Membership proves to be beneficial for branded hotels Franchise affiliation helps increase hotel values, financing Hotel real estate investment in the Americas reached a four-year high in 2011 with transaction volume reaching $15.2 billion, a 24-percent year-over-year rise, according to Jones Lang LaSalle Hotels. That’s good news for the hotel industry in general, but it’s better news for owners of franchised properties. Having a brand attached to a hotel increases the value of the hotel and increases the chance that financing will be available, according to brokers. H. Brandt Niehaus, president of Huff, Niehaus & Associates, said that in general, franchised hotels just do better than independents unless the independent is located in a destination resort-type location because a franchised hotel usually produces more revenue and more revenue generates better value. “One of the key things a franchise offers is consistency in product,” he said. “A lender and investor know by reputation what the consistency should be in a brand so it gives them confidence that it will perform at least to what that franchise’s standards are.” Sanjeev Misra, senior managing director of Paramount Lodging Advisors, which is based in Chicago, said people need to understand a hotel’s value proposition more now than ever before. “I could have two identical hotels next to each other doing the exact same revenue and income, and the one with superior branding will sell for 10 percent to 20 percent more,” he said. “There’s a perception that there’s going to be more stability in the performance if the brand is higher quality and the perception that when they sell it will be for a higher price.” According to the HVS 2011 U.S. Hotel Valuation Index, U.S. hotel values peaked in 2006 at $100,000 per room. The low point during the recent downturn occurred in 2009, when values dropped down to $56,000 per room. The report also stated that U.S. hotel values are expected to recover to 2006 levels in 2012 or 2013 and will continue to increase from that point. Potential buyers in today’s environment are focusing on what branding options are available to them. “The difference when we’re looking at brand is not necessarily what’s the brand on the hotel currently, but what brand will it have when I buy it,” Misra said. “So many times they might be buying an old Radisson and they might not like that brand, but they already have Hilton’s approval to make it an Embassy Suites.” The outlook for hotel values is promising, according to Corey Stender, a hotel real estate advisor with Timm & Associates, which is based in Eden Prairie, Minn. “We’re still going through a lot of bank owned and distressed inventory and that takes awhile to get that off the books,” he said. “It keeps the values down of performing assets because the market is still diluted with these distressed hotel assets. Once we can purge that inventory, I think we’ll see values increasing.” Money issues Stender said values are affected by stringent lending criteria from banks. “’Hotel’ is kind of a bad word in the lending industry,” he said. “They’re very hesitant to lend on a project that doesn’t have the rules and regulations [of a franchise] behind it. They know there will be brand standards that have to be followed, like a reservations system.” Often it’s a story of choosing ‘the devil you know over the devil you don’t.’ “Lenders know less about what really goes on in the industry than the investors and those involved in it day to day,” Niehaus said. “It’s got to be easier to convince them a franchise is worth financing versus an independent. You’d have to have an awfully good story for an independent product to develop or to take the brand name off and change it to independent.” While lenders might not be completely up to speed on the hotel industry, they are becoming much more aware of the differences in branding. This impacts a project’s ability to get financing, Misra said. “In today’s environment, it means you might not be able to get it at all,” he said. “Lenders are not very positive on our industry as a whole, so they will look at the top brands in the top locations to finance or they won’t do it at all. If you have a weaker brand, the only way you would still get loans is if your financial performance is very strong.” Franchise downsides Whatever the benefits, having a franchise on your property doesn’t guarantee success. There are a few situations where that flag might not be worth what it costs. Especially if franchise costs eat in to your overal profitability. “The only time there’s downside to a franchise is if that franchise isn’t performing above where the royalties are,” Stender said. “If you are paying 10 percent, you’d better be getting that back times two in reservation contribution and revenues.” Another downside can be the competition between brands in terms of offerings and amenities, according to Niehaus. “Franchisors are getting so onerous in what they require,” he said. “It’s like the Joneses trying to keep up with the Smiths.