Practical Law Glossary Item 6-580-1846 (Approx. 3 pages)
Glossary
Key Money
An up-front payment by a hotel operator or franchisor to a hotel owner to secure a hotel management agreement or franchise agreement. Key money is a powerful incentive that is used by a hotel operator or franchisor to secure desired properties in key markets.
Key money can be structured in several different ways, including:
A cash payment.
A loan.
Deferred fees.
It is generally 5% or less of the total costs of the management or franchise deal.
The terms and conditions of the key money are usually heavily negotiated and can require:
Repayment by the hotel owner on early termination of the management or franchise agreement.
Self-amortization over a period of years.
Repayment if the hotel meets certain performance thresholds or metrics.
Guaranties by the parent company of the hotel owner.
The right to convert to equity.
The hotel operator or franchisor sometimes requires that the key money only be used for certain expenses, such as a required property improvement plan.