Equity and Financing for Hotels and Hospitality Real Estate
"Debt capital is so cheap as never before – but to actually obtain a loan for the financing of a hotel or a restaurant is so difficult as never before!"
Healthy amount of equity capital!
Before you begin the search for a hotel property, make a complete cash check and a list of all the equity you have available to purchase and take over the property available. The hospitality consultants and hotel experts of ASPI recommend a healthy lower equity limit for hotel and restaurant properties. For hotel and restaurant businesses this should be around 32-36% of the investment cost (purchase price, costs, renovation costs, and costs for modifications or additions). With this healthy minimum of capital resources, a buyer of a hotel property / gastronomy will be able to run such a business properly and even get through a bad season or a short period of economic slowdown. If your available equity is significantly below this level, the hotel experts from Auer, Springer & Partner would recommend refraining from purchase and leasing a hotel instead or buying a cheaper property.
Interest rates are low as never before, but without sufficient capital it is almost impossible to obtain a loan to finance hotel and restaurants! You have found the perfect hotel property and negotiated the purchase price with the hotel seller. If your available capital is less than the purchase price of the property, it is time to head off to the bank. The property owner or your broker will have provided you with most of the documents required for a credit application. It makes a difference whether you go to your current bank or to a third-party bank with your loan application. Your bank knows your personal situation well, as well as the amount of your available and tied-up assets (real estate). So your current bank will be more generous with regards to your equity capital ratio and your credit check will be completed much more quickly. With a third-party bank, it is a little more complicated as they do not know you. You will be required to submit much more documentation about your personal financial circumstances and any other assets you may have. A third-party bank will usually require a higher equity ratio. Unfortunately financing models for hotel and restaurant real estate often require a 40% share of equity capital or more. Regrettably, most banks now categorise hotel / restaurant real estate as 'risky investments'!
Factors that positively influence the credit decision / amount of the equity ratio/ interest rate level:
- The bank knows the hotel; it might be the bank of the old owner.
- The object is well-established and well-positioned in the market.
- The financial figures and occupancy rates of the last three periods of operation were good.
- Your realistic business plan is convincing and there is a good future prognosis for the property
- The condition of the property, renovation backlog and future investments of the hotel / restaurant property are well-documented and planned.
- Important: the credit applicant’s know-how and competence are increasingly coming under scrutiny by the banks.
Why will ASP hotel brokers ask about your available equity?
Upon requesting information about one of our properties you will normally receive a basic report of the requested hotel with all sorts of information on the hotel property, the hotel operation, etc. If you are still interested in the property, would like to visit, want to review the balance sheets, occupancy rates, land register extracts and other highly confidential documents, then the respective expert broker at ASPI will (amongst other things) enquire about the amount of capital you have available and for new customers proof will be required.
You will understand that these highly confidential documents relating to the hotel property may be distributed only to reputable and serious prospective buyers or lease tenants. The hotel broker will interview you regarding your intentions, the planned type of operations, your expected return, as well as other points.
On the one hand our ASP hotel brokers are obliged to do this as property owners only want to offer viewings and conduct sale or lease negotiations with serious buyers or lease tenants. On the other hand the hotel broker can use this information to think of a suitable financing model and to select suitable banks. In some cases, he may suggest another property that is better suited to you and also explain why in his opinion this would be more suitable. Documents detailing evidence of capital / financing evidence / etc. are not disclosed to the owner! But the owner receives confirmation that there is sufficient equity for the purchase, or that given the available equity financing should not pose a problem.
Trust and openness in dealing with each other is very important.
The hotel brokers at ASP Global Hotel Brokers want to sell or lease you your dream hotel or restaurant property. The hotel broker will offer you their competent and expert support in selecting the right property, compiling all documents for due diligence tests, credit checks, the purchase or lease contract, and aid you up to the date of the acquisition of the hotel real estate. The more information you can provide our hotel brokers with, the sooner you can obtain your dream hotel property.