Buying A Hotel Business
For many entrepreneurial men and women who have always admired great hospitality companies like Hilton and Marriott, there is nothing more exciting than buying a hotel. Hotels are a sizeable investment of time, effort, and money, but success in the hospitality business is lucrative financially and satisfying on a personal level too.
buying a hotel business
Both the Small Business Administration (SBA) and the United States Department of Agriculture (USDA) back loans which can be used for purchasing or constructing a hotel. The backing of Uncle Sam means that lenders can offer lower interest rates to prospective buyers, which can alleviate some of the financial pressure that comes with the hotel business.
SBA hotel loans can be used to purchase or construct an independent or franchised hotel at a very low interest rate with a smaller down payment than a regular commercial loan. They are difficult to acquire, however, so be ready to be patient with the process. Get in touch with a funding company that can work with you to explain all the required paperwork and smooth the process along.
There are benefits to both franchising and choosing not to buy a franchise. It will often be more expensive to buy a franchise hotel, both in the initial purchase phase and over time as you pay franchising fees. But a franchise hotel is also more likely to receive funding from lending institutions. And while independent hotels allow you to put a very personal stamp on your business, a franchise provides built-in marketing, recognition, training materials, and numerous other benefits. Are you willing to give up that control in exchange for simplicity? For many entrepreneurs this is a big decision.
Some entrepreneurs envision building their own hotel from the ground up. Others decide to invest in a pre-existing hotel and make it their own. Whichever route you choose, you have the opportunity to bring your hotel management dreams to life.
So, how much should you pay for a hotel? And how much is a hotel worth? The total cost of buying a hotel or hotel franchise is based on a number of factors. These include location, property type, size, asset value, and more. Determine with your lending partner how much you can truly afford as you search for properties and evaluate offers.
The acquisition price of a hotel is often the biggest factor when determining how much you can afford to pay. Before beginning your search, know how much capital you have available and what return on investment (ROI) you are targeting for this property.
Be sure to seek advice from professionals who understand the industry as well. Speak with an accountant, business attorney, and lending professional before committing any capital; they can help you avoid any costly mistakes.
The purchase price of the property does not always determine whether it will be profitable. You should consider other aspects of the hotel, such as if there is room to increase the daily rates and/or occupancy of the property. Be sure to look at other incentives such as state and local tax credits that can lower your net operating income.
Part of knowing how to buy a hotel is knowing what to expect in additional costs. Set aside enough capital for operating expenses and the unexpected. The purchase of a hotel is not just about purchasing the property; you must also pay for renovations, utilities, insurance, staff, and other operational costs.
Determine whether you should purchase the property yourself or with a partner. The majority of hotel transactions involve an outside partner who brings capital, management expertise, and other resources to the table.
One of the most important initiatives prior to buying a hotel will be compliance. Nothing quashes an enterprising spirit quite like opening a business and then having to shut down due to negligent preparation. This is why the first question you should have answered is whether or not the property is compliant and up to code.
That final point may be the most prohibitive factor for aspiring entrepreneurs. Franchise fees can quickly offset the initial benefits of owning a franchise, but before you discount this option, consider what these fees entitle you to. Although franchise fees are nonrefundable, the skills you will learn in marketing, management, upkeep, and so on within the context of a franchise are invaluable and can be transferred to new business opportunities down the line.
If you choose to buy a franchise hotel from an existing owner, be sure to inquire about the existing agreement. The agreement may transfer to you without a hitch, or you might need to draft a new contract. Either way, acquiring ownership can come with hidden fees that must be anticipated.
This is when you consider whether or not you want to buy in a highly-traveled area. While areas such as Las Vegas, San Francisco, and New York bring in the most tourists a year, know that high-mileage areas are already saturated with hotels and come with a more expensive up-front cost.
Finally and most importantly, you need to consider your potential customers. Although it might seem reductive, getting to know your customer base is truly the best thing you can do to promote ongoing hotel success.
