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Practical Alternatives to Hotel Closings -
Intense, Pro-active Asset Management

 
By Jim Butler, August 11, 2009

We have gotten a lot of feedback on our recent article about the precipitous drop in value that accompanies a hotel closing, or as some say, when the hotel is "put in mothballs" or "goes dark". 

In that recent article, we talked about 8 bad things that happen when you close a hotel, and suggested that a hotel should never be closed without first running a careful analysis of cash flows and holding costs. That is not to say, a hotel should never be closed, but a hotel closing deserves close scrutiny, and full exploration of the alternatives.

Today, we will focus on one of those.

Intense, pro-active asset management

Jack Westergom, one of our long-time industry friends responded to the blog with some thoughtful insights, or "real-time thoughts from the field." Jack Westergom is Chairman and Managing Director of Manhattan Hospitality Advisors. We have worked with him for many years and have seen clients get some great results by tapping into his 30 years' of hotel experience, so we thought we would share his comments with our readers. 

Jack Westergom's report from the battlefield really expounds on another alternative to closing hotels or liquidating them in distressed sales. He tells us that his team improves the operating results and makes it feasible to hold the assets longer. He says, he has set up budgets with owners and lenders for an agreed-upon minimum amount of working capital to fund shortfalls while making an all-out focused effort to make hotels self-sustaining where others continue to falter.

The one concept that many operators have failed to deal with effectively is the need for increased revenue generation. 

Here is his message from the field with 12 observations for us: 
 

Dear Jim, 

Loved your blog on hotel closings and figured I would forward some real-time thoughts from the hospitality battlefield on what is truly happening in the marketplace. Hotels and resorts in every market and at every price point are fighting for survival as declining demand, over-supply and the current financial crisis has impaired many hotels' ability to fund their operating costs and meet debt service coverage. 

The business plans and strategies that supported record financial results in 2007 don't work any more. As asset managers, we are responsible for "managing the hotel management company." It is quite apparent to us that only new and bold actions will enable hotels and resorts to survive in these perilous financial times. While many operators have already taken some steps to minimize the gap between operating expenses and revenues, much more needs to be done. The primary focus has been on cost containment and very little attention has been given on altering strategies to drive revenue. 

Here is a recap on what is happening:

1. Communication between owners, asset managers and operators must be improved in order to facilitate the relationship between the two. Today, all but the worst of operators generate cash-flow forecasts as a regular operating exercise for owners and lenders. Some run them monthly, which might have been adequate in years past, but is highly inadequate with today's declining revenue stream. We have asked operators to focus on cash-flow on a weekly basis, in order to compensate for the difficulties in forecasting in today's environment. 

2. The best operators already reduced expenses last fall and many have reduced them again in the first quarter of this year. Now, expense reduction today is no longer the issue. Today, revenue enhancement is the main issue facing hotels. 
There is a misconception amongst many lenders today who believe that additional expense reduction is the only appropriate strategy to create income. 

3. Most operators have failed to understand that the "doing business as usual" business plan no longer works and alternative strategies and creative game plans are necessary. The one concept that many operators have failed to deal with effectively is the need for increased revenue generation. This is an area where we, as asset managers, collaboratively guide the operator to get creative and change their way of thinking. 

4. The past six great years of good times in the hospitality business has bred a new generation of marketing people who focus on "order taking," as opposed to "order making." 

5. Operators have become too reliant on generic brand marketing to fill their hotels -- a strategy that may be adequate in the best of times, but is grossly inadequate in the worst of times. In recent years, strong brands could generate the majority of a property's business, generating up to 75-80% of their business. Today, a brand might be capable of generating 35-40% of a hotel's business as corporate and group travel has declined markedly. With the brands delivering less than 40% of a hotel's business, both the operators and their marketing personnel do not know how to make up the difference. 

