Investing in your tenant's hospitality business: to do or not to do?

For many investors or banks, the hospitality industry is not an attractive industry to finance. In fact, in the hospitality industry, many investments lose their value almost immediately as security for financiers. There are some important reasons for this, but the reasoning behind it does not always hold true for landlords. For landlords, investing in the tenant's hospitality business can certainly be interesting, as long as you are aware of the following opportunities and risks.

Date: August 04, 2017

Modified November 14, 2023

Written by: Erik Jansen

Reading time: +/- 2 minutes

For many investors or banks, the hospitality industry is not an attractive industry to finance. In fact, in the hospitality industry, many investments lose their value almost immediately as security for financiers. There are some important reasons for this, but the reasoning behind it does not always hold true for landlords. For landlords, investing in the tenant's hospitality business can certainly be interesting, as long as you are aware of the following opportunities and risks.

"Architectural" ínvestments and natalization

Many investments that a tenant makes as a hospitality entrepreneur are modifications to the business space you rent to him. Think about insulation, air extraction or air circulation, heating or air conditioning, the grease trap, a new floor, elevations in the kitchen floor, a new ceiling, electricity, new toilet groups, a fireplace, a wall out or a wall in, painting.

Damage criterion

It can be very interesting for you as a landlord to invest in that. Many of these adjustments benefit the property, i.e. the landlord. With such an 'architectural' modification of the leased property, accession can take place because an affixed item becomes physically inseparable from the property. The owner of that investment loses his property and the owner of the real estate has then by operation of law, automatically, acquired a part with his real estate. The criterion is whether the afterthought is "constituent. This is the case if the investment becomes so connected to the real estate that it cannot be separated from it without relevant damage.

Traffic views

Another argument for wetness (in addition to the "damage criterion") is the concept of traffic. If, for example, the tenant has a new toilet installed, the tenant also loses ownership of that toilet, perhaps not because of the damage criterion (because the pot can easily be unscrewed again), but because of the criterion of the concept of traffic: after all, the toilet has become - as I am sure everyone agrees - part of the toilet group.

Right to reimbursement of investment made?

The hotel and catering entrepreneur who loses ownership of his investment because of accession may be entitled to damages. But this is often where the shoe wrings for the financier: in the leases that are standardly used in the hospitality industry, that claim of the hospitality entrepreneur against the landlord because of improvements to the property is, by default, "written away. This means that the tenant loses these investments immediately.

The hospitality entrepreneur often does not experience that disadvantage until the end of the lease. Meanwhile, business owner expects these investments to contribute to the atmosphere, turnover and results and - when sold - to higher goodwill. But that offers financiers no security.

Thus, for many financiers, financing these investments is risky. Therefore, external financiers often do not want to finance such investments. But as a landlord, this means that these investments have often already been "recouped" immediately as an increase in the value of the property due to natrekking.

Investment in furnishings and inventory

If your tenant asks for financing to invest in furnishings, you are more at risk. This includes kitchen equipment, furniture, sound system, cash register systems, art, dishes and glassware. These are investments in so-called "bottom lines. If operations go wrong, the tax authorities have a first right to the proceeds of these bottom items. You as landlord and financier may have stipulated a (silent) lien on them, but in the event of seizure by the tax authorities or bankruptcy, this is of no use to you. The value accrues to the tax authorities, and in case of bankruptcy to the estate.

This is even more problematic today because the law now states that if you have a lien on this type of ground property and you want to exercise the lien (because there are arrears in interest and repayment obligations), you must first notify the tax authorities. Then the tax authorities have a number of weeks to seize it themselves as well and thus "creep ahead".

Moreover, hospitality businesses also generally have few other assets that can be used for recourse. After all, most customers pay directly, so pledging accounts receivable is not interesting. Inventory is also limited and, moreover, has a limited shelf life, so it also has little value.

Thus, financing this type of investment is riskier than financing investments that directly contribute to the value of your property due to the lack of recourse. Moreover, the hospitality entrepreneur will feel that you as a landlord are thinking with him regarding the renovations.

Conclusion

As a landlord, in many cases you benefit directly from the "construction" investments made by the leasing hospitality entrepreneur. Thus, the risk of a lack of recourse is limited because you yourself immediately benefit from the investment. If the financing takes place through a loan, you may even earn twice from the investment made. Once through netting and the second time through the interest and principal payments you receive on the loan.

Because it is not interesting for external financiers to invest in this, your willingness to invest can be just the push the hospitality entrepreneur needs to get started in your property. And that while, as a landlord yourself, you can't actually lose much with it.


Stay Focused

As attorneys for business owners , we understand the importance of staying ahead. Together with us, you will have all the opportunities and risks in sight. Feel free to contact us and get personalized information about our services.