Even for the experienced hotel owner, operating a successful property is no walk in the park. Just ask Mike Marshall, president of Marshall Management Inc. in Salisbury, Md. Marshall Management, which manages 26 hotels, recently helped financially turn around one of its hotels: an urban, independent full-service property.

“The owners thought they were a step above the market, but the property was really a middle-of-the-road hotel and the rates were too high,” recalls Marshall. The hotel's daily room rates were $40 higher than comparable hotels in better locations. Additionally, the property's guests were more concerned with low rates, clean rooms and free breakfast than paying top dollar at a full-service hotel, he adds.

To help bring the hotel back to profitability, Marshall Management closed the restaurant, which was draining resources, and turned it into a continental breakfast area with low overhead and operating costs. The hotel became a limited-service property and rates dropped to $89 a night — lower than the $99 rates at comparable hotels.

Marshall also began using the Internet to attract bookings, and refocused the hotel's direct sales effort to drum up more business from local corporations. Occupancy surged from just over 30% to slightly above 60%, and the hotel went from losing $500,000 a year to making $500,000 a year. “You've got to know your market and your customer base,” concludes Marshall.

Despite the operating challenges, owning a hotel can be lucrative — that is, if it is run properly. Although the risks are high, so are the rewards, says Christian Charre, senior vice president at Jones Lang LaSalle Hotels, a hotel asset advisory and brokerage firm based in Chicago.

Charre observes that more of his clients are first-time hotel owners this year than in recent years. Real estate investors, he says, may be eyeing hotels more today than other sectors because the hotel industry is at the beginning stages of a rebound after suffering a three-year decline in occupancy and sales.

A ‘Mind-Boggling’ Challenge

“One of the first things prospective hotel owners should know is that a hotel is a business housed in real estate. It's a 24-hour-a-day, 365-day-a-year business,” says Morris E. Lasky, CEO of Lodging Unlimited Inc. in Chicago, a hotel management and consulting firm, which currently operates 14 hotels. In the last 30 years, Lodging Unlimited has managed about $6 billion in hotel assets and operated about 250 hotels with 50 to 1,500 rooms.

Running a hotel is like operating multiple businesses in one. Operators often oversee rooms, restaurants, bars, catering and even spas — all at the same time. “It's mind-boggling to run a hotel unless you've done it before,” says Doug Artusio, president and CEO of Alpharetta, Ga.-based Dellisart Lodging, which owns and operates two Staybridge Suites and manages one Wingate Inn.

The company also has two Staybridge Suites and two Wingate Inns under construction, both of which it will manage. Artusio spent almost 30 years working for Marriott and InterContinental Hotels before launching Dellisart about three-and-a-half years ago.

Because the hotel business is so complex, it's critical for new owners to partner with a proven hotel management company. An outside hotel operator's job, say experienced owners, is to work with investors to decide how to best position the property in the marketplace. Operators also have another main goal: to help hotels achieve the highest profits, says Charre.

To help attain these goals, owners should take the following steps: develop a solid business plan; formulate a marketing program; decide whether to franchise and, if so, which flag is appropriate; and pay attention to management details. That's just for starters.

The Art of Negotiation

Once a new owner has selected a hotel management company, it's then time to settle on a contract that will position the property for success. For example, owners should include a performance clause, which requires the management company to perform at a certain level or risk losing the contract, says Charre.

In addition, prospective owners can build incentives into the management contract. For example, the base contract fee — an agreed upon percentage of revenues — may start out low, and inch up as the hotel performs better. As the hotel hits certain sales targets, for instance, the operator stands to earn a higher percentage of the hotel's overall revenues, explains David Moyar, COO of Cleveland-based MEI Hotels, which owns and operates three Hilton Garden Inns and one Homewood Suites.

Once an agreeable contract is in place, both the owner and the management company should develop a solid business plan for the property, which essentially sets expectations for the hotel and outlines how these goals should be achieved. A business plan should include an analysis of how the hotel should be positioned in the market given the demand and competition.

