In the hotel and aparthotel sector, property ownership and hotel operations are typically separated. While the real estate asset is generally owned by an investor, developer or property company, the day-to-day operation of the property is entrusted to a specialised operator or carried out under an established hotel brand.

This separation makes the contractual framework governing the relationship between the owner and the operator a central component of any hospitality investment. It plays a decisive role in determining how risks and returns are allocated, the degree of operational control retained by each party and the asset’s long-term value-creation potential.

The Strategic Importance of the Contractual Structure

Selecting the appropriate contractual model is not merely a technical consideration; it is a fundamental strategic decision.

First, the contractual structure defines the investment’s risk-return profile. Depending on whether the parties choose a lease, management, franchise or hybrid model, operational risk, revenue opportunities and decision-making authority are allocated differently between the owner and the operator.

Second, there is a clear trade-off between income security and value-creation potential. Traditional lease agreements incorporating a fixed rental component provide stable and highly predictable cash flows, making them particularly attractive to institutional investors and lenders. By contrast, management and franchise models offer owners greater participation in the property’s operating performance, although this is accompanied by correspondingly higher volatility.

In practice, hybrid arrangements are becoming increasingly common. Many lease agreements now incorporate variable elements, such as revenue-sharing mechanisms, enabling owners to participate, at least partially, in the financial success of the operating business.

Third, the market is clearly moving towards more flexible and tailored contractual structures. Hybrid models and third-party management solutions, in particular, allow investments to be aligned more precisely with specific investment strategies, prevailing market conditions and the positioning of the asset.

Finally, the allocation of maintenance obligations and capital expenditure requirements, including CapEx and FF&E, is of critical importance. These items can have significant financial implications and must therefore be clearly allocated between the parties. This is often addressed through ongoing reserve funds, typically representing approximately 4–5% of revenue.

Contract Models in Hospitality: Structures, Opportunities and Risk Allocation

1. Lease Agreement

The lease agreement is the most traditional contractual model in the real estate sector. Under this structure, the property owner makes the asset available to an operator, which independently manages the hotel and pays rent in return.

The rent may be structured in several ways, including as a fixed, turnover-based or hybrid payment. While fixed rent provides a high degree of income certainty, variable components enable the owner to participate in favourable market developments and stronger operating performance.

From the owner’s perspective, this model closely resembles a traditional real estate investment, characterised by stable income streams and the substantial outsourcing of operational risk. The operator, by contrast, assumes full entrepreneurial responsibility for the business and bears the operating risk while remaining subject to its rental obligations.

Several factors are particularly important in practice. These include the operator’s creditworthiness and operational capabilities, the long-term sustainability of the rental burden and the allocation of costs between the parties.

Double-Net and Triple-Net lease structures are especially relevant, as they determine the extent to which the operator assumes additional operating, maintenance and insurance costs. Under a Double-Net lease, certain operating expenses and selected maintenance obligations are generally transferred to the tenant. Under a Triple-Net lease, the tenant is typically required to bear virtually all ongoing costs, including maintenance, insurance and operating expenses. This allocation has a direct impact on the owner’s net return.

2. Management Agreement

Unlike a lease agreement, a management agreement appoints the operator as a service provider. The operator manages the hotel on behalf of, and for the account of, the owner.

The operator’s remuneration is generally structured as a combination of a revenue-based base management fee and a performance-related incentive fee. While the owner bears the operating risk, the owner also benefits fully from the economic performance of the business.

This model is particularly suitable for investors seeking to benefit from the market expertise and operational capabilities of an established hotel operator while retaining exposure to the asset’s growth and value-creation potential.

Although day-to-day operations are delegated to the operator, the owner generally retains certain strategic decision-making rights, including the approval of budgets and major investment decisions.

Key areas of negotiation therefore include reporting obligations, performance benchmarks, termination rights and so-called Owner’s Priority Returns. Under such arrangements, the owner receives a specified minimum return before any additional profits are shared between the parties.

3. Franchise Agreement

A franchise agreement enables a property to operate under an established brand without the brand itself assuming responsibility for the hotel’s operation.

The franchisor provides access to the brand, reservation systems, distribution channels and operating standards. In return, the franchisee pays fees, which are typically linked to revenue.

The principal distinction between a franchise agreement and a management agreement is that the franchisor does not assume responsibility for the hotel’s day-to-day operation. This responsibility remains with the owner or is delegated to a separate management company.

This model is particularly attractive to owners seeking to benefit from global brand recognition and powerful distribution systems while retaining a greater degree of operational control.

However, the model also involves certain constraints. Franchisors impose detailed requirements relating to the property’s appearance, service offering and operations, generally referred to as Brand Standards. Compliance with these standards may require substantial capital investment and can restrict the owner’s operational flexibility.

4. Third-Party Management

Under a third-party management structure, the owner appoints an independent management company to operate the property, often in combination with a separate franchise agreement.

In this arrangement, the hotel brand provides its standards, reservation systems and distribution support, while the independent management company is responsible for operational execution.

The principal distinction between this structure and a traditional brand management agreement lies in the greater degree of flexibility available to the owner. Third-party management agreements are often shorter in duration, more individually negotiated and structured to provide the owner with greater influence over the property’s strategy and operations.

At the same time, this model creates a more complex multi-party structure in which the interests of the owner, management company and brand must be carefully aligned.

The success of this structure therefore depends heavily on the quality and capabilities of the management company, as well as on the effective alignment of interests between the owner, operator and brand.

5. Hybrid Structures

In practice, hybrid contractual models are becoming increasingly prevalent. These arrangements combine elements of different contractual structures in order to achieve a more balanced allocation of risk and return.

Common examples include lease agreements incorporating a guaranteed minimum rent supplemented by a revenue-participation component, as well as management agreements that provide the owner with a guaranteed minimum return.

Such structures can help align the interests of the parties more effectively by providing the owner with a degree of income protection while allowing both parties to participate in stronger operating performance.

Hybrid arrangements are particularly relevant for projects with uncertain or evolving income profiles. These may include development projects, repositioning strategies and aparthotel concepts whose market performance has not yet been fully established.

6. Owner-Operator Model

Under the owner-operator model, the property owner assumes direct responsibility for operating the hotel or aparthotel.

This structure provides the owner with maximum control over strategy, branding and day-to-day operations. It also enables the owner to capture the full value created by the operating business.

However, this model involves considerable complexity. The owner must possess extensive operational expertise in areas such as human resources management, pricing, sales and distribution, service quality and regulatory compliance.

Additional challenges include heightened operational risk, significant dependence on the quality of the management team and limited scalability. Consequently, this model is generally best suited to organisations with an established operating platform, substantial sector expertise and a clearly defined strategic focus.

Conclusion

The choice of contractual structure has a direct impact on the investment profile of a hotel or aparthotel. It influences not only cash-flow stability and risk allocation, but also the asset’s attractiveness to financing providers and its long-term value-creation potential.

While lease agreements offer stability and predictability, management and franchise models provide owners with greater participation in operating performance. Third-party management and hybrid structures introduce additional flexibility and enable the contractual framework to be tailored more closely to changing market conditions and specific investment strategies.

There is no universally preferred contractual model. The optimal structure depends on a range of factors, including the owner’s investment strategy, the operator’s risk appetite, the positioning of the asset and the requirements of equity investors and financing partners.

In hospitality real estate, the contract is therefore far more than a legal document. It is a fundamental lever for income generation, operational control, liquidity and sustainable long-term value creation.

Overview of the Key Contractual Structures