While uncertainty remains in much of the commercial real estate sector, the extended stay hotel segment of hospitality real estate remains robust. Major hotel franchisors have plans to launch new brands in the extended stay hotel segment, and this segment is primed for investment by developers, traditional hospitality investors, and more, as industry leaders (such as The Highland Group) project long-term profitability and success as consumer habits trend toward this extended-stay product.
Structuring a real estate investment involves important choices, especially given today's capital markets. Investors demand not only long-term returns but also cash flow and tax-efficient structures. Industry leaders point to the extended stay product, with a leaner staffing and expense model and longer guest stays, as a source of cash flow for investors. This cash flow potential makes extended-stay hotels a potentially good asset to use in a real estate investment trust (or REIT) structure. REITs require regular distributions to their shareholders, but they effectively give the shareholders pass-through tax treatment by allowing a deduction for those distributions. The Internal Revenue Code provides some requirements on how a REIT operates a hotel, but this structure is workable, especially for portfolios of real property assets or where institutional investors are involved. Additionally, when structuring investments and fundraising, investors may be concerned about leverage or other capital markets issues. Sponsors and other real estate investors should carefully consider these facets of the investment when looking to take advantage of this trend in the hospitality real estate market.