Hotel & Motel Management Magazine
          ON FINANCE Column
    (For April 5, 1999 Edition)

The Art of Making a Deal in Unreal Estate
           By Jeff Wilder

During what seems a lifetime ago, namely the late 80’s and early 90’s, hotel real estate experienced a precipitous downturn in value. Then, as we all know, optimistic and economically vibrant times emerged and the values of most assets climbed. Hotel real estate markets certainly benefited by both the growth of lodging demand, expansion of mortgage liquidity, and the ready availability of equity capital. All this drove property prices upward.

Then, came the mid 1998 credit contraction and riskier debt (like hotel loans) became less appealing. The result of that contraction was tightened underwriting standards, increased interest rate spreads, lower loan levels and increased equity requirements. Further, the growing realization that we were in a stable price economy, with a bias toward possible deflationary risk, caused leveraged assets such as real estate to be viewed as less attractive. These realities caused a predictable reduction in the value of hotel assets, which has impacted our industry since mid 1998. So, with nationwide hotel values having dropped by 10 to 15 % over the past year, some owners who were interested in selling their hotels are having second thoughts. Others, who understand where we are in the hotel industry’s economic cycle, are more realistic, motivated to do business, and have adjusted their sights and prices to accommodate today’s conditions.

For the sake of perspective, and for those owners reluctant to market their hotels in today’s environment, I offer a delightful story that humorist Art Buchwald recounted a number of years ago.

In the late 1980’s everyone was making a killing selling their houses, which had almost universally dramatically risen in value since originally being purchased. Buchwald’s cousin Flo was no exception and so she decided to sell her house, and move to a leisure garden community in New Jersey.
“How much are you asking for the house,” Buchwald asked
“Well, I bought it for $ 45,000, and I’m putting it on the market for $ 210,000,” she replied.
“How’d you arrive at that figure?” he queried.
“Well,” Flo answered, “the real estate man said that I should be able to get $ 150,000. My son thought $ 200,000 was about right and I added $ 10,000 for icing on the cake.”
A month later, she called Art to say that no one had made an offer. She asked him what to do.
“How about lowering the price?”
“If I do that I’ll lose money. No bargain chiseler is going to steal it from me.”
Buchwald agreed, saying that lowering the price would look like a sign of weakness. Yet another month went by and cousin Flo called him, again.
“I’ve decided to tell the real estate man to reduce the price to $ 200,000. I’ll take a
$ 10,000 loss because sometimes in business you have to take it on the chin to survive.”
“That sounds like a good idea,” he said, “Now your house will be priced the same as all the other $ 45,000 houses.”
Well, three (3) more weeks went by and the house still hadn’t moved.
“There’s only one course of action,” Buchwald opined. “You’ll have to reduce the price to $!60,000.”
“If I take your advice, I’ll lose $ 50,000!! Life can’t be that unfair,” moaned Cousin Flo.
“Then keep the house and hope that the price eventually rises. And, if you don’t sell it you can always give it back to the bank and let them deal with it.”
“I can’t. They’re no longer in business. It seems that they kept making million dollar loans to people who were buying $ 45,000 houses.”

Of course, to a greater or lesser extent, Cousin Flo’s attitude exists in all of us. We always want to get the most for what we do own and offer the least for what we want to own. Yet, for perspective, let’s try to remind ourselves that we are now in a very balanced healthy real estate market. Sellers need to put aside what they thought their hotel might have been worth in the supercharged markets of yesterday--that's history likely not to be repeated for quite a while. And buyers need to appreciate the good values that are absolutely available in today's ever-more realistic marketplace. But remember, realistic is not a code word for "cheap." In a low inflation world, the cap rates for hotels represent good value, pure and simple.
          ###########