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Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Chapter 10 The Investment Package
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Chapter Overview The Need for an Investment PackageThe Need for an Investment Package Components of an Investment PackageComponents of an Investment Package Evaluation of an Investment PackageEvaluation of an Investment Package –Lender –Owner/Investor
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Need for the Investment Package First step in gaining approval for funding is the preparation of a professional investment packageFirst step in gaining approval for funding is the preparation of a professional investment package The investment package should tell the story and sell the project to capital sourcesThe investment package should tell the story and sell the project to capital sources
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Parts of the Investment Package Executive summaryExecutive summary Fact sheetFact sheet Business planBusiness plan Source and use of funds statementSource and use of funds statement Photographs or renderingsPhotographs or renderings Third-party confirmationThird-party confirmation Project budgetProject budget Qualifications of the project teamQualifications of the project team Investment analysisInvestment analysis Personal financial dataPersonal financial data
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Executive Summary Brief recap of the project stating:Brief recap of the project stating: –How much capital is needed –Why the request should be approved –Major operational and financial benefits of the deal When seeking debt financing the executive summary should include:When seeking debt financing the executive summary should include: –Key loan terms being requested –Highlight the projects LTC, LTV, and DSCR
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Fact Sheet One-page description of the key components of the projectOne-page description of the key components of the project Should succinctly answer the basic questions the reader wants answers to with regard to the projectShould succinctly answer the basic questions the reader wants answers to with regard to the project
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Sample Fact Sheet Hotel Information Location The Huntington Hotel is located in downtown Charleston, on the peninsula, one mile northwest of the citys historical district. The hotel enjoys a wonderful location, overlooking the river and is only one block from the citys minor league baseball park. The Citadel is one mile to the north and the states largest medical complex is only half a mile to the south. US Highway 17, the main highway providing access to the peninsula from the surrounding Charleston region, is directly to the south of the hotel. Year Opened 1980 Rooms 300 guest rooms Description The full service hotel features a 14-story guestroom tower and 15,000 square feet of high quality meeting and banquet facilities with 15 meeting rooms. Food and beverage facilities at the hotel include a full-service restaurant and lounge. Additional guest amenities include a gift shop, an outdoor swimming pool, an exercise room, and a business center. Site Acreage 7.13 acres
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Business Plan Summary of the full business plan describing:Summary of the full business plan describing: –What the project is all about –How the borrower is going to make it successful
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Source and Use of Funds Statement PresentsPresents –Sources: when, and from whom, the capital is coming from –Uses: how and when the borrower intends to spend the money –How and when the borrower intends to pay the money back
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved The JC Hilton Head, SC Date Prepared: 7/15/2008 SOURCES and USES SUMMARY Total Uses / Acquisition Costs Cost per Room$50,085 Purchase Price$13,500,000 Third Party Inspection Reports (appraisal, environmental, engineering and cost reports, etc.) $25,000 Financing Costs 1.25%(mortgage loan fee + lender's expenses: legal fees, documentations, etc) $120,500 Legal Costs (consultants fees, liquor license consultants, etc.) $65,000 Closing Costs (closing prorations/adjustments, due diligence expenses, etc.) $100,000 Operating Funds (start-up working capital) $300,000 Franchise Application Fees $500(per room- initial fees) $118,400 Mortgage Brokerage Fees 1.00%(of the mortgage amount) - Neptune Hospitality Advisors $96,400 Brokerage/Advisory Fees 0.00%(of the purchase price) - Neptune Hospitality Advisors $0 Equity Placement Fees 0.00%(of the equity amount) $0 PIP Costs / Renovation Costs$500,000 Total Sources $ 14,825,300 65.0% Mortgage Loan Amount$9,636,400 0.0% Mezzanine Loan$0 35.0% Capitalization Required$5,188,900 100.0%Equity Partners$5,188,900 Sample Source and Use of Funds Statements
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Photos or Renderings Photographs or renderings of the projectPhotographs or renderings of the project Preliminary architectural or interior design plansPreliminary architectural or interior design plans
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Third-party Confirmation Report from a consulting firm affirming the feasibility of the projectReport from a consulting firm affirming the feasibility of the project Could be a market study or appraisalCould be a market study or appraisal
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Market Study vs. Appraisal Market Study Provides the following: Information on the local economyInformation on the local economy Evaluates the locationEvaluates the location Researches supply and demandResearches supply and demand Comments on the appropriateness of the proposed facilitiesComments on the appropriateness of the proposed facilities Presents projected operating resultsPresents projected operating results Appraisal Provides the following: Full market study An estimate of the projects present value based on: –Financial projections –Recent comparable sales –The approximate replacement cost of the project
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Project Budget Line item budget detailing:Line item budget detailing: –Hard costs (bricks and mortar) –Soft costs (fees and other pre-opening expenses) –An operating reserve to fund cash shortfalls It is best to take a conservative approach when developing a project budgetIt is best to take a conservative approach when developing a project budget
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Qualifications of the Project Team Resumes, curriculum vitas, and company brochures presenting the qualifications of each key member of the development and management teamResumes, curriculum vitas, and company brochures presenting the qualifications of each key member of the development and management team A hotel project development team typically includes the:A hotel project development team typically includes the: –Developer –Architect –Interior designer –Construction company –Structural engineer –Hotel brand – Hotel management company – Lender – Equity partner – Law firm – Accounting firm
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Investment Analysis Pro forma operating statement presenting projected:Pro forma operating statement presenting projected: –Sales –Expenses –Cash flow –Annual return on investment –Net present value –Internal rate of return
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Personal Financial Data Required where the lender requires the loan to be guaranteedRequired where the lender requires the loan to be guaranteed Financial data required from the guarantors of the loanFinancial data required from the guarantors of the loan –Copies of balance sheets –Prior year tax returns
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Lender Evaluation of the Investment Package How strong is this project and is it really feasible?How strong is this project and is it really feasible? Is the project team really qualified?Is the project team really qualified? What is the risk of this venture failing?What is the risk of this venture failing? –Investment package should clearly state risks and how they will be minimized
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Owner/Equity Investor Evaluation of the Investment Package How much equity is the sponsor group investing in the deal?How much equity is the sponsor group investing in the deal? What annual ROI can I expect to receive?What annual ROI can I expect to receive? Whats the payback period?Whats the payback period? What is the net present value of the deal?What is the net present value of the deal? What is my projected IRR?What is my projected IRR?
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Owner/Equity Investor Evaluation of the Investment Package How much is the sponsor group making on the deal?How much is the sponsor group making on the deal? What is the exit strategy?What is the exit strategy? –The shorter and more clearly defined the exit strategy, the more likely the outside investor will be to invest in the deal
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