What Are Hotel Operating Models? Lease, Management and Franchise

The name of a well-known chain is on the facade. But does the chain own the building? Does it run the hotel itself? Often, the answer to both is no. Anyone who wants to understand how a hotel works financially needs to know its operating model.

Owner-operated

In the simplest case, the property belongs to the family or company that also runs the hotel. Many independent hotels are organised this way. The owner bears all opportunities and risks but also makes every decision.

Lease

Under a lease, an investor hands the hotel over to an operator, usually already fitted with furniture and equipment. The tenant may use the property and keep the profits but pays an agreed rent regardless of how well the hotel performs. According to the consultancy Horwath HTL, the lease has long been the dominant model in the German hotel industry. Terms of 15 to 30 years are typical, often with stepped rent, because hotels usually only reach their revenue and earnings plateau after three to five years.¹

The risk is manageable for the owner but high for the tenant. Since the pandemic, caps on rent in weak trading periods, or variable rents linked to revenue or earnings, have therefore often become a standard part of contracts.¹

Management contract

Under a management contract, the owner engages an operator, often a hotel chain, to run the hotel. The hotel trades under the chain’s brand but on behalf and at the risk of the owner. The operator receives fees: for the brand, a base fee linked to revenue, and an incentive fee based on gross operating profit. Profits and losses are borne by the owner.¹

Franchise and hybrid models

With a franchise, the owner or tenant runs the hotel themselves but uses a chain’s brand, quality standards, booking systems and loyalty programme, and pays fees for this. There are also hybrid models, such as leases with variable components or management contracts in which the operator commits to a minimum result. According to Horwath HTL, international investors prefer management and hybrid models.¹

What hoteliers should look for

More in the magazine

What a change of brand means for a hotel is shown in our article "Frankfurt’s The Blasky joins Vienna House by Wyndham but wants to keep its own character". How a historic hotel makes a fresh start with a new operator after insolvency is described in "A castle, an insolvency and a new beginning". What management contracts, leases and ownership mean, using Kempinski as an example, is explained in "Kempinski’s leadership changes and what they mean for hotels and guests".