How to Buy a Hotel in the USA

Recently, we have been receiving a great number of queries for purchase of hotels in the USA. As a rule, those queries have nothing specific. Say, I want a hotel – offer me the hotels you have.

As in any other market, low-profit hotels are most actively searching for their purchasers. Hotels bringing good income are more aimed at development than at sale, therefore searching for a suitable hotel may take months.

As a rule, if the hotels are on sales lists and on different Internet sites dealing with property sales, it means that the situation is very poor. We usually find and purchase hotels before they are officially announced for sale by the owners.

First of all, you have to decide on three issues:

1. Which type of hotel you want? That can be a city hotel in tourist area, city hotel beyond tourist area, a hotel out of town, a hotel in airport area, a hotel in active leisure resort of a certain type (skiing, for example), a motel nearby a grand highway, a hotel at an ocean coast, a hotel on the islands, a hotel in a recreation area, a hotel in an industrial area;
2. The level of the hotel (number of stars). Keep in mind that number of stars of the hotel is sparsely connected with its profitability.
3. The amount of investment you are ready to make into this business. If you have 5 million dollars and you wish to buy a 5-star hotel in a tourist area of a big city, it is impossible. As well as it is impossible to buy a collection Bugatti or Lamborghini in good condition for 5 thousand dollars…

Rarely, one is seeking to sell good new high-profit hotels. According to our experience, ¾ of hotels for sale have a variety of problems. The question is how much it will cost to overcome these problems.

The main problem due to which hotels are sold is decrepitude of the building: the building requires major repair, which often requires a close-down of the hotel for a certain period.

The second problem is hotel exterior or interior design. What was considered as stylish or simply elegant in the 70’s to 80’s can inspire different emotions at present. In other words, not any lumber is retro.

The third group of problems in selection of a hotel as an investment object is related to the fact that the situation within the limits of the city, district, block has dramatically changed since the moment of opening of the hotel – hotels of the same price category have been built nearby, the architectural landscape has changed (for example, the chosen hotel appeared in the yard of another hotel or under a new railway line, highway, etc.), the routs of tourist flow have changed, etc. Perhaps, 30 years ago the hotel offered for sale was a very good out-of-town hotel. But the city has expanded for 30 years and now it is situated in the centre of quite a poor city district, which decreases its price to a large extend.

It often happens that hotels of large networks like Sheraton and Hilton are sold particularly due to that reason. That is why they do not want to loose competitiveness as compared to hotels nearby.

Furthermore, city hotels. Nobody sells a new recently built hotel in a good place. Buying such a hotel is just a miracle. Therefore, we can talk of a rather long time working hotel. The next issue is: whether this hotel is a historical building or not. If so, the number of your problems regarding the repair and reconstruction increases by many times. If not, it makes sense to deeply consider to demolish this hotel (if it is in a good place) and to build a new and modern one in its place, or to invest a good deal of money into the repair of the hotel (sometimes reconstruction may cost as much as or even more than construction of a new one).

Purchasing an old hotel is just like purchasing a second hand car – the older it is, the more problems there are. Of course, there are cases when the age of the hotel only increases its price (as a rare automobile). But that is an exception to the rule. Besides, have you tried to drive a 50-60 year-old car? A specific entertainment, especially if you are used to driving new cars. The same happens with the hotels. Even with a very decent historical facade, maintenance of such a hotel requires permanent attention.

All the above is the elementary truth for hotel business professionals. This text is for those who do not possess serious experience in hotel business. Many of our clients want “to make their bows” and buy a small hotel as a “quiet business”. Actually, this business is not as quiet as it seems from outside. Operation of the building, staff, and capricious clients – that is far from complete list of problems which you will have to face.

Let us see into the mechanism of hotel purchasing.

Purchasing an expensive property is always done through a lawyer. At the same time you understand of course that you have to bring your lawyer, not to use the services of the lawyer kindly provided by the seller…

The lawyer, strictly speaking, prepares all the hotel purchasing documents. That is a big laborious task which may take longer than one month.

