The Purchase and Sale Agreement (PSA) is the most important document in any hotel acquisition. It is the binding contract that governs every aspect of the transaction, from price and payment to what happens if something goes wrong. Yet most first-time hotel buyers sign PSAs they do not fully understand, relying entirely on their attorney without knowing what to push for or watch out for.
This guide breaks down each major section of a hotel PSA, explains the negotiation points within each one, and highlights the red flags that should trigger a closer look. Whether you are buying a micro resort or a 30-room boutique hotel, these terms apply across hospitality acquisitions.
What a PSA Is and How It Differs from the LOI
Before diving into the PSA itself, it is important to understand where it fits in the acquisition process.
The Letter of Intent (LOI) is a non-binding outline of proposed terms. It is the opening move in the negotiation. Once both parties agree on the LOI terms, the attorneys draft the PSA, which converts those general terms into enforceable legal language.
Key differences:
| Feature | LOI | PSA |
|---|---|---|
| Binding? | Generally non-binding (except confidentiality and exclusivity) | Fully binding once executed |
| Length | 2-5 pages | 20-60+ pages |
| Detail level | High-level terms | Comprehensive legal provisions |
| Who drafts it | Buyer (typically) | Seller's attorney or buyer's attorney (negotiable) |
| Purpose | Establish negotiation framework | Govern the entire transaction |
Think of the LOI as the handshake and the PSA as the contract. The LOI-First Method that we teach in our community ensures your LOI sets up favorable PSA terms from the start, rather than scrambling to negotiate them after the fact.
Key Sections of a Hotel PSA
1. Purchase Price and Allocation
This section defines the total purchase price and, critically, how that price is allocated between real property, personal property (FF&E), goodwill, and other assets. The allocation matters for tax purposes and can significantly affect both the buyer's and seller's after-tax outcomes.
Negotiation points:
- Push for a higher allocation to personal property and FF&E, which can be depreciated faster than real estate
- Ensure the allocation is specified in the PSA rather than left to post-closing negotiation
- If the property includes a liquor license, land, buildings, and equipment, each should have a separate allocation
2. Earnest Money Deposit
The earnest money deposit (EMD) is your good-faith deposit, typically placed in escrow within 3-5 business days of PSA execution. For hotel transactions, the EMD generally ranges from 1-5% of the purchase price.
Negotiation points:
- Keep the initial deposit as low as the seller will accept (1-2% is ideal)
- Negotiate a "day one" deposit with an additional "hard" deposit that goes non-refundable only after the due diligence period expires
- Ensure the PSA clearly states when the deposit becomes non-refundable and under what conditions it is returned
- The EMD is credited toward the purchase price at closing
3. Due Diligence Period and Contingencies
This is your protection window. During the due diligence period, you have the right to inspect the property, review financial records, assess physical condition, and verify everything the seller has represented.
Negotiation points:
- Push for 45-60 days minimum (30 days is tight for a hotel acquisition)
- Include specific contingencies: financing, environmental, title, physical inspection, review of financial records, and review of all contracts and leases
- Negotiate the right to extend the DD period for an additional deposit if needed
- Ensure you have a "free look" period where you can terminate for any reason with full refund of your deposit
For a complete walkthrough of what to investigate during this period, see our hotel due diligence checklist.
4. Representations and Warranties
Representations and warranties (reps and warranties) are statements of fact that the seller makes about the property and the business. They cover everything from the accuracy of financial statements to the existence of environmental issues, pending litigation, and compliance with laws.
Negotiation points:
- Push for comprehensive reps covering: financial accuracy, no undisclosed liabilities, compliance with building codes, no pending litigation, accuracy of rent rolls and reservation data, condition of FF&E, and environmental compliance
- Negotiate a survival period (how long reps remain enforceable after closing, typically 12-24 months)
- Watch for qualifiers like "to the best of seller's knowledge" which weaken the seller's obligation
5. Closing Conditions
These are the conditions that must be met before the transaction can close. Common closing conditions include:
- Buyer obtaining financing commitment
- Clear title with no undisclosed liens or encumbrances
- All seller representations remaining true at closing
- Transfer of required licenses and permits
- No material adverse changes to the property or business between PSA and closing
Negotiation points:
- Include a "material adverse change" (MAC) clause that lets you terminate if the business suffers a significant downturn between signing and closing
- Ensure financing contingency gives you adequate time and clear exit rights if your loan falls through
6. Prorations
Prorations determine how revenue and expenses are split between buyer and seller at closing. This section covers:
- Room revenue: Revenue from reservations that span the closing date
- Advance deposits: Guest deposits for future reservations transfer to the buyer
- Property taxes: Prorated based on the closing date
- Prepaid expenses: Insurance, vendor contracts, and utility deposits
- Accounts receivable: Outstanding payments from group bookings or OTA settlements
Negotiation points:
- Clarify exactly how advance deposits are handled (they can represent significant cash)
- Negotiate that the seller provides a final accounting within 30-60 days of closing for true-up adjustments
- Ensure OTA receivables (Booking.com, Expedia, etc.) are properly assigned
7. Transition Provisions
Unique to hotel acquisitions, transition provisions govern the handoff of the operating business. This includes:
- Employee transition (will the buyer hire existing staff?)
