New Construction Hotel Deal In SF - Does It Have A Chance?

22 Replies

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. 

Hi @Shawn T.  

WoW! and congratulations for this major undertaking. I wish you the greatest success. I hope you will find all the guidance and assistance you are seeking though BiggerPockets. My name is Rubelyn. I am on the support team.  I am anxious to follow your success with this project. Keep us posted on you progress, please!

Rubelyn

Hi Shawn,

Welcome to BP! It was a life-changing move for me. I will address what I can in your deal because I've been looking into hotels for a little while now and have gained some familiarity with the requirements. Additionally, I structured a similarly priced condo deal in the Spring so have some recent financing experience. 

Your deal looks solid on many fronts. Seems you have the ability to generate an accurate proforma based on your experience and if it passes the sniff test of GC (with hotel experience also), architect and banks you should be ok. Just a word of caution, be certain to give yourself a 15% or more cost contingency buffer.

In my neck of the woods I would approach smaller banks with this as a portfolio deal, but some of those could also underwrite as SBA. Not really sure about banking climate in SF. Most of my local financing wants you to fly a major flag, but I suppose the independents probably can do well in SF. 

Your net worth is strong and credit seems decent, will likely have to sign your life away. Have you considered partnering with a more experienced hotel developer to give yourself a bit of wiggle room?

Also, unless you have successfully acted as a project manager on another similar venture I would strongly urge you to hire one or see if architect offers construction management as part of services. You'll have a better project in the long run. However, watch closely how that relationship is structured and paid for. 

Just my 2 cents, but I'm sure there is someone out here with far more hotel exp. than me. Best of luck! 

Marshall Downs

    Part of a group that owns more than 40 hotels nationally. All flagged properties. San Francisco is a great hotel market, but keep in mind SF also has restrictions on new build hotels. I would look into this and the permitting process before moving forward.

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

    Shaun impressive you found the gusto make the move. You seem to have the goal in sight and pushing the right buttons. Let's connect on this.

    you first need to check with SF planning dept about demolishing an older building.  You may not be able to do it. Or have your architect find out. 

    As for 80-90% LTV, that sounds rich to me. Usually these types of commercial construction projects require project sponsor to have more skin in the game, which is why they're often done with multiple partners or as syndicates.

    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?

    only thing I can add is that I had a partner who dealt with sba once to buy a building in SF (apartments over commercial) and it turned out to be very restrictive. i.e. He could not add on partners. Plus the rate was rather high. 

    I think you need to study the sba loan issue very carefully. Are there commercial mortgage brokers that deal with sba? Maybe get their opinion. I'm not sure how knowledgeable the sba office itself is. 

    As for commercial lenders, I don't know how easy it would be to get this deal funded. You just have to engage them. 

    If time is on your side, you have an advantage, and can hopefully sort these issues out through trial and error. Maybe a backup plan would be to take on a minority partner that can handle the construction end. A contractor could be a good fit. 

    Unfortunately uncertainty is part of this process, so if you're determined to make this happen, have a plan B...and maybe even plan C.

    @Shawn T.  You say that the project costs have been strongly vetted, and I'll take your word for that, because I don't know anything about hotels or your market. To me, those costs seem very low for a commercial project in San Francisco. 

    • How many square feet are you looking at?
    • How big are the rooms? 
    • What finishes will you be using? (mid range, high end, etc.)
    • What amenities will it have and how much space do they take up? (laundry, common area space, etc.) 
    • How many stories will the hotel be?
    • How big is the lot? 
    • Permit fees in San Francisco? 
    • Time frame to develop? 
    • Costs to demo existing building? 

    As to the value of the land, that seems very low for a commercial property. 

    Do you have anything you can post like plans, renderings, etc. that gives a better picture of type of construction, etc.? 

    Karen Margrave

    @Shawn T. ...First off, good for you on deciding to move forward on a project like this...I think you've received great advice so far, and I know you say you've vetted your numbers, but I was going to ask the same questions @Karen Margrave asked; it seems really low cost for a hotel build in SF.  If they are on point and they've been triple checked then that's great.  

    Being a commercial financing broker, I would agree with @Amit M. that 80-90% "would be rich" even for SBA and even though their parameters call for up to 85% on these types of projects, it's finding the lender who is comfortable enough to offer you that high of leverage on these types of projects.  We work with many who specialize in hotel construction and you are going to want to make sure to have back-ups in your pocket as even though different lenders will or can offer the same SBA programs, how they will take to a deal is def not the same.  

