Today, every hotel owner is making one of three decisions: Do I hold, sell or refinance? There have been thousands of pages, reports, articles and books written on the subject; however, I believe the answer could be much simpler. If you own a franchised hotel, you should be a seller when there are buyers and when your hotel still qualifies for a new full-term franchise.
Within the U.S., most franchise companies are what we refer to as asset light—meaning they own very few hotels and very little real estate. Franchised hotels represent a high percentage of the U.S. lodging supply.
I am often asked, “When should I sell?” With franchised hotels, there comes a point in ownership where diminishing returns overtake the projected value return. Many of the suburban and tertiary select-service franchised hotels you see today will eventually be viewed and valued as brand obsolete and will struggle to maintain operational profitability.
When contemplating exit strategies, the central decision driver should be the brand. In fact, the value of a franchised hotel is tied directly to the brand and that brand’s performance. Therefore, the decision should be based on the longevity of the brand. One example would be a 10-year-old Hilton, Marriott or IHG hotel that can still be “pipped” deep enough to qualify for a new full-term license. Therefore, one simple answer to the question is to sell when you are certain the buyer can still get a new full-term license. Another example is owning a 15-year-old box when the economy is heading into a down cycle. Since most down cycles last five to six years on average, by the time the economy has improved, your 15-year-old hotel is now 20 years old and potentially at risk for its brand. If your franchisor is within one of the top-tier brand families, the death knell to your investment is hearing the words “remaining term only” from the franchisor. This basically means that your franchisor does not believe your hotel meets the long-term needs and image of the brand. When you hear those words, it is likely you waited too long to sell.
Therefore, my market advice is to sell when there are buyers and to sell while the buyer can still obtain a new full-term license. The definition of what makes a buyer a buyer is simple; they can get a loan and can see some upside. The life term of a franchise is continually a moving target and it is incumbent that the hotel owner understands where the brand is heading and the cost to maintain the hotel within brand guidelines. There are, of course, many other factors that impact value, but these are the most basic guidelines that may help a hotel owner maintain value in their real estate.
H. Keith Thompson is principal of Stockbridge, GA-based Avison Young, a full-service commercial real estate services firm.
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