Economy extended stay is a real estate niche most people have never thought about. Michael Nielson, founder and CEO of West 77 Partners and LivAway Suites, left his family's 20,000-unit multifamily business to build a vertically integrated platform focused on economy extended stay — a category he says operates closer to multifamily than to traditional hotels. Host Phil Coover talks with Michael about the staffing efficiencies that let these properties run on a fraction of a typical hotel's headcount, the market data behind site selection, and the in-house construction company that has kept every build on budget. Michael also explains why West 77 favors long-term holds over quick flips, and how employee ownership keeps everyone aligned.

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Real Estate for Breakfast, where McGuireWoods partner, Phil Coover brings you essential conversations with leaders in commercial real estate, translating complex industry challenges into actionable insights.

Good morning. This is Real Estate for Breakfast. I am your host, Phil Coover. I am a partner in the Chicago office of McGuireWoods, where I'm the co-leader of our real estate transactions group, McGuireWoods, international law firm, full service and over 1,000 attorneys. And today, we have a very special guest. We have Mike Nielson, who's the founder and CEO of West 77 Partners and LivAway Suites. Mike, thanks for coming on the show.

Yeah, thanks for having me, Phil. It's good to be here.

It's great to meet you fairly recently and get a chance to talk to you. I think that this will be a great topic. We haven't had the Extended Stay product discussed on our podcast, and you're also a developer. You're also one of the long line of former lawyers who've gotten away to do the business side, which is every real estate lawyer's dream. Thanks for coming on the show. Tell us a little bit about your companies. Please start with that.

I'm the attorney that went to the dark side, but maybe we'll call it the bright side. Who knows? So, we started into the economy extended stay space about 15 years ago. Really by background, we're more multifamily guys and my family's company owns about 20,000 apartments and that's really kind of the real estate food group, if you will, that I grew up on.

The bright side.

In early 20 teens, I left the family company and we started West 77 Partners, and really there was one mandate, just don't go create another multifamily company that's going to compete with the family business. So, I said, "Okay." So, multifamily was out. Unfortunately, we had a lot of industrial properties in the family, office properties, things like that. So, there was a few real estate categories that were just still off limits. Hotels were one that we weren't deep in. And so, we got into hotels really just long enough to know that we didn't really want to be in traditional hotels just due to the cyclicality and the higher risk profile, those kinds of things. So, no disrespect to anybody that's in hotels. And candidly, we own quite a few, I would call them normal hotels, non-extended stay hotels. We realized that the real value or the real opportunity for us was in economy extended stay or extended stay and then specifically within extended stay, economy extended stay.

And there's probably a lot of the listeners, maybe they've heard of extended stay, but they may not know what economy extended stay is. And if you have a continuum and let's say you have a traditional apartment way over here and over on this left side you have a traditional hotel. A lot of times normal extended stay will operate maybe just a couple of clicks towards multifamily from a normal hotel. Economy extended stay actually goes all the way across the continuum and gets pretty darn close to multifamily. A lot of that's due to just the length of stay. The length of a stay and economy extended stay can be measured in weeks and months. It's not measured in days typically. And so, because of that longer guest stay, the whole model can operate dramatically differently than a traditional hotel where you might need 10 to 12 housekeepers, you need front desk people, you need food and beverage people, you need general managers.

A typical hotel, even an extended stay hotel will operate on 25 to 30 employees. We have a few just throughout the United States and right between 25 and 30 employees total for that particular hotel to operate it on an annual basis. Within economy extended stay, we operate on about eight employees. So, literally about less than 25% of what a typical hotel operates on from a staffing standpoint, economy extended stay can operate. And so, really because of that, a very efficient labor model, which again goes back to that efficient labor model is a byproduct of this longer length of stay in the guest profile. We're only cleaning the rooms usually about every two weeks versus nightly like a normal extended stay hotel or even a transient hotel. So, because of that longer duration, you're not having as much turnover, you're only cleaning the rooms if somebody's staying there for four months, you're only cleaning the rooms every two weeks.

It really does narrow down the labor profile, which is usually our biggest expense in any business. It really narrows that profile down and creates a lot of efficiencies that just drop to the bottom line for the owners of the hotels. That was in essence, that's in a nutshell, what we identified early on back in the 20 teens when we first got into the space and we kind of fell in love with it because it felt very reminiscent of what we were used to in the multifamily space where you can operate 300 units on a staff of five, six people. And so, it just felt very similar from a staffing componentization and then the length of stay, a lack of turnover really creates a more durable and stable investment profile versus a hotel that, I mean, you got to think on a typical hotel, we own a hotel up in downtown Bellevue, kind of a sister city to Seattle.

