Managing to Fail

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A popular branded hotel is developed on a prime hotel site at a major interchange just outside a large city. Design, location, construction, and appearance check all the boxes for contemporary lodging investment.

Yet over a number of years, the property consistently underperforms its peers regionally and locally. Maintenance expenditures are significantly below normal ratio-to-sales parameters. Since occupancy and thus gross sales are quite low, the dollar amounts spent on maintenance annually are clearly and severely inadequate. And it shows. 

The property now presents a tired, outdated appearance in critical need of cosmetic upgrading of the realty and personalty to be able to compete with its nearby peers. Overall design and layout are still consistent with current development standards of the brand and competition, but a potential guest fooled by viewing it from the interchange will be disappointed.

As a result of the management issues, the property achieves only half the net income typical to the brand and type. Remembering most of the obsolescence is cosmetic and some accrues to personalty, is the property now worth only half the cost to replace less obsolescence? No!

Why is the answer “no”? This is the inevitable appeal basis, after all.

Here’s why: market value (and even value in use) assumes the realty is operated consistently with the principle of Highest and Best Use as a competitive hotel property maximizing investor return while offering value to the public. This is the use for which the property was built.

It lacks only one thing to achieve its goals: prudent management.