I Want to Buy a Hotel in the USA
Businesspeople coming to our office do not always surprise us with their requests regarding planned businesses. Most often, the demands are quite standard and, unfortunately, sound very general. Among the most popular desires among new American entrepreneurs is the wish to own a hotel. When asked, "What hotel can you offer?" we are unlikely to provide any specific answer.
How to Choose a Hotel Properly
This approach to choosing a business without considering its components is, to put it mildly, irresponsible and is unlikely to promise development and success. Why, you may ask? Because, more often than not, the hotels listed for sale are those that are low-income and low-yield, and most often – unprofitable. Additionally, old hotels in poor condition are actively sold, where one needs to invest huge amounts of money in renovation and reconstruction. Naturally, successful hotels interested in development, rather than sale, are not on the list of available properties. If you intend to take this seriously and spend a significant amount of money to acquire such a business, you will also need to invest time in finding the most suitable option for your situation.
The abundance of information in the media and on the internet about the sale of various hotel properties should itself raise red flags for a potential buyer, namely you. The urgency of the sale, price concessions, and generally low starting costs hint that the situation with this property is quite poor.
We take the opposite approach and try to offer our clients those hotels that have not yet been publicly listed and for which there has been no official announcement of sale. What does this approach provide? The opportunity to acquire a truly worthy business at a good price.
Main Points When Choosing a Hotel
If you have firmly decided to engage in the hotel business, do not forget to prioritize correctly when choosing a hotel, as well as emphasize the following principles:
- Type of hotel. This refers to the location – in the city or outside, in a tourist area or on the beach, a motel or a hotel. Each of these types has its own target audience, whose main characteristic is their needs and willingness to part with a specific amount of money.
- Hotel level. That is, the number of stars, which, let us remind you, is not necessarily related to the hotel's profitability.
- Investment volume. How much are you willing to invest to acquire the hotel? This factor will determine your capabilities regarding the type and level of hotel.
Why Hotels Are Sold
If you believe that you are buying a hotel in a good location, do not be misled. Carefully examine the surrounding environment, and you will be surprised to find that serious changes prompted the sale of the hotel by its previous owner: changing architecture, relocation of business centers, infrastructure redevelopment, resulting in tourist, transportation, and business flows moving to other points in the city and region. Simply put, instead of a garden or ocean view outside the window, new buildings have appeared, and the hotel is no longer on the front line with a magnificent view, but is overshadowed by larger structures. As the attractiveness and demand for the hotel among former visitors have declined, so has its price. Such changes affect even chain hotels, such as Sheraton or Hilton.
The main principle of developers is the correct choice of location for a given building. In terms of hotels, this principle is paramount, and therefore, hotels located in the right places and thus generating income are unlikely to be sold. Therefore, acquiring such a hotel is a great stroke of luck and a very successful start.
Consequently, the resale of more or less decent hotels happens without any announcements about them being for sale. The sale of such hotels is usually initiated by the buyer. Information about the sale of a hotel is confidential, especially from the hotel staff.
Where to Allocate Funds
No one is selling new hotels. No one builds hotels for sale. Finding a good location and building your own hotel is not a bad option. But it's costly and very time-consuming. Typically, it takes about 1.5 to 2 years from purchasing the land to starting construction. In larger cities, it might take 3 to 4 years...
Do not forget that even simply demolishing a building in the city center to build a hotel is a very expensive and complex task.
Let’s consider the purchase of an existing hotel. Do not think that once you invest funds in the purchase, your expenses will end there. Not at all. You need to calculate your financial resources in such a way that after the sale-purchase transaction, you have enough funds left for investments in renovation, re-equipment, rebranding, and marketing. This is essential because almost 90% of the properties being sold have numerous problems, without addressing which it is impossible to think about successful business. A single renovation can cost an amount comparable to the money spent on the purchase.
By the way, regarding renovations. It will require drafting a work plan, project, and budget where literally all details must be considered. If the cost of the work is too high, perhaps it is worth reconsidering plans and demolishing the old building, which holds no value, and constructing a new one in its place? This option is very good if the previous building stood in the right location.
Don’t forget to check with the relevant department about the status of the building: could it be a monument of history and culture? If so, there will be many more problems to address during renovation and re-equipment.
Re-equipment, meaning purchasing equipment and furniture, developing design – these are also expenses. Not every property for sale is equipped according to current standards, and simply outdated furniture is difficult to pass off as retro items without some specific work being done.
Constant maintenance of cleanliness, order, and a presentable appearance of the hotel is the golden rule of the hotel business. Therefore, keep in mind that significant amounts will be spent annually, for example, to maintain the facade of a historic building in decent condition. The older the building, the more difficult it is to maintain it.
Don’t forget about the staff. Even if they are present, funds will be needed for their training and retraining, as well as skill enhancement.
The Purchase Mechanism
Any real estate transactions should be conducted with the assistance of a lawyer, especially when purchasing such expensive properties. Naturally, the lawyer should represent you, not the seller.
