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Chapter 13: Purchasing a Hotel
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Buying a hotel?
Selecting a Property
Buying an existing property
Buying a property to build
Buying performance
Buying potential performance
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Hotel broker brings buyers and sellers together
Owner (seller) authorizes broker to solicit offers for the property
Broker sends potential buyers owner-supplied info (number of rooms, summary of most recent financial performance, current STAR Reports, etc.)
Potential buyers visit property
Potential buyers examine whether hotel is operating at reasonable levels of performance
Sales price will differ, based on performance levels
Selecting a property: Buying an Existing Property
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Considering purchase for its “upside potential”Cost of acquiring hotel is lowRisk greater than that of buying established, more profitable propertyLikelihood of making significant profits in future operation or sale of the hotel may exist
Receiving not only the real estate involved, but also an exceptionally solid operating businessIs likely to continue to perform at high level with continued, proper managementPaying more on a per room basisOften a safer investment than buying one not performing as well
Buying a strongly performing hotel:
Selecting a property: Buying an Existing Property (continued….)
Buying potential performance
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Step 1: Secure site
Selecting a property: Buying a Property to be Built
Step 2: Select franchiser
Step 3: Design building
Step 4: Coordinate building process
Step 5: Build hotel
Step 6: Furnish hotel
Step 7: Perform preparering & grand opening activities
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Term used to describe cost of hotel acquisition based on number of rooms (keys) purchased
Allowing comparison between hotels of unequal size.
Total Host Cost / Number of units (rooms) in hotel = Cost per Key
Per key
Securing Hotel Financing
Individual investor / owners should understand basics of hotel’s market value, potential funding sources and supporting documentation these funding sources.
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Current profitability
Factors of establishing value of the hotel
Securing Hotel Financing: Establishing Property Market Values
Annual revenues
Physical condition
Brand
Quality & experience of the hotel’s staff
Hotel’s STAR Report results
Its competition
Number of new hotels to be built in that area
growth (or lack of growth) in market within which hotel is located.
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Replacement approach
Assuming a buyer is unwilling to pay more for a hotel than the amount required to build (replace) a similar hotel in a similar locationLess useful when no replacement hotel has recently been or could be built in the area
Securing Hotel Financing: Establishing Property Market Values
Methods of establishing value of the hotel
Revenue stream
approach
Viewing primarily as producer of revenueValue is established as multiple of its room’s revenueHotel brokers often use this approach for advertising sale
Sales comparison
approach
Assuming similar type of hotels in a given area sell for similar per key pricesApproach is common in residential real estate market and is popular in commercial hotel real estate marketLess reliable in a market where no hotels have been sold recently
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Income capitalization
approach
Securing Hotel Financing: Establishing Property Market Values
Methods of establishing value of the hotel (continued….)
Often used for income producing properties such as apartment complexes and hotelsDeveloping a mathematical relationship (capitalization rate) between hotel’s projected income, expenses, and market valueMethod estimates 1) hotel’s potential gross revenue, 2) hotel’s operating expenses, 3) hotel’s net income, and 4) performs a value analysis of hotel based upon real costs of acquiring the property
Return on investment approach
Value is based on the owner’s anticipated return on investment
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
If loan is not repaid, lender has recourse to secure loan- Full recourse / limited recourse / nonrecourse
Lenders prefer to make full and limited recourse loans.In a foreclosure, lenders sell property to recover loan amount.Borrowers prefer to seek and secure nonrecourse fundingfuture operation or sale of the hotel may exist.
Fewer hotel buyers pay 100% of the purchase price at time of closing.Most buyers make a down payment on the property, and seek a mortgage for balance of purchase.Use of borrowed money helps buyers leverage their own funds.
Securing Hotel Financing:Applying for the loan
Liability for repayment
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Securing Hotel Financing: Funding SourcesFigure 13.1: Funding Sources for Hotels
Hotel type Funding source Loan amounts
Luxury hotels Life insurance companies Pension funds
$15,000,000 or more
First-class hotels
Life insurance companiesCredit companiesInternational banksNational banks
$3,000,000- $30,000,000
Midmarket hotels
Credit companiesInternational banksNational banksRegional banksCommunity banks
$1,000,000 - $15,000,000
Economy/Budget hotels
Regional banks
Community banks
SBA loan providers
($5,000,000 or less)
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
A strong market
- Hotels located in undeveloped / underdeveloped areas difficult to finance
Securing Hotel Financing:Funding Sources (continued….)
To successfully secure a loan, borrowers must demonstrate:
Appropriate equity-Amount of loan requested / property value = Loan to value ratio
Strong franchise affiliation- Few lenders will lend money to non-branded property
Proven operational and/or development experience
Defensible appraisal, business plan, and revenue forecasts
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Legal description of property and landPhysical condition of propertyAssessment of market conditions affecting hotelCurrent valuation of property for tax purposesValuation methods to estimate property’s market valueQualifications of those conducting the appraisalAssumptions in developing the appraisalDate appraisal was conductedEstimated market value of property
Potential lenders want to know from appraisal:
Securing Hotel Financing:Funding Sources (continued….)
