|By Sara K. Clarke, Orlando
SentinelMcClatchy-Tribune Regional News
Oct. 22, 2012--When local hotelier Richard Kessler announced plans to sell his Grand Bohemian Hotel last month, he demonstrated something the casual observer might not realize: Big hoteliers don't necessarily own their hotels.
Kessler signed an agreement to sell the downtown Orlando hotel but will continue to manage the property, which is the crown jewel of his portfolio. He made a similar arrangement for two other properties that he also sold to Inland American Lodging Group, an Orlando-based real estate investment trust.
The partnership gives the Orlando hotelier fresh capital to invest in future ventures, while it provides Inland American with four-star properties that lend a high-end air to its real estate portfolio.
"It is starting to help them position their portfolio as a four-star portfolio, instead of a three-star," said Kessler, chief executive officer of the Kessler Enterprise Inc. "It really gave us a way to recapitalize our business for growth."
While Kessler was selling his properties to a real estate investment trust, another big player in the Central Florida lodging market was doing essentially the opposite. Gaylord Entertainment had announced in May that it would reorganize itself as a REIT, maintaining ownership of its convention hotels, including the Gaylord Palms in Kissimmee, but selling the brand and management rights to Marriott International.
"There has been a gradual trend toward REIT ownership, as more and more people feel comfortable operating that way," said Jack Corgel, a senior advisor with PKF Hospitality Research and a professor at Cornell University's School of Hotel Administration. "Recently, the public markets have been very generous to REITs, in lending them money and also in selling their stock."
The primary motivation for REIT ownership is to save on taxes, said Patrick Scholes, senior lodging analyst with SunTrust Robinson Humphrey.
For the most part, a REIT's parent company doesn't pay taxes on any of the income it earns; instead, it must distribute 90 percent of its net income to shareholders, who then pay taxes on the distributions, Scholes said.
The REIT structure avoids the double taxation common with most corporations, which pay taxes on their earnings and whose shareholders then pay taxes on the dividends they issue.
"It makes more sense if you're going to own hotels to have them in a tax-efficient structure like a REIT," Scholes said.
Although they have special tax exemptions, REITs are prohibited from managing their properties. That's why they work deals with conventional hotel-management companies to operate the assets they acquire.
Nationally, publicly traded lodging REITs constitute about $28 billion in market capitalization, according to the National Association of Real Estate Investment Trusts in Washington, D.C., a small portion of the more than $500 billion in market capitalization represented by the 129 all-equity REITs tracked by the association.
Their acceptance by investors has been growing, and political currents may be speeding up what already was a long-term trend, said Corgel, the Cornell professor.
"I think we're seeing a little bit of an uptick in REIT formation because of the fear that the tax situation in the United States is going to get worse," Corgel said. "To be in a tax-exempt entity may make a lot of sense."
Locally, it isn't uncommon for hoteliers to be interested in selling their hotels while maintaining their management role, hotel broker Paul Sexton said. Although such an endeavor can be tricky for smaller properties, which are unlikely to attract big, hands-off institutional investors, it remains "every hotel owner's dream," he said.
Sexton, of HREC Investment Advisors, said REITs have become more active recently.
"I think as the stock market has rallied back through the course of this year, they have become more acquisitive," he said. "They're buying more because now they're able to access the equity market as well as the debt market."
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