our valuation of the management agreement for the new Hungerford Hotel, we determined that the contract had an NPV of $17,110 per room. This is the value of the brand services and of the management services. In our valuation of the franchise fees for the Hillwood Hotel, we determined the franchise had an NPV of $12,216 per room. This is the value of the brand services.
Based on this information about these agreements, create a post that answers the following questions:
- Is the difference in NPV, roughly $5,000 per room, adequate compensation for the responsibility of operating the property?
- Is the intellectual property properly valued in each instance?
- What conclusions can you make about operating a hotel system under franchise agreements vs. under management agreements?
Instructions
| SHA616: Valuing Hotel Intellectual Property and Structuring the Capital Stack | |
| School of Hotel Administration, Cornell University | |
| Check: Valuing the Management Agreement | |
| Instructions: | |
| Use this spreadsheet to answer questions about valuing the management agreement for the Hungerford Hotel. | |
| Copyright © 2017 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. |
MFeeValuation
| Hotel Management Fee Calculation and Valuation (all figures $’000) | |||||||||||||||||||||
| Overall Assumptions for Analysis | Overall Assumptions for Analysis | ||||||||||||||||||||
| OperatorKey Money Contribution ($’000) | $0 | Base Fee (% of Hotel Revenues) | 3.25% | ||||||||||||||||||
| Multiple for Net Base Fees at End of Analysis Period | 6.0 | Operating Expenses of Management Company (% of Basic Fee) | 75% | ||||||||||||||||||
| Multiple for Incremental Fees at End of Analysis Period | 4.5 | Incentive Fee (% of CF after 10% Owner’s Priority -$6.6M) | 26.00% | ||||||||||||||||||
| Multiple for Net System Reimbursible Expenses at End of Analysis Period | 6.0 | System Reimbursible Expenses as a Percent of Total Revenues | 2.75% | ||||||||||||||||||
| Discount Rate for Net Basic Fees | 10% | System Reimbursible Expenses – Costs (% of SRE Revenues) | 100% | ||||||||||||||||||
| Discount Rate for Incentive Fees | 16% | Number of Shares Outstanding (‘000) | 100,000 | ||||||||||||||||||
| Discount Rate for Net System Reimbursible Expenses | 10% | Number of Rooms | 300 | ||||||||||||||||||
| Cash Value | |||||||||||||||||||||
| Over Analysis | Present | Discount | Value | ||||||||||||||||||
| Annual Flows from Operations | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year 10 | Period | Value | Rate | per Room | ||||||
| A. Hotel Revenues | $ 19,640 | $ 23,884 | $ 26,115 | $ 26,940 | $ 27,746 | $ 28,534 | $ 29,343 | $ 30,076 | $ 30,830 | $ 31,598 | $274,706 | ||||||||||
| B. Hotel GOP before deducting Management Fees | $5,163 | $8,129 | $ 9,576 | $ 9,944 | $ 10,279 | $ 10,587 | $ 10,904 | $ 11,154 | $ 11,413 | $ 11,670 | $98,819 | ||||||||||
| C. Annual Debt Service | ERROR:#REF! | ERROR:#REF! | ERROR:#REF! | ERROR:#REF! | ERROR:#REF! | ERROR:#REF! | ERROR:#REF! | ERROR:#REF! | ERROR:#REF! | ERROR:#REF! | ERROR:#REF! | ||||||||||
| Revenues From Management Contract | |||||||||||||||||||||
| Base Fee Calculation | |||||||||||||||||||||
| Hotel Revenues | $19,640 | $23,884 | $26,115 | $26,940 | $27,746 | $28,534 | $29,343 | $30,076 | $30,830 | $31,598 | |||||||||||
| Times: Base Fee Percentage | 3.25% | 3.25% | 3.25% | 3.25% | 3.25% | 3.25% | 3.25% | 3.25% | 3.25% | 3.25% | |||||||||||
| Equals: Base Fee | $638 | $776 | $849 | $876 | $902 | $927 | $954 | $977 | $1,002 | $1,027 | $8,928 | $5,307.08 | 10% | $17.69 | |||||||
| Incentive Fee Calculation | |||||||||||||||||||||
| Adjusted GOP (Line B under “Annual Flows” less Base Fee) | $4,525 | $7,353 | $8,727 | $9,068 | $9,377 | $9,660 | $9,950 | $10,177 | $10,411 | $10,643 | |||||||||||
