How Does Due Diligence Work?

2 min read

Due Diligence Hotel Investments

2 Variables: (length of time & amount) Two important variables in a purchase and sales agreement include the amount of time that is being requested in the due diligence period and the amount of the due diligence deposit funds. While these are two major variables, there are several other variables worth considering. Developers should always consult and discuss other variables with a local attorney when negotiating purchase, sale, or due diligence instruments.

Due diligence time is a very critical time for a potential buyer or investor.  This is the period of time in which a buyer or investor is going to find out whether their plan is feasible and worth moving forward. The questions you need to ask and tasks that must be completed during this review process can include:

  • Whether your development is financially feasible: How much will your development cost?
  • What interest rate will you borrow money at?
  • What is the predicted return on your equity investment?
  • It’s also a time that you’ll want to inspect the land and the structural integrity of it. Various engineers will conduct soil borings and lab studies to determine geotechnical and site plan data and how that may affect or bring about hidden construction costs.
  • Will the city or local municipality allow it? Often times, developments can be restricted by regulations of the city or local municipality. It could be the case that only specific types of developments such as office space or hotel constructions can be built in a given area which must follow specific zoning rules. This is also known as entitlement process.

Due Diligence Time Period

Depending on the amount of time you need to complete all of these tasks, it can affect your deal. Shorter due-diligence periods are more attractive to sellers, therefore it is more likely to demand and receive a price reduction if your proposed due-diligence period is relatively short. The same goes the other way. If the amount of time being requested in the due-diligence period is long, it will probably require a higher purchase price to induce the seller to agree.

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Due Diligence Dollar Amount

The second variable in a due diligence deposit is the size, or the dollar amount, of the actual deposit itself. This variable allows the investor to do a variety of things. Sometimes you can propose to modify the terms and amount of your deposit. You can make the deposit refundable or non-refundable, essentially changing the amount of risk you are willing to take. Oftentimes, the risk you take with your due diligence deposit can have an impact on the amount and terms of the actual purchase price in the contract.

A quick example might help clarify how this works:
Imagine there is a piece of land that I would like to buy for $1.2m, but the land is listed for sale at $1.3 million. To induce a seller of real estate to sell the land to me at the lower $1.2 million price, I may offer a $100,000 non-refundable due diligence deposit to the seller. Many times, that seller will be induced by the chances that I don’t close on the deal and the potential of earning easy $100k. You can customize these terms, allowing your money to go non-refundable after a specific amount of time in the total due-diligence period, or right away. Again, some of this depends on the risk you are willing to take. Sometimes, offering a non-refundable deposit is a way to stick out among other buyers. If you are competing against a diverse group of buyers, offering a non-refundable deposit is a sure way to get the seller’s’ attention. Sometimes the land appears to be very risky and seems like there might be topographic or geotechnical issues with the land, and you may want to specify that your due-diligence deposit will remain fully refundable until you have had time to research potential problems with your civil engineer.

Where does your due-diligence deposit stay? It should technically be deposited into escrow with a mutual joint order escrow agreement. This ensure that your money is in safe/neutral hands and can not be accepted or deposited without a joint order from all parties. But this can also be customized. If you intend to offer a non-refundable deposit, the deposit can sometimes be sent directly to the seller or seller’s attorney. As always, make sure to hire a local attorney to advise you through any transaction.

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Limitations on Funding for Development Proposals

2 min read

Limitations on Funding for Development Proposals

What are our limitations on funding?

Many times we get inquiries about what types of deals EquityRoots.com funds. We fund a variety of deals: opportunistic turnarounds, acquisitions, new developments. However, we do have some qualifying criteria to ensure that our hotel investors have the highest quality crowdfunding projects available to them. All projects must be franchised with one of the big three brands. This includes Marriott, Hilton, and IHG. Why is it that we are only picking these three? It’s not to say that other properties and other franchises do not make money or are that they are poor investments. These properties do have the potential to perform well and earn returns, but the three big brands that EquityRoots has identified have proven track records of customer service, brand standards, and a sense of predictability that corporate travelers have come to expect. It’s the hotel brands that we feel comfortable investing behind and sharing to our hotel investors on our hotel crowdfunding platform. They have strong brand support that includes a robust central reservation system working to fill your guest rooms each night.

EquityRoots.com also likes to look at the type of transaction. New development hotel projects from the ground up tend to have longer planning times and disposition periods, but they also tend to draw in higher revenue than a comparable pre-existing hotel upon stabilization.  It’s no secret that new hotels often become market leaders, but hotel investors must endure 18-24 months of deferred returns during planning and construction.

