Explainer Series
Explainer

What are Hotel Property Developers?

Explainer by Gregory Autin

share this article
Last updated on 27 October 2020Comments

Property Developers

Advertisements

A property developer is the original owner and initiator of a property development project, the intermediary between property and the project service providers, and the party responsible for managing the overall project through to its realization. They develop properties in order to make a profit.

A developer is not a property investor, who purchases completed buildings and sells or rents them for profit. Nor is a developer a contractor, who is appointed to carry out construction works.

In the pre-construction phase, developers acquire the land, determine the marketing of the property, develop the building program and design, obtain the approvals, and raise the financing. In the construction phase, they improve the land and develop the facilities. Post-construction, they sell the property or rent out and manage it.

A pure-play property developer focuses solely on the development of build-to-sell projects, which are disposed of either before or upon completion of construction. Other property developers may undertake build-to-own development projects, which they hold and manage as long-term investments and lease out to tenants (build-to-rent).

A project sponsor is the original investor in a development project. Sponsor equity is the amount of equity capital the sponsor (property owner/developer) invests in a project when it is initiated, commonly in a special purpose vehicle (SPV) established for the development project.

Project exit is a complex process that can involve various interested parties - the developer, brands, asset managers, industry consultants, and real estate brokers. It requires knowledge of property operations and capital formation for the seller to make the best case for value and evaluate the offers.

Developers frequently use forward sales, in which the asset is sold before project completion, or forward financing, to achieve certainty of funding for the project. Sale proceeds may be used for general business needs, to reduce the developer's outstanding debt or to invest in new projects.

Several legal and commercial issues may arise from project exit. For a hotel property, these include relationships between the developer and the operator as well as the relationships with employees, guests and suppliers.

Transaction due diligence must be performed by buyers and sellers to address issues and risks and to overcome transaction obstacles. The risks when exiting a hotel project or selling the property include:

  • Entity risks- Risks on the part of the sponsor, lender, contractor, operator, supplier, government, equity investor, and other project stakeholders and participants;
  • Transaction risks- Operational, financial, country/political, legal, environmental, regulatory, force majeure and other risks resulting from the transaction itself; and
  • Project exit risk- The inability to exit from an investment project without incurring a loss.

A project is said to be sustainable when it continues to deliver benefits for an extended period post-construction - after developer exit from the project. There are a variety of factors that must be considered to ensure that project achievements will be sustained post-construction, after completion of the development project.

Related Explainer

What is Hotel Development?

7 October 2020 — Property development is the development of real estate. The property development life cycle starts with the launch of a development project and ends with project exit and usually the sale of the property by the developer.
Read more

Gregory Autin

    More from Gregory Autin
    Latest News
    Advertisements