Why Hospitality Operators are Losing Their Love of Real Estate
By Neale Redington Partner, Deloitte | August 03, 2010
The corporate finance aspects of the transaction may have been enticing, but few operators followed the Host MI model. The operators considered factors such as tax implications of the sale, relatively low prices for the real estate, and the diminished ability to control the real estate after sale. They are, however, now reconsidering this option as a result of the strength of the real estate market, confidence in the hospitality industry, and expansion of real estate acquisition vehicles. The growth of Real Estate Investment Trusts ("REITs") that can pay generous prices for the hotel property and are required by law to hire a hotel management company has been significant.
Hotel operators can also realize other key benefits from an Opco-Propco split:
Real Estate Ownership Structures
Various structures are created to form the Propco entity acquiring the real estate assets. These include the previously described REITs, regular C-Corporations, and limited liability companies or partnerships formed by Private Equity Investors ("PEIs").
The main benefit of a REIT is that only one level of tax is paid by the owner of REIT stock - the REIT entity itself generally does not pay tax. In return for this favorable tax treatment, however, the REIT must comply with many tax rules and regulations, including a rule that it must distribute 90% of its taxable income to its shareholders.