Maximizing Your Hotel Investment - Lessons, Strategies, and Insights

The other thing to keep in mind is that you can make anything look good in Excel and you can convince yourself of anything in Excel. So it's important to have other people on your team that maybe aren't as emotionally attached or other people that you trust take a look at things as well and make sure that you're not just drinking your own Kool-Aid. A lot of things just don't go the way that you think they're going to go. So you got to build a lot of cushion into your deals and make sure you're not getting into something that's so tight from the beginning where you have no breathing room. I'd encourage everyone to check out the podcast this week, Masters of Moments. I talk about all the mistakes that I've made investing in hotels and a lot of people like to talk about all the wins, all the successes, but I've found that the mistakes are really the things you learn the most from. And when you have a hospitality network, when you have a group of people that you can trust in the industry, that's even better because then you can learn from their mistakes too and you can share ideas. And not only will you learn from their mistakes, but maybe they can help you with some of your mistakes and you can help them. And I think that's the great part of having a community, having other people. So maybe you guys can also interact amongst yourselves. Maybe there's a better way we can do it. Maybe one of the upcoming calls we could kind of go around the room and talk through problems, issues, challenges that different folks are having. I think that would be really cool. That's something I do with some other hotel executives and CEOs and owners and operators. And it's been incredibly impactful and important for my career. And it saved me a lot of money. I remember during COVID, we were talking like every single week and one guy would say something and everyone would be like, no, we're not closing our hotels. And like the next week people would be closing their hotels and you'd be talking about how to do them. And you were at the cutting edge of all the government programs and how to deal with employees and what was right and what were the problems. Then when things started coming back, you could see that as well. And it's not just me that's doing that. Actually, I've found some of the best institutional private equity firms, some of the best real estate investors, before they do a deal, before they go into a market, they talk to other people that are in that market. Maybe they're past partners, maybe they're people they've met at a conference and they get their feedback. And we actually just signed an LOI to do a preferred equity deal in Savannah, Georgia. It's a ground up hotel, boutique hotel. It's going to be awesome. And we're going to be raising a little bit of capital for our preferred equity piece. So I have a couple of friends right now doing deals in Savannah. They have a couple of hotels under construction. So I'm going to show them the deal and maybe they'll do it with us. Maybe they won't from an equity standpoint, but if they won't, they're certainly going to give us some really, really, really great feedback that I'm going to learn during my due diligence period. So maybe they're going to say, hey, the partners that you guys have are the worst. Maybe they're going to say, hey, these guys are great. Maybe they're going to say the GC that you signed up, we're using him too. He's really good. Or here are the problems that we ran into. Maybe they're going to say, hey, everyone's really hot on Savannah right now, but let me tell you, I'm seeing the numbers of this other hotel and I'm very concerned. Maybe they're going to tell you, hey, did you know that the convention center is doing a hundred million dollar expansion? We did know that. And then maybe they're going to say, hey, I love the market so much. I want to invest in the deal too. So a lot of the best private equity investors that we know and that we've had the good fortune of being partners with also go around and check. And that's also another cool thing because it's great to help someone else out. So we've been the recipient of phone calls where people are like, we have a big presence in South Florida. People are like, hey, we're thinking about doing this deal in South Florida with these guys. What do you think about the deal? What do you think about the opportunity? Have you heard about it? What do you know? And I definitely don't take the opportunity to ---- talk unless there's really something bad that I've heard about the partner. But I do speak openly and candidly about the deal. And it definitely puts me in a sometimes uncomfortable position because I never like to talk negatively about someone's deal just for the sake of talking negatively. Obviously I'm more of a positive person, but I do think it's important to tell someone how you feel, particularly if they're seeking your advice. They're seeking your advice and they want to know if this is a good location or if this is a good hotel. And you're like, yeah, because you don't want to seem like a jerk. Then you're not really fulfilling your obligation as a friend, trusted advisor, colleague in the industry. So you're kind of walking that fine line. We had someone the other day pitching us an investment strategy. They didn't have a lot of hotel experience, but they have a lot of real estate experience. They thought this was like the greatest opportunity. We have a super niche. We have