Challenges for Startup Apart Hotel Development Exits
The journey of developing an apart hotel from concept to exit is fraught with unique challenges. Unlike traditional residential estate ventures, apart hotels – a blend of apartment living and hotel services – require relevant planning, significant investment, and strategic financial management. One of the most critical hurdles in this process is securing the right financing, especially for start-ups. This article delves into the challenges associated with apart hotel development exits, focusing on the requirements of commercial lenders and the intricacies of obtaining profitable valuations.
The Requirement for 12 Months of Accounts
One of the primary challenges for start-up apart hotel developers is the stringent requirement by commercial lenders for at least 12 months of operational accounts. These accounts are crucial for lenders to verify the demand for the asset and its profitability. Here’s why this is a significant barrier:
- Proof of Viability: Commercial lenders need to see that the apart hotel can generate consistent revenue and attract a steady stream of guests. Twelve months of accounts provide a track record of occupancy rates, and profits.
- Risk Mitigation: For lenders, the hospitality industry can be volatile, with demand influenced by factors such as tourism trends, economic conditions, and even pandemics. Verified accounts mitigate this risk by demonstrating that the business can withstand fluctuations.
- Investor Confidence: A solid financial history builds confidence among potential investors. It shows that the apart hotel is not just a speculative venture but a viable business with proven market demand.
Valuation Challenges | MV1 vs Bricks and Mortar
When it comes to valuations, borrowers in the hospitality sector can benefit from different types of assessments. For profitable businesses, a commercial Market Value 1 (MV1) valuation is often used. This valuation considers the apart hotel as a going concern, assessing its operational profitability and future revenue potential. However, achieving an MV1 valuation comes with its own set of challenges:
- Experience and Proven Track Record: An MV1 valuation requires that the apart hotel is seen as a viable, ongoing business. For start-ups without prior experience or sufficient operational accounts, this can be difficult to achieve. Lenders prefer to see a history of successful management and financial performance.
- Alternative Valuations: In the absence of sufficient operational data, borrowers may be restricted to a 90-day or bricks and mortar valuation. These valuations focus on the physical property and its immediate market value rather than its operational profitability. While this can still provide a pathway to financing, it often results in lower valuations and, consequently, less favourable loan terms.
Navigating Bridging and Development Lenders
For start-ups struggling to meet the stringent requirements of traditional commercial lenders, bridging and development lenders offer a viable alternative. These lenders provide short-term financing solutions that can help apart hotel developers bridge the gap between development and full operational maturity. However, these options come with their own considerations:
- Higher Interest Rates: Bridging loans often come with higher interest rates compared to traditional mortgages. This is due to the higher risk associated with lending to businesses without a proven operational history.
- Shorter Loan Terms: These loans are typically short-term, intended to cover the period until the apart hotel can demonstrate profitability and secure more traditional financing. Developers need to have a clear exit strategy to repay the loan within the agreed timeframe.
- No Experience: If you haven’t got any experience in owning Buy to Let property or a hotel before, then you may need to go with a mortgage product that could lend against a 90-day valuation, this is where it is valued based on it being sold within 90 days.