Worked Example: Conventional Bank Construction-to-Permanent Loan, Extended-Stay Hotel Feasibility Study in North Carolina

This is a worked example, not a client engagement. It follows an invented new extended-stay hotel in southern Wake County, North Carolina, through the test a bank's credit committee would put to it: does the stabilized income carry the loan the sponsor asks for, with the margin the lender requires? The example is built only from sourced public figures and stated assumptions, and it reaches an uncomfortable answer on purpose, because a feasibility study is worth reading when it says no as clearly as it would say yes.

At a glance. A four-story, assumed 96-suite mid-price extended-stay hotel with a kitchen in every suite, financed by one bank construction-to-permanent loan. The sponsor's pro forma, built from market figures, would carry the requested loan. The study's own base case, built line by line, would not.

• Total project cost: $18,501,335
• Bank construction-to-permanent loan requested: $8,010,000
• Borrower equity: $10,491,335
• Stabilized net operating income after replacement reserve: $366,511
• Stabilized debt service coverage: 0.52x
• Break-even occupancy at 1.00x: 87.8%
• Occupancy needed for 1.25x: 95.7%

What a Feasibility Consultant Tests First

A credit officer reading a hotel construction request asks one question before any other: what will the building earn once it is finished and full, and is that enough to repay the loan at the coverage the bank requires? A feasibility consultant works backward, from the cost of the building, the loan the sponsor wants and the stated coverage rule to the occupancy, rate and margin the hotel would have to reach, and asks whether the market evidence supports them.

This example is a conventional bank loan, so no federal guarantee program sets a coverage floor. The only coverage test is the lender's own, which this example assumes at 1.25x. Because that assumed minimum is the only one in play, it is also the one that binds, and every coverage figure below is read against it.

The reason a bank asks for a study at all is written into federal supervisory guidance. The interagency real estate lending guidelines in 12 CFR Part 365, Appendix A tell a bank to write into its construction lending policy a call for a feasibility study, an income sensitivity and risk analysis, a floor on hard equity and a floor on debt service coverage ^[1]. Part 365 also gives the ceiling on how much of a project a bank may lend, which for a commercial construction loan is a supervisory loan-to-value limit of 80 percent ^[2]. The example's bank is assumed to apply a tighter limit of 70 percent of the stabilized value, and it is that tighter limit, not the federal ceiling, that shapes the request.

Decision. The loan would be sized from the base case and not from the sponsor's pro forma, and both would sit side by side so the committee can see exactly what has to be true for the larger loan to work.

The North Carolina Market for a New Extended-Stay Hotel

North Carolina is, by one measure, a state where hotels are being built. HVS reported that North Carolina was one of the five states most represented in the sample of its 2026 hotel development cost survey, together with Florida, Texas, New York and California, and said the sample shows where the bulk of hotel development is occurring ^[3].

The state's population supports the interest. In the Census Bureau's Vintage 2025 series, the state had 11,197,968 residents on July 1, 2025, from an April 2020 base of 10,441,392 ^[4]. That is growth of 7.2 percent in the Table 1 lens. Wake County grew faster, and the Raleigh-Cary metropolitan area faster than the state: the county had 1,257,235 residents on the same date against a base of 1,129,356 ^[5], and the metropolitan area 1,595,720 against 1,413,995 ^[6].

The hotel business in the market is a business of visitors and corporate travelers together. Visit Raleigh states that Raleigh and Wake County welcome 19 million visitors a year, whose spending tops $3.4 billion ^[7]. A harder number from Visit Raleigh is that Wake County hotel lodging tax collections totaled more than $41.4 million in 2025, up one percent over 2024 ^[8]. A one percent rise in a tax that is collected on rooms sold tells a reader that the county's hotel income was close to flat in 2025, not booming. This example cites no county occupancy, rate or room-night figure, because the published county series comes from a data vendor whose figures are not republished here, so it leans on a hotel company's filed figures for an extended-stay brand.

