Hotel Management Agreements in the Dominican Republic: Clauses, Fees and Terms

Signing a hotel management agreement is the single decision that most shapes an asset’s profitability over the following ten years. It is not paperwork: it is the document that defines who controls the budget, who hires the staff, how fees are calculated and — the part almost nobody reads until it matters — how you get out of the deal when things stop working.

In the Dominican Republic this contract carries its own particularities: a labour framework whose severance entitlements are calculated differently from the rest of the Caribbean, tax incentives that depend on where the asset sits, and a pronounced seasonality that shapes how the fee clause must be drafted. This article walks through, clause by clause, what an owner needs to understand before signing with an operator such as NEXUM Hospitality.

What a hotel management agreement actually is

A hotel management agreement, or HMA, is the contract by which a hotel owner entrusts the full operation of the property to a specialised company while retaining ownership of both the real estate and the business.

The legal distinction matters and is often misread: the operator does not lease the hotel and does not assume the business risk. It acts as the owner’s agent. Revenues and expenses remain the owner’s; the operator charges a fee for managing. That means the result — good or bad — lands in the owner’s account, and the quality of the contract determines how much control the owner keeps over that result.

Three arrangements coexist in Dominican practice and should not be confused, as we set out in our article on what a hotel management company is and how it works: the management agreement, the franchise and the lease. Only the first delegates operations while the owner keeps the business.

The clauses that decide profitability

Of the thirty or forty clauses a typical HMA contains, seven concentrate almost all of the economic impact. These are they.

1. Management fees

The standard structure combines two components. A base fee, a percentage of revenue, which covers the operator’s structure and is charged whether or not there is profit. And an incentive fee, a percentage of the operating result, which is what aligns both parties: the operator earns more only when the owner earns more.

What deserves the most scrutiny is not the percentage but the calculation base. Total revenue or rooms only? Before or after taxes? Which line items enter the result on which the incentive is computed? A contract that fails to define this precisely is a contract that will be argued over every month.

2. Term and renewal

Terms of ten to twenty years are common, often with automatic renewals. The point to negotiate is not the length itself but the window for giving notice: how far in advance the owner must state an intention not to renew, and what happens if that window is missed.

3. Performance clause

This is the clause that separates a professional agreement from an adhesion contract, and the one most frequently absent. It should set measurable thresholds — a percentage of budgeted gross operating profit, and a RevPAR index against a named competitive set — together with a cure period and force majeure exceptions.

Without a market threshold, the clause measures the weather rather than the operator: a bad year for the whole destination sinks the result through no fault of the operator, and a booming destination hides mediocre management. How to read those indicators is covered in our article on RevPAR, ADR and occupancy.

4. Approval of budget and business plan

Who approves the annual budget, by when, and what happens if the parties disagree. A contract in which the operator approves its own budget leaves the owner without any real control over spending.

5. Bank accounts and signing authority

Operating accounts should be held in the name of the property or its owning company, never the operator’s, with tiered signing authority: the operator may disburse up to a set amount, above which the owner’s signature is required. When a relationship breaks down — and some do — this is the difference between a letter to the bank and a court case.

6. Employer of record

Either the owner is the employer and the operator directs the staff, or the operator is the employer and invoices the cost. Both models work if properly drafted. What the contract must state is who provisions the severance entitlements that accrue with seniority, how staff transfer if the operator changes, and who bears liabilities predating the signature. The framework is Labour Code 16-92, overseen by the Ministry of Labour, with social security contributions administered through the system supervised by SISALRIL.

7. Termination and transition

Grounds for termination, penalties for early exit, what happens on a sale of the asset, and — the most commonly forgotten item — the transition protocol: what is handed over, within what period and in what format. Accounts, personnel files, supplier contracts, forward bookings, the customer database and system access. A hotel that changes operator and does not receive its own reservation base starts from zero in the middle of the season.

What operators actually charge in the Dominican market

Published ranges vary by property size, category and the operator’s own structure, but the shape of the fee is consistent and worth understanding before comparing proposals.

• Base fee. A percentage of revenue, charged monthly regardless of result. The lower the percentage, the more attention the additional charges deserve.
• Incentive fee. A percentage of gross operating profit, ideally settled annually rather than monthly so that seasonality does not distort it.
• Shared corporate services. Sales, revenue management, centralised accounting and systems, allocated across properties by a formula that must appear in the contract.
• Technical services during pre-opening, when the operator joins before the hotel is built. Usually a fixed fee, and money well spent: decisions taken at plan stage are paid for daily over twenty years.

Two smaller items are frequently overlooked and belong in the same calculation: software licences for the property management system, booking engine and channel manager, and purchasing commissions if the operator retains part of the discount it negotiates with suppliers. Neither is illegitimate. What is illegitimate is finding out about them afterwards.

Common mistakes when negotiating

1. Negotiating the percentage instead of the base. A three per cent fee on total revenue can cost more than a four per cent fee on rooms revenue. The base is where the money is.
2. Accepting a performance clause with no market threshold. It then measures the destination rather than the operator, in both directions.
3. Leaving the competitive set undefined. “Comparable hotels in the area” is not a definition. It must be a list of named properties in an annex.
4. Ignoring the FF&E reserve. Without a funded reserve for furniture, fixtures and equipment, year six brings a capital call nobody budgeted for.
5. Signing without a transition protocol. The cheapest clause to negotiate at the start and the most expensive to be missing at the end.
6. Assuming the tax exemption. Building Law 158-01 relief into the financial model before the resolution is in hand is one of the more serious risks in the structuring phase.

What to prepare before sitting down

Owners who arrive with these documents shorten the negotiation by weeks and, more importantly, negotiate from a stronger position.