There was a time when anticipating your target demo was more or less guesswork. You would have to gather anecdotal information and just hope your business adjustments resonated with your clientele. Luckily, today things are more sophisticated thanks to the Internet of Things (IoT) and artificial intelligence.
Some hotel chains are leveraging IBM analytics technology to collect transactional and customer data into a central repository. This data can then be analyzed to make decisions about room arrangements, amenities, and customer experience services. The hotel industry is just now experimenting with big data, so expect this technology to continue to influence hospitality innovation.
This is far from a comprehensive list of questions to ask before buying a hotel, but this is a good place to start. Above all else, be diligent and be discerning. When it comes to buying a hotel, doing your homework is the answer to a successful purchase.
Bruce is the U.S. and International Business Manager for Dynamis Ltd., the parent company of us.BusinessesforSale.com, one of the largest online global marketplaces for buying and selling small-to-medium-size businesses. He is focused on helping small businesses succeed and regularly writes about entrepreneurship and small business management.
Owning your own hotel is a popular way to start a new business. Every year thousands of people, ranging from the retired couple to the lifelong hospitality professional, buy guest houses, hotels or bed-and-breakfasts, with the businesses as varied as the buyers. While investing a large amount of money in a hospitality business may seem daunting, it's a straightforward process with the right planning and professional assistance.
These are tough times in the hotel business. The recession has squeezed room rates and net operating income. The credit crunch means new borrowing is available only at lower loan to value ratios near 50%, on already beaten down values. At the same time, many tens of billions of dollars of existing hotel loans are maturing or otherwise in default, leaving the owners with little ability to sell or refinance at for amounts sufficient to pay off existing debt. However, out of problems come opportunities. For many owners, the next chapter in their hotel's storied history may be Chapter 11-of the Bankruptcy Code. That may be good news for hotel buyers, because while there are pitfalls, there are also unique opportunities in the bankruptcy process for buyers of hotels to reduce costs, increase value, and even obtain unconventional financing terms not otherwise available.Some Opportunities for Buyers in BankruptcyBuying a Hotel Free of the Management Agreement. Outside bankruptcy, if buyers financially encourage an owner to breach its existing management agreement to sell the hotel to them as a replacement manager\/operator, they face litigation from the terminated manager for interference with contract. In bankruptcy, however, the debtor has the power (and perhaps even a duty) under Bankruptcy Code Section 365 to "reject" burdensome executory contracts-including management agreements--if that will increase the value of a hotel to a buyer. To some buyers (especially those who want to re-flag the hotel and come in as the manager as well as owner), a hotel may be worth many millions of dollars more if it comes without a long-term existing management agreement in place. And, unlike the case outside bankruptcy, a buyer conditioning an offer on rejection of the existing management agreement generally cannot be sued in state court for participating in the bankruptcy sale process under those terms. (Bankruptcy law can even allows rejection of collective bargaining agreements with onerous terms, although such labor agreements have a higher standard for rejection, under Bankruptcy Code Section 1113.)Buying a Hotel Free of Existing Secured Debt.Outside bankruptcy, many hotels-especially those bought or renovated in 2006-2007-often have several holders of secured debt (a senior loan, a junior loan or mezzanine debt, as well as, sometimes, mechanics liens for unpaid contractors who worked on renovations) that total much more than the value of the hotel today. In view of the negative current cash flow of many properties and other operational challenges, few senior lenders are foreclosing and seeking to resell the hotels immediately, and there are several difficulties with buying at a foreclosure sale. Those circumstances make it difficult for a prospective purchaser to reach a deal to buy the hotel.In bankruptcy, though, the owner can often sell a hotel "free and clear" of liens and other property interests under Bankruptcy Code Section 363(f), with the liens attaching instead to the proceeds of sale. That allows a buyer to get clean (unencumbered) title even while paying less than the amount of the