<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
RULE 13E-3 TRANSACTION STATEMENT
(Pursuant to Section 13e-3 of the Securities Exchange Act of 1934)
SUPER 8 MOTELS NORTHWEST II
SEC File No. 2-76453
(Name of the Issuer)
Gerald L. Whitcomb
Maryanne Whitcomb
Columbus Motel Properties L.L.C.
(Name of Persons Filing Statement)
Limited Partnership Units
(Title of Class of Securities)
N/A
(CUSIP Number of Class of Securities)
Gerald L. Whitcomb
General Partner
Super 8 Motels Northwest II
7515 Terminal Street, S.W.
Tumwater, Washington 98501
Telephone: (360) 943-8000
(Name, Address and Telephone Number of Person Authorized to Receive Notices and
Communications on Behalf of Persons Filing Statement)
COPIES OF CORRESPONDENCE TO:
Marion V. Larson
William W. Barker
Graham & James LLP/Riddell Williams P.S.
1001 Fourth Avenue Plaza, 45th Floor
Seattle, Washington 98154-1065
Telephone: (206) 624-3600
Facsimile: (206) 389-1708
This statement is filed in connection with:
[X] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
[ ] The filing of a registration statement under the Securities Act of 1933.
[ ] A tender offer.
[ ] None of the above.
Check the following box if the soliciting materials or information statement
referred to above are preliminary copies: [ ]
<TABLE>
<CAPTION>
CALCULATION OF FILING FEE
- --------------------------------------------------------------------------------------------------
<S> <C>
Transaction Valuation* Amount of Filing Fee
- --------------------------------------------------------------------------------------------------
$5,447,332 (*Based on purchase price of property) $1,515
- --------------------------------------------------------------------------------------------------
</TABLE>
[X] Check box if any part of the fee is offset as provided by Rule 0-11(a) (2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number or the Form
or Schedule and the date of its filing.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
<S> <C>
Amount Previously Paid $1,515
Form or Registration No. 14A
Filing Party Registrant
Date Filed January 6, 1999
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
CROSS-REFERENCE SHEET SHOWING LOCATION IN
PRELIMINARY PROXY STATEMENT OF INFORMATION
REQUIRED BY ITEMS OF SCHEDULE 13E-3
The following is the cross reference sheet required pursuant to general
instruction "F" of Schedule 13E-3. It shows the location in the proxy statement
filed as Exhibit 99(d)(1) hereto of the responses of the filing persons to each
item and subparagraph of Schedule 13E-3.
<TABLE>
<CAPTION>
ITEM IN SCHEDULE 13E-3 LOCATION IN PROXY STATEMENT
<S> <C>
1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION
(a).......................................................... Summary--Super 8 Motels Northwest II
(b).......................................................... Summary--Required Vote; Beneficial Ownership
(c).......................................................... Summary--Market Information
(d) ......................................................... Summary--Market Information
(e) ......................................................... Summary--Market Information
(f) ......................................................... Summary--Market Information
2. IDENTITY AND BACKGROUND
(a) ......................................................... Summary--The Buyer
(b) ......................................................... Summary--The Buyer
(c) ......................................................... Summary--The Buyer
(d) ......................................................... Summary--The Buyer; Information About the Seller--Directors and
Executive Officers of the Registrant
(e) ......................................................... None
(f) ......................................................... None
3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS
(a)(1) ..................................................... Special Factors--Interests of Affiliates
(a)(2) ..................................................... None
(b) ......................................................... None
4. TERMS OF THE TRANSACTION
(a) ......................................................... Summary--Merger Consideration; The Merger Agreement
(b) ......................................................... None
</TABLE>
1
<PAGE> 3
<TABLE>
5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE
<S> <C>
(a) .........................................................Special Factors--Plans or Proposals of Issuer or Affiliate
Following Merger
(b) .........................................................Special Factors--Plans or Proposals of Issuer or Affiliate
Following Merger
(c) .........................................................Special Factors--Plans or Proposals of Issuer or Affiliate
Following Merger; --Management and Operations of Northwest II
Following Merger
(d) .........................................................Special Factors--Plans or Proposals of Issuer or Affiliate
Following Merger
(e) .........................................................Special Factors--Plans or Proposals of Issuer or Affiliate
Following Merger
(f) .........................................................Summary--Effect of Merger
(g) .........................................................Summary--Effect of Merger
6. SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION
(a) .........................................................Special Factors--Source and Amounts of Merger Consideration and
Expenses
(b) .........................................................Special Factors--Source and Amounts of Merger Consideration and
Expenses
7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS
(a) .........................................................Background of the Transaction; Summary--Effect of the Merger
(b) .........................................................Background of the Transaction
(c) .........................................................Background of the Transaction
(d) .........................................................Summary--Effect of Merger; Material Federal Income Tax Consequences
8. FAIRNESS OF THE TRANSACTION
(a) .........................................................Special Factors--Fairness of the Transaction
(b) .........................................................Special Factors--Fairness of the Transaction
(c) .........................................................Summary--Required Vote by Unitholders
(d) .........................................................Special Factors--Conflicts of Interest; Procedural Fairness
(e) .........................................................Special Factors--Conflicts of Interest; Procedural Fairness;
--Fairness of the Transaction
</TABLE>
2
<PAGE> 4
<TABLE>
<S> <C>
(f) .......................................... Background of the Merger--Attempted Sale to
Unaffiliated Third Party
9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN
NEGOTIATIONS
(a) .......................................... Special Factors--Business Valuation of
Exvere; -- Independent Appraisal of Motel
Properties by McKee & Schalka; -- Opinion of
Financial Adviser; Opinion of Financial
Adviser--
(b) .......................................... Special Factors--Business Valuation of
Exvere; -- Independent Appraisal of Motel
Properties by McKee & Schalka; -- Opinion of
Financial Adviser; Opinion of Financial
Adviser--
(c) .......................................... Special Factors--Business Valuation of Exvere; --
Independent Appraisal of Motel Properties by
McKee & Schalka; -- Opinion of Financial
Adviser; Opinion of Financial Adviser--
10. INTEREST IN SECURITIES OF THE ISSUER
(a) .......................................... Summary--Market Information
(b) .......................................... Summary--Market Information
11. CONTRACTS, ARRANGEMENTS, OR UNDERSTANDINGS
WITH RESPECT TO THE ISSUER'S SECURITIES....... None; Not applicable
12. PRESENT INTENTION AND RECOMMENDATION OF
CERTAIN PERSONS WITH REGARD TO THE TRANSACTION
(a) .......................................... Summary--Required Vote of Unitholders;
Beneficial Ownership
(b) .......................................... None
13. OTHER PROVISIONS OF THE TRANSACTION
(a) .......................................... Dissenters' Rights of Appraisal
(b) .......................................... Special Factors--Conflicts of Interest;
Procedural Safeguards
(c) .......................................... Not applicable
14. FINANCIAL INFORMATION ........................ Financial Statements; Selected Financial
Data; Book Value Per Share
</TABLE>
3
<PAGE> 5
<TABLE>
<S> <C>
15. PERSONS AND ASSETS EMPLOYED, RETAINED OR
UTILIZED
(a) .......................................... Special Factors--Conflict of Interest;
Procedural Fairness; Background of the Merger
(b) .......................................... Summary--Persons Making Solicitation
16. ADDITIONAL INFORMATION ....................... Where You Can Find More Information
17. MATERIALS TO BE FILED AS EXHIBITS
99(a) Loan commitment letters from U.S. Bank and rate lock agreement (incorporated by reference from Schedule 13E-3 filed
by Super 8 Motels Northwest I, February 10, 1999, SEC File No. 5-54999)
99(b)(1)+ Exvere business valuation of Northwest II
99(b)(2)* McKee & Schalka appraisal of Portland motel property
99(b)(3)* McKee & Schalka appraisal of Bremerton motel property
99(b)(4)* McKee & Schalka appraisal of Yakima motel property
99(b)(5) Presentation of financial advisor Ragen MacKenzie Incorporated (incorporated by reference from Schedule 13E-3 filed
by Super 8 Motels Northwest I, February 10, 1999, SEC File No. 5-54999)
99(b)(6)* Opinion of Financial Advisors, Ragen MacKenzie Incorporated (included in Exhibit (d)(1))
99(c) None
99(d)(1)* Proxy statement of Northwest II (as amended)
99(e)(1)* Detailed statement of dissenters' rights (included in Exhibit (d)(1))
99(f) None
</TABLE>
- --------------------
* Filed herewith.
+ Pursuant to the hardship exemption provided for in Rule 202 of Regulation
S-T, in lieu of filing this exhibit via EDGAR, this exhibit has been filed in
paper format with the Securities and Exchange Commission.
4
<PAGE> 6
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION
(a) The name and address of the issuer of the limited partnership
units which are subject to the Rule 13e-3 transaction and the
address of its principal executive offices is: Super 8 Motels
Northwest II, 7515 Terminal Street, S.W., Tumwater, Washington
98501.
(b) The relevant information set forth under the captions
"Summary--Required Vote" and "Beneficial Ownership" is
incorporated by reference herein.
(c) The relevant information set forth under the caption
"Summary--Market Information" is incorporated by reference
herein.
(d) The relevant information set forth under the caption
"Summary--Market Information" is incorporated by reference
herein.
(e) The relevant information set forth under the caption
"Summary--Market Information" is incorporated by reference
herein.
(f) The relevant information set forth under the caption
"Summary--Market Information" is incorporated by reference
herein.
ITEM 2. IDENTITY AND BACKGROUND
(a) The relevant information set forth under the caption
"Summary--The Buyer" is incorporated by reference herein.
(b) The relevant information set forth under the caption
"Summary--The Buyer" is incorporated by reference herein.
(d) The relevant information set forth under the captions
"Summary--The Buyer" and "Information About Northwest
I--Directors and Executive Officers of the Registrant" is
incorporated by reference herein.
(e) None of the relevant persons during the last five years has been
convicted in a criminal proceeding (excluding traffic violations
or similar misdemeanors).
(f) None of the relevant persons during the past five years was a
party to a civil proceeding of a judicial or administrative body
of competent jurisdiction resulting in a judgment, decree or
final order enjoining further violations of, or prohibiting
activities subject to, federal and state securities laws or
finding any violations of such laws.
ITEM 3. PAST CONTRACTS, TRANSACTIONS OR NEGOTIATIONS
(a)(1) The relevant information set forth under the caption "Special
Factors--Interests of Affiliates" is incorporated by reference
herein.
(a)(1) None; Not applicable.
(b) None; Not applicable.
5
<PAGE> 7
ITEM 4. TERMS OF THE TRANSACTION
(a) The relevant information set forth under the captions
"Summary--Merger Consideration" and "The Merger Agreement" is
incorporated by reference herein.
(b) None; Not applicable.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE
(a) The relevant information set forth under the caption "Special
Factors--Plans or Proposals of Issuer or Affiliate Following
Merger" is incorporated by reference herein.
(b) The relevant information set forth under the caption "Special
Factors--Plans or Proposals of Issuer or Affiliate Following
Merger" is incorporated by reference herein.
(c) The relevant information set forth under the captions "Special
Factors--Plans or Proposals of Issuer or Affiliate Following
Merger" and "Management and Operations of Northwest I Following
Merger" are incorporated by reference herein.
(d) The relevant information set forth under the caption "Special
Factors--Plans or Proposals of Issuer or Affiliate Following
Merger" is incorporated by reference herein.
(e) The relevant information set forth under the caption "Special
Factors--Plan or Proposals of Issuer or Affiliate Following
Merger" is incorporated by reference herein.
(f) The relevant information set forth under the caption
"Summary--Effective Date of Merger" is incorporated by reference
herein.
(g) The relevant information set forth under the caption
"Summary--Effective Date of Merger" is incorporated by reference
herein.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
(a) The relevant information set forth under the caption "Special
Factors--Source and Amount of Merger Consideration and Expenses"
is incorporated by reference herein.
(b) The relevant information set forth under the caption "Special
Factors--Source and Amount of Merger Consideration and Expenses"
is incorporated by reference herein.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS
(a) The relevant information set forth under the captions "Background
of the Transaction" and "Summary--Effect of the Merger" is
incorporated by reference herein.
(b) The relevant information set forth under the caption "Background
of the Transaction" is incorporated by reference herein.
(c) The relevant information set forth under the caption "Background
of the Transaction" is incorporated by reference herein.
(d) The relevant information set forth under the caption
"Summary--Effect of Merger" and "Material Federal Income Tax
Consequences" is incorporated by reference herein.
6
<PAGE> 8
ITEM 8. FAIRNESS OF THE TRANSACTION
(a) The relevant information set forth under the caption "Special
Factors--Fairness of the Transaction" is incorporated by
reference herein.
(b) The relevant information set forth under the caption "Special
Factors--Fairness of the Transaction" is incorporated by
reference herein.
(c) The relevant information set forth under the caption
"Summary--Required Vote by Unitholders" is incorporated by
reference herein.
(d) The relevant information set forth under the captions "Special
Factors--Conflict of Interest" and "Procedural Fairness" is
incorporated by reference herein.
(e) The relevant information set forth under the captions "Special
Factors--Conflict of Interest; Procedural Fairness" and "--
Fairness of the Transaction" is incorporated by reference herein.
(f) The relevant information set forth under the caption "Background
of the Merger--Attempted Sale to Unaffiliated Third Party" is
incorporated by reference herein.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS
(a) The relevant information set forth under the captions "Special
Factors--Business Valuation of Exvere"; "--Independent Appraisal
of Motel Properties by McKee and Shalka" "--Opinion of Financial
Advisors" and "Opinion of Financial Advisor--" is incorporated by
reference herein.
(b) The relevant information set forth under the captions "Special
Factors--Business Valuation of Exvere"; "--Independent Appraisal
of Motel Properties by McKee and Shalka" "--Opinion of Financial
Advisors" and "Opinion of Financial Advisor--" is incorporated by
reference herein.
(c) The relevant information set for under the captions "Special
Factors--Business Valuation of Exvere"; "--Independent Appraisal
of Motel Properties by McKee and Shalka" "--Opinion of Financial
Advisors" "Opinion of Financial Advisor--" is incorporated by
reference herein.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER
(a) The relevant information set forth under the caption "Summary --
Market Information" is incorporated by reference herein.
(b) The relevant information contained under the caption "Summary --
Market Information" is incorporated by reference herein.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE
ISSUER'S SECURITIES
None; Not applicable.
7
<PAGE> 9
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH
REGARD TO THE TRANSACTIONS
(a) The relevant information set forth under the caption "Summary --
Required Vote of Unit Holders; Beneficial Ownership" is
incorporated by reference herein.
(b) None; Not applicable.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION
(a) The relevant information set forth under the caption "Dissenters'
Rights of Appraisal" is incorporated by reference herein.
(b) The relevant information set forth under the caption "Special
Factors--Conflicts of Interest; Procedural Safeguards" is
incorporated by reference herein.
(c) Not applicable
ITEM 14. FINANCIAL INFORMATION.
(a) The relevant information set forth in the financial statements;
selected financial data; and book value per share is incorporated
by reference herein.
(b) Not applicable
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED
(a) The relevant information set forth under the captions "Special
Factors--Conflict of Interests; Procedural Fairness" and
"Background of the Merger" are incorporated by reference herein.
(b) The relevant information set forth under the caption
"Summary--Persons Making Solicitation" is incorporated by
reference herein
ITEM 16. ADDITIONAL INFORMATION
The relevant information set forth under the caption "Where You
Can Find More Information" is incorporated by reference herein.
In addition, the information set forth in Exhibit (d)(1)
consisting of the proxy statement of the registrant, is also
incorporated by reference herein.
8
<PAGE> 10
SIGNATURES
After due inquiry and to the best of our knowledge and belief, we
certify that the information set forth in this statement is true, complete and
correct.
Dated the 10th day of February, 1999 GERALD L. WHITCOMB, AN INDIVIDUAL
/s/ GERALD L. WHITCOMB
---------------------------------
Gerald L. Whitcomb
MARYANNE WHITCOMB, AN INDIVIDUAL
/s/ MARYANNE WHITCOMB
---------------------------------
Maryanne Whitcomb
COLUMBUS MOTEL PROPERTIES LLC
/s/ GERALD L. WHITCOMB
---------------------------------
Gerald L. Whitcomb,
Its Manager
9
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
99(a) Loan commitment letters from U.S. Bank and rate lock agreement
(incorporated by reference from Schedule 13E-3 filed by Super 8
Motels Northwest I, February 10, 1999, SEC File No. 5-54999)
99(b)(1)+ Exvere business valuation of Northwest II
99(b)(2)* McKee & Schalka appraisal of Portland motel property
99(b)(3)* McKee & Schalka appraisal of Bremerton motel property
99(b)(4)* McKee & Schalka appraisal of Yakima motel property
99(b)(5) Presentation of financial advisor, Ragen MacKenzie Incorporated
(incorporated by reference from Schedule 13E-3 filed by Super 8
Motels Northwest I, February 10, 1999, SEC File No. 5-54999)
99(b)(6)* Opinion of financial adviser, Ragen MacKenzie Incorporated
(included in Exhibit (d)(1))
99(c) None
99(d)(1)* Proxy statement of Northwest II (as amended)
99(e)(1)* Detailed statement of appraisal rights (included in Exhibit (d))
99(f) None
- ----------
* Filed herewith
+ Pursuant to the hardship exemption provided for in Rule 202 of
Regulation S-T, in lieu of filing this exhibit via EDGAR, this
exhibit has been filed in paper format with the Securities and
Exchange Commission.
</TABLE>
10
<PAGE> 1
EXHIBIT 99.(b)(2)
Appraisal of
SUPER 8 MOTEL
11011 NE Holman Street
Portland, Oregon
[PICTURE OF SUBJECT PROPERTY]
<PAGE> 2
APPRAISAL
OF
SUPER 8 MOTEL
11011 NE Holman Street
Portland, Oregon
AS OF:
January 1, 1999
AUTHORIZED BY:
Karl Schaffer
U.S. Bancorp Appraisal Division
Seattle, Washington
PREPARED BY:
E. Bates McKee, MAI
MCKEE & SCHALKA
Real Estate Appraisal Services & Consultants, Inc.
701 Fifth Avenue, Suite 6750
Seattle, Washington 98104
REFERENCE NO. 8220
<PAGE> 3
McKEE & SCHALKA
REAL ESTATE APPRAISAL SERVICES & CONSULTANTS, INC.
701 Fifth Avenue, Suite 6750, Seattle, Washington 98104
Telephone (206) 348-8909 Fax (206) 386-5777
December 29, 1998
Karl Schaffer
Senior Income Property Appraiser
U.S. Bancorp, Appraisal Division
1301 Fifth Avenue, Mezzanine Level
Seattle, Washington
NAME: PORTLAND SUPER 8 MOTEL
DESCRIPTION: 80-ROOM LIMITED SERVICE MOTEL
ADDRESS: 11011 NE HOLMAN STREET
MUNICIPALITY: PORTLAND, OREGON
REAL PROPERTY DESCRIPTION: MULTNOMAH COUNTY PARCEL NO. R-6433-0070, R6433-0170
OTHER PROPERTY DESCRIPTION: PERSONAL PROPERTY TAX ACCOUNT NUMBER P-090900600
MCKEE & SCHALKA 8220
REFERENCE NO.:
USBADW FILE NO.: A98-531
Dear Mr. Schaffer:
We have prepared the attached appraisal report for the subject property. The
subject is an 80-unit lodging facility which is located at 11011 NE Holman
Street in Portland, Oregon. The purpose of this appraisal is to estimate the
Market Value of the fee simple interest of the subject property. The definition
of Market Value used in this appraisal is found in the Appraisal Description of
the attached report.
<PAGE> 4
Transmittal Letter
Super 8 Motel, Portland, OR
McKee & Schalka Reference No.: 8220
December 29, 1998
Page 2
The accompanying complete appraisal report has been prepared in conformity with
the Uniform Standards of Professional Appraisal Practice (USPAP) and the
Appraisal Standards implemented by the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 (FIRREA). This appraisal has been prepared in
conformity with the requirements of the Code of Professional Ethics and the
Standards of Professional Appraisal Practice of the Appraisal Institute, and is
subject to the Assumptions, Certification & Limiting Conditions contained in
this report, as well as specific assumptions contained herein. This report has
also been prepared in accordance with the appraisal guidelines of U.S. Bancorp.
I am a Washington State Certified General Real Estate Appraiser (License No.
MC-KE-EE-B443RF), appraising in Oregon under Temporary Practice Permit No.
TNR0547.
I have personally inspected the subject property. Significant information and
assistance have been provided by other sources, including sources cited herein,
and by other associates of McKee & Schalka, Inc. As a result of our
investigation and analysis, our conclusion is:
<TABLE>
<CAPTION>
Effective Value
Description Valuation Date Conclusion
- ----------- -------------- ----------
<S> <C> <C>
Market Value - Fee Simple Estate 1/1/99 $5,300,000
</TABLE>
The above value estimate is commensurate with a reasonable marketing and
exposure time of one year. The market value includes furnishings, fixtures, and
equipment (F,F,&E), including both permanently affixed real estate, and personal
property. The contributory value of F,F,&E is estimated to be $160,000, which
includes personal property of $110,000.
Respectfully submitted,
E. Bates McKee, MAI
<PAGE> 5
CERTIFICATION, DISCLOSURE AND USE RESTRICTION
CERTIFICATION
I CERTIFY THAT, TO THE BEST OF MY KNOWLEDGE AND BELIEF:
o The statements of fact contained in this report are true and correct.
o The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are my personal,
unbiased professional analyses, opinions, and conclusions.
o I have no present or prospective interest in the property that as the
subject of this report, and I have no personal interest or bias with
respect to the parties involved.
o My compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the
amount of the value estimate, the attainment of a stipulated result, or
the occurrence of a subsequent event.
o My analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice.
o I have made a personal inspection of the property that is the subject of
this report.
o No one provided significant professional assistance to the person(s)
signing this report, with the exception of other associates of McKee &
Schalka, Inc.
o The reported analyses, opinions and conclusions were developed, and this
report has been prepared, in conformity with the requirements of the
Code of Professional Ethics and the Standards of Professional Appraisal
Practice of the Appraisal Institute.
o The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
o As of the date of this report, Mr. E. Bates McKee, MAI has completed the
requirements of the continuing education program of the Appraisal
Institute.
o The appraisal assignment was not based on a requested minimum valuation,
a specific valuation, or the approval of a loan.
RESTRICTION UPON DISCLOSURE & USE:
Disclosure of the contents of this appraisal report is governed by the By-Laws &
Regulations of the Appraisal Institute.
Neither all nor any part of the contents of this report (especially any
conclusions as to value, the identity of the appraiser or the firm with which
(s)he is connected, or any reference to the Appraisal Institute or to the MAI
designation) shall be disseminated to the public through advertising media,
public relations media, news media, sales media or any other public means of
communication without the prior written consent and approval of the undersigned.
No part of this report or any of the conclusions may be included in any offering
statement, memorandum, prospectus or registration without the prior written
consent of the appraiser. This appraisal is intended for use only by the client
identified in the Transmittal Letter, and may not be transmitted or communicated
to any other party without the specific written permission of McKee & Schalka,
Inc.
i
<PAGE> 6
- -------------------------------
Signature of Appraiser
ii
<PAGE> 7
GENERAL ASSUMPTIONS AND LIMITING CONDITIONS
The attached report may only be used or reviewed in its entirety. No individual
pages, portions, analyses or conclusions may be separated from the complete
report or verbally disseminated without transmittal of the entire report. The
report is intended solely for the review and use by the client identified in the
Transmittal Letter, and may not be transferred to any other party without the
specific written permission of McKee & Schalka, Inc. Certain aspects of the
report (including analysis methodology, spreadsheets, textual formatting and
content) are considered the exclusive intellectual property of McKee & Schalka,
Inc.
All rights are reserved.
The following General Assumptions and Limiting Conditions are supplemented by
additional specific assumptions and limiting conditions identified in the
attached report.
It is assumed that there are no hidden or unapparent conditions of the property,
subsoil, structures, or environment (including asbestos, formaldehyde, radon,
soil contamination, structural conditions, legal compliance including zoning and
Americans With Disabilities Act compliance, title or legal conditions, mineral
or other valuable conditions or rights, or unknown soils, hydrological, or
environmental factors) that render it more or less valuable. We have no
expertise in any of these areas, and we specifically counsel the client to
perform additional investigation by qualified experts. No responsibility is
assumed for such conditions or for arranging the studies that may be required to
discover them.
The liability of McKee & Schalka, Inc. and its employees is limited to the
client only, and only to the extent of the fee actually contracted for.
The value conclusions are the result of integration of the entire appraisal
process, including multiple methodologies, approaches and analyses. Any specific
errors or omissions may or may not change the value conclusions.
The appraiser is not required to give further consultation, testimony or
attendance in court by reason of this appraisal unless arrangements have been
previously made.
The information furnished by others is believed to be reliable, but no warranty
is given for its accuracy.
The forecasts, projections and estimates contained in this report are based on
current market conditions, anticipated short-term supply and demand factors, and
a stable economy. These forecasts are, therefore, subject to changes with future
conditions. The analyses and conclusions are valid only as of the date of
transmittal of the report.
The appraiser has made no survey of the property and assumes no responsibility
in connection with such matters. Any sketch or identified survey of the property
included in this report, is only for the purpose of assisting the reader to
visualize the property.
No responsibility is assumed for the legal description or for matters including
legal or title considerations. The property is appraised free and clear of any
or all liens or
iii
<PAGE> 8
encumbrances, unless otherwise stated. Title to the property is assumed to be
good and marketable.
Responsible ownership and competent management are assumed.
The allocation of total value to land, buildings, or any fractional part or
interest as shown in this report, is invalidated if used separately or in
conjunction with any other appraisal.
iv
<PAGE> 9
TABLE OF CONTENTS AND INDEX
[Not included]
v
<PAGE> 10
LISTS OF MAPS AND FIGURES
[Not included]
vi
<PAGE> 11
SUMMARY OF IMPORTANT CONCLUSIONS
<TABLE>
<S> <C>
NAME OF SUBJECT PROPERTY: SUPER 8 MOTEL - PORTLAND
ADDRESS: 11011 NE HOLMAN STREET
MUNICIPALITY: PORTLAND, OREGON
KING COUNTY PARCEL NOS: R-647333-0070 R-647333-0170 P-09090-0600
PROPERTY DESCRIPTION: 80-ROOM, 3-STORY LIMITED-SERVICE MOTEL
CONSTRUCTION: WOOD FRAME
SIZE: 31,915SF GBA
AGE: 1984
CURRENT STATUS: OPERATED AS FRANCHISE AFFILIATED SUPER 8 MOTEL
APPRAISER: E. BATES MCKEE, MAI
MCKEE & SCHALKA REFERENCE NO.: 8220
USBADW REFERENCE NO.: A98-531
EFFECTIVE DATE OF APPRAISAL: 1/1/99
DATE OF REPORT PREPARATION: 12/29/98
PROPERTY RIGHTS APPRAISED; FEE SIMPLE ESTATE
PURPOSE AND USE OF APPRAISAL: ESTIMATE MARKET VALUE FOR ASSET EVALUATION
TYPE OF APPRAISAL: COMPLETE
TYPE OF REPORT: SELF-CONTAINED
SIGNED CERTIFICATION: ATTACHED
ASSUMPTIONS AND LIMITATIONS: ATTACHED
SCOPE OF APPRAISAL: COMPREHENSIVE DATA COLLECTION; SALE
COMPARISON AND INCOME APPROACHES USED
HIGHEST AND BEST USE: CONTINUED MAINTENANCE AND OPERATION AS
FRANCHISE-AFFILIATED LODGING FACILITY
SALE COMPARISON APPROACH VALUE: $5,200,000
INCOME APPROACH VALUE: $5,330,000)
RECONCILED VALUE ESTIMATE: $5,300,000 ($66,250/ROOM))
</TABLE>
COMMENTS
The subject of this appraisal is the 80-room Super 8 Motel located Portland,
Oregon. This is a 3-story, wood frame, limited-service motel. The property was
constructed in 1984. It has been well maintained and managed. Typical of other
Super 8 properties the subject has fairly small rooms and limited common areas,
and a functional layout with an interior entrance configuration.
The improvements are located on a 3.43-acre site. The site is located on Holman
Street directly adjacent to both Interstate-205 and NE Airport Way at the
Portland Airport freeway interchange just east of the Airport at the northeast
comer of the Portland Metropolitan Area. This location has developed
substantially over the past decade and has experienced a significant increase in
new hotel supply. This includes 5
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new hotels built since 1994, with 2 other new properties currently under
construction in close proximity, to the subject property. The near-term future
will likely see occupancies decline somewhat for existing properties, and it is
evident that competition will be substantial. The subject benefits considerably
from its site, which is larger than needed for the primary building
improvements. The additional vacant land is used for airport parking, with hotel
guests offered free airport parking under the "Park and Fly" program. This
bolsters demand for the subject, which had an exceptionally high occupancy rate
of 82.6% in the last 12 months, at an average daily rate (ADR) of $59.27. We
have forecast 1999 occupancy for the subject at 79% with an ADR of $58, which
results in a decline in total rooms revenue because of the increasing
competition.
As the basis for the valuation of the property we used the Sale Comparison and
Income Approaches and did not use a Cost Approach. For an existing established
motel property of this size and age, purchasers are primarily interested in the
income characteristics and the market price for similar properties. For the Sale
Comparison Approach we reviewed a wide variety of hotel transactions in
Washington and Oregon, and used five for direct comparison with the subject. The
subject would be marketable if available for sale, and we have placed some
emphasis on the indications from this approach. The Income Approach is
considered compelling, based on detailed income and expense history for the
subject property over the past several years and a reasoned local and regional
market analysis. In the end, we gave consideration to both approaches in our
final value estimate.
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SUBJECT PHOTOGRAPHS
[photo here]
SUBJECT PROPERTY - PORTLAND SUPER 8 MOTEL.
ENTRANCE DRIVE FROM HOLMAN STREET WITH LONG-TERM AIRPORT
PARKING AREA.
[photo here]
LOBBY AND RECEPTION AREA.
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<PAGE> 14
[photo here]
TYPICAL GUEST ROOM BEFORE RENOVATION.
[photo here]
TYPICAL GUEST ROOM AFTER RENOVATION.
RENOVATION IS PLANNED FOR MOST ROOMS AND COMMON AREAS IN 1999.
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[photo here]
ONE-BEDROOM MANAGER'S APARTMENT UNIT (NOT CURRENTLY OCCUPIED).
[photo here]
ENTRANCE.
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<PAGE> 16
[photo here]
VIEW TO SOUTH FROM ENTRANCE, SHOWING LONG-TERM AIRPORT PARKING AREA, WITH VAN
SHUTTLE SERVICE TO THE AIRPORT.
[photo here]
EAST ENTRANCE DRIVE SHOWING INTERSTATE-205 INTERCHANGE TO WEST.
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APPRAISAL DESCRIPTION
IDENTITY OF PROPERTY
The subject is an existing 80-room lodging facility known as the Portland Super
8 Motel. It is located at 11011 NE Holman Street in Portland, Oregon.
LEGAL DESCRIPTION
We have not been provided with a title report for the subject property. The
property is legally described as Multnomah County tax lots R-64733-0070,
R-64733-0170, and personal property account #P-090900600. I assume that there
are no easements or unapparent title or legal considerations which affect the
value or utility of the subject site.
PURPOSE OF APPRAISAL
The purpose of this appraisal is to estimate the Market Value of the subject
property. The following is the definition of Market Value according to OCC
Regulation 12 CFR Part 34.42:
"Market Value means the most probable price which a property should
bring in a competitive and open market under all conditions requisite to
a fair sale, the buyer and seller each acting prudently and
knowledgeably, and assuming the price is not affected by undue stimulus.
Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under
conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and each acting
in what they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property
sold unaffected by special or creative financing or sales
concessions granted by anyone associated with the sale."
FUNCTION OF APPRAISAL
It is our understanding that the function of this appraisal is to assist in
decisions regarding financing and asset valuation of the property.
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<PAGE> 18
PROPERTY RIGHTS APPRAISED
This is an appraisal of the fee simple interest of the subject property.
UNAVAILABILITY OF INFORMATION
We have not been provided with an environmental report, title report, structural
inspection, report or a hydrologic or soils report. We are not expert in any of
these areas, and generally rely on the technical reports of qualified personnel.
We specifically assume that there are no unapparent conditions which affect the
value or utility of the property.
ADA COMPLIANCE
We have not been provided with any information regarding the compliance of the
subject property with the Americans With Disabilities Act (ADA). As a public
lodging facility, the property may be expected to meet increased standards for
access and other accommodation. ADA compliance standards are evolutionary, and
subject to legal and practical interpretation, and some future continued cost
and upgrade for the subject would be expected. We have considered these issues
in our valuation of the property. We are not experts in ADA compliance issues
and specifically assume that there are no unapparent conditions with regard to
ADA compliance which affect the value or utility of the property.
ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal is subject to the General Assumptions and Limiting Conditions
found at the beginning of this report, as well as specific assumptions noted
herein.
SCOPE OF APPRAISAL
This appraisal is not limited in scope, and uses both the Sale Comparison and
Income Approaches to value. The Cost Approach has not been employed in our
valuation process. Current purchasers of similar properties are primarily
interested in the income characteristics of the property, and focus on the
Income Approach and Sale Comparison Approach when determining an appropriate
purchase price. Also, the age of the improvements and subsequent renovation make
an exact estimation of accrued depreciation unreliable. Therefore the Cost
Approach has not been used, since it would not have had any bearing on the
reconciled market value for the property.
COMPETENCY
I am competent to appraise the subject property. I have considerable experience
in the analysis and valuation of lodging facilities throughout the region, and
have appraised other lodging facilities in the subject's market area. Please
refer to the Scope of Appraisal, the Appraiser's Qualifications and Experience
Data in the Addenda, and the research and presentation embodied in this report
for verification of competency.
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HISTORY AND CURRENT STATUS OF PROPERTY
The building improvements were constructed in 1984. The property has been owned
continuously and operated as a Super 8 Motel since the time of the original
construction. The subject was offered for sale in 1998, along with a portfolio
of about 25 other Super 8 properties located in Washington, Oregon and Alaska,
with an asking price of about $91 million. It is our understanding that several
parties expressed interest in the properties, with the highest offer at about
$81 million. This interest did not result in either transaction or indications
for individual properties, and the interested parties bidding on the portfolio
are different than the likely purchaser profile for the subject property
individually. The properties are not currently offered for sale, and we are not
aware of any current or pending purchase offers, listings, or agreements.
REASONABLE EXPOSURE TIME AND MARKETING TIME
The value conclusion in this report is as of the effective date of this
appraisal, and assumes that a reasonable exposure time has preceded that
effective date. Thus the value is consistent with expected transaction on that
effective date after prior marketing. Exposure time is the period of time that
would reasonably have preceded transaction of the property at the appraised
value on the date of appraisal. The reasonable marketing time discussed in this
section is that period which would be expected to be incurred to market the
property in the current environment as of the date of the appraisal report, with
the marketing to occur subsequently. Thus the value conclusion is not
necessarily the subsequent value that would be anticipated for transaction of
the property after the future marketing period.
It is our conclusion that the subject property would be marketable if available
for sale. The improvements are about 14 years in age, and appear to have been
well maintained. The subject is planned for a significant renovation to most of
the rooms and common areas in 1999, and should continue to be competitive within
its market segment for the foreseeable future. The quality and limited-service
orientation make it attractive to the owner-operator segment, who continue to be
active in the hotel market.
Regionally there continues to be significant sales activity for this property
type. Over the past several years the market activity of hotel properties
increased, as REITs and other entities had increased interest. More recently
this institutional interest declined over the last half-year. While interest
from this segment of purchasers declined, smaller income investors and owner
operators continue to be active.
On a single-property basis the subject property would be quite marketable.
Negative factors include new construction of competitive hotel properties in the
immediate and surrounding market, and a relatively slow rate of demand growth in
the last year, which will likely lead to a corresponding decrease in occupancy.
The subject, while having a proven income stream, is likely to experience a
decline in gross revenue. A positive factor is the good on-site parking
facilities, providing a guest amenity that is valuable and not typical of most
competing properties.
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<PAGE> 20
After consideration of these factors we have estimated a marketing and exposure
time of one year or less, and the value conclusion is consistent with that
estimate.
DATE OF INSPECTION
December 22, 1998
DATE OF APPRAISAL PREPARATION
December 29, 1998
EFFECTIVE DATE OF VALUE ESTIMATE
January 1, 1999
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NEIGHBORHOOD MAP
[Not shown]
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<PAGE> 22
NEIGHBORHOOD AND LODGING MARKET
REGIONAL OVERVIEW
The subject is near the Portland International Airport in the city, of Portland
Oregon. Portland is the largest city in Oregon and is located in Multnomah
County. The Portland Area is best described as the Portland PMSA, which includes
five Oregon Counties; (Clackamas, Multnomah, Washington, Yamhill, and Columbia)
and one in Washington (Clark). The populations as of July 1997 for Portland and
its PMSA are below. For a more in-depth discussion of the Portland area please
refer to the Portland Metropolitan Area Description located at the end of this
report.
<TABLE>
<S> <C>
City of Portland 508,500
Multomah County 639,000
Portland PMSA 1,779,200
</TABLE>
In the Portland PMSA population increased 69.2% between 1980 and 1990, and a
further 32.2% increase between 1990 and 1997. Population is forecast to increase
18.7% in the next five years. These exceptional and sustained growth levels have
largely fueled this rapidly expanding economy.
The unemployment rate for the Portland/Vancouver PMSA is as of November 1998 is
4.3%, .2% above the national average. This compares to the Portland/Vancouver
PMSA as of November 1997 which was 3.9%. This compares with the state of Oregon
at 5.4%, which is consistent with the historical trend of lower unemployment in
Portland relative to Oregon averages.
The Portland area has also experienced significant increases in median household
income. Average income in 1990 of $31,067 per family. This increased to about
$41,058 in 1997, a 32% rise over seven years, and 11% above the national
average. Median household income is forecast to increase an additional 19% in
the next five years, indicating continuing economic growth.
NEIGHBORHOOD OVERVIEW
Please refer to the neighborhood map on the facing page for visualization of the
location of the subject within this neighborhood. The subject is located in the
northeast area of the city of Portland. The subject is located at the southeast
corner of the Interstate 205/NE Airport Way Interchange. This location is about
two miles east of the Portland International Airport, and five miles northeast
of the Portland Central Business District. Please refer to the subject property,
photos, and the facing Neighborhood Map for better visualization of the subject
property's location and neighborhood.
The major industry in the subject neighborhood is the Portland International
Airport owned by the Port of Portland. The Port is in the midst of creating a
master plan for the
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Portland International Airport. This plan is going to guide development of the
Airport for the next twenty years. In 1996 the Airport had 12.6 million
passengers, 242,000 tons of air freight, and 310,000 operations. They have
estimated that in 2020 the Airport will have 29 million passengers, 823,000 tons
of air freight, and 505,000 aircraft operations. Creating the need for a master
plan.
Over the past five fiscal years (July-June) Portland International Airport has
seen substantial growth in both passenger and air freight activity. The chart
below shows activity from 1993 to 1998.
[Chart of airline activity not included]
As you can see over the 5 year period air passenger travel increased 38.5% and
air freight increased 47.5%. Both show substantial increase over the 5 year
period. The largest carriers as of October 1998 are; Alaska/Horizon (34.4%),
United Airlines (18.1%), and Delta (15.9%). Major carriers make up 55.2%,
National carriers with 23.8%, and regional carriers with 21%.
Recently the Port approved the PDX light rail project. This project will connect
the Airport to the existing Tri-Met light rail system. The project is going to
extend the rail 5.5 miles to the airport at a cost of $125 million. The project
is scheduled to be completed in the fall of 2001.
The largest arterial in the neighborhood is Interstate 205. The subject is
visible from 205 and the following is the average weekday crossings over the
last four years. As the chart shows the traffic counts have been substantially
increasing over the past four years.
[chart of traffic counts not included]
The subject is also greatly influenced by the conventioneers and tourists to the
Portland area. In 1997 the revenues from the Oregon Convention Center fell 17
percent from 1996 to 1997. Portland Oregon Visitors Association (POVA) credits
this loss to the lack of large meeting space. The convention center is still
active, but it primarily caters to the smaller regional
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PORTLAND AIRPORT HOTEL MARKET
[not included]
14
<PAGE> 25
conferences, not the larger higher income producing conventions. A planned
180,000sf additional exhibition, meeting and ballroom space could substantially
boost revenues generated by the center.
The immediate neighborhood surrounding the subject was essentially undeveloped
15 years ago when the subject property was constructed. The historical nature of
the neighborhood was low-lying and relatively undeveloped land along the
Columbia River, used primarily for agriculture for older, light-industrial uses.
The Columbia River borders this area to the north, and the entire corridor along
the Columbia River is completely diked and constantly pumped and drained to
provide the potential for development. Interstate 205, which is a major bypass
route for Interstate 5 through Portland, was completed about 20 years ago, and
considerably improved the access to the area. Access to the Portland central
business district is also quite direct via Interstate 84.
The area surrounding the subject property was annexed and slated for urban
renewal, with a long-term goal of providing additional employment. The area
along NE Airport Way, the major arterial which the subject fronts along, is the
primary commercial corridor that has been developed. The subject was one of the
first new developments in this area. Since then, numerous hotels, restaurants,
retail stores, commercial and office improvements have been constructed in the
immediate vicinity. The immediate surrounding uses include a major Thrifty car
rental facility with substantial long-term parking, and the new 205 Airport Way
Business Park which has just been completed to the southeast of the subject. A
new 94-room Sleep Inn hotel and has just started construction adjacent to the
east of the east entrance drive of the subject. Older surrounding uses are
primarily light industrial in nature. Other uses within close proximity along
Airport Way east of 1-205 include about seven other hotels as subsequently
described, a Shari's restaurant, a large tenant retail center, Burger King,
McDonald's, multi-tenant retail centers, and newer office and industrial
improvements. The subject has an excellent location within this neighborhood,
representing the comer of the I205/Airport Way interchange, and thus the closest
and most visible property to the Airport, with the other commercial development
extending to the east along airport way. However, the access to the subject is
indirect, requiring two right hand turns onto Holman Road.
Overall the subject has a strong location within this neighborhood. The direct
highway visibility and good access are positive factors for a lodging facility,
as is the proximity to numerous restaurants and other services. Also the
proximity to the Portland International Airport is a positive factor for the
subject.
The continued development of this area of Portland is expected.
OVERVIEW OF LODGING MARKET
The area lodging market is characterized by modem limited service properties,
particularly in the immediate vicinity of the subject. The subject Airport Way
submarket serves the airport, and most of the hotels have been built m just the
past several years.
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The figure on the facing page chronicles the history of construction in this
market. Only 280 rooms (including the
16
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HISTORY OF HOTEL/MARKET ROOM SALES
[Not included]
17
<PAGE> 28
subject) existed in 1990. Today that figure has nearly tripled to 798, and by
the Year 2000 there will be at least 1,143. The surrounding Columbia Corridor
submarket contains about 2,500 rooms and is also witnessing growth in supply,
while the Airport West market has about 2,000 rooms. The recent completion of
the Embassy Suites west along Airport Way near the airport is a significant
addition to the full-service market. The type of facility in the immediate
vicinity of the subject is relatively homogeneous, with limited service or
limited food service properties predominant.
HISTORY OF HOTEL/MOTEL ROOM SALES
The figure on the facing page summarizes the history of hotel and motel room
sales revenues for the city of Portland and Multnomah County over the last 12
years. The source of these figures is the State of Oregon's Hotel/Motel Tax
Revenue Reports. The individual annual figures show significant variation. This
is the result of numerous factors, including fluctuations in conventions,
tourism, and weather related factors. In addition, the figures reflect actual
room revenue tax collections from the facilities rather than tax obligations,
which sometimes results in individual variations due to delinquent tax revenue
collections.
As the figures show, the overall lodging market has shown increases over this
entire period, averaging about 8.6%/year. The average change over the last four
years has been 9% with a slight decline in the last two years to 8.8%.
These figures need to be viewed in the historical context of substantial
increases in supply over the past 5 years. As will be subsequently outlined,
five new hotels have opened since 1994, adding approximately 50% to the
competitive supply in this market. During this period the room revenue has
increased only about 9%, resulting in a substantial decline in revenue for
existing facilities. This is reflected both in declining occupancies in this
market, and in average daily rate (ADR) increases that have been more modest
than in most markets in the region. This market-wide decline in occupancy has
not been reflected at the subject. This is largely a result of the very
successful Park and Fly program in place at the subject. This program works
because of the relatively large site area at the subject and will be further
discussed in the Income Approach section of this appraisal. Still, the subject
will eventually be impacted by the new supply and overall flat revenue
statistics for this market.
Other indications of regional trends comes from a review of Trends in the Hotel
Industry, a publication by PKF Consulting most recently dated October 1998. This
survey, summarized on the facing page includes properties in both the Washington
and Oregon markets. The Oregon State and Suburban Portland lodging market had an
average occupancy of 66.5% and 68.3% for the first 10 months of 1998, which is
down about two percentage points from a year previously. The average daily room
rate increased from $79.50 to $80.37 in the Suburban Portland market over this
time frame. This increase was the result of the newer facilities coming on line.
The overall effect was a decline in average Revenue per Available Room (RevPar)
of 2.6% from the same period in 1997. Figures for Oregon State also showed
declines but on a smaller scale.
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In summary the subject submarket showed the most significant declines in RevPar
of any area of
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HOTEL ROOM REVENUE HISTORY IN THE PACIFIC NORTHWEST
[not included]
20
<PAGE> 31
Oregon State and also the region as a whole. This situation would be expected to
continue to decline as additional construction continues to come on line.
NEW SUPPLY
The most recent new supply in the subject market was the additions of the
Fairfield Inn and the Silver Cloud which added a total of 208 rooms in 1996.
There are a total of 244 rooms currently under construction. There are the
Hilton Gardens and the Sleep Inn both of which should be completed later this
year. In addition there are 101 rooms proposed for the Extended Stay America.
Given the relatively flat room revenue figures for Portland, further increases
in supply in the short to medium term are unlikely. Although some of the newer
properties appear to be performing well, (most notably Holiday Inn Express and
Oxford Suites), the average occupancy in this market has declined substantially.
Given the relatively stable demand segments and very modest historical ADR
increases, new construction does not appear feasible at this time, and this
situation is unlikely to change within the next few years.
NORTHWEST SUPER 8 STATISTICS
Please refer to the figures on the facing page which show the operating
statistics for 22 Washington and Oregon Super 8 properties under the same
management as the subject. The exhibit shows the occupancies, ADR, and RevPar
for the period Nov. 1997 - Oct. 1998, and also compares these with the previous
12 months. These chain-wide statistics show an average RevPar of $28.37 over the
past 12 months, which is down 1.1% over the previous figures. The average
chain-wide occupancy was 56.8% which is considerably less than the subjects
82.6% occupancy over this period. The ADR at the subject was also higher than
average at $59.27. This results in the highest RevPar in the chain at $48.93.
CONCLUSION AND FORECAST OF SUBJECT ROOM REVENUE
All of the indications show a very flat lodging market in Portland, with gradual
increases in demand and ADR, but declining RevPar for existing properties. This
has resulted from oversupply of new hotel rooms over the past several years,
which has resulted in declines in occupancies at existing facilities with
generally higher ADRs. It is expected that this trend will continue as new
supply continues to come on line.
Over the last year, the subject averaged 82.6% occupancy at an ADR of $58.92,
with a calculated RevPar of $48.64. For an 80-room limited service property
constructed 14 years ago, without elevators, a pool or complementary breakfast,
these figures are exceptional, and above economic levels. In particular, the
occupancy is anomalously high. The RevPar at this property is the highest of any
of the 23 Super 8 properties under the same management. Considering the likely
impact of new construction in this market, without substantial overall market
growth, these levels are not sustainable. Of the properties currently under
construction, the Sleep Inn
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WASHINGTON AND OREGON SUPER 8 MOTELS
1997-1998 OPERATING STATISTICS
[not included]
22
<PAGE> 33
nearly adjacent will be particularly competitive with the subject, both because
of its normally low rate structure combined with a new facility, and because of
its physical proximity. Potential guests coming along Airport Way or Holman will
be faced with a significant alternative. In any case, some aggressive
rate-cutting is already evident in this market, and more rooms will have a
negative effect on the market at-large. Although the subject is somewhat
buffered by being at the lower end of the Airport Way market, and by having the
amenable and cost-effective Park & Fly program, decline in both occupancy level
and room rate is likely in i999. Until the market stabilizes the level of
potential decline is uncertain.
FORECAST OF ADR AND OCCUPANCY
After considering the specific history at the subject property, supply and
demand forces within this market, evidence from other Super 8 motels, and
indications from the competitors, we have made the forecast of Year 1 ADR and
occupancy for the subject as follows; For the year 1999 we have forecast the
subject's ADR at $58.00. This represents modest decrease over the most recent 12
months figures. We have forecast occupancy for this time period at 79.0%. This
represents a moderate reduction from the current most recent 12 months
occupancy. This combination of factors results in a RevPar of $45.82, a decline
of about 6% from the last year. Some additional decline may be anticipated in
the next year also as the full impact of new construction is felt.
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SITE MAP
[not included]
24
<PAGE> 35
SITE DESCRIPTION
LAND AREA AND SHAPE Please refer to the Site Map on the facing
page. The subject property is a fairly
T-shaped parcel. Although the subject
property fronts along NE Airport Way to the
north, legal access is obtained from NE
Holman Street and 112th Avenue NE. Both of
these access points require turning from
Airport Way onto Holman Street about one
block southeast of the subject. The subject
property also fronts along the Interstate
205 right-of-way to the northwest, which has
a full interchange with NE Airport Way.
According to the Assessor records, the total
land area of the subject site is 3.43 acres
or 149,411sf. Of this, about half of the
area is directly associated with the hotel
improvements, while a large rectangular area
to the south and a smaller triangular area
to the east are used for long-term parking.
ACCESS & STREET FRONTAGE Valley Mall Boulevard, adjacent to the north
of the subject property, is a 3-lane major
arterial roadway. It has a full interchange
with Interstate 82, which is adjacent to the
east of the subject property. Primary access
to the subject is provided from Rudkin Road,
a 60' wide minor arterial located 200' west
of the subject. The 40'-wide paved access
easement area provides the direct access to
the subject site from Rudkin Road.
TOPOGRAPHY & SOIL CONDITIONS The subject site is level
and at grade with the surrounding streets.
It is currently developed with the existing
3-story motel building. We have not been
provided with a soils report for the subject
property. We assume that the sub-surface
soils are adequate to support the existing
improvements, and that there are no
unapparent drainage or soil problems.
ENVIRONMENTAL CONDITIONS We have not received any information
regarding environmental conditions at the
subject site. We are not experts in these
areas, and it is a specific assumption of
this report that there are no unusual
environmental conditions which materially
impact the value or utility of the property.
UTILITIES The subject property is fully serviced by
public utilities including water, sewer,
electricity, telephone and cable television.
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<PAGE> 36
ZONING According to the Assessor records, the
subject property is zoned GM and M-2 in the
City of Portland.
<TABLE>
<S> <C>
ASSESSMENT AND TAXES Land and Improvements $2,831,760
Personal Property: $129,930
----------
Total: $2,961,690
1998 Property Taxes: $60,316.99
Average Tax Rate: 2.0366%
SUMMARY The subject site is a fully functional
commercial site.
</TABLE>
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<PAGE> 37
SITE PLAN
[not included]
27
<PAGE> 38
IMPROVEMENTS DESCRIPTION
GENERAL DESCRIPTION
The following description of improvements is based on our inspection of the
subject improvements, as well as review of available plans and discussions with
the subject property owners and managers. The Site Plan on the facing page shows
the lay out of the improvements on the subject site. Please refer to the subject
photographs at the beginning of this report which also show these Improvements.
Copies of the available building plans are provided at the end of this section.
OPERATOR
The subject property is operated as a Super 8 Motel franchise.
GENERAL DESCRIPTION OF THE IMPROVEMENTS:
The Portland Super 8 Motel is a 80-room, 3-story, average-class motel. The
primary improvements were built in 1984. The gross building area is 31,915sf or
399sf/room. Typical of other Super 8 properties, the subject has fairly small
rooms and limited common areas, and a functional layout with an interior
entrance configuration. The property includes substantial excess parking area in
the south portion of the subject site with about 265 parking spaces total.
GUEST ROOMS
There are a total of 80 guest rooms. These rooms are divided between 44 doubles,
35 singles and one suite. Typical single rooms are about 12' x 22', with a total
room area of between 263sf and 301sf. Typical double rooms are about 12' x 26',
for a typical area of 312sf to 320sf. The average is about 295sf per room. am
additional 1-bedroom manager's apartment unit is situated on the top floor, and
is not currently occupied.
INTERNAL LAYOUT, PUBLIC CIRCULATION & FACILITIES
The motel building is three stories, with the lobby, registration area and
administrative offices at entrance level, between the ground level and the first
level. The upper floors are accessed via internal stairways on the east and west
ends of the buildings. The rooms are situated on either, side of the central
corridor on each floor, with the single rooms mostly on the south side, and the
doubles on the north side. Other public areas include a meeting room and guest
laundry facilities.
STRUCTURE
The foundation is a steel-reinforced concrete slab on matt and spread footings.
The building is wood frame.
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EXTERIOR WALLS
The exterior walls are 7/8" stucco, over 2' x 4' studs on 16" centers. Windows
are double-pane insulated glass.
INTERIOR WALLS & PARTITIONS
Interior walls are gypsum wallboard covered with thin-wall plaster. Part walls
consist of gypsum wallboard over RC channels, with batt insulation and thin-wall
plaster exterior.
FLOOR COVERINGS, CEILINGS & LIGHTING
Average-quality wall-to-wail carpet is the floor covering in the quest rooms and
public areas, including the lobby and registration area, administrative offices,
stairs and hallways. Vinyl flooring is the floor covering in the guest bath-
rooms, laundry room and other motel service areas. Ceilings are gypsum wall-
board with thin plaster covering in most areas. Lighting fixtures are generally
incandescent In the guest rooms, with both incandescent and fluorescent lighting
in the public areas.
ROOF
Tiled roof surface on a pitched deck.
DOORS & WINDOWS
The entrance doors are self-closing plate glass doors set in aluminum frames.
Interior doors are solid-core and hollow-core wood, with metal frames. Exterior
windows are double-pane glass in aluminum frames.
FIRE PROTECTION
Heat sensors connected to a central alarm system, with individual smoke
detectors in each guest room.
HEATING, VENTILATION & AIR-CONDITIONING
Individual through-wall air conditioning units in the guest rooms.
ROOM FURNISHINGS
Typical room furnishings include beds with frames and headboards, a straight-
back seat and an arm chair, a vanity unit, a color television set, fixed and
movable lights, art work, and an oak-framed mirror. The single rooms also
include a table. These furnishings are custom built, and appear to be attractive
and durable.
OTHER FEATURES
The subject improvements are generally of good quality and-attractive in
appearance. Although Super 8 Motels offer relatively low room rates and basic
amenities, compared
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with full-service motels and hotels, the quality of construction and detailed
amenities are superior to budget-class motels. The average guest room size of
the Portland Super 8 is about 295sf, somewhat larger than the 250sf typical for
a budget motel. Soundproofing is very, good with light- weight concrete floors,
and good soundproofing of party, walls. The extensive and secure excess paved
parking area is a substantial and desirable amenity in this market. The lack of
elevator or indoor pool are functional deficiencies for this property. Both the
building itself and the furnishing and fixtures are attractive in appearance and
should be durable over time.
RENOVATION AND CAPITAL IMPROVEMENT HISTORY
The subject improvements appear to be in fair condition and we are not aware of
any areas of deferred maintenance. Much of the furnishings and floor coverings
are dated and m need of replacement or modernization, and a substantial
renovation is scheduled for 1999, at a likely cost of about $200,000. We have
been provided with a summary, of expenditures on the property over the last four
years. The following table summarizes these amounts.
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1995 $42,745
1996 $36,887
1997 $28,854
1998 $2,649
--------
Total $101,135
--------
Per Room $1,264
</TABLE>
The subject also includes a 1996 Ford 12-passenger van with about 200,000 miles.
Based on our analysis of cost new and the information above, we have estimated
the contributory value of F,F&E at $160,000 or about $2,000/Room, including
5110,000 in personal property value.
EFFECTIVE AGE/REMAINING ECONOMIC LIFE
The average age of the subject is about 14 years which is consistent with our
conclusion of the effective age of the improvements. According to the Marshall
Valuation Service, the total useful life of the subject improvements would be
estimated at 35 years. Therefore, the remaining economic life is estimated at 21
years, although ongoing modernization will likely extend that period.
SUMMARY
The improvements consist of a Super 8 Motel with an average effective age of
about 14 years. The property has a fairly standard configuration for a
limited-service motel, with three floors of guest rooms on either side of a
central corridor. The property, is generally attractive in exterior appearance
and includes a large amount of parking, with about 180 spaces more than would be
required for the stand-alone hotel operation.
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Guest rooms have a standard configuration and moderately small sizes which are
typical for a property with this orientation. The property appears to be in good
condition for a motel of this age and has had significant recent expenditures on
rooms and common area maintenance. With ongoing maintenance, the property should
continue to be functional and competitive within its market segment.
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BLUEPRINT OF BASEMENT FLOOR PLAN
[not included]
32
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[1st Floor Plan -Architectural Drawing]
33
<PAGE> 44
[North Elevation/South Elevation
West Elevation/East Elevation Architectural Drawing]
34
<PAGE> 45
[Employee Wash Room/Office Cabinets/Typical Room HVAC Locations
Laundry Shelves/Lobby Area Plan/Laundry Plan-Architectural Drawing]
35
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Highest and Best Use
"Highest & Best Use" is defined by the Appraisal Institute as:
1) The reasonable and probable use that supports the highest present value
of vacant land or improved property, as defined, as of the date of the appraisal
2) The reasonably probable and legal use of land or sites as though vacant,
found to be physically possible, appropriately supported, financially feasible,
and that results in the highest present land value.
3) The most profitable use.
The concept of Highest and Best Use is based on the most profitable and valuable
use. The Highest and Best Use must meet four criteria: it must be physically
possible, legally permissible, financially feasible, and maximally productive.
Highest and Best Use As If Vacant and Unimproved
The subject site is a regularly shaped, 3.43-acre site which is relatively flat
and fully usable. It has a fairly unrestrictive zoning designation, and both the
physical characteristics and the zoning would allow a variety of uses. The
property is located in an established commercial area which is associated
primarily with the nearby Airport and Interstate-205 freeway interchange. There
are a wide variety of commercial and service-oriented establishments immediately
surrounding the subject, including family and fast-food restaurants, service
stations, stand-alone retail buildings and shopping centers, lodging facilities,
and other uses.
The size of the site would allow most forms of stand alone retail uses. Given
the specifics of the site, the highest and best use would be a use that benefits
most directly from the freeway exposure or airport area. This would include some
form of lodging facility, development or restaurant use. Both the size and
orientation of the site make it suitable for these types of uses. In addition,
there is ample evidence of both .types of uses in the immediate vicinity of the
subject.
After considering all of this evidence, it is our opinion that the highest and
best use for the subject property as if vacant and unimproved would be for
eventual development with retail or hotel improvements.
Highest and Best Use As Currently Improved
The site is currently improved with a 80-room, 3-story, limited-service lodging
facility. The effective age of this property is about 14 years with a
substantial 21 year estimated remaining useful life. The property is planned for
substantial upgrading of rooms and common areas in the near future, and is in
good condition.
Although upcoming additions in supply may result in reduced occupancy, the
property still has very strong operating statistics, and generates income
greatly in excess of the
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<PAGE> 47
current land value of the site. The property is fully functional in design, and
differs relatively little from newer limited-service facilities of this price
classification that have been recently constructed. The improvements are in
reasonably good condition with no major items of deferred maintenance noted.
With continued ongoing maintenance and periodic F,F,&E upgrades, the
improvements should continue to remain competitive within its market segment for
the foreseeable future.
Given these factors, it is our opinion that the highest and best use for the
subject property as currently improved is for continued maintenance and
operation as a franchise affiliated lodging facility.
37
<PAGE> 48
[Sale Comparison Photographs]
38
<PAGE> 49
[Sale Comparison Photographs - cont.]
39
<PAGE> 50
[Sale Comparison Photographs-cont.]
40
<PAGE> 51
[Sale Comparison Map]
41
<PAGE> 52
[Sale Comparison Summary-chart]
42
<PAGE> 53
Sale Comparison Approach
The Sale Comparison Approach uses analysis of sales of comparable improved
properties to derive units of comparison that are then used to indicate value
for the subject. Our search for sales was broad, including most major markets in
Oregon and Washington State. Our selection of comparisons included considerable
emphasis and understanding from the sales of properties we have previously
appraised. The primary units of comparison in this analysis are price per room,
price per square foot, and gross income multiplier. In addition, we have
analyzed the capitalization rates for these transactions, which will be used in
the subsequent Income Approach analysis.
Please refer to the exhibit on the facing page, which summarizes five relevant
transactions involving similar hotel properties. All of these transactions
occurred in 1997 or 1998, and all represent transactions of essentially limited
service motels. All are properties that bracket the subject in terms of size,
age, affiliation, and location characteristics. Photographs of these comparisons
and a map showing their location is found on the preceding pages, and additional
details regarding these transactions is included in the Addenda.
Sale Comparisons
Sale No. t is the American Motor Inn, an unaffiliated 51-room property at the
Western fringe of the Portland Metropolitan area. This 1985 property includes a
restaurant that was leased for five years just before the sale, and a
single-family residence. The analysis price has been adjusted down $500,000 to
account for these improvements, isolating just the limited service hotel rooms.