Essentially every night we have to fill up that hotel. You get a few people that are staying over one or two nights or maybe three nights, but you're basically filling that hotel up every single day. That's a big lift.

Yeah, no, I imagine with your traditional hotels, you have other concerns like hospitality. Maybe this is a vacation for some people, you have to be taking care of them. Food and beverage as you mentioned. An extended stay has different concerns. I mean, but people are living there so you want to provide a great place for people to live on this shorter term basis. But yeah, I could see that bearing out in the lower turnover being helpful in some ways. Well, tell us about the type of customers that you see. How are you filling up the hotels? Do you have to do a lot of... Probably don't have to do the same type of marketing as a traditional hotel. I mean, how do you find your occupants?

It's very different than what you would maybe expect in hospitality. If you're just saying, "Oh, it's a hotel." You're thinking, "Okay, maybe we're getting... Maybe extended stay is more sports teams that are staying for a week or long vacations or things like that." It's not that. It's not to say that you couldn't get that, but the middle of the bell curve for us is predominantly project-based work or assignments, if you will. So, think family gets a military assignment to be up in Joint Base Lewis-McChord up in the Seattle area. They're there for three months. Are they going to rent an apartment for three months? No. Are they going to go stay at a Residence Inn at $180 a night for three months or whatever? No, they're kind of in tweener zone where they're like, "Do we get an Airbnb?" Even getting an Airbnb sometime is tough for three months.

And so, they're really in this weird awkward phase where, to your point, you said they're living there. And I would say yes, they're kind of living there. I mean, it could be that somebody is just truly living there, but I think a lot of our guests are people that have a home somewhere else, but they're on assignment somewhere, whether it's, like I said, military, it could be traveling nurses, could be construction work. You got a drywall crew that's doing the drywall at a Walmart for the next 16 weeks. Where are they staying? That's a long duration stay, four months. And so, we get everybody from manufacturing and distribution to government-related travel. Education could be another big driver for us. Relocating or I kind of say just families in need, I'll leave it at that. Your house flooded, where are you going to go stay? They've got to rebuild.

Now you've got ServPro coming in to fix your home over the next five weeks. Where are you living while that's happening? And we get a lot of disaster remediation type situations. Apartment complexes about every 10 years will go through a renovation. Being a multifamily, I know we went through this a lot where you're trying to figure out how to renovate units and try to time it perfectly with empty units and somebody moving out. It never works out, right? So, you really do have to take people and say, "Okay, we're going to go put them up for two months while we renovate this three buildings and then we'll move them back in, then we'll move on to the next building." So, apartments that are going through turnover type situations related to capital improvements, we'll take those people. I mean, the list is literally so long. And the thing that was so dynamically interesting to me is I had never even thought about this category.

We've been a multifamily for years and just never even thought about it. And once I started going down the rabbit hole on this category of people that need long-term temporary accommodations. When I started going down that rabbit hole, I realized there is just a massive need for this. As you step back and look at some of the demographics, you've got two thirds of the country that is housing constrained right now. Struggle to buy a home, pay their rent, whatever it is. It's just they're housing constrained. And we play more in that affordable era so that our rate is a very affordable rate. It actually kind of compares to almost when you fully load it compares to maybe a class A apartment rate that you would sign for your year-long lease, but you're able to go get it for three months, fully furnished, all your utilities turnkey.

And so, it actually creates a very economical situation for people and it satisfies really a need that was largely non-existent in the world 30 years ago. And I think people are just staying at hotels or trying to negotiate a short-term lease with an apartment or whatever it is. And as this product category, economy extended stay has come onto the scene, we're filling them up. I mean, I could look at the math. I know the night before last, I haven't looked at today's daily report, but we've got projects all over the country and we have six or seven projects right now that are running 95% occupied. They're filled. There's that much of a need. Now it's summer right now, so take that. I don't want listeners to go like, "Oh, my gosh, you're 95% year round." No, we probably average closer to 80% year round, but that's still a really high number for a hospitality-related asset. Usually hotels, if you're over 65% occupied, you're stabilized, everything's working the way you want it to. We need to be about 80%, call it 80% to 85%. That's kind of our sweet spot.

You mentioned that you're all over the country and you're a developer too, so you're developing new products. Are there demographics and statistics that you look at to try to figure out where would be a good location? I mean, I'm sure there's always the cost basis, the land. There's the hard construction costs, but what are you looking at when you're trying to figure out where should I put another one of these that I can fill up?

