Everyone seems to have something to say about lawyers, even their own. That’s nothing new. Some like to quote William Shakespeare’s idea that killing all the lawyers was a good place to start improving the world.

Maybe the problem is that clients need some help in using their lawyers in an efficient way so that the lawyers can add value to a transaction. If we were to ask Benjamin Franklin about lawyers, he might suggest that legal services work best and cost least in preventing problems, rather than fixing them. No place is this truer than in hotel transactions, whether involving a flagged five-star resort or franchised limited service, or economy sector airport property. So how can clients better use the skills of their lawyers, and the lawyers better serve their clients and add real value to the deal? Some answers are provided in this article.

Plan Ahead

Like most lawyers, I am zealous about details and meticulous about operational matters. My master initial due-diligence checklist exceeds 12 pages. Then I follow that with a master key- issues list. Everything might not get fixed right away, but at least everything is considered. But if you are buying, selling or financing a hotel or resort property in the current marketplace, this is what it takes to get your deal done right and accomplish your objective of finishing the “good deal.” Even if the asset is smaller, economy sector or limited service, the same holds true. Kirby Payne, the treasurer of the American Hotel & Motel Association, recently wrote in Lodging Real Estate (June/July 2000), that using an attorney to draft the purchase agreement is a mechanism to “control the details of the terms.” And not just any attorney mind you, but one who knows commercial real estate and hotel transactions. Part of the message here is that there is no such thing as a “simple” deal anymore. Think of it this way, there was once a time when, with some modest skill, you could change your car’s oil yourself and pretty much do a basic service of your car in your driveway. Cars are more sophisticated now. First you need the right diagnostic tools, then the computer analysis, and then hundreds of thousands of dollars of equipment to effect the repairs. Same thing for hotel transactions. There are more moving parts now. Each part is far more complicated and sophisticated than in even recent memory, and if you get it wrong, well, it can cost you. Big. For example, let’s say you are the buyer of a hotel, even a small hotel, that has a restaurant/tavern. While giving your attention to the lender’s requirements, you miss the detail of the liquor license. On opening day for your new management team, you cannot legally serve alcoholic beverages. Not a good start.

How about a better start. Roland Leiser suggested in a recent article in H&MM Lodging Investment Update, that buying or selling a hotel requires a “healthy dose of realism.” Some of his “tips” include solid due diligence and allowing time to close the financing. Part of that solid due diligence is working through that master, initial due diligence checklist. Part of allowing time to close the financing is knowing exactly what needs to be accomplished, when and by whom. In the transactional world today, timing is everything. The timing for long-lead items change from deal to deal and jurisdiction to jurisdiction. Mr. Leiser’s tip is right on target, but making the advice work requires early attention to detail and constant vigilance during the life of the deal.

How Much Harder Can it Get?

Pick up any one or more of the trade journals we all read and watch the trends of the stories. Lately, much has been written along the following lines. On the one hand, the industry remains an attractive investment vehicle, and even some softness in the market has not altered interest in the industry as a good, solid investment. On the other hand, those who have traditionally financed the industry have become increasingly cautious and “downbeat” about hotel lending. Lenders want the right asset, in the right market and with the right flag. Each of those elements is an essential component of the underwriting formula, and each had better check out. So now that “doing your homework” piece and attention to detail has a further edge to it. Can the lawyer help here? If he or she has their eye on the ball, sure! If he or she can anticipate certain needs and potential landmines, so much the better.

What Other Ideas Do You Have?

Space in this article is limited, but some key “dos” and “don’ts” are as follows:

Sellers

  • Develop a purchase and sale agreement to fit your strategic goals for your sale. Know in advance what you absolutely must have and with what you can negotiate.

  • Put the title and survey in order and give it to the buyer as part of the purchase and sale agreement. This allows you to control the timing of two long lead items and in the process you can identify and correct any matters that either were missed when the asset was acquired or have arisen during the period of your ownership.

  • Review the assignability of mortgages, franchise agreements and management agreements.

  • Prepare a due diligence book to give to a buyer that includes information about FF&E and personal property inventories.

Buyers

  • Engage counsel early and get a jump on your key issues, especially operational issues on which the lender might focus or that might hurt you in the early transition stages.

  • Even if you have made up your mind about the entity structure and formation, look at it again. Examine any opportunities to build in flexibility for the future.

  • Know that the lender will underwrite the real estate and the flag. Make that work for you.

  • Assume that alcohol beverage and local law compliance will be worse than you think and attend to it as early as possible in the deal.

  • At the pre-letter-of-intent stage, be sure that financial, operational, and market due diligence is being managed.

Lenders

  • Don’t assume that your usual lawyer knows about hotels. Ask for and retain counsel who has substantial experience in hotel deals.

  • Read the purchase and sale agreement with an eye for what the seller needs to do for your buyer/borrower and what your borrower needs to do to close.

  • Deal with the management agreement. Get the comfort you require to step in if you need to.

The list of “hot tips” could fill many more pages. The one essential tip is to gain a better appreciation of the complexity of hotel transactions, which has only been further highlighted by the speed and intensity of the marketplace. Hotel, motel and resort properties represent some of the most interesting and dynamic sectors of the real estate and transactional business. Approaching the deals with a hospitality- focused team has never been more important. The right lawyer should be a part of that team right from the start, and the owner, developer or lender who can make that team work will benefit from significant added value and a smoother and maybe a “better” deal.

'The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.'