Hotel Management and Operations

The following variables must be determined to qualify for financing:
• The cost of the land
• Design and construction cost of the  building
• The cost of furniture, fixtures, equipment, and opening supplies
• Pre-opening marketing and labor costs
• A six-month operating capital cash  reserve

The sum of these constitutes the total cost of the project for purposes of securing  financing.

With this information, the ten-year operating pro forma budget is updated to reflect actual costs. It’s now time to go to the money markets for construction financing.The terms and conditions of a construction loan can vary widely depending on the individual lender.

Important terms that can affect the cost of the loan include:

• Personal guarantees by developers and/or equity partners/investors
• Loan origination fees
• Interest rate
• Required loan-to-value ratio
• Terms of repayment
• A requirement that interest/taxes be held in reserve
• Required debt service coverage ratios
• Length of the construction loan; length and costs of extensions

These are only a few of the considerations that must be analyzed when selecting a lender. The developer, on behalf of the owning entity, then approaches a number of lending institutions. The lending institutions
analyze the deal and offer a proposed term sheet that answers all of the borrowers’ questions. This allows the borrowers to select the lending institution with which they wish to work. The lender then commissions an appraisal of the project by an independent  appraisal company such as Hospitality Valuation Services (HVS). Based on the appraisal, the lender issues a loan commitment for the project that usually offers up to 60 percent of the project cost.The balance must be raised as equity from investors.