What do you need to keep in mind when deciding on financing the purchase of a property for tourist purposes?

Finance

Loans

18/01/2019

JOHN MATHEW

For the purpose of realizing an investment related to the purchase of a property for tourist purposes, we received an inquiry from a client for the preparation of a business plan which he needed to raise a loan from a commercial bank. At a meeting with the client, we observed the basic elements that are important for the client, the bank, and the sustainability of the investment, all for the purpose of better preparation of the business plan and loan approval. Since he had determined the amount of the property with the seller, the client’s first step was to go to the selected commercial bank to define the amount and terms of credit.

Defining the Amount and Terms of Credit

When defining the terms of the loan, it is important to determine when (during the year) the investor will make installment payments, taking into account the income generated in a specific part of the year (especially when it comes to businesses with pronounced seasonality such as tourism). Since it is a tourist activity – renting out accommodation facilities, the intensity of income generation of which is not the same throughout the year, we advised the client that it is important to define the time of loan repayment, i.e., that the repayment should not begin immediately upon the approval of the credit funds. Since the investor will not yet be generating income from the rental activity at that time, he agreed on an adjusted repayment method with the bank. The client will repay the loan annuities three times a year during the high season: 30.6, 31.7, and 31.8. This method of repayment is very important for the investor because this is the time when prices and occupancy of accommodation facilities are highest.

It was also defined that the client will pay the loan interest monthly. When projecting the annual financial flow, which represents the project’s “wallet” containing the amounts the investor pays, the conclusion was that, taking into account the total projected revenues, investment, and costs, the investor can service the credit obligations. However, with a detailed, monthly projection, it was visible in the financial flow that the investor would not be able to pay the interest amount for the first three months of repayment from the project. Following this, it was agreed with the bank that the client must deposit an amount of his own funds equal to the three-month interest amount into the bank.

Investor Costs

As advice to clients, but also to banking employees, we can emphasize that it is extremely important to request a projection of the monthly financial flow, in which it is clearly visible whether the investor will have enough funds at a certain moment to finance initial investments and interest repayment in the period before the income from the project realization starts to arrive. The investor decided to finance the property by using 50% credit and 50% own funds. It is also important for the investor to be aware of the additional costs incurred when seeking credit funds, for which the investor needs to secure funds before the loan approval.

These are the cost of property valuation (in the case of purchasing a property), and the preparation of a business plan. Other costs that accompany the loan approval, for which the investor also needs to secure funds, are the loan processing fee (usually 0.5% of the loan amount), and the cost of notarizing the loan agreement. It is important to take these costs into account because, depending on their amount, it is necessary to either set aside own funds for their financing or increase the loan amount by a certain amount. Since the investor did not have a company established, he had to start the procedure for opening a commercial company in the meantime, for which he also needs to allocate funds.

Decision on Purchasing a Property for Tourist Purposes

1. Purchase of a property that has been rented out

The property subject to purchase was owned by another legal entity for the previous two years, which placed it on the market for which interest was proven to exist. Since the tourist activity will be performed by a new company that has not performed this activity so far, the data of the previous owner were used as relevant data for comparing prices, occupancy, and revenue levels. The mentioned data were also used for revenue projection in the business plan. If we are buying a property that has been rented out, the investor has a certain degree of security that they will be able to achieve similar revenues as before their investment.

2. Purchase of a property that has not been rented out

In the event that the property being purchased has not generated income from the tourist rental activity so far, a market analysis needs to be done beforehand to get relevant data on prices, occupancy, and demand for the property in question, in order to make a revenue projection. There is a greater risk for the investor if we are buying a property that has not been rented out because in that case, he must work more on the marketing and recognition of the property being rented. In the revenue projection in the business plan, it is important to define realistic, market-based revenues. It is undesirable to inflate revenues and be unrealistic in their projection, as such an investment often “falls through.” On the one hand, in case of loan approval, the client may run into repayment problems, and on the other hand, the bank may determine that the revenues are not realistic, which can ultimately result in the rejection of the loan application.

Project Risk

One of the elements that a business plan must contain is certainly a sensitivity analysis in which the bank checks the risk of the project primarily from the aspect of revenue reduction. When analyzing the business plan, specifically the sensitivity analysis, the bank uses the data on how much the revenues from the mentioned activity can be reduced, while the financial flow remains positive throughout the entire observed life of the project, i.e., that the investor can repay the loan.

