This essay is a chapter from a book that has recently been published by the AH&MA's Educational Institute. The book is called Hotel Investing: Issues and perspectives. Jeff Wilder was asked by the AH&MA to author the section on Hotel Asset Disposition.

Hotel Asset Disposition

By Jeffrey S. Wilder

People dispose of hotels for a variety of reasons. Among the most common motives for sale are making a profit, ending a cash drain, unwinding a syndication, paying off debt, avoiding new debt, thinning out inappropriate properties from investment portfolios, avoiding intensified market competition, or simply retiring. Most institutional owners of lodging properties will confirm the 20/80 rule--20% of their investments take up 80% of their time. You can be assured that, more often than not, many of the properties in the "20% pot" are hotels. Lodging properties are management-intensive devourers of capital and time. They are usually vulnerable to intense rate and occupancy pressure from competitors and require constant cash flow monitoring and staff supervision if they are to turn a profit.

When it comes time to sell, you want to be sure that you know what you have to sell, understand how best to market it, minimally disrupt the ongoing business of the hotel, and maximize your value.

Determining What You Have for Sale

Once you decide it's time to sell, you must, naturally, objectively look at what you really own. It's often said that a hotel is not real estate but rather a business. I don't believe that--it clearly is both. A hotel's ability to mortgage or lease a site-specific fee and depreciate assets lends it the coloration of real estate. Yet, the exigencies of managing and marketing the operation going on inside just as clearly make it a business.

A hotel is a product with a bundle of rights and obligations. Two of the most important obligations that need be considered in deciding what you have to sell are the franchise and management contracts often associated with lodging operations.

Both the franchise and management contract may impart value. It is valuable to know that the franchise is issued to the hotel owner/operator, not to the hotel. Its life may end when the hotel is sold; the goodwill and benefits of the franchise terminate when title passes or the stock of the operating entity is sold. The incoming operator needs to make a fresh franchise application and meet the franchisor's current guidelines for continuation of the affiliation to be assured.

Several years ago I was asked to market an older franchised property for an insurance company. The 150-room hotel in Albany, New York, earned a net profit of around $500,000 and the owner priced it for sale at $3,500,000 (seven times the profit). Since the franchisor is constantly concerned about the quality of its chain's product, hotels need to meet certain physical requirements and standards in order for that franchisor to agree to write a new affiliation contract at the point of sale (or conclusion of the existing agreement's term). In the example at hand, the franchisor felt the property did not represent what it envisioned for the brand in the marketplace. Therefore, it offered to renew the license for a term of only five years rather than the more traditional ten-year-plus period. The franchisor required that the new purchaser completely upgrade the hotel to current franchise standards. This policy decision, which in my judgment was appropriate, required a fresh capital investment of over $1,000,000.

In other words, the ability of the hotel to continue receiving affiliation/reservation benefits and preserve its $500,000 net profit level demanded the expenditure of significant capital beyond the acquisition funds.

There was little assurance that the franchisor could give to the buyer that the affiliation would extend beyond the five-year term offered. Once the buyer understood the impact of the franchisor's decision, he reduced his purchase offer to the seller by one third--$1,000,000!

When the seller loudly objected, I remember the franchisor's representative telling me to "let the insurance company owner know that half the hotel value is in its real estate and half the value is in the franchise." While the preceding is somewhat overstated, there was significant truth in that assertion. Any franchisee that loses its affiliation and faces the day of reckoning when that reservation machine goes silent will attest to the critical importance of keeping an appropriate brand name on the building to retain overall hotel value.

Many "uneducated sellers" who initially turn a blind eye to the rights and importance of the franchisor are soon awakened from their ignorance, and the overall selling price is adjusted accordingly.

What you have to sell may be, and often is, also affected by an existing franchise contract's early-termination clause. A number of years ago, I was engaged to sell a franchised property in St. Louis, Missouri. The hotel was sold to a customer who elected to convert the property to another brand. Unfortunately for the seller, the purchase contract did not require the buyer to continue the hotel's current affiliation. This called for early termination of the franchise contract with the existing franchisee/seller. The franchisor's reaction was to simply tote up what it otherwise would have earned over the remaining life of its existing agreement and present a bill to the seller for a mid-six-figure settlement. It had the effect of reducing the overall net consideration that the seller received for his equity by about 40%!

Regarding management company contract rights, recent court cases in Maryland and elsewhere have had the effect of slamming a two-by-four over the owners' heads to wake them. If you sign a management contract, you are giving a company the right to earn substantial fee income over the term of the contract. Make sure you have a well-negotiated right to terminate. And be aware that termination fees in these agreements may be substantial as well. Since management companies are quite competitive, it is worthwhile to point out during contract negotiations that it is your equity at risk, not theirs. If they don't offer a liberal back-door clause, it is in your interest to show them the front door.

