Hospitality Franchises: Big Investments, Big Returns - Part 1
The hospitality business is enjoying a recovery that has some hotels looking for ways to refresh their brands. With an image make-over, a hotel franchise can compete at a higher level and plump up profits for the company and its franchisees. In this issue, we continue our insider's view on the hospitality industry as we speak to Alexandra Jaritz from Clarion about re-imaging and Bruce Lowrey from GMAC Commercial Mortgage Group about financing.

Clarion sharpens its image to appeal to upscale guests
Choice Hotels International has been franchising hotels for over 60 years. Of the company's nine hotel chains, Clarion represents the premiere full-service brand in the Choice portfolio. Alexandra Jaritz, Senior Director for Brand Strategy & Corporate Development says, "Clarion has traditionally been the place for mid-market consumers who want more and upscale customers who want value." But Clarion is now aiming to reposition itself in the marketplace.

"We are trying to move the Clarion brand out of the midscale segment to be the value alternative in the lower upscale segment," explains Jaritz. 'We are trying to move Clarion on up in category to compete against Radisson and Four Points," Jaritz said. To do that, Clarion is re-imaging both new hotels coming into the system and existing properties that will need to make some changes.

The "new" Clarion is a mid-to-high rise building with interior corridor, swimming pool, fitness facilities, full service in-house restaurant and lounge, room service, a minimum of 5,000 square feet for conference center and banquet facilities, and 24-hour business center. There are also Clarion Class Business Rooms that offer a larger work desk with dataports, daily newspaper delivery, two-line telephone, enhanced lighting, and compact refrigerator.

New Clarions must meet stricter requirements
Typically Clarions are conversion properties, not new construction. For new hotels to enter the Clarion system, Jaritz says, "We are getting tighter on requirements. We are very vigilant, for example, regarding interior versus exterior corridors. That is one of the elements that consumers expect in the segment where we are trying to compete. We are making sure that the hotels that we allow into the system have all of the necessary components for this market - the restaurant, the business center, meeting space, and full service. We want to be consistent with the product in terms of the full business experience."

For existing Clarions, upgrades are looked at on a case-by-case basis. Jartiz says, "Obviously we have made commitments with our existing Clarion franchisees that we are going to uphold. Some hotels are working with us to get to the level that we need them to be. In some occasions - although they are rare - properties are repositioning to a different brand that is more appropriate given their product, service, and amenities offerings."

Existing Clarions make incremental changes
For those existing Clarions that are re-imaging, changes can be small or sweeping. "We have a few Clarions that are redoing all of their guest rooms, putting in new case goods, new FF&E and changing their entire look," says Jaritz. "For them, we recently launched an interior design package. It includes everything you would have to put into a guestroom if you were to gut it. That includes furniture, fixtures, premium bathroom products, and materials with an overall look and feel that has been upgraded."

Competing at a higher level isn't just about looks. It's about service. "For some Clarions, stepping up is mostly about improving their overall service levels," says Jaritz. " This might mean implementing service standard training or adding room service that wasn't offered before. And there are some hotels that are exploring how to incorporate a restaurant where there isn't one now. We are making sure we have the services and amenities that are necessary to compete in our target segment. To that end we've rolled out things like bell service on demand, express checkout, newspaper delivery to the guestrooms, and high speed Internet access in all rooms."

Jaritz says the company is working with franchisees on a one-off basis. "We work with those who want to stay with Clarion," she explains. "Any who don't want to make the necessary investment, we try to find them another home in the Choice family." But Jaritz insists the investment will pay off on the bottom line. "What we want to achieve is consistency in terms of that full service experience. The entire brand benefits from a change like that. As consumers get a consistent experience going from Clarion to Clarion, the result is consumer guest satisfaction improvement with the overall brand. That ultimately should help drive both rate and occupancy."

