11th Mar 2014
In some ways, securing financing for a hotel project is similar to any other mortgage: you design the building, hire a construction firm, then approach a lender about financing, using the project itself as collateral. However, financing a hotel is a much larger project than a residential home, and much trickier than a small retail or office development. Here’s what you need to know in 2014 if you intend to finance a hotel project.
One: Due Diligence
Due to the size and scale of a hotel project, it is more important than ever that you not approach potential financiers until you have the basics in place: The location; the design and construction firms; the brand and operator; a timeline for the design and construction phase; a full financial projection showing the operating costs and profit margin for the finished hotel; and all necessary permits and other local filings. Banks get nervous when any of these elements are vague or missing, and you don’t want to give them any cause to turn down the loan request.
Two: Cash on Hand
Like any mortgage, a substantial down payment is going to be required by any bank that is approached for financing. Banks usually like to see the investors have some “skin in the game”, and the down payment is also used as a barometer of your overall financial health – if you’re unable to produce a down payment, there will be doubts about the viability of your whole project.
Three: Go Big
A hotel can be an immense project, usually requiring lengthy construction periods and large amounts of financing. Smaller banks used for residential loans likely won’t be able to handle the financing on your project. Larger banks will be necessary to find an institution with the available funds for your project. Some regional and community banks might be able to handle the funding request, but generally the larger institutions are the better place to start.
Four: Hit Your Dates
When working with a bank about a hotel construction loan, be certain of your project’s timeline. Know when construction will start, and be able to produce an agreement with your construction firm that shows firm dates for the project’s beginning; all the major milestones along the way; and the end of construction. The bank will want to see these dates clearly in the contracts in order to feel secure that you will be able to fulfill your end of the deal. A guaranteed maximum price agreement with the contractor goes a long way in calming the bank’s fears that the project will be completed.
In the end, a hotel is a complex and expensive project that requires reliable partners, including your contractors and financiers. In this or any year, it’s important that you choose both wisely.