Product improvement plans now

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A property improvement plan (PIP) is a list of franchisor-mandated improvements issued before a new franchise term is granted to the existing owner or prior to any change of ownership of a franchised property. As business slowed during the 2020 COVID-19 pandemic, many hotel owners opted to use this downtime and the availability of low-cost financing as an opportunity to go ahead and initiate a PIP.

However, this year there have been four major hurdles owners encountered to make them second guess this decision.  Inflation, interest rates, supply chain and lead times are all driving up the cost of this endeavor, not to mention the amount of purchase price renegotiations over the past few months.

Construction costs have soared. Coupled with supply chain issues and inflation, PIP costs are coming in much higher than what typically has been underwritten in the past. “Five years ago, the Hilton and Marriott soft good update would cost $9k to $10k per key; now it has jumped up to $15k. The 14-year Hilton Garden Inn refresh for soft goods, case goods, and bathrooms used to cost $20,000/key but now they are underwritten at $35k to $40k” says Joe Delli Santi of MCR. These issues create additional variables as listings are brought to market. Brokers should be in constant communication with owners, developers, lenders, and appraisers to stay on top of realistic PIP costs.

Another big issue, even if you have started your PIP over the past few months, is that lead times for delivery of product and any needed installation have gotten longer. Depending on the items involved and the source, the lead time may be up to one year and there is likely not much relief expected in that timeline for next 24 months. As a result, rooms under such renovations may be out of service much longer than expected.

Even if a hotel owner accepts the price increase on supplies, they also have to factor in labor price increases.  The cost to pull quality subs to job sites has also risen making it tougher in the secondary and tertiary markets for hotel owners to start their PIP.

Previously, franchisors offered some leniency during and immediately after the pandemic but are now cracking down on franchisees to get their PIP done. Owners will have to make the decision on trying to extend or delay the PIP or pass it on to the next buyer. Their choice will boil down to their gameplan and desired return on investment.

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Provided by Ryan Patterson, VP, Mumford Company