Acquired fee simple, convert to ground lease?

Question

Hey all -- Question -- If I was to purchase a hotel fee simple in an urban environment, would I be able to purchase it, improve it, and then resell it say in a year subject to a ground lease? Idea being that I would like to benefit from the property income but not have the headache of operating a hotel in the city. While I am familiar with the acquisition process, I am less so with ground lease agreements. Has anyone done this? Things to consider? Good / Bad idea? Currently researching online but wanted to reach out here as well. Cheers!

Chris Kane · Answer

@Matthew D.  Don’t know if you had your question answered... but, yes.  It is common to buy hotels fee simple and ‘bifurcate’ them.  The bifurcation process is as simple as writing a well crafted ground lease (leased fee estate) that won’t hurt the value of the improvements (leasehold estate).

The pros of this kind of transaction is that you will likely experience a positive arbitrage between buying a fee simple (ie conventional) deal versus a bifurcated deal.  In my experience, you generally net about 20% more than your initial purchase price.  The cons are that the buyer pool for leasehold hotels is smaller, leasehold debt is tricky to procure and you will need to pay attention to items like the franchise agreement, access agreements and easements, etc.  Importantly, you may have some tax implications that you will have to work around.

I exclusively focus on these types of transactions around the US and they get done all the time ... so don’t let anyone stop you or tell you some nonsense.  Get some good help and don’t try and DIY it on the formation of the ground lease.  Good luck!

Scott Matthew C. · Answer

I don't understand your first question.

I guess you could if you wanted it.

What are you saying?