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Hotel Loan

The word ‘hotel’ is used to describe a number of different commercial property types including those used solely for accommodation, pubs, clubs, motels and live music venues.

Hotels can be quite lucrative from a freehold going concern perspective but success comes down to good management.

How much can I borrow?

  • Freehold (with gaming): up to 65% of the purchase price.
  • Freehold (without gaming): up to 50% of the purchase price.
  • Leasehold (with gaming): up to 70% of going concern valuation by a bank instructed valuer.
  • Maximum loan term for principal and interest repayment: 5 years (debt to reduce to 40%)
  • Maximum loan term for interest only: 3 years
  • Loans over $5,000,000 are assessed on a case by case basis.
  • A business plan including business forecasting may be requested by the bank for the hotel you’re planning to purchase.
  • Low doc options are not available.
  • Interest rate discounts vary depending on the lender and your financial situation.

Call us on 1300 889 743  or fill in our free assessment form so we can provide you with an indicative funding approval for a hotel loan.

How can we help?

Thanks to the relationships we have with the commercial arms of the major banks and lenders, we may be able to negotiate the following, depending on your situation:

By choosing the right lender, you can get even more out of the loan than just low fees and a strong interest rate and take advantage of the commercial loan features that work best for you.

Our commercial property loans can provide more information about how the commercial loan process works and the other types of commercial properties that the lenders on our panel can finance.

What security can I use for the loan?

  • Mortgage over hotel property (or lease, if leasehold).
  • Registered fixed or floating charge or Bill of Sale over the business assets of the hotel.
  • Directors’ guarantee.
  • A specific charge/security over the hotels’ liquor licence and, where appropriate for state legislation, related licenses for gaming or off-licence packaged liquor operations (not applicable in WA and SA).
  • A deed of consent between lessor/lessee and the bank.

What do the banks assess?

Hotels and motels are considered to be a ‘specialised’ commercial property and, as such, the amount you may be eligible to borrow is significantly reduced when compared to other types of commercial properties.

The reason is that hospitality businesses operate within a small market and are faster to be affected by poor management than other commercial enterprises, making them riskier ventures.

In most cases, a borrower must have at least 1.5 to 2 times the amount of income to proposed interest expenses, otherwise known as the ‘serviceability ratio’.

Banks take into consideration experience in the industry although many people who have dived into purchasing a hotel have come from a completely different career.

Your income type, credit history, asset position and experience are all used by the lender when assessing your loan application.

Allow us to properly prepare your application and highlight your strength as a borrower so you can avoid getting declined. Call 1300 889 743 or complete our free assessment form today.

How do banks value hotels?

There are two going concern valuation types:

  • Real property and business value.
  • Lessee’s interest value.

Valuations are dependent upon who owns the freehold and who runs the business but, generally speaking, banks will take into consideration:

  • Net gaming takings.
  • Gaming machine commissions.
  • Total revenue.
  • Gross margin.
  • Wages for revenue figures.

They’ll also consider the asset quality position, financial performance of each of the above aspects and how they impact overall, as well as the industry and business environment and competition in the area.

Should I enter into a leasehold agreement?

When considering what type of ownership you want for the property, it’s essential to seek independent advice from a business broker, solicitor and accountant that actually specialise in hospitality.

There are business and tax implications for each type of ownership that require input from an expert.

When purchasing a leasehold business, for instance, one isn’t required to outlay money for the property. As a result, leasehold businesses offer a much higher yield/return on investment than freehold going concerns.

Nearly all hotel and motel transactions are ‘plus stock’. A solicitor will help you negotiate this with the vendor – the last thing you want to do is to buy into a business that has nothing to sell!

Should I choose a short or long term lease?

A good lease term are those for 17 or 18 years with a ‘lease-option’, that is, an option to purchase the property.

A lease term for less than this and you may have to consider amortizing and working that into your budget. It’s essential you speak to a hospitality accountant about this.

A long lease like this provides stability and allows you to firmly establish your business in town and protects you from having to move in case the landlord decides to sell the premises.

The cons of this type of arrangement is the obvious risk of paying rent for a business over a long period of time. In addition, the cost of maintenance and repairs for such a lengthy lease term needs to be taken into account.

What else should I look for in the lease arrangement?

Hotels, no matter the age, may require certain fixtures, fittings and services to be installed before you can start operating.

The party liable for installing these fittings should be determined and clearly outlined in the lease agreement before signing.

Fit-outs such as plumbing and electricity can be quite expensive so ensure you have a sufficient fit-out budget.

Be aware of delays in construction work, particularly over holiday periods. Every day that your business is not operating means less in potential profit.

Should I buy the hotel as a freehold going concern?

While leasehold business purchasers enjoy a much higher return on their investment, the worst case scenario (the business failing) usually means the loss of any money they outlaid for the business.

Deciding on which ownership to choose comes down to your circumstances and your lifestyle.

You don’t have to know everything about running a hotel or motel but you do need a basic understanding of how to run a cash flow business and, of course, a hospitable nature.

With freehold, the land itself retains value even if the business sinks so a couple in later life looking to quiet down and have a lifestyle may look at purchasing just the freehold itself.

A 30 or 40 year old couple looking to reach the peak of their success and take on a new challenge may look at purchasing a business as a leasehold.

There’s a much bigger return on the lease and you can later use it as a platform to leapfrog into building your portfolio which may in the future include freeholds.

At the end of the day, bricks and mortar don’t produce dollars: businesses do.

How to make an offer on a hotel

When searching for commercial real estate to purchase, price does matter but the conditions of the sale should also form a big part of your decision.

For example, if a certain amount of inventory isn’t made available or certain maintenance or repair issues aren’t resolved, then the purchase shouldn’t go ahead.