Appraisal is a required part of the loan application process!
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Figure 13.2: Sample business plan outline
Securing Hotel Financing:Funding Sources (continued….)
Well-written business plan plays important role in securing financing !
Cover letter to lenderTable of contents pagePlan summary / overviewPhysical description of hotelMarketing plan (description of hotel’s primary market)Financial plan(Statement of equity available/funding requested)Operating management plan (Description of current mgt. team)Supporting documentation (appraisal / copy of proposedpurchase agreement / franchise agreement / managementcontract / other supporting documentation)
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Sales forecast should be as accurate as possible.-Realistic assumptions about 1) hotel’s opening date, 2) achievable occupancy rates, 3) achievable ADR, 4) required operating expenses
Securing Hotel Financing:Funding Sources (continued….)
Hotel revenue forecast
Best sales forecasts include estimates of hotel revenues and expenses.-Revenue and expense forecast projects 1) revenues (sales) for a 4-yr period, 2) expenses for same period, 3) increasing occupancy percentage, 4) increasing ADR
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
New hotel is built
Existing hotel is purchased and operated under the same flag
Existing hotel is purchased and reflagged
Three scenarios involved in starting up new hotel:
Hotel Start-up
Reflag: to change a hotel from one franchise brand to another
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
G.M. arrives on-site (on-site trailer if new construction)Office supplies, stationery links orderedOffice installedBegin search for EOC membersSecure all franchiser operating manualsHotel tele-system orderedInstall “Coming Soon” sign with hotel name on siteJoin Chamber of Commerce subscribe to local and statebusiness magazinesEstablish hotel account with local bankEstablish petty cash accountOrder hotel courtesy vanOrder property walkie-talkies system
Hotel Start-up:Selected Preopening Responsibilities of G.M / Owners
Six months prior to opening
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Assure interface capability of PMSContract with landscaperOrder all exterior signsPlan direct mail campaign, implement of sales planOrder laundry and maintenance equipmentSet up accounts payable systemOpen needed vendor accountsFile for all licenses (liquor) and operating permitsOrder vending machinesPlace Yellow Pages adCreate area information guide (restaurants, attractions)Obtain federal tax I.D. numberPrepare job descriptionsOrder cable channels/movie services
Hotel Start-up: Selected Preopening Responsibilities of G.M / Owners (continued….)
Six months prior to opening (continued….)
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
DOSM selected begins workChief engineer selected begins workF&B suppliers selectedDetermine prevailing local wagesContact newspaper employee advertising processBegin FOM and executive housekeeper searchDetermine policies for reservationsPurchase exterior trash receptaclesExecutive housekeeper arrivesFOM arrivesSecure credit card accounts and authorizationSelect pest control vendorOrder audiovisual equipment/meeting room furniture
Hotel Start-up:Selected Preopening Responsibilities of G.M / Owners
Three months prior to opening
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Order insurance liability cards for guest roomsOrder roll-away beds, cribs, high chairsOrder ADA compliance itemsInstall emergency master key box for fire departmentConclude supervisory hiringPlan grand opening party
Hotel Start-up:Selected Preopening Responsibilities of G.M / Owners
Three months prior to opening (continued….)
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Review all policies with insurerInstall safety deposit boxesInstall decals (logos) on courtesy vanSelect fire extinguisher companyBegin hiring hourly employeesEstablish partnerships with local restaurantsMail grand opening invitationsOrder employee uniformsDesignate smoking/nonsmoking zonesContact health department for F&B inspectionsPurchase first aid/biohazard kitsInstall cellular telephone/CB in vanBegin training of hourly employees
Hotel Start-up:Selected Preopening Responsibilities of G.M / Owners
One month prior to opening
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Purchase laundry chemicals, dispensing equipmentPrepare MSDS bindersTest fire alarmPlan preventative maintenance programPurchase maintenance supplies
Hotel Start-up:Selected Preopening Responsibilities of G.M / Owners
One month prior to opening (continued….)
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Test all systems- Electronic locks- Credit card processing- Safety systems- Televisions/remotes- Water- HVAC- Cable/in-room movies- Room telephones/voice mailSend grand opening press release to mediaConduct practice room service, breakfast, lunch, dinner areasHost grand opening party“Keep smiling”
Hotel Start-up:Selected Preopening Responsibilities of G.M / Owners
One week prior to opening
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Mail thank-you cards to grand opening attendees
Follow-up on all leads made during the grand opening party
Thank the media for attending
Thank all hotel employees for their assistance during the
opening
Hotel Start-up:Selected Postopening Responsibilities of G.M / Owners
Postgrand opening activities
Hotel Operations Management, 1/e ©2004 Pearson Education Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Train staff, train staff, train staffImprove constantly through continued study of the- Hospitality field- Spend time daily with:- Each department head- Your hourly staff- Your guests- Your familyAssist the hotel sales effort whenever possibleManage your hotel
Hotel Start-up:Selected Postopening Responsibilities of G.M / Owners
Ongoing activities