The hotel corp (owned by my family member) would owe my family member's corp money, not my family member. The promissory note says that my interests would be protected in the event that happened and I spoke with him already when we were discussing the deal to find out what would happen if the hotel were operating at a loss. It's not structured for him to just get all his money back first and leave me without anything. You really are talking as though you are an authority on this topic when even I as a newbie I can see a lot of misapplied logic and misunderstanding on your part. As others have said, from my standpoint, the decision of whether or not this is a good deal is 99% based on the trust I have in my family member.

Why are you quoting me and changing what I said? I already know if the hotel is foreclosed I wouldn't expect to show a profit, what I wrote was why wouldn't I get "anything at all". If you don't have anything helpful to say or a legitimate issue to discuss then there's no need for you to troll the thread.

The deals success chance would depend on how much my family member knows about what he's doing and how much I trust him to not be screwing me over. How are you in a position to know it's 95% knowing nothing about either one of those lol.

There's also a lot of other things I know about why he thinks this is a good investment that I just don't think would be a good idea to post. I'm going to be working with him full time soon for the learning experience as well. As far as this investment, the main factors I can make my decision on without being an expert in business are 1) How likely do I think it is that he knows what he's doing, and 2) How likely is it that he's presenting everything he knows to me honestly. That's it. Even though like I said I have other reasons that I do know from a business standpoint make sense that make this a profitable investment, those would still be the main factors as others have mentioned.

I don't think I'm going to continue responding to naysayers/trolls though who aren't offering anything productive only because it's not a good use of my time and not very helpful anyway. To everyone else who has helped in the thread and through PM thanks, gives me some things to research and do on my own prior to going to work with him full time.

Yeah, this is something I initially was wondering as well. I'm going to get around to finding out his exact reason for this. I do know that the hotel corporation he's starting is planning to build a lot of hotels not just this 1 so even though this hotel cost $3m if he has a lot of $3m hotels as part of the corporation that might be more of a reason for it to be worth his time. He also spreads a lot of his money out and does lots and lots of projects as far as I'm aware.

He told me that this is a great investment opportunity for me and if he were in my shoes he would take it with certainty in my situation. He feels very confident about the expected returns and the chances of me losing all of my investment being "amazingly low". Then from my point of view it just comes down to whether I trust that or not.

dude, what do you think is the origin of the money that your family member's corp loaned the hotel corp? if your family member just created this corp as a vehicle to loan the hotel corp money, it came from his personal accounts. for illustration, YOUR FAMILY MEMBER --> FAMILY MEMBER CORP --> HOTEL CORP. if this is the case, and this is what it sounds like since he's willing to give you equity in his corp at the same proportion as your equity in the hotel corp, then how do you know how it is set up? he could foreclose and end up walking away with pennies on the dollar. in that case, you might be interested to know how that cash is going to be distributed. unless he is so rich that he will gladly just right off this lose, which if he is involved in the deal in the first place, i very much doubt.

if not, and this is some larger enterprise, why if his net worth is over 100mil, is his corp worth so little that you can get a 5% interest of it and get all your money on your promissory note repaid and interest on that for 150k. if you know how the corp is structured, please elaborate.

if there's any misapplied logic and misunderstanding on my part, it is as much a result of the fact that you have so little understanding about this undertaking that you can't even communicate what you think you are doing clearly as anything else.

if you'll notice, everyone with any sense is telling you that this sounds off, but we're all trolls and naysayers, right? like i said, you clearly are set on doing this and go with god. yet, don't shoot the messenger here for giving you our opinions, WHICH YOU ASKED FOR. plus, after seeing the quality of that promissory note and the general vagueness of your description of the deal, i think our skepticism is warranted.

there's a great warren buffet quote you should look up about how investing is like being a batter in baseball only you don't have to swing at any pitches that aren't perfect and can only strike out if you start swinging at the bad ones.

I'd like to think I have some sense, and I do not think it is necessarily a bad idea. I just largely question whether or not a hotel in this environment is a sound enough investment. The concept of a rich uncle being nice and letting his nephew in on a sweet deal sounds totally plausible. That is not what I am questioning.