When you sign a franchise or management agreement, their benefits surely have the potential to add value to what you own--but your financial responsibility to the franchisor and/or the managing agent just as surely needs to be accounted for. You should be sure you have a way out of these contracts, at a cost that is not onerous. Naturally, the appropriate time to negotiate the "back door" is before you sign the franchise or management agreement--not when you wish to terminate it.

Finally, what you have to sell is affected by government regulations (i.e., environmental issues, conformance to the Americans with Disabilities Act, and the like), local competitive conditions, the assumability of existing financing, and liquidity in the debt and equity marketplace.

This discussion regarding the determination of what you have to sell is not meant to be all-encompassing. However, I have used examples meant to illustrate that the capitalization of current income, by itself, may be an insufficient method of arriving at the value of what you own.

Can you keep your franchise and/or management company in place? Indeed, do you want to? What are the costs associated with continued affiliation? What is the effect on business of early termination? These questions, and others, all need to be analyzed before you can get at what you truly have for sale.

Alternative Sale Methods

Let's say you've committed to sell and are now faced with the decision of how you intend to dispose of the asset. Three common alternatives are:

Hiring a Broker
The traditional, and probably most reliable, method of selling a lodging property is through the use of a qualified hotel broker. Selling hotels is a specialization that demands financial and legal expertise, franchise familiarity, market acumen, product knowledge, networking skills, negotiating talent, and writing/editing ability. The experienced hotel broker has usually faced the challenge of getting a deal offered and successfully sold hundreds of times before. It's safe to assume that the lodging broker specialist has faced almost every conceivable consideration or obstacle that a hotel transaction could present and has a variety of solutions and a perspective that helps move the transaction toward a successful conclusion. Often, brokers such as those in Hotel & Motel Brokers of America (HMBA) work together in a co-brokerage relationship in order to meet a client's needs. HMBA is a nationwide association of 50 lodging property brokerage firms that has been in existence since 1959. Whether you hire an independent broker or one associated with a specialized network such as HMBA, it is naturally important to check the broker's credentials and recent closing record before hiring him or her to sell your multimillion dollar investment.

Selling It Yourself
Sometimes, an owner feels that the best course of action is to attempt the direct sale method. Perhaps the owner knows a series of logical buyers and wishes to "save" a brokerage commission; perhaps the owner is concerned that the hotel operation will suffer if it becomes common knowledge that the property is on the market; or perhaps the owner won't agree to give any one broker the exclusive agreement that most good brokers today require.

The seller, who is usually unaccustomed to offering a hotel property for sale, must commit himself or herself to preparing a first-class property offering brochure, sourcing and screening customer prospects, and negotiating directly with buyers. Most owners do not elect this route, since they are often not as experienced as the hotel broker in marketing a lodging facility.

Auctioning
The auction approach to selling hotel property enjoyed a growth in appeal as an adjunct to more traditional hotel disposition methods beginning around 1990. Most people in the hotel industry understand the depressing impact on hotel employee morale and transient business that develops once it becomes known that a property will be auctioned. Discretion in marketing a hotel that is for sale is most important to lodging industry professionals responsible for the operation itself. Ownership instability is usually unsteadying to the business. Yet, when the Resolution Trust Corporation became responsible for liquidating an incredibly large portfolio of real estate, auctions became an important vehicle for quickly pushing property back into private hands. During the early '90s, some hotels were naturally auctioned as part of this process.

After the RTC popularized the approach, private attempts to auction hotels began. This is a way to market property sales in the hope of maximizing value and clearing inventory; auctioning is also a way of selling hard-to-market property, as well as generating commissions for the auction and brokerage houses involved. The record of success with this approach is spotty. Sometimes, properties do not get offers that hit or exceed the reserve price (also called the upset price), and the hotels are withdrawn from auction. Often, the auctioned properties are sold at moderate value levels. I suspect that this occurs for several reasons. First, there's a lot of diligence involved in buying a hotel, and most buyers seem unwilling to invest the time necessary for open competitive bidding. If one physically goes to the auction and makes a bid, it's likely to be very conservative, so as to leave a cushion for "analysis of value" error. This is in contrast to private sales of lodging properties wherein buyers are far more willing to become involved with inspection, in-depth operational analysis, consideration of alternate franchise affiliation opportunities, working capital costs, legal compliance requirements, and so forth. Since the analysis of hotel value requires such diligent review, I believe professional buyers simply are often unwilling to make the time commitment if they don't believe that a seller will engage with them in serious private negotiations.

Finding a Broker

Locating a qualified hotel broker is primarily accomplished through personal contact, recommendation, review of brokers' ads in lodging industry periodicals (such as Lodging Magazine, Hotel an& Motel Management, and others), and contact with national broker networks such as the Hotel & Motel Brokers of America. Sometimes, regional or national real estate firms that do not specialize in hotel brokerage can produce qualified customers, but these firms are not usually in the river of information available to lodging property broker specialists. Finally, active brokers may well contact hotel owners to see if they may be thinking of selling.

