Leisure Law Insider (Vol. 5) - Winter 2025

In this issue

• The Safe Hotels Act Update
• “Getting Junked?”: A New Update for Hoteliers
• The Labor Law Pendulum: Anticipated Changes for the Hotel Industry
• Navigating Antitrust Risks: The Hidden Dangers of AI and Software Pricing and Inventory Tools for Hotels and Property Managers
• Negotiating Mixed-Use Branded Hotel and Residential Contracts

The Safe Hotels Act Update

KEY TAKE
The revised NYC Safe Hotels Act takes effect in May 2025. While it has limited some concerns, speed bumps are likely in the administration and enforcement of this legislation.

In our September Issue of Leisure Law Insider, we summarized Int. 991-2924, known as The Safe Hotels Act (New York City Council’s proposed hotel licensing and regulatory statute), and provided some observations about its implications. Since the September article, revisions have been made and a final version, dated October 23, 2024, was signed into law by Mayor Eric Adams on November 4, 2024, as Section 1, Chapter 2 of title 20, Subchapter 38 of the Administrative Code of the City of New York (the Act). The Act is expected to take effect on May 3, 2025.

Below is a summary of the legislation and some insights with respect to licensing, employment, operating requirements, and violations.

Hotel License Requirement

As of May 3, 2025, all hotel operators in NYC will be required to obtain a license to operate, which is valid for two years (the license fee is $350). Under the Act, “hotel operators” is defined to mean the owner, lessee, or manager of a hotel who manages the hotel and/or controls its day-to-day operations, including employment of the hotel’s employees. This is an important change from the proposed legislation (as outlined in our September 2024 summary), which is addressed below in the Direct Employment portion of this article.

To obtain or renew a license, a hotel operator must file an application with the Department of Consumer and Worker Protections (the Department), which provides information to establish that the hotel has complied with the staffing, safety, housekeeping and direct employment provisions enumerated in the Act. A collective bargaining agreement “that expressly incorporates the requirements”[1] satisfies these provisions for a duration of the collective bargaining agreement or 10 years from the date of the application, whichever is longer. Although the Act does not explicitly state that the duration of the license may then be extended, the Committee Report dated October 23, 2024, specifies that a collective bargaining agreement incorporating the requirements of the Act would allow the license to be extended until the end of the agreement or 10 years, whichever is longer.

The Act also provides that the issuance of a license may be contingent upon “such other information as the commissioner may require.”^[2] The previous iteration contained a separate rulemaking provision allowing the Commissioner to “promulgate such rules as the commissioner deems necessary” [emphasis added]. While the Act removes the Commissioner’s discretion to implement additional rules, alleviating some concerns regarding implementation and enforcement, there remains uncertainty as to what types of additional information may be sought on a case-by-case basis and whether such information may be uniformly requested in similar circumstances. Market players, in particular those with less tolerance for risk (such as lenders), do not look favorably on uncertainties regarding critical aspects of transactions and/or operations (such as whether a hotel that was bought and/or financed will obtain or retain its license). Thus, time will reveal whether the Commissioner’s discretion will be a disruptive element in the licensing component of the Act.

With respect to applications to renew a license, if an applicant has submitted all relevant forms and fees but the Commissioner fails to make a determination concerning renewal prior to the expiration date of the applicant’s license, that “shall not be cause to cease operation of a hotel.”[3] This provides hotel operators with the ability to continue to lawfully operate a hotel where a license has previously been granted, at least until such time as the Commissioner issues a final determination.

The Act further provides that in the event of a failure to comply with any of the provisions of this Act, the Commissioner may revoke a hotel’s license. The Commissioner must first notify the licensee in writing of a possible revocation and allow the licensee a period of 30 days to cure such non-compliance. If the licensee proves to the satisfaction of the Commissioner that the default has been corrected within 30 days of notification, the license shall not be revoked. While the Act does give the hotel operator advance notice of what the Act requires and, therefore, it may seem that 30 days to cure a violation could be fair and reasonable, there could be practical difficulties in correcting an operator’s failure to comply, such as, for example, changes to a collective bargaining agreement or discord with the union, parties obtaining injunctions in court, or other labor difficulties. This can be another area of uncertainty as sophisticated parties and experienced legal practitioners have come across any number of scenarios during their careers where what may seem facially susceptible to cure within 30 days can take much longer as a practical matter.

