• You will always be able to get a great brand. The key is to get the right brand and the right deal. Don't rush into this or get tied up too early.

• The brand representatives are professionals whose full-time job is getting owners locked up early and put on a path that limits an owner's options.

• Brand representatives are charged with taking care of the brand's interests -- not yours. They have a serious conflict of interest. Their advice is tainted by their overriding loyalty their employer, the brand.

• Most brands no longer have in-house development expertise.

• Take a hard look at the value of a brand's "technical assistance." Why pay for the brand's outside experts to fight you on what you want to accomplish?

• Of course, you will have to give the brand reasonable approval rights, but in a properly conducted RFP/HMA PRO™, you will find a great brand that will accept reasonable approaches guided by knowledgeable experts.

• Brand investment in your hotel project may be the most expensive capital you will ever take.

• Whenever the brands invest capital, provide credit enhancements or give other financial support, there will be a tremendous impact on the terms of a very long-term hotel management agreement.

• The change in management agreement terms in these cases can cost tens of millions of dollars and deprive the hotel owner/developer of all-important controls, approval rights, termination rights and flexibility.

• The brands get such a large percentage of the gross income -- off the top -- that the investment typically pales in comparison. The typical brand receives 12% to 14% of the gross revenues of your hotel for management fees, marketing fees, brand loyalty program fees, reservation services, IT services, purchasing and a host of other charges.

• In other words, brand investment does NOT align interests very well. It is a way that brands "buy" terms that they would otherwise never be able to negotiate.

• There are benefits to having an experienced hotel developer take over the development of your shopping center's hotel. However, there are significant benefits for the shopping center owner to develop the hotel itself.

• Most hotel developers only know about hotels. Their goal is to develop a successful hotel. They are not principally concerned about how the hotel can help the shopping center, and they probably don't have any experience with those issues. Only the shopping center owner cares about both the hotel and the shopping center.

• The hotel will generally receive its benefit from the shopping center without much effort. But for the shopping center to benefit from the hotel, you need to put in place the right "structure" of complex business and legal arrangements (along with their implementing documentation).

• For example: getting the "right brand" for your retail mix, negotiating a hotel management agreement that will benefit the shopping center, arranging financing for hotel construction, developing the mixed-use legal and operating procedures, negotiating SNDAs with the hotel brands, hotel lenders, shopping center lenders, and developing workable CC&Rs and REAs to realize the benefits of hotel-retail mixed-use. Hotel developers will handle all of these things for the benefit of the hotel, but they are not likely to optimize benefits to the shopping center without active guidance and participation by the shopping center owner.

• More importantly, it is difficult to get a good result in a complicated business and legal structure when you don't have a seat at the table where the deals are being cut. It is exponentially more difficult when all you can do is whisper in the ear of someone who does have a seat at the table. Even with the best of intentions, these parties will have different interests and goals.

• To thrive against competition from online retail sales and other bricks-and-mortar retail, shopping centers need to be more creative and aggressive in providing a unique "customer experience" at their centers. Analysts and investors need to understand this and to see the hard data that shows the strong synergies and significant financial benefits of hotel-retail mixed-use.

• If you don't find a way to deal with this issue, your competitors will.

• You may want the hotel to be on a separate legal parcel, adjacent to but outside the perimeter of the shopping center. You may also conduct the hotel development in an entity that is outside the REIT that owns your shopping centers.

• Cities love the bed taxes generated by hotels (generally called transient occupancy taxes or TOT). Cities are often willing to allow an increase in the buildable area for a hotel that would not be permitted for additional retail spaces. Also, in exchange for building a hotel, cities may be willing to provide significant financial incentives such as complete or partial TOT holiday for a specified term of years, expedited permits or zoning changes, parking concessions and the like.

• You can always sell your investment in the hotel once you have the right structure. You may even be able to arrange a forward sale commitment to institutional hotel investors, though this type of arrangement will give up a lot of the upside potential in the hotel.

• Hotels are too different from retail to use advisors who do not understand the business and legal relationships among the hotel owner, the shopping center owner, the brands and the capital providers involved in the transaction.

• Hotels can have complex franchise and brand management agreements, and different issues for tax, financing, operations, management, liquor licenses, employment, environmental, insurance, capital requirements and structures.

• There are competing interests among all stakeholders. The hotel management agreement, ground lease, REA and SNDA differ significantly for a hotel anchor than a retail anchor. In fact, these arrangements are probably driven more than 90% by hotel-specific issues, norms, customs and practices, and less than 10% driven by issues that would be encountered with a typical retail anchor.

• Complex mixed-use elements must dovetail so that each use enhances the value of the other uses.

• You need both hotel and shopping center expertise to guide the structuring of everything from the CC&Rs to the hotel management agreement, and from REAs and SNDAs to side agreements.

• Not every shopping center will be enhanced by a hotel. And not every hotel will benefit from proximity to a shopping center. In some cases, the hotel can be a great amenity for destination retail. In others, the retail can be an amenity for a hotel with a local demand base. Sometimes there is just no need or synergy for a new hotel. Each situation must be analyzed by an experienced consultant to test the market conditions and potential demand.

• A well done market study will test the viability of the hotel project. If it can work, the deal has to be structured to realize all of the potential "synergies" of hotel-retail.

• It takes a lot of focused effort by experienced hotel-retail experts to realize the optimal synergies that are possible in hotel-retail mixed-use. These synergies do not "just happen" automatically.

• It is difficult to finance any hotel development now.
• The shopping center owner may have to provide the cash or facilitate the financing.
• The shopping center owner probably can get construction financing itself.
• It may be tough to finance hotel development on a ground lease.
• Hotel investors and developers are wary of leases -- prefer development on fee simple land.

In some ways the hotel is similar to a retail anchor:

• If successful, the hotel anchor will draw quality tenants and customers.
• It can enhance the critical "consumer experience" that shopping center owners strive to achieve.

• In other important respects a hotel is not like a typical retail anchor:

• It provides several hundred new credit cards per day for the retailers at the shopping center -- shoppers from outside the local market area, and people who tend to spend more when away from home.

• Hotels have brands and operators (with very long-term contracts) whose interests must be aligned with the shopping center owner's goals.

• The lease terms, management agreement terms, SNDAs, REAs and side agreements are totally different for a hotel than for a retail anchor. The terms are driven by hotel specific considerations. (see items #6 and #10 in this list).

• Because hotel revenues are cyclical as well as seasonal, the economics of a hotel lease differ from those with a typical anchor.

• The hotel rental structure (both base and percentage) has to be viable for both the shopping center owner and the hotel developer/investor.

• The shopping center owner has to ensure that the developer/investor can raise debt and equity capital with a ground lease. This can be challenging in the current environment where there is a dearth of debt financing for hotel development.

• CAM charges for a hotel, if any, can differ significantly.
• Careful attention must be paid to use and exclusivity considerations for both the hotel and existing retail.
• Insurance and liability considerations and provisions for hotel operations differ from retail.

• What if the hotel wants to go dark? What provisions are feasible to mitigate that calamity? How do brand and operator SNDAs affect this?

• REIT shopping center owners must be mindful that the hotel anchor is an operating business.

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