Hosp2 Begin by reviewing the attached case study The attached case study presents 3 possible capital structures (stacks) for you to analyze. You are give

Hosp2 Begin by reviewing the attached case study

The attached case study presents 3 possible capital structures (stacks) for you to analyze. You are give

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Begin by reviewing the attached case study

The attached case study presents 3 possible capital structures (stacks) for you to analyze.  You are given all of the information you need for the assignment.

You may use the attached Excel file to complete the analysis.

JWULogo-BW(hor)

HOSP 4040 Asset Management

Assignment: Capital Stack Analysis

This assignment is due via the Assignment Link by
11: 59 PM Eastern, on the due date.

This assignment will be graded based on the rubic. You may view the rubric by clicking on the assignment link.

Late work will not be accepted.

The Case

You are working for a hotel ownership corporation. Your development and feasibility team has identified a resort hotel in Florida that appears to be a great opportunity. The acquisition team has identified three potential capital structures and has sourced these using entities your company has already done business with in other transactions. Your job is to examine the relative risk, and the return to your company for these three capital structures (stacks).

Background

As we have already learned, the financing structure used in the purchase of a hotel asset is virtually always some combination of debt and equity. A lender will never finance 100% of an asset – in fact they will rarely finance more than 60% of the asset because the hotel industry is classified as fairly high risk. In the event of a forclosure the lender wants to be assured that they could sell the asset and recover their entire debt.

On the other side, equity virtually never finances 100% of a project because it is not the optimal structure for them to receive an acceptable return. It is far better for them to leverage their available equity to enter into multiple deals, use some of the cash flow to service the debt and use the remainder to provide a return on the equity investment.

Your company has a policy that each transaction will be structured separately, based on the market, the proforma, and the overall transaction cost. In other words, there is no standard structure. Your company has a significant investment pool available, and often partners with other equity partners in hotel investments. This allows the company to invest in more deals than they otherwise could.

Your company also maintains relationships with lenders who have participated in the mortgage financing on other of your companies transactions, either by themselves or as a syndicator of a group of lenders.

These relationships allow your company considerable flexibility, and the abitlity to rapidly define a deal structure and then secure the debt and equity investors to close the deal quickly. This ability also allows a greater leverage in negotiating a purchase price because sellers know you can finance and close quickly.

Parameters of the deal participants:

Each of the various debt and equity participants your company deals with has some specific requirments. These are listed below. The participants are listed by the type of participation they prefer, and as “A”, “B”, etc.

Debt Participants:

Lender is a major national bank.

· They have deep experience in the hotel industry and can arrange and fund quickly.

· Their maximum loan to value exposure is 60%. For debt structures where their debt is below 40%, they are currently lending at 6%. For debt structures where their debt is between 40% and 60%, they are currently lending at 8%. All mortgages are amortized on a maximum 20 year term.

· They require that all commercial bank accounts are held at their bank. This includes the depository, payroll, and operating accounts for the hotel, the FFE reserve account for the hotel.

· They require automatic electronic draft of their monthly principal and interest payments on the 5th of the month.

· They require that both property insurance and property taxes are escrowed monthly. This is accomplished via including these escrows on the monthly automatic electronic draft. The escrows are held by the bank in a separate escrow account.

· All accounts held at the bank are considered collateral for the loan. In the event of forclosure, the accounts could be seized.

Equity Participants:

Equity A:

· Will provide only equity which is senior to all other equity financing in the deal, and only to 25% of the total financial structure.

· Requires an annual proforma return of 15%, paid annually, with a return of capital equal proportional to their investment.

· Will invest for a maximum of 7 years, but will consider a reinvestment at that point if there is a sell plan in place.

· Will invest as a Limited Partner.

Equity B:

· Will provide only equity which is senior to all other equity financing in the deal, up to 30% of the total financial structure.

· Requires an annual proforma return of 16%, paid annually with a return of capital equal proportional to their investment.

· Will invest for a maximum of 10 years, but will consider reinvestment at that point if there is a sell plan in place.

· Will invest as a Limited Partner.

Equity C:

· Will provide senior OR mezzanine equity.

· Senior equity to 30% at 16%, paid annualy as an equity return distribution. Maximum of 10 years.

· Mezannine equity to 10% at 21% for a maximum of 3 years. Paid annually as an equity return distribution

· Will consider reinvestment of senior equity if there is a sell plan in place.

· Will invest as a Limited Partner.

Your company:

· Prefers to provide only 20% of the total deal structure, but will fund up to 40% if the deal is attractive enough.

