Charlotte Lebioda grew up in the hotel business. Her parents owned and operated a 100-room limited-service hotel for 20 years. When Charlotte graduated from hospitality school, her parents retired, turning the business over to Charlotte. Her hotel has an appraised value of $3,000,000 and total mortgage debt of $1,000,000, and her initial equity was $2,000,000. The franchisor with which Charlottes property is associated has approached her to see if she wants her to develop a second property to be located ten miles from the original hotel. The franchisor is proposing a 100-room property, which can be built at a cost of $4,000,000. In addition, the franchisor has indicated that a special financing arrangement has been put in place that allows existing franchisees to obtain 100% financing if their current properties score in the top 10% of the franchisors annual inspection program. Charlottes property qualifies for the special financing offer.

Assume you were advising Charlotte. What would you tell her about the impact of the new hotel on the assets, liabilities, and owners equity portions of her new Accounting Formula? What do you believe are the key factors Charlotte should consider before agreeing to build the new property?