For the most
recent update on this topic, click
here
By
Jim
Butler and the Global
Hospitality
Group®
Hotel Lawyers | Authors
of www.HotelLawBlog.com
February 18, 2013
Hotel Lawyer on the Pros and Cons of
dual-branded hotels
Dual-branding
of hotels in a single structure or complex is
quite a trend in the hotel industry and has been picked up by the
popular
press.
The hotel
lawyers in JMBM's Global Hospitality Group® have
been working on dual-branded hotels for some time, so we thought we
would share
some our observations on the pros and cons of this approach.
My partner, Bob
Braun, has worked on many hundreds of hotel
management agreements and franchise agreements, and has written this
article to
provide an important update on this subject.
One
building -- Two brands
Two sides to the dual-branding coin
by
Robert E. Braun | Hotel Lawyer
USA Today recently reported that hotel
chains are
increasingly offering owners and developers a "two-for-one" deal - a
single building housing two separate hotels. While this is not entirely
new
(hotel companies have been placing multiple brands adjacent to each
other or
sharing facilities for many years), the trend of "dual-branding"
appears to be accelerating. JMBM's Global Hospitality Group® has
worked on a
number of these projects, and see both benefits and challenges in this
trend.
Here are a few of the considerations that we
have noticed.
Benefits of dual-branding hotels
- Probably one of the most appealing parts of a two brand,
one building approach is the ability to maximize the value of land,
which is one of the biggest costs of developing a new hotel property.
Hotel brands typically provide for a range of room sizes and
configurations in any single hotel. By effectively putting two hotels
on a single parcel, a developer can increase the number of guest rooms
and provide a greater variety of guest room types to maximize the
revenue generated from that property.
- Different brands from the same brand family can also appeal
to broader range of guests. For example, Hyatt Place and Hyatt House
properties are commonly co-located, making it possible to offer both a
select service hotel and an extended stay property. And at LA Live in
Los Angeles, Marriott International has combined a Ritz-Carlton and a
JW Marriott Hotel on the same property. In a separate building across
the street, Marriott will co-locate a Courtyard by Marriott and a
Residence Inn. That gives Marriott four Marriott-family brands to offer
guests in two buildings!
- Locating two hotels in a single property may also permit
more efficient use of space. The two hotels sharing a building may be
able to share costly parking, pool, fitness center facilities, meeting
space, restaurants, retail areas and engineering facilities which would
otherwise have to be duplicated.
- Just as important as maximizing the efficiency of physical
space is the cost savings that may be achieved in operational
efficiency. It may not be effective to have a full time chief engineer
or accounting staff for a single, 100-room hotel, but it may work if
they service 2 co-located hotels with a total of 250 rooms. Similarly,
having more hotel rooms operated in the same building by the same brand
has some potential for greater flexibility and scalability with other
personnel (housekeeping, maintenance, front desk and so on), and thus
can reduce employment costs and increase efficiency.
Challenges of dual-branding hotels
- While there are clear advantages to putting more than one
hotel in a single property, there are a number of challenges as well.
One of the key challenges an owner will face in a dual-branded property
is that different brand families will not mix. It is virtually
impossible to imagine two different brands would agree to operate
hotels in the same building. So even if the owner felt that a Hilton
hotel and a W hotel would be the perfect mix, if they ever did both
occupy the same building, they would never share operating space,
facilities or personnel.
- Even mixing two brands from the same brand family can also
be tricky when the two brands are far apart in typical guest profile -
the amenities of a luxury hotel would be compromised by sharing space
and personnel with a limited service hotel. For that reason, most of
the dual-branding efforts have been with brands that are fairly close
on the brand family chain scale. At the same time, putting two very
different brands together can muddy the differences between different
offerings.
- Owners should also consider financing issues. Financing
lenders may want to aggregate cash flows from the two hotel operations
for debt service coverage ratios and other benchmarks for internal
credit purposes. At the same time, they would normally also want
separate legal parcels for each hotel for remedy purposes. This adds a
few complications (generally not insurmountable) to negotiations and
transaction costs, that should be more than set off by cost savings and
efficiencies of dual-branding.
- In the typical dual-branding situation today, the
properties would normally both be managed under a single management
agreement, or at least by a single manager so as to achieve the
greatest operating efficiencies. Under a single agreement, the manager
would combine the financial results of the properties together, and
would apply a joint performance test. While that would avoid some of
the problems of running two separate hotels in one building, it would
also tend to hide the actual performance of the individual hotels. It
would also mean that if the owner wanted to terminate the manager of
the non-performing hotel, it would also have to terminate the
performing hotel. These issues can all be dealt with in management
agreement negotiations if an owner or developer is well-advised.
- At the same time, if the dual-branded hotels operated under
franchise agreements, they would require two different franchise
agreements. Franchise agreements and operations for dual-branded hotels
have not evolved to become common place. As a result, you will probably
need to craft customized approaches, contact provisions and operating
procedures to optimize the benefits of dual-branding.
More information about branding and
management
The right hotel brand and management
agreement can be the
difference between success and failure of a hotel. The Global
Hospitality
Group® at Jeffer Mangels Butler & Mitchell LLP has negotiated,
renegotiated, litigated and advised on more than 1,000 hotel management
and
franchise agreements all over the world. To see how we help clients in
this
arena, please click here
to see
our brochure.
We also have a rich library of free
resources available on
most topics of interest to people dealing with hotels. These are all
available
at www.HotelLawyer.com.
For blog articles, scroll down any page of
HotelLawyer.com
and look on the right side. For example, you can see all the blog
articles on
"Hotel
Franchise & License Agreements" by clicking that link. The same
goes for "Hotel
Management Agreements" or any other subject you see listed down the
right hand side of HotelLawyer.com.
You will also find our free handbooks on
HotelLawyer.com under the "Resource Center"
tab, such as:
- How to Buy a Hotel Handbook [coming soon!]
And much more.
_________________________
Robert Braun is a senior member of the Global
Hospitality Group® at JMBM. Mr. Braun advises hospitality clients
with respect
to hotel management agreements, franchise agreements and operating
issues. He
also advises on transactional matters, including entity formation,
financing,
and joint ventures, and works with companies on their data technology,
privacy
and security matters. These include software licensing, cloud
computing,
e-commerce, data processing and outsourcing agreements for the
hospitality
industry. He is a member of the International Association of Privacy
Professionals. Contact him at 310.785.5331 or [email protected].
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 hotels. 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
1,300 properties all over the world. For more information, please
contact Jim
Butler at [email protected] or
+1
(310) 201-3526.
Jim Butler is a founding partner of JMBM, and
Chairman of its Global Hospitality Group® and Chinese Investment
Group™. Jim is
one of the top hospitality attorneys in the world. GOOGLE "hotel
lawyer" and you will see why.
Jim and his team are more than "just"
great hotel lawyers. They are also hospitality consultants and business
advisors. 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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