· Has an investment hurdle rate of 18% on all equity participation, and prefers an annual interest payment based on cash flow. If the property produces cash flow above 18%, your company retains that as return as well. If the property produces less than 18% cash on cash return per year, your company may analyze the total growth to see if 18% would be achieved upon sale.

· Has a requirement that they are structured as the General Partner in all Limited Partnerships.

· Has a hold horizon of 3 to 10 years.

Potential Deal Structures

The chart below outlines the three potential deal structures you need to analyize.

Project Proforma

Your due diligence team (which is highly experienced) has put together this proforma for the project. They have identified several specific issues with market share and rooms operations which they are confident can be quickly fixed resulting in higher market share and and improved rooms department profit. They have assessed the probability of achievement of this proforma as high.

The market is growing, and there are additional hotels in the pipeline for the market, however the net growth in availability is only going to be 1.5% per year, so the impact of additional supply will be minimal.

Deal Cost

Your analyst has prepared the following summary of the project cost.

Capital Stack and Investment of the parties:

Your analyist has prepared the following investment required by the parties for each of the proposed structures.

Debt Service

Your analyst has prepared an amortization schedule for the debt in each of these structures.

Your Assignment:

Using the information provided, calculate the cash required for each of the 7 years for each of these structures. Your structure should be in the format:

· You will have 3 of these charts, one for each structure.

· You will need to calculate Years 1, 2,3,4,5,6,and 7 and a cumulative total for the 7 years for Your Companies basic (the annual return) and incentive (the cash remaining after all debt and equity payments have been made.

· The Cash Flow is taken from the project Proforma.

· Debt service is from the Amortization Schedule above

· Calculate the annual return required for each of the equity structures.

· Net Excess Cash Flow is what remains after all of the required debt and equity payments have been made

· Your company retains all excess cash – to the extent there is any, but also funds any cash shortfalls.

· You must plan to repay the Mezannine equity in year 3

· In a memorandum to your CEO, outline the cash on returns to your company under each of the scenarios, and recommend one of these scenarios based on the total cash on cash returns.

You will submit both your memorandum (Word Document) and the detailed calculation of the cash flow by year in an Excel file. Upload both files to the assignment link.

Memo Format requirements:

· Microsoft Word

· 12 Point Font

· Margins 1.5 inch top and bottom, 1 inch left and right.

· No grammatical nor spelling errors

· Minimum 3 pages.

Deal Structures

Debt

Structure A Structure B Structure C 0.6 0.5 0.4 Equity A

Structure A Structure B Structure C 0.2 5 0.25 Equity B

Structure A Structure B Structure C 0.25 Equity C

Structure A Structure B Structure C 0.1 Your Company

Structure A Structure B Structure C 0.15 0.15 0.25 Mezannine

Structure A Structure B Structure C 0.1

Deal Structure

Structure A Structure B Structure C
Debt 60% 50% 40%
Equity A 25% 25%
Equity B 25%
Equity C 10%
Your Company 15% 15% 25%
Mezannine 10%
100% 100% 100%