- Guest reservation honoring
- Vendor and supplier notification and contract assignment
- Management company transition (if applicable)
- Seller's cooperation during the transition period
Negotiation points:
- Negotiate a 30-90 day consulting agreement where the seller assists with the transition
- Include provisions requiring the seller to introduce you to key vendors, staff, and local contacts
- Clarify responsibility for honoring gift certificates, loyalty programs, and group contracts
8. Default and Remedies
This section defines what happens if either party fails to perform. Common provisions include:
- Buyer default: Seller retains earnest money as liquidated damages
- Seller default: Buyer can pursue specific performance (force the sale) or recover damages
- Cure periods: Time allowed to fix a default before the other party can act
Negotiation points:
- Push for liquidated damages (capped at your EMD) as the seller's sole remedy for buyer default, rather than allowing the seller to sue for actual damages
- Ensure you have specific performance rights if the seller tries to back out
- Negotiate reasonable cure periods (10-15 business days) for both parties
Red Flags in Seller-Drafted PSAs
If the seller's attorney drafts the initial PSA, expect it to be seller-favorable. Watch for these red flags:
- Short due diligence periods (under 30 days). This pressures you to rush your investigation.
- Non-refundable deposits from day one. Your deposit should be refundable during the entire DD period.
- Broad "as-is" language that attempts to eliminate all seller representations and warranties.
- No MAC clause. Without this, you are locked in even if the business deteriorates before closing.
- Vague proration language. This creates disputes at closing and post-closing.
- No survival period for reps and warranties. If reps expire at closing, you have no recourse for post-closing discoveries.
- Unlimited buyer liability for default. Your exposure should be capped at the earnest money deposit.
Key Principle
The PSA is where deals get protected or exposed. Every favorable term you negotiate in the PSA reduces your risk. Every unfavorable term you overlook increases it. Do not rely on trust alone. Get the protections in writing.
Hospitality Attorney vs. General Real Estate Attorney
One of the most common mistakes first-time hotel buyers make is hiring a general real estate attorney instead of one with hospitality transaction experience. Here is why it matters:
A general real estate attorney will handle the property transfer competently. But a hotel purchase involves business assets, operating contracts, employee transitions, liquor license transfers, franchise agreements (if applicable), and guest reservation obligations. A hospitality attorney has seen these issues before and knows the standard market terms.
Specific areas where hospitality experience matters:
- Liquor license transfer requirements (which vary significantly by state)
- Franchise agreement assignment or termination (if the hotel is flagged)
- Management agreement review and negotiation
- OTA contract assignment
- Employee classification and transition (especially in states with successor employer laws)
- FF&E allocation for tax optimization
The cost difference between a general attorney and a hospitality specialist is typically $5,000-$15,000. On a multi-million dollar transaction, that is a rounding error relative to the protection it provides.
Timeline from PSA to Close
Once the PSA is executed, here is a typical timeline for a hotel acquisition:
| Phase | Timeline | Key Activities |
|---|---|---|
| PSA execution | Day 0 | Deposit earnest money, begin DD clock |
| Due diligence | Days 1-45 | Property inspection, financial review, environmental assessment |
| Financing commitment | Days 30-60 | Lender appraisal, underwriting, loan commitment |
| Title and survey | Days 15-45 | Title search, survey, resolve any title issues |
| Pre-closing | Days 50-70 | Final walkthrough, closing document preparation |
| Closing | Days 60-90 | Sign documents, wire funds, transfer keys |
For a detailed walkthrough of what happens after the PSA is signed, read our guide on the hotel closing process.
Terms Every First-Time Hotel Buyer Should Push For
Based on our experience across dozens of hotel transactions in the Incredible Hospitality community, here are the terms we recommend every buyer negotiate:
- 45-60 day due diligence period with a full refund of deposit during that window
- Financing contingency with a clear definition of "commitment" and adequate time to secure it
- Comprehensive reps and warranties with a 12-24 month survival period
- Material adverse change clause with a defined threshold
- Seller transition consulting for 30-90 days post-closing
- Liquidated damages cap limiting buyer's exposure to the EMD amount
- Clear proration methodology with a post-closing true-up period
- Assignment rights allowing you to assign the PSA to your acquiring entity
If you are working through the acquisition process and want expert support on your PSA terms, the 5-Day Micro Resort Buyer Challenge includes frameworks for both LOI and PSA negotiation that you can apply to your first deal.
Frequently Asked Questions
What is the difference between an LOI and a PSA in hotel acquisitions?
A Letter of Intent (LOI) is a non-binding document that outlines proposed deal terms including price, timeline, and key contingencies. A Purchase and Sale Agreement (PSA) is the binding legal contract that governs the transaction. The LOI comes first and serves as the framework for negotiating the PSA. Once the PSA is signed by both parties, it becomes legally enforceable.
How long is a typical due diligence period in a hotel PSA?
Due diligence periods for hotel acquisitions typically range from 30 to 60 days, though more complex transactions may require up to 90 days. During this period, the buyer has the right to inspect the property, review financial records, assess environmental conditions, and verify all representations made by the seller. If issues are found, the buyer can renegotiate terms or exit the deal with their earnest money deposit returned.
What is earnest money in a hotel purchase agreement?
Earnest money (also called an earnest money deposit or EMD) is a good-faith deposit that the buyer places in escrow when the PSA is executed. For hotel transactions, this typically ranges from 1-5% of the purchase price. The deposit is generally refundable during the due diligence period and becomes non-refundable (or "hard") after the contingency periods expire. At closing, the earnest money is credited toward the purchase price.
Do I need a hospitality attorney for a hotel PSA?
Yes. A general real estate attorney may miss hospitality-specific issues like liquor license transfers, franchise agreement assignments, management contract assumptions, guest reservation handling, and employee transition provisions. A hospitality-experienced attorney will know which clauses to add and which seller-favorable terms to push back on. The cost difference is minimal compared to the protection they provide on a multi-million dollar transaction.