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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934)
AIRCOA Hotel Partners, L.P.
---------------------------
(Name of the Issuer)
AIRCOA Hotel Partners, L.P.
Century City International Holdings Limited
Regal Hotel Management, Inc.
(Name of Persons Filing Statement)
-------------
Class A Limited Partnership Units
(Title of Class of Securities)
009293-10-1
(CUSIP Number of Class of Securities)
-------------
Douglas M. Pasquale
AIRCOA Hotel Partners, L.P.
5775 DTC Boulevard
Englewood, Colorado 80111
(303) 220-2000
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications on Behalf
of Persons Filing Statement)
With a copy to:
Paul J. Shim, Esq. Thomas J. Rice, Esq. Mark Levy, Esq.
Cleary, Gottlieb, Coudert Brothers Holland & Hart LLP
Steen & Hamilton 1114 Avenue of the 555 Seventeenth Street,
One Liberty Plaza Americas Suite 3200
New York, New York Denver,
New York 10006 New York 10036 Colorado 80202-3979
(212) 225-2000 (212) 626-4400 (303) 295-8000
-------------
This statement is filed in connection with (check the appropriate
box):
a. [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.
b. [ ] The filing of a registration statement under the
Securities Act of 1933.
c. [ ] A tender offer.
d. [ ] None of the above.
Check the following box if the soliciting materials or
information statement referred to in checking box (a) are
preliminary copies. [X]
CALCULATION OF FILING FEE
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TRANSACTION VALUATION* AMOUNT OF FILING FEE**
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$4,791,260 $958.25
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* For purposes of calculating amount of filing fee only. The
amount assumes the purchase of 1,545,568 Class A Units, of
(the "Units") at $3.10 net in cash per unit, which represents
all public units reported to be outstanding at June 26, 1997
and not owned by the purchaser.
** The amount of the filing fee calculated in accordance with
Regulation 240.0-11 of the Securities Exchange Act of 1934
equals 1/50 of 1% of the value of the shares to be purchased.
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.
Amount Previously Paid: $958.25
Filing Party: AIRCOA Hotel Partners, L.P.
Form or Registration No.: Schedule 14A
Date Filed: July 3, 1997
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<PAGE>
INTRODUCTORY STATEMENT
This Rule 13E-3 Transaction Statement is being filed by
AIRCOA Hotel Partners, L.P. (the "Partnership"), Century City
International Holdings Limited ("Century City") and Regal Hotel
Management, Inc. ("RHM") in connection with the proposed merger
of Regal Merger Limited Partnership ("Regal"), a wholly owned
subsidiary of RHM, with and into the Partnership. The Partnership
is the issuer of the class of securities which is the subject of
the Rule 13E-3 transaction.
Concurrently with the filing of this Rule 13E-3 Transaction
Statement, the Partnership is filing with the Securities and
Exchange Commission the Partnership's preliminary Proxy Statement
(the "Proxy Statement") relating to the solicitation of proxies
by the Partnership to consider and vote upon a proposal to adopt
the Agreement and Plan of Merger, dated May 2, 1997, by and among
Regal, RHM, AIRCOA Hospitality Services, Inc., the general
partner of the Partnership (the "General Partner") and the
Partnership (the "Merger Agreement"), pursuant to which (a) Regal
will merge with and into the Partnership, which will become a
wholly owned subsidiary of Century City and its affiliates, and
(b) each holder (other than Century City and its affiliates) of
Class A units of limited partner interest (the "Class A Units")
of the Partnership will become entitled to receive $3.10 in cash,
without interest, for each Class A Unit held, and each holder
(other than Century City and its affiliates) of Class B units of
limited partner interest (the "Class B Units") of the Partnership
will become entitled to receive $20.00 in cash, without interest,
for each Class B Unit held.
A copy of the preliminary Proxy Statement is attached as
Exhibit (d)(1) hereto. The information contained in the Proxy
Statement is incorporated by reference in answer to the items in
this Rule 13E-3 Transaction Statement, and the Cross Reference
Sheet set forth below shows the location in the Proxy Statement
of the information required to be included in response to the
items of this Rule 13E-3 Transaction Statement.
<PAGE>
CROSS REFERENCE SHEET
(Pursuant to General Instruction F to Schedule 13E-3)
Item in Schedule 13E-3 Caption in Proxy Statement
- ---------------------- --------------------------
Item 1(a)-(b) Summary -- Record Date; Units Entitled to Vote;
Quorum
Item 1(c)-(d) Market for Partnership's Units; Distributions
Item 1(e) Not applicable
Item 1(f) Special Factors -- Background of and Reasons for
the Merger
Item 2(a)-(d), (g) Schedule 1
Item 2(e)-(f) During the last five years, none of the Partnership,
Century City or RHM nor, to the best of their
knowledge, any of the persons listed in Schedule 1
to the Proxy Statement (i) has been convicted in a
criminal proceeding (excluding traffic violations
or similar misdemeanors) or (ii) was a party to a
civil proceeding of a judicial or administrative
body of competent jurisdiction as a result of
which such person was or is subject to a judgment,
decree or final order enjoining further violations
of, or prohibiting activities subject to, federal
or state securities laws or finding any violation
of such laws.
Item 3(a)-(b) Special Factors -- Background of and Reasons for
the Merger; Special Factors -- Relationships Between
the Parties; Annex C to the Proxy Statement
Item 4(a) Summary -- Terms of the Merger; Special Factors --
Structure of the Merger; The Merger Agreement
Item 4(b) Summary -- Purpose of the Special Meeting; Summary
-- Terms of the Merger; Special Factors -- Structure
of the Merger; Special Factors -- Certain Effects
of the Merger; and The Merger Agreement
Item 5(a)-(g) Special Factors -- Relationships Between the
Parties; Special Factors -- Plans for the Partnership
After the Merger; Special Factors -- Certain Effects
of the Merger
Item 6(a) The Merger Agreement -- Financing of the Transaction
Item 6(b) The Merger Agreement -- Expenses of the Merger
2
<PAGE>
Item in Schedule 13E-3 Caption in Proxy Statement
- ---------------------- --------------------------
Item 6(c)-(d) Not applicable
Item 7(a)-(c) Summary -- Purpose of the Special Meeting; Summary --
Interests of Certain Persons in the
Merger; Summary -- Reasons for the Merger;
Special Factors -- Background of and
Reasons for the Merger; Special Factors --
Interests of Certain Persons in the
Merger; Conflicts of Interest
Item 7(d) Special Factors -- Certain Effects of the Merger;
Special Factors -- Income Tax Consequences; Special
Factors -- Accounting Treatment of the Merger; The
Merger Agreement -- General; The Merger Agreement --
Effective Time
Item 8(a)-(b) Special Factors -- Fairness of the Merger;
Recommendation of the Special Committee and
Position of Century City and RHM -- Position of
Century City and RHM With Respect to the Merger
Item 8(c) Summary -- Vote Required; Fairness of the Merger;
Recommendation of the Special Committee and Position
of Century City and RHM -- Recommendation of the
Special Committee -- Procedural Fairness
Item 8(d)-(f) Special Factors -- Background of and Reasons for
the Merger
Item 9(a)-(c) Special Factors -- Opinion of Financial Advisor;
Special Factors -- Appraisals; Special Factors
-- PKF Report; Special Factors --Background of
and Reasons for the Merger; Special
Factors --Fairness of the Merger;
Recommendation of the Special Committee
and Position of Century City and RHM;
Annex B to the Proxy Statement
Item 10(a)-(b) The Partnership -- Beneficial Ownership of
Class A Units and Transactions in Class A Units
by Certain Persons
Item 11 Not applicable
Item 12(a)-(b) Summary -- Vote Required; Summary --
Opinion of Financial Advisor;
Special Factors -- Fairness of the Merger;
Recommendation of the Special Committee
and Position of Century City and RHM --
Position of Century City and RHM With
Respect to the Merger; Special Factors --
Structure of the Merger
3
<PAGE>
Item in Schedule 13E-3 Caption in Proxy Statement
- ---------------------- --------------------------
Item 13(a) Summary-- No Appraisal Rights; The Proxy
Solicitation -- No Appraisal Rights
Item 13(b) Not applicable
Item 13(c) Not applicable
Item 14(a) Summary Financial Data; Consolidated Financial
Statements of AIRCOA Hotel Partners, L.P. and its
Subsidiary Operating Partnerships
Item 14(b) Not applicable
Item 15(a) Summary-- Interests of Certain Persons in the
Merger; Special Factors-- Background of and Reasons
for the Merger; Special Factors-- Interests of
Certain Persons in the Merger; Conflicts of
Interest; Special Factors-- Plans for the
Partnership After the Merger; The Merger Agreement
-- Financing of the Transaction
Item 15(b) Not applicable
Item 16 Proxy Statement and the related letter to
Unitholders, Notice of Special Meeting and Proxy
Item 17(a) Not applicable
Item 17(b) Fairness Opinion of Houlihan, Lokey, Howard &
Zukin (included as Annex B to the Proxy Statement);
Appraisal reports of Arthur Andersen LLP; Report
of PKF Consulting
Item 17(c) Merger Agreement by and among AIRCOA Hotel
Partners, L.P., AIRCOA Hospitality Services, Inc.,
Regal Hotel Management, Inc. and Regal Merger
Limited Partnership, dated May 2, 1997
(included as Annex A to the Proxy Statement)
Item 17(d) Proxy Statement and related letter to Unitholders,
Notice of Special Meeting and Proxy
Item 17(e) Not applicable
Item 17(f) Not applicable
4
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Item 1. Issuer and Class of Security Subject to the Transaction.
(a)-(b) The issuer which is the subject of the Rule 13E-3
transaction is the Partnership. The Partnership's principal
executive offices are located at 5775 DTC Boulevard, Englewood,
Colorado 80111. The Partnership's Class A Units and Class B Units
are the subject of the Rule 13E-3 transaction. The information
set forth in the section of the Proxy Statement entitled "Summary
- -- Record Date; Units Entitled to Vote; Quorum" is incorporated
herein by reference.
(c)-(d) The information set forth in the section of the
Proxy Statement entitled "Market for Partnership's Units;
Distributions" is incorporated herein by reference.
(e) Not applicable.
(f) The information set forth in the section of the Proxy
Statement entitled "Special Factors -- Background of and Reasons
for the Merger" is incorporated herein by reference.
Item 2. Identity and Background.
(a)-(d), (g) The information set forth in Schedule 1 to the
Proxy Statement is incorporated herein by reference.
(e)-(f) During the last five years, none of the
Partnership, Century City or RHM nor, to the best of their
knowledge, any of the persons listed in Schedule 1 to the Proxy
Statement (i) has been convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors) or (ii)
was a party to a civil proceeding of a judicial or administrative
body of competent jurisdiction as a result of which such person
was or is subject to a judgment, decree or final order enjoining
further violations of, or prohibiting activities subject to,
federal or state securities laws or finding any violation of such
laws.
Item 3. Past Contacts, Transactions or Negotiations.
(a)-(b) The information set forth in the sections of the
Proxy Statement entitled "Special Factors -- Background of and
Reasons for the Merger" and "Special Factors -- Relationships
Between the Parties" and Annex C to the Proxy Statement is
incorporated herein by reference.
Item 4. Terms of the Transaction.
(a) The information set forth in the sections of the Proxy
Statement entitled "Summary -- Terms of the Merger", "Special
Factors -- Structure of the Merger" and "The Merger Agreement" is
incorporated herein by reference.
(b) The information set forth in the sections of the Proxy
Statement entitled "Summary -- Purpose of the Special Meeting",
"Summary -- Terms of the Merger", "Special
5
<PAGE>
Factors -- Structure of the Merger", "Special Factors -- Certain
Effects of the Merger" and "The Merger Agreement" is incorporated
herein by reference.
Item 5. Plans or Proposals of the Issuer or Affiliate.
(a)-(g) The information set forth in the sections of the
Proxy Statement entitled "Special Factors -- Relationships
Between the Parties", "Special Factors -- Plans for the
Partnership After the Merger" and "Special Factors -- Certain
Effects of the Merger" is incorporated herein
by reference.
Item 6. Source and Amount of Funds or Other Consideration.
(a) The information set forth in the section of the Proxy
Statement entitled "The Merger Agreement -- Financing of the
Merger" is incorporated herein by reference.
(b) The information set forth in the section of the Proxy
Statement entitled "The Merger Agreement -- Expenses of the
Merger" is incorporated herein by reference.
(c)-(d) Not applicable.
Item 7. Purpose(s), Alternatives, Reasons and Effects.
(a)-(c) The information set forth in the sections of the
Proxy Statement entitled "Summary -- Purpose of the Special
Meeting", "Summary -- Interests of Certain Persons in the
Merger", "Summary -- Reasons for the Merger", "Special Factors --
Background of and Reasons for the Merger", and "Special Factors
- -- Interests of Certain Persons in the Merger; Conflicts of
Interest" is incorporated herein by reference.
(d) The information set forth in the sections of the Proxy
Statement entitled "Special Factors -- Certain Effects of the
Merger", "Special Factors -- Income Tax Consequences", "Special
Factors -- Accounting Treatment of the Merger", "The Merger
Agreement -- General" and "The Merger Agreement -- Effective
Time" is incorporated herein by reference.
Item 8. Fairness of the Transaction.
(a)-(b) The information set forth in the sections of the
Proxy Statement entitled "Special Factors -- Fairness of the
Merger; Recommendation of the Special Committee and Position of
Century City and RHM -- Position of Century City and RHM With
Respect to the Merger" is incorporated herein by reference.
(c) The information set forth in the sections of the Proxy
Statement entitled "Summary -- Vote Required" and "Special
Factors -- Fairness of the Merger; Recommendation
6
<PAGE>
of the Special Committee and Position of Century City and RHM --
Recommendation of the Special Committee -- Procedural Fairness"
is incorporated herein by reference.
(d)-(f) The information set forth in the sections of the
Proxy Statement entitled "Special Factors -- Background of and
Reasons for the Merger" is incorporated herein by reference.
Item 9. Reports, Opinions, Appraisals and Certain Negotiations.
(a)-(c) The information set forth in the sections of the
Proxy Statement entitled "Special Factors -- Opinion of Financial
Advisor", "Special Factors -- Appraisals", "Special Factors --PKF
Report, "Special Factors -- Background of and Reasons for the
Merger" and "Special Factors -- Fairness of the Merger;
Recommendation of the Special Committee and Position of Century
City and RHM" and Annex B to the Proxy Statement is incorporated
herein by reference.
Item 10. Interest in Securities of the Issuer.
(a)-(b) The information set forth in the section of the
Proxy Statement entitled "The Partnership -- Beneficial Ownership
of Class A Units and Transactions In Class A Units by Certain
Persons" is incorporated herein by reference.
Item 11. Contracts, Arrangements or Understandings With Respect to the
Issuer's Securities.
Not applicable.
Item 12. Present Intention and Recommendation of Certain Persons With
Regard to the Transaction.
(a)-(b) The information set forth in the sections of the
Proxy Statement entitled "Summary -- Vote Required", "Summary --
Opinion of Financial Advisor", "Special Factors -- Fairness of
the Merger; Recommendation of the Special Committee and Position
of Century City and RHM -- Position of Century City and RHM With
Respect to the Merger" and "Special Factors -- Structure of the
Merger" is incorporated herein by reference.
Item 13. Other Provisions of the Transaction.
(a) The information set forth in the sections of the Proxy
Statement entitled "Summary -- No Appraisal Rights" and "The
Proxy Solicitation -- No Appraisal Rights" is incorporated herein
by reference.
(b) Not applicable.
7
<PAGE>
(c) Not applicable.
Item 14. Financial Information.
(a) The information set forth in the sections of the Proxy
Statement entitled "Summary Financial Data" and "Index to
Financial Statements" is incorporated herein by reference.
(b) Not applicable.
Item 15. Persons and Assets Employed, Retained, Employed or Utilized.
(a) The information set forth in the sections of the Proxy
Statement entitled "Summary -- Interests of Certain Persons in
the Merger", "Special Factors -- Background of and Reasons for
the Merger", "Special Factors -- Interests of Certain Persons in
the Merger; Conflicts of Interest", "Special Factors -- Plans for
the Partnership After the Merger" and "The Merger Agreement --
Financing of the Merger" is incorporated herein by reference.
(b) Not applicable.
Item 16. Additional Information.
Reference is hereby made to the Proxy Statement and the
related letter to Unitholders, Notice of Special Meeting and
Proxy, copies of which are attached hereto as Exhibit (d)(1) and
which are incorporated herein in their entirety by reference.
Item 17. Material to be Filed as Exhibits.
(a) Not applicable.
(b)(1) Fairness Opinion of Houlihan, Lokey, Howard &
Zukin.*
(b)(2) Appraisal reports of Arthur Andersen LLP.
(b)(3) Report of PKF Consulting.
(c)(1) Merger Agreement by and among AIRCOA Hotel Partners, L.P.,
AIRCOA Hospitality Services, Inc., Regal Hotel Management, Inc. and
Regal Merger Limited Partnership, dated May 2, 1997.**
(d) Proxy Statement and related Letter to Unitholders, Notice
of Special Meeting and Proxy.
(e)-(f) Not applicable.
- --------------
* The information set forth in Annex B to the Proxy
Statement is incorporated herein by reference.
** The information set forth in Annex A to the Proxy
Statement is incorporated herein by reference.
8
<PAGE>
SIGNATURE
After due inquiry and to the best of its knowledge and
belief, each of the undersigned certifies that the information
set forth in this Statement is true, complete and correct.
Dated: July 3, 1997
AIRCOA HOTEL PARTNERS, L.P.
By: AIRCOA Hospitality Services, Inc.,
General Partner
By: /s/ Douglas M. Pasquale
--------------------------------
Name: Douglas M. Pasquale
Title: President and Chief
Executive Officer
By: /s/ David C. Ridgley
---------------------------------
Name: David C. Ridgley
Title: Senior Vice President
and Chief Accounting
Officer
CENTURY CITY INTERNATIONAL HOLDINGS
LIMITED
By:_/s/_Lawrence LAU Siu Keung____
Name: Mr. Lawrence LAU Siu Keung
Title:Director
By:/s/ Kenneth NG Kwai Kai_________
Name: Kenneth NG Kwai Kai
Title:Director
REGAL HOTEL MANAGEMENT, INC.
By: /s/ Lyle L. Boll
--------------------------------
Name: Lyle L. Boll
Title: Vice President
By: /s/ Joel W. Hiser
Name: Lyle L. Boll
Title: Vice President
9
<PAGE>
Exhibit Index
Exhibit Document
- ------- --------
(b)(2) Appraisal reports of Arthur Andersen LLP.
(b)(3) Report of PKF Consulting.
(d) Proxy Statement and related letter to Unitholders,
Notice of Special Meeting and Proxy.
<PAGE>
EXHIBIT (b)(2)
Arthur Andersen LLP
Appraisal of:
CLARION FOURWINDS RESORT AND MARINA
BLOOMINGTON, INDIANA
As of:
JANUARY 1, 1997
Prepared For:
AIRCOA HOTEL PARTNERS, L.P.
Special Committee
March 31, 1997
Prepared By:
ARTHUR ANDERSEN LLP
Hospitality Industry Consulting Services Group
<PAGE>
[Letterhead of Arthur Andersen]
March 31, 1997
Mr. James W. Hire
Hire & Associates
1383 Solitude Lane
Evergreen, CO 80439
Mr. Anthony C. Dimond
Miramar Asset Management, Inc.
617 Veterans Boulevard, Suite 212
Redwood City, CA 94063
Re: Appraisal of Clarion Fourwinds Resort and Marina; Bloomington, IN
As of January 1, 1997
Gentlemen:
As requested, we have completed an appraisal of the leasehold
interest in the above-referenced property. The reader is advised
that our Firm has not audited, examined, reviewed or applied
agreed-upon procedures to the financial data contained in the
accompanying report unless specifically noted. We have relied on
information including, but not limited to, industry statistics,
relevant market, demographic and financial data assembled by us
through direct research conducted by our staff or from secondary
sources as well as information provided by you. While these
sources of information are generally recognized as authoritative
in the field or otherwise considered reliable, we have not
audited this information nor do we warrant its completeness or
accuracy. The opinion of market value subject to stabilized
occupancy expressed herein is subject to the assumptions and
limiting conditions set forth in the body of the accompanying
report.
We understand that our valuation will be used to assist you in
determining the fair market value for internal purposes and may
not be disclosed to a third party without the prior consent of
Arthur Andersen LLP.
<PAGE>
Mr. James W. Hire
Mr. Anthony C. Dimond
March 31, 1997
Page 2
Based upon our research and analysis, it is our opinion that the
market value of the leasehold interest, including furniture,
fixtures and equipment, and business value, as of January 1, 1997
is:
-- Eight Million Thirty Thousand Dollars --
($8,030,000)
We appreciate the opportunity to serve you. Please call if you
have any questions or if we can be of further assistance.
Very truly yours,
/s/ Arthur Andersen LLP
<PAGE>
Clarion Fourwinds Resort and Marina Page i
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TABLE OF CONTENTS
SUMMARY OF CRITICAL FACTS AND CONCLUSIONS.......................iii
GENERAL ASSUMPTIONS AND LIMITING CONDITIONS.......................v
CERTIFICATION..................................................viii
A. INTRODUCTION..................................................1
A.1 SUBJECT PROPERTY IDENTIFICATION..............................1
A.2 OWNERSHIP HISTORY............................................1
A.3 PURPOSE AND FUNCTION OF THE VALUATION........................2
A.4 PROPERTY RIGHTS APPRAISED....................................3
Ground Lease Abstract...........................................3
A.5 EFFECTIVE DATE OF THE VALUATION..............................4
A.6 EXPOSURE PERIOD..............................................4
A.7 SCOPE OF THE APPRAISAL.......................................5
A.8 SPECIAL ASSUMPTIONS..........................................5
B. ANALYSIS OF THE SUBJECT PROPERTY AND ITS MARKET...............7
B.1 DESCRIPTION AND ANALYSIS OF THE PROPERTY.....................7
Location........................................................7
Legal Description...............................................7
Land............................................................7
Property Improvements...........................................8
Property Inspection............................................17
Past Renovation and Capital Requirements.......................18
Property Taxes.................................................20
Zoning.........................................................22
B.2 AREA ANALYSIS...............................................24
Economic and Demographic Indicators............................25
Employment.....................................................27
Office and Industrial Market Overview..........................29
Transportation.................................................30
Indiana University.............................................32
Tourism and Recreation.........................................32
Convention and Trade Show Market...............................34
Conclusion.....................................................34
B.3 HIGHEST AND BEST USE ANALYSIS...............................35
Highest and Best Use of The Land as if Vacant..................35
Highest and Best Use of The Property As Currently Improved.....36
Conclusion and Reconciliation of Highest and Best Use..........38
C. ANALYSIS OF COMPETITIVE LODGING SUPPLY AND DEMAND............40
C.1 COMPETITIVE LODGING SUPPLY..................................40
Identified Competitive Supply..................................40
Other hotels in the Bloomington market.........................49
Additions To Supply............................................49
C.2 LODGING SUPPLY AND DEMAND ANALYSIS..........................51
Overall Demand Trends in the Bloomington Lodging Market........51
Lodging Demand in the Identified Competitive Supply............51
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Clarion Fourwinds Resort and Marina Page ii
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Demand Segmentation and Estimated Demand Growth................54
C.3 ESTIMATED OCCUPANCY AND AVERAGE ROOM RATE...................63
Market Penetration and Average Annual Occupancy................63
Projected Average Daily Room Rate..............................70
D. THE APPRAISAL PROCESS........................................73
D.1 THE COST APPROACH...........................................73
D.2 SALES COMPARISON APPROACH...................................74
D.3 INCOME APPROACH.............................................81
Historical Financial Performance...............................82
Estimated Operating Results....................................86
INVESTMENT CLIMATE OVERVIEW...................................102
Discounted Cash Flow Analysis.................................103
E. RECONCILIATION AND FINAL VALUE ESTIMATE....................107
F. ADDENDA.....................................................109
F.1 HOTEL SALES COMPARABLES
F.2 SUBJECT PROPERTY PHOTOGRAPHS
F.3 COMPETITIVE HOTEL PHOTOGRAPHS
F.4 PROPERTY LEGAL DESCRIPTION
F.5 COPY OF GROUND LEASE
F.6 INDEMNIFICATION
<PAGE>
Clarion Fourwinds Resort and Marina Page iii
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SUMMARY OF CRITICAL FACTS AND CONCLUSIONS
Property Name: Clarion Fourwinds Resort and Marina
Property Address: 9301 South Fairfax Road
Bloomington, IN 47402
Property Location: The property is located on the shore of Lake
Monroe within the Hoosier National Forest.
Property Type: A low-rise full-service hotel and full-service
marina
Number of Rooms: 126 rooms, including two suites
Number of Slips: 880 slips and moorings
Owner of Record: Inn of Four Winds Corporation
Year-End Occupancy:
1994 58.9 percent
1995 56.7 percent
1996 (Estimated) 51.3 percent
Year-End Average Rate:
1994 $68.55
1995 $69.55
1996 (Estimated) $72.34
Interest Appraised: Leasehold
Land Area: 3,956,678 square feet (90.83 acres)
Building Area: 42,206 square feet (Hotel)
33,992 square feet (Used by Marina)
21,875 square feet (Boat storage)
Year Completed: 1971
Highest and Best Use:
Land as though vacant: Residential
Land as improved: Hotel and marina
Date of Valuation: January 1, 1997
Date of Inspection: November 13, 1996
<PAGE>
Clarion Fourwinds Resort and Marina Page iv
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Value Indications (Including Furniture, Fixtures, and Equipment,
and Business Value):
$ Amount $ Per Room
-------- ----------
Cost Approach: n/a n/a
Sales Comparison Approach: $ 8,270,000 $65,634
Income Approach: $ 8,030,000 $63,730
----------- -------
Reconciled Value Indication: $ 8,030,000 $63,730
=========== =======
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Clarion Fourwinds Resort and Marina Page v
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GENERAL ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal report is subject to the following general
assumptions and limiting conditions:
1. No investigation has been made of, and no responsibility is
assumed for, the legal description of the property being
valued or legal matters, including title or encumbrances.
Title to the property is assumed to be good and marketable
unless otherwise stated. The property is assumed to be free
and clear of any liens, easements, or encumbrances unless
otherwise stated.
2. Information furnished by others, upon which all or portions
of this appraisal are based, is believed to be reliable but
has not been verified in all cases. No warranty is given as
to the accuracy of such information.
3. It is assumed that all required licenses, certificates of
occupancy, consents, or other legislative or administrative
authority from any local, state, or national government or
private entity or organization has been, or can readily be,
obtained or renewed for any use on which the value
estimates contained in this report are based.
4. Full compliance with all applicable federal, state, and
local zoning, use, occupancy, environmental, and similar
laws and regulations is assumed unless otherwise stated.
5. No responsibility is taken for changes in market
conditions, and no obligation is assumed to revise this
report to reflect events or conditions which occur
subsequent to the appraisal date hereof.
6. The opinion of value is predicated on the financial structure
prevailing as of the date of this appraisal.
7. Responsible ownership and competent property management are
assumed.
8. Areas and dimensions of the property were obtained from
sources believed to be reliable. Maps or sketches, if included in
this report, are only to assist the reader in visualizing the
property, and no responsibility is assumed for their accuracy. No
independent surveys were conducted.
9. It is assumed that there are no hidden or un-apparent
conditions of the property, subsoil, or structures that
render it more or less valuable. No responsibility is
assumed for such conditions or for arranging engineering
studies that may be required to discover them.
10. No soil analysis or geological studies were ordered or made
in conjunction with this report, nor was an investigation
made of any water, oil, gas, coal, or other subsurface
mineral and use rights or conditions.
11. Neither Arthur Andersen LLP nor any individual signing
or associated with this report shall be required by reason of
this report to give further consultation, provide
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Clarion Fourwinds Resort and Marina Page vi
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testimony, or appear in court or at other legal proceedings
unless specific arrangements therefore have been made.
12. This report has been made only for the purpose stated and
shall not be used for any other purpose. Neither this
report nor any portions thereof (including, without
limitation, any conclusions as to value or the identity of
Arthur Andersen LLP or any individuals signing or
associated with this report or the professional
associations or organizations with which they are
affiliated) shall be disseminated to third parties by any
means without the prior written consent and approval of
Arthur Andersen LLP.
13. The date of value to which the opinions expressed in this
report apply is set forth in the opinion letter at the
front of this report. Our value opinion is based on the
purchasing power of the U.S. dollar as of that date. We
have no obligation to update our findings and conclusions
for changes in market conditions which occur subsequent to
our fieldwork.
14. Our study and report will be based on assumptions and
estimates which are subject to uncertainty and variation.
These estimates are often based on data obtained in
interviews with third parties, and such data are not always
completely reliable. Therefore, while our estimates will be
conscientiously prepared on the basis of our experience and
the data available to us, we make no warranty of any kind
that the financial results projected will, in fact, be
achieved.
15. Unless otherwise stated in this report, no hazardous
material, which may or may not be present on or near the
property, was observed. We have no knowledge of the existence of
such materials on or in the property; however, we are not
qualified to detect such substances. The presence of potentially
hazardous substances, such as asbestos, urea-formaldehyde foam
insulation, or industrial wastes, may affect the value of the
property. The value estimates herein are predicated on the
assumption that there is no such material on, in, or near the
property that would cause a loss in value. No responsibility is
assumed for any such conditions or for any expertise or
engineering knowledge required to discover them. The client
should retain an expert in this field if further information is
desired.
16. This appraisal has been made in conformance with the
Uniform Standards of Professional Appraisal Practice of The
Appraisal Foundation.
17. The allocation in this report of the total valuation among
components of the property applies only to the program of
utilization stated in this report. The separate values for
any components may not be applicable for any other purpose
and must not be used in conjunction with any other
appraisal.
18. Arthur Andersen consents to including, to the extent
required by federal securities laws, a copy of the
Appraisal and/ or a summary thereof or a reference thereto
in the Schedule 13E-3 and related proxy statement with the
Securities and Exchange Commission by AHP or the Special
Committee, provided that Arthur Andersen shall have the
right to approve the content of any summary of the
Appraisals, such approval not to be unreasonably withheld.
Otherwise, this report and parts thereof, any
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Clarion Fourwinds Resort and Marina Page vii
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additional material submitted, may not be used in any
prospectus or printed material used in connection with the
sale of securities or participation interests in any Public
Offering, Securities and Exchange Commission filing, or
other public document.
19. Arthur Andersen LLP's maximum liability relating to
services rendered under this report (regardless of form of
action, whether in contract, negligence, or otherwise)
shall be limited to the charges paid to Arthur Andersen LLP
for the portion of its services or work products giving
rise to liability. In no event shall Arthur Andersen LLP be
liable for consequential, special, incidental, or punitive
losses, damages, or expenses (including, without
limitation, lost profits, opportunity costs, etc.) even if
it has been advised of their possible existence.
20. The Americans with Disabilities Act became effective
January 26, 1992. We did not make any observations or
interpretations on compliance with the ADA. It is possible that a
compliance survey of the property, together with a detailed
analysis of the requirements of the ADA could reveal that the
property is not in compliance with the requirements of the Act.
If so, this fact could have a negative effect upon the value of
the property. Since we have no direct evidence relating to this
issue, we did not consider possible non-compliance with the
requirements of ADA in estimating the value of the property.
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CERTIFICATION
We certify that to the best of our 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 our personal, unbiased professional analyses, opinions
and conclusions.
- -- we have present no prospective interest in the property that
is the subject of this report, and we have no personal
interest or bias with respect to the parties involved.
- -- our compensation is not contingent on an action or event
resulting from the analyses, opinions, or conclusions in, or
the use of, this report.
- -- Sheila Bjornstad and Gloria Fu made personal inspections
of the property on November 13, 1996. Roger S. Cline, Matthew G.
Kimmel, and Brian E. Ginsberg have not inspected the subject
property.
- -- our 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
Supplemental Standards of Professional Practice of the
Appraisal Institute and the Uniform Standards of Professional
Appraisal Practice of The Appraisal Foundation;
- -- the use of this report is subject to the requirements of the
Appraisal Institute relating to review by its duly authorized
representatives;
- -- neither all nor any part of the contents of this report
(especially any conclusions as to value or the identify of
the appraiser) 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.
- -- this appraisal assignment was not based on a requested
minimum valuation, a specific valuation, or the approval of a
loan.
Respectfully submitted,
/s/ Brian E. Ginsberg /s/ Roger S. Cline
- ----------------------------------- ----------------------------------
Brian E. Ginsberg, MAI Roger S. Cline
Review Appraiser
Manager, Valuation Services /s/ Matthew G. Kimmel
----------------------------------
Matthew G. Kimmel, MAI
Contributing Appraisers Review Appraiser
Sheila M. Bjornstad Certified General Appraiser
Gloria Fu State of Indiana
License # CG69201263
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Clarion Fourwinds Resort and Marina Page 1
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A. INTRODUCTION
A.1 SUBJECT PROPERTY IDENTIFICATION
Property Address: 9301 South Fairfax Road
Bloomington, IN 47402
Tax Reference: Account # 004-09450-00 (hotel)
Account # 004-06840-00 (marina)
Deed Reference: Section 26.010
Current Owner of Record: Inn of Four Winds Corporation (hotel)
Four Winds Marina (marina)
A.2 OWNERSHIP HISTORY
The hotel and marina are owned by AIRCOA Hotel Partners, L.P.
(the partnership) which is a publicly-traded limited partnership
formed to acquire, own, and operate hotel properties. This entity
is the owner of the subject leasehold estate. The subject
property, known as the Clarion Fourwinds Resort and Marina,
consists of two parcels which are jointly operated as one entity.
The leasehold is improved with a 126-room hotel and an 880-slip
marina. The marina was constructed in 1968, and the hotel was
constructed in phases with the completion of the first section in
1972. These parcels are subject to a ground lease executed by the
Department of Natural Resources of the state of Indiana which
expires in 2030. The partnership holds a 99 percent limited
partner interest in The Clarion Fourwinds Resort and Marina. The
lessor of the ground lease is the Fourwinds Operating
Partnership, L.P. Recorded at the assessor's office, the two
official ownership entities established to own the subject are
the Inn of Four Winds Corp. (hotel) and the Four Winds Marina
(marina). AIRCOA Hospitality Services, Inc., which is a
wholly-owned subsidiary of Richfield Hospitality Services, Inc.,
holds a one percent general partner interest in both the
partnership and in the Clarion Fourwinds Resort and Marina.
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Clarion Fourwinds Resort and Marina Page 2
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A.3 PURPOSE AND FUNCTION OF THE VALUATION
The purpose of this report is to estimate the market value of the
leasehold estate in the subject property. Arthur Andersen has
been engaged by the Special Committee of AIRCOA Hotel Partners,
L.P. (AHP) for the purpose of assisting them in assessing the
value of the individual properties owned by the partnership.
As used herein, market value is defined as1 :
"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 the sale as of a specified date and the
passing of title from seller to buyer under conditions
whereby:
a. buyer and seller are typically motivated;
b. both parties are well informed or well advised, and
acting in what they consider their best interests;
c. a reasonable time is allowed for exposure in the open
market;
d. payment is made in terms of cash and United States
dollars or in terms of financial arrangements comparable
thereto; and
e. 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."
This appraisal has been prepared in compliance with the Appraisal
Standards Board requirements and is a self-contained appraisal
report. The report contains all information significant to the
solution of the appraisal problem and reports all significant
data in comprehensive detail.
- --------
1 Uniform Standards of Professional Appraisal Practice, Appraisal
Foundation, 1990 Edition.
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Clarion Fourwinds Resort and Marina Page 3
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A.4 PROPERTY RIGHTS APPRAISED
The property rights appraised include the leasehold estate
comprising a 126-room hotel and full-service marina. The
leasehold value reflects the tenant's interest or right to use
and occupy the real estate by virtue of a lease agreement. A copy
of the lease is provided in the addenda of this report. The
following is an abstract of lease terms.
GROUND LEASE ABSTRACT
Date: January 6, 1969 (Last Amendment Date: May 20, 1991)
Lessee: Fourwinds Operating Partnership, L.P.
Lessor: Department of Natural Resources of the State of Indiana
Term: January 6, 1969 through April 30, 2030
Options to Renew: Lease is a sublease of an agreement between the Department
of Natural Resources of the State of Indiana ("DNR")
and the United States Army. The DNR states
that they will attempt to negotiate options
to renew for an additional 25-year period.
However, there is no guarantee that this
lease will be renewed. This option would
then be conveyed to the lessee, Fourwinds
Operating Partnership, L.P.
Legal Description: See section F.4 in the addenda of this report.
Commencement Date: January 6, 1969
Rental: Base Rent - $10,000
Commencing January 1, 1991 and due and
payable on or before January 1 of each year.
Additional Rent:
From July 1, 1990 until June 30, 1991:
3.5 percent of gross revenues exceeding
$1,700,000 and not greater than $4,300,000;
7 percent of gross revenues exceeding
$4,300,000; and, Additional rent shall be
due on or before September 30, 1991.
From July 1, 1991 until December 31, 1991:
3.5 percent of gross revenues exceeding
$750,000 and not greater than $1,650,000; 7
percent of gross revenues exceeding
$1,650,000; and,
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Clarion Fourwinds Resort and Marina Page 4
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Additional rent shall be due on or before
March 31, 1992.
From January 1, 1992 and continuing for each
Lease Year throughout the Term:
3.5 percent of gross revenues exceeding $1,500,000 and
not greater than $3,300,000; 7 percent of
gross revenues exceeding $3,330,000;
Additional rent shall be due on or before
March 31 commencing March 31, 1993 and
continuing throughout the Term.
Revenues defined as: Gross revenues are defined as
all revenues generated by the hotel and
marina entities with the exception of boat
sales income. Rental payment on this income
is limited to two percent and shall not be
utilized in computing gross rental income.
In addition, gross revenues shall include
the gross revenues of the Tenant,
subtenants, Tenant's affiliates and
concessionaires, but shall exclude rent
received by Tenant from such subtenants,
Tenant's affiliates and concessionaires.
A.5 EFFECTIVE DATE OF THE VALUATION
The effective date of this value estimate is January 1, 1997. The
property was inspected by Sheila Bjornstad and Gloria Fu on
November 13, 1996.
A.6 EXPOSURE PERIOD
Exposure period refers to the amount of time which a property
would have been on the market prior to the date of appraisal for
it to sell at the appraised value. The current marketplace has
been characterized by illiquidity and capital restraints,
particularly on the part of banks, which has affected the time in
which real estate takes to sell. The market for most types of
properties was much more active in the 1980s due to greater
availability of credit and greater investor optimism. The volume
of transactions of hotel properties diminished in 1991 and 1992,
and there was less investment and development activity in the
marketplace. Since then, the markets have shown improvement and
there has been a significant increase in sales activity. Most of
the investors with whom we have spoken agreed that an exposure
period of between six months and one year would be sufficient in
order to maximize the price for a property such as the subject.
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Clarion Fourwinds Resort and Marina Page 5
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A.7 SCOPE OF THE APPRAISAL
As part of this assignment, the appraisers made a number of
independent investigations and analyses. In conducting our
investigation, various governmental planning agencies and the
local Chamber of Commerce were contacted for demographic data,
land policies and trends, and growth estimates. Neighborhood data
were supplemented by physical inspection of the defined area.
Information regarding zoning, utilities, and other limitations on
site utilization was obtained from the client and through the
appropriate agencies. Both the site and the surrounding area were
inspected to determine suitability for hotel use. All phases of
the local lodging market were analyzed for past trends and
current data. Estimated income and occupancy levels, expenses,
and income structures are based upon this market evidence.
A diligent search for comparable data was conducted, and
comparable information was obtained from both public and private
sources. In the case of comparable sales and rental data,
attempts were made to contact the buyers or sellers or other
knowledgeable third parties to verify that the transactions were
at arm's length, cash equivalent, and market reflective. Because
there was a limited number of comparable hotel sales in the
subject market area, we extended our search to other markets. The
sales comparison approach was employed, however, we did not place
much reliance on it but used it as a test of reasonableness. Due
to the limited number of combined hotel and marina properties
which have traded in the marketplace, we utilized a combination
of hotel (only) sales and hotels which included a marina. We have
made adjustments to account for differences between the
comparables and the subject property. The cost approach was not
utilized as it is considered to have limited reliability due to
the difficulty in estimating the significant depreciation and
external obsolescence present at the subject Clarion Fourwinds
Resort and Marina. The income capitalization approach was given
primary emphasis as there was sufficient data for its application
and it reflects the typical investor's behavior.
A.8 SPECIAL ASSUMPTIONS
The subject hotel and marina are encumbered by a ground lease
between the Indiana Department of Natural Resources of the state
of Indiana. This reflects a sublease of the land
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Clarion Fourwinds Resort and Marina Page 6
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from the Department of the Army of the United States of America.
In addition, the following factors may have a direct impact on
value of the subject. The subject has a management contract with
Richfield Hotel Management Inc. which cannot be terminated upon
sale. The franchise affiliation with Choice Hotels International
also cannot be terminated upon sale.
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Clarion Fourwinds Resort and Marina Page 7
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B. ANALYSIS OF THE SUBJECT PROPERTY AND ITS MARKET
This section of the report presents a description and analysis of
the subject property's location, improvements, physical
condition, capital expenditure requirements, property taxes, and
zoning. In addition, this section of the report presents a review
of the subject's market area and an analysis of the property's
highest and best use.
B.1 DESCRIPTION AND ANALYSIS OF THE PROPERTY
LOCATION
The subject of the appraisal is the leasehold estate of a
90.83-acres parcel of land that is improved by a 126-room hotel
and an 880-slip, full-service marina. The marina was constructed
in 1968 and the hotel was subsequently built in stages beginning
in 1972. The subject, known as the Clarion Fourwinds Resort and
Marina, is located on the east side of Fairfax Road on the shore
of Lake Monroe in Bloomington, Indiana. The civic address of the
property is 9301 South Fairfax Road in Bloomington.
LEGAL DESCRIPTION
A detailed legal description is provided in the addenda of this
report.
LAND
Size and Configuration: The subject site is rectangular in shape
and contains 3,956,678 square feet, or 90.83 acres.
Frontage and Accessibility: The subject has frontage on South
Fairfax Road. The property is located approximately six miles
from the Smithville Road/ Harrodsburg exit off Route 37. Route 37
is the main north-south highway in the area and provides access
to downtown Bloomington.
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Clarion Fourwinds Resort and Marina Page 8
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Topography: The topography of the subject site is flat near
Fairfax Road; however, it slopes steeply downward towards the
marina and Lake Monroe directly behind the hotel.
Floodplain: The subject property lies within a 100-year
floodplain. According to the zoning department of Monroe County,
the subject lies within Zone A which is characterized by no base
flood elevations determinable. A floodplain map and legend
indicating the subject's floodplain status is included in the
addenda of this report.
Utilities and Public Services: All utilities are available
to the site including public gas, water, sewer, telephone, and
electric.
Easements and Encroachments: Typical utility and access
easements exist through the subject site. We are not aware of any
easements which negatively impact the subject.
Development on Neighboring Sites: The subject hotel and marina is
on leased land within a United States forest reservation. As a
result, there is limited development in the nearby vicinity of
the subject property. The Pointe Golf and Tennis Resort is
located approximately one and one-half miles to the northwest of
the subject. The Pointe Golf and Tennis Resort is a condominium
complex, which includes a championship golf course, tennis, and
other resort amenities.
PROPERTY IMPROVEMENTS
General
The subject is a resort complex including a 126-room hotel and an
880-slip, full-service marina. The hotel building is a
three-story, low-rise structure which is divided into three
sections. These sections were built in various stages. The
original building, which includes Section A and B, were
constructed in 1972. Section A includes the property's public
space, a restaurant, a lounge, an indoor/ outdoor pool, a gift
shop, and meeting space. Section B includes 76 guest rooms.
Section C, which is the most recent addition to the building, was
constructed in the 1980s and includes 50 guest rooms. In front of
the hotel building is a surface parking lot with 221-marked
parking spaces.
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Clarion Fourwinds Resort and Marina Page 9
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The marina is located behind the hotel, or to the east, on Lake
Monroe. The marina operates seasonally from April 1 through
October 31. The marina complex includes 880 slips and moorings
situated on ten docks. These docks are titled A through J. Two
additional docks accommodate the boat rental and a courtesy
landing for transient slips. A waterfront grocery store is also
located on Dock D.
Adjacent to the main hotel, there is a marina building which is
partially leased to Boat Sales, Inc. Originally, the hotel
operated a store which sold boats and accessories in addition to
the servicing of boats. These operations were outsourced to Boat
Sales, Inc. in April 1995. The marina building contains boat
storage, repair facilities, and administrative office space.
The resort includes miniature golf, four tennis courts, a
shuffleboard court, a children's playground, and a beach
volleyball court. These amenities are clustered to the north of
the hotel building near Fairfax Road.
Guest Rooms
The hotel contains 126 guest rooms, including two suites, of
which 69 percent are rooms with two double beds. King-bedded
units account for approximately 29 percent of the total
inventory. The remaining rooms consist of parlors, which include
a furniture grouping and pull-out queen sofa. There is no bed in
parlor rooms. Each of the two suites are actually considered two
units within room inventory, inclusive of a connecting king room
to a parlor room. The guest corridors are double-loaded; thus,
all rooms either face the lake or the parking lot. Room rate
premiums are charged for rooms with lake views. The first floor
rooms on the lakeside include sliding glass doors opening to the
outside. A number of the lakeview rooms on the third floor
include balconies.
- ---------------------------------------------------
Current Rooms Configuration of the Subject Hotel
- ---------------------------------------------------
Double-Double Rooms 87
King Rooms 36
Parlors 3
- ---------------------------------------------------
Total Number of Rooms 126
- ---------------------------------------------------
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Clarion Fourwinds Resort and Marina Page 10
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All guest rooms include a television, an armchair, a desk, and
either an armoire or bureau. The color scheme and quality of the
soft goods are dependent upon the guestroom location and the
timing of its renovation. The most recent guestroom renovation
occurred approximately two years ago and included a limited
number of rooms. These rooms are located on the ground floor
facing the lake and have newer soft goods characterized by a red
color scheme. The remaining rooms have a neutral color scheme and
appear dated in appearance.
Food and Beverage Outlets
There is a restaurant and a lounge at the subject hotel. The
restaurant, which is called Tradewinds, is the all-day dining
facility, with 104 seats. The lounge is adjacent to the
restaurant and is named Windjammer. The lounge has 50 seats and
six stools at the bar. In addition to wine, beer, and spirits,
the lounge serves light snacks. Hours of operation at both
facilities vary depending upon the season. In addition, on a
seasonal basis, the Windjammer Lounge also houses the Galley
Deli. This outlet serves light snacks and sandwiches.
Room service is also available at the property. Hours of
operation for room service are from 7:00 a.m. through 10:00 p.m.
daily.
Meeting and Banquet Space
The property contains approximately 5,729 square feet of
dedicated meeting space. In the summertime, there is additional
space on the main and south patios of 2,773 and 443 square feet,
respectively. There is also a private dining room adjacent to the
Tradewinds Restaurant, which can seat up to 35 people. The
following table details the meeting space available at the
subject Clarion Fourwinds Resort and Marina:
- ---------------------------------------------------------
Meeting Room or Location/ Number of Square
Ballroom Name Floor Divisions Feet
- ---------------------------------------------------------
Admiral Room Main 2 2,688
Commodore Main 3 1,894
Wardroom Main 1 406
Windward Main 1 294
Leeward Main 1 149
Mariner Main 1 149
Outrigger Main 1 149
- ---------------------------------------------------------
Total Meeting Space 10 5,729
- ---------------------------------------------------------
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Clarion Fourwinds Resort and Marina Page 11
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Recreational Facilities
Aside from the marina, there are a number of recreational options
available at the Clarion Fourwinds Resort. Additional
recreational amenities include an indoor/ outdoor pool, a sauna,
and a hot tub within an enclosed pool area located in the main
section of the hotel. Outside the hotel building, there are four
tennis courts and other sporting areas. Games include croquet,
volleyball, shuffleboard, horseshoes, basketball, and miniature
golf. A fitness trail starting at the property has various
physical challenge tests included within the course.
The Pointe Golf and Tennis Resort ("Pointe") is approximately 1.5
miles from the subject property. Although operated as a private
facility, management at the property indicated that guests are
permitted to use the golf course at the Pointe.
Marina Services
The largest attraction at the subject property is the marina
which is also open to the public. The marina offers slip rental,
boat servicing, repair, boat sales, fuel sales, grocery store
sales, and rental of recreational water gear. The marina is open
between April 1 and October 31 but stores boats all year round.
This storage is either on dry ground, in the marina itself, or in
enclosed storage. Between November and March, a bubbling system
is used in order to ensure that the lake proximate to the marina
does not freeze. During the season, the marina rents pontoon
boats and fishing equipment to hotel customers and the general
public. There is also a lake cruiser which may be chartered by
groups.
The main revenue center at the marina is the rental of slips.
Slips are available for seasonal and full-year rental. There are
a limited number of buoys, which offer temporary storage for
boats during the season. These buoys are the least costly options
for boat storage. Management indicated that the marina is
currently near 100 percent capacity, with several hundred
individuals on the waiting list for available space. Slip rentals
have a number of options which provide for varying boat sizes,
electricity, and a covered dock. Approximately 50 percent of the
slips include electricity hookup. Boats may remain in the marina
during full-year slip rentals. However, the property also offers dry
dock storage.
The marina has a number of additional services and facilities
which are available to hotel guests and the public. On the
marina, there is a fuel dock which provides petroleum for motor
boats.
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Clarion Fourwinds Resort and Marina Page 12
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Fuel is stored in a 10,000 gallon storage tank located underneath
the fuel dock. There is also a floating grocery store, which is
open throughout the marina season. Membership is available in the
Harbour Club, which provides privileges including reduced boat
storage rates and repair and maintenance of boats. Previously,
this operation was managed by the subject; however, since April
1995, these operations were leased to Boat Sales, Inc., a third
party operator. The current lease between the hotel and Boat
Sales, Inc. is for a three-year term. Boat Sales, Inc. operates
the store located on the property, which includes repair and
maintenance services and sales of boats and boat-related
accessories.
A summary of the number of slips by dock location is included in
the following table.
- ------------------------------------------
Summary of Slips by Dock
- ------------------------------------------
Number of Docks available
for Slip Rental 10
Total Number of Docks 12
Dock Location Slips
------------- -----
A - Dock 88
B - Dock 114
C - Dock 94
D- Dock * 28
E - Dock 86
F - Dock 80
G - Dock 74
H - Dock 34
I - Dock 62
J - Dock 110
Boat Rental Dock 20
-----
Total Number of Slips 790
Additional Slips and Moorings (1) 90
-----
Total Slips and Moorings 880
- ------------------------------------------
* Location of gas dock, grocery store,
and bath club.
