Making your property work, from top to bottom

GLOBAL REPORT – For thousands of years, the workings of the lodging industry, whether hotels, inns, or that rentable stable out back, remained the same - you simply paid a fee for a space to sleep, and there might be a bit of food or drink available for a bit extra.

Within living memory, all that has changed with a whole new language and expectation growing up quite separate to merely owning a hotel, around the complexities of operating a lodging business. The different aspects of the operational stack are now specializations and they are legion. With the evolution and growing importance of brands - a very recent entrant in the millennia-long story of places to stay - this has meant a shift from being everything to being the cherry on top.

The separation of real estate ownership from the various elements of the operational hotel stack has created an industry all on its own and has led to the brands placing distribution rather than operations at their core, and the approach to whether you need a brand at all has become more nuanced. If your hotel is already a destination in its own right, probably not. Otherwise, factors such as location and target sector will bear weight on your choice.

But at the heart of any brand decision is the truth that the property and the brand have very different ambitions. For the brand, the greatest concern when adding the flag will be the impact that the hotel has on the brand overall, which is an immediate mismatch for an owner more concerned with their own asset than a brand owned by others.

This misalignment is highlighted by the fact that a brand’s fees are deducted off the top line revenues, while for the owner, everything of interest happens lower down the P&L. Of course, there is alignment when measuring a performance fee (though typically against AGOP rather than NOI), but the underlying question is how to ensure the brand is as concerned about the bottom-line as the owner, and how can you ensure they don’t take the easy route and pocket the fees while melting into the background leaving the owner stuck under their costs?

In practical terms, this misalignment is far from theoretical. Brand-related fees - royalties, marketing, reservation systems, and loyalty programs - can absorb a high single-digit to low double-digit percentage of gross revenue. Industry analysis consistently shows that comparable independent hotels often achieve materially higher profit margins than branded peers. This does not invalidate branding, but it demands a clear financial test: does the flag generate incremental profit after fees, mandates, and capital expenditure, or merely higher revenues with thinner margins?

Brand v unbrand

Before you hoist the flag, make a rigorous assessment of whether it will drive profitability, not just revenues. Brands can add huge value if you can afford them, but only if there is a net gain after fees and brand mandates. Brands run the risk of being vibes-based, bringing that certain, unquantifiable something to a property. If you take a more data-driven approach, balanced with analytical prowess, reality becomes apparent and more constructive conversations with the brand are possible.

This assessment is most effective when owners model branded versus unbranded scenarios on a like-for-like basis, stress-testing fee structures, brand-mandated costs, and capital requirements against net operating income. Once these mechanics are transparent, discussions with brands shift from perception and prestige to measurable value creation.

Once reality is available to all and the wizard working the controls in Oz has been revealed, it’s time to think about alignment. After all, the brand is focused on growing, and so is the owner; it’s a matter of bringing the global and the local closer together. Instead of fees being 100% top line, emphasize incentive fees in the mix. By including a percentage of GOP above a certain hurdle, you can increase the brand’s interest in costs and efficiencies, not just heads in beds.

Incentive structures are most effective when they are meaningful in scale and only triggered after the owner’s core financial priorities are met. Introducing owner-priority hurdles - such as debt service coverage or minimum return thresholds - ensures incentive fees are paid from surplus performance rather than from an underperforming operation.

Address realities

Having agreed to share the good times, it’s also a good idea to set up a structure to share the not-so-good times. And this needn’t be a time to throw around accusations, but to address the reality that markets fall and pandemics spread. During Covid-19 some brands agreed to temporarily pause or defer base fees and central charges to help hotels, arranging a scaled fee that resets during low-revenue periods (or a formula that waives certain fees if GOP falls below a threshold) can protect the bottom line when it matters most. The brand should not flourish while the owner bleeds – if you are all in it together, that means sharing risk as well.

Fee deferrals, sliding-scale base fees, and automatic waivers triggered by low GOP levels should be viewed not as concessions, but as deliberate risk-sharing mechanisms. When agreements acknowledge economic cycles upfront, they foster collaboration during downturns and strengthen long-term brand–owner relationships.

Alternative models

In these evolving times, it is also worth considering that not all brand models are the same, and shopping around for what you need may result in better alignment for all parties and a stronger relationship as a result. Many owners are now opting for soft brands or affiliation networks that offer access to global distribution and loyalty networks, but with lower fees and more operational flexibility. The days of mandatory foot-high brand books and expensive PIPs are behind us. Some brands don’t even require signage.

In some cases, alternative models go further by aligning fees directly with contributions, charging only on bookings or revenues they generate. For destination-led or lifestyle assets, this balance of reach, flexibility and cost discipline can outperform traditional franchise structures.

At the heart of any relationship, light touch or not, it comes down to communication. The multiple moving parts in a hotel may start to feel like plates spinning out of control, but active communication will ensure balance and harmony are achieved and that everyone can hit their targets. After all, the essence of why we are in this business is hospitality, a principle fundamentally at odds with conflict.

Contributed by Duncan Kinnear, Global Asset Solutions, Palma de Mallorca, Spain

The views and opinions expressed in this content do not necessarily reflect the opinions of Hotel Investment Today by Northstar or Northstar Travel Group and its affiliated companies.