We're typically not going to tertiary markets. I'll leave it at that. It's not to say that we haven't. We're typically looking for markets where the MSA, so the Metro's statistical areas is about 250,000 or more people. You really need depth of population to... And it's not so much that the population's that big of a factor. It's just usually a population that deep creates a pretty robust business dispersion and centralization. And so, you got to remember that again, a lot of these people, we want people gainfully employed that are on project assignments. They're there temporarily. So, markets that are expanding with infrastructure projects or there's a regional hospital that everybody in the whole area, 100 miles in any direction is coming into because that's the best hospital. That works out great for us too, because we'll get families coming in and staying with us or traveling nurses, whatever it might be. Not just nurses, but just medical professionals, I'll leave it at that.

We are typically looking for that 250,000 threshold. Outside of that, we're really looking at the concentration of demand drivers in a particular market. And so, construction's a big one for us. We always want to see good numbers on permits being pulled and year-over-year trends with respect to permits. And obviously you can't predict the future ever, but you can usually forecast somewhat what's going to happen over the next 10 years based on the last 10 years. And so, unless there's some major event that we're not aware of like COVID or something like that, but outside of that, you can play the trend line. So, we're looking for robust construction. We like to see just again, good business dispersion. So, a lot of demand that would bring everything from hospitals to military bases to education or junior colleges and colleges, universities tend to drive some demand, not so much from the students, but more just from all the support, whether it's sports or traveling professors or those types of plays are more prevalent for us than it really isn't the great...

I mean, it can work for student housing, I guess, not to say it couldn't, but that's not really our primary intent with it. And so, from there, once we identify a market, we have about 26, I'll call them key performance indicators for a market that we look at. Some of it's generic stuff, like I said, how many building permits are pulled? What are the projections? Its population, its median income. There's a lot of those things that weigh into it. But I mean, at the end of the day, you really just got to get into the market. I mean, I think there's a lot of people these days that just do desktop real estate development, and you know what I mean by that. They're looking at all the data, they're pulling their CoStar reports, they're pulling this, they're pulling that, they're calling the apartment, they're doing all this desktop work.

I'm a little old-fashioned. You just got to get into the market and you got to shop the competition. You got to drive it at 10 o'clock at night to understand who's staying at your competitor hotels. You got to go and meet with businesses and ask the question, what are their needs? If they had a brand new nicer version of what most extended stay hotels are in the market, a brand new, clean, nice, well-conditioned hotel, would that be something they would interest them in? Oh, yeah, absolutely. Okay, great. How many room nights are you guys using outside of the location or how many room nights do you bring in? Those types of questions. It's really just digging deep on your due diligence and asking enough questions to get a good feel for what the market's doing outside of, yes, there's all the quantitative data that we do and that's highly instructive, but really until we get boots in the ground in the market and dig into it physically, it's hard to really say this is going to be a market that works or not.

That makes total sense. I'm old-fashioned in a lot of ways. And with real estate, seeing the land is a key thing to understand how it might work. Well, let's talk about your development arm. So, is that the West 77 Partners side? Tell me about how you started that and how the development arm is doing because obviously you've talked about operating these products for this asset class and the extended stay product and how much you like it, but tell me about you're developing these things ground up and then you're holding them.

We are much more so in our entire investor group, it is more of a build and hold type of a play. And our entire thesis is I've watched this with my family's company that obviously at 20,000 apartments, we're not flipping apartments, we're building them or buying, holding them. So, I've seen with my family's company and they're one of the better ones in the country at it of how do you just reinvest capital every year back into your product to ensure that it looks the same at year three as it does at year 23 and create a good product, offer a great offering in the marketplace? And then instead of feeling like we got to build this and sell it between year four and year six because that's the inflection point in the IRR models that we're running, we got to maximize our GP take on this.

Our model's a little different. We step back from it and say, "Well, we're investing in these ourselves, substantial sums. And so, number one, we're just investors alongside our investors to get from the get-go. And then predominantly what we do is we take more of a founding equity approach where it's instead of a GPLP promote situation we're taking in the actual project versus... That promotes a longer term hold scenario. And so, with substantial sums of our own money in there and then us looking at the actual dynamics of the deal, we believe there's more money to be made in farming the cash flows and looking for strategic refinances. Or maybe I should say it's probably more opportunistic refinances because you just want to refinance when the timing's right. And sometimes that might be at year three and sometimes that might be at year six or seven. But when you do that, you're able to actually pull money off the table without having to sell the asset.

And somebody could argue, "Yeah, but if you flip it, you can repatriate the money and put it into something else." We've run those models. Based on our cash flows, the numbers are exponential in just a 30-year hold versus flipping every five years and thinking that type of a model. The numbers are exponentially better in our model and that's only assuming one refi. If you added multiple refis, which you know you're going to be able to get throughout a 30-year hold, the numbers get even better. And so, that's more of our thesis. Our investors subscribe to that thesis and we'd rather see 20Xs on our money over a 30-year period than, yeah, we got our 1.4X by holding it or 2.1X even by holding it for five years. Now we got to flip it and find something else that we can go into where we can earn mid-teens to high teens cash-on-cash return. I don't know about you, Phil, but we're just not seeing much of that anywhere right now.

