How to Build a Hotel: Expert Insights into Real Estate Development | Zeke Freeman E8

Ever wondered what it takes to transform an empty building or raw land into a thriving hotel? In this episode of The Hotel Investor Playbook, we’re diving deep into the real estate development process with architect and developer Zeke Freeman.

With over 20 years of experience and a current ground-up hotel project near the iconic Red Rocks Amphitheater, Zeke walks us through the entire journey—from identifying the right property to navigating zoning, entitlements, and building permits. We tackle the nitty-gritty of feasibility studies, managing risk, raising capital, and assembling a winning team of architects, contractors, and consultants. Plus, Zeke shares insider tips on designing for guest experience and maximizing your ROI.

If you’re looking to learn how to turn your vision into reality, avoid costly mistakes, and create a property that stands out in the hospitality market, this episode is packed with actionable insights.

In this episode, you’ll learn:

•How to approach property conversions, like turning office space into a hotel.

•The step-by-step process of entitlements, permits, and design.

•The crucial roles of your development team—and how to find the right players.

•Creative ways to manage risk and raise capital.

•The financial breakdown of a real-world hotel development project.

Whether you’re a seasoned investor or just getting started in hospitality, this episode is your blueprint for success. Don’t miss it!

🎧 Listen now and take your first step toward building the hotel of your dreams!

Connect with Zeke Freeman:
Instagram: @rootzekefreeman
https://root-ad.com/
LinkedIn: @zeke-freeman-20183020/
YouTube: Radical Hospitality Show

Connect with Michael on Instagram or LinkedIn.

Email Us at info@hotelinvestorplaybook.com

Visit the Hotel Investor Playbook Instagram

Invest with Malama Capital

Submit a deal

Transcript

Michael Russell 0:00

Would you risk $100,000 on a property that might never get approved for the project you envision? Scary, right? But what if that risk could lead to a multimillion dollar payday and a legacy project that changes an entire community? In today's episode, we dive into the high-stakes, high reward world of property development, specifically how to convert an underutilized space like an office building into a thriving hospitality destination. Our guest, architect and developer Zeke Freeman, brings over 20 years of experience and real-time insights as he shares his journey developing a ground-up hotel right near the iconic Red Rocks Amphitheater, just outside of Denver. From navigating zoning laws to building community support, Zeke pulls back the curtain on the entire development process. If you're looking for actionable advice to make your dream project a reality, this episode is for you. Let's get into it. Welcome to the Hotel Investor Playbook, your guide to building wealth and freedom through boutique hotel ownership, hosted by Mike and Nate. Get in the game. We currently own $30 million of real estate and are documenting our journey towards building a $400 million business. Boy, oh boy, am I excited about this episode. On today's show, we have Zeke Freeman. Zeke, welcome to the show. Awesome. Thank you guys. Glad to be here. Yeah. So listen, for selfish reasons, we really want to dig in because we feel like this topic is extremely relevant to what we're pursuing right now. And I think a lot of our listeners can relate as well because what's happening in the world of real estate is a lot of people recognize that office space is struggling, that the vacancy rates right now, uh, particularly in urban areas for office space, means that there is plenty of opportunity to purchase at um you know low prices and add value and really benefit from office conversion into alternative use. So in our case, we want to know how we can convert office space into hospitality space, specifically hostels in urban locations?

Zeke Freeman 2:37

Uh such a good question. Uh, love that, Michael. Um, you know, right now, I I think it really is a unique area to be looking at. Um, but because we've had this whole change in our downtowns uh where people are starting to work from home, um, and that's left a lot of open space in our downtowns. So some of the projects that we have been looking at are are these conversions. Um we've got one in the middle of uh downtown Denver right now for a client that uh he actually ran a tech business. He owned uh a three-story office building, and most of their tech company moved out of it and kind of left this building vacant. And so last couple of years, we've been helping them go through the process of reigning, doing a change of use, which is something important to know um as an entitlement process. There's usually gonna be broken up into a couple phases. Um, if it's not currently set up as a hotel, you'll you kind of first have to get the use by right, the allowed use into it. And so you're usually gonna do a change of use. That's usually a piece, and then and then the layout and the design to work through a conversion from an office to a hotel, you know, we'll have some unique nuances. Um depending on on the building that you're working with. This one, you know, had open structure, um, and so it's kind of an industrial look. And so, you know, one of the things that you'll often have issues in a like a hotel conversion is adding a lot of the bathrooms, a hostel, I which I guess would be a really good use and and you know, maybe simplify some of that where you're doing like a common bathroom. Uh Zeke.

Nathan St Cyr 4:25

So, Zeke, so before you go further, I want to there's like a huge component here that I want to can can I rewind to and dig into a little bit? Okay, cool. All right. So, because look, we are passionate about this subject. We're like, we could not wait to have you on because this is something that we have identified as an opportunity for us. And you're right, you just started to lead into the kind of the architectural um and the cost side of things. A hostel actually works better than a hotel. But before we go down that road, I want to rewind and go back to the to the to the zoning, right? And the the approved use. So because we've gone through this, we purchased a building that we were going to change the use. It had the correct zoning for up to a 20-room um hotel. Um, and that j that zoning did did change. But us going through that process, we ended up keeping it as in its existing state, and we moved on and purchased an existing hostel. But through that, there was a lot that came up and that we realized, wow, man, we feel like if we go into this next phase looking to do this, we feel like we need to be prepared. Like we need to understand. And we've had, we've got some wounds, we've got some scars. So I want to just go back to that first part of when you're looking at a city or a target market. Um, what number one, what should we be looking for? What are the things that you look for when you're like, oh wow, that building is amazing. And you can visually see it. It's for sale and it's there in the city. And and from there, where do you go? Is this something that we even could convert? Like, how do you start that process?

