Actual Project Development Mishaps

• A hotel project misses the opening date by 25 months with no work stoppages or financial trouble to blame.
• A 5-star hotel opens with the banqueting facility located 350 yards from the banqueting kitchen.
• A business hotel opens with elevators stopping one floor short of the penthouse level providing �stair only� access to what should have been the best rooms in the house.
• A large luxury convention hotel opens with no elevator access between convention facilities and car parking facilities.
• An exclusive luxury hotel built out over the water uses unwashed sea-sand in the concrete, resulting in immediate corrosion of the re-enforcing steel in all structural columns.

It is not too difficult to imagine a hotel development project spiraling out of control.

Cost overruns and construction delays can easily turn a profitable project into a development nightmare, of ten losing millions of dollars in the process. The careful selection and engagement of a professional Project and Development Services manager who represents the owner�s best interests will be the most valuable project cost allocation made in a hotel development.

We have outlined the �Top Ten Pitfalls� encountered in hotel development.

Pit fall # 10   Building A Dream Rather Than A Financial Winner?

Issue

Historically, many hotels were developed as trophy assets, often with little regard to the underlying economics of the development . While these types of developments were common in the late 1980s, they have by in large become the exception today.

The first question that needs to be asked is why build a new hotel. The answers will range from financial to fantasy.

The first step in any development process is to �prove� the vision; the most successful hotel developers set aside a judicious amount of time in the development cycle to validate their ideas.

Solution

The first and indispensable step of a project delivery process is the confirmation of the owner�s goals and objectives. Even if they have already been established, a thorough review of the goals and objectives is appropriate when a development team is retained. Constraints should be investigated to assure all budget and schedule risks are exposed. Objectives for image and costs must be tested in the market to assure expectations can be met. The owner�s decision-making process, financing requirements and similar concerns will be explored to unearth unforeseen risks.

Project planning, including the selection of all consultants, needs to be reviewed and coordinated from the beginning. The financial objectives of the development need to be established and clearly communicated, including the holding strategy, return on investment, equity available and the likelihood of raising construction and long-term financing.

As a development team will be responsible for the implementation of the owner�s decisions made early in the process, it is beneficial to introduce the development manager early in the development cycle to avoid divergent agendas of architects, contractors, operators and owners.

Pitfall # 9   Having The Wrong Entity Driving The Process � Should It Be The Owner, The Developer Or The Operator?

Issue

Very early in the development process, the owner must form their team. This team includes the owner, developer, architect, engineer, interior designer as well as other consultants unique to the project such as contractors, attorneys, financial advisers, appraisers and operators. Usually, there are three drivers jockeying for the lead position: the owner, the developer and the operator. All believe they have legitimate reasons for why they should spearhead the project.

Developers assume they should take the lead because they know how to convert the vision into a building. Operators think they should run the show because the hotel must be built according to specifications of their brand. Owners presume they should be in charge because their capital is financing the project. Although the team is assembled based on the owner�s concept, the developer and the operator each has a tendency to craft the agreement in a way that allows minimum interference from the owner.

The fact of the matter is that the owner should drive the process at all times and should be the ultimate decision-maker. After all, the owner is the risk taker and without his or her financial support, the project might remain on the drawing board. This does not mean that the owner should be involved in every detail of the project . Rather, it is assumed that the owner would have selected a competent project team and negotiated with the best suitable operator for the property.

Solution

To ensure the owner�s best interests, it is wise to assemble a development team with experience in completing complex hotel projects that can objectively oversee the development activity of a third party. To ensure a timely and successful delivery of a project , a qualified development adviser should initiate the following related processes that are critical to any development.
 

Pitfall # 8   Form At The Expense Of Function!

Issue

Unlike other types of real estate, the development of a hotel is the creation of a new business entity. Design decisions made early in the development process stay with the property for its lifetime and can become an operations benefit or nightmare. Decisions about technology, room size, meeting facilities, flexibility with current brand standards, and the mix of food and beverage must be the driving force in �future-proofing� a design so that the property remains competitive well into its future.

Solution

In order to achieve maximum value as well as budget control, a development team needs to ensure that a comprehensive construction estimate and updated project budget is prepared at the end of each design phase (Conceptual, Schematic, Design Development and Construction Documents). This process results in constant checks of the evolving design versus the project budget , which allows issues to be addressed while there is still time to adjust the design or the budget.

