Pub Loans

Do you need a pub loan?

Quitting your day job to run a pub or bar is a dream many Australians share

You may even turn a decent profit with the right business strategy and a solid management team in place.

Getting approved for a pub loan really comes down to highlighting your skills and experience and proving to the lender that you have what it takes to be a successful publican.

Commercial Loans

How much can I borrow?

• Freehold (with gaming): up to 65% of the purchase price.
• Freehold (without gaming): up to 50% of the purchase price.
• Leasehold (with gaming): up to 50% of going concern valuation by a bank instructed valuer.
• With the help of a guarantor, you can borrow up to 100% of the purchase price.
• Maximum loan term for principal and interest (P&I): 5 years (debt to reduce by 40%).
• Maximum loan term for interest only: 3 years.
• Loans over $5,000,000 are assessed on a case by case basis.
• You may be asked to provide a business plan including business forecasting.
• Preferred 3 years experience as a successful publican if you are managing the business yourself
• Low doc options are not available.
• Interest rate discounts vary depending on the lender and your financial situation.

For an indicative funding approval, call us on 1300 889 743 or fill in our free assessment form to speak with one of our highly-skilled mortgage brokers.

How can we help?

Our brokers have really strong relationships with the commercial arms of a number of Australian banks and because of that you may be able to borrow up to the maximum Loan to Value Ratio (LVR) for your commercial purchase and qualify for significantly reduced interest rates.

Have you checked out the commercial loan features page?

Getting the right commercial loan for your situation is more than just getting a low interest rate. Having the right features to manage your loan over the long term is just as critical.

Our commercial property loans section can provide more information about how the commercial loan process works and the other types of commercial properties that the lenders on our panel can finance.

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Lending Criteria

What do the banks assess?

Lenders see pubs and bars as ‘specialised’ commercial properties which means they treat them a little differently to such commercial real estate as office buildings and warehouses.

Businesses operating within the hospitality industry operate within a small market and are quicker to be affected by poor management making them riskier ventures.

It’s this reason that most commercial lenders will require you to have at least 1.5 to 2 times the amount of income to proposed interest expenses. This is known as the ‘serviceability ratio’.

You don’t necessarily need a clean credit history. If you can provide detailed explanations of how you resolved such credit issues as defaults, there are lenders who will consider your case.

Call one of our specialist mortgage brokers on 1300 889 743 so we can help you to present a strong case to the lender.

Apart from assessing your ability to pay back the loan, you’ll need to prove to the banks that you can run a successful business.

The best way to highlight this is with significant experience in an operation equivalent to the property you’re planning to purchase. The requirements for this will vary from case to case but it helps to submit a resume along with your loan application that shows this work experience as well as:

• Completed courses or certificates.
• A business plan that details cash flow forecasts, market competition and business model.

Our brokers are specialists in pub loans and we can help you prepare your application to highlight your strengths as a borrower so you have better chance of getting approved the first time around.

Call 1300 889 743 or complete our free assessment form today.

How do banks value pubs?

There are two going concern valuation types:

• Real property and business value.
• Lessee’s interest value.

These are dependent upon who owns the freehold title and who runs the business.

Generally speaking though, banks will take into consideration:

• Net gaming takings.
• Gaming machine commissions.
• Total revenue.
• Gross margin.
• Wages for revenue figures.

They’ll also consider the asset quality position, financial performance of each of the above aspects and how they impact the business overall, as well as the industry environment and existing market competition.

What security can I use for the loan?

• Mortgage over pub (or lease, if leasehold).
• Registered fixed or floating charge or Bill of Sale over the business assets of the pub.
• Directors’ guarantee.
• A specific charge/security over the pub’s liquor licence and, where appropriate for state legislation, related licenses for gaming or off-licence packaged liquor operations (not applicable in Western Australia and South Australia).
• A deed of consent between lessor/lessee and the bank.

