Proper search parameters lead to successful hotel purchase

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One of our investors recently had the good fortune of selling a valuable development parcel adjacent to their hotel and asked me to locate a hotel acquisition into which they could invest the freshly received funds.

Here’s what went into our thinking in locating a target acquisition and the approach to the search.

1. Total project cost: We decided to keep the leverage at no greater than 60-percent loan to value for several reasons. Firstly, lenders tend to get a bit skittish as you get north of 60-percent to 65-percent LTV and start pushing up their interest-rate quotes. Secondly, it’s simply more conservative to keep debt moderate, putting less pressure on business cash flow over the years and lowering the needless anxiety attendant to owning higher-leveraged assets.

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2. PIP Condition: We decided that the energy, planning, execution, risk and financing of a significant modernization was a less attractive option than targeting a hotel that didn’t require a big property improvement plan as long as the modernized hotel was achieved with good-quality furniture, fixtures and equipment.

3. Building construction and height: Many recently built hotels are wood-frame construction; this construction type is often of lesser quality and durability than concrete and steel or cinder-block buildings. Our investor group eventually eliminated any consideration of wood-frame buildings. Secondly, virtually all major brands are moving (or have moved) away from two-story buildings for their better brands. Those hotels are at risk of being downgraded in the future, adversely affecting their long-term value. We stuck to a minimum of three stories.

4. Branding: While a franchisee’s focus usually is, “Will our hotel be reaffiliated and at what cost?,” there often is less focus on the culture of the branding company. By this, I mean analyzing the general history of the branding company when it comes to initiating or ending brand affiliation, stuffing multiple sister-brands into the market, requiring capital-expenditure renovation, offered services, and the all-in cost/benefit evaluation. How deeply do you trust in the culture?

5. The search: I strongly recommend staying in ongoing contact with numerous hotel brokers, establishing good relationships with individual agents at these firms, constantly checking their listings online, and treating the brokers and their listings with the respect they clearly deserve. It is from one of them that you are highly likely to find the lodging investment with the benefits that will (hopefully) enhance your personal cash flows for years to come.

We eventually recommended the purchase of a three-story concrete and steel limited-service hotel in a destination market that had no current modernization requirement.