    I would also say taking on a minority partner also would probably not hurt or at least have one in your pocket whom you trust as that will be a factor that will be looked at in qualification.  You def sound strong enough though on a personal qualification level.  

    I'd like to see more information and when you're planning to get started.

    Hope to hear from you.

    Thanks,

    Jared Rine, Lender in California (#893462) and California (#01915324)

      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....

      Sounds better now that I know a little more about this. As for partners, we've never really partnered with anyone, so can't help you on what to look for as far as costs. I'm sure others on here can though. I think the obvious would be finding someone else in that niche, and there are a few here on BP that invest in hotels or run them, etc. 

      As for the land costs, if you allot more value, which I think you probably could easily justify, it will help you with that LTV for a lender. Good luck! Once you get it together, be sure to let us follow along on Investor Deal Diaries Forum.

      Karen Margrave

      @Shawn T. ..I re-read your original post..you may be totally fine with the experience you have with all the right people in place.   The development experience will obviously be looked at but the experience of owning/operating a hotel will also be weighed with a good amount of consideration.  Again, it's going to be finding the lender who's comfortable. 

      As far as a partner, I'd probably look for someone who has both - experience and $, but you sound strong personally, so I don't think the $ is as much an issue, as the development experience or owning hotel experience.  If you don't want them to be on the loan, but still want to offer them something, then I'd recommend not giving them more than 20% ownership interest, as they will have to personally guaranty on the loan if more than that. 

      With your financing plan, if I was going to find the financing for you or in your shoes, that's the route I'd look to go first - SBA 504 and then if not able for whatever reason, I'd go local bank.  Both routes I'd be looking for a lender who has SBA PLP status and also has an appetite for hotel/special-use properties and construction of these properties.   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.

      I agree with Karen too on the value of the land. If it's allotted for more value, it will likely help your LTV standard.

      I would definitely like to see the progress of this project but also help with the financing, if the chance is given. 

      Best,

      Jared Rine, Lender in California (#893462) and California (#01915324)

        @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%.

        Anyone have thoughts on my last post?

        Hey Shawn I am trying to catch up on this project and provide some good insights

        To answer your last question, generally speaking the allowance for contribution of land value towards a project will be cost, if less than 12 months, or appraised value if more than 12 months. Land contribution does count but always make sure to differentiate between loan-to-cost from loan-to-value

        As an originator who has worked on several SBA projects and a number of hotel projects there may be a way to navigate the financing process. I would strongly recommend using the same lender for the interim/construction financing and the permanent takeout so as to avoid surprises. One major thing to keep in mind with the differences between the SBA 504 and 7a program is that the 7a program allows for a lot more flexibility. The 504 is the program that I have primarily used but the 7a has several advantages that generally allow for the originating bank to structure as the bank sees fit.

        From my perspective some of the major challenges here will be the lack of national hotel flag and possibly an unproven concept. You seem to have great industry experience which is key especially in hospitality lending. Whatever you do, do not proceed with interim/construction financing without a tight commitment from your permanent lender.

        @Shawn T. ...

        I appreciate the conversation that's going on in this thread, but I hadn't responded yet because I'm in process of doing a write-up on the potential here and was going to get you some actual lender feedback on the deal as a whole and then respond as it would give way better explanation for some of your questions that you posted in response to my prior response.....PM me if possible too.

        Thank you.

        Jared

        Jared Rine, Lender in California (#893462) and California (#01915324)

          WOW. good deal have you got funding or still looking?  I really got some good ideas that you will be interested in.  Contact me and we can speak on what it is you are trying to do. 

          Xavier

          Sounds like a winner.  SF has always been a rock star for hotels.  It is harder than landing on the moon to get anything approved or built there.  That certainly helps.

          It sounds like you had to jump through a lot of hoops, but maximizing room counts is the way to go in your area.  You sure you can't jump through a few more hoops and add another floor?  4 story is very cost effective and the added rooms would be relatively cheap and maximize your land use.

          Sounds like a winner.  SF has always been a rock star for hotels.  It is harder than landing on the moon to get anything approved or built there.  That certainly helps.

          It sounds like you had to jump through a lot of hoops, but maximizing room counts is the way to go in your area.  You sure you can't jump through a few more hoops and add another floor?  4 story is very cost effective and the added rooms would be relatively cheap and maximize your land use.

          This was a very interesting thread. For the rest of us following, I would really appreciate a follow up to find out how the project is going.

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