Leasing spaces to restaurants and retail outlets can be a great way for hotels to bring more people on-property and unlock a new source of revenue, but speakers at the recent Hotel Asset Managers Association conference said it’s important to guard your interests in case things go south.
ATLANTA—Partnering with a restaurant or retail outlet can bring cachet and additional revenue to your hotel, but sources speaking at the recent Hotel Asset Managers Association conference said it’s important to build financial monitoring tools (and to use those tools) to make sure those partnerships don’t go belly-up.
Speaking during the “Retail and restaurant leases best practices” panel, Derek White, EVP of asset management at Portman Holdings, said there are a lot of deals that look like they hold significant potential in that space, but it’s important to keep in mind possible red flags that might pop up.
He pointed to a deal with a local celebrity chef at one of his company’s properties that first brought notoriety and interest to the hotel, but was ultimately unsustainable because of that chef’s interest in things other than growing the business.
“A lot of the parts of that deal were set on his presence and promoting the hotel,” White said. “He helped hire the chef and create the menu, and we required a certain amount of hours on property to interact with guests and staff. … But as his popularity grew, so did his propensity for wanting to do recreational substances. That deal went pear-shaped fast.”
But Tosh Wolfe, SVP and director of retails services at Colliers International, said unique retail and F&B offerings have become requirements for a hotel to differentiate among its competition, so hoteliers can’t simply opt out of making these sorts of deals.
“In the hotel world, it’s really about creating a buzz and a creating a great experience for the consumer or guest,” he said.
Both Wolfe and White agreed that leases are often preferable to licensing agreements, which are sometimes favored by high-profile F&B operators.
“Typically license agreements provide fewer protections for the asset and operator,” Wolfe said.
Andrew Petrie, attorney and partner at Ballard Spahr, said it’s important to have mechanisms negotiated into leases that allow owners and asset managers to monitor the financial situations of tenants. He said many agreements have these in place, but they aren’t always used.
It’s important to regularly make those financial checks and to also take advantage of things like online listed court filings and SEC filings to make sure partners are in good financial shape and are not likely to default, Petrie said. Searching online court filings can be particularly enlightening, and you don’t necessarily have to wait until a deal is signed to start digging.
“Even divorce filings can be useful,” Petrie said. A tenant “might not explain that their ex has a right to 50% of their revenues and is making their life crazy. You have to take it with a grain of salt, but it at least gives you a bird’s-eye view. It’s good to know what’s going on before you have a deal.”
Petrie said another key is to keep an eye on more than just the entity your hotel interacts with. In many cases, smaller retail and F&B operators silo their operations, so the numbers they report might not give a full picture and failures at other parts of their business might come back to haunt owners.
“Say you’re working with a celebrity chef … and all the money he’s making here could be going to prop up a bad operation downtown, and next thing you know he stops paying his payroll taxes and ends up short on cash here,” Petrie said. “People don’t really think about managing their relationship with the entire business entity.”
Digging out from a bad deal
Panelists urged that the first step toward overcoming a bad deal should be taken at the beginning of negotiations by putting protections and monitoring mechanisms in place.
“You have to think of yourself as a good custodian of that asset, especially as a long-term holder,” Wolfe said. “You have to think about certain provisions of a lease that allow you to relocate tenants or terminate leases if you want to redevelop. A lot of people say, ‘I’m not a long-term holder and I just want to get a deal done,’ but what you see in the sale of that investment is when you create clean deals that give future buyers flexibility with the asset, it helps drive further value.”
White said his company went through a situation when the operator of a pub at a Marriott property in the United Kingdom kept getting into deeper and deeper financial trouble, which continued until the hotel employees started noticing equipment being removed from the pub to be resold. Quick legal action was necessary to protect their asset.
“Under the laws of the U.K., we could take control of the space pretty quickly,” he said. “We called the sheriff, and it might have taken the presence of local law enforcement, but we were able to reopen a few days later under the management of the Marriott team.”
Petrie said it’s key to know what you have rights to and be aggressive in pursuing them, because often when a business goes belly-up there is a long line of creditors looking to get their piece of the pie. That means owners and asset managers often have to be more aggressive than they’d like, so they’re already ahead of the game when a partner reaches the points of being in default or bankruptcy.
“A lot of people are reluctant to send notices of default because it upsets the relationships, but if you have the right, you need to be right on top of it to exercise it,” he said.