Maximizing Asset Revenue: Converting Tenant Agreements to More Profitable Management Contracts

Transitioning from a traditional rental contract to a management contract can offer significant benefits for property owners, including increased revenue potential and reduced operational burdens. If you're considering this conversion, it's essential to understand the steps involved in making the switch while ensuring financial viability. Here's a guide on how to convert your tenants' rental contract to a management contract and potentially generate the same or higher returns.

Steps to Convert to a Management Contract:

1. Evaluate Current Rental Performance
   

• Begin by assessing the performance of your rental property under the existing contract. With a static rates you have a baseline yearly revenue. Review market occupancy and rates to determine your revenue (we recommend month by month to easier have your first budget draft ready to save time later). Create a mock P&L using estimated expenses and estimate overall profitability of the property not including your rent. You should find some slow months below your rent and many months at or above your static market rent. Overall in the yearly mock P&L you should find the total for the year is in excess of your static rent for the year. If you find months (or year) as LESS than your static rent then you have opportunity to create better stability by moving to management contracts vs rent. If you find the mock P&L is well in excess that means your rental deal has been costing you revenue compared to a management contract. Review your analysis and identify areas for improvement and growth potential.
  

1. Research and Select a Management Partner
   

• Research reputable management companies that specialize in your property type and market segment. Look for a partner with a proven track record of maximizing revenue and enhancing property value. Request proposals and compare terms.
  

1. Communicate with Existing Tenants
   

• Or, if you have existing tenants (and your local law allows), inform your existing tenants about the opportunity to transition from a rental contract to a management contract. Clearly explain the benefits of the new arrangement, such as better long term stability, better mutual alignment on asset management, and less risk during slow market conditions.
  

1. Negotiate Terms and Agreement
   

• Initiate discussions with your selected management company to negotiate terms for the management contract. Define responsibilities, performance metrics, revenue-sharing models, and any necessary property improvements or upgrades. Review necessary clauses and terms to protect both parties.
  

1. Monitor Performance and Adjustments
   

• Continuously monitor the performance of the property under the management contract. Review occupancy rates, ADR, guest satisfaction, and financial metrics. Work closely with the management team to make adjustments and optimizations as needed.
  

Converting your tenants' rental contract to a management contract can be a strategic decision to optimize property performance and generate higher returns. By following these steps and leveraging effective strategies, property owners can unlock the full potential of their assets under professional management, ultimately achieving long-term success in the hospitality market.