Hotel & motel financing: half real estate, half operating business

Why hotels are underwritten as a business, not a building

An office tower has five-year leases; an apartment has one-year leases; a hotel’s “lease” runs one night at a time. No contract guarantees the revenue — operations do. So lenders treat it as an operating business, and appraisals lean on the income approach: what this going concern is worth.

The practical consequence: hotel lending runs more conservative than other commercial property — lower leverage, closer scrutiny, higher expectations of the operator. Nothing personal; the revenue structure dictates it.

The good news is the logic is transparent: strong operating numbers make everything negotiable. What lenders want is evidence the business still runs when the current owner hands over the keys.

The three numbers lenders read first: occupancy, ADR, RevPAR

Occupancy: what share of room-nights are filled. ADR: the average nightly rate achieved. RevPAR is the two multiplied — revenue per available room — the industry’s core metric and the first number a lender looks at.

On statements, the T12 (trailing twelve months, month by month) matters most, backed by two or three years of annual financials for the trend. Branded properties add an STR report — you against your competitive set.

Seasonality is not a problem; failing to explain seasonality is. Know your curve, and how costs flex in the low season. Beyond the numbers, the lender is listening for whether you understand this business.

Franchise flag or independent? Lenders treat them differently

Franchised hotels: the brand, the reservation system and the standards make revenue more predictable — a plus in most lenders’ eyes. But the franchisor’s PIP (property improvement plan) is real money. Buying an older flagged property, get the PIP list before you write the offer and build it into total project cost.

Independent hotels and highway motels: often cheaper to buy and freer to run, but underwritten more closely, because revenue depends entirely on how the current owner operates. Vendor take-backs (VTBs) are common here — the seller leaves part of the financing in, which both fills your capital stack and signals to the lender that the seller believes in the business.

There is no standard answer to which to buy: budget, experience and the life you want (a motel is often a lifestyle purchase as much as a business one) decide together.

No hospitality experience — how do you clear the bar?

Experience is a hard criterion in hotel lending: the lender will ask, every time, “who operates this?” First-time buyers typically answer one of four ways: retain the existing manager or team; take a franchise and lean on its training and systems; bring in a partner with industry experience; or start with a smaller motel.

“Retaining the manager” is not a throwaway line: it has to be genuinely negotiated and written into the deal documents before a lender counts it. If the manager walks on closing day, the premise of your loan walks too.

Owner-operators: assemble your business track record — service and retail operating experience counts. What the lender needs is evidence you can run a business that opens its doors every single day.

Leverage and the capital stack: how these deals get built

Direction only — every lender and file differs: hotel leverage commonly runs 50–65%, a notch more conservative than other commercial property. Banks favour quality flagged assets; credit unions and B lenders do more of the independents; private funds bridge transitions and renovations.

The common stack is three layers: senior loan + vendor take-back + your own equity. VTBs are especially common in motel deals, and their terms must line up with the senior lender’s rules — not every lender accepts a second layer behind them.

Plan renovation and PIP money inside the deal, not after it. Price + improvements + working capital is one number, and the operating cash flow has to carry all of it.

Documents and process: the thickest file in commercial

Business side: monthly T12, two to three years of financial statements, occupancy records, staffing and management arrangements, franchise agreement if any. Property side: AACI appraisal (income approach), Phase I ESA, building condition report. Personal side: net worth, credit, operating history.

Time: generally longer than other commercial files — think two to three months and up. The appraisal needs an appraiser who genuinely knows hotels, and their calendars run tighter than general commercial.

My suggestion: before you fall for a property, send me its T12. Ten minutes tells you roughly what it can borrow, what’s missing, and whether it deserves the money you’re about to spend on reports.

Common questions