Hotels...
When a private equity company buys a hotel do they ”lease” it to a hotel company that operates it or do the private equity shop typically run the business itself?
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They’ll either manage it themselves if they have that capability (this is not as common) or they’ll hire a property management company which could be the property management arm of major brands I.e. Hyatt, marriott or managers such as aimbridge or highgate. Either choice you’re paying them a fee to manage much like you would pay a property management company a fee for multi family.
Only comment on the management fee is that management agreements typically have an incentive fee layered on top as well, which I've almost never seen in other asset classes.
For clarity - you're referring to hotels or MF here?
This, various fees based off revenue (brand license fee, % of rooms revenue, % rooms booked through their platform etc) and then incentive fee typically % of gross operating profit. Important to be very tight on what items they can put below GOP / in capex and have limits / approvals on these as otherwise they're happy to blow through capex to try drive revenue / GOP.
Hotels you basically renovate the hotel Yr -1 to hit a standard that Hyatt ect. will take then they take over as management and you changed the hotel from some weird botique to a name brand.
The manager (Hyatt ect.) take a fee on revenues along with an incentive. The higher end guys (Usually with in the same verticle Park Hyatt/Grand Hyatt/Hyatt Place) all have different fees and requirements.
Getting a new flag is really where value add comes from most of the time if you are not a hotel operator. If you are an operator its about changing the operator and putting in your own to increase revenues and CF from operations.
This is a bit confusing in that you're melting the role of the franchise and operator together. This is sometimes the case (i.e. Marriott managing an asset under the W franchise/brand), but not something you should ever want as an owner. Operator fees (hotel management) and franchise fees (cost of brand) are completely different line items.
In many cases a franchise and the manager/operator of the property are not related, which means, as an example, some private third party management company might be the one responsible for operating and ensuring compliance of your hotel under the W flag.
I find it interesting that you think changing from an unencumbered boutique asset to a flagged property is a more enticing business plan. I guess it could be if you're strategy is to operate limited-service assets. Our strategy is the exact opposite - buy a shitty flagged deal in a strong location and kick them out to create a way more attractive boutique property.
I'm grave digging hospitality threads to build my understanding of this space.
Could expand more on why having the same operator and franchise is a bad thing? You mentioned "not something you should ever want as an owner?"
I'm new to this forum and just wanted to chime in on the topic of private equity firms buying hotels. From my understanding, it really depends on the specific situation and goals of the private equity firm. In some cases, they may choose to lease the hotel to a management company that operates it, while in other cases they may choose to run the business themselves.
The structure is very different in north america vs. europe. Europe is more operator heavy and you have a NNN lease on the hotel to the operator.
I think this depends on market position. A lot of leases available for 3-star brands, 4/5-stars you're more often looking at management agreements.
Hotel guy here. No, it’s not a lease. Those aren’t common anymore or at least to what I know of. You will see leases by operators for your casino/gaming hotels (ex. BX and MGM partnership. BX owns the RE and MGM leases and operates the said property).
You will have your franchised hotels, brand managed, or your independent of brand hotels. Franchised, simply put, you build/own a hotel and want to put a flag on it (Marriott, Hilton, etc.) so you execute a franchise agreement. The brand will likely propose Managing it as well, but typically you prefer to stay away from the big brands as managers. Boots on the ground they aren’t terrible, but dealing with their corporate structure and crock of shit fees (Marriott’s Program Service Fees are the biggest crock of shit) are awful to work with at the brand managed level. On the contrary, you can then Franchise your hotel and find a third party operator to manage (Highgate, HEI, Aimbridge, etc.). So you have the Marriott or whatever brand and reservation distribution system but a third party operator. Your franchise fees are usually a certain % of Room Revenue (3.5%-6%) and if you have a heavy F&B operation, could be fees off that. Your Operator will then take a Base Management Fee (standard is 3%) of Gross Revenue and typically will include an Incentive Management Fee.
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