All Forum Posts by: Shawn T.

Anyone have thoughts on my last post?

@JaredRine, 

Thanks for your thoughts and breakdown. Would like your professional opinion on two items below. I would love to touch base with you in the next several months. I'll reach out via DM in November as I will be out of the country in October visiting family in Finland.

• A couple of lenders/friends in the business are telling me that its going to be a lot less complicated in terms of the various component of this loan, paperwork and development process if I go down a SBA 7aWhat do you think the main differences are with a 7A and SBA 504 for hotels, especially considering there is a construction component to this project?
• "When there is a construction component, it will be structured as a 50% 1st from bank/lender, 2nd interim/bridge and an permanent SBA loan offering through debenture upon completion of construction as they will not fund their loan until the property is fully constructed, a Certificate of Occupancy is issued, and the Lender provides certification that both the 1st TD and interim loans are fully disbursed." - My question is let's say I get interest from lenders for the SBA 504 at 85% LTV for the post construction loan. I am curious, will I generally need to get closer to 60%-65% LTV for the construction portion of the project? (~$2.5mm for hard costs). Can I use my land value there as well or do they generally want more liquid assets? How much of the appraised value do lenders generally give your land credit for? I know zoning, location etc make a difference but if the land is worth $2mm after a 3rd party appraisal, will they give me at least $1mm towards the LTV or is that too rich? Should I order a appraisal now before I get into serious discussions with lenders to lock down the value of the land? I've run my numbers assuming a worst case scenario of a $1mm valuation but I know its worth more even if i discount the price per square foot down by 20%.

Hi All, 

Thanks for the input, project cost of $3.6mm is for a micro room concept similar to the new Best Western brand Vib  or Yotel that is being developed in SF as well but just a stripped down non-branded version. Rooms around 180-200 sq ft. except for accessible rooms. Mid level finish with common lobby/lounge and bathrooms getting the most $ spent on finishes. Interior designer is the most critical part and we have a good one on board to mimic hotels from Europe that focus on a small room and hip design. Think Bloq, Qbic, Ruby, Schani etc. All with rooms under 200 sq. ft. Keep in mind that this development is not in the central city but just on the outskirts of the main center. 

Total building is cut down to bare amenities. 31 rooms plus housekeeping, laundry and one common/lobby lounge and storage. No bar, restaurant or extravagant rooftop. No gym, spa, etc. Focus on REVpar and high occupancy. Market avg occupancy is 85%. ADR target of $155 which is achievable given smaller room but accessible location. Proforma assumes a 85% occupancy in year 2 which I personally think it achievable and conservative for such a small property size. Debt service can be paid and all expenses covered down to a 65% occ level at same rate or 90% occ level with lower below market ADR around $135.

Total sq footage is small at under 12k sq. ft spanning 3 stories with no parking onsite. Waivers granted through SF planning dept after year long entitlement process costing ~$60k in city fees and $40k in land use attorney fees. Lot is 7k square feet. $1mm land value is a very conservative number. Based on sales comps it is actually around $1.7mm. Permit and impact fees will total ~$175k. Demo costs for existing building even thoughts its only 5k sq feet will be around $75k. Demo timeline of next Oct. Will use between now and then to get all ducks in a row and tighten up backups for financing etc. I won't post plans or renderings at this time for confidentiality purposes but surely will do early next year. 

For financing I was really targeting SBA 7A or SBA 504. Rate structure as I see it something like 40% local bank at 6%-7% for 20 year term and 40% SBA CDC at 5% for 20 year term with owners contribution of 20% in this case my land value with some cash as needed. Monthly debt service around $22k. I am hoping to go that route without a minority partner. My skin in the game was going to be whatever value they allow for the land contribution. I was going to use a CDC so they can have a couple of backup banks for the bridge/construction financing. But only time will tell as my financing conversations with lenders deepen to nitty gritty details. I am curious on a deal like this, what is a good way to start thinking about a minority partner and what % or terms in a general sense? I've never had a partner in all my years of business but if I have to then I will do so. What background should the partner have? Ground up development experience or just deep pockets? Thanks to all for their feedback thus far. I don't want to give up a large % but I also need to make it worthwhile for them right? Not sure where to start on the partner side....

Project is entitled with planning department and demo of building is okay as it is not historic and no issues with state environmental. SBA 504 allows for 85% LTV and new construction on special purpose loans. Amit any additional thoughts?

My project is allowed by zoning and all entitlements are in hand. Working on A&E now. Hope that helps clarify.

Looking for general thoughts/advice on realistic chances of getting this deal funded through SBA or other loan structure allowing for new independent hotel construction and a high LTV in the range of 80-90%:

• I am a principal with 20 years of experience running an independent hotel but no development experience although I have the right team in place in terms of Architects/GC's/Engineers/Designers etc and a great location with proven demand
• Solid performance, track record and high ranking on travel sites for current property
• Developing a small 31 room boutique hotel (economy/limited service concept interior corridor) on site of current hotel
• Older property in need of full tear down as life span is coming to end (built in 50's)
• Looking to do a full tear down and rebuild with a total project cost of $3.6mm including EVERYTHING - demo, construction, FF&E, entitlements, permits, impact fees, etc. Project cost has been vetted strongly.
• My net worth is ~$4.5mm with credit score over 700
• Liabilities of 500k for 7 year refi on Multi Family building on 5 year term. Proceeds to be used for soft costs for hotel development - plans, permits, entitlements. Would use 20-25 year loan proceeds from hotel financing to payoff 500k loan balloon payment in year 7.
• Existing property is free and clear. Land value likely around $1mm (San Francisco - Class A location next to city center - high occupancy rate location year around 80%+)
• Construction costs of $2.6mm and soft costs/FFE etc of $1mm =$3.6mm
• Would use land for owner contribution to recoup cash used from apt refi for soft costs that would be paid by me upfront. Essentially I would pay out of pocket for the front end costs and then when financing is in place I would recoup that money as part of the overall $3.6mm loan with my land as 1st lien collateral. I'm guessing I'll get at least 50% of the appraised value of land to use as collateral. 
• DSCR ratio for new owner operated property would be 1.4 in Year 1 and above 1.8 from year 2. ~45% Net Operating Margin and Cash flow to owner after debt service of ~$230k in year 1 and growing through year 5 to ~$350k.

Any thoughts on holes in this deal? What are lenders likely to pick at? I cannot afford to bring on a management company or project manager as the project budget needs to fit ADR. I think my main issue will be lack of prior new construction development experience but the pro forma is solid even when you stress test it for either low ADR and higher occupancy or vice versa.