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Friends, Family May be Fruitful Future Investors

by Jeff Wilder

Reprinted from Advanstar's Hotel & Motel Management Magazine

The year 1993 will continue to provide excellent hotel-purchase opportunities while the market becomes a tad less unforgiving to hotel sellers.

Prices are bottoming out while sales activity remains quite brisk. Hotel sellers have accepted the almost-complete absence of new mortgage financing; most recent sales have been "terms transactions." Serious sellers will hold paper for at least 75 percent of the purchase price.

Occupancies are improving in most areas of the country. If the hotel provides a good value in its markdown, generally its occupancy will show improvement over the previous year's results and bottom line figures will be higher.

The remaining challenge for an interested purchaser is raising the equity capital for the purchase. Our company is finding that many customers are raising their equity from four sources: friends, relatives and business associates; the Small Business Administration; foreigners seeking to place capital in the United States; and their own pocket.

Those Near And Dear

Many entrepreneurs are discovering that they can tap into a surprisingly liquid source of equity capital by asking their friends, relatives and business associates if they would like to invest in a hotel-acquisition opportunity. Great pools of savings capital also are in the hands of older citizens who have salted away money over the years. As their certificates of deposit, municipal and other savings instruments mature, they are faced with the prospect of having to accept lower income levels. Many are anxious to find a safe place to invest their money and increase their capital yields.

Today, the risk of investing in a hotel transaction is less for several fundamental reasons:

Properties are largely being offered at one-third to one-half their replacement cost.-Mortgage financing can be negotiated with existing owners at interest rates in the 8 percent to 10 percent range.-New development is minor and not expected to be a factor for years.-Transient business and the overall economy are improving.-Conservatively leveraged transactions are in vogue.Investors who understand these fundamental positives will appreciate the opportunity to put their money to work if offered a worthy investment vehicle. Frankly, with tax laws likely to increase taxes on wealthier people, the potential to receive a sheltered return on capital makes real estate even more appealing.

Some senior-citizen investors would prefer not to invest in a hotel venture as an equity participant. They may feel more comfortable investing in a debt instrument. In that case, you can create a private second mortgage for them.

For example, you can pool three or four individuals and offer them partial ownership of the debt position you've created. They would receive monthly payments on a priority basis just like any lender.

I believe that the characteristics of such a loan today would include a three-to five-year term with interest in the 10 percent to 13 percent range. Remember that this interest income will be fully taxable to the recipient. However, they will not participate in the equity risk or potential benefits.

In summary, the traditional middleman role that banks usually fill between depositors and entrepreneurial borrowers has temporarily been denied.

However, investment capital existst, if it can be accessed. Hotel purchasers must reach out to their contacts. Based on our hotel customers' reports, and my own recent experiences, a pleasant surprise awaits you if you do.