Hotels are operating businesses, so most hotel real estate is not owned under the kind of long-term triple net (NNN) lease common in retail or industrial property. This guide explains how hotel ownership, franchise, management and lease structures work, why a hotel brand does not by itself make a lease investment grade, and what to check if you are offered a hotel on a net lease. For the rating scale, see the investment grade guide.
How Hotels Are Usually Owned and Operated
- Franchise agreements: the owner pays a brand such as Hilton, Marriott or Choice for its name, reservation system and standards, and runs the hotel itself or hires a manager. Choice Hotels’ brands, such as Comfort Inn and Quality Inn, are predominantly franchised.
- Management agreements: the owner hires a brand or third-party management company to run the hotel for a fee. The owner keeps the operating profit and the operating risk.
- Leases: the owner leases the hotel to an operator that keeps the operating profit and pays rent. This is the least common structure for third-party owners.
Because hotel revenue resets every night, most owners and lenders treat hotels as operating businesses, valued on their operating income rather than on a fixed rent.
Hotel REIT Leases Are Usually Internal
Hotel REITs often lease their hotels, but to their own subsidiaries. REIT tax rules generally prevent a REIT from operating hotels directly, so a hotel REIT leases its hotels to a wholly owned taxable REIT subsidiary (TRS), which hires independent managers. Apple Hospitality REIT’s annual report for 2025, for example, states that its wholly owned taxable REIT subsidiary leases all of the company’s hotels and that these subsidiaries operate substantially all of its hotels under franchise or license agreements with national brands. The REIT still bears the hotels’ operating risk on a consolidated basis, so these internal leases are not evidence of passive, third-party credit-tenant income.
Extended Stay America used a similar structure when it completed its initial public offering in November 2013. Investors bought paired shares of Extended Stay America, Inc. and ESH Hospitality, Inc., a REIT; according to the offering prospectus, the REIT leased its hotel properties to affiliated operating lessees. Again, the lessee was part of the same group, not an outside credit tenant.
When a Hotel Is Leased to an Outside Operator
Third-party hotel leases do exist, typically for select-service or extended-stay hotels with simpler operations, for conversions, and for experiential lodging concepts. In those cases the rent depends on the operator’s results, and the operator is often a single-purpose company rather than a rated corporation.
The risk is real. Apple Hospitality REIT reports that it leased a 209-room New York property to a third-party hotel operator from May 2023; after the operator failed to make lease payments, Apple began legal proceedings in 2024 and recovered possession in April 2025, reinstating operations through a third-party manager.
A brand name on the building does not make the lease investment grade. In a franchised hotel, the franchisee or operating company signs the lease, and the brand’s credit rating does not stand behind the rent unless the brand company itself signs or guarantees it.
What to Check Before Buying a Hotel on a Lease
- Who signs and guarantees the lease: the operating company’s financial statements, any parent or personal guarantee, and its track record.
- Rent coverage: how many times the hotel’s operating profit (after a reserve for furniture, fixtures and equipment) covers the rent, through a full cycle.
- Franchise agreement: its term, required renovations (property improvement plans) and what happens to the brand if the operator defaults.
- Capital obligations: who pays for renovations, roof, structure and FF&E replacement.
- Remedies: security deposits, cross-default provisions, and how quickly the owner can replace the operator.
For income backed by rated corporate credit, compare hotels with net lease properties leased to tenants in our tenant ratings database.
Buying, Selling or Refinancing a Hotel?
We can help with hotel sales and acquisitions, refinancing maturing debt, recapitalizations and sale-leasebacks, and we can compare a hotel opportunity with investment grade net lease alternatives.
Frequently Asked Questions
Are hotels usually triple net leased?
No. Most hotels are owned and operated under franchise or management agreements. Hotel REITs usually lease hotels to their own subsidiaries, and leases to outside operators are less common.
Is a Marriott or Hilton hotel an investment grade tenant?
Usually not. In a franchised hotel, the franchisee or operating company signs the lease, so the brand’s credit does not support the rent unless the brand company signs or guarantees the lease.
Did Extended Stay America use sale-leasebacks?
At its November 2013 IPO, Extended Stay America used a paired-share structure in which ESH Hospitality, a REIT, leased its hotels to affiliated operating lessees. That was an internal lease within the group, not a lease to an outside credit tenant.
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