The Six Most Common Reasons for Delaying the Opening Date of a New Luxury Hotel
By Alex Sogno, Founder and CEO of Global Asset Solutions
“Owners and operators often differ in goals and approaches. Whatever the differences, however, the hotel should always come first. ”
Of all the nightmare scenarios that may keep a hotelier awake at night, few are scarier than the prospect of having to delay the opening date of a new luxury hotel.
The loss in potential revenue, coupled with the negative impact on pre-opening costs, income and cash flow – not to mention the adverse effects on the hotel’s brand – can be significant. After all, a business gets only one shot at making an excellent first impression.
Yet, a surprising number of hotel openings end up being postponed. Although no official statistics are available, it is estimated that in some parts of the world up to two-thirds of openings are delayed by anywhere from one month to a year or even longer. Such delays often happen because of persistent disagreements between owners and hotel operators.
By acting as a bridge between all parties, as well as providing sound financial and project oversight, hotel asset managers are well placed to mitigate and help prevent many of the delays that stem from those disagreements. Indeed, our specialist expertise means we are uniquely placed to make sure the owner, the local team and the corporate management continue to be on the same page throughout all stages of a new development.
Below, we have drawn on our experience as hotel asset managers to list some of the most common reasons for opening delays. We also provide insight into how asset managers can act to prevent these delays and how they can help the operator in the months following the property’s launch.
Reason #1: Not choosing the right operator
Hotel owners aren’t always professional hoteliers with plenty of operational hospitality experience under their belts. As a result, they often struggle to identify the right operator for their development. And even if they find the right fit, they might not necessarily know what to look out for when negotiating the best terms and conditions for their property.
Appointing a hotel asset manager early on during the planning stages of a new upscale development will prevent many conflicts further down the line. Aside from helping to select the right operator, hotel asset managers’ insights and benchmarking capabilities are useful when it comes to aligning everybody’s interests or, indeed, for validating the projections submitted by the operator.
Reason #2: Failure to set a realistic opening date
During the project and pre-opening phases, the owner covers all costs, but as soon as the hotel is operational, the operator needs to deliver. The balance of responsibilities shifts from the hotel owner to the operator on the day of the opening.
The timing of the launch is often subject to differences in vision and expectations between the hotel operator and the owner. The owner may prefer to maximize revenue by scheduling a soft opening as early as possible, while the operator might seek to push it back until they are satisfied all main variables such as staffing, commissioning and testing are fulfilled.
Setting an unrealistic opening date can strain the relationship between the parties. Asset managers often negotiate compromises between owners and operators, while providing clear and detailed pre-opening timelines.
Asset managers then take on the role of a project manager, overseeing all critical paths and ensuring that issues are clearly communicated and addressed before they impact the opening.
Reason #3: A lack of corporate support
A hotel’s pre-opening stage presents many opportunities for either the hotel owner or the executive team – or indeed both – to feel frustrated with what may be perceived as a lack of support and involvement from corporate management.
From putting standardized e-commerce and operational guidelines in place, to training staff and providing marketing support, corporate management must make sure it fully integrates the new property within its brand/management by allocating adequate resources to it.
Because one of the responsibilities of an asset manager is to foster effective communications between all parties on a project, asset managers are well placed to help forestall this issue. By making corporate management an essential partner in those communications, including regular meetings and site visits, asset managers provide additional reminders to corporate management to put this type of support in place.
Reason #4: Disagreements around the pre-opening budget
Determining the pre-opening budget can open up the potential for many conflicts between owners and operators. On the one hand, the onus is on the owner to provide sufficient working capital. On the other hand, the operator is mostly concerned about making sure the development is as ‘on brand’ and as attractive as possible compared to its nearest competitors.
This latter concern means operators often want to make sure they allocate their resources in a way that benefits the whole group, rather than just the new development.
Asset managers act as impartial arbiters when these challenges arise. They anticipate and act to mitigate any cost issues that might result from these opposing interests as early as possible. Asset managers do this by providing additional oversight with regards to liquidity management, thus helping to prevent operational interruptions. For example, one industry best practice restricts the operator’s access to the full agreed-upon pre-opening budget at any one time. Instead, distributing a predetermined amount to the operator monthly helps to ensure the operator stays within budget.
Operating supplies, equipment (OS&E) and IT budgets can also create unanticipated cost overruns that may lead to disagreements between operators and owners. These items are often flagged on a property’s so-called “snagging list,” the survey that itemizes deficiencies or incomplete features at the time of property handover from the owner to the operator. Operators are sometimes known for pushing for the upper end of what is considered “necessary” when it comes to this list as a way to avoid higher costs during the ramp-up time of the business.
The role of the asset manager includes reviewing the list and negotiating what is fair and necessary for the hotel owner, and what is not.
Reason #5: Failure to recruit the right GM and directors of Sales & Marketing and Revenue Management at the right time
The impact of appointing a GM on the pre-opening budget can be significant – which is why many GMs are hired far too close to their hotels’ opening dates. Based on our experience as hotel asset managers, we usually recommend a GM starts six to 12 months before launch. This timeframe allows the GM to become fully familiarized with the specific hotel and its unique characteristics, while also allowing him to monitor progress on team training and set-up procedures, and stay up to date on the pre-opening and the partial year budgets.
