Hotel Development Finance

A complete guide to gaining the development finance to build a hotel: the cost, the lenders’ requirements and how a broker can help you shape your business plans.

Development finance for a hotel uses the same core structure as any other scheme: staged drawdowns against build costs, repaid on completion. What changes is the underwriting — lenders are funding the operator and the exit as much as the building, and the case has to be built accordingly.

How hotel development finance works

The product family is the one used across development lending: senior development finance for the build, with mezzanine finance, bridging for the site acquisition or equity layered in where the scheme calls for it. Hotel projects tend to be larger, so the capital stack is often a blend rather than a single facility.

Funds are released in tranches as the build progresses, signed off by a monitoring surveyor at each stage. Hotel builds usually run longer than residential schemes and draw funds in smaller, more frequent tranches, so expect more inspections across the life of the loan.

The right structure depends on the scope of the project, the timescale and the location — a prime-site scheme and a rural one will attract different lenders and different terms.

How much you can borrow

As with standard development finance, lenders will typically fund 100% of the build costs, plus a contribution towards the site — usually around 60% to 65% of the land acquisition cost. If you already own the land, the full build cost can still be covered.

The overall facility is sized against the exit: you would not normally borrow more than around 65% of the finished value, and the numbers have to work at that level before any lender commits.

Who it suits: the operator question

Anyone can apply; what lenders underwrite is plausibility. Moving from a single residential build to a 400-bedroom hotel is a step change in project management, contractor oversight and exit complexity, so track record carries real weight.

The covenant behind the finished asset matters just as much. A pre-let agreement with an established operator strengthens the case materially — a national brand such as Premier Inn or Travelodge adds considerable weight to the exit, while a small or unproven tenant invites more scrutiny. If you plan to operate the hotel yourself, lenders will want sector experience, trading forecasts and a credible staffing plan.

Where experience or equity is the missing piece, a joint-venture partner can sometimes close the gap — something we can help structure.

What hotel development finance costs

Pricing follows the standard development finance model: an arrangement fee on the facility, monthly interest retained and added to the loan rather than serviced, and in most cases no exit fee. Rates and fees move with the market and the scale of the scheme — hotel loans tend to price slightly above standard development finance because of their size — so we quote against your actual case rather than a headline figure.

Budget for the extras that come with a longer, larger build: more frequent monitoring surveyor visits, each carrying its own fee before the next tranche is released, and higher legal and valuation costs on both sides of the transaction. None of these change the economics dramatically, but they belong in the appraisal from day one.

The process

Underwriting is weightier than for standard development finance, and the lender pool is smaller because the loans are larger. Before anything goes to market, we build the full picture: your experience, total costs, the exit model, and the tenant or trading forecast behind it.

We will run early modelling with you — total costs, estimates, likely end value. It is indicative rather than a valuation, but it tests viability and flags stumbling blocks before they cost you anything. Once the case is packaged, we take it to several lenders, gather pricing and appetite, and present the options back to you. That first stage typically takes three to four weeks.

Frequently asked questions

Can I get 100% hotel development finance?

Yes, by cross-charging other assets. The build costs are fully funded as standard; the gap is the land contribution — typically 30% to 35% of the acquisition cost plus legal fees — and that can be covered with additional security or, where you hold contracts, invoice finance. Because the gap is a fraction of total project cost, the extra security required is usually modest.

When do I need to repay the loan?

On practical completion, once the build is signed off. By that point a tenant contract should be in place — or, for an owner-operated hotel, a clear date for trading to begin. The usual route is to refinance the development loan immediately, often via development exit finance, then move onto commercial term finance over 15, 20 or 30 years, structured around what the business needs.

Do I need a tenant lined up before I apply?

Usually you will need to have had at least some discussions with prospective tenants — a lender wants to see the exit before committing to the build. The alternative is an owner-occupier case, where your own operating plan and sector experience stand in for the tenant covenant.

Can I get hotel development finance with bad credit?

Yes. Adverse credit narrows the lender pool and can affect pricing, but short-term products such as development finance remain available. Where there is a clear rationale behind the credit issue, most lenders stay open — it should not deter you from making an enquiry.

Listen to the episode

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Tell us about the site, the scheme and your intended exit, and we will set out the right way to fund it — including whether the numbers stack before you commit to the land. Call 020 7126 8574 or request a call back, and we aim to reply within one working day.

Your property may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it. Most development finance is not regulated by the Financial Conduct Authority.

Development finance · Development exit finance · Mezzanine finance · Joint venture finance · First-time developers · Development finance (GDV) calculator

Full transcript — “Hotel Development Finance”

Recorded July 2024. A conversation with Scott West of Propertyze, transcribed in full. 11 minutes · approximately 2,202 words.

