Top Options for Hotel Financing on a New Construction

Article Summary:

• Hotel financing for a new construction can be tough to get, but there are options.
• Hotel construction loans, bridge loans, SBA loans, and mezzanine financing can cover costs.
• Compare lenders and review terms and rates before taking on any financing.

How to Get Hotel Financing for New Construction

If you’re a hotel business veteran, at some point you might want to start your own place and build a new hotel from the ground up. Doing so requires a significant investment. According to the website Little Hotelier, the average cost to build a hotel can range from $7 million for a motel up to $60+ million for a luxury 5-star hotel. So, if you want to pursue hotel development, you likely need to look into options for hotel financing for new construction to bring your vision to life. In this guide, learn more about construction lending and the different options available.

What is Hotel Financing for New Construction?

Hotel financing for new construction refers to the loan options available to business owners and developers who want to build a hotel. These loan products provide the funding to cover the various stages of hotel development and come in different forms. For example, they could be bank loans, SBA loans, or business capital funding from an online or alternative lender.

Loan amounts, interest rates, and loan terms depend on the provider. However, borrowers can look into various options for hotel financing for new construction.

Types of Hotel Construction Financing

When you’re building something from scratch, there’s a lot at stake. You have many variables to deal with and a timeline that can be long and unpredictable. According to Little Hotelier, it can take about three years to build a hotel.

Lenders want a sure bet when deciding to give you money. Given these factors, getting approved for hotel financing for a new construction can be challenging. It’s a good idea to have a solid business plan, and if possible, show your track record in the hospitality industry.

When it’s time to apply for hotel construction loans, you can find a type of loan and lender that works for your business needs.

Hotel Construction Loans

When you get hotel financing for a new construction, the amount you borrow is typically disbursed in stages. You can receive a “draw” that correlates with different phases of the hotel construction project. This can be a good short-term financing solution to help you get your hotel off the ground.

You generally pay interest only when taking on hotel financing for new construction during the building phase, which can be several years.

Lenders may have different minimum loan amounts and amortization schedules but typically look at:

• Initial loan deposit
• The loan-to-value (LTV)
• Debt service coverage ratio (DSCR)
• Type of hotel (flagged hotel like Holiday Inn or Sheraton or independent)

After the project is done, you can look into construction takeout financing. This essentially replaces your existing short-term loan with a long-term loan.

Bridge Loans

Bridge financing or a bridge construction loan is a type of funding that allows you to cover potential gaps. So, if you’re starting a hotel construction project but waiting to get approved for longer-term financing, this option can “bridge the gap."

Since the purpose of bridge loans is to cover a short period of time, there are also shorter repayment terms. You can generally expect repayment terms of six months to three years.

Small Business Administration (SBA) Loans

Hotel owners can get financial support from the Small Business Administration (SBA), which provides numerous types of loans.

• SBA 504 loan. The SBA 504 loan can help fund your hotel construction project and comes with a maximum loan amount of $5.5 million. According to SBA.gov, the 504 loan is available for the purchase or construction of land and new facilities (among other things.) It’s important to note that you can’t use this type of loan for working capital or refinancing debt. But it’s a way to secure hotel financing for new construction.
• SBA 7(a) loan. The 7(a) loan is popular and versatile and has a maximum loan amount of $5 million. The funds can help business owners acquire, improve, or refinance real estate. Additionally, the loan can go toward your FF&E, or furniture, fixtures, and equipment.

To get an SBA loan, you may have to jump through some hoops and meet certain eligibility requirements. The advantage is that SBA loans are guaranteed by the federal agency, which minimizes the risk for lenders.

Mezzanine Financing

A mezzanine loan is a mix of debt and equity financing. If you default on the loan, mezzanine financing gives lenders the opportunity to turn debt into an equity interest in the company.

You can get more funds with mezzanine financing, on top of hotel construction loans to help keep the project going. Be aware that this type of hotel financing for new construction comes with much higher interest rates than other types of loans.

Final Thoughts

The hotel industry is on a growth trajectory. To capitalize on that growth, you can build your hotel with a lot of planning and the right type of financing. You can choose from different types of hotel financing for new construction, based on your needs and where you’re at in the process. Getting started now can help you get travelers in the door later.

FAQs about Hotel Financing for New Construction

Building a hotel from start to finish requires a lot of time, patience, and capital. Here are some answers to frequently asked questions about hotel financing for new construction.

What Credit Score Do You Need to Get a Construction Loan?

To qualify for hotel construction loans, you typically need a minimum credit score of 680. However, this number depends on the lender and may go up to 720 or higher.

What is the Minimum Down Payment for a Hotel?

The minimum down payment for a hotel is typically between 10% and 30%. The exact amount will depend on the lender and the loan program.

Is It Cheaper to Buy or Build a Hotel?

Buying an existing hotel is typically cheaper and more cost-effective than building a new hotel. You may have more financing options when buying a hotel. On the other hand, the underwriting for construction loans for commercial real estate can make it harder to get approved.

How Much Money Do You Need to Build a Hotel?

The cost of building a new hotel property depends on the location and type of hotel. However, the website Little Hotelier estimates that the average cost is around $7 million for motels and up to $60 million for a luxury hotel property.

Can You Get a Loan to Build a Hotel?

Hotel construction loans can help you get the type of financing you need to build a hotel from start to finish. Look at the minimum and maximum loan amounts, repayment terms, interest rates, and eligibility requirements.

What Type of Business Financing Can I Get for My Hotel?

If you have a hotel business and need some financial assistance, you can look into business cash flow loans and business loans based on revenue. For those looking to build a hotel, check out hotel financing for new construction. Options include SBA loans, bridge loans, hotel construction loans, and mezzanine financing.

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