It is relatively easy to determine broker qualifications. Here are some questions that should be answered:

• Does the office infrastructure have systems in place to tap into extensive hotel purchaser databases?
• Does it have the templates, resources, and knowledge to create first-class property offering packages?
• How many sales (both size and type) has the broker closed recently? Where?
• What is the broker's policy on co-brokering?
• Is the broker licensed in the state where the business will be conducted?
• What costs does the broker cover (i.e., advertising, travel)?
• What do the broker's brochures look like?
• Does the broker furnish monthly written progress reports?
• Have you spoken with clients the broker has represented?
• Do you feel comfortable with the broker?

Many institutional sellers have created request-for- proposal (RFP) formats in order to get at all this information. They send these RFPs out to three to five brokers and make their selection by reviewing the completed proposals and personally meeting the brokers. Private sellers are less likely to go through this formal approach and will generally rely on a more informal and personalized method of broker selection. Yet, "liking the broker" is simply not a good enough selection method. Diligence on the part of the seller in selecting a broker is likely to be rewarded with a positive outcome and a successful closing.

The Listing Agreement

There are three types of listing agreements that are generally used:

• Listing. This format which may be oral or written simply says that if the broker brings a buyer to the seller and the deal closes, the broker will get his or her fee. It does not obligate the seller to work solely with that broker.
• Exclusive Agency. This agreement is almost always written and it obligates the seller to work through one broker for a specified period of time, traditionally six to nine months. It should be noted that the seller does have the right to sell the hotel directly to another principal, in which case no brokerage commission need be paid.
• Exclusive Right to Sell. This agreement is also almost always in writing. It obligates the seller to work with one broker for a period of time, usually six to nine months. All customers or brokers that are interested in the property during that period of time are directed to the exclusive agent. Even if the owner sells the deal "directly," a commission is deemed necessary.

Mutually Acceptable Terms

The basic questions that should be addressed in any brokerage agreement are:

• What is the length of the agency relationship?
• What is the amount of the commission and how is it to be paid?
• When is the commission earned?
• Who pays for marketing costs?
• What is the broker's responsibility vis-·-vis preparation of the property offering brochure, working with co-brokers, providing formal update reports, and absorbing certain marketing costs?

At the minimum, these five issues should be discussed, agreed upon, and be in written form.

The Relationship

Once an owner has selected a broker, both must make sure that they are truly on the same side pragmatically, not just contractually. To the practical extent possible in any temporary relationship, each party needs a clear idea of what to expect from the other. The initial interview process and subsequent listing agreement negotiation are two excellent places in which to express each other's needs and expectations in a candid and forthright manner.

The broker must accept the assignment with the idea of maximizing the seller's value, not the broker's commission. Too often, brokers try to keep co-brokers at arm's length in the hope of selling the property directly and earning 100% of the commission. All would agree that this is human nature, but it clearly is not always in the seller's best interest, nor does it conform to the Law of Agency. Human nature must be restrained by the ethical and legal requirements of the agency relationship.

On the other hand, it is wise for the broker to keep control of the offering process. Hotels are valuable "going business" assets and the sale of such properties must be marketed professionally and discreetly. Brokers should be given the authority to screen both potential customers and co-brokers in order to determine if they are appropriate receivers of the valuable, private information available in the property offering brochure. After all, the brochure contains P&Ls, existing debt financing, purchase money debt proposals, and other facts and assumptions that are really quite privileged information. Owners must be open to accepting their broker's advice and counsel regarding the selling price and terms necessary to move the asset. This demands a trust between owner and broker that is central to the success of their relationship. Both parties ought to be cooperative in providing information, insights, and goals if the hotel is to attain its maximum realizable value.

Finally, let me say a word about brokerage exclusives from a professional broker's point of view. Sometimes, owners want to maintain the flexibility that they believe an open listing provides. Really, what they usually receive is a catch-as-catch-can "one shot" effort by the broker. Brokers who are only paid upon closing are usually unwilling or unable to devote the diligence or staff time necessary to professionally market a hotel under an open listing arrangement. There is usually neither the level of trust or confidence present in this type of relationship that is so essential in achieving an owner's goals.

The broker who receives an exclusive assignment clearly understands that he or she has won the confidence of an owner who is relying on the broker to achieve a successful result--disposal of the hotel asset. The broker accepts a high level of responsibility and is invested with a client's trust in his or her ability to perform. The professional broker is obligated to spend the appropriate time necessary to assemble a first-rate property brochure and develop sales pricing and a strategy that gets the job done. And brokers are morally obligated to spend their time and assets on behalf of those who have granted an exclusive. Other business, such as open listings, cannot achieve the same level of importance in a broker's office.

