Because of this increasing uncertainty, potential buyers of hospitality properties face a larger share of unknown risks in acquiring hotels and resorts than was the norm prior to the pandemic. Motivated buyers try to mitigate those risks by using escrow arrangements in the course of the purchase and sale transaction. Typically, this involves withholding a portion of the purchase price from the seller at closing and placing the funds into an escrow account with a third-party agent, such as a title insurance or trust company. The funds remain with the escrow agent for a specified period and are used to cover general or specific post-closing liabilities associated with the property. Any escrowed funds remaining after the expiration of the post-closing escrow period are released to the seller.

During the past several years, purchase price escrows have been used in the following kinds of deals involving hospitality properties:

• Properties that need post-closing repairs due to pandemic-related deferred maintenance or new governmental regulations
• Situations where the purchaser assumes obligations relating to formerly furloughed employees and cannot be certain of the costs of such obligations
• Instances of property being transitioned to a different, non-hospitality use when the potential liabilities from the transition are unclear to the parties

The principal benefit of such escrow holdback arrangements is that they can facilitate closing where the parties to an acquisition are unsure of the actual risks associated with the property. For a buyer, an escrow arrangement allows them to close and implement their plans for the hospitality property with a dedicated fund established to cover potential expenses or liabilities. For a seller, an escrow arrangement allows the property to be transferred with a portion of the purchase price set aside for future claims. In either case, closing escrow arrangements have helped parties close deals for hospitality properties in a still-uncertain time for the industry.