NEW CUMBERLAND, PA— As part of an effort to capitalize on the opportunities that are a direct result of the hotel industry’s upswing, Hersha Hospitality Trust has opted to terminate its eight remaining leases with Hersha Hospitality Management, LP and subsequently enter into new leases with the REIT’s taxable REIT subsidiary. It is a decision that is in step with practically every other hotel REIT, according to the New Cumberland, PA-based firm’s CFO, Ashish Parikh. “We have been transitioning to the taxable REIT subsidiary over the past 18 months,” he explained. “Almost every hotel REIT has now gone with this kind of structure.” The eight leases in question, which were terminated retroactive to April 1, are at the Holiday Inn Express in Long Island City, NY; Doubletree Club near John F. Kennedy Airport in Jamaica, NY; Comfort Inn in Frederick, MD; Hampton Inn & Suites in Hershey, PA; Hampton Inn in Danville, PA; Holiday Inn Express & Suites in Harrisburg, PA; and Sleep Inn and MainStay Suites located in King of Prussia, PA. Hersha has now transferred leases to its TRS at all 24 of the hotels it owns. The TRS has been formally entitled the 44 New England Management Company. The reasons behind the lease terminations and transfers have a lot to do with the current economic landscape in the hotel industry, Parikh said. “This new structure eliminates the lessee-lessor relationship that’s not actually found in the TRS structure,” he said. “And the primary reason for doing so is to capture the forecasted upside seen in the hotel segment right now. “Leases have proven to be beneficial over the past three or four years and during the ramp up of the market,” he continued. “REITs benefited from those fixed leases with the separate management companies. But now that good fundamentals have returned, we feel it’s a good time to terminate the leases.” Parikh said having its TRS hold the leases effectively gives Hersha Hospitality Trust more direct control of the hotels and potential for profit, albeit with slightly added risk. Meanwhile, Hersha Hospitality Management, which is an independent company apart from Hersha Hospitality Trust, will continue to operate the same hotels under fee-based, long-term management contracts. Parikh noted that the management company was formed by some of the founders of the REIT. “Compared to the original lease structure, the termination agreement allows the management company to operate the hotels to maximize profitability, which ultimately benefits our shareholders,” remarked Jay H. Shah, Hersha Hospitality Trust’s president and COO. “With the TRS acquiring the leases, we will more closely align the interests of all involved parties through the management fee structure and together focus on improving the bottom line.” Parikh further explained that the TRS is, in effect, a paper entity only, and so consequently it cannot manage the properties itself. He also pointed out that it is necessary to have leases in place with the TRS— rather than have the REIT hold them outright itself— because establishing leases with other entities is required of all hotel REITs. Another advantage gained from the lease terminations is that the entities that sold the hotels to Hersha have now waived all purchase price adjustments that were in the original purchase agreements for the hotels. Parikh said that those stipulations were settled during the termination negotiations. He also explained that the REIT had to negotiate with the management company in order to terminate the leases and that Hersha Hospitality Management decided to go along with the terminations because it is beneficial for it to maintain a good relationship with the REIT. Jay Shah said no cash consideration was paid to the lessee as part of the lease termination. Parikh added that Hersha Hospitality Trust will still entertain the prospect of establishing a lease with a third party in the event of a sale-leaseback transaction. He also explained that
