The Hotel Times - September 2008 - (Page 32)

IN CLOSING » BY NELSON F. MIGDAL Close the deal, forget the dinner Don’t let deals already in process fall through T Nelson Migdal is a principal shareholder with Greenberg Traurig LLP and can be reached at migdaln@gtlaw.com or (202) 331-3180. he 17th century English clergyman and historian Thomas Fuller said, “All things are difﬁcult before they are easy.” That sums up where we are today in regards to hotel transactions that are still in the works. Things are difﬁcult. With contract due diligence periods shrinking to the point of being of limited value to the buyer, more due diligence money will be spent earlier and faster just to make sure it is reasonable to “go hard” on a deposit. Nevertheless, efforts must be quickly made to do due diligence as soon as the deal is identiﬁed, sometimes prior to execution of a purchase and sale agreement. It is challenging when the market is like it is now and sellers insist on an “as is,” “where is” and “with all faults” agreement in tandem with a short period of due diligence. Nevertheless, there may be strategic opportunities to solicit information that a buyer just cannot ascertain through due diligence. For example, a seller that will not give any warranties with respect to environmental hazards, zoning or the current use of the asset may provide a representation or warranty that the seller has not received written notice from any governmental agency or authority asserting or alleging any violation of environmental laws, or zoning violations, or that the use of the property as currently existing is not lawful. Related considerations are the survival period of the representations and warranties and the continued existence of a creditworthy entity to support them post-closing. Both the buying and selling entities are likely to be single purpose bankruptcy remote entities that will, on the seller side, distribute all of the net sale proceeds and dissolve as quickly as possible after closing. This means buyers need a survival period for the selling entity itself to compel the seller to maintain its corporate existence, together with either a funded escrow or a covenant to maintain a level of capitalization adequate to support any surviving representations. The “ﬂag” or “no ﬂag” debate has become more complex because a familiar “brand” national hotel operating company carries value that investors and lenders recognize. When a buyer needs every ounce of value it can ﬁnd to assemble the equity stack and debt, having a hotel carry a franchise ﬂag or brand can force the decision away from remaining independent, despite a good “story” for the hotel as an independent. The ﬂag has an impact on everything when trying to lure investors to a project and satisfy a cynical underwriter. The ﬁnancial health of the hotel today and in the future as a result of the professional branded management of day-to-day operations of the hotel can be crucial. Getting the property improvement plan or capital expenditures budget right and getting near-term obligations funded, hopefully all through the loan, is key. Remember that franchisors and operators use the hotel’s transfer to a new owner as an opportunity to upgrade the hotel. The PIP is a map for renovating the hotel that will set forth a list of hotel improvements required to keep the ﬂag. Deals can go sideways quickly if the PIP comes at a staggering cost. Things may not get easy again for many months. There are opportunistic deals that can get done now, but both seller and buyer can take nothing for granted on the road to closing. hmm@questex.com 32 The Hotel Times September 2008 www.TheHotelTimes.com http://www.TheHotelTimes.com

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The Hotel Times - September 2008 Business Outlook Editorial Outlook Contents In The News Transactional Facts Hurry Up and Wait Capital Outlook Development Outlook Brokerage Outlook International Litigation: Who gets sued? Insurance Outlook Economic Crisis: Stress or Opportunity for Franchisees? Franchise Outlook Ad/Edit Index In Closing

The Hotel Times - September 2008

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