While hotel lease contracts have traditionally been very popular in Europe and continue to be preferred or required by many institutional investors, management contracts have become increasingly prevalent as many other investors have sought to share further in their hotel's trading profit and, at the same time, most major international hotel operators have become far less willing to offer leases.A hotel management contract is defined as an agreement between a management company (or an operator), and a property owner, whereby the operator assumes responsibility for managing the property by providing direction, supervision, and expertise through established methods and procedures. The operator runs the hotel, on behalf of the owner, for a fee, according to specified terms negotiated with the owner. Negotiating the terms of a hotel management contract should not be approached lightly, as it can characterise the property's identity for decades and produce differing results for owners. A well-negotiated management agreement should align the interests of both parties. As an owner, the major goals should be to select the management company that will maximise profitability and therefore the value of the asset, and to secure the best possible contract terms with that operator, while at the same time ensuring the operator is properly incentivised to maximise profitability.As a result of a gradual shift in hotel investment trends over the past 30 years, owners have generally developed a much greater understanding of hotel operations, and have become more sophisticated in their selection of operators and in the negotiation of contract terms, often with the help of specialist advisory firms. It has become increasingly common in recent years for institutional and financial investors and private equity funds to invest in hotel assets. Such investors typically aim to separate ownership of the physical hotel asset from operation of the business. In addition, the investment interest and associated increase in the amount of capital available for hotel investment from this wider pool of investors has further contributed to the increased sophistication of hotel investors, who often have in-house hotel asset managers or engage speciality consultancies or asset management companies to help monitor and drive peak performance from the operator.The most common of the management contract terms are listed below and described further in the following sections.
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