Finance Your Hotel, Motel, or Resort Today

If you’re a hotel, motel, or resort owner or investor, getting high-quality financing can be a challenge, but it’s far from impossible. Hotels are generally seen as riskier than multifamily or industrial assets so that typically means you’ll get lower leverage and face higher debt service requirements.

However, the increased risk of hotels doesn’t mean you can’t get great financing for your property. Common lending options for hotels include non-recourse CMBS loans, SBA loans, bank loans, USDA loans, and hard money loans. 

Markets and seasonal fluctuations matter when it comes to hotel financing, so hospitality properties in high-traffic areas, such as those near theme parks or large vacation destinations may be easier to finance than those in remote areas. 

In this complete guide to hotel financing, we’ll look at the ways you can use hotel loans, eligible property types, your loan options, and the prospective terms for each loan type.

Hotel and hospitality loans can be used for a variety of purposes, including:

• Acquisitions: Acquiring a hotel can be achieved with a CMBS, SBA 7(a), or bank loan. For acquisitions, historical cash flow must be strong, and borrowers should have some hotel management or ownership experience. 

• New Construction: Banks today are offering hotel construction loans, but typically only for borrowers with extremely strong financials and significant hotel ownership experience. SBA 504 loans may be a better option for those who qualify, as they generally offer longer terms and lower interest rates than bank financing. CMBS lenders do not offer construction financing due to the higher risks it entails. 

• Refinancing: CMBS, SBA 7(a), and bank loans can also be used to refinance higher-interest debt, or to recapitalize a property at the end of its original loan term. 

• Major Repairs: Many hotels need general repairs or rehabilitation, particularly for major structural elements such as roofs or HVAC systems. CMBS loans will not directly provide working capital financing for property improvements, but some CMBS lenders are willing to offer cash-out refinances, the proceeds of which can be used to finance repairs. Banks also generally only make loans on a hotel borrower’s real estate, and are often not willing to provide working capital to hotel borrowers, but may provide cash-out refinancing. SBA 7(a) working capital loans can also be used in these situations. 

• FF&E: FF&E, or furniture, fixtures, and equipment, involve upgrading specific parts of a hotel property, including lighting, room decor, and appliances, as well as potentially upgrading HVAC systems and other smaller property elements. They do not generally involve major exterior upgrades. FF&E improvements can generally be financed the same way as major repairs, with either SBA 7(a) financing or cash-out refinancing from banks or CMBS lenders. 

Hotel loans can finance a variety of property types, including:

• Flagged Hotels and Motels: Flagged hotels and motels include popular limited-service brands such as Motel 6, Super 8, and Red Roof Inn franchises, as well as slightly higher-end hybrid limited-service flagged hotels, such as Best Westerns and Holiday Inns. 

• Large Branded Hotels: Higher-end full-service hotels include brands like Hilton, Hilton Embassy Suites, or Radisson franchises. These hotels may be considered mixed-use, as they sometimes rent commercial space to restaurants and boutiques located within the hotel. 

• Boutique Hotels: Un-flagged, unbranded boutique hotels may be slightly harder to finance than well-known brands, but this doesn’t mean that they can’t achieve reasonably good financing. 

• Luxury Hotels and Resorts: Financing luxury resorts can be particularly challenging due to the incredibly high upkeep costs and operational expenditures, as well as seasonal cash-flow fluctuations. However, like for other types of hospitality assets, these challenges can be offset by strong historical cash flow, as well as name brand recognition. 

As we previously mentioned, the most common types of hotel financing include CMBS, bank loans, SBA loans, and hard money loans. Private equity lending is also available, but generally only for the largest properties. 

CMBS Loans: These are ideal for many hotel financing situations, as they’re generally non-recourse and borrower net worth requirements are low, typically set at only 25% of the loan amount.

Bank Loans: Banks can offer excellent financing in some situations as well, particularly for situations in which borrowers cannot be approved for CMBS.

SBA Loans: For owner-occupied hotels, SBA (7)(a) loans can be ideal for acquisitions and refinance, while the SBA 504 loan program is ideal for the construction of owner-occupied hospitality properties. 

USDA Loans: For hotels or motels in rural areas, the USDA also offers niche financing at incredible rates. For hotels in distressed situations, or for borrowers with credit or legal issues, hard money financing can be a useful, albeit expensive option.

Hard Money/Bridge Loans: Bridge loans, which can be provided by banks or hard money lenders, are typically the shortest term loans and are intended to be used as a “bridge” before refinancing to lower-interest bank, CMBS, or SBA debt. 

Below, we’ll review the standard terms for each of these loans.

CMBS loans can be ideal for hotel and hospitality properties, as they are generally non-recourse with standard “bad-boy” carve-outs, and typically offer the lowest rates on the market. CMBS lenders generally prefer hotels that are owned by one entity and managed by a separate management company. It should be noted that CMBS loans are not serviced by the original lender, which can occasionally lead to customer service issues. 

