Reserve funded at 2%, franchise agreement says 4%, and I found it in a footnote
Hotel repositioning fund, four assets, my position was $120k. I read the LPA before I signed and I read the quarterlies, which is more than most people do and clearly still wasn't enough.
The franchise agreements required a reserve for furniture, fixtures and equipment, ramping to 4% of gross room revenue by the third year of the license. The fund funded it at 2% for the entire hold. That's disclosed, sort of. It's in the notes to the audited financials, in a sentence saying the manager, with the general partner's consent, may fund the reserve at a level below the contractual requirement where cash flow requires, and that the shortfall accrues. Accrues to whom was never stated in a way I understood until the exit.
On a property doing about $7.4m in room revenue, 2% versus 4% is roughly $148k a year of work not being done. Across two of the four assets, over four years, call it $1.1m of soft goods and case goods that aged in place. Guest scores drifted. Nobody cared much while occupancy was holding.
Then the brand issued a property improvement plan at the license renewal window, and the buyer priced it. Their scope came in at $3.4m across the two assets. They took the whole thing off the price, plus a contingency, plus a haircut for the risk that the brand added to the scope after closing. We exited at 0.87x on those two. The other two carried the fund to something a bit above break even on my capital before fees.
What I'd do differently: pull the franchise agreement's reserve schedule and compare it to the actual reserve funding in the cash flow statement, every quarter, and treat any gap as a liability I'm carrying at par. And ask the GP directly whether they intend to fund at the contractual level, because "may fund below" in a footnote turned out to mean "will."