Hotel Acquisition, Conversion and PIP Feasibility Study

A hotel acquisition with continuity of operations is underwritten on history. Under SOP 50 10 8.1 Appendix 15, an Initial Acquisition must show at least 1.25 times historical debt service coverage on the last fiscal year or a two-year average, an Owner Buyout and an ESOP transaction the same, and a Business Expansion at least 1.15 times. A Quality of Earnings report is required when the business purchase price reaches $3 million, and advisory and agent fees are excluded from the equity injection. Where the acquisition includes owner-occupied special-use real estate whose value is substantially dependent on the business, the loan may carry a 25-year term. The feasibility study in this file does not replace the historical test. It normalizes the history, reconciles it to the Quality of Earnings report, and explains whether the floor survives.

A startup acquisition, where the buyer will not continue the seller's operation, change the flag, or close for renovation, is underwritten on projections, because Appendix 15 permits projections only where there is no continuity of operations or where the special-use property is fully secured by collateral. The study in this file builds the demand, supply and operating projection from the ground up and tests the acquisition price against comparable sales.

A conversion with a property improvement plan sits between the two. The trailing income describes a hotel that will no longer exist in its current form, and the projected income describes a hotel that does not yet exist. The study bridges the two: it normalizes the history, costs the PIP, supports the post-conversion rate and occupancy premium with brand-system comparables, and, where the lender includes the PIP and working capital in the financed amount, tests coverage on the full amount.

Trailing income is the most frequently misread number in a hotel acquisition file. The study adjusts it for five conditions.

One-time demand is the most dangerous. A motel beside a construction boom, a storm recovery, a pipeline, a plant expansion or a one-year event can show two years of record revenue that will not recur. The study identifies the generator, dates its end, and restates the income on the demand base that remains. In a parish where sales tax collections tripled in a year because of a single construction project, the trailing twelve months describe the peak, not the operation.

Deferred capital understates expense. A hotel that has not been renovated in fifteen years has been consuming its FF&E rather than reserving for it. The study restores a FF&E reserve of 4 percent of revenue and identifies the deferred items that the PIP or the lender's capital reserve must fund.

Owner compensation and related-party expense are restated to market. An owner-operator who draws no salary and performs the general manager's work has overstated the operating margin by the cost of a manager. The study carries a management expense at about 3 percent of revenue regardless of ownership.

Property tax and insurance are restated to the post-acquisition basis. Reassessment on sale and the current insurance market, where premiums fell about 5 percent in 2025 but remain roughly double 2019 levels, can move the margin by several points.

Brand transition is restated to the new fee load. A flag change replaces one royalty, marketing and loyalty structure with another, and the new structure for most midscale and premium-economy brands runs roughly 9 to 12 percent of rooms revenue.

The normalized figure is then compared with the Appendix 15 floor. Where the floor is met on normalized income the study says so. Where it is met only on unadjusted income the study says that too, and the lender decides.

Acquisitions in markets with contract crews, traveling medical staff, displaced residents or long-term guests carry a second risk under the SBA rules. More than 50 percent of the hotel's prior-year revenue must come from guests staying 30 days or less. An economy motel that has been housing construction crews for two years may fail that test on its own books. The study reconstructs the length-of-stay mix from the property management system or the folio history, reports revenue by band, and states whether the hotel meets the threshold as operated and as projected.

Most acquisition targets are economy and lower midscale hotels built between 1990 and 2010 along interstates and in county seats. The segment's 2026 performance is specific and must be reflected in the projection. National economy occupancy rose more than four points in the first half of 2026 while economy rate fell about 9 percent. Economy hotels filled rooms by cutting rate. Midscale and upper midscale gained occupancy with rate growth near zero. The practical rule for an acquisition study is that occupancy growth is supportable and rate growth is not, unless the conversion changes the product.

Closed sales confirm where the segment trades. Older exterior-corridor economy hotels in small Southern interstate markets have sold in a range of about $40,000 to $47,000 per key, even after renovation. Cash-flowing small economy hotels with recent capital have reached about $84,000 per key at capitalization rates near 13 percent. Older upper midscale product in small interstate markets has sold near $95,000 per key. Midscale conversions in secondary Georgia markets have traded near $66,000 per key. The study places the subject within those ranges on its own age, corridor type, condition and normalized income, and treats any premium above the range as a demand premium that the income must support.