Read the transcript

And this time on the Bridging Finance podcast, Scott joins us from Propertyze to talk all about hotel development finance. Welcome back, Scott. Thank you for joining us. Hi. Yes, thanks for coming back. I'm looking forward to kind of getting stuck into this one today as well. Yes, definitely. Well, let's get straight into these questions that we've got here for this then. So first of all, what type of development finance can I use for my hotel project and how does development finance for hotels work? So to break it down very simply, it's the same product you would use for development on houses and other development sites you would look at. So standard development projects. Product is very similar. The differences come with the underwriting process, the lender choice,

and yeah, kind of how the exit model is going to work as well. There's a bit more to it. So we can use development finance, we can use some senior debts and mezzanine finance, bridging loans for the acquisition, equity. Finance can be used because obviously the projects tend to be quite large. So there's lots of different elements we can include and mix and match to make the project work. The choice does depend on the scope of the project, how large it's going to be, the timescales needed, and probably location as well. If it's prime location versus something really rural, lender choice and terms will change as well. So lots of options. Okay. Yeah. So lots of factors involved there, but a clear start. Thank you for that.

Now let's move on to this next question. So how much can be borrowed with hotel development finance people would like to know? The same as normal development finance. So you can borrow 100% of the bill costs and then some balance towards the acquisition of the site as well. So if you already own the land, clearly you don't need to borrow the deposit for that, but 100% of the bill costs can be covered. Now that's obviously subject to affordability, checking the numbers work as an exit. So you won't ever usually get more than maybe 65% of the finished value. Otherwise the costs cannot be included. Right. Okay. There we go. Now the next question leads on from that Scott. So can I get 100% hotel development finance? Yes, you can, but it does include crosscharging other assets. So you

will need to contribute other securities, other assets. If you've got contracts, you can have invoice financing. There's also other things we can throw in to cover up the difference, but you will always get 100% of the bill costs. And it usually works out to be around 60, 65% of the land acquisition costs. So you only really need 30, 35% plus the legal fees and bits on top for the land, which works out quite a bit lower than the actual total cost usually. So it shouldn't be too much, but needed in the way of other assets to cover that, which would enable us to get to 100%. Right. Okay. There we go. So that makes sense there. Now following on from that, who is eligible for hotel development finance or

what criteria needs to be met? Can anyone get this? Short answer is yes. Anybody could get development finance for a hotel. The crux, that is understanding plausibility. So you need to have some experience going from building one house at the bottom of your garden to building a 400 bedroom hotel. It's quite a difference in the project size, managing that project, managing the contractors, the exit, there's lots of differences in that. So plausibility is the first big key. What experience do you have? What other projects have you completed? What the cost is going to be for this one? What's the exit plan? Do you have a tenant lined up? That's usually a big one too. Most of the time you'll need to have at least have some discussions with tenants

or if it's going to be an owner occupied hotel. So if you're perhaps building something a little bit smaller than you plan to use for your own business, what experience do you have in that industry? Have you ever owned a hotel before? What staff are you going to have? There's quite a lot to cover off with that topic, but the short answer is yes, anybody can do it. It's just understanding why and how you plan to make it work. If we can answer those questions and they're sensible, anybody could be eligible. Okay, so some key points is there to take away from the episode then. Lots involved here by the sounds of it. So let's continue then. How much does hotel development finance cost? So any differences here? Are there any extras?

Are there more extras? Yes, there will be more extras. You're more likely to have a longer build time. It's not going to be trying to four wheels, putting a roof on it. It's a lot bigger, so you're going to need more time to do that. You're probably going to want the money in smaller, more regular tranches of funds. So more drawdowns, it means more attendance by the lender or by QS. So it's a few hundred pounds of time for a hotel, maybe a thousand pounds of time for them to come out and do a site visit before releasing the next set of funds. So in the scheme of things, not a great deal of difference in cost, but it is an additional cost. And in terms of the actual product itself, a standard probably 2% arrangement fee,

probably 1 to 1.2% per month interest, which we retained and added to the loan. Most of the time, no exit fee. So the fees are really fairly consistent with standard development finance. The only difference being you pay for more visits from the QS. Legal fees will be higher for both yours and the lender's and the valuation fees obviously will be higher too. Right. Okay, there we go. So the breakdown of the costs there. Now people would also like to know then when do I need to repay a hotel development finance loan? Upon completion. So once you've finished the bill, it's all signed off and ready to go. At that point there, we'll repay the loan. Now we would probably have, almost certainly have a contract in place with a