Alternatively, existing asset acquisitions are also an attractive proposition because you’re ready to recognize a return on your hotel investment the day after closing.  Existing stabilized assets also allow hotel investors to see exactly the income that they’re buying, whereas new development deals are based on projections.

 

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Are there any dollar amount limits on funding?

In short – no. Traditionally, potential real estate investor bases are often limited by their location. EquityRoots’ platform allows sponsors to reach a larger investor base, using technology to enhance how they source capital. A Hampton Inn in New York City will have no problems raising capital online. It’s strong brand and larger sized market will allow this project to draw not only local investors in New York, but also investors from outside New York State. Our technology department focuses on effective quality search algorithms to make sure that investment opportunities are available to local investors. Interested hotel investors that may be researching how and where to invest in hotels online may find themselves directed to EquityRoots.com’s platform. You don’t have to live near an asset to perform due diligence and invest. With that said, we would expect the New York City Hampton Inn would raise quite a bit more capital than a La Quinta Inn in Albuquerque, New Mexico.

Looking beyond the deal itself

Oftentimes, the sponsor behind a hotel crowdfunding deal matters just as much as the merits and location of the deal itself. Although we don’t set funding limits, we often push project sponsors to contribute at least 50% equity, requiring them to share a significant stake in the success of the project.  This way, both passive hotel investors and project sponsors both share a mutual, financially backed interest in the success of the deal. Other factors matter too, and we look at each submitted project holistically before presenting the hotel crowdfunding opportunity to our hotel investors. In general, the better the flag, brand, sponsor, and market size – typically improve the outcome on the capital raise.

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Hotel Crowdfunding Through Title IV Regulation A+

5 min read

Title IV Regulation A+

For as long as we can remember, equity investing was something exclusively reserved for wealthy individuals. Investing in high growth companies and startups used to be only possible for accredited investors, or individuals with a substantial amount of wealth. To qualify as an accredited investor, individuals must earn $200,000+ for two consecutive years or establish a personal net worth of $1 million or more (excluding their primary residence). Unfortunately, anyone who pays off their home or possesses the majority of their equity paid into their home don’t benefit from these qualifications. However, the JOBS Act can change all that.

In 2012, the Jumpstart Our Business Startups Act (JOBS Act) was passed to democratize the investment marketplace. The JOBS Act contains multiple components, but we consider Title IV (and its subset Regulation A+) the most dynamic because it lifts the restriction of allowing only accredited investors to invest in deals. In other words, anyone can invest in a company which is planning to conduct a “mini-IPO”, regardless of their income or assets. Investors no longer need be accredited to invest.

What is Regulation A+?

Regulation A+ (Reg A for short) works similarly to a mini-IPO allowing companies and startups to utilize crowdfunding platforms to raise up to $50 million USD through accredited and/or non-accredited investors.  Individuals no longer need to be particularly wealthy to invest.  Brand loyal hotel guests can become investors of their preferred brands, and hotel guests everywhere can take financial roles as investors to develop hotel projects.

Reg A also enables localized and community-based investments because nearly everyone can participate in the deal. Localized investments drive positive community economic development.

How Does Reg A Work?

Title IV Regulation A+ is made up of two tiers; tier 1 and tier 2. Companies interested in raising capital in this manner need to apply for a Regulation A+ exemption.

Title IV Regulation A+: Tier 1

  • Under Tier 1, companies can raise up to $20 million. 
  • In this tier, anyone from anywhere across the globe can invest in a startup or business. Both accredited or non-accredited investors are permitted to invest in companies that gain Regulation A+ Tier 1 Exemption.
  • However, if a company wants to raise capital under the Tier 1 Exemption, it must create a disclosure document and receive the SEC’s approval. The company finances are reviewed, and must pass the Blue Sky laws in every state before earning the exemption.
  • These companies can also advertise their investable presence publicly.

Title IV Regulation A+: Tier 2

  • Under Tier 2, companies can raise as much as $50 million.
  • Similar to tier 1, everybody is allowed to invest from anywhere in the world as long as the startup or growth company gains the Title IV Regulation A+ Tier 2 Exemption.
  • Companies can acquire Tier 2 after receiving SEC’s approval. To do so, these companies must undergo financial audits, and must provide disclosure documentation in the form of current, annual, and semi-annual reports. Unlike Tier 1, Tier 2 structures allow issuers to bypass each State’s Blue Sky laws.
  • Companies under Tier 2 also have the freedom to advertise publicly.
  • There is a significant difference. Unlike Tier 1, Tier 2 sets non-accredited investors limits. Non-accredited investors can only invest an amount equal to 10% of their annual income or net worth, whichever is greater, per offer.
  • In addition, non-accredited investors are capped at $100,000 per investment, regardless of their annual income or net worth.
  • For example, if a non-accredited investor is making $100,000 annually, they can invest a sum of $10,000. If a person has a net worth of $400,000, they are able to invest $40,000.