(1) Additional slip count is based upon
transient, seasonal, and buoy field.
Source: Property management.
A diagram of the marina facilities is included on the following
page.
<PAGE>
insert marina diagram
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Clarion Fourwinds Resort and Marina Page 14
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The following information pertains to the hotel and marina
buildings.
Structural Systems (Hotel):
Floor-Area Ratio: 0.01:1
Floors: 3
Foundation: Poured concrete
Building Frame Hotel: Reinforced concrete
Roofing System: The roof is a combination of two surfaces. Over Section
A, which contains the public space, the roof is a rubber
membrane over foam surface. The main roof is flat,
however, this building also includes angled false front
roof that is covered with asphalt shingles, which gives
the building a lodge-like appearance. The remainder of
the building (Sections B & C) is built-up tar with stone-
ballast.
Exterior Walls: At the hotel entrance, the
exterior walls are constructed of wood
with a stone-trim facade. On the guest
room sections of the hotel, the exterior
walls are constructed of a wood base,
foam mid-layer, and stucco facade.
Structural Systems (Marina Building):
Floor-Area Ratio: 0.01:1
Foundation: Poured concrete
Building Frame Marina: Steal frame
Roofing System: Metal
Exterior Walls: Aluminum sidings
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Clarion Fourwinds Resort and Marina Page 15
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Structural Systems (Docks):
There are twelve docks in the marina, which have a varying number
of slips.
Construction: Docks are floating structures supported by steel braces.
These braces house concrete panels which rest upon
floatation devices constructed of foam encased in
rubber. These devices are underneath the steel braces
and sit on top of the water.
Supporting
Structure: Underwater flotation devices are reinforced by cables
and trusses.
Decking Surface: Exterior surface consists of pre-cast concrete or brock-
decking panels. Brock decking is a new, man-made,
hard-plastic material.
Mechanical Systems (Hotel):
HVAC System: The hotel building has two systems including heat
pumps and forced air systems. The main building (section A) is
heated and cooled via heat pump. Within the rooms, heating and
cooling is achieved by a forced air system of both heat pumps
and electrical units. All rooms contain individual
through-the-wall units. These units are identified by two
different brands, Zone Aire (electrical) and Carrier units
(heat pump).
Boilers:
-- Property: Six 480-volt, 118-gallon Lochinvar boilers.
Chillers:
-- Property: Four Carrier chillers located on roof.
Fire Protection System: Heat and smoke detectors are
submitted to a hard-wired annunciator panel at the front desk.
Guest rooms are equipped with battery-powered smoke detectors.
The hotel is not sprinklered.
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Clarion Fourwinds Resort and Marina Page 16
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Stairwells: There are four stairwells located throughout the
property. There are no elevators.
Plumbing: Domestic water is provided by the Department of
Natural Resources
Electrical System: Service is provided by Public Services
Inc. (PSI).
Mechanical Systems (Marina Building):
HVAC System: The marina building has a central heating and
cooling system.
Fire Protection System: This building structure is fully-sprinklered.
Plumbing: Domestic water is provided by the Department of
Natural Resources.
Electrical System: Service is provided by Public Services
Inc. (PSI).
Interior Finishes (Hotel):
Floor Coverings:
Lobby: Tile, except area rug in seating
arrangement.
Meeting Rooms: Carpet
Corridors: Carpet
Walls and Partitions:
Lobby: Sheet rock against reinforced concrete.
Meeting Space: Sheet rock against reinforced concrete.
Guest Rooms: Sheet rock against reinforced concrete. A
number of rooms at expansion joints have
stone facade walls.
Corridors: Sheet rock against reinforced concrete.
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PROPERTY INSPECTION
We completed an in-depth tour of the property's physical plant
including 1) the property exterior and parking; 2) nine guest
rooms including king-bedded rooms, double/ double-bedded rooms,
and a suite; 3) the public space, lobby, meeting space, and food
and beverage facilities; 4) the back-of-the-house space including
kitchens, storage rooms, housekeeping, laundry, administrative
offices, and mechanical and electrical equipment; and 5) the
marina including the grocery store, the docks, and the building
leased to Boat Sales, Inc.
Inspection of the subject property on November 13,1996 revealed
that deferred maintenance is present at the property. Management
indicated that two main areas of the property, which include the
exterior walls of the front of the hotel building and the docks
in the marina, will be actively addressed in the capital
improvement plan for 1997. These areas have experienced
weather-related damage over the past year and a half. As
described earlier, the exterior walls of the hotel building are
constructed of a stucco exterior over a layer of foam and a wood
base. According to property management, the walls were never
sealed properly which has resulted in water damage to a number of
guest rooms which face the parking lot.
The parking lot, which includes 221 spaces, appeared to be in
fair condition. Our inspection revealed cracks in the pavement
and parking spaces which were not clearly painted/ marked.
According to the property engineer, the parking lot is scheduled
to have the lines repainted in the summer of 1997. Based upon our
inspection of the parking lot, we estimate that the lot does not
warrant immediate attention; however, the surface will need to be
repaved in the next several years.
Guest rooms at the property had varying levels of quality. The
rooms on the first floor with lake views (approximately 20
percent of room inventory) underwent a soft goods upgrade two
years ago and appear to be in good condition. The remaining guest
rooms at the property appeared to be in need of a soft goods
upgrade. Through our tour of guest rooms, bedspreads and
mattresses appeared worn and in need of replacement. We noticed
stains on carpeting and water damage to carpets and walls in a
number of guest rooms facing the front of the building.
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This water damage was the result of seepage through improperly
sealed exterior walls. Casegoods throughout all rooms were a
blond oak veneer and appeared to be in good condition.
Within the public space, the lobby appeared to be in good
condition. Our tour of the restaurant indicated the need for a
soft goods upgrade and replacement of carpeting. We noticed tears
and stains in the carpet of the Tradewinds Restaurant. Casegoods
appeared to be in good condition throughout the public areas
including meeting space, the restaurant, the lounge, and the
lobby.
Back-of-house areas inspected included the kitchen, the laundry
room, and engineering areas. These areas appeared to be clean,
well-maintained, and in good condition. In addition, the roof
area appeared clean and in good condition.
Management indicated that the age and deterioration of the marina
warrants renovation in order for the facilities to remain
competitive with other regional marinas. Our inspection of the
dock area revealed cracked cement surfaces and overall
deterioration attributed to age of the docks. Management is
actively addressing these areas by allocating a significant
portion of the 1997 capital budget towards upgrading the docks.
According to management, a storm in July 1995 caused substantial
damage to the docks estimated at $742,000, of which approximately
$600,000 has been reimbursed by insurance. This damage is
expected to be repaired between the end of 1996 and 1997, when
the majority of capital funds will be spent. Our inspection of
the grocery store and the building leased to Boat Sales, Inc.
indicated that these areas have also been well-maintained. The
Boat Sales, Inc. building is less than ten years old. The
original building was burnt down in a fire in 1987 and was
subsequently reconstructed.
PAST RENOVATION AND CAPITAL REQUIREMENTS
Over the past several years, the majority of capital expenditures
have been on an "as-needed" basis. Property management indicated
that there has not been a planned maintenance schedule
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for upgrading guest rooms and public areas. Historical capital
expenditures totaled approximately $244,700 and $256,000 in 1994
and 1995, respectively. In 1994, major capital items concerned
repairs and replacement of the marina, specifically the dock
areas. In 1995, major capital items included replacement of the
roof, landscaping, 70 new televisions, fire hydrants, banquet
chairs, and equipment. Management indicated that at the time of
our inspection, a minimal amount of the capital budget had been
used for the 1996 calendar year. Year-to-date September
expenditures have totaled approximately $50,000, with an
additional $500,000 budgeted for the year. The remainder of the
funds budgeted are to be allocated towards dock repairs.
Management indicated that the 1997 capital expenditure budget has
yet to be approved by the owners, AIRCOA Hotel Partners, L.P.
However, a preliminary budget indicated that approximately
$1,650,000 is needed to renovate the property. Of these funds,
approximately 50 percent would be allocated towards repairs of
the docks in the marina and the balance would be expended on
renovating the hotel.
Within the hotel approximately $200,000 to $225,000 of capital
funds would be allocated towards repairing the front of the hotel
building exterior and a portion of guestrooms which have suffered
water damage. The remainder of hotel renovations would include
upgrading the guestroom corridors and completing a softgoods
upgrade of the restaurant. Management indicated that 1997 capital
expenditures within the hotel is likely to include minimal
guestroom renovations due to the focus on marina repairs and
guestroom corridor upgrades. We have added this estimate of
$1,650,000 to the statement of income and expenses and reflected
these capital expenditures in our projections of the property's
potential operating performance.
According to management, planned renovations in 1997 are not
likely to include all guest rooms and public space areas. We have
included an estimate of $4,000 per available room, or $504,000,
at the property in 1998 in order to provide for a softgoods
renovation to the hotel property. On the basis of our physical
inspection of the lodging facilities, these additional capital
investments are necessary, and we have incorporated these
assumptions into our estimates of future operating performance.
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PROPERTY TAXES
The subject property is under the taxing jurisdiction of Clear
Creek in Monroe County. Real estate taxes are assessed on a
calendar year basis and are payable bi-annually. Personal
property taxes (furniture, fixtures, and equipment) are assessed
on the same schedule as real estate taxes but are separately
billed to the hotel.
Real Estate Taxes
Taxing
Jurisdiction: Clear Creek
Tax Account Number: 004-09450-00 (hotel)
004-06840-00 (marina)
Replacement Credit: A replacement credit is established simultaneously
with the tax rate. This is reflective of a rebate off
real estate taxes. Thus payable taxes
are calculated by the gross tax
(assessed value times the tax rate) less
replacement credit (replacement credit
times the gross tax).
Current Tax Year: January 1 through December 31, 1996, payable
in 1997
Tax Rates
Established: Tax rates are established annually. Real estate
taxes are billed in April for the previous year
and are due on May 10 and November 10 of the
following year.
Current Tax Rate: $7.3744 per $100 of assessed value.
Assessments
Established: The assessed value of the hotel for tax purposes
is assumed to be 33 percent of the value derived
from the cost approach.
Reevaluations: The value derived from the cost approach is
reassessed every four years. The most recent
assessment of the property occurred in 1995.
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Personal Property Taxes
Taxing
Jurisdiction: Clear Creek
Tax Account
Number: 204-08650-00
Current Tax Year: January 1 through December 31, 1996,
payable in 1997
Tax Rates
Established: Tax rates are established annually. Real
estate taxes are billed in April for the
previous year and are due on May 10 and
November 10 of the following year.
Current Tax Rate: $7.3744 per $100 of assessed value.
Replacement A replacement credit is established simultaneously
Credit: with the tax rate. This is reflective of a credit to
personal property taxes. Thus payable
taxes are calculated by the gross tax
(assessed value times the tax rate) less
replacement credit (replacement credit
times the gross tax).
Assessments
Established: The assessed value of the
personal property for tax purposes is
assumed to be 33 percent of the value
derived from the cost approach. This
calculation is made by the hotel
property's annual submission of a
personal property list to the assessor's
office.
Reevaluations: The true tax value of personal property is
reassessed on an annual basis. Personal
property is recalculated on the basis of a
form filed with the Monroe County
assessor's office.
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The following table illustrates the computation of the real
estate taxes and personal property for the last three years for
the hotel (parcel #004-09450-00) and marina (parcel
#004-06840-00):
- ----------------------------------------------------------------------
Taxes Payable Taxes Payable Taxes Payable
Year in 1994 in 1995 in 1996
- ----------------------------------------------------------------------
True Tax Value*:
Parcel #004-09450-00 $1,744,000 $1,744,000 $1,078,900
Parcel #004-06840-00 1,504,200 1,543,900 1,187,800
Personal Property 421,736 435,030 494,130
----------------------------------------------
Total True Tax Value* $3,669,936 $3,722,930 $2,760,830
Assessed Value (1) $1,223,312 $1,240,977 $920,277
Total Tax Rate 0.0788851 0.077664 0.073744
----------------------------------------------
Gross Tax $96,501 $96,377 $67,858
Replacement Credit
Factor 0.0132047 0.0137711 0.0132391
Replacement Credit $12,740 $13,272 $8,984
Gross Tax $96,501 $96,377 $67,858
Less: Replacement Credit $12,740 $13,272 $8,984
----------------------------------------------
Adjusted Tax Total $83,762 $83,105 $58,874
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Source: Monroe County Assessors Office
* True tax value reflects the value derived by the cost approach.
(1) Computation includes both parcels and personal property cost
approach values times 33%.
In our analysis, we have assumed that property taxes will be
inflated by 3.5 percent per year from a base year in 1996
dollars. According to discussions with the county assessor, cost
approach values for real estate do not change in between
assessments unless major capital improvements are completed at
the property. Instead, annual changes in property taxes are
reflected in modifications to the tax rate and replacement credit
factor. The property cost value was reassessed in 1995 and will
not be reassessed until 1999. As a result, the cost approach
value of the property is not expected to change until the next
reassessment.
ZONING
The subject's zoning district is described as R1, which is
intended for residential use with a sewage system. According to
zoning laws, a hotel and marina are not permitted in the R1
district. Discussions with representatives of the Planning and
Zoning department of Monroe
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County indicated that the subject property was constructed prior
to the development of zoning laws in the area, and as a result,
the hotel and marina are permitted under pre-existing
nonconforming uses. The restrictions for pre-existing
nonconforming use are stated in Chapter 803 of the Zoning
Ordinance book of Monroe Country. Under these restrictions, the
subject property is permitted to continue with use and
maintenance of the facilities. Any additions or changes to the
property will require review by the planning and zoning board of
the county.
Restrictions and Requirements
Overall, the subject property does not conform to current zoning
ordinances. However, on the basis of pre-existing non-conforming
use law, the property appears to be in conformance with all
general and specific zoning requirements.
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B.2 AREA ANALYSIS
The Area Analysis provides information on market conditions as
they currently exist in the Bloomington area. Economic and
sociological trends provide insights relating to the strength of
the local market area; a review of such trends has been completed
to direct and support our estimates of future market growth in
the lodging industry.
The following section of the report outlines general trends in
the market. We consulted with the Chamber of Commerce, Convention
and Visitors Bureau, Economic Development for Bloomington and
other local sources for much of the following information. When
possible, information was verified directly from the primary
sources.
The subject property is located in Monroe County and is
considered in the city of Bloomington. Bloomington is
approximately 50 miles south of Indianapolis, the largest city in
Indiana. The Bloomington (MSA) comprises Monroe County and the
city of Bloomington.
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ECONOMIC AND DEMOGRAPHIC INDICATORS
This section summarizes historical trends in several key economic
and demographic indicators in the Bloomington market area. The
following table presents historical trends in Population, Retail
Sales, Eating and Drinking Sales, and Median Household Effective
Buying Power.
- --------------------------------------------------------------------
Summary of Economic and Demographic Statistics
Bloomington Area
- --------------------------------------------------------------------
CAG(1)
1990 1995 1990-1995
---- ---- ---------
Population (000's)
City of Bloomington 61.0 64.6 1.2%
Bloomington MSA 109.6 115.4 1.0%
Indiana 5,556.7 5,828.1 1.0%
United States 250,812.0 264,900.9 1.1%
Retail Sales ($000's)
City of Bloomington $638,223 $1,008,066 9.6%
Bloomington MSA 697,335 1,064,311 8.8%
Indiana 37,574,006 53,056,002 7.1%
United States 1,807,182,519 2,355,241,609 5.4%
Eating & Drinking Sales ($000's)
City of Bloomington $76,462 $138,465 12.6%
Bloomington MSA 81,764 145,237 12.2%
Indiana 2,702,501 5,706,341 16.1%
United States 182,107,195 241,780,257 5.8%
Median Household Effective
Buying Income (EBI)
City of Bloomington $17,668 $22,200 4.7%
Bloomington MSA 22,458 29,075 5.3%
Indiana 25,982 32,662 4.7%
United States 27,912 32,238 2.9%
- --------------------------------------------------------------------
Source: Sales and Marketing Management, Survey of Buying Power,
1991 and 1996.
Note: (1) Compound Annual Growth
- --------------------------------------------------------------------
Population
Between 1990 and 1995, population for both the city of
Bloomington and the Bloomington MSA increased at a comparable
rate to the national average. This level of growth has been
steady on account of the influence of Indiana University and its
steady growth patterns.
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Retail Sales
Retail sales have exhibited strong increases in the city of
Bloomington and the entire state. Between 1990 and 1995, retail
sales increased at a compound annual rate of 9.6 and 8.8 percent
for the city of Bloomington and the Bloomington MSA,
respectively. These strong increases, in conjunction with a
stable growth rate in population, are indicative of the
increasing amount of disposable income in the market area.
Although the city of Bloomington represents approximately 56
percent of the metropolitan area's population, it commands the
majority of the metropolitan area's retail sales.
Eating and Drinking Sales
Eating and drinking sales also increased at a strong average
annual rate in the city of Bloomington and the metropolitan
statistical area. Between 1990 and 1995, eating and drinking
sales increased at annual average rate of 12.6 percent in the
city of Bloomington. This strong increase is similar to the
strong pattern of retail sales increase in the region.
Median Household Effective Buying Income (EBI)
Median household effective buying income in the subject market
has historically lagged behind the median EBI of the nation. The
city of Bloomington is characterized by a young population. As a
result, these individuals usually have low incomes contributing
to the low median EBI of the area. While median EBI for the city
of Bloomington and the MSA is lower than that of the United
States, the area has experienced increases in excess of the
national average. This is a positive indicator of the greater
disposable income of the local population.
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EMPLOYMENT
Employment and Unemployment
The trend in local area employment is an excellent indicator of
the overall health of the market area's local economy. The
following table presents a summary of the trends in employment
and unemployment in the local market area for the last several
years.
- -------------------------------------------------------------------------
Growth in Employment and Unemployment
- -------------------------------------------------------------------------
Bloomington MSA State of Indiana
------------------------------ -------------------------------
Labor Total % Labor Total %
Force Empl. Unempl. Force Empl. Unempl.
---------------------------------------------------------------
1990 54,772 52,850 3.5% 2,799,000 2,651,000 5.3%
1991 54,251 52,153 3.9% 2,784,000 2,619,000 5.9%
1992 55,417 52,696 4.9% 2,844,000 2,658,000 6.5%
1993 57,698 55,408 4.0% 2,944,018 2,785,578 5.4%
1994 60,560 58,192 3.9% 3,048,234 2,897,731 4.9%
1995 61,375 59,295 3.4% 3,311,816 2,987,962 9.8%
CAG* 2.3% 2.3% 3.4% 2.4%
- -------------------------------------------------------------------------
Source: Department of Labor and United States Bureau of Labor
Statistics
Note: CAG - Compound Annual Growth
- -------------------------------------------------------------------------
The Bloomington MSA labor force has exhibited strong positive
growth over the last five years. Officials from the Bloomington
Economic Development Corporation indicated that Monroe County,
which is synonymous with the Bloomington MSA, is the second
fastest growing county in the state in terms of employment and is
the second largest employer in the state. Since 1990, both the
total labor force and total number of individuals employed
increased at an average compound annual rate of 2.3 percent per
year. As a result, the unemployment rate has remained below four
percent in almost every year. The stability of the area's labor
force is positively reinforced by the significantly lower rate of
unemployed individuals in comparison to the state.
Employment by Industry Sector
Employment by industry sector reflects trends in employment by
each major industry sector. Between 1990 and 1995, four sectors
achieved average annual growth rates in excess of three percent.
As the following table indicates, the government sector of
employment dominates the
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Clarion Fourwinds Resort and Marina Page 28
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area accounting for nearly one-third of all individuals employed.
This strong government presence is related to the area's large
representation from Indiana University.
- -------------------------------------------------------------------
Employment by Industry Sector (1990-1995)
Bloomington MSA
- -------------------------------------------------------------------
1990 1995 CAG (1)
----------------------------------------
Manufacturing 9,500 9,900 0.8%
Construction & Mining 2,400 2,800 3.1%
Transportation, Communication
& Uti1 1,800 1,800 --
Finance, Insurance & Real Estate 2,000 2,400 3.7%
Wholesale Trade 1,500 1,500 --
Retail Trade 11,000 13,100 3.6%
Services 9,900 11,600 3.2%
Government 17,800 18,600 0.9%
------ ------ ---
Total Employment 55,900 61,700 2.0%
- -------------------------------------------------------------------
Source: Bureau of Labor Statistics
(1) CAG - Compound Annual Growth
- -------------------------------------------------------------------
The strongest sectors of growth in employment included Finance,
Insurance, and Real Estate; Construction and Mining; Retail
Trade; and Services. These sectors have exhibited positive growth
as more industries have relocated to the Bloomington area. The
retail trade and services sectors are often considered support to
the local population. With positive trends in area disposable
income and increased commerce in the area, these industries have
increased their employment base. The services sector, which
includes the lodging industry, has also experienced increases in
employment. This may have been partially attributed to the
opening of a number of new hotels and restaurants in the
Bloomington market over the past several years.
Major Employers
The following table summarizes the largest employers in the
Bloomington MSA that generate demand for lodging accommodations.
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Clarion Fourwinds Resort and Marina Page 29
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- ------------------------------------------------------------------
Company Name Industry No. Employed
- ------------------------------------------------------------------
Indiana University Education 6,361
General Electric Manufacturing 2,700
Bloomington Hospital Health Care 2,000
Thomson (RCA) Consumer Electronics 1,700
Otis Elevators Manufacturing 976
Cook Inc. Medical Instruments 913
- ------------------------------------------------------------------
Source: Bloomington Economic Development Corporation
- ------------------------------------------------------------------
As the preceding table indicates, the largest employer in the
Bloomington MSA is Indiana University, which employs over 6,300
individuals. Area hotel operators and officials indicated that
the university is the largest demand generator for overnight room
accommodations as a result of the numerous activities, meetings,
and special events sponsored on campus. Aside from the
university, several corporations in the area are also important
sources of employment. Area officials indicated that the
employment base has been steady over the past several years and
that several companies are seeking to expand over the next year.
The most important corporate expansion is expected from General
Electric, which reportedly is increasing its current employment
of 2,700 to over 3,000 people by the first quarter 1997.
OFFICE AND INDUSTRIAL MARKET OVERVIEW
An important indicator of the strength of the Bloomington area
lodging environment is the strength of the market for office and
industrial space. The demand for office space has not been
historically strong and the amount of total office space in the
area has been limited. As a result, statistics on vacancy rates
and total available space have not been tracked throughout the
marketplace. Discussions with the economic development
corporation indicated that the Bloomington office market is
experiencing vacancy rates of approximately 20 percent. The high
vacancy rates are the result of new office space supply in the
area and the lack of strong corporate demand for office space in
the area. New supply to enter the market has been The Showers
Complex in 1995, which comprises approximately 47,000 square feet
of office space. As a result, office vacancy rates, which were
below ten percent in 1994, nearly doubled in 1995.
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Area officials indicated that this excess office space is not
expected to be absorbed into the marketplace for another 12 to 18
months.
While the demand for office space has not been a positive
indicator of the local economy, the industrial market has been
strong. The strong manufacturing base has contributed to the
demand for industrial space. Current estimates of vacancy for
industrial space are approximately five percent. There has also
been significant interest in the development of additional
industrial facilities, including the recent development of the
200-acres Northwest Industrial Park near the Monroe County
Regional Airport. This park, which opened in 1996, is the result
of a public and private partnership. The park has already sold
one third of its available lots to corporations seeking to expand
and new companies planning to relocate to the area. Growth in
construction and absorption of new office and industrial space in
the subject market area is a positive indicator for the local
lodging industry.
TRANSPORTATION
Roadway System
Major roadways to the Bloomington area include State Road 37 and
State Road 46. State Road 37 is the major four-lane, north-south
roadway that provides access for the subject hotel to downtown
Bloomington. This roadway is also the main route connecting
Bloomington to Indianapolis, the state capital. State Road 46 is
a two-lane highway which connects to Brown County to the east.
This roadway is the main route for travelers traversing to the
east and west in south central Indiana.
Airport
The Bloomington area is serviced by both the Indianapolis
International Airport and the Monroe County Regional Airport. The
Monroe County Regional Airport is the closest airport to the
subject property but has quite limited service. This airport has
direct flights via United Express to and from Chicago's Midway
Airport. There are four flights which depart daily during the
week and two daily flights which depart on the weekends.
Discussions with airport officials at the Monroe County Regional
Airport indicated that there are a number of charter
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Clarion Fourwinds Resort and Marina Page 31
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planes which also use this airport. Due to the lack of demand to
fly in and out of this airport, the number of enplanements at the
airport is approximately 2,000 per year.
Due to the small capacity of the Monroe County Regional Airport,
virtually all travelers fly directly to the Indianapolis
International Airport, which is a 45-minute drive from
Bloomington. This airport is significantly larger than the Monroe
County Regional Airport and has a greater number of daily
flights. The following tables highlight air passenger activity at
the Indianapolis International Airport between 1985 and 1995.
- --------------------------------------------------------------------
Trends in Air Passenger Activity
at Indianapolis International Airport
- --------------------------------------------------------------------
Year Enplanements Deplanements Total
1985 1,895,359 1,850,213 3,745,572
1990 2,851,815 2,858,310 5,710,125
1995 3,361,943 3,353,420 6,715,363
Compound Annual Growth
1985 - 1995 5.9% 6.1% 6.0%
1990 - 1995 3.3% 3.2% 3.3%
- --------------------------------------------------------------------
Source: Indianapolis International Airport
- --------------------------------------------------------------------
As indicated in the preceding table, the passenger traffic at the
Indianapolis International Airport has increased significantly
over the past ten years. During the period between 1985 and 1995,
total passenger counts increased at a compound annual rate of six
percent. This strong increase in passenger traffic is indicative
of the increasing prominence of Indianapolis as a destination
city. While many visitors flying into Indianapolis may not
necessarily visit Bloomington, the increase in passenger traffic
is a positive indicator of economic growth in the region.
According to interviews with hotel area managers, many travelers
with business in Indianapolis also have business in the
Bloomington area. As a result, these travelers may fly into the
airport in Indianapolis and visit the Bloomington area for a
portion of their trip.
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INDIANA UNIVERSITY
Indiana University is largest influence on the overall economy of
the Bloomington MSA. The Bloomington campus is considered the
main branch of Indiana University. The university is the largest
state educational institution and is the tenth largest university
in the nation. Founded in 1820, it is the oldest state university
west of the Allegheny Mountains. The Bloomington campus has an
enrollment of approximately 35,000 students and offers 320 degree
programs.
As mentioned earlier, Indiana University is the largest employer
in Monroe County. The university is also the largest sponsor of
events throughout the county. These events include Graduation,
Parent's Weekend, Alumni Weekend, five home football games,
Indiana University Sing, Little 500, and a variety of other
leisure-related events throughout the year. The university is
considered one of the Big Ten schools, which are characterized by
strong athletic programs. The football stadium seats over 50,000
people and sells out during the high profile football matches
throughout the season. These matches include games against
nationally-ranked football teams and other Big Ten university
teams. In addition, the university is a well-respected
educational institution and hosts a number of conferences,
lectures, and guest speakers throughout the academic year.
TOURISM AND RECREATION
Aside from university-sponsored events, there are a number of
recreational attractions which draw individuals to the
Bloomington area. There are a variety of outdoor activities that
have been extremely popular with residents and non-residents. In
the summer months, Lake Monroe is popular for boating and other
water sports. Lake Monroe is the largest in-land lake in the
state of Indiana and is adjacent to the subject property. Hoosier
National Forest is another destination for campers and hikers.
This 78,000-acre forest is the only federally protected
wilderness reserve in the state and has miles of trails which
traverse through wooded areas. Other nearby attractions include
Brown County and its vintage shops, McCormick's Creek, and Spring
Mill state parks.
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The influence of Indiana University and other local attractions
has enabled the Bloomington area to develop a broad base of
tourism activities. These activities and businesses resulted in
over 600,000 individuals visiting the area in 1993. According to
a study commissioned by the Bloomington Convention and Visitor's
Bureau, approximately 53 percent of these visitors were leisure
travelers. While leisure travelers comprise a large percentage of
many of the visitors to the area, this type of travel is subject
to seasonality, with the highest concentration of leisure travel
occurring between May and August.
Attractions
The university is also responsible for the development of a
prolific art and cultural community in the Bloomington area.
Indiana University has one of the premier music programs in the
country and is renowned for its opera program. Each year the
School of Music at Indiana University holds over one thousand
orchestra and jazz ensemble performances which are open to the
public. In addition, there are a number of popular musicians who
periodically perform in the area. The Indiana University Art
Museum is considered one of the premier university art museums in
the world. The museum, which was designed by I.M. Pei, includes
over 25,000 works of art in three permanent galleries. Other
museums in the area include the Glenn Black Laboratory of
Archeology and the Monroe County Historical Society Museum.
Spectator Sports
The variety of spectator sports in the Bloomington area is
primarily attributed to Indiana University. Both the football
team and basketball teams have been nationally ranked. The
basketball team has won three NCAA titles and has appeared in the
Final Four on nine previous occasions. The football stadium has
over 50,000 seats and frequently sells out for those games with
other nationally ranked teams. The area hosts the annual Little
500 which draws bicycle enthusiasts to watch the student
bicycling event.
Major events in Indianapolis have also frequently drawn visitors
to the Bloomington area. In 1997, Indianapolis will host the NCAA
Final Four, which is expected to draw individuals seeking
overnight accommodations to Bloomington. In addition, the annual
Indianapolis 500 is
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Clarion Fourwinds Resort and Marina Page 34
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also a popular event that consistently results in overflow
lodging demand and visitors to the Bloomington area. During this
event, the Bloomington lodging market typically sells out.
CONVENTION AND TRADE SHOW MARKET
The Monroe County Convention Center was completed in the fall of
1991. This center is located in downtown Bloomington and is
adjacent to the Courtyard by Marriott. This facility includes
approximately 20,000 square feet of meeting space and can
accommodate meetings of up to 1,000 people. Area hotel operators
indicated that the convention center previously catered to local
meetings only because the market area lacked sufficient nearby
lodging facilities to accommodate out-of-town groups. With the
opening the Courtyard by Marriott in September 1996, the
convention center should be able to attract larger, regional
groups and events to the market area.
CONCLUSION
Overall, the Bloomington area has experienced positive growth
over the past five years. Demographic statistics and employment
statistics have reflected favorably upon the overall stability of
the economy. The area is largely influenced by the activities
connected with Indiana University. The university is the largest
higher educational institution in the state and is also the
largest local employer. Other major employers include
manufacturing facilities located throughout the county. In
addition to university-related activities, the lakes and parks in
the Bloomington area have contributed to a strong leisure base of
activities in the vicinity. These events are largely seasonal and
occur primarily between May and August. The continued favorable
outlook for the Bloomington economy is positive for the lodging
industry.
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B.3 HIGHEST AND BEST USE ANALYSIS
The validity of an appraisal is dependent upon the consideration
and conclusion of highest and best use.2 Often expressed as "the
most profitable legal use," the concept requires a thoughtful
analysis of many factors. Vacant land value is directly related
to its highest and best use. On the other hand, an improved
property may have the same or a different highest and best use
than the land supporting the improvements when considered as
vacant land. Therefore, for improved properties, both highest and
best use decisions must be separately considered, both as vacant
land and as improved property. In addition to a conclusion for
both the vacant land and improved property, sale and lease
comparisons are usually made with properties having similar
highest and best uses as the subject.
The parameters for consideration relate to legality of use,
physical possibilities, financial feasibility, and maximum
economic production. Single uses, interim uses, legal
non-conforming uses, speculative uses or excess land
determinations require further analysis.
HIGHEST AND BEST USE OF THE LAND AS IF VACANT
Legally permissible uses are those limited by zoning, easements
and rights-of-way, deed restrictions, building codes, and
environmental controls. These restrictions have been discussed in
Section B.1 (Description and Analysis of the Property). As
mentioned earlier in the zoning section of this report, the
subject site is in the R1 district.
Physically possible uses are limited by size, design, topography,
flood possibilities and physical capacities. The subject site is
approximately 3,956,678 square feet, or 90.8325 acres. It is
regular in shape, but slopes steeply downward towards Lake
Monroe.
- -----------------
2 Highest and Best Use: "The reasonably probable and legal
use of vacant land or an improved property, which is physically
possible, appropriately supported, financially feasible, and that
results in the highest value. (American Institute of Real Estate
Appraisers, The Dictionary of Real Estate Appraisal, Second
Edition, Copyright 1993, Page 171.
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Clarion Fourwinds Resort and Marina Page 36
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Drainage and topography are acceptable for a variety of uses as
are the shape and frontage of the site. Although we are
unqualified to render an opinion of the physical load-bearing
capacity of the land or its freedom from hazardous materials, no
nuisances were obvious at the time of inspection.
Financially feasible uses must be supported by sufficient demand
in the neighborhood to create a sufficient return to invest over
the long term. In analyzing each highest and best use
alternative, the income potential from those legally permissible
and physically possible uses were considered. The income from the
highest and best use should be sufficient to satisfy investor
requirements and operating expenses, thereby providing a return
on the land.
Predominant land uses in the neighborhood provide
indications of profitable land uses for the location of the
subject property. The subject property is located in a
residential zoning district. The property is located in the
Hoosier National Forest, which is federally-protected land. As a
result, there are a number of restrictions including the Clean
Water Act, which permitted land uses must adhere to. The subject
was constructed prior to the development of the R1 zoning
district and is considered a pre-existing non-conforming land
use. If the subject property were demolished, permitted land uses
would be restricted to residential single family and multi-
family uses. Several other uses including outdoor theaters,
parking lots, and religious facilities would be permitted only
with a special exception or conditional permit. In researching
the highest returns for developing the subject land parcels, we
conclude that the highest and best use of the land as if vacant
would be residential use.
HIGHEST AND BEST USE OF THE PROPERTY AS CURRENTLY IMPROVED
The subject property is currently improved with a hotel
containing 126 rooms. In light of the existing improvements, a
contrast with other uses is made for the optimal use which is
also physically suitable for the site, legally permissible,
economically feasible and the most profitable usage of the site.
As earlier indicated, the highest and best use of a property as
improved may differ from the highest and best use of the land as
if vacant. The "as improved" analysis assists in the
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Clarion Fourwinds Resort and Marina Page 37
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identification of the use that is projected to provide the
greatest overall property return on invested capital, as well as
in the identification of comparable properties. Typical choices
for improved property include the following usage alternatives:
1. Demolition of the improvements
2. Remodeling or renovation
3. Continued usage, as is
The four tests of highest and best use are applied to each of the
above alternatives. All three options are legally permissible and
physically possible. The test of financial feasibility is that
the use must provide a return equal to or greater than the amount
needed to meet all operating expenses, financial obligations, and
capital expenditures. In addition, the use must be maximally
productive, or that use which produces the highest value,
consistent with the rate of return warranted by the market for
that use. Using current investor expectations, consideration of
all three scenarios was made.
Demolition of the Improvements
The implication in a highest and best use analysis is that the
existing improvements should be retained and/or renovated as long
as those improvements continue to contribute to the total value
of the property; or until the return from a new improvement would
more than offset the cost of demolishing the existing
improvements and constructing alternative facilities. An analysis
of the subject property reveals that the existing improvements do
continue to contribute to the overall value of the subject, with
no alternative use available to the site which would provide a
return greater than the return on current improvements after
consideration of the cost to raze the current improvements and
build an alternate use. Given the property's zoning as a
pre-existing non-conforming use, the subject property could not
be converted to an alternative use other than the permitted
residential uses stated in the existing zoning ordinances.
Therefore, demolition of the improvements is not considered
warranted, nor optimal from a highest and best use standpoint.
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Clarion Fourwinds Resort and Marina Page 38
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Remodeling or Renovation
Over the past two years, a minimum amount of capital expenditures
have been invested in the subject property. As a result,
management cited that the property has experienced some erosion
of marketshare. In addition, there was a storm in 1995 which
caused significant damage to the docks at the marina. According
to management, capital improvements are planned to upgrade both
the marina and the hotel in 1997. These expenditures are
estimated to total over $1.6 million. We have also assumed an
additional $504,000 in capital expenditures for 1998 to upgrade
the condition of guestrooms and public space. Beyond these
planned improvements, further major renovation or remodeling of
the existing improvements does not appear to be required at this
time.
Continued Usage As Is
As an alternative to demolition, the existing improvements could
be converted to an alternate use or left as-is. Again applying
the four tests to this premise, it would be physically possible,
as well as legally permissible to convert the improvements to
residential use. As discussed previously, the current use as a
hotel is the most maximally productive use available to the
property and other forms of income-producing uses are not
permitted within the zoning ordinance. Obviously then, converting
to an alternative use may lessen the return to the land, and
therefore, any such use would fail to be the most profitable
alternative.
CONCLUSION AND RECONCILIATION OF HIGHEST AND BEST USE
From the three options presented, one remains feasible for the
subject. Demolition of the improvements was eliminated as an
option since the existing improvements provide substantial
contributory value to the property. The fair condition of the
subject does not require substantial remodeling and renovation,
other than those previously stated. Therefore, continued use "as
is" is the indicated highest and best use of the subject as
currently improved. Also, given the restrictive laws of the
property's zoning district, it is our opinion that the highest
and best use of the site, as vacant, is for development with a
residential use.
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Clarion Fourwinds Resort and Marina Page 39
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In conclusion, the highest and best use of the subject property
is as currently improved is continued as is.
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Clarion Fourwinds Resort and Marina Page 40
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C. ANALYSIS OF COMPETITIVE LODGING SUPPLY AND DEMAND
C.1 COMPETITIVE LODGING SUPPLY
The subject property is located in the city of Bloomington in
Monroe County. According to the Monroe County Convention and
Visitors Bureau, there are currently 25 hotels and bed and
breakfast facilities located in the Monroe County area. (Monroe
County includes the city of Bloomington and its outlying areas.)
Hotels are primarily concentrated in the central business
district of Bloomington, with the exception of the subject
property and the Pointe Golf and Tennis Resort, which are located
near Lake Monroe. The subject property is located approximately
ten miles south of downtown Bloomington. This area is
characterized by a federally-protected wilderness forest and
mostly undeveloped land. The subject property benefits from its
lakeside location and is the only marina resort property in
southern Indiana.
IDENTIFIED COMPETITIVE SUPPLY
In order to evaluate the subject hotel's position within the
market, we have identified a competitive supply on the basis of
quality and extent of facilities, location, market orientation
and revenue potential. We identified six hotels as the primary
competition for the Clarion Fourwinds Resort and Marina. Several
of these properties are located outside of the subject property's
immediate market area, due to the resort orientation. Presented
on the following page is a map illustrating the location of the
subject hotel and the identified competitive supply. The tables
on the following pages following present pertinent operating
information and facilities descriptions of each competitive
hotel.
<PAGE>
Insert Map of Competitive Lodging Supply
<PAGE>
PROFILE OF COMPETITIVE LODGING SUPPLY
Property Name Clarion Four Winds Resort and Marina The Pointe Golf and
Tennis Resort
Address 931 Fairfax Road 2250 E. Pointe Road
Opening Year 1968 - Marine, 1972 - Hotel N/A
Affiliation Clarion Hotels and Resorts Independent
Management Richfield Hotel Management, Inc. Independent
Ownership Aircoa Hotel Partners, L.P. N/A
Total Number of
Rooms (incl. 126 Rooms 112 Condos
suites)
Number of Suites 2 Suites All units are condos
from one to four
bedrooms.
1996 Published Room Single Double Prices (in-season) (Deduct $10 for
Structure off-season)
Rack (in-season) $124.00 $134.00 One Bedroom $110.00
Rack (off-season) $56.00 $66.00 Two Bedroom $190.00 - 215.00
Corporate $65.00 $75.00 Three Bedrooms $285.00 - 385.00
Government $52.00 $62.00 Four Bedrooms $340.00
Estimated 1996 Market Mix Percentage
Leisure Individual Travelers 42% 70%
Commercial Individual Travelers 11% 5%
Corporate Groups 15% 15%
SMERFS and Other Groups 32% 10%
Facilities/Amenities
Restaurants The Tradewinds The Bistro
The Galley Deli
Lounges The Windjammer Lounge None
Total Meeting Space (Sq. Ft.) 5,729 Sq. Ft. Not available
due to
construction
Largest Room/Ballroom (Sq. Ft.) 2,688 Sq. Ft. and plans which
have yet to be
finalized.
Total number of meeting
rooms/divisions 10 Meeting Rooms
Swimming Pool Yes (indoor/outdoor) Yes
Exercise Room/Fitness Center No Yes
Gift Shop/Newsstand Yes Yes
Business Center No No
Other Resort Amenities 880-slip manna, boat 18-hole
rentals, tennis, golf course
beach, miniature golf, croquet, tennis,
volleyball, fitness trail. volleyball, and
bicycle rentals.
Estimated Occupancy
-1996 (est.) 51% 50%
-1995 57% 50%
Estimated Average Room Rate
-1996 (est.) $72.36 $135.00
-1995 $65.57 $125.00
<PAGE>
Property Name French Lick Springs Resort Brown County Inn
Address French Lick Springs Highway 46 and SR 135
Opening Year 1905 1970
Affiliation Independent Independent
Management Independent Independent
Ownership The Luther James Family Andy Rogers
Total Number of
Rooms (incl. suites) 485 Rooms 99 Rooms
Number of Suites 8 Suites 2 Suites
1996 Published Room Single Double Single Double
Rate Structure
Rack (in-season) $79.00 $89.00 $75.00-85.00 $100.00
Rack (off-season) $79.00 $89.00 $50.00-60.00 $50.00-60.00
Corporate $79.00 $89.00 N/A N/A
Government $79.00 $89.00 N/A N/A
Estimated 1996 Market Mix Percentage
Leisure Individual Travelers 80% 60%
Commercial Individual Travelers 5% 5%
Corporate Groups 5% 5%
SMERFS and Other Groups 10% 30%
Facilities/Amenities
Restaurants Chez James, Hoosier Room The Harvest
Plutos Pavillion, Ice Cream Parlor
Le Bistro Restaurant and Lounge
Lounges Le Bistro Lounge The Corn Crib Lounge
Derby Bar
Total Meeting Space
(Sq. Ft.) 54,005 Sq. Ft. (incl. exhibit sp.) 6,799 Sq. Ft.
Largest Room/Ball-
room (Sq. Ft.) 10,800 Sq. Ft. 3,220 Sq. Ft.
Total number of
meeting rooms/divisions 19 Meeting Rooms 8 Meeting Rooms
Swimming Pool Yes Yes
Exercise Room/Fitness Center Yes No
Gift Shop/Newsstand Yes No
Business Center No No
Other Resort Amenities two golf courses, tennis, basketball, miniature
horseback riding, golf, shuffleboard, volleyball,
bowling, skiing and children's playground
nearby
Estimated Occupancy
-1996 (est) 38% 70%
-1995 35% 72%
Estimated Average Room Rate
-1996 (est) $74.00 $70.00
-1995 $74.00 $67.00
<PAGE>
Property Name Seasons Lodge and Conference Center Holiday Inn
Address Highway 46 East 1710 Kinser Pike
Opening Year 1968 1981
Affiliation Independent Holiday Inn
Management Independent Servico Hotels
Ownership Andy Rogers Servico Hotels
Total Number of
Rooms (incl. suites) 80 Rooms 187 Rooms
Number of Suites No Suites No Suites
1996 Published Room Rate Single Double Single Double
Structure
Rack (in-season) $70.00-80.00 $95.00 $83.00 $89.00-$101.00
Rack (off-season) $50.00-60.00 $50.00-60.00 $50.00 $50.00
Corporate N/A N/A $65.00 $65.00
Government N/A N/A $60.00 $60.00
Estimated 1996 Market Mix Percentage
Leisure Individual Travelers 30% 35%
Commercial Individual Travelers 5% 20%
Corporate Groups 10% 10%
SMERFS and Other Groups 55% 35%
Facilities/Amenities
Restaurants Accent Dining Pastel's Restaurant
Lounges Fireplace Lounge Nitelite Lounge
Total Meeting Space (Sq. Ft.) 11,814 Sq. Ft. 3,002 Sq. Ft.
Largest Room/Ballroom (Sq. Ft.) 5,888 Sq. Ft. 2,618 Sq. Ft.
Total number of meeting rooms/
divisions 12 Meeting Rooms 4 Meeting Rooms
Swimming Pool Yes Yes
Exercise Room/Fitness Center No No
Gift Shop/Newsstand No No
Business Center No No
Other Resort Amenities No No
Estimated Occupancy
-1996 (est.) 65% 65%
-1995 67% 68%
Estimated Average Room Rate
-1996 (est.) $65.00 $62.00
-1995 $62.00 $64.00
<PAGE>
Property Name Courtyard by Marriott
Address 310 South College Avenue
Opening Year September 1996
Affiliation Marriott International
Management Dunn Hospitality
Ownership Dunn Hospitality
Total Number of Rooms (incl. suites) 120 Rooms
Number of Suites 5 Suites
1996 Published Room Rate Structure Single Double
Rack (in-season) $76.00-81.00 $84.00-89.00
Rack (off-season) $59.00 $59.00
Corporate $76.00-81.00 $84.00-89.00
Government N/A N/A
Estimated 1996 Market Mix Percentage
Leisure Individual Travelers N/A
Commercial Individual Travelers N/A
Corporate Groups N/A
SMERFS and Other Groups N/A
Facilities/Amenities
Restaurants Lobby Restaurant open for breakfast only
Lounges None
Total Meeting Space (Sq. Ft.) 1,134 Sq. Ft.
Largest Room/Ballroom (Sq. Ft.) 1,134 Sq. Ft.
Total number of meeting rooms/divisions 2 Meeting Rooms
Swimming Pool Yes
Exercise Room/Fitness Center No
Gift Shop/Newsstand No
Business Center No
Other Resort Amenities No
7
<PAGE>
Estimated Occupancy
-1996 (est.) N/A
-1995 N/A
Estimated Average Room Rate
-1996 (est.) N/A
-1995 N/A
<PAGE>
Clarion Fourwinds Resort and Marina Page 46
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The following paragraphs describe the competitive properties and
how they compete with the Clarion Fourwinds Resort and Marina.
The Pointe Golf and Tennis Resort
The Pointe Golf and Tennis Resort is located approximately one
and one-quarter mile from the subject property. This resort has
not been marketed aggressively as a transient lodging property
until it was sold to its current owners in January 1996. The
complex includes 196 condominium units, which range in size
between one and four bedrooms. Approximately 112 of the
condominiums are available for short-term rentals, while the
remainder are residential. Despite the significantly higher rates
at this property in comparison to the subject hotel, this resort
is assumed to be competitive due to its proximity and the
comparable costs on a per bedroom basis. The resort is presently
undergoing a $4 million renovation, which includes the addition
of meeting space, improvement of the golf course, construction of
a lobby and reception area, and renovation of the restaurant.
According to area hotel interviews, this resort has been popular
as a result of its championship golf course. While the course is
considered private, a special arrangement between the Clarion
Fourwinds Resort and Marina allows guest to utilize the golf
course. We expect that with the extensive capital improvements
and increased marketing efforts, this property will present
direct competition to the subject.
French Lick Springs Resort
The French Lick Springs Resort is located approximately
forty-five minutes south of the subject hotel in the town of
French Lick Springs. While this property is not considered to be
located in the market area of the subject hotel, the hotel
presents direct competition for leisure-related business.
Facilities include a golf course and a number of other resort
amenities. This hotel is currently lagging in occupancy in
comparison to the remainder of the hotels in the competitive set
as a result of its dependence on highly seasonal leisure-related
business and the poor condition of its facilities. The property
has also experienced weak overall occupancy due to the lack of
demand generators to support occupancy during the slower periods
and the large room inventory. Management indicated that the hotel
had been undergoing renovations for the
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Clarion Fourwinds Resort and Marina Page 47
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previous five years; however, the property continues to appear in
need of significant capital improvement. The hotel has had little
shift in its average rate due to the set rates at the property
which have remained unchanged for several years. An "American
Plan" also exists at the property where guests can have meals
included for an additional price. Despite the poor condition of
the property, we anticipate that this hotel will continue to
present competition to the subject for leisure-related business.
Brown County Inn
The Brown County Inn is located approximately forty-five minutes
(driving) north east of the subject property in Brown County.
This property is one of several hotels in the area, which are
owned and operated by Andy Rogers, a local real estate developer.
Area hotel management indicated that the area of Brown County has
historically been marketed as leisure-related destination area.
Brown County is appealing to tourists, particularly
non-collegiate SMERF (Social, Military, Educationally-Related,
and Fraternal) groups, due to its vintage shops and charming
atmosphere. As a result, the Brown County Inn has mostly been
marketed toward leisure individual travelers and groups. We
considered the Brown County Inn competition to the subject hotel
primarily for leisure business. Similar to the subject hotel,
peak periods of demand occur during the summer. Management of the
hotels in this area indicated that occupancy levels have "peaked"
and are unlikely to increase due to demand timing and
seasonality. Between 1995 and year-end 1996 estimates, this hotel
is expected to decline by two percentage points in occupancy due
to the competitive environment of the region. The property has
also been jointly marketed with its sister hotel the Seasons
Lodge and Conference Center; however, due to the small amount of
meeting space at the Brown County Inn, the majority of
group-related business is accommodated at the Seasons. Overall,
the quality and condition of the facilities at this property
appear to be comparable to the subject hotel.
Seasons Lodge and Conference Center
The Seasons Lodge and Conference Center is also owned and
operated by Andy Rogers. This property is located approximately
one-quarter mile from the Brown County Inn and approximately
forty-five minutes (driving) northeast of the subject hotel. This
property has
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Clarion Fourwinds Resort and Marina Page 48
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nearly 12,000 square feet of meeting space and captures a
significant amount of group-related business. The majority of
this group business includes SMERF and association groups. These
groups are attracted to the leisure demand generators in the
area. As a result, this property has a slightly lower rate
structure and occupancy in comparison to its sister hotel, Brown
County Inn. According to management, there is one sales and
marketing department for both the Seasons Lodge and Conference
Center and the Brown County Inn. Larger groups would overflow
from the Seasons property to the Brown County Inn. Due to the
strong group orientation of the Seasons Lodge, this property has
historically competed with the subject hotel for SMERFs and other
group business. We anticipate that this property will continue to
compete with the subject for group and some leisure business.
