Hotel ownership can take many different forms. It is a different game to be the owner of a privately owned and operated, franchised, managed, or leased hotel. Your risk appetite and how involved you want to be in the hotel business all impact what the best match is for your investment strategy.
In this article, we look at what hotel ownership is, different hotel ownership structures, and how to choose the right fit for you.
What is Hotel Ownership? The Role of Hotel Owners
Hotel ownership means owning a hospitality asset and earning income from its operations either directly or through a third party. The scope of responsibility of the owner varies based on the chosen ownership and management structure.
Depending on the model, hotel ownership can mean managing every aspect of the hotel business, including operations, or being completely hands-off as a landlord, leasing out the property for an operator.
Whatever the structure is, hotel owners are responsible for the financial performance and long-term value appreciation of the property.
Types of Hotel Ownership Models
Landing on an ownership model is a fundamental choice, as it directly impacts what you can expect in terms of financial performance and the risk you are exposed to. Furthermore, it determines the level of control you have over the hotel business as an owner. Below are the main types of hotel ownership models.
Privately Owned and Operated Hotels
Privately owned hotels, also called independent hotels, are not affiliated with a hotel brand or franchise system. The owner of an independent hotel is fully responsible for ownership and management, meaning complete control over every aspect of the property and operations.
Pros:
- Complete creative and operational control of the property, from design to branding to staffing, guest experience, and pricing
- No fees or constraints that come with brand affiliation
- Potential for higher profit margins because of full revenue retention
Cons:
- Higher financial and operational risk due to the lack of brand support (proven operational models, systems, and customer demand)
Independent hotels may face more challenges in achieving consistent occupancy because they do not benefit from the established reputation or centralized marketing of a well-known brand. Building a loyal customer base and handling distribution falls entirely to the owner.
However, if the hotel performs well, independent hotels may achieve higher profit margins than their franchised or managed counterparts. This is because no fees that come with brand affiliation are taken from the revenue the property generates.
Pro tip: It is important to note that independent hotel owners still have the option to hire a white-label hotel operator, which is a third-party management company that operates the property under the owner’s unique brand. This way, owners can benefit from professional hotel management while not having to sacrifice their own identity and positioning.
Franchised Hotel Ownership
In a franchised hotel ownership structure, owners operate their hotel under a recognized brand. While the hotel owner is still responsible for running the daily operations of the property, the affiliation comes with many benefits for the franchisee, including an existing customer base through loyalty programs and operational support in the form of training, marketing, brand guidelines, and back-end systems. In exchange for joining the network, owners pay fees to the franchisor and must comply with brand standards.
Pros:
- Substantial brand equity and built-in demand
- Access to global distribution and loyalty programs
- Easier to get financing from lenders because of being affiliated with a known brand
Cons:
- Ongoing fees and royalties that can erode profitability
- Limited creative flexibility because of needing to adhere to sometimes strict brand standards
The franchise model offers reduced risk for the owner. Firstly, there is no need to build a recognizable and trustworthy brand from scratch, allowing the owner to focus on executing the operations at the property level.
Furthermore, operational risk is reduced because of the support offered by the licensor. Finally, branded properties often enjoy price premiums and higher occupancy. The trade-offs are limited flexibility and recurring fees, which cut into the return potential.
Managed Hotel Ownership
In this model, the owner outsources daily operations to a professional hotel management company. The hotel operator oversees all departments and day-to-day activities, typically in exchange for a base fee and a performance-based incentive fee. The owner remains responsible for setting the long-term strategy of the property and monitoring the hotel’s financial results. Depending on the terms of the management contract, the owner can still have control over aspects of the business, such as staffing and capital planning.
Management agreements are often brand-affiliated, which means that the hotel is operated by a global brand like Marriott or Hilton. In some cases, an owner may franchise the brand but also bring in an independent third-party management company to get the benefits of a brand but have a bit more sway over operations.
Pros:
- The management company offers expertise
- The owner can focus on investment and asset strategy
- Brand support
Cons:
- The owner has less direct control over the guest experience
- Management fees reduce net returns
This model is popular among institutional investors and hotel ownership groups that do not have in-house hospitality expertise or wish to focus their energy on investment strategy. Using a proficient hotel operator can add to the value of the asset and help mitigate the risk of underperformance.
That said, the owner still carries the financial risk of the hotel. While hotel management companies are incentivized to perform well, as some fees are tied to results, the management fees are still payable even if the property delivers weak results.
Leased Hotel Ownership
Leased hotel ownership is the most passive structure. The owner leases the property to an operator responsible for running the hotel business. In return, the owner receives a fixed rent, regardless of how well the hotel performs, provided that the operator can meet the payment obligations.
Pros:
- Predictable and stable income that is not tied to the hotel’s performance
- No exposure to operations or staffing issues
Cons:
- Limited upside potential
- Tenant risk and long-term agreements
This structure is ideal for owners looking for low-risk and long-term returns without the operational responsibilities. While the operator absorbs the financial and operational risks, the owner gets stable rental returns, but does not share in the profits if the hotel outperforms expectations.
Choosing the Right Ownership and Management Structure
The right ownership model depends on your strategic goals, risk tolerance, and how involved you want to be in operations. Here are some considerations to help you choose the right ownership structure.
Legacy vs. Scale
For those looking to build a personal brand or legacy asset, a privately owned and operated hotel offers the freedom to differentiate and the potential to capture upside from solid performance.
However, if your goal as an owner is to rapidly scale your investment portfolio, working with a franchise or hotel management company enables you to enter a market faster and build on established and consistent standards.
Operational Capacity
Owning a hotel and managing do not have to go hand in hand. Running a hotel requires a lot of know-how and time, which makes direct ownership more feasible if you and your team have experience in hospitality.
Otherwise, a hotel management company can take a lot of the operational burden off your plate, reducing the complexity and freeing up your time for investment-related matters.
Risk Appetite
Hotel ownership structures come with varying levels of risk. Independent hotel owners take on the most operational and financial risks but also enjoy the highest potential returns. Franchised and managed hotels reduce operational risk while allowing owners to benefit from market performance. Leased hotel ownership offers the least risk, but also the least reward.
Making the Most of Your Hotel Ownership Strategy
Understanding hotel ownership and management models is essential for any hospitality investor, regardless of how involved in the operations you want to be. Each model offers a unique balance of risk and return and choosing the proper hotel ownership structure that fits your investment profile can unlock the full potential of your hospitality asset.
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