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By Altus Group | November 18, 2016

During the past decade, I have had the enviable joy of spending some nights of most every week in a hotel.  Sometimes overnight, sometimes a few nights.  And during that time I have lived through four hotel renovations (three different hotels): two majors (walls moved, restaurants re-installed, permanent fixtures replaced) and two minors (wallpaper, paint, and carpet re-done; new mattresses and bed/couch pillows; lighting renewed; bathroom cabinetry removed; new tables/chairs/TVs in gathering areas and reception). Neither effort is fun for a business/repeating “corporate” guest nor for the “transient”, off-the-street guest nor for the SMERFs (sports, military, educational, religious, fraternal – the group discounts) – probably not a lot of fun for the staff, either! During the reno fracas, I’d show up each week to a room other than my “regular” room.  Phones and TVs and clock radios didn’t work. If things got too tight at reservations, I might be “walked” (driven to another hotel because “mine” was 100% “occupied” by either guests or renovation crew).  Staff gets walked (furloughed), too, as there is less work to do if two floors (at a time, for a couple of weeks each) are being “occupied” by an outside renovation crew.  Tempers flare on both sides of the Front Desk.  Promises of thousands of hotel bonus points, free bottled water, and hotel swag are offered to soothe frayed nerves.  You get the idea.

But besides the in-house drama of the actual renovations/reconstructions there is the out-of-house drama of jurisdiction reassessment issues. Assessors think that when a hotel puts money into freshening up the joint, the assessed value of the real property goes up accordingly.  Such an assumption can cause the hotel’s assessment to jump almost as soon as the “thank you to our patient guests” ice cream social is underway.  However, every dollar put into a hotel’s updating is not equivalent to an uptick in the real property value assessment. As a manager in one of my regular hotels noted: “a dollar in is NOT a dollar up.”

The room “rack” rate (the major driver of revenue at a limited-service establishment) is set based on local market forces.  With the variety of discounting entities, the RevPAR (revenue-per-available-room, a function of average daily rate [ADR] and occupancy) is probably the more accurate predictor of an asset’s success.  And it is that spending money to maintain revenue that keeps a hotel’s management team planning these cyclical minor and major renovations. And losing sleep. Predicting with a crystal ball is hard work!

Hospitality is an ever-changing (and ever-checking-the-other-guy) world of service and visuals and rooms.  The folks at the top are constantly looking at their changing fortunes in the marketplace.  They are always investigating to find ways to support their healthy position in the competitive set of other hotels in their “neighborhood”.  If their hotel begins to lose market share when compared to similar assets nearby, they need to find ways to claw their way back into the struggle. If occupancy is dropping, they will first look at the site:  is it neat-and-clean, comforting, welcoming, easy to navigate?  Then the staff will get a review: are they neat-and-clean, comforting, welcoming, easy to navigate?!  Finally, after settling the two fixables, management will look at the wider “why”.

Most privately-owned hotels and all chain-operated hotels have a schedule of renovations, big and small.  These events happen every few years, somewhat determined (or at least encouraged) by the age and style of the original structure.  These renovations supersede any staffing and simple visual tweaks mentioned above, although if the tweaks don’t work as hoped, the renovation schedule might be advanced.  These efforts ordinarily center on the optics (and these days, the technologies) of the complex.

On the initial design side, one recent trend has recognized the increasing hotel stays by Millennials.  Sociologists and other scientists have opined that this up-and-coming generation moves faster and needs less closed closet space:  so in new hotels there are now closet-less hotel rooms with wall hangers (my regular hotel, newly-renovated, now has a bunch of rods attached to the walls for clothes hangers – and a LOT of warnings not to hang clothes on the sprinkler system similar fixtures nearby!), and more horizontal surfaces to place an overnight bag.  Industrial-looking, barn-like sliding doors have replaced “regular” doors separating the main space from the bathroom.  Larger gathering spaces on various levels have taken up the space once dedicated to the individual guest’s room.  Techno must be obvious at every desire level.  This seems to be the future, at least in the intermediate term, for the planning of new hotels.

For the most part, cyclical renovations are not as all-encompassing as these generationally-driven project design strategies. The cyclicals are instead meant to freshen, to re-introduce, to bring new (and re-bring old) folks in the door and onto the new mattresses.  And to help them to think about staying in that same space the next time they are in town. To (almost unknowingly) feel better about the (new) color-of-the-year coating the walls of the Reservation Area, instead of the erstwhile beige.  To remember how it felt to be gently pelted by the rainfall showerhead. To experience the more-theatre-like mood of the twice-the-size, slightly curved, impossibly-thin Communications Center (formerly your TV).  Which also connects you to the Front Desk or Room Service.  And your airline or car reservation.  And your kids, at home, on Facetime and Snapchat. Perhaps to your Deity, or at least to The Big Bang Theory!  But it’s the same hotel – just with new coverings and “stuff”.

The cyclicals are meant to maintain RevPAR in this ever-changing world. Not to increase the real property value of the hotel.  To bring in a tougher simile:  like a shark, a hotel must keep moving…or it will fall slowly and die. There are folks at the management level in every hotel and/or hotel chain who study and regularly modify what must be a part of that shark movement.  But when all is said and done, when the last piece of carefully-chosen carpet and wallpaper is affixed, when the nickel-plated faucets on the floating sinks are finally connected, and the guests are once-again welcomed into the newly-updated Lobby – what is the hotel worth…from an assessment point of view? What’s different, value-wise, in the real estate?

How does one value a hotel?  Broad brush, a hotel is “worth” what its capitalized net operating income calculates it is worth – minus tangible (inventory and FF&E [furniture, fixtures, and equipment]) and intangible (value of the “flag” brand, the reservations and membership rewards systems, start-up costs, etc.) personal property assets.  So we take the income, remove the expenses, capitalize the remainder, and remove the value of the various non-realty portions of the complex.  There are methods (and arguments) as to the precise nature of the steps for this process.  But in the end, what do we have?

After a cyclical renovation, we have the same property and building we had before the process all started.  The same land.  The same improvements. The SAME “real property”. For the most part, the same room rates. Often the same (recovering from the renovation downtime) net operating income.  What has happened in the intervening months is a carefully-budgeted endeavor to sustain the whole business entity as a healthy operating hotel, able to continue to charge the same market rates as its competitors.  Nothing magical has happened to make the real estate worth more. Yet an assessor, more times than most, sees gold in “them thar rooms”.  And she or he will often take a swing at raising the assessment based on the advertised reno alone.  Neither extra rooms nor new restaurant to increase revenue – just new coverings on the walls and floors, and new “soft goods” in the guest rooms.

At Altus, we face the assessor with facts. We have saved many millions of assessment dollars for a wide range of hotels – from boutique operations to hotel/convention complexes.  We can refocus an assessor’s fascination with the updated “pretty and shiny” renovations back to the basics of hospitality valuation. And achieve a fair and equitable assessment for your property, without having a jurisdiction distracted by the non-realty upgrades of a cyclical renovation.

You work on keeping the “Heads in Beds” (with thanks to Jacob Tomsky) – let Altus help you with the valuation of your hotel.

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