I believe an owner is best served by choosing one broker and investing that company with the responsibility of maximizing value in the marketplace and concluding a transaction on the seller's behalf.

The Broker's Opinion of Value

If you've elected to sell a hotel through a broker, there are three opinions of the property's value that count: yours, your broker's, and that of the marketplace. If only the harmonious synthesis of all three were the norm!  Usually that's not the case. Your agent's opinion of value is important because he better believe in the offering price, or there is a fatal flaw in your relationship.

The best way to understand your broker's opinion of value is to ask for a written analysis, having first provided complete, detailed hotel information subsequent to the broker's property and area visit.

In order for a realistic "guesstimate" of value to be generated, you'll need to provide:

• Several years' P&Ls
• Structure of post-closing debt assumptions
• Costs of maintaining the brand affiliation
• Costs to meet all local, state, and federal laws
• Available market and property information, including appraisals, area economic development material, site facts, and other data in your possession that affect value
• The seller must remember that the broker is usually providing this professional analysis gratis in the hope of winning the assignment. One should not expect the level of analysis that a prepaid appraisal may develop. Yet, what the owner will receive from the broker is a good idea of what price range is acceptable to the current hotel purchaser market. Realistically, a broker's desktop analysis of value without a site/area inspection is, in my judgment, inadequate. The broker must develop his sense of hotel value by:
• Inspecting the property and understanding the cost of modernizing and conforming it to relevant codes
• Analyzing competitors
• Visiting with the management team and franchisor
• Studying area road patterns
• Analyzing demand generators
• Studying the subject's performance in the marketplace and identifying its strengths and weaknesses
• Determining what is going on in the marketplace and how it could potentially affect future performance
• Examining alternative franchise and repositioning ideas

It is only after really understanding the specific product and market the hotel serves that one can give an educated opinion of value. The knowledgeable hotel broker brings the eye of a realistic market-driven expert with good perspective and a keen appreciation for "vision" to his or her analysis of value. Understanding and selling "vision" to the hotel buyer is the broker's responsibility. Poor management equals earnings under-achievement; a tired hotel with a dose of capital expenditure can increase both occupancy and average daily rate (ADR). A change in the niche market may bring improved gross income and/or net profit. An alternate brand affiliation may also improve earnings. All these factors, and more, race through a broker's mind during the inspection trip. Since the hotel broker's customer database consists primarily of hotel entrepreneurs, the buyer will appreciate a cogent view of the property's potential. The buyer's talent and hard work should give reality to the broker's vision.

The vision of selling what a hotel business can be, in addition to what it currently may be, is part of the art of brokerage. Yet, the broker deals in the real world of cash and credit in exchange for sticks and bricks, so his or her feet must be planted on terra firma when it comes to establishing a suggested sales price and terms. A broker's opinion of value will provide you with a good "guesstimate" of value by a realistic professional with knowledge, perspective, and understanding of what buyers in the current marketplace are seeking. Whether written or orally proffered, the broker's opinion of value serves as a good starting point for arriving at an offering price. Both the owner and the broker are well served by educating each other in a healthy and realistic discussion of property value. Once both points of view are synthesized into an agreement on market value, it is time to get started with selling the hotel.

The Broker's Plan of Action

Establishing an Offering Price and Terms

Let's assume that the broker's opinion of value is in line with the owner's. There are a variety of financing structures to achieve a return on that value, among them:

• An all cash sale
• Seller financing for a portion of the selling price, in combination with a buyer's down payment usually in the 15-35% range
• Joint venture
• Net lease

Outside influences that affect the offering terms of sale include:

1. Third-party debt availability
2. Franchise appropriateness, availability, and cost
3. Financing considerations
4. Tax considerations

Third-party debt availability is an important consideration. If your existing property debt is short-term and/or not assumable, it's a good idea to ask the lender to restructure to either extend the term or moderate the debt service payments. If the loan is due on sale and there is no likelihood of third-party financing, you may believe you're in a box, but you're not. You could consider net leasing the hotel, as title would not pass in that scenario and the mortgage would remain in place. One could envision structuring a triple net lease deal that sees the tenant pledge security up front or invest capital into hotel upgrading. The rental payment would cover existing mortgage debt service and the difference would be an "in your pocket" return on equity. The tenant might receive a purchase option, exercisable once acquisition financing became more available.

Franchise appropriateness, availability, and cost are other considerations. Is the existing affiliation the right one and, whether or not it is, what is the "all-in-cost" of changing or keeping it?

Must you receive all cash, or are you able to hold purchase money financing? Often, creative owner financing can accommodate early-year levels of thin earnings and allow for increased payments as time goes by. This allows the owner to achieve an increased price and the buyer to realistically manage cash flow--the classic give-and-take scenario where both sides can win.

