Jack vanHartesvelt is senior managing director for Alvarez & Marsal Capital Real Estate, a real estate private equity and asset management firm. In this role he has responsibility for creation, development, and management of hotel properties throughout the United States.
Prior to joining A&M, vanHartesvelt was executive vice president and a managing partner of Kennedy Associates Real Estate Counsel. Earlier assignments included executive vice president of development for North and South America at Westin Hotels & Resorts; and corporate vice president of development at Wyndham Hotel Group. Previously, he was the founding president of Hawthorn Suites and oversaw all aspects of the company’s operations, including hotel management, franchising, accounting, development, and finance. He was also vice president of development for Residence Inn.
He started his career at Laventhol & Horwath in Dallas, where he spent five years as a hotel consultant. He joined Residence Inn after a period of owning several restaurants in Memphis, Tennessee.
Mr. vanHartesvelt has been a speaker at numerous hotel industry forums and is a frequent college lecturer. He was voted Outstanding Alumnus in 1982 from Michigan State University’s School of Hotel, Restaurant, and Institutional Management, from which he graduated in 1975. He serves on the boards of one seminary, Pittsburgh Theological Seminary, and one school of theology, Bakke Graduate University.
The Conversation between Jack vanHartesvelt and Al Erisman took place July 30, 2012, in Bellevue, Washington, and was updated in October 2012.
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Ethix: You have been in the hotel business a long time. Didn’t you end up being the bellman at one of your hotels?
Jack vanHartesvelt: Yes. It was a rash moment when I was trying to inspire our hotel team. This was in Boston in 2009 when the financial crisis was strong and everything was crashing and burning in our business. This particular hotel was doing fairly well and I challenged them in the month of August to run 90 percent occupancy with a 90 percent fair-market share (measured as getting value for rooms compared with similarly rated hotels) and a 90 percent guest-satisfaction rate. If they achieved that, I said that I would work in a uniform as a bellman for a day at the front door, and I would turn over all my tips to the employee’s slush fund to be spent that evening on the after party. I also agreed to deliver an original poem in commemoration of that hotel to a gathering of the employees at the party.
Well, this is an oxymoron. You can’t run 90 percent occupancy, which is very difficult to do, and give five-star service to everybody, unless you absolutely give the rooms away. But even that doesn’t work because to achieve 90 percent share against the five-star hotels you have to charge a great room rate. So they said, “We’re on, pack your bag you’re going to be in uniform.” Anyway, they did it. They achieved all of their goals. They crushed it.
I was there in uniform, greeting customers and carrying bags. I was a rather lousy doorman, I might add. You can’t learn that job in a day.
The job of a bellman is hard work isn’t it?
It’s very hard work, particularly the way they did it at that hotel. They put a lot into remembering names and getting them right every time. We had 300 people working there. They knew that I was the owner and they always just saw me hanging around with the general manager and other executives. But this time they saw me as being like them. That I was willing to do this, letting them boss me around, was surprising to them. They needed to boss me around, too, because I didn’t know what I was doing. They saw me struggling a little bit, and then coming in later and delivering the poem. I write a lot of poems so that was the only easy part. The poem told them how great they were, and it was rewarding them.
That I was willing to do this, letting them boss me around, was surprising to them.
That hotel has done better ever since the challenge. It helped them to realize they could achieve a very lofty goal. It mentally changed their culture. It made them feel like winners.
Getting Started in Hotels
How did you get into the hotel business and why is it important to you?
I’ve been in the hotel business my entire career. I had a cousin I looked up to who was at Michigan State University when I was in high school, and he talked up the hotel school there. When people asked me what I was going to do after high school, I had no idea so I said I was going to go to the hotel school at Michigan State. I ended up there and found that I liked it. The part that turned out to be the most interesting for me was not operations but managing the assets: buying, building, and creating the lodging concepts. Most of what I do involves architecture, engineering, law, finance, and interior design, it just happens to be in the hotel business
Most of what I do involves architecture, engineering, law, finance, and interior design, it just happens to be in the hotel business.
What happened after you left the university?
For five years I was a consultant doing feasibility and market studies, and a few operation studies, for hotel and restaurant companies. Then I decided that I wanted to go off on my own. I bought a nightclub in Memphis, Tennessee, with my brother and it was a big success by many measures. We had the highest liquor revenues in the state and were rated among the top 50 nightclubs in the nation. I opened up a second nightclub. But then an opportunity came to move to Dallas where I had lived before, to help a fledging new company called Residence Inn, so I sold the nightclubs and took that position. My role was to head up operations and development for Residence Inn when there were four of them nationwide. When I left there were 65 open or under construction. We sold the entire company to Holiday Inn, and they later sold it to Marriott.
