Optimizing value: What hotel developers should know
 
Optimizing value: What hotel developers should know
21 MAY 2019 7:30 AM

A panel on hotel development and redevelopment at Meet the Money 2019 explained how hotel owners and developers can get the most out of their projects.

LOS ANGELES—Hotel owners and developers have an almost overwhelming number of options before them when it comes to new hotels and renovating older properties. Whatever route they take, they want to make sure their project creates the most value it can for them.

Hoteliers on the “Developing, redeveloping and repositioning to optimize value” session at Meet the Money 2019 shared their experiences with new-builds, adaptive-reuse projects, renovations and conversions.

Working with cities
Trigild has worked on redevelopment projects in Atlanta and San Diego, VP Kevin Berry said. Working with cities on their ordinances makes a big difference in what developers can and can’t do, he said. Working with the city can also mean getting some help. In Atlanta, the company received state tax breaks for a project turning around a 30-year-old full-service hotel, and with the city’s assistance turned the hotel into an independent, boutique property.

Prospera Hotels has owned the land where it is building a JW Marriott since 2007, COO Ron Kim said. The hotel was going to be Disney-managed, which was highly unusual because Disney doesn’t do third-party management, he said. However, when the recession hit, Disney said it need the hotel to have 866 rooms or it was out. Prospera couldn’t get financing in 2010, but it negotiated with the city for $81 million in transient occupancy taxes over a 20-year period.

Cities can be hurdles, though, Kim said. Developers need to understand the politics of the process and that city council members can change during elections.

“It is critical to know the city, not only the economic development department, but the planning department and public works,” he said. “You’ve got to navigate that process.”

That said, cities want to have a nice hotel, Kim said. There’s an incentive for them to replace lower-quality hotels with higher-quality properties. When a developer is able to bring in a luxury product to the market, the city is going to work with them on that, he said. The revenue from transient occupancy taxes are valuable to cities, and developers can bring the new tax revenue and clean the areas around the hotel.

“You have some leverage when negotiating with the city on what you want and what they can expect from you,” Kim said.

Historical properties
When working on a historical building, the first things developers should do is work with the local historical society to identify anything in the building that can’t be removed, such as marble flooring or tiles on the wall, Berry said.

“Understand what you can and you can’t do and then move forward,” he said.

Keep in mind, however, if the city requires developers to repair or replace historical materials with like kind, said Jack Westergom, founder and managing director of Manhattan Hospitality Advisors. If the marble floor came from a quarry in Italy 80 years ago, it might be difficult to meet that requirement, he said.

There are many buildings in Miami that sit old and empty because it’s difficult to meet those needs in the old art deco properties, said Brad Weiser, principal at Hostmark Hospitality Group. Adding newer required features, such as sprinklers and ramps, is nearly impossible, he added.

The city will have an idea of what in the property is of value historically or aesthetically, Westergom said. However, the developer must walk a fine line of meeting those needs while also adding modernizations. That might mean explaining why the new windows have to go in, because the new ones won’t leak or bleed sound from the street.

“It’s sort of a dance,” Westergom said. “You as the creative developer and the consultant team are making them understand why you need to do what you need to do.”

Conversions
The first hotel in Prospera’s portfolio was a shuttered, three-story, exterior-corridor motel in Anaheim, Kim said. The property was next to a convention center, so the team knew it had a good location. The project was a down-to-studs renovation, and when finished, the company branded it as a Days Inn, he said. It operated under that flag for two years, but there were several others under that brand in the market.

Prospera then decided to make the property an independent, Kim said. Instead of losing rate, the hotel gained rate and kept its occupancy. The company’s thought process was that the hotel had a good location and it didn’t believe it would lose its revenue stream, so the conversion would help it save on franchise fees, he said.

When looking at changing brands and property improvement plans, the construction and renovation costs are so expensive that they might prevent developers from changing, Kim said.

“You have to evaluate the cost if you want to up-brand or down-brand,” he said.

Although many in the industry complain about the number of brands in existence now, they do create opportunities, said Steve Van, president and CEO of Prism Hotels & Resorts. Even for an adaptive-reuse project, there are so many brands available, developers can find a brand that fits far easier than they could have 10 years ago.

“I think we’ve got more tools as developers and operators to match unique buildings for the best place in the market,” he said. “I think there are so many more options now knowing where the sweet spot is in the market.”

The market is going to dictate what developers can do, Westergom said. His company has a project in a suburban market where the developer is buying an existing building and wants to make it an upscale property. The problem is the market is at 72% at the best of times, he said. The hotel is at a roadside location and doesn’t have many demand generators around it.

Developers have to balance their desires with the reality of the market, he said. Ideally, the project is one that has some flexibility in the end product while allowing owners to pay the bills at the end of the month.

Key West has one of the largest independent hotel markets in the world, Weiser said. Its occupancy level stays near 90% year round, and that makes it easy to decide to go with an independent product there. However, 58% to 60% of the market books through online travel agencies.

“The challenge for independents is how do you get people to look at you and your website directly?” he said.

If an owner wants to convert from an independent hotel to a franchise, it’s necessary to see what the PIP will be, Berry said. When he worked on a project with an owner of an indie hotel who was considering converting to different brands, they looked at franchises in the area and found that 50% of reservations at nearby hotels came through OTAs. The indie hotel also had higher rates and occupancy levels than the franchise properties, he said. The PIP to convert “was extraordinary,” he added.

“The best bet was to leave it as an indie,” he said.

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