Financing Condo-Hotels in Boom Times

A Check List

by Steve Gold

Condo-Hotel projects with the most extensive series of complex problems are becoming easy to finance. Some lenders are excited about this venue because they see a simple solution to having their loan paid down early and paid off in a shorter time frame than a conventional hotel.

1. Start with a clear definition of what your objectives are and a feasibility that helps a lender understand the verification of price points and market demands.

2. Have a clear, legal understanding of when you can take reservations, and when you can take non-refundable deposits. Each state has different regulations.

3. If you are converting an existing property, hire a qualified civil engineer that can identify your obligations to current building and safety codes. If you are doing structural work, you will be subject to existing codes.

4. Marketing should be done by an experienced company that won't get you in trouble by violating SEC rules.

a. Not discussed often is an important marketing tool; Vacation Exchange. The opportunity for vacation owners to trade their resort time through a global network of resorts has been one of the most compelling motivations for buyers. The major firms, such as Interval International and RCI, have made this available to you.

5. Financing for the condo-hotel buyer is actually a difficult problem. Very few banks are prepared to make these loans. It is important to find a specialist early on to set up programs with your marketing team. A company that specializes in this is Vacation Finance.

6. Your lawyers should understand the type of documentation necessary to protect you from too many future lawsuits.

7. Determine the type of Homeowners' Association that can be formed and what will be the most equitable way for income and expenses to be distributed to the unit owners who participate in a rental pool.

8. Defect insurance coverage should be created by a specialist for a 10 year period and cover as many loose ends as possible.

9. Creating the financing proposal should include an analysis that shows this hotel works as a hotel and not only as a condo-hotel.

10. Create a source and use of funds which takes into consideration when the owners can actually close and move in.

11. Be careful regarding pre-sale proposals if the market you are in only allows reservations versus sales (i.e. you are buying a property to convert).

12. If you can take hard deposits, what are the regulations as to using part of this as equity.

13. Explain to the lenders who owns what and who manages what (i.e. restaurant, spa, common areas, etc.).

14. Determine how many units have to be sold before you can close escrows. Remember that the senior lender will want all proceeds after marketing costs. They will also be concerned as to what their security is as they release rooms to the new owners.

15. Conversion financing

a. The key issue as to loan proceeds will be pre-sales.

b. If, for any reason, you elect not to pre-sell, then the amount of leverage is the same as any hotel loan. Senior loan 65% - 70% loan to cost, Mezzanine Loan to 85% of cost, Rate combined 8%-9%, Fees 1.0-1.5 points.

c. If you own the property and can take secured non-refundable deposits, you can leverage the property as high as 90% of costs at a rate that will be based on the size of the deal. The larger, the less expensive (i.e. if you had 35% pre-sales on a project above $50,000,000, then you could borrow 90% at a 7%-8% rate).

16. Construction - If you are trying to secure pre-sales, then you have to be sure of your construction costs. Lawsuits are flying as projects that took deposits before breaking ground with final costs changing, are being seen in several markets.

Steve Gold is the managing director at Hotel Financial Strategies, located in Beverly Hills, California. He can be reached at (310)-247-2101 x102 or sgold@hotelfinancial.com.