Understanding Hotel Operating Models
Hotel operating models define the structure and relationship between property owners, hotel operators, and other stakeholders. They are fundamental to determining a hotel's operational efficiency, profitability, and competitive positioning. Over time, these models have evolved to reflect shifting consumer expectations and market dynamics. While traditional structures still exist, new hybrid approaches have emerged to address the industry's increasing complexity.
Fixed Lease Agreement
In the fixed lease model, also known simply as a lease, the owner leases the hotel property to a tenant (lessee) for a long-term period, typically over 20 years. The tenant assumes operational responsibility, while the owner receives a predetermined rent, independent of hotel performance. This structure provides stable and predictable cash flows and limits the owner’s exposure to operational risk, requiring little to no sector-specific expertise.
As a result, fixed leases are often seen as a low-risk, income-focused option. The property's value may also benefit from long-term secured income streams. However, this typically comes at the cost of lower returns compared to models with performance-linked upside. Investments in furniture, fixtures, and equipment (FF&E) are generally borne by the operator.
Under Swiss law, landlords remain responsible for major repairs, even in long-term leases. To avoid disputes, contracts should explicitly define the scope of the lessee's maintenance obligations.
The legal clarity of this “classic” model is an additional advantage. As the lease agreement is well-established in Swiss law and jurisprudence, risks are largely foreseeable. Termination and breach clauses are clearly regulated, providing a strong legal framework and mutual security.
Hybrid / Variable Lease Agreement
The hybrid lease model, combining fixed and variable rent components, gained prominence during the COVID-19 pandemic. As tourism came to a standstill, operators with high fixed lease obligations faced severe liquidity pressures. In response, many owners and operators renegotiated contracts to introduce variable rent mechanisms.
In a typical hybrid structure, a lower base rent is supplemented by a variable rent component linked to hotel revenues above a certain threshold. This enables owners to participate in upside performance while maintaining a base level of income. Consequently, owners share both risk and reward with the operator.
Hybrid leases offer increased return potential compared to fixed leases—particularly in strong market conditions—and have become more prevalent in recent transactions. Owners who renegotiated their lease terms during the pandemic often now benefit from stronger alignment with operator performance and improved financial outcomes.
However, hybrid structures require careful drafting. Disputes may arise over revenue-sharing mechanisms, accounting standards, or data transparency. Operators may be reluctant to disclose sensitive financial or operational information. To mitigate this, contracts should clearly define revenue calculations, audit and reporting rights, and the scope of data transparency to ensure effective monitoring and reduce the risk of conflict.
Hotel Management Agreement (HMA)
Under a Hotel Management Agreement (HMA), the owner (or head lessee) retains ownership and engages a third-party operator to manage the hotel on their behalf. Compensation typically includes:
- a base fee (2–4% of total revenue),
- an incentive fee (8–15% of gross operating profit), and
- a marketing fee (1–2% of revenue).
The operator assumes full responsibility for managing the hotel, with the agreement detailing not only the fee structure but also the operational standards, marketing strategies, and financial objectives. To mitigate the owner's risk, a minimum performance guarantee is often included in the contract. The operator oversees all day-to-day functions, including personnel, budgeting, marketing, and guest services. Meanwhile, the owner retains responsibility for asset maintenance, FF&E investment, and typically working capital financing.
This structure allows owners to leverage the operator's brand and operational expertise while maintaining long-term ownership and value creation potential. However, success depends on active asset management and close collaboration. Poor operator performance can directly impact asset value and cash flow, requiring owners to monitor performance closely and maintain clear contractual protections. Unlike lease agreements, HMAs are not explicitly governed under Swiss contract law. Instead, they are considered innominate contracts with elements of mandate law. As such, particular care is required in defining the contractual rights and obligations, including performance metrics, termination provisions, and remedies for breach. Precise and enforceable contract terms are essential to mitigate legal uncertainty and safeguard the investment.
Franchise Agreement
In a hotel franchise agreement, the hotel owner (franchisee) obtains the right to operate a hotel under an established brand and business concept. In return, the franchisee typically pays a one-time franchise fee as well as ongoing royalties, usually calculated as a percentage of revenue.
The franchisor provides comprehensive support, including training, marketing strategies, operational standards, and access to industry best practices. This enables the franchisee to benefit from the brand's recognition and reputation while retaining operational control within the framework of the prescribed standards. The franchisee remains responsible for day-to-day operations, including staffing, financial management, and guest services, while the franchisor focuses on brand oversight and strategic positioning.
It is important to note that not only property owners but also lessees or operators may enter into franchise agreements to operate a hotel under a franchise brand (see White Label Operators). In such cases, it must first be ensured that the base contract does not prohibit brand affiliations or changes to the hotel concept. Moreover, brand usage rights and intellectual property provisions should be negotiated carefully, particularly with regard to termination scenarios, as “rebranding” a hotel can involve considerable costs and operational disruption.
White Label Operators (WLOs)
White label operators (WLOs) have gained prominence in recent years, driven by the rising demand for flexible operating structures and the need to optimize profitability while mitigating operational risks. These independent operators manage hotels on behalf of owners or lessees—typically under an HMA or lease agreement—without using their own brand. Instead, they operate under an existing brand or a franchisor’s brand, offering comprehensive operational and management services.
WLOs are known for their close alignment with ownership objectives. When using a soft brand, flexibility is generally higher than with traditional hard brands. Additionally, this model offers access to international brands that may otherwise refrain from entering lease agreements, as the white label operator acts as an intermediary tenant or operator.
Many global hotel brands have begun investing in this model, offering flexible contracts that often include a share in operational performance for a defined period. In contrast to traditional management agreements—which can have terms of up to 20 years—contracts with white label operators typically range from 5 to 10 years and often include termination clauses that are more favorable to owners. This enhances the ability to change operators during a sale process and broadens the pool of potential investors, increasing the asset’s attractiveness in a transaction. In a WLO lease/rental model, lease and franchise agreement terms are typically interconnected.
In our view, the primary benefit of the white label model lies in its ability to diversify operational structures and distribute risk—especially in volatile or rapidly changing markets. However, this diversification also requires managing a greater number of contract types, each with distinct rights and obligations. As a result, more internal resources are needed to effectively oversee and coordinate such operations.
