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?

 

Fergus and Freya Eneas have owned Gregory’s Greek Restaurant for over thirty years in Gregory town, a small scenic town in the country. The restaurant overlooks a river and offers visitors a lovely view of the countryside. Over the years, the restaurant’s popularity has grown through word-of-mouth advertising, and now guests often wait up to two hours on the weekend before being seated. Fergus and Freya have been approached by Divina Developers, which wants to use the Gregory’s Greek Restaurant concept in a mixed-use development it is putting together. It seems that one of Divina’s managers ate at Gregory’s and loved the concept. Divina Developers put together an investment proposal for Fergus and Freya requesting to use their concept and cash equity for the deal. The following are excerpts from the offer sent by Divina: ■ Use of the Gregory’s Greek Restaurant name in exchange for limited partnership units in the new restaurant. ■ A request for a 45% equity investment from Fergus and Freya on the total project cost of $3,000,000. In return for their investment, they will receive 25% ownership and 25% of all cash flows, with Divina reserving 75%. ■ With an estimated $175,000 in cash flows in Year 1 and a 10% growth rate over the next decade, the return on equity looks very promising. ■ Divina Developers, as the general partner, will retain all operating rights, including the right to decide when the restaurant and property will be sold. 1. Identify and explain the positive and negative aspects of the proposed business entity for Fergus and Freya. 2. Calculate the IRR for this project based on a sale in Year 6 with a 10% cap rate. 3. Analyze the structure of the equity proposal. If you were Fergus and Freya, would you accept this offer as it stands? If not, what would you negotiate?