Dan Beider Discusses 1031 Exchanges for Lodging Hospitality
28/05/07 21:30 Filed in: Article
Dan
Beider Discusses 1031 Exchanges for Lodging Hospitality
1031 Exchange Draws New Hotel Investors
Institutional investors, private equity funds and high-net-worth individuals, all key players in the hospitality market in recent years, are continuing to earmark a larger percentage of their available dollars to our industry. Along with these experienced investors, we’re beginning to see a new type of investor enter our industry--smaller investors, often high-net-worth individuals who previously invested in other commercial real estate asset classes.
These new investors generally are unfamiliar with our industry and the reason why hotels work as an investment vehicle regardless of economic cycle. They know little or nothing about operating hotels. So why are so many of these investors buying their first hotel properties?
These investors are being driven to hotels by a provision in the tax code that allows investors to defer capital gains taxes realized on the sale of properties to a later date if they acquire a “like-kind” property within a specific time period. Add to that the fact that these investors can no longer find the attractive cap rates they are used to getting in office, multifamily or retail deals, and you have a recipe for hotel industry success.
We are now seeing investors with so-called 1031 exchange money from other real estate classes looking at hotel assets in larger numbers. Increased demand fueled by these first-time investors, particularly in the $8-million to $20-million range, makes it a great time to be a seller. Smaller investors are able to buy a single property with a strong brand and good economics within this price range, and larger investors can build small portfolios with their trade.
These new buyers bring demand for property and knowledge, which is where we hoteliers come in. It is here where the brokers, attorneys and tax consultants who specialize in hotel transactions can truly earn their keep by creating value and proving their expertise. These real estate investors new to the hospitality industry could well become the next group of successful hotel moguls, assuming that they enter the market under the right conditions and are properly advised.
Our team currently represents Homecourt Hospitality LLC in its initial $80-million acquisition into the hotel industry via proceeds generated from the sale of manufactured home communities where the cap rates have dropped and zoning regulations for their business were almost impossible to overcome. According to Jim Turner, President of Homecourt, “The leveraged returns currently available in the hotel industry exceed anything we could replicate within our own real estate submarket. We were approached by a group of experts, presented with scenarios, and educated ourselves about the industry.”
Richard Ross, Jr., an investment principal at Frederick Lure, LLC and 30-year real estate industry veteran, bought his first hotel via 1031. While Ross has traditionally dealt in office real estate, he saw the potential in this segment and went after it. “There are a number of reasons for pursuing hotel acquisitions. The current 1031 market has distorted the market with cap rates driven down to the point of making the economics of acquisitions questionable. This demand is spreading to the hotel industry, but it is the last segment to be affected,” says Ross.
This new 1031 money allows many investors to quietly acquire assets from growing management companies that would like to retain management and perhaps retain sliver equity. With this 1031 exchange money, management companies can redeploy the proceeds into new development or into their own 1031 exchanges, and thus quickly grow their management portfolios. A partial subordination of management fees and a preferred return on equity, if desirable, may also help these new hotel investors reach their return thresholds more easily than in other asset classes.
1031 Exchange Draws New Hotel Investors
Institutional investors, private equity funds and high-net-worth individuals, all key players in the hospitality market in recent years, are continuing to earmark a larger percentage of their available dollars to our industry. Along with these experienced investors, we’re beginning to see a new type of investor enter our industry--smaller investors, often high-net-worth individuals who previously invested in other commercial real estate asset classes.
These new investors generally are unfamiliar with our industry and the reason why hotels work as an investment vehicle regardless of economic cycle. They know little or nothing about operating hotels. So why are so many of these investors buying their first hotel properties?
These investors are being driven to hotels by a provision in the tax code that allows investors to defer capital gains taxes realized on the sale of properties to a later date if they acquire a “like-kind” property within a specific time period. Add to that the fact that these investors can no longer find the attractive cap rates they are used to getting in office, multifamily or retail deals, and you have a recipe for hotel industry success.
We are now seeing investors with so-called 1031 exchange money from other real estate classes looking at hotel assets in larger numbers. Increased demand fueled by these first-time investors, particularly in the $8-million to $20-million range, makes it a great time to be a seller. Smaller investors are able to buy a single property with a strong brand and good economics within this price range, and larger investors can build small portfolios with their trade.
These new buyers bring demand for property and knowledge, which is where we hoteliers come in. It is here where the brokers, attorneys and tax consultants who specialize in hotel transactions can truly earn their keep by creating value and proving their expertise. These real estate investors new to the hospitality industry could well become the next group of successful hotel moguls, assuming that they enter the market under the right conditions and are properly advised.
Our team currently represents Homecourt Hospitality LLC in its initial $80-million acquisition into the hotel industry via proceeds generated from the sale of manufactured home communities where the cap rates have dropped and zoning regulations for their business were almost impossible to overcome. According to Jim Turner, President of Homecourt, “The leveraged returns currently available in the hotel industry exceed anything we could replicate within our own real estate submarket. We were approached by a group of experts, presented with scenarios, and educated ourselves about the industry.”
Richard Ross, Jr., an investment principal at Frederick Lure, LLC and 30-year real estate industry veteran, bought his first hotel via 1031. While Ross has traditionally dealt in office real estate, he saw the potential in this segment and went after it. “There are a number of reasons for pursuing hotel acquisitions. The current 1031 market has distorted the market with cap rates driven down to the point of making the economics of acquisitions questionable. This demand is spreading to the hotel industry, but it is the last segment to be affected,” says Ross.
This new 1031 money allows many investors to quietly acquire assets from growing management companies that would like to retain management and perhaps retain sliver equity. With this 1031 exchange money, management companies can redeploy the proceeds into new development or into their own 1031 exchanges, and thus quickly grow their management portfolios. A partial subordination of management fees and a preferred return on equity, if desirable, may also help these new hotel investors reach their return thresholds more easily than in other asset classes.