Hotel development and ownership create opportunities for entrepreneurs to get strong returns in the long run. But securing finance in the hotel sector is much more complex than obtaining other forms of commercial real estate (CRE) credit. When securing financing, hotel owners/ developers like yourself usually focus on interest rates and repayment terms.
However, you should remember that hotel loans are hybrid credit solutions that include real estate as well as business operations. When underwriting hotel loans, lenders consider projected cash flows, brand strength, management capability, and seasonality in addition to the property. That is why you must understand the nuances of hotel financing by partnering with a seasoned lender who understands the nuances of the hospitality sector.
AVANA Capital, as a seasoned CRE lender, has a deep understanding of the complex hospitality sector. We have been helping entrepreneurs become successful hotel owners/developers by offering tailored credit products with speed and transparency. This blog will cover how AVANA Capital can help you in acquiring, repositioning, or refinancing by securing the right financing options by meeting the lending criteria set by leading lenders.
Understanding Your Financing Options
Lenders fund the acquisition, repositioning, or refinancing of hotels by offering a variety of loan products. These hotel loans differ from each other in several aspects – cost, return, risk, and flexibility. Hence, it becomes essential for you to understand and compare various financing options provided by lenders.
Senior Mortgage Loans: Hoteliers opt for senior mortgage loans to secure the lowest interest rates in lending options. This form of hotel loan occupies the first lien position in the capital structure and is typically secured by the hotel’s real estate. Lenders usually offer senior mortgage loans to stabilized hotels with proven cash flow. You can secure this hotel loan for the construction, acquisition, or refinancing of hotel property.
Mezzanine Debt or Preferred Equity: Mezzanine debt or preferred equity fills the gap when the senior lender does not finance the required amount fully. This hotel loan helps you reduce the equity you bring to the table. But the financing option remains subordinate to the senior loan and ranks above equities. Also, it usually carries a higher rate of interest. You can consider this financing option for funding large hotel projects or acquiring properties that traditional lending solutions cannot fund.
Construction and Bridge Loans: Both construction and commercial real estate bridge loans meet your short-term funding needs. You can secure construction loans for the development of a new hotel or the renovation of an existing hotel. On the other hand, bridge loans help you finance properties awaiting permanent financing or reposition underperforming hotels.
SBA-Backed and Government Programs: You can get the loans and assistance provided by the Small Business Administration (SBA) when your hotel is considered a small business. SBA loans enable you to expand your business while preserving your working capital. You can consider this financing option for construction, acquisition, renovation, partner buyout, and 1031 exchange purchasing. However, you cannot utilize the loan proceeds to refinance/repay debt and meet working capital needs.
Key Criteria Lenders Evaluate
The specialized nature of hotel financing makes lenders assess risk using different lenses. Seasoned lenders always assess the long-term viability of hotel projects by taking a comprehensive approach to underwriting. We are discussing four key areas hospitality lenders commonly focus on.
Property Type and Brand Affiliation: Full-service, limited-service, extended-stay, or boutique properties have distinct operational demands and revenue models. Hence, lenders evaluate the type of hotel you are developing or acquiring when assessing risk. They enhance financing terms significantly if your hotel leverages the brand standards, marketing support, and booking power of a leading brand. But they offer better terms to an independent hotel development project with stronger borrower experience and loan market validation.
Borrower Track Record and Sponsor Equity: Experience plays a crucial role in hospitality lending transactions. Lenders prefer borrowers or sponsor groups with a proven history of owning, developing, or operating similar hotel assets. Hence, you must convince the lender that the project will be executed and managed efficiently by building a strong resume. At the same time, you should reduce the lender’s exposure by demonstrating your commitment by bringing sponsor equity to the table.
Location, Market Demand, and RevPAR Trends: When reviewing a hotel loan request, lenders consider the demand and trends that drive the local market. They assess risk by evaluating important factors like tourism, business travel, conventions, and seasonality. They assess credit risks using RevPAR (Revenue per Available Room) as a critical benchmark. RevPAR helps them assess market strength and visualize competition by combining occupancy and average daily rate (ADR).
Debt Service Coverage Ratio (DSCR) and Other Financial Metrics: When evaluating a hotel loan request, lenders use several metrics to determine if the hotel will generate enough cash flow to serve the loan. For instance, the debt service coverage ratio (DSCR), as the primary metric, helps them calculate the ratio of net operating income (NOI) to annual debt payments. Likewise, they consider loan-to-cost (LTC), loan-to-value (LTV), and similar financial indicators when making underwriting decisions. Liquidity (free cash flow) is another measure lenders use in evaluating projects, as this is the safety net that can be relied upon during times of uncertainty.
The Application and Underwriting Process
Once you finalize the right hospitality loan, you have to navigate the application and underwriting processes. As lenders assess both real estate and business risks, these processes become more complex for borrowers.
Pre‑application: Before engaging with a hospitality lender, you must assemble a comprehensive loan package. This pre-application will demonstrate professionalism as well as accelerate the review process. It is always important to collect and organize documents like historical financial statements, detailed pro forma for projected performance, development cost and timeline, project summary, and franchise agreements.
Term Sheet and Rate Negotiation: After reviewing the initial documents, the lender will issue a term sheet. Despite being a non-binding document, the term sheet outlines key loan details like loan amount, interest rate, amortization schedule, required reserves and covenants, closing timeline, and fees. You can use the term sheet as a smart tool to negotiate with lenders for more favorable terms and flexibility on loan structure.
Due Diligence: Once the term sheet is signed, the deal will enter the due diligence stage. During this process, lenders identify potential risks by validating the assumptions used in underwriting. They will assess risks through the appraisal of the hotel/project site, property condition assessment, environmental reports, and franchise approval documents. You can navigate the due diligence stage smoothly by acting as a responsive borrower and sharing organized documentation.
