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Hotel experts say development and financing must be done by the numbers
By ALAN J. ORTBALS

   While the foundation of Spring Green Lodge in Edwardsville becomes overgrown with weeds and its developer searches for financing, experts say that hotel development is a sophisticated and methodical process that doesn't allow for shortcuts.

   It all begins with understanding the marketplace, according to Robert O'Loughlin, president and chief executive officer of LHM. O'Loughlin has developed 25 hotels all over the United States through his 38-year career.

   When O'Loughlin spies a location that looks like a good spot for a hotel, he goes to Smith Travel Research, which claims to be the nation's leading provider of information and data on the hospitality industry. Smith accumulates data from hotels nationwide.

   "If you give a competitive set of five or so hotels that are going to compete in the area that you want to put a hotel," O'Loughlin said, "Smith will give you the aggregate occupancy, room rate and the RevPAR (revenue per available room). They'll give you a report on what kind of business is in the area, whether it's strong or weak and then you have an idea. If all the hotels in that area are doing a 75 percent to 80 percent occupancy, we know it's a strong market and can probably take another hotel," he added.

   Armed with the Smith report, the next step is to hire a hospitality industry consultant to do an in-depth analysis of the market. O'Loughlin says the leading consultant in the St. Louis area is Gary Andreas, principal with H&H Consulting Inc. H&H consults on hotel development, acquisition and financing nationally and internationally. Andreas says H&H has done work in every state except Alaska plus Canada and Central America and is currently working in the Bahamas.

   "We go on the ground in the market," Andreas said. "We look at the hotels that are there, interview the managers and/or marketing people to see how that hotel is doing, try to determine the strength of the market and the market segmentation - the division of demand between leisure/transient group and commercial/transient and extended stay business. We'll look to see if there are brands that are not represented that could be represented if there were sufficient demand for another hotel, or if there was an opportunity to duplicate some brands. We develop our best estimate of where a proposed hotel would fit into the market, in terms of capturing demand and producing a profitable business experience after all their debts are covered and their return on investment," he added.

   Andreas says the hotel development business has gotten a lot tougher in recent years. One reason, according to Andreas, is that in the 1980s there were massive hotel failures brought on by a slumping economy - along with banks' low lending standards and lack of proper due diligence. After recovering from that experience, banks have taken a much tougher line when it comes to financing hotels.

   "Probably two-thirds of banks wouldn't touch a hotel loan if it was the best loan they could make," said Andreas. "Lenders understand retail, light industrial or warehousing much better than they do the hotel business because they make so many more loans in those areas. A lot of banks will only be approached once or twice a year to even do a hotel loan."

   The second reason, he said, is that many of the hotel markets are at capacity right now.

   "I don't always tell them it will be good for anything," said Andreas. "Sometimes the answer is 'run away as fast as possible.'"

   The hotel developer and consultant work together to determine the right fit for the market. "Let's say you wanted to do a Four Seasons Hotel or a Westin Hotel in Fairview Heights," O'Loughlin said. "They would say if it's a Westin or Four Seasons, you're going to have to charge $400 per night and everybody else is charging $75; that hotel just won't work in that market. So you would come back and ask if a Holiday Inn or a Sheraton would work. And they would come back and say, 'Yeah, you would probably get a 70 percent occupancy and the market runs $85 and you could justify the Hilton brand with that kind of occupancy and rate.'"

   In addition, the franchisor compiles its own statistics and comes to its own conclusion regarding the area, the site and the franchisee, O'Loughlin says.

   "It's a lot more sophisticated than one would think and it takes a lot of the guesswork out of whether you should be in there or not," he said. "Then, when you go to the bank with the franchise company verifying it, the market study and the Smith Travel Report, the bank has some assurance."

   Andreas cautions hotel developers on building non-franchise-affiliated hotels unless there is a unique opportunity.

   "If you are going to do a limited service or small, full-service hotel without a brand in the vast majority of markets, there has to be a real special reason to do it - either you're in a resort environment where the competition is all non-franchise properties or there is some real peculiar reason that it's going to work," Andreas said. "The other extreme would be people who are developing boutique hotels which tend to run without a franchise affiliation. Those occur in the Branson market, the Lake of the Ozarks market, the major central business districts or ski areas in Colorado where people are looking for a particular quality of hotel with particular attributes."

   O'Loughlin is planning to add on to the Four Points by Sheraton Hotel in Fairview Heights. "We feel that the occupancy, the rate and the structure could support another 30 rooms," he said. "The property has been doing really well."

   Despite the fact that the Fairview Heights hotel has a solid track record, O'Loughlin says that much the same process is required to acquire financing for the expansion. That due diligence review is currently under way. O'Loughlin expects to break ground on the expansion in the spring and the construction to take about six months.