Holiday Inn
The Holiday Inn is located in downtown Bloomington, approximately
eleven miles north of the subject hotel. Built in 1981, this
property is owned and operated by Servico Hotels. Facilities
include a Holidome, 3,000 square feet of meeting space, a
restaurant, and a lounge. The Holidome is an enclosed dome area
which includes a pool, whirlpool, and sauna. Holidomes are
popular with leisure travelers. According to management, the
Holiday Inn derives a significant portion of its demand from
Indiana University, particularly group-related business. The
property is also one of the first hotels to sell-out during peak
periods in Bloomington as a result of its full-service facilities
and its proximity to the university. At the same time, the
property has experienced a decline in both occupancy and average
room rate between 1995 and year-end 1996 estimates. According to
management, this decline is attributed to the new rooms supply
introduced in downtown Bloomington including the Courtyard by
Marriott, the Fairfield Inn, and the Shoney's Inn. We anticipate
that the Holiday Inn will continue to compete with the subject
property for university-related demand and group business. Due to
the lack of additional amenities at the Holiday Inn, this
property competes with the subject hotel for leisure-related
business on a limited basis. Overall, facilities appear to be in
good condition.
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Clarion Fourwinds Resort and Marina Page 49
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Courtyard by Marriott
The Courtyard by Marriott is also located in downtown
Bloomington, adjacent to the Monroe County Convention Center. The
property is owned and operated by Dunn Hospitality. The hotel,
which opened in September 1996, is the newest property in the
Bloomington market. We have not included this property in our
1996 estimate of market performance. According to management at
the hotel and officials from the Monroe County Convention and
Visitors Bureau, the booking of group meetings at the Monroe
County Convention Center was more difficult in the past due to
the lack of nearby lodging accommodations. It is expected that
the opening of the Courtyard by Marriott will address this need
in the marketplace. Management indicated that since the Courtyard
by Marriott's opening, the Courtyard by Marriott has been
successful in attracting university-related group and leisure
business. According to management at the hotel, the greatest
challenge at the property has been capturing demand from the
commercial transient market. We anticipate that as the Courtyard
by Marriott stabilizes within the marketplace, it will present
competition to the subject hotel for university-related demand in
all segments.
OTHER HOTELS IN THE BLOOMINGTON MARKET
There are a number of other hotels in the Bloomington market,
which were not considered to be directly competitive with the
subject hotel. These properties included budget hotels, bed and
breakfast facilities, and the Indiana University-owned hotel,
Indiana Memorial Union. Although Bloomington has a relatively
small lodging market, these lodging establishments did not
present direct competition to the Clarion Fourwinds Resort and
Marina due to their market orientation and quality of facilities.
ADDITIONS TO SUPPLY
In analyzing the existing competitive environment, it is
important to discuss any new hotel development that would
potentially impact the subject's performance. In the course of
our fieldwork, we did not discover any new additions to supply to
the competitive lodging market. It is important to note, however,
that there have been a number of new hotel openings in the
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Clarion Fourwinds Resort and Marina Page 50
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Bloomington market area over the past two years which have
significantly affected market occupancies and average room rates.
These new properties have included the Courtyard by Marriott, the
Fairfield Inn, and the Shoney's Inn. With the exception of the
Courtyard by Marriott, we did not consider these hotels to be
directly competitive with the subject property.
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Clarion Fourwinds Resort and Marina Page 51
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C.2 LODGING SUPPLY AND DEMAND ANALYSIS
OVERALL DEMAND TRENDS IN THE BLOOMINGTON LODGING MARKET
According to representatives from the Monroe County Convention
and Visitors Bureau, the aggregate market occupancy in
Bloomington has declined over the past two years. This decline in
occupancy is most likely attributed to the introduction of new
supply. Discussions with local hotel managers and area officials
indicated that the Bloomington market has been experiencing
stable levels of growth from both the university and the
development of local corporations. However, this level of growth
has not been enough to absorb the addition of three new hotels in
the marketplace, which has resulted in the overall aggregate
market decline in occupancy.
LODGING DEMAND IN THE IDENTIFIED COMPETITIVE SUPPLY
As indicated previously, we have identified seven hotels
(including the subject) as the primary competitive supply for the
subject hotel. The purpose of the analysis that follows is to
evaluate the historical and present supply and demand trends of
the market in which the subject hotel competes. We have completed
interviews with management of the competitive hotels and have
collected statistics on the occupancy, average room rate, and
market mix to estimate total accommodated demand by market
segment. As indicated earlier, we have not included the Courtyard
by Marriott in the following analysis due to its recent opening
in September 1996. The following table summarizes our estimate of
the aggregate market demand accommodated by the identified
competitive supply for estimated year-end 1995 and 1996.
<PAGE>
Clarion Fourwinds Resort and Marina Page 52
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Historical Growth in Lodging Demand
in the Competitive Supply
- -------------------------------------------------------------------
1995 Estimated 1996 (1)
------------------ ------------------ Percent
Room Nts % Total Room Nts % Total Change
------------------ ------------------ ----------
Leisure Individuals 113,100 56% 114,300 57% 1.2%
Commercial
Individuals 17,800 9% 18,100 9% 2.3%
Corporate Groups 19,300 10% 17,700 9% -8.3%
SMERFs & Other
Groups 50,300 25% 49,900 25% --%
------ ------ ---------
Total Occupied
Demand 200,500 100% 200,000 100% --%
Total Available
Supply 397,500 397,500 --%
Market Occupancy 50.4% 50.3%
Market Average Rate $74.00 $76.00 2.7%
Market RevPAR $37.50 $38.50 2.7%
- --------------------------------------------------------------------
Source: Arthur Andersen.
Note: Figures rounded to the nearest hundred.
* Compound Annual Growth
(1) Although the Courtyard by Marriott actually opened in late
September 1996, for the purpose of our analysis we have
assumed that this hotel will open in January 1997.
- -----------------------------------------------------------------
As indicated in the preceding table, hotel room demand in the
Bloomington market has remained stable between 1995 and year-end
estimates for 1996. The demand for lodging accommodations within
the competitive lodging supply has a strong base of
leisure-related and group-related business due to large volume of
such demand accommodated by the resort properties and the market
orientation of hotels located near the university. While total
occupied demand remained relatively unchanged between 1995 and
1996, average room rates exhibited a slight percentage growth
during this period. Overall, room rates increased 2.7 percent, or
$2.00, in 1996.
Our analysis of future demand growth includes assumptions of
base growth in demand, unsatisfied demand, and induced demand.
The following paragraphs define these sources of demand growth.
<PAGE>
Clarion Fourwinds Resort and Marina Page 53
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Base Growth in Demand
Base growth in demand is related to the strength of the local
economy. This growth assumption incorporates demand generated by
other factors, such as the addition of a new convention center,
new office development and absorption, improved transportation
access to the market area, etc. Our assumptions take into account
historical demand trends and the factors contributing to these
trends. On the basis of our interviews with management and on our
analysis of economic growth in the local market, base growth by
market segment is estimated for each year.
Unsatisfied Demand
During peak periods of demand, many travelers in search of
convenient accommodations among the hotels in the competitive
supply are required to use alternative hotels due to the lack of
capacity in the immediate area. These groups and individuals will
seek lodging in one of the other properties in the market area or
will leave the immediate market. Those room nights that are not
accommodated in the immediate market may be referred to as
"unsatisfied demand." In 1996, we estimate there will be a total
of 6,000 room nights of unsatisfied demand. While the low market
occupancies of the Bloomington area are not reflective of the
presence of unsatisfied demand in the market area, the
competitive market has a number of resort properties, which are
extremely seasonal. As a result, unsatisfied demand is likely to
occur during peak periods of demand in the summer months (July
through August) and concurrent to approximately ten university
sports-related, weekends throughout the year.
Induced Demand
Induced demand is defined as new room nights generated by the
addition of new hotels to the market area or by the repositioning
and marketing of an existing hotel to fulfill consumer needs not
previously met by the existing supply. Induced demand may also
include room nights generated by special events which are not
expected to remain permanently in the market area. In 1997 and
1998, we estimate that a number of new room nights will be
induced into the competitive supply, which are attributed to the
opening of the Courtyard
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by Marriott and the completion of renovations at the Pointe Golf
and Tennis Resort. Since the Courtyard by Marriott opened only in
September 1996, we estimate that the majority of new room nights
will be induced by this property in 1997 and 1998. In 1997 and
1998, we estimate that approximately 10,700 and 5,500 room nights
will be induced into the Bloomington market, respectively. We
anticipate that the $4 million renovation of the Pointe Golf and
Tennis Resort will attract new sources of demand to the
marketplace, primarily in the leisure-related segments. In
addition, the opening of the Courtyard by Marriott is expected to
result in strong demand from the two types of group segments, due
to this property's proximity to the Monroe County Convention
Center. Overall, we estimate that a total of 16,500 new room
nights will be induced into the marketplace in 1997 and 1998.
DEMAND SEGMENTATION AND ESTIMATED DEMAND GROWTH
Accommodated demand in the competitive hotel supply has been
divided into four major market segments: 1) leisure individual
travelers, 2) commercial individual travelers, 3) corporate
groups, and 4) SMERFs and other groups. On the basis of our
interviews with management of the subject property and its
competition and based upon an analysis of economic trends in the
market, we have estimated future growth in demand in the
competitive supply by market segment. The following paragraphs
define the individual market segments and our estimates of demand
growth. A detailed analysis of supply and demand growth for the
market is presented on the following page.
<PAGE>
Clarion Four Winds Resort
Estimated Growth in Lodging Supply and Demand
Market Area: Bloomington, IN
Estimated
1996 1997 1998 1999
Leisure Individual Travelers
Gross Demand 117,200 3.0% 2.0% 1.0%
Less: Unsatisfied Demand 2,900 120,800 123,200 124,400
1,900 1,900 2,300
======= ======= ======= =======
Net Demonstrated Demand 114,300 118,900 121,300 122,100
Plus: Induced Demand 0 5,100 7,100 7,200
======= ======= ======= =======
TOTAL SEGMENT DEMAND 114,300 124,000 128,400 129,300
Growth over Previous Year 8.5% 3.5% 0.7%
% of Total Market Demand 57% 57% 56% 56%
Commercial Individual Travelers 0.0% 0.0% 0.0%
Gross Demand 18,500 18,500 18,500 18,500
Less: Unsatisfied Demand 400 400 400 500
======= ======= ======= =======
Net Demonstrated Demand 18,100 18,100 18,100 18,000
Plus: Induced Demand 0 1,300 1,900 1,900
======= ======= ======= =======
TOTAL SEGMENT DEMAND 18,100 19,400 20,000 19,900
Growth over Previous Year 7.2% 3.1% -0.5%
% of Total Market Demand 9% 9% 9% 9%
Corporate Groups 2.5% 2.0% 1.0%
Gross Demand 19,000 19,500 19,900 20,100
Less: Unsatisfied Demand 1,300 400 600 600
======= ======= ======= =======
Net Demonstrated Demand 17,700 19,100 19,300 19,500
Plus: Induced Demand 0 2,300 3,700 3,700
======= ======= ======= =======
TOTAL SEGMENT DEMAND 17,000 21,400 23,000 23,200
Growth over Previous Year 20.9% 7.5% 0.9%
% of Total Market Demand 9% 10% 10% 10%
SMERFS and Other Groups 3.0% 2.0% 1.0%
Gross Demand 51,300 52,900 53,900 54,400
Less: Unsatisfied Demand 1,400 900 1,100 1,100
======= ======= ======= =======
Net Demonstrated Demand 49,900 52,000 52,800 53,300
Plus: Induced Demand 0 2,100 3,800 3,800
======= ======= ======= =======
TOTAL SEGMENT DEMAND 49,900 54,100 56,600 57,100
Growth over Previous Year 8.4% 4.6% 0.9%
% of Total Market Demand 25% 25% 25% 25%
TOTAL MARKET DEMAND
Gross Demand 206,000 211,700 215,500 217,400
Less: Unsatisfied Demand 6,000 3,600 4,000 4,500
======= ======= ======= =======
Net Demonstrated Demand 200,000 208,100 211,500 212,900
Plus: Induced Demand 0 10,800 16,500 16,600
======= ======= ======= =======
TOTAL MARKET DEMAND 200,000 218,900 228,000 229,500
Growth over Previous Year 9.5% 4.2% 0.7%
ANNUAL SUPPLY (ROOM NIGHTS) 397,485 441,285 441,285 441,285
Growth over Previous Year 11.0% 0.0% 0.0%
MARKET OCCUPANCY 50% 50% 52% 53%
Compound
Annual
Growth
2000 2001 (1996-2001)
Leisure Individual Travelers 1.0% 1.0%
Gross Demand 125,600 126,800
2,700 2,900
Less: Unsatisfied Demand ======= =======
Net Demonstrated Demand 122,900 123,900
Plus: Induced Demand 7,300 7,400
======= =======
TOTAL SEGMENT DEMAND 130,200 131,300 2.8%
Growth over Previous Year 0.7% 0.8%
% of Total Market Demand 56% 57%
0.0% 0.0%
Commercial Individual Travelers 18,500 18,500
Gross Demand 600 700
Less: Unsatisfied Demand ======= =======
Net Demonstrated Demand 17,900 17,800
Plus:Induced Demand 1,900 1,900
======= =======
TOTAL SEGMENT DEMAND 19,800 19,700 1.7%
Growth over Previous Year -0.5% -0.5%
% of Total Market Demand 9% 9%
1.0% 1.0%
Corporate Groups 20,300 20,500
Gross Demand 600 600
Less: Unsatisfied Demand ======= =======
19,700 19,900
Net Demonstrated Demand 3,700 3,700
Plus: Induced Demand ======= =======
23,400 23,600 5.9%
TOTAL SEGMENT DEMAND 0.9% 0.9%
Growth over Previous Year 10% 10%
% of Total Market Demand
0.5% 0.5%
SMERFS and Other Groups 54,700 55,000
Gross Demand 1,400 1,700
Less: Unsatisfied Demand ======= =======
53,300 53,300
Net Demonstrated Demand 3,800 3,800
Plus: Induced Demand ======= =======
TOTAL SEGMENT DEMAND 57,100 57,100 2.7%
Growth over Previous Year 0.0% 0.0%
% of Total Market Demand 25% 25%
TOTAL MARKET DEMAND 219,100 220,800
Gross Demand 5,300 5,900
Less: Unsatisfied Demand ======= =======
213,800 214,900
Net Demonstrated Demand 16,700 16,800
Plus: Induced Demand ======= =======
TOTAL MARKET DEMAND 230,500 231,700 3.0%
Growth over Previous Year 0.4% 0.5%
ANNUAL SUPPLY (ROOM NIGHTS) 441,285 441,285 2.1%
Growth over Previous Year 0.0% 0.0%
MARKET OCCUPANCY 52% 53%
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Leisure Individual Travelers
This segment of demand includes individual travelers that are
visiting the market area on vacation or for other non-commercial
reasons. This segment of demand includes leisure travelers
booking suites and guest rooms at rack rates during special
events and during the summer months but also includes individuals
seeking discounted rates and special packages offered by the
hotels during weekends. Due to the strong leisure orientation of
the resort properties included within the competitive supply,
this segment of demand is the largest source of room nights
within the competitive market. Demand in this segment occurs
primarily from April through October and during special weekends
throughout the school year. Special events that attract
leisure-related demand to the market area include the
Indianapolis 500, Parents Weekend and Commencement at the
University, in addition to football home games, and other
collegiate sporting events held at the university. While
Indianapolis is approximately 50 miles north from the subject
market area, area officials indicated that demand for special
leisure events frequently overflows to the Bloomington market
area.
While the leisure individual traveler segment is the strongest
source of demand throughout the marketplace, it is highly
seasonal, which is particularly acute at the resort properties.
Peak periods of demand occur during the summer and on the
weekends. During these peak periods, the resort properties,
including the subject hotel, are most likely to benefit from at
or near sell-outs. The remainder of the year is characterized by
virtually no leisure demand activity. While many leisure
individual travelers are attracted to the competitive market due
to the presence of resort hotels, the university is also a strong
demand generator of leisure-related room night demand.
Leisure Individual Traveler demand accounted for approximately 57
percent of total accommodated demand, or 114,500 room nights,
among the competitive lodging supply at the end of 1996. We
estimate that demand will increase slightly by approximately 1.2
percent between 1995 and 1996. On the basis of continued strength
in the Bloomington leisure market and on events scheduled within
the area, we estimate that the base growth rate in 1997 will be
three percent. Based upon discussions with the Monroe County
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Convention and Visitors Bureau, there are a number of
leisure-related events that will attract visitors to the area in
1997. These events includes the NCAA Final Four in Indianapolis
and the annual Indianapolis 500. In 1998, we estimate that base
growth in leisure individual traveler demand will be two percent.
In 1999 and thereafter, we estimate that demand in this segment
will continue to increase by one percent annually.
We estimate that there were approximately 2,900 room nights of
unsatisfied demand in the leisure individual traveler segment at
the end of 1996. This demand occurs during peak periods
throughout the summer months and on special university-related
weekends in the fall and spring months. According to area hotel
managers, leisure-related demand is extremely strong during the
above period and a significant percentage of this demand cannot
be accommodated in the Bloomington market resulting in overflow
to other areas. We anticipate that approximately 1,000 room
nights of unsatisfied demand will be absorbed in 1997 as a result
of the opening of the Courtyard by Marriott. By 2001, we estimate
that the level of unsatisfied demand will again reach 2,900 room
nights.
We estimate that approximately 7,000 room nights will be induced
into the marketplace between 1997 and 1998, which is primarily
attributed to the renovation of the Pointe Golf and Tennis
Resort. This condominium complex was not previously marketed
aggressively as a lodging property, and we anticipate that with
the creation of larger public space, inclusive of a front desk
reception area, and a stronger marketing effort, the Pointe Golf
and Tennis Resort will be a significant demand generator of new
leisure-related rooms into the marketplace.
Overall, the leisure individual traveler segment is estimated to
increase at a compound annual rate of 2.8 percent between the
1996 and 2001. We expect this segment to account for
approximately 131,800 room nights by 2001, or 57 percent of total
accommodated demand.
Commercial Individual Traveler
This segment of demand includes individual business travelers
visiting companies and other organizations located in the
Bloomington market area. As mentioned earlier, aside from the
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demand generated by Indiana University, there are a limited
number of corporations which generate demand for room nights. As
a result, the corporate market comprises a relatively small
segment of demand in the marketplace. Much of the corporate
demand accommodated by the hotels in the competitive supply is
generated by companies located within the downtown area of
Bloomington. These room nights may be booked at both published
and discounted room rates. However, this segment of demand is
typically discounted due to the price-sensitive nature of many of
the corporations within the area. Due to the competition for
commercial individual traveler business in the marketplace, rates
are significantly discounted for this segment. Although corporate
demand comprises less than ten percent of total accommodated
demand among the competitive supply, it represents the most
stable source of business throughout the year.
The university is the largest source of commercial-related
demand, either stemming from guest lectures or individuals with
business in conjunction with the university. Aside from the
university, a number of corporations provide a small base of
commercial demand in the marketplace. These companies include
General Electric, the Bloomington Hospital, and Thomson, a
division of RCA. According to area hotel operators, the majority
of commercial-related demand is likely to stay in downtown
Bloomington and may have business both in Indianapolis and
Bloomington. As a result, these travelers will typically stay one
or two nights during the midweek.
We estimate that there were approximately 400 room nights of
unsatisfied demand commercial individual traveler demand at the
end of 1996. This unsatisfied demand is the result of
displacement from other segments of demand. During certain
city-wide events such as the Indianapolis 500, graduation, etc.,
we anticipate that commercial-related demand would be displaced
from the market and thus become unsatisfied. We have assumed that
unsatisfied demand will remain constant throughout the projection
period.
In 1997 and 1998, we estimate some commercial-related demand will
be induced into the Bloomington market as a result of the opening
of the Courtyard by Marriott. The Courtyard by Marriott is
expected to induce some commercial individual traveler demand due
to Marriott International's strong reservation system and the
corporate-orientation of the brand
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name. We anticipate that the renovation of the Pointe Golf and
Tennis Resort will have a minimal impact on inducing
commercial-related demand into the marketplace due to the
property's distance from major sources of corporate demand.
Overall, we estimate that a total of 1,900 room nights will be
induced into the marketplace.
The commercial individual traveler segment is estimated to
increase at a compound annual rate of 1.7 percent between the
1996 and 2001. We estimate that this segment will achieve the
most conservative level of growth of the four segments, as a
result of the strong leisure market and the limited base of
corporate demand in the Bloomington area. We expect this segment
of demand to account for approximately 19,700 room nights by
2001, or nine percent of total accommodated demand.
Corporate Groups
This market segment includes room night demand associated with
corporate board meetings, training seminars, special events, and
small workshops. The majority of corporate group demand is
generated by the major employers located within the Bloomington
market area, particularly the university. Hotel market demand
from this segment is often accommodated at a discounted room rate
dependent upon the number of rooms guaranteed by each company and
the potential for ancillary group-related revenues. Demand from
this market segment is expected to occur primarily during
mid-week (Monday through Thursday) and has similar demand
patterns to the commercial individual traveler segment.
Between 1995 and estimated year-end 1996, we anticipate that the
total accommodated demand in this segment declined from 19,300
room nights in 1995 to 17,800 room nights in 1996. The majority
of this decline is attributed to the deteriorating quality of the
facilities at the subject hotel. The subject hotel previously had
strong demand from this segment in comparison to the competitive
lodging supply. Hotel management at the subject property
indicated that strong demand in the marketplace continues to
exist from this segment; however, the deteriorating quality of
the Clarion Fourwinds Resort and Marina has shifted demand
outside of the identified competitive supply. Throughout the
projection period, we have assumed continued strong growth in the
corporate group segment. We anticipate that
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the demand for corporate group accommodations will return to the
Bloomington market upon the completion of renovations of the
subject hotel and will also be captured by the newly renovated
Pointe Golf and Tennis Resort.
We estimate that there were approximately 1,300 room nights of
unsatisfied demand in this market segment at the end of 1996.
This level of unsatisfied demand occurred as a result of the lack
of suitable accommodations for corporate meetings. Unsatisfied
demand is expected to decrease as a result of the opening of the
Courtyard by Marriott, and the renovations of both the subject
hotel and the Pointe Golf and Tennis Resort. By 1998, we estimate
that the unsatisfied demand will decrease to approximately 600
room nights per year. We estimate that number of room nights
which are unsatisfied will remain constant throughout the
remainder of the projection period.
In 1997 and 1998, we estimate that a number of room nights will
be induced into the marketplace as a result of the renovation of
the Pointe Golf and Tennis Resort and the opening of the
Courtyard by Marriott. We estimate that approximately 2,300 room
nights will be induced in 1997 and the total number of room
nights induced into the market will increase to 3,700 room nights
by 1998.
Overall, the corporate group segment is estimated to increase at
a compound annual rate of 5.9 percent between the 1996 and 2001.
We expect this segment to account for approximately 23,600 room
nights by 2001, or ten percent of total accommodated demand.
SMERFs and Other Groups
This segment of demand which includes SMERFs (social, military,
educational, religious, and fraternal) and state and regional
associations groups represents the second largest segment for
room night demand in the identified competitive supply. Indiana
University is a major source of demand in this segment generating
visiting sporting teams, educational programs, and alumni
functions. Demand from this market segment occurs primarily
during weekends, and peaks in the fall when the university hosts
football games and other sporting events, and in the spring
during the school's commencement exercises. According to local
hotel management and
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the convention and visitors bureau, a number of other sporting
events also generate this type of demand but are not directly
related to the university's own sporting teams. These sporting
events are attracted to Indiana University and its on-campus
facilities. Demand in this segment is also attracted to the
resort amenities and the nearby attractions throughout south
central Indiana.
This segment of demand is expected to account for approximately
25 percent of total accommodated demand among the competitive
lodging supply at the end of 1996. Demand in this segment has
remained constant over 1995 levels. We estimate that demand in
this segment will increase from new events that will stay in the
Bloomington area in 1997. We assume a base growth rate of three
percent in 1997, due to the NCAA Final Four championships that
will be held in Indianapolis. According to local officials, this
large event is expected to create overflow demand that will
sell-out the hotels in the Bloomington area. In 1998, we estimate
that the base growth rate in this segment will decrease to two
percent. By 2000 and thereafter, we estimate that the base growth
rate will have decreased to 0.5 percent.
We estimate that there will be approximately 1,400 room nights of
unsatisfied demand in this market segment at the end of 1996.
This demand occurs during special university-related weekends
throughout the school year. Unsatisfied demand is expected to
decrease to 900 room nights in 1997 as a result of the opening of
the Courtyard by Marriott. We anticipate that this property would
be able to absorb unsatisfied demand in the marketplace,
especially considering its proximity to Indiana University.
Thereafter, we assume that unsatisfied demand will increase at
the level base level of growth for the segment. We anticipate
that the number of unsatisfied room nights will increase to 1,700
room nights by 2001.
In 1997 and 1998, we estimate that a number of room nights will
be induced into the marketplace as a result of the opening of the
Courtyard by Marriott and to a lesser extent the renovation of
the Pointe Golf and Tennis Resort. We expect that the Courtyard
by Marriott's location downtown and its proximity to the
convention center will induce demand from this segment into the
marketplace. We anticipate that the Pointe Golf and Tennis Resort
would
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Clarion Fourwinds Resort and Marina Page 62
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induce fewer room nights due to the higher room rate charged by
this property. Typically, this segment of demand tends to be
price-sensitive and as a result, we expect that this segment will
comprise a smaller percentage of overall demand at the Pointe. We
estimate that approximately 2,100 room nights will be induced in
1997 and the total number of room nights induced into the market
will increase to 3,800 room nights by 1998.
Overall, the SMERFs and Other Groups segment is estimated to
increase at a compound annual rate of 2.7 percent between the
1996 and 2001. We expect this segment to account for
approximately 57,100 room nights by 2001, or 25 percent of total
accommodated demand.
Conclusion
Overall, the lodging market in Bloomington has remained stable
over the past two years. Demand for accommodations in the
competitive supply is expected to continue to reflect
conservative growth, primarily as a result of new induced rooms
and estimates of underlying growth in the marketplace. Despite
the seasonality of the market, we estimate that a number of
unsatisfied room nights will be absorbed by the addition of the
Courtyard by Marriott into the marketplace. We estimate that
aggregate market demand will slightly outpace the addition of new
supply in the marketplace. Total market demand is estimated to
increase at a compound annual rate of three percent between 1996
and 2001. During the same period, supply is estimated to increase
at an average annual rate of 2.1 percent. As a result, market
occupancy is estimated to increase from 50 percent in 1996 to 53
percent by 2001.
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C.3 ESTIMATED OCCUPANCY AND AVERAGE ROOM RATE
We have prepared detailed estimates of average annual occupancy
and average daily room rate for the subject property from January
1, 1997 through December 31, 2001. The following table presents
historical occupancy, average room rate, and RevPAR achieved at
the subject Clarion Fourwinds Resort and Marina for year-end 1993
through estimated year-end 1996.
- -----------------------------------------------------------
Historical Occupancy and Average Rates
at the Clarion Fourwinds Resort and Marina
- -----------------------------------------------------------
- ----------------------------------------------------------
1993 1994 1995 1996 est.
-------------------------------------------
Occupancy 58.8% 58.9% 56.7% 51.3%
Average Rate $69.08 $68.57 $69.57 $72.34
RevPAR $40.61 $40.38 $39.43 $37.11
- -----------------------------------------------------------
Source: Subject Property
- -----------------------------------------------------------
The following section presents our analysis of estimated future
occupancy and average daily room rate.
MARKET PENETRATION AND AVERAGE ANNUAL OCCUPANCY
This analysis uses the concept of "fair" share and market
penetration. By forming a penetration analysis of market lodging
demand, the future average annual occupancy at the subject
Clarion Fourwinds Resort and Marina is estimated. Using this
technique, the property is first evaluated compared to its
competition, then its potential market share is calculated on the
basis of its relative appeal to a market segment. A hotel's
"fair" share of market demand is said to be equal to its fair
share of supply; i.e. a 100-room hotel in a market of 1,000 rooms
would have a "fair" share of demand of ten percent of total
market demand. A "market penetration" of 100 percent indicates a
property is capturing its exact "fair" share of demand.
Penetration in excess of, or lower than, 100 percent indicates a
hotel is likely to be viewed more or less favorably than the
competition by the respective market segment and thus
accommodates more or less than its fair share.
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The following table presents our estimates of the year-end 1996
market penetration by demand segment for the subject property and
for the hotels in the identified competitive lodging supply.
- ---------------------------------------------------------------------------
Estimated 1996 Penetration By Market Segment
For The Identified Competitive Supply
- ---------------------------------------------------------------------------
Leisure Commercial SMERFs
Hotel Name Individual Individual Corporate and Other Overall
Travelers Travelers Groups Groups Penetration
- ---------------------------------------------------------------------------
Subject Property 74% 124% 178% 131% 102%
Pointe Golf & Tennis
Resort 122% 55% 169% 40% 99%
French Lick Springs
Resort 106% 42% 43% 30% 76%
Brown County Inn 146% 77% 79% 167% 139%
Seasons Lodge &
Conf. Center 68% 71% 146% 285% 129%
Holiday Inn 79% 286% 146% 181% 129%
- ---------------------------------------------------------------------------
Source: Arthur Andersen/Market Interviews
- ---------------------------------------------------------------------------
By combining the above information with our market and property
analysis we calculate the future occupancy of the subject hotel
by market segment for the estimation period between 1997 and
2001. Due to the different market orientations of the properties
in the competitive supply, there is a wide disparity in
penetration rates among the hotels by segment. We have considered
the market in estimating the subject's penetration by segment;
however, we have given primary emphasis upon the historical
performance at the Clarion Fourwinds Resort and Marina in
assessing the property's potential market penetration. A detailed
penetration analysis of the subject hotel is presented on the
following page. The following paragraphs summarize our
penetration analysis by market segment.
<PAGE>
Clarion Four Winds Resort
Penetration Analysis
Market Area: Bloomington, IN
Estimated
1996 1997 1998 1999
ANNUAL SUPPLY (ROOM NIGHTS) 397,485 441,285 441,285 441,285
SIZE OF SUBJECT PROPERTY 126 126 126 126
FAIR SHARE (SUPPLY) 11.6% 10.4% 10.4% 10.4%
Leisure Individual Travelers
Total Demand 114,300 124,000 128,400 129,300
Fair Share of Demand 13,225 12,923 13,382 13,475
Penetration Rate 74% 75% 78% 79%
======= ======= ======= =======
Demand Captured 9,800 9,800 10,600 10,600
% of Total Demand Captured 42% 41% 40% 39%
Commercial Individual Travelers
Total Demand 18,100 19,400 20,000 19,900
Fair Share of Demand 2,094 2,022 2,084 2,074
Penetration Rate 124% 129% 125% 125%
======= ======= ======= =======
Demand Captured 2,600 2,600 2,600 2,600
% of Total Demand Captured 11% 11% 10% 10%
Corporate Groups
Total Demand 17,700 21,400 23,000 23,200
Fair Share of Demand 2,048 2,230 2,397 2,418
Penetration Rate 178% 187% 215% 225%
======= ======= ======= =======
Demand Captured 3,600 4,200 5,200 5,500
% of Total Demand Captured 15% 17% 20% 20%
SMERFS and Other Groups
Total Demand 49,900 54,100 56,600 57,100
Fair Share of Demand 5,774 5,638 5,899 5,951
Penetration Rate 132% 133% 136% 138%
======= ======= ======= =======
Demand Captured 7,600 7,500 8,000 8,200
% of Total Demand Captured 32% 31% 31% 30%
TOTAL MARKET DEMAND
Total Demand 200,000 218,900 228,000 229,500
Fair Share of Demand 23,140 22,813 23,762 23,918
Penetration Rate 102% 106% 110% 112%
======= ======= ======= =======
Demand Captured 23,600 24,100 26,200 26,900
ESTIMATED OCCUPANCY 51% 52% 57% 58%
MARKET OCCUPANCY 50% 50% 52% 52%
2000 2001
ANNUAL SUPPLY (ROOM NIGHTS) 441,285 441,285
SIZE OF SUBJECT PROPERTY 126 126
FAIR SHARE (SUPPLY) 10.4% 10.4%
Leisure Individual Travelers
Total Demand 130,200 131,300
Fair Share of Demand 13,569 13,684
Penetration Rate 78% 77%
======= =======
Demand Captured 10,600 10,600
% of Total Demand Captured 39% 39%
Commercial Individual Travelers
Total Demand 19,800 19,700
Fair Share of Demand 2,064 2,053
Penetration Rate 126% 127%
======= =======
Demand Captured 2,600 2,600
% of Total Demand Captured 10% 10%
Corporate Groups
Total Demand 23,400 23,600
Fair Share of Demand 2,439 2,460
Penetration Rate 236% 236%
======= =======
Demand Captured 5,800 5,800
% of Total Demand Captured 21% 21%
SMERFS and Other Groups
Total Demand 57,100 57,100
Fair Share of Demand 5,951 5,951
Penetration Rate 138% 138%
======= =======
Demand Captured 8,200 8,200
% of Total Demand Captured 30% 30%
TOTAL MARKET DEMAND
Total Demand 230,500 231,700
Fair Share of Demand 24,022 24,147
Penetration Rate 113% 113%
======= =======
Demand Captured 27,200 27,200
ESTIMATED OCCUPANCY 59% 59%
MARKET OCCUPANCY 52% 53%
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Leisure Individual Travelers
As indicated earlier in this report, a number of hotels in the
competitive market have a strong leisure-orientation and derive
more than fifty percent of their total demand from leisure
individual travelers. These hotels include the French Lick
Springs Resort, the Pointe Golf and Tennis Resort, and the Brown
County Inn. These properties, along with the subject Clarion,
have been marketed as leisure-individual traveler destinations.
The following factors were important in considering the subject
hotel's penetration rate in the competitive market:
- - strong attraction of the resort amenities including the marina;
- - renovations of the Pointe Golf and Tennis Resort,
resulting in increased competition with the subject hotel; and,
- - high seasonality in the marketplace, which is likely to
result in an effective maximum in the property's ability to
accommodate leisure demand.
Although the leisure segment accounts for more than forty percent
of total demand at the subject hotel, the property has not
captured its fair share of leisure-related demand. Leisure
individual traveler demand comprises 57 percent of market demand.
We assume that the subject hotel will continue to capture a
similar level of leisure-related demand as a result of
seasonality and demand timing. According to management, peak
periods for leisure demand typically occur during the weekends in
the summers and the fall. The hotel is likely to frequently
sell-out and cannot accommodate any more demand. As a result,
given this seasonality for leisure demand, there appears to be an
effective maximum on the subject property's ability to
accommodate leisure-related demand. Throughout the projection
period, we estimate that the penetration rate will increase from
75 percent in 1997 to 78 percent in 1999. We assume that the
leisure segment will comprise a smaller percentage of total
demand as the property's demand captured from other segments
improves. In a stabilized year of operation (2000), we assume
that total demand from leisure individual travelers will comprise
39 percent of demand, or 10,600 room nights.
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Clarion Fourwinds Resort and Marina Page 67
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Commercial Individual Travelers
The subject hotel is expected to receive more than its fair share
of demand in the commercial individual traveler segment relative
to that accommodated by the hotels in the competitive supply.
While the subject property is considered distant from commercial
sources of demand, the hotel has more commercial demand
generators in relation to the other resort-oriented properties
located outside of Bloomington. While the Pointe Golf and Tennis
Resort is equidistant to commercial demand generators in
Bloomington, we expect that this property will be less successful
in capturing commercial individual traveler demand due to its
condominium-style facilities. Commercial individual traveler
demand is expected to comprise 11 percent of demand at the
subject for year-end 1996, which represents a market penetration
of 124 percent. Within the competitive market, we assume that the
majority of this type of demand will choose to stay in downtown
Bloomington. As such, the Holiday Inn and the Courtyard by
Marriott are expected to capture a larger share of
commercial-related demand. The following factors were considered
in our analysis of penetration rates in the commercial individual
traveler segment:
- - perceived distance from major sources of commercial demand
in Bloomington;
- - increased competition from downtown Bloomington hotels
business as a result of new hotels in the marketplace; and,
- - weak brand affiliation, which would generate corporate
demand from reservations system.
Throughout the projection period, we estimate that the number of
commercial room nights captured at the subject hotel will remain
constant at 2,600 room nights. As a result, market penetration at
the property is expected to increase slightly from 124 percent in
1996 to 127 percent in 2001. We do not expect that the subject
hotel will be able to increase the number of commercial room
nights due to the distance of the property from downtown
Bloomington and the introduction of new supply in downtown
Bloomington.
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Clarion Fourwinds Resort and Marina Page 68
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Corporate Groups
We estimate that the Clarion Fourwinds Resort and Marina will
have the strongest growth in the corporate groups segment. Within
the competitive supply, the subject property and the Pointe Golf
and Tennis Resort have been the strongest in penetrating this
segment of demand. According to management at the subject hotel,
these two properties have had strong corporate group demand due
to the resort amenities of the facilities. Many corporate groups
from the region enjoy the marina attractions at the subject
property and the golf course at the Pointe. However, management
at the subject hotel indicated that the subject experienced
declines in corporate group business in 1995 as a result of the
property's need for renovations. We estimate that once the
property is renovated, the subject will be able to regain and
improve marketshare in this segment. We estimate that the
corporate group segment will achieve a 187 percent penetration
rate in 1997. This penetration rate is assumed to significantly
increase to 215 percent in 1998, due to the completion of
renovations at the property. By 2000, in a stabilized year of
operation, we estimate that corporate group demand will comprise
21 percent of the hotel's overall demand, or 5,800 room nights.
SMERFs and Other Groups
The SMERFs and Other Groups segment of demand is another
important source of business for the competitive market.
According to management at the subject hotel and the Bloomington
properties within the competitive supply, a large source of this
business is university-related. At the Brown County properties
and the French Lick Springs Resort, this segment of demand
comprises mostly religious groups and some educational groups.
SMERFs and other group demand is expected to comprise 32 percent
of total demand for year-end 1996. The following factors were
important in determining our estimates of penetration for the
subject:
- - attraction of the marina for groups and retreats;
- - assumptions of continued relationships with the
university-related sports teams;
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Clarion Fourwinds Resort and Marina Page 69
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- - "favorable" room count of property which has been
desirable for groups wanting to have exclusivity of the hotel;
and,
- - continued seasonality of demand patterns for this segment.
Management indicated that the facilities and the location of the
subject were strong attractions to this segment of demand.
Similar to the leisure-related segment of demand, this market
segment demand patterns are closely linked to major university
events occurring on weekends throughout the school year. As a
result, we estimate that growth in this segment will be limited
due to seasonality and demand patterns. In 1997, we estimate that
the subject hotel will achieve a 133 percent penetration rate. By
2000, when the property reaches stabilization, the Clarion is
estimated to achieve a 138 percent penetration rate. Overall,
this segment of demand is estimated to comprise 30 percent of
total hotel demand, or 8,200 room nights.
The estimated market mix of the subject hotel in a representative
year, at 59 percent occupancy, is presented on the following
table. We assume the subject property will stabilize by the year
2000, two years after the completion of renovations.
- ----------------------------------------------------------------------
Estimated Market Segmentation In A Stabilized Year (2000)
Clarion Fourwinds Resort and Marina
- ----------------------------------------------------------------------
Occupied Percent of Penetration
Market Segment Room Nights Total Occupancy Rate
- ----------------------------------------------------------------------
Leisure Individual Travelers 10,600 39% 78%
Corporate Individual Travelers 2,600 10% 126%
Corporate Groups 5,800 21% 236%
SMERFs and Other Groups 8,200 30% 138%
- ----------------------------------------------------------------------
Total 27,200 100% 113%
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Source: Arthur Andersen/Market Interviews
- ----------------------------------------------------------------------
Our estimates of the overall market penetration and resulting
occupancy for the subject hotel from 1995 through December 31,
2001 are presented on the following table.
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Clarion Fourwinds Resort and Marina Page 70
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Estimated Penetration And Occupancy
Clarion Fourwinds Resort and Marina
- -----------------------------------------------------
Estimated Overall Estimated
Year Penetration Rate Occupancy
- --------------------------------------------------------
1995 112% 57%
1996 102% 51%
1997 106% 52%
1998 110% 57%
1999 112% 58%
2000 113% 59%
2001 113% 59%
- --------------------------------------------------------
Source: Arthur Andersen
- --------------------------------------------------------
PROJECTED AVERAGE DAILY ROOM RATE
Growth in the average daily room rate by market segment for the
subject hotel is summarized in the following paragraphs.
Leisure Individual Travelers
The average room rate in the leisure individual traveler segment
is estimated to be approximately $74.76 in 1996 at the subject
hotel. Rates in this segment reflected growth from that achieved
in 1995. This stagnation in room rate is reflective of the
condition of the facilities at the hotel, and the increased
competition from new supply in the marketplace. This segment
represents the second highest rate among the demand segments and
is estimated to have strong growth in average rate after the
completion of property renovations. In 1997, we estimate that the
continued need for renovation of the subject hotel and the
competition from the newly renovated Pointe Golf and Tennis
Resort and the Courtyard by Marriott, will be prohibitive to rate
increases. In 1998, we estimate that the subject hotel will be
able to increase rates by six percent and in 1999 by four percent
as a result of the completion of renovations of the marina and
hotel facilities. In 2000 and thereafter, we estimate that
average rate increases in the leisure category will be 3.5
percent.
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Clarion Fourwinds Resort and Marina Page 71
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Commercial Individual Travelers
The average room rate in the commercial individual traveler
segment at the subject is estimated to be $58.47 in 1996,
reflecting a 3.4 percent decline from 1995. This segment of
demand is the most price-sensitive due to the low average rate in
downtown Bloomington properties and the need to discount rates to
attract corporate travelers to a more distant hotel location. The
depressed rates in this segment have also been the result of the
addition of new hotels in the budget segment in Bloomington.
We estimate that the rate growth in this segment will continue
to be conservative at the subject property. Due to the property's
distance from major sources of corporate demand, we assume that
the property will be unable to significantly increase rates or
room night demand. In 1997 during hotel renovations, we estimate
that the average rates for the commercial individual traveler
segment will increase by two percent. In 1998 and 1999, we
project four percent rate increases in this segment, resulting
from completed property refurbishment and more conservative rate
growth estimated in the prior years. In 2000 and thereafter, we
estimate that the segment will experience rate increases
comparable to an assumed rate of inflation of 3.5 percent per
year.
Corporate Groups
This segment of demand represents the highest-rated business at
the subject hotel. The average room rate in the corporate groups
segment is estimated to be approximately $80.16 in 1996 at the
subject hotel. This represented a 6.7 percent increase over the
rate achieved by this segment in 1995. While average rate
increases for the segment were strong between 1995 and 1996,
accommodated demand declined in this segment by 1,600 room
nights. According to management, the decline in accommodated room
nights was attributed to the deteriorating condition of the
facilities at the property. Based upon discussions with
management, we estimate that upon completion of property
renovations, rate growth in the corporate group segment will be
strong. In 1997 during renovations, we estimate that segment
average rate will increase at a conservative rate of two percent.
In 1998 and 1999, we estimate that the average rate for corporate
groups will increase five percent per year.
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Clarion Fourwinds Resort and Marina Page 72
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Thereafter, we estimate that segment average rates will continue
to increase by 3.5 percent per year.
SMERFs and Other Groups
The average room rate in the SMERFs and Other Groups segment at
the subject hotel was approximately $70.25 in 1996. This
represented a strong increase of 14.8 percent over the rate
achieved by this segment in 1995. Although this segment of demand
is typically considered price-sensitive, it also includes room
night accommodations booked during peak periods when rates are
higher than average. In addition, many of the sports teams
require large room blocks and multiple occupancies, which has
aided the hotel in negotiating room rates in the segment.
We estimate that the future increases in SMERFs and other group
average rates will be limited to inflationary adjustments, due to
the large increase in rate experienced between 1995 and 1996.
Throughout the projection period, we have assumed a 3.5 percent
increase in rate per year, with the exception of 1998, when we
have increased rates by four percent.
The following table presents our estimates of average daily room
rate for the Clarion Fourwinds Resort and Marina.
- ---------------------------------------------------
Estimated Average Daily Room Rate
Clarion Fourwinds Resort and Marina
- ---------------------------------------------------
Year Average Rate % Growth
- ---------------------------------------------------
1995 (actual) $69.55 ----
1996 (est.) 72.34 4.0%
1997 74.50 3.0%
1998 78.50 5.4%
1999 81.50 3.8%
2000 84.50 3.7%
2001 87.50 3.6%
- ---------------------------------------------------
Source: Arthur Andersen LLP
- ---------------------------------------------------
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Clarion Fourwinds Resort and Marina Page 73
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D. THE APPRAISAL PROCESS
The purpose of this appraisal is to estimate the "as is" market
value the subject property in accordance with accepted value
estimating procedure. "The valuation process is a systematic
procedure employed to provide the answer to a client's question
about real property value. It is a model of appraisal activity,
reflecting an understanding of value and the methods used in the
value estimation."3
There are three traditional approaches involved in the valuation
of real property. These are known as the cost approach, the sales
comparison approach, and the income capitalization approach. Each
of the three approaches is related to the other, as they involve
the gathering and analysis of sales, cost, and income data that
pertain to the property being appraised. Although all three
valuation procedures are given consideration, the inherent
strengths and weaknesses of each approach and the nature of the
subject property must be evaluated to determine which will
provide the most supportable estimates of market value. The
appraiser is then free to select one approach to arrive at a
final value estimate.
D.1 THE COST APPROACH
Valuation by the cost approach is based on the principle of
substitution. This principle asserts that an informed investor
will not pay more for a property than the cost to build a
substitute property of equivalent utility. Therefore, the cost
approach, when utilized in an appraisal, estimates the cost of
reproducing or replacing the subject property including
improvements and land, less an allowance for depreciation based
upon the physical condition, functionality, and economic
environment of the building. Although this approach is
particularly applicable to owner-occupied or special-use
properties in the absence of an investor market, it also
recognizes and establishes the relationship between cost and
market-derived values.
- ---------------
3 American Institute of Real Estate Appraisers, The
Appraisal of Real Estate Appraisal, Chicago, Illinois, 1989,
p.73.
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Clarion Fourwinds Resort and Marina Page 74
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In the subject appraisal, the property is now operating as a
business in the production of income to the various components
which comprise the total operation of a hotel and full-service
marina. Although the replacement cost of the subject hotel and
marina could be established, the estimate of market depreciation
is a very subjective consideration which significantly affects
the value indication. The depreciation estimate could only be
realistically estimated by comparison to other approaches,
thereby reducing the cost approach to coincide with one of the
other approaches, and losing the objectivity of the approach as a
third measure of value. In our opinion, an informed and
experienced purchaser would not rely on the cost approach in
establishing an indication of market value for the subject
property. Therefore, this approach has not been included in our
analysis.
D.2 SALES COMPARISON APPROACH
The Sales Comparison Approach estimates market value based upon a
comparative analysis of recent sales of improved properties that
are similar in function, size, income production, and use to the
appraised property. It is important to note that the subject
property has facilities unique to the marketplace. While we have
made assumptions to adjust for these factors, the consideration
of the value determined by the sales comparison approach should
only be used as a test reasonableness in value. This approach to
value assumes that the market will determine a price for the
Clarion Fourwinds Resort and Marina in the same manner that it
determines the price for comparable properties. To apply the
sales comparison approach, the appraiser employs a number of
appraisal techniques, including the principle of substitution
which holds that the value of a property that is replaceable in
the marketplace tends to be set by the cost of acquiring an
equally desirable property. Additional considerations include
examination of market conditions prevailing at the time of sale
as compared to those at the date of valuation. The following
pages explain the application of the sales comparison approach to
the subject property.
To develop the sales comparison approach, we researched the
subject market and the surrounding region for recent sales of
similarly improved properties. We were limited by the lack of
truly comparable properties and expanded our search to include
both hotel properties
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Clarion Fourwinds Resort and Marina Page 75
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(only) and one hotel and marina sale. From our research, we have
selected several sales for further analysis and direct comparison
with the Clarion Fourwinds Resort and Marina. We identified four
comparable hotel sales, which are primarily located throughout
the midwest and Florida. All the properties identified as
comparable sales are affiliated with a major brand similar to the
quality of the Clarion brand.
We have made adjustments to the price paid per room on the basis
of a comparison of each hotel relative to the subject hotel and
marina. Our analysis of the market recognizes primary factors
which affect the pricing of hotels including the following:
1. Transaction Market Conditions: analyzes the condition of
the market for hotel transactions and terms of the sale;
2. Location and Strength of the Local Market: analyzes the
market environment in which the hotel competes;
3. Extent and Quality of the Facilities: analyzes the
characteristics of the product offering;
4. Condition of the Facilities: analyzes the condition and
age of the product;
5. Marina: considers the existence of a marina operation and
its contribution to net operating income to the hotel property;
and,
6. Ground Lease: adjusts for the leasehold position at the
subject property. All properties were fee simple
transactions. The subject hotel is subject to a ground
lease. In order to adjust for the premium that would be
paid for a fee simple hotel property, we made a downward
adjustment to the price of all hotels. This downward
adjustment was calculated by using the subject's stabilized
ground rent of $294,000, which has been reflected in
constant 1996 dollars. This amount was capitalized at 11
percent (based upon the property's assumed terminal
capitalization rate) to arrive at a deduction to the
comparable sales price of $2.67 million. We deducted this
amount from the preliminary adjusted price per room to
arrive at the overall adjusted price per room, with a
leasehold assumption.