This analysis price of $2,110,000 (after adjustment) indicates physical
parameters of $41,373/Room, and $79/sf. This property does substantial corporate
business with the surrounding large companies, providing discounted rates for
longer stays and return business. Based on the reported occupancy rate of over
65% at an average daily rate out $42, this property, and had a revenue per
available room (RevPar) of about $30, which is considerably lower than the
subject property at $48.93. Essentially, the subject addresses a higher rate
market near the Portland airport, and has exceptionally high occupancy at over
80%. Thus the subject rooms should be more valuable than this comparison
property. Based on the reported income at or before sale, the Gross Income
Multiplier (GIM) is calculated at 3.8. Based on an estimated expense level of
55% excluding franchise fees or reserves, and some trending up of income to
provide a future forecast. The Net Operating Income divided Analysis Price than
indicates a Cap Rate of 12.0%. The subject property is physically superior to
this property, with better operating performance also, and is thus more
valuable.
Sale comparison No. 2 represents an offer for 2 Silver Cloud Inns, both located
in Portland. Please refer to the detailed data sheets for description of the two
properties individually. Collectively these properties comprised 183 rooms, in a
newly constructed and modem configuration, and with a relatively high average
area per room. The substantial offer of $16,200,000 was received within the last
two months. One of these properties is just on the other side of Airport Way
from the subject. These properties are
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<PAGE> 54
physically superior to subject property,, and had higher RevPar. The offer
indicates relatively high valuation of nearly $90,000/room, $159/sf, and a 4.5
GIM. The projected cap rate is about 10.4%. The subject is clearly inferior both
physically and in income characteristics to these properties, and downward
adjustment from these indications is appropriate.
Sale No. 3 is the Comfort Inn, situated at the north end of Vancouver near the
intersection of Interstate 205 and Interstate 5. This 58-room property is the
physically very similar to the subject, although was considerably newer at the
time of sale. It sold in June 1995 for $2,800,000, or about $48,000/room. The
property had a than lower financial performance than the subject, but was
physically superior. In general, the market has improved since that time, and
some upward adjustment is appropriate.
Sale No. 4 is the 89-room Best Western, located near the I-5 highway interchange
in Tumwater, Washington. This property was newer with a construction date of
1992, but otherwise physically the most similar to the subject property. It
recently transacted in June 1998 for just over $5 million, or about
$58,000/room. Although its income was slightly lower, the prospects for
increases in this market appear better than for the subject market, and only a
modest upward adjustment is indicated.
Sale No. 5 is the 103 room Best Western in Lynnwood, Washington, at the north
end of the Seattle Metropolitan Area. This older 1977 property sold in July 1997
for $7,200,000. However, it had considerable excess land, realistically valued
by the buyer and contributing $1,750,000 to the value. After downward adjustment
for this factor, the analysis price indicates a value of about $53,000/room, or
$101/sf. Because of the older property, and because of some vulnerability in the
market, the indicated capitalization rate is relatively high at 12.1%. Some
upward adjustment is indicated for the subject which is newer and has slightly
better financial performance.
Sale Comparison Approach Conclusions
The subject property is an older but relatively modem limited service property.
It has a well established income, which is likely to decline in the future
because of a relatively stagnant market and new construction. Positive factors
include the significant competitiveness it has relative to other nearby
properties because of the provision of on-site land used for Airport parking.
Negative factors include the fact that many of the nearby properties are newer
and more modem than the subject but have very, similar competitive rates, and
that the new 94-room Sleep Inn is now under construction nearly adjacent to the
subject and should be a substantial direct competitor. A purchaser of the
subject would be aware of these factors in establishing a price.
Most recent purchasers of limited service hotels have been individual
owner-operators, who may own one or several facilities. They often buy
properties based on the gross income characteristics, and subsequently
self-operate and manage the properties, sometimes with and sometimes without
franchise affiliation. Thus a motel property, represents an opportunity and a
business venture of a manageable scale. Individually, the subject is too small
to appeal to an institutional investor. Although the interest from
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<PAGE> 55
the institutional and REIT segments in purchasing hotels has diminished
substantially in the last year, other market interest in smaller lodging
properties has remained fairly strong resulting in a stable and active market
throughout 1998. The subject is relatively valuable at about $5 million, and is
at the top end of the owner-purchaser range. It may also appeal to an
experienced operator of multiple properties, both because of its good location
and relatively high value, but this segment is more cautious at this time and in
this kind of situation. Based or. all of this evidence we have concluded that
the subject would be marketable if available for sale.
The sale transactions bracket the property, in terms of physical
characteristics, market characteristics and income characteristics. Sale No. 1
appears anomalously low at $41,000/Room, while Sale 2 is anomalously high at
$88,000/Room. While these are both Portland properties, they represent opposite
ends of the spectrum for limited service properties in terms of location,
quality and financial performance, and purchaser profile. The subject should
fall near the middle of the range of these comparisons. The other three
properties all provide more consistent indications, ranging from $48,000/Room to
$58,000/Room. Although 3 and 4 are physically similar to the subject, the
subject has valuable additional land that generates revenue from parking and is
in a higher rate and more desirable market, and thus is more valuable than these
indications.
For many smaller properties purchasers talk about Gross Income Multipliers
(GIM), as they are most interested in the gross income characteristics. In
urbanized areas, newer limited service properties are purchased on a GIM of
about 4.2. Properties of about 10 years old may have a value of about 4.0 GIM,
while properties older than 15 or 20 years may have a GIM of 3.7 or less. Older
properties require a greater level of maintenance, and often require immediate
capital expenditure for deferred maintenance, and thus the gross income is than
less valuable than for a new property. Finally, in secondary non-urbanized
locations, the GIM may be reduced by .2-.5.
All of the sales provide some meaningful indications. All of these transactions
occurred in 1997 and 1998, and all are generally similar limited-service
facilities. In addition, we had good information regarding the income
characteristics at most of these properties, which .gives greater reliability
both to the market value conclusions and the indications for required
capitalization rates.
The sale comparisons indicates a value of about $65,000/room, or about
$5,200,000 in total. This is at the high end of the range of the indications on
a price/sf basis, at $163/sf, but this is reasonable considering the additional
revenue from the parking land and the efficient configuration from smaller
rooms. As a final check of reasonableness we have considered the GIM of 3.6
which this value conclusion represents. While the comparisons range from
3.6-4.5, we note that the other high-revenue older property in an urban location
(Sale 5) indicates 3.6, and this appears reasonable. In summary,, the value
indicated by the Sale Comparison Approach is $5,200,000.
Capitalization Rate
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<PAGE> 56
In the subsequent Income Approach analysis, the value has been estimated based
on a capitalization of forecast year 1 net operating income (NOI). The
capitalization rate expresses the relationship between the property's NOI and
sale price. For determining the appropriate capitalization rate for the subject
we have considered the indications from the sale comparisons as previously
described.
The appropriate capitalization rate to be applied to a specific property depends
on a wide variety of factors. These include the age of the property and expected
near-term future capital costs, which are not reflected in any one year's net
operating income. These rates are also affected by longer term income
characteristics relative to the actual or forecast income at the time of sale.
In addition, the required capitalization rate is strongly impacted by a
potential purchaser's perception of volatility or risk in the future income
characteristics, as well as the likely future marketability of the property.
For the subject, positive factors include the established income, good location,
good reputation and return visitation, and the parking land which makes the
otherwise higher than typical subject rates reasonable. Negative factors which
would tend to increase the required capitalization rate include the competitive
market with new facilities under construction, including a substantial potential
competitor next door, and the older age and somewhat less functional
configuration of the subject.
In specific terms, the sale comparisons have indicated capitalization rates in a
range from about 10.0% to 12.1%. The higher cap rate indications come from
properties that were older or in more vulnerable markets. After consideration of
all of these factors, we have estimated 11.5% as the appropriate capitalization
rate to be applied to the subject's income before reserves.
46
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[Rental Comparison Photographs]
47
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[Rental Comparison Photographs-cont.]
48
<PAGE> 59
[Rent Comparison Map]
49
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[Rental Comparisons-chart]
50
<PAGE> 61
Income Approach
The purpose of the Income Approach is to value an income property by analyzing
likely future income and expenses to the property. In this case we have employed
a Direct Capitalization Analysis, by dividing a annual forecast Year 1 net
operating income (NOI) by an appropriate capitalization rate.
We have relied on a variety of sources as the basis of the forecast of NOI,
including an analysis of the subject's historical income and expense. Please
refer to exhibits on the following pages, which summarize the detailed expenses
for the subject over the past two years, as well as a breakdown of the income on
a month-by-month basis from 1994 to the present. We have also specifically
compared the subject's operations with other properties in this market. We have
also used expense comparisons for forecasting individual expense items, which
are also summarized in an exhibit on a following page. Finally, we have
considered the broader supply and demand forces at work within this specific
lodging market and throughout the region. Please refer to the Lodging Market
section for a detailed discussion regarding the factors which influence room
sales, as well as historic and likely future trends in this area. Based on this
evidence we have made a forecast of income and individual expense items for the
subject property, which is found at the end of this section.
Please refer to the exhibit on the facing page. This shows the relevant details
regarding the four other properties we have used for direct comparison. These
include the two other competitive properties at the subject's interchange, as
well as two other Portland Airport facilities that provide "Park & Fly"
facilities. Photographs of these properties as well as a map showing their
location relative to the subject are found on the previous pages.
Rental Comparisons
Rental Comparisons 1 and 2 are both nationally affiliated properties in close
proximity to the subject. They are newer and more functional, but do not provide
any long term parking. There is some seasonality in this market,, and the rates
shown are the rates at the time of my survey in December 1998, with summer rates
typically $5-$10 higher. In general, this market appears to be characterized
with substantial discounting from the newer properties in the vicinity of the
subject, possibly due to the low season but also because of sluggish growth last
season and the pending new openings. Both the Fairfield and Comfort Suites are
new fully functional properties. The asking discounted rates below $60, in the
general vicinity of the subject rates, represent aggressive pricing.
Rental Comparison No. 3 is the Travelodge, on Sandy Boulevard at the next [-205
interchange south of the subject. This older commercial market also serves the
airport, representing the existing market before construction of the highway,
and this considerably older property is dearly dated and inferior to both the
subject and the other properties along Airport Way. In this case, the property
offers Park & Fly rates as with the subject, and thus is similar other than
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[Monthly Rooms Revenue History-Chart]
52
<PAGE> 63
its age and dated configuration and location. The asking rates range from
$45-$50, slightly below the subject. However the Park & Fly rate is higher at
$57 for 5 free days.
Rental Comparison 4 is one of the newest property in the Airport market, having
opened only a year ago. The Alderwood Inn is above typical for services, with
complementary full breakfast, and relatively spacious common areas including an
indoor pool. Discounted rates are currently $59. The Park and Fly facilities are
extensive, however the rate for up to 5 free days is $79. The $,59 rate is very
competitive, and highlights the current aggressive market.
Subject Room Rates
The subject property currently has rack or asking rates of $59.88 for a 1-person
single room, and $68.88 for a 2-person double room. The only standard discount
offered is the VIP plan, which results in a 10% discount off rack rates to a
rate of $53.98 single. Since enrolling in the VIP plan has a nominal cost that
is about commensurate with the discount the first time it is used, almost all
rooms are sold at the 10% discounted rates. Summer rates are traditionally
several dollars higher.
According to the manager, over 90% of rooms are sold to people using the Park &
Fly facilities. This typically return business segment would originate either in
Portland or elsewhere in the Pacific Northwest. Since Portland is an
international airport, the surrounding competing airports are SeaTac in Seattle,
and to the south in California, so the geographical draw to the airport is
extensive. Local parking is tight and rates have escalated, with the airport
offering about $10 for long term rates. Nearby the subject, Thrifty also offers
long term parking with van shuttle service, at rates of $6.95/day self-serve,
and $8.95/day valet. In summary, the subject parking facilities are significant,
increasing both room rates and occupancy. The subject effectively includes free
parking with a room sale, with over 5 days available to guests at $4.50/day.
Non-guests can also use the facilities for $7.50/day. At the time of my visit,
the parking facilities of about 165 spaces were virtually full, primarily from
guests. Thus the site may appear to have excess land, but it is my conclusion
that the long term parking in association with the hotel is the most financially
productive highest and best use for this !and. It provides considerable revenue
to the property, mainly in the form of increased occupancy and higher rates for
rooms sold to Park & Fly guests. The fact that the subject has the highest
occupancy rates in this market underscores the positive attributes of the
parking amenity, but also carries a risk of future loss in a more competitive
environment. Fortunately, local competition does not typically have extensive
parking facilities. It appears that the nearby Sleep Inn under construction will
have very limited parking. After considering this factor, the subject rates are
consistent with those offered by the nearby competitive properties, and the
subject rate structure appears reasonable and at market.
Monthly Rooms Revenue History
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The figures on the facing page indicate the average occupancy, average daily
rate, and revenue per available room on a month-by-month basis for the property
since January 1994. Below each
54
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[Income & Expense History-chart]
55
<PAGE> 66
table are the figures for the one-year period November 1997 through October 1998
as well as for the previous 12-month period. Over the last year, the subject
averaged 82.6% occupancy at an ADR of $58.92, with a calculated RevPar of
$48.64. For an 80-room listed service property constructed 14 years ago, without
elevators, a pool or complementary breakfast, these figures are exceptional, and
above economic levels. In particular, the occupancy is anomalously high. The
RevPar at this property is the highest of any of the 23 Super 8 properties under
the same management. Considering the likely impact of new construction in this
market, without substantial overall market growth, these levels are not
sustainable. Of the properties currently under construction, the Sleep Inn
nearly adjacent will be particularly competitive with the subject, both because
of its normally low rate structure combined with a new facility, and because of
its physical proximity. Potential guests coming along Airport Way or Holman will
be faced with a significant alternative. In any case, some aggressive
rate--cutting is already evident in this market, and more rooms will have a
negative effect on the market at-large. Although the subject is somewhat
buffered by being at the lower end of the Airport Way market, and by having the
amenable and cost-effective Park & Fly program, decline in both occupancy level
and room rate is likely in 1999. Until the market stabilizes the level of
potential decline is uncertain.
Forecast of ADR and Occupancy
Please refer to the Market Analysis, in which the broader supply and demand
forces and factors which influence room sales in this market are discussed.
After considering the specific history at the subject property, supply and
demand forces within this market, evidence from other Super 8 motels, and
indications from the competitors, we have made the forecast of Year 1 ADR and
occupancy for the subject as follows; For the year 1999 we have forecast the
subject's ADR at $58.00. This represents modest decrease over the most recent 12
months figures. We have forecast occupancy for this time period at 79.0%. This
represents a moderate reduction from the current most recent 12 months
occupancy. This combination of factors results in a RevPar of $45.82, a decline
of about 6% from the last year. Some additional decline may be anticipated in
the next year also as the full impact of new construction is felt.
Income and Expense Forecast
Please note the figures on the facing page which summarize the income and
expenses for the subject over the past two years. An exhibit on the following
page summarizes individual income and expense items for two other similar Super
8 motels, and an average for a survey of similar properties in the United States
in 1997. These properties bracket the subject in terms of ADR and occupancy, as
well as in terms of age and overall quality. Together, these indications and the
preceding discussion form the basis for our income and expense estimate for
1999.
The subject history is summarized from detailed accounting provided by
management. Expenses exclude interest, depreciation, and professional fees
(generally accounting and legal), which are related to ownership and not real
estate interests. The subject
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property is essentially owned and managed by a central organization that also
operates about 25 other Super 8 Motels
57
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[Expense Comparisons-chart]
58
<PAGE> 69
in the Northwest. Thus it is not only part of the Super 8 franchise chain, but
is also centrally operated and locally managed along with other properties.
Certain expense items, such as many administrative expenses, marketing, and
professional management are incurred off-site, and directly charged to the
subject property and to the other properties under the same management. This
allows for the good and cost-effective central administration, and quality
control of operations.
The subject history and the comparison properties are analyzed not only on total
dollars, but also on $/room, $/Room Sold, and % of Total Income. All of these
units of comparison are considered and used in our following forecast. As
previously discussed, we have forecast an ADR of $58.00 and a 79% occupancy,
which results in a 1999 rooms revenue forecast of $1,337,994. Telephone income
has been forecast at $0.30/room sold, while telephone expense has been estimated
at $0.60/room sold, for a loss for this operated department. Other Income
includes vending income, faxes, guest laundry, etc., and a substantial component
of parking revenue from long-term parking for non-guests, representing more than
5% of total income at a forecast of $3.60/room sold.
Rooms expenses accounts for cleaning, supplies and front desk labor. Although
this expense category is mostly variable with occupancy, larger properties are
more efficient in this category because of the fixed cost of front desk labor.
Also, some hotels account for on-site management and other labor in this
category instead of in Administrative and General, where we have accounted for
on-site management. These two expense categories should be viewed and analyzed
together for full understanding of operations. We have forecast Rooms expenses
at $2,700/room, or about $9.36/room sold. Administrative and General expenses
include on-site managers, credit card discounts, supplies, business taxes, and
direct reimbursement charges for offsite administration, training, hotel
accounting quality control and other charges. Some of these offsite expenses
relate to ownership accounting and would be expected to decline under generic
individual ownership. The level of quality, control and administrative
management for the subject is somewhat higher than typical. Although this
maintains the long-term viability, of the property, many purchasers would plan
on incurring less expense in the short term, and our forecast at 12.5% of total
income considers these issues. The combined total of Rooms and Administrative &
General appears reasonable and consistent with other properties. It should be
noted that the shuttle van requires an additional full-time person
around-the-clock, a labor expense not incurred for many other hotels.
Franchise fees are currently 5% of Rooms revenue. However, current fees for
Super 8 and other similar franchises are higher, and the rates at the subject
are "grandfathered" at a historically lower level. A new purchaser would recur a
total franchise fee of 8% of Rooms, which is our forecast. A strong franchise
affiliation is important in order to maintain market share in this competitive
lodging market. Much of the subject's room sales come from the central
reservations system, and the subject's strong name recognition and repeat
business are significant factors that would not be possible without such
affiliation. The forecast income implicitly assumes that such affiliation will
continue, and would be lower if this expense item were reduced or eliminated.
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<PAGE> 70
Marketing has been estimated at $350/room, or $28,000 in total. This is somewhat
higher than the recent historical expenses at the subject of less than
$25,000/year. Given the increased competition in this market, it is our opinion
that the subject will have to increase their marketing efforts in order to
prevent further erosion of a market share. Operations and Maintenance have been
estimated at $1,100/room. This is an item which varies considerably from
property to property and from year to year. This expense forecast assumes
ongoing maintenance on a stabilized basis, and accounts for the effective age of
the property and the current condition of the improvements. Because of the good
condition and recent renovation of the subject, a new purchaser may forecast
less maintenance in the near term, but this stabilized forecast is consistent
with a longer-term perspective. Energy and Utilities have been estimated at $675
/ room.
Management is forecast at 4.0% of effective gross income, or about 557,000
annually. This accounts for professional management on top of direct charges,
and is considered to be a typical level required for competent professional
management for a property of this size and complexity. Taxes for real and
personal property have been estimated based on the current tax assessment.
Insurance for property has been estimated at $150/room, or $12,000.
The sum total of this expense forecast is $814,798, or $10,185/room. This is
about 4% higher than the reported expenses for the property in the last 12
months. Overall, the expense ratio is about 57%, which is reasonable and typical
for similar properties.
Net Operating Income Before Land Lease
Please note the exhibit on the facing page, which summarizes the forecast of
income and expenses for the property as previously discussed. The Year i net
operating income, before land lease or reserves, is forecast at $613,111.
Capitalization Analysis - Fee Simple Estate
The anticipated net operating income is divided by a capitalization rate which
has been derived from an analysis of the sale comparisons. This rate as
previously derived in the Sale Comparison Approach is 11.5%. Applying this rate
to the forecast NOI results in an indicated Income Approach value of $5,330,000.
Replacement Reserves
Although net income from motel properties is often capitalized prior to
deductions for replacement reserves, reserves are an important factor in motel
ownership and requires careful consideration as it significantly impacts net
cash flow. Reserves are required to replace items with shorter lives than the
building itself. In the case of motels it relates primarily to the replacement
of the furnishings, fixtures, and equipment (F,F,&E), carpet and flooring. A
large portion of this takes the form of rooms furnishings which have a
relatively short economic life span. In order for facilities to remain
competitive, the economic life of these components would generally be considered
to be in the range of five to ten years. The remainder of the F,F,&E costs
involve items such as common area furnishings, front desk and administrative
equipment, pool and spa equipment, etc.
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These items generally have a longer economic life than the room furnishings, but
shorter than the building as a whole. Other required reserve items include roof
replacement, parking lot re-paving, and HVAC equipment. In consideration of
these factors we have estimated required replacement reserves at 3% of total
income, or $42,837 initially. Subtracting this figure from the forecast net
operating income would result in a net cash flow of $570,274 before land lease.
We note that based on the Income Approach value conclusion, the capitalization
rate after reserves have been deducted is 10.7%
Income Approach Conclusion
In conclusion, the value indicated for the leasehold estate of the subject
property, by the income approach is $5,330,000.
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Reconciliation and Final Value Estimate
The values indicated by the two approaches used in this report are as follows:
<TABLE>
<S> <C>
Sale Comparison Approach - Leasehold Estate $5,200,000
Income Approach - Leasehold Estate $5,330,000
</TABLE>
Reconciliation is the process of assigning different weight or emphasis to each
of the approaches to valuation used in the report to arrive at a final value
estimate. The primary considerations are the reliability of the data and the
applicability, of each method for valuing the particular property.
In this case we had fairly good information regarding the sales of numerous
lodging facilities to use for comparison. These included five sales of
limited-service properties that are generally similar physically to the subject.
All of these transactions occurred in 1997 or 1998 and no market conditions
adjustment was considered necessary. The sales resulted in a fairly wide range
in each of the units of comparison. After adjustment, the indications from this
approach are considered fairly compelling with the subject within the range
indicted by the comparisons. An additional adjustment to the Sale Comparison
Approach was required for the leasehold position of the subject. Overall, we
have given this approach significant weight in the final value conclusion. This
approach also provides indications of general marketability and required income
characteristics.
For lodging facilities, investors typically place a great deal of emphasis on
the income producing capabilities of the property. This is particularly true as
the properties get larger and the nature of likely purchasers tend to become
more institutional. In this instance the physical characteristics of the subject
would place it at the lower end of this spectrum with more likely desirability
to potential owner operators. We have excellent detailed information regarding
the subject's historical operating performance. This factor combined with
confidential information from other similar properties and analysis of the
broader supply and demand forces in this market results in a fairly reliable
forecast of future net operating income. This, combined with strong information
regarding required capitalization rates from the sale comparisons results in a
fairly reliable Income Approach value estimate as well. Because of the
reliability of the information considered in this approach as well as the
relevance of the approach to many potential purchasers of the property we have
placed a significant amount of weight on the indications of this approach in the
final value conclusion.
In the final analysis we believe that both approaches were relevant and
compelling, and have placed a considerable weight on the indications of each.
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<TABLE>
<CAPTION>
Description Effective Value
Valuation Date Conclusion
-------------- ----------
<S> <C> <C>
Current Market Value - Leasehold Estate 1/1/99 $5,200,000
</TABLE>
The above value estimate is commensurate with a reasonable marketing and
exposure time of one year. The market value includes furnishings, fixtures, and
equipment (F,F,&E), including both permanently affixed real estate, and personal
property. The contributory value of F,F,&E is estimated to be $160,000, which
includes personal property of $110,000.
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ADDENDA
Authorization Letter
Hotel Sale Comparison Details
Portland Metropolitan Area Description
Appraisers' Experience & Qualifications
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AUTHORIZATION LETTER
65
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[US Bank letterhead]
December 9, i998
F. Bates McKee, MAI
McKee and Schaika
701 Fifth Avenue, Suite 5750
Seattle, Wa. 98104
RE: Super 8 Motels
USBADW Files A98 529 through 534
Dear Mr. McKee,
This letter will confirm our telephone conversation in which you agreed to
prepare complete self-contained appraisal reports on the captioned properties.
These reports should comply with Regulation 12 CFR Part 34 of the Office of the
Comptroller of the Currency titled Real Estate Appraisals as revised in Federal
Register Vol. 59. No. 108, dated June 7, 199_, and must comply at a minimum to
the current Uniform Standards of Professional Appraisal Practice of the
Appraisal Standards Board, which the regulation adopts in full.
Please note that your timely responses to issues raised in the review process is
considered part of this appraisal assignment.
The subject property consists of existing Super 8 Motels located Federal Way,
Sea-Tac, Bremerton, and Yakima Washington and Portland, Oregon.
The purpose of appraisal is to estimate market value for mortgage lending
purposes.
Your report should provide tie following values of the subject's fee simple and
leasehold values as appropriate:
Market Value "as-is:"
A copy of this engagement letter must be included within the addenda of the
appraisal report. Please include the license or certification numbers of all
signatory appraisers on the letter of transmittal. Additionally, please state
the registration number of any appraisal assistants who provide significant
contribution to the analysis in the report.
If your appraisal report ;includes a Discounted Cash Flow model, please provide
the name of your program and include a copy of your computer disk as part of
your submission.
For additional subject property information please contact me following
individuals:
<TABLE>
<CAPTION>
Name Phone Number.
---- -------------
<S> <C> <C>
Property Background: Karl Schaffer 206-344-4551
Access Instructions Jerry Whitcomb/(Owner) 360-943-8000
</TABLE>
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You agreed to deliver the completed appraisal report by December 31, 1998 and
you estimated your fee not to exceed
Please inform me within five business days from the date of this letter if any
subject property information needed to complete the assignment is not available.
If you do not contact me within five business days, it will be assumed that you
hay. all the required subject property information needed.
The placement of this appraisal assignment was partially based on your agreed
delivery date. The Appraisal Division reserves the right to impose a penalty of
$100 per day for each business day the appraisal is late. This penalty may be
incurred unless you receive advance written authorization revising the delivery
date.
Your fee will be paid upon the satisfactory review of the submitted appraisal
report. If the appraisal report is cancelled at any time, you will be paid for
your services to date,
Please send 10 original copies of the appraisal report, along with your invoice
to rile address shown below:
U.S.BANCORP APPRAISAL DEPARTMENT
I301 Fifth Avenue, Mezzanine Level, WWH-411
Seattle, WA 98101
You are not authorized to release any information regarding the content or
conclusion of the appraisal report to anyone without prior written approval from
U.S. Bancorp.
Any modification of this agreement, or necessary, deviation, must be
specifically approved by the Appraisal Division.
As confirmation of receipt of this package and agreement with the aforementioned
terms, please sign below and return to my attention.
Sincerely,
/s/
- -------------------------------
Karl Schaffer
Senior Review Appraiser
U.S. BANCORP APPRAISAL DEPARTMENT
cc: Don Henry, WWH-784
Agreed and approved:
- ------------------------------- --------------
(Signature) (Date)
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[HOTEL SALE COMPARISON DETAILS]
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Hotel Sale Comparison Number: 1
Name: American Motor Inn - 3333 SW 198th
City: Aloha County: Washington State: OR
Location: North side of TV Highway west of Beaverton at the fringe of
the Portland Metropolitan area.
Legal Desc: Parcel No. R035956/R0357t16
Rooms: 51 Gross SF Area: 32,941
Age: 1985 Stories: 3
Description: Interior entrance average-class property, unaffiliated.
Property includes older house of 1,117sf, and restaurant that was leased for 5
years just before sale at modest rate. Estimated adjustment to hotel operation
only about $500,000 for these components.
Income Data: Occupancy rate 65%-68%, at A/DR of $42 = RevPar of about $30.
Much of the business is corporate with surrounding businesses. Purchased by
owner. Expenses estimated at 55% excluding franchise fee or reserves, income
trended up 5% for analysis of cap rate.
Document Price: $2,610,000 Analysis Price: $2,110,000
Date: 02-27-98 Document No.: 98-019285
Buyer: American Hospitality Investments, Inc.
Seller: Hong Kyoo & Ock Kim
Source: Various
Sales Data: Cash equivalent
Per Room: $41,373 Per sf GBA: $79.23
Cap. Rate: 12.0% EGIM: 3.8
Remarks: Price/sf includes all buildings.
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Hotel Sale Comparison Number: 2
Name: Silver Cloud Inns - 1949 NW 24th & 11815 NE Glenn Widing Dr.
City: Portland County: Multnomah State: OR
Location: 1 mile NW of CBD in commercial neighborhood, and 1 mile E of
Airport in developing commercial zone near 1-205.
Legal Desc: Metes and Bounds on file
Rooms: 183 Gross SF Area: 101,999
Age: 1992 & 1996 Stories: 4
Description: 2 properties: 3-story wood frame interior entrance with
structured parking built in 1992 with 81 Rooms, and 4-story interior entrance
built in 1996 with 102 rooms and indoor pool. Excellent condition and
appearance.
Income Data: Avg. 76.4% at $70.36 ADR = Revpar of $53.75. Misc. income with
estimated 60% expenses including 7% professional management and
franchise/affiliation fee, no reserves. Trended forward 5% for cap. rate
analysis.
Document Price: $16,200,000 Analysis Price: $16,200,000
Date: 10-15-98 Document No: Offer
Buyer: Confidential
Seller: Silver Cloud
Source: Owner and Broker
Sales Data: Properties were offered for sale for higher price. refused
offer.
Per Room: $88,525 Per sf GBA: $158.83
Cap. Rate: 10.4% EGIM: 4.51
Remarks: Withdrawn from market.
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Hotel Sale Comparison Number: 3
Name: Comfort Inn - 13207 NE 20th Ave.
City: Vancouver County: Clark State: WA 1 block west of I-5 at
I-5/I-205 freeway interchange
Legal Desc: Map 3NIE26-NE T.L.147
Rooms: 58 Gross SF Area: 33,364
Age: 1990 Stories: 2
Description: Newer wood frame 2 story motel. Average quality construction,
fairly basic room furnishings. Amenities include indoor pool and spa. Good
location near freeway interchange, but no direct freeway visibility.
Improvements in good condition at time of sale.
Income Data: Room rates at time of sale $45.00 single $60.00 double in
winter; $52.00 single $65.00 double summer. 1994 occupancy 68%, at estimated
A/DR of about $49.00.
Document Price: $2,800,000 Analysis Price: $2,800,000
Date: 06-05-95 Document No: 950606-0103
Buyer: Mahalaxmi, Inc.
Seller: Sita Ram LLC.
Source: James Brown & Assoc. (503) 363-5864
Sales Data: Sold shortly after achieving stabilized occupancy in 1995.
Purchased by owner-operator.
Per Room: $48,276 Per sf GBA: $83.92
Cap. Rate: 11.4% EGIM: 3.95
Remarks:
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Hotel Sale Comparison Number: 4
Name: Best Western Tumwater - 5188 Capitol Blvd
City: Tumwater County: Thurston State: WA
Location: Located on the east side of Interstate-5 about two miles south
of the Olympia CBD.
Legal Desc: Thurston Co APN 0908005300 and personal property account no.
990017339
Rooms: 89 Gross SF Area: 42,900
Age: 1992 Stories: 2
Description: Z-shaped, 2-story, wood frame, limited service lodging
facility. There are 63 singles, 20 doubles, and 3 handicapped rooms and three
suites. The rooms have an average area of about 341sf. Amenities include a
meeting room, fairly large lobby, exercise room and spa, and laundry areas.
Interior entrance configuration. Parking is provided for 85 vehicles. The site
is 85,378sf.
Income Data: Reported 65% occupancy at ADR of $58 in year prior to sale.
RevPar calculated at $37.70.
Document Price: $5,050,000 Analysis Price: $5,150,000
Date: 06-30-98 Document No: 2605370
Buyer: Yim Sang Kil/Chan Sook
Seller: Bill An
Source: Bill An
Sales Data: The property was not marketed for sale when the owner was
approached by the purchaser. All cash sale. At the time of sale, the property
had a reported 65% occupancy rate over the prior year and an average daily rate
of $58, indicating RevPar of $37.70. Following Cap. Rate based on assumed 5%
growth and 60% Expense ratio.
Per Room: $57,865 Per sf GBA: $120.05
Cap. Rate: 10.0% EGIM: 4.21
Remarks:
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Hotel Sale Comparison Number: 5
Name: Best Western Landmark Hotel - 4300 200th St. SW
City: Lynnwood County: King State: WA
Location: 1 block west of I-5 at 44th St freeway interchange in Lynnwood
Legal Desc: APN #3726-007-021-0601, 022-0105, 023-0005
Rooms: 103 Gross SF Area: 54,144
Age: 1977 Stories: 5
Description: 5 story concrete hotel with interior entrance configuration.
Also includes restaurant, lounge, extensive meeting space. Guest rooms in
average condition at time of sale.
Income Data: 1996 A/DR $60.48 at 66.4% occupancy. Total 1996 revenue
$1,646,000, reported NOI including 3.5% management fee prior to reserves was
$726,890.
Document Price: $7,200,000 Analysis Price: $5,450,000
Date: 07-17-97 Document No: 97071-70338
Buyer: Sunstone Hotel Investors
Seller: Markland Hotel Inc.
Source: Craig Schaefer, seller
Sales Data: Buyer intends to demolish 20,000sf of meeting space (excluded
from GBA), which will result in about 3.4 acres of excess land
on site. Buyer intends to construct 150 room Courtyard by
Marriott Hotel, and placed a value on this site of $2,000,000.
After consideration of demolition costs we have estimated
current contributory value of $1,750,000, which is the
equivalent of about $12.00/sf of land area, or $11,666/room.
Per Room: $52,913 Per sf GBA: $100.66
Cap. Rate: 10.1% EGIM: 3.5
Remarks: Restaurant and lounge had not been profitable historically,
and were shut down subsequent to transaction. Estimate of achievable NOI after
removal of meeting space is $656,890, which results in capitalization rate after
exclusion of contributory land value of 12.1%.
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<PAGE> 84
PORTLAND AREA DESCRIPTION
74
<PAGE> 85
[Area Map]
75
<PAGE> 86
Between 1996 and 1997, population increased at a rate of 1.9 percent from
1,746,800 in 1996 to 1,779,200 in 1997. The following chart tabulates population
for the Portland PMSA and Oregon as of 1980, 1990, 1997, and the projected
population for the year 2000.
[Portland PMSA Population-chart]
[Median Household Income-chart]
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<PAGE> 87
Portland Metropolitan Area Description
The subject property is located within the Portland Metropolitan Area. This
Metropolitan Area is comprised of five counties centered around the Portland,
Oregon, Central Business District (CBD). The Columbia River separates the states
of Washington and Oregon, and separates Clark County from the rest of the
metropolitan area. The population history of the six counties making up the
Metropolitan Area is summarized on the facing page. This table indicates a 69.2%
population increase between 1980 and 1990, and a further 32.2% increase between
1990 and 1997. Population is forecast to increase a further 18.7% in the next
five years. These exceptional and sustained growth levels have largely fueled
this rapidly expanding economy.
Multnomah County (where Portland is located) has experienced relatively little
population growth, whereas the other four suburban Portland counties have
experienced substantial population growth. The local and national recession in
the early 1980s resulted in essentially flat population figures from 1980 to
1983. In the mid-1980s, the metropolitan population began to grow once more,
with the growth rate accelerating at the end of the decade. Since 1990, this
area has continued to show strong growth figures, with an increase of about 6.0%
from 19901992, and a further 6.7% from 1992-1995. The majority of this growth
occurred in the outlying areas, with Clark County and Washington County
experiencing the majority of the increases. This represents in large part the
expansion of suburban communities located within reasonable commuting times from
the major employment centers.
The Portland area has also experienced significant increases in median household
income. Please refer to the table on the facing page, which indicates an average
income in 1990 of $31,067 per family. This increased to about $41,058 in 1997, a
32% rise over seven years, and 11% above the national average. Median household
income is forecast to increase an additional 19% in the next five years,
indicating continuing economic growth.
Metropolitan Area Employment
The Portland/Vancouver PMSA is comprised of five Oregon counties of Clackamas,
Columbia, Multnomah, Washington, and Yamhill in Oregon and Clark in Washington.
From 1995 to 1996, jobs in the combined areas increased 30,600, and an
additional 38,400 from 1996 to 1997. Job growth has averaged 4.5% for the last
three years. Employment growth is forecast to be a more modest 2% to 2.5% during
1998.
The unemployment rate for the Portland/Vancouver PMSA is as of November 1998 is
4.3%, .2% above the national average. This compares to the Portland/Vancouver
PMSA as of November 1997 was 3.9%. This compares with the state of Oregon at
5.4%, which is consistent with the historical trend of lower unemployment in
Portland relative to Oregon averages.
At the end of this section is a list of the Portland Metro Area Top 25
Employers. Portland has a relatively diversified economy, with no single
employment sector dominating the
77
<PAGE> 88
local economy. Services and miscellaneous and Wholesale and retail trade make up
over half of the jobs in the Portland Metropolitan area. Natural resources
(including lumber, other wood
78
<PAGE> 89
[Population & Income - Population Trends Chart]
79
<PAGE> 90
[Population and Income-chart cont.]
80
<PAGE> 91
products, and metals) have historically played an important part in Portland's
economy, but have been in decline over the past decade. This has been replaced
to a great extent by an increase in manufacturing, particularly in the high-tech
sector. The majority of this growth has occurred in the areas surrounding
Beaverton and Hillsboro, with large companies such as Nike, Tektronix, and Intel
located here, along with an increasing number of other high-tech and spinoff
companies. Over the past decade Portland has seen a large growth in the High
Technology section of employment. As of July 1998 Portland reported over 61,000
High Tech jobs in the Metropolitan area. There has been a 55% increase in High
Tech Jobs since 1990. More than 1,200 high-tech companies are located in the
Portland PMSA. Companies have been attracted to the area by the relatively clean
"livability" of Portland, the proximity to recreation, fairly low wages, and
educated workforce.
Other sectors which have shown strong growth include service industries,
construction, finance, and international trade. The Port of Portland is one of
the largest shipping port on the West Coast, and has seen relatively rapid
expansion of this sector over the past decade.
Summary
The Portland/Vancouver PMSA includes about 1.85 million residents, and is by far
the largest metropolitan area in Oregon. After a period of stagnation in the
early 1980's, Portland has experienced substantial economic growth, median
income growth, and population increases. As with many cities, the local economy
has gradually shifted away from reliance on resource-based industries, and is
now relatively diversified. High-technology firms have an expanding presence in
this area, and are attracted by the quality of life and of the workforce. This
trend should continue, as should increases in other sectors such as trade,
services, and tourism. We would expect continued net in-migration to the
Portland area, and continued moderate economic expansion in the future.
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<PAGE> 92
Research Update
Trends and News
[Sidebar]
A Biannual Publication of the Portland Oregon Visitors Association
FA report released in June by CIC Research and Dean Runyen Associates indicates
that the economic impact of the Oregon Convention Center (OCC) fell in 1997 to
$312 million, down 17 percent from 1996. The decrease in economic impact - which
occurred despite a rise in attendance and a high occupancy rate - can be
attributed to the types of groups using the facility for their events. As space
limitations force many national and regional conventions and trade shows -
events that produce the highest per capita impact on the region - to seek
roomier exhibition hails, smaller meetings and community events are filling the
void. "The major national, regional and international groups that once booked
the OCC have grown and are looking for larger venues to hold their events," said
Michael C. Smith. POVA's vice president of sales. "Our inability at this time to
grow with these groups lost us more than $35 million worth of business for 1998
alone - $236 million since I990. This has created a need to book the center more
often with smaller statewide meetings and locally oriented consumer shows." A
plan to expand OCC by an additional 180,000 square feet of exhibit, meeting and
ballroom space could substantially boost revenues generated by the center. Added
space would allow the facility to book the larger international, national and
regional meetings that provide the biggest economic return for the meeting;
additional space would also enable OCC to host two smaller meetings at the same
time. The funding mechanism to pay for the expansion will be offered to area
voters on the November ballot (Ballot Measure 26-69).
For the first six months of !998, PKF Consulting reports a 7.2 percent decline
in occupancy rates for downtown Portland hotels and a 4.1 percent decline for
suburban properties. In its June issue of Trends in the Hotel Industry, PKF
writes: "The first six months of 1998 brought decreases in room occupancy to
many of the markets analyzed in this report. caused primarily by the opening of
new hotels and motels. Most of these new additions to supply are limited service
or extended stay properties which entered the markets during 1997 and early
1998. While lodging demand generally continued to increase, the stronger
increases in supply caused statewide over-all occupancy to decrease by 0.6
percent in Washington, and by 4.6 percent in Oregon. Boise, Idaho average
occupancy decreased by 3.1 percent as compared to the same six-month period in
1997,"
in the July 28 issue of Travel Industry Indicators, Miami-based analyst James V.
Cammisa. Jr, reports that domestic trip volume rose an estimated 2.4 percent in
the first six months of the year. "Disappointment exists among many who had
anticipated better industry performance, particularly in a period of economic
boom." Cammisa writes. "But it should be kept in mind that the gains in 1998
follow three consecutive years of increases. Over the 1995-97 period. domestic
trip volume increased by an estimated
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<PAGE> 93
10.3 percent: international. 14.8 percent. Another factor is that while in a
strong economy consumers may have more money to spend for travel, their leisure
time does not increase proportionately. Much of the gains must therefore come
from per trip spending increases."
The August issue of Smith Travel Research's Lodging' Outlook states that "the
disparity between changes in supply and demand is expected to continue through
the balance of 1998 and. therefore, room occupancy for the year is expected to
be below the level of 1997." Among the other analysis provided by Smith Travel
Research: "Room occupancy is expected to continue to decline and we expect some
operators to have ' difficulty obtaining higher rates. No wide-spread
discounting is expected yet, but there are a great many new hotels in the
pipeline that will come on stream in the next few years. The strategies needed
to survive and grow in the months ahead will be severely tested."
The August issue of Association Meetings features the publication's annual
"Trend Report." which announces the results of the magazine's survey of
subscribers, who include trade and association executives. The report states
that "nearly half of the respondents reported an increase in attendance at their
largest annual event" and that "47.8 percent said their trade show square
footage had increased in i997." Among the other findings: Albuquerque was the
most popular "second-tier" city that readers were considering or had booked for
an upcoming meeting. Other second-tier cities mentioned by respondents included
Charlotte, Cincinnati, Cleveland. Minneapolis. San Diego and Washington, D.C.
According to the Travel Industry Association of America (TIA), weekend trips by
Americans increased by 70 percent between i986 and 1996 and now account for more
than half of all U.S. travel. By comparison, non-weekend travel increased by
only 15 percent during the same period. TIA also reports that six million
Travelers booked trips online in 1997 and the percentage of travelers who use
on-line services and/or the Internet for travel plans or reservations increased
from 11 percent in t996 to 28 percent in 1997.
A recent study completed for the Portland Oregon Visitors .Association by Dean
Runyen Associates provides new estimates of visitor spending in the Tri-county
area. The study compares the average annual expenditures of four groups:
out-of-state business travelers, out-of-state leisure travelers, in-state
business travelers and in-state leisure travelers. The study estimates that
out-of-state business travelers account for 28 percent of all spending and 24
percent of all trips: out-of-state leisure travelers account for 61 percent of
all spending and 58 percent of all rips: in-state business travelers account for
5 percent of all spending and 6 percent of all trips: and in-state leisure
travelers account for 6 percent of all spending and 13 percent of all trips.
(Leisure travel is defined as vacation or pleasure travel and visits with
friends and relatives. Business travel is defined as travel for the primary
purpose of attending business meetings, conferences and conventions, as well as
travel that is combined with pleasure or visits with friends and relatives.) The
study excluded air fares and daytrips.
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<PAGE> 94
A new aviation pact between the United States and Japan will nearly double the
number of flights linking Portland and Japan. Delta Air Lines' new
Portland-based nonstop flights to Fukuoka will begin Oct. 29, 1998; nonstop
flights to Osaka will begin June 1, 1999. Once the new routes are opened.
Portland will offer more nonstop flights to more cities in Japan than any other
U.S. mainland city.
84
<PAGE> 95
[The Convention Market - Chart]
85
<PAGE> 96
[Visitor Indicators - Chart]
86
<PAGE> 97
[Visitor Indicators- chart cont.]
87
<PAGE> 98
[Lodging - chart]
88
<PAGE> 99
[Lodging - chart - cont.]
89
<PAGE> 100
[Lodging - chart - cont.]
[Portland International Airport - chart]
90
<PAGE> 101
[APPRAISERS' EXPERIENCE & QUALIFICATIONS]
91
<PAGE> 102
McKee & Schalka
REAL ESTATE APPRAISAL SERVICES & CONSULTANTS, INC.
701 Fifth Avenue, Suite 6750, Seattle, Washington 98104
Telephone (206) 343-8909 Fax (206) 386-5777
EXPERIENCE & QUALIFICATIONS
E. BATES McKEE, MAI
Mr. McKee graduated from the Massachusetts Institute of Technology in Cambridge,
Massachusetts, in 1979. He received a Bachelor of Science Degree in Geology,
with a Minor in Writing. He additionally completed the O-Degree program in
Geology at Edinburgh University, Scotland, in 1978.
Mr. McKee received the MAI (Member of Appraisal Institute designation in 1988.
Mr. McKee founded the firm of McKee & Schalka in 1990. McKee & Schalka is a
comprehensive commercial appraisal company currently employing ten professional
appraisers. Mr. McKee previously joined the Seattle office of Shorett & Riely as
a commercial appraiser in 1984. In 1989 he co-founded and managed the Shorett &
Riely office in Bellevue, Washington.
Mr. McKee was previously employed as a Geologist with Roger Lowe Associates,
Bellevue, Washington, from 1979 to 1980. His work included site evaluation of
geologic and hydrologic conditions and hazards, economic feasibility analysis,
and construction inspection. Mr. McKee was employed as an investment manager and
analyst from 1981 to 1983. During this time he authored Optival, a computer
program for analyzing stock options. Mr. McKee was subsequently employed as an
investment software designer with Expert Systems, Inc., Redmond, Washington, in
1983. This position entailed design of software for analysis of real estate,
stocks, bonds, options, annuities and insurance.
Mr. McKee is a Certified General Real Estate Appraiser (Washington State
Certificate No. 270-11 MCKE-EE-B443RF). Mr. McKee has also completed the
requirements of the continuing education program of the Appraisal Institute. In
his appraisal experience, Mr. McKee has appraised and analyzed a wide variety of
commercial property types, and provided critical consultation and litigation
services to a diversified range of clients.
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<PAGE> 1
EXHIBIT 99.(b)(3)
APPRAISAL OF
Super 8 Motel
5068 KITSAP WAY
BREMERTON, WASHINGTON
[PHOTOGRAPH]
-------------------------
McKee & Schalka
REAL ESTATE APPRAISAL SERVICES & CONSULTANTS, INC.
1
<PAGE> 2
U.S. BANCORP APPRAISAL DIVISION- WA
1301 FIFTH AVENUE, MEZZANINE LEVEL, WWH 411
SEATTLE, WA 98101
PH: (206)344-4510
FAX: (206)344-4694
Date: January 15, 1999
To: Don Henry, WWH 784
From: USBAD
RE: Super 8 Motel, Bremerton, Washington (A98-0532)
Dear Don:
Please find enclosed 1 of the original 10 (each set of reports) appraisals on
the above noted file.
PLEASE BE ADVISED THAT THE FILE HAS NOT YET BEEN REVIEWED AND THAT AT THIS POINT
USBAD HAS NOT CONCURRED WITH THE APPRAISER'S ESTIMATED VALUE ON THE APPRAISAL.
The file has been assigned to KARL SCHAFFER for review. Any questions regarding
the review should be directed to him. Karl can be reached at (206)344-4551 or by
E-mail at UR39041.
The due date for the review is JANUARY 21, 1999. If there is a delay in the
review due date, you will receive notification from the reviewer.
**NOTE: Super 8 Motel reviews currently on hold until determination made of
which reviews are needed.
/jmk
appsend2.1tr
Enclosure(s)
"Working together, delivering superior service to our customers"
2
<PAGE> 3
APPRAISAL
of
SUPER 8 MOTEL
5068 Kitsap Way
Bremerton, Washington
AS OF:
January 1, 1999
AUTHORIZED BY:
Karl Schaffer
U.S. Bancorp Appraisal Division
Seattle, Washington
PREPARED BY:
E. Bates McKee, MAI
Charles B. McKee, MAI
MCKEE & SCHALKA
Real Estate Appraisal Services & Consultants, Inc.
701 Fifth Avenue, Suite 6750
Seattle, Washington 98104
Reference No. 8219
3
<PAGE> 4
MCKEE & SCHALKA
REAL ESTATE APPRAISAL SERVICES & CONSULTANTS, INC.
701 FIFTH AVENUE, SUITE 6750, SEATTLE,
WASHINGTON 98104
TELEPHONE (206) 343-8909 FAX (206) 386-5777
DECEMBER 21, 1999
Karl Schaffer
Senior Income Property Appraiser
U.S. Bancorp, Appraisal Division
1301 Fifth Avenue, Mezzanine Level
Seattle, Washington 98101
NAME: BREMERTON SUPER 8 MOTEL
DESCRIPTION: 77-ROOM LIMITED SERVICE MOTEL
ADDRESS: 5068 KITSAP WAY
MUNICIPALITY: BREMERTON, WASHINGTON
REAL PROPERTY DESCRIPTION: KITSAP COUNTY APN NOS. 162401-4-011-2008
162401-4-011-2107
OTHER PROPERTY DESCRIPTION PERSONAL PROPERTY TAX ACCOUNT NUMBER 0026856
MCKEE & SCHALKA REFERENCE 8219
USBADW FILE NO.: A98-532
Dear Mr. Schaffer:
We have prepared the attached appraisal report for the subject property. The
subject is a 77-umt lodging facility which is located at 5068 Kitsap Way in
Bremerton, Washington. The purpose of this appraisal is to estimate the Market
Value of the leasehold interest of the subject property. The site on which the
improvements are located is subject to a ground lease which has approximately 20
years remaining. The definition of Market Value used in this appraisal is found
in the Appraisal Description of the attached report.
The accompanying complete appraisal report has been prepared in conformity with
the Uniform Standards of Professional Appraisal Practice (USPAP) and the
Appraisal Standards implemented by the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 (FIRREA). This appraisal has been prepared in
conformity
4
<PAGE> 5
with the requirements of the Code of Professional Ethics and the Standards of
Professional Appraisal Practice of the Appraisal Institute, and is subject to
the Assumptions, Certification & Limiting Conditions contained in this report,
5
<PAGE> 6
Transmittal Letter
Super 8 Motel, Bremerton, WA
McKee & Schalka Reference No.: 8219
December 21,1998
Page 2
this report, as well as specific assumptions contained herein. This report has
also been prepared in accordance with the appraisal guidelines of U.S. Bancorp.
Mr. E. Bates McKee, MAI and Mr. Brian R. Ledbetter are both Washington State
Certified General Real Estate Appraisers.
In the course of this appraisal we have both substantially participated in the
analysis and valuation. Mr. Brian Ledbetter has personally inspected the subject
property. Significant information and assistance have been provided by other
sources, including sources cited herein, and by other associates of McKee &
Schalka, Inc. As a result of our investigation and analysis, our conclusion is:
<TABLE>
<CAPTION>
EFFECTIVE VALUE
DESCRIPTIVE VALUATION DATE CONCLUSION
----------- -------------- ----------
<S> <C> <C>
CURRENT MARKET VALUE - LEASEHOLD ESTATE 1/1/99 $1,400,000
</TABLE>
The above value estimate is commensurate with a reasonable marketing and
exposure time of one year. The market value includes furnishings, fixtures, and
equipment (F,F,&E), including both permanently affixed real estate, and personal
property. The contributory value of F,F,&E is estimated to be $180,000, which
includes personal property of $130,000.
Respectfully submitted,
E. Bates McKee, MAI Brian R. Ledbetter, Appraiser
N:/98/82198/br8/8219.doc
6
<PAGE> 7
CERTIFICATION, DISCLOSURE AND USE RESTRICTION
CERTIFICATION
I CERTIFY THAT, TO THE BEST OF MY KNOWLEDGE AND BELIEF:
- - The statements of fact contained in this report are true and correct.
- - The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are my personal,
unbiased professional analyses, opinions, and conclusions-
- - I have no present or prospective interest in the property that is the
subject of this report, and I have no personal interest or bias with
respect to the parties involved.
- - My compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the
amount of the value estimate, the attainment of a stipulated result, or
the occurrence of a subsequent event.
- - My analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice.
- - Ms. Heather Hake Woodside has made a personal inspection of the property
that is the subject of this report.
- - Mr. Bates McKee has not made a personal inspection of the property that
is the subject of this report.
- - No one provided significant professional assistance to the person(s)
signing this report, with the exception of other associates of McKee &
Schalka, Inc.
- - The reported analyses, opinions and conclusions were developed, and this
report has been prepared, in conformity with the requirements of the
Code of Professional Ethics and the Standards of Professional Appraisal
Practice of the Appraisal Institute.
- - The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
- - As of the date of this report, Mr. E. Bates McKee, MAI has completed the
requirements of the continuing education program of the Appraisal
Institute.
- - The appraisal assignment was not based on a requested minimum valuation,
a specific valuation, or the approval of a loan.
RESTRICTION UPON DISCLOSURE & USE:
Disclosure of the contents of this appraisal report is governed by the By-Laws &
Regulations of the Appraisal Institute.
Neither all nor any part of the contents of this report (especially any
conclusions as to value, the identity of the appraiser or the firm with which
(s)he is connected, or any
7
<PAGE> 8
reference to the Appraisal Institute or to the MAI designation) shall be
disseminated to the public through advertising media, public relations media,
news media, sales media or any other public means of communication without the
prior written consent and approval of the undersigned. No part of this report or
any of the conclusions may be included in any offering statement, memorandum,
prospectus or registration without the prior written consent of the appraiser.
This appraisal is intended for use only by the client identified in the
Transmittal Letter, and may not be transmitted or communicated to any other
party without the specific written permission of McKee & Schalka, Inc.
__________________________________ ____________________________________
Signature of Appraiser Signature of Appraiser
8
<PAGE> 9
GENERAL ASSUMPTIONS AND LIMITING CONDITIONS
The attached report may only be used or reviewed in its entirety. No individual
pages, portions, analyses or conclusions may be separated from the complete
report or verbally disseminated without transmittal of the entire report. The
report is intended solely for the review and use by the client identified in the
Transmittal Letter, and may not be transferred to any other party without the
specific written permission of McKee & Schalka, Inc. Certain aspects of the
report (including analysis methodology, spreadsheets, textual formatting and
content) are considered the exclusive intellectual property of McKee & Schalka,
Inc. All rights are reserved.
The following General Assumptions and Limiting Conditions are supplemented by
additional specific assumptions and limiting conditions identified in the
attached report.
It is assumed that there are no hidden or unapparent conditions of the property,
subsoil, structures, or environment (including asbestos, formaldehyde, radon,
soil contamination, structural conditions, legal compliance including zoning and
Americans With Disabilities Act compliance, title or legal conditions, mineral
or other valuable conditions or rights, or unknown soils, hydrological, or
environmental factors) that render it more or less valuable. We have no
expertise in any of these areas, and we specifically counsel the client to
perform additional investigation by qualified experts. No responsibility is
assumed for such conditions or for arranging the studies that may be required to
discover them.
The liability of McKee & Schalka, Inc. and its employees is limited to the
client only, and only to the extent of the fee actually contracted for.
The value conclusions are the result of integration of the entire appraisal
process, including multiple methodologies, approaches and analyses. Any specific
errors or omissions may or may not change the value conclusions.
The appraiser is not required to give further consultation, testimony or
attendance in court by reason of this appraisal unless arrangements have been
previously made.
The information furnished by others is believed to be reliable, but no warranty
is given for its accuracy.
The forecasts, projections and estimates contained in this report are based on
current market conditions, anticipated short-term supply and demand factors, and
a stable economy. These forecasts are, therefore, subject to changes with future
conditions. The analyses and conclusions are valid only as of the date of
transmittal of the report.
The appraiser has made no survey of the property and assumes no responsibility
in connection with such matters. Any sketch or identified survey of the property
included in this report, is only for the purpose of assisting the reader to
visualize the property.
No responsibility is assumed for the legal description or for matters including
legal or
9
<PAGE> 10
title considerations. The property is appraised free and clear of any or all
liens or encumbrances, unless otherwise stated. Title to the property is assumed
to be good and marketable.
Responsible ownership and competent management are assumed.
The allocation of total value to land, buildings, or any fractional part or
interest as shown in this report, is invalidated if used separately or in
conjunction with any other appraisal.
10
<PAGE> 11
[TABLE OF CONTENTS AND INDEX]
11
<PAGE> 12
[LIST OF MAPS AND FIGURES]
12
<PAGE> 13
SUMMARY OF IMPORTANT CONCLUSIONS
<TABLE>
<S> <C>
NAME OF SUBJECT PROPERTY: SUPER 8 MOTEL - BREMERTON
ADDRESS: 5068 KITSAP WAY
MUNICIPALITY: BREMERTON, WASHINGTON
KITSAP COUNTY PARCEL NOS.: 162401-4-011-2008, 162401-4-011-2107
PROPERTY DESCRIPTION: 77-ROOM, 3-STORY LIMITED-SERVICE
MOTEL.
CONSTRUCTION: WOOD-FRAME
SIZE: 29,735SF GBA
AGE: ORIGINAL CONSTRUCTION 1983.
CURRENT STATUS: OPERATED AS FRANCHISE AFFILIATED
SUPER 8 MOTEL
APPRAISERS: E. BATES MCKEE, MAI
BRIAN R. LEDBETTER, APPRAISER
MCKEE & SCHALKA REFERENCE NO: 8219
USBADW REFERENCE NO: A98-532
EFFECTIVE DATE OF APPRAISAL: 1/1/99
DATE OF REPORT PREPARATION: 12/21/98
PROPERTY RIGHTS APPRAISED: LEASEHOLD ESTATE
PURPOSE AND USE OF APPRAISAL: ESTIMATE MARKET VALUE FOR ASSET
EVALUATION
TYPE OF APPRAISAL: COMPLETE
TYPE OF REPORT: SELF-CONTAINED
SIGNED CERTIFICATION: ATTACHED
ASSUMPTIONS AND LIMITATIONS: ATTACHED
SCOPE OF APPRAISAL: COMPREHENSIVE DATA COLLECTION; SALE
COMPARISON AND
INCOME APPROACHES USED
HIGHEST AND BEST USE: CONTINUED MAINTENANCE AND OPERATION
AS FRANCHISE-
AFFILIATED LODGING FACILITY
LEASEHOLD SALE COMPARISON APPROACH
VALUE: $1,520,000 $1,310,000
LEASEHOLD INCOME APPROACH
VALUE:
RECONCILED LEASEHOLD VALUE ESTIMATE: $1,400,000 ($18,181/ROOM)
</TABLE>
13
<PAGE> 14
COMMENTS
The subject of this appraisal is the 77-room Super 8 Motel located in Bremerton,
Washington. This is a 3-story, wood frame, limited-service motel. The property
was originally constructed in 1983. It has been well maintained and managed.
Typical of other Super 8 properties the subject has fairly small rooms and
limited common areas, and a functional layout with an interior entrance
configuration. The property has an indoor pool and spa area.
The improvements are located on a 56,192sf (1.29 acre) site which is not owned
in fee simple, but is leased. The lease has 20 years and 5 months remaining and
this appraisal addresses the market value of the leasehold estate. The site is
just east of State Route 3, on the north side of Kitsap Way at the freeway
interchange with SR 3. Bremerton is a relatively stable market in terms of
demand for rooms and there has been no significant increase in new supply of
hotel rooms. The near-term future will likely see occupancies at about current
levels with new supply in the near-term unlikely. We have forecast 1999
occupancy for the subject at 60% with an ADR of $46, which results in a total
rooms revenue nearly identical to that which the subject achieved over the last
12 months.
As the basis for the valuation of the property we used the Sale Comparison and
Income Approaches and did not use a Cost Approach. For an existing established
motel property of this size and age, purchasers are primarily interested in the
income characteristics and the market price for similar properties. For the Sale
Comparison Approach we reviewed a wide variety of hotel transactions in
Washington and Oregon, and used four sales for direct comparison with the
subject. The subject would be marketable if available for sale, and we have
placed some emphasis on the indications from this approach. The Income Approach
is considered compelling, based on detailed income and expense history for the
subject property over the past several years and a reasoned local and regional
market analysis. Both approaches required direct consideration and downward
adjustment for the land lease encumbering the subject site, which requires
substantial rental payments and eventual lack of ownership at the end of the
lease in just over 20 years. In the end, we gave consideration to both
approaches in our final value reconciliation.
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<PAGE> 15
[SUBJECT PHOTOGRAPHS 6]
15
<PAGE> 16
APPRAISAL DESCRIPTION
IDENTITY OF PROPERTY
The subject is an existing 77-room lodging facility known as the Bremerton Super
8 Motel. It is located at 5068 Kitsap Way in Bremerton, Washington.
LEGAL DESCRIPTION
We have not been provided with a title report for the subject property. A legal
description for the subject property is referred to within the land lease
agreement, but the legal description is not included in the copy of the lease
which we were provided. The property has two Kitsap County Assessor's tax parcel
numbers, which are 162401-4-011-2008 and 162401-4-011-2107.
It is our understanding that access to the subject is via an ingress/egress
easement from Shorewood Drive. We assume that there are no other easements or
unapparent title or legal considerations which affect the value or utility of
the subject site.
