Asked to be Money Partner on Boutique Hotel

[Nathanial Miletta]

Hi All, 

I've been approached to invest in a hotel with 29 rooms in an area that is primarily busy Memorial Day to Labor Day and an additional  ~5500 square foot lot on a main road. The hotel is currently not run particularly well and is closed a good part of the year although there is no reason it could not remain operational year-round. The current management structure is all family of the owner and charge $160,000k/year for this part-time management so a lot of room for optimization. The business profited $30k last year after paying the family management team. 

The managing partner is successful in local businesses but cash depleted after a recent acquisition. He is asking for $240k for down payment/fees on a seller-finance 1.7M deal with a 3.5% interest rate and balloon in 5 years. He would not be bringing any cash to the deal. He is very diligent and has good thoughts and plans moving forward for the hotel and I trust he is operating in god faith but am a bit surprised by the proposal. He is offering the following:

95/5 split in his favor 

60% of depreciation assigned to me (I am a W2 employee and the tax savings would likely recapture my initial investment in year 1. 

His rationale is that with the depreciation, I would basically be making an IRS-backed loan to recapture that initial investment and buy myself a 5% stake in the business. 

To me, putting up all of the down payment represents significant risk, while his actual risk in the deal is minimal. In researching other money partner deals on bigger pockets and other websites, this split seems low, even with consideration for the depreciation. 

At the same time, there are other local deals available that I'm just starting to vet in other businesses as well as some opportunity outside of the U.S. What do folks think about this proposal? What would a reasonable counter be? With CDs paying at 5-6% with guaranteed returns, it's a challenge to not invest in more secure opportunities and wait for a potential market correction for value opportunities. 

Thanks for taking the time and your consideration.