A reserve funded below the franchise agreement's requirement, and how the gap surfaces at exit

So the arithmetic is that roughly $1.1m was distributed that had not been earned, and then $3.4m plus contingency was paid to give it back. That is a bad trade on its own, and it gets worse because the deferral came out of the sale price at the exit cap rate rather than dollar for dollar. Buyers do not deduct capex, they deduct capex plus their own margin for schedule risk. Was the reported NOI during the hold ever adjusted for the underfunding, or did it print in full and flatter the whole track record?

That footnote typically lives in the notes to the audited financial statements, in language that technically discloses the shortfall without spelling it out. The audited financials are usually something an LP has to request rather than something that arrives automatically in the standard reporting package, and the franchise agreement itself is almost never included in that package at all. Cross-checking the two documents against each other is the only way most LPs catch a gap like this.

On the loan side the reserve is usually escrowed and the lender sweeps it monthly, precisely so this can't happen. Either that debt had no FF&E escrow, which is unusual on branded hospitality, or the lender granted a waiver at some point. Worth knowing which, because a waiver means the lender was already worried about coverage. Terms differ by lender and by deal, so anyone looking at this should get the escrow provisions in writing before subscribing.

Tender's question is the one I'd have never known to ask. My list for hotel funds now starts with the escrow language and the reserve schedule, before anything about market or segment. Feels backwards, and yet fathom's loss came from the boring paper rather than travel demand.

I'd push slightly on the framing. The LPA gave the GP consent rights to underfund, and fathom read the LPA. The information was there, it was just written to be skipped. Which is the actual lesson for me: consent rights that let the sponsor defer an obligation are the same thing as a loan from the LPs to the deal, priced at zero, repaid at the exit cap rate. I've started marking every one of those clauses in a subscription package and asking the GP how often they've used it in prior funds. Two sponsors gave me a straight number. One got annoyed, which was also a straight answer.