A business plan is the tangible representation of an investor’s vision. This document aligns the team and sets the tone for the broader investment lifecycle.
Investors approach business planning in different ways. Some have a very strict process that includes in-depth analysis and requires mountains of supporting materials. Other investors are satisfied with a simple document that explains where the property is today, the vision for the future state, and how to get there.
Regardless of your approach, a business plan has tremendous value for taking the property from here to there.
A business plan can be as informal as a bar napkin outlining all the salient points, but that usually won’t pass muster for banks and investors. On the other end of the spectrum, you could spend weeks drafting a comprehensive plan that accounts for every eventuality.
A balance between complexity and simplicity is the most challenging task in drafting a high-quality hotel investment plan.
Your audience and partners in the plan will drive the content, and a general structure hitting all the major points goes a long way to making this task more manageable. The framework below follows a process that builds the business plan organically.
Property Information / Current State
The built environment is the first area to consider in describing a property. This includes the location, grounds, exterior, common spaces, rooms, and building systems that you evaluate during a property tour. However, the operations and contract positioning are of critical importance in establishing the current state.
Each property has its attributes and challenges. Your business plan amplifies the attributes and mitigates the challenges. A SWOT analysis – strengths, weaknesses, opportunities, and threats – is the most appropriate tool for this job.
Two factors drive a SWOT analysis – status and locus of control. The status defines whether something is an attribute or challenge, and the locus of control defines where these emanate from.
- Strengths – attribute generated from an internal source
- Weakness – challenge generated from an internal source
- Opportunities – attribute generated from an external source
- Threats – challenge generated from an external source
This analysis lays the foundation of the necessity for structural or operational changes.
Market positioning is also a major part of this section. This describes the size and composition of demand entering the market along with competitive supply that would reduce or challenge your fair share of that demand.
Major demand generators and sales targets drive your operational plan. A discussion on how the property performs now is important to understand what changes on-property will win the business you expect under new ownership.
Renovation Scope
Every construction project deals with three competing demands – quality, speed, and cost. Each of these has its own benefits, but you can only combine two and sacrifice the third. For example, you can have it fast and cheap, but quality will suffer. Similarly, resource constraints make it expensive to deliver a high-quality product quickly.
Align the renovation scope with your expected investment time period.
Some projects, like systems replacements, may be good to complete under an already disrupted tenant experience. However, the remaining useful life determined by your property condition assessment (PCA) may not justify such a project at that time.
Establish and defend the credibility of your renovation scope with a firm construction budget and supporting materials from PCA investigations.
Operating Plan
A property operating plan encompasses two parts revenue management and one part yield management.
Your management company will drive the bulk of the operating plan, which includes pro forma operating budgets, revenue segmentation, contract positioning, and other financial aspects of the business plan. However, human capital remains the most critical piece of the operating plan.
Most human capital plans simply lay out the organizational chart and clarify who stays and who goes. Still, culture has an enormous impact on revenue and bottom-line performance so it’s worth investing more thought in this area.
The management company inspires the property culture, but the people on the front line are responsible for creating it.
The financial aspect of your business plan is simple. These are copy and paste tables and analysis from your financial model. Targeted property culture requires some creativity and prose. It’s more art than science.
You may be thinking, “what’s the point? The management company has manuals, systems, and processes for all this stuff.”
You’re right; they do. However, you are responsible for selecting and overseeing the management company. You should expect that their mission for the property aligns closely with your vision. The only way to do that is to clearly define that vision at the outset. Don’t leave this to chance.
Timeline
Most commercial real estate investments can realize their value enhancement within a year or two. A Big Four CRE investor can sell a well-tenanted retail, office, or industrial asset at a higher valuation immediately upon signing the last lease. Similarly, a fully-occupied apartment building can maximize its value relatively quickly by stabilizing the rent roll with higher quality tenants. Specialty assets are different. They take more time to stabilize.
A solid business plan should include a robust sales and marketing plan paired with time-tested revenue management and business segmentation.
The investment timeline gets longer when you add renovations that disrupt the tenant experience and increases the effort to recover loyalty thereafter.
Consider, also, how your renovation and operational timelines align with preferred capital structures. Most deep value-add deals will benefit from the flexibility of a bridge loan, while stabilized assets would benefit from more affordable bank or CMBS loans. These each have different timing and performance expectations.
Capital Structure
A real estate investment discussion would be incomplete without touching on OPM.
The most successful investors always use financial leverage in their deals. Debt and equity structures allow sponsors to invest in more and larger deals by trading their expertise and hard work for a lower co-investment and more favorable investment returns.
Diversity of relationships in the capital markets allows you to approach a more diverse field of deals.
A business plan that conceives of a core plus acquisition would not fit with investors seeking value-add and opportunistic returns. The hold time frame, risk profile, and return expectations would fall flat. Further, you risk alienating those contacts if you consistently present deals that don’t fit their investment objectives.
Your business plan (at least the major points) should precede sourcing capital for a deal.
This document will serve to clarify the objectives and answer most questions a potential investor or lender may have about the deal. Similarly, the body of the business plan will contain content that transfers easily to investment and lender marketing materials.
Investment Returns
The pièce de ré·sis·tance remains – investment returns.
Real estate investing involves risk. A financial model provides a nice goal, but the returns will rarely materialize as projected. Therefore, a high-quality business plan will present base, optimistic, and pessimistic scenarios that account for the potential risks and opportunities that would challenge or enhance the returns.
This section doesn’t have to take up a lot of time and energy. Still, it’s helpful to present the potential for gain or loss along with strategies to produce or mitigate those eventualities.
Relevance is another consideration. Your investment and lending partners are interested in different investment return metrics. Lenders would be looking for debt service coverage and debt yield, while investors are most interested in cash return and IRR.
Include different discussions for each potential capital source and how your deal meets their expected needs and desires. This will make your life much easier when you start building marketing materials and answering questions about the merits of your deal.
Executive Summary
The executive summary always comes first in your business plan, but it should always be the last section written.
Writing your executive summary first is a complete waste of time. This section summarizes and condenses the most important points in your business plan to a brief two to three-page digest. You compile it by copying, pasting, and combining content from the body of your document.
Think of the audience. If they were to pick up this document and have a short window to get the gist, what would they want to read about?
You will build many derivative works from this business plan. The executive summary is good practice in pulling out and distilling the important bits of information for those future documents.