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Key Money
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.