existing secured debt. Even if there are fights among existing secured creditors over their lien priority, that doesn't have to prevent a sale in bankruptcy, because those disputes can be sorted out over the proceeds after the sale is completed. Buying a Hotel Without Paying Recording or Real Estate Transfer Taxes.Outside bankruptcy, sale of an expensive hotel can trigger substantial state and local recording or real estate transfer taxes. In San Francisco, for example, the recording\/transfer tax is 1.5% on transactions larger than $5 million. For a $100 million hotel property changing hands in San Francisco, these taxes alone are a $1.5 million transaction cost. Rates in some other cities, like New York, can be twice as high (combined state and city.)In bankruptcy, however, if a hotel is sold under the provisions of a confirmed Chapter 11 plan of reorganization, the buyer and seller avoid payable recording and real estate transfer taxes on the sale, under Bankruptcy Code Section 1146. The savings on transfer of a $100 million hotel in New York would be over $3 million. And, unlike other cost savings, which are realized over time (e.g., reduced management fees or labor expenses), this is an immediate benefit fully realized by the buyer at closing.The ultimate principals of the seller can also reap tax benefits from a sale of a hotel in bankruptcy. Under Internal Revenue Code Section 108, debt discharged in a bankruptcy does not create cancellation of debt income for the owner, which could otherwise flow through to the partners or members (in the case of an LLC), which can save millions of dollars in tax liabilities in some circumstances.Assuming Existing Debt to Buy a Hotel.Outside bankruptcy, existing debt is typically due on sale of a hotel (and often even on change in ownership), or such a transaction can result in the imposition of "default interest" at a much higher rate than the original note rate. Even in the absence of such provisions, the debt on many hotels is maturing shortly, in a market where replacement financing is unavailable on comparable terms. In bankruptcy, senior debt can be modified (subject to certain limitations) under a plan of reorganization to extend the maturity date, and potentially even modify the interest rate, as well as to allow for transfer of the property to new ownership, without triggering the due on sale clause or other negative consequences such as default interest charges. Thus, a confirmed bankruptcy plan can modify specific terms of the secured debt for the benefit of a hotel buyer using that debt to help finance the transaction. The Basics of the Bankruptcy ProcessTo understand bankruptcy asset sales, it is helpful first to get an overview of the bankruptcy process. If a hotel owner files for Chapter 11 bankruptcy relief, the automatic stay-a federal injunction under the Bankruptcy Code-halts foreclosures, lawsuits, collection actions, or attempts by third parties to obtain property of the owner in bankruptcy. The owner continues to manage its affairs, and bankruptcy law creates some breathing room to allow the owner to financially reorganize. Without court permission, the debtor is prohibited from paying pre-bankruptcy unsecured debts, and can even suspend paying secured debts for a time. Typically, the court authorizes use of revenues generated from the property to pay current operating expenses during the case. The provisions of the Bankruptcy Code also provide other tools to aid a financial restructuring: The debtor can reject burdensome contractual obligations, set aside certain pre-bankruptcy transfers that unfairly favored some creditors or investors, set aside unperfected liens, and sell assets free and clear of liens with the liens attaching to the proceeds of sale. The ultimate goal of a Chapter 11 is generally to confirm a plan of reorganization, which substitutes the obligations in the plan for the pre-bankruptcy debts. A plan divides creditors into separate classes (typically, each secured debt obligation is in a separate class, and other classes include a class of general unsecured creditors, like trade debt, and a class of relatively small claims of less than a specific dollar amount.) The bankruptcy debtor generally has a four month exclusive period to propose a plan of reorganization (a period often extended by the bankruptcy court, up to an additional 14 months). There are numerous requirements to confirm a plan of reorganization, but if it meets those requirements, a plan can do things like reinstate secured debts by curing defaults (thereby undoing the default rate which may have been triggered), extend the maturity of secured debts, and even reduce the pay rate or interest rate of those debts. The plan can pay unsecured creditors cents on the dollar over time. One of the key requirements for plan confirmation is that