Valuing a cash offer against a minority partnership stake for an interchange parcel

Rough frame on what they're implying. If the project costs $19M and you're contributing land they'd otherwise pay $1.35M for, and they're giving you $600k of that in cash, then $750k of land value is your contribution. $750k on a $19M project is about 4% of total cost. Equity in these is usually a chunk of that, say $5.5M to $6.5M. Your $750k against $6M of equity is around 12.5%.

So the 12% is roughly your land value expressed as an equity share, not a premium for taking the risk. That's the first thing I'd push on.

"Non-diluting for the first round" usually means your 12% stays 12% through the initial equity raise. It says nothing about later rounds. If construction goes over and they raise more, that is a later round, and you either write a check or your 12% shrinks. Ask them to say in writing what happens to your percentage if the project needs another $2M.

A two week deadline on an offer like this is a negotiating tactic. Ask for the partnership agreement and the pro forma and see whether the two weeks survives contact.

The piece to see before valuing the 12% is who the operator is going to be and what they are getting paid. A dual brand build is two brands under one roof sharing back of house. It is efficient on paper and it is a lot of moving parts in practice, and the management fee comes off the top before any distribution reaches a 12% partner. If they have not named a management company yet, the deal is not as far along as the two week deadline suggests.

I'd disagree with the general instinct in this thread to take the cash. You bought interchange land nine years ago because you thought hospitality would land there. It landed. The equity slice is the only version where you get paid for being right about the location rather than just getting paid for the dirt.

Even so, @mikeoconnell7's dilution point is the whole thing. If they can wash you out with a capital call you can't fund, the 12% is decoration.

$19M over 110 keys is about $173k a key all in including your land. From the trades side that's tight but not fantasy for select service, depends heavily on where you are and what the site work looks like. 6.1 acres at an interchange might have detention, utility runs and a deceleration lane in it. Ask whether their $19M includes offsite work, because that's where I've seen budgets go sideways and you'd be eating 12% of the overrun.

The point @nicole_adeyemi made and then talked past is the one that matters most here. He is a land person. Hotels reprice every single night and live or die on how a management company performs when nobody is watching. Taking a minority stake in an operating business you have no ability to influence, in the most cycle sensitive property type there is, is a different life than owning dirt. Take the $1.35M and go buy two more parcels you actually understand.

On the number, @mitchell_ray4 is right, and the schedule deserves the same scrutiny. Eighteen months of construction is a real 18 months only if they have permits and a GMP contract. If they are quoting 18 months off a concept plan, add six. Every month of delay is interest carry on the construction loan and it comes out of the equity before anybody's preferred return, including the pile your 12 percent sits behind.

Documents to ask for, in this order. The partnership agreement. Specifically the capital call section, the dilution mechanics if you do not fund, the waterfall, and whether you have any consent rights on a sale or a refinance. The preferred return terms. You said you are behind their pref. Find out the rate, and whether it compounds and is cumulative. A cumulative compounding pref on $6M of equity accruing through a two year construction period plus a three year ramp is a large number that eats first. The promote. After the pref is paid, the sponsor typically takes an outsized share of what is left. Your 12% is 12% of what is left after two haircuts. Contributing land into a partnership rather than selling it has tax consequences that differ a lot by how it is structured and by state, and that is a conversation for your CPA before you sign anything.

One thing worth pinning down before valuing the piece. A preferred return means the cash investors earn a return on their money before the landowner sees anything at all, even though the land was there first. That is backwards for the person who supplied the site unless the contributed land is credited as capital that earns the same pref, so the partnership agreement needs to say which it is.

@raj_mehta14, yes, that's how it usually works, and it isn't backwards. The land gets converted to equity at closing, so it's treated the same as cash equity of the same size. Whether the land sits at the same level as their cash or behind it is exactly the question to ask. Parcel, the underwriting question worth answering before any of the document work is yield on cost versus exit cap. At $19M all in, what's their stabilized NOI assumption? If they're saying $1.9M, that's a 10% yield on cost, and if hotels of that type trade at an 8.5% cap, there's $3.4M of created value before fees. If their stabilized NOI is $1.55M, that's 8.2% on cost and there is no spread, and the deal only works if cap rates move in their favor. Ask for the stabilized NOI and the exit cap in the same sentence. Their answer tells you whether the 12% is worth reading documents about. Also ask what occupancy and rate they need in year three, and then go count the hotels already at that interchange.

Nine years of holding a parcel says something about how you like to own things. The equity slice hands you six years of somebody else's construction schedule and then a hotel's occupancy report. @dpatel_re's spread question is the right filter, and if the answer is thin you are unlikely to enjoy the ride even if the money works out.