06 October 2010
Terminology
Contracts between hotel owners and managers (or operators) controlling the management of a hotel go by various names. They are called hotel management agreements, HMAs, hotel management contracts or hotel operating agreements. For convenient reference, this article will generally use the term “Hotel Management Agreement” or “HMA.” However all these terms can be used interchangeably and mean the same thing, just as with hotel operator or hotel manager.
Whatever they are called, Hotel Management Agreements allocate risk between the hotel manager and the hotel owner. They are critical in determining the profitability and value of a hotel.
Hotel Lawyer with a big tip on how to get a great hotel operator and a fair hotel management agreement — Why Hotel Owners Need HMA PRO™
For more than 20 years, hotel lawyers at JMBM’s Global Hospitality Group® have helped hotel owners find the best hotel operators for their properties and get fair hotel management agreements. Our clients get better results because of our experience gained in negotiating, re-negotiating, litigating, arbitrating and advising on more than 1,000 hotel management agreements and more than $87 billion of hotel transactions.
Our experience has has taught us that the traditional Request for Proposal or RFP process used to get hotel operators is too passive and ineffective. By its very nature, a “mere” RFP suggests that the owner should just wait for whatever an operator might propose, and that is simply not in the best interest of either the owner or the prospective operator.
HMA PRO™ is JMBM’s ultimate refinement of the old standby RFP. We started with the typical hotel industry RFP process still used by knowledgeable hotel consultants today, but we made some critical changes that have produced stunning results for our clients, greatly enhancing the value of the owner’s hotel.
Here’s how it works . . .
How to get a great hotel operator
using the “HMA PRO™” process
by
Jim Butler and Robert E. Braun | Hotel Lawyers
Getting a great hotel operator
Everyone agrees that the choice of the “right” hotel brand and operator may be one of the most significant decisions affecting the financial success and value of a hotel. The right operator will add significant value to the property, both on a current basis through better operations, and by enhancing the long-term value of the property. At the same time, the wrong brand or the wrong operator will reduce the current earnings of the property and the value of the property, making it harder to finance and resulting in a lower sales price.
Successful hotel investment also requires a fair HMA
Many owners discover too late that getting a great operator is only a part of the puzzle they need to solve. Investors also need a fair hotel management agreement or HMA. Without a fair HMA, the best operator in the world will not bring the expected benefits to the hotel investment.
The typical branded HMA is a terrible document for owners. Wholly apart from the fees and other economic terms, it is very one-sided and gives the operator virtually total control of the hotel while making the owner responsible to maintain the operator’s vision of its operating standards.
We sometimes say that such an agreement gives the operator all the benefits of ownership without any of the burdens.
Using HMA PRO™ to get both a great operator and a fair HMA
The best time to bring in JMBM’s Global Hospitality Group® experts is at the very beginning of your project, when you are evaluating, planning and structuring.
We have represented owners, developers and investors for more than 20 years in negotiating, re-negotiating, litigating, arbitrating or advising on more than 1,000 hotel management agreements. Based on this experience, we can say categorically that if an owner wants to select the right brand or operator, it must use an intentional, disciplined process that takes into account the owner’s needs, operator’s capabilities and the terms of their agreement.
We also are convinced that the solution to the getting the best hotel brand and operator – on terms of an HMA that is fair to all, including the owner – is a process we have refined to a new level and which we call the Hotel Management Agreement Procedure to Recruit an Operator or HMA PRO™.
HMA PRO™ is JMBM’s ultimate refinement of the old standby Request for Proposal or RFP. We started with the typical RFP process still used by knowledgeable hotel consultants today. But we didn’t like the passive nature of the RFP process, which suggests that the owner should just wait for whatever an operator might propose. And over a period starting more than 20 years ago, we made some critical changes to the typical RFP process that greatly enhance the outcome for owners and investors. We don’t know anyone else who has uses a unique process like ours, and we recently decided that our proprietary process needed a different name to distinguish it from what everyone else does. So we coined the phrase HMA PRO™.
Identifying the owner’s goals and priorities
Before recruiting a hotel operator, each owner must identify, evaluate and prioritize its goals and other considerations for a particular hotel. What does the owner want to accomplish with the property? How do relative advantages of alternative positioning compare? How do the ultimate ownership goals stack up against realistic alternatives? Each owner must consider its current and potential plans. For example:
- Is this to be an iconic trophy property or a less attractive but perhaps more reliable cash generating machine? Must the profit and capital appreciation come from the hotel itself, or from greatly enhanced value in a resort, integrated mixed-use components or adjoining residential, office or retail properties?
- What resources and capital is the owner prepared to dedicate to the project?
- Is the investment horizon short-term or long-term? Is it driven by any particular events or by economic return or other factors?
- How does this property fit in with other investments in the owner’s portfolio? And what is the cost-benefit analysis for alternative positioning?
Don’t even start talking to operators until you have a grip on the 50-point Comprehensive HMA PRO™ Checklist!
What good does it do to have hotel experts look at the non-binding deal that cannot be changed on any important business or legal terms? You can basically “take it or leave it” on the non-binding deal you struck, but you will likely have lost an operator that would have been the best for your property.
Before your first contact with a hotel operator, you should carefully identify all of your unique ownership priorities and goals.
