On the attached documents, you learned about owners, John, Sophie, and Alexandra, and the proposed investment property in Charlotte. Each owner may be interested in investing in the proposed three-star branded property in Charlotte under the right circumstances. Create a post in which you discuss the following:
- Which of the proposed owners seems the most likely to seek a deal? Why?
- Comment on the prospective investments outlined for John, Sophie, and Alexandra.
- Contribute your own proposed investment and respond to at least one proposal of a classmate.
fictional three-star branded hotel in Charlotte is available for acquisition from International Hotel Company. The hotel is in need of renovation. How might John, Sophie, and Alexandra evaluate the property?
John Dough, of Black Hall Lodging, is very interested in repositioning the property from three-star to four-star status. The needed renovations are a plus, because folding the renovations into a repositioning story allows Black Hall to add value to their investment in the hotel.
Two key factors drive John's decision. First, he wants to secure a manager who is willing to operate under a "termination-upon-sale" arrangement, because many potential buyers would wish to operate the hotel themselves. Second, he must be convinced that there are buyers for the property once the repositioning effort is complete.
Sophie Smith, of AIGH Insurance, is interested in long-term cash flow and needs to know three things before committing:
· Does the hotel bring a diversification benefit to other hotels in her portfolio?
· Is Charlotte a strong hotel market in the long-term?
· Is the manager capable of producing consistently high cash flows from a well-maintained asset?
She is deterred by the costs of the upcoming renovation, but might be induced to sign a long-term management contract if International Hotel Company offers financial inducements.
Alexandra Rodriguez, of Tarheel Development, is interested in the ability to terminate the manager and to manage the property under a franchise arrangement. Her plans call for redevelopment of the property. The 300-room three-star hotel would be transformed into two hotels: a 150-room Life Hotel, International's lifestyle brand, and a 75-room Comfy Suites, International's midscale extended-stay brand. Using cluster management would provide significant opportunities for operational efficiencies by using one staff to run both properties. TarHeel would earn development fees from the redevelopment and would have two new properties in the market that could be held for the long-term or sold for a profit.
Who Acquires the Property?
Well, it may not be a single buyer. Situations may develop in which John, Sophie, and Alexandra could all be involved in the redevelopment of the property. Here are a couple of possible scenarios:
Alexandra might enter into an agreement with Sophie in which Alexandra agrees to take the risk of repositioning the property, performing the renovations, and replacing management. Once the property has restabilized, Sophie agrees to purchase the property from Alexandra at the prearranged price that reflects the anticipated cash flows. Alexandra's firm will make significant returns if the repositioning effort succeeds. But Alexandra's firm takes significant risk, because Sophie's firm is not obligated to purchase the property if it does not achieve the anticipated cash flows, and her firm is not responsible for cost overruns on the repositioning effort.
Alexandra might enter an agreement with John's firm to acquire and redevelop the property. John's firm supplies the majority of the capital needed to fund the acquisition and redevelopment effort. John and Alexandra agree that the property will be refinanced two years after the development is complete, with Alexandra buying out John’s interest in the property using the refinancing proceeds. Alexandra's firm supplies a minority stake and the development expertise to execute the redevelopment effort. John's firm makes a healthy return for supplying the short-term bridge capital needed to redevelop the property. Alexandra's firm owns the project in the long-term, and has the option to continue to operate the hotel or to sell their interest should more interesting opportunities come along.
The question of who will own the property does not have a simple or single answer. The ultimate answer depends on how each potential owner evaluates the property. It also depends on how the operator and the lender evaluate the potential owners.
