The Hotel Times - June 2008 - (Page 32) IN CLOSING » BY JIM NORMAN What a difference a year makes Go for the smart close G Jim Norman is co-chair of Holland & Knight' s Global Hospitality, Resort and Timeshare team. etting a brand management deal closed always has presented challenges. Owners and brand operators have legitimate, competing interests. Six months to negotiate a hotel management agreement is not uncommon. For all of that, deals got done and documents signed almost all the time. That' s what a strong market will do. When occupancy, revenue per available room and condo-hotel unit sales are strong, everyone wants to close while the good times are rolling. Lenders joined the party, with 80 percent loan-to-value loans. Yes, each lender seemed to have its own hot buttons when it came to the Subordination, Non-Disturbance and Attornment Agreement (SNDA) with the operator, but it always got worked out. Why wouldn' t it? No loan, no project; no project, no fees. If something along the way went wrong, someone else would come alongÐ likely a Wall Street fund. Everyone wanted hotels. A year later, it' s a changing market. The residential market has the flu and is sneezing. The hotel industry hasn' t caught the bug yet, but has a scratchy throat. The same issues between owner and brand operator still are there, with some new ones. Lenders have become far more conservative. They' re looking for more real equity. Last year' s 85 percent loan to value has dropped to perhaps 65 percent. For condo-hotels and branded residence projects, pre-sale requirements have climbed. The allure of the condo-hotel has faded, at least to brand operators. Brands fret about the negative impact on them from failed projects and disappointed purchasers. They rightly fear being dragged into litigation. The all-condo- hotel rarely is seen in a new branded deal anymore. Yes, new projects are still getting done, but everyone is more cautious. If the test of an economy is optimism and confidence, then we can look to the mindset of hotel developers, perhaps the most blindly optimistic and perennially confident demographic group, to determine where we are in the market cycle. That mindset is revealed by an issue that was rarely raised a year agoÐ pre-commencement termination of the management agreement. Developers now are strongly negotiating (ª insisting uponº is not too strong a phrase) the right to terminate the management agreement, without any penalty, if they are unable to obtain and close on acceptable financing within some fixed period of time. Closing on a The residential market has the flu and is sneezing. The hotel industry hasn' t caught the bug yet, but has a scratchy throat. construction loan or development facility now usually requires reaching a certain pre-sale level of binding contracts. Brand operators tend to go along, if the time period is not unreasonably long. Their concern is being locked out of a market because of an area of protection (exclusive territory) provision without knowing they will have a project to brand and manage. Tough markets create opportunities for creative developers and outstanding projects. The strong will prosper. As for next year, we' ll have to wait and see. hmm@questex.com 32 The Hotel Times June 2008 www.TheHotelTimes.com http://www.TheHotelTimes.com
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