Hotel Leasing Agreement: Everything you need to know.

Of all the ways a hotel can be managed by a hotel management company, leasing is the most "asset-heavy" but also the most straightforward contract. It is asset heavy because, on the one hand, the duration of the contract has a long-term horizon (from 10 to 30 years and in some cases even more) and, on the other hand, because in this contract the hotel management company assumes the entire risk of the hotel business and its operation, with all that this entails. It is also the most straightforward because, on the one hand, we have the complete separation of the hotel property from the hotel business and, on the other hand, the return that the owner receives is clearly defined from the outset: lease.

Therefore, we have the lessor owner of the hotel property and the lessee hotel management company on the other hand. All that remains is for them to "get it right on the lease". But are things that simple?

Of all the types of commercial property (commercial, office, industrial, etc.), hotels are the most complex and complicated type of commercial property for the simple reason that they are not leased by the month or by the year like other types of commercial property, but by the night. Furthermore, the cyclical nature and seasonality of hotels and their vulnerability to external factors (economic and political developments, weather patterns, disposable consumer income, elasticity of demand and so on) make the leasing of a hotel property very different from other types of property.

Let's see:

 

Owner

What profile of owner are you?

As you read above, in the case of a lease we have the complete separation of the hotel business from the hotel property. The owner who will choose to lease is either a professional hotel property investor with experience in this type of property or an active owner - hotelier who for whatever reason wishes to completely separate from the hotel business. In any case, the type of owner who enters into a lease agreement has the following characteristics:

 

- Need for separation of the hotel property from the hotel business

- Need for stable performance

- Willingness to take low risk

- Long-term horizon

 

Hotel Management Company

Which hotel management company is suitable to lease the hotel?

The hotel management company that will lease the hotel property is crucial to both the sustainability of the deal and its performance. As leasing is the "heaviest" contract, the owner should do due diligence before choosing the right hotel management company to lease the hotel:

- Proven and long-term experience in hotel leasing

- Proven success in operating hotels with high financial returns

- Specialisation in specific types of hotel properties

- Experienced and talented human resources

- Capital adequacy to support the operation and maintenance of the hotel during the term of the contract

 

Type of Contract

Fixed Lease

Leases of hotel properties with a fixed lease, where the owner needs to be completely disengaged from the hotel business. Long-term fixed lease of hotel units. This type of lease is ideal for hotel owners who are looking for predictable and stable rental income from their hotel property with a willingness to take low risk. It is also suitable for hotel properties that are at the end of their cycle and require extensive renovations. This contract will usually have the longest term, as the investment the hotel management company makes in the hotel property will need to be fully depreciated over the term of the contract.

Recommended for:

- Stable return with low risk

- Owners who want a predictable and sustainable rental return from their property

- Owners who want to completely disengage from the operational side of their hotel business

- Properties that are at the end of their life cycle and need extensive renovations

 

Variable Lease

Dynamic leases of hotel properties based on revenue and other variables. Medium and long-term leasing of hotel properties based on revenue (dynamic). This type of lease is ideal for experienced hotel owners and investors seeking higher returns with a balanced risk appetite. It is also suitable for new hotel investments and properties at the beginning of their cycle. This type of contract can also have a medium-term horizon, as the property and its equipment are new and, in theory, the hotel is immediately operational.

It is recommended for:

- Maximum return with measured risk

- Properties that are being built or are new

- Owners with knowledge of hotel investments

- Owners with the necessary accounting and legal infrastructure

In general, there is no "one-size-fits-all" in hotel leasing. Depending on the characteristics of the property (size, category, location, etc.), the profile and objectives of the owner, the experience and expertise of the hotel management company, the appropriate contract is designed.

 

The Pros and Cons of Leasing

Pros

The most important advantage if you decide to lease your hotel is that the risk is shared more fairly between the owner and the hotel management company. The owner has the investment and the property, the hotel management company has the hotel business and its operation. Also, another important advantage is the clear separation of your property from the business. In this way you achieve the separation from the hotel business and the hotel becomes a stable profitable asset for you without having to be actively involved. Finally, another advantage is that the return from your hotel is predictable, long-term and low risk.

Cons

Despite its clear advantages, you should be aware that leasing is not suitable for all types of properties and that in general, for a hotel management company to enter into such a contract, a lot of factors have to be taken into consideration: location, size, category, seasonality and so on. For example let's say we have an active owner - hotelier with a lodge in a mountain village that seemingly has all the conditions to succeed, however the nearest town is 2 hours away and the productive population of the village has been gone for many years, which would make finding staff very difficult if not impossible. In this case leasing is not appropriate, but another management model with the owner remaining active and the hotel management company providing specialised services.

At Panel Hospitality we help you to achieve your goals. If you are considering leasing your hotel, contact us to explore your needs and reach a robust, mutually beneficial agreement.

 

 

Panos Noulas 

BA Hospitality Management, Hotelschool the Hague

Panel Hospitality Founder