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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Bhavik Dani Featured on Midland Investments Podcast

1 min read

Midland Self-Directed IRA & 1031

Earlier this month, our very own Dealflow Officer Bhavik Dani lent his hotel crowdfunding expertise to Midland IRA, on their Midland Media: Podcast Series. Bhavik goes in depth about how hotel crowdfunding distinguishes itself from other real estate investment opportunities, and also discusses our team’s journey so far on the road to making hotel crowdfunding accessible to investors across the nation!

Check out the full podcast here.

Bhavik Dani Featured on Midland Investments PodcastInterested in learning more about hotel investments and EquityRoots’ hotel crowdfunding platform? Click below!

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EquityRoots: Democratizing Hotel Investments

3 min read

Hi. I’m Bhavik Dani, Dealflow Organizer with EquityRoots.com. It’s my pleasure to talk to you about how crowdfunding is revolutionizing the hotel industry. EquityRoots.com uses crowdfunding as a finance mechanism to raise capital for real estate assets, specifically for premium branded franchised hotels. EquityRoots combines and harnesses the buying power of the crowd to bring you investment opportunities in institutional grade investments that were once available only to REITs, insurance companies, and the largest corporations. Our crowdfunding technology allows even the smallest of investors to pool their capital right next to proven developers and industry leaders. Hotel crowdfunding is really a system in which everyday folks like you and I become the source of capital. The capital can be structured as equity, debt, mezzanine debt, and sometimes even convertible debt. This capital is fairly flexible with how a developer can use it to further grow and improve business, from renovating a pre-existing hotel development to constructing and designing an entirely new development from scratch.  The advantages of crowdfunding to investors include:

Diversifying Risk

We can diversify risk by allowing the crowd to buy fractional interests in different hotels across the country. EquityRoots allows investors to select multiple assets, affiliated with different brands and located in various geographic territories.

Institutional Grade Assets

Next, it allow hotel investors to own a piece of an institutional grade quality hotel. Let me explain a little further. The average hotel groups and hospitality groups have the ability to build a standard 80-120 room hotel in a suburb, where barriers to entry and construction costs are often lower. However, in center city urban markets – like Chicago and New York – investors often encounter high barriers to entry and substantially higher construction costs. Deals in such markets can become out-of-reach for traditional hoteliers and real estate investors. This is where crowdfunding kicks in. By pooling capital from everyone, it allows combined leverage of the crowd to pursue a higher-grade, higher-quality deal. It’s something usually reserved for institutions –  REITs and insurance companies as I mentioned.

No Middleman and Commissions

Another advantage is removing middlemen and commissions. The crowdfunding process is very clean and simple. Our crowdfunding platform doesn’t allow broker fees or commissions for buying and selling the investment. EquityRoots aims to make every penny of your dollar count in the investment.

 

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Ownership Beyond Paper

Investing in property and buildings that you can see and visit is probably one last advantage I’d like to share. Hotel crowdfunding investments are markedly different than paper stocks and bonds – paper certificates that we trade on by speculation and can never actually “see” in the same sense that you can see and visit a hotel you invest in. Real estate is an investment that you’ll always be able to see. It has real property interest and improvements on the land.

Conclusion

These are just a handful of the reasons why hotel crowdfunding is such a game changer – not only does it harness the power of real estate crowdfunding, but it also allows real estate investors new and old to gain access to those high-barrier markets. EquityRoots is hotel crowdfunding, democratized for today’s investors.

 

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Keeping Chicago Competitive: The Hotel Supply Wave

4 min read

A Wave of Supply

Chicago’s hotel market is preparing for a supply wave. In the next few years, the Windy City expects to add an additional 12,000 to 13,000 new hotel rooms to its arsenal. To many, this isn’t shocking news. Hotel developers and operators in Chicago have enjoyed a steady climb in RevPAR since 2009. However, in 2016, we saw Chicago’s first decline in RevPAR in 6 years, a sign which some say is reason to worry about the incoming hotel room supply.

Market consultants and policymakers point to a potential oversupply problem as the source of their worries.  Under basic supply-and-demand principles, these critics essentially say that if there are too many hotel rooms in a market, then the price of each hotel room in that market will, on average, decrease.  There will be more hotel rooms than Chicago needs to accommodate its visitors and with more hotel rooms than hotel guests, the argument is that each hotel will get a smaller piece of the pie. We believe that these claims are blown out of proportion and fail to acknowledge any of the upside. While the argument is fairly simple and logical, the critics are erroneously oversimplifying the market and overlooking the micro and macroeconomic consequences. Our business team at EquityRoots wants to make sure investors and hotel owners are not oversimplifying Chicago’s market and then making assumptions on those generalities.

