You have completed your analysis of the financial feasibility of the proposed Hotel. Now let’s consider which of the two loans offers the best terms for TarHeel. If THD does proceed with the Hungerford project, which financing option—the base case or the optional case—would you recommend the firm choose? Why?
You should characterize the additional risks that THD is taking under the optional case financing scenario, and then make a recommendation.
Instructions
SHA611: Financial Analysis of Hotel Investments
School of Hotel Administration, Cornell University
Hungerford Hotel Case Study
Answer Key for Base Case
Instructions:
Use this workbook to obtain answers to the questions in the Hungerford Hotel Case Study for the base case.
To submit this assignment, please refer to the instructions in the course.
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AssumptionsBase Case
Hungerford Hotel, Grandville, USA
Investment Analysis Assumptions – Hungerford Hotel
Property Description
A 200-room Hungerford Hotel to be built in Grandville, NC. The 8 story hotel will open in 18 months.
Amenities will include a restaurant, indoor pool, fitness facility, business center, and 2000 square feet of meeting space.
”Turn-Key’ Development Costs $42,000,000 which equals $210,000 per key
Overall Assumptions
Desired Holding Period 10 years
Annual Increase in Cash Flows after 5th year 3.00%
Cash Flow Multiple for Hotel Real Estate 12.5 times equal to a 8.00% cap. rate
Selling Expenses 3% of Gross Sales Price
Desired Total Property Discount Rate (Hurdle Rate) 11.0%
Equity Investment Parameters
Desired Equity After-Tax Discount Rate (Hurdle Rate) 14.0%
Lending Parameters
Loan to Value Ratio 65%
Mortgage Amount $27,300,000
Interest Rate 5.15% fixed
Interest “Kicker” (extra interest after stabilization) 0.00% of Total Revenues beginning in the fourth year of operations
Amortization Term 25 years, monthly payments
Annual Debt Service (Monthly times 12) $1,943,856 per month
Tax Environment
Ordinary Income Tax Rate 39% of annual taxable income
Depreciation Recapture Tax Rate 25% of depreciation taken over holding period, paid at sale
Capital Gains Tax Rate 15% of capital gains, paid at sale
Depreciation Parameters – Initial Investment
Depreciable Basis of Initial Investment $35,000,000
Average Depreciable Life 25 years
Depreciation Method Straight Line
Depreciation Parameters – Replacement Reserves
Depreciable Basis Reserves Assume funds are spent each year
Average Depreciable Life 7 years
Depreciation Method Straight Line
Management Contract Valuation Parameters
Desired Overall IRR on Management Fee Flows 12%
Margin on Management Fees 50%
Cash Flow Multiple for Hotel Management Fees 4 times
Amortization Table
Year B. Bal Interest Principal E. Bal
1 $27,300,000 $1,393,070 $550,786 $26,749,214
2 $26,749,214 $1,364,025 $579,831 $26,169,383
3 $26,169,383 $1,333,449 $610,407 $25,558,976
4 $25,558,976 $1,301,260 $642,596 $24,916,380
5 $24,916,380 $1,267,374 $676,482 $24,239,898
6 $24,239,898 $1,231,701 $712,155 $23,527,743
7 $23,527,743 $1,194,147 $749,709 $22,778,033
8 $22,778,033 $1,154,612 $789,244 $21,988,789
9 $21,988,789 $1,112,993 $830,863 $21,157,926
10 $21,157,926 $1,069,179 $874,677 $20,283,249
11 $20,283,249 $1,023,054 $920,802 $19,362,447
12 $19,362,447 $974,497 $969,359 $18,393,089
13 $18,393,089 $923,380 $1,020,476 $17,372,613
14 $17,372,613 $869,567 $1,074,289 $16,298,324
15 $16,298,324 $812,916 $1,130,939 $15,167,384
16 $15,167,384 $753,278 $1,190,578 $13,976,807
17 $13,976,807 $690,496 $1,253,360 $12,723,446
18 $12,723,446 $624,402 $1,319,454 $11,403,992
19 $11,403,992 $554,823 $1,389,033 $10,014,959
20 $10,014,959 $481,575 $1,462,281 $8,552,678
21 $8,552,678 $404,464 $1,539,392 $7,013,286
22 $7,013,286 $323,287 $1,620,569 $5,392,717
23 $5,392,717 $237,829 $1,706,027 $3,686,690
24 $3,686,690 $147,865 $1,795,991 $1,890,699
25 $1,890,699 $53,157 $1,890,699 $0
Assumptions Optional Case Case
Hungerford Hotel, Grandville, USA
Investment Analysis Assumptions – Hungerford Hotel
Property Description
A 200-room Hungerford Hotel to be built in Grandville, NC. The 8 story hotel will open in 18 months.
