In this article, we will review in list format some of the key investment and management strategies that go into maximizing the value of a hotel property.

Hospitality has a glamour or cachet unlike any other form of real estate, even high-end retail. Partnered with communities and appealing to demanding and sophisticated guests, each hotel property has the dynamics of a small city. Thus, investing in, owning and managing a hotel property can be an exhilarating journey. The key to success is to enjoy the experience, while paying careful attention to choices and decisions that must be made along the entire chain of investment and management. The result can be strong daily operations and competitive posture, in addition to enhanced asset value and return on investment.

In this article, we will review in list format some of the key investment and management strategies that go into maximizing the value of a hotel property. In doing so, we will consider the areas of investment and financing, business operations, and management and the competitive environment. Clearly, the factors discussed are not meant to be all-inclusive, but, rather, will focus on common threads we find running through hotel investment, management and valuation.

Investment and Financing

1. Align Yourself with the Right People

Hospitality is at its core a people business. It is no different when choosing our investment partners. Some of the attributes of people that can insure the best success for your hospitality investment include: expertise and experience in working with similar projects; a relevant and solid track record; a “non-litigious” outlook on conflict resolution; an understanding of how hotels make profits and how they can add value to this process; a “supportive” cultural foundation when challenges arise (as they always do); deep value placed upon long-term relationships; and a genuine character based upon integrity and trust.

When third party managers are involved, they must be investor friendly and understand hotel operations from an owner’s perspective. In particular, successful hotel operations do not assuredly translate to a successful investment, but, rather, are an important contributor to the overall investment.

We must be comfortable not only with our investment partners but also those other companies with whom we do business. We need to know their skill sets, experience, motivations and values. These partners must be fully engaged and committed to helping us achieve our project goals, and be strong and reliable when facing challenges as well as when seas are smooth.

2. Understand Your Location and its Potential

When investing in hotels, it is vital to remember that good locations drive revenue, impacting cash flow, exit values and, therefore, return on investment (ROI). As we know, real property is a fixed asset, and once a location is built upon, it’s not going anywhere and thus becomes a permanent factor in the property’s value. Therefore it’s important to understand the many potential dynamics of “location” in its broadest sense.

Location positives include visibility and physical platform, i.e. curb appeal; easy access and parking; being close to retail, dining, and entertainment venues; and being near corporate or leisure demand generators.

Other, perhaps less apparent, but important, factors include the social environment, local government tax policies and business regulations, the overall business climate and degree of community spirit and cohesiveness. In particular, local business and community groups can become your first natural “partners” and demand drivers.

A very strong location is usually apparent. That doesn’t mean that less than ideal locations can’t work. However, it is always best to go into investment decisions with “eyes wide open” and realistic expectations for performance.

3. Due Diligence and Solid Financing

In order to minimize investment risk, comprehensive due diligence should be completed with all major assumptions being supported and understood. Due diligence review should include, but not be limited to:

• A detailed review of the market, understanding the potential for new competition and its impact to the subject property;
• Research and understanding of the demand drivers for your hotel and anticipated future changes;
• Detailed study of the improvements, including having an engineering report completed and reviewed, study of environmental status, and detailed bidding and budgeting for construction or renovation, reconciled with any franchisor required property improvement plan (PIP); and
• Detailed review of historical operating statements, accompanied by a detailed operating budget and review of all in-place service contracts.

Buildout and Business Operations

1. Stay on Budget and Avoid Cost Overruns

It undoubtedly started with the pyramids—projects not coming in at bid. There are many details on any construction or renovation project, yet it is extremely important to commit the time to review everything in exhausting detail in advance—challenging each assumption along the way. In addition to having team members review the plans and specifications, the city and hotel franchisor should also have the opportunity to review your plans before finalizing any budget and starting the construction or renovation project.

Planning steps should be sustained by a rigorous, ironclad bid process that ensures: fixed prices or guaranteed maximums; that all contractors and subcontractors are financially sound; a contractual time frame for completion; and strict requirements with respect to any change orders. This will help projects come in on time and on budget.

2. Maintain Adequate Working Capital Reserves

A key theme of this article is clearly the importance of financial restraint along the entire platform of investment, operations and asset disposition. Regardless, we shouldn’t attempt to get too lean, either, as any hotel property must be able to weather potential market downturns and other restraints on cash flow for a reasonable period.

Whether held in reserve at the property level or with sufficient ownership liquidity, it is advisable to carry a working capital balance adequate for operating requirements. This operating reserve should be supplemented by a capital improvement reserve for ongoing property upgrades that may be required by your franchisor or may be needed to maintain the product. Lenders understand this, as they, typically, require a set-aside equal to 4 percent of revenue for a capital improvement reserve.

3. The Role of Cost Control Systems and Procedures

A rigorous cost control system will maximize cash flow, help prevent overspending and minimize losses due to fraud. Some reporting systems and procedures that should be focused on in this effort include: regular Contract Review; Labor Tracking, which should include the ability to track actual personnel performance relative to expected performance on a daily basis; an aggressive Collection System; a Purchasing Platform with online and electronic capabilities; and Property Tax Monitoring, with appeals as appropriate.

