The loan matures in three months. Occupancy is good, the reviews are good, you have spent money on the place. So you ring the bank expecting a rate, and instead you get a list: three years of accounts, monthly management figures, a trading report, the franchise agreement, the fire risk assessment, and a question about your general manager’s notice period that you were not expecting at all.
We arrange property finance for owner-managed businesses, and hotels are the sector where I have this conversation most often. It goes wrong in the same four or five places nearly every time, and none of them is about the building.
You are not refinancing a hotel. You are refinancing a trade
A warehouse has a lease and a tenant, and the rent arrives whether or not the tenant had a good week. A hotel has neither. Every pound of your repayment comes from persuading strangers to book a room this week, and then persuading different strangers to do it again next week. The lender is underwriting an operating business that happens to own bricks, and that changes what they read.
Not room count, but what each available room actually earns, and whether that number is moving up or down. Where the bookings come from - because if a big slice arrives through one booking site, one corporate account or the local wedding market, that is concentration, and it will be priced. Payroll as a percentage of revenue, and which way it has moved. And who actually runs the place day to day: you, an employee, or somebody who left last spring.
The most common own goal is presenting a hotel refinance as a property transaction: photographs, a valuation, a rate expectation. The file that gets a good answer reads like a business case with a building attached.
The valuation is not the number you are imagining
This causes more disappointment than anything else on the list, and almost nobody is warned about it.
A hotel is valued on what it earns - not on what similar buildings sold for, and not on what it would cost to build. The valuer estimates the trade a reasonably efficient operator could sustain in that building, not what you achieve and not what a genius would achieve, and capitalises it. Which means an excellent operator can be valued below their own results, because the valuer is pricing the asset, not you.
A hotel valuer once put it to a client of mine, who did not enjoy hearing it: if you sold tomorrow, the buyer is not buying you. I have to value what is left when you have gone.
The same report usually carries a second figure: the vacant possession value. The building empty, no bookings, no team. It is often dramatically lower, and in a downside scenario it is the number the credit committee stares at.
A borrower quoting the trading value while the lender sizes against something nearer the vacant one is a negotiation that was never going to work.
The twelve months they read are not the twelve you would choose
Everyone wants the lender to look at the recent good run. Lenders look at the last full year of accounts, then the trailing twelve months, then the seasonality sitting underneath both.
This matters more than it sounds. A refurbishment that closed twenty rooms for a quarter reads as a collapse unless the file explains it. A strong summer flatters the trailing figures if the valuation lands in October. A one-off - a conference, a filming contract, an event down the road - inflates a year that then looks like decline.
Explain your own numbers before somebody else interprets them. One page setting out what happened, why, and what the sustainable run rate is will save you more than any amount of rate shopping. Unexplained volatility gets stressed. Explained volatility gets understood.
The brand agreement is a covenant you forgot you signed
If you are franchised or under management, the lender needs your brand agreement to outlive the loan. A five-year facility against a franchise with two years left, and a mandatory refurbishment due at renewal, is a problem discovered late and expensively.
Expect the brand to be asked for a comfort agreement giving the lender step-in rights if things go wrong. These take weeks, they sit with a legal team in another country, and they cannot be hurried in the final fortnight. Start them alongside the valuation, not after it.
And read what your own agreement obliges you to spend. A refurbishment programme due in year two is capital expenditure the lender will insist on funding or reserving for. It does not go away by not being mentioned.
Capital expenditure is part of the deal whether you raise it or not
Hotels consume money. Carpets, bathrooms, kitchen plant, and now the energy standards catching up with larger buildings. A lender who thinks you have under-invested assumes either the trade falls or a bill lands. Neither is good for them.
The instinct is to keep the loan clean and deal with all of that later. In practice you get a better answer by putting the programme in the request: what needs doing, when, what it costs, what it earns back. A reserve you propose looks like discipline. The same reserve imposed at credit stage looks like a condition, and arrives with far less flexibility.
What this looks like in practice
An experienced hotelier came to us wanting a second site, an owner-occupied purchase just off the M6, with £2.6m of lending to arrange. He had already bought one hotel, refurbished it, turned it around, and wanted to run the same play again.
His own bank had quoted 7.25% with a 1.5% arrangement fee. That price had very little to do with him. It was the word “hotel” being priced as a category, which is still how a lot of banks approach the sector.
So we did not lead with the building. We led with him: what the first turnaround had actually delivered, how he had got there, and a forecast for the new site built out of that experience rather than out of a spreadsheet. The argument was that the real risk here was an operator question, and this operator had already answered it once. Then we took it to a lender that underwrites operators rather than sectors.
Approved at 1.39% over base - 5.39% all-in at the time of writing - at 70% of vacant possession value. That last figure is the one worth pausing on, given everything above. Seventy per cent of the empty-box number, on a hospitality trading asset, is a strong outcome, and it was strong precisely because the file had already answered the question that figure exists to ask.
The arrangement fee went too. The property’s EPC ratings qualified for the lender’s green lending incentive and the 1.5% was waived in full - £39,000 that stayed in his pocket on day one, before counting roughly £47,000 of first-year interest saved against the quote he walked in with.
Same hotelier, same building, same numbers underneath. What changed was who the lender thought they were underwriting: the first hotel’s management accounts made the second hotel an operator story instead of a sector story.
If you take one thing from this
Start six months before maturity. Not three, and certainly not eight weeks.
That runway gives you time to clean up a trading period, renew or extend a brand agreement, get a comfort letter through somebody else’s legal department, commission a valuation whose basis you understand, and - if the first answer is no - go somewhere else without a deadline pressing on your neck.
Six months gives you a shot at several lenders. Eight weeks gives you a bridge and a lesson.
Frequently asked questions
How is a hotel valued for a refinance?
On its trading, not on comparable buildings. The valuer estimates the sustainable trade a reasonably efficient operator could achieve in that hotel and capitalises it, which means an excellent operator can be valued below their own results. The same report usually carries a second, much lower figure - the vacant possession value, the empty building with no bookings and no team - and in a downside scenario that is the number the credit committee weighs. Ask for the basis and both figures early.
When should I start refinancing my hotel?
Around six months before the loan matures. That is enough time to clean up a trading period, renew or extend a brand agreement, get a comfort letter through a franchisor’s legal department, commission a valuation whose basis you understand, and go to another lender if the first answer is no. Eight weeks is usually only enough time for a bridge.
What information will a lender ask for?
Three years of accounts, monthly management figures, a trading report showing occupancy and what each available room earns, the franchise or management agreement if there is one, the fire risk assessment, and detail on who runs the hotel day to day. The file that gets the best answer reads like a business case with a building attached, not a property transaction.
Does my franchise or brand agreement affect the loan?
Directly. The lender will want the agreement to run beyond the loan term, and will usually ask the brand for a comfort agreement giving them step-in rights if things go wrong - a document that sits with a legal team in another country and takes weeks. Any refurbishment the agreement obliges you to carry out is capital expenditure the lender will fund or reserve for, whether or not you raise it.
Why is my bank quoting me a high rate for a hotel loan?
Often because it is pricing the word hotel as a category rather than underwriting you as an operator. Lenders that underwrite operating businesses look at your trading record, your management accounts and your track record, and can land materially below a high-street quote - but only if the file is presented as an operating business, with the trading story told properly.
Accurate as at the date above. Tax rules and lending criteria change, and your position depends on your own numbers - take advice before acting on anything here.