New life for a tired extended-stay property: Lexington Hotel Suites – Grand Rapids, MI
Property: Lexington Hotel Suites
Market: Grand Rapids, Michigan
Property Attributes
Lexington Hotel Suites was designed and built by a local Grand Rapids developer who had owned and operated the property since its opening. The owners offered a unique lodging experience by combining all of the features typically found in a suite within an oversized guestroom. Unfortunately, the hotel's performance had suffered in the years immediately prior to its sale, due to a 25% increase in room supply at the exit coupled with a lack of capital investment.
The property was located at the 28th Street exit along Interstate 96, placing it in the highest growth quadrant in Grand Rapids. The 28th Street corridor was home to 14 high quality hotels and more than 60 restaurants. Lexington Hotel Suites was one of only four hotels visible from the interstate. The three-story property with 121 suites and interior corridors featured a breakfast area with fully equipped kitchen, indoor swimming pool, 2,700SF meeting space, fitness room, game room, and guest laundry.
| Year 1 | |
| A.D.R. | $64.89 |
| Occupancy | 58.0% |
| RevPar | $37.66 |
| Room Revenue | $1,663,114 |
| Total Revenue | $1,800,349 |
| NOI | $401,510 |
*NOI expressed after deductions for FF&E Reserve and Management Fees.
Owner Objective
The owner contacted Hotel Source, Inc. because they decided it was time to give up on the labor-intensive task of operating a hotel and spend their time developing other real estate in Grand Rapids. Furthermore, they did not want to invest additional capital into the property. Hotel Source met with the owners, thoroughly inspected the property, investigated possible franchise affiliations and looked at market ADR and occupancies.
In spite of such a drastic increase in room supply in this particular submarket, ADR and occupancy remained consistent at $78.45 and 74.5%. After analyzing this information, the market was determined to be one of the strongest and most diversified in the Midwest. In addition, because the hotel was less than 12 years old, of masonry construction, and well-maintained mechanically, it was easy to quantify the amount of capital required to give the hotel a differentiated feel.
The property did, however, present many challenges. It was not attractive to many buyers because of the declining revenue trends, the perception of an “overbuilt” market, and lack of franchises available. Furthermore, the property was not priced at a cap rate that made sense based on historical performance. The plan was to market the hotel to a targeted group of buyers that owned all-suite properties, were comfortable being in Michigan, and were not afraid of a “turnaround.”
Sales/Marketing Process
Hotel Source, Inc. initiated a strategic marketing process to properly expose the hotel to the targeted market, a process that took several months. The property benefited from well-thought-out collateral materials, print advertising, and website exposure. Numerous inspections occurred with prospective purchasers, and the owners received many offers. Hotel Source contacted financing sources and conducted preliminary underwriting to help ensure a smooth closing. Based on these efforts, a regional owner was selected not only because of the acceptable price but also on the basis ability to perform.
Negotiations
During the marketing and due diligence process, the owners were concerned that this process be well managed so as to not disrupt the operation. This was accomplished and due diligence interruption was kept to a minimum.
Conclusion
The previous owners of the property believe that their hotel was properly exposed to the market and as a result, its value was maximized. The new owner plans to complete extensive renovations and affiliate with a national franchise.