North Carolina also taxes the product in a way that matters to an extended-stay hotel in particular. The Department of Revenue states that the gross receipts from renting an accommodation, including a hotel room, are subject to the state rate, any local and transit rates of sales and use tax, and any local occupancy tax ^[9]. The same department states that, under G.S. 105-164.4F(d)(2), the sales tax on accommodation rentals does not apply to an accommodation supplied to the same person for 90 or more continuous days ^[10]. The amended provisions took effect February 1, 2020 ^[11]. For a guest on a long project assignment, the room rate after the ninetieth continuous night therefore carries no sales tax. The example assumes no revenue from that advantage.

Decision. The study would treat the state-level evidence as supportive of demand and neutral on price, and it would put the weight of its argument on full-year brand figures that a hotel company files with the SEC, taken as filed.

Supply and Public Comparables: The Segment, the Metro and the Listed REIT

The segment's supply story is the central risk in this case. The Highland Group, as reported by Asian Hospitality, counted 653,353 extended-stay hotel rooms open in the United States at the end of the third quarter of 2026 ^[12]. Of those, mid-price supply, the segment this example enters, was 270,776 rooms, up 6.3 percent, against 140,209 economy rooms (up 4.7 percent) and 242,368 upscale rooms (up 2.7 percent) ^[13]. The segment is therefore the largest and the fastest growing of the three, which is the opposite of an open niche. The Highland Group defines an extended-stay hotel as a property with a fully equipped kitchenette in each guest room that accepts reservations and does not require a lease ^[14], the product assumed here.

The growth in supply has already hurt the segment once. The Highland Group reported that U.S. extended-stay RevPAR fell 2.2 percent in 2025, driven primarily by lower occupancy ^[15], and that extended-stay hotels recorded their lowest fourth-quarter occupancy since 2013 (excluding 2020) in the fourth quarter of 2025 ^[16]. The Highland Group put occupancy that quarter at 71.3 percent ^[17]. Room supply in the 100 largest metropolitan areas rose 4.9 percent in 2025, more than double the prior year's pace ^[18].

Two pieces of evidence point the other way. First, the pipeline thinned: The Highland Group reported 24,817 rooms under construction in the 100 largest metropolitan areas at the end of 2025, down 21 percent from a year earlier ^[19], and it expects full-year 2026 supply growth to stay below the long-term average, saying high interest rates and construction costs make a significant acceleration in supply growth very unlikely ^[20]. HVS reported that hotel construction lenders remain selective, frequently requiring larger equity contributions ^[21]. The Federal Reserve's loan officer survey for October 2026 says the same at the level of the banks: on balance they tightened standards for every commercial real estate loan category, construction and land development included, and saw weaker demand in all of them ^[22]. Second, the third quarter of 2026 was strong. The Highland Group put extended-stay occupancy at 77.9 percent, up 1.8 percent from 76.5 percent, the third consecutive quarterly increase ^[23]. Mid-price demand rose 8.2 percent, and The Highland Group described mid-price extended-stay hotels as one of the industry's strongest-performing segments ^[24]. The report's segment occupancy, rate and RevPAR are not quoted, because the page credits its segment rate comparison to a data vendor whose figures are not republished here.

For occupancy and rate the example turns instead to a hotel company's own filing. IHG's Annual Report and Form 20-F 2025, filed with the SEC, reports 2025 occupancy of 72.8 percent for comparable Candlewood Suites hotels in its fee business ^[25], an average daily rate of $102.77 ^[26] and RevPAR of $74.83 ^[27], in a table that opens with the Americas region ^[28]; the example assumes the first two for its own stabilized year. IHG builds these figures from its own system's rooms revenue and room nights and counts only hotels that traded in both years, leaving new hotels out ^[29]. Choice Hotels' 2025 Form 10-K places its MainStay Suites brand in the midscale extended stay category, with a full kitchen in every room, and names Candlewood Suites first among its competitors ^[30], so Candlewood is a fair public stand-in for the product assumed here. The example's hotel is not assumed to carry that brand or any other named one. A full year matters: Chatham Lodging Trust, the listed REIT used below as the income comparable, expects lower revenue, operating income and cash flow in the first and fourth quarters and higher in the second and third ^[31], so a third-quarter figure would overstate the year.

