Types of hospitality development funded
Hospitality development finance spans new-build hotels through to outdoor and glamping schemes. Each sub-sector is assessed slightly differently, but all share the need to demonstrate a credible operating business behind the completed building.
- New-build hotels - budget, mid-market, and boutique properties; typically assessed on bedroom count, ADR (average daily rate), and occupancy assumptions
- Pub conversion and renovation - freehold pub conversions to boutique hotel, rooms above pubs, or village inn refurbishment
- Serviced accommodation development - purpose-built aparthotels and managed short-let developments; a growing sector with specialist lenders developing specific products
- Restaurant and food & beverage development - standalone restaurant buildings or food hall development, assessed on rent multiples
- Glamping and outdoor hospitality - glamping pods, shepherd's huts, eco-lodges; assessed on projected room occupancy income, increasingly lendable as the sector matures
How hotel GDV is calculated
Unlike residential development (where GDV = number of units x sale price), hotel GDV is assessed on either: (1) capitalised trading value - projected EBITDA x investment yield; or (2) comparable sales evidence of similar hotels in the same market. Both methods are used; lenders typically take the lower of the two.
Worked example - a 25-room boutique hotel in the Cotswolds. Projected ADR: £185. Occupancy: 72%. Rooms revenue: 25 x £185 x 365 x 72% = £1,217,025. EBITDA margin: 28% = £340,767. At a 7% investment yield: GDV = £340,767 / 7% = £4,868,100.
25 rooms at an ADR of £185 and 72% occupancy generate rooms revenue of £1,217,025. At a 28% EBITDA margin that is £340,767 of EBITDA, which capitalised at a 7% investment yield gives a GDV of £4,868,100.
Lender criteria for hotel development
Five factors drive how a hotel development application is assessed. The headline metric is LTGDV, but operator commitment, brand affiliation, and independently validated trading assumptions matter just as much to whether a lender will advance.
LTGDV: 55-62% for hotel new build. Lower than residential due to the operational complexity and potential revenue volatility of the completed business.
Operator agreement: some lenders require a pre-agreed operator or management company agreement before drawing the development facility. This reduces the risk of the completed hotel sitting empty while an operator is found.
Brand or affiliation: budget and mid-market hotel development against an established brand (Ibis, Holiday Inn Express, Travelodge) is significantly more lendable than unbranded. Lenders accept brand franchise agreements as evidence of operational commitment.
ADR and occupancy assumptions: lenders commission an independent market study (hotel operating projections from a specialist hospitality consultant) to validate the revenue assumptions. Conservative occupancy assumptions (typically 65-75% for the first full year) are used.
Exit: refinance onto a hospitality commercial mortgage or sale to a hotel group/investor. Lenders will want to see that the exit mortgage is achievable at the projected EBITDA - illustrative exit mortgage terms from specialist hospitality lenders should be included in the application.
Case study: 18-room boutique hotel, Shropshire
A boutique hotel operator converted a Grade II listed Shropshire farmhouse - purchasing it with an existing residential use consent and obtaining listed building consent for hotel conversion. Doulton arranged £2.28m development finance at 60% LTGDV. The GDV was assessed by a specialist hospitality consultant on a revenue per available room basis.
Construction completed in Month 18. The hotel opened in Month 19. First full year ADR was £220 at 68% occupancy. The facility was refinanced onto a 20-year hospitality mortgage at Month 24.
- Scheme: conversion of a Grade II listed farmhouse to 18-room boutique hotel, Shropshire
- Developer: experienced hospitality operator, 2 existing boutique hotels
- GDV: £3,800,000 (capitalised EBITDA at 6.5% yield)
- Build / conversion cost: £2,100,000 including listed building consent works
- Development facility: £2,280,000 (60% LTGDV)
- Term: 20 months
- Exit: specialist hospitality commercial mortgage, Month 24