<PAGE>
SALES COMPARISON ADJUSTMENT GRID
CLARION FOUR WINDS RESORT AND MARINA; BLOOMINGTON, INDIANA
Holiday Inn
Hotel Name Holiday Inn (now Select)
Location Louisville, KY Strongsville, OH
Interest Transferred Fee Simple Fee Simple
Number of Units (Rooms/Suites) 266 299
Occupancy 66% 68%
Average Daily Rate $72.00 $53.00
Rooms Revenue $4,613,717 $3,933,225
Date of Sale Aug. 95 Oct. 95
Adjusted Sales Price $17,100,000 $11,400,000
Adjusted Sales Price Per Room $64,286 $38,127
Gross Room Revenue Multiplier (GRRM) 3.7 2.9
OTHER ADJUSTMENTS (1)
Transaction Market Conditions 4.5% 4.5%
Location & Strength of Local Market -10.0% 15.0%
Extent and Quality of the Facilities 10.0% 15.0%
Condition of the Facilities/Age -15.0% -5.0%
Marina 35.0% 35.0%
PRELIMINARY ADJUSTED PRICE PER ROOM $80,000 $62,700
======= =======
Ground Lease Adjustment per Room(2) ($9,000) ($8,000)
OVERALL ADJUSTED PRICE PER ROOM $71,000 $54,700
- - LEASEHOLD ======= =======
Mahia Mar Resort &
Hotel Name Hampton Inn Yachting Club
Location Indianapolis, IN Fort Lauderdale
Interest Transferred Fee Simple Fee Simple
Number of Units (Rooms/Suites) 129 298
Occupancy 74% 85%
Average Daily Rate $59.00 $87.00
Rooms Revenue $2,066,843 $8,043,542
Date of Sale Sep. 95 Jun. 94
Adjusted Sales Price $7,702,000 $30,400,000
Adjusted Sales Price Per Room $59,705 $102,013
Gross Room Revenue Multiplier (GRRM) 3.7 3.8
OTHER ADJUSTMENTS (1) 4.5% 9.0%
Transaction Market Conditions -10.0% -20.0%
Location & Strength of Local Market 20.0% -5.0%
Extent and Quality of the Facilities -5.0% -15.0%
Condition of the Facilities/Age 35.0% 0.0%
Marina $86,300 $70,400
======= =======
PRELIMINARY ADJUSTED PRICE PER ROOM
Ground Lease Adjustment per Room(2) ($19,000) ($8,000)
OVERALL ADJUSTED PRICE PER ROOM $67,300 $62,400
- - LEASEHOLD ======= =======
Note:
(1) A negative adjustment indicates that the comparable sale had a
superior location, size & extent of facilities, condition or
location than that of the subject. As a result, the sale price
must be adjusted downward to make the sale comparable with the
subject property. A positive adjustment indicates that the
comparable sale was inferior to that of the subject and the price
per room must be increased.
(2) Adjustment for ground lease at the subject property. Stabilized
rent in constant 1996 dollars was capitalized at 11 percent to arrive at
a value of $2.67 million. This value of the ground lease was deducted on a per
room basis from each property to adjust for the fee simple
position of the comparable sales.
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Clarion Fourwinds Resort and Marina Page 77
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The following paragraphs briefly present the rationale for the
major adjustments made to the price per room of each identified
comparable sale.
Holiday Inn (Louisville, Kentucky)
The Holiday Inn located in downtown Louisville, Kentucky was
purchased by Ridgewood Properties from Southwest Value Partners
and Affiliates for $16,100,000 in August 1995. This hotel is a
seven-story, interior-corridor property. At the time of the sale,
the buyer intended to spend an additional $1 million to upgrade
the property to Holiday Inn core modernization standards. Planned
renovations included the relocation of the lounge and a softgoods
upgrade of the meeting space and public areas. We have included
the cost of this renovation to the sales price resulting in an
adjusted sales price of $17,100,000. We have made six additional
adjustments to the sales price per room:
- Transaction Market Conditions: the sales price per room
was increased by 4.5 percent. This adjustment accounts for
inflation and changes in the market for transactions since August
1995;
- Location and Strength of Local Market: the sale price per
room was decreased by ten percent. The property is situated in
downtown Louisville, which is able to command higher occupancy
and has a more diverse base of demand. As a result, the market in
which this property competes is less prone to seasonality;
- Extent and Quality of the Facilities: the sale price per
room was increased by ten percent. Despite having more meeting
space, the subject hotel is a resort, which has superior
amenities to this hotel;
- Condition of the Facilities/ Age: the sale price was
decreased by fifteen percent. According to the buyer, this
property was in good condition prior to purchase. The additional
capital costs to upgrade the facilities to meet core
modernization stands indicates that the property is in superior
condition to the subject;
- Marina: the sale price per room was increased by 35
percent. Based upon an analysis of additional net operating
income contribution at the subject's marina, this adjustment is
deemed appropriate; and,
- Ground Lease: the adjusted sale price was decreased by
$10,000 per room to account for the fee simple transfer.
On the basis of this analysis, the adjusted price per room of the
Holiday Inn Louisville is estimated to be $70,000 per room.
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Clarion Fourwinds Resort and Marina Page 78
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Holiday Inn (Strongsville, Ohio)
This property is located in Strongsville, Ohio, a suburb of
Cleveland. The original purchase price of the hotel $7,900,000.
The hotel was purchased from International Hotel Investors
Limited by Impac Hotel Group with the intention of renovating and
upgrading the property to a Holiday Inn Select. The buyer
indicated that approximately $3.5 million was spent on the
property to renovate/ upgrade the parking lot, public space,
meeting space, and replace select casegoods and softgoods in the
guestrooms. We have adjusted the original sales price to
$11,400,000, or $38,100 per room, to reflect this capital
investment. Six additional adjustments were made to the sales
price per room:
- Transaction Market Conditions: the sales price per room
was increased by 4.5 percent. This adjustment accounts for
inflation and changes which occurred in the market for
transactions since October 1995;
- Location and Strength of Local Market: To reflect this
variance, we have increased the sale price per room by fifteen
percent. The property is situated in a suburb of Cleveland. This
market is price-sensitive as exhibited by the low average rates
achieved by the property.
- Extent and Quality of the Facilities: the sale price per
room was increased by fifteen percent. Despite more meeting
space, the subject hotel is a resort, which has superior
amenities to this comparable hotel;
- Condition of the Facilities/ Age: the sale price per room
was decreased by five percent. According to the buyer, this
property was in good condition prior to purchase. The additional
capital costs to upgrade the facilities indicate that the
property is in better condition than the subject property;
- Marina: the sale price per room was increased by 35
percent. Based upon an analysis of additional net operating
income contribution at the subject's marina, this adjustment is
appropriate; and,
- Ground Lease: the adjusted sale price was decreased by
$9,000 per room to account for the fee simple transfer.
On the basis of this analysis, the adjusted price per room of the
Holiday Inn Strongsville is estimated to be $53,700 per room.
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Hampton Inn (Indianapolis, IN)
The Hampton Inn, which is located one hour north of the subject
hotel, was purchased from U.S. Lodging of Indianapolis, L.P. at a
sales price of $7,065,000. The buyer was Equity Inns Partnership,
a real estate investment trust. At the time of sale, the property
was in good condition, with approximately $637,000 of renovations
planned. We have adjusted the original sales price to $7,702,000,
or $59,700 per room, to reflect additional capital costs intended
for investment into the property. Six additional adjustments were
made to the sales price per room:
- Transaction Market Conditions: the sales price per room
was increased by 4.5 percent. This adjustment accounts for
inflation and changes which occurred in the market for
transactions since September 1995;
- Location and Strength of Local Market: the sale price per
room was decreased by ten percent. The property is situated in
Indianapolis, which is a superior market in terms of occupancy
and rate to the subject property;
- Extent and Quality of the Facilities: the sale price per
room was increased by twenty percent. This property is a
limited-service facility and has fewer amenities in comparison to
the subject hotel;
- Condition of the Facilities/ Age: the sale price per room
was decreased by five percent. According to the buyer, this
property was in good condition prior to purchase, which is also
reflected in the property's original price per room;
- Marina: the sale price per room was increased by 35
percent. Based upon an analysis of additional net operating
income contribution at the subject's marina, this adjustment is
appropriate; and,
- Ground Lease: the sale price per room was decreased by
$21,000 per room to account for the fee simple transfer.
On the basis of this analysis, the adjusted price per room of the
Hampton Inn is estimated to be $65,300 per room.
Bahia Mar Resort and Yachting Club - now Radisson (Fort Lauderdale, FL)
The Bahia Mar Resort and Yachting Club, which is located in Fort
Lauderdale, Florida, was purchased in June 1994 by RAHN
Properties. The sale transaction involved the purchase of the
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Clarion Fourwinds Resort and Marina Page 80
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improvements for $16,250,000 and the buy-out of the existing
ground lease for $2,500,000 for a total consideration of
$18,750,000. The buyer expended an additional $11,650,000 to
renovate the facilities. Based upon the additional capital
expenditures, we have adjusted the original sales price to
reflect an adjusted sales price of $30,400,000. Five additional
adjustments were made to the sales price per room:
- Transaction Market Conditions: the sales price per room
was increased by nine percent. This adjustments accounts for
inflation and changes which occurred in the market transactions
since June 1994;
- Location and Strength of Local Market: the sale price per
room was decreased by twenty percent. Although this comparable
hotel is also in a resort market, the Bahia Mar is in a strong
market, which achieves higher rates and significantly higher
occupancies;
- Extent and Quality of the Facilities: the sale price per
room was decreased by five percent. Although the extent of
facilities at this hotel is comparable, the quality of the
facilities are superior to that of the subject hotel;
- Condition of the Facilities/ Age: the sale price per room
was decreased by fifteen percent. A major renovation was planned
at the property, which upgraded the quality of this facility;
- Marina: no adjustment was made to the sale price per room.
There is a large marina at this property. Although this marina
has only 300 slips, it is able to operate year-round, and we
estimate that the location of the marina will be able to generate
revenue premiums over the subject marina,
- Ground Lease: the sale price per room was decreased by
$9,000 per room to account for the fee simple transfer.
On the basis of this analysis, the adjusted price per room of the
Bahia Mar Resort and Yachting Club is estimated to be $61,400 per
room.
After adjustments, the comparable hotel sale transactions
indicate a unit price range for the subject hotel from $53,700 to
$70,000 per room. We have given the most weight on the price per
room indications of Holiday Inn, Hampton Inn, and the Bahia Mar
Resort and Yachting Club. On the basis of an analysis of these
sales, we estimate the market value of the leasehold interest in
the subject property by this approach to be approximately $65,600
per room, or $8,270,000 (rounded) as of January 1, 1997.
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D.3 INCOME APPROACH
The income approach to value converts anticipated future benefits
into an estimate of present value. In this respect, the process
is very similar to pricing in other capital markets. The approach
requires the careful estimation of future benefits -- income
before debt service, residual values, etc. -- and application of
investor yield or return requirements. The income approach brings
together reasoned estimates of future revenues and expenses with
the investor's yield requirements. These yield requirements, in
turn, reflect varieties of risk, including property type,
location, local market conditions, and so forth.
Yield and direct capitalization techniques are conventionally
used to convert future benefits to value -- the discounted cash
flow (DCF) technique and the overall capitalization rate (OAR)
technique. The DCF technique entails (1) modeling the future
performance of the subject, over a specific holding period, (2)
estimating the future value (reversionary value) at the end of
the holding period, and (3) converting the stream of periodic
benefits and reversionary value, through a discounting process at
investor yields, to a present value. The selection of an
appropriate discount rate is essential to this process.
By comparison, direct capitalization using an overall rate (OAR)
converts a single, "normalized" year's income or income before
debt service into a value by dividing the appropriate
capitalization rate into the normalized income. Subsequent
adjustments are then made to take into consideration variations
from normalized operations. In order to value the Clarion
Fourwinds Resort and Marina, we have utilized only the discounted
cash flow method for the income approach. The direct
capitalization method has not been used because most investors do
not use it as a tool to analyze value from income. In addition,
it is difficult to reflect future increases in occupancy and room
rate using direct capitalization. Finally, using a "normalized"
or stabilized net operating income is somewhat speculative and
can produce erroneous results.
The discussion on the following pages provide a summary of our
projection of revenues, expenses, discount rates, capitalization
rates, and many of the other assumptions which are incorporated
within the income approach. The discussion of revenues and
expenses begins
<PAGE>
Clarion Fourwinds Resort and Marina Page 82
- --------------------------------------------------------------------
with an examination of historical trends. Finally, estimates are
made with regard to the appropriate projection of revenues,
expenses, and capital items.
HISTORICAL FINANCIAL PERFORMANCE
The historical operating results for the subject property are
presented on the following two pages. The third page presents the
detailed historical operating results for the marina.
<PAGE>
<TABLE>
Recast of Historical Financial Statements
Clarion Four Winds Resort - Marina Only
1994 Actual Income 1995 Actual Income YTD Oct. 31, 1995 YTD Oct. 31, 1996
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Marina (1) $2,078,938 79.2% $1,961,639 80.0% $1,700,601 76.5% $1,671,119 78.8%
P.O.L. 233,919 8.9% 210,529 8.6% 242,129 10.9% 217,457 10.3%
Boat Rental 124,237 4.7% 106,052 4.3% 106,431 4.8% 87,662 4.1%
Grocery Store 188,105 7.2% 2,785 7.0% 172,873 7.8% 43,424 6.8%
---------- ----- ------- ---- --------- ----- --------- -----
Total Revenues $2,625,199 20.8 $2,451,005 20.0% $2,222,034 23.5% $2,119,662 21.2%
DEPARTMENTAL
EXPENSES
Marina (1) $600,843 28.9% $459,797 23.4% $355,186 20.9% $278,231 16.6%
P.O.L. 181,047 77.4% 155,255 73.7% 195,239 80.6% 156,031 71.8%
Boat Rental 69,465 55.9% 34,050 32.1% 26,487 24.9% 37,397 42.7%
Grocery Store 127,944 68.0% 116,166 67.2 115,979 67.1% 17,556 82.0%
---------- ----- ------- ---- --------- ----- --------- -----
Total Departmental
Expenses $979,299 37.3% $765,268 31.2% $692,891 31.2% $589,215 27.8%
TOTAL DEPARTMENTAL
INCOME $1,645,900 62.7% $1,685,737 68.8% $1,529,143 68.8% $1,530,447 72.2%
Notes:
The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen. (1) Marina revenues and expenses in
1994 and 1995 include B.M.T. and Services. These operations were
discontinued in 1996 and leased to Boat Sales, Inc.
</TABLE>
<PAGE>
Clarion Fourwinds Resort and Marina Page 86
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ESTIMATED OPERATING RESULTS
Estimates of income and expenses, in current dollars, have been
prepared for the subject hotel and marina from January 1, 1997
through December 31, 2007. Our financial projections are based
upon an analysis of the historical operating results of the
subject and on the performance of comparable hotels. A
representative year of operation, expressed in 1996 dollars, is
first established and then adjusted to account for inflation and
the varying levels of occupancy for each year in the projection
period. The representative level of occupancy at the hotel is
estimated to be 59 percent. The following paragraphs describe the
assumptions and bases of our estimates.
Inflation Assumption
In order to estimate future inflation of revenues and expenses at
the subject hotel, we have reviewed the historical inflation of
the consumer price index - urban markets (CPI-U).
- -----------------------------
Year CPI-U
---- -----
1988 4.4%
1989 4.6%
1990 6.1%
1991 3.1%
1992 2.9%
1993 2.7%
1994 2.7%
1995 2.5%
- -----------------------------
On the basis of historical inflation rates and on our estimates
of future inflation, we have assumed an inflation assumption of
3.5 percent, compounded annually, from a base year of 1996.
Revenue
Rooms Revenue is based upon the estimates of average annual
occupancy and room rates as described previously in this
report.
<PAGE>
Clarion Fourwinds Resort and Marina Page 87
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Food Revenue is derived from estimated sales food in
the restaurant, the galley deli (seasonal), lounge, room
service, and banquet facilities. Food revenue also includes
any miscellaneous revenue such as corkage fees. Our
estimate is based upon an analysis of actual operations of
comparable hotels and on historical food sales.
On the basis of the analysis of the historical operating
results and the results of comparable hotels, we assume
that the subject hotel will achieve food revenue of $47.00
per occupied room, in 1996 dollars, at a stabilized
occupancy of 59 percent. Food revenue is estimated to be 50
percent variable with occupancy and is adjusted to account
for inflation and occupancy levels throughout the
projection period.
Beverage Revenue is derived from estimated sales of all
alcoholic beverages in the restaurants, galley deli,
lounges, room service, and banquet facilities. Our estimate
is based upon the actual operations of comparable hotels
and upon an analysis of historical beverage sales.
On the basis of the analysis of the historical operating
results and the results of comparable hotels, we assume
that the subject hotel will achieve beverage revenue of
$13.50 per occupied room, in 1996 dollars, at a stabilized
occupancy of 59 percent. Beverage revenue is estimated to
be 60 percent variable with occupancy and is adjusted to
account for inflation and occupancy levels throughout the
projection period.
Telephone Revenue includes the revenue derived from long
distance and local telephone calls, as well as any per call
charges applied to credit card or other calls. Revenue in
this category is estimated to equal $1.75 per occupied
room, in 1996 dollars, at a stabilized occupancy of 59
percent. According to management, the property replaced the
telephone switch in 1995, which has improved both revenues
and expense ratios in this department. Telephone revenue is
estimated to be 100 percent variable with occupancy and is
adjusted to account for inflation and varying occupancy
levels throughout the projection period.
<PAGE>
Clarion Fourwinds Resort and Marina Page 88
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Marina includes all revenue associated with the operation
of the marina. Within the marina, there are four separate
departments including the marina (slip rental), P.O.L.
(petroleum, oil, and lubricants), boat rental, and the
grocery store. According to management at the property,
historical revenues are not necessarily reflective of the
future performance of this department. In 1995, several
areas formerly operated by the hotel were outsourced and
leased to Boat Sales, Inc. As a result, departmental
revenues decreased; however, the reduction of expenses has
more than offset the loss in revenues which has resulted in
improved departmental profits.
Marina revenue includes all income from full-year,
seasonal, and transient slip rental, the lease of Boat
Sales, Inc., buoy field, bubble storage, and other miscellaneous
revenues. In estimating future revenue for this
sub-department, we investigated the competitive market for
marinas and typical slip rental rates; however, due to lack
of comparable marinas within the midwest, we primarily
relied upon historical operating revenue. Discussions with
the representatives at the subject indicated that there is
minimal competition from other marinas within the area due
to their distance from each other. These facilities also
cater to different markets areas and may compete on a
limited basis on a regional level. A summary of other
marinas and published slip rental rates is included within
the following table:
<PAGE>
Comparable Marina Rates
Drive Time
Marina Location (Hours) # Slips
- ----------------- ------------------ ---------- -------
Subject Fourwinds Bloomington - 880
Subject Fourwinds
Watertown Ohio River; Dayton,
Kentucky 3.5 474
Jamestown Lake Cumberland;
Kentucky 7 800
Jamestown
Four Seasons Ohio River;
Cincinnati, OH 3.5 500
Kents Harbor Brookville Lake;
Liberty, IN 2.5 300
Kents Harbor
Slip Price
---------------------------
Marina 10X20 15X40 18X55
- ----------------- ------ ------ -----
Subject Fourwinds $1,060 $3,130
Subject Fourwinds 4,450 4,450
Watertown
1,500 3,360 4,620
Jamestown
695
Jamestown
2,995
Four Seasons
1,440 2,880 3,960
Kents Harbor
1,075
Kents Harbor 1,165 2,595
Marina Comments
- ----------------- ------------------
Subject Fourwinds Open slips; full year
Subject Fourwinds Covered slips; full year
Watertown Open Slips; full year
Jamestown Open slips; seasonal only
Jamestown 16 X 40; covered slips
Four Seasons Open Slips
Kents Harbor Open Slips; no utilities
Kents Harbor Open Slips; seasonal
<PAGE>
Clarion Fourwinds Resort and Marina Page 90
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The preceding table indicates that slip rental rates at the
subject marina are comparable to other marinas within the
region. According to management, the marina is operating at
100 percent capacity and has a waiting list of several
hundred individuals for vacant slips. As a result, we
assume that the marina revenues are stabilized and mostly
fixed. We assume that in a stabilized year of operation,
the marina will generate $1,821,000 in revenues, in
constant 1996 dollars. Marina revenues are five percent
variable with hotel occupancy to account for some of the
effect of hotel demand on transient slip rental revenues.
P.O.L. includes revenues associated with the sale of gas and
oil. Due to the assumed stabilization of marina revenues, we
project P.O.L. revenues on the basis of historical operating
results. In a stabilized year of operation, P.O.L. sales are
estimated to be $225,000, in constant 1996 dollars. P.O.L.
revenues are assumed to be 95 percent fixed and have been
adjusted to account for inflation and changes in hotel occupancy
throughout the projection period.
Boat Rental is also based upon discussions with management
and historical operating performance. Boat rental revenue
is derived from boats purchased by the lessee, Boat Sales,
Inc., as outlined in the lease agreement. We assume that
boat rental revenue will be subject to a greater degree of
variability depending upon hotel occupancy in comparison to
other marina operations. In a stabilized year of operation,
we estimate that boat rental will be $90,000, in constant
1996 dollars. We have assumed that boat rental revenue will
be 25 percent variable with the level of occupancy at the
hotel.
The Grocery Store is also a seasonal operation open only
between April and October each year. The grocery store is
assumed to be stabilized with some variability of sales
depending upon hotel occupancy. We assume that grocery
store sales will be $165,000 in a stabilized year of
operations, in constant 1996 dollars. Grocery store revenue
is assumed to be 90 percent fixed and is adjusted to
account for inflation and hotel occupancy throughout the
projection period.
<PAGE>
Clarion Fourwinds Resort and Marina Page 91
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Other Operated Departments includes all revenue
associated with the operation of vending and movies sales.
We estimate that revenue in this category will equal
$35,200, or $1.30 per occupied room, at a stabilized
occupancy of 59 percent, in constant 1996 dollars. Other
Operated Departmental revenue is estimated to be 100
percent variable with occupancy and is adjusted to account
for inflation and varying occupancy levels throughout the
projection period.
Rental and Other Income, Net includes all miscellaneous income
(net of expenses) including interest income, concierge
commissions, photo commission, and other miscellaneous
items. This category also includes rental income from the
gift shop, meeting room rental, and audio/ visual rental.
According to management, 1995 historical income in this
category is not entirely reflective of ROI income due to
the accounting department's miscoding of revenues. As a
result, we have placed a greater emphasis on ROI for the
1996 period. On the basis of our analysis of historical
leases and miscellaneous revenue, we estimate that rental
and other income, net of expenses, will be $5.51 per
occupied room at a stabilized level of occupancy, in
constant 1996 dollars. Revenue in this category is assumed
to be 50 percent variable with occupancy and is adjusted to
account for inflation and varying occupancy levels
throughout the projection period.
Departmental Expenses
Rooms Departmental Expense includes salaries and wages for the
front desk, housekeeping, reservations, bell staff and
laundry, plus fringe benefits. Other operating expenses in
the rooms department include linen, cleaning supplies,
recreation and health club, guest supplies, uniforms,
reservations expenses, security, equipment leases and
travel agent commissions.
Rooms department expense is estimated based upon the
historical rooms departmental expenditures at the subject
hotel, comparisons to other similar properties, and our
estimates of occupancy and average rate over the projection
period. In order to achieve increased occupancy and average
room rates at the hotel,
<PAGE>
Clarion Fourwinds Resort and Marina Page 92
- --------------------------------------------------------------------
we assume that the rooms departmental expense will increase
slightly to improve the quality of the product. Based upon
an analysis of historical and comparable hotel departmental
expenses and a physical inspection of the property, we have
adjusted rooms departmental expense upward from 1995
expense levels. We estimate that rooms departmental
expenditures will equal 22.8 percent of departmental sales,
in a representative year at 59 percent occupancy. Expenses
are estimated to be 70 percent variable with occupancy and
are adjusted to account for inflation and occupancy levels
throughout the projection period.
Food and Beverage Expense includes the cost of goods sold
(food and beverages), labor and related benefits, and other
operating expenses. Labor costs include departmental
management, cooks and kitchen personnel, service staff,
banquet staff, and bartenders. Other operating expenses
include china, glass, silver, linens, restaurant and
kitchen supplies, menus and printing, and special
promotions. Labor costs are analyzed on a fixed versus
variable basis, as are other operating costs. The cost of
goods sold was considered completely variable as a ratio to
sales.
Food and beverage expense is estimated to be 79.5 percent of
combined food and beverage revenue in a representative year
at 59 percent occupancy. Food and beverage expenditures are
estimated to be 40 percent variable with occupancy and are
adjusted to account for inflation and occupancy levels
throughout the projection period.
Telephone Expenses are estimated based upon an analysis of
historical operating results at the subject hotel and an on
analysis of the expenses of comparable hotels. Based upon
discussions with management, telephone expenses have
improved at the subject since the installation of a new
telephone switch. We estimate that telephone expenditures
will equal approximately 57 percent of departmental revenue
in a representative year. Telephone expenses are estimated
to be 50 percent variable with occupancy and are adjusted
to account for inflation and occupancy levels throughout
the projection period.
<PAGE>
Clarion Fourwinds Resort and Marina Page 93
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Marina Expenses are estimated based upon the historical
operating performance at the subject property. As mentioned
previously, the hotel leased certain operations to Boat
Sales, Inc. in 1995. As a result, marina expenses are
estimated to be lower as a percentage of departmental sales
than in year-end 1995 and 1996. The expenses by
sub-department are detailed in the following paragraphs:
Marina includes payroll, utilities, and other costs
associated with the operation of the marina. We assume that
these expenses are mostly fixed. Based upon an analysis of
expenses for the trailing twelve months ending October 31,
1996, we estimate that marina expenses will be 20 percent
of departmental sales. Expenses are assumed to be 90
percent fixed and are adjusted to account for inflation and
marina sales throughout the projection period.
P.O.L. includes the cost of goods sold, payroll expenses,
and other expenses associated with the operation of this
sub-department. Expenses in this departments are highly
variable due to price fluctuations for petroleum. Based
upon historical expenses, we estimate that P.O.L. expense
will be 72 percent of total departmental sales or $162,000
in a stabilized year of operation, in 1996 dollars.
Expenses are assumed to be 75 percent variable and are
adjusted to account for inflation and fluctuation of
departmental sales throughout the projection period.
Boat Rental includes the cost of maintaining the pontoon
boats, payroll and other expenses. As mentioned earlier,
the use of boats are provided by Boat Sales, Inc.; however,
the subject hotel is responsible for the maintenance of
these boats. Based upon historical expenses we estimate
that boat rental expense will be 35 percent of departmental
sales in a stabilized year of operation. Expenses are
assumed to be 100 percent fixed and are adjusted to account
for inflation throughout the projection period.
Grocery Store expenses include cost of goods sold, payroll
and related, and other expenses. Based upon historical
expenses, we estimate that total grocery store expense will
be 70 percent of total departmental sales. Expenses are
assumed to be
<PAGE>
Clarion Fourwinds Resort and Marina Page 94
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50 percent fixed and are adjusted to account for inflation
and sales volume throughout the projection period.
Other Operated Departments includes all expenses associated
with the operation of vending machines and movie rentals.
We assume that departmental expenditures in this category
would continue to equal approximately 71 percent of revenue
in a stabilized year of operations. Expenses are assumed to
be 100 percent variable with occupancy and are adjusted to
account for inflation and occupancy levels throughout the
projection period.
Undistributed Operating Expenses
Administrative and General Expense includes payroll and
related expenses for the general manager, personnel and
training, clerical staff, controller and accounting staff.
Other administrative and general (A&G) expenses include
office supplies, computer services, accounting and legal
fees, travel expenses and liability insurance. We reflected
these expenses under the fixed component of this expense
item. Credit card commissions were classified as an A&G
expense, and are directly variable with sales.
A&G expenses are estimated based upon actual operating results
of comparable hotels and historical expenses recorded. Due
to the seasonality of the property and the added overhead
expense of the marina operation, A&G expenses are higher,
on a percentage of total sales, than is typical of the
lodging industry. We estimate that A&G expenses will equal
approximately 11.6 percent of total sales or $5,700 per
available room, at a stabilized occupancy of 59 percent, in
constant 1996 dollars. Expenses are estimated to be 90
percent fixed and are adjusted to account for inflation and
occupancy levels throughout the projection period.
Marketing Expense includes payroll and related expenses for
the sales and marketing staff, direct sales expenses,
advertising and promotion, and travel expense
<PAGE>
Clarion Fourwinds Resort and Marina Page 95
- --------------------------------------------------------------------
for the sales staff. Marketing expenses are estimated based
upon actual operating results of comparable hotels and
historical expenses recorded. We estimate that marketing
expenditures will equal approximately 6.0 percent of total
sales, or $2,942 per available room, at a stabilized
occupancy of 59 percent, in constant 1996 dollars.
Estimates are estimated to be 90 percent fixed and are
adjusted to account for inflation and occupancy levels
throughout the projection period.
Management Fee Expense is estimated to be four percent of
gross revenue on the basis of information provided by
Richfield Hospitality Services, Inc.
Franchise Fee Expense is estimated to be three percent of
rooms revenue on the basis of the terms outlined in the
franchise agreement with Choice Hotels International.
Energy Costs includes the expenditure for electricity,
fuel, water, waste removal and related operating supplies.
Based upon historical energy costs at the subject and the
actual energy expenses recorded by comparable hotels, we
assume that the energy expense will equal $1,700 per room
in a representative year, in constant 1996 dollars. Energy
expenditures are estimated to be 90 percent fixed and are
adjusted to account for inflation and occupancy levels
throughout the projection period.
Property Operations and Maintenance Expense (P.O.M.)
includes payroll and related expenses, as well as other
expenses necessary for painting, decorating, and repairs of
the building, grounds and equipment. This expense is
estimated based upon historical property operations and
maintenance expenses at the subject hotel and actual
expenses at comparable hotels. We estimate that the
property, operations, and maintenance expense will equal
$2,200 per room in a representative year, in constant 1996
dollars. P.O.M. expenditures are estimated to be 90 percent
fixed and are adjusted to account for inflation and
occupancy levels throughout the projection period.
<PAGE>
Clarion Fourwinds Resort and Marina Page 96
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Fixed Charges
Property Taxes are estimated based upon the current property
tax assessment and tax bill for the 1995 year, which is
payable in 1996. A more detailed analysis of historical and
current property taxes is presented earlier in Section B.1
of this report.
Insurance on building and contents against damage was
estimated based upon the expenses incurred at resort
properties throughout the hotel industry and comparable
hotel operating statements. Discussions with management
indicated that the property is currently negotiating to
improve existing coverage, especially of the marina. We
estimate that insurance costs will equal $400 per available
room, in constant 1996 dollars. This reflects a significant
increase from insurance costs previously incurred by the
subject. Expenses are adjusted to account for inflation
throughout the projection period.
Equipment Rental includes rental of computer equipment, copy
machines, fax machines, and other miscellaneous operating
equipment. On the basis of historical equipment rental
expenditures at the subject hotel, we estimate that
equipment rental costs will equal $430 per room, in
constant 1996 dollars. Expenses are adjusted to account for
inflation throughout the projection period.
Reserve for Replacement provides a fund for the replacement
of furniture, fixtures and equipment. We assume that the
reserve for replacement will equal four percent of total
revenue throughout the projection period, consistent with
industry practice.
Capital Expenditures are based upon the requirements to
renovate the property. These capital expenditures are
assumed as a deduction from operating income. A more
detailed analysis of the capital expenditures assumed is
presented in section B.1 (Description and Analysis of the
Property) of this report.
<PAGE>
Clarion Fourwinds Resort and Marina Page 97
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Income Before Debt Service
Estimated operating results for the subject property to the level
of profit before debt service, income taxes, depreciation and
other capital costs, are presented on the following pages.
<PAGE>
<TABLE>
Statement of Estimated
Income and Expenses
1997
Per Occupied
Amount Ratio Per Room Room/Day
<S> <C> <C> <C> <C> <C> <C>
Number of Days
Open/Year 365
Available Rooms
(Daily) 126
Available Rooms
(Annually) 45,990
Occupancy Percentage 52%
Occupied Rooms 24,100
Average Room Rate 72.50
REVENUES
Rooms $1,747,300 29.8% $13,867 $75.50
Food 1,189,100 20.3% 9,437 49.34
Beverage 333,900 5.7% 2,650 13.85
Telephone 43,700 0.7% 347 1.81
Marina (1) 2,364,500 40.4% 18,766 98.11
Minor Operating
Departments (2) 32,400 0.6% 257 1.34
Rents and Other
Income (Net) (3) 146,300 2.5% 1,161 6.07
Total Revenues $5,857,200 100.0% $46,486 $234.04
DEPARTMENTAL
EXPENSES
Rooms $433,900 24.8% $3,444 $18.00
Food & Beverage 1,227,700 80.6% 9,744 50.94
Telephone 25,100 57.5% 199 1.04
Marina 695,000 29.4% 5,516 28.84
Minor Operating
Departments (2) 23,000 71.1% 183 0.95
Total Departmental
Expenses $2,404,700 41.4% $19,085 $99.78
TOTAL DEPARTMENTAL
INCOME $3,452,500 58.9% $27,401 $143.26
UNDISTRIBUTED
OPERATING EXPENSES
Administrative &
General $734,900 12.5% $5,833 $30.49
Sales and Marketing 379,300 6.5% 3,010 15.74
Management Fees 234,300 4.0% 1,860 9.72
Franchise Fees 52,400 0.9% 416 2.17
Energy 219,200 3.7% 1,739 9.10
Property Operations
& Maintenance 283,600 4.8% 2,251 11.77
Total Undistributed
Operating
Expenses $1,903,700 32.5% $15,109 $78.99
INCOME BEFORE FIXED
CHARGES $1,548,800 26.4% $12,292 $64.27
FIXED CHARGES
Property Taxes $50,000 0.9% $397 $2.07
Personal Property Taxes 10,900 0.2% 87 0.45
Insurance 52,200 0.9% 414 2.17
Equipment Rent (4) 56,100 1.0% 445 2.33
Ground Rent 252,000 4.3% 2,000 10.46
Total Fixed
Charges $421,200 7.2% $3,343 $17,48
INCOME BEFORE
RESERVES $1,127,600 19.3% $8,949 $46.79
Reserve for
Replacement of
FF&E $234,300 4.0% $1,860 $9.72
Capital Expenditures 1,650,000 28.2% 13,095 68.46
Total Reserves and
Capital Exp. $1,884,300 32.2% $14,955 $78.19
INCOME BEFORE DEBT
SERVICE ($756,700) -12.9% ($6,006) ($31.40)
Notes
(1) Includes revenues and expenses from the following areas: Marina, P.O.L. (Petroleum, Oil & Lubricants), Boat Rental, and the
Grocery Store.
(2) Includes Movie Rentals and Vending.
(3) Includes cash discounts, no show revenue, sales tax
rebates, Interest Income, fax copies, postage, commissions,
a/v rental, meeting room rental and other rents.
<PAGE>
1998
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days
Open/Year 365
Available Rooms
(Daily) 126
Available Rooms
(Annually) 45,990
Occupancy Percentage 57%
Occupied Rooms 26,200
Average Room Rate 74.50
REVENUES
Rooms $1,951,900 30.8% $15,491 $74.50
Food 1,311,300 20.7% 10,407 50.05
Beverage 373,300 5.9% 2,963 14.25
Telephone 49,100 0.8% 390 1.87
Marina (1) 2,459,000 38.8% 19,516 93.85
Minor Operating
Departments (2) 36,500 0.6% 290 1.39
Rents and Other
Income (Net) (3) 157,600 2.5% 1,251 6.02
Total Revenues $6,338,700 100.0% $50,307 $241.94
DEPARTMENTAL
EXPENSES
Rooms $475,500 24.4% $3,774 $18.15
Food & Beverage 1,353,200 80.3% 10,740 51.65
Telephone 28,200 57.5% 224 1.08
Marina 720,500 29.3% 5,718 27.50
Minor Operating
Departments (2) 25,900 71.0% 206 0.99
Total Departmental
Expenses 2,603,300 41.4% $20,661 $99.36
TOTAL DEPARTMENTAL
INCOME $3,735,400 58.9% $29,646 $142.57
UNDISTRIBUTED
OPERATING EXPENSES
Administrative &
General $766,500 12.1% $6,083 $29,26
Sales and Marketing 395,600 6.2% 3,140 15.10
Management Fees 253,500 4.0% 2,012 9.68
Franchise Fees 58,600 0.9% 465 2.24
Energy 228,600 3.6% 1,814 8.73
Property Operations
& Maintenance 295,900 4.7% 2,348 11.29
Total Undistributed
Operating
Expenses $1,998,700 31.5% $15,863 $76.29
INCOME BEFORE FIXED
CHARGES $1,736,700 27.4% $13,783 $66.29
FIXED CHARGES
Property Taxes $51,800 0.8% $411 $1.98
Personal Property Taxes 11,300 0.2% 90 0.43
Insurance 54,000 0.9% 428 2.06
Equipment Rent (4) 58,000 0.9% 461 2.21
Ground Rent 285,700 4.5% 2,267 10.90
Total Fixed Charges $460,800 7.3% $3,657 $17.59
INCOME BEFORE
RESERVES $1,275,900 20.1% $10,126 $48.70
Reserve for
Replacement of
FF&E $253,500 20.1% $10,126 $48.70
Capital Expenditures 504,000 8.0% 4,000 19.24
Total Reserves
and Capex $757,500 12.0% $6,012 $28.91
INCOME BEFORE DEBT
SERVICE $518,400 8.2% $4,114 $19.79
<PAGE>
1999
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days
Open/Year 365
Available Rooms
(Daily) 126
Available Rooms
(Annually) 45,990
Occupancy Percentage 58%
Occupied Rooms 26,900
Average Room Rate 78.50
REVENUES
Rooms $2,111,700 31.4% $16,760 $78.50
Food 1,409,600 20.9% 11,187 52.40
Beverage 404,400 6.0% 3,210 15.03
Telephone 52,200 0.8% 414 1.94
Marina (1) 2,549,100 37.9% 20,231 94.76
Minor Operating
Departments (2) 38,800 0.6% 308 1.44
Rents and Other
Income (Net) (3) 165,300 2.5% 1,312 6.14
Total Revenues $6,731,100 100.0% $53,421 $250.23
DEPARTMENTAL
EXPENSES
Rooms $501,200 23.7% $3,978 $18.63
Food & Beverage 1,444,100 79.6% 11,461 53.68
Telephone 29,900 57.2% 237 1.11
Marina 746,100 29.3% 5,921 27.74
Minor Operating
Departments (2) 27,500 70.9% 218 1.02
Total Departmental
Expenses $2,748,800 40.8% $21,816 $102.19
TOTAL DEPARTMENTAL
INCOME $3,982,300 59.2% $31,606 $148.04
UNDISTRIBUTED
OPERATING EXPENSES
Administrative &
General $795,400 11.8% $6,313 $29.57
Sales and Marketing 410,500 6.1% 3,258 15.26
Management Fees 269,200 4.0% 2,137 10.01
Franchise Fees 63,400 0.9% 503 2.36
Energy 237,200 3.5% 1,883 8.82
Property Operations
& Maintenance 307,000 4.6% 2,436 11.41
Total Undistributed
Operating
Expenses $2,082,700 30.9% $16,529 $77.42
INCOME BEFORE FIXED
CHARGES $1,899,600 28.2% $15,076 $70.62
FIXED CHARGES
Property Taxes $53,600 0.8% $425 $1.99
Personal Property Taxes 11.700 0.2% 93 0.43
Insurance 55,900 0.8% 443 2.08
Equipment Rent (4) 60,100 0.9% 477 2.23
Ground Rent 313,200 4.7% 2,486 11.64
Total Fixed Charges $494,500 7.3% $3,925 $18.38
INCOME BEFORE
RESERVES $1,405,100 20.9% $11,152 $52,23
Reserve for
Replacement of
FF&E $269,200 4.0% $2,137 $10.01
Capital Expenditures 0 0.0% 0 0.00
Total Reserves
and Capex $269,200 4.0% $2,137 $10.01
INCOME BEFORE DEBT
SERVICE $1,135,900 16.9% $9,015 $42.23
<PAGE>
Clarion Four Winds
Statement of Estimated
Income and Expenses
2000 2000
Per Occupied Per Occupied
Amount Ratio Per Room Room/Day Amount Ratio Per Room Room/Day
Number of Days
Open/Year 365 365
Available Rooms
(Daily) 126 126
Available Rooms
(Annually) 45,990 45,990
Occupancy Percentage 59% 59%
Occupied Rooms 27,200 27,200
Average Room Rate 82.00 84.50
REVENUES
Rooms (1) $2,230,400 31.7% $17,702 $82.00 2,298,400 31.7% 18,241 84.50
Food 1,467,000 20.9% 11,643 53.93 1,518,300 20.9% 12,050 55.82
Beverage 421,400 6.0% 3,344 15.49 436,100 6.0% 3,461 16.03
Telephone 54,600 0.8% 433 2.01 56,500 0.8% 448 22.08
Marina (1) 2,640,100 37.6% 20,953 97.06 2,732,500 37.6% 21,687 100.46
Minor Operating
Departments (2) 40,600 0.6% 322 1.49 42,000 0.6% 333 1.54
Rents and Other
Income (Net) (3) 172,000 2.4% 1,365 6.32 178,000 2.5% 1,413 6.54
Total Revenues $7,026,100 100.0% $55,763 $258.31 7,261,800 100% $57,633 $266.98
DEPARTMENTAL
EXPENSES
Rooms (1) $5,22,800 23.4% $4,149 $19.22 541,100 23.5% 4,294 $19.89
Food & Beverage 1,501,200 79.5% 11,914 55.19 1,553,800 79.5% 12,332 57.13
Telephone 31,100 57.0% 247 1.14 32,200 57.0% 256 1.18
Marina 772,300 29.3% 6,129 28.39 799,400 29.3% 6,344 29.39
Minor Operating
Departments (2) 28,800 71.0% 229 1.06 29,800 71.0% 237 1.10
Total Departmental
Expenses $2,856,200 40.7% $22,668 105.01 $2,956,300 40.7% 23,463 $108.69
TOTAL DEPARTMENTAL
INCOME $4,169,900 59.3% $33,094 $153.31 $4,305,500 59.3% $34,171 158.29
UNDISTRIBUTED
OPERATING EXPENSES
Administrative &
General $824,200 11.7% $6,541 $30.30 $853,000 11.7% $6,770 $31.36
Sales and Marketing 425,000 6.1% 3,376 15.64 440,300 6.1% 3,494 16.19
Management Fees 281,000 4.0% 2,230 10.33 290,500 4.0% 2,306 10.68
Franchise Fees 66,900 1.0% 531 2.46 69,000 1.0% 548 2.54
Energy 245,800 3.5% 1,951 9.04 254,400 3.5% 2,019 9.35
Property Operations
& Maintenance 318,100 4.5% 2,525 11.69 329,200 4.5% 2,613 12.10
Total Undistributed
Operating
Expenses $2,161,400 30.8% $17,154 $79.46 $2,236,400 30.8% $17,749 $82.22
INCOME BEFORE FIXED
CHARGES $2,008,500 28.6% $15,940 $73.84 $2,069,100 28.5% $16,421 $76.07
FIXED CHARGES
Property Taxes $55,500 0.8% $440 $2.04 $57,400 0.8% $456 $2.11
Personal Property Taxes 12,100 0.2% 96 0.44 12,500 0.2% 99 0.46
Insurance 57,800 0.8% 459 2.13 59,900 0.8% 475 2.20
Equipment Rent (4) 62,200 0.9% 493 2.29 64,300 0.9% 511 2.36
Ground Rent 333,800 4.8% 2,649 12.27 350,300 4.8% 2,780 12.88
Total Fixed Charges $521,400 7.4% $4,138 $19.17 $544,400 7.5% $4,321 $20.01
INCOME BEFORE
RESERVES $1,487,100 21.2% $11,802 $54.67 $1,524,700 21.0% $12,101 $56.06
Reserve for
Replacement of
FF&E $281,000 4.0% $2,230 $10.33 $290,500 4.0% $2,306 $10.68
Capital Expenditures 0 0.0% 0 0.00 0 0.0% 0 0.00
Total Reserves
and Capex $281,000 4.0% $2,230 $10.33 $290,500 4.0% $2,306 $10.68
INCOME BEFORE DEBT
SERVICE $1,206,100 17.2% $9,572 $44.34 $1,234,200 17.0% $2,306 0.00
Notes
(1) Includes revenues and expenses from the following areas: Marina, P.O.L. (Petroleum, Oil & Lubricants), Boat Rental, and the
Grocery Stove.
(2) Includes Movies Rentals and Vending
(3) Includes cash discounts, no show revenue, sales tax
rebates, Interest Income, fax copies, postage, commissions,
a/v rental, meeting room rental and other rents.
<PAGE>
Clarion Four Winds
Statement of Estimated
Income and Expenses
2003 2004
Per Occupied Per Occupied
Amount Ratio Per Room Room/Day Amount Ratio Per Room Room/Day
Number of Days
Open/Year 365 365
Available Rooms
(Daily) 126 126
Available Rooms
(Annually) 45,990 45,990
Occupancy Percentage 59% 59%
Occupied Rooms 27,200 27,200
Average Room Rate 82.00 8 4.50
REVENUES
Rooms (1) $2,461,600 31.6% $19,537 $82.00 2,543,200 31.6% 20,184 93.50
Food 1,626,400 20.9% 12,908 53.93 1,683,300 20.9% 13,360 61.89
Beverage 467,200 6.0% 3,708 15.49 483,600 6.0% 3,838 17.78
Telephone 60,500 0.8% 480 2.01 62,600 0.8% 497 230
Marina (1) 2,927,200 37.6% 23,232 97.06 3,029,700 37.77% 24,045 111.39
Minor Operating
Departments (2) 45,000 0.6% 357 1.49 46,000 0.6% 370 1.71
Rents and Other
Income (Net) (3) 190,000 2.5% 1,513 6.32 197,300 2.5% 1,566 7.25
Total Revenues $7,778,500 100.0% $61,734 $285.97 8,046.300 100% $63,860 $295.82
DEPARTMENTAL
EXPENSES
Rooms (1) $5,79,600 23.5% $4,600 $21.31 599,900 23.6% 4,761 $22.06
Food & Beverage 1,664,500 79.5% 13,210 61.19 1,722,800 79.5% 13,673 63.34
Telephone 34,500 57.0% 274 1.27 35,700 57.0% 283 1.31
Marina 854,400 29.3% 6,797 31.49 886,300 29.3% 7,034 32.58
Minor Operating
Departments (2) 31,900 70.9% 253 1.17 33,000 70.8% 262 1.21
Total Departmental
Expenses $3,166,900 40.7% $25,134 116.43 $3,277,700 40.7% 26,013 $120.50
TOTAL DEPARTMENTAL
INCOME $4,611,600 59.3% $33,600 $169.54 $4,768,600 59.3% $37,846 175.32
UNDISTRIBUTED
OPERATING EXPENSES
Administrative &
General $913,800 11.7% $7,252 $33.60 $945,800 11.8% $7,506 $34.77
Sales and Marketing 471,600 6.1% 3,743 17.34 488,100 6.1% 3,874 17.94
Management Fees 311,100 4.0% 2,469 11.44 321.900 4.0% 2,555 11.83
Franchise Fees 73,900 1.0% 587 2.72 76,300 0.9% 606 2.81
Energy 272,500 3.5% 2,163 10.02 282,100 3.5% 2,239 10.37
Property Operations
& Maintenance 352,700 4.5% 2,799 12.97 365,000 4.5% 2,897 13.42
Total Undistributed
Operating
Expenses $2,395,600 30.8% $19,103 $88.07 $2,479,200 30.8% $19,676 $91.15
INCOME BEFORE FIXED
CHARGES $2,216,000 28.5% $17,587 $81.47 $2,289,400 30.8% $19,676 $91.15
FIXED CHARGES
Property Taxes $61,500 0.8% $488 $2.26 $63,700 0.8% $505 $2.34
Personal Property Taxes 13,400 0.2% 106 0.49 13,900 0.2% 110 0.51
Insurance 64,100 0.8% 509 2.36 66,400 0.8% 527 2.44
Equipment Rent (4) 68,900 0.9% 547 2.53 71,300 0.9% 566 2.62
Ground Rent 386,500 5.0% 2,978 14.21 405,200 5.0% 3,082 14.90
Total Fixed Charges $594,400 7.6% $4,717 $21.85 $620,500 7.7% $4,925 $22.81
INCOME BEFORE
RESERVES $1,621,600 20.8% $12,870 $59.62 $1,668,900 20.7% $13,245 $61.36
Reserve for
Replacement of
FF&E $311,000 4.0% $2,469 $11.44 $321,900 4.0% $2,555 $11.83
Capital Expenditures 0 0.0% 0 0.00 0 0.0% 0 0.00
Total Reserves
and Capex $311,000 4.0% $2,469 $11.44 $321,900 4.0% $2,555 $11.83
INCOME BEFORE DEBT
SERVICE $1,310,500 16.8% $10,401 $48.18 $1,347,000 16.7% $10,6906 49.52
Notes
(1) Includes revenues and expenses from the following areas: Marina, P.O.L. (Petroleum, Oil & Lubricants), Boat Rental, and the
Grocery Stove.
(2) Includes Movies Rentals and Vending
(3) Includes cash discounts, no show revenue, sales tax
rebates, Interest Income, fax copies, postage, commissions,
a/v rental, meeting room rental and other rents.
