Hotel Development Finance

What is hotel development finance?

Hotel development finance funds the construction of a new hotel or the conversion of an existing building into hotel use. The facility is short-term, typically 18 to 36 months, and draws down in stages as construction milestones are certified by an independent monitoring surveyor. The exit is what the whole structure hangs on: most facilities refinance onto a commercial mortgage once the hotel is open, trading, and producing the EBITDA that supports long-term debt, while others exit by sale of the completed asset to an investor or operator.

The schemes we fund vary widely. At one end are 15 to 30 bed boutique conversions of period buildings in market towns and cathedral cities. In the middle are 60 to 120 bed limited-service franchise hotels on edge-of-town and city-centre sites, built to a brand specification under a signed franchise agreement. At the larger end are full-service and mixed hotel and aparthotel schemes where the debt requirement runs well into eight figures. Around a third of the hotel enquiries we look at are conversions rather than ground-up, and conversions of offices and former public buildings into hotel use have become one of the busiest corners of the market.

FD Commercial arranges UK hotel development finance from £250,000 to £50m and above, with LTC up to 70%, LTGDV up to 65%, and 100% funding structures available on branded hotels where the loan exceeds £1m. Terms depend on the brand position, the operator, and the strength of the exit.

Before you approach the market, run your scheme through our development finance calculator and developer profit calculator. If the numbers do not work at 65% LTGDV with a sensible contingency, they will not work in front of a credit committee either.

How do lenders value a hotel development?

A hotel development is valued on its projected trading performance, not on the building. The valuer models occupancy, average daily rate and RevPAR against the local competitive set, deducts operating costs to reach a stabilised EBITDA, and applies a capitalisation multiple to that earnings figure. The result is the gross development value the lender will size the facility against.

The GDV of a hotel is a multiple of its stabilised EBITDA, which means two identical buildings can carry very different values depending on the operator and the brand attached to them. A 70-bed hotel trading under a recognised flag with a national reservation system behind it will value ahead of the same 70 beds trading independently, because the earnings are more predictable and the multiple is stronger.

This catches developers out constantly. Around a third of the hotel schemes we look at arrive with a valuation expectation built on comparable property sales rather than trading projections, and those numbers rarely survive first contact with a hotel-specialist valuer. Trading is everything. The valuer will test your occupancy and rate assumptions against STR-type market data for the location, and if your projections sit above the competitive set without a reason, the GDV comes down and the loan comes down with it.

According to Savills, UK hotel investment volumes reached around £6bn in 2024, the strongest year since 2018, with regional and branded assets taking a growing share of that capital. According to CBRE, UK hotel RevPAR has traded ahead of pre-pandemic levels since 2023, led by rate rather than occupancy. Both trends feed directly into the trading multiples valuers are applying to well-located new stock.

Can you get 100% hotel development finance?

Not as development finance. Development lending on hotels tops out around 70% of cost. Where 100% hotel funding does exist is on the other side of practical completion: a commercial mortgage on trading branded hotels, written at up to 100% of vacant possession value on loans above £1m. It is a trading business product assessed on the accounts, not a construction facility, and appetite for it sits in a very small corner of the market. Read our full guide to 100% hotel finance.

For developers the relevance is the exit. A scheme that completes, takes a brand and stabilises its trading can refinance into that market at gearing no conventional commercial mortgage will touch, which changes the equity mathematics of the whole project. We model that exit for hotel schemes at appraisal stage, not after practical completion when the options have already narrowed.

Which lenders fund hotel development in the UK?

The UK hotel development lender market splits by scheme type and operator strength rather than by loan size alone. Specialist development lenders including Shawbrook, United Trust Bank, Atelier and Hope Capital are active on conversions and mid-sized ground-up schemes, and they will look at first hotel schemes where the professional team and the operator plan are strong. Challenger banks such as Cambridge & Counties fund experienced operators building or extending under a brand. Together and similar bridging-to-development lenders pick up lighter conversion schemes where the works are closer to heavy refurbishment than full construction.

What we have found across the hotel cases we place is that lenders will forgive a first development scheme sooner than they will forgive a weak operator. A developer with no hotel history but a signed franchise agreement and an experienced general manager contracted for opening gets terms. A hotelier with twenty years behind the desk but no build team and no fixed-price contract does not. The lender is underwriting the whole package, and the operating side of that package carries at least as much weight as the construction side.

Get your franchise application in before you approach lenders, not after. A signed or agreed-in-principle franchise agreement changes the lender conversation completely, and it is the single document that moves a scheme from the speculative pile to the fundable pile.

What LTC and LTGDV apply to hotel development finance?

