Hotels and resorts are usually sold as operational entities. As such all operational agreements made with the previous owners are passed on to new owners to be honoured. This includes, for example, new bookings, equipment hire and staff contracts. This makes the sale of a hotel different from typical property transactions, where the property is sold without such complications.
Typically, staff and customers can get nervous if they know a hotel is being sold, especially if they find out second hand, rather than from the owner themselves. As such it is very important to work out how to address the sale process with the key customers and staff. If key staff leave or bookings are not made, it will have a negative impact on the price obtained for the property, as well as on the earnings generated before the sale completes.
In addition, the hotel requires stock to function. This is usually audited on the day of handover, and a separate amount of money is paid to cover this, over and above the agreed sale price. This is not standard for property transactions but is absolutely vital to both the buyer and the seller, if the property is to continue trading as well as it should. If a fair price were not paid for the stock, then the seller would try to reduce the stock on site, which could lead to shortages and potential customer complaints. This would impact on trading for the buyer. As the income earned from the hotel remains with the seller until it is transferred this lower income would also hurt the current owner as well.
It is also worth considering the impact of sale upon a franchised or managed property. Typically, there are clauses contained in various agreements that mean the transfer of these rights is not automatic, and the sale can be halted if the wrong person looks to buy the property. Alternatively, there may be a right for the management company to terminate the management contract and claim compensation in such an event.
AGREE WHAT IS REQUIRED, FEES AND TERMS & CONDITIONS
The first step is for the owner and their agent to determine what is actually required, and then to agree fees and the terms and conditions of the instruction. It might be at this stage that it becomes apparent that a sale may not be in the best interest if the owner, or that a different approach may realise more value from the asset. It might, for example, become apparent that holding the property for a short while whilst changes are made to the business would allow the property to be sold for significantly more.
It is vital the terms of the agreement between the owner and the agent are agreed and are very clear from the outset.
The agreement may be for sole or multiple agency, it may be an off-market transaction or a full marketed campaign, and in certain circumstances certain buyers may be excluded from the process. It is important that all parties agree at the outset if the process is to be relatively trouble-free and uncomplicated.
UNDERTAKE THE INITIAL DUE DILIGENCE TO ENSURE THE PROPERTY WILL ATTRACT POTENTIAL BUYERS
The due diligence work that is essential at the beginning of the sales process will include a full inspection of the property, so that “the good, the bad and the ugly” of the property are known to the agent. Opportunities to enhance trade will be discovered, as will defects or potential future problems.
Any defects can then either be addressed, or potential solutions can be considered, so the financial impact of such problems does not result in too low an offer.
The next step is to review, including details on the title (preferably a report on title), statutory documentation (including planning records), financial records and employment data. Any licences, sub-leases or agreements with third party operators will also be reviewed for their impact on the potential profitability, as well as looking at how these agreements may appeal or deter potential purchasers from buying the property.
Any treasure hunting opportunities will be sought out and considered as to how they will best help sell the property.
AGREE THE SALES PROCESS
The disposal method and process will be agreed, whether private tender, informal or formal tender of auction.
Text in Figure:
Private Treaty
The process of sale by private treaty is the method employed by most agents. It involves preparing descriptive details of the property and quoting a definitive asking price. Details are circulated and potential buyers may view the property and either agree to buy at the asking price or submit an offer to purchase. Agreement to buy at this stage is subject to formal contracts being prepared between the vendor and the purchaser and those contracts being signed and exchanged between the two parties. If several interested parties are introduced to the seller those parties will be invited for “best & final offer” thus ensuring the vendor receives the optimum price.
Pros
- Price is determined by the market
- Can generate higher sales prices than other methods
- Most buyers are comfortable with the process
Cons
- Very reliant on a good agent
- No transparency in the transaction
AUCTION
The property is advertised for sale by Auction, rather than at a fixed price. Those interested in buying attend a competitive auction, conducted by an Auctioneer, at which the person who bids highest buys the property. The successful bidder is legally bound to purchase when the Auctioneer’s hammer falls on his bid. He pays a 10% deposit there and then and has to complete the purchase on the stated completion date – normally 4 weeks after the auction date. The buyer has to arrange finance and make any enquiries (including carrying out a survey) before he bids. It is too late afterwards. Properties sold by auction usually only when there is likely to be strong competition, negating the problems that some potential purchasers may not be able to attend the bidding process.
