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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.

2

>Instructions

1: Financial Analysis of Hotel Investments

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SHA

6 1
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.

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To submit this assignment, please refer to the instructions in the course.
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20 16

AssumptionsBase Case

story hotel will open in

months.

2,000,000

,000

10

th year

.00%

.5

.0%

.0%

,300,000

Rate

%

43,856

25 years

Average Depreciable Life 7 years

Depreciation Method Straight Line

4 times

Interest

1

4

2 $26,749,214

3 $26,169,383

4 $25,558,976

,916,380

5 $24,916,380

9,898

6 $24,239,898

7 $23,527,743

4,147

,778,033

8 $22,778,033

9 $21,988,789

10 $21,157,926

9

11 $20,283,249

12 $19,362,447

$18,393,089

14 $17,372,613

15 $16,298,324

16 $15,167,384

17 $13,976,807

18 $12,723,446

19 $11,403,992

20 $10,014,959

21 $8,552,678

22 $7,013,286

23 $5,392,717

24 $3,686,690

25 $1,890,699

$1,890,699

Hungerford Hotel, Grandville, USA
Investment Analysis Assumptions – Hungerford Hotel
Property Description
A 200-room Hungerford Hotel to be built in Grandville, NC. The

8 18
Amenities will include a restaurant, indoor pool, fitness facility, business center, and 2000 square feet of meeting space.
”Turn-Key’ Development Costs $

4 which equals $2

10 per key
Overall Assumptions
Desired Holding Period years
Annual Increase in Cash Flows after

5 3
Cash Flow Multiple for Hotel Real Estate 12 times equal to a 8.00% cap. rate
Selling Expenses 3% of Gross Sales Price
Desired Total Property Discount Rate (Hurdle Rate) 11
Equity Investment Parameters
Desired Equity After-Tax Discount Rate (Hurdle Rate) 14
Lending Parameters
Loan to Value Ratio 65%
Mortgage Amount $2

7
Interest 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,

9 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
Depreciation Method Straight Line
Depreciation Parameters – Replacement Reserves
Depreciable Basis Reserves Assume funds are spent each year
Management Contract Valuation Parameters
Desired Overall IRR on Management Fee Flows 12%
Margin on Management Fees 50%
Cash Flow Multiple for Hotel Management Fees
Amortization Table
Year B. Bal Principal E. Bal
$27,300,000 $1,393,070 $550,786 $26,749,

21
$1,364,025 $579,831 $26,169,383
$1,333,449 $610,407 $25,558,976
$1,301,260 $642,596 $

24
$1,267,374 $676,482 $24,

23
$1,231,701 $712,155 $23,527,743
$1,

19 $749,709 $

22
$1,154,612 $789,244 $21,988,789
$1,112,993 $830,863 $21,157,926
$1,069,

17 $874,677 $20,283,249
$1,023,054 $920,802 $19,362,447
$974,497 $969,359 $18,393,089
13 $923,380 $1,020,476 $17,372,613
$869,567 $1,074,289 $16,298,324
$812,916 $1,130,939 $15,167,384
$753,278 $1,190,578 $13,976,807
$690,496 $1,253,360 $12,723,446
$624,402 $1,319,454 $11,403,992
$554,823 $1,389,033 $10,014,959
$481,575 $1,462,281 $8,552,678
$404,464 $1,539,392 $7,013,286
$323,287 $1,620,569 $5,392,717
$237,829 $1,706,027 $3,686,690
$147,865 $1,795,991 $1,890,699
$53,157 $0

Assumptions Optional Case Case

Hungerford Hotel, Grandville, USA
Investment Analysis Assumptions – Hungerford Hotel
Property Description

Amenities will include a restaurant, indoor pool, fitness facility, business center, and 2000 square feet of meeting space.

”Turn-Key’ Development Costs

which equals

per key

Overall Assumptions
Desired Holding Period 10 years

Cash Flow Multiple for Hotel Real Estate

times equal to a 8.00% cap. rate
Selling Expenses 3% of Gross Sales Price
Desired Total Property Discount Rate (Hurdle Rate)

Equity Investment Parameters

Desired Equity After-Tax Discount Rate (Hurdle Rate)

Lending Parameters

Loan to Value Ratio

Mortgage Amount

fixed

Interest “Kicker” (extra interest after stabilization)

of Total Revenues beginning in the fourth year of operations

Amortization Term 25 years, monthly payments

Annual Debt Service (Monthly times 12)

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

2 $28,815,421

3 $28,199,402

4 $27,550,252

5 $26,866,189

6 $26,145,337

7 $25,385,716

8 $24,585,241

9 $23,741,714

10 $22,852,822

11 $21,916,123

12 $20,929,047

13 $19,888,883

14 $18,792,778

15 $17,637,722

16 $16,420,546

17 $15,137,907

18 $13,786,285

19 $12,361,971

20 $10,861,054

21 $9,279,415

22 $7,612,713

23 $5,856,372

24 $4,005,572

25 $2,055,233

$2,055,233 $0

A 200-room Hungerford Hotel to be built in Grandville, NC. The 8 story hotel will open in 18 months. $42,000,000 $210,000 Annual Increase in Cash Flows after 5th year 3.00% 12.5 11.0%
15.0%
70%
$29,400,000
Interest Rate 5.25%
1.50%
$2,114,146
$1,529,567 $584,579 $28,815,421
$1,498,127 $616,019 $28,199,402
$1,464,996 $649,150 $27,550,252
$1,430,084 $684,062 $26,866,189
$1,393,293 $720,852 $26,145,337
$1,354,525 $759,621 $25,385,716
$1,313,671 $800,475 $24,585,241
$1,270,620 $843,526 $23,741,714
$1,225,253 $888,893 $22,852,822
$1,177,447 $936,699 $21,916,123
$1,127,070 $987,076 $20,929,047
$1,073,983 $1,040,163 $19,888,883
$1,018,041 $1,096,105 $18,792,778
$959,090 $1,155,056 $17,637,722
$896,969 $1,217,177 $16,420,546
$831,507 $1,282,639 $15,137,907
$762,524 $1,351,622 $13,786,285
$689,832 $1,424,314 $12,361,971
$613,229 $1,500,917 $10,861,054
$532,507 $1,581,639 $9,279,415
$447,444 $1,666,702 $7,612,713
$357,805 $1,756,341 $5,856,372
$263,346 $1,850,800 $4,005,572
$163,806 $1,950,340 $2,055,233
$58,913

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