Transcript: Episode 204: Failure Into Fuel

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[00:00:00] Susan Barry: This is Top Floor episode 204. You can find the show notes at topfloorpodcast.com/episode/204 

[00:00:14] Narrator: Welcome to Top Floor with Susan Barry. This weekly podcast ride up to the top floor features tangible tips and excellent stories from the experts and characters who elevate hospitality. And now your host and elevator operator, Susan Barry.

[00:00:32] Susan Barry: Sundip Patel is the founder and CEO of AVANA Companies, a financial services firm with over $1 billion under management, specializing in hotel lending and clean energy project financing. Born in Rhodesia, now Zambia, Sundip's global journey has taken him from CPA to startup founder to impact driven financier. His passion lies in empowering underserved communities through access to capital, creating jobs and democratizing financial literacy. Today we are going to talk about how hotel deals get financed, the ripple effects of job creation and the future of inclusive investment. But before we jump in, we need to answer the call button. 

Call button rings 

The emergency call button is our hotline for hospitality professionals, and probably in this case tired adults who have burning questions. If you would like to submit a question, you can call or text me at (850) 404-9630. Today's question was actually submitted Franzia, and this is what they say. What is the best way for a non-accredited investor to invest in hotels? I love this because I think it also includes the difference between accredited and non-accredited investors, which I don't think a lot of people are aware of. So take it away, Sundip. 

[00:02:12] Sundip Patel: Okay, so the difference between a non-accredited and accredited investor, these are definitions put out by the SEC. An accredited investor has to have a certain amount of income per year. Typically $250,000 on a joint basis and a net worth of roughly a million dollars excluding your residents. So if you fall outside of that, you're considered a non-accredited. They've relaxed some of these rules. Now as an investor, if you want to invest in projects, as long as you're investing $200,000, it is, I don't wanna say assumed, but it is accepted that you must be accredited to be able to make that kind of one time investment into a project. However, the question was how do non-accredited investors invest in hotel projects? The only way that I'm aware of is actually through funds that are specially designated for non-accredited investors. Typically they're called section A or filing A where basically it's reserved for non-accredited investors, and it's limited, roughly no more than $20 million of non-accredited investors, and then you, that particular fund manager can then invest that into a hotel. Either debt or equity across the us. But again, it has to be structured. It's very difficult otherwise for non-accredited investor to invest. 

[00:03:52] Susan Barry: I think Reg CF also allows for non-accredited investors to throw into a crowdfunding.

[00:03:59] Sundip Patel: Reg A was what I was thinking. Yes. 

[00:04:00] Susan Barry: Throw into a crowdfunding thing, but it's not an easy thing. So something that I've always wanted to know on this topic is, who bears the responsibility for proving that somebody is accredited or not? Is it up to the investor to make that declaration, or does the person who's managing the investment have a responsibility for like, you have to prove it to me. Does that make sense? 

[00:04:29] Sundip Patel: Yes, yes it does. So there, there're different regs, right? There's the 506B and 506C. Those are just fancy names given by the SEC, but basically what it means is if it's 506, then you have to prove and you can do it through an independent agency that will verify your income, your net worth and so forth, and then send a letter back to the fund manager or the investment advisor and saying, yes, they are accredited and therefore they can proceed. The 506C allows you to generally advertise to all types of investors, but then the acceptance into that type of investment is at a level of $200,000 as of late. That was the more recent change done by the SEC. 

[00:05:21] Susan Barry: And then there's that assumption that you mentioned that if you're doing that one time investment, you're good.

[00:05:28] Sundip Patel: Yes. That you must be accredited. Yes. 

[00:05:31] Susan Barry: Interesting. Well, this topic of conversation is I think probably a pretty far distance from Victoria Falls, which is where you are from originally. What was your path to building a billion dollar lending company in the United States. 