Zeke Freeman 6:18

Yeah. You know, and again, I don't know if we're if I'm the perfect expert on it. I mean, we've done enough of these that uh I'm getting a taste and a feel. And I think every project's a little different. Um, one of the things in urban locations versus, say, like a rural landscape hotel where you maybe have the ability to build out a whole bunch of amenities for people to come to. I think on the urban locations, you really need to be looking for, you know, is that site itself already an amenity? Like, is there an art museum that's next to it? Is there a you know uh a great destination to a you know uh like an oceanside you know front that people are gonna go and hang out? Because I uh urban land is gonna be more expensive. And I really think when you're looking at kind of urban development, you're gonna have to kind of maximize that site. Um, so I would start with that. Like, is it in a great location? Is something that people are gonna be walking to? You know, is there restaurants? Is there um, you know, attractions there? Do you have a lot of tourism already coming through there? So you're not building that in to the site?

Nathan St Cyr 7:25

I love that. Perfect. So now we've identified that yes, we checked every one of the boxes that you just said. Yes, it is a location that has restaurants and it's got bars and it's walking distance to parks and rose gardens, and it's freaking perfect. It's got a ton of travelers that that come through there for just the the the city or the urban um place itself. We've identified all that, check all the boxes. There's the building, we see it. Holy crap! I can see that I can walk from here to here, and it would be a great atmosphere, a great environment. But it was an office and I want to turn it into a hostel. So how do I now where do I go to start like digging in to find out what the current use is? And then if it's zoned correctly to be able to make that that conversion, where do you start? Now that we know that it checked all the boxes, right?

Zeke Freeman 8:21

Right. You know, and uh this is a creative process, right? So I think you're gonna you're gonna come into a project as a hostile expert and kind of knowing what the end product could should look like. And so there's a little bit of that overlay of like, hey, this this existing structure, um, you know, maybe it has you know a great entry for you, or maybe it has, you know, glass views to one site, and and a little bit of that should overlay and say, okay, can I take the end use, which may be like cool common areas, a lot of you know, bunk rooms that you can you know create unique stays and and spaces in? Does that work? And then you want to look at it and say, alright, is there some unique opportunities that are already within this building that, hey, maybe if I were building this from scratch, I might not have done, but that's gonna open up like a unique opportunity to do something you know different that you may not have had had before.

Michael Russell 9:26

All right, can I can I tell you what I'm scared of? Like I'm listening to you, and this is the exciting part where you're planning out how you can you know redevelop something for a better use and repurpose it. And that's the fun part, right? Um, and and not just for those that are you know like us, we're thinking like, wow, this would be great to repurpose a vacant office space into a hostel, and we could definitely add tremendous value. But if you're looking at perhaps converting a space into a hotel where if you want the ground floor to be a restaurant or retail space, and then you know, maybe build a hotel above it, but it's not zoned for that, let's say, or maybe it has like the outlier zoning, but there's still all these conditions and things with like parking that you got to satisfy and ADA compliance and all these like big hairy things that are like, oh, like that sounds scary to me to try to get those permissions. So, what what I want to start with is you go and negotiate with a seller of an office building that is vacant and you get a smoking deal. So you buy it at a low price point, but then you own the thing and now you absorb all this risk and you got to go through this painful process with the city or municipality, and you don't know how long that's gonna take. That's the scary part. So if we just kind of like rewind a little bit and say, okay, is there are there ways to mitigate risk here to start? Like, are there people we can hire that can do maybe either like a consultant study ahead of time, or can we purchase conditionally to where we could tie up the property while we perform these due diligence studies, or even while we ultimately pursue permits so that we can get approval prior to actually taking ownership and being responsible for paying for the property? That part freaks me out. Can you test like how do you handle that?

Zeke Freeman 11:15

Yeah, no, I mean I I I think that's uh uh a perfect kind of setup of the process you really need to be thinking about to go through. You know, you start with as a developer, are are you looking at this is a a you you feel like this is a great opp opportunity and location? Um, you maybe spend a little time and do some high level. And then you're you're gonna be heading through a lot of due diligence that's gonna have to happen through both, you know, the upfront is is this gonna meet zoning, is this gonna meet setbacks, all of that, uh to then really taking it through entitlement. So what we try to do, I call it like the lock and load strategy, where we'll take a project and we'll put it under contract uh after we've done some high-level due diligence. You know, we don't want to waste anybody's time. Um and and then we'll usually, if we're gonna take a project and entitle it, we'll put it under contract contingent on site development plan approval. Um, and that gives us or as a developer some time to work through all of these things that have to happen. Um so like as you mentioned, you know, when you walk into a project, you know, a couple of the first things, you know, very first things that you're gonna want to look at is, you know, is does the overlaying zoning allow for lodging or hospitality how to use? And and there's a lot of variations within that, within the zoning. Uh, it might be hotel, motel, hostel, um, bed and breakfast, a lot of variations that can fall into lodging. Um, and you want to kind of check those boxes is is can we take it there? The good thing with like, you know, the specific conversation around office, um, and whether it's an office building or a conversion of an industrial building, you know, um, any of those things, you're you're gonna have to go through both the entitlements on the zoning and the building permit phase. And so during that due diligence period, you know, you may set a like a 45 or 60 day due diligence that says, look, we're gonna go through and check some of the big boxes um here up front, uh, you know, including, you know, can we do this with the city? Uh, can we get the parking? Can we get the number of units to make it pencil out? Um that then after that that first kind of check period of of due diligence where you've gone through that and you said, yep, you know, this meets everything that the city is is going to ask for, and we can get those components to pencil out, then you may, you know, if if you can get a seller to work with you, uh, then start doing the actual planning. So, you know, I would kind of subdivide that due diligence into two periods and and maybe the conversation with the owner is, hey, 45, 60 day, you know, we'll we'll put some due diligence money down. And then after that, 45, 60 days, we'll let some of that go hard so that we're gonna then take it and then work through the site development. That would be an ideal situation. Um, and that's what we've done on really our last three projects.

