Hotels and REITs Think They're Right for Each Other

Oct 23, 12 | 12:02 am

By Sara K. Clarke  

When local hotelier Richard Kessler announced plans to sell his Grand Bohemian Hotel last month, he demonstrated something the casual observer might not realize: Big hoteliers don't necessarily own their hotels.

Kessler signed an agreement to sell the downtown Orlando hotel but will continue to manage the property, which is the crown jewel of his portfolio. He made a similar arrangement for two other properties that he also sold to Inland American Lodging Group, an Orlando-based real estate investment trust.

The partnership gives the Orlando hotelier fresh capital to invest in future ventures, while it provides Inland American with four-star properties that lend a high-end air to its real estate portfolio.

"It is starting to help them position their portfolio as a four-star portfolio, instead of a three-star," said Kessler, chief executive officer of the Kessler Enterprise Inc. "It really gave us a way to recapitalize our business for growth."

While Kessler was selling his properties to a real estate investment trust, another big player in the Central Florida lodging market was doing essentially the opposite. Gaylord Entertainment had announced in May that it would reorganize itself as a REIT, maintaining ownership of its convention hotels, including the Gaylord Palms in Kissimmee, but selling the brand and management rights to Marriott International.

"There has been a gradual trend toward REIT ownership, as more and more people feel comfortable operating that way," said Jack Corgel, a senior advisor with PKF Hospitality Research and a professor at Cornell University's School of Hotel Administration. "Recently, the public markets have been very generous to REITs, in lending them money and also in selling their stock."

The primary motivation for REIT ownership is to save on taxes, said Patrick Scholes, senior lodging analyst with SunTrust Robinson Humphrey.

For the most part, a REIT's parent company doesn't pay taxes on any of the income it earns; instead, it must distribute 90 percent of its net income to shareholders, who then pay taxes on the distributions, Scholes said.

Source for full article: Orlando Sentiel