Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, February 8, 1991 TAG: 9102080757
SECTION: BUSINESS PAGE: E-1 EDITION: EVENING
SOURCE: SANDRA BROWN KELLY BUSINESS WRITER
DATELINE: LENGTH: Long
The only bidder at the auction was Newport News Savings Bank, which forced the sale when it called the loan it held on the property.
Despite the sale, it will be business as usual for most at the Quality Inn. However, for Jimmy Forehand of Lynchburg, a partner in Southeastern Motor Inns, it means a paper loss on his a $1.2 million second deed of trust he held on the motel.
In 1985, when Southeastern sold the then-Sheraton Inn to Salem Hotels Limited Partnership, it was worth the $4 million price tag, Forehand said. Its true value now is closer to the bank debt of $2.9 million, he said, because of changes in tax laws, overbuilding in the hospitality industry and a nationwide drop in room occupancy rates.
Consider that in the past seven years some 30,000 hotel and motel rooms were added in the state, said Patrick McMahon, director of the Virginia Department of Tourism.
There always have been periods of oversupply in the industry. "If you plotted hotel industry growth over a 30-year period it would look like a staircase," he said. "What makes this time more abnormal is the recession and war."
Oversupply and economic downturn mean occupancy rates at Virginia motels and hotels were down 5.2 percent for the 11-month period ending in November from the same period in 1989, according to data from Pannell Kerr Forster, a national lodging industry consultant.
Its reports for the first 11 months of 1990 show a drop in the statewide hotel occupancy rate to 59.67 percent from 62.92 percent in 1989. The current state occupancy rate will just about cover a hotel's operating expenses, said industry experts, but generally won't service construction debt, hence foreclosures by lenders who financed the developments.
"There's a motel at every exit on the interstate," said Wayne Ratliff of Sheets Motel Investments, a Roanoke firm that markets hotels and motels in a four-state area.
Ratliff said there also are a number of properties that, like the Quality Inn, are in debt for more than the property is now worth. He said they got into the situation because lenders gave money on projected return, and that return hasn't materialized.
He said he turns down listings on properties that have excessive debt because he can't sell them. "A prospective buyer looks at debt service, expenses and income and asks: `Can I make a profit?' " Ratliff said.
For years, the rule of thumb for appropriate debt service has been three times the annual gross from room rental, Ratliff said. Some properties are now selling for only 2 to 2 1/2 times the annual gross.
Ratliff said he knows of few hotels that aren't down in business from two years ago, but it is difficult to trim expenses because most costs are fixed.
"You can lay off a maid here and there, and a maintenance worker," said Ratliff. That's one of the things Granger Macfarlane did. He is president of Eastern Motor Inns in Roanoke. He furloughed a maintenance worker and moved an operations and marketing employee out from the corporate office to manage a motel. The company also deferred some capital projects.
"I don't know anybody in business that isn't doing that," Macfarlane said. Eastern owns four Econo Lodges and the Colony House in the Roanoke Valley, a motel in Wytheville and one in Cary, N.C.
Macfarlane said he also cut the weekend single-room rate to $19.95 at two of his area properties that had tough competition.
Also at the crux of the hospitality industry's problems is a decline in tourism and business travel.
"Sales people are getting more done in fewer visits," Macfarlane said.
And, as of last week, several Roanoke Valley motels still had rooms available for March 7-10 when the Metro Basketball Tournament is expected to draw 8,000 to 11,000 visitors. That's despite earlier comments by promoters of the tournament that it had filled all 4,900 rooms in the Roanoke and New River valleys.
Oversupply cuts across the hospitality industry, from luxury hotel to budget motel, said John Poff, senior vice president for Krisch Hotels Inc. of Roanoke.
All hotel-motel companies have a low-end economy rate that is usually inventory-demand driven, he said. "It's the same principle as selling airline seats."
The valley's current popular rate is $39 a night, Poff said.
The Roanoke Valley's newest motel, Sleep Inn on 419 near Tanglewood, came into the market with rates of $38 and $39, and on weekends drops those to $35, said its general manager, Carolyn Murray.
Sleep Inn is owned by Dominion Lodging Inc., a Daleville company that has seven inns located between Roanoke and Staunton. Joyce Gilliam, vice president and director of operations, said business is "uncertain and unpredictable."
Bill Clegg is operations vice president and general manager at the Comfort Inn that opened in Blacksburg in June. He said state budget cuts have severely curtailed travel to Virginia Tech and affected motel room rentals.
"The universities [Tech and Radford] provide a substantial amount of our business, but it's not the splashy graduations," Clegg said. "It's visiting faculty, prospective students, people coming in for research."
by CNB