Michael Russell 14:22

Well, can I ask how well what what percentage, like let's just say, you know, you if a certain amount has to go hard, like what would be reasonable in a situation like this?

Zeke Freeman 14:31

I mean, it's gonna depend on the project. Um, you know, we did one um yeah, so the Red Hotel, I think we put 20 grand down. And as we worked through uh the project, then we allowed some of that to go hard over about a year period. Um depends on the owner. I mean, it's all a negotiation. Um, we did a landscape hotel out in Grant. Um, you know, they they look for a little bit more, I think probably about 50 grand um for a million-dollar property. So, you know, somewhere in there, I don't think it needs to be unreasonable. In addition to putting some money that's going hard, in other words, if you pull out of the project, they're gonna keep that money. Um you're gonna be spending money as a as a developer on architecture and engineering fees, and that shows a little bit of commitment to the project. So although it's not going to the owner, uh, you are improving their project, uh, potentially finding out, you know, hey, at the end of this, um, you know, you may have an improved site plan, an approved uh use. And that can be something you can kind of sell back to the owner and say, look, you know, right now, you know, your highest and best use is an empty office space, maybe worth X. We're gonna take and spend the money over the next year or smart entitle it and get it to a point where it's new highest and best use, uh, even if it's just the zoning approval, you know, to whatever whatever it is, is gonna add value to the land. Um, and so that can be kind of a negotiated conversation with the owners to say, look, we're gonna be adding value to it. We're putting skin in the game. Um I love that. And, you know, if we can't bring the capital at the end of the day, then you know, we will have helped you increase the value of your property and we'll, you know, be willing to let you, you know, take that over. Um so those are some points in negotiation.

Nathan St Cyr 16:32

Yeah, I love this. Um, and I've heard you say it three times now. So I just I want to you talked about kind of the phases and you talked about this first phase, maybe it's 45, 60 days, and then you you use the word of entitlement like three times. Like that's a part of the process getting it approved for or getting it entitled. Can you just explain to me what what getting it entitled means? Yeah.

Zeke Freeman 16:58

So it's a little separate. I mean, people often talk about like getting building permits as one thing. There most cities, especially commercial projects, kind of have two phases phases of it. Um, they'll they'll call it like a site development plan or a um a plan development, you know, a PUD, a plan unit development. There's usually a phase where you're working just with zoning. Um, and that may require like site plan landscape, civil plans, uh grading, parking, where you're kind of working all the horizontal things out and making sure that, hey, from a zoning point, this building's gonna work. Um the second phase is is usually your building permits themselves. And that's usually gonna include your architecture, your engineering, your mechanical planning. And these, depending on the project, will often overlap. You know, in a if you had just a straight uh new development, you may start a site development plan and then you know, two-thirds of the way through, you may start submitting that building permit along the way. Sure, sure. Well, so it sounds like yeah, go ahead.

Nathan St Cyr 18:11

Yeah, so it sounds like um, you know, cause because when I think through of actually building permits where you're getting down to the nitty-gritty of engineered pieces of like your water system and how that all of the engineering that goes with it, ultimately that's that's a building permit part that needs to get approved, but doesn't necessarily have to do with the entitlement process. The entitlement process, you may have to provide, it sounds like, some general plans as far as you know what you're gonna do, maybe from occupancy and floors and different things like that, but it's not it's not going through the actual building permitting process. It's first of all getting on the same page with the city and saying them saying, yes, if this is what you're gonna do and this is your occupancy and this is your parking, all of these things are doable. Yes, we will allow setbacks, we will allow this usage.

Zeke Freeman 19:11

And that's when and when that's done, then you know, you have entitled rights. You know, you may take a raw piece of land and you know, or a an uh an office building, and you know, it may or not be permitted to, you know, do a hostel in it. You may have to take it through that first initial phase of entitlements to be able to get that approved use. And that approved use and you know can potentially add value to a land. So that is a how long does that take? More or less. So yeah, and you experience it. It's gonna depend on the project. Um, you know, and I'll back up again to we'll probably talk a little bit about the Red Hotel in a minute. Um, you know, this was a piece of land that allowed uh uh the use of a hotel, but it required to go through a special use permit. Um and so that means it's going to go through a public process where you're going to present in front of um usually a plan development board and then a they have a board of trustees. And so there's kind of a public presentation piece of that site development plan. And they had the ability to vote yes or no on it. And so until you get to that then it's not a buy right situation. And so you know getting through that took a little over a year. Um and then you know after that we submitted for building permits that's kind of the phase we're in with that.

Michael Russell 20:41

So you know I think about some of these zombie malls I think they're called but basically these huge you know the former former malls that are just sitting there empty and you've got these cities that they they're they're just they're they're blight right and so they want a developer to come in and repurpose these malls and and so they encourage they offer incentives there's there's there's an alignment of interest for them to do something with these buildings that are sitting there empty what's the current sentiment now with office space that is you know sitting there empty maybe it's dilapidated do you feel like from a zoning conversion perspective that cities are more receptive now to being like okay cool like yeah maybe a hotel yeah we can although it's not zoned for that we can get behind that or what what's the current?

