Tourism Planning Taskforce Report - Western Australian Planning ...

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Appendix 1In the second option, the hotel is not usually strata titled. Rather it is built by the developer andretained, or sold to a single investor. The hotel is then managed by the new owner, or an independentoperator is appointed to manage or lease it (subject to an appropriate contract with the owner). Thesingle investor/developer who retains ownership of the finished product, is usually more interested in alonger term investment that generally takes a number of years' operation before it generates acommercial return.Banks would generally prefer to finance hotels developed under the first option, as in thesecircumstances they do not assume an ongoing operating risk.Option 1 - Develop and sell strata units to investorsUnder this option, developers build and strata title units, then sell the final product to investors (usuallyusing a prospectus or a similar document such as an information memorandum). To entice theinvestor to invest, the developer has usually arranged a suitable resort/hotel operator to manage thecompleted development. Examples of this in WA are the Kareelya and Seashells groups, which eachhave associated hotel/serviced apartment management companies which manage the complexes theydevelop. The management company need not be associated with the developer, as in the case of theRadisson Dunsborough which was developed by Futuris and managed by Radisson (prior to itstakeover by Kareelya Group).When financing these sorts of developments, banks are particularly interested in how their facility willbe repaid. This is generally by way of settlement of the sale of individual strata lots. Therefore before abank will agree to advance any monies to a developer to build a development, it will require a certainlevel of presales. This level will vary depending on a range of issues, including the developer's trackrecord and relationship with the lender, the location of the development, the level of borrowings etc.Generally a developer can borrow a percentage (say up to 70 per cent) of the total cost of adevelopment, with the balance to be contributed by way of equity. However, amongst other things, thepreparedness of a bank to advance this percentage (and in some cases more), will depend on thelevel and quality of presales. The higher the value of presales, the more certain the bank is of beingrepaid, and therefore the more flexible and accommodating it will be. The lower the presales the less adeveloper can borrow and the more difficult it is for developers to secure finance.Generally it is easier for developers to secure presales of residential apartments than tourist units,which means that if a development has a residential component, the developer may be able to securesome quick presales. This may in turn enable the project to commence quicker than would otherwisebe the case, which could have a positive impact on the profitability of the project.Depending on the level of presales required, there may be a residual debt owing by the developer tothe bank. The bank will be reliant on the sale of further stratas to repay this residual debt andtherefore assumes a sales risk during and post completion of construction, until its loan is repaid.Banks generally regard residential stock as easier to sell and better security than tourist based assets,due to a number of reasons, including:• the market for residential purchasers is deeper as it includes owner/occupiers and investors, whilstpurchasers of strata titled tourist accommodation is limited to investors,• the trading risks associated with short-stay accommodation, and• the banks consider there is less downside risk in the value of housing product (i.e. if the marketfalls, housing will fluctuate considerably less than tourism assets), thereby providing them withmore reliable security.Therefore banks would prefer to see a mix of residential and tourism stock, which reduces their riskprofile.Tourism Planning Taskforce Report95
Appendix 1Option 2 - Develop and retain ownership of the development or sell to a single purchaserIn some cases, developers build hotels with a view to:• selling the completed hotel to an investor who in turn manages it itself or appoints a professionaloperating group such as Hilton, Sheraton etc, or• operating the completed hotel themselves or appointing a professional operating group to manage thehotel on their behalf.Where the hotel is to be unsold to an investor, the bank would generally require that a sale agreementbe in place prior to commencement of construction. Practically speaking, the investor would then have itsown finance in place to assist with the purchase and ongoing operation of the completed hotel.In the above two scenarios, any bank that finances the completed hotel, assumes an operating risk,because operating a hotel is a real trading business. Therefore the bank needs to be satisfied that asuitably qualified operator is in place to manage the completed hotel for an investor or that the developerhas the necessary skills (if it is to become owner/operated) to manage the hotel itself.As an indication, banks will lend a maximum of 60-65 per cent of the hotel's value, although this dependsupon a range of issues, including the borrower's history, the hotel's location and trading history (or in thecase of a new hotel, its projections). When dealing with new hotels the banks usually take a moreconservative position because there is no trading history available to support profitability forecasts.Under this scenario 2, the loan is generally repaid from trading profits and the hotel's eventual sale, asopposed to Scenario 1, when bank finance is repaid from settlement of the sale of individual strata units(residential and short-stay). Therefore if there is a residential component that can be developed and soldto reduce borrowings (and therefore the gearing of the project), the banks will look upon this morefavourably than if they were solely reliant upon the trading performance and eventual sale of the hotel fortheir repayment.SummaryFinance is an art not a science and therefore the comments contained herein are, by necessity, ageneralisation. As an example Commonwealth Bank may lend money against a retail development thatANZ would not finance, whilst ANZ may fund a hotel that Commonwealth Bank would not. Banksgenerally work within a policy framework, but these are guides only and individuals have the ability toapprove transactions that fall outside of these policy frameworks, if they are satisfied with the overall riskprofile of the transaction.There is little doubt that due to the restrictions placed on short-stay accommodation, permanentaccommodation is easier to sell. Therefore, it could be argued that a project that has an increasedpercentage of permanent accommodation, would be more profitable than one with a lesser percentageand therefore easier to finance. Given these comments it is understandable that developers seek acomponent of permanent residential accommodation within their developments.With the general reluctance of banks to finance hotel development on the basis of ongoing operations,the only way for many tourist developments to proceed is if they are strata titled and sold to investors.Therefore in many cases, strata titling is effectively used by developers as a financing tool.With respect to the issue of the permanent versus short-stay accommodation requirements of the banks,most developers have already received development approval before they approach the bank forfinance. Therefore, the ability of the banks to influence the mix of short-stay and permanentaccommodation is limited. Furthermore, I would consider it most unusual for a bank to try to influence themix, as it could be argued that this would place it and its employees, in the position of acting as quasidirectors of the borrower. From my experience, a bank is most likely to question the number and value ofpresales and the impact this has on its risk profile, rather than try to influence the fabric of thedevelopment.Jeff Cohenca96 Tourism Planning Taskforce Report
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GLOSSARY . . . . . . . . . . . . .
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Summary• The rezoning of a touris
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Chapter 1Introduction1 Introduction
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Chapter 1Introduction• To identif
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Chapter 2State tourist accommodatio
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Chapter 3Current tourism developmen
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Chapter 4Term of Reference 14 Term
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Chapter 4Term of Reference 1require
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Chapter 5Term of Reference 2framewo
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Chapter 5Term of Reference 2require
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Page 100 and 101: ReferencesReferencesAustralian Bure
Page 102 and 103: Further readingGetz, Donald (1993)
Page 104 and 105: Further readingWilliams, P., Penros
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Page 110 and 111: Appendix 2Executive Officer*(4) REI
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Page 126 and 127: Appendix 4Bradley Woods,Karen Conne
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