Buying and selling hotels is, in many ways, similar to buying and selling other types of commercial real estate, such as office buildings, shopping centers, or other mixed-use properties. However, potential purchasers and sellers of hotels must understand the key differences and unique issues that arise in a hotel sale or acquisition.
This Note discusses:
- The distinct issues associated with hotels as operating businesses.
- Important considerations when transferring or terminating franchise agreements or branded hotel management agreements.
- Key provisions in hotel purchase and sale agreements (PSAs).
- Unique due diligence considerations in hotel sales and acquisitions.
Hotels as an Operating Business
A hotel is more than just real estate and improvements. It is an operating business with many moving parts that change daily, including:
- Employees (running everything from guest check-in and checkout to housekeeping).
- Food and beverage operations.
- Inventory turnover.
- Guest baggage.
Unlike many commercial real estate contracts, a hotel PSA must include mechanisms to address these operational concerns.
Another key distinction in the purchase and sale of hotels is that hotels may be either “branded” or “unbranded.” Unlike an office building or mixed-use property, the brand name or “flag” of a hotel adds significant value to the hotel. Where there is a brand associated with the hotel, the brand name is licensed to the hotel owner by a franchise agreement or licensing agreement.
The parties must agree at the outset whether the hotel is being sold either:
- Encumbered by a franchise agreement or branded management agreement (to be assumed by the purchaser at closing).
- Unencumbered by a franchise agreement or branded management agreement (the existing management agreement or franchise agreement is terminated at closing).
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