[00:05:48] Sundip Patel: So there are lots of little events. The ones that stick out to my mind is the immigration process of getting to the US, you know, and how daunting that can be for a foreigner. Then the education and the experience requirements of just putting hard work in to become a qualified accountant in the US. So I became a charter, a certified public accountant. I worked for a public accounting firm. So I went through that experience, learning about different businesses, different industries. Then I pursued becoming self-employed. That did not work out so well for me. It was less than spectacular. I filed bankruptcy and lost everything. And, and then I started again to build a business, which is the beautiful thing in America. You get second chances to start, no matter what happens, you can start again. And so I built the business, what is now known as AVANA Companies. And it's been a 23 year journey, but every step of the way has been just such an exhilarating ride. We've learned so much through the process. It's been driven by purpose, so that's what got us from, as you said, Victoria falls as a baby to where we are today in America.

[00:07:17] Susan Barry: How old were you when you immigrated? 

[00:07:20] Sundip Patel: Eight years old.

[00:07:21] Susan Barry: Oh, wow.

[00:07:22] Sundip Patel: Yeah, I was a baby. 

[00:07:23] Susan Barry: You mentioned being a CPA, and as I understand it, you pretty much hated doing that work. Why did you hate it and what was the turning point for you? 

[00:07:34] Sundip Patel: So the turning point was the butterflies that I used to get in the weekends and more so on Sunday. And I couldn't relax, I couldn't enjoy my weekend. 

[00:07:45] Susan Barry: The Sunday scaries, you had it? 

[00:07:47] Sundip Patel: Yes! I had realized that I had to go back. I love the people, don't get me wrong. It wasn't the people, it was the work itself. And I'm going, this is not what I'm meant to be doing. And I kept asking myself, I know I'm meant to be doing other things. This just not, isn't it? But I did it because coming from, as an immigrant into America it sounded like a sure bet, right? An accountant is going to eventually find a job. And so I pursued that path, but I really did not enjoy it. I wasn't made for it. I have such respect for people that do that every day. I mean, I have very smart accountants working for us, and I’m just in awe, but I couldn't do it. I lasted all but two, three years, I think after I got my license, I had to leave. 

[00:08:45] Susan Barry: And so you had to leave because you were miserable. But there had to have been sort of this counterbalance on your other shoulder. Like you should be scared that you're taking a big risk by quitting. So how did you quiet that, I don't know, voice in your head? 

[00:09:04] Sundip Patel: Thing about being an immigrant is that the rear view mirror is right there all the time. You know where you came from, right? So you understand and lends you perspective. And so taking that risk was not so much of a risk, to be honest. In other words, I knew what the standard of living I could end up or go back to. So I thought this was just going to be worth it if I could explore what, you know, God's put me on this planet for. So I wanted to do that. So that was what was driving me, more than anything else.

[00:09:39] Susan Barry: And was that how you got involved in your first startup?

[00:09:43] Sundip Patel: Yes, that's exactly how I got involved in my first start startup is I realized it was time for me to explore whether I'm truly meant to create something that was this sort of energy. You know, I mentioned the Sunday butterflies. I used to have this thing, this wantingness to give more of myself and create something, and yet I wasn't able to, not at work anyway. And so I needed to do this. And this was one turning point where I said, you know, this will gimme a chance. Why not start a business? So I looked for a problem and the problem that I found initially was very close to the business or the work that I was doing, which is I was seeing lots of records, paper records and very difficult to find things. And so I said, wouldn't it be nice if I could digitize all this, index it, make it accessible, and then make it available to the clients. So I started down that path. And that led me to another business where I wanted to develop software to make that, and that grew. But then that also that's the one that fails spectacularly. But it grew in the sense we had venture funds, we attracted venture capital. We had employees. I mean, I learned about growing a business very quickly. And so going from being an accountant to being a entrepreneur was almost baptism by fire. And it was great. I really enjoyed it. But then also, as it goes, you have to continue raising money. And at some point in 2000, I believe, when the market crashed, is when I lost everything. So that's when I decided, oh, I need to build a business. Yes, I get that. That's what I meant to do. That's where my creative energy comes out. But I need to do it where I build it slowly and by myself. Where the foundation's built on profit as opposed to venture money, venture or outside money. 

