Articles Posted in Hotel Franchise & License Agreements

Published on:

17 July 2020

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Franchise and Management Disputes in the Time of Covid
by
Robert Braun

If you are reading this, you are almost certainly in the hospitality industry, and you are most likely in a financial and emotional distress. During trying times, hotel owners rely more than ever on their brands and managers – the professionals that owners engage to protect the multi-million dollar investments that they have made in building, maintaining and upgrading properties. Owners rely on brands to drive occupancy and revenue, and on managers to make the most effective and efficient use of those revenues to drive the bottom-line revenues that allow owners to cover debt service, insurance and other expenses, and provide a return – without which no thinking investor would finance a hotel.

At the same time, the Covid-19 pandemic has driven hotel occupancy and rates fallen to levels that were previously unimaginable. Brands and managers are not to blame for the pandemic, but this is the time when they must stand up and work with owners to preserve their assets and prepare for the eventual – and lengthy – return to normal, whatever that normal may be.

Unfortunately, in many cases, brands and managers have not always met the challenge. Many brands and managers have simply submitted, without explanations, edicts regarding closing or reducing operations, demanding funds, and reduced responsiveness. Hotel companies have, across the board, furloughed or laid off large portions of their workforce, making it difficult to obtain the guidance and support owners need.

What Should Owners Do?

Take the First Step. Owners cannot and should not wait for their brands and managers to provide solutions. Under current circumstances, owners maybe more aware of the status of their projects, their strengths and weaknesses, than their managers and brands. Owners should take a hard look at their properties and determine what the best course of action may be, whether it is eliminating some operations (in many areas, that decision will be made by local or statewide authorities), reduce staff, or even close (understanding that closing hotel, and maintaining a closed hotel, is an expensive proposition).

Be the Squeaky Wheel. Rather than wait for management to deliver a working capital request, require updated projections of cash flows and cash needs, and use those as a tool to make appropriate changes in operations. Many, if not most, management agreements require an owner to provide working capital funds on 10 days’ notice (in some cases less); those demands may be impossible for an owner to meet, putting the owner in default and giving managers and brands additional leverage.

Read Your Agreements. Much has been made of the effectiveness, or lack thereof, of force majeure clauses. But that is not the only provision that will impact a manager’s or brand’s obligations and an owner’s rights. A thorough review of a franchise or management agreement is necessary to create a game plan. The devil may be in the details, but so are opportunities and alternatives.

Create a Game Plan. Now is the time to consider whether changes need to be made in the owner-manager-brand relationship. That might consist of changes to fees (not just management or royalty fees, but to marketing and other ancillary costs), operating standards and property improvement plans, but also a re-evaluation of whether the brand is the right brand or the manager is the right manager. Some brand-managed properties would benefit from third-party management, and in some cases, the brand was a bad fit from the beginning, and the pandemic has exposed greater fault lines.

Create Allies. Whatever decisions an owner may make, it cannot implement them with cooperation from all if its stakeholders, including lenders, investors, vendors, governmental authorities, and workers. An owner that creates a united front with all of the parties that depend on the survival and ultimate success of the property will have a better chance to achieve that success and come out of this crisis strong, and ready to take advantage of a recovery.

Be Bold. Sir Winston Churchill is credited with first saying, “Never let a good crisis go to waste.” This is a crisis like no other, and owners should not be timid in considering how they can better their position. However difficult these times are, we should remember that they will ultimately become a memory, not a reality, and we should prepare for the reality that follows.

The Global Hospitality Group of Jeffer Mangels Butler & Mitchell LLP works with owners and others in the hospitality industry during this crisis to create effective and meaningful solutions to intractable problems. CONTINUE READING →

Published on:

24 January 2020

If you’re planning to attend the 2020 ALIS conference next week, we’d like to hear from you! Our Global Hospitality Group® attorneys are ready to discuss:

  • Successful hotel purchase strategies
  • Getting a great hotel management agreement
  • Optimizing your financing structure
  • Avoiding regulatory pitfalls in 2020
  • How to protect your company and comply with new cybersecurity regulations
  • Hotel industry litigation issues

Please contact us if you’d like to get in touch during the conference:

jim-150x150Jim Butler
Partner, Chairman
Global Hospitality Group®
310.201.3526
JButler@jmbm.com
guy-150x150Guy Maisnik
Partner, Vice Chair
Global Hospitality Group®
310.201.3588
MGM@jmbm.com
david-150x150David A. Sudeck
Partner
310.201.3518
DSudeck@jmbm.com
bob-150x150Robert E. Braun
Partner
310.785.5331
RBraun@jmbm.com
jeff-150x150Jeffrey T. Myers
Partner
310.201.3525
JMyers@jmbm.com
mark-150x150Mark S. Adams
Partner
949.623.7230
MarkAdams@jmbm.com
Published on:

15 February 2019

$87 billion in hotel transactions involving more than 3,900 properties
LOS ANGELES—The hotel lawyers of JMBM’s Global Hospitality Group® are pleased to present their updated Hospitality Credentials, which include clients and projects that represent more than $87 billion in hotel transaction experience involving more than 3,900 properties worldwide – more than any other law firm.