Zeke Freeman 21:27

Yeah I mean I think there's definitely two components of it like you know cities don't want to have empty buildings. If you don't have eyes on the street then you start to have issues of homelessness and uh you know theft and all of those kind of things. And so that that does instigate politicians to get in and step in. Uh you know in Denver you know we've seen lots of conversations around that of hey this is an an area that we want to try to uh come in and support. So you know starting with the city support and sentiment is is helpful um from the opposite side or from the other component of that is the owner side. So you know if an owner whether they have a empty space that they're not getting any rent out of or if it's already rented but maybe they have a uh you know a loan coming due, you know, those are the situations like you know it's it's different than in a residential where you may put something up on the market and you know they're getting multiple offers and wanting to move things quickly. In a situation uh like office space where you know you may have you know whether it's a lack of occupancy or you know maybe it's not performing at the level that it can, you know, those are where you can start to have these conversations where you know you may need to take something through you know a process to get it you know entitled and and really get that timeline to be able to to work with an owner to get it to a place where it's a workable project in a in a hospitality sector.

Nathan St Cyr 22:55

Yeah so bottom line to really simplify what you just said to me that was a really nice way of saying because there's going to be a pretty significant timeline here and if you're gonna do it contingent upon it going all the way through that you got to find somebody that is doesn't have leverage that there's there's they don't there's not a time there's not an urgency or a timing factor. So if you just go look at a building that's for sale and that owner wants to sell it right away probably not going to be the good fit. But if you can go and locate a building that maybe has a loan that's going to be come due in two years and it was a 10 year balloon and they had full offices when they got the thing, but man, now the thing isn't even operating they're not even going to be able to refinance it with interest rates and you can see that coming that seller may be more willing to say look if if you'll go through the process and you'll go through the entitlement process at worst I end up maybe with an entitled uh new entitlements to what I have um at best I can sell the property and I'm not gonna have to face what's what's coming down the road in a couple of years.

Zeke Freeman 24:05

Yeah. No absolutely um you know and this you know that strategy might not be the strategy to work on every project but I think we're in a a unique moment right now with over the last couple of years where interest rates have been and where you know vacancy and occupancy that is a particular strategy that is you know you're adding value as a hospitality developer that they may not be able to get from a you know a typical office buyer. And so it's you know it's a place right now in in multiple sectors of commercial that you can come in and uh be able to purchase a piece of property you know maybe with at at a higher rate you're not having to negotiate out um you know to get the bottom dollar on every every deal. And maybe you're coming in with a little bit of a different creative idea than the other hospitality developers that are looking at all the hotels that are for sale. You know maybe this is a uh a sector that you can come in and find a really you know great asset uh and you know be able to you know create a long-term use that uh you've got some expertise in and both the you know whether it's hostel or hotel or you know unique stays. So I think it's I think it's a strategy to really look at and may you know that can kind of apply to land it can apply to office space. I think it's just a way to approach an owner and it's another tool in your tool belt.

Michael Russell 25:29

Yeah can can we talk a little bit about let's go back to the entitlement process and you said look there's some advantages to the owner because there's some cost up front. So there's a there's a vested interest whether the owner is is receiving um you know some a hard money deposit you know that that is non-refundable the fact is as you go through this entitlement process there's an investment cost and you so you alluded you're gonna have to hire some some specialists whether it's an architect and some others can you walk us through who are the typical specialists that you need to hire are they engineers, land use consultants, architects? Can you walk us from a high level like who's involved with the entitlement process and more or less what do these things cost? Like what would someone have to allocate up front what's the risk factor when when when going down this route, they got to think about well, this is all a little bit of a gamble but I'm curious to know like well how much is at stake here how much money needs to be invested up front for something that's not definitively going to get approved.

Zeke Freeman 26:31

Yeah I mean so again it's gonna depend on the project and depend on what you're what processes you're having to do. Some buildings may be set up and ready to go and it's you know a matter of walking down and just having a conversation with the planning and zoning. They could be that simple um you know it could be on the opposite end where you know there is going to be you know a lot of site working work um you know landscape um parking things that can go into it so I'll just you know dive into like an example um maybe I'll talk a little bit about the Lost Fork campground. So it's a campground that uh we recently took through this entitlement process. Uh it was put under contract contingent on site development planning is about an $800,000 piece of land. Um it needed a it had a existing campground on it that was illegal um and it just been kind of we called it the whiskey tango camp because it's just kind of ran you know uh underneath the radar for years and we knew to get the entitlements to do it um it wasn't a buy right situation but we were going to improve the property and we thought that through a public process they would be receptive to that if we're showing hey we're gonna improve this and at the end of the day uh it's gonna be a similar use maybe a little higher density but it's gonna be you know done right and so walking into that we knew like relatively low risk or or a or a risk that we felt like that would work. In doing the the new planned development on that you know that project took a civil engineer to do all the site grading work uh new infrastructure septic um uh new water rights because we had to put a well in there so we hired a water attorney in that um we did as the architect uh and planner we did the overall site planning for the project and layout of what the units would be the new common buildings the R V parking um as uh and so those would be the components that were part of the you know uh plan development architect civil engineer landscape engineer uh or sorry landscape architect uh and a water rights attorney yeah and that was that was probably a right around like six fix about a hundred grand or something to get through that process and that in that project um you know and that's probably a uh three million dollar project um and that might look completely different on a you know urban infill office but it would be similar components um in addition to that then after the that would be the entitlement part with the new plan development they completed that got approvals to be able to do it by right and then and then we submitted the building permit which included complete architectural structurals and MEPs mechanical electrical plumbing contracts so those are the kind of the two components uh that you might take it through on on a typical you know project you know somewhere between that like 10 to 15 percent percent of the cost of construction so that would be kind of the entitlement process on a a project about that size about a three million dollar project you know we typically say you know somewhere in that you know 10 to 15 percent of the cost of construction is where you need to think about for architecture and engineering to get through a project and it's it's gonna vary. I might rewind a little bit you know in terms of you know step one and we keep talking step one is entitlement really step one we call it a concept phase or pre-design and so that might be during that like really initial valuation where you may want to spend a couple of thousand dollars um to bring on an architect and be part of that due diligence for that high level and that might be the most important part of a of a project where you bring someone who's an expert in this type of process and maybe does an initial concept plan to say, okay, here's what we're thinking about doing and then sit down with the city planner with that and then poke all the holes so that as you get through that concept plan, you'll have a a roadmap to say, okay, here's where we're heading and what we're gonna do. And then here is all of the you know team members that we're gonna need to accomplish that project and here's what the fees are. So we really try to package up that you know concept plan, feasibility study as as really step one uh get in, do that due diligence and then you'll start into you know titlements and then building permit.

