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Pieces must align for new construction
April 24 2012

Panelists at AmericInn’s annual brand conference said it’s the right time to build midscale hotels—but only in markets with strong demand generators and on the right terms.

Highlights
  • At the start of the recession in 2009, there were markets in the United States that were in need of additional supply.
  • Owners should have an exit strategy, especially in markets where the demand is only temporary.
  • Relationships with all the partners—banks, management companies, architects, brands—are crucial.
By Jason Q. Freed
Contributing Editor, Tech Impact Report

 

REPORT FROM THE U.S.—While financing a new-construction project still comes with plenty of hurdles, experts say the right projects in the right markets with the right partners should be able to get off the ground.

“It is a good time to build a hotel in the $4-million to $10-million range,” said Steve Diedrich, principal at Economic Development Associates, which develops credit structures and obtains financing from public and private sources to fund commercial construction projects. “Lenders want to do deals, but their hands are somewhat tied. However, they can’t make money without lending money.”

Diedrich spoke Monday on a panel featuring a lender, a market feasibility consultant and an owner/developer at AmericInn’s annual brand conference in Minneapolis. The consensus: It’s the right time to build midscale hotels in markets with strong demand generators.

Greg Hanis, president of Hospitality Marketers International—the feasibility consultant—said there are markets in the United States that were in need of additional supply at the start of the recession in 2009, yet no projects came to fruition because of the financial collapse. Those markets still have enough demand to absorb more hotel rooms, he said.

“They’re out there right now,” Hanis said.

But Hanis strongly suggested having an exit strategy, especially in markets where the demand is only temporary, such as in the oil-boom markets of North and South Dakota.

“You have to have an exit strategy,” he said. “Build it, stabilize it, sell it.”

To get a deal done, Diedrich said, the owner or developer must have real skin in the game. He said he’s been a part of eight successful deals during the past seven months.

How to get deals done
David Harchanko, president of Apollo Development, opened one 60-room new-construction AmericInn at the end of March in Fairfield, Iowa, and he has another 60-room AmericInn under construction in Osage, Iowa.

Harchanko said he was able to get those hotels financed by packaging more than enough information for the lender. “Be prepared with solid documentation and backup,” he suggested.

Harchanko outlined some of the details of the financing he received for the AmericInns in Fairfield and Osage. The cost to build the buildings, without land and utility costs, was approximately $63,400 per key, he said. An AmericInn he opened in 2009—made of wood instead of concrete—cost $62,700 per room, he said.

Hanis—the lender—said banks are looking for solid demand characteristics within a market’s existing supply. “Limited service and select service are the place to be,” he said. “Those, along with some upper-economy brands, are the ones that are getting the attention.

“The first thing we look for is diversity of demand,” Hanis continued.

Hanis said the lack of diversity is one of the fears he has about the Dakota markets. “After the research (on oil extraction) is done, where does the demand come from?” he said.

The economics of a prospective area also are important. For a feasibility study to show success, he said a first-year occupancy projection should be in the upper 50s. Occupancy should be in the 65% to 67% range by the third year.

“Bill Marriott wouldn’t take on a deal that wasn’t projected to be in the 70s the first year,” Hanis said.

Despite that, Diedrich said banks want to see a realistic pro forma. Realistically, deals are getting done with occupancy projected in the high 50s with rooms selling at $80 to $100 a night.

To a banker, he said, the term developer is “kind of a dirty word.”

“He comes, builds the hotel and then leaves,” Diedrich said. “Lenders are looking for someone who’s actively involved. Whether it’s sitting behind your desk or physically on location, the lender is looking for someone who is going to be involved.”

Relationships with all the partners—banks, management companies, architects, brands—are crucial, the panelists agreed. What keeps a deal from getting done is when a developer comes to the lender with no local involvement on the plan.

“The banks are familiar with the participants. We bring the management, and we participate in the products,” Apollo’s Harchanko said. “When we bring that package to the lender, they feel comfortable enough to do the deal.”
 

Which brand?
Many midscale brands have tweaked their prototype to assist developers in building a less-costly product. AmericInn has done some similar tweaks, including flexibility with the lobby space and moving the swimming pool under the same roof as the hotel rooms—that is, removing the extra space on the side of the hotel needed for a pool.

“It makes it more cost-efficient to build,” Harchanko said.

However, Hanis said, with the addition of land and furniture, fixture and equipment costs, the cost to build an AmericInn is about the same to build a Hampton Inn or Holiday Inn Express.

“The biggest increase we’ve seen is the installation of the FF&E,” Harchanko said.

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