If you may be outsourcing food and beverage operations within your hotel or other mixed-use facility to a third party operator, here are some basic considerations for negotiating and structuring your transaction:
- Economic Terms: How will you pay your operator? If you will lease your space to the operator, your operator will retain the revenue from operations and pay you rent, which will usually include a base rent component and a percentage of gross sales. In a management agreement structure, you will retain the revenue from operations, and pay the operator a management fee, usually consisting of a percentage of gross sales or net revenue (or both). A joint venture or other equity arrangement allows the operator to participate in the profits of the food and beverage operations or the entire project. Note: taxes can impact the economics and should be investigated up front.
- Liquor License: Make sure that you understand liquor license requirements, in order to maintain maximum control over the license in the event that your relationship with the operator sours. The advice of a local attorney specializing in licensing is critical.
- Employees: Decide who will employ the food and beverage staff and consider the potential impact of any union-related activity.
- Quality Standards: Require the operator to conduct its business in accordance with well defined standards. If your facility is branded, your operator should comply with the standards of the brand, and possibly participate in brand programs and training.
- Radius Restriction: Consider whether you wish to restrict the operator from operating a similar establishment within a certain defined area in proximity to your property.
- Operations: Ensure that your operations staff weighs in on all operational details, such as required hours of operation, booking procedures, noise, parking, security and other services, room service and catering protocols if applicable, the integration of point of sale and other IT systems and day to day coordination and interaction between staff.
- Termination Rights: Consider whether you would want the ability to terminate the operator if it does not generate a certain level of sales or meet other benchmarks, or if you sell or reconfigure the property.
- Intellectual Property: Resolve who will own and control intellectual property such as the design of the facilities, trade names, recipes and menus.
- Build-out: Determine which party will oversee and pay for the initial design and construction of the facilities, and how this party will be repaid or recognized for its expertise and investment. Allocate control over design decisions. In a management agreement, the operator often has no responsibility for initial capital, but will often have an active role in design development, possibly for a separate fee, and the owner may receive a priority return of its invested capital. In a lease, either party (or both) may pay for and oversee the build-out process, and any funds contributed by the owner in that regard will be included in the rent and secured with a security deposit or guaranty.
- Key Personnel: If a principal of your operator, such as the chef, is important to the success of your project, specify how much time and attention he or she will need to dedicate to your facility and what happens if he or she is unable to do so.
- Cash Management: Consider who should have control over the collection of cash and other revenue, payment of expenses and collection of reserves, and bear accounting and bookkeeping responsibilities such as preparation of financial statements.
- Discounts and Priorities: Address any need you may have to book private or promotional events, entertain potential customers and obtain other discount and complementary services. Consider whether you need to ensure that certain customers are given priority service.
- Allocation of Expenses: Allocate to the food and beverage facilities some portion of overall property costs and expenses that benefit the food and beverage facilities, such as utility expenses; real estate taxes; repair, maintenance and other services and in-house engineering, IT, cleaning and other support, whether on a percentage basis based on square footage, an hourly basis based on time spent or other equitable methodology.
- Liability: Protect yourself from liability from claims and legal and contractual violations by requiring appropriate indemnities and insurance. Good risk management advice is critical in view of evolving areas of potential liability such as cyber activities, employee claims and privacy, and new ADA and employee compensation regulations.
- Consents: Review your loan documents, any underlying lease agreements and brand/management agreements to determine whether other parties must approve the operator or the agreement, and whether any particular terms are mandated.
The above is only a partial list of issues to be negotiated in the context of a food and beverage operations arrangement and is not intended to be legal advice.
Should you require assistance with your transaction, feel free to contact us, or visit us at www.zeidellaw.com for more information about our firm.