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Tips For Buying

Get financial & legal advice

Before considering getting into the pub game, be sure to get independent financial and legal advice first.

Most of the time, initial consultations are free for accountants, financial advisers and lawyers but even if you pay a few thousand for these professionals you can avoid common traps and they can actually help you save money in the long run.

An accountant who specialises in the hospitality industry, for instance, can help you set up an entity structure that is more profitable for your situation while a specialist solicitor can help you ensure the Contract of Sale is in your best interest.

For example, you’ll want to make sure that there is a null-and-void arrangement in the lease just in case you don’t get your liquor and/or gaming licenses approved.

Similarly, a buyers agent can help you negotiate with a vendor on your behalf.

Have you got a mentor?

Sounds a little cliche but having a mentor who has worked in the industry for a number of years, owning and managing a bar can work in your favour on so many levels:

• From the initial loan application stage, it shows to the lender that you’re serious about running a successful business and you’ll have a better chance of getting your loan approved.
• To keep the business afloat for many years to come, a mentor can not only help you avoid costly mistakes but help you to focus on proven strategies to increase profit.

If you don’t know someone personally in the industry, it may be worth joining the Australian Hotel Association (AHA), the peak industry body for hotel and pub owners.

They can provide plenty and support including training and strategies.

Should I enter into a leasehold agreement?

There are a number of business and tax implications for both freehold and leasehold ownerships that need to be carefully considered.

Leasehold arrangements, for instance, don’t require you to outlay money for the property. As a result,they offer a much higher yield on investment than freehold going concern arrangements.

It all comes down to what you’re trying to achieve with the investment though.

For example, a 30 or 40 year old couple looking to reach the peak of their success and take on a new challenge may look at purchasing a leasehold pub.

There’s a much bigger return on the lease than owning the freehold and you can later use the investment to later building your portfolio which may include freehold commercial properties.

What counts is your ability to put in the hard work.

Operating hours for a pub or tavern run well into the night and early morning but did you know that supply deliveries arrive really early as well? Other parts of the business may require you to be available nine to five.

Very quickly you may find yourself working around clock so be prepared.

Is a short term or a long term lease better?

Generally speaking, 17 or 18 year lease terms with a ‘lease-option’ (an option to purchase the property at the end of the lease term) is a popular choice for people looking to purchase a pub.

Why?

Well, a lease term for less than this may require you to amortize and work= that into your budget. It’s essential you speak to a hospitality accountant about this.

A long lease like this provides stability and allows you to firmly establish your business in town and protects you from having to move in case the landlord decides to sell the premises.

The drawback is the obvious risk of paying rent for a business over a long period of time. In addition, the cost of maintenance and repairs for such a lengthy lease term needs to be taken into account.

Please speak to a financial adviser and accountant about how operating a pub or bar fits into your long term financial goals.

What should be in the lease arrangement?

Leasehold pubs and bars are normally sold as ‘plus stock’ but you should get in touch with a solicitor so they can help you negotiate this with the vendor. The last thing you want to do is to buy into a business that has nothing to sell!

Similarly, the establishment may require certain fixtures, fittings and services to be installed before you can start operating.

Are you or the vendor liable for installing these fittings?

These details should be clearly outlined in the lease agreement before signing. Again, you can negotiate this with the help of business broker and solicitor.

Should I buy the bar as a freehold going concern instead?

While leasehold business purchasers enjoy a much higher return on their investment, the worst case scenario (the business failing) usually means the loss of any money they outlaid for the business.

Deciding on which ownership to choose comes down to your circumstances and your lifestyle.

You don’t have to know everything about running a bar but you do need a basic understanding of how to run a cash flow business and, of course, a hospitable nature.

The great thing about a freehold arrangement is that the land itself retains value even if the business sinks.

This is the reason that a couple in later life looking to slow down a little choose to purchase a pub freehold rather than focusing on running the business.

Have you done your due diligence on the pub?

