July 1, 2016
As a hotel broker, one point of contention I see in many deals is the arrival of the franchise property improvement plan, a.k.a. the PIP. Hotel franchise companies often take advantage of the license transfer to require more extensive renovations than is required of the seller to continue with the flag. Franchise companies know that hotel buyers can obtain financing to cover larger renovations included in the acquisition loan. In fact, for the buyer, financing the PIP in the new mortgage is indeed the best way to finance the cost of a PIP.
However, a large transfer PIP can come as a surprise to both buyer and seller, especially if the seller had no outstanding PIP list items. The contract sale price is negotiated with an expectation of the cost of franchise required renovations in mind. When a PIP arrives larger and costlier than expected, it can disrupt the deal. If the actual PIP is significantly higher than the expected cost of the PIP, the contract price may be re-negotiated as a result.
It is sometimes possible to negotiate or delay certain PIP items with the franchisor. While for various reasons, the seller and/or buyer may consider this strategy, it is usually in the new owner’s interest to renovate the hotel and complete the PIP as soon as possible after closing.
While a hotel may be performing well at purchase, delaying improvements may jeopardize current market share or future growth. Meanwhile a renovated, updated hotel can usually drive rate and occupancy. The goal with any renovation is to make back what was spent and more, adding to the overall ROI. Increased revenue, and renovations also increase the value of a hotel. Franchise required PIP items usually do just that, although sometimes there are simply brand standard items that don't really add to the guest experience, but simply distinguish the brand from other. Those kinds of PIP items are prime targets for owners to negotiate or delay, whereas all renovations that improve the guest experience and satisfaction, should be accepted and done with enthusiasm.
One advantage of SBA 7A and SBA 504 loans is that they can include PIP and renovation funds in the mortgage. So it's my advice to buyers to not begrudge the PIP, and include PIP costs and funds for any non PIP renovations required in the acquisition financing when possible, and 'git it done'.
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'Til Next Time,