The Pitfalls and Pleasures of Joint Ventures Between Hotel Owners and Managers or Retail Tenants

By Tara K. Gorman Partner, Perkins Coie LLP | October 28, 2008

In the traditional hotel owner/operator relationship the lines are drawn in the sand and the roles are clear. Just as the titles imply - the hotel owner owns the hotel and the hotel operator operates the hotel. The hotel management agreement governs the relationship and that's that. When a joint venture enters into the equation, these lines are not so clear and which party is taking on which role at which time gets to be an interesting, and often complicated question.

Before a joint venture can be formed, several basic questions must be asked and answered. The first question is: what does each party bring to the table? Real estate? Management expertise? Retail or food and beverage expertise? Equity? Business savvy? The second question is: which entity will be the joint venture? The ownership entity, the management entity, or the retail entity. The third question is: what percentage of ownership interest is allocated to each party? And the fourth, and perhaps most difficult question is, what happens if the parties don't get along and have to break up as business partners? Once these basic questions are answered, the parties can get down to negotiating the governing documents -- and that's where the fun/confusion begins.

Governing Documents

Organizational Documents: The heart and sole of the joint venture is set forth in the organizational documents: the Operating Agreement of a limited liability company or the By-laws of a corporation. In a nutshell, the organizational documents deal with how the joint venture is run, how major decisions are made, how capital (or value) is contributed and distributed, and what happens in the event that the parties no longer desire to be business partners. This is where all the ownership considerations should be addressed.

Management Agreement: The management agreement is an agreement whereby the hotel operator agrees to manage the hotel on behalf of the hotel owner. Typically there is a definitive term, clear expectations as to the day-to-day operations, including layers of consent from the hotel owner prior to the performance of various activities and clear guidelines and options for termination of the operator, including termination for poor performance on the part of the operator. This is where all the operational considerations should be addressed.

Lease: A lease provides the tenant with an interest in real property, exclusive use and possession of the retail facility, and typically, unless there is a default of some magnitude which has not been cured within the applicable notice and cure period, a lease is terminated upon the expiration of the term set forth in the lease. While the hotel owner may have broad consent rights over such things as alterations to the premises and assigning the lease, beyond safety and cleanliness, the landlord typically has little say over the day-to-day operations of the retail facility. This is where the operational considerations should be addressed in a lease context.

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