FIRST TO MARKET WITH FRANCHISE HOTEL

[Randy Benglan]

I need some suggestions on pitching investors.  Here in my resort community we have plenty of ma and pop hotels ~ over the past two years my small business has almost doubled in sales.  These local hotels are getting high ADRs for poor quality facilities.  I decided to look through my contacts for potential investors on a new 64 unit hotel project.  Now, I have a home run feasibility study & a group of dairy men who are anxious to invest.  Total project is $6M and we can get debt financing of 15-20%.  My primary investor is at $550k do invest. 

Now, the question is, what do I offer these guys, including return on investment, equity positions, management input etc ?????

Also, I'm thinking Partnership structure ~ thoughts???

[Chris Winterhalter]

Doug thanks for your kind words.  

@Randy Benglan 

It's exciting to hear that tourism in your area is booming.  Especially great for your business!  I'm active in the hotel and multi-family space.  Mainly hotel construction and multi-family investment.  A few questions about the hotel deal:

-Do you have hotel operations or investment experience?  

-Are you going to be an owner operator?  If so have you spoken with Best Western about this? It's a smaller hotel however many brands want experience or at least an experienced management company.  You mention you have a business currently. Does that take up most of your week?

-Is tourism coming back in your area or just starting to boom as an undiscovered area?  Always remember that hotels are cyclical.  We are in the upswing of the hotel cycle with many strong years ahead however make sure your feasibility study includes several worst case scenario stress tests. 

-Who performed the feasibility study? Do you have a STR report? What are hotels/resorts currently trading at in your town? What is the next newest branded hotel similar to your proposed property? Has that sold recently and at what cap?

-Have you spoken to experienced management companies in and around the area.  Preferably with experience managing a hotel/resort in your area. 

-I'm guessing with your LTV numbers that you are seeking an SBA loan? I'm not extremely knowledgable about SBA products however they might not be feasible for new construction. You could probably refi into one after 12 months of stabilization however that will take time. And honestly you are looking more like 65% LTC for an A&D loan. Which would put your equity raise to north of 2MM.

-You are estimating just about 94k/key to build.  Does this include all hard and soft costs for development?  Who put together your budget?  Who is your builder?  Do they have experience in the hotel space?  Do they have a reputation for speed and quality?  Who is managing the builder? 

-Regarding the equity raise, you will need to raise a lot more than just the down payment.  You need to fully understand what costs can be financed and what costs can't.  You will also need a significant reserve to weather the first 18-24 months.  Beyond that make sure you account for insurance (property, GL, work comp), taxes, FF&E reserve, utility deposits etc.  

Regarding your main question of how to structure and what to offer investors. What will you be bringing to the table?  Equity?  Experience?  Beyond structuring the entire deal are you going to manage the property or just the management company?  Are you going to oversee construction?  You will need to define exactly what you will be doing as the sponsor.  As far as the structure there are a million ways to slice and dice the deal with you and your investors.  I like to keep it simple.  I also would rather take more equity with no fees and more upside on performance.  If you are putting capital into the deal, managing the entire process from acquisition to development, plus managing the asset after stabilization I would push for a 50/50 split.  It really depends on what the market will accept.  With a new construction deal your investors probably won't see a return for 2-3 years.  So you need to make sure you structure everything in such a way where the return swings the other way on years 3,4, & 5.  You need to offer a preferred return that is acceptable to your investors.  

Good luck!