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The Nine Circles of CapEx Spreadsheet Hell

The Nine Circles of CapEx Spreadsheet Hell

Most hotel owners will be receiving 2018 CapEx plans from their hotels in the next few weeks.  Most of those CapEx plans will be submitted on Excel spreadsheets.

This is a perfect time (maximum pain levels) to consider The Nine Circles of CapEx Spreadsheet Hell, and develop strategies for a move to CapEx Planning Paradise.

  • What is wrong with using CapEx planning spreadsheets?
  • What are the alternatives?
  • What specific steps should owners and operators take?

Avoid CapEx Spreadsheet Hell!

Introduction

Hotel owners spend an average of 7% of gross revenues on CapEx, every year; a very significant reinvestment of scarce owner’s capital. Most management contracts require the hotel operator to deliver a CapEx plan to the owner sometime between August and the end of the year. The description of this “CapEx plan” is usually vague; anything will do to meet the requirement. These CapEx plans are often prepared and delivered in the form of an Excel spreadsheet.

If your properties are still using spreadsheets to manage CapEx planning and administration for a single property, or thousands of projects for a large portfolio, you have needlessly set yourself up for a trip to CapEx Spreadsheet Hell!

hotel capex hell

The Nine Circles of CapEx Spreadsheet Hell

Using spreadsheets to manage CapEx will eventually lead owners and operators into each of the following Nine Circles of CapEx Spreadsheet Hell: 

Inefficiency

Regenerating CapEx plans every year as a stand-alone process requires hours of dedicated time. Management at the property, regional, and corporate level must identify, describe, scope, price, and prioritize each project at each property.

Hotel owners are faced with individual spreadsheets from each property and/or multiple management companies which must all be compiled into a common format for portfolio level review and analysis.

Inconsistency

Inconsistency in project titles, scopes, and budget estimates make it extremely difficult to estimate CapEx costs across the portfolio, compare costs between similar properties, and aggregate purchasing and contracting across the portfolio to drive the lowest pricing from suppliers and contractors.

In a recent CapEx submission for a portfolio of 180 hotels, “PTAC” replacement projects were listed (and “speled”) in 26 different ways. Some of the PTAC projects included tax, freight, installation, and disposal; some only the purchase price of the PTAC unit. Some project costs were based on national account pricing; some on last year’s purchase costs; some on local supplier estimates.

Inaccuracy

Spreadsheet numbers entered as text, formulas overwritten or corrupted, and errors in column ranges can cause errors in individual projects, as well as property and portfolio totals. Checking thousands of projects for spelling, math, and spreadsheet entry errors is both mind-numbing and time consuming.

Inattention

CapEx planning often conflicts with the preparation of annual operating budgets, and is usually considered a lower priority for management time. CapEx plans are often hastily assembled at the last possible moment.

This time conflict is exacerbated by the stand-alone nature of spreadsheet based CapEx planning.

Integration

Spreadsheets typically cannot be integrated with other systems that are used to purchase, administer, manage, and maintain capital assets.

  • Asset age and condition data from the Maintenance Management System (computerized or manual), must be transcribed into the CapEx planning spreadsheets.
  • Fixed asset accounting system records are typically not available at the property level where CapEx planning is taking place.
  • Reflecting CapEx approvals, funding, and procurement processes in hotel accounting systems becomes a manual transcription process.
  • Project management systems typically cannot be simply updated from approved CapEx plan spreadsheets.

Updating fixed asset and maintenance records when assets are replaced does not flow smoothly from a spreadsheet based CapEx planning process.

Integrity

Capital equipment data (age, useful life, maintenance history, cost, etc.) must be transcribed from equipment records into the CapEx planning spreadsheet. It is nearly impossible to maintain this integrity as it is transcribed from each individual equipment record to each individual CapEx project.

Often, properties resort to guessing or making up this data rather than finding and re-typing multiple data points for each project.

Data Entry and Reporting

CapEx planning data and reports need to be formatted differently at each stage of the process. Property level planning requires input fields that control consistency and automatically correct errors. Portfolio level review requires less individual project detail, but accuracy and consistency on project names, scope, costs, and timing.

Collaboration and Coordination

Good CapEx planning requires an iterative process that fosters collaboration between management staff at the property, regional, and corporate levels, subject matter experts, and Ownership. It is very difficult to keep track of the status of review, requests for information, plan revisions, approval, and execution when the plan is on a spreadsheet that must be edited and redistributed with each change, and at each step of the process.

