FILED: NEW YORK COUNTY CLERK 08/05/ :23 PM INDEX NO /2016 NYSCEF DOC. NO. 10 RECEIVED NYSCEF: 08/05/2016 EXHIBIT 3

Transcription

1 FILED: NEW YORK COUNTY CLERK 08/05/ :23 PM INDEX NO /2016 NYSCEF DOC. NO. 10 RECEIVED NYSCEF: 08/05/2016 EXHIBIT 3

2 CPTS HOTEL LESSEE LLC VIA FEI)EX Atlanta, Georgia Attn: Vice President, Franchise Licensing and Compliance Steven Smith, Esq. Senior Vice-President and General Counsel. InterContinental Hotels Group Atlanta, Georgia Nimesh Patel, Esq. Vice President and Associate General Counsel InterContinental Hotels Group Atlanta, Georgia David A. Horn, Esq. Vice-President and Associate General Counsel InterContinental Hotels Group Atlanta, Georgia Re; License Agreement for Crowne Plaza Times Square (the "Hotel") between Holiday Hospitality Franchising LLC ("Licensor"), and CPTS Hotel I..essee LLC ("Licensee"), dated July 1, 2012 (the "License Agreement"; capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the License Agreement). NOTICE OF DEFAULT The undersigned is the Licensee pursuant to the License Agreement and is the Tenant of the Hotel pursuant to a lease agreement with Times Square JV, as landlord, dated December 16, 2011 (the "Lease"). As we have repeatedly discussed with you, the Hotel is consistently and significantly underperforming as a direct consequence of Licensor's failures. Despite Licensee's efforts, Licensor has failed to address its concerns and is in material default of its obligations under the License Agreement, including but not limited to, Licensor's obligation "to market Crowne Plaza. branded hotels as upscale hotels so as to promote, protect and enhance the public image and reputation of the Crowne Plaza name" as required by Section 4(D) of the License Agreement.

3 Page 2 Licensor's material failures in this regard are evidenced by, among other things, the following: 1. Licensor has failed to devote sufficient advertising so as to market Crowne Plaza branded hotels as upscale hotels. In contrast to its competitors in the upscale segment, and even to Licensee, Licensor both is spending less and targeting the wrong consumer segments/media types. As an example, in 2015 Licensor purchased airtime for only 117 U.S. television advertisements, while its peers such as Marriott (4,841 national airings), Courtyard (3,441 national airings), Hyatt (2,786 national airings), Residence Inn (5,435 national airings) and Hilton Garden Inn (544 national airings) dedicated vastly more resources to U.S. television advertising. In addition to trailing its peers in traditional media spend, unlike its competitors Licensor also has failed to materially invest in online search and mobile as necessary to promote, protect and enhance the public image and reputation of the Crowne Plaza name. Moreover, over the past six years Licensor has expended an average of only $4.0 million per annum for 'U.S. brand-wide television, print, radio, and online banner advertising (for, on average, nearly 41,000 rooms), equating to less than $100 per room. Licensor's advertising budget, generating the lowest brand contribution in Licensee's competitive market set, necessitated Licensee to spend approximately $250,000 annually on additional advertising for the Hotel (795 rooms). Licensee's expenditure of $314 per room for the Hotel, more than three times more per room on advertising than Licensor's per room expenditure nationwide, further evidences Licensor's failure to market Crowne Plaza branded hotels as upscale hotels so as to promote, protect and enhance the public image and reputation of the Crowne Plaza name. Licensor's average U.S. advertising outlay of roughly $4 million per annum is even more egregious given that, in 2015 alone, Licensee paid over $6.8 million in :franchise, royalty, marketing, and distribution fees to Licensor for the Hotel. For further context, Licensor's average advertising expenditure for Crowne Plaza equates to only 0.31% of Crowne Plaza's estimated $1.3 billion rooms revenue nationwide in Licensor also continues to use an outdated and uncompetitive central reservations system through which it is unable to market Crowne Plaza branded hotels as upscale hotels. Among other things, this antiquated system lacks the basic functionality necessary to interface with modern, technology-driven marketing channels, as a consequence of which Licensor cannot compete with other brands in the upscale segment in a manner necessary to promote, protect and enhance the public image and reputation of the Crowne Plaza name. 2. Licensor has failed to add upscale hotel properties to the Crowne Plaza brand portfolio as necessary to promote, protect and enhance the public image and reputation of the Crowne Plaza name, while continuing to allow underperforming and ill-fitting hotels to predominate and perpetuate the negative public image and reputation of the Crowne Plaza name. Crowne Plaza's brand pipeline materially lags behind its peers in the upscale segment, both in new builds and brand conversions. As of the end of 2015, Crowne Plaza had only four new builds and four brand conversions in the pipeline. This evidences Licensor's failure to market Crowne Plaza branded hotels as upscale hotels so as to promote, protect and enhance the public image and reputation of the Crowne Plaza name, as it reflects that the brand does not add value

