Hotel Development Finance
Bridging the gap between lucrative finance deals and high-net-worth individuals, investors, and developers in the UK.
Get In Touch
Home » Hotel Development Finance
Hotel Development Finance
Scott talks to us about hotel development finance.
What type of development finance can I use for my hotel project? How does development finance for hotels work?
Very simply, it’s the same product you would use for development on houses and other development sites.
The differences come with the underwriting process, the lender choice and how the exit model is going to work. We can use development finance, some senior debt, some mezzanine finance or bridging loans for the acquisition.
Equity finance can be used because the products tend to be quite large. There’s lots of different elements we can mix and match to make the project work.
The choice depends on the scope of the project, how large it’s going to be, the timescales needed, and probably location. If it’s prime location versus something really rural, vendor choice and terms will change. But there are lots of options.
How much can be borrowed with hotel development finance?
As with normal development finance, you can borrow 100% of the build costs and some balance towards the acquisition of the site as well.
If you already own the land, you don’t need to borrow the deposit for that, but 100% of the build costs can be covered. That’s obviously subject to affordability and checking the numbers work as an exit. You wouldn’t usually get more than 65% of the finished value.
Can I get 100% hotel development finance?
Yes, you can, but it would involve cross charging other assets. You will need to contribute other securities or assets. If you’ve got contracts, you could have invoice financing – there are other things we can throw in to cover up the difference, but you will always get 100% of the build costs.
It usually works out to be around 60% or 65% of the land acquisition costs. So you only really need 30% to 35% plus the legal fees for the land, which works out quite a bit lower than the actual total cost, usually. So we shouldn’t need too much in the way of other assets to enable us to get to 100%.
Who is eligible for hotel development finance? What criteria needs to be met?
Anybody could get development finance for a hotel. The crux is understanding the plausibility. You need to have some experience – going from building a house at the bottom of your garden to building a 400-bedroom hotel is quite a difference in project size, project management and overseeing contractors.
The exit will be very different as well. What experience do you have? What other projects have you completed? What’s the cost for this one? What’s the exit plan? Do you have a tenant lined up? That’s usually a big one too. Most of the time you’ll need to have had some discussions with tenants.
Or if it’s going to be an owner-occupied hotel, where perhaps you’re building something smaller to use for your own business, what experience do you have in that industry? Have you ever owned a hotel before? How will you staff it?
There’s quite a lot to cover off. But essentially anybody can do it as long as they have a plan to make it work. If you can answer those questions sensibly, anybody could be eligible.
Speak To an Expert
Combining our unparalleled industry experience and rich cross-border network with an unwavering passion for securing lucrative deals, we’ll lead with a focus on your short, medium, and long-term objectives.
How much does hotel development finance cost? Are there any extras?
Yes, there will be extras. You’re likely to have a longer build time. You’re probably going to want the money in smaller, more regular tranches of funds – more drawdowns.
There will be more attendance by the lender or by the quantity surveyor. For a hotel, that may cost £1,000 for each site visit before they release the next set of funds. In the scheme of things, that’s not a great deal of difference, but it is an additional cost.
In terms of the actual product itself, there will be a standard 2% arrangement fee, and probably 1% to 1.2% per month interest, which will be retained and added to the loan. Most of the time there’s no exit fee [podcast recorded in July 2024].
The fees are fairly consistent with standard development finance. The only difference is that you pay for more visits from the surveyor. Legal fees will be higher for both you and the lender and valuation fees obviously will be higher too.
When do I need to repay a hotel development finance loan?
Upon completion – once you’ve finished the build and it’s all signed off and ready to go. At that point, we’ll repay the loan.
We would almost certainly have a contract in place with a tenant. If you plan to run it yourself, you will have plans on when your business will be operating from that site.
We would be looking to get bridging finance immediately to repay the development loan, and then probably term finance with a commercial lender to put it onto a repayment vehicle over 15, 20 or 30 years – whatever the business needs.
What are the pros and cons of hotel development finance?
There are a huge amount of pros and cons. Again, it’s similar to a development finance project. Obviously, finance of any kind is going to be more costly than doing it in cash. Although with projects of this size it’s hard to do in cash because of the sheer amount involved.
The cons are the costs. It’s a 2% arrangement fee. You’re going to pay 1% to 1.2% per month on your loan balance, which can eat into your profit margins. The pros, though, are that you can do this whole project with very little of your own money – so it all balances out.
Interest rates will be slightly higher than on a standard development because of the size of the project. Another disadvantage will be the lending criteria – there will obviously be more hoops to jump through to prove plausibility, understanding of the exit vehicle and tenant profile.
If you’re going to be starting a contract after the build with a very small, unknown tenant, that can be a disadvantage. Tenant strength is a factor – a big name like Premier Inn or Travelodge would add a lot more weight to the exit.
How do you apply for hotel development finance?
The process is a bit more drawn out. Again, we need to have a full understanding of the plausibility, the exit, the forecast if you plan to run it yourself, or if it’s tenanted, who they are and proof of experience. There’s a lot more to cover off than with standard development finance. The underwriting process is more weighty.
The number of lenders we can use is smaller because the loans are larger than the standard development finance.
So come and speak to us. We’ll take you through what’s going to be needed, and if we see any stumbling blocks in your experience or issues we might have with lenders.
This links back to a previous podcast done on joint ventures [add link]. It might be that you found an opportunity, but it doesn’t work because you don’t have the experience or the equity. We could possibly link you in with a partner to cover off one of the missing pieces in the puzzle.
Once we’ve got that together, we have a packaged solution. We’ll take you to several lenders, get pricing, their appetite for the lending and terms and present these back to you. The first stage is going to take three or four weeks before we have solutions to give you.
What if I have bad credit? Can I still get hotel development finance?
Yes, you can. With most of the short-term products like bridging or development finance, with bad credit, you can always get them. Some lenders might be off the table and the pricing might change, depending on what the credit issue is, but we can always do them.
Most of the time there’s a logical reason for why things happened and often it’s not people’s fault. If there’s a rationale behind the debt, we can usually get to most lenders. It shouldn’t deter you from contacting us. We’ll tell you what you can and can’t do and who we can use for your project.
What else do we need to know about hotel development finance?
It allows you to really bring ambitious projects to life, so keep your eyes open for opportunities. Speak to us if you find things you want to discuss. We’re very happy to run through modelling with you: total costs, estimates, what it might sell for. It will be very loose because we’re not valuers, but we can help you understand the end goal and viability.
If you’re not sure about what it might cost, speak to us. We’ll go through those points and all the lending criteria upfront. We can explore your experience, the costs, if you need a partner, if you’re unsure about your tenant profile, what to do, how to work it… we can cover all these points with you.
It’s just really understanding what you want to do long term. Is the hotel something new for you or a business you’ve been in for a while? All these elements make a difference to how a lender will view the case and how we present it.