Hotel due diligence investigations are undertaken in different contexts and to achieve different ends. Typically, these investigations are conducted by buyers and investors in the process of evaluating a hotel investment, and thus are tailored to the acquisition of a hospitality asset.
The whole process involves some routine and some highly-specialized tasks, which can take the investor between one and three months in the most widely-accepted versions of the process. With the advent of the internet, auditing documents has become much easier, thanks to the digitization of paper documents and to the ease with which one can access servers from all over the world, thus simplifying the first phase of due diligence in a hotel real estate investment.
- Market due diligence: Analysis of the hotel asset’s reference market, Analysis of competitors and the market, Analysis of current performance and projected future performance
- Legal due diligence: Verification of ownership of the asset’s title, Sale and lease contract analysis, Checking the status of any litigation, Composition of a legal document checklist
- Tax due diligence: Tax conditions, Tax risk evaluation, External audit of tax position, VAT and tax reconciliation, Property tax projections and valuation
- Real Estate, Technical & Environmental due diligence: Technical verification of the real estate, Monitoring land registry data and correspondence with the state of places, Checking for the presence of asbestos, Fire code certification
- Financial due diligence: Pre-acquisition hotel evaluation, to determine the market value of the asset, Corporate and accounting audits, and outlining potential acquisition strategies (transfer of property vs. transfer of shares), Preparation of set documents to share between the parties, including the sale and purchase agreement
Pre-acquisition due diligence investigations are often performed by specialized professionals hired by the buyer or investor in order to reduce the risks associated with the acquisition of the asset. The due diligence process – facilitated by the seller – almost always begins with the signing of a preliminary confidentiality agreement known as an NDA, or Non-Disclosure Agreement, the purpose of which is to ensure the confidentiality of all of the information made available to the purchaser.
During the analysis, the main objective of the hired professionals is to render as faithfully as possible the buyer’s vision – legally and physically, technically and fiscally – passing on any discrepancies to the buyer in the phase of the hotel investment valuation. Following due diligence, acquisition proceedings can also be halted in cases in which the due diligence proceedings make it clear that completion of the transaction would be impossible, risky, or simply more complicated than expected.
In other cases, due diligence can bring to light minor deviations that do not impede the completion of the transaction, but instead, cause adjustments in the price agreed upon by the parties. Due diligence therefore fulfills its role of verifying, checking, and ascertaining the status of all elements that have the potential to be critical to the acquisition of hotel and hospitality real estate.