Hotel Financing, Step by Step: How Hotel Loans Work
How hotel loans work in Canada and the U.S.: the main loan types, the numbers lenders underwrite, and the steps from first package to closing.
Updated & fact-checked Figures are linked to their sources at the end of the article.
A hotel loan is a commercial mortgage on a building that is also a business. An apartment building earns rent under leases that run for a year or more; a hotel resells every room every night. That makes hotel income more volatile, and lenders price, size and document hotel loans with that in mind.
This guide is for buyers and owners of hotels and motels who are arranging acquisition or refinancing debt. It covers what lenders look at, the main loan types in Canada and the U.S., and the steps from first conversation to closing. For ground-up projects, see our guide to financing a new hotel development.
Why hotel loans are different
A lender financing an apartment building mostly underwrites the rent roll. A lender financing a hotel underwrites an operating business: room revenue, food and beverage, staffing, franchise fees, management fees and the cost of keeping the rooms competitive. Revenue can drop within weeks when travel slows, and there are no leases to fall back on.
The practical consequences are consistent across lenders:
- Lower leverage. Hotel loans are usually sized more conservatively than loans on comparable apartment buildings, so buyers need more equity.
- More reporting. Expect monthly or quarterly operating statements and, for branded hotels, the brand’s performance reports.
- The brand and the manager matter. A recognised flag and an experienced operator reduce the lender’s risk. A hotel with a franchise agreement that is about to expire, or a pending property improvement plan (PIP) from the brand, is harder to finance until that is resolved.
- Reserves for furniture, fixtures and equipment (FF&E). Lenders commonly require the owner to set aside a share of revenue to replace furniture and equipment, because rooms that fall behind lose rate.
The numbers lenders look at
| Metric | How it is calculated | Why the lender cares |
|---|---|---|
| Occupancy | Rooms sold ÷ rooms available | Shows demand; compared with competing hotels nearby |
| ADR (average daily rate) | Room revenue ÷ rooms sold | Shows pricing power |
| RevPAR (revenue per available room) | Room revenue ÷ rooms available (or occupancy × ADR) | The standard single measure of room performance |
| Net operating income (NOI) | Total revenue minus operating expenses, management fees and an FF&E reserve | The cash flow that services the debt |
| Debt service coverage ratio (DSCR) | NOI ÷ annual principal and interest | How much the income can fall before payments are at risk |
| Loan-to-value (LTV) | Loan ÷ appraised value | How much equity cushion stands in front of the lender |
Lenders usually look at trailing twelve-month figures, not a single strong season. If the hotel’s RevPAR is improving because of a recent renovation, they will want evidence that the gain is holding, not just a forecast.
The main types of hotel loan
Which loan fits depends on the size of the hotel, where it is, how stable its income is and whether you plan a repositioning.
| Loan type | Where | Typical use | What to know |
|---|---|---|---|
| Bank or credit union mortgage | Canada and U.S. | Stabilized, owner-operated hotels | Usually recourse to the owners; covenants on DSCR and reporting |
| BDC commercial real estate loan | Canada | Owner-occupied business premises | Up to 25-year amortization; requires 24+ months of revenue; excludes projects zoned residential |
| Canada Small Business Financing Program | Canada | Small hotels and motels with revenue of $10 million or less | Government-backed bank loans; maximum $1.15 million per borrower |
| SBA 7(a) | U.S. only | Acquisition, refinancing or improvement of an operating business | Maximum $5 million |
| SBA 504 | U.S. only | Buying, building or renovating fixed assets | Maximum $5.5 million from the CDC portion; bank first mortgage plus SBA-backed second |
| CMBS (conduit) loan | Mainly U.S. | Larger stabilized hotels | Non-recourse with carve-outs; fixed terms; prepayment is costly |
| Bridge or debt-fund loan | Canada and U.S. | Hotels being renovated, rebranded or turned around | Short term, higher rate; must be refinanced once the hotel stabilizes |
| Private lender or seller financing | Canada and U.S. | Deals banks will not do, or gaps in the capital stack | Most expensive debt; read the default and extension terms closely |
A few of these need more explanation.
BDC. The Business Development Bank of Canada offers commercial real estate loans with amortization of up to 25 years and, depending on the project, financing of up to 100% of project cost. The business must have been generating revenue for at least 24 months, and the loan does not cover projects zoned for residential use.[1] Whether a particular hotel qualifies is a question for BDC.
Canada Small Business Financing Program (CSBFP). Under this federal program, banks and credit unions make loans that the government partly guarantees. It is open to businesses with gross annual revenue of $10 million or less, and the maximum is $1.15 million per borrower, of which up to $1 million can be a term loan, including for real property.[2] That makes it a fit for small independent hotels and motels, not for larger properties.
SBA loans (U.S. only). The U.S. Small Business Administration guarantees 7(a) loans of up to $5 million, which can be used to acquire, refinance or improve real estate and to change ownership of a business.[3] Its 504 program pairs a bank first mortgage with a second loan from a certified development company (CDC) for fixed assets, with a maximum 504 loan of $5.5 million.[4] The borrower must contribute at least 10% of project cost, and 15% if the business has operated for two years or less or the project is a limited- or single-purpose building, a category that lenders often apply to hotels.[5] Canada has no direct equivalent; the CSBFP is the closest, at a much smaller scale.
Government-backed hotel loan limits
From first package to closing
How a hotel loan gets done
Assemble the operating history
At least three years of monthly profit-and-loss statements if available, the current year to date, and competitive-set reports for branded hotels. Lenders compare your occupancy, ADR and RevPAR with nearby hotels.
Write the business plan
Explain the market, the hotel’s position in it, any planned renovation or rebranding, and your projections. Show the assumptions behind the projections so a lender can test them.
Sort out the brand and the manager
Check the franchise term remaining, any PIP the brand will require on a change of ownership, and who will manage the hotel. The lender will usually want the franchisor to confirm the franchise will continue.
Approach several lenders
Hotels are a specialist asset; not every bank lends on them. A term sheet from more than one lender lets you compare rate, leverage, recourse, reserves and prepayment terms.
Third-party reports
The lender orders an appraisal, usually an environmental site assessment and a building condition report. Budget for them; they are normally at the borrower’s cost.
Commitment and conditions
Read the covenants: minimum DSCR, reporting, FF&E reserve, cash management triggers and personal guarantees. Negotiate before you sign the commitment, not at closing.
Closing
Legal counsel registers the mortgage and the security on furniture, equipment and revenue, and the brand, manager and lender sign any agreements between them.
When a conventional loan is not available
Hotels that are closed, deeply underperforming, being converted or changing brand rarely qualify for bank or government-backed debt until they have a track record. The usual path is a short-term bridge or private loan, often alongside an equity partner, followed by a refinance once occupancy and RevPAR have stabilized. Our guides to debt and equity financing and joint ventures cover how that capital is structured.
Two points apply to any bridge plan. First, the exit must be realistic: price the refinance on conservative numbers, not on the best month of the renovation. Second, compare the full cost of the bridge loan, including fees and extension costs, with the value the turnaround is expected to add.
Sources
- Commercial Real Estate financing and construction financing — BDC (Business Development Bank of Canada). 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.
- 7(a) loans — U.S. Small Business Administration. Checked 2026-10-12.
- 504 loans — U.S. Small Business Administration. Checked 2026-10-12.
- 13 CFR 120.910: Borrower contributions — Electronic Code of Federal Regulations (U.S.). Checked 2026-10-12.
