Improved Economy and Access to Capital Make Renovations and Expansions Possible

By Andrew Glincher Office Managing Partner, Nixon Peabody LLP | October 28, 2008

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.

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