Boutique Hotel Secrets Podcast

11 - From $0 to $1.2M in 90 Days: Our First Hotel Capital Raise with Micah & Adam

Share episode

Use Left/Right to seek, Home/End to jump to start or end. Hold shift to jump forward or backward.

0:00 | 39:34

In this episode, Adam and Micah share their journey from zero to $1.2 million raised in just 90 days as they approach closing on the Wesley Hotel, covering everything from navigating SBA lending and courting multiple lenders to discovering the power of building relationships with financial advisors and leveraging bonus depreciation for massive tax benefits.

Connect with Micah:
Instagram: micahinvests
Tiktok: micahinvests1

Connect with Adam:
Instagram: adaminvests1
LinkedIn: adaminvests1
Tiktok: adaminvests1

Thinking about Boutique Hotels?Schedule a call:
https://bit.ly/4t1q3bb

SPEAKER_00

90 days ago, we didn't have a single dollar raised on this hotel. Today, December 2nd, we have $1.2 million raised. Hey everybody, I'm Adam Wallace, and I'm here with my co-host Micah Thomas.

SPEAKER_01

We're short-term rental operators who made the jump into boutique hotels.

SPEAKER_00

And we're in it right now, raising capital, renovating the 50-room property. We're figuring it out as we go.

SPEAKER_01

This is the boutique hotel secrets podcast, and these are secrets.

SPEAKER_00

Welcome in, everyone, to another episode of the official Boutique Hotel Secrets podcast. My name is Adam Walls. I'm your host, and this is the show where we share all the secrets. We tell our story of going to zero to one from short-term rentals into the boutique hotel space. We have guests, we have educators, coaches, we got other students. But today, I want to update you a little bit on our story because we're actually getting dangerously close to owning a hotel. As always, it's not just me. Let me bring in Micah Thomas, my mister from another sister. How you doing today, Micah? Hey Adam, how you doing?

SPEAKER_01

I am doing really well. I am excited. I'm nervous. I'm calm. I'm ecstatic. You name it. I've probably felt it in the last 24 hours, if not the last week. Like you mentioned, we're getting really close to closing. Very excited, but because of that means there is a ton of things to do. We hear parallels and running multiple parallels at the same time. There's probably at least 15 things that are moving in different directions that all need to somehow be finished before we close. So I'm excited. Like I said, but uh there is a ton of things to do.

SPEAKER_00

It's in the air. And again, since we'll publish this a little later, just for kind of reference for ourselves and for kind of our, I'm sure our family members and friends. This is that we're recording this December 2nd. And we are potentially two weeks away from closing on the Wesley Hotel. And you're exactly right. A lot has changed, just even in the last month. Again, we've hosted some podcasts and interviewed some of our friends and folks in our community, which I think is hopefully really valuable to hear different people's stories, kind of attacking this from different angles. But man, I thought maybe we just start with like mindset. We can go into lots of different trajectories and we'll update you on SBA lender. We'll talk a little bit about success that we've had raising capital uh in this episode. We also want to talk a little bit about cost segregation and why getting this in December is so much more advantageous than finishing this out in January. But let's maybe just pause and talk about where our heads and hearts have been over the last 30 days because it it has been a roller coaster.

SPEAKER_01

Yeah, for sure. Roller coaster is a great way to describe it. But right now I'm in a, I would call it like a state of euphoria, maybe. Like I just I have such conviction that this is going to get done. We're gonna pull this off. We have all the pieces we need and we're gonna get this deal across the finish line. I don't know if it's because I'm writing my goals down every single morning on the same sheet of paper, or if I just have so much momentum behind our deal that I just I really feel like this will be done. And I would tell you, this is a lot different than I felt last week or the week before. But as we get closer, it seems like things are starting to fall into place. We can talk about capital raising and all the other things, but I'm really in a good place. And the more effort and energy I put towards getting this deal done, it just feels like I have so much more confidence that it will actually get done. There's no disbelief. There's not even a thought saying, what if this, what if that. There's only like laser sharp focus on what will happen and when it will happen. So that's how I feel on my side. How about you? How's your mindset going into the last two weeks of closing?