Pros
- Transparency of process (it can be demonstrated that the best price was achieved)
- It appeals to cash buyers
- Speeds up the sale process
- It is good for properties with serious defects, where buyers might pull out
- Where the sale price cannot be predicted this can help ensure the property is not sold too cheaply
Cons
- Potentially difficult for potential buyers to attend, so may lower the competition for the property
- Does not always generate prices comparable to private treaty
- Very dependent on the quality of the agent
INFORMAL TENDER
Sale by Informal Tender is a process where written offers will be invited (sealed bids) and a closing date for such offers published. All offers are opened at the same time. Generally, the vendor is not committed to accepting the highest or any offer. The offer is not binding and on acceptance of any offer the transaction proceeds subject to contract.
Pros
- Transparency of process (it can be demonstrated that the best price was achieved)
- Sets up a fixed timeline for completion of the process
- Good for properties with major defects
Cons
- Unusual method of disposal which can deter those unfamiliar with the requirements of the process
- Does not always generate prices comparable to private treaty
- Very dependent on the quality of the agent
FORMAL TENDER
When a property is sold by formal tender, as with an informal tender, the sale will be advertised with a deadline by which prospective purchasers must submit their bid. Each tender document from the bidders must include the full legal contract for sale and all bids have to include a bankers draft as a deposit on the contract. The bids are opened by the vendor or agent (representative). As soon as the “best bid” is selected, the bankers draft is accepted and contracts are automatically exchanged. The successful bidder is then committed to the contract and will have to complete the sale on the appointed date. If the successful bidder fails to complete the sale they will forfeit their deposit and further costs may be incurred. Generally rarely used due to its complexity.
Pros
- Transparency of process (it can be demonstrated that the best price was achieved)
- It tends to be used mostly for land disposals, where the formal use is as important as the price raised
Cons
- Does not always generate prices comparable to private treaty
- Very dependent on the quality of the agent
The specific marketing strategy and potential buyers will be discussed in detail, with a particular plan designed and followed by the parties.
One specific area that needs careful consideration is the choice of a “guide price”, which is outlined later in this chapter.
PREPARATION OF THE SUPPORTING MATERIALS
This will involve the production of any marketing collateral (including brochures and advertisements) and preparing the “data room”. A data room is typically an online area where access can be granted to specific parties so they can fully evaluate the opportunity, while still retaining a level of confidentiality for the seller. Typically, it will include legal documentation (leases, title documentation, operating agreements, statutory licences and consents, for example), financial reports (with full historic and budget management accounts), a property’s details (floor plans, surveys, report, valuations, photographs), general market information (data on the local area and local market) and employment sector (staff details and sample contracts).
MARKETING
The next stage of the sales process is to run the marketing campaign along the agreed lines, making any changes to the initial strategy as are required to help ensure the highest and best price is achieved.
Ideally the marketing campaign will generate strong interest from at least three or four parties, resulting in a bidding war, to drive the price above the initial offers received.
REVIEW OFFERS AND DETERMINING THE MOST SUITABLE BUYER
The next step is to review all offers and determine which offer is the most favourable to the seller. This may be the highest offer, the quickest, or the offer that has the least risk (unconditional offer, or an offer from a reliable source).
Certain buyers have a reputation for offering the highest bid and then at the due diligence stage reducing their bid to much lower levels. The risk of “chipping”, as it is sometimes known, can lead to certain buyers offers being excluded from the process at the outset.
COMPLETING THE TRANSFER
Typically, the seller will provide an exclusivity period (if not entering a contract race) to the purchaser, whilst they work through the financial, legal, valuation and condition due diligence. A contract race is when an agreement is made to sell a property to whichever potential buyer can exchange and complete the transaction quickest. This will involve more than one party spending significant amounts of money on due diligence and is only usually possible when a property is particularly desirable to investors, or when the seller offers to reimburse the losing parties of their costs if another party completes ahead of them.
