Room for Improvement: Recovering a Distressed Hotel

Andria and Bruce Lewis are used to taking over bank-owned properties. Through their company, Lewis Properties, the couple has recovered several retail and office buildings. But nothing prepared them for the ordeal that ensued when they took ownership of a bank-owned Holiday Inn Express in Littleton, Co.

The hotel wasn’t in great shape when the Lewises bought it. The bank-directed management company spent just enough to keep the doors open, which meant the property improvement plan was enormous. And there were several major issues with the hotel, such as the main sewer pipe needing repair and the parking lot not being properly graded, that the Lewis’s didn’t discover until they took ownership. This resulted in a big investment on their part. “Instead of spending $40,000 to repave this enormous parking lot, we ended up spending $400,000,” says Andria Lewis.

But they knew turning around the property wasn’t going to be easy. She says the difference between buying a hotel from another owner verses buying it from the bank is that sometimes the owner will stick around to help you make the transition. But you’re on your own when getting a property out of recievership. And you’re often at a disadvantage.

“A lot of hotel owners run their properties to the ground or have them mismanaged by management companies,” says Carlos Rodriguez, executive vice president of Driftwood Hospitality. His company specializes in turning around hotels in distress and a key part of his approach is establishing an exit strategy. “We come in, we fix it, we stabilize it, and we sell it.”

But for owners like the Lewises, with longer term ownership plans, the hotel flipping approach just isn’t feasible. It’s also not as common as it was two years ago since the number of distressed properties is dramatically lower than it was then.

“In 2011, we sold 30-35 properties for special servicers,” says Geoffrey Davis, president and senior principal, HREC Investment Advisors.” Last year, that number was down to 25, and this year it’s down to 15.” Still, he adds that his firm is busier than it has ever been, but most of his clients are now private-equity groups as opposed to lenders and special servicers.

“Basically, what happened was the lenders and the special servicers flushed out the really distressed stuff early on and a lot of them kept the assets in house so they could orchestrate their repositioning and sell them off when market conditions were more favorable. Which is happening now.”

Recovering a distressed property takes capital in terms of upgrades and renovations as well as to meet any PIP requirements. The transition may also come with unexpected minefields, whether they entail timing, coordination, communication, or simply the need for more investment dollars.

“The hotel itself wasn’t in bad shape—it was dated, but was still making money when we bought it,” says Lewis. So once the improvements were done, she knew they just needed to re-establish the hotel’s value. Coming in, she says, the hotel may have had, for example, 87 percent occupancy, but the management was selling rooms for nothing. “The hardest part was getting the rates back up,” says Lewis “You have guests coming back and saying, ‘we paid $69 before and now you’re asking us to pay $139 for the same room?’”

The improving economy helped some, but they needed a strategy to grow room rates at the times that made the most sense. Thanks to the addtion of a top-notch revenue manager, they were able to figure out the right approach to the local market.

Even though it took a while, the Lewises finally turned the corner with their Holiday Inn Express. “The hotel is doing fantastic now, but it took two years to get it turned around.” It’s nestled in this weird little spot outside of Denver, she says, so the draw isn’t huge. “We’ve struggled with the corporate business, but we don’t have any problems with leisure.” Part of that is due to the hotel’s proximity to the Red Rocks Ampitheater.

In terms of lessons learned, Lewis knows where to focus her attention next time. To avoid situations like the parking lot and sewer, she says her future building inspections by structural engineers will be more more in depth. She’s also more comfortable negotiating a PIP, which will make the transition that much easier.