Paid 62 cents on stated value for another LP's units in an 88-key extended stay

A partner in an 88-key extended stay wanted out badly enough to sell into a market of one. The units had been marked by the sponsor at $300k. I paid $186k, in cash, with the sponsor's consent and a transfer fee of $7,500 that I paid.

Why the seller was motivated: distributions had been suspended for five quarters while the property funded a brand mandated renovation out of cash flow, and the sponsor had circulated a letter about the possibility of a capital call that never came. The seller read the letter as a warning. I read the trailing twelves. Occupancy had held in the high 70s through the renovation because the demand base was insurance and project crews rather than transient leisure, and the rate discount they were giving during the work was 9%, not 25%.

What I underwrote before buying. Renovation was 70% complete with $410k left, funded and escrowed. Debt was fixed at a rate signed years earlier with four years of term left, roughly a 1.55 coverage on renovation-year cash flow. My basis of $186k against my share of trailing NOI put my going-in yield on resumed distributions near 9% where the original investors were looking at 5.5%.

Distributions resumed two quarters after I bought. Property sold 31 months later. On my basis the whole thing came in around a 17% annualized return with the sale, most of it from what I paid rather than anything the operator did.

The part that nearly broke it was the franchise relicense at sale. The buyer's lender required a comfort letter and the brand came back with a short punch list of $180k that hadn't been in anyone's model. It came out of proceeds and it delayed closing seven weeks while everyone argued about who ate it.

What I'd keep: buying the seller's fear rather than the asset's story, and only in a segment where I could name the guests. I would not have bought this at stated value.