The hotel is losing money, yet the operator is still making a fortune.

Welcome to one of the more remarkable business arrangements in luxury hospitality. Many luxury hotels are owned by investors who hire independent management companies to operate them under long-term contracts. The owners finance the properties and bear the investment risk, while the operators collect fees that don’t necessarily depend on whether the owners make money. That’s quite a deal.

I’m not saying that the model can never work. Some of these operators are genuinely excellent: They deliver extraordinary service, command spectacular room rates, and keep guests coming back. But a hotel can be an operational triumph and a financial disaster for its owner. And if the operator succeeds spectacularly while the investment fails, then it was the wrong deal at the outset.

Much of this comes down to how management agreements are structured. Base fees generally follow revenue, regardless of the owner’s return. Incentive fees can reward operating performance even when the owner’s equity earns next to nothing. In this configuration, an operator can meet every performance target and collect its fees while the owner still loses money.

So why would anyone agree to this? Because some owners are so seduced by the prestige of a luxury brand  they forget who’s assuming the financial risk. The operator arrives with a famous name and a management agreement designed to protect its own economics. The owner signs, convinced the brand will make everything work. That’s an expensive assumption.

Management agreements can also give operators considerable influence over renovations, staffing levels, and amenities required to maintain brand standards. The owner pays for them, whether or not the additional earnings justify the expense.

Operators have every reason to protect their brands. But when protecting the brand means spending millions of dollars of someone else’s money, it’s remarkable how quickly everything becomes absolutely essential.

The best operators can make owners a fortune, and deserve to be paid accordingly. But owners who sign agreements that reward the operator regardless of whether the investment succeeds are buying themselves a very expensive lesson in contract negotiation.

If the hotel is losing money while the operator gets rich, the problem may be the deal itself. And whoever negotiated it has some explaining to do.