Amenities will include a restaurant, indoor pool, fitness facility, business center, and 2000 square feet of meeting space.
”Turn-Key’ Development Costs $42,000,000 which equals $210,000 per key
Overall Assumptions
Desired Holding Period 10 years
Annual Increase in Cash Flows after 5th year 3.00%
Cash Flow Multiple for Hotel Real Estate 12.5 times equal to a 8.00% cap. rate
Selling Expenses 3% of Gross Sales Price
Desired Total Property Discount Rate (Hurdle Rate) 11.0%
Equity Investment Parameters
Desired Equity After-Tax Discount Rate (Hurdle Rate) 15.0%
Lending Parameters
Loan to Value Ratio 70%
Mortgage Amount $29,400,000
Interest Rate 5.25% fixed
Interest “Kicker” (extra interest after stabilization) 1.50% of Total Revenues beginning in the fourth year of operations
Amortization Term 25 years, monthly payments
Annual Debt Service (Monthly times 12) $2,114,146 per month
Tax Environment
Ordinary Income Tax Rate 39% of annual taxable income
Depreciation Recapture Tax Rate 25% of depreciation taken over holding period, paid at sale
Capital Gains Tax Rate 15% of capital gains, paid at sale
Depreciation Parameters – Initial Investment
Depreciable Basis of Initial Investment $35,000,000
Average Depreciable Life 25 years
Depreciation Method Straight Line
Depreciation Parameters – Replacement Reserves
Depreciable Basis Reserves Assume funds are spent each year
Average Depreciable Life 7 years
Depreciation Method Straight Line
Management Contract Valuation Parameters
Desired Overall IRR on Management Fee Flows 12%
Margin on Management Fees 50%
Cash Flow Multiple for Hotel Management Fees 4 times
Amortization Table
Year B. Bal Interest Principal E. Bal
1 $29,400,000 $1,529,567 $584,579 $28,815,421
2 $28,815,421 $1,498,127 $616,019 $28,199,402
3 $28,199,402 $1,464,996 $649,150 $27,550,252
4 $27,550,252 $1,430,084 $684,062 $26,866,189
5 $26,866,189 $1,393,293 $720,852 $26,145,337
6 $26,145,337 $1,354,525 $759,621 $25,385,716
7 $25,385,716 $1,313,671 $800,475 $24,585,241
8 $24,585,241 $1,270,620 $843,526 $23,741,714
9 $23,741,714 $1,225,253 $888,893 $22,852,822
10 $22,852,822 $1,177,447 $936,699 $21,916,123
11 $21,916,123 $1,127,070 $987,076 $20,929,047
12 $20,929,047 $1,073,983 $1,040,163 $19,888,883
13 $19,888,883 $1,018,041 $1,096,105 $18,792,778
14 $18,792,778 $959,090 $1,155,056 $17,637,722
15 $17,637,722 $896,969 $1,217,177 $16,420,546
16 $16,420,546 $831,507 $1,282,639 $15,137,907
17 $15,137,907 $762,524 $1,351,622 $13,786,285
18 $13,786,285 $689,832 $1,424,314 $12,361,971
19 $12,361,971 $613,229 $1,500,917 $10,861,054
20 $10,861,054 $532,507 $1,581,639 $9,279,415
21 $9,279,415 $447,444 $1,666,702 $7,612,713
22 $7,612,713 $357,805 $1,756,341 $5,856,372
23 $5,856,372 $263,346 $1,850,800 $4,005,572
24 $4,005,572 $163,806 $1,950,340 $2,055,233
25 $2,055,233 $58,913 $2,055,233 $0
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