Deal Structures

Debt

Structure A Structure B Structure C 0.6 0.5 0.4 Equity A

Structure A Structure B Structure C 0.25 0.25 Equity B

Structure A Structure B Structure C 0.25 Equity C

Structure A Structure B Structure C 0.1 Your Company

Structure A Structure B Structure C 0.15 0.15 0.25 Mezannine

Structure A Structure B Structure C 0.1

Proforma

4451899 4878169 5337622 5852176 6365873 6646811 6939513

Sheet2

Project Cost
Structure A Cumulative
Acquisition $ 24,000,000 Cash Flow $ 4,451,899 $ 4,878,169 $ 5,337,622 $ 5,852,176 $ 6,365,873 $ 6,646,811 $ 6,939,513
Renovation $ 750,000 Debt $ 2,102,100 $ 1,996,995 $ 189,714 $ 1,802,288 $ 1,712,174 $ 1,626,565 $ 1,548,237
Working Capital $ 200,000 Equity A $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625
Closing Costs $ 2,000,000 Equity B
Total $ 26,950,000 Equity C
Equity C Mezannine
Structure A Structure B Structure C Your Company Basic $ 727,650 $ 727,650 $ 727,650 $ 727,650 $ 727,650 $ 727,650 $ 727,650
Debt 60% 50% 40% Net Excess Cash Flow $ 611,524 $ 1,142,899 $ 3,409,633 $ 2,311,613 $ 2,915,424 $ 3,281,971 $ 3,653,001
Equity A 25% 25% Your Company Incentive $ 611,524 $ 1,142,899 $ 3,409,633 $ 2,311,613 $ 2,915,424 $ 3,281,971 $ 3,653,001 $ 17,326,065
Equity B 25%
Equity C 10% Structure B
Your Company 15% 15% 25% Cash Flow $ 4,451,899 $ 4,878,169 $ 5,337,622 $ 5,852,176 $ 6,365,873 $ 6,646,811 $ 6,939,513
Mezannine 10% Debt $ 1,751,750 $ 1,664,163 $ 1,580,954 $ 1,501,907 $ 1,426,811 $ 1,355,471 $ 1,287,697
100% 100% 100% Equity A
Equity B $ 1,078,000 $ 1,078,000 $ 1,078,000 $ 1,078,000 $ 1,078,000 $ 1,078,000 $ 1,078,000
Structure A Structure B Structure C Equity C
Debt $ 16,170,000 $ 13,475,000 $ 10,780,000 Equity C Mezannine $ 565,950 $ 565,950 $ 3,260,950 $ – 0 $ – 0 $ – 0
Equity A $ 6,737,500 $ – 0 $ 6,737,500 Your Company Basic $ 727,650 $ 727,650 $ 727,650 $ 727,650 $ 727,650 $ 727,650 $ 727,650
Equity B $ – 0 $ 6,737,500 $ – 0 Net Excess Cash Flow $ 328,549 $ 842,407 $ (1,309,932) $ 2,544,619 $ 3,133,412 $ 3,485,690 $ 3,846,166
Equity C $ – 0 $ – 0 $ 2,695,000 Your Company Incentive $ 328,549 $ 842,407 $ (1,309,932) $ 2,544,619 $ 3,133,412 $ 3,485,690 $ 3,846,166 $ 12,870,910
Your Company $ 4,042,500 $ 4,042,500 $ 6,737,500
Mezannine $ – 0 $ 2,695,000 $ – 0 Structure C
Total $ 26,950,000.0 $ 26,950,000.0 $ 26,950,000.0 Cash Flow $ 4,451,899 $ 4,878,169 $ 5,337,622 $ 5,852,176 $ 6,365,873 $ 6,646,811 $ 6,939,513
Debt $ 1,185,800 $ 1,126,510 $ 1,070,185 $ 1,016,675 $ 965,842 $ 917,549 $ 871,672
Debt Service $ 16,170,000 $ 13,475,000 $ 10,780,000 Equity A $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625
Interest Rate 8.0% 8.0% 6.0% Equity B
Equity C $ 431,200 $ 431,200 $ 431,200 $ 431,200 $ 431,200 $ 431,200 $ 431,200
Amortization A Principal Bal Principal Pmt Interest Total Equity C Mezannine
Year 1 $ 16,170,000 $ 808,500 $ 1,293,600 $ 2,102,100 Your Company Basic $ 1,212,750 $ 1,212,750 $ 1,212,750 $ 1,212,750 $ 1,212,750 $ 1,212,750 $ 1,212,750
Year 2 $ 15,361,500 $ 768,075 $ 1,228,920 $ 1,996,995 Net Excess Cash Flow $ 611,524 $ 1,097,084 $ 1,612,863 $ 2,180,926 $ 2,745,456 $ 3,074,687 $ 3,413,266
Year 3 $ 14,593,425 $ 729,671 $ 1,167,474 $ 1,897,145 Your Company Incentive $ 611,524 $ 1,097,084 $ 1,612,863 $ 2,180,926 $ 2,745,456 $ 3,074,687 $ 3,413,266 $ 14,735,805
Year 4 $ 13,863,754 $ 693,188 $ 1,109,100 $ 1,802,288
Year 5 $ 13,170,566 $ 658,528 $ 1,053,645 $ 1,712,174
Year 6 $ 12,512,038 $ 625,602 $ 1,000,963 $ 1,626,565
Year 7 $ 11,886,436 $ 594,322 $ 950,915 $ 1,545,237
Amortization B Principal Bal Principal Pmt Interest Total
Year 1 $ 13,475,000 $ 673,750 $ 1,078,000 $ 1,751,750
Year 2 $ 12,801,250 $ 640,063 $ 1,024,100 $ 1,664,163
Year 3 $ 12,161,188 $ 608,059 $ 972,895 $ 1,580,954
Year 4 $ 11,553,128 $ 577,656 $ 924,250 $ 1,501,907
Year 5 $ 10,975,472 $ 548,774 $ 878,038 $ 1,426,811
Year 6 $ 10,426,698 $ 521,335 $ 834,136 $ 1,355,471
Year 7 $ 9,905,363 $ 495,268 $ 792,429 $ 1,287,697
Amortization B Principal Bal Principal Pmt Interest Total
Year 1 $ 10,780,000 $ 539,000 $ 646,800 $ 1,185,800
Year 2 $ 10,241,000 $ 512,050 $ 614,460 $ 1,126,510
Year 3 $ 9,728,950 $ 486,448 $ 583,737 $ 1,070,185
Year 4 $ 9,242,503 $ 462,125 $ 554,550 $ 1,016,675
Year 5 $ 8,780,377 $ 439,019 $ 526,823 $ 965,842
Year 6 $ 8,341,359 $ 417,068 $ 500,482 $ 917,549
Year 7 $ 7,924,291 $ 396,215 $ 475,457 $ 871,672