PURPOSE OF APPRAISAL
The purpose of this appraisal is to estimate the Market Value of the subject
property. following is the definition of Market Value according to OCC
Regulation 12 CFR Part 34.42:
"Market Value means the most probable price which a property
should bring in a competitive and open market under all
conditions requisite to a fair sale, the buyer and seller each
acting prudently and knowledgeably, and assuming the price is not
affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of
title from seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and each acting
in what they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
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<PAGE> 17
(5) The price represents the normal consideration for the property
sold unaffected by special or creative financing or sales
concessions granted by anyone associated with the sale."
FUNCTION OF APPRAISAL
It is our understanding that the function of this appraisal is to assist in
decisions regarding financing and asset valuation of the property.
PROPERTY RIGHTS APPRAISED
This is an appraisal of the leasehold estate of the subject property. The
improvements are located on land which is subject to a long-term land lease. The
lease commenced in June 1983 prior to the construction of the improvements. The
lease is fully net to the owner of the improvements for all expenses including
property taxes, insurance, and other costs, and the lease has CPI-based
escalations every 3 years. At the termination of the lease, the improvements
revert to the lessor. A financial analysis regarding the value implications of
the land lease including a forecast of future land lease payments and total
value loss due to the land lease is included later in this report.
UNAVAILABILITY OF INFORMATION
We have not been provided with an environmental report, title report, structural
inspection report, or a hydrologic or soils report. We are not expert in any of
these areas, and generally rely on the technical reports of qualified personnel.
We specifically assume that there are no unapparent conditions which affect the
value or utility of the property.
ADA COMPLIANCE
We have not been provided with any information regarding the compliance of the
subject property with the Americans With Disabilities Act (ADA). As a public
lodging facility, the property may be expected to meet increased standards for
access and other accommodation. ADA compliance standards are evolutionary and
subject to legal and practical interpretation, and some future continued cost
and upgrade for the subject would be expected. We have considered these issues
in our valuation of the property. We are not experts in ADA compliance issues
and specifically assume that there are no unapparent conditions with regard to
ADA compliance which affect the value or utility of the property.
ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal is subject to the General Assumptions and Limiting Conditions
found at the beginning of this report, as well as specific assumptions noted
herein.
SCOPE OF APPRAISAL
This appraisal is not limited in scope, and uses both the Sale Comparison and
Income
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<PAGE> 18
Approaches to value. The Cost Approach has not been employed in our valuation
process. Current purchasers of similar properties are primarily interested in
the income characteristics of the property, and focus on the Income Approach and
Sale Comparison Approach when determining an appropriate purchase price. Also,
the age of the improvements and subsequent renovation make an exact estimation
of accrued depreciation unreliable. Therefore the Cost Approach has not been
used, since it would not have had any bearing on the reconciled market value for
the property.
In the course of this appraisal, Brian Ledbetter has personally inspected the
subject property. In addition we have evaluated the local neighborhood and
surrounding areas; surveyed the competitive lodging facilities within this
market; and reviewed historical data and income and expenses for other similar
properties. We have also carefully reviewed and analyzed the subject's income
and expense history over the past several years. We have spoken with the
subject's owners, manager, and other property managers, owners, and government
officials within this market. We have researched and evaluated the sales of
other lodging facilities, both locally and throughout the Pacific Northwest.
Overall, the scope of the research and analysis contained in this appraisal is
substantial, and in our opinion adequate to support the value conclusion.
COMPETENCY
We are competent to appraise the subject property. We have considerable
experience in the analysis and valuation of lodging facilities throughout the
region, and have appraised several other lodging facilities in the subject's
market area. Please refer to the Scope of Appraisal, the Appraiser's
Qualifications and Experience Data in the Addenda, and the research and
presentation embodied in this report for verification of competency.
HISTORY AND CURRENT STATUS OF PROPERTY
A land lease for the site was entered into in 1983, and the original
improvements subsequently completed, with Assessor's records indicating
construction in 1983. The property has been owned continuously and operated as a
Super 8 Motel since the time of the original construction. The subject was
offered for sale in 1998, along with a portfolio of about 25 other Super 8
properties located in Washington, Oregon and Alaska, with an asking price of
about $91 million. It is our understanding that several parties expressed
interest in the properties, with the highest offer at about $81 million. This
interest did not result in either transaction or indications for individual
properties, and the interested parties bidding on the portfolio are different
than the likely purchaser profile for the subject property individually. The
property are not currently offered for sale, and we are not aware of any current
or pending purchase offers, listings, or agreements.
REASONABLE EXPOSURE TIME AND MARKETING TIME
The value conclusion in this report is as of the effective date of this
appraisal, and assumes that a reasonable exposure time has preceded that
effective date. Thus the
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<PAGE> 19
value is consistent with expected transaction on that effective date after prior
marketing. Exposure time is the period of time that would reasonably have
preceded transaction of the property at the appraised value on the date of
appraisal. The reasonable marketing time discussed in this section is that
period which would be expected to be incurred to market the property in the
current environment as of the date of the appraisal report, with the marketing
to occur subsequently. Thus the value conclusion is not necessarily the
subsequent value that would be anticipated for transaction of the property after
the future marketing period.
It is our conclusion that the subject property would be marketable if available
for sale. The improvements are about 15 years in age, and appear to have been
well maintained. The subject has just completed a renovation to common areas and
about 20 of the rooms, and should continue to be competitive within its market
segment for the foreseeable future. The quality and limited-service orientation
make it attractive to the owner-operator segment, who continue to be active in
the hotel market.
Regionally, there continues to be significant sales activity for this property
type. Over the past several years the market activity of hotel properties
increased, as REiTs and other entities had increased interest. More recently
this institutional interest declined over the last half-year. While interest
from this segment of purchasers declined, smaller income investors and owner
operators continue to be active. On a single-property basis this would be the
subject's primary market segment, and the subject improvements would be quite
marketable to this segment.
Negative factors include a location in a secondary market, and the marketability
of a property encumbered by a land lease, and loss of improvements at the end of
the lease term. At about 20 years remaining this begins to become a significant
factor, and would tend to offset the otherwise stronger marketability of the
subject.
After consideration of these factors we have estimated a marketing and exposure
time of one year or less, and the value conclusion is consistent with that
estimate.
DATE OF INSPECTION
December 21, 1998
DATE OF APPRAISAL PREPARATION
December 21, 1998
EFFECTIVE DATE OF VALUE ESTIMATE
January 1, 1999
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[NEIGHBORHOOD MAP]
20
<PAGE> 21
NEIGHBORHOOD AND LODGING MARKET
NEIGHBORHOOD OVERVIEW
Please refer to the neighborhood map on the facing page for visualization of the
location of the subject within this neighborhood. The subject is located in
Bremerton, at the northwest edge of the business district area. This location is
directly adjacent to the east side of SR-3 and within the incorporated City of
Bremerton, and just on the southwest edge of Oyster Bay. Kitsap Way turns to the
north just west of the subject property and the subject is located adjacent to
the interchange with SR-3. To the east of the subject property Kitsap Way
extends into the downtown core area. Perhaps the most significant changes in
Bremerton within recent years have been within the downtown area. The downtown
core of Bremerton has been gaining an increasing amount of attention in recent
years due to several proposals for revitalization of the waterfront and ferry
dock areas.
Roadway traffic in the vicinity of the subject is fairly active. State Highway 3
is a major limited access highway, and the subject property is directly adjacent
to the highway right-of-way. It is essentially an extension of Highway 16, which
is connected to Tacoma via the Tacoma Narrows Bridge. To the north, Highway 3
provides direct access to the Silverdale, Poulsbo and Bainbridge Island areas,
and also connects with Highway 104 at the Hood Canal Floating Bridge, providing
more distant access to Highway 101 (which rings the Olympic Peninsula and is a
major tourist corridor). Thus, Highway 3 is a major link in the Western Olympic
Peninsula area, both for commercial travel between a variety of locations, and
for tourist travel, primarily in the summer months.
Bremerton is Kitsap County's largest city and contains 54% of the total
incorporated population. The 1997 population of Bremerton was estimated at
38,600, up just 1.2% from 1990. This is expected to grow at a modest rate,
according to a Puget Sound Regional Council 1995 publication. The neighborhood
is within the Bremerton Area Forecast Analysis Zone, and the 1990 population for
this area was reported to be 48,619. This is estimated to increase 6% to 51,485
by 2000. Population growth is expected to escalate at a much higher rate for the
following decades; 23% from 2000 to 2010, and 21% from 2010 to 2020.
Contributing to this population growth is the relative availability of vacant
developable land on the fringes of the zone. Nearly all of the forecast
population growth is expected to occur in outlying areas that are less
developed.
The economy of Bremerton is highly dependent on Puget Sound Naval Shipyard
(PSNS) employment. This yard is Washington State's second largest industrial
employer, behind Boeing. It is estimated that 76% of the workforce in Kitsap
County is directly or indirectly tied to the military. The employment at this
shipyard has seen significant downsizing since 1993. Employment in 1993 was
12,600 which has been reduced to about 8,800 employees today.
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<PAGE> 22
Bremerton currently has six ships homeported, including the aircraft carrier
Carl Vinson, Sacramento, Camden, Rainier, Bridge and the Hood. The shipyard
expects a fairly typical level of work for 1999, including the decommission of
two submarines, the Essex for a major overhaul, and at least one short visit by
the aircraft carrier Abraham Lincoln. The Abraham Lincoln is one of six ships
homeported at the Navy's new homeport facility in Everett, and would likely not
require significant levels of housing in 1999 or the near future. The Super 8
did have 5] rooms occupied for nine months in 1996 by personnel from the Abraham
Lincoln. The manager of the subject property indicated that the Essex had
contacted them regarding potential for 51 rooms in May through August 1999.
There is a significant redevelopment project planned for the Bremerton CBD which
could help offset lost employment at PSNS. The "Sinclair Landing" proposal
includes a complex of offices, retail stores, cinemas, a museum, and three
parking garages. The first phase of the project would be the updating and
expansion of the Bremerton Transit Center to accommodate a passenger only
waiting area, a Kitsap Transit Bus Center, and expanded transit facilities. This
proposal also includes expanding the marina to include 173 new permanent moorage
slips and two condominium apartment projects with a total of 180 units. An 80
room hotel and conference center is also planned as part of this project. It is
expected that this project will come on line over the next several years. In
general, this plan is consistent with the city's vision of a revitalized
Bremerton central business district area. Overall, the types of retail or
commercial activities contained in the downtown area would not compete with the
subject property but would increase the residential activity in and around the
central business district area.
The immediate neighborhood surrounding the subject property consists of the
commercial uses along Kitsap Way and contains a mix of hotels, retail,
restaurant and office buildings. The areas to the north and south of the
commercial properties along Kitsap Way are generally residential in nature.
Directly across 7th Avenue to the north of the subject property is an area with
the Central Bremerton residential zoning and the main commercial activity within
the central business district is located to the south of the subject property.
Traffic counts along Highway 3 in the vicinity of the subject are as follows:
<TABLE>
<CAPTION>
SR-3 AT AUTO CENTER WAY CROSSING
AVG. ANNUAL
1994 1995 1996 1997 CHANGE
- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
27,000 28,000 31,000 32,000 +4.6%
</TABLE>
Overall the subject has a strong location within this neighborhood. The direct
highway visibility and access are positive factors for a lodging facility, as is
the proximity to numerous restaurants and other services.
22
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[HISTORY OF HOTEL/MOTEL ROOM SALES TABLE]
23
<PAGE> 24
OVERVIEW OF LODGING MARKET
The Bremerton area lodging market is fairly self-contained, with nearly all of
the facilities located within the city limits of Bremerton and the majority of
the facilities are along Kitsap Way or SR-3. In total, there are about 598
hotel/motel rooms in the area, the majority of which are contained within about
8 primary lodging facilities. The 77 subject rooms accounts for about 13% of the
total rooms.
The motel properties are generally centered around the SR-3 interchanges within
the city of Bremerton, and specifically the Kitsap Way interchange. The stretch
of about 1.5 miles contains about half of the competitive facilities, and about
half are mostly older properties developed from the late 1960s and 1970s. Many
of these older properties are 2-story exterior entrance facilities, and all are
in the budget to moderate class price range. The Howard Johnson Motel, which was
previously the Bayview Inn, has the majority of conference/meeting room space in
the market and can hold up to 900 persons in large meeting rooms, a converted
theatre, and this facility also has a restaurant and views of Oyster Bay. This
full-service property has rates and services at the upper end of the local
market. This is the only property in the local market located west of the SR-3
interchange and the subject is the first motel property encountered when
traveling down the hill from this property, and the significant amount of
meeting space at the 146 room Howard Johnson facility results in some overflow
to nearby hotels, including the subject. A wide variety of factors contribute to
the demand for motel rooms in this area. Primary among these is the local
commercial and highway traffic activity, with a significant level of the local
occupancy related to the Navy presence.
A wide variety of factors contribute to the demand for motel rooms in this area.
Primary among these is the local commercial and highway traffic activity, with a
significant level of the local occupancy related to the Navy presence, as
previously discussed.
HISTORY OF HOTEL/MOTEL ROOM SALES
The figure on the facing page summarizes the history of hotel and motel room
sales revenues for the city of Yakima and Yakima County over the last 12 years.
The source of these figures is the State of Washington's Hotel/Motel Tax Revenue
Reports. The individual annual figures show significant variation. This is the
result of numerous factors, including fluctuations in Navy activity, tourism,
and weather related factors. In addition, the figures reflect actual room
revenue tax collections from the facilities rather than tax obligations, which
sometimes results in individual variations due to delinquent tax revenue
collections.
As the figures show, the overall lodging market has shown modest increases over
this entire period, averaging about 4.8%/year. More recently, following the
large increases in the late 1980% and early 1990% the figures have been
relatively flat. Over the last two years the average increase for the city has
been down at -3.4%, while the county as a whole has been up slightly, with a
3.8% increase. The figures for the first 10 months of 1998, versus the same
period in 1997 are slightly better for the city, although the
24
<PAGE> 25
county has been flat, showing -1.6% and .3% respectively.
25
<PAGE> 26
[HOTEL ROOM REVENUE HISTORY IN THE PACIFIC NORTHWEST TABLE]
26
<PAGE> 27
Other indications of regional trends comes from a review of Trends in the Hotel
Industry, a publication by PKF Consulting most recently dated October 1998. This
survey, summarized on the facing page, includes 140 Washington properties that
total 20,129 rooms, and is divided by sub-areas for the Washington market. We
have considered the "Olympia and Southwest WA" lodging market, and the
"Bellingham and NW WA" markets as being most representative of o the market of
the subject, which is not specifically covered in this report.
The Bellingham and NW WA market had increases in both ADR and occupancy and
overall increase in REVPAR of 4.2%. The average daily room rate increased from
$57.53 to $58.28. Thus the average Revenue per Available Room (RevPar) was
$39.86, up 4.2% from the same period in 1997. The state as a whole experienced a
slight decline in average occupancy was more than offset by ADR increases, and
average RevPar was up by 6.3%. In general, the urbanized areas showed increases,
while the more rural markets were flat to slightly declining. By size and rate,
the smaller and lower-rate properties had the lowest increases. In summary, on a
same facility basis, properties in the subject location, size and rate
classification were amongst the lowest performing properties in Washington
State.
NEW SUPPLY
There are currently no new hotels planned for the Bremerton area or surrounding
areas which would provide additional competition for the subject property. Given
the relatively flat room revenue figures for Bremerton, further increases in
supply in the short to medium term are unlikely. Given the relatively stable
demand segments and very modest historical ADR increases, new construction does
not appear feasible at this time, and this situation is unlikely to change
within the next few years.
NORTHWEST SUPER 8 STATISTICS
Please refer to the figures on the following page which show the operating
statistics for 22 Washington and Oregon Super 8 properties under the same
management as the subject. The exhibit shows the occupancies, ADR, and RevPar
for the period Nov. 1997 - Oct. 1998, and also compares these with the previous
12 months. These chain-wide statistics show an average RevPar of $28.37 over the
past 12 months, which is down 1.1% over the previous figures. The average
chain-wide occupancy was 56.8%, which is similar to the subject's occupancy over
this period. The ADR at the subject was also lower than average
CONCLUSION AND FORECAST OF SUBJECT ROOM REVENUE
All of the indications show a relatively flat lodging market in Bremerton, with
gradual increases in demand and ADR, but with REVPAR declining from the 1994
through 1996 levels. This has resulted from decreases in Navy activity and
tourism rather than over-supply of hotel rooms. This has resulted in declines in
occupancies at existing facilities. For the market as a whole we would expect to
see modest increases in rooms revenue overall, due to small expansions in demand
along with some achievable ADR increases.
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<PAGE> 28
Please refer to the Income Approach later in the report, wherein we will discuss
the detailed history of revenue for the subject, and the directly competitive
local hotels. After consideration of all of these factors we have forecast the
subject's 1999 occupancy at 60%, with an ADR of $46.00. This results in a RevPar
forecast of $27.60, slightly higher than the most recent figures but consistent
with the previous years REVPAR indications. We have considered that the property
has recently remodeled rooms, as well as the potential for Navy contract work
when the USS Essex arrives at the Bremerton shipyard. For the near-term future
we would expect a gradual increase in rooms revenue, as a result both of the
renovations making the property more competitive, and modest increases in the
market as a whole.
28
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[WASHINGTON AND OREGON SUPER 8 MOTELS 1997-1998 OPERATING STATISTICS TABLE]
29
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[SITE MAP]
30
<PAGE> 31
SITE DESCRIPTION
<TABLE>
<S> <C>
LAND AREA AND SHAPE Please refer to the Site Map on the facing
page. The subject property is an "L"-shaped
parcel. The total land area of the subject
site is 1.29 acres, or 56,192sf.
ACCESS & STREET FRONTAGE Although we have not been provided with a legal
description, it is our understanding from the owners
that there is a two-way access easement to Shorewood
Drive to the east, and a one-way exit-only access
easement to Kitsap Way to the south. Both access
easements are improved with paved driveways at this time.
TOPOGRAPHY & SOIL CONDITIONS The subject site slopes down to the west and north. It is
currently developed with the existing
3-story motel building. We have not been
provided with a soils report for the subject
property. We assume that the sub-surface
soils are adequate to, support the existing
improvements, and that there are no
unapparent drainage or soil problems.
ENVIRONMENTAL CONDITIONS We have not received any information regarding
environmental conditions at the subject site. We are
not experts in these areas, and it is a specific
assumption of this report that there are no unusual
environmental conditions which materially impact the
value or utility of the property.
UTILITIES The subject property is fully serviced by
public utilities, including water, sewer,
electricity, telephone and cable television.
ZONING The subject property is zoned "GB, General Business", in
the City of Bremerton. Under this designation motels
are permitted outright. Building height is restricted
to 60'. There is no minimum lot area. Minimum front
setback is 20', There is also no lot coverage
limitation. The subject property is an existing,
established use and appears to conform with the GB
zoning development standards.
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C> <C>
ASSESSMENT AND TAXES Land $340,000
Improvements: $1,550,000
Personal Property: $95,054
----------
Total: $1,985,054
==========
1998 Property Taxes: $30,837.07
Average Tax Rate: 1.55%
</TABLE>
32
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<TABLE>
<S> <C>
SUMMARY The subject site is a fully functional
commercial site. It is our understanding
that the easements provide access across
adjoining properties and the site is visible
from SR-3.
</TABLE>
33
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[SITE PLAN FLOOR PLAN DRAWING]
34
<PAGE> 35
IMPROVEMENTS DESCRIPTION
GENERAL DESCRIPTION
The following description of improvements is based on our inspection of the
subject improvements, as well as review of available plans and discussions with
the subject property owners and managers. The Site Plan on the facing page shows
the lay out of the improvements on the subject site. Please refer to the subject
photographs at the beginning of this report which also show these Improvements.
Copies of the building plans are provided at the end of this section.
OPERATOR
The subject property is operated as a Super 8 Motel franchise.
GENERAL DESCRIPTION OF THE IMPROVEMENTS:
The Bremerton Super 8 Motel is a 77-room, 3-story, average-class motel. The
improvements consist of a wood-frame building which was built in 1983. The
building has a total gross building area of 29,735sf or 386sf/room. Typical of
other Super 8 properties, the subject has fairly small rooms and limited common
areas, and a functional layout with an interior entrance configuration. The
building includes a manager's apartment, but does not include restaurant or
banquet facilities. On-site parking is provided for 69 cars, and it is our
understanding that 11 additional parking spaces are provided by the master
developer of the subject land on the adjacent site to the north, for a total of
80 parking spaces. The subject property also includes a small conference room on
the third floor across from the managers apartment which can accommodate small
meeting groups.
GUEST ROOMS
The first floor is a daylight basement level with 26 guest rooms, motel laundry,
boiler room, utility and storage room, and tenant laundry. The total gross floor
area is 10,131sf. The second floor is the main entrance level with 26 guest
rooms, a lobby and reception area, manager's office, supply room, employee room,
and vending area. Total area is9,802sf. The third floor has 25 guest rooms, a
conference room, a one-bedroom manager's apartment unit, and storage room. Total
area is 9,802sf.
The total Gross Building Area (GBA) is approximately 29,735sf. There are a total
of 77 guest rooms, including 36 single-rooms and 41 double rooms. Typical
single-rooms are about 12'-6" x 22', with a total room area of between 249sf and
275sf. Typical double-rooms are 12' x 26', for a typical area of 312' to 321'.
INTERNAL LAYOUT, PUBLIC CIRCULATION & FACILITIES
The motel building is three stories, with the lobby, registration area and
administrative offices at entrance level, between the lower level and third
floor. The upper floors are accessed via internal stairways on the east and west
ends of the buildings. The rooms
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<PAGE> 36
are situated on either, side of the central corridor on each floor, with the
single rooms mostly on the south side, and the doubles on the north side. Other
public areas include a meeting room and guest laundry facilities.
STRUCTURE
The foundation is a steel-reinforced concrete slab on matt and spread footings.
The building is wood frame.
EXTERIOR WALLS
The exterior walls are 7/8" stucco, over 2' x 4' studs on 16" centers, windows
are double-pane insulated glass
INTERIOR WALLS AND PARTITIONS
Interior walls are gypsum wallboard covered with thin-wall plaster. Party walls
consist of gypsum wallboard over RC channels, with batt insulation and thin-wall
plaster exterior.
FLOOR COVERINGS, CEILINGS & LIGHTING
Average-quality wall-to-wall carpet is the floor covering in the guest rooms and
public areas, including the lobby and registration area, administrative offices,
stairs and hallways. Vinyl flooring is the floor covering in the guest bath-
rooms, laundry room and other motel service areas. Ceilings are gypsum wall-
board with thin plaster covering in most areas. Lighting fixtures are generally
incandescent In the guest rooms, with both incandescent and fluorescent lighting
in the public areas.
ROOF
Tile roof shingles on a pitched deck.
DOORS AND WINDOWS
The entrance doors are self-closing plate-glass doors set in aluminum frames.
Interior doors are solid-core and hollow-core wood, with metal frames. Exterior
windows are double-pane glass in aluminum frames
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FIRE PROTECTION
Heat sensors connected to central alarm system, with individual smoke detectors
in each guest room.
HEATING, VENTILATION & AIR CONDITIONING
Individual through-wall air conditioning units in the guest rooms
ROOM FURNISHINGS
Typical room furnishings include beds with frames and headboards, a straight-
back seat and an arm chair, a vanity unit, a color television set, fixed and
movable lights, art work, and an oak-framed mirror. The single rooms also
include a table. These furnishings are custom built, and appear to be attractive
and durable.
OTHER FEATURES
The subject improvements are generally of good quality and-attractive in
appearance. Although Super 8 Motels offer relatively low room rates and basic
amenities, compared with full-service motels and hotels, the quality of
construction and detailed amenities are superior to budget-class motels. The
average guest room size is about 290sf, somewhat larger than the 250sf typical
for a budget motel. Soundproofing is very good with lightweight concrete floors,
and good soundproofing of party walls. Both the building itself and the
furnishing and fixtures are attractive in appearance and should be durable over
time.
RENOVATION AND CAPITAL IMPROVEMENT HISTORY
The subject improvements appear to be in very good condition and we are not
aware of any areas of deferred maintenance. According to the property manager,
20 rooms have been recently completely rehabbed and a variety of common area
improvements were also included. We have been provided with a summary of
expenditures on the property over the last four years. The following table
summarizes these amounts.
YEAR AMOUNT
- -------- --------
1995 $ 40,104
- -------- --------
1996 $ 3,288
- -------- --------
1997 $ 29,430
- -------- --------
1998 $123,311
- -------- --------
Total $196,133
- -------- --------
Per Room $ 2,547
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Based on our analysis of cost new and the information above, we have estimated
the contributory value of F,F&E at $180,000 or about $2,300/Room, including
$130,000 in personal property value.
EFFECTIVE AGE/REMAINING ECONOMIC LIFE
The average age of the subject is about 15 years which is consistent with our
conclusion of the effective age of the improvements. According to the Marshall
Valuation Service, the total useful life of the subject improvements would be
estimated at 35 years. Therefore, the remaining economic life is estimated at 20
years.
SUMMARY
The improvements consist of a Super 8 Motel with an average effective age of
about 10 years. The property has a fairly standard configuration for a
limited-service motel, with three floors of guest rooms on either side of a
central corridor. The property is generally attractive in exterior appearance
and includes a large amount of parking. Guest rooms have a standard
configuration and moderately small sizes which are typical for a property with
this orientation. The property appears to be in good condition for a motel of
this age and has had significant recent expenditures on rooms and common area
maintenance. This would result in an expectation for fairly modest short-term
capital expenditures. With ongoing maintenance, the property should continue to
be functional and competitive within its market segment.
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[RICHERT & ASSOCIATES FLOOR PLANS--4 PAGES]
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HIGHEST AND BEST USE
"Highest & Best Use" is defined by the Appraisal Institute as:
1) The reasonable and probable use that supports the highest present value
of vacant land or improved property, as defined, as of the date of the
appraisal.
2) The reasonably probable and legal use of land or sites as though vacant,
found to be physically possible, appropriately supported, financially
feasible, and that results in the highest present land value.
3) The most profitable use.
The concept of Highest and Best Use is based on the most profitable and valuable
use. The Highest and Best Use must meet four criteria: it must be physically
possible, legally permissible, financially feasible, and maximally productive.
Highest and Best Use As If Vacant and Unimproved
The subject site is a regularly shaped, 1.29-acre site which is relatively flat
and fully usable. It has a fairly unrestrictive zoning designation, and both the
physical characteristics and the zoning would allow a wide variety of uses. The
property is located in an established commercial area which is associated
primarily with the nearby SR-3 freeway interchange and the Bremerton CBD to the
southeast of the subject property. There are a wide variety of commercial and
service-oriented establishments immediately surrounding the subject, including
family and fast-food restaurants, service stations, stand-alone retail buildings
and lodging facilities.
Notable features at the subject site which would tend to shape its use include
the specific location directly adjacent to SR-3, with freeway visibility.. The
size of the site would allow most forms of stand alone retail uses. Given the
specifics of the site, the highest and best use would be a use that benefits
most directly from the freeway exposure. This would include some form of lodging
facility development or restaurant use. Both the size and orientation of the
site make it suitable for these types of uses. In addition, there is ample
evidence of both types of uses in the immediate vicinity of the subject.
After considering all of this evidence, it is our opinion that the highest and
best use for the subject property as if vacant and unimproved would be for
development with a restaurant or limited-service motel use.
Highest and Best Use As Currently Improved
The site is currently improved with a 77-room, 3-story, limited-service lodging
facility. The effective age of this property is about 15 years with a
substantial 20 year estimated remaining useful life. The property has recently
undergone upgrading of rooms and common areas and is in good condition.
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<PAGE> 41
The property is at the lower end of the local lodging market and still has
moderately strong operating statistics, and generates income greatly in excess
of the current land value of the site. The property is fully functional in
design, and differs relatively little from newer limited-service facilities of
this price classification that have been recently constructed. The improvements
are in reasonably good condition with no major items of deferred maintenance
noted. With continued ongoing maintenance and periodic F,F,&E upgrades, the
improvements should continue to remain competitive within its market segment for
the foreseeable future.
Given these factors, it is our opinion that the highest and best use for the
subject property as currently improved is for continued maintenance and
operation as a franchise affiliated lodging facility.
41
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[SALE COMPARISON PHOTOGRAPHS - Comparisons Nos. 1 and 2]
42
<PAGE> 43
[SALE COMPARISON PHOTOGRAPHS - Comparisons Nos. 3 and 4]
43
<PAGE> 44
[SALE COMPARISON MAP]
44
<PAGE> 45
[Super 8 Bremerton - Sale Comparison Summary]
45
<PAGE> 46
SALE COMPARISON APPROACH
The Sale Comparison Approach uses analysis of sales of comparable improved
properties to derive units of comparison that are then used to indicate value
for the subject. Our search for sales was broad, including most major markets in
Washington State. Our selection of comparisons included considerable emphasis
and understanding from the sales of properties we have previously appraised. The
primary units of comparison in this analysis are price per room, price per
square foot, and gross income multiplier. In addition, we have analyzed the
capitalization rates for these transactions, which will be used in the
subsequent Income Approach analysis.
Please refer to the exhibit on the facing page, which summarizes five
transactions involving Washington State hotel properties. All of these
transactions occurred in 1997 or 1998, and all represent transactions of limited
service motels. All are highway-oriented properties that bracket the subject in
terms of size, although the subject's age and quality are towards the lower end
of the range. Photographs of these comparisons and a map showing their location
is found on the preceding pages, and additional details regarding these
transactions is included in the Addenda.
Sale Comparisons
Sale Comparison No. 1 is the November 1997 transaction of the Howard Johnson,
which is located adjacent to the west of SR-3, about 1A mile west of the subject
property on Kitsap Way. This 146-room full service property was built in 1978
and represents one of the subject's competitors in the local Bremerton market.
This interior entrance facility was formerly operated as the Bayview Inn, and
has a variety of meeting rooms capable of hosting over 600 persons for meetings
or conferences. This property also has a restaurant /lounge area and a
significantly higher level of common areas than the subject property. The
$5,090,000 purchase price is the equivalent of $34,863/room, and a relatively
low $45/sf of building area due to the large common areas. Overall, this
comparison indicates a downward adjustment on a price/room basis as an
indication of value for the subject property, and an upward adjustment on a
price/sf basis.
Sale Comparison No. 2 is the sale in February 1996 of one of six Cypress Inn
motels, in Washington and Oregon. This sale is the transaction of a 63 room
property which is part of the overall transaction totaling 521 rooms. One of
these six properties is located 10 miles north of the subject in Poulsbo. Five
of these properties, including this comparison were constructed in the late
1980s by a Portland based developer, and they represent fairly basic, newer,
budget-oriented motels with limited amenities. Five of the six properties fall
into this classification, with the final property being a much older and
inferior quality motel. This represented a distressed sale resulting from
foreclosure and these properties had generally been in decline over the past two
years with limited capital expenditures or replacement of F,F,&E. They vary
somewhat in quality, but in total would be considered significantly below the
quality of the subject. Although this was a distressed sale, the properties were
widely exposed in the market and listed for sale with an asking price of
$16,000,000. Both the requirement for bulk sale and the
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<PAGE> 47
distressed nature of the seller probably reduced the price paid. The purchaser
was a California-based lodging facility operator who purchased these six
properties for $14.9 million or an average of $28,599/room. The purchaser
intended to sell one or two of the inferior properties including the older motel
in downtown Portland, and likely refurbish and place a national franchise
affiliation on the other properties. This property was affiliated as a Holiday
Inn Express franchise. Based on the purchaser's analysis of the income
characteristics of these properties, the capitalization rate was 12%, which
included a total of 6% deductions from the net operating income for reserves and
management fee. This purchase was recorded at a purchase price of $2,400,000, or
about $38,095/room and overall would indicate a downward adjustment as an
indication of value for the subject property. The bulk sale price indication and
analysis of the other properties indicate that this property would be one of the
more valuable within the bulk purchase.
Sale Comparison No. 3 is the EconoLodge in Fife. This somewhat older exterior
entrance property is well situated with highway visibility. The property was
purchased in December 1997 for $2,880,000 or about $28,000/room. The dated
exterior configuration decreases the value. The average area per room and the
income characteristics are slightly less than the subject. Thus the subject is
more valuable per room and this comparison indicates an upward adjustment on a
price/room basis.
Comparison No. 4 is a recent transaction involving the Needle's Inn, located in
Chehalis, Washington. This is an older facility located along the Interstate-5
corridor about midway between Seattle and Portland. This exterior entrance
facility has fairly basic rooms and limited amenities, and has not historically
had strong revenue statistics. Like the subject, the property has excellent
freeway visibility and good access. The purchase price at $2,275,000 is
$32,500/room. We have specific confidential information regarding the income and
expenses at this property at the time of sale, which indicated a relatively low
capitalization rate of between 10% and 11%. Overall we believe this market to be
quite similar in terms of achievable income, and this transaction is a
reasonably good indicator of value for the subject. Given the relatively small
room sizes and lack of common areas we believe this comparison is a good
indication of market value on a S/room basis, but slightly more on a $/sf basis.
One additional sale comparison is worth considering at this time. The Silver
Cloud Inn in Tukwila, south of Seattle, is a 120-room exterior entrance, limited
service motel, constructed between 1980 and 1986. In 1997, this property had
good operations at 75%occupancy at an ADR of about $52. It is situated on a
leased land site of about 2.45 acres, with the lease expiring in 2039. An offer
was tendered for this property within the last three months. The land lease is
currently well below market, but adjusts to market in 2010. Using a similar
methodology as will be subsequently used for the subject property, the sale
price is adjusted to $6,200, 000, after adding about $1,000,000 for the loss in
value represented by the leasehold. Based on this adjusted price, the equivalent
fee simple offer is about $52,000/Room. Although this building is inferior to
the subject property, with older construction, exterior entrance and outdoor
pool, the Seattle area market is superior, and the value indication should not
be used on a physical comparison basis. However, the financial comparison for
the fee simple estate indicates
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<PAGE> 48
the cap rate of 11.0%, and a GIM of 3.6. Based on the actual offer price for the
leasehold position, the capitalization rate on the leasehold is 12.4%. This
offer indicates the potential marketability of a leasehold position, and will be
subsequently discussed in the Income Approach.
Fee Simple Sale Comparison Approach Conclusions
The subject property is a limited service property with a well-established
income, which has fluctuated over the last several years as a result of the
local Navy presence. Positive factors include the significant renovation of
rooms and common areas in the last year, and the good highway visibility for the
site. Negative factors include the secondary location, and the fact that the
improvements are situated on leased land, which requires ongoing payments, and
the eventual loss of ownership of the improvements. For the purpose of this
analysis, we have first valued the subject property as if the land were owned
fee simple (as with all of the sale comparisons), and next made an explicit
adjustment for the loss in value as a result of the land lease.
Most recent purchasers of limited service hotels have been individual
owner-operators, who may own one or several facilities. They often buy
properties based on the gross income characteristics, and subsequently
self-operate and manage the properties, sometimes with and sometimes without
franchise affiliation. Thus a motel property represents an employment
opportunity and a business venture of a manageable scale. Individually, the
subject is too small to appeal to an institutional investor. Although the
interest from the institutional and REIT segments in purchasing hotels has
diminished substantially in the last year, other market interest in smaller
lodging properties has remained fairly strong resulting in a stable and active
market throughout 1998. Based on all of this evidence we have concluded that the
subject would be marketable if available for sale.
The sale transactions bracket the property in terms of physical characteristics,
market characteristics and income characteristics. Sale No. 1 is a full-service
property in the vicinity of the subject which transacted for approximately
$35,000/room and although a full-service facility, provides some indication of
value for the subject, requiring a downward adjustment. The other three
properties provide indications ranging from approximately $28,000/Room to
$38,000/Room. As a group, the comparisons indicate values on a price/sf basis
ranging from $45/sf to $111/sf. For these types of properties, many purchasers
are most interested in the Gross Income Multiplier (GIM), as they are most
concerned about the income characteristics. In urbanized areas, newer limited
service properties are purchased on a GIM of about 4.2. Properties of about 10
years old may have a value of about 4.0 GIM, while properties older than 15 or
20 years may have a GIM of 3.7 or less. Older properties require a greater level
of maintenance, and often require immediate capital expenditure for deferred
maintenance, and thus the gross income is than less valuable than for a new
property. Finally, in secondary nonurbanized locations, the GIM may be reduced
by .2 - .5.
The sale comparisons indicate a fee simple value of about $33,000/room, or about
$2,540,000 in total. We also have considered the GINI of 3.6 as an indication
of value
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for the subject, which
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[Super 8 Motel - Bremerton
Discounted Cash Flow Analysis - Land Lease]
50
<PAGE> 51
would indicate a value of approximately $2,600,000 While the comparisons range
from 2.4 - 4.3, most indicate a range of 3.3 - 4.0. We have also analyzed the
indications on a price/sf basis, with the comparisons indicating $85/sf, or
about $2,570,000 in total. In the final analysis, we have reconciled between
these two indications on a price/room basis and the GIM indication and have
estimated the subject's fee simple Sale Comparison Approach value at $2,570,000.
The subject is a well-maintained property with an effective age of about 15
years in a secondary market, and this indication appears reasonable.
In summary, the value indicated by the Sale Comparison Approach value as if
owned in fee simple is $2,570,000.
Leasehold Estate and Adjustment to Fee Simple Sale Comparison Value
The current market value of the leasehold estate of the subject is less than the
market value as if fee simple which has previously been estimated. This loss in
value due to the leasehold has three different components. The first is the
actual loss in net operating income over the term of the lease due to the land
lease payments. Please note the exhibit on the facing page, which summarizes our
analysis of the value implications of these future land lease payments. Please
refer also to the Appraisal Description section for a discussion of the land
leases which encumber the subject. Briefly, the land lease has about 20 years
remaining and the annual lease payments have been included based on the current
lease payment and CPI escalations every three years. The land lease payments are
then discounted back to a net present value as of January 1, 1999. The analysis
runs through the expiration of the lease. In this instance the future land lease
payments have been discounted at an equity discount rate (IRR) of 12.0%.
Discounting the future land lease payments results in a net present value for
the land lease payments at about $450,909.
The second component that impacts the current leasehold value relative to fee
simple value is the loss of reversion at the end of the lease. This could
potentially include both the value of the underlying site, and any remaining
value of the improvements at that time. Due to the relatively short remaining
term nature of the land lease, the magnitude of this component in loss is
becoming larger, and not particularly sensitive to changes in assumptions which
were made to estimate this value. Due to the length of the remaining lease term,
the reversionary value of the improvements is somewhat uncertain, and depends to
a large extent on the amount of subsequent renovations to the motel. In
estimating the reversionary value loss, we have used a current fee simple
property value estimate (based on the Sale and Income Approaches) of about
$2,470,000. For the purpose of reversion calculation we have escalated this
value at 2.0% annually. This loss in potential reversionary value has been
discounted back to the present. This results in a current loss in value due to
the loss in reversion at the end of the land lease at about $351,307. Totaling
these figures results in a total economic value loss from the land lease of
$802,217.
The final component in this loss of value is the negative impact on the
marketability of the real estate as the result of the leased land. This type of
investment is perceived both
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as more risky and more complicated than fee simple ownership. This results in
negative market perception of leasehold properties particularly as the lease
expiration date comes closer. In the case of the subject both the actual
reversion loss and the loss resulting in market perception would be reduced
because of the remaining lease term. After considering all of these factors, we
have estimated the value loss due to the reduced marketability of the property
at an additional 10.0% of the fee simple property value conclusion, or $247,000.
Adding this to the economic value loss from the lease payments and loss of
reversion, results in a total loss in value due to the leasehold estate at
$1,050,000 when rounded.
This figure has been deducted from both the Sale Comparison and Income Approach
fee simple value conclusions. Deducting this figure from the fee simple value
estimate above results in a Sale Comparison value conclusion for the leasehold
estate of $1,520,000.
Capitalization Rate
In the subsequent Income Approach analysis, the value has been estimated based
on a capitalization of forecast year 1 net operating income (NOI). The
capitalization rate expresses the relationship between the property's NO! and
sale price. For determining the appropriate capitalization rate for the subject
we have considered the indications from the sale comparisons as previously
described.
The appropriate capitalization rate to be applied to a specific property depends
on a wide variety of factors. These include the age of the property and expected
near-term future capital costs, which are not reflected in any one year's net
operating income. These rates are also affected by longer term income
characteristics relative to the actual or forecast income at the time of sale.
In addition, the required capitalization rate is strongly impacted by a
potential purchaser's perception of volatility or risk in the future income
characteristics, as well as the likely future marketability of the property.
For the subject, positive factors include the modest overall dollar value, which
is low enough to be feasible for purchase by many owner-operators. There
continues to be very strong demand from this market segment, and the subject
would likely be quite marketable to this segment if available for sale. This is
due to the strong physical characteristics, good specific location within a
secondary market, and mid-priced limited service orientation. As numerous recent
sales throughout the region demonstrate, these types of transactions often have
relatively low capitalization rates after typical expenses for outside ownership
are considered. Other positive factors include the subject's recent rooms
renovations (which totaled about $196,000 over the last four years) and lack of
deferred maintenance. This should result in low required near-term capital
expenditures for the property. The other positive factors relates to the
relatively modest occupancy in year I which has been forecast, at 60.0%. This is
due to substantial increases in supply in this market which make significant
increases unlikely in the short-term, but in a longer term context represents
up-side potential in future NOI.
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Negative factors which would tend to increase the required capitalization rate
include the location in a secondary market, which would not be as attractive to
potential income-oriented investors as more urbanized locations throughout the
region.
After consideration of all of these factors, we have estimated 11.0% as the
appropriate capitalization rate to be applied to the subject's income before
reserves. It should be noted that this capitalization rate assumes that the
underlying land is owned in fee simple, and does not account for the reduction
in marketability due to the current land lease.
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[Rental Comparison Photographs - Comparisons Nos. 1 and 2]
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[Rental Comparison Photographs - Comparisons Nos. 3 and 4]
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[Rental Comparison Photograph - Comparison No. 5]
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[RENT COMPARISON MAP]
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[Super 8 - Bremerton
Rental Comparisons Chart]
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INCOME APPROACH
The purpose of the Income Approach is to value an income property by analyzing
likely future income and expenses to the property. In this case we have employed
a Direct Capitalization Analysis, by dividing a annual forecast Year 1 net
operating income (NOI) by an appropriate capitalization rate.
We have relied on a variety of sources as the basis of the forecast of NOL
including an analysis of the subject's historical income and expense. Please
refer to exhibits on the following pages, which summarize the detailed expenses
for the subject over the past two years, as well as a breakdown of the income on
a month-by-month basis from 1994 to the present. We have also specifically
compared the subject's operations with other properties in this market. We have
also used expense comparisons for forecasting individual expense items, which
are also summarized in an exhibit on a following page. Finally, we have
considered the broader supply and demand forces at work within this specific
lodging market and throughout the region. Please refer to the Lodging Market
section for a detailed discussion regarding the factors which influence room
sales, as well as historic and likely future trends in this area. Based on this
evidence we have made a forecast of income and individual expense items for the
subject property, which is found at the end of this section.
Please refer to the exhibit on the facing page. This shows the relevant details
regarding the five other properties in the subject's local market. Photographs
of these properties as well as a map showing their location relative to the
subject are found on the previous pages.
Rental Comparisons
Rental comparison No. 1 is the Howard Johnson, located west of the subject on
Kitsap Way. This 146 room hotel is a full-service property with restaurant and
meeting rooms and is currently undergoing renovations. It is on the west side of
SR-3 and has views to the east of Oyster Bay. This property is located at the
upper end of the local market in terms of both room rates and amenities offered.
The property has meeting room capacity in excess of 600 persons and does provide
overflow business to the other local properties including the subject when
hosting large meetings or conventions. The subject is the closest lodging
facility to this comparison in physical location which is also beneficial. The
current rates are significantly higher than the subject and due to the full
service orientation this comparison is not a direct competitor with the subject.
Rental comparison No. 2 is the Oyster Bay Inn, located to the east of the
subject on the same side of Kitsap Way as the subject, but lacks the subject's
direct freeway visibility. This property has a more full-service orientation
than the subject, with a restaurant, lounge, and heated pool. As with the Howard
Johnson property, the room rates at this property are somewhat higher than the
subject due to the amenities offered. There are also two-bedroom units and
suites with whirlpool baths, and microwaves and refrigerators in some rooms.
Overall this comparison is considered to be superior to the subject and has
generally higher room rates.
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[Super 8 - Bremerton
Monthly Rooms Revenue History Chart]
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Rental Comparison No. 3 is the Best Western Bremerton Inn, which is located east
of the subject on the south side of Kitsap Way. This property includes 75 rooms
which are generally larger than the subject and the property has an outdoor
heated pool. The amenities offered include continental breakfast and this
property has generally higher rates than the subject.
Rental Comparison No. 4 is the Flagship Inn, which is located east of the
subject on the north side of Kitsap Way. This property is somewhat smaller than
the subject with 29 rooms and is an older property with more similar room rates
to the subject . The hotel is a three story interior corridor room access
facility with a heated pool. The rooms are larger than the subject and the
property has an outdoor heated pool. The amenities offered include continental
breakfast and this property has slightly higher rates than the subject.
The final comparison is the Chieftain Motel located just south of Kitsap Way on
National Ave. This property is the most similar to the subject in terms of room
rates and amenities, but is somewhat older than the subject, having been
constructed in 1960. It is very similar in terms of occupancy, and room rates,
although the quality of the subject is considered to be higher than this
comparison. Seven of the units within this facility have kitchen facilities and
this property also offers weekly and monthly rates.
Subject Room Rates
The subject property currently has asking rates of $48.88 for a 1-person single
room, and $54.79 for a 2-person double room. The only standard discount offered
is the VIP plan, which results in a 10% discount off rack rates to a rate of
$43.99 single and $49.31 double. Since enrolling in the VIP plan has a nominal
cost that is about commensurate with the discount the first time it is used,
most rooms are sold at the 10% discounted rates.
The property has a current winter rate special of $39.88 for VIP cardholders on
1 or 2 person for a one bed room, or $44.88 for 2-4 persons for a two bed room.
Looking forward, the rack rates are estimated to be escalated by about 10% for
the 1999 summer season from 5/19 - 9/7. These rates are consistent with those
offered by the similar nearby competitive properties, and the subject rate
structure appears reasonable and near the lower end of the local market,
consistent with the subject's limited service orientation.
Monthly Rooms Revenue History
The figures on the facing page indicate the average occupancy, average daily
rate, and revenue per available room on a month-by-month basis for the property
since January 1994. Below each table are the figures for the one-year period
November 1997 through October 1998 as well as for the previous 12-month period.
Over the last year, the subject averaged 55.4% occupancy at an ADR of $46.72,
with a calculated RevPar of $25.89. For a 77-room limited service property in a
secondary market in the Northwest, these figures are about typical and economic.
However, occupancy and RevPar have
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declined over the last 4 years, with the exception of 1996, when the subject had
a Navy contract for 51 rooms for the aircraft carrier Abraham Lincoln for nine
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[Super 8 - Bremerton
Income and Expense History Chart]
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months. There is potential for a repeat of this contract work, with the subject
property manager indicating current negotiations with the USS Essex, which is
coming into the shipyard in 1999. The property manager indicated that the
increased occupancy in 1996 resulted in some decrease in following years due to
lack of repeat business. We do not anticipate substantial additional new
construction in the near term in this market, and view the current market and
subject rates and occupancies as fairly stabilized at this time.
Forecast of ADR and Occupancy
Please refer to the Market Analysis, in which the broader supply and demand
forces and factors which influence room sales in this market are discussed. The
current rates and recent history of the subject are consistent with these forces
and with the empirical indications from other similar properties. After
considering the specific history at the subject property, supply and demand
forces within this market, evidence from other Super 8 motels, and indications
from the competitors, we have made the forecast of Year 1 ADR and occupancy for
the subject as follows; For the year 1999 we have forecast the subject's ADR at
$46.00. This is consistent with the most recent 12 months figures and considers
the potential for the sale of a large block of rooms at a slightly lower rate,
of which the overall result is an increase in rooms revenue. We have forecast
occupancy for this time period at 60.0%. This represents an increase from the
current most recent 12 months occupancy at 55.4%, but is more consistent with
prior years occupancy figures and considers the possibility of higher occupancy
at contract rates as exhibited in previous years. This combination of factors
results in a RevPar of $27.60, up 6% from the last year and consistent with
previous years RevPar indications.
Income and Expense Forecast
Please note the figures on the facing page which summarize the income and
expenses for the subject over the past two years. An exhibit on the following
page summarizes individual income and expense items for two other similar Super
8 motels, and an average for a survey of similar properties in the United States
in 1997. These properties bracket the subject in terms of ADR and occupancy, as
well as in terms of age and overall quality. Together, these indications and the
preceding discussion form the basis for our income and expense estimate for
1999.
The subject history is summarized from detailed accounting provided by
management. Expenses exclude interest, depreciation, and professional fees
(generally accounting and legal), which are related to ownership and not real
estate interests. Also, the expenses exclude land lease payments, since we will
first estimate the income and value of the property as if owned fee simple, and
subsequently make a specific adjustment for the impact of the land leases. The
subject property is essentially owned and managed by a central organization that
also operates about 25 other Super 8 Motels in the Northwest. Thus, it is not
only part of the Super 8 franchise chain, but is also centrally operated and
locally managed along with other properties. Certain expense items, such as many
administrative expenses, marketing, and professional
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management are incurred off-site, and directly charged to the subject property
and to the other
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[Super 8 - Bremerton
Expense Comparisons Chart]
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properties under the same management. This allows for the good and
cost-effective central administration, and quality control of operations.
The subject history, and the comparison properties are analyzed not only on
total dollars, but also on S/room, S/Room Sold, and % of Total Income. All of
these units of comparison are considered and used in our following forecast. As
previously discussed, we have forecast an ADR of $46.00 and a 60% occupancy,
which results in a 1999 rooms revenue forecast of $775,698. Telephone income has
been forecast at $0.75/room sold, while telephone expense has been estimated at
$0.80/room sold, for a slight loss for this operated department. Other Income
includes vending income, faxes, guest laundry, etc., and represents less than 2%
of total income at a forecast of $0.85/room sold.
Rooms expenses accounts for cleaning, supplies and front desk labor. Although
this expense category is mostly variable with occupancy, larger properties are
more efficient in this category because of the fixed cost of front desk labor.
Also, some hotels account for on-site management and other labor in this
category instead of in Administrative and General, where we have accounted for
on-site management. These two expense categories should be viewed and analyzed
together for a full understanding of operations. We have forecast Rooms expenses
at $2,300/room, or about $10.50/room sold. Administrative and General expenses
include on-site managers, credit card discounts, supplies, business taxes, and
direct reimbursement charges for offsite administration, training, hotel
accounting quality control and other charges. Some of these offsite expenses
relate to ownership accounting and would be expected to decline under generic
individual ownership. The level of quality control and administrative management
for the subject is somewhat higher than typical. Although this maintains the
long-term viability of the property, many purchasers would plan on incurring
less expense in the short term, and our slightly diminished forecast at 14% of
total income considers these issues. The combined total of Rooms and
Administrative & General appears reasonable and consistent with other
properties.
Franchise fees are currently 5% of Rooms revenue. However, current fees for
Super 8 and other similar franchises are higher, and the rates at the subject
are "grandfathered" at a historically lower level. A new purchaser would incur a
total franchise fee of 8% of Rooms, which is our forecast. A strong franchise
affiliation is important in order to maintain market share in this competitive
lodging market. Much of the subject's room sales come from the central
reservations system, and the subject's strong name recognition and repeat
business are significant factors that would not be possible without such
affiliation. The forecast income implicitly assumes that such affiliation will
continue, and would be lower if this expense item were reduced or eliminated.
Marketing has been estimated at $80/room, or $6,160 in total. This is a modest
increase from the most recent year's history. This level of increase appears to
be justified to maintain market share in this relatively stable market.
Operations and Maintenance have been estimated at $450/room. This is an item
which varies considerably from property to property and from year to year. This
expense forecast assumes ongoing
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maintenance on a stabilized basis, and accounts for the effective age of the
property and the current condition of the improvements.
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[Super 8 - Bremerton
Income and Expense Forecast and Capitalization Analysis Chart]
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Because of the good condition and recent renovation of a portion of the subject
rooms and common area, a new purchaser may forecast less maintenance in the near
term, but this stabilized forecast is consistent with a longer-term perspective.
Energy and Utilities have been estimated at $825/room.
Management is forecast at 4.0% of effective gross income, or about $32,000
annually. This accounts for professional management on top of direct charges,
and is considered to be a typical level required for competent professional
management for a property of this size and complexity. Taxes for real and
personal property have been estimated based on the current tax assessment.
Insurance for the property has been estimated at $125/room, or $9,625.
The sum total of this expense forecast is $543,088, or $7,053/room. This is
about 7.6% higher than the reported expenses for the property in the last 12
months. Overall, the expense ratio is about 67.7%, which is reasonable based on
the subject's operating history and typical for similar properties.
Net Operating Income Before Land Lease
Please note the exhibit on the facing page, which summarizes the forecast of
income and expenses for the property as previously discussed. The Year 1 net
operating income, before land lease or reserves, is forecast at $259,950.
Capitalization Analysis - Fee Simple Estate
The anticipated net operating income is divided by a capitalization rate which
has been derived from an analysis of the sale comparisons. This rate as
previously derived in the Sale Comparison Approach is 11%. Applying this rate to
the forecast NOI results in an indicated fee simple Income Approach value of
$2,359,913.
Replacement Reserves
Although net income from motel properties is often capitalized prior to
deductions for replacement reserves, reserves are an important factor in motel
ownership and requires careful consideration as it significantly impacts net
cash flow. Reserves are required to replace items with shorter lives than the
building itself. In the case of motels it relates primarily to the replacement
of the furnishings, fixtures, and equipment (F,F,&E), carpet and flooring. A
large portion of this takes the form of rooms furnishings which have a
relatively short economic life span. In order for facilities to remain
competitive, the economic life of these components would generally be considered
to be in the range of five to ten years. The remainder of the F,F,&E costs
involve items such as common area furnishings, front desk and administrative
equipment, pool and spa equipment, etc. These items generally have a longer
economic life than the room furnishings, but shorter than the building as a
whole. Other required reserve items include roof replacement, parking lot
re-paving, and HVAC equipment. In consideration of these factors we have
estimated required replacement reserves at 3% of total income, or $32,107
initially. This is the equivalent of about $417/room annually. Subtracting this
figure from the forecast net operating income would result in a net cash flow of
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$227,843 before land lease. We note that based on the Income Approach fee simple
value conclusion, the capitalization rate after reserves have been deducted is
9.7%
Income Approach Value of Leasehold Estate
This capitalized NOI excludes the land lease payments, and the derived
capitalization rate is also prior to consideration of the value loss due to the
loss of reversion and reduced marketability of the leasehold property. Please
refer to the section at the end of the Sale Comparison Approach for discussion
of the total value loss due to the leasehold interest. The total magnitude of
this adjustment has been estimated at $1,050,000. Deducting this from the fee
simple Income Approach value above results in an Income Approach value of the
leasehold estate of $1,310,000, rounded.
Please note that the net cash flow to the leasehold estate is the fee simple NOI
less the land lease payment of $52,403, so that the leasehold NOI is $207,187. A
purchaser at a cost of $1,310,000 would achieve a going-in capitalization rate
for the leasehold estate of 13.4%, which is considerably higher than the 11.0%
estimated for the fee simple estate. The additional return in the near term
compensates the buyer for the diminished marketability of the leasehold
position, and for the eventual potential loss of improvement ownership at the
termination of the land lease. Please refer back to the discussion of the recent
offer for the leasehold position in the Silver Cloud, which indicated a 12.4%
leasehold cap rate for that property with a similar situation in an urbanized
location. This offer indicates the viability of the leasehold adjustment process
and of the Income Approach value conclusion.
Income Approach Conclusion
In conclusion, the value indicated for the leasehold estate of the subject
property, by the Income Approach is $1,310,000.
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RECONCILIATION AND FINAL VALUE ESTIMATE
The values indicated by the two approaches used in this report are as follows:
<TABLE>
<S> <C>
Sale Comparison Approach - Leasehold Estate $1,520,000
Income Approach - Leasehold Estate $1,310,000
</TABLE>
Reconciliation is the process of assigning different weight or emphasis to each
of the approaches to valuation used in the report to arrive at a final value
estimate. The primary considerations are the reliability of the data and the
applicability of each method for valuing the particular property.
In this case we had fairly good information regarding the sales of numerous
lodging facilities to use for comparison. These included four sales of
properties that are generally similar physically or locationally to the subject.
All of these transactions occurred in 1997 or 1998 and no market conditions
adjustment was considered necessary. The sales resulted in a fairly wide range
in each of the units of comparison. After adjustment, the indications from this
approach are considered fairly compelling with the subject within the range
indicted by the comparisons. An additional adjustment to the Sale Comparison
Approach was required for the leasehold position of the subject. Overall, we
have given this approach significant weight in the final value conclusion. This
approach also provides indications of general marketability and required income
characteristics.
For lodging facilities, investors typically place a great deal of emphasis on
the income producing capabilities of the property. This is particularly true as
the properties get larger and the nature of likely purchasers tend to become
more institutional. In this instance the physical characteristics of the subject
would place it at the lower end of this spectrum with more likely desirability
to potential owner operators. We have excellent detailed information regarding
the subject's historical operating performance. This factor combined with
confidential information from other similar properties and analysis of the
broader supply and demand forces in this market results in a fairly reliable
forecast of future net operating income. This, combined with strong information
regarding required capitalization rates from the sale comparisons results in a
fairly reliable Income Approach value estimate as well. Because of the
reliability of the information considered in this approach as well as the
relevance of the approach to many potential purchasers of the property we have
placed a significant amount of weight on the indications of this approach in the
final value conclusion.
In the final analysis we believe that both approaches were relevant and
compelling, and have placed a considerable weight on the indications of each.
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<TABLE>
<CAPTION>
Effective Value
Description Valuation Date Conclusion
<S> <C> <C>
Current Market Value - Leasehold Estate 1/1/99 $1,400,000
</TABLE>
The above value estimate is commensurate with a reasonable marketing and
exposure time of one year. The market value includes furnishings, fixtures, and
equipment (F,F,&E), including both permanently affixed real estate, and personal
property. The contributory value of F,F,&E is estimated to be $180,000, which
includes personal property of $130,000.
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ADDENDA
Authorization Letter
Hotel Sale Comparison Details
Kitsap County Area Description
Appraisers' Experience & Qualifications
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[AUTHORIZATION LETTER SECTION SEPARATOR]
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[US Bank letterhead]
December 9, 1998
F. Bates McKee, MAI
McKee and Schaika
701 Fifth Avenue, Suite 5750
Seattle, WA. 98104
RE: Super 8 Motels
USBADW Files A98 529 through 534
Dear Mr. McKee,
This letter will confirm our telephone conversation in which you agreed to
prepare complete self-contained appraisal reports on the captioned properties.
These reports should comply with Regulation 12 CFR Part 34 of the Office of the
Comptroller of the Currency titled Real Estate Appraisals as revised in Federal
Register Vol. 59. No. 108, dated June 7, 199_, and must comply at a minimum to
the current Uniform Standards of Professional Appraisal Practice of the
Appraisal Standards Board, which the regulation adopts in full.
Please note that your timely responses to issues raised in the review process is
considered part of this appraisal assignment.
The subject property consists of existing Super 8 Motels located Federal Way,
Sea-Tac, Bremerton, and Yakima Washington and Portland, Oregon.
The purpose of appraisal is to estimate market value for mortgage lending
purposes.
Your report should provide the following values of the subject's fee simple and
leasehold values as appropriate:
Market Value "as-is:"
A copy of this engagement letter must be included within the addenda of the
appraisal report. Please include the license or certification numbers of all
signatory appraisers on the letter of transmittal. Additionally, please state
the registration number of any appraisal assistants who provide significant
contribution to the analysis in the report.
If your appraisal report includes a Discounted Cash Flow model, please provide
the name of your program and include a copy of your computer disk as part of
your submission.
For additional subject property information please contact the following
individuals:
<TABLE>
<CAPTION>
Name Phone Number.
<S> <C> <C>
Property Background: Karl Schaffer 206-344-4551
Access Instructions Jerry Whitcomb/(Owner) 360-943-8000
</TABLE>
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You agreed to deliver the completed appraisal report by December 31, 1998 and
you estimated your fee not to exceed
Please inform me within five business days from the date of this letter if any
subject property information needed to complete the assignment is not available.
If you do not contact me within five business days, it will be assumed that you
have all the required subject property information needed.
The placement of this appraisal assignment was partially based on your agreed
delivery date. The Appraisal Division reserves the right to impose a penalty of
$100 per day for each business day the appraisal is late. This penalty may be
incurred unless you receive advance written authorization revising the delivery
date.
Your fee will be paid upon the satisfactory review of the submitted appraisal
report. If the appraisal report is cancelled at any time, you will be paid for
your services to date,
Please send 10 original copies of the appraisal report, along with your invoice
to the address shown below:
U.S.BANCORP APPRAISAL DEPARTMENT
1301 Fifth Avenue, Mezzanine Level, WWH-411
Seattle, WA 98101
You are not authorized to release any information regarding the content or
conclusion of the appraisal report to anyone without prior written approval from
U.S. Bancorp.
Any modification of this agreement, or necessary, deviation, must be
specifically approved by the Appraisal Division.
As confirmation of receipt of this package and agreement with the aforementioned
terms, please sign below and return to my attention.
Sincerely,
/s/
- ------------------
Karl Schaffer
Senior Review Appraiser
U.S. BANCORP APPRAISAL DEPARTMENT
cc: Don Henry, WWH-784
Agreed and approved:
- ------------------------- -----------
(Signature) (Date)
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[HOTEL SALE COMPARISON DETAILS SEPARATOR PAGE]
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Hotel Sale Comparison Number: 1
Name: Howard Johnson Bremerton - 5640 Kitsap Way
City: Bremerton County: Kitsap State: WA
Location: North side of Kitsap Way, west of SR-3.
