Have you taken a good look at the real cost of the product improvement plan you are signing to transition that new hotel acquisition? You may be surprised when it costs more or takes far longer than anticipated to achieve that new room rate. Minimize the problem by following these five steps during your negotiations with the brand.
Most brands have established that converting existing assets is the only growth vehicle during this difficult period. All developers anticipate the cost of brand repositioning requirements into the equation when determining the project’s viability. These rough estimates are fine in the beginning, but before you sign the PIP, think twice.
During good times, brands often let PIPs evolve into “wish lists,” which might include every brand initiative, updating and remodeling all surfaces and every square foot of the hotel interior, and new exterior treatments that would make the old structure unrecognizable. Some PIPs even include every anticipated maintenance item that could need replacing over the next five years.
Of course, those PIPs required that all the work had to be completed in an accelerated time frame at what amounted to almost the total replacement cost of the building. Brands took this approach because the pipeline for new-build hotels was pretty healthy and conversion hotels were a low priority.
Today’s current period of slow growth has once again made some functionally obsolete hotels prime targets for brand-development teams trying to produce numbers. The dilemma, however, is how to make the tired, neglected victim glamorous, while keeping the PIP cost reasonable, and acquiring the asset before the competition, even if large changes are necessary.
The simple solution unfortunately has been to phase the renovation over a much longer period in order to spread out the cost. This extended period of renovation sounds more attractive because the point of entry seems less costly, but is it? As an old commercial aptly put it, “pay me now or pay me later,” but you will pay!
Before you agree to sign the PIP, let me offer the following five steps:
1: Thoroughly review the PIP with a professional to qualify and quantify its content. Most PIPs oversimplify elements, which results in contractors having to price the worst-case scenarios. For example, a PIP might require that all PTAC units older than five years must be replaced. How many PTAC units in the asset fit that description and what’s their condition? Are these six years old? Should they really be replaced, or is that just a guideline? Since you’re paying for it, have a professional on board to assist with these judgment calls. Negotiate!
2. Determine how many subjective items are in the PIP. Items like certain ceiling tiles or ceiling finishes can vary widely. The existing finish may be attractive and good as new, but different from what the brand requires. Ask the contractors to break out the price of those subjective items because they may be the first things to propose as value engineering points. These items can add up to thousands of extra dollars, while the guests might not even notice or care. Negotiate!
3. Any long-term maintenance items should be removed from the PIP. Yes, the hot-water heaters and roof will have to be replaced at some point, but if it’s not immediately necessary, wait. Those items are coming and will be paid for from a future capital budget and shouldn’t be part of the cost of entry. Unless these are absolutely necessary, get them out of the contractor’s bid and the PIP. Negotiate!
4. Do the work that most affects the guest first. Stretching out the work over several phases sometimes is offered to ease the repositioning. This usually increases the overall cost because the contractor has to keep restaging. They’re happy to pass this cost on to you and repeat the process often. Now you have continuous work going on in your newly converted hotel, which affects the guest experience and which in turn can cause lower guest satisfaction scores and your rate. Replacing the guestroom softgoods the first year and the furnishings the second year means the same rooms are being disrupted for two years. Discuss the options and devise a plan where entire sections are completed up-front prior to conversion, and other sections that can be sealed off from guest traffic are completed during later phases. Obviously, choose the most critical guest impression areas first. This isolates the work and will minimize the guest inconvenience. Negotiate!
5. Once you have negotiated the entire scope and timing of the PIP, be sure to select a team of professionals who specialize in hospitality work. Everyone in the construction trade is hurting and will offer great pricing but remember that adage, “pay me now or pay me later!” Choosing the wrong people can negate all the effort you made in steps 1 through 4. Remember that the best price isn’t always the best deal.
Repositioning a hotel effectively will involve compromises on all sides, but in the end, the goal of a “like-new,” well-branded, profitable hotel can be achieved. Following these steps will help you ensure you’re getting maximum value.