Current Event

Manhattan Marriots

• Location: Broadway & 54th
• 2 Marriot Brands to share hotel building ; Own Elevators
• Courtyard: 378 rooms, no kitchen, floors 6-32
• Residence Inn: 261 rooms, kitchen, floors 36-64
• "Courtyard & Residence Inn Manhattan / Central Park"
• Managed by Interstate
• One of NY's biggest projects
• Restaurant and Ground Floor Shops
• Open: Late 2013
• Tallest Lodging - Only Building in NYC

Current Event

Manhattan Marriots

Advantages

• Reduce Annual Operating Expenses: > 5%
• Sharing:
• Building
• Facilities: Laundry, Fitness, etc.
• Management & Administrative Staff
• Departments: Housekeeping, Marketing, etc.
• Competitive Advantage: High Visibility
• Increased Power over Suppliers
• Offers a variety to travelers

Current Event

Manhattan Marriots

Disadvantages

• New York City always presents contruction challenges

Current Event

Edition

• Honolulu: 353 rooms
• New Management Overnight:
• Edition → "The Modern"
• Demanded employees agree w/ new mgmt or be fired
• Owner: M Waikiki, LLC.
• Changed locks and signs

Current Event

Edition

Lawsuit

• Lawsuit filed in May against Marriot by M Waikiki, LLC.
• Claim: Mismanagement & Failure to develop Edition Brand
• $8.4 Mil in losses
• 4th Q, 2010 [Expected]: 62% Occupancy
• 4th Q, 2010 [Actual]: 30% Occupancy
• Marriot is citing Breach of Contract

Current Events

Hyatt Strike

• Employees on Strike at Hyatt
• Hyatt is Replacing Union Workers with Temporary Workers

Economy 

2008

• "Times are good"
• Unemployment Rates: < 5%
• Houses bought with Credit Cards
• Market and Stock Prices Increased

• Mortgages / Purchase of Home:
• Normal / Traditionally:
• 10% Down
• Equity: Payments

• Mortgages / Payments:
• Subprime Mortgages:
• 0% Down
• Adjustable Rate Mortgages
• 1st Year [Low]: 3%
• 5th Year [High]: 10%
• No Credit Checks
• Equity Appreciation:
• Increase in equity value of houses 
• Appreciation increase of a value in a floating exchange rate

Equity Appreciation

Refinancing

Example

• Original Value of the House:
• $300,000
• Appreciation Value of the House:
• $500,000
• Refinance Value of the House:
• $400,000
• End of Appreciation Value of the House:
• $350,000
• Debt:
• $50,000
• Owes $400,000 on House Valued at $350,000

End of Appreciation

Chain of Events leading to Economic Downturn

• People "walk away" from houses
• Banks Own More Houses due to Defaulting Mortgages
• People Stop Buying Houses
• Debt > Value of House
• "Upside Down" - Vegas
• People Stop Spending Money
• Unemployment Rises
• 6-9% in 6 Months
• Dow Jones:
• Decrease from 13,000 to 6,600

• Packages of Mortgages sold to Companies as Assets
• Used to be secure
• Banks Wanted More Mortgages
• Created Subprime Mortgages
• Mortgages were Overrated
• Investors had alot of Houses
• Housing Bubble Burst
• People Began Defaulting
• Companies who bought M.B.S. began writing off assets
• Financial Statements went bad

Changes 

Caused by Economic Crisis

• Banks
• Require 30% Down Payment & Good Credit History
• Housing Market
• No one bought houses
• Therefore, No one bought furniture, appliances, etc.
• Unemployement
• 6-9% in 6 Months

Franchise Agreements

• Definitions
• Franchisor
• Franchisee

• Franchisor:
• Owner of the overall rights and trademarks of a company and allows its franchisees to use these rights and trademarks to do business.
• Franchisee:
• An individual who purchases the rights to use a company's trademarked name and business model to do business.

Franchise Agreement

Definition

• Agreement between franchisor and franchisee giving the franchisee the rights to use the logo, trademarks, and operating systems of another business entity for the benefit of both.
• Creating Value in the Name
• Must establish the quality of the product and your expertise by operating company hotels

1. Intercontinental
• 558,153 Rooms / 3,763 Hotels
2. Wyndham
• 541,676 Rooms / 6,462 Hotels
3. Marriot
• 521,240 Rooms / 2,898 Hotels
4. Hilton
• 483,348 Rooms / 2,841 Hotels
5. Choice
• 445,000 Rooms / 5,474 Hotels
6. Others: 
• Best Western, Starwood, Carlson, Hyatt, & Westmont Hopitality Group