Then I started Hawthorn Suites as its founding president, also based in Dallas. We built it up and sold it to the Pritzker family, who owned Hyatt. That was 1988, when the economy was starting to deteriorate. Then I joined Trammel Crow, also based in Dallas. They had a small hotel company called Wyndham and I headed up development for them. We went from 17 hotels up to 90, and we then took the company public in 1995. At that point I was recruited away by Goldman Sachs to do for Westin what I had done for Wyndham, to build them up and then take them pubic, We did our version of going public 18 months later when we were acquired by Starwood Lodging.
Then I retired. But I found I was too young, and there wasn’t enough to do. I was playing golf and tennis and puttering a bit too much around the house, and soon my wife agreed that I needed to go back to work. I had moved to Seattle with Westin, and found a real estate investment firm that invested pension funds. I was offered responsibility for doing the same thing I’ve been doing all along, which is buying and building hotels. This time, however it was for any brand, any management Then I retired. But I found I was too young, and there wasn’t enough to do.company, whatever was right at that moment. For the next 13 years I managed over a billion dollars of pension fund investment money directed at building and buying hotels. About a year and a half ago I was recruited away to another company that wanted to be in the hotel and real estate business as owners. Under lots of labels and titles I have been doing the same thing: buying, building, and operating hotels.
Can you get a bit more precise about what this work entails?
We find a piece of property, either raw ground or a hotel that had seen its day and is now failing economically. We may buy it because of a good location inside of a major market. The goal is to buy it, as we say in business, “by the pound” because we are generally not interested in their business, just the physical asset. Then I hire architects, interior designers, and contractors. I oversee the concepting of the hotel. Or if it’s new construction versus massive renovation, our team may invent it from scratch. The goal is to create a lodging concept that customers will respond to.
As one example, I bought a historic jail in Boston, built in 1852. We created a luxury hotel out of that facility. In 2008, it was selected as the best new hotel design in the country, both for the hotel and the lobby. It won 15 or 20 different preservation and design awards. My favorite is the people’s choice award, because a lot of people showed up and stayed there. Not too many people would take a jail and turn it in to a luxury hotel. That has been done just two times before.
One in Oxford, England?
Yes, and one in Turkey, a Four Seasons. But it worked and people liked it. I enjoyed it because it’s creative. Once the construction is completed we bring in third-party managers to the run the hotel. My role then becomes overseeing the management.
Hotels as an Investment
What is the ultimate end-game? Does the pension fund want revenue from the hotel operations, or revenue from the ultimate sale of the property?
Both. The pension funds want a long-term steady return. Generally a pension fund has about 10-15 percent of its portfolio invested in real estate, and the hotel piece is maybe 10 percent of that. Investing in hotels is tricky because of volatility; tenants check out every morning. So what I do is try to create something that is worth more than what it costs to put in place. I run it anywhere from a year to five years and sell it, and they make a return on that as well. We also co-invest with the pension fund, so we have a stake in the success.
Dealing With the Economy
Recently we’ve been through a real estate bubble. How did that affect the hotel business?
It was the worst time since 1933 because everybody was afraid. Travel often is discretionary, so it represents the first thing that a business will reduce. You don’t have to fire anybody, you don’t have to change your business plan, all you have to do is just not send as many people on the road. If you were going to send 10 people to a conference, now you going to send two, or nobody. Instead of going and visiting that client in New York, you call them. With current technology, you can video conference from your laptop on your desk. The consequence of that was huge. Occupancies dropped dramatically. Hotels then try to compete for less business by dropping their rates. Hotels lost occupied rooms but they also lost 20-30 percent of their room rate at the same time.
[The hotel business in 2008] was the worst time since 1933 because everybody was afraid.
The hotel industry was in very, very difficult shape. It wasn’t overbuilt like 1992, it was a demand-side issue for a period of time. The hotel industry was just doing fine before the crisis hit. In fact, it was the healthiest it had ever been, and it went into a steep decline. There were a lot of layoffs, but that wasn’t enough; the whole industry was in trouble.
How did this affect your work during this painful period?
From an operations point of view, we had to get rid of services that people may have liked but were not required. Because we represent pension funds, we’ve got capital constraints. If I couldn’t pay the debt service on the loan, instead of defaulting we just had to pay it off or pay it down. But that’s a very difficult conversation we had to have with our pension fund partner, because they’re struggling also and don’t want to see this kind of added investment in the hotel.
In addition to the pension fund pressures, the company that I worked for as a management partner was a co-investor. We were also struggling with the valuations. We had to lay off staff within our company as well. It was very difficult. Seeing that coming, I remember sitting down with my wife and kids and telling them that they weren’t going to see much of me for the next couple of years. I could see it was going to be very hard.
