The Hotel Investor Playbook

Ground-Up Boutique Hotel Development in San Francisco - High Risk, Higher Reward? | Mike Demson E22

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Could you really buy a hotel development site in Fisherman’s Wharf, San Francisco—at a fire-sale price—and turn it into a boutique hotel with a projected value over $11 million?

That’s the plan today’s guest, Mike Demson, is working on. In this episode, Mike breaks down how he’s finding undervalued hotel opportunities, increasing density, reducing construction costs, and creating Instagram-worthy experiences with lean operations and smart design.

We challenge the assumptions, dig into the numbers, and talk about what it actually takes to pull off a project like this.

You’ll also hear about his second hotel project in Sonoma wine country—including a planned 67-unit expansion and brand partnership with IHG’s Vignette Collection.

If you’re thinking about hotel development—or you just want a behind-the-scenes look at a real-world deal—this one’s for you.


Connect with Mike:

Website: https://www.demsonconsulting.com

Linkedin: https://www.linkedin.com/in/mikedemson

Instagram: https://www.instagram.com/mike.demson

Facebook: https://www.facebook.com/michael.demaria.1987

Connect with Michael on Instagram or LinkedIn.

Email Us at info@hotelinvestorplaybook.com

Visit the Hotel Investor Playbook Instagram

Invest with Malama Capital

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Michael Russell

What if I told you someone picked up a hotel development site just blocks from San Francisco's Fisherman Wharf for around a million bucks and expects it to be worth over $11 million once it's stabilized? Sounds crazy, right? However, that's the plan today's guest, Mike Dempsen, is working on. In today's episode, Mike breaks down how he found the deal, why he's betting big on boutique hotels instead of short-term rentals, and how he's using smart design and lean operations to unlock serious upside. We press him hard on the numbers, challenge the assumptions, and get into what it really takes to make a hotel pencil in today's market. Let's dive in. 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, welcome to the Hotel Investor Playbook. We're Mike and Nate, your host, and on this podcast, we talk story about how to make money investing in hotels. On today's episode, we have Mike Dempsen. Mike, welcome to the show.

Mike Demson

Thank you very much for having me.

Michael Russell

Yes, sir. We are excited to talk story because you got a lot of things moving and shaking in the world of hotel investing, actually, real estate investing in general. Um, it's worth noting that your father-in-law is a big time construction real estate developer, huge projects all over the Bay Area. Um, I visited the website and there's a big old staff, a lot of personnel, and a lot of exciting things. But I say that to give some context because you guys right now are currently hyper focused on hotel projects, uh specifically some of these smaller projects here. And I want to dive into that because with all the experience that you have access to, we want to know what specifically about hospitality or hotel investing. What are you attracted to? Why this asset class?

Mike Demson

You bet. So, in my opinion, there's there's a lot of reasons to like hospitality and boutique hotels. Uh, a little bit about me, my background. I was working in marketing for more than a decade out of college, started and sold my first company, and had an opportunity to work for some big brands, including uh Sephora, Adobe, and Airbnb. And that was really the first introduction that I had to short-term rentals. Um, you know, started doing some investing on my own and you know, recognized that, you know, it's it's a massive opportunity. And um, you know, I sort of realized that as opposed to having 16 short-term rentals, um, the potential for having you know a single hotel with 16 or more rooms was, you know, much more uh uh of an attractive proposition um from an operational and and a management perspective.

Michael Russell

Okay, great. So by that, do you own any short-term rentals currently?

Mike Demson

Do. Uh currently have three, um, one in Lake Tahoe, one in Carmel, and one in Palm Springs.

Michael Russell

Okay, and so owning short-term rentals in those markets, have you experienced that the because of regulations or restrictions that it's becoming more difficult or challenging to scale?

Mike Demson

Absolutely. Um, there are recent regulations and restrictions, um, similar to what was done in New York, where um in San Francisco you actually have to um be, you know, living in in the short-term rental to be able to rent it out um full-time. It just didn't really make sense to continue scaling um with individual short-term rentals.

Michael Russell

Um, you mentioned that you know Airbnbs are becoming more restrictive, but how is that impacting your strategy for investing in hotels?

Mike Demson

You bet. So I actually draw in my experience with with marketing, um, you know, being creative, understanding what consumers want, what they demand, and um, you know, what becomes uh a marketable experience. Um found that you know having Instagrammable uh hotels is is one of those things that um just makes uh a ton of sense. It all right.

Michael Russell

So walk us through where you're working on. So partnered up with your father-in-law, who's a big developer. You've got all these projects that are spinning, but uh specifically as it relates to hotel investments, you've got one in downtown San Francisco that is under contract, and then you've got another one that is in Sonoma that you've already acquired, but you have plans to expand and re you know, to uh add additional rooms. Walk us through to start the one in downtown San Francisco. What's going on with that? And then you can touch upon the other one.

