The Continued Rise of Branded Residences: Opportunities and Structuring Considerations For Developers, Hotel Owners, and Brands | Goodwin
While the general commercial real estate markets have faced more than a year of raising interest costs, fewer deals, and economic uncertainty, the branded-residences sector has not only remained resilient but also has continued to experience sustained growth. Market reports reflect that the branded-residences market has grown by more than 150% over the past decade; based on the current pipeline of branded residential projects, this segment is anticipated to continue to grow. According to a 2023 Robb Report article (based on data from design firm WATG Strategy), there are more than 700 branded residential developments worldwide, with more than 100,000 homes either completed or in the planning stages. And the branded-residence phenomenon is a global one.
Recognizing the success of branded residential projects in the market, developers increasingly continue to pursue mixed-use developments that include a branded residential component — particularly in the luxury segment, where profits from the sale of branded residences can increase investor returns; synergies between a hotel and branded residences elevate the overall experience for hotel guests and residents. There has also been a recent increase in demand for stand-alone branded residential projects (unattached to a hotel). And while luxury hotel brands are significant players in this space, non-hotel luxury brands such as Aston Martin, Porsche, Lamborghini, Fendi, Missoni, and Nobu are seizing opportunities to expand into this space, each announcing their own branded residential projects under development.
In this article, we explore several underlying opportunities these types of projects offer developers; brands that have contributed to continued growth in this sector; and the considerations developer and brands should keep in mind when structuring these projects.
Opportunities of Branded Residential Projects
Branded residential projects provide a number of potential opportunities and benefits for both developers and brands.
Developers seeking more favorable financing terms in the current challenging debt market may advance financing negotiations by demonstrating to a potential lender that an established and well-known hotel or consumer products brand in the market has committed to the project, and also by providing reservation agreements signed by third parties interested in purchasing branded residences, as evidence of anticipated revenues. Further, depending on local rules and regulations, a developer may be able to use deposits paid by purchasers of branded residences to fund development costs, providing an additional valuable source of capital (and reducing the amount of project costs that need to be financed in a challenging debt market).
Pursuing a branded residential project (or adding a branded residential component to a hotel mixed-use project) may also increase investor returns. Brand association and the increased services provided to branded residences often allow a developer to drive returns by selling residences with significant price premiums compared to unbranded projects. Developers of hotel–residential mixed-use projects also may increase operational cash flow when branded residences located at their projects participate in a voluntary transient rental program offered as part of the hotel project.
Branded residential projects are also appealing to brands for many reasons. Brands typically negotiate with developers to receive a license fee in connection with the sale of each residence sold in return for granting the developer a license to use the brand’s name and marks to help market the residences for sale (a portion of which is typically paid at the outset of the deal and the balance paid upon the closings of sales of the branded residences). Also, because proceeds generated by a rental program offered through a hotel are often included in the hotel’s gross receipts, a brand managing a rental program through the hotel may also benefit from increased fee payments under the hotel agreements because participation in the rental program increases the overall hotel inventory. Hotel brands typically earn additional management fees associated with managing a branded-residence project, providing additional services to residential owners, and offering management services to the homeowners association whether as part of a larger hotel complex or independent of a hotel.
Beyond direct financial opportunities, branded residential projects offer brands a great opportunity to attract new customers and deepen relationships and loyalty with existing customers. Not coincidentally, the continued growth of branded residences has been on a parallel track with the growth and diversification of hotel brands and the products they offer travelers. For many brands, branded residential projects offer an effective way to introduce a brand to a new category of clientele that further helps them create and drive loyalty or, in the case of a consumer brand not connected to the hotel industry, expand the brand awareness through a new product line.
Structuring Considerations For Branded Residential Projects
To ensure developers and brands maximize the opportunities and benefits associated with branded residential projects, careful consideration should be undertaken by all parties involved in the structuring of a branded residential project, whether it is a stand-alone residential project or a component of a larger hotel mixed-use project.
A critical consideration in structuring a branded residential project effectively is to identify the business goals of the stakeholders involved. Hotel brands typically pursue long-term involvement with the project to continue to expand brand reach and receive fees, but it is less clear whether consumer brands not otherwise connected to the hotel industry will remain for the long term; their entrance into the branded residential market is relatively recent. On the other hand, in a stand-alone residential project arrangement, a developer will typically aim to develop the residences and exit the project shortly thereafter by selling residences to third-party purchasers. However, in a hotel mixed-use project, a developer may seek to receive a quick return on its investment and sell the hotel shortly after opening, or it may intend to hold it more long term and benefit from the revenue generated by operations. Therefore, a hotel developer (similar to a brand) will be motivated to ensure the structuring of the covenants, easements, restrictions, and other governing documents will not be detrimental to future owners of the hotel, because that may affect marketability of the hotel when the developer seeks to sell.
Parties should coordinate closely with local zoning and condominium counsel in the jurisdiction where the branded residential project will be located to ensure that the documentation that will govern the project (e.g., the homeowners/master association declaration and related documents) is consistent with local applicable laws. Developers typically seek to structure voting rights under homeowner/master association documents so as to allow the hotel owner in a mixed-use project the ability to control the board (including approval of budgets) and provide the hotel owner with special enforcement rights to ensure the overall standard of the residential project is maintained. Brands are aligned with these efforts, often seeking their own special approval rights in governing documents for a project to ensure the standard to which residences must be maintained and that any rental restrictions contained in the governing documents cannot be modified without their approval for as long as the brand manages the homeowners association.
In a hotel mixed-use project, parties should also consider when and under what terms access to hotel amenities should be provided to owners of branded residences, their guests, and lessees or short-term renters under a rental program. Such access may be provided to residential owners through a management agreement between the homeowners association and the brand (such that access to the hotel amenities would cease if the brand no longer managed the residential project), or in the governing documents to be recorded in public records. Additionally, access to such hotel amenities and facilities should be conditioned upon the hotel receiving either reimbursements for an allocated portion of the costs incurred to maintain and repair these hotel amenities or an access fee. Mixed-use projects also often offer residence owners the ability to receive certain services from the hotel upon request, such as in-room dining. Developers and brands are often generally aligned on these matters because they strive to establish an economically sustainable arrangement for the project.
Last, parties should seek counsel from U.S. securities law experts when structuring a rental program contemplated to be offered at a residential project to confirm the arrangement will not inadvertently result in the sale of branded residential units constituting the sale of a “security” subject to both federal and state securities laws, which generally would require registration — an often costly and time-consuming process. Over the years, the U.S. Securities and Exchange Commission has provided guidance through a series of no-action letters to developers and brands seeking to develop rental program offerings that are not considered securities, which should be carefully considered by developers and brands in early stages of structuring a rental program for a branded residential project.
Branded residential projects — whether stand-alone or incorporated into a hotel mixed-use project — offer a great opportunity for all parties involved to drive returns and expand and deepen a brand’s reach to consumers. But developing and structuring a mixed-use project requires careful planning to ensure the structure is sustainable and can maximize these benefits for the stakeholders involved on a go-forward basis. Committing the effort and time up-front to establish a sustainable structure for all parties involved will prove invaluable to the success of the project. Legal counsel with expertise in these types of complex branded projects can provide helpful guidance regarding securities considerations, structure and documentation, which will contribute significantly to the overall success of the project.
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