Understanding Pub Loans
In the past pub mortgages have been regarded as higher risk lending
by the high street commercial lenders. However some time ago that all
changed with the arrival of independent lenders in the business
mortgage marketplace. Where banks were
offering limited
loan to values (LTV) of 65%- 70% newer
lenders are able to consider commercial
loans of up to 85% LTV.
The main difference is that theses new lenders
are only lending against the “bricks and mortar” value of a
pub and not giving any allowance for the
goodwill. That being said there is no doubt that these new commercial
lenders had a revolutionary
effect on the
pub mortgage sector. Even the high street lenders
are now offering much better loan to values and greater
flexibility.
Who can get a commercial loan for a Public House?
Just about anyone who can demonstrate ability
in Public house management can apply for a pub loan. The
applicant needs to display a certain level of proficiency
to obtain a personal license
from the local authority, which coupled with some realistic
cash-flow projects should be sufficient to get approval. Most pub loan
applications will either be a self-certification of income or a full
status application (sometimes referred to as “prime”).
Self cert pub mortgages are based on the
applicants declaration that they are able to afford the loan
repayments. This can be from the proceeds of trading or topped up from
outside income, for example a partner’s salary. The self-cert public
house loan requires minimal underwriting and
is largely based on the freehold value of the pub. Purchases and
re-mortgages should qualify for 85%LTV with sitting tenants possibly
obtaining 90% of the purchase price. Self-cert mortgages are almost
always based entirely on the “bricks & mortar” value of the business so
you may need to introduce more capital to pay for the goodwill and
stock.
Full-status or prime public house mortgages
rely on a combination of the value of the freehold and the supporting
accounts. Commercial
lenders will usually work on an affordability calculation based
on the profits from the most recent accounts. The accounts will normally
be adjusted to “add back” certain items such as depreciation and any
extraordinary expenses. Lenders will normally consider loans in the
region of 75% loan to value of the full purchase price including
goodwill and fixtures & fittings (but not stock).
As you would expect the set-up costs, interest
rates and early repayment charges for
full-status pub
mortgages are generally more favorable
than self-cert ones.
What types of business
The examples we are discussing here relate to freehold public houses,
although most lenders will consider long leases it is quite unusual to
find pubs with leases in excess of 22 years. Leasehold pubs are financed
differently.
Pub mortgages are obtainable
for all types of public house, from those relying on food sales
to town centre pubs operating late hours. The definition of a night-club
varies from lender to lender, but generally speaking a licensed premises
which trades “normal” hours would be considered a pub. To give an
example, a premises which opens at midnight and closes at 6am would
almost certainly be viewed as a night club. Whereas a pub opening during
the day and staying open until 3am would still be classed as a public
house.
The Application Process
Anyone purchasing a pub for the first time
would be well
advised to talk to a
business mortgage broker to ensure that funding
would be available before talking to a
business transfer agent. Businesses looking for a re-loan should
approach their existing lender as best as an independent commercial
mortgage broker to ensure that they are considering the full range of
options.
Most brokers will ask general questions about the business, your
experience and background along with investigations into your finances.
Once a suitable pub loan has been identified
an application form and arrangements for the valuation should quickly
follow. When the lender receives the application paperwork, valuation
report and supporting documentation the formal loan offer is usually
issued.
Hopefully you will have found the above information about pub
mortgages useful. Please bear in mind that commercial lender’s
criteria is constantly changing and that
commercial
mortgages for pub are always individually underwritten so you should
talk to a commercial mortgage broker to establish the type of funding
you can obtain.
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