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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   February 2016

Develop a Spirit of Independence

Long considered risky, nonfranchised hotels are gaining favor as unique, economical properties

Develop a Spirit of Independence

For decades, hotel operators and investors, as well as the mortgage originators who arrange the financing, have put great stock in the power of a well-marketed brand name. Some operators are finding that the freedom they have as independents, including the freedom from pricey franchise fees, is more valuable than the backing of a well-known flag.

A long time ago, there were no hotel brands. Innkeepers simply hung their shingles and welcomed guests with the promise of comfortable accommodations, friendliness and a good meal. Fast-forward many decades, and the landscape has changed dramatically.

Hotel brands have proliferated. While the number of branded hotels has grown, the chains have, to varying degrees, lost their unique qualities and the ability to differentiate themselves from other hotels — be they branded or independent.

Today, the traveling public has virtually unlimited lodging choices and is often confused about what makes a hotel brand unique. With the introduction of third-party booking engines, hotels have been commoditized. Operators have given up control of their room inventories and are paying enormous fees to have their accommodations sold to consumers with no loyalty, at hugely discounted prices.

Changing course

Hotel owners and operators also are now in competition with new lodging alternatives, such as Airbnb, Homeaway and apartment swapping. Many brands are no longer unique, and differentiation is defined by bed scarves, lobby scents, free Wi-Fi, curved shower rods and how much complimentary food is offered at breakfast.

As a result, a growing number of owners and operators are ditching their standard-operating procedure manuals, adopting an independent mindset and choosing not to affiliate with a hotel chain or brand. They are taking a more entrepreneurial approach to business and are embracing a spirit of innovation and creativity. They run their businesses as they see fit and, at the same time, avoid franchisers’ large fees.

Independent hotels

There are many definitions, but most in the industry agree that an independent hotel is not branded and has a unique name. Sometimes boutique hotels, evoking images of chrome and techno music, are independent, but the word is more likely to connote lodging facilities that are less self-consciously cutting edge and more in the mold of authentic hotels.

There has been a movement away from hotels geared toward specific demographic audiences, in favor of lodging with more universal appeal. Why can’t a hotel be equally relevant to a millennial, baby boomer and empty nester?

Successful independents have adopted just that point of view by rejecting cookie-cutter rooms and creating engaging communal spaces that encourage interaction and networking among guests. Such designs have given independent operators a reputation as industry leaders, closely attuned to the needs of their guests.

Setting trends

Today, many of the newest, trendiest and most relevant international chains are following the independents’ lead with prototype hotels that include mini-rooms and well-designed, engaging communal spaces. The brands are trying to mimic the independent trend by inventing “soft brands,” where operators can conduct much of their business to their liking while also benefiting from the larger brand platform.

At the same time, most originators remain accustomed to financing branded hotels. They understand franchise fees, replacement reserves for product improvement plans and license terms. But many loan originators are learning more about how independents operate, observing their success in the market and dropping some of the skepticism they’ve had about nonbranded lodging.

A nonbranded hotel with a strong identity and vibe can often 
attract more savvy travelers willing to pay higher rates.

A growing number of savvy debt and equity sources are moving toward a wider acceptance of the independent hotel model, just as consumers have been doing for years. In conducting their due diligence and underwriting, originators are paying closer attention to specific factors when looking at providing financing for an independent property.

Originators considering financing for independent properties have tended to look kindly on those with experience working in the independent side of the industry. That is not necessarily the case for those seeking to go the independent route but who have experience more closely aligned with branded hotels. But the experience those owners and operators have gained in the branded world gives them just the background they need to be successful with an independent property.

Judging improvements

Large well-known brands have a reputation for forcing their franchisees to spend a great deal of money on items that are unimportant to the guests, but ensure their stay will be identical to what they would experience at any other hotel operating under the same franchise. What if an owner could base capital expenditures on what the guest desires (and will pay for), rather than franchise requirements?

Sometimes those franchise-required “enhancements” degrade the property and squeeze out any sense of personality or uniqueness. By foregoing a franchise flag, hotel operators can make better decisions about how to make their property appealing, and can put the savings from not paying a 12 percent to 15 percent franchise fee to work enhancing sales, digital marketing, public relations,  personnel training and a variety of customer amenities.

In short, an independent’s freedom in decisionmaking helps, whereas franchise restrictions often hinder.

Making location, loyalty work

In any decision about building or  financing a hotel, it is important to consider how the location of the property compares with other hotel locations in the market. Often, independent  hotels can draw more customers by commanding a superior location, which can offset any disadvantages from the lack of a recognizable brand. Conversely, strong independent hotels have proven that they are the draw and can prosper even in an inferior location.

A big selling point of branded hotels is the breadth and reach of their  loyalty programs. Consumers have become addicted to this perk and have stayed away from nonbranded hotels simply because of their lack of such perks. But this is changing, and more nonbranded hotels are offering robust loyalty programs of their own, or partnering with outside providers to accomplish that objective.

How does the guest feel by staying at an independent hotel? A nonbranded hotel with a strong identity and vibe can often attract more savvy travelers willing to pay higher rates and forego aggressively marketed chain-loyalty programs.

Building profit centers

Hotel food and beverages are often a necessary evil and a large expense. Complimentary full breakfast and restaurants with few customers can be a huge financial drain for a property. What if the restaurant and lounge were re-imagined as a profit center? What if a nonbranded hotel could leverage its name by creating retail opportunities? Surely this would help the hotel’s bottom line and make paying the mortgage easier.

Still, even some well-run, well- intentioned independent hotels will fail. What happens if the property is not as successful as planned, and the owner must give up control? It is more likely that a subsequent buyer will add a flag, so the lender should understand whether this is a possibility, given the physical constraints of individual buildings.

•  •  •

Providing financing for the independent hotel is not for everyone, but many originators are now considering such loans as a worthwhile method of expanding their hotel-lending platforms. They also are beginning to find, after conducting proper underwriting, that independent hotels are at times less risky to finance and more profitable than their branded counterparts. 


 


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