In this webinar, David Kessler presents a unique hospitality project in an Opportunity Zone in Hudson, New York.

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• Learn key details about the fund and related projects.
• Request more information from the fund sponsor.

Webinar Highlights

• Overview of David’s extensive career in real estate;
• Summary of the redevelopment of a vacant federal mansion in Hudson, New York into a boutique hotel;
• Expected returns and fees for the project;
• Factors driving significant demand for hotel rooms in Hudson, known as “the downtown of upstate”;
• Summary of the tax incentives associated with this project;
• The unique geography and demographics of Hudson;
• Drivers of visitors to Hudson, including wedding, leisure, and off-site retreats;
• Live Q&A with OZ Pitch Day attendees.

Industry Spotlight: Sandstone Partners

Founded in 2018, Sandstone is developing a boutique hotel in Hudson, New York. Sandstone Partners targets underperforming mixed-use, hospitality, and multifamily properties executing business plans ranging from value-add to ground-up development.

Learn More About Sandstone Partners

• Visit SandstoneRE.com

Webinar Transcript

Jimmy: David Kessler is with Sandstone Partners. And he’s gonna be presenting a really unique property, The McKinstry Mansion in Hudson, New York, in an opportunity zone, a little boutique hotel that’s gonna have event space. And, well, why don’t I let him tell you about it.

David: Hi, everyone. I’m David Kessler. I’m the founder and CEO of Sandstone Partners. And I’m excited to share our latest project with you today, which is an adaptive reuse of a historic property in the heart of Hudson, New York. And we’re redeveloping it into an independent boutique hotel. I’d like to start by telling you a little bit about myself. I’m originally from Atlanta, Georgia. I studied real estate at University of Wisconsin, and I moved to New York in 2001. Been in real estate my entire career. I started out at the real estate advisory services practice at Ernst & Young, and then I was an in-house appraiser over at Credit Suisse. And then I transitioned to the principal side of the business in 2006 where I’ve been ever since. I was second-in-command at three different development shops in New York City. And I oversaw all aspects of the development business, which included multiple historic renovation projects, as well as multiple hospitality projects.

I’d like to share with you a few of my recent successes. So, number one, two, and three on this list are projects that I developed in Williamsburg, Brooklyn. And the reason I bring this up is the first one’s a retail repositioning play in North Road and Bedford. And we… And the second one was a ground-up development at Driggs and North Road, and it’s 70,000 square feet. And the third is a condo building that we built, 30,000 square feet. These three building, these three properties were purchased back in 2012. And when I first came to that neighborhood at that time, the center of the neighborhood was really North 7th and Bedford, but I saw it shifting to our block. And now, if you go there, you would tell me, “Look, David, the center of this neighborhood is your block.”

And it was based on, you know, the growth and where that neighborhood was headed. And, you know, the first one on this list, we put Apple in the corner. And that was the first Apple store in all of Brooklyn. And then the second one, we built a 70,000 square-foot hotel there. I founded Sandstone back in 2018, and I came up to Hudson in the summer of 19. And I quickly realized that the best way to make this project a reality and a success was for me to move here. So, that’s exactly what I did. And the barriers to entry in Hudson are significant, and I’ve been working on this project for the last three years. We have all the municipal approvals in place, the plan substantially complete. The opportunities to invest in an opportunity zone fund that’s redeveloping a historic, vacant federal mansion that’s in the heart of Hudson, New York, where we’re redeveloping into a 55-room independent boutique hotel.

We’re gut renovating the existing 15,000 square-foot building. It was built in 1835. And we’re building a new modern addition that’s 20,000 square feet. The total project cost is roughly $32 million. And this includes a non-recourse long-term financing of $27 million, and approximately $5.2 million of new equity. And we have half of that committed, and we’re looking to raise the other half here today. The partnership, we’re… the way we’re structuring the partnership is with an 8% preferred return, and then 70% of the cash flow above and beyond that. And we’re charging market rate fees. This means that the investors’ net cash-on-cash return averages 20% per year throughout the hold period, which includes the first two years, which is our construction period. Assuming that we sell this asset in 10 years time, we’re projecting a net IRR to our investors of 24%, which is incredibly rare given a 10-year hold period.

And we’re projecting a 5.4 times equity multiple. So, if you invest a million dollars, you’re gonna get back 5.4 roughly over the 10-year horizon. This is in a premier location, and there’s significant tax benefits. I’d like to, you know, talk a little bit more about the investment highlights. So, this is a thriving yet underserved market. When I first came to Hudson in 2019, I tried to book a hotel room a month out, and I couldn’t book one single room. There’s, you know, we have the third busiest Amtrak station in New York State. In 2019 alone, we had over 200,000 tourists, and yet, we only had 200 hotel rooms. We are in a premier location. Hudson is considered the downtown of upstate. And there’s countless bars and restaurants, and art galleries, antique stores, performance venues, music venues, wedding venues, and the like. Incredibly charming town, great architecture, and it’s really a great place.

We are… we have several tax benefits as well, including the opportunity zone benefits, of course. We’re in the OZ, we have this OZ fund set up. And then we also went to the City of Hudson Industrial Development Agency, and we got a tax abatement. So, in exchange for our job creation and commitment to hire locally, we structured a PILT, which stands for Payment in Lieu of Taxes with the Industrial Development Agency, which allows us to abate sales taxes on construction materials, mortgage recording taxes. And we know what our real estate taxes will be for the next 11 years. This alone has added over $1.6 million in value to the site. We’re getting attrac… you know, we’ve secured attractive long-term debt financing in the form of a USDA B&I loan, and a CPACE loan, which combined total is $27 million, and at a blended interest rate of 8%. And we’ve eliminated all of our refinances for the next 27 years.

