NATIONAL REPORT—Getting hotel projects financed traditionally has become less difficult with each year of the current economic cycle as lenders continue to loosen the proverbial purse strings. But, it’s the nontraditional ways of financing, such as crowdfunding, that have the potential to permanently alter the lodging landscape from an investment perspective.
In 2014, there was roughly $10 billion raised in the U.S. through crowdfunding, which is defined as the practice of raising capital from a large number of people. That figure is projected to jump to roughly $25 billion in the U.S. this year, some $2.5 billion of which will be in the real estate sector, which could generate as much as $250 billion by 2020, according to some estimates.
“There has been an exponential increase in crowdfunding in the last 18 months, but that’s partly because the new exemption to the Securities Act of 1933 created by Title II of the JOBS Act has only been in existence since the end of 2013, so it literally started at zero… As more capital is raised through crowdfunding and more issuers and investors gain knowledge and acceptance of crowdfunding as a viable alternative to raise capital, it will only continue to expand,” said Tim Edgar, founder and president, Hotel Innvestor, a Newport, CA-based company featuring a web-based banking platform utilizing an equity crowdfunding model to raise capital for hotel projects nationwide.
Based in Miami, iCrowd Hotels is a recently launched proprietary online crowdfunding platform focused on the Millennial market. Chairman and founder Ted Farnsworth—who noted he had been working on the launch for the past 18 months or so following the changes in legislation—talked about the decision to create the platform. “Really, why I wanted to focus on the hotel industry from the crowdfunding standpoint is because, obviously, real estate in crowdfunding is doing extremely well here in the U.S. My theory was that people that are in different parts of the world, or even here in the U.S., can definitely see themselves owning a piece of a Marriott, Hilton or Hyatt. They’ve all stayed in these hotels, they understand it and it makes them feel comfortable, so it would be a viable source of income,” he said.
Farnsworth further talked about the impact of crowdfunding on traditional lending. “You’re definitely disrupting the whole investment banking system, and the whole system of how equity is raised,” he said.
“Crowdfunding can be an excellent source of funding for filling a gap in a hotel’s capital stack,” added Bill Sipple, executive managing director, HVS Capital Corp., the investment banking arm of HVS Consulting.
Farnsworth, who noted the company already has a hotel in New York City’s SoHo district under contract, talked about the early returns. “The acceptance so far has been really interesting. The quality of the deals that are coming to us via the Internet through crowdfunding is what I find very interesting and very attractive. I didn’t know how it would be at first, if it would be one guy coming to us with a Hampton Inn, but it’s been just the opposite. We’re getting serious players with serious portfolios from different parts of the world,” he added, noting the company’s current deals are valued at more than $130 million total in markets such as New York, California, Miami and Europe.
But any serious investor needs to understand what the exit strategy is when it comes to such projects, which has represented a bit of an obstacle for crowdfunding, at least initially.
“A potential issue is agreeing on the term of the investment between many investors. Up until now, many crowdfunded projects have been of a shorter term than a typical hotel investment. Aggregating a pool of investors with common investment expectations on timing of the investment can be a challenge,” said Sipple.
Farnsworth underscored the point. “When crowdfunders go and invest money, they want to know what their exit strategy is, the same as any other investor. The crowdfunders want to know that they have a limited time. We look at our hotels as a three-, four- or five-year project. Five years is probably the furthest out and that would be more of development per se. The development might give you a better return, but it is a longer hold,” he said.
Edgar elaborated on the types of projects that make the most sense. “The biggest drawback to crowdfunding a project is the amount of time it takes to raise the capital, which varies based on amount, investor returns, etc., but can take 90 to 120 days. That means crowdfunding an acquisition is very difficult unless it’s an off-market transaction with a flexible seller. As such, crowdfunding currently lends itself more to recapitalizing existing assets and new-development projects, which tend to have more time available,” he said.
While there seems to be a consensus on the type of projects that work best, the amount that’s invested by crowdfunders can certainly vary.
“Some platforms will let you invest for as little as $10,000 but, because we focus exclusively on hotels which tend to have larger capital needs Hotel Innvestor has set a $25,000 minimum and, sometimes, it’s a $50,000 or $100,000 minimum for larger raises,” said Edgar.
However, Farnsworth noted that the recent changing of Regulation A+ by the SEC will open up the market as investors no longer need to be accredited. “That’s going to be a game-changer because then you can take money in from anybody that wants to invest in whatever. Someday, you’re going to do a crowdfunding site where you do a hotel for as little as a $1,000,” he said.
Edgar, however, emphasized that the recent changes to the law will not alter his company’s approach. “Accredited investors are not just important, they are essential. You must be an accredited investor to invest in any Hotel Innvestor offering,” he said.
While Hotel Innvestor and iCrowd represent some of the early entries into hospitality crowdfunding, executives from both firms acknowledged the platform is likely to get more crowded in the near future—and potentially more narrowly focused.
“We expect more competition to come, but our experience indicates that we will see more hotel platforms focused on luxury and upper-upscale hotels as opposed to the midmarket and upper midmarket hotels that is our primary focus,” said Edgar.
“It’s only a natural. Once again, the U.S. is leading the way in crowdfunding, especially within the lodging side. I think we have the first-mover advantage. We’re the first one out there to start generating the traffic and information flow coming back and forth. I’m sure there’s other people that are going to be coming out. There might even be different sectors of the hotel industry. There might be someone who comes out and just does select-service hotels, or just does hotels in a certain state. I’m sure they’ll come out, I just don’t know when,” said Farnsworth. HB