KEYS TO EFFECTIVE MANAGEMENT CONTRACT NEGOTIATIONS

22 LODGING HOSPITALITY NOVEMBER 2007

B
oomi ng hotel and resort mi xed-use projects
present significant opportunities for hotel de-
velopers, but the developer-owner must retain
critical rights when negotiati ng agreements
with hotel management companies. Despite
experience as real estate developers, owners can be
burdened by onerous terms simply due to lack of experi-
ence. For practical insights, Lodging Hospitality spoke
with Albert Pucciarelli, chair of one of the leading hotel
and resorts practices in the country for New Jerseys
third largest law firm, McElroy,
Deutsch, Mulvaney & Carpenter.
Pucciarelli was a member of the
board, executive vice president
and General Counsel of InterCon-
tinental Hotels from 1988 to 1998.
Pucciarelli says that while the
owner typical ly delegates total
day-to-day control to the hotel
management company, payi ng
management fees based upon
gross revenue and operating in-
come, the owner also retains ulti-
mate economic responsibility for
the hotel operation and for funding working capital, capi-
tal improvements and below-the-line expenses.
The owner stands to gain or lose far more than the
management company if the hotel is poorly managed.
Their interests are not completely aligned, he says. The
owner needs protections to help drive bottom line in-
come from the property, while the management company
will fight to protect their key interestsfees derived
solely from above-the-line operations while enhancing
the brand experience and brand value which they sell to
other hotel owners.
Q
Is there one area of protection that is more critical
to the owners interests than others?
A
Absolutely. Owner approval of the annual budget of
the hotel is a must-have. It must be real approval,
not merely review and comment. Annual budget really
means the management companys annual business plan
for the hotel, which also includes capital expenditure
requirement for the next year and the ensuing five years
and not just usual above-the-line operating budgets.
Q
What key parts of the annual business plan are usu-
ally able to be negotiated by the owner? Which are
off-limits?
A
Owners must have approval over such items as
planned uses of the reserve for replacement of fur-
niture, fixtures and equipment, operating cash needs, an
employment plan, a revenue plan and a marketing plan,
among others.
The management companys proposed annual busi-
ness plan should be presented to the owner no later than
60 days before the commencement of the next fiscal year
with a period of time thereafter, typically 30 days, for the
owner to approve or reasonably reject the plan in whole
or in part.
However, the management company wi l l not al low
an owner to reject a budget because of expense items
beyond the control of the management companyfor ex-
ample, salaries and utilities. The management company
also will not permit budget rejection based on the owners
objections to anticipated central services charges such as
reservation fees, guest recognition or reward program
fees and other charges the management companies al-
locate among hotels in the chain.
If management asks for the right to increase expendi-
tures by the same percentage as the percentage increase
in revenue beyond budgeted revenue, owners should
resist. Not all revenue requires additional expenditures
and if so, the increase is not necessarily proportionate to
revenue increases. Non-emergency increases in expendi-
tures must be subject to owner approval.
Q
Are there additional, specific protections that an
owner must seek?
A
Owners must approve the selection of key hotel per-
sonnel, such as the general manager, the controller
and the director of marketing and sales. Owners also
must be able to reject any expense reimbursement to the
management company unless the expenses are incurred
pursuant to an approved budget. An example would be
travel of management company personnel in connection
with the provision of technical services for the design of
hotel improvements.
Pucciarelli
WWNEWS & TRENDS THAT SHAPE THE INDUSTRY
LODGINGToday
Owner approval of the annual
budget of the hotel is a must-
havereal approval, not merely
review and comment.
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24 LODGING HOSPITALITY NOVEMBER 2007
Surprise Stay Greets
Family
T
o celebrate more than $100 mil-
lion in collective upgrades and
improvements at the Downtown
Disney Resort Area hotels, Or-
lando, seven Walt Disney World
Resort Hotels presented Jennifer Carr
of Lutz, FL with a free two-night stay as
she checked into the Doubletree Guest
Suites August 31.
The free stay, awarded as part of the
Surprise Stays at the Downtown Dis-
ney Resort Area hotels sweepstakes,
was presented by Doubletree Guest
Suites GM Glen Winsor and Laurence
Richardson, director of sales and mar-
keting.
The sweepstakes awarded lucky
guests at each of the participating
hotels with up to three nights of com-
plimentary accommodations through
September 22. Other participating
hotels included the Best Western Lake
Buena Vista Resort, Holiday Inn, Regal
Sun Resort, Hilton Orlando Resort,
Royal Plaza and the Buena Vista Pal-
ace Hotel & Spa.
Jennifer Carr (center) and her family with
Doubletree Guest Suites staff Laurence
Richardson, left, and Glen Winsor.
management company must fai l on
both criteria and over a period of two
or two out of three consecutive years
before the test is deemed failed and
whether the management company
will have cure rights where it can make
a payment to stave off termination.
Developers need to be diligent and
thoughtful as they pursue agreements
for their properties and, in particular for
projects with mixed-used components.
achieve a daily room rate comparable
to that of an agreed competitive set
of hotels, and a budget test where the
management company must achieve
the results contemplated in the ap-
proved business plan.
There will be debate whether the
Importantly, the owner also should
insist upon a meaningful performance
test which, if failed, gives the owner
the right to terminate the management
company. Customary performance
tests typically include two criteria: one
where the management company must