As part of teams that advised on major hotel projects, such as the sale at Dubai’s Jumeirah Beach Residence of the Movenpick Hotel, Atlantis the Palm and the W Hotel Palm Jumeirah, and others involving Atlantis the Palm and the W Hotel Palm Jumeirah in the UAE, Barr Al Jissah Resort, Oman, Fraser Suites, Doha, Club Mediterranee SA, Egypt, and ZamZam Pullman Grande Suites Hotel, KSA, Patrick Tweedale, and Patrick Tweedale, and Patrick Tweedale, and Patrick Tweedale, and Patrick Tweedale, and Patrick, and Patrick Tweedale, and Patrick Tweedale, the 10 essential elements of the 10 things they need to know about when buying hotels.

Major events like Expo 2020 Dubai or the 2022 FIFA World Cup Qatar are helping to drive the growth of the Middle East’s hotel sector. There will be more hotel acquisitions during this exciting period of growth in the region. It doesn’t matter if you’re looking to expand your business or get into the hotel industry for the very first time; buying a hotel can be difficult and time-consuming. Here are 10 things to consider when purchasing a hotel.

1. Identify your acquisition criteria

You can acquire a hotel for many reasons. Some buyers may purchase a hotel as a short-term investment, to sell it quickly for a higher price. Some buyers may be more concerned about the long-term, such as the potential cash return that the hotel could generate. Each buyer will have their criteria, but the following are some examples:

1. Price and commitments to capital expenditures and working capital in the immediate and medium-term
2. The hotel owner can either operate it themselves, sign a franchise agreement, or manage the brand.
3. Potential appreciation in asset values
4. Potential upside from rebranding, considering the cost of any associated Property Improvement Plan (PIP) required by the incoming operator, etc.
5. Financial performance includes current and potential cash flow yield, revenue pro available room (RevPAR), occupancy rate, etc.
6. A hotel is a “trophy asset.”
7. Whether the hotel is Sharia-compliant includes alcohol-free and other considerations.
8. Location – A buyer might want an asset in a specific city or part of it. This is done by assessing the market set for the hotel and the likely future development of the area around the hotel.
9. Adding to an existing portfolio, whether the target hotels are a “good match” results in economies or geographic scope that the portfolio previously didn’t have.
10. Expected “hold” period (which is tied to the strategy).

Although there is no right or wrong answer, a buyer must be clear about its motivations for purchasing a hotel before it can enter the acquisition process.

2. Identify the right target

After you have established your acquisition criteria, it is time to reach out to the right people within the industry to find potential opportunities. This could be brokers, industry consultants, asset managers, or industry consultants. A site visit should be organized for assets that may meet your acquisition criteria. After that, you will need to conduct a property and marketing analysis (feasibility survey) and then you can begin developing a business plan.

3. Manage the bidding process

A lot of hotels are sold through an auction process. Although these processes can vary, you will usually need to submit an indicative bid. If that is accepted, a final offer will be made. Sometimes, it will also be necessary to include the draft sale agreement (SPA). The highest price does not guarantee success. Other factors, such as proof of funds, ability and willingness to close quickly, can significantly impact a seller’s decision. This process is resource-intensive and requires tight deadlines. It should be managed carefully.

4. The right price

The price you pay for a hotel is as important as any other acquisition. There are many different methods for valuing hotels, including EBITDA multiples and discounted cash flow analyses. You should also discuss the appropriate one with your financial advisor. Remember that price is a major factor in auctions where you might be the only bidder.

5. Choose the right structure

There are two options for buyers. The first is to purchase the company’s shares, which owns the property and other assets that make up the hotel. The second is to buy assets and property from the company. All assets, liabilities, and obligations of a company purchased shares are acquired, even those not known to the buyer. Only assets and liabilities that the buyer has agreed to acquire or assume are transferred in an asset deal. These assets and liabilities will be identified in a sale agreement. Asset purchases are generally more complicated than share transactions because each asset must be transferred, and approvals from third parties (counterparties, licensing authorities, etc.) are required. Although there are also issues with change of control in share purchases, they can be more difficult. Other structural problems arise in Dubai due to restrictions on foreign ownership and requirements by local authorities regarding which entities are allowed to own property or hold a license for a hotel. Based on their particular circumstances, offshore entities will need to consider tax implications. Your lawyers can handle all structuring issues.

6. Make sure your financing is in order

At the beginning of the transaction, you will need to decide how to finance the purchase and possibly an initial capital expenditure program. This will be from your existing cash resources, bank debt or other investors. You should talk to potential lenders early to determine how much they are willing and what security they might have over the hotel or bank accounts. You can then determine if the deal is possible, and if not, stop working and avoid unnecessary expenses. An existing hotel management agreement may have imposed loan-to-value criteria that must be followed.

7. Do your research.

Due diligence is crucial in any hotel deal. A team of experienced advisers will be needed, including lawyers, financial advisors, and property surveyors. Each adviser should do a detailed investigation of each part of the business relevant to their area of expertise. You should conduct high-quality due diligence to uncover any material issues that can be addressed upfront, such as contractual protections, deductions to price, or, in extreme situations, pulling out completely. Keep in mind that this is more than just a real estate asset. Due diligence is required for a hotel to be considered an operating business.

8. Evaluate your management options

It is most likely that a third party is managing the hotel. Their consent will be required to complete the deal. This includes the approval by the management company. You must have a conversation with the seller about this to determine how to approach the management company and when. You won’t want to wait to reach the management company, but you don’t want to until the end. You will need to verify if you have the right to terminate any hotel management agreement. A termination clause that allows for sale usually comes with a high termination fee. You will need to look at your options for management if there is no incumbent manager or the owner is still running it. A third-party management company should be contacted at an early stage. They will need to evaluate the hotel’s compliance with brand standards and determine if a PIP may be required. A hotel specialist lawyer should be appointed to help you negotiate the terms and conditions of the hotel management agreement. Franchising allows the owner to use the brand name and operate within the system (i.e., The hotel can be operated by the owner or with an unbranded operator.

9. Negotiate the price adjustment mechanism that is right for you in the SPA

Pricing will be a key negotiation point in any SPA. There are two main structures: 1) a valuation that is based on the target company at completion and then adjusted through a completion account process (Completion accounts), and 2) a target valuation that is based upon historic reference accounts. This is where the business’s economic upside and downside since that time is for the buyer’s account (Locked Box). A Completion Accounts system is the most preferred for buyers. They only have to pay for the actual balance sheet they acquire. Also, they can check the financial position and verify it when they have full control.

On the other hand, Locked Boxes have been the preferred choice of sellers because they guarantee the proceeds and do not require any post-completion adjustments or costs. It is not uncommon for sellers to insist that a Locked Box mechanism be used in an auction process. There is little to no negotiation on this issue. In such cases, you should ensure you do enough due diligence on historical reference accounts.

10. In the SPA, negotiate a solid set of warranties and indemnities

Warrants serve two purposes. Firstly, warranties complement due diligence by confirming the accuracy of the information provided to the buyer and ensuring that any issues are disclosed to the buyer before signing the SPA. Warranty apportion risks. In other words, the seller can be sued for damages for breaching the contract if they are false or inaccurate. The result is a decrease in the business’s value. Buyers will need warranties covering all key aspects of the target company, such as good title to the hotel land and accuracy of accounts. Indemnities, which provide dollar-for-dollar compensation for specific losses, should be used to address any known material risks.