Keeping Chicago Competitive: The Hotel Supply Wave

A robust supply of hotels are critical in establishing continued economic growth in Chicago.

Other regions in the United States outside of Chicagoland (San Antonio, New York, and Seattle, to name a few) have similarly seen the development of new hotels in their respective markets. These brand new hotels attract additional business and travel, and keep their cities competitive in the hospitality market. Cities that fail to upkeep their hotel inventory can lose out on significant business opportunities and city revenue. This includes Chicago, which stands to lose much ground to other established and on-the-rise metropolitan areas. If Chicago wants to remain a world-class city that is capable of handling large conventions and attracting major corporations to set up shop, it needs to keep things fresh with updated hotel products.

The Chicken, or the Egg?

If you’ve been watching Netflix recently, you might have stumbled upon “The Founder,” which takes a look at the entrepreneur Ray Kroc and his role in making McDonald’s a worldwide brand. For Ray Kroc, business growth is a supply and demand issue. Which comes first, the chicken or the egg? Ray Kroc believed that new supply attracts new demand, building the McDonald’s restaurant empire on this theory.  

Likewise, EquityRoots.com believes that the threat of oversupply is overhyped, particularly for the newest hotels to enter Chicago’s market. While it is true that there will be more hotel rooms available in Chicago from a sheer numbers standpoint, the newest constructed hotels will drive others to improve. Newer hotels that are slated to open in Chicago – including a Cambria hotel in Chicago’s Loop and a dual-brand IHG hotels in Schaumburg – introduce updated and upscale venues with cutting-edge floorplans that appeal to old and new visitors to the city. Modern additions including rooftop venues, new technology, and newer beds are likely to attract the majority of incoming travelers, and this is a standard that corporate travelers have come to expect in other markets across the country. This means that the pressure falls to older hotels to reinvest and renovate, especially those that are 20 years old or more. For example, developers are already spending about $20 million to renovate the Talbott Hotel in the Gold Coast in order to keep the asset competitive. Other older Chicago hotels are also expected to renovate and update their rooms and designs to avoid the risk of becoming outdated. Chicago’s hotel room supply will continue to be updated.  Increased expenditure and capital improvements will ultimately raise an owner’s basis, driving rental rates higher to obtain the same return.  As a result, the entire market responds by increasing average daily rates.  The supply of total rooms will go up, but so will quality.  This gives all hotels the edge in competing for corporate and leisure travelers. As a whole, competition will drive up the quality of hotel services and products offered in Chicago, which lead to positive experiences and can encourage even more travelers to visit the Windy City and drive demand.

Moving forward, Chicago is expecting more travelers, which is great news since the number of conventions and meetings held last year in 2016 was atypically low for the Windy City. When you couple that with high-publicity events like the Chicago Cubs’ World Series win last year, EquityRoots.com expects that the future still remains bright for Chicago’s hotels.

 

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So, what caused the 2016 decline?

If it wasn’t primarily oversupply that pushed Chicago’s downward RevPAR dip in 2016, what was the source? Chicago is facing microeconomic issues.  For starters, the city’s current lodging supply is outdated compared to other cities.  It’s also worth noting that Chicago was in the running as a host city for the 2016 Summer Olympics. During the bidding process, corporate travelers shied away from booking in Chicago because the Olympics typically creates a lot of traffic, congestion, and delay in the way of a busy work/meeting schedule.  A number of conventions and businesses avoided booking travel to Chicago during the time frame that the 2016 Olympics would be occurring, opting to hold their conferences and meetings in other cities like Detroit, Indianapolis, Las Vegas, or Minneapolis.  When Chicago wasn’t awarded the 2016 Summer Olympics bid (which went to Rio de Janeiro), the city got a 1-2 punch. The city not only missed out on the opportunity to capitalize on a huge wave of tourism for the games, but also was hurt by the void of typical corporate travel avoiding the market. As 2017 and future years pose more typical operational years, we believe the hotel industry will continue to improve in Chicago.

Chicago needs to stay competitive to keep up with other leading primary markets in the United States, including New York and San Francisco.

Chicago needs to stay competitive to keep up with other leading primary markets in the United States, including New York and San Francisco.

