At a time when lenders generally aren’t lining up to provide construction loans for projects like ours, a 176-key Marriott TownePlace Suites named Keystone, Poppy supplied us with a $48 million one. That’s roughly half of our hotel’s total development cost. The deal came together over a four-month period ending on Jan. 30, the same day we held a groundbreaking ceremony for our project within walking distance of the site of Google’s planned 80-acre campus and three blocks from Adobe’s global headquarters.
A rendering of our eight-story hotel at the northeast corner of West San Carlos and Josefa streets.
We got in contact with Poppy after a different bank took an interest in our senior housing project a block away from Keystone. Although we couldn’t come to terms on a construction loan for that project, the bank referred us to Poppy, which has over $5 billion in assets and 20 existing branches in California, with 10 new ones — including a branch in San Jose — set to open this year, according to its website. The company’s existing and new branches are spread across the Bay Area, Southern California, and the Sacramento-Roseville area.
Poppy Bank’s lending portfolio offers permanent and ground-up construction financing for commercial real estate and Small Business Administration loans. Construction-to-perm financing lets borrowers fund their construction costs and mortgage together in one loan. We wanted to start building Keystone before constructing our senior housing, so Poppy was a good fit for us — and vice versa.
After our initial meeting with Poppy Bank at the end of September 2022, the entire process — beginning with underwriting and ending with closing the loan — went smoothly from start to finish, said Kelly McRitchie, director of our capital markets team. While talks were ongoing, the lending markets remained disrupted by elevated interest rates.
“There wasn’t a whole lot of capital out there, and I wouldn't necessarily say it was specific to just hotels, either,” McRitchie said. “The fact that we were building a hotel probably added another layer of complexity to it. But Poppy Bank saw our vision."
That vision was to build a hotel that could capture a lot of the built-in business travel demand from the construction of Google’s planned campus, according to Jeff Zuckerman, managing director of our capital markets team. The hotel would support Adobe, Zoom, and the rest of Downtown San Jose’s larger businesses. Google’s demolition subcontractor began bulldozing sites last year for its project, which is expected to increase business travel spending to the SAP Center, San Jose’s main events venue, and Diridon Station, one of the nation’s largest transit hubs.
Poppy Bank CEO Khalid Acheckzai said in a statement that “we are proud to lend to projects that support the economic development of the areas we serve — and Urban Catalyst was a pleasure to work with. We look forward to continuing to reinvest in the local community where we live and work.”
Before launching Urban Catalyst in 2018, our founding partners recognized the positive impact Google’s campus plans and Adobe’s recent headquarters expansion would have on business travel demand, which is why an extended-stay hotel has always been part of our Downtown San Jose development portfolio. Yet we couldn’t have anticipated how well the U.S.’s extended-stay hotel segment has performed during Covid compared with the hospitality industry at large. The average occupancy for extended-stay properties in 2020 was about 60 percent, roughly 16 points above the national average, according to CoStar.
More Americans have begun to travel since then, and business travel still lags behind pre-Covid levels. Yet extended-stay hotels have remained a “pandemic success story,” as CoStar described them last year. Mid-price and upscale extended-stay hotels reported record-high demand in the third quarter of 2022, according to data from consulting firm The Highland Group. And all extended-stay segments reported record-high third-quarter average daily rates, Highland’s data show.
No wonder, then, that Ryan Meliker, president of Lodging Analytics Research & Consulting, has likened extended-stay hotels to “ATMs with a roof” because they offer profit margins of about 50 percent of revenue, nearly double the industry standard.
Our demolition subcontractor began clearing the site of our extended-stay hotel around mid-February. We expect to go vertical on the eight-story project next quarter and wrap up construction in the first quarter of 2025. We continue to raise money for it through our Fund II offering. If you’d like to learn more about how to invest, contact us here.
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Real Estate Risk Disclosure:
- There is no guarantee that any strategy will be successful or achieve investment objectives including, among other things, profits, distributions, tax benefits, exit strategy, etc.;
- Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
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- Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
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Opportunity Zone Disclosures
- Investing in opportunity zones is speculative. Opportunity zones are newly formed entities with no operating history. There is no assurance of investment return, property appreciation, or profits. The ability to resell the fund’s underlying investment properties or businesses is not guaranteed. Investing in opportunity zone funds may involve a higher level of risk than investing in other established real estate offerings.
- Long-term investment. Opportunity zone funds have illiquid underlying investments that may not be easy to sell and the return of capital and realization of gains, if any, from an investment will generally occur only upon the partial or complete disposition or refinancing of such investments.
- Limited secondary market for redemption. Although secondary markets may provide a liquidity option in limited circumstances, the amount you will receive typically is discounted to current valuations.
- Difficult valuation assessment. The portfolio holdings in opportunity zone funds may be difficult to value because financial markets or exchanges do not usually quote or trade the holdings. As such, market prices for most of a fund’s holdings will not be readily available.
- Capital call default consequences. Meeting capital calls to provide managers with the pledged capital is a contractual obligation of each investor. Failure to meet this requirement in a timely manner could elicit significant adverse consequences, including, without limitation, the forfeiture of your interest in the fund.
- Opportunity zone funds may use leverage in connection with certain investments or participate in investments with highly leveraged capital structures. Leverage involves a high degree of financial risk and may increase the exposure of such investments to factors such as rising interest rates, downturns in the economy or deterioration in the condition of the assets underlying such investments.
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