SPEAKER_00

Yeah, I think you summarized it well a month ago. It was still like 70% this is gonna happen, 80%. I don't know, depending on the day and the hour. We were getting ended inundated with a little bit of good news, a little bit of bad news. And so it really tests you, right? Kind of your fortitude about you need all 382 things to land correctly in the right sequence. So it's a if I don't know, it feels like you're an air traffic controller out here, just trying to guide and nudge and drive things forward. But I think you're exactly right. A month ago, I was unsure. You know, I was trying to have as much conviction and confidence and clarity about the vision as possible. But if I'm really honest with myself, it's yeah, it's exciting, but it's a little bit scary. And I think just humans have evolved to protect themselves. So what if it doesn't work out? What if you can't raise two million bucks? Like your head is always thinking of about backup options or plan B's. But I think all the coaching that we're getting in our community and from others is a little bit more of this. You gotta burn the boats, man. Like you gotta have 100% conviction and faith that this thing's happening. And the more relentless that you can be with that conviction, the more likely that just I don't know, the right puzzle pieces start falling into place. I would say probably the biggest thing that's happened over the last month is SBA. And again, a month ago, we thought we were gonna get $3.95 million dollars from SBA using a 7-A product. We're recording other lenders in the background because we did not have what's called a letter of commitment from the bank. We had a term sheet, we'd gone through pre-qualification, we'd gone through the credit committee. So it's all these hoops that you need to go through, but we did not have this letter of commitment. So we're talking to other banks because you hear this unfortunately, but people fall out of contract and stuff goes sideways. And I think we it feels good that we took an approach of let's at least have some backup options. But once we got that letter of commitment, and by the way, maybe you can talk about the number increased. We actually thought we were gonna get four million from the bank and talk about good news or lucky news. The bank is actually after extensive underwriting and putting us through some pretty rigorous questioning, like we came out on the other side with more money.

SPEAKER_01

Yeah, yeah. That's a really good point. Man, where do I start? So you're exactly right. We've talked to a total of 62 banks, and one day I'll probably write them all down on a sheet of paper to share with the class just for proof. But that's exactly right. And lenders probably don't like to hear this, but I think it's very smart to court several lenders at the same time because lenders can back out for a myriad of different reasons, and some of them being, none of them being really your fault at all. And just to give some background on what lenders may like or they don't like, if they have too many hotel loans in their portfolio, that means that your hotel loan likely won't get approved if they don't have the risk appetite for hotels or you're in a tertiary market or you're not a flagged hotel. These are just random reasons that we've heard while talking to many lenders on why they weren't able to lend on our product. So being that we've been down the road into this process with several lenders and we've still heard no, it really behooved us to talk to more than one lender at the same time until we got a little bit more solid news or that letter of commitment saying that this lender was committed to getting our loan across the finish line. So that's probably the first thing I would say. And now that we have that commitment letter, we are learning way more things than I think we knew before, just about how this SBA product is created, who it's created for, and then some of the requirements that are needed on the back end. So while it may be like a very stringent loan type, very beneficial. And like you mentioned before, we had a pretty long talk, about an hour and a half talk on the phone with the elite underwriter who asked us every question in the world that you could think about. And it really felt like I was explaining myself to my mother when she was asking some of these questions. She asked why me and Adam knew each other, which I mean, I guess it's interesting and important to know, but it just didn't seem like it had anything to do with the deal. She asked the same question a lot of different ways. Where are you getting your projections from? What data are you pulling? How do you have the reasoning that these are gonna, these numbers are gonna work? But they must have liked what they heard because, like you said, we were able to get an increased loan amount where we don't have to raise 2 million. Now I think we're at about $1.5 million, which is such a relief. And it feels a lot more attainable. And I would say a lot of credit to us for being able to speak with convince conviction, speak with facts on the data that we've had and we've learned and our vision with this project. So that's probably a general idea of my experience with SBA lending. And I could probably go into more detail, but I'm interested to hear what are your takeaways up to this point with SBA lenders.