Indecision

Spreadsheet based CapEx planning makes it difficult to confidently estimate CapEx expense, cash flow, and project timing. This lack of confidence leads directly to indecision at the Ownership level, delayed approvals, and difficulties executing CapEx in a timely and efficient manner.

Finding CapEx Paradise or “isn’t there an App for this?”

You wouldn’t consider using a spreadsheet to manage your contact list; manage depreciation schedules for fixed assets, or manage your guestroom inventory; you probably use software applications specifically designed for each of those functions.

Cost effective CapEx planning and administration technologies are available as standalone systems, as part of an existing system (accounting, maintenance management, etc.), or agile integrated systems that can connect across multiple systems, organizations, and levels.

Additionally, “Big Data” technology has enabled leveraging existing property level systems and process to provide a strong foundation for portfolio level CapEx planning, administration, and execution. Increasingly, data can be shared across systems seamlessly, eliminating redundant data entry, and providing for greater accuracy, reliability, and efficiency in CapEx planning, administration, and execution.

Here are the seven steps to find CapEx Planning Paradise:

Systems Based Continuous Process

Implement an integrated CapEx planning and administration technology that supports continuous planning.

Commit to developing and maintaining a ten year forward looking CapEx plan for each of your hotel properties, and put processes in place to ensure that projects are entered and discussed on a regular basis throughout the year.

Planning Consistency

Support your continuous process with standards that help bring consistency to your planning. Define what is considered CapEx, and which non-CapEx expenditures you would also like to include in the planning process (e.g. large periodic maintenance expenses).

Develop a dictionary of project categories, areas, names, and scope descriptions that supports consistent planning from year to year and hotel to hotel. Decide how budgets should be presented, and how budget add-ons should be calculated (e.g. design, tax, freight, fees, etc.).

Data Integrity

Design your system so that data resides in the appropriate system, and is available to the CapEx planning system as needed. That is, avoid replicating fixed asset data in the CapEx system if it is available in the maintenance management system or accounting system.

Transparency

Choose a system and process that provides transparency across linked systems and parties to the process. Management staff at the property, regional, and corporate office should have access to the same information as Ownership, asset managers, auditors, etc.

Transparency is critical to any collaborative planning process.

Long Term View

Ensure that the system captures all large and/or recurring CapEx projects; for example renovations, fire alarms, chillers, boilers, roofs, exterior paint, etc. Scheduling these projects out ten years provides a strategic long term view of the properties capital needs, and supports effective portfolio planning by Ownership.

Focused Review Process

Set up the CapEx system to support the review and approval process required by Ownership, as well as providing for incremental review of individual projects, and focused review of “classes” of projects. Rooms renovations require in depth review and planning; PTAC replacements do not.

CapEx approvals and administration should mirror this focused review. Senior management needs to review the scope of every renovation, but does not need to approve every replacement PTAC.

Portfolio Planning

The CapEx system and process should support portfolio level planning by both the Management Company and Ownership, and should allow aggregation of purchasing and contracting across the portfolio.

Summary

Having a strong CapEx planning system and process in place will help ensure that capital funds are only invested at their highest and best use, and that you will never again need to visit The Nine Circles of CapEx Spreadsheet Hell.

Take action:

  • Implement integrated systems.
  • Adopt a continuous planning process.
  • Insist on data accuracy, consistency, and efficiency.
  • Require a transparent process.
  • Take the long view.
  • Focus CapEx review and administration.
  • Negotiate best value through portfolio purchasing.

About the Author:

Thomas Riegelman offers an extraordinary range of expertise in facility and asset management, with over 30 years enterprise level executive experience managing multi-unit hotel, resort, and military housing operations.

His 19 years with Hyatt Hotels Corporation as VP of Technical Services and VP of Engineering provided him with broad experience in all phases of hotel and resort planning, CapEx management, construction, engineering, and facility operations. Tom also served as the General Manager for The Prudential Realty Group’s northeast hotel portfolio, giving him a strong owner’s perspective on real estate development and asset management.

After graduating from the Cornell University School of Hotel Administration with a concentration in hotel planning and design, he earned an MBA in Finance from the University of Chicago Booth School of Business. Tom also attended the Ecole Cordon Bleu in Paris.

