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11 June 2015

Mike Cahill, CEO and Founder of Hospitality Real Estate Counselors and co-chairman of the Lodging Industry Investment Council, speaks in the video below about activity in the 2015 hospitality market, the current cycle and where we may be headed next, distressed hotel sales from lenders, and interest rates and other potential disruptors to the hotel industry.

Mike’s conversation with Bob Braun, a senior partner in the JMBM Global Hospitality Group®, is part of our video interview series on hotel finance and investment opportunities in 2015.

A transcript follows the video.

CahillThumbForBlog

Bob Braun: Hi, I’m Bob Braun. I am a Partner with Jeffer Mangels Butler & Mitchell, and I am here at Meet the Money® 2015, our 25th anniversary, and I am sitting with Mike Cahill, CEO and founder of HREC. Mike, thanks very much for coming and spending a little time with us.

Mike Cahill: Thank you for having us. CONTINUE READING →

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28 November, 2014
Click here for the latest articles on Condo Hotels
Condo hotels: Don’t forget the secret sauce!

by

Jim Butler, Bob Braun and Guy Maisnik
Condo Hotel Lawyers

Condo hotels are back in vogue as “securities”

Developers particularly like the “new model” where condo hotel investments are offered as a “securities” using the new SEC Rule 506(c) for private placements with public solicitation.

Unfortunately, in their enthusiasm for this new model– which is well deserved – many developers will create dysfunctional structures that will be difficult or impossible to correct once they are put in place. These issues can all be avoided with an experienced team of experts who know and understand condo hotels.

What is right about this “new model”?

Condo hotels make sense in many situations. (See Condominium Hotels are hot! What is a Condo Hotel?) They can be a great financing device for developers, particularly at the luxury and high-end spectrum of hotel development. The “new model” of selling condo hotels as securities will clearly be the way to go in most situations. SEC Rule 506(c) is the key to this approach. (See: The “new breed” of condominium hotels — Key to financing new hotel development? Selling condo hotels as “securities” under new SEC Rule 506(c) . . .)

So what’s the problem?

With the right team of experienced experts, there is no problem. But some people don’t recognize the legal and business complexity of a condo hotel. Every mixed-use project introduces new dimensions of issues for development, design and operation. And a condo hotel adds an entirely new dimension of issues related to hotel operations, condo hotel operations, integration of the project components, design of the rental program and terms of participation by condo owners in that program. Who owns what? Who pays for what? Who gets to use what? How are these terms implemented in CC&Rs, HOA articles and bylaws, rental agreements, maintenance agreements, and the like? CONTINUE READING →

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01 November 2014

Click here for the latest articles on Condo Hotels
What is a Condominium Hotel (or Condo Hotel)?
Definition of a real estate legacy

by

Jim Butler, Bob Braun and Guy Maisnik
Condo Hotel Lawyers

A rebirth of the condo hotel phenomenon

Condominium hotels (or “condo hotels” as they are commonly called) are back in the news again. It seems like every high-end or luxury hotel development is at least considering using the condo hotel approach. The renewed interest is fueled by recovery of residential real estate markets, high construction costs for high end hotel rooms, and the recent change in SEC Rule 506(c) that has completely changed the “securities” dynamics on condo hotels. (On this latter issue, see “The “new breed” of condo hotels — Key to financing new hotel development? Selling condo hotels as “securities” under new SEC Rule 506(c) . . .“)

There are many important issues to discuss about condo hotels – whether they make sense, whether to structure them as real estate or securities, what regime structure best ensures a sound hotel operation, who owns what and who pays for what, and much more. But the first question many people ask, is “What is a condo hotel?”

What is a condo hotel?

Condo hotels enjoyed their first wave of popularity in the United States in the 1970s and 1980s. And the term “condo hotel” is often applied (or misapplied) to a wide variety of real estate structures.

The Condo Hotel Lawyers in JMBM’s Global Hospitality Group® think of condo hotels in the following terms, and condo hotel veterans generally agree:

What is a condo hotel?

Definition: A condo hotel is a hotel where some or all the rooms have been legally transformed into condominium units which are sold to purchasers, and where it is intended that the condominium units will be part of the hotel’s rooms inventory to be rented to the public and operated by the hotel management.

CONTINUE READING →

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30 October 2014

Click here for the latest articles on Condo Hotels.

Condo hotel revolution and resurgence:
Why developers are using “new breed” of condo hotels for financing

One “little” legal change has revolutionized and revitalized condo hotels

by

Jim Butler, Bob Braun and Guy Maisnik
Condo Hotel Lawyers

The condo hotel lawyers at JMBM have helped clients with more than 100 condo hotels and hotel condos. Our experience proves that well-structured condo hotels play a valuable role and have earned an enduring legacy in the hospitality industry. They make new hotel development feasible where limited financing and high construction costs would otherwise be prohibitive. And now one recent legal change sweeps away some of the knotty issues that have hampered condo hotel growth, and reignites the popularity of this approach with a “new breed” of condo hotels.

