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Jones Lang LaSalle Hotels |
February 2002
Actual Project Development Mishaps
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
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:
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:
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:
3. Mitigating risk and liability. 4. Retaining a high level of control:
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:
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
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
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
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
©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. |
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Jones Lang LaSalle Hotels Miami 2655 Le Jeune Road Suite 303 Coral Gables, FL 33134 tel: +1 305 779 3060 fax: +1 305 779 3063 |
Also See | Overview of the Miami Lodging Market / Jones Lang LaSalle Hotels Miami Office / August 2001 |
Hotel Investment Forecast for Argentina, Brazil, Chile and Mexico / Jones Lang LaSalle Hotels - Focus on Latin America / Aug 2001 | |
The Value of A Hotel Brand - What Would You Pay? / Jones Lang LaSalle Hotels / October 2001 |