People and institutions who make money by lending it want to know that it will be paid back, with interest. So, whichever lender(s) you choose, you will need to prepare a financing package and a business plan to explain the project. You can prepare the package yourself. Most of it is a compilation of information about the project. The financing package covers key information about the project and its sponsors and includes the funding request and financial snapshot. It is used to discuss the project with the lender and informs the lender’s underwriting.
5 C’s of credit worthiness
Your financing package should be concise, and it should answer the “Five C’s” that lenders use to gauge borrowers’ credit worthiness.
- Character: Lenders want to know that you are honest and have integrity – that you will repay the loan. For this reason, they will examine the credit history of all borrowers and guarantors involved in the hotel. They also want to be confident that you and your team together have the background, education and industry knowledge to successfully operate the business. Therefore, your package presents the team and their capacity and experience.
- Capacity: Lenders want to know that the business will be able to repay the loan. Your package presents financial projections for the hotel as well as historical information if the hotel has a history. The package summarizes why you expect the hotel to perform as you project – the project’s capacity.
- Condition: Lenders want to know how the loan proceeds will be used – a budget for acquisition, renovation, working capital, and so on. They also want to understand the market conditions supporting the deal. For this, it can be helpful to work with a lender that understands the hotel business. The financing package presents the “why” describing why this is a good deal, underlying market conditions, anticipated future market conditions (from experts), and how the business can be expected to continue, improve or deteriorate.
- Capital: Lenders want to know that you have “skin in the game” and are willing to take a risk yourself for this opportunity, so they want to know about your personal investment in the hotel. They also want to understand the rest of the funding sources for the business so they can be sure that there will be sufficient capital for success.
- Collateral: Lenders want information about the value of the hotel asset and the personal assets of guarantors as a secondary source of repayment to evaluate their own risk in making the loan.
Prepare your financing package
Your financing package should contain:
- Loan request: a summary of the project including the loan being requested, other sources of funding, physical address, proposed franchise if any, key characteristics (number of rooms, number of stories, restaurants and other amenities, type of construction, acreage, etc.)
- Description of the company (owners and investors): legal name of the ownership entity, legal structure, general/managing partner names and percent ownership and experience as well as a copy of the operating agreement. The lender will want the principal or team to have strong relevant experience
- Description of the hotel: project description in more detail including statements about environmental or other significant issues (specify if there are or are no issues to remediate), and description of any exceptions that may appear on the title such as easements, liens, etc.
- Budget for deploying the loan: plans for deploying the funds from the loan and other capital sources including description and budgets for acquisition, construction, soft costs, pre-opening marketing, contingency and other budgeted costs for the full project; this includes working capital (money to operate the business) and operating money for pre-opening and launch of the business
- Marketing and operational plan: summary of the market study, if one has been prepared; description of the market, competitive situation, anticipated future competition, demand sources, target markets, historic and anticipated future economic trends for the hotel’s immediate market, projections of occupancy and average rate for the market and your hotel, key features making the hotel competitive and strategies to market the hotel including brand/franchise
- Management and organization: outline of how you plan to manage and supervise the hotel including plans to hire a general manager or management company and introduction to the management company or asset manager, if any
- Financial history and projection: financial projections for the hotel including the ramp-up period and 5 years of projections with explanations of key assumptions together with historical financial statements, if available
- Photos of the project including renderings, pictures of color boards and concept schemes, if they are available
- Personal financial statements of all owners/partners holding over 20 percent of the entity
- Three years of personal tax returns of owners/partners holding over 20 percent of the entity
- Purchase agreement
- Legal description of the property
- Historical income statements for 3 years (if available)
- Supporting documents for the proposed budget such as proposals from contractors, price quotes for furnishings and services, etc.
- Verification of equity (bank or stock statement)
- Market study if one has been prepared
- STAR/STR report if available
- Franchise agreement
- PIP schedule (property improvement plan)
- Cost basis, including renovations, capital expenditures, and FF&E
- Offering memorandum (if marketed)
- Personal Financial Statement with Schedule of Real Estate Owned3 Years Business Tax Returns
- Three years of business tax returns (or personal returns if a new business)
- Current Balance Sheet with Debt Schedule
- Hospitality Resume for primary sponsors