Pub and Hotel Commercial Mortgages

Pub and Hotel Commercial Mortgages: What You Need to Know

Securing a **commercial mortgage** for a pub, hotel or hospitality venue requires specialist knowledge that goes far beyond standard commercial property finance. Lenders assess these properties as trading businesses rather than simple bricks-and-mortar investments, which means the underwriting process examines revenue streams, occupancy rates and profitability alongside property value.

At **Commercial Mortgages Broker**, we arrange finance for hospitality businesses across the UK, from village pubs to boutique hotels. This guide explains exactly what lenders look for and how to position your application for success.

Why Pubs and Hotels Are Treated Differently

Unlike offices, retail units or industrial premises, pubs and hotels generate income through **trade** rather than rental agreements. A standard commercial property derives its value primarily from the lease and tenant covenant. A pub or hotel derives its value from its ability to generate revenue through food, drink, accommodation and events.

This distinction matters because lenders must assess two separate risks: the underlying property value and the viability of the trading business. If the business fails, the property's value as an alternative use may be significantly lower than its trading value.

**Key Takeaway:** Hospitality property mortgages require lenders with specialist sector knowledge. High-street banks often decline these applications not because of poor financials, but because they lack the expertise to assess them properly.

Trading History Requirements

The most critical factor for any pub or hotel mortgage application is **trading history**. Lenders want evidence that the business generates sufficient, sustainable income to service the debt.

Minimum Trading History

• Established businesses: Most lenders require a minimum of 2-3 years of audited accounts
• Recently acquired businesses: Some specialist lenders accept 12 months of management accounts alongside projections
• New ventures: Very limited options exist for businesses without trading history, though experienced operators may qualify with robust business plans

What Lenders Examine

• Turnover trends: Is revenue growing, stable or declining?
• Gross profit margins: Food margins of 60-70% and wet sales margins of 55-65% are typical benchmarks
• Net profit: After all operating costs, what does the business actually generate?
• Seasonality: How does trading vary throughout the year, and can the business service debt during quiet months?
• Comparison to industry benchmarks: How does the business perform relative to comparable venues?

EBITDA Multiples and Valuation

**EBITDA** (Earnings Before Interest, Tax, Depreciation and Amortisation) is the primary valuation metric for hospitality properties. Lenders and valuers use EBITDA multiples to determine the fair market value of a trading business.

Typical EBITDA Multiples

The multiple applied depends on location, condition, brand strength, growth potential and market conditions. A well-maintained pub in a prime location with growing revenue will command a higher multiple than a tired venue in a declining area.

Adjusted EBITDA

Lenders typically calculate **adjusted EBITDA**, which removes one-off costs, owner's personal expenses run through the business, and normalises the owner-operator's salary to a market rate. This gives a clearer picture of sustainable earnings.

Tied vs Free-of-Tie Pubs

The distinction between **tied** and **free-of-tie** pubs significantly affects both valuation and mortgage options.

Tied Pubs

A tied pub is contractually obligated to purchase beer and other products from a specific brewery or pub company. Key considerations include:

• Lower purchase prices: Tied pubs typically sell for less because the tie restricts the operator's purchasing flexibility
• Reduced margins: The obligation to buy at brewery prices means lower gross margins on wet sales
• Lease restrictions: Many tied pubs operate under tenancy or lease agreements that complicate mortgage applications
• Lender caution: Some lenders avoid tied pubs entirely due to the complexity

Free-of-Tie (Free House)

A free house can purchase from any supplier, offering:

• Higher margins: Freedom to negotiate the best prices from multiple suppliers
• Greater flexibility: The operator can adapt the product range to local demand
• Higher valuations: Free houses typically command higher EBITDA multiples
• More lender options: Most commercial mortgage lenders prefer free-of-tie properties

**Key Takeaway:** If you are purchasing a tied pub, ensure your broker understands the specific tie arrangements and can identify lenders comfortable with these structures.

Hotel Revenue Analysis

Hotel mortgages require detailed analysis of multiple revenue streams. Lenders assess each income source independently to understand the overall business health.

Key Revenue Metrics

• RevPAR (Revenue Per Available Room): Total room revenue divided by the number of available rooms. This is the primary performance metric for hotels
• ADR (Average Daily Rate): Average price achieved per occupied room
• Occupancy rate: Percentage of rooms sold over a given period. Lenders typically want to see 60%+ annual average occupancy
• F&B revenue: Food and beverage income as a proportion of total revenue
• Ancillary income: Conference facilities, spa, events, parking and other non-room revenue

Seasonal Adjustment

Hotels in tourist destinations may achieve 90%+ occupancy in summer but drop to 30% in winter. Lenders stress-test the business against low-season performance to ensure year-round debt serviceability.