We are now at a pivotal point for condo hotels. We are witnessing the complete turnaround in the way developers will structure condo hotel deals — particularly for high-end and luxury properties. This 180 degree turnaround in approach is creating a new and better breed of condo hotels that builds upon past successes and takes a giant step forward.

This was all accomplished with the stroke of a pen late last year when the Securities and Exchange Commission (SEC) adopted Rule 506(c) in response to the express requirements of the JOBS Act. The JOBS Act required the SEC to eliminate the prohibition on using “general solicitation” in private placements under Rule 506 where all the purchasers of the securities are “accredited investors.” Effectively, this single legal change has suddenly made it feasible for most hotel developers to structure and sell their condo hotel projects as “securities.”

This is a big change! Over the past 50 years or more, with only a few isolated exceptions, all condo hotel deals were tortured monstrosities of legal convolution. Because of the prior securities laws, it was not practical for most developers to have their offering be considered a “security” because it was not practical to register the securities with the SEC (as in an IPO), and general public solicitation is essential to the sale of real estate like condo hotel units. However, under the prior law, achieving the critical “non-security” status imposed some nonsensical legal requirements.

Most of these absurdities resulted from the fact that investors typically buy condo hotels as an investment and want the kind of information that would be relevant to making an intelligent investment decision. However the prior SEC rules effectively prevented developers from selling condo hotels as an investment with the relevant information and structure to provide the greatest prospects of success. This created the practical paradox that it was illegal for developers to sell condo hotels as an investment, but it was not illegal for buyers to purchase condo hotels as an investment (and most buyers did so).

Practical implications of the new approach

In other articles, we intend to provide more background and detail for those who are new to the condo hotel scene. But this piece is designed for those who already know the basics, and perhaps even struggled with the limitations of condo hotel structure under the old rules. Thus, we move straight to the key considerations that hampered condo hotels under the old rules, and explore how the “new breed” of condo hotels (structured as securities to take advantage of the latest legal changes) is now positioned to become the dominant approach for this entire niche.

The table below summarizes some of the most significant requirements or features that distinguish the old approach of avoiding security status (and the old SEC rules on private offerings), from the new approach of accepting security status and complying with the new Rule 506(c). The critical requirement for the new approach is that all buyers of condo hotel units must be “accredited investors.” Generally speaking, this means that each purchaser must meet the requirement of either (1) a minimum net worth of $1 million (excluding primary residence), or (2) a minimum income of more than $200,000 per year (or $300,000 for a married couple) for each of the last two years, and reasonably expects the same for the current year.

So here it is in a nutshell, or in this case, a table. CONTINUE READING →

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2 April 2014

There is a new HMA Handbook! Actually, it is the HMA & Franchise Agreement Handbook (3rd edition), which makes some major updates to the “old” HMA Handbook (2nd edition).

A fundamental shift has taken place in the realm of hotel management agreements (HMAs) and we decided we could just not wait any longer to update our popular handbook on this important subject. So, it is with great excitement that my partner and co-author, Bob Braun, and I announce the publication of the 3rd edition of The HMA & Franchise Agreement Handbook.

Like all the handbooks in our We Wrote the Book™ series, it specifically addresses the needs of hotel owners, developers, investors and lenders. The news release below explains what all the commotion is about and will tell you how to get your free copy of The Handbook. As always, we invite you to share your comments and thoughts about the book with us.

Along with all the latest financing sources, and deal technology, we will be talking about HMAs and franchise agreements at the Meet the Money® national hotel finance and investment conference the first week of every May. We hope you can join us there!

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.

CONTINUE READING →

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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.

CONTINUE READING →

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23 January 2014

As the economy and the hotel industry fundamentals continue to improve, hotel values have recovered to pre-recession levels in many of the top 35 hotel markets, the number of hotel transactions has jumped and new capital is pouring into hotels. This new capital — whether focused on new, ground-up development, or the purchase of neglected assets with a view to deep renovation and rebranding — is increasingly seeking new brands and management for their hotels. We have not seen this many people looking for a great operator and a fair hotel management agreement in many years!

Veteran hotel owners and developers know that all this good news needs to be tempered with some cold realism about the process they are about to undertake. They know that finding a great operator and negotiating a hotel management agreement they can live with is critical to the success of their investment and the value of their hotel.

