Hoteliers take a first step in Cuba
Philip F. Zeidman
Illustration by Jonathan Hankin
Writing in this space a year ago about President Obama’s opening to Cuba (Zeidman and Sanchez, Don’t take eye off potential Cuban prize, March 2015), we speculated that the hotel companies would be the first franchisors to raise their hands. Now they have. Let’s take a look at what’s happened in a year, and what it means for franchising.
On March 20, Barack Obama became the first sitting U.S. president to visit Cuba in the lifetimes of all but a tiny sliver of living Americans. The presidential visit capped a process set in motion over two years before, involving secret meetings and negotiations, U.S. softening of sanctions and the re-establishment of diplomatic relations between Cuba and the United States.
On the eve of the president’s landing in Havana, his administration also issued a ground-breaking decision of special interest to franchisors. Indeed it did involve hotels: the authorization to Starwood Hotels to manage and operate hotels in Cuba.
The decision to allow Starwood to manage hotels under its Luxury Collection and Sheraton Four Points brands has its own interesting trajectory and, importantly, one that indicates what the Obama Administration is willing to allow under the sanctions that still remain in place with respect to Cuba.
As we reported, on December 17, 2014, President Obama announced he was charting a new course in U.S-Cuba policy. While wholesale changes in U.S.-Cuba sanctions require repeal by Congress, the president’s strategy is nonetheless clear: He seeks to “increase people-to-people contact, support civil society in Cuba, and enhance the free flow of information to, from and among the Cuban people” by expanding the existing categories of travel authorized under the sanctions.
While “tourism” is still not permitted, over the last 16 months the administration has amended the sanctions regulations five times and issued specific licenses (like the one issued to Starwood), each time liberalizing restrictions and adding to the level of U.S. business involvement in Cuba to complement or support the people-to-people contacts.
Because travel and tourism is so closely bound up with franchising, franchise companies were closely attuned to the rapid-fire steps (authorizing travel charters, and then permitting most individualized travel; authorizing more than 100 direct commercial round-trip flights per day; permitting travel by boat, including lodging aboard the boat; authorizing U.S. insurers to provide travel insurance for visitors to Cuba; and permitting travelers to open and maintain banking accounts in Cuba to access funds for authorized transactions while there).
Beyond these general steps, the administration began to address specific companies. One dealt with Carnival Cruise Lines. The next big step was to allow Starwood to manage hotels on the island. At the outset, Starwood has stated it will invest in restoring and outfitting the hotels (which presumably means U.S. suppliers will be authorized to provide goods and services to Starwood for these purposes).
Most significantly from a U.S. licensing policy perspective, Starwood is investing in and managing hotels owned by the Cuban state, including state-owned enterprises run by the Cuban military. And because Cuba does not permit foreign businesses in Cuba to hire workers directly, the U.S. license must, by necessity, allow Starwood to pay the state for the Cuban workers employed at the hotels.
There was a good deal more complexity to the transaction than this brief summary suggests. It entails two separate management agreements; rebranding agreements; another letter of agreement to rebrand a hotel, pending certain approvals; and a management fee to be paid to Starwood.
For franchisors, the fact that these are not typical “franchise” arrangements (they are management agreements, and they involve contracts with governmental rather than private entities) is not surprising: That has been the pattern elsewhere when previously state-owned enterprises or facilities were first targeted for expansion. And its significance is confirmed by the approval to Marriott to pursue business transactions on the island.
This ground-breaking precedent demonstrates the level to which the administration is willing to go in supporting its policy shift. As the White House says, “The regulatory changes are targeted to further engage and empower the Cuban people by facilitating authorized travel to Cuba by persons subject to U.S. jurisdiction; certain authorized commerce and financial transactions; and the flow of information to, from and within Cuba.”
All of that is welcome news to franchisors. No one is under any illusion that this will be a simple or rapid process. In addition to the very real economic barriers we discussed in our last column, these transactions must clear the formidable hurdles of both Cuban and U.S. laws dealing with foreign investments and transactions.
But the door has been opened, and it is difficult not to speculate.
Given the administration’s willingness to allow commerce that facilitates U.S. travelers’ people-to-people contacts, will we soon see the Havana Hilton actually run by Hilton? Who will manage the famed Hotel Nacional? Will we see Starbucks in U.S.-managed hotels or elsewhere in Cuba? And will we see authorizations that include the underlying U.S. suppliers of goods and services?
If the last 16 months are indicative, the days ahead will be very interesting.
Philip Zeidman is a senior partner in the Washington, D.C., office of DLA Piper and an expert in international franchise law. Reach him at firstname.lastname@example.org This article is co-authored by Ignacio Sanchez, a Cuban-American and co-chair of DLA Piper’s government affairs practice group. Reach him at email@example.com. The authors acknowledge the assistance of Evan Migdail, a partner in the firm’s government affairs practice group who assisted Starwood in the transaction described in this column..