Hotel Acquisition Due Diligence: Seller's Representations and Warranties, Indemnification, Timing

When purchasing a hotel, counsel must advise clients that the due diligence must include analysis of the physical assets associated with the property (i.e., the hotel structures, parking, systems, equipment, and inventories), as well as the operating business conducted at the hotel facility and the relevant markets and environment.

When developing a proposed acquisition price, the buyer must make assumptions about future market conditions and the hotel's performance within that market. A discounted cash flow on stabilized operating projections will reflect these assumptions. Thus, a preliminary business plan must reflect assumptions as to physical facilities and condition, management, affiliation, and other factors to assess the potential acquisition realistically.

In today's market, the time allotted for due diligence, deposits going non-refundable, and closing has been significantly compressed. All sophisticated buyers know they must act quickly. Counsel should assist in coordinating the due diligence team and start the process as soon as possible. Counsel should also coordinate with clients to prioritize and push critical areas of due diligence to identify and evaluate potential deal-breakers early.

Many buyers do not focus enough on seller representations and warranties--even with significant disclaimers in the purchase agreement. Diligent preparation can flush out critical physical and operational hotel issues that only a seller or its management company would understand. Even if the seller is unwilling to make a specific representation and warranty on a particular condition, focusing on the issue upfront will help frame the buyer's post-signing due diligence.

Likewise, indemnification clauses are not a haven for buyers. The language is typically inadequate to protect a buyer from additional costs avoidable with proper due diligence. Indemnification generally applies only for breaches of representations and warranties, and if the seller limits or qualifies its representations and warranties, the indemnification provision may not be triggered.

Listen as our authoritative panel discusses the legal concerns in hotel acquisition and due diligence, conducting a proper investigation, and evaluating the data to provide the buyer with more alternatives, lower costs, and negotiating power to deal with the issues.