Tom is the principal in charge, and personally supervises all consulting engagements by RA Associates.

R-A Associates provides management consulting services focused on creating and sustaining the long term value of hospitality real estate assets.

  • Property Planning and Design,
  • Facilities Operations, and
  • CAPEX.

Hospitality CapEx Math 101 – Useful Life

Highest and Best Use – CapEx – Part II

CapEx Math 101 – Useful Life

There are four important concepts that hotel owners and operators need to know about CapEx useful life.  Applying these concepts is crucial to good CapEx decisions and achieving highest and best use of owner’s capital.

The four important concepts of CapEx useful life: 

  • Maximize Useful Life
  • Match the Investment Horizon
  • Consider Risk, Obsolescence, Technology, and Taxes
  • Do the Math

 

Useful Life

Many hotel capital assets just do their job year after year, with minimal inputs of operating expense.  Examples of these assets include roofs, exterior walls and windows, water distribution systems, and fire and life safety systems.  These assets are great examples of the most basic rule of CapEx useful life:

Maximum Actual Useful Life = Maximum Return on CapEx $

The longer the actual useful life of a capital asset, the lower the costs become per unit of use.  In simple terms, a $900,000 roof that must be replaced after 15 years costs about twice as much per year than if the roof’s life is extended to 30 years.

Although it is easier to think about reducing CapEx costs “per year”, extending useful life is beneficial only in delaying the capital expense required to replace the asset.  There is really no “per year” benefit; only a delay in expenditure of the total replacement cost.

Here is a simple cash flow analysis:

thumbnail of TR1

This analysis is oversimplified to illustrate the point, but clearly demonstrates that there is an advantage to maximizing the useful life of this roof.  The 15 year roof costs $1,972K ÷ 30 yrs. = $66K/yr.  The 30 year roof costs $1,072K ÷ 30 yrs. = $36K/yr.

 

Maximizing Useful Life

How do you maximize the useful life of capital assets?  The concepts are pretty simple, and can be applied to most capital assets.

  • Buy the right capital asset to begin with, and
  • Take good care of it.

Here are some ideas for the roof example:

Design, Specification, and Installation – For both the initial investment, and any subsequent replacements, it is the owner’s responsibility to ensure that the roof is properly designed, specified, and installed.  This is the opportunity to make good decisions about expected useful life, warranties, maintenance requirements, price, and value.

thumbnail of TR3

Inspection, Maintenance, and Repair – Roof warranties generally require documentation of inspections, maintenance, and repair before the warranty will be honored.  Although it is the operator’s responsibility to ensure that the roof is properly inspected, maintained, and repaired, it is in the owner’s best interest to confirm that this work is being done, and that systems are in place to track and document the work.

The obvious intent of the warranty’s inspection, maintenance, and repair requirements is to extend the useful life of the roof at least until the end of the warranty term.  These same measures will continue to help extend the life of the roof beyond the warranty term.  It is absolutely possible to extend the actual useful life of a roof 5 to 15 years beyond the warranty period with regular inspection, maintenance, and repair.

There is also the “maintenance paradox” to consider.  Well maintained assets are less likely to require repair, and are less costly to maintain over the life of the asset.  Poorly maintained assets require more repair work, are more expensive to maintain, typically have a shorter useful life, and are more likely to fail catastrophically.

Finally, it is important to note that extending useful life only applies to existing capital assets, and is almost entirely under the control of the hotel’s operator.

Buy right, and insist that capital assets are well maintained.

 

Operating Expenses

Capital assets often require ongoing labor, energy, water, maintenance, and repair expenses.  In some cases, these annual operating expenses approach or exceed the cost of the capital asset itself.

Capital asset operating expenses typically increase over time.  As assets age, they often operate less efficiently and require more maintenance and repair.  While operating expenses complicate the analysis of maximized useful life, they do not alter the basic math.  For major capital assets, it is important that owners quantify these operating costs, and balance them against the capital replacement costs.  Well-functioning capital assets should only be retired when the operating expense balance tips in favor of replacement.

Extend Useful Life until replacement life cycle costs are below current operating costs.

 

Investment Horizon

Would you replace the $900K roof in the earlier example if you were planning to sell the property in two years?  Probably not.