4. Proactive Business Planning

Critical to the successful management of any hotel, proactive business planning will serve as a road map that provides management with an operational tool to establish and achieve ownership’s goals for a property. It also provides a benchmarking system to planning activities that maximize profitability over both the short and long term.

Key elements of a strong and effective business planning approach include: Careful Budgeting that includes time horizons, with business plans conducted and updated at regular intervals; a Competitive Positioning Review, which should include a full assessment of how effectively the property is positioned against its competition as well as identify revenue enhancement opportunities; and, as noted elsewhere, provision for Capital Improvements.

These business-planning systems must be “cemented” through follow-up procedures that provide the necessary focus to establish priorities and allow for operational adjustments.

Management and the Competitive Environment

If investment and financing comprise the hospitality playbook, management is the game plan made real by a team of coaches (managers) and players (employees). We now enter the human element. Grounds must be kept clean. Reservations must be managed. Food and beverage served. Guests must be pleased.

1. Care About People by Building a Strong Team

It is not enough to have a “people culture” in hospitality. We must live it and breathe it. Moreover, caring about people means selecting an outstanding team and training them so they are motivated and equipped to serve guests at the highest possible standard

Thus, a rewarding and fulfilling work environment will position a property to achieve its potential, while reducing turnover, increasing employee’s personal feelings of effectiveness, and, we believe, life satisfaction. This people-based culture should incorporate the following: formal programs of initial and ongoing training that provide people with the proper tools to do their specific job; supervision that provides staff with clear directions and expectations for their performance; an opportunity for team members to provide regular feedback on how well “we” are doing; and formal retention programs, noting that turnover can cost 25 percent of the employee’s annual wages for property staff and 150 percent or more for a general manager or director of sales.

These efforts can translate into higher revenue potential, happier staff, lower operating costs and a more positive guest experience.

2. Concentrate on Sales and Marketing

All or most hotel properties will have identified demand drivers, whether tourism, convention centers or a nearby corporation, as well as hotel brand reservation systems to bring guests through the front door.

We must do more. A strategic, well thought-out and expertly executed sales and marketing plan is a critical component to maximizing returns. This plan will serve as a road map to achieving a property’s sales goals and will position its sales and marketing department to be efficient, effective and creative in retaining existing client groups and attracting new ones.

In addition to the proper training, revenue management programs are an important component of a successful sales and marketing program. In a hotel environment where demand changes daily, managing rate and complex reservations systems to capture the optimal customer mix that maximizes revenue is a very dynamic process that requires a full understanding of the competitive landscape on a real-time basis.

3. Customers - First and Last

The activities at every level of a successful hotel management organization will tie back to the customer and the experience they have at our property. Building on positive guest experiences will lead to your guests returning to your property again, telling their colleagues, and possibly writing about their positive experience on an online venue. A positive customer relationship excellence will lead to customer loyalty, new customers, higher paying customers, higher profits and, ultimately, more asset value.

A corporate and property culture focused on the guest experience is supported in many ways, including property appearance, staff training and attitude, and a consistent, meaningful system for guest satisfaction surveys.

In particular, in today’s “wired and wireless” world, having a positive online reputation is essential for the success of a hotel property. Management staff should be knowledgeable on all forms of online reviews and should monitor them closely to identify and address issues at a property. Furthermore, when a management response is allowed, management should carefully craft the response and make sure that the issues identified are resolved.

Making It All Work

In many ways, a hotel investment can sometimes feel like that proverbial snowball rolling down a hill. Things happen so fast and one decision or action can impact many aspects of an operation: the financial, the physical and the human.

Reading between the lines, as it were, it is clear how all the areas just discussed impact the chain of expense—and value. Whether we are talking about the cost of capital, a build out or renovation, staffing or daily operations, every strategic decision, every expense decision has a direct and lasting impact on performance and valuation.

If we are careful, yet confident; comprehensive, yet focused, we can achieve it all: a great hotel experience; fulfilling career opportunities for management and staff; strong cash flow; and an excellent return on investment.

About the author:

In 1996, Richard Takach co-founded the company with a vision of creating unique hotels that offer the finest in quality and service. With more than 30 years of experience in the hotel industry, he has earned a reputation for attracting and retaining talented hospitality industry professionals who in turn create award-winning hotels with outstanding customer satisfaction. Before forming his own company, Mr. Takach served as Regional Manager for the Marriott Corporation in Bethesda, Maryland, and spent seven years as Executive Vice President of Dimension Development Company of Natchitoches, Louisiana. He has served on Hilton Hotels' Advisory Council and was Chairman (2007/8) of the Owner's Association for InterContinental Hotels Group. Mr. Takach is currently represents the Past Chairman for this organization and is also the Chairman of the Asia Pacific Region.