Why are more Hotels not Triple Net Leased assets? Why not lease to the operator?
Why are hotels not triple net leased assets?

Seems like it would make sense to lease to the franchisee in the same way you would with a Wendy’s NNN asset.
[{"id": "j2aumpx", "text": "Are you going to give TI money to the franchisee if the franchisor imposes a Property Improvement Plan on them?\n\nCollecting that triple net rent depends upon the staff efficiently managing reservations and turning over rooms. Is there enough of a margin to attract a competent operator? How screwed are you as the landlord if the operator loses their liquor license or the restaurant has issues with the health department?\n\nI think of a hotel as a more specialized asset like an assisted living or sober living facility than as a QSR or as normal retail.", "replies": [{"id": "j2ayb4s", "text": "It seems like several of those issues (staffing, health issues, liquor license) would apply to QSR/stand alone restaurants as well. \n\nLikewise, aren\u2019t QSR franchisees required to spend capex similar to a PIP?\n\nNeither of those explainations are hotel-specific", "replies": [], "depth": 2}, {"id": "j2aytw6", "text": "NNN hotels do exist to be clear, so it\u2019s not impossible, just uncommon.", "replies": [], "depth": 2}], "depth": 1}, {"id": "j2awsf1", "text": "I worked for a $1.5B portfolio. They bought a hotel on A very wealthy summer playground for politicians and celebrities. \n\nThey didn\u2019t even set up as opco propco \u2026 even though they hired a management company. (How a a lease would come into play) on some of the most valuable property in America. \n\n I brought it up, it apparently threatened the assets and Ops guys, as I was just the property manager. \n\nThen they didn\u2019t pull permits\u2026 on an i was like\u2026 okay, bye.", "replies": [], "depth": 1}, {"id": "j2b4m8d", "text": "In the US, hotel ownership, franchise, and management are often three unrelated parties due to the specialization/sophistication needed to do each well and the ability to hold each responsible/liable. There are alternatives such as Drury (who owns, manages, and has their own brand), but they are far less common. \n\nThe major US hotel chains (Marriott, Hilton, Hyatt, IHG, etc.) used to own and/or manage more hotels but Wall Street looked unfavorably on the mixed risk profile and most of the chains have shifted to separate the risk and specialize more. Now, most are asset light and franchise all but their luxury brands (where service and quality is a higher priority). Owners often prefer a third party manager anyway (as opposed to brand managed) because it provides more control over operations and the franchise model allows you to use the brand without a massive financial obligation like guarantees. The major exception to the franchise model is for large full service hotels with a large group component where the national scale of the hotel chain can attract more groups/conferences. \n\nIn Europe, the model is different. Many assets are triple net leased and the lessee is often both the manager and the brand. Parent brands exist but are less dominant, likely due to how fractured/regionalized the EU can be and how many hotels are still owned/run by families instead of larger companies.", "replies": [{"id": "j2b8at1", "text": "Again some of this is no different than QSR (ie there\u2019s an operator, brand, and landlord) \n\nIs it possible that US brands forbid franchisees from NNN leases within the franchise agreement?", "replies": [{"id": "j2bezh6", "text": "Lots of hotels are ground leased, so no, it's not forbidden. There are companies that make a business out of converting a fee simple asset into a ground lease, then leasing the property back to the original fee owner. It's rare, but not unheard of. Hotel assets are much more complicated to operate than QSR as other comments have alluded to and much more capital intensive, so that could be part of it.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "j2bpzwf", "text": "Ask The Patels. They know all about hotels", "replies": [], "depth": 1}, {"id": "j2bqmny", "text": "Hotel developer here. The margins just aren't there to justify an owner group going in, building and leasing a hotel to an operator. That's a ton of risk for what would be a nominal return, especially when you consider that deal sponsors are typically signing guarantees. \n\nAdditionally, from an ops perspective, there's nearly no difference to hiring a management company than nnn leasing to a management company. So why would I give up $1-2M/yr in NOI  in exchange for a ground lease?\n\nMakes no sense from an investment, return or risk perspective.", "replies": [{"id": "j2bqxan", "text": "Thanks that\u2019s a helpful explanation", "replies": [], "depth": 2}], "depth": 1}]