Sealing the Deal: The Art of Crafting Lucrative Hotel-Restaurant Partnerships

Adding the cachet of a talented celebrity chef or restaurant operator to a project can transform a humdrum food offering into a highly profitable, press-worthy anchor for any hotel or mixed-use development. While these partnerships can be transformative, each development is unique and a successful partnership requires the right deal structure that meets the needs of both the owner and the potential partner. Despite many different business parameters that factor into the selection of these agreements, there are only a handful of deal structures that are commonly used. Each deal type has advantages and disadvantages and solves different business needs. Choosing the wrong structure could cause unnecessary friction throughout the life of the relationship and have long-term financial ramifications for your business.

The following is a brief exploration of the most commonly used deal structures, their pros and cons, and the situations for which they are best suited. Going into the negotiation process with a functional understanding of the main deal types will make it much easier to land on a more productive win-win arrangement for everyone involved.

Standard Lease

A standard lease agreement is often the preferred deal structure for owners and hotel management companies.

A lease allows the ownership to carve out the F&B space within the facility and offload the responsibility of running the foodservice operation to a third-party operator. Like any free-standing restaurant, the operator would take control of the space, pay rent, and operate the venue as they would any independent location. For hotels in organized labor environments, a lease allows the operator to carve out the F&B venue from the organized labor agreement and gives the hotel the benefit of an on-site food and beverage operation without having to operate or pay for the unit. The predictability of the revenue stream and the large swing in profitability from an internally run operation to a lease makes this an ideal scenario for many property owners.

However, a lease is often a much less attractive option from an operator’s perspective. For a popular chef or restaurateur, there is little difference between a lease in a hotel or office development, and a lease in a prime location on a busy street. While the responsibility and the risks are quite similar, the location may be less than prime from a restaurant perspective, and these kind of landlords often place greater demands on the operation than a free-standing location. So convincing a talented local operator to consider a lease may be an uphill battle.

In addition, there are many infrastructural requirements for a leased operation that may preclude the use of this deal structure. The main requirement for a standard lease is that the space carved out within the development must be completely self contained and come with a separate kitchen, storage areas, offices, refrigeration, utilities, and staff facilities that do not mingle with the other F&B offerings in the facility. Leased kitchens often cannot be used to support banquet production, room service, bar prep or any other foodservice outlets in the facility unless expressly negotiated in the lease. And many independent restaurateurs don’t want to be in the room service, banquets or breakfast business. Therefore, if the available space not specifically built to support an independent restaurant, and you cannot find and operator willing to take on these services as a part of the lease, this deal-type may not be an option.

Another potential downside, specifically for hotels, is that a landlord in a standard lease deal has little control over the on-going operation of the restaurant. If not specifically negotiated in the lease, the restaurateur has no obligation to hold tables, accommodate large parties, host special events, stay open, or craft a menu that has a broad enough appeal for every hotel guest. In fact, most multi-concept operators will place a much greater emphasis on courting their local clientele and place the needs of the hotels guests well after their regulars.

Pros: Low risk deal structure for ownership. Creates a steady, predictable income stream. Removes all operational and financial responsibility of the day to day operation from the owner or management company. Protects ownership from organized labor.

Cons: Harder sell for third-party operators because there is greater risk than other structures. Requires completely separate and self-contained infrastructure often increasing the build-out costs. Offers ownership little control over the operation or guest experience outside of what is contained in the lease.

License Agreement

A license agreement is the deal type that many third-party operators prefer.

Under this type of agreement,. the third-party operator develops the new concept and provides the menu, recipes, operating standards and training for the key restaurant staff. The partner essentially creates the ‘script’ for the restaurant, lends the hotel or development the use of their name and brand, and ensures that this vision is maintained through on-going visits to the property. However, the staff does not work for the third-party and the operator is not responsible for hiring, staffing or on-going management of the concept.

Restaurateurs and MCO’s like these kind of deals because they allow them to grow their brand and expand the reach of their operation with little to no up front investment. It provides the third-party with an on-going revenue stream and gives them access to prime real estate normally out of their reach in a standalone lease. This kind of structure works quite well in hotels who are often skilled at operations, but not skilled at F&B development and need the cachet of a big name partner to enliven their offerings. A license agreement gives the hotelier the freedom to act like an independent restaurateur.

Owners and Developers tend to view a license agreement less favorably. This kind of deal does not provide the security of lease revenue, and does not help hotels with labor costs, as the staff still works for the hotel or development. In addition, these deal types do not require third-party partners to have any ‘skin in the game’ and they can be very one-sided if not carefully crafted. On the positive side, when these agreements work, they provide significant financial returns and cachet to the operation.

Pros: Popular with big name chefs and restaurateurs. Easier to find third-party candidate. Can add cachet and strong financial returns to the operation.

Cons: Less secure than a lease agreement. Doesn’t require ‘skin in the game’ from the operator. Does not protect the owner/developer from organized labor.

Management Agreement

This deal structure is very similar to a license agreement in that the third-party creates the ‘script’ for the restaurant, develops the menu, and trains the key staff. The difference for a management agreement is that the third-party is fully responsible for the on-going management of the operation, has full P&L accountability and handles all day-to-day decisions on behalf of the ownership. However, any losses incurred by the third-party are usually covered by the owner/developer, so the overall risk profile for the operator is low, but for the owner/developer it remains somewhat higher. In addition, it is a much more hands-on arrangement, can be quite a bit more expensive, and is usually employed when the owner or developer does not have access to in-house restaurant expertise.

The other difference is that the staff for the restaurant may be employed by the owner/developer (as in a license agreement) or they may be employed by the Third-Party (as in a lease agreement). As such, a management agreement offers limited protection against organized labor and must be carefully thought-out and negotiated.

A full management agreement get’s mixed reviews from MCO’s because, on one hand, it requires a more labor intensive approach for the life of the agreement. On the other hand, it gives the third-party the ability to protect their reputation and guest experience through on-going control over the business.

Pros: More popular than a lease, but less popular than a license agreement with big name chefs and restaurateurs. Easier to find third-party candidates. Provides ownership with peace of mind that a talented operator is looking after the operation full time. Can add cachet and strong financial returns to the operation.

Cons: Less secure than a lease agreement. Doesn’t require ‘skin in the game’ from the operator. May not protect the owner/developer from organized labor. Ownership required to cover all losses from the operation.

Joint Venture (JV) Agreement

A Joint Venture Agreement is a partnership between the developer/owner and the third-party operator to solve the unique constraints of the operation. It is a flexible deal structure that comes with an infinite variety of revenue sharing, liability, and equity options. No two are alike. In most cases, this co-owned JV entity leases the space within the development, handles the on-going operations and employs the staff.

A JV can give the ownership/developer the benefits of a lease (carved out F&B, protection from organized labor, steady rental income, etc…) while offering the third-party operator the benefits of license deal (lower threshold for entry, ongoing financial support, etc…). The downside is these agreements can be more difficult to negotiate and, in most cases, the ownership still bears the bulk of the financial responsibility for the operation.

Pros: Very flexible format that solves a variety of business challenges. Can ensure operator interest with more upside potential and ‘skin in the game’.

Cons: More involved negotiation process. Ownership normally bears brunt of any financial shortfalls.

Overall, there are a wide variety of deal types for third-party partnerships and choosing the right one is tantamount to the success of your business and to maintaining a positive ongoing relationship with your new partners.