Buying a Hotel: Be Aware of the Investment
What a hotel investor should be aware of, whether they are seasoned veteran or are new into the business, is what the overall expense of the hotel investment is. As hotel buyers seek properties, using LoopNet or Commercial IQ, there will be an associated price and usually a cap rate for the hotel listing. When buying a hotel it is important to understand that in most cases there are additional costs associated with purchasing a hotel. There are five things I would recommend a buyer to investigate to understand the total cost of a hotel and insure the success of the investment.
#1 – Is there a Property Improvement Plan Required?
Many times when hotel properties trade hands the franchisor will use this scenario to leverage the new buyer to invest money in upgrading the current hotel product. A property improvement plan can include as much as upgrading the entire exterior face or as little as upgrading room furnishings and accents. In either scenario an investor should be aware of these expenses and use them to:
A) Negotiate the offer based on the PIP cost
B) Seek financing that can roll the additional costs into loans
C) Be prepared to come out of pocket for these additional expenses
#2 – Franchise Transfer Fee for Hotel Properties
Under most circumstances a franchise transfer fee will be required in order for hotel properties to move from one owner to the other. These fees can be based on multiple things including the amount of hotel experience the buyer has, the brand of the franchise, or even the remaining term of the franchise agreement. Regardless a buyer should be keeping this in the back of his or her head as he or she enters into negotiations.
#3 – Franchise Application Fee
For new-comers into the hotel industry, traditional franchised hotels well require fees to become a member of the brand. Like transfer fees, these costs can be related to the experience of a hotelier and the brand in which you are applying for; traditionally, the better the brand the more expensive and more experience is needed to apply for that brand.Five things a hotel buyer should investigate to understand the total cost of a hotel Click To Tweet
#4 – Management Fees Involved with the Property
In many cases hotel owners well rely on management companies to run the day to day operations of a hotel. It is customary that the management company will charge a percentage of sales. If an owner-operator enters the picture, a franchisor could save a tremendous amount of money, or vice-versa. Be sure to check the profit and loss statement to know what you are buying.
#5 – Is the Property in Jeopardy of Losing the Hotel Brand?
One of the most important items for a hotel buyer to be aware of is the condition of the property and whether the property meets current brand standards. An exaggerated example of this would be exterior corridor Hampton Inn. A hotel investor needs to understand the likelihood of the franchise keeping a Hampton Inn brand for an exterior corridor product is very low. If this high quality brand is lost and cannot be replaced by the same caliber brand profits could take a big hit.A hotel buyer must know the condition of the investment property Click To Tweet
As hotel investments are on the rise and a great way to diversify your portfolio, keep in mind the unadvertised costs of buying a hotel. To discuss these five facts and more, contact a hospitality expert, and to learn more about investing in hotels, click here to read my posts.
About Bryan Morelock – Based in Pensacola, Bryan has gained significant knowledge of the retail and restaurant sectors for over five years. More recently, he has focused on honing his skills and working with clients in the hospitality sector, which he is particularly interested in. Feel free to follow him on Twitter at @BWMorelock.