Hotel Lawyer on buying hotels

NOW is a great time to buy a hotel (and not a bad time to sell)
For savvy investors, the time could be right
by
Guy Maisnik | Hotel Lawyer & Vice-Chair Global Hospitality Group®

• In 2011, we said "Hotel values per room are back to where they were in 1996, without adjusting for inflation, and HVS believes that hotel values have already increased more than 10% nationwide for 2010." Values have continued to increase over the past two years.

• Today, Smith Travel Research reports that RevPAR growth will continue to grow at nearly 6% per year through 2014.

• In 2011, we said "Debt financing for existing hotels is improving significantly (enhancing liquidity and value), while development and construction financing for new hotels is virtually non-existent, restraining the influx of new supply and competition for existing hotels."

• Today, debt financing is readily available for existing hotels with good cash flow in the top 25 markets, and 10-year, fixed rate debt costs about 4% or less for them.

• In 2011, we said: "Hotel industry fundamentals are improving from the worst collapse since the Great Depression, and look to get much stronger in second half of 2011 and are poised for double digit growth for the next three or four years."

• Today, although demand has rebounded robustly, rates were slower to rise, and the first years of the recovery were clearly led by the luxury and upscale segments of the market. All the experts worried that the industry would be hurt by the impact uncertainty and concerns over a succession of events -- the election, fiscal cliff, frustratingly high unemployment rates, troubles in Europe, Hurricane Sandy, and slowdown in China and India. None of these negative factors seemed to affect increasing demand for hotel rooms, and hotel fundamentals are projected to continue at a strong rate through at least 2017.

• In 2011 we talked about the significant drop in labor and materials costs since 2008, making new construction cost in certain areas feasible. According to the 2012 HVS JN+A Cost Estimating Guide, since 2009, across all markets, the cost of construction fell from 2009 to 2010.

• Today: Since 2010 construction costs generally continue to escalate. According to the HVS Hotel Development Cost Survey, in 2011 and 2012, the price of gypsum, copper pipe, and plywood exceeded inflation. At the same time, the cost for some materials, particular lumber, remains low. No doubt those material costs will also soon increase as the housing market begins to warm.

Buy early in the hotel recovery cycle! Buy right.

It is a good time to buy a hotel almost anytime you can purchase a good hotel in a good market for less than replacement cost . . . and even more so if the hotel can service debt with its present cash flow. And with the expectation of continued improvement in industry fundamentals for 5 more years, there should be some great buys possible over the next two or three years with some interesting upside to your investment.

Buying after a long down-market cycle is always safer than jumping in at the top of the bubble after a long run up. This is the easy part. The difference for the savvy hotel investor is buying a good asset at a good time in the market cycle and doing enough due diligence. (See, Due diligence tips for your next hotel acquisition.)

Happy hunting. Don't forget to do your homework, use your checklists, and get good hotel consultants and hotel lawyers to help avoid unnecessary pitfalls.

HOW TO BUY A HOTEL -- Free handbook

Until the free handbook on HOW TO BUY A HOTEL is published (expected soon), you can access all the materials on this subject at www.HotelLawyer.com. Look on the right hand side of the home page and click on "Buying & Selling a Hotel."

• Hotel Acquisition Checklist

• Due diligence tips for your next hotel acquisition

• Buying a hotel? Financing a hotel? 10 things every borrower should know. (part 1)

• Buying a hotel? Financing a hotel? 10 things every borrower should know. (part 2)

• The hotel purchase and sale agreement -- What is the value of the seller's representations and warranties to a hotel buyer?

• Can I use the EB-5 Visa Program for financing hotel acquisition and renovation?

• Seller representations and warranties in a hotel purchase agreement -- What are the big issues today?

• How to buy a hotel -- What you don't know about undocumented workers could really hurt you!

• HOW TO BUY A HOTEL Handbook: Franchise issues in hotel purchase and sale transactions

• HOW TO BUY A HOTEL Handbook: labor and employment tips

• 5 Things to remember when buying hotel notes

Guy Maisnik is a hotel lawyer with nearly three decades in commercial real estate transactions. He is a partner and Vice Chair of JMBM's Global Hospitality Group®, a member of the JMBM Chinese Investment Group™ and a partner in the JMBM's real estate department. Guy advises clients on hotel transactions, representing lenders, opportunity funds, banks, special servicers, owners, REITs and developers in hotel transactions, including senior and mezzanine financing, workout and debt restructure, strategic portfolio acquisitions, co-lender, participation and securitization arrangements, joint ventures, management agreements, buying, selling and ground leasing of hotels, complex mixed used resort development, fractional and timeshare. For troubled hotels, Guy develops and executes strategies for CMBS and whole loans, and REOs. He also assists investors with recapitalization of distressed borrowers and purchases of troubled assets. Guy has assisted major lenders in revising and structuring their hotel lending programs and documentation, including their hotel construction lending. Guy's practice is both domestic and foreign; he has advised on hotel and real estate matters throughout the United States, Canada, Mexico, South America, Middle East, Caribbean, Western and Eastern Europe, Asia and Scandinavia. For more information, please contact Guy Maisnik at 310.201.3588 or [email protected].

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from hotels. Who's your hotel lawyer?

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