To be more clear, this hotel has 50 rooms I believe. Lets say 80% occupancy. Avg room rate $150. So total gross revenue of 2.2mill. And the payment on the note is 720k/year. That is an awful lot of profit on 2.2 million gross. Obviously total estimates on my part, but this is why I would need to see comparable P/L's before I think you should sign on.

socko stop trying to speak as though you represent everyone in this thread. u've come across as the most clueless one in the thread while getting a lot of details wrong and admitting you're just some law student, while having the strongest opinion. The people who are making comments that seem the most knowledgeable aren't making broad statements like "get out asap!" because that's piss poor reasoning and logic. they are asking questions to have op find out more info and giving advice on due diligence. you're just one of those "the sky is falling!11!" loon's trying to press the panic button with no idea of anything and I'd expect even bigger flaming if OP didn't do the deal based on some 2p2 nit like you telling him he shouldn't. the people in this thread who have doubts are asking questions while just saying they can't know for sure since the full details of the investment are only with the Uncle.

The facts of the matter are:

Assuming his uncle has more business success than everyone on this forum (or at least in this thread) which it sounds like he does, then he'd have better judgment on whether or not this is a good deal. he'd be able to answer why and have all the answers to this but OP wouldn't. so if he presumably is a better investor with more experience than everyone here then assuming he's being honest with his nephew about whether or not he should invest is the main decision OP would have to decide on since he's no expert business wise. That's why one of the first responses in the thread by Master explained this is 99% based on trust of the Uncle. I know if my Uncle was Donald Trump and my birthday present from him was he was going to let me buy into an investment that he felt was "very very safe and should present high returns" I wouldn't bother asking clowns like you what they thought of it.

ur asking him to explain all of the investment to you and are getting mad that he can't? ofcourse he can't, he's not the expert here, he's passively investing with his Uncle who is.

he also never asked for advice on IF he should do the deal, wtf are you talking about, he asked for advice on the legal issues and due dilligence and other ****. he'd be an idiot to ask some random anon on here if this is a good investment or not when his Uncle who obv knows more than you has already said it is.

A little point here, just maybe this investor set up a NEW standalone corp structure for this deal. As a future lawyer you should have been the first to see this as a liability shield against his other holdings?

Most real estate deals are set up as "single purpose entities" in order to separate them from one another. Lenders typically attempt to cross collateralize the deals so that they don't get into a situation where one deal's cash flow is diverted to another.

I don't really care if OP wants to blindly invest in this deal, for whatever reason. I have seen plenty of deals over my 20+ year career in commercial real estate and this one certainly has plenty of unanswered questions. Commercial deals are tougher as there are so many more questions and things that can go wrong.

I do wish OP luck with the deal and would encourage him to post a follow up periodically for reference.

I don't advise you scuttle your deal with your uncle or question his business skills in an insulting manner. I just hope you use this opportunity to LEARN how deals work and how things could go wrong and how things could go right. It is easy enough to just trust your uncle and get paid at the end... but that would not be the really value of the experience.

If you come out of this whole thing and in hindsight can explain WHY this was a good opportunity that was too good to pass up, you will have gained an invaluable education and understanding. To be honest though, you will not get that understanding just taking your Uncle's word for everything. I don't care how good he is, he can't be right about everything, nobody ever is.

Agreed.

I feel that based on some of the things that he's discussed with me about a few of the reasons why he's investing how/where/why the way he is that I understand in a general sense why this is an opportunity that was too good to pass on but will elaborate on that at a later date as I'm not sure what effect just blurting out his strategy/approach would have here.

This investment was actually only part of the overall offer that he gave me. He said the real learning experience will be going back to work with him full time so that I can learn everything he has to teach me about putting together deals and doing business the way he has learned. This particular investment was just something that he said I could get in on if I were interested because he felt it was a great investment for me.

Regarding foreclosure:

It isn't as simple as the business cannot pay the interest and he can just take over the whole property. It seems like he is a shareholder and a lender and there are dual responsibilities and conflicts.

When you foreclose on a business, you need to go through a myriad of steps to gain control. You need to announce publicy you are doing this and give other creditors the option of coming. You will also likely have a host of accounts payable that you can't simply walk away from.

