SHA566: Achieving Hotel Asset Management Objectives Your Name:

Cornell School of Hotel Administration

Please enter your name here so that your instructor can easily identify your assignment.

Instructions
You should read the description of the case and review Exhibits B and C, contained in this document. You should also review Exhibits A, D, and E which you can download in this activity. When you have read the description of the case and reviewed the supporting materials, type your answers to the five questions that appear at the end of this document. Be sure to enter your name in the box at the top of this document. You will attach your completed assignment to an email that you will submit to your instructor. Specific instructions for submitting your assignment appear at the end of this document.

Tucson Turnadot Hotel Sophies Restaurant

In early 2003, the owner of the Tucson Turnadot Hotel (Hotel) proposed that the Hotel enter into a lease with Sophies Restaurant in 6,600 square feet of vacant space adjacent to the Hotel lobby. The lessee is a well-known restaurant operator in Tucson and both the owner and Turnadot Operations thought that the proposed restaurant would make an exciting addition to the Hotel. The Hotel currently has one restaurant, the Grazers Grill, which is operated by Turnadot Operations (Turnadot). The owner initially proposed that Turnadot close the restaurant and convert it to meeting space. However, Turnadot brand standards require Turnadot to operate at least one restaurant in the Hotel because prior experience indicates that leased restaurants do not provide acceptable breakfast service and room service, which are important to overall guest satisfaction. The owner agreed to Turnadots position even though the profitability of Grazers Grill will be reduced as hotel customers use Sophies Restaurant for dinner. The financial analysis for the proposed restaurant lease is summarized in Exhibit A.

Treatment Under Management Agreement

Under the terms of the Management Agreement, there are two ways that the $1,025,000 investment in the restaurant could be treated:
Page 1 of 7 Copyright 2008, Cornell University. All rights reserved.

SHA566: Achieving Hotel Asset Management Objectives

Cornell School of Hotel Administration

1. FF&E Loan the owner will make an FF&E loan to the Hotel to finance the investment. The loan will be repaid over 5 years and bears interest at 3%. Loan payments start in year 3 to give the new operation time to stabilize, and the loan is treated as a deduction in arriving at the Cash Flow Available for Owners Priority for the hotel. 2. Additional Capital Investment the owners investment in the Hotel will be increased by the amount of the investment. The Owners Priority will be increased by 10.75% of the additional owner investment.

Impact on Turnadot Management Fees

The terms of Turnadots management fees are presented in Exhibit C. Turnadot earns a base fee based on Hotel revenues and an incentive fee if Hotel profit exceeds the Owners Priority. Turnadot has not earned any incentive fees because Hotel profit has not exceeded the Owners Priority. Due to improvements in the Tucson market, the Hotel is projected to exceed the Owners Priority by the third year of the restaurant lease.

Financial Analysis
The financial analysis for the impact of the proposed restaurant lease for Turnadot is presented in Exhibit D. The analysis compares Turnadots management fees assuming the investment is treated as an FF&E Loan as compared to Additional Capital Investment. The financial analysis for the impact of the proposed restaurant lease on the owners returns is presented in Exhibit E. The analysis compares ownerships returns assuming the investment is treated as an FF&E Loan compared to Additional Capital Investment.

Page 2 of 7 Copyright 2008, Cornell University. All rights reserved.

SHA566: Achieving Hotel Asset Management Objectives

Cornell School of Hotel Administration

EXHIBIT B Proposed Lease Terms

Term: Minimum Rent: 10 Years plus four 5-year renewals options. Year 1 Years 2-10 Years 16-20 Years 11-15 Years 21-25 Years 26-30 $150,000 $200,000 $242,000 $220,000 $266,200 $292,820

Percentage Rent: Owner Investment: Tenant Improvements:

5% of revenues above $3,000,000 $1,025,000 $2,000,000

Page 3 of 7 Copyright 2008, Cornell University. All rights reserved.

