Les

Roches

2023-1

Program:

Assessment title:

EMIHM

Assessment Two (20%)

Dear Students,

Good Luck!

Course name and

No.:

Type:

S M 9214 Hospitality Real

Estate and Investment

Practical

Please solve the following problems on the shared Excel file "Assessment

Two_Management and Lease Contract Valuations" and kindly upload the

excel file on Moodle when done.

Please rename the file with your name. Problem 1 (30%)

Marriott, a renowned global hotel chain, has expressed keen interest in operating the

prestigious Costa del Sol Hotel in Marbella. As part of their commitment, a fresh

management contract has been inked, entrusting Marriott with the responsibility of efficiently

managing the property. This entails providing expert guidance, meticulous supervision, and

utilizing established methods and procedures to ensure the hotel's success.

In return for their exceptional management services, Marriott will be compensated with

management fees, as outlined in the contract. The structure of these fees is thoughtfully

designed to motivate the operator to optimize the financial performance of the hotel, thus

aligning their interests with the hotel's success.

Under the typical arrangement, Marriott's fees will be divided in a manner that reflects their

dedication to maximizing the hotel's profitability while upholding the highest standards of

hospitality. Typically, Marriott's fees will be split as follows:

1. Management Fee: 3.5%

2. Incentive Fee: 7%

3. Marketing Fee: 2%

4. Loyalty Programs Fees: 1.5%

Required:

a) Complete the 2022 - 2026 figures, in sheet one, on the shared Excel file using the

above information.

b) List the 3 main advantages of signing a management contract. Problem 2 (30%)

Assume now that Costa del Sol is operated by Marriott under a rental/lease contract. Under

the newly formed rental/lease contract, Marriott has taken the reins of operating Costa del

Sol Hotel in Marbella with carefully structured conditions:

1. Fixed Rent: Commencing in 2022, a steady fixed rent of €320,000 has been agreed

upon between Marriott and the property owners. This fixed rent guarantees a

minimum income for the property owners, providing them with stability and

assurance.

2. Country's Consumer Price Index (CPI) and Expected Increase: Presently, the

country's CPI stands at 2%, a measure of the inflation rate affecting the overall

economy. As part of the contract, and based on the economy's expectations, there is

a plan in place to increase the CPI by 0.5% each year until 2025. This adjustment is

in anticipation of potential inflationary pressures.

Required:

a) Complete the 2022 - 2026 figures, in sheet two, on the shared Excel file using the

above information.

b) List the 3 main advantages of signing a rental contract. Problem 3 (40%)

You are considering investing in a luxury hotel with an asking price of $800 million. The

investors expect a 12% return on their investment. Assuming an initial investment (CFO) of

$50 million, the hotel is expected to generate improved cash flows over the next 5 years as

follows:

1. The first 2 years: 10%

2. After year 2: 7%

3. The management team is confident that they can sustainably grow the cash flows at

a rate of 6% beyond Year 5.

NOTE: To be solved in sheet three, on the shared Excel file using the above information.

Required:

a) Should you invest $800 million in the luxury hotel? If yes, why?

b) What is the IRR of the project? What does the IRR show?

c) If the required rate of return is 15% based on the CAPM model, would you still invest

in this project?

Good Luck &/n