Mike Demson

Oh, you bet. Um so I actually lived in in San Francisco for uh say more than uh eight years. It's one of those most special places, in my opinion. And um, we're we're actually under contract for um 400 Bay Street. You know, we we're essentially pursuing a fire sale deal from a um, you know, the former owner, the seller, um, because you know the entitlements, the setup, um, you know, what they were planning to build, you know, what we found just wasn't feasible. Um their ask on um the piece of land, you know, wasn't something that um really allowed for um us to you know create a profitable development. Um the original asking price was close to three million. Um, you know, we've gone back and forth with with the seller for some time now and ultimately realized that uh the city of San Francisco would allow us to potentially increase the density on the entitlements that were already in place. Um they had um 12 rooms that were approved by the city of San Francisco. Um, and you know, once we actually looked at the drawings, we realized that there were a ton of inefficiencies. Um, the cost to actually build um what they were proposing and what they had approved, but it didn't make sense. Um, you know, I essentially, you know, leaned on the expertise uh of the team at Thompson Builders. And uh we found that, you know, removing uh a basement that was almost entirely Can I call the time off?

Nathan St Cyr

Can I just sure I want to understand first of all, this what you purchased are and are under contract with? Because this is such a freaking exciting topic for me. Like to actually be able to go in and like develop it just gets me so freaking juiced. So um, so I'm trying to visualize. So number one, is this just a uh a plot of land or is there an existing building here?

Mike Demson

No. So um the former developer, the the seller, um, actually acquired um, it was a building that was previously used as a a restaurant and a warehouse. Um, it's commercially zoned property. Um, and it's right next to um Greater Joe's and Safeway.

Nathan St Cyr

This location is like epic because it's halfway between where the sea lions are and then where the cable car main cable car drop off is. And this pin is almost like you can almost drop it right between the two of those. It's one block off of the stretch that every single tourist walks up and down. So to draw the picture of what this previous person that you're purchasing from, the seller, they saw this restaurant warehouse and they're like, hey, I've got a vision to potentially turn this into a hospitality property. And then it didn't work out because of the um their concept. And so they decided to sell. And now you've come in and want to develop this in a different way, correct?

Mike Demson

That's exactly it. Um, they're essentially letting it go at a fire sale price. Um, what that means is they realize that you know their approach to construction development just made made no sense. Um it was a ton of you know, common area. Um, it required these massive drilled piers that required a ton of steel and a ton of cost. And um, the number of rooms that they had, you know, thought that that would make sense to go there um across all four floors was was only 12. Um, so we we essentially, you know, are increasing the density. Um, we're you know looking for opportunities to do some value engineering, um, changing the foundation to a maps lab um and essentially looking to just you know less expensive, if you will, um to actually build.

Michael Russell

I gotta jump in. I'm looking at this thing on Google Earth. Dude, this thing is sick. It's like three blocks from the Ferris wheel, and like you're right, Nathan, all the sea lion stuff. So this is right there, all the tourists walk around, or what's it called? The fisherman's wharf, right?

Mike Demson

Fisherman's Wharf, Pier 39. Um, it's actually gonna have a roof deck on the fourth floor that has, you know, in my opinion, a pretty epic view. It's you know, got a view of the Ferris wheel at Pier 39, it's got a view of Alcatraz. Um, and you know, just uh a little bit to the left, it's got this incredible view of uh the Golden Gate Bridge. I knew you were gonna say that.

Michael Russell

Let's go. This is downtown San Francisco, man. San Francisco's crazy expensive. Like you can't buy in San Francisco three blocks from Fisherman's War for anything less than a bazillion dollars. What the heck? You said this thing was listed for three million dollars and you're getting it at a fire sale. Can you tell us? Are you allowed to tell us how much you got it for or no?

Mike Demson

You bet. Um, you know, we we've essentially finished the negotiations. Um, at this point, we have a contingency to close um based on increasing the density 25%, going from 12 to 16 rooms. Uh, we've got the plans already submitted to the city. We're just waiting, waiting for the final sign-off to actually close. Wow. Okay.

Michael Russell

So it's it's under contract. You don't have to tell us exactly how much. But what I know is if it was listed for 3 million and you're getting at a fire sale, like to me, because I'm such a skeptic, I go red alert. There's something wrong with this property. There's no way you can find a property three blocks from Fisherman's War for a fraction of three million dollars and be able to do anything with it. There's got to be a problem. And there's probably, you know, some it's a sinkhole, or there's something wrong with this. There's no way you can go and build this huge hotel, or not huge, but a what is it, 16 unit you've got planned and make money off of this? Well, you got to walk me through because right now I see red flags. How the heck did you find this thing?

Mike Demson

You bet. So it in my opinion, great deals don't don't just show up on loop. Um, it's either overpriced or or there's an issue. Um, but we rec what we recognized was um, you know, this this project as the former developer had it wasn't feasible. Um, construction costs were um completely out of proportion. Um so we're essentially purchasing it for you know close to a a third um of you know what the initial ask was. And the reason we're able to do that is because you know, we've negotiated, we've gone back and forth, um, and and we've looked for areas to improve um the design, the the layout, um, increase the density, and um, you know, bring the construction costs down. And that is you know how we've created uh this deal. And you know, it it's it's not easy.

Michael Russell

Well, let's talk about construction costs. 16 units. What's the cost per square foot to build this? Because you're basically gonna demolish what's there, right? And you're gonna rebuild. Is that the plan? Yeah. So what is it gonna cost per square foot?