Our product can consistently and has consistently, I would say our bandwidth is probably 12% to 18% depending on the project and timing and market conditions, those kinds of things. But those types of cash on cash returns, we're much better farming those cash flows, reinvesting it back into... We have a year-over-year platform where we launch a new portfolio every year. So, a lot of our investors can take their cash flows, which are predominantly sheltered by depreciation shelter, invest them right back into the next portfolio we're doing. And then it's kind of the rule of 72. Every time you get to 72% of reinvestment, you're doubling your money again.

And so, that just starts to become exponential as well the longer you hold it. It is more of a long-term hold. A lot of times people throw their brow and I say that and I just kind of laugh. I'm like, "You just don't like money, I guess. You are such a unicorn, you have so many great things to invest in where you're going to earn a 15% to 18% cash on cash return. I should probably quit what I'm doing and just invest with you." The reality is nobody does. They invest in a great thing, they farm their cash flows, and then you hear about the next one and they go, "Ah, dang it, that one didn't go as well." We know we're going into great assets. Let's just keep our money in there and make sure that we're contributing back into that property to keep it looking great for 30 years. And over 30 years, we'll go get an 18X to 20X on our money. That's more of our play.

I like it. I mean, there are reasons to do a short-term return, but I often find just in life, whenever you take the long-term view of anything, whether it's a relationship or with my client relationships, you never want to try to maximize one deal. I want 30 deals with anyone. So, whatever you have, whether it's a professional services organization or any sort of relationship or business, whenever you're taking the long-term view on things, a lot of times things come into focus on how you make decisions pretty easily. And so I've seen a lot of success with developers that do short-term holds as long as they're taking long-term views of how they want to work with their investors and how they're running their business. But I do like that about your model is just I assume a lot of your investors take great comfort in the fact that you're going to be in it for a long period so that it aligns a lot of incentives without having to negotiate very hard.

And to be clear, I want to make sure because I probably was sounding so animated there talking through that. All of that animation and that thesis that I just described works because we're playing an economy extended stay.

No, I love your energy.

It would be much different in another asset class. I mean, my family has a big office portfolio. That's a totally different dynamic. You do have to sell the asset to make money in office at the end of the day because it's really hard to make money year over year actually holding the asset due to the CapEx requirements in office. So, you got to buy it at 140 bucks a foot and hope that you can sell it for $210 a foot six years from now. That is the play. So, I want to be clear, I'm not disparaging short-term holds across all real estate asset classes, but I think with what we found with our asset class and the cash on cash returns and just the durable revenue, I mean, again, you got to remember, we're building to 10% to 12% unlevered yields. So, we're building to a 10% to 12% cap. Think of it that way. Those are such high caps that you might as well hold onto it.

If you can really get that, just hold onto the assets. So, I want to be clear, my thesis works because of the asset class. I'm not presenting that somebody should do this if they're an office developer or maybe they buy land and flip it to developers. That's the whole essence of your model. You got to buy and flip. So, it's just more specific to our situation. I want to make sure I didn't offend anybody in saying that.

It's a good clarification, but I also think it shows that you chose an asset class that you believe in and you believe in it not just for the product or the service you're offering, but also how it creates the business as a whole that you want to be a part of and you want to be a driver. And as we all know, when you're pitching investors, when you're selling anything, it's much better to be in a position where you believe what you're selling. That's a lot easier than any fancy sales tricks. It's just believing in it because then you can just be authentic about how much you care about it. Let's talk about, you mentioned your promote structure. If you don't want to talk about that, you don't have to, but if you want to tell us about how you view that as being different than some other structures. We have some pretty sophisticated listeners who dealt with a lot of deals, so they like to hear about how different people operate.

Probably the biggest distinction is just the amount of money that our collective base, and I don't want to say just me, but our different D level and partners within the firm. We do allow, that's probably one distinction I would say that's really different with our group is we allow all of our employees to invest into the projects. And sometimes they can do that with, I don't want to take a bonus, just put the bonus into the deal kind of a thing. And so, we're able to do that at times. It does make a difference, and I will say it's something that we've done our entire career is having our employees be investors in the deals. Everybody acts like an owner. And you know what I mean when I say that. There's just a different mentality when everybody is truly acting like an owner. I don't have to sit there and second guess constantly.