Michael Russell 31:34

Well what about a contractor? Like is there you would you suggest having a con contractor at that pre-design phase kind of weigh in and be like well look here's what my estimated cost would be very you know rough picture but you know from a feasibility perspective you kind of got to understand well what is it going to cost to build this thing?

Zeke Freeman 31:51

Yeah absolutely um you know that concept phase you know depending on how much you can kind of bring into that to know where you're heading you know we usually say you know you're kind of you know working towards a big target in the beginning and then you're narrowing that down to a bullseye as you move through those steps. And as you start in that concept phase you might be in this wide target where you're talking about like cost per square foot and you're looking at similar projects that have been completed. And so you know when I when I get engaged on a project I will usually look for all right who is a contractor that's in the area who's completed similar projects and then you know we'll have that high level conversation of you know how does this fit in and compare to you know the last three projects that you've done uh what would you expect a dollar per square foot to kind of be so you're not gonna get the best price you're not gonna get the uh you know like a hard bid between multiple contractors and know exactly what you're gonna do because you there's a million decisions to make between you know that concept phase and when your you know final set of construction documents are done but you you need those initial estimates up front to put together your performa to make sure that you're gonna be able to get the loans to raise the capital all the pieces.

Nathan St Cyr 33:05

Yeah absolutely so that's that's really good. I like that so that's the kind of that pre-concept hey let's get an architect potentially that understands the they're probably going to have some familiarity then with zoning and some of the land use as well contractor high level here's just a high level view of square footage what we want to accomplish this is what we envision here's our investment thesis this is what we envision at the end the experience to be the occupancy the ADR in this region all right and then you can kind of reverse engineer and see if there's a large enough gap between what your anticipated costs are going to be, what the end uh a value the end valuation will be once it's been constructed, stabilized up and running to know if it's going to hit the return profile that you're looking for.

Zeke Freeman 33:55

Yeah absolutely I mean and this is a it's a team sport right um and you know as you move regions and locations you know you're gonna have uh team members that you're gonna be relying on or relationships that you're gonna be relying on but you also at you know especially you know you guys like like yourselves might have this vision and expertise in uh hospitality and and hostels of what it's gonna look like in the end and might drive that but you may want to get into a region where you want someone who's been on the ground, knows all the locals uh knows the city officials so you can start to have the conversation and how and you want kind of that key guy that can help you build out the rest of your team you know a good architect should be able to you know bring in a good contractor or bring in a good um you know consultant on you know if you're doing water rights and all those pieces and there's and there's usually you know dozen of them that you got to build out a team pretty quick when you start putting your feet on the ground.

Michael Russell 35:01

Yeah I'm not gonna lie you said look it might cost 100 grand just an upfront cost just to get to the point where you could you know submit for this initial entitlement process 100 grand look my butt poker 100 grand I was like dang you know like that that is a lot to just throw out there and I'm wondering like okay you've got 20 years or so of experience being an architect and presumably you've been through this route plenty of times with you know clients have you ever seen a deal gone bad where someone invests all this money and then it's just like no sorry not going to work and they're out a hundred grand or more yeah I mean absolutely um it can and so that feasibility in that concept phase is is really the time to say look is is this worth going after because development's not easy I mean and it's not cheap and it's gonna take a lot of work and it and so you got to take that time I think up front you know where you might have to put a little skin in the game to start figuring out is this worth going after and then you know get an understanding of you know what size is this project?

Zeke Freeman 36:12

Is it a you know $100,000 project? Is it a $5 million project? So just numbers and that's going to fit into a performer that you're gonna have to you know put together capital for and then you got to decide like at the end of the day is that worth the amount of energy and effort and uh are we going to produce something that hey we're all going to stand back and say like that was an amazing project. It was impactful and it's making you know the people that invest into it a good return and the people that are coming in and staying in or enjoying it. You know and that that can be a you know a little one bedroom tree house that could be a you know 200 room you know landscape hotel and you know the numbers are going to be what they are going to be and you got to run those you know digits and figure out does this make make sense to do and you should get a feel for that in the beginning. And then you should ask yourself you know do do we have what it takes as a as a you know development team to make that happen. And is it and when it gets hard because it will get hard are we going to do what it's going to take to you know make sure it gets done um you know and I I'm I'm pushing more our clients to have those harder conversations up front because the last thing we want to do is you know get further down the road and and figure out that hey we didn't we didn't have all of a uh everything that was going to take to get this done whether it was financials or whether it was stamina or you know dealing with uh city boards and neighbor pushbacks I'd say it if you have the drive you have a big enough why then that could kind of overcome most anything.

Nathan St Cyr 37:51

Okay I want to share with you the way that everything you just said what it made me my mind spinning. So for those of us that are in this for the long game in my mind this concept is something that if you look at let's say $10,000 per initial hey we're gonna go in and we're gonna create this um this concept right let's just whatever 10, 15 grand to create the concept before we go all in to spend the $100,000 on the full entitlement proposal, right? In my mind I'm thinking, all right, so let's just say that we identify over the course of a year because we're hunting for these hey we're gonna go three we're gonna go through three different of these proposals and we're gonna spend 30 grand. And then you know what maybe two of them we think are they going to work out so we spend the full hundred grand. One of them doesn't work out one of them does in my mind it's like all right if we go invest a quarter million dollars and we're absolutely willing to see this thing through because it's an area that we feel is there's opportunity and that we want to expand in we're willing to invest and make that $250,000 investment that at the end of the day when I saw your return profiles for the project that you're working on would that be worth it for us to spend a quarter million dollars on Mike if you look at Zeke's return profiles that he anticipates seeing on his project?