Say the roof had failed, and there was no choice about replacing it.  Most owners would choose the least expensive replacement they could find, with the only requirement that it last at least until after the expected sale date of the property.  Let the new owner worry about the roof!

Conversely, if this hotel was a “core asset”, and you intended to hold the property for the next twenty or thirty years, you would be well advised to purchase a premium quality new roof with the lowest total life cycle costs.

Coordinating capital asset useful life with the owner’s investment horizon requires good judgement about how these decisions will be factored into the sales price.

  • Will the prospective buyer discount the purchase price by the full cost of replacing the worn out roof?
  • Should you replace the 30 year old chillers two years before sale, and get the value of the increased operating cash flow from energy and maintenance savings?
  • Will the full revenue benefit of a guestroom renovation be reflected in the sale price?
  • Will a deferred renovation be discounted in the purchase price by the buyer?

Balance CapEx useful life with owner’s investment plans.

 

Risk

Operating risk is an important consideration in useful life decisions.  Fire suppression, life safety, and security system replacement decisions all carry a substantial element of risk.  Failure of one of these systems in an emergency can potentially put a hotel out of business, but replacement is expensive, and has no positive affect on revenue.

Some capital assets also carry regulatory risk.  For example, although smoke detectors may continue to function for 15 or 20 years, they have a regulatory useful life of only ten years.  They “must” be replaced after ten years by regulation.  The regulatory risk penalty is a fine or injunction.  The safety risk is a guest or employee death or injury in the event of a fire.

Certain mechanical and electrical systems are critical to the operation of the hotel, and their failure can have a profound effect on the business.  For example, a full service Marriott hotel in Virginia suffered the failure of all three of its heating and domestic hot water boilers at the same time.  Unfortunately, the failure occurred during the winter, and during a period of high group occupancy.

Had the boilers been replaced in a planned fashion, they would have cost the owner only $275K.

Because of the failure, the owner paid a premium for the replacement boilers, expediting fees, overtime expense for installation, fees for temporary boilers, and substantial rebates to groups using the hotel.  The hotel’s reputation was also damaged in a very competitive market, reducing future revenues.

The additional one-time costs associated with the failure were roughly twice the cost of a planned boiler replacement.

Consider operating and regulatory risk.

 

Obsolescence

While extending the life of some capital assets indefinitely would be ideal (e.g. a hotel’s roof), maximizing the useful life of obsolete assets may require replacing them before the end of their functional life.

For example, 30+ year old chillers in perfect operating condition are not at all unusual in well-maintained hotels, but these machines may be as much as 25% less energy efficient than current technology.  Energy savings alone can often justify early replacement of this equipment.

Replace obsolete equipment.

 

Technology

New technology can eclipse the useful life of a capital asset.

In the early ‘80’s, hotels still had electro-mechanical telephone systems that required an operator to place long distance telephone calls.  The charges for the long distance call were printed out by the phone company on a dedicated “HOBIC” teletype machine located in the hotel’s front office, and then manually posted to the guest folio (an actual printed piece of heavy paper or cardstock) using another electro-mechanical machine.

Regulatory changes, and advances in computer technology completely replaced all of this equipment, required no direct labor expense, and improved accuracy and timeliness of transactions.  Computerized telephone systems, call accounting systems, and integrated hotel property management systems reduced operating expense and increased revenues.  Front office staffing requirements were halved.  System “maintenance” was handled remotely at substantially less expense.

New technology completely changed the operation of the telephone department and front office of the hotel, and also required significant new capital asset investments.  Of course, all of the old telephone equipment was still perfectly functional, and could have continued to operate for years had its useful life not been eclipsed by new technology.

New technology has driven similar changes in customer relationship management, property management, lighting, lock systems, energy management, accounting, and maintenance management.

Embrace new technology.

 

Depreciation and Taxes

There are three depreciation and tax questions related to useful life.

One: What happens if you replace a capital asset before it is fully depreciated?

  • EBITDA is not affected.
  • Owner’s capital is required to purchase the replacement capital asset.
  • The owner’s P&L must reflect for both the undepreciated costs of the retired asset, as well as the first year’s depreciation of the replacement asset.
  • Owner’s profit goes down by the excess depreciation expense.
  • The owner avoids income tax on the decreased profit.

Two: What happens if you replace a capital asset when useful life equals depreciation life?

