Specialist commercial mortgages for hospitality property

What lenders underwrite on a trading hospitality asset

Is it difficult to get a commercial mortgage on a hospitality property? It is more involved than a residential mortgage but routine for a sound trading asset placed with the right lender. On an owner-occupier case the lender underwrites the business: the trading accounts, the EBITDA and the fair maintainable trade a competent operator could sustain, the operator's own track record, and the trends in occupancy, room rate and wet or dry sales. On an investment case they underwrite the income: the rent, the strength and length of the operator's lease and covenant, and the interest cover the rent provides. In both cases they instruct a going-concern valuation on which the loan to value is measured, and they weigh the tenure, because a freehold is far stronger security than a short leasehold. A new business is fundable where the operator is experienced, the plan is credible and the deposit is real, though a startup with no trading history will carry a lower loan to value and a closer look at the personal guarantee. We package the trading story, the covenant and the valuation evidence so the lender sees the asset at its best, and we flag any weakness before it becomes a decline.

Deposit, loan to value and how much you can borrow

How much deposit do you need for a commercial mortgage? Typically 25 to 35 percent, because most lenders cap the loan at indicatively 65 to 75 percent of going-concern value, so the deposit is the balance. Can you get a 100 percent commercial mortgage? Not on the property alone, but the effective deposit can be reduced where a borrower gives additional security over another property, which lifts the total lending against the combined assets. The loan itself is sized on the lower of two limits: the loan to value against the valuation, and the income test, which on an owner-occupier case is a debt service cover ratio on EBITDA, commonly around 1.25 to 1.5 times, and on an investment case an interest cover ratio on the rent. A strongly trading hotel with proven occupancy, or a fully let asset with a long operator lease, supports more debt than a marginal business, because the income is proven and secure. We model the achievable loan from the accounts or the rent and a sensible going-concern value before we approach lenders, so the figure we quote is grounded in the trade. All bands are illustrative, vary by lender and asset, are subject to credit approval, and are not an offer.

Interest rates, fees and the cost of the debt

A hospitality commercial mortgage is priced on the risk the lender is taking, so the rate reflects the tenure, the strength of the trade and the loan to value. Pricing is typically a margin over the Bank of England base rate or SONIA, or a fixed rate, and it varies meaningfully by lender and trading history rather than sitting at one advertised number. Expect a lender arrangement fee, indicatively around 1 to 2 percent of the loan, a going-concern valuation fee, which is higher than a residential valuation because it assesses the business as well as the bricks, and legal costs for both sides. The headline rate is not the whole cost: a slightly higher margin with a lower fee, a longer interest-only period or a more workable cover covenant can be the cheaper facility once everything is counted, and a lender that understands the asset class prices it more keenly than one that does not. We compare the total cost across the market, disclose our broker fee in writing, and never claim an exclusive tie to any lender. The figures are indicative and not an offer of finance.

Owner-occupier against investment, freehold against leasehold

The right commercial mortgage depends on how the asset is held and run. What is the difference between a commercial mortgage and a normal mortgage? A normal residential mortgage is sized on a personal salary and regulated by the FCA; a commercial mortgage is sized on the property and the business and, on a trading asset held for business or investment, is unregulated. Within commercial, an owner-occupier mortgage funds the operator running the business and is sized on its EBITDA, while an investment mortgage funds a landlord and is sized on the rent, so an operator and an investor buying the same building take different loans. Tenure matters just as much: a freehold gives the lender the strongest security and the longest, keenest terms, a long leasehold can still be financed on the goodwill and the fixtures but at a lower loan to value and a term capped by the lease, and a short lease is often better funded by a business loan or asset finance than a mortgage. Where a case would touch the FCA regulated perimeter, such as a guest house that is also the owner's home, we refer it to an authorised firm. We map the structure to the asset so the debt fits how it is actually owned and traded.