4D — November 9 - 22, 2018 — Lender’s Directory — Financial Digest — Mid Atlantic Real Estate Journal
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L ender ’ s D irectory By Brenner Green, Real Property Capital, Inc. Financing pitfalls in the age of disruptive technology
“D isruptive Tech- nology” is a vague term. Generally
form of WeWork and Air BnB. However, “disruption” goes way beyond these near-household names and the fervor around this concept and the prospect of making wild profits off of it has caused enormous capital flow to countless startups in all facets of the industry. I would guess most of you have not heard of Sonder, which is a line of hotels with nine US locations that is run by a mid-20’s millennial who has attracted $135 million of startup capital. The concept is that Sonder leases full floors or even entire buildings of
conventional floor plate apart- ments (with input from Sonder during development) fills them with fine furniture and rents them out as hotel rooms, except without any of the typical ame- nities you would find in a hotel such as room service, a front desk, a workout room or a gift shop. The pitch is that it pro- vides an experience of “authen- ticity,” another widely-used millennial-centric buzzword. Most people when traveling to a strange city on business spend very little time in their room and would rather stay in an attended building, but clearly
many believe this disruption in hospitality is the future. The appeal to the landlord is that Sonder pays slightly lower rent than would be received by leasing out the building as apartments, but they also carry all of the operating expenses thereby providing a higher net income to the landlord. A friend of mine who is a competitor at a large national brokerage recently did a deal with a life insurance company where two out of the five floors were leased to Sonder. I was a little surprised, but that’s not enough evidence to prove that these
structures are financeable. At least in the Sonder example the building is leased at a rent lower thanmarket, which helps somewhat. We recently did a construc- tion loan in New York for a sev- en-story full-floor extended stay hotel. All units are to be 3-bed 3-bath. What really blew my mind about this one was that our client, who was a foreign national who had never before developed anything in the US, had leased the entire building to an operator, which shock- ingly was also a startup run by three young twenty-somethings who had ZERO existing loca- tions in operation. And they were paying the client about 1.25 times the market rent that the units would garner as con- ventional apartments. Nobody seemed to mind these minor details and we had multiple lenders all too happy to make the loan. In addition to hospitality, the concept of co-living is also pervasive in conversation about disruption in real estate. Per- sonally, it’s hard for me to write about co-living without becoming cynical and sound- ing like a cranky old Gen Xer, but there sure does seem to be a lot of interest in it. When we Gen X’ers, like the generations before us, finished college, we went to live either on our own or with a roommate. The idea that people will pay extra to live in dorm-style quarters evokes the image of a bunch of early 20-somethings sitting around in a common area after work, their faces glued to their pre- cious screens, mistaking the strangers looking face down at their iPhones across the shared living room as the experience of genuine human interaction. It’s a dark commentary on our society to think that that’s what’s in. We have a construction deal in our pipeline now where a for- eign company with two other US locations wants our client to spe- cially design unit floor plans to accommodate co-living and then sign a master lease for the build- ing at 1.2 times market rent. I asked my client to consider what would happen if this company went bankrupt and it took her six months to evict the foreign company and then she was stuck trying to lease units with a funky floor plan as conventional apart- ments. I also asked her how she was going to pay the mortgage continued on page 5D
anything like Ub e r t h a t threatens to change one or more indus- tries or even wipe out an i n d u s t r y , falls under this classifi-
Brenner Green
cation. The disruption has spilled over into commercial real estate in a big way, with some of the better known (and maybe better ideas) in the
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