Raising Capital for Hotels: Options and Strategies for Owners
Hotel and land owners have a lot of choices to make once they have decided to (partially) sell their business or raise capital for it. If any market has numerous flavors in transaction structures, it is most certainly the hotel real estate market. It is easy to get lost in the land of endless possibilities of raising hotel real estate capital and it’s just as easy to underestimate its complexity as well. Simply listing a hotel property ‘online’ does not mean you will hit a successful sale, let alone give you the best value as the owner or save you from a lengthy and headache-free process for that matter. This article intends to break down the various options and their typical pros and cons based on our experience at GSO Hotel Capital, a boutique placement company in international hotel real estate.
If you are an owner of a hotel business, property or land and you are seeking capital, then there are some choices to make in what exactly you are selling. The first thing to determine is the stage your hotel is in, which is typically defined as:
- Development (new construction)
- Value add (some enhancement work needed)
- Existing (up and running hotel)
The following capital raising scenarios are the most common for hotel projects across the above stages.
- Sell a plot of land “as is”, with or without a hotel permit. If you own a plot of land that could be a potential for a hotel development but doesn’t have a permit for it yet, then your chances of selling it will likely be quite slim. There is a lot of hotel dry powder in the market, but the permitting risk is not typically part of most investors’ mandate. There is a large uncertainty involved when permit processes need to be done, especially in countries that have a reputation for inefficient bureaucratic processes or even hotel restriction policies that complicate permit processes.
If you did take on that planning risk by getting a hotel permit, then you’re in a more comfortable selling position. A buyer could be a hospitality operating company with their own investors or outside investors involved, having the development capability in-house or outsourced. Otherwise it could simply be a development manager that forward funds the property once they sourced a tenant directly. In other cases, a hotel investment fund with an appetite for development could be interested in buying, while sourcing the developer and operator within their own network. And finally, you might have luck selling to a speculating land trader, and end up seeing your site listed for a higher price within a short timeframe after that. Either way, your selling success rate will always depend on the location of the site, its value potential within its competitive landscape and of course realistic pricing. It is advisable to engage a hospitality expert in determining the right market price.
- Selling a hotel development opportunity turnkey, i.e. you are the owner and developer which means you take full control of the permitting and construction process and perhaps also the operator search, unless you find buyers who will likely prefer to operate it themselves. You can offer the property turnkey on a forward funding basis, which means there is an investor willing to commit a certain price by a certain delivery time for a certain rental yield. Otherwise you can source a buyer more closer to the delivery date, when the tangible progress of your development can be shown for. Either way, this strategy exposes you to a certain number of risks that involve construction quality and pricing, land or soil issues, infrastructure dependencies, contractor or design issues and more.
- A third potential structure is to sell an ownership stake in either the land or the entire development project. In that case you are looking for a partnership, so it has to be a comfortable fit. Ideally you find a partner that is familiar with the country you are developing in. Typical partnership structures involve a revenue sharing model where a clear win-win is created. This can easily be applied to value-add situations and in fact is a quite common model for hotel owners, i.e. ‘sponsors’ to partner up with the right equity partner that also brings the necessary knowledge and network to the table for the value enhancements that the property needs, whether it is a renovation, extension of rooms, an operator change, booking system change or other value enhancement; the right partner could make the difference in achieving maximum returns on your hotel. Just make sure that the exit is clearly defined for all parties involved.
- If you do wish to keep the ownership in full control, but the operational management takes too much effort or it doesn’t fit your preference, you might choose to have the hotel property operated by a hotel operating company. Even within this structure, there are choices to make between fixed leases, management contracts or hybrid operating models with profit and loss sharing for both parties. Engaging a specialist such as GSO Hotel Capital to find the right operating partner that fits in terms of style, target market, designs and room sizes, but also in contractual terms and conditions, is highly recommendable.
- Whether your hotel is to be developed, improved or already up and running, you can always decide to own and also operate it fully yourself, but to outsource the branding. This is not necessarily a capital raising exercise, but it could certainly enhance the operational value of your hotel by tying up an international brand that brings in loyalty customers and recognition. Note that most brands have their requirements for room sizes/layouts, hotel segment and facilities as well as the location (i.e. beach access or city center), so it is important to find the right fit for the specific hotel. More specifically, finding the right brand within the competitive set of hotels around yours is crucial.
Within the options to keep ownership to yourself or combine it with a partner, there is always the potential added value of sourcing debt. Although debt does not come cheap anymore since 2023, there are still many ways to fund hotels and add value. When sourcing the debt, the critical differentiator in debt terms is the stage of the hotel, as defined above in Development, Value add or Existing. The earlier stage of development your hotel is in, the higher the debt rates typically are.
The landscape of debt providers in hospitality is quite diverse and has continuously been professionalizing over the years. Hospitality was traditionally not a very ‘bankable’ sector, mainly due to the lack of knowledge within banks about the operational details of the business. It is the most operationally focused real estate business, with rooms being sold every night and f&b being consumed throughout the day and night. Hospitality debt has long been perceived as a high inflation-linked product, with tourism fluctuating along inflation rates. And as we have seen since the aftermath of Covid, the worldwide hotel industry has shown impressive recovery rates. Numerous articles and studies have already been written about this subject, so for the purpose of capital raising, it is too much to cover here. The bottom line is that there is plenty of dry powder in the hotel debt markets as we speak; it’s just a matter of getting your foot through the right door with the right hotel opportunity. In the next article ‘How to Finance Hotels with Debt’ we will dive deeper into the workings of the debt capital markets in hospitality and the current trends we see at GSO Hotel Capital.
Writer: Anna-Larisa Snijders
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