Before you buy a share in a hotel: a checklist of what to verify

A share in a hotel can mean four quite different things, and the sales material rarely says which one you are being offered. This checklist is for the moment before you pay a reservation fee. It does not say whether any product is good; it says what to find out, in what order, and what a sound answer looks like. For how the main structures work, start with how hotel shares are structured. It is general information, not legal, tax or investment advice, and capital is at risk.

First, what exactly would you own?

• A registered title to a defined unit, with the right to rent it out through an operator.
• A fraction of a title (co-ownership), with rights to use the property for set periods and to a share of income.
• Shares in a company or vehicle that owns the hotel or the unit.
• A contractual right to a share of income, with no ownership of the property.

The name on the brochure does not tell you which of these you are buying. Ask for the legal description in one sentence and for the document that creates it. The difference decides everything that follows: who can sell, who can be sued, what happens in insolvency and how you can leave. For the product families compared side by side, see branded residences, condo hotels and fractional ownership.

Who holds title, and what happens if the operator or developer fails

If title is registered in your name or with a custodian for your benefit, find out what rights the register gives you and how a land registry entry is protected. If the property sits in a company, you hold shares, and the company's creditors rank ahead of you. If the hotel is still being built, ask where your money is held until completion: in an escrow or trust account under local law, or in the developer's own account. Ask what happens to your payments if construction stops. The checks on the builder side are in how to check a hotel developer.

The operator: track record, term and who can change the terms

• How many hotels does the operator run in this market, and for how long?
• How long is the management or lease contract, and can it be renewed or ended early? By whom, and on what notice?
• Can the operator change fees or rules without your consent, and can the owners vote to replace it?
• What happens to your income and your use rights if the operator leaves?

Owners of hotel-linked units in some markets have ended up in disputes with operators over exactly these points. A contract that is hard to end is a risk to your exit as well as to your income.

The fee stack and how income is calculated

Income to you is what is left after every deduction, and a brochure may state it before some of them. Typical deductions to look for:

• Base and incentive management fees, and brand or franchise fees.
• Booking and distribution commissions.
• A furniture and equipment reserve.
• Service charges, insurance and property tax.
• A rental pool or administration fee.
• Fees on transfer or exit.

Ask for the waterfall in writing: from gross room revenue to the net payment into your account, line by line, for an actual past year, with every assumption stated. A projected figure with no waterfall is a marketing number. How this compares with putting the same money in a bank is worked through in hotel income vs a bank deposit after all costs.

How income is paid and whether anyone audits it

Find out how often income is paid, in which currency, from which account and what can delay it. Ask whether the hotel's accounts are audited and by whom, and ask for the latest set rather than a summary. Ask how a rental pool shares income between owners (by unit, by size, by days used), what happens when owners use their unit, and whether reserves can be spent without a vote. The mechanics, and why regulators look at pools as investments, are in rental pools and guaranteed yields.

Transfer, exit and lock-in clauses

Read these before you read the income section, because they decide whether the money can come back. Look for a lock-up period, rights of first refusal for co-owners or the operator, consent requirements for a transfer, notice periods, exit fees and any buy-back clause, and ask who owes the buy-back and what backs it. Ask for the resale history of the scheme: closed sales, prices and time taken. If none exists, treat the exit as untested. The routes, costs and how to test a "quick exit" promise are in selling a hotel share or unit: the real exit routes.

Developer and project risk

If the hotel is not yet open, the risks are those of any building project: permits, financing, delays, cost overruns and a market that changes before opening. Ask for the building permit, the construction contract, the developer's accounts and the opening date, and ask what the contract says if the date is missed. For the full check on a developer and an off-plan project, use the developer checklist and the broader hotel due diligence checklist.

Securities-law status of the sale

In some countries, selling a share in a hotel's income or a place in a rental pool is treated as an investment product that needs a prospectus, a licence or an authorised seller. In others it is ordinary real estate that any agent can sell. Regulators in several countries have warned about hotel-room and holiday-unit schemes sold as unregulated investments; the UK financial regulator's public warning is one example. Ask the seller which regime applies and which authority supervises the sale, and check the answer with a lawyer in the country of the property. If the sale is regulated, you may have rights, such as a cooling-off period, a key information document and a complaints route, that you lose if it is not.

Red flags

• A guaranteed yield or buy-back stated as certain, without naming who pays and what backs it.
• A yield compared with a bank deposit, with no cost waterfall behind it.
• Pressure to decide: "last units", "the price rises tomorrow".
• No resale history, or a refusal to show closed resales.
• Accounts that exist only in a promotional presentation and are not audited.
• A request to pay into an account that is not an escrow or the title holder's.
• Documents available only after payment, or no time to take legal advice.
• A seller who cannot say which authority supervises the sale.

For a map of risks across the whole asset class, see the hotel investment risk matrix.

Questions to put to the seller in writing

• What exactly will I own, and where is it registered or recorded?
• Who holds title, and what protects my money until completion?
• Who is the operator, what is its record here and how long is its contract?
• What is the full fee stack, and what was the net income per unit in the last full year?
• Are the hotel's accounts audited, and may I see the latest?
• What are the lock-up, consent, notice and exit-fee terms?
• Is there a buy-back, who owes it and what secures it?
• What were the last twelve resales: dates, prices and time to sell?
• Which regulator, if any, supervises this sale, and what rights does that give me?
• Where do I pay, and who is the account holder?

Written answers matter because a verbal promise is difficult to enforce and a refusal to put an answer in writing is itself information.

FAQ

Is a share in a hotel safer than a whole unit? Not by default. It spreads the cost, but it can add a layer of company or co-owner rules and make the exit harder. What you hold matters more than the size of the holding.

Can I rely on the yield in the brochure? Treat it as a projection from the seller. Ask for the cost waterfall and for actual past income, and see what the contract says about changes.

Do I need a lawyer? Yes, one who works in the country of the property and is independent of the seller. Take the contract to them before you pay a reservation fee.

How we help

We read the sales agreement, the operating contract and the exit clauses with you, put your questions to the seller in writing and compare the price and the full cost stack with the alternatives before you commit. See hotels in our catalogue for what we currently list. Informational only, not legal, tax or investment advice; figures are indicative and change over time.