Trends in Hotel Transactions: An Increasingly Hospitable Environment for Hospitality Transactions

By: Richard J. Fildes and Andrew J. Orosz Lowndes, Drosdick, Doster, Kantor & Reed, P.A.

The recent announcement by Loews Hotels & Resorts of the development of a new 1,800-room resort at Universal Orlando is the latest in a series of significant hotel transactions taking place in Central Florida over the course of the past several years as hotel developers and operators have sought to take advantage of favorable financing terms, low construction costs, and a variety of pro-development initiatives during the economic recession.

These significant local projects, and similar transactions throughout the United States, serve to highlight a hospitality industry that appears to be poised for significant growth as the real estate market continues to recover.

The following trends are particularly relevant in today’s hospitality market:

Portfolio Acquisitions

The current market has given rise to an increasing number of portfolio acquisitions, as real estate investment trusts and other institutional real estate investors seek to sell several hotel properties in a consolidated transaction, often in an effort to offset an attractive property with one or several underperforming properties, and to prevent a buyer from “cherry picking” the most attractive assets comprising a portfolio.

Although portfolio transactions can result in added complexity, buyers of hotel properties can often exert a greater degree of leverage in helping institutional sellers dispose of underperforming assets.

“Boutique” Management Companies

Apart from the traditional names in the hotel management business — including Marriott, Hilton and Starwood — on the rise in today’s hospitality market are many smaller “boutique” management companies that accept a shorter management agreement term and may offer increased flexibility and creative fee structures relative to the traditional hotel management model.

Flexible Financing Terms

Lending institutions are offering hotel acquisition and development loans on more attractive terms. Buyers are also taking advantage of the opportunity to assume and/or refinance the seller’s existing financing as an alternative to new mortgage financing.

Even in situations where acquisition or development financing may not be readily available, hotel owners are nevertheless demonstrating confidence in the market by pursuing alternative sources of capital to facilitate the renovation, refurbishment and expansion of existing properties.

New Marketing Initiatives

Hotel operators will continue to differentiate their properties in an increasingly competitive market through innovative social media campaigns, creative rewards programs, concierge services and mobile booking options.

One cautionary note: increased targeted marketing raises numerous privacy issues, and hoteliers are advised to be well aware of the intricate legalities in that arena.

Traditional Issues

Apart from the key trends in today’s hospitality market, several critical issues remain relevant in hotel transactions, including the following:

Post-Closing Indemnification

Buyers need to be aware of the potential risks associated with buying a hotel property from a “special purpose entity” (SPE), whose only assets may be the property that is the subject of the transaction.

As a result, when dealing with SPEs, in particular, buyers should negotiate for either (a) a guaranty from the seller’s “parent” entity, or a related entity with verifiable assets, or (b) the escrow of a portion of the closing proceeds until the period for indemnification under the applicable purchase and sale agreement has expired.

Liquor License Issues

Liquor license laws vary significantly from state to state, and the failure to comply can result in a failed closing condition (if the liquor license cannot be obtained prior to the closing date), the revocation of an existing beverage license, potentially significant fines, and/or a lapse in beverage service to patrons of the hotel.

Buyers should engage a liquor license consultant or an attorney with experience dealing with the state and local liquor license laws as part of their transaction team.

Intellectual Property Issues

Many resort properties include a restaurant, spa, or golf club that operates under a well-known name.

Buyers need to be careful to specifically negotiate for the acquisition of these significant intellectual property rights, and to properly memorialize and register the conveyance of these rights at closing.

Employment Issues

The acquisition of an existing hotel, which often includes the negotiation of a new management agreement, presents unique employment law issues, as employees are frequently terminated by the seller and then immediately re-hired by the buyer.

Buyers must be aware of potential employment law issues and tailor the turnover of the hotel accordingly.

Compliance with The Worker Adjustment and Retraining Notification (WARN) Act should be addressed as part of the negotiation of the applicable purchase and sale agreement.

The acquisition or development of a hotel property can be a very sophisticated transaction with many complex issues.

This article is intended to provide an overview of several key trends in the hospitality industry, and should not be viewed as a comprehensive analysis. Please do not hesitate to contact us with any questions regarding the issues described above, or any other questions that you may have regarding the hospitality industry.

Our Hospitality & Leisure Group has represented buyers and sellers of a variety of sophisticated hotel properties throughout the United States. For more information on the firm’s Hospitality & Leisure Group, please visit: http://bit.ly/ZICJCr

Rich is a Partner & Co-Chair of the firm’s Hospitality & Resorts Group. In this role, he advises both public and private companies on commercial leasing, construction law, corporate and securities, franchising and licensing, hotel and resort development, real estate transactions, development and finance, and sports and entertainment law.

Andrew is a senior associate, and his practice focuses primarily on real estate transactions, development and finance.

For more information, visit our Web site at: www.lowndes-law.com

 

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