Hotel Expansion: Renovation vs. New Construction
By Fred B. Roedel, III Partner & Managing Member, Roedel Companies, LLC | April 02, 2015
Keys to Successful Expansion
There are three options to expanding your portfolio of hotels. You can purchase an existing property and leave it as is, build a new property or purchase an existing one and renovate it. Economics is what will drive your ultimate decision. In order to determine which expansion option best meets your objectives, it is important to properly and reliably evaluate each opportunity by breaking down its time, cost and quality elements in order to ensure success.
Renovating an Existing Structure
When considering whether to invest in renovating a hotel, two key factors to look at are location and opportunity. Renovation of a property makes the most sense when it is in a proven market and holds intrinsic value that cannot be recreated - is a historical landmark, is an example of unique architecture etc. Such properties are often valued by the community, sought out by travelers and, if of historic significance, may come with marketable tax credits.
A renovation of an existing hotel can be a positive alternative to building a new one for the following reasons:
- You have less market risk when buying an existing hotel with a proven location and trading history.
- Higher construction costs and land scarcity in good markets often mean that the economics of building a new hotel will not work.
- Buying an existing structure may be the only option for placing a hotel in a specific location.
- You are acquiring an existing structure and as long as the structure is sound and adaptable to your plans, a major development component is addressed.
- The overall construction timeline and cost may be less since a structure is already in place.
- The timeline to positive operating cash flow and market stabilization can be much shorter than that of a new development.
- Many communities actively seek developers to redevelop properties and be a part of redevelopment efforts, in some cases monetary assistance maybe available as an incentive.
- Redeveloping a property within a community can have an immeasurable positive impact on the property and its potential.
- Renovation tax credits are available for many older structures. Depending on renovation plans, a development could garner 10 - 20% of the commercial investment value in tax credits; you can then sell the tax credits and use the cash as equity.The areas to be cautious of when it comes to renovating a property are:
Have an accurate pre-renovation timeline.