An extension test on a hotel bridge loan that looks unfinishable by design
A 120-key full-service hotel bought out of a lender-driven sale at roughly $74k a key, well under replacement cost, with trailing twelve RevPAR around $61 on ADR near $99 and occupancy in the low 60s, is the kind of deal where the discount is explained by a previous owner who stopped spending and closed the food and beverage operation for an extended period. A bridge loan sized around $6.2M, with roughly $5.0M funded at close and the balance as a future advance for the property improvement plan, floating rate with a floor, interest only, on a 24-month term with two six-month extensions, is a common structure for this kind of value-add hotel play. A roughly $640k interest reserve built into the funded portion needs to be checked against the actual carry cost at full draw. If annual interest at full draw runs near $520k, a reserve sized at roughly fifteen months looks comfortable only until the renovation timeline is factored in. If a PIP renovation runs close to eleven months by the contractor's own schedule, the gap between rooms coming back online and the property generating enough operating income to cover debt service can be uncomfortably thin. The extension test is the sharper issue. A 1.25x debt service coverage requirement measured on trailing twelve months net operating income, when the renovation itself runs through much of that same trailing period, can be structurally unsatisfiable on a straight trailing basis, since eight or nine months of the measurement window would include a property with rooms out of service. That either means the borrower is unlikely to ever meet the test as written, or the lender has effectively always intended to waive it, and a participant coming in without control over waiver decisions is taking on that ambiguity directly. A lender participation with a cure right but no control over waivers is worth pushing back on before funding: asking for the extension test rewritten to an annualized trailing three months post-completion, rather than a full trailing twelve that structurally includes the construction period, is the kind of change that turns an unfinishable test into a real one. Legal review of the participation agreement's waiver and control provisions before committing is the standard diligence step this kind of construction-period hotel debt calls for.
