The Investment Package

Chapter 10The Investment PackageCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedChapter OverviewThe Need for an Investment PackageComponents of an Investment PackageEvaluation of an Investment PackageLenderOwner/InvestorCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedNeed for the Investment PackageFirst step in gaining approval for funding is the preparation of a professional investment packageThe investment package should tell the story and sell the project to capital sourcesCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedParts of the Investment PackageExecutive summaryFact sheetBusiness planSource and use of funds statementPhotographs or renderingsThird-party confirmationProject budgetQualifications of the project teamInvestment analysisPersonal financial dataCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedExecutive SummaryBrief recap of the project stating:How much capital is neededWhy the request should be approvedMajor operational and financial benefits of the dealWhen seeking debt financing the executive summary should include:Key loan terms being requestedHighlight the project’s LTC, LTV, and DSCRCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedFact SheetOne-page description of the key components of the projectShould succinctly answer the basic questions the reader wants answers to with regard to the projectCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedSample Fact SheetHotel InformationLocationThe Huntington Hotel is located in downtown Charleston, on the peninsula, one mile northwest of the city’s historical district. The hotel enjoys a wonderful location, overlooking the river and is only one block from the city’s minor league baseball park. The Citadel is one mile to the north and the state’s 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 Opened1980Rooms300 guest roomsDescriptionThe 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 Acreage7.13 acresCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedBusiness PlanSummary of the full business plan describing:What the project is all aboutHow the borrower is going to make it successfulCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedSource and Use ofFunds StatementPresentsSources: when, and from whom, the capital is coming fromUses: how and when the borrower intends to spend the moneyHow and when the borrower intends to pay the money backCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedThe JCHilton Head, SCDate Prepared: 7/15/2008SOURCES and USES SUMMARYTotal Uses / Acquisition CostsCost per Room$50,085Purchase Price$13,500,000Third Party Inspection Reports(appraisal, environmental, engineering and cost reports, etc.)$25,000Financing Costs1.25%(mortgage loan fee + lender's expenses: legal fees, documentations, etc)$120,500Legal Costs(consultants fees, liquor license consultants, etc.)$65,000Closing Costs(closing prorations/adjustments, due diligence expenses, etc.)$100,000Operating Funds(start-up working capital)$300,000Franchise Application Fees$500 (per room- initial fees) $118,400Mortgage Brokerage Fees1.00%(of the mortgage amount) - Neptune Hospitality Advisors$96,400Brokerage/Advisory Fees0.00%(of the purchase price) - Neptune Hospitality Advisors$0Equity Placement Fees0.00%(of the equity amount)$0PIP Costs / Renovation Costs$500,000Total Sources $ 14,825,300 65.0%Mortgage Loan Amount$9,636,4000.0%Mezzanine Loan$035.0%Capitalization Required$5,188,900100.0%Equity Partners$5,188,900 Sample Source and Useof Funds StatementsCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedPhotos or RenderingsPhotographs or renderings of the projectPreliminary architectural or interior design plansCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedThird-party ConfirmationReport from a consulting firm affirming the feasibility of the projectCould be a market study or appraisalCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedMarket Study vs. AppraisalMarket StudyProvides the following:Information on the local economyEvaluates the locationResearches supply and demandComments on the appropriateness of the proposed facilitiesPresents projected operating resultsAppraisalProvides the following:Full market studyAn estimate of the project’s present value based on:Financial projectionsRecent comparable salesThe approximate replacement cost of the projectCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedProject BudgetLine item budget detailing:Hard costs (bricks and mortar)Soft costs (fees and other pre-opening expenses)An operating reserve to fund cash shortfallsIt is best to take a conservative approach when developing a project budgetCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedQualifications of the Project TeamResumes, curriculum vitas, and company brochures presenting the qualifications of each key member of the development and management teamA hotel project development team typically includes the:DeveloperArchitectInterior designerConstruction companyStructural engineerHotel brand Hotel management company Lender Equity partner Law firm Accounting firmCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedInvestment AnalysisPro forma operating statement presenting projected:SalesExpensesCash flowAnnual return on investmentNet present valueInternal rate of returnCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedPersonal Financial DataRequired where the lender requires the loan to be guaranteedFinancial data required from the guarantors of the loanCopies of balance sheetsPrior year tax returnsCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedLender Evaluation of theInvestment PackageHow strong is this project and is it really feasible?Is the project team really qualified?What is the risk of this venture failing?Investment package should clearly state risks and how they will be minimizedCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedOwner/Equity Investor Evaluation of the Investment PackageHow much equity is the sponsor group investing in the deal?What annual ROI can I expect to receive?What’s the payback period?What is the net present value of the deal?What is my projected IRR?Copyright © 2007 by John Wiley & Sons, Inc. All rights reservedOwner/Equity Investor Evaluation of the Investment PackageHow much is the sponsor group making on the deal?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 dealCopyright © 2007 by John Wiley & Sons, Inc. All rights reserved