Hotel Development Finance
Straightforward mortgage advice from expert brokers. Finding the perfect mortgage just for you without the jargon.
- Access to competitive rates and some you can't get direct
- No need to spend hours researching the market
- Relax knowing you have the best advice
Straightforward mortgage advice from expert brokers. Finding the perfect mortgage just for you without the jargon.
What's On This Page?
Get In Touch
Hotel Development Finance
Adam Messer explains how hotel development finance works.
What type of development finance can I use for my hotel project? How does development finance for hotels work?
It’s a fairly big subject – I’ll be as accurate as possible, but if you’re listening and you need more info, just get in touch.
It depends on what the project is. Is it staying as a hotel or being converted to something else? Do you need planning? I’m assuming you’ll need some finance to buy a hotel in the first place. If it’s a run-down hotel, we’re probably going to take a bridging loan to do that.
You can probably borrow 60% to 65% of the purchase price. You might then need to go through planning stages. Once the planning’s done, there’s a natural uplift in value. We can use that to secure more funding, and turn your bridging finance into a refurbishment development loan. The lender’s then providing you with all the money you need to do the conversion.
With all these types of loans, it’s all about your exit strategy. On this, the exit strategy might be to turn this hotel into flats and sell them. It might be to refinance the flats afterwards. Or, if you’re buying a rundown hotel, doing it up and keeping it as a hotel, that’s fine too.
In that case, once the development aspect is done, you start operating the hotel. Eventually we’re going to want to turn that funding into a longer term commercial loan, which gets a little bit tricky because we need to show some trading history of the hotel.
If it’s a brand new project, we might need to extend the bridge to show that the hotel’s generating money. So that’s why it depends what you’re going to do with the hotel – you need to have a clear plan in place.
How much can be borrowed with hotel development finance?
It depends on the value of the property. Generally with bridging, we can get a higher loan to value on residential projects than on hotels and guest houses. You’re probably going to be getting 65% of the hotel’s value for a purchase.
However, we can then fund up to 100% of the development works potentially, subject to whether it needs planning or not. Sometimes you might get permitted development, but generally speaking, we would need planning.
If you’re buying a hotel that already has planning permission to convert to residential, we can borrow as if it’s already residential. We could borrow a larger amount than on standard commercial. It all depends on the type of the project.
Can I get 100% hotel development finance?
Not on the initial purchase, but potentially yes on the development side, as long as the end value (the GDV) is enough. Lenders won’t lend 100% of the final value. They want a decent cushion.
You can potentially borrow 100% of the cost of works, as long as that doesn’t go up to around 70% to 75% of the gross final value.
Who is eligible for hotel development finance? Can anyone get this?
Yes, it doesn’t need to be a certain type of person, although developing a hotel is a fairly major project.
It does depend on the hotel. You could get a four bedroom guest house, which is bigger than a standard four-bedroom house, but that’s not going to be a massive project. But if it’s a fairly large scale development, lenders are going to wonder what you’ve done before and if you’ve got experience.
You could just wake up one morning and decide to buy a hotel and turn it into flats. But you need some people around you that know what they’re doing. You need to do things right, and avoid spending too much or taking too much time – the lender wants it done and finished as much as you do, because that’s how they get their money back.
But there are no set eligibility criteria. We’re not concerned about income because you’re not paying this money back each month. It’s all paid off at the end. That’s why the end value and the exit strategy are so important.
Speak To an Expert
How much does hotel development finance cost?
I won’t put a figure on it because it changes all the time. It depends which lender we go to and what their rates are. Commercial bridging finance is always going to be slightly more expensive than residential.
It also depends on the current and future use. It’s not the cheapest finance to do, but there isn’t really much choice. If you want to redevelop a hotel, this is the finance you need.
There are also going to be some fees to consider. Generally, we’re going to have a 2% arrangement fee and some legal fees. Because it’s commercial, the legal fees might be more than residential – perhaps a couple of thousand pounds.
We need a valuation, so there’ll be a valuation fee. Again, this depends on your plans. Is it staying as a hotel or is it going to be a development? Both are slightly more complex than a normal residential valuation. So the valuation is likely to be a few thousand pounds, as well.
Legal fees generally can be added to the loan, but valuation fees are usually paid up front because they go to the valuer, not the lender. Most other things can be added to the loan and be part of the balance you pay back at the end.
When do I need to repay a hotel development finance loan?
Typically these loans have 12-month terms. That’s what we need to be aiming for. It does depend on the project.
If it’s a more long-winded project, we might do a bridge on the purchase before you get planning. Once you’ve got the planning permission, we’ll approach a new lender on a development basis and that will reset the timeline. We might be able to do a slightly longer term, as well.
There are different options we can go for. It doesn’t have to be done in six months. It depends on the project and how long it’s going to take. But 12 to 18 months, I’d say.
What are the pros and cons of hotel development finance?
It’s an odd question, really, because you either need it or you don’t. If you want to buy a hotel to turn it into something else or develop it, you’re going to need this type of loan.
I joked about waking up and wanting to buy a hotel, but you generally don’t do that. This is something you spend some time researching and looking at. You wouldn’t tend to do this as your first development project. It’s something more experienced people are going to be interested in.
How do you apply for Hotel Development Finance?
You need someone like me in your life, to help you navigate the lenders and put the application together. There’s a process around looking at the property and what you’re going to do with it, and getting plans together.
We go to relevant lenders, get some terms, and decide between us on a lender to go with.
We tell the lender who you are, what you do and what the plans are. You need to speak to a mortgage broker because you can’t find bridging lenders directly.
If you Google it, you will see lots of different lenders advertising their services, but ultimately you need a broker to approach them. We know which ones to go to and which ones not to bother with.
What if I have bad credit? Can I still get hotel development finance?
Yes, potentially. As with all these things, it depends how bad. But because you’re not repaying the interest each month, the lender’s not so concerned about you making payments.
With normal mortgages, you’ve got to be able to afford to make the monthly payment. But with this kind of lending, your individual credit isn’t so much of an issue. If you’re bankrupt, that’s going to be tricky, obviously. But if we’ve got small blips here and there, it’s not so much of a problem.
One thing we do need to be wary of, though, is your exit strategy. You might be planning to turn your hotel into flats and then keep those flats, refinance them and let them out. In that case, we need to know that a refinancing lender will be happy with your credit. So whilst it’s not so much of an issue for the bridge and the development lending, it is potentially later on.
Some Bridging Finance is not regulated by the Financial Conduct Authority.
Why Vantage?
- Always the perfect mortgage for you
- No need to spend hours researching the market
- Relax knowing you always have the best deal
