Hotel Investment

Real estate investment trusts (REITs) have provided an investment opportunity for

hoteliers. In the spring 2000 Virginia Hospitality and Leisure Executive Report, P. Anthony

Brown of Arthur Andersen writes the following about the U.S. Tax Relief Extension

Act of 1999. It is important to note that this information is useful as you plan your career

direction.

The most significant provision, however, is creation of a new type of corporation—a “Taxable REIT Subsidiary” (effective January 1, 2001)—which will allow REITs to create new incremental income streams. With new growth opportunities, shareholders should be rewarded with higher stock prices since companies with increased growth rates typically trade in the market at higher earnings multiples.

Under the terms of the 1999 legislation, Taxable REIT Subsidiaries can provide non-customary services to tenants through their subsidiaries. This legislation should enable REITs to provide better customer service, create stronger customer loyalty and sell new, non-customary services to tenants. In addition these new subsidiaries can lease lodging facilities from REITs. However, the lodging facilities must be managed by an independent contractor that is actively engaged in the trade or business of operating lodging facilities for any person other than the REIT.

With these changes, hotel REITs will be able to reorganize their structure in order to retain more of the income generated by their hotels. For example, FelCor Lodging Trust Inc., a hotel REIT based in Irving, Texas, currently leases its hotels to two tenants: 1) a company owned by its executives and directors; and 2) Bristol Hotels and Resorts, a publicly traded company. With the new legislation, FelCor will be able to form a new Taxable REIT Subsidiary and transfer the leases of its hotels to this new subsidiary. Accordingly, the net income of the existing lessee would be transferred to the new Taxable REIT Subsidiary. However, a management company (not owned by FelCor) must manage the hotels and must be actively engaged in the trade or business of operating lodging facilities for any person other than the REIT.

The delivery of hospitality in hotels has also come under review. For example, hoteliers are reviewing security plans to include the frontline employee who has to take immediate action based upon observations at the front desk, in the dining room and recreational areas, and on guest and public floors. The frontline employee who sees uncommon activities has to know the importance of reporting concerns to supervisors. Special training on what to look for with regard to guest interactions in public areas and on guest floors will assist the frontline person in becoming proactive.

Hoteliers must also be concerned with how to support hospitality as part of being responsible citizens in their communities. Hotel general managers should develop emergency plans to allow for offering immediate public space to medical personnel and disaster victims. Short-term concerns such as feeding disaster victims and emergency personnel and long-term commitments such as housing for displaced members of the community are just some of the issues faced by the hotel industry.