Direct Employment

The Act also requires that, except for small hotels (hotels with fewer than 100 guest rooms), the hotel owner, directly or through a single operator, retained to manage the entire hotel must employ all “core employees” of the hotel: core employees are employees whose job classification/duties are at the on-site front desk (check-ins, check-outs, and reservations), housekeeping, room attendants, bell staff, and door staff. In our prior article we pointed out the obvious challenge of requiring direct employment of these staff positions by the hotel; this change is an obvious result from the substantial pushback from the hospitality professionals who explained the practicality of the direct employment requirement (and the draconian effects it could have had) as many hotels, in particular the larger and more notable hotels, retain hotel managers who employ such persons rather than the hotel’s owner.

Daily Operating Obligations

The Act also requires that the hotel operator must provide continuous front desk coverage, as well as a security guard on premises at all times who has undergone human trafficking training. This security guard may take the place of front desk staff for overnight shifts.

In addition, hotels must provide daily housekeeping, unless affirmatively declined by a guest, and fresh towels and sheets upon request. Cleaning fees may not be imposed, nor may discounts or incentives be offered to guests who forego cleaning services.

Further, hotels may not accept reservations for stays of less than four hours, unless it is an airport hotel (i.e., within one mile from either LaGuardia Airport or JFK International Airport).

Hotels must also provide human trafficking recognition training for all core employees (newly hired core employees have 60 days from employment to complete this training). Additionally, panic buttons must be provided to all core employees whose duties involve entering occupied guest rooms.

Whistleblower Provision

The law also includes certain whistleblower protections. For example, under the Act, a hotel operator may not retaliate against any employee for disclosing or threatening to disclose the practices, policies, or activities of a hotel operator if the employee reasonably and in good faith believes the hotel is in violation of the Act or that such practices pose a substantial and specific danger to the public. Additionally, a hotel operator may not retaliate against an employee who objects to or refuses to participate in an activity, policy, or practice if the employee believes that it is unusually dangerous and it is not normally part of the employee’s job.

Violations of the Act

As to violations, the Act provides that hotel operators that violate the Act are subject to civil penalties of $500 for the first violation and up to $5,000 for four or more violations of the same kind within two years of the original violation.

We expect there will be further updates or revisions of the Act, as well as guidance on the Commissioner’s discretion as the Act continues to evolve and becomes implemented. We will keep you updated in future articles.

[1] NYC Council Safe Hotels Act - Section 20-565.2

[2] NYC Council Safe Hotels Act - Section 20-565.2(3)

[3] NYC Council Safe Hotels Act - Section 20-565.29(3)(d)

“Getting Junked?”: A New Update for Hoteliers

KEY TAKE
FTC’s final “Junk Fees” Rule Targets Hotels and Resort Fees. What every hotelier needs to know.

On December 17, 2024, the U.S. Federal Trade Commission (FTC) announced its Final Rule on Unfair or Deceptive Fees, known as its Junk Fees Rule, prohibiting bait-and-switch pricing and other deceptive tactics that obscure a consumer’s final price until after payment in the live-event ticketing and short-term lodging industries.

The final rule is far more expansive than the initial version of this rule proposed by the FTC in October of 2023. The initial proposed rule had no limitations on the types of businesses or sellers of goods and services it would cover. The proposed rule intended to regulate two forms of junk fees: hidden fees, where businesses bait-and-switch a lower price pre-checkout to a significantly higher price with hidden mandatory fees, and bogus fees, which refer to fees that are vague, inadequately described, or misrepresented in an invoice or receipt. The final rule does address both hidden fees and bogus fees in its prohibition (sections 464.2 and 464.3), but it is significantly narrower in many respects.

The rule was promulgated to combat so-called junk fees — including fees that are common in the hospitality industry, such as resort fees, convenience fees, and services charges. Ultimately, these fees raise the cost of a hotel stay for the consumer, which the FTC contends is unknown to the consumer until check out. The rule is geared towards creating more transparency regarding the total cost a hotel guest may face when booking a reservation.

