A Note From My Desk: So, You're Thinking About Leasing a Hotel?

Hey there,

As a hotel investment broker if there’s one thing I’ve learned, it’s that getting into this game is more than just a business decision—it’s a leap of faith. Lately, a lot of folks have been asking me about leasing hotels. It seems simple enough on the surface, right? You find a property, you rent it, you run it, you profit. Easy.

Well, the truth is, it’s a bit more complicated than that. A hotel lease isn't like renting an apartment. It’s a complex beast, and if you don’t know what you’re doing, it can bite you. But if you go in with your eyes wide open, it can be a fantastic way to run your own show without having to buy the whole building. So, pull up a chair, and let’s talk about what you really need to know.

First Things First: What Game Are You Playing? Lease, Manage, or Franchise?

Before you even think about signing a lease, you need to understand the landscape. You’ve basically got three main ways to run a hotel that you don’t own outright.

1. The Lease: This is what we’re here to talk about. You, the operator (or Lessee), rent the entire hotel from the owner (the Lessor). You pay the rent, and after that, every dollar of profit is yours to keep. But so is every dollar of loss. The owner gets to be a passive investor, collecting a steady check without worrying about whether the rooms are full. It’s a long-term marriage, usually 20 years or more, so you better be sure you like the partner. You get all the control, but you also carry all the risk.  
2. The Management Agreement: Here, the owner keeps the business but hires you, a pro, to run it for them. They take on all the financial risk, but they also get most of the reward. You get paid a fee, usually a percentage of revenue and/or profit, for your expertise. It’s less risky for you, but your upside is capped.  
3. The Franchise: This is where you pay a big brand like Hilton or Marriott for the right to use their name, their reservation system, and their playbook. You still own or lease the hotel and manage the day-to-day, but you have to follow their rules to the letter. This gives you instant brand recognition, but it comes with hefty fees and less freedom.  

The big money folks, like institutional investors, love the lease model because it feels safe and predictable, like a bond. That’s why you see it so often.  

The Nitty-Gritty: What’s Actually in the Lease?

Alright, let’s say you’ve decided leasing is for you. The lease document itself is where the rubber meets the road. It’s long, it’s dense, and every single word matters. Don’t you dare sign one without having a lawyer who specializes in hospitality look it over. Here are the clauses that can make or break you:  

• The Rent: This isn't always a simple, flat number. It can be a Fixed Lease, where you pay the same amount every month, come rain or shine. Or it could be a  

Variable Lease, where your rent is a percentage of your revenue or profit—great in a downturn, but you share the wealth in good times. Most common these days is a  

Hybrid Lease, with a lower fixed "base" rent plus a variable part that kicks in when you’re doing well. This gives the owner some security and you a little breathing room.  

• Maintenance and CapEx: This is a big one. The lease has to spell out, in painful detail, who pays for what. Usually, you (the lessee) handle the day-to-day repairs, while the owner takes care of the big structural stuff like the roof and foundation. But the real kicker is the  

FF&E Reserve—that’s the pot of money set aside to replace all the Furniture, Fixtures, and Equipment down the line. You need to be crystal clear on who funds that reserve and what happens if the franchisor demands a massive, multi-million dollar renovation (what we call a Property Improvement Plan, or PIP). If the lease doesn’t make the owner responsible for that PIP, guess who’s on the hook? You are.  

• Termination: How do you get out if things go south? A good lease has clear exit ramps. You might be able to terminate if the hotel is severely damaged or if the business is consistently losing money. Without these clauses, you’re trapped.  
• Insurance: You’ll be required to carry a mountain of insurance—property, liability, business interruption, you name it. It’s expensive, but non-negotiable.  

Do Your Homework (Then Do It Again)

I can’t say this enough: due diligence is everything. Before you sign, you need to become an expert on that property and its market.

• Market Feasibility: Is there actually a demand for a hotel here? Who are your competitors, and how are they doing? You need to analyze everything from local economic trends to tourist traffic.  
• Financial Deep Dive: Get your hands on at least three to five years of the hotel’s financial statements and go through them with a fine-toothed comb. Don’t just trust the seller’s rosy projections; build your own conservative forecast.  
• Property Condition Assessment (PCA): Hire an independent engineer to inspect every inch of that building, from the HVAC system to the foundation. Their report will tell you what needs fixing now and what expensive surprises are lurking down the road. This isn’t just a suggestion; it’s your shield against financial ruin.  

These things all feed into each other. The PCA might find that the boiler is on its last legs, which means you need to plug a huge expense into your financial model. The market study might show that all your competitors just renovated, meaning you’ll have to spend money on upgrades just to keep up. It’s all connected.

A Final Word of Advice

Leasing a hotel is a high-stakes game. You’re taking on all the operational risk in exchange for all the potential reward. The key is to mitigate that risk with a flexible rent structure, a meticulously negotiated contract, and the most thorough due diligence you can possibly conduct.  

It’s a tough business, but for the right person with the right plan, it’s one of the most rewarding things you’ll ever do. Go in prepared, get expert advice, and never, ever stop doing your homework.

All the best,

 Pri