How negotiation, timing and labor factor in to PIPs
 
How negotiation, timing and labor factor in to PIPs
05 APRIL 2018 8:21 AM

In an era of high labor costs, new tariffs and shorter windows for completion, property-improvement plans can be a challenge. Experts share best practices for how to stay on task. 

ATLANTA—Property-improvement plans are a big part of the relationship between a hotel brand and owners, and speakers on a panel at the recent Hunter Hotel Conference offered best practices for navigating PIPs in the current hotel environment.

There is flexibility and room for negotiation
While PIPs might seem like daunting documents handed down from on high, speakers said there often is flexibility if you approach it the right way.

“We take the (brand-issued PIP) and use it as a roadmap,” said Harry Wheeler, principal of Group One Partners, a hospitality design, architecture and procurement firm. “We typically see a 25-page PIP, and we’ll convert it into a tracking document. Specific brand requirements that have an immediate need are have-to’s. Everything else might be a want-to—it’s all part of the negotiation. What can we do to improve the property but still keep within the guidelines of the PIP?”

Paul Breslin, managing director of Horwath HTL, said it’s helpful to always think about your asset’s highest and best use, and how you can align those things to meet customer needs and be profitable.

“Read the brand (PIPs) for what they’re trying to achieve and be on point with that,” he said. “Be the brand. Don’t sign on as a Comfort Suites and then try to make yourself a Tryp.”

Keeping clear goals in mind for achieving the big-picture goals of a PIP can help hoteliers see where they want to negotiate and what might not be worth it, he said.

“You may find (the brand) is trying to achieve something in your best interest that may be a little different, but may end up better for you and for them,” Breslin said.

Still, knowing which battles to fight can help protect an owner’s investment.

“We’re part of a franchise system, and we believe in the power of the franchise,” said Craig Amos, EVP of capital investments for Apple Hospitality REIT. “We’ll kick and scream along the way, and in some cases the brands do (bend), but you have to be able to strike a balance and push back in places.”

Breslin said it’s about picking battles.

“I don’t like the silly stuff—like if you just bought 55-inch TVs and the brand comes in and wants 65-inch TVs, that’s a battle to choose,” he said. “But if you have tiny, old TVs, don’t fight it. Also, don’t fight Wi-Fi upgrades. It’s appalling when people fight that one.”

In other cases, speakers said it helps to know your guest mix well, such as in the case of brand-mandated tub-to-shower conversions, which can be pricy.

“That’s a good one to have a strategic plan and know your customer-use profile,” Breslin said.

Timing is key
PIP pricing can be tricky business, speakers said, and it’s important to pay attention to the details.

“In the very beginning, the PIP will roll out before you purchase the asset, and pricing in the beginning gets it established,” Wheeler said. “Deciding your negotiation points early is key.”

Amos echoed that statement.

“Sometimes sellers are proactive and have a PIP in place, while sometimes as buyers we’re calling for one,” he said. “Once the transaction happens, the PIP is attached to your franchise renewal, and it’s much harder to change. If you can, negotiate (the PIP) before the deal is finalized.”

It’s also not always cut and dried when it comes to who pays for the PIP.

“The seller pays (to have the brand draw up the PIP), so they’re going to bake that into the sale price,” Amos said.

But be mindful of how that cost is borne out, Breslin warned.

“Buyers will often try to deduct the cost of the PIP from the sale price, then after they get (the asset), they’ll renegotiate the PIP with the brand and it’s less,” he said.

Labor and planning go hand in hand
Panelists said planning early is extra important these days, not just for organizational purposes, but to manage around the scarcity of skilled labor.

“It’s extremely busy out there in the construction world, and labor isn’t that readily available because people are busy,” said Ben Wallace, president of River Ridge Renovations, a full-service contractor. “A proper plan from the beginning is key because (furniture, fixtures and equipment) needs more lead time, for sure.”

Wallace’s company has its own crews, which he said is an asset because field labor is scarce.

He and Wheeler agreed that labor and materials are costing anywhere from 5% to 10% more on average.

“That depends on the market, too,” Wheeler said. “We’re in more primary urban markets, and there you might see a 25% increase (in costs) over the last year to get things done.”

Those costs and hiring factors also contribute to overall job length, Wheeler said.

“We’re struggling with the overall schedules,” he said. “We may get a 12-month window where the PIP needs to be completed, and the pricing and (finding the team) has to happen in a very short amount of time, and we’re not making the first window. We’re seeing projects drag out an additional calendar year, which is a burden.”

Despite these challenges, all the panelists agreed that it’s most important to approach PIPs with your end goal firmly in sight.

“It’s not just about carpet; it’s about what you’re trying to achieve,” Breslin said. “Am I selling the asset or keeping it? Am I up-branding it? Everything starts with that strategic plan and then the rocks fall into place.”

Planning early and committing to the best people and products definitely saves time and money in the long run, Amos said.

“The biggest cost is displacement and disruption. The single biggest thing we could be doing better is starting earlier and planning better.”

Keep an eye on the news
While labor cost and availability is driven mostly by individual markets, the panelists said it’s important to keep an eye on bigger-picture economic trends that can have an impact on the hotel construction and renovation industries. Sitting at the top on that list is the U.S. government’s new tariffs on most imported steel and aluminum.

Wheeler said the impact tariffs have on materials cost might mimic what the industry has seen during times of shortages, but it will have a different twist this time.

“There may be a premium on the material, but the majority of our costs are labor,” he said. “So if there’s a bump in materials cost, it gets diluted across the budget. But where we’ll see (the impact of steel tariffs) most is in FF&E. Many brands are doing products with exposed steel and steel legs and that sort of look, and I think we’ll see an impact on FF&E costs at that point.”

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