Staying Competitive

Freezing free market activity and slowing down updated prototypes will push Chicago laps behind in a race against other cities. America and capitalism thrived on encouraging innovation and progress.  If Chicago were to halt new development for fear of oversupply, it will have comparatively lower quality lodging than other cities, which will make it more difficult to attract travelers and other demand drivers to come here in the first place. We are seeing incredible market strength in cities like Seattle, NYC, and Boston – cities that happen to offer the latest and greatest hotels and amenities.  Chicagoland needs to put pressure on the status quo, create pressure to improve, and bring in the latest and greatest facilities so that we can attract more businesses and travelers to come here.

Sources

Gallun, Alby. “Hotel market falters after six-year run.” Crain’s Chicago Business. Sept 26, 2017. 

Gallun, Alby. “Will the downtown hotel market bounce back in 2017?” Crain’s Chicago Business. Jan 30, 2017. 

Hoisington, Alicia. “Oversupply concerns loom over Chicago.” Hotel Management. Mar 6, 2017. 

Ori, Ryan. “Talbott Hotel to shut down for $20 million renovation.” Crain’s Chicago Business. Dec 8, 2016. 

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4 Great Benefits of Hotel Crowdfunding

4 min read

4 Great Benefits of Hotel Crowdfunding

EquityRoots.com uses crowdfunding as a finance tool to raise capital for premium branded franchised hotels. We harness the buying power of the crowd to create investment opportunities in institutional grade assets that were once only available to REITs, insurance companies, and established players in the hospitality industry. Our crowdfunding technology allows even the smallest of investors to invest alongside professional real estate developers, hotel owners, and other like-minded investors. It’s a system in which everyday folks can tap into serious sources of capital for investment purposes. This capital can be structured as equity, debt, mezzanine debt, and sometimes even convertible debt – security instruments that are designed to yield a return for investing. There are plenty of advantages in crowdfunding investments. Here are just a few!

1. Diversifying Risk.

Hotel investors can diversify risk by investing in fractional interests in different hotels across the country. Hotel investors can select hotels under different brands in various states. Our EquityRoots platform allows investors to select multiple assets, and buy shares or investment units in different projects and properties, diversifying your investment risk by brand, by the market, by different geographic regions, or simply by the different types of hotels, whether it is an extended stay, limited service or full-service hotel.

2. Owning Pieces of Institutional Grade, High-Quality Developments.

Typical hoteliers and hospitality groups commonly pursue 80-120 room properties in secondary or tertiary markets. This is where barriers to entry are often less and construction costs are generally lower. However, in higher density urban markets such as Chicago and New York, hoteliers face much higher barriers to entry and construction costs are significantly higher. Consequently, many hospitality groups aren’t able to penetrate into those markets. Primary urban markets have institutional grade assets that typically cost $20-50 million and although they can take many years to develop, it’s worth the hassle. Institutional grade assets tend to have the highest average daily rates, highest occupancies, and strongest profit opportunities for their owners and investors. But because of their size and other barriers to entry, these deals sometimes become out-of-reach not just for everyday people, but also for proven hoteliers. This is where crowdfunding kicks in to provide leverage and opportunity that hotel investors otherwise would not have access to. By pooling capital from crowd, EquityRoots’ crowdfunding platform allows everyday folks to compete for higher-grade, higher-quality deals. Crowdfunding is now gaining access to deal flow usually reserved for institutional players like REITs and insurance companies, giving even new hotel investors a chance to enjoy the ownership of some of the most profitable opportunities.

 

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3. No Middlemen and No Commissions.

The crowdfunding process is very simple and efficient. Under specific exceptions to the securities registration requirements, broker’s fees or commission fees for buying and selling the investment are not permissible. Crowdfunding aims to make every penny of your dollar count in the investment, instead of letting middlemen walk away with your money.

4. Local-Concrete Investments You Can See.

Investing in property and buildings that you can see and visit is yet another advantage. Hotel investments are different than paper stocks and bonds; paper certificates that we can never see and often trade on speculation. Real estate is an investment that you’ll always be able to see. It has real property interest and physical improvements on the land. A family can walk into a hotel, point to it, and feel a sense of ownership. It’s a more rewarding investment experience than collecting paper certificates in a file cabinet.

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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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Modular Construction: Hotel Construction & Design

3 min read

Modular Construction: Hotel Construction & Design

Modular construction is revolutionizing building construction, especially in the hotel industry. Instead of having to build the entire hotel from the ground up, modular construction pushes most of the construction to happen off site. This type of construction is incredibly appealing, especially to first-time hotel investors looking for a smart real estate investment.

