Articles Posted in Hotel Franchise & License Agreements

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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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7 March 2014

Comfort letters are more important than ever as franchising continues to be a dominant form of branding hotels. As many of our recent articles have noted, there has been a sea change in the hotel world. Franchise agreements have become the dominant means of branding most hotels in the US, except for a few of the most upscale and luxury brands.

This popularity of franchising has made comfort letters more important than ever simply by the predominance of the franchise model, and lender’s desire to get certain protections that they feel comfort letters offer.

In today’s article, my partner, hotel lawyer Robert Braun, explains what comfort letters are and the kind of provisions they usually contain.


Comfort Letters – Comfort for Whom?

by
Robert E. Braun | Hotel Lawyer

If you are buying, building or refinancing a hotel, you’ll almost certainly be looking to a bank or other lender to finance the hotel, and when you do, you’ll need to negotiate dozens of documents, some long, some short, but all of them necessary to get your loan. In other articles, we have talked about the importance of subordination, non-disturbance and attornment agreements (SNDAs). SNDAs are used in the context of a hotel management agreement (HMA) — usually only long-term branded HMAs — to define the rights of lenders vis a vis the hotel operator in the event of the owner’s/borrower’s loan default, breach of the HMA, foreclosure by the lender or a deed-in-lieu of foreclosure.

But what about franchised hotels? Lenders who take security in a franchised property will want a “comfort letter,” an agreement between the lender and the franchisor that defines the rights of lenders and franchisors if the hotel owner defaults on its loan obligations, the franchise agreement or other related arrangements. In other words, lenders seek SNDAs to deal with their rights and obligations with respect to HMAs. They use comfort letters to deal with their rights with respect to franchise agreements.

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26 February 2014

The ascendancy of hotel franchise agreements.

Branded hotel franchise agreements continue their rise to dominance in the hotel landscape. Hotel management agreements are not dead, but the advantages of having a hotel operator independent of the brand have been widely recognized and continue to propel the franchise model. (The considerations of branding and using branded (versus independent) management are discussed at length in “When should you choose a brand for your hotel? And when should the brand manage your hotel?“)

What’s really negotiable in a franchise agreement?

The most common question we hear from clients is, “What’s really negotiable in a franchise agreement?”
Franchisees are told by the brand that the franchise agreements are not negotiable, but then they hear that someone else has been able to negotiate at least one or two contract terms. Potential franchisees don’t want to waste time chasing something they cannot get, but the contracts seem so one-sided, and they want to get as much substantive relief as they can.

Based on our experience with hundreds of hotel franchise agreements, JMBM’s Global Hospitality Group® knows that there is plenty of wiggle room to get some important concessions if you know what to go for and don’t waste your effort where it won’t do any good.

One of the biggest mistakes owners make when trying to negotiate a franchise

One of the biggest mistakes we see is owners trying to negotiate the franchise terms themselves. Their lack of experience shows that they are amateurs, and the brands quickly realize that they don’t have to give much by way of concessions.

While we don’t recommend negotiating your franchise agreement without an experienced advisor, hotel lawyer Bob Braun has laid out a few areas where we have been able to help owners improve their contract terms. Depending upon your circumstances, there may be significant other opportunities.

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29 March 2013

Hotel Lawyer on branding your hotel or running it as an independent. When should you brand your hotel and when should you leave it unbranded? How do you know when the benefits justify the costs? And if you decide to brand, should you go with brand management or an independent operator? What are the considerations?

Few decisions are more important. Here is hotel lawyer, Robert Braun to share some insights garnered by our Global Hospitality Group®’s experience in helping clients with more than 1,000 hotel management agreements and franchise agreements.


To Brand or Not To Brand
(your hotel)
by
Robert E. Braun | Hotel Lawyer

Why the hotel branding and management decisions are so important

One of the first decisions in the hotel development or acquisition process can have a lasting impact on the success of the project: whether the property should be branded, and whether that brand should manage the property. The hotel’s brand will be a defining part of the profitability, image and value of the hotel, and there may be no other decision which has a greater effect on the future of the property. Similarly, the management of a hotel can enhance the value of the brand, protect the owner, or detract from the value of the hotel — by as much as a 50% swing.

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16 February 2013

Hotel Lawyer on the Pros and Cons of dual-branded hotels

Dual-branding of hotels in a single structure or complex is quite a trend in the hotel industry and has been picked up by the popular press.

The hotel lawyers in JMBM’s Global Hospitality Group® have been working on dual-branded hotels for some time, so we thought we would share some our observations on the pros and cons of this approach.

My partner, Bob Braun, has worked on many hundreds of hotel management agreements and franchise agreements, and has written this article to provide an important update on this subject.

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30 December 2012

Hotel Lawyer on the spike in reflagging hotels. It’s often good news for us when the business section of a major newspaper explains what is going on in the hotel sector. (And nice, too, when the paper includes a quote by yours truly.)

The topic? How and why hotel owners reflag properties. The reason for the story: the Great Recession has changed just about everything.

