Nicole Sharp, director of acquisitions for Sahara Hotels Corp., has discovered a promising location for a future hotel. The subject property is located in a densely populated urban setting and borders the business district in Shepard City. Ms. Sharp is in the process of developing an investment package for potential equity investors and has put together the following fact outline: â–  The location of the proposed hotel is excellent, as it is located in one of the fastest-growing market areas in Shepard. Businesses have been readily moving to Shepard because of favorable tax incentives. Along with increased business development, local hotels have experienced an increase in ADR and revenue per available room. â–  The acquisition price of the land will be $3.5 million, with an additional $15 million needed for construction costs for the proposed 197-room property. In total, the project will cost $18.6 million. â–  The city is currently in the process of building a major freeway in front of the proposed build site, which will increase land values and traffic. â–  The hotel competition in the immediate area consists of two major branded hotels and one independently operated property. Competitor A is a budget hotel, Competitor B is a midmarket property without food and beverage facilities, and Competitor C is an upscale independent property with food and beverage facilities. Ms. Sharp is proposing to build a 197-room upscale full-service property to meet the underserved business travelers currently visiting the area. The following is a pro forma for the first six years of operation. Ms. Sharp has projected six years because she has set a timeline to sell the property in Year 6 at an 11% cap rate. 1. Is any information missing that should go into an equity investment package? If so, list the information missing. 2. Calculate the return on investment in Year 1 for an equity investor who provides 45% of the total project cost. 3. Calculate the internal rate of return for this project with a sale in Year 6. (Utilize the cap rate method for sale price in Year 6.) 4. Would you invest in this project? Why or why not?

 

Dean Hotel Investments, an S-corporation, has identified a potential investment property near a major New England airport. The 302-room Blackstone Hotel is a recently DE franchised upscale hotel asset that has been lender-owned for several years and fallen on hard times. Dean Hotel Investments is proposing converting the independent hotel to a major limited-service brand, which would provide brand recognition and an increased customer base. The property has been on the market for two years and the current asking price is $8,000,000, which is well below comparable sales in the area. The airport market has seen a slight drop in occupancy and ADR over the past couple of years due to the struggling economy. Experts have estimated that as soon as the economy begins to rebound, so will occupancy and ADR. Dean Hotel Investments plans on converting the property to a limited-service brand, thereby creating the market leader in a price-sensitive marketplace. The planned renovations and reflagging the investment should result in a total project cost of $11,535,000. Dean Hotel Investments has identified an equity investor willing to invest 35% of the total project cost. Dean has also found a lender, Star Bank, willing to provide 50% of the project cost, and a second lender, Prize Bank, to provide a mezzanine loan for the remaining 15%. The following terms were offered by Star Bank: â–  Interest Rate: 7% â–  Loan Term: 10 â–  Points: 4 points up front â–  Collateral: Hotel owned by Dean Hotel Investments The following terms were offered by Prize Bank: â–  Interest Rate: 12% â–  Loan Term: 5 â–  Points: 2 points up front â–  Collateral: Subordinated claim of the Blackstone Hotel 1. Calculate the amount of the loan from Star Bank, payment amount, and effective interest rate. 2. Calculate the amount of the loan from Prize Bank, payment amount, and effective interest rate. 3. Analyze the terms offered by both banks. If you were Dean Hotel Investments, what terms would you negotiate, and why?