How to buy a hotel

It takes a lifetime to learn how to live, and a closing to learn how to buy

When Claire left her last job, the difference between real estate acquisitions and asset management loomed large. Each had been a large and very separate department of her company. The former found and bought new properties; the latter ran them. She’d been doing the latter, but the former had a reputation as harder, faster, and more intense. The people on the acquisitions team were the hunters; asset management just babysat.

She looked at jobs in acquisitions, but kept getting pressured back toward asset management. She would have to find something small enough that she could drive it herself. To finally get the experience of acquisitions, she had to find something she wanted to own.

November

1. Go to LoopNet.com, switch to the “For Sale” tab, and filter to “Hospitality”.

Screen properties by some top stats. Price, location, number of rooms. Average daily rate (ADR): room sale revenues divide by number of rooms sold. Revenue per available room (RevPAR): same, but divided by number of rooms available. Cap rate: net income divided by price, i.e. the reciprocal of a P/E ratio. A low cap rate means the price is very hyped-up; a high cap rate means it looks suspiciously cheap and there must be some ticking time bomb in there.

Once something catches your eye, you have to decide whether to reach out to the broker or try to go over their head to talk to the owner directly. It’s tempting to try to cut out the middleman, go straight for the heart-to-heart, the real deal. But no. Don’t try to be a bigshot. Trust the process. The broker has some emotional distance and is incentivized to close a deal.

2. Contact the broker to schedule a property tour.

No matter the stats, there’s no point in doing anything until you go see it. Do it fast — you’re racing other offers. You might’ve been waiting for this opportunity for years; you gotta move in days.

The broker was local and well-connected and would go on to become a conduit to every sort of lawyer, inspector, contractor, selectman, shopkeeper, and so on. I work remotely and don’t care where any of my coworkers live, but this is a deal and field where being local is an enormous advantage. The locals have a better network, longer memory, more tacit knowledge, and skin in the game.

3. Tour the property.

Claire toured the Apple Tree Inn on Thursday, December 7. She loved it in a way that made her dizzy with its terrifying plausibility.

The broker told her there were other potential buyers; he received another offer Tuesday, December 12, that was going to expire on Wednesday.

On Tuesday night Claire spoke with the sellers and asked if they could give her until Friday. They agreed.

On Thursday, wanting a sober second opinion, she visited again with her astute mother. She also met a local lawyer to talk about zoning.

Ideally a building is already doing what you want to do with it so you don’t have to worry about zoning. Otherwise, it’s impossible to know what you can do with land until you try to do it, by which time it’s too late. Claire was stymied by that fog on several previous potential deals. In this case, it was already operating as a hotel, so there was no issue — but you still want to know if you could add rooms, because there are serious economies of scale (future post).

Moreover! Unless you’re Warren Buffett, the value of anything is partly determined by what someone else would be able to do with it. If you’re buying a hotel, and want to run it as a hotel, its value still depends on how much someone would pay to turn it into condos. And you should know if you could ever add rooms.

4. Provisionally decide what you think the hotel is worth.

When Claire was a child, she remembers, her dad described how there are two ways to value a pizza shop. One: add up its revenue, subtract its expenses, predict that pattern continues, and decide how much you’d pay now for that stream of future payments. Two: look at all the similar pizza shops in town and average out how much they’ve recently sold for. Bottom-up and top-down.

If you’re serious, the sellers will give you all sorts of financials. You can pore over their “P&L” — profit and loss statement, a big spreadsheet of how they made and spent money — and sorta make-pretend that you could make more and spend less. And you can pay for an “STR report” on up to five comparable hotels and get their occupancy and ADRs (and thus RevPAR, which is the product of those two) over the last five years, broken down various ways. Look at the property’s value per square foot, per acre, per key (i.e. room), and assessed value per square foot (i.e. value according to the tax collector) versus your comps.

I say “provisionally” because there are many more steps before the money is really committed. At this stage you’re racing the other potential buyers to be earlier and higher without screwing yourself.

5. Make an offer.

One day after she toured with her mom, and three days after first talking to the sellers, on Friday, December 15, Claire made her offer for exactly the listed price.

Does that mean she independently arrived at an identical valuation? It looks suspiciously like just anchoring on what the sellers asked for!

