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Checking In on Hotel Transactions

January 05, 2023

By: Richard Fildes & Logan Opsahl

As Central Florida tourism continues to thrive, the hospitality industry is reaping the benefits from the influx of visitors. According to Visit Orlando, the region’s official tourism association, the Orlando market achieved an average hotel occupancy rate of 72% for the first eight months of the year 2022 alone. These strong occupancy numbers are an important consideration for potential developers and investors looking to participate in the Central Florida hotel market.

Recent noteworthy transactions are yet another indicator of the strong hotel market in Central Florida. For example, Lowndes had the pleasure of representing Orlando-based Xenia Hotels & Resorts, Inc., in its recent $27.75 million sale of the Bohemian Hotel Celebration, as well as Tishman Hotel Corporation in its $120.5 million acquisition of the Wyndham Grand Orlando Resort Bonnet Creek and its $46.5 million acquisition of the Grand Orlando Resort at Celebration. These and other significant hotel transactions and projects indicate a hotel industry continuing to prosper in a post-pandemic real estate market.

The following trends are particularly relevant in today’s hotel market:

Entitlements and Permitting Matters

Evolving hotel trends continue to encourage hotel owners and purchasers to renovate and remodel hotels to meet shifting guest preferences. In any sale or purchase of a hotel, entitlements and permitting play a significant role in both the current uses and any future improvements to the property.

A hotel owner or purchaser should engage a land use attorney or consultant with experience in land use regulations and specific design standard requirements of local jurisdictions to ensure such improvements do not run afoul to local regulations.

Business Interruption Insurance

As the hotel industry continues to improve following pandemic shutdowns, many hotel owners are considering business interruption insurance options to protect against future unforeseen threats to business operations. Business interruption insurance protects against business closure due to physical damage to the property.

Hotel owners should review and analyze their policies to identify the specific exclusions to coverage to determine insurability of losses relating to pandemic, hurricane damage and other natural disasters. It is also worth noting that insurers have begun to specifically exclude viral, bacterial and pandemic-related losses.

Financing Alternatives

In the ever-shifting landscape of the lending industry, many larger institutional lenders may require additional collateralized loan obligations which can be problematic in larger hotel transactions. However, local regional banks appear to remain active in local hotel transactions.

Additionally, the potential of continued increased interest rates may also encourage hotel owners to pursue alternative sources of capital for the renovation, construction, or expansion of existing hotel facilities.

Boutique Management Companies

For many investors, a large franchise model may not be suitable. If a contract requires entry into new franchise agreement with an existing franchisor, investors will be wise to consider the costs and implications of either assuming or terminating existing franchise agreements.

Franchise agreements with national companies have a series of requirements and policies from signage to branding that require specific performance and may include various restrictions that could affect the day-to-day operations of the hotel. These agreements are also generally more expensive to owners than agreements with boutique management companies.

Whether or not you chose to remain with the current franchise, have a boutique management company, or develop your own branded hotel, it is important to carefully review the franchise agreement.

Traditional Issues

In addition to the trends in today’s hotel real estate market, several critical issues remain relevant in hotel transactions, including the following:

  • Post-Closing Indemnification

    Buyers need to be aware of the potential risks associated with buying a hotel property from a "special purpose entity" (SPE), whose only assets may be the property that is the subject of the transaction.

    Particularly when dealing with a SPE, buyers should negotiate for either (a) a guaranty from the seller’s "parent" entity, or a related entity with verifiable assets, or (b) the escrow of a portion of the closing proceeds until the period for indemnification under the applicable purchase and sale agreement has expired.

  • Liquor License Issues

    Liquor license laws vary significantly from state to state. Failure to comply can result in a failed closing condition (the purchase and sale agreement should include obtaining a liquor license as a buyer closing condition), the revocation of an existing beverage license, potentially significant fines, and/or a lapse in beverage service to patrons of the hotel.

    Buyers should engage a liquor license consultant or an attorney with experience dealing with the state and local liquor license laws as part of their transaction team.

