Whether you are refurbishing, buying an existing property or building a new facility hotel financing can be a tricky investment. Understanding all of the aspects of raising working capital and being able to make construction loan and mortgage payments prior to the hotel realizing a profit is important to the success of the project.
Before any attempt can be made to secure hotel financing a working business plan must be developed. A valid plan usually covers all aspects of the operation from turning the first shovel of dirt for new construction through at least 10 years past the expected date of loan payoff. If you are unable to show how any and all loans and debt will be eliminated over time, without the need for additional debt, there is little chance your hunt for hotel financing will be successful.
Regardless of how many business partners are involved each one will want assurances that their investment is a secure one and that an escape route, in case of total business failure, is not limited to selling the property at any given point. In other words, you cannot have a plan stating if something goes wrong and you cannot afford the payments, you will sell the building and return their money.
Initial Equity Can Be Good Selling Point
How much of an initial investment you are capable of making can be the deciding factor in obtaining hotel financing. If you can begin with 25 percent of the total project cost for example, it should be easy to finance 75 percent. Keep in mind, your investment will be for the construction cost and most of your initial earnings from operation will go to the other 75 percent of costs. You will still need fund to pay for day to day operations and other expenses such as franchise fees and advertising.
For instance, if your hotel financing plan for construction is a $30 million facility, by the end of construction the cost, with loan payments could rise to about $35 million or more, depending on interest rates. You must also, in your plan, look at the ramifications if the interest rate rises. You can look at history and project an interest rate increase based on a similar time frame rate increase for the immediate past. Meaning, if you are looking at the first five years of operation, look at the rate increase for the most recent past five years and figure that percentage increase into your plan.
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