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19 FebFunding of hotel investmentsFunding the construction of hotelsHotel project fundingLeasing as a tool for funding the purchase of hotelsLong-term funding for hotel construction

Funding the construction of hotels: general information

Companies taking their first steps in the funding the construction of hotels and hospitality business often experience difficulties in financing projects.

Sometimes they don’t have experience in the industry, they don’t have a credit history, and they don’t even have adequate collateral.

Obviously, before starting any capital-intensive project, it is critical to conduct a comprehensive study of the company and consult with the top management who plans to invest in the hotel. This work should address the possibility of obtaining funds to finance the project and analyze the most effective ways to attract them.

Financing of large projects in the hotel business can be carried out using a wide range of internal and external resources.

Equity capital can be generated as a result of current operating activities (for example, current income from other hotels, retained earnings, depreciation, sale of assets), as well as by increasing the company’s authorized capital. An increase in the authorized capital can be carried out through contributions of the owners or by attracting new partners (issue of new shares).

An important way to raise capital is the cooperation of the hotel business with venture capital funds. Venture capital funds are involved in high-risk projects with above-average potential returns. As a rule, such projects are not accepted by large banks due to an excessively high level of risk.

The most common debt securities that serve as an instrument for funding the construction of hotels and hospitality facilities  are bonds.

Other securities that are used relatively rarely include bills of exchange and warrants.

Bonds are securities issued in series, in which the issuer confirms the debt to the creditor and undertakes to perform a specific action in relation to him. Bonds come in different types depending on the type of issuer, maturity, face value, interest rate, additional options and ways to minimize the investment risk of a particular project.

Hotel project funding: construction lending

As the pandemic draws to a close, the hospitality industry is looking to the future.

The basis for the recovery and prosperity of this industry is funding the construction of hotels and affordable long-term loans for new facilities or the reconstruction of existing ones.

By 2020, hotel construction around the world was at a high level, requiring multi-billion dollar funding for nearly 15,000 new projects with more than 2.4 million new hotel rooms.

Today, financial institutions and other providers of capital are extremely cautious about funding new projects, which requires more comprehensive research and analysis, as well as increasing the demand for professional support and management of investment projects.

CP Finance UK is ready to offer your business long-term financing for the construction and modernization of hotels in Europe, the USA, Canada, Latin America, the Middle East and South and East Asia.

We specialize in long-term loans, organization of project finance (PF) schemes, investment engineering, consulting and management of large projects.

To find out more about our services and opportunities, contact an CP Finance UK representative and schedule a free consultation at a convenient time.

Long-term funding for hotel construction

Until recently, bank loans have been the most common external source of funding the construction of hotels.

When choosing loans, experts recommend that companies carefully read the policy of a particular bank regarding commissions and additional fees charged to customers.

The offers of banks are as diverse as the terms of financing.

Since banks strive to ensure a high return on capital, the cost of a loan consists of several elements, such as a fee for processing a loan application, a commission for providing funds, interest, and more.

As part of a credit relationship, the bank provides the company with funds, and the borrower is obliged to repay them with interest due in accordance with the loan agreement. Investment loans for the construction of hotels are often provided for a period of 7-10 years or more.

Together with an investment loan, a loan for replenishment of working capital can be issued, which provides additional benefits to project participants. The procedure for applying for a loan requires submitting to the bank the results of studies related to the funding of hotel investments. These include a business plan, financial plan, estimate, project documentation and other documents.

In the hotel industry, important indicators for lenders are, among others, the RevPAR index (profitability of an available room), NOI (net operating income), LTV (loan-to-value ratio), NCF (net project cash flow) and others.

During the negotiation process, the main provisions of the future loan agreement are formulated, such as the accrual of a penalty for early repayment of the loan, the possibility of recourse and requirements for additional borrowing.

The results of the analysis of the loan application and the response of the bank will largely depend on the existing credit risks and the creditworthiness of the company. The level of risk is significantly affected by the availability of liquid collateral. Such collateral can be a land plot, as well as a financed hotel complex, movable property of the borrowing company, financial assets, etc. The collateral provided, its value and liquidity affect the final cost of borrowed funds.

To increase the chance of obtaining a loan for the construction of a hotel, experts recommend using such auxiliary tools as guarantees.

In many cases, additional mechanisms are being developed to ensure debt repayment, such as a guarantor’s application to enforce financial obligations (restrictions on the payment of dividends to shareholders, etc.).

An important point that is taken into account by banks when considering a loan application is the borrower’s financial participation in the project.

The more significant the initiator’s participation in funding the construction of hotels, the higher the chance of obtaining a loan on favorable terms.