Clarion system continues to grow
There are currently 157 U.S. Clarion locations with 13 in development and Jaritz says the company is open to new franchisees. "We will continually try to penetrate primary and secondary market locations. We represent a great investment because we focus on only asking our franchisees to do things that will create an ROI for them at the end of the day. We want to make sure we are really meeting the expectations of the guests, but we won't get into an amenity war or an amenity creep. One of our biggest value propositions for this brand is being really smart about what we are asking our franchisees to spend money on. We provide licensees with unparalleled service and results that exceed other hotel franchisors," asserts Jaritz.

Contact Information: Alexandra Jaritz, Senior Director, Brand Strategy & Corporate Development, Clarion Inns, (301) 592-6381, camila_clark@choicehotels.com, www.choicehotelsfranchise.com

Upscale hotel franchises turn to GMAC Commercial Mortgage Group for funding
One of the most daunting aspects of opening a hotel franchise is figuring out how to finance a venture that typically requires funding in the millions. The good news is that lenders and investors have become more competitive and borrowers are benefiting from higher leverage loans, thinner spreads, and more flexible terms. And even though the deals are more complex than ever, lenders are closing transactions faster, down from about 45 days to often less than 30.

GMAC Commercial Mortgage Group has a specific department for financing hotel franchises, the Hospitality Industry Division. Bruce Lowrey, Senior Vice President at GMAC Commercial Mortgage Group says, "We'll do about $850-$900 million of hotel financing this year. We have several programs such as the long-term non-recourse fixed rate program and a short-term floating rate program that is for five years or less. For existing customers, we will also finance development."

Loan customers must meet three broad criteria at GMAC. "First and foremost," says Lowrey, "we look for a strong borrower. By that I mean that it's probably a multiunit owner with deep roots in the industry and a lot of experience in the business. Then we look at location, which is preferably in the top 50 U.S. major metropolitan markets. And third, we look to assets. What we like are upscale, limited and full-service assets. That varies from market to market of course, but Residence Inn would be a very good example of the type of property we finance."

There are two levels of analysis at GMAC, the qualitative and the quantitative. Lowrey explains, "We are primarily a cash flow lender so at the quantitative level, we are going to want to see what kind of performance the property has demonstrated over the last three years. We look at cash flow to see if the request works and if it make sense to make a loan. At the qualitative level, we want to know who is the borrower, where is the property located, and what is the condition of the assets. A borrower can start by putting together that information with limited economic information to get an initial feedback. Or they can go ahead and put together a substantial package with all the color as well as the data behind it."

Franchises have the advantage
Even though GMAC lends to both franchise and independent hotels, franchises are looked upon more favorably. "From the lending community standpoint, franchise properties are generally more bankable than independents," explains Lowrey. "There are a lot of exceptions to that, but typically with franchise hotels you are going to have a very consistent product. For the lending community and the people who buy loans or pieces of loans, this means they know exactly what they're getting. Do we look at the franchise company behind the borrower? Absolutely."

Hotel owners will continue to benefit from low interest rates
Some in the industry feel that low interest rates, which have helped fuel the hotel industry recovery, may not last much longer. Lowrey disagrees. He feels the window of opportunity will remain open for the near future. "Right now, the 10-year treasury is around 4.1%. It is projected to be 4.25% in three years, which is virtually flat. Interest rates are driven by what treasuries are for fixed rate loans, so there is not a lot of lift there. There will be a little more rise in floating rate loans. I think interest rates are at a low point so there will be some rise, just not a lot in the short to medium term," says Lowrey.

At GMAC, loans are primarily for $10 million and up. Lowrey says anyone wanting less than $10 million in hotel funding should look to the SBA. "The SBA has a couple of great loan programs that finance hotels and that is usually done in conjunction with a local bank. There are some specific SBA groups out there, but the vast majority of financing for properties $5-7 million and under are done through local and regional banks. They will continue to be the vast source of debt for those owners."

Contact Information: Bruce Lowrey, Senior Vice President, GMAC Commercial Mortgage Group, (703) 749-4360, bruce_lowrey@gmaccm.com, www.gmaccm.com