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The Issue of Union Protections after a Hotel Sale Becoming
 a Top Priority of the Unite Here Labor Union

By Anya Sostek, Pittsburgh Post-GazetteMcClatchy-Tribune Regional News

Jul. 8, 2007 - It wasn't just salaries, health-care costs or any of the other usual suspects that held up a contract between union workers and the Sheraton Station Square that was signed last month.

A large part of what prolonged negotiations for three months after the previous contract's expiration was the union's insistence on "successorship language" -- a relatively obscure provision guaranteeing that the contract will remain in effect even if the hotel were to be sold.

The clauses are a top priority of the Unite Here labor union because hotels are suddenly the hottest thing going on the real estate market. Driven by high operating returns and cheap capital, sales of hotels hit a record volume of $35.3 billion in 2006 -- tripling the record set just two years before, according to a March report from Jones Lang LaSalle Hotels that tracked sales greater than $10 million.

"The industry's really changed a lot," said Sam Williamson, Western district director of the Pennsylvania Joint Board for Unite Here. "Hotels get bought and sold all the time, and if they are sold, many times new owners will force everyone to reapply and not hire all of them."

Several factors have contributed to the furious pace of hotel sales, said Kristina Paider, senior vice president of marketing and research for Jones Lang LaSalle Hotels.

Public hotel companies, such as Starwood and Hilton, have been selling off the hotel buildings and retaining contracts to manage the hotels, said Ms. Paider, because income from management fees is generally more stable than the real estate market.

The Westin Convention Center Hotel, for example, is owned by Forest City Enterprises but managed by Starwood Hotels. A successorship clause also is at issue for ongoing contract negotiations at the Westin, where the union contract expired on June 30, said Mr. Williamson.

With public companies putting their hotel buildings up for sale, private equity funds and real estate investment trusts have emerged as the main buyers, with some of the deals almost unimaginably pricey. The most expensive deal in 2006 was the $502.8 million sale of the Four Seasons Resort Hualalai in Hawaii -- a figure that breaks down to more than $2 million for each of the hotel's 243 rooms.

Needless to say, there haven't been any Pittsburgh deals approaching those heights. But there has been a fair amount of activity, particularly among hotels tied to national brands.

"The owners are recognizing that values for hotels are at an all-time high and capital for financing is at an all-time high in terms of availability," said Mark Popovich, managing director of the Pittsburgh office of Holliday Fenoglio Fowler, a firm that arranges financing for real estate transactions.

"With all that together, owners are realizing that it's a good time to sell their assets."

In May 2006, the Hilton Pittsburgh sold for $26 million to Shubh Hotels, a Boca Raton, Fla., company.

In addition to the Hilton, a portfolio including the Residence Inn and Hampton Inn in Cranberry, as well as the Holiday Inn Express and Hampton Inn in Green Tree, sold last year, said Mr. Popovich, also noting that the Hampton Inn in Monroeville is currently under contract.

Nearly all of the hotels here have sold to out-of-town investors, he said.

Part of the reason for all of the buying and selling, said Ms. Paider, is that private equity firms tend to "flip" their properties much faster than traditional real estate investors. "Traditional investors had hold periods of seven years, but private equity companies have come in and said we can flip this in as little as 18 months and make our target investment goals," she said.

Which explains the unions' insistence on successorship clauses. "It would be rather naive to think that national trends wouldn't begin to touch Pittsburgh," said Mr. Williamson, of Unite Here. "It's possible, or indeed likely, that they'll sell these properties."

Some Pittsburgh hotels have long had successorship clauses, and Mr. Williamson lauds the smooth transition when the Hilton, which had such a clause, was sold in 2006.

He points to the Crowne Plaza in Secaucus, N.J., as an example of what can happen to employees at a hotel without a successorship clause. There, Unite Here battled for three years for union recognition after Rosdev Group bought the hotel in 2004, with the parties eventually reaching a contract this April.

Those looking to buy hotels that already are unionized are generally not looking to break the union, said Mr. Popovich, because if their views are so strongly antiunion, they would probably just invest in another property instead. But nonetheless, a successorship clause may have a negative effect on a hotel's value.

"When you talk about the marketability, the more limitations you place on the owner, the less attractive it becomes," he said. "Even if it's a nonissue, it's still just one more stipulation that might keep the hotel from being attractive."

The issue of union protections after a hotel sale will become more common as hotels change hands with ever-increasing frequency. Ms. Paider said she was fairly confident, from Jones Lang LaSalle's projections, that 2007 would outpace 2006.

"Hotels are the flavor of the month in capital markets," said Mr. Popovich. "Right now, it's good to be a hotel owner."

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Copyright (c) 2007, Pittsburgh Post-Gazette

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