$500 Million Hotel Broker: Why Your Franchise Flag Might Be Capping Your Hotel's Revenue | Chris Kilcullen E90

[Music] The Hotel Investor Playbook. Your guide to building wealth and freedom through hotel and hospitality ownership. [Music] Welcome back to the Hotel Investor Playbook. I am Michael Russell, founder of Meloma Capital and your host. On this podcast, we talk story about everything you need to know to make money investing in hotels and in hospitality assets. My guest today is a 30-year hospitality veteran. He's a senior hotel broker at Avison Young. He's closed over $160 million in hotel transactions and counting. He's seen this business from every angle. From franchise sales to acquisitions to brokerage. I've got Chris Kilcolin with me today. Chris, welcome to the show. Thank you, Michael. Pleasure being here. I just realized I got to update my LinkedIn profile. That's like five years old. So what's the number now? You know, I have to do the math, but it's got to be over $200 million in transactions. Yeah, even better. Yeah. Awesome. Well, listen, before we dive in, why don't you give our listeners the 30-second version of who you are and what you do? Great. Great. Well, my name is Chris Kilcolin, obviously. I live in Evergreen, Colorado right outside of Denver. I've been in the hotel and restaurant business all my career. My parents bought a restaurant when I was in high school. So I learned how to smoke brisket in Texas. And then found my way in hospitality in 1992 when I was selling suits part-time at Marshall Fields. And I sold this guy more suits than he came into buy. And I offered me a job selling franchises. So I went to work for a company called Hospitality Franchise Systems, selling gaze in Ramada and Howard Johnson flags back then. Way before the internet, it was still recognizing a sign of the interstate and calling an 800 number. And anyway, that's how I got in the industry. That grew into brokerage, took some time out, learned how to lose money in a restaurant that I opened in Dallas. That was a great experience, actually. Not the best financially, but learned just piles about business. And then went to work for real estate investment trust for about three years buying hotels. So learned the equity side of underwriting and acquisitions. And then it'd been a broker with Avis and Young for five years now. Actually six years. Excellent. So that's the quick summary. Let's start with a franchise question. Yeah. You spent 15 years selling hotel franchise agreements to independent operators. 250 more than 250 deals, right? If an investor came to you today and asked if they should buy a flagged hotel, what would you tell them? You know, I would try to understand them personally in what kind of investor they are. Because if you're somebody that just wants to place some capital somewhere and put a management company in place, that's a solid investment based on kind of a smaller parameter of brands. You know, there's a lot of brands out there and many of them are literally just a waste of money. If you're creative and you're entrepreneurial, there are some really good opportunities now to be independent. However, Hilton and Marriott, really all the brands, but Hilton and Marriott specifically because they're the best in the industry, measurably better than anyone else below them. They've now got soft brands at literally every chain scale. So Hilton came out with a soft brand for mid-scale product and so did Marriott. Marriott's is called Series Collection and Hilton is called the outset collection. And so you can take up, you know, older property that has lost its flag, renovated, put a little brand positioning story behind it and create your own name. And then affiliate with Hilton and Marriott and capture all of their rewards platforms, which, you know, the biggest value is that rewards platform because it doesn't, there's only about a 5% fee for the rewards fee. Otherwise, you're paying OTA's online travel agents, Expedia, travelocity, hotels.com, a larger commission for a discounted rate. And so they just provide a path to much better N-O-I. Let's talk about that. OTA is like booking.com and Expedia. They've basically wedged themselves between the hotel owner and the franchiser. And they're taking that 15 to 20% off the top. Before those franchise fees even get deducted, when you add that all to this franchise fee, what does an owner add a second or a third-tier brand actually net for every $100 in revenue that they bring it? Terrible. You've got to be an owner operator in those hotels and be squeezing every nickel. That's chasing every housekeeper. That's just watching every nickel going in and out of the hotel to make any money. And that was the space that I used to play in. Was that that third-tier branding? And it's just not very profitable. I mean, you've got lower branded or lower rated customers, first of all. And then you pay that discount on top of that and then you pay the franchise fee. And you're left with nothing. I mean, you're essentially buying yourself a job. You're going to take the gentleman, Andrew Sowery, and you're going to work it. And they just don't produce the NLI that an investor really needs. So there are a ton of these that are for sale. And if they don't pencil and they don't make financial sense and you're not an owner operator, who's buying these hotels? And more importantly, what do the sellers plan on doing if they can't find a buyer? Yeah. Well, you know, I would say mostly they're immigrant owner operators that will do that kind of grinds that I just described. And they make money at them. I'm going to have got some. That's one thing that's amazing about this industry. I've got