Tax considerations often play an important role in deal structuring. A private owner who has taken considerable depreciation over the years may have a low tax basis. Often, the existing hotel debt will be in excess of that basis and a sale will involve booking a profit, for tax purposes, that is greater than the equity received at the point of sale. By way of example, let's say you have a $10 million hotel with a $7 million mortgage. You've owned the hotel for many years and your depreciated basis is $5 million. At sale, you receive $10 million, pay off your $7 million mortgage and you have $3 million cash in pocket. However, as far as the government is concerned, you've taken depreciation over the years and deferred taxes on income through depreciation sheltering. Now comes the day of reckoning. You have to pay tax on a $5 million profit, though you only have $3 million in cash. Since your tax is probably in the 35-40% range (depending on your state taxes and federal rules applicable at the time), you'll be paying to the government a significant portion of what you receive--say $2 million in taxes on $3 million in hand. In this circumstance, it would be wise to consider deferring the gain by arranging to do an exchange transaction, wherein the equity gain you receive from the sale goes into the purchase of another property. You'd then defer the gain on the first hotel, have a new basis in your next purchase, and defer taxes for years as a result.

Regardless of the deal structure or third-party influences on value, the bottom line is that hotels are sold on a multiple of perceived earnings. All other structuring considerations bend to this reality of the marketplace. Capitalization rates for hotels historically range in the 11-13% range with debt costing 8-12%. Figuring in the positive impact of leveraging, equity yield should be in the 12-20% range. Remember that negotiations over value take into consideration three profit figures. The seller is trying to sell the "vision" of tomorrow; the buyer is looking at the actuality of current earnings and, in addition, is naturally figuring that he or she will do better. So, the price tends to get nudged up to a seemingly lower capitalization rate than would seem "justified" by current earnings. However, the blend of existing and potential earning is, after all, what serves as the basis for determining value.

Preparing the Property Offering Brochure

Once you've established an offering price and terms, it is time for the broker to prepare the property offering brochure. Some brokers use the following sequence and list of components in preparing the brochures:

• Executive summary (including salient facts and deal theory)
• Photographs of the property
• Complete property description
• Status of the existing franchise and alternative choices
• Market Summary
• List of competition
• Description of demand generators
• Financial data, including all mortgage and lease obligations
• Historical operating statements
• Monthly revenue (including room occupancy and average daily rate) for the past 24-36 months to date
• Disclaimer

A first-class property offering brochure will go a long way toward efficiently generating marketplace interest. At any one point in time, there are hundreds of hotel listings on the market. The buyer must be motivated by the package and be excited enough to go "into the field" to make a property inspection. A well- prepared presentation with complete data about the offering will not only be appreciated, but it will often accomplish the goal of inducing a physical inspection. I am also convinced that a first- class brochure helps maximize value.

I would like to say a word about including pro formas of future hotel performance in the property brochure. That word is, in my judgment, DON'T. In our litigious world, it is a bad idea to make representations about future performance to a buyer. Buyers should do their own projections and not rely on any representations of the seller, or the broker, in making up their minds. The property brochure should provide facts, not conjecture.

Disseminating Information to the Marketplace

An organized marketing effort, in combination with good personal contacts, is certainly the right track to a successful sale. When you are in a large community with numerous hotels, it is just as likely that the buyer may be another local person as it is that an "out-of-towner" will be the acquirer. However, while personal contact with local owners may well elicit an offer, it might not be the preferable route to travel. You are, after all, providing detailed financial data on the hotel's operation to a competitive owner. For that reason, and in the hope of widening the purchaser search and maximizing value, it is usually a wise idea to circulate the hotel offering, with care, as broadly as necessary.

Generally speaking, I find that most successful selling efforts encompass similar methods. That is, they disseminate the information to a selected list of qualified customers from an extensive hotel owner/operator customer base and circulate the property brochure to a specialized network such as the Hotel & Motel Brokers of America.

First, brokers should phone prospective buyers in their database, qualify their interest in the offering, and send property brochures when both the buyer and broker think it worthwhile. The next step is to recall the prospect after they have received the package to determine the prospect's interest level, answer questions, and arrange a property inspection.

Of course, the property inspection is central to the broker's selling effort. Someone who leaves his or her comfortable seat in order to visit a hotel site and area, usually hours from home, is a serious prospect. He or she may not buy the hotel you are promoting, but you know that you have a real prospect. All seriously interested, qualified potential customers should be personally accompanied through the property by a broker or an associate. All inspections should be made by appointment and in a manner least disruptive to the hotel's management staff and business operation. After all, you must remember that what is being sold is a going business with staff members whose morale must be kept high and a transient customer base that needs to be protected. It is the broker's professional and moral responsibility to keep these considerations in mind.

The result of the telemarketing campaign to a targeted customer list, providing a first-class property offering brochure and accompanying all buyers on site inspections, is that you will usually generate serious offers, one of which will result in a successful closing.

