How to Secure a Commercial Mortgage for Hotel Purchase
Is getting a commercial mortgage for your hotel purchase a good decision? Find out how this finance option impacts your hospitality business in this guide.
A common source of finance for business owners, commercial mortgages are typically secured against a property that is not your main residence. This is generally a source of stable lending that supports long-term business plans. Hotel mortgages are similar in concept but can be tailored to the specifics of hotel businesses. Unlike traditional residential mortgages, commercial offerings tend to have higher interest rates and deposit expectations.
While many people are familiar with commercial mortgages for buy-to-let properties and landlords, it’s less common for potential hotel owners to recognise the value of a commercial mortgage and how it pertains to their business. To make informed decisions, you need to understand the commercial mortgage process and how it applies to hotel businesses.
Unlike other more specialist forms of finance such as bridging finance and mezzanine financing, a commercial mortgage is more of a traditional loan that is secured against the value of your property and is repaid on a long-term basis. Generally, this is between 3-30 years, but terms and rates vary.
Here at Rangewell, we’re experts in hotel finance options and work across the whole lender market to find the best solution for you. With that in mind, we’re sharing our experience in this guide to everything you need to know about securing a commercial mortgage for hotel purchases.
Hotel lending guidelines
Hotels, unlike residential properties, are considered through separate criteria - with each lender generally assessing your background in the hospitality industry, your hotel’s financial potential and even occupancy rates in order to come to a decision.
With so much variance in the market, a commercial mortgage may only be offered to those who can demonstrate experience in the successful ownership or management of hotels. If you’re a first-time buyer, you’ll need demonstrable experience of working in the hotel industry - or you’ll need someone with experience in a senior role in your business who you can present to the lenders.
Before you approach any lenders, you should have a fully-realised business plan that accommodates the growth of the hotel via detailed financial forecasts. You should also include a detailed overview of the hotel’s location, marketing strategy, occupancy rates and any other pertinent information such as plans for an expansion or new facility.
Of course, that same strategy applies to ANY type of hotel financing you apply for. In terms of commercial mortgages, lenders place more scrutiny on the following questions:
- Is the hotel already operating? How long for?
- What level of refurbishment or maintenance is required?
- How many staff are currently employed at the hotel
- Will a commercial mortgage meet all of your requirements, or will there be a shortfall?
- What kind of loan to value (LTV) can the lender offer? That’s the ratio of the mortgage amount divided by the value of the hotel. A ‘strong’ application has an LTV of 60% or below.
Once these questions have been assessed, a lender may be happy to proceed - but they may also suggest alternative forms of finance. For instance, if the hotel is currently closed and needs extensive refurbishment, they may offer a refurbishment or even development finance option.
How do I get a commercial mortgage for a hotel business?
Commercial mortgages may appear relatively ‘safe’ for the lender because they’re secured against the property, but it’s for that very reason the lender has to scrutinise your business plan - they need to assess how ‘exposed’ to risk they are against the value of the hotel. If the hotel you want to buy already has good occupancy rates and has been operating for years, it’s less risky for a lender than say, a brand new hotel that has yet to demonstrate much success.
Getting a commercial mortgage generally means being able to confidently present a hotel’s trading history and then decide on your flexibility on loan to value (LTV) ratios and if you’re comfortable with capital repayments rather than interest-only, as most lenders will expect the former for commercial hotel mortgages.
To answer the question in this section’s title, to actually ‘get’ a commercial mortgage you must find the right lender, prepare your business plan, apply for finance, negotiate with the lender if needed and then await a decision.
Finding a lender: who offers hotel mortgages?
Finding the right lender is a task in itself as there are many options from large high street banks through to independent funding businesses. It’s not a simple choice and shouldn’t be taken lightly - defaulting to a ‘brand name’ is rarely going to provide the best rates and terms for you and your business. The main types of lender are:
- High street banks: Traditional lenders like banks typically offer low-interest rates and fees, but only selected customers will be eligible. There are often higher expectations around the hotel’s performance and low LTV.
- Challenger banks: more relaxed with lending, usually offers higher terms and higher LTV. More likely to offer interest only.
- Specialist commercial hotel mortgage lenders: specialist lenders can be more forgiving of bad credit or poor hotel performance, though you may need to pay a higher interest rate which can necessitate an interest-only agreement.
- Independent options: seed-funding/angel investor/venture capital groups tend to stick to alternative funding options rather than standard mortgage structures.
When browsing the lender’s market, you must consider the type of hotel purchase you intend to make and how that will affect the lender’s decision. Some, for example, are more interested in other forms of finance and won’t be able to offer commercial mortgages. Others may be able to offer commercial mortgages with terms that accommodate for your business plan and occupancy rates, rather than a flat mortgage rate that can be restrictive.