friends that I've known in this business that came over here with nothing from every country around the globe and worked their way up through a hotel job, either through a friend or a partnership, bought their first hotel, and then end up with 20, 30, 40, 50 and they're portfolio. They can make money, but it's literally a grind. And those hotels are sold not on NLI or a caprate, but on a multiplier of revenue based on really the kind of renovation that's needed. And I guess the only positive side of these third-tier brands, renovation costs are not very extreme or burdensome, but they also don't produce the kind of revenue because of it. And so I would say two to maybe a three times multiplier, unless you're out in California or maybe in Hawaii, but that's where those things are priced. And there are some people that are buying those things and taking them out of the system and repurposing them either into multi-family or even up branding them into different flags or taking even some of these older cool exterior quarters or hotels and making them really fun. And so there is some value to uncap. It's interesting. It says arc here. You've gone from taking independent operators and selling franchises for them to become part of flagged branded hotels. But now full circle now it's taking those same flagged hotels and the upside appears to be converting them into boutique hotels. Yes. Like questions. Have boutique, are boutique hotels or independent hotels? Are they growing in RevPAR faster than branded properties? Yes. And if so, what's driving that? Yeah. Well, first of all, because if you're if you own a Hampton Inn, for example, and I'm not going to isolate Hampton for the brand other than just as an example. But if you're in a market like Red Rocks, or you got an amphitheater, you got concert goers coming, and you you have massive demand because of these concerts, there's kind of ceiling on what people are going to pay for Hampton Inn. You create some cool experiential hotel that has amazing reviews and people like, oh, I'm going to try that. Yeah, I'll pay 350 a night for that. It's just there's just a different perception about a boutique as opposed to a templated, consistent branded experience that is good. You know, that investor I was talking about earlier, they just wants to place some capital somewhere and get steady mailbox money. That's terrific. And that's why brands have done so well because so many the older independents were there was just an inconsistency problem. You don't have that anymore. I mean, you've got reviews, you got images, you know what you're getting now, and it's hard to fool that customer anymore. But customers want different experiences. It's been all the trend in rage since COVID. People love outdoor. People love unique experiences, and they're willing to pay for it. Yeah. Well, it's a combination, I think, of what you just described with people not getting capped by the ceiling of a brand for unique property or an independent property. There's an expectation that maybe it'll be a more valuable experience than what they're accustomed to with the standardized commodity hotel. Beyond that, though, what I've seen in looking at markets where you've got a Marriott like on every corner, it's so saturated. And I'm picking on Marriott, but Hilton, it seems like they're doing the same into a degree. Hyatt has now decided to follow suit where there's just less concern for a franchiseer's perspective. Like when you would open up a Marriott and people are buying in that brand or I should say, guests are attracted to the brand because of the loyalty points, there's significant delusion when Marriott allows multiple sub brands in the same small market. So now you've got delusion and revenue from both the ceiling cap that we talked about and just the oversupply of these branded hotels. And to me, it seems like I'm having trouble making sense of why a brand would even make sense in today's day and huge. Well, you know, some of this has been selling hotels for years and years and unwriting hundreds and thousands of assets, brands drive value. And something that is pivoted recently is I mentioned the new soft brands that Hilton, the Marriott have come out with, they're essentially now an OTA, both of them are. And I would say an elevated OTA. They do have brands everywhere and you go to Hilton or Marriott conference and every franchisee is complaining about the number of brands they've created. However, they're still by him and I think what's happening now more than ever before is that those loyalty platforms are now a magnet for consumers. And I know people that still book through OTAs, but once Hilton and Marriott grabs them, if you spend more than 20, 30 nights a year in a hotel or traveling, you want to have a loyalty platform. Because you're going to get more just a little bit lightly better service, but you're going to build those points and you will redeem with those points. And there is some value there, but that you can't book a lot of those brands on some of the OTAs. And it's just, you know, Hilton and Marriott is, they're just the king pins in the industry. I think that with these other brands that they're creating, in addition to the soft brands, they've also created City Express. Well, Marriott bought City Express. They also Hilton created a brand called Spark. So they're now going after that third tier brand that you mentioned earlier and pulling in that customer into the rewards platform. So the the customer that was staying in windom choice, best Western brands now have an option from a price point perspective to go stay in a Hilton or Marriott customer. So if you know, you've got an expense account and you're