6. Ensure that your financing is in place
You will need to consider at the outset of the transaction how you are going to fund the purchase and, potentially, an initial capital expenditure programme. Will this be from existing cash resources, other investors or bank debt?
If bank debt is going to be required, you should speak to potential lenders at an early stage to find out how much they are willing to lend and what specific requirements they may have in terms of security over the hotel and/or the bank accounts. This will enable you to determine whether the deal is feasible and, if it is not, you can stop work and avoid incurring unnecessary costs. If there is an existing hotel management agreement in place, the operator may have already imposed certain loan to value criteria which would need to be complied with as well as the requirement to obtain a non-disturbance agreement.
7. Carry out proper due diligence
On any hotel deal, due diligence is of critical importance. You will need to appoint a good, experienced team of advisers which will typically include lawyers, financial advisers and property surveyors. Each adviser should conduct a thorough investigation of the part of the business that corresponds to its area of expertise. High quality due diligence should uncover material issues which can then be dealt with up front — for example, by way of contractual protections or deductions to the price (or, in extreme cases, by pulling out of the deal altogether). Bear in mind that you are acquiring more than a real estate asset. A hotel is an operating business so the due diligence process needs to be conducted accordingly.
8. Assess your management options
In most cases it is likely that a third party management company is managing the hotel already. If so, their consent will be required for completion of the deal (which includes approval of the buyer by the management company). Therefore, it is important that you discuss this with the seller with a view to agreeing how best to approach the management company and at what stage in the process to do this. Although you will not want to contact the management company at the outset, you will not want to wait until just before completion either. Most hotel management agreements are for a long duration (often up to 20+ years for luxury brands) and you will need to check if there is any ability to terminate the agreement. If there is a provision for termination upon sale it normally comes with a fairly high termination payment. If there is no incumbent management company or it is run by the current owner, you will need to consider your management options. You should engage with a third party management company at an early stage as they will need to assess the hotel for compliance with their brand standards and assess if a PIP is required. You should appoint a hotel specialist lawyer to assist you negotiate the terms of the hotel management agreement. Franchising is another option pursuant to which the owner obtains the right to use the brand and operate within the brand system (i.e. reservations systems, loyalty programmes, etc), but operates the hotel itself or with an unbranded operator.
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