Take one important point into account – the proof of money origin legality. Even if you have billions but if you are unable to prove their legal origin, nobody will sell a hotel to you. The problem is that the USA have very strict laws against legalization of incomes gained in criminal ways (and if in Russia that is just a “grey” scheme of tax avoidance, in the US if those are undeclared incomes taxes from which were not paid, that is illegal income received through crime). And if the “money laundry” is proven, the purchaser may be deprived of the hotel and the seller of money. Mechanisms of recognition of transactions like that are very well developed in the USA. It is not worth checking.

After you make on official offer to the seller for the purchase of the hotel you have to make a deposit (equal to the purchase amount) on a special account which will be inaccessible neither to you nor to the seller until the moment the hotel is purchased or until refusal from the purchase of the hotel.

The price of the purchase may change depending on what your technical groups drag out. Now, on the technical groups.

Besides a lawyer at least 2 more technical groups are working on tap.

One group is carrying out the technical inspection of the building. Though in accordance with the law, the seller must indicate all the building faults before execution of the purchase (defects of pipelines and networks, condition of walls and floorings, etc.), but it is not a fact that the seller will indicate all that (especially those facts which can decrease the hotel price). Sometimes the hotel owner is not aware of everything, sometimes that is economically grounded forgetfulness.

The second group is dealing with documents and investigation into the compliance of the hotel to the building plans available and conformity of modifications to the permissions received.

There can be lots of pitfalls. For example, according to the general city development plan a highway will run here two years later, and you will invest money into reconstruction of the hotel… Or the present owners have introduced some unauthorized modifications of the hotel without approval of respective authorities or Mayor’s office. The first commission will force you to remake it all at your own expense. Or the urban municipality has introduced a special code for the disabled and now all the approaches to the hotel and toilets have to be specially equipped for convenient entrance of the disabled in wheelchairs. When the hotel was designed 50 years ago nobody was thinking about it. And now it is expensive and quite a problem to do it. And of course, the previous owners of the hotel either ignored that fact or were putting it off “until better times”, i.e. until you come.

One of the most important points is management. If within the course of hotel purchase the director quits taking key staff with him, with the most successful option of hotel purchase you will come across such a number of problems that you will be able to recover from it in a year or two. At the same time the usage of your hotel capacity will fall far lower than profitability level…

And one more point is marketing. It often happens that previous management were doing marketing “in old ways” and “did not notice” all the modern trends, e.g. Internet and on-line booking systems. That is, you have to take it up as soon as possible not waiting until you purchase the hotel and it stands empty for 3-4 months until you establish relations with several on-line booking systems. It is even more important to take it up as soon as possible if you are buying a hotel from a big hotel network – as you are just buying a hotel without the well-advertised brand, without marketing, without a set-up sales system.

If a hotel is sold to you (especially if it used to be included into a large hotel network), nobody will “kindly” supply clients to it. That is, when the hotel becomes your property you automatically loose 90% of the clients. It is guaranteed that your hotel will be unprofitable until you create your own system of hotel filling (your own sales system). Moreover, all the staff of big hotels are employees of a big corporation and have very serious benefits, insurances and allowances, which you will hardly be able to ensure. That is, get ready for the change of the majority of staff.

It often happens that a good big hotel included into a large network, does not belong to that network, but belongs to private proprietors and investors. That is a perfect option for you. In this case the hotel may change the proprietor but not change the network (remain under the network trademark and under the hotel network management). But this option is rather rare and, as a rule, it is a matter for very expensive hotels (100 million dollars and above).

And of course, before purchasing a hotel, we make a special marketing research for our clients, on completion of which we either recommend to purchase that hotel, or not. More often “not”, we have to admit.

Hotel business – is a serious capital-intensive business with a high level of competition and which requires serious treatment. Our company will be able to assist you in major part of the issues listed, but with sufficiently serious approach from your end as well.

Usually, within the first three months from the purchase of the hotel the new owner realizes that there will be no quiet running of the hotel until hotel operational control duties are delegated – kitchen, laundry, reception, marketing, building maintenance, every 15^th client is a troublemaker, staff hiring, book-keeping. Where is the place for peace and calm here? Therefore, the new owner most frequently reserve controlling functions with himself, calling them the strategic control and our company manages the operational control and reporting before the hotel owner, Internal Revenue Service and municipality of the city. That is the proven way for owner’s harmony between hotel management and satisfaction from life. The experience of work in hotel business makes us differentiate these two notions.