If you go through the court system to get an approved foreclosure, you are looking at thousands of dollars in fees. If you don't, you leave yourself open to lawsuits that this was designed as a way to get control of the corporation.

It is just very complex and it is never is as easy as thinking that the hotel acts as $3MM collateral. Who pays for all the fees while it goes through the foreclosure process?

I have worked for a lender and went through the foreclosure process on two businesses. After receivers and legal fees and paying off creditors who can hold you hostage, the assets of the business are significantly reduced.

Good luck and hopefully it won't come to this.

Can you tell me who the creditors might be (I'm wondering since the $3m was all his money) would be and the types of things that would significantly reduce the assets? The thousands of dollars in court fees seems insignificant with regard to a $3m hotel so I assume he would be paying that.

If the business is failing, the creditors could be:
-Unsecured additional loans they business took out
-Unpaid Taxes
-Accounts Payable Creditors - all the services needed to make a hotel operational (utilities, laundry, fed-ex, etc, etc etc)
-Employee Accrued wages and vacation

To make the interest payment, most operators will of course try to extend paying out accounts payable. One day, the lights are turned off or the water stops flowing.

It isn't as easy to start a new corporation at the same site called Hotel2 just because an interest payment was missed. And lawsuits can hold up the businesses from even operating costing more money.

I wouldn't underestimate these costs. If you think there is a good chance of the business going under, I wouldn't do the deal.

Independent hotel industry is brutal and the economic climate is still tough. Does your family member know this industry well? I know people who work for Hilton Corp in Los Angeles (they are moving to Washington DC) and they have said how tough it has become lately.

I have to go back and check, but what is the plan if you have a negative cash flow? Where will the money come from every month to pay vendors if you are not booked up solid from day 1? All those things add up.

I hate to break it to you, but it is not so cut and dry as the guy who invested all the initial money gets to take his money and walk away leaving every other creditor holding the bag. In a lot of cases, vendors will want personal guarantees unless previous relationships exist. But then if those relationships do exist, you run the risk of ruining them by leaving them unpaid.

Ignore all startup costs and building costs, and say on Day 1 your costs are all covered under the 3 million. That first month you will have payroll, insurance, taxes, linen services, outside contractors, utilities and whatever else you need to run the business. Say these operating costs are 25k a month (which seems low but I don't know the specifics of the hotel business), and the hotel only brings in 15k of revenue. Who is making up for that 10k? Does the business have a line of credit with a bank? Will they get loans? If so the bank is going to want to be at the front of the line, not behind your Uncle.

Again it may have been covered in the last few posts, but is there something set aside for operating capital in that initial 3 million? I suspect the guys that are running the hotel and only having a minority share are going to want pretty decent salaries and benefits.

Anyways, still sounds like an interesting experience for you, and again not trying to disuade you, just perhaps a few ideas for things to investigate that will help you understand the process.

90% of all businesses are almost all the same. The other 10% unique to a business can make all the difference in the world, but the 90% can help you a long way towards understanding any kind of business you might get involved in, in the future.

Ahhh ok, I see what you guys are referring to now. Basically if the hotel starts off immediately operating at a loss who pays for that. Yeah, I'm not sure exactly and will add this to my list of things I'm going to try to find out. So yeah, if I'm understanding you correctly then even if the hotel were operating at a profit and they had paid off $1m of the loan, once the hotel did potentially start operating at a loss it would create some debt because even if foreclosed at this point it means money is still owed to people and if all previous profits of the hotel were used in paying back the loan then the money to pay them would have to come from some where. I get the impression my family member isn't willing to let things go too far if he notices it operating at a loss and has the power to foreclose if this were to happen.

I'm not claiming that's what he would do or even if that's what he plans to do but if he has the power to do that wouldn't that limit the about of debt created? I don't see how he'd allow the hotel to operate for so long at a loss that by the time he forecloses there would be so much debt that I "get hardly anything" for my % ownership. If he foreclosed after 2-3 months of operating at a loss, how much debt could really be generated? And if $1m worth of the loan has been paid off I'm guessing he could then just take it from that. In the situation though that the hotel is operating at a loss I'm aware and prepared to take a loss on my money.

