What happens to a $50k hotel fund position if travel softens?

Also ask what the fee stack is on your $50k. Acquisition fee, asset management fee, the hotel management company's base fee off gross revenue, incentive fee, disposition fee. That is a lot of hands before you see the 8%, and the 8% on the summary page may be gross of some of them.

The thing I would want on paper is the relationship between the fund's ten year life and where we are in the economic cycle. Hotels track travel demand, and travel demand tracks the economy more tightly than any other property type I've read about. A five to seven year hold means the exit lands whenever it lands.

So I'd ask two things. What happens if the assets are not sellable at a decent price in year six, and does the fund have the ability to extend rather than sell into a bad market. Extension provisions in the fund documents are worth reading carefully, not because they are hidden, because they decide whether you get forced out at the bottom.

Dumb question from someone who mostly reads about paper: where does the debt sit? If each hotel has its own loan and one of the three gets in trouble, does that loan reach the other two? I've been trying to understand cross-collateralization and this seems like the exact place it would matter.

@vellum that's not dumb, it's the second thing I ask now. Ask whether the assets are financed individually or under one facility.

@verity the other thing nobody tells you the first time: the $50k is usually a commitment, not a wire. They call it in pieces as they buy. Find out the call schedule and whether there is a reserve for renovation overruns already committed, because if there isn't, more calls are coming.

On the documents, three clauses do most of the work in a fund like this. The capital call default remedy, which can dilute you hard if you miss a call. The key person provision, since your friend being there is part of why you're interested. And the sponsor's ability to change the hotel management company, which in hospitality is the single biggest lever on performance.

Whether any of that is enforceable as written against you is a question for a securities attorney reading the actual documents, and it is worth paying one for a few hours.

I'd want the operator's track record separated from the sponsor's. Two different companies, two different questions. For the management company, ask for their RevPAR index history on comparable assets, meaning how their hotels performed against their competitive set rather than against a forecast. STR-style benchmarking data exists for exactly this and any real hotel operator has it.

Also ask what the airport asset's demand base actually is. Airport submarkets can be crew contracts, distressed travel, and connecting traffic, and those repriced very differently from each other. "Airport" is not a demand driver by itself.

Run break-even occupancy yourself. Take their stabilized expense line, add debt service, divide by achievable ADR times keys times 365. On a select service asset that number often lands in the mid to high 50s in occupancy terms once there's a mortgage on it. Then compare that to what the asset ran in the worst year of the last cycle.

If the gap is four or five points, you know what you're buying. @verity your $95 stabilized RevPAR against $71 today is a 34% increase. That is not an operations tweak, that is a repositioning bet, and repositioning bets need the capex number next to them or the RevPAR number is decoration.

On the capex, ask for the property improvement plan line by line, with dates. I've watched a hotel renovation go from soft goods to a case goods and bathroom job because the brand inspector showed up mid-project. That is a different number entirely.

Also ask how many rooms are out of service at once and for how long. Displacement during renovation is real lost revenue and half the pro formas I've seen either skip it or assume the crew works faster than crews work.

Worth getting the loan terms in writing rather than paraphrased: maturity dates against the hold period, the DSCR covenant and how it is tested, and whether there is a cash trap that sweeps distributions if coverage slips. A cash trap is the mechanism that turns your 8% into 0% in a soft year while the asset is still technically fine. Terms vary by lender and by deal, so confirm the actual documents rather than the term sheet language.

Maturity risk is the one I'd stare at. If a loan comes due in a weak hospitality capital markets window, you refinance on whatever terms exist then.

Two things in the paperwork that nobody reads on hotel deals.

The franchise agreement. It has a term, and if the term runs out inside your hold period the brand can require a full renovation to renew. It also has liquidated damages if the sponsor wants to sell to a buyer who won't take the flag. That clause has killed exits.

The FF&E reserve. Brands and lenders typically require a percentage of gross revenue set aside for furniture and equipment replacement. Check whether the sponsor's 8% is calculated before or after that reserve funds. I've seen both, and the difference is more than a point.

@verity you asked whether this is the version that survives a bad year. Nothing on a summary page can tell you that. The three RevPAR scenarios @thicket asked for plus the loan maturity schedule will get you most of the way.