I remember sitting down with my wife and kids and telling them that they weren’t going to see much of me for the next couple of years
I was the only one who had responsibility to deal with that particular part of the company. Not everybody can say, “You’re fired.” I’ve got to make two jobs into one, and then figure out which person will do that one remaining job. We had to do the same thing at the hotel level, dealing with the hotel management companies. I was also responsible for dealing with the lenders. This was the most difficult stretch of my professional career.
It seems that technology has introduced a volatility into the travel business that was not there before. Companies can reduce travel for a period of time. How does this cause you to think about the business going forward, anticipating the next bump?
According to economists, productivity gains are a good thing. When we can build cars with robots, everybody cheers. But when technology in the office leads to fewer people getting hired in the white-collar trades and fewer people having to travel in order to move the economy to the same degree, that hurts us. It’s good for America, it’s a good thing for the economy generally, but we have to react.
But when technology in the office leads to fewer people getting hired in the white-collar trades …that hurts us
The question is: What happens to these productivity gains when business picks up and there is more flexibility? If the company is doing well, they view attendance at a conference or convention as a perk for some of their rising stars. So, they send them off to the conference to get educated and to network with their peers within their industry. But in general, business travel is shrinking. On the other hand, leisure travel continues to grow as times get better. People who have the resources simply want to travel, to see other places.
If you track the growth in the economy, GNP, and the growth in occupied rooms for the last 25 years, they’re right on top of each other except after 9/11 when everybody was afraid to get on an airplane.
Let’s talk about operations. You mentioned that when difficult times come you have to make some tough operational decisions. How deeply do you get involved in the operation of the hotel?
This is a very important issue because there is a direct correlation between employee satisfaction and guest satisfaction. Happy employees equal happy customers. The happy customers come back more often than the ones who are not. So, that leads to greater market share, which leads to better profitability. If you just follow the logic, and it’s pretty darn simple. if you have happy people working for you (content, motivated, and trained properly, and who feel good about themselves and who they work for) you’re going to end up with a more profitable hotel that you would have had otherwise.
Happy employees equal happy customers
The owner plays a role in that. I’m only dealing with the executive committee: the general manager, the director of sales, accounting, head of engineering, and down a few levels. I don’t deal with the housekeeping staff except when I stay in a hotel. When they’re smiling at me saying thank you and please, I tip appropriately. By the way, I pay for everything in the hotel. My time there is like any other guest.Operations is more of a leadership issue
But operations is more of a leadership issue. When it comes to management, day-to-day management, I deal primarily with the executive committee. I deal with them very constructively. What they do has value, and we build on their strengths. I don’t take out my frustrations, even though I may have them, on them personally. Even though privately I may think it’s a personal failure on their part, I gain nothing by saying that to them. We talk about the things that need to be fixed without getting personal. We talk about who we could hire, and what else we could do with the workload. As a last resort, we’ll replace the individual. But I don’t make them feel bad.
Sometime you go further, to create a positive environment for the hotel. Can you give me an example of that?
There are some dramatic examples. When Hurricane Katrina hit New Orleans, we had a hotel there and needed to make a quick decision. Immediately after the hurricane, the hotel was wet, then it was boarded up, then the power was turned off. If you know anything about biology, you know that mold is going to eat up that hotel in about two months. There were barricades around the city. We were fully insured and we could have gotten all of our money back by doing nothing, or we could have gone in and spent a lot of time and effort and money to fix that hotel up and be operating in a middle of a disaster zone. It would take maybe five or seven years to make it worth as much as the insurance company would have paid us for doing nothing.
That was a 10-minute conversation – I exaggerate, it was a five-minute conversation ― when we decided to run the barricades, light up the hotel, dry it out, and get back to business.
Why did you decide to do that?
To do otherwise would have seemed like stealing. Fixing the hotel may have been a bad short-term business decision, but it seemed to us at the time, to me especially, that any other decision would have been dishonest. We knew we could save that hotel and by not doing that we would have been robbing the insurance company. We would also have been depriving our employees of employment. There were a lot of conflicting priorities and interests, a lot of different stakeholders. That was seven or eight years ago, and I think that hotel is right now finally worked its way back. That was ’05 or ’06 when Katrina happened, and since then we went through the recession and then they went through the BP oil spill. That market has struggled. But we wanted to do the right thing.
Fixing the hotel may have been a bad short-term business decision, but it seemed …that any other decision would have been dishonest.