SPEAKER_00

Yeah, maybe even before the SBA lender, something that was unanticipated, but certainly felt like it was beneficial during and after was working with a broker. And we didn't even know this, but our broker in this deal was actually sharing comps and additional information with the actual lender and the underwriting team, get giving them data and helping guide to go, hey, what these guys build are building is not in this market. And so we can look at a basket full of 25 apples all day long and figure out where these guys go, but they're building an orange and they're just gonna be different. And so we just need to look at other markets where oranges exist and see why that's an outlier product and why people are willing to travel and maybe spend an extra 10-15 bucks to stay at places like these that are lifestyle oriented, that are more design forward, have the cool murals, cool pool, Instagrammable. I think this is uh it's not just us, but this is very in vogue right now. And I didn't realize that our broker was sending some of this guidance or planting some of these seeds. So it'd be interesting in an alternate universe somewhere if we didn't have a broker, if they would be willing to give us up to the four seven. But the other factor was we had, I can't remember, read or talked with somebody about FF and E budget kind of being on the outside of that, that SBA dollars could not be used for FF and E. So we effectively left it off. And then we also, because again, getting back to just document control, the SBA actually had a previous bid from RGC that was just a smaller number, right? And so it's these small clerical errors if you're not on top of it, if you don't know your stuff, if you're not sharing this kind of transparently, all of that loaded into the SBA at the end of the day just going, well, is and then finding out that hey, if you talk to us 90 days ago, we didn't have a single dollar raised on this hotel. But today, December 2nd, we have 1.2 million dollars raised. So it's just a different conversation at this point in the game about where we're at and why they were willing to give us 4.7 million dollars of debt. So, anyways, but one last comment I would make here that I think is might be valuable to people is thinking about who the SBA uh product originally was for. So my dad bought an ace hardware way back in the day. He's retired now, but that's how he did it. The owner seller finance, like the 10% kind of down payment. And it was a small business administration, a government program working with local banks to say, hey, we'll back you, we'll underwrite this, and we'll basically give you some insurance or protection because we want to stimulate the economy and we want to help out middle Americans all across the nation realize their dreams and open up a flower shop or an ace hardware or the Wesley Hotel. And you'd actually told me this, Mike. Uh, when you're talking to SBA lenders, really the idea should be to paint the picture of the transformation, the story, all of the conservative underwriting that you're putting into this, but that really your goal is to perform on this loan over 25 years. So again, we've got pretty stringent, what do you call it? If we refinance too quickly, yeah, but prepayment penalties, right? So FBA does not want to hear, oh, we're gonna buy this thing, and then 18 months from now, we're planning to refi out of this. That is not what the bank wants to hear. Again, some of the things that we're sharing with investors or that are in our minds might be different from what we're sharing with the lender. So, anyways, I think that's just helpful context for people that are looking at SBA loans versus conventional. And I would say the last thing that I'll say about SBA and then we can move on, but they're one of the only products that can look at proformas and look into the future. Most traditional banks, conventional banks, they're all looking in the rear view mirror. And for our specific hotel, when they said, Hey, can you send us the last three years of PLs and tax forms? And we did that, and they go, Hey, hang on, this thing's losing money. We can maybe how much you guys need like 10 bucks or like a hundred bucks? We need millions of dollars. So most traditional banks just are not willing to lend on something that's distressed or is a significant value add opportunity. And so that became really compelling for us to look at again the 7A or the 504 products because they're future focused. They're betting on Americans looking forward and our ingenuity, our tenacity, our mindset to create something great.

SPEAKER_01

Yeah, yeah. And I just to piggyback off of what you're saying, that's one of the reasons why they don't want you to refinance out of these types of loans because they're believing in you and your product, and they know that there's not other loan products, if any, that will do the same thing. So, because of that, they want you to be a long-term partner. Of course, they want to make their interest on the back end, but they're buying into your vision. So you have a long-term partnership with the small business administration. So, with that being said, I know earlier we talked about pitch decks and just what you present to a lender or an SBA lender versus what you present to an actual investor. So it's okay to tell investors we plan to sell in year five, six, ten, whatever the case is, we plan to refinance in year three, four. But the banks, they don't really want to hear an exit strategy. Again, they're looking at this from a long-term point of view. They want you to work with them for the life of the loan. And then, as well as what you're showing them as far as investor returns, those aren't necessarily things that the bank wants to hear. They understand that there may be money that has to be raised to make this deal work. But as far as showing them like what a waterfall looks like or a preferred return, it's not something that I would say they're interested in. Yeah, it just goes right over their head. And we're talking to someone or companies that are very risk adverse and they're really looking for a reason to say no. So you don't want to give them any additional information that's not necessarily going to strengthen your case from the lender's point of view. So I just wanted to add that in there as well.

