The Process of a Hospitality Property Acquisition

Written By Stephanie Kountis

Hospitality property acquisition is a complex, multi-phase process that requires precision, deep market knowledge, and operational foresight. In today’s environment, marked by capital constraints, shifting valuations, and evolving guest preferences, success depends on more than just finding a deal. It demands the ability to underwrite, structure, and operate assets with both speed and discipline.

This article provides a comprehensive breakdown of the hospitality acquisition process, highlighting critical steps, key players, and best practices for institutional investors and experienced owner-operators alike.

1. Investment Thesis & Target Market Selection

Every acquisition begins with a clear investment thesis: What’s the goal of the acquisition? Is the strategy core, core-plus, value-add, or opportunistic? What are the IRR and cash-on-cash return thresholds?

At this stage, investors typically identify key criteria such as:

  • Market Tier (primary vs. secondary)

  • Brand Affiliation (e.g., Marriott, Hilton, IHG)

  • Asset Type (select-service, extended stay, luxury)

  • Operating Performance Metrics (RevPAR index, GOP margins, ADR)

Why It Matters: In 2024, 57% of hotel transactions occurred in secondary markets (JLL), signaling a strategic shift in investor targeting amid compressed returns in gateway cities.

2. Sourcing & Deal Flow Generation

Acquisition opportunities come through several channels:

  • Brokers (e.g., Marcus & Millichap, CBRE Hotels)

  • Off-market relationships

  • Lender-led sales or special servicing

  • Brand referral or ownership network deals

A strong sourcing strategy includes both inbound deal flow and outbound targeting, often leveraging tools like CoStar, STR, and brand-specific pipelines.

Tip: The best operators maintain direct lines to distressed ownership groups or lenders under pressure, particularly relevant as $35B in CMBS hotel loans mature by 2026 (Trepp).

3. Underwriting & Feasibility Analysis

This phase includes:

  • Reviewing trailing 12-month (T12) P&Ls

  • Benchmarking RevPAR, ADR, occupancy, and flow-through

  • Assessing CapEx needs and estimating a PIP (Property Improvement Plan)

  • Forecasting revenue and expense line items over a 5–10 year hold

Tools used include STR reports, HotStats benchmarking, and internal pro forma models. Key metrics include:

  • IRR / Equity Multiple

  • Cap Rate (Going-In vs. Stabilized)

  • DSCR (Debt Service Coverage Ratio)

  • GOP and NOI margins

  • Per key valuation

Case in Point: In Q1 2025, upper-upscale select-service hotels traded at an average cap rate of 7.2% in secondary markets, while luxury properties in coastal markets remained in the 5.5–6.0% range (CBRE, 2025).

4. LOI Negotiation & Deal Structuring

Once the asset passes underwriting, the buyer submits a Letter of Intent (LOI) outlining:

  • Purchase price and deposit terms

  • Due diligence period

  • Closing timeline

  • Key contingencies (e.g., financing, franchise approval)

Creative deal structures may include:

  • Seller carrybacks

  • Preferred equity partners

  • Assumption of existing debt

  • Brand or management conversion incentives

Trend: With tighter lending, many 2024-2025 deals involve co-GP structures, PIK interest, or convertible preferred equity to bridge equity gaps.

5. Due Diligence: Financial, Legal & Physical

Diligence typically takes 30-60 days and includes:

  • Financial Audit: Confirming revenues, expenses, outstanding liabilities

  • Legal Review: Title, environmental reports (Phase I ESA), zoning, franchise agreements, union contracts, labor compliance

  • Physical Inspection: Property condition assessment (PCA), engineering, MEP, life safety, ADA compliance

This step is where hidden risks (e.g., deferred CapEx, code violations, franchise restrictions) can dramatically alter a deal’s economics.

Tip: Involve brand representatives early - flag conversions, PIP requirements, or key money incentives can materially affect underwriting.

6. Franchise & Management Negotiations

If the asset is flagged:

  • Buyer submits for brand approval (subject to liquidity, experience, and scope of renovation).

  • A new franchise agreement is signed, often with a 10–20 year term.

  • New PIP is issued and timeline agreed upon.

If the buyer is bringing in new management, a Hotel Management Agreement (HMA) must be negotiated, balancing performance thresholds, fees, and termination clauses.

Note: Savvy buyers often re-negotiate royalty or marketing fee reductions or seek “soft brand” conversions for upside without strict operational mandates.

7. Financing the Acquisition

Financing sources include:

  • Bank and CMBS loans (currently 60–65% LTV for well-located deals)

  • Debt funds and bridge lenders (up to 75% LTV with higher interest)

  • Preferred equity

  • JV equity partners (including family offices and institutional investors)

Interest rates remain elevated, floating-rate debt hovers around SOFR + 500–600bps, making fixed-rate or rate-capped structures more desirable.

Best Practice: Build in reserves for interest rate increases, tax reassessments, and PIP overruns, especially in value-add deals.

8. Closing & Transition

The final stage includes:

  • Finalizing loan docs, title, and escrow

  • Transitioning licenses, permits, and utilities

  • Onboarding third-party management or internal teams

  • Launching renovation schedules and marketing plans

Depending on the deal complexity, closing can take 60–90 days from LOI signing.

Operator’s Edge: Successful transitions include pre-closing staff engagement, immediate CapEx mobilization, and a 90-day rebranding plan to drive RevPAR lift.

Hospitality acquisitions are part art, part science. They require operational expertise, underwriting discipline, and strategic capital alignment. In a market shaped by macro volatility and micro opportunity, investors who understand the full acquisition lifecycle (and can act with speed and precision) are best positioned to create lasting value.

Key Takeaways:

  • Build a repeatable diligence and underwriting process.

  • Focus on operational levers, not just pricing.

  • Involve brands and managers early to structure win-win deals.

  • Use creative capital strategies to unlock value.

Sources:

  • CBRE Hotels (2025), “U.S. Hospitality Investment Survey”

  • JLL Hotels (2024–2025), “Global Hotel Investment Outlook”

  • STR & HotStats (2025), “U.S. Hotel Operating Benchmarking”

  • Trepp (2025), “CMBS Hotel Loan Maturities Forecast”

  • PwC (2024), “Hospitality Sector Deal Structuring Guide”

Stephanie Kountis
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