Wednesday, February 1, 2017

How do hotel owners shop for management companies?

Generally, the client-owner has a problem (or a want, or a dream, or a desire, in the case of a developer who wants to build a new hotel; but even that's a 'problem': at least that's a problem worth having); and goes to whoever he thinks can offer a solution. He's often not aware that there are even as many choices as there are to pick from.
Sometimes, it's a banker or an attorney or a franchise brand rep who refers him to a management company (usually a much larger, more established one). Sometimes, they actually do go online in search of one.
Image result for hotel management agreement
I know they don't all consult Forbes magazine, but I've gotten several calls as a result of articles I've written that were published on Forbes - every one of which was picked up by Forbes right here on Quora, and none of which contained my phone number. They just read the piece in Forbes, googled Beechmont, and found my badly SEO'd website that I only launched back in the spring (I need to find a way to fix that robots.txt), and a bunch of my answers on Quora (I love it that Google spiders Quora answers individually).
If one goes through my accumulated material on Quora, one can learn a lot about me and how I like to work . . . and then I get a call. As a way to get my foot in the door, I'll take that any day of the week over being one of those guys dressed up in a tailored suit and tie (which I avoid wearing to work: I'm too much of a hands-on guy) and phony smile, posing on a grand staircase in an upscale hotel lobby; like I've seen on a few management company websites. (No one's going to hire me for my looks, anyway. And frankly, that's just the way I like it.)
But that's just how people pick me.

