The OPM (Other People’s Money) syndrome ? redux
Late last year, I had the pleasure of speaking at a General Manager’s conference for a major international hotel brand, and also at the annual meeting of the Resort Committee of the American Hotel & Lodging Association. The topic for both presentations was very similar ? basically, “How to Think Like an Owner.” Kudos to both groups for wanting to deliver that kind of “alignment” message to the people who are responsible for running lodging assets worth millions (in many instances, hundreds of millions) of dollars.
One of my key messages from these two presentations can be summed up in three words: “Respect the capital.” An understanding and/or appreciation of that concept is absent from the mindset of many hotel operators, whether due to benign ignorance, indifference, arrogance, inappropriate training or reasons unknown.
Sadly, that same lack of respect for capital occurs all too often among those who manage and deploy capital in the real estate sector (hotels or otherwise). And these are people who should know better.
There are, of course, investment managers whose concern for other people’s money equals, or even exceeds, concern for their own. We should all be so lucky to have our money invested with such people or companies. But absent such an internal Jiminy Cricket, the only fences that work are careful alignment of interests ? and such alignment generally comes in and out of vogue depending on market conditions:
- When markets are hot, money is plentiful, and capital providers are falling over one another to get money out the door. It is at these times that investment advisors, sponsors and developers are able to obtain the highest fees and participations, regardless of a project’s or portfolio’s ultimate success.
- In the shadow of economic/real estate meltdowns like the one we just experienced, standards tighten. Fees are lower, sponsor participation stands behind higher hurdles and performance is averaged across a portfolio of assets rather than individual “at bats.”
Notwithstanding the safeguards of proper deal structuring, there is tremendous pressure from both sides of the capital equation to raise and place money. So, what it will always come down to is this: Who are the people managing and investing the money ? and how have they dealt with their investors in prior cycles? Were they enriched by fees while Rome burned? Or did they treat their investor’s money as though it were their own?
As we find ourselves again on the threshold of another surge in hotel real estate investment, capital providers would be well advised to look closely at who was wearing clothes the last time the tide went out.