Buying a hotel involves balancing many priorities, and how to find capital is the one that usually haunts your dreams.
Hotel deals come together when an acquisition opportunity receives financing. The timing of when that financing comes into play depends on where it sits in the capital stack. Therefore, a structured approach that leaves no stone unturned helps you sleep better.
Let’s start with the who…
The Team
Business success always comes back to the strength of your team.
A well-connected team of B players will beat a loose team of A players any day of the week. Take great strides to establish a vision and bring everyone on board early in the game.
Your role as the deal sponsor when buying a hotel is to pull the team together on a unified vision.
Capital sourcing is a critical piece of the deal puzzle, but you have many other things demanding your time, like due diligence and transition planning. Therefore, it’s essential that you empower your team to run full speed toward a common goal.
Financing Intermediary
The leader of your sales and marketing efforts will build marketing materials, field calls, and initiate negotiations with capital providers. This should be someone with a thick database of potential contacts with the skill and market knowledge to target and obtain the best capital options.
A financing intermediary may be an external banker or someone within your organization. Regardless, their undivided attention to your capital objectives is essential.
Ask probing questions about track record and network depth and breadth during the initial selection meetings. Compare the answers of each interviewee with the others to form a benchmark that calls out the overly optimistic.
Your motivations, needs, and desires come out in the initial conversation. The follow-up meeting should reveal the intermediary’s recommendations after careful consideration.
Sourcing capital takes a lot of time and skill. You can learn some of this quickly but leave the heavy lifting to people that make this their life’s work.
Many deal sponsors love this part of the business and have rich capital relationships. If that’s you, great, go for it. If not, you’re likely to get better results hiring it out.
Legal
Your attorney is a critical part of your team throughout the fund raising process.
She helps structure the deal, prepare offering documents, and reviews risks contained in sales and marketing collateral. You become fairly self-sufficient with more experience and refined templates, but the first few offerings need this important oversight.
Attorneys come in and out of the picture through the closing and funding processes. Specialization is essential for each area involved with buying a hotel.
You’ll want an attorney with specialization in hospitality for management and brand agreements. Real estate generalists are good for purchase and sale agreements and loan documents. They may even be helpful in the operations agreements. Still, securities offerings touch so many regulations that it makes sense to find an attorney just for that task.
Partnerships are not a securities transaction so long as each partner has a material impact on the success of the investment.
Any time you sell a passive stake in your deal, you touch a variety of state and federal regulations that require careful oversight. This is risky ground that requires a skilled guide.
Note: Do not consider anything in this article as legal or financial advice. Please consult your legal counsel for advice on your situation.
Platform
“Where” is a critical factor when considering how to find capital for your deal.
Commercial real estate is a human-to-human business. Each property has a different set of circumstances that materially impact the value and risk associated with that deal. Therefore, a one-size-fits-all solution quickly devolves into a customized review.
Hotels further complicate the evaluation with considerations about brand, management, and increased lease velocity.
Email is the simplest form of mass-marketing, but your list limits your reach. It is also incomplete.
The essential functions of a modern offering platform are:
- Email broadcast
- Lead tracking
- Data room
An external financing intermediary usually has a proprietary or outsourced platform to coordinate the offering process.
An integrated solution creates efficiency and reach in your sales and marketing efforts. They give you access to a pool of pre-screened investors and a platform to coordinate your offering.
Real Capital Markets is a good resource for partnerships and loans and CrowdStreet is great for syndications.
Now, let’s look at the how…
The Process
Raising money for deals is a time-sensitive task that starts well before you get a signed purchase and sale agreement.
Relationships grease the wheels of business. They establish trust, credibility, and strategy alignment.
More importantly, you answer many of the basic questions that take time to fully digest before a deadline forces your hand. Therefore, the efficiency of your sales and marketing process depends entirely on the strength of your relationships.
Timing
Brokered transactions typically follow a structured process that moves from collateral preparation to broadcast and direct outreach and ends with fielding offers. This takes approximately six weeks from start to finish.
Good brokerage relationships give you a leg up on the competition by allowing you to sense a deal before they reach the broader market.
Time offers a tremendous advantage when buying a hotel.
Your well-worn and tweaked systems allow for quick deal evaluation, equity and debt offering preparation, and efficient contract negotiation. Consequently, experienced real estate groups win more good deals than their less-established competitors.
