How to Raise Money for a Hotel Purchase
When you want to buy a hotel, you have to balance a lot of things, and how to get money is usually the one that keeps you up at night.
When an opportunity to buy a hotel gets financing, a deal is made. Depending on where it is in the capital stack, this money will be used at different times. So, a planned approach that doesn't leave anything out helps you sleep better.
First, let's talk about who...
A Strong Team is Essential to Achieving Business Success
Any day of the week, a tight-knit group of B players will beat a loose group of A players. Take big steps to set a goal and get everyone on board as soon as possible.
As the person in charge of the deal, it's your job to get everyone on the team to work toward the same goal.
Capital sourcing is an important part of a deal, but you also have to do things like due diligence and plan for a smooth transition. So, it's important to give your team the tools it needs to work at full speed toward a common goal.
Intermediary in Financing
The person in charge of your sales and marketing will make marketing materials, make calls, and start talks with people who can give you money. This person should have a large list of possible contacts and the skills and knowledge of the market to find and get the best capital options.
A financing intermediary could be a banker from outside your organization or someone from inside. No matter what, it is important that they give your capital goals their full attention.
During the first selection meetings, ask a lot of questions about the person's track record and how deep and wide their network is. Compare the answers of each person you talk to with the answers of the other people you talk to. This will help you find people who are too optimistic.
During the first conversation, your goals, needs, and wants become clear. At the follow-up meeting, the mediator should share the suggestions he or she has made after thinking about them carefully.
It takes a lot of time and skill to find money. You can learn some of this quickly, but the hard stuff is best left to people who do this for a living.
Many people who put together deals enjoy this part of the business and know a lot of people who have money. If so, that's great, you should do it. If not, you might do better to hire someone to do it.
Legality
During the process of raising money, your lawyer is an important part of your team.
She helps set up the deal, makes sure the offering documents are ready, and looks over the risks in the sales and marketing materials. With more experience and better templates, you can do most things on your own, but the first few things you sell need this important oversight.
During the closing and funding processes, lawyers are brought in and out of the picture. In every part of buying a hotel, you need to know what you're doing.
For management and brand agreements, you will need a lawyer who specializes in hospitality. Generalists in real estate are good for buying and selling contracts and loan documents. They might even help with the agreements on how to run the business. Still, there are so many rules about securities offerings that it makes sense to hire an attorney just for that.
As long as each partner has a significant effect on the success of the investment, a partnership is not a securities transaction.
When you sell a passive stake in a business deal, you run into a number of state and federal rules that need to be carefully watched. This area is dangerous and needs a skilled guide.
Note: Nothing in this article is meant to be taken as legal or financial advice. Please talk to a lawyer about how to handle your situation.
When thinking about how to get money for your deal, "where" is a very important question.
Commercial real estate is a business that is done between people. Each property has its own unique set of circumstances that affect the value and risk of the deal in a big way. So, a solution that works for everyone quickly turns into a customized review.
Hotels add to the complexity of the evaluation by making you think about things like brand, management, and faster leases.
Email is the easiest way to market to a large group, but your list limits how many people you can reach. It is also not enough.
A modern offering platform must be able to do the following things:
Send out emails to track leads
Data room
Most of the time, an outside financing intermediary has its own platform or uses a third-party platform to coordinate the offering process.
Your sales and marketing efforts will be more effective and reach more people if you use an integrated solution. They give you access to a group of investors who have already been screened and a place to organize your offering.
Real Capital Markets is a good place to find loans and partnerships, and CrowdStreet is a good place to find syndications.
Now let's talk about how...
This Is How We Do It
Raising money for deals is a time-sensitive task that starts long before you have a signed purchase and sale agreement.
Relationships are what make business run smoothly. They build trust, credibility, and alignment of strategies.
More importantly, you answer many of the basic questions that take time to fully understand before a deadline forces you to act. So, the success of your sales and marketing depends entirely on how well you get along with other people.
Timing Is Everything
Brokered transactions usually follow a structured process that starts with putting together the necessary materials, moves on to broadcasting and direct outreach, and ends with getting offers. From start to finish, this takes about six weeks.
Good relationships with brokers give you a leg up on the competition by letting you know about deals before they hit the market as a whole.
When it comes to buying a hotel, time is a huge advantage.
Your tried-and-true systems make it easy to quickly evaluate deals, prepare stock and debt offerings, and negotiate contracts. So, real estate groups with more experience win more good deals than those with less history.