We help clients accomplish this by walking them through our Comprehensive HMA PRO™ Checklist. In almost every case, it changes the operators you want to approach, how you approach them, and what you want to accomplish from any exchange with operators.
It usually takes several hours of focused discussion to work through the business and legal points in the Comprehensive HMA PRO™ Checklist, and most clients find this time some of the most valuable in the entire process of recruiting a great operator. The checklist is a detailed list of more than 50 tier-1 and tier-2 business and legal issues which an owner needs to resolve prior to or during the earliest stages of negotiating the term sheet or letter of intent (LOI) with the operator. We call these matters tier-1 for “must have” deal points, and “tier-2” for “really want to have” matters that perhaps are not as crucial, but are still extremely important. The tier-3 issues are more mechanical items that can be hashed out in the actual negotiation of the hotel management agreement itself, after the term sheet or LOI is finished.
People outside the hotel industry often don’t realize that the owner’s ability to negotiate for these tier-1 and tier-2 checklist items will be jeopardized or lost once the back-and-forth of the LOI negotiations have begun. They find themselves drawn into a seductive process of negotiations with proposed operators, thinking no harm can come from getting a “non-binding” term sheet with an operator, and they will have the hotel experts look it over later on.
But beware! Once the first requests or comments are given by the owner to an operator proposal (even though “non-binding”), operators typically will say that the owner is “re-trading” the deal if it tries to raise these issues later on, and operators normally will not discuss these issues further even though they might have agreed to them if “properly” sequenced. What good does it do to have hotel experts look at the non-binding deal that cannot be changed on any important business or legal terms? You can basically “take it or leave it” on the non-binding deal you struck, but you will likely have lost an operator that would have been the best for your property.
While some operators may cut a little slack in this situation, most do not. And even with the more flexible ones, every deal point will be harder fought and more compromised. It is better to avoid being put in such a position of weakness.
People outside the hotel industry often don’t realize that the owner’s ability to negotiate for these tier-1 and tier-2 checklist items will be jeopardized or lost once the back-and-forth of the LOI negotiations have begun.
What is HMA PRO™?
We developed HMA PRO™ because we observed that the traditional RFP did not create a competitive, owner-oriented process. The name itself, RFP or “request for proposal,” puts the owner in a passive position and does not encourage the owner to shape the proposals for its maximum benefit.
HMA PRO™ is a different and unique solution. It relies on early identification of the owner’s key concerns, and then approaches a small handful of pre-selected candidates who are more likely to meet the owner’s needs, rather than using a shotgun approach. It does not treat operators like fungible commodities. Rather, it recognizes that each operator brings different strengths and qualities to a management opportunity. We have found that this approach make operators more willing to participate in HMA PRO™ than an RFP. An RFP often makes operators feel like they are wasting time and resources on an auction where they have little chance of success. HMA PRO™ lets each operator know it is special, encourages participation and focuses the parties on critical elements, mutual expectations and terms, rather than platitudes and advertisements.
It is a better and more focused process that uses everyone’s precious time more efficiently.
7 Basic steps in the HMA PRO™ process
Our HMA PRO™ process has 7 basic steps for identifying and contracting with the optimum operator:
- Establish and prioritize the owner’s needs and goals, and develop strategies and approaches to achieve them.
- Identify the brand and operator candidates most likely to meet the owner’s needs and goals.
- Recruit the best brand and operator candidates by developing a package and approach to “sell” the merits of the project, generate operator interest with direct contact at the appropriate level, and gain buy-in to the HMA PRO™ process.
- Draw candidates into a constructive, interactive process with on-site property inspections and mutual presentations by operator and owner. Elicit a proposal from each candidate that is responsive to owner’s priorities.
- Evaluate the business and legal elements of each proposal received to select the “finalists” for a “best and final” process.
- Seek “best and final” proposals and analyze them to identify one party to negotiate with until a deal is reached (and if a deal cannot be concluded, move on to the first alternate).
- Negotiate to conclusion and an executed agreement.
When to bring in the hotel advisors
The best time to bring in JMBM’s Global Hospitality Group® experts is at the very beginning of your project, when you are evaluating, planning and structuring. We are like the legal and business architects helping you develop the blueprint for your hotel transaction strategies. And everyone knows that you call in the architect before starting construction. You want the architect’s experience to help develop concepts, test feasibility of certain approaches, and ultimately to prepare the blueprint to guide your very first steps.
That is what we do. We bring the business and legal experience gained over more than $87 billion of hotel transactions, and more than 1,000 hotel management agreements. We are dedicated to helping owners understand “market terms” and bring them practical business experience to protect their financial interests. That is one of the reasons why we developed HMA PRO™ to help owners get a great operator and a hotel management agreement they can live with.
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Robert Braun is a senior member of the Global Hospitality Group® at JMBM. Mr. Braun advises hospitality clients with respect to management agreements, franchise agreements and spa agreements. He also advises on business formation, financing, mergers and acquisitions, venture capital financing and joint ventures, telecommunications, software, Internet, e-commerce, data processing and outsourcing agreements for the hospitality industry. Contact him at 310.785.533 or rbraun@jmbm.com.
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This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $87 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who’s your hotel lawyer?
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Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $125 billion of hotel transactions, involving more than 4,700 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.
Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE “hotel lawyer” and you will see why.
JMBM’s troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE “JMBM SAVE program”.)
Whether it is a troubled investment or new transaction, JMBM’s Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.