In the New York Times article, Dressing Up for Success, reporter Amy Zipkin says: “According to statistics from Smith Travel Research, a research firm in Henderson, Tenn., nearly 2,500 hotels were reflagged in 2011. While that represents just a 5 percent sliver of all hotel properties in the United States, it was still a 39 percent increase from 2010.”

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9 November 2012

Representations and warranties in the documentation of a hotel purchase and sale agreement (or agreement for purchase and sale of any type of hospitality property): What is the value of the seller’s representations and warranties? When does it matter?.

Hotels, restaurants, resorts, vacation ownership projects, spas, golf courses and other similar hospitality properties are different than most real estate. They involve operating businesses that are integrally intertwined with special purpose real estate.

So the documentation to buy or sell such a property (and business) needs to be different than that used for other commercial real estate. One of the areas that is most apparent is in the seller’s representation and warranties.

The article below is by hotel and timeshare lawyer David Sudeck, a senior member of JMBM’s Global Hospitality Group®, and someone very experienced in the purchase and sale of hotels, restaurants, resorts, vacation ownership projects, spas, golf courses and other similar hospitality properties. In a recent article, David wrote about representations and warranties in a purchase and sale agreement — what they are, what areas they cover, and what you want to get in a typical deal.

In this article, he writes about the value of these representations and warranties, hurdles to enforcing them and common terms used today.

This article is one of a series of insights that will be published initially as articles on the Hotel Law Blog at www.HotelLawyer.com and then they will be assembled into the HOW TO BUY A HOTEL handbook for our “We wrote the book™” series, much like the HMA Handbook and the Lenders Handbook for Troubled Hotels (see Resource Center at HotelLawyer.com for free copies).

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4 November 2012

Hotel Lawyer with some tips on buying a hotel or other hospitality property.

Hotels, restaurants, resorts, vacation ownership projects, spas, golf courses and other similar hospitality properties are different than most real estate. They involve operating businesses that are integrally intertwined with special purpose real estate.

So the documentation to buy or sell such a property (and business) needs to be different than that used for other commercial real estate. One of the areas that is most apparent is in the seller’s representation and warranties.

The article below is by hotel and timeshare lawyer David Sudeck, a senior member of JMBM’s Global Hospitality Group®, and someone very experienced in the purchase and sale of hotels, restaurants, resorts, vacation ownership projects, spas, golf courses and other similar hospitality properties. In this article he talks about representations and warranties — what they are, what areas they cover, and what you want to get in a typical deal.

This article is one of a series of insights that will be published initially as articles on the Hotel Law Blog at www.HotelLawyer.com and then they will be assembled into the HOW TO BUY A HOTEL handbook for our “We wrote the book™” series, much like the HMA Handbook and the Lenders Handbook for Troubled Hotels (see Resource Center at HotelLawyer.com for free copies).

CONTINUE READING →

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18 July 2012

There is nothing more important to the value and financial success of your hotel than selecting the right operator, and getting a management agreement with reasonable terms.

At a recent meeting in Los Angeles, my partner and Hotel Lawyer Robert E. Braun of JMBM’s Global Hospitality Group® moderated a panel of hotel industry leaders on some of the key issues owners should consider in selecting a new hotel operator.

The panelists included Patrick Bajdek of Carlson Rezidor Hotel Group, Craig Mance, from Hilton Hotels, Rich Musgrove from HotelAVE, Larry Somma of Hyatt Hotels, and Sam Winterbottom from Grubb & Ellis.

Below, Bob gives his top 5 takeaways from the panel. . .

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12 September 2011

Hotel Lawyer with some tips on Hotel Franchise Agreements and the 5 biggest mistakes a hotel owner can make

Hotels need brands, and brands need hotels. For many years, hotel brands have been growing in importance for the success of hotels in the United States and abroad. The trend toward branding is quite a phenomenon. According to numbers we have seen, In the early 1990s, approximately 40% of the hotels in the U.S. were branded and the balance were independent. Now the number is probably closer to 80% or more of the hotels are branded or brand-affiliated.

The branding is often accomplished by a franchise or license agreement from a company owning the brand. Other times it is accomplished by a branded hotel management company entering into a management agreement with the owner of the hotel, providing both the brand and management for the property.

Although we have spent a lot of time on Hotel Law Blog discussing hotel management agreements, today we are going to focus on the franchise or license agreement arrangements. With more than 20 years’ experience working with more than 1,000 hotel management and franchise agreements, we have some perspectives that may be worth considering.

Hotel owners keep falling into the same traps
One of these perspectives of our hotel lawyers is that many sophisticated hotel investors and owners seem to fall into a handful of traps that would be easy to avoid. And this same handful of traps catches the unwary time and again.

So this article focuses on hotel franchise agreements and outlines the 5 biggest mistakes an owner can make when seeking a hotel franchise arrangement. If this sounds all too familiar, you have probably learned these lessons the hard (and expensive) way. If you haven’t stumbled on these yet, you won’t want to miss the warning flags and the traps they portend.

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Contact Information
Jim Butler, Chairman
Global Hospitality Group®
Jeffer Mangels Butler & Mitchell LLP
(310) 201-3526 • jbutler@jmbm.com
www.HotelLawyer.com

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