Now . . . if taking on such problems as 'what are we going to do with this hotel, how are we going to make it work, and how can we make it perform a thousand times better than anyone else could even imagine?' and coming up with solutions for them is the sort of thing that you like to do for fun, or the kind of thing you'd do full time if every job paid the same and you could pick any job you wanted; then there may be an opportunity for you here. (Note the race cars on my website [ ]. I was actually advised against that by one hotel owner with whom I work, but I put them there and keep them there anyway to make a point, even though I'm not really that much of a NASCAR fan myself. People - like my friend noted - might wonder, "what kind of crazy person, or crazy management company, would have race cars on their website?" . . . and read the story, looking for the answer. It's there.)
Ascertain the client-owner's needs very carefully, offer him a comprehensive solution responsive to those needs (like, actually take a look at them, study them, analyze them, and don't just come up with some off-the-shelf plan like some franchise organization's business model) that you're willing to stay with and see through for several years; and you have yourself a customer.
When you think of management companies, you think of big ones like Marriott, Interstate Hotels, or Hersha. I was inspired to form and to launch mine, in large part, by
  • the company that had signed a hotel in Connecticut where I'd once worked: these dimtwits didn't have a clue what they were doing. They own some run-down old hotel with a cheap franchise up in upstate New York, they had a friendly connection at a bank, so they decided to diversify into third party management, called up their bank contact, and presto, they were in business ( , Days Inn (Southington, CT) ). No overhead, five percent of gross revenue on a year-to-year HMA, payable quarterly, and a termination fee in the mid-five figures if someone bought the hotel. I've seen slimebucket operators who buy up old motels on SBA loans and overleverage them, hoping to milk the last five bucks out of a $3.98 investment, do just as good a job as they did running that hotel, and run just as classy an operation.
  • I've seen another take over a near-bankrupt hotel in my Mocksville, N. C. hometown and literally run it into the ground - they weren't even trying to make it profitable, only to keep costs down and run it as close to breakeven as possible. Their goal was to be the management company in place when the hotel was foreclosed upon and/or sold to a group of passive local investors: meanwhile, they weren't paying the bills, apparently hoping the lender would foreclose and thereafter, have difficulty finding a buyer for a long, long time. They recruited a general manager with no hotel experience and no understanding of the local market, and they neglected maintenance and let the property run down. Frequently a hotel owner who is delinquent on his mortgage will sign a management company at the insistence of the lender, and these people were so expert, that they made the cardinal mistake of signing a hotel with an owner who was circling the drain financially, without insisting that the lender also be a party to the hotel management agreement, so their evil little plan was thwarted through the power and magic of their own stupidity, just as they deserved. The lender finally had enough, and not only took over but pulled the plug and shut the place down when the franchise organization deflagged the hotel . . .
The term 'hotel management company' can mean a lot of things. There are some out there, for example, who specialize in development, build the hotel, get it running, then turn the new hotel over to the hotel operator that contracted them - exactly the opposite of what we do. There are some that bring their own funding, and actually invest money in hotels that they sign, if they see the potential for a good return. Nearly all, however, manage hotels for owners who see the merit in a hotel investment - or get stuck with a hotel because of an investment (often in the form of a mortgage loan) gone bad - but have other things to do besides deal with the day-to-day activity of running a hotel. And while, when you think of management companies, you think of big reputable companies like Marriott, Interstate Hotels, or GF Hotels; there are a lot of management companies of just the caliber of these Southington, and Mocksville, characters out there, actually signing hotels. Well, this is obviously something that anyone can do . . .
The other half of the story about how my own company came to be took place some 650 miles away, and we'll come back to it; but here is the required investment for a hotel management company:
  • You start out with some hotel experience, preferably lots, and at different levels. (see Michael Forrest Jones' answer to How do you get into hotel management? . I've been a general manager of four different hotels, I've been a part-time maintenance/utility worker back in high school, I've done everything in between except be a maid, and I've even cleaned rooms: I just haven't done enough of it to get the time it takes me to do it down to a half hour consistently.)
  • You want to incorporate or form an LLC.
  • You need a website.
  • Very importantly (here's where you'll be investing lots of time and work in advance), you need a general plan, an ability to organize things, and an ability to manage things in an organized manner (No seat-of-the-pants management: establish procedures and stick to established procedures. No matter how successfully you can put together a team ahead of time, you'll be working with people who don't know you, and you'll want everyone working in sync).
  • And most importantly, you have to be able to put a team together, that you can deploy in a hurry to any property you sign. I can have a general manager, an assistant general manager if the property has more than eighty rooms (for a smaller property, the night auditor is the AGM and vice versa), a housekeeping manager, an engineer if need be (I prefer to recruit maintenance people locally), and an experienced night auditor if need be, on site in any property on the East Coast within a very few weeks. I myself may be one of those people. Not all of these people have worked together before, but they all know how I like to work and they all know what will likely be expected of them.
No matter how big or reputable or well-established they are, every hotel management company started out with just that.
That's your total investment. You're off on your way. We need more people like you. Seriously.
Am I letting daylight in upon magic here, letting slip too many secrets, inviting competition for myself? No: either you can do it or you can't. If you can't, then competition by you has no more than nuisance value. And if you're one of the ones who can . . . well, who cares if I am inviting competition to myself? There are not enough management companies out there. (That's how those Connecticut, and Mocksville, knotheads were able to sign that hotel, and others. The fact that the previous owners had lots of problems themselves didn't help - but that's the market for management companies: so long as you're more capable of running a hotel than the present, or previous, owners of the hotel, your position is secure. 'No-cut' hotel management agreements can be terminated, as a recent high-profile court case illustrated, but barriers to exit are high . . . )
