The rising cost of materials, labor, borrowing and utilities means that the cost of financing a new hotel today is very different from the costs of doing so even a few years ago.
In addition, with the building and construction industry reportedly producing approximately 40 percent of global greenhouse gas emissions, developers are under increasing pressure to reduce their carbon emissions. In light of this, environmental, social and governance (ESG) issues are typically prioritized in new hotel developments.
Where development financing and ESG meet, there is “green financing.” We have seen an increase in sustainability-linked loans (SLLs) and green loans.
The purpose of SSLs and green loans and a brief description of how the hotel sector uses them are outlined below.
Sustainability-linked loans
Purpose
- An SLL is flexible and typically usable for any purpose.
- An SLL is a green product because the underlying loan document sets specific sustainability criteria for the borrower. There is then a pricing adjustment based on the borrower's performance against the agreed sustainability criteria.
Application in the hotel development sector
- A hotel developer can apply for an SLL for the development financing of a new hotel.
- When a developer produces a hotel that meets predetermined energy efficiency targets, the margin on the loan is reduced.
- Additional reporting obligations with an SSL result in higher administrative costs to the borrower.
- Setting the sustainability criteria at the right level is essential. Failure to meet such standards can result in an increased margin (and higher development costs) and possibly an “event of default” under the loan facility.
Green loans
Purpose
- The green loan market aims to facilitate and support environmentally sustainable economic activity.
- A green loan can be used only to finance or refinance new or existing eligible green projects. Examples of green projects are included within the Green Loan Principles.
Application in the hotel development sector
- A hotel developer producing a “green building” (as defined in the Green Loan Principles) is entitled to apply for a green loan for the purpose of financing or refinancing that building, which could achieve preferential borrowing rates.
- As with SLLs, green loans increase a borrower’s reporting and administrative obligations, and it is important to ensure that the developer has the ability and resources to comply with the reporting obligations contained within the loan documents.
Benefits of green financing
- Reduced carbon emissions: With increasing pressures on corporates to reduce their carbon footprint, obtaining a green financing product demonstrates that a developer is focused on reducing carbon emissions.
- Positive public image: Environmental matters are an increasing priority for investors and end users. A hotel that obtains a green financing product can benefit from a positive image in the market.
- Future appeal: A hotel developed in line with a comprehensive ESG plan will likely appeal to buyers, investors and lenders on future sales and/or refinancing.
- Better interest rates: Green financing products may offer better interest rates when compared to other loans on the market.
- Reduced running costs: Unlike some other commercial investment properties, hotels include all amenity and service costs within the price of booking a room. Developing a hotel that runs efficiently could reduce hotel operating costs and increase profit.