capped at no 120 bucks or $100 a day or you're an entrepreneur, you own your own business and you're trying to keep costs down. You used to have to stay at some of those other third tier brands to afford it. And now Hilton and Marriott have those branding options to win that customer into their platform. Hey guys, if you're getting value out of this conversation, do me a favor and take 30 seconds right now and leave me a review on Apple podcast or Spotify. It literally takes half a minute, but it makes a huge difference in helping other hotel investors find the show. Okay, now back to the episode. Well, there's there's no doubt I can relate to what you're saying, but I think there's two perspectives. There's the guest perspective, which and I'll be honest, I do prefer to stay at Marriott hotels for that exact reason that I accumulate points. I have a consistent experience. I get value. I get potentially upgrades and sometimes free nights. All of that as a guest has value to me from a guest perspective. But when I underwrite deals as an investor and I see the compression of prices going down because of market competition for similar products, it doesn't add up financially as an investor as a guest. Heck yeah, sign me up. But as putting my money on the line, it's hard to see how these guys are being are profitable. Now I hear you and especially when you've been an aging ass said all I do is underwrite hotels. I have to look at what Michael Russell's hotel is worth to the next buyer in order to find a way to transact and we see it all over the place. That NOI has been compressed either by additional supply or no demand. I moved out or whatever reason, but that hotel is only going to be worth what it is today based on the end of why I can reduce tomorrow. Those pip expenses are really hard to digest hard to comprehend. I see it in the offering memorandums all the time where it's marketed as an advantage like four million dollars in pip just invest it. And in my mind, I go, holy heck because I buy this thing and I run a 10 year cycle and then I'm going to have to pay the next four million or six or eight million dollars this next cycle. I don't want any piece of that. So it's hard for me to wrap my head around that. And I don't want to bash us too much. I think that the point is here it's for a particular type of investor who's got comfort in a yield and understands the profile of being able to have certain consistency and operations and have the brand behind them for marketing all of that. If someone is making the transition away from the brand or they're interested in going and investing into an independent hotel, but they have experience with the predictability of a branded hotel. What's the biggest thing that they give up by going independent? Well, I don't think people do that intentionally mostly because there's liquid damages tied to the brand. But the biggest thing they're going to give up right off the top is big chunk of and of gross revenue and value. If you lose a hampton in, I'll just keep on that train. You're going to lose 30 to 40% of the asset value because that gross is now gone. And if you have to reposition it into one of those third tier brands, that's going to just further road value could be as much as 40% value. If you could replace take a hampton to a holiday express, you might lose as much as 20% but you're going to lose value. Now back to kind of the original conversation or the spirit of conversation and could you position that into a boutique and could you see upside? And my answer is 100% yes. You know, along with these branded templated experiences that you get that good consistent service and kind of product quality, there is now this templated service experience. Where it almost feels like when you're checking in, you're in line and that person at the front desk is just like, what can I do to get this person out of the way so I can work on the next one? You know, that's their job. And they they fall into this process oriented customer service experience that doesn't lift that experience for the guest. And that's just a small piece of it. But as we were talking earlier, I've been working on a brand myself for products just like this called slumber and dough. There's never been a better opportunity than breakfast in this business because what's been happening over the last 20, 30 years, you know, I started this business. There's some guy that had the great idea of I'm going to give coffee and donuts to my customer so that I'm more competitive than that guy across the street and that created the continental breakfast. It's now ballooned into an expensive amenity for hotel owners that keeps compressing that in a lot. So Hilton is now competing with Mary-on to do a better breakfast and they're just imposing that expense on the owner. And so now there's hot food that's all packaged. There's waffles and multiple types of yogurt, fruit, cereal, bread, all of its packaged. All that comes out of a closet. It's generally been frozen and then reheated in a microwave or convection oven, but it all has terrible flavor and filled with preservatives. And it's the one guest complaint that is consistent with every brand. So they're definitely delivering the same consistency in a bad breakfast. And so I see this as an opportunity. I've put some branding together. I'm looking for the right opportunity and talking to some equity partners because I think that if I can do one really, really well, I can scale it and do 10 to 20 and then get to 50 and then possibly even sell the brand. Okay. So let me, let me unpack this a little bit here. Please. So you started by explaining this issue with basically nobody wants this crappy