The rule specifically requires that businesses in the live-event ticketing and lodging industries must clearly and conspicuously disclose the total and inclusive price of their good or service in any offer, display, or advertisement. And, the total price must be the most prominent display of pricing information communicated by the business.

In FTC Chair Lina M. Khan’s statement on December 17, 2024, the FTC issued a stark warning to businesses outside the purview of the rule, stating, “I urge policymakers to continue building on the FTC’s success in challenging junk fees and to guarantee more sweeping protections across the economy.” Notably, California has already taken such action — passing an expansive junk fee prohibition law that applies to virtually all California businesses and those targeting California consumers that sell or lease goods and services for a consumer’s personal use.

What Is required Under the Rule?

Under the new rule, hotels are required to clearly and conspicuously disclose the all-in cost of booking a reservation in any advertisement, offer, or display. Even when an itemized list of costs is shown, the total cost must be displayed as the most clear and prominent figure. Additionally, the rule provides that when a business excludes allowable fees, like shipping or taxes, that exclusion must be clearly and conspicuously disclosed before the consumer proceeds to checkout.

Specifically, the rule defines the “Total Price” as “the maximum total of all fees or charges a consumer must pay for a good or service and any mandatory Ancillary Good or Service,[1] except that Shipping Charges and Government Charges may be excluded.” This definition allows businesses to exclude fees for optional ancillary goods or services. Shipping charges, government charges, taxes, and the like are permitted to be excluded from the total price, so long as there is a disclosure to the consumer that these fees have not been included in the total price yet.

What Should Impacted Businesses Do?

Hoteliers should take steps to ensure that their reservation systems comply with the FTC’s rule, including prominently displaying the “Total Price” in any advertisement and/or potential sale of a guest room. For example, if taxes are excluded from the reservation price that a consumer initially sees when evaluating a room, that exclusion should be clearly and conspicuously stated before check out.

While the new administration may have a different view of this policy, the rule is currently set to go into effect within 120 days after it is published to the Federal Register. Hoteliers should take action now to ensure compliance ahead of this date and should consult with knowledgeable legal counsel for any questions regarding implementation of the rule.

[1] Ancillary Good or Service is defined in the rule as “any additional good(s) or service(s) offered to a consumer as part of the same transaction.”

The Labor Law Pendulum: Anticipated Changes for the Hotel Industry

KEY TAKE
All employers, not just those with unions representing their employees, should be aware of the labor law changes anticipated by the Trump 2.1 NLRB.

It is a common misconception that labor law and the National Labor Relations Board (NLRB) only apply to employers if their employees are represented by a union. In fact, the NLRB covers almost all U.S. employers. Therefore, it is important to understand that the NLRB is one of the most politically sensitive federal government agencies. That is the case because the president has the authority to appoint a majority of the NLRB’s five members, as well as the NLRB’s General Counsel (G.C.). Historically, Democratic presidential appointments have favored unions and employees, and Republican presidential appointments have favored employers. Commencing in 2025, it is expected that pendulum of NLRB decisions will swing back to favoring employers after four years of decisions favoring unions and employees. This article will summarize some of the possible pendulum swings that may affect the hotel and hospitality industry.

Assuming that President Trump fires G.C. Jennifer Abruzzo promptly upon inauguration, it is reasonable to anticipate that a new G.C., who is favorable to employers, will rescind several G.C. Memoranda issued during the prior four years. Although G.C. Memoranda are not legal precedent like NLRB decisions, they do instruct NLRB Regional Offices on the types of cases that should be filed to support the G.C.’s enforcement priorities. The following is a list of G.C. Memoranda that are likely to be rescinded:

• Expansion of remedies in unfair labor practice (ULP) cases to include “consequential damages,” in addition to reinstatement and back pay
• Prohibition of confidentiality and non-disparagement clauses in severance agreements
• Limitation of non-competition (“stay or pay”) clauses in agreements
• Limitation of electronic monitoring of employees
• Classification of college athletes and graduate assistants as employees who can form a union

More impactful changes in the direction of the NLRB pendulum are likely to be caused by the reversal of several NLRB decisions and rules favoring unions and employees issued during the prior four years. The pendulum may swing back in favor of union-free hotel and hospitality industry employers if the following NLRB rules and decisions relating to union organizing and election campaigns are reversed:

• Quickie Elections: Shortened time frames for employers to campaign during a union election, and strict filing obligations imposed on employers after a union petition for election is filed.
• Micro Units: Allowing a union to establish the initial group of employees who are eligible to vote in a union election, possibly a much smaller group of employees than the employer may desire.
• Cemex Construction Materials: When a union demands that an employer voluntarily recognize it, the employer commits a ULP if it does not either do so or file a NLRB Petition For Election.
• Siren Retail Corp. d/b/s Starbucks: An employer cannot make election comments stating that unionization will interfere with employees’ relationship with management.
• com Services: An employer cannot conduct a captive audience (mandatory attendance) meeting during a union election campaign.

As stated above, labor law and the NLRB are applicable to all employers, whether or not any of their employees are represented by a union. If the following NLRB decisions were reversed, all hotel and hospitality industry employers would benefit:

• Thryv: “Consequential damages” required to remedy ULP in addition to reinstatement and back pay
• McLaren Macomb: ULP for an employer to include broad confidentiality and non-disparagement clauses in severance agreements
• Stericycle: Facially neutral handbook provisions and rules may be ULP
• Lion Elastomers: Protections for employees who engage in abusive conduct including swearing

Hotel and hospitality industry employees would be well advised to monitor the NLRB pendulum, as it is likely to swing toward being more employer favorable in the next few years.

Navigating Antitrust Risks: The Hidden Dangers of AI and Software Pricing and Inventory Tools for Hotels and Property Managers

KEY TAKE
Artificial intelligence has significant benefits, but it may be risky business to hotels and property managers.

Artificial intelligence (AI) is everywhere and in every business. In the hospitality industry, AI tools can offer significant benefits to hotels and property managers, such as optimizing prices and improving vacancy rates. Even better, these helpful tools come with no legal risk, right? Not necessarily. In fact, though a complicated and uncertain area, multiple federal courts have permitted price-fixing claims to proceed based on competitors’ common usage of the same algorithmic software tool, and the U.S. Department of Justice (DOJ) has taken the position that coordination of competition through an algorithm is no less illegal than direct collusion. As a result, hotels and property managers need to seriously consider the potential antitrust risks when using AI-driven or algorithmic software-based third-party services for property, revenue, or inventory management. These tools can increase efficiency, but, depending on specifics, can also lead to serious antitrust risks if, for example, the tool facilitates sharing of competitively sensitive information or results in coordination of rental rates among competitors.

Why Is it Risky?

As an initial matter all businesses should know that competitors cannot lawfully coordinate to set their prices or to manage their inventory to the same effect. In the traditional sense, that would mean competitors directly communicating and reaching an agreement about their prices or output. However, antitrust law applies equally to indirect agreements reached through a common agent — or hub. For example, multiple competitors agreeing to coordinate their pricing through use of the same agent would be legally no different than such competitors reaching that same agreement directly. In antitrust parlance, this is known as a “hub and spoke” conspiracy because the direct agreements are between each competitor (or spoke) and the common “hub,” but each such “spoke” proceeds at least in part because it understands that its competitors are entering parallel agreements with the “hub” that will facilitate the desired coordination.

The recent development that hotels and property managers especially need to recognize is that this “hub and spoke” paradigm of alleged collusion has started to be applied in rental markets where competing hotels, landlords, or property managers use a common third-party algorithmic software provider that works with each competitor to recommend and optimize its prices and inventory management decisions, but may do so based on what the AI or software “learns” from other competitors’ proprietary data input into the same tool. Now, if your business is using a software that you know none of your competitors are using, or that the software only utilizes publicly available, non-confidential data, then your antitrust risk is likely minimal. But in reality, how can your business know that?

If your business is relying on an AI/algorithmic software service to analyze market data and make pricing (rate) or inventory management recommendations based on what it “learns” from your confidential data and what it otherwise “knows” from the market (perhaps including competitors that use the same service), then you may be unwittingly taking a substantial antitrust risk. Specifically, private plaintiffs or the DOJ could claim that by so doing, you are engaged in collusion to fix prices in violation of federal and state antitrust laws. Even if you never actually communicate with anyone from any of your competitors, much less “agree” with any of them, using and relying on the price and inventory management recommendations of a common algorithmic software tool has been alleged to legally amount to the same thing — and could land your business as the defendant in a federal lawsuit.