Michael Russell 39:29

Well heck yeah I think hell yeah let's go get an opportunity to to to maybe shift gears a little bit here Nathan if you're okay with it let's let's dig into this project okay so here I'll I'll give a uh a quick synopsis and then Zeke feel free to to weigh in but this is a a ground up uh hotel in Morrison Colorado which is right near Red Rock so you know the Red Rock amphitheater it it's it gains a lot of attraction um there's 190 concerts a year Um, but there's there's no hotels there from what I can see. There's really there's limited hotels there. So I'm number one, I'm like, well, why the heck is that? And number two, if you could walk us through how you identified that you could put a hotel there, because it seems pretty obvious to me.

Zeke Freeman 40:20

Yeah, yeah. And I and you know, as a local, you know, I mean, this is an area we've been here for 15 years, and we kind of watch you know thousands of people come here every year to go to Red Rocks events and really have you know the best venues in the world coming here. I mean, having U2 and um, you know, Beatles and huge names that have have performed out at Red Rocks throughout the years, and um you'll get um enormous crowds that come, will go through, enjoy the foothills, enjoy Morrison, and go to the concerts, and then they all go back to Dipper or Golden or the periphery and stay. Uh Morrison has been one of these small, kind of sleepy towns that's adjacent to Red Rocks that has really over the years, you know, been let's just say like they they like the way they are. Their logo is keep Morrison, Morrison, and um, you know, and it's great. Like, I mean, we enjoy, you know, the local restaurants, um, but the opportunity to have, you know, something that's quaint, uh, that fits into the community, that allows people to come and and stay when they go and take some of that revenue back from um from Denver and other areas that you know are putting taxes and demands on all of our civil infrastructure and police, um, you know, by offering a place to stay, then people stay and they spend money at at restaurants and they, you know, are able to, you know, and invest some of that tourism dollars back into a community. So we've always seen this like, hey, this is a community project at the end of the day, with something that's gonna improve the downtown, that's gonna help, you know, drive revenue. Um, and it just needs some creative thought. So, you know, we don't we've never wanted to be the people to come into our backyard and um and you know press something on a community that has reason to be proud for what they are. And so it was a very intentional, hey, we're part of this community. We want to build something that uh fits into the community, creates a legacy. Um, and so that took a lot of conversations. Uh, we're the third group to come in and try to do that because I I think, like you mentioned, it's obvious that there's a need and there's a demand. Uh, when you have 1.9 million people a year coming into an area, uh, usually traveling from out of state to go to concert venues like this, um, you know, there's just a need for lodging that's that's there in local. And we have felt that we own a little short-term rental that's uh kind of a treehouse spot, and it's done exceptionally well. And that's always been because of, you know, again, these concert goers. And so we kind of knew as that as a little bit of a test market that, hey, the demand was there, we we see and we feel it. Um, and so for us, that kind of answered the first checkbox question of if you build it, they'll come because there's there's a need and demand.

Michael Russell 43:30

I I just looked it up. So look, in in 2023, Red Rocks ranked as the number one most attended outdoor venue in the U.S. and the fourth most attended venue of any kind in the world. So you talk about demand, yeah, that's a good sign that you're onto something.

Zeke Freeman 43:46

Yeah, yeah. And you know, as you mentioned, like it's it is it's no small feat to know that when you step into a project, that you're gonna have to spend you know, time and investment to you know take it through, like we talked about, all of that initial planning process. Uh as an architecture firm, we also felt like we were uniquely positioned to invest that in with our effort and work. Um, that at the end of the day, um, you know, our uh our unique skill set is is doing this type of project. And so as an architect and a developer in this, those were the pieces we were kind of able to put in over the last year and a half to build the value into the land so that by the time what we were completed with the entitlement, which took you know multiple community group meetings. Uh, we actually got denied at one of the planning boards. We had to do an appeal and go back. Um, we had to rework and redesign with the uh uh inputs from board of trustees, which all that's time and money. Um but we knew, like I said, that hey, at the end of the day, we're we're gonna do what it takes to get a project done. And if you come in with that mindset that the, you know, the end is is worth the effort, um, then yeah, you'll you'll get a project through. So you know, maybe in that concept phase, maybe it's a one and three where hey, you're spending a little bit of money and you're testing the waters and and you should know by the time, you know, all right, this isn't this isn't the right project, but you learn some things, you go to the next. When you move into, you know, a full design on a project, you know, you need to be in those high 90%. Like there may be something that kills the project. Um, but if you start, you know, going down this path of of are we gonna, you know, full design, we're gonna engineer, then the further down the path, the more committed, you know, you need to be to be able to get that project done.

Michael Russell 45:50

Uh so let's let's dig into this a little bit. I want to dig into the specifics of of this project and kind of what you're projecting in terms of financial returns. Before I do so, though, I just I want to take a minute to just explain, quick disclaimer, that that this is not a solicitation for this deal that you're working on. But we're gonna dig in a little bit about what you're doing. So, high level, uh, it's called the Red Hotel, like we said in Morrison, Colorado. What is it like half a mile outside of Red Rocks Amphitheater? It's very close. Um, it's a 22-room hotel, three floors. It's got a ground floor coffee shop, and also I guess you're gonna house your corporate headquarters. Is that right?

