Understanding the Basics of Buying a Hotel Property

Buying a hotel is not the same as buying a cafe or a warehouse.

The property comes with licensing obligations, sometimes accommodation compliance, and often a liquor licence that adds value but also complexity. Lenders treat hotels as higher-risk commercial assets, which means the loan structure, deposit requirement and serviceability test all shift compared to standard commercial property loans.

If you're looking at a coastal hotel in Shoreham or elsewhere on the Mornington Peninsula, you're also dealing with seasonal revenue patterns that lenders will scrutinise closely. What works in summer might not cover loan servicing in winter, and that volatility needs to be accounted for in your application and your business plan.

How Lenders Assess Hotel Acquisitions

Lenders want to see that the hotel can service the debt from its operating income, not just that you have equity or collateral elsewhere. They will request profit and loss statements for the last two or three years, and they will apply their own adjustments to remove owner benefits, one-off income, or discretionary spending that inflates the reported figure. The adjusted earnings before interest, tax, depreciation and amortisation is what they use to calculate debt service coverage ratio, and most lenders expect that ratio to sit above 1.25 or higher for hospitality.

Consider a buyer acquiring a small hotel in Shoreham with accommodation and a public bar. The listed financials show strong summer takings, but winter revenue drops by 40%. The lender adjusts the average monthly income downward to reflect that variability, then applies a coverage ratio test. If the loan servicing costs exceed the adjusted income by too much, the deal either needs a larger deposit or a co-borrower with additional income to support the shortfall.

That is why most hotel acquisitions require a deposit of at least 30% to 40%, sometimes more if the business has a short trading history or if the premises require capital works post-settlement.

Secured vs Unsecured Lending for Hotel Purchases

Most hotel acquisitions are funded through a secured business loan, where the lender takes security over the property, the business assets, and sometimes a registered charge over the liquor licence. Security reduces the lender's risk, which in turn can improve your interest rate and loan amount. Unsecured business finance exists, but it is rarely suitable for acquisitions of this scale because the loan amount is typically capped, and the interest rate reflects the higher risk.

A secured business loan for a hotel purchase will usually involve a first mortgage over the freehold or leasehold property, a general security agreement over business assets like plant and equipment, and sometimes a personal guarantee from the director or borrower. That structure gives the lender multiple recovery pathways if the business cannot meet repayments, and it also allows the borrower to access a higher loan amount at a lower rate than unsecured alternatives.

Unsecured business finance might be used to top up working capital after settlement or to cover fit-out costs, but it would not typically fund the acquisition itself.

What Goes Into the Loan Structure

Hotel loans are almost always structured as interest-only for the first few years, with principal and interest repayments starting later. That structure helps preserve cash flow during the early phase of ownership, when you might be investing in refurbishment, building customer base, or navigating the learning curve of a new operation. Some lenders also offer progressive drawdown if you are purchasing the business and the property separately, or if part of the purchase price is being held in escrow pending licensing or lease transfer.

The loan term is usually shorter than a residential mortgage, often five to ten years with a balloon payment at the end, though some lenders will offer longer terms if the property is freehold and the business has strong historical performance. Variable interest rates are more common than fixed rates in commercial lending, though you can sometimes negotiate a fixed period for part of the loan to manage rate risk during the first few years.

Flexible repayment options and redraw facilities are less common in commercial loans than in residential lending, but some lenders do offer limited redraw on principal payments or the ability to make additional payments without penalty. That flexibility can matter if you have a strong summer season and want to reduce the principal ahead of schedule.

The Role of the Business Plan and Cashflow Forecast

You will not get a hotel loan approved without a detailed business plan and a cashflow forecast that extends at least 12 months forward. The lender wants to see that you understand the revenue drivers, the cost base, and the risks specific to this hotel in this location. If the hotel relies heavily on weekend trade, or if it has a function room that brings in variable income, that needs to be reflected in your forecast with realistic assumptions.

Your business plan should also explain what you bring to the operation, whether that is hospitality experience, local market knowledge, or a strategy to grow revenue through events, accommodation upgrades, or extended trading hours. Lenders are more comfortable backing experienced operators, but if you are new to hospitality, having a strong operational team or advisor attached to the business can help.

The cashflow forecast should be conservative, especially around seasonal dips. If you are acquiring a hotel in Shoreham, where tourism peaks in summer and quiets in winter, your forecast needs to show that you can meet loan repayments during the low season without drawing down on reserves indefinitely.

Licensing, Lease Terms and Lender Expectations

If the hotel operates under a leasehold rather than freehold title, the lease term and renewal options become critical. Most lenders want to see a remaining lease term that exceeds the loan term, or at least a clear pathway to renewal. A lease with only three years remaining and no option is unlikely to support a ten-year loan, because the lender's security evaporates when the lease expires.

The liquor licence is another asset the lender will consider, particularly if it is transferable and adds measurable value to the business. Some lenders will take a registered interest in the licence as additional security, while others will simply factor its value into the overall business valuation. Either way, you need to confirm that the licence transfer is approved before settlement, because a hotel without a liquor licence loses most of its income.

If the property includes accommodation, the lender will also want to confirm that it meets current planning and building regulations, and that any required compliance works are either completed or factored into your post-settlement budget.

When to Bring in a Broker

Hotel acquisitions sit at the complex end of commercial lending, and most buyers benefit from working with a broker who understands hospitality finance and has relationships with lenders active in that space. Not every bank lends on hotels, and the ones that do have different risk appetites depending on location, business model, and your experience level.

A broker can help you structure the application to address lender concerns before they become deal-breakers, and they can also source options you might not find directly, including specialist lenders who focus on hospitality or regional commercial property. If your scenario involves a seasonal business, a leasehold property, or a first-time hospitality buyer, a broker can often mean the difference between a declined application and a funded one.

Call one of our team or book an appointment at a time that works for you. We work with buyers across the Mornington Peninsula, including Shoreham, and we understand how to structure commercial loans for hospitality acquisitions that actually get approved.

Frequently Asked Questions