6. They have long forgotten and abandoned the "backyard strategies" required to drive "local marketing initiatives" that fill hotel rooms in good times and in bad. These property specific strategies include marketing partner alliances, local website strategies, neighborhood marketing strategies for food and beverage and competitive hotel intelligence. 
Operators have become too reliant on generic brand marketing to fill their hotels 

7. There is a misconception amongst many lenders today who believe that additional expense reduction is the only appropriate strategy to create income. We strongly disagree as we have reviewed many distressed properties this year that have cut expenses so deeply that service is below minimum brand and consumer standards. In many instances the asset and its ability to generate revenue, and asset value have suffered. 

8. It appears that most lenders basic strategy with today's distressed assets is to immediately put a receiver in place to hold the asset. We believe that this may not necessarily be the most prudent action in order to maintain and increase asset value. 

9. Most operators' sole goal is to meet brand standards, not to protect and preserve asset value, and, therefore, they do not have their interests aligned with the owners. 

10. Most operators do not understand that CMBS loans differ from traditional loans and require capital expenditure approval by lenders. 

11. Most operators do not know that the ground rules for operating hotels change when a receiver is put in place or a hotel is foreclosed upon. 

12. In this financial downturn, most brands have done little to create programs (as they did last downturn) that attempt to focus on the owner and the owner's ability to satisfy debt service requirements. 

Very truly yours,

Jack Westergom
Chairman & Managing Director
Manhattan Hospitality Advisors, Inc.
2615 Pacific Coast Highway
Suite 218
Hermosa Beach CA 90254
(310) 798-8863
jwestergom@manhattanhospitalityadvisors.com

What's it all mean?

In order to make intelligent decisions, you should know all your options and understand their consequences. Closing a hotel is generally one of the least attractive options, compared with a fast sale or better asset management. Sometimes, keeping a hotel open takes cooperation and contributions from different stakeholders -- perhaps unions, municipalities, operators, lenders, owners and others. 
 



About the Author:
Jim Butler is one of the top hotel lawyers in the world. GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and you will see why.  He devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders.  Jim leads JMBM’s Global Hospitality Group®—a team of 50 seasoned professionals with more than $40 billion of hotel transactional experience, involving more than 1,000 properties located around the globe. In the last 5 years alone, they have brought their practical advice to more than 80 “hotel-enhanced mixed-use” projects, a term Jim coined to fill a void in industry lexicon.  This term describes one of the hottest developments in real estate-where hotels work together with shopping center, residential, office, retail, spa and sports facility components to mutually enhance the entire project’s excitement and success. Jim and his team are more than “just” great hotel lawyers.  They are also hospitality consultants and business advisors.  They are deal makers.  They can help find the right operator or capital provider. They know who to call and how to reach them. They are a major gateway of hotel finance, facilitating the flow of capital with their legal skill, hospitality industry knowledge and ability to find the right “fit” for all parts of the capital stack.  Because they are part of the very fabric of the hotel industry, they are able to help clients identify key business goals, assemble the right team, strategize the approach to optimize value and then get the deal done.  Jim is the author of the Hotel Law Blog, www.HotelLawBlog.com.  He can be reached at +1 310.201.3526 or jbutler@jmbm.com.
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Contact:

Jim Butler
Chairman, Global Hospitality Group
Jeffer, Mangels, Butler & Marmaro LLP
1900 Avenue of the Stars, 7th Floor
Los Angeles, CA 90067-4308
(310) 201-3526 direct
jbutler@jmbm.com
www.HotelLawBlog.com

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Also See: Lenders, Here's Why Mothballing a Hotel Can be a Very Bad Idea; Closing that Hotel May be the Worst Money-saving Idea You Ever Had! / Jim Butler / August 2009
Do You Know the 8 Dos and Don'ts of Handling Troubled Hotel Loans? / Jim Butler / November 2008
Workouts and Special Servicing for Hotel Mortgage Loans: What Is So Different About Troubled Hotel Loans / Jim Butler / November 2008
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