Hotel Effectiveness Blog

How 3% over-spending on labor led to a $100,000 default

Labor Costs
Hotels on the edge of default

We recently did some analysis for a large select service hotel that had a ‘little labor problem’ that turned into a nightmare for the owner.  Here’s the story:

The GM of this hotel is very competent and most people would consider pretty effective at his job.  The management company knew that they had some labor cost issues, but like many management companies, they figured that it was not the end of the world if they over-spent by a little (3-5%), plus they had bigger things to worry about.

A Little Problem:

Every week they ran a bit over normal planned hours for a couple of areas like complimentary breakfast and front desk.  They also saw that their housekeepers were always a few minutes over their minutes per room (MPR) targets.  The result of all of this was that the hotel ran labor costs about 3% higher than they should.  It was not bad management, but they were leaving money on the table (around $300 per week in their case).

That was enough though that the hotel missed their debt coverage requirements.  They were not far off; in fact they were only off by a few hundred dollars a month. Sensing an opportunity, the lender threatened to throw the property into default.  The property was current on its payments and returning reasonable cash flow.  The management company was just over-spending a little bit, but that little bit was enough to cause the owner untold issues.

The lender offered to modify the loan to avoid default.  The price to do this modification was going to be a very small percentage of the loan amount.  That small percentage added up to $100,000.

Result: 

What started out as a $200-$300 a week labor problem, that the management company thought was small enough to overlook, all of a sudden became a nightmare that put control of the property in jeopardy.

 

 

photo courtesy Christina Welsh (Rin) under Creative Commons –http://www.flickr.com/photos/christinawelsh/5956909876/sizes/z/in/photostream/

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