Operator Agreement: Management, Franchise or Lease

Which operator agreement fits a hotel in Zanzibar?#

For a hotel in Zanzibar, a management agreement with a hard performance test is the form that most often fits, provided the owner can actually enforce it. The three forms divide risk differently. Under a management agreement the owner funds the hotel and keeps the operating risk. Under a franchise the owner licenses a brand and still has to run the hotel or hire someone to run it. Under a lease the operator pays rent and keeps the operating risk. This reading is directional. It is Victaura Research's judgement and not a measured fact, and the sections below set out the evidence and where it breaks.

*A hotel management agreement is a contract in which an owner appoints an operator to run the hotel in exchange for fees.* The operator typically earns a base fee on revenue and an incentive fee on profit. The owner pays the payroll, funds the capital reserve and absorbs the losses. The operator controls staffing, pricing, distribution and standards. Control sits with one party and the money with the other. That asymmetry is the whole difficulty of the form.

*A franchise agreement licenses a brand, a reservation system and a set of standards to an owner, who then operates the hotel or hires someone to do it.* The franchisor does not run the building. It earns a royalty on room revenue, plus program and reservation fees. The owner keeps the operating risk and the day-to-day control. A franchise answers the question of who sells the room. It leaves open the question of who runs it.

*A hotel lease hands the operating business to the operator in return for rent.* The rent can be fixed, variable or a hybrid of the two. The owner becomes a landlord and underwrites the tenant's ability to pay rent instead of a trading result. The operator keeps both the upside and the downside, within whatever caps and floors the lease writes in. Most numbers below carry a grade, such as measured, industry estimate, directional or broker-reported, so that the principal can see how much weight each will bear.

What does a hotel management agreement cost the owner?#

The base fee is paid before the owner sees any profit. HVS reported in April 2024 a base fee of 2.0% to 4.0% of total operating revenue, with 3.0% the most common rate (industry estimate, contract practice as described by HVS). On an illustrative hotel with USD 5 million of total operating revenue, 3.0% is USD 150,000 a year, due whether or not the hotel makes a profit. That arithmetic is illustrative. It is not a forecast for any project, and no Zanzibar-specific fee sample is published in the sources reviewed.

The incentive fee is where the contract allocates the upside, and the owner's priority decides when it starts. HVS describes a formula in which the manager receives between 10% and 20% of cash flows above a performance threshold. The threshold is reached when adjusted gross operating profit exceeds a return on the owner's investment of 8% to 12% (industry estimate). In the HVS worked example, a USD 10 million development carries a priority of about USD 1,000,000, which is 10% of development cost. The test runs year by year, and no incentive fee is paid in a year in which adjusted gross operating profit does not exceed that amount.

Fee levels differ by region, so a single global figure misleads. The 2020 HVS study of Middle East contracts reports a scaled average base fee of 1.7% of gross operating revenue in that region, against a global average of 2.6% (industry estimate, sample of signed contracts). A gap of nearly one percentage point on the same revenue line is large. It suggests that fee levels reflect local bargaining power, and that the principal should not import a Gulf or a European fee level into East Africa without evidence. Cushman & Wakefield's 2022 survey of more than 180 European hotel operator executives adds that owners are typically compensated for risk shifted onto them through higher key money (an upfront payment from the operator to the owner to win the contract), reduced fees, shorter terms or more flexible termination provisions (broker-reported). Fees, key money, term and exit rights are traded against each other.

How long does a management agreement run, and when can the owner leave?#

Management agreements are long contracts, and the length is part of the price. Marriott International's 2025 annual report states that its management agreements are generally for initial periods of 20 to 30 years, with options for the company to renew for up to 10 or more additional years (measured, company disclosure). Hilton's 2015 annual report says the initial term for its full-service management agreements is typically 20 years. Those are the terms disclosed by two global brand companies. Directionally, an independent or regional operator has less leverage to ask for them, and an owner has more leverage to refuse.