Well, I will say that part of his strategy here definitely involves not attempting to do this in the USA. He feels the location/market that he's operating in will be key in the success of it.

So do you know how the law would apply in foreclosure process? I only have experience in the US. Some countries might make it very difficult to foreclose based on a missed interest payment.

I would also think it will take awhile to get up to full potential. Word of mouth and repeat customers. Most businesses operate at a loss in their first couple years.

http://audiovideo.economist.com/?fr_...=hptextfeature

more evidence OP is making a terrible decision.

I can't imagine a legitimate situation where someone would foreclose on a new business because it was not generating a profit in the first two months.

The problem with investing and running small businesses is you don't always know when it is time to pull the plug. You push it too far and everything could be lost. You move too early and you might have just missed turning the corner to success.

I still am not clear on where the operating capital is for this project, unless it comes out of the 3 million dollars.

OP clearly doesn't know either.

Loz/Onwiththeshow - I'm not sure what you guys don't understand yet. As others have mentioned earlier on in the thread, my decision from an investment standpoint comes primarily from the read/trust I have in my family member, not the business portion of it. Me not having expertise in the business portion of it is irrelevant because if I did I wouldn't need to invest through him, I'd be out there investing on my own. Sure you could claim that since I don't have the business expertise on my own to wait until I do, but if I know him to have far more than myself and most people as well as to be really successful, then turning down an offer of his is way too nitty, especially when I can afford to lose it. Everything from the business standpoint is a learning experience for me but even if things turn out to not work, I still am very confident that the decision of whether or not to invest in my family member based on all the information I had and my read on him was a good one at the time.

As I mentioned also, this was just part of the offer he made me which was a passive investment, the other part of the offer I outlined in this thread here:

http://forumserver.twoplustwo.com/56...-close-493663/

I finally got a chance to talk to him on the phone about some of the issues I had taken note of from this thread in terms of: Valuation of the hotel, my options for liquidating my small ownership %, documents about the corporation and stock certificates, and some other things.

I still have a bunch to ask him but will do that soon when I talk to him again.

I asked him about the point others were making that in terms of commercial valuation, the actual value of the property is based on how it operates as a business and his response was that that's true if you are trying to actually sell it in the current form of whatever unprofitable business has been running. He said that he built the property in such a way that it can be transformed into some other type of business other than a hotel that may operate more successfully if the hotel did in fact not operate successfully. So I'm guessing this means that if the actual property itself can be valued at $3m then the business operating on the property is interchangeable. Basically like if you open up a subway that's failing as a business and try to sell it in that form, it's not worth much but if you just change it into a Taco Bell that does much better then it'll sell for more.

As far as receiving all that paperwork (stock certificate, corporate info, bycharter laws, etc) about the hotel he said that I will be receiving that soon and we just had to wait on him receiving the money and us finishing signing the paperwork. When I asked about liquidating my 3% ownership he said that in 3-4 years the plan is that it will become a publicly traded company.

I received some messages which I agree with that basically say one of the reasons this thread might receive a lot of flames and negative responses, while not really going anywhere is really because I basically made a thread to talk about an investment that I made based on a family member's expertise instead of my own. So because of that, there's really nothing interesting to discuss since he's the one with the business expertise and I'm just a family member that thoroughly trusts his judgment and is investing in that. I kind of knew that before hand but thought others may be interested in hearing how it plays out though.

Am thinking of discontinuing the thread though because from a business standpoint there's not much that can even be talked about since I can't give some of the details I do know and then certainly can't give any of the details I don't know, and since the main decision from my standpoint has to do with factors that nobody can really assess other than me, it just doesn't leave much to talk about.

Hi Newbie,

I know I am a bit late to this thread. As a disclaimer, I have never been involved in this sort of investment, so I will try to provide the best advice I can based on this limited knowledge.

