Answers ~7 min read Updated
Hotel Financing: How Banks Underwrite a Hotel Loan
Hotels are usually financed with SBA 504 or 7(a) loans with 15% to 20% down, or bank loans with 30% or more. Lenders look at occupancy, ADR, RevPAR, the franchise agreement, and any required renovation plan.
Most smaller hotels are financed with SBA 504 or 7(a) loans with 15% to 20% down, or with bank loans that need 30% or more. Lenders focus on the hotel's occupancy, average daily rate (ADR), and revenue per available room (RevPAR), the strength of the franchise brand, any required renovations, and your hotel management experience.
Hotels are special-purpose properties and their income can change quickly with the economy. So lenders ask for more cushion than they would on an office or warehouse.
Your financing options
| Option | Typical down payment | Best for |
|---|---|---|
| SBA 504 | 15% (20% for a new business) | Buying or building, with a long fixed rate on the CDC portion |
| SBA 7(a) | Often 10% to 20% | Buying an operating hotel, with renovations and working capital in one loan |
| Conventional bank loan | Often 30% to 40% | Experienced owners with strong flagged hotels |
| CMBS and debt funds | Varies | Larger hotels and refinances |
The numbers lenders read first
- Occupancy: the share of rooms sold each night.
- ADR (average daily rate): room revenue ÷ rooms sold.
- RevPAR (revenue per available room): room revenue ÷ all available rooms. It combines occupancy and rate, and it's the number lenders compare against nearby competitors.
- Net operating income after a reserve for furniture and equipment replacement, often about 4% of revenue.
- DSCR, often 1.30 to 1.40 or higher for hotels.
The franchise and the PIP
If the hotel is flagged with a brand like Hilton, Marriott, or IHG, the lender will review:
- The franchise agreement. Its term should run well past the loan, or the brand should confirm in writing how a transfer will work.
- The Property Improvement Plan (PIP). When a hotel changes hands, the brand usually requires renovations. A PIP can cost from thousands to millions of dollars. Lenders want the full cost in the budget and paid for at closing or held in reserve.
Independent hotels can get financed too, but lenders usually want more down and more history.
Common reasons hotel loans stall
- A PIP that's bigger than the buyer budgeted
- A franchise agreement that ends soon
- Revenue that depends on one event, contract, or season
- A buyer with no hotel management experience and no professional manager in place
Run the hotel's cash flow through the How Much Can I Borrow? calculator with a 1.35 DSCR to see a realistic loan size. For SBA program details, read SBA 504 loan requirements.
Common questions
How much down payment do I need to buy a hotel?
With an SBA 504 loan, usually 15%, or 20% if your business is new, because a hotel is a special-purpose property. SBA 7(a) loans are often similar. Conventional bank loans commonly need 30% to 40% down.
Can I get an SBA loan for a hotel?
Yes. Hotels and motels are eligible for SBA 7(a) and 504 loans because they are operating businesses, not passive real estate. SBA loans are one of the most common ways smaller hotels are financed.
What is a PIP in hotel financing?
A Property Improvement Plan. When a hotel is sold or a franchise is renewed, the brand often requires renovations to meet its current standards. The lender will want the PIP cost included in the budget and financed or funded at closing.
What DSCR do lenders require for a hotel loan?
Usually higher than for other businesses, often 1.30 to 1.40 or more, because hotel income can swing with the economy and the seasons.