Providing Status Reports

After the broker has won the confidence of the seller, received the listing agreement, and begun the property marketing effort, it is obviously necessary to keep the seller informed about progress (or lack of progress) in the sales campaign. The selling process turns up new information and insights as well as customers. Written or oral status reports, provided to the owner on a periodic basis, are a good mechanism for discussing adjustment of the offering price and terms to the marketplace. Written reports allow you to more fully express rationales and conclusions that may be difficult to get across orally. Too, a seller probably appreciates being able to digest written information and reach conclusions in a quiet, deliberative manner. Naturally, status reports leading to the conclusion that the price needs to be dropped are not pleasant documents to read. But, if buttressed by a reasoned review of specific market reaction to the offering, the status report serves as an invaluable mechanism for keeping the owner and broker "in synch" with each other. It allows reasonable adjustment to pricing, if necessary, in order to achieve the sale result.

Monthly status reports in combination with continuous phone updates are a good mix.

The Offering Process

Qualifying Prospects
An integral part of the disposition process is screening the customer. Naturally, a buyer who shows purchase interest is "music to an owner's and broker's ears," as making a match is the whole goal of the hotel disposition effort and the missing ingredient is the customer. Yet, hotel purchasers have preferences that need to be acknowledged. What type of acquisition do they prefer? Limited service, full service, highway, resort, or in city? All cash, leveraged, how much cash? Are there guarantees required on the debt? What is the preferred area of the country? A good customer might be interested in a deal, but not so motivated as to maximize his or her offer. That customer is not going to be your top candidate for that hotel, but might be perfect for another. Of course, a customer's interest and capacity to perform (close) the transaction is most important.

With so much lodging brokerage activity conducted on the telephone, it becomes incumbent on the sales agent to listen carefully to a buyer's needs--get at motivation, cash availability, and type of hotel desired during the telephone interview. "I'd like to make a good deal on a profitable property" is interesting but useless information; so would everyone else!

Telemarketing
The most tried and true way to get to your logical customer base for a specific lodging brokerage assignment is through telemarketing. Effectively, it's knocking on the door. You can't beat that approach for unearthing a live customer. Some brokers assemble a list of potential prospects and personally call every single one. Brokers should not send someone a "blind" package of information on a hotel unless they have first discussed the situation with them.

After a customer has been carefully screened, a broker may enter the customer's name into the brokerage's database. Computer storage capacities allow review of customer files and help identify customer preferences.

When prospects indicate sincere interest, a broker may send either an executive summary or a full marketing package, depending on the customers' interest level. Several days after the package arrives, the broker may place a follow-up call in order to answer questions, discuss the deal in depth, and, hopefully, arrange for a hotel inspection. Rifle-shot telemarketing to a select list of qualified prospects pays the best dividends when it comes to screening the customer. The give- and-take dialogue between broker and buyer in a thoughtful telephone conversation is the next best thing to a personal visit, which is often impractical because of the distances involved among broker, customer, and property.

Advertising
Many owners look askance at publicly advertising their hotels for sale; others are more sanguine. If the mutual decision is to advertise, the broker should provide a proposed advertising schedule, together with appropriate advertising copy.

Advertising is clearly a useful way to pick up activity, so long as you know where to do it and are willing to spend the time to screen out inappropriate customers. It is also quite expensive, since your cost is tied into general media circulation levels and it's a safe bet that few of the readers are motivated hotel purchasers. Selectively advertising in lodging industry publications is often a most cost-effective approach. Industry magazines such as Lodging Magazine and Hotel & Motel Management have real estate classified sections that buyers look to for opportunities. Other places to advertise include the "Friday Real Estate Corner" of the Wall Street Journal and Business Opportunity sections of such newspapers as The New York Times.

Co-Brokering

I believe in selective co-brokering with other professional hotel brokers as a legitimate aspect of the overall marketing campaign. Some brokerage offices are loathe to co-broker because they feel a need to be in control of the offering process and/or they want to earn 100% of the commission. The former is understandable; the latter is in violation of the commonly understood responsibility that a broker has to his or her principal under the Law of Agency. Simply put, venality has no place in brokerage.

The lodging property brokerage community is relatively small and most competitors are also cooperators--as long as the broker feels that he's dealing with another professional. The co-brokers' competence and honesty must be relied upon in doing right by the owner/seller. Not surprisingly, good brokers develop reputations that allow a comfort zone to exist and co-brokering to occur.

Networks such as Hotel & Motel Brokers of America (HMBA) encourage the development of trusted long-term friendships to thrive amongst member brokers. This unique association is the granddaddy of all lodging property co-broker networks, with affiliate offices throughout the country. As a longstanding member and past president of HMBA, I can unequivocally vouch for the high standards that it expects its members to adhere to. The bonds of cooperation that are the hallmark of HMBA affiliation are an invaluable asset that the HMBA broker brings to a listing.

