Full Definition
A hotel franchise agreement grants the hotel owner the right to use the brand name, loyalty program, and reservations system in exchange for franchise fees (typically 4–7% of room revenue), marketing fees (1–3%), and compliance with brand operating standards. Franchise agreements typically run 10–20 years and can be terminated if brand standards are violated. Buyers of branded hotels must be approved by the franchisor and must comply with any PIP requirements.
Example
An investor buys a Marriott Courtyard. Franchise fee: 6.5% of room revenue. If annual room revenue is $2M, franchise cost = $130,000/year. In exchange, the hotel participates in Marriott Bonvoy loyalty program, receives reservations from Marriott.com, and benefits from brand recognition that drives premium occupancy vs. independent.
Why It Matters
Franchise agreements are a major factor in hotel underwriting and due diligence. They affect revenue (brand drives bookings), cost (franchise fees hit NOI), and exit (buyers must be franchisor-approved). Always review remaining term, renewal options, and PIP requirements before acquisition.