Actually, Hotel Franchise Agreements Are Negotiable
March 27, 2017
The Fine Print - Spring 2017
There is a widespread assumption that brand franchise agreements are not negotiable. This assumption is so prevalent that many real estate investors will devote substantial effort to negotiating the terms of a hotel purchase agreement, management agreement and loan agreements, while accepting the brand’s first draft of the franchise agreement with a shrug.
This is a mistake. Because like most widespread assumptions, it is true only part of the time. Here are a few provisions that are often negotiated between hotel brands and prospective franchisees (but note the caveat below):
Franchise Fees — franchise fees are based on a percentage of room revenues. Franchisees can sometimes negotiate a temporary reduction of the applicable percentage, particularly if the hotel is new construction or if the franchisee will perform substantial renovations.
Guarantor — many form franchise agreements require a personal guaranty to be signed by a principal of the franchisee entity. This requirement can usually be waived so long as the franchisee will have substantial equity in the hotel.
Interest Transfers — transfers of interests in the franchisee entity are subject to the brand’s approval. However, franchisees can sometimes get
specific types of future transfers pre-approved by the brand.
Right of First Refusal — many form franchise agreements contain a ROFR/ROFO in favor of the franchisor in the event the franchisee elects to sell the hotel during the term. Franchisees should get this removed up front.
Area of Protection — brands will sometimes agree to an “area of protection” for the franchisee, prohibiting any additional hotels under the
same brand within a certain area for the first few years of the term. The territory and number of years are negotiable (and increasingly in this age of brand mergers, whether the restriction applies to more than one brand).
Key Money — for important properties, brands will sometimes provide upfront capital to the franchisee, called “key money”. Key money does
not have to be repaid so long as the hotel performs under the franchise agreement throughout its stated term, which is why it is popular with
franchisees. Note, however, that the provision of key money may make the brand less flexible in negotiating other terms.
A better way to frame the question is not “what” provisions are negotiable, but rather “when” a franchise agreement is negotiable. A brand needs a compelling reason to change its form agreement. If a franchisee is in a position to walk away from a deal unless certain changes are made, or, even better, has the option to go with another brand offering better terms for the same hotel, then the brand is often willing to work with the franchisee. But if a franchisee waits to negotiate the franchise until a week before the closing deadline (after the deposit is non-refundable), the best the franchisee can usually do is accept the franchise agreement with a shrug.