The palace, built by Sultan Abdülâziz on shore of the Bosphorus, was designed by the palace architect Nigoğayos Balyan and constructed by his sons Sarkis and Hagop Balyan between 1863 and 1867, during a period in which all Ottoman sultans built their own palaces rather than using those of their ancestors; Çırağan Palace is the last example of this tradition. The inner walls and the roof were made of wood, the outer walls of colorful marble. A beautiful marble bridge connects the palace to the Yıldız Palace on the hill behind. A very high garden wall protects the palace from the outer world.

The construction and the interior decoration of the palace continued until 1872. Sultan Abdülâziz did not live long in his magnificent palace - he was found dead inside on May 30, 1876, shortly after he was dethroned. His successor, his nephew Sultan Murad V, moved into Çırağan Palace, but reigned for only 93 days. He was deposed by his brother Abdülhamid II due to alleged mental illness and lived there under house arrest until his death on August 29, 1904.

During the Second Constitutional Monarchy, Sultan Mehmet V Reşat allowed the parliament to hold their meetings in this building. Only two months after, on January 19, 1910, a great fire destroyed the palace, leaving only the outer walls intact. Called "Şeref Stadı", for many years it served as a football stadium for the club Beşiktaş J.K..

In 1989, the ruined palace was bought by a Japanese corporation, which restored the palace and added a modern hotel complex next to it in its garden. Today, it serves as luxury suites for the five-star Kempinski hotel along with two restaurants that cater to guests.

The Palace was renovated again during the first quarter of 2007, now resembling the authentic palace with the baroque style and soft colors.

The current site renovation began initial design phases in 2012 and will include formal gardens, covered dining, private pools, personal poolside cabanas, and additional dining options. Construction to begin June 2016.