Hotel Management Contract Trends

HVS Report - Hotel Management Companies and Equity Contributions: Benefits and Risks - By Todd Isenstadt and Hans Detlefsen

Typically, hotel developers attempt to finance new hotel construction projects with a combination of debt and equity. This article investigates the benefits and risks of seeking equity participation from hotel management companies.

HVS Introduction

Hotel financing takes different forms based on the capital requirements of the developer and the availability of alternative financing sources. These factors vary with the economic climate. Typically, hotel developers attempt to finance new hotel construction projects with a combination of debt and equity. Within these two general categories of capital, various sources may be required to fund the project. This article investigates the benefits and risks of seeking equity participation from hotel management companies.

Financing Scenarios

In today’s lending environment, active hotel lenders are generally willing to offer first-mortgage debt in an amount that equates to roughly 50- to 75-percent of the property’s “when complete” market value. For the purpose of this article, let’s assume a developer is able to obtain a construction loan for 60-percent of the project’s total development cost. Furthermore, let’s assume the developer owns a vacant site with an appraised market value equal to 10% of the project’s total development cost. For simplicity, we’ll also assume that the project’s total development cost is exactly equal to its “when complete” market value, so the project is just barely feasible.

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