The supply risk is also local in one respect that the national figures hide. The Highland Group found that among the 100 largest metropolitan areas, extended-stay hotels make up more than 15 percent of total hotel supply in 47 of them and 20 percent or more in seven, and that Raleigh, North Carolina is one of the three with the largest extended-stay shares ^[32]. A new hotel in southern Wake County would compete in a metropolitan area that is already one of the most extended-stay-heavy in the country. The same report says that over the five years to 2025, extended-stay occupancy averaged 78 percent or more in one-fifth of the 100 largest metropolitan areas, while 10 averaged below seventy percent ^[33].

The listed REIT as the income comparable. The only fully public operating statement in this segment is a listed lodging REIT's annual report, so it tests the example's expense lines. Chatham Lodging Trust's Form 10-K for 2025 describes a company that invests primarily in upscale extended-stay and premium-branded select-service hotels ^[34], and says it owned 33 hotels with an aggregate of 5,021 rooms in 15 states and the District of Columbia at the end of 2025 ^[35]. The REIT supplies public numbers only; no owner, lender, brand or guest here is drawn from it. Chatham Lodging Trust reported 2025 same-property occupancy of 76.6 percent, ADR of $185.78 and RevPAR of $142.39 ^[36]. Its occupancy is somewhat above the mid-price market figure, and its rate is far higher. Because of that rate gap the comparison below is made in ratios and dollars per room.

Chatham Lodging Trust's hotel revenue for 2025 was $293,997 thousand, of which room revenue was $269,206 thousand, food and beverage $6,894 thousand and other $17,897 thousand ^[37]. Chatham Lodging Trust's hotel property-level expenses were $191,125 thousand, itemized line by line in its filing ^[38]. The comparison table in the pro forma section sets each of these lines, as a share of revenue and per room, beside the example's.

Decision. The listed REIT would serve for expense ratios and for the margin test only. It would not use the REIT's rate or occupancy as the example's, because the REIT's rate reflects upscale, urban and premium-branded hotels in other markets.

Demand: Biomanufacturing in Holly Springs and the Extended-Stay Guest

The demand story is specific, and it is why the site is in southern Wake County. In April 2024 the state announced that a biopharmaceutical manufacturer would expand its facility in the Town of Holly Springs, Wake County, adding 680 jobs and $1.2 billion of investment, on top of a 2021 project of over 700 jobs and $2 billion ^[39]. The state put the average annual wage of those expansion jobs at $109,923, against a Wake County average of $74,866 ^[40]. In December 2024 it announced that a biotechnology company would expand its biologics manufacturing operation in Holly Springs, creating 370 additional jobs and investing $1 billion in Wake County ^[41]. In May 2025 it announced that another biotechnology company would invest $700 million to build a new manufacturing plant in Holly Springs, creating 400 jobs ^[42], with average salary for the new positions of $119,833 against a Wake County average wage of $76,643 ^[43]. The company announcing that plant said it would create new manufacturing and construction jobs ^[44].

Added together, the three announcements are 1,450 jobs and $2,900,000,000 of announced investment. No company named in those announcements is a guest, tenant, owner or party to this example. They show only that a plant of that size is built over a period of years, by project teams, commissioning engineers, contractors and relocating managers, many of whom would not live in the town and would need a furnished suite with a kitchen for weeks or months at a time. Chatham Lodging Trust, the listed REIT, describes the principal customer of an extended-stay hotel in much those words ^[45].

The towns around the site have grown quickly enough to confirm the pull. The Census Bureau's July 2025 estimate puts Holly Springs at 50,288 people, up from 41,263 in the April 2020 base the series counts from ^[46], growth of 21.9 percent in the Table 1 lens, and the town of Fuquay-Varina, North Carolina, rose from 34,280 to 48,536 over the same span ^[47].

