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Ritz Carlton To Stay, For Now

Court blocks Green Isle from signing with Wyndham; denies motion to reject contract with Ritz-Carlton


April 18, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

The U.S. Bankruptcy Court in Florida has denied a motion by Green Isle Partners–the owners of The Ritz-Carlton San Juan Hotel, Spa & Casino–to enter an operating agreement with Wyndham International through its affiliate Grand Bay Management LLC.

It has also denied Green Isle Partners’ motion to reject its pre-commencement and operating agreement with Ritz-Carlton, without prejudice, and objected to extending its exclusivity period for the reorganization process.

A management & franchise option evaluation prepared by consultant Thomas O’Neill of Miami-based Hotel Consulting International (HCI) compared Grand Bay Management LCC and the current Ritz-Carlton operational agreement. HCI concluded that the best potential for recovery for the property’s unsecured creditors is for the hotel to retain its affiliation with Ritz-Carlton but to renegotiate its management agreement with a lower base fee and performance based incentive fee, after secured and unsecured debt.

According to the HCI report, while the Grand Bay name is associated with quality, it is a relatively weak brand with only two properties worldwide and minimum marketing presence and budget. The brand is not optimal for the property and will not protect its substantial investment, stated the study.

The study also concluded that a significant transition risk exists under the Grand Bay Management agreement and that the loss of the franchise may have substantial economic impact, such as a change in key personnel, which could create disruption and lead to employee turnover. A high risk of litigation exists with Ritz Carlton that may be disruptive and changes in marketing strategies and agreement will pose even greater risk, particularly during the initial year, the study ensued.

Another important issue presented in the HCI study is that the potential for conflict of interest is high for Wyndham International due to the ownership of Wyndham El San Juan. This means the operating company will control Wyndham El San Juan’s most significant competitor, the Ritz-Carlton. If Grand Bay were an unsuccessful affiliation, which is possible, the Wyndham El San Juan would benefit directly and substantially.

On the other hand, the report states that while Ritz-Carlton has exceptional brand recognition and captures premium rates, its operational performance has been unsuccessful. With revenue of over $60 million a year, a greater house profit should be attainable. Its operating income levels are low compared to Ritz-Carlton system wide. In five years, management has not produced sufficient profits for debt service or equity return.

Ritz-Carlton’s management agreement is said to be unfavorable by HCI, as it does not contain performance or termination clauses. Fees are based primarily on revenue and there are inadequate incentives to encourage net income for debt equity participants.

Green Isle Partners filed a voluntary petition for bankruptcy relief under Chapter 11 of the Bankruptcy Code on June 25, 2001. Subsequent to the filing, the debtor continued to manage its asset, which is The Ritz-Carlton Hotel Ltd. with the leasehold interests in the hotel and casino.

On Dec. 14, 2001, Green Isle Partners sought authority from the U.S. Bankruptcy Court to reject the operating agreement with Ritz-Carlton. One month later, a petition was followed to select a replacement operator.

In filing with the Bankruptcy Court, Green Isle rejected Ritz-Carlton’s operating agreement.

A synopsis of the two management contracts shows that the Ritz-Carlton agreement has a group services expense of 1% for group services shared with other Ritz-Carlton hotels on a prorated per key basis. The Grand Bay Management agreement, which does not include a Wyndham affiliation, does not have a similar charge.

The Grand Bay agreement has a performance provision and provides for termination if debt service is not covered by profit or operator’s funding, and the Ritz-Carlton does not allow termination unless by default.

The Ritz-Carlton agreement is for a 20-year term with a 10-year extension, while Grand Bay’s is for five years with two five-year extensions.

Fourteen hotel companies were approached by Green Isle to manage the property. Some companies declined to respond, the debtor reported, due to concerns of future litigation from Marriott International, the parent company of the Ritz-Carlton brand. Three companies responded to the Request for Proposal–Hilton International, Wyndham International, and Flagship Hospitality.

This Caribbean Business article appears courtesy of Casiano Communications.
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