Key Money: What It Is and How It Benefits Your Hotel Investment

Hotel investment · 6-minute read · By Sareneth Valencia Zepeda, Head of Development

Some franchises of large hotel chains have adopted the concept of Key Money as a strategy to consolidate projects. When the franchise contract is signed, the investor pays its amount and gains access to an information package to develop the construction and equipment according to the selected model.

Strategic alliances and acquisitions have created broad brand portfolios that chains seek to bring to market, and Key Money has become a strategy not only to expand their presence but to help the investor with part of the investment.

How is Key Money granted?

Not all chains implement it, and there is no defined structure as such, but it usually comes in two forms:

1. Key Money for acquiring the franchise. The brand seeks a long-term relationship —contracts run from 10 to 20 years— and, as an incentive, at some point during construction or at opening it reimburses the client for the franchise fee. That capital can be used freely as working capital.

2. Key Money for construction. It's usually driven by two variables: that a professional market study reveals the market's business potential, and that the same study reveals there is demand for a certain brand in the portfolio. Once the franchise is signed, a Key Money is granted that can be as significant as the hotel's equipment budget; the amount and timing are proposed by the franchise, as the equivalent of a non-repayable grant.

What financial benefits does Key Money bring?

• Reduces the investment amount: the lower the investment, the higher the return.
• Frees up capital: available for working capital or for the hotel's construction and equipment.
• Aligns the brand with your success: it keeps the chain interested in the project having the conditions to succeed, based on what the market study reveals.

A safeguard for the project

As consultants, we see that Key Money has led the proposed locations and products to be reviewed by the brand's approval committee, which represents a safeguard for the project. It's no longer just the view of a "franchise sales advisor": it's an analysis based on market evidence, a shared interest from the brand in taking part in that site, and a commitment to support a long-term relationship with the investor.

Should I accept a Key Money?

It's wise to evaluate the amounts and terms, because many incentives are ultimately not free. These questions help you decide with a cool head:

• Is it an opportunity to enter the hotel business with capital that won't cost me?
• Is it really a significant amount relative to the total investment?
• Will it be granted at an optimal time?
• Does the brand know the local market well enough for its proposal to add certainty to the project's success?
• Do I have a specialized market study that lets me verify the projection and rate the brand proposes?
• How does the Key Money impact the project's financial evaluation?

Advice to decide with certainty

At JJ Díaz de Sandi & Asociados we advise the investor throughout the decision-making process: from validating the business idea and supporting the selection, acquisition and signing of the franchise, to staying close to architects and engineers so it is an efficient project, and optimizing the business's operation to maximize profits.