SPEAKER_00

Yep, yep. I think that's great. So, anyways, huge unlock there, getting the debt secured, getting that letter of commitment. So if you're on that path, just know that it can be can feel perilous. My advice is to court multiple lenders. There's a danger and a risk of putting all your eggs in one basket. I won't name names, but there is someone from our community that just fell out of contract because they put all their attention on one lender. All the things that they were saying were again assuring them that they could perform. At the end of the day, they couldn't and they backed out and they didn't have that letter of commitment. So, anyways, I feel really good about our debt position and where we've gotten to there. And I thought maybe today we could up maybe give an update kind of on the capital raising side. Again, you and I, I don't know, a year ago, do you think you could have raised a million bucks?

SPEAKER_01

No, this was not in my wildest dreams a year ago.

SPEAKER_00

It's pretty wild, right? It's pretty humbling. And I would say, too, like this is the hardest time to raise money, is when again we've got six years of hospitality experience in the Airbnb world, but that's residential. And when people start really asking about your direct experience, how many times have you been a GP? How many times have you syndicated? How many times have you transformed or done a value add in a commercial in the commercial space? Look, even even the guys have been in the game for 50 years, at some point they had zero, and that's us right now. So it's the kind of most vulnerable you'll ever be, and probably the hardest pitch or raise that you'll ever do is your first. But this is why I think 90 plus percent of people start with a reg D 506B, which is friends and family, where again it doesn't really matter if you're accredited or non-accredited, and you might take a thousand dollars at a time. That we ended up looking at that approach, but we actually opted for the 506C, which allows you to generally solicit, but everyone that you take money from has to go through a pretty extensive or more extensive verification process that they're accredited. You can only take money from accredited investors. But we thought, okay, if we're sharing our story on a podcast, we want to post about this and share this transformation story. It's very likely that we could get in trouble if we're limited to only sharing the story with friends and family. So our goal, and because we knew that we wanted to be built out loud and be more public, we chose the 506C route. And I would say most of the people that we've talked to, anyways, were already accredited. Your mileage might vary. I feel a little fortunate and lucky here that I'm based in the Bay Area in a pretty bougie part of the world or a high cost of living. So you end up getting high net worth people or people, and these are doctors, lawyers, a lot of technology folks out here. But I've had to pretty much be to me almost like borderline annoying, where like every dads meet up, every chance I have to talk about what I'm up to, it's about I got this hotel thing going on. And I don't try and pitch everyone in the world, but I just I've found that the more vocal and the more willing I am to share that this is what I'm up to and that I need help and I'm looking for people that are looking to place capital. Do you know anybody that that has led us from again 90 days ago, didn't have a dollar raised to today $1.2 million. We have enough money to move forward and close on the project and to start construction, which is exciting.

SPEAKER_01

Yeah, yeah, that's that's such a good point. And I think there is some value, really a lot of value, in always talking about what you're doing, what you're excited about, letting people know what you're doing. Because you may think that people know what you're doing, you may think that people want to invest in you and they're choosing not to. But a lot of times they just want that personal question or that personal idea. Like, hey, I'm investing in a hotel. Are you interested in this? Or do you know somebody who's interested in this? And a lot of times you'll get people who ask more questions, they want details, they want to know where. So, yeah, for us, it feels like we're just a broken record playing over and over again. But for a lot of these people, they want to know more, especially like you said, people are looking to place capital. Our deal is fortunate enough that we can get tax benefits as long as we close before the end of the year. So that is very appeasing to a lot of individuals. But before we go to the bonus depreciation and the cost eggs side of things, do you want to highlight a specific individual that you have in your network that really helped us raise the amount of money we raised?