Mike Demson

You know, there there's a range that that's going to depend on, you know, the finishes, the fixtures, um, and sticking to a very precise project schedule. Um, you know, as we have it currently, uh, we're we're looking at 350 per square foot.

Michael Russell

Oh, to me, that seems low. Now, I'm not saying it's not possible, but what you just described in the value opportunity was looking at it from a different perspective than the original developer, you were able to bake in some cost efficiencies. And I think a lot of that has to do with the fact that your father-in-law is a you know successful real estate developer. And so I trust that this number is accurate, but my first take at this would be like, whoa, 350 seems super low. But but how many what's the total square footage that approximate that this this is gonna be?

Mike Demson

You bet. So it's uh 16 rooms. Um, the average room size is 322 square feet. Um there's also uh ground floor retail that we're essentially looking at in like uh maybe a coffin shop, a pete, Starbucks, uh that's close to 900 square feet. Um and uh let's see, yeah, those are the the specifics.

Michael Russell

So so do we have a total square footage for the building estimate?

Mike Demson

Um total reefs is uh 5,162.

Michael Russell

And then another 900 for the common area? I'm just trying to bacon. What is it gonna cost to build this bad boy? So it's 350 times approximately 6,000 square feet, 2.1 million bucks. That does not seem like a huge, I mean, that's not a big number for a 16-unit hotel in downtown San Francisco, brand spanking new. What is that thing gonna be worth theoretically once it's up and stabilized with the exit of the exit?

Mike Demson

We're looking at a value north of uh 11 million.

Michael Russell

Dude, I I I I I can't believe uh you said 11 million dollars? Exactly.

Mike Demson

11 million okay, so it's got projected at uh you know about 50,000 eight and a half to do the math.

Michael Russell

I don't doubt that, but I'm very excited because that seems like a home run. Um, and then you add into the fact that you can presumably go and get construction financing, right? So how much is the bank willing to finance for the the development for the construction?

Mike Demson

Uh 65%. That's kind of a typical number. You can do loan to value um or loan to cost. Um, we worked it out, you know, that uh 65% was was the right amount of leverage. And you know, we don't need a huge uh amount of equity to start with. Um plus it's it's a job. Um it's you know an opportunity to to build something and to create something uh value. Wow, that's incredible.

Michael Russell

Okay, so this thing is currently under contract. Where are you in the entitlement process?

Mike Demson

So we we essentially worked with an architect, uh with a structural engineer, um, and you know, have an entire team in place that uh essentially went through the redesign process going from 12 to 16 rooms. Um, you know, we've uh got those submissions into the city of San Francisco, and right now we're just waiting for um everything to be reviewed and approved. And um, you know, we'll we'll actually be able to use the former um developers' entitlements. And um, you know, it's it's basically a shovel ready project once once we're ready to go.

Michael Russell

Okay. And so you you're under contract, you're going through the process. How long do you have this where the purchase is conditional upon you getting those entitlements? Can you walk us through what's at stake here from a financial outlay and how long you have until that money goes hard and it's not refundable?

Mike Demson

You bet. So we've essentially got 90 days from now and only have uh, you know, $50,000 that that would will go hard in 50%.

Nathan St Cyr

Okay, so there's $50,000 of earnest money that would go hard in 90 days. But what you've shared with us is that this process, you were able to negotiate that it's contingent upon the increase of 25% more room. So you're leveraging that that this seller has gone through and already secured entitlements, I'm assuming for um usage of hospitality, retail mix. So all of that has already been done and secured by the seller. If we can't get the increased density, then it doesn't pencil force, doesn't make sense. So at that point we would, we would, we would walk.

Mike Demson

That's exactly it. Um, you know, we worked with the architects, you know, reduced some of the common area, um, got rid of a basement, and um, you know, made the rooms uh a little bit smaller than um what was previously approved. Um but yeah, we we can essentially um operate under those um the entitlements that were already in place.

Michael Russell

Okay, so how long is it gonna take if this thing gets entitled from the time that it's entitled to complete the construction?

Mike Demson

So there's different different ways to think about the you know project scheduling, the estimate. You know, we we've got um 18 months that um you know we we believe is a very realistic timeline for for completion. Um let's say that we start that in you know April or May. Um from that time, you know, 18 months out, we we expect to essentially have uh you know launch and um you know work work towards getting the asset stabilized.

Michael Russell

Okay, so during that 18-month period, you've got holding cost, you've got construction costs. How does this work with the bank and how does it work with funding this project until you know there's no income coming in? You're putting all this money out. Walk us through in your strategy, how is this happening?

Mike Demson

We work with uh Premier Bank. There's um, you know, some pretty favorable construction, construction lending um that they offer. And we essentially have an interest reserve that you during the construction period um we're paying interest only. Um and then they they essentially lend us the money um or that gets added onto the loan um that you know we we don't have to come out of pocket for. We we've got um you know a few uh interested um private equity and um limited partners that we're working with as well. Um so you know, the the way that we've uh essentially structured this is, you know, we're we're essentially bringing the expertise of Thomson builders to the table. And um, you know, it's in my opinion, an A plus location. And we we have um you know the potential to build something that's going to be worth, you know, close to uh I'd say 11 million. And um, you know, with uh pr pretty small construction budget, um it it makes uh a ton of sense. You know, we we don't want to call it a home run before um, you know, it's it's essentially across the finish line, but we we believe that it has the potential to be you know a very good development.

