Hotels Funding

What is Hotels Funding?

Whilst Covid has been a massive blow to the Hotel sector, in normal times our experienced team can choose from a range of lenders to support new purchases and refinances. Across our careers we have funded all sorts of hotels large and small and in and out of town.

Typically, we can source the right funder for the purchase and ongoing requirements of: Hotels, Apart hotels, Boutique Hotels, Budget Hotels, Mid-market hotels, Luxury Hotels and Serviced apartments.

Loan Period

Loan amortisation period up to 30 years and interest only up to 24 months.
Loan commitment period from lenders typically 2-10 years

Financial parameters

Interest cover of minimum 3x (assessed on CFADS)
Debt service cover of minimum 1.2x (assessed on CFADS)
Leverage: historically up to 7x EBITDA with potential to spike up to 9x for justified reasons e.g. ramping up trade or capex etc. Typically the higher leverage is only likely in London and the South East.

Valuation

Hotels are usually valued based on a multiple of their EBITDA (earnings before interest, tax, depreciation, and amortisation). These multiples vary by region — for example, they tend to be lower in areas like East Anglia or the North East, and higher in London or the South East.

However, the value a hotel might sell for is often higher than what a lender is willing to fund. Lenders typically build in a safety margin, so while a hotel in central Manchester might be valued at 11x EBITDA, the lender may only lend up to 7–9x EBITDA to stay within their risk limits.

Many lenders also use loan-to-value (LTV) ratios, with a typical maximum of around 75% of the hotel’s market value when trading normally.

More cautious lenders may also consider restricted sale value, vacant possession value, or alternative use potential — and may lend a smaller percentage based on these figures to reduce risk.

What other financial and performance metrics lenders ask for?

Some lenders are quite forensic in the analysis, and have the capability to compare hotel performance between similar operations in their customer base. Here are some typical benchmarks:

Monthly P&L and cashflow should be a minimum along with commentary from the client on performance also a balance sheet prepared if not monthly then quarterly.
Income from rooms, food, beverages
Available rooms in the period
Rooms sold
Room occupancy rates (%)
Average room rate (ARR)
Rev-Par (Revenue per available room i.e. room revenue divided by the number of available rooms)
Gross operating profit (operating profit before fixed charges, rent, insurance, interest, depreciation, amortisation and income taxes)
EBITDA (GOP minus non-operating income and expenses)
Hotel gross margin
Catering gross margin
Total gross margin
Total payroll/sales (%)
Ebitda/revenue (%)
Restaurant spend per cover split across breakfast, lunch and dinner
Diners from the hotel and not from the hotel.

What information do lenders ask for?

Alongside the numbers the lender wants to understand the key principles of the business and what they are asked to support so they need:

Valuations
Satisfactory Trip Advisor ratings
Review of the management contract if one is in place, similarly any branding or business critical contracts.
Clarity of staff employment – i.e. who employs the staff is it the hotel owner or the management company, what are the contracts, what is the churn rate
Seasonality of trade and key drivers of trade, spread of revenue by source i.e. is the hotel dependant on weddings, conferences, weather, spread of revenue by income type e.g.restaurant (Food and beverage), accommodation etc.
Operating analysis – an overview of generally how the hotel operates on a day to day basis.
A monitoring surveyor for significant capex projects or development of new rooms/facilities
If the operator is a portfolio operator then insight into other ventures and holdings will be required, particularly if there is a group structure. Lenders don’t want to see another holding disrupting their lend and there are many ways this can happen.

Security

Security for the loans is typically a 1st legal charge over the freehold property and debenture. Where the property is leasehold there normally has to be at least 75 years remaining at the end of the debt term unless it is paid down to zero, otherwise the funder faces a “refinance risk” i.e. other lenders start to struggle to take on the debt if you wanted to move funders because the property is reducing in value faster potentially than the funding secured on it. If the property is leased then the lender will inspect the lease for any reversion of title clauses i.e. if the borrower fails to pay the passing rent to the freeholder then the bank will want a right of step in.

Fees and Costs

As with all property related transactions there will be valuation costs, arrangement fees and legal fees. Because the financial information can be quite intensive there may be a need to pay an accountant or consultant to draw a pack together, typically three years historic accounts and three years forecast are required.

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Steve Carter

Nathan Foster / Funding Friends

We worked with Nathan Foster on a complex refinancing deal. He worked tirelessly to deliver a solution, staying positive despite all the bumps in the road, and we ultimately achieved a very successful outcome. I would happily recommend Nathan and Funding Friends to others.

Ross McDonald

Expert Advice and Support from Andrew Robertson

Andrew Robertson was a source of constant support in this process. Always willing to help and advise, he was at the end of a call or email for what seemed 24/7 during this our funding application. Knowledgeable, diligent and thoughtful, he helped facilitate achieving our funding goals and helped us persevere through some tougher challenges. I would highly recommend him and Funding Friends.

Victoria Sylvester

Lisa Walls-Hester was amazing

Lisa Walls-Hester was amazing. Really supportive and clear, and helped a lot to keep everything moving along. Her credible relationships with lenders and knowledge really helped us to find the right lender to work with.

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Funding Friends is a trading style of Funding Friends Ltd, registered in England No. 12693505

Funding Friends Ltd is authorised and regulated by the FCA No. 935775

Funding Friends is a member of the NACFB registration number 28750

Funding Friends operates as a commercial finance broker and is not a lender. Any finance or products arranged through Funding Friends is entered into entirely at your choice and is at your risk, and you are advised to consult qualified professionals outside of Funding Friends to make the right decision for your needs and circumstances. Your property or other assets may be repossessed if you do not keep up repayments on any debt secured against it. Funding Friends may receive a commission or finder’s fee for effecting introductions to lenders or third parties.