But that meant going further. We got $40,000 and put $10,000 in cash in four people’s hands. We sent them out on the road leading out of New Orleans to find our employees who were in shelters. Their homes were gone, families scattered, living in temporary shelters. When we found them we invited them to a safer place. They didn’t have credits cards, they didn’t have anything. So we gave them cash and we got them to safe houses initially. As soon as we were able to dry out our hotel, we wanted to move them there. By the way, the National Guard confiscated two of our generators, wanting to use them for hospitals and other emergency areas, as we were trying to get through the barricades. We had to call the White House to get help. We told them that the National Guard could use the hotel once we lit it up and dried it out. We finally worked out an arrangement with them.
We moved 70 of our employees’ families into the hotel as soon as it was habitable. We had constructional workers in there as well as they were working on it. When we opened up for business, we only had about two-thirds of our rooms available for guests because of employee families and construction workers. Then we worked with each one of those employee’s families to find permanent housing. That was in September and October. In December, I sent down 28 counselors from the Seattle area and they worked with the employees. Our counselors told us the employees had post-traumatic stress disorder. In a nutshell, they needed time before their lives were going to settle down.
That year my wife and I bought Christmas presents for the children of all the employees who worked in the hotel, whether they were able to come back to work or not. We tracked down everyone we could find. One guy we couldn’t find; I don’t know if he made it.
That was a big Christmas. My wife and I spent more on everybody else’s kids that year than we did, in total, of buying presents for our own four children over 32 years. But it was a very gratifying experience.
We also decided to fix up one church, which is all that we could manage from 1,700 miles away. We found a Catholic church, which was above sea level but all bashed in. They had every problem including termites, and the building had been condemned. We worked with the Southern Louisiana Building Trades to do an extreme makeover and fix it up over several weekends. When we, the Protestants, came in and said we wanted to fix the church, the priest honestly thought another plague had arrived. He was Irish, from Belfast, and had learned to distrust Protestants. He was very surprised and pleased that we fixed up his church for free. To do this, I raised money from the Seattle Archdiocese, World Vision, and many others who donated $100 to $500 each. We did 90 percent of it in about 30 days – the finish work took a couple months more. We worked with the union laborers in New Orleans, so we created some jobs in addition to fixing up the church.
By the way, this work changed the culture of that hotel. By the time we were done with that church in New Orleans, the guest satisfaction in our hotel was the highest in the Lowe’s hotel chain. In the middle of a disaster zone, we had the highest guest satisfaction in the entire chain.
This work changed the culture of that hotel.
An independent filmmaker created a documentary film about the project. It was just supposed to be a film for the guys who worked on it to say thank you, but it turned in to a profit-making venture for the filmmaker. That’s what happens when you ask for volunteers; they’re not under contract and they do whatever they want.
Didn’t you do something similar with a hotel in New York after 9/11?
Yes. We had the W Hotel, the first hotel north of the barricades, on 17th Street. I asked our general manager to make sure that we first looked after the employees. Then I said that there were people who were not going to want to go home, employees who didn’t want to go home even though their shift was over, but they would want to stay because they felt the need. I knew this because prior to that point I had been through a dozen different hurricanes in the Caribbean with hotels. I knew it is human nature for some to go to the wall to protect when predators are coming up the hill. I knew we had people who wouldn’t want to go home even if they had a home to go to, which many of them did.
Forty of our employees moved into the hotel. I asked the general manager to let their families move in also until they felt comfortable that everyone was going to be OK, and 40 families moved in. We also opened it up to Red Cross with a Red Cross rate. We could have charged anything and made a lot of money. On that day we didn’t charge anybody anything. We ended up becoming kind of a makeshift hospital, people running to our lobbies and throughout the hotel. There were kids there, some injured, some in shock. We’d set up beds, cots, gave the police whatever they asked for, whether a cup of coffee, a place to stay, a place to make a phone call, or just a place to sit down. That changed the culture.
After things settled down and the guests came back, we ended up with the highest guest satisfaction for the entire chain in that hotel. We ultimately sold the W Hotel for the highest price per room of any hotel sold in America in a 20-year period. I believe we sold it for a premium because of the way those employees felt about who they worked for and what their work was about. Somebody cared about them, and all I ever asked them to do in exchange was to treat the customer that way. Take what you feel and express it to the customer, show them that gratitude.
More Than Strategy
Are you saying that you really didn’t care about the people, it was a new method of maximizing shareholder value? (laughing)
No. The increase in economic value was a consequence of what we did but not the goal in doing it. The goal was to do the right thing. We care about the people. It just so happens that if you take care of your people then they take care of the customers. What’s wrong with that? You love your employees, you show them genuine care and affection. It feels good. We’re human beings, we’re made for that. What a surprise to find out that when you do that your businesses will do better than it would have otherwise. That doesn’t mean, by the way, that this way of treating employees will make up for a bad economic decision. If you spent too much, or the economy has failed, you are not going to be rescued from your own bad judgment or bad timing. It doesn’t save you from yourself. But you will do better than you would have otherwise, and that’s it. A very important distinction, I think.
