MCD Hotel Advisors

Current State of Hotel Development

Hotel development has continued to soften in 2025 due mostly to high construction costs, higher interest rates and overall caution of lenders for projects.  According to Costar, the U.S. hotel development pipeline continued to contract in September 2025, marking the ninth consecutive month of year-over-year decline.

Impact of Tax Credits on Hotel Underwriting

In several recent underwriting projects for clients, we have seen this same impact. The deals “don’t pencil” these days due to the factors mentioned above. So, what to do?  Well, times dictate creativity.  As such, more of my clients are seeking projects that qualify for tax credits.  Tax credits exist at both the state and federal levels and vary by state.  In general, they allow the developer to get tax credits against a portion of their development budget.  The specifics vary, but a common practice is for the hotel to start claiming these tax credits at open and annually for some period of time.  Developers can use them in the following ways…

• Use them as straight tax credits to offset project taxable income as they are received
• They can monetize them at some discount (80-90% on average) through 3^rd party investors that can better leverage these benefits
• Leverage them for a Bridge Loan in the capital stack to reduce the amount of equity required

By including this benefit into the underwriting, a hotel can potentially go from not viable to meeting developer/investor IRR return hurdles.

Deep Dive Into Historic Tax Credits

Historic Tax Credits (“HTC”), a program in existence for almost 50 years in its current form, are available for the renovation of a historic building according to historic standards, qualifying the project for a 20% federal tax credit for a portion of these renovation expenses (and sometimes also an accompanying State HTC that can be used in conjunction with the FHTC). The expenses that qualify for the HTC are known as Qualified Rehabilitation Expenses (“QREs”).  They are generally accepted to be costs related to the design and construction of the historic structure but can also include other soft costs such as developer fees, interest costs during construction, etc.  HTC advisory firms, like Gaslamp Capital, have years of experience in this niche and can help historic building owners structure and monetize the historic tax credits into their projects.  

What Types of Projects Qualify For HTC

HTC eligible projects cross asset classes and geographies and are generally reserved for historically significant/contributing buildings over 50 years old but can include a wide array of structures that might not necessarily appear historic at first glance.