Partnership/Ownership Help for Hotel

[Kyle Davis]

Help BP members!

I'm proceeding with my first large commercial project (building a new hotel) and working on finding investors/partners.

Here's the deal:

The all-in cost for the project is $4,000,000.  The local bank wants to go with an SBA loan, and they require a 25% down payment (AKA $1,000,000).

The way I would like to structure it (at least the easiest way that I know of in my brain) is to offer 1,000,000 units of ownership priced at $1 each.  And your ownership percentage would be based off of how many units you own in relation to the number of units sold.  So if you bought 50,000 units, it would cost you $50,000 and your overall ownership of the hotel would be 5%  (50,000 units/1,000,000 units offered = 5%).

The monkey wrench thrown into the mix is that the bank requires anyone who is over 20% owner to sign a personal guarantee of the bank loan.  Since I will more than likely be the only person over 20%, it is my opinion that I should probably have more units of ownership given to me as my risk is higher than the other investors.  I was thinking of giving myself an extra 5% ownership for being the personal guarantor of the loan.  So doing the math, there would actually be 1,053,000 units of ownership and the extra 53,000 units would go to me (5% of 1,053,000 is 53,000 roughly).

Feel free to poke holes in this theory, or give me any better ideas!

Thanks!

Kyle

[Jimmy Klein]

We own multiple hotels with multiple partnership structures. Let me see if I can help you. 

You will have a very very very difficult time finding any partners that don't have any operational say willing to put up any guarantees for the loan, why would they? Step in their shoes. Why increase their liability without even having a chance to run anything. SBA would make the most sense for you, but you'll be on full recourse and they will come after everything of yours. As someone mentioned above, CMBS is great as non-recourse, but you will not qualify because at a $4 million deal won't be worth it plus they got strict liquidity requirements. We did a deal a couple years ago for CMBS and the principals had $1 million in a liquid account, which still wasn't sufficient, also they will have the ability to restrict cash flow/distributions/operating cash, etc. per the term sheets.

Regarding selling units , I highly advise you please don't do this or at the very least find a really good securities attorney, when you mention the word units or shares, the IRS has sensors that go off and if they find out your issuing shares, you will be in BIG trouble. The kind of trouble where your talking serious penalties for violating securities regulations. 

As someone else above mentioned, the bank is most likely going to have a tough time approving this given that this is a construction deal. I understand you have a relationship, but you need a commitment letter. A relationship does not mean commitment letter. If you can get one, thats great. 

With that being said, I commend you for trying, its always good to try, but just realize when your doing construction, issuing equity, and more importantly dealing with hotels, this is one of the hardest scenarios to deal with in the CRE industry.