A buyers agent can help you to get a better understanding of the pub or tavern but your best option is to get out there, get a feel for the property and meet the current owners yourself.

Questions you might want to ask include:

• Does the pub come with accommodation? This adds a new dynamic to your business plan and another source of income.
• Is the tavern close to or part of a popular holiday destination? You may be run off your feet during holiday periods but you’ll have to think of strategies to generate more business during off peak periods.
• Does the leasehold have the right licence for the venue you want to operate? The pub you are looking to purchase might not have a license to serve more than 100 people even though you could easily fit 300.
• How long have management been in place? A great management team is key to running a successful establishment because they understand the business at a patron level.
• Who are the current suppliers? You may have to renew these contracts when you take over the leasehold. Then again, you may be better off switching suppliers for those located a little closer (a better option logistically) or for suppliers that are cheaper.

How do you make an offer on a pub?

When searching for commercial real estate to purchase, price does certainly matter but the conditions of the sale should also form a big part of your decision.

For example, if a certain amount of inventory isn’t made available or certain maintenance or repair issues aren’t resolved, then the purchase shouldn’t go ahead.

A simple letter of offer or Heads of Agreement that spells out your intentions is a helpful document to have prior to the Contract of Sale. Along with your deposit, it acts as a stencil of the contract to come.

Isn’t this risky?

Not really. A commercial buyers agent or business broker can help you to draft up the Heads of Agreement and by having a formal agreement between you and the vendor and the agent can take that property off the market.

It gives you breathing space to undertake your due diligence.

If certain conditions aren’t met, such as the landlord not extending the lease because it’s a little too short for you to qualify for finance, then you can pull out of the deal and the deposit is totally refundable.

Do you need to renovate?

Whether you want to bring the tavern back to what it was in its heyday or you simply want to alter the look and feel of the establishment to match your location, you’ll need to apply for a development application with your local council.

You could submit the application yourself or hire a professional to organise and handle this for you. Depending on the nature of the property and its location, it may cost you upwards of $20,000 but these professionals have the relevant contacts to get your application over the line meaning you can open your doors for trade a lot sooner.

Keep in mind that fit-outs, such as plumbing and electricity. can be quite expensive so ensure you have a sufficient fit-out budget.

Be aware of delays in construction work, particularly over holiday periods. Every day that your business isn’t operating means less for you in potential profit.

Do you need certain permits to run a pub?

Once you’re fairly satisfied with the inspections you’ve undertaken on the property, it’s essential to apply for your permits as soon as possible so you can get started on generating business.

Although it varies slightly from state to state, in most cases the bar itself will hold a liquor license while the operator will be required to complete the required courses to be the nominee on that license.

Bear in mind, your responsibility may not end when an inebriated patron leaves the premises. If they are assaulted or injured on the way home, you can find yourself up for some damages.

You’ll also require a community impact statement addressing residents and businesses within 100 metres of the premises and key stakeholders in order to apply for a general hotel licence from your state’s liquor and gaming authority.

For New South Wales, this would be the Office of Liquor, Gaming and Racing (OLGR) and, for Victoria, the Victorian Commission for Gambling and Liquor Regulation (VCGLR).

Getting a licence takes a lot longer than it used to (sometimes up to 8 weeks or more) because regulators are quite backed up with applications.

Are there poker machines?

f the licence is attached to the leasehold, you should be ok, otherwise you’ll need to apply for a gaming licence.

There are also other permits required depending on the pub’s offering such as food safety, accommodation and outdoor seating/patio seating permits.

Have you considered location and competition

Having a pub located on a main road can help generate a lot of business but what the pub actually offers is often more powerful.

Patrons will travel to a bar if it has a good atmosphere and regular entertainment, for instance. A lot of older patrons tend to be loyal to one pub so you have to try and cater to these customers while also evolving to attract new patrons.

