Hotel financing is one of the most complex and risk-intensive segments of commercial real estate lending. Unlike other CRE assets (where revenue derives from leases with contractual terms), hotels are operating businesses where every room is leased daily at market rates — meaning revenue can drop sharply overnight in response to economic downturns, local supply increases, competitive displacement, or catastrophic events like pandemics.
Hotel underwriting relies on a distinct set of operating metrics: occupancy rate (percentage of available rooms occupied), average daily rate (ADR, revenue per occupied room), and revenue per available room (RevPAR = occupancy × ADR). RevPAR is the key performance indicator for hotel revenue. Lenders analyze RevPAR trends against the competitive set ("comp set") — the group of similar hotels in the same market — to assess whether the subject property is gaining or losing market share.
Hotel loans are typically structured with DSCR tests based on the hotel's trailing 12-month NOI — but because RevPAR volatility is so high, lenders must stress-test performance across economic cycles. Conservative underwriting applies a "haircut" to trailing NOI (e.g., 15–25%) to simulate a moderate economic downturn scenario. Loan sizing is then based on the stressed DSCR — ensuring the property can service debt even in a mild recession.
Brand relationships significantly affect hotel creditworthiness. Franchise agreements with major hotel brands (Marriott, Hilton, Hyatt, IHG) provide a property with reservation system access, loyalty program participation, and brand recognition that support RevPAR performance above what an independent hotel could achieve. However, franchise agreements also impose capital expenditure requirements — property improvement plans (PIPs) — and can be terminated if the property fails to maintain brand standards, creating a contingent capital liability that lenders must underwrite.
Hotel lending is concentrated in specific institutions — hotel-focused CMBS conduits, specialized real estate debt funds, and banks with dedicated hospitality teams — because the asset class requires deep operational knowledge. General commercial lenders who wander into hotel finance without this expertise often underestimate operating volatility and the operational complexity of underwriting an ongoing business enterprise rather than a passive real estate asset.