What Is the Department of Justice Saying?

Private plaintiffs and U.S. enforcement agencies have increasingly targeted hotels and landlords as well as their property management companies for alleged collusion facilitated by and through common usage of the same software pricing tools. Though dependent on factual specifics such as whether the common software tool utilizes non-public data provided by competing subscribers, the DOJ made its position on the issue clear in both its own case against a leading algorithmic software company (RealPage, Inc.) as well as in an amicus brief filed in the plaintiffs’ Ninth Circuit appeal of the recent dismissal of their private antitrust claims against competing casino hotel operators (Gibson v. Cendyn Group, LLC, D. Nev. May 8, 2024). Specifically, the DOJ has argued that it makes no difference that prices are fixed through common use of an algorithm instead of by a person; sharing information through an algorithmic service should be treated the same as sharing information through email, fax machine, or face-to-face conversation. Put another way, the DOJ has argued that whether competitors effectuate a price-fixing scheme through a software algorithm or through human-to-human interaction should be of no legal significance.

The DOJ has even taken it a step further, claiming that it is not necessary for conspirators to consistently adhere to a common software tool’s recommendations for a challenged price-fixing scheme to be per se unlawful. The DOJ has argued that even where the use of a common pricing algorithm results only in a common default or starting point of prices that ultimately vary in practice, such an agreement is still per se illegal. With respect to whether there actually is any agreement among competing property managers (as opposed to just each independently agreeing with the common software service), the DOJ has taken the position that such a horizontal agreement can be implied where the software provider makes the same pitch to each competitor indicating that use of the algorithm “could help them avoid competition,” and then each competing property manager agrees to use the software tool.

What Are Courts Saying?

As of now, some courts have been skeptical of price-fixing suits alleging that the common use of an algorithmic software tool to inform pricing and inventory management decisions violates antitrust law. These courts have refused to allow an implication of the requisite horizontal agreement among competing property managers where each may just as easily have independently decided to use the same third party software tool — in antitrust parlance, that there is no “rim” (horizontal agreement) around the “hub and spoke” that is required in order to plead a collusive agreement. Some courts have also questioned whether any price-fixing conspiracy can exist where competitors have not agreed and are not bound to follow the recommendations of the commonly used software tool. However, other courts have permitted such claims to proceed based on plaintiffs’ allegations and the theory of an implied “rim” because the utility of the algorithmic software tool may plausibly be said to depend on its use by a substantial proportion of competitors in an impacted market.

The District of Nevada’s recent dismissal of claims against world-famous hotel-casinos illustrates the skepticism of some courts. There, the judge questioned the viability of the plaintiffs’ antitrust theory of the case, stating that “the courts are struggling with this issue — if members of the agreement were able to deviate, what does that mean for the allegations of a conspiracy?” In the most recent case that was dismissed in the District of New Jersey (Cornish-Adebiyi, et al., v. Caesars Entertainment, Inc., D. N.J. September 30, 2024), the court found that the 14-year gap between when the various casinos had subscribed to the software, coupled with the independent pricing authority the casino-hotels continued to retain and exercise, made it “quite implausible that they tacitly agreed to anything, much less to fix the prices of their hotel rooms.” The court further found that because the plaintiffs had not alleged that proprietary data was pooled or otherwise commingled into a common data set, it could not be inferred that the software’s pricing recommendations offered to each hotel were informed by, much less based on, a set of confidential competitor data. Both of these cases are now on appeal, and, as already noted, the DOJ has weighed in on the side of the plaintiffs in the Gibson appeal pending in the Ninth Circuit. So it remains to be seen whether and on what basis those claims may proceed.

