This case study was about the Madison Hotel project in Memphis. After determining the case, there were lots of problems occurred during the processes which are over budgeting and delay opening because of the unplanned acquisition of facilities. The problems are occurred because the owner of project changed the concept of the restaurant, the land price was raised, the name of the building was belonging to the previous owner, refusing the loan from the back, and inaccurate and insufficient construction. After the root causes of the problems are discovered, there are many ways to solve and prevent the problem. There are three main ways to solve them. The first way is to improve the construction contract. The owner should invest the background of the construction company before signing the contract.
Also, make a clear cut-contract to ensure that the constructors will finish the project on time. In case there is any fee from defaults or failures, the constructors have to respond for them. The second way is to consider the risk that involve with this project. The management team should be able to respond the unexpected risks that may occur immediately and they should have a second plan for more alternatives as well as reducing the period of working time. The last way is about planning process. The owner should have a plan which is covered all the part of the project and all responsibility of the project member for avoiding any complexity to prevent any pushing the responsibility off duties to other players.
The more important of the project, the more efficient of the plan should be considered. If the plan is achieved, the hotel will be opened on time and the project owner will not have to pay for unnecessary processes. Also, the Madison Hotel will be the best boutique hotel in Memphis according to its fully service and facilities, and for special events, the hotel will have high occupancy rate from fully booking. On the other hand, if the plan is failed, the hotel will face with the same problems which are delay opening, over budgeting, complicated business plan, and failure to achieve the goal.
The description of the case
1.1 Background of the case
This case study focused on the creation of a 110-unit luxury boutique hotel in Memphis, Tennessee by four developers and the lessons they had learned during this complicated project. The individuals who identified in this project are
– Walter Broadfoot: a veteran hotel owner and broker from Memphis – Tony Klok and Gene Kornota: they funded the majority of the equity for the project – Mohamad Hakimian: The long time general manager of Memphis’s most famous hotel who became involved in the project as a managing partner to shaping the renovation and character of the hotel Walter Broadfoot first eyed the Tennessee Trust Building as a possible hotel in Memphis because it was an ideal structure to convert to a hotel that is to say it already had a window and an identical floor plan from floors three though sixteen, a large ground floor lobby, a second-level mezzanine, a lower or basement level and the potential for a rooftop deck that would command a breathtaking view of the mighty Mississippi.
But the Memphis lodging market had enough depth and there were a lot of complexities and extent of challenges faced him at the certain period of the time. Therefore, the project was abandoned right away at that time. The building was cost $250,000 and was selling by CNA Company, but CNA didn’t hold any legal right to it because it was in the name of previous owner. After the developer bought this building from CNA Company, they had to pay for this unplanned process which cost about $100,000 and took several months to be done. He encountered the owners who were either unwilling to sell or wanted to make a quick buck in order to make space for hotel’s food, beverage and banquet facilities.
After many months of planning and meetings, the developers faced another exceedingly budgeting problem. By the time, the hotel was swelled to approximately $15 million which is 50 percent more than the estimated total project cost ($9.7 million). The developers site several major factors that drove up the original budget which are -the enhancement of the initial food and beverage concept: from limited in scope to full-service/upscale grill and bar – Inaccurate and insufficient construction cost budgets: by an unqualified general contractor – The expense for ensuring construction interest that they (new contractor) will be continued well beyond the time frame
According to over budgeting, the entrepreneurs need to loan from the local bank but the local bank realized that this project hold too much risks, consequently, there weren’t any local banks interested in providing permanent financing for the project. Tony and Gene have to loan from the bank of Chicago base on banking relationship. The loan was about 50% of the project cost and the bank will continue to hold the title of the building as additional secured collateral.
The business entity that was formed to own the hotel was a Tennessee limited liability corporation. Equity share is defined as the actual cash equity contributed by each partner while financial share represents the structure of the profit distributions after receives a return on their original cash equity.
Equity shareFinancial share
1.2 The purpose of the case
The purpose of this study was to understand the complexities involved in this project. Also, to create a new plan in order to prevent any unexpected situations or unfavorable conditions that may occur during the processes. To learn the previous obstructions and the lessons that already occurred to prevent current risks and problems that may exist as well as to think ahead and preclude complicated problems in the future. For improving and developing this boutique hotel to become the best European style boutique hotel in the Memphis, hopefully, in the Tennessee likewise.
1.3 The scope of the case
This case study looks into the Madison hotel renovation which is located at Tennessee, United state by four entrepreneurs. It is all about the business planning process which is about how to start a hotel business starting from buying the properties along with finding the source of investment funds not including sale and marketing analysis, competitor analysis, or other irrelevant aspects.
1.4 The limitation of the case
The case study involved with the financial incentives and tax free exchange provisions which were beyond our basic knowledge. Hence, this case study analysis will not refer to any financial topic which has no effect to analysis process.