How do you underwrite a PIP the brand will not scope before you are under contract?

Question

Work through a rural interstate exit hotel: 78 keys, seller wants $2.1M, which is about $27k a key. Trailing RevPAR $47, occupancy in the high 50s. A 1998 build with six years left on the franchise agreement. The brand says a property improvement plan will be required on transfer but will not give a scope until the buyer is under contract with a signed application. A regional GC ballparks $18k to $25k a key for guestroom soft goods plus case goods plus bathroom, plus lobby and corridors, so call it $1.6M to $2M on top of purchase. So the all-in lands somewhere between $3.7M and $4.1M for a hotel doing maybe $2.8M of room revenue at present pace. The lender wants 30% down on the purchase and treats PIP money as a separate conversation. Two things to resolve: how does a buyer underwrite a number the brand will not disclose before commitment, and if the PIP comes in at the high end does the right move become drop the flag and run it independent or soft brand?

Rena Expert · Answer

You underwrite the number by pricing the option instead of the scope. Get the application in, pay the fee, and make the PIP scope a named contingency in the purchase agreement with a dollar threshold and a walk right above it. Brands generally will not issue scope pre-application, so the sequence you're describing is normal, and the protection is contractual rather than informational. Franchise documents and the transfer terms are worth having a hospitality attorney read, because the termination and liquidated damages language is where the real exposure sits.

On the numbers, your all-in of $3.7M to $4.1M on 78 keys is $47k to $53k a key, and the thing that decides whether that works is not the PIP total. It's what RevPAR does after. If the market supports $47 and the renovation moves you to $56, that's roughly $250k of additional annual room revenue at a strong flow-through, and it takes several years to repay $1.8M. If the renovation is defensive and RevPAR just stops declining, you have spent $1.8M to preserve the existing number. Ask the brand for the STR report and look at your index against the competitive set. A property running at index 95 has some room to recover. One at 110 is already outperforming and a renovation buys you very little.

Going independent in a rural interstate location is the harder path than most people expect. Highway travelers book on brand recognition and loyalty points, and a soft brand gives you distribution without the full PIP but still carries fees and standards. Model the same hotel unflagged at 8 to 12 points lower occupancy before you decide the PIP is the expensive option.

The thing your GC number probably excludes: elevator modernization, roof, PTAC replacement, and parking lot. On a 1998 build all four are live, and none of them show up in a soft goods per-key figure.

sonia_alvarez · Answer

The lender comment is the part to push on. "PIP money is a separate conversation" usually means they will do the acquisition loan and then want the renovation as a second facility, possibly at different terms, possibly not until you have seasoned. If the PIP has a completion deadline in the franchise agreement and your money is not committed at close, you are carrying a default clock you cannot control. Ask them in writing whether the PIP is funded at close in an interest reserve or holdback structure, and what happens to the covenant tests during the renovation when rooms are out of service.

How do you underwrite a PIP the brand will not scope before you are under contract?

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