When looking to purchase an existing hotel, it’s extremely rare for a buyer to find a property in “perfect” condition. In fact, it’s typical for properties to be sold under the condition that a property improvement plan, commonly known as a PIP, will be enacted.
The total amount of work required to meet brand standards under a PIP can vary tremendously. It’s critical to have a complete understanding of what will, and will not, be required to achieve the hotel brand’s approval prior to a purchase commitment.
One way to understand your total capital cost is to get help before your purchase from a project-management company that can provide guidance for your soon-to-be-owned hotel’s renovation process. You can use the company’s insight to assist when negotiating with the franchising company if the PIP comes in higher than expected. It also allows the buyer to go back to the seller to discuss possible adjustments to the sale price.
When determining PIP cost, it’s essential to find a company that specializes in hotel building and renovations. These companies understand the unique nature of working in a hotel setting and also how to build economies of scale into the project. A good project-management group will also engage contractors that specialize in lodging renovations and construction to confirm costs.
Equally as important is to define and agree to the scope of the work with all stakeholders. This is vital because scope creep tends to be more costly after the contractor is engaged than it is when included in the initial agreement.
When selecting a contractor, there are various forms of agreements available. Three typically used are a lump sum, which invites contractors to provide a hard cost to perform the scope of work; guaranteed maximum price, where the contractor guarantees the maximum price for the scope of work; and third, a cost-plus fixed fee. Each provides some benefits and some challenges but the latter two are more transparent to the ownership.
It’s important to recognize that entering a relationship with a contractor is sort of like a temporary marriage. You’ll be working with that team for an extended period of time, so it’s crucial to find a contractor that you trust and set your contract vows accordingly.
Stephen Siegel is principal with H-CPM, a construction project management and owner representation company.