With so many hotels struggling because of the COVID-19 pandemic, Legendary Capital has created a proprietary Equity Preservation UPREIT (EPU) mechanism that helps owners get through the pandemic recovery.Legendary Capital sponsored the transaction of two properties this year through the EPU structure, the Holiday Inn El Paso Sunland Park in Texas and a Courtyard by Marriott in Aurora, CO. For each of the transactions, existing ownership contributed their respective property in exchange for a special class of Transition Partnership Units. The consideration also included refinancing of the existing loans secured by the property and payment of cash to the owners.
Essentially, the owners of the properties contributed them to a partnership and exchanged their equity for partnership units, becoming partners in the entity.
Following a mutual review period—after both parties completed their due diligence—the partnership became the owner of the properties in exchange for consideration, which included partnerships units.
Although the parties became partners through the course of the transaction, new license agreements were entered into with the franchisors.
Through the EPU, the partnership paid some cash, assumed financing, and the rest of the consideration was paid in partnership units. “These contributors received partnership units in our affiliated operating partnership, which has a diversified set of hotel assets,” said Dave Durell, chief investment officer, Legendary Capital.
In Legendary’s patent-pending EPU structure, the contributor potentially preserves its equity while the property restabilizes. “That equity may have been lost in a conventional transaction,” said Durell.
He understands that there may be difficulty in trying to get through the COVID downside and the challenges related to having adequate cash available to do things like hotel improvements, which attract guests and may be required by brand mandates. Working capital may also be a challenge for some in the industry right now. “What our EPU is designed to do is allow us to partner with hotel owners with whom we have relationships and for each of us to bring value to the partnership through our respective roles,” Durell said.
Durell said that the EPU structure was created by Legendary as an improvement over typical UPREITS.