Hospitality Market Update: March 11, 2025

Top 10 Factors Lenders Consider When Evaluating a Hotel Loan

Written by Katie Vivian, Hotel Loan Originator

Securing hotel financing requires careful preparation and a clear understanding of lender expectations. Here are the top ten factors lenders consider when evaluating a hotel loan request:

1. NOI & Debt Yield – Lenders analyze Net Operating Income (NOI) and debt yield (NOI divided by loan amount) to assess the property’s ability to generate sufficient returns. Higher debt yields indicate lower risk for lenders. When calculating NOI, lenders use a standard 3% management fee and a 4% FF&E reserve.  Hotel lenders look for a minimum 12% debt yield on hotels.  The higher the debt yield, the more competitive the interest rate.
2. Performance Against Comp Set – Lenders review STR report metrics such as occupancy, Average Daily Rate (ADR), and Revenue per Available Room (RevPAR) to compare the hotel’s performance against its competitive set. Ideally, lenders prefer properties performing towards the top of their comp set, as this indicates strong market positioning and demand.
3. Debt Service Coverage Ratio (DSCR) – A key metric that measures a property’s cash flow relative to its debt obligations. Most lenders require a DSCR of at least 1.40x to ensure sufficient cash flow for loan repayment. Generally, the higher the DSCR, the more favorable the interest rate a borrower can secure.
4. Flagged or Strong Independent Properties – Lenders prefer properties affiliated with major brands such as Hilton, Marriott, Hyatt, or IHG. Upscale independent hotels in strong markets with established demand drivers can also be favorable.
5. Franchise Agreement Term – Ideally, the franchise agreement extends beyond the loan term, reducing risk. If it expires during the loan term, lenders may require additional structuring. A renewal or extension in place before closing may be necessary.
6. Property Improvement Plan (PIP) – If a PIP is due within the loan term, lenders will assess the scope, cost, and completion timeline. Many lenders may require escrow for the full PIP amount at closing. A light PIP refresh is more favorable than an extensive PIP where major renovations and construction may significantly disrupt occupancy.
7. Stable Operating History – Lenders look for consistent financial performance, demonstrating the property’s ability to service debt. If there is historical volatility, lenders will need to understand the story behind it to get comfortable with the deal.
8. Market & Demand Generators – Lenders focus on the market and demand generators that drive occupancy because they directly impact a hotel’s long-term viability. Strong corporate, leisure, healthcare, or education-related demand sources provide stability and reduce investment risk.
9. Borrower Equity & Cost Basis – Lenders want to see a clear total cost basis and ensure the borrower has sufficient equity in the deal.
10. Borrower Strength – A borrower’s financial strength, industry experience, performance of other hotels owned, and creditworthiness play a key role in lender decisions.

Preparation in these areas can improve financing terms and streamline the loan approval process. If you’re considering hotel financing, ensuring these elements are in place will position you to achieve the best financing terms available.