Sellers Prepare for Better Offers
The hotel transaction markets are currently extremely active. While interest rates have increased, revenues and profitability are continuing to improve. Supply introductions in most market sectors are in balance with demand growth.
Newport News, VA (PRWEB) September 3, 2006 -- The hotel transaction markets are currently extremely active. While interest rates have increased, revenues and profitability are continuing to improve. Supply introductions in most market sectors are in balance with demand growth.
Notwithstanding what some would call a seller’s market, sellers need to be cognizant that buyer’s remain cautious. To capture the maximum price the marketplace will pay for your property, the seller needs to recognize that buyer uncertainty can be mitigated by properly preparing your hotel for sale. A seller’s failure to be adequately prepared to deliver buyer due diligence material, or other deal information, can produce “red flags” for buyers resulting in a discounted offer price or an elongated contracting process.
When preparing the hotel for sale, you should start with complete understanding of the financial encumbrances on your property. Begin with your loan documents. A checklist for the loan review includes: pre-payment penalties, assumption provisions, fees, and required escrows for taxes, insurance, and any other escrow requirements.
If your existing financing is a securitized loan that cannot be prepaid, you should determine the cost to defease the debt, especially if your existing loan represents a below average Loan-to-Value or prohibits any additional debt against the hotel. In many cases, it may be challenging to sell your hotel if sufficient financial leverage can’t be obtained by the buyer or if the loan documents prohibit a franchise change. A handy resource for determining an approximation of the loan defeasance is www.defeasewithease.com. If you believe a buyer may wish to assume your loan, you should contact the loan servicing agent and determine the steps and costs required. Be prepared to guide the buyer through any loan assumptions required.
Review any outstanding capital leases and operating agreements you wish a buyer to assume. Most buyers would prefer to purchase the property without capital leases in place and you should determine the payoff amounts of such leases. Existing operating agreements are usually acceptable to most buyers, however, you should determine if the vendor’s consent is required to effect an assignment to the buyer and obtain the necessary forms. Be prepared to deliver to the buyer, at or before contract execution, a complete listing of all agreements you wish the buyer to assume along with copies of the agreements.
Most owners review their title policy and survey at the time they purchase or construct the hotel and then never look at the policy again or check for liens. Obtaining a title policy update or commitment prior to marketing your hotel for sale is an essential step. A policy update will reveal any mechanics liens, such as the drywall vendor you hired four years ago and paid, but failed to obtain or file the lien release. Mechanics liens and similar encumbrances should be cleared before you commence marketing your hotel. Keep in mind that anyone can record any claim against your property for a relatively small filing fee with the county clerk and sometimes errors do occur. Ensure your title is clear of any non-routine liens.
Sellers should attempt to anticipate the buyer’s due diligence needs and collect the relevant data in advance of executing a contract. Providing a buyer the basic due diligence material, pre-contract, may assist in negotiating a shorter inspection period or perhaps limit inspection contingencies to latent defects. A checklist of materials most commonly needed are: existing title report and survey, existing environmental inspection report, detailed listing of all personal property included in the sale, the last two quality inspection reports, detailed profit and loss statements for last three years, and, depending upon type of financing sought by the buyer, tax returns for the last three years.
Providing the environmental report in advance of the contract execution can allow this contingency to be limited to material changes since the last report and provide the buyer confidence the property will be acceptable to financing sources.
To assure that both buyer and seller are in agreement on the personal property to be conveyed, a good practice is to create a detailed inventory. Some sellers attempt to use depreciation schedules to convey this information. Unfortunately, a depreciation schedule often does not provide the specific level of detail necessary to avoid confusion about the property being sold.
Detailed profit and loss statements should display easily understood income and expense categories that have been consistently used across the years. In the event you have elected to expense unusual items, an explanation of the nature of the items should accompany the financials. This will allow the buyer to produce appropriate documentation for his lender that is consistent with the historical statements. All too often financials presented to buyers display inconsistencies in the calculation of occupancy, average rate, application of payroll expenses, and application of expenses to repairs and maintenance. In some of the worst cases, the statements are presented with a blend of accrual and cash accounting. As you can imagine, these inconsistencies create questions and uncertainty. Pick a system and consistently apply it.
In the event the seller is not subject to Sarbanes-Oxley regulations, tax returns are often used by lenders and buyers to verify the property’s performance. A common problem with this method is when multiple businesses are rolled up into a single entity tax return and sellers do not wish to provide the breakout information necessary for verification purposes. One way to solve this dilemma is for the seller to obtain a letter from his tax preparation firm that the profit and loss statements provided were the basis for the tax return.
When you present your property to the marketplace it is inevitable that employees will learn the property is for sale. Sellers should consider sharing with employees that the hotel is for sale and that you intend to conduct business as you have in the past until such time as the hotel is sold. If appropriate, you may wish to create a bonus program for the employees as a retention tool and to provide a level of security to the employee during what can be an uncertain time for the employee.
If your organization contains a certain number of employees, the sale of your hotel may trigger the WARN Act. Before executing a contract, you should consult with appropriate legal counsel regarding the applicability of the WARN Act to your hotel.
The successful sale of your hotel depends upon your preparation. The seller’s objective should be to provide a buyer with the materials and disclosure the buyer needs to gain confidence in the business operation and the future of the investment. Uncertainty creates discounted offers; don’t discount yourself by failing to be prepared.
Established in 1978 The Mumford Company is proud of its heritage as a leader in the hotel real estate industry. For more information on The Mumford Company and its’ services, please visit our website at www.mumfordcompany.com or contact Jackie L. Wilder at 757-873-0962 ext 303.
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