Terms have been shortening in younger markets. HVS found in 2020 that Middle East contracts signed after 2008 averaged 17 years, down from 21, against a global average of 18.3 years (industry estimate), and expected initial terms in future contracts to shorten further. The same study describes the manchise, a hybrid in which the operator manages the hotel for an initial period of 5 to 7 years and the owner can then convert to a franchise. The manchise is a way of buying operating help for the first years without committing to it for two decades.

The performance test is the clause that lets the owner leave an operator that is failing. In the HVS Middle East sample, 86% of agreements included a performance test (industry estimate). Testing typically starts once the hotel has stabilised, three to four years after opening. Failure is usually defined over two consecutive years, against thresholds set between 85% and 95% of the benchmark. RevPAR, revenue per available room, is measured against a competitive set, a group of comparable hotels agreed in the contract, and gross operating profit against budget. HVS 2024 gives the same shape for RevPAR penetration, typically 85% or 90% over two consecutive years. The sample granted an average of two cure rights, chances for the operator to remedy a failed test, in the initial term, plus one in each renewal term, and Marriott's disclosure confirms the principle, since many of its agreements allow termination for missed metrics only if the shortfall is not cured.

Why does a performance test often fail to protect the owner?#

A performance test that can be cured, reset or excused protects the operator more than the owner. An eHotelier analysis of the standard clause (2017) sets out the typical structure. The owner may terminate if, for two consecutive years, the hotel fails both of two tests, namely 90% of budgeted revenue or gross operating profit and 90% of the RevPAR of the agreed competitive set. The word both matters. A hotel that misses its budget but still sits near its competitors does not trigger the right.

The cure mechanics are where the test loses its force. The same analysis notes that the manager can pay to bring revenue within 90% of budget, can choose which year to cure, and that curing either year clears both. After a first-year failure the manager can also lower the next year's budget. The competitive set may include hotels that are not truly comparable. In practice the clause can be satisfied by cheque, which is a different thing from satisfying it by performance.

Exceptions and exit costs close what is left. Failure is excused by loosely defined force majeure or by any owner breach, including unfunded capital expenditure needed to meet brand standards. Termination usually requires the owner to repay what is owed to the manager, such as key money or loans. A struggling hotel is unlikely to hold that cash. Performance is also often measured above lines the manager says it cannot control, such as reserves, insurance, taxes and debt service, so the owner's net result is not what is tested.

What does a franchise agreement change for the owner?#

A franchise sells the brand and keeps the operating risk with the owner. Hospitality Investors Trust's 2016 annual report states that its franchise agreements typically carry a royalty of 5% to 6% of gross room revenues, and that it generally pays 3.7% to 5.2% of gross room revenues as program or reservation fees (measured, company disclosure, US portfolio). Taken together, a franchisor can take roughly 9% to 11% of room revenue whatever the hotel's profit. That sum is derived from the two ranges, and it applies to a US portfolio, not to Zanzibar.

Franchise terms tend to be shorter than management terms, and they may carry no right to renew. The same filing describes a typical term of 15 to 20 years and says agreements usually provide no renewal or extension rights. Hilton's 2015 filing gives approximately 20 years for new construction and 10 to 20 years for conversions. Marriott's 2025 filing says franchise terms vary but are generally 10 to 25 years. Without a renewal right, the brand on the hotel depends on a licence the owner does not control.

In a market without mature local operators, a franchise tends to recreate a management layer. A reservation system, a loyalty programme and brand standards are real assets for a hotel that sells rooms to European and international tourists. They do not recruit a general manager or train a kitchen brigade. The owner buys the brand, then buys the operating capability separately. That is a legitimate structure, and it can be cheaper than a branded management agreement, but it adds a second contract and a second counterparty. The principal should read the franchise and the operator contract as one package.

How does a hotel lease move the risk to the operator?#

A lease converts a trading risk into a credit risk. The owner no longer underwrites occupancy and rate. The owner underwrites whether the tenant will pay rent for the length of the lease. A fixed rent makes the income steady and gives away the extra profit in a good year. A variable rent, tied to revenue or profit, shares both. A hybrid sets a fixed base with a variable top-up. The choice allocates the cost of volatility, and the principal should price it as such.

