EquityRoots is a niche platform offering equity and debt investments in hotel projects. Minimums are high ($15K+) and there's not much open inventory of opportunities, but it's well worth a look for investors interested specifically in hotels.
- Unique niche
- Can browse details about current and past investments without registering
- No direct investors fees
- Site implies they will have Reg A+ offerings open to non-accredited investors
- High minimums ($15K+)
- Low selection (1 open offering at the time of this writing)
- Limited track record (only 2 projects shown as funded)
- Complex collection of deal documents to review
Within the broader investment crowdfunding categories (like real estate, angel investing, and online lending), niche players are emerging with an even narrower focus in order to carve out a corner of the market. For example, some real estate platforms only operate within a particular geography, and some platforms for funding startups only offer investments within a particular industry. EquityRoots joins Reg D platform Hotel Innvestor in targeting hotel investments.
Started in 2014, they list 2 projects funded, with 1 open investment.
Types of investments EquityRoots offers
EquityRoots offers both debt and equity investments in hotel properties, though as of this writing no debt investments are available (and the lone equity investment has a relatively long projected hold time of 10 years). While specifics vary by investment, it appears a common scenario is that an experienced hotel operator is looking to finance new construction with a combination of bank loans and crowdfunding via EquityRoots.
EquityRoots' hotel property offerings are more complex than many of the other commercial real estate crowdfunding portals, in part because the revenue streams are more varied (room charges, catering, food & beverage, etc.), and arguably could be more volatile as compared with annual apartment leases or longer-term commercial leases. Investors with some knowledge of the hospitality industry and/or the health and trajectory of the local economy around an investment may have a leg up in evaluating EquityRoots' offerings.
What do you get when investing with EquityRoots?
When you invest through EquityRoots, as with many crowdfunding investment platforms, what you actually receive is a membership interest in an LLC created specifically for the investment. The LLC in turn is what actually holds the equity or debt interest in the property. For each investment you make with EquityRoots, you'll receive a separate K1 at tax time to report your share of the income (if any) received by the LLC.
EquityRoots fee structure
EquityRoots does not charge fees directly to investors. They do charge issuers various fees (typically $100K-$255K) to the issuers. Prospective investors should also be sure to read the offering documents in detail to make sure they understand how the issuer is compensated -- for example, in one offering the LLC created for the investment pays the issuer a "development fee" of 1% of the total development costs, a 3.5% property management fee (paid monthly), along with "loan acquisition" and "loan guaranty" fees (each 1% of the loan amount taken out to help finance the project). Pro-forma financials appear to show returns net of all those fees.
Potential returns and cashflow
Although their FAQ references debt investments, the only current and past offerings shown on the EquityRoots site are equity investments, with relatively long hold times (5-10 years). Most show a projected IRR of 20-26%, including a mix of annual distributions and a share of the proceeds upon sale or refinance of the property. Investors should be sure to review the offering documents in detail to be sure they understand how long it will be until the project is completed if it's new construction, as any distributions are dependent on the hotel actually receiving revenue.
Investors should also review the membership agreement for the investment LLC to be sure they understand whether and under what circumstances the LLC may buy out investors before any refinancing event or sale of the property.
Breadth of offerings on EquityRoots
As of this writing, there is only one open investment on EquityRoots, with another shown as "coming soon". Their first two projects were both hotels in Schaumburg, Illinois (where EquityRoots is based), and the current and coming soon projects are in San Antonio, Texas and Lexington, Kentucky respectively.
Regulatory framework and due diligence expectations
EquityRoots does not list any affiliation with a broker-dealer. Projects to date have been offered under SEC Reg D, and so are limited to accredited investors, though their website suggests they intend to also offer some projects under Reg A+, which would be open to all investors.
As for underwriting and due diligence, it would be helpful to see more detail beyond the following relatively vague description:
One of my favorite parts about tracking the evolving investment crowdfunding ecosystem is seeing the diversity of niche platforms covering specialized geographies or investment types, and given the size of the hospitality industry, it's perhaps surprising there aren't more like EquityRoots out there. Macro-trends around on-demand lodging (ie, AirBnB) and the dependence on hyperlocal trends in tourism and/or business travel add some complexity to these investments, but investors with an understanding and aptitude for analyzing hospitality deals may well find some interesting opportunities here.