How a ground lease affects the market value of a hotel

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.