This can be a complicated process, so many hotel buyers turn to finance specialists who can act as brokers to the lender. If you’d like to make the process easier, contact Rangewell and we’ll guide you through the entire financing journey, from selecting the right lender to business planning and then securing your commercial mortgage.
Hotel mortgage lending criteria overview
When you’ve chosen your lender, you’ll be almost ready to submit an application. In this stage, you’ll likely have to provide all of the information below. Here are some quick tips on each section to help your application succeed.
Capital & credit
You need a certain level of capital before you can take out a commercial mortgage. However, that capital doesn’t have to be solely based on your prior career or earnings, it come from other sources such as friends and family or investors - a benefit that many ex-hotel managers find themselves utilising when they come to purchase their first hotel. But regardless of the source, you do need some form of deposit if you want to attract good rates or avoid having to use key personal or business assets.
Commercial mortgages tend to require deposits between 25-40% of the value of the property. For hotel-specific lending, you may be able to reduce your capital investment by securing a smaller deposit - though this will only be offered by select lenders after a negotiation period. Some lenders may even offer 100% finance agreements to cover the entirety of your hotel purchase plans - but these deals are generally secured against other assets you own such as your home or another business.
A final note is to be aware of your credit score, as like any finance application, you may struggle to find a lender if you have a poor personal or business credit score. If you’re in this situation, contact the team at Rangewell today and our experts can help talk you through options for financing a hotel with bad credit.
Commercial mortgage lenders favour active hotels with strong occupancy rates as it makes for a more stable investment. The profitability of almost any hotel is based on occupancy volumes and most accountants who work in hotel finance can calculate figures such as the revenue per available room (RPAR) and average daily rate (ADR), so make sure you include these in your business plan to show lenders the strong investment potential.
However, it is also worth noting that in some instances, occupancy itself can be deceiving. A large budget hotel may not generate as much revenue as a small boutique hotel in an in-demand location. This explains why more focus is placed on occupancy rate and revenue per available room rather than the total amount of guest rooms in a hotel.
If you’re planning to build a new part of the hotel or construct one from scratch, then most development finance lenders want to know your total projected amount of rooms as they are important for forecasting future potential.
Property & location
Hotels may be businesses that can rise and fall with the times, but they are still generally valuable even as property assets. The actual bricks and mortar value of the building and the land it is on will impact the mortgage rates offered and the capital you’ll need. You should assess whether the hotel owns the land or not - as some modern city hotels are situated within apartment blocks and are leaseholds.
The location itself is important to the lender, as it gives them an indication of both the risk of the investment as a whole as well as the potential for profit. A city-centre location with great transport links will be more favourable than a hotel tucked away in the Scottish Highlands - even though your potential future guests may disagree! The lender is going to see the remote hotel as more ‘exposed’ to risk than a city-centre one - so bear that in mind when preparing your application (or even when first selecting the hotel you want to buy).
Potentially the most important element of your commercial mortgage application for hotels comes in the way of showcasing any relevant experience. Lenders are on the lookout for defined history as a hotel owner or manager. The more experience you have in the sector, the more favourable your application is going to be in the eyes of the decision-maker as it shows you have a history of successfully operating within this challenging industry.
Obviously, not all business owners run their properties in a direct fashion. If your hotel purchase is an investment strategy, you’ll need to direct lender attention to the employees you plan to hire and the manager you will appoint. That manager’s experience can be scrutinised instead - though the lender may see that the loan to value ratio is adjusted as a result.
Some lenders will want to see further evidence into your overall hiring strategy and licensing plans. Assess questions such as: does the hotel already hold a good food hygiene record? Does it have an alcohol license - if so, what hours does it cover? What inspections or awards does the hotel have in its history?
You may need to request two years of trading history from the seller of the hotel, as the lender will want to see it to review the overall affordability of finance requirements. Some specialist lenders don’t need two years of trading accounts, but many that offer standard commercial mortgages expect this as a minimum.
Business and marketing plan
Your business plan is imperative for the success of your actual business, but it’s also valuable as a way to show a lender you have a competent vision for the future and are a reliable investment. You can’t just rely on a hotel’s existing record of occupancy and good reviews - you need to show that you are going to add value to it once you buy the hotel. To do that you’ll need to put together a business plan which accommodates for:
- Executive summary is an overview that gives the lender a summary of the rest of the business plan. It should offer an ‘at a glance’ overview that includes the pertinent parts of every other section that follows it. While this is always placed at the start of a business plan, it’s actually written last.