4 Page 3 or attract upscale clientele sufficiently to attract developers. By contrast, as of the end of 2015 Hotel Indigo (another upscale brand under the same corporate umbrella as Crowne Plaza) had twenty-eight new builds in the pipeline, while DoubleTree had nine and Radisson six. DoubleTree and Radisson, respectively, also each had twenty-four and twelve brand conversions in their pipelines. At. the same time, of the 138 Crowne Plaza hotels in the United States, approximately one-third (44/138) are ranked in the bottom third of hotels in their market as measured by TripAdvisor reviews, often below hotels in the midseale and budget segments. Another eighteen hotels are in budget-oriented markets that do not attract upscale clientele. Thus, the Crowne Plaza branded hotels in the United States are not considered upscale hotels by the public and fail to promote, protect or enhance the public image and reputation of the Crowne Plaza name. Despite this preponderance of substandard hotel properties bearing the Crowne Plaza flag, Licensor's own franchise disclosure documentation shows that it has failed to undertake any meaningful efforts to cull such properties from the brand portfolio. Moreover, a number of the best performing hotels in the brand portfolio lack visible association with the Crowne Plaza name, negating any positive impact of the inclusion of such hotels in the brand and reflecting the widespread acknowledgement even among Crowne Plaza hotel owners that the Crowne Plaza name bears a negative public image and reputation. As a result of, among other things, Licensor's failures in this regard, the Crowne Plaza brand consistently sits at or near the bottom of third-party rankings of upscale hotel brands and in customer satisfactions surveys. For example, in J.D. Power & Associates' annual North American Hotel Guest Satisfaction Study, the Crowne Plaza brand has been rated below average in each of the past five years. Similarly, in the American Customer Satisfaction Index for both 2014 and 2015, the Crowne Plaza brand ranked last among hotels in the upscale segment, and below midscale brands such as Best Western and La Quinta. This further evidences Licensor's material failure to market Crowne Plaza branded hotels as upscale hotels so as to promote, protect and enhance the public image and reputation of the Crowne Plaza name. 3. Licensor has tailed to undertake efforts to establish the Crowne Plaza brand as an urban destination for upscale business and leisure clientele. Unlike its upscale segment competitors, Crowne Plaza has no presence in the central business districts of many of the largest cities in the United States, including Los Angeles, Philadelphia, Miami, Boston, San Francisco and Phoenix. Out of twenty-seven major U.S. markets, only thirteen have Crowne Plaza hotels in the central business district, while in the remainder, Crowne Plaza either has a suburban or airport location (nine) or no presence at all (five). Without a consistent presence in U.S. business centers, the Crowne Plaza brand cannot successfully market to the upscale, brand loyal and rewards program focused business traveler it claims to be its target demographic, and thus cannot satisfy its contractual obligation to market Crowne Plaza branded hotels as upscale hotels so as to promote, protect and enhance the public image and reputation of the Crowne Plaza name. 4. Licensor significantly trails its peers in the upscale segment in brand contribution. For example, through its global distribution system, central reservations office and website, Licensor contributed only 33% of the room nights at the Crowne Plaza Times Square in