The increase in economic value was a consequence of what we did but not the goal in doing it.
You illustrated some uncommon ways of treating people in times of disaster. But what about partnerships in the ordinary, everyday course of work?
It is basically about doing the right thing regardless of the circumstances. Let me give you an example from a recent investment opportunity we were pursuing. As you might expect, these large deals can get complicated, with many players on each side.
We were provided an opportunity to build a hotel with a group that had an option on a large property. The group was well financed but didn’t have a lot of experience in this kind of activity. What they wanted in return for just bringing us this opportunity seemed too much. We had haggled over what they would earn on the deal, and we agreed and signed a letter of intent. It’s not a contract, it’s just an agreement between civilized people to pursue the deal in a certain way.
Over the next couple of months, we brought in all of the equity, about $70 million, through a capital partner. The work required a lot of design talent, which I had and they didn’t. We needed construction expertise, which I had and they didn’t. We had to have relationships with hotel companies, which I had and they didn’t. So we came up two days before all the contracts were supposed to be signed and they really hadn’t done anything because they weren’t qualified. I met with my partners, and we decided it was time to revisit this letter of intent, this gentleman’s agreement.
There were several million dollars hanging in the balance and we had them in a vulnerable position. I gave this little speech about character, not being a character but having character. It’s a moment like this that defines who we are as a company and as a team. I said we should not fundamentally change the deal. But I’m a partner in my company, not the CEO, so there were others who had a vote. I had to use a little bit of persuasion. But they decided that they agreed with me, that this was the kind of company we wanted to be, people with integrity. So we went back and we made a couple of very noncontroversial changes, and everything was settled.
Two days after that, our major capital partner got into an argument with the seller, and they started yelling at each other. The seller of the property said, “We don’t want to do anything with your major capital partner ever again. You guys can come back, but not with the guy that has the $70 million.” A week later the group that brought the deal to us found someone else that could provide the $70 million. They also formed a joint venture with a major real estate company. Now the group that brought almost nothing to the deal except the introduction had construction capability, hotel operating capability, and $70 million. The shoe was immediately on the other foot. Now we were the weaker partner.
When we got back together, they trimmed the deal back a little bit, but fundamentally stayed with the same deal as in the letter of intent. It blew me away. They reflected back to us what we had shown to them. They got it.
Sometimes when the economy is swinging, you don’t know which way it’s going to go or where you’re going to end up with the competition or with partners. Sometimes the tides turn fairly quickly and people you thought were very vulnerable aren’t. All you really have is your character.
All you really have is your character.
Working With Employees
Do you treat your employees with the same level of respect?
Absolutely. Here is a very small example, but equally important. Generally the housekeeping staff in a hotel wear uniforms so they are readily recognized, but what uniform? A uniform can either be a pantsuit or it can be a knee-high dress, and everybody is supposed to be wearing the same thing. Usually owners don’t pay any attention to details like that. But I have found that women – and all of our housekeepers are women – have different views on what they prefer to wear. Some of them think the dresses are immodest because they have to kneel and bend down in the course of their work. It makes them uncomfortable to wear a dress. They would prefer a pantsuit. Others don’t want to wear the pantsuit because they think it unflatteringly accentuates the shapes of their bodies. They want to wear the dress. All I know for sure is that whichever way we go, dress or pantsuit, somebody is going to come to work feeling bad about themselves physically.
All of our hotels for the last 12 years or so have been union operated, and the union takes no position on this. So we decided to allow the housekeeping staff to choose. If you want to wear a dress, wear a dress. If you want to wear a pantsuit, wear a pantsuit. We can give you the choice rather than forcing something on you. It is amazing how such a little thing can have a big impact on morale.
We found a related issue in the assignment of rooms the staff clean. Most want to clean the same rooms because they take pride in what they do. Generally, they do a deep clean every two weeks, not every day. ,When they do this deep clean, the best housekeepers clean the grout around the tile and the bathtub with a tooth brush. If you’re the only one who is doing that, it’s kind of irritating when you are continually being assigned different rooms. So, they want to clean the same rooms whenever they can. It takes a lot of effort to do that because the guests don’t want to check out exactly when you need them to.