Michael Russell

Hey guys, quick break from the episode. Look, we're always looking to bring you the best content here on the Hotel Investor Playbook. And honestly, we'd love to hear from you. We want to know what you want to learn about. Is there a topic you're dying to hear us dive into? Or maybe you know someone who'd be an awesome guest, someone with a great story, unique expertise, or insights that would bring value to all of us in the hotel investing game. Shoot us an email at info at hotelinvestorplaybook.com. That's info at hotelinvestorplaybook.com and let us know. We read every single message, and honestly, it would make our day to hear from you. Your feedback helps us make this podcast better and more relevant for you. So don't be shy, reach out and help shape the next episodes. All right, back to the show.

Nathan St Cyr

Yeah, okay. So that's I had the land, I had the the construction cost and whatever, just ballpark four million dollar project cost range. Uh, you know, I don't know. I'm just doing some estimates. Um, but then when you go to You said you said NOI being close to nine hundred thousand dollars. Is that correct? Nine hundred and fifty-six. What are you projecting then from those sixteen rooms as far as oh I'm I'm assuming that okay, well, first of all, you said you're gonna put potentially cafe, something like that downstairs. So there's there's the NOI that gets generated from I'm I'm I'm assuming some sort of triple net retail lease downstairs. That's it, yeah. Okay, and what percentage of the the overall noi will come from that retail?

Mike Demson

We're using uh five dollars per square foot. Um and on an annual basis that comes out to about 55,000 um for the retail section. Um the rest, of course, is from um the 16 rooms. And we have you know room rates that range from um, you know, it's a pretty wide range because we have you know studios all the way up to two bedrooms, um, anywhere from you know 270 up to you know four or five hundred dollars, depending on um the the room and and the layout. Rev par comes out to uh 224.

Michael Russell

Well, 900,000 is your your net, right? If you take off the 55,000, right? But that's net. So you gotta figure well what's gross revenue. So if we did 900,000 divided by you know at a 65% uh expense ratio, maybe it's 60, you know, I don't know. It just depends on what how um you know uh conservative you are with your underwriting, but I'm gonna use 65% expense ratio. You got to do two and a half million in gross revenue to net 900,000.

Mike Demson

You bet. So we we have other hotels that we actually operate at a significantly lower expense ratio. Um, you know, I'm not gonna say that that's the same for every property, but with new construction, you know, the maintenance costs, the the ongoing expenses tend to be significantly lower. Um, and we believe that, you know, operating and managing this this asset in-house, we could be closer to uh I'd say somewhere in the range of 35 to 40 percent um expense ratio. So let's see. Um revenue we're we're looking at uh one 1.4.

Nathan St Cyr

So $500,000 of expenses.

Mike Demson

That's it, yeah. Got it. And that's essentially, you know, leveraging the technology, um you know, being cognizant of you know sorry, my what did you say your expense ratio is?

Michael Russell

I was I was doing math here, and so I I dare five percent to forty percent.

Nathan St Cyr

Yeah, it's what it's French. I mean, you only have 1.4 million dollars of gross revenue. So if you're expecting $900,000 of NOI, that's a that's you're you're really it's 35%, 35% expenses. Which when I think about when I think about just frickin' property taxes and insurance in San Francisco, I'm like, gosh dang, like that that's a that's a big hefty uh cost right off the gate.

Mike Demson

You bet. Um, you know, the annual taxes are gonna be close to 130,000. So it's it's no joke. Um, you know, we we've got a pretty good grasp on um you know what the expenses are, and you know, there's two ways to to increase net operating income. You can uh increase top line or decrease the expenses, and we we look to operate as as efficiently as possible.

Michael Russell

All right. So this brings up a topic that we've come across quite a bit lately, which is I presume that your underwriting is going with the self-check-in model using technology so that people can check in. So you're gonna go staff light, correct?

Mike Demson

Almost no staff, actually.

Michael Russell

Okay. Your location is killer. One of the things about going staff light that we've observed is it's much more difficult to create the ambiance that can deliver a higher average daily rate because some people want that human element and they're they're looking for atmosphere and they're looking for engagement with people. And that's what really drives the the reviews and the experience. Sometimes when you have a pretty place and there's no one there and it's a ghost town, it's it it feels um kind of sterile. And so I'm wondering like, have you baked that into this element where yes, cutting cost theoretically is going to drive a higher net income, but how will your rates be affected by not having the human element?

Mike Demson

You know, I I think this is largely driven by my experience at working as an employee at Airbnb. Um, you know, we we essentially have um, you know, the design experience, the design expertise, the um, you know, creating a memorable experience um for customers as as the core part of you know everything that we do. Um that's kind of part of my background with marketing. And what we found is, you know, we we know our customers um or who our you know potential customers would be at at this particular location. And, you know, they care about um the amenities. Um and when I when I say amenities as it relates to 400 Bay Street in San Francisco, we're thinking about the the restaurants, Pure 39, the cable cars, um getting out in the next law and maybe doing a cruise uh around the bridge and going you know around Alcatraz and under the Golden Gate Bridge. Um, you know, they're they're not necessarily going to be, you know, at the hotel that much. Um, but you know, we we've essentially got the technology um in cloakes that that allows us to you know create these um frictionless experiences for customers where it's you know easy to check in. And then, you know, we also have uh virtual assistants that that are essentially on standby. Um anytime there's a customer request or an issue, um, if you know I need to step in or or that gets escalated, you know, I'm only you know 25, 30 minutes away. So it's you know a simple um you know human touch if and when necessary, but it's pretty rare.

