Eucalyptus Sand Hill Hotel and Office Development Project Harvard Case Solution & Analysis

Eucalyptus Sand Hill Hotel and Office Development Project

Question 1

A typical ratio of land as percent of value is 25 percent. Birdwell needed to understand the residual land value for 2825 Sand Hill road. Specifically, what is the residual land value under the 300-room and 120-room hotel scenarios and the 60,000 and 120,000 square foot office building? Make sure to show the leveraged and unleveraged cash flows and IRRs for the 300-room and 120-room hotel scenarios.

The optimal hotel size could be any size chosen by Birdwell. However, the land owned by Stanford was enough to have a hotel with 300 rooms. This would approximately be equal to 300,000 square feet. There were a range of options avail be to Stanford to utilize their land and when Birdwell sought for the attention of Maritz to analyze all the range of the options available to the owners in order to utilize the land then two of the most prominent options that had been identifiedwere the develop either a 120 room hotel or develop a 300 room hotel.

It had also been identified that Menlo Park was looking out for one of the luxury hotels in the area. Menlo Park also had emphasized to maximize the TOT in the area through the increase in the total occupancy rates, average daily rates and the number of rooms in the hotels that were booked by the customers. Therefore, due to these reasons, Maritz had finalized two options, which were to either develop a 300 room hotel or develop a 120 room hotel.

According to Maritz among both the options that had been considered above the most suitable option, which would be considered as a luxury hotel option, would be the 300 room hotel. This was because of the size of this hotel and the sizes of the rooms in this hotel. The luxury market segment had been quite shallower in the country therefore; this seems to be the most attractive option to utilize the land by developing a 300 room hotel.

However, the height limitations and the FAR will also have to be considered when this luxury hotel will need to be developed. Apart from this a number of other facilities would also be required in order to give a luxury feel to the 300 room hotel therefore, Maritz had then considered to give a luxury look to the 120 room hotel by developing expensive guest rooms, fitness facilities, spa and the space for the weekend weddings and brunches.

Therefore, considering both of these two options, the estimations for the revenue sources, which are the rentals per room and the expenses to be incurred in a 300 room and a 120 room hotel, have been compiled as shown in the excel spreadsheets. The Pro-forma income and expenses have been computed based upon the respective growth rates, the inflation rates and the general inflation rates as shown in the case exhibits, which had been already estimated by Birdwell.

The departmental profits have been then computed by subtracting the departmental revenues from the departmental expenses. Lastly, after deducting the undistributed departmental expenses and all the other fixed charges from the departmental profits, the net operating income has been calculated from year 1 to year 6 for the 300 room and the 120 room hotels.

The residual land value for the 300 room hotel and the 120 room hotel has then been computed by taking the net operating income for the last year and then dividing it by the cap rate of 7% for the 300 room hotel and the 120 room hotel. However, the residual land values for the 60000 and the 120000 square foot office building has been computed by first of all calculating the value of the land per square feet...........................

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