Question: I am the asset manager for a hotel that is in default. We have a receiver and hotel management company in place, but despite their best efforts, the hotel is still incurring monthly shortfalls — even without paying debt service. Would it be more cost effective to simply close the hotel, and save the related expenses associated with the management company, such as employees, franchise fees, etc.?
Answer: Occasionally it makes sense to close a hotel — but in the vast majority of cases, your net recovery will be far greater if the property remains open for business. The following are a few key issues to consider:
1. Generally speaking, a franchised hotel in fair condition located in a decent market will lose 40% to 60% of its value when it is closed. The reasons are as follows:
- When you close a hotel, the franchise will be lost. In a competitive market, it can be difficult — if not impossible — to secure a major flag once it is lost.
- It is easier to sell an open hotel than a closed one. Any potential buyer will need to factor into their offer the considerable expense and ramp-up time necessary when re-opening a hotel, including: hiring employees, training, ordering supplies, and spending time to rebuild base business. Other factors include overcoming a prior negative image, re-acquiring a liquor license and other business permits, securing new vendors, and operating at a significant shortfall while the business is rebuilt.
2. An open hotel is much more appealing to buyers than a closed one. Most potential buyers will factor in improvements and ultimately, view an open hotel in a more favorable light.
3. A closed hotel still has ongoing costs and generates no income to offset these inherent expenses. At the bare minimum, a hotel will incur costs for:
- Property and Liability Insurance, which often carry a higher premium on a vacant building.
- Security can be a significant monthly cost depending on the property’s size, layout and its surrounding neighborhood.
- Additional Security, such as lock changes and boarding up of windows. The cost associated with securing doors and windows will vary depending on the building’s construction.
- Winterizing the Property, if the hotel is in a cold, snowy region.
- Utilities. Some will need to remain on, such as the electricity for the alarm system and water for fire safety purposes. In certain areas of the country, it is less expensive to leave the heat on, rather than shut it off and run the risk of pipes rusting and breaking.
- Landscaping – another item that cannot be deferred. In fact, most towns and cities will issue fines if hotel grounds are not properly maintained. A municipality may even send someone to mow the lawn, but the invoice will often be double what it would cost if landscaping was performed on a regular basis.
- Property Management Fees and ongoing inspection for mold and mildew. The property management company will handle inspections, check all locks and any areas that were boarded up, handle any calls relating to the property, and serve as the emergency contact.
Question: What happens if we keep the hotel open but the franchise is lost?
Answer: One of the biggest challenges with a distressed hotel is keeping the franchise. If the flag is lost, the hotel will be removed from the reservation and internet booking system. Typically, all branding related to the flag must be removed within 60 days. Franchises often put their brand on everything in the hotel — from shampoos and bedspreads to elevator doors. The cost to replace these items can be steep, so it is crucial to work diligently to avoid the risk of losing the franchise flag.
If it is not possible or feasible to maintain the franchise, you can either seek a new franchise or operate the property independently. Often in a distressed situation, the goal is to sell the hotel as quickly as possible – so it often makes sense to operate the hotel as an independent property in the interim. It will take roughly six weeks to rename the hotel, get it placed on the third party reservation sites, and create a new website and signage. In the meantime, occupancy and room rates may suffer dramatically. However, with Expedia and other online booking sites, the loss of a franchise is not as detrimental to business as it has been in the past.
Trigild president and receiver William J. Hoffman has been added to New York’s list of approved receivers, making him eligible to receive appointments from all courts in that state.
Adding to its growing portfolio of distressed properties, Trigild was appointed receiver of 14 single family homes and 43 lots in an 89 single family home development in Clovis, California.
In two quick turnarounds, Trigild closed the receiverships of a 78 room branded hotel in Vancouver, Washington and of a 249 unit multifamily apartment complex in Seattle, Washington.
Trigild also successfully closed the receivership of four casual dining restaurants located throughout Texas, Arkansas and Oklahoma.