Largest Franchise Brands

1. Best Western
• 306,000 Rooms / 4,000 Hotels
2. Marriot Hotels
• 191,303 Rooms / 524 Hotels
3. Hilton
• 184,521 Rooms / 518 Hotels
4. Holiday Inn Hotels
• 171,380 Rooms / 929 Hotels
5. Days Inn
• 152,557 Rooms / 1,878 Hotels
6. Others:
• Comfort Inn, Sheraton Hotels & Resorts, Holiday Inn Express, Super 8, and Quality Inn

• Term: 20 Years [Average]
• Fees:
• Initial / Application Fee: Minimum / Per Room
• Royalty Fee (Monthly): 3 - 7%
• Advertising / Marketing Fee: 1% - 4.3%
• Reservation Fee: 0.15% - 4.5%
• Options Available
• Frequent Traveler Program Fee
• Options Available

Franchise Fees

Available Options

Reservation Fee / Frequent Traveler Program Fee

• Reservation Fee: 0.15% - 4.5%
• Options:
• 0.4% - 10%: Rooms Revenue
• $1.10 - $10: Available Rooms / Month
• Frequent Traveler Program Fee:
• Options:
• 0.3% - 6.2% of Rooms Revenue
• $4 - $6 Per Member Room

• Total:
• Lowest: 0.6%
• Middle: 5.6%
• Highest: 17.2%
• Average: 9.8% - 10.9%

Franchising Agreements

Top Ten "First Class" Brands

• Highest Fees
• Westin: 17.2%
• 7 of 10 'Top Ten First Class Brands' 
• Starwood

Advantages to the Franchisee

• Technical Assistance
• Training
• Prototypes and Design
• Interior Design
• Purchasing
• Marketing
• Company Name
• Brand Awareness
• Group Advertising
• Reservation System
• *Loyalty Programs*

• Expensive Cost & Fees
• Burdensome Quality & Operational Issues
• Relatively Short Term
• Little Control Over Franchisor
• Impact Issue

• Inexpensive Rapid Expansion
• Profitable Source of Revenue
• Builds Brand Recognition
• Builds Customer Loyalty

• Loss of Operational Control
• Difficulties with Hotel Owners
• Liability without Control
• Quality & Service Problems
• No Control over Pricing
• Costly Start-Up until Critical Mass

Franchise Agreements

Additional Issues

Goals

• Goals:
• Franchisees:
• Want Quality within Brand Standards
• Franchisors:
• Want Quantity within Brand Standards

Franchise Agreements

Additional Issues

Impact

• Impact:
• Franchisors:
• Want Franchise System to Grow
• Franchisees:
• Want Franchise System to Grow, but Not "In Their Backyard"

Franchise Agreements

Impact

Area of Protection [AOP]

• AOP until End of Agreement
• Company Owned & Managed Hotels Included in AOP
• Franchisee Notified of Potential Impact from New Application
• Franchisee Can Request Impact Study
• Costs: Evenly between Franchisor & Franchisee
• Impact Resolution Options:
• Deny Application w/ Potential Impact
• Offer Existing Franchisee First Right to License
• Reduce Franchise Fees
• Exit System w/out Liquidated Damages

Franchise Agreements

Additional Issues

Preferred Vendors

• Franchisees:
• Want to Select Own Goods
• Franchisors:
• Feel Quality Will Suffer

Franchise Agreements

Additional Issues

Termination

• Termination
• Franchisee (Reasons):
• Franchise Reduces Value
• Franchise Restricts Rates
• Reinvestment Too High
• No Liquidated Damages
• Franchisor:
• Termination Not Allowed After Benefits have been Received
• Need Liquidated Damages, Loses Revenues if Terminated

Franchise Agreements

Additional Issues

Sale & Renewal

• Franchisee:
• Wants to Sell With Brand
• Franchisor:
• Wants Approval of New Owner

Management Contract

Definition

• An agreement between a hotel's owners & a hotel management company under which the management company operates the hotel for a fee.
• Management Contract Stipulates:
• Operater is acting fully and completely as an agent of the owner

Management Contract

Responsibilities

• Value of Real Estate & Building
• Profit / Loss
• Employees

• Value of Real Estate & Building
• Owner
• Profit / Loss
• Owner
• Employees
• Owner

Management Companies

First & Second Tier

• First Tier: Chain Affiliated
• Marriot
• Hilton
• Second Tier: Non-Chain Affiliated 
• Benchmark
• Winegardener & Hammons
• Waterford
• Prism
• Vista Host 
• **All Have Recruited at Penn State**

Management Companies

Targeted Expertise

• Management Companies have Certain Specializations:
• Brand
• Geographic Area
• Segment Type
• Size of Company

Management Companies

Owner Objectives

• Annual Operating Cash-Flow Return
• Capital Appreciation
• Competitive Hotel
• Appropriate Market & Management
• Quality Product
• Influence on Management & Operation
• Flexibility to Sell or Refinance

