What is the LVR% for hotel development finance in the current environment? Answer: “It depends…”

Any owner, developer, investor or consultant involved in developing a new hotel would have at some stage pondered what is the maximum loan-to-value ratio (“LVR”) available for the project?

 Before the COVID-19 outbreak and in more bullish times, the answer would have probably ranged from 50% to 65%, depending on who you asked and which lender.

 During the peak of the pandemic (when it looked like the world was going to end), pundits might have suggested 0% to 20% at best!

 Today, the answer will probably be “it depends” …

 Depends on what? Well, it depends on which crystal ball your banker is looking into and the appetite of their credit committee! But more informatively and irrespective of the economic climate, it will always depend on the experience and balance sheet of the sponsor, the location of the project, the loan-to-cost ratio, the builder, the operator, the brand, the demand drivers, the competitive set, the management terms, and the quality of the project consultant team. 

The list could go on and on and does not even consider the structural elements of a debt facility (fees, pricing, term, security, undertakings, covenants) that all need to be commercially thought through and negotiated.

Whilst this response might sound non-committal, it reflects the specialised and nuanced nature of debt funding greenfield hotel and hospitality assets – where there is a property development phase (carrying delivery risk) followed by a “trade up” of the operating business until it reaches a stabilised position (carrying market and credit risk). From “go to whoa” concept planning to finally opening the doors and successfully trading – there is likely to be a minimum of 4-5 years of potential uncertainty and change to navigate. A considerable investment of time and money until the real rewards come to light. 

 The honest answer to the question should, therefore, not reference a static LVR%! The optimal leverage for any hotel development (or any going-concern hospitality business for that matter) will always be a case-by-case and a function of the strength of the underlying trading cash-flows...that have been independently prepared and sensitised using realistic, granular, and robust assumptions.

 Over the coming weeks, the Minett Prime Square team looks forward to sharing insights learned from local and off-shore hotel development projects – to help developers and hoteliers meet their advisory, funding and ongoing asset management needs. 

 We would love to hear about your recent experience. Please get in touch.

Anthony Ries +61 408 540 588 anthony.ries@minettprimesquare.com