  • EBITDA is not affected.
  • Owner’s capital is required to purchase the replacement capital asset.
  • Depending on the exact details of the replacement timing, there may be two depreciation payments in a single tax year (one for the old asset, one for the new), or one for the old asset one year, and one for the new asset the following year.
  • Profit goes up or down by the change in depreciation expenses.
  • The owner pays more or less income tax on the change in profit.

Three: What happens if you extend the useful life of a fully depreciated capital asset?

  • EBITDA is not affected.
  • Cash is not required to fund purchase of the replacement capital asset.
  • Since there is no longer a depreciation expense for the asset on the owner’s P&L, profit goes up by the amount of the avoided depreciation expense.
  • The owner pays income tax on the increased profit.

Note that in all three cases, cash flow from operations does not change, owner’s capital cash requirements change in timing but not amount, and depreciation expense changes in timing but not amount.

Any resultant changes in taxable profit will change the timing of taxes paid, as well as the amount of taxes paid due to changes in tax rates or bracket.

Changes in useful life affect the timing of depreciation, taxes, and capital investment, but generally not the amount.

 

Doing the Math

See how you do on this quick math test:

Which would you pick (actual prices on Amazon)?

 

☐  Palmolive Dishwashing Liquid, Original (1.32 Gallon) @ $20.49

 

                    ☐  Palmolive Dishwashing Liquid, Original – 32.5 fluid ounce (Twin Pack) @ $5.66

 

My mother-in-law can do this math in her head faster than I can pull up a calculator on my phone.  Although I can estimate the unit costs for each container in my head, it takes a calculator to bring the answer to 4 decimal places of precision.

  • The big container costs ……………………………………. $0.1227 per ounce
  • The Twin Pack costs ………………………………………… $0.0871 per ounce

Even though there is a 40% per ounce price difference between the big jug and the twin pack, it doesn’t really matter which container of soap you buy; it isn’t a material expense.  However, while overspending on a bottle of soap is no big deal, choosing the wrong capital asset, or paying more than you need for CapEx may affect the financial success of the hotel.  The larger the CapEx, the more material the effect on the owner’s financial success.

Once you start considering useful life, inflation rates, revenue effects, energy costs, labor expense, tax effects, and so forth in your CapEx analysis, the math quickly becomes too complex for even my mother-in-law’s capable brain.

  • Simplify and state your assumptions and alternatives
  • Quantify and include all cash flows
  • Itemize other decision factors; risk, obsolescence, etc.

Incorporating these factors in a flexible analysis spreadsheet will allow you to test your assumptions about useful life, operating costs, and timing, and to directly compare the costs of alternative CapEx investment strategies.  An example analysis is attached.

Do the Math, test your assumptions.

 

Summary

Understanding how useful life affects CapEx costs and decisions will help owners achieve highest and best use of their capital dollars.

  • Extend useful life

  • Maintain & repair

  • Keep an eye on operating expense

  • Consider risk

  • Retire obsolete assets

  • Embrace new technology

  • Don’t worry about taxes & depreciation

  • Do the math and test your assumptions


About the Author:

Thomas Riegelman offers an extraordinary range of expertise in facility and asset management, with over 30 years enterprise level executive experience managing multi-unit hotel, resort, and military housing operations.

His 19 years with Hyatt Hotels Corporation as VP of Technical Services and VP of Engineering provided him with broad experience in all phases of hotel and resort planning, CapEx management, construction, engineering, and facility operations. Tom also served as the General Manager for The Prudential Realty Group’s northeast hotel portfolio, giving him a strong owner’s perspective on real estate development and asset management.

After graduating from the Cornell University School of Hotel Administration with a concentration in hotel planning and design, he earned an MBA in Finance from the University of Chicago Booth School of Business. Tom also attended the Ecole Cordon Bleu in Paris.

Tom is the principal in charge, and personally supervises all consulting engagements by RA Associates.

R-A Associates provides management consulting services focused on creating and sustaining the long term value of hospitality real estate assets.

  • Property Planning and Design,
  • Facilities Operations, and
  • CAPEX.

Contact Thomas Riegelman

Highest and Best Use – CapEx Planning

Most hotel management companies and hospitality asset owners are at the front end of CapEx planning for 2018 and beyond.  Most participants in this planning will ask themselves, at one point or another; Is CapEx planning a horrible waste of my time?”

