Hotel Investments Handbook 2002 Previously published in part as Hotel Investments: A Guide For Lenders And Owners by: Stephen Rushmore President and Founder HVS International Mineola, New York Copyright © 2001 Previously published, in part, as Hotel Investments: A Guide for Lenders and Owners PRINTED IN THE UNITED STATES OF AMERICA About the Author STEPHEN RUSHMORE, CRE, MAI, CHA, is the president and founder of HVS International, a global hospitality consulting organization with offices in New York (Mineola), San Francisco, Miami, Boulder, Dallas, Vancouver, Toronto, São Paulo, Buenos Aires, London, New Delhi, Sydney, and Singapore. He directs the worldwide operation of this firm and is responsible for future office expansion and new product development. Rushmore has provided consultation services for more than 10,000 hotels throughout the world during his 35-year career and specializes in complex issues involving hotel feasibility, valuations, and financing. He was one of the creators of the Microtel concept and was instrumental in its IPO.
Rushmore is one of the few hospitality consultants that actually invests in and owns hotels. HVS International has provided consulting services for thousands of clients in all 50 states and more than 60 foreign countries. Its professional staff of more than 150 industry specialists offers a wide range of services, including market feasibility studies, valuations, strategic analyses, development planning, and litigation support. Through its divisions, HVS supplies unique hotel consulting expertise in the areas of executive search, food and beverage operations, gaming, technology, hotel operations, asset management, marketing, interior design, parking, golf, and investment counseling.
HVS International is the industry's primary source of hotel sales information. Its databases contain information on more than 10,000 hotel transactions and thousands of financial statements. HVS is also the most comprehensive source of hotel compensation data. As a leading authority and prolific author on the topic of hotel feasibility studies and appraisals, Mr.
Rushmore has written all five textbooks and two seminars for the Appraisal Institute covering this subject. He has also authored three reference books on hotel investing and has published more than 300 articles. He writes a monthly column for Hotels magazine and is widely quoted by major business and professional publications. Rushmore lectures extensively on hotel trends and has taught hundreds of classes and seminars to more than 20,000 industry professionals.
He is on the faculty of the Cornell Hotel School's professional development program. Rushmore has a BS degree from the Cornell Hotel School and an MBA from the University of Buffalo. He holds an MAI designation from the Appraisal Institute, and a CHA (certified hotel administrator) from the American Hotel and Lodging Association. Rushmore is a member of numerous hotel industry committees, including IREFAC and the NYU Hotel Investment Conference.
In 1999, he was recognized by the New York chapter of the Cornell Hotel Society as "Hotelie of the Year.” In his free time, Mr. Rushmore enjoys skiing, biking, and sailing. He holds a commercial pilot's license with multi-engine instrument rating, collects hotel key tags, and is one of the foremost authorities on regional dining (www. Stephen Rushmore can be contacted at HVS, 369 Willis Ave., Mineola, NY 11501 Phone: (516) 248-8828 x204 Fax: (516) 742-3059 E-mail: srushmore@hvs.com Web: www.com February, 2004 Preface Investing in hotels and motels is considered by many to be a high-risk use of time and capital.
The investor not only acquires an interest in a volatile form of real property but also participates in the highly specialized business of operating a service-oriented going concern. Where the lodging facility includes food, beverage, banquet, and recreational facilities, the risk and accompanying aggravation are often multiplied tenfold. Yet, despite the sometimes dire consequences associated with such investments, investors continue to be drawn to the status and glamour of hotels as well to the potential for gain. Hotel Investments Handbook—2002 has been written as a guidebook for those who want to participate in the lodging industry while keeping their risk exposure to a minimum.
Its coverage is equally designed for all three types of investors associated with hotel projects: (1) owners, who invest equity capital and assume the major portion of the risk; (2) lenders, who invest debt capital; and (3) hotel operators, who invest considerable time and effort. The book provides an investor with the basic tools for making a hotel investment: a complete understanding of the U. and international hotel industries; the steps for planning the investment; a procedure for determining the economic feasibility of the investment; criteria for choosing a management company and a franchise affiliation along with tips for drafting sound agreements to define these relationships; and the fundamentals of developing, acquiring, and financing a lodging facility. The book is intended to be useful to a first-time hotel investor, while at the same time offering valuable insights to experienced investors.
Hotel Investments Handbook—2002 brings together in one easy-to-use volume all the information needed to make a successful hotel investment. The book is organized in a step-by-step manner that describes hotel investing from a "how-to" perspective and that follows the actual sequence of events in the development of an investment. It includes numerous charts and tables that convey information in a simple, straightforward manner, as well as case studies that illustrate the various procedures used in evaluating hotel investments in a real-world setting. Since hotel investing is a dynamic process and the hotel industry is constantly changing, Hotel Investment Handbook will be updated yearly with a new edition.
