Owners need to act now to keep hotels from becoming distressed

You can’t talk about the hotel real estate markets for too long these days without hearing the phrase “distressed assets.” The word distressed is defined as an entity that’s facing or experiencing financial trouble or difficulty. Unfortunately that could define a lot of properties these days. Any hotel with double-digit RevPAR losses and occupancy under 50% could be considered in distress.
This issue of HOTEL BUSINESS® is filled with management companies that can help turn a distressed asset into a profitable property under the right circumstances, and a number of them are now seeking such opportunities out and, in fact, specialize in these assets (see story p. 7). However, even the best of these companies will tell you that, often times, by the time ownership looks to bring them in it is far too late.
As an owner, it is incumbent on you not to let it get to that point. No one would dispute the difficulty of running a profitable hotel in 2009 when demand is down and costs are up. However, the opportunity is there to take market share from your competitors by doing something none of them are doing—investing in your property. And while it’s been well documented that getting large loans is virtually impossible these days, local banks are still offering small loans or SBAs.
There is another means of generating cash flow today called cost segregation, which is less well known but no less effective. This model effectively offers tax relief to commercial properties by accelerating the depreciation of their properties (for more information on cost segregation, visit www.bergincostseg.com).
If liquidity is not an issue for you now, this is the perfect time to renovate or at least modernize your property when occupancies are lower. As quickly as your hotel can gain a reputation as a destination, if it’s not in proper condition or the service is not where it should be because the staff has been cut, word will get out just as quickly. This is particularly the case in today’s technology-led environment where every bad experience is magnified with unsatisfied guests getting on the Internet and letting the world know.
Becoming the owner of a distressed hotel in this environment could be a sure recipe for financial disaster. Many in the industry are expecting that the market will be flooded with distressed properties later this year. With that increased volume there may be no guarantee that you can lure a management company in to fix it, and selling is certainly not the best option these days.
There’s an old saying that ties into all of this: “An ounce of prevention is worth a pound of cure.” But rescuing an asset from distress may be worth far more than that nowadays.