Key takeaways
- Lenders assess a hotel as a trading business and a property together.
- Owning your hotel can remove lease risk and turnover-based rent.
- Valuations often consider vacant possession (VP) rather than market value (MV).
- Branded and unbranded hotels can both be financed, but may be assessed differently.
What is a hotel commercial mortgage?
A hotel commercial mortgage is a specialist type of property finance, used to buy or refinance a hotel.
Hotel lending sits in its own category, as these properties (and the businesses that they house) come with some unique features compared to, for example, a standard office block. Lenders assess the property and the trading business together, not separately.
There are two main uses for hotel commercial mortgages:
- Owner-occupiers buy the building they run their hotel from, or
- Investors buy a hotel to rent to a tenant and use as an income-producing asset
Why established hotel operators consider buying their property
If you lease your hotel today, buying the freehold might seem like an attractive option.
Firstly, because the connection between turnover and rent is an unfair game. Many hospitality leases set the rent as a percentage of the operator’s turnover. Have a good year and you’re punished for your success with a rent hike.
Then, every lease renewal is a Pandora’s Box of risks. Higher rent, changing terms, or the owner simply deciding to sell up – it’s rarely a comfortable experience.
Your whole business – from the rooms to your customer experience and reputation – lives within the walls of your property. Owning it removes some of the risks, giving you more control over the place your business is so closely connected to.
And, in purely financial terms, mortgage repayments build your equity in an asset. Rent payments don’t. At the end of a commercial mortgage term, you could have a substantial asset to pass on, refinance, or even sell.
How lenders assess a hotel property for mortgage purposes
A hotel’s value is tied to how well the business trades, not just the building. That’s why lenders assess hotels differently from some other commercial properties.
Lenders often work out the maximum loan against VP value rather than MV. MV is what the property is worth as a going concern, VP is what it might be worth if it was sold empty and without the trading business. Lenders typically use VP as a more cautious measure.
Branded hotels, which belong to a hotel group or franchise, and unbranded hotels are usually assessed differently. That affects the loan-to-value (LTV) a lender will offer.
For more on pricing, see our guide to commercial mortgage rates.
What you will need to apply for a hotel commercial mortgage
Here’s what a hotel application typically needs:
- at least two full years of financial accounts
- up-to-date management accounts, which matter most on larger loans
- evidence of earnings before interest, taxes, depreciation and amortisation (EBITDA) and trading performance
- a detailed proposal summary covering your business structure, the directors’ backgrounds, the property you’re offering as security and evidence you can afford the repayments
Larger loans usually come with closer lender involvement and more regular reporting during the term.
Our guide on commercial mortgage application tips explains how to get your application ready.
Frequently asked questions
How does a hotel mortgage differ from a standard commercial mortgage?
A hotel mortgage looks at the trading performance of the business as well as the property value. A standard commercial mortgage values the property alone.
Can I get a hotel commercial mortgage for an unbranded property?
Yes, unbranded hotels can be financed. Lenders may apply different LTV limits compared with branded hotels, because a brand affiliation affects how a lender views the risk.
Can I refinance a hotel I originally purchased with bridging finance?
Yes, this is a common route. Refinancing onto a commercial mortgage usually becomes possible once you can show a strong enough trading record and meet the lender’s standard criteria. At Allica, we offer a specific bridge-to-term product that requires no additional valuations or paperwork when you move to term.2
How much can I borrow against a hotel property?
It depends on the type of hotel, how much you can afford to repay (your debt service cover), your financial performance, the loan size, and the lender’s appetite. At Allica, we lend up to £10 million to owner-occupiers and £15 million to investors.1
Talk to Allica about hotel finance
We have a dedicated team of hospitality specialists who can support owner-occupied and investment hotel applications.
Each case is considered on a case-by-case basis, but we’ll always make the time to talk through your options and let you know what’s possible.1
Explore commercial mortgages or download our Hospitality Sector Spotlight report, written in collaboration with UK Hospitality.
1 All lending is subject to status, our lending criteria, and a satisfactory credit assessment. Terms and conditions apply. For more information, visit here.
2 All lending is subject to status, our lending criteria, and a satisfactory credit assessment. Terms and conditions apply. For more information, visit here. Bridging Finance services are provided by Allica Bridging Finance Limited. Registered office: 3rd Floor 12-18 Grosvenor Gardens, London, England, SW1W 0DH. Incorporated under the laws of England and Wales with company number 10859711. Allica Bridging Finance Limited is not authorised or regulated by the Prudential Regulation Authority or the Financial Conduct Authority. The bridging products offered by Allica Bridging Finance Limited are not regulated products.
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Disclaimer: This is information – not financial advice or recommendation.
The content and materials featured in this article are for information and education only, and are not intended to take into consideration any particular recipient’s financial situation. The product details referred to are correct at the time of writing. The information does not constitute financial advice or recommendation and should not be considered as such.
