Under a hotel lease agreement, the owner of a hotel property leases it to the tenant, who uses it to run its hotel business. The property owner (landlord) has no control over the property's operation and bears no risk and liability for the hotel business.
The landlord leases the property to the tenant under a commercial real estate lease commonly for 20 years and longer for a fixed rent. The landlord is typically responsible for property maintenance while the tenant manages the hotel business and bears all its operational risk.
The landlord typically receives a fixed rent, usually subject to periodic review and some agreed rate index. Banks and institutional investors favor lease arrangements over other hotel operating models as they provide stable cash-flows and a secure return on their investment. Many construction companies also lease the buildings they develop to capture the ongoing revenue streams.
Sale-and-leaseback transactions (SLBT) have led to the “sandwich model", in which a third-party management company ("while-label operator") is contracted to run the property for the tenant. The tenant receives the operational profit/loss and the landlord receives the lease payment under a lease guarantee. The sale and manage-back is used in realizing the asset-light strategies of developers and chains for the disposal of assets.
Leased properties may be managed by the tenant or an operator on the tenant's behalf. Hotel brands tend to avoid leasing property directly and instead enter into a franchise agreement with the tenants.
Common issues for negotiation of property leases are build-out/construction issues, where the premises are either turn-key or built out by the tenant, as well as capital expenditures and repairs. Either the landlord or the tenant owns the furniture and equipment and bears the cost of insurance for business interruption coverage and indemnity for personal injury or negligence claims.
A subordination, non-disturbance and attornment agreement (SNDA) is commonly also negotiated. It assures lender’s that their mortgage is superior to the tenant’s lease while assuring tenants that their rights to their leased premises will be preserved (“non-disturbed”) in the event of landlord default and lender foreclosure on the property.
