Hotels have enormous recurring expenditures. Why let somebody else make all the money from them?

Every hotel keeps writing checks for renovations and design refreshes. Furniture wears out, rooms get dated, and buildings need work. Hold the asset long enough and you’ll spend millions keeping the place worth what you paid for it. Somebody earns a profit every time you write one of those checks.

There’s an opportunity sitting right there. If enough of that work recurs across your assets, own some of the capability yourself and keep some of the money inside the enterprise. You were going to spend it anyway. You may as well make some of it back.

You don’t need fifty hotels to make this work. You need enough recurring work to keep good people busy without building an expensive department that spends half its life waiting for something to do.

A team that repeatedly works on your type of hotel will learn where owners waste money and which improvements actually earn a higher rate. If you bring that accretive knowledge in-house, you benefit from the efficiency. After all, if they don’t get better every time they do it, why are they on your payroll?

From an investment perspective, this model is attractive when you look at where the money flows. A development fee billed from one company you own to another company you own is still your money, of course. But the real gain comes when you stop paying an outsider’s margin, and instead get your own people do better work for less money.

One caveat: there’s plenty of room for BS here. Build the infrastructure without enough work behind it, and you’ve created a payroll problem. Calling overhead “vertical integration” doesn’t make it valuable. But it’s not difficult to avoid these kinds of games. If you build a business that earns money from expenditures the hotels were going to make anyway, you’re onto something.

A buyer can put a value on that. If the work keeps coming and the internal business keeps earning money from it, those earnings can continue after the hotels change hands.

Hotels are always going to spend money keeping their properties current. That isn’t going away. The question is how much of that money you want to keep for yourself.