St. Regis Bal Harbour, a luxury high-rise hotel and condominium residences, sits majestically on the edge of the Atlantic oceanfront in the desirable county of Miami-Dade, Florida. Just two years after its grand opening, the luxury hotel—which is estimated to have cost $1 billion to develop—under the Starwood Resorts & Hotels flag was sold to a Qatar-based firm for $213 million. That firm owns more than 25 hotels in the Middle East, Africa, Europe, and North America.
Purchasing a hotel can be exceptionally attractive. And now may arguably be one of the best times in the recent past to do so. But buying a hotel is not a simple real estate transaction. Even with previous experience, the process is likely to be as unique as each property under consideration. For example, beyond the bricks and mortar, a hotel purchase requires careful due diligence—extensive research and preparation—as it involves the transfer of additional business assets such as the goodwill, inventory, stock, and perhaps most importantly, its employees. Therefore, both pros and novices alike should begin with a collation of such documentation and information well in advance. This will undoubtedly identify concerns, eliminate mistakes, get the negotiations off to a proper start, and result in a successful transaction.
Preparing to Purchase A Hotel
These steps, among others, are often key when preparing due diligence in a hotel purchase:
- Assemble a Due Diligence Team. In any hotel acquisition deal, proper due diligence cannot be stressed enough. In fact, it is the due diligence process that will often take up most of the hotel buyer’s time. Indeed, it is not unusual for due diligence questionnaires to be dozens of pages long. A good place to start is to make a list of all documents that need to be reviewed. The key is to have your due diligence team (hotel consultant, construction/engineer consultant, zoning consultant, and legal counsel) walk through what is needed in each respective area. For example, a zoning specialist is essential to review the hotel entitlements and to confirm that the hotel assets comply with all environmental and zoning laws. Accordingly, each team member should conduct a thorough investigation of that which applies to their respective area of expertise to ensure that the buyer acquires a clean, transparent and well-organized company.
- Review Statutory Books and Corporate Documents. Are the hotel’s statutory books in good order? A buyer should ensure that they are complete and up to date, including the registers of members, transfers, allotments, charges, directors, and secretaries. It is equally important to review the hotel’s bank accounts and borrowings. A buyer should no doubt also see copies of all the insurance policies. It is important to check that all relevant permits are in order to ensure that the seller has complied with all relevant statutory requirements. It should also be ensured that the hotel has current licenses for all its activities.
- Intellectual Property and Brand Issues. Intellectual property rights are always important assets of hotel companies. Does the hotel have a registered trademark? If so, the buyer should ensure the registration has not expired and that the buyer has a copy of the registration certificate. If the hotel has a website, it should be known who operates it and who owns the domain name and the rights in the web design. Do these need to be transferred to the buyer prior to its sale? A buyer should also obtain details of the computer system, including the hardware and software components. It is advisable to compile a list of all computers, servers and related hardware and software programs used by the hotel.
- Employee Matters. A buyer should thoroughly review the complete list of all employees and the employee records. Employee records should include the name, date of birth, and start date, salary, job title, and full or part-time status of each employee. A seller should be asked to provide copies of employment contracts, any staff handbooks, details of all benefits offered to employees, and of any bonus schemes and details of any pension scheme operated by the hotel. Failure to manage this process correctly could result in claims being brought against either the seller or the buyer. Careful legal advice should therefore be sought.
- Survey of the Property. The buyer should ensure that a full survey of the hotel premises is undertaken in order to ascertain, to the extent possible, its state and condition. The buyer should also investigate title to any property owned or used by the hotel. It would be helpful to draw up a schedule of properties stating whether the properties are freehold or leasehold and, if they are leasehold, details of the number of years outstanding on the lease and the name of the landlord.
- Seller Warranties and Representations. More often than not, buyers do not spend enough time focusing on seller representations and warranties which would be a mistake. The seller of the hotel will have knowledge of the assets and securing representations and warranties from the seller regarding the assets will provide the buyer with some additional information, as well as comfort that the information the buyer already has is accurate. The proper drafting of seller representations and warranties is therefore critical. Needless to say, these areas of the purchase agreement should be reviewed and drafted with great care. Having a set of properly drafted representations and warranties by experienced local counsel can significantly help flush out critical issues.
Truth be told, there are many more than the above key considerations for buying a hotel. With experienced professionals and seasoned legal counsel paying close attention to any that might be unique to the property under consideration, the likelihood of success increases exponentially. Finding professionals with the proper experience to assist in the transaction will assure the buyer that they are fully informed as to how the issues at hand will impact the hotel acquisition.