Decision. The study would accept the biomanufacturing announcements as evidence of a durable pool of corporate travelers and relocating families, and would refuse to count them as occupancy. Occupancy in the base case stays at the brand's full-year figure and is not raised for them.

The Site in Southern Wake County

The example places the hotel on about 2.5 acres in southern Wake County, in the Holly Springs area. No parcel, address, owner or zoning decision is claimed. The site is a stated assumption, and its cost is an assumption too: the land line in the cost table is the assumed $14,000 a suite, $1,344,000 in all, and it comes out of the HVS central cost per suite described below, not from a land sale. No public land price for the area was found for this example, so the line is a judgement.

The site's tax burden is partly sourced. Wake County's property tax rate is $0.5171 per $100 of valuation for 2025-26 ($0.5135 in 2024-25); its latest revaluation was in 2024 and the next is scheduled for 2027 ^[48]. North Carolina requires taxable property to be assessed at full appraised value and real property to be revalued at least every 8 years ^[49], and the example assumes an assessed value of $160,000 a suite, about 87 percent of the HVS cost, and an assumed municipal rate of $400.00 per $100,000 of value, a judgement because the Department of Revenue's municipal rate file is a spreadsheet this example could not read. The operating statement prints the result as $140,867 for Wake County and municipal property taxes together. The county's next revaluation, in 2027, could step the tax line up in the first years of operation.

The site also decides which appraisal the bank can lean on. A commercial real estate transaction of more than $500,000 needs an appraisal by a State certified appraiser under the federal appraisal rules in 12 CFR part 323 ^[50], and the appraisal for a federally related transaction must analyze and report appropriate deductions and discounts for proposed construction ^[51]. The value used in this example for the loan-to-value tests is the capitalized value of the stabilized net operating income at an assumed 7.75 percent. HVS calls a rate near 8.0 to 8.5 percent normal for a stabilized or near-stabilized hotel and adds: "Economy, extended-stay hotels and luxury hotels will likely trend below this level" ^[52]. The example therefore sets its rate 0.25 points below the bottom of that range and no lower, because HVS gives no figure for the gap and this hotel would be valued before it has any operating record. The only sourced rate below the range is the 7.7 percent HVS reports, citing MSCI Real Capital Analytics, for closed U.S. hotel sales in the second quarter of 2026, a quarter weighted toward upscale hotels ^[53].

Decision. The study would treat the site as a stated assumption and would ask the sponsor for a contract, a survey, an engineer's site estimate and a zoning confirmation before the bank relies on any line of the cost table that depends on the land.

The Bank's Rules for a Construction-to-Permanent Hotel Loan

A conventional bank loan has no program handbook, but it has rules, and they come from two places: the federal supervisory framework and the bank's own policy. The framework matters here for three reasons.

The first is the loan-to-value ceiling. The supervisory ceiling in Part 365 is 85 percent for an improved property loan and 80 percent for a commercial construction loan, which sits above the example's assumed bank limits ^[2]. The bank in this example is assumed to set its internal limit at 70 percent of the as-stabilized value, and 65 percent of cost, so the request is the smaller of what the income carries and what those two caps allow.

The second is capital. The federal capital rule defines a high volatility commercial real estate exposure as a credit facility secured by land or improved real property that primarily finances the acquisition, development or construction of real property ^[54]. An FDIC-supervised bank must assign a 150 percent risk weight to such an exposure ^[55]. A commercial construction loan stays outside that category only when two tests hold together: a loan-to-value ratio no higher than the supervisory maximum, and a borrower stake, paid in before any advance, worth at least 15 percent of the appraised as-completed value, in cash, readily marketable assets, development costs already paid or contributed land ^[56]. A bank may reclassify the exposure once construction is substantially complete and the property's cash flow is sufficient to support its debt service and expenses under the bank's underwriting criteria for permanent financings ^[57]. The request in this example clears the 15 percent hard-equity test comfortably; it fails on income, not on equity.

