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Faced with So Many Options, What Would You Recommend to James?

Contents

Introduction

Recommended option

Conclusion

Sources

Introduction to The Regency Group Analysis

Chairman James Canavan founded the Regency Group 38 years ago. Starting out small, he and a small team of staff conducted deal after deal, each time learning from their mistakes and growing the portfolio of properties. Today, having successfully built and owned several shopping centers, office buildings and residential apartment blocks, he had always dreamt of owning a hotel. One of the first deals he made more than 30 years ago involves a 4000 square meter piece of land with a warehouse he built in Rothbury. James had purchased the land for only $350,000 those days. Since that time, Rothbury has evolved from being a light industrial location to now a hip and happening residential and highly sought-after lifestyle suburb. He wants to construct a hotel on that land and for that reason he need more equity because he cannot make all the investment by himself.

Now, he has multiple offers or options and he should have to accept one option.

Recommended Option

As the James have so many options and he is confused to choose one option which would be beneficial for him, the option I would recommend the option given by the Oliver Thumb from Cest Apartment Hotels, because if we talk about the bank offers there are some problems because James do not want such things and that unlike things would make problems for him in deal, the first bank offer was:

“Allstar Bank has offered 60% LVR with an Interest Rate of 7.5% for a 20-year term using a personal guarantee from James and security from his other assets. “

There LVR is and suitable but the interest would create problem for James, and even he does not like that interest, interest would create problem because it is a long term interest and interest would increase with the increase of value of hotel, which means if hotel would be profitable as James think then every year he has to pay more compared to last year which is not suitable and beneficial for James. The other offer given by the other bank was:

“Eastpac Banking has offered 55% LVR with an Interest Rate of 7% for a 25-year term with no early repayment possibility and secured against the development and two other additional assets.” 

The LVR of this bank is low as compared to Allstar Bank but its interest is higher than that bank which is the main problem and most unlike thing for the James because he does not like the interest rate and he would likely to do LVR but bank must take interest. Interest create problem in this way that it is a long term interest and interest would increase with the increase of value of hotel, which means if hotel would be profitable as James think then every year he has to pay more compared to last year which is not suitable and beneficial for James.

Moreover, it is also a condition by the both banks that if the risk associate with a non-affiliated brand and the inexperience of operating a hotel by the group have resulted in the lower LVR and higher interest rate. Both lenders have also required a Debt-Coverage Ratio of no less than 1.5 times the EBITDA. That is a major problem for James.

That’s why he chooses the option of Cest Apartment Hotels, because they got the following option:

“To explore their franchise partnership program, Cest Apartment Hotels' Oliver Thumb was approached. They were very interested in the James project as it suits the mid-term stay target market of their company. They offered several options, including the sale of the completed project to one of their customers, who currently owns 20 of the Cest franchises. The customer is a fund that seeks to secure low risk investment on a long-term basis. The fund can provide equity financing for the correct return. Otherwise, they even suggested that James could retain the property under the franchise model as landlord to obtain the property's guaranteed rental income.”

This option is the best and suitable for James due to the many reason, first reason is that they provide many options to james and james can make a deal easily on its own demand, the second reason is the james also like their option, the best thing is their option is reliable, have low risk, the uncertainty is also very low and james can earn guaranteed income without any high risk as he has to face high risk option if he makes a deal with one of those banks. The investor of Cest Apartment Hotel in a guaranteed long term investor and it prove is that he owns the 20 of the Cest franchised properties, which means that if Cest Apartment Hotels believe him then he can also believe him, they also give an alternative option to james that james could retain the property as landlord under the franchising model and obtain a guaranteed rental income for the property, which the best option for him because in this way he would remain the owner and the landlord of the property and also can get a guaranteed rental income for the property, it is best and suitable because in this way the dream of james of having a hotel would be fulfilled, he would also got an investor and he can easily solve his problem of equity and the main thing is that he would get the guaranteed rental income for the property , in all aspects , the james would be in profit and can easily fulfill his dream of hotel and can increase the worth of his property by making a hotel on that property through accepting the offer of Cest Apartment Hotels. 