I think everyone in the thread so far has missed on crucial point, what do you want to do in the long term? Do you want to be involved in this opportunity simply because it is big and is being handed to you? I don't think that this investment is a bad idea (I don't think anyone in this thread has enough information to make that assessment), but for you to figure out if this is a good deal will require A LOT of homework... and interest in understanding why this would be a good investment. Do you really want to be in the 'dream' scenario 4 years out simply to discover that due to lack of oversight by the principals (you) that other actors have acted in poor faith with your 3% ownership share? I guess my point here is that owning 3% of a multimillion dollar hotel (best case) is a large resposibility if you want to optimize your investment for years to come. Even if it is made public and you sell the shares, you will want to have a good ground level understanding of what is going on so that you can time the sale of those to provide yourself the most value.

The other big question should be, what % of your net worth would this investment be and how reliable would your back up income be if this goes sour? Are you truly tolerant to the level of risk that you would receive here? You obviously don't need to answer this publicly, but use your common sense here.

If the answer to the above questions make you feel more sound in accepting this level of risk if things are as they appear, you have many, many questions to ask and to answer.

First, you should be examining financials for publicly traded companies that would be similar in size, scope and scale to this investment. You will need to have a firm understanding of what kind of operating capital is required, what the income to expense ratios are 'normal' for this type of enterprise, what occupancy rates can be expected for this location, what happens legally in this country if things go south, and many many other factors.

Do research on what types of risks are greatest for this sector. How, why and when did similar ventures fail?

I think you should also ask your uncle what his figures are based on. Do these correspond with your research? Do you have the 'warm fuzzies' about this investment after meeting with the 40% ownership management team? Do the pieces fit together?

Hope this helps, and good luck whatever you decide to do.

Hmmmm...A hotel has many self-contained rooms. The only interchangeable business I can think of would be a brothel. Restaurants are far more interachangeable.

Please update us as time goes on. I think most of us are interested in how it turns out.

Well, now you're kind of getting into an area that I had mentioned in the other thread that I have thought about a lot as well in that a main reason I am getting into this is because I'm not certain about the future of online poker and not sure if I want to be playing poker forever (this depends though on what my options are), and I want to establish some sort of financial security. This particular question that you're asking though seems like it would apply more to the other thread I made about going to work with him full time, as it deals a lot with what kind of lifestyle I want to be living and what I'm really interested in. That's a tough question that I think I'm going to have to decide on as things go along. There's too much unknown information for me to really know at this time such as 1) is poker going to be profitable a long time from now? 2) How much will I enjoy what he's teaching me? 3) How long will I be required to be involved in it? (a main attraction for me to poker is the freedom to travel) 4) How much money can I make doing what he does? etc etc... I'm going to just have to play it by ear as I go along.

Yeah, I wouldn't have an invested an amount that I couldn't afford to lose. My ability to make it back depends on how the poker economy shapes out but I've made a good bit of it back since having created this thread already.

Yeah, I am planning to work with him full time soon as part of the arrangement so that I can learn all about these things.

Well, I will be doing this for learning experiences on my own as well but I'm sure my family member has done a lot of this type of research since the investment decision was his idea, I'm just a passive investor. I certainly am interested however in learning these things and plan to ask plenty of questions with him in the future.

Thanks for the post man, I know he told me that he had the warm fuzzies for sure, and I wouldn't go so far as to say I have the warm fuzzies since my assessment as far as if this is a good investment is just based on critiquing his abilities/knowledge as well as how much I trust the things he tells me. Based on those things though I feel pretty good about it.

What about an apartment building? I know that one was one of the ideas he threw out there, but I didn't really peg him for other alternatives.

As I have posted before, the value of the hotel is directly related to how much income it produces, divided by an appropriate capitalization rate. A cap rate is like a price/earnings ratio (ie., the inverse of a P/E as it is E/P), as it indicates the relative risk of an investment. A high cap rate indicates high risk and they change over time in relation to investor perception of risk.

Cost does not equal value. If cost = value, then we would all be crapping on gold toilets.

Apartments are much larger than hotel rooms. I suppose that a conversion could make sense in the right market, however, the research must be done.

I have seen many scams in real estate. The responses that you have received are generally from altruistic folks who do not want to see you get scammed. However, it is up to you to do what you wish.

Good luck.