STEPHEN RUSHMORE Summary of Contents 1 Overview of the U. Lodging Industry 2 History of the Lodging Industry 3 National Supply 4 National Demand 5 Market, Product, and Site Selection 6 Site Analysis 7 Neighborhood and Market Area Analysis 8 Lodging Supply Analysis 9 Lodging Demand Analysis 10 Analysis of Market Share, Occupancy, and Average Room Rates 11 Revenue Forecast 12 Expense Forecast 13 Property Valuation 14 Investment Strategies 15 Ownership Considerations 16 Capital Sources and Financing 17 Buying, Selling, and Exchanging Hotel Properties 18 Hotel Franchises 19 Property Management 20 Hotel Management Contracts and Related Documents 21 Hotel Development 22 International Markets 23 Analysis of Casino Gaming 24 Selecting a Consulting and Appraisal Firm HOTEL INVESTMENTS HANDBOOK APPENDIXES 1 DATA COLLECTION CHECKLIST 1A SAMPLE FORM: PURCHASE OF A HOTEL 2 SAMPLE CLAUSES FOR HOTEL PURCHASE AND SALE AGREEMENT 3 MANAGEMENT CONTRACT CLAUSES 4 MANAGEMENT CONTRACT TERMS 5 HOTEL GROUND LEASES 6 SELECTED PROVISIONS OF LEASE OF LAND ONLY 7 SELECTED PROVISIONS OF SUBLEASE DIRECTORIES DIRECTORY OF HOTEL MANAGEMENT COMPANIES AND OWNERS DIRECTORY OF HOTEL FRANCHISE COMPANIES INDEX XIV Table of Contents CHAPTER 1 Overview of the U.01 THE LODGING INDUSTRY An investment in the lodging industry, whether it be for the purpose of acquiring an existing facility or developing a completely new one, requires a certain amount of research regarding both the industry as a whole and the investment itself. Hotel Investments Handbook presents the necessary information and analytical methods in the sequence in which they are used in order to make a prudent investment. Before embarking on a hotel investment, a prudent investor gains a general knowledge of the hotel industry and the ways in which it works.
Chapters 1 through 4 provide an overview of the industry and discuss the forces that affect it. [1] History The evolution of the lodging industry in the United States is, of course, closely related to the economic history of the country. Usually, the health of the industry can be gauged by the condition of the economy as a whole. Prosperous times for the nation typically mean increased room and occupancy rates and the construction of more lodging facilities.
When the economy falters, leisure and business travelers tend to stay home or spend less on accommodations when travel is necessary. Internal industry cycles also have a strong effect on the lodging industry. The most important of these is the continually changing relationship between room demand and room supply. For example, hotel construction is fueled by several factors other than simple demand.
The availability of funds is often a determining factor. Oversupply, often the result of periods of increased construction activity, has meant stagnation for the industry, even when the economy as a whole performs well. This was the case in the late 1980s. Along with the evolution of lodging products and the identification and pursuit of specific segments of the lodging market, the ownership and management of lodging facilities have undergone many changes.
The industry, which began with entrepreneurs who owned and managed individual properties, has come to be dominated by national and international chains. At one time, the chains built and owned the properties on which their names were displayed, but the trend in the industry is for many of the major hotel chains to develop and manage properties for outside investors. This fundamental change has dramatically increased the number of individuals and corpo- rate entities involved in hotel projects. Chapter 2 traces the development of the lodging industry in the United States from colonial days to the present.
Along the way, it points out the major developments that have affected the industry, such as franchising, new financing methods, and product and market segmentation. This chapter also introduces the reader to the hotel industry as it exists today. [2] National Supply and Demand In addition to a familiarity with the basic elements of the lodging industry and the economic trends that affect it, an understanding of the nature of the national supply of lodging and the national demand for lodging is essential in order to correctly make the crucial decisions affecting an investment, such as the choice of a particular market or product. Chapter 3 describes the various types, classes, and locations of facilities that make up the national supply of lodging as well as the characteristic operating results of the various kinds of facilities.
Chapter 4 identifies the sources of data by which present demand can be quantified and future demand projected.02 PLANNING A HOTEL INVESTMENT Whether a hotel investment entails the development of a new property or the acquisition of an existing facility, proper planning is necessary for success. The following lists outline the steps that must be taken to acquire or develop a lodging facility. Some of the steps are appropriate for both the development and acquisition process, while others are unique to only one. The order of the various steps is not fixed and some may be performed concurrently.
Hotel Acquisition: • Planning stage: —Select a region of the United States. —Narrow the selection to several cities or market areas. —Look for a market niche. —Look for a product (i.
—Perform a preliminary economic market study and appraisal. • Implementation stage: —Tie up the property with a letter of intent, option, or contract. —Negotiate the terms of the sale. —Go to contract on the property.
—Line up an operator. —Line up a franchise. —Commission a formal economic market study and appraisal. —Line up mortgage financing.
—Line up equity financing. Hotel Development: • Planning stage: —Select a region of the United States. —Narrow the selection to several cities or market areas. —Look for a market niche.
—Look for a product (i. —Perform a preliminary economic market study and appraisal. • Implementation stage: —Tie up the property with a letter of intent, option, or contract. —Obtain zoning and permits.
—Assemble the project team. —Line up an operator and franchise. —Prepare architectural plans and estimate project costs. —Commission a formal economic market study and appraisal.
—Line up a mortgage. —Line up equity capital. Chapters 5 through 13 describe the essential steps in planning a hotel investment, particularly the evaluation of markets, sites, and products in order to determine a viable location; the type and class of facility that would best utilize the attributes of the location and opportunities afforded by the local market area; and the financial results that can be expected from the proposed facility. Appendix 1 contains a data collection checklist covering many of the topics described in these chapters.
Chapters 5 through 13 feature case studies developed to illustrate the concepts presented in the text.