Part 1: Hotel PSA 101
The hospitality industry continues to experience the extreme challenges presented by the ongoing global pandemic. Even as we adjust to life in the COVID era and the decrease in asset values throughout the hospitality industry, many owners are considering a sale of their hotels and many investors are eyeing an opportunity to purchase hotels at a significant discount from pre-pandemic values. In this five-part series of posts, we will review the Purchase and Sale Agreement (PSA), the legally binding contract for a hotel transaction. Negotiating and executing a PSA is the next step in the hotel sale and acquisition process after successfully negotiating a Letter of Intent (LOI) as discussed in our previous post.
As a reminder, it is crucial that during the PSA negotiation, work with your legal counsel to ensure that all sides are protected and that the PSA is perceived as fair and accurate by both Buyer and Seller.
Assuming that the Buyer and Seller have a fully executed LOI, refer to that document as the basis for the PSA. The LOI tends to stipulate which party will be generating the PSA and by what date it must be presented to the other party. If you are responsible for generating the PSA, make sure that your legal counsel has a fully executed copy of the LOI to refer to when generating the PSA based on a standard PSA template that he or she has used for other transactions. No need to start from scratch, it’ll save time and legal fees!
Before the PSA generation process gets underway, ensure that there are clear lines of communication and points of contact to facilitate the transaction on all sides. Minimizing points of contact will expedite the process. In addition to your legal counsel, designate one person to facilitate the transaction representing the Buyer and one person on the Seller side. If a broker is involved, that individual can be cc-ed on communication but should not necessarily be an intermediary between legal counsels.
Make sure that all sides are aware of and adhere to initial timelines as stipulated in the LOI. If you are responsible for generating the PSA, be sure to understand how many days from the date of LOI execution you must generate and present the first draft of the PSA. Additionally, what date is stipulated in the LOI by when the final version of the PSA should be executed? These timeframes are generally quick and while they can vary, here’s a rough guideline:
- 5 business days from LOI execution to presentation of the first draft of the PSA
- 15 business days from LOI execution to final PSA execution
As you go through the negotiation process, if you find that you’re getting stuck in a back and forth of redlined versions of the PSA, it’s best to get all parties including legal counsel in a meeting, even virtually or by phone, to nail down the outstanding points. This can generally resolve any last concerns and get the PSA finalized. Remember, the goal is to come to an agreement, not grandstand and cause the transaction to fall apart. Streamlining the negotiations will get the PSA finalized and executed so the transaction can proceed as planned.
In the next post in this series, we will get into the initial portions of the negotiations.