Closing and transition is the final phase in a long hotel acquisition cycle. Until this point, all activity has been speculative with relatively little risk. Now, your deposits are non-refundable, services are transferring, and employees are joining your team. You can only hope for a smooth closing and transition as tension mounts for closing day. Thankfully, a solid hotel closing checklist has prepared you for this day. These 10 steps from effective date to closing day will ensure success.

Step 1: Write a business plan

Real estate is a simple business. You buy a property, build a stable capital structure, and let it cash flow. Simplicity is what makes the business so approachable and error proof. However, it is also deceiving when you fail to consider the operating aspects of a hotel.

A hotel is not a simple real estate investment. It is a capital-intensive operating business with a real estate component. At best, you have a few months of nightly leases upon acquisition. At worst, the property transfers with no business on the books.

Business plans add structure to your objectives and serve as an artifact on which to align your team. The initial plan will influence each decision from the moment you start negotiating the purchase and sale agreement (PSA) to your eventual exit.

You will not execute exactly as planned, but the planning process is essential to formalize your objectives.

Step 2: Identify and classify working parties

Due diligence, operational transition, and closing involves a lot of people. Your hotel closing checklist should clearly list all the people involved and their contribution. The closing and transition leader must manage each person effectively to ensure fluidity of the closing process.

It is a major undertaking to keep these working parties organized. This requires that you know what they are responsible for and when each task needs to be complete. In fact, a mindset focused on tasks over deliverables may help ensure accountability.

Define the universe by assigning each person to a category. Consider the following:

  • Seller
  • Lender
  • Legal and Closing
  • Third-party Consultants
  • PIP – Architecture, Design, and Construction
  • Brand and Management
  • Operational Service Providers

Your categorization may be different based on the deal specifics and your closing and transition team. However, a solid understanding of individuals involved along with their role and contact information will help eliminate risk throughout the process.

Your working parties list must also include an understudy or second in command for each role. A reliable hotel closing checklist should eliminate key person dependency. That is, the closing and transition leader can disappear for any reason with limited disruption to the process.

Remember, companies don’t perform services, people working in those companies do. Always look for an accountable party when you engage a company. That person should be available to you on a moment’s notice to work through any challenges that may delay or inhibit a smooth closing.

Step 3: Lay out a weekly roadmap

Your hotel closing checklist will clearly define milestones, accountable parties, and deadlines. In this way, it is more project plan than checklist.

The Effective Date, end of the Inspection Period, Closing Date, and a few others are the only hard-and-fast dates in your PSA. Most deadlines fall within an acceptable range. Therefore, you have almost 11 weeks to plan out in a typical 30-day inspection and 45-day close deal.

Think in terms of actions and artifacts. Actions are decisions and artifacts are the results of those decisions. For example, the decision to order a property condition assessment is an action and the final report would be the artifact.

The closing and transition team must clearly define each action and artifact along with specific date or week for completion. It may be helpful to work backwards from the Closing Date to fill in these details.

Due dates are meaningless and missed with regularity. However, adequate planning and diligent leadership will ensure routine accomplishment. In this way, the closing and transition leader can focus weekly status meetings on success rather than reasons around missing arbitrary dates.

Step 4: Order third-party reports immediately

Third-party reports take time to schedule, prepare, and refute, so it’s best to get in queue early. The following are the absolute basics:

  • Survey
  • Title Search
  • Zoning Opinion
  • Environmental Site Assessment (ESA) – Phase I
  • Property Condition Assessment (PCA)
  • Appraisal

These vary in time and cost depending on the size and complexity of the property. Your attorney can perform the title search and zoning opinion off-site, but the survey, ESA, and PCA require a site visit. Your access agreement should allow for easy access to complete these studies with enough time to review and raise questions to the inspectors.

Allow at least a week prior to the expiration of the Inspection period to bring major concerns to the seller. This gives you an opening to renegotiate the PSA or buy time to fix outstanding issues.

Step 5: Engage the brand early and often

Brand license and management agreements are mostly standard, but there are always areas where you can negotiate. Your relationship with the brand should be mutually beneficial. Consider changes any time you feel like the arrangement is lopsided. Rebranding is your ultimate leverage, but it’s usually most economical to look for resolution in your current relationship.

Every branded property requires some capital investment as part of the change of ownership process. The scope and cost of the property improvement plan depends greatly on asset quality and deferred maintenance. It will also depend on your ability to negotiate certain aspects of the property improvement plan to focus on return on investment.

The interview and qualification process could take some time in addition to the contract negotiation. You or your management company’s experience with the brand will streamline this process. Still, get as much done in the Inspection Period as possible.

Step 6: Finalize the stub and year 1 operating budget

The budget that helped you decide to buy the property is not the budget that you will use for operating the hotel. The difference lies in granularity.

