An £85 Million Hotel Refinance Shows Why Mezzanine Should Not Be the Starting Assumption

A borrower may enter the market asking for mezzanine finance because part of a portfolio cannot yet support the desired debt. That does not mean mezzanine should be the default solution. Where trading performance is expected to strengthen within a defined period, staged senior debt can sometimes provide a lower-cost and operationally cleaner route.

FRP Real Estate Advisory has arranged an £85 million funding package for three owner-operated hotels in South West England. One property is trading normally, while two recently refurbished hotels are still rebuilding occupancy and establishing their stabilised earnings profile.

The financing comprises a £75 million, five-year senior loan used to refinance the existing lender and a further £10 million committed accordion. The accordion can be drawn as the refurbished properties reach agreed trading milestones. The facility is interest-only with a bullet repayment, and its pricing reduces as leverage falls.

The transaction reportedly began as a request for mezzanine finance. After testing mezzanine and whole-loan markets, the advisory team concluded that senior debt with a committed accordion offered better value and gave the borrower access to additional capital as the hotels' performance improved.

The Initial Product Request Was Not the Final Solution

Complex borrowers often describe their requirement by naming a product. They may ask for a bridge, a whole loan, mezzanine debt or preferred equity because that is the structure they believe will deliver the required proceeds. The adviser’s role is to test the underlying need rather than simply match the request to a lender.

In this case, the underlying requirement was not merely “mezzanine finance”. The borrower needed to refinance an incumbent lender, retain sufficient day-one capital and secure access to further funding once the two refurbished hotels had built stronger occupancy and cash flow. Those objectives could be addressed through more than one capital structure.

Mezzanine may have delivered additional leverage immediately, but it would also have introduced a second lender behind the senior facility. That can increase pricing, documentation, consent requirements and intercreditor complexity. It can also place greater pressure on cash flow during the period in which the operating assets are least able to absorb additional finance costs.

The senior-plus-accordion structure instead separated the borrower’s immediate refinancing requirement from the capital that would become supportable after stabilisation. The result aligned funding availability more closely with the expected development of trading performance.

Why Recently Refurbished Hotels Need a Different Lending Analysis

A hotel is not valued or underwritten solely as a building. Its debt capacity is closely linked to operating performance, management quality, room rates, occupancy, food and beverage income, payroll, energy costs, capital expenditure and the sustainability of earnings.

When a hotel emerges from refurbishment, historic accounts may no longer represent the asset in its current form. At the same time, a lender may be unwilling to treat forecast occupancy and room rates as fully proven. The property can therefore sit between two credit positions: materially improved as a physical asset, but not yet supported by a complete period of stabilised trading evidence.

This gap is common in operational real estate. The owner may have invested substantially in bedrooms, public areas, leisure facilities, branding or repositioning, yet the resulting value and earnings are realised over time rather than on the day the refurbishment completes.

A lender assessing such a portfolio will normally examine both current and prospective performance. Relevant measures may include revenue per available room, average daily rate, occupancy, gross operating profit, EBITDA, debt-service coverage and leverage against current and stabilised valuations.

How a Committed Accordion Can Bridge the Stabilisation Period

An accordion facility gives the borrower the contractual ability to increase borrowing up to an agreed amount once specified conditions are met. It differs from a future refinancing assumption because the additional capacity is negotiated as part of the original transaction.

The draw conditions might require minimum occupancy, EBITDA, interest cover, debt-service coverage or a revised valuation. The lender may also require confirmation that there has been no default, that trading is tracking the agreed business plan and that the additional debt remains within the approved leverage parameters.

For the borrower, the principal advantage is certainty of access. A business that expects to require additional capital in six or twelve months does not have to assume that a new lender will be available on acceptable terms at that point. It has a committed route to increase the senior facility if the portfolio performs as expected.

The structure can also reduce negative carry. Rather than drawing the entire debt amount on day one and paying interest while the capital is not required or fully supportable, the borrower draws the accordion when the agreed need and performance conditions arise.

Why Mezzanine Can Be the Wrong Starting Assumption

Mezzanine finance has a legitimate role. It can fill the gap between senior debt and sponsor equity, support acquisitions, release capital or fund growth where a senior lender cannot provide the full required leverage. The issue is not that mezzanine is unsuitable in principle; it is that the product should not be selected before the whole capital stack has been tested.