5 Page , down from 40% in The remaining room nights were generated through Licensee's property-level efforts. This contrasts markedly with the other brands in the upscale segment, such as Hilton, Courtyard by Marriott, Hilton Garden Inn and DoubleTree, which on average contribute well in excess of 50% of the room nights to their flagged hotels in midtown Manhattan. The Crowne Plaza brand's abysmal contribution rate continues to worsen with each passing year, reflecting Licensor's material breach of its obligation to market Crowne Plaza branded hotels as upscale hotels so as to promote, protect and enhance the public image and reputation of the Crowne Plaza name. 5. The Crowne Plaza brand materially underperforms its peers in the upscale segment both on rate and occupancy. As revealed by Licensor's own disclosures, for each year the Crowne Plaza brand achieved lower occupancy and lower average rates than the upscale segment average compiled by STR. For example, in 2014 the Crowne Plaza brand achieved occupancy of 69.7% with an average rate of $119.59, while the STR upscale segment averages were occupancy of 73.9% with an average rate of $ As this subpar performance persists year after year, the Crowne Plaza brand's RevPAR penetration rate continues to erode, down to 88.4% in The Crowne Plaza brand's ADR penetration rate similarly continues to slide with each passing year, 'falling to its lowest point in years in 2014 at 93.8%. Licensor's inability to position the Crowne Plaza brand to compete with its peers in the upscale segment on either rate or occupancy demonstrates Licensor's failure to market Crowne Plaza branded hotels as upscale hotels so as to promote, protect and enhance the public image and reputation of the Crowne Plaza name. 6. Licensor has failed to maintain a consistent corporate direction. Licensor suffers from rampant executive turnover, rendering it incapable of marketing Crowne Plaza branded hotels as upscale hotels so as to promote, protect and enhance the public image and reputation of the Crowne Plaza name. For example, over the last four years Licensor has assigned five different Directors of Brand Support, five different Directors of Revenue Management, six different Directors of Sales & Marketing, and two different Senior Vice Presidents of Operations/Franchise Operations to provide regional support to the Hotel, with the latest management overhaul taking place in September Each of these management regimes has had its own perspective, goals and approach. As a result of this turnover, Licensor has failed to establish, among other things, a consistent marketing strategy to compete with its peers in the upscale market. This corporate turmoil further evidences Licensor's breach of its obligation to market Crowne Plaza branded hotels as upscale hotels so as to promote, protect and enhance the public image and reputation of the Crowne Plaza. name. 7. Crowne Plaza branded hotels transact for lower prices per key than hotels flagged with other upscale brands. As an example, in each of , hotels flagged with Licensor's Hotel Indigo brand transacted at per key prices far in excess of the transaction prices for Crowne Plaza branded hotels. In 2015, Hotel Indigo branded hotels achieved a per key transaction price of $216,297, while Crowne Plaza branded hotels transacted at a per key transaction price of $110,123. Similarly, in 2014 Hotel Indigo branded hotels achieved a per key transaction price of $166,202, while Crowne Plaza branded hotels transacted at a per key transaction price of $54,187. This trend further evidences Licensor's breach of its obligation to market Crowne

6 Holiday Hospitality Franchising LL C. Page 5 Plaza branded hotels as upscale hotels so as to promote, protect and enhance the public image and reputation of the Crowne Plaza name. PLEASE TAKE NOTICE THAT, as evidenced by, among other things, the facts set forth above, Licensor is in material Default of, among other things, Section 4(D) of the License Agreement, in that Licensor has "materially fail[ed] to market Crowne Plaza branded hotels as upscale hotels so as to promote, protect and enhance the public image and reputation of the Crowne Plaza name." PLEASE TAKE FURTHER NOTICE THAT, pursuant to Section 12(A)(2) of the License Agreement, Licensor is hereby required to cure said Defaults on or before June 23, 2016, that being more than thirty (30) days after service of this notice upon Licensor, by: (i) compensating Licensee for the damages caused by the foregoing conduct in the amount of $30 million since the License agreement was executed (an average of $8 million per year)'; and (ii) marketing Crowne Plaza branded hotels as upscale hotels so as to promote, protect and enhance the public image and reputation of the Crowne Plaza name, including by correcting each of the foregoing issues. Upon Licensor's failure to cure the foregoing Defaults, Licensee may elect to terminate the License Agreement in accordance with Section 12(A)(2) of the License Agreement. PLEASE TAKE FURTHER NOTICE THAT, Licensee reserves its right to terminate the License Agreement, pursuant Section 1(A) of License Agreement, upon the expiration of the Lease. Licensee further reserves its rights to terminate the License Agreement as a personal services contract and/or terminate the Licensor as Licensee's agent or otherwise. PLEASE TAKE FURTHER NOTICE THAT, this Notice is being served upon you in accordance with Sections 12(A)(2) and 14(F) of the License Agreement. PLEASE TAKE FURTHER NOTICE THAT in addition to all notice requirements under the License Agreement, any response to this Notice should be directed to Licensee's attorneys, Pryor Cashman LLP, 7 Times Square, New York, New York 10036; Attn: Todd B. Soloway, Esq. and Joshua D. Bernstein, Esq. ' Licensee reserves the right to seek. additional and other damages for Licensor's breaches of the License Agreement, including but. not limited to the diminution in value of the Hotel, as well as damages that accrue in the future.

7 Page 6 The above is without prejudice to all of Licensee's rights and remedies under the License Agreement and at law, all of which are expressly reserved. CPTS HOTEL LESSEE LLC cc: David J. Kaufmann, Esq. Kaufmann Gildin Robbins & Oppenheim. LLP 777 Third Avenue, 24th Floor New York, New York (by Federal Express) Paul M. O'Connor, Esq. Kasowitz, Benson, Torres & Friedman LLP Broadway New York, New York (by Federal Express) Wallace L. Schwartz, Esq. Kasowitz, Benson, Torres & Friedman LEP 1633 Broadway New York, New York (by Federal Express) Pryor Cashman LLP 7 Times Square New York, New York Attention: 'fold E. Soloway