5 considerations when pursuing a hotel deal in today’s market

(Thing to consider when buying a hotel)

With low interest rates and higher capital gains tax rates having translated into lofty asking prices for assets, buyers “reaching for yield” and more buyers seeking to defer taxes by doing 1031 tax-free exchanges, one has to be very disciplined in pulling the trigger on a hotel purchase these days. You’ll have to live with your decision for many tomorrows.

Here are a few thoughts that ought to impact your offering price decision:

  1. Will the physical envelope of the subject hotel building be attractive to franchisors and lenders in the future?
    Just as the exterior-corridor model often connotes a hotel that’s past its prime, franchisors seem now to be increasingly concerned that a two-story interior-corridor building is less attractive than a mid-rise. Will there be satisfactory alternate branding opportunities available to you in the future for the asset that you are buying today?
  2. What are the bottom-line profit implications for the hotel if you are pushed to a less than optimal brand?
    Just as a higher profit percentage on increased revenue inures to your benefit on the way up the ladder, the reverse is true on the way down. How will a forced rebranding to a lesser or different affiliation impact the hotel’s stabilized earnings level years from now? And have you built that consideration into your offering price?
  3. What are the implications if the existing franchisor elects to bring a sister product into its system nearby?
    As national brands proliferate their franchise offerings, they also induce guests to jump among the multiple brands within the master online reservation system. So it’s no longer just the same brand nearby or online that can hurt you. Your own franchisor’s decision to plant a sister product in the market may hurt, as well. And be certain that if the franchisor can expand its footprint, it will.
  4. How will the value of your investment be impacted as mortgage interest rates increase?
    In tomorrow’s debt markets, will your property have sufficient value for you to be able to borrow enough to refinance your existing loan when due, let alone attract the capital required for a future modernization?
  5. Do you fully appreciate the impact on property value that a strong “frequent flyer” program has? What the loss of that program would mean to the hotel’s value?
    Capitalize the bottom-line profits earned by reason of a loyalty program by eight to 10 times and you’ll realize its meaningful incremental impact on the overall asset value of the property. Buyers often do not truly appreciate what the loss of such a program would mean to a hotel property’s valuation and/or future mortgaging potential; you’re often talking in the millions of dollars. Have you factored that into the “today” price you are willing to pay for that hotel you’re eying? HM

Jeff Wilder is president of Wilder Ventures Hotel Investments.