Zeke Freeman 46:31

So we actually started out with a full, you know, corporate headquarters. One of the things that we've learned going through this is, you know, as I mentioned early on, uh urban spaces, the land value is important, the density of your units is important. Um, we can get cheaper office space than we can build right now. And so the last plan modification, we've gone ahead and maximized the number of units. So our office space will end up being in another location, and we'll we'll put in another two units. So we're gonna be at 22 units in the final design. We're keeping the ground floor, food and beverage, coffee shop, part of a wine bar, because we really feel like that kind of enhances and creates that guest experience. The other thing it does, 22 units, although it's it's big on an Airbnb scale, it's small on a hotel scale, where you need to be careful on your staffing. And so what we look at is that that uh coffee shop can serve the public, uh, but then it can also double up as our front desk and our our guest experience. And so, you know, where we're not paying a person to sit just behind the desk and welcome people in, they're actually there and they're creating revenue and they're creating a great experience where you can get a you know, a great cup of coffee, a glass of wine, you can take your wine up to a rooftop bar. So that's our thought process behind that. Um the um yeah, so the rooftop deck on this kind of went through a couple of variations, and this was one of those uh you know community inputs is originally we had a full three stories and then a rooftop deck on on top of that. One of the modifications and kind of uh concessions that we made with the city was to lower the scale of this building. We drop the front of the of the building down to two stories with the rooftop deck on the front, and then the third floor kind of sets back. And it kind of gives this feel of a little bit lower scale project, uh, which I love. I think you know, it gives a little bit of protection, some great views out to mountains that are around the region. Um and then we we received some concessions back and negotiated with them uh for TIF funding into the project and some additional parking spaces. One of the one of the unique things on this site that also made it buildable is is parking. Um, you know, parking you'll find like drives a lot of projects. You gotta, it's one of the very first things you got to look at is you know, how are you gonna be able to uh you know park a project? Some districts do not require parking. Uh a lot of main street districts have said, okay, we are landlocked and we're gonna take an approach of um a more sustainable approach where we're gonna look for people to either use public parking or they're gonna need an Uber in. Um, so you'll see that in a lot of urban areas. Um, and this is one. And so, you know, that was one of the things when we looked at this project right away that we said, oh, well, we don't have to build out parking because there's already a public infrastructure for that. Um, that'll allow us to increase the density of what we can do on the site. Uh, it was also a big contingency, you know, thing. You know, not everybody agrees with that. So we had to have lots of conversations with neighbors to, you know, kind of help them understand our parking plan and what that looks like.

Michael Russell 49:52

Yeah, parking is a deal killer for so many of these things. That's clutch. That's awesome. I'm I'm getting a little neck cramp here because I'm I'm nodding along as what you're saying. I'm like, yeah, yeah, yeah. The guest experience, the coffee shop. Yeah, all this stuff, the rooftop, or not the rooftop deck, but the third floor deck, like all these things that you've thought through are more than just about how we can put rings in here. It's really about we're creating a guest experience and we're identifying ways to generate auxiliary income so that we can maximize revenue. And I wanna I want to shift gears into the financial aspect of this. Can you talk about to start the funding? How did you pay for this development? Let's start with your loan, because I believe you got an SBA loan. Correct, can you walk us through that?

Zeke Freeman 50:41

Yeah. So, you know, going through the project, um, you know, initially we thought that we would be able to do a smaller enough project that, you know, our architecture fees would come in as the equity to the project and we'd raise a little bit of capital. It became a much bigger project than we thought. And so, you know, we learned how to raise capital. This is our first time doing that. Um, we are using an SVA 7A loan, which has a couple of benefits. Uh, it's good for hospitality and hotel developers because usually they're looking for owner occupants in that. And that is hard to do in a lot of, you know, like if I wanted to just put an architecture office in it, I have to occupy 75% of the space or some large number. I can't remember what it is. Um, but as a hospitality or a hotel, you know, your whole business occupies this space, and so it makes it easier to utilize SBA loans. So we went down that path. Um the there's two different primary SBA loans, the 504 and the 7A. Um the there's and I'm not an expert in it, so I won't go down like the pros and cons, but I I will say, you know, the 7A that we ended up with, it has a like a $5 million cap on it currently. Um and so really anything over that you're you're having to raise as equity. So they'll, you know, in our case, they wanted it to be at least $80, $20. You know, we're gonna be closer to you know $65, $35. Um we're it's an $8 million project, and so we're raising about $3 million on that project. Um we did it in it's all technically one capital raise, but we broke it up into you know two timed phasings. Uh so the first phase, we raised enough to be able to purchase the land. So uh the first million and a half of that. Uh we started in June, finished that up in August, and then closed on the property in August. Um and then we're taking the equity that's now in the land, and then we've are are finishing up the capital raise that will roll the land into the construction loan that will also uh take over, you know, as the primary loan for the project. And so um that we're gonna do that.

Michael Russell 53:06

What you're saying is the SBO SBA loan component is to start a construction loan that will roll into permanent debt thereafter once it's built. Yeah.

Zeke Freeman 53:17

So we we purchased the land with cash. So a portion of what we needed to raise for the equity, we uh we raised that portion. We went ahead and closed on the property with the first portion of the equity raise. We know we needed to raise additional, so we continued to do that. And then when we close on the construction loan, that'll be a construction loan that'll roll into a perm with the SBA loan.

Michael Russell 53:41

Gotcha. So $5 million loan, eight million dollar project. So you raised how much money total?

Zeke Freeman 53:49

So it's a $3 million raise.

Michael Russell 53:52

Okay, so did you put any of your own money in this deal, or you or you just raised money for the whole thing?

Zeke Freeman 53:58

Yeah, we did. So we paid over the last course of the year, you know, almost $100,000 and uh engineering fees and permit fees, and then we're also rolling in our architecture fees as part of that. And so that counts as part of the equity stack that's in the project. So there's about you know $300,000 and and owner equity contributions on that.

