Nationally, hotel performance is growing and the hotel transactions market is strong. Many analysts think there is still time in this extended market cycle before the next down turn. According to Hotel Management, “The hotel industry is predicted to grow comfortably through 2018 and for the next two years. According to STR, high occupancy levels should provide leverage to achieve attractive ADR increases for the next two years in select markets”. If you have been considering investing in a hotel purchase, now is a great time to do so.
Whether this will be your first hotel or just the latest expansion of your portfolio, here are 10 tips to consider before and during due diligence process to set your business up for success:
Look to purchase a hotel marketed by an experienced hotel broker
Hotel deals which involve an experienced hotel broker:
- Are researched and professionally presented by a licensed real estate broker/agent who is also experienced in hospitality, and therefore are less risky.
- More likely to close than deals made directly between seller and buyer. You don’t waste time on a deal that will not close.
- Have more motivated sellers- an owner offering an “off market” hotel for sale is typically less motivated to sell and has no open market check on value.
Look for a well-maintained cash flowing property
Focus your search on a hotel with steady cash flow and good condition; unless, you have experience with a major hotel renovation and repositioning. Major renovations and PIPs require skills to manage timing and storage of product deliveries as well as managing potential cash flow shortfalls should the renovation take longer than expected. Potential pitfalls of a major renovation include excessive room closures, negative guest reviews, or even losing a large client due to noise and construction. Hoteliers who are well experienced in major renovation and repositioning of hotels can reap great rewards of big equity gains; but, you should know if your skill set and experience are up to handling that increased risk. New construction also carries far greater risks than buying a performing hotel. It can be rewarding, but it is a totally different business than operating a hotel. More on that in another BLOG!
Look for upside opportunity
Even hotels with strong existing revenue and profitability can have upside opportunity. If the owner of the hotel is not on-site, called “absentee owner”, there could be potential savings if you plan to work on-site at the hotel. For instance, on-site owners are more likely to order the correct amount of supplies without over ordering, can decrease many expenses, and on-site owners who have the correct training can also pro-actively manage rate to increase revenue. There may still be opportunities to increase occupancy, average daily rate, corporate or group sales, and decrease labor as well as cost of goods through efficiencies and with skilled management, either with a general manager or management company.
Renovate at time of purchase
If the hotel you are purchasing requires small or large renovations, it’s to your advantage to structure the PIP funds in the mortgage for renovations. Depending on the loan program, it is cheaper and easier to get financing for renovations and upgrades in the mortgage than to get financing later down the line for renovations. Plus, paying for renovations out of cash flow can cause delays and inconveniences. Lastly, the time of management change is the most powerful time to create a new image for the hotel. The best way to signal a management change is to change the look through new furniture, fixtures, and equipment, in the public spaces and the guest rooms. To know which loan programs can finance renovations and PIP costs, go to https://www.hotelloanhub.com/faq.
Keep and nurture skilled employees
When a hotel is running efficiently and has strong net operating income, most of the employees will be worth keeping. It will make your life easier without sacrificing customer service. Take ample time to review employee performance before laying off or firing employees and know your rights and responsibilities in your state as an employer. Hotels are successful or not successful in large part due to the competency of the staff. Lead your team, use all brand training programs, track and motivate performance, and reward your best performers.
If full service, hire an experienced F&B manager, or lease out the Food & Beverage facilities
An on-site restaurant or bar can be profitable and even drive increased occupancy at your hotel. However, restaurants can also be a money pit if not managed well. Focus your time on what you know well, hotel operations, and hire someone experienced in running a restaurant to manage your F&B.
Be wary of mortgage brokers who are not lenders that charge upfront fees
If you are required to pay a fee just to get a term sheet with no guarantee of a commitment letter, you could be risking your money and wasting your time. Do NOT accept a term sheet from anyone BUT DIRECT LENDERS, and do not pay big upfront fees to mortgage brokers. Mortgage brokerage fees should be paid at closing of the loan.
Use Hotel Loan Hub to compare multiple loan term sheets with no up-front cost
Hotel Loan Hub is an easy to use software that will match your hotel loan with interested hotel lenders. You will complete one online application then upload documents on the due diligence checklist and the lenders will review and submit competitive loan terms. Compare multiple loan terms side-by-side with no commitment and no fee.
After selecting your lender, Hotel Loan Hub software facilitates lender underwriting to get to closing sooner. At closing if the loan is not an SBA 7A loan, you pay a flat $19,000 software usage fee which offers savings over the traditional mortgage brokerage fee on most loan amounts for a hotel. Many times, this software usage fee can be financed in the new loan, saving you even more out-of-pocket costs. Check it out at https://hotelloanhub.com.
Use an experienced hospitality lawyer
Use a lawyer with strong hotel transaction experience to review the contract and handle title work, etc. A lawyer that is not experienced in hospitality will require more time and may focus on the wrong issues and may overlook key hotel factors such as advanced booking deposits, post-closing adjustments, F&B inventory, or franchise considerations. Also, be sure the attorney has thorough knowledge and understanding of all the applicable laws pertaining to the state in which the subject hotel is located. Laws can vary greatly from state to state, and unnecessary delays may occur in closing the loan if the attorney is not familiar with or misunderstands those laws, regulations and practices.
Use time saving technology and save money in operations
Modern software offers labor and cost saving solutions for hotel operations. Digital marketing cannot be underestimated for getting direct sales, as well as the OTA side. Also, back-office software can provide efficiencies for your staff and more business intelligence for making profitable decisions. One such solution is Hotel Investor Apps Accounting Software. Hotel Investor Apps offers advanced accounting features with built in PMS importing, and 80+ integrations to save time. Plus, reports, dashboards, and workflows are completely customizable. Learn more at https://hotelinvestorapps.com.
Till’ next time,
– Charlie Fritsch, President, MBA Hotel Brokers & Jaime Goss, MBA Hotel Brokers