a commodity, partly because third-party booking engines make price
the key determining
factor in booking a
room. Loyalty programs offered by the
top brands are another major influence.
Business travel has
decreased, and other
travelers have traded
down from full-service
hotels to limited and
select-service offerings. It is still unclear
if these travelers will
return to full-service
hotels when the economy recovers further.
Although numbers certainly have increased
in select areas, most
markets are nowhere
near where they were
in 2007.
« HOTEL continued from page 24
What are lenders financing?
Many investors and lenders forget
that hotels are market and product-
type specific. Why are lenders eager
to finance limited-service hotels lo-
cated on interstates where the only
demand generator is drive-by traffic?
In this instance, lenders focus almost
solely on the strong net operating in-
come and franchise affiliation, failing
to notice that: the selling price is close
to replacement cost; franchise agree-
ments are nearing their end; and de-
mand generators are
not diversified.
“Although
some niche
investors are
seeking hotels
to convert to
senior housing
or extended-stay
accommodations,
these buyers
are few and
far between.”
In many cases, owners opt to pay a
market-base management fee (
usually 3 percent) with a strong incentive management fee.
2. past experience and future strat-
egy: When comparing manage-
ment companies for a potential
contract, owners should analyze
the manager’s current portfolio
and review their experience op-
erating similar assets. Key pieces
of information to review include:
operating margins, market pen-
etration and overall profitability.
Owners also should probe poten-
tial operators on their sales and
revenue-management approach.
For example, an owner might ask,
“What is your strategy for rev-
enue growth and increasing mar-
ket share?” or “Do you centralize
your accounting and/or revenue-
management departments?” It is
important to understand how they
plan to operate the asset to maxi-
mize the investment. Centralizing
certain functions like accounting
and/or revenue management de-
creases overhead expenses at the
property level. Accounting and
revenue management can cost
$5,000 a month, while an account-
ing and revenue-management de-
partment on the property can cost
$12,000 a month for just salaries
and benefits. By investigating
these issues, owners can weed out
weaker candidates.
“The right partner
will help maximize
the value of the asset.”
including negotiating fees and
property-improvement projects.
Another area to research is the operator’s relationships with other
owners. Advise your owner clients
to ask prospective management
companies for references.
These are just a few areas to consider when dealing with a potential
operating partner. Brokers and their clients do their due diligence when buying or financing an asset; they should
be sure to do it when choosing a management company, as well. Choosing
the right partner will help maximize
the value of the asset — which means
not only a better bottom line but also a
better deal when financing. •
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Largest
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