In some previous attempted deals over the last couple years, when Claire did her valuation, it arrived at a very different number than what the sellers wanted — typically much lower, in some cases insultingly lower. (But in some cases the sellers were, y’know, very idiosyncratic and emotionally attached to weird properties without good comps. The double-edged sword of looking for something special!)

In this case, the list price felt about right. And you’re competing against other unknown players who are also presumably anchoring.

The sellers accepted her offer the same day. We went out to dinner at Kava in the South End. Though it did feel like a celebration, it was just the beginning. People began asking “Is it done?” “Did you do it?” “Is the ink dry?” “When is it final?” — language that, though I hadn’t previously realized it, implies that buying a hotel is an event that’s either in the future or in the past. But we lived inside that event for another four months.

6. Put together a purchase and sale agreement.

The offer is sort of informal. The real legal contract is the purchase and sale agreement (PSA), which takes a lot longer to put together, and was somewhat delayed for Christmas and New Year’s.

The PSA stipulated:

• What documents the sellers had to share. More of the P&L; financial statements; balance sheets; insurance policies; tax bills; permits they pulled; employee names, contacts, and contracts; and what they put into the property. Claire also requested a specific report on revenue per room type by day of week by month, because it’s such a seasonal business.

• How the liquor license would transfer. You don’t just automatically get to keep it; you have to reapply. That takes an uncertain amount of time to wind through the town committee, which exposes you to risk, which the PSA tried to mitigate by pegging the close to when the license transfers.

• The terms of seller financing. Since interest rates were up and the business wasn’t really making money, the sellers had to offer financing to attract buyers — like, the mortgage (the loan) to buy the hotel is from the sellers themselves, for half the price. Loans are typically for 3 or 5 years (occasionally 10, rarely 4); Claire got 5.

• How pre-booking and reservations would work. She had to honor existing reservations for rooms booked after she would take ownership, but you gotta work out a system for: if you’ve sold someone a gift card and they come to Claire to redeem it, how does that work? Do they transfer the value of the gift card? Or if guests have made deposits for future stays, do those transfer with the property?

• The dates that hard deposits would be due.

The sellers had an existing PSA from their lawyer and then Claire added stuff in.

She wishes she had requested more documents: insurance claims, most recent reports from building inspector like sprinkler report, their inspection report from when they bought it.

That stage took much longer.

7. Show your husband around.

I saw the hotel for the first time on January 5. My Foursquare check-in reads, simply, “omg lol”. It was eerie to walk in. It was quiet. The first time you see the place is when the last guys have already pulled out; I wish I could’ve seen their parties. There were no other guests. We stayed the night with two of Claire’s friends and sat by the fire and came up with names (“Claire’s Hotel”) and grand ambitions and rattled off places we loved and would dream of emulating. Deetjen’s Big Sur Inn, Montero’s, The Chatham Squire, Chiltern Fire House, Goose Barnacle, Keene’s Steakhouse, Lavagna, Joshua’s, Stissing House, Burp Castle, Early to Rise, Taconnet.

8. Sign the PSA.

On January 14, Claire and the sellers signed. At that point she had to fund 1% of the purchase price with a refundable deposit. The sellers had to put all the listings “under contract” and couldn’t continue with other buyers. They entered a 45-day inspection period.

9. Do due diligence.

Lie on the grassy hotel lawn as the morning sun peeks over the trees and inspect each blade of grass for beads of condensed water… no, dummy, not dew diligence!

Claire spent a lot of time onsite talking with home inspectors, contractors, insurance agents, and wedding planners.

She worked more on projections, making her own guesses about revenue and expenses, how the event business could be. She studied comparable transactions. Talked to other hotel owners in the area. Met with the crucial strategic Tanglewood people.

She mentally processed “am I prepared to do this?” She met with the sellers a couple times. And she negotiated. You do inspections to find the things that make the hotel worth less than it was advertised to be worth, and argue that you should have to pay less.

I’ve never negotiated anything. How can it possibly work? Of course you want to pay less; why should they let you? I guess you need to internalize that they also don’t want the deal to fall apart, and you need the confidence to be willing to let it fall apart. There were times when Claire really was willing to walk away (and I, secretly, wasn’t), for which I’m proud of her. A roof will need repairs; she got a bit knocked off. Her logic was to only push on things that are safety hazards, nothing cosmetic.

