Hotel Re-Financing: key construction-related considerations

Hotel Re-Financing: key construction- related considerations 

Climate and outlook

 Despite a backdrop of economic and political uncertainty both globally and in the UK and the market expectation that digital economy properties (such as data centres and logistics / warehousing) will continue to take the top spots in commercial real estate asset class rankings over the next 12 to 18 months[1], there continues to be an increasing interest in operational real estate investment (e.g. hotels). In the UK, operational real estate investment increased by 17% in Q3 2025 compared to the previous quarter, with hotels leading the way, driven largely by high-volume single-asset (as opposed to portfolio) transactions[2]. The hospitality sector is therefore demonstrating relative stability, resilience and investor confidence in high-quality hotel assets.

Financing or refinancing?

 A significant number of hotel loans are expected to require refinancing over the next 12–24 months as development facilities mature and/or redevelopment and growth are required to maintain and enhance the underlying asset. Refinancing, however, is not simply an extension of the original development finance. While initial financing focuses on achieving practical completion, refinancing requires lenders to consider the operational realities and performance of a trading hotel, the longevity of construction-related protection and the ongoing ability to manage defects and safety compliance.

 Refinancing typically occurs in one of two scenarios: either with the existing lender, where certain security arrangements may be preserved or amended, or with a new lender, where a full due diligence exercise is required to ensure that construction-related rights remain assignable and enforceable. Hotels present particular complications because of phased openings, continuous refurbishment cycles, integration of FF&E packages and the possibility of mixed-use development structures, all of which influence the availability and value of construction-related protection.

Timing is key 

 Understanding the completion status of the construction works is another critical component of refinancing diligence. Lenders will need to confirm when practical completion occurred, whether the certificate of making good defects has been issued and whether any snagging or disputes remain unresolved. Retentions may have been released, and any outstanding issues could have funding implications. For hotel assets, phased completion, sectional handovers and ongoing refurbishment programmes complicate the picture further; lenders must clearly understand which elements of the hotel were covered by the original construction contracts and which have been delivered subsequently through separate contracting arrangements. Where a project monitor was engaged during the development stage, their reports at completion can be invaluable in identifying residual risks and informing the drafting of any continuing construction-related covenants in the finance documents.

Security

 A key starting point for lenders is to confirm the status of the existing security package. Any refinancing, whether with the same lender or an incoming lender, requires clarity on whether or not previous security has been fully redeemed and discharged. Incoming lenders will need to establish what security can validly be taken over the building contract, key consultant appointments, collateral warranties, performance bonds, parent company guarantees and insurance policies. This exercise is especially important where the hotel forms part of a wider multi-use asset and different elements of the scheme have been financed separately and/or at different times. For example, in complex redevelopments such as the iconic Old War Office development (on which Withers advised both on the development financing and the refinancing[3]), security over the construction documentation proved to be a complex process vis-a-vis the residential and hotel components, which also created intricate intercreditor and priority issues. Similar risks arise where assignments have been granted during the original finance process and must be released or re-assigned before the new lender can take effective security.

 With regard to collateral warranties and third party rights, where practical completion has already been achieved, step-in rights are generally of limited use and the focus will shift to the enforceability and assignability of the warranties / third party rights themselves, the remaining contractual limitation periods and whether the professional team, main contractor and key design sub-contractors continue to maintain adequate professional indemnity insurance (particularly where several years have passed since practical completion). Construction parties may no longer be willing or able to issue new warranties, so lenders must rely on the protections already in place. Understanding which warranties remain live, which parties are still trading and the scope of any exclusions or caps on liability is essential. In addition, lenders also increasingly favour third-party rights regimes as they avoid the logistical and commercial difficulty of obtaining fresh signatures long after the construction phase has concluded.

 Insurance arrangements also require a detailed assessment. Lenders will need to verify how the building is insured as an operational hotel, including confirmation of property and business interruption cover, and evidence of professional indemnity insurance (as referred to above) should also be reviewed. Latent defects insurance, if available, can provide an additional layer of protection where PII is limited or where contractor or consultant insolvency risk is present, a point which can be especially relevant in long-running hospitality schemes.

Other key considerations 

The Building Safety Act 2022 continues to shape the risk profile across the built environment. Although most hotels do not fall within the definition of 'higher-risk buildings', the extended limitation periods under the Defective Premises Act and Building Act apply more widely. Lenders will therefore expect evidence of compliance with building regulations and to understand the borrower’s governance processes for maintaining safety standards and the “golden thread” of information, even where the legislation does not apply strictly.

 Facility agreements for refinancing should also contain ongoing obligations that reflect the operational nature of the asset. These may include covenants to notify the lender of defects, disputes or material damage, obligations to maintain insurance, requirements to enforce warranties and guarantees, and provisions for capex or reserve accounts to fund future refurbishment or latent remedial works. Where financing is expected to occur in phases, this should be considered from the outset. Several recent high-profile hospitality developments have demonstrated the difficulties that arise where phased financing was not anticipated early enough, resulting in complex contractual and security arrangements that reduced refinancing flexibility.

 As it is often the case that the owner and operator of a hotel are not the same or even affiliated entities, consideration will also be needed in relation to an incumbent (or new) third party operator and/or manager of the hotel and due diligence carried out on any relevant operating agreement and/or hotel management agreement to ensure that the value of the hotel asset is maximised and there are no onerous terms that may affect the lender. For example, there may be a requirement for the owner to obtain a non-disturbance agreement to ensure that the lender is bound by the management agreement on a foreclosure (this is often required by international hotel operators and may need to be negotiated).

Key takeaways

 Ultimately, construction diligence on a hotel refinance is not a box-ticking exercise and requires careful investigation, planning and (where required) creativity. Hotels are long-term operational assets with continuous capex demands and lifecycle risks. Lenders must ensure that the construction security package remains enforceable and meaningful and that the borrower has the ability and obligation to manage construction-related liabilities throughout the life of the facility. As refinancing activity increases across the sector, a clear understanding of these issues will be essential for both lenders and hotel owners navigating the next phase of the market.