Today's Deals Require Flexibility, Creativity, Cooperation

Reprinted from Advanstar's Hotel & Motel Management Magazine

The sales market of today is conservative, rational and moving along at a lethargic pace.

Our hotel sales-brokerage office has, happily, become a magnet for owners wishing to quietly market their inns, and I don't think we're unique. Many owners - including franchisors, syndicaters and institutions seeking to divest - have no choice but to turn to a professional hotel sales-broker or use direct customer contact.

Gone are the days of a marketplace dominated by lawyers, accountants and syndication. There is a collective recognition that hotel operators and entrepreneurs are back in the market as purchasers. They are, and always have been, the primary customer base of most hotel brokers.

These customers were always there, of course. But in recent years, they were often shut out of acquisitions by the less informed, tax-oriented buyer. Owners now recognize the need to make equitable and realistic deals with operators who focus on basic operational cash-flow economics as the driving force behind doing deals.

Potential For Improvement

Does this mean owners must "give away the store"? Absolutely not. A mis-franchised or unaffiliated property, or one that's passively owned or poorly managed, can and should realize improved results under new circumstances. Well-managed hotels that are worn at the edges but in good locations can often be upgraded and brought back to respectable profit levels.

Owners will find that buyers today will risk capital for a good value. They will certainly not invest money without expecting early success - after all, there's no way out if the property doesn't "turn." That's why people are willing to pay for current earnings rather than risk cash in a "turnaround" situation unless excellent terms are offered by the owner.

First-class hotels with slipping occupancies are quietly dropping rates to assure market share. As the guest sees increasing value for his dollar, all the hotel owners in the marketplace must re-evaluate their rates. Thus, the water torture of sinking real rates and/or market share loss occurs. Often, declining rates and slumping occupancies coincide just at the point at which a hotel must do major capital improvements just to stay competitive.

No wonder buyers are so conservative. There's simply little luster to hotel development these days - especially since tax rates on property sales have resulted in higher taxes paid by owners at the point of title transfer. A seller with good cash flow expects a premium for the inn's earnings because he can't replace the income stream with the lower current after-tax proceeds of a sale. Therefore, the owner is less flexible on price and terms.

This occurs even though the acquisition market is in a conservative, highly competitive environment. Naturally, when the newly realistic seller has missed the boat and must be even more flexible, the buyer isn't there at the old price.

Tough To Take Terms

We humans find it difficult to take, for example, $3 million in terms rather than the $3.3 million in cash we might have taken last year. So we keep our hotel and rely on our belief in its future and on infusions of cash to get us through the tough times - or we decide that it's time to find somebody else who can do the job better.

If you can accept the notion of flexibility, give credit to the basic value of the sticks and bricks, and avoid protracted negotiations, then you can make a deal in today's market. Use the whole range of devices legally available: exchanges, operating leases, ground leases, tax free loans, lower prices with higher interest payments, participating mortgages, and so forth.

In short, if you expect to make a deal in today's market, you must be flexible, cooperative and creative.