The History of Financing Boutique Hotels

The Origin Story of How Owners Finance Boutique Hotels

The boutique hotel industry has grown considerably over the last several years, attracting investors and business owners alike. Although every real estate transaction has different considerations, financing a hotel or motel today comes with unique challenges. Looking back at the history of financing boutique hotels can give you an idea of how far this industry has come from its start in the 1980s. It can also help you know where to begin if you’re interested in financing a boutique hotel of your own.

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1980s: The Rise of the Boutique Hotel

Luxury hotels were big in the early 1920s, with an emphasis on resort-style stays and excess. After the legalization of gambling in the 1970s, casino hotels had their heyday in the following decade. It wasn’t until the 1980s that the boutique hotel became more than just an idea. The boutique hotel movement began around 1984, with the opening of Morgans in New York City (although others say the first true boutique hotel was the Clarion Bedford Hotel in San Francisco in 1981).

Note: correction to the original article* - Early boutique hotels also included the Raphael Hotel at Geary and Mason Streets in San Francisco that opened in 1971, followed by Kansas City in 1976 and Chicago in 1978. A chain of 3 that we called "Little Elegant Hotels" before Ian Schrager coined the term "Boutique Hotels". The San Francisco Raphael was the hotel concept that Bill Kimpton copied when he created the Bedford Hotel in 1981.

The founders of Morgans, Ian Schrager and Steve Rubell, started the boutique hotel after spending a year in prison for tax evasion in 1980. The pair acquired the funds for Morgans from years of doing business together; they owned the Studio 54 and Palladium nightclubs in New York City, as well as through partnerships with investors. They bought existing properties and renovated them, rather than constructing new builds – a concept that’s still common in boutique hotel ownership today.

Renovating existing buildings can save money for the investor and lends personality to the establishment. Personality is vital in creating the boutique hotel atmosphere. Schrager and Rubell, for instance, built their nightclubs in old opera houses and art buildings. Financing for boutique hotel buildings came from lenders and/or private sources in the 1980s. Boutique hotel financing hasn’t undergone significant change since the first brands on the market.

1990s-2000s: Financing Boutique Hotels in the Beginning

Before boutique hotels really took off, owners and investors found financing for their real estate ventures through private equity investors and real estate investment trusts (REITs). REITs own commercial buildings of all kinds, but mainly income-producing real estate such as hotels and motels. Unfortunately, finding any type of financing for real estate projects was difficult in the 1990s. Banks provided the majority of hotel funding (58%), followed by other sources such as small business loans and mortgage funds.

From the early 2000s through today, it has become easier for investors to find funding for their commercial property projects. Equity investors and debt providers have become more active in the independent and boutique hotel market in the United States. Public REITs have acquired more boutique than branded hotels in the last several years, according to JF Capital Advisors. They’ve also paid more on average: $400,000 vs. $309,000. Investors in the 1990s and 2000s often looked to institutional investors (95%) and high-net worth individuals (5%) for capital to fund their hotel purchases.

Starting in the mid-2000s and stretching to today, word-of-mouth advertising has been incredibly important for promoting and financing boutique hotels. Instead of having a major brand to rely upon for marketing, boutique hotel owners must create names for themselves the hard way. Spreading the word through people who have stayed at the hotel and enjoyed themselves is a common way to find investors and manage successful independent hotel establishments.

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What Does Financing a Boutique Hotel Look Like Today?

If you’re interested in financing a boutique hotel in 2018, you have a variety of options. Conduct a search for commercial real estate financing in your area. As an investor, you can collect funding for boutique hotels and a variety of other commercial enterprises through providers such as Hallmark Funding Corporation and other such sources. A funding company can provide the necessary capital to purchase, refinance, or renovate a boutique hotel based on your specific needs. Also, there are a number of boutique hotel specialists today that can help shape the necessary story and guide sponsors and investors through the maze of steps needed to secure the right type of financing. Owning a boutique hotel today can involve the following types of financing:

  • Conventional loan

  • Business and industry loan

  • Construction loan

  • Small Business Administration (SBA) 504 loan

  • SBA 7a loan

  • Cash refinance

  • Private funds

The financing process in 2018 takes proving your creditworthiness, calculating the amount you’ll need for your boutique hotel project, writing up a business plan, preparing loan and venture capital proposals, and presenting your proposals to prospective sources of funds – either banks, the SBA, or a private lender. Your boutique hotel venture doesn’t have to be “risky” with the right type of financing. Compete with larger hotels and maintain a scalable business by properly researching and preparing for the financing process.

The Future of Hotel Financing

Examining the past isn’t enough to get a feel for financing boutique hotels. While its history is intriguing and has led financing to where it stands today, as an investor you must always look to the future to inform your next step. Predicted trends for the future of boutique hotels are optimistic. With the increase in hotel marketing and revenue agents, and skill on line service providers, experts believe the industry will continue its current growth pattern, enjoying even greater gains in revenue in the coming years.

Expectations for the future of boutique hotels include more apps and technology, the need for guest experience personalization, and collaborations with unique partners. Boutique hotel financing in the future will likely rely on a sponsor’s ability to prove value through a variety of  marketing tools such as influencers and relevant innovations.

Securing financing may require investors and boutique hotel owners to be creative to impress lenders. Luckily, the entire premise of the boutique hotel is founded on creativity in hospitality. To succeed as the boutique hotel investor of the future, you’ll need to think on your feet and keep competitors guessing.