PUTTING IT ALL TOGETHER—THE STORY OF AN EXTENDED-STAY HOTEL DEVELOPMENT PROJECT
The City Development Commission in a Pacific Northwest community purchased a 1.55-acre parcel of riverfront land in the downtown area.The land was previously contaminated with industrial pollutants thatmade the parcel unsafe for habitation and construction. The City Development Com- mission used state, local, and federal grants to have the land decontaminated, created a master plan for the area, and then offered the parcel for sale and development.
The City Development Commission issued a request for proposal (RFP) that outlined the asking price of $2,076,240 ($30/sq.ft.) for the land and the design requirementsset down by the Commission for a buildingthat would fit the intended look and feel of the area.The RFP was sent to many major hotel companies and commercial real estate brokers, asking prospective buyers to submit a purchase price bid along with a statement of the buyer’s development history and ability to develop a hotel of the type envisioned by the
Commission. It listed a closing date by which all bids had to be submitted.
An area commercial real estate broker contacted a hotel development and management company with a long history of developing and managing extended-stay hotels in the Pacific Northwest, including a property located in a similar setting to that being offered for sale.The commercial realtor offered to represent the developer in negotiations with the City Development Commission, which would be paying the real estate commission on the sale. An agreement was reached with the commercial real estate broker to represent the buyer to the seller, and the developer went to work in preparing a proposal.
The developer conducted a feasibility study to see all of the conditions in the marketplace that would be encouraging or discouraging to this development project.
Studies were conducted to estimate how many room-nights were being sold within a five-mile radius, how many extended-stay room-nights were available in the market, how many hotel rooms existed, and how many were being planned over the following five years. From this, the developer was able
to estimate the number of extended-stay room-nights available needed to produce an 82 percent occupancy with an average daily room rate of $141 when the hotel achieved stabilization three years after opening. That provided the basis for a ten-year revenue estimate.
The developer proposed a nine-floor, 258-suite extended-stay hotel with an indoor pool, spa, and exercise facility, a guest laundry, offices, meeting facilities, and a three-floor parking garage with parking for 193 automobiles, all at a total cost of $38 million, or $147,286 per suite.
The $38 million construction budget was broken down as follows:
The opening date for the hotel was projected at 27 months from the date of proposal
acceptance.
The City Development Commission awarded the project to the developer, and
work began.
First, an ownership limited liability company (LLC) was formed as the ownership entity that would hold title to the hotel.
The LLC, in turn, entered into a development and construction management agree-
ment with the development company to manage the arrangements for financing and construction of the hotel.
The developer, as agent for the ownership LLC, also entered into a hotel management contract with a management company to manage the pre-opening marketing, preopening hiring and training, and the day-to-day operation of the hotel once it was opened.The arrangements called for the management company to be paid 3 percent of rev- enue and 2 percent of the net operating income for management services.
The ownership LLC then contacted a major hotel company and applied for a franchise to allow the development and operation of an extended-stay hotel. A 20-year franchise was granted with a fee of $400 per suite or, $102,800. This was to be followed by a 5 percent royalty and a 3 percent advertising fee
once the hotel was open and operating.
The developer, acting as agent for the owner, prepared a private placement memorandum document seeking investments from accredited investors.These investors were pri- marily defined as people with a net worth of $1 million, or those with an income in excess of $200,000 over the previous two years and expecting an income in excess of $200,000 in the current year. (Note: Additional entities may also be defined as accredited investors by the Securities and Exchange Commission.)
The private placement memorandum offered $100,000 units of ownership to accredited investors, guaranteeing a 9 percent priority return on the investment and a combined 50 percent ownership in the hotel.A group of initial investors retained the other 50 percent in exchange for putting the project together.This effort was successful in raising 40 percent of the total cost of the hotel in anticipation that a lender would provide the remaining 60 percent in the form of a construction loan. In addition to the priority return, investors could expect to participate in any future capital gain realizedshould the hotel be sold.
The development company, continuing to function as agent for the owner, then sought a commercial bank to provide threeyear construction financing for the project.
As $22,800,000, or 60 percent, of the $38 million development cost was to be borrowed, only major banks were considered as prospective lenders.The size of the construction loan was above the lending limits of
most small regional banks. After a precon-struction appraisal by a third-party appraisal firm chosen by the lender confirmed the value at $38 million upon completion of con-struction, and for an origination fee of
$400,000, a three-year construction loan was secured.The terms allowed the developer, as agent for the owner, to draw down the loan every 30 days after providing proof that funds had been properly disbursed in the construction process.The loan documents set an interest rate and also required that the ownership LLC seek a permanent mortgage prior to the three-year expiration date on the construction loan.
The development company then negotiated with and selected a general contractor
with significant hotel construction experience who acted on behalf of the developer, as agent for the owner. The general contractor then selected design-build subcontractors and an interior designer to select colors, fabrics, furniture, fixtures, and equipment to meet the hotel franchise design requirements.