SPEAKER_00

If you're getting value from this, follow the show and share it with one person who's ready to move beyond short-term rentals.

SPEAKER_01

And if you want to learn more about the boutique hotel secrets community, the link is in the show notes. Yeah.

SPEAKER_00

So I won't blow him up by naming him outright. Maybe later. He might be interested in being named. I don't know. But it's fascinating because he's an independent registered investment advisor. So an R I A. So he's a fiduciary himself. He manages other people's money. But he's just, he's we've been family friends with this guy for five years out here in Lafayette, Arinda, Moraga, the La Marinda area, just in the East Bay. And again, we had him over to our house and I was chatting about the hotel, and all of a sudden, I thought it was just kind of like polite conversation. He was just humoring me by asking questions, but then it turned into another conversation and another conversation. And before I knew it, I was like, oh shit, like I think I'm being vetted right now. And that's literally what he was doing. He's doing his due diligence to go as an independent RIA. Obviously, he makes his money assets under management. So kind of that classic like bonds, stocks, stuff that you can buy on Vanguard or Charles Schwab or whatever. That's how he deploys investor capital to make sure that they're participating in the upside, but he's actively managing it and he's trying to figure out hedges. So if the market is cut in half overnight, that you just wouldn't have the normal exposure that most portfolios would have. So, anyways, like I've been for the last 10 years just like an index fund investor, not trying to pick stuff. I'd use some financial guys in the past, but just decided let me just throw it more or less in the total stock market or SP 500, etc. But what became abundantly clear is that these RIAs, again, if you've been managing somebody's money for 10, 20, 30 years, they've got millions of dollars. One way to help them diversify is to find alternative places to put your money outside of the stock market. How can I help people make 10, 15, 20 percent on their money or a portion of their money if the market's sideways or if the market's down? So, anyways, and that was hilarious. I think I told you this a week ago, I attended, I don't know, now I'm looped in with all these capital raisers and influencers and all this. And I went to a little mastermind or a little workshop with a guy, and this was this guy's pitch was that I accidentally stumbled into this, but he was basically saying, as syndicators or people raising money, you should target people like this because they're gonna go out and basically sell or advocate on your behalf. And that's exactly what's happened, Micah. So we're getting $500,000 of our $1.2 million from this one person, but if because of his trust, his credibility, his relationship. Relationships with others. There are people that are going to be putting $50,000 to $100,000 into our deal that I've never even met. Yep. Which feels absolutely wild to say out loud. But how many of these people are out there in the world? And for somebody who's worth, I don't know, $10 million, $100 million, taking a hundred thousand dollars shot on being a part owner of a cool boutique hotel. It's interesting.

SPEAKER_01

For sure. You're exactly right. These are high net worth individuals. So if you can't get exact or direct access to these high net worth individuals, I feel like you have the next best thing, the person who manages their money. So you don't, it's there's, I don't know, I think about this a lot of different ways, but the one thing that really stands out to me is you have to foster this relationship. This isn't something that you just go do overnight. It's really important, like you said, you've had this relationship for five years and didn't even realize that this could be somebody who's an asset to us, and really for his benefit as well. But it starts with fostering the relationship and having somebody who trusts you because that person that you mentioned, he now has to go and speak to his investors about an alternative asset that he believes in, why he believes in it, and why they should put their money into it. I just wanted to say that it's really important that that we really, I don't know, just continue to push our limits and what we think we can do because this is somebody who has pretty much been over to your house several times before and we just we didn't know it. And this is somebody who has brought a substantial amount of capital to our deal. So just wanted to highlight that and kudos to you for being able to make the connection.