So, you could have a dozen or so people around the country doing what we do, and there'd be enough work to go around for everyone: unless we get sucked in to destructive head-to-head competition for the same hotel or ownership group, no problem. And, like my Southington/Mocksville inspiration, many of the 'management companies' that are out there are themselves incompetent, run by the kind of people we enjoy watching Anthony Melchiorri scream at on each new episode of Hotel Impossible.
Here's the situation. We're only now beginning to see the light at the end of a tunnel from a mortgage crisis. And during the next down cycle in the hospitality industry itself (these things run every five years give or take, and we're a year or two away from another one), there are more hotel mortgage loan defaults coming, because as credit becomes more freely available, hotels are being - again - overleveraged. So, I suspect that Anthony is wrong about one thing, maybe two:
  • The 2007 crisis didn't 'clobber' all of the 'pretenders' out there: actually, it missed quite a few. And now that credit is now again becoming available for hotel acquisition and construction, the same bad practices that lit off the 2007 crisis have been resumed. These lenders didn't learn a darn thing. We're going to live it all over again. But that's OK, it happens every five years or so: all bad lending and financing practices do is exaggerate the effects when the hammer comes down.
  • Manhattan is not the only place where you can run a hotel badly and still be profitable: owners whose properties weren't overleveraged survived, even if they didn't exactly deserve to. Owners whose properties were overleveraged - some of whom might have been more capable and might have had a better chance if they hadn't been overleveraged - went down.
  • (One of the perils of hotel ownership is that hotel management looks like a much more simple business than it is, so much so that many people think that anyone can manage a hotel. The notion that running a hotel is something that just anyone can do has just enough truth to float the myth. The grain of truth that floats the myth is that many smaller, cheaper hotels can indeed run themselves better than the people who run them try to run them, so long as someone's taking the responsibility to see the bills are paid, the staff shows up, the rooms are cleaned, and the guests are kept sufficiently happy that they're not walking out the door never to return almost as fast as they show up. I like Anthony Melchiorri and his show, and I listen to him and learn new things, but there is definitely some selection bias to some of the heartwarming turnaround stories that happen on Hotel Impossible. I claim no expertise on how they select the hotels that are profiled on the show, but I suspect that there's some 'triage' involved. There are good hotels out there that could maybe benefit from Anthony's advice and become a little better, but even Anthony would agree were still very good to start with. There are many, many, many others which I'd bet even Anthony would tell you that there's no use wasting his time with. The hotels that are profiled on the show are picked, in part [scenic location and telegenic staff probably helps: it's TV, after all], because he can make an appreciable difference for them.)
At one point, several thousand hotels across the country were in foreclosure, and many more would have been, but for the fact that the lenders, who would then be responsible for managing the foreclosed hotels, couldn't find companies to manage them.
Many of the big companies - the Marriotts, the Interstates, the Hershas, and the like - aren't really set up for too many of the kind of flexible agreements that we're set up, in large part, to do. They didn't want short-term agreements: any eventual buyer is going to want the hotel unencumbered by management. Nor do they get it about low overhead, or keeping the staffing levels minimal: they're too accustomed to long-term agreements with passive groups or institutional investors who don't question expenses (see Michael Forrest Jones' answer to When a hotel has an electronic "Do Not Disturb" system, what happens, and where, when a guest toggles the setting? ). We like long-term agreements, too, but you have to start with something.
Meanwhile, I had a problem of my own, which I shared with an older guy - a semi-retired, part-time night auditor at age 75 - who back in his day was a comptroller for a chain of a dozen or so upscale hotels up and down the East Coast, and who had also worked for several years as a bank officer. I wanted to put together an investment group and get my own hotel. His advice: start a management company.
I was a little hesitant. This sounded to me like a diversion into an field in which I had very little interest (and frankly, somewhat of a dislike for, based on what I'd seen of several management companies and the kind of people who ran them). But he was persuasive.
  • I could be, he reminded me, what I chose to be, and any hotel or company under my management would reflect that.
  • Instead of behaving like most of the management companies I'd seen, I could run a class operation, do things right; and not sacrifice the interests of the client-owner or his hotel for the sake of keeping the management contract or trying to squeeze more money out of it, like I'd seen several do. (While, when you think of management companies, you think of big ones . . . the one thing that frequently shows up as missing in the smaller, lesser ones is just as as often any pretense at moral character as it is specific hotel know-how or ability. And, as my website notes, I run what a reputable carnival operator that we contracted to run the Elizabeth City, N. C. fair back in my days as a Jaycee, calls a 'Sunday-school operation'.)
  • Instead of being some guy with an investment scheme to pitch to people who'd question my 'qualifications', I'd be the guy who showed up offering a badly needed service to people who needed it very badly.
Start putting my material together, he said, and he'd make some calls to his former banking contacts. Well, if those clowns in Connecticut could do that, I could do it; I and the people I can put together are more capable, and I'm certainly more deserving. My first properties, signed under such circumstances, might be short-term HMAs for properties that would make a Motel 6 look respectable by comparison; but that would be all I'd need to, within a very few years, accumulate a track record that would allow me to credibly package a hotel development project and either approach an investment group with it, or put together an investment group of my own.
It's working.

Originally appeared on Quora

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