<PAGE>
2005
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days
Open/Year 365
Available Rooms
(Daily) 126
Available Rooms
(Annually) 45,990
Occupancy Percentage 59%
Occupied Rooms 27,200
Average Room Rate 82.00
REVENUES
Rooms (1) $2,638,400 31.7% $20,940 $97.00
Food 1,742,200 20.9% 13,827 64.05
Beverage 500,500 6.0% 3,972 18.40
Telephone 64,800 0.8% 514 2.38
Marina (1) 3,135,700 37.6% 24,887 115.28
Minor Operating
Departments (2) 48,200 0.6% 383 1.77
Rents and Other
Income (Net) (3) 204,200 2.5% 1,621 7.51
Total Revenues $8,334,100 100.0% $66,143 $3206.40
DEPARTMENTAL
EXPENSES
Rooms (1) $620,900 23.5% $4,928 $22.83
Food & Beverage 1,783,100 79.5% 14,152 65.56
Telephone 36,900 56.9% 293 1.36
Marina 917,400 29.3% 7,281 33.73
Minor Operating
Departments (2) 34,200 71.0% 271 1.26
Total Departmental
Expenses $3,392,500 40.7% $26,925 124.72
TOTAL DEPARTMENTAL
INCOME $4,941,500 59.3% $39,218 $181.67
UNDISTRIBUTED
OPERATING EXPENSES
Administrative &
General $978,900 11.7% $7,769 $35.99
Sales and Marketing 505,200 6.1% 4,010 18.57
Management Fees 333,400 4.0% 2,646 12.26
Franchise Fees 79,200 1.0% 629 2.91
Energy 291,900 3.5% 2,317 10.73
Property Operations
& Maintenance 377,800 4.5% 2,998 13.89
Total Undistributed
Operating
Expenses $2,566,400 30.8% $20,368 $94.35
INCOME BEFORE FIXED
CHARGES $2,375,100 28.5% $18,850 $87.32
FIXED CHARGES
Property Taxes $65,900 0.8% $523 $2.42
Personal Property Taxes 14,400 0.2% 114 0.55
Insurance 68,700 0.8% 545 2.53
Equipment Rent (4) 73,800 0.9% 586 2.71
Ground Rent 425,400 5.1% 3,190 15.64
Total Fixed Charges $648,200 7.8% $5,144 $23.83
INCOME BEFORE
RESERVES $1,726,900 20-.7% $13,706 $63.49
Reserve for
Replacement of
FF&E $333,400 4.0% $2,646 $12.26
Capital Expenditures 0 0.0% 0 0.00
Total Reserves
and Capex $333,400 4.0% $2,646 $12.26
INCOME BEFORE DEBT
SERVICE $1,393S,500 16.7% $11,060 $51.23
<PAGE>
Clarion Four Winds
2006
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days
Open/Year 365
Available Rooms
(Daily) 126
Available Rooms
(Annually) 45,990
Occupancy Percentage 59%
Occupied Rooms 27,200
Average Room Rate 100.50
REVENUES
Rooms $2,733,600 31.7% $21,695 $100.50
Food 1,803,200 20.9% 14,311 66.29
Beverage 518,000 6.0% 4,111 19.04
Telephone 67,100 0.8% 533 2.47
Marina (1) 3,245,400 37.6% 25,757 119.32
Minor Operating
Departments (2) 49,900 0.6% 396 1.83
Rents and Other
Income (Net) (3) 211,300 2.4% 1,677 7.77
Total Revenues $8,628,500 100.0% $68,480 $317.22
DEPARTMENTAL
EXPENSES
Rooms $642,600 23.5% $5,100 $23.63
Food & Beverage 1,845,500 79.5% 14,647 67.85
Telephone 38,200 56.9% 303 1.40
Marina 949,500 29.3% 7,536 34.91
Minor Operating
Departments (2) 35,400 70.9% 281 1.30
Total Departmental
Expenses $3,511,200 40.7% $27,867 $129.09
TOTAL DEPARTMENTAL
INCOME $5,117,300 59.3% $40,613 $188.14
UNDISTRIBUTED
OPERATING EXPENSES
Administrative &
General $1,013,200 11.7% $8,041 $37.25
Sales and Marketing 522,900 6.1% 4,150 19.22
Management Fees 345,100 4.0% 2,739 12.69
Franchise Fees 82,000 1.0% 651 3.01
Energy 302,200 3.5% 2,398 11.11
Property Operations
& Maintenance 391,000 4.5% 3,103 14.38
Total Undistributed
Operating
Expenses $2,656,400 30.8% $21,083 $97.66
INCOME BEFORE FIXED
CHARGES $2,460,900 28.5% $19,531 $90.47
FIXED CHARGES
Property Taxes $68,200 0.8% $541 $2.51
Personal Property Taxes 14,900 0.2% 118 0.55
Insurance 71,100 0.8% 564 2.61
Equipment Rent (4) 76,400 0.9% 607 2.81
Ground Rent 446,000 5.2% 3,302 16.40
Total Fixed Charges $676,600 7.8% $5,370 $24.88
INCOME BEFORE
RESERVES $1,784,300 20.7% $14,161 $65,60
Reserve for
Replacement of
FF&E $345,100 4.0% $2,739 $12.69
Capital Expenditures 0 0.0% 0 0.00
Total Reserves
and Capex $345,100 4.0% $2,739 $12.69
INCOME BEFORE DEBT
SERVICE $1,439,200 16.7% $11,422 $52.91
<PAGE>
2007
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days
Open/Year 365
Available Rooms
(Daily) 126
Available Rooms
(Annually) 45,990
Occupancy Percentage 59%
Occupied Rooms 27,200
Average Room Rate 104.00
REVENUES
Rooms $2,828,800 31.7% $22,451 $104.00
Food 1,866,300 20.9% 14,812 68.61
Beverage 536,100 6.0% 4,255 19.71
Telephone 69,400 0.8% 551 2.55
Marina (1) 3,359,000 37.6% 26,659 123.49
Minor Operating
Departments (2) 51,600 0.6% 410 1.90
Rents and Other
Income (Net) (3) 218,700 2.4% 1,736 8.04
Total Revenues $8,929,900 100.0% $70,872 $328.31
DEPARTMENTAL
EXPENSES
Rooms $665,100 23.5% $5,279 $24.45
Food & Beverage 1,910,100 79.5% 15,160 70.22
Telephone 39,500 56.9% 313 1.45
Marina 982,800 29.3% 7,800 36.13
Minor Operating
Departments (2) 36,600 70.9% 290 1.35
Total Departmental
Expenses $3,634,100 40.7% $28,842 $133.61
TOTAL DEPARTMENTAL
INCOME $5,295,800 59.3% $42,030 $194.70
UNDISTRIBUTED
OPERATING EXPENSES
Administrative &
General $1,048,700 11.7% $8,323 $38.56
Sales and Marketing 541,200 6.1% 4,295 19.90
Management Fees 357,200 4.0% 2,835 13.13
Franchise Fees 84,900 1.0% 674 3.12
Energy 312,700 3.5% 2,482 11.50
Property Operations
& Maintenance 404.700 4.5% 3,212 14.88
Total Undistributed
Operating
Expenses $2,749,400 28.5% $20,210 $93.62
INCOME BEFORE FIXED
CHARGES $2,546,400 28.5% $20,210 $93.62
FIXED CHARGES
Property Taxes $70,600 0.8% $560 $2.60
Personal Property Taxes 15,400 0.2% 122 0.57
Insurance 73,600 0.8% 584 2.71
Equipment Rent (4) 79,100 0.9% 628 2.91
Ground Rent 467,100 5.2% 3,418 17.17
Total Fixed Charges $705,800 7.9% $5,602 $25.95
INCOME BEFORE
RESERVES $1,840,600 20.6% $14,608 $67.67
Reserve for
Replacement of
FF&E $357,200 4.0% $2,835 $13.13
Capital Expenditures 0 0.0% 0 0.00
Total Reserves
and Capex $357,200 4.0% $2,835 $13.13
INCOME BEFORE DEBT
SERVICE $1,483,400 16.6% $11,773 $54,54
</TABLE>
<PAGE>
Clarion Fourwinds Resort and Marina Page 102
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INVESTMENT CLIMATE OVERVIEW
In establishing valuation parameters to apply to the projected
operating cash flow from the proposed property, we have
researched the current market for hotel investments. Arthur
Andersen conducts a survey of a select group of hotel companies,
investors, developers, investment bankers, and brokers. Our most
recent survey was conducted at the end of the third quarter of
1996.
Our surveys indicate that the investment climate has undergone
significant changes over the last five years. After the economic
recession in the early 1990s, the number of hotel sales
transactions increased significantly between 1993 and 1995. The
price per room of lodging property has increased significantly as
well. In the early 1990s, the primary buyers of hotel assets were
opportunity funds and individual investors lured by the low
prices as a percentage of the replacement cost. New lodging
REITs, established in the early 1990s, also began to invest
heavily into hotel assets. During 1995 and 1996 the larger REITs
(such as Patriot American Hospitality; Starwood Lodging Trust;
FelCor Suite Hotels, Inc.; and HPT) accounted for a large share
of the transactions involving full-service lodging properties.
These organizations must maintain the level of acquisition
achieved in the past and, therefore, have been paying
increasingly higher prices for lodging assets. In addition, many
of the recent REIT acquisitions were completed as part of a
portfolio which, attracted by the opportunity to purchase more
assets in one fell swoop, often resulted in aggressive pricing
parameters.
As the health of the overall U.S. lodging industry has improved,
so has the interest in acquiring lodging assets. The activity of
the REITs, combined with the strategic interests of hotel
companies and the interest of equity investors, has resulted in a
competitive acquisition market.
These changes in the investment market have resulted in a
significant shift in the criteria used to evaluate a potential
transaction. Terminal capitalization and discount rates assumed,
which averaged 11-12 percent and 14-16 percent, respectively in
1991, decreased to an average of 10-11 percent and 12-13 percent,
respectively in early 1996. Investors interviewed in the third
quarter of 1996, however, indicated that investment parameters
may currently be at the "low-point" of
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Clarion Fourwinds Resort and Marina Page 103
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this real estate cycle. Investors interviewed admitted that
although recent acquisitions have been structured using
aggressive investment parameters, they are likely to re-evaluate
the assumptions and investment parameters used in the near
future.
The following table summarizes the results of our investor survey
completed at the end of the Third Quarter 1996.
- ------------------------------------------------------------
Arthur Andersen Hotel Investor Survey - Third Quarter 1996
- ------------------------------------------------------------
Range
Free and Clear Discount Rates 12.0%-15.0%
Terminal Capitalization Rates 10.0%-12.5%
Going-In Capitalization Rates 10.0%-11.0%
Equity Return Req. (leveraged) 20.0%-30.0%
Equity Return Req. (unleveraged) 12.0%-18.0%
Cash on Cash Return Requirements 10.0%-17.5%
- ------------------------------------------------------------
DISCOUNTED CASH FLOW ANALYSIS
The discounted cash flow (DCF) technique converts the projected
stream of benefits, either before or after financing, as
appropriate, into a present value. Once the projection of net
income or cash flow is accomplished, a discount rate and
capitalization rate at reversion must be chosen. The selection of
these rates is necessarily subjective, since investor criteria
for the acquisition of real property is subject to variation, and
no organized property exchange exists.
Discount Rates
A free and clear discount rate is used to discount future
earnings without regard to any leverage or financing. Since there
has been a general lack of hotel financing over the last several
years, most of the larger hotel transactions have involved
all-cash purchases. Discount rates (or internal rate-of-return
requirements) typically vary by a number of factors: long-term
investor-return requirements on alternative investments; type and
motivation of investor;
<PAGE>
Clarion Fourwinds Resort and Marina Page 103
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property type -- e.g., hotel, apartments, etc.; and local market
area conditions. Our survey of hotel investor criteria indicated
that investors are currently assuming discount rates that range
from 12 to 15 percent. Consideration of the discount rate for the
subject property necessitates an analysis of the return
requirements associated with both hotels in the region and
full-service marinas. Both components of operation are considered
stable and have been in existence for an average of twenty-five
years. After giving full consideration to the investor survey as
well as to the unique qualities of the property being appraised,
its competitiveness in its market place, and the stability of the
general market conditions, a discount rate of 13.0 percent,
applied to income before debt service, is judged to be
appropriate.
Terminal Capitalization Rates
The "exit" capitalization rate at reversion is used to convert
the projected stream of income beyond the last year of the
projection period into a value at the end of the projection
period. Our investor survey revealed capitalization rates ranging
from 10.0 to 12.5 percent. The property is an older property of
average quality, which is encumbered by a ground lease. We have
also given consideration of the overall stability of the demand
for lodging in the marketplace and the value of the marina
component in the subject. According to Douglas Norvell, a
professor from Western Illinois University who has authored
several books on the marina industry, average capitalization
rates for marinas are ten percent.4 In the early 1990s, average
capitalization rates for hotels were comparable to marinas. As a
result, we have assumed the capitalization rate for the subject
on the basis of a combined analysis of hotels and marinas. The
subject hotel and marina is an older facility, which is not of
the quality associated with higher-end resorts. Given these
considerations, a 11.0 percent capitalization rate has been
adjusted upwards by 100 basis points to account for the ground
lease. At the residual date in 2006, the subject hotel will have
only 24 years remaining on the lease agreement. As mentioned
earlier in this report, there is no guarantee that this lease
will be renewed. On the basis of this analysis, a terminal
capitalization rate of 12.0 percent is judged to be appropriate
for the subject hotel and marina.
- ------------------
4 "Marinas - More Than a Place to Dock," Real Estate
Perspectives. March 15, 1991, Page 5.
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Clarion Fourwinds Resort and Marina Page 105
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Conclusion by Discounted Cash Flow Analysis
Application of the discounted cash flow technique to the total
projected net income for the appraised property yields a market
value estimate of the leasehold interest in the subject of
$8,030,000. The table on the following page presents our
discounted cash flow analysis.
<PAGE>
Discounted Cash Flow Analysis
Clarion Four Winds Resort
Bloomington, IN
Year Income Residual Discount Net Present
Before Debt Value(1) Factor(2) Value Income
Service &(3) Before Debt
Service
1997 ($756,700) 0.8850 ($669,646)
1998 518,400 0.7831 405,983
1999 1,135,900 0.6931 787,236
2000 1,206,100 0.6133 739,724
2001 1,234,200 0.5428 669,874
2002 1,273,000 0.4803 611,445
2003 1,310,500 0.4251 557,042
2004 1,347,000 0.3762 506,687
2005 1,393,500 0.3329 463,875
2006 1,439,200 $11,990,817(4) 0.2946 3,956,326
----------
Value at January 1, 1997: $8,030,000
Value Per Room: $63,730
Notes:
(1) Income Before Debt Service in the exit year was capitalized
at 12.0 percent.
(2) Income was discounted to net present value using a 13.0
percent discount rate.
(3) Analysis uses end-point discounting.
(4) A sales commission of 3.0 percent was assumed.
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Clarion Fourwinds Resort and Marina Page 107
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E. RECONCILIATION AND FINAL VALUE ESTIMATE
Valuation of the appraised property has been developed by the
direct sales comparison approach and the income approach. Various
appraisal techniques and methods were utilized in these analyses
and estimates of the value of the leasehold estate derived by
each approach is summarized as follows:
- -------------------------------------------------------
Amount Price Per Room
------ --------------
Cost Approach N/A N/A
Sales Comparison
Approach $8,270,000 $65,634
Income Approach $8,030,000 $63,730
- ----------------------------------------------------------
The Cost Approach is most useful when valuing new or nearly new
properties or when appraising special purpose properties. The
reliability of this approach is diminished as buildings and other
forms of improvement increase in age and begin to depreciate. The
resulting loss in value becomes increasingly difficult to
accurately quantify. Given the age and significant assumed
depreciation of the subject, the cost approach was therefore not
utilized in valuing the subject property.
The Sales Comparison Approach is frequently a good indicator of
value, especially when a sufficient number of relevant
transactions with reliable information on each is available. As
mentioned previously, exact comparable sales were difficult to
obtain given the unique qualities of the subject property. The
sales comparison approach was used as an indicator of the
reliability of results obtained from the income capitalization
approach.
The income capitalization approach is generally considered the
most applicable method for estimating the value of investment
properties, as it incorporates the economic motivations of buyers
and sellers in the analysis. The reliability of this approach is
enhanced when adequate data are available to assure proper
development of the income, expense, and capitalization rate
analyses.
<PAGE>
Clarion Fourwinds Resort and Marina Page 108
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Based upon the research and analyses performed in the development
of these approaches, and with primary emphasis on the income
approach, it is our opinion that the market value of the
leasehold interest in the appraised property as a going concern,
as of January 1, 1997 is:
-- EIGHT MILLION THIRTY THOUSAND DOLLARS --
($8,030,000)
In accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP), prepared by The Appraisal Standards
Board of The Appraisal Foundation, it is necessary to identify
and separately value any personal property, fixtures, or
intangible items that are not real property but are included in
the appraisal. Personal property and fixtures in a hotel consists
of a variety of components including bedroom case-goods, bathroom
fixtures, restaurant and kitchen equipment, signage, computers
and other related items. Our physical inspection of the property
indicated that these items were generally in average condition
relative to the age of the property.
We estimate that the replacement cost for the furniture,
fixtures, and equipment at the subject hotel is approximately
$10,000 per room, in constant 1996 dollars. This estimate is
based upon industry averages. We have assumed a replacement of
FF&E throughout the property which is included in the property
renovations during 1998. Assuming an average useful life of eight
years and an effective age of six years, the value of the
furniture, fixtures, and equipment is estimated to be
approximately $2,500 per room. On the basis of this analysis, the
value of the personal property for the subject hotel is estimated
to be $315,000.
Since a hotel's furniture, fixtures, and equipment is such an
integral component of the facility's ability to generate income
and is seldom removed from the property or sold separately, the
value produced by the separation of the personal property
component from the real property is not particularly meaningful.
<PAGE>
Clarion Fourwinds Resort and Marina
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F. ADDENDA
<PAGE>
Clarion Fourwinds Resort and Marina
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F.1 HOTEL SALES COMPARABLES
<PAGE>
Clarion Fourwinds Resort and Marina
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Clarion Fourwinds Resort and Marina
Name: HOLIDAY INN
Location: 1325 Hurstbourne Lane
Louisville, Kentucky
Grantor (Seller): Southwest Value Partners and
Affiliates (Arizona)
Grantee (Buyer): Ridgewood Properties
Date of Sale: August 1995
Sales Price: $16,100,000
Adjusted Sales Price
(with renovations) $17,100,100
Property Rights Conveyed: Fee Simple
Number of Rooms: 266
Year Built: Built in phases between 1960s
through 1970s
Adjusted Price per Room: $65,300
Occupancy (TTM 8/95): 66 percent
Average Rate (TTM 8/95): $72.00
Est. Gross Room Revenue: $4,613,700
Est. Net Income Before Debt
Svc.: N/A:
Overall Capitalization Rate: 12.5%
Comments:
This hotel is a seven-story interior corridor hotel located
in downtown Louisville. Facilities included a restaurant, a
lounge, 11,000 square feet of meeting space, a pool and a
fitness center. According to the buyer, the property was in
good condition at the time of sale. However, a renovation of
$1 million was planned in order to meet core modernization
standards of Holiday Inn Worldwide, the franchisor.
Renovations included relocation of the lounge, and a soft
goods upgrade to the meeting space and public areas.
<PAGE>
Clarion Fourwinds Resort and Marina
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Name: HOLIDAY INN (NOW HOLIDAY INN SELECT)
Location: 15471 Royalton Road
Strongsville, Ohio
Grantor (Seller): International Hotel Investors Limited
Grantee (Buyer): Impac Hotel Group
Date of Sale: October 5, 1995
Sales Price: $7,900,000
Adjusted Sales Price
(with renovations): $11,400,000
Property Rights Conveyed: Fee Simple
Number of Rooms: 299
Year Built: 1972
Adjusted Price per Room: $38,100
Occupancy (TTM 10/95): 68 percent
Average Rate (TTM 10/95): $53.00
Est. Gross Room Revenue
(TTM 10/95) $3,933,200
Est. Net Income Before
Debt Svc.
(TTM 10/95): $875,000
Overall Capitalization Rate: 7.7%
Comments:
Facilities at this hotel included a restaurant and a lounge,
an indoor/ outdoor pool, an exercise room, meeting space
accommodating 1,000 people, and transportation to the
airport. At the time of sale, the new owners planned to
upgrade the property from a core Holiday Inn brand to the
Holiday Inn Select affiliation. A $3.5 million renovation
included the casegood and soft good replacement in
guestrooms and upgrade of the public space, meeting space,
and the lounge. The property's surface parking lot was also
renovated.
<PAGE>
Clarion Fourwinds Resort and Marina
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Name: HAMPTON INN
Location: 6817 East 82nd Street
Indianapolis, Indiana
Grantor (Seller): U.S. Lodging of Indianapolis, LP
Grantee (Buyer): Equity Inns Partnership (Equity
Inns - the REIT)
Date of Sale: September 1995
Sales Price: $7,065,000
Adjusted Sales Price
(with renovations) $7,702,000:
Property Rights Conveyed: Fee Simple
Number of Rooms: 129
Year Built: 1987
Price per Room: $59,700
Occupancy (TTM 9/95): 74 percent
Average Rate (TTM 9/95): $59.00
Est. Gross Room Revenue
(TTM 9/95) $2,067,800
Est. Net Income Before
Debt Svc.
(TTM 9/95): $886,700
Overall Capitalization Rate: 11.5%
Comments:
This hotel is located in the Castleton area of Indianapolis
with visibility from Interstate 69. The site includes a
retention pond, which reduces the amount of usable land from
3.37 acres to 3.0 acres. A total of six facilities,
including this transaction were purchased by the buyer at
about the buyer. Five of these hotels were purchased from
related parties; however, the buyer did not consider the
purchases to be a package deal.
<PAGE>
Clarion Fourwinds Resort and Marina
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Name: BAHIA MAR RESORT AND YACHTING CENTER
(NOW RADISSON)
Location: 801 Seabreeze Boulevard
Fort Lauderdale, Florida
Grantor (Seller): Bahia Mar Yachting Center, Inc.
Grantee (Buyer): RAHN Properties
Date of Sale: June 1994
Sales Price: $18,750,000
Adjusted Sales Price
(with renovations): $30,400,000
Property Rights Conveyed: Fee Simple
Number of Rooms: 298
Year Built: 1966 and 1977
Price per Room: $102,000
Occupancy (1992): 85 percent
Average Rate (1992): $87.00
Est. Gross Room Revenue
(1992): $8,043,500
Est. Net Operating Income
(1992) N/A:
Overall Capitalization Rate: N/A
Comments: The sale of this property included a restaurant, a
lounge, 7,713 square feet of meeting space, a health club, a pool
with surrounding deck, and a Jacuzzi. The resort was purchased
out of foreclosure, of which, the original loan on the property
was for $32 million subject to a ground lease. The sale
transaction involved the purchase of the improvements for
$16,250,000 and the buy-out of the existing ground lease for
$2,500,000 for a total consideration of $18,750,000. A renovation
of $11,650,000 was expended on upgrading the facilities at the
resort. The seller's accounting department adjusted the stated
consideration downward by $553,000 to reflect favorable financing
provided by the seller.
<PAGE>
Clarion Fourwinds Resort and Marina
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F.2 SUBJECT PROPERTY PHOTOGRAPHS
<PAGE>
Clarion Fourwinds Resort and Marina
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Subject Property Exterior
Renovated Guestroom
<PAGE>
Clarion Fourwinds Resort and Marina
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Tradewinds Restaurant
Meeting Space
<PAGE>
Clarion Fourwinds Resort and Marina
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View of the Marina
View of the marina building leased to Boat Sales, Inc.
<PAGE>
Clarion Fourwinds Resort and Marina
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F.3 COMPETITIVE HOTEL PHOTOGRAPHS
<PAGE>
Clarion Fourwinds Resort and Marina
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The Pointe Golf and Tennis Resort
French Lick Springs Resort
<PAGE>
Clarion Fourwinds Resort and Marina
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Brown County Inn
Paste Photograph #4 Here
The Seasons Lodge and Conference Center
<PAGE>
Clarion Fourwinds Resort and Marina
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Holiday Inn
Courtyard by Marriott
<PAGE>
Clarion Fourwinds Resort and Marina
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F.4 PROPERTY LEGAL DESCRIPTION
<PAGE>
LEGAL DESCRIPTION OF THE PROPERTY
TRACT I: A part of the East half of Section 26, Township 7
North, Range 1 West, Monroe County, Indiana, described as
follows:
Commencing at the northwest corner of the northeast quarter of
said Section 2b; thence SOUTH 88 degrees 44 minutes EAST 1168.76
feet to the east right-of-way of Fairfax Road, said point being
the point of beginning; thence SOUTH 5 degrees 14 minutes WEST
for a distance of 227.91 feet; thence around a curve to the left
for a distance of 187.78 feet, said curve having a radius of
484.31 feet and a deflection angle of 22 degrees 13 minutes;
thence SOUTH 16 degrees 59 minutes EAST for a distance of 292.00
feet; thence around a curve to the left for a distance of 141.90
feet, said curve having a radius of 500.33 feet and a deflection
angle of 16 degrees 15 minutes; thence SOUTH 33 degrees 14
minutes EAST for a distance of 155.35 feet; thence around a curve
to the left for a distance of 205.16 feet, said curve having a
radius of 476.50 feet and a deflection angle of 24 degrees 40
minutes; thence SOUTH 57 degrees 54 minutes EAST for a distance
of 58.18 feet; thence around a curve to the right for a distance
of 209.00 feet, said curve having a radius of 315.13 feet and a
deflection angle of 38 degrees 00 minutes; thence SOUTH 19
degrees 54 minutes EAST for a distance of 180.21 feet, thence
around a curve to the right for a distance of 203.07 feet, said
curve having a radius of 1662.14 feet and a deflection angle of 7
degrees 00 minutes; thence SOUTH 12 degrees 54 minutes EAST for a
distance of 120.00 feet; thence .NORTH 75 degrees 01 minute 27
seconds EAST for a distance of 687.05 feet; thence NORTH 29
degrees 43 minutes WEST for a distance of 612.14 feet; thence
NORTH 16 degrees 28 minutes 52 seconds WEST for a distance of
682.77 feet; thence NORTH 88 degrees 44 minutes WEST for a
distance of 150.0 feet; thence NORTH 16 degrees 28 minutes 52
seconds WEST for a distance of 400.00 feet, and to the north line
of the said Section 26; thence NORTH 88 degrees 44 minutes WEST,
over and along the said north line, for a distance of 600.94
feet, and to the place of beginning. Containing 28.1885 acres,
more or less.
EXHIBIT "A"
TRACT II: A part of the East half of Section 26, Township 7
North, Range 1 West, Monroe County, Indiana, described as
follows:
Commencing at the northwest corner of the northeast quarter of
said Section 26; thence SOUTH 88 degrees 44 minutes EAST 1914.55
feet; thence SOUTH 1 degree 16 minutes WEST 1748.22 feet to the
point of beginning; thence NORTH 75 degrees 0l minute 27 seconds
EAST for a distance of 687.05 feet; thence NORTH 29 degrees 43
minutes WEST for a distance of 612.14 feet; thence NORTH 16
degrees 28 minutes 52 seconds WEST for a distance of 682.77 feet;
thence NORTH 73 degrees 31 minutes 08 seconds EAST for a distance
of 700.00 feet; thence SOUTH 16 degrees 28 minutes 52 seconds
EAST for a distance of 601.58 feet; thence SOUTH 29 degrees 43
MINUTES EAST for a distance of 848.l2 feet; thence SOUTH 19
degrees 02 minutes 16 seconds WEST for a distance of 1363.78
feet; thence north 68 degrees 07 minutes WEST for a distance of
700.89 feet; thence SOUTH 19 degrees 02 minutes 16 seconds WEST
for a distance of 50.00 feet; thence NORTH 73 degrees 45 minutes
52 seconds WEST for a distance of 255.87 feet; thence NORTH 12
degrees 42 minutes EAST for a distance of 450.33 feet; thence
NORTH 71 degrees 38 minutes WEST for a distance of l8.80 feet;
thence around a curve to the right for a distance of 170.32 feet,
said curve having a radius of 166.16 feet and a deflection angle
of 58 degrees 44 minutes; thence NORTH 12 degrees 54 minutes WEST
for a distance of 193.66 feet, and to the place of beginning.
Containing 49.1940 acres, more or less.
Tract III Part of the East one half of Section 26 and the West
one half of Section 25. Township 7 North, Range 1 West, Clear
Creek Township, Monroe County, Indiana and described as follows:
Commencing at the northwest corner of the northeast quarter of
said section 26; thence S-88.44'00"-E a distance of 2912.05 feet;
thence S-1.16'00"-W a distance of 2766.35 feet to the point of
beginning; thence S-68.07'00"-E a distance of 300.00 feet; thence
N-19.02'l6"-E a distance of 1785.75 feet; thence N-68.07'00"-W a
distance of 327.82 feet,; thence S-60.l7'00"-W a distance of
300.00 feet; thence S-29.43'00"-E a distance of 300.00 feet;
thence S-19.02'16"-W a distance of 1363.78 feet to the place of
beginning and containing 13.45 acres.
EXHIBIT "A", Page 2
<PAGE>
Clarion Fourwinds Resort and Marina
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Insert ground lease
<PAGE>
AMENDED AND RESTATED
INDENTURE OF GROUND LEASE
THIS AMENDED AND RESTATED INDENTURE OF GROUND LEASE
("Lease"), dated as of the ____ day of __________, 1991, by and
between INDIANA DEPARTMENT OF NATURAL RESOURCES OF THE STATE OF
INDIANA, a governmental agency of the State of Indiana
("Landlord"), and FOURWINDS OPERATING PARTNERSHIP, L.P., a
Delaware Limited Partnership ("Tenant"), WITNESSES THAT:
In consideration of the rents reserved herein and the mutual
covenants and agreements set forth herein, Landlord and Tenant
agree as follows:
WHEREAS. by Lease Agreement dated January 6, 1969 ("Lease"),
Landlord entered into a Lease Agreement with Taggart Corp. of
Indianapolis ("Taggart") to lease certain property located at the
Fairfax State Recreation area on Monroe Lake, Monroe County,
Indiana ("Lease Agreement"); and
WHEREAS, by amendment #1 to the Lease Agreement, Taggart did
assign, set over and transfer to Tenant all of its rights, title
and interest under the Lease, and
WHEREAS, by amendment #2 to Lease Agreement, the parties did
agree to modify the Lease Agreement to correct it in certain
respects to reflect present circumstances and to make provisions
for certain assignments of and under the Lease Agreement as
amended and to approve a sale of the assets of Tenant, and
WHEREAS, by amendment #3 to Lease Agreement, the parties did
agree to modify the Lease Agreement as amended to correct it in
certain respects to reflect present circumstances and to make
provisions for an adjustment in percentage rent to be paid to
Landlord in boat income only for contract years beginning July 1,
1983 and July 1, 1985, and
WHEREAS, by amendment #4 to Lease Agreement. the parties did
agree to modify the Lease Agreement as amended to reflect certain
circumstances and to make provisions for an adjustment in rent to
be paid to Landlord, and
WHEREAS, by amendment #5 to Lease Agreement, the parties did
agree to modify the Lease Agreement as amended to correct it in
certain respects to reflect present circumstances, to acknowledge
certain assignments, to amend and restate the legal description
of the Demised Premises, to modify the Demised Premises by adding
a tract #III and to make certain temporary modifications rent
schedule, and
<PAGE>
WHEREAS, by amendment #6 to Lease Agreement, the parties did
agree to modify the Lease Agreement to correct it in certain
respects to reflect present circumstances and to make certain
modifications relating to encumbering the Lease Agreement in
connection with financing obtained by Tenant or Tenant's
successors or assigns, and
WHEREAS, the parties mutually acknowledge that the presence of so many previous
amendments makes the use and understanding of the Lease
difficult, and
WHEREAS, the parties again desire to modify the Lease Agreement
to reflect present circumstances and to make certain
modifications, to clarify and codify the Lease Agreement and the
prior amendments, and
WHEREAS, the parties, the property, and the total term of years
are the same as in the prior Lease Agreements.
NOW, THEREFORE, in consideration of the above purposes and of the
mutual covenants and agreements contained herein the parties
hereby agree that an amended and restated Lease Agreement shall
51
<PAGE>
be executed which shall clarify the past amendments and the prior
Lease Agreement so that business may be conducted in a more
orderly and efficient manner between the parties.
ARTICLE I
DEFINITIONS
The following terms, when used in this Lease with initial
capital letters, have the following definitions:
"Access Road(s)" means the access roads which are located
in or on the Reservoir and which give access to the Leased
Premises.
"Additional Building(s)" means a building, structure or
other improvement erected or constructed by Tenant on the Real
Estate after the date hereof, including without limitation, boat
slips.
"Additional Provisions" shall mean additional or different
conditions, terms, covenants or agreements in the renewals or
extensions of the Army Lease which (a) are consistent in all
respects with this Lease, the Leasehold Estate and the rights of
Tenant hereunder, including without limitation, the right and
option of Tenant to extend the Term for the Extension Terms and
Partial Extension Terms, and (b) do not restrict, limit or
compromise, or purport to restrict, limit or compromise, the
Leasehold Estate or the rights of Tenant hereunder.
2
<PAGE>
"Additional rent" shall have the meaning set forth in
Section 4.02 and 4.04.
"Affiliate(s)" means any person or entity directly or
indirectly Controlling, Controlled by, or under common Control
with, Landlord, Tenant or such other entity or individual, as the
case may be, and when used with reference to an individual,
includes any member of the individual's immediate family.
"Annual Fixed Rent" means the amount paid by Landlord to
Tenant pursuant to Section 4.01.
"Agreed Management Program" shall have the meaning set forth
in the Army Lease.
"Annual Statement(s)" means the statement showing (a) Gross
Revenues and Operator Receipts for a particular Lease Year and ~)
the computation of Percentage Rent for that Lease Year.
"Approved Plans" means plans and specifications for the
construction of Additional Buildings approved by Landlord
pursuant to Section 6.01.
"Appurtenance(s)" means any and all appurtenances, rights,
titles, interests, estates, tenements, privileges, easements and
other hereditaments in any way now or hereafter belonging or
pertaining to the Real Estate, including without limitation, (a)
any and all right, title and interest of Landlord in and to any
land lying in the bed of any adjacent street, road or highway and
(b) any and all rights of access, ingress and egress over and
across existing access roads, such interior roads and driveways
as may be constructed, and, as may be approved by the District
Engineer, at such additional places on land owned or controlled
by the United States of America or Governmental Agencies of the
United States of America.
"Army" means the Department of the Army of the United
States of America, and its successors and assigns, as landlord,
under the Army Lease.
"Army Lease" means the Department of the Army Lease for
Public Park and Recreational Purposes and for Fish and Wildlife
Management Purposes, Monroe Reservoir by and between the Army, as
landlord, and the State of Indiana, Department of Natural
Resources, as tenant; executed by Landlord on November 16, 1967
and by the Tenant on September 25, 1967. As amended by (a)
Supplemental Agreement No.1, executed by Landlord on April 28,
1970 and by the Tenant on February 20, 1970, ~) Supplemental
Agreement No.2, executed by the Landlord on November 22, 1974 and
by the Tenant on February 12, 1974, (c) Supplemental Agreement
No.3, executed by the Landlord on June 30, 1978 and by the Tenant
on April 20, 1978, (d) Supplemental Agreement No.4, executed by
the Landlord on February 10, 1987 and by the Tenant on February
9, 1987, (e) Supplemental Agreement No.5, executed by the
Landlord on June 21, 1989 and by the Tenant on June 6, 1989.
3
<PAGE>
"Assessment(s)" means all general and special assessments,
ditch fees and all other governmental or public dues. charges and
impositions levied upon or with respect to the Real Estate and/or
the Improvements.
"Condemnation Award(s)" means the total aggregate awards
paid to Landlord and/or Tenant as a consequence of a Taking of
the Leased Premises or a part thereof.
"Constructive Total Taking" means a Taking of a part of the
"Leased Premises to such an extent that the remaining portion of the
Leased Premises and the Improvements are insufficient to permit
the restoration of the Improvements so that the Improvements
constitute a complete, operable resort facility capable of
producing a proportionately fair and reasonable net annual
income, after (a) the payment of all debt service and operating
and other expenses thereof, and (b) performance of all terms,
conditions, covenants and agreements of this Lease to be
performed by Tenant.
"Control" means the power to direct the management and
policies of an entity, directly or indirectly, (a) through the
ownership of or power to direct or vote fifty percent (50%) or
more of the shares of stock in the entity or of any other equity
or beneficial interest in the entity, or (B) under the
partnership or trust agreement of the entity, under any other
instrument or contract or by any other means, and the terms
"Controlling" and "Controlled" have meanings correlative to the
foregoing.
"District Engineer" means the U.S. Army District Engineer in
charge of administering Monroe Lake.
"Event of Default" has the meaning set forth in Section
16.01.
"Execution Date" means the date set forth above on which
the last of Landlord or Tenant execute this Lease.
"Extension Term" means an extension term of this Lease not
to exceed two (2) extension terms, the first of which shall be
for a term of twenty-five (25) years and the second for a term of
fourteen (14) years, each pursuant to Indiana Code 14-3-8-3.
"Governmental Agency(ies)" means any agency, department or
authority of the federal government or any state or local
government having jurisdiction over the Leased Premises, other
than Landlord.
"Gross Revenues" has the meaning set forth in Section 4.03.
"Improvements" means all buildings, structures, docks,
piers, levees, slips, wells, fences, landscaping, roads,
driveways, walkways, parking lots and paved surfaces, tennis
courts, swimming pools and other recreational facilities and all
other improvements of any kind located, erected or constructed on
the Real Estate at any time during the Term.
"Insurance Proceeds" means proceeds paid by an insurance
company under policies of insurance required to be maintained by
Tenant or any Subtenant under this Lease.
"Landlord" and "Tenant" mean the owner of the interest of
Landlord or Tenant, as the case may be, at any time under this
Lease, and following any sale or assignment permitted by the
terms of the Army Lease or this lease, the successor or assignee
of the respective leasehold estate so acquired, shall be deemed
to be Landlord or Tenant hereunder, as the case may be.
"Lease Year(s)" means (a) a calendar year from January 1 to
December 31 of each year, (b) the partial calendar year, if any,
from and including the Execution Date to December 31, 1990, (c)
the partial calendar year, if any, after the last January 1
during the Term to and including the date on which the Term
expires or this Lease is terminated.
"Leased Premises" means the Real Estate, the improvements,
and the Appurtenances.
"Leasehold Estate" means the right, title, interest, and
estate of Tenant in and to the Leased Premises under this Lease.
"Mortgage(s)" means any right, title, interest or estate of
Tenant in or to the Tenant Improvements and/or the Leasehold
Estate granted or assigned by Tenant to a Mortgagee to secure a
Mortgage Loan, including without limitation, a mortgage lien on
part of all of the Tenant Improvements and/or the Leasehold
Estate.
"Mortgage Loan(s)" means any loan to Tenant or an Affiliate
of Tenant or other type of financing for Tenant or an Affiliate
of Tenant secured by a mortgage on the Leased Premises or the
Leasehold Estate, including without limitation, construction
loans, permanent loans and all advances thereunder.
"Mortgagee(s)" means any mortgagee, lender or other person
or entity which makes a Mortgage Loan or holds a Mortgage.
"Notice(s) of Default" means any notice given by Landlord
to Tenant under clauses (a) or (c) of Section 16.01.
"Notice(s) of Termination" means any notice given by
Landlord to Tenant designating a date for termination of this
Lease under Section 16.02.
"Original Term" means the term of this Lease commencing as
of the Execution Date and ending on April 30, 2030.
"Partial Extension Term" means an extension term of this
Lease, the duration of which is (a) shorter than an Extension
Term and (b) jointly determined by Landlord and Tenant.
<PAGE>
"Partial Taking" means any Taking of a part of the Leased
Premises which is not a Total Taking or a Constructive Total
Taking.
"Percentage Rent" has the meaning set forth in Section 4.02.
"Personal Property Taxes" means (a) all taxes and charges
imposed upon the conduct of Tenant's businesses on the Leased
Premises and (b) all taxes imposed upon Tenant's fixtures,
equipment, merchandise, goods and other personal property on or
about the Leased Premises.
"Project" means the hotel and marina now known as
"Fourwinds/ A Clarian Resort", operated by Tenant, and shall apply
notwithstanding any name or hotel affiliation change.
"Real Estate" means that certain real estate located in
Monroe county, Indiana, more particularly described in Article
II.
"Real Estate Taxes" means and includes all ad valorem real
property taxes levied upon or with respect to the Improvements
and/or the use thereof.
"Rent" means the Annual Percentage Rent, together with the
annual fixed Rent.
"Reservoir" means the approximately 22.663 acres of land
and water area in the Monroe Lake Project, referred to as the
"premises" in the Army Lease.
"Sublease(s)" means any and all subleases, concessions and
licenses granted pursuant to Section 15.01.
"Subtenant(s)" means all subtenants, concessionaires and
licensees of part or all of the Lease Premises or the Tenant
Improvements under Subleases.
"Taking" means (a) a condemnation or other trading for
public or quasi-public purposes or use under any law, statute or
ordinance or by the right of eminent domain or (b) a sale or
conveyance in lieu thereof under threat of condemnation or
taking.
"Tenant Bankruptcy" means an Event of Default described in
clauses (e) through (j) of Section 16.01.
"Tenant Improvements" means the Improvements erected or
constructed on the Leased Premises by Tenant or Affiliates of
Tenant.
"Term" means the original term, together with the Extension
Terms and any Partial Extension Term(s) for which Tenant may
exercise its option pursuant to Section 3.03.
"Total Taking" means a Taking of the entire Leased Premises.
<PAGE>
"U.S. Army Engineers" Master Plan' shall have the meaning
set forth in the Army Lease.
"Utility(ies)" means telephone. electricity, natural gas,
water and sanitary sewer and other utility services furnished to or for the
Leased Premises.
"Utility Company(ies)" means any Governmental Agency or
other company or entity which provides Utility service to the Leased Premises.
ARTICLE II
DEMISE OF LEASED PREMISES
Landlord hereby leases to Tenant and Tenant hereby leases
from Landlord the Leased Premises for the Original Term, which
commences on the Execution Date and expires on April 30, 2030,
upon and subject to the conditions. terms, covenants and
agreements set forth herein. The Real Estate is more particularly
described as follows:
See attached Exhibits A and B (the legal description of
Exhibit B shall be initialed by the parties and substituted at
such time as it is prepared by Landlord.)
ARTICLE III
EXTENSION TERMS
Section 3.01. Extension of Army Lease. Landlord shall
exercise its best efforts to obtain an extension or renewal of
the Army Lease for an additional term of at least twenty-five
(25) years after the expiration of the Original Term on the same
conditions, terms, covenants and agreements now set forth in the
Army Lease; provided that Landlord shall have the right to accept
Additional Provisions in such renewal or extension of the Army
Lease. Landlord shall have the obligation to accept any
Additional Provision if (a) the Additional Provision is required
by federal or state law or (b) the Army refuses to renew or
extend the Army Lease unless the Additional Provision is included
as part of the renewal or extension and the Additional Provision
will not substantially increase the annual financial obligations
of Landlord under the Army Lease.
If Landlord is unable to obtain such extensions or renewals
of the Army Lease, but Landlord is able to extend or renew the
Army Lease for shorter terms and such extensions or renewals
otherwise satisfy the conditions, terms, covenants and agreements
of this Section, then (a) Landlord shall so extend or renew the
Lease, (b) the Landlord shall continue to exercise its best
efforts to extend the Army Lease pursuant to the conditions,
terms, covenants and agreements of this Section for an aggregate
of at least two (2) twenty-five (25) year option periods after
the expiration of the Original Term, and (c) Tenant shall have
the right and option to exercise further additional Extension
Terms not to exceed two (2) extensions, the first, for
<PAGE>
twenty-five (25) years and the Second for a term of fourteen (14)
pursuant to Indiana Code 14-3-8-3. Landlord shall permit Tenant
to participate with Landlord to negotiate and obtain such
extensions or renewals of the Army Lease. Any lease by and
between the Army, as landlord, and the Landlord, as tenant,
subsequent to the Army Lease shall be deemed to be an extension
or renewal of the Army Lease, and no such subsequent lease,
extension or renewal shall be deemed to terminate this Lease or
the Leasehold. This Lease and the Leasehold shall survive the
extension or renewal of the Army Lease or the expiration or
termination of the Army Lease and the execution of a subsequent
lease with respect to the Leased Premises by and between the Army
and Landlord. Landlord shall notify Tenant in writing of all
amendments to, all extensions or, and the termination of the Army
Lease.
Section 3.02. Extension Terms. If Tenant complies with the
conditions, terms, covenants and agreements of this Lease to be
performed by Tenant so that at the expiration of the Original
Term or the preceding Extension Term or Partial Extension Term as
the case may be, there is no uncured Event of Default for which
Landlord has given Tenant notice and for which the applicable
cure period has elapsed, the Tenant shall have the right and
option to extend the Term for up to two (2) extensions, the first
for twenty-five (25) years and the second for a term of fourteen
(14) years, each pursuant to Indiana Code 14-3-8-3.
Section 3.03. Exercise of Extension Options. Tenant
automatically shall be deemed to have exercised its right and
Option to extend the Term for each of the Extension Terms, unless
Tenant shall give written notice to Landlord and each Mortgagee
of its intention (a) not to exercise such right and option, or
(b) to exercise its right to extend this Lease for a Partial
Extension Term, at least one hundred twenty (120) days prior to
the expiration of the Original Term or the preceding Extension
Term or Partial Extension Term, as the case may be; provided
that, after Tenant has given a notice not to exercise its right
to extend this Lease for the Extension Term or a Partial
Extension Term, each Mortgagee shall have the right and option to
extend the Term for the period of each of the Extension Terms by
giving written notice to Landlord at least sixty (60) days prior
to the expiration of the Original Term or the preceding Extension
Term or Partial Extension Term, as the case may be.
ARTICLE IV
RENT
Section 4.01. Annual Fixed Rent.
The Tenant shall pay to the Landlord an annual fixed rent
of Ten Thousand Dollars ($10,000.00) due and payable on or before
January 1 of each full calendar Lease Year commencing January 1,
1991 and continuing on January 1 of each Lease Year thereafter.
PROVIDED, HOWEVER, the January 1, 1991 payment shall be in the
amount of Five Thousand Dollars ($5,000.00) in order to
compensate for the prior annual fixed rent payment made by Tenant
on July 1, 1990.
<PAGE>
Section 4.02. Annual Percentage Rent.
Tenant shall pay to Landlord as additional rent
("Additional Rent") for the Leased Premises during the Term, the
following Percentage Rent:
(a) From July 1, 1990 until June 30, 1991:
(1) 3.5% of the Gross Revenues exceeding One Million Seven
Hundred Thousand Dollars ($1,700,000.00) and not greater than
Four Million Three Hundred Thousand Dollars (54,300.000.00); and
(2) 7% of the Gross Revenues exceeding Four Million Three
Hundred Thousand Dollars ($4,300,000.00);
(3) The Additional Rent shall be due on or before September
30, 1991.
(b) The computation of the percentage rent for the period
between July 1, 1991 and December 31, 1991 shall be based upon
the following:
(1) 3.5% of the Gross Revenues exceeding Seven Hundred
Fifty Thousand Dollars
($750,000.00) and not greater than One Million Six Hundred Fifty
Thousand Dollars ($1,650,000).
(2) 7% of the Gross Revenues exceeding One Million Six
Hundred Fifty Thousand Dollars ($1,650,000.00).
(3) The Additional Rent shall be due on or before March 31,
1992.
(c) Commencing January 1, 1992 and continuing for each
Lease Year throughout the Term:
(1) 3.5 % of the Gross Revenues exceeding One Million Five
Hundred Thousand Dollars ($1,500,000.00) and not greater than
Three Million Three Hundred Thousand Dollars ($3,300,000.00);
(2) 7% of the Gross Revenues exceeding Three Million Three
Hundred Thousand Dollars (53,300.000.00).
(3) The Additional Rent shall be due on or before March 31
of each Lease Year commencing March 31, 1993 and continuing
throughout the Term.
Section 4.03. Gross Revenues.
"Gross Revenues" for each Lease Year shall mean all
revenues received by or on behalf of Tenant resulting from the
daily operation of the Leased Premises in the ordinary course of
<PAGE>
business on all of its facilities from guests. licensees and
other persons occupying space or rendering services in, at, on or
from the Leased Premises. Gross Revenues shall include the gross
revenues of Tenant, subtenants, Tenant's affiliates and
concessionaires. but shall exclude rent received by Tenant from
such subtenants. Tenant's affiliates and concessionaires. Gross
Revenues shall include but not be limited to total room sales,
food and beverage sales, Marina Complex sales other than boat
sales, and service. boat rental, slip space rental (including
transient slip space rental), shore mooring income, garage
rental, vending machines, newsstand. telephone and telex (less
the cost thereof), interest income, recreation and rental fees
(including miniature golf) and any and all sums of any kind and
nature whatsoever received by Tenant and paid in cash resulting
from the daily operation of the Leased Premises. Gross Revenues
shall exclude, however, Percentage Rent from Boat Sales pursuant
to Section 4.04 herein, all gratuities or service charges added
to a customer's bill or statement in lieu of gratuities, which
Tenant is obligated to turn over to an employee, all amounts
equal to credits or cash refunds actually made to customers.
guests, or patrons, all sums and credits received in settlement
of claims for loss or damage to merchandise, all sales taxes,
excise taxes. gross receipts taxes, admissions, taxes,
entertainment taxes, tourist taxes or other governmental charges
or impositions (excluding income tax), all income or proceeds
from the sale or other disposition or financing or refinancing
of the Leasehold Estate, all proceeds
received by Tenant from loans not secured by the Leasehold
Estate, and all insurance proceeds (other than business
interruption insurance). Credit sales shall be included in Gross
Revenues upon receipt of the actual payment from such sale. The
sale of a capital asset for replacement purposes shall not be
included in the computation of Gross Revenues. For purposes of
this Agreement, it is the intention of the parties that the
computation of Gross Revenue shall be determined as if the Tenant
operated the entire facility in its normal course of business.
Section 4.04. Percentage Rent From Boat Sales.
Only boat sales income shall not be included in the Gross
Revenue derived from the business operations of the Leased
Premises (Inn and Marina), but shall be maintained as a separate
item. The percentage rent paid to the Landlord for income
derived-from boat sales shall be in the amount of two percent
(2%) of the gross income derived from boat sales, and shall not
be subject to any exemption in computing percentage rent.
In computing the percentage of gross income to be applied
for the sale of boats at the Marina when a trade-in boat is
involved, the percentage shall be applied to the dollar
difference between the sales price of the boat sold and the
allowance price of the trade-in and when the trade-in is
subsequently sold by Tenant, the percentage shall be applied to
the sales price of the trade-in boat. In computing the percentage
of gross income to be applied for the brokering of boats not
owned by the Tenant (or other entity owned or controlled by
Tenant operating at the Leased Premises), the percentage shall
be applied only to the amount of commission earned by Tenant for
brokering the boat and not the sales price of the boat.
<PAGE>
Section 4.05. Annual Statements and Audits.
Tenant shall keep and make available to Landlord complete
and accurate books and records of the revenues, receipts and
proceeds from the Project which are included in Gross Revenues.
Such books and records and Tenant's federal, state and local
sales and income tax returns (to the extent that the tax returns
concern revenues, receipts and proceeds from the Project) shall
be open for inspection by Landlord and the State Board of
Accounts of the State of Indiana upon prior written notice during
reasonable business hours for a period of two (2) years after the
Lease Year to which such books, records and tax returns apply. On
or before March 31 of each Lease Year after the first Lease Year,
Tenant shall prepare and submit an Annual Statement to Landlord.
The Annual Statement shall be (a) prepared by a Certified Public
Accountant (which may be the accountant customarily used by
Tenant) in accordance with the conditions, terms, covenants and
agreements set forth in Section 4.01 and (b) verified under oath
by a general partner or principal financial officer of Tenant. At
any time within the period of two (2) years after the expiration
of the Lease Year to which an Annual Statement applies, Landlord
may cause the State Board of Accounts to audit the books and
records of Tenant for such Lease Year. If such audit discloses
that the aggregate of the Annual Fixed Rent, the Annual
Percentage Rent or the Percentage Rent from Boat Sales shown on
the Annual Statement exceeds the actual aggregate of the Annual
Fixed Rent, the Annual Percentage Rent or the Percentage Rent
from Boat Sales, as applicable. then Landlord shall pay the
excess to Tenant on demand. If such audit discloses that the
aggregate of the Annual Fixed Rent, the Annual Percentage Rent or
the Percentage Rent from Boat Sales shown on the Annual Statement
understates the actual aggregate of the Annual Fixed Rent, the
Annual Percentage Rent or the Percentage Rent from Boat Sales, as
applicable, then Tenant shall (a) pay the deficiency to Landlord
on demand or (b) cause a second audit to be made of the books and
records by a nationally recognized accounting firm selected by
Landlord from a list of three (3) such firms prepared by Tenant.