When thinking about how to get money for your business, you can divide the world into two main groups: equity and debt. Each person has different needs and wants, and they all happen at different times.
Equity is a risky position that leaves you with few or no options if you fail. These investors want to get to know you for a long time before they decide to work with you.
Debt is risky, but if you don't pay, the lender can take your property. In the case of a personal guarantee, the lender can even try to get their money back by taking your personal belongings. So, it takes lenders less time to look over a deal.
Once you have a good business plan, it's time to talk about equity. This usually happens in the middle of the broker's process of marketing. You can start answering questions and improving your business plan by showing the deal to a small group of partners.
Early on, ask very few lenders for quotes on debt. The full-fledged process of selling debt can wait until you have the deal. After all, until you sign a PSA, most lenders will give you vague, less reliable terms.
Choosing The Right Materials
Your brand is everything that has your name on it.
This includes emails, phone calls, one-on-one meetings, presentations, and so on.
Simply put, branding is everything you do to show the world what you're made of.
Deal presentations are one way to make sure your prospects remember you. If you know your audience well, you'll have a good idea of what to include. This is very important for their investments as well as their own needs and wants.
The basics of the collateral package are:
Teaser email: A simple email that gets your prospect interested enough to ask for more info.
Deal Summary Flyer: Basics about the deal, like total capitalization, revenue, expenses, and highlights from the business plan, for a quick evaluation
Deal Presentation: A deep dive into the business plan, pro forma operating budget, market positioning, and financial projections.
Follow-up Sequence: Email, phone call, and other ways to follow up with the prospect.
Legal documents include the Operating Agreement, the Joint Venture Agreement, the Subscription Agreement, the Private Placement Memorandum, the Hotel Management Agreement, etc., which are all things that need more research.
Deliver each of the things above in order. The next piece of collateral has more information than the one before it.
This sets you up to accept the opportunity bit by bit.
At each step of the sales and marketing process, there is something that lenders and investors can see that shows how good your work is. Make sure they look and feel professional and fit with how you want to be known.
Spend some time getting better at writing.
Copy isn't just the words on the page. It includes everything that gets your prospect from where they are now to where you think they want to be after buying your deal. This is a very important strategic skill that makes you stand out from the rest.
Outreach
More important than what you send investors and lenders is how you get in touch with them.
Sales and marketing are a game of small steps.
Your prospects know their investment strategy well, and they might even know a little bit about yours. But each deal is different, and even the smartest real estate agent needs a minute to figure out the finer points.
The above list of collateral materials gives you a good idea of how to go about your outreach.
The most common rookie mistake is to expect to make a sale as soon as a deal is brought up. It also makes you feel bad, which makes you less likely to reach out to more people.
Measure the success of each step by how interested your prospect is in moving on to the next step, not by how quickly they invest.
The deal can be brought up by email, phone call, social media post, face-to-face meeting, or a number of other ways. What you say should make the prospect want a Deal Summary Flyer or Deal Presentation.
A well-designed Follow-up Sequence keeps your prospect interested by bringing up parts of the deal that are important to them. So, it's important to ask a lot of questions right at the start.
Questions help you find better deals and show the deeper advantages of buying a hotel through you.
The Five-Yard-Line
Now you know how to get the money you need to buy a hotel...
The next step is to finish the deal.
Your lenders and investors will be interested enough in the deal to spend time evaluating it if you use the step-by-step method described above. Still, at some point in the process, you will have to ask for the investment.
A request doesn't have to be hard to understand. After all, this is what these people do for a living: they invest money in real estate. But it has to be right on time and based on good information.
Focus on being fair. The easiest way to ruin a good deal is to ask for too much.
Keeping an eye on the long game is the best way to do this. Think about what the possible lender or investor can do to help your platform grow in the future.
This one deal will open the door to more business. If the first deal goes well, it opens the door for the next 5–10–50 deals.
A Word on Turning Down
The fear of being turned down is a big part of reaching out.
A sales and marketing funnel helps a large group of possible investors and lenders go from not knowing about something to being interested to making a decision. Along the way, dozens of prospects will drop out for different reasons.
When people drop out, you can do one of two things:
- Let the rejection make you feel bad about yourself and doubt your skills as a deal sponsor, or use it to improve your targeting for the next deal.
- The best real estate sponsors are always looking for ways to make things better.
Real estate stars have been right where you are now. What made them great was the education they got along the way. Don't compare your first page to their twentieth chapter.
