What to check before buying a hotel

A hotel is not a building that happens to make money. It is a fully operational business sold with its contracts and its economics attached. The diligence that matters most is the part a property checklist misses.

Plenty of buyers do thorough property and legal diligence and still get the economics wrong, because the numbers that decide a hotel's return sit inside contracts and below the headline profit. Work through these in order.

1. The operating agreement you inherit

A hotel usually comes with a management or franchise agreement attached, and you inherit it. Read it before you read the financials. What is the term and what is left to run? Can the operator be changed, and on what terms? What does termination on sale look like? An attractive hotel with a punitive, long, unbreakable agreement is a different asset from the same hotel free of one. Start with management contract vs lease vs franchise to understand which structure you are buying into.

2. The full fee stack, not just the base fee

The base management or franchise fee is the visible cost. The marketing, distribution, loyalty, central and technology charges around it often add up to as much again. Price the whole stack as a share of revenue, because it comes straight off your return. The breakdown is in hotel management agreement fees, and you can size it quickly with the free fee stack calculator.

3. The real owner's return, below GOP

Sellers and brokers quote gross operating profit, because it looks strong and it sits near the top of the statement. Your return is what is left after the management fees, taxes and insurance, the reserve and the debt, and it can be a third less than the GOP headline. Make sure the price you are paying is set against the owner's bottom line, not GOP. See GOP, EBITDA and the owner's bottom line.

4. The reserve and the capital you will have to spend

Hotels need a steady replacement reserve and periodic refurbishment, and a brand will often require a property improvement plan soon after a sale. A projection that leaves the reserve out, or ignores a looming PIP, overstates what the hotel really earns. Confirm the reserve and the near-term capital works before you price the deal. See FF&E and replacement reserve.

5. The asset and the market

The traditional diligence still matters: condition and deferred maintenance, the competitive set and demand drivers, the labour market, and how dependent the hotel is on a single source of business. A hotel that lives off one nearby employer or one event is a concentrated bet. Note these, but do not let them crowd out the contract and economic checks above, which are the ones buyers more often miss.

6. The legal and title position

Zoning, licences, title, any ground lease, employment liabilities and outstanding code or planning issues all carry real risk, and an older or independent hotel can hide them. This is where your lawyers and specialist due-diligence advisers earn their fee. Brief them early.

7. Model it before you commit

Every check above resolves into one question: at this price, with these contracts and this capital plan, what does the owner actually keep? The honest way to answer it is to model the deal in full, on the USALI 12 standard, and stress it the way a lender will. A projection that survives that scrutiny is the one to trust. See a projection that survives due diligence.

For the full owner's playbook on the agreements you inherit and how to negotiate them, see The Hotel Operating Agreements Series.