Hotel commercial mortgages: financing the purchase of a hotel

A hotel is valued and lent against as a trading business, not just a building. Valuers normally use a profits-based approach: they estimate the profit a reasonably efficient operator could sustain, then apply a multiple drawn from comparable sales. The result includes the building, the goodwill attached to it, and the furniture, fixtures and equipment. That has three consequences for a buyer.

• The valuation moves with trade. A hotel whose profit has fallen will be valued lower, even if the building is unchanged.
• Lenders apply two tests: a maximum loan-to-value, and a requirement that profit covers interest and capital repayments with a margin. The smaller result sets the loan. Hotel lending typically sits below the loan-to-value available on ordinary commercial premises, so the deposit is substantial.
• Lenders lend on the lower of the price and the valuation. If you pay above the valuer's figure, the difference comes from your own funds.

The commercial mortgages page explains the general mechanics; the rest of this page deals with what is specific to hotels.

• VAT on the purchase. A hotel bought as a trading business can often be treated as a transfer of a going concern, so no VAT is charged on the price, but the conditions must be met; HMRC sets them out in Notice 700/9 on transferring a business as a going concern.
• Stamp Duty Land Tax. Hotels in England and Northern Ireland are normally charged at the non-residential and mixed rates, and the purchase price allocation between property, goodwill and equipment needs care. Scotland and Wales have their own land taxes.
• Forward bookings and deposits. Weddings and group bookings already paid for must be honoured; agree how deposits are credited to you at completion.
• Staff. Employees transfer under TUPE, with their terms and any holiday pay owed.
• Licences. The premises licence must transfer and a designated premises supervisor be named; civil ceremony approval and any music licences need checking.
• Contracts. Brand or franchise agreements, booking-site contracts, equipment leases and service contracts that will continue after completion.

Hotels carry high fixed costs, so a modest fall in occupancy can erase much of the profit that supports the loan. Test your plan against a weaker year before committing. Paying for future potential rather than current trade leaves you funding the gap from your own cash. Refurbishment backlogs are routinely underestimated, so keep a contingency outside the purchase budget, or line up refurbishment finance in advance. Personal guarantees are common below the largest deal sizes. If owner accommodation in the hotel will be your home, mention it early, because where living space forms a large share of the property the loan may become a regulated mortgage, which we do not arrange. Smaller properties run by their owners are covered on our guesthouse finance page, and our guide on whether to borrow to buy a business covers the wider decision.