If you represents the interests of hotel ownership and considering only the financial analysis, would you recommend that the investment be treated as an FF&E loan or additional capital investment? Why

Under the terms of the Management Agreement, the Owners $925,000 investment in the bar could be treated in two ways.

1. FF&E loanThe Owner could make an FF&E loan to the Hotel to finance the investment; any FF&E loans carry an interest rate of 8.0%. The loan will be repaid in five equal payments of $280,000. The loan is treated as a deduction when calculating the incentive fee for manager. Thus, FF&E loans have the effect of lowering managers incentive fee. This treatment lowers the taxable income of the hotel due to the treatment of the loans interest as an expense.

2. Additional capital investmentThe Owners priority will be increased by 10.35% of the additional Owner investment of $925,000. This will also lower the managers incentive fee. This treatment has no impact on the taxable income of the Hotel.