How lenders size a hotel loan: RevPAR, NOI and DSCR

A hotel lender sizes your loan from the income the hotel already earns. It works out net operating income (NOI), divides by the debt service coverage ratio (DSCR) it requires to find the largest payment it will accept, turns that payment into a loan amount, and then caps the result at a share of the price or appraised value. You get the smaller of the two.

Step 1: revenue from RevPAR

RevPAR (revenue per available room) is ADR times occupancy. A motel selling rooms at $92 on average and filling 64% of them has RevPAR of $58.88. Multiply by the rooms and 365 nights for rooms revenue: 80 rooms gives $1,719,296. Add other income (vending, pet fees, a meeting room) to get total revenue.

Lenders use the trailing twelve months, and they check them against tax returns and, for branded hotels, the STR report.

Step 2: net operating income

From total revenue, subtract:

• departmental and operating costs: payroll, housekeeping supplies, utilities, repairs, credit card fees, software
• franchise fees: royalty, marketing, reservation and loyalty fees, from the brand’s FDD
• a management fee, even for owner-operators
• property taxes and insurance
• a reserve for replacing furniture, fixtures and equipment (FF&E)

What remains is NOI. Mortgage payments, depreciation and income taxes come after this line.

Step 3: debt service coverage

DSCR is NOI divided by the year’s loan payments. If NOI is $420,000 and the payments are $330,000, DSCR is 1.27. The lender sets a minimum. For an SBA 7(a) loan to buy a hotel, SOP 50 10 8.1 requires 1.25x; most other SBA loans need 1.15x. Banks lending without SBA set their own minimum and commonly ask for more on hotels because the income can drop quickly in a downturn.

Step 4: turn the payment into a loan

Divide NOI by the minimum DSCR to get the largest payment allowed: $420,000 / 1.25 = $336,000 a year, or $28,000 a month. At 10.00% over 25 years (the SBA 7(a) cap in October 2026), $28,000 a month carries a loan of about $3,080,000.

Then the lender checks the other limit, the loan-to-value or loan-to-cost cap. If the price is $3,200,000 and the lender goes to 90%, the cap is $2,880,000. The smaller number wins, so this loan is $2,880,000, and the buyer’s down payment, not the hotel’s income, is what limits it.

Why the bank’s number is smaller than yours

• Trailing income, not pro forma. Your plan to raise ADR doesn’t count until it shows up in the books.
• Imputed management fee and reserve, even if you’ll never pay them as line items.
• Stressed rate. Some lenders size a variable-rate loan at a rate above today’s.
• Lower of price or appraisal.
• Global cash flow. For SBA and most banks, your personal debts and other businesses get added to the test.

Run your own numbers in the hotel loan calculator, which follows these steps and shows breakeven occupancy too.