Types of Leases in Hospitality Business

Avatar By: Pravesh Asati

Given the cyclical nature of the hospitality business, the correct lease type will ensure that an investor is well protected during the market down cycles and seeing high margins during market boom cycles.

Investing in a hotel space is capital intensive with a long investment recovery period. Furthermore, these investment are debt based on many occasions, making it important for investors to not only find the right asset to invest in but also negotiate a lease that has acceptable risk to reward ratio. Therefore, it is important for investors to understand different lease types that are common in the industry.

Types of Leases 

Fixed Lease

Such lease agreements contain a fixed rental mechanism with standard annual escalation. This model works well for investors who are not enthusiastic about engaging in operational risks and feel easier with a steady rental return. When all operating expenses and rental payments are met, with entire profit and loss belongs to the lessee, and the business risks also rest with the hotel company/lessee. 

Fig 1 The Lalit Hotel

Variable Lease 

Such leasing agreements only consist of the investor's revenue share. This type of lease model suits investors with a high-risk appetite, who are looking for a larger revenue share as opposed to a minimum guaranteed rent or fixed rental. One should know that business risk is relatively high for the investor in this model, but the returns are also high in good performing years. 

Fig 2 Le Meridien Hotel

Variable + Fixed Lease 

This type of leasing model is a hybrid model in which fixed rental is pledged to an investor with regular annual acceleration. Variable lease payment is made in the form of a percentage of sales turnover. This type of model is perfect for those investors who want to protect their investment through an assured fixed rental (although rental is low than the fixed rental). Also, one can earn additional returns with the help of a variable lease component.

Variable Lease Along With Minimum Guaranteed Rent 

Such a model is common among leisure hotels and the top-performing urban hotels. The investor will be getting a percentage of sales turnover or a minimal guaranteed rent, whatever is higher on stake. High-performance potential, prime location and visibility, among other factors empowering investors to command higher revenue share, which is secured by minimum guaranteed rent on the assumption of the market down cycle. A higher yield on investment is enabled in this model for the long term. 

Fig 3 Taj Maan Singh Hotel

 

Given the cyclical nature of the hospitality business, the correct lease type will ensure that an investor is well protected during the market down cycles and seeing high margins during market boom cycles. We at ImpactR have helped many businesses find the perfect lease for their hospitality business. For information contact us at info@impactr.global.

 

Given the cyclical nature of the hospitality business, the correct lease type will ensure that an investor is well protected during the market down cycles and seeing high margins during market boom cycles.

Investing in a hotel space is capital intensive with a long investment recovery period. Furthermore, these investment are debt based on many occasions, making it important for investors to not only find the right asset to invest in but also negotiate a lease that has acceptable risk to reward ratio. Therefore, it is important for investors to understand different lease types that are common in the industry.

Types of Leases 

Fixed Lease

Such lease agreements contain a fixed rental mechanism with standard annual escalation. This model works well for investors who are not enthusiastic about engaging in operational risks and feel easier with a steady rental return. When all operating expenses and rental payments are met, with entire profit and loss belongs to the lessee, and the business risks also rest with the hotel company/lessee. 

Fig 1 The Lalit Hotel

Variable Lease 

Such leasing agreements only consist of the investor's revenue share. This type of lease model suits investors with a high-risk appetite, who are looking for a larger revenue share as opposed to a minimum guaranteed rent or fixed rental. One should know that business risk is relatively high for the investor in this model, but the returns are also high in good performing years. 

Fig 2 Le Meridien Hotel

Variable + Fixed Lease 

This type of leasing model is a hybrid model in which fixed rental is pledged to an investor with regular annual acceleration. Variable lease payment is made in the form of a percentage of sales turnover. This type of model is perfect for those investors who want to protect their investment through an assured fixed rental (although rental is low than the fixed rental). Also, one can earn additional returns with the help of a variable lease component.

Variable Lease Along With Minimum Guaranteed Rent 

Such a model is common among leisure hotels and the top-performing urban hotels. The investor will be getting a percentage of sales turnover or a minimal guaranteed rent, whatever is higher on stake. High-performance potential, prime location and visibility, among other factors empowering investors to command higher revenue share, which is secured by minimum guaranteed rent on the assumption of the market down cycle. A higher yield on investment is enabled in this model for the long term. 

Fig 3 Taj Maan Singh Hotel

 

Given the cyclical nature of the hospitality business, the correct lease type will ensure that an investor is well protected during the market down cycles and seeing high margins during market boom cycles. We at ImpactR have helped many businesses find the perfect lease for their hospitality business. For information contact us at info@impactr.global.