If you are considering investing in hotel real estate in Italy, the first thing you need is a team of professionals, including a real estate agency, a broker, an auditor, a notary, and other specialists who focus on hotel real estate.
Let’s discuss the key points and stages you should pay particular attention to when buying a hotel in Italy as well as explore the main Key Performance Indicators (KPIs) for evaluating hotel performance.
THREE MAIN PARAMETERS WHEN CHOOSING A HOTEL
The primary factors that influence the hotel’s performance and the success of your investment are:
1. Location
2. Location
3. Location
Due Diligence
Acquisition of a hotel is a complicated procedure, therefore, to protect the interests of the buyer, it is necessary to perform Due Diligence – a comprehensive (legal and not only) assessment of the hotel structure. Due Diligence allows to avoid risks and secure investments in hotel real estate/business. Due Diligence procedure includes legal, technical, financial and tax Due Diligence, as well as risk assessment of a particular transaction:
- Financial & Tax Due Diligence – verification of financial, accounting and tax reports
- Legal Due Diligence – verification of legal documents, certificates, licenses, encumbrances, etc.
- Technical Due Diligence – verification of technical condition of real estate and equipment
- Chance & Risk – assessment of the prospects of development of the location, as well as the influence of existing and potential competitors
Share Deal vs Asset Deal
When purchasing a hotel, buyers can typically choose between two primary transaction structures: a Share Deal or an Asset Deal. Each has distinct legal, financial, and tax implications.
In a Share Deal, the buyer purchases the shares of the company that owns the hotel. The buyer acquires the company’s shares, thus gaining control over the hotel and all associated assets and liabilities. The buyer assumes all liabilities of the company, both known and unknown, including potential hidden debts or legal claims. That is why more complex Due Diligence is required in this case to uncover any hidden liabilities, legal issues, or tax problems associated with the company. On the other hand, Share Deal is more tax-efficient.
In an Asset Deal, the buyer purchases the property itself and does not take over the legal entity, so the buyer can avoid inheriting unwanted liabilities.
Key Performance Indicators (KPI) of a Hotel
Even if you are not directly involved in the hospitality industry and do not intend to manage the hotel yourself, it is crucial to understand how the hotel business operates and be familiar with the main performance indicators (KPIs).
- Room Revenue — revenue from room sales (total revenue from room sales over a specific period, minus commissions to hotel booking services)
- ADR (Average Daily Rate) — the average daily room rate
- Occupancy (OCC) — the actual occupancy rate of the hotel
Generally, an occupancy rate of around 60% is considered the minimum acceptable level for the hotel business.
RevPar (Revenue per Available Room) — the average revenue per room. RevPar is a very important hotel performance indicator
or another one way to calculate RevPar:
Let’s consider an example: The hotel has 100 rooms. As of January 1st, 80 rooms have been sold, and the room revenue amounted to 4,000 euros
RevPAR = 4,000 / 100 = 40 euros
- Double Occupancy — the average number of guests per room. This is an important indicator for planning additional hotel services (restaurant, spa, etc.) and related operational expenses
- RevPac (Revenue per Available Customer) — the revenue generated per guest per day/week/month/year. This includes income from room sales and other hotel services
- GOP (Gross Operating Profit) — the total revenue minus total expenses (before taxes)
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
Return on Investment (ROI)
In conclusion, let’s consider how to assess the investment attractiveness of a hotel and calculate your return on investment (ROI). To calculate ROI, you need to add up the costs associated with acquiring the hotel:
• Cost of the hotel/building
• Due diligence expenses
• Taxes
• Agency commission
• Notary and legal fees
• CAPEX (Capital Expenditures) – costs for improving the property (if necessary). For example, upgrading the building to a hotel category, major renovations, etc.
Then, divide the resulting amount by:
• The EBITDA amount (if you manage the hotel yourself)
• The annual rental income (if you lease the hotel to a management company)
If the resulting figure is around 12 years or less, it’s a great investment!
We hope now you have a general understanding of hotel operations and the hotel key performance indicators . If you have any questions, require more information or need assistance in selecting a hotel and closing the deal, feel free to contact us. We are happy to assist you at every stage of the hotel purchasing process.
