Independent Hospitality LPs

Manchester, New Hampshire
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Independent Hospitality LPs

Zach Blatt
Member since 2024 · 2 posts · 0 votes

I've been running a self-funded search fund with the aim of acquiring and leading an existing company as the new CEO. More recently I've focused on real estate opportunities, particularly independent multi-unit hospitality offerings with the potential for significant value-add. I came across a cabin community in the Upper Midwest that's for sale for about $5m that I've discussed with some of my peers in the real estate community and they think that it's a promising opportunity. However, I'm realizing that the investor community I've cultivated for my search is not well suited to invest in this as they prefer actively managed companies with higher (30%+) IRR targets. Does anywhere here have a recommendation for an investor who might be an anchor GP as well as something of a coach for this? (I imagine the deal will require over $1min equity and could see this as the first of several similar syndication deals).

Thanks!

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  • Stuart UdisPro Member
    Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
    10mo

    Your personal network is usually the best place to find investors, especially when you are starting a new venture. First, they know and trust you which is incredibly important. Secondly, the fact that people around you already want to invest passively puts you ahead of most. From what you described, your network may just need more education on the opportunity, and real estate in particular. 

    They are trying to compare buying an actively managed business to investing in real estate, but those two things operate very differently. All real estate, but particularly a STR community like you're interested in purchasing really is a business with turn around and value creation opportunities. Beyond that, it sounds like your investor network is trying to compare the actively managed businesses acquired in the past to real estate which goes back to educating them on the opportunity.

    For example, what is the investment period behind that 30% IRR they are quoting? The hold period can dramatically change that return. Then you have the tax differences. Real estate investors benefit from depreciation during the hold and long-term capital gains at the exit. In contrast, selling an actively managed business usually results in a mix of ordinary income and long-term capital gains, which can materially reduce after tax returns. After tax is what truly matters.

    Financing and scalability also differ. Real estate can often be financed with better leverage and can be scaled through third party property managers and vendors with far fewer employees. Actively managed businesses, on the other hand, normally require ongoing staff and rarely qualify for the same type of bank financing. Once your network understands these differences, real estate may look much more appealing as a passive investment strategy.

    I am actually dealing with the reverse situation. The current lending environment makes it difficult for restaurant operators to obtain financing. That has created opportunities for my real estate partnerships to own the restaurant operations inside our buildings without investing much more than we would have spent building out space for a tenant where the individuals who customarily would have been arm's length lease operators are now brought on through management agreements to run the businesses.  It took time to explain how this opportunity fits into our real estate model, but I was able to show how this was really a real state play that added an additional revenue stream while increasing the real estate value. You need to take a similar approach focusing on education.

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  • Zach Blatt
    OP
    Member since 2024 · 2 posts · 0 votes
    10mo

    Thanks for the detailed post.

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