Legal Desc: APN #3719-001-023-0007
Rooms: 146 Gross SF Area: 113,339
Age: 1978 Stories: 2
Description: Interior corridor Motel, (previously Bayview Inn), with
lounge, restaurant, and meeting rooms for 600+. Indoor pool and spa. Original
construction in 1978.
Income Data: No income information available.
Document Price: $5,090,000 Analysis Price: $5,090,000
Date: 11-26-97 Document No: 3054393
Buyer: Bayview Hotel Associates
Seller: O&J Hotel Investments
Source: Metroscan, Kitsap County Assessor, John Creiger
Sales Data: Warranty Deed, All cash to seller.
Per Room: $34,863 Per sf GBA: $45.00
Cap. Rate: N/A EGIM: N/A
Remarks: Property is undergoing interior renovation as of 12/98.
Views to the east over Oyster Bay and visibility from SR-3 in a high traffic and
visibility location north of intersection with Kitsap Way.
98219-1
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Hotel Sale Comparison Number: 2
Name: 6 Cypress Inn Motels
City: Various County: Various State: Various
Location: Everett, Poulsbo, Kent, Portland (2), Clackamas
Legal Desc:
Rooms: 521 Gross SF Area: 0
Age: 1960-1989 Stories:
Description: Six limited service motels, most of which were constructed between
1987 and 1989, with 1 older Downtown Portland Motel. Most of the properties of
average quality and condition, with the Kent Cypress Inn above average and the
older Downtown Portland property significantly below average.
Income Data: Buyer estimated a 12.0% Cap Rate on existing income for the
properties in total, after deduction of 6% for management and reserves. This
implies NOI after accounting for these items at $1,788,000, which is the
equivalent of $3,432/room.
Document Price: $14,900,000 Analysis Price: $14,900,000
Date: 02-02-96 Document No.: Various
Buyer: Sunstone Hotel Investors LP
Seller: HL Project 1
Source: David Kincaid (Sunstone) 714-361-3900
Sales Data: Property purchased out of foreclosure due to bankruptcy from
original property developer. Requirement to purchase all 6 motels together, but
publicly listed and widely available for sale, with listing price of
$16,000,000.
Per Room: $28,599 Per sf GBA: $.00
Cap. Rate: 12.0% EGIM:
Remarks: Purchaser intends to sell older Portland property and
possibly one other, and renovate remaining facilities in order to place national
franchise affiliations.
6025-1
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Hotel Sale Comparison Number: 3
Name: Nendel's Chehalis - 122 Interstate Ave.
City: Chehalis County: Lewis State: WA
Location: East side of Interstate 5 in Chehalis
Legal Desc: Lewis Co. APN #005871-071-017
Rooms: 70 Gross SF Area: 20,436
Age: 1970 Stories: 2
Description: Exterior entrance wood frame motel, in average condition at
time of sale. Fairly basic rooms and furnishings; outdoor pool.
Income Data: Confidential
Document Price: $2,275,000 Analysis Price: $2,275,000
Date: 05-14-97 Document No: 3020406
Buyer: 85 5th St. Assoc.
Seller: Cholock Hotel Investors
Source: Buyer
Sales Data: Purchased by experienced NW hotel operator, intends to
change franchise affiliation.
Per Room: $32,500 Per sf GBA: $111.32
Cap. Rate: 10%-11% EGIM: 3.4-4.3
Remarks: Older property with failed franchise affiliation, in decline
prior to sale. Excellent freeway visibility and good access, but not in
established lodging location; few nearby services.
97160-2
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Hotel Sale Comparison Number: 4
Name: Econolodge Motel - 3518 Pacific Hwy E.
City: Fife County: Pierce State: WA
Location: South side of Pacific Hwy E. and north of I-5. Near Port of
Tacoma Rd. exit from I-5.
Legal Desc: APN #032002-4-080
Rooms: 81 Gross SF Area: 22,195
Age: 1980 Stories: 3
Description: Three story wood-frame limited service motel property with
exterior entrance rooms. 62 vehicle parking spaces on-site, plus 9 truck parking
spaces.
Income Data: Income information confidential.
Document Price: $2,300,000 Analysis Price: $2,300,000
Date: 08-07-96 Document No: 9608070059
Buyer: Jung Sang and Seyoung An
Seller: Tae Y. and Jeong J. Chae
Source: Comps Inc. and Broker, Max Lee 206 878 6666
Sales Data: Property was previously purchased in 1995 for $2,100,000, or
about $25,926/room. This purchase was at a purchase price of $2,300,000, or
about $28,395/room.
Per Room: $28,395 Per sf GBA: $103.63
Cap. Rate: EGIM:
Remarks: Property has excellent access and visibility and is located
between the two I-5 exits which provide access to the Port of Tacoma area.
97191-1
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[KITSAP COUNTY AREA DESCRIPTION SEPARATOR PAGE]
83
<PAGE> 84
[KITSAP COUNTY MAP]
84
<PAGE> 85
KITSAP COUNTY AREA DESCRIPTION
Kitsap County is the smallest of the four counties that are considered part of
the Puget Sound Metropolitan Area. It is geographically separated from the other
three counties, being the only one located on the west side of Puget Sound, and
is therefore functionally separated from the major economic activity in the
Puget Sound region. Additional geographic constrains include the Olympic
Mountains and Hood Canal to the west; thus, this county's only direct surface
connection with other major population centers is with Tacoma and Pierce County
to the south via the Tacoma Narrows Bridge. The connection between Kitsap County
and the greater Seattle Metropolitan Area is via the State of Washington vehicle
and passenger ferry service. The population in each of the four Puget Sound
Metropolitan Area counties is summarized below.
Four-County Population History
<TABLE>
<CAPTION>
Increase
County 1980 1989 1990 1992 1994 1998 1980-1998
- ------ ---- ---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
King 1,269,749 1,446,000 1,507,305 1,564,486 1,599,500 1,665,800 31.2%
Snohomish 337,720 430,400 465,642 494,300 516,500 568,100 68.2%
Pierce 485,667 560,900 586,203 624,000 648,900 686,800 41.4%
Kitsap 147,152 181,500 189,731 205,600 213,200 229,000 55.6%
Totals 2,240,288 2,618,800 2,748,895 2,888,386 2,978,100 3,149,700 40.6%
</TABLE>
1 Source: Washington State Office of Financial Management, Revised Population of
Cities, Towns & Counties, 10/98
It should be noted that the population figures summarized above represent all
the persons who reside in the area designated. This includes military personnel,
military dependents, persons living in correctional institutions, and persons
living in nursing homes and other care facilities. As indicated by the table
above, there has been a steady increase in the population of the Puget Sound
Metropolitan Area in the decade of the 1980s, with particularly strong growth
occurring in the late 1980s to 1993. The increase from 1980 to 1998 was
approximately 41%. The majority of growth on a percentage basis has occurred in
both Snohomish County, with an increase of about 68% from 1980 to 1998, and
Kitsap County, with an increase of approximately @6% for the same period. This
substantial growth is expected to continue, especially in Snohomish and Kitsap
Counties, which have large, unincorporated areas for further expansion.
Population is projected to increase to about 281,000 by the year 2010, according
to state forecasts.
The majority of future growth in Kitsap County is likely to occur in the
unincorporated areas surrounding the incorporated cities of Bremerton,
Bainbridge Island, Port Orchard, and Poulsbo. The following table summarizes the
Kitsap County population in both unincorporated and incorporated areas for 1990,
1992, 1994 and 1998.
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Kitsap County Population
<TABLE>
<S> <C> <C> <C> <C>
Municipality 1990 1992 1994 1998
Bainbridge Island 3,081 16,850 17,510 19,080
Bremerton 38,142 38,990 35,920 37,260
Port Orchard 4,984 5,275 5,700 6,945
Poulsbo 4,848 5,280 5,415 6,590
Incorporated 51,055 66,395 64,545 69,875
Unincorporated 138,676 139,205 148,655 159,125
Totals 189,731 205,600 213,200 229,000
</TABLE>
We noted that, in the above summary, the increase in the population of
unincorporated Kitsap County from 1990 to 1991 reflects the incorporation of the
new City of Bainbridge Island that, in 1990, was the City of Winslow with a
population of 3,081. Thus, a large area of unincorporated Kitsap County became
the city of Bainbridge Island, with a 1991 population of 16,390. The single
largest concentration of population in unincorporated Kitsap County is the
Silverdale area to the north of Bremerton. This area, which serves as a retail
hub for the Kitsap Peninsula, contains about 20,000 residents. It has become an
area of new expansion in both retail and residential growth.
Overall, Kitsap County has two major factors that impact the resident
population. The primary factor is the large Naval presence of the Puget Sound
Naval Shipyard in Bremerton and at the nuclear submarine base at Bangor. The
second, more recent, factor is the recent expansion from the Seattle, Tacoma,
and Everett economies outside of Puget Sound. The populations of the counties on
the west side of Puget Sound have increased, partly due to a larger number of
people who live in Kitsap County and commute to Seattle or other destinations
via the Washington State ferry system. The ferry system has frequent departures
from Bremerton, Bainbridge Island, and Southworth to downtown Seattle and other
points on the east side of Puget Sound. The table below summarizes the historic
increase in passenger ferry ridership during the last years where data are
available. It is interesting to note that, while the ridership has been
increasing, the number of vehicle crossings has remained relatively constant
over the past decade for the Seattle-Bremerton run, which is the primary ferry
service for Kitsap County. This is due primarily to the advent of passenger-only
ferries over the past several years, which has decreased both the crossing time
and expense, particularly for Kitsap County residents who commute to the Seattle
CBD.
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Ferry Passenger Volume
<TABLE>
<CAPTION>
Increase
Seattle To 1988 1990 1994 1988-1994
- ---------- ---- ---- ---- ---------
<S> <C> <C> <C> <C>
Bainbridge Island 3,443,038 3,822,786 4,072,258 18%
Bremerton 1,139,576 1,484,629 1,399,354 23%
Southworth 326,852 383,536 347,534 6%
</TABLE>
1 Source: Washington State Ferries Public Relations.
87
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[EMPLOYMENT AND DEVELOPMENT TABLES]
88
<PAGE> 89
Kitsap County Economy
The exhibit on the facing page summarizes Kitsap County's largest civilian
employers. As this chart indicates, the local economy of the area is heavily
dependent upon the level of civilian employment at the Puget Sound Naval
Shipyard in Bremerton and the Naval facilities at the Trident Nuclear Submarine
Base in Bangor and at the Keyport Undersea Warfare Engineering Station, as well
as other minor military facilities. The government presence in Kitsap County
allows the area to possess a relatively strong and stable economy. Although the
Kitsap area economy has been affected by the overall national recession of the
early 1990% the overall effects were mitigated by the strong government presence
and payroll.
It is impossible to definitively state whether the net impact on the Kitsap
County economy of long-term changes in the military structure will be positive
or negative. Given the most recent information and trends, it is our perception
that military employment will likely be relatively stable, helped in part by
base closings at other facilities, while related civilian employment at Kitsap
County military facilities will likely be stable to slightly declining.
Summary
Kitsap County is the smallest of the four counties that comprise the greater
Puget Sound Metropolitan Area. It is physically separated from the majority of
the area's economic and population base by Puget Sound and relies on vehicle and
passenger ferry service to King and Snohomish Counties. Population has increased
significantly over the past decade and is expected to continue to increase,
albeit at more moderate levels, for the foreseeable future. The economy relies
heavily on the military for its employment base, with the top three county area
employers being Naval facilities. This sector has historically been relatively
stable and expanding and has fueled expansion in other sectors, particularly the
retail and service industries. Recent declines in military-related employment
have impacted the county's economy, although the best estimate is for a neutral
effect for the near-term future. The overall outlook is for a relatively flat
economy in the short run, with a return to relatively slow and steady economic
growth over the medium to long term.
89
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[APPRAISERS' EXPERIENCE AND QUALIFICATIONS SEPARATOR PAGE]
90
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McKEE & SCHALKAREAL ESTATE APPRAISAL SERVICES & CONSULTANTS, INC.
701 Fifth Avenue, Suite 6750, Seattle, Washington 98104
Telephone (206) 343-8909 Fax (206) 386-5777
EXPERIENCE & QUALIFICATIONS
E. BATES McKEE, MAI
Mr. McKee graduated from the Massachusetts Institute of Technology in Cambridge,
Massachusetts, in 1979. He received a Bachelor of Science Degree in Geology,
with a Minor in Writing. He additionally completed the O-Degree program in
Geology at Edinburgh University, Scotland, in 1978.
Mr. McKee received the MAI (Member of Appraisal Institute) designation in 1988.
Mr. McKee founded the firm of McKee & Schalka in 1990. McKee & Schalka is a
comprehensive commercial appraisal company currently employing ten professional
appraisers. Mr. McKee previously joined the Seattle office of Shorett & Riely as
a commercial appraiser in 1984. In 1989 he co-founded and managed the Shorett &
Riely office in Bellevue, Washington.
Mr. McKee was previously employed as a Geologist with Roger Lowe Associates,
Bellevue, Washington, from 1979 to 1980. His work included site evaluation of
geologic and hydrologic conditions and hazards, economic feasibility analysis,
and construction inspection. Mr. McKee was employed as an investment manager and
analyst from 1981 to 1983. During this time he authored Optival, a computer
program for analyzing stock options. Mr. McKee was subsequently employed as an
investment software designer with Expert Systems, Inc., Redmond, Washington, in
1983. This position entailed design of software for analysis of real estate,
stocks, bonds, options, annuities and insurance.
Mr. McKee is a Certified General Real Estate Appraiser (Washington State
Certificate No. 270-11 MCKE-EE-B443RF). Mr. McKee has also completed the
requirements of the continuing education program of the Appraisal Institute. In
his appraisal experience, Mr. McKee has appraised and analyzed a wide variety of
commercial property types, and provided critical consultation and litigation
services to a diversified range of clients.
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McKEE & SCHALKAREAL ESTATE APPRAISAL SERVICES & CONSULTANTS, INC.
701 Fifth Avenue, Suite 6750, Seattle, Washington 98104
Telephone (206) 343-8909 Fax (206) 386-5777
EXPERIENCE & QUALIFICATIONS
BRIAN R. LEDBETTER
Mr. Ledbetter graduated from the United States Naval Academy in Annapolis in
1985, with a Bachelor of Science Degree in Physical Science. In 1990, he
completed a five-year service in the Navy as a Communications Officer aboard the
USS Cleveland. He was a member of the 1988 and 1992 U.S. Olympic Teams,
competing in the men's single-handed sailing competition, earning a Silver Medal
in 1992. He joined the firm of McKee & Schalka in 1992.
Mr. Ledbetter is a Certified General Real Estate Appraiser (Washington State
Certificate No. 27011LE-DB-EB-R376QQ). He is also a candidate of the Appraisal
Institute and has completed courses and examinations in Standards of
Professional Practice, Parts A and B. He has also successfully challenged the
Appraisal Institute examinations for Appraisal Principles and Appraisal
Procedures.
A partial list of property types for which appraisals have been prepared
includes multi-family, lodging, retail, office, industrial, marinas, and
special-purpose properties. Appraisals have been prepared for vacant land, as
well as proposed properties and existing improvements.
92
<PAGE> 1
Exhibit 99.(b)(4)
APPRAISAL
Of
SUPER 8 MOTEL
2408 Rudkin Road
Union Gap, Washington
As of:
January 1, 1999
Authorized by:
Karl Schaffer
U.S. Bancorp Appraisal Division
Seattle, Washington
Prepared by:
E. Bates McKee, MAI
Charles B. McKee, MAI
MCKEE & SCHALKA
Real Estate Appraisal Services & Consultants, Inc.
701 Fifth Avenue, Suite 6750
Seattle, Washington 98104
Reference No. 8218
1
<PAGE> 2
McKEE & SCHALKA
REAL ESTATE APPRAISAL SERVICES & CONSULTAINTS, INC.
701 Fifth Avenue, Suite 6750, Seattle, Washington 98104
Telephone (206) 343-8909 Fax (206) 386-5777
December 6, 1998
Karl Schaffer
Senior Income Property Appraiser
U.S. Bancorp, Appraisal Division
1301 Fifth Avenue, Mezzanine Level
Seattle, Washington 98101
<TABLE>
<S> <C>
NAME: YAKIMA SUPER 8 MOTEL
DESCRIPTION: 95-ROOM LIMITED SERVICE MOTEL
ADDRESS: 2605 RUDKIN ROAD
MUNICIPALITY: UNION GAP, WASHINGTON
REAL PROPERTY DESCRIPTION: YAKIMA COUNTY APN NO. 191205-21401; 191205-21403
OTHER PROPERTY DESCRIPTION PERSONAL PROPERTY TAX ACCOUNT NUMBER 500000-10108 8218
MCKEE & SCHALKA REFERENCE NO.: 8218
USBADW FILE NO.: A98-534
</TABLE>
Dear Mr. Schaffer:
We have prepared the attached appraisal report for the subject property. The
subject is a 95-unit lodging facility which is located at 2605 Rudkin Road in
Union Gap, Washington. The purpose of this appraisal is to estimate the Market
Value of the leasehold interest of the subject property. The site on which the
improvements are located is subject to a g-round lease which has approximately
36 years remaining. The definition of Market Value used in this appraisal is
found in the Appraisal Description of the attached report.
The accompanying complete appraisal report has been prepared in conformity with
the Uniform Standards of Professional Appraisal Practice (USPAP) and the
Appraisal Standards implemented by the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 (FIRREA). This appraisal has been prepared in
conformity with the requirements of the Code of Professional Ethics and the
Standards of Professional Appraisal Practice of the Appraisal Institute, and is
subject to the Assumptions, Certification & Limiting Conditions contained in
this report, as well as specific assumptions contained herein. This report has
also been
2
<PAGE> 3
Transmittal Letter
Super 8 Motel, Union Gap, WA
McKee & Schalka Reference No.:8218
December 6, 1998
Page 2
prepared in accordance with the appraisal guidelines of U.S. Bancorp. Mr. E.
Bates McKee, MAI and Mr. Charles B. McKee, MAI are both Washington State
Certified General Real Estate Appraisers.
In the course of this appraisal we have both substantially participated in the
analysis and valuation. Mr. Charles McKee has personally inspected tile subject
property. Significant information and assistance have been provided by other
sources, including sources cited herein, and by other associates of McKee &
Schalka, Inc. As a result of our investigation and analysis, our conclusion is:
<TABLE>
<CAPTION>
EFFECTIVE VALUE
DESCRIPTIVE VALUATION DATE CONCLUSION
----------- -------------- ----------
<S> <C> <C>
CURRENT MARKET VALUE - LEASEHOLD ESTATE 1/1/99 $2,080,000
</TABLE>
The above value estimate is commensurate with a reasonable marketing and
exposure time of one year. The market value includes furnishings, fixtures, and
equipment (F,F,&E), including both permanently affixed real estate, and personal
property. The contributory value of F,F,&E is estimated to be $300,000, which
includes personal property of $210,000.
Respectfully submitted,
E. Bates McKee, MAI
Charles B. McKee, MAI
3
<PAGE> 4
CERTIFICATION, DISCLOSURE AND USE RESTRICTION
CERTIFICATION
I CERTIFY THAT, TO THE BEST OF MY KNOWLEDGE AND BELIEF:
o The statements of fact contained in this report are true and correct.
o The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are my personal,
unbiased professional analyses, opinions, and conclusions-
o I have no present or prospective interest in the property that is the
subject of this report, and I have no personal interest or bias with
respect to the parties involved.
o My compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the
amount of the value estimate, the attainment of a stipulated result, or
the occurrence of a subsequent event.
o My analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice.
o Ms. Heather Hake Woodside has made a personal inspection of the property
that is the subject of this report.
o Mr. Bates McKee has not made a personal inspection of the property that
is the subject of this report.
o No one provided significant professional assistance to the person(s)
signing this report, with the exception of other associates of McKee &
Schalka, Inc.
o The reported analyses, opinions and conclusions were developed, and this
report has been prepared, in conformity with the requirements of the
Code of Professional Ethics and the Standards of Professional Appraisal
Practice of the Appraisal Institute.
o The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
o As of the date of this report, Mr. E. Bates McKee, MAI has completed the
requirements of the continuing education program of the Appraisal
Institute.
o The appraisal assignment was not based on a requested minimum valuation,
a specific valuation, or the approval of a loan.
RESTRICTION UPON DISCLOSURE & USE:
Disclosure of the contents of this appraisal report is governed by the By-Laws &
Regulations of the Appraisal Institute.
Neither all nor any part of the contents of this report (especially any
conclusions as to value, the identity of the appraiser or the firm with which
(s)he is connected, or any
4
<PAGE> 5
reference to the Appraisal Institute or to the MAI designation) shall be
disseminated to the public through advertising media, public relations media,
news media, sales media or any other public means of communication without the
prior written consent and approval of the undersigned. No part of this report or
any of the conclusions may be included in any offering statement, memorandum,
prospectus or registration without the prior written consent of the appraiser.
This appraisal is intended for use only by the client identified in the
Transmittal Letter, and may not be transmitted or communicated to any other
party without the specific written permission of McKee & Schalka, Inc.
- ------------------------------- -------------------------------
Signature of Appraiser Signature of Appraiser
5
<PAGE> 6
GENERAL ASSUMPTIONS AND LIMITING CONDITIONS
The attached report may only be used or reviewed in its entirety. No individual
pages, portions, analyses or conclusions may be separated from the complete
report or verbally disseminated without transmittal of the entire report. The
report is intended solely for the review and use by the client identified in the
Transmittal Letter, and may not be transferred to any other party without the
specific written permission of McKee & Schalka, Inc. Certain aspects of the
report (including analysis methodology, spreadsheets, textual formatting and
content) are considered the exclusive intellectual property of McKee & Schalka,
Inc. All rights are reserved.
The following General Assumptions and Limiting Conditions are supplemented by
additional specific assumptions and limiting conditions identified in the
attached report.
It is assumed that there are no hidden or unapparent conditions of the property,
subsoil, structures, or environment (including asbestos, formaldehyde, radon,
soil contamination, structural conditions, legal compliance including zoning and
Americans With Disabilities Act compliance, title or legal conditions, mineral
or other valuable conditions or rights, or unknown soils, hydrological, or
environmental factors) that render it more or less valuable. We have no
expertise in any of these areas, and we specifically counsel the client to
perform additional investigation by qualified experts. No responsibility is
assumed for such conditions or for arranging the studies that may be required to
discover them.
The liability of McKee & Schalka, Inc. and its employees is limited to the
client only, and only to the extent of the fee actually contracted for.
The value conclusions are the result of integration of the entire appraisal
process, including multiple methodologies, approaches and analyses. Any specific
errors or omissions may or may not change the value conclusions.
The appraiser is not required to give further consultation, testimony or
attendance in court by reason of this appraisal unless arrangements have been
previously made.
The information furnished by others is believed to be reliable, but no warranty
is given for its accuracy.
The forecasts, projections and estimates contained in this report are based on
current market conditions, anticipated short-term supply and demand factors, and
a stable economy. These forecasts are, therefore, subject to changes with future
conditions. The analyses and conclusions are valid only as of the date of
transmittal of the report.
The appraiser has made no survey of the property and assumes no responsibility
in connection with such matters. Any sketch or identified survey of the property
included in this report, is only for the purpose of assisting the reader to
visualize the property.
No responsibility is assumed for the legal description or for matters including
legal or
6
<PAGE> 7
title considerations. The property is appraised free and clear of any or all
liens or encumbrances, unless otherwise stated. Title to the property is assumed
to be good and marketable.
Responsible ownership and competent management are assumed.
The allocation of total value to land, buildings, or any fractional part or
interest as shown in this report, is invalidated if used separately or in
conjunction with any other appraisal.
7
<PAGE> 8
[TABLE OF CONTENTS AND INDEX]
8
<PAGE> 9
LIST OF MAPS AND FIGURES
9
<PAGE> 10
SUMMARY OF IMPORTANT CONCLUSIONS
<TABLE>
<S> <C>
NAME OF PROPERTY SUPER 8 MOTEL - YAKIMA
ADDRESS: 2605 RUDKIN ROAD
MUNICIPALITY UNION GAP, WASHINGTON
YAKIMA COUNTY PARCEL NOS: 191205-21401; 191205-21403; 500000-10108
PROPERTY DESCRIPTION: 95-ROOM, 3-STORY LIMITED-SERVICE MOTEL
CONSTRUCTION: WOOD FRAME
SIZE: 40,065SF GBA
AGE; ORIGINAL CONSTRUCTION 1985; EXPANDED IN 1992
CURRENT STATUS: OPERATED AS FRANCHISE AFFILIATED SUPER 8 MOTEL
APPRAISERS: E. BATES MCKEE, MAI
CHARLES B. MCKEE, MAI
MCKEE & SCHALKA REFERENCE NO: 8218
USBADW REFERENCE NO: A98-534
EFFECTIVE DATE OF APPRAISAL: 1/1/99
DATE OF REPORT PREPARATION: 12/6/98
PROPERTY RIGHTS APPRAISED: LEASEHOLD ESTATE
PURPOSE AND USE OF APPRAISAL: ESTIMATE MARKET VALUE FOR ASSET EVALUATION
TYPE OF APPRAISAL: COMPLETE
TYPE OF REPORT: SELF-CONTAINED
SIGNED CERTIFICATION: ATTACHED
ASSUMPTIONS AND LIMITATIONS: ATTACHED
SCOPE OF APPRAISAL: COMPREHENSIVE DATA COLLECTION; SALE COMPARISON AND
INCOME APPROACHES USED
HIGHEST AND BEST USE: CONTINUED MAINTENANCE AND OPERATION AS
FRANCHISE-AFFILIATED LODGING FACILITY
LEASEHOLD SALE COMPARISON APPROACH
VALUE: $2,160,000
LEASEHOLD INCOME APPROACH VALUE:
$1,990,00
RECONCILED LEASEHOLD VALUE $2,080,000 ($22,947/ROOM)
ESTIMATE:
</TABLE>
COMMENTS
The subject of this appraisal is the 95-room Super 8 Motel located in Union Gap,
Washington. This is a 3-story, wood frame, limited-service motel. The property
was originally constructed in 1985, and subsequently expanded in 1992. It has
been well maintained and managed. Typical of other Super 8 properties the
subject has fairly
10
<PAGE> 11
small rooms and limited common areas, and a functional layout with an interior
entrance configuration. The property has an indoor pool and spa area.
The improvements are located on a 3.57-acre site which is not owned in fee
simple but is leased. The lease has approximately 36 years remaining (including
extension options) and this appraisal addresses the market value of the
leasehold estate. The site is located directly adjacent to Highway 82, at the
Union Gap freeway interchange just south of Yakima. Yakima is a relatively
stable market in terms of demand for rooms, but over the past few years has
experienced a significant increase in new supply. This includes 5 new hotels
built since 1994 which have added about 20% to the competitive supply of rooms,
which has led directly to a corresponding decline in occupancy at most existing
facilities, the subject included. This has been only slightly offset by the
modest increase in average daily rate (ADR), and by slight increases in hotel
revenue overall in this market, which have averaged about 1.5% over the last 3
years. The near-term future will likely see occupancies at about current levels
once the new properties stabilize, with new supply in the near-term unlikely. We
have forecast 1999 occupancy for the subject at 55% with an ADR of $49.50, which
results in a total rooms revenue nearly identical to that which the subject
achieved over the last 12 months.
As the basis for the valuation of the property we used the Sale Comparison and
Income Approaches and did not use a Cost Approach. For an existing established
motel property of this size and age, purchasers are primarily interested in the
income characteristics and the market price for similar properties. For the Sale
Comparison Approach we reviewed a wide variety of hotel transactions in
Washington and Oregon, and used five for direct comparison with the subject. The
subject would be marketable if available for sale, and we have placed some
emphasis on the indications from this approach. The Income Approach is
considered compelling, based on detailed income and expense history for the
subject property over the past several years and a reasoned local and regional
market analysis. Both approaches required direct consideration and downward
adjustment for the land lease encumbering the subject site, which requires
substantial rental payments and eventual lack of ownership at the end of the
lease in 36 years. In the end, we gave consideration to both approaches in our
final value estimate.
11
<PAGE> 12
[SUBJECT PHOTOGRAPHS] (8)]
12
<PAGE> 13
APPRAISAL DESCRIPTION
IDENTITY OF PROPERTY
The subject is an existing 95-room lodging facility known as the Yakima Super 8
Motel. It is located at 2605 Rudkin Road in Union Gap, Washington.
LEGAL DESCRIPTION
We have not been provided with a rifle report for the subject property. A legal
description for the subject property is contained in the land lease agreements,
copies of which are included in the Addenda. The property can also be legally
described as Yakima County tax lots 19120521401, 191205-21403, and personal
property account #500000-10108.
It is our understanding that access to the subject is via an ingress/egress
easement from Rudkin Road. We assume that there are no other easements or
unapparent title or legal considerations which affect the value or utility of
the subject site.
PURPOSE OF APPRAISAL
The purpose of this appraisal is to estimate the Market Value of the subject
property. following is the definition of Market Value according to OCC
Regulation 12 CFR Part 34.42:
"Market Value means the most probable price which a property
should bring in a competitive and open market under all
conditions requisite to a fair sale, the buyer and seller each
acting prudently and knowledgeably, and assuming the price is
not affected by undue stimulus. Implicit in this definition is
the consummation of a sale as of a specified date and the
passing of title from seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and each acting
in what they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
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(5) The price represents the normal consideration for the property
sold unaffected by special or creative financing or sales
concessions granted by anyone associated with the sale."
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FUNCTION OF APPRAISAL
It is our understanding that the function of this appraisal is to assist in
decisions regarding financing and asset valuation of the property.
PROPERTY RIGHTS APPRAISED
This is an appraisal of the leasehold estate of the subject property. The
improvements are located on land which are subject to long term land leases. The
first lease was signed in 1984 prior to the construction of the original
improvements, with a lease subsequently entered into for the adjacent site prior
to the expansion of the property in 1992. Both leases have identical expiration
dates of July 2034 after option extension. The leases are fully net to the owner
of the improvements for all expenses including property taxes, insurance, and
other costs, and the first lease has CPI-based escalations every 3 years, while
the second lease has annual 5% increases. The subject owner has a first right of
refusal if the underlying land is sold, but otherwise holds no purchase options.
At the termination of the lease, the improvements revert to the lessor. A
financial analysis regarding the value implications of the land lease including
a forecast of future land lease payments and total value loss due to the land
lease is included later in this report.
UNAVAILABILITY OF INFORMATION
We have not been provided with an environmental report, title report, structural
inspection report, or a hydrologic or soils report. We are not expert in any of
these areas, and generally rely on the technical reports of qualified personnel.
We specifically assume that there are no unapparent conditions which affect the
value or utility of the property.
ADA COMPLIANCE
We have not been provided with any information regarding the compliance of the
subject property with the Americans With Disabilities Act (ADA). As a public
lodging facility, the property may be expected to meet increased standards for
access and other accommodation. ADA compliance standards are evolutionary and
subject to legal and practical interpretation, and some future continued cost
and upgrade for the subject would be expected. We have considered these issues
in our valuation of the property. We are not experts in ADA compliance issues
and specifically assume that there are no unapparent conditions with regard to
ADA compliance which affect the value or utility of the property.
ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal is subject to the General Assumptions and Limiting Conditions
found at the beginning of this report, as well as specific assumptions noted
herein.
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SCOPE OF APPRAISAL
This appraisal is not limited m scope, and uses both the Sale Comparison and
Income Approaches to value. The Cost Approach has not been employed in our
valuation process. Current purchasers of similar properties are primarily
interested in the income characteristics of the property, and focus on the
Income Approach and Sale Comparison Approach when determining an appropriate
purchase price. Also, the age of the improvements and subsequent renovation make
an exact estimation of accrued depreciation unreliable. Therefore the Cost
Approach has not been used, since it would not have had any bearing on the
reconciled market value for the property.
In the course of this appraisal Mr. Charles McKee has personally inspected the
subject property. In addition we have evaluated the local neighborhood and
surrounding areas; surveyed the competitive lodging facilities within this
market; and reviewed historical data and income and expenses for other similar
properties. We have also carefully reviewed and analyzed the subject's income
and expense history over the past several years. We have spoken with the
subject's owners, manager, and other property managers, owners, and government
officials within this market. We have researched and evaluated the sales of
other lodging facilities, both locally and throughout the Pacific Northwest.
Overall, the scope of the research and analysis contained in this appraisal is
substantial, and in our opinion adequate to support the value conclusion.
COMPETENCY
We are competent to appraise the subject property. We have considerable
experience in the analysis and valuation of lodging facilities throughout the
region, and have appraised several other lodging facilities in the subject's
market area. Please refer to the Scope of Appraisal, the Appraiser's
Qualifications and Experience Data in the Addenda, and the research and
presentation embodied in this report for verification of competency.
HISTORY AND CURRENT STATUS OF PROPERTY
A land lease for the site was entered into in 1984, and the original
improvements were completed in 1985. In 1992 a 36-room addition was built, with
a second land lease entered into as described above. The property has been owned
continuously and operated as a Super 8 Motel since the time of the original
construction. The subject was offered for sale in 1998, along with a portfolio
of about 25 other Super 8 properties located in Washington, Oregon and Alaska,
with an asking price of about $91 million. It is our understanding that several
parties expressed interest in the properties, with the highest offer at about
$81 million. This interest did not result in either transaction or indications
for individual properties, and the interested parties bidding on the portfolio
are different than the likely purchaser profile for the subject property
individually. The properties are not currently offered for sale, and we are not
aware of any current or pending purchase offers, listings, or agreements.
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REASONABLE EXPOSURE TIME AND MARKETING TIME
The value conclusion in this report is as of the effective date of this
appraisal, and assumes that a reasonable exposure time has preceded that
effective date. Thus the value is consistent with expected transaction on that
effective date after prior marketing. Exposure time is the period of time that
would reasonably have preceded transaction of the property at the appraised
value on the date of appraisal. The reasonable marketing time discussed in this
section is that period which would be expected to be incurred to market the
property in the current environment as of the date of the appraisal report, with
the marketing to occur subsequently. Thus the value conclusion is not
necessarily the subsequent value that would be anticipated for transaction of
the property after the future marketing period.
It is our conclusion that the subject property would be marketable if available
for sale. The improvements range between about 6 and 13 years in age, and appear
to have been well maintained. The subject has just completed a significant
renovation to most of the rooms and common areas, and should continue to be
competitive within its market segment for the foreseeable future. The quality
and limited-service orientation make it attractive to the owner operator
segment, who continue to be active in the hotel market.
Regionally there continues to be significant sales activity for this property
type. Over the past several years the market activity of hotel properties
increased, as REITs and other entities had increased interest. More recently
this institutional interest declined over the last half-year. While interest
from this segment of purchasers declined, smaller income investors and owner
operators continue to be active. On a single-property basis this would be the
subject's primary market segment, and the subject improvements would be quite
marketable to this segment.
Negative factors include a location in a secondary market which has recently
experienced significant increases in supply, and a corresponding decrease in
occupancy. The subject, while having a proven income stream, has had a decline
in gross revenue. The other significant negative factor in the marketability
relates to the land leases, and loss of improvements at the end of the lease
term. At about 36 years remaining this begins to become a significant factor,
and would tend to offset the otherwise stronger marketability of the subject.
After consideration of these factors we have estimated a marketing and exposure
time of one year or less, and the value conclusion is consistent with that
estimate.
DATE OF INSPECTION
December 3, 1998
DATE OF APPRAISAL PREPARATION
December 6, 1998
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EFFECTIVE DATE OF VALUE ESTIMATE
January 1, 1999
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[NEIGHBORHOOD MAP]
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NEIGHBORHOOD AND LODGING MARKET
REGIONAL OVERVIEW
The subject is located in the small incorporated city of Union Gap. Union Gap is
adjacent to the south edge of the City of Yakima in Yakima County in the south
central part of the state of Washington. The estimated 1998 populations for
Union Gap, Yakima, and the County are
Union Gap 5,340
City of Yakima 64,290
Yakima County 210,500
The city of Yakima is the largest city in the county in terms of population and
the largest commercial and industrial center. Union Gap, although separately
incorporated, is economically a part of the urban area which includes the City
of Yakima and the immediately surrounding areas.
The Yakima County economy is heavily oriented toward agriculture, including
fruit, vegetables, and livestock. Agricultural jobs are the largest segment of
the job market, and the majority of economic activity is either agriculturally
or service-oriented. The county population has been growing between about 1.0%
and 2.5% each year since 1990. We expect continued gradual population growth,
and we expect agriculture to continue to be the primary, economic base. A more
complete regional description is attached in the Addenda.
NEIGHBORHOOD OVERVIEW
Please refer to the neighborhood map on the facing page for visualization of the
location of the subject within this neighborhood. The subject is located in
Union Gap, at the south edge of the greater Yakima area. The subject is located
directly adjacent to the west side of Highway 82 about 4 miles south of the
Yakima CBD. This location is at the SW quadrant of the Valley Mall Blvd/Highway
82 interchange, the only interchange in Union Gap. The dominant commercial land
use in this neighborhood is the Valley Mall, the development of which has
shifted much of the retail focus south towards Union Gap from Yakima. Valley
Mall is located two blocks northwest of the subject, just north of Valley Mall
Blvd and east of 1st St.
Major retailers in and around the Valley Mall include Sears, Eagle Hardware,
ShopKo, Office Depot, Future Shop, Costco, and Top Foods. While there has been
some discussion of a second major mall being built at the east end of Yakima in
the future, the prospects of this are uncertain, and the likelihood is that the
Union Gap neighborhood will continue to be a major focus of retail activity for
Yakima.
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The subject's specific location is at the south edge of the retail district just
south of Valley Mall Blvd. between Rudkin Road and Interstate 82. The subject is
immediately surrounded by a Denny's restaurant to the west, with an older
Quality Inn motel, Arco gas station/mini-mart and Settlers Inn restaurant
further west across Rudkin Road. To the north is ShopKo, Eagle, SeaGalley
restaurant, with a Days Inn hotel and truckstop further north. To the south and
southwest is a vacant lot, and further south is a State Patrol office. Traffic
counts along Highway 82 in the vicinity of the subject are as follows:
TRAFFIC COUNTS
<TABLE>
<CAPTION>
AVG. ANNUAL
LOCATION 1994 1995 1996 1997 CHANGE
-------- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C>
I-82 S. Of Nob Hill 32,000 33,000 34,000 37,000 +5.2%
Blvd.
</TABLE>
Overall the subject has a strong location within this neighborhood. The direct
highway visibility and good access are positive factors for a lodging facility,
as is the proximity to numerous restaurants and other services. The emergence of
this area as a primary retail location is also a positive factor, offsetting the
somewhat removed location relative to downtown Yakima and the main ho' .-1
areas.
OVERVIEW OF LODGING MARKET
The Yakima area lodging market is fairly self-contained, with nearly all of the
facilities located within the city limits of either Yakima or Union Gap. As
previously discussed, these two cities effectively operate as a single
metropolitan area, centered around the Yakima CBD. In total, there are about
2,100 hotel/motel rooms in the area, the majority of which are contained within
about 20 primary lodging facilities.
The motel properties are centered around three specific submarkets. The largest
concentration of motels is located along the North First Street Corridor which
stretches from Interstate-82 in the north to the Yakima CBD in the south. This
stretch of about 1.5 miles contains about half of the competitive facilities,
and these are mostly older properties developed from the late 1950s to the early
1970s, when 1st Street was a major north/south corridor through Yakima. Many of
these older properties are 2-story exterior entrance facilities, and all are in
the budget to moderate class price range, with the exception of the Doubletree
Hotel-Yakima Valley which is a full service facility.
The second primary submarket is the Yakima Avenue corridor, which basically runs
through downtown from First Street in the west past Interstate-82 to the east.
This corridor contains most of the larger hotels and has also seen the majority
of the recent development in Yakima. These hotels primarily serve the retail and
commercial core of the city as well as the Yakima Convention Center, which is
centrally located near these lodging facilities. In general, these
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[HISTOR OF HOTEL/MOTEL ROOM SALES TABLES]
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CBD properties have the highest room rates and appear to have the strongest
occupancy statistics, largely as a result of the significant amount of
convention business in Yakima.
The final primary submarket is the subject's Union Gap area located about four
miles south of the Yakima CBD. The properties in this market are centered around
the Interstate 82 interchange, which is a major service and retail oriented
neighborhood at the south edge of the Yakima metropolitan area. There are only
three competitive properties in this submarket, which includes the subject Super
8 at 95 rooms, the adjacent Quality Inn (former Huntley Inn) at 86 rooms, and
the 114 room Days Inn located 1/4 mile to the north. Of these the subject has
the strongest location in terms of freeway access and visibility, although the
Days Inn benefits from an adjacent truckstop with the same ownership. All three
Union Gap properties offer truck parking, which is an important demand segment
in this market.
A wide variety of factors contribute to the demand for motel rooms in this area.
Primary among these is the local commercial activity, as Yakima serves as the
primary economic, social, and administrative focus for Yakima county. The
county's economy is driven primarily by agriculture and related activities, and
the population has experienced fairly steady modest increases over the past
decade, increasing just over 1% annually. Another important element which drives
local room sales is convention business. Several factors have contributed to
this increased demand segment, including the increased utilization of the Yakima
Convention Center, which contains about 14,500sf of meeting space and was
recently renovated. Positive factors in Yakima's ability to attract regional
convention business include Yakima's reputation for excellent climate, and a
central location relative to other cities in Washington.
Other significant demand factors aside from local commercial business and
conventions include truckers, and visitors to Yakima for sports tournaments.
This is a particularly large market segment in Yakima due to the weather,
central location, and good sporting facilities, and Yakima hosts numerous annual
tournaments, as well as the Central Washington State Fair. Tourism also plays an
important role in room sales and has been gradually expanding over the past
decade. Partly this is a result of destination visitation for activities such as
hunting and fishing, camping and hiking, and winery touring. The Yakima Valley
wineries to the south have become a tourist destination within the region and
this segment will likely continue to expand in the future. The primary
tourist-oriented business however comes mainly from transient travelers along
Interstate 82, and as a stopping point between other Eastern Washington and
Oregon locations and the greater Seattle area. This is a factor both during the
summer tourist season, and intermittently during the winter during periods of
bad weather. The subject's specific location is a positive factor for this
segment, particularly for northbound traffic, for which the subject represents
the first visible option.
Other demand generators include the Yakima Sundome, (which is relatively
underutilized), the Yakima Speedway, and historically the horse racing track.
The recent announcement that this will be closing down is a negative factor, as
is the recent announcement that Boise Cascade will close their plywood plant in
1999.
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[HOTEL ROOM REVENUE HISTORY IN THE PACIFIC NORTHWEST TABLE]
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HISTORY OF HOTEL/MOTEL ROOM SALES
The figure on the previous page summarizes the history of hotel and motel room
sales revenues for the city of Yakima and Yakima County over the last 14 years.
The source of these figures is the State of Washington's Hotel/Motel Tax Revenue
Reports. The individual annual figures show significant variation. This is the
result of numerous factors, including fluctuations in conventions, tourism, and
weather related factors. In addition, the figures reflect actual room revenue
tax collections from the facilities rather than ___ obligations, which sometimes
results in individual variations due to delinquent tax revenue collections.
As the figures show, the overall lodging market has shown modest increases over
this entire period, averaging about 6%/year. More recently, following the large
increases in the early 1990's the figures have been relatively flat. Over the
last two years the average increase for the city has been 1.2%, while the county
as a whole has been nearly flat. The figures for the first 8 months of 1998 are
slightly more positive, showing 1.9% and 1.5% respectively.
These figures need to be viewed in the historical context of substantial
increases in supply over the past 5 years. As will be subsequently outlined,
five new hotels have opened since 1994, adding approximately 20% to the
competitive supply in this market. During this period the room revenue has
increased only about 5%, resulting in a substantial decline in revenue for
existing facilities. This is reflected both in declining occupancies in this
market, and in average daily rate (ADR) increases that have been more modest
than in most markets in the region. This market-wide decline in occupancy has
been mirrored in the subject's figures over this time period, with occupancies
declining from a high of 78.3% in 1994 to the most recent 12 months figure of
56.2%.
Other indications of regional trends comes from a review of Trends in the Hotel
Industry, a publication by PKF Consulting most recently dated October 1998. This
survey, summarized on the facing page, includes 140 Washington properties that
total 20,129 rooms, and is divided by sub-areas for the Washington market. The
"Tri-Cities and Central Washington" lodging market had an average occupancy of
58.8% for the first 10 months of 1998, virtually the same as the 58.7% in the
previous year. The average daily room rate declined from $57.99 to $57.11. Thus
the average Revenue per Available Room (RevPar) was $33.58, down 1.3% from the
same period in 1997. RevPar had declined 3.4% in the preceding period from 1996
to 1997. Figures for Eastern Washington were similarly stagnant, but for the
state as a whole a slight decline in average occupancy was more than offset by
ADR increases, and average RevPar was up by 6.3%. In general, the urbanized
areas showed increases, while the more rural markets were fiat to slightly
declining. By size and rate, the smaller and lower-rate properties had the
lowest increases. In summary, on a same facility basis, properties in the
subject location, size and rate classification were amongst the lowest
performing properties in Washington State.
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NEW SUPPLY
The recent additions in the Yakima Market include the 74 room Best Western
Peppertree Motel along the N. 1st St. corridor, and the 107 room Oxford Suites
on the east side of Highway 82,
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[WASHINGTON AND OREGON SUPER 8 MOTELS 1997-1998 OPERATING STATISTICS TABLE]
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both of which were added in 1995. In 1997 the 49 room Budget Suites was built,
and in June 1998 the 88-room Holiday Inn Express was opened, both in the CBD
area near the convention center. Other recent additions include the development
of the 59 room Comfort Inn Suites, the first property developed along the 40"'
St corridor on the west side. In total, these additions in supply represent 377
additional rooms, or an increase in supply of about 18%.
Given the relatively flat room revenue figures for Yakima, further increases in
supply in the short to medium term are unlikely. Although some of the newer
problems appear to be performing well, (most notably Holiday Inn Express and
Oxford Suites), the average occupancy in this market has declined substantially.
Given the relatively stable demand segments and very modest historical ADR
increases, new construction does not appear feasible at this time, and this
situation is unlikely to change within the next few years.
NORTHWEST SUPER 8 STATISTICS
Please refer to the figures on the facing page which show the operating
statistics for 22 Washington and Oregon Super 8 properties under the same
management as the subject. The exhibit shows the occupancies, ADR, and RevPar
for the period Nov. 1997 - Oct. 1998, and also compares these with the previous
12 months. These chain-wide statistics show an average RevPar of $28.37 over the
past 12 months, which is down 1.1% over the previous figures. The average
chain-wide occupancy was 56.8%, which is nearly identical to the subjects
occupancy over this period. The ADR at the subject was slightly lower than
average, with the subject showing one of the larger declines in room revenue
over this period at 5.5%. This is a direct result of the new supply in this
market, combined with the relatively fiat growth in total market revenue.
CONCLUSION AND FORECAST OF SUBJECT ROOM REVENUE
All of the indications show a very flat lodging market in Yakima, with gradual
increases in demand and ADR, but declining RevPar for existing properties. This
has resulted from oversupply of new hotel rooms over the past several years,
which has resulted in declines in occupancies at existing facilities. Given the
magnitude of the supply increases the subject's income history looks fairly
typical, particularly given no substantial renovation over that period. The fact
that the new properties are at or near stabilization now, combined with the
subject's recent renovations, should stop the recent decline in occupancy. For
the market as a whole we would expect to see modest increases in rooms revenue
overall, due to small expansions in demand along with some achievable ADR
increases.
Please refer to the Income Approach later in the report, wherein we will discuss
the detailed history of revenue for the subject, and the directly competitive
local hotels. After consideration of all of these factors we have forecast the
subject's 1999 occupancy at 55.0%, with an ADR of $49.50. This results in a
RevPar forecast of $27.23, nearly identical to what the property achieved over
the past 12 months. For the near-term future we would expect a gradual increase
in rooms revenue, as a result both
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of the renovations making the property more competitive, and modest increases in
the market as a whole.
[SITE MAP ON THE REVERSE OF THIS PAGE]
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SITE DESCRIPTION
LAND AREA AND SHAPE Please refer to the Site Map on the facing
page. The subject site is a fairly
rectangular-shaped and consists of 2 tax
parcels, identified on the map as "Land
Lease - Lot 1" arid "Land Lease - Lot 3".
The total land area of the subject site is
about 3.57 acres or 155,509sf, according to
assessor records. This area excludes the
easement to Rudkin Road.
ACCESS & STREET FRONTAGE Valley Mall Boulevard, adjacent to the north
of the subject property, is a 3-lane major
arterial roadway. It has a full interchange
with Interstate 82, which is adjacent to the
east of the subject property. Primary access
to the subject is provided from Rudkin Road,
a 60' wide minor arterial located 200' west
of the subject. The 40'-wide paved access
easement area provides the direct access to
the subject site from Rudkin Road.
TOPOGRAPHY & SOIL CONDITIONS The subject site is fairly level and at
grade with the surrounding streets. It is
currently developed with the existing
3-story motel building. We have not been
provided with a soils report for the subject
property. We assume that the sub-surface
soils are adequate to, support the existing
improvements, and that there are no
unapparent drainage or soil problems.
ENVIRONMENTAL CONDITIONS We have not received any information
regarding environmental conditions at the
subject site. We are not experts in these
areas, and it is a specific assumption of
this report that there are no unusual
environmental conditions which materially
impact the value or utility of the property.
UTILITIES The subject property is fully serviced by
public utilities, including water, sewer,
electricity, telephone and cable television.
ZONING The subject property is zoned "C-1"
(Commercial District) in the City of Union
Gap. Under this designation, motels are
permitted outright. There is a minimum lot
size of 5,000sf and a maximum building
height of four stories or 451. Setback
requirements are minimal. Signage is limited
to one sign per
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parcel. The subject property appears to
fully conform with the "C-1" zoning code.
<TABLE>
<S> <C> <C>
ASSESSMENT AND TAXES Land $362,000
Improvements: $1,669,000
Personal Property: $108,386
Total: $2,139,386
1998 Property Taxes: $27,549.__
Average Tax Rate: 1.288%
</TABLE>
SUMMARY The subject site is a fully functional
commercial site.
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[SITE PLAN MAP]
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IMPROVEMENTS DESCRIPTION
GENERAL DESCRIPTION
The following description of improvements is based on our inspection of the
subject improvements, as well as review of available plans and discussions with
the subject property owners and managers. The Site Plan on the facing page shows
the lay out of the improvements on the subject site. Please refer to the subject
photographs at the beginning of this report which also show these Improvements.
Copies of the available building plans are provided at the end of this section.
OPERATOR
The subject property is operated as a Super 8 Motel franchise.
GENERAL DESCRIPTION OF THE IMPROVEMENTS:
The Yakima Super 8 Motel is a 95-room, 3-story, average-class motel. The
improvements originally consisted of a 62 room structure which was built in
1985. The Building was expanded in 1992 to its current configuration which has a
total gross building area of 40,065sf or 421sf/room. Typical of other Super 8
properties, the subject has fairly small rooms and limited common areas, and a
functional layout with an interior entrance configuration. The property includes
a swimming pool and spa area and there is adequate parking for cars and
substantial truck parking in the truck parking area in the south portion of the
subject site.
GUEST ROOMS
There are a total of 95 guest rooms. These rooms are divided between 60 doubles,
34 singles and one suite. Typical single rooms are about 12' x 26', with a total
room area of between 248sf and 285sf. Typical double rooms are about 12' x 26',
for a typical area of 312sf to 344sf.
INTERNAL LAYOUT, PUBLIC CIRCULATION & FACILITIES
The motel building is three stories, with the lobby, registration area and
administrative offices at entrance level, between the ground level and the first
level. The upper floors are accessed via internal stairways on the east and west
ends of the buildings. The rooms are situated on either, side of the central
corridor on each floor, with the single rooms mostly on the south side, and the
doubles on the north side. Other public areas include a meeting room with a 32
person capacity, guest laundry facilities, and a pool and patio area.
STRUCTURE
The foundation is steel-reinforced concrete slab on matt and spread footings.
The building is wood frame.
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EXTERIOR WALLS
The exterior walls are 7/8" stucco, over 2' x 4' studs on 16" centers, windows
are double-pane insulated glass
INTERIOR WALLS AND PARTITIONS
Interior walls are gypsum wallboard covered with thin-wall plaster. Party walls
consist of gypsum wallboard over RC channels, with batt insulation and thin-wall
plaster exterior.
FLOOR COVERINGS, CEILINGS & LIGHTING
Average-quality wall-to-wall carpet is the floor covering in the quest rooms and
public areas, including the lobby and registration area, administrative offices,
stairs and hallways. Vinyl flooring is the floor covering in the guest bath-
rooms, laundry room and other motel service areas. Ceilings are gypsum wall-
board with thin plaster covering in most areas. Lighting fixtures are generally
incandescent In the guest rooms, with both incandescent and fluorescent lighting
in the public areas. Skylighting provides additional natural light in the pool
area.
ROOF
Tile roof shingles on a pitched deck.
DOORS AND WINDOWS
The entrance doors are self-closing plate-glass doors set in aluminum frames.
Interior doors are solid-core and hollow-core wood, with metal frames. Exterior
windows are double-pane glass in aluminum frames
FIRE PROTECTION
Heat sensors connected to central alarm system, with individual smoke detectors
in each guest room. The new portion of the building has a wet sprinkler system.
HEATING, VENTILATION & AIR CONDITIONING
Individual through-wall air conditioning units in the guest rooms
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ROOM FURNISHINGS
Typical room furnishings include beds with frames and headboards, a straight-
back seat and an arm chair, a vanity unit, a color television set, fixed and
movable lights, art work, and an oak-framed mirror. The single rooms also
include a table. These furnishings are custom built, and appear to be attractive
and durable.
OTHER FEATURES
The subject improvements are generally of good quality and-attractive in
appearance. Although Super 8 Motels offer relatively low room rates and basic
amenities, compared with full-service motels and hotels, the quality of
construction and detailed amenities are superior to budget-class motels. The
average guest room size of the Yakima Super 8 is about 290sf, somewhat larger
than the 250sf typical for a budget motel. Soundproofing is very good with
light- weight concrete floors, and good soundproofing of party walls. The
enclosed pool is a desirable amenity in a tourist-oriented motel market. Both
the building itself and the furnishing and fixtures are attractive in appearance
and should be durable over time.
RENOVATION AND CAPITAL IMPROVEMENT HISTORY
The subject improvements appear to be in very good condition and we are not
aware of any areas of deferred maintenance. According to the property manager,
41 rooms have been recently completely rehabbed and 23 rooms were partially
rehabbed. We note that 33 of the rooms were constructed in 1992 and are only six
years old. In addition much of the common area was recarpeted. We have been
provided with a summary of expenditures on the property over the last four
years. The following table summarizes these amounts.
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1995 $47,091
1996 $38,279
1997 $ 916
1998 $171,282
--------
Total $257,568
Per Room $2,711
</TABLE>
Based on our analysis of cost new and the information above, we have estimated
the contributory value of F,F&E at $300,000 or about $3,200/Room, including
$210,000 in personal property value.
EFFECTIVE AGE/REMAINING ECONOMIC LIFE
The weighted average age of the subject is about 10 years which is consistent
with our conclusion of the effective age of the improvements. According to the
Marshall Valuation Service, the total useful life of the subject improvements
would be estimated at 35 years. Therefore, the remaining economic life is
estimated at 25 years.
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SUMMARY
The improvements consist of a Super 8 Motel with an average effective age of
about 10 years. The property has a fairly standard configuration for a
limited-service motel with three floors of guest rooms on either side of a
central corridor. The property is generally attractive in exterior appearance
and includes a large amount of parking. Guest rooms have a standard
configuration and moderately small sizes which are typical for a property with
this orientation. The property appears to be in good condition for a motel of
this age and has had significant recent expenditures on rooms and common area
maintenance. This would result in an expectation for fairly modest short-term
capital expenditures. With ongoing maintenance, the property should continue to
be functional and competitive within its market segment.
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[EXTERIOR ELEVATIONS SCHEMATIC DRAWINGS]
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[BASEMENT FLOOR PLAN SCHEMATIC DRAWINGS]
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[FIRST FLOOR PLAN SCHEMATIC DRAWING]
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[TYPICAL ROOM FLOOR PLANS]
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[LOWER LEVEL FLOOR PLAN - SCHEMATIC DRAWING]
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HIGHEST AND BEST USE
"Highest & Best Use" is defined by the Appraisal Institute as:
1) The reasonable and probable use that supports the highest present value
of vacant land or improved property, as defined, as of the date of the
appraisal.
2) The reasonably probable and legal use of land or sites as though vacant,
found to be physically possible, appropriately supported, financially
feasible, and that results in the highest present land value.
3) The most profitable use.
The concept of Highest end Best Use is based on the most profitable and valuable
use. The Highest and Best Use must meet four criteria: it must be physically
possible, legally permissible, financially feasible, and maximally productive.
HIGHEST AND BEST USE AS IF VACANT AND UNIMPROVED
The subject site is a regularly shaped, 3.57-acre site which is relatively flat
and fully usable. It has a fairly unrestrictive zoning designation, and both the
physical characteristics and the zoning would allow a wide variety of uses. The
property is located in an established commercial area which is associated
primarily with the nearby Interstate-5 freeway interchange. There are a wide
variety of commercial and service-oriented establishments immediately
surrounding the subject, including family and fast-food restaurants, service
stations, stand-alone retail buildings and shopping centers, lodging facilities,
and other uses.
Notable features at the subject site which would tend to shape its use include
the specific location directly adjacent to Interstate 82, with freeway
visibility. Other notable features include the fact that the subject has good
access from Valley Mall Blvd and Rudkin Road. The size of the site would allow
most forms of stand alone retail uses. Given the specifics of the site, the
highest and best use would be a use that benefits most directly from the freeway
exposure. This would include some form of lodging facility development or
restaurant use. Both the size and orientation of the site make it suitable for
these types of uses. In addition, there is ample evidence of both types of uses
in the immediate vicinity of the subject.
The recent additions of supply result in a market which is over-supplied in the
near term and new lodging facility construction is on likely feasible at this
time. Over a longer term gradual increases in demand will eventually result in
the feasibility of new construction. The feasibility of restaurant or other
service uses would also depend on specific conditions with the general situation
in balance at this time.
After considering all of this evidence, it is our opinion that the highest and
best use for the subject property as if vacant and unimproved would be to hold
the property for eventual development with a restaurant or limited-service
motel.
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HIGHEST AND BEST USE AS CURRENTLY IMPROVED
The site is currently improved with a 95-room, 3-story, limited-service lodging
facility. The effective age of this property is about 10 years with a
substantial 25 year estimated remaining useful life. The property has recently
undergone substantial upgrading of rooms and common areas and is in good
condition.
Although recent additions in supply have resulted in reduced occupancy at the
subject, the property still has moderately strong operating statistics, and
generates income greatly in excess of the current land value of the site. The
property is fully functional in design, and differs relatively little from newer
limited-service facilities of this price classification that have been recently
constructed. The improvements are in reasonably good condition with no major
items of deferred maintenance noted. With continued ongoing maintenance and
periodic F,F,&E upgrades, the improvements should continue to remain competitive
within its market segment for the foreseeable future.
Given these factors, it is our opinion that the highest and best use for the
subject property as currently improved is for continued maintenance and
operation as a franchise affiliated lodging facility.
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[SALE COMPARISON PHOTOGRAPHS - Nos. 1 and 2]
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[SALE COMPARISON PHOTOGRAPHS - Nos. 3 and 4]
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[SALE COMPARISON PHOTOGRAPH - No. 5]
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[SALE COMPARISON MAP]
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[BACK SIDE OF SALE COMPARISON MAP: Yakima Super 8 Motel Sale Comparison Summary]
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SALE COMPARISON APPROACH
The Sale Comparison Approach uses analysis of sales of comparable improved
properties to derive units of comparison that are then used to indicate value
for the subject. Our search for sales was broad, including most major markets in
Washington State. Our selection of comparisons included considerable emphasis
and understanding from the sales of properties we have previously appraised. The
primary units of comparison in this analysis are price per room, price per
square foot, and gross income multiplier. In addition, we have analyzed the
capitalization rates for these transactions, which will be used in the
subsequent Income Approach analysis.
Please refer to the exhibit on the facing page, which summarizes five
transactions involving Washington State hotel properties. All of these
transactions occurred in 1997 or 1998, and all represent transactions of limited
service motels. All are highway-oriented properties that bracket the subject in
terms of size, although the subject's age and quality are towards the upper end
of the range. This is offset by the subject's market which is oversupplied and
has relatively low occupancies, and which would be considered to be at the low
end of the spectrum. Photographs of these comparisons and a map showing their
location is found on the preceding pages, and additional details regarding these
transactions is included in the Addenda.
SALE COMPARISONS
Sale Comparison No. 1 is the May 1998 transaction of the Quality Inn, which is
located adjacent to the west of the subject in Union Gap. This 85-room property,
was built in 1973 and represents one of the subject's two direct competitors in
Union Gap. This exterior entrance facility was formerly operated as the Huntley
Inn, and has historically had low occupancies and been a poor performer in the
Yakima market. The new owner is an experienced regional operator primarily of
Best Western motels, and indicated that this property had essentially zero net
operating income at the time of sale. He estimated a 1998 occupancy at about 50%
and average room rates slightly higher than the subject, with this property
having much more variability in rates from winter to summer. The $1,955,000
purchase price was the equivalent of $23,000/room. Because of the exterior
entrances and small room sizes, the value/sf was a relatively high $92.