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Benefits

There are 3 major benefits with Title IV Regulation A+.

  • Anyone Can Invest: Title IV enables anyone to invest in a startup as long as it has been qualified by the SEC. Accredited or not.
  • Testing the Waters: Growth companies and startups can determine the interest of potential investors by providing them an initial offering. Then, they can decide whether or not to proceed with a Title IV offer.
  • Eliminating Blue Sky Law Filings: In Tier 2, Regulation A+ enables issuers to bypass state laws on selling securities to potential investors. Although issuers under tier 1 have to still comply with the Blue Sky Laws, the filing time has been decreased and the filing costs are now reduced.

Crowdfunding Hotel Investments with Regulation A+

  • EquityRoots.com is a hotel crowdfunding company considering the launch of a Regulation A+ hotel fund.
  • The hotel investment firm plans to create a $50 million fund to be leveraged with debt and deployed into new development assets licensed with IHG, Hilton, and Marriott.
  • Periodically, funds may also be used to opportunistically acquire existing assets.
  • Equityroots.com is a website owned and operated by Equityroots, Inc. a Delaware Corporation. For more information, please visit www.EquityRoots.com

Sources

“What is Title IV Regulation A+.” Crowdfunder.

“Summarize Title IV Regulation A+ For Me.” Manhattan Street Capital.

“Fact Sheet on Jobs Act Title IV – Regulation A+.” CrowdFundBeat News Wire.

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Financing Justice Through Litigation Crowdfunding

3 min read

Financing Justice

Helping Plaintiffs Gain Access to Justice through Crowdfunding

The worst-case scenario. Imagine you were badly injured in an accident that left you paralyzed, against a Fortune 500 company. The medical bills continue to skyrocket and the accident has left you unable to work. You have no one else to depend on for income. You had your case evaluated by an attorney and you are fairly certain that your damages are well over $700,000, potentially upwards of a few million.

Yet there’s still one additional problem: your attorney has told you that your case could cost you at least $200,000 in legal fees, not including additional legal expenses. Your attorney won’t work on a contingency basis, meaning they aren’t going to front the costs, and you can’t take out a loan because you don’t have enough leverage. What can you do?

The defendants have funds to out “lawyer” you. Seeking out loans or searching for a law firm to take your case on a contingency fee or as a pro bono case is unlikely. At first glance, you would appear to be out of luck.

However – there is an alternative. You have the opportunity to finance the litigation and your lawsuit through crowdfunding.

Crowdfunding Litigation

Crowdfunding litigation (or litigation financing/funding) allows investors the ability to invest in a legal cause of action. Like institutional-grade assets, investors are able to invest in lawsuits with the potential for a rate of return on the investment.

The process is actually similar to hotel crowdfunding investments. If a plaintiff does not have enough capital to pursue a case, that plaintiff can reach out to investors. Those investors can fund portions of the total amount needed. In return, the investor receives a portion of the judgment based on the total judgment award.

From the investor’s view, crowdfunding opens the opportunity to invest in justice — giving the plaintiff their “day in court” that otherwise would have gone unfulfilled. Sharing in the risk of judgment means that the investor shares in a portion of the total judgment award. Investors can feel empowered with the ability to promote access to justice.

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Intensive Vetting

Of course, litigation investments carry risk as do any other investment. As an investor, it’s important to know each case is properly vetted to ensure that only meritorious claims are pursued. Investors should familiarize themselves with the review process of each lawsuit to ensure that not only are invested funds put towards a good cause, but also that returns to increase the likelihood of an investment return.

At EquityRoots we go above and beyond for our clients to ensure our vetting process yields worthy claims. For clients, EquityRoots provides lawsuit and litigation financing for legal expense assistance. For investors, EquityRoots ensures that we have properly vetted each legal case, just as we do with any hotel crowdfunding investment opportunities we offer.

For more information about financing your lawsuit or investing in a lawsuit visit us at http://signup.equityroots.com.

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1031 Exchange: Defer Your Tax Obligations

3 min read

1031 Exchange- Defer Your Tax Obligations

Investing in hotels and real estate continues to be one of the best ways to build your wealth, grow your portfolio, and minimize your taxes. Thanks to Section 1031 of the Internal Revenue Code, investors are able to enjoy these advantages.

What Is Section 1031?