The next stage is to exchange contracts with an agreed completion date (and deposit paid).
There will usually be a stock audit on day of hand over with additional sum paid on basis of actual stock, prior to the completion of the transfer.
HOW TO ENSURE THE HOTEL IS AS VALUABLE AS IT CAN BE?
It is important for anyone involved in the hotel business to have an understanding about the various factors that will determine how much money their hotel could sell for, as this will inform them of the optimum time to try and sell the property, or when the sale price is likely to be at its highest.
As discussed earlier in the book, three key factors come into play when assessing value. Firstly, how much profit does the hotel make? Secondly what multiple of profit is a purchaser prepared to pay for that type of hotel? Thirdly what condition is it in? Many other factors affect these key areas, but for the purposes of looking at how to get the highest price when selling your hotel or resort, it is important just to focus on the bigger picture in the first instance. Anything that positively impacts these three factors will help enhance the potential sale price.
There is one outlier here that needs to be considered. Although a hotel / resort is sold as a trading entity, if the property has a higher alternative use value (for example if it were converted to a care home for the elderly, or into private residential dwellings), then a purchaser may consider paying a higher value if they believe a change of use is actually possible and potentially profitable. It is not always easy to release this “additional value”, so rarely will the full excess value (or “hope value”) be paid over by a potential purchaser. However, if the seller has taken steps to open up the opportunity, for example, by gaining planning consent for a change of use and undertaking an independent feasibility, then the offers received are more likely to reflect this additional value.
Factors that may impact on profits include:
Potential new supply
Any new hotels could have an impact on the trading potential of a hotel, if demand for hotel rooms (and facilities) does not increase at the same pace as the new supply. In Luanda, the capital of Angola between 2010 and 2015 supply of quality bedroom accommodation went up by 120%, which had a detrimental impact on RevPAR, as demand for rooms did not increase by the same amount.
Existing supply upgrading
If all the competitive hotels are enhancing their “product” whilst the subject hotel is not, this is likely to lead to the hotel being seen as less desirable by the market, with a possible impact on the volume of room nights sold, the rate achieved, or potentially on both.
Existing supply closing down
When supply decreases, as long as demand for hotel rooms does not decrease at the same rate, it is likely that performance (across the whole market) will improve, allowing a well-placed, well managed hotel to see business increase.
Changes in local demand
If a large local business closes down, its requirement for bedroom nights, meeting facilities or restaurant bookings ceases, which can have an adverse impact on trading potential. On the converse side of the equation, if new businesses open up, or expands taking on new staff, this could well lead to enhanced business.
Changes in demand for all parts of the property
Whether looking at changes in the supply and demand equation at the health club (in terms of membership numbers or membership rates), the spa, golf course, bar or restaurant, any major changes that impact “the satisfied demand” at the property can have an impact on trading potential.
Changes in dynamics of the local demand profile
A new road or railway line linking the property’s location to potential new demand is likely to have a positive impact on the trading potential of the business. New airport links are of vital importance for the growth of hotel demand in new destinations.
Ryanair almost single handily enhanced demand to a wide range of secondary and tertiary leisure destinations by opening up cheap transportation links with potential source markets. However, changes in infrastructure that deter people from staying or lessen the need for them to stay. For example, constructing a bypass, negating the need to stay overnight at a destination will potentially have a negative impact on trading.
Changes in cost structure
A rise in energy prices will potentially have a direct impact on the profitability of a hotel. Likewise increases in staff wages and benefits could also impact directly on hotel profitability.
Changes in supply chain
If food supplies suddenly become scarce, costs can increase leading to reduced profitability. However, if new suppliers become available, potentially offering well priced local supplies that reduce the need for transportation costs, this can have a positive impact on profitability.
The multiplication factor applied to the profits is a significant factor in maximising the value realised from an asset sale. Many factors impact what the potential buyer will determine is the appropriate multiplication factor including:
Price of potential alternative investments
If the typical purchaser of a boutique hotel would alternatively consider investing in fine wines, and fine wines are currently generating 15% returns, then this will have an adverse impact on the demand for 10% returns on hotel investments. Typically, most investors have alternative investment options and if they are seen as too expensive then hotels will look desirable, whilst if they are shown to produce better returns, then hotels may appear less desirable.
