News for the Hospitality Executive
Hotel Lawyer: 5 Key Elements for Good Hotel Management
By Jim Butler and the Global Hospitality Group®,
Author of www.HotelLawBlog.com
February 7, 2011
For the most recent update on this topic, click here
Hotel Lawyer with more advice on Hotel Management Agreements, focusing on critical budget provisions.
For more than 20 years, the hotel lawyers of JMBM's Global Hospitality Group® have negotiated, renegotiated, litigated, arbitrated and advised hotel owners on more than 1,000 hotel management agreements. Negotiating the hotel management agreement (or HMA) is one of the most important things hotel owners will ever do for their hotel investment. A good HMA can add significant value to a hotel property - and a bad one can detract significant value, as well.
The HMA Handbook is coming soon! We think that the HMA is so important, that our next book in the "We Wrote the Book" series will focus entirely on the hotel management agreement and will include the many critical components needed to achieving an HMA that is good for the owner as well as the operator. We have included numerous articles on hotel management agreements in the Hotel Law Blog over the years (Click here to access all of them), but this is the first article we have presented on HMA budget provisions. You won't want to miss it.
The budget provisions in the HMA provide the means by which the owner achieves efficiency and profitability, and the operator achieves brand integrity. While both are equally critical to the success of the hotel, operators are often able to drive the budgeting process to their advantage. Based on his experience negotiating hundreds of hotel management agreements, Robert Braun, a senior member of the JMBM Global Hospitality Group®, offers hotel owners 5 key elements for a good budget provision. These 5 keys can help to unlock significant value in your hotel while helping to ensure that your goals and your operator's goals are aligned for success.
HMA Budget Provisions: Why they are so important, and
5 Key elements for a good budget provision
Robert E. Braun | Hotel Lawyer
have emphasized in previous articles how a good hotel management
add significant value to a hotel property, and how a bad one can
as significantly - a swing of as much as fifty percent in value.
Importance of Budgets
It is difficult to overstate the importance of a meaningful budgeting process for a hotel. Ultimately, the budget represents the implementation of the Owner and Operator's vision for the Hotel. It is the means by which the Owner and Operator achieve the qualitative goals we associate with the brand or style of the hotel, and the quantitative goals of achieving a well-run, efficient and profitable business. Moreover, it is often the means by which we judge the performance of the Operator.
The approved budget is also key to many other provisions in the agreement. Often, the inclusion of a line item expense in a budget will constitute the Owner's approval of that expense without further inquiry. For this reason, Owners consider the budget process seriously and recognize that it will have far-reaching impact on the success of the property. Properly drafted, the budget process created by the HMA provisions can provide the Owner its most significant ability to affect the operations, profitability and success of the Hotel.
Owners face a significant challenge in the budgeting process. Simply stated, the Operator has the upper hand for a variety of reasons. Unlike Owners, Operators create budgets all the time. Operators have entire departments of staff dedicated to budgets and have much greater experience than do Owners. This experience and capacity gap increases each year. Operators almost always dictate the form of the budget, giving them a benefit in presentation (and knowing in which 3 line items an expense is buried). Moreover, Operators have access to much more information than do Owners, both as to the property at issue and all of the Operators' other properties. For these and other reasons, Operators almost always have a big "home field advantage" when it comes to creating and evaluating budgets.
Owners face another challenge in that while Operators spend many months preparing a proposed budget - some Operators have told us that budgeting is, in fact, a year-round process - Owners have only a short window of time at the end of the year in which to evaluate and critique budgets. Given the reality of Thanksgiving, Christmas and the New Year's holidays, Owners have only four to five weeks to evaluate and respond to the budget that Operators have been preparing for months.
5 Key elements to a successful budget provision
Given these facts, there are five key pieces to crafting a good budget provision in an HMA that can add great value to the hotel and save a lot of grief when times get tough.
The proposed budget must be delivered in time for the Owner and its advisors to evaluate it carefully and thoughtfully respond - at least sixty days before the beginning of the fiscal year, typically November 1. Doing so will allow for the necessary review, comments, redrafting and review that makes the budget process meaningful. If possible, the operator should provide preliminary budgets even earlier.
2. Scope of review
Some operators will attempt to limit the scope of the Owner's review by stating that certain estimates, such as anticipated room rates or expenses necessary to meet brand standards, are not subject to Owner's objection. This is wrong! The Owner should have the ability to question everything in the budget. It doesn't mean the Owner will always prevail, but the Owner should have a say.
3. Owner's Approval and Resolution of Budget Dispute
4. Budget Format
While it should go without saying, budgets must be provided in adequate format and detail to provide real information about the Operator's plans. Budgets should be detailed enough to include not only the line items, but clear narrative explanations of the assumptions underlying those assumptions. It is also essential that the budget process be integrated, so that operating, capital and marketing be presented as a unified whole.
Budgets should also be zero-based, rather than an increase (or decrease) of the prior year. The underlying assumptions and rationales of the budget need to be rethought and reanalyzed, so that Owners are not presented with the repetition of prior years' mistakes and do not miss changes in markets or technologies that move so quickly.
5. Variances and Amendments
Most operators argue that budgets are a planning device but cannot be relied upon, and they should be authorized to stray from the budget. This results in a meaningless budget. We believe that the Operator should be contractually required to adhere to the budget except for permitted variances which are carefully defined in the budget provision of the HMA.
Consequently, while minor variances can be tolerated, some basic guidelines should be followed:
Hotel owners who fully participate in the budgeting process can positively affect the operations and profitability of the hotel. The budgeting process can be time-consuming. But isn't it worth taking the time once a year, however inconvenient, to protect your investment? The budgeting process can also be contentious. But isn't it worth it to work through disagreements to find ways -- one line at a time -- to leverage your investment into greater profitability? And wouldn't it be great if you and your operator understood and respected each others' needs and were aligned in your commitment to owning and operating a great hotel?This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who's your hotel lawyer?
Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at [email protected] or 310.201.3526.
Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.
JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE® program".)
Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.
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