PIP financing for hotels, and how a PIP changes your loan

A property improvement plan (PIP) is the brand’s list of renovations a hotel must finish to keep or join the flag, with deadlines. Brands issue one on a sale, a conversion or a franchise renewal. For a buyer, the PIP is part of the purchase price in all but name: the lender adds it to the project cost, and you put equity in against the total.

What goes in a PIP

A PIP reads like a punch list written by the brand’s standards team: replace carpet with hard flooring in guest rooms, new case goods and bedding, bathroom refits (tub-to-shower conversions are common), lobby and breakfast area redesign, new signage to the current logo, exterior paint, parking lot work, and technology such as the property management system and Wi-Fi. Each item has a completion date, often split into work due before reopening under the new owner and work due within the first one or two years.

Ask the brand for the PIP before your due diligence period ends. Price it with a contractor who has done that brand’s work, and add a contingency. Brands inspect against the list, and an unfinished PIP can put the franchise agreement in default.

How lenders treat it

Take a $3,000,000 purchase with a $450,000 PIP and $120,000 of closing costs. The project cost is $3,570,000. At 10% equity, the buyer brings $357,000, not $300,000. Lenders usually hold the PIP money in a construction or renovation account and release it in draws as the work is inspected.

The PIP also changes the underwriting story. A lender will accept that a tired property can earn more after a renovation, but it sizes the loan on income the hotel has proven. Upside from the PIP is a reason to approve the deal, not a number that makes the loan bigger.

Ways owners pay for a PIP

The usual answer is to put it in the acquisition loan: SBA 7(a) can carry the real estate, PIP, furniture and working capital together, and SBA 504 covers PIP work that counts as fixed assets. On a hotel you already own, a cash-out refinance or an SBA loan for the improvements does the same job.

Sellers sometimes take part of the PIP off the price or give a credit at closing, especially when the brand issued the PIP because the property fell behind on standards. And some franchisors offer key money or fee reductions for conversions and new builds; the FDD describes those programs, usually with strings attached, such as paying the money back if you leave the brand early.

Size the whole project, PIP included, in the hotel loan calculator by adding the PIP to the purchase price. Then send the deal to Janover Capital with the PIP attached.