Management Companies

Operator Objectives

• Market Presence & Market Share
• Quality Product
• Management Fees
• Maximum Discretion in Management
• Long-Term Stability
• Owner's Ability to Fund

Management Contracts

Relative Bargaining Strength

• Relative Bargaining Strength Has Shifted:
• Increased Competition Among Operators
• Greater Demand by Owners for Operator Exposure

Management Contracts

Ten Provisions

1. Operator Loan & Equity Contributions

• No Contribution was Expected
• Contributions Now Expected & May be Legally Required
• Range from 100,000 to 5,000,000
• Primarily Used for Working Capital
• Signifies Commitment to Project

Management Contracts

Ten Provisions

2. Term of the Contract

• Initial Terms, Number of Renewals, & Lengths of Renewals
• Decreased due to Owner Bargaining Power

Management Contracts

Terms

Chain Operator (with no equity)

• Initial Term 
• Low: 5
• Median: 10
• High: 20
• Number of Renewals
• Low: 1
• Median: 2
• High: 5
• Length of Each Renewal
• Low: 3
• Median: 5
• High: 10

Management Contracts

Terms

Chain Operator (with equity)

• Initial Term:
• Low: 10
• Median: 15
• High: 30
• Number of Renewals:
• Low: 2
• Median: 3
• High: 5
• Length of Each Renewal:
• Low: 5
• Median: 6
• High: 10

Management Contracts

Terms

Independent Operator

• Initial Term:
• Low: 1
• Median: 3
• High: 10
• Number of Renewals:
• Low: 0
• Median: 2
• High: 3
• Length of Each Renewal
• Low: 1
• Median: 2
• High: 3

Management Contracts

Ten Provisions

3. Management Fee Structures

• Increased Competition & Increased Lender Activity in Negotiations has Reduced Fees
• Chain Operator:
• 1.5% - 3% of Gross Revenue + 8% - 10% of Gross Operating Profit
• Independent Operator
• 1.5% - 2.5% of Gross Revenue + 5% - 6% of Gross Operating Profit
• Straight G.R. [2% - 4%] + Straight G.O.P. [8% - 15%]
• Other Methods Based on Cash Flow Becoming More Common

Management Contracts

Ten Provisions

4. Operator System-Reimbursable Expenses

• National / Regional Sales Offices
• Accounting
• Training
• Purchasing
• Which can be billed
• How much billed to each management  company hotel?

Management Contracts

Ten Provisions

5. Operator Performance Provisions

• Use of Performance Provisions: Increasing
• Operator Must Perform, Must Pay, or Will be in Default

Management Contracts

Ten Provisions

5. Operator Performance Provisions

(Cont'd)

• Base: G.O.P.
• Start-Up Exclusionary Period
• Shortfall Deviation Allowance
• Can be 0% - 6% Under Projections before Default Provisions
• Shortfall Time Frame
• Two Years of Shortfall Deviation before Default Provisions
• Default Provisions: Operator Cure - Mandatory Cash, Not to be Reimbursed
• Contract-Renewal Hurdle: Renewal Only After GOP Hurdles Achieved

Management Contracts

Ten Provisions

6. Owner Input in Operational Decision-Making

• Operating Policies: Uniform Decisions
• Day-to-Day Operating Decisions: Rate Management
• Budget Approval
• Personnel
• Line-Level Work for Owner
• Executive Committee works for Operator
• Wages Reimbursed by Owner
• "Move The Bird Cage" Example
• Owner insisted Bird Cage be in one location; Operators insisted it be in another

Management Contracts

Ten Provisions

7. Financial & Operational Reporting

Management Contracts

Ten Provisions

8. Contract Termination

• Termination w/out Cause: *50% of Contracts*
• Exercised usually after Predetermined No-Cut Period w/ Notice
• Owners Pay Termination Fee
• Termination in Event of Sale
• Increasing in Use;Owners Want Unencumbered Property to Sell
• Operator Usually has First Right of Refusal to Buy Property
• Owners Pay Termination Fee
• Termination in the Event of Foreclosure
• Increasing in Use; Lenders want Flexibility to Sell Property
• Termination Fees Paid to Operator

Management Contracts

Ten Provisions

9. Non-Competition Convenants

• Impact
• Offer of First Refusal to Build
• Example:
• Marriott Manages a Courtyard for You
• Building a Marriott-Managed Fairfield Inn Nearby
• Impact?
• Building a Marriott-Managed JW by Marriott Nearby
• Impact?

Management Contracts

Ten Provisions

10. Dispute-Settlement Mechanisms

• Choice of Arbitrator
• Provisions Subject to Arbitration
• Budget Approval Process, etc.
• Process of Arbitration
• Conditions
• Arbitration Outcomes are Binding, etc.
• If No Reconciliation:
• Litigation = Next Step