Hotels: Doing one right - Posted by ray@lcorn

Posted by Eric C on September 17, 2002 at 20:36:40:

Hi there Ray -

Love the post. Great insight there. And those criteria are valid for a lot more than just hotels.

Thanks for that article – it goes in the “save” file.

Eric C

Hotels: Doing one right - Posted by ray@lcorn

Posted by ray@lcorn on September 17, 2002 at 16:35:42:

Hello all,

I just read an excellent article about how to go about buying hotels by one of the preeminent authorities in the field, Stephen Rushmore. Good words to read and heed for real estate investments in general, written by a man who has learned it in the trenches. I’ve copied the article below:

Making The Ideal Hotel Investment

By Stephen Rushmore, MAI, CHA, CRE, president and founder of HVS International

I have been helping people buy and sell hotels for the past 30 years and also have acquired a few for my own account. Hotels are complicated, high-risk investments that require specialized operational expertise or you will run the risk of quickly losing a substantial amount of capital. Over the years, I have developed a set of criteria that I use for making hotel investments and would like to share this information with you.

Criteria For Making Hotel Investments

Never buy a hotel unless it has at least an eight-month season.
In a seasonal market, it is best that the in season months are consecutive. Shorter seasons may work only if there is a sufficient average rate premium during the high season. Examples of markets that enjoy long seasons include London, Paris, Hawaii and Lake Tahoe, Nevada.

Select markets that enjoy visitation from several market segments.
Avoid hotels that depend on just one market segment such as commercial, group and leisure for the bulk of their demand. This provides relief from a downturn in one travel sector. For example, Boston’s hotel occupancy decline caused by the shrinkage of technology demand has been cushioned somewhat by an increase in leisure travel to the area.

Never be dependent on just one demand generator.
What happens when an airport closes, a theme park goes out of business or a company is acquired and its headquarters are relocated? These are examples of hotel markets that suffered due to the demise of a primary generator of hotel demand.

Never short-cut your due diligence investigation.
In the United States we call it, “Buyer Beware.” You need to thoroughly understand the property’s condition and exactly what you are buying. An engineering study is essential. I have seen what appeared to be habitable hotels rendered totally unusable because of underground environment pollution, interior mold infestation, structural damage from termites and rodents and properties that do not meet the current building codes. A new hotel in Wilmington, Delaware, was not permitted to open because the developer added extra guestroom floors and failed to comply with the local building codes.

Look for hotel markets with high barriers to entry.
Overbuilding is a problem throughout the world. Markets such as Dallas, Atlanta, Salt Lake City and Phoenix, where it is relatively easy to acquire hotel zoned land and build a lodging facility, tend to become overbuilt during periods where financing is readily available. In cities such as London, Hong Kong and Beverly Hills, California, the barriers to entry are high.

Investigate your management company.
If you plan on using a hotel management company be sure you fully understand its capabilities. That means obtaining financial statements for similar hotels it operates and determine whether revenues are maximized and expenses are in line. If it refuses to share operating performance, find another management company.

Match the brand with the product.
Hilton is excellent at attracting meetings and conventions, while Days Inn operates better in the leisure market. When branding a hotel you need to understand which brands attract which type of travellers and select the brand that will generate the most business for your hotel. Be careful of brands that still are trying to develop a unique identity. With all the brand consolidation you need to investigate possible adverse impact issues where you may be directly competing against other brands within the same chain.

Remember you will need to sell your hotel someday.
When you plan to buy a hotel you also need to plan for the eventual sale. To have the greatest flexibility to find the right buyer, try to structure your acquisition so you can easily terminate the management contract, the franchise agreement, assign or prepay the mortgage, buy out your partners and minimize your tax exposure.

Following these criteria for making a hotel investment may not always guarantee success, but they do illustrate some of the potential pitfalls that I have experienced over the years. Good luck and may your next hotel investment be successful.

Stephen Rushmore, MAI, CHA, CRE, is president and founder of HVS International, a global hotel consulting firm with offices in New York, San Francisco, Denver, Miami, Dallas, Vancouver, Toronto, New Delhi, Singapore, Sao Paulo and Buenos Aires.