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Improving the Bottom Line

By: Richard O. Kopf
Hospitality & Mixed-Use Leader
January 2010

In today's economy, occupancy and Revenue per Available Room (RevPAR) numbers have fallen significantly across the country, and hotel owners and operators are scrambling to cover their operating expenses, let alone covering debt service. As a result, finding opportunities to create more income or squeeze expenses is at the top of the "To Do" list. While every item in the budget is a candidate for review and analysis, the following is a list of income generating and expense reduction measures we have encountered that might not otherwise be apparent to an owner or operator. Some of these ideas might apply to individual projects, while others provide bigger picture portfolio-wide ideas.

Income Generating Measures

  • Re-branding the hotel. In today's economy, many hotels are improperly positioned in the marketplace and can significantly increase their market share and ultimately their profitability by re-branding. While never an inexpensive proposition, shifting the brand between options within the same hotel company can many times be accomplished through negotiations with the hotel company. Moving to another brand not owned by that hotel company will require an understanding of the termination provisions in the franchise/management agreement. In any event, negotiations between ownership and management will intensify as brand standards come under increasing scrutiny.
  • Addition of rooftop antennas for wireless transmission services. Some clients use a rooftop management company to handle these opportunities across their portfolio.
  • Addition of Captivate Network as an additional guest service.
  • Implementation of Leadership in Energy and Environmental Design (LEED) and environmental programs and associated credits. This can be as far reaching (and, in the short term, expensive) as installing solar panels or cisterns to collect rainwater, or as simple as changing landscaping to utilize more drought resistant plants to reduce expenses by minimizing required irrigation.
  • Contract for "after hours" (for example, daytime) parking on the hotel property for adjacent uses such as retail, entertainment, etc.
  • Signage/billboard agreements. This can apply on the roof, exterior walls, inside the hotel common areas such as the lobby, in the hotel facilities (for example, in the gym or spa) and in the rooms.
  • Addition of ATM facilities.
  • Drop box leases (for example, FedEx, UPS, Airborne, etc.).
  • Addition of fitness/spa facilities for monthly dues and/or fitness/spa company lease in unleased and underutilized space.
  • Addition of on-site rental car facilities.
  • Change managed facilities to leased facilities (for example, restaurant, bar, spa, gym, etc.). This can result in a loss of gross revenue but, with a good tenant, can actually improve the bottom line.
  • Many recent projects have been developed with associated condominiums or rental units. Income generating ideas related to the associated condos or rental units include:
    • Discounts to drive greater food and beverage, spa or related services revenue from the "captive" audience
    • Provision of additional a la carte for a fee services (for example, dog walking, etc.)
    • Provision of additional storage areas for sale or lease to unit owners
    • Creation and sale or lease of cabanas at a poolside/beach
  • Sale of licenses guaranteeing rooms for certain events on an annual basis. For example, in connection with the construction of a hotel adjacent to a college football stadium, the developer sold licenses to alumni for rooms for home football game weekends. It is reasonable to assume this concept can be applied to other appropriately situated hotels with regular on-going events or uses that would appeal to individuals or corporate America (NASCAR races, marathons, large trade conventions, etc.).

Cost Savings Measures

  • As indicated above, re-branding can increase gross income by properly positioning the hotel. Likewise, in certain instances, re-branding to a lesser brand can reduce costs by reducing service levels and overall hotel costs. This option requires significant evaluation as down-branding will reduce the average room rate and, unless a proportionate increase in occupancy is achieved, gross income will go down as well.
  • Renegotiation of telecommunication, video, data and/or WiFi service providers at the hotel.
  • Without a doubt, every hotel in the country has lost value over the last year. As a result, ad valorem and personal property tax evaluations and appeals are appropriate on a universal basis.
  • Food and beverage operations need to be examined closely for positioning, hours, staffing, menus and pricing.
  • Converting parking to a cost plus contract. Normally, a parking garage operator gets a percentage of the gross with certain add-ons. There is very little transparency to the average contract. Over time, the add-ons can become profit centers for the garage operator. By merely bidding out the contract at actual cost plus a percentage, some costs (like insurance) can be shifted. This exercise can also be utilized to tighten up operating standards.
  • Standardize operational agreements that can be used across all projects to avoid the cost of negotiating each agreement using individual service provider forms:
    • In a rollout or large portfolio situation, hotel management and franchise agreements
    • Service and maintenance agreements
    • Food and beverage and bar leases
    • Spa leases
    • Construction agreements
    • Consulting agreements
    • Event license agreements
  • Negotiation of national/regional contracts with selected companies to drive down costs. If you can choose economically viable companies and negotiate hard to keep escalation provisions tightly controlled, it could mean significant upside when the economy comes back. The quid pro quo could be that the hotel could commit now to a certain level of spending in exchange for guaranteed low prices for a fixed term (hopefully well into a time when the lower costs will be dwarfed by significantly higher revenues).
    • Telephone/Internet services. It hasn't happened yet, but can you envision a day when telephones in hotel rooms become obsolete?
    • Elevator
    • Landscaping
    • Union
    • Janitorial
    • Pool/gym
    • Security
    • Parking
    • Electricity
    • Laundry/dry cleaning
    • Uniforms
    • Carpet, lighting, etc.
    • Automated External Defibrillator (AED) supply/maintenance
  • Electronic monitoring of dumpsters as a means of "auditing" billing by waste companies.
  • Outsourcing various services (for example, laundry, janitorial, maintenance, accounting, HR, etc.).
  • Implementation of advanced utility submetering programs (for example, electric, water, etc.) to allocate costs to various hotel tenants (for example, bar, restaurant, spa, etc.) and identify areas of waste.
  • Switching to longer lasting (and more energy efficient) florescent lighting throughout the hotel and system.

While these ideas are not appropriate for every hotel, the preceding list is also not all-inclusive as the options are limited only by the creativity and tenacity of the owner and operator. Our firm’s Hospitality & Resort Projects, Ancillary Services and Telecommunications groups are ready, willing and able to help you through these trying times.