Recently, Bob Nozar of H&MM and Bob Hunter of Atlanta’s Hunter Real Estate invited me to speak on a panel at the 11th Annual Hotel Investment Conference that was held in mid-March in Atlanta. This is a terrific get-together that was founded by H&MM, Bob Hunter and the Cecil B. Day School of Hospitality Administration at Georgia State University. It’s target audience is owners of mid-sized hotels and roughly 70% of the roughly 400 attendees were exactly that.

The topic Messrs. Nozar and Hunter asked me to speak about focused on the franchisee/franchiser relationship. I chose to highlight two (2) major elements of franchise contracts that, in my judgment, have the most serious impact on property value. Those areas center on Liquidated Damage clauses and "arbitrating" Impact issues. Subsequent to my presentation, numerous hotel owners corralled me to ask that I continue speaking out on the matter. This column outlines the point of view I presented at the conference on these two issues.

Liquidated damage clauses in franchise contracts keep the franchisee from canceling its agreement and signing up with another franchiser. Most brands, with the exception of Best Western, include these clauses and fight hard to enforce them when broken. The franchiser often charges up to three (3) times annual gross fees as a cancellation payment. This could easily add up to one third (or more) of the entire equity in the hotel. Some companies, are now starting to moderate this payment level, which many owners properly consider onerous.

Of course, the franchisers are entirely within their rights to demand enforcement of a Liquidated Damage clause if, in fact, the franchisee has signed a contract with this clause included. At the conference, I argued that payments should be based on the net profit lost to the franchiser, not the gross income. After all, if it’s no longer providing the franchisee with its services, it seems like unjust enrichment to build a liquidated damage payment around gross income. Further, as USFS executive Steve Romaniello pointed out, any payment should really be based solely on the franchise fee portion of the contract, not including various extra marketing and other fees, as those are pure cost pass-throughs. Steve said he was amazed that most franchisees don’t really appreciate this distinction, which probably means they simply have not focused on their true economic costs.

The second topic I addressed was the Impact Study process. Much has been written about the use of Impact Studies to mitigate the potential damage done to a franchisee by the introduction of another sister or competing brand entering the market place. This nettlesome issue is difficult to resolve, as someone’s ox is always being gored. However, I argued that the basic process is flawed for two reasons that have been little discussed.

Firstly, there are simply no objective standards for determining impact. Professional valuation associations, such as the Appraisal Institute, have devised very specific considerations that must be addressed in determining property value. Yet, no such objective standards have been developed for Impact Studies and the consultants who do them are often "free-lancing" their reports. It would be most helpful if an objective association of hotel consultants developed standards everyone agreed to follow.

Secondly, the very fact that franchisers approve the listing of particular consultants from which a franchisee may choose to have a report done (and has the report issued to them) opens up serious concerns about propriety. That is not to question the honesty of either the franchiser or the consultant, but rather the potential for the appearance of inequity. The consultant is listed for hire because of its recognized credentials as a "hospitality expert." But, any system that leaves the consultant at risk of being dropped from "the list" puts him/her in a very uncomfortable ethical position. For instance, how many times would a consultant have to come down against the franchiser for that consultant to be removed from the list of approved venders? Further, why should these questions need even be raised in the first place ?

As Impact Studies can have a major impact on property value, the question arises whether there may be an even better way to handle these extraordinarily important issues than are currently in place.