Concept Check: The Right Hotel for the Right Market Questions 1, 2, 3, and 4
- Is any information missing that should go into an equity investment package? If so, list the information missing.
- Calculate the return on investment in Year 1 for an equity investor who provides 45% of the total project cost.
- 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.)
- Would you invest in this project? Why or why not?
cost for a -service hotel in a major metropolitan city The Right Hotel for the Right Market Concept Check Nicole Sharp, director of acquisitions for Sahara Hotels Corp., has discovered a promising lo- cation 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: 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. 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. 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. 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 prop- erty with food and beverage facilities. Ms. Sharp is proposing to build a 197-room upscale full-service property to meet the un- derserved 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 property in Year 6 at an 11% cap rate. the 312 CHAPTER 10 THE INVESTMENT PACKAGE 6 Year Pro Forma Year 4 5 3 6 1 2 $ 2.252,500 $ 2,388,776 $ 2,557,424 $ 2,737,978 $ 2,902,257 $ 3.076.32 $ 10,936 Revenues Rooms Telephone Restaurant Lease Other Income Gross Income $ 9.500 $ 141.750 $ 96.250 $ 9,461 $ 129,386 $ 86,258 $ 9,713 $ 107,625 $ 118,913 $ 9.733 $ 120.927 $ 80,815 C $ 10,317 $ 128,183 $ 135,874 $ 85,664 $ 90,804 Te $ 5,500,000 $ 5,720,000 $6,063,200 $ 6,245,096 $ 6,682,253 $ 7.216.833 Direct Costs Rooms Telephone Restaurant Utilities Other Total Direct $ 765,850 $ 28,310 $ 49,613 $ 1,444 S 845,216 $ 804,062 $ 852,221 $ 28,654 $ 27,631 $ 37,292 $ 44,384 $ 1.766 $ 1,268 $ 871,774 $ 925,504 $ 903,263 $ 947,885 $ 28,143 $ 29.534 $ 41,068 $ 43,096 $ 1,176 $ 1.234 $ 1.295 $ 973,651 $ 1,021,749 $ 1,072,223 $ 994,710 $ 30,993 $ 45,225 Gross Operating Income $ 4,654,784 $ 4,848,226 $5,137,696 $ 5,271,445 $ 5,660,504 $ 6,144.610 Indirect Costs Administrative and General Franchise Fee Marketing Energy Repairs and Maintenance Total Indirect $ 720,500 $ 741,827 $ 778,473 $ 793,809 $ 840,882 $ 899,071 $ 167,200 $ 172,149 $ 180,653 $ 184,212 $ 195,136 $ 208,639 $ 430,650 $ 452,355 S 484,291 $ 503,808 $ 544,465 $ 593,903 $ 304,150 $319,479 $ 342,034 $ 355,818 $ 384,533 $ 419,449 $ 352,000 $ 362,419 $ 380,323 $ 387,815 $ 410,812 $ 439,241 $ 1,974,500 $ 2,048,229 $ 2,165,774 $ 2,225,462 $ 2,375.828 $ 2,560,302 Gross Operating Profit $ 2,680,284 $ 2,799,997 $ 2,971,922 $ 3,045,983 $3,284.675 $ 3,584,307 Fixed Charges Management Fee Real Estate Taxes Insurance Reserve for Replacement Total Fixed $ $ 171,600 $ 181,896 $ 187,353 $ 245,300 $ 227,656 $216,456 $ 214,831 $ 245,300 $ 227,656 $ 216,456 $ 214,831 $ $ 171,600 $ 181,896 $ 187,353 $ 490,600 $ 798,512 $ 796,704 $ 804,368 $ 200,468 $ 216,505 $ 229.869 $ 248.259 $ 229,869 $ 248,259 $ 200,468 $216,505 $ 860,674 $ 929,528 Net Available for Debt $ 2,189,684 $ 2,001,485 $ 2,175,217 $ 2,241,615 $ 2,424.001 $ 2,654,779 QUESTIONS 1. Is any information missing that ould go into an equity investment package? If so, list the information missing Calculate the return on investment in Year 1 for an equity investor who provides 45% of the total project cost. 2. EVALUATION OF THE