We’re projecting stabilizing at the beginning of year four at an average daily rate of 510, an occupancy of 68%. The projected stabilized net-operating income equates to about $3.6 million. So, if you take that and you divide that by our total project cost, we’re projecting a stabilized yield on cost of over 11%, which is phenomenal. Boutique hotels today are trading, you know, in the 7 to 8% range. We’re projecting selling it at an 8.5% exit-cap rate in 10 years time, which we believe to be conservative. And that results in a net IRR to our equity investors of over 24%. And, again, a net equity multiple of about 5.4 times multiple. We are, you know… I have over 20 years of experience in this business and over a billion dollars of development experience. We have a great team.

And, now, I’d like to talk a little bit about what makes Hudson so unique. And, you know, one of the interesting things is we made the list of the top 25 small towns in America with the most millionaires, yet we’re also in the opportunity zone. It’s an incredibly diverse place. And, you know, there’s countless articles that talk about the Hamptonification of the Hudson Valley and how it’s becoming really a high-end entertainment town. And we’re nestled between the Berkshires and the Catskills. And we’re only two hours from New York City by car or train direct from Penn Station. We’re two and a half hours from Boston, two hours from Hartford. And there’s, you know, countless outdoor activities in the immediate area. The accessibility is just phenomenal.

Catering to three distinct customer segments here, wedding, leisure, and offsite retreats. So, let’s talk about the wedding business for a second. There are over 16 wedding venues within a 12-mile area. That means that over 35,000 people came here just to attend a wedding in 2019. Another interesting thing to note is, during the pandemic, we had more net in migration per capita of anywhere in the country. And then we’re also catering to the leisure market and the corporate offsite retreat market. Today, none of the other hotels or motels or inns in town really can effectively cater to all three segments because either they don’t have the number of rooms, the amenities, or the sales and marketing team to go after that business, but we’ll be able to.

Now, I’d like to just talk a little bit about the history of the property. It’s a beautiful property in the heart of town, literally one block from the main town square in the heart of the growth of the town. It was… This property, it’s 15,000 square feet. It was built in 1835 for a guy by the name of Robert McKinstry. He was the mayor of the town, he owned an apothecary in town. And then he died in the late 1800s and sold to the home for the aged. And it was an old age home from 1900 until 2014. And it’s been vacant ever since, and we’re bringing it back to its original glow. This is the way the building looked back in 1835. This is the way the building looks today. And this is the way the building will look upon completion.

We’re gonna execute a locally-rooted concept that will lean into the art scene and food scene, and accessibility to locally grown foods and wineries in the area. And it’ll be very experiential. We’re gonna hire a third-party hotel management firm that focuses on managing luxury independent boutique hotels. So, this is our entrance. And then to the right, you can see the restaurant space with 20-foot ceilings that’ll open up onto an outdoor dining terrace. Our food and beverage programming, we’re gonna have a restaurant with 48 seats, a private dining room with 12 seats, plus a bar with a speakeasy entrance under the porch of the historic mansion. That’ll feature 32 seats, exposed brick, exposed beams and two wood-burning fireplaces. And we’re gonna call it the apothecary since… not Robert McKinstry’s… you know, he owned an apothecary in town.

On the parlor level of the historic mansion, we’ll have a series of event rooms. We can host events, you know, seated events, up to 70, cocktail style events up to 130. And when this room is not being used for private events, it’ll be the living room of the property with soft seating. Over 35% of the half an acre corner lot will be landscaped open space even after we add our 20,000 square-foot addition. So, here you can see, this is the addition that we’re building. This is that restaurant space that will open up into an outdoor dining terrace. Here’s our main entrance to the hotel. We’re building around this old growth tree here. And then here, we have a outdoor spa facility with the sauna, jacuzzi, and fire pit. The thought there is we’re gonna cater to ski packages, or sell ski packages to people who live in New York City that don’t own a car that can hop on Amtrak two hours later they’re in Hudson, which is much more interesting town than some of the mountain towns nearby.

And we’ll shuttle you to and from the resort… ski mountain. There’s two mountains nearby, one’s 25 minutes to our east, the other is 35 minutes to our west. And then in front of that outdoor spa facility with the sauna, jacuzzi, and fire pit, we’ll have a yard where we could fit a tent for a hundred-person wedding ceremony. And then in front of the historic mansion here, we have a series of formal gardens with an Instagram room as you approach. Again, if you go under the porch of the historic mansion, that’s the entrance to the speakeasy. And here’s another rendering for you. And that concludes my presentation. Thank you very much for your time. If you’d like to find out more information, please reach out to me at [email protected] or 917-679-6000. Thanks so much.

Jimmy: Well, thank you, David. And David, we met, I don’t know, quite a while back, about a year and a half ago. Really excited that you could join us for OZ Pitch Day. Today, this is your first time presenting at OZ Pitch Day, and it really is an incredible project you have there in Hudson. We got time for just one question. And we got you started a little bit late, we’re running a few minutes behind, but wanted to make sure you got at least one question in. Do you plan to operate the hotel or will it be flagged?

David: I tend to engage a third-party hotel management firm that specializes… I’m a strong believer of do what you’re good at, let other people do what they’re good at. I’m a developer. And so, we’re gonna hire a third-party hotel management firm to operate it. It will be independent and boutique. This isn’t a market where, you know, having a Marriott flag or a Hilton flag really benefits you. People who come to Hudson want the independent and boutique experience, and that’s what we will be creating here.

Jimmy: Fantastic. Well, David, we’ve run outta time, but thank you for joining us today. I’m gonna make sure that your contact information gets in the chat. If anybody has any questions that we weren’t able to get to, please do reach out to David directly and request more information from him. David, thank you so much.

David: Thank you.