Saturday, July 6th, 2019 July6th2019

Sell for More Trivia: What is a Property Improvement Plan?

Published on July 6th, 2019

Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.

 

Today we’re entering the world of hotels where Property Improvement Plans (PIPs) are an essential part of hotel sales.

Most hotels are branded with a recognizable name…think Marriot, Hilton, etc.  If the hotel building owner wants to continue to operate the hotel using those 3rd party brands they must bring the hotel in compliance with the current brand standards.

The required changes are detailed in the Property Improvement Plan.  The goal of the PIP is to ensure all branded properties have the same general look and feel.  Remember the brands don’t own the properties…individual investors do.

Here are some things to keep in mind:

From a practical standpoint, these property improvements will address physical aspects like mechanical systems, plumbing, and electrical; corridors, guest rooms, and spaces such as meeting rooms or fitness centers; communication and security systems; landscaping, lighting, and parking.

More extensive programs might include lobby space, modifying the arrival experience, and adding or reconfiguring restaurants, all of which can be costly.

Most branded hotel transactions will trigger a mandated, formal property improvement plan, making it an important initial step in valuing the asset.  The PIP provides a renovation scope and timeframe that a hotel buyer must implement following a change of ownership.  In recent years, PIP expenditures have increased greatly.

Complicating the matter, with the hospitality industry enjoying steady RevPAR growth for nearly a decade, most brands have become more aggressive in their PIP requirements, asking for more capital to be spent as the industry enjoys this profitable period.

Brands may also use PIPs to persuade owners to another sub-brand. This can happen in markets where a brand may want to pave the way for the development of a new property under an existing flag, or downgrade or upgrade an existing hotel to a different chain scale within their brand umbrella.  By tweaking the requirements and corresponding costs of PIPs with multiple sub-brand options, brands can largely dictate the direction a new owner takes.

Which brand maximizes the value of your hotel? Sellers and buyers alike should always evaluate brand options during a change of ownership, especially if a franchise agreement is nearing expiration.

If the property is “locked” into the current brand, would the parent brand be willing to re-flag to a different brand within its system? Such a switch can potentially lead to new revenue opportunities or operating efficiencies.

Timing is everything. Usually, three to six weeks are required to prepare a PIP document, which generally remains valid for six to 12 months. We encourage sellers to order PIPs as early in the sale process as possible, preferably before an asset even hits the market.

Having the PIP document in hand prior to going to market helps sellers understand the capital expenditures that buyers will be underwriting.  This head start also allows for the opportunity to negotiate scope and timing as noted below. Once a hotel is listed for sale, sharing the PIP as early as possible allows a seller to convey cohesive and transparent information to the market.

It’s a negotiation. The scope and completion timeframe of a PIP are often negotiable. In particular, brands are typically receptive to sellers and buyers who have existing relationships with the brand and own or manage other franchised properties.

We recommend that sellers negotiate as much as they can upfront before sharing the PIP with potential buyers, and also encourage buyers to take another bite at the apple with the brand once they have been awarded the purchase of a property.

What else is needed beyond the PIP? Change-of-ownership PIPs typically revolve around guest-facing furniture and finishes in guest rooms, corridors, lobbies, meeting rooms and other public areas.

However, as suggested earlier, the PIP may only paint a partial picture of the capital needs at a property. Items outside the scope of a PIP, such as elevator modernizations, roof replacements, kitchen equipment upgrades and or mechanical systems, can often cost buyers more than the PIP amount.

As indicated, PIPs continue to take center stage in many hotel dispositions. Planning for, scrutinizing and negotiating PIPs early on can directly increase proceeds to sellers and lower the costs for buyers in most hotel transactions.

 


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About Beau Beach, CCIM

Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.

Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee, South Florida and Chicago markets.

He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.

Beau can be reached at 800-721-3287, click to schedule a call or Beau@ProwessIRES.com