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Section 8.1: The Capital Stack

Understanding the Hierarchy of Senior Debt, Mezzanine, Preferred Equity, and Common Equity

Learning Objectives

Why This Matters

Main Content

I. The Stack as a Hierarchy

II. Senior Debt: The Foundation

III. Mezzanine Debt: The Gap-Filler

IV. Preferred Equity: Equity in Name, Debt in Behavior

V. Common Equity: Last in Line, First to Dream

VI. Blended Cost — and a Familiar Formula

VII. A 2026 Alternative: C-PACE

Concepts at a Glance

Key Terms Glossary

Chapter Summary

Review Questions

Section 8.2: Debt Metrics That Decide the Deal

LTV, LTC, DSCR, and Debt Yield — and Which One Actually Binds

I. Loan-to-Value: Protection Against a Price Fall

II. Loan-to-Cost: The Development Test

III. DSCR: The Cash Flow Test

IV. Debt Yield: The Test That Ignores Everything Else

V. Which Test Binds?

VI. Stress Testing: The Numbers Behind the Numbers

Section 8.3: Risk-Adjusted Targets

Aligning Return Expectations with Core, Value-Add, and Opportunistic Strategies

I. The Logic of Risk and Return

II. Core and Core-Plus: The Income Plays

III. Value-Add: The Mid-Cycle Play

IV. Opportunistic: High Stakes, Back-Loaded Rewards

V. Why the Multiple Rides Alongside the IRR

VI. Reading the Benchmarks Honestly

VII. Strategy Is Also Timing

Section 8.4: Underwriting Discipline

Identifying Non-Negotiables and Spotting Common Pro Forma "Traps"

I. The 4% Non-Negotiable: The FF&E Reserve

II. The PIP Trap: Hidden Capital

III. The OTA Commission Leak

IV. The Danger of Annual Averages

V. The Cap Rate Spread: Pricing Operational Risk

VI. Broker Fantasy vs. Defensive Underwriting

Section 8.5: Stress-Testing the Deal

Sensitivity Matrices, P10/P50/P90 Thinking, and Finding the Break Point

I. The Danger of Point Estimates

II. The Sensitivity Matrix

III. P10, P50, and P90

IV. Monte Carlo Simulation

V. Finding the Break Point

Section 8.6: The Investment Committee Memo

Synthesizing Data into a Persuasive Recommendation and Risk-Mitigation Plan

I. The Strategic Narrative

II. IC Memo vs. Offering Memorandum

III. The Essential Components

IV. Risk as a Strategic Lens

V. The Lifecycle

VI. The Modern Workflow

Quizzes

Quiz: The Capital Stack Hierarchy

Quiz: Senior and Mezzanine Debt

Quiz: Preferred and Common Equity

Quiz: Loan-to-Value and Loan-to-Cost

Quiz: DSCR and Debt Yield

Quiz: Binding Tests and Stress Testing

Quiz: Core and Value-Add Strategies

Quiz: Opportunistic Strategies and Multiples

Quiz: Benchmarks and Timing

Welcome to 'Structuring and Underwriting Hospitality Real Estate Deals,' the definitive course for mastering the financial mechanics behind successful hotel investments. Hospitality real estate is a unique asset class where operational intensity meets traditional real estate finance.

Welcome to 'Structuring and Underwriting Hospitality Real Estate Deals,' the definitive course for mastering the financial mechanics behind successful hotel investments. Hospitality real estate is a unique asset class where operational intensity meets traditional real estate finance. This comprehensive course is designed to bridge the gap between theoretical finance and real-world hotel underwriting. You will dive deep into the intricacies of the Capital Stack, exploring the hierarchy of Senior Debt, Mezzanine financing, Preferred Equity, and Common Equity, alongside modern alternatives like C-PACE. We will demystify the critical debt metrics that ultimately decide a deal—such as LTV, LTC, DSCR, and Debt Yield—and teach you how to identify which metric truly binds your financing. Beyond the basics, this course instills rigorous underwriting discipline. You will learn to spot common pro forma traps, account for non-negotiables like FF&E reserves and PIPs (Property Improvement Plans), and accurately price operational risks through cap rate spreads. Furthermore, you will master advanced stress-testing techniques, utilizing sensitivity matrices, P10/P50/P90 scenarios, and Monte Carlo simulations to find your deal's break point. Finally, you will learn how to synthesize complex data into a persuasive Investment Committee (IC) Memo that effectively communicates strategic narratives and risk-mitigation plans. Whether you are evaluating Core, Value-Add, or Opportunistic strategies, this course equips you with the analytical tools and defensive underwriting mindset required to thrive in hospitality real estate.

Chapter 8: Structuring and Underwriting Hospitality Real Estate Deals

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            <p>Hospitality real estate stands apart from other asset classes due to its dynamic nature, where daily lease terms and intensive operational demands create a unique risk-return profile. Mastering the financial mechanics behind these assets requires a deep understanding of how capital is structured and how risk is quantified. This course delves into the intricate world of structuring and underwriting hotel investments, providing a comprehensive roadmap for navigating the financial complexities of the industry. From dissecting the hierarchy of the capital stack—including senior debt, mezzanine financing, preferred equity, and modern alternatives like C-PACE—to analyzing the critical debt metrics such as DSCR, LTV, LTC, and Debt Yield that ultimately decide the viability of a deal, learners will gain the analytical tools necessary to evaluate and execute profitable hospitality transactions.</p>

<p>Beyond foundational financial structures, successful hotel investment hinges on rigorous underwriting discipline and the ability to anticipate market volatility. The curriculum explores essential operational nuances, such as accounting for non-negotiable FF&E reserves, navigating hidden Property Improvement Plan (PIP) traps, and accurately pricing operational risk through cap rate spreads. Furthermore, the course emphasizes the importance of stress-testing deals using sensitivity matrices, Monte Carlo simulations, and P10/P50/P90 scenarios to identify critical break points. Ultimately, these quantitative and qualitative insights culminate in the creation of a compelling Investment Committee (IC) Memo. By synthesizing complex data into a persuasive strategic narrative and robust risk-mitigation plan, participants will be fully equipped to present, defend, and secure capital for their hospitality real estate ventures.</p>
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