breakfast yet hotels continue to provide it and impose it onto the franchises or franchisees, I should say. Yep. And that's a cost that eats in the profit and it's miserable for the hotel owner. It's miserable for the guests. Why is this terrible continental breakfast still served if it's so bad? You know, it's funny because earlier this year I heard that days in was exploring with not doing a kind of breakfast anymore. And they're going to put vending machines in where you could actually buy food because they've got nothing. I mean, why would somebody choose a day's in over any of the rent? Right? There's not a differentiator. It used to be something that was convenient and accessible and consistent along the interstate. There, there are people that are asking that very same question right now. The problem is consumers locked in the belief that when they stay at a hotel, they get a free breakfast. That toothpaste is already out of the jar or the tube. And I don't think that there's a way to bring that back in. Now, there's lots of hotels that sell breakfast, right? You stay to Hilton Garden, you have to buy breakfast. The room is exactly like a Hampton Inn. There's really no quality differentiator between a Hampton Inn room and a Hilton Garden room. You have to pay for the breakfast and you generally pay a little bit more and rate, but I don't know how they figured out how to make that happen. Now, if you're a loyalty member, you will still get free breakfast. And so I don't have the answer to your question because it's one of the biggest quantities in the industry. You know, sidebar here, coincidentally, so I just returned from a trip to Costa Rica. And before and after our experience there, we stayed at a Hilton Garden Inn right there by the airport because it was convenient. So when we arrived and when we departed, one night on either end. And sure enough, there was a Hampton Inn and I didn't even really know beforehand, but they're both Hilton brands. And yeah, so in my mind back to what we were discussing previous, I go, these are two hotels that are of the same brand that are right next to each other, cannibalizing. They're pricing, right? Be one thing if it was a different hotel and you're attracting people within your guests that would not want those points, but to have two of the same branded hotels right next to each other. Just that was just an example they came to mind and I'm like, what? Well, it's interesting though, you chose the Hilton Garden. So they must have been a better value for you, right? Yeah, honestly, I just do what the boss says and she chose, she chose the Ella. So I don't know what decision making process went into that. But, but I digress a little bit. I really want to get back to here is so breakfast is not good, right? And you've come up with a concept called slumber and dough. What is this? What is slumber and dough? Is it a hotel brand or is this like a third party food and beverage concept? Now it's going to be a hotel brand. We're going to buy older Hamptons, courtyards, halled in Express 80 to 120 room. Kind of is the scope. We're going to look for roadside destinations in good big markets. We don't. want to be in plebolo, for example, less it's the right deal. But I say that jokingly, because we want to be surrounded by demand generators for the food and beverage component. So think of a panera in the lobby of your hotel. That's what we want to do. And we're going to bake a breakfast that you'll see, you'll smell, you'll taste, and you'll want to eat. And much like that double tree cookie that you know made them famous, we wouldn't have a breakfast that makes us famous, and it will truly separate us from everyone else. Then we want to sell our guests, things as they're walking out the door. Everyone's in for a business meeting or to meet a family whether on a road trip. And if you've got a business meeting, you can show up with a box of Danish, much like a cinnabon kind of cinnamon roll or maybe a raspberry S kind of Danish. You'd grab a box and take it with you. Same thing with family. If you're on a road trip and you're going to take sandwiches or salads or something on your road trip for the next destination, we want to sell that for you as well. But then we're going to use that same kitchen to deliver through third-party delivery platforms, cater breakfast and lunch. So when you have, hand, 12, 20 people show up at your office or less, eight people. We want to deliver amazing breakfast sandwiches, amazing lunch, super easy products that are made to scale in the kitchen so that we can do volume. Much like kind of a Jimmy John's does or Jersey Mikes. So what's your target price point? I mean, where are you guys sitting relative to again, the Hampton Inn? We want to be evenly priced. Maybe, maybe slightly below them, but evenly priced. We are going to affiliate with either Hilton or Mariant. Mariant's already approved us for their series collection brand. We just haven't found the right property yet and just talking to the right equity partners. We want to find people that want to invest in the first knowing that there will be a next round who got and do the next 10 after this. So that's kind of where we're looking. So again, this would be a franchise system where you will sell basically the marketing and licensing, but you'll have independent brand operators who will own the business. In the beginning, we're going to own everything and we're going to operate everything. We may have a third-party management company do the operations, but we're going to bring that kind of in-house. There are some really good management companies out there. I've got one in mind that has already scaled up a really