The European evidence shows leases drifting toward variable structures. In the Cushman & Wakefield operator survey of June 2022, 30% of respondents said they offer hybrid and especially variable structures more often, and lease structures were reported as more common in the Iberian Peninsula, the UK and Ireland, and Italy (broker-reported, survey of senior operator executives). In the same release Richard Candey of Cushman & Wakefield said fixed leases will remain the preferred model, and that some owners or developers may consider other structures if the value proposition compensates for the extra risk. Operators are moving toward variable rent, and owners have not settled on it.

The lease form is limited by the tenant behind it, and this note assumes that operators with deep balance sheets are scarce in East Africa (Victaura Research assumption). A lease is only as strong as the tenant behind it, and a tenant with a thin balance sheet in a seasonal market can sign a fixed rent it cannot pay in a weak quarter. The owner then holds a lease and no tenant. I have not found a published example of a fixed lease to an international brand on Zanzibar, and the absence is not proof of non-existence, as the sources reviewed are press and filings and not a register of private contracts. The directional reading is that the lease needs a creditworthy tenant. That few operators on the island could guarantee rent from their own balance sheet is a Victaura Research assumption, not a measured fact, because the sources reviewed include no census of Zanzibar operators.

What does Zanzibar's seasonality do to each contract?#

Zanzibar's demand is growing and sharply seasonal, and the weak months put the strain on whoever carries the fixed costs, the owner under a management or franchise agreement and the operator under a fixed lease. The Office of the Chief Government Statistician, as reported by The Citizen in January 2026, recorded 917,167 international arrivals in 2025 against 736,755 in 2024, an increase of about 24.5% (measured, confirmed in the office's Statistical Abstract 2025). In December 2025 Europe accounted for 68.1% of visitors, and Italy was the largest single source market that month, at 14.4% of arrivals. A growing, European-led market is the setting for every contract discussed here.

The occupancy gap between a low month and a high month is wide. The same office reported estimated bed occupancy of 27.9% in April 2025, with 247,083 of 884,430 available bed spaces occupied, and 92.9% in August 2026, with 949,056 of 1,021,853 bed spaces sold (directional, press-reported official statistics, different years). Those months are 65 percentage points apart. January 2026 stood at 87.5% and December 2025 at about 89%. The weak months are the ones a contract has to survive.

Each form meets that range differently. A management agreement charges the base fee on revenue, so the operator's income falls in a weak month, but the owner pays the full fixed cost base. A franchise charges royalties on room revenue and leaves the full fixed cost with the owner. A fixed lease asks the operator to find the same rent in April as in August, and that is the point at which a thinly capitalised tenant fails. Directionally, a variable or hybrid rent fits this curve better than a fixed one.

Capacity is also growing, which raises the bar for a new hotel. Available bed spaces rose from 884,430 in April 2025 to 1,021,853 in August 2026, an increase of about 15.5% (derived from the two official figures, which are bed-night totals for a 30-day and a 31-day month, so part of the difference is the extra day and part may be seasonal). The principal should read that as a warning against underwriting on occupancy alone. Owner-use nights also compete with rental nights in a branded villa scheme, a trade-off set out in owner nights against rental nights.

Which form holds where local operators are not yet mature?#

Where local operators are immature, the binding constraint is enforcement, and enforcement favours the form with the shortest chain of obligations, the management agreement. This is Victaura Research's directional judgement. A lease needs a tenant with a balance sheet, which this note assumes to be scarce. A franchise needs a separate operator, which adds a counterparty. A management agreement needs only an operator willing to accept a hard test. If that operator can be found and the test drafted tightly, the management form has the fewest moving parts.

