A proverb states that prudence does not avoid all misfortune, but a lack of prudence never fails to attract it. This is why due diligence is a vital step in buying a hotel. In a hotel acquisition context, the term "due diligence" refers to the investigations carried out by the prospective buyer. These investigations focus both on the hotel assets (i.e. the operating building as a whole) and the company that owns these assets or operates the hotel. Due diligence must also enable the buyer to fully appreciate the hotel's business, understand its structure, environment and market, and analyse the long-term viability of their project.Due diligence is often carried out further to the drafting of a letter of intent and a non-disclosure and exclusivity agreement that define the key points of the transaction. Any letter of intent protecting the parties' interests should stipulate that the results of the limited investigations undertaken were satisfactory, and in particular, did not reveal any material misstatement or departure from the information provided by the seller.It should not be assumed that the seller's warranty [or legal guarantees] will protect the buyer as much as effective due diligence would. Buyers are advised to scrupulously perform due diligence (as if the seller had not issued a warranty). Since the contractual indemnities due by the seller under the seller's warranty are limited in time and amount, they will never replace successful independent due diligence conducted by the potential buyer.We have reviewed the five essential checkpoints to be examined by the potential buyer of a hotel (or group of hotels) below:1 Legal due diligenceThe potential buyer will ensure that the hotel operation complies with the regulations in force by examining current operating contracts (franchises, management contracts, service provision contracts, commercial leases, etc.), as well as contracts in place with suppliers, licences, potential brands or agreements concluded with financial institutions. In particular, due diligence must identify all contracts whose continuation is likely to be affected by the proposed transaction, taking into account an intuitu personae clause.The risk of immediate repayment of the company's financing (leasing contracts in particular) in the event of disposal of the shares and ownership interests of the hotel operating company or owner of the premises must also be carefully examined and dealt with before a promise to sell agreement is signed.A legal audit of the company that owns and operates the business is required, as is an investigation into the owner of the hotel premises, if applicable, in order to verify the seller's ownership rights and capacity to sell. Legal due diligence will also uncover any disputes initiated by or filed against the hotel, and the commercial and financial consequences thereof that may impact the final price or the seller's warranty.In addition to these habitual legal checks, a new subject has also recently arisen: protecting the personal data of guests and staff under the GDPR[1] which came into force on the 25th May 2018. Due diligence should cover all the procedures implemented within the hotel and actually used, hotel and staff management software, contracts involving confidential data processing such as those negotiated with OTAs, supplier contracts and hotel management agreements[2]. In addition, data processing management must also examine the compliance of those entities that process data on behalf of the hotel, in particular through SaaS software, i.e. software hosted by suppliers and accessed via the Internet.To be monitored: the current franchise contract or hotel management agreement.When a hotel operating company has entered into a management agreement with a hotel brand, the buyer should carefully review the history of the relationship with the brand and the investments made. There are often clauses requiring the prior agreement of the hotel group with regard to the transfer of control of the company/ business or premises. Lastly, if the potential buyer wishes to terminate the contract early, the cost of such and the contract terms will have to be assessed. A lawyer can advise the buyer on the most practical way to approach the hotel group in this respect - a direct approach is often best. The same considerations apply to hotel franchise contracts or hotel consortia membership agreements.To be foreseen: the commercial hotel lease and its renewal with a capped rent.Instructing a legal expert and a lawyer experienced in valuing rent can be judicious. Capex (if possible) and the lease should be carefully examined, taking into account the regulations in force[3] in order to avoid any unpleasant surprises with regard to the financial conditions of renewing the hotel lease that arise from the property's single use status and its capped rent. If the difference between the current indexed rent and the rent under the renewed lease is too significant, the hotel's profitability can be affected, as can the negotiations surrounding the sales price.2 The operational component of the hotelThe potential buyer will have to understand all the operational characteristics of the hotel and its positioning on the market. The buyer will focus investigations not only on the characteristics of the existing client base, but also on its resilience, the contribution of each segment (leisure, corporate, individual, group) and the weight/ cost of each distribution channel in the marketing of rooms and the revenue structure. A detailed understanding of the yield management strategy employed, the IT systems used (CRM, database, POS) and the professionalism of the management in place should make it possible to identify areas for improvement in order to boost the property's competitiveness vis-a-vis its competitors. It