Michael Russell 54:20

Okay, cool. So um just reading your your collateral here. It looks like it's a 14-month build out. So you've got 14 months to build this thing, 18 months to stabilize the income thereafter. So let's let's walk through like the investor offering. Like, how does this work? What are you giving your investors in exchange for them investing their money? What kind of returns?

Zeke Freeman 54:44

Yeah. So the investors we set up, you know, there's a general partner group. Um there is a debt signer that is receiving a certain a percentage of equity, and then there's the limited partner pool. Uh, the limited partnership pool that makes up the majority of the equity cash is getting put into the project is a 10% preferred return. And so that gets accumulated from day one when they start their investment. You know, the guys that we that invested into the purchase of the project, so they're accumulating a 10% PREF. That gets paid out of the cash flow of the project once it's up and operating. And then there is a uh 26%, and this is just kind of unique the way we set it up, uh, percent equity ownership. So to that pool of investors, they have a 26% ownership, that whole pool into the project. And that kind of equated for us, like simple math, of one percent per share is how we divided that up. So there's 26 shares, they're 120 grand each. Uh each share then is entitled to a 10% preferred return and a 1% equity return. So the equity return gets paid either at a refinance or a sale of the project, and we've put that at a five-year period. So that return profile should, you know, based on our cash flow projections, come out to like a a little over a 2x multiplier of their investment, um, and then around a 20% IRR. So those are the projections based on um, you know, what we're what we're you know projecting for cash flow in the project.

Michael Russell 56:38

All right. So you're gonna hold this thing for a few years. I see here that in a five-year term, you're expecting an eight cap based on the the um revenue, the the NOI, you're expecting this thing to be somewhere between 15 to 17 million dollars upon exit, correct? Yeah. So you got eight million dollars for the project cost, you got 17 million dollars for sale minus I you know, I don't know exactly how it works out, but there's roughly nine million dollars or so of profit, right? So just in simple terms, if you're looking at, well, who's getting what, how much of that nine million dollar profit goes to the investors?

Zeke Freeman 57:20

Yeah, so 26% of that goes to the investors.

Michael Russell 57:23

Okay, so what's the math on that? Nine, nine times 26.

Zeke Freeman 57:28

You're really gonna make some do some math on a podcast. I'm always curious about it. I'm curious, man. I'm not looking at a spreadsheet. 26.

Nathan St Cyr 57:39

So they're getting a little bit more than a lot of things. I'm thinking about the I'm thinking about the 74, bro. I'm not thinking about the 26. I'm doing the 50. Holy snipies, bro.

Michael Russell 57:48

Okay, so you just go and look, this is a lot of work. This is what you just went through. Like, oh my gosh, I was spinning, like, oh my goodness, there's a lot of expertise, there's a lot of know-how, there's a lot of just sweat equity that goes into this. But if you hit your target as the developer of this project, you're looking at like seven million bucks. Yeah, it's a great that's not chunk change, no.

Zeke Freeman 58:10

So, you know, you're putting a lot of work in, but you're not doing it for nothing. And so you're coming back with this. Hey, this is the vision of what we're trying to accomplish. I love it. Yeah, yeah. Yeah. You guys ready to go to the next deal?

Nathan St Cyr 58:26

Yeah, I I'm I'm like, mom spinning right now. Yeah. I mean, look, I think that we have I I really believe that this is extremely valuable to um to us because of where we see opportunity. And it really aligns with what we did to start, right? So if if we think about purchasing an extremely approachable piece of real estate that we could really leverage and and you know, when you go back and and and think through this and how much equity now we're we're sitting on, ours is a little bit different. We didn't have to go and raise all of the capital. We were able to have an approachable piece of real estate with a you know a couple hundred grand each into it into a deal that then in three years generates, you know, five to eight million dollars worth of equity. It's a similar, there's there are some similar yields there. Um, but this, but, but that grand slam that we hit, those are those are those are more rare, right? And so I think that digging into this specific strategy could allow for more of those grand slams. Yeah.

Michael Russell 59:38

And I don't know, everybody. Look, this is a win. When you were walking through initially what the advantages are from the city's perspective, like you're talking about bringing life and commerce to the city. So that's a win. Like going in and taking a space that's underutilized and improving it, that is a win for everyone in that community. It's a win for your investors because the return. That they're going to get, you know, the the over 20% returns. That's phenomenal. And then, of course, we just went through like, it's a huge win for you. You should be rewarded for this effort. So this is an all-around win-win-win. I think this is a great point to wrap up the podcast. It's um, Zeke, it's been it's been great having you on. And I've learned a tremendous amount from this episode. I feel like I could uh you know continue. I want to ask you so much more. Um, but we'll we'll end here for now. We'll probably circle back with you uh a little bit further down the line to check in with you and your project and see how it's going. Um but for our listeners, if um if someone wanted to get in touch with you, uh how can they how can they get hold of you?

Zeke Freeman 1:00:40

Yeah, uh love to connect with anybody. Uh you can get kind of find all of our social media stuff on our website, uh root-ad.com. Uh I'm on most social media platforms, you know, at Zeke Freeman. Um, you can also look at Root Architecture as well. So all those places.

Michael Russell 1:01:01

Awesome. So we'll put all that in the show and all.

Nathan St Cyr 1:01:04

Yeah, what an awesome conversation, man. Appreciate you spending the time to walk through your project and to just provide a lot of value to our listeners that I know are having these thoughts. So awesome. Thank you. Love it. Thanks for having me on. Really enjoyed it, fellas.

Michael Russell 1:01:19

Hey guys, if you enjoyed that episode and want us to continue to pump out more exciting episodes just like this, do us a favor. Go ahead and rate and review us on whatever platform you listen to this podcast. Come on, you can do it. It's not that hard. Whip out that phone. Go ahead and rate and review us right now. Why wait? Don't procrastinate, do it. It's awesome. You can do it. We appreciate it. As always, thank you so much. And aloha.