Third party management companies provide great value for hotel owners. Yet owners and their attorneys often do not look for third party managers that provide the best possible suite of services or cost savings because they do not know what to ask.
The following points address issues owners and their attorneys should look for or inquire about when evaluating who to hire.
1. Cost savings: There are a myriad of ways a third party management company can reduce an owner’s expenditures that fall straight to the bottom line. Many of these savings possibilities are ones that sophisticated real estate investors should request as a matter of course but fail to address in contract negotiations. Two primary examples are using reverse auctions for energy procurement and using cost segregation to generate savings through depreciation. Third party managers who share the widest variety of cost savings on elemental items in addition to their management expertise should stand out to you.
Another key area of savings is the selection of the Group Purchasing Organization (GPO) from which the third party manager procures supplies for your hotel. GPO product availability differs from organization to organization for many reasons including GPOs exclusively offering only on brand or line of products. Unfortunately, this could mean the GPO the third party manager uses as a matter of course may be purchasing higher priced products because a lack of lower cost competing products are not made available.
2. Intellectual Property Indemnification: Franchises protect their trademarks, logos, and trade secrets vigorously. This includes owners being held liable to the franchise in the franchise agreement. Third party managers that proactively address this reality and procure intellectual property insurance to indemnify you from this specific risk are addressing a potential multi-million dollar liability claim. This level of consideration should be appreciated in the decision making process.
3. Change of Control: Specifically, what if the third party manager is acquired by or merged into a separate company? The owner needs to maintain the level of quality provided by its prior third party manager. Two great ways to show this concern are (a) requiring C-level meetings within 60-90 days of acquisition and (b) flexibility if quality levels cannot be met.
Additionally, the specific terms of the agreement can vary widely depending on the hotel’s location, size, brand affiliation, and other factors, so customization is the rule, not the exception.
David Seidman is the principal and founder of Seidman Law Group, LLC. He serves as outside general counsel for companies, which requires him to consider a diverse range of corporate, dispute resolution and avoidance, contract drafting and negotiation, real estate, and other issues. He can be reached at david@seidmanlawgroup.com or 312-399-7390.
This blog post is not legal advice. Please consult an experienced attorney to assist with your legal issues.