good brand that was sold to Hilton, but we want to buy all of our hotels, own them, and if it becomes a franchise, it'll become a franchise 10 years down the road and we sell it to Hilton or Mariant. Sell the whole brand. You lost a restaurant once. You referenced this at the beginning of this episode. Yet a young family, there's a personal guarantee. It didn't work. And you said that this taught you more about business than any business school could. So what did you learn from this experience? Well, first thing I learned was pick the right market. We opened a restaurant in Frisco, Texas. I was a little over in 30. Anyway, we knew the market was growing and I don't know if you know anything about Frisco, Texas, but Frisco is just outside of Dallas. Just incredibly prosperous market. And we knew it was coming. What we saw was probably 20% of what Frisco has become, but we were way early. And so we did really good Thursday, Friday, Saturday night business. The rest of the week was just really soft. We couldn't do hardly anything for lunch and we failed. We just couldn't generate the revenue. Our best month was $65,000 in revenue. And you just can't make money at that level. And it was my first startup. So learned a lot. The biggest thing that I learned is how to watch every freaking nickel. I used to be a sales guy selling franchises. I was knocking on doors and selling franchises. And I learned everybody coming through that door was just trying to separate me from my money, you know, and you have to be very, very careful as you know as a business owner to be very prudent with every nickel and look for every, every investment in a service or a vendor with an ROI at the other end of it. You know, how is this going to produce either higher gross and or a better NOI result? And are both. Well, I think that's, that's a good point. And given everything that this experience cost you, I guess I want to know what made you want to put food back at the center of a hotel concept. Yeah. Well, I think first of all, because I, I love food and beverage. It's something that I've just blessed with. It's hospitality is in my jeans and in my spirit. And I also know that if it's done right, it can do well. You have to be very disciplined and not try to be everything to everyone. Chick-fil-A is a really good example. They started off doing a chicken sandwich extremely well in and out burger. Another one. They do really good burgers, but they're very consistent. Small menu and consistency. They develop a process and they execute on that process all the time, much like a hotel franchise. And so we're going to do things that we can do at scale, but do a few things very, very, very well. Biscuits, cinnamon rolls, easy product, and then have some other bakery items that will be more specialty items that we can also sell. So there's no doubt that you'll offer a superior product. But what I want to know is how do you judge whether or not a market can actually support a restaurant? Like whether or not you're being too optimistic, what are the things that you look for to justify that particular location? Well, good question. And that's where the third party kind of delivery platform is. So every hotel has a director of sales that's out knocking on doors and talking to all the companies that surround the hotel and looking for local negotiated rates that we can book 10, 20, 30, 40, you know, 50 room nights with through that company or more, obviously, we're also going to be selling that same customer a different product through delivered catered breakfast and lunch when they ate it. And so we're layering on a different product to sell to that customer, but we have to have that. We also have to have other hotels in the cluster. We want to be the delivered room service to the Hampton Inn right next door to us. Deliver that lunch, deliver that dinner. If that Hampton as a meeting room, we're going to deliver lunch into that meeting room. If that courtyard, same way, all these hotels that surround us, that's really our cluster. And so we're going to be looking at each location very carefully to make sure that there's lots of demand generators around the hotel. Sometimes it's the interstate. That's part of the traffic as an demand generator, but we want to really focus on businesses that we can see and identify and walk in and meet with them and generate revenue in different streams. Is there a ratio of F&B investment to key count that you use as sort of a gut check? Well, I would say there's a key count first of all of a minimum threshold of 80 rooms. We want to be north of 80 rooms, ideally 100 rooms and above. Okay. And we think 100 to 120 is probably the scope. And to back up a little bit, the reason for this concept is today if you build a hotel, as we're talking about costs, building a brand new Hampton or brand new courtyard anywhere from 160 to 200,000 dollars a room to build. I'm going to buy these things at 60 to 70,000 dollars basis and then put another 40 in them. So we're at 100 to 110. So well below replacement cost and I'll include the kitchens. And you know, we're not trying to put in a kitchen that's like a chiles or you know, some large full-service kitchen. When you walk into a Jersey mics or Jimmy John's, that's the kind of kitchen we're going to develop small, compact and really efficient. So we don't have that massive kitchen exposure from a collective. So quick math. Let's say you buy this at I don't know 60K per key. And for simple math 100K, or I'm sorry, 100 room hotel, it's six million. And you want to put in another four, maybe five million. So your basis is 11 and you want to be profitable on the exit. Who's buying a 15 million dollar Hampton and