4 Things to Consider Before Opting for a Hotel Acquisition

By Tom Baker, Managing Principal

Due to the pandemic, developers worldwide face the same controversial decision of whether they should proceed with or abandon the development and acquisition of new hotel projects. There is no denying that these projects have an extra element of risk as a business proposition at the moment, but there is also the very real upside of a potential savings on associated costs and a likely large increase in the value of the property post-pandemic.

This is always a decision to approach with considerable thought, but even more so now. With that in mind, here are four things to consider before opting for a hotel acquisition in 2021 or 2022.

4 Important Considerations:

1. Consider Your Means of Financing

At the onset of acquisition, consider how you will fund the purchase. This would be an excellent time to set up an initial capital expenditure program to guide your expense throughout the process. Unlike many companies today, a hotel requires a great amount of capital to get off the ground and run smoothly. It’s best to take all costs into account. These include the expenses incurred on the premises itself, renovating rooms, on-site facilities, and restaurant setup. It can be expensive to set up a hotel, so it is best to look into different avenues of funding your acquisition to make the best possible financing choice.

2. Assess the Development Risk

The more complicated the type of asset, the higher the development risk and in most cases, the higher the potential payoff. Hotels are a valuable piece of real estate. Any setbacks at the start of the development can negatively affect future investments into the project. To assess how likely it is that this risk will pay off, ask the following questions of an expert you trust along with other standard questions:

  • Is the hotel located at a place where people will feel safe? Safety is even more important now than before.
  • How many people are you planning to accommodate in the space, and will your hotel space be able to do that?
  • Are nearby entertainment, conference and business facilities handling the current situation to the best of their abilities?

These variables can increase the value of the hotel property immediately, making it an important asset for the long term.

3. Develop A PIP (Property Improvement Plan) With A Professional

Having a PIP in place allows hoteliers to improve the business gradually. It’s vital to understand the actual cost of the product improvement plan and other salient points, so you have a good grasp of the timeline and potential for profitability. This is why developers factor in the cost of brand repositioning when determining a project’s viability. Rough estimates are acceptable initially, but later on, they can cause problems, so it’s best to have a professional by your side when doing the calculations.

4. Beware Of Contractual Disputes

The contractual obligations that are currently straining the hospitality industry can lead to contractual disputes as payments could get delayed, or transactions could be discarded. This one reason why due diligence is critical before signing the deal. It would be best to appoint an experienced team of lawyers, financial advisers, and property surveyors to study the paperwork or have someone you trust do that for you. Worrisome contractual disputes can be hidden on a financial statement, sandwiched in the accounts receivables instead of recorded as lost income. By investing in research, you’ll avoid problems along the way and get on with the excitement of a new hotel project as quickly as possible.

The AHA Takeaway

With restrictions easing and the vaccine rolling out efficiently in many parts of the world, people have eagerly begun to plan travel again. This is just one of many reasons investing in a hotel acquisition could pay off now when done properly. Take these four points to heart and you’ll be well on your way to a thoroughly researched decision you’ll feel great about.

Let’s talk. Use the quick form below and I’ll personally reach out to you.

– Tom Baker, Managing Principal

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