Section 1031 of the Internal Revenue Code allows an owner of any business or investment property to defer paying federal capital gains taxes and depreciation recapture if they exchange business or investment properties of like-kind. The 1031 Exchange allows you to swap properties or businesses while ignoring the taxable gains and reinvesting it into more valuable property. Essentially investors are using money that would otherwise be due in taxes to continue funding a bigger portfolio.

What are the Benefits?

There are numerous benefits that can be the result of a 1031 Exchange, but there are a number of requirements that must be met in order to complete an exchange. The most obvious benefit of a 1031 Exchange is tax deferral. The true power, though, lies in what comes as a result. Depending on your investment objective, a 1031 Exchange offers a wealth of opportunity.

Preserve Equity

If you are looking to preserve your equity, a 1031 Exchange can do that. Tax deferral will allow your initial investment to continue to grow. And since there’s no limit on how many times you can do a 1031 Exchange, you can defer indefinitely and continue to reap the benefits.

Purchasing Power

Or if you’re simply looking to increase your purchasing power, a 1031 Exchange can do that too. By allowing you to use all the sale proceeds- money that would otherwise be tied up in taxes- you can leverage it into more valuable real estate, which can subsequently increase the return on your investment by producing more cash flow and greater depreciation values.

Diversify Investments

And if you’re looking to diversify your portfolio and improve your investment position, a 1031 Exchange can do that too! Although this tax provision is limited in scope to only property located within the US, diversifying into different geographic regions or into different types of business or investment properties may be desirable for you or your business.

But if you’re looking to split up property or consolidate properties, a 1031 Exchange can do that too! Allowing you to roll over the gain from property to property, gives you the option to exchange a large property and split up the gain among several smaller properties or to exchange multiple properties and consolidate the gain into one larger property.

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Is it Right For Me?

A 1031 Exchange may be just the thing if you are intending to sell business or investment property, and you plan to buy a business or investment property of like-kind, within 180 days following the closing of your relinquished property.

It is ideal for taxpayers looking to sell their appreciated property–a low tax basis, business or investment property that has been held for more than one year. However, it should not be utilized if you have recently refinanced the property you want to sell, nor is it recommended if the transaction will result in a capital loss.

It’s important to know, though, that 1031 Exchanges are subject to strict rules. And depending on the type of transaction involved, these can sometimes be very complex. However, the use of a qualified intermediary to coordinate the essentials is imperative to the success of any exchange. Despite its complexity, though, 1031 Exchanges remain a very powerful investment strategy- that allows ‘real estate to help defer your tax obligations!

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EB-5 Visa Program: A New Way to Improve the Economy

1 min read

EB-5 Visa Program— A New Way to Improve the Economy

Since 1990, the EB-5 investor program has gradually increased in popularity in the United States over the years. Initially, not that many people—including prospective foreign investors from China, India and Africa—knew about this glorious opportunity to become a legal citizen of the United States. That is not the case anymore, especially during the last (5) years. The demand for EB-5 visas seems to have reached new heights considering the huge spike in new hotel and real estate developments and crowdfunding platforms operating in the United States. In addition, a lot more real estate developers and issuers have been actively pursuing foreign investors overseas by flying out to promote their project proposals in person. As a result, there has been an increase in applications for EB-5 visas— which led to a cap of 10,000 applications being set in the United States.

What is an EB-5 visa?

The EB-5 visa program is a process that allows foreign immigrant investors to become permanent legal residents of the United States by performing and satisfying certain conditions. If these conditions are satisfied, that particular immigrant investor will receive a visa (equivalent to a green card) that will allow them to live in the U.S. To be eligible for an EB-5 visa, the immigrant investor must invest at the minimum $500,000 in a Targeted Employment Area (high unemployment or rural area) or $1 million in a new commercial entity that produces a for-profit business.

Furthermore, through this investment, there are more conditions that need special attention from prospective foreign investors. First, foreign investors should be aware that they must be able to demonstrate that their investment created or preserved at least 10 full-time jobs for qualified employees within the United States. Secondly, if foreign investors can provide proof that 10 full-time jobs were created within two years, the investor and his family (spouse and children under the age of 21) will be eligible to have the temporary restrictions removed from their status and to become permanent residents of the United States.

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What’s so special about the EB-5 visa?

In addition to being a proven foreign investment program, the EB-5 visa program has the potential to inject some life into the United States economy as well. For starters, the money associated with the million dollar investment will contribute to the funding of new business entities in the U.S. In addition, these respective foreign investors will own a share in that particular project or company they choose to invest in. And lastly, there will be an influx of jobs into the U.S. economy— thus allowing for the unemployment rate to decrease and for the Americans to sustain their quality of living.

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