Historically, the construction for a hotel development occurs on-site. All your raw materials are delivered to the site, where they are assembled by various tradesman and sub-contractors. The foundation is poured and the framework is built. Each floor is set up, and individual rooms are then constructed and finished as mechanical, electrical, and plumbing systems are established.

So what does modular construction offer? Modular construction refers to the modules that are constructed off site and then delivered to the construction site to be connected together. In the case of hotels, this often means that each room is built as a module off site. The rooms are shipped to your construction site and then the rooms are hoisted and stacked and sealed together, very much like legos. Instead of building your entire building from scratch on-site, you are able to construct your hotel into smaller sections that are later placed together. There are numerous benefits to modular construction, including:

Efficiency

Hotels benefit disproportionately from modular construction because most of the guest rooms are essentially the same and easy to replicate. By having most of the construction take place off-site, hotel developers often save time and money in the actual on-site construction, since the rooms are already built. Modular construction minimizes weather delays on site, and simultaneously reduces construction hazards. In addition, because of reduced construction time, there are potential savings associated with construction financing being a shorter term. There are also actual material savings using prefabricated modular construction. The repetitious nature of modular assembly allows carpenters and tradesman to bring material wastage down to a bare minimum. Additionally, construction traffic delays are shorter, and your development timeline is shorter, allowing you to make it to opening day and realize a return sooner. There is probably a good chance that a prefabricated construction company is able to buy lumber, steel, plumbing, and electrical equipment at better prices than most local builders, simply because of their volume and purchasing power.

Quality Management

Mass production allows you to speed up not only construction but also allows developers to have better quality. Modular construction reduces a lot of the variable guesswork in on-site construction from room to room, ensuring that each room’s construction will be consistent and predictable. Even the tiny details like screws and nails go into the exact same place, for each room module. It might also be important to note that indoor factory building doesn’t expose the materials or tradesman to natural elements, especially if you’re thinking about building in a cold or rainy climate. Naturally, the materials stay dry and worker productivity remains high when you’re inside controlled environments.

 

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Conclusion

We predict that modular construction will only get more popular, and will allow hotel developers to speed up their rate of development without sacrificing quality. Moving ahead, modular construction companies are now even offering to build rooms with your FF&E (furniture, fixtures, and equipment) already built in, so hotel developers have even less to worry about when preparing to open doors and getting to revenue.

Sources:
“Why Build Modular?” Modular Building Institute.

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Should I Invest in a New Hotel or an Existing Hotel?

5 min read

Should I Invest in a New Hotel or an Existing Hotel?

Do I invest in a brand new hotel, or in an existing hotel? Real estate investors often find this decision difficult when first expanding their investment portfolio to include hotel assets. When deciding between hotel investment opportunities, knowing the distinctions between new and old hotel assets can serve you well. Combine that knowledge with information about the cost basis, time, quality, and potential disposition value of each deal, and you have the foundational tools you need to make smart investment decisions.

For starters – there are two types of investments available for hotel investors. Hotel investors can choose to invest in a new construction project. This is where a hotel developer takes the time to design and build a brand new hotel. On the flip side, hotel investors can choose to invest in an existing hotel, usually in the form of a renovation project. Renovations could include structural upgrades to a building, but may also involve a change of a hotel’s brand name. For example, a developer might want to take a pre-existing Country Inn & Suites and convert it to a Staybridge Suites.

The benefits of new construction hotels might seem apparent to many first time investors. After all, the hotel asset that you invest in will be brand new, often coming with the newest amenities. However, existing hotel renovation projects also have their fair share of benefits.


New Construction Hotel Investments

New Construction Hotel Investments

Investing in a new development project can be a risky but rewarding investment. It is truly a unique experience, being able to invest in a project that you can see from its designing stages, to the groundbreaking, and to the final construction phases.

Advantages to New Construction Investments

New construction developments have numerous benefits, including:

  1. Modern Design: Everything is new! The guest experience and floorplans of today’s hotel prototypes are more efficient and modern than older hotels. Guests are satisfied and leave great travel reviews, encouraging additional business.
  2. Market Leaders: New construction hotels typically beat out the older competition in the area. These new assets often become market leaders in rate and occupancy in large part because business travelers don’t mind spending more money to stay in newer hotels.
  3. Lean Operating Margins: Operating margins in new hotels tend to be leaner than their older counterparts because the newer hotel is less susceptible to extensive maintenance and repairs.
  4. Higher Disposition: When selling a newer hotel after owning it for a few years, it is common to see offers that are higher than those that would be made for old hotels. REITS and institutional buyers demand the best performing assets and often pay the highest value to new or newer hotels.