Throughout a project, a systematic value engineering approach needs to be adopted to maximize the cost/benefit impact of every dollar invested in the project . The goal of value engineering is to analyze every opportunity, recommendation or new technology/material during the design and construction phase that has the potential to �enhance� the project while maintaining budget and schedule control. Value enhancement can occur (1) when a project can be constructed more economically and efficiently from a cost and schedule standpoint; (2) when new products or more durable material is developed that will decrease operations and maintenance costs, and (3) when operators provide input on functionality, work flow and overall building performance.

The discipline of value engineering requires the evaluation of everything against a pre-determined set of criteria, which are established in the initial development phase with the owner.

Pitfall #7   Why Foot The Bill Yourself? � Get Local And Regional Civic Participation!

Issue

A hotel should ultimately be developed because it is financially sound and provides the type and quality of services that the market desires. By developing a hotel, the owner is contributing a tangible asset to a local community by providing additional tax revenue and gainful employment. In exchange for these benefits to the community, an owner/developer should take advantage of its privileged position and get support from the local government.

Although not always available, this support can take various forms, from building the access infrastructure (such as an access road to the hotel site) to tax incentive financing. The key is to ensure that all forms of available incentives are investigated and incorporated into the financial plan, if they are favorable to the owner�s overall goals and objectives.

Solution

During early due diligence on the project and the site, the owner/developer needs to be familiar with potential public incentives in the municipality where the project will be built. With the right approach, a developer can often obtain financial support from the local and federal government for the project . Following are a few of the options an
owner/developer should consider:

• Municipal tax free bonds
• Access infrastructure improvements
• Tax incentive financial (TIF) districts
• Federal historical tax credits
• Environmental clean-ups
• Beach restorations

Issue

Hotel projects are notorious for last minute installations of case goods and scrambles to complete interior finishes. The final push toward the opening deadline of ten forces contractors to cut corners to avoid financial penalties or liquidated damages for missed deadlines. Without defined project controls, the keys to the hotel are often handed to the hotel manager, only to find substandard materials and workmanship that create operating problems well after the contractors have moved onto their next project.

Solution

A comprehensive quality control program is the backbone to any hotel development and should focus on three primary goals: (1) knowledgeable design phase input, (2) clear communication of expectations to contractors, and (3) regular on-site inspections to review the construction and conformance to the quality standards contained in the design specification and, if necessary, formulate an aggressive program to correct non-complying work. As the project progresses, continual reviews of each phase of the project will minimize the final punch list and turnover process so project closeout can be expedited and hotel operations can proceed with minimal interference.

During the final phases of the project , it is imperative to coordinate the efforts of the general contractor and the local authorities to gain all necessary licenses and permits required to open the hotel in conjunction with the hotel operations plan.

The entire project team must be aligned to the goal of opening the hotel on time, with minimal remaining punch list items at the time of turnover to operations. Preliminary and final punch list procedures must be established early in the project to allow sufficient time for completion prior to turnover.

Prior to the expiration of all project warranties, inspections must be conducted to determine the existence of any warranted defects and arrange with the respective manufacturers and subcontractors to correct the defects prior to the expiration of the warranty.

Pitfall #5   Functional Obsolescence � Missing The Trends!

Issue

Now more than ever, hotel guests are being exposed to ever increasing service levels, design innovations and new technology. Hotel guests are traveling more frequently and are being exposed on a regular basis to the latest in hotel trends and gadgetry. The process of one-upsmanship is nothing new, but to build a hotel today without consideration of future trends may create an asset that soon loses value through functional obsolescence. The mega trends in the lodging industry continue to evolve. We are seeing a continued shift toward quality not quantity, such as the proliferation of boutique hotels offering a unique experience over the cookie cutter approach to corporate lodging. With this evolving landscape, it becomes important to the long-term profitability of a project that every effort is made to incorporate product flexibility in the initial design.

Solution

The time frame on large projects from conception to completion can take anywhere from two to four years. This time frame is a lifetime in terms of technology and means that the available technology, materials and techniques at the start of a project can be vastly different from those available at completion.

To ensure that the �latest thinking� is brought to bear on a given project , it is important to draw from global experience on asset management, project management and financing. It is critical to balance the financial objectives of the project with the overall financial objectives of the asset during operations. 

Additionally, as stated previously, the discipline of value engineering will ensure that new technology, materials, products and design changes will be constantly evaluated against the overall design parameters and incorporated into the project should an overall benefit be substantiated.

Pitfall #4   Back-Door Procurement�A Friend Of Mine Imports Beautiful Marble!

Issue

The procurement process needs to be expertly managed and tightly controlled until the last towel is placed in the guestrooms. The hotel FF&E procurement process is full of stories of kickbacks, inferior products being delivered late or the wrong product arriving at the last minute. The procurement process is a haven for cost padding and political and self-serving decisions that affect the hotel operations for the useful life of the products.

