14 October 2012
Buying a hotel — the Hotel Purchase Agreement documentation and process.
The Hotel Purchase Agreement documentation and process is where fortunes can be won or lost. The hotel lawyers of JMBM’s Global Hospitality Group® have decided to share some practical tips we have gleaned over the past 25 years from more than $87 billion of hotel transactions. Initially, these insights will be published as articles on the Hotel Law Blog at www.HotelLawyer.com and then they will be assembled into the HOW TO BUY A HOTEL handbook for our “We wrote the book™” series, much like the HMA Handbook and the Lenders Handbook for Troubled Hotels (see Resource Center at HotelLawyer.com for free copies).
Here is our next contribution to the “Buying a Hotel” series. . . It is a new topic that every buyer should be aware of and consider as part of the due diligence on buying a hotel.
What you don’t know about undocumented workers
could really hurt you!
Guy Maisnik | Vice Chair, Global Hospitality Group®
Let’s say you are buying a hotel. You have engaged the right legal and due diligence team. One of the items your team is investigating is whether the hotel employees are legally documented. Upon review of the hotel records, your team discovers that there is a fairly high turnover of hourly workers. You know the challenge of attracting and retaining enough good workers.
New focus on the employer, not the employees.
In the past, you may have risked hiring undocumented workers. In practice, only employees were targeted. In many cases, authorities would pull up to a worksite, round up dozens of employees and load them on a bus. However, this indictment in Kansas marked a significant turn of events, with hotel owners now charged with conspiracy to harbor undocumented immigrants for personal gain, five counts of harboring undocumented immigrants and wire fraud.
In other words, this new approach by the Feds suggests:
- Forget the illegal workers
- Bring criminal indictments against owners and
- Seize the hotel where undocumented workers are employed
What are your concerns about your pending hotel purchase?
In this new environment, here are 3 key things you should be concerned about as the owner of a hotel with undocumented workers:
- First, you worry about having documented workers or possibly going to prison and having your hotel or restaurant seized.
- If there are too many undocumented workers, you could possibly have a shortage of workers and need constantly to find new ones. In many hotels, a significant number of employees can be undocumented. What could this cost be to you?
- You have concerns about whether you can legally ask workers for documents without violating their rights of privacy or civil liberties or being accused of discrimination. What safe harbors do you have? Do you need to verify accuracy of any documents you receive? How far beyond the papers can you go/should you go to verify? Are you responsible for forged or phony papers?
What should you do? What can you do?
Under Federal law, employers are required to ensure that their employees are entitled to work in the US and complete form I-9 (Employment Eligibility Verification) published by the Department of Homeland Security. The purpose of form I-9 is to document that each new employee is authorized to work in the United States. Knowingly hiring or retaining an unauthorized alien violates the Immigration Reform Control Act (IRCA). For hiring violations (knowingly hiring or continuing to employ unauthorized alien), fines can run to $11,000 per unauthorized alien, plus additional fines up to $1,100 for failing to maintain necessary paperwork for the I-9 of $110 – $1,100 for each individual for whom the paperwork was not properly kept. There are also civil and potentially criminal penalties.
So you don’t step into some problems you don’t want when you buy a hotel, here are a few steps you should consider taking as a hotel buyer (and prospective employer):
- Require that the seller provide you with a complete list of the employees and their corresponding I-9 forms.
- Require that the purchase agreement contain adequate remedies if a certain number of hotel employees are undocumented. Such remedies could include a credit against the purchase price for the cost of hiring and training a certain number of employees.
- Prior to closing, smart buyers will typically require that the seller (or operator if the operator is the employer) terminate all its employees. Simply transferring the employees is risky because the buyer would have to trust that the seller correctly prepared form I-9s for all employees. In our experience, when performing due diligence, we rarely see a perfectly prepared set of form I-9s. If the employees are transferred to the buyer, the buyer cannot re-run form I-9s.
In re-hiring, the buyer must comply with IRCA and complete a new I-9 form for each employee. Any form not completed should be rejected. Any employee that cannot provide a completed I-9 form cannot legally be hired.
This all means that you need to pay more attention to the undocumented worker issue and do things right.
It’s costly to replace and train an employee. Not having a sufficient number of properly trained employees can lead to loss of services and hurt the hotel’s reputation, and hence, a loss of revenue. It can be even more costly and risky for any hotel employer to suffer potential civil and criminal penalties by employing undocumented works. A sophisticated hotel buyer will properly negotiate appropriate remedies in the hotel purchase agreement, perform adequate due diligence and follow appropriate employment procedures to ensure that it is complying with applicable law when re-hiring the seller’s or hotel manager’s employees.
HOW TO BUY A HOTEL — Free handbook
Until the free handbook on HOW TO BUY A HOTEL is published (expected soon), you can access all the materials on this subject at www.HotelLawyer.com. Look on the right hand side of the home page and click on “Buying & Selling a Hotel.”
Here are a few of the articles on the subject under this topic:
Buying a hotel? Financing a hotel? 10 things every borrower should know. (part 1)
Buying a hotel? Financing a hotel? 10 things every borrower should know. (part 2)
The hotel purchase and sale agreement — What is the value of the seller’s representations and warranties to a hotel buyer?
Can I use the EB-5 Visa Program for financing hotel acquisition and renovation?
Seller representations and warranties in a hotel purchase agreement — What are the big issues today?
How to buy a hotel — What you don’t know about undocumented workers could really hurt you!
HOW TO BUY A HOTEL Handbook: Franchise issues in hotel purchase and sale transactions
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $87 billion of hotel transactions and have developed innovative solutions to help investors be successful in bidding for hotel acquisitions, and helping investors and lenders to unlock value from troubled hotel transactions. Who’s your hotel lawyer?
Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $87 billion of hotel transactions, involving more than 3,900 properties all over the world. For more information, please contact Jim Butler at email@example.com or 310.201.3526.
Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE “hotel lawyer” and you will see why.
Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.