General CMBS loan terms for hospitality properties include: 

• Loan Size: $2 million minimum to $1 billion+ 

• Loan Terms:

  • 5, 7, or 10-year fixed-rate loan terms.

  • Lower, floating-rate terms may be available in rare situations.

  • Partial or full-term interest-only (I/O) loans may also be available for highly qualified borrowers with lower maximum LTV and higher DSCR requirements. 

• Leverage: 

  • Flagged/branded properties: 75% maximum LTV/1.40x DSCR

  • Non-flagged/unbranded properties: 70% maximum LTV/1.50x DSCR

• Amortizations: 25-30 year amortizations generally available 

• Eligible Properties:

  • Markets: Properties generally must be in strong markets, such as major MSAs or areas close to tourist attractions, like beaches or theme parks. 

  • Financials: Properties generally must have strong historical cash flow; lenders generally want to see at least 3 years of audited financials. 

  • Management: Hotel management needs to be highly experienced. Many CMBS lenders prefer outside management companies and may be hesitant to lend to self-managed or fully “owner-occupied” properties. 

  • Brands: Flagged and unflagged (non-branded) properties eligible. 

  • Service Orientation: Both limited-service hotels and motels, as well as full-service hotels and resorts, are generally eligible. 

• Interest Rates: Typically based on leverage and debt service ratios.

  • Non-flagged/unbranded properties: Typically start at 180 bps over U.S. Treasury rates

  • Flagged/branded properties: Typically start at 150 bps over U.S. Treasury rates

• Loan Assumption:

  • Generally assumable with servicer approval and 1% fee.

  • Assuming borrower must have similar management experience (for owner-occupied properties), and minimum 25% net worth of the entire loan amount, with 5-10% liquidity. 

• Prepayment Penalties: Defeasance or yield maintenance

• Recourse: Typically non-recourse with standard bad-boy carveouts

• Third-Party Reports:

  • Full Property Appraisal

  • Phase I Environmental Assessment

  • Project Capital Needs Assessment (PCNA)

  • ALTA Land Survey

Banks are often the first option that hotel owners look toward for financing, but that doesn’t mean they’re the best choice. Since they generally keep loans on their balance sheets and do not receive any government guarantees, banks tend to be more conservative than CMBS and SBA lenders when it comes to hotel financing, which they rightly see as riskier than lending to multifamily or industrial borrowers. However, due to the fact that most banks are balance sheet lenders, they do have flexibility in rates and terms that other lenders may not. 

Typical hotel bank loans terms include: 

• Size: $1 million to $50 million+ (lower and amounts available in certain circumstances) 

• Maximum LTV: 65-70% maximum, often lower  

• DSCR: Minimum 1.40x 

• Term: Up to 30 years, most loans between 5-10 years 

• Amortization: Up to 30 years

• Interest Rates: Fixed and variable rates available, interest-only (I/O) options available

SBA 7(a) loans can be an ideal option for financing or refinancing owner-occupied hotel and hospitality properties. Unlike CMBS and most bank loans, SBA 7(a) loans can provide working capital for property renovations, marketing, FF&E (furniture, fixtures, and equipment), or other operating expenses. A borrower may take out multiple SBA loans for different purposes, provided they do not exceed the $5 million limit. SBA 7(a) loans are also often used to refinance higher-interest bank or hard money loans.

Technically, a borrower must have looked for financing elsewhere to apply for an SBA loan and must fit the SBA’s size requirements, which vary by industry. In addition, a borrowing business cannot be involved in gambling or any federally illegal activities, so casino hotels or hotels with marijuana dispensaries are out of the question.  

• Size: Up to $5 million

• Loan Term: Up to 10 years for working capital, up to 25 years for real estate 

• Rates: Rates generally range between 4.5% and 6.5% depending on loan size and maturity 

• Loan Use: Purchasing real estate, working capital, equipment, purchasing a business or franchise, refinancing higher-interest debt

• Credit Score Requirement: Generally 680+

• Down Payment: 10-20% of the total loan amount. 

• Collateral: Generally required for non-real estate loans, otherwise real estate functions as the collateral. 

• Approval Timeline: Some SBA 7(a) loans can be approved in as little as 7 days, while most are approved within 45 days of application. 

SBA 504 loans allow for the purchase of real estate, heavy equipment, and other fixed assets for small businesses, including hotels. In contrast to SBA 7(a) loans, however, the SBA 504 Loan Program can be used for ground-up construction projects, pursuant to some additional due diligence. Also, unlike the SBA 7(a) program, SBA 504 loans cannot be used for working capital. 

These loans are issued by Community Development Corporations (CDCs), non-profit community funding institutions that are regulated and certified by the SBA, in partnership with SBA-certified lenders, including banks and credit unions.

