$135.00 B e 3 T u d r he i d t T t l he i HMA & FRANCHISE AGREEMENT e o r n HANDBOOK / HMA B r The HMA & Franchise Agreement Handbook is a valuable new resource for a u hotel owners, developers, investors and lenders. It is written in plain n language for business people who don’t have full-time jobs negotiating & hotel management agreements every day, but want the kind of legal and business T advantages and insights they would get if they did. h e Drawing on practical experience gained over more than 25 years, more than 1,000 H hotel management contracts and hundreds of hotel franchise agreements, Jim M FRANCHISE Butler and Bob Braun are hotel lawyers and veteran advisors who can help you A quickly sort out what is important and what is not. & Branded hotel management agreements continue to be very important, but they F are no longer the dominant format for branding or operating hotels in the United R AGREEMENT States. Owners and brands are placing more importance than ever on franchise A N agreements, and these agreements are increasingly negotiable. This shift also C raises issues of when to use independent operators, and the favorable terms that H may be negotiated with them. This version of The Handbook appropriately marks I S this sea change in the hotel industry. HANDBOOK E In the Foreword to The Handbook, Jan deRoos, HVS Professor of Hotel Finance A and Real Estate at Cornell University’s School of Hotel Administration says, “The G R authors’ objective of providing the keys for ‘breaking the code’ to HMAs and fran- E chise agreements is fully realized in this important work.” E M Hotel Management Agreements E N About the Authors T & Franchise Agreements H Jim Butler is the author of the Hotel Law Blog (www.HotelLaw- A for Blog.com), a founding partner of Jeffer Mangels Butler & Mitchell N D LLP (JMBM), Chairman of JMBM’s Global Hospitality Group®, and B Owners, Developers founder and conference chairman of Meet the Money®. He has O been quoted as an expert on hospitality issues in The New York O Investors & Lenders Times, The Wall Street Journal, Los Angeles Times, Forbes, Busi- K nessWeek, TIME Magazine, USA Today, Hotel Business, and other publications. Bob Braun is a corporate and finance lawyer who has negoti- ated hundreds of hotel management and franchise agreements for owners, developers, investors and lenders. A partner of Jeffer Jim Butler BoB Braun Mangels Butler & Mitchell LLP and senior member of JMBM’s Chairman, Partner and Senior Member, Global Hospitality Group®, Bob represents hospitality clients in JMBM Global Hospitality Group® JMBM Global Hospitality Group® both transactional and operational issues. His articles have been published in the Hotel Law Blog, Law360, Hotel-Online, Hotel News Resource, ehotelier.com, and 4hoteliers.com. Hotel Management Agreements & Franchise Agreements for Owners, Developers, Investors & Lenders Jim Butler Chairman, JMBM Global Hospitality Group® and Bob Braun Partner and Senior Member, JMBM Global Hospitality Group® Published by the Global Hospitality Group® of JMBM Los Angeles, California April 2014 3rd edition © 2011, 2012, 2014 JMBM's Global Hospitality Group®. All rights reserved. 1st edition, 2011 2nd edition, 2012 We wrote the book™ series: • The Developer’s EB-5 Handbook for EB-5 construction financing • The HMA & Franchise Agreement Handbook • How To Buy And Sell A Hotel Handbook • The Lenders Handbook for Troubled Hotels • The ADA Compliance and Defense Guide This handbook is provided for informational purposes only. Legal advice should be based on your specific information and provided by a qualified attorney. Dedicated to all the owners, developers, investors and lenders who deserve an even shake when they go up against experienced brands and operators. We hope this will help level the playing field. What's new in the HMA & Franchise Agreement Handbook? The 3rd edition of the HMA & Franchise Agreement Handbook includes a new title, eight new articles and a new chapter to deal with the important issues raised by franchise agreements, brands and independent operators. The new material covers: • When should you choose a brand for your hotel? When should the brand manage your hotel? • The myth that franchise agreements cannot be negotiated – eight things to negotiate in your next franchise agreement • The importance of comfort letters in financing franchised hotels • Brand franchise issues in hotel purchase and sale transactions • Dual-branded hotels • Beware the trap of "changing brand standards" • Why all long-term hotel management agreements are now terminable • Case Study: Marriott v. Eden Roc Table of Contents Foreword by Jan A. deRoos ...................................................... viii Preface by Jim Butler ..................................................................... x Introduction ................................................................................... xi Getting started – terminology .................................................... xii About the authors ........................................................................ xv CHAPTER 1 – HOW TO GET A GREAT HOTEL OPERATOR Maximizing hotel value with management, branding and franchise .......................................................... 2 Three of the most important things you will ever do for your hotel ............................................................ 4 The five biggest mistakes hotel owners make in selecting operators and negotiating brand HMAs....................................................................................... 9 How to get a great hotel operator and a fair hotel management agreement ............................................ 13 HMA PRO™ Checklist ........................................................ 18 How to make your HMA PRO™ successful – a practical guide ................................................................... 22 How to negotiate an HMA .................................................. 25 CHAPTER 2 – WHAT YOU NEED IN YOUR HOTEL MANAGEMENT AGREEMENT What to do before you start negotiating your brand HMA ........................................................................... 30 Hotel management agreement performance standards and why they matter ......................................... 