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Leaders: ‘Obamacare’ has far-reaching effects
February 27 2013

As the full implementation of the Affordable Care Act draws closer, hotel owners and operators are seeing some little-known consequences affecting their worlds.

Highlights
  • Valuations are harder to complete as the added cost of health care for all employees must be factored in when hotel transactions are considered.
  • Some sources doubt the Affordable Care Act will be completely launched on time.
  • Trying to get around the rules and regulations set forth by the legislation isn’t a wise choice.

MEMPHIS, Tennessee—A number of hotel owners and operators remain concerned as ever as the countdown continues for the expected full implementation of the Affordable Care Act, or “Obamacare.”

Enacted on 23 March 2010, the ACA mandates all Americans will have access to affordable health insurance options in 2014. Hotel executives participating in a Presidents’ Dinner held in conjunction with last week’s Memphis Lodging Update spent the better part of the conversation discussing challenges related to the Act.

Larry Wright Sr., chairman emeritus of Wright Investment Properties, said the legislation is causing problems in the hotel-underwriting arena.

“The impact of ‘Obamacare’ on the valuation of the properties we’re looking at and attempting to underwrite is significant,” said Wright, whose Memphis-based company owns and/or operates 14 hotels comprising nearly 2,400 guestrooms.

Wright said the typical hotel in the company’s portfolio has 170 employees, including 53 who have voluntary health-care coverage. The hotel will have to pay an additional $250,000 per year for every 50 additional employees on the government health-care program.

“With an eight (capitalization rate), that is almost $3 million in additional valuation,” Wright said.

“It just lowers the whole valuation,” said Don Howard Jr., president of H&W Hotel Management Company, a Lexington, Kentucky-based firm that owns and/or operates nine hotels. “We underwrite on a different number than we used to underwrite on. But until it does happen, you hate to be the first to jump in and revaluate your hotel.”

Bill Reynolds
MHR Capital

Bill Reynolds, senior managing director of MHR Capital (a business unit of Marcus Hotels & Resorts that focuses on investing in hotels and resorts), said the ACA will change the leverage amount on a property, and it will be interesting to see what vehicle is developed to equalize it.

Wright said the automatic enrollment aspect of the ACA puts pressure on owners and buyers of hotels because that has to be factored into the valuation.

“I would rather underwrite a union hotel than a non-union hotel (under the Act) because I can underwrite the number,” Wright said. “You know what percentage of your employee base you should underwrite for having health care. ... How do you place a price on a property if you don’t underwrite health care.”

Wright said there are no known viable options.

“Every direction you look to mitigate the downside risk of this to the valuation of the properties, you get stopped,” he said.

Bob Hunter, CEO of Atlanta-based Hunter Realty Associates, said it might be better for hotel owners if they embraced the concept of providing health care for all.

Wright said it’s not a question of him not wanting employees to be covered.

“You’re trying to be a decent person,” he said. “You have investors ... it’s a hard thing to deal with emotionally, morally, mentally.”

Howard said when identifying the revenue per employee equation, the hotel industry is “down the line” compared with non-service industries.

“It’s difficult to layer in the cost of this, it’s tough to absorb,” he said.

Mary Calorio, GM of Elvis Presley’s Heartbreak Hotel and chairwoman of the Metropolitan Memphis Hotel & Lodging Association, said she doubts the ACA can be fully implemented by 2014 as there are many items, such as health-care exchanges, that still need to be established.

Greg Adkins, CEO of the Tennessee Hospitality Association, said whether a state has its own exchange or defers to the federal government, it will have an effect on how employers react.

“Owner/operators will push everybody to exchanges,” added John Pharr, president of Strand Development Company, a Myrtle Beach, South Carolina-based third-party management company with more than 50 hotels in its portfolio. “The bigger players are going to have to deal with it. They’ll have to take a write down because they have to revaluate.”

Paying a $2,000-per-employee penalty and not providing health-care options is not practical for most companies, the executives said.

Don Howard
H&W Hotel Management Company

 

“How are you going to attract and retain good employees?” Wright said. “They will go to the hotels that are providing it ... that’s a problem.”

Adkins said for owners looking to try to avoid the program, they need to talk to legal counsel before going down that road.

“Also consider the PR implications if you take the penalty,” he said. “It’s a legitimate thing you have to consider.”

The executives agreed that attempting to skirt the issue by reducing full-time employees to part-time employees, or by other means, isn’t a wise thing to do. Dan McEwan, principal for Maximum Hospitality, said employers are already being measured for the program.

“In all likelihood, we’re creating a baseline now in terms of how many employees you have, etc.,” said McEwan, whose company develops, operates and asset-manages hotels.

“You should all feel somewhat at ease—you’re all in it together,” Adkins said. “At the end of the day, the cost to the consumer will change. It will have to.”

He said the expansion of the Medicaid and Medicare programs is also a part of the Act that hoteliers will need to understand.

Looking forward to…

Larry Wright Sr., chairman emeritus, Wright Investment Properties: “Growth in new acquisitions.”

C. Kemmons Wilson Jr., president, Wilson Hotel Management: “Doug (Owings from Owings Properties) and I are building a Holiday Inn Express in Huntsville (Alabama). (Wilson) is going to build a Holiday Inn Express in Gatlinburg (Tennessee). And we’re going to build an Embassy Suites in Tuscaloosa (Alabama). That’s a lot of activity for us on the hotel side.
I’m just hoping we get ramped up because costs get out of whack.”

Dan McEwan, principal, Maximum Hospitality: “The overall lack of building that we’re seeing. Not having a lot of new rooms come online is a good thing.”

Bob Hunter, CEO, Hunter Realty: “I’m excited about the industry being back. Our conference (Hunter Hotel Conference) has a theme of “Move forward with confidence,” and I believe the industry has a lot of confidence right now.”

Don Howard Jr., president of H&W Hotel Management Company: “I’m exciting about revenue. We’ve been driving revenue to levels where we’ve never been before.”

Bill Reynolds, senior managing director of MHR Capital: “(Industry executive) Bob Hazard easily said 15 years ago ‘when the Chinese finally get a middle class, we won’t have enough rooms when they start traveling.’ I think we’ll see that—that’s a big-picture long-term item.”

Top concerns …

McEwan: “My concerns would primarily stem from the Affordable Care Act and it’s effect on our business. I also have some frustration about the increase in costs of frequency programs. And the increased price of oil and it’s effect on construction materials, wall vinyls, etc. We’re seeing a 15% increase in cost in some of those materials.”

John Pharr, president of Strand Development Company: “The price of oil ... and anything that has to do with government travel, you have to be concerned.”

Hunter: “New supply. (The industry) can take a good rising market and ruin it. We’ve proven that.”

Howard: “I’m concerned about government interference and franchise costs ... the cost of doing business.”

Mary Calorio, GM of Elvis Presley’s Heartbreak Hotel: “As a destination resort, I’m concerned about the price of oil, the disposable income people have will affect my market greatly. It’s not just about the gas for the trip to come, it’s about what they’re paying for gas all year and how it affects their vacation plans.”

Reynolds: “On the concern level, I’m right there on ‘Obamacare.’ Fundamentally the issue is you have a government that doesn’t seem to understand how we created wealth in the first place. The people you think you are trying to help aren’t better off if you can’t grow the economy and business.”

 

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