[00:11:57] Susan Barry: So do you think that that business failed because you scaled too quickly, because of market conditions, because there were too many fingers in the pot or something else entirely, or all of the above?

[00:12:13] Sundip Patel: Oh, no, I think I'm squarely to blame. When you build a business, I've learned that the mistakes I made, I've learned, you know, as I was scaling the business, you have to hire the best people. I didn't hire the best people. I made that mistake. I followed the money, not necessarily smart money, as opposed to lack of better word, dumb money. Money that wasn't going to help me grow the business or provide more strategic knowledge or, or advice. So I made that mistake. And then the third was I was too young. I was trying to learn how to be a good leader. So building a leadership coach or having some sort of association like I do today through YPO, it wasn't a good sort of ingredients to grow a business successfully. So we failed at what I call a dominant culture because we were spread too thin. We were spread in US, the software was being made in India. And again, so that's the mistake I made. And so I'm squarely to blame for my failings, but what I've learned through those failings is these lessons that nobody teaches you in business school. You learn 'em by just having to apply yourself in trying to grow a business. Nobody tells you how to build a culture. Nobody tells you how to hire the best people. Nobody tells you how to find the right board members. I mean, these are things you'd learn by doing. And I made all the mistakes. And these are just something that I'm telling you. There were so many more honestly.

[00:14:01] Susan Barry: Well, I appreciate your transparency. I wanna ask a somewhat technical question because the company that you have now deals intimately with this. Our listeners are often on the operational side of hotels, and so I wanna make sure that what we're gonna talk about makes sense to them. So before we dive too much further, can you talk about what a capital stack is in the context of hotel finance. What is a capital stack and where does the funds that you manage sit within that capital stack? 

[00:14:41] Sundip Patel: Absolutely. So, let's visualize the building and let's assume it has three or four floors. Okay? And that, so if you just keep that visual in your mind for a second, the top floor is where the senior lean or the senior position of a lender sits, meaning it's the most safest part of their capital stack. 

[00:15:05] Susan Barry: They get paid back first?

[00:15:07] Sundip Patel: So the building represents a capital stack, meaning they would get the first dollar that is paid by the business owner or by the property owner. Okay? The second floor would be where you have what we call junior lien, which is typically going to be a second lien or a subordinate lien in the business. That's someone who's willing to take a little more risk, wants a little more higher interest rate, right? But understands, hey, when the first dollar is paid out, they're gonna be second in line. So now in that capital stack, they're called the junior lien holders. The third piece in this four story building is usually known as a preferred equity holder, someone who has preferential rights. On the equity that's in this building or the equity payout in this building, over the last floor, which is common equity, which is the common holders, right? Common stockholders, shareholders. Now, if you add all those four pieces, that's a capital stack. That means how you finance the building. So if you just pause, step back a little bit, common equity and preferred equity is ownership. People who want to own the building play in that area. Right? They then borrow money, either both senior and junior or just senior, depending on the type of building, depending on the age of the building, whether it's just, you know, a new building, a performing building or so, so many factors go into that, but that's what a capital stack is. And capital stack only just describes the structure of how the money is put together to finance and purchase or develop the building. 

[00:17:07] Susan Barry: Is it fair to refer to those first two floors as debt and the second two floors as equity or is that not quite right?  

[00:17:16] Sundip Patel: Yes. No, that, that's exactly right and I forgot to mention that, but yes, the first two floors are debt. The second two, the last two floors are equity. 

[00:17:26] Susan Barry: Where does your company fit? 

[00:17:28] Sundip Patel: So we only play on the first floor. Everything we do is for senior lean, because that's the mandate from our investors, right? So we have a group of class of investors that only want senior lean only want that first sort of dollar position. And that's fine because they are either banks, credit unions, or institutional pension funds and so forth. 

[00:17:55] Susan Barry: So that leads perfectly into my next question, because from a lay person's perspective, it sort of feels like being a lender is the same thing as being an investor. I know that that's not true, but can you talk a little bit more about what those differences are? Like if I am a Limited Partner investor, and I'm contributing $50,000 in equity, how is that different from you lending $50,000 to a project? 

