The extension test on this $6.2M hotel bridge looks unfinishable

Rooms out of service matter more than I first assumed, and now I understand the shape of the problem. If you take a floor down for renovation you lose those room nights permanently, there's no catching up later the way a store can restock. So the trailing twelve at the test date is measuring a period where the building was half a building. Does the lender's own model show what the trailing number would be at month eighteen? That seems like the first document to ask for.

On the management side, the thing I'd want named in the loan documents is who runs it and what happens if they leave. A full-service property coming out of a distressed sale with the food and beverage closed needs an operator who can rebuild group and corporate accounts from nothing, and that takes a sales director who has local relationships. If the sponsor's plan is a management contract with a regional company, ask which specific general manager is assigned and what the incentive fee hurdle is. Ask also whether the RevPAR ramp to $84 assumes food and beverage reopens, because if it does, that's a separate business with its own payroll and its own failure mode, and it's usually the part that runs behind schedule.

Your two concerns are the same concern arriving at different dates. Both depend on when revenue resumes relative to when cash obligations resume.

On the reserve: $640k against roughly $520k of annual interest is about fifteen months, but that math assumes full draw from day one. Interest on the $1.2M future advance accrues only as it funds, so the reserve stretches somewhat further than fifteen months if the advance draws late in the schedule. Ask for the lender's reserve runway model with the draw schedule overlaid on the construction schedule, month by month. What matters is the month the reserve hits zero versus the month the property first covers interest from operations. On an eleven-month PIP with a ramp from $61 RevPAR, the property does not cover interest the day the last room reopens. Hotels reprice nightly and rebuild rate through occupancy first, so a ramp of three to four quarters after completion is the assumption doing all the work in that stabilized case.

On the extension test: a trailing twelve test at month 24 on a property renovated through month eleven is mechanically unpassable, and lenders know it. That structure usually exists so the extension is discretionary in practice. Asking for annualized trailing three months post-completion is the standard fix, and lenders often counter with trailing six annualized plus a minimum debt yield. Either version transfers the risk of a slow ramp to you in a shorter window.

As a participant without waiver control, the economics of your $1.5M are set by decisions someone else makes. That is a legal document question and a lawyer should read the participation agreement before you commit.

Fifteen months of reserve against eleven months of work leaves four months. I've never seen an eleven-month hotel renovation finish in eleven months.

I read this thread hoping to understand hotel debt as an income option and mostly I've learned it isn't one for me. The part I keep rereading is that you get the 90-day cure right but no vote on waivers. So the lead lender can extend the loan, restructure the reserve, and you carry the outcome. Is there a version of a participation where you get a consent right on material modifications, or is that only available at bigger check sizes?

Reopening a closed food and beverage operation after two years is not a line item, it's opening a restaurant. Hood cleaning, health inspection, a new kitchen crew in a small labor market, menu costs that have moved since the last owner priced anything. If the $84 RevPAR case leans on banquet and group business that needs a working kitchen, ask what portion of the $2.1M PIP is kitchen and back of house. If it's under $300k I'd want to know who priced it.

A question about the $74k a key. If the building was built for far more, why does a low price per key not just make this safe? I understand there's renovation cost on top, but $8.9M plus $2.1M is still $92k a key. What's the number that would actually make it unsafe?

@ember the price per key only protects you if there's a buyer at that price when things go wrong, and full-service hotels in secondary markets have thin buyer pools during a soft travel stretch. Replacement cost is a comfort story, not a bid.

@tender the number I'd solve for is debt yield at exit rather than coverage. $6.2M of debt against a stabilized NOI you'd have to believe in. If the ramp to $84 RevPAR produces, say, $1.35M of NOI, that's a 21% debt yield and refinancing is easy. If it stalls at $70 RevPAR you might be at $800k, a 13% debt yield, and takeout financing gets expensive right when the reserve is empty. Ask the sponsor what RevPAR their refinance breaks at, and see whether they've ever answered that question before.

The eleven-month contractor letter is the document I'd read hardest. Is it a letter or a guaranteed maximum price contract with liquidated damages for delay? Those are very different pieces of paper, and only one of them puts the delay risk somewhere other than your reserve. If the sponsor doesn't have a signed contract yet, the schedule is an intention.

Add a hotel to the list of things I'm no longer putting on my list. But I want to understand the waiver point better, because it seems like the real risk here isn't the property at all. If the lead lender waives the extension test and pushes maturity out eighteen months, your $1.5M sits at a floating rate in a construction project for three and a half years. Does the participation agreement cap total term, or does it just follow whatever the lead does?

@marlow consent rights on material modifications do exist in participations, and they usually come attached to a minimum percentage of the loan. $1.5M of $6.2M is 24%, which in my experience of reading these is right at the edge where you can sometimes ask for a consent on maturity extension and reserve re-sizing specifically, without asking for a general vote. Whether you get it depends on who else is in the syndicate and how badly the lead needs your dollars filled. Worth asking as a term, not as a favor.

The clause I'd read before anything else is how the lead is compensated for a waiver. Some participation agreements let the lead collect an extension fee on the whole loan while participants only get their pro rata interest. That misaligns exactly at the moment the deal is in trouble, because extending pays the lead and costs you time. Also check whether the lead can sell its piece and whether your consent rights survive that transfer. Those two things together decide who you're actually partnered with in month twenty.

I'm in the middle of a much smaller construction loan right now and the thing that surprised me is how fast a reserve empties once the schedule slips. Two weeks of a permit sitting on someone's desk cost me a month, and interest didn't pause for it. @pike's month-by-month request is the right ask. On the hotel specifically, I'd also want to know whether the future advance has conditions precedent that a delayed project can fail, because a lender that can decline to fund the last $1.2M mid-renovation holds every card and the sponsor's $2.1M is already spent by then.

Running your numbers a different way. $6.2M at 62% occupancy and $99 ADR gives roughly $2.67M of rooms revenue at current levels, so debt is about 2.3x revenue on a full-service property where undistributed costs are heavy. Full-service houses at that RevPAR often produce GOP margins in the high twenties, so call it $700k of GOP before taxes, insurance, and reserve, which is under the $520k interest number by less than most people would like. The stabilized $84 RevPAR gets you to about $3.68M of revenue and the margin improves with rate, so the whole deal is that ramp.

Which means your underwriting question is what the market's competitive set actually does. Get the market RevPAR index for the submarket and see whether $84 is the set's current level or a level the set has never reached. Sponsors write ramps to the top of the set as if the renovation entitles them to it. Travel demand isn't guaranteed to cooperate over the next two years either.

Reading this whole thread as someone still choosing a lane, the thing that lands is that the property is almost beside the point. Every real risk you've listed lives in a document: the reserve sizing, the extension test, the waiver rights, the future advance conditions. That's a different skill from spotting a good hotel, and I don't think I'd want to learn both at once. If you do take the participation I'd be curious later whether the displacement schedule existed at all when you asked for it.