News for the Hospitality Executive
RevPAR is up, room rates are up, travelers are back, REITs have made the hotel ROI they wanted, and hotel valuations are nearly the same as they were in 2007, before the Great Recession hit. It sure feels like we're in the middle of the game - which is a lot better than being at the bottom._______________________
All these factors make this a good time for buying or selling hotels. At the same time, caution is key.
Some don'ts and do's:
You need to spend only as much as you can to prove that you can generate ROI greater than the present one. Proof like that is music to a lender's ears.
Operating history helps; it's easier for a veteran than a newcomer to secure a loan, just as it's easier to work with a franchise than an independent.
Say you own five hotels and can lay down realistic ROI projections based on your experience. A lender will listen.
If you're looking to acquire a franchised property, be sure to nail down the franchisor's PIP requirements - and whether or not the franchisor aims to stay in place with a new owner. Continuity is reassuring. Also key to a franchise deal: fees, liquidated damages and franchise breakage costs.
In the case of an independent, you have to know how it does in its competitive set and ask whether it should be a franchise and if so, which one. Independents do make sense in certain markets.
Franchise or independent, of course, keep these words in mind: location, location, location.
Both buyers and sellers are doing much more due diligence in preparing and listing a property for sale and, from a buyer's standpoint, knowing what it's likely to trade at. From a seller's standpoint, you must be aware of the financial markets and what your buyer is likely to look like so you can prequalify that buyer for your property. Has the buyer owned other hotels and if so, how many? Does the buyer know the business and how it operates, rather than being a manager who knows five or six people with money?
When you're considering a buyer, look for an owner - at least; an owner-operator is even better. You might attract buyers that present higher offers, but if they lack experience in the hotel industry, it might be harder to close such transactions.
That's because in the lending community, history counts. To persuade a lender to finance a project, a newcomer has to present lots of equity, join forces with a qualified management company or partner with somebody that has that hotel experience.
Say you're an industry newbie with no prior ownership experience. You'd do well to persuade a management company to join you in an arrangement calling for a bit of equity and management of the property. After all, the owner of a hotel doesn't have to be an hotelier.
If you're a seller today, you don't want to feel like you're selling your property at a low valuation and leaving money on the table. And as a buyer, you should feel like you're getting fair value with some upside. It's incumbent upon the buyer to know what that upside is.
Consultants can help a buyer secure institutional equity. They can also help a seller when it comes to timing.
If you're a buyer, have your equity in place before making your offer. From a seller's standpoint, things to think about include time period for due diligence; a seller wants to keep that as short as possible, typically no more than 45 days so the property isn't left dangling. However, to secure financing for a property typically takes at least 90 days.
Narrowing that gap becomes the issue. Sellers will look for upfront deposits in exchange for longer due diligence times. Buyers must be serious; at the end of the day, bridging that divide weeds out the folks who are just looking around and captures the serious ones with the wherewithal to close the deal.
About Jeff McKee
Jeff McKee is Co-Founder and Managing Director of Premier Capital Associates and has primary responsibilities of originations, debt and equity placement, and advisory services. He has overseen several billion dollars of commercial real estate transactions including first mortgages, mezzanine financing, equity, workouts and restructures, and valuations focused primarily in the hospitality sector. Jeff has been in commercial finance since 1989 with a focus on hospitality beginning in 1994.
Mr. McKee previously served as Senior Vice President of GE Commercial Finance, building a successful hospitality finance division from the ground up. He also developed executive level relationships with the nation's top franchise companies. Jeff has been quoted and published in many hospitality industry periodicals over the years and continues to be a frequent participant on hospitality industry panels.
is the Key to Unlocking Trapped Equity in Hotel Portfolios / Jeff
McKee / April 2013