Most often, credit institutions require the financial participation of the project initiator at the level of 30-60% of the total cost of the hotel.

However, some financial mechanisms make it possible to implement a project with the participation of the initiator at the level of 10% or even lower.

In the case of granting loans to the hotel business in foreign currency, the currency and interest rate risk is additionally increased. The bank can reduce the interest rate risk by obliging the borrower to enter into an IRS (interest rate swap). This means replacing fixed interest rates with floating interest rates.

Currency risks are also minimized through hedging (futures contracts).

The IRS refers to an agreement between two counterparties to exchange a fixed interest rate for a floating interest rate. The floating interest rate is set for a partial period based on the base rate (eg EURIBOR or LIBOR). This tool serves as a hedge against adverse changes in interest rates. The agreement is concluded for a certain period of time.

The key document on which hotel business lending is based is the loan agreement. The loan agreement specifies the specific purpose of the loan, the terms of its repayment, the currency of the loan, the collateral and the repayment schedule. The preparation of this document requires a professional approach and repeated consultations between representatives of the bank, the borrower and other interested parties.

Due to the high social significance of certain investment projects, the state, as a regulator, can pursue a policy of economic stimulation of priority sectors. In particular, the government may support environmental, infrastructure, high-tech projects or projects aimed at improving the situation of certain social groups.

Private hotel projects can rarely rely on government support, but in some cases support is provided in the form of loan subsidies and guarantees. Ultimately, these solutions reduce the need for equity capital and reduce the value of the collateral provided.

Leasing as a tool for funding the purchase of hotels

Leasing or factoring can be alternative instruments for Funding the construction of hotels.

These instruments can be used, for example, to finance the purchase of hotels. In practice, there are two types of leasing: operating leasing and financial leasing, which have certain limitations.

Operating lease actually refers to obtaining the right to use property for periodic lease payments and without the obligation to buy the property at the end of the term of the agreement. The asset remains the property of the lessor and is recorded on the lessor’s balance sheet. The lessee’s expenses represent the cost of the monthly lease payments and part of the down payment, determined depending on the planned length of the lease period.

Financial leasing essentially means “leasing” financial resources (funds).

The lessee becomes the owner of the asset, which is recorded on his balance sheet. This fact is of great importance for calculating depreciation and tax liabilities of the company.

Attention should be paid to leaseback, when the owner of an asset sells it to a leasing company and becomes its lessee on the basis of a separate agreement. Through such a transaction, the company receives an immediate cash inflow and continues to use this asset (hotel complex).

Factoring is a type of commercial transaction in which a specialized financial institution (factor) acquires claims for payment of money that a client owes to another party as a result of its current activities.

The conclusion of a factoring agreement can significantly speed up the implementation of current investment projects and increase liquidity.

If you need professional advice on the financing of hotels and tourism projects, contact ESFC Investment Group and make an appointment at any convenient time. We will answer any of your questions and offer the best financial solutions for a specific investment project.

The role of a business plan in hotel financing: investment consulting services

As we said above, the role of professional investment consulting services in hotel project financing is steadily growing.

This can be easily explained by the tightening of requirements in the financial sector, which is looking for reliable and well-prepared investment projects in order to avoid losses. An important role in attracting funding belongs to a solid business plan, which should reflect the potential opportunities, risks and limitations of the project.

Whether it’s a bank or an investment fund, the hotel’s business and financial plan will be key when deciding whether to provide large funds.

Potential lenders or investors want to know more about the history of the company, its current results, owners, services, the position of the hotel in the tourism market, its development strategy and competitors.

The business plan describes the history of the company and its development plan for the future.

It defines the mission and strategy of the company, its goals, resources, market, target group of customers and direct competition. Essentially, a hotel business plan is a plan of action, according to which investments will be realized and results will be achieved in the future. It should present a realistic picture of the future based on previous analyzes and studies, contracts and plans.

A detailed financial plan for a hotel project is designed to answer any questions about the expected financial results in a certain period.

This plan is drawn up on the basis of reports, balance sheets, analysis of financial flows and changes in the company’s capital structure. The finance team should pay particular attention to standard project financial performance indicators, sensitivity analyses, loan maturities, schedule of financial needs, etc.

A very important element of the financial and economic plan is the operational forecast, compiled in accordance with USALI (The Uniform System of Accounts for the Lodging Industry). This generally accepted system requires taking into account hotel services, organizational structure, staff motivation, hotel occupancy levels, service profitability, fixed costs, and much more.

The success of the project will largely depend on whether your company can obtain the necessary funding on adequate terms.

In general, the more effort a team puts into a hotel’s business plan and financial planning, the more detailed, substantiated and persuasive documents a company can provide to potential investors and lenders.