Sale Comparison No. 2 is a very recent transaction of the Nendel's Renton, which
sold in November 1998. This 130 room three-story interior entrance facility was
built in 1986, and has historically not performed well and had previously been
foreclosed upon. The property was purchased by an experienced Puget Sound area
motel developer earlier in 1998, who subsequently purchased the land lease,
performed about $125,000 in renovations, and re-sold the property to an
owner-operator. The most recent fee simple purchase price at $4,900,000 was the
equivalent of about $38,000/room, or about $99/sf. Like the subject this
property exists in the submarket which is in the midst of substantial increases
in supply, including a new hotel proposed for development directly adjacent. The
1997 occupancy for this property was about 60% at an ADR of about $46,
indicating a RevPar almost identical to the subject. Despite the modest
renovations prior to sale (at about $1,000/room) this property was still in
below-average condition at the
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time of sale and would be considered inferior to the subject in terms of
physical characteristics. The income prospects were superior, although likely to
decline as the new competition stabilizes. Overall we believe this is a
reasonably good indicator of market value for the subject on a S/room and $/sf
basis. In addition the approximately 11% capitalization rate is a good
indication of current required capitalization rates for a relatively large owner
operated properties.
Comparison No. 3 is a recent transaction involving another Nendel's Inn, located
in Chehalis, Washington. This is an older facility located along the
Interstate-5 corridor about midway between Seattle and Portland. This exterior
entrance facility has fairly basic rooms and limited amenities, and has not
historically had strong revenue statistics. Like the subject, the property has
excellent freeway visibility and good access. The purchase price at $2,275,000
is $32,500/room. We have specific confidential information regarding the income
and expenses at this property at the time of sale, which indicated a relatively
low capitalization rate of between 10% and 11%. Overall we believe this market
to be quite similar in terms of achievable income, and this transaction is a
reasonably good indicator of value for the subject. Given the relatively small
room sizes and lack of common areas we believe the subject is worth more on a
S/room basis, but slightly less on a $/sf basis.
Sale Comparison No. 4 is the EconoLodge in Fife. This somewhat older exterior
entrance property is well situated with highway visibility. The property was
purchased in December 1997 for $2,880,000 or about $28,000/room. The dated
exterior configuration decreases the value. The average area per room and the
income characteristics are slightly less than the subject. Thus the subject is
more valuable per room.
The final comparison is the former Days Inn in Spokane, which subsequent to the
transaction has been converted to a Motel 6. This property sold in March 1998
for $2,636,000, which is about $29,000/room. This property is a basic
limited-service facility which would be considered inferior physically to the
subject. It has a good location in the Spokane Valley submarket, with a
reasonably good freeway-visible site. While the markets would be considered
similar, the value of the subject would be more on both a S/room and $/sf basis
due to the subject's higher quality, more modem improvements.
One additional sale comparison is worth considering at this time. The Silver
Cloud Inn in Tukwila, south of Seattle, is a 120-room exterior entrance, limited
service motel, constructed between 1980 and 1986. In 1997, this property had
good operations at 75%occupancy at an ADR of about $52. It is situated on a
leased land site of about 2.45 acres, with the lease expiring in 2039. An offer
was tendered for this property within the last three months. The land lease is
currently well below market, but adjusts to market in 2010. Using a similar
methodology as will be subsequently used for the subject property, the sale
price is adjusted to $6,200, 000, after adding about $1,000,000 for the loss in
value represented by the leasehold. Based on this adjusted price, the equivalent
fee simple offer is about $52,000/Room. Although this building is inferior to
the subject property, with older construction, exterior entrance and outdoor
pool, the Seattle area market is superior, and the value indication should not
be used on a physical comparison basis. However, the financial comparison for
the fee simple estate indicates
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the cap rate of 11.0%, and a GIM of 3.6. Based on the actual offer price for the
leasehold position, the capitalization rate on the leasehold is 12.4%. This
offer indicates the potential marketability of a leasehold position, and will be
subsequently discussed in the Income Approach.
FEE SIMPLE SALE COMPARISON APPROACH CONCLUSIONS
The subject property is a relatively modern limited service property, with an
indoor pool. It has a well-established income, which has declined significantly
over the last several years as a result of a relatively stagnant market and new
construction. Positive factors include the significant renovation of rooms and
common areas in the last year, and the good highway visibility for the site.
Negative factors include the secondary location, and the fact that the
improvements are situated on leased land, which requires ongoing payments, and
the eventual loss of ownership of the improvements. For the purpose of this
analysis, we have first valued the subject property as if the land were owned
fee simple (as with all of the sale comparisons), and next made an explicit
adjustment for the loss in value as a result of the land lease.
Most recent purchasers of limited service hotels have been individual
owner-operators, who may own one or several facilities. They often buy
properties based on the gross income characteristics, and subsequently
self-operate and manage the properties, sometimes with and sometimes without
franchise affiliation. Thus a motel property represents an employment
opportunity and a business venture of a manageable scale. Individually, the
subject is too small to appeal to an institutional investor. Although the
interest from the institutional and REIT segments in purchasing hotels has
diminished substantially in the last year, other market interest in smaller
lodging properties has remained fairly strong resulting in a stable and active
market throughout 1998. Based on all of this evidence we have concluded that the
subject would be marketable if available for sale.
The sale transactions bracket the property in terms of physical characteristics,
market characteristics and income characteristics. Sale No. 1 appears
anomalously low at $23,000/Room. This property is very near to the subject,
although the exterior room configuration, considerably older age, and lack of
direct highway visibility require positive adjustments relative to the subject.
Also, the recent updating of the subject and the good facilities for truck
parking, and the indoor pool all support upward adjustments to this comparison.
Obviously, the fact that this property reportedly earned no net income would be
a considerable concern for a purchaser.
The other four properties all provide much more consistent indications, ranging
from $28,000/Room to $38,000/Room. The older exterior entrance facilities
represented by sales 3, 4 and 5 indicate the low end of the range at about
$30,000/Room. The property that is most similar to the subject physically, with
a newer age and interior hallway configuration, is sale No. 2, at about
$38,000/Room. As a group, the comparisons indicate a more consistent value on a
price/sf basis, centering around $100/sf. For these types of properties, many
purchasers talk
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[SUPER 8 MOTEL - YAKIMA
Discounted Cash Flow Analysis - Land Leases (both parcels
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about Gross Income Multipliers (GIM), as they are most interested in the gross
income characteristics. In urbanized areas, newer limited service properties are
purchased on a GIM of about 4.2. Properties of about 10 years old may have a
value of about 4.0 GIM, while properties older than 15 or 20 years may have a
GIM of 3.7 or less. Older properties require a greater level of maintenance, and
often require immediate capital expenditure for deferred maintenance, and thus
the gross income is than less valuable than for a new property. Finally, in
secondary non-urbanized locations, the GIM may be reduced by .2 - .5.
All of the sales provide some meaningful indications. Comparison No. 2 is most
similar in terms of physical and income characteristics, but is located in a
superior market. Comparison Nos. I and 5 have the most similar markets but are
inferior properties. All of these transactions occurred in 1997 and 1998, and
all are generally similar limited-service facilities. In addition, we had good
information regarding the income characteristics at most of these properties,
which gives greater reliability both to the market value conclusions and the
indications for required capitalization rates.
The sale comparisons indicate a fee simple value of about $35,000/room, or about
$3,330,000 in total. We have also analyzed the indications on a price/sf basis,
with the comparisons indicating $95/sf, or $3,800,000 in total. In the final
analysis, we have reconciled between these two indications and have estimated
the subject's fee simple Sale Comparison Approach value at $3,500,000. As a
final check of reasonableness we have considered the GIM of 3.7 which this value
conclusion represents. While the comparisons range from 2.4 - 4.3, most indicate
a range of 3.3 - 4.0. The subject is a well-maintained property with an
effective age of about 10 years in a secondary market, and this indication
appears reasonable.
In summary, the value indicated by the Sale Comparison Approach value as if
owned in fee simple is $3,500,000.
LEASEHOLD ESTATE AND ADJUSTMENT TO FEE SIMPLE SALE COMPARISON VALUE
The current market value of the leasehold estate of the subject is less than the
market value as if fee simple which has previously been estimated. This loss in
value due to the leasehold has three different components. The first is the
actual loss in net operating income over the term of the lease due to the land
lease payments. Please note the exhibit on the facing page, which summarizes our
analysis of the value implications of these future land lease payments. Please
refer also to the Appraisal Description section for a discussion of the land
leases which encumber the subject. Briefly, the land leases have about 36 years
remaining once extension options are included. The two land leases have somewhat
different payment clauses, with the first having CPI-based escalations every 3
years, which we have estimated at 2.5%. The second lease is somewhat more
onerous, containing 5.0% annual escalations. The combined year one (1999) land
lease payments are estimated at $98,569.
The land lease payments are then discounted back to a net present value as of
January 1, 1999. The analysis runs through the expiration of the lease, assuming
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extension options are exercised by the owners of the motel. In this instance the
future land lease payments have been discounted at an equity discount rate (IRR)
of 12.0%. Discounting the future land lease payments results in a net present
value for the land lease payments at about $1,120,000.
The second component that impacts the current leasehold value relative to fee
simple value is the loss of reversion at the end of the lease. This could
potentially include both the value of the underlying site, and any remaining
value of the improvements at that time. Due to the long term nature of the land
lease, the magnitude of this component in loss is relatively small, and not
particularly sensitive to changes in assumptions which were made to estimate
this value. Due to the length of the remaining lease term, the reversionary
value of the improvements is somewhat uncertain, and depends to a large extent
on the amount of subsequent renovations to the motel. In estimating the
reversionary value loss, we have used a current fee simple property value
estimate (based on the Sale and Income Approaches) of about $3,400,000. For the
purpose of reversion calculation we have escalated this value at 2.0% annually.
This loss in potential reversionary value has been discounted back to the
present. This results in a current loss in value due to the loss in reversion at
the end of the land lease at about $123,000. Thus the reversion represents only
about 10% of the total value component, while the intervening land lease
payments represent about 90%.
Totaling these figures results in a total economic value loss from the land
lease of $1,242,349.
The final component in this loss of value is the negative impact on the
marketability of the real estate as the result of the leased land. This type of
investment is perceived both as more risky and more complicated than fee simple
ownership. This results in negative market perception of leasehold properties
particularly as the lease expiration date comes closer. In the case of the
subject both the actual reversion loss and the loss resulting in market
perception would be reduced because of the significant remaining lease term.
After considering all of these factors, we have estimated the value loss due to
the reduced marketability of the property at an additional 3.0% of the fee
simple property value conclusion, or $102,000. Adding this to the economic value
loss from the lease payments and loss of reversion, results in a total loss in
value due to the leasehold estate at $1,340,000 when rounded.
This figure has been deducted from both the Sale Comparison and Income Approach
fee simple value conclusions. Deducting this figure from the fee simple value
estimate above results in a Sale Comparison value conclusion for the leasehold
estate of $2,160,000.
CAPITALIZATION RATE
In the subsequent Income Approach analysis, the value has been estimated based
on a capitalization of forecast year 1 net operating income (NOI). The
capitalization rate expresses the relationship between the property's NOI and
sale price. For determining
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the appropriate capitalization rate for the subject we have considered the
indications from the sale comparisons as previously described.
The appropriate capitalization rate to be applied to a specific property depends
on a wide variety of factors. These include the age of the property and expected
near-term future capital costs, which are not reflected in any one year's net
operating income. These rates are also affected by longer term income
characteristics relative to the actual or forecast income at the time of sale.
In addition, the required capitalization rate is strongly impacted by a
potential purchaser's perception of volatility or risk in the future income
characteristics, as well as the likely future marketability of the property.
For the subject, positive factors include the modest overall dollar value, which
is low enough to be feasible for purchase by many owner-operators. There
continues to be very strong demand from this market segment, and the subject
would likely be quite marketable to this segment if available for sale. This is
due to the strong physical characteristics, good specific location within a
secondary market, and mid-priced limited service orientation. As numerous recent
sales throughout the region demonstrate, these types of transactions often have
relatively low capitalization rates after typical expenses for outside ownership
are considered. Other positive factors include the subject's recent rooms
renovations (which totaled about $258,000 over the last four years) and lack of
deferred maintenance. This should result in low required near-term capital
expenditures for the property. The other positive factors relates to the
relatively modest occupancy in year 1 which has been forecast, at 55.0%. This is
due to substantial increases in supply in this market which make significant
increases unlikely in the short-term, but in a longer term context represents
up-side potential in future NOI.
Negative factors which would tend to increase the required capitalization rate
include the location in a secondary market, which would not be as attractive to
potential income-oriented investors as more urbanized locations throughout the
region. In addition, the large increases in supply this market has experienced
is coupled only with modest future room revenue growth, leading to declining
income at most properties in Yakima, the subject included. The subject's
substantial decline in room revenue and overall status of this market are
considered negative factors in terms of required capitalization rates.
In specific terms, the sale comparisons have indicated capitalization rates in a
range from about 10.0% to 11.3%, aside from Comparison No. 1 which was
essentially not generating positive income prior to the sale. The bottom of the
range is represented by a sale to an owner-operator with the lowest overall
property value, while the top of the range represents the purchase of the
largest magnitude. In conjunction with this appraisal we have also reviewed
extensive sales information from about 20 recent lodging facility transactions
throughout the Pacific Northwest. As a data set these had a somewhat higher
typical capitalization rate relative to the specific comparisons utilized in
this appraisal.
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After consideration of all of these factors, we have estimated 11.0% as the
appropriate capitalization rate to be applied to the subject's income before
reserves. It should be noted that this capitalization rate assumes that the
underlying land is owned in fee simple, and does not account for the reduction
in marketability due to the current land lease.
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[RENTAL COMPARISON PHOTOGRAPHS - Comparisons 1 through 4]
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[RENTAL COMPARISON MAP]
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[SUPER 8 YAKIMA - Rental Comparisons Chart]
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INCOME APPROACH
The purpose of the Income Approach is to value an income property by analyzing
likely future income and expenses to the property. In this case we have employed
a Direct Capitalization Analysis, by dividing a annual forecast Year 1 net
operating income (NOI) by an appropriate capitalization rate.
We have relied on a variety of sources as the basis of the forecast of NOI,
including an analysis of the subject's historical income and expense. Please
refer to exhibits on the following pages, which summarize the detailed expenses
for the subject over the past two years, as well as a breakdown of the income on
a month-by-month basis from 1994 to the present. We have also specifically
compared the subject's operations with other properties in this market. We have
also used expense comparisons for forecasting individual expense items, which
are also summarized in an exhibit on a following page. Finally, we have
considered the broader supply and demand forces at work within this specific
lodging market and throughout the region. Please refer to the Lodging Market
section for a detailed discussion regarding the factors which influence room
sales, as well as historic and likely future trends in this area. Based on this
evidence we have made a forecast of income and individual expense items for the
subject property, which is found at the end of this section.
Please refer to the exhibit on the facing page. This shows the relevant details
regarding the four other properties we have used for direct comparison. These
include the two other competitive properties at the subject's interchange, as
well as one other Yakima facility and the nearest other Super 8 Motel.
Photographs of these properties as well as a map showing their location relative
to the subject are found on the previous pages.
RENTAL COMPARISONS
Rental comparison No. 1 is the Days Inn, located 1/4 mile north of the subject
in Union Gap. This 118 room limited service motel was recently renovated, and
has a similar overall room quality and orientation to the subject. Like the
subject it generates a significant business from the trucker segment, partly as
a result of an adjacent truckstop with common ownership. It is our understanding
that this property has an average occupancy at about 60%, with an ADR slightly
higher than the subject as well. The current rates are about $5.00 higher
overall, with significant variation in rates from winter to summer.
Rental comparison No. 2 is the Quality Inn, previously described as Sale
Comparison No. 1. This property is located almost directly adjacent to the west
of the subject, but lacks the subject's direct freeway visibility. Despite the
relatively strong franchise affiliation this property has lower occupancy than
the subject at about 50%, with slightly lower room rates as well. This property
offers substantial discounting during the slower winter months and also offers
trucker parking, although it is less extensive and not as well utilized as the
parking at the subject. This property also increases rates in the summer more
than the subject, with $10 - 15 increases resulting in single rack rates in
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the $60 to $65 range. Overall this comparison is considerably inferior to the
subject without the modem appearance, and amenities such as the indoor pool.
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[SUPER 8 YAKIMA - Monthly Rooms Revenue History Chart]
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Rental Comparison No. 3 is one of the many older limited service properties
located along the N. 1st Street corridor in Yakima. Of these the Motel 6
provides the most direct competition due to a recent renovation about three
years ago, and despite the exterior entrance configuration and somewhat dated
appearance provides reasonably similar quality rooms. Typical of Motel 6
properties, this comparison has substantially lower room rates with no
discounting, with a single rate at about $33 and double rate of $39. This
property is estimating about 50% occupancy for 1998, which is down slightly from
their performance in 1997, with the ADR holding about even.
The final comparison is the 101 room Super 8 Motel located in Ellensburg, about
40 miles northwest of the subject. This is the next nearest Super 8 to the
subject, and is located in the same overall Central Washington lodging market.
It is very similar in terms of overall quality, occupancy, and room rates, with
a slightly lower occupancy resulting in a RevPar that is nearly identical to the
subject, and like the subject's operations experienced a substantial decline
from 1987 to 1998.
SUBJECT ROOM RATES
The subject property currently has rack or asking rates of $48.88 for a 1-person
single room, and $56.88 for a 2-person double room. The only standard discount
offered is the VIP plan, which results in a 10% discount off rack rates to a
rate of $43.99 single and $51.19 double. Since enrolling in the VIP plan has a
nominal cost that is about commensurate with the discount the first time it is
used, most rooms are sold at the 10% discounted rates. Truckers represent about
20% of the rooms sold, and are strong ongoing business, with a further
discounted rate of $39.99. Looking forward, the rack rates are to be escalated
to $55.88 single and $64.88 double for the 1999 summer season from 5/28 - 9/6.
These rates are consistent with those offered by the nearby competitive
properties, and the subject rate structure appears reasonable and at market.
MONTHLY ROOMS REVENUE HISTORY
The figures on the facing page indicate the average occupancy, average daily
rate, and revenue per available room on a month-by-month basis for the property
since January 1994. Below each table are the figures for the one-year period
November 1997 through October 1998 as well as for the previous 12-month period.
Over the last year, the subject averaged 56.2% occupancy at an ADR of $48.72,
with a calculated RevPar of $27.40. For a 95-room limited service property in a
secondary market in the Northwest, these figures are about typical and economic.
However, occupancy and RevPar have declined significantly over the last 4 years,
averaging a loss of about 7%/year. This is the impact of new construction in
this market, without substantial overall market growth. A similar number of
rooms are sold in total, split up between more properties with corresponding
lower average occupancy. Conversely, new construction requires higher rates to
be economically feasible, and the subject and market ADR has generally increased
over this period, offsetting some of the occupancy loss. We do not anticipate
substantial additional new construction in the near term in this market, and
view the current market and subject rates and occupancies as stabilized at this
time.
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[SUPER 8 YAKIMA - Income & Expense History Chart]
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FORECAST OF ADR AND OCCUPANCY
Please refer to the Market Analysis, in which the broader supply and demand
forces and factors which influence room sales in this market are discussed. The
current rates and recent history of the subject are consistent with these forces
and with the empirical indications from other similar properties. After
considering the specific history at the subject property, supply and demand
forces within this market, evidence from other Super 8 motels, and indications
from the competitors, we have made the forecast of Year 1 ADR and occupancy for
the subject as follows; For the year 1999 we have forecast the subject's ADR at
$49.50. This represents an increase of 1.6% over the most recent 12 months
figures. With 20% of rooms sold to truckers at about $40, the implied average
rate for the other rooms is $51 - $52, which is consistent with the asking VIP
rates currently in effect and planned for the summer season. We have forecast
occupancy for this time period at 55.0%. This represents a slightly reduction
from the current most recent 12 months occupancy at 56.2%, but slows down the
rate of decline that has previously been exhibited. This is due to the fact that
the other properties are expected to approach stabilization during this period,
along with continued moderate increases in demand for the market as a whole.
This combination of factors results in a RevPar of $27.22, virtually unchanged
from the last year.
INCOME AND EXPENSE FORECAST
Please note the figures on the facing page which summarize the income and
expenses for the subject over the past two years. An exhibit on the following
page summarizes individual income and expense items for two other similar Super
8 motels, and an average for a survey of similar properties in the United States
in 1997. These properties bracket the subject in terms of ADR and occupancy, as
well as in terms of age and overall quality. Together, these indications and the
preceding discussion form the basis for our income and expense estimate for
1999.
The subject history is summarized from detailed accounting provided by
management. Expenses exclude interest, depreciation, and professional fees
(generally accounting and legal), which are related to ownership and not real
estate interests. Also, the expenses exclude land lease payments, since we will
first estimate the income and value of the property as if owned fee simple, and
subsequently make a specific adjustment for the impact of the land leases. The
subject property is essentially owned and managed by a central organization that
also operates about 25 other Super 8 Motels in the Northwest. Thus it is not
only part of the Super 8 franchise chain, but is also centrally operated and
locally managed along with other properties. Certain expense items, such as many
administrative expenses, marketing, and professional management are incurred
off-site, and directly charged to the subject property and to the other
properties under the same management. This allows for the good and
cost-effective central administration, and quality control of operations.
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<PAGE> 66
[SUPER 8 YAKIMA - Expense Comparisons Chart]
66
<PAGE> 67
The subject history and the comparison properties are analyzed not only on total
dollars, but also on $/room, $/Room Sold, and % of Total Income. All of these
units of comparison are considered and used in our following forecast. As
previously discussed, we have forecast an ADR of $49.50 and a 55% occupancy,
which results in a 1999 rooms revenue forecast of $944,027. Telephone income has
been forecast at $0.45/room sold, while telephone expense has been estimated at
$0.50/room sold, for a slight loss for this operated department. Other Income
includes vending income, faxes, guest laundry, etc., and represents less than 2%
of total income at a forecast of $0.85/room sold.
Rooms expenses accounts for cleaning, supplies and front desk labor. Although
this expense category is mostly variable with occupancy, larger properties are
more efficient in this category because of the fixed cost of front desk labor.
Also, some hotels account for on-site management and other labor in this
category instead of in Administrative and General, where we have accounted for
on-site management. These two expense categories should be viewed and analyzed
together for full understanding of operations. We have forecast Rooms expenses
at $1,900/room, or about $9.46/room sold. Administrative and General expenses
include on-site managers, credit card discounts, supplies, business taxes, and
direct reimbursement charges for offsite administration, training, hotel
accounting quality control and other charges. Some of these offsite expenses
relate to ownership accounting and would be expected to decline under generic
individual ownership. The level of quality control and administrative management
for the subject is somewhat higher than typical. Although this maintains the
long-term viability of the property, many purchasers would plan on incurring
less expense in the short term, and our slightly diminished forecast at 14% of
total income considers these issues. The combined total of Rooms and
Administrative & General appears reasonable and consistent with other
properties.
Franchise fees are currently 5% of Rooms revenue. However, current fees for
Super 8 and other similar franchises are higher, and the rates at the subject
are "grandfathered" at a historically lower level. A new purchaser would incur a
total franchise fee of 8% of Rooms, which is our forecast. A strong franchise
affiliation is important in order to maintain market share in this competitive
lodging market. Much of the subject's room sales come from the central
reservations system, and the subject's strong name recognition and repeat
business are significant factors that would not be possible without such
affiliation. The forecast income implicitly assumes that such affiliation will
continue, and would be lower if this expense item were reduced or eliminated.
Marketing has been estimated at $150/room, or $14,250 in total. This is somewhat
higher than the recent historical expenses at the subject of less than
$10,000/year. Given the increased competition in this market, it is our opinion
that the subject will have to increase their marketing efforts in order to
prevent further erosion of a market share. Operations and Maintenance have been
estimated at $450/room. This is an item which varies considerably from property
to property and from year to year. This expense forecast assumes ongoing
67
<PAGE> 68
[YAKIMA SUPER 8 - Income and Expense Forecast & Capitalization Analysis Chart]
68
<PAGE> 69
maintenance on a stabilized basis, and accounts for the effective age of the
property and the current condition of the improvements. Because of the good
condition and recent renovation of the subject, a new purchaser may forecast
less maintenance in the near term, but this stabilized forecast is consistent
with a longer-term perspective. Energy and Utilities have been estimated at
$675/room.
Management is forecast at 4.0% of effective gross income, or about $39,000
annually. This accounts for professional management on top of direct charges,
and is considered to be a typical level required for competent professional
management for a property of this size and complexity. Taxes for real and
personal property have been estimated based on the current tax assessment.
Insurance for property has been estimated at $150/room, or $14,850.
The sum total of this expense forecast is $602,870, or $6,346/room. This is
about 4.6% higher than the reported expenses for the property in the last 12
months. Overall, the expense ratio is about 62%, which is reasonable and typical
for similar properties.
NET OPERATING INCOME BEFORE LAND LEASE
Please note the exhibit on the facing page, which summarizes the forecast of
income and expenses for the property as previously discussed. The Year 1 net
operating income, before land lease or reserves, is forecast at $365,949.
CAPITALIZATION ANALYSIS - FEE SIMPLE ESTATE
The anticipated net operating income is divided by a capitalization rate which
has been derived from an analysis of the sale comparisons. This rate as
previously derived in the Sale Comparison Approach is 11%. Applying this rate to
the forecast NOI results in an indicated Income Approach value of $3,326,811.
REPLACEMENT RESERVES
Although net income from motel properties is often capitalized prior to
deductions for replacement reserves, reserves are an important factor in motel
ownership and requires careful consideration as it significantly impacts net
cash flow. Reserves are required to replace items with shorter lives than the
building itself. In the case of motels it relates primarily to the replacement
of the furnishings, fixtures, and equipment (F,F,&E), carpet and flooring. A
large portion of this takes the form of rooms furnishings which have a
relatively short economic life span. In order for facilities to remain
competitive, the economic life of these components would generally be considered
to be in the range of five to ten years. The remainder of the F,F,&E costs
involve items such as common area furnishings, front desk and administrative
equipment, pool and spa equipment, etc. These items generally have a longer
economic life than the room furnishings, but shorter than the building as a
whole. Other required reserve items include roof replacement, parking lot
re-paving, and HVAC equipment. In consideration of these factors we have
estimated required replacement reserves at 3% of total income, or $29,065
initially. This is the equivalent of about $306/room annually. Subtracting this
figure from the forecast net operating income would result in a net cash flow of
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<PAGE> 70
$336,884 before land lease. We note that based on the Income Approach fee simple
value conclusion, the capitalization rate after reserves have been deducted is
10.1%
INCOME APPROACH VALUE OF LEASEHOLD ESTATE
This capitalized NOI excludes the land lease payments, and the derived
capitalization rate is also prior to consideration of the value loss due to the
loss of reversion and reduced marketability of the leasehold property. Please
refer to the section at the end of the Sale Comparison Approach for discussion
of the total value loss due to the leasehold interest. The total magnitude of
this adjustment has been estimated at $1,340,000. Deducting this from the fee
simple Income Approach value above results in an Income Approach value of the
leasehold estate of $1,990,000, rounded.
Please note that the net cash flow to the leasehold estate is the fee simple NOI
less the land lease payment of $98,569, so that the leasehold NOI is $267,381. A
purchaser at a cost of $1,990,000 would achieve a going-in capitalization rate
for the leasehold estate of 13.4%, which is considerably higher than the 11.0%
estimated for the fee simple estate. The additional return in the near term
compensates the buyer for the diminished marketability of the leasehold
position, and for the eventual potential loss of improvement ownership at the
termination of the land lease. Please refer back to the discussion of the recent
offer for the leasehold position in the Silver Cloud, which indicated a 12.4%
leasehold cap rate for that property with a similar situation in an urbanized
location. This offer indicates the viability of the leasehold adjustment process
and of the Income Approach value conclusion.
INCOME APPROACH CONCLUSION
In conclusion, the value indicated for the leasehold estate of the subject
property by the income approach is $1,990,000.
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RECONCILIATION AND FINAL VALUE ESTIMATE
The values indicated by the two approaches used in this report are as follows:
<TABLE>
<S> <C>
Sale Comparison Approach - Leasehold Estate $2,160,000
Income Approach - Leasehold Estate $1,990,000
</TABLE>
Reconciliation is the process of assigning different weight or emphasis to each
of the approaches to valuation used in the report to arrive at a final value
estimate. The primary considerations are the reliability of the data and the
applicability of each method for valuing the particular property.
In this case we had fairly good information regarding the sales of numerous
lodging facilities to use for comparison. These included five sales of
limited-service properties that are generally similar physically to the subject.
All of these transactions occurred in 1997 or 1998 and no market conditions
adjustment was considered necessary. The sales resulted in a fairly wide range
in each of the units of comparison. After adjustment, the indications from this
approach are considered fairly compelling with the subject within the range
indicted by the comparisons. An additional adjustment to the Sale Comparison
Approach was required for the leasehold position of the subject. Overall, we
have given this approach significant weight in the final value conclusion. This
approach also provides indications of general marketability and required income
characteristics.
For lodging facilities, investors typically place a great deal of emphasis on
the income producing capabilities of the property. This is particularly true as
the properties get larger and the nature of likely purchasers tend to become
more institutional. In this instance the physical characteristics of the subject
would place it at the lower end of this spectrum with more likely desirability
to potential owner operators. We have excellent detailed information regarding
the subject's historical operating performance. This factor combined with
confidential information from other similar properties and analysis of the
broader supply and demand forces in this market results in a fairly reliable
forecast of future net operating income. This, combined with strong information
regarding required capitalization rates from the sale comparisons results in a
fairly reliable Income Approach value estimate as well. Because of the
reliability of the information considered in this approach as well as the
relevance of the approach to many potential purchasers of the property we have
placed a significant amount of weight on the indications of this approach in the
final value conclusion.
In the final analysis we believe that both approaches were relevant and
compelling, and have placed a considerable weight on the indications of each.
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<PAGE> 72
<TABLE>
<CAPTION>
Effective Value
Description Valuation Date Conclusion
- ----------- -------------- ----------
<S> <C> <C>
Current Market Value - Leasehold Estate 1/1/99 $2,080,000
</TABLE>
The above value estimate is commensurate with a reasonable marketing and
exposure time of one year. The market value includes furnishings, fixtures, and
equipment (F,F,&E), including both permanently affixed real estate, and personal
property. The contributory value of F,F,&E is estimated to be $300,000, which
includes personal property of $210,000.
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<PAGE> 73
ADDENDA
Authorization Letter
Hotel Sale Comparison Details
Yakima County Area Description
Appraisers' Experience & Qualifications
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[AUTHORIZATION LETTER SEPARATION PAGE]
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<PAGE> 75
USBank U.S. BANCORP
Appraisal Department WWH411
1301 Fifth Avenue
Mezzanine Level
Seattle, WA 98101
206-344-4510
206-344-4694 Fax
December 9, 1998
E. Bates McKee, MAI
McKee and Schalka
701 Fifth Avenue, Suite 6750
Seattle, WA 98104
RE: Super 8 Motels
USBADW Files A98 529 through 534
Dear Mr. McKee,
This letter will confirm our telephone conversation in which you agreed to
prepare complete self-contained appraisal reports on the captioned properties.
These reports should comply with Regulation 12 CFR Part 34 of the Office of the
Comptroller of the Currency titled Real Estate Appraisals as revised in Federal
Register Vol. 59. No. 108, dated June 7 199__, and must comply at a minimum to
the current Uniform Standards of Professional Appraisal Practice of the
Appraisal Standards Board, which the regulation adopts in full.
Please note that your timely responses to issues raised in the review process is
considered part of this appraisal assignment.
The subject property consists of existing Super 8 Motels located Federal Way,
Sea-Tac, Bremerton, and Yakima Washington and Portland, Oregon.
The subject property consists of existing Super 8 Motels located Federal Way,
Sea-Tac, Bremerton, and Yakima Washington and Portland, Oregon.
The purpose of appraisal is to estimate market value for mortgage lending
purposes.
Your report should provide tie following values of the subject's fee simple and
leasehold values as appropriate:
Market Value "as-is:"
A copy of this engagement letter must be included within the addenda of the
appraisal report. Please include the license or certification numbers of all
signatory appraisers on
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the letter of transmittal. Additionally, please state the registration number of
any appraisal assistants who provide significant contribution to the analysis in
the report.
If your appraisal report ;includes a Discounted Cash Flow model, please provide
the name of your program and include a copy of your computer disk as part of
your submission.
For additional subject property information please contact me following
individuals:
<TABLE>
<CAPTION>
Name Phone Number.
- ---- -------------
<S> <C> <C>
Property Background: Karl Schaffer 206-344-4551
Access Instructions Jerry Whitcomb/(Owner) 360-943-8000
</TABLE>
You agreed to deliver the completed appraisal report by December 31, 1998 and
you estimated your fee not to exceed
Please inform me within five business days from the date of this letter if any
subject property information needed to complete the assignment is not available.
If you do not contact me within five business days, it will be assumed that you
hay. all the required subject property information needed.
The placement of this appraisal assignment was partially based on your agreed
delivery date. The Appraisal Division reserves the right to impose a penalty of
$100 per day for each business day the appraisal is late. This penalty may be
incurred unless you receive advance written authorization revising the delivery
date.
Your fee will be paid upon the satisfactory review of the submitted appraisal
report. If the appraisal report is cancelled at any time, you will be paid for
your services to date,
Please send 10 original copies of the appraisal report, along with your invoice
to rile address shown below:
U.S.BANCORP APPRAISAL DEPARTMENT
I301 Fifth Avenue, Mezzanine Level, WWH-411
Seattle, WA 98101
You are not authorized to release any information regarding the content or
conclusion of the appraisal report to anyone without prior written approval from
U.S. Bancorp.
Any modification of this agreement, or necessary, deviation, must be
specifically approved by the Appraisal Division.
As confirmation of receipt of this package and agreement with the aforementioned
terms, please sign below and return to my attention.
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<PAGE> 77
Sincerely,
/s/
- -------------------------------
Karl Schaffer
Senior Review Appraiser
U.S. BANCORP APPRAISAL DEPARTMENT
cc: Don Henry, WWH-784
Agreed and approved:
- ------------------------------- -----------------
(Signature) (Date)
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[HOTEL SALE COMPARISON DETAILS SEPARATION PAGE]
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Hotel Sale Comparison Number: 1
Name: Quality Inn (former Huntley Inn) 12 Valley Mall Blvd.
City: Union Gap County: Yakima State: WA
Location: Located near a major freeway interchange in Union Gap.
Legal Desc: 191205-22019, -22020
Rooms: 85 Gross SF Area: 21,200
Age: 1973 Stories: 2
Description: Older, exterior entrance facility located directly adjacent
to the Super 8 in Union Gap.
Income Data: The property had no income at the time of sale.
Document Price: $1,995,000 Analysis Price: $1,995,000
Date: 05-01-98 Document No: 310034
Buyer: Integrity Investors
Seller: RJL Properties
Source: Tor Morgal, Owner
Sales Data: This property was formerly known as the Huntley Inn and has
historically had low occupancies and has been a poor performer in the Yakima
market. The new owner is an experienced regional operator primarily of Best
Western motels. The property reportedly had no net operating income at the time
of sale.
Per Room: $23,000 Per sf GBA: $92.22
Cap. Rate: 0 EGIM:
Remarks: The estimated 1998 occupancy was about 50%. This property has
rates that have historically varied widely from season to season.
98218-2
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Hotel Sale Comparison Number: 2
Name: Nendel's Renton - 3700 East Valley Road
City: Renton County: King State: WA
Location: Located on the east side of East Valley Road in south Renton.
Located in close proximity to Valley Medical Center Hospital.
Legal Desc: King County APN 302305-9117
Rooms: 130 Gross SF Area: 49,260
Age: 1986 Stories: 4
Description: Four story, wood frame limited service lodging facility.
Building has a covered entryway. Fairly standard configuration with guest rooms
centered around a common corridor. The only significant guest amenity is an
indoor spa room with exercise equipment. Building was in poor to average
condition at the time of sale. Building exterior is CMU block and cedar siding.
Income Data: The 1997 occupancy for this property was about 60% at an ADR
of about $46, indicating RevPar of $27.60.
Document Price: $4,700,000
Analysis Price: $4,900,000
Date: 11-12-98 Document No: 1650850
Buyer: Chong S. Yi
Seller: Golden Treasury LLC
Source: Bill An, previous seller
Sales Data: This property was purchased by an experienced Puget Sound
area motel developer in early 1998 who subsequently purchased the land lease,
performed $125,000 in renovations, and resold the property to an owner operator.
Recorded price is less than total transaction price per seller.
Per Room: $37,692 Per sf GBA: $99.47
Cap. Rate: Confid. EGIM: 3.7
Remarks: Projected reasonable cap rate in the range of 10.5%-11.5%.
98218-3
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Hotel Sale Comparison Number 3
Name: Nendel's Chehalis - 122 Interstate Ave.
City: Chehalis County: Lewis State: WA
Location: East side of Interstate 5 in Chehalis
Legal Desc: Lewis Co. APN @005871-071-017
Rooms: 70 Gross SF Area: 20,436
Age: 1970 Stories: 2
Description: Exterior entrance wood frame motel, in average condition at
time of sale. Fairly basic rooms and furnishings; outdoor pool.
Income Data: Confidential
Document Price $2,275,000 Analysis Price: $2,275,000
Date: 05-14-97 Document No: 3020406
Buyer: 85 5th St. Assoc.
Seller: Cholock Hotel Investors
Source: buyer
Sales Data: Purchased by experienced NW hotel operator, intends to change
franchise affiliation.
Per Room: $32,500 Per sf GBA: $111.32
Cap. Rate: 10%-11% EGIM: 3.4-4.3
Remarks: Older property with failed franchise affiliation, in decline
prior to sale. Excellent freeway visibility and good access, but not in
established lodging location; few nearby services.
97160-2
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Hotel Sale Comparison Number: 4
Name: Econolodge Motel - 3518 Pacific Hwy E.
City: Fife County: Pierce
Location: South side of Pacific Hwy E. and north of I-5. Near Port of
Tacoma Rd. exit from I-5.
Legal Desc: APN @032002-4-080
Rooms: 81 Gross SF Area: 22,195
Age: 1980 Stories: 3
Description: Three story wood-frame limited service motel property with
exterior entrance rooms. 62 vehicle parking spaces on-site, plus 9 truck parking
spaces.
Income Data: Income information confidential.
Document Price: $2,300,000 Analysis Price: $2,300,000
Date: 08-07-96 Document No: 9608070059
Buyer: Jung Sang and Seyoung An
Seller: Tae Y. and Jeong J. Chae
Source: Comps Inc and Broker, Max Lee 206 878 6666
Sales Data: Property was previously purchased in 1995 for $2,100,000, or
about $25,926/room. This purchase was at a purchase price of $2,300,000, or
about $28,395/room.
Per Room: $28,395 Per sf GBA: $103.63
Cap. Rate: EGIM:
Remarks: Property has excellent access and visibility and is located
between the two I-5 exits which provide access to the Port of Tacoma area.
97191-1
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Hotel Sale Comparison Number: 5
Name: Days Inn Motel-1919 N. Hutchinson
City: Spokane County: Spokane State: WA
Location: Near the Argonne Road/Interstate-90 Interchange. Property has
reasonably good freeway visibility.
Legal Desc: Spokane County APN 45074-0703
Rooms: 92 Gross SF Area: 34,324
Age: 1983 Stories: 2
Description: Two story, wood framed motel containing 92 rooms. Adequate
parking. The site contains 2.19 acres. Older exterior entrance property located
in the Spokane Valley submarket. Below average quality improvements. This is a
limited service facility.
Income Data: N/A
Document Price: $2,636,000 Analysis Price: $2,636,000
Date: 10-08-97 Document No: 4149342
Buyer: C7 Inc.
Seller: RJL Properties
Source: Representative for buyer
Sales Data: Property became a Motel 6 subsequent to the sale.
Per Room: $29,289 Per sf GBA: $76.80
Cap. Rate: EGIM:
Remarks:
98218-1
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[YAKIMA AREA DESCRIPTION SEPARATION PAGE]
84
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[YAKIMA AREA MAP]
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YAKIMA AREA DESCRIPTION
Yakima County is located in the south-central portion of Washington state. Much
of the county's land area is mountainous and unpopulated or only sparsely
populated. The east slopes of the Cascade Mountain Range occupy approximately
the western half of the county. The Yakima River has its source in the mountains
in Kittitas County to the north of Yakima County. The river flows through the
eastern half of Yakima County generally from northwest to southeast and
continues eastward to flow into the Columbia River at Richland in neighboring
Benton County. Within Yakima County, the river valley has many square miles of
level to rolling land that has been used for farming, orchards, and ranching.
Both to the north and to the south of the river valley are increasingly steeper,
higher hills.
The majority of the cities and towns in the county are located along the Yakima
River valley (see map on facing page). The only interstate highway in the county
also follows the river valley. This is Interstate 82, which connects Interstate
90 on the north (the Seattle-Spokane east/west interstate) with Interstate 84 on
the south (the Portland, Oregon-Boise, Idaho east/west route). 1-82 gives Yakima
County good freeway access.
The land in Yakima County becomes increasingly arid as one moves eastward from
the Cascade Mountains. Many of the areas in and around the Yakima River valley
that are used for agriculture are irrigated.
POPULATION AND DEMOGRAPHICS
The table on the following page shows the population history for the whole
county as well as for the incorporated cities. The city of Yakima, the county
seat and largest city has a 1998 population of 64,290. Yakima County has a 1998
population of 210,500.
The rate of population growth for the county as a whole and for the city of
Yakima is:
<TABLE>
<CAPTION>
Yakima County Yakima City
Year % Increase Time Period % Increase
- ---- ---------- ----------- ----------
<S> <C> <C> <C>
1980
1990 9.5% 10 Yrs. 10.1%
1995 8.1% 5 Yrs. 8.9%
1996 1.7% 1 Yr 3.0%
1997 .53% 1 Yr 1.3%
1998 .86% 1 Yr 1.2%
</TABLE>
We note that these population figures may not accurately reflect the variability
created by the migrant farm worker population that lives and works in Yakima
County during at least part of the year. A large group of migrant farm workers
follows the rotating harvest of various crops throughout various portions of
Washington state and sometimes throughout a multi-state area. The 1997 estimated
per capita personal income in Yakima County and in the State of Washington were:
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[April 1 Population of Cities, Towns, and Counties
Used for the Allocation of Designated State Revenues
State of Washington - Chart]
87
<PAGE> 88
Yakima County $32,741
Washington State $42,915
EMPLOYMENT AND ECONOMIC BASE
On the following page is an exhibit obtained from an analyst at the Labor Market
and Economic Analysis Branch of the State of Washington Employment Security
Department. This exhibit shows the non-agricultural employment in Yakima County.
It shows total annual average employment broken down by sector using a moving
average for the most recent 12 month period. Yakima County had 76,000
non-agricultural jobs on average over the past year. The average unemployment
rate over this period was 10%.In Yakima County, agricultural jobs are the
largest segment of the job market. In 1997, for example, agricultural employment
represented about 20% of the total population or 20,720 workers.
The largest employment sector in the non-agricultural category is "Services and
Miscellaneous," which includes a growing number of jobs in the health care
industry. (At the end of this section we have included a list of the largest
employers in Yakima County. Two of the top six employers are hospitals.)
Following "Services," "Government" and "Retail Trade" are tied as the next
largest categories, followed by "Manufacturing." The "Manufacturing" category is
heavily weighted toward food products. Just as the "Manufacturing" category is
heavily influenced by the agricultural base in Yakima County, many other
non-agricultural jobs are directly related to the agricultural community. These
include jobs in farm, orchard, and irrigation supply firms, cold storage of food
products, etc.
The major agricultural products raised in the county are fruits, vegetables,
wine grapes, hops (for beer brewing), beef and dairy cattle, and other
livestock. Yakima County ranks first in the United States in the number of all
fruit trees, and is first in the production of apples, mint, winter pears and
hops.
Although the county has not historically been a major center for high technology
employment or non-agricultural-related distribution, the Ace Hardware
Corporation built a major retail hardware distribution facility in Yakima
several years ago serving a multi-state area. Dowty Aerospace has a facility in
Yakima that is a Boeing subcontractor.
Yakima County has experienced continued population growth but has also
experienced continued relatively high unemployment. The unemployment rate for
calendar year 1997 for the Yakima MSA was 10%, down from 12.5% in 1995. Monthly
figures show a large degree of seasonal variation due to the preponderance of
agricultural jobs. Yakima quite consistently has a higher average unemployment
than the state or nation as a whole. See the history of annual unemployment
rates at the end of this section.
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[YAKIMA COUNTY EMPLOYMENT STATISTICS - Chart]
89
<PAGE> 90
Yakima County also draws a significant number of tourists annually. The Yakima
Convention Center is one of the main area attractions with a total of 302 events
from January to November 1998. This center currently has a capacity for 2,200
people and has had a total of 100,113 visitors to the facility for the first ten
months of 1998. Funding was recently approved to expand the convention center so
it have a total of 25,000sf of meeting space. The Yakima SunDome opened in 1990
giving Yakima a 7,750 seat facility for concerts and 6,500 seats for sporting
events. This multi-purpose arena is also used for agricultural and
business-related exhibitions and shows. It is located on the Central Washington
Fairgrounds, another area attraction. Other area attractions include the
numerous vineyard and wineries extending throughout the Yakima Valley. These
wineries have established a strong reputation for producing good quality wine
and are popular with tourists. Other recreation in the area includes hiking,
fishing, and skiing.
TRENDS
We expect the steady population growth seen over the last decade in Yakima
County to continue. We expect agriculture to continue to be the primary economic
base of the county.
The city of Yakima is the urban center for the county, with regional shopping
centers and the major commercial, health services for this portion of the state.
It is expected that this roll will continue and gradually expand for the
foreseeable future.
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1997 YAKIMA COUNTY TOP EMPLOYERS
<TABLE>
<CAPTION>
Number of Full-Time
No. Employer Name Equivalent Employees
- --- ------------- --------------------
<S> <C> <C>
1 Yakima School District 1,500
2 Yakima County 948
3 Providence Yakima Medical Center 914
4 Yakima Valley Memorial Hospital 901
5 Snokist Growers 830
6 Tree Top, Inc. 800
7 City of Yakima 731
8 Washington Beef, Inc. 635
9 Shields Bag & Printing 479
10 West Valley School District 440
11 Del Monte Corporation 438
12 Yakima Valley Community College 432
13 Yakima Training Center 415
14 Selah School District 409
15 Boise Cascade Corporation 400
16 Irwin Research & Development, Inc. 380
17 Western Recreational Vehicles, Inc. 377
18 Noel Corporation 363
19 Quality Transportation 300
20 Safeway Stores, Inc. 297
21 CanAm Millwork 296
22 Washington Fruit & Produce Company 285
23 EPIC 275
24 Jack Frost Fruit Co. 275
25 East Valley School District 265
</TABLE>
91
<PAGE> 92
YAKIMA COUNTY HISTORICAL ECONOMIC STATISTICS
State of Washington
Employment Security Department
Labor Market & Economic Analysis
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CIVILIAN LABOR FORCE 102,300 101,600 109,300 112,700 110,900 113,400 115,300 115,200
growth rate N.A -0.7% 7.6% 3.1% -1.6% 2.3% 1.7% -0.1%
EMPLOYMENT 91,400 88,800 94,500 96,400 98,000 99,100 99,800 103,700
UNEMPLOYMENT 10,900 12,800 14,800 16,300 12,900 14,300 15,500 11,500
UNEMPLOYMENT RATE 10.7% 12.6% 13.5% 14.5% 11.6% 12.6% 13.4% 10.0%
</TABLE>
92
<PAGE> 93
[Yakima County Labor Market Information
Population, Labor Force and Pay Estimates
Annual Averages 1970, 1980, 1990-2997 - CHART]
93
<PAGE> 94
[APPRAISERS' EXPERIENCE & QUALIFICATIONS - SEPARATION PAGE]
94
<PAGE> 95
McKEE & SCHALKA
REAL ESTATE APPRAISAL SERVICES & CONSULTANTS, INC.
701 Fifth Avenue, Suite 6750, Seattle, Washington 98104
Telephone (206) 343-8000 Fax (206) 386-5777
EXPERIENCE & QUALIFICATIONS
E. BATES McKEE, MAI
Mr. McKee graduated from the Massachusetts Institute of Technology in Cambridge,
Massachusetts, in 1979. He received a Bachelor of Science Degree in Geology,
with a Minor in Writing. He additionally completed the O-Degree program in
Geology at Edinburgh University, Scotland, in 1978.
Mr. McKee received the MAI (Member of Appraisal Institute) designation in 1988.
Mr. McKee founded the firm of McKee & Schalka in 1990. McKee & Schalka is a
comprehensive commercial appraisal company currently employing ten professional
appraisers, Mr. McKee previously joined the Seattle office of Shorett & Riely as
a commercial appraiser in 1984. In 1989 he co-founded and managed the Shorett &
Riely office in Bellevue, Washington.
Mr. McKee was previously employed as a Geologist with Roger Lowe Associates,
Bellevue, Washington, from 1979 to 1980. His work included site evaluation of
geologic and hydrologic conditions and hazards, economic feasibility analysis,
and construction inspection. Mr. McKee was employed as an investment manager and
analyst from 1981 to 1983. During this time he authored Optival, a computer
program for analyzing stock options. Mr. McKee was subsequently employed as an
investment software designer with Expert Systems, Inc., Redmond, Washington, in
1983. This position entailed design of software for analysis of real estate,
stocks, bonds, options, annuities and insurance.
Mr. McKee is a Certified General Real Estate Appraiser (Washington State
Certificate No. 270-11 MCKE-EE-B443RF). Mr. McKee has also completed the
requirements of the continuing education program of the Appraisal Institute. In
his appraisal experience, Mr. McKee has appraised and analyzed a wide variety of
commercial property types, and provided critical consultation and litigation
services to a diversified range of clients.
95
<PAGE> 96
McKEE & SCHALKA
REAL ESTATE APPRAISAL SERVICES & CONSULTANTS, INC.
701 Fifth Avenue, Suite 6750, Seattle, Washington 98104
Telephone (206) 343-8000 Fax (206) 386-5777
EXPERIENCE & QUALIFICATIONS
CHARLES B. McKEE, MAI
Mr. McKee graduated from the University of Washington in 1986 with a Bachelor of
Arts degree in Economics. In 1988, he was a member of the U.S. Olympic Team,
where he competed in the 470 Class Sailing competition, earning a bronze medal.
In 1989 and 1990, he was the business manager for a residential contracting
company. He joined the firm of McKee & Schalka as an appraiser in 1991, and
received the MAI (Member of Appraisal Institute) designation in 1995.
He is a life-long resident of Seattle.
Mr. McKee is a Certified General Real Estate Appraiser (Washington State
Certificate No. MC-KEEC-B387DM). Mr. McKee has also completed the requirements
of the continuing education program of the Appraisal Institute. A partial list
of the property types for which narrative appraisals have been prepared includes
multi-family, lodging, retail and commercial, office, industrial, residential
subdivision, medical office and special-purpose properties. Appraisals have been
prepared for vacant land, as well as proposed properties and existing
improvements. Interests valued include both fee simple and leased fee.
96
<PAGE> 1
EXHIBIT 99.(d)(1)
[LETTERHEAD OF SUPER 8 MOTELS NORTHWEST II]
February [__], 1999
To Our Unitholders:
You are cordially invited to attend a special meeting (the "Meeting") of
limited partners ("Unitholders") of Super 8 Motels Northwest II, a Washington
limited partnership ("Northwest II"). The Meeting will be held at the offices of
Graham & James LLP/Riddell Williams P.S., 1001 Fourth Avenue Plaza, Suite 4500,
Seattle, Washington 98154 on March [ ], 1999 at 1:00 p.m.
Gerald L. Whitcomb and Peninsula Development Services, Inc. (formerly The
Peninsula Group Incorporated), a Washington corporation ("PDS"), (collectively
"Whitcomb") as the general partners of Northwest II and on its behalf, have
entered into an Agreement and Plan of Merger and Reorganization dated December
31, 1998, as amended, (the "Merger Agreement") with Columbus Properties L.L.C.,
a Washington limited liability company ("Columbus"). Gerald L. Whitcomb and
Maryanne Whitcomb, husband and wife, own 100% of PDS and, along with other
family members, own 100% of Columbus. At the Meeting, you will be asked to
consider and vote upon the proposed Merger Agreement which provides for the
merger of Northwest II with and into Columbus (the "Merger"). Columbus will be
the surviving company and Northwest I will cease to be a public company. If the
Merger is approved, each outstanding limited partnership unit ("Unit") of
Northwest II held by unaffiliated Unitholders will be converted into the right
to receive $1,343 in cash (the "Merger Consideration") and unaffiliated
Unitholders will have no further interest in Northwest II.
The attached proxy statement provides a detailed description of the terms
of the Merger. The Merger Agreement is attached as Annex I to the proxy
statement. Please read these materials carefully. Approval of the Merger
Agreement requires the affirmative vote of 66% of the outstanding Units at the
Meeting.
Because Whitcomb is both the proposed purchaser (through Columbus) and the
general partner of Northwest II, Ragen MacKenzie Incorporated, Investment
Bankers and Brokers, Seattle, Washington ("Ragen MacKenzie") has been retained
by Northwest II to render an opinion concerning the fairness of the Merger
Consideration to unaffiliated Unitholders. In the opinion of Ragen MacKenzie,
the Merger Consideration to be paid to unaffiliated Unitholders is fair from a
financial point of view. The full text of the Ragen MacKenzie opinion is
attached as Annex II to the proxy statement.
In addition, McKee & Schalka ("McKee"), Independent Real Estate Appraisers
& Consultants, Seattle, Washington have appraised the motel properties owned by
Northwest II and have issued their report dated December 31, 1998. The McKee
appraisals are described in greater detail in the proxy statement.
On the basis of the Ragen MacKenzie opinion and the McKee appraisals,
Whitcomb, on behalf of Northwest II, has approved the proposed Merger. Whitcomb
and Columbus believe that the Merger and the Merger Consideration is fair to
unaffiliated Unitholders.
Your vote is important. Even if you plan to attend the Meeting, please
date, sign and promptly return the proxy card in the enclosed envelope. If you
were a Unitholder as of
<PAGE> 2
January 6, 1999, and attend the Meeting, you may change your vote in person even
if you have previously mailed a proxy card. You may also change your vote by
sending us a later dated properly executed proxy card.
Northwest II Unitholders may exercise dissenters' rights of appraisal by
complying with the procedural requirements of the Revised Code of Washington,
including not voting in favor of the Merger Agreement.
Promptly after the Merger, a letter of transmittal, along with the required
transmittal forms required for the Unitholder to receive the Merger
Consideration, will be mailed by Columbus, the surviving company in the Merger,
to each Northwest I Unitholder as of January 6, 1999. Upon receipt of the
required transmittal forms, Columbus will mail the Merger Consideration to the
Unitholders.
We look forward to seeing as many of you as possible at the Meeting.
- --------------------
Gerald L. Whitcomb,
A General Partner
<PAGE> 3
SUPER 8 MOTELS NORTHWEST II
7515 Terminal Street, S.W.
Tumwater, Washington 98501
(360) 943-5000
NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
To be held March [__], 1999
A special meeting (the "Meeting") of limited partners (the "Unitholders")
of Super 8 Motels Northwest II ("Northwest II"), a Washington limited
partnership, will be held at the offices of Graham & James LLP/Riddell Williams
P.S., 1001 Fourth Avenue Plaza, Suite 4500, Seattle, Washington 98154 on
March [ ], 1999 at 10:00 a.m. for the following purposes:
1. To vote on the adoption of an Agreement and Plan of Reorganization
and Merger dated December 31, 1998, as amended (the "Merger Agreement"), by and
among Gerald L. Whitcomb and Peninsula Development Services, Inc. (formerly The
Peninsula Group Incorporated), a Washington corporation ("PSD"), (collectively
"Whitcomb") as the general partners of Northwest II on behalf of Northwest II,
and Columbus Properties L.L.C., a Washington limited liability company
("Columbus"). Gerald L. Whitcomb and Maryann Whitcomb, husband and wife, own
100% of PDS and, along with other family members, own 100% of Columbus. If the
transaction is approved, Northwest II will be merged into Columbus (the
"Merger") and you will receive cash in the amount of $1,343 ("Merger
Consideration") for each limited partnership unit ("Unit") you own. Approval of
the Merger Agreement will also constitute an amendment to the Certificate and
Agreement of Limited Partnership of Northwest II to provide that gain, if any,
realized by Northwest II in the Merger will be allocated to the unaffiliated
Unitholders receiving the Merger consideration.
2. To transact such other business as may be properly presented at the Meeting
including any adjournment or postponement thereof, none of which other business
is currently anticipated.
The Merger Agreement is included in the attached proxy statement as
Annex I.
Unitholders as of the close of business on January 6, 1999 (the date of the
first public announcement of the proposed merger) are entitled to notice of and
to vote at the Meeting. As of January 6, 1999, there were 4,052 Units
outstanding. A list of Unitholders entitled to vote at the Meeting will be
available at the executive offices of Northwest II commencing February [ ],
1999. You may inspect the list for purposes germane to the Meeting.
If the Merger is consummated, Unitholders who do not vote to approve the
Merger Agreement and who otherwise comply with the requirements of Article 14 of
Chapter 25.10 of the Revised Code of Washington, have statutory dissenters'
rights of appraisal. A complete copy of Article 14 is attached to the proxy
statement as Annex III. A description of the procedures to be followed to
perfect dissenters' appraisal rights is set forth in the proxy statement
beginning on page 32.
Units represented by valid unrevoked proxies will be voted as specified
therein. If no specification is made, Units covered by proxies will be voted (i)
"FOR" approval and adoption of the Merger Agreement and approval of the
transactions contemplated thereby; and (ii) in the discretion of the persons
named as proxies on such other matters as may properly come before the Meeting.
<PAGE> 4
Pursuant to the authority granted to Whitcomb by the Northwest II
Certificate and Agreement of Limited Partnership, Whitcomb will not consent to
any assignee of Units becoming a substituted Unitholder in place of the assignor
between January 6, 1999 through the date of the Meeting, including any
adjournment or postponement thereof.
- ---------------------
Gerald L. Whitcomb,
A General Partner
<PAGE> 5
PROXY STATEMENT
SUPER 8 MOTELS NORTHWEST II
7515 Terminal Street. S.W.
Tumwater, Washington 98501
----------------------------------
SPECIAL MEETING OF UNITHOLDERS
TO BE HELD ON MARCH [ ], 1999
----------------------------------
This proxy statement is being furnished to limited partners ("Unitholders")
of Super 8 Motels Northwest II, a Washington limited partnership ("Northwest
II"), in connection with the solicitation of proxies by Gerald L. Whitcomb and
Peninsula Development Services, Inc. (formerly The Peninsula Group
Incorporated), a Washington corporation ("PDS"), the general partners of
Northwest II (collectively "Whitcomb"), from Unitholders for use at the special
meeting of Unitholders to be held at the offices of Graham & James LLP/Riddell
Williams P.S., 1001 Fourth Avenue Plaza, Suite 4500, Seattle, Washington 98154
on March [ ], 1999 at 10:00 a.m. including any adjournment or postponement
thereof ("Meeting").
At the Meeting, Unitholders as of January 6, 1999 will consider and vote
upon a proposal to approve and adopt an Agreement and Plan of Reorganization and
Merger, dated December 31, 1998, as amended ("Merger Agreement"), pursuant to
which Northwest II will merge (the "Merger") with and into Columbus Properties
L.L.C., a Washington limited liability company ("Columbus"). Gerald L. and
Maryanne Whitcomb, husband and wife own 100% of PDS and, along with other family
members, own 100% of Columbus. If the Merger is approved, each outstanding unit
("Unit") held by unaffiliated Unitholders will be converted into the right to
receive $1,343 in cash ("Merger Consideration"). The Units were initially sold
by Northwest II for $1,000 cash. Columbus will be the surviving company and
Northwest II will cease to be a public company.
Whitcomb deems it advisable to require approval of this affiliated
transaction by 66% of the outstanding Units.
As you read through this proxy statement, note the following issues which
are discussed in detail in the proxy statement:
o Whitcomb faces substantial conflicts of interest in proposing to purchase
your Units. These conflicts can be mitigated but cannot be eliminated.
o The Merger proposal was not reviewed by an independent committee.
o You will pay federal income tax on gain from the sale of your Units.
o If the Merger is approved, you will have no further interest in Northwest
II including the right to quarterly distributions and potential
appreciation of assets over time.
Your vote is important. Even if you plan to attend the Meeting, please
date, sign and promptly return the proxy card in the enclosed envelope. If you
are a Unitholder as of January 6, 1999, and attend the Meeting, you may change
your vote in person even if you have previously mailed a proxy card. You may
also change your vote by sending us a later dated properly executed proxy card.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN GIVEN BY NORTHWEST II OR ITS AFFILIATES.
Whitcomb knows of no other additional matters that will be presented at the
Meeting.