Conventional and CMBS lenders underwrite select-service and extended-stay hotels to a net operating income debt yield that currently runs about 15 to 17 percent, which implies loan amounts of roughly $65,000 to $100,000 per key on branded product in secondary markets. The study reports the debt yield alongside the SBA coverage ratio so that the lender can see both.

The PIP is costed from two sources and the study states which one the budget follows. The first is the brand's published conversion range. The leading premium-economy conversion brand launched with guidance of about $18,000 to $23,000 per key for an average conversion; its first open property cost about $35,000 per key with exterior work and FF&E, and a 170-room suburban conversion came in near $23,000 per key including an $8,000 per-key FF&E package and was completed in 65 days. The second is the contractor's scope for the subject, which governs where it exceeds the brand range.

The PIP budget includes the FF&E package, the exterior and signage work, the brand's technology and connectivity requirements, the life-safety and accessibility items a lender's engineer will require, and a contingency. The conversion timeline is stated, together with the displaced room nights during the work and the ramp after reopening. Where the hotel closes for the conversion, the loan is underwritten as a startup under Appendix 15 and the study is built on projections.

Franchise terms are stated at the full contractual load. For the leading premium-economy conversion brand that is a $75,000 initial fee, a 5.5 percent royalty and a 3.5 percent brand fund on gross rooms revenue, before loyalty and reservation charges, on a 15-year term. Those fees are carried in the projection from the first month of operation under the new flag.

A conversion thesis rests on a rate and occupancy lift. The study supports the lift from brand-system comparables in similar markets, not from the brand's national averages, and it states the lift required to meet the coverage floor so that the lender can judge whether it is reasonable. In a submarket where midscale and economy hotels run 41.6 percent occupancy at a $92 rate, a 60-room conversion produces about $840,000 of rooms revenue before any lift, and the lift required to carry the acquisition, the PIP and the new fee load at 1.25 times coverage is stated as a specific occupancy and rate target. Where the required lift exceeds what the brand's comparables have achieved, the study says so.

The acquisition, conversion and PIP study includes the normalized trailing income with each adjustment stated; the length-of-stay reconstruction and the 30-day test; the market area and demand generators with end dates; the segmented demand analysis; the verified competitive set with announced supply; the acquisition price tested against closed sales per key; the PIP budget with its source stated; the franchise and management terms at full load; the post-conversion projection on a USALI basis over a three-year ramp; the capital stack by program; the Appendix 15 coverage test and the debt yield; sensitivities including a post-generator case where the trailing income depends on finite demand; and a signed conclusion.

A MMCG acquisition, conversion or PIP study runs between 80 and 120 pages and is delivered in 9 to 16 business days from engagement and receipt of the project file, or from 5 business days on an expedited basis. Fees begin at $4,900 for a single-site SBA 7(a) acquisition study and range from $7,500 to $18,000 for SBA 504 special-purpose studies depending on scale and scenarios. USDA and conventional studies are quoted on scope. Payment is 50 percent at engagement and 50 percent at delivery, and revisions required by the lender, CDC or agency are made at no additional cost under MMCG's written acceptance guarantee.

The second case is a 7(a) acquisition of a 76-room, two-story economy motel at an interstate exit in Rayville, Louisiana, built in 2001 and last renovated in 2011, in a parish where a data center construction project has pushed sales tax collections from about $21 million to a projected $50 million in a year and local hotel rates to multiples of their historical level. The historical 1.25 times coverage test passes on the trailing twelve months. The study's central task is to normalize that income to the post-construction demand base, reconstruct the length-of-stay mix to confirm the 30-day rule under contractor occupancy, value the hotel within the $45,000 to $55,000 per key range the closed sales support, and carry a capital reserve for fifteen years of deferred renovation. The full model study is on its own page.

The fourth case is a conversion of an aging independent motel in the Cornelia, Helen and Clarkesville corridor of Northeast Georgia to a premium-economy conversion brand, financed under SBA 504 with the PIP included in the project. The submarket's midscale and economy class, 2,512 rooms across 120 hotels of which 70 are independent, ran 41.6 percent occupancy and a $92 rate in the year to November 2025, while the upscale and upper midscale class ran 59.4 percent and $154. The study's central task is to state the occupancy and rate lift the conversion must achieve to carry the acquisition, a PIP of about $23,000 to $35,000 per key and a 9 percent brand fee load at 1.25 times coverage, and to support that lift from brand-system comparables in a market where seasonal occupancy swings from under 50 percent in January to 77 percent in July. The full model study is on its own page.