Relationships with Managers and Franchisors

12 Months Ended

Dec. 31, 2019

Relationships With Managers [Abstract]

Relationships with Managers and Franchisors

Relationships with Managers and Franchisors

We are party to hotel management agreements for each of our hotels owned. Under our hotel management agreements, the hotel manager receives a base management fee and, if certain financial thresholds are met or exceeded, an incentive management fee. The base management fee is generally payable as a percentage of gross hotel revenues for each fiscal year. The incentive management fee is generally based on hotel operating profits, but the fee only applies to that portion of hotel operating profits above a negotiated return on our invested capital, which we refer to as the owner's priority. We refer to this excess of operating profits over the owner's priority as “available cash flow.”

The following is a summary of management fees for the years ended December 31, 2019, 2018 and 2017 (in thousands):

	Year Ended December 31,
	2019			2018			2017
Base management fees	$	21,712		$	20,467		$	22,265
Incentive management fees	5,705			5,805			6,259
Amortization of deferred income related to key money	(227		)	(2,398		)	(4,840		)
Amortization of unfavorable contract liabilities	(1,715		)	(1,715		)	(1,715		)
Total management fees, net	$	25,475		$	22,159		$	21,969

Eight of our hotels earned incentive management fees for the year ended December 31, 2019. Nine of our hotels earned incentive management fees for the year ended December 31, 2018. Ten of our hotels earned incentive management fees for the year ended December 31, 2017.

Performance Termination Provisions

Our management agreements provide us with termination rights upon a manager's failure to meet certain financial performance criteria and manager's decision not to cure the failure by making a cure payment.

Key Money

Our managers and franchisors have contributed to us certain amounts in exchange for the right to manage or franchise hotels we have acquired and in connection with the completion of certain brand enhancing capital projects. We refer to these amounts as “key money.” Key money is classified as deferred income in the accompanying consolidated balance sheets and amortized against management fees or franchise fees on the accompanying consolidated statements of operations. We amortized $0.4 million of key money during the year ended December 31, 2019, $2.6 million during the year ended December 31, 2018, and $5.8 million during the year ended December 31, 2017.

In connection with a change in hotel manager of the Courtyard Manhattan/Midtown East, we recognized $1.9 million of accelerated amortization of key money provided to us by the previous hotel manager during the year ended December 31, 2017. In connection with the termination of the management agreement for Frenchman's Reef, we accelerated the amortization of key money received from the hotel manager from the date of our notice of termination in 2017 through the effective termination date of February 20, 2018. We recognized an additional $2.6 million of amortization of key money during the year ended December 31, 2017 in connection with this acceleration. The remaining $2.2 million was amortized during the first quarter of 2018.

During 2015, Starwood provided us with $3.0 million of key money in connection with our renovation associated with the brand conversion of the hotel formerly known as the Conrad Chicago to The Gwen, a Luxury Collection Hotel. The key money was amortized against franchise fees over the period of the renovation, which was January 2016 through April 2017.

Franchise Agreements

We have franchise agreements for 14 of our hotels as of December 31, 2019. Pursuant to these franchise agreements, we pay franchise fees based on a percentage of gross room sales, and, under certain agreements, a percentage based on gross food and beverage sales. Further, we pay certain other fees for marketing and reservation services.

The following is a summary of franchise fees for the years ended December 31, 2019, 2018 and 2017 (in thousands):

	Year Ended December 31,
	2019			2018			2017
Franchise fees	$	27,102		$	26,348		$	24,890
Amortization of deferred income related to key money (1)	(170		)	(170		)	(920		)
Total franchise fees, net	$	26,932		$	26,178		$	23,970

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(1) Relates to key money received for the Lexington Hotel New York.

In October 2019, we entered into a franchise agreement with Marriott for Frenchman's Reef. The franchise agreement expires on the 20th anniversary of the hotel's opening date. Subsequent to December 31, 2019, we entered into a franchise agreement with Marriott for the Westin Boston Waterfront Hotel. The franchise agreement expires in December 2026.