SPEAKER_00

Yep. And look, over the past 90 days, we've also talked to very wealthy people that we've met one or two times, or sometimes we got an invite on the books and then they cancels because they don't know us and they're worth a ton of money. That's exactly right. Who are these guys? So when there's not a relationship and somebody's got a lot of money, I think the natural inclination is they're guarded and they're skeptical, and they're like 99% going to say no. And so I think this is kind of this interesting strategy we were noticing as we were setting up more and more appointments with quote unquote whales, people that could write a one to two million dollar check. By the way, we had a guy from NVIDIA who said yes for up to two two million dollars, and then the next week was out, right? So it's like you can meet these people, there are lots of people with crazy amounts of money, but how strong is that relationship? I think at the end of the day, and so this has been a very organic, natural process. I'm finding catching whales is really hard. And then but on the flip side, catching minnows, again, we don't want a thousand investors putting in 500 bucks. So there's just this interesting tension between where's the sweet spot? And at least for us, I feel that 50, 100, 150k range has been where most of the individual investors have lived. Again, it's a small, a relatively small proportion of their wealth where they can take a shot on something like this, they see something, it seems fun, it seems interesting, they want to help the next generation of entrepreneurs, they want to be able to tell their friends at a dinner party that they own a hotel. And when we have that grand opening in May, like these are the people flying down with us to hang out for a weekend or a week. Like, it's one of my favorite things about this asset class. Just like an Airbnb, you and your family can go use your Airbnbs. You can take friends to your Airbnbs, and it's okay, there's an opportunity cost, but it literally doesn't cost you. Your accommodation is covered. Like when we go to the Black Hills with friends like last July 4th, it was awesome to not have to come out of pocket $500 a day for hotel costs or accommodation costs.

SPEAKER_01

Yeah.

SPEAKER_00

Like I just keep imagining in May with all these friends that kind of believed in us taking a shot on this. I think we're gonna get to consume it and enjoy it together. And then already we're having conversations about if this goes well, Mike and Adam are not stopping here. We want to buy a second, we want to buy a third. Joel wants us to buy five. So we'll see where this goes. But again, I think starting kind of small, starting with friends of friends, starting with acquaintances. But this might be a new strategy that that again, if you're working on your first-time hotel, I stumbled into this, but maybe this is a little breadcrumb that you can pick up. You might just be able to literally Google or use ChatGPT to figure out do I have some independent RIAs in my neighborhood to already know some of these guys? Could I have some conversations? I bet you they might have a handful of investors that they manage that would be open to a conversation about additional diversification or a chance to double, triple their money over a set period of time.

SPEAKER_01

Yeah, yeah, I totally agree. So I do want to pivot now. We're gearing up for close. Like you said, this is this December 2nd, and we're trying to close. And I believe we will close before the end of the year. And with that, become it comes a very large tax break. So I want to talk a little bit about bonus depreciation and just cost segregation, all the things taxes. And I want to lead by saying we are not tax professionals. Please do not take our advice. But I do think that there is quite the benefit our investors will be getting this year.

SPEAKER_00

Yeah. And we we talked to three, four different cost segregation firms. There's small shops, there's national shops, there's virtual shops that kind of became popular in COVID and all this. And then obviously there's residential, there's commercial. So there's lots of flavor. So just as we've been out there interviewing accountants and lawyers and designers, like COTSEG is just yet another kind of vendor for you to consider, but there's significant upside here. And some people have already done this like on their Airbnbs or homes, so they're aware of what happened. Trump's big beautiful bill reset bonus depreciation. It used to be 100% year one, 80%, then 60%. Every year it would go down, and then Congress would have to approve or put it back in motion or reset it to 100. The big beautiful bill, permanent 100% bonus depreciation depreciation for at least the foreseeable future until tax laws or legislation changes. But effectively, what this means, and again, we're gonna buy this building for let's call it about six million dollars all in. The first part is you have to figure out the land value and you exclude that. So land is not depreciable, but then you go, okay, we've taken off in our case, maybe let's call it 2 million bucks for land value. So if we still got four million bucks left, okay, how much of that goes into these different buckets? And the buckets are useful life. So how much goes into the three-year bucket? So it could be like our mattresses, how much goes in the seven-year bucket, the 15-year bucket, et cetera. And then the final one is 39. So the traditional straight line depreciation on a commercial asset is 39 years. So again, you'd figure out your purchase price or kind of your basis, exclude land, take that number, divide it by 39, and that's your depreciation expense. That is a paper loss that the IRS allows you to take to help offset rental income, quite frankly. So it's a passive loss. But for people that have passive gains, this becomes very interesting. And anyways, the initial report basically said they're giving us a range of outcomes, but the median, like their expected outcome, is probably about $500,000 of tax savings in 2025. And so again, we'll take a look at kind of the final pool of our equity. We'll calculate kind of ownership, but roughly speaking, let's say if somebody wrote us a check for 100,000, maybe that's five, six, seven percent of the pool. They could be looking at 25,000, 30 of passive losses in 2025. So again, Micah, you hand me a check for 100 grand. Maybe you've got other Airbnbs or other rental income. I hand you back 35k of passive losses to reduce your taxable income. So that sounds pretty sweet. So I don't know. How did I do? Any reaction to that?

