Mr. Migdal

Hospitality Law

The Battle of Hotel Brand Standards and the Effect on the Bottom Line

By Nelson Migdal, Real Estate, Shareholder, Greenberg Traurig LLP

Brand standards not only effect the guest experience, but they also effect the value placed on the hotel by hotel owners, lenders and investors. The juxtaposition between the desire of the brand to upgrade its brand standards and the desire of the hotel owner, lenders and investors to keep a tight grip on the bottom line can be complicated - and the brand standards are a critical component in the equation.

The pendulum appears to be swinging in the direction of greater influence being exerted by the easily recognized and well known branded hotels. The credit world finds comfort in a name on a hotel that has a solid history and reputation, and investors seem to be similarly eased by mobilizing capital resources into a branded hotel. But what is the brand standard in the area of hotel operations and management? Certainly we can find any number of hotel design and construction manuals. Every established brand can tell you the prototype number of keys, the minimum available floor area ratio for the lobby, the size of the bathroom, and the requisite number of bathroom fixtures and the other required guest amenities. These are the physical standards - the physical component of the Brand Standards. Beyond the physical standards it becomes a bit more subjective. The other component of Brand Standards is the operating standards - these standards go to the heart and soul of the day to day operations of the hotel and to the guest experience.

Every hotel management agreement refers to the Brand Standard and the duty of the hotel owner to maintain the Brand Standard during the management agreement term. What that means in very general terms is that the operating budget or annual plan must include such items as the manager deems appropriate to maintain the Brand Standard. It also usually means that even in those circumstances where the hotel owner has the right to approve the operating budget, the owner cannot object to any elements of the operating budget that represent expenditures to maintain the Brand Standard. While this is critical for the brands to protect the brand and to ensure a consistent experience at every brand hotel, it can be expensive and risky leap of faith for owners.

One relatively common way to express a Brand Standard is to tie it to other hotels within the brand family as well as an external (although still subjective) standard. For example, for a luxury hotel, something like, brand standards for the Hotel will be the standard of quality and operation of such other hotels located in the United States which from time to time are generally regarded in the international hotel industry as being of luxury standard. As far as physical standards this may refer to the look and feel of the hotel, capital improvements and the quality of the furniture, fixtures and equipment (FF&E) -- to make sure that all hotels have the latest upgrades. As far as operating standards this may refer to providing in-room dining on a seven (7) day per week, twenty four (24) hour per day basis, and personnel in adequate number to provide luxury service in areas such as food, beverage, housekeeping, banqueting, parking, bellmen and concierge services. Another way to express the concept in a non-luxury setting is to say something like, the operating standard will be manager's use of commercially reasonable efforts to maximize the long-term profitability of the Hotel as a first-class, full-service hotel with related amenities, including restaurant service, parking and food and beverage sales. Some brands go as far as to compile a manual of operating standards with great specificity. For example, operating standards may require the hotel personnel to make eye contact with guests when the hotel staff are within 8 feet of the guests, phone calls must be answered within 2 rings, and drink orders must be delivered within 6 minutes of the order being placed. Policing these operating standards is nearly impossible - but at least owner and manager alike know exactly what the operating standards entail.

The real challenge is when the "bottom line" takes a hit due to the Brand Standards and how this effects the relationship between hotel owner and hotel manager in providing a rational working approach to understanding that while there must be a consistent Brand Standard, there may be more than one appropriate strategy to achieve the desired result. The branded hotel manager will be and should be intently focused upon providing the guest with a consistent experience across the brand without regard to where the hotel is located or who is the hotel owner. If there is no discernable brand consistency, there can be no "brand". The hotel owner, on the other hand, shares a concern for the guest experience, but also is aware that every penny that will be spent at the hotel to assure consistency of brand standard that is not provided by hotel operations will be provided by the hotel owner from its own cash. This will make the hotel owner hyper-sensitive to requests from the manager for the owner to spend money for brand standard matters. This is most acutely felt when the connection between the expense and the return on that expense is not clearly demonstrated. Indeed, this dynamic is seen in the area of capital expenditures in connection with upgrades to the physical standards, but at least with capital expenditures many branded managers recognize that having owner's approval is reasonable and this requirement is typically clearly set forth in the management agreement.

Owner's approval within the annual budget approval process for matters of operating standards, or physical standards which may not rise to the level of capital expenditures - such as cosmetic improvements or FF&E upgrades - is another matter entirely. When talking about this issue, one analogy is to tap into the 1950 Broadway show "Guys and Dolls". "Big Julie" and "Nathan Detroit" are rolling dice (playing "Craps"). The only problem is that the dice are blank and show no black markings at all. Big Julie (the brand in our analogy) assures Nathan (the owner) that he need not worry because Big Julie remembers where the dots on the dice "formerly were" and that he (Big Julie) will let Nathan know the outcome of each roll and whether he has won or lost. When the question is whether or not an expenditure is necessary to maintain Brand Standards, the relationship between the owner and the manager must be better than Big Julie and Nathan, and owners generally seek a mechanism to cause the manager to demonstrate the connection between the budget expense and maintaining the quality of the brand. The logic of becoming affiliated with a brand implies a commitment by the hotel owner to maintain the standard of that brand. Hotel owners do need to be cognizant of that when selecting a brand for the asset. Branded hotel managers should recognize the economic aspects of the hotel owner's commitment to the brand and provide checks and balances within the hotel management agreement and other documents that structure the owner-manager relationship to temper brand zeal. For example, savvy owners may require that the majority of the brands must be required to implement the required modifications to brand standards prior to the mandatory implementation at the subject hotel, as well as requiring time and monetary constraints. For example, in no event will the brand require one hotel to implement the modifications more quickly than it is requiring other brand hotels to implement the modifications and the modifications must be approved in the annual operating budget.

On a practice level, this means that hotel owners that affiliate with branded hotel managers will need to apply some degree of due diligence in exploring the Brand Standard and what the historic cost per key or range of costs are to achieve and maintain the standard. Hotels can be toured and most of the brands can generate a pro forma demonstrating departmental and other operating costs of the brand. Brand managers can, and many do, provide more and better information and data on the brand, and operate with a higher level of transparency. Within the hotel management agreement, more attention can be given to negotiating covenants for disclosure and cooperation with respect to the Brand Standard and better delineation between operating expenses and categories of capital expenses, and how the hotel owner and manager will address each category.

On a marketplace level, where hotel owners investigate the potential profitability of hotel ownership because people will come to the hotel and stay longer and spend more money, and branded managers investigate the potential profitability of hotel management because people will come to the hotel and stay longer and spend more money, the hotel owner and the hotel manager share a common focus and objective. Perhaps if the goal of maximizing the long-term profitability of the Hotel is kept front and center in the conversations about Brand Standards both sides of the conversation can get what they want. No asset can be profitable to the owner or yield to manager all of its desired fees if the devotion to Brand Standard is blind to cost and allows expenses to overtake income. On that all sides can agree.

Nelson F. Migdal is a Principal Shareholder at Greenberg Traurig and head of the Mid-Atlantic Real Estate practice group. He has practiced hospitality law for over 25 years. He handled the management agreements for The Echelon Place, in Las Vegas. In Panama, as owner's counsel, he obtained the first "Trump" license in Central America. Nelson is owner's counsel for The Trump Soho Project, and handled the Exclusive License with Trump in Istanbul. Nelson is an officer of the Academy of Hospitality Industry Attorneys and a member of the International Society of Hospitality Consultants. Mr. Migdal can be contacted at 202-331-3180 or migdaln@gtlaw.com Extended Bio...

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