How to Evaluate Sustainable Technologies in Hotels

As a global hospitality consultancy, HVS is oftentimes asked to comment on emerging sustainable technologies that are potentially applicable to hotel and resort operations. Here are six questions that hotel owners and managers can use to frame their conversations with vendors to enable both parties to rapidly and efficiently hone in on whether a technology or product makes sense for a particular hospitality asset. These questions are relevant for nearly any level of investment, ranging from a simple fixture replacement to a large-scale plant retrofit.

Question 1: Where is the technology operational today?
The greatest indication of the viability of a new or emerging technology is its performance in a real-world operational context. If the technology is already deployed in hotels, the first step in the due diligence process should be to speak with owners or operators of facilities who are already using it, in order to ascertain its performance and cost-effectiveness. Alternatively, the technology may be deployed in a context that is analogous to hospitality (e.g. commercial real estate), which can still provide an effective indication of its applicability to a hotel setting. Owners should be aware that a relatively new installation (within a couple years) might not provide an adequate indication of longer-term performance and maintenance costs, both of which factor into the final return on investment.

Question 2: What are the operational requirements and constraints?
Subsequent to identification of the fundamental principles of the technology, it is helpful to have a clear understanding of installation requirements and operating protocols. While this information is typically conveyed via cut sheets and technical specifications from the vendor, it is imperative to identify any operational externalities that could adversely impact guest experience (i.e. noise, vibration, odors, aesthetics, etc). These issues are usually best identified by visiting one or more properties with the technology in place. For larger capital projects, the cost of travel to inspect a system or product firsthand is typically negligible compared to the longer-term cost of having to replace a system that functions with unanticipated impacts.

Question 3: What is the feasibility of securing approvals and permits?
The regulatory regime surrounding deployment of a new technology or product can range widely, from simple exemption from permitting requirements to the need for comprehensive approvals and permits at multiple levels of regulatory authority. If the technology is new in a certain municipality, the hotel owner and/or vendor could consider conducting an informal consultation with the relevant regulatory authorities to discuss the technology and receive preliminary feedback regarding the likelihood of securing approvals and permits.

Question 4: What levels of financial performance are modeled, and are these costs and savings verifiable through actual performance?
Most vendors of environmental technologies provide calculations regarding anticipated system performance and cost savings. Hotel representatives should ask for detail regarding the calculations, including any assumptions and whether the calculations are theoretical in nature or based on actual system performance. If the technology is intended to replace or augment an existing utility, the financial evaluation should include a sensitivity analysis based on anticipated future variations in commodity rates to provide a range of anticipated returns. Where various governmental or utility company incentives (e.g. rebates, credits, tax abatements) are considered, it is essential to confirm that these incentives are: 1) valid for the vendor and specific technology proposed; and 2) funded at the time when the technology will be installed and operated.

Question 5: What are the environmental outcomes associated with operation of the technology?
If sustainability issues are an important consideration associated with the technology or product (from an ownership or brand compliance perspective), some level of environmental due diligence should be conducted relating to the actual reduction in resource consumption and/or waste generation associated with implementation of the technology. It may be prudent to perform a high-level alternatives analysis to understand the highest and best use of working capital. For example, if a hotel’s carbon footprint is an immediately pressing issue (perhaps in terms of securing MICE business), the technology could be compared with other uses of capital to ascertain which investment will result in the greatest reduction in emission levels, and therefore be most attractive to potential MICE clients.

Question 6: How does the vendor structure its relationship with clients?
The contractual relationship between the vendor and hotelier can be structured in different manners based on the scale of the transaction and the potential cost savings associated with the technology. While most transactions are conventional purchase agreements, alternative-financing methods such as performance contracting, sale of energy agreements and other novel funding structures are being utilized with greater frequency. Upon review and understanding of the contractual relationship, the hotelier can then evaluate the specific details of the proposed agreement against ownership objectives to determine if the technology is viable from an investment horizon perspective.

To obtain a sample copy of a hotel audit that documents the costs and returns of investing in utility efficiency, please contact Kevin Goldstein at kgoldstein@hvs.com

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