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To PIP or Flip? The Costs, Benefits of Property Improvement Plans

To PIP or Flip? The Costs, Benefits of Property Improvement Plans

Hoteliers whose portfolios are mostly composed of branded hotels are familiar with the ins and outs of property improvement plans (PIPs). These PIPs are a simple fact of life for branded hoteliers, but there are times that adhering to a PIP can dig so deep into owners’ pockets that it doesn’t make sense to follow through.

So how does an owner know whether to go through with a PIP or flip the property, either to a new owner or to a new flag? There are several factors to keep in mind, but the first to consider is cost. Hoteliers must thoroughly research a PIP’s expense before deciding to renovate, change flags, or sell. According to Steve Van, president and CEO of Dallas-based management company Prism Hotels & Resorts, hoteliers spend between 7.5 percent and 8 percent of their annual revenue on PIPs, and, “at the end of the day, putting 4 percent of assets in any reserve fund is a myth, just like the Easter Bunny.”

Another factor to consider is a property’s perception in its market. Individual owners can gather the information needed to weigh their options by looking at online customer reviews and feedback to better determine whether sticking with an existing flag is worth the PIP. Van says, “An owner has to look not only at what the brand is requiring, but also at what the customer is wanting. Online reviews are a really powerful tool for keeping owners on their toes.”

Market perception also matters from the brand perspective. Brands want their properties to be the best in their market segment. Therefore, market saturation factors into the decision; if too many similar hotels are in one area, it may be in an owner’s best interest to sell if the PIP is too expensive. Stephen Siegel, principal at Fairfield, N.J.-based hospitality construction management company H-CPM says, “Owners are looking to see what kind of upside is out there. They look at the marketplace to see if a PIP would lead to more impact in a particular market and how that’s going to affect their revenue.”

Additionally, all PIPs are not created equal. Renovations can vary immensely depending on the property’s ownership—branded hotels have structured PIPS, but independent hotels can stretch out their PIPs depending on their business. Michael Tall, president and COO of the Charleston, S.C.-based management company Charlestowne Hotels, says, “If you’re an independent hotel, you have the flexibility to do the work in stages that coincide with cash flow and business flow. With a branded property, that is not always the case.”

If a hotelier decides that going through with the PIP is the best course of action, preparation is key. Siegel cites the following five ways to prepare for a PIP: (1) allow a year for planning; (2) make sure the right design team is on board; (3) have third-party help; (4) specify a time frame for PIP completion; and (5) renovate during the softest season. If owners are careful about expenditures, they can save as much money as possible during a PIP.

Choosing the right people for the PIP is essential to the renovation’s success. A branded hotel should hire designers and contractors that have worked on the brand before. Tall says, “The property needs to go through a heavy due diligence process and hire experienced and well-connected firms that can recommend designers, project managers, architects, etc.”

To that point, Van says, “Not every hotel is the same. Not every market is the same. There’s room for negotiation and value engineering. You just need to make sure that whoever’s providing that service for you—whether it’s your management company, a construction company, or an interior design group.”

PIPs also give hoteliers a variety of opportunities to improve their business. Beyond updating the look and feel of their property, if a hotel markets a PIP correctly, guests who may have stayed during a construction period will come back if they’re excited about it. At the end of renovations, the property can throw a reopening party or use PR strategies to increase bookings. Tall says, “It’s about spending money wisely, documenting the process, and communicating that to your potential and former guests. You have to get them excited about all the enhancements that are going on at the property and use this to your advantage.”

If the price of the PIP is too daunting and an owner chooses to sell a branded property, the buyer must decide whether to stay with the brand, switch flags, or go entirely independent. For the buyer, staying with the brand also means completing the PIP. However, they also have options and negotiating power. With proper negotiations, they can receive waivers for some of the brand’s standards. They can also work to increase revenue and capture guests that the previous owner wasn’t.

Having a broker involved can save a hotelier money when selling. If the broker believes the property can generate a certain amount per key, it may be worth it to the owner to invest more money to expand the hotel and increase revenue prior to selling.

The most lucrative time to sell is at the end of franchising agreements when new owners can choose what they want to do with a property. If a PIP isn’t completed before the sale, the new owner can be saddled with renovations that they didn’t choose.

While PIPs can be expensive, properties that are not maintained deteriorate, not just physically, but also in their value to a potential buyer. Van says, “PIPs are essential to a healthy industry and it’s good for the customer, the owner, and the brand.”

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