This series of blog posts has shared A&R’s value-add checklist for value-add investments. Now, let’s put it into practice with a case study involving a property that A&R Group is in the process of acquiring in Birmingham, Alabama.

1. Emerging Markets: Despite being an established city, Birmingham is experiencing significant growth. According to a national survey, the city ranked 3rd for economic growth potential among mid-sized U.S. cities. The city’s GDP has grown nearly 14% in the last decade, with a population growth of 11%. In addition, from 2019 to 2022, the city saw a rise in visitors from 2.9 million to 3.9 million.

Conclusion: These metrics indicate that the hotel in Birmingham is within a growing economy and fast-growing tourist destination.

1. High Barrier to Entry: The hotel is located within Birmingham’s historical district, which makes building and renovating buildings within this area notoriously difficult. The city also has very few empty lots big enough for hotel development within the downtown area.

Conclusion: Due to the area’s historical distinction and low supply of lots, the barrier to entry is sufficient.

1. Brand: The hotel in question already has a quality and well-established brand. As such, the brand will remain the same as rebranding would cause more headaches than profits in this particular case.

Conclusion: No action is required.

1. Caliber of Construction: The property condition report found no damage on the foundation, and there were no recommended repairs relating to the building’s substructure. The same goes for the superstructure, which also had no recommended repairs. The only recommended repairs for the property were cosmetic and relatively low cost.

Conclusion: Due to the quality foundation and superstructure, the building’s caliber of construction is well within the range of acceptability.

1. Services: The hotel has its own restaurant and bar that operates six days a week.

Conclusion: No action is required.

1. Cost: Using the Cap Rate formula, which is (Net Operating Income / Current Market Value) x 100, the property generated an NOI of $4,783,105 in 2022, and the CMV is $27,000,000. When plugged into the formula, the Cap Rate is 17.7%.

Conclusion: This is far above A&R’s threshold for Cap Rate and proves that our assumptions about the property were correct.

This case study serves as an excellent example of how using a value-add checklist can help ensure a successful acquisition. By analyzing the market, barrier to entry, brand, caliber of construction, services, and cost, A&R Group was able to determine that the hotel in Birmingham was a sound investment. Remember, applying these principles can help you make more informed decisions when looking to invest in the hospitality industry.