A case study in how a second capital call dilution can cost more than the operating miss

Four years with no distributions and then a call on top. The puzzle is why anyone signs up for construction risk and calls it an income position. That is a job with extra steps and no paycheck.

The 14-day notice is worth working through at a smaller scale, because the arithmetic is the same. Take an 8-unit gut where the JV needs another $180k and one partner's share is $44k they don't have. Borrowing it at 14% for eleven months costs about $5,600 in interest. If the dilution formula in that deal is 2x, taking the dilution instead gives up roughly $70k of exit value. That is an easy call once the arithmetic is actually done, and it often takes an evening because these formulas tend to be written in prose rather than as an equation. Thicket, did you run that comparison at the time, or was there simply no lender who would touch it in 14 days? Because that is the real trap. The math might say fund it while the calendar says you can't.

Slightly lost on the mechanics. When your percentage went from 3.1 to 1.7, does that mean your $200k stopped counting, or just that your share of the profit shrank while the capital account stayed the same?

Harrow, I read it differently. The budget overage was $2.4M on a deal that sold for around $17.5M. The exit was $28k a key under underwriting, which on 148 keys is $4.1M. That's the bigger hole and it came from the income, not the concrete.

RevPAR 23% short of plan and GOP margin seven points light means the asset never earned the value the exit assumed. A hotel is worth its trailing income divided by whatever cap rate the market gives you that quarter, and thicket got a bad number on both halves. You can absorb a construction overrun on an asset that hits its operating plan. You cannot absorb an operating miss with a tighter construction budget.

Thicket, was the comp set assignment ever renegotiated? An index of 88 sometimes means the brand put you against a set you don't actually compete with, and sometimes it means you're losing share. Those are different problems and only one of them is fixable.

The operator change in year three is the part I want to hear more about. Two operators in four years on a 148-key select service seems like a big deal on the service side. Was that the sponsor's decision or did the brand force it after a quality score problem?

I ask because every transition I've read about involves rehiring most of the department heads, redoing the training, and a few months where the guest scores go down before they go up. If the sponsor swapped operators hoping for a fast revenue lift, the first two quarters usually go the other way.

I had to read this twice. What does a RevPAR index of 88 mean? Is 100 the average of the comp set, so 88 means the hotel earned 88% of its fair share of revenue?

Juniper, that is it. 100 is your fair share against whatever hotels the brand decided are your competition. Which is exactly the soft spot in small and secondary markets. In rural corridors a highway property's comp set can include two hotels 14 miles apart on different interchanges serving completely different demand. One gets the crew business, one gets the weekend traffic, and the index comparing them says almost nothing about whether either one is well run. Thicket's number might be real underperformance or it might be the brand's mapping.

Fourteen days is normal, and ten is not unusual. That is the part LPs keep getting surprised by and it is written into nearly every set of docs. On the seven points of GOP margin, labor is the whole game at that size. Select service pencils housekeeping at a certain minutes per room and a certain wage, and if the operator cannot hire at that wage it either pays more or runs rooms out of order, and out of order rooms kill occupancy in the exact months that matter. Both roads lead to the same margin. A 41 percent GOP assumption on a conversion opening into a market where somebody has to actually staff it deserves two numbers side by side, the wage rate the operator used and the local rate it will really pay. Thicket, was that in the deck at all?

Question I'd have kept to myself a year ago. Thicket said the final distribution came after a preference to the sponsor's co-invest. Why does the sponsor's money get paid before the LP money? I thought the sponsor was behind everyone as the tradeoff for the promote. Is that a thing that got negotiated in, or is it standard when the sponsor funds a call the LPs skip?

Compass, in a lot of these the money that funds a shortfall gets a priority return, and whoever wrote the check is ahead of the original capital. Sometimes it's structured as a member loan instead of equity, in which case it's ahead of everything including the preferred. Thicket, what number did the docs give for the maximum additional call? You said 25% of committed capital. That's the single line worth modeling as an actual scenario rather than a footnote, because it turns a $200k commitment into a $250k commitment on a two-week fuse. The sounder sizing is $160k in the position with $40k held liquid, instead of $200k committed and hope.