The results of the second audit shall bind Landlord and Tenant,
and neither Landlord nor Tenant shall have any right to challenge
the results of the second audit, absent fraud or undue influence
by the other party. If the second audit discloses that the
aggregate of the Annual Fixed Rent, the Annual Percentage Rent or
the Percentage Rent from Boat Sales shown on the Annual Statement
understates the actual aggregate of the Annual Fixed Rent, the
Annual Percentage Rent or the Percentage Rent from Boat Sales, as
applicable, then Tenant shall pay (a) the deficiency to Landlord
on demand and (b) all fees and charges by the accounting firm for
completing the second audit: provided that, if the understatement
shown by the second audit exceeds three percent (3%) of the
actual aggregate of the Annual Fixed Rent, the Annual Percentage
Rent or the Percentage Rent from Boat Sales, as applicable, then
Tenant shall also pay all reasonable costs and expenses incurred
by the State Board of Accounts to complete the first audit. If
the second audit discloses that the aggregate of the Annual Fixed
Rent, the Annual Percentage Rent or the Percentage Rent from Boat
Sales shown on the Annual Statement equals or exceeds the actual
aggregate of the Annual Fixed Rent, the Annual Percentage Rent or
the Percentage Rent from Boat Sales, as applicable, then Landlord
shall pay (a) any excess to Tenant on demand, (b) all costs and
expenses incurred by the State Board of Accounts to complete the
first audit and (c) all fees and charges by the accounting firm
to complete the second audit.
<PAGE>
Section 4.06. Payments Under Protest. In the event of a
dispute between Landlord an Tenant concerning the amount of any
payment of Rent, Tenant shall have the right to make payment
under protest, and, if Tenant successfully asserts or prosecutes
its claim with respect to part or all of such payment, then
Landlord shall pay to Tenant on demand the amount of the Payment
with respect to which Tenant has successfully asserted or
prosecuted its claim.
Section 4.07. Rent Payments. All payments of Rent shall be
made to Landlord at Division of Reservoir Management, 603 State
Office Building, Indianapolis, Indiana 46204, or at such other
place as Landlord may designate in writing from time to time.
All Rent shall be paid without relief from valuation and
appraisement laws. In addition to the payment of Percentage
Rent, Tenant shall pay to Landlord as Additional Rent all other
sums of money and charges required to be paid by Tenant to
Landlord under this Lease.
Section 4.08. Late Charges and Interest. If any payment of
Rent is not made when due, then such payment of Rent shall bear
interest from and after the date due until paid at the rate of
ten percent (10%) per annum.
ARTICLE V
USE OF LEASED PREMISES
Tenant may use the Leased Premises and the Improvements for
the following purposes: (a) the operation of a marina, including
without limitation, sales, rentals of boats, boating equipment,
fuel, lubricants, other boating supplies and any other goods
commonly sold, rented or displayed in marinas, repairing and
servicing boats and boating equipment, launching, docking,
mooring and storing boats and furnishing other services and
facilities commonly provided by marinas; (b) operation of a
hotel, including, the furnishing of services and facilities
commonly provided in connection with the operation of a hotel;
(c) operation of a conference and meeting facilities; (d)
operation of tennis courts, swimming pools, health clubs, spas,
exercise facilities and other recreational and health facilities
and furnishing services and facilities commonly provided in
connection with such recreational or health facilities; (d)
operation of restaurants, snack shops and other food and beverage
services, including without limitation food and beverage services
which include the sale of alcoholic beverages, on the condition
that Tenant complies with all licensing requirements therefor;
(e) operation of such other facilities as Landlord shall have
deemed at any time to be appropriate in or on any other property
leased by Landlord pursuant to I.C. 14-3-8 or as Landlord may
hereafter deem to be appropriate with respect to the Leased
Premises; and (f) Tenant shall not use any part of the Leased
Premises or Improvements for any unlawful purpose. Tenant shall
have the right to use the Leased Premises for any other purpose
if Tenant obtains the prior written consent of Landlord, which
consent shall be withheld only if the use is inconsistent or
incompatible with (a) the use of the Leased Premises as a resort,
(b) the U.S. Army Engineers' Master Plan or the regulations of
the Secretary of the Army governing the public use of the Leased
Premises or (c) applicable Indiana statutes or regulations.
<PAGE>
ARTICLE VI
ADDITIONAL L BUILDINGS
Section 6.01. Additional Buildings. Subject to Landlord's
approval and consent as provided for herein, Tenant shall have
the right at its expense to construct additional buildings, boat
slips, or to make structural alterations, extensive renovations,
or additions to any existing improvements. Prior to construction
of additional buildings, or boat slips, or any structural
alterations, extensive renovations, or additions to any existing
improvements, Tenant shall (a) prepare and submit to Landlord
plans and specifications for the alteration or addition, (b)
solicit the comments of Landlord concerning the alteration or
addition and (c) obtain Landlord's written approval, which
approval shall not be withheld, conditioned or delayed
unreasonably, and shall be withheld only if Landlord provides to
Tenant written justification for withholding approval which
specifies in detail the basis for disapproval. In no case shall
construction of the Additional Building commence prior to the
granting of written approval by Landlord of plans and
specifications thereof in accordance with the conditions, terms,
covenants and agreements of this Section 6.01. No oral statement
by any employee or representative of Landlord shall constitute
the written approval of Landlord required under this Section
6.01.
Tenant shall further have the right, at its expense, to
perform routine maintenance to the Improvements without the prior
written consent of the Landlord.
Section 6.02. Approval by the Army. Within ten (10) days
after Landlord approves plans and specifications for the
construction of any Tenant Improvement pursuant to Section 6.01,
Landlord shall submit the Approved Plans to the District
Engineer. At the request of Tenant, Landlord promptly shall
arrange for a meeting of Landlord, Tenant and the District
Engineer to address any such Approved Plans and the conditions of
the District Engineer's approval. If the District Engineer fails
to approve such Approved Plans within ninety (90) days after
submission by Landlord, Tenant shall have the right to terminate
this Lease.
Section 6.03. Title to Tenant Improvements. At all times
during the Term, title to all Tenant Improvements shall remain in
Tenant, and Tenant shall continue to own the Tenant Improvements
in fee simple, with all rights of a fee owner to convey, sell or
transfer part or all of the Tenant Improvements. Upon the
expiration of the Term or earlier termination of this Lease, (a)
title to and fee simple ownership of the Tenant Improvements
shall vest in Landlord, subject to the rights of Tenant and the
rights of Mortgagees under this Lease, and (b) Tenant shall
execute and deliver such documents or instruments as reasonably
may be requested by Landlord to acknowledge that title to and fee
simple ownership of the Tenant Improvements have vested in
Landlord.
Section 6.04. Additional Slips. Notwithstanding anything to
the contrary contained herein, Landlord shall permit Tenant to
construct additional boat slips so long as the boat slips are in
compliance with Section 6.01.
<PAGE>
ARTICLE VII
LEASEHOLD MORTGAGES
Section 7.01. Leasehold Mortgages. Tenant shall have
the right at any time during the Term to grant one or more
Mortgages o the Tenant Improvements and/or the Leaseholder Estate
without prior consent of Landlord and separately from or together
with interests in any other property owned or leased from time to
time by Tenant or Tenant's Affiliates. The execution and delivery
of any Mortgage shall not be deemed to constitute an assignment
of this Lease, and no Mortgagee shall be (a) deemed to be an
assignee of this Lease or (b) required to assume the performance
of any of the terms, conditions, covenants or agreements of this
Lease to be performed by Tenant. Tenant shall (a) give Landlord
prompt written notice of the execution and delivery of each
Mortgage and (b) furnish to Landlord a true, accurate and
complete copy thereof.
Section 7.02. Notices to Mortgages. Until a Mortgage is
released of record or written Notice of satisfaction is given to
Landlord by the Mortgagee holding that Mortgage, Landlord shall
deliver to the Mortgagee a copy of each notice of default under
the terms of this Lease given to tenant under this Lease. No
notice to Tenant of default shall be effective, unless a copy
thereof is delivered to each Mortgagee of which Landlord has
received notice.
Section 7.03. Rights of Mortgagees Upon an Event of
Default. For a period of sixty (60) days after the later of (a)
receipt by a Mortgagee of a Notice of Default or (b) the expiration
of the applicable cure period or the Event of Default specified
in such Notice of Default, that Mortgagee shall have the right to
cure or cause to be cured the Event of Default and Landlord
shall accept performance by a Mortgagee as performance by Tenant.
If a Mortgagee notifies Landlord within such period of sixty (60)
days that it intends to obtain possession of the Leased Premises.
The Tenant Improvements and/or a part thereof, appoint a receiver
for the Leased Premises, the Tenant Improvements and/or a part
thereof or foreclose its Mortgage, then Landlord shall not
terminate or take action to effect a termination of this Lease
without first giving to that Mortgagee a reasonable period of
time within which it may (a) obtain possession of the Leased
Premises, the Tenant Improvements and/or the part thereof
encumbered by the Mortgage and cure or cause to be cured such
Event of Default, (b) perfect the appointment of a receiver for
the Leased Premises, the Tenant Improvements and/or the part
thereof encumbered by the Mortgage and cure or cause to be cured
such Event of Default or (c) institute and complete foreclosure
proceedings or otherwise acquire the Tenant Improvements, the
Leasehold Estate and/or the part thereof encumbered by the
Mortgagee; provided that no Mortgagee shall be required to
continue in possession, continue a receivership or continue in
possession, continue a receivership or continue foreclosure
proceedings after such Event of Default has been cured.
Section 7.04. Extension to Cure and Foreclose. If Landlord
elects to terminate this Lease for any Event of Default, then in
addition to the rights of Mortgagees under Section 7.03, any
Mortgagee shall have the right to postpone and extend the date
specified by Landlord for the termination of this Lease for a
period of six (6) months; provided that any Mortgagee which
<PAGE>
exercises such right shall (a) cure any uncured Events of Default
curable solely by the payment of money, (b) diligently proceed to
cure or cause to be cured all other Events of Default reasonably
susceptible of being cured by the Mortgagee, (c) pay the Rent and
comply with and perform all conditions, terms, covenants and
agreements in this Lease to be performed by Tenant, and (d)
commence and diligently proceed to complete the sale of the
Tenant Improvements, the Leasehold Estate and/or the part thereof
encumbered by the Mortgage by foreclosure of the Mortgage or
otherwise. If a Mortgagee is actively engaged in selling or
attempting to sell Tenant Improvements, the Leasehold Estate
and/or the part thereof encumbered by the Mortgage, then the
period of six (6) months shall be extended for such additional
period of time as may be reasonably necessary to complete the
sale.
Section 7.05. Rights of Mortgagees Upon the Termination of
Lease. Notwithstanding any other condition, term, covenant, or
agreement in this Lease, if Landlord purports to terminate this
Lease for any reason prior to the expiration of the Term, then,
upon the election of any Mortgagee, Landlord shall (a) enter into
a lease of the Leased Premises with that Mortgagee, or its
nominee, for the remainder of the Term, effective as of the date
of such purported termination, at the rents and upon the same
conditions, terms, covenants and agreements as in this Lease,
including without limitation, the options to extend the Term
pursuant to Article III, and (b) simultaneously with the
execution and delivery of such lease, assign to the Mortgagee, or
its nominee, all Subleases. The Subleases shall (a) survive any
terminations of this Lease and any assignment to a Mortgagee or
its nominee and (b) remain in full force and effect in accordance
with their terms. To exercise such election, a Mortgagee shall
give written notice to Landlord of the election within sixty (60)
days after the date of a purported termination. After exercising
such election, that Mortgagee, or its nominee, shall (a) pay or
cause to be paid to Landlord on the commencement date of the term
of such lease all unpaid Rent (b) cure or cause to be cured all
uncured Events of Default which are curable by the payment of
money and (c) diligently proceed to cure or cause to be cured all
other Events of Default reasonably susceptible of being cured by
that Mortgagee. If Landlord and a Mortgagee or its nominee, enter
into a lease pursuant to this Section, then the purported
termination shall be deemed ineffective and void ab initio, and
the lease shall be deemed to be a continuation of this Lease for
all purposes under applicable law.
Section 7.06. Limitations on Terminations. Landlord's right
to terminate this Lease for a particular Event of Default shall
end on the date a Mortgagee or any purchaser, assignee or
transferee of the Tenant Improvements, the Leasehold Estate
and/or the part thereof encumbered by a Mortgage (whether by
purchase at any foreclosure sale or through an other assignment
or transfer of the Tenant Improvements, the Leasehold Estate
and/or the part thereof encumbered by the Mortgage in lieu of
foreclosure) shall obtain possession of the Leased Premises as
the successor to the Leasehold Estate (whether under this Lease
or another lease), unless Landlord has validly exercised its
right under Section 16.02 and this Article to terminate this
Lease for failure by the Mortgagees to cure an Event of Default.
No modification, surrender or cancellation of this Lease (other
than a termination by Landlord in compliance with the conditions,
terms, covenants and agreements set forth in Section 16.02 and
this Article) shall be effective without written approval of all
Mortgagees, and the acquisition by a single person or
<PAGE>
entity of both the fee title in the Real Estate and the
Leasehold Estate shall not be deemed to effect a merger thereof
without the express written consent of all Mortgagees affected
thereby.
Section 7.07. No Obligation to Cure. No condition, term,
covenant or agreement in this Lease shall be deemed to or shall
require any Mortgagee to cure or cause a cure of any default of
Tenant, unless such Mortgagee elects to exercise its rights under
Sections 7.03, 7.04, or 7.05 for which cure of defaults is a
condition.
Section 7.08. Insurance and Condemnation Proceeds. The
conditions, terms, covenants and agreements of this Lease
concerning the application of Insurance Proceeds or Condemnation
Awards for Tenant Improvements or the Leasehold Estate are
subject to any rights reserved in any Mortgage by a Mortgagee to
apply all or any part of the Insurance Proceeds of Condemnation
Awards for Tenant Improvements and the Leasehold Estate to the
indebtedness secured by a Mortgage.
Section 7.09. Modification or Lease. If a prospective
Mortgagee requests reasonable modifications in this Lease as a
condition to making a Mortgage Loan to Tenant, then Landlord
shall execute an agreement in recordable form modifying this
Lease as requested by the Mortgagee; provided that no such
modifications shall affect Landlord or its rights hereunder in
any material adverse respect.
Section 7.10. Restrictions on Mortgages. During the Term,
Landlord shall not have the right or power to (a) mortgage or
otherwise grant any Security interest in, or other liens or
encumbrances upon, the Army Lease, the Leased Premises, the
right, title, interest and estate of Landlord in and to the
Leased Premises under the Army Lease, the Improvements, any
fixtures, equipment or other personal property at any time and
from time to time located on the Leased Premises, or any part
thereof, or (b) to amend, modify, extend, renew, replace,
refinance or otherwise change or affect any Mortgage.
Section 7.11. Estate of Landlord Not Subordinated. No
condition, term, covenant or agreement of this Lease shall be
deemed to (a) constitute a subordination of the right, title,
interest and estate of Landlord in and to the Leased Premises
under the Army Lease to any Mortgage or (b) require Landlord to
execute any Mortgage or other document or instrument to effect
any such subordination.
ARTICLE VIII
PAYMENT OF TAXES
Section 8.01. Payment or Taxes and Assessments. Tenant
shall pay and discharge prior to delinquency (a) all installments
of Real Estate Taxes and Assessments which become due and payable
during the Term and (b) all Personal Property Taxes.
<PAGE>
Section 8.02. Right to Contest Taxes and Assessments.
Tenant at the cost and expense of Tenant may contest by
appropriate legal proceedings all Real Estate Taxes and
Assessments and the valuation of the Improvements for the purpose
of determining the amount of Real Estate Taxes or Assessments.
Tenant shall have the right to conduct all such proceedings
without the consent or further authorization of Landlord and in
the name of Landlord. Landlord shall (a) cooperate with Tenant in
connection with contesting Real Estate Taxes and Assessments or
the valuation of the Improvements, and (b) upon request by
Tenant, execute all petitions and other instruments and documents
necessary in connection therewith. Notwithstanding any other
condition, term, covenant or agreement set forth in this Section,
Tenant shall pay installments of Real Estate Taxes and
Assessments prior to the date on which the Improvements or any
part thereof shall become subject to sale upon foreclosure of the
lien for such Real Estate Taxes and Assessments. The legal
proceedings conducted by Tenant pursuant to this Section may
include any and all appropriate appeals or other similar
proceedings, if such appeals or other proceedings are sufficient
to prevent a foreclosure sale.
Section 8.03. Distribution of Overpayment of Taxes. If
there are any refunds or rebates on account of the Real Estate
Taxes and Assessments paid by Tenant, then such refund or rebate
shall belong to Tenant (whether or not received by Landlord
during the Term). Any such refund or rebate received by Landlord
at any time shall be deemed to be received by Landlord in trust
for Tenant, and shall be paid to Tenant immediately upon receipt.
Upon the request of Tenant, Landlord shall execute any receipts
or other instruments or documents which may be necessary to
secure the payment of any such refund or rebate.
Section 8.04. Separate Assessments. Upon request of Tenant,
Landlord shall apply for or join in Tenants' application to
obtain separate tax assessments for such portions of the
Improvements as Tenant may designate at any time and from time to
time. Landlord shall (a) cooperate with Tenant, in connection with
any such application and (b) upon request by Tenant, execute any
additional instruments or documents necessary or appropriate to
obtain such separate tax assessments.
Section 8.05. Excluded Taxes. No condition, term, covenant
or agreement in this Lease shall be deemed to require Tenant to
pay any income, gross income, net or supplemental income, gross
receipts, inheritance, estate, succession, transfer, gift,
franchise or profit taxes. or any tax similar to or enacted in
lieu or replacement of any of the foregoing, that is or may be
imposed upon Landlord, or its successors or assigns. Landlord
represents and warrants that (a) no ad valorem real property
taxes have been or will be levied or with respect to the Real
Estate. the Reservoir and/or the use thereof and (b) no general
and special assessments, ditch fees or any other governmental
dues, charges and impositions have been or will be levied upon or
with respect to the Reservoir.
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ARTICLE IX
MECHANICS' LIENS
Tenant shall pay and promptly discharge all mechanics' or
materialmens' liens filed against the Real Estate and/or the
Improvements; provided that Tenant shall have the right to
contest the validity of any such lien in any manner permitted by
law if (a) Tenant provides to Landlord title insurance, a bond or
other assurance or security in any amount equal to one hundred
percent (100%) of the amount claimed to be due, and (b)
diligently proceeds to cause such lien to be discharged. If
Tenant fails to discharge any such lien as required under this
Section, then Landlord may discharge the lien for the account of
Tenant by (a) paying the amount claimed to be due, (b) depositing
in court a bond for the amount claimed to be due or (c) such
other manner as may be permitted by law. The legal proceedings
conducted by Tenant pursuant to this Section may include any and
all appropriate appeals or other similar proceedings, if such
appeals or other proceedings are sufficient to prevent a
foreclosure sale.
ARTICLE X
INSURANCE
Section 10.01. Liability Insurance. Tenant, at its cost and
expense, shall maintain in full force and effect during the Term
a policy or policies of general public liability insurance issued
by a reputable company or companies naming Landlord as an
additional insured and covering any and all claims for injuries
to or death of persons and damage to property occurring on the
Leased Premises, in an amount not less than (a) One Million
Dollars ($1,000,000.00) for injuries to or deaths of any
individuals in the same accident or occurrence, (b) Five Hundred
Thousand Dollars ($500,000.00) for damage to property arising out
of any one accident or occurrence, and (c) an aggregate of One
Million Dollars ($1,000,000.00) coverage.
Section 10.02. Casualty Insurance. Tenant, at its cost and.
expense, shall maintain in full force and effect during the Term
a policy or policies of insurance on all Tenant Improvements for
the benefit of Tenant against loss or damage by fire or other
casualties covered by a customary extended coverage endorsement,
in an amount not less than eighty percent (80(%) of the
replacement cost of the Tenant Improvements. Any and all such
policy or policies shall be held by either the Mortgagees or
Tenant. Landlord shall not carry any insurance concurrent in
coverage and contributing in the event of loss with the insurance
policy or policies required to be maintained by Tenant under this
Section, if the effect of such separate insurance would be to
reduce the protection or the payment to be made under the
insurance policy or policies maintained by Tenant.
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Section 10.03. Workmen's Compensation Insurance. Tenant
shall (a) comply with the applicable provisions of the workmen's
compensation law and (b) insure against its liability thereunder
as required by law.
Section 10.04. Blanket and Umbrella Policies. Any
requirement of Tenant under this Lease to maintain an insurance
policy or policies may be satisfied by maintaining blanket
property insurance or umbrella liability insurance covering the
Leased Premises and the Tenant Improvements and other locations
or operations of Tenant or its Affiliates: provided that such
blanket or umbrella insurance policy or policies shall comply
with all of the other requirements of this Lease.
Section 10.05. Certificates of Insurance. Upon request by
Landlord, Tenant Eh-all furnish to Landlord certificates of
insurance showing that the policies of insurance required to be
maintained by Tenant under this Lease are in full force and
effect.
ARTICLE XI
DESTRUCTION
Section 11.01. Occurrence of Damage or Destruction. If the
Improvements are destroyed or damaged by fire or other cause,
then Tenant, at its election, may repair, restore, rebuild and
replace the Improvements in whole or in part. If the Improvements
are substantially destroyed or damaged by fire or other cause (to
the extent of more than eighty (80%) percent of the cost to
replace or restore the Improvements) Tenant, at its election, may
terminate this Lease. Prior to rebuilding any Improvement which
is structurally damaged by fire or other cause, Tenant shall (a)
prepare and submit to Landlord plans and specifications for the
Improvements, as rebuilt, and (b) solicit the comments of
Landlord concerning such plans and specifications. Any complete
replacement of Improvements destroyed or damaged by fire or other
cause with Improvements of a different type or nature shall be
deemed to be the construction of an Additional Building under
Section 6.01, and Tenant shall comply with the terms, conditions,
covenants and agreements of Section 6.01 prior to replacing any
Improvements with an Additional Building. Tenant shall (a) raze
any Improvements which Tenant does not repair, restore, rebuild
or replace, (b) regrade the ground on which such Improvements
were located an (c) seed such ground with grass or pave such
ground for parking.
Section 11.02. Insurance Proceeds. All Insurance Proceeds
paid under the insurance policy or policies required to be
maintained by Tenant under Section 10.02 shall be applied in
accordance with the Mortgages and if required by the terms of the
Mortgages, all such Insurance Proceeds shall be deposited with
the Mortgagees to be disbursed pursuant to the Mortgages as the
repair, restoration, rebuilding and replacement of the
Improvements are completed. All Insurance Proceeds which are not
applied pursuant to the Mortgages shall be the property of Tenant
unless Tenant either terminates the Lease or elects not to
rebuild the Improvements, in which case these Insurance Proceeds
shall be the property of Landlord.
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ARTICLE XII
CONDEMNATION
Section 12.01 Occurrence of Condemnation. If a Total Taking
or a constructive Total Taking shall occur at any time during the
Term, then this Lease shall terminate on the date of such Taking.
If a Partial Taking shall occur at any time during the Term, then
(a) this Lease shall not terminate and, (b) Tenant, at its
election, may repair, restore, rebuild or replace any
Improvements which have been taken in whole or in part. Tenant
shall (a) raze any Improvements which Tenant elects not to
repair, restore, rebuild or replace. (b) regrade the ground on
which such Improvements are or were located and (c) seed such
ground with grass or pave such ground for parking.
Section 12.02. Condemnation Awards. The portion of any
Condemnation Awards paid for (a) the Taking of all or part of the
Army's fee ownership of the Lease Premises or (b) the Taking of
Landlord's right, title and interest in and to the Leased
Premises under the Army Lease shall be paid to and be the
property of the Army or Landlord. as the case may be, and Tenant
shall not be entitled to and shall have no interest in any such
Condemnation Awards. The portion of any Condemnation Awards paid
for or otherwise attributable to (a) taking the Tenant
Improvements, the Leasehold Estate, or fixtures, equipment and
personal property of Tenant or (b) expenses to move such
fixtures, equipment and personal property or otherwise compensate
Tenant for the loss of the Leasehold Estate shall be applied in
accordance with the Mortgages, and, if required by the terms of
the Mortgages, shall be deposited with the Mortgagees to be
disbursed pursuant to the Mortgages. All such Condemnation Awards
which are not applied pursuant to the Mortgages shall be the
property of Tenant.
Section 12.03. Rights to Appear. Landlord, Tenant, and all
Mortgagees shall have the right to participate in any
condemnation proceedings or other proceedings concerning a Taking
for the purpose of protecting their rights hereunder and to
introduce evidence to establish the value of or damage to the
Leased Premises, the Tenant Improvements or the Leasehold Estate.
ARTICLE XIII
MAINTENANCE
Section l3.01. Maintenance and Repairs. During the Term,
Tenant, at its cost and expense, shall keep, maintain and repair
the entirety of the Leased Premises and all Tenant Improvements
in good, clean and safe order, condition and repair, wear and
tear and the effects of time excepted. In addition, Tenant shall
implement a regular program of cleaning and outdoor maintenance,
including without limitation, cutting grass and caring for
landscaping, sufficient to keep the Leased Premises and the
Tenant Improvements in an aesthetically acceptable condition.
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Section 13.02. Use of the Leased Premises. Tenant shall not
(a) vacate or abandon the Leased Premises, [or] (b) commit any
waste of or cause a nuisance to exist on the Leased Premises.
Tenant shall use the Leased Premises and operate the Project in
accordance with all applicable laws, statutes and ordinances and
all applicable rules and regulations of Governmental Agencies,
including without limitation, the provisions of I.C. 14-3-8-3(8)
concerning the retail sale of alcoholic beverages on lands which
are under the control and management of Landlord, the legal title
to which is vested in the federal government. Tenant shall not
permit refuse, trash or garbage to accumulate on the Leased
Premises or in the Tenant Improvements, and Tenant shall remove
or cause all refuse, trash and garbage to be removed from the Leased
Premises on a regular basis.
Section 13.03. Right to Contest Laws. Tenant, at the cost
and expense of Tenant, may contest by appropriate legal
proceedings the application of any law statute, ordinance or any
rule or regulation of any Governmental Agency with respect to the
use of the Leased Premises or the operation of the Project, if
the legal proceedings continue to postpone enforcement of the
law, statute, ordinance, rule or regulation against the Leased
Premises. During such contest, Tenant shall not be deemed to be
in default of the conditions terms, covenants or agreements of
Section 13.02 with respect to the law, statute, ordinance, rule
or regulation which Tenant is contesting. Tenant shall have the
right to conduct all such proceedings without the consent or
further authorization of Landlord. Landlord shall not interfere
with any action taken by Tenant in connection with contesting the
application of any law, statute or ordinance or any rule or
regulation of any federal or local Governmental Agency. The legal
proceedings conducted by Tenant pursuant to this Section may
include any and all appropriate appeals or other similar
proceedings.
Section 13.04. Preservation of Environment. In furtherance
of the purpose and policy of the National Environmental Policy
Act of 1969(Public Law 91-90, 42 USC 4321, 4331-4335) and
Executive Order 11514, entitled "Protection and Enhancement of
Environmental Quality" March 5, 1970 (35 Federal Register 4247,
March 7, 1970), Tenant acknowledges the importance of the
preservation and the elimination of environmental pollution. At
all times during the Term, Tenant shall comply with all
applicable federal, state, and local laws, statutes and
ordinances and all applicable rules and regulations of
Governmental Agencies concerning environmental pollution. Tenant
shall take reasonable and economically practical action to
promote (a) reduction of chemical vapors and control of engine
exhaust gases and smoke from heaters, (b) reduction of water
pollution by control of sanitary facilities, the storage of fuels
and other contaminants, and turbidity and siltation from erosion,
(c) minimization of noise levels, (d) proper on and off-site
disposal of waste and other contaminants from construction
activities, and (e) minimization of defacement and damage to
forests.
Section 13.05. Non-Discrimination. Tenant shall not
discriminate on the basis of race, creed, color, ancestry,
national origin or political affiliation against any employees,
applicant for employment or any person seeking to utilize the
facilities or services provided by Tenant on the Leased Premises
or otherwise violate the Indiana Non-Discrimination Law, I.C. 22-
9-1-10. Such prohibition concerning discrimination against
employees and applicants for employment shall include, without
limitation, employment, promotion, demotion, transfer,
recruitment, training, termination, rate of pay, or other forms
of compensation. The provisions of this Section shall be included
in any construction contract by and between Tenant and any third
party.
Section 13.06. Promotional Activities. Tenant shall engage
in such advertising and promotional activities as Tenant shall
deem adequate to acquaint the public with the facilities and
services which are available on the Leased Premises. To assist
Tenant in the preparation of advertising and promotional
activities and material, Landlord shall consult with, advise, and
furnish information to Tenant. All stationery, post cards,
brochures, displays and other advertising material used by Tenant
to advertise to promote the Project and the use of the facilities
located on the Leased Premises shall indicate that Tenant is
operating the Project and such facilities under this Lease for
the benefits and patronage of the public. All brochures, displays
and other advertising material used by Landlord to advertise.
promote or inform the public of the general facilities in the
Reservoir shall identify the Project and describe the facilities
and services provided by Tenant on the Leased Premises. Landlord
shall (a) consult with Tenant concerning all such descriptions
prior to use or publication and (b) make such revisions therein
as Tenant reasonably may request.
ARTICLE XIV
UTILITIES
During the term, Tenant shall pay all use and other charges
for Utility services furnished to or used on the Leased Premises.
If Tenant requires additional or increased Utility services for
the Leased Premises, then Tenant shall have the right to obtain
such additional or increased services at its cost and expense.
Landlord shall (a) cooperate with Tenant in connection with
obtaining additional or increased utility services, and (b) upon
request by Tenant, execute without charge to Tenant all petitions
and other instruments and documents necessary in connection
therewith. Landlord shall execute agreements and other
instruments creating easements or other similar rights in favor
of Utility Companies and Tenant as may be necessary or
appropriate to (a) extend Utility lines and mains to the boundary
of the Leased Premises or (b) obtain additional or increased
utility services. Such agreements and easements shall provide to
Utility Companies and Tenant (a) rights of access to Utility
mains and lines and (b) rights to use, maintain, repair and
replace Utility mains and lines.
ARTICLE XV
ASSIGNMENT AND SUBLETTING
Section 15.01. Subleases. Landlord hereby consents to any
and all (a) subleases by Tenant or part or all of the Tenant
Improvements or the leased Premises and (b) grants by Tenant of
concessions, licenses and other rights to the use and occupancy
of part or all of the Tenant Improvements or the Leased Premises,
so long as such sublesses,
<PAGE>
concessionaires and licensees are obligated to use the
Leased Premises in accordance with Article V. No sublease.
concession or license permitted hereunder shall relieve Tenant of
its obligations and liabilities under this Lease. Tenant shall
provide written notification to Landlord of the existence of any
subtenant, licensee or concessionaire and shall further provide
Landlord with a summary of the terms of any such sublease,
concession or license agreement.
Section 15.02. Sales and Assignments. Tenant shall have the
right at any time to sell. assign or transfer this Lease and/or
the Leasehold Estate to any other party if Tenant obtains the
prior written consent of Landlord. Landlord's consent to such a
sale, transfer or assignment shall not be withheld if the
proposed purchaser, assignee or transferee (a) has the financial
worth equal to or greater than Tenant to perform the conditions,
terms, covenants and agreements of this Lease to be performed by
Tenant and (b) has the expertise or is affiliated or associated
with parties which have the expertise to operate the Project. Any
such sale, transfer or assignment of this Lease and the Leasehold
Estate to a party having such financial wherewithal and expertise
shall release Tenant from (a) all liabilities accruing hereunder
after the date of the sale, assignment or transfer, and (b) all
obligations to perform the conditions, terms. covenants and
agreements of this Lease to be performed by Tenant after such
date. Landlord hereby consents to any and all sales, assignments
or transfers of the Tenant Improvements or a part thereof and/or
the Leasehold Estate. Any Mortgagee shall have the right to sell,
assign or transfer this Lease, the Leasehold Estate, and/or part
or all of the Tenant Improvements after notifying Landlord of the
impending sale, assignment or transfer. Notwithstanding any other
condition, term, covenant or agreement of this Lease, a transfer
of this Lease, the Leasehold Estate and/or part or all of the
Tenant Improvements by death, incapacity or operation of law
shall not be deemed to be a sale, assignment or transfer for
purposes of this Lease, and Landlord's consent shall not be
required. Notwithstanding any other condition, term, covenant or
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agreement in this Lease of each purchaser, assignee or transferee
of the Lease or the Leasehold Estate (whether by purchase at any
foreclosure sale or any other assignment or transfer in lieu
thereof) shall (a) assume and agree to perform all of the
conditions, terms, covenants and agreements of this Lease to be
performed by Tenant, subject to the limitation of liability set
forth in Article XXV, and (b) furnish to Landlord a document or
instrument executed by the purchaser. assignee or transferee and
setting forth such assumption and agreement.
ARTICLE XVI
TENANT DEFAULTS
Section 16.01. Events of Default. Each of the following
events shall constitute an Event of Default: (a) the failure of
Tenant to pay any installment of Rent when the same shall be due
and payable and the continuation of such failure for a period of
thirty (30) days after written notice to Tenant from Landlord;
(b) the failure of Tenant to comply in a timely manner with the
order or decree of the appropriate Governmental Agency after a
final determination that Tenant has breached the conditions,
terms, covenants and agreements set forth in Section 13.05 and
exhaustion by Tenant of all appeals and other appropriate legal
proceedings; (c) the failure of Tenant to perform any other
condition, term, covenant or agreement of this Lease to be
performed by Tenant, unless Tenant shall commence a cure of such
failure within thirty (30) days after written notice to Tenant
from Landlord specifying the nature of the default and shall
diligently proceed to complete the cure; (d) the sale of the
Leasehold Estate pursuant to execution; (e) the making by Tenant
of a general assignment for the benefit of creditors; (f) the
appointment of a receiver in equity for Tenant's property, unless
such appointment is vacated. discharged or bonded within one
hundred twenty (120) days after the receiver is appointed; (g)
the appointment of a trustee or receiver for Tenant's property in
a reorganization; arrangement or other bankruptcy proceeding,
unless such appointment is vacated, discharged or bonded one
hundred twenty (120) days after the trustee or receiver is
appointed; (h) the filing by Tenant of a voluntary petition in
bankruptcy or for reorganization or arrangement; (i) filing by
Tenant of an answer admitting bankruptcy or agreeing to
reorganization or arrangement: or (j) the adjudication of Tenant
as insolvent or as bankrupt; provided that no Event or Default
shall be deemed to have occurred if Tenant shall be delayed in or
prevented by Unavoidable Delay from curing or commencing a cure
of a default or failure by Tenant.
Section 16.02. Remedies for Tenant Defaults. Upon the
occurrence of an Event of Default, Landlord may (a) cure the
default for the account of Tenant or (b) terminate this Lease. If
Landlord elects to cure the default, then Tenant shall pay to
Landlord on demand all costs and expenses incurred by Landlord in
connection with curing the default. If Landlord elects to
terminate this Lease, then Landlord shall give Tenant a written
notice of termination specifying such default and designating a
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date for termination, which date shall not be less than sixty
(60) days after Landlord gives the Notice of Termination to
Tenant. Simultaneously with giving the Notice of Termination to
Tenant, Landlord shall give a copy of the Notice of Termination
to all Mortgagees, as required under Section 7.02, and to any
other parties that Tenant shall have previously designated to
Landlord to receive a copy of a Notice of Termination. If Tenant
or any Mortgagee cures the default on or before the date
designated for termination of this Lease in the Notice of
Termination, then Landlord shall have no right to terminate this
Lease for such default. Notwithstanding any condition, term,
covenant or agreement set forth in this Section, Landlord shall
have no right to terminate this Lease as a consequence of Tenant
Bankruptcy if (a) the Rent due and payable hereunder shall
continue to be paid and (b) the other conditions, terms,
covenants and agreement so this Lease to be performed by Tenant
continue to be performed. The conditions, terms, covenants and
agreements set forth in this Section and the rights of Landlord
hereunder are subject to the conditions, terms, covenants and
agreements of Article VII.
ARTICLE XVII
QUIET ENJOYMENT AND LANDLORD COVENANTS
Section 17.01. Covenant of Quiet Enjoyment. Landlord
covenants and agrees that Tenant shall have the peaceable and
quiet possession of the Leased Premises from and after the
Execution Date and at all times during the Term. This covenant
shall run with the land constituting the Real Estate and bind
Landlord, and its successors and assigns. Landlord covenants and
agrees that Landlord shall not (a) sell, assign or transfer to
any person or entity (whether collaterally, by operation of law
or otherwise) this Lease, its rights and interests as Landlord
under this Lease or its right, title, interest and estate under
the Army Lease or (b) grant any easement or other right, title,
interest or estate in or to the Leased Premises unless Landlord
obtains Tenant's prior written consent, which consent with
respect to easements shall not be withheld unreasonably. All such
attempted or purported sales, assignments, transfers or grants
shall be deemed ineffective and void ab initio unless Tenant's
written consent is obtained.
Section 17.02. Covenants Concerning the Army Lease.
Landlord covenants and agrees that Landlord shall not (a) cause
or permit any amendment, modification or other change of or in
the Army Lease which affects this Lease, the Leasehold Estate,
rights of Tenant hereunder or the obligations of Landlord
hereunder, unless Landlord obtains the prior written consent of
Tenant, (b) cause or permit any default of the conditions, terms,
covenants and agreements of the Army Lease to be performed by
Landlord which might result in the termination or cancellation of
the Army Lease, (c) cause or permit the Army Lease to be
terminated or canceled by either Landlord or the Army, (d) cause
or agree to any amendment, modification or other change of or in
the U.S. Army Engineers' Master Plan or the Annual Management
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Program which is inconsistent or incompatible with the
development and full use and enjoyment of the Project, the rights
of Tenant hereunder or the obligations of Landlord hereunder,
or (e) agree to or enter into a new U.S. Army Engineers' Master
Plan or Annual Management Program which is inconsistent or
incompatible with the development and full use and enjoyment of
the Project, the rights of Tenant hereunder or the obligations of
Landlord hereunder. Landlord covenants and agrees that Landlord
shall exercise its best efforts to enforce fully and diligently
the conditions, terms, covenants and agreements of the Army Lease
to be performed by the Army. Landlord shall permit Tenant to (a)
participate directly with Landlord to enforce such conditions,
terms, covenants and agreements of the Army Lease, and (b) if
Landlord fails to fully and diligently enforce such conditions,
terms, covenants and agreements of the Army Lease, then Tenant
shall have the right to conduct enforcement proceedings in the
name of Landlord. Landlord shall (a) cooperate with Tenant in
connection with such proceedings, and (b) upon request by Tenant,
execute all complaints, pleadings, instruments and documents
necessary in connection therewith.
Section 17.03. Covenants Concerning the Reservoir. Landlord
covenants and agrees that, at all times during the Term, Landlord
shall (a) maintain the Reservoir as a public facility for
recreational and fish and wildlife management purposes so that
the Reservoir is suitable for the use and enjoyment by the
customers and patrons of the Project for boating, fishing, hiking
and all other customary outdoor recreational uses of Indiana
reservoir properties, (b) preserve public access to the Reservoir
and the Lake and assure that the use of the Reservoir and the
Lake is available to the public, and (c) maintain the Reservoir
and all public amenities in the Reservoir in good, clean and safe
order, condition and repair and in compliance with all applicable
laws, statutes and ordinances and all applicable rules and
regulations of Governmental Authorities.
Section 17.04. Covenants Concerning Lake Level. Landlord
covenants and agrees that Landlord shall exercise its best
efforts with respect to the Army and cooperate with the efforts
of Tenant to avoid raising or lowering the water level of the
Lake materially above or materially below 538 feet above sea
level. The parties acknowledge that the primary purpose of the
reservoir is for flood control, low flow augmentation, and to
provide recreational opportunities.
Section 17.05. Landlord Defaults. In the event Landlord
shall default in the performance of any of the covenants or
conditions which Landlord is required to observe and perform
under the terms of this Lease Tenant shall give Landlord thirty
(30) days written notice of such default. Landlord shall have
such additional time as is necessary to cure such default
provided that Landlord begins to cure same during said thirty
(30) days and diligently pursues such cure thereafter. The Tenant
shall have all legal remedies available to it and may enforce any
and all rights available to Tenant.
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ARTICLE XVIII
PUBLIC CHARGES
Landlord and Tenant agree that the obligations of Tenant
and Landlord with respect to reviews by the District Engineer and
Landlord pursuant to the Army Lease and any applicable laws or
statutes, of fees, rates and prices charged on the Leased
Premises for furnishing or selling lodging, services and goods to
the public will be satisfied as follows: (a) prior to increasing
fees for slip rental and lodging room rental above the fees
existing at the date of the execution of this Lease. Tenant will
submit a schedule of the initial or increased fees to the
Landlord for approval by the Director of Landlord; (b) the
approval of the Director shall not be withheld unless the fees
submitted exceed fair market fees charged by operators of other
similar privately-owned resort developments comparable to the
Project in the area for comparable slips and lodgings, and then
shall be withheld only with respect to the fees which exceed such
fair market fees; (c) the Director shall approve or disapprove
each fee on the submitted schedule within a reasonable time after
receipt of the schedule of fees (not to exceed thirty (30) days,
which approval shall not be withheld conditioned or delayed
unreasonably; (d) any disapproval of a fee shall be in writing
and shall specify in detail the basis for disapproval; and (e)
the approval by the Director shall be deemed to be the approval
by Landlord. The conditions, terms, covenants and agreements set
forth in this Section shall be applicable unless and until the
same shall be determined to be inconsistent with the requirements
of applicable laws or statutes in a final, non-appealable
decision by a court of competent jurisdiction, in which event the
interpretation of the applicable laws and statutes by such court
shall be binding upon Landlord and Tenant. If any person shall
claim that the conditions, terms, covenants and agreements set
forth in this Section are inconsistent with the requirements of
the applicable laws or statutes, then Landlord and Tenant agree to
cooperate and to use their best efforts to support and defend the
conditions, terms, covenants and agreements of this Lease.
ARTICLE XIX
ACCESS ROADS
Landlord represents and warrants that Tenant, the
Subtenants and their respective employees, agents, contractors.
customers and patrons shall have adequate and convenient access,
ingress and egress at all times to and from the Leased Premises
from and to public highways and roads over and across all access
roads in the Reservoir. Without limiting the foregoing
representation and warranty, the Army and Landlord hereby grant
to Tenant appurtenant and non-exclusive easements in, on, over,
above and across the Access Roads, which easements shall continue
in full force and effect until the expiration of the Term or the
termination of this Lease. Such easements are granted for the
benefit of, and may be used by, Tenant, the Subtenants and their
respective employees, agents, contractors, customers and patrons.
Landlord covenants and agrees that Landlord shall maintain the
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Access Roads in good, passable. clean and safe order. condition
and repair and in compliance with all applicable laws, statutes
and ordinances and all applicable rules and regulations of
Governmental Authorities. Landlord shall remove snow from the
Access Roads promptly after each snowfall commences. Tenant
acknowledges that in the event of a heavy snowfall, (a) the
current equipment of Landlord is inadequate to remove large
accumulations of snow, and (b) Landlord must rely on other
Governmental Authorities to remove large accumulations of snow
from the Access Roads. Tenant agrees that, in the event of a
heavy snowfall with a large accumulation, Landlord shall not be
in default of its obligations under this Section to remove snow
if Landlord exercises its best efforts and diligently attempts to
obtain snow removal for the Access Roads from other Governmental
Authorities. When Landlord obtains adequate equipment to remove
large accumulations of snow from the Access Roads, then the
foregoing acknowledgment and agreement of Tenant with respect to
heavy snowfalls with large accumulations shall have no further
force or effect. As part of the easements granted to Tenant in
this Section, Tenant shall have the right to install, maintain,
repair and replace (a) signs at the entrances to the Fairfax
State Recreation Area, and (b) such direction and information
signs along the Department of Natural Resources controlled access
roads as Tenant reasonably may deem necessary or appropriate.
Tenant shall obtain Landlord's prior written consent to the form,
design, and placement. of any such signs.
ARTICLE XX
SURRENDER
Upon the expiration of the Term or earlier termination of
this Lease, Tenant shall (a) surrender to Landlord the Leased
Premises and the Tenant Improvements, in good order, condition
and repair, wear and tear and the effects of time excepted and
(b) remove from the Leased Premises and the Tenant Improvements
all fixtures, signs, equipment and other personal property
belonging to Tenant and the Subtenants.
ARTICLE XXI
EXCLUSIVE RIGHT OF FIRST REFUSAL
Subject to the conditions herein contained and subject to
Indiana Code 14-3-8, Landlord covenants to extend to the Tenant
the preferential right to provide such additional accommodations,
facilities, or services as may, in its opinion, become necessary
on, adjacent to, or in the immediate vicinity of the Leased
Premises during the term of this Lease or any extension or
renewal thereof. This is a preferential right and not a
monopolistic or exclusive right. When appropriate, the Landlord
will request the Tenant to provide the needed additional
accommodations, facilities, or services. If the Tenant doubts the
necessity, desirability, timeliness, reasonableness, or
practicability of such new or additional facilities, it will be
allowed sixty (60) days in which to prepare and submit evidence
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to support its position. The Landlord will review all the
evidence pertinent to the situation that is available, and make
the final decision in the matter.
However, it is agreed that there will be no mandatory
requirements for additional rooms or other lodging until the
occupancy rate for the rooms in operation at the time of the
request has averaged seventy-five percent (75%) for at least one
full year.
If the decision is that the accommodations, facilities, or
services are required; if space is available and usable therefor
without interference with the operations and uses authorized by
the terms of this Lease; and, if the Tenant does not advise the
Landlord of its intent to exercise its preferential right in
writing within one (1) month of receipt of notice of the
Landlord's final decision, then, the Landlord may, in its
discretion, authorize others to provide such accommodations,
facilities or services, but only upon terms and conditions no
more favorable than those offered to the Tenant.
ARTICLE XXII
NONRECOURSE
The term "Tenant," as used in this Lease, for the purposes
of the conditions, terms, covenants and agreements of this Lease
to be performed by Tenant, shall be construed to mean only the
person or entity holding the Leasehold Estate at the time in
question. Notwithstanding any other condition, term, covenant or
agreement of this Lease, no Mortgagee, Affiliate, partner,
officer, director, agent, employee or beneficiary of Tenant or a
successor Tenant shall be liable personally for the performance
or nonperformance of any condition, term, covenant or agreement
of this Lease to be performed by Tenant.
ARTICLE XXIII
FORCE MAJEURE
Notwithstanding any other condition, term, covenant or
agreement of this Lease, if (a) either Landlord or Tenant is
required to perform any act (other than the payment of money) at
a specified time or within a specified time limit and (b) such
performance (other than the payment of money) is prevented or
delayed as a consequence of an Unavoidable Delay, then such time
or time limit, as the case may be, shall be extended by a period
equal to the period of the Unavoidable Delay.
ARTICLE XXIV
NOTICES
No notice, demand. approval, consent or other communication
authorized or required by the conditions, terms, covenants or
agreements of this Lease shall be effective, unless the same
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<PAGE>
shall be in writing and (a) delivered personally, with a receipt
signed by the party to which the notice is delivered, or sent
postage prepaid by United States registered or certified mail,
return receipt requested, addressed in each case to the other
party at its address set forth below, or such other address as
either party may designate by written notice, and (b) delivered
or sent in the same manner to any Mortgagee and any other party
entitled to a copy of such notice:
The address for notices to Landlord is:
Director, Department of Natural Resources
State Office Building
Indianapolis, Indiana 46204
With copies to:
Attorney General
State House
Indianapolis, Indiana 46204
The address for notices to Tenant is:
FOURWINDS
c/o REGAL-AIRCOA COMPANIES, INC.
4600 S. Ulster Street, Suite 1200
Denver, Colorado 80237
With copies to:
REGAL-AIRCOA COMPANIES, INC.
Attention: General Legal Counsel
4600 S. Ulster Street
Suite 1200
Denver, Colorado 80237
ARTICLE XXV
CERTIFICATES
Upon demand at any time, either party shall certify to the
following matters by written instrument duly executed,
acknowledged and addressed to any Mortgagee, (a) whether this
Lease has been supplemented or amended, and if so, the substance
of each such supplement or amendment; (b) whether this Lease is
valid and in full force and effect in accordance with the
conditions, terms, covenants and agreements of this Lease; (c)
whether any default exists hereunder and whether any condition
exists which, with the passage of time or the giving of notice,
will constitute a default; (d) whether any offsets, counterclaims
or defenses exists under the Lease; (e) the correct commencement
and expiration dates of the Term; and (f) any other matters as
reasonably may be requested. Any such certificate may be relied
upon by the party requesting it and any other person or entity to
whom the certificate may be exhibited or delivered, and the
contents of such certificate shall be binding on the party
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<PAGE>
executing the certificate.
ARTICLE XXVI
GENERAL
Section 26.01. Non-Waiver. Failure of Landlord or Tenant
to complain of any act, omission or default on the part of the
other party, however long the same may continue, shall not be
deemed to be a waiver by said party of its rights hereunder. No
waiver by Landlord or Tenant at any time, express or implied, of
any default under any condition, term, covenant or agreement of
this Lease shall be deemed a waiver of a default under any other
condition, term, covenant or agreement of this Lease or a consent
to any subsequent default under the same or any other condition,
term, covenant or agreement of this Lease.
Section 26.02. Governing Law. This Lease and the
performance hereof shall be governed, interpreted and construed
by the laws of the State of Indiana. The authorities for this
Lease are: I.C. 14-3-2-9(2) 14-3-8-2, and 14-3-8-3. Wherever
herein the singular number is used. the same shall include the
plural, and the masculine gender shall include the feminine and
neuter genders, and vice versa, as the context shall require.
The Article and Section headings are for reference and
convenience only, and shall not enter into the interpretation
hereof. This Lease may be executed in several counterparts, each
of which shall be an original, but all of which shall constitute
one and the same instrument.
