Hotels for Sale: The Complete Guide to Buying a Hotel
November 10, 2018
Buying a hotel, the right hotel, acquired in the right way, can be an extremely rewarding investment. This includes the purchase of foreclosed hotels for sale. Assets America® arranges hotel financing for acquisition loans starting at $20 million. We understand the risks that arise when an investor does not properly prepare and execute an acquisition plan. We are pleased to provide this guide to hotel purchase, in which we explain the 10 steps required for a successful transaction and long-term profit. Read further to learn how buying a hotel can be accomplished through a professional, methodical process.
Step 1. Defining Hotel Purchase Criteria
The financial motivation for buying a hotel can involve short-term or long-term objectives. If you have a short-term perspective, you will treat the project as a fix-and-flip – buying a rundown or neglected hotel, perhaps from a list of foreclosed hotels for sale, rehabbing and possibly reflagging the property, and then selling it for a substantial gain.
If you’re interested, you may want to read our Commercial Renovation Guide.
On the other hand, you might view hotels for sale as assets that will provide you with long-term net operating income. In this case, you’ll either run the hotel yourself or you’ll hire a hotel operator to perform the work. One strategy involves buying a functioning hotel and replacing the management with a more competent group. As in the short-term case, you’ll no doubt need to rehab the property (which can involve anything from cosmetic upgrades to a full-blown hotel renovation), and you may want to reflag it as well.
Obviously, operating a hotel requires another whole set of considerations when compared to the fix-and-flip case. However, there are a number of criteria to consider that are common to both strategies.
Decision Criteria
The physical aspects of the project involve criteria relating to the property’s type, size, cost and location. Buying and fixing up a small boutique hotel is very different from acquiring a large resort, so the scale of the project and the required financing are key to property selection. The infrastructure surrounding the property must also be considered, as the ability for customers to conveniently access the hotel is vital. Zoning might also be a factor.
Location is paramount when considering the marketing criterion for the property. A marketing survey, also known as a feasibility study, is necessary to evaluate the ability of the subject property hotel to compete in the market, including the type, size and number of local competing hotels, and the demographics of the area. You’ll want to know the property’s stability and riskiness of earnings, its appreciation potential, projected cash flow yield. And, if applicable, the upside potential from reflagging the property and/or replacing current management. Finally, you need to be brutally honest about your own abilities when it comes to renovation, long-term CRE investments, and hotel management.
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Step 2. Identifying Target Hotels for Sale
Unless you already have a particular property in mind, you’ll need to spread the word that you are interested in hotels for sale that conform to specific criteria. You can contact hotel companies, industry consultants, hotel lenders, asset managers and commercial real estate brokers, like Assets America. Trade publication ads and press releases can also be used to get out the word. As you start receiving available hotel listings for sale, you’ll screen the properties to eliminate ones that do not fit your concept, thereby ensuring that you don’t waste time and effort on inappropriate properties. Unless you are an expert, you might want to hire an acquisition consultant to perform preliminary due diligence on candidate properties. A trustworthy consultant with extensive local knowledge will prove useful later on when negotiating the deal and acquiring the property.
A Word About Foreclosed Hotels for Sale
A viable source of candidate hotels for sale is the inventory of real estate owned (REO) properties owned by banks. These are foreclosed properties, including foreclosed hotels for sale, that failed to sell at auction. By sourcing REO hotels, you save the time spent at auctions competing with other investors. Banks typically want to dispose of REO properties at any reasonable price, so you may be able to drive a hard bargain. For various reasons, do not assume the selling bank will also be your lender – you may very well receive substantially better loan terms through Assets America® when considering foreclosed hotels for sale.
Step 3. Gather the Deal Team
Investors who are new to the hotel market or to the target area will want to assemble a brain trust of hotel industry experts. The team should include the following:
Appraiser
Pick one with extensive commercial experience that includes at least a few hotel properties.
Lender/Broker
You’ll want a seasoned professional organization with heavy commercial experience, like Assets America®, that can help assemble the bid package and find the best hotels loan to match your requirements.