Maybe it’s like: (1) You have to both believe the initial offer was fair given the initial information. (2) Discounts have to be based on additional information such that the sellers that believe any reasonable buyer would discount their valuation similarly if they had that information.

Claire wished she had gotten another building inspector out there, had gotten the insurance agent out way sooner, had spent more time learning about the neighbors. Who are they? What are their motivations? A couple months later she said, “I’ve done an OK job but I could do so much better if I could do it again.”

February

10. Miss the deadline.

Remember in that TV show Lost how there was that button they absolutely desperately had to press every 108 minutes and nobody knew what would happen if they didn’t but they believed it would be catastrophic? (I just learned from a sign at the yoga center across the road that 108 is sacred.) Life has certain borders where the border is more precisely defined than the price of transgression, which leads to a certain vertigo as you cross over and “nothing happens” — which is not to say it doesn’t matter.

When the inspection period ended, Claire and the sellers had not yet agreed to the terms of the seller financing. They mutually agreed to an extension. Claire didn’t even know that was an option; she thought the whole deal would blow up; but the lawyers just sort of did it. Turns out it’s pretty normal, though we wouldn’t recommend it.

Here’s a good reminder for me, the computer programmer, that law is not code.

They extended up extending twice. There’s a brief gap where they’re not bound by any document; the deal is kept alive more by the inertia and goodwill (and eagerness) of the people.

Part of the delay was due to nailing down the loan terms. The PSA had only a high-level summary (amount, interest rate, term); they had to decide stuff like what happens if Claire misses an interest payment.

The insurance agent came out on almost the last possible day, which we would not recommend. Claire knew the insurance market was going crazy, so she had “underwritten” (i.e. assumed in her Excel model of the valuation) that insurance would be twice what the previous owners had paid. It turned out to be something like $20,000 more than that.

Let’s call the hotel profit margin roughly 10%: for each dollar of revenue, you make 10¢. So for every dollar you spend, you gotta make $10! So an extra $20k of expenses means you have to make an extra $200k in revenue, which, at $200/night, is 1,000 extra room-nights, or almost three per day.

But, by the terms of the loan documents, she had to get insurance. There were actually different requirements stipulated in the loan and security agreement and in the commercial mortgage — not only different limits, but different kinds of limits. Claire’s lawyer had them go with the most conservative interpretation of each.

The insurance agent had come out on a Wednesday. That Friday, Claire asked the sellers to knock some more off the price. On Monday morning they said no. At midday, Claire called and capitulated.

11. Pay the nonrefundable deposit.

This is the real point of no return for the buyer: a 4% “hard” deposit. March 18. Claire couldn’t believe it was happening. You gotta tell the bankers in advance so they can get the cash out. And when you tell them to wire the money, they’ll call you to make sure you’re real and don’t have a gun to your head. (Yes, this is where it’s scary how computers are getting better at talking faster than bankers are adapting their practices.) The money goes to sellers’ agent’s escrow account, where it will sit until you close.

At that point, something really disastrous would have to happen for the buyer to back out and forfeit the 4%. On the other hand, if the sellers wanted to back out, they’d have to pay Claire more like 1.5%, which was negotiated in the PSA. So, after all this work Claire’s done, someone else could theoretically ride on her diligence and just offer the sellers more than 1.5% more than Claire had offered. That possibility felt very scary at that point, and Claire wished she had pushed for a higher breakup fee.

(Were the sellers symmetrically nervous that some more-than-4%-better opportunity would come along for Claire? Another hotel did come on the market in this period, and she at least reached out to the broker.)

12. Begin acting like you own the hotel, though you don’t.

At this point Claire had to start talking to all these insurance agents and town permit committees and such as “the incoming owner”. It sounds weird on your tongue at first, but you fake it ’til you make it.

This limbo produces Kafkaesque tensions. You can’t get certain permits until you own the hotel, but as soon as you own it you’ll be in violation of the requirements by operating without them. Is there a formal grace period? In many cases Claire still doesn’t know. Some things, like the domain name and Google Workspace, transferred before the close. Some things, like getting her innkeeper license (which sounds important!), she still hasn’t gotten even today. She registered all sorts of things under our Boston apartment’s address so she could receive (e.g.) IRS EIN forms while we lived there, but now we don’t and it’s a pain to go back and change them all!

