Understanding Pub Loans

The Basics about Pub Mortgages

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 these 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.