Despite Brexit, the hotel industry in the UK is booming. The forecast for growth in this sector looks positive for 2018/2019 and for the foreseeable future. Historically, development loans for hotel builds have been hard to come by, however, lending is now on the increase. Jaspreet Patter of the corporate team at IBB Solicitors, has just completed a hotel financing of £17.5 million and provides some top tips on how to prepare the project build for financing.
Ensure your corporate structure is in order or have a plan for re-organisation before approaching a lender. It is common to have a group structure for such ventures where the land/property is owned by one of the companies, the hotel will be managed by another associated company (this is the one that has the franchising and licensing rights), and any other proposed hospitality services at the hotel (ie banqueting, conferencing, restaurants, spa, gym etc) are operated by another associated company (in order to separate revenue streams from that of the franchisee’s revenue on which a percentage would be payable to the franchisor). A lender would expect each of the companies to belong to the same group and lending will often be to the parent company. Any company related to the venture would be expected to belong to the group.
Lenders like to see that a franchise agreement is in place, this is usually a condition of lending. Review the terms or ask your lawyers to review them with you, to ensure that the correct entity has the franchise rights and the terms and conditions are attainable, ie the opening date of the hotel, providing guarantees for fees etc, as lenders do not like to see any hint of potential defaults which could lead to termination of the franchise agreement. Consider re-negotiating and/or seeking a variation with the franchisor to any terms (as necessary) early on. Further, check whether the franchisor’s consent is needed for the borrowing and whether there are any restrictions. It is common for lenders to want a charge over the franchise agreement, but in most instances, this is expressly prohibited by the franchisor.
Loan to cost (LTC) is a metric used in construction projects to compare the financing of a project (the loan by the lender) to the cost of the build project. LTC helps to delineate the risk of providing the finance. Ensure budgeted costs are accurate by ascertaining the cost for the build, design, interiors, equipment and professional fees (ie lawyers, accountants, surveyors, project managers) at an early stage. Most lenders only provide loans that finance a certain percentage of the project, generally between 70-80%. For example, should the project build have an estimated cost of £30m and the lender is offering an LTC of 70%, you will be expected to inject equity of £9m. The chances are that a lender would expect this to be injected into the project prior to drawdown of the lender’s loan, so you will need to ensure these funds are readily available and, if being raised as finance from alternative providers, repayment of such lending and any security being granted would rank behind the primary project lender’s interests.
Third party rights over property
Ascertain any rights of way or subleases granted to external third parties such as utility providers, and/or neighbouring properties and procure a plan for release or variation early, as a lender will in most instances not allow drawdown where subsisting third party rights exist, particularly where the build project will infringe or breach such rights.
For a good team
Form a great team of accountants and lawyers that understand the hotel industry and projects of such kind. Also engage a reputable and credible project manager/architect and get builders on board. There are a few in the industry that the main lenders prefer.