Supply of similar investments
If there is a shortage of “investment product” and a large amount of competition for each investment opportunity, this will generally enhance the multiplication factor applied to a hotel investment. This “wall of money” looking for a home will compete with itself until the price becomes uneconomic. However, when there is an oversupply of “investment product”, potential investors will be able to pick and choose which investments to buy, typically leading to lower prices.
Prevailing economic climate
If confidence in the economy is strong, then investment yields tend to be stronger, reflecting that confidence. When people are concerned about the economic climate it can lead to lower prices, or just less deals overall, as more buyers decide to delay making new investments.
Prevailing investment climate
The prevailing investment climate is linked to the general economic climate but is more specific to the investment sub-set. If people fear that the hotel market has overheated, or that demand may be lower in the future it generally has an adverse impact on yields. The same is true in reverse; if people feel there will be enhanced demand in one market, for example feeling that hotels in New York are too cheap, then yields will tend to sharpen.
Amount of supply in the direct marketplace
If there is a shortage of luxury hotels in Monaco, then investors may well be prepared to pay a higher price to buy one. Conversely if it is considered that there are too many mid-market resort hotels in Mombasa, prices are likely to lower.
How well suited the property is to the specific investor’s requirements?
Specific purchasers will determine the yield that a property is worth to them depending on how well it suits their needs. An international hotel chain that is missing a hotel in a key city like Tokyo may well be prepared to pay more (whether buying the asset, offering more rent for a lease, or accepting lower management fees) to fill that gap in their inventory, for the benefit of the whole chain.
The quality of the tenure
The nature of the tenure has an impact on the value of an asset. Typically, freehold title is most valuable, with leasehold title generally lower in value (all things remaining equal) with licences or customary title less valuable still. In essence, anything that lowers the control an owner will have on the land and lowers their ability to sell the property, the lower its value.
Potential development of the property in the future
If the property has any latent value, for example the ability to develop more rooms, private residential apartments or condos, or to redevelop the whole site for a more valuable use, then this “hope value” may well factor into the price a person might be prepared to pay for the asset.
Skill and financial standing of existing operator
If the hotel or resort is being sold as an investment (i.e. subject to an operational lease or a management contract) then the perceived quality and perceived financial standing of the operator will impact on the yield investors are prepared to pay.
The nature of any operating agreement
The lower the risk to the investor, the higher yield they are usually prepared to pay for an asset. As such a fixed stream rental income where the rent is easily affordable will attract a sharper yield than a management contract where all the operational risk is passed on to the investor.
Reputation of the property
Market perception of a property, especially if it is perceived to be a trophy asset will have an impact on the yield that investors are prepared to pay for a hotel.
The condition of the asset has an impact on the price that will be paid, though slightly less directly than for the other two key factors. If a property requires capital expenditure to bring it up into optimum condition, the cost of such works are obviously an important consideration. However, a property in poor condition can also generate lower income for the owner (impacting on profits) and be less desirable to investors (impacting on the multiplication factor applied to the investment.
RESOLVING TITLE ISSUES
Reviewing the title and dealing with any issues that become apparent, whether resolving them or preparing for them during the due diligence process is an important step in enhancing the sales price.
Ideally the hotel will be freehold, with good and marketable title, with no encumbrances and restrictions at all upon the use of the property. If that is the case, then the sales price will be as high as the trading allows.
If the property is leasehold, the agreed rent will obviously have an impact on the profitability of the hotel, and restrictions on use could have profit implications (not selling alcohol for example).
However, legal issues tend to impact the multiplication factor most, with lower multiplication factors usually applied to anything that restricts value. In addition, the term of the lease has a direct impact on the value of an asset, as the value is dependent upon the term it is held for.
Therefore, if a leasehold term is nearing expiration, agreeing a new term could have an immediate positive impact on the sale price that is achieved.
If there are encumbrances and restrictions upon the title, and if these can be removed, or the impact of them lessened then this will enhance the potential sales price.
In the event issues cannot be resolved, for example a restrictive covenant forbidding the use of the property as a hotel that cannot be removed, then looking into an insurance policy might be the best way forward to mitigate the issue.