The CDC provides the majority of the loan with an SBA guarantee, and the lender provides the remaining portion of the loan with a similar guarantee from the SBA. Qualified borrowers may combine an SBA 7(a) loan for working capital for expenses like marketing and operations, with an SBA 504 loan in order to fully fund the construction and initial operation of a hotel, motel, or resort. 

• Size: Up to $5 million

• Loan Term: 20 years for land and buildings

• Rates: Vary, current maximum rates for the CDC portion of an SBA 504 loan are between 2.08 and 2.18% above the relevant U.S. Treasury Index (5-year index is used for 10-year loans, while the 10-year index is used for 20-year loans). 

• Loan Use: Real estate, land, and other fixed assets such as heavy equipment. No working capital is allowed. 

• Credit Score: Lenders typically require scores of 680+, but there is no official minimum. 

• Down Payments: Minimum 10% down payment required for most borrowers 

• Approval Timeline: Loans for land or real estate are generally approved in 65 to 75, while heavy equipment loans often close within 45 days. 

If you’re looking to finance a hotel, motel, or resort in a rural area, the USDA Business and Industry Guaranteed Loan (B&I) program could be the perfect fit. The USDA B&I program is particularly versatile, allowing for the acquisition, construction, and refinancing of hotels and other hospitality properties.

The program is open to a wide variety of businesses, so hotels combined with small theme parks or other attractions may qualify, provided that they’re likely to bring new employment opportunities to local residents. 

• Loan Amount: $1 million to $10 million

• Loan Purpose: Acquisitions, refinances, or construction of hotels, motels, resorts, and other types of small businesses. Refinances can be used to repay higher-interest debt or to finance hotel or motel franchise PIPs (property improvement plans). 

• Terms: 25-30 years 

• Rates: Fixed and variable-rate loans are available 

• Amortization: Loans are generally fully-amortizing 

• DSCR: 1.25x minimum 

• LTV: 70-80% maximum, set by individual state’s USDA B&I Office

• Reserves: None required 

• Prepayment Penalties: Vary, typically limited to 3-5 years after origination 

• Borrower Requirements:  

  • Borrowers may be corporations, partnerships, individuals, public bodies, cooperatives, or other legal entities, including profits and non-profits.

  • Indian tribes on a federal or state reservation and federally recognized tribal groups are also eligible. 

  • Individuals must be citizens of the United States or U.S. legal permanent residents. 

  • Corporations or other private institutional borrowers need to be, at minimum, 51% owned by either U.S. citizens or U.S. permanent legal residents. 

• Project Eligibility: Funded projects must: 

  • Be located in rural areas, defined as cities or towns with less than 50,000 people, as well as the adjacent areas of these cities or towns. 

  • Provide employment to local residents.  

  • Improve the economic or environmental climate.

  • Promote the conservation, development, and use of water for aquaculture; or reduce reliance on nonrenewable energy resources by encouraging the development and construction of solar energy systems and other renewable energy systems.

• Hotel Eligibility: Hotels must not include golf courses, casinos, gambling facilities, or racetracks. Ownership in the hotel by military or government employees need to be under 20%.

• Tangible Equity for Purchases: Proforma 20% to 25% for hotels, depending on individual state. 

• Tangible Equity for Refinances: 10%

• USDA Guarantee Fee: Varies with the loan amount.

  • Loans of up to 5 million: 80% guarantee, fee: 3 points on 80% of the loan.

  • Loans of 5 to 7 million: 70% guarantee, fee: 3 points on 70% of the loan.

  • Loans from 7 to 10 million: 60% guarantee, fee: 3 points on 60% of the loan.

• Origination/Closing Costs: Generally between $13,500 to $20,000, including:

  • Lender Processing Fee: $1,000 to $4,000.

  • Appraisal and Property Review: $4,000 to $6,000.

  • Phase I Environmental Assessment (ESA): $2,000.

  • Survey: $2,000 to $3,000, not needed if recent copy available. 

  • Lender Legal: $4,000 to $7,000 if outside attorney is used.  

  • Miscellaneous Fees: Generally $500 to $1,000, including: 

    • Credit reports

    • Tax services

    • UCC search

    • Other documentation

Hard money loans have a well-deserved reputation for being expensive, but they can still be a great option for borrowers who cannot qualify for CMBS, SBA, bank, or USDA financing. This may be due to credit or legal issues, low borrower net worth, or due to the fact that a property may not be fully stabilized.

• Size: $500k to $5 million+ 

• Loan Purpose: Acquisitions, construction, refinancing 

• Maximum LTV: 55-75%+

• Loan Term: 6-36 months 

• Interest Rates: Generally 12-20%, fixed and variable rates available

• Interest-only (I/O): Interest-only options available for some loans

• Origination Fee: 3-5%

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