However, other courts have ruled that plaintiffs’ allegations of property managers’ collusion through usage of the same software tool are sufficient to at least state an antitrust claim and proceed to discovery to determine whether the actual facts bear out those allegations. One such case that has made it past the pleading stage is the private class action on behalf of renters against leading algorithmic pricing software company RealPage, Inc (In re: Realpage, Inc. Rental Software Antitrust Litig., M.D. Tenn. Dec 28, 2023). There, the Tennessee federal court issued a split decision, dismissing claims alleging a so-called horizontal agreement among landlords and property managers (the “rim”), but upholding claims alleging that the vertical agreements between RealPage and each of its property management and landlord clients (the “spokes”) were unreasonable and anticompetitive even in the absence of any horizontal agreement.

More recently, a federal court in Washington state upheld private class action collusion claims brought by renters against another leading real estate management software company, Yardi Systems Inc. (Duffy v. Yardi Systems, Inc., W.D. Wash. Dec 4, 2024). There, the federal court refused to dismiss claims against Yardi and its building manager clients because Yardi’s “Rentmaximizer” software had allegedly been promoted and adopted as a means of pooling clients’ non-public pricing and inventory data in order to increase rents, which would only be plausible if at least most competing management companies used and followed the recommendations of Yardi’s tool. Thus, at least for pleading purposes, the court accepted the allegation of an implied horizontal and per se unlawful agreement among the competing property managers that was effected through Yardi. Although the defendants deny that Yardi’s tool actually depends on, much less shares, their non-public competitive data, that disputed issue of fact will now be subject to discovery and further litigation.

State and Local Legislation Weighs In

To add an additional layer to this already complex and unsettled legal risk, state and local legislatures are weighing in on the issue. For example, not content to rely on courts’ interpretations of federal antitrust law, Philadelphia Bill No. 240823 would enact a legislative ban similar to that already enacted in San Francisco, which in July became the first city to pass an ordinance prohibiting algorithmic programs that set or recommend multifamily residential rents or manage occupancy levels (which indirectly impacts rents). The Philadelphia bill defines “price coordination” to include collecting certain non-public competitor information, including price, supply, and occupancy rates; processing that information through “a computational or algorithmic system, software, or process”; and generating recommendations for rental prices, fees, terms, or occupancy levels. Such municipal legislation may start a trend at the local and state levels that could supersede antitrust rulings for defendants in federal courts, and so is yet another issue to keep an eye on.

What Should You Do Now?

An individual hotel, landlord, or management company’s unilateral pricing and other competitive decisions are typically insulated from antitrust risk because Section 1 of the Sherman Act requires joint conduct, or an agreement in restraint of trade among multiple parties. But use of a third party software service or tool that could be framed as a common agent that shares non-public information and/or “learns” from the inputs of other users of that same tool may be alleged to transform individual decisions into an unlawful agreement — and alleged price fixing through that common tool. This risk is mitigated where such a tool uses (“learns” from) only public information — for example, publicly announced room or rental rates — but particular caution is warranted where subscribers input their non-public, competitively sensitive information into the tool and so may be alleged to be implicitly sharing such information with competitors that use the same tool (and input their respective competitively sensitive non-public information) in order to generate coordinated recommendations as to rents or occupancy levels. Another rule of thumb for consideration is whether such an algorithmic software tool’s recommendations would be useful for one property management company (or hotel or landlord) if none of its competitors were using it. If the answer may be no, then caution is warranted as to the potential antitrust risks.

Ultimately, the legality of an algorithmic or any commonly used software pricing tool is a fact-based analysis that takes account of what user data the software relies on and how the software operates in analysis of and “learning” from such data in making recommendations. However, there are steps that hotels and other property managers can take to help minimize these legal risks by conducting their own due diligence and risk assessment of any AI or algorithmic software tool before it is deployed. In sum, the company needs to gain an understanding of how the technology actually works before using it, and make sure that you are maintaining competitive independence when it comes to pricing and inventory decisions. The alternative could be to unwittingly become a defendant in federal court for allegedly having participated in a price-fixing conspiracy.

Negotiating Mixed-Use Branded Hotel and Residential Contracts

KEY TAKE
Owners and developers of mixed-use hotel projects must have the right advisors and legal consultants to succeed long-term.

Negotiating license and management contracts for mixed-use branded hotel and residential projects can be quite complex. Having the right team of highly experienced hospitality business and legal advisors in place from the very outset of project planning and development is often crucial for avoiding critical and costly mistakes in brand license and management contract negotiations that could impact the future operational and financial success of the project.

