Banks still not lending for CapEx
Banks still not lending for CapEx
29 OCTOBER 2010 8:21 AM

Hotels are increasingly putting off maintenance and renovations as lending remains tight.

REPORT FROM THE U.S.—It’s an all-too common story: A hotelier, hit hard during the recession, needs to make improvements to her property per the terms of her loan agreement, but occupancy is down and cash flow is non-existent.

Another project is deferred and the hotelier is beginning to wonder how she will get caught up.

Jeffrey Freund
VP of operations
Country Inns & Suites by Carlson

“I would say it’s a fairly common thing that’s been going on the past 16 months,” said Jeffrey Freund, VP of operations for Country Inns & Suites by Carlson. “It’s not the projects that would impact public safety or guest satisfaction, but other projects that can be deferred.”

Freund said bankers are striking a balancing act between making sure the assets they made loans against are maintained, while being sympathetic to hoteliers who are struggling.

“It really comes down to the relationship,” Freund said. “If the hotel has a relationship with the bank, they’re more likely to work with them.”

Brand managers agree banks do not want their assets to deteriorate and also do not want hoteliers to default on loans by using the money to make improvements that aren’t absolutely necessary.

“The bank understands that paying the mortgage is the most important thing,” said Ron Pohl, senior VP of brand management at Best Western International. “There’s been so many hotels foreclosed on that they are being more flexible on the spending they require than they were previously.”

Deferred maintenance

The types of projects being deferred really depend on the type of loan an hotelier has and the terms of the loan. The hotelier also has to worry about maintaining brand standards, said Keith Pierce, president of brand operations—the Americas for Wyndham Hotel Group.

The mandate to upgrade to triple-sheet premium bedding and flat-screen televisions are two of the most common and costly capital improvements hoteliers are deferring. Upgrading to premium bedding and electronics can cost US$2,000 per room. Most of the projects being deferred are not operational maintenance such as landscaping, although Freund said landscaping in some hotels is now done internally rather than by professional landscaping companies.

“There’s what the bank requires and what the franchise requires,” Pierce said. “The brands have been realistic in working with the hotels on their product improvement plans and just doing what is required.”

Mitul Patel, COO of Peachtree Hotel Group, whose company has five brands, agrees brands are willing to work with hoteliers. “Most of the brands realize what’s happening and are just sitting tight right now,” Patel said.

Brand managers said many banks are not requiring major equipment be replaced or even adding scheduled improvements such as flat screen televisions, new bedding and furniture in the rooms because they still are not lending money to make those improvements.

“With dollars so tight from an operational perspective and institutions not able to provide funding unless there are really a lot of assets, hoteliers basically have no choice but to spend their operational funds to repair major equipment such as roof top air units and kitchen equipment and keep them running as long as possible,” Pohl said.

Banks on occasion have been willing to work with the hotels without lending new money. Patel said two of the company’s hotels also were able to adjust their interest rate with their bank, which freed up cash flow to upgrade the electronics in the hotels.

“But others have not been willing to make any changes,” Patel said. “One lender even tried to hit the hotel up for a fee because they weren’t making their ratios.”

Playing catch up

Ron Pohl
senior VP of brand management
Best Western International

The good news, said brand managers, is the slight rise in occupancy this past summer should allow some hoteliers to begin to get caught up on their deferred maintenance projects this fall and winter.

“It’s typical that hotels don’t do a lot of improvements during the summer, but I think the hotels that saw an increase in occupancy this past summer will be taking that money and adding staff to help with preventative maintenance on equipment to keep it running,” Pohl said.

Freund said as the business continues to rebound, more hoteliers will be replacing the wallpaper and the common area carpets and finishing other improvements they might have deferred during the height of the recession.

“In the last three months, hotels have been doing more,” Freund said. “We think business will be back within the next three years.” 

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