In 2025, hotel financing is undergoing unprecedented transformation, spurred by economic slowdowns and shifting market dynamics. Hoteliers are facing a pivotal moment where innovation in funding strategies has become crucial for ensuring project success and future growth.
As traditional lending sources tighten their belts, alternative financing methods such as C-PACE loans and mezzanine debt are emerging as lifelines for navigating these turbulent times. Understanding and embracing these options is more critical than ever for thriving in the hospitality industry.
A changing lending environment
In times of stability, banks are more willing to offer loans under favorable terms and conditions. However, the current economic uncertainty calls for hoteliers to explore diverse funding sources beyond traditional avenues. These options include:
Regional banks and popular sources today
Regional banks continue to be reliable providers of first-mortgage debt in local markets where their understanding of unique conditions gives them a competitive edge. Yet, leverage remains limited, with loan-to-value ratios averaging about 60%, often accompanied by guarantees. This cautious lending underscores the need for creativity in financing hotel projects. Other first mortgage debt providers include commercial-mortgage-backed securities (CMBS) loans with five- and 10-year durations and life insurance companies, typically with five-year terms.
Understanding mezzanine debt: A critical component
Mezzanine finance occupies the middle tier of the capital structure, bridging the gap between bank debt and equity. For many hoteliers facing limited access to credit from banks, mezzanine finance has become not only enticing but essential. Its flexibility and equity-like characteristics make it a viable option for projects with robust potential, such as hotels in markets where demand is growing, supply is muted, new businesses are growing, and the brand, sponsor team and location are strong.
Key sources of mezzanine funding include hotel management companies, franchise organizations (key money), specialized financial firms and even government entities such as the U.S. Small Business Association. With terms typically spanning one to three years, mezzanine loans often defer principal payments until senior debt is retired. This structure gives hotel owners the opportunity to maintain control while securing necessary funds for repositioning and growth.
Loan example
A typical structure might include a $15 million first mortgage, a $5 million mezzanine debt piece and $10 million of equity. If we can find a first mortgage at 6% and a mezzanine piece at 10%, the blended rate would be 7%. If offering a 7% preferred return on equity is an option, the financing is pretty good in today’s market. If the project will support it, increase the loan proceeds and the return of equity improves.
Mezzanine lenders often aim for an internal rate of return targets aligned with the risk profile of the project, with pay rates ranging from 2-5% above senior debt. Importantly, the deployment of mezzanine finance enables owners to retain autonomy over daily operations and decision-making, even as equity partners share in the project's upside.
C-PACE financing: Sustainability meets affordability
C-PACE financing is gaining traction as a compelling alternative to mezzanine debt. Designed for energy-efficient and renewable energy projects, C-PACE loans feature long-term, fixed-rate terms with no upfront costs. This innovative financing model empowers hotel owners to prioritize sustainability while preserving cash flow. C-PACE loans are repaid via a property tax assessment, offering an attractive solution for enhancing operational efficiency in a slow-growth environment.
Charting a path forward
Today's hospitality industry is at a crossroads. As traditional capital sources remain somewhat cautious, tools such as C-PACE loans, mezzanine debt and innovative equity structures offer transformative solutions for overcoming financing challenges. By embracing these strategies, hoteliers can position themselves for resilience and stability. When the market stabilizes, those who adopt creative financing now will be primed for success in the next cycle of growth and prosperity.
Robert Rauch, CHA, has been an owner-operator of hotels for several decades and is founding chairman of Brick Hospitality, owner of R. A. Rauch & Associates, Inc.
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