In this article, we share some key considerations and recommendations for you to keep in mind when planning for and negotiating brand license and management agreements for mixed-use projects garnered from our many decades of experience in advising clients in mixed-use branded hotel and residential contract negotiations.

Market Considerations

First, be sure that market demand characteristics and the competitive landscape are fully vetted and that they warrant development of the mixed-use project, with each being conducive to the development of the hotel and residential components as conceptualized. Sometimes there are obvious, but often overlooked, market questions that should be answered in the early planning stages of development. These include:

• Is there ample hotel market demand at projected levels of annual occupied room nights and average daily room rates sufficient to support new hotel development at the overall estimated cost of new hotel development?
• Will the market support sales of residential units at the targeted monthly sales pace and average sales price per square foot commensurate with overall estimated costs of residential development?
• Will the quality and caliber of hotel facilities and services, and targeted clientele, be consistent with and complementary to that of the residential component of the project and vice versa? So often there is a disconnect in this regard leading to serious conflicts, dissatisfaction, and even litigation brought by residential unit owners against project developers, hotel owners, and hotel brand managers.
• How many competing projects are there in the relevant market area, including projects under development and in the planning stages of development that, if built, could impact the viability of the project?
• Are there significant identifiable and tangible points of differentiation and competitive advantage of the subject project that are sufficient to warrant performance metrics above that of the existing and future competition?

Selecting the Right Brand

Be sure to select the “right” brand for the project. No matter how well the project is conceived and developed, including its facilities, finishes, and services, selecting the right brand that aligns with the vision and target market of both the hotel and residential components is crucial for the overall success of the project. Often, our assignments include advising developers on brand identification and selection. This typically involves:

• Determining the right brands for consideration for the project and their availability for the project.
• Determining brand experience and track record in the relevant market, especially their experience in mixed-use hotel and residential projects.
• Assessing brand strength and brand reach relevant to attracting the targeted hotel and residential clientele for the project.
• Determining depth of corporate and regional capabilities of the brand to support the project.
• Evaluating brand performance indices against competing brands in the market in terms of average occupancy, average daily rooms rates (ADR), and revenue per available room (RevPAR) pertaining to hotel operations, and residential pricing premiums and sales absorption pace premiums over the competition for branded residences.

Another key consideration often overlooked is competition from other brands within the same brand family, for example St. Regis and Ritz-Carlton within the Marriott brand family, Waldorf Astoria and Conrad from Hilton, and Thompson and Andaz from the Hyatt brand family, that might compete for and draw customers from the same brand loyalty program and central reservations system.

Selection and affiliation with the right brand can significantly enhance the value and appeal of both the hotel and residential components and significantly enhance the mixed-use project developer’s overall return on investment.

Negotiating Brand Definitive Agreements

Know the types of brand agreements that must be negotiated. Often, our clients are surprised to learn that multiple agreements must be negotiated and entered into with the brands for various aspects of licensing and management of hotel and residential components of the project. Each of the definitive agreements can often be complex and lengthy as to terms, provisions, and restrictions. These mixed-use agreements typically include:

