The owner drives the hotel project from inspiration to operation to eventual sale. However, this is not a one-woman job. In the process, you will leverage a variety of other people to bring your hotel to reality. Those people will be your partners, investors, employees, consultants, contractors and quite possibly family and friends. Although you will work with many people, there will be a core group that you will rely on – your development team. In addition to these key players, your project will engage other specialists.
Plan to interview several prospects (2 to 4) for each of these roles. It’s important to understand what they will cost and what services they will provide (or recommend). This process involves comparison shopping, negotiation and contracts or agreements. You should be comfortable that each specialist – paid or not – will give you good information and recommendations. The earlier you assemble your team, the better able they will be to provide you the guidance you need at the right time.
Key players and your team
To one degree or another, all these people will work with you between inception and delivery of your hotel. A few will be deeply involved and will become your development team. This will include your accountant/bookkeeper, attorney, brand representative, broker (for an acquisition), and operator. If there will be construction or renovation, your architect, construction manager, designer and purchasing agent will also be key team members. On a less formal basis, a good friend or involved family member may be an important sounding board and advisor. You want to trust your team.
- Accountant or bookkeeper: Cost controls, properly managed payments, internal controls and the other aspects of keeping books, filing government forms and reports, and reporting to investors and lenders are critical to delivering a hotel on time, running a profitable operation and keeping stakeholders like lenders and investors confident in your leadership. Cash management is particularly important during acquisition and development. There are firms that specialize in hotel accounting and bookkeeping and there are propriety accounting packages designed for hotel companies. For a smaller hotel, you may choose to use a local bookkeeper; select someone knowledgeable about hotel accounting. For a select service hotel or inn, you need someone part time while for a full-service hotel you may need more coverage. Accountants can also assist you with operating projections, capital budgets and other analyses and reports needed for financing packages and your own decision making. Your accounting team member will be key should be on board shortly after you commit to a specific project.
- Appraiser: Independent third party working for the lender, the appraiser estimates the value of the property. In order for the sale to close, the appraised value must meet or exceed the underwriter’s requirement. The appraiser is not a member of your team, but their work is critical to closing any acquisition or financing. Your role is to provide the appraiser with the right information quickly. You want them to see the value in your project and to deliver the appraisal on time.
- Architect: As you plan the hotel and move through construction, the architect works with you to make smart, affordable, market-driven design decisions. Architects can make a project affordable – or not. Hotels are specialty buildings and working with an architect who specializes in hotels and brings detailed knowledge about delivering your particular product or brand generally saves time and money. For new construction or a significant renovation, the architect will be a key team member.
- Attorney: You will use an attorney at critical points in the project including when you set up your company, negotiate the purchase of a hotel or land, close on acquisitions, negotiate with your management company, negotiate a construction contract and evaluate your franchise agreement. During an acquisition, your attorney (buyer’s attorney) will be your liaison with the seller’s attorney, who is also a key player in the transaction, although not on your team. Attorneys may also be involved with employee manuals, complex government permitting and other aspects of the project. Attorneys are expensive. It makes sense to engage an attorney who is a specialist in hotel projects like yours so you are not paying for their learning curve. Keep in mind that most hotel attorneys work (almost) exclusively on hotel deals, so look for one with extensive hotel experience, not simply a real estate attorney who has done a few hotel deals. Hotel contracts have nuances that are very different from other commercial real estate. If this is one of your first hotel deals, attorneys who regularly negotiate hotel contracts can also provide you a wealth of information during the term sheet negotiations, as they know where typical hotel deal points are being negotiated and can explain the pros and cons to you. For a standard type of hotel, some attorneys offer a standard package of services at a fixed fee so you can control your costs. You won’t want to run your costs up by spending excess time visiting with your attorney. But you do want to use an attorney appropriately and to work with someone you can ask questions and who you trust. Your attorney will be a key player on your team.
- Brand/franchise representative: Working with the brand is a crucial aspect of defining the hotel product as well as planning and implementing marketing within the brand system. Brands will be part of your decisions about property management systems, a consideration in selection of the general manager, and a key partner throughout development, onboarding and operating your hotel. The franchise representative and franchise specialists who prepare and negotiate your Product Improvement Plan (PIP) are valued sources of information throughout the life of the investment and will be key players on your team.
- Broker: During the purchase process, the broker will be a key source of information and assistance. Once the sale closes, the broker will drop off your team of key players. The broker will also help you assemble the materials you need to close and will press to keep you on track. In a home sale, the seller’s broker pays the commission and it is split between the buyer’s broker and the seller’s broker. With hotels, the seller pays the commission and the seller’s broker gets all of that commission. It is less common for the buyer to have a broker and, if there is a buyer’s broker, that fee is likely to be paid by the buyer.
- Consultants: Discussed in another post, you will engage a variety of consultants as you bring your hotel deal to fruition. These may include: surveyor, environmental consultant, insurance agent, mortgage broker, environmental consultant, market analyst and others depending on the needs of your project.