For any smart hotel owner, and any smart management company, CapEx planning is absolutely worth doing, and absolutely worth doing well!

What’s a CapEx and Why is CapEx Planning Important?
It depends…….

BusinessDictionary.com offers the following definition:

“An amount spent to acquire or upgrade productive assets (such as buildings, machinery and equipment, vehicles) in order to increase the capacity or efficiency of a company for more than one accounting period.”

Hotel owners, operators, brands, and accountants all tend to have different perspectives on the definition of capital expenditures (CapEx), but most definitions of hospitality CapEx are based on the tax law/accounting treatment of fixed assets.

The accounting perspective is the most straightforward. Accountants are interested in compliance with GAAP (Generally Accepted Accounting Principles), and the easiest fixed asset and tax accounting process.

The operator’s perspective is slightly more complex. Typical management contracts include incentives for increasing revenues and operating profit. Any CapEx that raises revenue or reduces expense is likely to be a financial benefit to the operator; regardless of the cost of the CapEx.

For example, when an operator replaces (CapEx) a broken piece of equipment, rather than repairing it (operating expense), the “savings” go right to the profit line and potentially earn incentive compensation. In similar fashion, an operator increases “profit” if they reduce maintenance cost (OpEx), even if that lack of maintenance reduces the useful life of the hotel’s equipment (CapEx).

The brands are also in an interesting position regarding CapEx. Brands have a strong financial incentive to increase hotel revenue (they collect more franchise fee), but they do not participate in hotel capital costs. Brand required renovations and improvements increase fee revenue at no cost to the brand. It is easy to require something if you don’t have to pay the bill!

However, the hotel owner’s perspective is probably the least ambiguous, since they are the ones paying the CapEx bill.

Here is the definition of a capital asset from a prominent Mid-Atlantic hospitality REIT:

“A new physical asset with a normal service life of at least one year, a minimum unit cost of $500 (including taxes, freight, installation, and fees), and an aggregate cost of at least $1,000.”

Owners are typically concerned with four major types of cash flow over the life of their hotel investment;

  • Purchase price,
  • Operating profit or loss,
  • CapEx, and
  • Sales price.

Owners want to minimize cash outflows and maximize cash inflows. Purchase price and CapEx are the only flows directly controlled by the owner, and it is almost always the owner’s practice to spend the least amount of money on CapEx possible. It is critically important to Owners that they get the “highest and best use” out of each CapEx dollar.

The owner’s definition is the only one that really matters, and for long-term success, operators, brands, and accountants should understand the owner’s definition of CapEx, and align their CapEx planning and execution with the owner’s objectives.

Does CapEx matter?

Of course CapEx matters, particularly to hotel owners.

Capital expenses are a material ongoing cost to all owners of hotel properties. According to the ISHC CapEx 2014 Study, capital expenses average over 7% of a hotel’s gross revenue, every year. There is variation in these percentages by property type, age, location, and ownership, but in every case, CapEx is a material expense to hotel owners.

It is also a fact that most Hotel owners are perennially short of capital funds. Optimal use of capital is crucial to the long term financial success of any hotel real estate investment.

What’s important?
“Highest and best use of owner’s capital”

Highest and best use of owner’s capital is the most important objective of hospitality Capital Expenditure planning.

However, this high-level objective doesn’t always help in developing specific strategy and tactics for capital investments. It is more useful to focus on some of the more specific planning objectives when building a good capital plan.
Here is a short list of important CapEx planning objectives (in priority order) that will help achieve “highest and best use of owner’s capital”:

  • Provide advance notice of property/portfolio capital funding needs.
  • Plan both property level and portfolio level investment cycle, acquisitions, and sales.
  • Optimize property market position and revenue potential.
  • Optimize property operational efficiency.
  • Lower property risk (service disruption, equipment failure, life safety).
  • Harmonize property stakeholder’s interests; owner, asset manager, operator.
  • Optimize CapEx project execution.
    • Fiscal control
    • Low overhead costs: management time, administration, accounting
    • Best value/pricing for purchases, contractors, project management
    • Minimal disruption of service and operations,
    • Maximize the return and minimize the cost of CapEx.

Any CapEx planning process that does not satisfy these objectives will fail to meet the overall objective of “highest and best use of owner’s capital”.

What should Owners and Operators do?

