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Lodging industry change triggers evolution of the buy/sell dynamics. Yet, the overriding principles behind most buy/sell decisions remain relatively constant. A number of industry executives who own properties and make these decisions on a daily basis discuss the art (and science) of such decision-making. From the novice hotelier who purchased a first hotel within the last year to the current owner of 28 properties who has been at it for more than 20 years, these owners shared their secrets of buying and selling hotels. For example, in making acquisition and development decisions, Leon Volkert, president of Summit Hotel Management, looks at the depth of a market and studies its demand generators. He proceeds assuming he will hold properties he buys or builds for at least 10 years.

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Falgun Dharia of JDFD Management operates a portfolio of 43 Dunkin' Donuts franchises in three eastern states. He has a great deal of expertise and experience in franchising and restaurant operations. Earlier this year, Dharia and the group of investors he represents ventured into new territory: They acquired what he believes will be the first in a portfolio of hotel properties, a limited-service property in the Northeast. What prompted the decision to buy?

Like any real estate investment, hotels present owners or potential owners with several basic questions. When is it right to make a purchase? Which property of the many available is the right one? When is the right time to dispose of that same asset? How do you know when to just hold on?

The 1990s were a time of tremendous growth in the hospitality market. Lending opened up, development-particularly in the limited-service mid-tier segment-was strong, occupancies were high, and there was a lot of transaction activity in the marketplace. Following Sept. 11, occupancies took a nosedive across the board. Some markets, particularly those that are primarily tourist-driven and rely heavily on fly-in visitors, have seen occupancies drop as much as 25 percent.

Orlando, arguably the most leisuredriven fly-in U.S. market, saw 25 percent of its hospitality properties fall into default by the second quarter of 2002-the highest percentage nationally.

How do these factors change the answers to those questions? Surprisingly, not that much. Each investor has specific priorities, goals and objectives. The markets we serve shift, and the industry changes in response to those market conditions.

In turn, industry change triggers evolution of the buy/ sell dynamics.

Yet, the overriding principles behind most buy/sell decisions remain relatively constant.

During this interesting and volatile time in our industry, I discussed the art (and science) of such decision-making with a number of industry executives who own properties and make these decisions on a daily basis. From the novice hotelier who purchased his first hotel within the last year to the current owner of 28 properties who's been at it for more than 20 years, these owners shared their secrets of buying and selling hotels.

WHAT AND HOW

According to Ravi Patel, president & CEO of SREE Hospitality Group, "Location, location, location is still key." He prefers to operate east of the Mississippi and likes to have three to four hotels in a given market. Clustering properties reduces human resources and support service costs, he says.

Patel believes the "location, location, location" theme must be expanded to include "flag, flag, flag."

The right franchise, or no franchise at all, is a crucial decision. The company's first acquisition, more than 20 years ago, was an independent that converted to an Econo Lodge.

The firm now has 26 hotels, with four slated to open this year.

Knowledge of trends within the industry plays a major role in SREE's success. The flexibility to change with those trends is crucial.

The company's success was built in the economy segment, but Patel now considers that market overbuilt and is moving to midscale and upscale properties.

Bill Meyer, chairman of Meyer Jabara Hotels, asks three questions as he analyzes transactions. One, will the property be competitive in its marketplace in 10 years? As a test, Meyer looks at what is already in the market. "If a market has no Hamptons or no Courtyards, you must assume they'll get built. You then must assess what impact they'll have," says Meyer "I learned this lesson the hard way: Many years ago, we bought a full-service Ramada in Florence, SC. The limited-service properties came in and took our market."

Secondly, what are the barriers to entry? Finally, Meyer Jabara operates on a return-on-equity analysis as a function of RevPAR. If the return is low and it will take too long to get it to an acceptable level, the company stays away.

An example Meyer cites is the Brookshire Hotel in downtown Baltimore. While conducting due diligence to acquire the property, the firm determined that after renovation, rates could be increased to approximately $150, which would produce an acceptable return..

Prior to acquisition, the ADR was $88; in 2001, it increased to $146, a 66-percent increase that proved the pre-sale analysis accurate.

JHM Hotels, owner of 27 properties with three under development, is another long-term success story.

Hasmukh (H.P.) Rama, its chairman & CEO, worries about brand dilution. JHM Hotels uses a long-term view as it looks to expand operations to larger cities. In building new properties, it considers a 15- to 20year hold.

Rama believes "some (chains) have redefined the segments and made their own brands obsolete."

Rama and Patel share a concern over aggressive brand growth because they believe it has led to inconsistency and diminished quality among some franchises.

Securing a franchise affiliation that's appropriate to the market, the property and your operation is also important. Patel cites examples where his company couldn't profitably operate a 60-room Hampton or Fairfield in a particular market where a mom & pop or a 60-room Comfort Inn could make money.

In making acquisition and development decisions, Leon Volkert, president of Summit Hotel Management, looks at the depth of a market and studies its demand generators.

He proceeds assuming he'll hold properties he buys or builds for at least 10 years. Summit has 28 properties in 12 states under a variety of flags.

Volkert acknowledges that it is slow, tedious work to find a market in which every kind of property and brand is not already in place.

WHEN DO YOU SELL?

That answer is simple-maybe not easy, but simple-says H. P. Rama. " Sell when it hurts the most-when business is great."

Patel attributes the decision to sell to timing, product knowledge and intuition. Typically, he finds a hold of five to six years to be opportune for a turnover.

One problem with selling in today's market has to do with certain physical characteristics of hotels.

Exterior corridors are a prime example. Many buyers don't want properties with them because they believe customers don't want them.

Some lenders won't even consider them, and some franchisors won't re-flag exterior-corridor hotels.

Once the foundation of the transient market, exterior corridors have in some cases become an indus pariah.

Again, the specifics of the mar (location, location, location) come into play. While Patel has several exterior-corridor properties he can't sell because they can't be financed, he recently sold one in Hendersonville NC. "Some people in some markets like them. The views from some of the rooms in this property made it salable."

In this instance, the market perception overcame concerns about the safety and disfavor by lenders toward this style of hotel design.

As a seller, you also must think like your buyer, says Volkert. "You don't want a dog. Don't buy somebody else's problems." As to when to sell, Volkert's answer is easy. He typically doesn't sell. But, echoing Rama's comments, "The last property we sold was more than four years ago, and we sold when it was performing well."

SOME THINGS NEVER CHANGE

Several common themes bind these examples of longevity and success:

Know your market

Provide the right product

Buy or build as if you never intend to sell

Sell when all is well

Learn from your mistakes.

In researching this article, I learned that a small limited-service property Ravi Patel's SREE Hospitality Group built in Florence, SC 17 years ago was the one that eroded the marketshare of the full-service Ramada owned by Bill Meyer's Meyer Jabara Hotels.

That goes back to donut-shop franchisee JDFD Management and its decision-making process that led it to move into the hospitality field and to buy a Holiday Inn Express.

Part of the move was prompted by the real estate component of hotel operations. Typically, restaurants operate as tenants and don't own the real estate. Dharia felt the management techniques learned and practiced in his restaurants could translate well to hotels.

"We saw a lot of fat in the (Holiday Inn Express) operation and thought we could improve on it," he says. In fact, even though business was down five percent this year, operating income increased by seven percent due to the group's management skills and to controls put in place.

JDFD may be the next long-term successful hotel operator. What does it take? The same things it took 20 years ago-timing, knowledge, intuition and hard work.

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