In most cases, direct competition can kill a business, especially if the competition is already well-established in the area.

In saying that, competition can actually be a good thing as many venues in one locality can create an entertainment ‘precinct’ which can attract even more people to the area.

Similarly, certain businesses may compliment your bar, such as theme parks, monuments, historical sites and other tourist attractions, and entice more patrons to stop for a drink.

Areas you’ll want to be wary of are those that have council-imposed restrictions on noise or opening hours. Again, this really depends on your business model.

Where can I find out vacancy rates for area?

The bar’s landlord should be able to provide this information, otherwise a commercial buyers agent or the town/city’s information centre or chamber of commerce should have this data on file.

How much does a pub cost?

You don’t necessarily have to pay through your nose for a nice tavern, especially in regional towns or suburbs closer to city outskirts.

These cheaper venues often provide a chance for a buyer to come in and establish a food or entertainment hub where there previously wasn’t one.

Check out some well-established real estate listings and really understand the area you’re buying in. If it’s an area you already live in, you have a bit of bargaining power already.

How much does it cost to run a bar?

To figure out the costs of running a bar, it’s important to identify operational benchmarks.

This isn’t just focused on comparable sales and market sales – it’s more in relation to the proportion of your turnover compared to what you’re paying in rent and staff wages.

It helps to define whether your pub is in a regional or city location because there is a significant difference between the cost of goods in the country and cost of goods in the city when it comes to things like wages and freight costs.

Taking this into account, one calculation you could employ is to consider the license capacity of the bar and break the annual rent down by a per person basis (applicable when purchasing the lease term). For instance, if you have an 800-capacity pub and you pay $40,000 a year in rent, you should aim to make more than $50 per person.

The old-fashioned way to work out rent ratio was to look at square metres of the property or to look at the percentage of turnover. A percentage turnover can be skewed purely because you could be a better operator than the previous owner, or vice versa.

The (AHA) will be able to provide you with operational benchmarks as you plan-out your business.

Are there environment or OH&S issues to consider?

Environmental considerations such as waste management and recycling are similar to all commercial properties.

Some of the Occupational, Health and Safety (OH&S) laws and regulations that are unique to pubs though include potentially harmful kitchen equipment and disorderly members of the public.

Is the premise fit out with wheelchair access?

You could be faced with a complaint under the Disability Discrimination Act 1992 so negotiate with the previous owner prior to settlement as to whose responsibility this is to install.

Can zoning prevent you from undertaking certain activities?

Pubs and bars, like other commercial properties, are broken up into two zones: Commercial 1 and Commercial 2.

Commercial 1 Zone

• Replaced Business 1, Business 2 and Business 5 Zones.
• Allows taverns, hotels and gaming premises without a planning permit, unless in a strip shopping centre where gaming premises are prohibited. You will still need a liquor licence.

Commercial 2 Zone

• Replaced Business 3 and Business 4 Zones.
• Prohibits accommodation, except for caretaker’s house, motel and residential hotel which require a permit.

As stipulated in the legislation regarding these commercial zones, there are various ‘dry’ zones which do not allow the sale of any liquor.

Similarly, live music venues don’t work well within residential areas, and gaming venues are not permitted within strip shopping areas.

Be sure you discuss with a business broker prior to purchasing.

How long does settlement take?

Like other commercial properties, settlement on a pub or bar usually takes around 6 to 8 weeks.

Bear in mind that you will have to apply for a liquor and gaming licence, which can take as long as 8 weeks to process and approve.

Get the right advice

If you’re purchasing the pub leasehold from the landlord, ask them for advice. In most circumstances, they’ll offer help because they too want you to be successful. Having a handover period is massive help.

The AHA can provide all of the education and support you’ll need to run your pub or bar.

Need a pub loan?

Let one of our expert commercial mortgage brokers properly assess your situation and tell you if you qualify for pub finance.

Call us on 1300 889 743or complete our free assessment form today.

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