A lot of things are triggered when a property changes hands because of things like grandfathering. Why does that happen? I guess it’s hard to pass new regulations, and it’s also hard to imagine how proposed regulation would affect the world unless it would already affects you. So the opposition tends to be people who are already violating the proposed regulation, but the proponents are more worried about the future. So you compromise to exempt existing behavior. But the more stuff is grandfathered in, the more liabilities will be triggered by a property changing hands, which adds friction and risk. You gotta worry about whatever doesn’t transfer. The zoning transfers, which was great. The liquor license doesn’t, which was an annoyance. And the insurance doesn’t, which was a disaster.

She applied for the liquor license, which requires first getting TIPS certification (“Training for Intervention ProcedureS”). I think it was that one that had a slide with photos of three people and asked Claire who was likely to get drunk the fastest. (Based on weight, not personality.) Again, the liquor revenue is significant, and nobody knows how long the license will take to get approved, and the summer season is coming, so you want to start the clock as soon as possible.

She had to structure her corporate entities. We lead with the org chart on ringohospitality.com because it was not trivial or obvious how to set it up; our friend Joe had sketched it on a literal napkin when we visited with him in January. The PSA is signed by an individual, but the closing has to be done by the companies. She had registered Eclipse Properties LLC ages ago, and had figured that would be her management vehicle, but some tax thing came up such that it would be better to have that be an S Corp, so Eclipse was repurposed as the shell holding the property itself (future post).

She wrote an investment memo. She set up bank accounts. There were some little changes to the loan document “post–‘go hard’”, like, everything had been in 50¢ increments, and they made it flat dollars. Every month diligence went on, she asked the sellers for the new P&L.

And she thought about what the employee uniform would be. So far, none.

She tried again to get out of buying insurance, but the lawyers (both hers and the sellers’) insisted. She got property, liability, workers’ comp, liquor, and title insurance. She didn’t get environmental, cyber, EPLI, or employee dishonesty/theft insurance.

Throughout all this, what people mean by “required” is a subject for another post. Who requires? Under penalty of what? The state? A fine? Higher premiums? Often people answer “it’s just not done” and you gotta figure out why not. For example, you legally (state? federal? what?) have to have liquor liability insurance if you run a bar, but the limit is town-specific; in Lenox it has to be at least a $500k policy, though “what’s done” is $1m. Claire got $500k.

Getting insurance forces you to get to know your property by answering questions you couldn’t have imagined. Is the sprinkler system wet pipe (water) or dry pipe (foam)? (Water, I think.) Is there a deep fat fryer? (No, I think.) What’s the official capacity of every venue? (I don’t know.) How are we storing guests credit card info? (Same.)

She spent a lot of time in town, on the property, talking to people, interviewing past owners. She got floorplans and estimates for potential renovations. She interviewed all the current employees (four people, one quit, three stayed) and contractors and vendors hoping to continue working together. It was a lot of work just to make a list of what had to transfer: tech, PMS (property management system), event management, booking engine, water, electricity, trash. Talking to the people in the Philippines who handle customer service and revenue management (setting room rates), ensuring they’d raise prices for the weekends when Tanglewood had announced its non-classical “popular” concerts.

Though the contract had pegged the close date to the liquor license, the pressure was on, the summer was coming, and the sellers wanted to get going. They negotiated a discount based on lost revenue in order to close earlier.

And she reached out to guests who would be checking in right after the close.

April

13. Close.

I said above that buying a hotel was not an event but a process — but that’s only how it feels until this point, which is an event. “The close.”

We had a number of slapstick moments where Claire would say it’s closing soon and someone would react with distress and she’d be like, no no, the deal is closing, like in a good way. “Close” is one of those words.

There were lots of loan documents to sign: the loan and security agreement, commercial mortgage agreement, promissory note, a couple of guarantees, a pledge, and a couple more. And then she signed the transfer of title, or whatever it’s called. And several more. We’re tired and she forgets.

It turns out you have to pay the sellers for the gas they have in all the property’s tanks at the time of closing, which was a surprise. And you get paid to assume the roughly $40,000 of liabilities for outstanding gift certificates going back to 2001 (future post), since in Massachusetts they can’t expire.

