INTERNATIONAL REPORT—Count saving for capital expenditure reserves as another casualty of the global economic recession. Hotels,
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which normally put at least 4 percent of gross revenue away for such things as new furniture, fixture and equipment, technology upgrades and new mechanical systems, are having a hard time saving when there isn’t enough money to go around. “Most hotels are struggling to meet debt service, and therefore it is difficult to save for capital projects where there is no dedicated required capital reserve,” said Jonathan Falik, founder and CEO of New York, New York-based JF Capital Advisors. “Most mortgage loans to require a minimum 4-percent FF&E reserve. As a general rule, the 4-percent reserve is not enough of a reserve to meet the true capital requirements over a longer-term basis.”
The reserve should be 8 percent to 10 percent when a full room refresh is required every seven to 10 years, he said. And Falik said it’s important to note that 4 percent of a lower revenue base leads to a lower and sometimes insufficient reserve.
Jonathan Nehmer, president of Jonathan Nehmer + Associates, an architecture, project management and interior design firm in Rockville, Maryland, said it is imperative that hotels find a way to plan and save now for capital expenditures.
“The (International Society of Hospitality Purchasers) published a study called CapEx 2007, which showed that each hotel should reserve approximately 8 percent to 9 percent of revenue each year for capital expenditures and repair and maintenance costs combined,” he said. “Down the road, a missed or delayed capital improvement or preventative maintenance project will hinder the bottom line of the hotel and ultimately, the value of the asset.”
Chuck Pinkowski, founder of Pinkowski & Co, a consulting company based in Memphis, Tennessee, said that if we’ve been in a recession for 18 months, it will take 18 months for hotels to get occupancy and rate back, so that means three years hotels haven’t been saving for capital improvements.
“When you finally come out of it, your property has been through three years where it’s probably going to need some pretty good capital investment to get it back to where it was five years ago,” he said. “If you haven’t been funding that for three years, it’s going to be tough to make that happen.
“Like everything else, cash is king. The companies that have the cash and the ability to fund their capital reserves are going to be better able to recover and capture market share.”
Branded properties
Properties that are part of a chain face different issues because a varying amount of improvements are required by the franchisor each year to meet the brand’s standards.
“Brands are becoming more flexible with the owners in terms of meeting the capital requirement to meet brand standards, but once we come out of this, the brands are going to go back to being hard-nosed about meeting the standards,” Pinkowski said. “They are going to be firm about the owners putting more money into the properties.
Falik agreed that the concessions are only temporary.
“Brands have been accommodating their owners with deferrals on nonservice-related standards issues,” he said. “Once the market recovers, the brands will start to require owners to complete the projects that were deferred when capital was scarce.”
Nehmer said flexibility on the part of franchisors and franchisees will improve the situation, now and in the future.
“In these times, there is room to negotiate how to phase in immediate capital expenditures, so there has to be give and take from both sides,” he said. “That mindset should also continue later as things get better. The hotel franchisors are your partners, and I believe they succeed when you succeed.”
Pinkowski said the recovery, whenever it takes hold in the industry, will result in a shift in the brand landscape.
“If the owners can’t afford to do what the brand mandates, they can sell the property or they can go to a different brand,” he said. “If the brand they’re with is making those demands, any comparable or higher brand will be in the same position, so the logical conclusion is they will change brand and spiral down to the next level.”
Successful strategy
One property that has been able to renovate despite the economy is St. George’s Caye Resort in Belize. Susan and John Spencer own the 12-cabana, eight-guestroom property, which features a spa and conference center.
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Susan Spencer |
“We were fortunate in that we bought the resort in December of 2007 and had the plan to renovate to bring it up to our vision since the purchase,” Susan Spencer said. “We have been making small improvements as we go and did the major work over the past eight or nine months.” The work cost between US$1 million and US$1.5 million.
“The renovations were part of our overall plan for the resort, so we had prebudgeted for it,” Susan Spencer said. “As part of our yearly budget, we make a determination of revenues and needs and the savings are part of our overall business plan.”
Her advice for other hotels?
“We are confident in the quality of our resort and confident in our marketing program, and any advice would be for other owners to believe in the same.”