Is this guy just trying to do what's right for his bonus? Or they've got money in this thing, they're trying to do what's right for the actual property and just aligns interests so much better with our investors. So, anytime we can, as much as possible, we promote our employees investing in the projects and I think does create a different mentality throughout the life of that project, especially given the long-term hold nature. People truly are. Some of these people are investing and it kind of almost qualitatively becomes their 401(k). If I can invest $10,000 in 42 different properties, now I've got a very diverse profile of ownerships across all these different projects that are spinning off cash flow every month. And yeah, they're not going to retire off any one of those, but collectively it starts to create a pretty good scenario for people over time. That's ultimately one of our main goals.

Do you want to talk about your GC company? Because you guys are vertically integrated and so that's a nice way to control the quality of the product that you're developing that you're going to hold for a long time is by supervising the construction.

Yeah, I think that's another just huge competitive advantage we have in the marketplace. And about 15 years ago, we started the construction company and really just did it out of necessity more than anything. We were getting bids from... We were up in the Seattle market and building our first economy extended stay hotel. We'd never built one and we though we knew what we could build it for though. And we kept going out to the market and the market was $20,000 a key more expensive. We were just like, "This cannot be." And this is pre-COVID, so this is up in Seattle to give you context. I think at the time we though we could do it right around $60,000 a door or a key, if you will, just the hard cost. And everybody was giving us bids in the $80,000 to $90,000 a key range.

And we just thought this is ludicrous. We can absolutely do this. So, within my family's company, we had started our own construction company, so I wasn't completely new to starting a company. It probably was a little naive to think we could go do it in Seattle. It was just a different market doing a brand new product and product that we had never built before. But it actually worked out really well. And I think again, it kind of goes back to that ownership mentality I think to a large degree is all of a sudden we were the contractors and our investors understood that and they trusted us. And we went and we ended up building the very first one of these. I didn't quite hit our $60,000 mark, but I think we built it $61,200. So, we were about $1,200 a key more than what aspirational mark was that we thought we could do it, but that was still $20,000 cheaper than anybody else in the Seattle market could do it.

I mean, we were going to guys that probably you and I would go, "Are you sure you want this guy to build? This guy's kind of a trunk slammer. Is he really the right contractor? Does he even have the right insurances?" And they were still up in those numbers. And so, that really opened our eyes to what can be done when most construction relationships, it can be friendly, but it's always adversarial, if you will, from using a legal term. It's an adversarial relationship. You're two different parties with disinterested alignments of interest. And so, how do you work together and they're always going to look out what's best for their company, you're going to look out what's best for yours. We found that that just creates a lot of CYA. And unfortunately, anytime there's CYA in any transaction, it translates to dollars. "Well, if I got to cover this, then I got to pat this." "Well, if we're going to do this, then we got to insure this." And then we're buying subguard, we're doing this, we're buying bonds for the contractor.

All these costs get introduced when it's a third party. We realized we kind of eradicate. One, we could just charge a cheaper fee than the market was charging. Not dramatically cheaper because we still got to make sure we can pay everybody. We could offer a little better fee than the rest of the market could do. The second big thing that we found is we started really going through divisional line items on that first build. And again, I'm not trying to expose anything on contractors, but they carry a ton of risk. They come in, they give you a gross maximum price, GMP contract. They're on the hook for that. If it goes over that, they're on the hook for that.

So, what they're going to do is they're going to, "Okay, we've got a bid from the site guy for $1.2 million. Let's carry $1.4 million so we're sitting on some contingency because stuff will come up, issues come up, they always do." And so, they pad that and that happens across 16 divisions within construction. And next thing you know, that's the $20,000 per key that we were talking about. And so, what we realized is, well, we knew our product and we had our confidence in the sub-base we were buying, and we also had some different arrangements with subs that put the risk a little bit back on them in some cases. Some cases we took it. But in doing that, we realized we could pull all that fluff out of the contract that gets just put in there, just gets spent. Throughout the course of construction, somehow it just gets spent.

I wish I understood exactly why. I don't think anybody's being dishonest. It's just somehow all that fluff will get spent. Stuff comes up, it is what it is. And then you end up paying the GMP amount. So, we realized those were the fee and then pulling the fluff out were two huge items. The other thing that we realized is we just, again, going back to that ownership mentality, we just had a stronger interest in ensuring that this hotel came in on time, on budget and on quality when we were the ones managing it, that we were absolutely able to, I don't want to call it partner, but we took an interest in making sure our subs were successful. We want them to make money because we're going to go try to do another one of these right after this so we want to help them.

And our team members actually became almost, again, we didn't cross any lines legally, but just our whole mantra was, "How do we help all of these subs be successful? How do we help them see what's coming down the pike?" Versus the tip of, "Well, if they're going to be idiots, we'll let them be idiots." And it was just a different mentality. It was a much more cooperative spirit. I would say I don't think we learned that 100% on that first project, but after three or four projects up in the Seattle market, and we would even hear subs say, "You guys just do it different than everybody up here." And I never really knew what that meant, but I think that's ultimately what they were saying is we weren't out to get them and we were out to help them be successful because if they made money, they actually got their margins and they did well on the project and there wasn't a dramatic amount of rework, that's where everybody loses money.

