In the first two posts of this series, we reviewed the key aspects of location and brand selection. We now turn to how to finance a hotel development.
Once a site has been selected and a brand has been locked down, the next crucial step is to secure financing for the hotel.
With interest rates slowly rising and as we move further into the economic cycle, some lenders are becoming more discerning with respect to hotel projects. However, capital is still available, and it is increasingly common to access capital from local banks that have a vested interest in the local community vs. large national banks more focused on their balance sheet. For new construction projects debt is generally available at 60%-65% loan to value. Although this necessitates a higher amount of equity, this can be beneficial in the long-run because even before the construction loan is converted into a permanent loan after hotel opening, lower leverage can mitigate downside market risk should a negative macroeconomic event occur such as a recession.
As described in part two of this series, an executed franchise agreement can also make securing a loan with more favorable terms for the developer that much more possible. Not only do lenders have familiarity with the major brands but after executing the franchise agreement, brands are generally amenable to providing a comfort letter to the lender. Ideally an investor will receive terms sheets from several lenders but it is important to note that not all lenders have familiarity with the unique aspects of hotel assets so some will not touch this asset class. Sea Glass Hospitality Partners has strong relationships with many financial institutions and can assist with the lender negotiations to secure the best terms for ownership.
The next post will move into the nitty gritty of development.