Strategic Approaches to Successful Hotel Property Acquisitions
Strategic Approaches to Successful Hotel Property Acquisitions
Do you dream about buying or selling a hotel? While it might seem like a straightforward real estate transaction, there's a lot more to it than meets the eye.
This process is filled with intricacies and complexities that go beyond the usual concerns of title, taxes, and deeds.
In fact, it's a whole different ball game with unique challenges tied to operating a business. In this blog post, we will highlight some of the hotel-specific issues you could encounter during such transactions.
So, if you're planning to purchase a hotel any time soon, be sure to address these following issues to ensure a smooth and successful hotel acquisition process.
Continuation of Management and Branding Relationships Post-Sale
When it comes to the nuances of Hotel Management Agreements (HMA) and Franchise License Agreements, a meticulous review is imperative in light of sale considerations. Typically, Franchise Agreements create a unique bond with the asset owner, and their transferability to a potential buyer isn't inherent. This necessitates the buyer to seek approval for a fresh license agreement with the franchisor.
On the other hand, Hotel Management Agreements generally entertain the idea of assignment to a future owner. However, this might be contingent on getting the manager's consent. Savvy owners may negotiate the prerogative to terminate the hotel management agreement at the point of sale. This negotiation, which usually involves a fee, can enhance the property's market appeal.
A sale also presents a golden opportunity for a brand to enact a Property Improvement Plan (PIP). This plan outlines the necessary capital improvements required to meet the brand's current standards, albeit potentially expensive.
It's essential for both the buyer and seller to address the continuity of the existing brand and management company for the property. Alternatively, they may consider establishing new relationships. This discussion should take precedence early in the sale/acquisition process to ensure a smooth transition.
Transferability of Vendor Agreements in Hotel Sales
In hotel sales, vendor agreements for services like laundry and IT are typically signed at the property level. Buyers need to identify which of these contracts can be assigned or terminated upon sale. Sellers often provide a blanket assignment for transferable contracts.
However, some multi-property or master agreements may not be transferable, necessitating negotiations for new contracts.
Due to limited representations from sellers in purchase agreements, buyers must conduct thorough contract audits—a potentially time-consuming part of the due diligence process.
Inclusions in the Purchase and Sale of Hotel Properties
The purchase or sale of a hotel property is more complex than typical real estate assets. Besides the land and improvements, it also includes intangible assets like information technology systems, intellectual property, and accounts receivable.
However, if these assets are owned by third parties like franchisors or management companies not retained post-sale, they'll need to be excluded.
For instance, intellectual property used in hotel branding may need to be debranded. Similarly, third-party IT systems should also be excluded. Each case requires individual analysis.
Comprehensive Representations and Warranties from Sellers
Sellers typically provide representations and warranties in a sale, but their comprehensiveness can be subject to negotiations.
Sellers often aim to limit these, while buyers attempt to expand them. These assurances could cover aspects like physical conditions, environmental factors, financial performance, bookings, litigations, contract status, alterations, union and employee status, and other encumbrances like management and franchise relationships.
However, the scope of these representations and warranties often depends on the sellers' knowledge and the buyers' bargaining strength.
Disclosure of Information about Hotel Properties
Information about a hotel property is usually disclosed through various schedules in the purchase and sale agreement.
These disclosures, tied to the seller's representations, resemble corporate transactions more than real estate ones.
They could include lists of material contracts, significant litigation, law violations, etc., all depending on the extent of representations the seller is willing to make during the negotiation process.
Government Disclosures Required for Hotel Sales
The sale of a hotel often requires government disclosures, unlike most commercial real estate sales. In many states, sale of operating businesses like hotels necessitate bulk sales disclosures to governmental agencies, which could significantly affect the closing timeline.
These agencies are primarily interested in assessing if there are any outstanding sales taxes related to the hotel.
Without approval for bulk sales or other allowed arrangements such as withholding of closing proceeds, the buyer could potentially become liable for the seller's unpaid taxes.
Transfer of Liquor Licenses in Hotel Property Transactions
The transferability of a liquor license from a seller to a buyer largely depends on the specific regulations of each state.
Liquor licenses are often personal and non-transferable, necessitating the buyer to plan for potential operation downtime while obtaining their own license.
However, some states allow buyers to operate under the seller's license temporarily under certain conditions. Therefore, it's crucial for buyers to strategize efficiently to secure non-transferable licenses and permits, with the help of local liquor license counsel.
Employee-Related Concerns in Hotel Sales
Employee-related issues are multifaceted in the sale of a property. The property might be subject to union agreements and employment contracts.
If there's a significant number of employees laid off upon sale, it could trigger a "mass layoff" under federal and possibly local Worker Adjustment and Retraining Notification (WARN) acts.
Both parties need to understand these implications and comply with statutory notice requirements to avoid potential liabilities.
While buyers commonly interview the seller's employees for continued employment, the seller might wish to retain some employees for other operations, thus not allowing them to be interviewed.
Additionally, providing the buyer access to certain employee records may have implications under employment laws.
Access to Hotel Guest Data for Buyers
While a buyer might desire access to personally identifiable guest data for marketing and other purposes, the disclosure of such information is heavily regulated by various state and international privacy laws, as well as by the privacy policies agreed upon by the guests.
For instance, if the hotel serves customers in the European Union, data treatment would be subject to the EU's General Data Protection Regulation (GDPR).
Given the potential severe liabilities under these laws, sellers must judiciously consider if they can and want to grant the buyer access to this information, and under what conditions.