You installed the brick, it's wrong, you got to rip it off, redo it. And all of those dollars are kind of built into these subs bids. What we found is our bids started actually going down. Even though we were in a quasi-inflationary market, our bids kept getting tighter and tighter because the sub was building the same thing. They saw how it went last time. They knew what the spec was. They knew we weren't trying to play gotcha with them. And so, we actually saw cost profiles actually trend slightly down on our builds by about the fourth or fifth build, and that worked really well. So, that was in the State of Washington. And then we translated that over the past five years just really nationwide. So, we're now licensed in, I forget how many states, but I think we're licensed in 23 or 24 states around the country.

We're employing that same methodology. The one last thing I'll note that's really helped us, because I think a lot of people are listening saying, "How could we do this?" It is a scary thing to go into markets where you don't have a sub base, and I would caution people against that in most cases. What we've been really fortunate to find is a lot of subs that'll travel with us around the country. We've built that relationship I just described. They know that's how we are. We're building the exact same thing over and over and over and over again. I mean, we're onto our 20th or 21st build now. So, you build something 20 times. I mean, you buy a chair at IKEA, by the time you've built four of them, you're not even looking at the screws, you're just doing this, you're watching the football game and you've built it, not even thinking about it.

When the first one you were like, "What is this stick figure guy doing? I don't even know what..." By the fourth one you've got it. It's that same mentality with what we're building. When we build a prototype and we're sticklers on the prototype, unless the jurisdiction makes changes, we build the exact same thing over and over and over again. And that also leads to the success of these subs being able to make the margins they want to. It's an area I get super excited about and it's an area I don't have to lead. My partner, Dan Barrett, leads that and he does an amazing job, a much better job than I ever dreamed of doing when I started the construction company. He's taken the company to another level and it's fun to see how good it's gotten.

I appreciated the large explanation because I found all of that fascinating how you approach it. I'm sure it also helps with just estimating costs as you prepare the development, as you're going through entitlements, trying to figure out what your capital raise is going to be, trying to figure out what your loan size going to be, just to have that kind of dialed in approach on the cost. You have your GC company with you throughout the way. Because one challenge that a lot of developers have is you have an estimation in your mind of what the costs are or in your spreadsheets, it's not just back of the napkin, it's legitimate estimates. But then you take it to bid and you get surprised sometimes. I'm sure you got to bid out your subs, but you probably with the repetition that pretty dialed in at this point.

We get laser detailed. I mean, look, it's the biggest portion of your project cost profile and it's highly susceptible portion of the entire cost profile to bust is your hard construction costs. And so, it's rare that people are like, "Oh, the land we though we were paying $2 million. We had to pay $3 million." You know your land price. It's locked into a contract. You know what that's going to be. If it's a hotel and you have furniture, fixture and equipment, usually you kind of know what that is. That's pretty forecastable. It's the hard cost at the end of the day that's really sometimes city fees. We call them PIC fees. It's like permit, impact, connection fees, things like that can move on you a little bit in these profiles. And then the hard costs. And the beautiful thing for us is we start looking at our proformas and exactly like you just described, Phil, with our laser detail and track record and multiple state track record of building these, we're able to get very, very steely-eyed of what it's going to cost.

And then we always carry appropriate contingencies on top of that. We're able to forecast that. So, really the only thing that's even a potential, and I still call it's not a blowout, is that PIC fees category, the permit, impact. But we do these exhaustive studies and we update them manually. If you have a project that's in pre-development for a couple of years, we update them manually. And I think, I'm going to knock on wood, I believe we've never blown the budget on those PIC fees ever. And every project we've ever built, I take all of our portfolios, all of it we're on portfolio, we're about to launch portfolio seven, all of our first six portfolios, we've brought those in well within budget. And I think a lot of it goes down to just that, that we're able to forecast so correctly at the beginning. And probably some cases we're a little too conservative, even how well we know the numbers, we're still going to come in a little conservative that we do have, again, it sounds weird to say because people are always like, "Yeah, right."

And I'm like, "Look at it. We have a perfect track record on bringing projects in below budget," or meaning within budget. That's a nice thing. You don't have to go back to investors and, "Whoops, we thought it was going to be $14 million and then guys, it's actually $16 million. We need to raise $2 million." We've never had to do that, which is nice. And we talked about this last time, but about five years ago, we started a brand in this space called LivAway Suites. And a lot of people are going, "Oh, my gosh, start a brand," or we hear people... It's very different in this space. Like I said, you think of that continuum and where economy extended stay fits almost closer to multifamily than it is traditional hotels. That's probably also a good continuum for the difficulty of starting your own brand or the dependence on the brand for your clientele.