THE DATE OF THIS PROXY STATEMENT IS FEBRUARY [ ], 1999.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SUMMARY ........................................................................................................2
Super 8 Motels Northwest II.............................................................................2
The Buyer - Columbus Properties L.L.C...................................................................2
Affiliated Parties......................................................................................2
Offers by Columbus for Motel Properties Owned by Northwest I, Lacy, Anchorage
and Tongass......................................................................................3
Date, Time and Place of Meeting.........................................................................3
Purpose of the Meeting..................................................................................4
Merger Consideration....................................................................................4
Required Vote by Unitholders; Beneficial Ownership......................................................4
Persons Making the Solicitation; Expenses...............................................................4
Revocability of Proxy...................................................................................4
Effect of the Merger....................................................................................4
Effective Time of the Merger............................................................................5
Payment of Merger Consideration; Loan Commitment........................................................5
Opinion of Financial Advisor............................................................................5
Independent Appraisal of Motel Properties...............................................................5
Material Federal Income Tax Consequences................................................................5
Dissenters' Rights of Appraisal.........................................................................5
Market Information......................................................................................6
WHERE YOU CAN FIND MORE INFORMATION.............................................................................7
SPECIAL FACTORS.................................................................................................8
Conflicts of Interest; Procedural Safeguards............................................................8
Fairness of the Transaction.............................................................................9
An Independent Committee Did Not Review the Merger Proposal............................................11
Source and Amounts of Merger Consideration and Expenses................................................11
Plans or Proposals by Issuer or Affiliates Following Merger............................................11
Opinion of Financial Advisor...........................................................................11
</TABLE>
i
<PAGE> 7
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Interest of Affiliates in Matters to be Acted Upon; Past Contracts and Agreements......................12
Management and Operations of Northwest II Following Merger.............................................12
Business Valuation of Northwest II by Exvere...........................................................12
Appraisal of Bremerton, Yakima and Portland Properties by Mckee & Schalka..............................15
BACKGROUND OF THE TRANSACTION..................................................................................
Reasons for the Merger.................................................................................18
Background of the Merger; Alternatives Considered; Attempted Sale of Motel Properties
to Unaffiliated Third Party.....................................................................18
Acquisition of Motel Properties by Columbus............................................................19
Acquisition of Northwest II by Columbus; Approach to Determination of Merger Consideration.............20
OPINION OF FINANCIAL ADVISOR...................................................................................21
THE MERGER AGREEMENT...........................................................................................26
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.......................................................................30
DISSENTERS' RIGHTS OF APPRAISAL................................................................................32
</TABLE>
ii
<PAGE> 8
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEX TO FINANCIAL STATEMENTS.................................................................................F-1
ANNEXES
MERGER AGREEMENT..........................................................................................ANNEX I
OPINION OF FINANCIAL ADVISOR.............................................................................ANNEX II
DISSENTERS' RIGHTS STATUTE..............................................................................ANNEX III
COMPARISON OF VALUES.....................................................................................ANNEX IV
</TABLE>
iii
<PAGE> 9
SUMMARY
The following is a summary of the proposed Merger of Northwest II with and
into Columbus, as described below, and contains information about the Meeting.
While complete in all material respects, this summary is qualified by reference
to the detailed information appearing elsewhere in this proxy statement and the
attached annexes. You should carefully read all of these materials.
SUPER 8 MOTELS NORTHWEST II
Northwest II is in the business of owning three Super 8 Motels located in
Bremerton, Washington ("Bremerton"), Yakima, Washington ("Yakima") and Portland,
Oregon ("Portland"). Gerald L. Whitcomb and PDS are the general partners of
Northwest II. Pursuant to the terms of the limited partnership agreement,
Northwest II's existence will terminate on December 31, 2022 unless earlier
terminated under the limited partnership agreement or as otherwise provided by
law.
THE BUYER - COLUMBUS PROPERTIES L.L.C.
The proposed buyer is Columbus (formerly Whitcomb Family L.L.C.), a
privately-owned Washington limited liability company formed in 1995. Columbus is
100% owned by Whitcomb. Columbus currently owns and operates four Super 8
Motels: Ferndale Super 8 Motel, in Ferndale, Washington; Redmond Super 8 Motel,
in Redmond, Oregon; Roseburg Super 8 Motel in Roseburg, Oregon; and Woodburn
Super 8 Motel, in Woodburn, Oregon. The principal executive office of Columbus
is located at 7515 Terminal Street, S.W., Tumwater, Washington 98501. Its
telephone number (360) 943-8000.
AFFILIATED PARTIES
Whitcomb and Peninsula Development Services, Inc. ("PDS") (formerly The
Peninsula Group Incorporated ), which is 100% owned by Whitcomb, are also the
general partners of five other limited partnerships engaged in the business of
owning and operating Super 8 Motels. PDS was formed in 1976 to develop the Super
8 Motel franchise system in the states of Washington, Oregon, and Alaska.
Whitcomb and/or PDS are the general partners of the following five additional
limited partnerships: Peninsula Motel Associates, a Washington limited
partnership ("Peninsula"); Super 8 Motels Northwest I, a Washington limited
partnership ("Northwest I"); Super 8 Motels of Lacey Associates, a Washington
limited partnership ("Lacey"); Anchorage Motel Associates, a Washington limited
partnership ("Anchorage"); and Juneau Motel Associates, a Washington limited
partnership ("Juneau'). Peninsula, which owns 13 Super 8 Motels, is 100% owned
by the Whitcombs. Lacey (1 Super 8 Motel), Anchorage (1 Super 8 Motel), and
Juneau (1 Super 8 Motel) are privately-owned and have unaffiliated limited
partners. Northwest II (3 Super 8 Motels) and Northwest I (2 Super 8 Motels) are
public companies with approximately 900 and 1,050 limited partners,
respectively. Whitcomb is also a partner in Tongass Motel Associates, an Alaska
general partnership ("Tongass"), which owns 1 Super 8 Motel and Peninsula
Properties Partnership, a Washington general partnership ("Peninsula
Properties"), which owns 1 Super 8 Motel.
Whitcomb and PDS have served as general partners of Northwest II since
inception. Mr. Whitcomb, who leads the day-to-day operations of the various
partnerships, has 20 years of experience in the hospitality industry, owning and
operating motels and serving as general partner of limited partnerships that own
and operate motels.
Peninsula Management Northwest Inc., a Washington corporation ("Peninsula
Management"), was formed in 1979 to provide administrative and motel management
services for the 27 motels owned by the various partnerships and by the
Whitcombs. Prior to January 31, 1999 Peninsula Management was owned by PDS and
on that date it was merged into PDS.
2
<PAGE> 10
The services that Peninsula Management (now part of PDS) provides include
business and marketing services, accounting and payroll, maintenance, and human
resources. Prior to its merger into PDS, Peninsula Management did not own any
real estate and did not own any interest in any of the limited partnerships,
including Northwest II.
Peninsula Development Services, Inc., a Washington corporation ("Peninsula
Development"), was formed in 1976 as a general contractor and was licensed in
Washington, Oregon and Alaska. Peninsula Development was responsible for the
development, new construction, and some renovations of motels managed by
Peninsula Management. Prior to January 31, 1999 Peninsula Development was 100%
owned by PDS and on that date was merged into PDS.
[FLOW CHART]
OFFERS BY COLUMBUS FOR MOTEL PROPERTIES OWNED BY NORTHWEST I, LACEY, ANCHORAGE
TONGASS AND PENINSULA PROPERTIES
Contemporaneous with the proposed Merger, Columbus is making proposals to
the limited partners of Northwest I, Lacey and Anchorage and to the other
general partners of Tongass and Peninsula Properties for the acquisition of a
total of 6 additional Super 8 Motels. Other than the consideration per unit, the
terms of the proposals for the acquisition of the Super 8 Motels owned by these
partnerships are substantially the same.
DATE, TIME AND PLACE OF MEETING
The Meeting will be held at the offices of Graham & James LLP/Riddell
Williams P.S., 1001 Fourth Avenue Plaza, Suite 4500, Seattle, Washington 98154
on March [ ], 1999 at 10:00 a.m. Unitholders as of January 6, 1999 are
entitled to notice of and to vote at the Meeting.
3
<PAGE> 11
PURPOSE OF THE MEETING
The Whitcombs, through Columbus, propose to purchase Units owned by
Unitholders of Northwest II in exchange for the Merger Consideration. To
accomplish this, Unitholders are being asked to approve the proposed Merger.
MERGER CONSIDERATION
The Merger Consideration is $1,343 per Unit for each Unit exchanged in the
Merger. The Merger Consideration was determined solely by Whitcomb on behalf of
Columbus.
REQUIRED VOTE BY UNITHOLDERS; BENEFICIAL OWNERSHIP
The limited partnership agreement of Northwest II does not specifically
address the vote required in the event of a merger. The Northwest II limited
partnership agreement does, however, require that transactions between Northwest
II and Whitcomb with respect to partnership property be approved by 66% of the
outstanding Units. Whitcomb therefore deems it advisable to require approval of
the Merger by 66% of outstanding Units at the Meeting. Each Unit counts as one
vote at the Meeting. Nonvotes and abstentions count as votes "AGAINST" the
Merger.
As of January 6, 1999, there were approximately 900 investors of record and
4,052 outstanding Units. As of December 31, 1998 no person or group of related
persons was known by Northwest II to be the beneficial owner of more than 5% of
the Units. Whitcomb owns 1.2% of Northwest II, comprised of 1% in his capacity
as general partner and .2% in his individual capacity. The remaining Northwest
II Units are owned by unaffiliated Unitholders. Whitcomb intends to vote
his interest in Northwest II "FOR" the Merger.
PERSONS MAKING THE SOLICITATION; EXPENSES
This solicitation is being made by Whitcomb. Employees of Northwest II and
Whitcomb may also solicit proxies. Solicitation may be made either in person, by
telephone, or by other electronic means. Solicitation may be made by paid
solicitors. Costs of solicitation, estimated to be less than $5,000, will be
borne by Columbus.
REVOCABILITY OF PROXY
If you are an Unitholder as of January 6, 1999, and attend the Meeting, you
may change your vote in person even if you have previously mailed a proxy card.
You may also change your vote by sending us a later dated properly executed
proxy card.
EFFECT OF THE MERGER
If 66% of the outstanding Units are voted to approve the Merger, and all
required conditions are satisfied or waived, the Merger will be consummated and
Northwest II will be merged into Columbus. Unitholders will receive the Merger
Consideration in exchange for their Units, which Units will then be cancelled.
Unaffiliated Unitholders will no longer have any interest in Northwest II.
Northwest II will cease to be a public company. Northwest II will not file
reports under the Securities and Exchange Act of 1934 and will not be subject to
other provisions such as the short swing profits provisions of Section 16 and
the proxy rules. The benefits of the Merger to Unitholders are (1) that you will
have an immediate exit strategy, whereas previously there has been no public
market for your Units, and (2) that you will be paid a price for your Units in
cash. The detriment of the transaction to Unitholders is that you will forego
the opportunity to continue to participate as an investor in Northwest I,
including the right to quarterly distributions and potential appreciation of its
assets over time.
4
<PAGE> 12
EFFECTIVE TIME OF THE MERGER
The Merger will become effective following the Meeting if all required
conditions have been satisfied or waived, upon filing the required documents
with the Secretary of State of the State of Washington. It is anticipated that
the required documents will be filed at the earliest on the first business day
following the Meeting and at the latest on the last business day of the month in
which the Meeting occurs.
PAYMENT OF MERGER CONSIDERATION; LOAN COMMITMENT
As soon as practicable after the effective date of the Merger, Columbus
will mail a letter of transmittal, along with any required forms, to you
requesting that you send in such completed forms. Upon receipt of the required
forms, Columbus will send you the Merger Consideration, without interest. The
entire process should take less than 30 days.
Columbus has obtained a commitment letter from U.S. Bank, subject to
customary conditions, to lend Columbus sufficient funds to consummate the Merger
and to pay the Merger Consideration to the unaffiliated Unitholders.
OPINION OF FINANCIAL ADVISOR
Ragen MacKenzie Incorporated ("Ragen MacKenzie"), has been retained by
Northwest II to act as its financial advisor. Ragen MacKenzie has delivered its
opinion to the effect that the Merger Consideration is fair to the
unaffiliated Unitholders from a financial point of view.
INDEPENDENT APPRAISAL OF MOTEL PROPERTIES
The appraisal firm of McKee & Schalka ("McKee"), Independent Real Estate
Appraisers & Consultants, Seattle, Washington, has appraised the Northwest II
motel properties and have issued their reports dated December 31, 1998.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
This is a taxable transaction. The receipt of cash in exchange for Units
pursuant to the Merger will be a taxable transaction for federal income tax
purposes and may also be a taxable transaction under applicable state, local and
foreign tax laws. Accordingly, you will recognize a gain or loss on the
conversion of Units in the Merger to cash to the extent of the difference
between the amount realized and your adjusted basis in the Units sold. See
"Material Federal Income Tax Consequences" beginning on page 30 of this proxy
statement.
DISSENTERS' RIGHTS OF APPRAISAL
You have statutory dissenters' rights of appraisal with respect to your
Units. You may demand an appraisal of the fair value of your Units and payment
in cash according to the procedures as described in Article 14, Chapter 25.10 of
the Revised Code of Washington in lieu of accepting the Merger Consideration.
"Fair value" may be greater than, less than, or the same as the Merger
Consideration. If you desire to preserve your dissenter's rights, you
must either not vote, or if you execute a proxy you must vote "AGAINST" approval
of the Merger or "ABSTAIN" from voting. Voting "FOR" or delivering an unmarked
proxy will, unless revoked prior to the vote on approval of the Merger,
constitute a waiver of your dissenter's rights. See Annex III to this proxy
statement which contains the full text of Article 14.
5
<PAGE> 13
MARKET INFORMATION - NORTHWEST II
Northwest II went public in 1982 through a $7 million (7,000 units), best
efforts, offering that closed after the sale of 4,052 Units in 1984. Northwest
II files annual and quarterly reports with the SEC. Northwest II
did not apply to have the Units quoted on Nasdaq or on an exchange as it was
never intended that an active trading market for the Units would develop.
Accordingly, there has never been an active trading market in the Units and
there have been no significant transactions between private parties that would
establish an accurate market price for the Units. Over the past 18 months,
Whitcomb has repurchased two Units from one investor, on a voluntary basis, at
$1,711 per Unit.
The limited partnership agreement of Northwest II provides for an
agreed-upon rate of return of 10% per year which has been paid to the limited
partners including distributions of cash in the amount of $405,200 ($100.00 per
Unit), $616,281 ($152.09 per Unit), and $1,174,026 ($289.74 per Unit) per year
in 1997, 1996, and 1995, respectively. Pursuant to the Merger Agreement
Northwest II made an additional distribution to Unitholders of $101,300 ($25.00
per Unit) for 1998 on January 31, 1999, with the aggregate distributions to
Unitholders relating to 1998 being $455,850 ($112.50 per Unit). Since inception
of the Northwest II, through December 31, 1998, Unitholders have received in
excess of $6.2 million ($1530.11 per Unit) in the form of quarterly
distributions, which is more than the required 10% per year return.
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WHERE YOU CAN FIND MORE INFORMATION
Northwest II files reports with the SEC on a regular basis. You may read or
copy any document that Northwest II files with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information about the Public Reference Room by calling the SEC for further
information at 1-800-SEC-0330. Northwest II's SEC filings are also available
from the SEC's web site at www.sec.gov.
Whitcomb and Columbus, are affiliates of Northwest II. Accordingly, they
have jointly filed with the SEC a Schedule 13E-3. This proxy statement does not
contain all of the information contained in the Schedule 13E-3, some of which is
omitted as permitted by SEC rules. Statements made in this proxy statement,
while complete in all material respects, are qualified by reference to documents
filed as exhibits to the Schedule 13E-3. The Schedule 13E-3, including exhibits,
is available for inspection and copying at the SEC as described above.
Columbus is not a public company and is not required to file reports of any
type with the SEC.
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SPECIAL FACTORS
Unitholders are urged to consider a number of special factors that apply to
the Merger in addition to other information in this proxy statement.
CONFLICTS OF INTEREST; PROCEDURAL SAFEGUARDS
Whitcomb faced substantial conflicts of interest in proposing, negotiating
and structuring the Merger. On the one hand, as the general partner of Northwest
II, he owes unaffiliated Unitholders certain fiduciary duties. On the other
hand, Columbus, as the prospective acquiror of Northwest II, which is owned by
Whitcomb, has an interest in not paying more than is fair for the Units acquired
in the Merger. Whitcomb selected Ragen MacKenzie and, although McKee was
commissioned by U.S. Bank, McKee has performed appraisal services for Whitcomb
in the past. Limited partners were not independently represented in the
negotiation of the Merger Agreement. While these conflicts cannot be eliminated,
to deal with and mitigate the conflicts of interest, a number of procedural
safeguards were implemented:
- - Ragen MacKenzie was retained to act as financial advisor to Northwest II
and has rendered its opinion as to the fairness to the Unitholders, from a
financial point of view, of the Merger Consideration.
- - An independent appraisal by McKee of the three Super 8 Motels owned by
Northwest II was commissioned by U.S. Bank in November 1998. The McKee
appraisal of these three motels is part of a larger appraisal of 26 Super 8
Motels, and will be relied upon by U.S. Bank to determine its loan to value
ratio in connection with Columbus' acquisition of the limited partnerships.
- - The law firm of Foster Pepper & Shefelman ("Foster Pepper"), 1111 Third
Avenue, Suite 3400, Seattle, Washington, 98101, (206) 447-4400, was
retained by Northwest II to act as independent counsel with respect to the
Merger and to advise Unitholders concerning the terms of the Merger
Agreement. Mr. David R. Wilson, a partner in Foster Pepper will be
available at the Meeting to answer questions by Unitholders and will also
be available on March __, 1999, from _____ to ______ p.m. to meet with or
to take phone calls from Unitholders having questions about the Merger.
Foster Pepper has not been retained to render any opinion or to otherwise
pass upon the fairness of the transactions contemplated by the Merger
Agreement.
- - Unitholders have statutory dissenters' rights of appraisal under Washington
law.
- - Northwest II, Whitcomb and Columbus deem it advisable to require that the
Merger be approved by 66% of the Unitholders.
The procedural safeguards described above are listed in descending order of
importance, i.e., the first safeguard listed was given the most weight in the
determination that the proposed transaction is procedurally fair, although, as a
practical matter, this process is an approximation of the weight given to each
safeguard because each safeguard is relevant. While the conflicts of interest
cannot be eliminated, Northwest II, Whitcomb and Columbus believe that the steps
taken and to be taken constitute sufficient procedural safeguards for
Unitholders' interests and that the proposed transaction is procedurally fair.
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FAIRNESS OF THE TRANSACTION
Columbus and Whitcomb believe that the proposed Merger and the Merger
Consideration are substantively fair to unaffiliated Unitholders. Columbus and
Whitcomb's conclusion in this regard is based on the following material factors.
The factors considered are generally listed below in descending order of
importance, i.e., the first factor listed was given the most weight in the
determination that the proposed transaction is substantively fair. As a
practical matter, however, this process is an approximation of the weight given
to each factor because each factor is relevant, some factors are of nearly equal
importance, and it is impossible to weigh each factor precisely:
- Northwest II has received a fairness opinion from Ragen
MacKenzie that the Merger Consideration is fair to unaffiliated
Unitholders from a financial point of view. Whitcomb considered
this important for its independent assessment of the Merger
Consideration.
- The Merger Consideration offered to Unitholders is higher than
the $1,310 per Unit which Whitcomb estimates could be obtained,
after costs of sale and payment of Northwest II's liabilities,
if Northwest II were to individually sell the Bremerton, Yakima
and Portland motels to unaffiliated third parties at the McKee
appraised values. Whitcomb considered this important because it
illustrates that the Merger Consideration is higher than might
be obtained from other sources.
- There is no established trading market for the Units, except as
created through sale or merger of Northwest II, which Whitcomb
has been unsuccessful in arranging to date. The average life of
a limited partnership investment is 10-12 years. Unitholders
that have held their Units since the beginning, have held their
Units for over 16 years, with most Unitholders having held their
Units for 15+ years. Whitcomb believes that the circumstances of
many Unitholders have changed over the life of Northwest II and
believes that Unitholders want an opportunity to liquidate their
investments. Heretofore, since there is no trading market, to
dispose of their Units, Unitholders have had to arrange private
sales. Whitcomb considered the lack of current and historical
market prices for Units important because, in considering
alternatives to the Merger, it emphasizes that there are limited
opportunities available to create an exit strategy for
unaffiliated Unitholders.
- Whitcomb considered going concern value, as that term is
commonly understand to relate to income producing property, to
be important in concluding that the merger is fair to
unaffiliated Unitholders. In his efforts in 1998 to sell all of
the motel properties owned by the various partnerships to an
unaffiliated third party, Whitcomb did not secure any offers
which he deemed sufficient. As described in "Background of the
Transaction," beginning on page 18 of this proxy statement, the
best proposal received by Exvere, Inc. ("Exvere"), on Whitcomb's
behalf, for all of the Super 8 Motels was an aggregate cash
amount of $80 million ($84 million if five year performance
goals were met). If allocated on the basis of the values for the
Northwest II motels assigned by Exvere in its report described
on page 12 of this proxy statement, this proposal would have
resulted in $1,421 per Unit after costs of sale and payment of
Northwest II's liabilities, or $78 per Unit more than the Merger
Consideration. Whitcomb does not believe that this difference
militates against the fairness of the Merger. First, Whitcomb
believes that the Exvere valuation did not properly take into
account that the Bremerton and Yakima motels are on leased land
rather than owned land. Second, the difference is only 6% of the
Merger Consideration. Third, the data for the Exvere valuations
was as of June 30, 1997. Whitcomb gave greater weight to the
McKee appraisals dated December 31, 1998 because the McKee
appraisals are (1) more recent, (2) take into account subsequent
changes in market conditions in each location, and (3) take into
account that the Bremerton and Yakima motels are on leased land.
Consequently, Whitcomb believes that the McKee appraisals
represent a more current and valid assessment of the values of
NW II's motel properties.
- Through December 31, 1998, Unitholders have received in excess
of $6.2 million ($1,530 per Unit) in the form of quarterly
distributions. In addition, Unitholders received an additional
distribution from Northwest II in the aggregate amount of
$101,300 ($25.00 per Unit) on January 31, 1999. Upon the sale of
their Units as described herein, unaffiliated Unitholders will
receive Merger Consideration of $1,343 per Unit. Whitcomb
considered this important because the Merger Consideration is
greater than the September 30, 1998 $159.72 net book value per
Unit and the $1,000 per Unit paid by Unitholders in the 1982
initial public offering.
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- Whitcomb does not believe that liquidation value, as that term
is commonly understand, is relevant to the sale of a limited
partnership owning and operating motel properties. Consequently,
liquidation value did not play a role in determining that the
Merger was fair to unaffiliated Unitholders.
- The Merger Consideration will be paid in cash.
- Whitcomb believes that liquidation of the interests of
unaffiliated Unitholders, rather than the continued public
ownership, is consistent with the investment objectives of
Northwest II.
- Unaffiliated Unitholders have statutory dissenters' rights of
appraisal under Washington law.
- Although the motels are in good condition, they are now more
than 15 years old and will soon require additional refurbishing.
Whitcomb believes that the funds for such expenditures would not
be available from Northwest II's cash flow without reducing
future distributions to limited partners.
- Northwest II's intention has always been to sell the properties
when market conditions warranted sale. It was never an
investment objective of Northwest II to hold the properties
permanently.
Notwithstanding the foregoing, Unitholders should note that Whitcomb may
benefit from the Merger. This is most likely to occur if the value of the
properties increases beyond the appraised value or by improving cash flow from
the properties. Therefore, it is possible that Unitholders would receive a
greater return on their investment if Northwest II continued to own and operate
the properties and sold them at a later date, instead of consummating a sale
under the Merger proposal. It is also possible that Unitholders would fare worse
if they kept their Units and the value of the properties declined.
There were no factors that led Whitcomb or Columbus to believe that the
Merger was unfair to unaffiliated Unitholders. Factors that militate against the
proposed Merger, however, are Whitcomb's decision not to initiate another
marketing process, the lack of an independent committee to review the Merger
Consideration offered by Columbus, and the possibility that the continued
ownership of the Units could be more economically beneficial than a sale if the
value of the properties were to rise or cash flow from the properties were to
increase. Although Whitcomb repurchased two Units for $1,711 each from an
investor who wished to cash-out his investment during the last 18 months, which
was higher than the $1,343 Merger Consideration, no conclusions should be drawn
from this. This was an isolated transaction, only two Units were involved, and
the price was not based upon any appraisals of the motel properties. Therefore,
Whitcomb placed no weight on this isolated repurchase.
Whitcomb believes that the Merger, even though it is an affiliated
transaction that was not initiated by the Unitholders, is consistent with
Unitholders' desire for a broad-based exit strategy. Therefore, Whitcomb and
Columbus believe that the factors listed above in favor of the transaction
outweigh any negative considerations.
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AN INDEPENDENT COMMITTEE DID NOT REVIEW THE MERGER PROPOSAL
Northwest II does not have its own governing body, similar to a board of
directors, that manages its day-to-day business and operations. The business and
operations of Northwest II have been managed by Peninsula Management which is
now part of PDS, which is wholly-owned by Whitcomb, who also owns Columbus, the
proposed buyer. Although there are approximately 900 investors of record,
Northwest II does not have any single Unitholder or groups of related
Unitholders that own significant amounts of Units from which to readily identify
a suitable independent committee. Therefore, an independent committee was not
reasonably available and, considering the size of the transaction, the prior
offers, the valuation by Exvere, the appraisals by McKee, the fairness opinion
by Ragen MacKenzie and the other procedural safeguards described above, an
independent committee was not considered warranted in this case.
SOURCE AND AMOUNTS OF MERGER CONSIDERATION AND EXPENSES
The total amount necessary to pay the Unitholders the Merger Consideration
is approximately $5.4 million. As described above, Columbus is also making
similar merger proposals to acquire for cash the partnership interests in
Anchorage, Northwest I, Lacey, Peninsula Properties and Tongass, subject to any
required approvals under state law. Columbus expects to fund the Merger, and the
other proposed acquisitions, through secured bank loans from U.S. Bank.
On behalf of Columbus, Whitcomb has entered into a loan commitment letter
with U.S. Bank, subject to customary terms and conditions. The loan commitment
letter provides for a fixed rate and variable rate option, of which Whitcomb has
selected the fixed rate option. Pursuant to the loan commitment letter, U.S.
Bank agrees to lend up to 75% of the approval value of property that is owned
and up to 60% to 75% of property that is leased. Each loan is secured. Under the
fixed rate option interest would be at the Treasury Rate plus 3%, but not less
than 7.5%. Under the variable rate options interest would be at the Prime Rate
plus .25%. Whitcomb entered into a separate rate lock agreement with U.S. Bank,
which will provide the necessary financing at approximately 7.5% interest,
provided the transaction closes by April 2, 1999. The loan transaction covers 26
motels, 23 as part of a loan package, with separate loans for Lacey, Bremerton
and Yakima. The 23 motels in the large loan package include eleven in Oregon,
three in Alaska and nine in Washington, owned by Peninsula (13), Columbus (4),
Anchorage (1), Tongass (1), Northwest I (2), Northwest II (2), and Peninsula
Properties (1). The loans with U.S. Bank will be based on real estate appraisals
recently made by McKee. Columbus will pay the costs and expenses incident to the
loans. The total amount of costs and expenses incurred in connection with the
Merger and the other mergers with the other partnerships and the transactions
contemplated thereby, including costs and expenses incident to the U.S. Bank
loans, is estimated to be an aggregate of approximately $1.9 million. The U.S.
Bank commitment is not conditioned on completing all of the acquisitions
contemplated by Columbus, but is expected to be available to finance any
acquisitions that are made.
The loans are expected to be repaid out of cash flows from the properties,
unless a sale or sales of the properties or businesses is consummated. There are
no specific plans or arrangements in this regard, however.
PLANS OR PROPOSALS BY ISSUER OR AFFILIATES FOLLOWING MERGER
As general partner, Whitcomb unsuccessfully attempted in early 1998 to
arrange the sale of Northwest II's Super 8 Motels, along with those owned by the
other partnership, in an arm's length transaction with an unaffiliated buyer.
The primary purpose of the Merger is for Whitcomb to provide an exit strategy
for Unitholders by acquiring the outstanding Units of Northwest II. Neither
Columbus nor Whitcomb have any specific plans for the sale or disposition of the
assets or any material change in the business of Northwest II following the
Merger. Columbus will, however, continue to evaluate any proposals and may sell
or dispose of assets if attractive terms are offered. There are presently no
arrangements or proposals to do so, however.
EFFECTS OF TRANSACTION
Following the Merger, Northwest II will cease to be a public company.
Northwest II will not file reports under the Securities and Exchange Act of 1934
and will not be subject to other provisions such as the short-swing profits
provisions of Section 16 and the proxy rules. Unitholders will forego the
opportunity to continue to participate as investors in Northwest II, including
the right to quarterly distributions and potential appreciation of its assets
over time.
Unitholders will recognize a gain or loss on the conversion of Units into
cash in the Merger to the extent of the difference between the amount realized
and the adjusted basis in the Units sold. See "Material Federal Income Tax
Consequences" beginning on page 30 of this proxy statement.
OPINION OF FINANCIAL ADVISOR
Ragen MacKenzie was retained by Northwest II to act as its financial
advisor for Unitholders in connection with the Merger. Ragen MacKenzie delivered
its opinion to Northwest II dated December 31, 1998, to the effect that, as of
that date and based on the procedures followed, factors considered
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and assumptions made by Ragen MacKenzie as set forth therein, the Merger
Consideration to be paid to unaffiliated Unitholders pursuant to the Merger
Agreement is fair from a financial point of view. See "Opinion of Financial
Advisor" beginning on page 21 of this proxy statement. The full text of the
Ragen MacKenzie opinion is attached as Annex II to this proxy statement. Read
the opinion carefully.
INTEREST OF AFFILIATES IN MATTERS TO BE ACTED UPON; PAST CONTRACTS AND
AGREEMENTS
Beneficial Ownership
Whitcomb beneficially owns 1.2% of Northwest II, 1% in his capacity as
general partner and 0.2% in his capacity as a limited partner.
General Partner Fee to Whitcomb
Under the limited partnership agreement, Northwest II agrees to pay fees
for Whitcomb's management services. In accordance with the agreement, the
obligation to provide management and to recoup management fees was assigned by
Whitcomb to Peninsula Management. Peninsula Management receives a fee equal to
5% of the partnership's gross revenues from motel operations in addition to
reimbursement of certain out-of-pocket cost incurred by Peninsula Management in
connection with management of the property. Payment of fees to Peninsula
Management is subordinated to receipt by investors of a cumulative, pre-tax
return on their adjusted capital investment of 10% per annum. Accordingly,
Northwest II did not begin paying monthly management fees until 1996 and all
management fees are paid to date. In fiscal years ended December 31, 1995, 1996
and 1997, and the nine-months ended September 30, 1998, the management fees paid
to Peninsula Management were $168,112, $179,999, $162,328 and $127,736,
respectively. Peninsula Management also receives reimbursement for direct
operating expenses of motels under a pooling arrangement, whereby each motel is
billed directly for its pro rata share of operating expenses.
License Fee Rebate
PDS has a license agreement with Super 8 Motels, Inc. under which it
acquired the exclusive territorial rights to develop Super 8 Motels and
franchises in the states of Washington, Oregon, and in four cities in Alaska
through November 2006. Super 8 Motels developed within this three state area
enter into franchise agreements directly with Super 8 Motels, Inc. As owner of
this exclusive territorial license. PDS receives a franchise fee rebate from
Super 8 Motels, Inc. on each motel The franchise fee rebates paid on the
Bremerton, Yakima and Portland motels owned by Northwest II are equal to 1% of
room revenues. In fiscal years ended December 31, 1995, 1996 and 1997, and the
nine-months ended September 30, 1998, franchise fee rebates paid to PDS with
respect to these three motels was $32,772, $35,001, $31,329 and $24,745,
respectively.
MANAGEMENT AND OPERATIONS OF NORTHWEST II FOLLOWING MERGER
In connection with the consolidation of the various entities owned or
managed by Whitcomb or Columbus and their affiliates, it is anticipated that an
independent property management company be engaged to manage Northwest II and
the other motel properties.
BUSINESS VALUATION OF NORTHWEST II BY EXVERE
The following is a summary of the material methodologies, conclusions, and
assumptions used by Exvere in its business valuation report on Northwest II
dated February 27, 1998. The information and conclusions in the report were as
of June 30, 1997. The Exvere valuation report was obtained for the purpose of
deciding whether or not to attempt to market the motel properties. As indicated
above, the
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marketing effort to sell the motel properties to an unaffiliated third party did
not result in any offers that Whitcomb considered sufficient. Although the
Exvere business valuation was provided to Whitcomb in connection with the
marketing effort, it was not used by Columbus as the basis for determining the
Merger Consideration and Northwest II has not used such report in determining
whether or not the Merger Consideration is fair to Unitholders. Nevertheless,
because the Exvere valuation report was received by Whitcomb, under applicable
SEC rules the valuation report must be disclosed and described herein.
The appraisal was based on information obtained by Exvere during
conversations with key individuals, copies of financial statements, and
estimates of costs furnished by Northwest II. The appraisal also included
consideration of other information, such as that related to transactions in the
private and public markets.
Exvere's approach was to arrive at Total Invested Capital (TIC), and then
arrive at a "net equity value" by backing out of TIC cash and cash equivalents,
current liabilities and certain interest bearing indebtedness and preferred
stock. Under this approach, TIC is the sum of the market equity of the company
(determined through one of the methods described below) and the fair market
value of interest-bearing debt both short-term and long-term. If TIC is being
valued, it assumes that seller receives TIC value for the company and takes the
company's cash and cash equivalents, but is obligated to pay off all
interest-bearing debt and preferred stock, and buyer assumes the adjusted net
operating working capital position in non-current liabilities. Net operating
working capital is defined as "all current assets except cash, less all current
liabilities except interest-bearing debt."
Exvere initially considered eight valuation methods for Northwest II,
which ranged in value from $7.7 million to $12.4 million. Those eight
approaches were: Capitalization of Earnings Approach, Discounted Future EBIT
Approach, Discounted Future Cash Flow Approach, Discounted Future Debt-Free
Cash Flow Approach, Publicly Traded Comparatives Approach, Market Data
Approach, Capitalization of Dividend-Paying Capacity, and Asset Accumulation
Approach. Exvere considered the four most appropriate methods to be: (i)
Publicly Traded Comparatives Approach; (ii) Market Data Approach; (iii)
Capitalization of Earnings Approach; and (iv) Asset Accumulation Approach.
Exvere believed these four to be the most appropriate because they gave Exvere
the greatest confidence in qualifications and appropriateness for use, as well
as methodology and resulting value.
Publicly Traded Comparatives Approach
Under the Publicly Traded Comparatives Approach, a relationship was drawn
between a publicly traded company's stock price in the market place as it
relates to its revenue, earnings, cash flow and/or book value, and then the
compared figures of the comparable companies were applied against the figures of
Northwest II to arrive at a proportional estimation of value based upon the
comparable companies. Using the Publicly Traded Comparatives Approach, the
calculation of value on a debt-free basis resulted in a total pre-adjusted TIC
of $11,314,000. After deducting interest-bearing debt at market of $2,488,000
and normalized non-current liabilities of $627,000, this approach resulted in a
pre-adjusted net equity value of $8,200,000. Similar calculations using weighted
averages, a regression trend analysis, and a forecast yielded values of $9.7
million, $6.5 million, and $6.5 million, respectively.
Market Data Approach
Exvere compiled a list of 46 businesses with statistics similar to
Northwest II. Equal weight was applied to the median, historic and expected
revenue, and the normalized EBIT multiples, as the weighting is fairly
consistent with the Publicly Traded Comparatives Approach described above.
Additionally, the multiples were chosen to conform with that derived from a
regression analysis of earnings and multiples derived from two alternate,
private transaction sources. Multiples of book were excluded, to deal with the
uncertainty of how many of the private transactions included the land component.
Under the Market Data Approach, the calculation of pre-adjusted net equity value
was determined by Exvere to be $11,980,000.
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Capitalization of Earnings Approach
The Capitalization of Earnings approach assumes that an equally desirable
substitute for the business being valued would be one that had similar
investment characteristics but not necessarily one that was similar from a
physical or operational standpoint.
Exvere followed the following sequence of steps: first, to determine the
appropriate earnings based capitalized, and then the amount of return
attributable to the business or property to be appraised; second, identify other
types of investments that are similar with regard to investment criteria,
including liquidity, expectation of growth or shrinkage of principal amount,
burden of management, and risk; and third, use the rate of return actually
provided by comparable investments to capitalize the amount of return from the
business to be appraised, thus arriving at an estimate of the value of the
business. Under the Capitalization of Earning Approach, and assuming a
capitalization rate of 15.6%, Exvere arrived at a pre-adjusted net equity value
of $5,878,000. This conclusion assumes that a reasonable long-term compound
annual growth rate (CAGR) for Northwest II over the next 20 years is 6.3%.
Asset Accumulation Approach
The Asset Accumulation Approach was used to arrive at an estimate of the
total value by estimating the cost of duplicating (replacing) the individual
elements of the business or other property being appraised, item by item, asset
by asset. In the case of Northwest II, however, premiums were derived from
market data provided by industry sources, which made an estimate of goodwill
possible. The average premium for the economy and budget class motels was
determined to be 23.5%. Considering replacement cost of an initial investment in
a 60-room new construction facility, Exvere arrived at a net equity value under
the Asset Accumulation Approach of $9,940,000.
Reconciliation and Conclusions of Exvere
The final step in the valuation process was to reconcile the various
valuation techniques and coming to conclusions on the fair market value of
Northwest II. Here, Exvere gave 25% weight to each of the Comparative Publicly
Traded Companies Approach, Market Data Approach, Capitalization of Earnings
Approach, and the Asset Accumulation Approach. Based upon Exvere's analysis, it
was determined that a gross fair market value of a 100% interest in Northwest
II, including cash on hand, was $10.5 million. After elimination of cash and
debt the net equity was approximately $7.8 million.
Qualifications of Appraiser and Availability of Report
Exvere is a financial advisory firm that was founded in 1992 to advise
Northwest businesses on capital transactions such as mergers, acquisitions, and
in areas of corporate finance. Exvere was selected to provide an independent
valuation in connection with a possible sale of the business to an unaffiliated
third party on the strength of its reputation in the Northwest in the field of
valuation analysis. During the past two years, Exvere and Northwest II have not
had any material relationship.
A copy of the Exvere valuation is available for inspection and copying at
the principal executive offices of Northwest II during regular business hours by
any interested Unitholder or his designated representative. A copy of the
Exvere business valuation will be sent to you, at cost, upon your written
request for us to do so.
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APPRAISAL OF BREMERTON, YAKIMA AND PORTLAND PROPERTIES BY MCKEE & SCHALKA
In connection with extending credit for the acquisition of Northwest II and
the other motel properties, U.S. Bank commissioned independent appraisals of 26
of the Whitcomb/PGI-managed motel properties, including the Bremerton, Yakima
and Portland motel properties owned by Northwest II. U.S. Bank selected McKee,
Real Estate Appraisers & Consultants, Inc. of Seattle, Washington, to appraise
the 23 properties located in Washington and Oregon. This appraisal firm was
selected based upon their expertise in the field of commercial real estate
appraisals, with specific experience in the appraisal of lodging properties.
The following is a summary of the material, methodologies, conclusions, and
assumptions used by McKee in its appraisal reports to U.S. Bank. No limitations
were placed on the McKee appraisals. The appraisals use both the Sale Comparison
Approach and Income Approach to value. The Cost Approach was not employed in the
valuation process since it would not have significant bearing on the reconciled
market value of the properties. For existing established motel properties of the
size and age of the Bremerton, Yakima and Portland motel properties, purchasers
are primarily interested in the income characteristics and market price for
similar properties. For the Sale Comparison Approach, McKee reviewed a wide
variety of hotel transactions in Washington and Oregon, and used at least four
sale comparisons in each report for direct comparison to the motel properties.
The McKee appraisals considered the Income Approach compelling based on a
detailed income and expense history for each property over the past several
years, as well as a recent local and regional market analysis. The Income
Approach also considered income and expense comparisons, and market rent
comparisons in the estimate of net operating income. Emphasis was also placed on
the Income Approach because of the reliability of the data and the fact that
hotel properties are income properties.
In the course of conducting their appraisal, McKee conducted a physical
inspection of the motel properties. McKee also evaluated the local neighborhood
and surrounding areas; surveyed the competitive lodging facilities within the
markets; and reviewed historical data and income and expenses for other similar
properties. McKee spoke with the owner of the properties, managers and other
property managers, owners and government officials within this market. McKee
researched and evaluated the sales of other lodging facilities, both locally and
throughout the Pacific Northwest.
In comparison to the Exvere business valuation which focused on the
business of Northwest II as a whole without addressing the individual underlying
properties of the Bremerton, Yakima and Portland motel properties, the McKee
appraisal focused solely upon the individual properties of the Bremerton, Yakima
and Portland motels.
Sale Comparison Approach
The Sale Comparison Approach uses analysis and sales of comparable improved
properties to derive units of comparison that are then used to indicate a value
for the subject property. McKee conducted a broad search for sales of comparable
improved properties, including most major markets in Washington State. The
selection of comparisons included considerable emphasis and understanding of the
sales of properties McKee previously appraised. The primary units of comparison
used in this analysis were price per room, price per square foot and gross
income multiplier (GIM). In addition McKee analyzed the capitalization rates for
comparable transactions, which were also used in the subsequent Income Approach
Analysis.
The most comparable transactions (based on size and similar financial
characteristics) involving Washington State motel/hotel properties considered
comparable by McKee were then analyzed and
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adjusted relative to the subject properties. The Bremerton sales indicated a
range of values on a price per room from approximately $28,000/room to
$38,000/room, price/sf from $45/sf to $103/sf, and GIM indications from 3.4 to
4.3. The Yakima sales indicated a range of values on a price per room from
approximately $28,000/room to $38,000/room, price/sf from $77/sf to $103/sf, and
GIM indications from 2.4 to 4.3. The Portland sales indicated a range of values
on a price per room from approximately $50,000/room to $88,000/room, price /sf
from $79/sf to $120/sf, and GIM indications from 2.4 to 4.3. The majority of
these transactions occurred in 1997 or 1998, and typically represented
transactions of limited service motels, or full service motels where applicable
within a specific market. The appraisal conclusions are consistent with the
ranges indicated by these comparisons.
Income Approach
The purpose of the Income Approach is to value an income property by
analyzing likely future income and expenses to the property. In this case, McKee
employed a Direct Capitalization Analysis by dividing an annual forecast Year 1
net operating income (NOI) by an appropriate capitalization rate, which McKee
believed to be 11% for the Yakima and Bremerton properties and 11.5% for the
Portland property. McKee relied on a variety of sources as the basis of the
forecast of NOI, including an analysis of each of Bremerton's, Yakima's and
Portland's historical income and expenses. McKee also used expense comparisons
for estimating individual expense items. Based upon an average room rate of $46
and 60% occupancy, the fee simple Income Approach value of the Bremerton motel
property is $2,360,000. Based upon an average room rate of $49.50 and 55%
occupancy, the fee simple Income Approach value of the Yakima motel property is
$3,330,000. Based upon an average room rate of $58 and 79% occupancy, the fee
simple Income Approach value of the Portland property is $5,330,000.
Leasehold Adjustments
The Bremerton and Yakima properties are located on leased land and required
leasehold adjustments, for value loss due to the presence of the land lease. The
leasehold adjustment has been applied to each of the two approaches for the
Yakima and Bremerton properties and the resulting values were then reconciled.
The leasehold adjustment considers the loss in value due to three
components. The first adjustment is based on the actual loss in net operating
income over the term of the lease due to the land lease payments. The second is
the loss of reversion at the end of the lease, including the value of the site
and remaining value of improvements at that time. The third component is the
negative impact on marketability of the property, which increases as the
remaining lease term decreases. In this case, the Bremerton property has just
over 20 years remaining, while the Yakima land lease has just over 35 years
remaining, including extension options. The total leasehold adjustment to the
Fee Simple value conclusion is $1,340,000 for Yakima, and $1,050,000 for
Bremerton.
Reconciliation and Conclusions of McKee Appraisals
The final step in the McKee appraisal process was to reconcile the Sale
Comparison Approach and the Income Approach values to arrive at a final value
conclusion. The primary
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consideration to reconcile the two approaches are the reliability of the data
used and the applicability of each method for valuing a particular property.
Here, after reconciling the various factors, McKee arrived at a final appraised
value for the Bremerton property of $1,400,000 and the Yakima property of
$2,080,000 and the Portland property of $5,300,000.
The value estimates are commensurate with a reasonable marketing and
exposure time of one year. The market values include furnishings, fixtures, and
equipment (F,F,&E), including both permanently affixed real estate, and personal
property. The contributory value of F,F,&E for the Bremerton property is
estimated to be $180,000, which includes personal property of $130,000. The
contributory value of F,F,&E for the Yakima property is estimated to be
$300,000, which includes personal property of $210,000. The contributory value
of F,F,&E for the Portland property is estimated to be $160,000, which includes
personal property of $110,000.
Qualifications of Appraiser and Availability of Report
McKee is a real estate appraisal and consulting firm specializing in
providing valuations for commercial real estate. This appraisal firm has a very
strong reputation in the appraisal of complex commercial real estate including
lodging facilities. McKee was selected by U.S. Bank to provide an independent
appraisal of all of the Whitcomb/PGI managed motels in Washington and Oregon in
connection with extending financing for the acquisitions. The McKee & Schalka
Appraisal firm has prepared a number of appraisals of Super 8 properties over
the last eight years. Almost all of these appraisals were conducted at the
request of various lending institutions. The total amount of this appraisal work
was a nominal percentage of the firm's work during this period and no one at the
appraisal firm has any financial interest in any of these properties.
A copy of the McKee appraisals has been filed with the SEC as an exhibit to
the Schedule 13E-3 filed by Whitcomb and Columbus. Copies of the McKee Real
Estate Appraisals for the Bremerton, Yakima and Portland Motel Properties are
also available for inspection and copying at the principal executive offices of
Northwest I during regular business hours by any interested unitholder or his
designated representative. Copies of the McKee appraisals will be sent to you,
at cost, upon your written request for us to do so.
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BACKGROUND OF THE TRANSACTION
REASONS FOR THE MERGER
Northwest II was formed in 1982 and initiated a $7.0 million best efforts,
offering with the assistance of selected broker-dealers in the Northwest. The
offering commenced in 1982 and was completed in 1984 after the sale of 4,052
units. Since 1984, Northwest II has made distributions to Unitholders which, in
the aggregate, exceed the 10% return per year required by the partnership
agreement. Northwest II did not apply to have its Units quoted on Nasdaq, as it
was never intended that an active trading market would develop. At the same
time Northwest II bears the significant expenses of annually filing required
documents and financial statements with the SEC.
Whitcomb believes that the typical life of a limited partnership investment
in motels is 10-12 years. Most of Northwest II's Unitholders have held their
Units for more than 15 years. While Northwest II has met its objective of paying
investors a 10% annual return on their investment, other investment
opportunities may offer a rate of return that is as good or better than that
offered by Northwest II. Since the Units are not quoted on Nasdaq or listed on
an exchange, Unitholders are unable to sell their Units except under limited
circumstances. Accordingly, in response to unsolicited inquiries from
Unitholders seeking to liquidate their investment, Whitcomb has occasionally
purchased Units from Unitholders on a voluntary basis and, recently, Whitcomb
has been encouraged by some Unitholders to create an exit strategy for all
Unitholders. While Whitcomb believes that the Merger proposal responds to
Unitholders' desire for liquidity, the Merger proposal was not initiated by
Unitholders. The primary purpose of the Merger proposal is to provide all
Unitholders with an opportunity to liquidate their investment in Northwest II at
a price that is fair to unaffiliated Unitholders, yet still attractive to
Columbus and Whitcomb.
BACKGROUND OF THE MERGER; ALTERNATIVES CONSIDERED; ATTEMPTED SALE OF MOTEL
PROPERTIES TO UNAFFILIATED THIRD PARTY
To facilitate an exit strategy for all Unitholders, Whitcomb first
considered a sale of all the limited and general partnerships' properties to an
unaffiliated third-party in an arm's length transaction.
To that end, there being no public market to value the Units, Whitcomb
arranged for the valuation of all of the Whitcomb/PGI-managed partnerships,
including Northwest II, by Exvere in late 1997, which was completed in early
1998. Exvere concluded that as of June 30, 1997 a reasonable range of value for
all 27 motels and the other assets described below was between $72 million and
$127 million. Exvere also concluded that the Northwest II properties had a value
within a range of $6.7 million to $12.7 million with a selected gross value of
$10.5 million. For a description of the factors considered by Exvere in making
its valuation, see "Business Valuation of Northwest II by Exvere" beginning on
page 12 of this proxy statement.
Based upon the Exvere valuations, Whitcomb authorized Exvere to begin
marketing the portfolio of motels for sale. The assets offered for sale included
the 27 Super 8 Motels, as well as the stock of PGI and its subsidiary, Peninsula
Management, an Exclusive Territorial Agreement (aka "Master Franchise
Agreement") with Super 8 Motels and certain other assets. The terms of the
offering stipulated that any acquisition should be structured as a stock
purchase for PGI and its subsidiary, Peninsula Management, although the
acquisition of the partnership motels could be structured as an asset purchase.
Each bidder was asked to indicate what the bidder would pay for: (a) the motels
and the stock of PGI and its subsidiary, Peninsula Management, excluding the
Exclusive Territory
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Agreement or (b) the motels and the stock of PGI and its subsidiary, Peninsula
Management with the Exclusive Territory Agreement. Bidders were also told to
assume that all existing debt would be paid at closing, the sellers and
purchaser would have to agree on the allocation of purchase price, the sale
would require the consent of the various entities' partners, and that a
purchaser would either have to enter into a new franchise agreement with Super 8
Motels, Inc. or pay franchise termination fees.
Exvere prepared a confidential offering memorandum and sent it to
approximately 77 recipients. It received indications of interest from several of
the recipients, which led to receipt of two proposals that it considered to be
worthy of consideration. One of the proposals indicated an interest in buying
the motels, and the PGI and Peninsula Management stock and the Exclusive
Territory Agreement) for $80 million in cash at closing, plus the potential of
an additional $4 million in contingent payments based on future performance of
the motels over a five year period. If the proposed purchase price was allocated
on the basis of the Exvere assigned values for the Northwest II motels the
allocated proposed purchase price for the Northwest II motels would be
approximately $9.1 million (excluding the contingent purchase price). That
bidder indicated that it was also willing to pay $1 million in cash and $2
million in a promissory note for the Exclusive Territory License owned by a
Whitcomb affiliate. The second proposal was from an entity which proposed $61
million in cash and $26 million in securities to be issued by a REIT that was in
the process of formation, for a total price of $87 million for the motels and
the Peninsula Management stock, excluding the Exclusive Territory Agreement.
Neither prospective buyer provided any indication as to how it would propose to
allocate the purchase price among the various motel properties.
Whitcomb concluded that it was not in the best interests of the various
partnerships to sell their assets for less than an aggregate of $87 million in
cash, excluding the stock he owned in PGI and its subsidiaries (which own the
Exclusive Territory Agreement). He asked Exvere to try to get the offers
increased to $87 million cash for the motels only, but none of the interested
parties were willing to meet that price.
Accordingly, Whitcomb concluded that he should look for alternative ways to
achieve liquidity for the Unitholders. After reviewing the options, Whitcomb
concluded that the partnerships would receive the best net return if he could
obtain financing to purchase all of the interests held by the other investors in
the partnerships. He believes that, as the general partner, he could avoid
certain transaction costs that a third party buyer would incur, and that he
could achieve certain economies of scale by structuring the acquisitions in a
manner that would result in a single ownership entity that was privately held.
ACQUISITION OF MOTEL PROPERTIES BY COLUMBUS
Having concluded that the partnerships would receive the best net return if
he could obtain financing to purchase all of the interests held by the investors
in the partnerships, in a manner that would result in a single ownership entity
that was privately held, Whitcomb began working with bankers to secure financing
that would enable Whitcomb to purchase the unaffiliated partners' units in
Northwest I, Northwest II, Lacey, Anchorage, Peninsula Properties and Tongass,
based on the appraised price of the properties at the end of 1998.
Selling the various motel properties individually was not seriously
considered because it would be too expensive, too time consuming and Whitcomb
did not believe that it would yield the best results for investors in the
various partnerships.
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Accordingly, Whitcomb negotiated with U.S. Bank the terms of a loan
commitment dated November 18, 1998, under which U.S. Bank will provide a secured
loan to Whitcomb of up to 75% of the appraised value of the motel properties
owned in fee and 60% to 75% of the properties located on leased land.
The McKee appraisals, dated December 31, 1998, appraised various Super 8
Motels, including those owned by Northwest II, which they appraised at $8.78
million gross value ($1.4 million Bremerton, $2.08 million Yakima and $5.3
million Portland) before any reduction for liabilities or cost of sale. For a
description of the factors considered by McKee in making its appraisals, see
"Appraisal of Sea-Tac and Federal Way Properties by McKee & Schalka," beginning
on page 15 of this proxy statement.
ACQUISITION OF NORTHWEST II BY COLUMBUS; APPROACH TO DETERMINATION OF MERGER
CONSIDERATION
Whitcomb's attempts to sell the Super 8 Motels owned by the various
partnerships in a package sale to an unaffiliated third party were unsuccessful
because none of the expressions of interest or offers were sufficient to
generate a gross sales price of $87 million cash for the motel assets alone.
Accordingly, Whitcomb concluded that it would be in the best interest of the
various partnerships, including Northwest II, to structure a proposal whereby
Columbus would acquire the various motel properties pursuant to the proposed
mergers. Whitcomb believes that the proposed Merger will provide a higher net
value to Unitholder than could have been obtained for the Unitholders through a
sale of all of the motel properties as a package to an unaffiliated third party
or which could be obtained if each partnership were to undertake the sale of the
various motels on an individual basis based upon the McKee appraisals. In
formulating the offer by Columbus for the Northwest II properties, Whitcomb's
objective was to offer a higher Merger Consideration to the Unitholders of
Northwest II than that which likely would have been obtained based upon the best
offer received by Exvere or which could be obtained through individual motel
sales based on the McKee appraisals, after consideration of the transaction
expenses which would be incurred in either alternative, such as commissions,
title insurance, real estate excise taxes, appraisals, fairness opinions, legal
fees and partnership wind-up cost. However, as shown on Annex IV, the next
amount which would have been received by Northwest II Unitholders in connection
with the best proposal received by Exvere, if allocated based upon the Exvere
assigned values, would yield an amount in excess of the Merger Consideration. As
explained at pages 9-10, Whitcomb does not believe that the Exvere valuation
completely addressed the fact that two of Northwest II's motels are on leased
land and that the aggregate purchase price would have been reallocated in
negotiations. In addition, Whitcomb believes that the more recent McKee
appraisals represent a more current assessment of values.
Attached to this proxy statement as Annex IV is a schedule setting forth
Columbus' estimate of the net amount which would have been received per Unit,
after costs of sale, for both the best offer received by Exvere, based upon the
allocation of Exvere's assigned values, and if Northwest II were to sell the
three Super 8 Motels owned by it in individual sales. For purposes of
comparison, current assets and liabilities and long-term debt of Northwest II
are as of September 30, 1998. The estimates of transaction costs for the various
alternatives are based upon Columbus' best estimates after consultation with its
advisors.
As shown on Annex IV to this proxy statement, the best offer received by
Exvere, if allocated on the Exvere assigned values, would have yielded an
estimated per Unit value of $1,421 ($1,514 if the contingent purchase price was
earned) after transaction costs and payment of liabilities. A sale of the motels
on an individual basis by Northwest II at the values determined by the McKee
appraisals would yield an estimated per Unit value of $1,310, after transaction
costs and payment of liabilities as compared to the $1,343 per Unit Merger
Consideration.
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OPINION OF FINANCIAL ADVISOR
Whitcomb, on behalf of Northwest II and the Unitholders requested Ragen
MacKenzie to render its opinion as to whether the consideration to be paid by
Columbus pursuant to the Merger Agreement is fair, from a financial point of
view, to the Unitholders of Northwest II. Whitcomb retained Ragen MacKenzie
based upon its prominence as an investment banking and financial advisory firm
with experience in the valuation of businesses, their properties and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private placements and
valuations for corporate purposes.
On December 31, 1998, Ragen MacKenzie delivered its written opinion to
Northwest II that, as of the date of the opinion, based on Ragen MacKenzie's
review and subject to the assumptions, limitations, procedures followed and
qualifications described below and set forth in the opinion, the consideration
to be received by the Unitholders from the Merger is fair to the Unitholders,
from a financial point of view. Ragen MacKenzie is not making, and the opinion
should not be construed as, a recommendation to any Unitholder as to whether or
not a Unitholder should approve the Merger. Additionally, the fairness opinion
does not compare the relative merits of the Merger with those of any other
transactions or business strategies available to Northwest II as alternatives to
the Merger, and Ragen MacKenzie was not requested to, and did not, solicit the
interest of any other party in acquiring the motel properties.
THE FULL TEXT OF THE FAIRNESS OPINION WHICH CONTAINS A DESCRIPTION OF THE
MATERIAL ASSUMPTIONS AND QUALIFICATIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
IMPOSED ON THE REVIEW AND ANALYSIS IS SET FORTH IN ANNEX II AND SHOULD BE READ
IN ITS ENTIRETY. NORTHWEST II IMPOSED NO CONDITIONS OR LIMITATIONS ON THE SCOPE
OF RAGEN MACKENZIES' INVESTIGATION OR THE METHODS OR PROCEDURES TO BE FOLLOWED
IN RENDERING THE FAIRNESS OPINION.
In rendering the fairness opinion, Ragen MacKenzie, among other things: (i)
reviewed the Merger Agreement; (ii) reviewed and analyzed consolidated historic
and projected financial and operating data of Northwest II and the motel
properties, including audited and unaudited financial statements for Northwest
II and unaudited cash-basis estimates prepared by management for the motel
properties; (iii) reviewed and analyzed other internal information concerning
the business and operations of Northwest II and the motel properties furnished
to it by management; (iv) reviewed and analyzed publicly available information
concerning Northwest II and the motel properties; (v) reviewed and analyzed
publicly available information concerning the terms of selected merger and
acquisition transactions that Ragen MacKenzie deemed relevant to its inquiry
(based on size and similar financial characteristics); (vi) reviewed and
analyzed selected market purchase price data that Ragen MacKenzie considered
relevant to its inquiry; (vii) held meetings and discussions with Whitcomb and
employees of Northwest II concerning the operations, financial condition and
prospects of the motel properties; and (viii) conducted such other financial
studies, analyses and investigations, including visits to the Bremerton, Yakima
and Portland motels, and considered such other information as Ragen MacKenzie
deemed appropriate.
In arriving at its opinion, Ragen MacKenzie relied, without independent
verification, on the accuracy and completeness of all of the financial and other
information that was publicly available, supplied or otherwise communicated to
it by Northwest II. Ragen MacKenzie assumed that the financial estimates
(including the underlying assumptions and bases thereof) examined by it were
reasonably prepared and reflected the best currently available estimates and
good faith judgments of Northwest II as to the future performance of the motel
properties. Ragen MacKenzie expressed no opinion with respect to any forecasts
or the assumptions on which they were based. Ragen MacKenzie did not make an
independent evaluation or appraisal of the assets or liabilities (contingent
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or otherwise) of Northwest II (including the motel properties). However, Ragen
MacKenzie was furnished with independent appraisals on each property prepared by
McKee in conjunction with U.S. Bank's financing. The fairness opinion is based
upon financial, economic, market and other conditions and circumstances existing
and disclosed to it as of the date of its opinion. As background for its
analyses, Ragen MacKenzie held discussions with Whitcomb regarding the history,
current business operations, financial condition and future prospects of the
motel properties.
In conjunction with rendering its fairness opinion, Ragen MacKenzie
considered a variety of financial and comparative analyses, including:
- a discounted cash flow analysis;
- an analysis of certain transactions pursuant to which selected
public and private companies have acquired motel or hotel
properties similar to those in the partnerships;
- an analysis of selected publicly traded companies;
- an analysis of third party indications of interest obtained
during the marketing of Northwest II during the Spring and
Summer of 1998 (the "Market Test"); and
- an analysis of the appraisals conducted by McKee for the U.S.
Bank financing.
For purposes of its analysis, Ragen MacKenzie relied upon audited financial
statements for Northwest II for the year ended December 31, 1997, unaudited
financial statements for Northwest II for the nine months ended September 30,
1998 and unaudited cash basis estimates for the motel properties for the years
ending December 31, 1998 through 2003, inclusive, as provided by Northwest II.
Ragen MacKenzie's opinion is directed only to the fairness to Northwest II
and to the Unitholders, from a financial point of view, of the consideration to
be received by the Unitholders from the Merger, and does not address any other
aspect of the Merger. The summary set forth below does not purport to be a
complete description of the analyses used by Ragen MacKenzie rendering its
fairness opinion.
Discounted Cash Flow Analysis
Ragen MacKenzie analyzed the financial terms of the Merger using a
discounted cash flow analysis. The discounted cash flow approach assumes, as a
basic premise, that the intrinsic value of any business or property is the
current value of the future cash flow that the business or property will
generate for its owners. To establish a current implied value under this
approach, future cash flow must be estimated and an appropriate discount rate
determined. Ragen MacKenzie used estimates and other information provided by
Northwest II and Whitcomb to estimate the free cash flows, defined as total
projected cash revenue (including base rent and expense recoveries net of
certain free rent and vacancy allowances) minus total projected cash property
expenses (including utility expense, repair and maintenance expense, property
management fees, insurance, real estate taxes, tenant improvements, leasing
commissions and capital improvements ("Free Cash Flows")), for years ending
December 31, 1998 through the year ending December 31, 2003, inclusive. To
determine a perpetuity value, growth rates were applied to the year ending
December 31, 2003 ranging from 0.00% to 1.0%. Based on the forecasts provided by
management of the General Partner, Ragen MacKenzie assumed revenue growth
ranging from (0.3)% to 1.5% and which resulted in revenues of $3,246,000,
$3,238,000, $3,283,000, $3,329,000, $3,329,000, and $3,329,000 for the years
ending 1998-2003 respectively. Expenses were assumed to increase from 0.0% to
2.0% which yielded earnings before taxes of $777,000, $789,000, $793,000,
$751,000, and $709,000 for the years ending 1998-2003 respectively.
