How deep should a hotel hold sit in reserves before the reserve itself erodes the return

A sponsor's reserve policy calling for three months of debt service plus a lender's FF&E escrow at 4% of gross reads thin next to what a deeper reserve would cost. Run the arithmetic on a hypothetical 100-key select service asset with $8M of gross revenue and $1.1M of annual debt service. Three months of debt service is $275k sitting idle. Twelve months is $1.1M. Add a properly accrued PIP at $25k a key and the reserve carries $2.5M against a $6M equity raise, meaning a meaningful share of investor capital sits in a bank account rather than in the asset. If the projected distribution is 6%, that reserve costs the deal roughly a point and a half of yield in exchange for surviving a bad year without a suspension. The case for deep reserves is that hotels reprice nightly and a single soft summer can take NOI below debt service, and the worst outcome for a passive investor is not a low distribution but a forced sale or capital call in a market that is not buying. The case against is that reserves are a sponsor's cheapest way to look prudent while collecting fees on capital that is not working, and that a lender escrow plus available credit can do the same job without the drag. If a sponsor needs twelve months of debt service in cash to feel safe, that often means the debt was sized wrong to begin with. The honest tradeoff is between 6% projected with three months of cushion and 4.5% projected with a year of it, and the right answer depends on how volatile the specific submarket's seasonality actually runs.