Securing A Commercial Mortgage For A Hotel

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The hotel industry in the UK is going strong, with lenders keen to back would-be borrowers for both purchases and refinances. The market is a popular career choice, both long-term and as a method of ‘changing pace’ or taking on a new venture during formal retirement.

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Key Criteria Points

There are numerous key factors in securing funding for hotels. Whether purchasing a new business, refinancing or refurbishing a property, commercial mortgage lenders are keen to support borrowers in the sector.

Client Experience

Experience in the hotel, or hospitality industry is preferred. Although being a relative newcomer doesn’t mean a commercial mortgage is out of the question. If you’re looking to move into the industry with no experience, the lender is more likely to look kindly on an application involving a strong hotel.

Where there is no experience in running hotels, experience in running a business, acting as a manager or even providing strong customer care will strengthen your application.

Historical Performance of the Hotel

Where you are financing a hotel that is already trading, the lender will want to see the financial accounts, ideally covering the last two years.

If the hotel is running well and has strong occupancy rates, demand can easily be demonstrated. Without demand for the product, there will be no profit, which will clearly not help your commercial mortgage application.

Hotel Reputation

Lenders are keen to lend to businesses with a strong reputation. If a hotel is suffering from numerous negative online reviews, they will want to understand how this is to be resolved.

Where there is a change of management and staff will not be retained, clarity around the staff changes and how the reputation will be repaired are key. Turning around a hotel that is failing to treat its guests well is a strong win for applications.

Where you’re expecting to turn around a hotel with previously poor customer service, experience of where you have managed a similar situation will put the lender at ease.

Accounts

The lender will assess the trading performance using the latest two years accounts for the business. They will check the EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) to check the affordability of the loan.

EBITDA shows the trading position of the business without certain accounting practices and costs being taken into account. This allows them to understand the true profitability of the business, and its ability to support the loan repayments.

Changes to The Business

When buying a business or raising capital to put back into moving the business forward, past financial performance may mean little when predicting future income. As such, if you’re making changes to the business and expect financial performance to improve as a result, your lender may be willing to accept these when assessing the application.

This is true whether you’re projecting an improvement to the financial performance, or customer satisfaction and reputation.

Changing Management Structures

A change in management structure can result in eradication of problems around the reputation of the business very quickly. In addition, where previous management structures were either very expensive, or not running the hotel to its full potential, there is scope for improvements in profit overnight.

As such, details of any change in the management structure of the business should be laid out upfront. This is a key point in your purchase of a hotel.

Refurbishment

Refurbishment of the hotel can also produce a dramatic change in revenue. Firstly, the cost of the works and your ability to fund that, along with any impact on capacity must be taken into account.

In addition, where there is a big change in the standard, aesthetic or type of hotel, this may impact on the trading performance.

Marketing Strategies

Some hotels rely on repeat trade and their marketing has been practically non-existent for a number of years. Those hotels won’t be reaching their capacity in a world of online hotel booking. Large changes to marketing strategies – either how bookings are generated, or the addition of special events and private functions – will be considered.

If you’re planning to make major changes to a hotel of this nature, where affordability may be tight, some lenders will allow you to use projections. Projections are designed to supplement the current financial accounting figures, showing both the expected position going forward.

Finance Terms

Commercial mortgages for hotels are usually often based on the ‘going concern value’. This means that both the property and business value can be considered by the lender. We can usually fund up to 65% of the going concern value, or 75% of the property value, depending on your application.

Some lenders will allow you to take out your application on a capital repayment, or interest only basis, and most will offer both fixed and variable rates. In addition, we can usually offer:

  • Interest rates from 2.25%
  • Loans from £50,000 with no maximum loan size
  • Lending terms of up to 25 years (some lenders will restrict borrowing to 15 years)

Timescales & Application Details

The commercial mortgage process usually take 6 – 8 weeks, depending on the transaction. The main delays are usually caused by failure to provide all the required information to the lender upfront.

To ensure your application runs as quickly as possible, you should always endeavour to provide the following:

  • 6 months’ personal bank statements
  • Projections (where projections are being used in conjunction with a business plan).
  • 2 years’ accounts
  • 6 months’ business bank statements (for refinance applications)
  • CV of the borrowers
  • Business plan (where future changes are planned)

Who Offers Hotel Mortgages?

Mortgages for hotels can largely be broken down into three different types of lender, as follows:

  • High street banks – These are the well-known banks that you’re used to seeing on the high streets, albeit usually specialist commercial divisions of them. They tend to have the tightest criteria and as a result, the lowest interest rates.
  • Challenger banks – These tend to take a slightly higher risk approach by relaxing the criteria around credit history and affordability. Challenger banks will charge slightly higher interest rates in most situations, as a result of their more relaxed approach to assessing applications.
  • Specialist Commercial Mortgage Lenders – They tend to be far more understanding of previous credit problems or poor trading performance. You’ll find that they require less robust financial information. The price you pay for working with these lenders are higher interest rates and lower loan to value limits.

Can I Get a Hotel Mortgage to Refurbish a Property?

Yes, depending on the level of work required and whether the property will be closed during the refurb. Where only light works are needed to refresh a property, a commercial mortgage lender may be happy to help.

For more involved projects, including full refurbishments that will see the business close for an extended period of time, a bridge loan may be a more suitable option.

How Does Hotel Mortgage Pricing Work?

The pricing of your application depends on the level of risk taken on by the lender. The perceived risk is decided on the trading history of the hotel, the location, the loan size and loan to value and your background and experience.

To get the best commercial mortgage rates for your business, you should look to satisfy the above in as much detail as possible.

Trading history involves providing the accounts for the business and providing detail of any potential cost savings and one-off expenses which will not show in the next set of accounts.

Where occupancy rates have been poor and are expected to improve, you should provide solid detail explaining why this is the case. It may be that the previous occupants only opened for a short time or had a poor reputation. Detail will be key in ensuring that the improvements are believed.

Again, experience can be detailed with a CV breaking down your history. You can also include details of transferable skills gained in other industries.

What Other Types of Funding Are There for Hotels?

For those looking to raise further funds for their hotel business, we can also provide the following:

Lender’s View

With the hotel industry continuing to benefit from strong demand, lenders are keen to support the industry. Whether you’re looking to purchase a booming hotel, buy a fixer upper, or start-up a new, or currently closed hotel, we can help.

about-the-author-gary-hemming

About The Author

This content was produced by our Commercial Lending Director, Gary Hemming. Gary has over 15 years’ experience in financial services and specialises in bridging loans, commercial mortgages, development finance and business loans. He is widely respected in his field and regularly provides expert commentary for specialist trade publications, specialist business press as well as local and national press.

Gary Hemming CeMAP CeFA CeRGI CSP  -  
Commercial Lending Director

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