What challenges should be considered in hotel acquisitions and dispositions?
26 September 2017
The hotel industry has grown into a global business contributing to the world economy, and hotel brands are increasing their global footprint. Hotel acquisitions and dispositions provide opportunities for growth, but when negotiating the sale and purchase of a hotel, the seller and the purchaser must confront and resolve myriad issues particular to hotel properties. These challenges range from evaluation of real and personal property rights to day-to-day business operations and the hotel operating model. We set out below how these issues affect hotel sales and purchases, step by step.
Due diligence and inspection
As part of the sale/purchase process, the purchaser’s team carries out numerous reviews and inspections. In particular the hotel purchaser needs to evaluate the following issues:
- real property
- tangible personal property – such as current and detailed inventories
- intangible personal property – including future reservations for rooms and meeting space, deposits for reservations, service contracts, computer systems and operating systems, warranties and guarantees related to the hotel, and licenses and permits related to the hotel.
- labor and employment issues
- books and records
- IT systems
- capital improvements requirements – for example, many hotel brands have adopted “green” standards for hotel development and operation that seem poised to become the industry norm, and significant capital expenditures may be needed to comply with these standards as a condition to maintaining a hotel’s brand identity.
- branding arrangements – whether the purchaser wishes to keep or change the current brand, and under what conditions such branding may occur
Cooperation by hotel manager
If a management agreement is in place, it is essential that the manager cooperates with both parties in the due diligence and closing phases of the deal. However, obtaining the manager’s cooperation may be easier said than done, especially if the hotel management agreement is being terminated and the manager is being replaced by another hotel brand.
Seller covenants particular to hotel transactions
Hotel purchasers often negotiate specific seller covenants related to hotel operations, which may include:
- operation of hotel during contract period
- consumables, supplies and inventories necessary for hotel operations and maintenance
- valuable or unique personal property – for example artwork or other unique items of significant value
In addition to the usual array of purchase/sale documents, hotel acquisitions usually involve certain additional deliveries such as:
- assignment and assumption agreement(s) that address reservations/deposits/bookings, receivables/payables, leases/service contracts, labor/employment agreements, various intangibles, and/or hotel management agreement
- termination of hotel management agreement
- new hotel management agreement and/or hotel franchise agreement
- keys or combinations to the safe deposit boxes in the hotel and all receipts and agreements relating to these
- letters to guests at the hotel, informing them of the change of ownership (and, if applicable, the change of hotel brand)
- estoppels under major tenant leases or other material contracts
- audits or inventories of items in hotel safe deposit boxes, checked baggage and valet parked vehicles as of the closing time
The purchase and sale agreement typically contains detailed provisions related to the following:
- closing time – the purchase and sale agreement should specify a closing time for purposes of prorations
- prorations – the number and type of prorations are more varied for hotel transactions, and a post-closing reconciliation is necessary with respect to items that cannot be definitely determined as of the closing time
Other hotel-specific issues that should be taken into account, particularly if hotel management is changing, include the following:
- accounting process
- brand turnover issues
- notice to guests
- audit of safe deposit boxes
- inventory of checked baggage
- verification of valet parked cars
- transfer or replacement of licenses and permits
- casino turnover issues
For more information about hotel acquisitions and dispositions and how our hotel sector team at Eversheds Sutherland can support you, please contact Ellen Smith or Susan Samuel.