Part 3: When Is It Mine and What Am I Buying?
The first two posts in this series covered the basics of a hotel PSA and then moved onto the price and Due Diligence (DD) period. Now we move onto the specifics of when the transaction is expected to close and what is covered in the transaction.
After the DD period, there is a relatively short time frame by which the deal is expected to close. This is generally a 15-day closing period when all of the final paperwork and other legal documents are completed, e.g., depositing the final balance due towards the purchase price, getting the sale recorded, and other needs as may be stipulated in the PSA or by escrow.
Another important item is to determine the time at which the transaction closes. It is important to make note of the time because in addition to the legal transactions that must be completed, there are several hotel operations transactions that must be completed as well. For example, if the transaction does close at 12:01am, Night Audit will need to complete its processes before midnight so that the Seller receives all monies it is due (if this is the process agreed to in the PSA). This will also be a cleaner process for the Buyer as a new set of books will be started and legal responsibility transfers from Seller to Buyer. It is also important because if the Buyer is managing the hotel or employing a new third-party management company upon purchase, the Buyer needs to get its employment needs in order so there is a seamless transition for team members as well as from a guest perspective whose experience should not be impeded.
Conditions to Close
The conditions to close the transaction are specific to each deal although there are some general clauses that were likely spelled out in the LOI. These include the ability of the Seller to deliver the property free and clear and the ability of the Buyer to satisfactorily review all of the items required during the DD period.
Be sure to specify whether the Buyer or Seller is paying specific costs throughout closing as stipulated in the LOI. Among these costs are the cost of a title search, recording documents, and escrow fees. Who is responsible for expenses, utilities, and real estate taxes among other items? Will these expenses be prorated (see the subsequent post in this series for more details)? Are the parties responsible for their own attorney fees? If there is a broker as part of the transaction, who is responsible for paying the broker’s fee? It’s important that whatever was agreed to in the LOI is described in the PSA as well.
A few other items that are generally referenced include ensuring the transfer and/or securing of all necessary licenses and permits for legal operation of the property. For branded properties, this can include the transfer and/or completion of a new franchise agreement and a change of ownership Property Improvement Plan (PIP). With respect to an alcohol license or permit, this is jurisdiction specific but as this process can take time, either the Buyer will insist that the transaction closes once the alcohol license is secured or the Buyer may enter into a temporary agreement with the Seller until the alcohol license is secured.
Specification of Assets
It is important to detail everything that is included in the transaction. While the PSA is designed to govern the hotel transaction, there are many other items contained in the sale including the following:
- The hotel building itself
- Furniture, fixtures, and equipment (FF&E)
- Any vehicles that may be included such as a shuttle van, maintenance vehicle, or golf cart
A point of clarity should be made between assets that will be covered by the transaction and leased assets that may transfer through the sale to the Buyer (if allowed by specific lease assets). This may include a copy machine, time clocks, property management system (PMS), point of sale (POS) system, or sometimes even electric car chargers. Another item that may be leased is a solar system and if so, the Buyer’s satisfactory review and agreement with the terms of the solar lease should be included in the PSA.
It is also important to note what personal property the Seller may have on property and needs to be removed before the transaction is completed. This may include specific pieces of artwork, furniture, or personal files. Total clarity is the name of the game and the PSA serves as the legal contract so the Seller knows what may be kept and the Buyer knows what is being purchased.
In the next post in this series, we will get into more detail about price adjustments, responsibilities of the Buyer and Seller, and what could happen in the unfortunate event that the transaction is not completed as anticipated.