Broker keeps calling the PIP "the real price" of the hotel

Read the franchise agreement before you argue about the PIP dollars. The clause that matters more is liquidated damages on early termination, often calculated off the average franchise fees for the trailing couple of years times a multiple. If your plan is to complete a 4.2m PIP and then reflag, you may be paying twice. There's usually a transfer fee too, quoted per key or as a flat amount.

Whatever number you land on, a lender will not underwrite the revenue you lose while rooms are down. Ask about a PIP escrow sized above your budget, an interest reserve for the renovation months, and whether the loan sizes off trailing income or your post-PIP projection. Most hotel lenders I look at do trailing, which is exactly the year the PIP will hurt. Confirm the actual terms in writing, they move around.

Convert everything to per key before you do anything else. 9.9m on 110 keys is 90k a key, plus 38k a key of PIP, so you're all in near 128k a key before closing costs and any working capital. Then ask what it costs to build that hotel new in that market today. If new construction is 165k a key you have room. If it's 140k you're buying someone else's deferred maintenance at a small discount, and you're doing 18 months of construction to get there.

harrow, you'll know this better than I do, but the PIP scopes I've seen priced go sideways in the bathrooms. Brand says replace vanity and tub surround, demo finds substrate rot and a 1970s drain layout, and suddenly it's a plumbing job on every stack. Also worth pinning down rooms out of order per crew per week, because that's your revenue loss line and the GC's schedule and the operator's forecast are never the same document.

The dates almost never live in the franchise agreement itself. They come in an approval letter or PIP addendum attached at closing, and that's the document with the teeth. While you're collecting paper, ask whether the franchisor will issue a comfort letter to your lender, which is what lets the lender step in and keep the flag alive if you default. Lenders on branded hotels ask for one, and franchisors have their own form they don't much like editing.

Does the OM show displaced revenue anywhere, or is the 4.2m the only renovation cost in the whole package?

Different angle on the same room. If the answer is that a 110-key deal needs 14m of capital plus construction management, most people asking this question aren't buying the hotel, they're deciding whether to be an LP in something. Private hotel funds I've been shown set minimums around 100k to 250k, sometimes higher, and they're offered only to qualifying investors. Listed hotel REITs have no minimum at all beyond a share price. Very different risk, same sector exposure.

The part that stops me on hotels is that during a PIP year there may be nothing coming out. I want income that shows up monthly, and a hotel mid-renovation is the opposite of that.

Two operating things nobody's said yet. Payroll is the whole game on a limited service box, housekeeping hours per occupied room drive your margin more than rate does on soft weeks. And if there's a bar or breakfast alcohol service, liquor license transfer rules vary a lot by state, some let you operate on a temporary permit at closing and some make you wait on a board hearing. Ask early, it has stalled closings.

Sanity check on the income side: limited service hotels commonly run departmental and undistributed expenses that leave gross operating profit somewhere in the 35 to 45 percent of total revenue range, and then management fees and the FF&E reserve come off that. If this OM shows a margin well above that band, ask which expenses the seller left in the owner's column. I've seen property taxes, insurance and the reserve all excluded to make a number.

So the broker's line is backwards. The PIP is the part you can measure with a tape measure, and the trailing income is the part you can't. That's the risky end.