General

• For the purpose of expanding their own brand, well-known hotel companies often provide franchisees (white label operators) with their trademark rights, a tested procurement, marketing and sales structure as well as support regarding education and training of employees. The significant surge in brand franchise has also seen an increase in operating franchised hotels – without having their own brand.
• Lease agreements as traditional investments are also common in the Austrian hotel sector.
• License agreements, where the licensee assumes only certain trademarks (eg names, logos) from the licensor (in contrast to franchise agreements) or cooperation agreements with marketing companies, are less frequent on the Austrian market.
• Purchase agreements are quite uncommon because of the obvious financial risk.

One alternative is a lease agreement whereby the business activity of the subject hotel(s) is carried out by a lessee who, in consideration for a rent (fixed or variable or a combination of both), operates the hotel on their behalf (as operator), and not on the account of the owner. It is important to note, however, that the mandatory application of the Belgian Commercial Lease Act of 1951 leases creates a number of difficulties. The act contains a number of mandatory provisions protecting lessees, including a right for the lessee to unilaterally terminate the lease at the end of each three-year period and a right for the lessee to request three renewals of the initial lease period which may not be shorter than nine years (each), giving the agreement a potential duration of 36 years. Moreover, commercial leases are not subject to VAT and, therefore, lessors are not permitted to deduct the VAT paid on construction works or on the acquisition price of the FF&E and operating equipment. For all these reasons, commercial lease agreements are extremely rare in the hotel industry.

The lease alternative is considered when the contract has a duration which exceeds 15 years, ie in cases where an emphyteutic lease can be concluded instead of a regular commercial lease and where the entire amount of VAT paid on the construction works and on the purchase price of the FF&E and operating equipment (if paid by the owner) has already been recuperated.

Another alternative is the system of franchised hotel(s). Hotel chains franchise one of their brands to hotel owners, who either operate their hotels themselves or operate the hotel through a third party acting as the operator under an HMA.

Common alternatives to HMAs in Brazil are:

• lease agreements;
• franchise agreements; or
• brand licensing.

Commercial lease agreements and franchise agreements are possible but less common given that few operators take a real estate interest.

Franchise agreements (either a hybrid of a management/franchise agreement or a management agreement that converts into a franchise agreement after a certain number of years) are common alternatives.

Alternatives to HMAs are lease agreements and franchising agreements. With a lease agreement, the hotel operator leases the relevant building and as lessee assumes all the risks relating to the operation of the hotel. It is the hotel operator who is responsible for obtaining all the licenses and permits.

The alternative is commercial leases or management lease contracts (location-gérance), which are submitted to mandatory regulations and disliked by international operators.

Lease agreements are used and preferred by property owners due to the stable and predictable income they guarantee. In addition, banks financing the acquisition of hotel properties also prefer lease agreements. Especially for upscale/luxury hotels, bespoke lease agreements/hybrid agreements with lease and management elements and flexible rent and profit share mechanisms are increasingly used. Direct HMAs are regarded being riskier, and many German players do not see a commercial benefit in HMAs and prefer to take the safe option. German open-end funds are often not able to conclude HMAs due to the aforementioned regulatory restrictions. This being said, indirect HMAs can sometimes be an option as they shift some of those risks to the white label operators.

For budget and midscale hotels operated under international brands, franchise agreements are very common. In this scenario the operator concludes a lease agreement with the owner and, at the same time (as a franchisee with a hotel company) a franchise agreement with the corresponding brand and reservation system.

In the last few years a few hotel operators have also purchased hotel properties. This had been very uncommon for the last decade.

Franchise agreements are a common alternative, particularly for international operators with strong records managing hotels in Hong Kong.

Lease and franchising are the two other alternatives.

In transactions concerning a hotel business, the following structures are generally taken into consideration:

• Property Lease Structure: the property is leased by the owner to (the OpCo, incorporated, held and managed by) the manager/tenant, on the basis of a property lease agreement. The manager/tenant is responsible for (incorporating the OpCo), obtaining the licenses and hiring the employees necessary to carry out the business activity within the property. Certain activities can be lease to or operated by third parties, on the basis of business branch leases entered into with the manager/tenant (the Third-Party Lease).
• Business Lease Structure: the property is leased by the owner to the OpCo, incorporated and held by the same owner. The licenses are obtained by the owner. The business going concern carried out by OpCo in the property is leased by owner to the manager on the basis of a business lease agreement. Employees working for the OpCo are hired by the owner or the manager. Certain activities can be leased to or operated by third parties, on the basis of Third Party Lease(s) entered into with the client.
• Pure Management Structure: the property is leased by the owner to the OpCo, incorporated and held by the owner. The licenses are obtained by the owner. The business carried out by the OpCo in the property is managed by the manager on the basis of a management agreement. Employees working for the OpCo are hired by the owner but can be selected/coordinated by the manager. Any Third-Party Leases are entered into by the owner with third-party operators, and the relevant activities can be supervised by the manager. 