Solution

Cost control and quality can be maintained by implementing a coordinated FF&E procurement process including:

• Establishing the RFP process for procurement & installation providers and controlling the process all the way through.
• Challenging the interior designer, the procurement company and the vendors to evaluate and recommend best-in-class solutions to FF&E.
• Reviewing product data and samples proposed with the owner and the hotel operator to make sure they are in compliance with the client �s requirements.
• Developing a plan and coordinating the installation of FF&E in conjunction with the contractor�s construction turnover schedule and the operator�s training schedules on all elements of the project, including furniture delivery strategies and inventory security.

Issue

Without a clearly conceived strategy for implementing the project, together with experience, coordination and communication, a project can literally spin out of control. The financial implications that result from development pitfalls can be devastating. Following are some of the potential hazards:

• Labor disputes
• Legal disputes
• Less than ironclad agreements with general contractors and trades, allowing for uncapped price fluctuation
• Accumulation of delays, causing loss of business and increased construction costs
• Accumulation of change orders due to a flawed or incomplete design prior to construction
• Construction conflicts adding to delays
• Lack of contractor/trade warranties
• Non-bonded contractors and trades on the job
• Uncooperative neighbors
• Potential loss of business and goodwill

Solution

Experience is key to the hotel development process and qualified advisers can mitigate most of these issues with minimum involvement by the owner. The primary objective of advisers is to ensure that the owner�s best interest is met during all stages of development. To accomplish such a project, the development team must focus on the following:

1. Establishing benchmarks and performance targets:

• Assembling a design and construction team of best-in-class providers;
• Maximizing the buying power of each dollar spent on the project by testing, evaluating and expanding local contractor and subcontractor relationship negotiations to take advantage of current market conditions and discounts; and
• Challenging design solutions to ensure optimum value for construction dollars and efficient and economical future flexibility.

3. Mitigating risk and liability.

4. Retaining a high level of control:

• The control of a project�s schedule is essential to minimize cost overruns. Process control, scheduling and project management cost reporting systems put real cost containment into the hands of the project team and owner management.
• Expert management provides important initial feasibility information and manages the design and construction process to the interests of the owner. This will produce an end result that is consistent with the overall project goals and business plan.

Issue

Finally the hotel is built and almost ready to open for business. Often this is when the owner must feverishly scramble to secure all licenses and permits necessary to open the hotel. Time is money, and any delay in the hotel opening can be costly. Construction delays are one aspect of the equation. The other side of the equation is the lack of understanding and knowledge of the process for obtaining the necessary permits, licenses and certificates to open a hotel. The following list represents some of the required licenses and permits prior to opening:

• City Occupational Licenses
• County Occupational Licenses
• Certificate of Registration�Collection of Sales & Use Tax
• Business License (Rooms, Miscellaneous)
• Food & Beverage (Bars/Restaurants)
• Food & Beverage (Kitchens/Food prep areas)
• Beverage Licenses (4COPS/3M) (Florida)
• Special Tax Stamp (Retail Liquor Dealer)(U.S. Dept. of Treasury)
• Swimming Pool Permits (State/County)
• Elevator/Escalator Certificates of Operation
• Certificate of Balcony Inspection
• Boiler Certifications
• Certification of Fire Protection System
• Fuel Storage Tank Licenses
• Dry Cleaning System Permits

There is no excuse for not having all the licenses, certificates and permits in place upon completion of the development. These documents may require planning months in advance and should be an integral part of the development�s critical path planning. To ensure a smooth process of attaining the necessary licenses and permits, it
is important to remain in constant contact with the local government agency throughout the various development phases of the project. Issues are addressed during regular visits with the local inspectors and, therefore, do not accumulate over time to the point that they become unmanageable. Lack of communication translates into licensing delays.

Pitfall #1   Missing The Deadline�The Guests Are Knocking But Nobody's Home!

Issue

Project delays resulting in the postponed opening of a hotel can have many adverse consequences. In order to ease the financial pressure of the typical hotel start up, the sales and marketing team will begin to book association and group business 12 to 18 months prior to opening. The importance of establishing an opening date and completing the hotel on schedule is critical to avoid the cost of relocating group bookings and the associated negative publicity. The same can be said for the various publications and directories catering to the corporate and leisure travelers. If group
business cannot be layered in and publications and promotional material do not accurately reflect a hotel's opening, the hotel opening is likely to produce poor financial results.

Solution

Critical path planning and adherence to development schedules are imperative to a hotel project�s financial success. Managing the development schedule and assuring compliance requires that all interaction between the owner/developer, the hotel operator and the design and construction team are managed.

