The New Frontier: Understanding Rights and Responsibilities When Changing Hotel Brands
By William A. Brewer III Managing Partner, Brewer, Attorneys & Counselors | December 21, 2014
Tension between hotel owners and hotel management companies comes as no surprise during tough economic times. But even in times of improved economic prosperity, some hotel owners are intolerant of management companies that fail to manage assets in the most effective and profitable manner possible. This results in certain owners seeking, or being compelled, to convert their asset to a different brand, or in some cases no brand at all. They do so to protect their long-term economic interests in markets that have proven to be cyclical. In this piece, we explore important considerations regarding the respective rights and responsibilities of owners and managers in such circumstances.
Setting the Stage: The Shifting Dynamics of the Industry
Following the economic downturn in 2008, the hospitality industry rebounded to a renewed confidence in hotel investment. Significant improvements in lodging fundamentals exist throughout the industry. According to the American Hotel & Lodging Association, in 2013, the lodging industry witnessed pretax income growth of more than ten percent, with total industry revenue increasing nearly six percent. Notably, hotel investments are reported to be the best performers this year among U.S. real estate investment trusts.
Such positive financial trends may have eased tensions and softened certain impacts resulting from constrained capital budgets, but they have not deterred hotel owners from continuing to carefully analyze their relationships with the hotel management companies which manage their assets, and scrutinize the manger's performance of its duties and obligations. Finally, savvy owners are beginning to recognize the significance that hotel management providers have on the value and performance of their investments, and demanding a fidelity that chain-brand management companies do not provide. This is resulting in a sharp increase in property transfer activity and owner rebranding decisions even in these prosperous times.
For example, owners, as well as hotel management companies, are increasingly becoming the targets of shareholder activists seeking higher investment returns. In addition, traditional long-term investment "hold" strategies are less typical in the case of private equity vehicles and distressed asset funds that now flood the industry, which often limit specified asset hold periods to five-to-seven years. Furthermore, the advent of stiff and increasing competition among brand managers has caused even the most renowned brands to begin offering franchising as a way to incentivize owners to utilize their brand.
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