A company that specializes in this type of consulting and has the knowledge, practice and ability to raise capital can help achieve this goal.

If you are interested in investment consulting and project finance services, CP Finance UK is at your service at any time.

CP Finance UK FINANCE LIMITED
Website:https://c-pfinanceuk.com/
E-mail:finance@cpuk-financeltd.com
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11 FebAlternative sources of financing for real estate projectsFinancial engineering in real estate project financeFinancing of real estate projectsReal estate financingReal estate project financeResidential and commercial real estate projects

Real estate project finance: funding options and general features

Over the past few decades, developed countries have used a new method of financing of real estate projects and risky development projects 

This method is called project finance (PF).

This concept is usually characterized as leveraged financing of a project with limited recourse by raising funds through a specially created independent company.

Thus, project finance differs from traditional construction finance in at least two ways.

First, lenders share some of the business risks with the project company.

Secondly, the project finance is provided against the future cash flow generated by the project.

A very important feature of the projects implemented in this way is the sharing the risk between the participants. Each PF initiative is assessed by the participants mainly in accordance with its ability to generate cash flows, which become the main guarantee of debt repayment and return on equity.

Project finance is a flexible combination of financial products / services that makes it possible to finance projects in the field of residential or commercial construction against a guarantee of expected future cash flows.

In order to obtain a safe environment for invested funds, the generated cash flows must be isolated from any other property of the participants.

This is achieved through the establishment of a special purpose vehicle (SPV / SPE). Thanks to a formally independent company, in the event of a project failure, creditors can only seek to satisfy their claims within the assets of the project company. Accordingly, the initiators risk only those funds that were invested in this company.

Conversely, in the event of shareholder insolvency, the SPV / SPE will continue to operate under all circumstances.

This guarantees the completion of the development project regardless of the financial health of the initiating companies.

Real estate project finance

Currently, there is a wide range of instruments for financing of real estate projects of various types.

Usually, developers use financing from internal sources and attract external financial resources by issuing shares or borrowing (loans, leasing, bonds).

The world financial literature gives more than fifty methods of real estate financing, classified according to many criteria.

The dilemma of every developer at the stage of preparing to secure financing of real estate projects is the choice of the most appropriate source of funds and the organizational form of the project.

CP Finance UK has recruited a multidisciplinary finance team with solid experience in financing development projects around the world.

We are ready to offer a large bank loan of 10 million euros or more with a maturity of up to 20 years for a Financing of real estate projects.

If you are looking for a reliable source of funds for the construction of large properties or refinancing loans, contact us.

Financial engineering in project finance

All residential and commercial real estate projects are characterized by a complex planning stage and a long period of operation of finished objects.

Another important characteristic of such projects is the irreversibility of investments.

At the initial stage, the project involves high capital costs, and at a later stage, the maintenance of buildings and residential complexes implies significantly lower operating costs. The revenues / benefits from such a project increase over time, but the costs are stable and predictable.

The implementation of a large development project usually involves a significant proportion of borrowed funds (high debt burden). Moreover, the bulk of the required resources must be provided within the first 1-2 years of construction.

Financial engineering in real estate project finance applies to the selection of funding sources and capital structure.

It assumes, in particular, the following actions:

• Calculation of the weighted average cost of capital (WACC).
• Determination of the optimal capital structure and external financing mechanisms.
• Assessment of the project’s creditworthiness and search for optimal sources of funds.
• Financial planning of cash flows after tax.
• Securitization of future financial flows.
• Identification and assessment of project risks.
• Preparation of a hedging strategy to reduce / eliminate risks using derivatives.
• Refinancing of asset-backed securities.

The preparation and implementation of a large development project depends on the impact of other sectors, therefore it is extremely vulnerable to changes in the macroeconomic situation, legislative changes, and so on.

This is clearly demonstrated by projects for the construction of hotels, shopping centers or entertainment complexes, which have suffered as a result of the pandemic and severe restrictive measures.

For this reason, financing of real estate projects requires a professional approach to project risk assessment.

PF assumes a rational distribution of risks between participants, depending on their ability to control these risks.

Financing of real estate projects looks complex, requiring a combination of various financial instruments, including complex derivatives.

It is very difficult, therefore projects according to this formula in many developing countries of the world with a weak financial market are not being implemented.

When modeling financial cash flows, classical discounting methods are used. The finance team needs to calculate whether a given project has a positive or negative value, or calculate the rate of return. Of course, a detailed analysis of the financial projections is necessary.

If you need real estate project finance services, please contact CP Finance UK.

Bank loans for commercial real estate projects

Currently, bank financing of real estate is most often carried out according to the project finance formula (PF).

