By Chase Keller, CCIM
Business sales can take many forms. That’s true in the hotel industry as well. One option for sellers is a sale-leaseback, where the owner of a property sells the real estate to a buyer, then immediately leases it back and continues operating the business. In the hotel industry, this separates the real estate ownership from hotel operations, and it’s common in transactions with branded hotels, independent hotels, and institutional investors.
A hotel owner usually owns the hotel building and land, as well as the hotel’s operating business. In a sale-leaseback deal, the owner sells the hotel real estate to an investor. At closing, the seller signs a long-term lease and continues operating the hotel as the tenant/operator. The buyer becomes the landlord and collects rent for the property.
The operator keeps: the hotel revenue, the staff, the brand affiliation, and control over day-to-day operations.
The real estate buyer receives: rental income, appreciation potential, and a stable, long-term tenant.
Why Hotel Owners Use Sale-Leasebacks
A sale-leaseback can unlock substantial capital tied up in real estate, enabling the seller to invest in property improvements and other opportunities. It’s a win/win because it provides the seller liquidity without giving up control of the business. The capital can fund expansion, renovations, acquisitions, or be used to reduce debt or pay a distribution to the owner.
Why Investors Use Hotel Sale-Leasebacks
Investors like these deals because they can acquire income-producing real estate with a long-term lease. Risk is minimized because the landlord has performance data over time and a track record of success from an experienced operator already in place. Many sale-leaseback buyers are REITs, Private equity firms, Family-owned investment companies, and real estate investment groups.
What a Sale-Leaseback Transaction Looks Like
An owner of a hotel affiliated with a national brand sells the property for $35M. At closing, the seller signs a 25-year lease, agreeing to pay $2.5M in annual rent and to continue operating the hotel under the brand. The investor owns the real estate and receives rent.
What Are the Risks?
The Operator assumes high fixed-rent obligations for an extended period that won’t be renegotiated based on the hotel’s performance or market changes. The seller forfeits any real estate appreciation over time and the option to sell the whole property in the future. They risk defaulting on the loan if the economy, the market, or the brand experiences a downturn.
The Landlord risks losing money if the hotel’s performance declines. Because the rent is fixed, the operator may face bankruptcy if hotel revenues can’t cover operating costs or if the brand implements a costly, mandatory Property Improvement Plan. The landlord and the operator may disagree on how to invest capital and other priorities. There is also the risk that the brand could terminate its relationship with the property, which might significantly reduce the property’s value and performance.
A well-structured sale-leaseback can be attractive for both sides, especially when the hotel has stable cash flow, strong branding, and an experienced operator.
