Why Hotel/Stay Alfred Concepts

Curious if anyone has used Why Hotel/Stay Alfred in their MF developments? How did you handle security and issues with turnover costs, etc. Seems a lot of new products are including these concepts into their developments to increase absorpotion/cash flow. If anyone has any experience would be interested knowing how these concepts worked. Thanks.

 
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Working on one now...and considered one in the past. I could write an entire white paper on this topic. It seems like a simple concept put there's a LOT of issues to consider.

Yes...it can help with your absorption rate and cash flow. However...while it might seem like an amazing thing at first...it can create significant issues with your financing (for a new development) if you lease too high of a percentage of units to one of those companies.

Then you can start to get into legal issues depending on the city in which the property is located. A given jurisdiction might consider those leased units to be hospitality units. Now you might have a zoning compliance issue (is hospitality a permitted use under the zoning?). And then you might have issues with your debt arrangement as you building is now longer considered strictly residential...but mixed-use. You also have to consider sub-leasing provisions in the debt covenants along with how any liens on their FF&E might be impacted.

If the leased units are considered hospitality use...then there's likely state or local permitting and/or licensing requirements...as well as a requirement to collect bed taxes...etc. And if the company leasing the units fails to comply with those requirements...you could find yourself with legal challenges...and perhaps end up with code violations and liens placed against your asset as the property owner.

To get back to some of your original questions...the lease terms tend to be either 3 years...5 years...or 7 years. They want to include rent abatement so that they don't start making payments until they place each individual unit into service...which might be 3 to 4 months after you deliver the units to them...and then some abatement provisions for the end of the lease term. Therefore...while you might execute a 3 year lease...they will do everything they can to not actually make 36 lease payments.

For security...we're trying to incorporate an insurance/bond type product into the monthly payments. The coverage would be provided by a third party company and protect us for damages along with missed revenue in the event of a default. This is in addition to a letter of credit.

I'm not too sure what you mean regarding turnover. The leasing company is in charge of providing their own maintenance (apart from some major items like mechanical and fire)... improvements...and housekeeping services.

Regarding to the above...you need to figure out how to provide building and amenity access...not just for their tenants but for their vendors as well.

Some other issues to consider include parking access (oddly they don't want any parking)...utility connections/billing (they want their own dedicated internet service)...whether to include CAM...pet restrictions...caps on the length of stays...indemnification...eviction considerations...etc.

Overall...you need to take several steps to protect yourself. For example...use a highly specialized attorney...and request a formal determination letter from both the city attorney and head of planning/development about potential zoning and regulatory compliance. You should also limit the amount of units you lease to a certain percentage of the overall units...something like 20%.

We're trying to make it so they lease units that are less desirable. In other words...units in which we cannot obtain rent premiums (like top floors...balconies...preferred views...etc.). For example...leasing them a wing on the second floor.

Just as an FYI...my understanding is their business model is to obtain 2x their costs in terms of revenue and hit 80% occupancy. So...with that in mind...consider that they will want to pay sub-market rents. You have to balance the upside from locking in long-term leases versus a hit to your overall potential revenues.

 

Right now were around 45% occupied with the intent to have one of these concepts lease roughly 15-20% on a 3 year term. Above market rents, building will yield positive cf year 1. Municipality won't consider building as hospitality. But as you stated are biggest concerns are security, taxes, turn over costs. Building is funded with 100% equity so financing isn't an issue. Thanks for the input, a lot to consider here.

 

It seems like a good option for you given what you've shared.

One other issue to contemplate...if your asset is managed by a third party...you may want to consider if/how their management fee might be impacted by the bulk leases. In our instance...we are underwriting with one less leasing employee than normal...and have an adjusted formula for determining the overall gross rental income on which the management fee is determined.

 

We're still in the pre-development phase...but the management agreement will call for discounting the EGI from the bulk leases when determining the overall management fee.

The thought is that the revenue from the bulk leases will be automatically drafted on a monthly basis to our bank account. So the management company doesn't have to chase down the rents...provide late notices...deposit the checks...etc. In addition...they won't have to perform annual lease renewals for those units...and don't have responsibility for arranging for maintenance for those units.

Really...there's not much for the management company to do with respect to those units. They didn't origination those leases and have very little to do with servicing them on an ongoing basis.

 

I am not as familiar with Why Hotels and I can't speak a ton on an owner's decision making process here but I can offer some general insight on Stay Alfred. I had several friends who worked there in their early days and a few who are still there. In the early days, it was hectic and chaotic. We're talking the check-in process was a rotary contractor box often chained to a gate somewhere on the property. You can imagine how something this simple created consistent, aggravating problems for existing residents. They had tons of issues with residents complaining about turnover. Since then, they have really ironed out and streamlined the process. It is really easy to check-in, well-managed, and they keep a close eye and respond swiftly when there are issues. You are required to send a picture of yourself and a copy of your photo id before you can reserve a room. I'm not sure how in depth it is but I do think they run some sort of background check before accepting reservations. I had an issue once where my key fob wouldn't work at like 1:00am. I called and instantly had a rep on who was excellent on the phone and had me in within ten minutes. They are now a very well-run company and can add a lot to a property if it fits their model. The CEO is a great guy, former military, built it from the ground up with his wife.

 

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