may be advisable to seek the advice of a consultant specialised in benchmarking in order to verify the hotel's positioning and performance (OR, ADR, RevPAR) with regard to its competitive set.Similarly, the analysis of each expense item and the comparison of expenditure levels with industry norms or averages is a source of valuable information. This will reveal the business model (subcontracting or in-house management of maintenance, cleaning, security, etc.), growth drivers (improvements in management), and even internal control procedures that call into question the proper functioning of the establishment.These operational investigations can be completed by an estimation of the property's "as-is" value. Taking into account potential improvements, the future value of the property can also be determined for the buyer, once the identified efforts (management, Capex, marketing, etc.) have been instigated.3 Technical inspection of the hotel building and its equipmentThis is one of the points that hotel neophytes often fear the most. The potential buyer's technical consultants and lawyers will carry out a detailed document and on-the-spot study of all the physical elements of the hotel building and associated reports. This includes installations and equipment such as electrics, plumbing, building structural aspects, IT systems, decorative elements and hotel material.A close examination will be carried out to ensure that the hotel, which falls under the category of public-access buildings, complies with fire safety and health standards. Particular care will be taken to ensure compliance with the recommendations indicated by the Health & Safety Commission and the various control authorities as part of their mandatory periodic checks. Lastly, due diligence can make it possible to verify, prior to the transaction, whether or not rooms can renovated or capacity increased in accordance with current urban planning rules.If the due diligence reveals that regulatory compliance work has to be carried out - in particular with regard to disabled access - the financial cost will in principle be borne by the seller [point to be negotiated]. Yet the question of which party is responsible and when the works should start does remain: if it is the seller, this may result in a further delay in signing the final sales act.4 Hotel tax, finance and accounting issuesDue diligence enables the buyer to check whether the hotel is up to date with its tax obligations and to assess the tax risks of the previous hotel operation by examining the various mandatory reporting that has been carried out. A tax and accounting audit of the hotel and/ or the operating company or the hotel operating group will help determine in particular the amount of the seller's warranty, the acquisition plan and the timing and structuring of the transaction (business or shares of the operating company).This part of the due diligence process requires a detailed study, notably an examination of the business' accounting documents and tax returns, as well as all legal documentation in order to assess financial coherence. In this respect, the verification of revenues and declared results makes it possible to check that there is no risk of a tax adjustment for VAT or corporate income tax purposes. Due diligence will also assure the buyer that the accounts are true and that the hotel is not in a precarious financial situation. In addition, it guarantees that the sale will not be called into question in the context of the fight against money laundering. Further, the potential buyer will examine operating expenses and their relevance in relation to the standard hotel industry ratios, which also provides a good indicator of how well the property is being managed.Lastly, accounting and financial due diligence is essential to evaluate the coherence of the proposed sales price in relation to the book value of the assets or shares acquired. In this respect, care must be taken with regard to the cut-off date, if set. Indeed, forgetting to rigorously account for accounts receivable or inventories can have consequences that are all the more significant since the hotel being sold is substantial. Provisions must also be verified. The proposed buyer must be able to identify all the risks related to the operation and then measure the repercussions on the accounts. They must also check that there are no fictitious assets recorded, such as non-existent inventories or receivables with a long history. 5 Hotel human resources and social aspectsDue diligence lists are generally exhaustive with regard to human resource issues. Legal due diligence will ensure compliance with labour law regulations and verify the hotel's HR management. It is therefore advisable to obtain information on employment contracts, the list of employees with an indication of seniority, the amount of salaries and the various benefits granted to staff collectively or individually.With regard to HR issues, it is the risk of litigation brought before the Industrial Tribunal by a former employee that is the most frequently observed. Human resources due diligence will make it possible both to assess the buyer's HR obligations and to evaluate any necessary reorganisation and restructuring with regard to the collective Hotels - Cafes - Restaurants labour agreement (in principle) and the company's agreements in place.In addition, it is crucial for the buyer to be able to anticipate future costs given the age pyramid of the staff and the existing skills versus the skills required in the future for the successful development of the hotel, after having identified key employees. The potential buyer is invited to examine the positioning of jobs in the classification of the labour agreement in place, gender equality, subcontracting contracts (housekeeping, for example), the