Hotel development and conversion finance

Who can borrow and what lenders look for

Development lenders fund experienced developers and operators, or first-timers who bring in the right team. They want a planning consent in place or close to it, and on a conversion a clear change-of-use position, a fixed-price or well-controlled build contract, a credible contractor with a track record on similar buildings, and a realistic programme with contingency. For a hotel, they assess the operator and the market demand: evidence that the location can fill the rooms carries real weight, because a hotel that cannot reach a sensible occupancy will not service its eventual debt. They also expect the developer to commit meaningful equity, usually 35 to 40 percent of cost, so the borrower has capital at risk alongside the lender. On a conversion the works are often harder to price than a new build, because an existing structure can hide problems behind its walls, so lenders want a thorough survey, a realistic contingency and, where possible, a contractor who has converted similar buildings. They also look at whether the finished hotel will trade as an independent or under a brand or franchise, because a flag agreed before the build completes brings a distribution system and a recognised covenant that shortens the lease-up and strengthens the exit. We package the scheme, the team, the planning position and the demand evidence to give the lender confidence the hotel will be built on budget and filled on plan.

How much you can borrow

Development lenders work to two limits and lend to the lower of them. Loan-to-cost is the share of total project cost they will fund, indicatively up to 60 to 65 percent, with the developer providing the balance as equity. The second limit caps the loan at around 60 percent of the gross development value the finished hotel will reach, which protects the lender against an over-optimistic appraisal. On a strong scheme with an experienced operator, a mezzanine layer can lift total leverage toward 75 to 85 percent of cost by sitting behind the senior facility. The achievable loan therefore depends as much on the projected end value, driven by the room count, the achievable ADR and the location, as on the build cost. London and regional values differ sharply, at around 315,000 pounds and 129,000 pounds a room respectively per Knight Frank for 2025, which feeds straight into the GDV. The interplay between the two limits matters in practice: a scheme with a modest build cost but a high end value is constrained by loan-to-cost and leaves the developer needing less equity, while a scheme where the cost is high relative to the finished value is constrained by the GDV limit and demands more equity, even if the build itself is cheap. This is why we run both calculations on every appraisal rather than quote a single percentage. On a strong scheme, mezzanine behind the senior facility can close part of the equity gap, but it only works where the development margin is healthy enough to carry the higher cost of that junior layer and still leave a return. We model both senior limits, the equity requirement and any mezzanine top-up from the appraisal so you know your true cash commitment before you commit.

Rates and costs

Development finance is priced for risk and is dearer than a term mortgage, indicatively around 9 to 12 percent a year or 0.85 to 1.25 percent a month, usually with interest rolled up and added to the loan rather than serviced, then repaid on exit. Expect a lender arrangement fee of around 1 to 2 percent, an exit fee on some facilities, a monitoring surveyor's cost for the staged drawdowns, a valuation reporting on cost and GDV, and legal fees for both sides. Because interest rolls up, the length of the build and lease-up period drives the total finance cost, so a tight, well-run programme saves real money and an overrun is expensive twice over, in extended interest and in the delayed exit. The monitoring surveyor is worth the cost rather than a grudge purchase: by certifying each drawdown against work genuinely completed, the surveyor protects the lender and keeps the project honest, which is part of why a hotel built under proper monitoring refinances cleanly. We disclose our broker fee in writing, compare facilities on total cost to exit rather than the monthly rate, and never claim an exclusive tie to any lender.

Development finance, bridging or a term mortgage

Development finance is the right product when you are building, extending or converting and the hotel does not yet exist as a trading business. Once the hotel is built and open, it moves off the development facility onto a stabilisation loan while it ramps, then onto a long-term term mortgage once trade settles, each step cheaper than the last. If you are buying a site or a building quickly, before the development facility is in place, hotel bridging finance can fund the acquisition and roll into the development loan. If the building is already a trading hotel and you are simply buying it, acquisition finance, not development finance, is the product you need. We plan the full route from site to stabilised hotel so each stage uses the right money at the right price.