For the past 15 years, we have written quarterly articles for the Law Journal with a heavy focus on the hospitality industry and the gamut of legal and practical issues faced by the various stakeholders, most notably brands, owners, third-party managers and the variety of industry financiers from institutional lenders to private equity to private financing.

Through our deep involvement in the hospitality industry, we have been at the center of and have witnessed the arc of change that only occurs over decades.

Those fundamental shifts—whether attributable to the natural evolution of the business, such as the increasing move towards “asset-light” management and operations; industry consolidation including once-in-a-generation deals like the merger between Starwood and Marriott; the societal impacts of the COVID-19 pandemic; or the winds of political change—all contribute, over time, to the transformation of the industry and its practices. These changes have also led to a variety of legal and factual issues as the industry, at times, evolves out of coordination with the realities on the ground.

With a view to history and the future of the industry, over the course of the next year we will be offering a series of articles focused on emerging issues that warrant attention to ensure the industry continues to thrive and promotes the common interests. We begin by exploring the ever-increasing prevalence of the asset light model, the reasoning behind it, and the current imbalances and strife resulting from it.

The Asset-Light Evolution

The hotel industry began as a soup-to-nuts business, with brands owning and operating the hotels identified with their brands. Capturing the essence of the original hospitality business model, Conrad Hilton, the legendary founder and namesake of Hilton Hotels, once famously said, “Soap, water and elbow grease, those are the three ingredients for success in the hotel business.”

While this model ensured the brand was invested in the hotel’s success, it exposed hoteliers to substantial financial risks by simultaneously owning real estate and a hotel business, including construction overruns, operational costs, labor costs and disputes, property taxes, debt service, and economic downturns.

As the hotel industry grew, industry stakeholders began to separate brand ownership and control from ownership of the hotel real estate. This evolution was spurred on by the private equity and investment banking worlds’ recognition that separating brands from the real estate is a valuable tool for value creation.

One of the effects of this separation was to create a new and complicated dynamic: with the brands attempting to shift property-level balance sheet risk to independent hotel owners, they needed to institute ways to retain influence over the customer experience to ensure that the brand preserved its associated goodwill and reputation. This gave rise to innovations such as ‘brand standards’ an owner is obligated to maintain, required periodic renovation requirements, and the imposition of new fees to fund new brand initiatives.

Beginning in the 1990s and accelerating through the 2000s, the industry embraced “asset-light” strategies. The objective for the brand was to de-risk by transferring the real estate, labor, capital expenditures, and operating volatility to independent owners while earning fees for providing the brand, booking channels, and loyalty programs for the owner to use. For hotel owners, this shift presented a significant opportunity to participate in a growing industry and gain access to a valuable brand.

Marriott led the way. In October 1993, it split into two companies: retaining Marriott International as a franchising and management company while spinning off its real estate assets into what is now Host Hotels & Resorts, the world’s largest publicly traded hospitality REIT. By December 2025, Marriott owned or leased less than one percent of approximately 9,805 branded properties worldwide, including only 14 hotels in the United States and Canada.

Other major brands followed suit. In 2002, IHG owned or leased nearly 200 hotels. By 2015, IHG sold its last owned major hotel asset, culminating in real estate sales totaling almost $8 billion. Hilton’s 2007 acquisition by Blackstone accelerated its asset-light transformation.

In 2016, Hilton spun off its remaining real estate into a REIT, and its timeshare businesses into a separate publicly traded company. By 2025, Hilton owned fewer than 50 of approximately 9,200 branded properties.

In its 2009 Annual Report, Hyatt acknowledged that it is “exposed to risks resulting from significant investments in owned and leased real estate,” leading Hyatt to pursue an “asset recycling” strategy targeting $1.5 billion in property sales in 2017.

Its 2025 purchase of Playa Hotels & Resorts illustrated the model: Hyatt purchased the brand, promptly sold Playa’s real estate assets while retaining Playa’s management contracts. Countless other examples exist.

This strategy was intended to allow brands to reduce capital costs and operating exposure while retaining contractual control over hotels they do not own, employ, or fund. In turn, it allowed hotel owners to access brands with a global reach—including brand reservations systems, loyalty programs, and marketing efforts—enabling them to capture more of the market. These relationships are documented in management agreements or franchise/license agreements.

Management Agreements: Shifting Costs, Retaining Control

Under a typical hotel management agreement, the brand operates the hotel for the owner. The owner funds development, working capital, operating shortfalls, and capital improvements; for branding and operating the hotel, the brand receives a base fee calculated as a percentage of top-line revenue and an incentive fee tied to profitability.

Most hotel management agreements provide operators with control over day-to-day decisions, allowing brands to ensure quality control over properties bearing their marks while avoiding many property owner-related risks.

De-risking is not absolute in a management relationship. Owners have recourse if a brand fails to abide by its management duties, including noticing a default. In addition, as the face of the operation, vendors, suppliers and other contractual counterparties (such as group booking customers) often look to the brand when something goes wrong.

This can present significant risks during periods of distress or economic downturns, as recently seen during the COVID-19 pandemic, when many operators were sued for unpaid wages and other expenses after owners (often bankruptcy remote single-purpose entities) failed to fund operations.

Franchising: The Asset-Light Frontier

Franchising is another common structure. The brand supplies its name, reservation system, loyalty program, and marketing platform, while the owner/franchisee is responsible (on its own or through an approved manager) for operating the hotel and pays royalties plus system, marketing, reservation, technology, and loyalty fees to the brand/franchisor.

The brand is not directly responsible for managing the hotel operations, but typically retains authority to enforce quality standards, require capital improvements, and approve vendors.

This arrangement also can lead to complications. The brand remains at risk if an owner does not abide by the brand standards, putting at risk the brand’s reputation and consumer expectations. Owners are at risk of being obligated to continue paying fees even if the brand is not delivering an economic benefit, especially as these agreements typically do not contain a default procedure.

The franchise relationship can be beneficial for both sides, but tension arises when the owner concludes that the brand is not delivering guests to the hotel despite charging sizeable fees.

As part of the intensification of the industry’s “asset-light” approach, franchising/licensing has become the predominant business arrangement in the industry.

As of December 2025, Marriott’s licenses or franchises nearly 80% of its properties; more than 75% of Hyatt’s properties in the United States are franchised; and almost 90% of Hilton’s properties are franchised. The exception to this trend is the luxury segment, where brands often mandate that they remain in control of every facet of operations.

What Comes Next?

The asset-light model continues to evolve. More and more, Conrad Hilton’s soap, water and elbow grease of daily operations is the responsibility of independent owners and their third-party managers, while brands sell them valuable intellectual property, industry know-how and marketing engines.

In a perfect world, this arrangement works for all stakeholders: the brands reduce risk and expenses, allowing them to monetize their intellectual property, global appeal and industry know-how. Owners gain access to a brand with global reach, supercharging hotel performance.

But in the real world, the hotel industry is grappling with how best to balance the competing (and arguably misaligned) interests of the stakeholders in this new paradigm.

Most starkly, the owner cares about the bottom-line net profit; conversely, the brand is paid on top-line performance. And while brands are incentivized to police their brand goodwill and reputation—which is now their chief product—doing so means forcing owners to fund capital projects that may not achieve an acceptable return on investment.

In our next article, we will explore how major industry stakeholders can reach common ground in this new era.

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This article first appeared in the August 18, 2026, edition of the “New York Law Journal” © 2026 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.