Structure A Structure B Structure C
Debt 60% 50% 40%
Equity A 25% 25%
Equity B 25%
Equity C 10%
Your Company 15% 15% 25%
Mezannine 10%
Total 100% 100% 100%

Structure A Structure B Structure C
Debt 16,170,000$ 13,475,000$ 10,780,000$
Equity A 6,737,500$ -$ 6,737,500$
Equity B -$ 6,737,500$ -$
Equity C -$ -$ 2,695,000$
Your Company 4,042,500$ 4,042,500$ 6,737,500$
Mezannine -$ 2,695,000$ -$
Total 26,950,000.0$ 26,950,000.0$ 26,950,000.0$

Structure AStructure BStructure C

Debt 60%50%40%

Equity A 25% 25%

Equity B 25%

Equity C 10%

Your Company 15%15%25%

Mezannine 10%

Total 100%100%100%

Structure AStructure BStructure C

Debt 16,170,000$ 13,475,000$ 10,780,000$

Equity A 6,737,500$ -$ 6,737,500$

Equity B -$ 6,737,500$ -$

Equity C -$ -$ 2,695,000$

Your Company4,042,500$ 4,042,500$ 6,737,500$

Mezannine -$ 2,695,000$ -$

Total 26,950,000.0$ 26,950,000.0$ 26,950,000.0$

Deal Structure

Structure A Structure B Structure C
Debt 60% 50% 40%
Equity A 25% 25%
Equity B 25%
Equity C 10%
Your Company 15% 15% 25%
Mezannine 10%
100% 100% 100%

