chapter 13: purchasing a hotel. hotel operations management, 1/e©2004 pearson education...

Chapter 13: Purchasing a Hotel

Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

Buying a hotel?

Selecting a Property

Buying an existing property

Buying a property to build

Buying performance

Buying potential performance



Hotel broker brings buyers and sellers together

Owner (seller) authorizes broker to solicit offers for the property

Broker sends potential buyers owner-supplied info (number of rooms, summary of most recent financial performance, current STAR Reports, etc.)

Potential buyers visit property

Potential buyers examine whether hotel is operating at reasonable levels of performance

Sales price will differ, based on performance levels

Selecting a property: Buying an Existing Property



Considering purchase for its “upside potential”Cost of acquiring hotel is lowRisk greater than that of buying established, more profitable propertyLikelihood of making significant profits in future operation or sale of the hotel may exist

Receiving not only the real estate involved, but also an exceptionally solid operating businessIs likely to continue to perform at high level with continued, proper managementPaying more on a per room basisOften a safer investment than buying one not performing as well

Buying a strongly performing hotel:

Selecting a property: Buying an Existing Property (continued….)

Buying potential performance



Step 1: Secure site

Selecting a property: Buying a Property to be Built

Step 2: Select franchiser

Step 3: Design building

Step 4: Coordinate building process

Step 5: Build hotel

Step 6: Furnish hotel

Step 7: Perform preparering & grand opening activities



Term used to describe cost of hotel acquisition based on number of rooms (keys) purchased

Allowing comparison between hotels of unequal size.

Total Host Cost / Number of units (rooms) in hotel = Cost per Key

Per key

Securing Hotel Financing

Individual investor / owners should understand basics of hotel’s market value, potential funding sources and supporting documentation these funding sources.



Current profitability

Factors of establishing value of the hotel

Securing Hotel Financing: Establishing Property Market Values

Annual revenues

Physical condition

Brand

Quality & experience of the hotel’s staff

Hotel’s STAR Report results

Its competition

Number of new hotels to be built in that area

growth (or lack of growth) in market within which hotel is located.



Replacement approach

Assuming a buyer is unwilling to pay more for a hotel than the amount required to build (replace) a similar hotel in a similar locationLess useful when no replacement hotel has recently been or could be built in the area


Methods of establishing value of the hotel

Revenue stream

approach

Viewing primarily as producer of revenueValue is established as multiple of its room’s revenueHotel brokers often use this approach for advertising sale

Sales comparison

approach

Assuming similar type of hotels in a given area sell for similar per key pricesApproach is common in residential real estate market and is popular in commercial hotel real estate marketLess reliable in a market where no hotels have been sold recently



Income capitalization

approach


Methods of establishing value of the hotel (continued….)

Often used for income producing properties such as apartment complexes and hotelsDeveloping a mathematical relationship (capitalization rate) between hotel’s projected income, expenses, and market valueMethod estimates 1) hotel’s potential gross revenue, 2) hotel’s operating expenses, 3) hotel’s net income, and 4) performs a value analysis of hotel based upon real costs of acquiring the property

Return on investment approach

Value is based on the owner’s anticipated return on investment



If loan is not repaid, lender has recourse to secure loan- Full recourse / limited recourse / nonrecourse

Lenders prefer to make full and limited recourse loans.In a foreclosure, lenders sell property to recover loan amount.Borrowers prefer to seek and secure nonrecourse fundingfuture operation or sale of the hotel may exist.

Fewer hotel buyers pay 100% of the purchase price at time of closing.Most buyers make a down payment on the property, and seek a mortgage for balance of purchase.Use of borrowed money helps buyers leverage their own funds.

Securing Hotel Financing:Applying for the loan

Liability for repayment



Securing Hotel Financing: Funding SourcesFigure 13.1: Funding Sources for Hotels

Hotel type Funding source Loan amounts

Luxury hotels Life insurance companies Pension funds

$15,000,000 or more

First-class hotels

Life insurance companiesCredit companiesInternational banksNational banks

$3,000,000- $30,000,000

Midmarket hotels

Credit companiesInternational banksNational banksRegional banksCommunity banks

$1,000,000 - $15,000,000

Economy/Budget hotels

Regional banks

Community banks

SBA loan providers

($5,000,000 or less)



A strong market

- Hotels located in undeveloped / underdeveloped areas difficult to finance

Securing Hotel Financing:Funding Sources (continued….)

To successfully secure a loan, borrowers must demonstrate:

Appropriate equity-Amount of loan requested / property value = Loan to value ratio

Strong franchise affiliation- Few lenders will lend money to non-branded property

Proven operational and/or development experience

Defensible appraisal, business plan, and revenue forecasts



Legal description of property and landPhysical condition of propertyAssessment of market conditions affecting hotelCurrent valuation of property for tax purposesValuation methods to estimate property’s market valueQualifications of those conducting the appraisalAssumptions in developing the appraisalDate appraisal was conductedEstimated market value of property

Potential lenders want to know from appraisal:


Appraisal is a required part of the loan application process!