The third is the lender's coverage requirement. This example assumes 1.25x and shows it in the debt table beside the rows labelled lender minimum and binding minimum.

Rounded to the dollar; lines may not foot by $1.

Three inputs in that table move the answer. For the permanent phase the example takes a 5-year Treasury reading of 4.64 percent ^[60] and adds an assumed spread of 2.75 percentage points, giving an assumed 7.39 percent. That sits inside the band of interest rates of 6.70 to 7.61 percent that Chatham Lodging Trust's debt table shows for its hotel mortgage loans, from its Dallas hotel to its Exeter hotel ^[61]. Prime stood at 7.00 percent through the whole first week of November 2026 ^[59], and the construction phase is priced an assumed 0.75 points above it. And the amortization is an assumed 25 years.

Decision. The study would run the permanent phase at the quoted 7.39 percent and show a two-point shock in the sensitivity table, because the loan converts five years after the hotel opens at a rate nobody knows today.

Uses and Sources of Funds: What the Hotel Costs and Who Pays

The cost basis starts with HVS's 2026 hotel development cost survey, which puts median development costs for limited-service and midscale extended-stay hotels in a range of $170,000 to $197,000 per room, upscale extended-stay at about $265,000 and select-service at about $200,000 ^[58]. This example takes an assumed $183,500 a suite, the central value of the first range, and splits it into assumed lines: land, site work, building, soft costs, contingency, furniture and kitchens, pre-opening costs and closing costs. HVS also reports that the Turner Building Cost Index grew 4.8 percent over the 2026 trailing twelve months ^[67], so a cost set from a 2026 survey and built in 2027 would carry some escalation; the assumed contingency of $6,500 a suite is the cushion for it.

The loan-driven costs sit on top of the development cost. With a construction period of an assumed 16 months and an assumed average draw of 55 percent of the loan, priced at prime plus the assumed spread, the model makes the interest reserve $455,235, and the bank's assumed 1.0 percent origination fee adds $80,100 on the $8,010,000 request. The assumed operating reserve of $350,000 is borrower cash held for the ramp years. The cost table prints the total: $18,501,335, or $192,722 a suite.

The cost table says the loan is 43.3 percent of the total project cost and the borrower's equity is the other 56.7 percent, assuming the request stands. This example assumes that a sponsor brings no more than 35 percent of the total as equity, a stated cap and not a rule of any lender or program; the equity above that assumed cap is $4,015,868. Staying under it would take a loan near the assumed 65 percent of cost, and the sizing table shows why no loan that large is available.

How the sponsor's request was sized. The sponsor's request is the smallest of three amounts, computed from the sponsor's pro forma at the brand figures and rounded down to the nearest ten thousand dollars. The first is the loan the sponsor's net operating income carries at the assumed 1.25x: $8,082,381. The second is the loan at the bank's assumed 65 percent of cost: $12,208,247. The third is the loan at the bank's assumed 70 percent of the sponsor's value, which is $11,448,578 at the assumed 7.75 percent capitalization rate, so $8,014,005. The smallest is the third, and the request is $8,010,000.

Concepts tested against the equity cap. Before settling on the assumed 96 mid-price suites, the example tested an assumed 80-suite mid-price format and an assumed 96-suite upscale format under the same assumed 35 percent cap, and neither met it. The reason is arithmetic that does not change with size or brand: at the assumed permanent rate and amortization the debt costs 8.78 percent of the loan each year, the loan constant Table 9 prints, so the assumed 1.25x test needs net operating income of 10.98 percent of the loan, and the assumed bank value cap holds the loan well below the loan-to-cost cap. The smaller format needs equity of 56.9 percent and the upscale format 58.6 percent: scale leaves the per-suite arithmetic where it was, and the upscale brand's higher rate does not keep pace with its higher cost. The concepts table prints each.

