National Report – In today’s new “sharing economy,” a collaborative-consumption system built around the sharing of human and physical assets, crowdfunding is a natural offshoot. And one hotel owner has already tapped into its vein. In April, the Hard Rock Hotel Palm Springs in California reportedly became the first hotel to go the crowdfunding route. The hotel’s majority owner, Andy Carpiac, partnered with Realty Mogul to allow anyone to make investments ranging from $10,000 to $200,000. Investors will get a return on their money— sharing in the income from the hotel through quarterly rental payments and any appreciation of the hotel when it is sold. They’ll also receive exclusive perks, such as room upgrades and F&B discounts.
Carpiac said the money is being raised to renovate the pool area, attract entertainment acts, expand the spa, open a nightclub and pay down debt. “We think it’s a winning formula for all involved,” he said.
Pictured: The Hard Rock Hotel Palm Springs partnered with Realty Mogul in a crowdfunding effort to raise money toward renovations and debt paring.
Jay Samit, executive chairman of Realty Mogul, is a big proponent of crowdfunding in the hotel space, and has little doubt that it’s more than a fad. “Crowdfunding is not only a fast and efficient way to raise capital, it also has the potential to increase a hotel’s revenues by turning customers into owners,” he said. “Owners are more likely to visit and enjoy a property that they have a financial interest in.”
While not proof positive, Samit estimated that those buying a stake in the Hard Rock will see a return on investment of 15 percent to 17 percent over five years.
Overall, Carpiac is convinced the future of crowdfunding in hotels is bright. “It will be a huge part of the hotel investment industry in the near future,” he said.
On the contrary
Others aren’t so sure. Such as David Loeb, managing director and senior real estate research analyst for Robert W. Baird. “I say it’s a fad. What’s the long run here? It’s kind of a gimmick right now. I would need to understand where I stood relative to the owner. Do I get paid first? Last? Can I get my money out? Maybe in a time when there is very limited availability of capital, particularly debt capital, maybe it could work,” he said.
In essence, it already does. Real estate investment trusts are publically traded entities that allow investors the chance to put their private dollars into hotels. “In some sense, the REIT model is [like crowdfunding], a way that public investors can invest in real estate transactions at a very low cost, and isn’t that a better, more proven model?” he said.
A recent spin on crowdfunding from Baird does suggest crowdfunding may have legs—even in New York. Citing source material from The Wall Street Journal, it wrote about the JOBS Act, which allows investment companies to publicly advertise deals to accredited investors. “This has prompted proposals to finance developments through crowdfunding,” it wrote, citing Prodigy Network, which successfully crowdfunded a development in Colombia, and has announced plans to raise $31 million, in $100,000 increments, to fund the conversion of an apartment building in New York into an extended-stay hotel.
Crowdfunding is still a fledgling piece of financing, particularly for projects on a large scale—such as real estate development. “The reach of crowdfunding through the digital domain offers the borrower the advantage of presenting his deal before a large audience and to craft the offering at terms favorable to him. This, of course, differs quite a bit from a borrower having to make his case to a conventional lender, who will decide whether or not to provide a loan,” said Greg LaBerge, national director of the national hospitality group for commercial real estate brokerage firm Marcus & Millichap.
Be that as it may, crowdfunding may never be able to 100-percent finance a project. “It remains to be seen whether crowdfunding will become the primary source of funding for, say, the purchase or development of a $10 million hotel,” LaBerge said, also noting that his company had not yet heard anything about crowdfunding from clients and industry contacts, but acknowledged that it is something that people are aware of and will be following with some interest in the future.
Sean Hennessey, founder and CEO of Lodging Advisors, is in a similar camp as LaBerge. “At this point, it seems likely to remain a niche capital program,” he said of crowdfunding. “I can’t see it being an effective means of accessing large amounts of capital for risky, time-sensitive projects.”
For now, crowdfunding remains a comparatively neophyte concept in the hotel industry. But for the Hard Rock in Palm Springs, it has worked. “Crowdfunding is the ultimate extension of democracy,” Samit said. “It allows individuals to participate financially in things they are passionate about. It also gives small investors access to deals that only Wall Street used to be able to see.”
Dos and don’ts of crowdfunding
Keep the campaign short: 30-45 days for ideal results
Plan ahead of time: If your campaign is 45 days long, plan 45 days in advance.
Plan out your finances before the campaign: People often forget about taxes and reward costs, among other things. If you factor in all of it before your campaign, you won’t run into monetary issues later.
Communicate with your donors and followers: People who donate a small amount at the beginning of your campaign are likely to donate more later on if you keep them updated and send them thank-you notes.
Treat crowdfunding like it’s a tip jar: A reason for failure of a campaign is thinking that money will come in just by putting it up. Planning a crowdfunding campaign is like planning an event, so how are you going to keep people excited about your project?
Keep your supporters in the dark: Transparency is key to successful crowdfunding.
Release your ideas unprotected: There is no way to copyright or patent an idea.
Worry if you haven’t met your goal yet: A third of the money can come in during the campaign’s final stretch.
Source: Crowdfund Insider
Five top crowdfunding sites
Kickstarter is a site where creative projects raise donation-based funding. These projects can range from new creative products to a cool watch, to pre-selling a music album. It’s not for businesses, causes, charities, or personal financing needs.
Indiegogo approves donation-based fundraising campaigns for most anything—music, hobbyists, personal finance needs, and charities.
Crowdfunder.com is the platform for raising investment (not rewards), and has one of the largest and fastest growing network of investors.
RocketHub powers donation-based funding for a wide variety of creative projects.
Somolend is a site for lending for small businesses in the U.S., providing debt-based investment funding to qualified businesses with existing operations and revenue.