A simple letter of offer or Heads of Agreement that spells out your intentions is a helpful document to have prior to the Contract of Sale. Along with your 5% deposit, it acts as a stencil of the contract to come.

Isn’t this risky?

Not really. A commercial buyers agent or business broker can help you to draft up the heads of agreement and by having a formal agreement between you and the vendor, the agent can take that property off the market.

It gives you breathing space to undertake your due diligence. If certain conditions aren’t met, such as the landlord not extending the lease because it’s a little too short for you to qualify for finance, then you can pull out of the deal and the deposit is totally refundable.

When should I apply for a liquor and gaming license?

Once you’re fairly satisfied with the due diligence and inspections you’ve undertaken on the property, it’s essential to apply as soon as possible so you can get started on generating business.

Planning permit capacities do not always match the liquor license capacity. A good solicitor should thoroughly check this during a due diligence investigation.

How long does it take to reach settlement on a hotel?

Like on other commercial properties, settlement on a hotel or motel usually takes around 45-60 days.

Bear in mind that if your hotel sells alcohol or conducts gaming, you will have to apply for a liquor and gaming licence, which can take as long as 8 weeks to process and approve.

Do I need certain permits to run the hotel?

Although it varies slightly from state to state, in most cases the hotel itself will hold a liquor license while the operator will be required to complete the required courses to be the nominee on that license.

There are also other permits required depending on the hotel’s offering such as food safety permits, accommodation permits and outdoor seating/patio seating permits.

Is traffic and direct competition a good thing?

In most cases, direct competition can kill a business, especially if the competition is a large conglomerate. However, with hotels, the influence of these factors really depends on why you’re buying the property in the first place.

Competition can actually be a good thing as many venues in one locality can create an entertainment ‘precinct’ which can attract even more people to the area.

How much does it cost to run a hotel?

To figure out the costs of running a hotel or motel, it’s important to decide on operational benchmarks.

This isn’t just focused on comparable sales and market sales – it’s more in relation to the proportion of your turnover you should be paying in rent and staff wages.

It helps to define whether your hotel is in a regional or city location because there is a significant difference between the cost of goods in the country and cost of goods in the city when it comes to things like wages and freight costs.

In the country, a hotel or motel operation is, more often than not, a family affair so there isn’t as much of a need to employ 20 casual staff, for instance.

Taking this into account, you should consider the license capacity of a hotel and break the annual rent down by a per person basis. So, if you have an 800-capacity hotel, you should be able to make so much per person, for instance.

The old-fashioned way to work out rent ratio was to look at square metres of the property or to look at the percentage of turnover. A percentage turnover can be skewed purely because you could be a better operator than the previous owner, or vice versa.

The Australian Hotels Association (AHA) is the key industry body for hotel and pub owners and they will be able to provide you with operational benchmarks as you plan-out your business.

Does location matter?

Having suppliers and distributors nearby can help you to cut costs, while having certain businesses in the area that compliment yours, such as theme parks, monuments, historical sites and other tourist attractions, can help to drive more guests to your hotel.

Can I find out vacancy rates?

The hotel’s landlord should be able to provide this information, otherwise a commercial buyers agent or the town/city’s information centre may keep this data on file.

What are the environment or OH&S issues of owning a hotel?

Environmental considerations such as waste management and recycling are similar to all commercial properties.

Some of the Occupational, Health and Safety (OH&S) laws and regulations that are unique to hotels and motels include potentially harmful kitchen equipment and disorderly members of the public.

Is the premise fit out with wheelchair access?

You could be faced with a complaint under the Disability Discrimination Act 1992 so negotiate with the previous owner prior to settlement as to whose responsibility this is to install.

Can zoning prevent you from undertaking certain activities?

Hotels and motels, like other commercial properties, are broken up into two zones: Commercial 1 and Commercial 2.

Commercial 1 Zone:

  • Replaced Business 1, Business 2 and Business 5 Zones.
  • Allows taverns, hotels and gaming premises without a planning permit, unless in a strip shopping centre where gaming premises are prohibited. You will still need a liquor licence.

Commercial 2 Zone:

  • Replaced Business 3 and Business 4 Zones.
  • Prohibits accommodation, except for caretaker’s house, motel and residential hotel which require a permit.

As stipulated in the legislation regarding these commercial zones, there are various ‘dry’ zones which do not allow the sale of any liquor throughout the state.

Similarly, live music venues don’t work well within residential areas, and gaming venues are not permitted within strip shopping areas.

Be sure you discuss with a business broker prior to purchasing.

Get the right advice

Have a handover period when you buy it from the previous leaseholder.

If you’re purchasing the leasehold from the landlord, ask them for advice. In most circumstances, they’ll offer help because they too want you to be successful.

Ensure you become a member of the AHA and Tourism Accommodation Australia (TAA), a division of AHA that specialises in hotels for accommodation.

They can provide all of the education and support you’ll need to run your commercial investment.

Need a hotel loan?

Allow one of our expert commercial mortgage brokers properly assess your situation and tell you if you qualify for hotel finance.

Call us on 1300 889 743 or complete our free assessment form today.

  • Alexandra B.

    I have a $700k motel loan with a bank at the moment and I want to refinance 50% LVR. I am living in the property at the moment and running the business. I also want to buy a $500k house at 90% LVR to live in. I have owned the motel for over a year and business has been good. Can you help me with both loans?

  • Hey Alexandra, yes, we can help you with both. Most commercial lenders should be able to assist with this and some can do the home loan as well. We can also look to drop the LVR a bit on your owner occupied residential property so as to increase the LVR on the commercial. We can discuss this in detail on 1300 889 743.