[00:18:24] Sundip Patel: Very, that's a great question, Susan. Okay, so let's take the example of you investing as equity in $50,000, right. The beautiful thing is you get to ride up the value in the building. So when the building appreciates in value because you've rented it out, you've increased the rents or so forth, the value of that building goes up because it's generating more income. So therefore, when you do sell it, you are going to get obviously $50,000, but you'll pro rata percentage of the ownership stake that you hold in that building that's sold. So your 50,000 will probably earn, it could double depending on the value of the building, or it could, you know, you'll get a sizable return. Whereas if I'm investing in as a debt holder, the most I can make and the only thing I can make is the interest that I've put and agreed to with my borrower, the person that owns that building. What I call the fourth floor tenants in that building, the equity holders. They have agreed to pay me a certain interest rate. That's all I'm going to collect for the life of that loan or the life of that building, depending on how long the loan is. Typically it's gonna be five years, but you have much better also advantages in the sense that as an owner. Now you get to write off depreciation, you get to deduct expenses of the building. There's a lot more tax advantages to you, per se, as an equity holder than than me. I'm simply just a person who's gonna collect interest and that's all I'm gonna get.

[00:20:04] Susan Barry: But the difference is I can lose all of my $50,000 and you get paid back first no matter what happens to the business, right?

[00:20:12] Sundip Patel: That is true. That is true. That's the definition of being a lender, right? We like to take the least amount of risk and, and we price the risk accordingly. So, yes, that's correct. 

[00:20:25] Susan Barry: Other than risk or lack of risk, I know job creation is a key driver of your investment decisions. How do you measure that? How does building a hotel sort of create ripple effects throughout a local community, and what do you use to determine how effective those are? 

[00:20:46] Sundip Patel: So, measuring is probably the hardest thing in social impact or environmental impact evaluation. There are different ways to measure impact. You start with what's called a theoretical framework. What's known as a theory of change, right? The theory of change basically says if you were to do a specific action or an intervention, what are the outputs gonna be? What are the outcomes gonna be, and what is the long-term impact? Now to measure it, there are lots of ways. How we do it, quite honestly is sometimes we'll just ask the client on a transaction that we're doing, how many people did you have on that construction site? How many were men? How many were women? So that's one way. Getting a survey from the client. You can hire a third party to do that too. And then there's what I call reference statistics that are available that allow you to set a say for every $10,000, oh, sorry, not 10,000, a hundred thousand dollars it, it equals to 10 jobs. Again, I'm giving you this as a rule of thumb, but that's not the numbers change. I think sometimes it was as low as 60,000, but the point I'm trying to make is you've got these reference statistics you can look at. You've also got a way to do it by sending out surveys. There's a company in the Bay Area called 60 Decibels that does that for lots of companies like ours, measuring impact. But you have to start with a Theory of change framework. And that is, you know, it only gets done if it's important to you, job creation. Wage gaps, gender equality, these are all social impact goals, right? And we look for projects where we know it's going to benefit the community where we're sort of planting that project, but also the underserved markets around it because it's gonna pull labor from those areas. And that is part of our sort of way of looking at projects when we do that across America. 

[00:23:00] Susan Barry: We like to make sure that our listeners come away from every single episode of Top Floor with a couple of really specific practical tips and ideas that they can try either in their businesses or their personal lives. You are working on a program that really speaks to me to teach girls age 13 through 18 about real estate investment. What are, I don't know, the top two or three concepts that you think they need to understand? 

[00:23:34] Sundip Patel: So this is a passion project of mine. As you may know, I have a 15-year-old daughter so I want to build something that would allow her to learn about what I do, what Daddy does at work. And so the concepts that I'm working on is, it may sound simple, but understanding how interest rates work. Simple interest rate and compound interest rate. How lien positions in real estate work, meaning our senior lien is better than junior lien, but then junior lien with certain rights could actually be just as good. I mean, there's things that we, I want to teach. And then lastly, understanding different types of properties and the different types of financing that is offered on these types of real estate. I'm curating right now a sort of, I wanna call it storyboard so that it becomes more, I don't wanna say gamified, but the point is I want them to enjoy the process if it's too mundane it's not gonna be fun. I want them to enjoy learning about it, but also scoring points.

