George Smith Partners recently released a tombstone about a commercial loan closing that used a financial term of which I had never heard:
"George Smith Partners arranged $23,750,000 in bridge financing for the refinance of a 229-key, full-service hotel located in Downtown Minneapolis, Minnesota... The Property, built in 1986, underwent a PIP in 2017."
What in heavens is a PIP?
A PIP is a Property Improvement Plan required by a brand or franchise - usually a hotel franchise, like Marriott or Hilton - to maintain or improve standards. Often the property owner needs to obtain a secondary loan or refinance the property.
A property improvement plan (PIP) is required to bring a hotel in compliance with brand standards. According to HVS, an effective PIP should help owners gain market share, increase guest satisfaction, drive revenue performance, and enhance profitability. Elements like lighting, faucets, and fixtures are foundational for brand standards, but now energy-efficient equipment upgrades are entering the equation.
One hotel franchisor recently said that her company is pushing hard to incorporate sustainability measures into the conversion process. There are things that the franchise is recommending in order for the franchisee to run an efficient building.
For instance, if a boiler system has a 30-year life expectancy, but it’s only 20-years-old, the franchisee might consider changing it out early because there is no down time, new systems are 30 percent more energy efficient, and there is a good ROI attached. “We’re looking at mechanical systems, chillers, boilers, and things that are not very sexy,” she says. “It’s really important in looking at how much it’s going to cost to operate that piece of property.”
Property Improvement Plans (PIP's) are not cheap. PIP costs can vary greatly with different brands, hotel sizes, and property locations. One of the most popular PIP's, Holiday Inn's Formula Blue, usually costs between $10,000 and $25,000 per room. Since the average Holiday Inn Express location has around 75 rooms, that adds up to between $750,000 and $1.875 million in total costs. Hampton Inn's Forever Young Initiative is another popular PIP, which experts estimate will cost between $15,000 and $40,000 per room.
Yikes. That's real money. SBA loans are often, but not always, utilized to finance a PIP. It is important to understand the types of improvements a prospective hotel owner can make using SBA funds. Experienced hotel owners often focus on the following areas:
- Renovations to exterior facades – including signage, roofing, and colors
- Room and lobby updates such as lighting and fixtures
- New amenities such as indoor/outdoor pools and fitness areas
- Expand or improve parking
- Replacing mechanical items that are close to end of their useful life – such as the roof or heating system.
Instead of obtaining secondary financing, many property owners choose instead to refinance the entire property. Because ten-year Treasuries are so low, this is the best time in history to refinance your property with a CMBS loan.
