What a $50k hotel fund position does 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 to want on paper is the relationship between the fund's ten year life and where the economic cycle sits. Hotels reprice nightly, so they track travel demand, and travel demand tracks the broader economy more tightly than any other property type. A five to seven year hold per asset means the exit lands wherever it lands. So there are two questions worth putting to them. 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 closely. They decide whether an investor gets forced out at the bottom.

The thing worth pressing them on is where the debt sits. If each hotel carries its own loan and one of the three gets into trouble, does that loan reach the other two? Cross-collateralization is the term to ask about by name, because it decides whether one bad asset stays contained or takes the equity in the other two with it.

@raj_mehta14 that's a fair question and it's the second one worth asking. Ask whether the assets are financed individually or under one facility. @tylerbrooks9 the other thing that catches first time LPs is that the $50k is usually a commitment rather than 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 shaped like this one. The capital call default remedy, which can dilute a position hard if a call gets missed. The key person provision, since the person you know being there is part of why the slot is interesting at all. And the sponsor's right 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 a limited partner 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, and 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 is 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 are buying. @tylerbrooks9 the $95 stabilized RevPAR against $71 today is a 34% increase. That is a repositioning bet rather than an operations tweak, and repositioning bets need the capex number sitting next to them or the RevPAR figure 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 to 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 the 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 will not 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. Both versions are common, and the difference is more than a point. @tylerbrooks9 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 @brandonlee36 asked for, plus the loan maturity schedule, will get you most of the way.