Decision. The study would present the assumed 96-suite mid-price hotel as the project and report the equity share as a finding: at market figures the request needs 56.7 percent of the cost in cash, more than the assumed 35 percent cap, so the cap is breached, not met. The first concept stands, with the breach disclosed, because it needs the least equity of the three and mid-price is the most built and strongest-performing segment in the evidence ^[24].

The Pro Forma: The Sponsor's Market Figures Beside the Study's Base Case

The example carries two pro formas, and the reader should keep them apart. The sponsor's pro forma takes market figures at their face: IHG's full-year Candlewood Suites occupancy of 72.8 percent and ADR of $102.77 ^{[25] [26]}, other revenue at the listed REIT's ratio of 9.2 percent of room revenue, and the REIT's Adjusted Hotel EBITDA margin of 35.0 percent less an assumed replacement reserve of 4.0 percent. That produces revenue of $2,862,991 and net operating income after the reserve of $887,265. The study's base case builds the same hotel line by line from assumed inputs and reaches revenue of $2,700,219 and net operating income of $366,511.

The revenue table shows the two columns sharing occupancy and rate, the brand figures as filed. The example makes no site adjustment either way: the biomanufacturing demand argues for a higher figure, Raleigh's large extended-stay share of supply ^[32] for a lower one, and no public, republishable figure for this market measures either. Both columns therefore show a RevPAR of $74.82. Other revenue is an assumed 3.0 percent of room revenue against the REIT's 9.2 percent, because the REIT's figure carries restaurants and paid parking in urban markets and this hotel would offer pantry, pet, laundry and meeting charges only. On that one choice the base case's total revenue is lower than the sponsor's.

Three further assumed ratios fill out the operating statement: rooms department expense of an assumed 22.0 percent of rooms revenue, other departments of an assumed 50.0 percent of other revenue, and franchise, program, reservation and loyalty fees of an assumed 10.0 percent of rooms revenue. The assumed fee rate draws on the franchise terms of two mid-price extended-stay hotels in Chatham Lodging Trust's portfolio: one pays a royalty of 5.0 percent and a program fee of 3.0 percent ^[64], the other 4.0 percent and 3.5 percent ^[65], and the assumption adds reservation and loyalty charges on top. Chatham Lodging Trust's management agreements calculate base fees as a share of each hotel's gross room revenue ^[68], and one extended-stay hotel in its table shows a base fee of 3.0 percent ^[66], so the assumed management fee here, charged on total revenue, rests on a slightly larger base.

The fixed lines are the assumed annual administrative and general of $420,000, sales and marketing of $90,000, utilities of $220,000, repairs and maintenance of $250,000 and information and telecommunications of $40,000. These are judgements, and they are the lines on which the margin turns.

The operating statement prints the result: total operating expenses of $2,225,700, EBITDA of $474,520 and an EBITDA margin of 17.6 percent. The replacement reserve, assumed at 4.0 percent of revenue, is $108,009, and net operating income after the reserve is $366,511, which is the number the coverage test uses.

The margin is the deciding judgement. The sponsor's pro forma uses a margin of 35.0 percent, taken from Chatham Lodging Trust's 2025 Adjusted Hotel EBITDA of $102,872,000 ^[38] on hotel revenue of $293,997,000 ^[37]. The study's base case produces 17.6 percent, well below it. The study's room, franchise and management lines sit at or close to the REIT's ratios: rooms department expense is assumed at 22.0 percent against the REIT's 22.2 percent, and fees are assumed at 10.0 percent against 8.8 percent. But the fixed lines are a larger share of a smaller revenue. Administrative and general is 15.6 percent of revenue against the REIT's 9.2 percent, utilities 8.1 percent against 4.2 percent, and repairs and maintenance 9.3 percent against 5.2 percent. Those lines are not high per room: per suite, the example's assumed administrative and general is $4,375 against about $5,379 for the REIT, utilities $2,292 against $2,464 and repairs $2,604 against $3,042, so each line is at or below the REIT's per-room level. Chatham Lodging Trust's per-room figures use its 5,021 year-end rooms ^[35], which slightly overstates them because the year included hotels sold. The example's lines are high only as a share of revenue, because its revenue per room is 52.6 percent of the REIT's.