Inter‑creditor Agreements: The senior lender will require a formal inter-creditor agreement when you opt for mezzanine financing or preferred equity. The agreement clearly outlines the rights and responsibilities of participating lenders in case of default or reconstruction. You can accelerate the complex and time-consuming process by involving an experienced legal counsel and a seasoned CRE lender like AVANA Capital.
Structuring the Right Hotel Loan
The structure of the desired hotel loan will directly impact many things, ranging from cash flow to exit strategy. That is why you must ensure that the loan structure stays aligned with the project’s lifecycle, operational goals, and risk profile. You can make the loan succeed by focusing on these structural elements.
Amortization Schedules and Interest‑Only Periods: The amortization schedule determines when and how you will repay the principal amount. Your early-stage cash flow will be impacted if the amortization schedule is too aggressive. Hence, you must maintain a positive cash flow by opting for a flexible repayment plan. The plan should consider interest-free periods and adjust the amortization schedule once your hotel is stabilized.
Prepayment Options and Yield Maintenance: You cannot sell or refinance the hotel project before the loan matures when there is no prepayment flexibility. Hence, you should check if the lender supports an open prepayment window after a specific lockout period or requires you to pay step-down prepayment penalties. However, you must ask specific questions to know if the lender protects their expected return by imposing yield maintenance or defeasance penalties.
Equity Kicker and Warrant Structures: Lenders usually require equity kickers as a profit participation mechanism in case of non-recourse or higher-leverage hotel loans. The equity kicker increases loan proceeds and dilutes investor returns. You must check if the equity kicker includes options like warrants or rights to share sale/refinance proceeds and preferred returns in case the proceeds exceed certain thresholds.
Covenants and Compliance: As ongoing borrower obligations, covenants protect the lender by detecting signs of financial stress early. Lenders often impose penalties or trigger defaults when you breach common hotel loan covenants like minimum debt yield thresholds, restrictions on loan distribution or addition, and various reporting requirements.
Common Pitfalls and How to Avoid Them
There are many instances when the most promising hotel projects failed due to proper financial planning and risk management. You must make your dream hotel project successful by avoiding these simple mistakes when securing credit.
Over‑leveraging vs. Under‑capitalizing: Hotel owners and developers feel tempted to push leverage when market conditions are strong. But minor dips in occupancy make them vulnerable when the debt level is high. Likewise, it becomes difficult for them to accelerate construction and respond to changes if the capital is too low. Hence, you must avoid this pitfall by using realistic projections, considering stress scenarios, and prioritizing long-term stability over short-term returns.
Misaligned Exit Strategies: Often, borrowers face balloon payment or refinancing pressure, and the hotel project is stabilized when the loan maturity, property ramp-up timeline, and investor expectations do not align. You should avoid forced sales and unfavorable refinancing terms by keeping exit strategies aligned. In addition to aligning loan terms to your business plan, you must plan exits conservatively when the market conditions are volatile.
Ignoring Seasonal Cash‑Flow Variability: You must not forget that hotels are not 12-month businesses. Monthly occupancy and revenue will vary based on a slew of factors, including weather, tourism, and local events. Hence, you should not ignore month-to-month variability when projecting annual cash flows. It is always important to create cash flow models by month and cover lean seasons by maintaining working capital reserves.
Failing to Build Contingency Reserves: Hotel project timelines are often delayed due to constraints related to costs and resources. Hence, you need to ensure that emergency capital needs do not halt the project. That is why you must consider soft cost escalations and build a contingency reserve. At the same time, it is important to confirm lender requirements related to funded and unfunded reserves.
Why Partner with AVANA Capital?
Hotel financing is not only about getting the right loan on favorable terms. The complexity of hotel loans makes it essential for you to get the loan delivered by a partner who understands your business and shares deep industry insights. AVANA Capital, as a seasoned hospitality lender, helps hotel developers and owners like you succeed by providing tailored financing options like construction loans, bridge loans, and hospitality loans.
Fintech‑driven Speed and Underwriting Precision
We understand timing can make or break a deal in hotel lending. Our proprietary fintech platforms accelerate and streamline the whole process without cutting corners. We proceed quickly and confidently by making faster credit decisions, keeping real-time communication transparent, and making documentation workflows efficient.
Deep Hospitality Industry Expertise
AVANA Capital has over two decades of experience and expertise in helping many hotel owners and developers succeed. Our team makes informed decisions by understanding seasonal demand cycles, RevPAR modeling, franchise relationships, and repositioning strategies. Our experts help you understand the nuances of hotel ramp-up, stabilization, and exit planning.
Customized Loan Solutions for Every Stage of Hotel Development
We meet the funding needs of hotel owners and developers by offering tailored credit solutions like hospitality loans, construction loans, and commercial bridge loans. We structure each loan product according to your business plan, capital stack, and timeline. You can trust us to get structured loan products for acquisition, construction, repositioning, and refinancing purposes.
Let AVANA Capital Turn Your Hotel Vision into Reality
In the high-stakes world of hotel development, having the right financial partner can mean the difference between delays and doors open. At AVANA Capital, we go beyond just providing capital; we bring decades of hospitality lending expertise, tech-driven speed, and tailored loan structures designed to align with your unique project goals and timelines.
Whether you’re acquiring a boutique gem, repositioning a flagging property, or building a full-service hotel from the ground up, our team is ready to support your success with flexible, competitive, and transparent financing solutions.
Don’t let complexity stall your vision. Contact AVANA Capital today to structure your next hospitality loan with confidence and clarity. Let’s build your future room by room.
This article was originally published on avanacapital.com. Accessed on July 31, 2025.
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