frequency of use of fixed-term contracts (casual staff) and the risks of requalification. This is definitely not about conducting a Prevert-style inventory, but rather about identifying risks (financial and legal, not to mention the seller's reputation amongst staff).Perhaps a sixth condition for successful due diligence is related to the due diligence method itself. For example, properly coordinating the team of due diligence consultants, meeting deadlines and preparing the due diligence checklist in advance so it can be carried out within the specified timeframe.The potential buyer will have to conduct hotel due diligence in accordance with an often tight schedule, while rapidly identifying the key priority points to be covered. Effective due diligence is based on the proper coordination of the various parties involved and the exchanges between the various consultants and experienced lawyers (generally organised by the law firm, which already has its specialised lawyers and tax specialists).No checklist has been annexed to this article, since no standard list exists - the list must be adapted to each transaction. Indeed, we sometimes come across hotel due diligence checklists that are not necessarily appropriate for the hotel transaction in question. Some are too short or generic. Others result in the creation of voluminous data rooms which are time consuming to process on the buyer's side (and thus unnecessarily costly) - these create delays and are counterproductive since they fail to get to the heart of the matter. In short, let us not forget, "Hell is truth seen too late" (Thomas Hobbes).[1] General Data Protection Regulation on data privacy - European regulation ndeg2016/679 and law ndeg78-17 - French Data Protection Act, modified on the 20th June 2018[2] Reference: our article published in Deloitte - In Extenso's 2019 Tourism and Hospitality Trends publication : Personnal data processing and the hotel industry in France: hotel management agreements will need to be revised and currently found at https://www.hospitalitynet.org/opinion/4089147.html[3] Reference: our article published in Deloitte - In Extenso's 2017 Tourism and hospitality trends publication: French hotel, tourist residence and apart-hotel leases are evolving and currently found at https://www.hospitalitynet.org/opinion/4084138.html

Indeed, given the volatility in the travel market many hotel owners would no longer take the risk of entering a relationship with a hotel operator without the ongoing support of a hotel asset manager.Employed by the asset owner, the role of a hotel asset manager is to ensure a property reaches its full potential so that it can create increased returns in the long term or be sold at the peak of its real estate value.Fred Novella, Managing Director at hotel asset management company Global Asset Solutions, outlines the three main reasons why hotel asset managers have come to play such an invaluable role.Reason #1: They bridge the knowledge gap between owners and operators When owners and operators enter a hotel management agreement, they often do so with different objectives in mind.The operator may naturally be more focused on protecting their brand and on growing their footprint, while the owner may be looking at maximising their profits or the value of the asset.Although the management agreement usually goes some way towards aligning these objectives, it often leans slightly more towards the operator.This misalignment wouldn't necessarily be an issue if there was a greater symmetry between the hospitality expertise of the owner and that of the operator.But large hotel owners aren't always professional hoteliers. They're more likely to be financial institutions, funds, real estate companies, high-net-worth-individuals, etc. - often with little operational experience in hospitality.This lack of experience means they may sometimes struggle to identify the right operator in the first place. And even when they do, they may not always know what to look out for when negotiating the best terms and conditions.This is where we as hotel asset management professionals step in.Our experience in hotel operations, contract negotiations, development and performance management, along with our track record of working with high-profile international management companies in different world regions, gives us the level of expertise some owners may be lacking.And while operators can also offer a great deal of local and tactical expertise during agreement negotiations - often hand in hand with the advice received from their legal representatives - it may not be enough.Hotel asset managers bring a much broader understanding across geographical markets, segments, property types, best practices, brands and operators.This big-picture thinking can be helpful while owners are choosing an operator that's right for their property. Our early involvement often prevents future conflicts down the line.Once a hotel property is operational, we then provide the owner with regular detailed reviews of the financials, Profit & Loss, balance sheets, budgets, cash flow, as well as any advice on capital expenditure.We provide support to the hotel management team with regards to sales strategies, food and beverage marketing plans and any other issues relating to the future of the hotel.We also regularly make sure the voice of operators and the local management team is heard by the owner on security issues, industrial action, delays in opening or any other urgent matters.Reason #2: They are the owner's eyes and ears on the ground Hotel asset managers make sure communications between the owner, the hotel management company and their local team are coordinated in the most efficient way.Our role is to ensure all information - positive and negative - reaches the ownership as quickly as possible. This