The German hotel investment market remains strong with a lack of
high quality assets available for sale. This trend is likely to
continue. The German hotel market currently has some interesting
characteristics, namely the significant number of unbranded hotels
(although many of these hotels are burdened with material capex
requirements), a strong German economy, a robust business travel
market as well as an increasing attractiveness of German cities
such as Berlin and Munich for international tourists.
This is resulting in an increasing number of investments being
made into office properties but with potential for subsequent
conversion into hotels. Just as there is a strong demand for hotel
space there has been a decreasing demand for office space in some
areas (particularly non-central CBS locations) as tenants are
opting for "home office" solutions, shared office space
and other ways to minimise the need for office space.
The German legal framework provides for the necessary
flexibility to convert office space into hotel properties.
Accordingly, we see an increasing appetite of international
investors in particular with conversion experience in other
jurisdictions joining other developers in exploring this
alternative method of acquiring assets for hotel use.
The key legal aspects to consider are:
Is a hotel permissible in downtown areas where most of the
conversion projects are located? In most cases, urban zoning plans
and state building law will allow for conversions. There are few
legal hurdles preventing the grant of the necessary building
The newly created hotel space must of course comply with all
regulatory requirements applicable to all hotel projects (e.g.,
safety, fire protection, etc.). The usual suite of professionals
such as architects, engineers and, if necessary, lawyers can help
to address these requirements quite easily. In this context, it is
important to understand that office conversions are counted as
completely new buildings. The developer cannot rely on the
privileged status quo under the original (office) building permit.
In other words, grandfathering regulations will not apply and the
refurbishment is subject to the up-to-date building requirements
which apply to hotels.
Negotiations of a hotel lease or hotel management agreements
for future hotel use will not materially deviate from the usual
negotiations of such agreements for hotels under development
although stipulations on timing and permit related issues might be
more detailed to cover the future tenant or operator. Brand
standard compliance may also need care and attention depending on
what structural restrictions impact the design and an
operator's preferred brand requirements. A few waivers may need
to be "mutually agreed"!
Originally published 7 October 2016
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