The RevPAR index test in the license is the clause I can't price

Who actually runs the building. You've told us the fee structure and nothing about the people it pays. How long has the current general manager been there, does the manager keep them through the transition, and how many other hotels does that manager operate within a two hour drive? A third-party manager with eleven hotels in the region and one regional revenue manager covering all of them is a very different asset than one with a dedicated on-property revenue role. The 37 percent margin is somebody's daily work, and if that somebody leaves at closing you bought the number without the person who made it.

I don't follow the liquidated damages math. Trailing three-year average royalty on rooms revenue of about $3.4M is roughly $187k a year, times 36 months is $561k? That's the number the borrower owes if they get terminated, on top of losing the flag and the reservation system, and it lands at the exact moment the hotel is performing badly enough to fail a test. If that's right the clause isn't really about damages, it's a lock.

37 percent GOP on select service isn't heroic, I've seen high thirties hold in stable markets. What I'd stress is flow-through. At 68 percent occupancy your fixed labor is already spread about as thin as it gets, so if RevPAR drops 8 percent you don't lose 8 percent of GOP, you lose closer to 18 or 20 because housekeeping hours and front desk coverage don't come out cleanly at the margin. Run the same pro forma at RevPAR $82 and see what happens to the incentive hurdle and the debt coverage. My guess is the hurdle stops getting hit long before the coverage breaks, which tells you the manager's incentive is aligned to a scenario you might not be in.

Ran the revenue build. 104 keys times 365 is 37,960 available room nights. At 68 percent that's 25,813 occupied nights, times $132 is $3.407M of rooms revenue. You show total revenue at $3.9M, so other revenue is about $493k, which is 12.6 percent of the top line. Select service hotels usually land somewhere in the low single digits to maybe 7 percent unless there's meeting space, parking income, or a fee structure I'm not seeing. Ask what's in that $493k line by category, and ask whether any of it is one-time. If half of it isn't repeatable, your GOP is not $1.44M.

The FF&E deferral is smaller than it looks, by the way. 4 percent of $3.9M is $156k, 2 percent is $78k, so the deferral saves $78k a year and $156k across two years. That's five percent of the PIP. Fighting for the amendment on that line costs you sponsor goodwill for a rounding error next to a $2.6M to $2.9M capital event with no fixed scope. I'd spend the same energy on the PIP contingency and who funds an overrun.

And there's no debt in your post. Loan amount, rate, term, amortization, and whether the maturity sits before or after the PIP completion deadline in the license. That last one decides most of this.

Two document questions before any of the operating numbers matter.

First, license term versus loan maturity. If the license has 14 years left and the loan matures in five, the franchisor holds the refinance. Lenders on flagged hotels generally want a comfort letter from the franchisor, and those letters set out what the lender can do if it takes the property back, including whether the license survives. Ask for the draft comfort letter now, not at closing.

Second, who signs. Franchise licenses for limited service hotels are usually personally guaranteed by principals, and the guaranty typically covers the liquidated damages @vellum priced out. Find out whose name goes on it, because that person's incentives when the index slips to 86 are not the same as yours. If the guarantor can cure by selling the hotel at a bad price, that is what happens.

The management agreement outliving the license by four years is its own problem. In that overhang window the manager is being paid a percentage of gross by a hotel with no flag. Look for a clause tying the HMA term to the license term, and if there isn't one, that absence is a negotiated outcome someone accepted.

I'd build the index as an input rather than a fact. Current 96, test threshold 85, so you have 11 points of cushion in a metric you don't control and can't audit line by line. Model 84 for two consecutive years and put the $561k @vellum calculated plus a reflagging cost plus displacement into that scenario. If the deal still returns something you can live with in that case, the clause is priced. If the answer is a total loss of LP capital, then you've learned the deal only works if the index behaves, and you can decide whether you believe that.

Running a small crew has made me suspicious of any hotel pro forma where I can't see the wage line by department. At 104 keys with breakfast you're carrying housekeeping, laundry, front desk across three shifts, maintenance, and a GM, and the difference between in-house housekeeping and a contract house is several points of GOP in either direction depending on your market. Ask for the actual payroll register by department for the last 12 months, plus average wage by role and turnover. @keystone's flow-through point is right, and the reason it's right is that most of those roles are scheduled by rooms occupied, so the schedule lags the demand drop by two or three weeks every single time.

The two-year test window and the PIP overlap, and nobody's said what that does.

