Securing Funding for Your Hotel Development
How a new or converted hotel is funded: the full project budget, each layer of the capital stack, where the equity comes from and what lenders need first.
Updated & fact-checked Figures are linked to their sources at the end of the article.
Funding a new hotel, or converting another building into one, means assembling several layers of capital before construction starts: a construction loan, the developer’s own equity, usually outside equity, and sometimes mezzanine debt, money from the hotel brand or public programs. Each layer has its own conditions, and most of them depend on the others being in place.
This guide is for developers and owners planning a ground-up hotel or a conversion. It sets out what the budget has to cover, how the capital stack is built, where the equity comes from, and what lenders and investors expect to see. For the mechanics of the construction loan itself, see our guide to construction financing; for buying an operating hotel, see how hotel loans work.
Start with the full project budget
Hotel developments run short of money most often because the budget left things out. A lender and an equity investor will both test it line by line. A complete budget usually includes:
- Land or the existing building, plus closing costs.
- Hard costs: construction, site work and a contingency.
- Soft costs: design, engineering, permits, development charges, legal, insurance, appraisal and lender fees.
- Furniture, fixtures and equipment (FF&E) and operating supplies, which for a hotel are a large separate line.
- Brand costs: franchise application fees and any brand-required design or technology standards.
- Pre-opening costs: hiring and training staff, sales and marketing before the doors open.
- Interest during construction, usually funded by an interest reserve inside the loan.
- Working capital to carry the hotel while occupancy ramps up after opening.
A new hotel does not reach stabilized occupancy on opening day. Equity and lenders will want to see that the ramp-up period, and any losses during it, are funded.
How the capital stack is built
| Layer | Who provides it | Cost and risk | Notes |
|---|---|---|---|
| Senior construction loan | Banks, credit unions, debt funds | Lowest cost; first claim on the property | Funded in draws after the equity is spent; must be repaid or refinanced at completion |
| Mezzanine loan or preferred equity | Debt funds, private lenders, family offices | Higher cost; paid after the senior loan | Fills the gap between the senior loan and the common equity; needs the senior lender’s consent |
| Common equity | Developer, joint venture partners, private investors | Highest risk; paid last; keeps the upside | Usually must be fully invested before the first loan draw |
| Brand contribution (key money) | Some hotel brands or management companies | Often repayable if the agreement ends early | Negotiated case by case; not available on every deal |
| Public programs | Government agencies | Varies | Usually small relative to the project; see below |
The developer’s equity carries the most risk, so lenders want to see a meaningful amount of the developer’s own cash in the project, not only investors’ money. Our guide to debt and equity financing explains how each layer is priced and what control it carries.
Where the equity comes from
The developer and partners. Most hotel equity comes from the developer, a landowner who contributes the site, and one or more joint venture partners, such as family offices, private equity funds or experienced hotel operators.
Private investors. Raising money from passive investors is generally a sale of securities. In Nova Scotia, the Securities Act requires a prospectus unless an exemption applies; the exemptions commonly used for private real estate offerings include the accredited investor, family, friends and business associates, and offering memorandum exemptions in National Instrument 45-106.[1] In the U.S., private offerings usually rely on Regulation D: Rule 506(b) bars general solicitation and limits non-accredited investors to 35 in any 90-day period, while Rule 506(c) allows general solicitation if every purchaser is an accredited investor whose status the issuer has taken reasonable steps to verify.[2] Use a securities lawyer before taking anyone’s money.
The brand. Some brands and management companies contribute “key money” to win a hotel, usually in exchange for a long franchise or management agreement and often repayable if the agreement ends early. Treat it as part of the brand negotiation, not as a funding plan.
Public programs
Government money rarely funds a hotel on its own, but it can fill a gap.
- Atlantic Canada. The Atlantic Canada Opportunities Agency’s Business Development Program offers interest-free, unsecured repayable funding that can cover up to 50% of the capital needed to start or expand a business.[3] Eligibility depends on the project; ask ACOA early.
- Small properties in Canada. The Canada Small Business Financing Program supports bank loans of up to $1.15 million per borrower for businesses with gross revenue of $10 million or less.[4]
- U.S. only. The SBA 504 program can fund the purchase, construction or renovation of buildings, with a 504 loan of up to $5.5 million alongside a bank first mortgage.[5] Canada has no direct equivalent.
Programs open and close. ACOA’s separate Tourism Growth Program, for example, is no longer accepting applications.[6] Check what is current before building it into a budget.
What lenders and investors need to see
From concept to a funded hotel project
Independent feasibility study
A hotel consultant’s study of demand, the competing hotels, likely occupancy and rate, and projected income. Lenders rely on it; a study you wrote yourself carries little weight.
Brand and management decision
A franchise or management agreement in principle, or a credible plan for an independent hotel. The brand affects both the projections and the lender’s appetite.
Site control and approvals
Ownership or an option on the land, zoning that allows a hotel, and a realistic timeline for permits.
Budget and construction plan
A full budget prepared or reviewed by a cost consultant, a qualified general contractor, and a construction schedule.
Equity committed
Signed commitments for the equity, including your own. Lenders generally require it to be in the project before they advance.
Debt term sheets
Approach several construction lenders. Compare leverage, rate, guarantees, interest reserve, completion and cost-overrun requirements, and how the loan will be repaid at the end.
Exit or take-out plan
Show how the construction loan will be refinanced once the hotel stabilizes, or sold. This is the question lenders ask most often.
Sources
- Rule 45-501: Statutory Liability for Misrepresentations in an Offering Memorandum under Certain Exemptions from the Prospectus Requirement — Nova Scotia Securities Commission, Effective October 7, 2013. Checked 2026-10-12.
- Exempt offerings — U.S. Securities and Exchange Commission. Checked 2026-10-12.
- Business Development Program — Atlantic Canada Opportunities Agency, Modified 2026-10-08. Checked 2026-10-12.
- Helping small businesses get loans (Canada Small Business Financing Program) — Innovation, Science and Economic Development Canada, Modified 2026-06-22. Checked 2026-10-12.
- 504 loans — U.S. Small Business Administration. Checked 2026-10-12.
- Tourism Growth Program in Atlantic Canada — Atlantic Canada Opportunities Agency. Checked 2026-10-12.
