While it’s been a tough couple of years for start-up lifestyle brand NYLO Hotels, no one could have predicted its latest calamity: last month’s massive flood that pummeled New England and significantly damaged the company’s Warwick, RI property. The 163-room hotel, which had three to four feet of water throughout the first floor, will be closed for at least four months and perhaps as long as six.

“It was a real tragedy for the hotel,” says John Russell, a NYLO founder and company CEO. “Fortunately, the guests and staff all got out safely and we have extensive insurance coverage. It was a fluke. We built the hotel above the 100-year flood plain, but it was the worst flood in 200 years or longer.”

Although company officials have yet to determine the full extent of the damage, Russell believes losses in ff&e alone will be about $1.3 million. And, of course, that doesn’t count the business and market momentum the property will lose while it’s closed during the busy summer season. One key factor in how long the hotel will be closed is that much of the first-floor furniture, including the front desk and bar, was custom-made either in the U.S. or China.

Russell says crews were in the hotel 12 hours after the water receded, and the basic clean up was finished in about nine days. Guests staying on the upper floors had to wait four or five days before they could access the hotel to retrieve their belongings.

“Their job was to get the water out as quickly as possible to mitigate any mold damage, and they did that very aggressively,” says Russell of the clean-up team. “Unfortunately, the bar, restaurant, fitness center and some of the guestrooms are on the first floor. And everything touched by the water had to be replaced.”

Following the initial clean up, a team of forensic auditors went to work assessing the damage and lost revenues. In the third phase, which starts this week, an architectural engineering crew will do further testing and assessment. As part of its work, the team will open up the building’s brick walls to make sure no water is still trapped in the structure. Other aspects of the clean up include sterilization of all stainless-steel components, scoping of drains with cameras to make sure there’s no backwash, cleaning electrical components with liquid nitrogen and testing soil outside the property for contamination.

Despite the problems at this property, Russell remains upbeat. One reason is improving performance at the chain’s other two locations: Plano, TX, which opened in late 2007, and Las Colinas, TX, which opened last summer. (The Warwick property opened in 2008.) Russell says RevPAR at the Plano hotel has increased by 42 percent this year, and both properties are outperforming food and beverage sales expectations.

“About 75 percent of our f&b business comes from the local communities,” he says. “We budgeted about $600,000 in revenues, and we’re doing more than $2 million annually, at a 32-percent profit margin.”

Food and beverage was one area the management team has tweaked from the first to the third property. Menus, for example, have evolved from mostly small plates to broader offerings with an emphasis on regional cuisine. All three properties use extensive promotions and heavy use of social media to drive local and in-house business.

The guestroom configuration has also changed from the brand’s original concept. “We built the Plano property with no connecting rooms and some rooms with twin doubles, which we quickly learned wasn’t acceptable to our customers,” says Russell. “The other two properties have both connecting rooms and double-doubles. We also added a few more meeting rooms in hotels two and three.”

Russell still hopes to expand the chain despite the industry downturn and credit crunch. A couple more properties may open late this year or early 2011, including one in the Chicago West Loop area, and he says NYLO’s franchise pipeline has more than 30 properties.

“The problem is lack of debt financing,” he says. “These are deals in which developers have equity and they own the land, but just can’t get reasonable debt.”

The company has several other irons in the fire that could spur growth. Several of the potential franchise properties are rehabilitations of existing buildings and, thus, should qualify for Historic Rehabilitation Tax Credits and New Market Tax Credits. The company works with industry consultant Don Landry and Campo Architects to help developers access these credits.

NYLO also has an alliance with CampusBrands, Inc., a firm that’s creating a branded student housing concept suitable for both new construction and conversions of hotels and other buildings. NYLO is helping the company with design expertise and the development of design and operational standards.

Otherwise, not much has gone smoothly for the nascent chain.

“It’s our version of the perfect storm,” says Russell. “We opened the first hotel when the economy was starting to go bad. Lehman Brothers (the chain’s primary financing source) went bankrupt after the second opening, which led to a delay in the third property. Then came the industry meltdown. It hasn’t been easy, but we’re still here.”