these five deals lined up and literally it's the opposite of our strategy right now. And they were trying to see maybe if we'd be interested in partnering with them, maybe we'd be interested in doing preferred equity for part of the deal. I didn't really have the heart to tell them on the phone that I thought their idea was bad because their idea could be great. And I feel like just making a generalization, if I was to do that, wouldn't be the right thing to do. They weren't asking for my advice. I think they were looking for my capital. And if I kind of ignore them, maybe they'll think I don't like the deal anyway. So that was one example where I didn't just come out and say, hey, I really disagree with your deal. But I try and do that a lot, especially if a friend is coming for some honest advice. What I wanted to talk about today is kind of how we underwrite deals. And I picked a deal that we lost that, well, no one wanted, but we didn't end up doing. Maybe it'll come back. And I think it's very relevant with potentially some deals that you're looking at because the price point is, well, we were trying to get it for sub $9 million. The seller had much bigger expectations. And we weren't able to align. But I wanted to just talk through about how we were underwriting the deal, our thought process, show you what my model looks like, and how we kind of approach a potential investment. So I can share some photos. I don't want to totally give away the confidential information of the deal because we had to sign some stuff. And I want to respect their deal, but maybe it'll come back to us. So this was a hotel in New England. It was more of a summer seaside hotel. If you can kind of see these pictures how I'm showing it, this is the lobby. Here's the check-in area. It doesn't get more mom and pop than this. The hotel is kind of like a, it looks like this. Let me see if I can play the video. Maybe you guys can see it. It looks like kind of a motel style. It's single story in one area, two story in another area. There's kind of a great pool area in the middle. It could really be jazzed up. There's, you know, it feels very residential. It's run and managed by people that aren't in hotel industry, but have a great reputation in the neighborhood. They're well-known, well-liked. Apparently they have customers that really like the hotel. I thought the location was fantastic. It's kind of in a residential area and the demand is very, very resilient for this part of New England, but it's very, very, very seasonal. So I'm talking a season that runs from like maybe April to maybe October. And that is a pretty tight season. And that's something we had to get comfortable with. This is our second deal in the market. The first one, you know, we definitely struggled with that. And frankly, the occupancy wasn't even that strong for a seasonal market. Like, you know, the hotel is averaging, let's look it up. I'll show you the model. I think it was doing like 60% or something occupancy. And that's not over the whole year. That's over the period that the hotel is open. So let's look at like the pro forma. Let me just scroll over here so you guys can see. Yeah. I mean, so let's just say for our stabilized years, we were assuming 54% occupancy, 57% occupancy, but the rate is pretty nice. So the rev bar is good, $172. But again, that's 54% over the open period. And then the closed period, it's closed. So one of the things we had to think about is like, what does the staffing look like? So in a seasonal hotel like that in this market, you know, you got to hire a GM full time. And the GM that we would be looking for is like kind of a cruise director, like a guy that loves everyone that knows how to run a business. Maybe he's a retired GM for a lot of big hotels and kind of wants to be in a more leisurely environment and be kind of like almost like a cruise director, bed and breakfast director. And that's what we would look for. And then you'd have to have like an engineer, maybe someone on the cleaning staff retained throughout the winter, but kind of that's it. And then everyone else has to be seasonal, which is tough because if you want to do a food and beverage component, you kind of have to revamp that up. So luckily we have a corporate food and beverage team we can kind of use to supplement and use to retrain and do all that for every season. We'd have to bring in seasonal labor. The other thing that was kind of interesting on this deal was they had employee housing because the housing market was so tight here. So as part of the deal, the sellers owned kind of like a house. So we were going to be leasing the house for a period of time to retain some of those employee units. And I'll just talk about the business plan and I'll show you the model. So our business plan was to buy the hotel and buying the hotel like timing matters in a seasonal hotel because if we bought the hotel and close kind of in the spring, then we're going to have to operate the hotel pretty much as is. Like obviously we're going to redo the website and we're going to bring in our best practices, but we're not going to be able to change anything in terms of the rooms. We're not going to really create the vision that we want to do in that amount of time. If you flip that around and we were closing kind of when the hotel just closed for the season, we might have an opportunity to implement more of the business plan. But I actually don't think that's a bad thing because one of the things that we've found is a lot of times