You want to sell to who?
“What’s your exit strategy?” That’s one of the first questions I always ask my clients when they are buying a hotel (in good times or in bad) because I don’t know the best way to get them into a deal, unless I know how and when they want to get out.
The question is an important one up front, particularly when dealing with a branded hotel, because the brands often try to restrict whom the owner can sell to. There is usually a prohibition on selling the branded hotel to a “competitor.” This makes sense. Aside from the awkward appearance of having one brand operating a hotel owned by a different one, the brand doesn’t want one of its competitors using its status as an owner to gain access to the manager’s proprietary information, including growth plans, pricing models, brand development strategies, or even how they approach their budgeting process.
But who is a competitor? With the rise of institutional ownership of hotel brands, the answer isn’t so easy these days. Although the precise wording varies from contract to contract, a “competitor” is usually described in a management agreement as a person engaged in the business of operating (as distinguished from owning or financing) hotels or other lodging facilities in competition with the hotel manager. When the brands were standalone companies focused on a strategy of growth through long-term management contracts, that definition worked. In recent years, however, institutional investors have acquired brands at the same time they hold portfolios of hotels including, for example:
· Kingdom Holdings’ stakes in Mövenpick, Fairmont-Raffles and Four Seasons, while owning the Hotel George V (among other hotels)
· Starwood Capital’s portfolio of ownership of hotels and brands including, for example, Concorde, Golden Tulip, Baccarat and Crillon
· Blackstone Group’s ownership of Hilton
· Lowe Enterprises, which owns third-party branded hotels and operates others under its Destination Hotels & Resorts brand
Each of these four companies is a highly regarded owner — and active buyer — of hotels. So, how does an owner avoid unduly restricting its pool of potential buyers? I have seen several largely unsatisfactory attempts at articulating a distinction between the institutional investor (who may not present a problem for the brand) and the active brand owner (which another brand will consider persona non grata). The challenges in crafting such a restriction are significant. For example, how much of an ownership interest in a brand disqualifies the potential buyer? Does it need to be a controlling interest, or is a 10% stake enough? What if the investor merely holds a “passive” interest (and what does that even mean)? Can the manager refuse to disclose to the institutional owner of a hotel and a brand certain information that it would otherwise share with owners and, if so, what information can it reasonably keep secret?
The market hasn’t yet sorted this out, but if institutional owners continue to acquire brands, hotel owners will need to be careful not to unduly limit their access to the pool of potential buyers.