am on record as despising their use – are “skin in the game.” I have always questioned this from two perspectives:
First, are there any metrics to back up this statement? All the management companies I know are, indeed, dedicated to performing for their owners; methods and results vary.
Second, as an industry, do we so dislike and distrust our managers that we need them to have “skin in the game” to be certain they are trying their hardest to manage to profit? What happened to “good faith” in agreements and the best “trust but verify” tool – strong, knowledgeable and present asset management.
As an aside, at virtually the very same time, the same HVS office (Chicago, helmed by Hans Detlefsen with great support from Todd Isenstadt) published a horizontal study of the performance of some 400 Hampton Inns, reaching the conclusion and offering the hypothesis that good management does, indeed, matter. Given the juxtaposition of these two articles, one wonders whether HVS checked to see how many of the “good” Hampton Inn managers had investments – rather than complete or majority ownership – in their properties. Given the brand, I suspect the answer is quite a few.
I repeat what I have often said: If a developer needs the manager’s money, then, by all means, ask for it and take what comes; if, however, the developer can find the money elsewhere, then it should do so, as the manager’s money is likely more expensive with more strings attached than any other investment capital.
Contributed by Michael Shindler, president, Four Corners Advisors, Orlando, Florida