Shake-Up In Hotel Competition Standards: Key Takeaways

Law360, New York (June 16, 2016, 4:24 PM EDT) -- One of the ways in which hotel owners and managers measure the success of a hotel is whether it meets, exceeds or falls behind its competitors. While that may not be a perfect measure of success — and I, like many commentators, don't think it is — that test has gained wide acceptance. Consequently, many hotel management agreements contain performance test standards allowing an owner to terminate a management agreement if the hotel fails to meet specified guidelines, and most of those tests incorporate a "RevPAR Test" — whether the hotel's revenue per available room is comparable with a set of competitive hotels, its "competitive set." The RevPAR test typically allows an owner to terminate a management agreement if the hotel's RevPAR fails to meet a specified percentage, or index, of the competitive set's RevPAR. A typical provision might allow termination of a management agreement if the hotel's RevPAR was less than 85 percent (often referred to as the RevPAR Index) of the competitive set's aggregate RevPAR. Competitive sets can also be used to determine incentive pay or for other measures of performance, as well as assist owners and developers in projecting the potential performance of a property. At a minimum, the competitive set allows for the measurement of performance against competitors....

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