We decided to make an effort to give the staff the same sections and to make sure that they feel comfortable with their appearance. Again, it’s about respect. The housekeepers are the face of the hotel to the customer. You always take care of them, they’re everybody’s mom. Waitresses come and go, bartenders come and go, but the housekeepers stay. They’re oftentimes the primary breadwinner of their families; they have kids. They’re responsible, they care. You wouldn’t know that unless you took the time to figure it out.
The housekeepers are the face of the hotel to the customer.
I talk to people who operate hotels, and when I tell them this, they have a distant look on their faces and their eyes seem to say “Hey, that’s right.” It disappoints me, because they hadn’t focused on it themselves. In operations, the details matter!
Making Operations Work
Do the details involve everybody, including the bellman at the front door? Earlier you told how you did that role for a day at one of your hotels. How does the bellman get engaged in the details?
To show you the challenge, the hotel where I was a bellman sits right next to Massachusetts General Hospital, one of the best hospitals in the world. People come from all over the world with major illnesses and not all survive who go to that hospital. When I was working as bellman, I had my headset on and I was listening to what everybody was saying. There’s all this chatter going on between the service employees. They speak in a kind of code, “Two checked in, one checked out. Lady in green dress, no happy talk.” This was what that meant. “A couple checked in, the man died. The woman is now leaving. She is in a green dress coming down the escalator, no happy talk.” So when she leaves, you don’t say, “Mrs. Johnson, I’m so happy you stayed with us. Please come back.”
This was going on all day long, employees modulating their behavior toward their customers. I had no idea that they were doing this, and I found out that the customers loved it. I hadn’t realized how sophisticated they were. That one little example just choked me up.
One of the things I have observed at hotels I have visited is that many of the workers are not from the U.S. How do you deal with the issue of migrant workers?
We check all of the names through immigration to make sure they’re citizens or have a green card. I have taken over hotels where that was not the policy. In the case of a hotel in Albuquerque we had acquired, we discovered 35 undocumented workers who had been there for a long time. They were in a lot of key positions. They were doing a wonderful job, but they were all illegal. When we found out about it, we notified them that immigration was going to be doing an audit at our request, and if that was going to be a problem they should let us know now.
All 35 stepped forward. We were able to let them go in an orderly way and replace them in an orderly way. So we didn’t turn them in, but we got them out of the hotel. I don’t know if that was the right thing to do, but it seemed like it was at the time.
I don’t know if that was the right thing to do, but it seemed like it was at the time.
It’s been my observation that the more expensive the hotel, the more they charge for Internet access. At most budget hotels these days, Internet access is free, while an expensive hotel may charge $15 per day. Why is that?
I can answer that in three words: because they can. There is nothing more insightful I can say than that. We argue about that with our hotel operators all the time. The operator has to deal with people at the front desk who are coming up and complaining about that fact that they stayed at the Hampton Inn and they got Wi-Fi for free; why are they being charged $10.50? The desk clerk gets demoralized, while I’m thinking $10 per occupied room, in a hotel that may have 100,000 occupied rooms in the year is a million dollars in revenue. The infrastructure’s in, my incremental cost is still there. Do you want me to basically take a million dollars and erase it from my bottom line? This is not a trivial issue. Someday it’s going to be free for everybody like a utility. But these are issues that cause needless conflict today.
Cell phones have introduced another kind of change from technology. People used to use our hotel phones to call, and hotels earned a lot on their phone service. Now people use their cell phone even though the hotel phone is still in the room. Instead of it being a profit center it became a loss.
A long time ago you told me the story about how you decided to think about negotiations in a different way. What happened, and how do you do things differently?
I can tell you the big events that changed me. I mentioned earlier that I had the few nightclubs in Memphis. When I was buying the second nightclub, it had been a pizza parlor that had gone out of business, and it was owned by this police officer. He had taken his wife’s modest inheritance and invested it with a big dream, and he had lost it. I put the pizza parlor under contract, but I was using my finely tuned negotiation skills, and I told him that I would pay for the furnishings. I said I would pay him $5,000, but I wanted a period of time to review everything, and I set that at 30 days when I knew that his landlord had him given 21 days to either pay up or get out and he was going to get nothing after the 22nd day. Well, the guy trusted me, I seemed like an honest guy.
On the 20th day, one day before he was going to get booted out, I told him ― and his wife was standing there with him ― that I had re-valued his furnishings and they were only worth a thousand dollars, and that was all I could afford. He had no choice but to take that. He hung his head, this was the final thing for him to prove that he was a failure. I glanced over at his wife, and she was just shaking her head. I knew that she had been saying stuff to him ― like wives sometimes do.
