In the world of real estate, relationships play a huge role. The hotel business is a very small world, and the amount of knowledge that people have about each other – their projects and backgrounds – is vast. Likely, a large part of that is due to the historically transient nature of hoteliers. To build a career in the business, moving often is inevitable and people become connected with each other more closely than in other spaces. It makes sense, then, to partner with investors, developers, contractors, brands, managers and lenders that you know or with whom you have existing connections.
Choosing the right location for a hotel is a huge component of the investment process, and a misstep can mean failure for the property. After that location is chosen, the next step of branding (or lack of branding) is critical. It can be tempting to pick one of the new, sexy brands available, but an important question to ask is whether you have the right group of people on your team to work through the development process with that brand.
Thousands of dollars can be spent to “negotiate” franchise agreements with the wrong legal team, which could ultimately lead you nowhere. You could also be driven to multiple architectural and design changes when not properly advised about the passions of the brand visionaries. This could potentially result in operational inefficiencies or maintenance issues as the asset ages, resulting in no additional revenues from customers.
Another important choice to make during the investment process is deciding which contractor to use. Building a hotel is not the same as building multi-family unit, corporate office or hospital. Choosing the right partners in the development process can mean the difference between average returns and great returns on an investment.
After thinking through the development process, it is important to understand the power of the brand and the asset, as well as any limitations. Having the best box in town isn’t enough. Now more than ever, it is about the experience. As an investor, understanding who is driving the experience in the hotel and making sure that the company culture behind those drivers allows them to be passionate about your guests is necessary. At the same time, those passionate drivers should be continually armed with a fresh and functioning asset. Choosing a management company and hotel leadership is another critical decision. The management and associates strongly influence the source of top line revenues and guest intent to return but are also hugely influential on how much of the top line makes it to the bottom line. Top line will greatly matter to the next owner of the hotel; bottom line is what matters in calculating return on investment before the sale.
Financing is an ongoing important consideration. In this world of rising interest rates, it is ever so tempting to look at the commercial mortgage-backed securities markets (CMBS) for a financing solution. When entering that realm, it is important to think about what may and will occur over the financing time frame, as CMBS is not a flexible solution and there is not a lender relationship to lean on in hard times. Over a 10-year timeframe, consideration must be given to cyclical renovations and the possibilities of brand reinventions, new supply and market downturns. Even with careful planning, a combination of unforeseen events can cripple an asset that does not have flexible access to capital or a lender on the other end of the phone who cares about the success of the asset or the owner.
Given large enough buckets of money, anyone can end up with a great hotel. A great hotel investment, however, requires the synergy of the right people working together to achieve common goals. Assembling the right team is as critical as choosing the right location and should be done with careful consideration and reliance on relationships.
By Julie Richter, chief financial officer, Concord Hospitality, Raleigh, North Carolina