Gary Loveman was seething. The CEO and president of Caesars Entertainment Corp. felt burned following the collapse of a licensing agreement with New York’s Gansevoort Hotel Group. Whether he was playing with fire is open to debate. The deal was supposed to breathe new life into Bill’s Gamblin’ Hall, a dowdy hotel-casino on a prime piece of Las Vegas real estate, across the Strip from Caesars Palace. The Gansevoort name was intended to provide the remodeled property with a hip, youthful image.
Loveman pulled the plug last October after gaming investigators in Massachusetts—who were researching an unrelated Caesars investment—revealed that a Gansevoort principal allegedly had a connection, through a family member, to organized crime. “I’m deeply disappointed and, frankly, angry about this outcome,” said Loveman during a quarterly earnings call. “This individual has never been charged or convicted of anything.”
While the failed Caesars-Gansevoort deal is somewhat unique, given the role gaming regulators played, it still highlights an important issue, that partnership problems do arise from time to time—and they can attract unwanted attention. For example, in April 2013, the owners of the Eden Roc Renaissance Hotel in Miami Beach sued Marriott, claiming that the company mismanaged the property. The highly publicized dispute made further waves when Eden Roc attempted a surprise takeover of the hotel. Despite a long-term hotel management contract, Marriott was eventually ousted as operator.
“When you’re creating a partnership agreement or a management agreement, the tendency is to look at the economic issues that surround it,” notes Greg Hartmann, the executive vice president at Jones Lang LaSalle who oversees hotel asset management. He warns, however, that choosing the right partner involves more than simply finding someone with deep pockets, especially in the hotel industry. “Among real estate sectors, the hotel business is quite different in that it has such a heavy operational component,” Hartmann observes. “You’re involved with the operation virtually on a day-by-day basis, so it is a different animal.”
Hotel expertise is paramount to putting together a deal that’s going to last, according to Guy Maisnik, vice chairman of the Global Hospitality Group at the Jeffer Mangels Butler and Mitchell law firm. Over the past 25 years, the company has handled more than $60 billion in hotel transactions. Maisnik says integrity and compatibility should also be key components to successful relationships. “It’s important because these partnerships are going to be tested,” he explains. “All projects have their ups and downs. There are always surprises. There are things that just happen. It’s how parties work together to address issues.
“Partners who don’t like each other don’t do well. The communication is too important,” Maisnik adds. “They have to agree on things. When they don’t get along well, you read about those battles in the paper.” Hartmann points to a 1994 court case as a well-known example of a partnership that turned sour. According to an article in the Los Angeles Times, the owners of the New York Grand Hyatt sued Donald Trump for $100 million because he failed to put up his half of the $37 million proposed for renovations, plunging the property into decline.
“Oftentimes, it’s the wrong deal that becomes the problem more so than any particular pitfall within the deal and how it’s structured,” Hartmann says. “You want to consider, ‘Is that particular partner litigious? Have we seen a lot of issues with them in the past?’ There are individuals in the hotel business who’ve had more issues than others.”
“You have to be willing to do exactly what you say you’re going to do and be willing to accept the consequences if you do not,” Maisnik points out. He believes that having an exit strategy in writing helps keep disputes from snowballing into public view. “Parties should build into their documents a way to unwind the relationship so that, if it’s not working, one party can continue on and the other party can leave,” he says.
After ending a business partnership that isn’t working, it’s time to move forward. In Las Vegas, construction is under way on Caesars’ new boutique hotel, The Cromwell, slated to open in late spring.