A hotel owner’s bill of rights
 
A hotel owner’s bill of rights
22 FEBRUARY 2017 8:25 AM

Hotel owners can sometimes be underappreciated by management companies.

Editor's note: This is article five of a six-part series on hotel asset management.

Often the understanding of and empathy for the point of view on how owners view hotels from an investment perspective can be overlooked by brands, management companies and senior leadership at the unit level.

In my experience, most management companies and property-level management teams have little appreciation for what it means to be a hotel owner.

While it’s true that management companies—both branded and independent—have been owners, in an era where “asset light” is the favored strategy, it is all too often the case that hotel investment is merely a means to an end. That is, ownership is de minimis and/or temporary and intended to secure a long term management contract rather than being the sole reason of the investment.

The so called “sliver equity” was never really a true investment in real estate since the management company would do just fine economically (fees) even if they never made back a dime on their investment—especially since their equity was almost always accompanied by more onerous contract terms. If you doubt this logic, why do you think key money has become the preferred “investment” vehicle for securing management contracts? It’s clear that management companies have given up any pretense that sliver equity aligns the interests of owners and operators.

A few important points to remember about the fundamentals of real estate finance:

To achieve a 25% rate of return, you must effectively double your equity every 2.9 years (look up the Rule of 72). Then there is the “time value of money.” That is, money received at some future date is less valuable than money received today because it must be “discounted” for risk and inflation.

So, getting a big payday years in the future when the hotel is sold is not the windfall it appears to be once the sale proceeds are “discounted” back to “present value” to account for this time value of money.

Capitalization rates—and their reciprocal (called the multiples)—are a typical method used to calculate the value of income-producing real estate. An 8% cap rate would equal a 12.5 multiple (1 ÷ 0.08 = 12.5). So, if a hotel would sell at an 8 cap, every $1,000 in additional NOI would equate to $12,500 in incremental value for the owner upon sale.

Hotel ownership is a risky proposition—a reality that is too often ignored or underestimated by management.

The bottom line is this: If a hotel investor is assuming all this financial risk while providing an opportunity for a brand to penetrate a market/gain distribution and giving a brand/management company a stage on which it can demonstrate its value in the marketplace, then the owner should be entitled to an appropriate risk adjusted rate of return. Owners should also receive a reasonable say in how decisions are made, how rewards are divvied up and how risks are born, and some respect/deference in the context of how the brand, the management company and the property management team behaves.

This is the premise behind the hotel owners bill of rights, which is as follows:

Hotels owners have the right…

  1. To make a reasonable “risk-adjusted” return on their investment.
  2. To have reasonable approvals over how their investment is managed—and to expect managers to make rational business cases to obtain those approvals.
  3. To be treated with respect and deference as opposed to indifference or, all too often, disdain.
  4. To be upset when their asset is going off the rails—and to bring in third parties to intervene.
  5. To challenge physical and operating standards that benefit the brand at the owner’s expense without benefit to the owner’s hotel.
  6. To have their interests be senior to that of the agent/contractor they hire in good faith to run the business.
  7. To have management just as focused on expenses and bottom line in the good times as they are in the bad times.
  8. To open honest and timely communication on all matters relating to their hotel (including accurate and timely financial reporting).
  9. To have access to all information relevant to the operation and marketing of their hotel except information which can be reasonably demonstrated to be proprietary to the manager or the brand.
  10. To be protected against the adverse impacts of competitive hotels managed by the operator or bearing a brand that is part of the family of brands of which their hotel brand is a part.
  11. To be represented by a knowledgeable hotel expert who advocates aggressively, albeit reasonably, for their best interest (i.e., an asset manager).
  12. To dedication, focus, effort and a high standard of care from both corporate and property level management with the goal of optimizing cash flow, asset value or other ownership objectives.

This list should occupy a prominent place in the offices of hotel managers and serve as a reminder of who really pays your rent and enables you to put your kids through college.

I would love to hear your views and/or additions to the Bill of Rights as CHMWarnick intends to republish this list sometime in the not so distant future.

Richard Warnick is Managing Director and Co-Chairman of CHMWarnick (“CHMW”), the leading provider of hotel asset management and owner advisory services. The company asset manages over 60 hotels comprising approximately 25,000 rooms valued at roughly $15 billion. CHMW’s owner advisory services cover virtually every aspect of the hospitality industry, and all phases of a hotel’s lifecycle, including ground up development and repositioning. The company is currently providing development advisory services for client hotel and resort projects valued at over $3 billion. CHMW has offices in Boston, Phoenix, New York, Los Angeles, San Francisco, Fort Lauderdale, Minneapolis, and Honolulu. For more information, contact 978.522.7000, visit CHMW’s website at http://chmwarnick.com/or follow us on LinkedIn www.linkedin.com/company/CHMWarnick or on Twitter @CHMWarnick.

The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Columnists published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.

1 Comment

  • William David Oliver February 22, 2017 11:41 AM Reply

    Rich, great beginning to a needed list. Please consider adding.
    Right of the owner to have
    1. transparency regarding all marketing activities, plans and initiatives
    2. Clear billing regarding all expenses on monthly management fees and chargebacks

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