INVESTMENT PACKAGE 313 3. Calculate the internal rate of return for this project with a sale in Year 6. (Utilize the caprate method for sale price in Year 6.) Would you invest in this project? Why or why not? 4. cost for a -service hotel in a major metropolitan city The Right Hotel for the Right Market Concept Check Nicole Sharp, director of acquisitions for Sahara Hotels Corp., has discovered a promising lo- cation 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: 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. 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. 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. 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 prop- erty with food and beverage facilities. Ms. Sharp is proposing to build a 197-room upscale full-service property to meet the un- derserved 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 property in Year 6 at an 11% cap rate. the 312 CHAPTER 10 THE INVESTMENT PACKAGE 6 Year Pro Forma Year 4 5 3 6 1 2 $ 2.252,500 $ 2,388,776 $ 2,557,424 $ 2,737,978 $ 2,902,257 $ 3.076.32 $ 10,936 Revenues Rooms Telephone Restaurant Lease Other Income Gross Income $ 9.500 $ 141.750 $ 96.250 $ 9,461 $ 129,386 $ 86,258 $ 9,713 $ 107,625 $ 118,913 $ 9.733 $ 120.927 $ 80,815 C $ 10,317 $ 128,183 $ 135,874 $ 85,664 $ 90,804 Te $ 5,500,000 $ 5,720,000 $6,063,200 $ 6,245,096 $ 6,682,253 $ 7.216.833 Direct Costs Rooms Telephone Restaurant Utilities Other Total Direct $ 765,850 $ 28,310 $ 49,613 $ 1,444 S 845,216 $ 804,062 $ 852,221 $ 28,654 $ 27,631 $ 37,292 $ 44,384 $ 1.766 $ 1,268 $ 871,774 $ 925,504 $ 903,263 $ 947,885 $ 28,143 $ 29.534 $ 41,068 $ 43,096 $ 1,176 $ 1.234 $ 1.295 $ 973,651 $ 1,021,749 $ 1,072,223 $ 994,710 $ 30,993 $ 45,225 Gross Operating Income $ 4,654,784 $ 4,848,226 $5,137,696 $ 5,271,445 $ 5,660,504 $ 6,144.610 Indirect Costs Administrative and General Franchise Fee Marketing Energy Repairs and Maintenance Total Indirect $ 720,500 $ 741,827 $ 778,473 $ 793,809 $ 840,882 $ 899,071 $ 167,200 $ 172,149 $ 180,653 $ 184,212 $ 195,136 $ 208,639 $ 430,650 $ 452,355 S 484,291 $ 503,808 $ 544,465 $ 593,903 $ 304,150 $319,479 $ 342,034 $ 355,818 $ 384,533 $ 419,449 $ 352,000 $ 362,419 $ 380,323 $ 387,815 $ 410,812 $ 439,241 $ 1,974,500 $ 2,048,229 $ 2,165,774 $ 2,225,462 $ 2,375.828 $ 2,560,302 Gross Operating Profit $ 2,680,284 $ 2,799,997 $ 2,971,922 $ 3,045,983 $3,284.675 $ 3,584,307 Fixed Charges Management Fee Real Estate Taxes Insurance Reserve for Replacement Total Fixed $ $ 171,600 $ 181,896 $ 187,353 $ 245,300 $ 227,656 $216,456 $ 214,831 $ 245,300 $ 227,656 $ 216,456 $ 214,831 $ $ 171,600 $ 181,896 $ 187,353 $ 490,600 $ 798,512 $ 796,704 $ 804,368 $ 200,468 $ 216,505 $ 229.869 $ 248.259 $ 229,869 $ 248,259 $ 200,468 $216,505 $ 860,674 $ 929,528 Net Available for Debt $ 2,189,684 $ 2,001,485 $ 2,175,217 $ 2,241,615 $ 2,424.001 $ 2,654,779 QUESTIONS 1. Is any information missing that ould go into an equity investment package? If so, list the information missing Calculate the return on investment in Year 1 for an equity investor who provides 45% of the total project cost. 2. EVALUATION OF THE INVESTMENT PACKAGE 313 3. Calculate the internal rate of return for this project with a sale in Year 6. (Utilize the caprate method for sale price in Year 6.) Would you invest in this project? Why or why not? 4
