Whereas many hoteliers perceive the necessity for property enchancment plans (PIPs) and incorporate them into their improvement plans, they won’t understand that the right timing of PIPs can drive lender urge for food and deal construction. They’ll even influence whether or not a transaction crosses the end line.
Heading into 2026, it’s important that debtors align with their lenders on PIP timing to keep away from hitting roadblocks.
The place Homeowners and Lenders Diverge
Whereas homeowners could have a look at PIPs as objects on a distant ‘to-do’ checklist, lenders see them as scheduled, non-optional capital obligations—and the present surroundings is reinforcing that stance.
Model cycles are compressing, and they’re simply one in all many techniques tightening requirements after years of deferred CapEx and different pandemic-era delays. Talking of CapEx, prices are larger and anticipated to stay risky. Ongoing inflation in building and FF&E prices make these areas even extra dangerous.
Homeowners suppose they’ll be capable to negotiate the scope, refinance earlier than the PIP hits, or be in a stronger money place down the street. However lenders—already factoring in larger insurance coverage, labor strain, and fee uncertainty—aren’t underwriting on best-case eventualities. PIPs are contractual. If they’re not executed, the model can pull the franchise, and the collateral worth drops instantly. A big, unfunded PIP is solely not a variable they’ll tackle religion.
This disconnect performs out in another way relying on when the PIP falls relative to the mortgage time period—and that timing shapes all the things from leverage to order necessities as to if lenders have interaction in any respect.
How PIP Timing Shapes the Capital Stack
Right here’s how every situation sometimes unfolds:
PIP Inside 24 Months
A near-term PIP will probably be handled as a part of the whole mission value. Lenders will measurement leverage off an all-in foundation that features the complete PIP scope, that means debtors want to return to closing with extra fairness than they may anticipate. Count on day-one reserves escrowed for the complete renovation price range, with disbursement tied to building milestones or model sign-offs. Some lenders could require a completion warranty from the sponsor, significantly if the PIP includes structural work or brand-mandated timelines.
PIP at 24–36 Months
That is the grey zone the place offers typically stall. Debtors often assume they’ll fund the PIP by means of gathered money stream or a future refinance—however lenders will closely stress-test that assumption. On this situation, anticipate tighter money stream covenants, elevated FF&E reserve necessities (typically 5–6 p.c vs. the usual 4 p.c), and detailed sponsor liquidity checks. Lenders can also require a funded reserve account or letter of credit score sized to a proportion of the projected PIP value. If the sponsor’s observe report on CapEx execution is skinny, leverage will get sized decrease, or the deal doesn’t transfer ahead.
Refinance with PIP Simply Past Mortgage Maturity
Even when the PIP sits outdoors the mortgage time period, lenders worth the chance into their exit assumptions. Count on slight cuts to projected exit proceeds, pressured money stream modeling that accounts for renovation disruption, and probably lowered leverage to create a cushion. Lenders can also require extension choices to be funded upfront or inbuilt defeasance flexibility, recognizing {that a} looming PIP may complicate the borrower’s refinance timeline.
Franchise Expiration Inside Mortgage Time period
That is essentially the most delicate situation as a result of lenders are underwriting model threat instantly. They’ll assume a serious PIP, repositioning, or full conversion is coming and can scrutinize the borrower’s stability sheet, world liquidity, and execution functionality to decide whether or not the flag will probably be maintained. Capital stack implications are important: lenders could require a funded reserve account particularly for rebranding contingencies, demand private guaranties or further collateral, or just scale back proceeds to the purpose the place the deal not works. If the trail to flag retention is unclear, most lenders will go.
How Homeowners Can Enhance Financing Outcomes
Sponsors who handle PIP timing proactively get quicker responses, extra bids, and higher leverage.
First, deal with any upcoming PIP as a core a part of the marketing strategy, not an afterthought. Present an in depth funding plan, specifying which funds will come from the mortgage, fairness, and reserves, and align timing with the mortgage construction slightly than assume future flexibility. It may additionally be value acquiring an early PIP evaluation, similar to a model letter or third-party stroll.
Past the funding plan itself, FF&E reserves deserve particular consideration—they’re typically a sticking level for lenders. Debtors who can show an actual, cumulative FF&E reserve stability with documentation take away a big lender objection. For mid-market homeowners, a correctly funded FF&E reserve typically does extra to construct lender confidence than any narrative.
Lastly, companion with an operator who’s well-versed in PIPs, conversions, or turnarounds. Their credibility turns into the borrower’s credibility—and in some circumstances, it can open doorways to capital constructions that wouldn’t in any other case be on the desk.
The Backside Line
On this surroundings, lenders need readability, capital, and a reputable timeline. Debtors who acknowledge the timing problem, keep actual reserves, and construct a capital plan round PIP execution will discover a deeper lender universe and higher phrases. Debtors who don’t will maintain listening to the identical suggestions: ‘We just like the deal, however we are able to’t get comfy with the PIP.’
