Hotel Developers, Investors Look To Crowdfunding As Industry Struggles Abound
The hotel sector is experiencing headwinds. New supply threatens to outpace demand, and the industry is being forced to get creative to secure funding as financial institutions remain conservative in their lending.
Some hotel developers have begun looking to crowdfunding as an alternative for both fundraising and investment.
"[There is] a gaping need for financing. That’s why people are starting to step into [crowdfunding], as are we,” RealtyShares Vice President and Head of Commercial Real Estate Debt Originations Bill Lanting said.
Hotel developer Driftwood Acquisitions & Development recently launched a crowdfunding platform for investors to grab equity stakes in hotels. The business allows accredited investors — individuals or entities that meet a set of established requirements regarding income, net worth, asset size, government status or professional experience — to invest cash in exchange for equity stakes in fully operational, cash-generating hotels.
The crowdfunding model is fairly simple. Driftwood purchases hotels using its own capital, manages hotel operations with its own supervisory team and once the hotel or resort is up and running, the company will extend an offer to investors to co-invest a minimum of $100K.
“[It is] kind of a hybrid where we decided to start a general partnership fund using people who had invested in us for quite a long time. Every time we buy, we then turn around and say, 'OK, do you want to come in?'" Driftwood Acquisitions & Development Executive Vice President Carlos Rodriguez Jr. said.
Brands within Driftwood's portfolio include the Tan-Tar-A Resort, a 500-room lakefront property set on the shores of Lake of the Ozarks in Missouri, and the Flamingo Beach Resort & Spa in Guanacaste, Costa Rica. Both properties are owned and being rebranded in partnership with Margaritaville Holdings, Forbes reports. The goal is to acquire and build properties that will generate strong and safe cash flows for investors.
It is a strategy that Chicago-based Origin Investments uses as well, though the firm focuses primarily on multifamily and office properties.
Like Driftwood, Origin is careful about the properties it selects to invest in so as to avoid risk and maximize profit for investors. Origin often invests in value-add and core-plus assets.
RealtyShares has also entered the hotel space. The crowdfunding company, which offers financing solutions for residential and commercial properties, has raised more than $300M through 550 investment opportunities in the U.S., and has facilitated 88 commercial deals in under two years. Though RealtyShares was not previously active in the hotel crowdfunding sector, the company recently shifted its focus and this week raised $2.4M in equity investments sponsored by the Buccini/Pollin Group for the Sheraton Hotel in Irving, Texas.
With crowdfunding, investors have the opportunity to invest in properties they may not have otherwise been exposed to were it not for a crowdfunding platform.
“[We give investors] access to deals that they wouldn’t have otherwise had, they wouldn’t have otherwise seen. They’re [essentially] private deals that are being marketed to the general public,” Origin Investments principal Michael Episcope said.
In the case of Driftwood, the platform offers a safer approach for investors because revenues and operations have already been established.
“So now when we buy a deal, our operating team [and] our management team is in place already. [The investors] know we own 100%. There’s no pressure with timing, the only constraint is them coming in before anybody else comes in [to invest],” Rodriguez said.
The platform works to take the pressure off all parties by dealing with the financial details upfront, thereby allowing for a more leisurely fundraising process.
“Instead of having to raise a big fund and then deploying it, we get to raise as we go,” Rodriguez said.
And using crowdfunding over a non-traded REIT, for example, means there is no need for a middleman, which typically means fewer fees and a more transparent transaction for all involved.
“The investor going direct into a crowdfunding vehicle because they’re not paying a middleman, it has a big advantage,” Episcope said.
That person or entity is able to save money while simultaneously gaining more foresight and control over their investments, Rodriguez said, as is the case with Driftwood. The company allows investors to choose their own portfolio and the hotels in which they would like to put their cash.
While there are a few notable companies moving forward with this concept, it has been slow to catch on, especially for the hotel sector. That could soon change.
“I think we’re in the early stages here. I have to think it’s less than 2% or 3% that have ventured into the crowdfunding sector,” Episcope said. “[But] we’ve seen more and more large players starting to adopt this and starting to go into this area and to attract new investors into this area."