equivalent are people doing that? Yeah, all day long. I mean, that 10 to 20 million dollar transaction is really the sweet spot. Those are bread and butter transactions for this industry. And we bought something at a basis. And we're going to exit at a cap rate because we're going to have additional N.O.I. from that food and beverage component and higher ADR and RevFar because of the experience. I want to talk about how investors can get on a broker's radar so that they can get wind of good deals. So when you have an off market hotel deal and you're deciding who to call first, what does that investor look like? Like what gets someone onto your short list? Really good question. I would say it's always somebody I've either transacted with or built a relationship with. And I want to find somebody that I can trust in a transaction. If I bring them something that is a steady eight cap like PIP, it's got all the metrics of a good deal that they'll execute on it and execute on it quickly and execute on it painlessly. That doesn't mean you're going to do an inspection and find out, hey, the hot water heater is just failed or is about to fail or is 18 years old and it's going to fail and we need to have a conversation about it. But going into a deal and routinely retraining will take you off my short list in heartbeat. You know, you're buying a used car. It's going to need new tires and we always disclose if a renovations needed. Everybody knows there's trip cycles out there. But it's really somebody that's capable of closing. That's capable of of executing on a transaction. That's everything and that's that's really something that we look for in every transaction period. When I go to market for Michael Russell selling his hotel, he hires me because I'm going to underwrite his hotel. We're going to agree on a price. But then I'm going to go wide and identify the most capable buyers at the best price. And we filter through buyers as we go through a process. We ask the right questions. How many hotels you bought? What hotels you bought? What Brands your own what kind of equity do you have how do you leverage what kind of banking relationships do you have and so we want to Make sure that we can execute. I've got a client right now with a hotel in Texas that called me and said I don't want to go to market, but I want to sell the hotel Here's the price we negotiate a little bit to get real and I called one guy and we're under L.O.I Right now so when we go I don't do many off-market deals, but when we do we want to find the right buyer quickly For someone who is never bought a hotel, but they want to what's the fastest way to get a broker like you to take them seriously? Good question and I deal with with first-time hotel buyers all the time and sometimes it takes looking at a couple of transactions before we find the right transaction and I encourage that honestly because I love helping people get into this business You know, I don't want to say it's an easy business, but it can be very fruitful and it's as stable as Most volatile businesses kind of a crazy way to say it, but what COVID happens? It's rare 9/11 happens. It's rare 2008 happens. It's gonna happen, but that impacts everybody Not just the hotel business, but if somebody wants to invest in the hotel I am very willing and able to help hold their hand Investigate a few transactions until we find the right one. You're linked in Biles says that you're currently spending a great deal of time Identifying hotels that are right for conversion into a work first housing and Multi-family assets. So what's driving that? I would say it's clients that are driving it I don't go out and search for it, but I have clients to call me and just say look I've got this deal. It's either lost its flag or a demand generator's left Or there's been a lot of supply that has opened up and the value is just not there for a hotel anymore And so we start to explore well, what does the multi-family look like around there? What are the code requirements in the market? And would it be a good conversion? I'm working on one right now up in Estus Park, Colorado exact same scenario and That one will likely be converted to workforce housing mostly because the demand is just so strong and there's just more value in it for the hotel owner Well, what types of hotels make the best conversion candidates in terms of age or size or location? I mean, how do you identify these these hotels? Well, I would say the easy answer is extended stay hotels Those are the perfect solution because they've already got a kitchen in them outside of that It's going to be something with a good room count because you're likely to lose some unit count either combining two rooms to make like a one bedroom or Kind of taking three rooms to two with an L shape and just have higher density or higher square feet in each room And then really it's not this is necessarily about the hotel more about the market You know is there a studio rent of a thousand dollars or more in the market and and that's the first thing that triggers Investigating whether or not a deal will work Then it's looking at the zoning is the zoning possible is the city welcomed the idea or they Ademily opposed to it and so that is the next threshold and then looking at the bathroom walls is the bathroom wall facing an outside wall in the Guest room could you bolt a kitchen on the outside of that wall? Can you bring in additional power to the guest room? Those are all things that start to get factored in and they're complicated deals and the biggest challenges Code enforcement when you do a change of use does that trigger new code requirements that are going to be Forhibitive or is the city