Real estate crowdfunding is spreading to the U.S. hotel industry, offering individual investors perks such as room upgrades along with an interest in the property.
The owner of Southern California’s Hard Rock Hotel Palm Springs is selling stakes in the 163-room luxury resort, with investors receiving such benefits as improved bookings, room-rate discounts and free use of a poolside cabana set aside for hotel owners. The offering, which started yesterday, is the first of its kind for an existing hotel, according to online marketplace Realty Mogul and Kittridge Hotels & Resorts LLC, the property’s majority owner.
Crowdfunding, in which large amounts of money are raised through small contributions, has been on the rise in commercial real estate and probably will gain popularity among hotels as investors seek to put money into “an existing asset they understand and can use,” said Steve Cinelli, chief executive officer of online marketplace Primarq Inc.
“With crowdfunding in the lodging space, what you’re looking to do is not just provide a stake in a hotel but also perks,” Cinelli said in a telephone interview. “Besides raising capital, you’re building an audience. That’s why lodging makes so much sense for crowdfunding.”
Primarq, which brings together property owners and investors, is planning to use the strategy to raise money for two hotels in the San Francisco Bay area, where the company is based, Cinelli said.
Kittridge is seeking to raise as much as $1.5 million within four weeks to build a new nightclub at the Hard Rock and recoup some of its original investment, said Andy Carpiac, president of the Calabasas, California-based company.
The Palm Springs property, purchased in September 2012 for an undisclosed price, was closed for renovations last July and reopened under the Hard Rock brand in October. Kittridge spent $8 million on the conversion and upgrades, according to Carpiac.
“We expect a fairly large amount of investor interest because we have many fans of the hotel and the brand,” Carpiac said in a telephone interview. “They come here and stay with us, they spend money here, they bring their friends and family and act like real owners, which they should. It benefits them and it benefits us.”
The minimum investment is $10,000, Carpiac said.
Crowdfunding gained traction after the Jumpstart Our Business Startups Act went into effect in April 2012. The law has eased restrictions on investments in closely held companies, including those set up to own commercial property, by people making less than $200,000 a year and with a net worth of less than $1 million. Before passage of the JOBS Act, such firms could market and sell shares to individuals who exceed those levels, known as accredited investors.
All types of crowdfunding jumped 81 percent to $2.7 billion in 2012 and was expected to soar to $5.1 billion last year, according to a 2013 report by research firm Massolution.
Realty Mogul, based in Beverly Hills, California, raised $14.9 million for 58 properties from September through last month, according to its website. Retail and residential made up the biggest share of transactions, at a combined 59 percent, while hospitality was the last of six property types at 5 percent.
The Hard Rock Hotel offering may appeal to investors because of rising lodging demand in the area. Palm Springs occupancy was 68 percent and nightly room rates averaged $145.49 in the first two months of 2014, the highest levels for the period in at least five years, according to Hendersonville, Tennessee-based research firm STR Inc.
Hard Rock Hotel Palm Springs probably will outperform other hotels in the area with an expected average occupancy of about 70 percent this year, Carpiac said. The hotel had an average nightly rate of $198 in March. Carpiac wouldn’t say what he expects the average rate to be for all of 2014.
The hotel’s public areas feature music-oriented displays such as an archway made of speakers, framed rock memorabilia and pop art-inspired paintings and murals. Its rooms, lobby and hallways are decorated in dark purple, orange, pink and gold, and rooms have beds with leather headboards and furniture in the mid-century-modern style.
As of this morning, the Hard Rock had attracted about $280,000 from individual investors through RealtyMogul.com, according to Jilliene Helman, the company’s CEO and co-founder.
“Anything that has a very understandable consumer orientation really lends itself well to crowd financing,” said Cinelli of Primarq. “You’re not selling a technology that has algorithms you have to be a rocket scientist to understand.”
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