Hotel management agreements, leases and franchises: who carries which risk

A hotel is two businesses in one building: a property that someone owns and a trading business that someone runs. Who owns which, and who carries the risk of the second, is decided by the operating model. Four models cover almost every deal a private investor will meet: owner-operated, management contract, lease and franchise. They split income, risk and control very differently, so the model matters as much as the price you pay. This article explains how each works, what the usual fees and terms look like and what to check before you sign. It continues our hotel investment guide and sits next to the pieces on how to choose an operator and how to value a hotel.

The four models in one minute

• Owner-operated or independent. You, or your own company, run the hotel, employ the staff and hold the trading risk. You keep all the profit and absorb all the losses. This is the most common model among small hotels in Europe.
• Management contract. You own the building and the business; a professional operator runs it for fees. The operator acts as your agent, so staff costs, utilities and losses are yours.
• Lease. You own the building and rent it to an operator, who runs the hotel at its own risk and pays you rent. Your income depends on the tenant's ability to pay, not on the hotel's daily profit.
• Franchise. A brand licenses its name, standards, booking system and loyalty programme to whoever runs the hotel. The franchisee, who may be you or a third-party operator you hire, still carries the operating risk.

Hybrids are common. A "manchise" starts as a management contract and turns into a franchise after an initial period. In a sample of large listed hotel groups analysed by HVS, roughly half of European rooms were under franchise, about 30% owned or leased and about 20% under management contracts, and independent hotels are far more common in Europe than in North America. That sample is about chains. For a small hotel, the independent or local-operator route is usually what is actually on offer.

Management contract: you pay for expertise and keep the risk

Under a management contract the operator typically earns in three ways, all charged to the hotel's accounts:

• A base fee on total revenue, usually in the range of 2.5% to 4%, paid whether or not the hotel makes a profit.
• A marketing or system fee, often around 1% of revenue on top, for the brand's sales and distribution.
• An incentive fee on profit, commonly 8% to 12% of gross operating profit (GOP) or adjusted GOP, flat or in tiers, often paid only after the owner has received a priority return.

The owner also funds a reserve for furniture, fixtures and equipment (FF&E), commonly between 3% and 5% of revenue, with 4% to 5% often quoted for branded hotels, so that rooms are refreshed before they look tired. Add the operator's centralised charges (reservation systems, shared services, purchasing, pre-opening costs) and the true fee load can sit well above the headline percentages. Always model the owner's cash flow after every charge, not only after the base fee.

Terms are long: 10 to 20 years or more, with renewals typically in blocks of five years. Length is the point: a good operator needs time to build the hotel, and a bad one is hard to remove. Two protections matter most, the performance test and the termination clause, covered below.

Some brands pay "key money", an upfront contribution to the owner for fit-out or re-branding. It is not free money. It is usually amortised over the life of the contract, and the unamortised part is repayable if the contract ends early. A law-firm guide notes that key money can be small or run to several million dollars, depending on the size and location of the hotel, the projected fees and the competition among operators.

Lease: the rent is only as good as the tenant

In a lease the operator pays rent and carries the trading risk. European leases come in three flavours:

• Fixed rent, indexed to inflation. The lowest perceived risk for the owner and the lowest upside.
• Variable rent, linked to turnover, profit or both. The owner shares the upside and the downside.
• Hybrid: a fixed floor plus a variable top-up. In some disclosures by European listed landlords the fixed part is about 70% of stabilised rent.

Recent leases in those disclosures run around 15 years, often triple-net, which means the tenant pays operating costs and most of the upkeep. What matters to a private owner is the covenant. The rent is a promise from a company, and a hotel operator's balance sheet can be thin. Ask for accounts, a parent guarantee or a deposit, check the rent cover (how many times the hotel's profit before rent covers the rent) and read who pays for structural repairs and for FF&E renewal. A very high fixed rent on a weak hotel is a risk to you, not a safeguard: when the tenant fails, you inherit an empty hotel.

Franchise: a brand without management

A franchise gives you a name, standards, a reservation system and a loyalty base. It does not give you an operator. Franchise fees usually include a royalty of about 3% to 6% of room revenue, a marketing contribution of roughly 1% to 4.5% and a reservation or system fee of about 1% to 2%, so the total often lands between 8% and 12% of room revenue. An initial fee from tens of thousands of dollars to well over 100,000 is common, and the brand will require a property improvement plan (PIP) before opening. These ranges come from filings of US-listed franchisors. European franchise rules differ by country and terms are individually negotiated, so treat the numbers as orders of magnitude.

