Global Hospitality Advisor: Hotel-Enhanced Mixed-Use: Planning for Brand Transition

Planning for Brand Transition

Any casual observer of transactions in the hospitality industry will notice that hotels regularly change their flags.

In a mixed-use environment, the owner of a major shopping mall (or an office-residential-hotel project) may decide to upgrade or reposition the mixed-use development. A hotel may be a vital part of this effort, and transitioning to the right brand for the mixed-use community is critical. In addition to selecting a brand that appeals to its targeted consumer group, the owner will need to identify an operator that will cooperate with its mixed-use neighbors and seamlessly integrate into the larger project.

Rebranding—whether in a mixed-use environment or as a stand-alone property—will also typically take place on termination of franchise and management agreements, or when a hotel gains a new owner. In these cases, a hotel owner often seeks a new manager in order to achieve better operating results, maximize value, or simply to engage an operator that is more in tune with the owner’s objectives.

Benefits and Consequences

The benefits of a change in brands can be significant: a new brand can give marketing a boost, increase the public profile of a property and can lead to higher occupancy, higher revenue and ultimately, greater value. These benefits may be lost, however, if the transition to new management or a new brand is not implemented effectively. Even worse, a badly done transition can cause significant problems. Failure to consider the impact of changing reservation systems can lead to lost reservations or a half-empty hotel. Poorly conceived downsizing can result in labor problems and litigation. Failure to remove the signs and other proprietary marks of a prior franchisor or manager can result in claims of trademark infringement. And all of this can result in negative publicity, which may be difficult to overcome.

The best time to consider termination issues is in the beginning—when the parties first enter into the operating or franchise agreement. While it seems counterintuitive to address these issues years in advance, the simple fact is that all agreements terminate at some point—some more abruptly than others—and putting into place the framework for termination early will facilitate later changes. Even if termination provisions are included, the parties should review them carefully prior to a change and determine whether they should be supplemented or revised to take into account changed circumstances and goals.

Key Considerations in Rebranding

Surrender of Premises. A manager should agree in advance to surrender the premises peaceably at the time of termination. Any dispute regarding the surrender should be resolved separately, and not interfere with the ability of new management to take control of the hotel.

Income and Fees. Termination provisions should be clear as to the calculation of fees on termination, and the timing of payment. Remember that reimbursements and fees may not be calculable until some period of time after termination. Provisions should be considered which define specifically the timing for determination of fees, and the means by which disagreements will be resolved.

Employee Transition. Is it necessary or appropriate for all or any employees to be terminated? (Remember: hotel employees are often employed by the operator.) Who will make the announcements? Where employees will be terminated, consideration must be given to state and federal plant closing laws as well as labor contracts and other limiting factors. At the same time, there may be key senior personnel—including department heads—with valuable institutional knowledge whom an owner would want to retain. In soliciting employees, both owner and operator need to be wary of “interference” issues.

Signage and Proprietary Marks. Hotels are usually replete with marks belonging to operators and franchisors. Removing them at termination is essential to the rebranding process (and to avoid claims of infringement). Some brands may choose to purchase goods with marks (e.g., towels, toiletries, etc.), typically at the lesser of cost or fair market value. These alternatives should be clearly understood prior to termination.

Licenses. A hotel typically requires many business licenses to operate. While some of these might be held in the name of the owner, many are held in the name of the operator. The obligation of the operator to transfer licenses, and the process for transfer, should be spelled out in detail. Licenses, which require particular attention, such as liquor licenses, should be identified and dealt with separately. For example, an operator may, with appropriate safeguards and indemnification, agree to hold a liquor license on a temporary basis after the sale of a property to facilitate the change in management, pending issuance of a license to the new operator.

Assignment of Contracts. As with licenses, many contracts (including warranties on operating equipment) may be held in the name of the manager; however, a complete inventory must be made and all contracts that can be transferred, should be transferred, and the departing manager should assist in the process. Particular attention should be paid to agreements that restrict or prohibit assignment.

Hotel and Guest Information. Hotel owners and operators are becoming increasingly aware that guest information is one of the most valuable assets of a hotel. A key provision in any management or franchise agreement will ensure that all hotel records are the property of the owner, not the manager or franchisor, so that a departing manager will not have a basis for retaining hotel records essential to the continued operation of the property. Additionally, providing for the complete and secure transfer of information is essential, particularly when it must be transferred between different or incompatible computer systems.

Pre-Termination Solicitation of Business. As a management agreement or franchise agreement approaches termination, the obligation to solicit additional business should be addressed. While the newly-branded hotel should not begin operations without guests, it should also not begin operations saddled with inappropriate reservations and contracts.

Plan, Plan, Plan

Changing hotel brands can be an exhilarating, yet often difficult transition. In order to realize the benefits of change, plan for the transition well in advance. Doing so will help retain and enhance the value of the asset.

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Robert Braun is a senior member of the Global Hospitality Group® and partner in the Firm’s Corporate Group, Mr. Braun
advises hospitality clients with respect to business formation, financing, mergers and acquisitions, venture capital financing and joint ventures. He also represents clients in the negotiation of hotel and spa management and franchise agreements, as well as telecommunications, software, Internet, e-commerce, data processing and outsourcing agreements for the hospitality industry. For more information on how rebranding might affect your business, contact him at 310.785.5331 or rbraun@jmbm.com.