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How a ground lease affects the market value of a hotel
Corporate Real Estate Journal,
9
(2),
130-143
(2019)
Abstract
The purpose of this paper is to explore how a land lease may affect the market value of a hotel. Since the 1980s, hotels that sit on ground leases have become increasingly prevalent in urban locations throughout the US. As land becomes dearer and construction costs rise in densely urbanised areas, the frequency of land leases in the development of hotels is likely to increase in the future. To date, research on hotel land leases has primarily been undertaken by appraisers, brokers, hotel owners and/or operators and lawyers, as opposed to the academic community. Furthermore, the literature review identified a gap in research relating to the value implications of a ground lease on hotel investment transactions. As such, the literature review component of this paper focuses on valuation methodologies in hotel investment analyses and approach to leasehold positions, the associated land lease terms and provisions that have an impact on the value and opportunities for value creation by utilising a land lease. To complement the literature review, primary research was undertaken via interviews with hotel owners, operators, appraisers, brokers, mortgage bankers and brand representatives, which provided insight into how the market gauges the impact of a ground lease’s terms and provisions on a hotel asset’s market value. While the sample of stakeholders interviewed was robust, the lessor side of the equation was not sufficiently represented, which represents one limitation of the research. A further limitation was a substantially subjective element in valuation methodology undertaken by the survey respondents. Nonetheless, it is hoped that this research will aid hotel investors, as well as other industry stakeholders, to better understand land leases and their prospective impact on value.
Keywords: ground leases; hotels; hotel valuations; value creation
The full article is available to subscribers to the journal.
Author's Biography
Gregg Rockett was a member of the Hilton development team 2004–18 as Vice President of Development. Initially he had responsibility for hotel expansion in Latin America and the Caribbean and later assumed responsibility for corporate development in North America with a focus on public-private hotel initiatives. Gregg’s previous experience includes nine years with the hotel development group of Marriott International. While based in Madrid for three years, he led the expansion efforts in Spain, Portugal and Italy and prior to that, he was based in Washington, DC as Director of Feasibility and Market Analysis in Latin America and the Caribbean. Gregg has been involved in the hotel and tourism industry for over 30 years, mostly focused on international markets. He has a Bachelor’s degree in hotel and restaurant management from the University of Houston, Conrad N. Hilton College and a Master’s in business administration from the University of Maryland University College. Gregg has served as adjunct professor of the Master’s in professional hospitality management programme at Georgetown University. Currently he is serving as professor of practice at the Hong Kong Polytechnic University School of Hotel and Tourism Management.
Dan Hawkins has been a senior director specialising in investment sales for the Berkadia Hotels & Hospitality Group since 2017. Prior to joining Berkadia, Dan was with CBRE, where he worked as a senior financial analyst conducting financial modelling on a broad spectrum of hotel assets and portfolios, including all segments of the industry, totalling more than US$1.5bn. Prior to joining CBRE, Dan worked for the Donohoe Companies, where he assisted senior leadership within their hospitality division in the management of US$150m in hotel revenue, underwriting new hotel projects and leading several major PIPs. Dan was actively involved in the hotel industry during this time, serving on both IHG’s Emerging Leaders Executive Council and the Washington DC Southwest Business Improvement District’s board of directors. Prior to his time at Donohoe, Dan worked at Stonebridge, where he assisted leadership with multi-use development projects in the preconstruction phase and was critical in the disposition of several thousands of acres of land assets for an institutional client. Dan attended the University of Maryland at College Park and is a graduate of Georgetown University’s Master’s in hospitality management programme.
