An overview of key revenue-related provisions in hotel purchase and sale agreements
When entering into the decision to purchase or sell a hotel property, principals are likely to spend a lot of time focused on the provisions in the purchase and sale agreement (PSA) stage that deal with the transfer of the real estate. Still, one needs to remember that the PSA also covers the sale of the hotel business operated on the real property and there are numerous revenue-related provisions in that portion of the PSA that also should receive a principal’s time and attention.
1. DUE DILIGENCE
The first key section where revenue-related provisions will come up in the PSA is in the list of due diligence materials a seller is obligated to provide and what representations the seller will provide as to those materials. Purchasers likely want sellers to provide detailed historical financial information on the performance of the hotel, lists of top accounts, and copies of any leases that produce recurring revenue for the hotel. If that type of information is provided, the parties should then address whether it is being provided on an “as-is” basis or if the seller represents as to its accuracy. Further, if leases that provide recurring revenue are being purchased under a PSA, the PSA should address whether or not the seller is required to provide a current estoppel certificate from the tenant under the applicable lease. All these issues are open for negotiation between the parties, and the final resolution can depend on whether the asset is being sold at a discount or a market price.
2. REVENUE AND EXPENSE PRORATION
The next area in the PSA where revenue-related provisions will come into play are the provisions addressing proration and adjustments of the various revenues and expenses generated by the hotel. This will include addressing how the revenue from the evening before closing (the “guest ledger”) will be divided between the parties, when the purchaser is responsible to take on liability for the employees of the hotel, and how the taxes and other operating expenses will be prorated between the parties. There also should be a clear agreed-upon period post-closing for the parties to “true up” any adjustments or prorations that had to be estimated at the actual closing. Failing to address these adjustments and prorations in a comprehensive manner in the PSA could cause unintended difficulties post-closing in transitioning the hotel business to the new owner.
In addition, a PSA should address whether the buyer will be purchasing any or all of the seller’s existing accounts receivable and, if so, at what price. If the accounts receivable are being purchased, that purchase is often limited to current “short-term” receivables, and the seller will retain the obligation to collect longer term receivables, but the scope of the purchase is open to negotiation. If the seller’s receivables are being excluded from the purchase transaction, the PSA should address the purchaser’s obligations with regard to receivable payments received at the hotel after the closing.
3. TAX PROCEDURES
One final revenue-related provision the parties should consider addressing in the PSA is whether the seller will be required to comply with any state-specific bulk sales clearance or tax clearance certificate procedure. If the parties determine to forego a requirement for the seller to obtain a clearance certificate, this potential liability could be addressed by the inclusion of some type of mutually acceptable indemnification provision, which could then include a requirement for the seller to escrow funds for a period of time post-closing until any seller tax liabilities are resolved.
In summary, principals buying or selling hotel properties should be sure to spend as much time and effort on finalizing the provisions related to the sale of the hotel business as they do on the provisions related to the sale and transfer of the real property on which the hotel is located. Spending the appropriate time negotiating mutually acceptable hotel business provisions in the PSA will help ensure a smooth transition to the new owner and will minimize post-closing disputes between the parties related to the hotel’s revenues and operations.