The Performance Test: Time for a Change?

By Paul Courtnell Director, Leisure & Resorts Group, Gunster LLP | November 07, 2010

Introduction

Most hotel management agreements contain a "performance test" that gives the Owner of the hotel an option to terminate the management agreement if the Operator fails to achieve one or more financial benchmarks in the operation of the hotel. Many of these performance tests were negotiated under very different economic conditions than prevail today. Given the new reality that prevails in the hotel industry, Owners, Asset Managers and Operators should be reviewing the performance tests in their existing management agreements to determine if it is time for renegotiation. With respect to new management agreements, the parties should approach the performance test by keeping in mind the mistakes made and lessons learned from the past. This article explains the components of a typical performance test in a management agreement and recommends areas for examination and negotiation.

Components of a Typical Performance Test

A typical performance test negotiated in better economic times probably contains the following elements

  • Delayed Start Date: Typically, the performance test may not commence until the fourth or fifth full year of management by the Operator. Particularly in the case of a newly constructed hotel, the purpose of the delayed start date was to allow the hotel to reach stabilization.

  • More Than One Year of Failure: The language usually provides that the test must be failed either for two consecutive years or two out of three years for the Owner's termination option to be activated.

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Coming up in February 2018...

Social Media: Engagement is Key

There are currently 2.3 billion active users of social media networks and savvy hotel operators have incorporated social media into their marketing mix. There are a few Goliath channels on which one must have a presence (Facebook & Twitter) but there are also several newer upstart channels (Instagram, Snapchat &WeChat, for example) that merit consideration. With its 1.86 billion users, Facebook is a dominant platform where operators can drive brand awareness, facilitate bookings, offer incentives and collect sought-after reviews. Twitter's 284 million users generate 500 million tweets per day, and operators can use its platform for lead generation, building loyalty, and guest interaction. Instagram was originally a small photo-sharing site but it has blown up into a massive photo and video channel. The site can be used to post photos of the hotel property, as well as creating Instagram Stories - personal videos that disappear from the channel after 24 hours. In this regard, Instagram and Snapchat are now in direct competition. WeChat is a Chinese company whose aim is to be the App for Everything - instant messaging, social media, shopping and payment services - all in a single platform. In addition to these channels, blogging continues to be a popular method to establish leadership, enhance reputations, and engage with customers in a direct and personal way. The key to effective use of all social media is to find out where your customers are and then, to the fullest extent possible, engage with them on a personal level. This engagement is what creates a personal connection and sustains brand loyalty. The February Hotel Business Review will explore these issues and examine how some hotels are successfully integrating social media into their operations.