A common goal of hotel owners and asset managers is to preserve and enhance the value of their hotel assets. The condition of the physical asset is one of the biggest drivers of value.
Optimizing asset preservation is more than “PM’ing” a room a few times a year. There are many other actions owners can take to ensure they are maximizing the value of their asset. A comprehensive and focused approach to proactive, preventative maintenance will reduce labor costs, increase energy efficiencies and lengthen the useful life of assets, all of which will increase asset value. Following are five ways to do so.
1. Maximize flexibility of FF&E reserve
Preserving your hotel asset starts with the management agreement negotiation. Some brand operators require they maintain final approval and control of how some or all of the furniture, fixtures and equipment reserve is spent, obliging owners to pay out of pocket for any repair or replacement needs that do not fit into their defined FF&E parameters.
Brand operators often require FF&E funds only be available to maintain brand standards versus maintaining and extending the useful life of the physical plant. Because brands already have the right to put an owner in default for not meeting brand standards, the need for them to limit the use of the FF&E fund is not necessary in the owner’s view. Owners should maintain control of the reserve, ensuring capital is available for asset preservation and normal wear and tear without being required to fund additional projects out of pocket, especially if funds are available in the reserve account.
2. Maintain approval rights of chief engineer hiring
In most management contracts, owners typically maintain the right to approve key executives such as the GM, director of sales and director of finance. However, the chief engineer, who is responsible for the physical asset and systems worth millions of dollars, typically is not subject to owner approval. By maintaining approval rights over this key position, owners can ensure that the most qualified and skilled candidate will be overseeing their multimillion-dollar investment.
3. Own the capital budgeting process
During the capital budget process, it is important for ownership/asset management to take the lead to ensure funds are being properly spent.
Maintaining control will ensure capital expenditure spending is focused on improving and extending the life of the physical assets and not on items primarily meant to enhance the brand or are simply “nice to have” versus “need to have.” Communicate that the process is based on “what is needed” and not “how much there is to spend.”
An active role and clear request-for-proposal process will help ensure projects come in on budget. Institute a three-bid policy for all capital request items. This helps ensure adequate research has been done to get the best price and quality.
Prepare return-on-investment analysis for major CapEx items to analyze the impact they would have on future net operating income, long-term competitiveness, and therefore, attractiveness of the asset to potential investors which in turn affects market value.
4. Develop a long-term, 10-year capital plan
Most operators prepare five-year capital plans for their hotels. This, however, leaves ownership vulnerable for what potential needs and expenses might arise in year six onward. New properties start requiring more capital in years six through seven and again in about another five years. The only way to accurately forecast for large capital needs is to develop a long-term planning model that tracks the age and useful life of every asset.
With consistent preventative maintenance, operators may be able to extend the useful life of the physical assets, but knowing when these assets typically need to be replaced allows ownership to plan accordingly and not be hit with unexpected, large capital requests. Additionally, the long-term plan will allow ownership to avoid spending on unnecessary items. For example, if the operator wants to replace carpeting in the guestrooms in year five and ownership is planning a rooms renovation in year seven, ownership can work with the operator to ensure the life of the carpet is extended instead of replacing just before a renovation.
5. Utilize a CapEx planning matrix to monitor property maintenance
The optimal rule of thumb when it comes to hotel maintenance is the 80/20 rule: 80% of the maintenance should be focused on preventative actions and 20% on reactive. Properly using a CapEx planning matrix or tool will help streamline and manage the preventative steps. Brand operators offer capital planning tools (“Enterprise Asset Management”/ “Computerized Maintenance Management System”), but even the best CMMS are only as good as their end user. To maximize the benefits of the system, every contributing member of the hotel team must be trained on the system, use it consistently and supplement with any necessary manual tracking. Investing in the training of maintenance staff on both equipment and the use of EAM CMMS software is minimal compared to the cost of replacing a high-dollar item before the end of its useful life. Using the CMMS in conjunction with the long-term plan gives ownership the ability to prepare for large expenditures but also ensure the operator is doing his or her best to extend the useful life of all assets.
Ensuring a properly executed preventative maintenance plan, hiring the right people and maintaining control of the capital budget and FF&E funds will allow owners to avoid many unplanned repair nightmares, as well as extend the life of the asset. All assets/equipment require attention and maintenance over the course of their useful lifecycle. Dedicating proper and consistent attention is the key to preserve your hotel asset and improve value.
Kristin Knox-Attar, Vice President, CHA, has more than thirteen years of hospitality industry experience, spending five years in hotel/casino development and feasibility and over eight years in asset management with hotelAVE. At hotelAVE, she is actively involved in the asset management of multiple assets and is responsible for monitoring portfolio performance to budget and identifying value enhancement opportunities.
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