When you buy a hotel, you are buying two things at once: a piece of real estate and an operating business. How you connect those two — who runs the hotel, who carries the operational risk, and who keeps the profit — is decided by the operating structure. The three dominant models are the management agreement (HMA), the lease, and the franchise. Choosing the wrong one can quietly erase the returns that looked so attractive in the spreadsheet.
This guide explains each structure in plain terms, who bears the risk and reward, and how to decide which fits your investment strategy.
The Core Question: Who Operates, Who Owns the P&L?
Every operating structure is really an answer to one question: who controls and owns the hotel's profit-and-loss account? In a management agreement the owner does; in a lease the operator does; in a franchise the owner does, but with a brand bolted on. Everything else follows from that.
1. Hotel Management Agreement (HMA)
Under an HMA, the owner retains the operating business and hires a professional management company — often an international brand — to run the hotel on the owner's behalf. The owner keeps the P&L: all revenue and all operating costs flow to the owner, who pays the operator a fee.
How the operator is paid: typically a base fee (a percentage of total revenue) plus an incentive fee (a percentage of gross operating profit), which aligns the operator with profitability.
- Who takes the risk: the owner. If trading falls, the owner absorbs the downside.
- Who keeps the upside: the owner. Strong years flow largely to the owner, net of the incentive fee.
- Control: the owner is exposed to operational performance but often has limited day-to-day control, since the operator runs the hotel.
Best for: investors who want exposure to operating upside and trust a strong operator — common in branded, upscale and luxury hotels.
2. Lease
Under a lease, the owner is a landlord. The operator (the tenant) takes the entire operating business and pays the owner rent. The operator keeps the P&L — all the trading profit and all the trading risk.
How rent is structured:
- Fixed lease: a set rent regardless of performance — maximum income certainty for the owner.
- Variable / turnover lease: rent linked to revenue or profit — the owner shares some upside and some downside.
- Hybrid: a fixed floor plus a variable top-up, the most common institutional compromise.
- Who takes the risk: the operator (subject to the lease type).
- Who keeps the upside: the operator — the owner's return is capped at the rent.
- Control: the owner has predictable, bond-like income but gives up the operating upside.
Best for: investors who want stable, predictable income and treat the hotel as a real-estate yield play rather than an operating business — common among pension funds and core institutional capital.
3. Franchise
A franchise is not an alternative to operating — it is a branding layer. The owner (or its appointed operator) runs the hotel and keeps the P&L, but licenses a brand name, reservation system, loyalty programme and standards from a franchisor in exchange for fees.
How the franchisor is paid: an initial fee plus ongoing royalty and marketing/loyalty fees, usually as a percentage of room revenue.
- Who takes the risk: the owner/operator.
- Who keeps the upside: the owner/operator, net of franchise fees.
- Control: high operational control, but the owner must meet brand standards (including mandated CapEx and refurbishment cycles).
Best for: owners who want brand distribution and demand generation while retaining operational control — common in mid-market and select-service segments. A franchise is frequently combined with a third-party management agreement: the brand for distribution, a separate operator for day-to-day running.
Side-by-Side Comparison
- Owner keeps the P&L: HMA — Yes. Lease — No. Franchise — Yes.
- Owner bears trading risk: HMA — Yes. Lease — No (largely with tenant). Franchise — Yes.
- Income predictability for owner: HMA — Low/Medium. Lease — High. Franchise — Low/Medium.
- Owner's exposure to upside: HMA — High. Lease — Low (capped at rent). Franchise — High.
- Brand provided: HMA — Often. Lease — Sometimes. Franchise — Always.
How Structure Affects Valuation and Exit
The operating structure changes who the natural buyer is at exit and how the asset is valued. A leased hotel with strong covenant and a fixed rent prices like a real-estate investment and appeals to core, yield-focused capital. A hotel on an HMA prices on its trading performance and appeals to operationally minded investors who want the upside. Mis-matching the structure to your intended buyer pool can cost you at sale — a point worth settling before you acquire, not when you market the asset.