For the owner, the question is whether the brand brings more revenue than it costs. For an independent hotel the main alternative is dependence on online travel agencies (OTAs), which charge roughly 15% to 25% commission depending on the platform and programme. One 2026 vendor report put the OTA share of independent hotels' bookings at about 63%. A franchise can reduce that dependence through the brand's direct channels, but only if the brand is strong in your market.

Owner-operated: control, effort and exposure

Running the hotel yourself, or through a family company, keeps every cost and profit with you and gives full control over product and price. It also puts revenue management, staffing, compliance and distribution on your shoulders. If you are not a hotelier, you will almost certainly hire a general manager, and the question becomes whether to hire one person or a professional company. Many small owners end up with a hybrid: their own company holds the licence and the building, and a local operator runs the hotel under a short contract with a base fee and an incentive.

Who carries which risk

• Market and demand risk: with you under owner-operated, management and franchise models. A lease moves it to the tenant, but it comes back to you if the tenant fails.
• Operating cost risk: yours under management and franchise, the tenant's under a lease.
• Capital expenditure risk: yours, except under a triple-net lease where the tenant carries most of the upkeep. The FF&E reserve is how this is budgeted.
• Brand risk: only with a franchise or a branded management contract. If the brand loses value or leaves your market, you keep the building.
• Contract risk: long terms and termination costs under management contracts and leases, exit costs in franchise agreements.

Performance tests and termination

A performance test lets the owner terminate if the hotel underperforms. A common US formulation allows termination if, for two consecutive years, the hotel fails to reach 90% of budgeted revenue or gross operating profit and also 90% of the RevPAR of an agreed set of competing hotels, the competitive set. Operators often have the right to cure by paying the shortfall to the owner. Look closely at who chooses the competitive set, whether the owner agrees the budget and whether the cure right can be used every year.

Termination without cause usually needs a pre-agreed compensation. Operators often include liquidated damages clauses, and the sale of the hotel can itself be an event that lets the operator terminate or that triggers a fee. Before you buy a hotel with an existing contract, find out whether it binds the buyer, what it costs to leave and whether the operator has to consent to a sale. Those are the points to settle in the negotiation checklist.

Which model fits which owner

• You want income without day-to-day work and have the capital for a fitted hotel: a lease with a strong tenant and a hybrid rent, or a management contract with a performance test.
• You want control and accept the workload: owner-operated with a hired general manager.
• You buy a branded property in a market where the brand drives demand: a franchise, ideally with a third-party operator.
• You buy a condo hotel unit rather than a whole hotel: that is a different structure, see branded residences, condo hotels and fractional ownership.

A rule of thumb in the industry is that the large international management brands concentrate on larger hotels, which leaves small and mid-size owners with franchises, local operators or running the hotel themselves. Check this against the market you are targeting.

Questions to ask before you sign

• Who holds the licence, the guest database, the website and the booking-engine accounts, and who keeps them after the contract ends?
• What is the total fee load after every centralised charge, as a percentage of revenue and in euros per room?
• What are the performance test, the cure right and the termination compensation?
• Who approves the annual budget and capital spending?
• What happens on a sale: is the contract binding on the buyer and can the operator veto?
• Who employs the staff and who pays severance if the contract ends?
• If it is a lease, what do the accounts of the tenant and of the guarantor show?

Who this is for, and who should not

This is for private investors comparing a whole hotel with other property, or comparing offers from operators. If you want income with no work and no risk, no hotel model gives it: even a lease only turns trading risk into counterparty risk. Be careful with any offer that promises a fixed return without showing who stands behind it, and read guaranteed rental schemes: the catch first.

FAQ

Is a management contract better than a lease? Neither is better in general. A management contract keeps both the upside and the downside with you. A lease gives steadier income and caps the upside, with the risk that the tenant fails.

How long are these contracts? Management contracts often run 10 to 20 years or more, and leases about 15 years in recent European deals. Franchises have fixed terms with termination rights on set dates. Terms vary by country and by deal.

Can I change the operator? Yes, but usually only for cause, after a failed performance test, or by paying compensation. That is why the contract matters more than the brand.

How we help

We help you compare offers on net cash flow to the owner, read the key clauses with a local lawyer and negotiate before you commit. See also hotels in our catalogue for what is currently listed.

This article is informational only and is not legal, tax or investment advice. Fee ranges are indicative market orders of magnitude, not offers, and change over time.