A wave of renovations has swept across the industry as ownership companies rush to refresh their hotels and take advantage of “revenge travel” trends.
At the same time, investors of every size are on the pursuit for acquisitions. Finding the correct value of a hotel asset can be challenging following the disruption from the last two years.
When acquiring an asset, every hotel should consider a thorough audit of a property's infrastructure, current brand standard if applicable, as well as the state of its physical plant. For example, what are the ages of the current equipment — including mechanical systems, elevators, FLS, IT systems — on property. Are there any recent mandates or new brand standards which may impact the current floor plan or existing technology? Does the building meet ADA accessibility requirements? Each of these factors should be taken into consideration during the due-diligence phase of an acquisition. Finding the answer to these questions could heavily affect the capital needed once the acquisition has been completed.
During the due diligence phase, some challenges are not always easy to discover, and identifying them requires detailed investigation of a hotel’s physical condition, historic capital expenses and understanding costs of the anticipated planned improvements. Some owners who are looking to dispose of their hotel assets could be doing so because of rising supply-chain costs, changes in market conditions as well as funding challenges associated with fulfilling property-improvement-plan obligations and/or anticipated capital expenditures. It should be assumed that typically the sellers have knowledge of these matters, however it is the buyer’s responsibility to research these challenges.
To the right investor, acquiring hotels always presents a valuable opportunity. They could also serve as a pitfall for those who are unprepared to adapt to the myriad changes in the market and/or hidden physical/infrastructure challenges. Understanding all of the factors can sometimes feel overwhelming without expert insight.
Buyers should hire the right consultants who have knowledge of the market and others who can fully examine the asset as well as perform focused inspections. While this is not always popular with the seller, it is an important part of the due diligence effort, and excessive pushback can alert buyers to the potential of a hidden pitfalls within the asset.
For example, sometimes superficial damage to the exterior of a building is just that — and sometimes it can be indicative of a deep-seated issue within the structure. For example, cracks in a building’s facade could be cosmetic, which requires a simple repair with the applicable sealant, but the potential is there for internal damage to a property’s structure if water has been able to penetrate enough into the building structure, affecting its integrity.
Timing should also be taken into consideration during the negotiations and having an expedited due-diligence period can show the seller there is motivation. Having the right team in place and ready to act at the execution of the purchase and sale agreement can provide the edge once the contract is signed, which will allow quick feedback of any findings affecting the anticipated capital needs.
It’s important to not get caught up in the heat of the deal and commit to something before fully understanding the physical conditions of the asset. These inspections are just as important as understanding the operational costs. Any excess capital cost only diminishes the true return on the investment.
Stephen Siegel is principal of H-CPM (Hospitality CPM).
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or CoStar Group and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to contact an editor with any questions or concern.