A reader who disagrees with the base case can use the comparison table to test the margin. On the base case's revenue, a 35.0 percent margin less the reserve gives net operating income of $836,821, and coverage on the example's debt service of 1.19x. That is closer to the assumed 1.25x minimum but still short of it. The margin judgement was set before the result and has not been moved. The sponsor's column needs the REIT's margin and the REIT's other revenue ratio together to reach 1.26x.

Decision. The base case is the answer given here, and the sponsor's pro forma is the case the sponsor would have to prove. It would ask for evidence on three items before moving: a franchisor's fee schedule, a management company's staffing plan for the assumed 96 suites, and a utility estimate for a building of that size.

Coverage at the Lender's Minimum, Sensitivity and Break-Even

The loan is the sponsor's $8,010,000 request, at the assumed permanent rate of 7.39 percent over an assumed 25 years, and annual debt service is $703,455. Net operating income after reserve of $366,511 in the base case gives coverage of 0.52x, and the sponsor's pro forma gives 1.26x.

No program floor applies to a conventional bank loan, so the assumed 1.25x lender minimum is the binding minimum, and the base case sits $512,808 below it. The sponsor's pro forma is $7,946 above it. The debt yield, net operating income over the loan, is 4.6 percent in the base case and 11.1 percent in the sponsor's. The as-stabilized value at the assumed 7.75 percent capitalization rate is $4,729,172 on the base case, so the request is 169.4 percent of that value, which is far above both the assumed 70 percent bank cap and the supervisory limit of 80 percent ^[2]. The sponsor's pro forma gives a value of $11,448,578 and a loan-to-value ratio of 70.0 percent.

The capital rule's hard-equity test of 15 percent of as-completed value ^[56] is met in both columns: the borrower's capital in the project, equity less the operating reserve, is 214.4 percent of the base-case value and 88.6 percent of the sponsor's. Meeting it does not rescue the loan, because reclassification needs cash flow sufficient for debt service ^[57].

Equity at the supported loan. The largest loan the base-case net operating income carries at the assumed 1.25x binding minimum is $3,338,665. Recomputed on that loan, the interest reserve and origination fee are $223,134, the total project cost becomes $18,189,134 and the equity becomes $14,850,469, or 81.6 percent of the total. The request is above the supported loan by $4,671,335.

The ramp. No new hotel fills from its first night. For the opening years the ramp table assumes 62.8 percent occupied at a rate of $95.68 in year one and 69.8 percent at $100.11 in year two, reaching the assumed stabilized 72.8 percent and $102.77 in year three. Coverage on the sponsor's request is 0.06x, 0.37x and 0.52x in the three years.

The shortfalls after debt service are $658,437 in year one and $444,762 in year two. Added together they are $1,103,199, against an assumed operating deficit reserve at closing of $350,000, which leaves the reserve short by $753,199, a second and independent failure of the request.

Sensitivity. The sensitivity table shocks the base case one input at a time, using assumed round shocks. With revenue lower by an assumed 10 percent, coverage is 0.29x, and at a 20 percent fall it is 0.06x. A permanent rate two points higher gives 0.44x. An assumed rise of 10 percent in operating expenses gives 0.20x, and occupancy five points lower gives 0.36x. Every shock moves coverage further below the assumed 1.25x.

Break-even. The break-even table reports what the base case would need. The hotel's fixed operating costs, those that do not move with revenue, are $1,266,467, and after the variable lines 0.62 of each dollar of rooms revenue is left to cover them and the debt. At the base ADR, break-even occupancy at 1.00x is 87.8 percent, and occupancy for the assumed 1.25x binding minimum is 95.7 percent. At the base occupancy, break-even ADR at 1.00x is $123.98 and the ADR for that minimum is $135.04. In RevPAR terms the hotel needs $90.25 to break even and $98.31 to reach the minimum, against the $74.83 IHG reports for Candlewood Suites ^[27]. The brand's own full-year figure is well below break-even RevPAR.

