Hotel owners and developers are sometimes surprised to learn that the business and legal terms of the hotel management agreement between owner and operator—wholly apart from the operator’s abilities—can easily add or subtract 25% of the nominal value of the hotel or more. That is huge. Take a hotel nominally worth $10 million; the hotel’s value could easily swing from $7.5 million to $12.5 million depending on the operator and the management contract terms. And these numbers are “scaleable.” The hotel request for proposal (RFP) is one of the most successful ways to get the right operator for your project and on terms you can live with. The hotel RFP When we first suggest owner/developer clients use a hotel RFP, many assume that an RFP is simply a way to put out a notice to operators that they are taking bids (wrong). Others assume we can just provide them with a simple checklist or form that can be used to handle the RFP (wrong again). Still others are stuck on a specific brand or management company that is “perfect” for their property and think an RFP will scare the brand away (wrong, wrong, wrong). Unlike the RFPs often used in other contexts—to identify the best qualified providers of goods or services at a fair price—the hotel RFP is a highly interactive process used to strategically position your hotel to get the best operator and the best terms for your project. In addition to being a “process” the hotel RFP involves some important documents. Both the process and the documents should be carefully integrated to address all the relevant business, legal and hotel industry issues. At JMBM, we don’t pull documents off the shelf, as the hotel RFP needs to be customized to each project. But the documents are the easiest part of the process once the all-critical business judgments are formed. Good advisors don’t just document the deal; they should help you get the best deal. What are the hotel RFP process steps? Your hotel RFP can take many forms. It could be a very short letter inviting proposals. More often, it is a longer document that lays out certain important business points or objectives that you hope to accomplish. It may be desirable to prepare a very comprehensive document with numerous exhibits that describes your project in detail and includes market and feasibility reports, projections and specifications. The RFP may outline the desired terms and conditions or even include a proposed form of documentation to be used, and require all material requests for changes to the document to be submitted as part of the bid process. The RFP can be presented in many different successive steps, such as: • Soliciting an indication of interest in participating in the RFP or discussions with the owner/developer. • Requesting a confidentiality agreement in order to receive further information. • Providing different levels of information to RFP candidates in two or more stages. • Granting access to a “due diligence room” or providing a “book” of information and exhibits. • Marketing to potential RFP bidders to whet their appetites, create excitement for the project and show them how much there is to gain if they reach to get the deal. • Collecting, reviewing and analyzing proposals. • Requesting clarifications of proposal deal points. • Running an interview process with selected finalists, which leads to a “best and final” proposal process. • Ultimately, negotiating and preparing final documentation with a selected candidate or two. Factors that determine what your RFP will ultimately look like How well known is the project? Your location may be known internationally, but you may need to explain the specific site and impart the opportunity it presents. What is the nature of the RFP? Does it seek a single-branded operator management agreement? A franchise and an independent operator? A joint venture partner for the development? Branding for residential components? What parts of the project are confidential or sensitive? What information, if any, can be provided prior to a confidentiality agreement, and what information should be provided later either to all RFP candidates or perhaps only semi-finalists or finalists? Are there complexities that need to be “sold” or understood? For example, complex ground lease arrangements may deter some bidder interest unless properly explained or “sold” early in the process. Similarly, integration of hotel mixed-use components with complex covenants, conditions and restrictions and contractual arrangements may justify more effort in a multi-step process. Where are we in the economic and the hotel cycles? How competitive is the environment for hotel development and operation? The RFP should recognize the current market situation and take advantage of the current market realities. This might include understanding which new brands or lifestyle brands are seeking to establish themselves relatively quickly with aggressive proposals to enter certain strategic markets. The hotel RFP is a great tool for developers and owners. The RFP process helps to define your project’s critical business issues as well as define what is special and unique about the property. Ultimately, it will help to attract an operator that shares your vision—an operator that understands that both sides can work together to be successful. Jim Butler is the chairman of the global hospitality group at Jeffer, Mangels, Butler & Marmaro LLP in Los Angeles. He is also the author of www.hotellawblog.com and one of the top hotel lawyers in the world. He devotes 100% of his practice to hospitality, and represents hotel owners, developers and lenders. JMBM’s global hospitality group has a team of 50 seasoned professionals with more than $50 billion of hotel transactional experience involving more than 1,000 properties located around the globe. You may contact Jim Butler at [email protected] or 310-201-3528.