In light of the many biased articles about hotel management agreements being written by operators (or by advisors to operators), my partner Bob Braun felt it was time to challenge all the “hay that has gone through the horse” and is being spread around.

The HMA Handbook and the Hotel Law Blog provide important information on this topic. For a more detailed discussion of relevant issues, we suggest you look at the links at the end of this article.

CONTINUE READING →

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14 January 2014

Click here for the latest articles on Data Technology, Privacy & Security.

Hotel Lawyer: The growing problem of security breaches with sensitive customer information.

The recent headlines about the Target and Neiman Marcus security breach with customer credit cards highlights a growing crisis that concerns owners and operator of hotels as well as retailers. In this article, Bob Braun, one of the senior members of our Global Hospitality Group® who focuses on data security — when he is not working on hotel management or franchise agreements — gives us some thoughts on what to do about this problem.
The Target and Neiman Marcus breaches:
What hoteliers need to know
by
Robert E. Braun | Senior Member, Global Hospitality Group®
The Target and Neiman Marcus problem. The massive security breach of Target’s customer data may affect more than 110 million Americans — potentially about 1 in 3 persons living in the United States. Followed in quick succession by another 40 million customers of Neiman Marcus (and more disclosures expected soon from other retailers), it is time for us in the hotel industry to look at our own policies and procedures, and to think about how we should respond to these malicious attacks.

Hoteliers beware. Hotels are obvious targets for identity and financial theft for many reasons. Hotels transact business through credit cards, and those credit cards are kept on file and can be accessed multiple times during a guest’s stay. The possibility that a credit card charge will be recorded occurs with each night’s room charge, room service, bar or restaurant bill, spa charge, and so on. Every charge is another opportunity for an identity thief to access the information using sophisticated computer hacks and other malicious software, generally without the hotel’s knowledge.

The need to respond to guest demands is another source of insecurity. The Identity Theft Resource Center noted, “The ability to connect to the Internet is an integral part of many individual’s daily life. This has led to the increased demand for public WiFi.” As a result, hotels find themselves compelled to offer wireless internet, and that service is almost always unsecured. But an unsecured wireless network is “just as dangerous as leaving files of your most important personal documents on a street curb for all to see. Hackers can easily get into an unsecured wireless network and get financial information, business records or sensitive e-mails.” (PC World, “Got Wireless Security”). At the same time, hotels have little say in the matter. Guests demand wireless internet service.

Finally, hotels have employees — lots of employees — and many of them have access to the credit card and other personal information of guests. No matter how well trained and supervised, more personnel correlates to greater risk. The fact that low-level employees typically have access to key guest information, and that there is, historically, a high turnover in hotel employees, exacerbates the problem.

What happened to Target? While investigations are continuing, sources have reported that investigators believe the attackers used similar techniques and pieces of malicious software to steal data from retailers. One of the pieces of malware is a RAM scraper, or memory-parsing software, which allows cyber criminals to grab encrypted data by capturing it when it travels through the live memory of a computer, where it appears in plain text, the sources said. While the technology has been around for many years, its use has increased in recent years as retailers have improved their security, making it more difficult for hackers to obtain credit card data using other approaches.

The lesson? Even as merchants become more vigilant and focus on the security of their systems, criminals have become more sophisticated and are investing more time and effort in crafting their own systems.

CONTINUE READING →

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4 December 2013

Hotel Lawyer on the jump in hotel development and investment activity.

These are getting to be pretty exciting times to be in the hotel business. Hotel industry fundamentals have continued to improve since the Great Recession and none of the experts see a particular event or reason that fundamentals will stall. Although occupancy growth rate is slowing in some sectors, ADR growth generally continues to drive greater profits to the bottom line.

All this activity creates “management agreement opportunities”

New development is finally coming back, and 2014 may be a break-out year for long-delayed projects. The volume of purchase and sale transactions continues to grow. And owners or investors are seeking to maximize hotel value by repositioning existing assets.

The confluence of these factors is creating a lot of hotel management agreement opportunities for hotel brands, operators and owner/developers.
The 2 most important things affecting the value of your hotel

In the midst of all this activity, hotel developers and investors should remember that two of the most important things they can do with their hotel asset are to

  1. Choose the “right” brand and operator
  2. Negotiate a management agreement that preserves a reasonable amount of value, control and flexibility

And . . . get practical guidance on these issues from experienced veterans representing your interests (and only your interests) at the earliest possible time in the process.

New White Paper on short term management contracts
In case you missed it, Hotel Management recently published an excellent white paper that is highly relevant to all of these hotel management agreement opportunities. The article is called, “The Evolution of Short-Term Management Contracts“. Click here to download a PDF of the article.

CONTINUE READING →

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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