Hospitality Business Structure

January 06, 2020

by a searcher from Columbia University in New York, NY, USA

Hey all -
Happy new year! Good hunting in 2020.

I am looking at the acquisition of one or a couple hotel properties. Though I have rental real estate in the portfolio, this is my first time looking at hospitality. I have a structure that seems to work well for approaching companies, but wonder if hospitality should be approached differently. Specifically:
- How much of the value should be reflected in the real estate vs the enterprise?
- Do sellers typically expect to carry a note?
- Are there particular protective clauses that one can use in a hospitality deal that are market in that game? (ie. earnouts, clawbacks, etc)

Reply by a lender
from Michigan State University in Newport Beach, CA, USA

From a lending perspective, mainstream banks want borrowers/partner with hospitality experience. If you're considering conventional or SBA financing, that will be crucial. There may be some lenders who don't require it, but my experience is that they are more difficult to find. Regarding your valuation question, the business and real estate are somewhat independent, even though it's one big business. You can have high real estate and low business values, and vice-versa. It just depends on the specific location and cash flow/tax returns. Sellers may or may not carry a note, very subjective as well. The hospitality world is quirky, and you get all kinds of situations.

Reply by a searcher
from Oregon State University in San Francisco, CA, USA

Real Estate deals in hospitality usually get analyzed on CAP rates, most all of the deals I have been in or been involved in don't have earn-outs, claw backs etc. I have tried to do so in the past but the sellers are usually not used to these structures. Seller notes are not as common as when buying other businesses.

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