• Residential Marketing Brand License Agreement: This is for use of the brand name and marks in marketing residential units for sale. Key negotiating considerations include length of term; brand protections, both as to a specific area of protection for the selected brand and protection against competing brands within the same brand family; the basis for calculating licensing fees that might be determined as a percentage of sales, typically in the range of 2 to 6% of residential sales prices, or in tiered fixed amounts depending on levels of aggregate sales revenues attained; the staging of payments; and levels of brand marketing support the brand will provide in the marketing and sales of units.
• Brand Technical Services Agreement: This is for technical brand support in the design of facilities, furnishings, equipment, and systems and review and approval of these designs in accordance with established brand standards. Key negotiating considerations include contractually identifying and “locking in” the applicable brand standards that may otherwise change over time; negotiating the basis and amount of technical services fees, usually fixed amounts, and terms and timing of services to be provided and related payments; negotiating the pre-opening budget for hotel and residential components; and identifying and restricting pass-through brand costs and reimbursable expenses.
• Hotel Brand Management Agreement: This is a long-term agreement for brand operation and management of the hotel component of the project typically spanning a minimum of 20 years, and typically with automatic renewal provisions sometimes bringing the total term to up to 60 years or more. This will likely be one of the most complex of the definitive agreements. Key negotiating considerations include length of term; basis for calculating base and incentive management fees; basis and limitations on shared pass-through corporate charges and expenses; budget adherence; performance-based termination rights; owner approval rights of executive hotel personnel; area brand protection; who employs the hotel staff (in most cases the manager but sometimes the hotel owner); and identification of applicable brand standards.
• Shared Facilities Management Agreement or Reciprocal Easement Agreement: This is an agreement between multiple property owners, such as the hotel owner, the residential unit owners, and the related condominium or homeowners’ association, that allows the various constituents to share access and use of common or shared facilities such as hallways, swimming pools, health clubs and associated facilities, parking facilities, rooftops, utility towers, sometimes building balconies and exteriors, and other similar shared facilities. These agreements allow the various parties to develop and operate all the shared facilities as a single unit despite, in some cases, varying ownership of each component. Key negotiating considerations include the responsibilities and obligations of each party to the agreement; basis and limitations on the sharing of costs; budget approval rights of each party; responsibility for and approval of capital improvements; and operational standards. Hotel brands will usually require that the hotel owner has control over these facilities in mixed-use branded hotel and residential projects to assure that the quality of brand standards are adhered to.
• Homeowner Association (HOA) Management Agreement or Condominium Association (CA) Management Agreement: This is a long-term agreement that typically spans from 3 to 20 years depending on state HOA and CA laws and regulations for brand operation and management of the residential component of the project. These agreements are typically initially entered into between the project developer and the hotel brand and assigned by the project developer to the related condominium or homeowners association when the developer turns the association over to its members. Key negotiating considerations include length of term; basis for calculating management fees; basis and limitations on shared pass-through of corporate charges and expenses; budget adherence; performance-based termination rights; basis of cost-sharing between the hotel and residential components; and identification of applicable brand standards.

Other Fee and Cost Considerations

Be sure to understand the full overall fee structure, including any upfront fees, ongoing royalties, and performance-based incentives. Make sure these are clearly defined and agreed upon. Ask the brand representative of each brand you are considering to provide you with a proforma fee summary that includes the basis, breakdown, and calculation of each type of fee and royalty as well as any mandatory brand centralized services cost allocations that the property will be responsible for paying. Make sure you understand the drivers of the cost allocations and negotiate any relevant caps on the cost allocations that are not dependent on the volume of business at your property. We recommend that owners consider requesting and negotiating for a “most favored nation” clause when it comes to fees, royalties, and mandatory centralized services cost allocations such that if any other owner of a hotel of the same brand in the same territory (such as the United States) negotiates a more favorable term for any of these items, your agreement is modified to match the terms of the more favorable agreement.

Operational Considerations

Consider the operational implications of licensing a brand to a residential development. This includes the level of finishes required by the brand, involvement of the brand in the day-to-day operations, the total cost of having the brand involved, the experience and successes of the brand to manage the day-to-day residential operations, and the brand operating standards that need to be maintained.

Legal and Regulatory Compliance

Ensure that the agreements comply with applicable state and local laws and regulations. This may include zoning laws, building codes, condominium and homeowners association laws, and other regulatory requirements. Make sure you understand if local ordinances allow for rental of residential units on a transient basis through a hotel-operated residential rental program, which is a particularly important consideration to potential hotel profitability and viability for the hotel owner. Also, you should understand whether restrictions can be placed on residential owners prohibiting short-term rentals through sharing platforms like Airbnb that would compete with the hotel brand managed rental program.

Stakeholder Engagement

Engage with all relevant stakeholders, including developers, brand representatives, and legal advisors, to ensure that all aspects of the contract are thoroughly reviewed and agreed upon.

By keeping these considerations in mind, you can navigate the complexities of negotiating branded hotel and residences contracts more effectively.

REH Capital Partners is a nationally recognized firm of real estate and hospitality advisors, providing clients with strategic advice and expert assistance on a wide range of business and financial matters, with a special focus on complex business situations.

*REH Capital Partners