Hotel construction loans: how a new build gets financed
A hotel construction loan pays for the build in stages and converts to a long-term loan once the hotel opens. Lenders size it on a budget they test against the brand’s own cost estimate and on projections that have to show the hotel can cover its payment within a set time. For owner-operators the usual paths are SBA 504 and SBA 7(a).
The budget
Start with the brand’s Franchise Disclosure Document. Item 7 is the franchisor’s estimate of what it costs to open one of its hotels, from land and construction to furniture, opening inventory and working capital, as a low-to-high range for a prototype with a stated room count. A lender compares your contractor’s budget with that range and asks about anything far outside it. The franchise cost table shows the Item 7 range for each brand we cover, with the filing linked.
A complete budget has hard costs (site work, building, FF&E), soft costs (architect, engineering, permits, impact fees, legal, insurance during construction), the franchise application and initial fees, pre-opening costs, interest during construction and a contingency.
Projections instead of history
A new hotel has no trailing twelve months, so the lender relies on a feasibility study and your projections. For SBA loans based on projections, SOP 50 10 8.1 asks for projected debt service coverage of at least 1.15x within two years of funding, or for construction projects, within two years of the end of construction. Lenders look hard at the ramp-up: how fast occupancy and rate can build in the first years.
SBA 504 for a new build
504 suits construction well because it pays for land, building and equipment and gives a fixed rate on the CDC share for up to 25 years. A hotel project needs at least 15% from the owner, or 20% if the business is new, with the bank’s first mortgage at 50% and the CDC’s debenture covering the rest, up to $5,000,000. See SBA 504 for hotels.
SBA 7(a) for a new build
7(a) can fund construction up to the $5,000,000 loan cap, with a real estate term of up to 25 years plus the construction period. A new hotel counts as a start-up, so SBA requires at least 10% of total project cost as equity. The lender pays the money out in stages as the work is done. See SBA 7(a) for hotels.
Both SBA programs require
- Every owner a U.S. citizen or U.S. national living in the U.S.
- A brand on SBA’s Franchise Directory, if the hotel will be franchised.
- More than half of revenue projected from guests staying 30 days or less.
Draws and inspections
Construction money is released in draws. Before each draw, an inspector or the lender confirms the work is done, and the contractor provides lien waivers. Plan your cash around the gap between paying subcontractors and receiving the draw.
Put your projected first full year into the hotel loan calculator to see the loan it supports, and send the project to Janover Capital once you have a budget and a franchise application in hand.
Questions people ask
How much equity does a hotel construction loan need?
With SBA 504, at least 15% of the project for an existing business and 20% for a new business, because hotels are special-purpose property. With SBA 7(a), SOP 50 10 8.1 treats a business in operation one year or less as a start-up and requires at least 10% of total project cost. Banks lending without SBA usually want more.
How is construction money paid out?
In draws as the work progresses, after the lender or its inspector confirms each stage and the contractor provides lien waivers. Final lien waivers from the contractor and every subcontractor come before the last draw.