Hospitality investments often appear deceptively straightforward. Investors see a recognizable brand, a confident operator, strong revenue per available room (RevPAR) projections, and a lender eager to quote leverage. Yet the issues that determine whether the project ultimately delivers its promised return rarely appear in the offering memorandum. Instead, they are embedded in the fine print of franchise and management agreements, in a capital stack engineered more for lender protections than operational flexibility, and in underwriting assumptions that fail to reflect the realities of labor, compliance, taxes, and the true cost of maintaining brand standards.
In my practice advising hotel and restaurant investors across the U.S., three structural traps surface repeatedly. Understanding and mitigating these risks before signing an LOI or going hard on deposits can be the difference between a strong yield and an inescapable drag on value.
Trap 1: Brand and Manager Control That Quietly Consumes Your Upside
One of the most common and dangerous traps arises from the control architecture built into franchise agreements and hotel management agreements (HMAs). These contracts often grant brands and managers a long list of discretionary rights, ranging from mandatory property improvement plans (PIPs) and marketing assessments to broad approval rights over transfers, financings, and even routine operating decisions. The result is an “invisible partner” whose decisions can materially impact operations without bearing any of the economic risk.
This dynamic often manifests in one-sided performance tests that are difficult to trigger, incentive fees that reward the manager before the owner reaches its priority return, or key-money contributions with clawback provisions that effectively restrict an owner’s exit strategy. Investors frequently underestimate the economic and operational weight of these provisions. Mandatory PIPs, for example, can wipe out hundreds of basis points of expected yield if the timing and scope are not tightly negotiated. Similarly, transfer and assignment restrictions can prevent an owner from refinancing at the optimal time, selling to the best buyer, or resolving a loan default efficiently.
Investors should approach these agreements with a firm commitment to recalibrating the balance of control. Performance tests must be tied to meaningful metrics such as RevPAR index and gross operating profit (GOP) margin, not just revenue. PIPs should carry negotiated caps, phased implementation schedules, and credit for recent capital improvements. Clawbacks on key money should be limited to voluntary early exits rather than lender-driven events. And any transfer or financing restrictions should be aligned with lender expectations and protected through a robust Subordination, Non-Disturbance, and Attornment Agreement (SNDA).
Without these protections, a hotel that looks profitable on the spreadsheet may generate materially lower cash flow in practice, all while limiting the owner’s ability to execute its business plan.
Trap 2: A Capital Stack That Limits Flexibility and Strips Optionality
The second major trap emerges not in the operating agreements, but in the financing structure. Hospitality assets—particularly those undergoing renovation or repositioning—require financial flexibility. Yet many deals include senior loans and preferred equity structures that constrain operations through tight cash-management controls, springing lockboxes, early trigger cash sweeps, and restrictive budgets that require lender or investor approval for even minor deviations.
These provisions can choke liquidity precisely when an asset needs it most. A modest dip in debt service coverage ratio (DSCR), a seasonal fluctuation, or an unexpected rise in labor or insurance costs can rapidly trigger a cash sweep, leaving insufficient funds for operational initiatives or capital improvements. Similarly, complicated intercreditor arrangements may grant preferred equity holders de facto veto power over essential decisions, such as replacing the manager, adjusting the brand strategy, or modifying the capital expenditure (CapEx) plan.
To avoid being boxed in, investors must negotiate for realistic covenant headroom and clearly defined cure periods that allow operational adjustments before remedies attach. CapEx draw procedures should rely on third-party inspections rather than subjective standards that move with each request. Intercreditor agreements must clarify which party controls key decisions and eliminate “silent vetoes” masked by language such as consent “not to be unreasonably withheld,” which often leads to endless delays in practice. Exit options—including refinancing and sale—should be structured with manageable prepayment windows and transfer mechanics aligned with the brand’s own approval requirements.
Without this clarity and flexibility, an otherwise promising hospitality investment can quickly become constrained by financial structures that prioritize lender protections over operational success.
Trap 3: Underwriting the Pro Forma Instead of the Operational Reality
The third trap lies in a mismatch between underwriting assumptions and the realities of hospitality operations. Pro formas frequently underestimate labor costs, tax reassessment following acquisition, insurance premiums in tightening markets, and the full weight of a brand’s technology stack. They also tend to omit significant compliance obligations, including Americans With Disabilities Act/Title III requirements, liquor licensing, food-safety certifications, pool and life-safety standards, and point-of-sale and payment card industry (PCI) considerations.
These omissions are not trivial. A miscalculated labor model—particularly one involving service charges, tip credits, or complex scheduling mandates—can erode margins by 100 to 150 basis points. A property tax reassessment alone can wipe out projected net operating income growth. Mandatory technology upgrades or systemwide brand charges can quietly add six figures of recurring annual expense. And failure to map licensing timelines can delay opening or create compliance exposure at critical moments.
A disciplined underwriting approach must therefore account for realistic labor models, updated insurance quotes, brand-mandated tech subscriptions, furniture, fixtures and equipment (FF&E) reserves, and post-stabilization property taxes. Investors should also prepare a licensing road map that identifies all approvals affecting opening, operations, or revenue generation. These items must be treated not as contingencies, but as core economic inputs that meaningfully shape the trajectory of the investment.
A Smarter Pre-LOI Process
Given the complexity of hospitality investments, the early diligence period should be used to develop a concise but pointed understanding of the brand relationship, financing structure, and operational realities. A short-term, 72-hour “fast filter” that summarizes key franchise and HMA provisions, outlines consent rights across the capital stack, stress-tests downside financial scenarios, and identifies critical-path licensing items can significantly improve decision-making and reduce deal friction.
This process not only surfaces hidden risks but also helps investors negotiate from a position of strength before committing capital or losing leverage.
How DarrowEverett LLP Helps Hospitality Investors Protect and Enhance Value
At DarrowEverett LLP, our Hospitality, Real Estate, and Corporate teams regularly help owners structure deals that maximize upside while preserving operational flexibility. We negotiate owner-favorable HMAs and franchise agreements, engineer capital stacks with practical decision rights and draw mechanics, and develop diligence frameworks that expose labor, licensing, ADA/Title III, PCI, and brand-related risks early in the process—before they erode projected returns.
About the Author
- Gabriel S. Saade, Esq., Partner, DarrowEverett LLP — Miami
- Hospitality · Real Estate · Corporate · Complex Disputes
DarrowEverett is a full-service law firm serving clients from its three offices in Florida (Miami, Boca Raton, and Tampa) and in four other states (New York, Massachusetts, Rhode Island and North Carolina).