Take action!

Hospitality asset owners and operators should take the following three steps to improve the CapEx planning for their properties.

1. Communicate investment objectives

Hotel owners need to understand their own portfolio and property objectives, clearly articulate those objectives, and communicate those objectives to their asset managers and operators.

Core assets have very different CapEx planning objectives than assets that may be held for only two or three years. Successful properties in strong markets will have different CapEx priorities than failing properties that are about to be sold. It doesn’t make sense to replace individual pieces of FF&E in a property that is being scheduled for a complete renovation, while it does make sense to replace FF&E in properties where renovations will be delayed.

Communicate well, and asset managers and operators will be able to deliver CapEx plans that reflect the owner’s investment objectives.

2. Require a high standard of CapEx planning

Asset managers and operators charge a substantial fee for their services. Owners should demand that they earn their fee when it comes to CapEx planning.

Good CapEx planning requires three important elements:

  • Systematic process
    CapEx planning should be supported by computer software systems integrated with accounting, purchasing, maintenance, and asset management systems. A systems supported approach makes it less expensive to maintain good data about the past, present, and future capital needs of the property, and provides continuity through management and personnel changes.
  • Long term perspective
    A ten year forward looking CapEx plan will provide adequate advance notice of all of the property’s CapEx requirements. At minimum, CapEx plans should include the owner’s remaining “hold” period for the asset if less than ten years. Long term planning contributes significantly to both the completeness and the accuracy of the planning effort as scope and budget detail is added to projects as they become closer in time.
  • Completeness
    The CapEx plan should include everything that the property will need to continue operating the business efficiently and effectively: PIP’s, renovations, building exterior projects, building systems, major overhauls or upgrades to equipment or systems, Brand required upgrades, etc. The more inclusive the plan, the easier it is for ownership to make the larger property and portfolio investment decisions, and the less likely that ownership will be surprised by an unexpected funding need.

Set a high standard, and don’t accept incomplete or poorly done CapEx plans.

3. Make it a conversation

Operators and asset managers are closest to the guest, most aware of their competitive set, and have the most specific knowledge of property condition. They are also most aware of how guest satisfaction, market position, and property condition change during the year. Take advantage of this knowledge to inform CapEx planning.

The planning effort will be more effective if it is part of daily operations rather than an annual “exercise”. Make CapEx a specific part of property operations reporting, even if major projects are being executed by third-party project managers. Discuss CapEx project status and planning during every owner and asset manager meeting.

Let these conversations drive adjustments to the CapEx plan during the year, and support better investment decisions at both the property and portfolio level.

Summary

1. What’s a CapEx?

Whatever the property owner defines as CapEx.

2. Does CapEx matter?

Yes, a lot. Particularly to hotel owners.

3. What’s important?

Squeezing the most value out of every capital dollar;

“Highest and best use of owner’s capital”

4. What should Owners and Operators do?

Know their investment objectives, communicate, demand a high standard of management and planning, and keep a lively conversation going throughout the year.


CapEx Part II – Hospitality CapEx Math 101

Understanding how useful life affects hospitality property CapEx costs and decisions will help owners achieve highest and best use of their capital dollars.

Read More

 

CapEx Part III – The Nine Circles of CapEx Spreadsheet Hell

Having a strong CapEx planning system in place will help ensure that capital funds are only invested at their highest and best use.

Read More


About the Author:

Thomas Riegelman offers an extraordinary range of expertise in facility and asset management, with over 20 years enterprise level executive experience managing multi-unit hotel, resort, and military housing operations. His 19 years with Hyatt Hotels Corporation as VP of Technical Services and VP of Engineering, and General Management role with Prudential Realty overseeing their Northeast hotel portfolio provided him with broad experience in all phases of hotel and resort planning, CAPEX, construction, engineering, and facility operations. After graduating from the Cornell University School of Hotel Administration with a concentration in hotel planning and design, he earned an MBA in Finance from the University of Chicago Booth School of Business. Tom also attended the Ecole Cordon Bleu in Paris.

Tom is the principal in charge, and personally supervises all consulting engagements by RA Associates.

R-A Associates provides management consulting services focused on creating and sustaining the long term value of hospitality real estate assets.

  • Property Planning and Design,
  • Facilities Operations, and
  • CAPEX.

Contact Thomas Riegelman