when we go into a hotel with a business plan, especially an existing hotel, really only existing hotel, when applied to a development, what you think maybe you should do is not necessarily what you should do. And you don't really realize that or understand it until you see how the hotel is operated, until you see how the guests use certain things in the hotel, until you kind of are there to experience it. And I can remember a recent acquisition where that was true and we kind of pivoted where we were going to spend certain CapEx dollars because after we owned it for nine or 10 months, our view of the hotel changed and shifted because we got to know the property and the customer a little bit better. So if we were going to do that here, I think it actually is better because then we could bring in designers, consultants during the season, let them see what's going on, come up with a great plan, execute that in the off season, and then open fresh year two. So that was our business plan. We were going to take this basically mom and pop boring hotel that wasn't professionally managed, had no style, no soul, no sense of place, and create all those things. We were going to add a little bar out by the pool. We were going to do some weddings. We were going to add amazing landscaping. There was all that asphalt and parking lot and stuff. We're going to put gravel down and really lean into the landscape. We were going to paint the outside of the hotel. We were going to probably spend, we estimate around $50,000 a key on the hotel. In a recent hotel renovation, we replaced all the furniture that was in the room. It was like $18,000 a room. So we jacked that up because we wanted to do some stuff in the bathroom. The other thing to think about with a smaller hotel is you can't really include the lobby renovations and some of the exterior renovations. You can't think about it necessarily on a per key or per room cost basis if it's a small hotel. Let's just say you're allocating $10,000 a key for lobby and it's only a 20-room hotel. That's only $200,000. If you had a 100-room hotel, that'd be a million. In that instance, you really got to think about how much you want to spend in a lobby and use that as a fixed number and then maybe use the price per key as more of a variable number on some of the other line items. That was our plan. It would have been really exciting. Maybe it'll come back around, but it's not a deal we're doing today. I thought I would show you confidentially what our model looked like and what assumptions we were making. So let's start with this. When we get a deal, this is the other thing. This deal was brokered by a residential broker. She was a very nice lady, but she knew nothing about hotels. A lot of these small deals, that's how it happens because the owners are unsophisticated. They're not professional real estate people. They have a friend that's a real estate agent, and they think that's the best person to sell their hotel. Hotels are very, very complicated businesses. The brokers are usually very sophisticated. They understand hotels. They understand business plans, and they do way more work than any other broker, whether it's commercial or residential. Hotel brokers do a lot of work when you're comparing the brokerage landscape. We didn't have that on this deal, so we had to really try and anchor set where we were coming from, our business plan, explain that this is a business for us. It's not emotional. It's going to come down to dollars and cents. We want to do the deal. We're going to take good care of it. We're going to create something special, but it has to work from a number standpoint. A couple of things we struggled with on the sellers is, well, they're like, this land is so valuable. I'm like, well, sure, the land is valuable, but there's a hotel on it. It's just worth whatever the hotel is worth because that's the operating business. If there was no hotel on it and you could build residential homes, then sure, maybe you could sell it for a lot more money, but I don't think you can do that. You're not telling me you could do that, and we're not looking to do that. This is what it's worth. The value of the land really is irrelevant to me unless I think some buyer is going to pay me for that value, and I don't. If they do, that's a risk that I should take based on my upside, based on the business that we create, but based on the business they created, no one's paying them any extra for the land. It's just not happening. That was a hurdle we had to overcome and do our best to explain to the seller how we look at a deal. The other metric we were trying to use is price per key. We recently bid on another property. It didn't sell, but we were close enough where we thought we knew where value and basis was. When we first get a deal, if there's a formally prepared deck, we read the deck, and we really try to understand, okay, what am I going to do with this property? What's the business plan? Even before that, I'm assuming though that this location is great, the property is great, this is something that we want to do. If the location sucks, and it's a crabby property, and it's not something we'd ever do, we don't waste time reading the book to maybe convince ourselves to do it. We set those ones aside. This assumes that we like everything, we think it's interesting, and we want to do it. We read the book, we try to understand the business plan, and then we really dive into the numbers. We want to understand what they're doing. Basic numbers, what