Commercial property loan lenders don’t review hotel financing like a standard commercial mortgage because, unlike an office building or a warehouse, a hotel is not just a piece of real estate: it’s also an operating business.
And as far as operating businesses go, it’s a volatile one.
The income of a hotel can change by the night, so the loan risk is very different from that of a CRE asset with long-term leases.
Are you interested in hotel financing from a CRE lender?
Your loan request needs to show more than the purchase price and appraised value: it also has to show how the hotel will turn nightly room revenue into a dependable net operating income.
What is hotel project financing?
Hotel project financing is the broad term used for commercial real estate loans that fund hospitality properties. You may use it to:
- Buy an operating hotel
- Build a new hotel
- Refinance the current debt that a hotel might have
- Fund renovations or brand-required improvements
- Convert another commercial property into a hotel
- Carry the asset while you prepare to sell or refinance
CRE lenders who have experience in hospitality can structure a loan that suits both the property’s current condition and your business plan for it.
The standard rules of underwriting still apply: A stabilized hotel with a strong operating history will be viewed as far less risky than one that needs major renovations.
Branded hotels with solid franchise agreements are also viewed more favorably compared to an independent hotel that depends more heavily on local marketing and management.
What makes hotel financing different from other CRE loans?
Rooms in a hotel are rented night by night. This fundamental income pattern of not having long-term tenants makes this asset class harder to underwrite.
Lenders are well aware that the revenue can fall quickly if travel activity suddenly slows for reasons that are largely outside the owner’s control, like disruptive weather or even geopolitical tensions.
This is why hotel lenders pay a lot more attention to factors that directly affect the asset’s operating performance:
- occupancy
- average daily rate
- Revenue per available room
- expenses
- seasonality
- brand
- management experience
- whether major repairs are due
If the hotel’s operations are weak, lenders may still hesitate even if they like the real estate.
It doesn’t matter that the building has value; if the business does not produce a realistic source of repayment, the loan may need to be structured around a lower valuation.
What strategies can help you get approved for hotel project financing?
The lender will look at different factors based on what you plan to do with the property.
If you’re buying a hotel
If the property is fairly stabilized, the lender will want to see its recent income and expenses, as well as its occupancy history.
For an underperforming asset, they will want to know exactly what issues caused the problem and how you plan to correct those shortcomings.
Be ready to explain where the upside will come from, whether it’s from one of a combination of:
- better management
- property improvements
- brand change
- stronger local demand
The lender will also expect a realistic timeline (how many months it will take you to get the hotel producing enough income for a permanent loan).
If you’re renovating a hotel
Are you planning to borrow money to improve the hotel’s rooms and common areas, and/or address maintenance issues that have been deferred for years?
Aside from the renovation budget, the lender will thoroughly review how the work might affect the hotel’s revenue.
Will some of the rooms and amenities be unavailable during construction?
Make sure that your loan request accounts for that temporary income loss and explain that clearly to the lender.
If you’re building a hotel
Ground-up hotel construction is usually the hardest type of loan request to review because the property won’t generate income until the project is complete.
There is no NOI or operating history, so the lender will have to rely on projections.
When underwriting hotel construction loans, lenders look at:
- the land
- approvals/permits
- the construction budget
- contractor plans
- Your experience (as the borrower) with similar projects
- the local market (whether there’s enough demand to justify the rooms being added)
Make sure that your construction budget is detailed and that your repayment plan accounts for the time it takes to complete the work and stabilize operations post-construction.
If you need bridge financing
When you apply for bridge financing, the lender will want to know why the hotel is not ready for permanent financing. Expect them to look at:
- the current loan balance and maturity date
- the payoff amount
- Your renovation budget (if you will use the money to update the property)
- the hotel’s recent operating history
- room revenue
- expenses
If the income dropped, explain why and how you intend to change that during the bridge loan term.
Most importantly, the lender will want to see your exit: how you plan to pay off the bridge loan. This needs to be realistic based on current numbers, not a best-case projection.
If you are refinancing
The lender will compare the loan amount you’re requesting against the hotel’s current value.
Can its room revenue and net operating income cover the new debt payment after taxes, insurance, franchise fees, payroll, and required reserves?
If you want to cash out, the lender will ask why. Pulling equity for another commercial real estate purchase is different from pulling cash because the hotel is short on operating funds. You need to explain how the proceeds will be used.
What do hotel lenders evaluate?
| What lenders want to know | |
|---|---|
| Property value | Is the hotel worth enough to secure the loan even if the business plan takes longer to execute than expected? |
| Operating history | Do your trailing 12-month metrics (actual ADR, RevPAR, and profit-and-loss statements) show that the hotel’s cash flow can safely cover the new debt service? |
| Brand position | Does the hotel’s flag actively drive guest demand through reservation systems? Do the franchise fees and required property improvement plans (PIPs) drain too much cash flow? |
| Management plan | Who is calling the shots daily? If you don’t have deep hospitality experience, have you partnered with a proven third-party management company to handle staffing and pricing? |
| Borrower equity | How much hard cash are you leaving in the deal? Do you have enough post-closing liquid reserves to carry the hotel through slow, seasonal months? |
| Exit strategy | Exactly how do you plan to pay this loan off if interest rates stay flat or the property takes an extra year to stabilize? |
How should you prepare before asking for hotel financing?
There are things you can do to improve your loan request. The goal is to help the lender understand the deal quickly:
1. Produce a simple sources-and-uses summary. This should show:
- the loan amount
- Your cash contribution
- the purchase price
- renovation budget
- closing costs
- reserves
- any debt being paid off
2. Prepare the hotel’s operating documents:
- profit and loss statements
- occupancy reports
- rate history
- tax returns
- brand documents
- current loan information
3. Write a short explanation of the business plan. Explain:
- What you are buying or refinancing
- What needs to change
- What the work will cost
- How the loan will be repaid.
Make sure you have all the papers to reduce back-and-forth during underwriting.
When might private hotel financing be better than bank financing?
Traditional banks are often not the best sources of financing if your hotel project doesn’t fit rigid criteria, such as if it has:
- uneven income
- a limited operating history
- deferred maintenance issues
- renovation issues
Private capital is usually best in these cases. Lenders in this segment can review and approve short-term loans within a few days using a more flexible hospitality-specific criteria that considers both the real estate and hotel operations. That’s why these loans are ideal for when:
- You need to close quickly
- The hotel needs to be renovated first before it can qualify for bank financing
- The current loan is maturing
- The property has upside, but its recent income has been weak
- You need short-term capital before selling or refinancing
- The deal calls for a lender who is comfortable with hospitality collateral
Of course, private capital is more expensive than conventional financing, so before you accept the terms, make sure that you understand the full cost of the loan, including reserve requirements and legal/third-party costs, points, lender fees, interest carry, and extension fees, etc. You also need to have a solid, realistic payoff plan.
Here at Private Capital Investors, we work with commercial real estate borrowers seeking hotel financing in the $1 million to $50 million range. We can review financing requests for:
- acquisitions
- bridge loans
- renovation loans
- construction loans
- refinancing
Tell us more about your hotel project by filling out our loan request form. You can also call us at 972-865-6205.
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