SPEAKER_01

I know we said we weren't tax professionals, but you sure sounded like one right there. So no, you're exactly right. The benefits are amazing, especially when you think about trying to write off some of those passive income. There's another thing we found out about. I'm not sure if you'll be as good about explaining this, but it's QIP or qualified improvement property, and that's a depreciation of 15 years. So would you mind taking a stab at that as well, Mr. Professional?

SPEAKER_00

And what's crazy is they ran their original the Cos Seg company, gave us projections, and this might be an interesting reason to use these guys. And if you guys, again, have questions, please DM us or if you see this. But we could have Preet and Chris and his firm on to answer your questions or to explain this from a professional's perspective rather than an armchair expert over here. But QIP is beautiful because basically you think about we're gonna spend about $2 million to re-renovate and reposition this property. And out of that $2 million bucks, I don't know, call it maybe $200 to $300K will be on non-QIP stuff. For example, the roof, some of the electrical or plumbing. So there's some exclusions just on the normal bonus depreciation. You can't uh write off land. QIP is kind of the same way. It's a 15-year basis, but it's within the walls, it's only on commercial property. So you can't use QIP on residential. That's an important distinction. But if it's basically if we're, for example, we're redoing the bathrooms. So we're gonna rip up the tile, rip up the tub, put in kind of new spa showers, new vanity, new all this, new electrical, new plumbing. Everything that's happening inside the building is able to go on this QIP plan, which is great. And again, most of it will be like an automatic deduction. You don't need a second cost segregation study. It is like automatic, and basically it's one of those things that IRS is assuming if you're doing this within your walls, you get to automatically claim it. You would have to like exclude yourself if you did not want to participate, which obviously we don't. And then the other side of this, all the F and E, so furniture, fixtures, and equipment. So we're buying TVs, we're buying mattresses, we're buying all the stuff that goes in the rooms. So that is eligible for QIP. And then finally, all the external amenities. So we're putting in a barrel sauna, we're building a deck, we're like anything that's non-permanent, which is most of the amenities that we're putting in. Imagine like a day bed. We're gonna build that out of like wood or maybe use something prefab. That thing's probably going to have a shelf life of less than 39 years, and therefore the IRS lets you bonus depreciate or accelerate the depreciation on this. And again, my understanding of QIP was it was the same old, it used to phase out or phase down from 100 to 80 to 60 to 40 to 20 to zero. And then Congress would need to come back in to enact this. But right now, because bonus depreciation is 100%, anything that falls in that QIP bucket is a hundred percent like eligible for acceleration. To the tune of, again, we're checking with our professionals. It almost sounded too good, Micah. But 2026, our investors, if they're putting in 100 grand, should probably see 60 to 70K in passive losses.

SPEAKER_01

Yeah, that's exactly right. And I think we found a little bit, I don't want to call it, it's just something that we didn't know about. I don't I want to be careful to use certain words when we talk about taxes, but yeah, and the accountant that we talked to was very quick quick to tell us wait, you can use QIP for pretty much all of your interior because you guys are doing a renovation, all of your interior changes you guys can use as a qualified improvement property and pretty much accelerate that depreciation. So once he explained it, it was very straightforward when he explained it and you as well, but it just made so much sense. And like you said, it almost felt like we were getting over because of the amount of losses that we could create. But that I think that's really the benefit of bonus depreciation and why people do it, because you're able to accelerate a lot of those losses. So very exciting. And it felt even better to tell our investors this as well, because we're talking to investors that have made some pretty big gains over the course of the year and probably will do the same next year. So this has an immediate benefit on our investors as well as us as well. So just excited. Um go ahead.