Loan-to-Value and Debt Service

Hospitality mortgages typically offer lower LTV ratios than standard [commercial mortgages](/services/commercial-mortgages) due to the additional trading risk.

Typical LTV Ranges

• Pubs: 55-70% LTV
• Hotels: 55-65% LTV
• Premium/established venues: Up to 75% LTV with strong trading performance

Debt Service Coverage Ratio

Lenders require the business to generate sufficient profit to cover mortgage payments with a comfortable margin. The typical **DSCR** requirement for hospitality is 1.3x to 1.5x, meaning the business must generate 130-150% of the annual debt service from its net operating income.

Which Lenders Finance Pubs and Hotels?

Not all commercial mortgage lenders operate in the hospitality sector. Those that do include:

• Specialist hospitality lenders: Dedicated teams that understand the sector intimately
• Challenger banks: Lenders like Allica Bank, Shawbrook and Aldermore have appetite for well-performing hospitality businesses
• High-street banks: Lloyds, NatWest and Barclays will consider established hospitality businesses with strong track records, typically requiring larger deal sizes
• Private banks: For premium hotels and high-value transactions

Working with a specialist broker like **Commercial Mortgages Broker** gives you access to the full range of lenders and ensures your application reaches those with genuine appetite for your specific property type.

Application Requirements

A strong pub or hotel mortgage application should include:

Financial Documentation

• 2-3 years of audited accounts
• Current year management accounts
• VAT returns (to verify declared turnover)
• Bank statements (6-12 months)
• Till reports and booking system data

Business Information

• Detailed business plan (especially for acquisitions)
• CV and experience of the operator(s)
• Staff structure and key personnel
• Licence details (premises licence, personal licence)
• Any planned capital expenditure

Property Information

• EPC certificate
• Fire risk assessment
• Food hygiene rating
• Planning use class confirmation
• Details of any tie arrangements

Common Challenges and Solutions

Challenge: Insufficient Trading History

**Solution**: If you are an experienced operator acquiring a new venue, provide your track record from previous businesses. Some lenders will accept 12 months of the target property's accounts combined with the buyer's operational experience.

Challenge: Declining Revenue

**Solution**: If revenue has dipped, demonstrate the cause and your plan to reverse it. Capital investment plans, menu changes, marketing strategies and local market analysis can help lenders see beyond current figures.

Challenge: Seasonal Cash Flow

**Solution**: Propose an interest payment structure that accounts for seasonality. Some lenders offer flexible payment schedules with higher payments in peak months and reduced payments during quieter periods.

Challenge: Mixed-Use Properties

**Solution**: A pub with letting rooms above or a hotel with a separate restaurant requires careful structuring. A broker can advise whether to approach this as a single commercial mortgage or separate the elements.

Refurbishment and Development Finance

If your pub or hotel requires significant investment, you may need a combination of [commercial mortgages](/services/commercial-mortgages) and [bridging finance](/services/commercial-bridging) or even [development finance](/services/development-finance) for major works.

Common Scenarios

• Light refurbishment: Many commercial mortgage lenders will include refurbishment costs within the main facility
• Adding rooms: Converting upper floors to accommodation can significantly increase revenue and property value
• Major renovation: A bridging loan to purchase and refurbish, followed by refinance to a term mortgage once trading is established
• New build: Development finance for ground-up hotel construction, with refinance to a commercial mortgage upon completion

Interest Rates and Terms

Hospitality mortgage rates are typically higher than standard commercial property rates, reflecting the additional risk:

• Interest rates: Typically 3.5% - 7% above base rate, depending on the property, business performance and LTV
• Terms: 15-25 years for term mortgages
• Arrangement fees: 1-2% of the loan amount
• Early repayment charges: Usually apply for the first 3-5 years

How CMB Can Help

Our team has extensive experience arranging finance for pubs, hotels and hospitality businesses across the UK. We understand the nuances of sector-specific underwriting and maintain relationships with specialist lenders who have genuine appetite for hospitality property.

Whether you are purchasing your first pub, expanding a hotel portfolio or refinancing an existing hospitality business, [contact us](/contact) for expert advice tailored to your situation.

Frequently Asked Questions

Below are the most common questions we receive about pub and hotel commercial mortgages.

*Written by Matt Lenzie, Founder of Commercial Mortgages Broker. Ex-Lloyds Bank & Bank of Scotland.*