Nathan St Cyr

Got it. So is this this is the same model that you're utilizing for the Sonoma property?

Mike Demson

It is um identical. You know, it's it's a seamless check-in, check-out. You know, we essentially share a guide with everyone, um, has all of the FAQs, all of the um, you know, recommended uh local attractions, uh destinations. You know, we even have um some affiliates that that we work with that um, you know, they're they're essentially giving favorable rates to our guests. And you know, that's uh another source of revenue that it's uh it's a good good thing to have nice amenities nearby and and to have uh amazing restaurants and bars and um to sort of be right in the middle of, you know, whether you're downtown San Francisco or um, you know, in Sonoma in wine country, you know, knowing where to go is uh I'd say uh a good thing.

Michael Russell

Yeah, this is the crux of it right here. This is what people are, I know people are doing this analysis where they're going, gosh, if I can do remote check-in, I can do staff light, and I can cut expenses, there's value to be made. And I think that um there's absolutely opportunity here. And I know we're putting on you on in the hot seat here, Mike. We're asking you questions, they're tough questions, but I want you to know the where we're coming from with this because we're look, we're intrigued. We want to do this, right? We recognize that this is a phenomenal opportunity in theory. Now, I'm a bit of a skeptic, so I'm always gonna look at, well, all right, how does this actually flush out? And I want people to defend it, not because I don't I don't believe in it, but because I want to do it. So I want to know, all right, is this real? Can we actually cut expenses down to 35% and still generate the average daily rates, particularly in a place like San Francisco, where let's face it, right now, in this moment, rates are down, right? San Francisco is a place that's being avoided. Occupancy is down across the board. And maybe you're looking at that as an opportunity because, like you mentioned, the previous developer couldn't get this thing to pencil, but you're projecting a crap ton of NOI based on um, you know, some pretty lofty goals here. And so flushing all this out in my mind, I'm going, all right, is this realistic? I I love it from on paper. I want to, you know, flush it out to make certain like this is the actual actually can be done. But um, so I just wanted to give you some context why we're asking this because of course I think everyone would like to be able to pursue this model because it's a it's a lot simpler from a operations perspective to not have staff. Once you include staff, it's not only more expensive, it's more complicated.

Mike Demson

For sure. Um, you know, what we're building is is not the four seasons, it's not ombridge. It's you know meant to be somewhere between a three and a four-star hotel. It's elevated in the sense that, you know, it's not like uh a Motel 6, an Icana Lodge. It's um meant meant to be uh a frictionless experience for customers to check in and check out and to get out and explore. Uh very focused on finding the very best location and creating the the very best experiences.

Michael Russell

Yeah. You know, I'm curious because Sonder has a model similar to this, but at scale. Now it's a totally different model because Saunder was all about growth and they were raising money and they were, you know, they were communicating that they are going to grow like a tech company. And so I know it's not exactly the same, but there are lessons to be learned from Sonder. And I'm curious, have you looked at any other competitors that are doing this to kind of gauge what the occupancy levels are or what the profitability is of particularly as in San Diego or in San Francisco specifically?

Mike Demson

So, you know, that there's always competitors out there. Um, you know, it's it's sort of a fact. You know, we we looked at the CoStar reports, we looked at the data um for occupancy, RevPar, um, you know, did some competitive analysis, some positioning, and and ultimately what we found is yeah, Saunder is um one of those uh you know organizations out there that you have to be aware of. Um, you know, I I'd say in you know five to seven years, we we'd love to, you know, think about you know the possibility of uh an acquisition from from one of those competitors, you know, if we create, you know, a very memorable experience and an amazing location and an incredible um asset, you know, I think that's something that you know we've thought about from the start. And some of our um private equity partners actually um they they have direct relationships with with some of those competitors. And it's one of those things that um, you know, depending on on how um growth over time takes takes place, it's it's gonna be something that we we consider.

Michael Russell

Okay, so but looking at Sonor as an example, why are they failing? You know, maybe you don't say failing, but why are they not excelling right now? They're you're seeing that they're pulling back, they're they're not growing, they're they're contracting their growth. And so from your perspective, your lens, and I'll give you some context. We were in the same situation with our hostels. We had Selena, which was like the leader in the hostile world of like growth, growth, growth. And then they collapsed. And now Saunder is in the news and there's publicity about Saunder that they're they're this this self-check-in model is struggling a little bit. I just want to be aware of this. And again, this is more from a personal perspective because I'm the skeptic. Like, hey, how does this work when you're noticing maybe there's some pullback in the market for this model?

