12 Sep Hotel Construction Financing Options
Hotel Construction Financing Options
Since 2017 the hotel construction business has been on the rise, which means there is more demand for financing options. Currently there are over 5,000 hotel construction projects lined up with an additional 2,427 projects in early planning stages. If you are considering hotel construction for your investing portfolio, here are five tips to help you with financing options.
- Know your market: where you plan to build your hotel is a crucial component and knowing the local trends will help your chances of getting finances. Study information such as fluctuations in demand, peak travel seasons and any other factors that could impact the occupancy rate of your new hotel. Find out about upcoming demands on the horizon, such as a new sports team in town, the potential opening of an Amazon HQ2 or other significant positive changes to the area. Do your research!
- Have a well-planned project: each lender has its own parameters of what is an acceptable loan-to-cost ratio, but they will take into consideration several factors. You will need to have an all-in budget that includes a breakdown of development costs, such as the project’s hard costs (physical construction of the building), cost of the land, and soft costs (architectural and engineering expenses, legal fees, permits, insurance, taxes, etc.). There needs to be enough detail that a lender can determine if the costs to develop the project are reasonable.
- Assemble a competitive set: as a developer, you need to know who your competition is. Your competition are other hotels offering similar amenities within a similar price range. Once you have identified your competition, historical operating data can be obtained through a number of different sources to assess positive or negative trends, and provide critical data for the operation projections.“Say they are building a Hampton Inn in Atlanta,” said Mike Jayne, HALL Structured Finance President. “They should be able to identify five or more comparable hotel properties with competitive flags and amenities. Using market research data, they can then show, on a historical basis, how the competitive set in the marketplace has performed over the last five years.”
- Prepare an executive summary: don’t submit a lengthy, overwhelming report to a potential lender. Instead, prepare a concise overview of the proposed hotel project. Include the sponsor’s background, and experience as it relates to the type of hotel project.
- Be prepared: the proposal that has the best success at being approved is the one that is best prepared with the ability to close within a 60-day period. This means that your construction plans, final project costs and construction permits need to be filed. In addition, knowing the loan terms that work best for your hotel project and the obligations you will be committing to, is a good idea. An investor who is prepared to contribute their own funds to the project will be more attractive to a lender.
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