Section 26.03. Partial Invalidity. If any condition, term,
covenant or agreement of this Lease. or the application thereof
to any person, entity or circumstance, shall at any time or to
any extent be held invalid or unenforceable, then (a) the
remainder of this Lease, or the application of such condition,
term. covenant or agreement to persons or circumstances other
than those as to which it is held invalid or unenforceable, shall
not be affected thereby, and (b) each such condition, term,
covenant and agreement of this Lease shall continue to be valid,
binding and enforceable to the fullest extent permitted by law.
Section 26.04. Entire Agreement. This Lease (a)
constitutes the entire agreement between the parties and (b)
shall not be amended, modified. changed, terminated or canceled
except by a written instrument.
Section 26.05. Memorandum of Lease. Upon executing this
Lease. the parties shall execute and deliver a memorandum of this
Lease, in recordable form, setting forth a description of the
Leased Premises, the Term and any conditions. terms, covenants or
agreements thereof required by the applicable statute or
requested by Tenant.
Section 26.06. Parties. Except as otherwise expressly
provided herein, the covenants, conditions and agreements
contained in this Lease shall bind and
inure to the benefit of Landlord and Tenant and their respective
successors and assigns.
Section 26.07. Authority. Landlord and Tenant each
represent and warrant to the other party that they have the power
and authority to execute and deliver this Lease and to carry out
and perform all conditions, terms, covenants and agreements to be
performed by such party hereunder. Landlord and Tenant each
represent and warrant to the other party that this Lease is (a)
the legal, valid and binding obligation of such party and (b)
enforceable in accordance with the conditions, terms, covenants
and agreement hereof. Each person signing on behalf of a party
hereto represents and warrants that he is fully empowered and
authorized by all necessary governmental or other action of such
parry to execute and deliver this Lease.
Section 26.08. Non-Collusion. Tenant acknowledges and
agrees that no partner, member, representative, agent or employee
of the partnership, directly or indirectly, has (a) entered into
or offered to enter into any combination, collusion or agreement
to receive pay, or (b) received or paid any sum of money or other
consideration for the execution of this Lease, other than that
which appears upon the face of this Lease.
ARTICLE XXVII
ARMY ACKNOWLEDGMENTS
If Tenant is unable to obtain such acknowledgments and
agreements by the Army with respect to this Lease and if the Army
rejects this Lease in writing, then Tenant shall have the right
to cancel this Lease and reinstate the original Lease. After such
cancellation, neither Landlord nor Tenant shall have any
liability under or in connection with this Lease. Landlord shall
exercise its best efforts and cooperate with Tenant to obtain
such acknowledgments. If the Army requests reasonable
modifications in this Lease as a condition to making such
acknowledgments and agreements, then Landlord and Tenant shall
execute an agreement in recordable form modifying this Lease as
requested by the Army; provided that no such modifications shall
effect Landlord or its rights hereunder in any material adverse
respects.
ARTICLE XXVIII
INDEMNIFICATION
The Tenant agrees to hold the Landlord and the United
States of America harmless and indemnified against any liability
for environmental damages caused by the Tenant or liability for
injury or death to any persons or damage to any property in or
upon the Leased Premises, arising from or out of the negligence
of Tenant, its employees, and all persons in the Leased Premises
at Tenant's invitation, including the personal property of the
Tenant and its employees and all persons in the Leased Premises
at its or their invitation.
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ARTICLE XXIX
MERGER
All understandings and agreements had heretofore between
the parties are merged in this Agreement, which alone fully and
completely expresses their agreement. This Agreement, including
all exhibits, constitutes the entire understanding and agreement
among the parties hereto as of the date hereof. No modification
or termination of this Agreement shall be binding unless signed
by the parties. No waiver of any provision of this Agreement
shall be effective and binding unless in writing and no waiver of
any other provision hereof (whether or not similar) shall
constitute a continuing waiver unless expressly so stated.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Indenture of Ground Lease as of the day and year first above
written.
"LANDLORD"
INDIANA DEPARTMENT OF NATURAL RESOURCES
OF THE STATE OF INDIANA, a governmental
agency of the State of Indiana
By:______________________________
Printed:______________________________
Title:________________________________
<PAGE>
"TENANT"
FOURWINDS OPERATING PARTNERSHIP, L.P.
a Delaware limited partnership
By: AIRCOA HOSPITALITY SERVICES, INC.
a Delaware corporation,
Managing General Partner
By:_____________________
Printed:____________________
Title:________________________
By:_____________________
Printed:____________________
Title:________________________
84
<PAGE>
STATE OF INDIANA )
) SS:
COUNTY OF _____ )
Before me, a Notary Public in and for the State of Indiana,
personally appeared __________, the _________, of INDIANA
DEPARTMENT OF NATURAL RESOURCES OF THE STATE OF INDIANA, a
governmental agency of the State of Indiana, who acknowledged the
execution of the foregoing Indenture of Ground Lease for and on
behalf of said INDIANA DEPARTMENT OF NATURAL RESOURCES OF THE
STATE OF INDIANA, and who, having been first duly sworn, stated
that the representations contained therein are true.
WITNESS my hand and notarial seal this ____ day of _______, 1991.
- -----------------------
Notary Public
- ----------------------
Printed Name
My commission Expires:
- -----------------------
I am a resident of ___________ County, Indiana.
<PAGE>
STATE OF INDIANA )
) SS:
COUNTY OF _____ )
Before me, a Notary Public in and for the State of Indiana,
personally appeared ________, the _____, and ___, the _____ of
AIRCOA HOSPITALITY SERVICES, INC., a Delaware Corporation, the
General Partner of FOURWINDS OPERATING PARTNERSHIP, L.P., a
Delaware Limited Partnership, who acknowledged the execution of
the foregoing Indenture of Ground Lease for and on behalf of said
FOURWINDS OPERATING PARTNERSHIP, L.P., and who, having been first
duly sworn, stated that the representations contained therein are
true.
WITNESS my hand and notarial seal this ____ day of ____________,
1991.
- -------------------
Notary Public
- --------------------
Printed Name
My commission Expires:
- ---------------
I am a resident of _________ County, Indiana.
APPROVED this ____ day of _______, 1991
- -------------------------------
EVAN BAYH, GOVERNOR, STATE OF INDIANA
APPROVED this ____ day of ________, 1991.
- --------------------------------
LINLEY E. PEARSON, ATTORNEY GENERAL, STATE OF INDIANA
ATTEST:
- ----------------------------
JOSEPH H. HOGSETT, SECRETARY OF STATE
APPROVED this ____ day of _______, 1991.
For the STATE BUDGET AGENCY, STATE OF INDIANA
By:______________________
FRANK SULLIVAN, JR., DIRECTOR
<PAGE>
APPROVED this ____ day of ____________, 1991
For the DEPARTMENT OF ADMINISTRATION, STATE OF INDIANA
By:_________________________
JOHN KISH, COMMISSIONER
STATE OF INDIANA )
) SS:
COUNTY OF _____ )
Before me, a Notary Public in and for the State of Indiana,
personally appeared JOSEPH H. HOGSETT, SECRETARY OF STATE OF
INDIANA, a governmental agency of the State of Indiana, who
acknowledged the execution of the foregoing Indenture of Ground
Lease for and on behalf of said Office of the SECRETARY OF STATE
OF INDIANA, and who, having been first duly sworn, stated that the
representations contained therein are true.
WITNESS my hand and notarial seal this ____ day of _________,
1991.
- -----------------
Notary Public
- ---------------
Printed Name
My Commission Expires:
- ------------------
I am a resident of __________ County, Indiana.
87
<PAGE>
STATE OF INDIANA )
) SS:
COUNTY OF _____ )
Before me, a Notary Public in and for the State of Indiana,
personally appeared EVAN BAYH, GOVERNOR OF THE STATE OF INDIANA,
who acknowledged the execution of the foregoing Indenture of
Ground Lease for and on behalf of said OFFICE OF THE GOVERNOR OF
THE STATE OF INDIANA, and who, having been first duly sworn,
stated that the representations contained therein are true.
WITNESS my hand and notarial seal this ____ day of _________,
1991.
- ----------------
Notary Public
- ---------------
Printed Name
My Commission Expires:
- -------------------
I am a resident of ________________ County, Indiana.
STATE OF INDIANA )
) SS:
COUNTY OF _____ )
Before me, a Notary Public in and for the State of Indiana,
personally appeared JOHN KISH, COMMISSIONER FOR THE DEPARTMENT OF
ADMINISTRATION, a governmental agency of the State of Indiana,
who acknowledged the execution of the foregoing Indenture of
Ground Lease for and on behalf of said DEPARTMENT OF
ADMINISTRATION, and who, having been first duly sworn, stated
that the representations contained therein are true.
WITNESS my hand and notarial seal this ____ day of _________,
1991.
- ----------------
Notary Public
- ---------------
Printed Name
My Commission Expires:
- -------------------
I am a resident of ________________ County, Indiana.
88
<PAGE>
STATE OF INDIANA )
) SS:
COUNTY OF _____ )
Before me, a Notary Public in and for the State of Indiana,
personally appeared FRANK SULLIVAN, JR., DIRECTOR OF THE STATE
BUDGET AGENCY OF THE STATE OF INDIANA, who acknowledged the
execution of the foregoing Indenture of Ground Lease for and on
behalf of said OFFICE OF THE STATE BUDGET AGENCY, and who, having
been first duly sworn, stated that the representations contained
therein are true.
WITNESS my hand and notarial seal this ____ day of _________,
1991.
- ----------------
Notary Public
- ---------------
Printed Name
My Commission Expires:
- -------------------
I am a resident of ________________ County, Indiana.
Prepared by Stephen A. Backer, BACKER & BACKER, P.C., 101 West
Ohio Street, Suite 1500, Indianapolis, Indiana 46204.
<PAGE>
Clarion Fourwinds Resort and Marina
- --------------------------------------------------------------------
F.6 INDEMNIFICATION
<PAGE>
[Insert Indemnification Letter]
<PAGE>
AIRCOA HOSPTALITY SERVICES, INC.
By:/s/ Joel W. Hiser
--------------------
Name: Joel W. Hiser
Tile: Sr. Vice President
By:/s/ David Rigby
--------------------
Name: David Rigby
Tile: Sr. Vice President
ARTHUR ANDERSEN LLP
By:/s/ Roger Cline
--------------------
Name: Roger Cline
Tile: Partner
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
By:/s/ John A. Schoenfeld
----------------------------------
Name: John A. Schoenfeld
Tile: Co-Director, Real Estate Group
AHP SPECIAL COMMITTEE
By:/s/ James W. Hire
----------------------------------
Name: James W. Hire
By:/s/ Anthony C. Dimond
----------------------------------
Name: Anthony C. Dimond
<PAGE>
Appraisal of:
REGAL MCCORMICK RANCH
SCOTTSDALE, ARIZONA
As of:
JANUARY 1, 1997
Prepared For:
AIRCOA Hotel Partners, L.P.
Special Committee
March 31, 1997
Prepared By:
ARTHUR ANDERSEN LLP
Hospitality Industry Consulting Services Group
<PAGE>
March 31, 1997
Mr. James W. Hire
Hire & Associates
1383 Solitude Lane
Evergreen, CO 80439
Mr. Anthony C. Diamond
Miramar Asset Management, Inc.
617 Veterans Boulevard, Suite 212
Redwood City, CA 94063
Re: Appraisal of Regal McCormick Ranch
As of January 1, 1997
Gentlemen:
As requested, we have completed an appraisal of the leasehold
interest in the above-referenced property. The reader is advised
that our Firm has not audited, examined, reviewed or applied
agreed-upon procedures to the financial data contained in the
accompanying report unless specifically noted. We have relied on
information including, but not limited to, industry statistics,
relevant market, demographic and financial data assembled by us
through direct research conducted by our staff or from secondary
sources as well as information provided by you. While these
sources of information are generally recognized as authoritative
in the field or otherwise considered reliable, we have not
audited this information nor do we warrant its completeness or
accuracy. The opinion of market value subject to stabilized
occupancy expressed herein is subject to the assumptions and
limiting conditions set forth in the body of the accompanying
report.
We understand that our valuation will be used to assist you in
determining the market value for internal purposes and may not be
disclosed to a third party, without the prior consent of Arthur
Andersen LLP.
Based upon our research and analysis, it is our opinion that the
market value of leasehold interest (subject to a groundlease),
including furniture, fixtures and equipment, as of January 1,
1997 was
-- Thirteen Million Seven Hundred Seventy Thousand Dollars
($13,770,000)
<PAGE>
We appreciate the opportunity to serve you. Please call if you
have any questions or if we can be of further assistance.
Very truly yours,
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
<PAGE>
Regal McCormick Ranch Page i
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TABLE OF CONTENTS
SUMMARY OF CRITICAL FACTS AND CONCLUSIONS......................iii
GENERAL ASSUMPTIONS AND LIMITING CONDITIONS......................v
CERTIFICATION.................................................viii
A. INTRODUCTION................................................10
A.1 SUBJECT PROPERTY IDENTIFICATION............................10
A.2 OWNERSHIP HISTORY..........................................10
A.3 PURPOSE AND FUNCTION OF THE VALUATION......................11
A.4 PROPERTY RIGHTS APPRAISED..................................12
A.5 EFFECTIVE DATE OF THE VALUATION............................12
A.6 EXPOSURE PERIOD............................................13
A.7 SCOPE OF THE APPRAISAL.....................................13
A.8 SPECIAL ASSUMPTIONS........................................14
B. ANALYSIS OF THE SUBJECT PROPERTY AND ITS MARKET.............15
B.1 DESCRIPTION AND ANALYSIS OF THE PROPERTY...................15
Location.....................................................15
Legal Description............................................15
Land.........................................................15
Property Improvements........................................16
Property Inspection..........................................21
Past Renovation and Capital Requirements.....................22
Property Taxes...............................................24
Zoning.......................................................27
B.2 AREA ANALYSIS..............................................29
Economic and Demographic Indicators..........................30
Employment...................................................34
Real Estate Overview.........................................39
Transportation...............................................40
Freeways.....................................................40
Mass Transit.................................................42
Rail Service.................................................42
Airport......................................................42
Tourism and Recreation.......................................44
Conclusion...................................................48
B.3 HIGHEST AND BEST USE ANALYSIS..............................49
Highest and Best Use of The Land as if Vacant................49
Highest and Best Use of The Property As Currently Improved...52
Conclusion and Reconciliation of Highest and Best Use........54
C. ANALYSIS OF COMPETITIVE LODGING SUPPLY AND DEMAND...........55
C.1 COMPETITIVE LODGING SUPPLY.................................55
Identified Competitive Supply................................57
Additions To Supply..........................................63
C.2 LODGING SUPPLY AND DEMAND ANALYSIS.........................67
Overall Demand Trends in the Scottsdale/Paradise
Valley Lodging Market.......................................67
Lodging Demand in the Identified Competitive Supply..........68
<PAGE>
Regal McCormick Ranch Page ii
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Demand Segmentation And Estimated Demand Growth..............72
C.3 ESTIMATED OCCUPANCY AND AVERAGE ROOM RATE..................79
Market Penetration & Average Annual Occupancy................79
Projected Average Daily Room Rate............................84
D. THE APPRAISAL PROCESS.......................................89
D.1 THE COST APPROACH..........................................89
D.2 SALES COMPARISON APPROACH..................................90
Conclusion by the Sales Comparison Approach..................96
D.3 INCOME APPROACH............................................97
Historical Financial Performance.............................98
Estimated Operating Results..................................98
Investment Climate Overview.................................106
Discounted Cash Flow Analysis...............................107
E. RECONCILIATION AND FINAL VALUE ESTIMATE...................109
F. ADDENDA....................................................111
F.1 HOTEL SALES COMPARABLES..................................112
F.2 SUBJECT PROPERTY PHOTOGRAPHS..............................117
F.3 COMPETITIVE HOTEL PHOTOGRAPHS.............................121
F.4 PROPERTY LEGAL DESCRIPTION................................125
F.5 LEASE (GROUND)............................................127
F.6 INDEMNIFICATION...........................................129
<PAGE>
Regal McCormick Ranch Page iii
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SUMMARY OF CRITICAL FACTS AND CONCLUSIONS
Property Name: Regal McCormick Ranch
Property Address: 7401 North Scottsdale Road
Scottsdale, Arizona 85253
Property Location: The subject property is located
on Scottsdale Road in Maricopa County,
Arizona. It is easily accessible to
numerous area demand generators and
attractions including golf courses,
shopping malls, the Scottsdale Airport,
Sky Harbor International Airport,
Pinnacle Park and Rawhide attractions,
the Mayo Clinic, and Arizona State
University.
Property Type: The subject property comprises a
125-room, three-story, full-service
resort hotel. The improvements include
a restaurant, lounge and meeting/banquet
space in one contiguous building. The
property also offers a swimming
pool, whirlpool, jogging path, boat
dock, tennis courts and a pro-shop.
Number of Rooms: 125
Owner of Record: AIRCOA Hotel Partners L.P.
Interest Appraised: Leasehold (Subject to a Groundlease)
Land Area: 353,273-square feet (8.11 acres)
Building Area: 78,884-square feet
Year Completed: 1978
Highest and Best Use:
Land as though vacant: Hold for future hotel development
Land as improved: Hotel
Date of Valuation: January 1, 1997
Date of Inspection: November 6, 1996
<PAGE>
Regal McCormick Ranch Page iv
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Value Indications (Including Furniture, Fixtures, and Equipment):
$ Amount $ Per Room
-------- ----------
Cost Approach: n/a n/a
Sales Comparison Approach: $ 13,750,000 $110,000
Income Approach: $ 13,770,000 $110,160
------------ --------
Reconciled Value Indication: $ 13,770,000 $110,160
============ ========
<PAGE>
Regal McCormick Ranch Page v
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GENERAL ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal report is subject to the following general
assumptions and limiting conditions:
1. No investigation has been made of, and no responsibility
is assumed for, the legal description of the property
being valued or legal matters, including title or
encumbrances. Title to the property is assumed to be
good and marketable unless otherwise stated. The
property is assumed to be free and clear of any liens,
easements, or encumbrances unless otherwise stated.
2. Information furnished by others, upon which all or
portions of this appraisal are based, is believed to be
reliable but has not been verified in all cases. No
warranty is given as to the accuracy of such
information.
3. It is assumed that all required licenses, certificates
of occupancy, consents, or other legislative or
administrative authority from any local, state, or
national government or private entity or organization
has been or can readily be obtained or renewed for any
use on which the value estimates contained in this
report are based.
4. Full compliance with all applicable federal, state, and
local zoning, use, occupancy, environmental, and similar
laws and regulations is assumed unless otherwise stated.
5. No responsibility is taken for changes in market
conditions, and no obligation is assumed to revise this
report to reflect events or conditions which occur
subsequent to the appraisal date hereof.
6. The opinion of value is predicated on the financial
structure prevailing as of the date of this appraisal.
7. Responsible ownership and competent property management
are assumed.
8. Areas and dimensions of the property were obtained from
sources believed to be reliable. Maps or sketches, if
included in this report, are only to assist the reader
in visualizing the property, and no responsibility is
assumed for their accuracy. No independent surveys were
conducted.
9. It is assumed that there are no hidden or un-apparent
conditions of the property, subsoil, or structures that
render it more or less valuable. No responsibility is
assumed for such conditions or for arranging engineering
studies that may be required to discover them.
10. No soil analysis or geological studies were ordered or
made in conjunction with this report, nor was an
investigation made of any water, oil, gas, coal, or
other subsurface mineral and use rights or conditions.
11. Neither Arthur Andersen LLP nor any individual signing
or associated with this report shall be required by
reason of this report to give further consultation,
<PAGE>
Regal McCormick Ranch Page vi
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provide testimony, or appear in court or at other legal
proceedings unless specific arrangements therefore have
been made.
12. This report has been made only for the purpose stated
and shall not be used for any other purpose. Neither
this report nor any portions thereof (including, without
limitation, any conclusions as to value or the identity
of Arthur Andersen LLP or any individuals signing or
associated with this report or the professional
associations or organizations with which they are
affiliated) shall be disseminated to third parties by
any means without the prior written consent and approval
of Arthur Andersen LLP.
13. The date of value to which the opinions expressed in
this report apply is set forth in the opinion letter at
the front of this report. Our value opinion is based on
the purchasing power of the U.S. dollar as of that date.
We have no obligation to update our findings and
conclusions for changes in market conditions which occur
subsequent to our fieldwork.
14. Our study and report will be based on assumptions and
estimates which are subject to uncertainty and
variation. These estimates are often based on data
obtained in interviews with third parties, and such data
are not always completely reliable. Therefore, while our
estimates will be conscientiously prepared on the basis
of our experience and the data available to us, we make
no warranty of any kind that the financial results
projected will, in fact, be achieved.
15. Unless otherwise stated in this report, no hazardous
material, which may or may not be present on or
near the property, was observed. We have no knowledge
of the existence of such materials on or in the
property; however, we are not qualified to detect
such substances. The presence of potentially
hazardous substances, such as asbestos, urea-formaldehyde
foam insulation, or industrial wastes, may
affect the value of the property. The value estimates
herein are predicated on the assumption that
there is no such material on, in, or near the property
that would cause a loss in value. No
responsibility is assumed for any such conditions or
for any expertise or engineering knowledge required
to discover them. The client should retain an expert
in this field if further information is desired.
16. This appraisal has been made in conformance with the Uniform
Standards of Professional Appraisal Practice of The Appraisal
Foundation.
17. The allocation in this report of the total valuation
among components of the property applies only to the
program of utilization stated in this report. The
separate values for any components may not be applicable
for any other purpose and must not be used in
conjunction with any other appraisal.
18. Arthur Andersen consents to including, to the extent required by
federal securities laws, a copy of the Appraisal and/or
summary thereof or a reference thereto in the Schedule 13E-3
and related proxy statement with the Securities and Exchange
Commissions by AHP or the Special Committee, provided that
AA shall have the right to approve the content of any summary
of the Appraisals, such approval not to be unreasonably withheld.
Otherwise, this report and parts thereof, and any
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Regal McCormick Ranch Page vii
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additional material submitted, may not be used in any
prospectus or printed material used in connection with the
sale of securities or participation interests in any Public
Offering, Securities and Exchange Commission filing, or other
public document.
19. Arthur Andersen LLP's maximum liability relating to
services rendered under this report (regardless of form
of action, whether in contract, negligence, or
otherwise) shall be limited to the charges paid to
Arthur Andersen LLP for the portion of its services or
work products giving rise to liability. In no event
shall Arthur Andersen LLP be liable for consequential,
special, incidental, or punitive losses, damages, or
expenses (including, without limitation, lost profits,
opportunity costs, etc.) even if it has been advised of
their possible existence.
20. The Americans with Disabilities Act became effective
January 26, 1992. We did not make any observations or
interpretations on compliance with the ADA. It is
possible that a compliance survey of the property,
together with a detailed analysis of the requirements of
the ADA could reveal that the property is not in
compliance with the requirements of the Act. If so, this
fact could have a negative effect upon the value of the
property. Since we have no direct evidence relating to
this issue, we did not consider possible non-compliance
with the requirements of ADA in estimating the value of
the property.
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CERTIFICATION
We certify that to the best of our 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 our personal, unbiased professional
analyses, opinions and conclusions.
- -- we have present no prospective interest in the property
that is the subject of this report, and we have no
personal interest or bias with respect to the parties
involved.
- -- our compensation is not contingent on an action or event
resulting from the analyses, opinions, or conclusions in,
or the use of, this report.
- -- Jeffrey Davis and Patrick Deming, made personal inspections
of the property on November 6, 1996. Dan A. Paulus M.A.I has
not made a personal inspection of the property.
- -- as of the date of this report, Dan A. Paulus has completed
the requirements of the Continuing Education Program of the
Appraisal Institute.
- -- our 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
Supplemental Standards of Professional Practice of the
Appraisal Institute and the Uniform Standards of
Professional Appraisal Practice of The Appraisal
Foundation;
- -- the use of this report is subject to the requirements of the
Appraisal Institute relating to review by its duly authorized
representatives;
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- -- neither all nor any part of the contents of this report
(especially any conclusions as to value or the identify of
the appraiser) 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.
- -- this appraisal assignment was not based on a requested
minimum valuation, a specific valuation, or the
approval of a loan.
- -- Dan A. Paulus currently holds an appropriate state
certification allowing the performance of real estate
appraisals in connection with federally related
transactions in the state in which the property is
located.
Respectfully submitted,
/s/ Roger S. Cline
---------------------------
Roger S. Cline
/s/ Dan A. Paulus M.A.I.
---------------------------
Dan A. Paulus M.A.I.
Arizona State Certified
General Appraiser No. 30234
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A. INTRODUCTION
A.1 SUBJECT PROPERTY IDENTIFICATION
Property Address: 7401 North Scottsdale Road
Scottsdale, Arizona 85253
Tax Reference: Account # 0179383
Deed Reference: Parcel Number 174-24-005 A
Current Owner of Record: AIRCOA Hotel Partners, L.P.
A.2 OWNERSHIP HISTORY
AIRCOA Hotel Partners, L.P., a Delaware limited partnership
("AHP" or the "Partnership") was organized in December 1986, by
AIRCOA Hospitality Services, Inc. ("AHS" or the "General
Partner") to acquire, own, operate and sell hotels and resort
properties ( the "Properties") through operating partnerships
(the "Operating Partnerships") which were acquired in 1986.
The partnership owns a 99 percent limited partner interest in
each of the six Operating Partnerships which hold title to the
Properties and through which the Partnership conducts all of its
operations. The Regal McCormick Ranch represents one of these six
properties. AHS, a wholly owned subsidiary of Richfield
Hospitality Services, Inc. ("Richfield"), is also the one percent
general partner of each of the Operating Partnerships. Richfield
operates the Properties for the Partnership under certain
management agreements.
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A.3 PURPOSE AND FUNCTION OF THE VALUATION
The purpose of this report is to estimate the market value of the
leasehold estate in the subject property. Arthur Andersen LLP has
been engaged by the Special Committee of AIRCOA Hotel Partners,
L.P. (AHP) for the purpose of assisting them the value of the
individual properties owned by the partnership.
As used herein, market value is defined as1 :
"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 the sale as of a
specified date and the passing of title from seller to
buyer under conditions whereby:
a. buyer and seller are typically motivated;
b. both parties are well informed or well advised,
and acting in what they consider their best
interests;
c. a reasonable time is allowed for exposure in the
open market;
d. payment is made in terms of cash and United States
dollars or in terms of financial arrangements
comparable thereto; and
e. 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."
This appraisal has been prepared in compliance with the Appraisal
Standards Board requirements and is a self-contained appraisal
report. The report contains complete information significant to
the solution of the appraisal problem and reports all significant
date in comprehensive detail.
- -----------
1 Uniform Standards of Professional Appraisal Practice, Appraisal
Foundation, 1990 Edition.
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A.4 PROPERTY RIGHTS APPRAISED
The property rights appraised are the ownership of the leasehold
interest. The leasehold value reflects the tenant's interest or
right to use and occupy the real estate by virtue of a lease
agreement. A copy of the lease is provided in the addenda of this
report. Following is an abstract of lease terms.
Date of Lease Agreement: August 31, 1978
Lessor: Trustee Estate of James Campbell
Lessee: ARI INC. Ohio Corporation
Term: The term of the lease is 55 years
commencing September 1, 1978.
Options to Extend: Lessee shall have the right to extend
the term of the lease for two separate,
and successive, 10-year periods.
Rent: Minimum rent annually of $90,000 payable
in equal quarterly installments in
advance on the first day of September,
December, March, and June.
Percentage Rent equal to the greater of
4 percent of total sales, net of
telephone and villa revenue; travel
agent and credit card commissions,
or 8 percent of the gross room sales.
A.5 EFFECTIVE DATE OF THE VALUATION
The effective date of this value estimate is January 1, 1997. The
property was inspected by Jeffrey Davis and Patrick Deming on
November 6, 1996. We assume that no major physical alterations
nor economic conditions changes have occurred between the date of
inspection and the date of value. If changes have occurred which
impact market value, we reserve the right to adjust our value
estimate.
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A.6 EXPOSURE PERIOD
Exposure period refers to the amount of time which a property
would have been on the market prior to the date of appraisal for
it to sell at the appraised value. The current marketplace has
been characterized by illiquidity and capital restraints,
particularly on the part of banks, which has affected the time in
which real estate takes to sell. The market for most types of
properties was much more active in the 1980s due to greater
availability of credit and greater investor optimism. The volume
of transactions of hotel properties diminished in 1991 and 1992,
and there was less investment and development activity in the
marketplace. Since then, the markets have shown improvement and
there has been a significant increase in sales activity. Most of
the investors with whom we have spoken agreed that an exposure
period of between six months and one year would be sufficient in
order to maximize the price for a property such as the subject.
A.7 SCOPE OF THE APPRAISAL
As part of this assignment, the appraisers made a number of
independent investigations and analyses. In conducting our
investigation, various governmental planning agencies and the
local Chamber of Commerce were contacted for demographic data,
land policies and trends, and growth estimates. Neighborhood data
were supplemented by physical inspection of the defined area.
Information regarding zoning, utilities, and other limitations on
site utilization was obtained from the client and through the
appropriate agencies. Both the site and the surrounding area was
inspected to determine suitability for hotel use. All phases of
the local lodging market were analyzed for past trends and
current data. Estimated income and occupancy levels, expenses,
and income structures are based upon this market evidence.
A diligent search for comparable data was conducted, and
comparable information was obtained from both public and private
sources. In the case of comparable sales and rental data,
attempts were made to contact the buyers or sellers or other
knowledgeable third parties to verify that the transactions were
at arm's length, cash equivalent, and market reflective. Because
there was a limited number of comparable hotel sales in the
subject market area, we extended our search to other markets. The
sales comparison approach was employed, however, we did not place
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much reliance on it but used it as a test of reasonableness. The
cost approach was not utilized as it is considered to have
limited reliability due to the difficulty in estimating the
significant depreciation and external obsolescence present at the
Regal McCormick Ranch. The income capitalization approach was
given primary emphasis as there was sufficient data for its
application and it reflects the typical investor's behavior.
A.8 SPECIAL ASSUMPTIONS
Revenues at the subject property are achieved primarily from room
and food and beverage sales. However, there are 51 privately
owned condominium units ( The Shores Condominiums) located
adjacent to the south of the subject property. Management of the
hotel has been retained to operate the Shores Condominiums on
behalf of the owners and the Shores Condominium Association. A
separate company (Four Peaks Management) has been established.
These two and three bedroom condominiums are rented out on a
daily, weekly, and monthly basis on behalf of the individual
owners. While rental of these condominium units is not reflected
in the subject property's assessment of occupancy, the hotel may
elect to use vacant units during busy periods. Villa revenues
represented on the income statement represent a percentage of
shared revenues between the management company and the
condominium owners. Expenses include cost of sales, payroll and
related items, operating supplies, contract cleaning, and other
direct operating costs. We have included treatment of these
revenues and expenses similar to a "Minor Operated Department" in
our estimates of value.
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B. ANALYSIS OF THE SUBJECT PROPERTY AND ITS MARKET
This section of the report presents a description and analysis of
the subject property's location, improvements, physical
condition, need for capital expenditures, property taxes, and
zoning. In addition, this section presents a review of the
subject's market area and an analysis of the property's highest
and best use.
B.1 DESCRIPTION AND ANALYSIS OF THE PROPERTY
LOCATION
The subject of the appraisal is located on a 8.11-acre parcel of
land that is improved by a 125-unit resort hotel. The property,
built in 1978 and known as the Regal McCormick Ranch, is located
on the eastside of North Scottsdale Road in Scottsdale, Arizona.
The civic address of the property is 7401 North Scottsdale Road,
Scottsdale Arizona 85253.
LEGAL DESCRIPTION
A detailed legal description is provided in the addenda of this
report.
LAND
Size and Configuration: The subject site is irregular in shape and
contains 353,273 square feet, or 8.11-acres.
Frontage and Accessibility: The subject has frontage on North
Scottsdale Road. The property is located approximately two tenths
of one mile north of the intersection of Scottsdale Road and
Cheney Drive, and one-tenth of one mile south of the intersection
of Scottsdale Road and McCormick Parkway. The subject property
enjoys excellent visibility and is easily accessible traveling
both north and south on Scottsdale Road. Additionally, the
subject property is easily accessible to numerous area demand
generators and attractions including golf courses (the subject is
adjacent to the McCormick Ranch Golf Club's two 18-hole courses),
shopping malls, the Scottsdale Airport, Sky Harbor International
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Airport, Pinnacle Park and Rawhide attractions, the Mayo Clinic,
and Arizona State University.
Topography: The property is generally level and is on-grade with
Scottsdale road.
Floodplain: According to the maps provided by the United States
Bureau of Census, the subject property is located in designated Census
Tract # 1050.01.
Discussions with local zoning officials indicated that portions
of the subject property are located in flood hazard Zone X
(shaded) and/or Zone X (unshaded). Zone X shaded indicates areas
in a 500-year flood zone; areas in a 100-year flood zone with
average depths of less than one foot or with drainage areas less
than one square mile; and areas protected by levees from the
100-year flood. A floodplain map illustrating the above is
provided in the addendum to this report.
Utilities and Public Services: All utilities are available to the
site including public gas, water, sewer, telephone, and electric.
Electrical power is supplied by Arizona Public Service and water
is supplied by Scottsdale Water Service.
Easements and Encroachments: Typical utility and access
easements exist through the subject site. We are not aware of any
easements which negatively impact the subject.
Development on Neighboring Sites: The neighborhood
surrounding the subject property consists primarily of resort,
residential, and commercial developments.
PROPERTY IMPROVEMENTS
General
The subject property is a full-service, 125-unit, resort hotel
facility. According to the property engineer, the Regal McCormick
Ranch comprises a three-story "V-Shaped" building and is situated
on approximately 8.11 acres of land. The subject property is
located adjacent to the 51-unit Shores Condominiums, and is the
only resort facility in Scottsdale on the 40-acre Camelback lake.
Improvements at the subject include an outdoor swimming pool, a
whirlpool, four lighted tennis courts, a gift shop, two
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restaurants, a lounge, a small boat dock, a walking and jogging
path, and more than 8,000 square-feet of meeting and banquet
space.
Guest Rooms
Guest rooms facilities at the property include 121-standard
rooms, three parlor suites, and one presidential suite.
Approximately 41 percent of the rooms include one king sized bed
and the remaining 59 percent include two double beds. The
following table details the number guestrooms and suites by type.
- ----------------------------------------------------------------------
Current Suites Configuration of the Subject Hotel
King Rooms 47
Double-Double Rooms 74
Presidential Suite/King 1
Parlor Suite/King 3
Total Number of Suites 125
- ---------------------------------------- --------------------- -------
Guestrooms at the subject property are equipped with a mini bar,
hair dryer, iron, and coffee maker. Each unit offers a patio or
balcony with a lakeside, mountain, or palm court view. Guestroom
furnishings include a small table, an armoire/television cabinet,
a king or double-double bed, a reading chair with ottoman, and
two small bed-side tables. The decor of each guestroom is
consistent with the resort's overall Southwestern interior
design. Guestroom bathrooms contain a toilet and bathtub/shower
with a separate vanity counter and wash basin located just
outside of the bathroom area.
Food and Beverage Outlets
Food and beverage facilities at the property include two
restaurants and a lounge. The restaurants - The Pinon Grill and
Diamondbacks Bar & Grill - are both located on the ground floor
and offer guests Southwestern cuisine. The Pinon Grill contains
200 seats and is open daily at 6:30 am serving a breakfast
buffet, a traditional lunch, and a Southwestern-style dinner. The
restaurant offers extended breakfast hours on Sunday.
Diamondbacks Bar & Grill contains approximately 75 seats and is a
casual lounge and dining facility which offers guests a lighter
fare lunch and dinner menu. Both restaurants offer guests outside
seating overlooking the swimming pool and Camelback lake.
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Meeting and Banquet Space
The property contains more than 8,000 square feet of dedicated
meeting and banquet space in eight rooms-including the new
lakeside Pavilion which offers guests an outdoor banquet space
with scenic views- for groups up to 325 people. The following
table details the meeting space available at the Regal McCormick
Ranch.
- ----------------------------- -------------- -------------- -------------
Meeting Room or Location/ Number of Square
Ballroom Name Floor Divisions Feet
- ----------------------------- -------------- -------------- -------------
Superstition 1 2 2,365
Superstition East 1 0 1,161
Superstition West 1 0 1,161
Four Peaks 1 2 1,144
Four Peaks East 1 0 572
Four Peaks West 1 0 572
Squaw Peak 1 0 486
Camelback 1 0 486
Lakeside Pavilion 1 0 3,024
Pinnacle Peak 1 0 624
- ----------------------------- -------------- -------------- -------------
Recreational Facilities
The Regal McCormick Ranch resort offers guests access to two
18-hole PGA golf courses, an outdoor swimming pool and whirlpool,
four lighted tennis courts, shuffleboard, volleyball, and a
lakeside setting offering guests complimentary use of
paddleboats, sailboats, and canoes. Guests at the hotel are
offered preferred tee times at the McCormick Ranch Golf Club,
which is located adjacent to the hotel.
Other Services
In addition to the above-mentioned recreational facilities, the
subject property's concierge can assist guests with booking tee
times and other recreational activities including shopping
excursions, professional spectator sports, and area tours.
Transportation to the nearby McCormick Ranch Golf Club and
trolley service to area shopping centers is also provided free of
charge.
For V.I.P guests, the subject property offers an upgraded service
called the Regal Class Guestroom. Physically identical to other
guestrooms, the Regal Class upgrade offers guests a complimentary
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continental breakfast, a free morning newspaper, and a monogram
terrycloth bathrobe.
Structural Systems:
Floor-Area Ratio: 0.22
Floors: Three floors
Foundation: The building foundation consists of
poured concrete block.
Building Frame: The building frame consists of
reinforced concrete block.
Roofing System: The subject property has a flat built-up
roof which consists of individual rubber
membrane panels linked together via a
waterproof adhesive compound.
Exterior Walls: The exterior walls of the subject
property consist of a combination
of concrete block with stucco.
Mechanical Systems:
HVAC System: Public areas within the subject property are
cooled by 15-ton Trane forced-air conditioning units located
on the roof of the main building. Heat to the public areas
is provided by an electrical, forced air gas-pack system.
Heating and cooling in guestrooms is provided by
through-the-wall individual General Electric units.
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Boilers:
Guest Rooms/Meeting Space: Hot water is provided to all
guestrooms and public areas
throughout the subject property
via a 1,000 gallon Raypack
water boiler with a 1.5 horse
power circulating pump.
Chiller
Guestrooms/Meeting Space: No chiller on premises.
Fire Protection System: All public areas are fully
sprinklered; however, guestrooms are not. Each guestroom is
equipped with one hard-wired smoke detector. Heat and smoke
detectors are submitted to a fire control panel located in
an adjacent storage and boiler room at the rear of the
subject property. The fire control system is manufactured by
Simplex and a signal is sent directly to the Rural County
Fire Department.
Elevators:
Passenger Elevators: There is one elevator that travels
from the lobby level to the third
floor.
-- Cab Manufacturer: United States Elevator
-- Control Manufacturer: United States Elevator
-- Age: 1978
Service Elevators: There is one elevator that travels
from the lobby level to the third
floor.
-- Cab Manufacturer: United States Elevator
-- Control Manufacturer: United States Elevator
-- Age: 1978
Plumbing: Domestic water is provided by Scottsdale Water Service
direct to the hotel via (2), two and one half-inch water mains.
Electrical System: Service is provided by the Arizona Public
Service Company. An emergency generator is located in the
mechanical room for instances when the main power supply is
interrupted.
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Interior Finishes:
Floor Coverings:
Lobby: The lobby floor comprises ceramic tile.
Meeting Rooms: All of the meeting rooms contain wall-to-wall
carpeting.
Guestrooms: All guestrooms contain wall-to-wall carpeting.
Guest room bathrooms are tiled.
Corridors: All corridors contain wall-to-wall carpeting.
Walls and Partitions:
Lobby: Walls consist of reinforced sheetrock with a
vinyl covering.
Meeting Space: Walls consist of sheetrock with a vinyl
covering. Partitions in the Superstition and
Four Peaks meeting rooms consist of reinforced
aluminum covered with soft fabric.
Guest Rooms: Guest room walls consist of sheetrock with a
vinyl covering.
Corridors: Corridor walls consist of sheetrock with a vinyl
covering
PROPERTY INSPECTION
We completed an in-depth tour of the property's physical plant
including 1) the property exterior and parking; 2) the public
space, lobby, meeting space, and food and beverage facilities;
and 3) the back-of-the-house space including kitchens, storage
rooms, housekeeping, laundry, administrative offices, and
mechanical and electrical equipment. In addition, we toured four
guest rooms, two with double-double beds and two with king beds.
We also viewed a model guestroom, representative of how all
guestrooms will appear following the renovation which is expected
to be completed by January 1, 1997.
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The Regal McCormick Ranch, although somewhat dated in terms of
general decor and furnishings, is in very good condition. All of
the public and back of the house areas appear to be well
maintained, clean, and attractive. Noticeable areas within and
surrounding the subject property which appear to require
attention include carpeting in all guestroom corridors,
re-surfacing of parking lots, re-surfacing of the tennis courts,
the replacement of carpeting in meeting rooms, and general roof
maintenance.
PAST RENOVATION AND CAPITAL REQUIREMENTS
The subject property is well maintained, clean and attractive.
According to property management, there has been no major
renovation of the property in the past few years. Instead, items
such as air conditioning units, walk-in refrigeration
compressors, kitchen equipment, and public area and guestroom
furniture, fixtures and equipment have been replaced as needed.
In 1994, capital expenditures totaled approximately $250,000 and
included, but was not limited to, the replacement of furniture,
fixtures and equipment in both food and beverage facilities, the
installation of additional ground lighting, and the replacement
of ice machines on the guestroom floors.
In 1995, capital expenditures totaled approximately $300,000 and
included, but was not limited to, the replacement of two kitchen
air conditioning units, upgrading of the PBX phone system,
replacement of terrace chairs and tables, and the installation of
a new Point of Sales system.
In July of 1996, a new outdoor dining pavilion was completed at a
total cost of approximately $240,000. This new outdoor pavilion
offers guests a unique outdoor dining space with spectacular
views of Camelback lake and area mountains. In addition to
providing guests with an aesthetically appealing function area,
the pavilion was added to increase the total amount of banquet
space in an effort to enable the property to remain competitive.
In November of 1996, management will begin a $900,000 renovation
of all guestrooms which is scheduled to be completed by the end
of December 1996. This renovation will include the replacement of
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Regal McCormick Ranch Page 23
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all guestroom soft goods including carpeting, wall vinyl,
bedspreads, curtains and drapes, artwork, and bathroom fixtures.
In addition, management has also budgeted $300,000 for the
scheduled replacement of roof areas which require repair due to
exposure to the sun and heat.
For 1997, management has budgeted for approximately $560,000 in
capital improvements, including but not limited to, the
replacement of carpeting in all corridors, additional landscaping
and aesthetic enhancements around the new pavilion and lake area,
upgrading the lobby and check-in area, and the replacement of
kitchen equipment.
Given the competitive nature of the Scottsdale lodging market, we
anticipate that the subject property will be required to update
the quality level of its meeting and banquet space, including new
carpeting, furniture and fixtures, and wall vinyl. For 1998,
management has budgeted for a total of approximately $600,000.
This amount is expected to be used to replace outdated equipment
in the kitchen, softgoods in all guestrooms, upgrade the existing
roof, and to renovate the main ballroom.
Based upon a physical inspection of the subject property and an
evaluation of the proposed capital expenditure budgets for the
next two years, we have assumed that a total of approximately
$500,000 in capital expenditures over and above an assumed
reserve for replacement will be required over the next two years
to maintain the hotel's competitive position.
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PROPERTY TAXES
The subject property is under the taxing jurisdiction of the
Maricopa County Treasurer. Real estate within the County of
Maricopa is re-assessed annually. Tax payments for the first half
of the year are due October 1st (delinquent after November 1st).
Second tax payments are due March 1st of the following year
(delinquent after May 1st). Most commercial properties are valued
using a modified application of the Cost Approach. However, if
real estate taxes are appealed during any given period, the
Income Approach to Value may be used. Personnel in the Maricopa
County Assessor's Office indicated that commercial property
assessments have remained relatively stable over the past few
years. Once the market value is determined, an assessment
equalization factor of 25 percent is applied to determine the
assessed value to which tax rates are applied.
Tax rates are determined annually and are based upon the fiscal
needs of the many taxing districts which comprise the entire tax
rate schedule. Primary real estate tax rates in Maricopa County
are established by the State, County, City, and applicable school
district needs. Secondary or Full-Cash tax rates are established
primarily by financing needs including, but not limited to, the
issuance of state and city bonds.
In addition to real estate property taxes, the state of Arizona
also requires payment of taxes assessed on the value of personal
property. Personal property is valued based upon the original
cost and age of the taxable personal property (i.e. such items as
signs, supplies, phone and facsimile equipment, security systems,
leased or rented equipment, leasehold improvements, furniture,
draperies, linens, kitchen appliances, television sets, radios,
office equipment etc.).
Similar to property taxes, a 25 percent equalization factor is
applied to the overall value of personal property. Taxable
personal property is reported through the filing of a Personal
Property Statement, Form DOR 82520, with the county assessor each
year.
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Real Estate Taxes
Taxing Jurisdiction: Maricopa County
Tax Account Number: 174-24-005A 6
Current Tax Year: October 1, 1996 through to March 1, 1997
Tax Rates Established: Tax rates are established annually.
Current Tax Rate:
Limited (Primary Value) $7.60 per $100 of assessed value
Full Cash(Secondary Value) $3.22 per $100 of assessed value
Assessments Established: The assessed value of the hotel for
tax purposes is assumed to be
25 percent of market value.
Reevaluations: The market value of the property may
be reassessed each year or the
taxing authority, at its discretion,
may elect to "roll over" the
value assessed from a prior year.
The following table illustrates the computation of the real
estate taxes for the last four years.
- ------- --------------- ------------- -------------- --------------
Tax Market Assessed Tax Rate Property
Year Value Value (per $100) Taxes
- ------- --------------- ------------- -------------- --------------
1993 $5,743,622 $1,435,905 $10.84 $155,633
1994 5,781,217 1,445,304 11.15 161,136
1995 5,781,212 1,445,303 11.50 165,877
1996 5,781,212 1,445,303 10.98 158,700
- ------- --------------- ------------- -------------- ---------------
CAG 0.22% 0.12% 0.65%
- ------- --------------- ------------- -------------- ---------------
CAG: Compound Annual Growth
Source: Regal McCormick historical tax invoices
As indicated in the preceding table, property taxes for the
subject property have remained relatively unchanged over the last
four years. According to representatives from the Maricopa County
Tax Department, there were two important legislative decisions
passed over this period. First, it was decided that property
values assessed during 1994 would be rolled over until the 1997
calendar tax year. Secondly, it was decided that no state taxes
would be levied during 1996. As a result, assessed property value
has remained flat, and taxes have shown little or no increase
over the past four years. Based upon discussions with tax
officials, it is uncertain whether or not assessed values will be
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rolled over in 1997 or reassessed. Considering the strength of
the local economy and level of development in the area, it is
likely that property values will be reassessed. To reflect this,
we have assumed that property taxes will increase at the rate of
inflation, or 3.5 percent annually.
Personal Property Taxes
Taxing Jurisdiction: Maricopa County
Tax Account Number: 0179283
Current Tax Year: Calendar Year
Tax Rates Established: Tax rates are established annually.
Current Tax Rate:
Limited (Primary Value) $8.25 per $100 of assessed value.
Full Cash(Secondary Value) $2.89 per $100 of assessed value.
Assessments Established: Effective in 1997, the first $50,000
of personal property value
will be exempt from taxes. An
equalization rate of 25 percent is
applied to the remaining value to
arrive at assessed value.
Reevaluations: Each year the subject property
must submit a Personal Property
Statement form DOR 82520 listing all
personal property items to the county
assessor which is used to determine
value.
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The following table illustrates the computation of the personal
property taxes for the last four years.
- ------------------ --------------------- ---------------------
Tax Market Assessed
Year Value Value
- ------------------ --------------------- ---------------------
1993 $1,057,000 $264,250
1994 824,946 206,235
1995 619,344 154,615
1996 568,504 130,125
- ------------------ ---------------- ---- ---------------- ----
CAG -18.7% -21.0%
- ------------------ ---------------- ---- ---------------- ----
- ------------------ ---------------- ---------------------
Tax Tax Rate Personal Property
Year (per $100) Taxes
- ------------------ ---------------- ---------------------
1993 $10.22 $25,816
1994 10.48 21,604
1995 10.79 16,676
1996 11.14 14,500
- ------------------ ------------ --- ----------------- ---
CAG 2.91% -17.5%
- ------------------ ------------ --- ----------------- ---
CAG: Compound Annual Growth
Source: McCormick Ranch historical tax invoices
As indicated in the preceding table, personal property taxes have
decreased annually over the last four years by approximately 17.5
percent. This is the result of depreciation schedules used by the
Maricopa Treasurers Office to assess value. As a result, personal
property value assessments decrease each year, thereby decreasing
the tax liability. However, the tax rates have increased at a
compound annual rate of approximately three percent. Presently,
the total value of the personal property according to the 1996
tax invoice is $550,000. Considerate of the fact that the subject
property will replace soft goods in all guestrooms by year-end
1996 at a total cost of $900,000, this will likely increase the
assessed value of the personal property. Taking this into
consideration, we have assumed that the total value of the
personal property following the renovation will approximate
$1,000,000. Using an equalization rate of 25 percent, and taking
into consideration the $50,000 exemption, this translates into an
assessed value of $200,000 which should remain stable (except for
age) during the entire holding period. Given uncertainty
regarding future legislative decisions affecting tax rates, we
have assumed that tax rates will increase annually at the rate of
inflation, or 3.5 percent.
ZONING
The subject property is zoned R-4R which is designated as Resort
Residential permitting the development and operation of a resort,
hotel, or motel.
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Restrictions and Requirements
The following summarizes the restrictions and requirements that
the Regal McCormick Ranch must conform to under its existing
zoning.
Minimum Lot Size The minimum lot size must be 7.5-acres
or 7.6 du/ac; guest units 10.6 du/ac.
Minimum Frontage No restrictions apparent
Minimum Yards No restrictions apparent
Maximum Building Height The maximum building height is 35 feet.
Maximum F.A.R. No restrictions apparent
Maximum Lot Coverage No restrictions apparent
Parking Requirements No restrictions apparent
On the basis of the zoning code, the property site plan, our
physical inspection of the subject property, and discussions with
local zoning representatives, the property appears to be in
conformance with all general and specific zoning requirements.
