As a hotel broker,
one point of contention I see in many deals is the arrival of the franchise
property improvement plan, a.k.a. the PIP. Hotel franchise companies
often take advantage of the license transfer to require more
extensive renovations than is required of the seller to continue with
the flag. Franchise companies know that hotel buyers can obtain
financing to cover larger renovations included in the acquisition
loan. In fact, for the buyer, financing the PIP in the new mortgage
is indeed the best way to finance the cost of a PIP.
However, a large
transfer PIP can come as a surprise to both buyer and seller,
especially if the seller had no outstanding PIP list items. The
contract sale price is negotiated with an expectation of the cost of
franchise required renovations in mind. When a PIP arrives larger and
costlier than expected, it can disrupt the deal. If the actual PIP is
significantly higher than the expected cost of the PIP, the contract
price may be re-negotiated as a result.
It is sometimes
possible to negotiate or delay certain PIP items with the franchisor.
While for various reasons, the seller and/or buyer may consider this
strategy, it is usually in the new owner’s interest to renovate the
hotel and complete the PIP as soon as possible after closing.
While a hotel may be
performing well at purchase, delaying improvements may jeopardize
current market share or future growth. Meanwhile a renovated, updated
hotel can usually drive rate and occupancy. The goal with any
renovation is to make back what was spent and more, adding to the
overall ROI. Increased revenue, and renovations also increase the
value of a hotel. Franchise required PIP items usually do just that,
although sometimes there are simply brand standard items that don't
really add to the guest experience, but simply distinguish the brand
from other. Those kinds of PIP items are prime targets for owners to
negotiate or delay, whereas all renovations that improve the guest
experience and satisfaction, should be accepted and done with
enthusiasm.
One advantage of SBA
7A and SBA 504 loans is that they can include PIP and renovation
funds in the mortgage. So it's my advice to buyers to not begrudge
the PIP, and include PIP costs and funds for any non PIP renovations
required in the acquisition financing when possible, and 'git it
done'.
If you like my blog, please share it with friends and colleagues.
'Til Next Time,
Charlie Fritsch
www.mbahotels.com
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