5 essential elements to get your hotel project off the ground

Sundip Patel breaks code of getting the funding for hotel projects

ABOUT THE AUTHOR

Sundip Patel has been in the commercial banking industry for over 14 years. He serves as the CEO of AVANA Capital and is involved in all aspects of the business. Sundip has worked in public and private accounting, gaining experience in mergers and acquisitions, tax planning, leverage buyout financing, and securing U.S. government contracts.

Sundip Patel

The demand for hotel development loans has increased. Construction loan volumes are up, bouncing back after the lack of development during the recession. Lenders, however, are still understandably gun-shy. They’ve seen the highs and lows in this sector over the past 15 years and know that the future health of the hospitality industry is often unpredictable. That’s why today’s top lenders make decisions based on their own organization’s value proposition (the niche they target) and the borrower’s creditworthiness. How can you obtain financing for your hotel’s expansion or new development project? Keep the following fundamentals in mind as you pursue funding for your project:

GET YOUR HOUSE IN ORDER

Expect your financials to be closely scrutinized. Your corporate due diligence items must be up to date and ready for inspection. Before a lender will approve an $8 million-plus loan for hotel development, they’ll want to see your financial statements, tax returns, and other related documents.

Markets can remain irrational longer than you can remain solvent.

CHECK LOCAL MARKET GROWTH

Lenders look for Tier 1 locations in major cities. These locations have a well-established and increasing visitor base. One caveat to keep in mind: Tier 1 markets are attractive because they show resiliency over time. But along with that staying power comes strong competition. To be successful, your brand must target a specific customer niche, and demographic trends must support your predictions for growth in that segment.

DEMONSTRATE PREVIOUS BRAND EXPERIENCE

Lenders will review owner and developer experience in building, managing, and working with the same or similar franchise. Having worked for a budget brand does not qualify you to develop, operate, and own a large upscale or luxury brand. You must demonstrate relevant expertise, progressive career growth, and management strength.

BUILD A STRONG WAR CHEST

Lenders want to see owner’s equity in the 25 percent range, which is 25 percent of total project cost inclusive of all the fees. Then the owner is vested and has skin in the game. You’ll also have to show balance sheet liquidity and prove you have excess reserves for sustainable strength. Economist John Maynard Keynes famously said, “Markets can remain irrational longer than you can remain solvent.” Both owners and developers must prove they have operational resources that will ensure post-development solvency.

CHOOSE THE RIGHT TIME

Good timing can be difficult to achieve because it often involves external factors. Sometimes franchise agreements dictate the schedule or pressure from investors seeking immediate returns can rush the process. Owners with the strongest balance sheets know when to stop building and when to start expanding. Developers should also know when the timing is right to initiate a project.

You must demonstrate relevant expertise, progressive career growth, and management strength.

While you can’t predict the future, you can know exactly where you stand in today’s market and whether you have the fortitude to remain profitable with your current resources.

Consider these five fundamentals a requisite guide for obtaining development financing in the hospitality sector. As the market tightens its lending standards, those hoteliers and developers who build a solid economic case for their venture and have a proven track record in the industry stand the best chance of receiving the financing they need to get their projects off the ground.

ABOUT THE FIRM

With offices in Arizona, and Manama, Bahrain, AVANA offers owner occupied commercial real estate financing through conventional, bridge, and SBA 504 lending programs for acquisition, refinance, and construction. Since its founding in 2002, the company has funded more than $900 million in loans and is known for its speed and certainty of execution. For more information, visit www.avanacapital.com.