CHOICE OF MANAGEMENT
The choice of management is of vital importance to both potential earnings and to the multiplication factor applied to the investment. Having the optimum operator for a property will enhance not only the hotel or resorts revenue potential, but also how efficiently that income is converted to earnings for the investor.
Appointing an international operator to manage a hotel can have a significant impact on the returns the owner receives from the investment.
International operators can often improve performance over and above that generated by an independent hotel operator, increasing revenue production, whilst also using their size to generate cost savings thereby improving the owners return. In addition, when the hotel is finally sold it usually attracts a higher multiple of earnings if it is internationally branded (and therefore a higher price).
However, if it is “the wrong brand”, or in the “wrong structure” (a poorly conceived operating agreement for the specific property type), it could have a negative impact on operational earnings potential and the therefore capital value of the asset.
Having the correct management team in place is important for vacant possession properties as well. Having an experienced, enthusiastic team in place is of real benefit to the operation of the hotel or resort, generally generating better returns. However, such enthusiasm is usually noticed by potential buyers, to whom the property will appear more attractive, because of such enthusiasm.
The difference the choice of the management team can make to the potential sales price is much larger than would be expected. Even though hotels are usually sold with the potential to change the management structure, the actual trading and projected trading is very important to the price that potential purchasers will pay for the asset.
STAFFING
The quality of management leads straight through to the quality of the team below them. If the property has the optimum number of staff employed, an experienced team in place, and the appropriate flexibility in place, then the price paid should not be adversely impacted by staffing issues.
The amount of staff varies around the world as well as depending on the type of property. Super economy hotels have as little as 1 member of staff per 10 rooms, whilst a super deluxe safari lodge can have as many as four staff members per room. The level of service, the amount of additional facilities offered over and above basic rooms, and the quality and skill of the available labour pool all impact on staffing requirements.
Having too many staff, or indeed too few staff will impact upon trading potential, so it is important to review the staffing levels to ensure they are optimal.
Typically, the staff will be allocated to certain departments, where their training will ensure a consistent standard of service. There has been a trend towards multi-training, allowing flexibility within staffing rotas, though this does require good training and excellent staff.
TIMING OF THE SALE
Taking into account the three key factors that impact on value mentioned above, each one will potentially have an impact on the optimum time to sell. The ideal scenario is finding a time when trading is as high as it will get to (in present values), when demand for that type of asset is at its highest, and when the condition of the hotel is excellent.
Determining when profit is at its highest in present values is dependent upon knowing the market’s cycle. Just for clarity, we are talking optimum trading in present values, as if we take inflation into account, a stable hotel will continue to enhance its monetary profits each year, without actually enhancing the actual profit. If growth in profit is higher than inflation, then the trading of the hotel is not stable.
A typical new hotel takes a number of years to reach stable trading levels. A new development will typically take between three and five years to each stable trading after opening, and once trading has stabilised, that will usually be the best time for a developer to sell, if all other factors stay the same.
New supply into a market, or changes in demand (for example a new office park opening up, new airline routes, new bypass taking business away, or main customers closing down) can have a major impact in future trading, and should be factored into any timing considerations for when to sell an asset from a profits perspective.
PREPARING FOR SALE
A wise investor plans for the time to sell the hotel from the very beginning, at the development phase or even during the initial process of an operating hotel. If the investor knows what they want to do in the first instance they can ensure that it is built into their planning as long term holds have different strategies than medium term holds or early disposals.
There is one final point to mention. It is essential that all the due diligence paperwork is collated by the owner and agent, ahead of going to market. Nothing stops a very keen potential buyer having an interest in a transaction than having to wait for the paperwork to review. It is imperative to the success of a transaction to be able to follow up such interest immediately to build the momentum in the transaction, so it can be pushed through to a successful conclusion.
CHOICE OF AGENT
When disposing of the hotel, an experienced specialist hotel agent will usually be best placed to secure a quicker sale at the best possible price. The chosen agent must be competent in the specific location, with the type of property and with the type of structure being sold.
Generally, the best agents will only work on a sole agency basis, to ensure they can fully control the disposal process, thereby enhancing the chances of a successful transaction.
