Resort and Hotel Financing Options in India: A Guide for Developers

Hotel or Resort projects require substantial capital investment, making it crucial to understand the associated costs and available financing options. Given the significant financial risks involved, hotel developers should implement prudent resort and hotel financing strategies and prepare contingency plans to address unexpected changes in circumstances.

What are the resort and hotel financing requirements?

The resort and hotel financing options vary based on the development stage of the property. Also, the operating model is likely to influence the available financing routes. Based on the development stage, resort and hotel financing options can broadly be categorized into three stages:

• 1. Early Planning and Land Acquisition: Funded through developer equity or private investors.
• 2. Construction and Development: Supported by construction finance or the sale of serviced residences or vacation rental homes.
• 3. Mortgage Loans: Essential for long-term financing.

What are the typical resort and hotel financing options?

1. Equity Partnerships:

• One of the most prevalent resort and hotel financing option is Equity partnerships. The developer (or the landowner) deploys their own equity. In this model, the developer can co-partner with a group of private investors or institutional investors.
• In case the developer partners with a group of investors then the financing involves raising capital by selling property shares to investors. This option is usually preferred when the property is situated in the prime business or tourist locations. In case of emerging locations, this model can be evaluated in case the hospitality operator offers a fixed annual rent or offers a Minimum Guarantee.
• For large projects, partnerships with Private Equity firms can be evaluated. PE firms contribute a sizeable amount of capital to hotels and other hospitality-related properties. Clear titled land, availability of required development approvals, partner profile, location, market statistics, and operating partner are a few of the critical parameters evaluated by PE firms. Returns expected by PE firms are usually upwards of 25 per cent.

2. Construction Finance:

• The most common way of structuring project finance is through a mix of equity and debt (construction finance). Usually, a developer (or the landowner) uses their own equity for land acquisition, development approvals and early planning of the project. Upon the commencement of construction of the project, construction finance loan is raised. The interest rates offered by banks and NBFCs range between 9 per cent and 11 per cent.
• Further, in case of construction finance, the developer or the owner can raise funds on 70 per cent of the total development or the construction costs (excluding the land costs). In this case, the developer or the owner equity will be land cost + 30 per cent of the total development / construction cost.

3. Sale of Serviced Residences:

• Growth in the HNI and the UNHI segment in India has led to development of vacation rental homes or second homes in some of the leading tourist markets of India. In this mode, hotel project comprises of two distinct developments – the resort and the villas. The villas are leased back by to the hospitality operator. This option helps the developer add in resort or hotel inventory by the means of villas and for the villa owners the product is also yields an income along with it being a lifestyle product.
• While considering this model, developers need to structure the development of resort in multiple phases. While it is prudent to have the first phase of the hotel or resort operational prior to commencing sale of the vacation rental homes or serviced residences, equity or funds for the subsequent phase of the resorts can be planned through the cashflows generated from the sale of villas.

4. Fractional Ownership Model or Timesharing Memberships:

• One of the options available for the developers to raise project finance is through sale of an asset on Fractional Ownership Model. In this model, an asset – resort or vacation rental home, is sold to multiple investors. The investors are either promised of a minimum guaranteed return or can enjoy partial ownership to the property as pre-agreed. In this model, it is important for the developers to have a tie-up with hospitality operator.
• Akin to Fractional Ownership model is the sale of Timeshare Memberships. This option is usually adopted by the developer that has an in-house operating arm. It is suggested for developers that have multiple operational properties prior to commencing the sale of Timeshare Memberships.
• Through the sale of Timeshare Memberships, the developer can raise funds for development of hotel or resort properties through the sale of Timesharing Memberships. In this model, the investors do not have any ownership rights but are given an access to the hotel projects for pre-agreed duration annually.

Financing hotel or resort projects through equity partnerships and construction finance are the most prevalent routes for hotel financing. Changing travel patterns and growth in the HNIs and UHNIs, property owners are now evaluating developing a mix of serviced residences supported by a resort. This model is currently evolving, and key tourist destinations of India are suitable for development of resort or hotel projects through this model. Financing hotel projects through Fractional Ownership or timeshare membership is nascent in India and this model is likely to be restricted to large, organized developer and hotel operators.

Meraqi’s Hospitality Real Estate Services assists developers, owners, and investors with development advisory, product development strategies, asset or portfolio valuations, operator search, and transactions.