"Hotel syndication" may sound a bit sinister, but for more than a decade it has been the key tool with which Marriott Corp. has built its worldwide chain of hotels and motels.
Marriott pioneered the financing technique in the hotel business in the late 1970s to keep a steady stream of capital flowing for the construction of new hotels.
By building hotels with its own money, then syndicating the properties -- that is, selling pieces of the hotels to investor groups that it had put together -- Marriott found that it could continue to rapidly expand its hotel empire without having large amounts of its own money tied up in the buildings.
Marriott itself owns only about 10 percent of the 613 hotels that bear its name. The rest have either been sold outright to large institutional investors, such as insurance companies, or sold in syndication deals.
Marriott uses two methods of putting together investor groups, or syndications: private placements and public partnerships. The public partnership units are sold in $1,000 increments to investors willing to put up a minimum of $5,000 to $10,000; private placements start at $100,000 and are sold only to select investors.
These investment groups then sign contracts with Marriott to manage their hotels.
In a typical "full-service" hotel, Marriott receives 3 percent of the revenue and a bonus if based on profits.
In a rising real estate market, the company can realize capital gains from the sale of new hotels. Last year, Marriott's bottom line was fattened by $35 million from real estate transactions. But according to investment analyst Robert L. Renck, Jr., hotel-management contracts have become the single most important contributor to Marriott's earnings and growth.
The interwoven relationship between Marriott and some of its investors exposes Marriott to financial risk if these partnerships have financial trouble -- and a few already have. Last December, for example, Marriott was forced to absorb an estimated $80 million in losses to cover cash advances made to several troubled partnerships.
Marriott plays down the potential for problems in other partnerships. Changes in the federal tax code in 1986 have made partnerships sold since then less of a financial risk for Marriott, said David Chichester, Marriott's assistant treasurer.