Align the GM’s goals with investors

NATIONAL REPORT – One of the more often sited comments in hospitality real estate investing is aligning interests. The investor(s) chooses what and where to buy but must also choose a franchise and a management company. Sometimes they choose a separate asset management company, and they usually ask for approval rights for the general manager in their management agreement, recognizing the importance of that position to achieving their goals.

Hiring a management company is like hiring a football coach, someone to set up systems and provide direction to all the various areas. Hiring an asset manager is like hiring an analytics person who can see trends and compare them to other similar situations to provide guidance. Hiring a general manager is like hiring a quarterback. That is the person who must execute the strategy in real time under real pressure and get results.

For all, alignment is sought with monthly payments, performance incentives and sometimes promote interests or investments. The general managers are mostly analyzed on various KPI metrics with dollar incentives paid quarterly and/or annually. These financial incentives rarely are for longer than a year and are positive but not enough to alter a general manager’s life choices.

For those who are very long-term holders this may be fine, but if you are a five year and under holder with a sale or refinance objective in mind you look at each year as a trend that is getting you to your goal and not as an end goal in and of themselves. You are aware of the disruption that always comes with any general manager change.

If we look at this from the general manager’s perspective, a poor GM will get fired. An average GM will get by as long as possible but will not maximize the investment outcomes. A great GM can drive the investment but is often the most heavily recruited and sought after. The only way they can advance their personal goals is to get a higher salary from becoming a regional vice president or moving to a bigger, better paying general manager job.

In my past operating and investing life, I have had great success with aligning general managers to our investment goals with a focus on the expected timeline, a sharing of the investment goals and waterfall impacts and a piece of that waterfall big enough to actually change their life, such as putting a child through college. The positive impacts were:

• Higher retention until the liquidity event occurred and a minimization of change disruption.
• Strategic and tactical decisions made with the end goal in mind and not shorter-term decision focus.
• Pushing themselves outside their comfort zone to maximize NOI.
• Increased focus on taking input from the operating company and asset managers so they can translate it into actual performance enhancements.

Nothing is a cure all but if you are looking for something additional to increase the potential return on your investment, think about how the general managers of your past investments have impacted your returns and how aligning their goals with yours may benefit everyone involved. Then look at how to make sure the position that has the most direct impact on your investment is aligned with you.

Contributed by David McCaslin, CapStar Advisors, Austin, Texas

The views and opinions expressed in this content do not necessarily reflect the opinions of Hotel Investment Today by Northstar or Northstar Travel Group and its affiliated companies.