It will cost an average of $27 million to construct a hotel in 2020. While this number might seem daunting at first but once you’ve got an understanding of how costs will be broken down, the chances are that it will begin to make sense. With this in mind, read further for a detailed overview of the major spending categories, as well as an outline of your financing options.
What factors into the costs of hotel construction?
Before we get into more specific numbers of what you should be spending on hotels It is important to gain a better understanding of the direction your money will go. In that regard, we took the liberty of listing the top six categories of spending that you must include included in the budget.
To determine the figures, we rely on information from a new study conducted by Cushman & Wakefield, a company that provides consultancy and valuation services to new and existing hotels. This is what they found from their study:
1. Costs of land
The purchase of land is the initial biggest expense for hotels. The cost of land comprised around 9.0 percent of a hotel’s total development expense. However, the study states that in particular in urban areas, they’re seeing an increase in the number of long-term ground leases, as opposed to site acquisitions based on the market.
2. Hard costs
For a hotel, the hard expenses will comprise building permit, subcontractor and contractor bids along with engineering costs, landscaping expenses, and cost of construction for any additional construction projects, such as creating parking garages.
In general, hotel owners can anticipate that these expenses will take up the majority of their budget. The study found that the hard costs comprised between 64% to 72 percent of the budget depending on the quality of the hotel are. The more expensive the project is and the more expensive the cost, the lower the percentage of the total expense.
3. Soft costs
In addition, when calculating the building costs, soft costs are accounted for in your costs for architectural services; professional consulting fees, such as surveyors and interior designers as well as financing costs. carrying costs.
The study notes that these expenses added up to anywhere from 10% to 18 percent of the budget in general, it’s important to consider that the widespread of COVID-19 and other shutdown initiatives have definitely contributed to these numbers.
The report cites a study conducted by McKinsey & Company that anticipates that the measures taken to stop spreading the disease could result in these costs increasing by up to 15%-30 percent.
4. Furniture, equipment, fixtures and fixtures (FF&E)
The name suggests that furniture for hotels bathroom fixtures and furniture for public spaces and soft goods such as carpeting and drapes are included in FF&E expenses. In addition, any technological or telecommunications equipment is included in this class.
Based on the research, such expenses were responsible for between 8 and 10 percent of the hotel’s budget on average.
5. Working capital and pre-opening costs
This is a category that includes operating reserve as well as the cost of recruiting and training personnel, the expense of constructing the inventory of supplies like towels and linens along with any charges for technical services.
The study shows that these costs comprise only a small portion of the budget of an upcoming hotel, and account for anywhere between 1% to 4 percent of the total cost at a minimum.
6. Development fee
The last category of cost to look at is the development cost. This includes all costs for the hotel’s development team like travel expenses administration fees, travel costs, and even payroll.
It is interesting to note that this cost is not a part of any revenue anticipated to be generated following the building for the establishment. It usually ranges between 1% and percent of the expense to construct your hotel. A lavish hotel project attracting a higher cost.
Which is the mean price for a Hotel room?
The cost to build hotels may fluctuate significantly, it’s better to consider the building cost on a more specific scale. In this case, we’re making projections of potential costs based upon prices per hotel room instead of considering the costs for the entire structure. This way, you will be able to figure out a budget projection in accordance with your occupancy capacity.
However, the Cushman & Wakefield study found the following average cost per hotel room per of the levels of hotels:
- Midscale hotels: $147,000 per room.
- Upper midscale hotels: $175,000 per room.
- Upscale hotels: $235,000 per room.
- Upper upscale hotels: $409,000 per room.
- Hotel rooms with luxury: $1,630,000 per room.
Calculating the numbers: What do hotels cost on average?
With these figures with that in mind, it’s straightforward to calculate the amount the average hotel could cost. For this experiment, let’s suppose that the standard hotel is averaging 115 rooms according to data. Be aware, however that the more expensive hotels get bigger, the bigger it gets. Except for boutique hotel, then it’s more likely to have a smaller size.
Based on these figures, here is the cost average for each hotel level:
- Midscale hotels: $16,905,000.
- Upper midscale hotels: $20,125,000.
- Upscale hotels: $27,025,000.
- Upper upscale hotels: $47,035,000.
- Hotels with luxury amenities: 187,450,000.
Of of course, this is only the standard number. The price per room could be more expensive if you intend to include a lot of amenities or looking to open an franchised hotel and need to pay franchising fees. It is also possible to cut down on expenses by buying or renovating your hotel.
How do hotel financing works?
Once you’ve got an idea of what the average hotel cost to construct, it’s time to figure out the best way to get funds to finish your hotel construction. Here are four typical ways to finance in the hospitality industry:
1. SBA 504/CDC Loan Program
If you’re a business owner with a proven track record, SBA loans should be the top priority on your list of priorities. They are offered by the Small Business Association (SBA) is a partial guaranteeing loan provider that makes them easier for small-scale business owners to obtain.
Particularly SBA 504/CDC loan program is a good example. SBA 504/CDC loan offers to fund for the following objectives:
- Land purchases.
- Land improvements.
- Construction of new facilities.
- The purchase of existing buildings.
As with all SBA loans, The loan’s term for one SBA 504/CDC loan is 10 twenty, or 25 years. Borrowers are able to finance as much as $20 million.
2. SBA 7(a) loan
However it is this SBA’s 7(a) loan is an operating capital loan, which means that it is able to be used to fund the more general expenses associated with the construction of hotels, for example, FF&E or the development fee and operational costs.
In this scenario, the loan amount can be up to $5 million, and the terms of the loan will be different according to how the funds will be employed. The loan term could be as long as seven years for operating expenses and 10 years for purchases of equipment or 25 years in the case of commercial real estate purchase.
3. Commercial real estate loan
Although SBA loans typically offer some of the most favorable loans, they’re necessarily easy to qualify for. In this regard in the event that you aren’t able to obtain the SBA loans, you could consider a traditional commercial real property loan.
Based on the loan product you choose depending on the loan product, the terms of the loan and requirements for borrowing can differ significantly. It is possible to see loans with terms that range between one year for a hard money loan up to 25 years when it’s an institution loan. Additionally, interest levels and loans could be distributed throughout the board.
4. CMBS loan
If you’re able to obtain a construction loan to construct your hotel — often known as the CapEx credit in the commercial finance industry however you aren’t able to get traditional bank financing to finance a mortgage since you don’t have a solid track record of business, you might be interested in a credit card CMBS. It’s a CMBS loan is basically an unsecured bridge loan that can be used to provide temporary financing until you’ve built the credibility of your repayment history.
It’s the bottom line
At first, the expense of building a hotel might seem like a huge amount at first, but after you’ve had the opportunity to look at a breakdown of how much money is spent in your budget, and also look over the financing options available, chances are that it is much more feasible. If you’re thinking of developing a hotel take the numbers and details above to get more of an idea of the amount you’ll have to pay.