Minimum income for a hotel development loan?

Hotel development finance is short-term funding to build or convert a hotel, aparthotel or serviced-accommodation block. It is released in stages against certified costs, underwritten on the trading business the finished hotel will house, and repaid by a hotel mortgage once trading is established or by a sale to an operator or investor.

A hotel development is valued as a trading business instead of on comparable sales. The valuer projects occupancy, average daily rate and revenue per available room, estimates the earnings the hotel will generate at stabilised trading, and capitalises them to reach a going-concern value, cross-checked against the value of the building with vacant possession.

On the cases we arrange, specialist lenders fund hotel development up to 65% of gross development value, with the loan also capped by total cost, and the facility is the lower of the two. The gross development value is a going-concern valuation of the hotel at stabilised trading, so occupancy, room rates and the operator decide how much the scheme can borrow.

How long hotel development finance takes depends on the package, and it can take longer than a residential scheme, because the specialist hotel valuation and the review of the operator's plan and any franchise or management agreement sit alongside the usual monitoring surveyor and legal work. An adviser sets out the timetable once the package is complete.

A first-time developer can be considered for hotel development finance. Lenders look for an experienced operator or management company, a franchise or management agreement where possible, a fixed-price build contract and enough equity, because a hotel's value depends on trading that has yet to be proved.