Mezzanine lenders accept greater risk because their security ranks behind the senior lender. Their return therefore tends to be higher and may include arrangement fees, exit fees, minimum interest, payment-in-kind interest, warrants or profit participation. The borrower must also account for legal work and an intercreditor agreement governing control, enforcement and cure rights between the lenders.

In a stabilising hotel portfolio, those costs can be incurred precisely when operating cash flow is still recovering. If occupancy builds more slowly than forecast, the additional interest burden may reduce the financial flexibility the borrower was trying to create.

A staged senior structure can be more proportionate where the lender is comfortable that value and earnings should strengthen within an agreed period. It preserves the option to draw more capital without imposing the full cost and complexity of subordinated debt from completion.

The Correct Comparison Is the Entire Capital Stack

Headline interest rates rarely provide a sufficient basis for comparing complex commercial finance. A borrower should examine the total cost, net proceeds, control rights, covenant package, repayment profile and flexibility under each structure.

A whole loan may provide a single lender and greater day-one leverage, but its blended pricing may be higher than conventional senior debt. A senior-plus-mezzanine structure may maximise proceeds, but it introduces two credit committees and an intercreditor relationship. Preferred equity may avoid scheduled interest in some cases, but can require a substantial share of the project or investment return.

The analysis must also consider where security is granted. Portfolio-level security can allow a lender to recognise the strength of the stabilised property alongside the improving assets. Property-level facilities may provide greater ring-fencing, but can reduce the ability to move capital across the group or release individual assets without consent.

The best structure is therefore the one that provides sufficient capital while remaining resilient if occupancy, valuation or refinancing takes longer than expected. Maximum leverage is not automatically equivalent to the best commercial outcome.

The Downside Case Matters as Much as the Stabilised Case

A staged structure still depends on the borrower meeting its conditions. The accordion is committed, but it is not unconditional. If the hotels do not reach the agreed performance or valuation thresholds, the extra capital may remain unavailable.

The borrower should therefore test the business plan against slower occupancy growth, weaker room rates, higher operating costs and delayed valuation improvement. It should also understand whether the original £75 million facility remains serviceable without the accordion and what alternative sources of liquidity exist if the draw conditions are not met.

Bullet repayment creates a further requirement for disciplined exit planning. The borrower must either refinance, sell assets or repay from other resources at maturity. A falling pricing margin as leverage reduces can reward successful deleveraging, but it does not remove the need to manage the maturity profile well before the five-year term ends.

The Lesson Extends Beyond Hotels

The same structuring question arises across care assets, student accommodation, serviced apartments, leisure property and other operational real estate. In each sector, a newly developed, refurbished or repositioned asset may need time to establish occupancy and recurring earnings.

A care home may be physically complete but still building resident numbers. A student scheme may be between construction completion and its first full academic-year intake. A serviced-apartment portfolio may be integrating a new operator or brand. In each case, the borrower may need more capital than current trading supports, while having a credible case that debt capacity will improve.

The finance should reflect that transition. A delayed draw, accordion, bridge-to-term structure or carefully designed whole loan may be more efficient than introducing mezzanine immediately. Conversely, where the stabilisation case is uncertain or the required leverage materially exceeds senior parameters, mezzanine or equity may still be the correct answer.

Borrowers Need Structuring Advice, Not Product Matching

The £85 million hotel transaction demonstrates the value of approaching the market with a defined commercial objective rather than a fixed product assumption. The advisers did not stop after testing the requested mezzanine route. They compared alternative capital structures and identified a senior facility that could expand as performance improved.

That process is particularly important for family-owned and owner-operated hospitality groups. Their portfolios may contain properties at different stages of maturity, with varying refurbishment histories, trading profiles and capital requirements. A single static leverage measure may not capture the real credit story.

Willow Private Finance approaches these cases by examining the entire borrowing requirement: the existing debt, day-one liquidity, future drawdown need, operating forecasts, security package, covenants and exit. The aim is to determine which combination of senior debt, stretch capital and equity best supports the business rather than assuming the named product is the answer.

For hotel owners emerging from refurbishment, the immediate question is not simply how much can be borrowed today. It is how capital can be made available at the point the portfolio is able to support it, without paying unnecessarily for complexity in the meantime.