I guess, what I'm saying is economy extended stay is not as dependent on a big loyalty program. We're not getting 80% of our guests through, and nobody does regardless, whether you're Marriott, Hilton or Choice or Wyndham, any of them, you're not getting the majority of your clientele through your reservation system. It just doesn't happen in this space for whatever reason. I mean, I think a lot of it goes to the nature of the clientele and how they book, and it's much more company-based and things like that. For whatever reason, you're only getting about 15% to 20% of your clientele through your reservation system, if you will, on most of these hotels. So, we knew that and had the confidence ultimately that we could build something, I don't want to say revolutionary, but just definitely better in a number of categories. If you look at the landscape of a lot of just the economy extended stay hotels out there, a lot of them, I would say the majority of the economy extended stay hotels that are out there, I think there's 130,000, 140,000 rooms in the United States.

Definitely 70%, 80% of those were built 20-plus years ago. It's a very aged population of economy extended stay hotels in the United States and the bar's a little low already. It's also dated just from a technology standpoint or things you can incorporate into these hotels, whether it's sound attenuation or exhaust or just like I said, incorporation of technology into the actual way the hotel operates. We've been able to pull a lot of that in. And in our view, it's just a much better box than anything out there right now. Even the new stuff that's being built by some of the big brands, it's just ours is better. It's better sound attenuation. It's better exhaust. Smells are kind of a big issue in extended stay hotels because you have all these people cooking in these kitchens and it just kind of lingers in these hallways.

We have the most sophisticated exhaust system of really any extended stay hotel in the country. It's a simple thing, but you know what? It keeps the smells down in the building. And I walk into our hotels from Maine to Seattle and I can tell you, I am picky as I'll get out on stink, just smells. I never smell it. It's funny because there's a smell and anybody that's walked older economy extended stay hotels will know what I mean. There's kind of this familiar smell when you walk into it. I don't know if it's just the compounding of smells over 30 years and just people living in there, but it's a smell and you could blindfold me. I'd say, "Oh, I'm in this hotel," kind of a thing.

Our hotels, no, they're new, but they're devoid. Even our hotels have been open for a couple of two, three years. They're devoid of that smell, which I think it really is attributable back to that exhaust system and it was a small thing. It was a fairly costly thing. At the time we could have gone cheaper, but we just said it's an important thing. We want our guests to not have to live with that when they come into a LivAway Suites hotel. And so, we're about 30% better than the entire field on sound attenuation. Granted, you go onto our website, you're still going to, any hotel, you're going to hear noise complaints or read complaints on there. It is interesting. They're much fewer and far between than what I would expect in economy extended stay hotels. So, from our STC ratings and things like that that we do, we've done with engineers, it's about 30% better than the competition. And so, we've tried to, at the end of the day, we've incorporated the room design as a better layout.

It's a much more centralized kitchen versus a kitchen in the hallway as you're walking out. Everything in the building is really just set up to create efficiency from a labor standpoint while simultaneously creating a better experience for the guest. So, those were the two requirements. We wanted efficiency because we wanted to get more optimized on the overall cost of operating or the expense of operating the hotel. And then on the other side, we wanted to create a superior guest experience for our guests. I believe we've done that. So, that was one of the big things that we did in creating the brand. But that was a long way of saying your question of what's challenging for us today. And I think where I was going with that is we have our own LivAway Suites. We're heavily involved in LivAway Suites. I'm serving as the CEO of that presently right now as well.

We launched our own property management company in February, which is an effort or a Herculean effort in and of itself. I'll leave it at that. We have our own construction company, we have our development platform, and then we actually have our own law firm as well, just so we have dedicated attorneys working on our stuff only and we don't have to wait for other people. And so having really five different companies, if you will, and then many, many tens of hotels now and moving to goals to be in the hundreds, I think our biggest challenge right now is a few fold. It's how do you just build in all the infrastructure? We know how to, it's just doing it, getting all that infrastructure in place to be able to support that and not solving for 20 or 25 hotels, but solving for 250 hotels because if that's the goal, we want the infrastructure and the platform that's there.

