Raising 1.2 million and the Seller Will Finance the Rest...strategies?

Question

Hi everyone, I'm new here and faced with a very interesting project.

I’m currently trying to raise the funds to acquire a hostel in New Orleans with a long operating history and strong reputation among international travelers. The purchase price is $6M.

Deal Structure (Proposed)

• Equity: $800k–$1.2M (I already have $400k committed)
• Seller Financing: Remainder (~$5.2M–$4.8M) at 6% interest-only with a 5-year balloon
• Investor Terms: Offering 8% preferred return + equity participation

Equity: $800k–$1.2M (I already have $400k committed)

Seller Financing: Remainder (~$5.2M–$4.8M) at 6% interest-only with a 5-year balloon

Investor Terms: Offering 8% preferred return + equity participation

Financial Snapshot

• Revenue: ~$780k/year (3-year average)
• Operating expenses: ~$300k/year
• Normalized NOI: ~$450k–$480k
• With seller note + investor pref, the deal is tight at current occupancy (~43%), but becomes strongly cash-flow positive once occupancy improves back to historical levels (~60–65%).

Revenue: ~$780k/year (3-year average)

Operating expenses: ~$300k/year

Normalized NOI: ~$450k–$480k

With seller note + investor pref, the deal is tight at current occupancy (~43%), but becomes strongly cash-flow positive once occupancy improves back to historical levels (~60–65%).

The Opportunity

• Historical occupancy was ~65%, but recently dipped to ~43% due to management/marketing issues.
• Strong potential to restore performance through better operations and marketing.
• New Orleans remains a top U.S. tourist destination, supporting long-term demand.

Historical occupancy was ~65%, but recently dipped to ~43% due to management/marketing issues.

Strong potential to restore performance through better operations and marketing.

New Orleans remains a top U.S. tourist destination, supporting long-term demand.

My Ask

I already have $400k committed from an investor (10% equity). I’m looking to raise the balance ($400k–$800k more) and am exploring the best structure and sources.

• What’s the best way to attract equity partners for a deal like this?
• Should I be focusing on local HNWIs, angel groups, or real estate syndication platforms?
• I've dreamt of getting into real estate for a while, but even more so managing and owning a hostel, particularly this one due to its robust size and potential. I have someone who would act as a consultant who has a vast amount of local real estate experience as well as someone who has worked at the hostel for 19 years to oversee mentoring me in the undertaking, as well as the investor for $400k sitting as my current team. Ideally an investor/mentor situation would be ideal.

What’s the best way to attract equity partners for a deal like this?

Should I be focusing on local HNWIs, angel groups, or real estate syndication platforms?

I've dreamt of getting into real estate for a while, but even more so managing and owning a hostel, particularly this one due to its robust size and potential. I have someone who would act as a consultant who has a vast amount of local real estate experience as well as someone who has worked at the hostel for 19 years to oversee mentoring me in the undertaking, as well as the investor for $400k sitting as my current team. Ideally an investor/mentor situation would be ideal.

Evan Polaski · Answer

@Vera Hendriks, what SEC exemption are you raising under?  Reg D, Reg A, etc?  If D, 506(b) or 506(c)?

Everything else about this post is irrelevant, without that info, both because options are different, but also because if it is Reg D 506(b) you are already in violation of SEC rules, so I would highly recommend you delete this post.

Don Konipol · Answer

@Vera Hendriks

I posted this a couple of years ago, hope it helps you

There’s lots of confusion, incorrect information, and false assumptions being made about the legality of raising capital for investment. So here is a very short, quick outline of the legal process in the U.S.A.

Any capital raised for investment purposes, in which one or more parties is NOT active in the management of the investment entity, is a securities offering.  All securities offering must be REGISTERED with the Securities and Exchange Commission, unless the offering is covered under an exemption from registration.

There are three primary exemptions from SEC registration.  The exemption for intra state offerings (the offer is made to investors residing in a single state), the exemption for investors with FEDERAL accreditation (Federal banks, investment banks of a certain size, Federal funds dealers, etc) and the private placement exemption.

Since single state offerings are very limiting, and many states require state registration and compliance with inherent costs, the private placement exemption remains the most popular.

There are two methods of “private placement”. The old traditional one was the general exemption for private placement.  The sponsor, with the help of a securities attorney, determines that the offering meets the (often ambiguous) requirements for determination of private placement and proceeds with the offering. The advantageous of this type of offering is simplicity, cost, and speed.

The second method of private placement, is compliance with the SEC “safe harbor” RegD. Sec 504, 505, or 506 b or c. This will necessitate the production of a Private Placement Memorandum (PPM), Operating Agreement, and Subscription Agreement. Current cost are $8,000 to $15,000 for legal fees, inclusive of Form D filing with SEC and notification filing for the states the initial investors reside in. The advantages of the Reg D are (1) if the sponsor complies with the Reg D requirements, the offering as to it being a private placement will NEVER be challenged by the SEC. Further, if disgruntled investors sue, the sponsor has a “definitive defense” as well as a “statutory defense” in a lawsuit. This means that by merely complying with the Reg D requirements, the sponsor should have enough of a defense to beat any lawsuit. I can tell you from personal experience that a small few investors will consider suing EVEN IF THEY MADE MONEY; and that no attorney will take their case (at least not on contingency) if the sponsor complied with Reg D, absence fraud. As important, all sophisticated investors will only consider investment in private offerings that are Reg D, or occasionally Reg A, compliant.

The most important aspect of Reg D is the 506 c offering, which ALLOWS general solicitation and advertising, and eliminates the requirement of the sponsor and investor having an established relationship

Bill B. · Answer

If you can’t arrange for a refinance in 5 years is the seller allowed to take the property back and everyone loses 100%? (Imagine you had made this purchase 5 years ago. Today you’d be trying to refinance at rates 3-4% higher, or double what they are today, whichever way you prefer to do the math.) would it make money, and would a bank finance it today for 9%? If you have to fire sale it for $5M to avoid foreclosure how much of the $1M loss are you expecting to cover?

You need to cover the escape from the deal 10x more than the easy entry. Imagine the city decides it doesn’t want you there. There’s another hurricane that shuts it all down. They outlaw the type of property, or suddenly increase code enforcement, or decide they need a new fire suppression system and escape system, and an elevator? Where does that money come from? Show your hopefully investors that you’re risking as much as them, have backup plans and funds, and list your experience dealing with this type of property and the local government. Otherwise you give off a “I want you to take all the risks while we share the rewards”  vibe.

Good luck. Hopefully you contribute to fixing up the property and the area.

Vera Hendriks · Answer

Hey, yes absolutely. There are so many pieces to the puzzle. I’m still learning about the whole SEC side. My understanding is that if I take on passive investors, it counts as a security and I’d need to follow Reg D exemptions and work with an attorney. I’m not trying to publicly solicit here, just want to make sure I go about it the right way. If anyone has experience with how they structured a small raise like this, I’d love to learn from it. Ideally, as I mentioned finding someone local to the hostel that could be another active partner of the team would also be fantastic. I'm just trying to sort everything out and figure out the missing pieces.

Raising 1.2 million and the Seller Will Finance the Rest...strategies?

Deal Structure (Proposed)

Financial Snapshot

The Opportunity

My Ask

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