Hotel room investments

Hotel room investment is not a new concept. In the post-war era especially, wealthy Americans would buy rooms in their favourite European hotels to ensure they were available when holidaying on the continent. Mostly these were high end luxury hotels in Europe’s capitals. The hotel received a lump sum cash injection and was able to sell to other paying guests when the room’s owner wasn’t using it.

Today in hotel room investment has moved on a lot and is now much more sophisticated and accessible to a far wider audience of investors. It is not only the wealthy that can invest in hotel rooms.

Here at Winston Solicitors LLP we act for investors buying one or more rooms in a hotel. Many of our client investors are from overseas China, Eastern Europe, Russia, UAE and USA but there are a significant number from the UK.

What is the legal structure to hotel room investment arrangements?

The purchase of a room in a hotel or in another leisure facility will usually have the same or a very similar legal structure. This will be the grant of a long lease (usually 150 years) of the room by the hotel owner to the client which at the same time is then immediately leased back by the client to the hotel’s management arm for a 10 or 15 year period. So the control over the room remains with the hotel owner at all times and under the leaseback the investor gets a guaranteed rent or return over 10 or 15 years. The rate of return is often between 10% per annum and so is considerably higher than the yield on a buy to let property.

There are often, but not always, rights for the client purchaser to have free of charge 2 periods of 7 day stays at the hotel they are buying into or another hotel owned by the hotel owner.

How do hotel room investors get their investment back?

There will often be put and call options in the suite of legal documents so that the investor has the right to get their money back or for the hotel owner to force a client to sell the room back. These are usually at defined intervals after 5 or 10 or 15 years. There is often an uplift on the capital invested ranging between 10% and 25% and we have seen as high as 37.5%.

Is there any protection in the event of the hotel company selling the freehold of the hotel to a third party and the third party trying to?

We register the client’s long lease at the Land Registry so that it is binding on any third party to whom the original hotel owner seeks to sell the freehold of the hotel. This is effectively the investor’s security outside of the use of the put options.

Is this hotel room investment for me?

Whilst we have experienced a surge in investors wanting to buy hotel rooms in the last 18 months it should always be considered a high risk investment because the hotel owner could have difficulties during the term of the leaseback to pay the high returns to the client or to pay the capital back with the promised generous uplift.

The fact that the client’s lease is registered in its own right at the Land Registry does give clients room (no pun intended!) to negotiate with the hotel owner or an insolvency practitioner in a distress situation but like any investment clients are not guaranteed to get back all their returns or their capital.

Why use Winston Solicitors LLP?

We have developed a real niche in this area and know that clients like what we do for them. We also know what to look out for in the suite of legal documents and the more general questions of the strength of financial covenant issues surrounding the hotel owner.

If you have clients who are considering a hotel room investment you would do well to talk to us first.

Please contact Jonathan Perry at Winston Solicitors LLP on 0113 320 5000 or jp@winstonsolicitors.co.uk.

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