Sometimes it appears prudent that people appoint multiple agents. The logic behind this is that two sets of agents will approach twice as many potential purchasers, twice as quickly, making the chance of a successful sale twice as likely. However, this is rarely the case. The problem with joint agency instructions is that no single person is responsible for the whole disposal program, so certain buyers may not be contacted through accidentally being forgotten, or that the joint agents may wish to keep certain “buyers” away from the other agents, and so do not contact them.
TREASURE HUNTING
Ideally all treasure hunting opportunities will have been explored before the property is brought to market. They may already have been constructed, in which case full value should be sought for them. They may just have been developed as a concept, with drawings, planning consents, a feasibility study and development costs in place. In that case the potential buyer may pay a higher price to take into account this potential.
If the assessment of the work (costs, feasibility study design) is not carried out, and planning consent is not in place, then little value will be attributed to such potential. However, it is still worth bringing it to the attention of potential purchasers as it might be a deciding factor on whether to bid for the property.
MARKETING
It is essential that the property is marketed to the correct people. There is no point, for example, in advertising a property to international buyers when non locals cannot own property in that country. In addition, certain types of properties and structures attract certain types of buyers and it is a waste of time to contact investors who have no interest in the type of property that is being offered for sale.
There are times when it is prudent to speak informally to one or two buyers in an off-market scenario to best complete a sale. Your agent will advise on this, on a case by case basis. However, in most situations, the desire for secrecy can limit disposal options, usually reducing the potential buyer pool, and possibly even lowering the price attained at sale.
Sometimes there are advantages in placing advertisements into the press to attract potential buyers, especially when the likely buyer is an unknown quantity (for example a “lifestyle” type of property).
APPROPRIATE GUIDE PRICE
Research has been carried out that suggests that when a property is marketed with a realistic guide price it attains a higher sale price than when an inflated asking price is used instead. The skill of working out what is an appropriate guide price is a simple valuation issue.
If the property is priced too expensively it may deter potential investors from looking at it. If a property is worth €50 million, then a guide price of €70m is not suitable, in the same way that €30m is also not suitable. If the price is too much higher than the true value, then potential purchasers will feel they are wasting their time looking at the property. If someone is asking €70m, most buyers would assume that the seller would be unwilling to discount the sale price by 29%. Having too low an asking price will attract many potential purchasers, but these are likely to be attracted purely by “a bargain”, and will lose interest when the property starts to get priced appropriately.
There is also research that shows that there is such a thing as an “anchoring bias” and that presenting a low asking price sets that number as a fix in the mind of potential buyers. In this instance the higher the price the better for the seller. However, in markets where most buyers use expert valuers to carry out the due diligence this “anchoring bias” is rendered redundant.
TIMING OF THE SALE
Timing of the marketing campaign is important, and not just in terms of what impacts on the trading or yield selection applied to the hotel or resort. Timing of the campaign, in terms of the time of the year can be important. Avoiding key holiday periods is also important, as if the marketing starts when potential buyers are absent (say August for a hotel in France that would appeal to French buyers) it might lead to them either completely missing the opportunity, or assuming they were too far behind and therefore not looking at it seriously.
Sending out marketing particulars on a Friday in Dubai may not also be the best plan, as ideally you want the option to purchase to be very visible to the potential buyer, not buried under a weekend of email traffic.
When selling a seasonal hotel, it is generally best to market it whilst it is open, so that potential purchasers can visit it when it is at its best.
ENHANCING DEMAND
This is what every good agent strives to do, and what separates a good agent from a great agent. The ability to present a property to the right people in the right way, to ensure demand for that property is as high as it can possibly be.
Working out how potential buyers want to receive their opportunities, on what day they are most likely to have the time to consider opportunities (or just as importantly, when are really bad times when they have no time to review new opportunities), as well as working out who the most likely buyers for one asset are, and how to attract other potential buyers to the opportunity.
The key is to have a very experienced agent, one who knows the market (for that type of hotel or resort) very well. Using a local agent when international buyers are most likely buyers is not the best choice. The same is true in reverse, when the buyer will be a local buyer, you need an agent that can tap into that market easily.