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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 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 by Robert E. Braun
| Hotel Lawyer
We
have emphasized in previous articles how a good hotel management
agreement can
add significant value to a hotel property, and how a bad one can
detract just
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. Challenges 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. 1.
Time 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:
Conclusion 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?
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. |
Contact:
Jim Butler
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