at least one class of impaired creditors (those whose legal rights are altered by the plan) has to vote in favor of the plan, not including the vote of the owners or other "insiders." A class votes in favor of the plan if both a majority in number of creditors, and two-thirds of dollar amounts of claims, of creditors actually voting in such class votes in favor of the plan. (Creditors who don't vote, either for or against, are simply ignored.) If there are substantial unsecured creditors in the case, the U.S. Trustee (an arm of the Justice Department overseeing the bankruptcy process) typically will appoint an unsecured creditors committee, which, among other things, will negotiate with the debtor over the terms of the plan, with the goal of being able to recommend to creditors that they vote for the plan.The Bankruptcy Code Section 363 Asset Sale ProcessEven before any plan of reorganization is proposed, a debtor can file a motion to sell, with court permission, a hotel (or other asset) under Bankruptcy Code 363. The process is different from sales outside bankruptcy in many respects. First, sales in bankruptcy are generally "as is," with very limited representations, warranties or indemnities from the seller. Second, there typically are few or no contingencies other than bankruptcy court approval for the sale. Third, the purchase agreement is typically subject to overbids, as part of a process approved in advance by the bankruptcy court.Typically, a debtor offers the hotel for sale and sets up a data room for due diligence. Potential bidders are qualified, and after several rounds of negotiation, the highest and best offer is accepted as the "stalking horse bid." The purchase agreement negotiated with that stalking horse bidder is subject to bankruptcy court approval and typically subject to higher bids, setting the floor for a final auction.As part of the process, savvy buyers frequently negotiate, as part of the agreed sale procedures approved by the bankruptcy court, a "break up" fee (if they are outbid) and minimum overbid increments (with the first increment higher than the initial bid plus the break up fee.) Break up fees are typically lower than in non-bankruptcy transactions, to prevent undue discouraging of rival bids. This varies some by bankruptcy court district, and is often heavily negotiated, but often ranges between 2% and 5% of the sale price.At the final auction (which is often overseen by the bankruptcy court) any qualified bidder under the sales procedure order can bid more for the hotel, and the stalking horse bidder can then raise its bid as well. At the conclusion of the auction, the debtor (generally in consultation with the unsecured creditors committee) selects what it believes is the highest and best offer. This is sometimes an "apples vs. oranges" comparison, because one offer, for example, may be for a higher nominal amount, but include a lower up front cash component or result in additional costs to the estate (for example, it is conditioned on the debtor rejecting a management agreement, which would increase the amount of creditor claims to be paid by the bankruptcy estate). The court ultimately determines which bid is in the best overall interests of the bankruptcy estate and enters an order approving the sale. If the court finds that the winning bidder is a buyer "in good faith," the order approving the sale is irrevocably binding under Bankruptcy Code Section 363(m), even if it is later challenged, or even reversed on appeal (unless the sale is stayed pending appeal, an extremely rare occurrence). Some Tactical and Practical Options and Issues in Bankruptcy SalesInstead of the auction process described above, the debtor could propose a plan that calls for a sale to a specific buyer. This has some potential advantages and disadvantages: First, from the buyer's perspective, it is more certain, because it sets up a sale, not just an auction. Second, if the hotel is sold through a bankruptcy plan, as discussed above, the transfer is free of transfer taxes. Third, under some circumstances, a bankruptcy plan can modify and extend the secured debt currently on the property and transfer the property with some or all of that debt still on it. That is particularly attractive during a credit squeeze, when other sources of financing are limited. One disadvantage of transferring a hotel under a bankruptcy plan (compared with the sale motion described above) is that it requires a vote of creditors and satisfaction of numerous confirmation requirements under bankruptcy law. That, in turn, means at least one class of impaired creditors must vote in favor of the plan. In order to induce unsecured creditors to vote in favor of a plan, the plan typically must provide them with some recovery (even if their debts would otherwise be wiped out in a foreclosure),