Hotel Development Finance

What is hotel development finance?

Hotel development finance is short-term funding to build or convert a hotel, aparthotel or serviced-accommodation block, released in stages against certified costs and underwritten on the trading business the finished building will house, with the loan repaid by a hotel mortgage once trading is established or by a sale. A hotel's finished value, the gross development value (GDV), is a going-concern valuation of a trading business, unlike a block of flats or offices, so lenders assess the operator and the brand or management agreement, projected occupancy, average daily rate (ADR) and revenue per available room (RevPAR) alongside the build. The planning use is usually Use Class C1 (hotels) in England and Wales (Class 7 in Scotland), though some aparthotel schemes are treated as sui generis, and conversions of offices, warehouses and larger houses to hotel use sit alongside ground-up builds.

Hotel development finance to companies and investors is unregulated business lending. On the cases we arrange, specialist lenders fund hotel development up to 65% LTGDV, below the 70% we see on other commercial schemes, reflecting a value that depends on trading which does not exist until the hotel opens.

Hotel development finance rates

Hotel development finance is priced through interest and fees. Interest is charged on the drawn balance, rolled up or retained. The fees are an arrangement fee on the facility; an exit fee on the loan or the GDV; monitoring surveyor fees for each drawdown; a development valuation on both a going-concern and a vacant-possession basis; and legal fees, including review of any franchise or management agreement. Each lender prices a hotel scheme on its own view of the risk, and because the exit depends on trading that has yet to happen, the operator and any brand affect the terms offered. Every rate is subject to status and lender criteria. The full cost structure is on the property development finance page.

Have a hotel site, a conversion opportunity or an operator lined up? Get in touch. We run the trading appraisal, both caps and the hotel mortgage exit before any lender is approached.

Hotel development finance criteria

The figures below are the positions we see on the cases we arrange, as at 1 October 2026. They describe our experience across the lenders we use and are not a market-wide rule: each lender sets its own criteria, and the terms on any scheme depend on the scheme, the borrower and the lender's own assessment.

Hotel schemes, and how each is funded

Hotel development is funded on the strength of the business the building will house, so the structure of the operation matters as much as the structure of the building.

Ground-up hotel development

A new hotel on a cleared site is fully staged: a land advance on day one, then build drawdowns against the monitoring surveyor's certificates, with fit-out, furniture, fixtures and equipment in the cost plan. Lenders underwrite the consent, a fixed-price or tendered build contract, the programme to opening and the operator's plan. The staging is covered on ground up development finance.

Get in touch with the consented drawings, the build tender and the operator's plan.

Conversions to hotel use

Converting offices, warehouses, larger houses or listed buildings into a hotel avoids groundworks and can shorten the programme, but the existing structure is the unknown. Lenders look for a structural survey, the change-of-use consent and a cost plan that allows for what the strip-out reveals, and listed building consent adds its own conditions where it applies.

Get in touch with the planning consent and the survey for a conversion.

Branded and franchised hotels

A franchise or management agreement with an established brand brings a booking system, a trading record across the brand's other hotels and an operator the valuer can benchmark. That evidence can support lending up to the 65% LTGDV ceiling we see on the cases we arrange.

Get in touch with the heads of terms of the franchise or management agreement.

Independent and first-time operator hotels

An unbranded hotel, or one run by an operator without a hotel track record, can be funded by fewer lenders and below the ceiling, because the valuer has less evidence that the projected trading will be achieved. Appointing an experienced management company to run the hotel can narrow the gap.

Get in touch with the operator's business plan and experience.

Aparthotels and serviced apartments

Aparthotels and serviced-apartment blocks sit between hotels and residential: they trade on short stays but are built as self-contained units. Lenders look at the planning use, the operating model and the length of stays, and the exit can be a hotel mortgage or specialist serviced-accommodation lending. The specialist exit structures are covered on apart-hotel development exits and serviced accommodation mortgages.

