Looking at a 54-key select service in a mid-size market, and the franchise royalty runs about 5% of room revenue. Operator is pitching the brand as rate protection when occupancy dips, but I can't find 12 months where that actually held.
On my end I hold a note against a 78-key branded select-service in a secondary Ohio market, and the borrower gave me access to STR comp data for the full 2022-2023 cycle. Q1 2023 was the soft quarter everyone was dreading post-stimulus. The flagged property dropped RevPAR about 11% versus the prior year same period. The independents in the same submarket dropped 19-23%. So the brand did compress the swing, but it did not eliminate it, and the borrower was still eating that 5% royalty plus the 2% marketing assessment on a revenue base that had already shrunk. Net-net the brand loyalty channel drove maybe 60% of occupied rooms that quarter, and without it the debt coverage would have cracked below 1.1x. So the flag earned its keep in that specific case, but only because the loyalty program was actually producing heads in beds, not because the brand name alone held rate.
The thing I would pressure-test before you underwrite that 5% as "worth it" is what percentage of trailing-12 reservations are coming through brand.com versus OTA versus direct. If brand-sourced bookings are under 45% of total room nights, the royalty is mostly a tax on revenue the operator would have captured anyway. My borrower was sitting at 58% brand-sourced, which is why the math worked. A mid-size market with one corporate demand generator and heavy leisure mix can easily run 35% brand-sourced, and then you are paying 5% plus the marketing fee to protect almost nothing during the exact quarter when margins are thinnest.
The pitch sounds clean but the brand isn't doing the work in a soft quarter, the distribution channel is. And 5% on room revenue is real money when RevPAR is already compressing.
What I'd want to see is the STR comp set for that specific market segmented by flagged versus independent, not the brand's own marketing data.
The one thing I have never seen hold up is the brand protecting ADR when their own loyalty discount tiers are running in the same market. What actually happens is the flag's member rates and last-minute system pricing undercut the premium they promised you, so you're paying 5% royalty to compete against your own brand's discount engine. A 62-key Hampton in secondary Ohio dropped RevPAR 18% in Q1 2023 with full brand support, because the system was filling rooms through negotiated corridors that crushed rate.