The observable market behaviour points toward layered structures. Marriott's February 2024 release on Le Méridien Zanzibar described a franchised property in Bwejuu with a third-party operator named in the release, and targeted a 2025 opening (press-reported, release text read in the Hotel Online reprint of 19 February 2024, which names ALEPH Hospitality as operator; no confirmation of opening found as of 9 October 2026). That is one example, not a market survey. It does show that a global brand entering the island paired a licence with a separate operator. The brand and the operator were different parties, which splits accountability when occupancy disappoints.

Victaura publishes a project page for its second Zanzibar hospitality position. That public project page is the only description of the position used here. This article is a general comparison of contract forms. It does not state which form any Victaura project uses, and nothing in it should be read as a statement about the terms of one. The reader who wants to see how the firm approaches underwriting can start from our approach.

What should a Zanzibar operator term sheet fix before signing?#

The term sheet should fix the performance test before it fixes the brand. The principal should ask for a competitive set named in the contract, a ramp period, the years before testing starts, no longer than the hotel's realistic stabilisation, a single cure right per initial term, no reset of the budget after a failure, a termination cost expressed as a number, and measurement that reaches owner-level net income. The HVS 2020 sample averaged two cure rights in the initial term. A request for one is a negotiating position, and it is directional. It is not a market norm.

The fee stack should be read as one line, and the term should be tied to results. Base fee, incentive fee, owner's priority, franchise royalty, program fees, chain charges for central services such as marketing and technology, and any key money repayment belong in a single table, run through a downside case in which April-like occupancy lasts longer than planned. A fee set that looks light at 92.9% occupancy can be heavy at 27.9%, because the fixed cost base does not fall with revenue. A 20-year term is defensible only if the exit rights are real. HVS expected in 2020 that initial terms in Middle East contracts would keep shortening (industry estimate), and where an operator insists on a long term the principal should price it, through lower fees, key money or a stronger test.

Local law and local capacity are separate diligence items. The contract's governing law, its dispute forum, the enforceability of step-in rights over a Zanzibar asset, and the operator's licensing and staffing plan all sit outside the commercial terms discussed here. I have not set out Zanzibar land, tax or residence rules, because the sources reviewed for this article do not include the primary legislation. Those points belong to counsel qualified in Tanzanian and Zanzibar law, not to a research note.

Weak points, honestly disclosed#

Most of the contract evidence in this article comes from other markets. The HVS studies describe a Middle East sample and global averages. The filings by Marriott, Hilton and Hospitality Investors Trust describe those companies' own portfolios, largely in the United States. The Cushman & Wakefield survey covers nine European markets. I found no published sample of operator contracts in Zanzibar or East Africa, so every fee and term in this article is a benchmark and not a Zanzibar fact.

Several sources are secondary or incompletely read. The Zanzibar occupancy and arrival figures are official statistics as reported by The Citizen, and I did not read the Office of the Chief Government Statistician's own releases. The occupancy figures are island-wide estimates of bed occupancy, the press reports define neither a bed space nor the establishments covered, and a single hotel's room occupancy can differ from them. The Le Méridien details come from the Hotel Online reprint of the Marriott release, as the Marriott page itself returned only a headline. The HVS guide to management contracts is partly paywalled, so I did not rely on it for any figure. The eHotelier piece is a commentary from 2017, and the clause practice may have moved. The conclusion also rests on judgement, because a different analyst could weigh the tenant-credit problem differently, or find a local operator with a balance sheet. The management form ranks first only if an operator accepts a hard test, and the one Zanzibar contract named here, Le Méridien, is a franchise with a separate operator. Nothing here is a price, a yield or a forecast, and nothing here states the terms of any Victaura position.

Skin in the game disclosure. Victaura, through its parent Greystone B.V. (Netherlands), develops projects on Lake Como (Italy), in Nungwi, Zanzibar (Tanzania), on Gili Air and in Uluwatu, Bali (Indonesia), and holds an off-plan capital position on Al Marjan Island, Ras Al Khaimah (UAE). Readers should assume commentary may be influenced by, or benefit, these positions. This document is classified as marketing material under MiFID II Article 24(3). It is not investment advice.