“If you are a hotel owner, developer, or capital provider, our hospitality lawyers can provide expertise and experience you just won’t find elsewhere,” said Jim Butler, Chairman of JMBM’s Global Hospitality Group. “Whether you are buying or selling a hotel, developing a new one, need a privacy and cybersecurity plan, or defend an ADA lawsuit – we have lawyers who know the ropes, and can guide you every step of the way.”

JMBM’s Global Hospitality Group provides a full range of services to the hospitality industry including:

  • ADA compliance & defense
  • Cannabis
  • Celebrity chef agreements
  • Construction
  • Corporate governance
  • Cybersecurity
  • Data privacy
  • Development
  • Equity & joint ventures
  • Expert witness
  • Fiduciary duty
  • Financing
  • Foreign investment
  • Franchise & licensing
  • Hotel-specific contracts
  • Labor & employment
  • Land use & environmental
  • Leasing
  • Litigation
  • Management agreements
  • Mergers & Acquisitions
  • Opportunity Zone
  • Proposition 65
  • Purchase & sale
  • Shareholder disputes
  • Tax
  • Trademark & copyright
  • Trusts and estates
  • Union negotiations
  • Union prevention
  • Vacation ownership
  • Workouts, bankruptcies & receiverships
“Exceeding $87 billion in hotel transactions involving 3,900 properties is a new milestone, and one I am proud to announce,” said Butler. “I am grateful to all of our wonderful hospitality clients who have shown us their trust and confidence over the years and continue to provide us with challenging and meaningful work.”

About JMBM’s Global Hospitality Group
JMBM’s Global Hospitality Group is the premier hospitality practice in a full-service law firm and the most experienced legal and advisory team in the industry. The Group publishes the Hotel Law Blog and hosts the annual Meet the Money® National Hotel Finance & Investment Conference (May 6-9, 2019 in Los Angeles). For more information visit www.HotelLawyer.com.

Contact:

Jim Butler
jbutler@jmbm.com
+1 310-201-3526

Published on:

8 December 2018

Hotel Lawyer on Owners’ concerns with hotel brand franchise agreements — Areas of Protection or Non-competition clauses

My partner Bob Braun is a senior member of our Global Hospitality Group® and has experience with many hundreds of hotel management and franchise agreements. Bob is also co-author of the Hotel Management Agreement & Franchise Agreement Handbook (3rd edition), and has first-hand experience with branding and management for every major traditional hotel brand, including a number of multi-branded properties. Today he explores the growing problem for hotel franchisees in gaining meaningful protection from other hotels operating under their franchisor’s brands.
Hotel Franchise Agreements:
What happened to my Area of Protection?
by
Bob Braun, Hotel Lawyer

 

Brand concentration, new brand proliferation and ascendance of the franchise model of branding

Brand concentration has intensified greatly over recent years and many new brands have been created. At last count (and the count changes often), Marriott owns 30 brands, Accor has 33, Wyndham has 18, Hilton has 14, IHG has 13, Choice has 11 and Hyatt has 10. For a hospitality chain, a portfolio of brands used to represent a customer and regional segmentation strategy designed to target buyers across the economic spectrum and resonate with local preferences.

Before the mergers and acquisitions, new brand launches, and the development of soft brands, a hotel chain typically had a few iconic brands in each chain scale that customers could easily recognize and differentiate from the competition. Guests could rely on their knowledge of the brands for a predictable experience commensurate to the brand promise. Moreover, it was common for brands to operate, own, or both operate and own properties, giving brands “skin in the game” and greater ability to create a uniform guest experience. Over the years, however, franchising became the preferred model for growth, shifting more of the costs of development and costs of ownership to hotel owners. Today, you would be hard-pressed to name a hotel that owns a significant number of properties.

While the move to managed and franchised hotels freed up capital to invest in new growth, the brands faced a new dilemma — how to build or convert more hotels in a market where they already had operating branded properties. After all, brands could not rely solely on fee-based revenue from existing properties growing at single-digit RevPAR to meet expectations of Wall Street investors, but they also couldn’t open the same brand next to one that already existed.

