Sometimes the hardest time to sell is when you don’t have to

I have been in hotel real estate for 25 years. I can count on one hand the hotels that owners should consider holding indefinitely and pass on to their children. All the rest of them are a commodity that should be viewed exactly as such.

I had a client a few years ago that could have sold his hotels at what I believed to be the highest value factor of all time. He was making good cash flow and made a very poor judgement that the future of those hotels would remain sound. A smart guy once told me that everything should be for sale except, of course, our family and our moral foundations. This particular client had a portfolio of hotels that were average at best and located in a market where new development had very few restrictions.

You already know what happened to this client. He did not sell his hotels and choose to hold the real estate; he ultimately lost control of his hotels to his lender and it devastated his company.

It is always too easy to sell when you have to, but it is another thing altogether to sell when you would rather keep it. It is in those times when the decision to sell should always be viewed on what I call the risk curve. One should ask himself several questions, including what will this investment be like in 5 years if the market changes or if the underlying economic fundamentals change.

In our hotel real estate world, the only thing you know to be true is what the market is today. I cannot tell you how many people make the wrong choice based on what they think the hotel income will be over the next 5 years. No one knows what the economic climate will be like, what interest rates will be like, etc.

At Hotel AG, we believe that sellers ought to be sellers when there are buyers. Simple, right? I ask sellers to put on a buyer’s hat and tell me what they see. At the core of the reasons a buyer buys, it is because he can get a loan today, and he can see some upside in his investment. When all the upside is gone and the deal starts tracking downward, it is almost impossible to sell.

I believe a seller should always know what the value of his holding are and always know a number that he would transact at. We were selling a Marriott hotel in mid-2007, and the hotel was brand new. We had a REIT (real estate investment trust) as a buyer and the price was in the stratosphere at the time. The seller gets on a conference call with the buyer and begins to tell the buyer how to run their company and really shows himself on the call. The buyer backed out of the deal that same afternoon, and the seller now owns the same hotel 8 years later; it is worth a fraction of the price we had presented him. This seller earned a master’s degree on what never to do again.

My advice to sellers is to recognize that the market cycles up and down and to make decisions he/she would be proud of if the market changes. Sometimes selling for 90% of what you may think the deal could possibly be worth in the future is better than being faced with a downturn and then having your options limited.

All you can do is to make the wisest decisions you can with the data you have, but most importantly, one needs to trust their gut and heart because very seldom are those two factors wrong. KT

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