your occupancy is, what your rate is, how much money you're bringing to the bottom line, what your expenses are like. In this hotel, this was a QuickBooks operation, so this P&L did not look like any other P&L that you would traditionally look at We really questioned the numbers. We really could not rely on their financials except for maybe the revenue, but we didn't even rely on the revenue for that. We really threw everything away and just used it as a reference point or as a point of knowledge. In order to generate our own metrics, we had to start with the revenue and then try and layer in some expenses. Let's go with the revenue. What we did from the revenue is we got a Smith Travel Research Report, and they had decent coverage in that market. We could understand what the market was doing in similar hotels in rate and occupancy. This is a smaller town, so we had to expand outward a little bit, but we think we got a good handle on potential revenue. Then we wanted to add a bar, so we add a little food and beverage revenue in there. This hotel didn't charge a resort fee. We thought we could charge a resort fee, offer some bikes, maybe a shuttle into town, beach chairs, that sort of thing, free Wi-Fi, blah, blah, blah, all that stuff. Resort fees are pretty commonplace, and we thought there was an opportunity to do that here. Those are some of our revenue sources. On the expense side, we don't operate any hotels this small, so we really had to dig into other hotels that we'd previously looked at, maybe that were a little bit more sophisticated, and we could rely on those financials, and we were seeing what they were doing. But we pretty much built a P&L from scratch. We thought about what kind of fixed payroll we would have. We thought about what kind of variable payroll we would have. It was going to be an independent hotel, so we really had a lot of options in terms of the IT and the systems, but we knew that we were going to get probably a decent amount of business from OTAs, so we had to definitely have enough of a commission or percentage expense going to the OTAs. We were seeing probably 20%, but we were going to have a kick-ass website, so we thought we'd also generate a lot of our own business, a great social media program, generate our own business. But still, we had to assume that some expenses were going to go to Airbnb. Then when we got all the rooms expenses and the F&B expenses, we really got into the G&A and the revenue and the repair or, sorry, the repair and maintenance and some of the taxes and insurance. Taxes and insurance are easy. You get insurance quotes from an insurance broker that's sophisticated in the market. Taxes, you can kind of figure out by talking to the local taxing authority. But your G&A is like your GM and some of your other costs related to the business. We had to rely on just plugging in actual numbers, like getting quotes for some of the things, thinking about what we were going to pay a GM, thinking about in the sales and marketing line on what we would pay a salesperson. Do we even need a salesperson? That was something we considered because this is really only a transient hotel. What do we need to have a salesperson for? The GM could probably book weddings and different things like that. So we ultimately eliminated that position. That was how we kind of generated basically this pro forma. The way that we set it up is when we start to get serious, we'll basically build our own pro forma from scratch. The way that we have it set up is a lot of things are based on per occupied room and then some things are per available room like insurance and other things might be more fixed. So we kind of layer in these costs and those costs, depending on what the metric is, whether it's fixed, variable or something else, then layer into this whole pro forma. To get the revenues, we will basically layer in what's called a Smith Travel Research report and we'll determine what percentage of that business our hotel is going to generate versus the competitive set. So maybe it'll be 100%, maybe it'll be 120%, maybe it'll only capture 80%. That's how we will figure out what the revenue is going to be. We're going to go ahead and base it off of the market performance. So I think I have that right here. So this is kind of how we look at that. So we have our competitive set and then how we are going to perform against our competitive set. So we'll make assumptions in the market, like whether we think occupancy or rate is going to grow over the next couple of years, whether it's going to stay flat, what the changes might be, and then we're going to show how our hotel performs against based on the number that the comp set is doing. And then all of that rolls into a, here's the percentage index. So in this one, for example, we thought we'd captured 95% of the occupancy, we ramp up to a hundred percent and then we get like a hundred percent of the rate. So that's, we thought we would just be kind of in line with the market. And because we were offering such a good product, great website, everything else kind of sucks around here. We would be able to ramp up very quickly. That's why it goes from like 85 to a hundred just in two months. The other thing, depending on how detailed we get is our sources and uses and how we are figuring out what we're going to spend. So this model set up for kind of later in the process, we're going to really line item out every single category, but in the initial assumption to determine if we're interested, we're