Disadvantages to New Construction Investments

However, savvy real estate investors know that depending on the individual deal, new does not always mean better. New construction hotels have their own share of risks:

  1. Longer Process: The development process often takes 6-18 months of hard work with engineers, attorneys, and architects. Only after the development undergoes several rounds of approval does the project move forward to construction, which often takes another 16-24 months of time.
  2. Income Delay: New hotel assets are not taking in any income during that development and construction process.
  3. Building Codes & Zoning Laws: Government review can have a huge hand in restricting the hotel design. Different local governments vary greatly in what is allowed or not allowed in construction. With a brand new hotel, it can add on additional work and approval rounds with city officials, all which can lengthen the amount of time until opening day for that hotel.
  4. Difficult Construction Financing: Construction financing is generally more scarce expensive than existing hotel acquisition loans. There are plenty of lenders for existing hotels, but not as many for new-construction loans.

Existing Hotel Investments

Existing Hotel Investments

When real estate investors decide to invest in the renovation of an existing hotel, they must compare the cost basis of acquiring the hotel to the cost benefit of changing flags or renovating the property into a different brand. In other words, how does the price of investing in the hotel compare with the potential return of the renovated property? This comparison is especially important if the existing hotel is located in an extremely busy market, center-city location, or in a market where vacant land is scarce.

Advantages to Existing Investments

Existing hotel investments offer many benefits that are distinct from new hotel assets, including:

  1. Clear Performance History: Investing in or purchasing an existing hotel with an operating history provides an accurate look at how the hotel is performing right now. This can give you a clear picture of what the return on your investment currently looks like before renovation.
  2. Reduced Development Costs: Due to rising costs of construction and scarcity of land in strong markets, the building a new hotel is easier said than done. With an existing hotel asset, you do not have to shell out for materials to build an entirely new building.
  3. Faster Income: Assuming that the hotel asset is cash flow positive, investors can recognize income 12-24 months sooner compared to new construction hotel investments. Again, hotel investors benefit from a shorter waiting period before the hotel operates.
  4. Shorter Development Period: Pre-existing hotel assets have already undergone the entitlement, design, and development process from its initial construction, so developers and investors can save valuable time.
  5. Assuming Financing: The acquisition cost for an existing hotel can be significantly below new construction replacement cost. Additionally, existing hotels often have financing that you can assume from the previous owner. It’s convenient not having to go searching or negotiating for a loan when you can readily assume a quality loan.

Disadvantages to Existing Investments

With older hotel buildings (and for real estate assets in general), maintenance and other disadvantages can lower the value of your investment. Investors must be careful to make sure that the price of acquiring a pre-existing hotel does not outweigh the cost of simply constructing a new hotel. Other downsides to existing hotel assets include:

  1. Outdated Infrastructure: Many older hotel buildings lack adequate electrical, plumbing, or mechanical systems to keep up with the demand of today’s travelers. Investors can often spend just as much money replacing these systems as they would installing brand new ones.
  2. Limited Branding Options: Older hotels may be limited on branding options, as some brands (particularly high performing ones) may have additional restrictions on which buildings they are willing to allow their branding on.
  3. Lower Disposition Value: Renovated or repositioned hotels will most likely sell for a substantially lower premium than newly constructed assets.
  4. Higher Maintenance Costs: Older, existing hotel assets will cost more to maintain than new construction hotels.

 

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Conclusion

Both new and existing hotel assets come with their own set of pros and cons, and investors should take into account their financial goals when considering investment decisions. If investors seek to supplement their short-term cash flow, then the types of investments that work best for them will be different than if those investors were seeking to maximize their long-term gain. Beyond looking at the type of hotel investment, looking at other variables including “equity multiples” can provide valuable information.

Equityroots recently found value in partnering with Intercontinental Hotel Group (IHG), licensing two of their most iconic brands, Holiday Inn and Holiday Inn Express in a dynamic dual-brand design. The development was able to identify Class-A vacant site in a market with barriers to entry, it was an easy decision to pursue new development given the circumstances.  New development projects and investments often require a higher degree of patience compared to existing hotel acquisitions, but the added layer of patience is often rewarded during the exit strategy.

Equityroots.com is website owned and operated by Equityroots, Inc., a Delaware Corporation and real-estate developer specializing in select service and full service hotel development.  For more information on hotel investments, visit us at www.equityroots.com or sign up for our monthly newsletter at the bottom of our homepage.