Decision. The study would report that the request does not meet the binding minimum, that no single sensitivity shock rescues it, and that break-even RevPAR is above the brand's full-year figure. It would not recommend the request.

What Would Change the Answer, and a Restructure That Passes

The base case fails, so the next question is what would have to change. Six things bear on it.

The first is the operating margin. At the REIT's margin, coverage on the request would be 1.19x, not enough alone. The second is the rate: the hotel would need an ADR of $135.04 at the base occupancy, well above the assumed $102.77 and above even the $134.45 IHG reports for its upscale Staybridge Suites brand ^[63]. The third is occupancy: 95.7 percent at the base rate is higher than any occupancy in the evidence, including the 76.3 percent IHG reports for Staybridge Suites ^[62]. The fourth is cost. A development cost below the HVS central value would leave stabilized coverage unchanged, because debt service depends on the loan and not on the cost; it would lower the equity needed. The fifth is the permanent rate: the sensitivity table shows a two-point rise takes coverage to 0.44x, so a fall of that size would help by much less than the gap requires. The sixth, and outside the sponsor's control, is extended-stay supply in the Raleigh metropolitan area, which the evidence says is already among the heaviest in the country ^[32].

None of the six reaches the binding minimum alone. The honest alternative is to change the loan. The restructure below is the smaller of two amounts: the supported loan of $3,338,665 and an assumed 70 percent of the base-case value, $3,310,420, rounded down to the nearest ten thousand dollars. That gives a restructured loan of $3,310,000. The interest reserve and the origination fee are recomputed on it, at $188,118 and $33,100, so total project cost is $18,187,218, and the sponsor's equity is $14,877,218, or 81.8 percent of the total, which is $4,385,883 more than the original request needed. Annual debt service falls to $290,691, and coverage is 1.26x, above the assumed 1.25x binding minimum. The restructured loan is 18.2 percent of the total cost and 70.0 percent of the as-stabilized value, so it passes the income test and the bank's assumed value cap together. The first two years' shortfall falls to $277,671, which the assumed $350,000 reserve covers with $72,329 left over.

The restructure passes both tests, the binding coverage minimum and the assumed loan-to-value cap. What it shows is what the bank can lend on the study's figures. It is not a structure a sponsor is likely to accept: a developer rarely brings 81.8 percent of the cost of a hotel in cash, and a hotel that needs that much equity is a hotel the sponsor should probably not build on these figures. The sponsor's way forward is a site, design or operating plan that lifts margin and rate together, tested with the same tables.

Decision. The study would report that the request fails, that the restructure is the largest loan the bank could make on the study's figures, and that the way back to the sponsor's loan is a documented margin and rate, not a different assumption about the market.

Questions to Ask a Feasibility Study Company or Consultant

What should a bank-financed hotel study show that a broker's package does not? It should show the sponsor's market-figure case and the study's own line-by-line case in the same tables, with the reason they differ stated. Here the difference is a margin of 35.0 percent against 17.6 percent, and a reader who sees only the first column would not know the second exists.

Does a conventional construction loan need a feasibility study? Federal guidance expects a bank's own policy to say when one is needed ^[1]. Whether a particular bank asks is its own decision, so the borrower should ask at the start.

How do I choose a feasibility study company or consultant? Ask whether the company will show the market figures and its own figures side by side, name the source of each market figure and the firm that produced it, state every assumption as an assumption, and publish the break-even occupancy and rate. Ask for a sample that recomputes from the inputs it prints. Ask what the company would do with a base case that fails, and be wary of one that has never reported one. A consultant who tunes inputs until a request passes has produced a document that a bank's reviewer can take apart in an afternoon.