Identifying the right brand and/or operator for a hotel is among the most impactful decisions a developer or hotel owner will make in the life of any lodging asset. Think about it: The terms of the hotel management agreement will impact your fundamental rights as the owner of the real estate for the years to come, it will impact the cash flow to the investors over the life of the asset, it will impact the exit price and it will impact the required investments an owner is required to make over the years.
It starts with understanding the market dynamics, project vision and demand potential. Not all brands fit a market or an asset. I tell our clients, if they believe that 10+ hotel brands can fit their hotel and subject market, then there isn’t an in-depth understanding of the competitive landscape and the right positioning for the hotel that will lead to the success of their investment. Equally important is to consider the owner’s objectives for the asset and strategic long-term investor’s objectives, including topics such as:
- Expected duration of ownership
- Risk mitigation
- Current versus capital appreciation
- Minimum returns
- Operator’s key money
- Alignment of interests
- Corporate resources, corporate reimbursable expenses and support for the asset
- Fee structure, incentive fees and other financial considerations
- Termination penalties
- Ownership approvals and other rights
- Non-compete
- Flexibility of exit
One of the biggest mistakes an owner can make is falling in love with a brand or operator. Regardless of how much you believe you have found the right brand or operator, you will lose the leverage to negotiate if you don’t consider alternative partnerships. Engaging an experienced hotel advisor to run the process is also an alternative. The right advisor will bring perspective to the deal (based on their experience from previous processes) to give a competitive benefit to the negotiations and represent the owners’ rights and objectives. Either way, an owner/developer or investor must run a competitive selection process and request proposals from multiple candidates to create a controlled sense of urgency and competition throughout the process.
Any savvy investor will request a minimum of two to three letters of interest from potential brands or operators and compare the offers received—both quantitative and qualitative metrics should be measured and ranked in a scorecard matrix to allow for an objective decision-making process.
A brand and operator may encumber an asset over 10, 15, 30 or 40 years—choosing the wrong brand or soft negotiating a deal will negatively impact your return on investment for the life of the asset and hinder an owner’s ability to maximize exit proceeds.
Andrea Grigg is head of global hotel asset management at JLL.