The lawyer's responsibilities include not only collecting documents but also gathering information and ensuring the legality of the transaction. What does this entail? First and foremost, it involves confirming the legality of the transaction, meaning the legality of the declaration and your funds. You must explain the source of your funds for purchasing the hotel. Without proof, the transaction simply will not happen. Attempting to legalize income through "gray" schemes, as is common in the former post-Soviet space, will not work. Even if it does, there’s no guarantee that the seller will lose the money made from the sale, or that you won’t lose the hotel during the first inspection of the transaction's legality by law enforcement authorities.
Secondly, the lawyer's role is crucial in identifying hidden motives, pitfalls, and unclear situations that, when revealed and presented to the seller, may affect the price, leading to a decrease in value.
The mechanism for purchasing a hotel, like any real estate in the U.S., is as follows: you make an official offer to the seller, open a deposit account at the bank, and deposit the exact amount you intend to pay for the hotel. The funds in this account will only be available after the transaction is closed or if the transaction does not proceed.
What are technical groups and why are they necessary?
Transaction preparation involves not just the lawyers: two technical groups should also be involved. What are their tasks?
The first technical group is responsible for inspecting the building and assessing its technical condition (partitions, ceilings, roof, etc.), as well as the infrastructure and communications. According to U.S. laws, it is the seller's duty to provide a detailed description of the hotel's technical parameters, but unfortunately, not all sellers fulfill this requirement.
The second technical group checks the documentation, comparing descriptions with the actual state of affairs and making amendments according to received permits.
It is important not to underestimate the work of these assistants. Just a few examples will show their necessity.
For instance, you might purchase a hotel, and a few years later, according to a plan approved before your transaction, a major highway or railway could start being built nearby. Or, it may happen that the previous owner made unauthorized changes to the building's structure without obtaining the necessary permits. If such a fact is discovered after the sale, you will have to address these issues at your own expense.
Finally, another example involves a municipality that previously issued an order to ensure that people with disabilities can move freely around the city, including your newly purchased hotel. However, the building does not meet these requirements, and the previous owner did not address this issue for some reason. Therefore, you will have to solve this problem yourself, again at your own expense.
Hotel management
If you think that resolving all technical issues means you've completed the necessary program for the hotel's successful operation, you're mistaken. Besides having beautiful rooms and a well-thought-out, reliably operating infrastructure, you must also address the selection of management personnel. After the sale of the hotel, it’s likely that the managers responsible for the smooth operation of the hospitality business will leave. This situation is especially common when chain hotels change ownership: the brand leaves, along with loyal employees who received bonuses, premiums, and other benefits such as perks and insurance. In chain hotels, many of these people simply move to another hotel within the same chain. This is natural, as in the early stages, you will hardly be able to guarantee them the same level of income and quality of the hotel.
However, it is the management personnel who determine the “weather” in your hotel, which makes them very important. Forming a new, well-coordinated team is not easy: it can take months, during which the hotel's reputation may suffer, and such losses are very hard to recover.
Marketing
Another key component of success. Before purchasing a hotel, try to learn what marketing strategy has been adopted, who the hotel’s target audience is, how previous owners positioned their services, what the competition looks like, and all other questions that are vital for effective promotion.
Mandatory marketing activities should include developing a new website or rebranding an existing one, considering the provision of online booking and payment services, and other modern amenities. It would be great if these actions could begin even before the actual purchase of the hotel.
Currently, hotel occupancy of 70%-80% comes from online reservation systems. You will need to sign agreements with several hotel online booking systems.
If you're considering acquiring a hotel without a brand, name, or positive reputation, be prepared to invest and reconsider the sales system, as well as activities aimed at promotion and marketing through all available and suitable channels for the target audience. Even if all this was in place, it’s quite likely that a significant portion of regular guests will be lost during the resale of the hotel, and you will have to attract them back.
It would be beneficial if you could acquire a hotel that is part of a large chain. Typically, chain owners and investors are not inclined to change the name, brand, or profile, so a well-established chain, brand, or mark will remain recognizable and generate profits without losing management personnel and a stream of loyal guests. It is worth noting that while such opportunities exist, they are unlikely and quite costly.
Addressing current issues
The hotel business requires constant attention and investment, given the high level of competition. Understanding the nuances of hotel management is aided by specialists who have extensive experience in the field. Therefore, do not hesitate to delegate some management responsibilities to these professionals: it is impossible to handle everything independently, especially in the early stages.
Every hotel is an enterprise with a complex structure that includes not only the accommodation units but also infrastructure with laundry, kitchen, restaurants, bars and cafes, room service, concierge service, marketing department, accounting, and customer service department, among others. Hiring staff for all these positions, training them, and overseeing their work is not a task that can be accomplished in a day or a month, nor is it suited for a single person. Therefore, it is logical that the owner takes on the main management functions, while secondary responsibilities are distributed among the managers working in the hotel or recruited from outside.
The specialists in our company are ready to provide all possible support in conducting marketing research, attracting lawyers, assisting with the transaction, addressing immediate tasks after acquiring the hotel, liaising with the tax office and the municipality, and taking on some functions related to selecting hotel management personnel.
After reading this article, you should begin to understand why we cannot and should not provide an immediate answer to the question, “What hotel can we offer?” The answer to such a question requires extensive work, most likely by an entire team over several months.
We seek the best solutions for our clients and do not leave them on the path to success!
