HOTEL FINANCING TRENDS AND SCHEMES 173 ects. TAX ABATEMENT: An agreement with the government to forego the payment of property and other taxes. TRAINING GRANT: A subsidy offered by the government to a hotel developer to train local resi- dents for employment positions. PROJECT INFRASTRUCTURE: Construction cost provided by the government related to curb cuts, exit ramps, and connections to utilities. SLIVER EQUITY: A small amount of equity provided by construction companies and/or manage- ment companies. INVESTMENT BANKERS/BANKS: Companies that work with businesses to raise funds for proj- TAX SHELTERS: Means where individuals can invest and defer paying taxes until later, thereby "sheltering" their tax liabilities to the government. REAL ESTATE MORTGAGE INVESTMENT CONDUITS (REMIC:): These conduits made mortgage loans and sold them as commercial mortgage-backed securities primarily to financial institu- tions that formerly made real estate loans directly to real estate developers. COMMERCIAL MORTGAGE-BACKED SECURITIES (CMB6): Securities created by real estate mort- gage investment conduits, or REMICs. They are essentially mortgage loans. REAL ESTATE INVESTMENT TRUSTS (REIT.): Tax-exempt corporations that own real estate. EQUITY REITO: REITs that invest in and own properties. Their revenues are derived primarily from rental income. Approximately 96% of all REITs are equity REITs. MORTGAGE REITO: REITs that invest in mortgages and mortgage-related securities, Mortgage REITs derive their revenues from interest income. HYBRID REITO: REITs that invest in both commercial properties and mortgages. Application Exercises 1. Sarah Scott borrowed $200,000 from a bank to start a catering business and has agreed to pay the bank $15,000 per year in interest expense. What is the cost of debt for Sarah? 2. Sarah raises another $100,000 of equity from her sister Allison, agrees to give her a 25% ownership position in her catering business, and projects annual cash flow before debt to be $50,000, what is Sarah's cost of equity? 3. What is the weight of debt for Sarah's catering business? 4. What is the weight of equity for Sarah's catering business? 5. If Sarah's business falls in the 30% tax bracket, what is her cost of debt after tax? 6. What is the weighted average cost of capital for Sarah? 7. Define business loans, permanent loans, and mezzanine loans. 8. What sources can provide convertible loans and mini-perms? 9. Compare and contrast venture capital and SBICs