Moreover, the use of a long-term bank loan is becoming an integral part of the process of buying / building commercial real estate in modern realities.

In the project finance formula, the borrower considers the proceeds from the project as the main source of debt repayment. This type of financing is entirely based on the future cash flows expected to be received under commercial lease contracts, both already signed and ready to sign.

In the case of a PF, the borrower is usually an independent special purpose vehicle (SPV or SPE – Special Purpose Vehicle / Special Purpose Entity), which deals only with the construction and management of real estate.

Thanks to this structure, the project debt does not burden the financial statements of the initiators.

Assets are not used as collateral for debt, and the provider of capital (usually a large bank) issues a loan against future cash flows.

Before the 2020 pandemic, project financing was widely used for the construction of large tourist facilities, hotels, shopping and entertainment centers around the world. Many capital intensive projects in the French Riviera, Barcelona and other tourist destinations in Europe have been built using this mechanism.

But even today, when investors have redefined their attitude towards commercial real estate projects, there are ample opportunities for project finance in various areas.

Banks’ requirements for borrowers and development projects:

Before an investor goes to the bank with his project, he must answer a few questions.

First of all, does the project meet the basic requirements of the bank, necessary for the consideration of a loan application?

Below is a list of banks’ requirements for commercial real estate projects:

• Formal legal requirements. A reliable investment project must have an orderly legal status of real estate. In addition, banks pay attention to the presence or willingness of participants to create an SPV / SPE, the presence of building conditions or a building permit.

• Technical requirements of the bank. To finance the project, a positive assessment of the project and a conclusion on the technical feasibility of the project are required. The initial document confirming this possibility is an architectural project, and then a building permit. In addition, the experience of an investor in commercial real estate or the ability to provide expert services is important for most banks.

• Financial requirements. To negotiate with the bank, a potential borrower is required to provide a ready-made financial model with a business plan. Typically, the project initiator must provide 10 to 40% of the investment costs. The documentation must confirm compliance with the DSCR (Debt Service Coverage Ratio) standards.

• Marketing requirements. The Bank requires a positive result of market research, confirming the possibility of leasing retail space or selling real estate on favorable terms.

The choice of the financing bank should not be random.

Financing a construction investment project is a long process.

When deciding to cooperate with a bank, an investor should be aware that for several years he will have to interact with this lender and depend on him.

Ineffective collaboration can negatively impact project implementation. During the construction of real estate, the real estate project can change greatly, so the investor must not only assess the financial conditions, but also analyze the bank’s policy.

Alternative sources of financing for real estate projects

Bank financing of real estate projects remains the most popular and affordable type of funding for CRE  projects.

However, the pandemic and economic downturn are forcing banks to treat borrowers more selectively, and development companies have become cautious with lending funds.

The greatest difficulties in obtaining loans are experienced by hotel and commercial real estate. Banks are still open to finance investments in warehouses, offices and residential premises, but financing conditions are more conservative.

Funding for commercial real estate after 2020 is still limited to the best projects.

Moreover, todaylarge construction projectsare supported only by a few banks, and it is almost impossible to obtain credit funds for hotels.

Banks have also tightened their funding criteria and are now offering lower LTV and LTC options, expecting higher levels of pre-lease retail space and sales for residential properties.

There is also an increase in loan margins and a significant increase in the processing time for loan applications.

Experts point out that this could be an impetus for investors to search for alternative financing methods, the availability of which is still limited in many countries of the world. However, the current situation shows that dependence on one form and lack of diversification of sources of financing for commercial real estate is a critical issue that threatens the survival of the business.

Regardless of the choice of funding sources, companies need to properly prepare for real estate investments.

A business plan, project documentation and financial analysis are the minimum that can become a prologue to serious negotiations on financing real estate construction.

Another financial indicator that is important to consider is LTC (Loan to Cost). It indicates the ratio of the cost of the loan to the cost of building the property. Assessing this ratio can give project participants clear information about whether there is a chance of a return on investment.

Banks also often condition the decision to grant a loan on the value of the LTC ratio.

So, financing of real estate projects and the construction of  the facility through a long-term loan is still the most popular solution among investors.

Almost all institutions on the market offer loans for real estate construction. However, investors are frustrated by the increasingly restrictive approach of banks to assessing a potential borrower.

The pandemic that led to the economic downturn is making it difficult to finance some retail, hotel and sports facilities around the world.

Of course, this situation does not exclude the possibility of concluding a loan agreement, but the proposals of banks may be far from your expectations.

If you are looking for attractive sources of financing for commercial real estate projects, contact the CP Finance UK  for advice.

CP Finance UK
Website:https://c-pfinanceuk.com/
finance@cpuk-financeltd.com
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