kind of just baking that in here. So you'll see hotel hard costs, we just shot in there 45,000. That's what we were kind of assuming as a base case, as we get further down the road from an acquisition standpoint, maybe it gets better, maybe it gets worse, but that's kind of the level of detail that we had, but we have it fully built where if we want to start getting into the specifics and adding line items, we can easily do that. Like for example, there was an opportunity to build a short-term rental on the property. So we talked to some builders, we thought we could build it for a million and a half dollars. We didn't need to detail it out that specifically until we were really starting to move forward. So we just kind of have the round number there. And then this is how we thought of actually the rate and occupancy for the short-term rental. So that had its own revenue numbers, which would roll into the main pro forma. The other thing obviously that's very important is your sources and uses and kind of how you're thinking about your financing. So we were thinking about getting basically a bridge loan for three years and our rate would be floating. So we have this set where we download a SOFR curve from the internet and it kind of follows whatever the curve is. And then we apply a spread over that. So here we thought the spread would be 400 based on our conversations with some debt advisors. And this current SOFR index is going to basically fluctuate monthly with where the curve is. So you could see here, like here's SOFR and it's changing. And we're not making this up. We're downloading this information from, I think Chatham is where we get it. Chatham is like a financial source where you can download the interest rates. And then we had our analysts make this cool little button. And anytime it updates, we just hit the button and it'll automatically get new rate curves. That way, if the process is taking two or three months, we want to update it and refresh it. It's pretty easy to do right there. And then we were going to eventually refinance. So we would show that here on this refinance toggle, but we were assuming just for simplicity that we would have interest only for three years and then hold the loan for two years and sell it. But if we wanted to do something different, we could easily build in a refinance right there. And then another thing I like to have like in a summary page is just some quick metrics. So I think it's really important. Here's our projected returns. Unleveraged yield on cost is a data point we look at all the time. Cap rate obviously in the market is a data point we look at all the time. What is our price per key on an exit? What is it on a square foot basis? All of these little things are kind of good back of napkin rule of thumb items that you want to see here in your model. And we have them. And then once we have our pro forma done, it basically rolls into a cash flow. So cash flow would include debt service in this case, because we were financing it. So here you see cash flow after debt service, that line. So we have our net operating income from the hotel. You're making your loan payments. And then this is your cash flow after debt. And then again, because this is the debt, we have our debt service coverage ratio, because there's going to be covenants in the loan that tie to that. What our equity is yielding, just these quick metrics so you can see and make sure something doesn't feel out of whack. And then obviously we'll make assumptions after the debt on what the leverage is and how much equity we'll need and what the terms to our investors will be. We kind of keep our investor terms pretty consistent so they don't surprise people. So we don't spend a lot of time messing around with that. It's basically the same thing every time. It's typically 30 over an eight on the cash flow. And then on a capital event, the investors get all their equity back. And then we split it 70-30. 70 to the investor, 30 to us. We get an asset management fee along the way. We get a hotel management fee. And then we'll usually get an acquisition fee at the beginning as well. So all that stuff gets baked into the cost, the sources and uses. And it's really important that the investor know what their return is net of all that cost, because that's really what they're going to see at the end of the day. And it's important to set expectations. So that was a lot, but that's kind of how we look at a deal, how we think about it from a modeling standpoint. And then we also write internal memos. And the internal memos are great because they force us to really think about the investment. They force us to articulate why we like the investment, but we share with our investment committee. The investment committee can quickly see it because we have people on the investment committee that aren't necessarily working in the deal day in and day out. So they need to be brought up to speed. And the other nice thing about these kind of short memos that we have is if we start previewing them with potential partners, then we have something nice to ship them. And we can say, hey, we're going to send you a more built out deck or model later, but kind of here's the general thesis. So that is our process. And then we're constantly updating the model really up until closing. We'll put all the closing costs kind of exactly to the penny of the model. And then we have like a locked model that we'll kind of use as the project goes on to update based on performance. And we can track