Case: Hotel seasonal recovery misses a debt-service test

Hypothetical hotel recovery. A hotel has just completed a weak year and forecasts a much stronger next summer. Annual loan debt service is $600,000, paid as $150,000 each quarter for this simplified case. A $5 million principal balance matures on June 30 of the recovery year, before the strongest projected quarter.

The owner has $100,000 of opening operating cash and believes the forecast proves repayment is manageable. The analysis must separate the cash needed to stay current from the historical measure required by the covenant and the proposed refinance lender. All operating figures and loan conditions are invented.

Put actual history and the forecast in different columns

The prior year’s quarterly cash flow before financing is $50,000, $100,000, $250,000 and $100,000, totaling $500,000. The recovery-year forecast is $120,000, $150,000, $450,000 and $180,000, totaling $900,000. Assume the forecast Q1 and Q2 become actual results; Q3 and Q4 remain projections at the June maturity.

The OCC hospitality discussion identifies seasonality as a hotel underwriting factor. It does not establish this hotel’s recovery path or the reliability of its summer bookings. A real forecast needs reservation, cancellation, rate, room-availability and expense evidence.

The Q3 and Q4 cash-after-debt figures are conditional illustrations that hold $150,000 quarterly debt service unchanged after the June maturity. They require an effective extension or replacement financing with that payment burden; they are not scheduled payments under a loan that has already matured. Actual new terms can change those cash figures and later coverage denominators.

Starting with $100,000, the owner uses $30,000 to pay the Q1 shortfall and retains $70,000 through Q2. All scheduled payments are made on time in this model. There are no other capital uses, reserve transfers or distributions. Actual intramonth timing would require a more detailed schedule.

Recalculate the rolling covenant measure

Assume the loan’s covenant requires trailing-four-quarter cash flow divided by annual debt service to be at least 1.25×. At March 31, the trailing sum replaces the prior Q1 with the new Q1: $100,000 + $250,000 + $100,000 + $120,000 = $570,000. At June 30 it becomes $250,000 + $100,000 + $120,000 + $150,000 = $620,000.

The hotel’s ability to pay Q1 from existing cash does not change the covenant numerator. Conversely, failing the stipulated ratio does not prove the bank account is empty. The actual documents determine any trigger, cure, waiver or default consequence; this case does not assign one automatically.

The OCC cash-flow discussion distinguishes covenant and underwriting definitions. Here, the 1.25× covenant is deliberately different from the 1.35× refinance requirement below. They should not be merged into a single unnamed “lender DSCR.”

Size the June takeout on evidence actually available then

Assume a new lender accepts June’s $620,000 trailing cash flow, requires 1.35× coverage, uses a 10% annual principal-and-interest constant and imposes a $5.2 million collateral ceiling. Income capacity is approximately $4,592,593, below the collateral limit.

After 2% refinancing costs, proceeds are approximately $4,500,741. Against the $5 million principal payoff, the gap is $499,259 before accrued interest, payoff charges or new reserves. The $70,000 operating cash is held for hotel operations in this scenario and is not treated as freely distributable payoff money.

If the lender instead accepted the $900,000 forward forecast, income capacity would exceed the $5.2 million collateral ceiling. That gross loan would net $5,096,000, leaving $96,000 before excluded uses. The difference is substantial, but the stronger result depends on an explicitly accepted underwriting basis, not merely on placing the forecast in the same column as actual results.

The summer recovery arrives after the obligation

At June 30, the projected $300,000 Q3 cash surplus has not been earned. It cannot fund the maturity wire without a separate committed financing or capital source. An extension to reach September also requires effective agreement and satisfaction of its conditions; the seasonal forecast does not grant time by itself.

The OCC refinance guidance provides context for assessing the actual repayment conditions. It does not require a lender to overlook a weak trailing period or accept a particular recovery forecast.

The owner should prepare a dated proposal showing actual first-half cash, supported summer assumptions, required operating liquidity, the $499,259 modeled gap and any committed contribution. If requesting a different underwriting basis or an extension, identify the evidence and decision deadline. The case demonstrates why timely payments, improving operations and a forecast annual 1.50× ratio can coexist with a genuine June refinancing problem.