A $2.6M to $2.9M PIP on 104 keys means guest rooms out of order in blocks, corridors closed, public space torn up, and probably a period where you can't sell your best floor. Occupancy and rate both take a hit during that, and so does your review score, which follows you for a year after the drywall is done. That's precisely the period where your RevPAR index drops, because the comp set is not renovating. I've seen a 96 index sit in the low 80s for the duration of a heavy renovation and then come back. The license apparently doesn't care whether the reason is renovation. Two consecutive calendar years below 85 and the franchisor may terminate, which means the PIP the franchisor required can hand the franchisor the right to terminate.

So the questions I'd put to the sponsor. Does the license carry a force majeure or renovation carve-out from the performance test, and if not, will the franchisor issue a written waiver of the test for the calendar years of the PIP as a condition of the change of ownership approval. Is the PIP scheduled to straddle two calendar years, and can it be sequenced into one. What displacement is in the pro forma, in rooms-nights, because @ledger's revenue build has no displacement in it at all.

A franchisor will often paper that waiver, since forcing the renovation and then penalizing the result isn't in their interest either. But it has to be in the approval documents. A phone call is not a carve-out, same as the lender's verbal on the FF&E reserve.

Can someone define fair share plainly for me. My understanding is that if you have 104 of 1,000 rooms in the comp set, your fair share of demand is 10.4 percent, and index is your actual share divided by that, times 100. So 96 means you're capturing slightly less than your room count would suggest and 85 means you're well behind. If that's right, then adding a brand new 120-key hotel to the set changes the denominator and your index falls even with identical performance, which is @halyard's point and it seems like a big deal for a clause with termination attached.

$2.9M over 104 keys is $27,900 a key, and that's soft goods plus case goods plus bathrooms plus something structural, not a paint and carpet refresh. On the construction side the numbers that matter are the phasing plan, the rooms-out-of-order count per phase, the contingency percentage, and whether the GC is bidding a fixed scope or a scope the franchisor hasn't finalized. You cannot fix-price a PIP that gets written after inspection. Anyone telling you $2.6M is holding a number with no drawings behind it, and my experience with hotel work is that you find the electrical and the water intrusion once the walls are open. If the sponsor's contingency is under 10 percent on an unfinalized scope, ask who writes the check for the gap, and get the answer from the LP agreement rather than the sponsor's email.

What happens to your $340k if there's a capital call and you don't fund it. That's the one I'd read three times, because between the PIP with no fixed scope and a two-year window where distributions are probably suspended anyway, a call looks more likely than not. Dilution formulas in these documents range from mild to punitive, and the punitive versions can take a non-participating LP down to almost nothing.

Document requests I'd send before wiring anything. The actual STR report, not the sponsor's summary of it, with the comp set membership listed and 36 months of monthly index history. The franchisor's quality assurance inspection scores for the last three years, including any default or cure notices issued to the current owner. The full change of ownership application with the PIP punch list attached if it exists in draft. The last two years of monthly operating statements in the brand's own chart of accounts, so you can see @ledger's $493k other revenue broken out. And the manager's incentive fee calculation as actually paid, month by month, so you can see whether the hurdle has ever been cleared.

If the sponsor will not put the STR report in your hands because of the reporting subscription's terms, that's a real constraint rather than evasion, and you can usually get the index history written up for you instead. If they won't even write it up, start worrying.

Are you getting the full management agreement and license before you commit, or excerpts? I've had sponsors show me a summary and call the documents confidential until after subscription.

Different world from mine. The independent lodges I look at in small markets trade at a fraction of this per key, and nobody's index gets revised on them by anyone.

I came into this room hoping to find something that pays without becoming a job, and this thread has cured me of that hope for hotels. @warrant is a limited partner with no control and he still has to understand comp set revisions, PIP phasing, and a manager's incentive hurdle just to know what he owns. Also, if @plumb is right about the renovation window, there's a stretch of two years or so with no distributions and a real chance of a call. That's not income, it's a commitment.

@marlow, that's the honest shape of it. @warrant, the version of this I could hold would be a hotel that has already finished its PIP, with the index history showing recovery after the work, a manager with a track record in that specific submarket, and a loan maturing well after the license expires. You'd pay more for that and give up the renovation upside. Buying the pre-PIP version means underwriting a scope nobody has written yet, and I don't know how you price a scope nobody has written.

The thing I'll take from this thread and use elsewhere is that the required improvement and the penalty test live in the same document and don't reference each other. Once you see one of those you start looking for the pattern everywhere, and the fix is always the same, get the carve-out written into the approval before you close rather than relying on the counterparty's good sense afterward. @plumb's sequencing question is the cheapest one on the list to ask, and if the PIP can be pulled inside a single calendar year the whole termination risk shrinks a lot.