The idea is over time, if once the project is completed, we're actually just in the storyboard phase still. When it's completed, we'd like to give them our house money to invest on projects that we're putting onto a platform and let them make the decisions. So this is, when I say house money, this is principle money. Money that we would give to them to invest. In return, they get the interest earnings from those projects, so that they can take that back to the school that they're coming from and basically apply it to all kinds of needs that schools have. But this is kind of dual purpose - they’re learning something, they're gaming it, they're enjoying the game of learning and earning something by doing it. And I’ve sort of targeted twenty schools initially that I want to go after within the US in different states and I think because we have good clients on the 39 states that we're active in, I think there's plenty of support that I can garner from my client base just to introduce it to the local community. I'm excited to tell you that when I finish it. 

[00:26:11] Susan Barry: That's really cool. I cannot wait. You'll have to come back on. I wanna play the game too. I will not take any of the money, I promise, but I just wanna see if I can do as well as your 15-year-old daughter. Probably not. We have reached the fortune telling portion of our show, so now you have to predict the future and then we will see if you got it right. What is a prediction you have about the future of hotel financing? I think everyone wants to know what is gonna happen for the rest of this year. Will anything transact? What do you think? 

[00:26:46] Sundip Patel: Oh, okay. So for this year, I think there's still some challenges because hotels were priced at much lower interest rate four or five years ago, and those maturities have come up. So most of the hotels are gonna be short in some ways when lenders are trying to size them because the interest rates were six, now they're 10, eight or 10. So that just changes the dynamics entirely on the valuation and how a lender is going to look at stress testing what can be given in terms of refinancing. I'm really, Susan, I'm really more excited to tell you about sort of my vision of where the future would be when I see AI, when I see quantum computing, when I see digitization and tokenization, I think that financing and fractional ownership of hotels is going to make capital even more abundant for this asset class. You can hold fractional pieces of risk. You don't have to hold the entire risk. And if someone wants to own only a fractional piece of the debt at, let's just say St. Regis or the boutique hotel near the water, they can, because now it's possible. So I see these things that are happening, even making capital even more abundant and easily accessible to hoteliers because AI will make information that much more clear and that much more transparent, assuming everyone else is participating in this sort of ecosystem. And I believe that that's where the hotel industry is going. And so future wise, I see hotel financing, actually the speed of financing increasing, but also the abundance of capital coming into this segment growing as well. 

[00:28:50] Susan Barry: When you say fractional ownership of an asset, of a hotel asset, are you referring to something like — and forgive me if this is a stupid question, I'll cut it out if it's too dumb — but are you referring to something like timeshare or the sale of residences within hotels, or do you mean something different that I'm not getting? 

[00:29:14] Sundip Patel: So it's not timeshare. No, that's not what I mean. So let's talk about fractional ownership. Today, on our Equalise platform, we have loans that are fractionally sold off and participated. Now, what do I mean by that? Take, imagine a loan, like a piece of cake. Banks and credit unions come in and take small pieces of this cake so that nobody has the entire exposure, or nobody's eating the entire cake. So therefore, if something happens, let's say the market goes down or that market becomes depressed, no one single lender is exposed completely. Yes, they have some exposure, but they're fractional exposure and they have fractional ownership of the loan. And that's what I mean. And if that gets tokenized then the ownership of that fractional loan can be traded. Imagine like a tokenization, the best way I can explain it is the ability to encapsulate your ownership so that it can be easily traded through a distributed ledger. Someone will keep track of that accounting because it's tokenized throughout the universe.

[00:30:32] Susan Barry: So basically, you're a fractional owner of debt in an assortment of markets, so the ebbs and flows of the economy in a specific market don't impact you as much? 