So, that's a big initiative for us right now. I think more on the development side, candidly, we're building things within budget. Our hotels are operating the way that we want to. There's obviously challenges and things there that we're always working on and we're sticklers for quality. Just the quality control side is a constant battle just to, in my opinion, we're the best. You can walk into our hotels and go, "Yeah, this is much cleaner, much nicer than any other hotel in your segment." But we're just going to keep stepping on the gas. This will just keep getting better and better. And so, that's a big ongoing effort. But I think on the development front, the biggest challenge for us right now is just continuing to find sites that meet our requirements. It sounds like I keep saying we've got, we've got. This is a lot of other people doing this. This isn't me. So, don't take this as me brag. Take this as me... I think there's so many great people that have built things within our company and I think our acquisitions platform is one of the better ones in the country.

I've got friends at Blackstone that have talked about it and they're like, "Yeah, that's as sophisticated as anything we're using." We're just a little old company. We're a little old us. But it really is a sophisticated system and it's a dual-pronged acquisitions platform that actually tackles both the on-market properties and then it also tackles the off-market property. So, think of if something shows up on CBRE's listing, a two-acre parcel next to the hospital, yeah, we're going to definitely be aware of that so is everybody else. What everybody else isn't going to be aware of is there's four other sites within a five-mile radius of that site that meet the zoning.

They meet our sizing requirements. We've now talked to the sellers. They're willing to talk to us and negotiate. And so, what we do probably 40% to 50% of the time, we're buying sites that the market wasn't even aware of. And it's just a site that we went and said, "Hey, that's better than the site that's on the market. We want to be on the best site." And one of our thesis is when we go into a market, we have to be on the site that we believe is... I mean, there's always going to be a better site, but we have to feel that our site is in a superior position to the majority of the other even options without somebody tearing down a building or something like that. So, I'm talking more vacant land. We do exhaustive searches every time we look at a site and start going down the rabbit hole to say, we've got to be one of the better, call it top 10 percentile on great sites because we just don't ever want to be outpositioned, right?

I mean, somebody will come up with the next best thing, whatever it is. We'll always try to stay ahead of them. Where you can get in trouble is if you've been out-positioned. It's not even as good of a product, but man, they are just in a such better spot than you. And so, people are going to see them better. We're constantly trying to figure out how to get better in that category and that ends up just, and I say it's a challenge, it really is because by the time you get that best site, then you might find out, "Oh, it's got some environmental on it." And we're like, "Do we really want to deal with environmental?" And it's finding sites that meet all of our requirements and we can actually get through the AHJ and get a permit on. That's probably our biggest challenge right now, or I would say the biggest detractor from us scaling just as fast as we want to.

Great investors, great lenders, got a great platform once they're open of how to operate them. And it's really just how do we get more and more sites? And the other tough part, Phil, sorry to add onto that is you're just going like, "This guy's not going to stop talking, is he?" But the other tough part is there's just such an... And that's probably the side that gets me excited about this sometimes maybe if you're hearing a little passion in my voice. Yeah, I love the investment side of it, but if something's just about money, it's like, "Yeah, it's fun for a minute." But I don't know, for some people maybe that's fun. It just doesn't get me totally amped up. And so, you got to be making money, that's a requisite and we want to make money and that's why we do this. But there's another fun side of this is that, like I mentioned, there's just not a lot of great product out there.

And even the product that's out there, we're falling short of what the true need is. I mean, I think I mentioned there's about 140,000 keys right now. Rough estimates, the United States right now probably needs close to 300,000 and 350,000 units. So, you look at that math and you go, "Man, we are massively undersupplied based on the true need." And so, in our minds, we're really doing something that gives back a little bit. And I hate to agree, "Oh, it's all truistic." No, we're making money and all that, and that's why we're doing it. But it is fun to bring a great product to people where they're getting so much more value than they do with the competition. And we could charge more for it and we're not. That is a little bit of our, if you will, kind of our Costco is a great company based on their market share and all that.

They could charge so much more for the goods than they do and the membership and all these things and they don't. They just say, "No, we want that value to go back to the customer." Ours is kind of the same. We think we're better off in the long run creating great value opportunities for the guest and that'll create loyal followers and loyal guests over time. And that's the way you kingdom make. I mean, you look at the great companies, they always pass more value back to the customer than they were necessarily taking themselves. And so, that's another big challenge of us is how do we just keep that balance constantly for our guests?

Well, it's because you have that long-term view and I think that's a great way to wrap this up. That's an awesome way for us to close out with that explanation because Mike, thanks for coming. I love your energy. I love how proud you are of your business and your company and what you're offering. You can hear the pride in your voice. It's not just the energy because of what your product is. And I loved hearing about all the different businesses and the way you think about how you can expand, not just geographically, but into the different ancillary businesses that service your core business. So, thanks for coming on. Thanks for sharing. And you're always welcome back.

Hey, thanks, Phil. Whenever you need me, I'm here.

Thank you for joining us on this episode of Real Estate for Breakfast. To learn more about today's discussion, please email host, Phil Coover at [email protected]. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.