against how we underwrote. But I mean, what I can guarantee pretty much is that whatever we underwrote today is going to look a lot different in five years. And we don't have a crystal ball, but you kind of want to get the end result somewhat correct. But there's definitely going to be a lot of fluctuation around the middle. Like things are not going to go how you underwrite. The other thing to keep in mind is that you can make anything look good in Excel and you can convince yourself of anything in Excel. So it's important to have other people on your team that maybe aren't as emotionally attached or other people that you trust. Take a look at things as well and make sure that you're not just drinking your own Kool-Aid. A lot of things just don't go the way that you think they're going to go. So you've got to build a lot of cushion into your deals and make sure you're not getting into something that's so tight from the beginning where you have no breathing room. So that's what I want to talk about. Hopefully that was helpful. We got a couple minutes for questions if there's anything you want to talk about there or something else. Would you consider a deal like that approaching with a lease-to-buy option so that you can actually kind of come in, acquire the property, see how it works, and then if you want to buy it, buy it. If not, just move on or you never looked at it. Maybe do that. Kind of like a master lease. Yeah, it's really interesting. Where are you calling from? Canada, but I'm in Puerto Rico. Yeah, so doing that is very big in Europe actually because you have a lot of landowners that don't want to sell property and a lot of people will basically do a master lease of like a historic building or something and do a hotel. A friend of mine did that in the United States where like a German pension fund or something bought the real estate and I think he kind of master leased it back with no option to buy, but it worked out really well for him. I think it could be interesting, but it's going to come down to how you have it structured and what risk you're taking. So if you are putting in significant capex and you can't really take that with you at the end of the day if the business doesn't work or you can't really sell it, you have to be aware of that. But let's just say you have a great hotel and someone kind of wants out and you're like, well, maybe I would do it, but I really want to kind of feel it out first and the person's kind of not desperate, but they don't really have any buyers of the real estate, so they're willing to give it a shot and they feel like you can at least pay whatever the minimum rent is, then it could be interesting and obviously the benefit to you is to get it at a fixed price today. So where if you create all this value, maybe they were leaving all this low-hanging fruit on the table, you're going to retain the value for that upside that you create. What you don't want to be in a situation obviously is where you create all this, like maybe they were mismanaging the hotel, no one knew about it, it did terrible and then you start doing amazing and you go to buy from them, they're like, well, the hotel's worth like five million dollars now, that's because you did that. So you want to pre-negotiate the price. A friend of mine did a deal recently where a group came in kind of a little bit different where they were like a Mez lender and they had the option to buy at a fixed price, buy him out, and he was kind of the owner equity operator and it could cut both ways because it worked out great because he needed the money, so he got the Mez loan, he was able to build what he wanted to build, but they're basically just taking an option where if everything went great, they could own the whole hotel for a number they liked and if it didn't go great, well, they might own the hotel anyways because they're in the Mez. So I don't know if that's the best scenario. I don't like ground leases though where you are leasing the ground, leasing the building and taking the risk on the debt because a ground lease is really just extra leverage. So if you are going to be taking risk on debt and a ground lease, you're probably heavily levering up the property and can easily lose things. Now, if you have nothing to lose, it doesn't really matter. Yeah. I just asked you because you were saying, hey, sometimes it's better to see if you operate and feel it out and I'm wondering if you make all this amazing pro forma, which is kind of my next question, who does the pro forma? I'm curious about, do you do it yourself or do you have some geek in your company that goes through this? Because I'm thinking, why did you do all that? It makes sense in paper. And then you go there, you're completely wrong. You made a mistake and you just missed it. Maybe with the lease, you would have been able to be like, oh ----, this is not what I want to do. I was approached, I have a very small hotel and I was approached by a company that acquires small hotels and they kind of package them up and sell them to a family office that wants to buy a certain size. And their play with me was say, hey, basically, we think we can operate the property even better than you and we'll make it very profitable for years so it can qualify for this fund. So in a sense, they're kind of doing that. So yeah, I'm kind of curious about that and also the pro forma. Do you do it, do you have a geek or how does that work? Yeah. So when I started, I did it myself because I didn't have anyone else to do it. So