Third-party operators and asset managers who work with first-time hotel owners need to be prepared to take extra time and steps necessary to help their clients succeed.
REPORT FROM THE U.S.—First-time hotel owners often partner with experienced third-party operators and asset managers who guide them during the development or acquisition and in running the hotel.
The third-party operators and asset managers work with the new owners to explain how hotels work and how to best navigate the challenges of the industry.
New owners can bring an asset manager on at any time, but that relationship is better established early on, even before they take ownership of the property, CHMWarnick SVP Maxine Taylor said.
That way the asset manager can help the owner understand the risks and opportunities apparent with the property and make sure expectations are realistic, she said. Sometimes lenders will require new owners to hire an asset manager as part of the financing, she said.
Though new owners will likely have goals in place based on market research and due diligence, asset managers can help tweak those goals and the strategies to achieve them, she said.
“You might lose a big account that in the underwriting you weren’t expecting to lose,” she said. “The strategy has to change. You have to understand what is the new reality? How can we mitigate it? What are the other opportunities we didn’t think about in the due diligence?”
The hotel operating model is so fluid and changes so often to reflect the demands of the market, she said.
The goals of each owner can vary according to priorities, Pinnacle Advisory Group EVP Matthew Arrants said. His company works with colleges and universities with hotels attached, where the hotel is seen as an amenity and an additive to the school, for trustees and visiting scholars, students and families to stay, he said.
One of his company’s clients ran into an issue where the hotel’s to-go containers were not environmentally sustainable, but the alternative was more expensive. They worked with the school’s administration and hotel operator on a solution.
“That’s one example where profit is not the end-all, be-all,” he said.
Some new owners have no commercial real estate experience but see hotels as an investment vehicle, said Lloyd Crabtree, SVP of asset management at Banyan Investment Group. For example, a group of doctors in a small town might decide to buy a hotel together to diversify their investments, he said. This type of owner tends to be a little more hands-off, wanting to learn more about how a hotel operates in the front end and then leaving it to the operators later on, he said.
Getting involved with a group like this early on is helpful because that affords operators the chance to work with them to unify their goals and strategies, which helps avoid conflicts later on, he said.
“Making them think about the process in the front end makes them more likely to be unified and speaking with one voice,” he said.
Education and communication
Often new owners are surprised by the precise expectations brands have for franchisees, Maverick Hotels and Restaurants founder and CEO Bob Habeeb said.
When new owners are developing a property, they have an idea of what they want the hotel to look like and do when it’s complete, but they’re surprised when the brands come in with the smallest of details, he said.
“The challenge for managers in the middle is to explain to them that brand standards are 90% nonnegotiable,” he said.
During the planning and specs stage, a manager with experience in developing a hotel can give good advice on what brands will push back on, he said. Brands do try to be flexible and accommodate owners’ wants and needs where they can, but there are a number of areas they’re not willing to negotiate, he said.
Similarly, there’s a science to managing hotels that new owners don’t realize coming into the industry, he said. There’s a lot of market information at their disposal at any time, and hotel companies have to dig in and know those details and articulate a strategy to owners on revenue goals they want to accomplish, he said.
Communication gaps lead to most of the angst between hotel owners and management companies, Habeeb said. Operators who take a closed-campus approach and hope the owner sits idly by are making a mistake, he said. In many cases, first-time owners want to get involved personally because their hotel is a passionate investment.
“The majority of people who undertake hotel development because they have a desire to get into the business,” he said. “They want to learn the business and become serious practitioners.”
When there’s trouble between the new owner and a manager, it’s most often because they don’t communicate enough, Vesta Hospitality Chairman and CEO Rick Takach said. His company has monthly meetings with owners to review financial performance, revenue performance versus the comp set, guest satisfaction scores and more, he said.
Teaching new owners about the industry can be challenging and time consuming, but it’s necessary. If it takes an hour to explain to a new owner what an executive housekeeper does and why the hotel needs one, that’s an hour-long discussion that needs to happen, he said.
“The less (owners) know, the greater the challenge,” he said.
Blessing and a curse
Prior commercial real estate experience can work against new owners, Arrants said. When they invest in hotels after owning other real estate classes, many will think they already know the answer when they actually don’t. He said hotels are different in that they are an operating business as opposed to simply being real estate.
“It sometimes takes owners a while to realize that,” he said.
While other classes of real estate can keep tenants on the books for years, hotels see changes every day, Taylor said.
“Once a night is gone, that day’s revenue is gone,” she said. “It can vary widely on several factors: trends in the industry, increase in expense, a big group falls off or short, it could be natural disasters. It could have an impact for a long time. It’s really an operating entity that you have to understand on a daily basis.”
Sometimes new owners will assume they know the solution to an issue because they don’t know to ask the right question and equate it to previous experiences, Crabtree said. They don’t necessarily see how the hotel model is sensitive to daily and weekly market conditions because they’re used to longer-term tenants, he said.
However, that commercial real estate experience does mean they understand the basics of how all commercial real estate works, he said. Everyone likes to buy low and sell high. They understand when to sell the asset and the real estate value locked in there. They understand how whatever percentage it’s leveraged up affects the return, he said.
“They get the real estate side of the business,” he said. “That’s a really good plus when investing in any kind of real estate vehicle.”