August 2008 Newsletter - by Jack Spears

HOW OWNERS BECOME SELLERS

Choosing these Newsletter Topics is fun. I get to write about whatever I feel like, as long as it turns out to be somewhat educational and interesting. So let's see if I can adequately explain why owners sell their hotels. Certainly it is the most asked question by prospective buyers... "Why are they selling?" So it must be relevant and important.

Of course there are many reasons why an owner decides to sell. Divorce, death, poor health or some drastic change in physical abilities are sometimes the reason. But the most common I've seen are retirement, moving up to a larger hotel or changing focus into another business.

Several years ago I read a study showing that the average length of hotel ownership was seven years. I'm not sure that statistic would hold true today, but averages are only the approximate middle of a bunch of ownership terms. I have sold many hotels for owners of over twenty years and I've sold hotels for several owners under five years.

The size and type of operation will have a direct bearing on how long someone owns a specific lodging property. Investors who become part of a group, owning several large chain hotels, tend to stay much longer than small hotel owner-operators. And many small hotel owner- operators end up owning three or more hotel properties over the years, supervising the operations through individual managers.

Looking at the many different types and sizes of hotel operations will probably be the key to discovering 'how owners become sellers.' At one end we have the smaller, under fifty rooms, owner-operated properties. These are often referred to as 'ma and pa' motels, inns, lodges, etc. These size and type properties are usually not flagged/franchised. They are most often owner-operated and include an owner's home or apartment. Typically a husband and wife will do the lion's share of the administration, management, front desk and maintenance. Housekeepers will be hired and closely supervised. Outside contractors will be needed only for major repairs or improvements. In this way operating expenses can be held to a minimum, usually under fifty percent of the annual rooms gross income.

Mid-level hotel ownership would then be the fifty to eighty room properties, sometimes with a restaurant, usually franchised with a national (flag) identity. With this size and type lodging property the owner or owners will typically be in a property management position, supervising the operation through a full time hotel manager or management couple.

These properties are typically owned by one to three people, with the owner or one of the partners acting as the property manager. Operating expenses for this size and type are going to be fifty-five to sixty-five percent of annual rooms gross, including the owner's or managing partner's compensation. Profit for the owner and/or partnership will be what remains after all operating expenses, capital improvements and debt service.

Above this mid level size range are the eighty room and up properties. There are actually two categories here. Eighty to one hundred twenty room properties, which are simply a larger version of the mid-level operation described above, and the big, full-service hotels ranging from one hundred fifty to several hundred rooms.

My thirty five years of hotel brokerage sales and experience has been limited, by choice, to the smaller and mid-level lodging properties. Looking back over the years I find that over fifty percent of my hotel sales have been due to retirement. About twenty-five percent were a direct or indirect result of either a change in career focus or moving up to a larger type lodging property, many times with a new geographical location. The remainder of my lodging sales had something to do with a change in family dynamics, such as illness, death, personal injury, divorce or one of several other life changes people sometimes encounter.