Get in touch with the operating model for an aparthotel scheme.

Extensions and refurbishment of trading hotels

Adding rooms to, or substantially refurbishing, a trading hotel is funded on the existing business's accounts as well as the works, and the facility may sit alongside or refinance the existing hotel mortgage. Light works can be funded with refurbishment bridging instead; see the bridging loan guide.

Get in touch with the hotel's accounts and the works plan.

How hotel development finance is arranged

1. Trading appraisal and structure. The operator's business plan, projected occupancy, ADR and RevPAR, the brand or management agreement and the build cost plan are assembled, and both caps are run against the going-concern GDV.
2. Credit, valuation and due diligence. A specialist hotel valuation on going-concern and vacant-possession bases; the monitoring surveyor's review of cost and programme; legal review of title, planning, the building contract and the franchise or management agreement; security documentation.
3. Drawdown. The land or purchase advance, then build and fit-out costs drawn in arrears against the monitoring surveyor's certificates, with interest rolled up.
4. Opening, trading and exit. Practical completion and opening; then refinance onto a hotel mortgage once trading supports it, a sale to an operator or investor, or a development exit loan while trading builds.

The hotel arithmetic: rooms to value

A hotel's value comes from its trading, so the facility follows from the number of rooms, occupancy, room rate and the operator's margin.

Step 1. From rooms to value

An illustrative 80-room hotel at a £100 average daily rate and 75% occupancy, with an illustrative 30% margin of EBITDA (earnings before interest, tax, depreciation and amortisation) on rooms revenue, valued at an illustrative 7.5% yield, against £7,300,000 total cost.

Illustrative arithmetic on hypothetical figures; the trading figures, margin and yield are chosen to show the mechanism, not to represent any market or any lender's valuation method. Not an offer of finance.

Step 2. The two caps on the build

The caps are the 65% LTGDV we see for hotels and the 90% loan to cost ceiling we see on commercial schemes, both on the cases we arrange.

At the 65% LTGDV we see on the cases we arrange, the value cap binds well before the cost cap, so the developer funds £1,606,000, about 22% of the cost. A hotel scheme therefore needs more equity than a housing scheme of the same cost on these ceilings, and some hotel developers look at joint venture development finance or mezzanine funding to bridge the gap.

Step 3. The exit test

Once trading is established, the hotel refinances onto a hotel mortgage. Up to 75% loan-to-value is the maximum we see on hotel mortgages, and the lender also tests the trading against the interest, here at the illustrative 5.2% rate used across our guides.

Step 4. What occupancy does

Drop occupancy from 75% to 65% and hold everything else: RevPAR falls to £65, rooms revenue to £1,898,000, EBITDA to £569,400 and the value to £7,592,000. The 65% LTGDV cap falls to £4,934,800, the developer's equity rises to £2,365,200 and the profit on cost falls from 20% to 4%. Margins can also fall when occupancy falls, so the real effect can be larger. Lenders and valuers therefore test the trading projections against comparable hotels in the location, and the operator's track record affects how much weight the projections carry.

Step 5. Planning, fit-out and opening

Hotel use is usually Use Class C1 in England and Wales (Class 7 in Scotland) under the use classes framework, and a conversion from offices, shops or houses needs consent for the change of use. Fit-out, furniture, fixtures and equipment, pre-opening costs and the first months of trading belong in the appraisal: a hotel opens before it trades at its stabilised level, and the exit lender completes once there is trading evidence.

What decides the case

The operator and the brand shape a hotel case, with the quality of the trading evidence and a cost plan that includes fit-out and pre-opening. A lender whose appetite matches the scheme is the other part, and we test the rooms-to-value figures, both caps and the hotel mortgage exit at a range of occupancy levels before the site is bought.

Related reading: hotel mortgages covers the term lending the scheme exits onto; commercial property development finance covers other commercial schemes; the holiday let mortgage guide covers the short-stay income model.