- General Contractor (GC) and/or Project Manager: If your hotel is to-be-built or renovated, a GC will be part of your development team, and they will engage and oversee the various subcontractors (plumbers, electricians, etc.) on your project. In addition to a GC, consider hiring a Project Manager – especially if your project is fairly complex. They have the technical expertise to help you with the construction budget, to oversee the GC’s work, and to review the GC and subcontractor invoices for discrepancies. The Project Manager will be your guide and help you oversee the construction and help you to keep your project on time and within budget.
- Insurance agent: You need commercial property insurance (covering building, land and property equipment) and general liability (protection from lawsuits due to personal injury or property damage) in place at the time of closing. Insurance for hotels in a specialty market. The best values and most appropriately designed packages are usually provided by agents specializing in hotels. Your franchise company will have required specifications for insurance that you must meet. You must have insurance when you close.
- Investors: Some investors are passive, or hands-off, and their only relationship with the hotel is to make the investment decision and review your regular reports. Other investors are active and can be a good source of information, expertise and ideas. Co-investors with the buyer, capital partners are investors who share costs associated with the transaction. If you have partners or colleagues actively working on the project with you – whether a pure business partner or a friend or family member – they may be part of your key team.
- Lender: The lender’s team will include the lender’s legal counsel, loan originator (the representative working with you), underwriter who evaluates risk for the lender, and staff to accumulate paperwork and make sure it is complete.
- Mortgage broker: You may engage an intermediary connecting you, the buyer, with lenders. The mortgage broker provides deal data and information about the buyer to multiple lenders for underwriting and approval. The mortgage broker earns an origination fee, normally 1 percent of the loan amount, which is paid at closing.
- Operator: Whether you use a management company or oversee a general manager yourself, this role connects you to the ultimate operation. Your operator or general manager will be your resource as you make design choices that are cost effective to operate, oversee staffing, and set up purchases of everything from security systems to supplies. They come on board 3 to 6 months before opening for a new hotel so they can get the business running and implement marketing (up to 12 months in advance, for example, if the hotel will be group-focused, to enable them to pre-sell groups). For an acquisition, they should be on your team at least a few weeks before you take over so the hotel transitions from one management team to another smoothly. If you have a relationship with a management company, they may help you evaluate the acquisition and assist with financial projections and your valuation analysis.
Either a general manager you employ or the management company who will operate the hotel will be a key part of your team. With the assistance of your attorney, you will review and negotiate a hotel management agreement and that will define the management company’s involvement with your team and their charges.
- Purchasing Agents and Interior Designers: Furniture, fixtures and equipment will collectively be among your biggest expenses. They will be a crucial part of how the public perceives your hotel. Unless your project involves ground up construction or adaptive reuse, the interior designer will often be the lead design professional, and the architect may play more of a support role to the to ensure the design does not conflict with the building and that it meets required codes. Many brands have preferred interior designers and you can ask your anticipated brand representative to provide you with recommendations for designers who have worked successfully within the brand’s design approval process. Some brands have the right to approve designers, so be sure to check this before engaging an interior designer. Interior designers and purchasing agents who specialize in hotels bring you a wealth of expertise and experience about durable, safe and brand-compliant products to optimize your investment. Conversely, a designer that is inexperienced in working with hotels and/or is new to a brand’s design approval process can cause delays and added costs as a result of a brand’s required design revisions. Purchasing agents and interior designers may be part of the same company or may be independent. The designer contributes the look and feel of the property, its image and positioning, as well as defining products and specifications. The purchasing agent implements the design by sourcing products that meet specifications for the best price, and scheduling delivery to coordinate with your development schedule.
- Surveyor: To provide information about the condition of the property, an ALTA survey examines boundary lines, building and land improvement information, and any recorded items on the title. You will need a survey to close.
- Title agent: An employee of the title insurance company, the title representative conducts the title search including all recorded transfers in property ownership, liens, easements, unpaid taxes and other potential claims against the property. The title search has to be timely so that both the buyer and seller can review the results and rectify or rebut any claims prior to closing. Your attorney and the lender will assist you with the title search and title insurance.
These are some of the key people you will work with on your journey to hotel ownership. Your project will also have others, depending on your specific needs. As the owner, you will:
- Balance what is available with what you actually need for the project. Spend money for the work you need to realize the hotel, but keep it under tight control so you can afford the hotel.
- Comparison shop, getting proposals from 2 to 4 providers. As you shop, you will learn about different approaches and the scope of work you actually need.
- Keep the process moving at all times. You are the foot on the gas. Your focus on completing the deal promptly is crucial.
Once you find people that you trust, you will often use the same team members for future projects. This will enable you to move swiftly for future projects, so consider and take a long-term view of your relationships. Hospitality is a small community, and people know each other – and readily share information about people they have worked with – for better or worse.