Converting an existing building into a hotel is not for the faint of heart. Number one, it’s darn expensive. And, number two, which likely leads to number one, the process is full of surprises.
The best case scenario is that you are changing something that already smells like a hotel, a hospital, apartment building, etc., and that it’s been around for less than twenty years. The next best option is that you’re renovating an existing hotel to dramatically change its identity and/or condition. The more you stray from either of these scenarios, the more costly the project, and the more important the next paragraph becomes.
When you buy a property with the prospect of converting it into a hotel, you are not buying an office building or a warehouse…you’re buying an opportunity to create more value. And, that value almost always depends on two things: location and story. Location is extremely important if you’re going to ride someone’s coat tails…take the Hilton Austin Airport for example. This property was converted from an Air Force command post (once instrumental in running Operation Desert Storm) and is now the only hotel located on the airport. While more costly than building a new structure, the obvious intent was to secure the location as well as preserve military history…both elements give the hotel a significant advantage over the competition. However, as I’ve said before, the best prospect for success is to have your own story, and preferably one that’s already built-in. That’s why historic buildings in high profile areas are such popular conversion properties…the stories are often timeless, making their value far greater than the initial purchase price of the building. If you’re lucky enough to find a reasonably priced, run-down castle on the Cliffs of Dover, I’d say you have a pretty good shot of seeing a respectable return, no matter how many change orders you see from your contractor.
Again, conversions are costly. Consequently, they take more time to pay-off. So, be sure the initial evaluation considers more than the sticker price of the real estate and the expense of getting it to meet code. The intrinsic value is what drives demand…and revenue. If that’s not obviously superior, don’t spend too much time on how much it’s going to cost.