attendant. If you plan to run it yourself, plans on when your business will be running from that and operating from that site. So we would be looking to get a bridging finance immediately to repay the development loan and then probably term finance with a commercial lender to put it onto a nice repayment vehicle that we can sort out over 15, 20, 30 years, whatever needs the business has. Right. Okay. Brilliant. There we go. Thank you for that one. So moving on then, what are the pros and cons of hotel development finance then? There was a huge amount of pros and cons really. Again, it's very similar to a development finance project. So obviously having finance of any kind is going to be more costly than doing in cash. So these projects are this

size though, it's very hard to do them in cash because the sheer volume and the amount you would need. So the cons I guess are the costs. It's a 2% arrangement fee. You're going to pay 1 to 1.2% per month on your loan balance, which can eat into your profit margins. The pros though are that you can do this whole project with very little of your own money. So they balance out really. The interest rates will be slightly higher than standard development because the size of the project, another con would be this lending criteria. It's obviously more hoops to jump through. There's more plausibility, more understanding of the exit vehicle and where we plan to go. Tenant protocol. If you're going to be starting a contract with someone at the usual hotel

after the build and they are a very small, very unknown tenant, tenant strength can be a factor. If you've got a tenant, you know, premiering, travel lodge, any of the really big names, it gives a lot more weight to the exit as well. So there are some small pros and cons, but largely it still functions very much like a standard development project. Okay. Well, it's always useful to know those points there and way up those pros and cons. So there we go. Now, just following on then, how do you get or apply for hotel development finance? So what is the process here? The process is a bit more drawn out, again, because of all those things I mentioned previously, we need to have a full understanding of the plausibility,

the exit forecast if you plan to run yourself, if it's tenanted, who they are, proof of experience. There's a lot more to cover off than just standard development finance. The underwriting process is a bit more weighty and the number of lenders we can use is smaller because, generally speaking, the loans are quite a bit larger than standard development finance. How do you apply for it? Come and speak to us. We'll take you through what's going to be needed, where we see if we see any stumbling blocks in your experience. If we see issues we might have with lenders, we'll cover all those off upfront. And this kind of links back to a previous podcast we've done on John Venture. So it might be that you found the hotel opportunity that

didn't work. It doesn't work because you don't have the experience or the equity. We can possibly link this in with a John Venture partner to cover off one of the missing pieces in this puzzle. So it worked quite well for that. And then once we've got that together, we have a packaged solution. We'll take you to several lenders, get pricing, get their appetite for the lending and terms, so we can then present these back to you. So the first stage is going to be three or four weeks before we have several solutions to give you, I guess. Okay. Well, a clear guide there to that process. So hopefully that makes sense. Thank you for explaining that. Now we have one question left. So this one asks, what if I have bad credit? Can I still get hotel development finance?

Yes, you can. Again, with most of the short-term products, so bridging or development funds of any kind, regardless of what they are. With bad credit, you can always get them. The differences will be some lenders might be off the table and the pricing might change depending on what the credit is. But we can always do them. Most of the time, there's a really logical reason for why things happened. Most of the time, it's not people's fault. So if there's a rationale behind what it is, why it happened, we can usually get to most lenders anyway. It shouldn't deter you from contacting us or deter you from looking at projects. If you have bad credit, speak to us, we'll tell you what you can and can't do and who we can use for those projects going forward.

Okay. Well, hopefully that sounds reassuring there. Now we've covered off all the main points, all the main questions there, Scott. Have you got anything else you'd like to add or any final thoughts? I guess really total development finance allows you to really bring ambitious projects to life. So keep your eyes open for them. Speak to us if you start finding things you want to discuss. We're very happy to run through modeling for you. Very loose modeling, but running through how it could look. Total costs, some estimates, what am I going to sell for, which are very loose because we're not valuables. But understanding what it might look like as an end goal, what the viability is. If you're not sure about what it might cost, come speak to us.

We'll go through those points. We'll go through all the criteria up front. As I said before, the experience, the costs, if you have the need for a daily partner, if you're unsure about your tenant profile, what to do, how to work it. We can cover all these points with you. And it's just really understanding what you want to do as long term. Is the hotel something new for you? Is hotels a business you've been in for a while? All these different things make a difference to have a lender will view the case and how we present the case. Okay. Well, some good points there to end on. Thank you for that, Scott, as always. Hopefully that's proved useful to anybody listening to this. And Scott, I'm sure we'll speak to you on the podcast again very

soon. Thank you very much. I look forward to that.

This is a transcript of a spoken conversation recorded in July 2024, published as recorded and lightly corrected for names and technical terms only. It is general information about how this type of lending works, not advice on your circumstances. This recording is more than eighteen months old. Any rates, fees, loan-to-values or criteria mentioned reflect the market as it stood when this was recorded and are not current pricing and not an offer of finance — for today’s figures, speak to an adviser.

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