SPEAKER_00

And I was gonna say one important caveat to note is again, it's passive losses. I originally was thinking, oh, I've got some stock and RSUs and I can sell that and I create a capital game. Can I use this passive loss to offset that passive income? That's not the case. So again, they're gonna go into different buckets, but this is called like a portfolio game versus so, anyways, check with your tax advisor, but don't make assumptions that this is gonna wipe that out. Or it's been really popular in our space, people looking at the STR tax loophole. That's where you materially participate. You're active and the most active in your actual rental business. And then you can use bonus depreciation or passive losses against active income. So that's a huge kind of unlock for people. But if you're investing in a syndication and you're throwing 100K at us, uh you're a limited partner or you're a member in an LLC. So by very definition, you are passive. You are not active and you would not be eligible. So I just that was an important distinction. And my mom was actually even potentially interested because she turned 72 this last year. Happy birthday, mom. She's facing the RMDs, required minimum distribution. So she's got a retirement count. Government forces you to liquidate X percent of your portfolio, and she's facing higher and higher taxes each year. So she was thinking, oh, maybe I can invest in your thing, take a tax loss. Again, the passive tax losses that we're creating are best for if you've got other K1 or syndication kind of income that's coming in passively, or our hotel in a couple of years, again, you'd be able to wipe out future gains. Or if you've got a rental portfolio, quite frankly, we're hanging out with lots of people that are active real estate investors. And so if you're showing rental income, schedule E or Schedule C, I guess in this case, schedule E, we're looking for that passive income. This can be used as a passive loss to knock that out. So just wanted to, again, these are conversations over the past month. We're learning every single day. But obviously, before you make big moves or you're asking other people to make big moves for you, keep consulting pros to consult on your specific situation.

SPEAKER_01

Thank you for this informational session, Adam. But no, in all reality, this has been great. I want to be respectful of everybody's time. I feel like we've delved into quite a few things. We're very excited. I feel like we can go another hour just talking about interior design and upgrades, amenities, but we'll save that for another episode. But just wanted to hear, did you have anything you wanted to say before we sign off for today?

SPEAKER_00

Look, man, we're the kids growing up playing Monopoly that thought it was a real game. And we're about to go from little greenhouses to one red house, one red hotel. And I think that's how you win in Monopoly. That's how you win in life is you convert your active income for passive income. You move from being the employee to being the investor. And, anyways, we're on our own journey. We're putting in our blood, sweat, tears, effort. We're personally guaranteeing our assets and this debt. So we are fully committed to making this successful. Our goal is obviously to educate, to entertain, to inspire you to take action. So maybe you've got a handful of Airbnbs, you're looking at this jump into the commercial space. Man, there's a community for you. Again, boutique hotel secrets. Let me let me rep the mug. This is Mike Shogren's group. That's how Micah and I met. We found invaluable mentorship, guidance, playbooks, education in this space. So my closing thought is this stuff isn't necessarily hard, but it does take effort. It takes discipline, and it's best going with other people. So trying to do this alone, I think is a really dangerous path. Get around other people, get around a community, experts that can support you to help you be successful in this game. So again, thank you for letting us join you either on your mobile device or your walk, or maybe you're sitting on a couch watching some YouTube. But our goal here is to be informative, instructive, helpful, maybe even inspiring to those that don't yet have a hotel that are thinking about making this jump. So I think that's it from my side.

SPEAKER_01

You've pretty much said it. Find your tribe and join a community. You can do it by yourself, but it feels a whole lot easier to do it when you got the support of others. With that, I'll be quiet.

SPEAKER_00

Done and done, man. Great episode. I think next week we'll get back to having some guests, but we thought it was important that to bring y'all along. It's gonna be one of the very last times that you're hearing us talk before we close. Uh, anyways, I think the next time you hear about our deal, I think it's gonna be on the other side of the finish line. So thanks for tuning in, or thanks for going back in time and kind of binge watching the season one, the Micah and Adams show, as we kind of share the wins, the losses, all the lessons with you. So thanks again for your time, your attention, and that's the pod.