# Case: Hotel purchase with a mandatory franchise improvement plan

Canonical: https://commercialdebtadvisory.com/cases/hotel-purchase-with-a-mandatory-franchise-improvement-plan/
Status: Published
Publisher: Jaken Finance Group

**This is a fictional hotel acquisition, renovation and debt exit.** The buyer agrees to pay $8 million for an 80-room hotel subject to an assumed $1.2 million franchise property improvement plan. The fictional brand requires completion by month twelve. There is no real brand, actual financing offer or operating forecast behind these numbers.

The buyer can fund the construction budget. The unresolved question is whether the hotel will have enough accepted operating evidence to repay an 18-month bridge. Completion of physical work and demonstration of financeable cash flow are different events.

## Reconcile the acquisition before discussing the exit

| Total project uses | Amount |
|---|---:|
| Hotel purchase | $8,000,000 |
| Physical PIP budget | $1,200,000 |
| Closing and financing costs | $200,000 |
| Dedicated operating cash | $300,000 |
| Total | **$9,700,000** |
| Total hypothetical bridge commitment | **$6,000,000** |
| Total owner equity | **$3,700,000** |

Assume $5.2 million of debt funds at closing and $800,000 is available later for eligible PIP work. All $3.7 million of equity is available at closing. Initial sources of $8.9 million fund the $8 million price, $200,000 costs, $300,000 operating cash and the first $400,000 of PIP costs. Later debt advances fund the remaining $800,000 physical budget under this simplified schedule.

The model assumes the future advances actually meet their conditions and arrive before the corresponding payments. If they reimburse previously paid invoices, an additional temporary funding schedule is needed. The [separate PIP funding guide](/property/hotel-franchise-property-improvement-plans-and-loan-proceeds/) handles that draw-timing problem; it is held resolved here so the case can isolate the repayment problem.

Bridge interest and operating cash movements are not forecast line by line in this case. At maturity, assume all $6 million is funded and no principal has been repaid. The $300,000 operating account is assumed consumed by the full operating/carry plan and unavailable for the payoff. If a verified balance remains, show it as a separate source instead of silently reusing the opening allocation.

## Measure the earnings effect of closing rooms

The stabilized underwriting forecast assumes $900,000 of annual accepted cash flow after operating expenses and the chosen recurring capital provision. Within the measured twelve-month operating period, twenty rooms are unavailable for ninety days. Assume those room-nights would otherwise have sold at 70% occupancy and a $125 average daily room rate.

Lost room revenue is 20 × 90 × 70% × $125 = **$157,500**. Assume 30% of that lost revenue represents avoided variable operating costs. The contribution lost is therefore $110,250, and the modeled cash flow for that measured period is **$789,750**. Fixed costs and other revenue are held unchanged; no displacement into the remaining rooms is assumed.

The [OCC hospitality discussion](https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf) identifies franchise obligations, condition and seasonal operating factors as underwriting considerations. It does not supply these occupancy, rate or cost assumptions. In practice, the room-closure calendar should be aligned with the property's actual busy season, group commitments and renovation phases.

## Two cash-flow records produce different permanent loans

Assume a prospective permanent lender sizes debt at 1.40× DSCR with a 10% annual principal-and-interest constant and 65% LTV on a stipulated $10 million value. The 10% constant is not a note rate. Both income scenarios are below the $6.5 million LTV ceiling, so DSCR controls.

| Permanent financing calculation | Stabilized forecast accepted | Measured disrupted period accepted |
|---|---:|---:|
| Annual sizing cash flow | $900,000 | $789,750 |
| Loan: cash flow ÷ 1.40 ÷ 10% | $6,428,571 | $5,641,071 |
| Refinancing costs, 2% of new debt | ($128,571) | ($112,821) |
| Net debt funding | $6,300,000 | $5,528,250 |
| Bridge principal payoff | ($6,000,000) | ($6,000,000) |
| Residual before other payoff uses | **$300,000 surplus** | **$471,750 shortfall** |

The complete project funding does not eliminate the second outcome. An investor who spends $3.7 million of equity at acquisition can still need another $471,750 at maturity. Accrued bridge interest, exit charges, new reserves and other closing uses are excluded here and would increase the requirement if applicable.

## Put the lender's evidence requirement on the calendar

Suppose physical work finishes in month twelve, but the intended lender wants twelve months of acceptable post-completion operating evidence. At an 18-month bridge maturity, the owner has only six post-completion months. A forecast can describe the missing period; it cannot establish that the condition has been satisfied.

Potential responses include a different documented underwriting approach, a longer committed bridge term, an executed extension, earlier completion or committed payoff equity. Each changes a different variable. An unsigned extension expectation does not add time to the current maturity, and a brand completion signoff does not waive a lender's operating-history condition.

The [OCC refinance-risk bulletin](https://www.occ.treas.gov/news-issuances/bulletins/2024/bulletin-2024-29.html) provides the supervisory context for testing repayment against the conditions then available. It is not a promise that a bank will accept annualized recent hotel results.

## Solve the threshold and make the purchase decision

Ignoring the excluded payoff uses, net proceeds must equal $6 million. With 2% refinancing costs, the required new gross loan is $6 million ÷ 98%, or approximately $6,122,449. At the assumed DSCR and constant, accepted cash flow must be at least **$857,143**. The projected $900,000 therefore has only about **$42,857 of income cushion**, not the full $110,250 lost during renovation.

The acquisition committee should approve a documented path to that accepted income by the actual funding date, plus a funded fallback if the evidence arrives later. It should also verify the actual PIP scope and franchise consequences through the brand documents. If the only exit argument is that the renovated hotel ought to earn $900,000 someday, the debt-placement plan remains incomplete even though the construction sources and uses balance.


## Source references
- [OCC — Commercial Real Estate Lending, version 2.0](https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf) — Hospitality, printed pp.123–125 · Checked 2026-10-21 · Bank supervisory context. March 2022 publication, with March 20, 2025 reputation-risk edits. All case amounts, thresholds and contractual conditions are invented teaching assumptions.
- [OCC Bulletin 2024-29 — Refinance Risk](https://www.occ.treas.gov/news-issuances/bulletins/2024/bulletin-2024-29.html) — Transaction-Level Risk Management and Risk-Rating Considerations · Checked 2026-10-21 · October 3, 2024 publication; OCC-supervised bank context. No fictional underwriting threshold is prescribed by the bulletin.