Lease agreements are well entrenched in the market, often as a result of owners' financing requirements. Hybrid leases – leases that contain elements of management agreements – are common between local owners and international hotel operators and allow the parties to share the risks and benefits of hotel operations, including by pegging rental fees to revenue, gross operating profit (GOP), or a combination of the two. Franchise agreements have gained popularity with some international hotel operators in recent years, but are normally reserved for owners (or operators) with successful track records in operating a hotel.

Some international operators, normally those with strong track records managing hotels in the Maldives, have agreed to franchise arrangements in recent years.

The alternative is to have a lease. There are some situations where there is a combination of a commercial lease and an HMA in order to have the commercial lease registered in the Public Registry of Commerce. Depending on the location, when the term of the lease is longer than a certain period of time (eg in the State of Jalisco it is six years), the lease has to be registered. This option is not generally accepted by international operators due to the fact that (i) commercial leases may not exceed a certain term (ie the State of Jalisco, the term is 20 years or the State of Quintana Roo the term is 15 years) and (ii) rent will have to be paid to owner by the operator.

A regular lease and increasingly hybrid leases with, for example, a (partly) revenue-based rent, FF&E Reserve, performance measurement and certain reporting obligations, are used. The market in the Netherlands – from a real estate investment perspective – still seems to be in favour of leases.

Leases are most commonly used, and mostly preferred by property owners due to the stable and predictable income that they guarantee (if they include minimum rent). In addition, banks financing the acquisition or construction of hotel properties also prefer lease agreements with minimum rent. HMAs are seen as riskier, and many Norwegian players do not see a commercial benefit in HMAs and prefer to take the safe option.

Furthermore, there are some combinations of leases (with the property owner) and franchise (with the owner of specific brands).

The alternative to HMAs are lease agreements.  Currently, we are also seeing a significant increase in franchising agreements in the Polish market.

Lease is the obvious alternative. Most hotel operators resist taking a real estate interest, and the growth of corporate owners (and investment into them) with internal operating capacity has seen a growth in franchised hotels.

As well as HMAs, owners choose hotel franchise/long lease agreements.

In recent years, we are starting to see more international operators becoming increasingly willing to enter into Franchise Agreements. This is as a result of having an increasing number of hotel owners that are appropriate partners for a franchise arrangement and an increasing use of asset managers in the hotel sector.

Real estate lease agreements are the most common alternative to hotel management agreements. They are preferred by traditional landlords and are still widely used because owners consider them to be safer and involve less management risk. In this cases, the landlord is the owner of the property, but not of the hotel business, and therefore only has to fulfil their obligations to maintain the premises and make the necessary repairs, while earning a fixed income without being subject to the risks involved in running a hotel. This is the preferred option for SOCIMIs (Spanish REITs), which can only invest in rented assets.

A modality closely linked to this type of leasing and which is used on many occasions in the tourism sector in Spain is financial leasing, whereby a financing company acquires a property intended for hotel use and transfers it to the financed party, but retains ownership of the property for a period of time and in exchange for a periodic payment. This type of contract always includes a purchase option at the end of the lease.

On the other hand, more sophisticated "industry lease" agreements – where the contractual object is determined on the one hand by the property, as a material support, and on the other hand, the business or company installed and developed therein, with the elements necessary for its exploitation – are also common in the Spanish hospitality sector, especially for more turnkey projects or assets where the operator is taking over a going concern.

Franchise agreements are also taking off in Spain.

Use of franchise agreements, particularly between operators and owners with strong track records, is increasing and sometimes preceded by a manchise arrangement (ie a managed hotel converts into a franchised hotel if certain criteria are satisfied). Leases are less common and used mostly by upstart operators.

In recent years, we are starting to see more international operators becoming increasingly willing to enter into Franchise Agreements. This is as a result of having an increasing number of hotel owners that are appropriate partners for a franchise arrangement and an increasing use of asset managers in the hotel sector.

Lease is the obvious alternative.  Most hotel operators resist taking a real estate interest and the growth of corporate owners (and investment into them) with internal operating capacity has seen a growth in franchised hotels.

The alternative is to have a lease. Widely used in Europe, the lease structure has been slow to debut in the US, and is used primarily with foreign investors and in the franchise context. Upscale and luxury hotels which are managed are rarely subject to leases and most always managed under a branded HMA. A lease agreement is consummated through a sale-leaseback, where the hotel owner sells an asset to a new owner, which leases the property back to the seller, who self-manages, as an operator itself, or more typically, through a third-party operator. Most branded hotel operators in the US prefer to remain asset-light and will not take on the financial risk of owning a real estate asset, as their primary expertise is management, not ownership with its attendant risks.