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MIHM304 Regency International Case Study Assessment Answer

MIHM304

Hospitality Property Management and Development Strategies

Subject Information

Purpose of Subject

This subject develops the specialised skills required to use professional judgement in the choice of property management strategy. The subject has a multidisciplinary approach integrating the legal, accounting and design aspects of developing and managing different classes of property within hospitality business structures. The student will gain advanced understanding of the application of contract law principles and contract management in complex scenarios and reflect on the risks associated with different types of leases. Students will also gain technical knowledge in the evolution and use of different types of business ownership and critically analyse the possible competitive advantages associated with complex multi-owner arrangements separating real estate, brand and management functions.

Learning Outcomes

On successful completion of this subject, students will be able to:

  1. Analyse complex hospitality property management scenarios in terms of practical consequences through identifying the role and significance of different types of property, differentiating between ownership and possession and evaluating the use of different types of leases.
  2. Apply the relevant accounting standard to analyse a scenario and determine whether a non- current asset is held under a finance or operating lease and reflect on the most appropriate type of lease for different types of property in different arrangements.
  3. Critically analyse the negotiation process to determine the mere representations and terms of a contract, analyse complex scenarios to determine whether a contract exists, differentiate between different types of contracts and synthesise a simple contract given the facts in a particular case study.
  4. Identify and critically analyse the role of the manager in negotiating, executing, modifying and terminating contracts with various stakeholders such as customers, franchisors and contractors and synthesise a comprehensive Contract Management Plan to manage stakeholder’s expectations, allocate resources, mitigate risks and ensure transparent relationships.
  5. Select the most appropriate simple business structure for a particular hospitality business with reference to the advantages and disadvantages of each structure, including a discussion on franchising.
  6. Critically analyse a complex arrangement separating the ownership of the real estate, building, franchise name and management functions from the perspective of the manager’s role in effectively managing the contractual arrangements

Assessment 1 Outline

Assessment title: Regency International Case StudyAssessment weighting: 20%
Assessment type: AsWord limit: 1500 Equivalent
Assessment instruction

With reference to provided facts from The Regency International case study with the set of scenarios (which will be provided), critically analyse the options on offer, identifying the different categories of property involved. Determine and evaluate the best deal structure and identify the relevant owner and key players. Determine if the new purchase is held under a finance or operating lease.

Critically analyse the scenarios and options on offer.

  • Evaluate the deals and scenarios.
  • Conduct the necessary financial and feasibility analysis.
  • Identify the relevant owner and key players.
  • Determine if the scenario is held under a finance or lease arrangement.
  • Provide commentary on the issues of risk, control, structure and opportunity.
  • Clarify any assumptions made (if any) in your analysis.
Present a recommendation on the deal you would suggest and provide your reasons and evidence as to why.
Assessment format
Business Document with CDU Harvard style referencing. You may use headings and subheadings in the document. If applicable, you may also include comparison tables and calculations to back up your recommendations.

Provide evidence of academic research and wider reading on the topic.


Answer

Regency International Case Study

1. Introduction

The details given under the case law defines the different scenarios in which James, the owner of land has given several business alternatives by other businesses. To evaluate the profitability and financial feasibility of different deals, a financial analysis has been considered by James. Identification of relevant owner and key players in every different deal and scenario has been determined. Also the issues of risk, control, structure and opportunity in different available deals has been assessed. The case has been discussed and examined to find out the adequate business option for James, the owner of land on the basis of financial feasibility and other aspects of different deals. 

2. Available Deals and Scenarios

  1. Argon Developments: A company Argon Developments made offer to James for the acquisition of his land for $5 million on which they will build luxury apartments blocks with various facilities such as car parking, gym, tennis courts, swimming pool, café and retail stores. On receiving such offer, James contacted Jacaranda Hospitality Consulting for conducting a market study to find out the feasibility of hotel development in that area. The finding report reflected growth trends for hotel services in that place (Houtkoop, 2019). On the basis of positive market report concluded by the Jacaranda Hospitality Consulting, Regency group has decided to build their own hotel at such place in Rothbury. For access of funds to initiate the project, Regency group contacted Ivy Coutts who was the financial broker of Regency group since last 15 years. Ivy Coutts found two best deals to fund the construction cost of hotel for Regency Groups which are described below.
  2. Allstar Bank: The bank offered 60% LVR (loan to value ratio) on the property with an interest rate of 7.5% for a term of 20 years. To issue such loan the bank demanded personal guarantee from James and security from his other assets. The interest rate and LVR offered by the bank is lower due to the non-affiliated brand and inexperience of operating hotel. 
  3. Eastpac Banking: The other funding option available to the Regency Group offered 55% LVR to them on an interest rate of 7% for a minimum term of 25 years (Zohlnhöfer, Herweg, and Huß, 2016). There was no early repayment option with such loan and the amount of loan was secured against the development and two other additional.
  4. Cest Apartment Hotels: James was not happy with both the loan offers by banks as he was not in the favor of higher interest rates and personal guarantee. However he can afford to put $4,000,000 in project but he have to raise the additional amount from any other option. At that time he had approached by the Cest Apartment Hotels for an offer of franchise partnership (Nieves, and Diaz-Meneses, 2018). The Cest Apartment Hotels was very interested in the project of James with alternatives either to sell the finished project to their client who already owns almost 20 franchised properties of Cest or to retain the property as landlord with guaranteed rental income.
  5. Allwood Hotel Group: Another offer has been received by James from Allwood Hotel Group who proposed him for two alternatives. They proposed him either to establish a lease buy back arrangement or to enter into a conventional management agreement which will entitle them to brand and operate the hotel. This option could influence the lender’s risk assessment and also reduces the risk of project.

