Part 2: Let the Negotiations Begin
In the first part of this series, we discussed the basics of a hotel PSA. Now it’s time to get into the details. As referenced in the previous post, the LOI is the best place to start when looking at the contract terms but it’s only a guideline for the major points.
The purchase price should be the same as the price agreed to in the LOI. While this is generally the toughest part of the pre-PSA conversations, it should be straightforward when it comes to the PSA. However, it is important to detail if all funds can be released to the Seller upon the close of the transaction, if a portion of the funds need to be maintained in a separate account for a specified period of time, or if there will be an escrow hold back for a portion of time. The need for this clarity is described in detail in a subsequent post, especially as it relates to potential adjustments and prorations.
The deposit should be rather straightforward as it should have been agreed to in the LOI. However, there should be additional clauses stipulating what escrow officer will be used and how funds can be transferred. Also, there should be a clear timeline or date by which the deposit goes hard, as stipulated in the LOI, and when the deposit can be released to the Seller regardless of if the transaction goes through. Typically, the deposit goes hard at the end of the Due Diligence (DD) period but in some instances, it may be earlier or later.
Due Diligence Period
The length of the DD period should be stipulated in the LOI so there should be no surprises between Buyer and Seller. However, it is important to detail what is expected during this time. The first clause that should be agreed upon – if it wasn’t discussed in the LOI – is if there can be an extension of the DD period. For example, if the DD period was agreed to be 60 days, can there be a 30-day extension of the DD period? Can there be multiple extensions? If there is an extension, is it only the Buyer’s decision? Does the Seller need to agree to an extension? Does the extension need to be communicated in writing? And if the DD period is extended, does the deposit go hard at the end of the initial DD period? After the end of the extension of the DD period? Or at some other point? Clarity on the DD period is important as it is one of the most crucial time periods covered in the PSA.
Another important part of the DD period is determining what documents must be turned over for review from the Buyer to the Seller and by what time documents need to be turned over. DD materials are generally expected to be provided to the Seller within 5-10 business days of PSA execution. And many Buyers will have prepared an online repository in anticipation of the transaction but total clarity on what documents need to be determined should be spelled out in the PSA. Some examples of documents to be submitted for review from Buyer to Seller include:
- Historical financials
- Monthly STR reports
- Current loan agreement
- Last twelve months’ bank statements
- Current franchise agreement for branded hotels
- Transfer of ownership Property Improvement Plan (PIP) for branded hotels
- Most recent Quality Assurance reports for branded properties
- Current management agreement if the property is third-party managed
- Current team member positions and wages
- Contracts between the hotel and third-party vendors
- Parcel map with clearly designated lot lines
- Any easements that may exist
- List of major mechanical systems and any warranty terms that may still be in force
- Copies of any leases that may be in force
- Current inventory of linen and food and beverage (F&B) equipment
- Property drawings and/or blueprints
- As-builts if available
- Previous appraisals if available
- Any environmental studies if available
- Copy of occupancy certificate
- Copy of any health permits
- Copy of most recent fire inspection report
- Copy of alcohol license if applicable
- List of pending or threatened litigation
In the next post in this series, we will get into closing the transaction and specifying the actual assets involved in the transaction.