I had to learn the models, learn the underwriting. The best way to do that is to really understand hotel P&Ls, like an actual P&L and how they work and the inputs that go into that. But now we have an analyst that does the model, but then I'll go into the model and change things because I want to see how sensitive it is. I want to see if I tweak this so I know how to work the model, but I have an analyst that's sucking all the data out that we're getting, putting it in the model, like we're telling him what to assume. But once it goes through kind of all of our vetting on the investment side, then we send it to our hotel management company and they look at it. And what a lot of times this happens is like, you know, the management people will be like, yeah, you guys just, everything looks good in an Excel model. It's not how it's actually going to play out. So they'll review it. But then the other thing that we'll be doing when we're in due diligence is we will sit and go line by line with the hotel's accounting people and the current owner and really ask very specific questions. So back into their numbers to make sure our assumptions align with what they're actually doing. So, you know, how much is your GM making? How much are housekeeping per hour? Like, you know, what are you buying this for? Get into all those costs so that we know that what we put in our model aligns. And if it doesn't, then we got to tweak it or determine that, well, we're going to leave it because this is how we're going to operate the business. What I was referencing about like getting into it and then changing the business plan, that's typically after we already own it. So like we're taking the risk. We know that something's going to change, but we're seeing it. And the only way to see it is like, if you're really operating it, you're really in it. I don't think you can kind of look at the property over a year and figure it out. Like maybe you can go there a bunch and kind of try and see, but you know, maybe something happens in the market. And, you know, for example, if you were, I don't know, like building a hotel next to a convention center and the convention center sold, well, then you might, or the convention center is no longer open. Then you might want to reposition your business and target a different kind of customer. What's the target for your investors that you look for typically when you're underwriting a hotel? I mean, hotel is the most risky thing. So nowadays for common equity, like I probably wouldn't do a deal unless it was like close to a 20 IRR, which by the way, hitting a 20 IRR is very difficult. I just think the bar is very high. Now, maybe there's other reasons why we would consider something lower. Maybe it's a stabilized asset in an A-plus location and our investors are only looking for a 9% or a 10% return, but we're doing preferred equity deals right now that are on 16 or 18% because we're taking less risks. So the return is going to go down, but that's our target for that. But for common equity and even for development, like ground up development, it's got to be like insanely high. It has to be like, you know, you have to pay the dumb tax because there's just so much risk. Yeah. You said something about 8 over 30. I did not understand that. And then you said the capital event is 7.30 split after you get the capital. I understood that. The 8 over 30, I did not understand. Okay. This is probably an episode in itself, which maybe I'll do. So the way that we have a lot of our deals set up is a simple 8% return to the investor. So let's just say the investor put in a hundred dollars every year before we, as the sponsor doing all the work, could take some of the profit just on the cashflow. The investor has to get 8%. So in that case, it would be $8. Now the 8%, there's some fine print there and people can do it a couple different ways. It could be 8% compounded. You know, it could be 8% simple interest, which is just 8% times a hundred. It could be non-cumulative or cumulative. So what non-cumulative means is each year stands on its own. So let's just say you're operating the hotel in the first year, you achieve an 8% return and they get $8. Second year, you achieve, for whatever reason, a 0% return and they get $0. Third year, what happens? If it's non-cumulative, you just have to hit that 8% before we would be able to participate above that. If it's cumulative, you have to make back the 8% for the second year plus the third year. So you have to hit a 16% for us to dip into that. And we always like to differentiate how we split up cashflow between the sponsor and the investor and how we split up a capital event or a refinance, because I think it's important for the sponsor to be like motivated along the way. So to be getting a little bit of cashflow. So after the investor is getting a nice, decent return, the sponsor gets a little taste and it's just a little taste. He's not getting rich off of the cashflow most likely. And then when you go to sell, we make sure that the investor has gotten 100% of all of their capital back before we get anything. And then after they get 100% of their capital back, typically we would split the profits 70% to the investor, 30% to us. And you could do that with the return or without a return. In some deals, we set it up without a return because theoretically they should have been getting it from the cashflow all along. But we've done deals where they get their money back, then they get an 8% return. We make sure that they've gotten