Family friend wants $15k for a slice of a 96-key highway hotel

Start with the number they left out. A property improvement plan is the brand telling the new owner to renovate to current standards, and on a limited service hotel that can run anywhere from ten to thirty thousand dollars a key depending on how far behind it is. At 96 keys that's a range of roughly $1M to $2.9M, which is the same order of magnitude as the entire equity raise. If that's not in the $8.2M or in a separate line, the deal you're being shown isn't the deal.

Ask him for the PIP scope letter. Not a summary, the letter.

The one I'd ask first: who actually runs it day to day? Nobody in that group is going to be standing at the front desk at 6am. Hotels usually get run by a management company on a contract, and that contract has a fee, usually a percentage of revenue plus an incentive piece. So there's a whole business between you and the money and you should know who it is and what they get paid.

Interstate exit means you should be able to name the demand. Is it truck traffic, is it a hospital, is it a plant that runs contractors through in six week waves, is it people driving four hours to a lake in July? Each of those breaks differently. A hotel that fills up because one employer has crews in town is a hotel with one customer and you won't see that in a RevPAR number.

61% occupancy at $112 is a normal, unexciting limited service hotel. Nothing wrong with it. The whole return in a deal like this lives in two places, what the renovation does to rate and what cap rate somebody pays you in year six. Both of those are guesses.

The part I'd sit with, rigging, is that $15k buys you zero say. You can't fire the operator, you can't stop a capital call, you can't sell your piece to anybody. You're along for whatever they decide. That's fine if you know it going in.

I own small multifamily and the mental switch that helped me: a hotel is a building full of leases that expire every morning at 11. Everything good and bad follows from that. When demand is strong you reprice up tonight, no waiting for renewal. When demand drops you find out this week, not next year. My tenants keep paying through a soft quarter out of inertia. Hotel guests just don't come.

@arbor is on the thing that would worry me most. I look at rural and small market stuff and I've watched two interstate hotels in one town go from packed to half empty when the crews finished a job. Ask what the top five accounts are by room nights and what percent of the year they represent. If one name is 20% of the business, that's the deal.

Something nobody's said yet: labor. Housekeeping, front desk, breakfast, maintenance. That's the single biggest cost line and it moves with the local wage market whether or not rates move. Ask what the payroll number is per occupied room and whether they're assuming it stays flat. If the projection has revenue rising 4% a year and payroll rising 2%, somebody is being optimistic on purpose.

Before Thursday I'd ask how long the money is tied up and what happens if it goes longer. Five to seven years is a range, and value-add hotel deals slip. Also ask whether you can be called for more money after the first check. Some structures let them, some don't, and that changes what $15k means.

You said $15k is most of what you've saved. That's the answer to the actual question, before any of the hotel stuff. This is the most cycle-exposed property type there is and it's illiquid for most of a decade. It might be a fine deal and still be the wrong thing for someone whose whole reserve it is.

Let me run their numbers back at you.

96 keys times 365 is 35,040 available room nights. At 61% that's 21,374 sold. At $112 that's $2.394M in rooms revenue. Their RevPAR of $68 checks out ($112 x 0.61 = $68.32).

So $780k of NOI on ~$2.4M of revenue is a 32.6% margin. That's on the good side of normal for limited service but not crazy.

Now the thing that's probably missing. Franchise agreements and lenders generally require a furniture, fixtures and equipment reserve, commonly around 4% of gross revenue. That's $96k. If it isn't already deducted, real NOI is closer to $684k.

$5.7M of debt, call it 7.5% on a 25 year amortization, is roughly $505k a year of payments. You'd want to confirm actual quoted terms in writing with whoever is lending, since rates and structures move. $684k over $505k is a 1.35 debt service coverage. Workable. But knock occupancy from 61% to 55% and rooms revenue drops about $235k, almost all of which falls straight to NOI, and coverage goes to about 0.9. That's the sensitivity you're buying.

Ask him to show you the deal at 55%.

@ledger's 55% case is the one I'd want on paper. Separately, rigging, ask who else is in the equity and how big the biggest check is. A raise of a couple million dollars in $15k slices means a lot of small investors and a sponsor spending a lot of time on investor relations. If there are two or three large checks and you're rounding, the large checks may have side terms you don't have. That happens and it's worth knowing.

Hotel debt behaves differently from apartment debt. Terms are typically shorter, coverage requirements are tighter, and personal guarantees show up more often. If the loan comes due in year five and the sale slips to year seven, somebody is refinancing into whatever the market looks like then. Ask what the loan term is, when it matures, and whether it's fixed or floating. Get those from the term sheet, not from the deck.

The sizing question is the one I'd answer for myself first. Not "is the hotel good" but what fraction of everything you own this represents. If it's most of your savings, the honest number for a first illiquid position in the most economically sensitive property type is probably smaller than $15k, or zero for now. Nobody here can tell you your number.

Documents I'd ask for, and I'd expect a real sponsor to hand them over without drama:

• trailing twelve month operating statement, month by month, not annual
• the STR report showing the comp set and the hotel's index against it
• the PIP scope letter @tally mentioned
• the franchise agreement, with remaining term
• the management agreement
• the loan term sheet

The monthly statements matter more than anything else on that list for a beginner. Seasonality is invisible in an annual number. A hotel doing 61% for the year might be doing 80% for four months and 42% for five.

When you get the management agreement, look at the term and how it ends. A lot of them run ten or twenty years with termination only for cause, or with a fee to get out. If the group's plan is to sell in year six, a long management contract that transfers with the property narrows the buyer pool, because plenty of buyers want to bring their own operator.

Also check whether the franchise agreement's remaining term extends past the planned hold. A buyer inheriting three years of brand term is inheriting a re-franchising decision and another PIP, and they'll price that in.

None of this makes it a bad deal. It's just where the money leaks in these structures, and the deck will never mention it.