One of the blogs I frequently visit for quality insights into the hotel and tourism industry is the Hotel Law Blog. The writer, Jim Butler, is a prominent attorney specializing in hotel matters. His blog entries provide a unique view into current hotel trends, legal, financing and business issues, etc.––really cutting edge information about the hotel business.
Recently, Mr. Butler’s posts stopped and I was disappointed that perhaps, like many bloggers, he was no longer interested in this pursuit. But low-and-behold it has become evident he was busy with a court case––representing a plaintiff against Marriott International and Ritz-Carlton. The verdict in the case favored Butler’s client including $10 million in punitive damages against Marriott and Ritz-Carlton.
But here is what stands out from his blog entry announcing his summary of the case, “We have been helping owners, developers and lenders with many hundreds of hotel management agreements over the past 20 years. We have negotiated, re-negotiated, terminated and litigated almost every aspect of them, so the only thing surprising about the latest jury verdict handed down on January 25, 2008 against Marriott International and Ritz-Carlton is that it shows a continuing arrogance and disconnect of operators who choose to ignore their contractual and fiduciary duties.”
Further in the post Butler says, “Owners should be able to trust their operators to honor the letter and spirit of their hotel management agreement––and to fulfill the fiduciary duties that the law imposes on every agent. Operators sometimes seem to confuse the POWER they are entrusted with in running hotels with the RIGHT to do anything they wish. That is a big mistake.”
And further, “The terms of that management agreement have a controlling impact on the value of the hotel for years to come. Why? The hotel management agreement is intertwined with virtually every legal and business aspect of your hotel. It is the keystone affecting the most crucial components of your hotel’s success, including financing, ownership structure, value and profitability, day-to-day operations and guest perception. It is often said that, a management agreement can easily add or subtract 25 percent of the value and often much more! And, a long-term management agreement is difficult to “fix” once it is in place.” For the whole story go to www.HotelLawBlog.com
Well, what can I say? Ever since I was a permanent resident in the Eagle Base Intrawest built properties, and having a front row seat to how things really operate, I’ve had lots of questions. Any of my longer standing readers know I have been expressing those concerns for quite some time. In fact, in April of 2006, I forwarded (at his request) 13 questions about these types of issues to MMSA CEO Rusty Gregory. Those questions centered around the conflict between Mammoth Hospitality (a subsidiary of MMSA) acting as both the “front desk” (or reservation company) and the on-site condominium manager. The delineation between expenses and responsibilities was of great concern and there was nothing spelling it out. All appearances were they were just “winging it”, and not in favor of the homeowners. There were other concerns. I never received a response to those 13 questions. As Rusty Gregory has been quoted in the local paper, “We do a crappy job at hotel management.” That inspires confidence.
Now I have new concerns. When a “brand” or “flag” like Westin or Ritz-Carlton is involved, what value are buyers placing in the name? And what if the brand decides to bail on the project after a few years? (For those who don’t have clarity on this, the “Westin”, “Ritz-Carlton”, or even “Trump” part of these type of offerings is as a licensed operator or name. They have no ownership interest in the property. Their vested interest is rather shallow.) Now with the serious problems of staffing a large, high-level hospitality facility here in Mammoth, and the very low annual and very seasonal occupancy rates, and the overall high costs of doing business here in Mammoth, and a whole bunch of other serious obstacles (especially compared to so many other marketplaces), why would or should they stay? (Simple conjecture on my part, but the subject of Butler’s trial was the Ritz-Carlton Bali, one of the most highly rated and popular hotels in the world. If Ritz-Carlton can’t respect their fiduciary responsibility there, are they really going to care that much about Mammoth?)
And if a significant chunk of the perceived real estate value is in the brand, and the concurrent bundle of marketing, services and training that comes with it, and the brand leaves, how does that impact the value to the individual investor? As Mr. Butler points out, the management agreement can easily add or subtract 25% “and often much more!” to the value. If the Westin leaves, does “The Monache” (named after a tribe of local Indians known as “fly eaters”) inspire you to make a booking or want to own?
Do any buyers of these condo hotel units ever review the management agreements with these brands or even Mammoth Hospitality?? It’s probably in the 750 pages or so of disclosures the buyer receives and signs off on (at least the original buyers). Do they understand the ramifications if the brand decides to leave? And there are probably tons of “outs” in the management agreement. And would Mr. Butler even understand it all? And does the developer care? They’ll be down the road and protected legally. (Think Intrawest.)
One of my other concerns is how this all applies to condo hotels. In Mr. Butler’s case study there was only one owner––long established, unified, and of one-mind. Condo hotel ownership structure is scattered, disinterested for the most part, and un-unified (and even worse you might have a couple of egomaniac Board members).
But if you have lots of money and don’t care, and if being able to tell people at cocktail parties that you own a “such-and-such”, well then be my guest. Oh, and of course, the Airport will solve all of these problems.