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Hospitality How-To: Plan your asset exit strategy
December 06, 2024
Whether you buy a hotel for a long- or short-term investment, your business plan should always include a built-in exit strategy. Here are six questions hoteliers should consider when developing such a strategy to ensure a smooth transition and maximize value.
1. What is the current valuation of my hotel?
The valuation of your asset is a complex process, and different potential buyers will favor different types of assets.
“Besides the most common factors for any real estate product type underwriting such as age, location, cash flow, cap rates, CapEx or deferred maintenance, comp set, and new supply in the pipeline, the element of franchise company and brands within such franchises makes an enormous difference. For example, a very well kept and operated but unbranded hotel on a beachfront may be valued significantly less than luxury branded hotel adjacent to it,” said Chris Gomes, executive managing director, hospitality division, Marcus & Millichap.
To get the most reliable estimation of value, owners should seek a full appraisal or consult with one or more trusted hotel brokerage firms for a ‘broker’s opinion of value (BOV).’ “If an appraisal is ordered, the owner should make sure to choose a firm or appraiser who is a hospitality specialist and likewise if requesting a BOV, the selected broker should be both an expert in the type of hotel being sold and experienced in the hotel’s local market,” said Ed James, managing principal, Mumford Company.
2. What Are Current Market Conditions?
One of the first tasks is to analyze the market conditions for your hospitality asset, as hotel values can change rapidly as a result of both macro and micro economic conditions at the time of sale. External factors like the state of the economy following the election, for example, can influence these conditions. This is why monitoring market conditions over time is imperative.
“Property sales prices are maximized in periods of strong revenue and sub-market growth and conversely, they are lower in times of economic contraction and revenue decreases. The same guidelines apply to the market for hotel acquisition lending. In a low-interest rate environment or in times where profitability is increasing, underwriting guidelines allow for more leverage and lower cost for financing, thus property valuations rise,” said James.
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1. What is the current valuation of my hotel?
The valuation of your asset is a complex process, and different potential buyers will favor different types of assets.
“Besides the most common factors for any real estate product type underwriting such as age, location, cash flow, cap rates, CapEx or deferred maintenance, comp set, and new supply in the pipeline, the element of franchise company and brands within such franchises makes an enormous difference. For example, a very well kept and operated but unbranded hotel on a beachfront may be valued significantly less than luxury branded hotel adjacent to it,” said Chris Gomes, executive managing director, hospitality division, Marcus & Millichap.
To get the most reliable estimation of value, owners should seek a full appraisal or consult with one or more trusted hotel brokerage firms for a ‘broker’s opinion of value (BOV).’ “If an appraisal is ordered, the owner should make sure to choose a firm or appraiser who is a hospitality specialist and likewise if requesting a BOV, the selected broker should be both an expert in the type of hotel being sold and experienced in the hotel’s local market,” said Ed James, managing principal, Mumford Company.
2. What Are Current Market Conditions?
One of the first tasks is to analyze the market conditions for your hospitality asset, as hotel values can change rapidly as a result of both macro and micro economic conditions at the time of sale. External factors like the state of the economy following the election, for example, can influence these conditions. This is why monitoring market conditions over time is imperative.
“Property sales prices are maximized in periods of strong revenue and sub-market growth and conversely, they are lower in times of economic contraction and revenue decreases. The same guidelines apply to the market for hotel acquisition lending. In a low-interest rate environment or in times where profitability is increasing, underwriting guidelines allow for more leverage and lower cost for financing, thus property valuations rise,” said James.
