Tourism Planning Taskforce Report - Western Australian Planning ...

Appendix 1Appendix 1PAPER ON FINANCING TOURIST ACCOMMODATION FOR “THE MINISTERIALTASKFORCE TO INVESTIGATE THE IMPACT OF COMBINING TOURIST ANDPERMANENT RESIDENTIAL ACCOMMODATION AND THE IMPACT OF STRATATITLING OF TOURIST ACCOMMODATION”BY JEFF COHENCADirector Commercial FinanceAshe Morgan Winthrop18 TH NOVEMBER 2002FINANCING OF TOURIST ACCOMMODATIONPurposeThe purpose of this paper is to provide an overview of the funding policies of the major banks withrespect to tourist accommodation (the terms tourism accommodation and hotels are interchangeablein this paper). In particular, the Ministerial taskforce is interested in understanding why developers areseeking planning approval for a residential component within these projects, and the financialimplications of the strata titling of such projects.A copy of the letter of instruction provided by the Ministerial taskforce and the Terms of Reference areattached to the rear of this paper.BackgroundTourism is not an asset class that banks are especially bullish about financing, therefore whenpresented with a tourist asset, they will take an inherently more conservative position than mightotherwise be the case. This is due to several reasons, including:• The recent history (say in the last 10-15 years) of tourism assets and particularly hotels, to trade atsignificant discounts to replacement cost. In the late 1980's - early 1990's, development finance fortourist accommodation was considerably easier to secure with lower equity requirements than isthe case today. However, this changed when the banks incurred significant losses in this sector,during the 1990's. It could be argued that it was this tightening in credit standards that has led tostrata titling developments becoming a more popular way of effectively financing tourismdevelopments, and• The ability of single events such as the 1989 pilots' strike, the 2001 terrorist attacks on the WorldTrade Centre and the collapse of Ansett, to have a material impact on the industry.Essentially when undertaking hotel developments, developers have two options, with these being:• Develop and sell individual strata units to investors, and• Develop and retain ownership of the development or sell to a single purchaser.It is important to note that the two options are completely different, with the first being a property "play"where the developer builds a building, sells the product and crystallises a development profit. In someinstances, a company associated with the developer assumes the ongoing management rights for theoperation of the hotel whilst in others they are managed by arms length hotel managementcompanies/operators. However, this represents a separate "transaction" and the developer'sobligations generally terminate once all strata lots are sold and any ongoing contractual obligations(such as minimum rental guarantees) are satisfied.94 Tourism Planning Taskforce Report