Hotel Property Improvement Plan PIP Strategy for Branded Properties | Hotel Marketing
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Hotel Property Improvement Plan (PIP) Strategy for Branded Properties
Property improvement can take a sizable capital investment. Now and then, hotels would have to go through it at some point. Electrical systems and plumbing, elevator and stairways, and security and communications systems are just some of the basic features that require upgrading in a Property Improvement Plan. A major project may involve renovating restaurants, the lobby, or other more prominent spaces in the property like conference areas and gyms.
Why do hotel owners need to make changes and add improvements to their hotels? This significant move is usually made in compliance with brand requirements. It is intended to make the property more attractive and updated for guests, leading to increased booking, higher occupancy rates, and lower expenses in the long run.
A Property Improvement Plan (PIP) is a crucial part of assessing the property’s value. This is why a PIP is a must-have for most hotel agreements, especially the branded ones. In addition, once the new owner acquires a hotel, the PIP can serve as a foundation for making decisions moving forward.
As PIP costs have skyrocketed in the past several years, it has also significantly affected hotels’ sale proceeds. As a result, along with regular REVPAR growth, many flagged hotels have increased their PIP requirements, consequently translating to higher capital investment needed. Because of stiff competition, there are more brand options available, which cause the costs of PIPs to soar even more. This increase happens as each hotel modifies and personalizes their guests’ experience under their sub-brands.
Brands can use PIPs to influence property owners. How? A brand can adjust the PIP requirements if it needs to downgrade or upgrade a property, and by doing so, affects the buyer on what steps to take and which direction to follow as a new owner.
Whenever there is a change in ownership, both buyers and sellers must assess brand options. Questions such as “Could the brand gain market share? In case the hotel is flagged, would the parent be equipped to rebrand while maintaining operations?” are asked. Operational improvements and more revenue opportunities can arise from these events.
It is always best to get your PIP ready as soon as you decide to put your property on the market. Having a PIP on hand will help you know the capital expenditures that investors will be bankrolling. A good PIP can also serve as leverage for negotiation. Overall, PIP can also improve the effectiveness of the sales process. Why? Because it contains valuable information to potential buyers and adds value to your offer.
Brands are usually very open to negotiations on the scope and completion time frame, especially with sellers and buyers they have had previous working relationships with.
As much as possible, it is a must to negotiate before sharing the PIP with any potential investor. This is to encourage buyers to spend and invest more with the brand.
Then there’s the projected ROI. When you renovate rooms and facilities and update furnishings, it increases the hotel’s desirability and competitiveness. After such changes, investors would usually expect an increase in ADR and occupancy. Be very cautious with the Return Of Investment (ROI). Both you, as a seller and the buyer, should have a realistic perspective on this matter. Always check and consider whether ADR and occupancy have already peaked. If they have, shelling out more capital investment may not be needed, and investors may take away the PIP costs from their purchase price without factoring in the ROI.
However, it is important to note that a PIP may not cover the entire investment required in the property because the transfer of ownership usually only involves changing furniture and guest-facing furnishings. In addition, features beyond the scope of a PIP, such as elevator upgrades or roof replacements, can cost more than the entire PIP itself.
Lastly, you should consider the most critical detail in the sale—capital expenditure. This is one of the most significant deciding factors in closing the deal. Potential buyers need to fully grasp your estimates as a seller and how they affect the pricing guidance. Likewise, as a seller, you should also ask for estimates of PIP and other capital expenditures from your potential buyers. This would let you compare investors on a level playing field...