Hotel Sale-Leaseback Deals Storm America’s Shores

U.S. hotel operators looking to free up more capital are embracing a common European hospitality practice to do so: sale-leaseback deals.

“Hoteliers are finding that maybe these Europeans have a great model that can work here,” Horwath HTL Managing Director Andrew Cohan said. “Why do I need to own a building if I can just pay a rent check?”

Many of the world’s largest hotel brands do not own most of their real estate. Traditionally, when setting out to enter the hotel business, hotel developers will own the building and enter a franchise arrangement with a hotel brand to run the property. This encompasses two business transactions: a property buy and a hotel operations contract.

But today, U.S. hoteliers are finding it easier to let someone else worry about the real estate so they can focus solely on the operations side of the business. This is where sale-leaseback arrangements, a trend that is popular across the Atlantic, are gaining traction.

“Hoteliers used to be in the hotel-owning business but now are in the hotel operating business,” Horwath Global Business Director James Chappell said. “It’s tremendously capital-sensitive when you buy a building and open a hotel.”

Minimizing Risks And Freeing Up Capital

Opening a hotel can be a risk exercise for a hotelier. Establishing and maintaining a relationship with a hotel franchise, in addition to making sure the property stays up to that brand’s standards is expensive. Tack on the responsibility and financial burdens that come with property ownership, and it is apparent how much risk hotel owners are taking on.

Sale-leaseback deals are helping operators manage that risk. This financial arrangement occurs when the seller of a building is immediately able to lease back the property from the new owner after the deal is finalized, freeing up capital that would otherwise be laden down in the asset. In these arrangements, the standard lease is for lengthy stretches along the lines of 20 years or more. For sellers, the transaction improves their books and boosts opportunities for loans for future projects.

French hotel group Accor executed a $402.5M sale-leaseback transaction with an unidentified buyer in 2009 that involved 158 hotels, the biggest deal France had seen in five years. Accor continued to operate the hotels in a 12-year lease with six renewal options. The deal also allowed the company to lower its adjusted net debt by $253M. 

“Hoteliers may say they don’t want to hold all this cash in, hypothetically speaking, a Pittsburgh hotel. [Instead they will] take the cash from a sale-leaseback and invest in other cities,” Cohan said.

The building's buyers get a more financially stable situation, as the long-term lease gives them a steady flow of income. These transactions are not rushed; they typically require extensive financial research, so the chance of renter default is low. 

“As the [buyer], you don’t get all the profits, but you do get a seat at the table,” said Tom Engel, head of Boston-based hotel advisory and asset management firm T.R. Engel Group.

Sale-Leaseback Deals Hit America's Shores

German investors have been active in these transactions in America.

Chicago-based Oxford Capital Group developed the Godfrey Hotel in downtown Boston. Before construction on the 242-room boutique hotel was even complete, the developer sold the property in a sale-leaseback transaction in late 2015 to Hamburg, Germany-based Union Investment Real Estate for nearly $174M.

“The international investor will be primarily focused on primary markets,” Engel said. “I do think there are developers and managers today who are actively working with European investors on this format because management can grow the company without at-risk capital.”

Oxford did a similar deal with the same firm at Chicago’s LondonHouse, selling the 452-room hotel in 2016 for $315M and leasing it back under a 25-year contract. Some industry experts consider this model a win-win for all involved — it simply comes down to whether hoteliers prefer to be in the ownership business or whether they prefer to be in the operating business.

“It’s like if you pay cash for a house. You own it, but you are responsible for taxes and upkeep,” Cohan said. “If you just rent the house, you’re only on the hook for the rent.”