The Director of Sales & Marketing and the Director of Revenue Management should be appointed at least 12 to 18 months prior to opening, even if the rest of their teams are hired at a later stage. After all, having a good commercial strategy in place as early as possible is critical to ensuring a hotel has a successful first year of operation. From establishing rate strategies, educating travel agents, setting up websites, online travel agent accounts and distribution, to reaching out to key accounts, building relationships with key clients for meetings, incentives, conferences and exhibitions that require longer booking windows – each of these activities takes time.
By bringing in the Director of Sales & Marketing and the Director of Revenue Management before launch, the necessary marketing groundwork will be in place for having customers booked and checking in on the opening day and in the weeks and months after.
Reason #6: Failure to hire the right staff – and at the right time
Payroll is easily one of the largest expenses in the pre-opening budget. Because of this, the operator needs to involve the owner closely when putting together the hotel’s staff hiring plan. Recruitment and service training timelines mean certain key personnel may need to be employed up to six to eighteen months before the launch (see Reason #5, above, for three such key personnel), while a more staggered approach can be taken with other employees.
Although the plan is mostly overseen by corporate management and the executive team on the ground, the owner needs to monitor the plan’s implementation. A hotel asset manager can provide additional levels of accountability with regards to unfilled positions, over-staffing, timings, salary ranges, benefits, service and training programs.
Often, the hotel will benefit from employing certain staff members at the property sooner rather than later. However, the operator may instead prefer to use their most talented personnel elsewhere in a ‘live’ situation for as long as possible or the owner does not want to incur extended pre-opening payroll for certain positions. This issue should be discussed in a frank and open way at the outset to keep conflicts from developing or to prevent delays to the hotel’s launch.
Timing is crucial. While service levels need to be perfect, having a cost base without income for too long can significantly strain an owner’s cash flow.
After the opening: Launching a new hotel moves operations into a new phase of challenges
You’ve launched. Your executive team has successfully established and deployed sound, workable strategies to support the launch. Your service staff are trained and performing well. Clients are booking meetings, rooms and events. Now what?
A smooth launch is a good start, but it is only one key milestone for the business. The entire first year of a new hotel’s operation presents many additional challenges that may worry a hotelier, and the executive team needs to shift quickly from a pre-opening mentality to an operational ‘ramp-up’ mode.
Even the best budget forecasts cannot predict unexpected operational issues or surprise market dynamics that may require adjustments in strategy and approach. As the local operating team steps into gear, it is therefore critical that owners carefully track the team’s performance, encouraging it to respond quickly to emerging trends and challenges. This oversight allows for adjustments to be made so that performance remains consistent with – or, ideally, higher than – the original underwriting proforma.
Just as they can assist with smoothing the pre-launch phase, asset managers can lend their expertise and experience to the operation to help mitigate first-year growing pains. They provide additional assurance to management by watching for and spotting inaccuracies in forecasting so that corrective action can be taken before problems develop. They can also leverage their relationship and lines of communication with corporate management to advocate for greater sales & marketing support for the hotel. The asset manager works to help the new hotel succeed, because when it does, all players – owner, operator, executive, staff, and so on – benefit.
Owners and operators often differ in goals and approaches. Whatever the differences, however, the hotel should always come first.
Hotel asset managers play an important, non-intrusive role in managing those differences. They do this by enhancing communication between all parties, by providing additional oversight to prevent potential over-spending across budgets and by providing advice on necessary systems, timelines, recruitment and service training. They also support the local executive team by making sure the opening budget is well spent while safeguarding that revenue management and sales & marketing strategies are in place and followed.
Asset managers serve an important role in reminding all parties that the bottom line is a goal they all share – whether it is in the form of a higher incentive fee, a more positive valuation, or a bonus scheme.
Indeed, by bringing the owner, the local team and corporate management together so that they are all on the same page from the earliest stages of the hotel’s development onwards, the asset manager helps to ensure the hotel as a whole will do better.
Copyright © by Hotel Asset Value Enhancement Inc. and Hotel Asset Management Magazine. All rights reserved.
About the Author
Mr. Alex Sogno is the founder of Global Asset Solutions, which provides expert oversight and asset management in the hospitality luxury industry. Global Asset Solutions benefits from dynamic international exposure and exponential growth in the EMEA and APAC regions. He has lectured frequently and published several articles on hotel real estate finance and asset management. Mr. Sogno is also the co-writer of the Hotel Asset Management textbook (2nd edition), published by the Hospitality Asset Managers Association (HAMA), the American Hotel & Lodging Education Institute, and the University of Denver. Mr. Sogno created and teach the Hotel Asset Management MBA online course and license at the Ecole Hôtelière de Lausanne. He was the founding President of HAMA Asia Pacific (in Singapore) and developed HAMA Middle East Africa (in Dubai).