Divide the universe into two major categories when thinking about how to find capital for your deal – equity and debt. Each has a different set of needs and desires, and the timing is completely different.
Equity is a risky position with little to no recourse upon failure. These investors demand a lengthy courtship to get comfortable with you as a partner.
Debt is risky, but the lender has the right to the property in the case of default. In the case of a personal guarantee, the lender can even go after your personal assets to become whole. Therefore, lenders need less time to review a deal.
Equity discussions should start as soon as you have a solid business plan. This is often in the middle of the broker’s marketing process. Present the deal to a select group of partners to start answering questions and refining your business plan.
Approach very few lenders early on for debt quotes. The full-blown debt offering process can wait until the deal is yours. After all, most lenders will give you broad, less-reliable terms until you have a signed PSA.
Materials
Everything with your name on it reflects your brand.
That includes emails, phone calls, one-on-one meetings, presentations, and so on.
Simply, everything you do to show the world what you’re made of is a branding opportunity.
Deal presentations are one way to stay top-of-mind with your prospects. A solid understanding of your audience gives you a starting point for what to include. This is especially important for their investment and personal needs and desires.
The basic collateral package is comprised of:
- Teaser Email – Simple email to excite your prospect to request more information
- Deal Summary Flyer – Deal basics, like total capitalization, revenue, expenses, and business plan highlights, for a quick evaluation
- Deal Presentation – Deep dive into the business plan, pro forma operating budget, market positioning, and financial projections
- Follow-up Sequence – Email, phone call, and other ways of following up with the prospect
- Legal Documents – Applicable items for deeper diligence, such as the Operating Agreement, Joint Venture Agreement, Subscription Agreement, Private Placement Memorandum, Hotel Management Agreement, etc.
Deliver each item above in a series. The next collateral piece goes progressively into deeper detail than the prior item.
This sets you up for incremental acceptance of the opportunity.
Each step in the sales and marketing process has a tangible reminder for your lenders and investors of the quality of your work product. Make sure they have a professional look and feel aligned with your intended branding.
Take some time to polish your copywriting skills.
Copy is more than just the words on the page. It includes everything that leads your prospect from where they are today to where you believe they want to be after buying into your deal. This is a very important strategic artform that sets you apart from your competition.
Outreach
How you reach investors and lenders is more important than what you send them.
Sales and marketing is an incremental game.
Your prospects know their investment strategy well, and they may even have a basic understanding of your strategy. However, each deal is different, and it takes a minute for even the most astute real estate mind to get a handle on the finer details.
The collateral materials listed above is a good indication of how to approach your outreach effort.
Expectation of a sale upon introduction of a deal is the most common rookie mistake. It also leads to disappointment, which take the wind out of your sails for further outreach.
Measure the success of each step by your prospect’s interest to move to the next step rather than acceleration to an investment.
Introduction of the deal may be by email, phone call, social media post, in-person meeting, or a variety of other options. What you say should bring the prospect to request a Deal Summary Flyer or Deal Presentation.
A well-crafted Follow-up Sequence keeps your prospect engaged by highlighting aspects of the deal that align with their interests. Consequently, it’s important to ask lots of questions on the front end.
Questions help you better target deals and reveal the deeper benefits of buying a hotel with you.
The 5 Yard Line
Now, you know how to find capital for buying a hotel…
Next, you need to close the deal.
The incremental approach described above gets your lenders and investors interested enough to spend time evaluating the deal. Still, the process eventually comes to a point where you must ask for the investment.
An ask doesn’t have to be overly complicated. After all, these people are in the business of deploying capital for real estate investments. However, it does have to be timely and supported by good information.
Focus on fairness. A piggish ask is the easiest way to ruin a great deal.
The best way to do this is to keep your eye on the long game. Think about what the potential lender or investor can do for you in the future to help you grow your platform.
This one deal is a stepping stone to follow-on opportunities. A great first experience enables the next 5-10-50 deals.
A Word on Rejection
Rejection looms large over the entire outreach process.
A sales and marketing funnel takes a big group of potential investors and lenders from awareness to interest to commitment. Dozens of prospects will drop out for a variety of reasons along the way.
You have two options when people drop out:
- Let the rejection get you down and question your abilities as a deal sponsor, or
- Learn from it to further refine your targeting for the next deal
The best real estate sponsors constantly focus on improvement.
Real estate icons were in exactly your place before. It was that education along the way that made them great. Don’t compare your page 1 to their chapter 20.