by Matt Arrants
April 2013

Over the last several years there has been a dramatic increase in the number of colleges and universities developing lodging facilities on or near their campuses.  As hotel owners, colleges and universities are unique relative to more traditional owners such as individual investors, private equity funds and/or Real Estate Investment Trusts (REITS), as profit is often not the institution’s primary consideration.  Additionally, they are often the largest lodging demand generator, are very concerned with protecting the reputation of their brand and strive to integrate hotel operations with the school.  As a result of these complex factors, hotel asset management for college and university-owned facilities is particularly challenging, requiring an in-depth knowledge of the both the lodging industry as well as the academic environment.

Understanding the Goals for the Facility

Colleges and Universities develop on-campus lodging facilities for a variety of reasons.  Some of the more common goals include providing:

• an enhanced visitor experience;
• a facility to house and entertain potential donors;
• a catalyst for revitalizing a local area; and
• support of other internal interests (e.g. executive development programs or hospitality management curricula).

Profitability can sometimes be at the bottom of the list, if it makes the list at all.  The lack of emphasis that colleges and universities place on profitability creates two issues.  First, these hotels often generate less income than they could due to mandated preferred pricing for internal clients.  Second, it may be difficult to measure management’s performance against the school’s intangible objectives.

The Profitability Challenge

Measuring a hotel manager’s effectiveness can be more complex in universities and colleges than in other environments, particularly if the institution places pricing or operating restrictions on the manager in pursuit of its intangible objectives. Profitability, one of the traditional measures of management effectiveness, is a lesser priority for many colleges and universities and alternative measures of management performance must be utilized. Typically, these include guest and employee satisfaction surveys, on-line reviews, and benchmarking reports from Smith Travel Research.  It is the role of the asset manager to identify appropriate alternative measures of performance and evaluate management’s performance within the context of the institution’s objectives, both intangible and financial.

Removing profitability as a key metric in measuring performance can create a degree of complacency on the part of operators.  In addition, the focus on intangible measures of performance (e.g. guest satisfaction scores, and the satisfaction of critical stakeholders such as trustees and donors) provides an excuse for operators who may not be focusing enough on revenue management, sales, or expense control.  These are all areas that are outside the experience of the typical college or university administrator that is responsible for the hotel.
  
Recognizing that they do not have the necessary skill set to operate a lodging facility, most colleges and universities hire a third party management company.  Unfortunately, the school’s interests are often not completely aligned with those of the management company.  Since operators receive the bulk of their income from top line revenues, they have a tendency to maximize revenues while putting less emphasis on controlling expenses.  At the same time, schools need to be concerned about their reputation and thus are susceptible to overspending on the product and service levels.   The net result is a hotel with strong revenues but diminishing profitability.  Without a qualified third party asset manager, most schools are not qualified to effectively evaluate the costs versus the benefits of the product and service levels proposed by management. 

The challenge in using profitability (or return on investment) to measure success for college and university hotels is the complexity of the equation.  How does one factor in the facility’s impact on securing a large donation from a benefactor who has been housed and entertained at the on campus hotel?  What is the financial benefit of providing a comfortable place to stay for visitors to the campus?  How much money does the facility retain for the school that otherwise might be spent at privately owned hotels?  In our work with colleges and universities we attempt to identify and address those issues and then apply reasonable benchmarks.

Demand and Pricing

The fact that the school is the largest source of lodging demand presents a major challenge with regard to pricing.  As the primary demand generator for the hotel, it makes sense that the school-related visitors would receive a discount.  The challenge is determining the right rate structure.  If lodging demand generated by the school is too heavily discounted, management would be losing out on management fee income.  This could lead management to target other sources of demand that might displace demand from the school, or to charge exorbitant rates to non-school affiliated visitors, which in turn could tarnish the school’s reputation or cause travelers to use competitive hotels that are not owned by the school.  The asset manager serves to advise the owner and the operator on dynamic pricing that helps to maintain this delicate balance.
 
Integration with the School

Many schools attempt to integrate the hotel with the rest of the university to leverage existing operations, relationships and facilities.  For example, most large universities have extensive in-house resources that can provide services and support for marketing, advertising, and public relations.  They also have resources that can support the engineering function of a hotel such as plumbers and electricians.  Lastly, due to their size, some schools have their own power plant, or receive volume pricing that can benefit the hotel operation.  When considering these economies of scale, it’s important to understand the strengths of the school and the needs of the hotel.  For example, the school may have great web designers in house, but they have no experience with hotels.  That could present a challenge for the operator who is ultimately going to be responsible for the website.  The role of the asset manager is to objectively evaluate the functions provided by the school and advise ownership and management as to their effectiveness for the hotel operation.

Conclusion
Colleges and universities face unique challenges as hotel owners due to the complexity of their goals and objectives.  Furthermore, as a result of their unique and complex goals, it is difficult to ensure that hotels owned by colleges and universities are performing to their full potential.  To maximize their performance colleges and universities are well served to have professional independent third party asset managers to support them. 
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About the Author:
Matt Arrants, Executive Vice President of Pinnacle Advisory Group, has extensive experience in asset management and hotel operations analysis. His clients include universities, hospitals, real estate investment funds and hotel owners and lenders.  A former chairman if the International Society of Hospitality Consultants, he lectures regularly at Cornell University’s School of Hotel Administration and Boston University’s School of Hotel Administration. He formerly held management positions within several major hotel operators.

About Pinnacle Advisory Group
Pinnacle Advisory Group, with offices in Boston, New York, Florida and Southern California, provides third-party asset management services to a variety of clients nationally.  Its portfolio of asset management properties ranges from branded, full-service hotels to independent, luxury resorts and its clients include private equity firms, institutions of higher education and high net worth individuals.  Pinnacle’s value enhancement approach to asset management focuses on a identifying and elevating a property’s ability to drive value for the owner.