From lack of access to funding to overt or covert bias, a new wave of diverse investors will need a lot of muscle to power past hospitality investment’s roadblocks.
The hospitality industry’s first foray with diversity delivered a powerful payback. Hotel chains’ initiatives to smooth out the path to ownership made Asian Americans a dominant force in the hospitality investment community. AAHOA’s (Asian American Hotel Owners Association) 20,000 members now own 60% of all U.S. hotels and continue to drive supply growth, especially in the select-service tier.
Although this powerful ownership base shows no signs of slowing down, there’s a new wave of interest from Black entrepreneurs and women investors. And, there’s a lot of open playing field. While Black investors own only 2% of U.S. hotels, women own just one hotel for every nine owned by men. It’s going to take a lot of patience, persistence and deep pockets to foster the full potential of these next-gen diverse owners and developers.
Bust Through Biases
Because people of color have been systemically suppressed from wealth creation, according to Tracy Prigmore, founder and managing partner, TLTsolutions, Washington D.C./Baltimore, they start with less liquidity and lower net worth than more established investors. “Therefore, their options for lending are limited. It’s easier to get money when you have money.”
For Black women and men, said Andy Ingraham, National Association of Black Hotel Owners, Operators, & Developers (NABHOOD) president, founder and CEO, finding funds is difficult and often involves seeking joint-venture partners or forming Black investment groups. To acquire the $650 million Waldorf Astoria in Washington, D.C., for example, CGI Merchant Group’s investor team included boxer Floyd Mayweather, baseball star Alex Rodriguez and additional high-net-worth Black celebrities.
With few financial institutions lending money, particularly for newbuilds, he added, many investors of color are looking to acquisitions to break into hospitality investment. “We must go out and create those relationships so that we can get new investors who have not been in the space,” Ingraham said.
Do the Tough Deals
Diversity pioneers caution new investors that initial deals may not come quickly or easily. Maki Bara, president and cofounder of The Chartres Lodging Group and cochairwoman of Sightline Hospitality, San Francisco, said, their acquisition of the 200-room Muse Hotel in New York’s Times Square took one year to close. “But we think it was well worth the effort, since we would never have been able to get into this market and location at the basis we were able to achieve if the markets had been ‘easy.’”
In fact, Bara said, acquisitions made after economic downturns have proven most rewarding for Chartres. “There weren’t many competitors looking to acquire hotels during those times, and while getting a deal done was more difficult, the ones we did manage to source and consummate ended up being our most successful investments.” With high interest rates, a credit crunch, and looming recession, Bara said, “We think this is the right time to be turning over rocks to find the right opportunities.”
Homage Hospitality, Oakland, California, recently secured $13 million in debt and is sourcing around $7.5 million in equity, including $3.5 million in city funds, to create the 80-room Gordon Hotel in Albany, Georgia. To land the deal, Homage entered a partnership with the city, which originally owned the asset, as part of a revitalization plan to attract larger conventions. “The beauty of that project is that we own the physical real estate,” said Damon Lawrence, president and CEO of Homage Hospitality, Oakland, California. Because the partners in the deal already operate a business out of the building, he said Homage could be more patient in waiting for capital to become available.
Lawrence said the biggest lesson he’s learned – especially over the last year – is that diverse owners and developers must work twice as hard as others. “There are questions that come up when I’m pitching a deal that other people probably wouldn’t have to answer.”
As a test, Lawrence created two slide decks for a deal he recently pitched: one set featured his photo exclusively, another with a photo of his white partner (Stephen Muller, founder and managing director, Vanadium Group, New York). “Listening to some of the calls that he would have, I realized the reception was different – less hole-poking of the numbers and a belief that whatever was in the pro forma was inherently correct.”
To counter lenders’ concern that a hotel brand honoring Black culture might alienate other races, Lawrence and colleagues noted the success of San Francisco’s Hotel Kabuki, the Line Hotel in Los Angeles’ Koreatown, and mainstream products ranging from Air Jordan sneakers to the Black Panther movies.
“Implicit bias is real,” Lawrence said. “It’s no coincidence that there are not many people who look like me doing what we're doing in hospitality.”