Turnover-based Rents – A Game Changer for the Hotel Industry? : An Analysis of the Effects of a Purely Revenue-based Rent Model for Hotel Real Estate

Abstract: Stockholm’s hotel market has been performing well the past 15 years, but the Covid-19 pandemic has shattered years of growth. The aim of this report has been to evaluate a purely turnover-based rent model that can increase flexibility for the hotel owners during economic crisis, while possibly increasing the value of the property and returns during good economic times. An interview study with 10 subjects representing hotel real estate companies, hotel owners and property appraisers has been conducted. A quantitative study using historical data was performed to see how the value of the property changed depending on what type of rent was used. Contract management theory has been used to evaluate aspects throughout the report. The results proved that a purely turnoverbased rent can increase the value of the property during good economic market conditions and increase the returns to the real estate owner. Furthermore, the results showed that this type of contract can help hotel operators to cope with rent payments during periods of severely decreased revenue. However, this type of contract comes with a large increase of volatility of the returns and can have large decreases in property values during pandemics and other economic hardships. Finally, a revenue-based contract was found to have a negative impact on the real estate companies’ ability to finance new hotel projects.