Thread by @somehotelguy

Going to walk you all through my back-of-napkin on a currently listed property, thanks to our friend @moseskagan!

The Property: A 27-room motor lodge in LA’s Thai Town listed for sale for a whopping $11.28MM ($418K per key). The Harvard House Hotel at 5251 Hollywood Blvd.

My Process: (a) look at the site on our friend Google (Maps, StreetView, Earth); (b) look at pictures of the property (LoopNet, the publicly-available OM, the website, Google, etc.); (c) SWAG a renovation budget; (d) add renovation budget to purchase price to get all-in basis;…

…(e) determine a targeted stabilized yield; (f) extrapolate a required revenue; (g) see if that’s achievable.
Let’s dive in.

First the site: good visibility corner, pretty residential neighborhood, proximate to a medical center. I don’t know much about Thai Town but seems nice

Next the property: Woof. Old everything. Visible thru-the-window AC units. Visible wall patching that makes me think of leaks. Looks like a gut. Site work and façade work also going to be needed.

Now reno budget: Given the basis in the building, you’ve gotta go nice.

My SWAG: minimum $75K per key to renovate ($2.0MM; breakdown = $975K in the guestrooms for a total redo, $500K for new HVAC, $50K in the lobby, $75K in site work, $75K on the façade, $200K on doors & windows, and $175K in contingency, all assuming you don’t open the walls and…

…find a disaster). I’m sure @antonia_mdprjct will tell me some of these #s are way off, but i'd bet I'm wrong in the wrong direction (e.g., I’m light).

Our new basis: $11.28MM + $2.0MM = $13.28MM, or $492K per key. Yikes!

But we’ve got a really nice new hotel, and these rundown motel -> high design hotel conversions are AWESOME. Love ‘em.

Targeted yield: Now it gets hard. Unencumbered, fully renovated asset in LA should go for no higher than a 6% Cap (prob less, but hard to underwrite less)

I need a spread for risk abatement and “entrepreneurial incentive” (yep, it’s a technical term). Generally on new dev, I like to target a 300 bps spread, but this is adaptive reuse and urban, so let’s say 250 bps. I need an 8.5% yield on cost at stabilization.

Extrapolate revenue: 8.5% yield on $13.28MM basis is $1.128MM in NOI. Small hotels are inefficient, but high ADR hotels are efficient, so let’s split the baby and assume we can hit a 30% NOI margin.

Means we need $3.76MM in annual revenue, or $382 in Total Revenue Per Available Room (Total RevPAR). Maybe you can get some of that from parking – let’s say $20 per occupied room from parking, assuming $50 per night and 40% capture; an AGGRESSIVE assumption.

Assuming a high occupancy – let’s say 85% Occ – that leaves you needing to get an Average Daily Rate of $429 on an annualized basis.

Is that achievable? $400+ ADRs are absolutely achievable in LA.

However, its typically in high-demand areas and in hotels with strong ancillary offerings (great restaurants / bars, spas, meeting space, etc.). Could you achieve this here? Maybe, but it’s an awfully high risk.

The decision?

Pass. It’s priced like a development site, and that’s likely the best outcome for it. This exact same deal in Beverly Hills, WeHo, or even DTLA (well, maybe)? My DMs are open, and I pay good commissions...