It is budget season again — that time when operators and owners sit down to agree on the financial blueprint for the next year. My partner Bob Braun has worked on many hundreds of hotel management agreements and issues arising under them. Today, he shares some insights about the how to maximize the budget opportunity for constructive dialog between owners and operators.
It's hard to overstate the importance of a budget in the relationship between a hotel manager and owner. The budget is the way that a manager describes, in black and white, how it plans to operate the owner's property; it is the document that translates operating standards into action, and how the owner can expect to profit from the manager's efforts. It is also an important opportunity to be sure that the operator is giving due consideration to the owner's financial expectations and/or exit strategies.
Many of the larger independent management companies present a budget with little opportunity for dialog. In significant part, they diminish the direct impact of asset and property management teams. This means people sitting in an office 3,000 miles away make key budget decisions for properties that they have not seen or on markets they have not visited, based on STR reports and raw data. Generally, one would think that the property-level asset management team would be the best to guide the budget process because of their hands-on knowledge – not the corporate budgeting team.
Unless owners have a wealth of operating experience or hire experienced asset managers, they will likely be at a severe disadvantage when they review budgets. Consider typical challenges of the budget timing and process:
Because budgets are provided so late in the year, and with so little time to review, owners should do more than simply wait for them to be delivered. Owners should take steps not only to be ready for to review and comment on the budget promptly, but to become more involved in the entire budget process.
So what should the owner do? First, treat the budget process like the manager does – as a continuing, proactive process, not a reactive exercise. Start considering how the budget should be shaped long before the manager delivers its proposal. Owners should consider providing objectives to the operator at the start of budget process as a way of expediting the process. In others words, provide the operator with a standard that ownership will accept in advance.
Owners should look at the hotel and its results for the current year , and consider some key issues:
While some owners have the resources to take these steps, most owners do not, and should consider engaging advisors, including experienced asset managers, to assist in the process. In addition, while a manager's failure to meet budget projections is rarely a breach of a management agreement, the budget process is a key element to the manager's performance; where issues exist with a manager's performance, legal counsel should be consulted to ensure that all of the owner's alternatives are considered.
At the same time, waiting until receiving the budget is a practice doomed to failure. Using a golf analogy, the reason that golfers keep score on every hole is so they can clearly understand their performance long before the game is finished and can make adjustments after every hole. Likewise and owner needs to evaluate his operator's performance weekly and monthly. They should not wait until budget time to see whether the operator has passed or failed.
The JMBM Global Hospitality Group® works hand in hand with owners and their asset managers and other advisors during the budget process. We work to craft management agreements that ensure that the budgets are meaningful in content and delivered in time to allow for true analysis. After the management agreement is completed, we assist in analyzing the performance and responsiveness of managers to protect owners on an ongoing basis.
JMBM Global Hospitality Group®
1900 Avenue of the Stars, Seventh Floor
Los Angeles, CA 90067
Phone: (310) 203-8080
Fax: (310) 203-0567
Robert E. Braun
Bob Braun is a Senior Member of JMBM’s Global Hospitality Group® and is Co-Chair of the Firm’s Cybersecurity & Privacy Group. Bob has more than 20 years experience in representing hotel owners and developers in their contracts, relationships and disputes with hotel managers, licensors, franchisors and brands, and has negotiated hundreds of hotel management and franchise agreements. His practice includes experience with virtually every significant hotel brand and manager. Bob also advises clients on condo hotel securities issues and many transactional matters, including entity formation, financing, and joint ventures, and works with companies on their data technology, privacy and security matters. These include software licensing, cloud computing, e-commerce, data processing and outsourcing agreements for the hospitality industry. In addition, Bob is a frequent lecturer as an expert in technology, privacy and data security issues, and is one of only two attorneys in the 2015 listing of SuperLawyers to be recognized for expertise in Information Technology. Bob is on the Advisory Board of the Information Systems Security Association, Los Angeles chapter, and a member of the International Association of Privacy Professionals. Contact Bob Braun at 310.785.5331 or firstname.lastname@example.org.