Hospitality Property Sales: Special Considerations
Hospitality Property Sales: Special Considerations
Hospitality Property Sales: Special Considerations
Hospitality Property Sales: Special Considerations
Selling a hotel or resort property is a complex process that requires careful planning and consideration. Unlike traditional property transactions, the sale of a hospitality property comes with unique challenges and considerations. In this article, we will explore the key factors to keep in mind when selling a hotel or resort, including structuring the sale, managing operational agreements, conducting due diligence, and more. By understanding these special considerations, sellers can maximize the value of their property and ensure a smooth transaction.
1. Structuring the Sale
One of the first decisions to make when selling a hotel or resort is how to structure the sale. This includes determining whether to sell the assets or shares of the property. Each option has its own implications for taxes, cash flow, and contractual obligations.
Selling the assets of the property provides greater flexibility and simplifies contractual arrangements. However, it may require additional costs for transferring assets into new entities. On the other hand, selling shares offers tax advantages and simplifies ongoing contracts and commercial arrangements. However, both sellers and buyers need to consider the potential costs and liabilities associated with share sales.
Foreign purchasers looking to acquire a hotel in Australia should also be aware of increased fees imposed by the Foreign Investment Review Board. These fees can vary based on the value of the acquisition and should be factored into the overall transaction costs.
2. Managing Operational Agreements
When selling a hotel or resort, it is crucial to consider the impact of existing operational agreements. These agreements include bookings, equipment rentals, and staff contracts that were made with the previous owners. It is essential to ensure that these agreements are passed on to the new owners and honored.
Informing key customers and staff about the sale process is important to maintain stability and minimize disruptions. Failure to address these concerns can negatively impact the price of the property and its earnings. Additionally, a stock audit should be conducted on the day of handover to accurately determine the value of the stock included in the sale.
For franchised or managed properties, there may be clauses in the agreements that restrict the transfer of rights or allow for termination in certain circumstances. Sellers should be aware of these provisions and ensure compliance during the sale process.
3. Conducting Due Diligence
Due diligence is a critical step in the sales process that involves evaluating the property’s financial, legal, and operational aspects. It is essential to provide potential buyers with detailed and organized information about the hotel or resort to facilitate a smooth transaction.
Creating a well-designed data room with restricted access to sensitive materials can streamline the due diligence process. This includes providing comprehensive documentation such as title reports, financial records, employment data, and any agreements with third-party operators. Clear guidelines for submitting questions and expected response times can also expedite the due diligence process.
4. Negotiating Warranties
Warranties are an important aspect of any sales contract. They outline the representations and guarantees made by the seller regarding the property. Negotiating warranties can be a significant point of contention in hotel transactions.
The extent and scope of warranties should be carefully considered based on the commercial aspects of the transaction and the condition of the property. While warranties provide additional protection for buyers, enforcing warranty claims can be challenging and costly. Sellers should weigh the potential risks and benefits of offering warranties and seek legal advice to ensure a fair and balanced agreement.
5. Ensuring Access Rights and Other Legal Issues
Access rights and legal issues related to hotel properties should be thoroughly reviewed and addressed during the sales process. This includes ensuring that visible access paths to the property, such as roads and pedestrian walkways, are properly owned or covered by legal rights.
Hotels often have agreements in place for sharing services and accessing neighboring properties. It is important to review these agreements and identify any potential issues or restrictions. This includes situations where fire exits or other essential services are located on third-party-owned land or where neighboring developments have rights to use hotel facilities.
Identifying and resolving these issues in advance can prevent complications during the negotiation of transaction documents. Any necessary approvals for assignment of access agreements should be secured within the overall timeline of the transaction.
6. Addressing Employee Responsibilities
Properly addressing employee responsibilities and expenses is essential when selling a hotel or resort. Staffing is a significant expense in the hospitality industry, and contractual arrangements must be carefully managed to protect both the seller and the buyer.
Adjustments may need to be made to employee benefits and liabilities during the sale process. Buyers must also consider their obligations in offering employment to transferring employees. Cash flow considerations should be taken into account, as the payment of employee entitlements is tax-deductible for the business.
Engaging with experienced consultants and legal advisors is crucial to navigate the complex minefield of employee-related issues in hospitality property sales.
7. Managing Risk and Hotel Operations
During the period between contract exchange and completion, the seller usually retains the risk of the hotel or resort. However, certain matters may require joint compliance by both the seller and the buyer. This includes addressing any statutory notices or significant capital works that may arise during this period.
Buyers are concerned with ensuring that the hotel continues to operate smoothly and maintain its standard of business and assets until completion. They may seek control over certain business decisions, such as new contracts, capital expenditures, and hiring, to align with their future plans for the property.
Clear communication and agreement on the process of seeking and finalizing approvals are essential to avoid any disputes or delays.
8. Adjustments and Timing
Adjustments play a significant role in hospitality property sales, particularly in relation to hotel business adjustments. These adjustments can be complex and vary from one transaction to another. They involve examining the financial aspects of the hotel business, such as revenue, expenses, and profitability.
Timing is crucial when calculating adjustments and ensuring their accuracy. Factors such as arrears collections, books, and other financial considerations should be carefully reviewed and addressed to avoid any discrepancies or disputes.
Engaging professionals with experience in hospitality property sales can help navigate the complexities of adjustments and ensure a fair and accurate valuation of the property.
9. Resolving Disputes
Disputes are not uncommon in hotel property sales. It is essential to have a mechanism in place to address any disagreements that may arise during the transaction. Including a dispute resolution clause in the contract can provide a structured process for resolving disputes.
One effective approach is to require parties to refer disputes to senior management before involving third-party experts or resorting to legal action. This encourages negotiation and resolution at a lower level, reducing the need for costly and time-consuming litigation.
It is important to determine whether the decision of an independent expert in resolving disputes will be final and binding or subject to appeal.
10. Engaging Experienced Consultants
Engaging consultants with expertise in hospitality property sales adds value to the transaction. These consultants, including lawyers and other professionals, can provide specialized knowledge and guidance throughout the sales process. Their experience in negotiating and concluding similar transactions can help sellers and buyers achieve their goals and maximize the value of the property.
Conclusion
Selling a hotel or resort requires careful consideration of the unique challenges and considerations associated with the hospitality industry. Structuring the sale, managing operational agreements, conducting due diligence, negotiating warranties, addressing legal issues, and managing employees are all crucial aspects of the sales process. Additionally, managing risk, making adjustments, resolving disputes, and engaging experienced consultants contribute to a successful transaction. By understanding and addressing these special considerations, sellers can navigate the complexities of hospitality property sales and achieve optimal outcomes.