Figure 13.2: Sample business plan outline


Well-written business plan plays important role in securing financing !

Cover letter to lenderTable of contents pagePlan summary / overviewPhysical description of hotelMarketing plan (description of hotel’s primary market)Financial plan(Statement of equity available/funding requested)Operating management plan (Description of current mgt. team)Supporting documentation (appraisal / copy of proposedpurchase agreement / franchise agreement / managementcontract / other supporting documentation)



Sales forecast should be as accurate as possible.-Realistic assumptions about 1) hotel’s opening date, 2) achievable occupancy rates, 3) achievable ADR, 4) required operating expenses


Hotel revenue forecast

Best sales forecasts include estimates of hotel revenues and expenses.-Revenue and expense forecast projects 1) revenues (sales) for a 4-yr period, 2) expenses for same period, 3) increasing occupancy percentage, 4) increasing ADR



New hotel is built

Existing hotel is purchased and operated under the same flag

Existing hotel is purchased and reflagged

Three scenarios involved in starting up new hotel:

Hotel Start-up

Reflag: to change a hotel from one franchise brand to another



G.M. arrives on-site (on-site trailer if new construction)Office supplies, stationery links orderedOffice installedBegin search for EOC membersSecure all franchiser operating manualsHotel tele-system orderedInstall “Coming Soon” sign with hotel name on siteJoin Chamber of Commerce subscribe to local and statebusiness magazinesEstablish hotel account with local bankEstablish petty cash accountOrder hotel courtesy vanOrder property walkie-talkies system

Hotel Start-up:Selected Preopening Responsibilities of G.M / Owners

Six months prior to opening



Assure interface capability of PMSContract with landscaperOrder all exterior signsPlan direct mail campaign, implement of sales planOrder laundry and maintenance equipmentSet up accounts payable systemOpen needed vendor accountsFile for all licenses (liquor) and operating permitsOrder vending machinesPlace Yellow Pages adCreate area information guide (restaurants, attractions)Obtain federal tax I.D. numberPrepare job descriptionsOrder cable channels/movie services

Hotel Start-up: Selected Preopening Responsibilities of G.M / Owners (continued….)

Six months prior to opening (continued….)



DOSM selected begins workChief engineer selected begins workF&B suppliers selectedDetermine prevailing local wagesContact newspaper employee advertising processBegin FOM and executive housekeeper searchDetermine policies for reservationsPurchase exterior trash receptaclesExecutive housekeeper arrivesFOM arrivesSecure credit card accounts and authorizationSelect pest control vendorOrder audiovisual equipment/meeting room furniture


Three months prior to opening



Order insurance liability cards for guest roomsOrder roll-away beds, cribs, high chairsOrder ADA compliance itemsInstall emergency master key box for fire departmentConclude supervisory hiringPlan grand opening party


Three months prior to opening (continued….)



Review all policies with insurerInstall safety deposit boxesInstall decals (logos) on courtesy vanSelect fire extinguisher companyBegin hiring hourly employeesEstablish partnerships with local restaurantsMail grand opening invitationsOrder employee uniformsDesignate smoking/nonsmoking zonesContact health department for F&B inspectionsPurchase first aid/biohazard kitsInstall cellular telephone/CB in vanBegin training of hourly employees


One month prior to opening



Purchase laundry chemicals, dispensing equipmentPrepare MSDS bindersTest fire alarmPlan preventative maintenance programPurchase maintenance supplies


One month prior to opening (continued….)



Test all systems- Electronic locks- Credit card processing- Safety systems- Televisions/remotes- Water- HVAC- Cable/in-room movies- Room telephones/voice mailSend grand opening press release to mediaConduct practice room service, breakfast, lunch, dinner areasHost grand opening party“Keep smiling”


One week prior to opening



Mail thank-you cards to grand opening attendees

Follow-up on all leads made during the grand opening party

Thank the media for attending

Thank all hotel employees for their assistance during the

opening

Hotel Start-up:Selected Postopening Responsibilities of G.M / Owners

Postgrand opening activities



Train staff, train staff, train staffImprove constantly through continued study of the- Hospitality field- Spend time daily with:- Each department head- Your hourly staff- Your guests- Your familyAssist the hotel sales effort whenever possibleManage your hotel

Hotel Start-up:Selected Postopening Responsibilities of G.M / Owners

Ongoing activities

chapter 13: purchasing a hotel. hotel operations management, 1/e©2004 pearson education...

Documents

hotel slide

hotel step

hotel broker

hotel operations management

cost of hotel acquisition

property potential buyers

property broker

existing property slide