Pay me now or pay me later

Those of us of a certain age will remember an ad campaign rolled out in the late 1970s by Fram Oil Filters: “You can pay me now or pay me later.”

The message was clear: you can either maintain your asset carefully or pocket the money now, but if you do the latter, in the long run it will cost you far more.

I think of those words whenever I walk a hotel where one sees a mishmash of conditions: a third of the rooms renovated last year, the other two-thirds not done; the ballroom up to date but the breakout rooms six to seven years old; half the stack chairs new, the others not; the bar modernized but the restaurant concept obsolete; etc.

It seems obvious this approach to capex results in a product that is consistently inconsistent, where guests (and meeting planners) never know what they’ll get when they arrive and where parts of the hotel are always inferior to the competition.

The usual cause: spending its FF&E reserve each year, and that’s all. And when I question why this is the approach to capex, I get responses like, “The lender wants the reserve spent each year,” or, “We can’t afford to do more.”

The alternative, of course, is to NOT spend the reserve but to put it in the bank, not just make an entry on the balance sheet. To do a complete top-to-bottom update of the hotel every five to six years rather than dribble the capital into the asset a little bit at a time. To have a completely new competitive product that is consistent throughout, well maintained with adequate R&M budgets.

We all know “paying me later” is real. If you plan to sell in the medium term, buyers will deduct every penny and more than you would have spent for the capex and maintenance you deferred. The brand PIP will be much more expensive than it would have been if the hotel were kept up to standards. And most importantly, the NOI and value of the hotel will be lower than in the “pay me now” mode because you have lost or had to discount to the customers who were tired of utilizing a half-baked product.

So, to quote my old friend Ricky Ricardo, “‘Splain me this, Lucy!” Does the capex model we all see so often really benefit the owners and increase their ROI? Or should owners, asset managers, lenders and brands work together to change the paradigm?