Toronto is one of the top tourist destinations in North America. Canada’s largest city is known for its diverse neighbourhoods, fantastic food, world-class museums, and incredible attractions. From the CN Tower to the Toronto Raptors and Kensington Market to Lake Ontario, there’s something for every visitor to enjoy.
Toronto has built an extensive hotel industry to accommodate many tourists. Hundreds of hotels are in the city, and new ones are constantly on the horizon. Just this year, Toronto saw the opening of the upscale TOOR Hotel and the first Canadian location of Nobu, among other things.
If you’re hoping to get involved in the city’s dynamic hotel business by purchasing a hotel, exciting opportunities lie ahead. However, there are also complicated issues to consider.
Financing Your Hotel Acquisition
Before exploring and settling on a financing option, you must complete some preliminary steps.
Step 1: Determine Your Financial Position
First, you’ll need to assess and understand your financial position properly. This means asking questions like:
- What’s your net worth?
- How much cash do you have for a down payment?
- What’s your credit score?
- How much debt can you responsibly assume?
Step 2: Create a Business Plan
Now that you know where you stand financially, the next step is to create a business plan. A business plan is a written document that describes the hotel you intend to purchase and what you want to do with it. Your business plan might also include:
- A market analysis: overview of the hotel market, comparison with nearby hotels, etc.
- Marketing strategy: ideas for attracting guests
- Financial plan: the purchase price, projected revenue, etc.
- Operations plan: how you’ll manage the hotel
Once you have a solid idea of your financial health and you’ve developed a comprehensive business plan, you’re ready to start exploring options for financing your hotel acquisition.
Hotel Financing Options
Hotel financing primarily covers the hotel’s purchase price. However, it may also help pay for other kinds of costs, such as:
- Construction or renovation
- Furniture, fixtures, and equipment
- Franchise fees
- Closing costs
Some of the most popular financing options include:
1. Traditional Bank Loans
Traditional bank loans are one of the most common ways to finance a hotel purchase. Most Canadian banks offer commercial loans for the hospitality sector, which can be used to finance a hotel acquisition.
Interest rates can be either fixed or variable, and will depend on several factors, including your credit profile and the details of the deal.
For traditional bank loans, the process tends to be lengthy, and the bank often requires a significant down payment, which could be 20% or 30% of the total purchase price of the hotel.
For example, if you want to buy a mid-sized hotel listed for $8 million, you would likely apply for a loan through a traditional bank. The bank would review your financial status, business plan, and credit history, among other factors. If everything checks out, the bank might then approve a loan of $5.6 million, which is 70% of the purchase price, under these terms:
- 30% down payment, which amounts to $2.4 million
- 6% fixed interest rate over 10 years
In the right circumstances, traditional bank loans are a reliable way to get the funding you need for your hotel.
2. Government Grants for Small Businesses
Another option for aspiring hoteliers is government grants. Both Ontario and Canada offer several programs to help small businesses with funding.
At the federal level, for example, the Canada Small Business Financing Program can be a valuable resource. Its mission is to help small businesses obtain loans from financial institutions by sharing the risk with lenders.
Eligible businesses can apply for loans of up to $1 million, which can be used to purchase a hotel.
To qualify, businesses must have a gross annual revenue of $10 million or less.
3. Private Lenders or Investors
A third option to explore is financing your hotel through private lenders. Private lenders might be individuals, real estate investment groups, or private lending companies. This can be an attractive option for those who are looking for fast approval and flexible terms. However, private lenders often require higher interest rates and larger down payments than traditional bank loans.
Say, for example, you find a small, older hotel that’s being sold for $3 million. This might be considered a risky purchase. Therefore, a traditional bank might not be willing to loan you the money you need. You might then approach a private lender. The lender might agree to fund $2 million of the purchase price. In exchange for the loan, the lender might impose the following terms:
- A 12% interest rate (higher than a traditional bank loan)
- A 2-year loan term
- A down payment of $750,000
In some cases, investors or developers might contribute capital to your hotel purchase in exchange for equity in the hotel.
Although these are stringent requirements, a private lender could be your strongest option.
4. Franchise Financing
Buying a hotel franchise can be advantageous because it gives you automatic brand recognition, marketing support, and established operating systems. Some of the most common hotel franchises in Ontario include Hilton, Best Western, and Marriott.
Additionally, the franchisor may offer its own financing options to franchisees. The franchisee will pay the franchisor royalty fees in exchange for financing and other benefits. The amount of fees owed will depend on the specific details of the franchise license agreement.
Final Thoughts on Financing a Hotel Purchase
Purchasing a hotel in Toronto can be a smart and rewarding investment, especially in a vibrant, world-class city that draws millions of visitors each year. It is crucial, however, that you secure the right financing, which will allow you to set your business up for success. You first need to understand your financial position well and create a solid business plan. Whether you choose a traditional bank loan, government support, private lending, or franchise financing, you must consider the pros and cons carefully. Making an informed, educated decision will allow you to confidently move toward owning and operating a thriving hotel in one of North America’s most exciting markets.
Contact the Hotel Lawyers at Baker & Company for Trusted Advice on Hotel Financing in Toronto
At Baker & Company, our talented team of hotel lawyers takes the time to work closely with clients and understand their unique needs and goals. From proactive advice to dispute resolution, we can help ensure you are positioned for success in your new hotel business. Whether you are a seasoned hotelier or have recently considered purchasing your first hotel, contact us at 416-777-0100 or reach out to us online to schedule a consultation and learn how we can assist you.
