Editor: You recently moved from Proskauer’s New York office to its Boca Raton office. What can you tell us about that experience?
Kornreich: I was born and raised in New York and went to college in upstate New York at Cornell University and law school at Fordham. I am a quintessential New Yorker, but I’ve adjusted very quickly to South Florida. The move has been terrific on a personal level – my family enjoys the South Florida lifestyle. Professionally, it has been a “home run.” After working in Proskauer’s New York office for over 12 years, I was presented with a chance to grow our corporate and lodging and gaming practices in Florida and I jumped on the opportunity.
Editor: How does the Boca office differ from the New York office in terms of size, clientele, practice areas, etc.?
Kornreich: Being in a smaller office is a little different for me, but not as much as you might think. In Boca, we have talented lawyers who offer a breadth of legal services – we have a very prominent personal planning department as well as labor and employment, corporate, transactional real estate, litigation, and healthcare practices. The lawyers down here are terrific – I’ve worked with many of them over the years, and now have gotten to know them on a personal as well as professional level. I continue to work closely with my colleagues in New York, traveling there frequently and to our other offices, as I had done prior to my move. I think Proskauer has done a first-rate job of integrating all of our offices seamlessly. We really do view ourselves as “one firm,” and whether one of our lawyers is in New York or Boca or elsewhere, we offer the same level of client service throughout the country and across the globe. Most importantly, I’m able to leverage off the knowledge of our 700-plus lawyers, which means that no matter what a client needs, it is almost certain that someone in our firm will have the capability required to handle the matter.
Editor: It must be quite beneficial to your work in Florida to have been in the New York office, to know the practice groups and the talent available. Please tell our readers about your broad practice. I was surprised to read in your bio the number of areas that you cover.
Kornreich: I’m a general corporate lawyer, and I focus on a broad range of corporate transactional work: mergers and acquisitions, equity investments and joint ventures, and acting as outside counsel to clients on legal, strategic, and business issues, including licensing arrangements and restructurings. I’m a member of the firm’s Mergers & Acquisitions Group, where I represent buyers and sellers in transactions in a broad range of industries. I am also a member of Proskauer’s Private Equity Real Estate and Lodging and Gaming Groups. As a member of the Lodging and Gaming Group, I handle the full range of transactions in the hospitality industry, including acquisitions and sales of hotels, their construction and development, hotel management agreements, and franchising agreements. So it is a very broad practice.
Editor: And you even dip into bankruptcy from time to time?
Kornreich: We were dealing with a lot of distressed hotel properties over the last few years, but right now the economic climate has changed for the better, so we’re not dealing with that as much today.
Editor: How do you see your practice interfacing between corporate and real estate?
Kornreich: While I am a corporate lawyer, there are definitely a lot of real estate aspects to my practice. Hotels are unlike some other classes of real estate assets in that they are not just pieces of dirt – they are operating businesses. The same can be said about other transactions outside the hospitality space. For example, the purchase of office retail and multi-family residential assets in partnership with other investors requires a corporate lawyer to negotiate joint-venture documents.
Editor: Generally, what are the differences between practicing M&A in New York and in Florida?
Kornreich: Generally speaking, deal size is smaller in Florida. There are a lot more small- to mid-market transactions. For me personally, it fits in very well with my experience in New York since I focused a large part of my practice on small- and middle-market M&A. I also find that there are a lot more family business owners in Florida. Unfortunately, many of them have not done adequate family business succession planning. Business succession planning can be complex. A staggering percentage of family businesses do not pass successfully to the next generation, resulting from a delay in making hard choices before it is too late.
Editor: What kinds of transactions are on your plate right now?
Kornreich: We’ve been active, particularly in the hotel space. We’re involved in a broad range of hotel transactions, including a number of hotel acquisitions and a number of hotel sales.
Editor: Has that industry bounced back in Florida?
Kornreich: It has definitely bounced back in a big way. Just a few years ago, not too many people would expect we would be where we are today. Hotel values have recovered to pre-recession levels. Miami/South Florida is a very hot market right now, and the turnaround there has been astounding. Few hotels were being built during the course of the recession, and supply did not keep up with demand. Miami is a gateway city, a venue where major hotel operators and hotel investors want to be.
Editor: I gather then that you are seeing a great deal of hotel construction?
Kornreich: It has definitely picked up after a number of years of inactivity. Hotel values are finally exceeding construction/replacement costs, which means that new construction is economically viable again. For the past number of years, new construction virtually ground to a halt, but now projects that were “on the shelf” are being revived. We’re definitely seeing a change. I’m involved in new construction projects in New York, Florida and the Caribbean.
Editor: With your lodging and gaming experience, could you please explain the importance of negotiating and structuring hotel management agreements?
Kornreich: The hotel management agreement is a unique animal. We have negotiated agreements over the years involving most of the major brands, sometimes representing owners, and sometimes operators. Being on both sides of the table is a unique perspective. The owner essentially “turns over the keys” to its hotel to the operator to manage its asset, subject to a budget and other rights that the owner is able to negotiate. Contracts with branded management companies can be long-term arrangements, so they have to be forward-looking. If you’re representing an owner, you want flexibility, and you want the ability to terminate, for example, if you sell the asset, or are not satisfied with the hotel’s performance or terms. A branded operator, on the other hand, is generally looking for a long-term steady income stream, protecting its brand and brand standard by locking in the owner as long as possible. Ultimately, the owner and the operator are going to have to live together for an extended period, which means that both of them have to make sure that they’ve selected the right brand for the right asset and the right location.
Editor: What do you mean by “extended period”?
Kornreich: This depends on the asset and on the brand. I have seen management agreements with branded operators that are as long as 80 years, including renewal rights. While that is not the norm in the industry, it is not unusual to see agreements with branded operators for 20 or more years, whereas management agreements for independent, unbranded hotels tend to have shorter terms. In any event, a long-term commitment is being made on the part of both the owner and the operator. The owner has to make sure that it has selected the right brand for the particular asset and the particular location. The operator has to do the same analysis since it is looking to protect its brand and might be precluded from managing other hotels within a certain vicinity of the hotel as part of a non-compete/area of protection in favor of the owner. An owner will typically seek the right to terminate if the hotel does not achieve certain performance levels over a given period – what is commonly called failing a “performance test.”
Editor: What about maintenance? Whose responsibility is that?
Kornreich: In a traditional hotel management arrangement, typically the expenses of the hotel are for the account of the owner. That means maintenance, capital expenditures, payroll and other operating expenses. The operator receives a base management fee based on a percentage of revenue of the hotel as well as an incentive fee based on some profit component of the hotel. That’s the typical arrangement – the risk is borne by the owner but the owner also enjoys most of the upside.
Editor: What factors should an owner consider in choosing a brand?
Kornreich: Obviously, it depends on the particular asset and location. If you have a five-star property, you have a different set of possible operators than for an upscale, midscale or economy property. Among other things, an owner looks for management expertise, a solid reputation, a reservations system, group marketing expertise (for convention/business hotels) and brand standards and design that are consistent with the owner’s vision for the property. Ultimately, the owner has to determine whether the association with the brand will add value to the property. In places like Miami and New York, you see more independent “boutique” hotels without a major hotel brand association.
Editor: You are also a member of Proskauer’s Private Equity Real Estate Group. Tell us about this group.
Kornreich: We focus on private equity investments in the real estate sector. We advise on a range of matters, including mergers, acquisitions, dispositions, financings, public, private and non-traded REITs, and joint ventures, all as it relates to real estate and real estate-related businesses and investments. In the past two months alone, the group has announced or closed over $8 billion in real estate transactions, so we have been extremely active!