creates a win-win for the owner and the operator.By being proactive and truthful in all reporting, we make sure there are no surprises for the ownership later on.Each asset manager takes a slightly different approach, but most will produce a monthly market review and a monthly profit and loss review which highlights any major issues.These reports are based on information provided by the operator which is then standardised to make it more easily digestible for the owner.The reforecast and the PACE are also closely monitored to ensure the hotel finishes the year on target or above.We also verify balance sheets, cash flow, summaries of monthly capital expenditure projects, etc.In doing so, we make sure all provided data has been calculated correctly and follows the latest USALI guidelines.We also highlight key points relating to operational departments, operating expenses, human resources, cash flow, balance sheets, statistical data, etc.When it comes to capital expenditure, the asset manager will regularly provide owners with a detailed analysis of where the asset is at, along with the best strategy for going forward.We always seek to immerse ourselves at a property level so that we can provide this type of high-level service.We study how the asset is run, review its capital expenditure, booking pace, the types of groups coming into the hotel - indeed, anything that may impact the profitability of the property.During the construction and pre-opening phase, we will also provide boots on the ground with ongoing site visits and meetings with the regional operational team, future general manager and steering committee.As hotel asset managers, we rely on our detailed knowledge of the hospitality industry across a number of regions, but our experience of working with a variety of different operators is also very helpful.It allows us to support general managers and their teams in using the latest techniques and international best practices relating to hotel sales and marketing, revenue management, commission levels and flow-through.Beyond the level of the individual property, we have an in-depth knowledge of the tourism industry as hotel asset managers.It gives us great insights into potential disruptors affecting the market (think Airbnb, HotelTonight or other OTAs) and any developments in digital marketing, online booking tools and social media - not to mention their impact on commission fees.Reason #3: They act as an arbiter in resolving potential tensions between operators and ownersAlthough as hotel asset managers we are accountable only to the asset owner, our role is to build bridges across different teams.Those who buy into the cliche of the aggressive asset manager telling operators how to run their businesses, will no doubt be disappointed by the courteousness, professionalism and ease with which our interactions take place.Instead of micro-managing general managers and their executive teams, our success depends on our ability to work collaboratively.To achieve the best result on behalf of the owner, we need to be able to work harmoniously with the operator's corporate office as well as local teams on the ground.We're often well aware of the tightrope many general managers are expected to walk between demonstrating accountability towards the hotel owner (as they should), their regional manager and the corporate office (as is often the case).Hotel asset managers regularly provide additional backup to general managers when it comes to pushing for more support from the wider brand, particularly when the local team doesn't feel able to speak up - for example on issues relating to better engineering supervision or increased sales and marketing support.This is why we spend so much time trying to get a full picture of the specific dynamics and limitations each general manager works under.Given the need we talked about earlier to align interests, the role of a hotel asset manager can of course be adversary too.After all, we need to ensure owners only get billed for justifiable expenses and cross-check that revenue and cost items are booked in the right departments.It is also our job to help ensure the best executive team is in place and see to it that operators comply with the most recent accounting standards.Mistakes can and do happen of course. When we pick up a particular issue, we'll first approach the general manager with a request to rectify it.If disagreement with the local team persists, we may then escalate it to the corporate office.If no solution can be found at that point, we'll seek to mediate and identify a way forward which is acceptable to all parties.If it involves an accounting issue, we may also be required to contact USALI.The owner is always informed of any mistakes we pick up on, although minor ones will mostly be dealt with without their direct intervention.Of course, the management team may occasionally consider us a 'fly in the ointment'.But they also know well enough that by us challenging the status quo, they're more than likely to benefit from improvements in practice and performance themselves.ConclusionAlthough still more common in upscale, full-service hotels operated by regional and international hotel companies - hotel asset management is a thriving profession.Given the complexities of the hospitality market, many asset owners highly value the stability and clarity we bring within the relationship between the owner and the operator.And while our ultimate responsibility is to maximise the profit and value of a specific asset, our role has evolved beyond a solely 'checking the books' function.Indeed, our impartial expertise in areas as diverse as real estate, operations, sales, capital expenditure, strategic positioning and marketing, has made us an essential partner in some of the most successful owner/operator relationships.

