Sale Leasebacks Can Help Hotel Operators Free Up Capital Through Existing Real Estate
An investment agreement that is a win-win for both the investor and hotel owner.
How can you sell your hotel but keep your hotel?
There is a way: Under a sale-leaseback agreement, popular in Europe’s hospitality scene, the seller of a hotel becomes a lessee to a new owner, maintaining a brand flag and management agreement but avoiding certain economic risks and alleviating concerns over potential oversupply in top markets.
It’s a Win-Win
Sale-leasebacks are a good strategy for certain hotel developers who want to cash out early. The buyout is at 100 percent of the fair market value of the hotel. These deals also provide an opportunity for a buyer looking to keep a hotel’s managers in place, and to also get a return on the leasehold.
The deal, from a real estate standpoint, is relatively straightforward. The sale includes a transfer of title and then a leaseback to the existing seller as a tenant.
In this structure, the structure stays basically the same with the management company agreement and the franchise agreement staying in place. They aren’t affected by the sale, and the seller becomes a lessee under the long-term leaseback…At the end of the deal, if you look at the real estate, the operation looks almost exactly the same as before the sale.
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Are There Any Disadvantages?
There are no real disadvantages. A sale-leaseback deal lets a developer cash out of the real estate to pay off debt or use the funds for new hotel development. But there are other benefits to all of the parties. You get a hotel investor who’s got an experienced operator/franchisor/management company to operate an asset and gain a return on investment. It’s usually an investor who is not in the business of operating assets like this. They’re leasing to a management team to operate an asset.
The sale-leaseback model is more typical in Europe than in the U.S. but now It’s coming here because investors overseas are looking for assets in the U.S., and they’re using a structure they’re comfortable with. This seems to appeal to certain types of developers who want to cash out. It keeps the developer in place and it makes the investor comfortable. They’re buying real estate with the management in place. They don’t have to reinvent the wheel and they’re comfortable with the structure.