SHA566: Achieving Hotel Asset Management Objectives

Cornell School of Hotel Administration

EXHIBIT C Management Fees

Base Fee: Incentive Fee: Owners Priority: 3% of revenues 25% of Net House Profit in excess of Owners Priority $4,898,341
Page 4 of 7 Copyright 2008, Cornell University. All rights reserved.

SHA566: Achieving Hotel Asset Management Objectives

Cornell School of Hotel Administration

Page 5 of 7 Copyright 2008, Cornell University. All rights reserved.

SHA566: Achieving Hotel Asset Management Objectives

Cornell School of Hotel Administration

Questions
Enter your answers to these five questions below. When you have completed your assignment, be sure to save this file to your computer. Then submit your completed assignment to your instructor using the Email Assignment to Instructor button. 1. Acting as an asset manager, representing the interests of hotel ownership, and considering only the financial analysis, would you recommend that the investment be treated as an FF&E Loan or Additional Capital Investment? Why? Acting as an asset manager, representing the interests of hotel ownership, and considering only the financial analysis, I would recommend that the ownership treats this as an FF&E loan as opposed to additional investment. This is because the IRR for treating this as an FF&E Loan is at 28.8% which is better than an IRR of 28.0% should it be treated as an additional investment. 2. Acting for Turnadot, and considering only the financial analysis, would you recommend that the investment be treated as an FF&E Loan or Additional Capital Investment? Why? Acting for Turnadot, and considering only the financial analysis, I would recommend that the investment be treated as Additional capital because the Total Free Impact to Turnadot - After tax over the 10 year period is at $ 229.178 which is higher than if this is treated as an FF&E loan which has a Total Free Impact to Turnadot - After tax over the 10 year period of $ 199.030 3. Now expand your analysis to consider more than just the finances. List two qualitative factors that the Owner should consider and two qualitative factors that Turnadot should consider. How would they alter your analysis for either side? The owner should also consider the value that the leased restaurant will bring to the hotels overall value and also the value of the additional investments by the lease when the lease expires. Operator should consider the potential additional business into the hotel due to the presence of a well known restaurant as well as the overall guest experience having a well known restaurant at the hotel they are staying. 4. Should Turnadot waive its brand standard and close the hotel restaurant? Why, or why not?

Page 6 of 7 Copyright 2008, Cornell University. All rights reserved.

SHA566: Achieving Hotel Asset Management Objectives

Cornell School of Hotel Administration

Yes they should waive its brand standard and close the hotel restaurant provided that (1) There is clause in the lease agreement that the lessee will serve breakfast that is of Turnadot standard. (2) There is also provision in the lease agreement on the way that room service is being treated. This is because by turning the current hotel restaurant into a meeting space, not only that the space will maximize its revenue but also changing it into meeting space will reduce the number of headcount for permanent staff and thus this will result in better bottom line. As such, Turnadot will get better incentive fee.

5. How might the Owner and Turnadot deal with the impact of the new restaurant on Turnadots management fees? Owner might deal with the impact of the new restaurant on Turnadots management fees in a way that they would ask for a higher owner priority due to the amount of additional investments in the property whether it is treated as an FF&E loan or as an additional investment. Turnadot might deal with the impact of the new restaurant on Turnadots management fees in a way that they are happy with the increased fee and also less responsibility.

Once you have completed the answers to the five questions in this assignment, save the file to your computer as sha566_turnadot_abc.doc (replace abc with your initials). Be sure to save it to a convenient location (for example, your desktop or the My Documents folder on your hard drive) where you will be able to find it easily. Make sure that you have entered your name at the top of your assignment. You will submit your work using the Email Assignment to Instructor button. Click this button to open a pre-addressed email to your instructor. Add your name to the email, then attach your completed assignment to the email and submit it to Page 7 of 7 your instructor.
Copyright 2008, Cornell University. All rights reserved.