|September 26, 2005 - 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
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
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.