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. | |
| Copyright © 2016 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. |
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 |
