Real Estate
Home›Real Estate›Industry›Hotel brands use key money to fill financing gaps in s…
Hotel brands use key money to fill financing gaps in sluggish market
Key money payments are typically capped at 5% of total deal cost, helping owners bridge financing and renovation needs as hospitality sale prices fall.
Hotel brands and third party operators are increasingly using “key money” to support hotel development and dealmaking in a weaker hospitality real estate market, according to Bisnow. Key money is described as an up front, forgivable loan offered by a brand such as Hyatt Hotels Corp. or Marriott International, or by an operator, to help secure franchise and management agreements.
The funding is being used to help owners bridge financing gaps, offset renovation costs, justify conversions, and support projects such as ground up developments, management changes, property improvement plans, and rebranding. Bisnow also notes key money can be used to retain properties that are nearing the end of their franchise or management contracts.
Market conditions are making both equity and debt harder to obtain, and some owners say the tool is essential to getting projects done, while others view it as offering only marginal value and not solving deal economics overall. “The conversation has become very collaborative as the markets have started to become tighter and more difficult to develop,” said WalshDupart principal Grant Dupart at a Bisnow event.
Bisnow cites Getzler Henrich & Associates saying payments are typically no more than 5% of the total deal cost, and it points to data showing sale prices have slipped 9.3% year over year in June. It also says WalshDupart’s five new Marriott hotels in the Rocky Mountain region are each receiving key money, with Dupart adding that the projects would not move forward without it.