AN ASIAN AMERICAN hotel development company is about to dramatically change the landscape in downtown San Antonio as well as the way hotel projects may be funded in the future.
REM Hospitality of San Antonio, co-founded by Pratik Patel and Anand Bhakta, plans to start construction this summer on a $48-million Cambria Suites hotel and office complex. The project’s financing strategy includes crowdfunding with EquityRoots.com, a Chicago-based fintech firm that previously raised more than $5 million for a 182-room dual-branded development in Schaumburg, Illinois.
Attorney Bhavik Dani established EquityRoots.com in 2014. It is the first crowdfunding business exclusively dedicated toward raising money for branded hotel assets and based in the Chicago Board of Trade.
Crowdfunding enables everyday people to invest relatively small amounts of equity into new business ventures – including real estate development – via the internet. The industry is regulated by the U.S. Securities and Exchange Commission.
Crowdfunding became a viable investment option when President Obama signed it into law in 2012 under the JOBS Act. The SEC allows accredited investors (those with a net worth of $1 million or an annual income of $200,000) and non-accredited contributors (the rest of us) to participate in online fundraising.
Asian American hoteliers should grasp the concept of EquityRoots.com as it is merely a virtual model of friends-and-family financing.
Dani said he and his team understand hotel financing and management, and put that knowledge to work when vetting the feasibility of an investment project. “When we learned there were people who wanted to invest $20,000 into the project, we jumped at it,” said Dani. “We went through the due diligence with REM. We tore apart the numbers and the PPM (private placement memorandum). Everything checked out.”
Dani said EquityRoots.com’s initial fundraising goal is $5 million. If it breaks that threshold, it will continue the offering, up to $24 million. “REM will invest its own equity as well,” Dani said. REM will look to conventional financing methods to make up the other $24 million, Patel said.
In its previous projects, EquityRoots.com priced shares at $15,000 each. The Cambria Suites Riverwalk project is $20,000 a share. The amount is manageable for high-earning professionals such as lawyers and doctors, who want to invest in something that will promise a greater yield than an IRA or certificates of deposit.
After four or five years or when the hotel business reaches $5 million in annual net operating income, REM will re-finance the asset and return the investors’ initial proceeds. The investors – who are co-owners of the asset – will remain in the business, realizing a perpetual cash return. This is different from EquityRoots.com’s other project, which gives investors a “clean exit” with initial investment plus capital gain.
EquityRoots.com is attracted to the project for several reasons, Dani said. It will supply much-needed office space in San Antonio’s business district, that also includes the courthouse. The hotel complex is being built on one of the last few remaining parcels of open land in the downtown. And it’s one block from the convention center and the Riverwalk, a tourist destination.
Patel said he and Bhakta wanted to include EquityRoots.com in its financing strategy because it brings transparency to the process. “People who have not invested in hotels before are reluctant to invest without transparency,” he said. “EquityRoots.com attracts smaller investors seeking minimal risk.”
The model also allows commercial real estate investors to diversify, he said. “People who want to invest in hotels today don’t want to commit $50,000 to $60,000 to one project.”
In addition, Patel said, seasoned investors used to traditional methods will pony up smaller amounts with a crowdfunding firm to learn how it works. If it proves to be a successful model, they will contribute more money on the next project.
Last month, REM acquired the half-acre corner site from Choice Hotels International, which, about two years ago, purchased the tract where the burned-out remains of a building had stood for several years.
Patel said excavation of the site is set to begin this summer. The 18-story, 182-room hotel will feature a rooftop bar and lounge and cater to business travelers as well as leisure guests. Joining the 30,000 square feet of class A office space will be 8,000 square feet of retail space.