Often, an owner in one city will hire a broker in a second city to sell a hotel in a third location. A good broker will always be certain to accompany the customer on a property showing. Sometimes, perhaps due to scheduling conflicts, it's not physically possible for the listing broker to show the property. Yet, one needs to be responsive to a customer's wishes because the client seller has a right to expect it. An HMBA broker usually has the advantage of being able to ask an associate broker, who's relatively closer, to show a hotel listing. There are generally accepted split-fee arrangements in such circumstances, depending on how much work the showing co-broker does. The co-broker is of valuable assistance in providing seamless service to the owner.

Aside from showing hotels, co-brokers may well have just the right customer for the property. Selective co-brokering with trusted members of the lodging brokerage community is smart, pure and simple.

Inspections

Property inspections are a most delicate part of the marketing process. When a hotel is for sale, word spreads to both the hotel staff and local businesses pretty quickly. Front desk staff, management, bookkeeping, and even the housekeeping and maintenance staff live in a small world and gossip cannot be contained no matter how hard one tries. Attempting to quell operational disruption, owners often tell staff that consultants, insurance people, or potential mortgage lenders will be inspecting the hotel, but it is probable that few believe this fiction. That being the case, it is wise to limit inspections to those customers who have been pre-qualified as to both their interest and capacity to perform (close).

The Offer and Purchase Contract

Firming Up Offers

After a customer has shown interest and taken the time to inspect the hotel, it is likely that an offer to purchase will be forthcoming. It is normal for more than one person to be negotiating on a property during the selling period. You'll want to be certain that the customer who succeeds in gaining the purchase agreement is also the one who closes the transaction. After everyone has worked so hard to locate a viable purchaser willing to pay an acceptable price, it is most disappointing for the contract to fall apart. You want to do all in your power to ensure that this does not happen.

If you have three buyers interested in purchasing the same property at the same time, choose the buyer wisely, otherwise you might lose all the customers and end up with no sale. The person who offers the highest price, or most cash, may not be the right choice. You must examine the contingencies that the buyer incorporates into the offer, determine whether they are reasonable, how long it will take to satisfy them, and how much it will cost. You also want to confirm the financial capacity of the purchaser to perform. Of course, the best way to eliminate the risks inherent in signing a contract that includes contingencies is to simply say no to a buyer who won't put cash at risk on a contract.

One hotelier was famous for saying that "a contingent contract is a free option period and I won't give anybody free options." If a buyer does step forward to purchase the hotel and offers to put a significant contract deposit at risk, you should treat that person as your most serious purchase candidate.

Now, how can you, as an owner or broker, avoid many of the risks inherent in signing a contingent contract?

In hotel transactions, buyers are concerned with reading environmental studies and learning the estimated scope and cost of modernization that the existing (or proposed) franchisor will require. These studies should be read before making an offer. Obviously, the potential expenditure on property modernization of many hundreds of thousands (if not millions) of dollars will have a dramatic impact on the purchase offer. So, too, will the cost of mitigating such environmental problems as asbestos, leaking underground storage tanks, and the like.

I think it is both time-consuming and foolish for a hotel offering to proceed without the benefit of the buyer's having analyzed a pre-completed Environmental Phase I report or a franchisor's modernization study. If the reports are not available, buyers may make their offers contingent on receiving that information. It may take four to eight weeks for the franchisor and modernization experts to order and complete those reports and provide the results, which is all the time that the hotel may be in contract and off the market. Too, any costs associated with the study's conclusions are simply going to result in a deal re-negotiation, with the seller in a weakened position. Therefore, the self-help method of firming up an offer into a meaningful executed contract is for the owner to get this information beforehand, provide it to any serious purchaser, and eliminate those important issues as contract contingencies. Having done this, you've made a major stride in firming up an offer into a worthwhile closeable contract.

A final word on firming up offers. As the owner, or broker, it is entirely proper for you to let a buyer know that your goal is to only sign a contract of sale with the person you're sure will close. Alert the buyers that since you don't want to risk losing an interested customer, the buyer who is willing to minimize or eliminate the "due diligence period" (free option time) and pledge a significant contract deposit at risk, will be given preference. The purchasers who really want the deal the most will often respect your point of view and put cash at risk.

For an owner, the perfect world is to sign a purchase contract solely conditional on providing clear title.

The Purchase Contract

The hotel purchase contract, like most real estate agreements for commercial property, is rather involved. I will not use this space to go through all the elements of the contract. Rather, I'd like to highlight certain areas that we, as brokers, focus on.

As-Is Representations

I recommend to owners that they sell the property as is and make no representations that survive the closing. The buyer should have access to all data that the seller believes is in his or her interest to share, and that is all.