Management of the development schedule requires an intimate understanding of the owner�s decision-making processes, the creation of interim milestone dates with the necessary tracking process, and the necessary expertise to provide real time solutions to remedy construction delays.

To ensure that a hotel opens on time, many construction contracts will include performance clauses such as bonus incentives for early completion or liquidated damages as a penalty for late completion. Other steps that can be implemented to ensure timely openings include staged occupancy of critical components of the hotel. Typically kitchens, training facilities, computer rooms, and laundry and operating supply areas are brought online three to four months before opening, while guest rooms, front office and reception are turned over four to six weeks ahead of
opening.

The strict management of the development schedule, including establishing and tracking critical milestones, managing an �Action Item List� throughout design and construction and identifying and tracking long-lead items will result in a smooth ending of a long and demanding development process.

Jones Lang LaSalle�Project and Development Services Approach to Hotel Development

A successful Project & Development Services (PDS) team must provide expert management of all aspects of a project while acting in the owner�s best interests based upon clearly defined goals and objectives. Strategy, communication and experience are required to manage the design teams; to communicate on all aspects of the project; to juggle multiple financial objectives and expectations; to control phasing, budgets and schedules; and to meet unique hotel operating requirements. The primary goal is to deliver a project that fits the investor�s business plan ON TIME, ON BUDGET and WITHOUT SURPRISES.

The Jones Lang LaSalle Advantage

Jones Lang LaSalle�s Project and Development Services (PDS) brings a bottom-line business focus to our client�s project and property challenges on all project t ypes and industries. Our 400+ professionals are based throughout the United States and can implement customized and creative solutions that fit our clients' specific requirements while ensuring strategically smart solutions at the lowest cost and within the most expedient time frame. PDS services include development management, advisory, build-to-suit, interior project management, renovation & rehabilitation, move management, furniture project management, multi-site program management and strategic occupancy planning.

In addition to our expert management of the design, construction and relocation processes, we have uniquely integrated resources within Jones Lang LaSalle which can be deployed to handle any complex real estate issue, resulting in real quantifiable value�wherever our services are needed.

Jones Lang LaSalle Hotels, the world�s leading hotel investment services group, provides clients with value-added investment opportunities and advice. In 2001, its success story includes the sale of 7,972 hotel rooms to the value of US$1.3 billion in 39 cities and advisory expertise on 100,550 rooms to the value of US$26.3 billion across 255 cities.

Jones Lang LaSalle Hotels� services include transactions, mergers and acquisi tions, financial advice and capital raising, valuation and appraisal, asset management, strategic planning, operator assessment and selection and industry research.

Jones Lang LaSalle can offer a wide range of consulting, project management and development services specifically tailored to any hotel development.

Biographies of Contributors
 

Gregory Rumpel, Senior Vice President, Jones Lang LaSalle Hotels Gregory Rumpel is a Senior Vice President with Jones Lang LaSalle Hotels' Miami office where he spearheads much of the firm's hospitality investment sales, consulting and advisory assignments in the Southeastern region of the United States and Latin America. He has over 10 years of hotel operations and real estate experience throughout the Asia Pacific, US and Latin America. His advisory experience includes hotel conversion and new development feasibility analysis, hotel facilities/operations consulting and mixed use development planning.

Christian Charre, Vice President, Jones Lang LaSalle Hotels Christian Charre is Vice President of Jones Lang LaSalle Hotels� Miami office charged with expanding services of the firm in the Southeast United States, the Caribbean and Latin America. As a hotel specialist, Mr. Charre has over 20 years of hospitalit y experience and has been involved in various hotel, resort and mixed-use openings worldwide. He was recently involved with the opening of the Diplomat Hotel and Resort in Hollywood, Florida.

David A. Black, Senior Vice President, Project and Development Services, Jones Lang LaSalle David Black is a Senior Vice President of Jones Lang LaSalle and leads the hospitality practice for Project and Development Services. Mr. Black serves as a strategic adviser and project executive on a diverse group of project types. He has over 20 years of experience in the hospitality and real estate industries focusing on the development, design and construction of luxury hotels, conference centers, corporate offices and complex redevelopment projects.

©2002 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable, however no representation or warranty is made to the accuracy thereof.

Disclaimer Copyright � All material in this publication is the property of Jones Lang LaSalle Hotels (NSW) Pty. Ltd. (ABN 65 075 217 462). No part of this publication may be reproduced or copied without written permission.

The information in this publication should be regarded solely as a general guide. While care has been taken in its preparation, no representation is made nor responsibility accepted for the accuracy of the whole or any part. This publication is not part of any contract and parties seeking further details should contact the author.