Mike Demson

So it's it's definitely one of those things that that we're aware of. Um, you know, if you look at the occupancy data um for San Francisco as a whole, um, it's very different than the occupancy data for the submarket of Fisherman's Wharf in Pier 39. Um, I think location makes a big difference. Um, you know, San Francisco is no different than any big city like LA, San Diego. Um, you know, there's parts that, in my opinion, are, you know, great and very family friendly and um, you know, areas where you'd want to spend time with your family and get out and explore. And there's other areas that you really wouldn't. Um, that, you know, as a former resident of San Francisco, there's certain parts of the city that I avoid altogether.

Nathan St Cyr

Yeah. Look, I I love San Francisco. Um, in fact, I'll do the opposite. I'll I'll go because Pure the Pier 39 area and the fisherman's wharf area, uh, a lot of the brands offer opportunity to stay up in Union Square because there's less demand up there because of what's what's happened over the past few years. Although I do think that it's uh starting to emerge again. Um, but just in my mind, when I go and look at this and I think about expense ratios and where do you get when you're digging in to do research and occupancy. I mean, I go in and I look at brands that carry a lot of weight, right? That have, because of their brand, are gonna bring in and drive occupancy and ADR. And, you know, I'm looking at weekend rates, and they're, you know, they're 175 to 200 bucks in that exact, in that exact area. And so I go, well, what's the differentiator? Like I'm gonna go and I have a whole brand behind me and I have all of their resources, all of their, you know, Marriott is the the the largest hotel brand in the world that comes with massive amounts of freaking power and backing. And you know, their room is 178 bucks a night. What what is a differentiator between why is somebody gonna book with you? You bet. So and at a much higher ADR. You said 270 to 400. I mean, that is a that is a step up, and it's staff light, so they don't have it's not gonna be because, well, there we have exceptional human touch and service, and it's it's a room in the same location, but yet it's a significantly higher ADR.

Mike Demson

I'll share kind of a personal experience. I actually grew up um with parents that you know were timeshare owners at Marriott. So um what I've found is um you know that there are certain customers that will always stay at the Marriott, you know, no matter what. And there's a decent Marriott, um, you know, pretty pretty close to uh Fishman's Wharf in San Francisco. But it's you know not exactly uh curated experiences, it's not, you know, an elevated design, it's not an Instagrammable type of uh trip. And if you're just looking for a place to stay, um, you know, there there's going to be a certain subset of the market that will stay at a Marriott. Um, if you're looking for a spa and in Michelin dining, well, there's there's the four seasons. Um, there's you know a very different subset of customers that are are essentially choosing those two brands. Um, but we're essentially looking to create uh unique and differentiated experience based on you know the technology and the the frictionless uh check-in and check-out, and um also the Instagrammable experience of um you know being in a an amazing location where you know the amenities are the the restaurants, the bars, the the cable cars, all of the attractions that that are literally just right at your door.

Nathan St Cyr

But those attractions are available whether you're staying in a $175 room or a $270 room. The attractions are there on its own. So I look, I'm asking this because we go through this and we try to figure out well, how do we value this? Like, is there what has your research told you as far as the the the market that's specific your avatar that's going to choose that space versus all of the other rooms that exist in that same area? You've said Instagrammable many times, but then when you talk about Instagrammable, you talk about the experiences, but the experiences are available to everybody no matter where they stay down there.

Mike Demson

On the humanity side, that's completely correct. Um, you know, we we think about you know who the potential customers are and the ideal customer profile. It's you know, people who maybe work in tech, it's people with families um that you know don't want to wait in the long line for check-in, um, that want, you know, uh a clean modern room. Um, and you know, ultimately we feel the the differentiator is is the design, it's the layout, and it's the experience. And you know, there's gonna be certain customers that always go to Marriott, and there's gonna be other customers that always go to the four seasons, and and that's okay. That's that's not who we're trying to to get. Or our our approach is is focused on, you know, a different set of the market, you know, right between that three and four star, where it's you know, a little bit um more of an experience than going to a Motel 6 or um, you know, one of the more less expensive options. And um, you know, we're we're essentially looking at the pricing as a function of that.

Nathan St Cyr

Great. Yeah. Well, look, these are again, we're asking the difficult questions because they're the questions that we ask ourselves as we're going in and dissecting different markets. Um, and at the end of the day, I'm gonna roll everything back. And when we look at what you've projected in a future valuation, there is a massive, there is a massive amount of upside that you presented from where your project cost is to ultimately where your end game valuation is. There, so um, you know, even if these numbers from the conservative side, if we were to to take a more conservative approach, um, I think that uh obviously they work extremely favorable no matter what, based on what you've uh talked about from what you're purchasing, your construction cost and and the revenue that you're gonna generate.

Michael Russell

Can I ask you? So you you're getting this, you know, we know the build is about 2 million, right? 2.1. And we know it was for sale about for about 3 million. You said that you were getting it for about a third of that. So I'm just gonna say that this is around a $3 million cost. And if you've got a 35% um down payment, or you said it was gonna be a 65% loan to value, you got to come up with about a million dollars. And what I would like to know is where is that million dollars coming from? Are you guys self-financing that million bucks, or are you raising capital from private investors? You're raising capital.

