Hotel Investments: Part 1

HOTEL AQUISITION

PLANNING STAGE:
Select region of country
Narrow selection to cities or market areas
Look for market niche
Look for product / available properties
Perform preliminary economic market study & appraisal

IMPLEMENTATION STAGE:
Tie up property with letter of intent, option or contract
Negotiate terms of sale
Go to contract on property
Line up operator
Line up franchise
Commission a formal economic market study & appraisal
Line up mortgage financing
Line up equity financing


HOTEL DEVELOPMENT

PLANNING STAGE:
Select region of country
Narrow selection to cities or market areas
Look for market niche
Look for product / available sites
Perform preliminary economic market study & appraisal

IMPLEMENTATION STAGE:
Tie up property with letter of intent, option or contract
Obtain zoning and permits
Assemble project team
Line up operator and franchise
Prepare architectural plans and estimate project costs
Commission formal economic market study & appraisal
Line up mortgage
Line up equity capital

SELECTING MARKET:

Proximity to home office: Hotels are labor-intensive that require constant supervision and direciton. When aquiring or developing a facility its advisable to keep it close to home so that it can be given full attention.

Signs of economic growth: Regions exhibiting strong growth trends are generally better suited for hotel investments than regions that are economically stagnant

Competitive environment: Carefully evaluate regional supply of competitive facilities in conunction with economic growth. Even if economic trends are favorable, an adverse competitive environment brought by the oversupply of hotel rooms can make a region undesirable location for aquiring or developing a facility

Evaluating market area: Look for situations that exhibit a need for specific hotel product. Consideration is given to protective charecteristics known as barriers to entry - which include restrictive zoning or license approval process, limited suitable land or acquisition opportunities, rapidly escalating construction costs and unavailablility of appropriate chain affiliation or management company. Unique market position can quickly change to overbuilt position if no barriers to entry exist and other competitive products can enter the market without difficulty.

Market niche: May be necessary to reposition an existing property. Hotel can be repositioned through a renovation or upgrading, changing franchise affiliation or introduction of new management.

PROPERTY & SITE SELECTION:

Once type of hotel is determined on basis of evaluation of market niche, investor must start looking for available hotels if an existing property is desired or suitable sites if a new development is desired

When looking for existing hotel, investors use services of broker whose practice is concetrated in the lodging industry. When looking for potential hotel sites, best to use a land broker familiar with local area - particularly the zoning regulations, building codes and related laws. One of the difficult aspects of accomplishing a hotel development is obtaining necessary zoning changes and variances. Knowledgeable land broker understands these issues and can direct developer to suitable sites requiring minimal zoning changes and approvals. Brokers are compensated by seller with commissions based on a % of sales price - generally 1-4% for existing hotels and 4-10% for vacant land.

PRELIMINARY MARKET STUDY & APPRAISAL:

Before any $ is commited to the purchase of property, investors perform or commission a thorough preliminary economic market study and appraisal. Information yielded by this analysis is used to determine the type of hotel and facilities best suited to the location and type of management and franchise affiliation that would be most effective. Another important product of a market study is a forecast of revenues and expenses that the subject property can be expected to realize. This information is vital to the buyer during the negotiation of sale of property because it can be used to determine the value of facility.

First step in evaluating a proposed investment is to analyze the site of the proposed or existing property. The suitability of site for hotel operations is important determinants of success of investment. Site analysis involves such factors as physical suitability of land, access and visibility and availability of utilities and other services and applicable zoning regulations.

Once site is selected, the area in which it is located must be evaluated. This evaluation includes both immediate neighborhood o fthe site and its market area. Extent of relevant neighborhood can be usually determined by simple observation of surrounding area, including roads and land-use patterns. The market area is hardeter to identify because it involves a larger area and depends on more factors (competition/travel patterns). Another important step is an examination of the supply of lodging facilities in the area. Before success of proposed investment can be determined the appraiser must determine the degree with which other hotels in the area would compete with the subject property.

After supply of hotels is evaluated, existing demand must be quantified to determine the ability to support new hotel or acquisition of existing facility. Demand analysis can be performed using - demand generator build-up approach or lodging activity build-up approach. In addition to local supply and demand, appraiser must determine the competitive positions of all local facilities and how the subject property would fit into this picture. This involves determining current market share, average room rate and occupancy rate of existing competition. Once this determination is made, appraiser can forecast the variables for subject property.

Final step in preliminary appraisal is to forecast the income and expense of the proposed hotel investment. Income projection focuses on hotel's main categories of revenue - such as rooms, food and beverage and telephone income. The expense projection examines hotel's main items of expense - such as rooms, food/beverage, telephone, administrative, management and marketing costs.

A property valuation along with forecasts of revenue and expense allows appraiser to make recommendation regarding the feasibility of proposed investment. First step in property valuation is to determine overall worth of subject property. This step entails appraising appraising existing hotel or forecasting value of proposed property. This value is contrasted against the cost of the property which is either the cost of acquisition or construction.

FRANCHISE AFFILIATIONS & HOTEL MGMT

Two important steps in investment process are obtaining a franchise affiliation and selecting a hotel management company. Franchise affiliation is important decision in investment that should be made early in the acquisition or development process as possible. Franchise company will want the opportunity to participate in decisions regarding designs and specifications for a lodging facility because most have companywide standards that must be met by each of their properties. An early decision also enables owner to accurately determine the cost of the franchise affiliation and use the information when analyzing economics of the project.

PROPERTY MANAGEMENT

Management company should be retained as early as possible. Management company should be brought in before any significant amount of time is spent on architectural drawings so the mgmt co will have opportunity to provide suggestions regarding the layout and general design of the facility. Securing mgmt co is important for acquisition because the company will often be able to generate valuable information regarding projected operating performance of the property. Mgmt company will indicate changes that must be made to the property if improvements are required in order to meet the company's operating standards.

MANAGEMENT CONTRACTS

Proper execution of management contract is vital step for the development of the investment. This document spells out relationship between owner and operator. Each party must be able to negotiate the contract with full understanding of the consequences of including or disallowing a particular provision. If either party is permitted to include provisions that are disproportionately favorable to its position the working relationship between the parties can be damaged. Basic provisions include - fee structures, financial reporting, budgeting to termination, assignment of employees and indemnification.