In an area I frequently vacation at, five years ago there was
A Courtyard by Marriott
A Hilton Garden Inn
A Holiday Inn
A Hampton Inn
A Fairfield Inn.
Over the past 10 years or so, the Holiday Inn building was razed and replaced with a new construction Courtyard by Marriott. The existing Courtyard was changed into a Hampton Inn. The existing Hampton Inn was changed into a Fairfield Inn. The Hilton Garden Inn became a Holiday Inn Express. The Fairfield became a Comfort Inn.
The net result of all this is the area is now down one Hilton Garden Inn and up one Comfort Inn. Near as I can tell the rates were and are still all within about $20 a night or so. It must be expensive to get rid of all the Courtyard stuff and put in in Hampton Inn stuff, so what gives?
A lot of it has to do with franchise agreements. A hotel of a certain brand is expected to adhere to standards, which include how often the rooms are upgraded, amenities offered, etc. If the facility gets too old to upgrade to the franchise standards it may move downscale (I believe Comfort Inn and Holiday Inn Express are considered lower-end midscale). On the other hand, it may go all out in renovations and switch to a more upscale brand.
I believe it has to do with the tax laws. Hotels are able to depreciate the buildings over a few years, and once they have done so it is financially advantageous for them to sell it and buy another building to depreciate. And thus it helps all the big brands to sell their buildings to each other.
I’m not certain of the details of how this works, and my info is rather old. But my father’s cousin was a lawyer for a hotel chain, and he explained it to me once.
Also if they’re sold the new owner might be brand loyal or get a better deal from a different brand. If it was in bad shape for whatever reason they might switch brand as an advertisement to locals that it’s under new management and in good shape again.
The Express in Holiday Inn Express tells you they have limited amenities, even if it’s brand new. No dining room for one.
In a broader sense, I think this is a symptom of highly-competitive and nearly commoditized markets. Each particular brand has established the small niche in which they can maximize their profits, but they have to work their business model until it screams bloody murder to keep it. So if one brand is better at catering to the short-stay businessperson, another is better at providing breakfasts, and another at depreciating real estate assets, then there’s more incentive to shuffle properties around and rebrand as they age, and as the market changes around them. As markets become more commoditized, if you can’t rely on brand loyalty then the techniques for cutting costs, finding other revenue streams, and just generally running the business can look pretty strange from the outside. Squeezing out just 1-2% takes a massive amount of work in that sort of situation.
I would say it’s because each hotel branding requires a certain level of upkeep and amenities. Owners want to get into the top category their place is able to achieve and that would net top dollars, but it’s hard to maintain as it ages, so when it no longer qualifies it downgrades to the next lower category. Add to this some hotels are build fast and cheap, it can go downhill fast.
I always assumed that buying a hotel, then using the profits to pay off the mortgage as a business expense, then selling the hotel to generate lower-taxed capital gains, was a good medium-term business model for any hotel.
Not a CPA but I do know only the interest is a business expense. The principal paid is considered income but taxed at different rate. We bought a building and put a restaurant in it and the first years tax bill was an unpleasant surprise.
Indeed. Running a hotel chain that actually owns its physical buildings would be extremely capital-intense and therefore unfeasible. The usual set-up is that the building is owned by some local investor, who concludes a contract with a major chain about running the place under the brand of that chain.
As I understand things, the precise arrangement differs. Sometimes it’s a franchising concept whereby the local investor runs the place for their own account and pays licencing fees to the chain for the use of the brand; in other cases, the chain operates the hotel directly and disburses the revenues from this location, minus a management fee which the chain retains, to the owner of the physical facilities. But the chains for sure don’t own the buildings in which their hotels are located, save possibly for a few flagship locations.
In many cases, the same company owns several different hotel brands. For instance, from the brands mentioned by the OP, Courtyard and Fairfield are owned by the same company (Marriott International), and so are Hilton Garden Inn and Hampton (Hilton Worldwide). So a change of the same location from one of these brands to another owned by the same umbrella organisation could be a result of a simple strategic repositioning within that group.
The initial razing was probably because it was less expensive to bulldoze and rebuild, maybe built before the ADA or maybe just an older building that was more expensive to upkeep.
Brand name changing is probably due to how the licensing works. In the past, Courtyrard meant all interior corridors (no outside rooms) and at least some restaurant on site. But, the standards could easily change. Before Covid, some hotels tried to go green and get rid of travel size toiletries, adding an extra expense to remodel bathrooms.
Pre-Covid, there was an anime convention I went to every year called Portcon. Over the years, Portcon has been held in a Sheraton, a Wyndham, a Doubletree, and a Hilton. But it has been in the exact same building every single time, it just kept changing names. Most people I know refer to this building as “The Portcon Hotel” rather than whatever name is on the sign.
How different did it look when they changed owners? Was it just a simple change of branding or did the new owners make significant changes to where it looked like a different hotel?
I’ve stayed at the same hotel for an event for at least 15 of the past 20 years. The brand has changed a few times, although I don’t know if the ownership has. Although there were changes, they weren’t so significant that it looked like a different hotel - they were mostly cosmetic. New wallpaper, furniture, the front desk was moved once, and the restaurant was changed to more of a restaurant/bar. Amenities change - the year it was a Crown Plaza we got welcome packages with sleep masks, pillow spray, a sleep mask and a white noise CD in addition to the soap,shampoo etc. But aside from that , all the other changes could have happened even without a brand change- if a hotel stays a Holiday Inn for 20 years, at some point they will replace furniture , wallpaper, mattresses and linens etc.
The hotel business is very complex. One hotel can have at least these many “owners”:
The owner of the real estate
The owner of the license to operate the hotel
The owner of the brand/chain/standards that also sets requirements for the amenities, often dictating what vendors that supplies should come from
The company or companies that supply all the physical goods used in the hotel
The company that actually runs and staffs the hotel
A small roadside hotel might just be a sole proprietor who lives on the property and owns it and has to deal with the brand franchisor and its vendors. There are commonly disputes over the these contractual relationships, so there’s often turnover in these relationships. Brand owners are very strict about maintaining standards—they have to be, or else they might lose their trademark rights if they are found to engage in “naked licensing.”
The brand owners can often be quite oppressive from the franchisee’s perspective, because the brand owner isn’t spending any of its money on this stuff—it’s collecting licensing fees and telling the hotel franchisee how to spend its money.