In the lead up to the 2019 Arabian Hotel Investment Conference (AHIC), we asked a number of industry partners how they synchronise for success.In the hotel industry you often hear the owner-operator relationship being compared to a marriage, where both parties enter into the arrangement with the best of intentions and a view towards a lifetime partnership. While this may seem a slightly idyllic perspective the fundamental principles are nonetheless very similar and as with all relationships, the most important factors in building strong, long-lasting relationships are trust, communication and a shared vision for the future. The ultimate goal of course, is to develop a sustainable and profitable real estate investment, create job opportunities, contribute to the economy, and to continue to maintain and optimize the value of the asset for owners.Hotel agreements now come in many guises but the owner-operator relationship is the cornerstone of any long term hotel agreement. It is based on trust and continuous dialogue between the parties to tackle obstacles and to minimize conflict and misunderstanding. Any operational or financial issues can be resolved, and the hotel management agreement saved, if the relationship is strong and transparent. Indeed, most agreements fall apart because the relationship was not properly handled or where expectations were not managed as they should have been. As much as possible both owner and operator should have a common vision from the outset but also understand that there will be bumps along the way where you may temporarily fall out of love, but always retain the outlook that you are in for the long term.As the hospitality market continues to evolve so do owner-operator relationships nurtured with careful consideration given to an owner's specific needs and an understanding of their investment requirements. Today, hotel management agreements need to incorporate some flexibility to reflect the changing landscape and ensure owners' concerns are being addressed by putting together more reflective and more balanced agreements. For instance, as owners with multiple hotels start insisting on franchising, it is important that operators start incorporating franchising into their strategies for the region and partnering with specific owners who have the infrastructure and expertise to support such an operation, at least with certain brands. Such adaptation to market trends is just one example out of many that we should do in order to optimize the chance of success. But like in any business transaction it is important to highlight to some owners why franchising may not be the right choice for them as it would involve extensive infrastructure and may well be costlier than expected, involving industry expertise and extensive resources. Franchising is just one example of many where hotel agreements need to be tailored to address owners' concerns and strategies, while still preserving the rights of the hotel operator and brand.Equally so, new or first-time owners need to seek advice and be realistic when it comes to expectations, investment returns, and over-leveraging. The hotel asset class cannot be compared to residential real estate, for instance. As much as it is the operator that needs to manage such expectations and keep the dialogue, it is important that investors commission third party advisory firms to get an independent opinion throughout the process if necessary. The hotel type and its positioning need to be established given the market, the location and the city. Whether it is to develop a hotel or serviced apartments, whether it is to be positioned in the midscale or upper tier categories, are all factors that should be agreed on from the start given the market dynamics.As mentioned earlier both owners and operators should have a clear and common vision for the hotel from the onset of the relationship. And it is vital that both parties recognize the market variables and that market demand will continue to evolve. When a traditional source market shuts down due to sanctions or economic conditions, another market needs to be tapped. Such diversity is crucial to reduce any long term risk. For instance, when Dubai had experienced a reduction in the Russian market in recent years, the government's strategy was to eventually waive visas for Russian nationals which brought back the demand, while at the same time opening up to more visitation from India, China and some African markets. Hotels in turn have to adapt to changing trends and to remain proactive in their strategies by creating and stimulating demand rather than waiting for the business to come from established sources.So, in summary the key elements to foster harmonious relationships between all stakeholders may be simply categorized into the following: a shared vision, managing expectations, constant dialogue, transparency and fostering solutions. As an ever-changing industry synchronizing for success is simply partnering with the right owners, developing the right product, understanding the importance of the owner-operator relationship, adapting to changing owner and consumer trends, and living by these pillars proactively and transparently.This year will see our continued focus on adding value to our owners and maximizing the value of their real estate assets. The core philosophy will remain to manage a profitable, sustainable hotel operations by maximizing returns for our investors with the right type of agreement, the most appropriate brand and optimal real estate offering.