Sources

“Hotel Investment: How to Finance the New Supply.” Hotel Online. Apr 11, 2014.

Jones, Michael. “What Does it Take to Start a Hotel?”  Forbes. Feb 23, 2013.

LaSalle, Jones. “5 Forces Driving Hotel Investment.” Building Design and Construction. Feb 5, 2013.

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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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Hotel Crowdfunding vs REIT Investments

4 min read

Hotel Crowdfunding vs. REIT Investments — Investing Tools for the 21st Century

The 21st century has brought about quite a few developments in the real estate industry. As with most industries, technology has played a huge role in propelling the real estate industry forward. Two have jumped to the forefront within the real-estate industry: Crowdfunding and Real Estate Investment Trusts (REITs).  These two innovations – particularly as they relate to hotel crowdfunding, are alternatives to the traditional investing methods. Now, many investors wonder how to best utilize hotel crowdfunding and REITs for their investment or capital raising needs.

What’s so Special about Crowdfunding for Hotels?

With the passing of the Jumpstart Our Business Startups Act of 2012 (JOBS Act), online platforms such as EquityRoots can now solicit the sale of real estate backed securities to prospective investors by registering Form D with the SEC—the Security and Exchange Commission, or qualifying for an exemption. When using general solicitation, all purchasers of the public offering (in this case hotel assets) must have accredited investor status. The JOBS Act has also paved way for non-accredited investors to participate.  More recently, and under newer offering types like Title IV Regulation A+, unaccredited investors can participate under certain limitations.  This opens up the possibility for online platforms to extend investment opportunities to everyone, not just accredited investors anymore.

Under these circumstances, hotels are a great asset class to crowdfund because of its existing large and loyal customer bases associated with each of the top Hotel chains such as Marriot, IHG, Hyatt and Hilton.  In most cases, commercial real estate like hotels yield investors a greater rate of return than residential real estate investments.  Equity crowdfunding investments can easily exceed the typical returns from residential real estate, often seeing a rate of return above 20% when factoring 5-year holding periods and including the disposition proceeds.  The cash flow performance of hotel assets can also impress investors, especially when the development is backed by a strong reservation system and strong brand.  Crowdfunding is not limited to equity, you can also crowdfund a mortgage or a business loan.

 

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What’s the infatuation with REIT(s)?

Real Estate Investment Trusts (REITs) didn’t start to matriculate in the investment marketplace until the 1960s—when Congress introduced this investing tool into the U.S. economy. What is a REIT? By definition, it is a corporation that owns and operates income producing real estate. More specifically, it joins the capital of several investors and investors earn a share of the income produced, yielding a 8.8% rate of return averaged over the last 10 years.

A REIT offers investment flexibility at a reasonable entry price. REIT(s) can invest in multiple asset classes such as retail, residential, healthcare, offices. and for each of these asset classes, investors can earn a share of the income produced. Many people find REIT(s) an attractive investment because of it’s liquidity, meaning you can wake up and sell it if you need the cash.  Be weary, certain REIT’s often have restrictions on when and how much you can sell.

Conclusion & Comparison

After comparing the two investment tools, it’s clear that each has their pros and cons. A REIT’s ability to earn a reasonable rate of return and the liquid nature of the investment may be a good fit for some people. But for the savvier investor that can decipher between good/bad markets and good/bad flags, they have multiple options on what they can invest into.  It is not uncommon for online investors to yield a higher rate of return through a variety of equity and debt instruments via crowdfunding, and outperform their REIT counterparts.  Real estate and hotel crowdfunding may allow people to diversify their portfolio by personal preferences that are strategically better than a giant pool of assets accumulated over time.

The same cannot be said of REIT(s).  Essentially, a REIT is a pool of multiple properties that you are investing into.  Sometimes the REIT picks good apples and sometimes it picks bad apples, and sometimes the good ones go bad over time, you’re essentially investing into the average. REIT(s) do not allow the investor to pick and choose which investment type they would like to fund, whereas crowdfunding gives control back to the investor and allows them to choose investments that may be most suitable for them, sorting by debt, equity, brand, flag, geographic market, hold period, etc.

Remember, that all investments come with risk.  Investing is inherently taking on some form of risk for a potential reward.  And although people have 24/7 internet access to crowdfunding platforms, they should consult an attorney or financial advisor prior to investing.  Crowdfunding platforms like www.equityroots.com enable its online investors to easily share due-diligence documents and investment contracts with their attorney prior to investing.  Past performance is never a guarantee of the future.

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