Me!

rewrite the sentence to make the pronoun reference clear.

the lobby of the old hotel was dimly lit with a crystal chandelier. it was dingy and needed repair.

The problem is the pronoun "It" at the start of the second sentence.
Does the writer mean for it to refer to the lobby? the hotel? or the chandelier?

Well, subject pronouns HAVE to agree with the main subject in the previous sentence. Since neither 'hotel' nor 'chandelier' are the subjects, the pronoun must be referring to 'lobby.' (We know that because these nouns appear inside of a prepositional phrase, and such nouns can never serve as the "real" subject of a sentence.) Since, that is the case, grammatically speaking, there really isn't any confusion. In fact, there shouldn't be any confusion because the writer has made no grammatical mistake! The only confusion is the **potential** ambiguity in the mind of the reader -- and quite understandably so.

But, ... if we are directed to recast the sentence, one acceptable alternative could be this:
The lobby of the old hotel, which was dimly lit with a crystal chandelier, was dingy and needed repair.

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