Hotel developments are sized against loan-to-cost and loan-to-gross-development-value, with the lender advancing whichever produces the lower figure. Indicative bands in 2026:

• Branded scheme, signed franchise agreement, experienced operator: 65% to 70% LTC, 60% to 65% LTGDV, with 100% cost funding available above £1m through the structure described above.
• Branded scheme, first-time hotel developer with strong build team: 60% to 65% LTC, 55% to 60% LTGDV.
• Independent hotel, experienced operator, evidenced local demand: 55% to 65% LTC, 50% to 60% LTGDV.
• Independent hotel, no operating history: 50% to 55% LTC, sponsor equity of 40% or more, and a shorter list of lenders willing to look at it.

Rates in 2026 sit broadly between 0.85% and 1.15% per month on specialist development terms, or 7% to 11% per annum where priced as a margin over the Bank of England base rate, currently 3.75%. Arrangement fees run 1% to 2% of the gross loan, plus valuation, monitoring surveyor and legal costs. Interest is almost always rolled up. All figures are indicative and depend on the scheme, the operator and the lender.

An independent hotel with no operating history is the hardest hotel asset to fund, and no amount of design spend changes that.

How does a franchise or brand agreement affect funding?

A franchise agreement converts a property scheme into a business plan a lender can underwrite. The brand brings a reservation system, brand standards that fix the specification, RevPAR benchmarks from hundreds of comparable sites, and a distribution engine that removes most of the ramp-up risk in the trading projections. Lenders price all of that in, which is why branded schemes take the top of the LTC and LTGDV bands and unlock the 100% structure above £1m.

The main brand families that carry weight with UK funders are the Hilton family, Marriott, IHG, Accor and Wyndham, typically under franchise agreements of 10 to 20 years. The franchise route leaves you as owner-operator under the flag. The alternatives sit at either end of the control spectrum: a hotel management agreement hands day-to-day operation to the brand or a third-party operator in return for fees, while an operating lease hands the whole trading risk to a tenant and turns the asset into an income investment. Lenders fund all three structures but underwrite them differently, and the covenant behind a management agreement or lease gets examined as closely as the developer does.

We recently worked on a scheme involving a listed former bank building in a cathedral city where the ground-floor banking hall could not be altered under the listing, which killed the planned restaurant and thirty covers of projected food and beverage revenue with it. The developer had built the whole appraisal on the full-service model. Reworked as a limited-service franchise with a breakfast offer only, the projections held, the brand approved the variation, and the scheme funded. The lesson is that the operating model and the building have to agree with each other before the finance can work.

How do drawdowns and monitoring work on a hotel build?

Hotel development finance draws down against certified construction milestones, not on a timetable. An independent monitoring surveyor certifies progress at each stage, the lender releases the corresponding tranche, and work continues. Typical milestones on a hotel scheme run: site acquisition and groundworks, structural completion, mechanical and electrical services, internal fit-out, FF&E installation and commissioning, then practical completion and opening preparation.

FF&E deserves its own line in every hotel cost schedule. Furniture, fixtures and equipment on a branded hotel are specified by the brand and cannot be value-engineered away, and we see at least one scheme every quarter where the FF&E budget has been left out of the cost schedule entirely or parked as a round number someone hopes will be enough. On a limited-service franchise hotel, FF&E commonly runs £8,000 to £15,000 per bedroom before the brand's technology stack is counted. Put the real figure in the appraisal at the start, because the monitoring surveyor will find it either way.

Lenders typically retain 5% to 10% of each drawdown until practical completion, and capitalised interest draws alongside each tranche. We model the full drawdown and interest profile before submission so the peak debt position is known and priced from day one.

What exit strategies do lenders accept?

Two exits dominate hotel development finance: refinance onto a trading commercial mortgage, and sale of the completed asset. The refinance route is the most common, and it depends entirely on the hotel's early trading. Long-term hotel mortgages are sized on EBITDA and debt service cover, so the development lender wants to see projections that support the refinance figure at a sensible multiple, with headroom for a slower ramp-up than the appraisal assumes.

Most hotel development facilities exit onto a trading refinance 6 to 18 months after opening, once the hotel has enough trading history for a long-term lender to underwrite the EBITDA. Where the gap between practical completion and a refinanceable trading record is longer than the development facility allows, a development exit facility bridges it at a lower rate than extending the development loan.

The sale route suits developers building for the investment market, particularly branded assets with a management agreement or lease in place, where institutional and private buyers will price the income. Forward commitments from buyers strengthen the funding application in the same way a franchise agreement does: they take the exit risk off the table before the lender commits.

Worked example: funding an 80-bed branded hotel build

How we arrange your hotel development facility

Frequently asked questions