Deal Structures

Debt

Structure A Structure B Structure C 0.6 0.5 0.4 Equity A

Structure A Structure B Structure C 0.25 0.25 Equity B

Structure A Structure B Structure C 0.25 Equity C

Structure A Structure B Structure C 0.1 Your Company

Structure A Structure B Structure C 0.15 0.15 0.25 Mezannine

Structure A Structure B Structure C 0.1

Proforma

4451899 4878169 5337622 5852176 6365873 6646811 6939513

Sheet2

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Project Cost
Structure A Cumulative
Acquisition $ 24,000,000 Cash Flow $ 4,451,899 $ 4,878,169 $ 5,337,622 $ 5,852,176 $ 6,365,873 $ 6,646,811 $ 6,939,513
Renovation $ 750,000 Debt $ 2,102,100 $ 1,996,995 $ 189,714 $ 1,802,288 $ 1,712,174 $ 1,626,565 $ 1,548,237
Working Capital $ 200,000 Equity A $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625
Closing Costs $ 2,000,000 Equity B
Total $ 26,950,000 Equity C
Equity C Mezannine
Structure A Structure B Structure C Your Company Basic $ 727,650 $ 727,650 $ 727,650 $ 727,650 $ 727,650 $ 727,650 $ 727,650
Debt 60% 50% 40% Net Excess Cash Flow $ 611,524 $ 1,142,899 $ 3,409,633 $ 2,311,613 $ 2,915,424 $ 3,281,971 $ 3,653,001
Equity A 25% 25% Your Company Incentive $ 611,524 $ 1,142,899 $ 3,409,633 $ 2,311,613 $ 2,915,424 $ 3,281,971 $ 3,653,001 $ 17,326,065
Equity B 25%
Equity C 10% Structure B
Your Company 15% 15% 25% Cash Flow $ 4,451,899 $ 4,878,169 $ 5,337,622 $ 5,852,176 $ 6,365,873 $ 6,646,811 $ 6,939,513
Mezannine 10% Debt $ 1,751,750 $ 1,664,163 $ 1,580,954 $ 1,501,907 $ 1,426,811 $ 1,355,471 $ 1,287,697
Total 100% 100% 100% Equity A
Equity B $ 1,078,000 $ 1,078,000 $ 1,078,000 $ 1,078,000 $ 1,078,000 $ 1,078,000 $ 1,078,000
Structure A Structure B Structure C Equity C
Debt $ 16,170,000 $ 13,475,000 $ 10,780,000 Equity C Mezannine $ 565,950 $ 565,950 $ 3,260,950 $ – 0 $ – 0 $ – 0
Equity A $ 6,737,500 $ – 0 $ 6,737,500 Your Company Basic $ 727,650 $ 727,650 $ 727,650 $ 727,650 $ 727,650 $ 727,650 $ 727,650
Equity B $ – 0 $ 6,737,500 $ – 0 Net Excess Cash Flow $ 328,549 $ 842,407 $ (1,309,932) $ 2,544,619 $ 3,133,412 $ 3,485,690 $ 3,846,166
Equity C $ – 0 $ – 0 $ 2,695,000 Your Company Incentive $ 328,549 $ 842,407 $ (1,309,932) $ 2,544,619 $ 3,133,412 $ 3,485,690 $ 3,846,166 $ 12,870,910
Your Company $ 4,042,500 $ 4,042,500 $ 6,737,500
Mezannine $ – 0 $ 2,695,000 $ – 0 Structure C
Total $ 26,950,000.0 $ 26,950,000.0 $ 26,950,000.0 Cash Flow $ 4,451,899 $ 4,878,169 $ 5,337,622 $ 5,852,176 $ 6,365,873 $ 6,646,811 $ 6,939,513
Debt $ 1,185,800 $ 1,126,510 $ 1,070,185 $ 1,016,675 $ 965,842 $ 917,549 $ 871,672
Debt Service $ 16,170,000 $ 13,475,000 $ 10,780,000 Equity A $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625 $ 1,010,625
Interest Rate 8.0% 8.0% 6.0% Equity B
Equity C $ 431,200 $ 431,200 $ 431,200 $ 431,200 $ 431,200 $ 431,200 $ 431,200
Amortization A Principal Bal Principal Pmt Interest Total Equity C Mezannine
Year 1 $ 16,170,000 $ 808,500 $ 1,293,600 $ 2,102,100 Your Company Basic $ 1,212,750 $ 1,212,750 $ 1,212,750 $ 1,212,750 $ 1,212,750 $ 1,212,750 $ 1,212,750
Year 2 $ 15,361,500 $ 768,075 $ 1,228,920 $ 1,996,995 Net Excess Cash Flow $ 611,524 $ 1,097,084 $ 1,612,863 $ 2,180,926 $ 2,745,456 $ 3,074,687 $ 3,413,266
Year 3 $ 14,593,425 $ 729,671 $ 1,167,474 $ 1,897,145 Your Company Incentive $ 611,524 $ 1,097,084 $ 1,612,863 $ 2,180,926 $ 2,745,456 $ 3,074,687 $ 3,413,266 $ 14,735,805
Year 4 $ 13,863,754 $ 693,188 $ 1,109,100 $ 1,802,288
Year 5 $ 13,170,566 $ 658,528 $ 1,053,645 $ 1,712,174
Year 6 $ 12,512,038 $ 625,602 $ 1,000,963 $ 1,626,565
Year 7 $ 11,886,436 $ 594,322 $ 950,915 $ 1,545,237
Amortization B Principal Bal Principal Pmt Interest Total
Year 1 $ 13,475,000 $ 673,750 $ 1,078,000 $ 1,751,750
Year 2 $ 12,801,250 $ 640,063 $ 1,024,100 $ 1,664,163
Year 3 $ 12,161,188 $ 608,059 $ 972,895 $ 1,580,954
Year 4 $ 11,553,128 $ 577,656 $ 924,250 $ 1,501,907
Year 5 $ 10,975,472 $ 548,774 $ 878,038 $ 1,426,811
Year 6 $ 10,426,698 $ 521,335 $ 834,136 $ 1,355,471
Year 7 $ 9,905,363 $ 495,268 $ 792,429 $ 1,287,697
Amortization B Principal Bal Principal Pmt Interest Total
Year 1 $ 10,780,000 $ 539,000 $ 646,800 $ 1,185,800
Year 2 $ 10,241,000 $ 512,050 $ 614,460 $ 1,126,510
Year 3 $ 9,728,950 $ 486,448 $ 583,737 $ 1,070,185
Year 4 $ 9,242,503 $ 462,125 $ 554,550 $ 1,016,675
Year 5 $ 8,780,377 $ 439,019 $ 526,823 $ 965,842
Year 6 $ 8,341,359