Navigating legal challenges in the hotel industry
Navigating legal challenges in the hotel industry
02 FEBRUARY 2018 9:14 AM

Hoteliers and attorneys share their perspectives on the bottom line, debt and guest privacy rights at the Americas Lodging Investment Summit Law conference. 

LOS ANGELES—Hotel owners and their attorneys need to be on top of an unending number of legal issues on a day-to-day basis.

During the “Non-Labor Legal Issues in Hotel Operations” session of the Americas Lodging Investment Summit Law conference, a group of hoteliers and attorneys addressed some of the ongoing issues facing the hotel industry today.

The bottom line
Aligning the interests of the operator with the owner is much easier when the hotel isn’t managed by the brand, said Bill Tennis, EVP, general counsel and corporate secretary at DiamondRock Hospitality Group.

“When we talk about brand-managed (hotels), it’s entirely different,” he said. “Understandably, it’s because the brand is more worried about preserving the brand standards throughout. It’s a constant battle responding to the brands.”

The brands’ requests for additional funding into hotels are the source of regular negotiations, he said. There’s never 100% alignment unless the owner decides to put all the money in, he said. The management agreement might say one thing, he said, but how much exactly is the owner going to invest? It matters how rigid the brand standards are, he said.

DiamondRock has a team that looks at how capital is spent to determine which projects are a priority and how much to invest in those, he said.

“Management companies ask for the world, and we’ll typically cut it back,” he said. “Most times, we reach an agreement.”

It’s easier to reach an understanding on investment with independent management companies because they don’t have a brand they’re trying to maintain, he said.

It’s common for owners to ask the brands to put up some funding through key money, said Maki Bara, president and co-founder of The Chartres Lodging Group.

“Unfortunately, a couple of trends we’ve been seeing the past couple of cycles are not great for owners,” she said. “Amortization schedules have gotten much longer. I was used to key money burning off after 10 years. If a brand is terminated in year seven, that’s only three years’ worth of amortized key money. Now it’s 20 years or longer.”

Chartres Lodging is an opportunistic investor, she said, so it asks for flexibility upon a sale in year five, six or seven. That still leaves a chunk of unamortized key money left, she said, and there’s a contingent liability to account for.

What she’s seeing now is that companies that terminate brand contracts—for any reason, even when there’s cause to do so—still owe unamortized key money, she said.

“It’s going more and more in favor of the big brands,” she said. “We’re seeing less competition among the big brands.”

CMBS debt
Commercial mortgage-backed securities are back in a big way, said Stephen Ledoux, partner at Davis Wright Tremaine. While many owners don’t want to use CMBS loans more than once, the temptation of the leverage and price brings them back, he said.

For acquisition financing, owners should get managers involved early, said Matthew Gunlock, general counsel at Highgate Hotels. They know how to do it without hiccups or headaches during the acquisition, he said.

“It’s money well spent on the front end rather than after the fact,” he said.

DiamondRock hasn’t found the idea of lockboxes and CMBS loans to be an issue, Tennis said. Putting a CMBS loan into place isn’t any more difficult than others, he said, but the hard part is having the loan and then trying to do anything with it.

“It’s realizing you’re stuck with the CMBS loan, stuck with the manager and you can’t invest in the hotel because it exceeds the threshold,” he said. “It’s unbelievably time consuming dealing with servicers. It’s not an issue with us and the manager, who tends to be cooperative. It’s the lender and servicer who are the more difficult issue.”

Bara expressed similar frustrations in working with servicers.

“In a downturn, you’re looking to renegotiate certain terms or work out a loan, but you don’t know who to talk to,” she said. “Getting the servicer’s attention is difficult.”

Also, trying to play hardball with the servicer is a fool’s errand, Gunlock said. Being courteous and taking a delicate approach, understanding that there are certain steps which must be taken, will help accomplish objectives better, he said. Owners should strive to make the servicer’s job easier when they have to present the case to a committee, he said.

The lack of transparency for owners taking on CMBS debt is fascinating, he added. The loan agreement says one thing, which should be law, but the servicer then says it’s not actually that because the loan is a certain size in the pool, he said.

“How would you know that as a borrower?” he asked. “Your governing document is your contract.”

Privacy rights
In a discussion about the recent controversy involving Motel 6 providing guest information to U.S. Immigration and Customs Enforcement, the panelists each said their companies would not turn over guest information without a lawfully issued subpoena.

“I suspect that is the industry standard,” Gunlock said. “I think it’s critical to protect the rights of those guests. It’s also protecting the owners for whom we manage.”

Gunlock referred to a request by the New York Police Department for guest registries ahead of New Year’s Eve celebrations at Highgate Hotels properties, which his company initially refused, but then granted when the NYPD came back with a subpoena, he said. It’s not about being difficult, because he recognizes the good work the police department does for the community, he added.

In light of the shooting in Las Vegas and other incidents, the industry needs to reinforce its policies, Bara said. Hotels can track guests’ movements up until they get to their rooms, where they are protected by privacy laws, she said.

Regarding recent decisions by Disney and Hilton to alter their policies for do-not-disturb signs, Tennis said it makes sense to have a policy which calls for someone from security and management to knock on the door, announce themselves and then enter a room that has had a sign on the door for more than 48 hours.

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