The Bottom Line
There is no universally "best" structure — only the one that fits your appetite for risk, your desire for control, and your intended hold and exit. If you want predictable income, lean toward a lease. If you want operating upside and trust your operator, an HMA. If you want brand distribution while keeping control, a franchise — often alongside management. Decide this early: it shapes your underwriting, your financing, and your buyer at exit. If you are weighing a specific acquisition, our team can model each structure against the asset — start with how to buy a hotel in Europe or contact us directly.
Frequently Asked Questions
What is the difference between a hotel management agreement and a lease?
Under a management agreement the owner keeps the hotel's profit-and-loss account and pays an operator a fee to run it, so the owner carries both the risk and the upside. Under a lease the operator becomes a tenant who keeps the P&L and pays the owner rent, so the owner gets predictable income but gives up the operating upside.
Is a franchise the same as a management agreement?
No. A franchise only licenses a brand, reservation system and standards in exchange for fees, while the owner or its operator still runs the hotel. A management agreement is where a company actually operates the hotel on the owner's behalf. The two are often combined: a brand franchise plus a separate third-party operator.
Which hotel operating structure is best for institutional investors?
It depends on the mandate. Core, income-focused institutions such as pension funds often prefer leases for their bond-like predictability, while investors seeking operational upside prefer management agreements. There is no universally best structure — only the one that matches your risk appetite, control and exit strategy.
How does the operating structure affect a hotel's value at sale?
A leased hotel with a strong tenant prices like a real-estate investment and attracts yield-focused buyers, while a hotel on a management agreement is valued on its trading performance and attracts operationally minded buyers. Matching the structure to your intended buyer pool protects value at exit.
Frequently asked questions
- What is the difference between a hotel management agreement and a franchise agreement?
- Under a management agreement the owner keeps the profit-and-loss account and hires an operator to run the hotel, paying a base fee on total revenue plus an incentive fee on gross operating profit. A franchise is not an operating structure at all but a branding layer: the owner or its appointed operator still runs the hotel and still keeps the P&L, while licensing the brand name, reservation system and loyalty programme for an initial fee plus ongoing royalty and marketing fees on room revenue. The two are frequently combined - the brand for distribution, a separate operator for day-to-day running.
- What is an HMA contract in hotels?
- An HMA - hotel management agreement - is the contract under which the owner retains the operating business and appoints a professional management company, often an international brand, to run the hotel on the owner's behalf. All revenue and all operating costs flow to the owner, who pays the operator a base fee as a percentage of total revenue plus an incentive fee as a percentage of gross operating profit. The owner is exposed to operational performance but usually has limited day-to-day control.
- Who takes the trading risk under each hotel operating structure?
- Under a management agreement the owner absorbs the downside and keeps the upside, net of the incentive fee. Under a lease the operator is the tenant: it takes the whole operating business and the trading risk, and the owner's return is capped at the rent. Under a franchise the owner or its operator carries the risk and keeps the upside, net of franchise fees.
- Which structure gives an owner the most predictable income?
- A lease. A fixed lease pays a set rent regardless of trading performance, which is the highest income certainty available to an owner; turnover and hybrid leases trade part of that certainty for a share of the upside. A management agreement gives low to medium predictability, because the owner holds the P&L and absorbs the swings in trading.
- How should an investor choose between an HMA, a lease and a franchise?
- Start from what you actually want to own: the operating result, or a rent. If you want exposure to operating upside and are prepared to carry the downside, a management agreement with a strong operator fits - the common choice in branded, upscale and luxury hotels. If you want predictable, bond-like income and treat the hotel as a real-estate yield play, a lease fits - the common choice for pension funds and core institutional capital. A franchise suits owners who want brand distribution while keeping operational control, typical in mid-market and select-service.
- Does the operating structure affect what the hotel is worth at exit?
- Yes, and it decides who the natural buyer is. A leased hotel with a strong covenant and a fixed rent prices like a real-estate investment and appeals to core, yield-focused capital. A hotel on a management agreement prices on its trading performance and appeals to operationally minded investors who want the upside. Mismatching the structure to the intended buyer pool costs money at sale, which is why it is worth settling before you acquire rather than when you market the asset.
