By Michael Matthews
April 1, 2010 -- I am sitting here shaking my head while trying to work out a formula that places a sane financial value on a hotel. Why does one hotel or resort sell for an astronomical amount while another sells for a pittance?

As I have written in this column before, a hotel owner needs to charge $10 a night for every $10,000 spent per room to buy the property. So if you buy a 200-room hotel building or a resort complex for $50 million, you're going to need an average daily rate of $250 per night. You'll also need an average of 68 to 70 percent of your rooms filled 365 day a year.

That's all pretty simple. But if it's all so simple, why do some hotels sell for sums of money that, using my formula, make absolutely no sense whatsoever?

A case in point: There's a fairly nice hotel at Madison Avenue and East 61st Street in New York City. It's called the Helmsley Carlton House. It has 161 "keys," industry jargon for rentable guestrooms. It's no Four Season, Pierre or Carlyle, mind you, just an adequate four-star job. It sold earlier this month for $170 million--or slightly more than $1 million a key. Add in legal costs, transfer fees and some minor renovations and you'll quickly reach a cost of $1.1 million dollars a key.

That means the new owners of the Carlton House will need to charge $1,100 a night to even have a chance to make any money. The problem with that? Rooms at the Carlton House this weekend are selling for $300 a night.

I'm thinking this is a purchase that is going to end badly for the new owners, investors who bought the property from the estate of Harry and Leona Helmsley.

So why do money men, who are supposed to be brighter than us, pay such unreasonable prices for hotels? I can understand it if you are a billionaire or a foreign government looking to get rid of your Internet or petro dollars by snapping up some trophy properties. Even then, though, there must be someone who has the balls to tell you that you are making a rash investment.

Michael Dell, founder and once-again chief executive officer of the computer firm that bears his name, apparently didn't have one of those hard-nosed advisors. Several years ago, Dell's investment venture, MSD Capital, paid extraordinarily high prices for a collection of Hawaii resorts that includes the Four Seasons in Maui and the Big Island and the Kona Village Resort. He paid so much that even if the properties continued to perform at their then-record highs, he would have only seen a minimal return of 1.5 percent.

But oops, a hiccup in the market. During the last two years, Hawaii tourism fell, occupancy rates sank and daily room rates plummeted. Now Dell is desperately seeking new financing and has fallen behind on his mortgage payments.

Given the state of the economy in general and the lodging industry in specific, there are terrific deals out there if you want to buy yourself a hotel or resort. Unlike Dell, you have the chance to buy at the bottom of the market.

In the past 18 months, the hotel industry has seen property values collapse. Foreclosures are mounting every day. With so many hotels going deep into the red, usually because they are under-funded and over-leveraged, there are some incredible bargains available. Several major banks have started vulture funds--generally closed to the hoi polloi like you and me--just to invest in down-on-their-financial-luck hotels.

Want an example of how bad it's gotten in the hotel industry lately? Consider The W Hotel at Union Square in New York, just a few miles south of the Helmsley Carlton House. This 270-room hotel, built in 2000, sold at auction late last year for just $2.1 million. That's less than $8,000 a key. Of course, things are never what they seem. The property was purchased for nearly $300 million in 2006 by a division of the financially stressed Dubai World. A junior lender got its hands on the glitzy hotel for that $2.1 million pittance, but even that turned out to be too much. The junior lender declared bankruptcy last week to avert a foreclosure auction arranged by a senior lender that holds a $60 million note on the hotel.

Many other hotels across the country are being sold at "absolute auction." In other words, no matter how low the bid might be, you get the hotel if your bid is the highest on the day of the auction. There is even one on the block in Winter Haven, Florida, a wealthy community that boasts some of the highest-priced real estate in Florida. If you are interested, surf here for the auctioneer's Web site. They have half a dozen lodging properties going under the hammer soon.

The generally agreed price to pay for an existing and operating hotel, probably carrying the flag of some major chain, is ten times its gross operating profit. Most selling by auction are going for a far lower multiple, making them very attractive buys.

For my money (not that my money amounts to anything), I'd look to acquire a property that has gone bust. As for me I will pass, I've been in this business for too many years and know the pitfalls all too well.

But if you are so inclined, give me a call and I will give you some guidance. Just promise me that you won't do a Michael Dell.

ABOUT MICHAEL MATTHEWS Michael Matthews has managed and marketed fine hotels around the world for more than 45 years. He spent 14 years in Hong Kong building the legendary Regent International group. He has also worked with St. Regis, Ritz-Carlton and Rosewood hotels. Matthews is currently based in Arizona. He began writing Do Not Disturb in early 2004.

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