History Lesson: Owners and Management Companies Weigh Responsibilities and Risks in Response to COVID-19
By William A. Brewer III Managing Partner, Brewer, Attorneys & Counselors | July 26, 2020
Today, the chain brand hotel companies (e.g., Marriott, Hilton, IHG, etc.) represent 69% of the rooms in supply. They do so through a variety of brands, spread over different price strata, offering different levels of facilities and services to their guests. Although the traveling public may not realize it, the brands rarely own any of the hotels within their "chain" of distribution. Rather, the owner of the hotel is either a licensee or the principal who has contracted for the asset to be managed by the brand. This was not always so.
Before the 1970s, the chains actually owned a significant percentage of their "distribution." In the '70s, a fundamental change began to emerge in the hotel industry as hotel companies moved from an asset-heavy model to being a collection of consumer brands. For example, at a hotel opening in Los Angeles on September 7, 1973, J. Willard Marriott Jr., then president of the former Marriott Corporation, announced that his company would operate the majority of its future hotels on a management?fee basis instead of being the owner.
The management?fee plan, he said, "will continue for the foreseeable future largely because under the plan the company won't have to make extensive capital commitments for hotel construction." Echoing this sentiment, in August 1976, Hugo M. Friend Jr., then president of the Hyatt Corporation, said, "hotels are too expensive for mere mortals to build..." And with that, Hyatt began shifting its business model from hotel ownership to asset management.
The economic downturn in the 1990s further fueled the industry's shift to what later became known as an "asset-light" business after hotel companies found themselves carrying large amounts of debt on their balance sheet for the properties that they could not sell as a result of the deteriorated real estate market.
Marriott, for example, built hotel after hotel, then sold or franchised them while retaining the management contracts throughout the 1980s until it found itself with 639 hotels – including 150 it was trying to sell – and a growing fear that it could not pay off its debt. As a result, in 1992, the hotel company announced it was spinning-off its underperforming real estate operations, which ultimately allowed it to grow its presence and profit without the burden of risky equity investments.
The Hotel Management Agreement