When hotel owners are ready to buy their next asset, they should take time to consider the conversion opportunities offered by the brands.
Selling a hotel requires more than hiring a broker, creating an offering memorandum and installing a so-called “for sale” sign.
There are a number of factors a seller should consider to realize the maximum selling price. One of them is identifying items a buyer would potentially need to invest in post-closing and decide whether to address them before bringing the property to market.
A smart buyer will look not only at the existing or new brand-required property-improvement plan, but also the condition of the physical plant itself. That reality means there will inevitably be components—based on the hotel’s age—that must be dealt with, either prior to the sale or calculated into the property’s asking price.
Increasingly savvy investors will bring a team to review aging equipment during the negotiating process. They will create spreadsheets that look at the life expectancy of items such as boilers, elevators, HVAC and more. Any equipment that will need to be replaced will be factored into their first five-year budget and will directly affect how much the hotel will sell for. They’ll also take an in-depth review on potential saving on operating costs. A few examples of this could be whether or not the property is leveraging energy savings from LED fixtures, water usage and mechanical efficiencies.
Additionally, buyers will need to understand franchise requirements for the current brand on the hotel, or to prepare a scope for a potential rebranding. This means potential purchaser must factor in how much time is left on the current brand refresh cycle when deciding on offer to submit. The seller can avoid this point of negotiation by recognizing that expectation into the asking price.
Impending brand initiatives are critical when selling a lodging asset. Initiatives such as new technology, change in television sizes, tub-to-shower conversions, recently enacted signage requirements, exterior requirements and other enhancements beyond the typical refresh requirement are also considerations buyers will contemplate when making an offer. This is an opportune time to leverage the expertise of a brand representative on possible PIP requirements to be completed post-sale. If not, the buyer must undertake this effort during the due-diligence period so they understand what the brand will ultimately expect as part of the new franchise agreement.
The same rules apply if a brand conversion is being considered, however this PIP scope is typically required to be completed prior to or shortly after the brand change. Also depending on the viability of market, how difficult it is to build new due to a market’s barrier of entry and how anxious the franchisor would like a particular brand in the selected location, there can be flexibility on brand requirements. It is a buyer’s goal to look for a value-add when acquiring a lodging asset, and on conversions opportunities this new brand is expected to provide a higher ROI. However, the brand being considered must be available in that market.
We are working on an asset where the franchisor is allowing the property to be referred to “white label” during its transition state. This enables the hotel to receive the benefits of the brand’s reservation system before officially converting to the flag. As long as the required upgrades are completed per the contract and prior to the agreed completion date, the white label will be in effect until the flag is switched on. This method of conversion is the first time we have experienced this type of brand change. If successful, it’s maybe a future trend to look out for.
When selling an asset, expect some negotiations from the buyer. While it’s the buyer’s duty to review the hotel and brand’s needs, understanding the asset and brand requirements will allow the seller not to expect an exaggerated value when going to market.
By focusing on the mindset of the buyer and understanding their expected costs post-sale, sellers will be able set a price point that is not just fair to both parties but also removes purchase price retrading or other obstacles. This hopefully will help accelerate the sales transaction.
Stephen Siegel is principal of H-CPM (Hospitality CPM) and a proven professional in the areas of design, engineering, contractor negotiation and project management for new construction and renovation projects. He earned both a bachelor’s and master’s degree in construction management from the University of Florida.
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