A hotel is not a leased building. It is an operating business that happens to own real estate, re-leasing every room nightly at a price that resets with demand, competition, and season. There is no tenant to abstract and no rent roll to reconcile, only a revenue-management strategy and a brand standard the property must keep meeting.
Because hotel income has no lease to anchor it, the underwriting depends entirely on occupancy, average daily rate, and the operator's ability to move both in the right direction. A DST sponsor's projected yield is a forecast of business performance, not a contracted payment.
Evaluate a hotel DST as a review of the franchise agreement, the management contract, and the capital plan first, and the distribution rate second. The rate is only as reliable as the business generating it.
Review revenue per available room across at least three trailing years, broken into occupancy and average daily rate. A rising RevPAR driven by rate increases behaves differently under a downturn than one driven by occupancy gains, since rate can be cut quickly while fixed operating costs cannot.
Compare the property's RevPAR growth with its competitive set, not with a citywide or national hotel index. A property losing share to a newer competitor down the street can still show positive year-over-year growth off a low base.
Ask how the sponsor's projection treats seasonality and any one-time demand events, such as a convention or local event calendar, that may not repeat during the hold period.
Read the franchise or brand agreement for its term, renewal conditions, and property improvement plan requirements. Brands periodically mandate renovation cycles, and a required PIP can arrive mid-hold regardless of the trust's own capital plan.
Confirm what happens if the property fails a brand quality inspection or the franchise agreement expires during the hold. Losing a recognized flag can shift demand to a different guest segment overnight and change the achievable rate.
Review termination fees and de-flagging costs in the franchise agreement, since these obligations run with the property and bind the trust regardless of who owned the hotel when the agreement was signed.
Because there is no tenant, a third-party or brand-affiliated management company runs the hotel day to day under a management agreement that sets fees, incentive structure, and the owner's limited approval rights over staffing, capital, and pricing decisions.
Review base management fee, incentive fee triggers, and any minimum guaranteed payment to the manager. Incentive structures that reward revenue growth without regard to profitability can push a manager toward occupancy at the expense of margin.
Ask what authority the sponsor retains to replace an underperforming manager and how quickly that change could occur given contract termination notice periods and any brand-required successor qualifications.
Also review any exclusivity the management company holds over ancillary revenue, such as food and beverage, parking, or meeting space, since fees on these lines can reduce the property's net income independent of room performance.
Hotels typically fund a furniture, fixtures, and equipment reserve as a set percentage of revenue, used for the recurring replacement of guest room furnishings, casegoods, and soft goods that wear out on a predictable cycle independent of the trust's preferences.
Compare the reserve contribution rate against the brand's expected replacement cycle and any deferred maintenance identified in the property condition report. An underfunded reserve becomes a capital shortfall exactly when a PIP or renovation is required.
Stress a scenario where reserve draws exceed contributions during a renovation year and identify what the trust documents permit if that gap cannot be closed from operating cash.
Hotel loans are typically underwritten and priced against operating performance more aggressively than leased property debt, given the absence of contracted rent. Review debt-service coverage under a stressed RevPAR scenario, not only at the trailing twelve-month figure used at acquisition.
Confirm loan maturity relative to any required PIP or brand renewal date, since a lender may condition refinancing on completed brand-mandated capital work that has not yet been funded.
Ask how a temporary operating downturn, such as reduced business or group travel, would be absorbed under the loan's covenants and cash management provisions before it reaches investor distributions.
Confirm whether the lender requires a lockbox or cash management trigger tied to a coverage threshold, since that provision can redirect hotel cash away from distributions before a formal default occurs.