Start with revenue – always.

Revenue drives a variety of expenses, but it is also the starting point for profitability. Use forward booking and historical data to project the remainder of the year and the year ahead. In many cases, you can use the existing projections, but your asset manager needs a good understanding of where the business is coming from.

On the expense side, consider using a zero-based budget, which builds expenses from the ground up. Revenue and associated costs are the first layer of this budget. Expectations for fixed and semi-fixed expenses, like taxes and utilities, respectively, are the next layer. Wages and service contracts fill in the remainder.

Step 7: Review and decide on labor and contracts

Operating hotels are voracious consumers of internal and external labor. On-property staff, like housekeeping and general maintenance, can complete many tasks. However, some tasks are so infrequent or specialized that they require a third-party service contract.

Coordinate a detailed labor and contract review with your management company – internal or external. Many service contracts require a termination notification period of 30 days or more. Therefore, it makes sense to provide this notification the same day your deposit becomes non-refundable.

The seller must give notice and feel confident in your ability to close. A non-refundable deposit goes a long way, but enhanced communication is always a best practice.

You’re probably only going to have access to the executive committee during the Inspection Period. These people will be your on-the-ground intelligence for on-property reorganization. Look for cultural fit and business plan alignment throughout the closing and transition.

Be cognizant of WARN Act requirements as you consider your employee reorganization. Most large hotels are subject to the provisions of this law.

Step 8: Solidify the capital stack prior to posting hard deposits

Your capital structure is a critical item in your business plan. All lenders and investors have different needs, strategies, and asset management culture.

Lenders are somewhat interchangeable with respect to deal economics. Still, their loan servicing requirements can have a material impact on how you report financials, pay your bill, and interact with the lender.

Investors – limited or joint venture – are a different animal entirely. In many cases, the investor looks to the deal sponsor for the structure of periodic reporting and other communication. Economic terms are as diverse as the investor universe, and personality is an important factor. The unstructured world of common equity requires that you go out of your way to be more user friendly than the competition.

Insurance is a critical item in the financial security of your hotel even though it is not formally part of the capital stack. Engage your insurance broker early in your due diligence to allow time to gather a variety of quotes. You will have a chance to refine coverage as lender and investor requirements become clear.

Step 9: Formally kick-off the operational transition

The business plan, hopes, and dreams start to become reality once you post your non-refundable deposit. Inspection Period needs were your primary focus until this point. Now, it’s time to shift focus to transition.

A smooth closing depends entirely on an aligned team.

The best team captains know how to engage each person on their working parties list to get maximum results. A single kick-off meeting may work for some elements of the team, but others may benefit from direct conversations. Therefore, consider the formal kick-off as a series of actions rather than a single meeting.

The working parties list identifies everyone that will have a role in the operational transition. Consider which of these people need to be working together and how involved they need to be.

Schedule meetings with the smallest audience as possible.

Large meetings are a waste of time for marginally attached people. Prepare an agenda and invite only those that have a material impact on the success of the transition. The closing and transition leader should delegate responsibility to engage others within the organization to this inner circle.

Note, a small inner circle is important for confidentiality, but it is most effective for accountability. Transparency beyond the inner circle will ensure alignment and creativity to get the job done most effectively.

Step 10: Prepare an internal settlement statement

A week before closing is the worst time to be scrambling for invoices. Keep a running tally of expenses incurred during due diligence and those items to paid from escrow.

You’ll be signing so many documents the week before closing. These decisions will be much easier if you can borrow brain power from a time when your mind was clearer.

A good hotel closing checklist should include following critical items on your settlement statement:

  • Prepaid service contracts
  • Inventories – guest supplies, operating supplies, food, and beverage
  • Prepaid taxes and insurance
  • Renovation advance
  • Title search costs
  • Title insurance
  • Acquisition fees
  • Brokerage fees
  • Pursuit costs
  • Payments to third-party consultants

Each deal will have a different set of expenses. Sometimes it’s helpful to separate these into balance sheet items and closing costs to maintain alignment with your accounting team.

Bonus: Report and reposition constantly

Each period of your contract is fraught with risk of different levels. Transparency and accountability are essential values to manage and mitigate these risks, and constant reporting and repositioning are your tools.

Schedule weekly status meetings that review the previous week and set goals for the coming week. A military-style debrief will help you determine areas of success and opportunity. Guide the discussion with the following five questions:

  • What were our expectations going into this week?
  • What actually occurred during the week?
  • What did we do well and why?
  • What could be improved and how?
  • What will we do differently in the next week?

A hotel closing checklist that allows for fluid questioning and pivot will make reporting easy and actionable. Finally, empower your team to correct mistakes quickly by maintaining open and free communication throughout the closing process.