The franchise flag added 14 points of RevPAR but the royalty fee and PIP obligation nearly canceled the gain.

The separation question is the right one, and almost nobody builds it correctly. Before testing whether the flag earned its keep, I would want to confirm the royalty base: some franchise agreements calculate the royalty on total room revenue inclusive of fees and surcharges that the property never actually collects net, which inflates the royalty drag above what a clean gross room revenue read suggests. I would also check whether the franchise agreement includes a marketing or program services fee on top of the 6.8 percent, because a brand like Marriott or Hilton often layers another 5 to 6 percent there, which would push total brand fees past 12 percent of room revenue and reframe the entire NOI story. The PIP financing assumption matters too: if that $2.8 million sits as mezzanine or preferred equity rather than senior debt, the 7.5 percent carry cost may actually be understated once you factor in the return hurdle rather than just the coupon. The question I would run before anything else is what the displacement-adjusted ramp looks like: if occupancy dropped 15 points during renovation and took 14 months to recover, the RevPAR index gain may simply be measuring the asset returning to its pre-disruption baseline rather than the flag adding genuine incremental demand.

What does the franchise agreement say the marketing and program services fee runs as a percentage of room revenue, separate from the royalty line?

The math you've laid out is clean, and the pinch point is exactly right. At 6.8 percent on gross room revenue, the royalty scales with top line whether the bottom line follows or not. That is the structural problem with percentage-of-revenue royalties on a property still absorbing a PIP: the flag gets paid before you get to see whether the RevPAR lift actually cleared the cost of capital.

The assumption doing the most work in your model is the flow-through rate. If you're running 35 to 40 percent flow-through, which is realistic on a limited-service asset mid-renovation, the 14 RevPAR points may add $390k to $450k in incremental room revenue but deliver $135k to $175k to NOI. That doesn't clear $400k in combined annual drag from royalty and carry cost, which means you need either a higher RevPAR index than you have, stronger flow-through than the asset can deliver in years one and two, or the PIP costs to compress faster than a 30-year amortization implies.

The risk you haven't named explicitly is the PIP scope creep problem. Brands reserve the right to issue supplemental PIPs at future inspections, and a $2.8 million initial obligation can grow if the property misses brand standards during the renovation window. That's worth a hard look at the franchise agreement's PIP re-inspection language before you treat $2.8 million as a fixed number.

On the RevPAR index question, the pre- and post-conversion comp set matters enormously. If the flag moved you into a higher-quality comp set, the index improvement may understate how the property would have performed against its original peers. That distortion is common on upflag conversions and makes the operator's pro forma look better than the underlying economics.

What does the franchise agreement say about the PIP reinspection cycle, and did you negotiate any royalty abatement during the renovation displacement period?