Business Cycle and Long-Term Debt: Effects on Hotel Operating Lease

Abstract

Over the last 25 years, many hotel operators have chosen to lease their property instead of owning as a financing strategy. This paper examines the combined and separate contributions of business cycles and a firm's level of long-term debt on hotel owner/operator use of operating leases. The results indicate that operating leases were used more often during contracting business cycles and less often during cycles of expansion. According to the results, operating leases and long-term debt are not complementary, although they are increasingly treated as complements when the economy suffers a downturn.

Is the Hospitality Industry Ready for the New Lease Accounting Standards?

“…And it is equally important for them to communicate with their bankers or bond trustees about how their debt covenants might be impacted. Furthermore, Lee, Huh, and Lee (2015) provide evidence indicating that hotel companies rely on operating leases instead of debt financing, especially in economic downturns. Hence, it is even more imperative in contracting business cycles for hospitality companies to recognize how their borrowing costs and debt covenants would be affected.…”