It appears that the hotel industry has at least bottomed andlately has seen rising revenues in many markets. Values are down40%-50% from the 2007 peak and they have barely begun to rise yet.The decline of 19% peak to trough of Revpar was the worst inhistory of the US. In short, it appears we are at the bottom of theworst downturn hotels has ever experienced and it is the right timeto be getting back in so long as you understand this is not a quickhit, but a 4-5 year cycle play.

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Unlike office and retail, which are still suffering spacereductions by major tenants and rent reductions which will lastseveral years due to the longer leases, hotels can turn on a dime,good or bad. If you believe that this is the bottom, or even closeto it, then hotels offer a better return than office or retail, andresidential over the near term. The investors who will harvest highreturns, are those who team up with top quality highly experiencedmanagers, who have the cash to fund PIPs-renovations. The brandshave been allowing owners to defer the property improvement planrequirements for the past two years, and it will be those who havethe cash now to upgrade their properties, who will reap the biggestrewards over the next several years.

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Many owners have depleted the FF&E reserve just to pay debtservice, and they are not able to replenish it even with a loanmodification because NOI is still not nearly at a level whichallows sufficient cash to be set aside. As the economy recovers andas hotel occupancy improves, it will be the renovated propertiesand those bought at discounts that win the competitive battle. Ifyou buy a hotel at a lower cost than the owner down the road paidin 06-or 07 to build or buy his hotel, and you have the cash to dothe PIP, then you can attract the guests and charge competitiverates to the nearby hotel which is saddled with the high leverageloan and unable to do the PIP

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Multi-family may be recovering, but for most assets, it does nothave the potential of .the level of returns which are possible withhotels coming off of the historic declines they have suffered.

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The key with hotels is to remember they are really an operatingbusiness and it is essential to only invest with operators who havedeveloped, owned, operated and sold hotels successfully for manyyears. Just because a company manages some hotels, does not makethem as good at buying and owning and financing as you need them tobe. There is a real difference between putting your own cashat stake as a partner/operator, and doing fee only management.There is also a big difference between having negotiatedacquisitions for your own account and just coming in as a managerafter the asset is acquired.

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Pick your operator partner very carefully, don’t choose hotelsthat need major renovation or major repositioning, and don’t bidfor major assets in major cities, nor major resorts. The riskadjusted returns in hotels have been shown over time to be betterin secondary cities and near in suburbs, than they are for majorurban assets or major resorts. If you want solid, low risk returnsand very good longer term capital gains, stay with mid marketassets in secondary cities. If you want to swing for the fence withmuch higher risk, buy a major resort or major urban assets.

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Joel Ross

Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.