Chapter 14 Purchasing a Hotel. Hotel Operations Management, 2nd ed.©2007 Pearson Education...

Chapter 14 Purchasing a Hotel

Hotel Operations Management, 2nd ed. ©2007 Pearson EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

Buying a Hotel?

Selecting a Property

Buying an Existing Property

Buying a Property to Build

Buying Performance

Buying Potential Performance



Hotel broker brings buyers and sellers together

Owner (seller) authorizes broker to solicit offers for the property

Broker sends potential buyers owner-supplied info (number of rooms, summary of most recent financial performance, current STAR Reports, etc.)

Potential buyers visit property

Potential buyers examine whether hotel is operating at reasonable levels of performance

Sales price will differ, based on performance levels

Selecting a Property: Buying an Existing Property



Selecting a Property: Buying an Existing Property (cont.)

Receiving not only the real estate involved but also an exceptionally solid operating businessIs likely to continue to perform at high level with continued proper managementPaying more on a per-room basisOften a safer investment than buying one not performing as well

Buying a strongly performing hotel:

Considering purchase for its “upside potential”Cost of acquiring hotel is lowRisk greater than that of buying established, more profitable propertyLikelihood of making significant profits in future operation or sale of the hotel may exist

Buying potential performance:



Step 1: Secure the Site

Selecting a Property: Buying a Property to Be Built

Step 2: Select a Franchisor

Step 3: Design the Building

Step 4: Coordinate the Building Process

Step 5: Build the Hotel

Step 6: Furnish the Hotel

Step 7: Perform Preopening & Grand Opening Activities



Term used to describe cost of hotel acquisition based on number of rooms (keys) purchased

Allowing comparison between hotels of unequal size

Total host cost / Number of units (rooms) in hotel = Cost per key

Per Key

Securing Hotel Financing

Individual investors/owners should understand basics of hotel’s market value, potential funding sources, and supporting

documentation for these funding sources.



Current profitability

Factors for establishing hotel values:

Securing Hotel Financing: Establishing Property Market Values

Annual revenues

Physical condition

Brand

Quality and experience of the hotel’s staff

Hotel’s STAR Report results

Hotel’s competition

Number of new hotels to be built in that area

Growth (or lack of growth) in market within which hotel is located



Replacement Approach

Assumes a buyer is unwilling to pay more for a hotel than the amount required to build (replace) a similar hotel in a similar locationLess useful when no replacement hotel has recently been or could be built in the area

Securing Hotel Financing: Establishing Property Market Values (cont.)

Methods of establishing hotel values:

Revenue Stream

Approach

Viewed primarily as producer of revenueValue is established as multiple of its room’s revenueHotel brokers often use this approach for advertising sale

Sales Comparison

Approach

Assumes similar types of hotels in a given area sell for similar per key pricesApproach is common in residential real estate market and is popular in commercial hotel real estate marketLess reliable in a market where no hotels have been sold recently



Income Capitalization

Approach

Often used for income-producing properties such as apartment complexes and hotelsDevelops a mathematical relationship (capitalization rate) between hotel’s projected income, expenses, and market valueEstimates 1) hotel’s potential gross revenue, 2) hotel’s operating expenses, 3) hotel’s net income, and 4) performs a value analysis of hotel based upon real costs of acquiring the property

Return on Investment Approach

Value is based on the owner’s anticipated return on investment

Securing Hotel Financing: Establishing Property Market Values (cont.)

Methods of establishing hotel values (cont.):



If loan is not repaid, lender has recourse to secure loan.– Full recourse / limited recourse / nonrecourse

Lenders prefer to make full and limited recourse loans.In a foreclosure, lenders sell property to recover loan amount.Borrowers prefer to seek and secure nonrecourse funding;future operation or sale of the hotel may exist.

Few hotel buyers pay 100% of the purchase price at time of closing.Most buyers make a down payment on the property and seek a mortgage for balance of purchase.Use of borrowed money helps buyers leverage their own funds.

Securing Hotel Financing:Applying for the Loan

Liability for repayment:



Securing Hotel Financing: Funding SourcesFunding Sources for Hotels

Hotel Type Funding Source Loan Amounts

Luxury HotelsLife insurance companiesPension funds

$15,000,000 or more

First-Class Hotels

Life insurance companiesCredit companiesInternational banksNational banks

$3,000,000–$30,000,000

Midmarket Hotels

Credit companiesInternational banksNational banksRegional banksCommunity banks

$1,000,000–$15,000,000

Economy/Budget Hotels

Regional banks

Community banks

SBA loan providers

$5,000,000 or less



A strong market

– Hotels located in undeveloped/underdeveloped areas difficult to finance

Securing Hotel Financing:Funding Sources (cont.)