• Three years of financial statements, if the hotel is operating, reconciled with filed tax returns.
• Historical operating indicators by month: occupancy, average rate and RevPAR.
• Current channel mix, showing the weight of direct sales against online agencies and tour operators.
• Payroll with length of service per employee and the accrued severance liability.
• Technical condition report of the building, with an estimate of deferred investment.
• Clean corporate and title documentation, so that due diligence does not stall the process.

How to assess an operator before signing

A presentation deck proves nothing. Four checks do.

• Ask for a real reporting pack from another property, with the figures redacted if necessary. It shows exactly what you will receive every month.
• Ask for the full list of properties under management — not “advised” or “affiliated” — with years of tenure at each.
• Speak to two current owners and, if possible, one former owner. Ask whether reports arrive on time, whether unexpected charges appeared, and how the last serious disagreement was resolved. That third question is worth more than the other two together.
• Ask who will actually run the hotel. The person who signs the contract is not the person who manages the property. Request the profile of the proposed general manager and of the regional executive who will supervise it.

The annexes nobody reads, and that settle arguments

Most operational disputes are not resolved in the body of the contract but in its annexes. Four are worth reading twice.

• Accounts and signing authority: which accounts exist, in whose name, who signs and up to what amount, how surplus is distributed and what minimum working capital stays in the operating account.
• Reporting annex: the exact contents of the monthly pack and the delivery deadline. Without a deadline, reports arrive late precisely in the months when they matter.
• Tax annex: who files what, who withholds on payments abroad, and who bears any penalty for late filing.
• Insurance annex: policies required, sums insured and who is named as beneficiary. In coastal properties, wind and flood cover must be checked explicitly against real reconstruction cost.

What the Dominican framework changes

Three local factors alter how the contract must be drafted.

Severance grows with seniority

Dominican severance on dismissal without just cause increases with length of service, so a long-tenured team represents an accrued obligation that rarely appears in any projection. The contract must state who provisions it month by month and who assumes it on termination.

Seasonality distorts the incentive fee

The gap between high and low season in Dominican leisure destinations is among the sharpest in the Caribbean. An incentive fee settled monthly rewards the operator in February and penalises it in September for reasons unrelated to management quality. Settling the incentive on an annual basis is the sensible answer. Arrival figures by month are published by the Ministry of Tourism and the National Statistics Office.

Tax incentives are not automatic

Law 158-01 on tourism development grants temporary exemptions to qualifying projects in designated poles. Qualification is applied for, assessed and resolved; it does not follow automatically from sitting in a tourist zone. Official investor information is centralised by ProDominicana, and tax obligations are administered by the Directorate General of Internal Revenue.

How fees translate into money

Percentages sound abstract until they meet a budget. The useful exercise, before signing, is to take the projected first full year and add up every charge the hotel will bear: base fee, estimated incentive, shared corporate services, software licences and travel costs for corporate staff. Express the total as a percentage of projected revenue.

It is common for the proposal with the lowest headline base fee to end up the most expensive once the additional charges are added. That half-hour of arithmetic saves more money than any other step in the process, and it should be read against the cost structure we set out in what it costs to run a hotel in the Dominican Republic.

The negotiation, in order

1. Define the fee calculation base in writing, with a worked numerical example of one month’s settlement.
2. Close the list of additional charges. If the draft says “and other reasonable expenses”, ask for the list to be made exhaustive.
3. Name the competitive set hotel by hotel in an annex. Changing it later moves every performance index.
4. Agree the reporting package: monthly, in USALI format, with comparison against budget and against the same month of the prior year.
5. Settle banking and signing authority before anything else is discussed.
6. Negotiate the exit while the relationship is good. Nobody negotiates a fair transition protocol in the middle of a dispute.

A negotiation of this kind typically takes six to twelve weeks when the owner arrives with the documentation prepared. You can see how we approach it in why partner with us, who does it in our management team, and how the relationship begins in our collaboration process.

Conclusion: the contract is the control

An owner who delegates operations does not delegate the result: the result stays in their account. What the contract determines is how much visibility and how much leverage they retain over it. A well-drafted agreement gives an owner monthly comparable information, a measurable performance threshold, control over disbursements and an orderly way out.

A poorly drafted one gives a summary report, no benchmark, no signing authority and a costly exit. The building is the same in both cases. The difference is on paper. You can review the properties we operate in our portfolio and the services behind them in our solutions.

Frequently asked questions about hotel management agreements

How much does a hotel operator charge?

The usual structure combines a base fee on revenue with an incentive fee on the operating result. More important than the percentages is the calculation base for each and the closed list of additional charges billed on top.

Is it a bad sign if an operator charges no incentive fee?

Usually, yes. Without an incentive its income depends on turnover rather than on the result, so it does not share the owner’s risk. A lower base fee with an incentive tends to align interests better than a higher base fee without one.

Who should hold the hotel’s bank accounts?

The property or its owning company, never the operator, with signing authority tiered by amount. That is what allows an owner to regain control of the cash with a letter to the bank rather than through litigation.

Can I terminate a management agreement for poor results?

Only if the contract provides for it. That is why the performance clause is essential: it must set measurable thresholds, both against budgeted operating profit and against a named competitive set, along with a cure period and force majeure exceptions.

How long does it take to negotiate one?

Six to twelve weeks when the owner comes prepared. The phase that stretches longest is defining the performance indicators and the competitive set — precisely because it carries the most consequence.

What must an outgoing operator hand over?

Closed and reconciled accounts, personnel files, current supplier contracts, forward bookings, the customer database and access to every system. The reservation base is the most critical: without it the hotel restarts its commercial effort from zero.