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 Over
the last ten years, the number of hotel rooms in Ireland has
seen unprecedented growth. Amongst other reasons, this increase
can be attributed to tourism initiatives, tax incentives, a low
interest rate environment and, in particular, a ready access
to capital from banks and private investors.
Financing a hotel is a complicated
task involving a number of different parties. Managing the expectations,
requirements, risks and constraints of the promoter, operator,
bank and investors is a time-consuming process but essential
for the successful financing of a hotel in a tax-efficient manner.
There are a number of requisite
steps to financing a hotel successfully:
Step 1: Assessing the business
case
Above all, the hotel must be
a viable, sustainable business proposition that will generate
sufficient return for the promoter. If the hotel does not trade
successfully, then the promoter will need to inject further cash
year on year to fund losses. The most reliable way to assess
the business case is to hire credible, experienced hospitality
consultants to conduct a feasibility study and assess the viability
of the business case.
Step 2: Employing a Hotel
Operator
After the feasibility is assessed
and the hotel receives the green light, the operator must be
put in place. For owner-managed properties, this is clearly not
an issue. However, in recent years the trend has been for an
increasing numbers of hotels to be led by property developers.
This has resulted in a marked increase in domestic and international
hotel management companies.
The right management company
brings a full suite of expertise required to operate the hotel.
The management contract/lease is a long term commitment for both
sides and needs to be carefully constructed and vetted. Additionally,
the management company brings sales and marketing capabilities
with established recognisable brands and the promise to enhance
the profile and trading of the hotel significantly.
Step 3: Raising the Finance
It is essential when financing
a hotel to balance the requirements of the main debt provider
with the financial capacity of the hotel and the promoter. There
are three key sources of capital for financing hotels –
bank debt, investor equity and promoter equity.
Bank Debt
Banks in Ireland have begun to
take a more cautious approach to financing hotels. The reasons
for this stance include fears over potential oversupply, increasing
interest rates and escalating construction costs with resulting
cost overruns. It is essential that the bank is comfortable with
the feasibility and the financial projections of the hotel. Therefore,
the credibility of the consultant that prepared this is vital
in the financing. The key factors for a bank are the viability
of the hotel and the market value of the underlying security
should they have to sell it to discharge the loan.
If the bank has to sell the hotel,
the asset will (generally) be under-performing and will realise
only a portion of the valuation had it being achieving its projections.
On this basis, banks will typically lend an amount of 65–75%
of the market value of the hotel to be repaid over a period of
15–20 years. Banks will lend in excess of this but often
require additional collateral security from the promoter.
Investor Equity
The balance of the cost of the
hotel will be financed using a mixture of investor equity and
promoter equity. As there are still very favourable capital allowances
available, albeit being phased out at present, there has been
a ready pool of private investors. Structured correctly, a group
of investors will pay a percentage of the construction cost of
the hotel up-front and in turn will be entitled to capital allowances
on the entire construction cost of the hotel. The investors will
use these over a period of seven years as a tax shelter for surplus
Irish rental income.
The addition of external investors
complicates the deal substantially but is extremely beneficial
to the promoter. The equity received
reduces the requirement for promoter
to inject cash and often represents the difference between a
project coming to fruition and not.
Promoter Equity
If the investors are paying an
amount of 20–25% of the construction cost of the hotel,
this leaves only 5–10% of the construction cost and the
site cost to be funded by the promoter. Ever increasing property
prices have further reduced this requirement with the banks comfortable
to gear up on other property assets held by the promoter. Structured
successfully, the promoter will have built a successful and profitable
hotel with minimal cash introduced.
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Planned
National Stadium at Lansdowne Road
Tourism
Ireland’s television ad campaign, currently running on TV
stations across Great Britain, has been listed in Marketing
magazine’s Adwatch column as one of the top 20 most recalled
ads by British TV viewers. The 30 second Tourism Ireland TV ads
encourage viewers to ‘Discover Your Very Own Ireland’
as well as highlighting Ireland as home to the 2006 Ryder Cup.
The ad campaign reflects the core strengths of the island of
Ireland: beautiful scenery, the warmth of the people, the living
and historic culture as well as providing information about what
a holiday in Ireland could involve.
