From new construction to renovations to operations, hotels require significant capital throughout their lifecycle. While the hospitality industry remains attractive for investment, owners must tap diverse funding sources covering development costs, managing cash flow, riding out downturns, and financing future growth.
Table of Contents
This blog explores the most common hotel funding options across debt, equity, alternative finance, and government programs hoteliers leverage to fuel success.
Traditional Hotel Fundings and Loans
Debt financing from banks and commercial lenders covers significant hotel investments and improvements.
SBA Loans
SBA-backed financing offers long terms, lower down payments, and more flexibility than conventional loans for funding construction, renovations, operations, or acquisitions.
Loans like SBA 7(a) and 504 reduce lender risk while requiring personal guarantees. 504 projects must promote economic development.
Commercial Mortgages
Banks provide mortgages covering 65-80% of project costs to finance new hotel construction, often requiring equity, collateral, and guarantees.
Typical terms run 10-25 years on interest-only or principal-plus-interest payments. Hospitality expertise aids underwriting.
Refinancing
Refinancing existing commercial loans at lower interest rates or longer terms unlocks equity for renovations, expansions, or smoothing cash flow.
Cash-out refis allow drawing equity for improvements. Rate-and-term refis get better loan terms with minimal costs.
Lines of Credit
Revolving lines of credit provide flexible working capital covering short-term operational needs prior to securing long-term hotel funding.
Hospitality-focused banks understand seasonal EBIDTA fluctuations and provide LCs to bridge gaps.
Hospitality Lender Expertise
Seeking lenders specializing specifically in the hotel industry provides excellent financing knowledge. Experience with extended stays, resorts, brands, independent hotels, etc., aids in assessing risk realistically.
Alternative and Creative Hotel Finance Options
Innovative structures widen the pool of capital available beyond traditional institutions.
Crowdfunding
Online platforms enable raising smaller chunks of capital from many individuals to fund projects in return for ROI, rewards, or perks. It provides marketing exposure and community backing. It is better for moderate renovations than significant development.
Opportunity Funds
Pooled investment vehicles focused on Opportunity Zones facilitate new hotel development in designated urban and rural communities with tax advantages. Investors receive capital gains, tax savings, deferrals, and other benefits by supporting qualifying projects that stimulate growth.
Mezzanine Financing
A hybrid of debt and equity, mezzanine funds fill capital structure gaps with flexible, higher-interest subordinate loans in return for equity-like upside. It is a valuable supplement to senior debt. Turnkey programs with hospitality expertise exist through specialized lenders.
Prefunded Reserves
Guests prepay future stays through discounted certificates redeemable for future lodging, generating upfront capital for improvements. It is more flexible than traditional hotel funding and loans. Highly dependent on marketing and customer base. It is best for redemptions within five years.
Management Contracts
Third-party operators invest capital upfront for renovations in return for managing the property and sharing in profits. It saves costs of traditional financing. Operator incentives align with driving performance. It vets operators diligently.
Equity Investments and Partnerships
Strategic investors inject funds in return for partial hotel ownership and sharing in financial returns.
Private Equity
PE firms target hotel platforms, brands, or individual properties with upside potential to reposition through capital investments and asset management. PE applies institutional rigor, seeks higher returns than typical mortgages, and takes an active role.
Joint Ventures
Partners jointly develop or acquire a hotel splitting equity, risk, responsibilities, and reward according to arranged terms. Ideal for complex projects. Terms govern economics, approvals, buyouts, capital calls, waterfall distribution, etc.
Franchisor Incentives
Significant brands offer incentives like critical money, furniture fixtures and equipment (FFE) funding, pre-opening support or fee waivers to incentivize development. Incentives can make branded projects more feasible. It researches options from approved franchisors.
Real Estate Investment Trusts (REITs)
Public REITs provide tax-efficient vehicles for investors to fund portfolios of hotel assets, diversifying risk. It lowers yields more than direct ownership but adds liquidity. REITs own rather than manage hotels.
International Investment
Foreign investors and funds attracted to US hospitality provide alternative pools of capital for acquisitions and ground-up development. It vets foreign equity sources closely. Differences in expectations require navigation.
Government Programs and Incentives
Public sector initiatives help stimulate hospitality projects with societal benefits through grants, tax relief, and subsidized financing.
Economic Development Subsidies
State/local agencies provide funding for projects generating jobs, tourism, and revitalizing distressed areas in need of growth. Competition is high, but subsidies can make projects viable. Often require job creation commitments.
Community Development Grants
Programs like CDBG fund construction costs for hotels partially accommodating low-income residents or providing public spaces. Part of the project must benefit the LMI community. Funding cannot replace private financing.
Opportunity Zone Investments
Tax benefits encourage investment into qualifying projects in designated urban and rural communities requiring growth. Investors can defer and reduce capital gains taxes through Opportunity Fund investment.
Historic Preservation Tax Credits
Tax credits offset rehab costs for historic hotels meeting requirements, facilitating building preservation for qualifying certified landmark structures. Tax credits offset 20% of costs.
Sustainability Incentives
Grants, expedited permitting, and subsidies support hotels following green building standards or renewable energy adoption. State/local programs incentivize LEED, EnergyStar, EV charging, solar power, and other eco-friendly projects.
Conclusion
Blending hotel funding sources strategically provides savvy hotel owners and operators with the complete capital stack needed to maintain liquidity, chase growth, and sustain properties through economic cycles.
Emersion Wellness partners with clients to evaluate options and structure optimal Hotel Funding packages tailored for their particular projects and objectives.
See Also: What are the Top Expenses in the Hotel Business?
I'm Nathan Baws, a nutrition nerd, exercise and weight loss expert, and an unwavering advocate for good health. As the founder of Emersion Wellness, I'm passionate about crafting Seamless Weight Loss Programs to supercharge hotel revenue and transform lives. We've pioneered the World's First Plug & Play Weight Loss Programs for top hotels and resorts, sparking a wellness revolution. Beyond my professional journey, you'll often find me hiking, swimming, and riding the waves, embracing every moment in nature. Join me on this exhilarating journey towards diet, health and wellness.