Why you should consider hotel real estate syndication and how to find the right investment partner who will maximize your returns.
If you are interested in the potential high returns that come from investing in hotel real estate but don’t have the time, expertise, or inclination to do due diligence, structure the deal, and manage the property—you don’t have to forego these lucrative investment opportunities.
By investing through hotel real estate syndication, you can have all of the benefits of owning a commercial real estate investment without the hassle. Here’s what you need to know.
What’s Real Estate Syndication?
In its simplest definition, real estate syndication is a group of individuals pooling capital together for the common purpose of purchasing and managing a property with multiple owners.
There are typically two parties involved in real estate syndication—the sponsor and the investor. The sponsor (also sometimes called the syndicator, asset manager, general partner, GP, or operator) is the individual or company in charge of finding, acquiring, and managing the property. They also underwrite and complete the due diligence of the asset.
Meanwhile, the investors (often called the limited partners or LPs) provide funding and own a percentage of the real estate being acquired. They enjoy the benefits of property ownership without getting involved in the actual process of acquiring the property, such as arranging financing and being responsible for the day-to-day asset management.
Sometimes, a joint venture (JV) or equity partner may be involved. These groups typically have access to many investors and can serve as a conduit between the sponsor and the investors. Besides potentially facilitating financing, they may also assist the sponsor with investor reporting and communication as well as tax documentation.
How Can Investors Benefit From Syndicated Hotel Real Estate Deals?
Hotel real estate syndication allows investors to broaden their access to deals with the potential for high returns without spending the time to research hundreds of properties. As limited partners, they can take advantage of the passive nature of the investment without the hassle of managing the properties.
When you work with sponsors who have a track record of success, you can rely on them to manage the property’s day-to-day operation and ensure the highest ROI. They’ll also give you monthly or quarterly updates on your investment to keep you informed.
Investing in syndicated hotel real estate allows you to diversify your portfolio into an asset class that’s not directly tied to the public markets. This can help protect your investments during a financial crisis or recession. Hotel syndications also have the benefit of being able to improve overall yields through tools such as dynamic room pricing, monetization of meeting/conference rooms, food and beverage services, etc.
Lastly, a large commercial property offers investors economies of scale in their contracts for property management, renovation expenses, cleaning services, etc.—which can improve the profitability and return on investment compared to smaller, non-syndicated investments.
What You Need to Know When Underwriting a Hotel Deal
When you partner with a real estate syndication sponsor, they are responsible for doing the due diligence and underwriting the investment. Making and confirming accurate underwriting assumptions is one of the best ways to ensure that a deal is successful and profitable.
Typically, the sponsor will provide you with financial projections of the investment and can often outline some of the main assumptions included in the underwriting. It is beneficial to understand how changing some of these assumptions can impact the returns of the investment. Here are some an experienced hotel syndication investor considers when reviewing a deal:
- New supply in the market and how it could impact future occupancy if it’s not adequately addressed.
- The timing of the ramp-up period and how it affects cash-flow projections.
- Understanding the underwritten expense projections and noting any overly optimistic underwriting assumptions.
- Understanding the story behind large growth rates in revenue.
- Reviewing historical financial statements to identify one-time expenses.
- Being aware of any capital budgeted for a renovation or property improvement plan (PIP) and confirming adequate contingencies are included in the budgets.
- Knowing how the projected average daily rate (ADR) and revenue per available room (RevPAR) are positioned against the competitive set.
- Confirming that the hold period of the investment is reasonable (e.g., not in the middle of planned renovation) and that the exit assumptions are justified based on available market data.
- The length and terms of the hotel’s franchise agreement (if applicable).
A sponsor will also evaluate the location, the number of rooms, acquisition assumptions (e.g., capitalization rate and sales comps), financing assumptions (e.g., loan-to-value ratio, loan interest rate, amortization period), exit assumptions, and historical cash flow. (for a definition of common financial terms, please click here)
How to Align the Interest of the Sponsor and the Investors
To ensure success in hotel real estate syndication deals, the interests of the sponsor and the investors must align. This can be accomplished in several ways:
- Confirm the sponsor is co-investing a substantial amount in the property alongside the investors.
- Give the sponsor a carried or promoted interest in the investment. Typically, this involves setting hurdle rates where the sponsor receives an increased share of the cash flow from the investment once investors receive a minimum return on their investment.
- Establish performance bonuses for the sponsor where the completion of certain financial milestones entitles them to additional payments or increased ownership in the investment.
Finding the Right Hotel Real Estate Syndication Sponsor
Working with the right sponsor is the key to hotel real estate investment success. Here are some criteria you can use to evaluate your potential partner:
- They have an in-depth understanding of the market, the hotel industry, and the geographic area where the property is located, preferably based on similar projects they have successfully completed.
- They are familiar with the national and local laws and regulations to avoid unnecessary, costly, and time-consuming legal disputes.
- They understand the tax implications of the investment and take advantage of various tax benefits to increase the investment’s profitability.
- They have a team of talented and market-savvy experts who know how to add value to the property and increase its revenue-generating potential.
- They have a solid and successful portfolio with projects that match your investment approach.
Partnering with a reputable and experienced hotel real estate syndication sponsor can maximize your investment while eliminating the hassle. Lifeafar’s leadership and expertise has made us one of the most successful hotel real estate syndication sponsors in Colombia and Puerto Rico. If you are interested in learning more about the lucrative financial returns that can come from investing in hotel real estate, with returns often ranging from 12-26%, please visit our website to see our current hotel real estate investment opportunities.
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