3. Financial & Feasibility Analysis

The present value of land which James has in Rothbury is $4.8 million and as described in above mentioned scenario, he has received number of offers against such land. Afterwards James thinks to build a hotel with 110 rooms on his land which would cost to $198 million in total (each room costs $180000). To assess the feasibility of options and to choose the favorable alternative, financial analysis of alternatives has been done which is as follows:

  • Alternative 1: Argon Developments offered James to acquire his land for $5 million which has the worth of $4.8 million. Hence he could gain the financial profit of $.2 million from the sale of this land. 
  • Alternative 2: The Allstar Bank offered an amount of loan up to 60% value of property with an interest rate of 7.5%.  The bank would issue loan amount of 2.88 million with an interest rate of 7.5% per annum which will result in the total interest amount of $2.5 million over 20 years (Rueda, Alonso, Moya, Combescure, Ayneto, and Locke, 2017). Hence James would have to pay a large interest amount in this option and also he has to give the personal guarantee for such loan. On the basis of this financial picture it could be inferred that this alternative has no financial feasibility as it will result more expensive for the Regency group. 
  •  Alternative 3: The Eastpac Banking offered 55% LVR to James on an interest rate of 7% for a minimum period of 25 years with no early payment possibility. Thus the loan amount which will be issued by the bank is $2.64 million on which James has to pay an overall interest of $3.69 million (Kaźmierczak, Lorenc, and Strzałkowski, 2017). Also the loan has no early payment possibility which makes it more expensive for James. Hence it could be said that this option of financing is not favorable for the Regency group as it will cost huge interest liability to them.
  • Alternative 4: The Cest Apartment Hotels approached James with two alternatives which are-

a) Selling of finished project an investor of Cest Hotels who is already having 20 Cest franchised properties. James can raise equity funding from the funds received from investor for right returns. 

b) James could retain the property as landlord under the franchising model and obtain a guaranteed rental income for the property (Montajabiha, Khamseh, and Afshar-Nadjafi, 2017). Hence James could allot his property on lease for gaining regular rental income.

  • Alternative 5: James was also approached by Allwood Hotel Group which given him two alternatives for funding-

a) Lease buy back arrangement in which he could get the funds for business by selling his land to Allwood Group.

b) Conventional management agreement in which the Allwood would be authorized to operate the business of hotel of Regency group (Souza, Gimenes, and Binotto, 2019). This option will mitigate the risk of project and influence the lender for financing the project. 

Recommendation: -As per the given details in the case law, James found the offer of Cest Apartment favorable but he also has another option to raise capital equity. In this option it has been considered that if Regency group sells a portion of units to small investors with guaranteed returns then he will be able to sell his management rights up to $2 million for raising the funds. For such purpose he has to sell almost 10 units of project. Hence it could be recommended that he could go with the option of sale of units to small investors or could also purchase the franchise to brand the development of project through which the potential risk involved in the project could be removed. 

4. Relevant Owner & Key players

The detailed scenario of this case law reflects that there were several interested parties and companies which wanted to invest their funds in the hotel project of Regency group. On the basis of evaluation and relevance of deals offered by different investors it could be inferred that the major players in these scenario are Cest Apartment Hotels and Allwood Hotel Group because they had offered some feasible and viable funding offers to Regency Group. On the other hand the identification of owner could be done by the acceptance of offer (Abdallah, and Sicotte, 2018). If Regency group accepts the offer of Cest Apartment Hotels of selling the project to one of their investor then the title of owner could be transferred to such investor. Hence the relevant owner and key players in the case are dependent on the scenario and acceptance of the deals.

5. In case of finance or lease arrangement

The past situations would be different if the company accept the finance or lease arrangements. If the company would accept the finance options offered by banks then they have to pay high interest on the loan amount which is also higher than the cost of capital of company. Hence it will cause extra and irrelevant cost to the company without any favorable return. On the other hand if the company goes with the lease arrangements then James will get a regular rental income on his leased land which will cause no cost to him (Cox, 2017). However in both the situations, the land would be entitled under the ownership of James but the difference of cost liability on James will differ. 

6. Issues of risk, control, structure and opportunity

The risk involved here is that on the failure of this project, the financial liability can occur on the personal head of James which will ultimately cause damage to the financial health of Regency Group. 

On the other hand James will lost his opportunity of rental revenue which he was getting from the warehouse if will pursue for the hotel project on this land.

The Regency group has no experience in the hotel business hence it is difficult for James to take control over his new hotel business and to operate the business with efficiency (DINI, 2017). 

The issue of structure is relevant to the capital structure of company hence the capital structure of company would become complex and more based on debt if the company goes for financing from the bank loans.

7.  Conclusion

In the conclusion of entire case study, it could be inferred that to choose the favorable option for financing of project James should undertake an analysis of financial feasibility. Every available option has different risks and opportunities attached with them hence to assess their viability; it is must to analyze all the relevant aspects of finance options. 

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