As brands pursued franchised growth, they have also tried to retain the right to saturate a market with their affiliated flags. Hotel brands now uniformly reserve the right to operate competing properties in the same location as existing properties — helping them to fulfill their goal of expanding their markets. Hotel owners, of course, have a different view — having the only property of their brand (or of any competing property, whatever the brand) is a benefit, and allows the owner comfort that they will be able to benefit from their investment.

Owners’ challenges in obtaining protection from competition by their brand’s other hotel owners using the same reservation system.

Owners see a number of benefits to limiting competition within the brand: CONTINUE READING →

Published on:

Chinese-Photo-1-2

Recently, a Chinese government delegation visited Jeffer Mangels Butler & Mitchell LLP.  The delegation included some of the highest-ranking officials from a top Chinese government agency – “China State Administration of Foreign Exchange” – an agency that directly oversees the investment of $3 trillion of China’s foreign reserve. CONTINUE READING →

Published on:

7 November 2016

Hotel Lawyer on multi-branded hotels.

Hotels with more than one brand are increasingly common, but it wasn’t always so. Although some compelling advantages are driving this trend in many situations, developers and owners should weigh the advantages against other considerations.

My partner Bob Braun is a senior member of our Global Hospitality Group® and has experience with many hundreds of hotel management and franchise agreements. Bob is also co-author of the Hotel Management Agreement & Franchise Agreement Handbook (3rd edition), and has first-hand experience with branding and management for every major traditional hotel brand, including a number of multi-branded properties. Today he explores the phenomenon in greater detail.
Dual-branded & multi-branded hotels:
Opportunities and challenges
by
Bob Braun, Hotel Lawyer

The trend of dual-branded and multi-branded hotels

Over the past few years, the popularity of multi-branded properties has exploded. Less than a decade ago, a dual-branded hotel was an oddity. Then dual branding became more common, and some properties began to use more than two brands, so “multi-branding” was born in the hotel industry. In the early days, multi-branding resulted from unique circumstances. Today, it is driven by a number of factors discussed below, and there are nearly 100 properties with multiple brands and nearly that many again in construction. CONTINUE READING →

Published on:

21 September 2016

Have you noticed the explosion of new brands from hotel companies over the past few years? At JMBM, we do a lot of work with branding through license agreements, management agreements and other arrangements. So we asked my partner Bob Braun to give us some insights on what this is all about and what significance it has.

Here are Bob’s thoughts, along with some practical advice on what owners and developers should do in this situation.
Hotels – Brand Expansion or Brand Explosion?
by
Bob Braun, Hotel Lawyer

Consumer oriented companies commonly use “brand extension” to launch a new product by using an existing brand name on a new or related product, often in a different category. These companies use brand extension to leverage their existing customer base and brand loyalty to increase profits with a new product offering. CONTINUE READING →

Published on:

23 November 2015

As the biggest merger in the history of the hospitality industry,  the Marriott-Starwood merger, is grabbing headlines worldwide. Most of the recent press has focused on the sheer size of the potential transaction. But in his article below, my partner and hotel lawyer Bob Braun, considers the practical impact of the merger on hotel owners, franchisees and developers. With the loss of the Starwood family of brands as an independent and significant competitive force in the industry, the merger will bring mixed blessings to stakeholders.

 
The Marriott-Starwood merger – Is bigger really better?
Impact of the merger on hotel owners, franchisees and developers
by
Robert E. Braun | Hotel Lawyer

The proposed merger between Marriott and Starwood will, by all accounts, create a behemoth in the hotel industry. If the merger goes through as planned, the combined company will be the world’s largest hotel company, with more than 5,500 hotels under management or franchise, 1.1 million hotel rooms around the world, 30 hotel brands and up to 75 million hotel loyalty members.

While commentators have speculated as to whether the combined entity will benefit consumers, stockholders or frequent guests, little has been said about how it could impact hotel owners, franchisees and developers currently in either of the brand families or looking to them in the future. No one will really know until after the merger (if it is, in fact consummated, and there are a variety of hurdles to closing such a complex transaction), but the JMBM Global Hospitality Group has negotiated many hundreds of franchise agreements, including agreements with virtually every major hotel brand, and we believe hotel owners should consider a few important factors:

Will Owners Have Fewer Choices? The first, and most obvious, impact on any potential owner is that the field has been reduced by a significant player. Thirty brands (31, if we include the new Grand Sheraton brand) may remain, but in fact they will be operated by a single entity, and that entity will decide on what brands will be available in a given market. Moreover, the differences between particular brands in a given price or quality segment are likely to be reduced. How long, for example, will Sheraton or Le Meridien hotels be markedly different from Marriott or Renaissance properties? Where will they be positioned relative to other brands in the new combined family?

