Deal strategies for first-time and underrepresented owners start and end with, “Leave no stone unturned”.
To secure funding in a tight development climate, diverse ownership groups must leave no stone unturned and, often, undergo extra scrutiny. Although partnerships with larger investors and public entities can provide starting points, diverse investors commonly decry the dearth of opportunities to become majority owners.
After the George Floyd tragedy, said Damon Lawrence, president and CEO of Homage Hospitality, Oakland, California, major lenders including J.P. Morgan and Citibank made billions in making funding available to diverse borrowers – but virtually none of it was earmarked for hospitality.
That’s par for the course for Black investors who currently account for less than 2% of hotel owners, according to research shared by the National Association of Black Hotel Owners, Operators, & Developers (NABHOOD), Fort Lauderdale, Florida. So, where is the money that will back diverse owners’ projects or portfolios?
Public-private partnerships like the Gordon Hotel represent a promising entry point for diverse owners and developers. Accessing public funds can cut capital costs, reducing exposure and increasing ROI. “But in many cases, we have to elbow our way in and raise the necessary capital or negotiate with the public sector to include us in the deal,” said Andy Ingraham, NABHOOD, president and CEO. “We may have to appeal to elected officials, particularly African-American elected officials, to let them know that the are groups within NABHOOD that can play in that space.”
Another path to ownership involves partnering with a seasoned investor. In AAHOA, Asian American Hotel Owners Association (AAHOA) President and CEO Laura Lee Blake said members support each other to a degree that is perhaps unusual. “For example, if one member is facing additional scrutiny or challenges with a lender, they might reach out to somebody that already owns multiple hotels and invite them to be a part owner of their hotel so they can get the credibility and additional backup for the loan to go through.” Sometimes, she admitted, less experienced investors must settle for mezzanine debt, with interest rates as high as 20%.
To lower labor costs, Blake said, AAHOA members often bring friends and family from India to work in their hotels, allowing quicker debt repayment. “Even though the U.S. population is only 1.4% Indian-American,” Blake said, “AAHOA members now own more than half of all hotels across the United States.” The needle has definitely moved regarding hotel ownership in this group, she said, although room for improvement remains.
Points of entry
“Whatever way you can get in, you do it. So, the first few deals, you’re riding somebody’s coattails,” said Tracy Prigmore, founder and managing partner, TLTsolutions, Washington D.C./Baltimore. However, she emphasized, diverse investors should not perpetually have to settle for minority stakes in others’ deals. “We shouldn’t always be scrimping, scraping and begging to get in. I want to see more of us who are general partners and investors sponsoring these deals. That’s where the wealth is created.”
Among market segments, said Ingraham, lower labor and operational costs make select-service the most profitable sector for investment. To address post-shutdown housing shortages, he added, many brands are targeting extended-stay as well.
However, the lack of capital available does not limit minority investors to lower-tier brands. Programs including Wyndham’s Women Own the Room and Black Owners & Lodging Developers (BOLD) initiatives, plus Marriott’s Bridging the Gap and Choice’s Emerging Markets and HERtels efforts offer underrepresented investors incentives such as franchise-fee reductions and support in seeking funding. Additionally, said Blake, some brands provide up to $25,000 per room, depending on location, in key money that can be used as equity.
Prigmore said that the above efforts represent steps in the right direction, but they are not enough. Minority investors need programs, particularly on the equity side, for entering the hospitality industry, she said. To that end, Prigmore created the She Has a Deal (SHaD), a real-estate investment platform. “Our mission is to create new pathways to hotel ownership and development for women and people of color,” she said.
To ensure that women have the competencies required to become successful hotel owners and developers, SHaD offers hotel-investment masterclasses virtually on its EdTech platform. Additionally, SHaD hosts a hotel-investment pitch competition, SHaDPitch, where women compete to win equity in their deals.
What women need to know
The areas where women typically need education, Prigmore said, include underwriting deals and raising capital. As one strategy to address the capital-access issue, Prigmore is raising capital for SHaD’s Prosperity Fund I to invest in women-led hotel-investment projects originating from SHaDPitch.
Blake added that many female AAHOA members of Indian descent, and Black women, are typically listed after spouses on financial documents and credit cards. “So, their credit history doesn’t show up when they go to lenders.”
To address such hurdles, last October the AAHOA held its inaugural HerOwnership Conference & Retreat for women who want to start or expand hotel portfolios. Offerings included sessions with lenders. Organizers initially expected 50 attendees; the conference drew more than 300.
The Castell Project was founded with a goal “of seeing more than one in three seats at all levels of hospitality leadership and ownership filled by women.” Its leadership program and Castell@college initiatives were established to give women the tools they needed to reach that goal. Last year’s merger with the American Hotel & Lodging Association foundation will expand the program’s reach and opportunities.
Presently, said Prigmore, much of the money available for lodging projects is bridge financing, “which is extremely expensive and restrictive, meaning it’s short-term, and you’d better have a solution at the end of that maturity.”
According to Blake, U.S. Small Business Administration (SBA) loans provide probably the best way for minorities to obtain financing because government backing allows for minimal down payments, currently 15% to 20%. Working with smaller and local banks that service SBA loans also enables borrowers to build a track record, she added, and lenders who know the local market are more comfortable loaning locally.
Should trouble arise, Prigmore said, “When you’re with a local bank, you can pick up the phone and call someone. Their goal is to support the community’s growth, and they’ll work with you to help you get to the other side.” When the COVID shutdown began, her company requested three months’ forbearance on a loan; the local bank gave six months, and eventually a year. At nine months, TLTsolutions was able to begin repaying, and now those hotels are profitable again.
Regarding larger lenders, Chartres Lodging Group has a partnership with the New York State Common Retirement Fund that is administered by Artemis Real Estate Partners. It offers programs for women and minority investors. Other funds offer similar programs, which are a great way to diversify the landscape of real estate investing, said Maki Bara, president and cofounder of The Chartres Lodging Group and cochairwoman of Sightline Hospitality, San Francisco.