HB 382 – Investment Structure Case Study
The School of Hospitality Business
Michigan State University
Assignment Due Date – Wednesday, October 12th
Jim-Singh Investments owns a hotel located in a gateway city and received an unsolicited offer to
buy the hotel for $100 million. Jim-Singh acquired the hotel 4 years ago for $75 million (closing
costs equated to 1.5% of the purchase price) and completed an initial renovation of $7.5 million.
The ownership group was able secure a loan equal to 65% of the purchase price, closing costs and
initial renovation, at a fixed interest rate of 5%. The Net Operating Income (“NOI”) in the first
year of ownership was $5.0 million and increased by 10% in Year 2, followed by 5% in Year 3,
and 3% in Year 4 (the sale year). In Year 3 the ownership group decided to make an additional
investment of $1 million into the asset to convert some underutilized office space into an executive
meeting center and the existing gift shop into a Starbucks kiosk. If Jim-Singh Investments sells
the hotel for $100M the selling costs will be 2% of the sales price as they need to pay the broker
involved in the transaction.
There are two things driving interest in this asset from buyers: 1) the hotel has good existing cash
flow, and 2) there is a proposed development of a new 1.5 million square foot office building that
will house over 5,000 government employees, which are being relocated from other office
buildings throughout the metro area. However, development of the new government facility (and
additional demand) isn’t definitively moving forward just yet as it needs to be approved by the
City. The hotel’s NOI is expected to materially increase as the office building comes online and
the employees are relocated from other buildings throughout the area. The main item driving this
increase in NOI is that the delta between the hotel’s current Average Daily Rate and the
government per diem is $30, which would have a positive impact on the hotel’s profitability.
The hotel needs a capital infusion of $5 to $7 million to renovate the hotel to maintain good
standing with the brand, which will need to be done in the next few years. However, Jim-Singh is
a private equity group that doesn’t want to go through another significant re-investment of capital
back into this property.
Jim-Singh generally likes to achieve an Internal Rate of Return (IRR) between 17% and 19%, and
an Equity Multiple of 2x or greater on their investments. However, they’re also very risk averse
in their investment strategy.
Based on the above facts and investment return model, please provide a written
recommendation in paragraph form to the Jim-Singh Investment committee advising if they
should accept the unsolicited offer of $100 million (and accept the returns they have realized)
or continue to hold the asset, and some reasoning behind your recommendation.
Purchase answer to see full