Any hotel owner, franchisee or investor should also recognize that the Marriott-Starwood merger might only be the first of its kind. Many analysts predict that other brands will merge to create the size and influence that will allow them better to compete with the largest hotel branding company in the world. If that happens – and transactions like this seem to occur in bunches – owners will have even fewer choices.

Will Owners Have Reduced Leverage? The immediate corollary to fewer choices is reduced leverage. A hotel owner will no longer be able to create a competition between two of the largest players in the business; Marriott/Starwood is unlikely to bid against itself for management or franchise opportunities.

This challenge is likely to extend beyond just the merger of Marriott and Starwood. Other major brands – Intercontinental Hotel Group, Hilton Hotels, Hyatt Hotels to name a few – will have greater bargaining power when negotiating with owners because there will simply be fewer competing companies.

Will Hotel Companies be Less Flexible? A common concern among hotel owners is the desire for their brands to acknowledge the unique qualities of each property. While some franchised or branded businesses can achieve a high degree of uniformity, hotels are special, and hotel owners need brands to recognize that. As much as brands strive to create a consistent experience at all properties operating under the same name, local differences – whether it be location, common amenities, zoning, legal restrictions, competition or otherwise – have to be addressed. But larger companies have greater reasons to increase efficiency and reduce variations between different properties, and hotel owners may have difficulty ensuring that local needs are met.

Will New Players Step Into the Breach? At the same time, it may be possible for new, smaller and more nimble brands to make inroads in this market. If there is less differentiation between different flags, if the larger players are less flexible, the smaller players may find inroads and opportunities that are closed to them now. It’s even possible that Marriott-Starwood may choose to shed some brands, for antitrust or business reasons, giving rise to new competition.

The JMBM Global Hospitality Group® believes that hotel owners should be mindful of these concerns when considering their branding opportunities, and when negotiating with brands. Our practice focuses on leveling the playing field between brands and owners, and creating a lasting, functional relationship between them. While this merger may lead to a new set of rules for the road, we are ready to help our clients understand the new realities navigate the new landscape.

CONTINUE READING →

Published on:

23 June 2015

Jack Westergom, Managing Director of Manhattan Hospitality Advisors, discusses hotel operating agreements, asset management, and the RFP process in the video below.

Jack spoke with David Sudeck, a senior partner in the JMBM Global Hospitality Group®, as part of our video interview series on hotel finance and investment opportunities in 2015.

A transcript follows the video.

Jack Westergom discusses hotel operating agreements, asset management and cycles - Meet the Money®


David Sudeck: I’m David Sudeck. I’m a senior attorney with Global Hospitality Group® at Jeffer Mangels Butler & Mitchell. We’re here at the 25th Annual Meet the Money® Conference. I’m here with Jack Westergom, Managing Director of Manhattan Hospitality Advisors. Welcome.

Jack Westergom: Thank you. CONTINUE READING →

Published on:

18 September 2014

Hotel Lawyer: New Uniform System of Accounts will affect your hotel management and franchise agreements. Are you ready?

Commencing January 1, 2015, the hotel industry will have a new, significantly revised set of guidelines governing accounting for hotels. That is the effective date for the recently published Uniform System of Accounts for the Lodging Industry, 11th Edition (2014) (“11th Edition”). This is just one of the many things that distinguishes hotels and the hotel industry from every other class of real estate. And the new rules will have a significant impact on a number of matters in hotel management agreements.

Here is a summary of the important changes from one of our industry friends who worked on the 11th Edition, Michelle Russo of hotelAVE.
How will the 11th edition of the Uniform System
affect your management agreement?

by
Michelle Russo, CEO, Hotel Asset Value Enhancement, Inc. (hotelAVE)

The AHLA issued the new 11th edition of the Uniform System of Accounts for the Lodging Industry (USALI) in July 2014.   The process took almost three years and the edition reflects the first time that ownership interests were included in the Financial Management Committee that previously comprised only operators, industry consultants, CPAs and educators.  While there are many changes from the 10th to 11th editions, this article addresses what owners and operators need to evaluate to understand the impact of the 11th edition on manager fees and performance tests.

Recommendations for Evaluating Current Agreements.

The 11th edition includes title and definition changes as well as new schedules.  For example Total Revenue is replaced with a new term called Operating Revenue.  There is also a new schedule that is reported below GOP that includes revenue not generated by the operator (including interest income, other income such as antenna lease income and cost recovery income).  You or your lawyer should determine how these changes affect base fees, incentive fees and performance tests.  Please note that these changes are effective January 1, 2015. CONTINUE READING →

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