Those of you who practice traditional “dirt” real estate may periodically come across a transaction involving hotels. When you do, you should be aware that hotels are quite different from other real estate asset classes. They involve many unique legal issues and norms and are the subject of hotel-specific case law and statutes.
First and foremost, it’s essential to recognize that a hotel is an operating business. The real estate aspect of the asset is often a secondary consideration. Unlike a shopping center or multifamily development that relies on long-term leasing for revenue, typical transient hotels have few, if any, long-term occupants or fixed recurring income sources such as rent. Accordingly, each night there is the equivalent of potentially hundreds of one-day space agreements, with room rates that fluctuate based on the calculations of dedicated revenue managers. Further, amenities such as food and beverage, event space, and spas do not secure their space with a lease. Instead, they usually operate under management and consulting arrangements.
In some cases, the ownership, operation, and branding of a hotel property all reside within a single company or affiliated companies. But that is becoming increasingly rare. These roles are now generally split among various unrelated parties. Over the last few decades, hotel companies that once owned their real estate shifted to an “asset light” model, selling their real estate to third parties or spinning off a separate real estate investment trusts (REIT) or other structures to hold the real estate. Most hotel companies with household names own little real estate and usually function as an operating company or a franchisor providing only the day-to-day management and/or branding of someone else’s real estate.