Very good article. There is a lot of nuance to PIPs, PIP timing and how to pay for it. Speaking generally about branded select service hotels, owners will have a softgoods PIP every 5-8 years and a softgoods + casegoods (furniture) + common area reno every 10-16 years. Using the HVS/Nehmer Hotel Cost Estimating Guide (https://www.nehmer.com/costguide/) as reference, the per key cost for the 10-16 year PIP is substantially higher than a softgoods PIP. To fully reserve for PIP cycles out of cash flow requires reserving much more than 15% of EBITDA.
What's more, brands dictate when owners make PIP investments...irrespective of ROI on that investment. Where a multifamily owner can time a reno to capture a healthy delta between in place and market rents. The brand will expect you to PIP a property when it's due per the franchise agreement even if you're #1 in the comp set.
I love hotels. The operating leverage is thing of beauty. It costs the same to make ready a Hampton Inn room whether guest paid $75 or $300. Owning a high demand location where new supply is constrained or extremely expensive (per your comments re replacement cost) from a real estate perspective is second only to having your finger on CTRL+P at the Federal Reserve.
Very good article. There is a lot of nuance to PIPs, PIP timing and how to pay for it. Speaking generally about branded select service hotels, owners will have a softgoods PIP every 5-8 years and a softgoods + casegoods (furniture) + common area reno every 10-16 years. Using the HVS/Nehmer Hotel Cost Estimating Guide (https://www.nehmer.com/costguide/) as reference, the per key cost for the 10-16 year PIP is substantially higher than a softgoods PIP. To fully reserve for PIP cycles out of cash flow requires reserving much more than 15% of EBITDA.
What's more, brands dictate when owners make PIP investments...irrespective of ROI on that investment. Where a multifamily owner can time a reno to capture a healthy delta between in place and market rents. The brand will expect you to PIP a property when it's due per the franchise agreement even if you're #1 in the comp set.
I love hotels. The operating leverage is thing of beauty. It costs the same to make ready a Hampton Inn room whether guest paid $75 or $300. Owning a high demand location where new supply is constrained or extremely expensive (per your comments re replacement cost) from a real estate perspective is second only to having your finger on CTRL+P at the Federal Reserve.