Hotel New Construction CashFlow

[Alexis Morleand]

Hello Everyone,

Hoping to gain some insight and additional knowledge with this post.

I'm currently in the process of my due diligence on a New Construction Commercial Hotel Project that was brought to me.

I've been provided the Feasibility Report which includes a 5 year Proforma, Project Construction Cost Breakdown and I've also been provided a Trend Report for the previous 5 years as well. Trend report uses comparisons of other Hotel's in the area and showing true ADR, Occupancy Rates, Revenues etc.

The issue I've run into is that the Debt Financing has not been completed and has a range between $30 and $40 million. I'm trying to estimate the Debt Servicing in order to get an estimate of what the project will Cashflow yearly. I want to have at least a strong estimate of the cashfllow before signing any Term Sheet.

Questions

1. Is it standard to sign Term Sheets without debt financing being finalized?

2. Is there a formula of sorts that would allow me to make a quick guestimate as to if the property will cashflow? or at what occupancy rate the property needs to hit in order to cashflow positive?

3. When investing in a New Construction Commercial Deal, what do you considered more important.. equity acquired? cash on cash return? or cash flow? I know this question depends on the investor, but would love to see what the consensus is here.

Thank you and I'll supply as much information as I can if more is need to answer the questions above.

[Ken Jernigan]

Most of your questions regarding the pro forma should be answered in the feasibility. All the same something's not right about this deal. $40 million in debt implies a $50 million or so project. Round about 250 rooms at a top tier luxury hotel. A legit project like this would have pretty heavy hitting sponsors and be on the radar of big time institutional lenders.