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The Free Cash Flows and perpetuity values were then discounted to the
present, using discount rates ranging from 12.0% to 16.0%. These discount rates
reflected Ragen MacKenzie's assessment of real estate investments in general,
and the specific risks of the motel properties, in particular. Ragen MacKenzie's
calculations resulted in a range of aggregate imputed values of the motel
properties of $6.6 million to $9.3 million.
Selected Comparable Acquisition Analysis
Ragen MacKenzie also analyzed more than 100 acquisitions that it believed
to be comparable based on size and other financial characteristics in which
certain public and private companies acquired a single or multiple motel and/or
hotel properties. Ragen MacKenzie compared the purchase price paid in each
comparable motel/hotel acquisition with the latest twelve months or reported
period, on an annualized basis, as a multiple of revenues and price per room.
These calculations created the following range of multiples: a range of purchase
price to target motel/hotel portfolios revenues of 2.5x to 4.1x, with a mean of
3.1x; a range of purchase price per target motel/hotel portfolios room of
$22,900 to $51,000, with a mean of $28,100. Applying the applicable range of
these acquisition multiples to the partnership properties' revenues for the
trailing twelve month period ended September 30, 1998, as adjusted to reflect
management's pro forma adjustments and to the number of rooms yielded an implied
aggregate range of values of the partnership properties of approximately $5.8
million to $13.2 million. The comparable acquisitions (targets) included
hotels/motels from the following: Super 8 Motels, Embassy Suites, Fairfield Inn,
Hampton Inn, Residence Inn, Holiday Inn, Hawthorne Suites, Knights Inn,
Travelodge, Comfort Suites, Fountain Suites, Homewood Suites, Studio Plus,
Allstar Inns, Best Western, Beverly Suites, Courtyard Inn, Summer Suites,
Columbia Inn, Cross Keys Inn, Knights Inn, Country Inn, Bavarian Inn, Econo
Lodge, Deluxe Inn Motel, Dutch Country Inn, Cobblestone Inn, Red Roof Inn,
Natchez Eola, Waves Motor Inn, Sleep Inn, Airport Inn, Lone Palm Motel, Turnpike
Motel, Bismark Inn, Country Club Motel, Fervis Inn and Amerisuites.
Selected Comparable Company Analysis
Ragen MacKenzie also analyzed public companies that it deems to be
comparable based on size and other financial characteristics. Such comparable
companies included Amerihost Properties, Inc., Candlewood Hotel Company, Choice
Hotels International, Red Roof Inns, Sholodge, Signature Inns, Inc., Suburban
Lodges of America, Sunburst Hospitality Corp., and Supertel Hospitality. Ragen
MacKenzie compared the aggregate value of the Comparable Companies with the
latest twelve months or reported period, on an annualized basis, as a multiple
of revenues, EBITDA and EBIT. These calculations created the following range of
multiples: a range of revenue multiples of 1.1x to 4.3x, with a mean of 2.3x; a
range of EBITDA multiples of 3.7x to 10.4x, with a mean of 7.0x; and a range of
EBIT multiples of 5.3x to 9.1x, with a mean of 7.3x. Applying the applicable
range of these multiples to the partnership properties' revenues, EBITDA and
EBIT for the trailing twelve month period ended September 30, 1998, as adjusted
to reflect management's pro forma adjustments and certain additional adjustments
that Ragen MacKenzie deemed appropriate, yielded an implied aggregate range of
values of the partnership properties of approximately $7.4 million to $9.8
million.
Selected Comparable Market Purchase Price Analysis
Ragen MacKenzie also compared financial information relating to the motel
properties to publicly available information on recent purchase prices of the
limited-service sector of motel and hotels in particular markets in which the
motel properties are located.
Ragen MacKenzie analyzed the prevailing purchase capitalization rate
(calculated by dividing property net operating income for the applicable
trailing twelve month period by the purchase price paid) for the limited service
sector. Ragen MacKenzie believes that these markets closely resemble the
respective markets in which the motel properties are located and are an
appropriate basis for the comparison of values.
Applying this selected data to the applicable motel properties' net
operating income for the twelve months ended September, 30 1998, as adjusted to
reflect management's pro forma adjustments
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and additional adjustments that Ragen MacKenzie deemed appropriate, yielded an
aggregate range of values for the motel properties of $5.9 million to $7.3
million.
Market Test
Ragen MacKenzie also reviewed indications of interest received by Northwest
II and the affiliated partnerships during the attempt to sell Northwest II to an
unaffiliated third party ("Potential Acquirors"). Ragen MacKenzie analyzed a
pro-rata share of the proceeds to be received from such transaction by the
Unitholders. The pro-rata share was based on a percentage determined by
historical appraisals and a third-party valuation. Ragen MacKenzie did not
develop a separate pro-rata methodology for allocating the proceeds and relied
solely on the formula provided by Northwest II. The proceeds were then allocated
to the Unitholders in accordance with the partnership agreement. It should be
noted that these offers did not result in the consummation of a transaction and
should be viewed accordingly.
Based on the range of values received from the Potential Acquirors, Ragen
MacKenzie calculated an implied aggregate range of values of Northwest II's
properties of approximately $8.5 million to $9.7 million.
Appraisals
Ragen MacKenzie also reviewed the appraisals of Northwest II's properties
prepared by McKee. For this analysis Ragen MacKenzie relied without independent
verification, on the accuracy and completeness of all information in the
appraisals. Ragen MacKenzie did not conduct any independent appraisals. Based on
the McKee appraised values, the implied aggregate of value of the Northwest II
properties is $8.8 million.
The summary set forth above describes the material analyses made by Ragen
MacKenzie. The preparation of a fairness opinion involves various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of these methods to the particular circumstances. Each of the
analyses was performed by Ragen MacKenzie to provide a different perspective on
the transaction and contribute to the total mix of information available to
Northwest II. Ragen MacKenzie did not form a conclusion as to whether any one of
the analyses, considered in isolation, supported or failed to support an opinion
as to the fairness from a financial point of view of the Merger Consideration.
Instead Ragen MacKenzie, in reaching its conclusion, considered the results of
the analyses taken as a whole. Ragen MacKenzie's conclusion involved significant
elements of judgement and qualitative analyses as well as a financial and
quantitative analyses. Ragen MacKenzie did not place particular emphasis or
weighting on any individual factor, but instead concluded that its analysis
taken as a whole supported its opinion. Accordingly, notwithstanding the
separate factors summarized above, Ragen MacKenzie believes that its analyses
must be considered as a whole and that selecting portions of its analysis and
the factors it considered without considering all analyses and factors, could
create an incomplete or misleading view of the evaluation process underlying its
opinion. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than as set forth therein. In addition,
analyses relating to the values of real estate properties are not appraisals and
may not reflect the prices at which such properties may actually be sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty and Ragen MacKenzie does not assume responsibility for any future
variations from such analyses or estimates. The following paragraphs summarize
the significant quantitative and qualitative analyses performed by Ragen
MacKenzie in arriving at the fairness opinion. In performing these analyses,
Ragen MacKenzie noted that the partnership only represented ownership in
specific properties. This
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differentiates these properties from hotel operating companies that are managed
for growth. Consequently Ragen MacKenzie noted lower multiples of historic
earnings to individual properties. In performing its analyses, Ragen MacKenzie
made numerous assumptions with respect to industry performance, general
business, financial, economic, and market conditions and other matters, many of
which are beyond the control of Northwest II. Furthermore, events occurring
after the date of the Ragen MacKenzie fairness opinion may materially affect the
assumptions used in preparing the Ragen MacKenzie fairness opinion and
accordingly the Ragen MacKenzie fairness opinion is necessarily based upon
market, economic, and other conditions that exist and can be evaluated as of the
date of the opinion, and on information available to Ragen MacKenzie as of such
date. In addition, analyses relating to the value of the business or securities
do not purport to be appraisals, or to reflect the prices at which such
businesses or securities can actually be sold. Analyses based on future results
are not necessarily indicative of actual future results that may be
significantly more or less favorable that suggested by such analyses.
Pursuant to an engagement letter dated December 14, 1998, Ragen MacKenzie
will receive $125,000 for its services in rendering fairness opinions to
Northwest I, Northwest II, Anchorage and Lacey. Ragen MacKenzie will also be
reimbursed for certain of its expenses. Columbus has agreed to indemnify Ragen
MacKenzie, its affiliates and each of its directors, officers, employees,
agents, consultants and attorneys, and each person or form, if any, controlling
Ragen MacKenzie or any of the foregoing, against certain liabilities, including
liabilities under federal securities, law, that may arise out of Ragen
MacKenzie's engagement.
Ragen MacKenzie has, from time to time, provided securities brokerage
services to Whitcomb and affiliates, and may do so in the future, but the
compensation paid by Whitcomb and affiliates to Ragen MacKenzie is not material,
constituting less than 1% of Ragen MacKenzie's total 1998 commission revenue.
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THE MERGER AGREEMENT
The Merger Agreement is between Gerald L. Whitcomb and PDS, the general
partners of Northwest II, on behalf of Northwest II, and Columbus. The material
provisions of the Merger Agreement are summarized below.
Pursuant to the Merger Agreement and the Articles of Merger attached
thereto, the Washington Uniform Limited Partnership Act and the Washington
Limited Liability Company Act, at the effective time, Northwest II will be
merged with and into Columbus, with Columbus continuing as the Surviving
Company.
CLOSING DATE; EFFECTIVE TIME OF THE MERGER
The Merger will become effective on the closing date when the Articles of
Merger are filed with the Secretary of State of the State of Washington. At the
earliest, this will take place on the first business day following the Meeting
and at the latest will take place on the last business day of the month in which
the Meeting occurs. The closing will take place at the administrative offices of
Northwest II located at 7515 Terminal Street S.W., Tumwater, Washington 98501,
unless otherwise agreed by the parties.
EFFECTS OF THE MERGER
At the effective time by virtue of the Merger, and without any further
action on the part of anyone, each Unitholder's Units outstanding immediately
prior to the effective time will be cancelled. Each Unit will be automatically
converted into a right to receive the Merger Consideration, without interest.
Immediately before the effective time the Whitcombs' partnership interests
(whether general or limited) will be contributed to Columbus for additional
interests therein. Approval of the Merger by Unitholders will also constitute an
amendment to the limited partnership providing that gain, if any, realized by
Northwest I in the Merger will be allocated to the unaffiliated Unitholders
receiving the Merger Consideration. This allocation will not change the amount
of Merger Consideration received or the amount or timing of income or gain
allocated to Unitholders.
PAYMENT
Promptly after the effective time, Columbus will mail to each Unitholder as
of January 6, 1999, a form of transmittal letter, any other required forms, and
instructions. Delivery will be effected, and the risk of loss to Units will
pass, only upon delivery of these documents and receipt of the Merger
Consideration for each Unit. Upon the surrender of such transmittal documents
and the payment by Columbus of the Merger Consideration in exchange for the
Units, the Units owned by Unitholders will then be immediately cancelled. Until
surrendered and exchanged, the Units owned by Unitholders represent only the
right to receive the Merger Consideration multiplied by the number of Units
owned by such Unitholder. Upon the surrender of Units, each Unitholder will
receive the Merger Consideration, without interest. If any cash is to be paid to
a name other than the name in which the Units are registered, it will be a
condition to payment that the Unitholder requesting payment will pay to Columbus
any transfer or other taxes required by reason of payment to a person other than
the registered Unitholder. Notwithstanding the foregoing, neither Columbus nor
any other party will be liable to any Unitholder for any Merger Consideration or
other payments made to a public official pursuant to applicable abandoned
property laws. Columbus will be entitled to deduct and withhold from the Merger
Consideration any taxes or other amounts required by law, including Sections
3406 and 1445 of the Internal Revenue Code of 1986, as amended. Pursuant to
federal law, to the extent that amounts are withheld, these amounts will be
treated as
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having been paid to a Unitholder for purposes of the Merger Agreement. Beginning
at the effective time, there will be no further transfers of any Units on the
books of Northwest II. Each Unitholder that has converted Units will be deemed
to have withdrawn as a limited partner of Northwest II. Unitholders will then
have no further interest in Northwest II or Columbus, including any allocations
or distributions of income, property or otherwise, other than the right to
receive the Merger Consideration.
Following the effective time, Whitcomb, on behalf of Northwest II, will
deregister the Units and terminate Northwest II's reporting obligations under
Section 12 of the Exchange Act by filing a Form 15 with the SEC, in Washington,
D.C.
Unitholders will have dissenters' rights of appraisal in connection with
the Merger, as set forth in Article 14 of Chapter 25.10 of the Revised Code of
Washington. See "Dissenters' Rights of Appraisal" beginning on page 32 of this
proxy statement.
ACTIONS OF COLUMBUS NORTHWEST II AND WHITCOMB
Under the Merger Agreement, Columbus consents to the Merger, agrees in all
respects with the terms of the Merger Agreement and, subject to the terms and
conditions of the Merger Agreement, the consummation of the transactions
contemplated by the Merger Agreement. Pursuant to the Washington Limited
Partnership Act and Article VI of the limited partnership agreement, by
executing the Merger Agreement, Whitcomb, as the general partner of Northwest
II, subject to the requisite approval of Unitholders at the Meeting, consents to
and approves the Merger Agreement and transactions contemplated thereby on
behalf of Northwest II.
REPRESENTATIONS AND WARRANTIES OF PARTIES
The Merger Agreement contains customary representations and warranties. In
addition, Columbus represents and warrants that it has obtained a commitment
letter from U.S. Bank, subject to customary conditions, that U.S. Bank will lend
Columbus sufficient funds to consummate the Merger and Northwest II represents
and warrants that it has received the fairness opinion from Ragen MacKenzie and
that it has not paid or agreed to pay any fee or commission to any broker,
finder or intermediary in connection with the Merger.
LEGAL CONDITIONS TO THE MERGER
Whitcomb (on behalf of Northwest II and Columbus) agrees to take all
reasonable steps necessary to promptly comply with all legal requirements with
respect to the Merger and to take all reasonable action necessary to promptly
furnish information to the other parties in connection with any such
requirements. Columbus will take all reasonable actions necessary (i) to obtain
any consent, authorization, order, approval, or exemption of any governmental or
administrative agencies or third parties; (ii) to lift, rescind or mitigate the
effect of any injunction or restraining order or other similar order adversely
affecting the Merger; (iii) to fulfill all conditions pursuant to the Merger
Agreement; and (iv) to prevent the entry of any temporary, preliminary or
permanent injunction or court order.
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EXPENSES
Columbus will bear all costs and expenses of each party in connection with
the Merger, including the real estate excise tax payable by the Unitholders with
respect to the transfer of their Units; such costs and expenses having been
taken into consideration by Columbus in determining the Merger Consideration.
CONDITIONS PRECEDENT
Completion of the Merger is subject to customary conditions precedent. It
will be a condition precedent that the loan commitment from U.S. Bank will
remain available to Columbus, such that Columbus may borrow sufficient funds on
or before the closing date in order to pay the Merger Consideration to the
Unitholders as provided in the Merger Agreement. The parties to the Merger
Agreement agree that in exercising its discretion to waive or require
fulfillment of conditions precedent, Columbus will not be required to consider
the interest of any person or entity that may be affected by the Merger, other
than Columbus. Columbus will have no obligation, fiduciary or otherwise, to the
limited partners of Northwest II in exercising such discretion.
The respective obligations of each party, generally, to effect the Merger
is subject to a number of customary conditions. It is a condition of each party
generally that Roger MacKenzie will not have withdrawn or modified in any
material respect its opinion that the Merger Consideration is fair to the
unaffiliated Unitholders from a financial point of view.
TERMINATION
The Merger Agreement may be terminated by mutual consent of Columbus and
Northwest II. The Merger Agreement may also be terminated by Northwest II if
Columbus is in material breach of any term of the agreement. The Merger
Agreement may be terminated by Columbus if Northwest II is in material breach of
any term of the agreement. The Merger Agreement may be terminated by either
Columbus or Northwest II if the Merger has not been completed by March 31, 1999,
or a final order prohibiting the Merger has been entered by a court or
government agency. In the event of termination of the Merger Agreement, it will
become void and there will be no liability on the part of Columbus or Northwest
II for failure to complete the Merger or otherwise.
AMENDMENT
The Merger Agreement may be amended only in writing. No amendment may be
made without the approval of Unitholders holding at least 66% of the outstanding
Units, if the proposed amendment would either (a) change the type or reduce the
amount of the Merger Consideration, or (b) alter or change any other terms and
conditions of the Merger Agreement if any of such alterations or changes, alone
or in the aggregate, would materially adversely affect the Unitholders.
EXTENSION; WAIVER
At any time prior to the effective time of the Merger, whether before or
after this proxy statement is mailed, any party may (i) extend the time for the
performance of any of the obligations or other acts of any other party to the
Merger Agreement; (ii) waive any inaccuracies and representations and warranties
contained in the Merger Agreement; and (iii) waive compliance with any of the
agreements of the other parties or conditions to its own obligations contained
in this agreement. Any agreement with respect to extension or waiver must be in
writing. No consent or waiver of
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compliance given by any of the parties to the Merger Agreement will operate as a
consent or waiver of compliance in respect to any subsequent default, breach, or
nonobservance.
NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS
The respective representations and warranties of Northwest II and Columbus
will expire with, and will be terminated and extinguished upon, consummation of
the Merger. Thereafter, neither Northwest II nor Columbus, or any officer,
director or principal of such entities, will be under any liability whatsoever
with respect to any representation or warranty in the Merger Agreement.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
of the Merger. This discussion does not discuss all of the federal income tax
consequences that may be relevant to Unitholders that are subject to special
treatment under the federal income tax laws, including foreign persons,
tax-exempt entities, life insurance companies, or S corporations. The discussion
set forth below is based on the Internal Revenue Code of 1986, as amended
(hereinafter, the "Code"), Treasury Regulations, announcements promulgated
thereunder, published rulings and court decisions, all as in effect on the date
of this proxy statement and without giving effect to changes in the federal tax
laws, if any, enacted after the date of this proxy statement. Unitholders are
assumed to hold their Units as capital assets.
Gain or Loss Will Be Recognized
Unitholders will recognize gain or loss on the sale of Units in the Merger
to the extent of the difference between the amount realized and his or her
adjusted basis in the Units sold. The amount realized is the amount of cash
received plus the Unitholder's share of Northwest II's liabilities (determined
under Code Section 752 and the Treasury Regulations thereunder). The adjusted
tax basis of a Unitholder's Units is generally equal to the cost of the Units to
such Unitholder, decreased by the Unitholder's cumulative share of Northwest II
distributions and losses, and increased by the Unitholder's cumulative share of
Northwest II income and Northwest II liabilities, as determined under Code and
the Treasury Regulations thereunder. If a Unitholder's share of the Northwest
II's liabilities exceeds the adjusted tax basis of his or her Units, the
Unitholder's realized gain will include the excess.
The amount of cash received by Unitholders in exchange for their Units that
is attributable to unrealized receivables or inventory items ("Section 751
property") of Northwest II will be considered as an amount realized from the
sale or exchange of property other than a capital asset. The remainder of the
gain or loss realized by an Unitholder who has held the Units as capital assets
will be capital gains or loss, and will be long term capital gain or loss if the
Units have been held for more than one year.
Unitholders who have held their Units for more than one year may be
entitled to a lower long-term capital gains tax rate on that portion of their
gain, if any, that is not attributable to Section 751 property. Capital losses
generally are deductible only to the extent of capital gains plus, in the case
of non-corporate Unitholders, up to $3,000 of ordinary income. Capital losses
realized from the sale of Units may be utilized to offset capital gains from
other sources and may be carried forward, subject to applicable limitations.
Pursuant to Code Sections 708, 721, and 731(b), the Merger is not expected
to be a taxable event to Northwest II.
Statement Required to Be Attached to Selling Unitholders' Federal Income
Tax Returns.
Selling Unitholders are required to submit with their income tax return for
the year in which the Units are sold a statement that sets forth, among possible
other things, the following information: (1) the date of the sale, the amount of
the selling Unitholder's adjusted basis in his or her Units, and the portion
thereof attributable to Code Section 751 property pursuant to Code Section 732;
and (2) the amount of any money and the fair market value of any other property
received or be received for the transferred Units in Northwest II, and the
portion thereof attributable to Section 751 property.
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In general, the portion of the selling Unitholders' adjusted basis for his
Units to be allocated to Section 751 property is an amount equal to the basis
such property would have had under Code Section 732 if the selling Unitholder
had received his share of such properties in a current distribution made
immediately before the sale. The payment agent will provide selling Unitholders
with Northwest II's basis in Section 751 property. SELLING UNITHOLDERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS FOR ASSISTANCE IN DETERMINING THE PORTION OF
THEIR ADJUSTED BASIS IN THEIR UNITS ATTRIBUTABLE TO SECTION 751 PROPERTY.
The Merger Agreement provides that the selling Unitholders' amount
realized is to be allocated between Northwest II's Section 751 property and
non-Section 751 property based on the relative fair market values of Northwest
II's Section 751 property and non-Section 751 property and that such relative
fair market values are agreed to be as determined by Columbus. The paying agent
will distribute this information to the selling Unitholders.
Foreign Investment in Real Property Tax Act Withholding
Units are considered United States real property interests for purposes of
Code Section 897, the Foreign Investment in Real Property Tax Act ("FIRPTA").
Consequently, pursuant to Code Section 1445, Columbus, as buyer of the Units,
must deduct and withhold a tax equal to 10% of the total consideration paid for
such Units unless it receives a nonforeign person affidavit. A suitable
nonforeign person affidavit will be included as part of the transaction
documents mailed to the Unitholders by the payment agent.
Washington State Real Estate Excise Tax
Washington State imposes an excise tax on sales of real property.
Acquisitions of controlling interests in partnerships are considered sales
subject to this real estate excise tax. This real estate excise tax is imposed
on the seller; in this case, the Unitholders. This real estate excise tax is
imposed at rates ranging from 1.53% to 1.78%. Pursuant to the terms of the
Merger Agreement, Columbus is responsible for payment of the real estate excise
tax since the liability has been taken into consideration by Columbus in
determining the Merger Consideration. Unitholders will not be required to pay
this tax out of the Merger Consideration received.
EACH UNITHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE
THE SPECIFIC FEDERAL INCOME TAX CONSEQUENCES OF SELLING UNITS IN THE MERGER, AS
WELL AS THE EFFECTS OF STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS.
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DISSENTERS' RIGHTS OF APPRAISAL
You have dissenters' rights of appraisal under Article 14 of Chapter 25.10
of the Revised Code of Washington ("Article 14") with respect to your Units. The
following summary of the material dissenters' right procedures is qualified in
its entirety by reference to Article 14, a copy of which is attached as Annex
III to this proxy statement. Unitholders thinking about exercising their
dissenters' rights are urged to review the full text of Article 14. The
procedures set forth in such chapter must be followed exactly or dissenters'
rights may be lost.
A Unitholder who properly follows the procedures for dissenting and
demanding payment for his or her Units pursuant to Article 14 (as summarized
below) may be entitled to receive in cash the "fair value" of his or her Units
in lieu of the Merger Consideration provided in the Merger Agreement. The "fair
value" of a dissenter's Units will be the value of such Units immediately before
the effectuation of the Merger, excluding any appreciation or depreciation in
anticipation of the Merger, unless exclusion would be inequitable. The "fair
value" could be greater than, less than, or the same as the $1,343 per share
Unit Merger Consideration the Unitholder would have received if the Unitholder
had not dissented. In the event the dissenting Unitholder and Northwest I
(referred to in this section as the "Surviving Company") cannot agree on the
"fair value" of the dissenter's partnership interest, a court in an appraisal
proceeding may ultimately determine "fair value."
To properly exercise dissenters' rights with respect to the Merger and to
be entitled to payment under Article 14, a Unitholder must (a) not challenge the
Merger unless the Merger fails to comply with the procedural requirements
imposed by Article 14, the partnership agreement, or is fraudulent with respect
to an investor or Northwest II; (b) not vote in favor of or approve the Merger;
and (c) demand payment by the date set in the dissenters' notice to be sent by
the Surviving Company (as described below). Thus, any Unitholder who wishes to
dissent must either vote "against" the merger or "abstain" from voting such
partnership interest. A vote "AGAINST" the Merger, without satisfying the
requirement of clause (c) above, is not a proper exercise of dissenters' rights.
The right of a dissenting Unit holder to obtain payment of the fair value
of the Unitholder's partnership interest shall terminate upon the occurrence of
any of the following events:
a. The Merger is abandoned or rescinded;
b. A court having jurisdiction permanently enjoins or sets aside the
Merger; or
c. The Unitholder's demand for payment is withdrawn with the written
consent of Northwest II.
Within 10 days after the approval of the Merger by the Unitholders, the
Surviving Company will deliver a written dissenters' rights notice to all
dissenting Unitholders who did not vote in favor of or the Merger. The
dissenters' rights notice will:
a. State where the payment demand must be sent;
b. Inform Unitholders as to the extent transfer of the Units will be
restricted as permitted by RCW 25.10.930 after the payment demand is
made;
c. Supply a form for demanding payment;
d. Set a date by which the Surviving Company must receive the payment
demand, which date may not be fewer than thirty (30) nor more than
sixty (60) days after the date the notice is delivered; and
e. Include a copy of Article 14.
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A Unitholder who demands payment retains all other rights of a Unitholder
until the Merger becomes effective. A Unitholder sent a dissenters' notice who
does not demand payment by the date set in the dissenters' notice is not
entitled to payment for the Unitholder's Units under Article 14.
Northwest II may restrict the transfer of Units from the date the demand
for their payment is received until the Merger becomes effective or the
restriction is released under Article 14.
Within 30 days of the later of the date the Merger becomes effective, or
the payment demand is received, the Surviving Company will pay each dissenter
who properly demanded payment the amount that the Surviving Company estimates to
be the fair value of the Units, plus accrued interest. The payment will be
accompanied by, among other things,
a. Copies of Northwest II's financial statements for the most recent
fiscal year maintained as required by RCW 25.10.050;
b. An explanation of how the Surviving Company estimated the fair value
of the Units and how the accrued interest was calculated;
c. A statement of the dissenter's right to demand payment; and
d. A copy of Article 14.
If the Merger does not become effective within sixty days after the date
set for demanding payment, Northwest II shall release any transfer restrictions
imposed as permitted by RCW 25.10.930. If, after releasing transfer
restrictions, the Merger becomes effective, the Surviving Company must send a
new dissenters' notice as provided in RCW 25.10.910(2) and 25.10.920 and repeat
the payment demand procedure.
A dissenter may notify the Surviving Company in writing of the dissenter's
own estimate of the fair value of the dissenter's Units and the amount of
interest due and demand payment of the dissenter's estimate, less any payment
under RCW 25.10.935, if:
a. The dissenter believes that the amount paid is less than the fair
value of the dissenter's Units or that the interest due is incorrectly
calculated;
b. The Surviving Company fails to make payment within 60 days after the
date set for demanding payment; or
c. Northwest II, having failed to effectuate the Merger, does not release
the transfer restrictions imposed on Units as permitted by RCW
25.10.930 within sixty days after the date set for demanding payment.
A dissenter will be deemed to have waived the right to demand payment of
the dissenter's estimate of fair value unless the dissenter notifies the
Surviving Company of the dissenters' demand in writing within thirty (30) days
after the Surviving Company made payment for the dissenter's units.
If a demand for payment remains unsettled, the Surviving Company will
commence a proceeding in the Superior Court of Thurston County, Washington
within 60 days after receiving the payment demand and petition the court to
determine the fair value of the units and accrued interest. If the Surviving
Company does not commence such proceeding within the sixty-day period, it will
pay each dissenter whose demand remains unsettled the amount demanded by the
dissenter. The Surviving Company will make all dissenters whose demands remain
unsettled, whether or not residents of Washington State, parties to the
proceeding as in an action against their Units, and will serve all
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parties with a copy of the petition. The Surviving Company will be able to serve
nonresidents by registered or certified mail or by publication as provided by
law. The Surviving Company may join as a party to the proceeding any Unitholder
who claims to be a dissenter but who has not, in the Surviving Company's
opinion, complied with the provisions of Article 14. If the court determines
that such Unitholder has not complied with the provisions of Article 14, the
court will dismiss the Unitholder as a party. The jurisdiction of the court in
which the proceeding is commenced will be plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decisions on the question of fair value. The appraisers will have the powers
described in the order appointing them or in any amendment to it. Dissenters
will be entitled to the same discovery rights as parties in other civil
proceedings. Each dissenter made a party to the proceeding who is not dismissed
will be entitled to judgment for the amount, if any, by which the court finds
the fair value of the Units, plus interest, exceeds the amount paid by the
Surviving Company.
In a proceeding commenced to determine the fair value of Units, the court
shall determine all costs of the proceeding, including reasonable compensation
and expenses of appraisers appointed by the court. The court will assess the
costs against the Surviving Company, except that the court may assess the costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment. The court may also assess the fees and
expenses of counsel and experts for the respective parties, in the amounts the
court finds equitable:
(1) Against the Surviving Company and in favor of any or all dissenters if
the court finds the Surviving Company did not substantially comply with the
requirements of Article 14; or
(2) Against either the Surviving Company or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by Article 14.
If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the Surviving Company, the
court may award to these counsel reasonable fees to be paid out of amounts
awarded the dissenters who were benefited.
Failure to follow the steps required by Article 14 for perfecting
dissenters' rights may result in the loss of such rights.
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF WASHINGTON LAW, ANY
UNITHOLDER WHO IS CONSIDERING DISSENTING FROM THE MERGER SHOULD CONSULT A LEGAL
ADVISOR.
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INFORMATION ABOUT NORTHWEST II
BUSINESS
Northwest II is a Washington limited partnership formed to invest in and
operate three "economy" motels located in the states of Washington and Oregon.
Northwest II operates its motels as a franchise of Super 8 Motels, Inc., the
national franchiser of the "Super 8" trade name. Northwest II does not own any
interest in Super 8 Motels, Inc., or in PGI, the regional sub-franchiser and one
of the general partners of Northwest II. The other general partner is Whitcomb.
Northwest II was formed in March, 1982. Units of Northwest II were offered
and sold in an initial public offering by selected broker-dealers on a best
efforts basis in Washington, Oregon, Montana, Idaho, Alaska, Wisconsin,
Illinois, and Georgia. Sale of the Units began on May 8, 1982. Funds were
released from escrow on January 12, 1983, when gross sales of the Units reached
$950,000. The partnership agreement was amended in May 1983 to provide for a
gross offering of $6,602,000. At December 31, 1983, Northwest II had raised a
total of $2,710,000. On May 8, 1984, the offering was closed. In the period
January 1, 1984, through May 8, 1984, Northwest II raised $1,342,000 in
additional limited partnership subscriptions. The final result of the offering
was 4,052 Units sold yielding gross offering proceeds of $4,052,000. This was
$2,550,000 under the initially intended subscription amount.
To achieve Northwest II's objective of developing three Super 8 Motel
properties, long-term mortgage financing in the amount of $2,200,000 was
arranged through Sterling Savings and Association of Chehalis, Washington. This
debt is secured by the Portland property and assignment of the Yakima (Yakima)
land lease.
Northwest II operates in a single industry (motels) and within that
industry only in the economy motel category.
The motel properties were developed and are being operated as economy
motels in the locations described below. The economy motel concept provides for
a clean, comfortable average-size motel room that has all the basic amenities
required by the traveling public at a price lower than that of most surrounding
motel properties of equal quality.
The 77 room Bremerton, Washington property services the military-based city
of Bremerton, Washington.
The 80 room Portland, Oregon property's proximity to the Portland
International Airport allows it to provide free transportation to and from the
airport, courtesy telephone and long-term parking privileges. The property has
one mini-suite and a small conference room available.
The 95 room Yakima, Washington property features a year-round indoor
swimming pool, one mini-suite, a medium-sized conference room, guest laundry
facilities and special parking for commercial trucks.
Each of the properties historically experiences seasonal fluctuations in
the occupancy, the low point occurring in the winter months and peaking in the
late summer.
All guest rooms are equipped with direct-dial telephone, color television
and tub/shower combination, and are fully carpeted, sound proofed and insulated.
Guests are allowed to use major national credit cards and cash checks with our
proprietary VIP Club membership. Vending machines
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are also available. Each property has interior hallways, a lobby with a
manager's office, an employee lounge, and in-house laundry. No restaurants are
located on any of the properties.
The motels provide full or part-time employment for approximately 54 people
(Bremerton 15, Portland 19, Yakima 20).
MOTEL PROPERTIES
In 1983, Northwest II leased the Bremerton 1.75 acre site located on State
Road 3 and Kitsap Way. The lease has a 37 year term. Adjacent to the site is a
24 hour family restaurant.
In 1983, Northwest II purchased the Portland site for a purchase price of
$720,000. This site is at the interchange of Interstate 205 and Airport Way,
approximately on mile east of the Portland International Airport. Significant
environmental contamination including ground water contamination, has been
discovered within the Airport Way Urban Renewal Area in Portland at the former
ICN site, a medical manufacturing firm. ICN, which is no longer in existence,
potentially discharged hazardous substances into wells which have contaminated
the ground water. POC has orally advised Northwest II that it believes it is
unlikely that Northwest II's property is contaminated.
In 1983, Northwest II leased the Yakima site located at the intersection of
I-82 and Rudkin Road just south of Yakima, Washington. The lease is for a term
of 30 years. At the time of the building of additional rooms in 1990, the
partnership entered into a second ground lease on adjacent property for a term
of [ ] years.
The Bremerton motel opened on October 23, 1983, the Portland motel on May
25, 1984 and the Yakima motel on September 14, 1984.
The motels are of frame construction with stucco exteriors and tile roofs
and have full fire alarm systems. In addition, the Portland motel is fully
equipped with a fire protection sprinkler system. Heating and cooling is by
individual room through wall heat pumps.
The Bremerton facility occupies approximately 29,740 square feet, the
Portland facility occupies approximately 31,900 square feet and the Yakima
facility occupies approximately 39,190 square feet.
A 33 room addition to the Yakima property opened for occupancy on January
15, 1991. Total cost of the addition (including furniture and fixtures) was
$875,000.
LEGAL PROCEEDINGS
Northwest II is not party to any material legal proceedings.
MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED SECURITY HOLDER MATTERS
Units are owned of record by approximately 900 investors. There is no
established public trading market for the Units and no significant transactions
in Units have occurred since the original offering of Units. Because of this,
Northwest II is unable to determine a fair market value for the Units based on
market price.
Distributions of cash to the Unitholders totaled $405,200 ($100.00 per
Unit) in 1997, $616,281 ($152.09 per Unit) in 1996, and $1,174,026 ($289.74 per
Unit) during 1995.
36
<PAGE> 44
SELECTED FINANCIAL DATA OF NORTHWEST II
For the years ended December 31, 1995, 1996, and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Total Sales $3,277,174 $3,500,148 $3,132,920
Net Income (Loss) $ 705,904 $1,006,899 $ 692,709
Net Income per Unit $ 172.47 $ 211.22 $ 145.31
Total Assets** $4,391,793 $3,986,972 $3,641,686
Long-Term Debt $3,988,018 $3,181,870 $2,725,565
Cash Distribution Per Unit $ 289.74 $ 152.09 $ 100.00
</TABLE>
**Net of amortization and depreciation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
At December 31, 1997, 1996, and 1995, Northwest II's current assets
exceeded its current liabilities by $161,512, $229,578, and $540,908
respectively resulting in the current ratios noted below. The variance in total
current assets is largely attributable to the relative cash position of
Northwest II at December 31. Cash balances have declined each year as accrued
property management fees have been paid.
The interest rate on Northwest II's long term debt is tied to a treasury
bill index plus 3.5%. The effective rate at December 31, 1997 was 9.00%, the
same as 1995 and lower than the 9.38% effective rate in 1996. The long term
interest rate on debt encumbering the Portland property is variable at 1% plus
the Lenders Prime Rate. The effective interest rate on this debt at December 31,
1997 is 9.06%, slightly lower than the 9.25% rate at December 31, 1996.
The interest rate on the long term loan funding the Yakima addition is
variable based on the treasury bill index plus 2.5% per annum, but was fixed
through December 31, 1997 at 10.25% per annum.
BALANCE SHEET DATA
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Current Assets..................................... $885,576 $641,740 $468,690
Current Liabilities................................ $344,668 $412,162 $307,178
Current Ratio...................................... 2.57:1 1.56:1 1.53:1
</TABLE>
At December 31, 1997, the Bremerton motel had completed its fourteenth full
year of operation.
Portland and Yakima completed their thirteenth full year of operations.
37
<PAGE> 45
Comparative operational statistics follow:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Bremerton
Occupancy..................................... 64% 84% 54%
Rented rooms.................................. 18,028 23,671 15,277
Gross room rate*.............................. $ 44.22 $ 42.00 $ 46.25
Portland
Occupancy..................................... 82% 86% 82%
Rented Rooms.................................. 23,649 25,055 24,282
Gross room rate*.............................. $ 55.66 $ 56.80 $ 59.34
Yakima
Occupancy..................................... 72% 64% 58%
Rented Rooms.................................. 24,860 22,115 20,264
Gross room rate*.............................. $ 46.81 $ 48.15 $ 48.41
Total
Occupancy..................................... 73% 77% 65%
Rented rooms.................................. 66,537 70,841 59,823
Gross room rate*.............................. $ 49.25 $ 49.41 $ 52.37
</TABLE>
*"Gross Room Rate" is defined as total room revenue divided by total rooms
sold.
Total 1997 room sales revenue decreased $367,228 to $3,132,920 from
$3,500,148 in 1996 and $3,277,174 in 1995. Total rented rooms mirrored the drop
in revenue and decreased from 70,841 in 1996 to 59,823 in 1997, a decrease of
11,018 rented rooms and 6,714 lower than 1995 levels. The majority of the
decrease is due to the lack of Navy contract business in Bremerton this year.
Total room revenues decreased by 10%, of which the lack of Navy contract in
Bremerton accounted for 80% of the decrease. Gross room rates increased 6% to
$52.37 per room in 1997 compared to $49.41 in 1996 and $49.25 in 1995.
Net income in 1997 decreased $314,190 to $692,709 down from a high of
$1,006,899 in 1996 but in line with 1995 net income of $705,904. The decrease is
consistent with the decrease in revenues.
Direct operating expenses in 1997 decreased $21,609 to $1,094,059 down from
$1,115,668 in 1996 and 6% lower than 1995 levels. The majority of the decrease
is due to decreased supplies and maintenance expenditures. Significant
renovations were completed at the Bremerton, Portland and Yakima motels which
resulted in increased supplies and maintenance expenses in 1998.
SELECTED QUARTERLY FINANCIAL DATA OF NORTHWEST II
For the quarters ended March 31, June 30, and September 30, 1998:
<TABLE>
<CAPTION>
MARCH 31, 1998 JUNE 30, 1998 SEPT. 30, 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Total Sales $ 699,213 $ 874,112 $ 981,386
Net Income (Loss) $ (14,182) $ 257,001 $ 152,962
Net Income (Loss) per Unit $ (3.50) $ 63.43 $ 37.75
Total Assets** $3,490,002 $3,604,242 $3,445,392
Long-Term Debt $2,301,402 $2,390,168 $2,445,805
Cash Distribution Per Unit $ 25.00 $ 25.00 $ 37.50
</TABLE>
**Net of amortization and depreciation.
38
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE FIRST THREE QUARTERS OF 1998.
As in the past, Northwest II experienced lower occupancy levels in the
first three months of the year. In addition, the Bremerton motel underwent a
$90,000 renovation in the first quarter of 1998 resulting in increased supplies
and maintenance expenditures that flowed through to the bottom line.
Current ratios showed steady improvement throughout the year as current
assets exceeded current liabilities by $30,146, $140,284, and $161,512 in the
first, second, and third quarters of 1998 respectively. Accounts payable
decreased sharply from the first to third quarters as renovation expenses for
the Bremerton property were paid. In addition, accrued property management fees
totaling $350,000 in the first quarter have been paid in full at September 30,
1998.
The Bremerton property followed a strong second quarter with a strong month
of September helping to boost third quarter results. The Portland motel remains
steady while the Yakima motel retreated slightly in the third quarter.
QUARTERLY BALANCE SHEET DATA
For the quarters ended March 31, June 30, and September 30, 1998:
<TABLE>
<CAPTION>
MARCH 31, 1998 JUNE 30, 1998 SEPTEMBER 30, 1998
-------------- ------------- ------------------
<S> <C> <C> <C>
Current Assets $356,996 $511,226 $390,470
Current Liabilities $326,850 $370,942 $365,549
Current Ratio 1.09:1 1.38:1 1.07:1
</TABLE>
Total sales for the third quarter of 1998 were $981,386, an increase of
$107,274 from second quarter 1998 and $282,173 higher than the first three
months of the year.
As in the past, occupancy figures and, in turn, revenue figures are
significantly lower in the first quarter of the year.
Average occupancy figures posted strong gains in the third quarter helping
to boost total room revenues.
Renovations at the Bremerton and Yakima motels in the first and third
quarters resulted in unusually high supplies and maintenance expenses in those
periods.
Indirect operating expenses remain relatively flat with increases in
advertising, property and business tax expense accounting for much of the
$22,692 increase from the first to third quarter of 1998.
Property management and franchise fee expenses parallel room revenue in
their steady increase from the first through third quarters.
Nationwide the Super 8 motel chain continues to grow, increasing the name
familiarity of the chain.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, NUMBER OF SUPER 8 MOTELS INCREASE
------------------ ------------------------ --------
<S> <C> <C>
1997 1,614 122
1996 1,492 92
1995 1,400 180
</TABLE>
39
<PAGE> 47
<TABLE>
<CAPTION>
AS OF DECEMBER 31, NUMBER OF SUPER 8 MOTELS INCREASE
------------------ ------------------------ --------
<S> <C> <C>
1994 1,220 159
1993 1,060 119
1992 941 78
</TABLE>
The Super 8 "Superline" national reservation system and "VIP Club"
(approximately 5,000,000 members) continue to be improved.
Distributions paid to limited partners in 1995 aggregated $1,174,026, which
equaled the per-Unit amount necessary to pay to the limited partners a 10%
cumulative return on their investment from the final closing of the offering of
Units on May 5, 1984. Subsequently, on January 31, 1996, limited partners were
paid amounts, which varied by partner, necessary to pay that partner a 10%
return on their investment from the date of their investment (or, if later, the
initial breaking of the escrow established in connection with the offering on
January 12, 1983) until the closing of the offering on May 5, 1984.
Prior to 1985, Northwest II had been accruing the property management fees
of each motel. Even though the obligation to pay those fees existed, the terms
of the limited partnership agreement of Northwest II did not allow them to be
paid until such time as the limited partners had received a cumulative annual
10% return on their adjusted capital investment. In previous filings with the
SEC, and in Northwest II's prior years of financial statements, Northwest II's
accounting policy regarding these fees was to expense them when paid (instead of
when earned) and to not accrue unpaid property management fees as a liability on
the face of the balance sheet.
In 1994, Northwest II changed its accounting policy for property management
fees to reflect, on Northwest II's income statement, the expense when the
obligation to pay the fee was incurred and to accrue the corresponding liability
on the face of Northwest II's balance sheet. Thus, the financial information
contained in this report conforms with that reporting position. Previously
incurred but unpaid management fees totaled approximately $1,367,000 on December
31, 1995. Subsequent to that date, Northwest II has paid all unpaid management
fees to date.
YEAR 2000 COMPLIANCE ISSUE
Currently, equipment and software handle motel reservations and credit card
approvals provided respectively by Super 8 Motels, Inc. and the individual
banking institutions with which the properties do business. Currently, property
accounting (with the exception of call accounting) is completed manually.
Pursuant to the POWER-UP program being designed, instituted and paid for by
Super 8 Motels, Inc., all motels will be provided a PC-based Property Management
System which integrates all reservations, credit card approvals, call
accounting, security and motel accounting into a single system.
This fully integrated system is to be in place at every motel within the
Super 8 System by the third quarter of 1999. The equipment and software is new
and has been designed and developed by the Franchisor, and the franchisee will
be required to utilize it. Northwest II has been assured by Super 8 Motels, Inc.
that the total system will be year 2000 compliant. The total cost of this
conversion, which may be borne by the motels owned by Northwest II, should not
exceed $5,000 per motel.
Internally, the general partner of Super 8 Motels Northwest II and
Peninsula Management have undertaken the task of totally replacing the current
corporate accounting system to ensure that it will fully integrate with the new
Property Management System being installed by Super 8 Motels, Inc. It
40
<PAGE> 48
is anticipated that this conversion will be completed by the year end 1999. Part
of the hardware and software will be provided by the POWER-UP initiative at no
cost to the company. For those systems purchased by the general partner or
affiliates, all software, hardware and systems vendors will be required to
certify that their products are year 2000 compliant. The cost attributed to each
motel in Northwest II for this conversion should not exceed $5,000 per motel.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The general partners of Northwest II are PGI and Gerald Whitcomb.
Gerald Whitcomb, age 55, was educated at the University of Nebraska with
majors in economics and business finance. Whitcomb earned his J.D. from the
University of Nebraska in 1969, following which he practiced law until 1979.
Since 1979, he has been involved in the management of PGI and its affiliates.
Whitcomb is the principal organizer and stockholder of PDS and its
subsidiaries. Whitcomb is the general partner of Northwest I. He is also a
partner in Super 8 Motel Developers, which is general partner of Lacey,
Northwest II, Juneau, Anchorage and Peninsula. Mr. Whitcomb is the managing
partner of Tongass and Peninsula.
PGI is a privately owned Washington corporation. It owns franchise rights
for Super 8 Motels in Washington, Oregon and selected sites in Alaska.
The officers and directors of PGI are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE TERM OF
OFFICE
<S> <C> <C> <C>
Gerald L. Whitcomb 54 Director, Treasurer and President One year
Maryanne Whitcomb 50 Chairman, Secretary, and Executive Vice One year
President
Lawrence Knudsen 56 Director and Executive Vice President One year
H. Samual Polack 56 Executive Vice President One year
Cortnae del Valle 26 Director One year
Kelly M. Huarte 23 Director One year
</TABLE>
EXECUTIVE COMPENSATION
The general partner received no salary or bonus compensation from the
Northwest II during the fiscal year ended December 31, 1997. See "Certain
Relationships and Related Transactions," below.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
TITLE NAME PERCENT
----- ---- -------
<S> <C> <C>
General partners Gerald L. Whitcomb .1
PGI .9
Limited partners 900 various 99.0
-----
100.0
</TABLE>
41
<PAGE> 49
Gerald Whitcomb and Maryanne Whitcomb are the beneficial owners of all of
the stock of PGI and also own four Units individually and four Units in trust
for their children, in addition to Whitcomb's general partner interest. Kelly
Huarte owns two Units.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions between Northwest II and the general partners, PGI and
Whitcomb, and between affiliates of the general partners are as follows:
<TABLE>
<CAPTION>
TRANSACTION 1995 1996 1997
----------- ---- ---- ----
<S> <C> <C> <C>
Purchases of supplies and equipment $266,673 $148,935 $182,941
Administrative service fees $182,235 $191,324 $205,999
Property management fees $168,112 $179,999 $162,328
</TABLE>
Northwest II has a management agreement with Peninsula Management (now part
of PDS) to employ it for a period of 20 years as manager of the motels owned by
Northwest II. The agreement provides for payment of a property management fee to
the affiliate equal to 5% of Northwest II's gross revenues from motel operations
in addition to reimbursement of certain out-of-pocket cost incurred by the
affiliate in connection with management of the property. The 5% base fees are
recorded as property management fees. The reimbursements of out-of-pocket costs
are recorded as administrative service fees.
Payment of property management fees is subordinated to receipt by
Unitholders of a cumulative, pre-tax return on their adjusted capital investment
of 10% per annum. This 10% was achieved during 1996. Accordingly, current year
management fees of $162,328 and prior years' management fees totaling $349,048
were paid in 1997. The balance of unpaid management fees of $350,000 were paid
in 1998.
Management believes that these transactions were made on terms at least
as favorable as could have been obtained from unaffiliated third parties.
42
<PAGE> 50
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS....................................................................F-2
FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1996, 1997 and September 30, 1998 (unaudited)..................F-3
Statements of Income for the years ended December 31, 1995, 1996 and 1997
and for the nine months ended September 30, 1997 and 1998 (unaudited).......................F-5
Statements of Changes in Partners' Equity for the years ended December 31, 1996
and 1997 and for the nine months ended September 30, 1998 (unaudited).......................F-6
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997
and for the nine months ended September 30, 1997 and 1998 (unaudited).......................F-7
Notes to Financial Statements....................................................................F-8
</TABLE>
F-1
<PAGE> 51
REPORT OF INDEPENDENT ACCOUNTANTS
To the General and Limited Partners
Super 8 Motels Northwest II
We have audited the accompanying balance sheets of Super 8 Motels Northwest II
as of December 31, 1997 and 1996, and the related statements of income, changes
in partners' equity, and cash flows for the three years ended December 31, 1997,
1996 and 1995. These financial statements are the responsibility of Northwest
II's management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Super 8 Motels Northwest II as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the three years ended December 31, 1997, 1996 and 1995, in conformity
with generally accepted accounting principles.
MOSS ADAMS LLP
Tacoma, Washington
February 2, 1998
F-2
<PAGE> 52
SUPER 8 MOTELS NORTHWEST II
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1998
--------------------------------- ------------------
1996 1997 UNAUDITED
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash ............................... $ 551,202 $ 387,878 $ 297,498
Accounts receivable, trade ......... 17,457 15,042 22,417
Accounts receivable, affiliates .... 3,149 - -
Inventory .......................... 58,319 58,858 58,860
Prepaid expenses ................... 11,613 6,912 11,695
----------- ----------- -----------
Total current assets ........... 641,740 468,690 390,470
----------- ----------- -----------
PROPERTY AND EQUIPMENT, at cost
Land ............................... 714,301 714,301 714,301
Buildings .......................... 4,097,107 4,097,107 4,097,106
Equipment, furniture and fixtures... 1,241,326 1,242,261 1,244,306
----------- ----------- -----------
6,052,734 6,053,669 6,055,713
Less accumulated depreciation ...... (2,738,663) (2,906,997) (3,023,487)
----------- ----------- -----------
Total property and equipment.... 3,314,071 3,146,672 3,032,226
----------- ----------- -----------
OTHER ASSETS
Loan fees .......................... 26,375 26,375 26,375
Franchise fees ..................... 45,000 45,000 45,000
Lease option costs ................. 6,000 6,000 6,000
----------- ----------- -----------
77,375 77,375 77,375
Less accumulated amortization ... (46,214) (51,051) (54,679)
----------- ----------- -----------
Total other assets .......... 31,161 26,324 22,696
----------- ----------- -----------
$ 3,986,972 $ 3,641,686 $ 3,445,392
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 53
SUPER 8 MOTELS NORTHWEST II
BALANCE SHEET
LIABILITIES AND PARTNERS' EQUITY
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, 1998
------------------------------ ------------------
1996 1997 (UNAUDITED)
---------- ---------- ----------
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable, trade ................. $ 47,021 $ 17,862 $ 26,298
Accounts payable, affiliates ............ 83,663 53,939 37,436
Accrued expenses ........................ 126,478 108,377 121,672
Current portion of long-term debt ....... 155,000 127,000 180,143
---------- ---------- ----------
Total current liabilities ........... 412,162 307,178 365,549
---------- ---------- ----------
NONCURRENT LIABILITIES
Long-term debt, net of current portion
shown above ........................... 2,345,801 2,223,015 2,265,662
Accrued rent under lease agreements ..... 137,201 152,550 166,985
---------- ---------- ----------
2,482,822 2,375,565 2,432,647
---------- ---------- ----------
ACCRUED PROPERTY MANAGEMENT FEES ............. 699,048 350,000 166,985
---------- ---------- ----------
COMMITMENTS (Notes 7 and 9)
PARTNERS' EQUITY
General partner's equity (deficiency).... 63,632 96,031 101,770
Limited partners' equity (authorized,
issued and outstanding
4,052 Units) ........................ 329,308 512,912 545,426
---------- ---------- ----------
392,940 608,943 647,196
---------- ---------- ----------
$3,986,972 $3,641,686 $3,445,392
========== ========== ==========
Book value per Unit .......................... $ 96.97 150.28 $ 159.72
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 54
SUPER 8 MOTELS NORTHWEST II
STATEMENT OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SALES
Rooms ............................. $3,277,174 $3,500,148 $3,132,920 $2,487,308 $2,474,512
Other ............................. 85,069 99,682 113,201 85,346 80,199
---------- ---------- ---------- ---------- ----------
3,362,243 3,599,830 3,246,121 2,572,654 2,554,711
---------- ---------- ---------- ---------- ----------
DIRECT OPERATING EXPENSES
Payroll and related expenses ...... 654,913 660,323 659,424 508,128 518,682
Supplies and maintenance .......... 292,889 224,116 212,780 177,101 418,178
Utilities ......................... 187,831 195,160 191,653 146,296 146,386
Other ............................. 33,800 36,069 30,202 22,386 25,919
---------- ---------- ---------- ---------- ----------
1,169,433 1,115,668 1,094,059 853,911 1,109,165
---------- ---------- ---------- ---------- ----------
INDIRECT OPERATING EXPENSES
Taxes (principally property taxes)
and fees .......................... 144,931 147,424 148,799 66,750 64,679
Advertising and promotion ......... 126,888 82,104 83,566 35,622 37,853
Bank and credit card charges ...... 47,000 44,493 45,411 27,295 28,376
Insurance ......................... 38,604 37,721 36,541 112,073 99,079
Other ............................. 22,660 14,731 12,584 9,710 6,919
---------- ---------- ---------- ---------- ----------
380,083 326,473 326,901 251,450 236,906
---------- ---------- ---------- ---------- ----------
ADMINISTRATIVE AND GENERAL EXPENSES
Administrative service fees ....... 182,235 191,324 205,999 155,665 131,078
Property management fees .......... 168,112 179,999 162,328 99,492 98,980
Franchise fees .................... 131,938 139,654 125,294 128,633 127,736
Professional services ............. 36,257 42,279 37,949 24,525 23,520
Other ............................. 25,260 26,682 36,561 24,092 23,375
---------- ---------- ---------- ---------- ----------
543,802 579,938 568,131 432,407 404,689
---------- ---------- ---------- ---------- ----------
FIXED CHARGES
Interest expense .................. 246,505 244,594 238,831 3,628 3,628
Depreciation ...................... 174,683 170,833 168,334 127,896 116,490
Current Lease ..................... 137,591 143,153 146,580 172,682 167,906
Deferred Lease .................... 18,251 15,983 15,529 109,725 111,091
Amortization ...................... 4,838 4,838 4,838 11,647 14,435
---------- ---------- ---------- ---------- ----------
581,868 579,401 574,112 425,578 413,550
---------- ---------- ---------- ---------- ----------
INCOME FROM OPERATIONS .................. 687,057 998,350 682,918 609,308 390,401
OTHER INCOME ............................ 18,847 8,549 9,791 7,034 5,380
---------- ---------- ---------- ---------- ----------
NET INCOME .............................. $ 705,904 $1,006,899 $ 692,709 $ 616,342 $ 395,781
========== ========== ========== ========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT .................. $ 172.47 $ 211.22 $ 145.31 $ 129.29 $ 83.02
========== ========== ========== ========== ==========
EARNINGS TO FIXED CHARGES ............... $ 1.21:1 $ 1.74:1 $ 1.21:1 $ 1.45:1 $ .96:1
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 55
SUPER 8 MOTELS NORTHWEST II
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
YEAR ENDED DECEMBER 31, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
General Limited
Partner Partner Total
----------- ---------- -----------
<S> <C> <C> <C>
BALANCE, December 31, 1995 .............. $(30,618) $ 89,725 $ 59,107
Distributions paid ................ (56,785) (616,281) (673,066)
Net income ........................ 151,035 855,864 1,006,899
-------- --------- ----------
BALANCE, December 31, 1996 .............. 63,632 329,308 392,940
Distributions paid ................ (71,506) (405,200) (476,706)
Net income ........................ 103,905 588,804 692,709
-------- --------- ----------
BALANCE, December 31, 1997 .............. 96,031 512,912 608,943
Distributions Paid ................ (53,628) (303,900) (357,528)
Net Income ........................ 59,367 336,414 395,781
-------- --------- ----------
Balance, September 30, 1998 (Unaudited).. $101,770 $ 545,426 $ 647,196
======== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 56
SUPER 8 MOTELS NORTHWEST II
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- --------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Revenues and other income received in cash ..... $ 3,349,353 $ 3,666,580 $ 3,261,475 $ 2,583,010 $ 2,552,716
Operating expenses paid in cash ................ (2,039,115) (2,770,299) (2,553,719) (2,006,169) (2,210,422)
Interest paid .................................. (244,550) (244,360) (242,652) (172,582) (168,892)
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities . 1,065,688 651,921 465,104 404,159 173,402
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ............ -- (23,550) (936) (934) (2,044)
Proceeds from sale of asset .................... -- 3,000 -- -- --
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities ..... -- (20,550) (936) (934) (2,044)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loan ............................. 129,580 -- -- -- --
Principal payments on long-term debt ........... (95,912) (141,019) (150,786) (106,847) (95,790)
Payment of loan fees ........................... (2,500) -- -- -- --
Distributions to:
Limited partners .......................... (1,174,026) (616,281) (405,200) (303,900) (303,900)
General partner ........................... (11,858) (56,785) (71,506) (53,628) (53,628)
----------- ----------- ----------- ----------- -----------
Net cash used in financing activities ..... (1,154,716) (814,085) (627,492) (464,735) (261,738)
----------- ----------- ----------- ----------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS ..................................... (89,028) (182,714) (163,324) (61,150) (90,380)
CASH AND CASH EQUIVALENTS,
beginning of year .............................. 822,944 733,916 551,202 551,202 387,878
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year ............... $ 733,916 $ 551,202 $ 387,878 $ 490,052 $ 297,498
=========== =========== =========== =========== ===========
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATING
ACTIVITIES
Net income ..................................... $ 705,904 $ 1,006,899 $ 692,709 $ 616,342 $ 395,781
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................. 179,521 175,671 173,172 131,524 120,118
Lease expense-deferred ......................... 18,251 15,983 15,529 5,771 14,435
Loss on sale of asset .......................... -- 5,864 -- -- --
Change in assets and liabilities
Accounts receivable ....................... (31,737) 58,201 5,564 3,332 (7,375)
Inventory ................................. 13,049 (466) (539) -- (2)
Prepaid expenses .......................... 18,583 3,387 4,701 (6,878) (4,783)
Accounts payable .......................... (15,454) 43,892 (58,883) 18,423 (8,067)
Accrued expenses .......................... 9,459 10,602 (18,101) (15,297) 13,295
Accrued management fees ................... 168,112 (668,112) (349,048) (349,048) (350,000)
----------- ----------- ----------- ----------- -----------
359,784 (354,978) (227,605) (212,183) (222,379)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES ..................................... $ 1,065,688 $ 651,921 $ 465,104 $ 404,159 $ 173,402
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 57
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - PARTNERSHIP OPERATIONS
Super 8 Motels Northwest II is a Washington limited partnership. Northwest II
owns and operates three motels: one in Bremerton, Washington; one in Portland,
Oregon; and one in Yakima, Washington.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS - Cash equivalents are investments with maturity at date of
purchase of three months or less.
INVENTORY - Inventory consists of various operating supplies which have been
valued at cost.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and are
depreciated using straight-line and accelerated methods over estimated useful
lives as follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Land improvements 28
Buildings 7, 15, and 30
Equipment, furniture and fixtures 5 and 7
</TABLE>
Expenditures for maintenance and repairs and minor renewals and betterments are
charged to expense when incurred. Renewals and betterments which extend the
lives of the assets involved, if material in amount, are capitalized.
LOAN FEES - Loan fees incurred in connection with financing for the Yakima
property are amortized over the term of the loan of 10 years.
FRANCHISE FEES AND LEASE OPTION COSTS- Initial franchise fees and lease option
costs are stated at cost; amortization of these amounts is being provided using
the straight-line method over 20 and 30 years, respectively.
ACCRUED VACATION - It is Northwest II's policy to expense vacation pay as paid
rather than as earned as required by generally accepted accounting principles.
The effect upon the financial statements is not significant.
INCOME TAXES - No provision has been made in the accompanying financial
statements for federal or state income taxes as taxable income or loss of
Northwest II is allocated to and included in the taxable income of the partners.
See Note 5 for additional discussion.
INCOME PER LIMITED PARTNERSHIP UNIT - Net income per limited partnership unit
Unit is computed by dividing the limited partners' share of net income by the
limited partners' Units outstanding for each year.
F-8
<PAGE> 58
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK - Northwest II has bank deposits in excess of
federal deposit insurance limits. Northwest II's management does not anticipate
any adverse effect on its financial position resulting from the credit risk.
USE OF ESTIMATES - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION - The unaudited financial statements at
September 30, 1998 and for the nine months ended September 30, 1997 and 1998
have been prepared on the same basis as the audited financial statements
included herein. In the opinion of management, such unaudited financial
statements include all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the information set forth therein. The
results for the nine months ended September 30, 1997 and 1998 are not
necessarily indicative of results to be expected for the full year or for any
other interim period.
