Hotel Financing Issues To Consider Before Building

Hotel financing can be a complicated issue, whether you are refurbishing, buying existing properties, or building a new hotel, you need to be sure you have a good plan in place. For your project to be successful, you will need to be able to make the payments on the mortage, and any construction loans until the hotel begins to turn a profit.

Before any attempt can be made to secure hotel financing a working business plan must be developed. A strong business plan should cover all aspects of your operation, from construction, through to the loans being paid off, and ideally several years past that. If you are unable to show that the hotel can trade and turn a profit without the need for future loans to be taken out, then it will likely be very difficult for you to obtain financing.

Any business partners that you are involved with will naturally want assurances that their investment is a secure one, and that, should things go wrong, there is a plan in place that involves more than just selling the property to recoup any losses. 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.

Your Initial Equity Can Be a Big Help

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.

As an example, if your hotel financing plan for construction is a $30 million facility, then after you include interest over the period of the loan, your construction costs could come to over $35 million. You will need to consider this in your plan, and also consider the impact any interest rate increases could have. A good way to do this is to look at how interest has changed in a similar time period (if your loan is for 10 years, then how much has interest risen in the past ten years) and base your projections on similar changes. A good plan, that has considered such issues, will stand you in good stead with prospective financiers.

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