Building permits were applied for, and the building design was presented to the City
Development Commission for its approval, along with other groups with a stake in the appearance of the finished building in relation to the area and neighborhood.With all of these approvals in place, construction commenced, and the hotel opened two years later.
The City Development Commission issued a request for proposal (RFP) that outlined the asking price of $2,076,240 ($30/sq.ft.) for the land and the design requirementsset down by the Commission for a buildingthat would fit the intended look and feel of the area.The RFP was sent to many major hotel companies and commercial real estate brokers, asking prospective buyers to submit a purchase price bid along with a statement of the buyer’s development history and ability to develop a hotel of the type envisioned by the
Commission. It listed a closing date by which all bids had to be submitted.
An area commercial real estate broker contacted a hotel development and management company with a long history of developing and managing extended-stay hotels in the Pacific Northwest, including a property located in a similar setting to that being offered for sale.The commercial realtor offered to represent the developer in negotiations with the City Development Commission, which would be paying the real estate commission on the sale. An agreement was reached with the commercial real estate broker to represent the buyer to the seller, and the developer went to work in preparing a proposal.
The developer conducted a feasibility study to see all of the conditions in the marketplace that would be encouraging or discouraging to this development project.
Studies were conducted to estimate how many room-nights were being sold within a five-mile radius, how many extended-stay room-nights were available in the market, how many hotel rooms existed, and how many were being planned over the following five years. From this, the developer was able
to estimate the number of extended-stay room-nights available needed to produce an 82 percent occupancy with an average daily room rate of $141 when the hotel achieved stabilization three years after opening. That provided the basis for a ten-year revenue estimate.
The developer proposed a nine-floor, 258-suite extended-stay hotel with an indoor pool, spa, and exercise facility, a guest laundry, offices, meeting facilities, and a three-floor parking garage with parking for 193 automobiles, all at a total cost of $38 million, or $147,286 per suite.
The $38 million construction budget was broken down as follows:
The opening date for the hotel was projected at 27 months from the date of proposal
acceptance.
The City Development Commission awarded the project to the developer, and
work began.
First, an ownership limited liability company (LLC) was formed as the ownership entity that would hold title to the hotel.
The LLC, in turn, entered into a development and construction management agree-
ment with the development company to manage the arrangements for financing and construction of the hotel.
The developer, as agent for the ownership LLC, also entered into a hotel management contract with a management company to manage the pre-opening marketing, preopening hiring and training, and the day-to-day operation of the hotel once it was opened.The arrangements called for the management company to be paid 3 percent of rev- enue and 2 percent of the net operating income for management services.
The ownership LLC then contacted a major hotel company and applied for a franchise to allow the development and operation of an extended-stay hotel. A 20-year franchise was granted with a fee of $400 per suite or, $102,800. This was to be followed by a 5 percent royalty and a 3 percent advertising fee
once the hotel was open and operating.
The developer, acting as agent for the owner, prepared a private placement memorandum document seeking investments from accredited investors.These investors were pri- marily defined as people with a net worth of $1 million, or those with an income in excess of $200,000 over the previous two years and expecting an income in excess of $200,000 in the current year. (Note: Additional entities may also be defined as accredited investors by the Securities and Exchange Commission.)
The private placement memorandum offered $100,000 units of ownership to accredited investors, guaranteeing a 9 percent priority return on the investment and a combined 50 percent ownership in the hotel.A group of initial investors retained the other 50 percent in exchange for putting the project together.This effort was successful in raising 40 percent of the total cost of the hotel in anticipation that a lender would provide the remaining 60 percent in the form of a construction loan. In addition to the priority return, investors could expect to participate in any future capital gain realizedshould the hotel be sold.
The development company, continuing to function as agent for the owner, then sought a commercial bank to provide threeyear construction financing for the project.
As $22,800,000, or 60 percent, of the $38 million development cost was to be borrowed, only major banks were considered as prospective lenders.The size of the construction loan was above the lending limits of
most small regional banks. After a precon-struction appraisal by a third-party appraisal firm chosen by the lender confirmed the value at $38 million upon completion of con-struction, and for an origination fee of
$400,000, a three-year construction loan was secured.The terms allowed the developer, as agent for the owner, to draw down the loan every 30 days after providing proof that funds had been properly disbursed in the construction process.The loan documents set an interest rate and also required that the ownership LLC seek a permanent mortgage prior to the three-year expiration date on the construction loan.
The development company then negotiated with and selected a general contractor
with significant hotel construction experience who acted on behalf of the developer, as agent for the owner. The general contractor then selected design-build subcontractors and an interior designer to select colors, fabrics, furniture, fixtures, and equipment to meet the hotel franchise design requirements.
Building permits were applied for, and the building design was presented to the City
Development Commission for its approval, along with other groups with a stake in the appearance of the finished building in relation to the area and neighborhood.With all of these approvals in place, construction commenced, and the hotel opened two years later.
