18 unit waterfront hotel, creative financing

[Andrew Warner]

Investment Info:

Other commercial investment investment in Leland.

Purchase price: $3,000,000
Cash invested: $475,000

18 unit waterfront hotel in Leland, a small vacation town in Leelanau County (Northwest Lower) Michigan. This was a cold call (off market) deal and we have taken a mom and pop hotel and added value in many ways, increased occupancy and ADR (average daily rate), integrated with OTAs (online travel agencies) and increased marketing efforts to emphasize the strengths of the property as a destination for tourists visiting our region. We were able to secure an SBA 504 loan with very good terms. We lived on property with our family and ran the Inn for the first 4 months after purchase, and now have innkeepers in place that live on site. I have learned a huge amount about the power of commercial real estate between the debt pay down, building equity, appreciation and depreciation. Since I am highly involved in the business it is also able to pay many of my expenses (vehicle, phone etc). Now seeking next commercial opportunity in my region.

What made you interested in investing in this type of deal?

I have a friend who started in the hotel industry by purchasing small mom and pop hotels. He has done well and now has 4 properties (currently listed for sale as he is entering another arena).

How did you find this deal and how did you negotiate it?

I cold called the owners after seeing my friend's success rate. The hotel was not for sale but sat down for coffee. There was an interesting coincidence in that our kids were the same age as their kids when they purchased the property 18 years ago. We hit it off and structured the deal from there, which took 4 months to negotiate and close.

How did you finance this deal?

I borrowed $475,000 from a relative who receives a monthly flat rate return from the business, but I have 100% equity. The other 25% of down payment was an "owner carry" so I have a small note payment to the past owners which has a balloon in 4 years. I utilized an SBA 504 loan for the other 80% which was split between the lending bank and the SBA so the bank carries around $1,500,000 and the SBA around $900,000. Our debt pay down alone is nearly $70,000 per month.

How did you add value to the deal?

So far: new septic, 5 new hot water heaters, all new towels and linens, new soaps/shampoos, lotion etc. New waterfront docks and kayaks/SUPs for rent. Revamped gift shop, updated website and redid logo, drone video of property and all new outdoor and room photos. Added online bookings and OTA integration. We also created systems for front desk procedures, cleaning and laundry and added on site innkeepers so that the business can be turn key should we decide to sell.

What was the outcome?

We were able to increase rates and occupancy and should be 10-12% revenue increase over past owner's best year. Average 4.7 rating on major review engines.

Lessons learned? Challenges?

In real estate based businesses you have to be ready for anything and be quick to adapt, make repairs, self-correct, and always be thinking about how to improve. Always look for ways to be more organized, and build a great team. If you do these things then I'm convinced any size deal is feasible which is why I am seeking my next opportunity.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Several if you are in my area.

[Andrew Warner]

We've had a record July and August. Used to be phones only, so we went online with a new booking engine called Think Reservations. Then we integrated with Expedia and their family of companies as a gap filler. On weekends in peak season we require a 2 night minimum, however we relax those restrictions if we don't fill up. Otherwise by night or whatever a guest prefers, we do have several 4, 5 night stays, week long and even two-week stays in our cottage suites which have kitchenettes. We have in house laundry and housekeeping. The staffing is 2 full time innkeepers then 7 part time seasonal employees in peak. We'll go down to about 4 part time in fall and then innkeepers only for winter. We are right on M-22, one mile south of Leland on your left as you head toward town. Our docks are across the road and we have 216 ft on North Lake Leelanau.