SHA561: Financial Analysis of Hotel Investments

School of Hotel Administration, Cornell University

Operator and Lender Project Metrics

Instructions:
Use the following information to understand how the operator and the lender evaluate a
prospective hotel investment.

Operators determine the NPV of the property by taking the management fees,
deducting the direct costs, and then discounting for each year at the operator's hurdle
rate. The fees include pre-opening fees paid to the operator and pre-opening expenses
paid by the operator. They include the management fees received by the operator each
year (including base and incentive fees) less the operator's overhead costs. Finally, they
include the contract termination fee paid to the operator at disposition. All these fees are
discounted at the hurdle rate and the resulting sum is the NPV.

Operators calculate the NPV per room and compare this to an internal benchmark that
is calibrated to the fees they earn at other hotels. If the NPV per room at the subject
hotel is above the internal benchmark, the decision is to proceed with the deal, if it is
less, the decision is made to decline the deal.

1
© 2016 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners.
 SHA561: Financial Analysis of Hotel Investments
School of Hotel Administration, Cornell University

Lenders determine the yield they can expect to realize on the loan. The major cash flow
out for the lender is obviously the mortgage principle, but it also includes evaluation and
administration expenses incurred before the loan is issued. The lender obtains annual
debt service, including any contingent interest, over the course of the holding period.
Administrative expenses are subtracted from this debt service. The lender calculates
the IRR for each of these annual flows. If the IRR calculation results in a yield larger
than the lender's hurdle rate, the lender is likely to find the loan attractive.

2
© 2016 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners.