Identifying Hotel Real Estate Opportunities in Uncertain Markets

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

There are individuals and companies with the resources to buy and hold onto a promising hotel, and ride out the tough economy.

Knowing which properties have potential and which are likely to be good long-term bets, takes expertise, experience and judgment.

Of course, the first consideration is always location. Is it a solid business location that, in a good economy, is always going to draw business travelers? The answer to this question is not always obvious and usually requires an intimate knowledge of the community. A downtown area may have been strong for years, but may now be deteriorating as businesses move to the suburbs. An area that appears weak may be targeted by the city for major economic development programs.

Or there may be unique considerations. One of our current matters involves a hotel in what appears to be a stable suburban business district. However, a significant number of its rooms had historically been booked by executives and visitors of a large international corporation located in an office building across the road. That company recently moved and bookings dropped dramatically. Whether that office space is filled with another large corporate tenant, or a series of small businesses - or remains vacant for an extended period of time - can have a significant impact on the valuation of this particular hotel.

Assuming the location is viable, one of the first things a prospective buyer is going to consider is any licensing agreement that is in place. The brand name and reservation services of some chains can be valuable attributes. On the other hand, a new owner may be able to negotiate a new agreement with a different chain that saves the property a significant amount of money or, conversely, creates additional opportunities to make more money. The fees associated with the franchise agreement, the operating standards, amenities, types of restaurants or housekeeping services that are required, are all factors. A prospective buyer is likely to come armed with ideas about the brand he or she wants to be associated with, and the type of licensing agreement that will be the most profitable. That won't always mean the least expensive - it might make sense to be part of a demanding brand, that costs the property more, if it brings in more reservations at higher room rates.

Restaurants and retail are other areas where prospective buyers sometimes feel they will be able to add more value. If someone has had experience creating successful restaurants within hotels in business districts, attracting lunch and dinner guests who work in the area, he or she might count on the possibility of replicating that success in a new property - creating value that was unavailable to the previous owner.

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