Understanding PIP Requirements can make or break a hotel investment
PLAINFIELD, IL, NOVEMBER 30, 2021 — Stay-in-place orders, travel restrictions, and cancellations intended to control the spread of COVID-19 caused a severe drop in hotel occupancy and revenue. Even the best marketing has not prevented the most enticing hotels from becoming victims of the pandemic. Famed names like the Renaissance Grand & Suites Hotel in St. Louis, the iconic Fairmont Hotel in San Jose, Washington, D.C.’s century-old Marriott Wardman Park, and The Blakely New York have all fallen into bankruptcy. More hotel bankruptcies may be on the horizon as lenders lose patience with defaulting property owners.
Against this less than optimistic backdrop, however, a recovery is ramping up. Just as they did following the Great Recession, opportunistic investors willing to look beyond the current crisis are sweeping in to purchase distressed hotel properties, REITs and trusts. Confident in hospitality’s recovery they are actively seeking distressed assets in this space, often acting as both investors and managers. Several closed hotels are now set to reopen anew, rebranded, as a result.
Rebranding plays an oversized role in investment strategies. Changing brands or “flags” can breathe new life into a distressed hotel that has developed a poor reputation. It can also help attract new customer types.
At minimum, rebranding requires a makeover to replace signature design elements that are synonymous with the previous flag. Or in other cases, a total renovation of the property is needed to meet the new flag’s current branding standards, including carpeting, tub-to-shower conversions, wall coverings, furniture, smart technology and more. Investors should be aware that major renovations often trigger new building code requirements, as well as life safety and ADA updates, that add to costs.
PIP Top Shape
More times than not, rebranding a distressed hotel is a complex process requiring meticulous, strategic planning laid out in the Property Improvement Plan (PIP) written by the new brand’s franchisors. Additionally, basic maintenance may have been deferred in a long closed hotel. This, too, can have an impact on the scope of the renovation of a distressed hotel.
To provide some guidance, I’ve compiled a few tips on how to go about rebranding successfully.
Painstakingly review the PIP. Besides typical upgrades to corridors, guest rooms, and lobbies, PIPs can mandate upgrades to security systems, electrical and plumbing, and landscaping, as well as the addition of a fitness room, business center, meeting rooms or ballrooms.
In the same vein, it is not uncommon for franchisors to oversimplify PIP elements with words like “all” or “throughout the property” that results in contractors having to price in the most expensive scenarios. For example, does “all” Furniture, Fixtures & Equipment (FF&E) include both the moveable and non-movable furniture? Does the FF&E requirement extend itself to elevators, public restrooms and hallways?
Identify negotiable items in the PIP agreement. Items like flooring tiles or wall finishes can vary widely in price. A general contractor to break out the price since these might be the first things to propose as value engineering points to the franchisor.
During rebranding, sometimes franchisors allow PIPs to be broken into several stages that coincide with the hotel’s cash flow and business cycles. While this sounds good in theory, it usually increases the overall PIP cost because the contractor has to repeatedly re-stage. Don’t take the bait.
Stay open or closed? From a pure construction standpoint, shutting down a hotel allows for greater speed, ease and flexibility. From a cashflow standpoint, this is a nightmare. Valued members of your staff leave, bookings are lost or deferred, and operating income drops to zero while fixed costs continue to pile up.
For this reason, most hotel renovations are completed while the property continues to operate. Guestrooms are often renovated floor by floor or by grouping two adjacent floors at a time. Vertical renovations are ideal for bathroom conversions where access to plumbing requires taking stacked rooms out of service or where noise traveling through plumbing shafts is a problem.
Given today’s supply chain issues, before getting started an investor will want to discuss the implications of shortages with the franchisor as it effects deadline requirements and possible penalties. The franchisor will need to agree to a modified time frame so that you avoid delay penalties. Get that in writing.
Audit marketing assets. Before re-introducing the hotel, audit marketing assets to improve content performance. Review the inventory of photos, videos, blogs, presentations, email formats and infographics used by the previous owner to ensure they are up-to-date and on-brand with new franchise standards.
Once the investor has settled on the scope of the PIP with the franchisor, they will need to select a team of contracting professionals who specialize in hospitality renovations. Without extensive experience in the hotel industry, the contractor will lack the needed skill set for this highly detailed work.
Like other stages in purchasing a distressed hotel, PIPs are negotiable in both their scope and completion timeframe. New owners should negotiate as much as they can upfront before signing off on a PIP agreement, and before sharing the PIP with other potential investors. Keep in mind that it is the end-goal of the franchisor to not only make the best deal, but to maintain the highest brand standards and the best appearance for the hotel. The key is to find a balanced cost solution that meets brand requirements and the investor’s long-term financial goals.