What the Desk Cannot See

Over lunch last week, Lisette La Costa and I discovered we had been describing the same asset in two different languages.

She builds feasibility studies. Market data, comparable sets, penetration rates, capital structure: what a project can earn if the market behaves. I walk buildings. I look at who the staff turn to when something breaks, whether the reporting describes reality or decorates it, and which agreements exist only in someone's memory.

I also walk the parts no guest will ever see. The back of the kitchen, the staff canteen, the staff parking, the tool shed, the laundry. What an owner has spent on the people who work there tells you where the cash has actually been going, and what the operation thinks of itself.

We were not competing. We were measuring different things and calling both of them diligence.

Two documents, one hotel

Imagine a beachfront property on the Caribbean coast, offered at a price that looks reasonable against the trailing twelve months.

The study says the market supports a higher rate, that occupancy can rise with better distribution, and that the capital plan returns within the projected hold. Every number in it is defensible. Built from the desk, it is accurate.

Then you stand in it.

Maintenance runs at three times what a hotel that size would normally budget, because the building sits between salt air and rainforest and neither of them stops. Every device with a chip in it, air conditioners, washing machines, dryers, refrigerators, dies early. The humidity and the salt reach the electronics, and a replacement board costs more than a new machine. That line is in nobody's model, and nobody calls it what it is, which is the opposite of sustainable.

The property sits at the end of the road, twelve kilometres past the tourist hub. The people who would staff it live ten kilometres beyond that hub, which makes this hotel the furthest job available to them in either direction. They can earn the same money without the extra twelve kilometres, so you inherit turnover. The only genuinely stable team is the handful who live close by, and close by is no longer affordable, because those houses went to Airbnb.

The seller mentions that you can add rooms, with air conditioning. The installed cable is already at its ceiling and runs warm when the hotel is full.

And in the reviews, if you read far enough back, guests mention the power cuts. There is no backup system.

None of that contradicts the study. All of it changes the investment.

Why the gap exists

A desk reads what has been recorded. A building holds what nobody recorded.

That is not a criticism of analysis. Without the study you do not know whether the opportunity is worth examining at all, and the structuring, the tax position and the capital plan are work I would never claim to do better. But a spreadsheet inherits the quality of what it was given, and in this region much of what matters was never given to anyone. Founder built, informally run, with procedures living in the heads of long tenured staff.

In Central America the gap is wider than almost anywhere. The assets worth buying here were built by people, not institutions. That is precisely why they are available, and precisely why they are mispriced in both directions.

What a foreign buyer actually risks

A buyer who only buys the desk view tends to make the same three errors.

They underwrite the revenue line and inherit a flow problem. Growth is not the same as throughput, and a hotel that is full is not the same as a hotel that is working.

They budget renovation and inherit organisational deferred maintenance. Physical decay gets priced. A team that has learned not to speak up does not, and it costs exactly like a leaking roof: quietly, then suddenly.

They buy a performance that depends on one person. Remove that person and the numbers go with them, because the relationships, the pricing and the memory were never institutional.

What the two readings do together

Used together, they are stronger than either alone.

The study tells you what the asset should be capable of. The ground reading tells you what this particular asset will actually do, and what has to change first for the study to come true. One gives you the ceiling, the other gives you the sequence.

That sequence is where most value is won or lost. A room renovation dropped into a broken commercial engine produces prettier rooms sold through the same discounted channels. The same renovation, sequenced after the engine is rebuilt, produces a repriced asset.

How to use this before you commit

If you are evaluating an asset in this region, ask for both readings, and keep them separate.

Commission the analysis from people who do analysis. Then send someone to stand in the building for two or three days, with a mandate to report what is not in the data room: who the building obeys, what the organisation can carry, which agreements are informal, what the physical plant will actually support, and what the back of house says about where the money has been going.

Ask for it in writing. Ask what it would cost to fix each thing found. Then look at the two documents side by side. If they disagree, the building is usually right.

The study tells you whether an asset can work. The walk tells you whether this one will.

Who does what

Two readings of the same asset, by two people who do not do each other's work.

Lisette La Costa, the numbers. Feasibility studies and valuations: market data, comparable sets, penetration rates, capital structure. What the asset should be capable of. lacostacr.com

Tara Nowacki, the ground. Operational due diligence, owner representation and project management: what this particular building and this particular organisation will actually do, and in what order it has to be fixed.

We work separately and we refer to each other. Commission whichever reading you need, and ask for the next one when the first raises a question it cannot answer.