Any long-married couple will likely tell you there’s no such thing as the perfect partner. We’re all flawed humans, which means any system we build – whether it’s a relationship or a financing structure – comes with its own challenges.
Hotel development, construction and adaptive reuse/conversion projects are no different. Neither are the lenders who step in to fund them.
Still, some partners are better than others. The best ones tend to see us clearly. They recognise what we bring to the table, acknowledge our weaknesses and support our goals. Most importantly, despite our flaws, they choose to invest in us anyway.
In this sense, private lenders may just be the ideal match for hotel investors looking to carry out an adaptive reuse or conversion.
“For projects where the returns can be higher than ground-up builds, private capital often provides the structure and risk tolerance needed to bring these unique developments to life,” says Ebbie Khan Nakhjavani, founder and CEO of EKN Development and EKN Engineering. “A strong lending partner understands that reuse is not just renovation – it’s reinvention.”
Willing to convert
Today’s higher cost environment and stringent traditional lending standards have made adaptive reuse or conversion to hotel a sound alternative development strategy for some investors. The problem is, not all lending partners see the light. Many private credit providers do, however, which has turned them into a source of support and partnership on these endeavors.
“Private credit is an especially well-suited financing source for conversion and adaptive re-use projects due to the greater underwriting flexibility that such lenders can provide,” says Jon Gitman, partner at BridgeInvest.
More specifically, Gitman notes that regulated institutions often need to score or grade each loan based upon defined risk metrics that are produced by internal departments or regulators.
“The challenge is these metrics are often defined by asset classes, and an adaptive reuse project may pose a challenge for more regimented lenders to define which asset class they should be scoring,” he continues.
Kevin Davis, Americas CEO for JLL's Hotels & Hospitality Group, adds that this problem can be compounded if the lender isn’t as experienced with adaptive reuse or hotel conversions. On the other hand, many private credit providers have the knowledge and expertise to get these projects done for two reasons. One, they’ve filled the lending gap on these types of projects ever since traditional lenders pulled back following the Global Financial Crisis. Two, some private credit providers own assets like this themselves.
“Private credit providers are continuing to attract more capital into their space, so we expect that they will be very active in hospitality,” Davis says. “Private credit likes the hotel space because it provides an inflation hedge and typically offers a yield premium relative to other asset classes.”
And many hotel developers are just as fond of private credit. In fact, some credit (no pun intended) these lenders as the reason their conversion projects were able to cross the finish line in the first place.
“We worked on the financing of a high-quality hotel in New Orleans that was successfully converted from an office building into a hotel,” Davis continues. “It was financed by a private credit provider. The availability of private credit is what enabled the deal to get done.”
It’s also what enabled Hotel Marcel (part of the Tapestry Collection by Hilton) to become the first net-zero hotel and Passive House-certified hotel in the U.S. when it opened in New Haven, Conn., in 2022. Originally constructed between 1968 and 1970 as the Armstrong Rubber Company headquarters, the building was revitalized by architect and developer Bruce Redman Becker of Becker + Becker.
The firm utilized more than $7 million of C-PACE to finance the adaptive reuse project, which included a large-scale solar array. The property can now generate its own electricity for lighting, heating, cooling and hot water for its common areas, restaurant, laundry, meeting rooms, and 165 guest rooms and suites.
C-PACE financing was also used for envelope measures, such as roofing, windows, insulation and lighting. The end result is that Hotel Marcel will use 80 percent less energy than a typical hotel in the United States, according to Nuveen Green Capital, which provided this funding.
Mutually beneficial partnerships
Private credit providers appreciate more than the hedge against inflation and yield premium associated with this sector. Many also appreciate the risks and rewards adaptive reuse and conversion projects can bring.
“The relationship between the developer and private lender is critical,” Nakhjavani says. “Hotel conversions carry a range of risks – from construction and cost overruns to regulatory delays, branding challenges and market volatility.”
Private credit helps EKN manage these variables through flexibility and tailored structuring. Unlike traditional lenders, private capital can accommodate extended timelines, phased financing and evolving development needs…also known as surprises.
EKN’s Hotel Indigo, an adaptive reuse project in Rochester, Minn., came with exactly that. The firm acquired the then-Holiday Inn Downtown Rochester in 2018, operated it for a few months, then closed the property for its redevelopment and conversion to the Hotel Indigo. The redevelopment transformed the ‘60s-style hotel into a sleek, modern hotel that fit within the city’s downtown.
“It came with structural surprises, regulatory complexity and evolving timelines,” Nakhjavani notes of the hotel, which opened in 2020. “We look for lenders who bring flexibility, sector knowledge and the patience to navigate unexpected challenges. When both sides share a vision and a willingness to adapt, the chances of success increase dramatically.”
Gitman has learned to expect the unexpected from these types of projects. This is why BridgeInvest typically requires twice the amount of contingency as it would on a standard ground-up development.
“The issue with these adaptive reuse projects is that there are always more surprises when you start bringing down walls or ripping up flooring,” he explains. “Cost overruns are very common in these projects, so additional contingency mitigates this issue.”
The firm also conducts a more detailed review of the architectural plans, as Gitman notes many projects “really don't work well” for repositioning.
“One must look at the newly created layouts and determine if they really make sense,” he continues.
Of course, the numbers have to make sense, too. Gitman says he often sees developers who have entered deals with the wrong cost basis when buying a property before renovating it.
“The truth is that sometimes the building itself is a liability from a cost perspective as compared to building ground-up,” he adds. “In other words, the renovation will cost more than a new project.”
He also knows, however, that there are instances where an adaptive reuse makes sense. This can be the case if it’s difficult to obtain approvals for new projects; the cost or public opinion associated with demolishing an existing building (especially if it is historic) is unfavorable; the building boasts special features that make it particularly attractive, lending the space an authentic flair; or when the dimensions of the building (height, square footage, etc.) are greater than what can be achieved with a new build.
Even in these scenarios, the issue of cost should remain at the forefront of a developer’s mind.
“The important thing is purchasing the asset for a low price, which will allow the project to absorb potential design changes or cost overruns,” Gitman continues. “However, many investors overpay for these projects when the per-square-foot price is similar to that of a healthy, operating building, as opposed to that of a redevelopment opportunity.”
Finally, there is the level of risk to consider. Gitman believes adaptive reuse and conversion projects fall into one of two categories: construction or renovation. He notes there is a higher standard of due diligence and underwriting for construction projects, which comes with higher loan pricing. On the flip side, a standard renovation, such as a property improvement plan, is considered lower risk.
“The fact of the matter is that although the building exists, these projects are often even more risky than ground-up construction,” he says.
Once again, experience matters. Working with a sponsor that has successfully completed these types of projects before can mitigate a good deal of this, Gitman adds. Having guarantors that meet stringent financial covenants to ensure there is additional credit support for the transaction if things go wrong can also help.
For its part, EKN likes to be able to show private credit partners a clear feasibility study, well-defined operator strategy and that it has engaged early on with local experts to show that the path forward has been considered, not just imagined.
“These foundational elements help bring that vision to life – making the extraordinary both financeable and achievable,” Nakhjavani says.
In essence, EKN and developers like it are hoping for what everyone hopes for in a partner. Namely, not just the ability to see eye to eye, but the willingness to imagine what could be and the faith to take that leap. Together.
“It starts with vision – being able to see what a forgotten or underutilized building could become,” he continues. “Conversion and adaptive reuse demand more than financial modeling; they require imagination, sensitivity to history and the ability to unlock character that ground-up development can’t replicate. But vision alone isn’t enough. There needs to be substance and verifiable returns.”