There are many ways you can supplement your personal equity. However, it is important to note that all will entail giving a corresponding percentage of your ownership to those sources. These will be your business partners and you must iron out early on how much control you will be ceding in return for their equity.
Sliver equity. Sliver equity is equity given by your chosen management company, if you have one selected. See the section entitled “Equity Contributions” in the following link for a discussion of the pros and cons of sliver equity: https://www.akerman.com/en/perspectives/alternatives-to-key-money-in-hotel-management-agreements.html
Family offices. A family office is a private company that manages the assets of a wealthy family so asset value can be preserved and passed on to future generations.
Family offices are typically not very visible. See this article for tips on how to find them: https://sifted.eu/articles/family-office-funding-startups/
Angel investors. Angels usually invest in projects they have experience with, so they are not only a good source of funds but also partners that will work closely with you during the investment life cycle (think: Shark Tank). https://angel.co/hotels/investors
Venture capitalists. VC funds are private equity firms that make targeted investments in individual projects. You can approach real estate private equity firms as well companies that just target hotels.
Equity funds. [Peggy: Don’t these funds prefer to buy the whole property outright? I consider equity funds as a buyer on the exit.]
Business Plan Competitions. This is the only source of equity that doesn’t involve giving a piece of your ownership away. If you have an idea for a new hotel concept and/or your investment is part of a bigger start-up venture, you can consider entering a business plan competition. Winners can walk away with cash to put towards their equity.
Crowdsourcing: is a relatively new way to build up your initial equity contribution, as well as raise capital for a revamp of a certain amenity post-closing. If the amenity will benefit the area surrounding the hotel (e.g., a trendy new dining concept), you will also have an opportunity to foster a bond with the locals. Two well-known crowdfunding sites are Kickstarter and GoFundMe. Crowdfunding is a campaign that raises money through small investments from a large number of people. It became federally sanctioned in 2014. There are now websites that specialize in raising crowdsourced funds and companies that manage the relationships and reporting that go along with having many small investors.
Sweat equity. This is basically equity in the form of labor. For example, if you are good with tools, you can make any needed repairs yourself instead of hiring someone to do it. Friends and family come in handy here.
Key money. If you have a property management company lined up for the asset, you can approach them about obtaining key money to help you complete your capital stack. The amount of key money a property management company will give you is discussed early in the hotel management agreement (HMA) negotiation process, along with the term length, termination options, and base and incentive fees. These components of the HMA are all interrelated, implying that if the manager gives you key money, it will expect to be compensated elsewhere (e.g., with higher fees, a longer contract, more lenient performance termination terms , or the ability to purchase the property from the owner upon sale). Key money may be structured as a loan with a 0% interest rate which is forgiven at the end of the management contract. https://www.nortonrosefulbright.com/en/knowledge/publications/cf5acc30/hotels-and-leisure-key-money
EB-5
Congress set up a program called EB-5 to foster economic development by encouraging foreign direct investment from foreign nationals who are interested in migrating to the United States. EB-5 is an “employment based” immigration provision providing expedited visa processing. Immigrants earn a fast-track to US citizenship by investing a minimum of $500,000 and creating a minimum of ten new US jobs for projects located in Targeted Employment Areas (TEAs) or a minimum of $1 million in other areas. It can be used for construction. It cannot be used for acquisition unless the project is in bankruptcy or failing or being converted to a new use which would enable an existing building to meet the new jobs requirement.
EB-5 fits into the capital stack as a form of equity. It is typically more expensive than permanent financing but may be less expensive than other forms of equity. EB-5 investment is often organized through a “regional center”. These are organizations around the world that market to prospective EB-5 investors and work through the procedures, documentation and logistics with investors and project leads. While there are hundreds of regional centers, a very small number produce most EB-5 funding so it is important to select the right center.
Using EB-5 funding can be complex and there are experts who assist with this process.
When accepting equity, you should always hire a lawyer to document the terms of the investment via an investor contract and have it notarized, even when investing with friends and family. Expectations, processes, and all the financial details must be worked out and put in writing to allow you to put 100% of your effort into running your hotel once you get going.
