Mr. Roedel, III

Development & Construction

Hotel Expansion: Renovation vs. New Construction

By Fred B. Roedel, III, Partner & Managing Member, Roedel Companies, LLC

Keys to Successful Expansion

There are three options to expanding your portfolio of hotels. You can purchase an existing property and leave it as is, build a new property or purchase an existing one and renovate it. Economics is what will drive your ultimate decision. In order to determine which expansion option best meets your objectives, it is important to properly and reliably evaluate each opportunity by breaking down its time, cost and quality elements in order to ensure success.

Renovating an Existing Structure

When considering whether to invest in renovating a hotel, two key factors to look at are location and opportunity. Renovation of a property makes the most sense when it is in a proven market and holds intrinsic value that cannot be recreated - is a historical landmark, is an example of unique architecture etc. Such properties are often valued by the community, sought out by travelers and, if of historic significance, may come with marketable tax credits.

A renovation of an existing hotel can be a positive alternative to building a new one for the following reasons:

  1. You have less market risk when buying an existing hotel with a proven location and trading history.
  2. Higher construction costs and land scarcity in good markets often mean that the economics of building a new hotel will not work.
  3. Buying an existing structure may be the only option for placing a hotel in a specific location.
  4. You are acquiring an existing structure and as long as the structure is sound and adaptable to your plans, a major development component is addressed.
  5. The overall construction timeline and cost may be less since a structure is already in place.
  6. The timeline to positive operating cash flow and market stabilization can be much shorter than that of a new development.
  7. Many communities actively seek developers to redevelop properties and be a part of redevelopment efforts, in some cases monetary assistance maybe available as an incentive.
  8. Redeveloping a property within a community can have an immeasurable positive impact on the property and its potential.
  9. Renovation tax credits are available for many older structures. Depending on renovation plans, a development could garner 10 - 20% of the commercial investment value in tax credits; you can then sell the tax credits and use the cash as equity.The areas to be cautious of when it comes to renovating a property are:

Have an accurate pre-renovation timeline.

  • Do not shortchange your project in this area. If anything renovating a property requires more due diligence and planning than building a new one. Think about using construction software by Procore or another company as this can give you a better visualization of the costs of the renovation.

  • It may take a hotel brand longer to review and approve a renovation/rehabilitation project than a new one.

The acquisition cost.

  • You must be able to acquire the property at a price that when combined with the renovation costs, does not exceed the cost of building new.

Ability to meet today's brand standards.

  • You must be able to build current standards into the existing structure. Several of the major franchises have developed brands specifically for redevelopment.

Potential surprises

  • Investigate an existing property to the fullest extent possible. There are too many stories of finding unknowns behind walls, under floors, in ceilings, etc.
  • Unknowns in the renovation / rehabilitation field can be catastrophic to a budget and a development timeline

Existing reputation

  • There are cases in which the negative history of a hotel cannot be overcome regardless of the investment made in its structure and image.

Brand Options

  • Often times the amount of time and money required to develop a highly reliable product will significantly reduce the number of viable brand options available to you.

New Construction

Developing a new hotel increases the reliability that you will end up with one within the market segment and of the brand you want. It also gives you the flexibility to modify a design to meet local flavor, while enjoying the luxury of designing from the ground up.

New construction offers the following advantages:

  1. Designing and building a hotel from the ground-up dramatically improves the reliability of its design and systems.
  • You do not have to organize and/or deal with existing conditions
  • There are no unknowns.
  • Pre-development costs may be lower since no one is dealing with an existing structure.
  1. The hotel will be fully compliant with all current building codes and requirements.
  • There is no need to retrofit, accommodate or seek any kind of variance to a standard.
  1. Franchises and Brands are more comfortable with a new hotel
  • They have piece of mind that the building meets all of their standards
  • Project approval by Franchises and Brands may be far quicker.

Although new construction offers many advantages, it has challenges as well:

  1. The pre-development time may be longer when you have to go through the entire design and review process
  • You must meet local zoning & building codes
  • You must contend with allowable use issues
  1. The overall timeline from start to finish can be longer
  • Management of overall process and the ability to maintain schedule and budget can be more difficult to achieve.

Development Objective & Performance Standards

Regardless of how you choose to expand your portfolio, you cannot afford to overbuild a project. Successful hotel development projects are ones in which time and effort was invested in obtaining a clear understanding of the market and defining a development that it will support. It is crucial to have a realistic objective and performance standards.

Objective

Do the necessary work to clearly understand the market you are looking at. Ask yourself...

  • What does the market want?
  • What will the market reasonably, reliably and conservatively support?
  • What is it that I want to develop?
  • What customer am I looking to attract?
  • What brand is most appropriate?
  • What other revenue sources might be appropriate and reliable compliments to your objective and the marketplace?

In addition to doing your own investment analysis, consider having an independent party review the market you are interested in and provide their opinion regarding its feasibility. Use the information you glean to develop your own P&L, capitalization structure and investment budget.

Time frame:

Determine the total time frame you are willing to accept to complete a project. Time loss can be devastating when you think about ever changing market conditions with your targeted customer, commercial credit availability and development costs.

In order to establish a realistic timeline it is essential to spend time evaluating and understanding the systems and processes necessary and required to getting a project approved by a brand and governmental authorities. Keep in mind that...

  1. New construction projects can take a significant amount of time due many elements that require review and approval

  2. Renovating an existing structure may also require an extensive amount of time just to deal with current code requirements versus existing building conditions, i.e. life safetyBudget:

  • Develop and adhere to your investment budget.
  • Remember that to bring a higher reliability to the budget, you must keep other people involved such as your operators, designers and constructors
  • New development costs can be far easier to define since everything is new
  • Renovating an existing structure will incur different expenses that need to be identified and planned for Quality.

All final designs need to meet the standards of the brand you are developing and governmental building code standards. Remember that all the major brands have invested significant time and money into defining their respective standards so you do not need to try to one up them in this area unless there is a very compelling reason.

Both building a new hotel and rehabilitating an existing one clearly have positive and negative attributes. No matter which option you choose, it is crucial to never lose track of the fact that markets dictate and core economics rule. The amount of effort invested in investigating and uncovering an opportunity to expand your hotel portfolio is what will determine whether or not you are successful.

Mr. Fred Roedel is a Manager of Roedel Companies, LLC along with his brother David. He shares the responsibility of developing and implementing the annual strategic plan of Roedel Companies. He also shares the responsibility of approving the final design, budget and timeline of any asset developed. Mr. Roedel is President of ROK Builders, LLC, the wholly-owned Construction Management subsidiary of Roedel Companies. In this capacity he is responsible for developing the strategic and annual plans of ROK Builders. Mr. Roedel, III can be contacted at 603-654-2040 ext. 105 or FredRoedel@roedelcompanies.com Extended Bio...

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