36 Hotel management agreement performance standards – the operator's take ........................................... 40 Hotel management agreement performance standards – the Owner's Return test ................................. 44 Table of Contents Five keys for good HMA budget provisions .................... 48 Indemnification provisions ................................................. 53 SNDAs: Subordination agreements affect the value, financeability and collateral value of a hotel ....................................................................................... 57 Exculpation clauses – protecting the owner's assets ...................................................................................... 63 CHAPTER 3 – ABOUT FRANCHISE AGREEMENTS, BRANDS & INDEPENDENT OPERATORS Decisions about brands and management ........................ 67 The myth that franchise agreements cannot be negotiated ............................................................................. 74 The importance of comfort letters in financing franchised hotels .................................................................. 79 Brand franchise issues in hotel purchase and sale transactions ................................................................... 82 Dual-branded hotels – what every owner or developer should know ...................................................... 88 Five things to keep in mind when you look for a hotel operator .................................................................... 91 CHAPTER 4 – HOW TO TERMINATE A HOTEL MANAGEMENT AGREEMENT Why is hotel management agreement litigation on the rise? ............................................................................ 95 Why all long-term hotel management agreements are now terminable ......................................... 97 Case Study: Marriott v. Eden Roc – what it all means for terminating hotel management agreements .......................................................................... 100 Importance of fiduciary duties in disputes between hotel owners and hotel operators .................... 107 Table of Contents Case Study: Turnberry Isle ............................................... 110 Case Study: Waikiki Edition ............................................. 115 Terminating hotel management agreements when things don't work? ................................................... 125 Terminating a hotel management agreement – where to begin ................................................................... 129 Epilogue ...................................................................................... 133 About HotelLawer.com The Hotel Law Blog Meet the Money® ...................................................................... 134 Foreword by Jan A. deRoos Why a Practical Guide is Relevant and Needed by the Industry Over the years, hotel owners and hotel brands (and independent operators) have developed impor- tant relationships based on the con- siderable value they provide to each other: one provides the real prop- erty and the other the intellectual property that together make a successful hotel. Not surprisingly, a sophisticated and legally intricate system of man- agement agreements (HMAs) and franchise agreements has evolved to govern how hotel owners contract with branded managers or independent operators who manage, brand and have long-term control of the hotel's assets. Fortunately, The HMA & Franchise Agreement Handbook by Jim Butler and Bob Braun provides an excellent and invaluable guide to understanding the important and complex arrangements created by HMAs and franchise agreements. The detailed discussion of HMAs and franchise agreements by Butler and Braun is refreshingly direct and candid. It is written for business people in easy-to-understand language. And it provides owners, developers, investors and lenders with the unique and pragmatic counsel that only comes from intense hands-on experience with hospitality matters – particularly HMAs and franchise agreements – representing many clients over a long period of time. Today, the names of many hotel owners and hotel operators are recognizable throughout the investment community. But it is not necessarily the case that the party with the greatest market capitalization or success in other categories of real estate has the greatest power in negotiating an HMA or franchise agreement. This handbook by Butler and Braun provides essential infor- mation that will help owners, developers, investors and lenders understand the far-reaching impacts of their HMAs and fran- chise agreements, and the important points that can, and should, be negotiated. This version of The Handbook has been revised extensively to reflect a recent sea change in the hotel industry – the proliferation of franchise agreements, which have become increasingly negotiable. Hotel management agreements continue to be critical for luxury properties, resorts and larger properties. But for bread-and-butter hotels and the hot select service segment, owners and brands are placing more importance than ever on franchise agreements. This shift also raises issues of when to use independent operators, and the more favorable terms that may be negotiated with them. The authors' objective of providing the keys for "breaking the code" to HMAs and franchise agreements is fully realized in this important work. In addition, by freely distributing this work via the Internet,* they have committed to educating a broad audi- ence with relevant and current practice. I commend Butler and Braun for their excellent and invaluable book. Jan A. deRoos Ithaca, New York March 25, 2014 Jan A. deRoos is the HVS Professor of Hotel Finance and Real Estate at Cornell University's School of Hotel Administration. He is co-author of The Negotiation and Administration of Hotel Management Contracts long considered to be the industry's leading reference on hotel management agreements. The current fourth edition (2009), co- authored with James Eyster, is available at through Cornell University at [email protected] or (607) 255-2933. *The HMA & Franchise Agreement Handbook is available electronically through hotellaw.jmbm.com/hma_handbook.