Mr. Glincher

Hospitality Law

Improved Economy and Access to Capital Make Renovations and Expansions Possible

By Andrew Glincher, Office Managing Partner, Nixon Peabody LLP

Where the traditional sources of financing were equity participants and banks (which usually required significant equity investment before they would lend money), today we are seeing considerable interest among investment banking firms, pension funds, mutual funds and other entities which have not been as active as the hotel market. But with limited vehicles for delivering the kind of returns they need, these investors are starting to look at hotels as an opportunity with great potential.

These new sources of capital are coming onto the scene at a time when property owners have greater demand. Occupancy rates are up, revenues per available room are up, income is up and the time may be right for expansion - or for the type of capital intensive strategic repositioning that some properties require.

In addition to adding rooms through renovation and new construction, many properties are rethinking their mix of space. Some are converting a portion of their rooms to condos - which requires significant investment, but can pay off handsomely when completed. Others are renovating public spaces to include more retail - which can provide a steady income stream over time. The other advantage to reconfiguring a property's retail space is that is gives management a chance to reconsider the type of retailers it includes. Should they be higher-end? Should a restaurant be designed in partnership with a celebrity chef? Can the retail space be used to add luster to the hotel? Or should it mainly be viewed as an amenity for guests? What formula will balance those needs - and produce the most income?

Of course, in some cases, the analysis process leads to unexpected conclusions. We were recently involved in a situation where it very quickly became clear that if the entire property were reconceived - for retail use rather than hotel - the property value would increase substantially.

But for most properties, the focus is simply addressing deferred needs. Over the past few years, with tough economic conditions, cash flow was suffering and non-essential maintenance was deferred. Now that the economy has improved and owners have access to the capital necessary to make improvements, they are finding that more than simple maintenance is required.

New construction in virtually every market and upgrades to existing properties have made it essential for any property that is looking toward the future to think about major investments in improvements, amenities and, in some cases, a major repositioning, simply to remain competitive.

Even budget hotels, which compete mostly on price and are sensitive to any excess expenditures, are finding that they need to spend money to be fresh and up to date, and to provide business travelers with Internet access and amenities that once were available only in higher-end brands, but now are commonplace necessities.

Whether it's a luxury hotel or one that caters to the budget conscious, the first steps involve market research. What do your clients want in a hotel? It may be no more complicated to find the answer than to ask them. Provide a card on check-out that gives guests the ability to tell you how important they consider certain features - which ones determine their choice of hotel and which ones they'd be willing to pay extra for.

And do research on the competition, which may be no more complicated than simply making personal visits to other hotels in the area. What do they offer that you don't? How have their configured their retail space, their restaurants, their spa or other services? You can then make some informed judgments about your own property - do you want to follow the lead of the competition, or set yourself apart? What can you learn from their successes and from their mistakes?

The improved economy and access to capital in today's market certainly makes the decisions easier, but research, analysis and sound business judgment are at the core of the process. Don't simply invest because the capital is available; invest wisely in improvements and additions that will make the property stronger in the long-term.

Andrew Glincher specializes in the negotiation and resolution of business and real estate disputes. Mr. Glincher has represented developers and owners of retail centers, hotels, movie theatres, office and industrial buildings and parks, utilities, restaurants, subdivisions, apartment complexes, assisted living housing complexes, long-term care facilities and condominium projects. Mr. Glincher is admitted to practice in Massachusetts, the U.S. Court of Appeals, Third Circuit, the U.S. District Court, District of Massachusetts and the U.S. Tax Court. Mr. Glincher can be contacted at 617-345-1222 or aglincher@nixonpeabody.com Extended Bio...

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