Are fixed leases really dead?

Insight Comment
Often it takes a massive economic shock to change the way business is done and the pandemic highlighted the fault lines between landlord and tenant. Plenty of people believe there is a better way of working together. More flexibility in leases is surely the way forward but it requires investors to be more engaged in the way hotels run their business.

The Covid-19 pandemic continues to test the strength of the relationship between tenant and landlord across all commercial sectors.

The state of affairs has prompted some in the hotel industry to explore new ways of working.

Lionel Benjamin, co-founder of Ago Hotels, set up the business last year and has grown from 9 to 15 hotels in the space of nine months. He is one of those pushing for a seismic shift in stakeholder relationships.

Ago offers a hybrid lease with elements of guaranteed fixed rent and profit sharing. The fact that many landlords haven’t been paid during the pandemic, while their of their tenants have been able to keep trading, has made them more receptive to new ways of working.

“I think landlords are believing now that if you set a rent level where your tenant can afford to actually pay the rent consistently, where you can give them a profit share and they see an upside and they always know the downside is covered, its incentivising landlords to move away from a traditional lease,” Benjamin said during a panel discussion at IHIF 2021, called New partnership models: redefining relations between all stakeholders.

This new harmonious relationship might just sound too good to be true, according to others in the industry.
For one, as Jan Steinebach, head of hotels, The Netherlands at CBRE Hotels said, some investors don’t understand or simply have no interest in understanding the economics of hospitality.

“The feedback that I get from the market is that the investors are not educated enough to understand the bottom line, that’s why they’re betting on the top line,” Steinebach said.

One way of getting investors to show an interest in more flexible leases would be perhaps to move in increments, so mixing talking about revenue targets rather than profit sharing.

There’s also the issue of traditional lenders, a point Max Luscher, CEO Central ad Northern Europe at B&B Hotels brought up.

“I think in the beginning of most real estate assets in the hospitality industry there will be a fixed lease because banks will need it,” Luscher said.

But after 20, or 25 years, there’s more freedom to be flexible, especially with investors that understand the industry.