The percentage by which the amount of realized annual income is usually reduced is between 15% and 20%. It is important that even when revenues are reduced, the loan repayment is not jeopardized. Based on all the data contained in the business plan, especially the financial ones: revenue projection, expenditure projection, profit and loss account, financial flow, and economic flow, calculated indicators such as the net present value of the project, and the internal rate of return of the project, a final decision is made on the project’s profitability and the decision on the approval of credit funds to the investor. When defining the financing of the investment, it would certainly be good to explore other options for financing the investment or at least part of it, such as, for example, EU funds, support from local and regional self-government units, tourist boards, and similar. Author: Jelena Barić, Consultant at Zobnica d.o.o.

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Concessions

4 Sep , 2025

Economic Feasibility Study

An Economic Feasibility Study is a document that must be prepared if you are bidding for a concession for a specific public good or service, and it typically constitutes a mandatory part of the tender documentation. For the allocation of a concession on the maritime domain, an Economic Feasibility Study is a mandatory attachment to the bid.

It is common for the tender documentation to prescribe the specific content of the study; thus, it can range from simple and concise to extensive and concrete. Naturally, this depends on the type of public services/goods in question and the estimated value of the concession.

The Economic Feasibility Study demonstrates the viability and profitability of the economic use of the public good or service. This requires creating a projection of operating revenues and expenses regarding the subject of the concession for the entire duration of the concession period. Within the study, the amount of the fixed and variable parts of the concession fee for the economic use of the good or service is determined. The amount of the concession fee, alongside the amount of investment into the concession subject, are the most frequent criteria by which received bids are evaluated and ultimately ranked.

Beyond the goal of winning the tender, it is crucial to ensure that the stated concession fee can be covered by operating revenues (along with other operating expenses necessary for performing the activity), and that the investment into the concession good has its own economic viability—whether direct or indirect.

Additional criteria that may be evaluated, and which form an essential segment of the Economic Feasibility Study, include the number of planned new jobs, as well as the bidder’s experience in performing the activity for which the concession is sought.

In our experience, more complex Economic Feasibility Studies are primarily required for the purpose of obtaining concessions on the maritime domain, specifically for ports, beaches, marinas, anchorages, hospitality facilities, etc.

Simpler examples of Economic Feasibility Studies are required for goods or services that can be provided on the maritime domain, such as: maritime and passenger agencies in ports, fuel supply for vessels, and similar activities.

For these more complex studies, it is highly recommended that they be prepared by an expert with the necessary experience and knowledge. The study must cover the entrepreneur’s historical performance, location analysis, technical-technological analysis, procurement and sales market analysis, and an economic-financial analysis that includes a projection of operating revenues and expenses, as well as an assessment of the return on investment.

Zobnica d.o.o. is focused on project preparation for obtaining financing from various sources, ranging from EU funds to commercial bank loans, as well as consulting on the preparation of various types of studies for concession applications. We have been successfully operating in the consulting market for 10 years, with clients coming from various industries and sectors. For institutional clients (Port Authorities, counties, and Local Self-Government Units), we have prepared feasibility studies for granting concessions, and for entrepreneurs, we have prepared economic feasibility studies for applying to concession tenders, giving us a comprehensive view of the process from both sides.

We understand that concession renewal for clients who have already invested significant funds into the concession subject is a very sensitive topic, and that obtaining a new concession is a vital and delicate matter for them; we approach it with the appropriate level of care.

The study preparation process should begin on time, even before the official publication of the concession tender, as alignment with tender conditions can be adjusted in a later phase.

If you require an Economic Feasibility Study and wish to have an informational conversation with us or receive a quote, please fill out the form at the following link, and we will get back to you as soon as possible.

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EU Funds

4 Mar , 2024

A Guide for Farmers

Whether you’ve just started or have been planning to apply for a non-reimbursable EU grant for some time, I believe you have various questions and dilemmas and are looking for answers.

This manual is the ideal starting point for your search for answers, and it was created after numerous conversations and meetings with farmers who have never applied for or implemented projects co-financed by EU funds.

The manual stems from the need to familiarize users with the fundamental prerequisites/concepts related to agricultural holdings viewed from the aspect of applying for non-reimbursable EU tenders.

The good news that I must emphasize right here is that with the purchase of this manual, you also receive half an hour of telephone consultations during which I will give you answers to your questions related to the content of the manual, as well as free advertising of your products and services on our portal Ethno Dalmacija. Our cooperation doesn’t have to end here; on the contrary, we dare to say that this is just the beginning, and you can see what else we can do for you and how we can help you on our website, where you can choose something for yourself. The price of the guide in PDF format is 70.00 Euros, which you can pay using this payment slip and confirm to us by email: info@zobnica.hr. Once we receive the payment, we will send you the guide by email and arrange a time for telephone consultations!

Take a look at the guide Download Pay and send an email to info@zobnica.hrDownload