NOTE 3 - DISTRIBUTIONS AND ALLOCATIONS OF PROFITS AND LOSSES
DISTRIBUTIONS - Under The partnership agreement, on a quarterly basis, the
general partner determines the amount, if any, of cash available for
distribution and distributes cash as follows:
o 1% to the general partner and 99% to the limited partners until the limited
partners have received a cumulative pretax return on their adjusted capital
investment equal to 10% per year through the end of Northwest II year for
which the distribution is being made, then:
o Any remaining cash will be distributed 15% to the general partner and 85%
to the limited partners.
Distributions paid to the partners in 1995 aggregated $1,174,026, which equaled
a per-Unit amount necessary to pay to the limited partners a 10% cumulative
return on their investment from the final closing of the offering of Units on
May 5, 1984. Subsequently the limited partners were paid amounts, which varied
by partner, necessary to pay that partner a 10% return on their investment from
the date of their investment (or, if later, the initial breaking of the escrow
established in connection with the offering on January 12, 1983) until the
closing of the offering on May 5, 1984.
PROFIT AND LOSSES - Profits and losses are allocated 1% to the general partner
and 99% to the limited partners until the limited partners have received a
cumulative pretax return of 10% per year on their adjusted capital investment;
and thereafter, 15% to the general partner and 85% to limited partners.
F-9
<PAGE> 59
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
o Note payable to bank, collateralized by assignment of land lease
and other property; interest rate is variable and is adjusted
annually based on a treasury bill index plus 3.5%; payable in
variable monthly installments which is currently $18,826 including
interest; due August 2009. The interest rate at December 31, 1997
is 9%.
$1,708,349 $1,634,802
o Note payable to bank, collateralized by assignment of land lease
and other property; interest rate is variable and is adjusted
annually based upon a treasury bill index plus 2.5%; payable in
monthly installments of $8,308, including interest; due February
2001. The interest rate at December 31, 1997 is 10.25%.
725,377 700,248
o Line of credit, collateralized by real property; interest rate is
variable at 1% plus lender's prime rate, currently payable in
monthly installments of $4,167 plus interest, due January 2000. The
interest rate at December 31, 1997 is 9.06%.
67,075 14,965
---------- ----------
2,500,801 2,350,015
Less current portion 155,000 127,000
---------- ----------
$2,345,801 $2,223,015
========== ==========
</TABLE>
F-10
<PAGE> 60
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - LONG-TERM DEBT (CONTINUED)
Based on the December 31, 1997 interest rates, principal payments required on
these notes during each of the next five years and thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 127,000
1999 123,000
2000 134,000
2001 153,000
2002 162,000
Thereafter 1,651,015
------------
$ 2,350,015
============
</TABLE>
NOTE 5 - INCOME TAXES
The cost of certain assets and the amount of certain expenses reported for
federal income tax purposes are different from the amounts reported under
generally accepted accounting principles in the accompanying financial
statements. The differences arise primarily from:
o Depreciating the buildings for financial reporting purposes using the
straight-line method over a 30 year life, and for federal income tax
purposes using the straight-line method over 15, 18, or 31.5 year life.
o Depreciating furniture and equipment for financial reporting purposes using
accelerated and straight-line methods over a 5 or 7 year life, and for
federal income tax purposes using the accelerated cost recovery method or
the modified accelerated cost recovery method over a 5 or 7 year life.
o Amortizing capitalized interest for federal income tax purposes using a
10 year life and for financial reporting purposes amortizing it over the
life of the building.
o Deducting sales tax incurred prior to 1987 on property and equipment
acquisitions as an expense for federal income tax purposes and capitalizing
it for financial reporting purposes.
F-11
<PAGE> 61
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5 - INCOME TAXES (CONTINUED)
The following is a reconciliation of net income for financial reporting purposes
to net income for federal income tax reporting purposes:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income as shown in the statement of income
$ 705,904 $ 1,006,899 $ 692,709
Additional depreciation and amortization for income tax
purposes (41,488) (38,785) (40,965)
Accrued (paid) property management fees 168,112 (668,112) (349,048)
Lease expense- deferred 18,251 15,983 15,529
Other 7,569 6,652 4,148
----------- ----------- -----------
Net income for federal income tax reporting purposes $ 858,348 $ 322,637 $ 322,373
=========== =========== ===========
</TABLE>
NOTE 6 - RELATED PARTY TRANSACTIONS
Transactions between Northwest II and the general partners, The Peninsula Group,
Inc. (formerly named Super 8 Motels Northwest, Inc.) and Gerald L. Whitcomb, and
between affiliates of the general partners are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Purchases of supplies and equipment $266,673 $148,935 $182,941
Administrative service fees $182,235 $191,324 $205,999
Property management fees $168,112 $179,999 $162,328
</TABLE>
Northwest II has a management agreement with an affiliate of the general
partners to employ the affiliate for a period of 20 years as manager of the
motels owned by Northwest II. The agreement provides for payment of a property
management fee to the affiliate equal to 5% of Northwest II's gross revenues
from motel operations in addition to reimbursement of certain out-of-pocket cost
incurred by the affiliate in connection with management of the property. The 5%
base fees are recorded as property management fees. The reimbursements of
out-of-pocket costs are recorded as administrative service fees.
Payment of property management fees is subordinated to receipt by the limited
partners of a cumulative, pretax return on their adjusted capital investment of
10% per annum. This 10% was achieved during 1996. Accordingly, current year
management fees of $162,328 and prior years' management fees totaling $349,048
were paid in 1997. The balance of unpaid management fees of $350,000 will be
paid only as sufficient operational cash flow is experienced.
NOTE 7 - COMMITMENTS
FRANCHISE AGREEMENTS - Northwest II has purchased franchise rights to provide
motel services to the general public using a system commonly known as Super 8
Motels. An initial franchise fee of $15,000 was paid for each motel and
Northwest II is committed to pay additional fees equal to 4% of gross room
revenue for the 20 year term of the respective agreements. In addition, 1% of
F-12
<PAGE> 62
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
gross room revenue is remitted to Super 8 Motels for advertising and
participation in the national reservation system. This amount is included in
advertising and promotion.
LEASE COMMITMENTS - Northwest II leases the land upon which the Bremerton and
Yakima motels are located under three operating leases with initial lease terms
of 36, 30, and 24 years.
The Bremerton and one of the Yakima land leases provide for adjustment of the
minimum rent ranging from one to three years by a factor based on changes in the
consumer price index.
The remaining Yakima land lease provides for adjustment of the minimum rent
annually by a factor of 5%. This lease requires fixed minimum payment
escalations over the lease term. Generally accepted accounting principles
require Northwest II to recognize lease expense on a straight-line basis over
the term of each lease. As a result, lease expense is presently greater than
cash lease payments. Cash lease payments are captioned "lease expense- current"
in the statement of operations. Noncash lease expense is captioned "lease
expense- deferred" in the statement of income. In the balance sheet under
noncurrent liabilities, "accrued rent under lease agreements" reflects accrual
of noncash lease expense. This accrued rent will not begin to be paid until
2004.
Minimum lease payments based on current rents are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 149,928
1999 154,514
2000 158,168
2001 162,081
2002 168,734
Thereafter 2,720,181
------------
$ 3,513,606
============
</TABLE>
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS - The carrying amount approximates fair value because
of the short-term maturity of those instruments.
LONG-TERM DEBT - The carrying amounts of Northwest II's borrowings under its
long-term revolving credit agreement and notes payable approximate fair value.
NOTE 9 - YEAR 2000 COMPLIANCE
Currently, motel reservations and credit card approvals are handled by
equipment and software provided respectively by Super 8 Motels, Inc. and
the individual banking institutions with which the properties do business.
Currently, internal accounting (with the exception of call accounting) is
completed manually. Pursuant to the POWER-UP program being designed,
instituted, and paid for by Super 8 Motels, Inc. all motels will be
provided a PC-based Property Management System which integrates all
reservations, credit card approvals, call accounting, security, and motel
accounting into a single system.
F-13
<PAGE> 63
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
This fully integrated system is to be in place at every motel within the
Super 8 System by the third quarter of 1999. The new equipment and software
have been designed and developed by the franchisor, and the franchisee will
be required to utilize it. Northwest II has been assured by Super 8 Motels,
Inc. that the total system will be year 2000 compliant. The total cost of
this conversion, which may be borne by the motels owned by Northwest II,
should not exceed $5,000 per motel.
Internally, the general partner and the affiliated management company have
undertaken the task of totally replacing the current corporate accounting
system to ensure that it will fully integrate with the new Property
Management Systems being installed by Super 8 Motels, Inc. It is
anticipated that this conversion will be completed by year end 1998. Part
of the hardware and software will be provided by the POWER-UP initiative at
no cost to the Company. For those systems purchased by the general partner
or affiliates, all software, hardware, and systems vendors will be required
to certify that their products are year 2000 compliant. The cost attributed
to each motel in Northwest II for this conversion should not exceed $5,000
per motel.
NOTE 10- NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which is required
to be adopted for annual periods beginning after December 15, 1997 and
interim periods beginning in fiscal year 1999. SFAS No. 131 establishes
standards for the way that public companies report information about
operating segments in an annual financial statements and requires that
those companies report information about segments in interim financial
reports issued to shareholders. The partnership's management believes this
new standard will not have significant effect on the partnership's
financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which
establishes new accounting and reporting standards for the costs of
computer software developed or obtained for internal use. This statement
will be applied prospectively and is effective for fiscal years beginning
after December 15, 1998. The partnership's management believes that
implementation of this new standard will not have a significant effect on
its financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be
expensed as incurred. This statement is effective for fiscal years
beginning after December 15, 1998. The statement requires capitalized costs
related to start-up activities to be expensed as a cumulative effect of a
change in accounting principle when the statement is adopted. The
partnership's management believes that the adoption of this new standard
will not have a significant effect on its financial position or result
of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes new
accounting and reporting standards requiring that all derivative
instruments (including certain derivative
F-14
<PAGE> 64
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
instruments embedded in other contracts) be recorded in the balance sheet
as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement
and requires that a company must formally document, designate, and assess
the effectiveness of transactions that receive hedge accounting. This
statement is effective for all fiscal years beginning after June 15, 1999.
The partnership's management believes that the adoption of this new
standard will not have a significant effect on its financial position or
result of operations.
F-15
<PAGE> 65
ANNEX I
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (this "Agreement") dated
as of December 31, 1998, as amended on February 5, 1999, among GERALD L.
WHITCOMB ("Whitcomb") and PENINSULA DEVELOPMENT SERVICES, INC., a Washington
corporation (formerly known as THE PENINSULA GROUP INCORPORATED) ("PDS"),
(collectively, the "General Partner"), on behalf of SUPER 8 MOTELS NORTHWEST II,
a Washington limited partnership ("NWII"), and COLUMBUS PROPERTIES L.L.C., a
Washington limited liability company ("Columbus").
RECITALS
WHEREAS, NWII has heretofore issued limited partnership units (the
"Units"), each representing limited partner interests in NWII;
WHEREAS, Whitcomb and PDS are NWII's general partners;
WHEREAS, NWII wishes to merge with and into Columbus (the "Merger")
pursuant and subject to the terms and conditions of this Agreement, whereby each
issued and outstanding Unit will be converted into the right to receive
$1,343.00 (the "Merger Consideration");
WHEREAS NWII has retained the services of Ragen McKenzie Incorporated to
render its opinion as to the fairness of the Merger Consideration to the holders
of the Units (the "Unitholders") from a financial point of view;
WHEREAS, the General Partner has also retained the services of McKee &
Schalka, an MAI Appraiser to appraise the real property and/or leasehold
interests owned by NWII;
WHEREAS, the General Partners, on behalf of NWII, have duly approved this
Agreement and the Merger pursuant hereto; and
WHEREAS, this Agreement and the Merger is to be submitted to the
Unitholders for approval and adoption at a meeting of Unitholders called for
such purpose (the "Merger Meeting") pursuant to Section 16.2 of the 1982
Certificate and Agreement of Limited Partnership of SUPER 8 MOTELS NORTHWEST II
(the "Partnership Agreement").
NOW THEREFORE, in consideration of the mutual benefits to be derived from
this Agreement and of the representations, warranties, agreements and conditions
contained in this Agreement, the parties agree as follows.
Article I
The Merger
1.1 The Merger. In accordance with and subject to (a) the provisions of
this Agreement, (b) the Articles of Merger (as hereinafter defined), and (c) the
Washington Uniform Limited Partnership Act (the "Washington Limited Partnership
Act") and the Washington Limited Liability Company Act (the "Washington Limited
Liability Company Act"), at the Effective Time (as hereinafter defined), NWII
shall be merged with and into Columbus in the Merger.
A-1
<PAGE> 66
As a result of the Merger, the separate existence of NWII shall cease and
Columbus shall continue as the surviving company. Columbus is hereinafter
sometimes referred to as the "Surviving Company."
1.2 Effective Time of the Merger. Subject to the provisions of this
Agreement, Articles of Merger, a form of which is attached hereto as Exhibit A
(the "Articles of Merger"), including the Plan of Merger, a form of which is
attached hereto as Exhibit B (the "Plan of Merger") shall be duly executed and
filed by NWII and Columbus on the Closing Date (as hereinafter defined) in the
manner provided in Section 25.10.820 of the Washington Limited Partnership Act
and Section 25.15.405 of the Washington Limited Liability Company Act. The
Merger shall become effective at such time on the Closing Date as the Articles
of Merger are filed with the Secretary of State of the State of Washington (or
such later time as may be specified in the Articles of Merger) (the "Effective
Time").
1.3 Closing. Unless this Agreement shall have been terminated and the
transactions contemplated by this Agreement shall have been abandoned pursuant
to the provisions of Article VIII, and subject to the provisions of Sections 7.1
and 7.2 hereof, the closing of the Merger (the "Closing") will take place at the
earliest 10:00 a.m., Tumwater, WA. time, on the first Business Day (as
hereinafter defined) occurring after the Merger Meeting and at the latest on
the last business day of the month in which the Merger Meeting occurs, or, if
all of the conditions set forth in Section 7.1 and 7.2 hereof shall not have
been satisfied (or waived in accordance with Section 9.2 hereof), at such later
date and time which is agreed to in writing by the parties (the "Closing Date").
The Closing shall take place at the offices of NWII at 751 Terminal Street SW,
Tumwater, Washington 98501, unless another place is agreed to by the parties.
For purposes of this Agreement, "Business Day" shall mean any day except
Saturday, Sunday or any day on which banks are generally not open for business
in Tumwater, Washington.
1.4 Effects of the Merger. The Merger shall, from and after the Effective
Time, have the effects provided for in the Washington Limited Partnership Act
and the Washington Limited Liability Company Act.
(a) Conversion of Units. At the Effective Time, by virtue of the
Merger and without any action on the part of NWII, Columbus, or any holder of
any of the Units, each Unit that is issued and outstanding immediately prior to
the Effective Time shall be canceled, extinguished and retired, and be converted
into and become a right to receive, without interest, the Merger Consideration.
(b) The Whitcombs' and PDS's Interests. Notwithstanding Section
1.4(a), immediately before the Effective Time, by virtue of this Agreement and
without any action on the part of NWII, Columbus, Gerald L. or Maryanne
Whitcomb, or PDS, any partnership interest (general or limited) in NWII owned by
Gerald L. and/or
A-2
<PAGE> 67
Maryanne Whitcomb or PDS shall be contributed to Columbus in exchange for units
in Columbus.
1.5 Payment.
(a) Promptly after the Effective Time, the Surviving Company shall
mail to each record holder of Units a form of letter of transmittal and any
other required forms (the "Transmittal Documents") (which shall specify that
delivery shall be effected, and risk of loss and title to such Units shall pass,
only upon delivery of the Transmittal Documents to the Surviving Company) and
instructions for use in delivering the Transmittal Documents and receiving the
Merger Consideration for each Unit owned by the Unitholder. Upon the surrender
of such Transmittal Documents and the payment by the Surviving Company of the
Merger Consideration in exchange therefor, the Units owned by such Unitholder
shall forthwith be canceled. Until so surrendered and exchanged, the Units owned
by such Unitholder shall represent solely the right to receive the Merger
Consideration multiplied by the number of Units owned by such Unitholder, and
the holder thereof shall have no rights whatsoever as a Unitholder of NWII or
the Surviving Company. Upon the surrender of such Units, the holder shall
receive such Merger Consideration, without any interest thereon. If any cash is
to be paid to a name other than the name in which the Units surrendered in
exchange therefor is registered, it shall be a condition to such payment that
the person requesting such payment shall pay to the Surviving Company any
transfer or other taxes required by reason of the payment of such cash to a name
other than that of the registered holder of the Units surrendered, or such
person shall establish to the satisfaction of the Surviving Company that such
tax has been paid or is not applicable. Notwithstanding the foregoing, neither
the Surviving Company nor any other party hereto shall be liable to a holder of
Units for any Merger Consideration or other payments made to a public official
pursuant to applicable abandoned property laws. The Surviving Company shall be
entitled to deduct and withhold from the Merger Consideration otherwise payable
to a holder of Units pursuant to the Merger any taxes or other amounts as are
required by applicable law, including without limitation Sections 3406 and 1445
of the Internal Revenue Code of 1986 as amended. To the extent that amounts are
so withheld by the Surviving Company, they shall be treated for all purposes of
this Agreement as having been paid to the holder of the Units in respect of
which such deduction and withholding was made.
A-3
<PAGE> 68
(b) At and after the Effective Time, there shall be no transfers on
the books of the Surviving Company of any Units. As of the Effective Time, each
holder of a Unit which was converted into the right to receive cash pursuant to
Section 1.4(a) hereof shall be deemed to have withdrawn as a limited partner and
shall have no further interest in NWII or the Surviving Company or any
allocations or distributions of income, property or otherwise, other than the
right to receive the Merger Consideration as provided in this Article I.
1.6 Deregistration of Units. Following the Effective Time, the General
Partner, on behalf of NWII, shall take all actions necessary to effect the
deregistration of the Units with the Securities and Exchange Commission (the
"Commission").
1.7 Dissenters' Rights. Unitholders shall have dissenters' rights in
connection with the Merger as set forth in Article 14 of Chapter 25.10 of the
Revised Code of Washington.
Article II
Approval of the Merger
2.1 Actions of NWII and the General Partner.
(a) The General Partner hereby consents to the Merger, agrees in all
respects with the terms of this Agreement and, subject to the terms and
conditions of this Agreement, the consummation of the transactions contemplated
hereby. In connection therewith, pursuant to the Washington Limited Partnership
Act and Article VI of the Partnership Agreement, by executing this Agreement,
the General Partner subject to the requisite approval of the Unitholders at the
Merger Meeting, consents to and approves in all respects this Agreement and the
transactions contemplated hereby (including, without limitation, the Merger) on
behalf of NWII.
(b) The General Partner shall submit this Agreement and the Merger to
a vote by the Unitholders in person or by proxy, at the Merger Meeting which
will be held not less than twenty (20) nor more than forty (40) calendar days
from and after the mailing of the Proxy Statement to the Unitholders.
2.2 Proxy Statement. Promptly following the execution of this Agreement,
NWII shall prepare (and Columbus shall cooperate in preparing) and as soon as
reasonably practicable thereafter shall file with the Commission a preliminary
proxy statement with respect to the Merger. Subject to compliance with the rules
and regulations of the Commission, NWII shall thereafter file with the
A-4
<PAGE> 69
Commission and mail to Unitholders a definitive proxy statement with respect to
the Merger (the "Proxy Statement"). The term "Proxy Statement" shall mean such
Proxy Statement at the time it initially is mailed to the Unitholders and all
amendments or supplements thereto, if any, similarly filed and mailed. Columbus
and NWII each agree to correct any information provided by it for use in the
Proxy Statement which shall have become false or misleading in any material
respect.
Article III
Representations and Warranties of Columbus
Columbus represents and warrants at the date hereof to NWII and the
General Partner as follows:
3.1 Organization and Qualification. Columbus is a limited liability company
duly formed, validly existing and in good standing under the laws of the State
of Washington, with the requisite power and authority to carry on its respective
business as now conducted. Columbus is duly qualified to do business, and is in
good standing, in each jurisdiction where the character of its properties owned
or leased or the nature of its activities makes such qualification necessary,
except where the failure to be so qualified or in good standing would not, in
the aggregate, have a material adverse effect on Columbus. Copies of the
certificate of formation and operating agreement of Columbus (such documents,
the "Columbus Organizational Documents") previously delivered to NWII and the
General Partner are accurate and complete as of the date hereof.
3.2 Authority Relative to this Agreement. Columbus has the requisite power
and authority to enter into this Agreement and to perform its obligations
hereunder. The execution, delivery and performance of this Agreement by Columbus
and the consummation by Columbus of the transactions contemplated hereby have
been duly authorized by Columbus' managers and members as necessary and no other
action or proceeding on the part of Columbus is necessary to authorize the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby. This Agreement has been duly executed and
delivered by Columbus and constitutes a valid and binding obligation of
Columbus, enforceable in accordance with its terms, except to the extent that
its enforceability may be limited by applicable bankruptcy, insolvency,
reorganization or other laws affecting the enforcement of creditors' rights
generally or by general equitable principles.
3.3 Compliance.
(a) Neither the execution and delivery of this Agreement by Columbus,
nor the consummation of the transactions contemplated hereby nor compliance by
Columbus with any of the provisions hereof will (i) violate, conflict
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with, or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination of, or accelerate the performance required
by, or result in a right of termination or acceleration under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties or assets of Columbus under any of the terms, conditions or
provisions of (x) the Columbus Organizational Documents (y) any material note,
bond, mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which it or any of its properties or assets, may be
subject, or (ii) subject to compliance with the statutes and regulations
referred to in the next paragraph, violate any judgment, ruling, order, writ,
injunction, decree, statute, rule or regulation applicable to Columbus or any of
its properties or assets, except, in the case of each of clauses (i) and (ii)
above, for such violations, conflicts, breaches, defaults, terminations,
accelerations or creations of liens, security interests, charges or
encumbrances, which in the aggregate, would not have a material adverse effect
on the transactions contemplated hereby or on the condition (financial or
other), business or operations of Columbus (a "Material Adverse Effect on
Columbus").
(b) Other than in connection with or in compliance with the provisions
of the Washington Limited Partnership Act, the Washington Limited Liability
Company Act, the Exchange Act or "blue sky" laws ("Blue Sky Laws") or other
similar statutes and regulations, no notice to, filing with, or authorization,
consent or approval of, any domestic or foreign public body or authority is
necessary for the consummation by Columbus of the transactions contemplated by
this Agreement, except where failure to give such notice, make such filings, or
obtain such authorizations, consents or approvals would not, in the aggregate,
have a Material Adverse Effect on Columbus.
3.4 Documents and Information. The information supplied by Columbus
expressly for inclusion in the Proxy Statement shall not, (i) at the time of the
mailing thereof and (ii) at the Closing Date, contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
3.5 Financing. Columbus has obtained a commitment letter from U.S. Bank
(the "Commitment"), subject to customary conditions, to lend Columbus sufficient
funds to consummate the Merger and to pay the Merger Consideration to the
Unitholders.
Article IV
Representations and Warranties of NWII
NWII represents and warrants at the date hereof to Columbus as follows:
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4.1 Organization and Qualification. NWII is a limited partnership duly
formed, validly existing and in good standing under the laws of the State of
Washington and has the requisite power and authority to carry on its business as
it is now being conducted. A copy of the Partnership Agreement (the
"Organizational Documents of NWII") which has heretofore been delivered to
Columbus is accurate and complete as of the date hereof.
4.2 Authority Relative to this Agreement. Subject to approval of this
Agreement and the transactions contemplated herein by Unitholders owing in the
aggregate at least sixty-six percent (66%) of the issued and outstanding Units
("Unitholder Approval") at the Merger Meeting, NWII has the requisite power and
authority to enter into this Agreement and to perform their obligations
hereunder. Subject to Unitholder Approval, the execution, delivery and
performance of this Agreement by NWII and the General Partner and the
consummation by NWII and the General Partner of the transactions contemplated
hereby have been duly authorized by NWII and the General Partner and no other
action or proceeding on the part of NWII or the General Partner is necessary to
authorize the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby. Subject to Unitholder
Approval, this Agreement has been duly executed and delivered by NWII and the
General Partner and constitutes a valid and binding obligation of NWII,
enforceable in accordance with its terms, except to the extent that its
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization or other laws affecting the enforcement of creditors' rights
generally or by general equitable principles.
4.3 Capitalization. As of the date hereof, there are four thousand
fifty-two (4,052) Units issued and outstanding. All such Units have been validly
issued. Other than such Units and the General Partners' general partnership
interest, there are no equity securities of NWII authorized or outstanding, and,
no outstanding options, warrants, rights to subscribe to (including any
preemptive rights), calls or commitments of any character whatsoever to which
NWII is a party or may be bound, requiring the issuance or sale of any Units or
other equity securities of NWII or securities or rights convertible into or
exchangeable for such Units or other equity securities of NWII, and there are no
contracts, commitments, understandings or arrangements by which NWII is or may
become bound to issue additional Units or other equity securities of NWII or
options, warrants or rights to purchase or acquire any additional Units or other
equity securities or securities convertible into or exchangeable for such Units
or other equity securities of NWII. None of the Units are held by NWII in
treasury.
4.4 Fees. NWII has not paid or agreed to pay any fee or commission to any
broker, finder or intermediary in connection with the transactions contemplated
hereby.
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4.5 Documents and Information. The information supplied by NWII expressly
for inclusion in the Proxy Statement shall not, (i) at the time of the mailing
thereof and (ii) at the Closing Date, contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
4.6 Opinion of Financial Advisor. Ragen MacKenzie Incorporated, the
financial advisor to NWII (the "Financial Advisor"), has delivered to NWII its
written opinion, dated December 31, 1998, to the effect that the Merger
Consideration to be received by the Unitholders pursuant to the Merger is fair,
from a financial point of view, to the Unitholders.
4.7 Compliance.
(a) Neither the execution and delivery of this Agreement by NWII and
the General Partner nor the consummation of the transactions contemplated hereby
nor compliance by NWII and the General Partner with any of the provisions hereof
will (i) violate, conflict with, or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of NWII under any of
the terms, conditions or provisions of (x) the Organizational Documents of NWII
(y) any material note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which it or any of NWII's
properties or assets, may be subject, or (ii) subject to compliance with the
statutes and regulations referred to in the next paragraph, violate any
judgment, ruling, order, writ, injunction, decree, statute, rule or regulation
applicable NWII or the General Partner or any of NWII's properties or assets,
except, in the case of each of clauses (i) and (ii) above, for such violations,
conflicts, breaches, defaults, terminations, accelerations or creations of
liens, security interests, charges or encumbrances, which in the aggregate,
would not have a material adverse effect on the transactions contemplated hereby
or on the condition (financial or other), business or operations of NWII (a
"Material Adverse Effect on NWII").
(b) Other than in connection with or in compliance with the provisions
of the Washington Limited Partnership Act, the Washington Limited Liability
Company Act, the Exchange Act or "blue sky" laws ("Blue Sky Laws") or other
similar statutes and regulations, no notice to, filing with, or authorization,
consent or approval of, any domestic or foreign public body or authority is
necessary for the consummation by NWII and the General Partner of the
transactions contemplated by this Agreement, except where failure to give such
notice, make such filings, or obtain such authorizations, consents or approvals
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would not, in the aggregate, have a Material Adverse Effect on NWII and the
General Partner.
Article V
Covenants
5.1 Legal Conditions to the Merger. NWII and Columbus shall take all
reasonable actions necessary to comply promptly with all legal requirements with
respect to the Merger and shall take all reasonable action necessary to
cooperate promptly with and furnish information to the other parties in
connection with any such requirements. NWII and Columbus shall take all
reasonable actions necessary (i) to obtain (and will take all reasonable actions
necessary to promptly cooperate with the other parties in obtaining) any
consent, authorization, order or approval of, or any exemption by, any
administrative agency or commission or other governmental authority or
instrumentality (a "Governmental Entity"), or other third party, required to be
obtained or made (or cooperate in the obtaining of any thereof required to be
obtained) in connection with the Merger or the taking of any action contemplated
by this Agreement; (ii) to lift, rescind or mitigate the effect of any
injunction or restraining order or other order adversely affecting the
consummation of the transactions contemplated hereby; (iii) to fulfill all
conditions pursuant to this Agreement; and (iv) to prevent, with respect to a
threatened or pending temporary, preliminary or permanent injunction or other
order, decree or ruling, the entry thereof.
Article VI
Additional Agreements
6.1 Distributions to Partners Prior to the Merger. On or before January 31,
1999, NWII shall distribute an aggregate amount of $119,203.00 to the partners
of NWII, such amount to be allocated between the Unitholders and the General
Partner in accordance with Section 10.2 of the Partnership Agreement.
6.2 Expenses. Columbus shall bear all costs and expenses of each party
hereto and/or pay all costs and expenses on behalf of each party hereto incurred
in connection with the transactions contemplated by this Agreement, having taken
such costs and expenses, including any real estate excise taxes payable by the
Unitholders in connection with their transfer of Units, into consideration in
determining the amount of the Merger Consideration.
6.3 Allocation of Amount Realized Between Internal Revenue Code Section 751
Property and Non-Section 751 Property. Pursuant to Section 751 of the Internal
Revenue Code of 1986, as amended, (the "Code") Columbus and NWII agree that the
amount realized is to be allocated between Code Section 751 property and
non-Code Section 751 property based
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on the relative fair market value of NWII's Code Section 751 property and
non-Code Section 751 property as determined by Columbus.
6.4 Allocation of Gain. Approval of the Merger Agreement by Unitholders
will also constitute an amendment of the Partnership Agreement of NWII in order
to allocate the gain, if any, realized by NWII in the Merger to the Unitholders
receiving the Merger Consolidation.
Article VII
Conditions Precedent
7.1 Certain Conditions on the Obligation of Columbus to Consummate the
Merger.
(a) The obligations of Columbus to effect the Merger shall be subject
to the fulfillment of the following conditions, any or all of which may be
waived by Columbus in its sole discretion:
(i) except for changes in the business or conditions of NWII,
financial or otherwise, or in the results of operations of NWII, occurring prior
to the date of this Agreement, or expected by the General Partner to occur based
on events occurring prior to the date of this Agreement, there shall not have
occurred any Material Adverse Effect on NWII from that set forth in or
contemplated by the financial statements of NWII for the nine months ended
September 30,1998;
(ii) there shall not be pending or threatened against NWII or the
General Partner, any action, suit or proceeding involving a claim at law or in
equity or before or by any Governmental Entity, domestic or foreign, that would
be reasonably likely to have a Material Adverse Effect on NWII; and
(iii) there shall not be pending or threatened against NWII, the
General Partner, Columbus or their respective properties or businesses, any
other action, suit or proceeding involving a claim at law or in equity or before
or by any federal, state, or municipal or other court of competent jurisdiction
or other Governmental Entity, relating to the Merger or this Agreement that
would be reasonably likely to have a Material Adverse Effect on NWII.
(iv) the Commitment shall remain available to Columbus, such that
Columbus may borrow sufficient funds on or before the Closing Date in order to
transfer the Merger Consideration to the Payment Agent for payment to the
Unitholders pursuant to Section 1.4(a).
(b) The parties hereto agree that in exercising its discretion to
waive or require the fulfillment of the conditions prescribed in Section 7.1(a)
above, Columbus shall not be required to consider the interests of any person or
entity that may be affected by the Merger other than Columbus, and that Columbus
shall have no obligation, fiduciary or otherwise, to the limited partners of
NWII or the General Partner in exercising its discretion under Section 7.1(a).
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7.2 Obligation of Each Party to Effect the Merger. The respective
obligations of each party generally to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the following conditions:
(a) This Agreement and the Merger shall have received the required
Unitholder Approval.
(b) Neither the execution and delivery of this Agreement by the General
Partner on behalf of NWII nor the consummation of the transactions contemplated
hereby nor compliance by NWII with any of the provisions hereof shall (i)
violate, conflict with, or result in a breach of any provision of, or constitute
a default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of NWII under any of the terms,
conditions or provisions of (x) the Organizational Documents of NWII or (y) any
material note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which NWII is a party, or to
which it or any of its respective properties or assets, may be subject, or (ii)
violate any judgment, ruling, order, writ, injunction, decree, statute, rule or
regulation applicable to NWII or any of NWII's properties or assets, except, in
the case of each of clauses (i) and (ii) above, for such violations, conflicts,
breaches, defaults, terminations, accelerations or creations of liens, security
interests, charges or encumbrances, which would not, in the aggregate, have a
material adverse effect on the transactions contemplated hereby or on the
condition (financial or other), business or operations of NWII (a "Material
Adverse Effect on NWII");
(c) The Financial Advisor shall not have withdrawn or modified in any
manner materially adverse to NWII or any Unitholder its opinion as described in
Section 4.6; and
(d) No preliminary or permanent injunction or other order, decree or
ruling issued by a court of competent jurisdiction or by a Governmental Entity
nor any statute, rule, regulation or executive order promulgated or enacted by
any Governmental Entity shall be in effect, which would make the acquisition of
NWII by Columbus illegal or otherwise prevent the consummation of the Merger or
make the consummation of the Merger illegal.
Article VIII
Termination
8.1 Termination. This Agreement may be terminated, and the Merger
contemplated herein may be abandoned, at any time prior to the Effective Time,
whether prior to or after approval of the Merger by the Unitholders:
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(a) by mutual written consent of Columbus and NWII; or
(b) by NWII if Columbus breaches in any material respect any of its
representations, warranties, covenants or agreements contained in this Agreement
(other than any breach caused by NWII or the General Partner) or if the
Financial Advisor shall have withdrawn or modified in any manner adverse to
NWII, the Unitholders, or Columbus its opinion as described in Section 4.6; or
(c) by Columbus, if NWII breaches in any material respect any of their
representations, warranties, covenants or agreements contained in this Agreement
(other than any breach caused by Columbus) or if the Financial Advisor shall
have withdrawn or modified in any manner adverse to NWII, the Unitholders, or
Columbus its opinion as described in Section 4.6; or
(d) by either Columbus or NWII:
(i) if the Merger has not been consummated prior to March 31,
1999; or
(ii) if any court of competent jurisdiction or other Governmental
Entity shall have issued an order, decree or ruling, or taken any other action
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or other action shall have become final and nonappealable.
8.2 Effect of Termination. In the event of the termination of this
Agreement as provided in Section 8.1 hereof, this Agreement shall forthwith
become void, and there shall be no liability on the part of Columbus, the
General Partner or NWII.
Article IX
General Provisions
9.1 Amendment. This Agreement may not be amended except by (i) an
instrument in writing signed on behalf of each of the parties hereto; provided,
however, that after approval of the Merger by the Unitholders at the Merger
Meeting, no amendment may be made without the further approval of Unitholders
holding in the aggregate at least sixty-six percent (66%) of the issued and
outstanding Units which would either (a) change the type or reduce the amount of
the Merger Consideration or (b) alter or change any other terms and conditions
of this Agreement, if any of such alterations or changes, alone or in the
aggregate, would materially adversely affect the Unitholders.
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9.2 Extension; Waiver. At any time prior to the Effective Time, whether
before or after the mailing of the Proxy Statement, any party hereto may (i)
extend the time for the performance of any of the obligations or other acts of
any other party hereto; (ii) waive any inaccuracies in the representations and
warranties contained in this Agreement; and (iii) waive compliance with any of
the agreements of the other parties or conditions to its own obligations
contained in this Agreement. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party by a duly authorized person. No such
consent or waiver of compliance given by any of the parties hereto shall operate
as a consent or waiver of compliance in respect of any subsequent default,
breach or non-observance, whether of the same or any other nature.
9.3 Nonsurvival of Representations, Warranties and Agreements. The
respective representations and warranties of NWII and Columbus contained herein
shall expire with, and be terminated and extinguished upon, consummation of the
Merger, and thereafter none of NWII or Columbus or any officer, director or
principal thereof, shall be under any liability whatsoever with respect to any
such representation or warranty. This Section 9.3 shall have no effect upon any
other obligation of the parties, whether to be performed before or after the
consummation of the Merger.
9.4 Entire Agreement; Counterparts.
(a) This Agreement contains the entire agreement among NWII and
Columbus with respect to the subject matter hereof and supersedes all prior
arrangements and understandings, both written and oral, among such parties with
respect thereto.
(b) This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement and shall become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other parties, it being understood that all parties need not
sign the same counterpart.
9.5 Severability. It is the desire and intent of the parties that the
provisions of this Agreement be enforced to the fullest extent permissible under
the law and public policies applied in each jurisdiction in which enforcement is
sought. Accordingly, in the event that any provision of this Agreement would be
held in any jurisdiction to be invalid, prohibited or unenforceable for any
reason, such provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more narrowly drawn so
as not to be invalid, prohibited or unenforceable in such jurisdiction, the
parties shall adopt an amendment hereto in accordance with the provisions of
Section 9.1 hereof in which such provision, as to such jurisdiction, is so
narrowly drawn, without invalidating the remaining
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provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction.
9.6 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to be sufficient if contained in a written
instrument and shall be deemed to have been duly given if delivered personally,
telecopied, sent by nationally recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following addresses (or at such other addresses as shall be
specified by a party by like notice):
(a) If to NWII or the General Partner:
Gerald L. Whitcomb
7515 Terminal Street S.W.
Tumwater, WA 98501
with a copy to:
Bruce Bjerke
Graham & James LLP/Riddell Williams, P.S.
1001 Fourth Ave., #4500
Seattle, WA 98154
(b) If to Columbus:
Gerald L. Whitcomb
7515 Terminal Street S.W.
Tumwater. WA 98501
with a copy to:
Bruce Bjerke
Graham & James LLP/Riddell Williams, P.S.
1001 Fourth Ave., #4500
Seattle, WA 98154
All such notices and other communications shall be deemed to have been received
(a) in the case of personal delivery, on the date of such delivery if received
prior to 5:00 p.m. Tumwater, Washington time on such date, (b) in the case of a
telecopy, when the party receiving such telecopy shall have confirmed receipt of
the communication, (c) in the case of delivery by nationally recognized
overnight courier, on the Business Day following dispatch and (d) in the case of
mailing, on the third Business Day following such mailing.
9.7 Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
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9.8 Assignment. This Agreement is not intended to confer upon any person
other than the parties any rights or remedies hereunder. This Agreement shall
not be assigned by operation of law or otherwise; provided, however, that
notwithstanding the foregoing, the parties hereto acknowledge that Columbus
shall have the unrestricted right to assign all of its respective rights
hereunder to a wholly owned affiliate of Columbus; provided, further, that
notwithstanding such assignment, Columbus shall not be released from its
obligations hereunder nor shall such assignment prejudice the rights of
Unitholders entitled to receive payment pursuant to Section 1.4(a) hereto to
receive such payment for Units properly delivered to the Payment Agent and
accepted for payment.
9.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington, without reference to the
conflicts of laws provisions thereof.
9.10 Consent to Jurisdiction; Service of Process.
(a) The parties hereto irrevocably submit to the jurisdiction of the
Superior Court of Thurston County of Washington or the U.S. District Court for
the Western District of Washington over any dispute arising out of or relating
to this Agreement or any of the transactions contemplated hereby and each party
hereby irrevocably agrees that all claims in respect of such dispute or
proceeding shall be heard and determined in such court. The parties hereby
irrevocably waive, to the fullest extent permitted by applicable law, any
objection which they may now or hereafter have to the laying of venue of any
such dispute brought in such court or any defense of inconvenient forum for the
maintenance of such dispute. Each of the parties hereto agrees that a judgment
in any such dispute may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law.
(b) Each of the parties hereto hereby consents to process being served
by any party to this Agreement in any suit, action or proceeding of the nature
specified in subsection (a) above by mailing a copy thereof in accordance with
the provisions of Section 9.6 hereof.
9.11 Limitation of Liability. In no event shall any partner (other than the
General Partner) or representative of NWII or any other such person, be
personally liable for any obligation of NWII or the General Partner under this
Agreement. In no event shall recourse with respect to the obligations under this
Agreement of NWII or the General Partner be had to the assets or business of any
person other than NWII or the General Partner, respectively.
9.12 Limitation of Remedies. The sole remedy of any party hereto for breach
by any other party of a covenant, representation or warranty made under this
Agreement shall be limited to termination of this Agreement.
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IN WITNESS WHEREOF, the General Partner, on behalf of NWII, and Columbus
have caused this Agreement to be executed as of the date first written.
SUPER 8 MOTELS NORTHWEST II
By: /s/ Gerald L. Whitcomb
GERALD L. WHITCOMB
General Partner
By: /s/ Gerald L. Whitcomb
Gerald L. Whitcomb, President,
PENINSULA DEVELOPMENT SERVICES, INC.,
General Partner
COLUMBUS PROPERTIES L.L.C.
By: /s/ Gerald L. Whitcomb
GERALD L. WHITCOMB
Manager
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EXHIBIT A
ARTICLES OF MERGER
OF
SUPER 8 MOTELS NORTHWEST II, A WASHINGTON LIMITED PARTNERSHIP
AND
COLUMBUS PROPERTIES L.L.C., A WASHINGTON LIMITED LIABILITY COMPANY
THESE ARTICLES OF MERGER are executed for the purpose of merging Super 8
Motels Northwest II, a Washington limited partnership ("NWII") with an into
Columbus Properties L.L.C., a Washington limited liability company ("Columbus").
1) The plan of merger is attached hereto and made a part hereof.
2) The merger was duly approved by the partners of NWII pursuant to RCW
25.10.810 and the members of Columbus pursuant to RCW 25.15.400.
Dated: _________, 19__.
Columbus Properties L.L.C.
-------------------------------------------
By Gerald L. Whitcomb
Its Manager
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EXHIBIT B
PLAN OF MERGER
OF
SUPER 8 MOTELS NORTHWEST II, A WASHINGTON LIMITED PARTNERSHIP,
AND
COLUMBUS PROPERTIES L.L.C., A WASHINGTON LIMITED LIABILITY COMPANY
Super 8 Motels Northwest II, a Washington limited partnership ("NWII"), and
Columbus Properties L.L.C., a Washington limited liability company ("Columbus"),
hereby certify that:
FIRST: NWII and Columbus are planning to merge, with Columbus being the
surviving limited liability company into which NWII plans to merge.
SECOND: The terms and conditions of the merger were advised, authorized and
approved by the sixty-six percent (66%) of the partners of NWII and the
requisite vote of Columbus' members as set forth in its operating agreement.
THIRD: The manner and basis of converting the partnership interests of NWII
into member interests in Columbus or cash is as follows. Except as provided
below, each unit of NWII shall be converted into $1,343.00 cash. Partnership
interests (general or limited) in NWII owned by Gerald L. and/or Maryanne
Whitcomb and Peninsula Development Services, Inc., a Washington corporation,
shall be contributed immediately before the effective time of the merger to
Columbus in exchange for units in Columbus.
Dated: _______, 19__.
Super 8 Motels Northwest II Columbus Properties L.L.C.
- -------------------------------------- ----------------------------------
By Gerald L. Whitcomb, General Partner By Gerald L. Whitcomb, its Manager
- --------------------------------------
Gerald L. Whitcomb, President,
Peninsula Development Services, Inc.,
General Partner
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ANNEX II
[Ragen MacKenzie Letterhead]
December 31, 1998
Gerald L. Whitcomb
General Partner
Super 8 Motels Northwest II
7515 Terminal St. S.W.
Tumwater, WA 98501
Dear Mr. Whitcomb:
We understand that Columbus Properties L.L.C. ("Columbus")(formerly
Whitcomb Family L.L.C.) has entered into a Merger Agreement, dated as of
December 31, 1998, (the "Merger Agreement") which provides, among other things,
for the merger of Super 8 Motels Northwest II, a Washington limited partnership
("Northwest II"), into Columbus, with Columbus as the surviving company
("Merger"). Pursuant to the Merger Agreement, at the effective time of the
Merger Columbus will i) pay $1,343.00 ("Merger Consideration") per limited
partnership unit ("Unit") to the holders thereof ("Unitholders") and ii) as a
result of the Merger will acquire all the assets of the Partnership
("Properties") and will assume the outstanding debt of the Partnership which
stood at approximately $2.4 million as of September 30, 1998 (together referred
to herein as the "Transaction"). The terms of the Transaction are set forth more
fully in the Merger Agreement. You have requested our opinion on behalf of
Northwest II and the Unitholders (the "Fairness Opinion") as to whether the
Merger Consideration to be paid by Columbus pursuant to the Merger Agreement is
fair, from a financial point of view, to the Unitholders of Northwest II Units.
In connection with rendering this Fairness Opinion, Ragen MacKenzie,
among other things: (i) reviewed the Merger Agreement; (ii) reviewed and
analyzed consolidated historic and projected financial and operating data of
Northwest II and the Properties, including audited and unaudited financial
statements for Northwest II and unaudited cash-basis estimates prepared by
management for the Properties; (iii) reviewed and analyzed other internal
information concerning the business and operations of Northwest II and the
Properties furnished to it by management; (iv) reviewed and analyzed publicly
available information concerning Northwest II and the Properties; (v) reviewed
and analyzed publicly available information concerning the terms of selected
merger and acquisition transactions that Ragen MacKenzie deemed relevant to its
inquiry; (vi) reviewed and analyzed selected market purchase price data that
Ragen MacKenzie considered relevant to its inquiry; (vii) held meetings and
discussions with Mr. Whitcomb and employees of Northwest II concerning the
operations, financial condition and prospects of the Properties; and (viii)
conducted such other financial studies, analyses and investigations, including
visits to SeaTac and Federal Way, and considered such other information as Ragen
MacKenzie deemed appropriate.
In preparing its Fairness Opinion, Ragen MacKenzie relied, without
independent verification, on the accuracy and completeness of all information
that was publicly available, supplied or otherwise communicated to Ragen
MacKenzie by the General Partner or Northwest II. Ragen MacKenzie assumed that
the financial estimates (including the underlying assumptions and bases thereof)
examined by it were reasonably prepared and reflected the
<PAGE> 84
best currently available estimates and good faith judgments of the General
Partner as to the future performance of the Properties. Ragen MacKenzie did not
make an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of Northwest II (including the Properties). However,
Ragen MacKenzie was furnished with independent appraisals on each property
prepared by McKee & Schalka Seattle, Washington (the "McKee Appraisals") in
conjunction with U.S. Bank's financing. Ragen MacKenzie assumed without
independent verification that the amount being paid per limited partnership Unit
was determined consistent with the partnership agreement. This Fairness Opinion
necessarily is based upon financial, economic, market and other conditions and
circumstances existing and disclosed to it as of the date of this Fairness
Opinion.
Our Fairness Opinion is directed only to the fairness, from a financial
point of view, of the Merger Consideration to be paid by Columbus to the
Unitholders of Northwest II and does not constitute a recommendation concerning
how Unitholders should vote with respect to the Merger Agreement.
Ragen MacKenzie, as part of its investment banking business' is engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and valuations. We have acted as a financial
advisor to Northwest II in the preparation of this opinion and will receive a
fee for our services. In addition, Columbus, the surviving company pursuant to
the terms of the Merger Agreement, has agreed to indemnify us as to certain
liabilities arising out of the rendering of this Fairness Opinion.
This letter and the opinion expressed herein are provided at the
request of the General Partner and for the information of Northwest II and the
Unitholders and may not be referred to, quoted or used for any other purpose
without our prior written consent, except that this letter may be disclosed in
connection with a Proxy Statement used in connection with the Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of
the date hereof, the aggregate Merger Consideration being paid by Columbus to
the Northwest II Unitholders pursuant to the Merger Agreement is fair, from a
financial point of view, to the Unitholders of Northwest II.
Very truly yours,
Ragen MacKenzie Incorporated
By: /s/ Robert P. Davidson
--------------------------------------
Robert P. Davidson
Vice President
2
<PAGE> 85
ANNEX III
ARTICLE 14
DISSENTERS' RIGHTS
RCW 25.10.900 DEFINITIONS. As used in this article:
(1) "Limited partnership" means the domestic limited partnership in which
the dissenter holds or held a partnership interest, or the surviving limited
partnership or corporation by merger, whether foreign or domestic, of that
limited partnership.
(2) "Dissenter" means a partner who is entitled to dissent from a plan of
merger and who exercises that right when and in the manner required by this
article.
(3) "Fair value," with respect to a dissenter's partnership interest,
means the value of the partnership interest immediately before the effectuation
of the merger to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the merger unless exclusion would be
inequitable.
(4) "Interest" means interest from the effective date of the merger until
the date of payment, at the average rate currently paid by the limited
partnership on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
RCW 25.10.905 PARTNER--DISSENT--PAYMENT OF FAIR VALUE. (1) Except as
provided in RCW 25.10.915 or 25.10.925(2), a partner of a domestic limited
partnership is entitled to dissent from, and obtain payment of, the fair value
of the partner's partnership interest in the event of consummation of a plan of
merger to which the limited partnership is a party as permitted by RCW 25.10.800
or 25.10.840.
(2) A partner entitled to dissent and obtain payment for the partner's
partnership interest under this article may not challenge the merger creating
the partner's entitlement unless the merger fails to comply with the procedural
requirements imposed by this title, Title 23B RCW, the partnership agreement, or
is fraudulent with respect to the partner or the limited partnership.
(3) The right of a dissenting partner to obtain payment of the fair value
of the partner's partnership interest shall terminate upon the occurrence of any
one of the following events:
(a) The proposed merger is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets aside the
merger; or
(c) The partner's demand for payment is withdrawn with the written consent
of the limited partnership.
RCW 25.10.910 DISSENTERS' RIGHTS--NOTICE--TIMING. (1) Not less than ten
days prior to the approval of a plan of merger, the limited partnership must
send a written notice to all partners who are entitled to vote on or approve the
plan of merger that they may be entitled to assert dissenters' rights under this
article. Such notice shall be accompanied by a copy of this article.
A-1
<PAGE> 86
(2) The limited partnership shall notify in writing all partners not
entitled to vote on or approve the plan of merger that the plan of merger was
approved, and send them the dissenters' notice as required by RCW 25.10.920.
RCW 25.10.915 PARTNER--DISSENT--VOTING RESTRICTION. A partner who is
entitled to vote on or approve the plan of merger and who wishes to assert
dissenters' rights must not vote in favor of or approve the plan of merger. A
partner who does not satisfy the requirements of this section is not entitled to
payment for the partner's interest under this article.
RCW 25.10.920 PARTNERS--DISSENTERS' NOTICE--REQUIREMENTS. (1) If the plan
of merger is approved, the limited partnership shall deliver a written
dissenters' notice to all partners who satisfied the requirements of RCW
25.10.915.
(2) The dissenters' notice required by RCW 25.10.910(2) or by subsection
(1) of this section must be sent within ten days after the approval of the plan
of merger, and must:
(a) State where the payment demand must be sent;
(b) Inform holders of the partnership interest as to the extent transfer
of the partnership interest will be restricted as permitted by RCW 25.10.930
after the payment demand is received;
(c) Supply a form for demanding payment;
(d) Set a date by which the limited partnership must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days after
the date the notice under this section is delivered; and
(e) Be accompanied by a copy of this article.
RCW 25.10.925 PARTNER--PAYMENT DEMAND--ENTITLEMENT. (1) A partner who
demands payment retains all other rights of a partner until the proposed merger
becomes effective.
(2) A partner sent a dissenters' notice who does not demand payment by the
date set in the dissenters' notice is not entitled to payment for the partner's
partnership interest under this article.
RCW 25.10.930 PARTNERSHIP INTERESTS--TRANSFER RESTRICTIONS. The limited
partnership may restrict the transfer of partnership interests from the date the
demand for their payment is received until the proposed merger becomes effective
or the restriction is released under this article.
RCW 25.10.935 PAYMENT OF FAIR VALUE--REQUIREMENTS FOR COMPLIANCE. (1)
Within thirty days of the later of the date the proposed merger becomes
effective, or the payment demand is received, the limited partnership shall pay
each dissenter who complied with RCW 25.10.925 the amount the limited
partnership estimates to be the fair value of the partnership interest, plus
accrued interest.
(2) The payment must be accompanied by:
A-2
<PAGE> 87
(a) Copies of the financial statements for the most recent fiscal year
maintained as required by RCW 25.10.050;
(b) An explanation of how the limited partnership estimated the fair value
of the partnership interest;
(c) An explanation of how the accrued interest was calculated;
(d) A statement of the dissenter's right to demand payment; and
(e) A copy of this article.
RCW 25.10.940 MERGER--NOT EFFECTIVE WITHIN SIXTY DAYS--TRANSFER
RESTRICTIONS. (1) If the proposed merger does not become effective within sixty
days after the date set for demanding payment, the limited partnership shall
release any transfer restrictions imposed as permitted by RCW 25.10.930.
(2) If, after releasing transfer restrictions, the proposed merger becomes
effective, the limited partnership must send a new dissenters' notice as
provided in RCW 25.10.910(2) and 25.10.920 and repeat the payment demand
procedure.
RCW 25.10.945 DISSENTER'S ESTIMATE OF FAIR VALUE--NOTICE. (1) A dissenter
may notify the limited partnership in writing of the dissenter's own estimate of
the fair value of the dissenter's partnership interest and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under RCW
25.10.935, if:
(a) The dissenter believes that the amount paid is less than the fair
value of the dissenter's partnership interest or that the interest due is
incorrectly calculated;
(b) The limited partnership fails to make payment within sixty days after
the date set for demanding payment; or
(c) The limited partnership, having failed to effectuate the proposed
merger, does not release the transfer restrictions imposed on partnership
interests as permitted by RCW 25.10.930 within sixty days after the date set for
demanding payment.
(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the limited partnership of the dissenter's demand
in writing under subsection (1) of this section within thirty days after the
limited partnership made payment for the dissenter's partnership interest.
RCW 25.10.950 UNSETTLED DEMAND FOR PAYMENT--PROCEEDING--
PARTIES--APPRAISERS. (1) If a demand for payment under RCW 25.10.945 remains
unsettled, the limited partnership shall commence a proceeding within sixty days
after receiving the payment demand and petition the court to determine the fair
value of the partnership interest and accrued interest. If the limited
partnership does not commence the proceeding within the sixty-day period, it
shall pay each dissenter whose demand remains unsettled the amount demanded.
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<PAGE> 88
(2) The limited partnership shall commence the proceeding in the superior
court. If the limited partnership is a domestic limited partnership, it shall
commence the proceeding in the county where its office is maintained as required
by RCW 25.10.040(1). If the limited partnership is a domestic corporation, it
shall commence the proceeding in the county where its principal office, as
defined in *RCW 23B.01.400(17), is located, or if none is in this state, its
registered office under RCW 23B.05.010. If the limited partnership is a foreign
limited partnership or corporation without a registered office in this state, it
shall commence the proceeding in the county in this state where the office of
the domestic limited partnership maintained pursuant to RCW 25.10.040(1) merged
with the foreign limited partnership or foreign corporation was located.
(3) The limited partnership shall make all dissenters (whether or not
residents of this state) whose demands remain unsettled parties to the
proceeding as in an action against their partnership interests and all parties
must be served with a copy of the petition. Nonresidents may be served by
registered or certified mail or by publication as provided by law.
(4) The limited partnership may join as a party to the proceeding any
partner who claims to be a dissenter but who has not, in the opinion of the
limited partnership, complied with the provisions of this chapter. If the court
determines that such partner has not complied with the provisions of this
article, the partner shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is commenced is
plenary and exclusive. The court may appoint one or more persons as appraisers
to receive evidence and recommend decisions on the question of fair value. The
appraisers have the powers described in the order appointing them or in any
amendment to it. The dissenters are entitled to the same discovery rights as
parties in other civil proceedings.
(6) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of the
dissenter's partnership interest, plus interest, exceeds the amount paid by the
limited partnership.
RCW 25.10.955 UNSETTLED DEMAND FOR PAYMENT--COSTS--FEES AND EXPENSES OF
COUNSEL. (1) The court in a proceeding commenced under RCW 25.10.950 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the limited partnership, except that the court may assess the costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the limited partnership and in favor of any or all dissenters
if the court finds the limited partnership did not substantially comply with the
requirements of this article; or
(b) Against either the limited partnership or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this article.
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<PAGE> 89
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the limited partnership, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
A-5
<PAGE> 90
ANNEX IV
Per Unit Proceeds to Unitholders if the Northwest II Motels Were Sold Based Upon
the Best Offer Received by Exvere
<TABLE>
<CAPTION>
<S> <C>
Northwest II's allocated share
of proposed $80 million Purchase Price $ 9,112,000(1)
Less: Current Liabilities in excess
of Current Assets at
September 30, 1998 after
deduction of Cash Distributions
to Partners of $178,764 paid October 31, 1998
and $119,203 paid January 31, 1999 (92,425)
Less: Long-Term Debt at September 30, 1998 (2,445,805)
-----------
Amount Available for Distribution
Before Selling Costs $ 6,573,770
Less: Estimated selling costs and
expenses of winding down of Northwest II,
including 1% sales commission, title insurance,
real estate excise tax, appraisal fees
fairness opinion, legal, tax and accounting $ (457,036)
-----------
Net Available for Distribution to Partners $ 6,116,734
</TABLE>
<TABLE>
<CAPTION>
Allocation of Net Available for
Distribution to Partners Between
Limited Partners and General Partner:
Limited Partner General Partner Total
--------------- --------------- -----
<S> <C> <C> <C>
Priority Return of Net
Capital Contribution
Pursuant to Section 10 of
the Partnership Agreement $3,960,250 $ 40,002 $4,000,252
Remaining Net Available
For Distribution to Partners
Allocated 85% Limited
Partners and 15% General
Partner Pursuant to Section 10
of the Partnership Agreement 1,799,010 317,472 2,116,482
---------- ---------- ----------
TOTAL $5,759,260 $ 357,474 $6,116,734
---------- ---------- ----------
</TABLE>
Per Unit Distribution
To Limited Partners $5,759,260 / 4,052 = $1,421
- --------
(1) Excludes the proposed $4 Million contingent purchase price based upon the
performance of the 27 motel properties over a 5-year period which, if
earned, would result in an additional payment of $93 per unit to Northwest
II Unitholders.
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<PAGE> 91
Per Unit Proceeds to Unitholders if the Northwest II Motels Were Sold
Individually at the McKee Appraised Values.
<TABLE>
<S> <C>
Appraised Values:
Bremerton - without land $ 1,400,000
Yakima - without land 2,080,000
Portland 5,300,000
-----------
TOTAL $ 8,780,000
Less: Current Liabilities in excess
of Current Assets at
September 30, 1998 after
deduction of Cash Distributions to Partners
of $178,764 paid October 31, 1998 and
$119,203 Paid January 31, 1999 (92,425)
Less: Long-Term Debt at September 30, 1998 (2,445,805)
-----------
Amount Available for Distribution
Before Selling Costs $ 6,241,770
Less: Estimated selling costs and
expenses of winding down of Northwest II,
including 4% sales commission, title insurance,
real estate excise tax, appraisal fees,
fairness opinion, legal, tax and accounting ($ 654,940)
-----------
Net Available for Distribution to Partners $ 5,586,830
</TABLE>
<TABLE>
<CAPTION>
Allocation of Net Available for
Distribution to Partners Between
Limited Partners and General Partners:
Limited Partner General Partners Total
--------------- ---------------- -----
<S> <C> <C> <C>
Priority Return of Net
Capital Contribution
Pursuant to Section 10 of
the Partnership Agreement $3,960,230 $ 40,022 $4,000,252
Remaining Net Available for
Distribution to Partners
Allocated 85% Limited
Partners and 15% General
Partners Pursuant to Section 10
of the Partnership Agreement 1,348,592 237,986 1,586,578
---------- ---------- ----------
TOTAL $5,308,822 $ 278,008 $5,586,830
---------- ---------- ----------
Per Unit Distributions
To Limited Partners $5,308,822 / 4,052 = $1,310
---------- ----- ------
</TABLE>
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<PAGE> 92
PROXY SUPER 8 MOTELS NORTHWEST II PROXY
7515 TERMINAL STREET, S.W., TUMWATER, WA 98501
---------------------------------------------
SPECIAL MEETING OF LIMITED PARTNERS -- MARCH [ ], 1999
THIS PROXY IS SOLICITED ON BEHALF OF NORTHWEST II
The undersigned hereby appoints Gerald L. Whitcomb and Maryanne
Whitcomb, and each of them, as proxies, each with full power of substitution,
and hereby authorizes each of them to represent and to vote, in such manner as
in their discretion shall be deemed appropriate to carry out the authority as
designated below, all the limited partnership units of Super 8 Motels Northwest
II ("Northwest II") held of record by the undersigned on January 6, 1999, at the
special meeting of limited partners to be held [ ], 1999, or any adjournments or
postponements thereof.
1. Agreement and Plan of Merger and Reorganization, dated December 31,
1998, as amended, between Northwest II and Columbus Properties L.L.C.
("Merger").
___ FOR the Merger
___ AGAINST the Merger
___ ABSTAIN
2. In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting or any
adjournments thereof.
<PAGE> 93
THIS PROXY CARD, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED LIMITED PARTNER, AND WILL GRANT DISCRETIONARY
AUTHORITY TO VOTE ON OTHER MATTERS. EXCEPT AS OTHERWISE DIRECTED, THIS PROXY
WILL BE VOTED FOR THE MERGER.
Please sign exactly as name appears below. When limited partnership
units are held by joint tenants, both should sign. When signing as an attorney,
executor, administrator, trustee, or guardian, please give full title as such.
If a corporation, please sign in full corporate name by president or other
authorized officer. If partnership, please sign in partnership name by
authorized person.
PLEASE MARK, SIGN, DATE AND
RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED
ENVELOPE.
DATED: __________, 1999
----------------------------
Signature
----------------------------
Signature, if held jointly
2
