Today's Hotelier - February 2018 - 23

 5.5-MINUTE READING TIME

for the most desirable urban real estate
for their new brands. Their fervor is
prompting many to sweeten the deal by
dangling key money incentives in front
of hotel developers. These incentives
are meant to convince developers - and
assist them - to quickly launch the new
brands in prime locations before a competing hipster brand beats them to it.
Key money incentives typically
amount to 5 percent or less of the total
project cost. On some projects, that
could mean $1 million or more and could
be dependent on the number of keys (or
guest rooms) being delivered.
Sounds great if one of the big players is
courting you as a developer. Who doesn't
like the idea of the franchise throwing
in some of its own cash?
After all, the hottest urban-core properties in any city command top dollar.
Total costs of land and construction can
range from $15 million to $80 million
on many of the new hospitality brands.
A key money offer could offset some of
the high upfront costs of getting a new
property started on an expensive chunk
of real estate.
But like with most good things, there is
a catch. Although many of the umbrella
brands here are proven franchisors,
these newer brands are unproven. They
commonly come with at least two major
risk factors for the owner - pricey real
estate and little to no customer loyalty.
The details are everything with key
money incentives, however. Seemingly
innocuous specifics can make the difference between a good or bad deal for
the developer.
This is especially critical when the
deal involves a new brand with no builtin customer base. The developer must
scrutinize every detail about the contract - including any key money incentives - to reduce risk as much as possible.
For example, the franchise might offer
an incentive tied to completion of the
project by a certain date. If that date is
missed, the incentive can disappear if
the deal doesn't include correct delivery

"

Experience
as a developer
is extremely
valuable but also
dangerous if it leads
to complacency
about the fine
details of any
incentive offered.

"

flexibility. The developer loses potentially hundreds of thousands of dollars,
or even more.
Keep in mind the most desirable urban
locations are often among the most difficult locations for new construction.
They could involve historic sites that are
tightly regulated. They might be subject
to strict sustainability rules. Couple that
with tightening permitting rules, banking regulations and shifts in construction. High-barrier markets are dubbed
that for a reason.
These and myriad other issues common in older, urban centers can wreak
havoc with construction timetables.
And that could make or break a key
money incentive tied to a completion
deadline. So, as a baseline, it is imperative to understand the milestone dates
along with negotiating extensions from
the onset.
A range of other forms of incentives
and obligations could also be in the mix
on any hotel management agreement.
Often the incentive is presented as an
upfront cash incentive but is really a
loan/equity hybrid, where the franchise
contributes certain funding as a key
money incentive (with a payback burn
off). However, this likely comes with an
increased franchise fee (or desire to not
reduce to market standards).
As such, the incentive really is
more like a loan that is keyed off the

hotel's revenue, often for the life of
the franchise agreement. Sometimes,
depending on the expected total room
revenue, that incentive money could
add up to a costly loan reaching even
into double digits.
The developer should also avoid
assuming a key money incentive on
one of the edgy, new hotel brands is
just like any other key money incentive
they might have seen before. Experience
as a developer is extremely valuable
but also dangerous if it leads to complacency about the fine details of any
incentive offered.
Given that the legacy companies are
almost frantic to quickly establish their
new brands, those fine details could be
significantly different than those seen in
previous hotel management agreements.
One area you want to very closely
review is your area of protection ("AOP")
to be sure that this takes into consideration legacy brands as well as the brand's
foray into new ventures.
Finally, everything is negotiable when
it comes to key money incentives. The
risks associated with launching an
unknown brand are substantial. It's up
to the developer to negotiate aggressively to reduce those risks to the
maximum extent possible and open a
dialogue with the brand to address the
primary concerns.
After all, this is a new venture for
the franchisor, as well. And valuable
input from the developer doesn't go
unnoticed.
■
Rahul Patel is managing
partner of Patel Gaines,
a Texas-based law firm,
and an adjunct professor
of hospitality law at the
University of Houston's
Conrad N. Hilton College of Hotel
and Restaurant Management. He has
represented more than 200 hotels and
is a frequent speaker at AAHOA's events.
He also serves on AAHOA's Government
Affairs Committee.

TODAYSHOTELIER.COM | FEBRUARY 2018 | 23


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Table of Contents for the Digital Edition of Today's Hotelier - February 2018

Letter From the Chairman
Letter From the President & CEO
Government Affairs
CEO View
The Great Extended-Stay Boom
12 Easy Pieces for a Hotel Renovation
Key Money Incentives: To Take or Pass?
How ADA Compliance Laws Affect Your Hotel Website
When Small Businesses Prosper, America Prospers
Hotel Financing Q&A
AAHOA @ Industry Events
Aahoa Founding Members
Aahoa Vendor Partners
Classifieds
Advertiser Index
Today's Hotelier - February 2018 - Intro
Today's Hotelier - February 2018 - cover1
Today's Hotelier - February 2018 - cover2
Today's Hotelier - February 2018 - 3
Today's Hotelier - February 2018 - 4
Today's Hotelier - February 2018 - 5
Today's Hotelier - February 2018 - 6
Today's Hotelier - February 2018 - 7
Today's Hotelier - February 2018 - Letter From the Chairman
Today's Hotelier - February 2018 - 9
Today's Hotelier - February 2018 - Letter From the President & CEO
Today's Hotelier - February 2018 - 11
Today's Hotelier - February 2018 - Government Affairs
Today's Hotelier - February 2018 - CEO View
Today's Hotelier - February 2018 - The Great Extended-Stay Boom
Today's Hotelier - February 2018 - 15
Today's Hotelier - February 2018 - 16
Today's Hotelier - February 2018 - 17
Today's Hotelier - February 2018 - 12 Easy Pieces for a Hotel Renovation
Today's Hotelier - February 2018 - 19
Today's Hotelier - February 2018 - 20
Today's Hotelier - February 2018 - 21
Today's Hotelier - February 2018 - Key Money Incentives: To Take or Pass?
Today's Hotelier - February 2018 - 23
Today's Hotelier - February 2018 - How ADA Compliance Laws Affect Your Hotel Website
Today's Hotelier - February 2018 - 25
Today's Hotelier - February 2018 - When Small Businesses Prosper, America Prospers
Today's Hotelier - February 2018 - Hotel Financing Q&A
Today's Hotelier - February 2018 - AAHOA @ Industry Events
Today's Hotelier - February 2018 - 29
Today's Hotelier - February 2018 - Aahoa Founding Members
Today's Hotelier - February 2018 - 31
Today's Hotelier - February 2018 - Aahoa Vendor Partners
Today's Hotelier - February 2018 - 33
Today's Hotelier - February 2018 - 34
Today's Hotelier - February 2018 - 35
Today's Hotelier - February 2018 - 36
Today's Hotelier - February 2018 - 37
Today's Hotelier - February 2018 - 38
Today's Hotelier - February 2018 - 39
Today's Hotelier - February 2018 - Classifieds
Today's Hotelier - February 2018 - 41
Today's Hotelier - February 2018 - 42
Today's Hotelier - February 2018 - 43
Today's Hotelier - February 2018 - 44
Today's Hotelier - February 2018 - 45
Today's Hotelier - February 2018 - Advertiser Index
Today's Hotelier - February 2018 - cover3
Today's Hotelier - February 2018 - cover4
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