Other key elements include a marketing strategy, which should encompass a competitive market analysis. Also, a detailed operating budget should highlight marketing costs as well as physical maintenance and improvements necessary to preserve the asset and its position in the marketplace. In addition, the business plan should address a big issue for all new owners: to flag or not to flag the property, says Charre.

To Franchise or Not to Franchise

One common mistake new owners make is that they immediately replace the existing flag with a new brand. In many cases, the hotel's existing franchise is perfectly suitable and helps drive traffic. On the other hand, the hotel's flag may be inappropriate for the location or the market it serves. Each case is different, say veteran owners.

For example, if an owner buys a branded hotel that's not generating substantial occupancy, the owner should evaluate the market and the competition. If there's a stronger brand out there and no other hotel bearing that flag, maybe it's time for a change.

Some of the more powerful hotel companies, including Marriott, Hilton, Starwood and InterContinental, offer toll-free reservations systems, as well as field-level support and preferred guest programs — all of which drive business, says Artusio of Dellisart Lodging. “Many owners sell because the hotel is not making money and they feel they have to dump it. Maybe all they really need to do is change the flag,” says Artusio.

In other cases, the hotel may not need a flag at all, and it may be costing the owner unnecessary franchise fees, says Lasky of Lodging Unlimited. “The only reason you should buy a franchise is that it leads to more business. We don't always recommend a flag, particularly if the hotel has high occupancy and limited competition,” he says.

Owners pay franchise companies about 10% of the revenue generated by the hotel. For that reason, it's imperative that the flag work for the franchisee, says Marshall, whose managed hotels bear the names of Holiday Inn, Hampton Inn, Ramada, Comfort Inn and Comfort Inn and Suites.

Marketing Power

A well-crafted marketing and sales program can also make or break a property's success, say owners and managers. Perhaps no one knows this better than Englewood, Colo.-based Destination Hotels and Resorts. Because most of its 29 managed properties are independent upscale hotels in distinctive locations, it competes against chains with brand equity and corporate marketing clout, such as Four Seasons. Marriott's Ritz-Carlton and Starwood's St. Regis, says Charlie Peck, president and COO.

“Marketing is of pre-eminent importance,” says Peck, adding that Destination uses Internet booking sites, its Web site, direct mail and e-mail blasts to reach out to existing customers and potential new guests. “We deliver a compelling story through public relations and relationships with travel agents, meeting planners, and corporate accounts,” says Peck.

Lasky says that every hotel, including small limited-service properties, should have a marketing strategy. “If your plan is to place an ad in The Wall Street Journal once a year, that's a waste of money. A marketing program should be ongoing. If you want GE employees to stay at your hotel, you're going to have to spend time with GE selling your property,” he says.

Paying attention to management details can be essential to a hotel's bottom line. For example, payroll is often overlooked, yet it can be a huge money pit. Lodging Unlimited, for example, saved $600,000 in executive payroll during the first week that it began managing a full-service hotel. “The wrong people were doing the wrong jobs for the wrong salaries. We eliminated some jobs and reorganized the staff,” recalls Lasky.

Keeping Up Appearances

Another common problem is that owners' budgets for capital expenditures are often insufficient, says Moyar of MEI. Normally, lenders require hotel owners to set aside 4% of their yearly revenues for capital expenditures to cover hotel maintenance costs and renovations. Yet, most hotels actually need to spend 6% to 7% of their annual revenues to cover these costs. Otherwise, the hotel can become run-down and have a negative effect on occupancy and revenues, he says.

Thirty percent of owners sell because the hotel needs capital improvements, and they don't have enough money, says Moyar. “Owners need to understand that if they want to hold onto their assets, they need to set aside sufficient funds.”

Robyn Taylor Parets is a Sharon, Mass.-based writer.