Don't put yourself or your firm in a position of having buyers come back to you for economic recompense because they say they relied on you for certain facts that did not prove to be accurate. The onus of discovery needs to be placed squarely on the buyer, not the seller. This is especially important to contractually affirm today. The legal principle of caveat emptor (let the buyer beware) seems to be more attackable in courts today by buyers who seek post-closing financial redress (or even recision of the transaction) if they believe they've been financially disadvantaged. As a broker, I am not advocating that sellers hide salient information critical to a buyer's decision-making; I am just recommending that sellers not lay themselves open to post-closing financial liability, if at all possible.

"What you see is what you get" should be the guideline.

Due Diligence Periods

Due diligence periods are caution lights to brokers. A broker spends months preparing the property for market, offering it, negotiating with customers and getting to the lawyers so a contract can be hammered out. Now there is a stack of documents and an executed purchase contract. The seller is surely committed. But is the buyer?

Any contract that contains a due diligence period requires a seller's "leap of faith" that he or she has chosen the right buyer who will do his or her best to close. However, due diligence periods are free options and little else need be said in the matter.

Financing Contingencies

Often, when a seller needs, or wants, to sell "all cash," the buyer will require a financing contingency. The buyer needs a signed contract in order to take it to a lending source to obtain the required funding. This process may take months, the potential for failure is significant, and the possibility of the deal crashing is quite real.

A few ways to minimize the seller's risks are:

• Require a letter of interest from the specific third-party lender, ensuring that the borrower has already provided relevant data to that lender (financials, modernization and environmental studies, and the like) and that there is a real prospect of your buyer receiving a funding commitment.
• Committing the buyer to accept alternate purchase money financing from the seller in the event its third-party financing falls apart. The seller could offer a short-term, personally guaranteed, high-interest mortgage alternative that can be "put" to the purchaser in order to ensure a closing and title transfer. This will induce the buyer to complete the more favorable third-party financing. However, it will commit the buyer to close, even if the financing option fails to appear. Remember, you don't have to offer the financing--you have the option of doing so. If the buyer won't accept this concept, maybe he or she is not the right customer for the particular hotel acquisition.

Franchise Responsibility

If the property you're selling is chain-affiliated, the franchise contract will terminate (on the franchisor's side) once the hotel operator, or title, changes. However, as discussed earlier, the existing franchisee has a monetary commitment to the franchisor that must not be overlooked. Be sure to dovetail the termination of your existing franchise agreement with the sale of the property so that the owner's economic liability ends when the hotel is sold. If that is not possible, at least make sure that you've negotiated a modest termination payment provision with the franchisor. The same notion applies to existing management contracts, leases, or other obligations that the owner has taken on over the years. Do your best to end any liability that survives the closing.

Between Contract And Closing

Once the property is "in contract," you're in an operational no-man's-land. The buyer tends to spend more time at the hotel, checking out a myriad of details, calling in consultants and purveyors, interviewing staff, and the like. While all this seems reasonable, it is most unsettling to the hotel staff and its operation of the business.

It is usually a good idea to limit the buyer's access to the hotel until closing day. While there are many good reasons to prevent access that causes operational disruption, the most compelling reason from an owner/broker's viewpoint is not an operational one. There's always dirty laundry in a hotel and it's not always found in the laundry room. The buyer, anxious yet nervous, may well hear stories that shake his or her confidence in going forward with the transaction. Deal confidence is a delicate commodity. As the seller, you want to offer as little opportunity for "second thoughts" as possible. Second thoughts about going through with a transaction can quickly escalate into fear or concern that may translate itself into a buyer walking off the deal or a re-negotiation. Imagine how a purchaser may feel upon learning from the sales director that a major motorcoach account might be leaving. Human nature being what it is, the buyer will focus on that, rather than the potential new corporate account the hotel may be about to snare.

The Closing

If you cover every issue related to a closing in the purchase contract, you'll have a smooth, no-surprises, transfer. Everyone has an interest in making sure that happens. The closing should be a mechanical implementation of the purchase and sale agreement. The closing need not be a scene for re-negotiation or conflict. However, let me give you one example of how difficulties that could be avoided sometimes occur.

Imagine the purchase contract is signed and both parties agree therein that the seller will offer purchase money financing to the buyer at a certain rate and term. Here's an entire economic understanding, including ground rules and remedies, that will be in effect for years after the closing. Yet, the mortgage and note denoting that agreement may not have been attached as an exhibit to the purchase contract when executed. Post-contract, the seller's lawyer sends his or her version of the note and mortgage to the buyer's lawyer, but mutually acceptable language is not entirely agreed upon. "We'll finalize the language at the closing" are seven words that I dread hearing.

Do your best to ensure that the closing of the hotel transaction involves mechanics, not negotiation. Because third parties, such as the franchisor, management company, financing institution, and legal authorities (i.e., the liquor board) are often involved, it is a good idea to have a "dry run closing" a week or two before the actual closing. This needn't be in person, but all the appropriate papers, down to the last detail, should be addressed and resolved during the dry run so that the actual closing day goes smoothly.

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