Mike Demson

Um, we've got a private equity partner um that we actually got introduced um to through through Rich. It's actually one of his um former mentors and um partners that that he's worked with. And um, you know, that was something that, you know, they they were investing in new developments. They had an interest in hotels. And um, you know, we we shared a little bit about um this boutique hotel as well as the um expansion at the Sonoma Stonehouse. And um, you know, there there was some some interest there. And um, of course, you know, we we still have a ways to go with uh, you know, uh finalizing and closing, um, getting the approvals uh for the increased density and you know, actually m moving. Forward, but you know, we we've got um some people at the table that you know could be very good partners.

Michael Russell

Okay, so this is a joint venture deal, this is not a syndication, you've got a partner that's gonna join in on this, correct?

Mike Demson

I've got a partner and also a few other um limited partners that we're gonna be bringing in as well. Um, you know, once once the the time makes sense.

Michael Russell

Okay. So I'm always curious. There's a there's a rule of thumb, more or less, it's all negotiable, but when you do a syndication, maybe the split is 70% of the profit goes to the limited partners and 30% may go to the general partner. When you do a joint venture or you know something like what you're describing, every situation is different. I'm curious to know how how have you set this up. This person, presumably coming in with the majority of the money to invest, what kind of a percentage stake can they expect for investing that money?

Mike Demson

You bet. So, you know, the the terms are are still in flux. Um, you know, what we've heard is that, you know, the private equity partner is looking to be uh a majority owner. Um so they they would of course have some influence on uh not only you know who the LPs are, but what the slip look like. But you know, we're anticipating um something in the the 70-30 range. Um, and then you know, could have you know the typical waterfall where if the returns are better, um, you know, as that's a general partner, we would essentially get you know a larger percentage. Gotcha.

Michael Russell

All right, cool. Look, I I want to shift gears a little bit, if that's all right with you, Nathan, because I want to pivot into this other project that you have. And it's called the Sonoma Stonehouse. You can look it up. And to your point, Mike, the decor that you guys have done with this property, it's it's awesome. It looks great. I mean, from a visual perspective, when you go and you look on your website and you see the photos and what the experience looks like, it's really well done. The design is awesome, and I can see how that will apply for you know this next project, presuming it goes through and anything else you do. Um, but walk us through what the plan is. So coincidentally, this Sonoma Stonehouse that you currently own and operate is 16 units as well. And the key with this, though, is there's major upside. You guys are currently in the process of gaining entitlements to build another 67 units on this property. And you have expressed that this um is gaining some interest from IHG as a possible flag hotel. Can you walk us through what your plans are for this?

Mike Demson

You bet. Um, so this was essentially a value add. Um, we essentially bought um what used to be a behavioral health um facility or or treatment center. Um, it was a historical building, so it had some restrictions on the zoning, on the uses. Um, when we first acquired it, it actually had um an affordable component that we needed to address in order to uh essentially you know turn it into a boutique hotel. Um now, when we purchased it, it actually came with uh an adjoining lot next door. Um it's a pretty big lot. And um, you know, we we went through this process. Uh it was an RFP process through uh um the HVS consultants, and ultimately, you know, we found that there were several brands that were interested in coming to the area. Um they liked that we already had, you know, the 16 rooms up and running, stabilized and and had plans to essentially build an additional 67 rooms next door. Um ultimately IHG and their big vignette um sub brand was you know the best fit from you know the um offer for for key money. And you know, they they turned out to be you know the kind of partner that that we were looking for because you know they they shared you know a similar vision, a similar approach, and you know, it it turned out to be a pretty good fit from from what we were looking for.

Nathan St Cyr

Okay, and you said that um in the beginning stage of this, you went through the RFP. What does that stand for?

Mike Demson

Uh request for proposal. Um anytime you know you're going through a ground of development, you can essentially um, you know, if you're thinking about going down the the branded route, you you can get um proposals from from different hotels, different brands. Um, and that essentially just allows them to um you know make make an indication of interest in a particular area and you know you you get some pretty good data just from that in itself. Awesome.

Michael Russell

Okay, so IHE is this big company, but they've got they own they own quite a few of these household names, these brands that we all know of. Which is the brand that you are expecting will you ultimately flag this hotel-asque?

Mike Demson

Bet. So it's you know, one of their smaller brands, uh vignette.

Michael Russell

Vignette. Okay. Yeah, you said that. I didn't attach that. I never heard of vignette. Nathan, are you familiar with that?

Nathan St Cyr

Well, just in in knowing their different brands, I have heard that name before, and it seems very, very fitting for where this is located and the the whole stonehouse concept that it would be that it would be one of their brand branded brands under the umbrella that's name is vignette. I mean, it just sounds like, okay, yeah, this is Sonoma freaking stonehouse, right? Done by Vignette.

Mike Demson

It's a historical building. Um, it's been it was built in 1909 by some Italian artisans that were, you know, stonemasons. They came over, they they built it. Um, it was used for different purposes, you know, throughout that time. And ultimately, you know, we we think that the boot boutique hotel um uh approach is is the right way to um you know pay launch to to to that particular um site and and the building itself.

Michael Russell

Okay, cool. I'm just googling it right now, but I want to understand the business model here. So you you buy this thing, you want to build these additional units, and then you want to get it flagged under vignette. And I guess I'm curious to um how does that work? Uh do they manage the property then at that point? And you're just the property owner and they're technically the property manager? Walk us through what the process is.