  • Intellectual Property Issues

    Many resort properties include a restaurant, spa, or golf club which operates under a well-known name. Buyers need to be careful to specifically negotiate for the acquisition of these significant intellectual property rights, and to properly memorialize and register the conveyance of these rights at closing.

  • Employment Matters

    The acquisition of an existing hotel often includes the negotiation of a new management agreement. This presents unique employment law issues, since employees are frequently terminated by the seller, and then immediately re-hired by the buyer.

    Buyers must be aware of potential employment law issues and tailor the turnover of the hotel accordingly. Compliance with The Worker Adjustment and Retraining Notification (WARN) Act should be addressed as part of the negotiation of the applicable purchase and sale agreement.

The acquisition or development of a hotel property can be a very sophisticated transaction with many complex issues. This article is intended to provide an overview of several key trends in the hospitality industry and should not be viewed as a comprehensive analysis.


This article is informational only. You should consult an attorney before acting or failing to act. The law may change rapidly and no warranty is given. LOWNDES DISCLAIMS ALL IMPLIED WARRANTIES AND WITHOUT LIMITATION, ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. ALL ARTICLES ARE PROVIDED AS IS AND WITH ALL FAULTS. Consult a Lowndes attorney if you wish to establish an attorney/client relationship.
Richard

With years of experience in real estate transactions, including acquisitions, dispositions, development and finance; commercial leasing; and construction law, Rich Fildes advises both public and private companies on a broad spectrum of matters in the hospitality, real estate, sports and entertainment industries.


Rich represents owners, developers, lenders, investors, and operators in hotel and resort acquisitions, sales, financings, management, operations and development, franchising and licensing. As co-chair of the firm’s Hospitality & Leisure Group, he and his team have handled more than $25 billion in client transactions involving hotels, resorts, golf and country clubs, theme parks and water parks, family entertainment centers, ski resorts and marinas throughout the U.S. and Canada.

In addition, Rich has represented the developers and operators of sports venues as well as past and current professional athletes in various business capacities.

Chambers USA (2017)* reports that Rich is recognized for his excellence in real estate acquisitions, dispositions, development and finance, most notably with respect to the hotel, sports and entertainment sectors. He is co-chair of the firm’s hospitality and leisure group.

*We make no guarantees or promises that the reader will realize the same or similar results

Logan

Logan Opsahl is an attorney in the firm’s Real Estate Department who focuses his practice on commercial real estate transactions, land use, eminent domain and local government issues. He represents developers, homebuilders, landlords, tenants and franchisees in a wide range of matters involving the acquisition, disposition, development and leasing of commercial real estate.

A third-generation Floridian, Logan is passionate about real estate development initiatives within the state, and he enjoys assisting clients navigate all aspects of real estate transactions, ranging from simple, straightforward deals to highly complex ones. He routinely handles the drafting and negotiation of purchase and sale agreements, as well as retail and office leases. He also has extensive experience counseling clients on development agreements, site plan requirements and other development matters.

A significant portion of Logan’s practice focuses on the representation of both property and business owners against condemning authorities regarding the taking of property for projects related to road widenings, highway construction, natural gas pipelines and powerlines. He has successfully represented the interests of both landlords and tenants in a variety of eminent domain matters, including the taking of commercial properties, residential properties, agricultural properties, gas stations, HOA properties and vacant land.

Prior to joining Lowndes, Logan gained broad experience in municipal law and land use matters while serving as assistant city attorney and police local advisor to the City of Ocoee, where he reviewed development applications and provided legal counsel to city staff.

Logan earned his law degree, as well as a certificate in environmental and land use law, from the University of Florida Levin College of Law. While attending law school, he was a member of Florida Blue Key and served as vice president of the Florida Moot Court Team and vice president of community service of the John Marshall Bar Association. He also served as a clerk for Justice Ricky Polston of the Supreme Court of Florida and worked in the General Counsel’s Office to Florida’s Chief Financial Officer. He holds an undergraduate degree in both economics and political science from Florida State University.

In his free time, Logan enjoys fishing, boating, surfing, hiking and just spending time in the great outdoors of Florida.

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