Real Estate Broker
A good broker brings buyers and sellers together, and facilitates completion of the sale. Expect to pay a percentage of the sale price as the broker fee, though most brokerage fees are paid by the seller. In addition to financing hotels, Assets America® also brokers (sells) hotel properties!
Accountant
The accountant will ensure that funds are properly applied and that the seller has adequate reporting systems. She should also review the property’s books and records for any red flags.
Marketing Consultant
We touched upon this earlier. The consultant should prepare a study of market conditions, and work with your funding source to evaluate how the target property will perform.
Lawyer
Pick an attorney specializing in the acquisition of hotels for sale and is familiar with local legal requirements.
Architect/Engineer
The architect and engineer should review the current property as well as your renovation plans. Once again, pick experts with experience evaluating at least one hotel for sale.
Step 4. Assess Candidate Properties
After you’ve screened the universe of offerings and weeded out the non-starters, you’ll want to arrange site visits or property inspections for the remaining candidates. Before making the final decision, commission a preliminary market and property analysis, and use the information to pick the primary target or to eliminate a candidate property.
Step 5. Decide the Amount of Your Offer
To calculate a useful bid price, you’ll need to analyze the hotel’s earnings potential, even if you are only planning to flip the property rather than operating it. Flippers need to convince buyers that the property will meet required profit targets. Based on assumed future market conditions, you’ll be able to develop a discounted cash flow or stabilized operating proforma. Your bid will encompass rehab costs, hotel affiliation and management, repositioning and other factors.
Make sure the plan is realistic – unfounded optimism has torpedoed many a project. Include historical data and forward projections of average daily room volumes and rates, occupancy rates, RevPAR, yield, and expected market penetration. Your real estate agent will help you with comparable properties and the current market tenor. Don’t forget other factors, such as the hotel facilities, flagging or other identification issues, management issues, capital structure and financing costs. Combining these factors with your cash flow projections, market conditions, exit strategy and disposition price, you can formulate a bid.
Step 6. Begin Negotiations
Once you’ve submitted your offer, you can begin negotiating with the seller. If you make sufficient progress, you can issue a letter of intent or term sheet. Of course, this depends on how strongly you feel about the deal. You should prepare an investment memorandum that includes all the property particulars. With revisions, this will serve as the basis for the transition to operations.
Step 7. Nail Down Key Terms
These terms include the adjusted purchase price, financing arrangements, property condition, and any title limitations. The terms should also include stand-still or no-shop provisions, default procedures, indemnifications, checklist of items included/excluded from the purchase price, financing terms and contingencies, and prorations. You should identify all hotel assets and liabilities. It is important to verify your ability to assign, terminate or otherwise deal with an existing hotel management contract.
Step 8. Finalize Due Diligence
In this step, your acquisition team finishes its due diligence of the physical property, operations, financials, title, environmental constraints, property tax and the market environment. The results should validate your reasons to buy this hotel for sale. The estimate of potential earnings from the hotel should be as accurate as possible. This is so that you can confirm the final purchase price. A proper due diligence process minimizes the risk of unforeseen expenditures and other surprises. All financial statements should be audited. Furthermore, you should include a detailed history of capital expenditures on the hotel for the previous five years.
Step 9. Negotiate the Final Contract
The final purchase and sale contract includes all conditions and terms of the transaction. The contract typically includes, but is not limited to: purchase price, deposits or earnest money, property and business assets being sold, due diligence findings, terms of financing, title commitment, employee issues, representations, warranties, covenants, indemnifications, prorations, adjustment and all materials related to the closing of hotels for sale..
Step 10. Closing the Deal
The attorneys from both sides meet at the closing to execute the actual title transfer. Also present are the lender, title company representative, and real estate broker(s). Activities include the final accounting to allocate and prorate the property’s expenses and revenues, and a review of all physical items included in the purchase. Notes and mortgages are signed, money changes hands, and title is transferred to the buyer.
