Types of Hotel Ownership

A hotel with a recognized brand name may be a reassurance to most that their stay will be uneventful. A brand name on the outside of a hotel, however, is not an indication of ownership. James Goldberg of MeetingsNet, an online resource for professional meeting planners, says that as of 2007, approximately three-fourths of United States hotels operate as franchises and most of the physical hotel buildings are owned by someone other than the hotel operator. (See Reference)

There are four basic types of hotel ownership and management: franchise, privately owned and operated, leased and managed. A franchise operation is privately owned, but the owner pays an up-front fee to purchase the franchise along with ongoing royalties. A privately owned and operated hotel may have investors or others with a financial interest in the hotel, but the ownership structure is in one person or company’s name. Leased hotels are owned by an individual or company, but normally lease the physical building. A managed hotel is also privately owned, but has signed an agreement with another hotel brand to run the hotel operations.

A franchise hotel operation has clear advantages and disadvantages. While the hotel will benefit from recognition of the brand name by consumers, a proven business model and national marketing, the hotel’s owner is dependent on that brand name for its business. If the brand loses popularity with consumers, the owner’s business suffers as well. In addition, since a franchise is generally limited to the territory it can market in and cannot franchise itself, its growth options are limited to purchasing additional franchises.

This type of hotel ownership gives an owner the most freedom, but also the biggest risk. The hotel owner is free to make all decisions on staff, operational structure and growth, but does not have the benefit of a brand behind him. All marketing research and efforts must be built from the ground up.

Leased hotels are also privately owned, but the physical hotel building belongs to someone else. These types of arrangements are generally on long-term leases. The lessor will stipulate a minimum rent for the premises, and may also include a sliding scale based on total revenue for ongoing rent.

While the trend for new hotels is to open as franchises, existing hotels quite frequently go the managed route. This is where an existing privately owned hotel partners with a recognized brand name or smaller, more experienced hotel. The hotel continues to be privately owned, but the managing hotel takes over the day-to-day operations of the business and quite frequently lends its brand name as well. The managing hotel charges royalties based on total revenues.