Performance test in the management agreement expires two years before the franchise term does

The sunset is a real thing operators ask for, and the argument they make is that they're investing in the asset's long term positioning and don't want to be fired in year eight over one soft cycle. Whether an owner should agree to it in that form is a different question, and a hospitality attorney should read the actual clause before your friend's group relies on any of this.

The fix I've seen discussed is not removing the sunset. It's making the test survive as a right to require a management change at the property level, meaning the general manager and the director of sales get replaced, rather than terminating the whole agreement. Operators fight that less.

The budget circularity is the bigger hole. A percentage-of-budget test measures the operator against their own forecast.

Every version I've written down in my notes pairs it with an external test, so the RevPAR index against the competitive set does the real work and the NOI test is secondary. Your agreement already has the index at 90%, which is a normal-ish number. The thing to check is who defines the competitive set and whether the operator can change it. If they can swap in weaker hotels, the index test goes soft too.

What does RevPAR index actually measure against? Like who decides which hotels count as the competitive set?

@rigging it's your RevPAR divided by the average RevPAR of a named group of nearby hotels, so 100 means you're getting your fair share of the market. The set gets defined in the agreement or in the benchmarking subscription, usually five to eight properties, and @bramble's point is that whoever gets to redefine it controls the score.

@halyard the two consecutive years plus both tests failing is the part I'd count as the real concession. Both tests, two years running, means a hotel can underperform badly for three years before anyone can act, and that's before the sunset even comes up.

Asking the thing I'd have kept to myself: why would an owner sign a ten year management agreement at all? If the operator is the whole engine on an economically sensitive asset, wouldn't you want a three year term and the ability to walk?

I assume the answer is that good operators won't take three years, or that the lender wants the operating agreement to outlast the loan. But if it's the second one, then the lender's requirement is what created @halyard's mismatch, and it's worth finding out which document the ten years came from before negotiating anything.