Hotel Lawyer on buying hotels
Our hotel lawyers spend a big part of their time helping clients identify and vet attractive hotel acquisition targets, and then get them under contract, run a thorough (but fast) due diligence, arrange financing and execute on the purchase. Often there is a lot of follow up work in repositioning the property or cleaning up some old problems.
But one of the perennial questions we hear from people is, "Is this a good time to buy a hotel?"
A little more than 2 years ago, my partner Guy Maisnik wrote an article on this very subject. It was called "So you think you want to buy a hotel?" That article has been one of our best-read pieces on Hotel Law Blog, and similar questions keep bouncing around. So we persuaded Guy to write an update, which continuing improvements in the hotel industry forced him to rename: "NOW is a great time to buy a hotel (and not a bad time to sell)".
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®
Investors, Take Note!
In January, 2011, I wrote an article titled, "So, you think you want to buy a hotel?" In it, I noted that hotel investors who delayed investment for another year or two in search of the holy grail of the bottom of the market or the "perfect" opportunity were going to be disappointed. I couldn't help but reference my Uncle Bernie who often laments about the deals he should have closed on but didn't. To his credit, Uncle Bernie closed plenty. But as he loves saying "the disappointments experienced on missed opportunities do not make my successes feel any better." So, let's recap some salient points from that article and see how they stand up today.
A parable of real estate investing tells us this: When prices are in a free fall, the average investor believes prices will keep falling. That same investor will believe prices will continue to rise when prices are rising. So in declining market transitions, the average investor will...do ...nothing. Only in hindsight, will the average investor regret his or her indecision. Savvy investors -- the 3% who know how to make money no matter which way the market is trending -- know what the rest do not: smart investment decisions do not need to be made at the bottom or top of a market.
Savvy investors buy or sell when key market indicators tell them to do so. Moreover, savvy investors know that they cannot time the market. By waiting, they know they would miss a key opportunity, and then be left scrambling like the rest of the herd. Hotel investors who delay investment for another year or two waiting for the bottom of the market will surely kick themselves. I can hear uncle Bernie's gruff old world voice saying, "I could of had that hotel for a song compared to prices today."
Well into recovery now with 5 years of projected industry improvement
Barring unforeseen circumstances, most hotel industry experts now believe we are well past the bottom the hotel cycle and into the upward inflection. For the first time in many years, there seems to be a consensus that industry fundamentals are poised to continue their improvement, driving both profitability and values, for at least another 5 years!
Here are then-and-now perspectives from our last article on this subject:
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.
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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