To successfully secure a loan, borrowers must demonstrate:

Appropriate equity– Amount of loan requested / Property value = Loan to value ratio

Strong franchise affiliation– Few lenders will lend money to a nonbranded property

Proven operational and/or development experience

Defensible appraisal, business plan, and revenue forecasts



Legal description of property and landPhysical condition of propertyAssessment of market conditions affecting hotelCurrent valuation of property for tax purposesValuation methods to estimate property’s market valueQualifications of those conducting the appraisalAssumptions in developing the appraisalDate appraisal was conductedEstimated market value of property

Potential lenders want to know from appraisal:


Appraisal is a required part of the loan application process!



Sample Business Plan Outline


Well-written business plan plays important role in securing financing!

Cover letter to lenderTable of contents pagePlan summary/overviewDescription of hotelMarketing plan (description of hotel’s primary market)Financial plan (statement of equity available/funding requested)Management plan (description of current management team)Supporting documentation (appraisal / copy of proposedpurchase agreement / franchise agreement / managementcontract / other supporting documentation)



Sales forecast should be as accurate as possible.– Realistic assumptions about 1) hotel’s opening date, 2) achievable occupancy rates, 3) achievable ADR, and 4) required operating expenses


Hotel revenue forecast:

Best sales forecasts include estimates of hotel revenues and expenses.– Revenue and expense forecast projects 1) revenues (sales) for a 4-year period, 2) expenses for the same period, 3) increasing occupancy percentage, and 4) increasing ADR



New hotel is built

Existing hotel is purchased and operated under the same flag

Existing hotel is purchased and reflagged

Three possible scenarios when starting up a new hotel:

Hotel Start-Up

Reflag: To change a hotel from one franchise brand to another.



GM arrives on-site (on-site trailer if new construction)Office supplies, business cards, stationary orderedOffice equipment installedBegin search for EOC membersSecure all required franchisor operating manualsOrder hotel Internet and telephone systemsInstall “Coming Soon” sign with hotel name on the siteJoin local chamber of commerce; subscribe to local and statebusiness magazinesEstablish hotel account(s) with local bankEstablish petty cash accountOrder hotel courtesy vanOrder property walkie-talkies or wireless communication system

Hotel Start-Up: Selected Preopening Responsibilities of the GM/Owner

Six months prior to opening:



Assure interface capability of PMSEnter contract with landscaperOrder all needed exterior and interior signsPlan direct mail campaign; begin implementation of sales planOrder laundry and maintenance equipmentSet up accounts payable systemOpen needed vendor accountsFile for all licenses (liquor) and operating permitsOrder vending machinesPlace Yellow Pages adCreate area information guide (restaurants, attractions)Obtain federal tax I.D. numberPrepare job descriptionsOrder cable channels/movie services

Six months prior to opening (cont.)

Hotel Start-Up: Selected Preopening Responsibilities of the GM/Owner (cont.)



DOSM selected and begins workChief engineer selected and begins workFood and beverage suppliers selectedDetermine prevailing local wagesContact newspaper to begin employee advertising processBegin FOM and executive housekeeper searchDetermine policies for processing reservationsPurchase exterior trash receptaclesExecutive housekeeper arrivesFOM arrivesSecure credit card accounts and authorization systemSelect pest control vendorOrder audiovisual equipment/meeting room furniture

Three months prior to opening:




Order insurance liability cards for guest roomsOrder roll-away beds, cribs, high chairsOrder ADA compliance itemsInstall emergency master key box for fire departmentConclude supervisory hiringPlan grand opening party

Three months prior to opening (cont.):




Review all policies with insurerInstall safety deposit boxesInstall decals (logos) on courtesy vanSelect fire extinguisher service companyBegin hiring hourly employeesEstablish partnerships with local restaurantsMail grand opening invitationsOrder employee uniformsDesignate smoking/nonsmoking zonesContact health department for food and beverage facility inspectionsPurchase first-aid/biohazard kitsInstall cellular telephone/CB in vanBegin training of hourly employees

One month prior to opening:




Purchase laundry chemicals and dispensing equipmentPrepare MSDS bindersTest fire alarmPlan preventative maintenance programPurchase maintenance supplies

One month prior to opening (cont.):




Test all systems– Electronic locks– Credit card processing– Safety systems– Televisions/remotes– Water– HVAC– Cable/in-room movies– Room telephones/voice mailSend grand opening press release to local news mediaConduct practice meals: room service, breakfast, lunch, dinner areasHost grand opening party“Keep smiling”

One week prior to opening:




Mail thank-you cards to grand opening attendees

Follow up on all leads made during the grand opening party

Thank the media for attending

Thank all hotel employees for their assistance during the

opening

Postgrand opening activities:




Train staff, train staff, train staff!Improve constantly through continued study of the hospitality fieldSpend time daily with:– Each department head– Your hourly staff– Your guests– Your familyAssist the hotel sales effort whenever possibleManage your hotel

Ongoing activities:


Chapter 14 Purchasing a Hotel. Hotel Operations Management, 2nd ed.©2007 Pearson Education...

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Transcript of Chapter 14 Purchasing a Hotel. Hotel Operations Management, 2nd ed.©2007 Pearson Education...