- Market & competitor analysis: you need to assess both the hotel market as a whole and your competitive landscape. Consider the market’s movement since COVID-19 and how the hospitality industry has changed, then show how your new hotel purchase will stay ahead of market change and remain a stable, well-planned investment. Present your competitors and show how you’ve planned to perform against them.
- SWOT analysis is a strengths, weaknesses, opportunities and threats analysis that looks at the various risks and opportunities your hotel presents. Take time identifying these as the last thing you want is for a lender to point out a weakness you have not accommodated for.
- Financial forecasts: we always advise getting an accountant or hotel specialist to create detailed financial forecasts for the business. This includes general concepts such as profit and margins, but also specific hotel issues such as average daily rate and revenue per available room.
- Operations: You must first demonstrate the organisational structure of the business - which means listing the business structure and senior team. That includes detailing how bookkeeping, insurance and permits are maintained. You should also point out any supplier relationships you either currently have, plan to purchase when you buy your business or organise once you own the hotel.
- Staff: How will your employee structure be organised and managed? What will the day-to-day running of the hotel look like? How will that impact services such as catering and cleaning? Will you establish protocols and training procedures to keep staff and guests safe?
- Services, amenities & upgrades: What sort of services and amenities are currently available at the hotel and how do you plan to improve them? What value, if any, will you add to increase the general profitability of this part of your business?
- Cost-based analysis and forecasting: If you’re going to expand your hotel or invest in a new facility, you’ll need to have detailed financial forecasting done for that too - as no lender wants to read ‘increase guest satisfaction by creating a new gym’ in the business plan without a realistic, cost-based plan for how that will be achieved.
- Marketing plan: How will you grow your business? What sort of budget will you attribute to marketing? A lender may not be as interested in this section as the rest, but they still want to see the commitment you’ve put into your plan, and it should always be included even outside of the lending environment.
Can I use a commercial mortgage to finance a hotel refurbishment?
The best way to refurbish a hotel is to get a specific refurbishment loan, as commercial mortgages may be unsuitable for that type of project. You may also consider another form of finance, such as asset finance or even a short-term bridging loan.
Whichever route you take, speak to Rangewell first, and our team will help you decide on the right route for your hotel refurbishment project.
How can I get the best mortgage rates for my hotel business?
As we’ve covered in this guide, the best rates are typically offered by the largest lenders to individuals that have extensive experience in the hotel sector and have put together a well-planned application that shows their experience, the hotel’s financial performance and a profitable vision for the future.
Factors that affect hotel mortgage rates:
- Experience in the sector - whether that’s you or a nominated manager in the business
- The lender themselves - banks, specialists and independents all offer different terms
- Business plan - the better and more robust your plan, the more likely a lender is to offer favourable terms
- Occupancy rates & location - more in-demand hotels are safer investments for lenders
- Capital - your deposit amount and proposed capital structure can impact your rate. Interest-only hotel mortgages are rarer but still achievable if you have a strong justification for one.
Provided you can follow the tips in this guide, you should be able to ‘put your best foot forward’ when you approach a lender - but even just selecting the right one can be a challenge. Instead, just pick up the phone and talk to our team so that we can guide you through the options and help tailor your application to specific lenders to negotiate better terms and rates.
What other types of hotel finance loans are there?
In addition to commercial mortgages, there are lots of other financial products that can help you own your first hotel or expand your existing hotel business. These include:
if you have a short-term funding requirement, a hotel bridging loan can ‘bridge the gap’ and help you meet your shortfall. These are useful in instances such as buying a hotel at auction.
Assets such as computer equipment or machinery can be secured with asset finance, a specific product aimed at businesses that need to expand assets.
Annual tax bills and VAT returns can place a strain on your cash flow. Tax loans help alleviate this.
Merchant cash advance
If you accept card payments, your hotel can benefit from a merchant cash advance that allows you to repay loans through card payments.
This is an umbrella term that means a loan made up of several products. These are complicated and should be managed by an experienced finance expert.
What about using development finance to buy a hotel?
If you’re planning to convert or build a hotel from the ground up, you’ll need hotel development finance which has its own strict repayment terms and generally requires more planning before you can apply for funding.
Read more about this in our full guide on ‘how to get funding for a hotel’. As you can probably tell, a commercial mortgage for your hotel purchase provides perhaps the most effective and straightforward route to buying and operating your new business. However, this loan comes with its own terms and risks - so make sure you understand them before applying.
Hotel commercial mortgages with Rangewell
When you’re considering your future as a hotel owner, there’s no need to take risks with finance. Instead, give yourself the best chances possible in the eyes of a lender by working with Rangewell - our team of hotel finance experts will act on your behalf to secure a finance agreement that allows you to buy the hotel of your dreams.