Sometimes a hotel sale can cause complications in terms of key money. If, how many times, but not always, a hotel owner is not obliged to repay the key money at a sale (provided the management agreement is maintained), the buyer would likely assume the conditional obligation to pay the keys when he has not received payment of the key. This problem does not come into play with a set-up. Fourth, any termination of the management contract raises a number of related issues, including: the details of the main money and exclusivity agreements may not always be at the forefront when the parties focus on the overall picture of a business opportunity, but both sides of the transaction should take a second look and take into account not only the specific conditions of these contracts, but also the potential tax effects. The higher the amount of money from the key injected by the operator, the longer the management fees (as a percentage of total revenue or GOP, etc.) and/or the duration of the contract, as the operator will try to compensate for the initial injections (NPV calculation). Some operators are willing to pay equity contributions to obtain a management agreement. Often, the stake takes the form of “capital-fragmentation” in which the operator acquires a small stake (usually 10 percent or less) in the owner, while some operators are willing to collaborate with a developer or buyer of a hotel and make a larger investment. The legal website LegalEagle finds that the requirement for the money of the key may be legal if it is specifically entered into the rental contract of the property. The take away here can be expressed in two sentences: “Write what you want” and “Mean what you write”.
From the owner`s point of view, both the key money and the minimum guarantee meet the requirement for an interest agreement. While key funds can provide financing to ensure an initial investment, they are generally less sought after for an existing hotel with a historical record looking for a new operator. Compared to the minimum guarantee, key money does not guarantee the secure return that homeowners require especially when they are institutional investors or when their investment is covered, for example, by bank financing. A “hot” property may well be eligible for key money or other financial incentives. Owners and operators should carefully assess the pros and cons of different alternatives. In certain circumstances, key funds are repaid by the owners through burn-off provisions that proportionately remove the owner`s obligation to repay key funds; often on all or most of the initial duration of the HMA/franchise contract.) Therefore, if, for any reason, the HMA is terminated before the expiry of a burn-off period, it is customary for the balance of the key money to be immediately refunded to the operator. Nevertheless, the supply of key money remains attractive to homeowners who wish to cover some of the risk associated with the project and is attractive to banks when they borrow. Traditional power brands such as InterContinental, Radisson, Wyndham, Choice and Best Western are competing for the most coveted urban real estate for their new brands. Their fervor drives many people to soften the agreement based on significant financial incentives to hotel developers. These incentives are intended to convince developers – and help them – to quickly launch new brands in first-class locations, before a competing brand of hipsters beats them.
As such, the incentive is more like a loan that is disconnected from the hotel`s income, often for the life of the franchise agreement.