realistic right walk me through the upside like walk me through the conversion math if I buy a distressed 60 room economy motel at a reduced basis and I convert this into multifamily or workforce housing What does that deal look like theoretically on paper? Well the biggest benefit is you lose all that payroll of a hotel So you're operating costs just fall to the floor and then the other biggest piece of value is Lenders love and investors also love the steadiness of having a six to 12 month lease cycle in your tenants and then Following the cap rate you could take what was a 10 cap hotel deal and move it to a six or seven cap multifamily deal or even better depending on the market and so the room costs conversion costs can be anywhere from on the very low side 20 grand room to the high side at 40 and even 50 grand room is depending on what structurally has to be done all the MEP they asked to be converted or Enhanced mostly plumbing, but if you put a kitchen in you get another 20 amp circuit for sure coming into the room Just to handle the the powered Demand yeah, is there a building profile where it just doesn't make sense where you tell investor to walk away regardless of the price I would say 100 under 100 rooms. Well, it's just not worth the time Does make sense. Yeah, and that really from a hotel perspective too I mean if you buy a 60 room hotel you're you're buying a job You're never going to make any real money unless you're in there working behind the front desk by at least 80 rooms and buy in a market where there's good rate Yeah, my last question might be a little bit redundant, but I want to know if you had one last piece of advice If you were ever going to give a hotel investor any any words of wisdom what's the one thing you'd make sure that you said to them Two things buy right don't over leverage. I mean it's it sounded virus. Yeah, those the two scenarios that Always get people in his rubble, you know overpaid. I think so Yeah, particularly for hotel investments I think that the leverage part is tricky because with SBA business financing It makes it a heck of a lot easier to to get high leverage deals To get to go through and so the upside is you have beginner investors buying smaller deals in which they're able to scale up into Larger assets that maybe previous to this they don't have experience doing any deals with and it's just a perfect recipe for Potential failure because they over leverage but put down 10 or 15% instead of 40 or 50% and then when interest rates rise because that's Seven a financing is floating then they get wiped out And I've seen that time and time again. Yeah. Yeah, and if if you're a first time hotel buyer and you've only got I don't know three hundred thousand dollars in cash that might be your only pass But if you're gonna be in the hotel behind the front desk and you're gonna be talking to guests And you're gonna be working with your employees to make sure that everything is run efficiently That's where a lot of immigrants have made money because a high leverage of seven a does allow them to Buy something for the first time. Yeah. Yep. Well, Chris has been great How can my listeners stay in touch with you or follow what you're building? Maybe they want to reach out to you if they've got a deal. How can they connect with you? Great. Well, Avis and young.com First of all is where all of our listings are Find my contact information there and it's a VISO in Young young.com and then LinkedIn I'm unlinked in can easily find me there's not many kill cullins out there, especially in the hotel business And you know, I've got a wide range of opportunities everything from a 240 acre master plan development in north podger Island. It's all new construction with short-term rental and residential to a massive hotel resort to all kinds of other asset classes I've got stuff in Estus Park, Colorado big 64 acre development. It's also really really fun And then just sold a holiday and express last week for eight million dollars So wide range of of offerings and we do bank deals for closures that those are the real kind of value add deals And then that basic steady eddy easy transaction million dollar in a line with light pip ahead of it But easily predictable kind of transaction that we talked about earlier for that person just wants to place some capital into a deal Are do you have a geographic area in which you you specialize in? Everything kind of west of the United of the Mississippi on the western half the United States except for California I just don't understand evaluation is there so I just don't try to spend a lot of time there But everywhere else in the country and I've done stuff as far as Georgia and North Carolina But predominantly it's that kind of western half the United States a lot of stuff in Texas We talked about working on a deal and maintaining them right now. So all over the place All right sweet well you heard it listeners if you're looking to buy sell or develop a hotel west of the Mississippi and not in California Chris Kylkullen is your man Chris. I really appreciate you being on show This has been so interesting and you've shed a lot of a lot of light on some really important topics So thanks for being on the show today and for our listeners look if you learned something today And this was helpful to you share this episode with someone who can benefit from listening to it and leave us a review Wherever you're listening it's the best way to help other investors and to help this show and we will catch you again next week I am Michael Russell. He is Chris Kylkullen and we are signing off of another episode of the hotel investor playbook We'll catch you again next week. Uh, loha [MUSIC]