I've invested in a couple large syndicated deals, but recently had one referred to me by a friend. It's a luxury boutique hotel in the wine country. The deal structure has some subtle, or maybe not-so-subtle, differences compared to just about every apartment deal I've seen. And these differences are quite attractive. However, my hospitality knowledge is lacking and I'm looking for some advice. Anyone on BP do these types of deals and willing to network a little?
I've looked at several hospitality deals, what are the differences?
Here are some of them that make a difference to me.
- Target COC is 7% and 14-16% IRR over a 3-5 year hold. A little less than what I normally see for apartments. But there is a 12% preferred rate for investors. Couple points with this. If at any time the NOI won't support the 7%, the sponsor will make up the difference. At the time of sale, the investor gets paid first until we hit the 12% preferred rate. After, the split is 90/10 sponsor/investor. So I would be trading back end upside for a higher probability of hitting the 12%. Notice I'm not saying guarantee.
- The sponsor does not get any fees for any milestones until the deal closes on the back end. Additionally, they put in 10% of all incoming investment. They get a $100,000 investment, they put in $10,000 of their own capital. What I like is this aligns the sponsor with the investor. Too many deals I see pay the majority of the sponsors fees on early milestones, leaving the alignment skewed. At that point, they are playing with house money. The risk/reward is skewed and they may take on much higher risk, even when they still have "capital in the deal."
- The sponsor is much larger and have a significantly larger balance sheet than most syndicated deals I've seen. They could easily do this deal without any investment many times over. This means the above is more believable.
- The sponsor, being quite large, is heavily connected and this is run more like institutional type deals. There reason they are looking for individual investors for a large portion of the deal is we happen to also be their clientele. Luxury boutique hotel, right? So it's partially marketing. But being so, I was extremely impressed with the class of auditors, insurance, etc... It also means they are well connected to the eventual exit partners.
I'll try to think if there were any more differences, but these were the main ones.
I'm a bit concerned about the impact of economy changes, but of course, there is a sales pitch around this. Luxury boutique hotel patrons aren't affected by the economy nearly has much as general public. Not dependent on business travel. People may cancel a trip to France for wine tasting and go to California wine country for the "cheap" vacation. Etc...
There is a very large value add portion, with all sorts of revenue channels I'm not familiar with. Spas, food & drink, etc...
No one can ever answer my questions on potential fraud. So there's a strike against them (and every one I've looked at).
Larry, maybe. I have seen properties do fine in a recession. I just don't know about this particular type. I've asked for data from years around 2008. The current owner has been running it for 20 years, so the answer is there.
And maybe I should clarify, they weren't saying it might not get bad, just not horrible and maybe not as bad as other types which are more dependent on the economy. I much more concerned about losing a property and my capital, than having to hold longer. I don't need the return now.