25th Feb 2014
Securing a lender for your hotel development project may be a step that comes later on in the development process, but it is something that must be planned for from the beginning, so that the development project can be successful. Among the things that lenders look for when they are determining whether or not to fund a project, includes the experience of the developer, the architect, design team and brand. Lenders will also be looking at the economic viability of the project, including the expected return on the investment, and the developer’s likelihood of avoiding default if market conditions deteriorate. The good news is that, with the slow but steady improvement in the economy, lenders are making loans again, as hotel development loans no longer seem as risky as they did a few years ago.
Because of this, there needs to be careful planning when entering into a hotel development project from the very beginning. When putting together a development team, the lenders will want to see some experienced members of that team. Lenders want to be sure that the project can remain within its budget, and also that the project will come to fruition. By having team members who have done successful projects before, the current project will have a better chance of also being seen by the lender as potentially successful as well. This includes architects, builders, operators and advisors.
Before approaching the lender, the team also needs to be sure it has done the best study as to the economic potential of the development project, so that it can create a better picture of the potential outcome to a lender. Well-supported projections of everything from potential occupancy rates and room prices, to operating expense levels, will be essential when securing funding. Part of the benefit of having an experienced team is to provide more comfort to the lenders about these outlooks.
Another thing which a development team needs to plan for is how much of a contingency fund will be required by the lenders to be set aside in the case of unforeseen development and start-up costs. With more experienced teams, the chances of going over budgets is likely to be lower, meaning that when making a proposal for funding, the lenders may require only about 5% over the budget costs to be placed in a reserve fund. However, for teams that are less experienced, a much higher amount must be reserved as a rainy day fund, possibly as high as 10% of the construction costs, plus six months of debt service during the start-up period of operations. Thus, the stronger sponsors of developments will be able to get a much better funding package from their lenders.