# Finance-AW182

## Finance-AW182 Online Services

Use the report writing guide from the course website, performing the analysis and answering the questions that follow

Q. 1. Ms. Warren originally approached the company, Desert Mirage Accounting, when she discovered problems with her faulty title to the vacant land. She hired the company to value the hotel property so she could provide lenders an independent appraisal of the collateral value of the property.

Desert Mirage Accounting researched valuation approaches used to determine most banks’ collateral value of bed and breakfast Inns in the Palm Desert area and discovered that most bank appraisers calculate the collateral value using the expected value approach. They place weights on appraisals that result from two methods. First, many bed and breakfast operations are valued at four times the past two years’ average gross margin. Appraisers assume that this appraisal is correct about 38% of the time, and accordingly place a 38% weight on the number derived from this method. Second, many properties are valued by taking the present value of the average of the past three years’ cash flows discounted at an 6.25% discount rate for 10 years. (Appraisers assume that the past cash flows are a good estimate of future cash flows and those cash flows should continue for 10 years in the future.) Appraisers place a weight of 62% on the number derived from this method.

Using the income statement and footnotes for Hotel California for the past three years provided by the existing owner’s accountant to help in the appraisal process, verify the value of the hotel determined by Desert Mirage Accounting by using

a. Four times the past two years’ average gross margin

b. The present value of the average of the past three years’ cash flows discounted at 6.25% for the next 10 years. In order to do this, first prepare an estimate of cash flow from operations for the three years. Then discount the average of this amount at 6.50% for 10 years to determine the hotel’s implied value.

c. Combine the values calculated in a) and b) using the weights provided. What is the appraised value of the Bed and Breakfast? Assume the appraised value is the total amount that the bank will loan Ms. Warren unless Ms. Warren either pays 25% of the purchase in cash or pledges to the bank a first priority lien on the vacant land as collateral. If Ms. Warren has \$500,000 available as a down payment, could she have borrowed enough money based on this appraisal without pledging the vacant land as collateral?

d. Should Desert Mirage Accounting have relied on the income statement and footnote information provided by Ms. Ramirez’s accountant? Why or why not?

Q.2. Assume the verification of Desert Mirage’s accounting did not result in enough loan value to avoid needing title to the vacant land and that the lien release was critical for the loan to proceed. Using the materials provided to you in the attached library (assume that the applicable precedent is from the fictional jurisdiction of the state of Green provided to you in the attached library), please address all elements of Ms. Warren’s negligence cause of action against Mechanics National Bank. Assume Mechanics National Bank is liable for its employees’ actions.

California State University, Chino, specializing in the hospitality industry. After working for fifteen years as a manager at the Marriott Hotel in Newport Beach, California, Ms. Warren decided to go on her own and acquire an existing hotel located in Palm Desert in the state of Green and convert it to a bed and breakfast inn.
After locating a suitable hotel, known as Hotel California, Ms. Warren conducted an in-depth study of the market and decided that the hotel possessed an immense potential if it were to become a bed and breakfast inn. She contacted the listing agent of the hotel, Babak Gordon, and obtained preliminary data on the property, including financial statements of the hotel for the past three years. The hotel was listed for sale for \$4.5 million.

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After conducting her own due diligence, Ms. Warren, Shirley Ramirez, the hotel owner, and Mr. Gordon met on January 5, 2005 and had a preliminary discussion on the purchase and sale of the hotel. Following the meeting, Ms. Ramirez called Ms. Warren and offered her the property for \$4.3 million, excluding the furniture. The sale was to conclude following a 45-day escrow. On January 6, 2005, Ms. Warren faxed Ms. Ramirez a letter stating the following:

“Thank you for offering to sell me the hotel you own, Hotel California, located at 20567 Avenue of the Stars, Palm Desert, Green. I am excited to accept your offer to sell the hotel for \$4.3 million, excluding the furniture. However, since it would take me some time to arrange financing, I would like to close escrow within 60 days. I look forward to working with you on this deal.

The same day, Ms. Warren contacted a number of lenders to secure financing for the deal. Most lenders that she contacted turned her down due to her poor credit record and lack of business ownership experience. However, on January 30, 2005, she managed to obtain a financing commitment from one lender. It was a sixty-day firm commercial loan commitment from Bank of the West.

The loan commitment required that Bank of the West would obtain a first priority lien on the hotel property, as well as on an unrelated undeveloped parcel of land that Ms. Warren owned in Lagoon Beach, Green. Ms. Warren had acquired the land in Lagoon Beach in 1984 and had managed to pay off the mortgage on that property on November 1, 2004. However, the lender on the Lagoon Beach property, Mechanics National Bank, had failed to remove the lien it had on that property despite the language in the deed of trust requiring it to promptly record a reconveyance of its lien on the property upon payment in full of the underlying loan.1

For the next sixty days following her faxed response, Ms. Warren vigorously attempted to get Mechanics National Bank to remove its lien on the Lagoon Beach property, but to no avail. She specifically mentioned to a number of officers at the bank that she would need Mechanics National Bank to reconvey the lien on her Lagoon Beach property as soon as possible so that she

could pledge the property as collateral for a new loan she was in the process of obtaining to finance a hotel acquisition. Despite repeated assurances from various officers at Mechanics National Bank, no one at Mechanics National Bank initiated and followed up on the processing of the reconveyance request. The failure resulted due to the various internal turnovers in Mechanics National Bank.

To further her chances of obtaining a loan from the Bank of the West (and to try and persuade them to lend the money without a lien on the vacant land,) Ms. Warren contracted for an appraisal report from an independent company. Ms. Warren hired Desert Mirage Accounting to prepare an appraisal using techniques that banks generally employ to determine the loan value of small hotels. Unfortunately, that valuation did not result in enough loan value to justify the hotel property as the sole collateral on the loan. Hence, to obtain the loan from Bank of the West, she still needed clear title to the vacant land.

Product code: Finance-AW182