I couldn’t get that image out of my head. I outsmarted that police officer for $4,000. But what I did was intentional. I used the law and knowledge that I had, and that he didn’t have, to deprive and manipulate him. That bothered me. For several years after that, I was negotiating for much larger things than $5,000 in used furniture. But it was the same stuff where you’re using your ability to understand contracts well, your ability to be persuasive, to look trustworthy, and to lead people into a bad place for them for economic gain for you.
Typically you ask for more than what you want to create value in something that you don’t care anything about so that you can trade it at the end of the day for something that you want.
Typically you ask for more than what you want to create value in something that you don’t care anything about so that you can trade it at the end of the day for something that you want.
You can also create a rubic within the agreement that works for you but not for them if they don’t understand it as well as you. I said I didn’t want to do that. I wanted to make sure that there was a fair deal for everyone, not just for us but for them as well.
I finally I got to the point where I wanted to bring my faith to my job, and in my faith, these tactics were wrong. It became an imperative when I was with Wyndham. At that point I had done 25 different transactions with our lawyers, and one day I told them I didn’t want to take a deceptive approach, to play the game, any longer.
My lawyers said, ”There are only two people in the company who can ruin it, you and the chairman of the board. You’re the only ones dealing with pieces that are big enough. To make the change you’re proposing, you have to go to the board and get permission. If you don’t, we won’t represent you.”
I went to our board and told them what I wanted to do. To their credit they said OK. I think they thought that was what I was doing anyway. All they knew was the company was growing and making money. I committed to doing business this way in 1991 and I have stuck with it. I found that it’s a great way to do business. A lot of goodwill comes your way. A lot of people just don’t realize that you can do business that way. I have to emphasize that it doesn’t save you from bad judgment. I can still make mistakes. It’s not a health-and-wealth strategy; it’s a character issue. It’s who you are as a person.
Working Negotiation Details
Can you tell me about the first time you did this?
It was in New Orleans. I was dealing with two men, local real estate developers and the owners of a particular property there. We were going to manage the property and put up all the money. They were both trained lawyers and, though they weren’t practicing law, they knew the law. I told them that I wanted to work out a deal that worked for both sides, a fair deal. I was going to look out for them and I wanted them to look after me. They kind of laughed nervously like, “Right, sure. Whatever you want, Jack.”
As we started to go through the contracts there were times when they were getting ready to turn the page and I said, “Excuse me, before we turn the page let me go back to 2.1 here where it talks about your development fee. It looks like it’s fair and equitable, but if you flip back here on the default section, 10.9, I can actually keep you from getting that if you do anything whatsoever even if it’s benign, and there’s nothing you can do about it. If we flip over to the Notice and Right to Cure section, which is a couple of pages after that, there really is nothing that relates to this section here, and I think that that’s wrong.” My attorney was looking at me kind of like, “Are you serious? Are you kidding me?” I don’t know what our new partners were thinking at that point.
A half hour later we’re on a different section and I did the same thing. I stopped them before they turned the page because I thought they were going to catch something and they didn’t. I said, “That has a mirror provision over here in the partnership agreement and they actually work in tandem. In fact, they actually reference each other. But if you go over to the other one and then you go back to this, you realize that you can actually be squeezed out of this partnership if you do something benign. While I would never do that, we shouldn’t have this in there in the first place. We shouldn’t be tempting somebody to do that.”
At that point one of them said, “Who are you?” We ended up talking about the entire agreement in this way. These are complicated agreements and there’s a lot at stake. We used language like, “What would be right for you? What would be right for me? How can I take advantage of you? How can you take advantage of me?” Normally you don’t have those conversations. But we talked about it openly in that fashion, every provision. We tried to come up with something in each case that was fair, that was equitable in an absolute sense. We approached it like a judge and not like advocates for my side and for their side. We moved away from a “smart guy” contest.
We used language like, “What would be right for you? What would be right for me? How can I take advantage of you? How can you take advantage of me?”
That investment was $25 million to build a hotel. Two years later we sold it for $45 million, and they got half. That was 1991, which was in the middle of a recession, and the $10 million they earned saved them economically. They had been asset rich and cash poor. Now all of a sudden they had the cash that they needed to stabilize their companies. It changed them.
We stayed friends over the years and have done other hotel deals together. They’ve spoken quite openly about that first negotiation, and how they wanted to keep doing business like that. I didn’t think at the time that they both got it. But apparently they did and they’ve both done very well.
Sometime later, one of them was a plaintiff in a lawsuit, and I was called as a witness. They had a hard time empaneling the jury because the people who they were trying to get to sit on the jury would say, “I know this plaintiff and he’s a good man. If he thinks that somebody did something wrong I’m inclined to believe him.” It was very odd.
