Major Challenges in Financing Boutique Hotels in Today's Credit Crisis

By Steven Marx Managing Principal, Lifestyle Hospitality | October 28, 2008

The hot topic at every hotel conference over the last year has been "financing"; i.e., how to get it!

It is clear that the credit crisis has now infiltrated and affected literally every industry that requires real estate financing, from residential to hospitality. As difficult as it is to get financing for acquisitions of properties that are operating with cash flow, financing for development project is like pulling teeth; and the pain that developers are experiencing attempting to source debt often feels like a root canal!

Are projects getting done? Of course. But the lenders are looking for "bullet proof" projects, assuming any truly exist. Strong brand, experienced management company, major geographical market, reduced fees, lower leverage, recourse financing, etc, etc.

So what hope do we boutique hotel developers have if more "conventional" hotels are running into trouble? Well, with a lot of ingenuity, collaboration, talent, friends in high places, a compelling project, and, of course, at least a "sliver" equity capability, boutique hotels can be developed.

First of all, let me define what I mean by a 'boutique' hotel, at least as referenced in this article. What I DON'T mean are soft-branded "lifestyle" hotels from large niche companies such as Morgan's (Mondrian, Delano), Kimpton (Monaco, Palomar); or hard branded 'lifestyle' hotels such as W by Starwood. And I'm also not talking about the crop of select service lifestyle brands from major chains such as Aloft and Hyatt Place. I'm referring to independent, individually branded, 3 diamond and up properties of approximately 80 to 200 rooms that typically feature a stylish design, intimate service, and typically a first class restaurant experience.

What we have found is that there is a surprising amount of equity chasing good deals, and if you know where to find them, many equity players that will partner with you to develop a niche product that pencils well, assuming you (the sponsor) can take responsibility for putting together the "capital stack" that will be required to move the deal forward, and that the development/management team has a track record of capability and experience in the boutique hotel segment.

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The hotel industry has undertaken a long-term effort to build more responsible and socially conscious businesses. What began with small efforts to reduce waste - such as paperless checkouts and refillable soap dispensers - has evolved into an international movement toward implementing sustainable development practices. In addition to establishing themselves as good corporate citizens, adopting eco-friendly practices is sound business for hotels. According to a recent report from Deloitte, 95% of business travelers believe the hotel industry should be undertaking “green” initiatives, and Millennials are twice as likely to support brands with strong management of environmental and social issues. Given these conclusions, hotels are continuing to innovate in the areas of environmental sustainability. For example, one leading hotel chain has designed special elevators that collect kinetic energy from the moving lift and in the process, they have reduced their energy consumption by 50%  over conventional elevators. Also, they installed an advanced air conditioning system which employs a magnetic mechanical system that makes them more energy efficient. Other hotels are installing Intelligent Building Systems which monitor and control temperatures in rooms, common areas and swimming pools, as well as ventilation and cold water systems. Some hotels are installing Electric Vehicle charging stations, planting rooftop gardens, implementing stringent recycling programs, and insisting on the use of biodegradable materials. Another trend is the creation of Green Teams within a hotel's operation that are tasked to implement earth-friendly practices and manage budgets for green projects. Some hotels have even gone so far as to curtail or eliminate room service, believing that keeping the kitchen open 24/7 isn't terribly sustainable. The May issue of the Hotel Business Review will document what some hotels are doing to integrate sustainable practices into their operations and how they are benefiting from them.