[00:30:46] Sundip Patel: Correct. Imagine if I could own tokens in Minnesota, Florida, California, Texas, Arizona, and all I have is these tokenized ownership of loans, but they're spread across. And by the way, Susan Barry comes on and says, Hey Sun, we met over lunch. I'd love to buy some of your tokens in Florida. Easily traded to you. Ownership passes to you. There's a ledger that keeps track of that. Now you are the owner of that token, and you just now own a small piece of a loan of a hotel in Florida. And initially that was mine, but now it's traded to you. I don't need much paperwork. It's that easy to sell it to you. 

[00:31:33] Susan Barry: Got it. So versus the interminable purchase and sale agreement and closing and thousands of pieces of paper.

[00:31:43] Sundip Patel: Yeah, Escro agreements. Oh my gosh, yes.

[00:31:45] Susan Barry: I got it. Okay, so this might be the same answer, but if you could wave a magic wand and change one thing about how lending institutions factor the sort of broader social impacts into their decision making, what would it be? 

[00:32:03] Sundip Patel: So I've been reading this book again. It's written by Sir Ronald Cohen, it's called the Second Bounce of the Ball, and he now works on social impact measurement. The reason I bring that up is if I had a magic wand, I wish I could do it where every loan carried a social impact risk grade. Much like we have a credit risk grade, I wish we could do a social impact risk grade. And again, you said a magic wand, so I'm gonna take the liberty a little bit. I wish it was easy to measure, easy to communicate, easy to understand and trade on so that people would say, Hey, if they have this sort of social impact, risk rate and they have this type of credit risk rate, I'm willing to, you know, reduce my rate, interest rate that I charge this borrower because they're doing so well here. I'm not so worried about this. That would be my magic wand.

[00:33:10] Susan Barry: Or you could start to run models that would let you know things like when you have a diverse C-suite, your company is more profitable. 

[00:33:22] Sundip Patel: Correct. And I mean, you know, you could look at things like, hey, are they creating jobs? Are they providing living wages? Are they providing parody of wages? Is there gender discrimination that's not, I mean, there's so many things, but getting to what I call a social impact risk rate requires, you know, formity of measurement. And the reason I mentioned Sir Ronald Cohen was he's one person I've been following and reading on that does, has done a lot of work in this area to come up with measurement standards that are uniform. Just like auditors have GAP and IFRS, we're coming up with social impact measurement standards so that we can kind of say, Hey, this is what the company produces, but this is their social impact on the planet. And I hope that capital can follow and price that. But that's my magic wand. You said magic wand, so I'm gonna. 

[00:34:26] Susan Barry: Listen, all important things start as a magic wand, so I love that idea and I hope it happens. Okay, folks, before we tell Sundip goodbye, we are going to head down to the loading dock where all of the best stories get told.

Elevator voice announces, “Going down.”

[00:34:30] Susan Barry: Sundip, what is a story you would only tell me on the loading dock? 

[00:34:51] Sundip Patel: Oh gosh. I would say, never stop believing in yourself. I think that life is full of challenges, but it's also full of surprises if you just bet on yourself as I've had to over the last 23 years. And pursue your passion with purpose. Make sure you are very clear about your purpose because otherwise, I mean, it's a life well lived if you know what you're doing every day and why you're doing it. 

[00:35:27] Susan Barry: Sundip Patel, thank you so much for being here. I know that our listeners learned a lot about hotel financing. I certainly did, and I appreciate you riding up to the top floor.

[00:35:38] Sundip Patel: Thank you so much. Thank you, Susan. 

[00:35:42] Susan Barry: Thank you so much for listening. You can find the show notes at topfloorpodcast.com/episode/204. Jonathan Albano is our editor, producer, and all around genius. He even wrote and performed our theme song with vocals by Cameron Albano. You can subscribe to Top Floor on Apple Podcasts, Spotify, or wherever you like to listen and your rating or review will go a long way in helping us give you more of what you like. 

[00:36:17] Narrator: Thanks for listening to the Top Floor Podcast at www.topfloorpodcast.com. Have a hospitality marketing question? Reach us at 8504049630 to be featured in a future episode.