The problem with buying a hotel is that now you own it! As soon as you leave that lawyer’s office, you’re in the service industry. Sometimes you have a contract such that the previous manager stays on for a transition period, but we didn’t. Fortunately it closed midweek, a month before the summer ramped up, with no guests that night — a quiet time, but getting busier every week.

Cap rates abruptly recede into the background and you just gotta direct someone to the toilet and restock the homemade muffins and there’s a bear who’s been hanging around the upper parking lot.

---

After reading this tonight, Claire described some lessons she wrote down along the way, so-called “obvious” things that she nevertheless wishes she’d thought more about sooner:

• When you receive a document or have to make a decision, don’t wait until you’re stuck to ask for help. Immediately think critically about whose advice and review you’ll want. Tell them (especially lawyers) what they’ll have to review well in advance.

• In a legal document, look at least for reciprocity. Where it asks you to make warrants and representations about yourself, does it expect the same of your counterparty? You don’t have to be a lawyer to notice asymmetries.

• Ask your broker for multiple recommendations (for lawyers, agents, inspectors) and interview them about transactions similar to yours. Do they have experience with large negotiations during inspection contingency, with seller financing, with land use law?

• Think about which contracts you’ll want to keep and cancel. Of course it’s hard to know until you’re running the place, but many vendors will want to immediately lock you into two-year contracts, and you may not have much time to consider them.

• If you have an advantage over someone in a negotiation, don’t lord it over them. If the contract says you can’t close until the liquor license clears, it doesn’t mean you won’t end up having to close before the liquor license clears. Don’t drag your feet waiting to pick the perfect day.

And she said, “I like running the hotel a lot more than buying the hotel.” Asset management is more fun when you live inside the asset.

---

Changelog

The pool has been uncovered and the chemicals are, uh, balancing or whatever. Should be ready by Memorial Day.

We’ve updated the logos on social media to use a tracing of the old wood sign on the road. Our apologies to whoever did the nice drawing of the building in the old logo!

For the first couple weeks, Claire and Memo would make eggs, bacon, or pancakes for people for breakfast for free on demand, but that’s a lot of work and they stopped.

Claire moved the large tray of tea bags to a drawer below the coffee, with just a handful of bags in a smaller bowl, since we don’t go through them that fast and they take up space.

She switched to larger trays for used mugs and water glasses so they run out less often.

She has made great progress in hiring staff to reopen the Ostrich Room.

Recently asked questions

Is there a bathroom down here [by the lobby]?

Yes, right back there, sort of tucked away. Facing the front desk, right behind you, take the first left after the front door.

Was there something else here on this platter?

Yes, croissants, but unfortunately we’re all out. This is the first morning we ran out of breakfast; usually a lot goes to waste.

We had this big hike planned but I’m sore and want to do something smaller by the lake.

Take a left out of the driveway, then immediate right, then immediate left, and continue for a mile until you see the Bullard Woods on the right. There are some nice flat trails through the woods, less than a mile, down to the water. Or you can skip the last turn and drive a mile to the boat ramp, right on the water, but you can’t walk along the water there, because it’s abutting private property.

Do you have change for a $20?

No, we don’t, but we should. You know, I went to Bank of America a few months ago to get some quarters and I asked if anyone ever gets anything other than quarters and she said oh yeah, all the time. I asked who and why and she said shopkeepers, so they can make change. Wow! Duh! That had never occurred to me! I never need to carry change only because the more fixed-in-place party assumes the liquidity burden!

If we go hiking after we check out and come back, is there a bathroom where we could change into clean clothes before driving home?

We need better signs for the bathroom!

Reader mail

Tom writes, “I like the name I-90 better than the turnpike because I grew up taking I-90 to Seattle, and I drove I-90 to get to college in MN. Something like the Catholic mass being inaccessible, impersonal in Latin but it was the same in other countries which was nice.”

Errata

In last week’s post, I wrote: “There’s one room visible from the fire escape that nobody has a key for and nobody has gotten into in memory.” In fact, there is no door. The room has somehow been entirely walled off, but is visible from the fire escape through an exterior window. I’ll get a photo sometime.

Announcements

We’re currently open Thursday through Saturday nights and will be open seven days a week starting June 1.

We’re planning to reopen the Ostrich Room (tavern) in early June for Wednesday through Saturday nights from 4 – 10 p.m. with live music a couple times a week.

We have found a couple of great bartenders but are still hiring a cook; please DM if you know someone!