Ten or 12 years later, I was in New Orleans for some business. .One of these developers was being recognized for some of the philanthropic work he had done, and he invited me to sit in on the recognition event. I was sitting back in the audience and he was up front in front of all the city councilmen who were saying all these incredibly nice things about him. For example, one of them said, “Once every thousand years somebody comes along and changes a people, and you, sir, are that man.”
Then they asked him to say something. I was thinking to myself, “Say nothing. Just say ‘Thank you’ and sit down. There’s nothing that you can say at this point.” But he stood up and asked me to come up and sit next to him. I thought, this is not good, but I got up and walked forward and I sat next to him. Then he said, “I thank you, ladies and gentlemen, for all the kind things that you said to me today, but the person that you should be honoring is not me, it’s him,” and he turned around and pointed at me sitting in that chair. He went on to say a lot of kind things about me and how what we had done together mattered. It blew me away. I thought that he was the guy who didn’t get it. He was the more difficult of the two, but he did get it.
You try to do the right thing, but the other side doesn’t always get it right away. Sometimes it takes time. It’s just like that bad act, where stuck it to that police officer on his pizza parlor. In that moment, it just started growing in me. Sometimes the good things that you do take time to be recognized by others as well.
You need to consistently do the right thing, but this gets tough at a time of adversity. When there’s something at stake, and you do something for someone else that actually hurts you ― that is not in your interest but is in theirs, because it is the right thing to do. It may take a little bit of time but they do get it.
It’s not always about you or about right now. Sometimes the situation isn’t about you right now, it’s about somebody else. If you view this as a lifestyle, who you are as a person, it changes things. It is not just some clever moment in a negotiation or in a business practice, it’s who you are as a person and it does make your life richer.
It’s not always about you or about right now.
When It Hurts
Most of the examples you’ve given have turned out really well. So you get the idea that these things could simply be strategy, a way to make more money. Have you ever had a case that you had to make the right call and it just didn’t work out?
Yes. I have had some people try to take advantage of me when I try to be fair with them. But I have found that when this happens, you just don’t do business with them anymore. As I said before, it is not just about right now, and in the long run you move on.
Doing the right things also doesn’t save me from bad judgment. I had a hotel that I could have sold, should have sold, back in 2008 in Chicago. It would have worked out well. I chose to hold out in the belief that I’d do better later, and then the economy got worse until the property was worth less than the amount of debt.
Doing the right things also doesn’t save me from bad judgment
I also made a mistake with that hotel’s employees. It looked like we would lose it to the lender. We sat down with the bankers to try to work out a deal, and at the time they seemed willing, but then the bank failed and a new bank took over. One week before Christmas, the new bank came back to us and said, “We changed our minds. We’re not going to make the protective advances.” So I had to close the hotel and I had to close it by January 1st. A week before Christmas I laid off 220 people and ended up being on the front page of the Chicago Sun Times as the bad guy, the Scrooge. I didn’t dispute what the newspapers said. I could have told them 60 days before, and I didn’t. I could have trusted my employees to not run away, I could have told them along the way that this could end badly. But, I thought I could figure it out. I was afraid that my very best people would leave, and maybe I’d stay open but with a very weak staff. But in the end, that was not a good decision. I lost financially but also with the employees. You like to think you’re a good guy. I thought I wouldn’t screw up, but in that case I did.
What do you see going forward? What’s next in your career?
I’m still going after it. I’m looking forward to buying and building more hotels and I want to create a positive culture that’s fun. I enjoy it. One thing I learned from trying to retire is I’m not suited to it. The less I do, the less I do. I’m actually happy being busy. I hope to do this as long as I can, as long as people will let me.
How do you see the climate for business in the world today?
I’m much more optimistic now. I don’t think good news sells as many newspapers as bad news. The hotel business is up, there are more occupied rooms today than there have been at any time in history. The second busiest time was last year. So we have had two record-breaking years as measured by occupied rooms. While room rates are not all the way back, they’re coming back. Because of productivity gains, we are not getting as much employment. But the economy is going fine and the employment will kick in. I think the economy is much better than we are spoon-fed to believe.
Advice for younger people
Do you have any advice you would give to younger people going into business today?
Just get started. Don’t over-think the master plan, particularly students. Life is not like school. You don’t have to sit down and take a test every day. if you try to do the right thing, over time, your life will be blessed It’s actually a lot easier than that. Just get started and you’ll do just fine. You will change jobs a few times and eventually you’ll get the right one. But it’s better to get started and get engaged and give it everything you’ve got. Don’t waste time, just go for it.
Don’t forget who you are. Try to do the right thing. A lot of times it’s subtle, it’s a nuance, it’s not always 100 percent clear in each moment. But I think if you try to do the right thing that, over time, your life will be blessed.