LTV sets the ceiling, DSCR often sets the real number
A lender might advertise up to 65% LTV, but if your NOI doesn't support debt service at that loan amount under their minimum DSCR, they'll size the loan down to whatever coverage ratio they require — often pushing effective leverage closer to 50%-55%. This is why two hotels with identical purchase prices can require very different down payments.
Worked example
Consider a $9,000,000 purchase with $850,000 of stabilized NOI. At 65% LTV the lender would consider up to $5,850,000. But testing DSCR at 1.30x and a 6% rate over 25 years shows maximum supportable debt service of $653,846 ($850,000/1.30), which at that rate/amortization only supports about $8.4M... wait, actually check against the smaller constraint. In this case DSCR allows more leverage than the LTV cap, so the binding constraint is LTV at $5,850,000 — meaning the buyer needs roughly $3,150,000 (35%) in equity plus closing costs.
Flag strength moves the equity requirement
Nationally recognized flags with strong reservation systems and consistent RevPAR performance can unlock 70%-75% LTV from select lenders, cutting the equity requirement by several percentage points versus an independent or newly-flagged property. Franchisors with strong loyalty programs and corporate account bases are viewed favourably because they smooth demand across cycles.
Transitional and value-add deals need more equity, not less
It's a common misconception that a discounted, underperforming hotel needs less cash to buy. In practice, lenders apply lower LTV and sometimes require interest-only bridge structures until performance stabilizes, meaning transitional purchases often need 40%-50% equity, offset partly by the discounted purchase price itself.
Sources of down payment lenders will and won't accept
Lenders want to see the equity is genuinely at risk and traceable.
- Accepted: verified personal or corporate funds, sale proceeds from another property, arm's-length vendor take-back subordinated to the first mortgage
- Scrutinized closely: gifted funds without a clear paper trail, short-term unsecured loans used to inflate apparent liquidity
- Generally not accepted as primary equity: undocumented cash
Working capital is separate from the down payment
Beyond the equity injection for the purchase itself, lenders and prudent buyers budget separate working capital for payroll, deposits, and the FF&E reserve (typically 3%-5% of revenue) so the business isn't undercapitalized in its first operating quarter. Skipping this step is one of the most common causes of early financial distress in newly acquired hotels.
Frequently asked questions
- Is 20% down payment ever enough for a hotel purchase?
- Rarely for conventional financing; most Toronto-area hotel lenders require 35% or more equity given LTV caps of 50%-65%. A 20% down payment scenario would typically only work with significant vendor take-back or private mezzanine financing layered behind the first mortgage.
- Does a bigger down payment always get a better rate?
- It helps, particularly when it pushes you into a lower risk tier or reduces DSCR pressure, but rate is also driven by flag strength, operating history, and term selected. A strong, well-documented file with 40% equity often prices better than a thin file with 50% equity.
- Can I use a vendor take-back to reduce my cash down payment?
- Often yes, subject to the first mortgage lender's consent and typically capped at a modest percentage of purchase price, with the VTB registered in second position and standstill terms acceptable to the primary lender.
Talk to a Toronto hotel financing specialist
We arrange hotel, motel and resort debt across Toronto, the GTA and Ontario — acquisitions, refinancing, construction and PIP capital, and short-term bridge loans — through banks, credit unions, secondary institutional and private lenders.