Complex Prorations Required at Hotel Closing
Certainly, prorations for closing a hotel pose a greater complexity compared to other real estate assets.
These prorations encompass various aspects such as cash on hand at the hotel, booking deposits, employee compensation, inventory, and payments for current guests' stays.
Additionally, they involve the customary real estate prorations like taxes, utilities, and lease payments.
Typically, an audit and inventory by both parties is needed on the day before closing and this may be subject to a post-closing true-up.
Maintaining Hotel Operations Between Contract Signing and Closing
Between the time the contract is signed and the closing, the operation of the hotel is a significant concern, especially for the buyer.
The buyer may have concerns about the seller's level of commitment during this transitional period. To address this, it is advisable to include a provision in the contract that clearly stipulates the seller's obligation to uphold the day-to-day operations of the hotel in line with standard practices.
This encompasses tasks such as repair and maintenance, inventory management, and other customary responsibilities.
Furthermore, the buyer may be given the right to approve any new operational contracts and leases to preserve the value and goodwill of the asset.
Buyer Indemnification from Certain Claims in Hotel Sales
Yes, the buyer is usually indemnified from certain claims, but these indemnities can be quite intricate in the hotel context.
They are intended to shield the buyer from various claims, including those stemming from a seller's breach of representations about the property. Sellers typically require a deductible and possibly a cap and time limit on the indemnity obligations.
The deductible prevents the indemnity from activating until claims surpass a specific minimum amount.
This is because minor claims are common in the hotel business, so buyers are expected to shoulder some risk.
The cap restricts the seller's exposure to protect its downside, while the limited survival period provides the buyer with a deadline for making claims under the indemnity. The amounts of the deductible and cap often become significant points of negotiation.
Handling of Accounts Receivable in Hotel Transactions
Accounts receivable are handled in various ways during a business sale. Sometimes, the seller retains the right to the funds, and the buyer agrees to pass on any collected money.
In other instances, the buyer keeps the receivables and credits the seller for the outstanding amounts, typically at a discount, as the buyer assumes the risk of non-payment.
Management of On-Site Guest Items in Hotel Sales
How guest items left on-site like stored luggage or contents in safe-deposit boxes are handled during a hotel sale varies depending on the contract.
Some contracts outline a detailed procedure for both parties to jointly inventory and record these items before closing. On the other hand, some contracts manage this transfer more briefly.
Regardless of the approach, it is crucial for the parties to address these items in some manner. This is to ensure there's a record in case a guest files a claim of loss against the hotel later.
It also helps in maintaining continuity of service and ensuring customer satisfaction, which can be critical during the transition period.
Handling Pre-Sale Room Bookings for Post-Sale Dates
When a hotel is sold, the handling of room bookings secured pre-sale but scheduled for post-sale dates is a crucial aspect.
Typically, the seller stipulates that the buyer must honor all pre-existing room bookings that fall after the closing date.
Should any of these bookings have been made using loyalty reward redemptions, the buyer would usually anticipate reimbursement from the seller at the prevailing market rates.
This process is essential to ensure continuity of service and maintain customer satisfaction during the ownership transition.
Hotel-Specific Closing Conditions in Property Transactions
Closing a hotel sale is a nuanced process that involves several specific conditions, both from the buyer's and seller's perspectives. These conditions are integral to ensuring a smooth transition and avoiding unforeseen complications.
Sellers generally aim to limit conditions that would allow the buyer to refund their deposit.
Buyers may need to confirm certain unknowns before closing, such as:
Securement of a new franchise agreement
Acquisition of a liquor license
Obtaining a bulk sales tax clearance
The risk bearing for unmet conditions is typically negotiated in the contract.
Sellers are often required to maintain current operations, inventory, and equipment until closing.
The seller must comply with all covenants, and all warranties and representations must remain true.
Sellers should agree to continue operating the hotel in good condition, making necessary repairs or improvements.
Potential risks associated with hotel closure, like water damage or vandalism, should be considered and planned for.
The De-branding Process in Hotel Sales
The process of "debranding" a hotel involves removing all traces of the previous brand prior to closing, particularly if the hotel brand is set to change. This process is quite detailed and involves several steps:
Removal Or Covering Of All References To The Brand: This includes names, logos, and insignias on all property elements. Examples could range from logos at the bottom of a swimming pool to those on guest towels.
Signage Alteration: All signs referring to the old brand should be taken down, replaced, or covered up to prevent any brand confusion.
Change Of Proprietary Elements: The debranding process may also extend to proprietary furniture, fixtures, equipment, and other design elements that are unique to the brand. These elements would need to be removed or replaced.
Removal Of Excluded Items: The seller will also have to physically remove other items that they have excluded from the sale. This could include software systems, guest data, and other proprietary information.
Overall, debranding is a meticulous process that requires careful planning and execution to ensure a seamless transition to the new brand.
The Bottom Line
Selling a hotel is no small feat, with numerous considerations to keep in mind from legal obligations to the intensive debranding process.
Sellers must ensure that the property is maintained in good condition even after the sale, anticipate potential risks, and effectively execute the meticulous process of debranding.
The buyer, on the other hand, must be prepared to take over and execute a seamless transition to the new brand.
In essence, while the process may be complex and intensive, with careful planning, diligent execution, and mutual transparency, it can lead to a successful and smooth transition. As in any business endeavor, effective communication and understanding are paramount to achieving the desired outcome.