Mike Demson

That's correct. Um, you know, they they give key money in exchange for you know covering the entitlement costs, the development costs. Um, and you know, it really is a partnership. You have to figure out, you know, is is this a company or an organization that that you want to work with? Um and you know, their vision has to be aligned with you know what what you're looking to do. Um, you know, we we also we spoke with people from Hilton and and Marriott, and you know, we we determined that uh IHG was the the best fit for for what we were looking for. Okay, what is key money? Um it's it's essentially just a way to uh cover the entitlement costs. There's you know architects, there's engineers, there's studies, there's surveys, there's there's a lot to um getting these entitlements approved. Um there's you know city-county fees, there's there's a lot of fees.

Michael Russell

Okay, so they front the cost of this. And then what if it doesn't go through? Do you have to pay them back?

Mike Demson

So, you know, we we essentially reimburse ourselves once um you know everything is is said and done. We we don't necessarily um take the payment up front. You you've had to go through the approval process, get the entitlements, and and actually get it built. Um, and you know, at that point, you you can reimburse yourself. That's um, or at least you know, the the way that you know we're approaching it. Okay, there may be, you know, uh other arrangements out there. And yeah.

Nathan St Cyr

So basically you're gonna build a hotel regardless. So you're gonna go through all of those costs. You're gonna go through design costs, you're gonna go through all of those things. But because you have created this relationship and made the commitment to them that they will be your partner, then they're going to give you a a per key reimbursement for um what you've gone through in the entitlement process.

Mike Demson

That's exactly it. Um, you know, it's it's not necessarily the right fit for you know every operator out there, but you know, it was one of those things that um once you're in that you know 50 plus uh range, you you start to think about you know, having uh a day-to-day operator that that's in place that you know it becomes uh a much larger asset. So revenue management, um, having you know the the operations expertise um and and assistance and processes, you know, that was something that you know we didn't want to build this massive asset and then be uh out of our debts.

Nathan St Cyr

Yeah. This is freaking, this is freaking awesome.

Michael Russell

So yeah, Mike, I've really enjoyed this conversation. And one thing we try to do each episode is provide a nugget to our listeners, something they can take away that they can learn from and apply for their own journey. And in your experience here, if you could share something with our listeners, if they wanted to pursue developing a hotel of their own, can you give us some actionable advice for our listeners?

Mike Demson

I bet so anything in commercial real estate is uh it's a team sport. Um, leverage the expertise, leverage the experience of your contractors, of your consultants, of your architects. Um, think about you know the experiences that you've had personally, staying at different hotels, different experiences, um, and you know, build build something that you you yourself would be excited about. I think, you know, that's sort of the thesis of you know the the Stonehouse in Sonoma and what we're doing um in San Francisco. You know, we we are essentially creating the those kind of experiences that you know we we'd want uh as a consumer. And um I think when you approach it from a common sense perspective, that's in my opinion, the right way to do it.

Michael Russell

Yeah, is there anything that you would suggest not doing?

Mike Demson

Uh don't overextend yourself. Um, you know, I I think 65% loan to value is kind of a good uh threshold for for debt. Um make sure that you know your limited partners or um private equity partners are aligned with not only the timeline, but the vision for a project. Um, that they are are someone that you'd be comfortable working with for five to seven years. And um, you know, hopefully on the limited partner side that they're not gonna look to cash out early or or need um to to essentially have a liquidity event um sooner rather than later. And you know, that that sort of simplifies things in in my opinion.

Nathan St Cyr

This is just like I'm juiced because, you know, in our our vision, this is an area that um we obviously at this point lack expertise in, but is an area that we want to continue to grow in, is the opportunity to is the opportunity to develop. And just having this conversation and getting the wheels turning, getting a little bit more uh just getting a little bit further along in our our own process. Uh, this is this is the exciting part about having these conversations for me. So uh thanks for the value that you brought, not just to our listener base, but to us. That's I'm I'm freaking leaving this conversation fired up, Mike. Thank you. For sure.

Michael Russell

Um if our listeners want to stay in touch with you or follow along with your journey, how can they do so?

Mike Demson

Instagram, LinkedIn, um at Mike Dempsen or Mike.dimson. Um, tosses about uh consulting practice, dimpsonconsulting.com. Uh yeah, happy to answer questions. Uh reach out and I'll be sure to uh you know share those specifics for for show notes.

Michael Russell

Yeah, I'm excited to watch your journey with this project, man. That's there's a lot of upside in what you've described. So this is going to be really neat to observe. All right, listeners, thanks so much for tuning in to another episode of the Hotel Investor Playbook. He's Mike Dempsey. We are Mike and Nate signing off, and we'll catch you again next week. Aloha. Thanks for hanging out with us today on the Hotel Investor Playbook. If you got even one good nugget of wisdom about hotel investing, do us a favor, hit that subscribe button and leave us a five-star review. And hey, if you're feeling extra generous, drop a quick line in the review section. Something like Mike and Nate are the go-to hotel investing guys, or best podcast for anyone looking to crush it in hospitality. Or, you know, whatever feels right. Those little shout outs go a long way in helping more people find the show. And they pretty much make our day. All right, appreciate you guys. Catch you next time.