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Can Short-Term Rentals Finance Development?

Short-Term Rentals Finance
July 2019

Could short-term operators change the underwriting on development and acquisition?

Could the jolt of early revenue that distributed hotel providers offer change the underwriting of land deals? One development executive says it’s possible.

“If it’s feasible in scale, you can start to underwrite [the distributed hotel income] and change the amount you’re willing to spend on buying land,” says Charlie Kuntz, Managing Director and Innovation Officer for Houston-based developer Hines. “That’s feasible, but we’re far from that point right now.”

Jason Fudin, CEO and Co-Founder of WhyHotel, goes a step further, contending that developers who underwrite the pop-up hotel income will have an advantage when competing for land.

“Pop-up, serviced apartments will become part of development cycles forever,” Fudin says. 

“Any high-rise building will have this. In the future, if someone doesn’t underwrite this in, they’ll lose out on deals. So, it will become part of buying and tying [the land] up.”

AMLI has The Guild operating 40 of its apartments at a project in Denver and is exploring a deal with WhyHotel for a 150-unit pop-up hotel in Miami. It sees short-term rentals as a way to produce NOI to offset hard costs in its new construction.

“As construction costs continue to rise and rents plateau, getting a development deal to pencil is becoming increasingly difficult,” says Ken Veltri, Senior Vice President of AMLI Residential. “Taking advantage of the sharing economy, creating additional revenue during lease-up utilizing companies like WhyHotel or The Guild can help meet underwriting.”

Ultimately, Andrew Kitchell, CEO and Co-Founder of Lyric, envisions his firm as an anchor tenant.

“We’d come in during pre-development and take a long-term lease in communities we think will perform well,” he says. “We diversify a building’s revenue stream. There will be opportunities when the real estate market takes a dip.”

Mason Harrison, Director of Communications at Sonder, says his company can be a partner throughout the development process. “There are a lot of blighted areas—old commercial areas—that are underutilized in many cities,” Harrison says. “Here, we can work with developers to renovate those properties and turn them into a mixed or transient use on the first floor.”

Sonder will also take over leasing in a redevelopment. “We can help fund building improvements through being a Triple A occupant [a reliable master lease tenant that pays its rent on time and has never defaulted],” he says.