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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Human Resources: An Era of Transition

Traditionally, the human resource department administers five key areas within a hotel operation - compliance, compensation and benefits, organizational dynamics, selection and retention, and training and development. However, HR professionals are also presently involved in culture-building activities, as well as implementing new employee on-boarding practices and engagement initiatives. As a result, HR professionals have been elevated to senior leadership status, creating value and profit within their organization. Still, they continue to face some intractable issues, including a shrinking talent pool and the need to recruit top-notch employees who are empowered to provide outstanding customer service. In order to attract top-tier talent, one option is to take advantage of recruitment opportunities offered through colleges and universities, especially if they have a hospitality major. This pool of prospective employees is likely to be better educated and more enthusiastic than walk-in hires. Also, once hired, there could be additional training and development opportunities that stem from an association with a college or university. Continuing education courses, business conferences, seminars and online instruction - all can be a valuable source of employee development opportunities. In addition to meeting recruitment demands in the present, HR professionals must also be forward-thinking, anticipating the skills that will be needed in the future to meet guest expectations. One such skill that is becoming increasingly valued is “resilience”, the ability to “go with the flow” and not become overwhelmed by the disruptive influences  of change and reinvention. In an era of transition—new technologies, expanding markets, consolidation of brands and businesses, and modifications in people's values and lifestyles - the capacity to remain flexible, nimble and resilient is a valuable skill to possess. The March Hotel Business Review will examine some of the strategies that HR professionals are employing to ensure that their hotel operations continue to thrive.