Why hotel owners should keep an eye on their management companies
December 21, 2018
It’s common for hotel owners to outsource the management of their properties. Unfortunately, hotel management companies sometimes fraudulently profit at the owners’ expense.
Fraudulent mismanagement can take several forms. In one instance, a real estate property developer hired an international hotel management company to run his new hotel in Miami. The developer installed his own executive to oversee operations. But when the executive questioned a management company invoice to the hotel for $8,000 in unspecified sales and marketing services, the company couldn’t provide an adequate explanation. The hotel’s developer sued, accusing the management company of fraud, accounting irregularities and mismanagement.
In another case, fraud experts discovered that vendor contracts were supplying a hotel management company with millions of dollars in undisclosed rebates. Yet the management contract restricted compensation to basic fees and incentives. By failing to disclose the rebates it received from vendors, the company could be accused of accepting bribes. The forensic investigation also uncovered hidden management company ownership interests in several vendors.
When hotel owners suspect their management agents of fraud and self-dealing, forensic accounting experts are available to help sort out the facts. An operational audit can determine if the management company is complying with the management contract. Legal action may be appropriate if fraudulent activity is found.
Most lawsuits against hotel management companies target purchasing practices. In addition to hiding rebates, self-dealing operators may levy extra fees and conceal documents from owners. If the management contract specifies that the management company may receive only purchasing fees for their purchasing services, then rebates and extra payments represent profits unlawfully withheld from hotel owners.
With the help of fraud experts, owners may be able to recover all or a substantial part of vendor discounts and rebates. Experts can also uncover excessive fees that end up doubling or even tripling charges specified in the management contract. A thorough forensic investigation may help owners negotiate new purchasing agreements that will provide them with substantial proceeds from rebates or discounts.
To ensure a decent rate of return on your hotel investment, it’s essential that you evaluate the true cost of hiring a management company. If fraud is involved, the cost is probably too high. We can help you and your attorney make an informed decision.