Owning a hotel can be both fun and financially rewarding. If you plan to purchase a hotel, though, you should realize that doing so is significantly different than investing in other types of business. Here are 10 things you should try to learn about hotel purchasing before you make your move.
1. Buying Into a Franchise
The most common way to own a hotel is to buy into a franchise. Depending on the brand you choose, you should expect to carefully review franchise obligations. Remember, most franchisors prefer to hold onto a significant amount of control.
2. Drafting a Management Agreement
Hotel loans typically come with stringent requirements. When you apply for financing, you may need to provide a management agreement. These agreements define management duties. They also outline scenarios when you must replace hotel managers.
3. Managing Cash
To secure a bank loan for your hotel purchase, you probably have to have a cash management plan in place. Generally, lenders require hotel owners to deposit cash directly into an account when they receive it.
4. Creating a PIP Reserve
As you probably know, franchisors want to preserve their good name. When you buy a hotel, you may need to create a property improvement plan. You may also have to reserve certain funds for property improvement. Moreover, the franchisor may require you hold these funds in trust.
5. Creating an Operational Budget
When you are thinking about hotel purchasing, you must develop an annual operational budget. This is a breakdown of how much money you intend to spend on running your hotel. You also must decide where to allocate funds.
6. Understanding Debt Limitations
So you do not overextend yourself, your lender may ask you to limit other debts.
7. Respecting Trademarks and Other Intellectual Property
If your hotel is part of a franchise, you must respect the trademark and other intellectual property of the brand. As such, you may be under tight restrictions about how you can use the company’s trademark in advertising and other media.
8. Obtaining Liquor Licenses
Since many hotels have bars, you may have to obtain a liquor license to obtain a loan.
9. Limiting Lender Responsibilities
Most lenders want to limit their legal risk. When you finalize loan documents, expect to execute an indemnification agreement.
10. Requesting Timely Responses
Time is of the essence when you buy a hotel. As such, you may need to request prompt processing of your hotel financing application.
All business are unique, but hotels are a special kind of business. To get the most out of your purchase, try to understand the ins and outs of hotel purchasing before making an offer.