Hotel Construction Loans
Hotel construction loans fund a new hotel from the ground up, or a major renovation, expansion or conversion of an existing one. We structure and underwrite the project, then take it to the hotel construction lenders whose programs fit it, from SBA 504 and bank construction loans to debt fund construction, with preferred equity and mezzanine available to fill the gap, and stay on the deal from the first call to the closing table.
Construction
Construction Loans for Hotels & Hospitality Properties
A hotel construction loan provides the capital to build a new hospitality property from the ground up — or to fund a major renovation, expansion, or conversion of an existing hotel or motel. Funds are typically released in stages (draws) as construction milestones are completed, and the loan is usually interest-only during the build, then repaid or refinanced into permanent financing once the property opens and stabilizes. We help hotel owners and developers compare construction-loan options across our lender network and match each project to the right structure.
Whether you're developing a new flagged hotel, building an independent boutique property, or undertaking a substantial renovation or property-improvement plan (PIP), a construction loan is designed to fund the project through completion. Lenders evaluate the project's budget, plans, timeline, the experience of the development team, the projected (as-completed) value, and the property's expected performance once it opens. Because every project is different, terms vary by lender, project scope, and sponsor profile.
Hotel Construction Lending: Leverage and What Lenders Want to See
Hotel construction lending is sized on total project cost. What the lenders we work with typically consider, which varies by lender, project and sponsor:
| SBA 504 | up to 85% of total project cost |
|---|---|
| Bank construction | typically 60% to 65% of project cost |
| Debt fund construction | typically 65% to 75% of project cost |
With SBA 504, a hotel project is typically structured as a 50% bank first lien, a 35% Certified Development Company debenture and 15% borrower equity, or 20% equity where the borrower is also a new business. Read more about SBA 504 for a hotel.
What Lenders Want to See
- Franchise approval of the project. The franchise does its own due diligence on the market, which is a strong signal to the lender.
- A market feasibility study supporting the project.
- A borrower and guarantor strong enough relative to the size of the project.
- A developer with a track record, and a general contractor who has completed several hotel projects.
Building from the ground up? Our guide to hotel construction financing explains how lenders fund a build and manage cost risk.
What Is a Hotel Construction Loan?
A construction loan is short-term, project-based financing used to cover the costs of building or substantially improving a property — land development, hard costs (materials and labor), and soft costs (architecture, permits, and fees). Rather than funding the full amount up front, the lender disburses money in draws tied to verified construction progress, so interest typically accrues only on the funds drawn to date. Most hotel construction loans are interim financing: they carry the project through the build, after which the borrower repays the loan or refinances into a longer-term permanent loan — a structure often called construction-to-permanent financing.
Unique Characteristics of a Construction Loan
- Short-term, interim financing that lasts through the construction period — commonly 2 to 3 years for a bank construction loan, depending on project size.
- Funds are advanced in draws as milestones are completed and inspected, not as a single lump sum.
- Interest is generally charged only on the amount drawn, and many construction loans are interest-only during the build.
- A bank construction loan typically carries a monthly variable rate, commonly tied to reference rates over SOFR. Debt fund construction loans are priced at a premium, typically 7.5% to 10.0% interest.
- Sizing is often based on a loan-to-cost ratio and the project's as-completed value, with the sponsor contributing equity.
- At completion, the loan is typically repaid or refinanced into permanent financing.
How Does Hotel Construction Loan Financing Work?
After you share your project details — plans, budget, timeline, and your experience — we help you identify lenders whose programs fit the scope. Once a lender is engaged and the loan is approved and closed, funds are released through a draw schedule: as each phase of construction is completed and verified (often by a third-party inspector), the lender advances the next portion of the loan. You generally pay interest only on the funds drawn during the build. When construction is finished and the hotel is operating, the construction loan is paid off or refinanced into permanent financing. Specific structures, timelines, and requirements depend on the lender and the project.
What You Should Look for in a Construction Loan
If a construction loan is right for your project, a few things are worth comparing: the loan-to-cost and loan-to-as-completed-value a lender will consider; the draw process and how quickly inspections and advances are handled; whether the loan can convert to permanent financing (construction-to-perm) to save a second closing; the interest structure during the build; and the lender's experience with hospitality projects specifically. We help you weigh these factors across multiple lenders so you can choose the structure that fits your project and timeline.
Where the construction loan does not cover the whole cost, preferred equity or mezzanine financing can fill the gap behind it. Preferred equity typically receives prioritized dividend repayments of 11% to 14% ahead of common equity; mezzanine is expensive capital, usually 12% to 18% interest. Where a major renovation includes energy-efficiency work, C-PACE can cover part of that cost.
This information is general and educational; it is not a commitment to lend, an approval, or an offer of credit terms. Rates, programs, and terms vary by lender and are subject to application and underwriting.
Questions about Hotel Construction Loans? Speak with a hotel financing expert
Call (866) 994-6835 or complete the form to speak with a hotel financing expert. We will talk through your deal and review your documents at no charge, with no obligation — and you do not need to have it all organized first.