The Peter Rooke from Allwood Hotel Group also approached him and gave their option but their option is also very attractive but actually it is confusing at some points and can make trouble in future because of that confusion and also there is a threat that is the major problem. There offer is as under:

Peter Rooke from Allwood Hotel Group approached the Regency Group to propose a management agreement using one of the Allwood Hotel Group’s subsidiary brands. They indicated they may be willing to consider a lease buy back arrangement or conventional management agreement under a HMA to brand and operate the hotel. This arrangement could de-risk the project and influence the lender’s risk assessment of the project. Peter indicated the benefits of economies of scale and proposed even a shared management structure between the proposed development and the new Allwood Styles opening in 2020. James is concerned about the impact and would like Allwood to consider contributing key money to cover some of the capital funding shortfall (Lee & Shin, 2018). 

If we read that offer, it also contains a low risk but the threat for james or the threat because of which james is also not interested in that option is that may be Allwood Hotel group give their own name or title to hotel, and the major problem which I see in that offer is that they would construct that hotel according to their desire and there is a probability or a chance that the james may be would not like their construction design or hotel design then there would be clash and james can also lose his hotel because Allwood hotel group wants to make an lease buy back arrangement, and in this way james dream of making an hotel would be collapsed or cannot be fulfilled (Brigham & Daves, 2012).

James also thinks that to make the equity by sell option, and for this he thought that on sell a portion of the units to small unsophisticated investors with a guaranteed return, using the presale tactic to raise capital equity in the process. This option is good but it also have its own demerits or disadvantages that james cannot see, the demerit is or disadvantage is that he is thinking to sell units to small unsophisticated investors , but the small investors are always curious and afraid of loss and risk, although it is not a risky investment for them but they may be afraid that if they buy small units and due to inexperience if the hotel would not be profitable or would not operate properly then their investment would be in loss, that’s why they make trouble for james and always remain in fear of loss, small investors are always hard to handle because they always afraid of loss and make troubles and they may also can change their decision on the main time when the contracts would be ready to sign. That’s why the best option and the most suitable option from all the option is the option of Cest Apartment Hotels.

Conclusion on The Regency Group Analysis

From all the offers or options, the best offer or option is the one which is given by Oliver Thumb from Cest Apartment Hotels, because it is the offer with low risk because the investor is experienced, he would not make any trouble for james, the investor is low risky, and the main thing is there is not any kind of interest and the best part is if james wants he would remain he owner and the landlord of the property and would got the guaranteed rental income of the property. All option or all kind of offers would have its own merits and demerits, even this offer would have it demerits like the other options but the demerits of other options are more risky and dangerous for james as compared to the demerits of this offer and the thing which is the best of this offer is that it would give the guaranteed income to james while he will remain the owner or the landlord of the property, which means he can earn and get money from that property while remaining the landlord of that property on which the hotel would be constructed.

Sources for The Regency Group Analysis

Brigham, E. F., & Daves, P. R. (2012). Intermediate financial management. Nelson Education.

Christensen, T. E., Huffman, A. A., & Lewis-Western, M. F. (2017). Earnings management proxies: Prudent business decisions or earnings manipulation? Available at SSRN 2793838.

Lee, I., & Shin, Y. J. (2018). Fintech: Ecosystem, business models, investment decisions, and challenges. Business Horizons61(1), 35-46.

Njenga, R., & Jagongo, A. (2019). Effect of financial management decisions on financial performance of selected non-deposit taking SACCOs in Kiambu County, Kenya: Theoretical review. International Academic Journal of Economics and Finance3(3), 204-217.

Sielicka, E., & Choma, A. THE IMPORTANCE OF DATA WAREHOUSING AND DATA MINING IN BUSINESS INTELLIGENCE: THE IMPACT ON BUSINESS STRATEGY AND MANAGEMENT DECISIONS FROM THE FINANCIAL INSTITUTIONS PERSPECTIVE. ББК 72я431 ISSN 2522-932X, 91.

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