that 8% return all along. So if there was a year where you missed it, you true them up and then you split. So there's just different ways to cut it up. I like keeping things simple though. I don't like crazy things where it's hard to figure out or I just like keeping it simple and it's less to articulate to an investor. Awesome. Thank you. 100%. Mark, you got anything? Yeah. I was wondering what made you not invest in that deal? We couldn't agree on the price. They wanted a price that just didn't make any sense. It made sense to them, but they're not going to sell it to anyone else because there'd be no upside for us. And we've said, listen, we're underwriting to sell this hotel for 21 million. How am I going to pay you 15 million and put 5 million in it? Then I'm going to make a million bucks. So that was the issue. They just were too emotionally attached to it and thought it was worth probably more than it should be worth. Makes sense. And on a property like that, when you're looking at it in terms of trying to figure out how you're going to redesign it and how you're going to spend the money, when do you use an interior designer or how do you go about the design aspects? I know you have a pretty good eye yourself. Is it dependent on the type of property or do you always use a designer? Yeah. I have a good eye, but I have a good eye to pick people and to pick a direction of what I think would do well in the market. But I think working with an amazing branding agency, a lot of people do that first actually, because the branding agency will help come up with the property and then you can bring in a designer once you have the vision very clearly articulated and let them do the design. I would always really do that. But listen, we own some properties and sometimes we have to do little things here and there, and I don't necessarily bring in a designer. We might just order furniture, frankly, online, like mom and pop it. But most things we'll bring in a designer, most things, and especially a project like that, we'd bring in a designer. Typically, what are you budgeting for? What do we pay them? It's less designer. Well, that's a big mystery. I've paid designers a million dollars for a ground up deal. I've paid them $400,000 for a ground up deal. I've paid designers 250 for a renovation. It's all negotiation. I like working with people that are sophisticated because you have to be very detailed with plans and specs or else it's going to cost you way more money down the road. But I like trying to find up and comers. They're usually a little bit more hungry for the work. They're willing to make a deal because you could help them make a name for themselves. I like trying to find those people that have spun out of a bigger firm, have a lot of great resources and connections, but have maybe just started out on their own. That's what I like to try and find. But on that deal, actually, there's a very famous designer that lives in that town or that has a summer place in that town, amazing hotel designer. The project just wouldn't be able to afford him. But the deal would be like, maybe we can give you some points on the back end. It's in your backyard. It would be a fun thing for you to do. But here are the dollars. Our renovation budget is $4 million. We can't pay you a million bucks. Maybe we can pay you $150,000 or whatever it is, $200,000. We can figure maybe some other stuff out if the project becomes successful because I think you would have a part of that. But yeah, you never know. I would be careful with that, have something very simple so there's not a lot of drama. But yeah, you got to be creative. But I also think you get what you pay for and you can also find people where you get outstanding work that you feel like you've got a great value. So you both, I'm sure, you have your Rolodex as well as you're always looking at the same time. Yeah, but then for certain properties, for certain jobs, there's some firms that you just have a rhythm with that you can just continuously go back to. So it's like, hey, we need to kind of redo this ballroom. I know you, I know your team, I know your process. We don't have to get to know each other. It's a quick bada-boom, bada-boom. So there's one designer we've worked on four or five projects with recently just because it's easy. And at what point do you bring them in? I try and bring them in the earliest point because time is always the killer to any deal. So if you waste a lot of time while you own the asset, like for this deal, I would have tried to hire the designer before we closed. I would have a deal, probably like a handshake almost before we closed. And maybe I would have even put some capital at risk once I'm hired to get them going so that I'm not using my money, my cost of capital to delay the project. I'm using the seller's cost to start the project. Yeah. So I would try and do it as soon as possible. It'd be awesome if the day you close, you can go to the hotel and you have a conceptual meeting about what their plans are and what their designs are, what their mood looks like. Okay. Thank you. Yeah. A hundred percent. All right, guys, I'll see you next time. I hope this was good and maybe we'll do something fun for the next time and just talk about what everyone else is working on. Hey, everyone. It's Jake here. Thanks again for joining me on this conversation. Be sure to subscribe on Apple Podcasts, Spotify, or YouTube. Lastly, don't forget to follow me on Twitter at Jay Worzak. I'll see you in the next episode.