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The ugly baby

Those of us who have been through multiple cycles in the industry agree that this one has been the most challenging. While economic forces and the man-made financial crisis are mostly to blame, another factor contributed to the defaults and write-downs of equity: the decline in underwriting standards and processes.

All parties involved in a hotel development or transaction have always had a vested interest in the deal. While brokers, in-house development teams, franchisors and management companies all have talent and expertise, by their very roles they lack objectivity and independence.

There was a time when buyers, lenders and developers all accepted this and sincerely wanted someone objective to tell them bluntly and frankly if their baby was ugly. In the frenzy of the mid-00s, this changed. No one cared if the risks of a particular deal were high; the bundling of risks made them think only a few ugly babies could not affect overall performance. Wrong!

The prices we now see being paid for ordinary hotel assets seem to reflect a belief that costs of capital will remain at historic lows come what may and that short-term risks are low. Is it time for objective and independent underwriting to make a comeback? Or are all babies beautiful in the eyes of those with vested interests in getting the deals done?

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