Leasing spaces to restaurants and retail outlets can be a great way for hotels to bring more people on-property and unlock a new source of revenue, but speakers at the recent Hotel Asset Managers Association conference said it’s important to guard your interests in case things go south.

Andrew Petrie, attorney and partner at Ballard Spahr, said it’s important to have mechanisms negotiated into leases that allow owners and asset managers to monitor the financial situations of tenants. He said many agreements have these in place, but they aren’t always used. He advised taking advantage of online listed court and SEC filings to investigate the financial health of partners to gauge their likelihood of default.

“Even divorce filings can be useful,” Petrie said. A tenant “might not explain that their ex has a right to 50% of their revenues and is making their life crazy. You have to take it with a grain of salt, but it at least gives you a bird’s-eye view. It’s good to know what’s going on before you have a deal.”

Petrie said it’s also to be aware of how a hotel interacts with other people and entities. “Say you’re working with a celebrity chef … and all the money he’s making here could be going to prop up a bad operation downtown, and next thing you know he stops paying his payroll taxes and ends up short on cash here,” Petrie said. “People don’t really think about managing their relationship with the entire business entity.”

He also stressed it’s important to know what you have rights to.

“A lot of people are reluctant to send notices of default because it upsets the relationships, but if you have the right, you need to be right on top of it to exercise it,” he said.

Read the full article here. Subscription may be required.