| Less: Owner’s Priority of $6.6 Million | $6,600 | $6,600 | $6,600 | $6,600 | $6,600 | $6,600 | $6,600 | $6,600 | $6,600 | $6,600 | |||||||||||
| Equals: Cash Flow After Owner’s Priority | ($2,075) | $753 | $2,127 | $2,468 | $2,777 | $3,060 | $3,350 | $3,577 | $3,811 | $4,043 | |||||||||||
| Times: Incentive Fee Percentage | 26.00% | 26.00% | 26.00% | 26.00% | 26.00% | 26.00% | 26.00% | 26.00% | 26.00% | 26.00% | |||||||||||
| Equals: Incentive Fee | $0 | $196 | $553 | $642 | $722 | $796 | $871 | $930 | $991 | $1,051 | $6,751 | $2,615.26 | 16% | $8.72 | |||||||
| System Reimbursible Expenses Calculation | |||||||||||||||||||||
| Hotel Revenues | $ 19,640 | $ 23,884 | $ 26,115 | $ 26,940 | $ 27,746 | $ 28,534 | $ 29,343 | $ 30,076 | $ 30,830 | $ 31,598 | |||||||||||
| Times: SRE Fee Percentage | 2.75% | 2.75% | 2.75% | 2.75% | 2.75% | 2.75% | 2.75% | 2.75% | 2.75% | 2.75% | |||||||||||
| Equals: System Reimbursible Expenses – Revenues | $540 | $657 | $718 | $741 | $763 | $785 | $807 | $827 | $848 | $869 | $7,554 | $4,490.61 | 10% | $14.97 | |||||||
| Total Revenues | $0 | $1,178 | $1,629 | $2,120 | $2,258 | $2,387 | $2,508 | $2,632 | $2,734 | $2,841 | $2,947 | $23,234 | $12,412.94 | $41.38 | |||||||
| Expenses & Costs of Management Contract | |||||||||||||||||||||
| Operating Expense Calculation | |||||||||||||||||||||
| Basic Fee | $638 | $776 | $849 | $876 | $902 | $927 | $954 | $977 | $1,002 | $1,027 | |||||||||||
| Times: Operating Expenses as % of Basic Fee | 75% | 75% | 75% | 75% | 75% | 75% | 75% | 75% | 75% | 75% | |||||||||||
| Equals: Operating Overhead | $479 | $582 | $637 | $657 | $676 | $696 | $715 | $733 | $751 | $770 | $6,696 | $3,980.31 | 10% | $13.27 | |||||||
| Impact Calculation | |||||||||||||||||||||
| Total of Base Impacts | $0 | $30 | $31 | $31 | $33 | $34 | $34 | $35 | $37 | $38 | |||||||||||
| Total of Incremental Impacts | $0 | $24 | $25 | $27 | $27 | $28 | $29 | $29 | $30 | $31 | |||||||||||
| Total Impact | $0 | $54 | $56 | $58 | $60 | $62 | $63 | $64 | $67 | $69 | $553 | $315.77 | 10% | $1.05 | |||||||
| System Reimbursible Expenses – Costs | |||||||||||||||||||||
| System Reimbursible Expenses – Revenues | $540 | $657 | $718 | $741 | $763 | $785 | $807 | $827 | $848 | $869 | |||||||||||
| Times: SRE – Costs as Percentage of SRE Revenues | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% | |||||||||||
| System Reimbursible Expenses – Costs | $540 | $657 | $718 | $741 | $763 | $785 | $807 | $827 | $848 | $869 | $7,554 | $4,490.61 | 10% | $14.97 | |||||||
| Key Money Contribution | $0 | $0 | $0.00 | $0.00 | |||||||||||||||||
| Total Expenses and Costs | $0 | $479 | $636 | $693 | $715 | $736 | $758 | $778 | $797 | $818 | $839 | $7,249 | $8,786.69 | ` | $29.29 | ||||||
| Net Annual Flows | $0 | $700 | $993 | $1,427 | $1,544 | $1,651 | $1,750 | $1,853 | $1,937 | $2,022 | $2,108 | $15,985 | $3,626.25 | $ 12.088 | |||||||
| Pre-Tax Earnings Per Share | $ – 0 | $ 0.007 | $ 0.010 | $ 0.014 | $ 0.015 | $ 0.017 | $ 0.018 | $ 0.019 | $ 0.019 | $ 0.020 | $ 0.021 | $ 0.160 | |||||||||
| End of Analysis Period Valuations | |||||||||||||||||||||
| Net Base Fee Value at End of Analysis Period | $1,126 | $1,126 | $434.28 | 10% | |||||||||||||||||
| Incentive Fee Value at End of Analysis Period | $4,730 | $4,730 | $1,072.30 | 16% | |||||||||||||||||
| Net System Reimbursible Expenses Value at End of Analysis Period | $0 | $0 | $0.00 | 10% | |||||||||||||||||
| Total End of Analysis Period Values | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $5,857 | $5,857 | $1,506.58 | $5.02 | |||||||
| Total Present Value | Total Present Value and Value per Room | $ 5,132.83 | $ 17.109 | ||||||||||||||||||