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B.2 AREA ANALYSIS
The Area Analysis provides information on market conditions as
they currently exist in the Scottsdale, Arizona area. Economic
and sociological trends provide insights relating to the strength
of the local market area; a review of such trends has been
completed to direct and support our estimates of future market
growth in the lodging industry.
In general, growth in hotel demand in a market correlates closely
with the general economic patterns in the respective market.
Demographic and economic conditions in the Phoenix Metropolitan
Area are very strong, and the region is well positioned to
experience continued long term growth. Additionally, the area's
reputation as a leisure and group destination in the past few
years has been enhanced through publicity generated by national
sporting events, including the Super Bowl, the college football
national championship game at the Fiesta Bowl, and the NBA
all-star game.
The following section of the report outlines general trends in
the market. We consulted with the Chamber of Commerce, Convention
and Visitors Bureau, the Scottsdale Office of Economic
Development, and other local sources for much of the following
information. When possible, information was verified directly
from the primary sources.
Scottsdale is located within Maricopa County and is considered
part of the Phoenix metropolitan area. The Phoenix Metropolitan
Area consists of approximately 23 incorporated and
un-incorporated communities, and includes the Cities of Phoenix,
Scottsdale, Tempe, Mesa, Chandler, Glendale and Peoria. Phoenix
is the largest city in Arizona and serves as the state capital
and the Maricopa County seat. The geographical boundaries of
Maricopa County conform roughly to the Phoenix metropolitan area
and demographic data for Maricopa County is considered reflective
of the Phoenix Metropolitan Area. Scottsdale is located
approximately 15 miles northeast of downtown Phoenix, and is
recognized worldwide as a major resort and leisure destination.
The map on the following page depicts the subject property in
relation to the Phoenix Metropolitan Area.
<PAGE>
[Map of Phoenix Showing Location of Subject Property]
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ECONOMIC AND DEMOGRAPHIC INDICATORS
This section summarizes historical trends in several key economic
and demographic indicators in the Scottsdale market area.
Population
POPULATION GROWTH IN THE PHOENIX METROPOLITAN AREA
1980, 1990 AND 1995
- ---------------------- ------------- ------------- ---------------
City 1980 1990 1995
- ---------------------- ------------- ------------- ---------------
Scottsdale 88,364 130,075 168,176
Phoenix 789,704 983,392 1,149,417
Tempe 106,743 141,993 153,821
Glendale 96,988 147,864 182,615
Mesa 152,453 288,104 338,117
Chandler 29,673 89,862 132,360
Metropolitan Area 1,509,052 2,122,101 2,551,765
- ---------------------- ------------- ------------- ---------------
- ---------------------- ------------ -------------
CAG(1) CAG(1)
City 1980-1990 1990-1995
- ---------------------- ------------ -------------
Scottsdale 3.9% 5.3%
Phoenix 2.2% 3.2%
Tempe 2.9% 1.6%
Glendale 4.3% 4.3%
Mesa 6.6% 3.3%
Chandler 11.7% 8.1%
Metropolitan Area 3.5% 3.8%
- ---------------------- ------------ -------------
(1) Compound annual growth
Source: City of Scottsdale Office of Redevelopment
The Phoenix Metropolitan Area has experienced strong population
growth over the last 15 years. This growth is primarily
attributable to migration to the area by people from other areas
of the country especially from Southern California. In 1994, the
City of Phoenix passed Dallas to become the nation's
seventh-largest city in terms of the resident population. The
population growth throughout the Phoenix Metropolitan Area has
accelerated this decade compared to the population growth the
area experienced in the 1980s. Between 1980 and 1990, the
population of the Phoenix metropolitan area increased at a
compound annual rate of 3.5 percent. Between 1990 and 1995 the
rate of population growth for the metropolitan area increased to
3.8 percent, which compares to a 1.1 percent compound annual
growth rate nationally during this same period.
Scottsdale has historically experienced population growth rates
that exceed the Phoenix metropolitan market average. Between 1980
and 1990, the population of Scottsdale increased at a compound
annual rate of 3.9 percent, which compares to the 3.5 percent
growth rate for the metropolitan area as a whole. The margin
between the population growth rate in Scottsdale and the rate
experienced for the Phoenix Metropolitan Area has increased over
the last five years. Between 1990 and 1995, the population of
Scottsdale has increased at a compound annual rate of 5.3
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percent, which compares to 3.8 percent for the metropolitan area.
Since 1990, the population of Scottsdale has grown faster than
all other communities in the Phoenix Metropolitan Area, except
for Chandler.
Current forecasts call for continued population growth in
Scottsdale and the Phoenix Metropolitan Area for the remainder of
the decade. The Economic Outlook Center at Arizona State
University forecasts population growth in the Phoenix
metropolitan area to be 2.8 percent in 1996 and 2.6 in 1997. By
the year 2000, the population of Scottsdale is projected to
increase at a compound annual rate of 3.3 percent to
approximately 198,000, and the population of the Phoenix
Metropolitan Area is expected to increase at a compound annual
rate of 1.9 percent to approximately 2,801,000.
The population growth experienced in the Phoenix Metropolitan
Area is attributable to the employment growth generated by the
area's pro-business environment, low cost of living and location
as the center of the growing southwest region of the country. As
each of these factors are not expected to change, population
growth in the Phoenix Metropolitan Area is expected to continue
to experience strong gains.
Retail Sales
Retail sales in the City of Scottsdale and the Phoenix
Metropolitan Area have rapidly increased in the past decade.
Retail sales per household in the greater Phoenix area exceeded
the U.S. metropolitan average by nearly five percent in 1995. The
Phoenix Metropolitan Area and Scottsdale achieve high retail
sales per household because of the thriving tourism industry and
high number of retail establishments.
The City of Scottsdale has historically outperformed the Phoenix
Metropolitan Area in terms of retail sales per household, because
of its affluent population, its image as a leisure destination,
and its reputation for upscale shopping. In 1995, retail sales
per household in Scottsdale were approximately 74 percent higher
than retail sales per household for the Phoenix Metropolitan Area
as a whole. The most recent data available shows that Scottsdale
achieved the highest retail sales per household of all cities in
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the Phoenix metropolitan area. The following table illustrates
the retail sales per household for cities in the Phoenix
Metropolitan Area.
RETAIL SALES PER HOUSEHOLD IN 1995
PHOENIX METROPOLITAN AREA
- ------------------------- -------------------
Retail Sales
City Per Household
- ------------------------- -------------------
Scottsdale $43,700
Tempe 33,600
Mesa 29,200
Chandler 19,900
Metropolitan Area 25,130
- ------------------------- -------------------
Source: Sales and Marketing Management
Current forecasts call for impressive growth in retail sales for
the Phoenix Metropolitan Area over the next two years. The
Economic Outlook Center at Arizona State University forecasts
retail sales growth in the Phoenix Metropolitan Area of 6.7
percent for 1996 and 5.5 for 1997. The increase in retail sales
per capita is expected to be fueled in part by the continued
strength of the tourism industry in the area. Scottsdale can be
expected to experience strong retail sales growth with the
planned Nordstrom development, which is also expected to include
a 250,000 square foot pedestrian and retail bridge linking
Nordstrom with the Fashion Square mall. Further retail
development in the area will likely result in inducing additional
tourist demand to the Scottsdale market area.
Personal Income
Personal income per capita in the Phoenix Metropolitan Area has
reflected real growth over the past five years. Recent data shows
that personal income per capita in the metropolitan area
increased at a compound annual rate of four percent between 1990
and 1995. In comparison, inflation for the Western United States
increased by approximately three percent during the same period
based on movements in the Consumer Price Index. The real increase
in personal income helps spur economic growth in the area as
residents have higher levels of disposable income. The strong
increase in per capital income also serves to attract new
residents to the area from other parts of the country. The
following table illustrates the growth of personal income per
capita for the Phoenix Metropolitan Area between 1990 and 1995.
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PERSONAL INCOME PER CAPITA
PHOENIX METROPOLITAN AREA
1990 THROUGH 1995
-----------------------------------------------------------
Per Capita Percent
Year Income Change
1990 $18,256 ---
1991 18,613 2.0%
1992 19,450 4.5%
1993 20,253 4.1%
1994 21,364 5.5%
1995 22,285 4.0%
CAG (90-95) 4.1%
-----------------------------------------------------------
Source: Bureau of Economic Analysis
CAG: Compound Annual Growth
As indicated in the preceding table, personal income growth in
the area began to accelerate in 1992. Current forecasts indicate
that personal income should continue to exhibit growth for the
next two years. The Economic Outlook Center at Arizona State
University forecasts personal income growth in the Phoenix
Metropolitan area of 7.3 percent for 1996 and 6.5 for 1997. The
increase in personal income in the area should continue to
encourage new commercial and residential development activity and
attract new residents to the area.
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EMPLOYMENT
Employment and Unemployment
Trends in employment is an excellent indicator of the overall
health of a local economy. The following table presents a summary
of the trends in employment and unemployment in the local market
area for the last several years.
The City of Scottsdale and the Phoenix Metropolitan Area have
experienced strong employment growth over the past five years.
Between 1991 and 1995, both Scottsdale and the Phoenix
Metropolitan Area experienced compound annual growth in total
employment of 4.8 percent. By comparison, the United States only
achieved a compound annual growth rate of only 1.8 percent during
this same period. Employment in the Phoenix Metropolitan Area and
City of Scottsdale has benefited from both strong economic growth
and planned development of major high-technology manufacturing
facilities in the area, such as Sumitomo Corporation's $500
million chip plant. The following table presents the annual
employment growth for Scottsdale and the Phoenix Metropolitan
Area for the years 1991 through 1995.
ANNUAL EMPLOYMENT
1991 THROUGH 1995
- ----------------- -------------------- ------------------------
Phoenix
Year City of Scottsdale Metropolitan Area
- ----------------- -------------------- ------------------------
1991 72,984 1,044,600
1992 72,537 1,038,200
1993 74,551 1,067,000
1994 80,940 1,152,000
1995 87,901 1,258,100
- ----------------- -------------------- ------------------------
CAG (91-95) 4.8% 4.8%
- ----------------- -------------------- ------------------------
Source: Arizona, Department of Economic Security
CAG: Compound Annual Growth
As indicated in the preceding table, growth in employment levels
in Scottsdale and the Phoenix Metropolitan Area have accelerated
in the last three years, which has resulted in very low
unemployment for the area. The unemployment rate in Scottsdale
has historically been below the unemployment rate for the Phoenix
Metropolitan Area as a whole and substantially below the national
unemployment rate. Between 1992 and 1995, Scottsdale's
unemployment rate decreased from 4.6 percent to 2.5 percent.
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Through the first four months of 1996, Scottsdale's unemployment
rate was a record low of 2.2 percent. The following table
presents the unemployment rate for Scottsdale, the Phoenix
Metropolitan Area, and the nation for the years 1991 through
1995.
AVERAGE ANNUAL UNEMPLOYMENT RATE
1991 THROUGH 1995
- ----------------- ------------- ------------------ ---------------------
Phoenix
Year Scottsdale Metro Area United States
- ----------------- ------------- ------------------ ---------------------
1991 3.6% 4.9% 6.7%
1992 4.6% 5.7% 7.4%
1993 3.7% 5.1% 6.8%
1994 3.3% 4.6% 6.1%
1995 2.5% 3.5% 5.6%
- ----------------- ------------- ------------------ ---------------------
Source: Arizona, Department of Economic Security
As indicated by its low unemployment rates, the City of
Scottsdale has become the greatest net importer of labor of all
communities in the Phoenix Metropolitan Area. According to the
Office of Economic Development, there were approximately 1.3 jobs
per Scottsdale resident in the labor force in 1995, which would
be expected to stimulate further residential development and
population growth for Scottsdale in the coming years.
Current forecasts predict steady employment growth in the Phoenix
Metropolitan Area for the next two years. The Economic Outlook
Center at Arizona State University forecasts employment growth in
the Phoenix Metropolitan Area of 4.2 percent for 1996 and 3.4 for
1997. The continued increases in employment are attributable to
the thriving high-tech, health-care, and tourism industries in
the area, as well as corporate relocations to the area.
Employment by Industry Sector
Employment by industry sector details the number of individuals
employed in a market area by each major industry category. An
analysis of the trends in employment by industry sector can
provide insights on which are the most important industries in
the local market area and which sectors have reflected recent
growth or declines. The following table presents a summary of
trends in employment by industry sector for the subject market
area.
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Employment in the Phoenix Metropolitan Area has traditionally
been supported by the service and trade sectors, and to a lesser
degree by the public, manufacturing, construction, and
wholesale-distribution sectors. In 1995, the service sector
accounted for approximately 30.2 percent of total employment in
the area and the trade sector accounted for approximately 25.5
percent of total employment. The service and the trade sectors
are closely linked to the growing tourism sector of the economy.
The following table presents non-agricultural employment by major
industry sector in the Phoenix Metropolitan Area for 1994 and
1995.
- ------------------------------------------------------------------------------
Non-Agricultural Employment by Industry Sector (1994-1995)
Phoenix Metropolitan Area
- ------------------------------------------------------------------------------
1994 1995 % Change
------------------ ------------------ -------------------
Manufacturing 142,300 144,000 1.2%
Construction 74,000 81,600 10.3%
Agriculture & Mining 0 0 0.0%
Transportation,
Communication & Util. 58,700 59,500 1.4%
Finance, Insurance
& Real Estate 88,100 86,300 -2.0%
Retail Trade
/Wholesale Trade 273,200 300,100 9.8%
Services 330,200 354,900 7.5%
Government 139,600 149,700 7.2%
- ---------- ------- ------- ----
Total Employment 1,106,100 1,176,100 6.3%
- --------------------------------------------- ------------------ -------------
Source: United States Department of Labor
- ---------------- -------------------------------------------------------------
As indicated in the table, total non-agricultural employment in
the Phoenix Metropolitan Area increased by 6.3 percent in 1995.
All industry sectors achieved employment growth during this
period, except for the finance, insurance & real estate sector.
The construction and mining sector demonstrated the strongest
increase of 10.3 percent between 1994 and 1995. This sector's
strength can be attributed to the near-record levels of
single-family home construction in the Phoenix Metropolitan Area
during 1995, new retail development, and the initiation of
construction of the new baseball stadium in downtown Phoenix. The
retail and wholesale trade sector followed closely behind the
construction and mining sector with a growth rate of 9.8 percent
in 1995. Retail and wholesale trade volume has experienced a
significant increase over the last decade. According to a recent
survey of the state economy, Arizona has 215 percent more retail
trade than the national average. Due to its growing tourism
industry and proximity to Mexico, which creates additional demand
for retail stores, Arizona can support the rapid growth of its
retail and wholesale industry.
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The services sector of employment increased by 7.5 percent (or
24,700 jobs) between 1994 and 1995. This sector benefits from
healthy visitor counts and thriving healthcare industry in the
area. We expect services-related employment to continue to
increase with the expected addition of several large new hotels
in the area, as well as the employment created by Phoenix's two
new major league sports teams.
Government employment accounted for 12.7 percent of the Phoenix
metropolitan area's non-agriculture wage and salary employment in
1995, which represented a 7.2 percent increase over 1994. Despite
this favorable increase, the public sector's share of employment
in the area remains below the national average. In addition to
the large numbers employed by federal, state and local
administrative entities, a very important segment of government
employment is represented by the numerous public school systems,
the community colleges and Arizona State University.
The manufacturing sector in the Phoenix metropolitan area
accounted for approximately 12.2 percent of total
non-agricultural employment in 1995, which was a decrease from
12.9 percent in 1994. The high-technology and aerospace
industries are the largest employers in the manufacturing sector.
Approximately 43 percent of all manufacturing jobs in 1995 were
in the high-technology sector. In recent years, these industries
have flourished and have helped boost the area's manufacturing
output and employment. The slow growth rate experienced in
manufacturing sector employment in 1995 is expected to accelerate
in coming years as several large high tech companies, including
Intel and Microchip, have announced plans to create major
manufacturing plants in the area.
Ranked by Financial World magazine as the best-managed city in
the U.S., Metropolitan Phoenix has established itself as the
financial, governmental, and industrial center of the State of
Arizona. Overall, the city's diverse economy is not tied to the
growth of a single industry sector. Many large corporations have
made Phoenix their corporate or regional headquarters. These
include: America West Airlines, Intel Corporation, Motorola, and
U-haul International. In addition, numerous companies from other
states, such as California, are relocating and opening support
facilities in Phoenix. Despite a potential slowdown in the
nation's economic expansion, continued economic and demographic
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growth in the Phoenix Metropolitan Area and City of Scottsdale is
anticipated for the next decade.
Major Employers
The following table summarizes the largest employers in the
Phoenix metropolitan area that generate demand for lodging
accommodations.
The largest employers in the Phoenix metropolitan area are
currently banks and financial services firms, including Pinnacle
West Capital Corporation, Bank of America Arizona, Bank One
Arizona Corporation, and Wells Fargo Bank of Arizona. Other major
employers in the metropolitan area include America West Airlines,
Circle K Corporation and Fry's Food Stores of Arizona.
The City of Scottsdale has traditionally been viewed as a bedroom
community with a strong reliance upon the services sector for
employment. During the past decade, the Scottsdale economy has
expanded and become more diverse. Like the Phoenix Metropolitan
Area, the city benefited from the recent growth in the high-tech
and the healthcare industries. The following table presents the
ten largest employers in Scottsdale in 1995.
LARGEST EMPLOYERS
CITY OF SCOTTSDALE
- ----------- -------------------------------------------- --------------
Number of
Rank Company Name Employees
- ----------- -------------------------------------------- --------------
1 Motorola Government Electronics Group 5,000
2 Scottsdale Memorial Health Systems 3,500
3 Scottsdale Unified School District 2,100
4 PCS Health Systems (Eli Lilly) 1,700
5 City of Scottsdale 1,400
6 Mayo Clinic 1,200
7 Scottsdale Princess Resort 1,150
8 Scottsdale Insurance Company 1,060
9 Hyatt Regency Scottsdale at Gainey Ranch 800
10 Rural Metro 500
- -------- ---------------------------------------------- ---------------
Source: City of Scottsdale Chamber of Commerce
As is indicated in the preceding table, high-technology and
health care companies are the largest employers in Scottsdale.
Given the recent construction of high-tech manufacturing plants
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and the increasing size of the aging population in the city,
these companies should continue to flourish in Scottsdale and the
Phoenix Metropolitan Area. Although tourism should remain the
most important industry to the city, we expect Scottsdale to
continually expand and diversify its economy.
REAL ESTATE OVERVIEW
An important indicator of the strength of the Phoenix
Metropolitan Area lodging environment is the strength of the
market for office space. During the early 1980s, unprecedented
growth in population spurred the construction of residential
housing. The resultant influx of new businesses to the Phoenix
Metropolitan Area encouraged significant amounts of speculative
office and industrial development. The large increase in supply
coupled with declining economic conditions and the savings and
loan scandal resulted in a depressed real estate market in the
Phoenix Metropolitan Area during the late 1980s and early 1990s.
The strong population, employment and personal income growth in
the Phoenix Metropolitan Area has experienced over the last four
years has created strong demand for residential, commercial, and
industrial real estate products in the market. In the past five
years, the improved economic conditions has resulted in declining
vacancies and increasing rents in most commercial sectors. In
1995, Phoenix was second in the nation in terms of new housing
starts, which primarily consisted of single-family housing.
During 1995, the first new major master-planned communities since
the 1980's also came on-line, including the 713-acre Kierland
project in northeast Phoenix. Approximately half of the area's
housing starts over the next few years will be in these new
master-planned communities. Forecasts developed by Grubb & Ellis
predict that the Phoenix Metropolitan Area will remain among the
top five housing markets in the United States for the next two
years.
Office Market Overview
During the past few years, a strong residential and employment
growth, coupled with a lack of speculative development, has
greatly decreased vacancies and raised rents for commercial space
in the Phoenix metropolitan area. The following table illustrates
the commercial vacancy rates for office space in the Phoenix
Metropolitan Area and Scottsdale from 1991 to 1996.
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OFFICE VACANCY RATES
1991 TO 1995
--------------------------------------------------------------------
1991 1992 1993 1994
--------------------------------------------------------------------
Metro Phoenix 26.3% 25.2% 22.0% 18.6%
Scottsdale 26.9% 25.7% 20.7% 13.2%
--------------------------------------------------------------------
--------------------------------------------
1995 1996
--------------------------------------------
Metro Phoenix 12.0% 12.6%
Scottsdale 5.4% 7.4%
--------------------------------------------
Source: Grubb and Ellis
As indicated in the preceding table, the City of Scottsdale
reflected lower vacancies than the Phoenix Metropolitan Area
between 1993 and 1996. Vacancy rates for all categories of
commercial development in Scottsdale have dropped below ten
percent for the first time since 1986 due to strong demand in the
market as well as the lack of new additions to supply.
Such favorable real estate conditions has helped facilitate new
commercial construction in the Phoenix Metropolitan Area and in
the City of Scottsdale. According to Grubb & Ellis, approximately
1.2 million square feet of commercial development was under
construction in Scottsdale as of July 1996. These projects
include the Scottsdale Spectrum, the first major speculative
office project in the Phoenix Metropolitan Area since 1991. The
250,000 square-foot complex will be located at Scottsdale Road,
north of Lincoln Drive and is being developed by a partnership
between two Phoenix-based companies, Opus Southwest Corporation
and Globe Corporation. Other planned commercial developments
include, the Scottsdale Waterfront mixed-use project and the
development of the Portales site on North Scottsdale Road.
Commercial real estate development typically benefits hotel
demand by attracting greater amounts of individual commercial and
meeting group related demand.
TRANSPORTATION
FREEWAYS
The Phoenix Metropolitan Area has embarked upon an ambitious
freeway building program that is expected to cost approximately
$6 billion and add 132 miles of freeways to the road system by
2006. The project is primarily being funded by a half-cent
increase in the local sales tax. Significant construction work
has been initiated to both expand the road system and upgrade the
existing roadways. However, approximately 19 percent, or 25 miles
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of the freeway, was still unfunded at the time of our fieldwork.
The Arizona Department of Transportation (ADOT) will seek funding
from cities located within the Phoenix Metropolitan Area and
private sources to complete the unfunded portions of the system.
The expansion of the freeway transportation system in the Phoenix
metropolitan area will not only contribute to the local economy
during construction, but also set in place a transportation
structure to support continued population growth into the next
decade.
There are several freeways and parkways currently planned or
under construction by the ADOT in the Phoenix Metropolitan Area.
These include the Pima outer loop freeway, which will connect the
Red Mountain Freeway (202) in the south with North Scottsdale
Road and will effectively run through the City of Scottsdale once
completed. The Pima outer loop freeway is being constructed in
stages. The City of Scottsdale has entered into an
intergovernmental agreement with the ADOT to accelerate portions
of the freeway through Scottsdale. Under the agreement, the city
will advance funds to the ADOT to complete the construction of
the Pima freeway from Red Mountain Freeway to Shea Boulevard by
late 1998. The ADOT has scheduled the completion for the
remainder of the freeway by 2003. At present, downtown Scottsdale
has no direct access to freeways in the metro area. As a result,
the surface roadways are congested especially during the peak
rush-hour periods. The Pima outer loop freeway will connect
downtown Scottsdale with other parts of the Phoenix Metropolitan
Area and could help stimulate new commercial and residential
expansion in Scottsdale. The following lists other proposed
freeway projects, although portions of each project may not be
fully funded.
- The Agua Fria (101), which is planned to connect I-17
and I-10 in a loop from Tolleson road in the southwest,
along 99th Avenue to Beardsley Road, to I-17 in the
north, should be completed by the end of 1997.
- The Red Mountain Expansion (Rt. 202), will expand the
Rt. 202 to the east along the Salt River to the
Bush Highway in east Mesa. Thereafter the freeway will
extend to the south connecting to Superstition
Freeway (I-60).
- The San Tan will connect I-60 to Ray Road, then to the
I-10 in the southwest at Pecos Road and the northern
boundary of the Gila River Indian Reservation.
Thereafter, the freeway will traverse north at 59th
Avenue to I-10 at 54th Avenue.
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- The Price Road, which extends from the I-10 at the Salt
River and Price Road alignment will connect with I-60 in
Tempe and then further south onto the San Tan in
Chandler.
As of mid-1996, approximately 31 miles of freeway needed to
complete the planned 132-mile expansion have been opened. ADOT
representatives indicated that the construction of funded
portions of the freeway project are on schedule.
MASS TRANSIT
With only one public bus line, Phoenix Transit, mass transit
plays an insignificant role in the Phoenix metropolitan area at
present. Bus ridership has increased somewhat over the past ten
years and may triple by the year 2000. Despite this substantial
growth, bus ridership will only account for a small percentage of
total transportation within the area.
RAIL SERVICE
Three railroads, the Santa Fe, the Southern Pacific and the
Tucson Cornelia & Gila Bend provide service to the Phoenix
Metropolitan Area. Rail service concentrates on moving freight
with food, petroleum, lumber, mineral ores and farms products.
Rail access is of relatively little importance to most local
manufacturers. Most manufacturers in the area employ common
carrier trucking firms to move raw materials and finished goods.
Consequently, rail access only has a small impact on the location
of manufacturing in the area in recent years.
AIRPORT
In 1995, Sky Harbor International Airport was the eleventh
busiest airport in the U.S. and seventeenth in the world in terms
of passenger volume. Sky Harbor International Airport has
experienced increases in passenger volume throughout the 1990s.
The table on the following page presents the total number of
arrivals and departures at Sky Harbor International Airport from
1990 to 1995.
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TOTAL PASSENGERS AT SKY HARBOR INTERNATIONAL AIRPORT
1990 TO 1995
- ----------------- --------------- ------------------- -------------------
Year Total Arrivals Departures
- ----------------- --------------- ------------------- -------------------
1990 21,718,068 10,875,452 10,842,616
1991 22,140,434 11,011,391 11,129,043
1992 22,118,399 11,141,065 10,977,334
1993 23,621,781 11,964,710 11,657,071
1994 25,625,624 12,885,686 12,739,938
1995 27,856,195 13,961,059 13,895,136
- ----------------- --------------- ------------------- -------------------
CAG 90-92 2.8% 3.2% 2.4%
CAG 93-95 8.6% 8.0% 9.2%
- ----------------- --------------- ------------------- -------------------
Source: City of Phoenix, Aviation Marketing Division
*Represents Year-To-Date September
Total passengers handled at the airport was negatively affected
by the national recession, the Persian Gulf War and the Martin
Luther King holiday controversy in Arizona during the early
1990s. However, since 1993, the number of passengers handled at
Sky Harbor has reflected strong growth, which is consistent with
the other economic trends indicated in this section of the
report.
The availability of direct airline service from all areas of the
country provides the lodging industry in the Phoenix Metropolitan
Area with a distinct advantage over most competitive resort
destinations, including Palm Springs, Tucson, and Hawaii. In
addition, the airline fares to Phoenix are typically much less
expensive than these other resort destinations because of the
large number of major airlines servicing Phoenix.
In order to accommodate increases in passenger volume, the
airport has been undergoing numerous facility expansions. In
1990, a fourth passenger terminal was completed with 48 boarding
gates, which was recently expanded to 58 gates. The airport has
planned a third runway which is expected to be completed by 1999.
Sky Harbor International Airport serves as a major hub for both
America West Airlines and Southwest Airlines, which together
handle the majority of passengers at Sky Harbor. In 1994, these
two airlines combined handled approximately 62 percent of total
passengers boarded. Other major airlines servicing Sky Harbor
include Delta, United, Alaska, American, Northwest, Continental,
USAir, and TWA.
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International service to Sky Harbor Airport is expected to
increase in the future as additional international flights have
been added. British Airways recently initiated a direct flight
route from Sky Harbor International Airport to Gatwick
International Airport in London. LTU International Airways plans
to offer direct service from Germany to Sky Harbor Airport
beginning in November 1996. The addition of these flights are
expected to especially benefit the hotel industry in the area
during the summer months when European tourists typically visit
the United States.
Scottsdale Airport is one of six smaller municipal airports in
the Phoenix Metropolitan Area and is located in north Scottsdale.
The municipal airport primarily accommodates small aircraft
including personal, chartered, and corporate flights. The airport
handled approximately 178,109 passengers in 1995. As economic
activity increases in Scottsdale, the airport may be expanded to
accommodate commuter flights.
TOURISM AND RECREATION
Despite Scottsdale's success in diversifying its economy, the
tourism sector remains the city's most important industry.
According to the Office of Economic Development, tourism
accounted for approximately one out of every four jobs in the
city. Furthermore, tourism generated approximately 27 percent of
the city's sales tax revenue in the fiscal year ended 1995. The
area's continued reputation as a leisure destination,
diversifying economic base, and increasing population has
contributed to growing visitor volumes and spending during 1995.
According to the Office of Economic Development, the number of
total overnight visitors to Scottsdale increased to approximately
1.06 million in 1995, representing a 15.1 percent increase from
1994. In comparison, the number of visitors to the Phoenix
Metropolitan Area in 1995 increased to 11 million, a seven
percent increase over 1994. The strong historical growth
increases, the existing visitor infrastructure in the
metropolitan area, and the aggressive marketing efforts on the
part of the Phoenix and Scottsdale convention and visitor
authorities and chambers of commerce, should support continued
growth of the local tourism industry.
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TOTAL VISITORS TO THE CITY OF SCOTTSDALE
1992 TO 1995
- ----------------- -------------------- ------------------
Overnight Percentage
Year Visitors Growth
- ----------------- -------------------- ------------------
1992 709,654 -----
1993 885,114 24.7%
1994 919,915 3.9%
1995 1,059,255 15.1%
CAG 92-95 14.3%
- ----------------- -------------------- ------------------
Source: Office of Economic Development, City of Scottsdale
CAG: Compound Annual Growth
As indicated in the table, the number of overnight visits to
Scottsdale has reflected strong growth over the last three years.
Much of the increase in overnight visitation to the Scottsdale
market during this period is attributable to non-leisure related
demand. According to a survey conducted by the Scottsdale Office
of Economic Development, the percentage of leisure related
visitors to Scottsdale decreased from 74 percent of total
visitors in 1992 to 63 percent of total visitors in 1994. This
trend is reflective of Scottsdale's effort to diversify its
economic base beyond the leisure and tourism industry.
According to the Phoenix Convention and Visitors Bureau
statistical report, the western United States generates 38
percent of all metro Phoenix visitors followed by the North
Central (23 percent), South (21 percent) and Northeast (11
percent) regions. Less than one out of ten visitors (seven
percent) come from other countries.
The large increase in the number of overnight visitors to
Scottsdale between 1992 and 1994 may also be attributable to the
series of negative events that affected the visitor industries in
Florida, Southern California and Hawaii. Hurricanes in Florida
and Hawaii hampered leisure travel to those destinations in 1993
and 1994. Southern California has been regularly impacted by
publicity relating to the LA riots, earthquakes, and crime. All
together, publicity has negatively impacted travel to these
destinations which may, in turn, have redirected demand to
Scottsdale.
Overnight visitor expenditures in the City of Scottsdale were
approximately $129 million in 1995, which represented an increase
of 35 percent from 1994. This increase may be attributed to
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strong growth in visitor volume as well as higher expenditures
per visitor during the same period. Based on information provided
by the Office of Economic Development, the following table
summarizes the estimated growth of overnight visitor expenditures
to the City of Scottsdale between 1992 and 1995.
OVERNIGHT VISITOR EXPENDITURES TO THE CITY OF SCOTTSDALE
1992 TO 1995
----------------- --------------------
Expenditures
Year (In millions)
----------------- --------------------
1992 $60
1993 92
1994 96
1995 129
CAG 92-95 29%
----------------- --------------------
Source: Office of Economic Development, City of Scottsdale
CAG: Compound Annual Growth
As indicated in the preceding table, visitor expenditures have
strongly increased during the past four years. Recently proposed
retail and entertainment development in downtown Scottsdale
should ensure that this positive growth trend in visitor
expenditures continues for the foreseeable future.
Data from the Office of Economic Development also indicates that
visitors to Scottsdale have higher average daily expenditures
than the average for the Phoenix Metropolitan Area. In 1995, the
average individual visitor expenditure to Scottsdale was $122 per
day compared to the average individual visitor expenditure in the
Phoenix metropolitan area of $97 per day. This statistic is
attributable to the presence and the appeal of high-end retail
activities in Scottsdale.
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Attractions
Many visitors to the Phoenix Metropolitan Area and the City of
Scottsdale enjoy golf as one of their recreational activities.
Approximately, 31 percent of all visitors to Scottsdale in 1995
played golf. As a travel destination, the City of Scottsdale
benefits from its reputation for abundant and high-quality golf
courses. Many of the high-quality golf courses in the area are
available for public play, which provides the market with a
competitive advantage over Palm Springs, where the majority of
the high quality golf courses are private. Accordingly,
full-service hotels and resorts in the area, which do not have
their own courses, typically offer transportation and playing
arrangements with other golf courses.
While golfing remains one of the most popular recreational
activities, tourists also come to the Scottsdale area to enjoy
worldclass shopping, dining, and to partake in the "Western
Experience". Two of the most popular tourist attractions include
Westworld (an arena and ground for large equestrian related
events) and Rawhide (a western town and steakhouse) which provide
for a wide variety of events that relate to cowboy culture,
rodeos, and an overall "Western Experience".
Spectator Sports
Arizona is home to the Phoenix Suns; a professional basketball
team, and the Phoenix Cardinals; a professional football team.
Both of these sports teams have a positive economic impact on the
Phoenix Metropolitan Area. The addition of two major sports
league teams in Phoenix is expected to act as an additional
stimulant to the metropolitan area's economy. The former Winnipeg
Jets National Hockey League team has moved to Phoenix and began
play as the Arizona Coyotes in October 1996. The Coyotes play
their home games at the existing America West arena in downtown
Phoenix. In April 1998, Phoenix's new major league baseball
expansion team, the Arizona Diamondbacks, will begin play. The
Diamondbacks will play their games in a new state-of-the-art
stadium - with a retractable roof - currently under construction
in downtown Phoenix near the America West arena. The addition of
these teams will make Phoenix one of only eight metropolitan
areas nationwide represented with teams in each of the four major
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professional sports leagues, and will further enhance Phoenix's
image as a growing metropolitan region and business and cultural
center of the American Southwest.
CONCLUSION
During the past 20 years, the Maricopa County economy has
experienced a high level of growth, spurred by the
diversification of industry and new investment from markets
outside of the "Sunbelt." Currently, no single industry dominates
the greater Phoenix area, and there are three major
classifications of employment: services, retail trade, and
manufacturing. Mining and agriculture are also significant
contributors, though they no longer hold dominant positions.
The population and economic growth experienced in Scottsdale over
the last several years has outpaced the growth experienced by the
rest of Maricopa County. Because it has a large number of
resorts, golf courses, and retail outlets, Scottsdale is
considered one of the most desirable locations to work, live and
visit in the metropolitan area. Scottsdale has historically been
thought of as a commuter community without a diversified
employment base other than the tourism industry. Over the last
ten years, however, Scottsdale has been successful in developing
a more diversified economy and employment base. Scottsdale is now
the greatest net importer of labor of all the communities in the
Phoenix Metropolitan Area.
The economic outlook for the Phoenix Metropolitan Area, and
Scottsdale in particular, is positive and bodes well for the
continued expansion of the hotel industry in the area. The
pro-business approach of local government and relatively low
costs of living has attracted many businesses to the area, which
in turn has stimulated continued residential and commercial
development.
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B.3 HIGHEST AND BEST USE ANALYSIS
The validity of an appraisal is dependent upon the consideration
and conclusion of highest and best use.2 Often expressed as "the
most profitable legal use," the concept requires a thoughtful
analysis of many factors. Vacant land value is directly related
to its highest and best use. On the other hand, an improved
property may have the same or a different highest and best use
than the land supporting the improvements when considered as
vacant land. Therefore, for improved property, both highest and
best use decisions must be separately considered, both as vacant
land and as improved property. In addition to a conclusion for
both the vacant land and improved property, sale and lease
comparisons are usually made with properties having similar
highest and best uses as the subject.
The parameters for consideration relate to legality of use,
physical possibilities, financial feasibility, and maximum
economic production. Single uses, interim uses, legal
non-conforming uses, speculative uses or excess land
determinations require further analysis.
HIGHEST AND BEST USE OF THE LAND AS IF VACANT
Legally permissible uses are those limited by zoning, easements,
and rights-of-way, deed restrictions, building codes, and
environmental controls. These restrictions have been discussed in
Section B.1 (Description and Analysis of the Property). As
mentioned earlier in the zoning section of this report, the
subject site is zoned under the code R-4R which allows for the
use of the land as a resort, motel, or hotel.
Physically possible uses are limited by size, design, topography,
flood possibilities and physical capacities. The subject site is
approximately 353,273 square feet or 8.11-acres and is generally
square in shape. The subject property is located slightly above
street level and a percentage of the property lies within the
limits of a flood plain.
- ---------------
2 Highest and Best Use: "The reasonably probable and legal use of
vacant land or an improved property, which is physically possible,
appropriately supported, financially feasible, and that results
in the highest value. (American Institute of Real Estate
Appraisers, The Dictionary of Real Estate Appraisal, Second
Edition, Copyright 1993, Page 171.
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Drainage and topography are acceptable for a variety of uses as
are the shape and frontage of the site. Although we are
unqualified to render an opinion of the physical load-bearing
capacity of the land or its freedom from hazardous materials, no
nuisances were obvious at the time of inspection.
Financially feasible uses must be supported by sufficient demand
in the neighborhood to create a sufficient return to invest over
the long term. In analyzing each highest and best use
alternative, the income potential from those legally permissible
and physically possible uses were considered. The income from the
highest and best use should be sufficient to satisfy investor
requirements and operating expenses, thereby providing a return
on the land.
Predominant land uses in the neighborhood provide indications of
profitable land uses for the location of the subject property.
The subject property is located on North Scottsdale Road where it
intersects with McCormick Parkway and has good access to major
roadways. Development in this area is oriented toward resort
hotel properties with limited commercial and other retail uses. A
number of uses, including hotel, residential and office, would
conform with the subject's surrounding development.
The increased number of visitors to the area is reflected in the
growth in hotel occupancy and average daily rate levels in the
market. Between 1993 and 1995, average annual occupancies and
average daily rates in the City of Scottsdale have exhibited
compound annual growth rates of 2.8 percent and 5.5 percent,
respectively. Average daily rates and occupancies grew despite
the fact that lodging supply in the city increased by 9.3 percent
during the same period. In the Phoenix metropolitan area,
occupancies and average daily rates also experienced similar
compound annual growth rates of 4.1 percent and 11.3 percent,
respectively, between 1993 and 1995. The following table, which
summarizes occupancies and average daily rates for the City of
Scottsdale and the Phoenix Metropolitan Area between 1993 and
1995, illustrates Scottsdale's established position as the
high-end leisure destination within the greater Phoenix
metropolitan area.
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OCCUPANCIES AND AVERAGE DAILY RATES
1993 TO 1995
1993 1994 1995 CAG
- -------------------------------------------------------------------------
Occupancy
Scottsdale 73.2% 76.2% 77.7% 3.0%
Metro Phoenix 67.4% 71.4% 73.0% 4.1%
Average Daily Rate
Scottsdale $101.00 $104.00 $112.50 5.5%
Metro Phoenix $82.15 $90.13 $101.67 11.3%
- -------------------------------------------------------------------------
(1) Compound Annual Growth Rate
Source: Scottsdale Office of Economic Development
Average daily rates in the City of Scottsdale have historically
exceeded the average daily rates in the Phoenix metropolitan
area. Scottsdale benefits from its numerous large luxury resorts,
its high-end retail activities, and its reputation as an upscale
resort and leisure destination. For these reasons, the city has
historically been a popular location for upscale meeting groups
and leisure Travelers. The resorts in the Scottsdale area compete
with other competitive leisure destinations in the U.S., such as
Palm Springs, Florida and Hawaii. Therefore, we conclude that the
highest and best use of the land as vacant is for commercial
development commensurate with hotel or other resort development.
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HIGHEST AND BEST USE OF THE PROPERTY AS CURRENTLY IMPROVED
The subject property is currently improved with a hotel
containing 125 rooms. In light of the existing improvements, a
contrast with other uses is made for the optimal use which is
also physically suitable for the site, legally permissible,
economically feasible, and the most profitable usage of the site.
As earlier indicated, the highest and best use of a property as
improved may differ from the highest and best use of the land as
if vacant. The "as improved" analysis assists in the
identification of the use that is projected to provide the
greatest overall property return on invested capital, as well as
in the identification of comparable properties. Typical choices
for improved property include the following usage alternatives:
1. Demolition of the improvements
2. Remodeling or renovation
3. Continued usage, as is
The four tests of highest and best use are applied to each of the
above alternatives. All three options are legally permissible and
physically possible. The test of financial feasibility is that
the use must provide a return equal to or greater than the amount
needed to meet all operating expenses, financial obligations, and
capital expenditures. In addition, the use must be maximally
productive, or that use which produces the highest value,
consistent with the rate of return warranted by the market for
that use. Using current investor expectations, consideration of
all three scenarios was made.
Demolition of the Improvements
The implication in a highest and best use analysis is that the
existing improvements should be retained and/or renovated as long
as those improvements continue to contribute to the total value
of the property; or until the return from a new improvement would
more than offset the cost of demolishing the existing
improvements and constructing alternative facilities. An analysis
of the subject property reveals that the existing improvements do
continue to contribute to the overall value of the subject, with
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no alternative use available to the site which would provide a
return greater than the return on current improvements after
consideration of the cost to raze the current improvements and
build an alternate use. Therefore, demolition of the improvements
is not considered warranted, nor optimal from a highest and best
use standpoint.
Remodeling or Renovation
Subject property management performs periodic maintenance and
renovations to various parts of the hotel in order to maintain
its position within the competitive market. In November of 1996,
management began a renovation to all 125 guestrooms. This
scheduled renovation will consist of the replacement of such
items as carpeting, drapes and curtains, bed spreads and linens,
bathroom sink fixtures, artwork, and wall vinyl. Given the
competitive nature of the Scottsdale lodging market, we
anticipate that the subject property will be required to update
the quality level of its meeting and banquet space, including but
not limited to, new carpeting, furniture and fixtures, and wall
vinyl. Beyond this upgrading of the rooms product and meeting
space, further major renovation or remodeling of the current
improvements is not required.
Continued Usage As Is
As an alternative to demolition, the existing improvements could
be converted to an alternate use or left as-is. Again applying
the four tests to this premise, it would be physically possible,
as well as legally permissible, to convert the improvements to
another use. However, as discussed previously, the current use as
a hotel is the most maximally productive use available to the
property. Obviously then, converting to an alternative use would
lessen the return to the land, and therefore, any such use would
fail to be the most profitable alternative.
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CONCLUSION AND RECONCILIATION OF HIGHEST AND BEST USE
From the three options presented, one remains feasible for the
subject. Demolition of the improvements was eliminated as an
option since the existing improvements provide substantial
contributory value to the property. The good condition of the
subject does not require substantial remodeling and renovation.
Therefore, continued use "as is" is the indicated highest and
best use of the subject as currently improved. Also, given
current market conditions, it is our opinion that the highest and
best use of the site, as vacant, is for development with a
commercial use commensurate with hotel use.
In conclusion, the highest and best use of the subject property,
as currently improved, is continued use as a resort hotel.
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C. ANALYSIS OF COMPETITIVE LODGING SUPPLY AND DEMAND
C.1 COMPETITIVE LODGING SUPPLY
The evolution of the lodging industry in Scottsdale has
paralleled that of the Southwest. In the earlier days of the
Scottsdale hospitality industry, dude ranches and health spas
flourished. In the 1960s the development of a local art industry
and specialty shopping districts was analogous with the
development of new resort hotels. This ultimately gave way to the
full-service, amenity-laden, recreation properties that have made
the resort business in Scottsdale unique. Today, Scottsdale is an
internationally-recognized tourism destination community widely
known for its recreational amenities, climate, five-star resorts,
numerous events and attractions, and world-class restaurants.
The greater Scottsdale and Paradise Valley lodging market
consists of a approximately 50 hotel properties with more than
8,900 rooms. The properties in the market area may be grouped
into five distinct categories based upon market orientation,
price, and service level. These five categories include: luxury,
upper moderate, moderate full-service, moderate limited service,
and economy. The Scottsdale lodging market can be further divided
into four primary resort "cores" with services and amenities
geared for the short-term business visitor, meeting groups, and
independent leisure Travelers. The following table describes each
resort core, and the map on the following page identifies the
location of each respective area.
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Resort Cores
- -----------------------------------------------------------------------
Downtown Scottsdale Features smaller properties with
a strong focus on the business
traveler.
Scottsdale Road Corridor Features a selection of
contemporary full-service
destination resorts with an
emphasis on conference facilities
which appeal to the corporate client.
Lincoln Drive
/Paradise Valley Features full-service destination
resorts with full amenities geared
to leisure and small commercial
group business.
North Scottsdale/Carefree Represents the future character of
Scottsdale resorts featuring full-service,
self contained, often remote resorts
capitalizing on the natural desert
environment.
- -----------------------------------------------------------------------
<PAGE>
[Map of Scottsdale]
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Regal McCormick Ranch Page 57
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Available lodging supply in the greater Scottsdale/Paradise
Valley market area has increased at a compound annual rate of
approximately 3.7 percent between 1985 and 1996. Between 1994 and
1995 the city of Scottsdale experienced a 12.0 percent increase
in the number of hotel rooms. Most of this recent growth in total
rooms supply in the city of Scottsdale may be attributed to the
proliferation of limited service properties which have
contributed approximately 600 rooms to total rooms inventory
since 1995. The following table details available lodging
inventory by market area for the years 1985 through 1997.
Scottsdale/Paradise Valley Market Area Hotel Inventory
- ------------------------- --------------------- ---------------------------
Inventory as of January 1 Scottsdale Paradise Valley
- ------------------------- --------------------- ---------------------------
1985 3,786 1,812
1986 4,026 1,812
1987 4,549 1,812
1988 4,930 1,812
1989 5,181 1,812
1990 5,321 1,812
1991 5,515 1,812
1992 5,515 1,812
1993 5,515 2,151
1994 5,515 2,151
1995 5,515 2,151
1996 6,165 2,145
1997* 6,758 2,145
- ------------------------- --------------------- ---------------------------
CAG 1985-1996 4.5% 1.6%
% Change 1995-1996 11.8% -
- ------------------------- --------------------- ---------------------------
- ------------------------- ----------------------
Inventory as of January 1 Rooms Supply
- ------------------------- ----------------------
1985 5,598
1986 5,838
1987 6,361
1988 6,742
1989 6,993
1990 7,133
1991 7,327
1992 7,327
1993 7,666
1994 7,666
1995 7,666
1996 8,310
1997* 8,903
- ------------------------- ----------------------
CAG 1985-1996 3.7%
% Change 1995-1996 8.4%
- ------------------------- ----------------------
*Estimated
IDENTIFIED COMPETITIVE SUPPLY
The subject property is located along the Scottsdale Road
Corridor. While there are numerous properties located proximate
to the subject property in this resort core area, we have
identified a competitive supply on the basis of quality and
extent of facilities, price, market orientation, and revenue
potential. We identified six hotels as the primary competition
for the Regal McCormick Ranch.
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The map on the following page illustrates the location of the
subject hotel and its identified competitive supply. The tables
on the following pages present pertinent operating information
and facilities descriptions of each competitive hotel.
In addition to the identified competitive supply, the subject
property may compete with the more upscale luxury and
limited-service properties. Based upon conversations with local
area hotel operators, many of the high-end properties will lower
their rate structures in an effort to boost occupancy during the
slower summer months. Additionally, the limited-service
properties, with an already lower established rate, will do the
same. As a result, the hotel properties in the competitive supply
will experience pressure from other hotel properties in the
surrounding market area. Furthermore, we expect the future
addition of both limited-service and full-service luxury
properties to have an increasing negative impact on overall
market occupancy and average rates. Based upon discussions with
local area hotel operators and county tourism representatives,
the continued proliferation of limited-service properties, given
their lower rate structure, will begin to impact both occupancy
and average daily rates achieved within the identified
competitive supply. A detailed discussion of future additions to
supply and their competitive impact on the subject property is
discussed in the following section of this report.
<PAGE>
PROFILE OF COMPETITIVE LODGING SUPPLY
Scottsdale, Arizona
Property Name Radisson Resort Scottsdale Scottsdale Hilton Resort
and Spa
Address 7171 North Scottsdale Road 6333 North Scottsdale Road
Opening Year 1977 Reopened in 1994 1975
Affiliation Radisson Hotels Hilton Hotels
Management Independent Independent
Ownership Independent Independent
Total Number of Rooms 317 232
Number Standard
Guest Rooms 217 187
Number of Suites 50 45
Number of Villas 50 0
Estimated 1995 Market Mix
Commercial Individuals 10.0% 30.0%
Corporate Meeting Groups 25.0% 30.0%
Other Meeting Groups 40.0% 10.0%
Discretionary Travelers 25.0% 30.0%
Facilities/Amenities
Restaurants/Bar Andre's Iron Horse Restaurant
Markers Iron Horse Lounge
Cabana Bar Oasis
Total Meeting
Space (Sq. Ft.) 30,000 Sq. Ft. 14,000 Sq. Ft.
Largest Room/
Ballroom (Sq. Ft.) 13,160 Sq. Ft. 7,600 Sq. Ft.
Total number of
meeting rooms/
divisions 10 Meeting Rooms 13 Meeting Rooms
Swimming Pool Yes Yes
Exercise Room
Fitness Center Yes Yes
Gift Shop Yes Yes
Golf No No
Occupancy
1996 80% 80%
1995 78% 76%
Average Daily Rate
1996 $120.00 $108.00
1995 $98.00 $102.00
<PAGE>
PROFILE OF COMPETITIVE LODGING SUPPLY
Scottsdale, Arizona
Property Nam The Doubletree Paradise Scottsdale Plaza Resort
Valley Resort
Address 5401 N. Scottsdale Road 7200 North Scottsdale Road
Opening Year 1984 1975
Affiliation Doubletree Hotels Independent
Management Doubletree Hotels Independent
Ownership Independent Independent
Total Number of Rooms 387 404
Number Standard Guest Rooms 375 224
Number of Suites 12 180
Number of Villas 0 0
Estimated 1995 Market Mix
Commercial Individuals 5.0% 10.0%
Corporate Meeting Groups 48.0% 40.0%
Other Meeting Groups 20.0% 35.0%
Discretionary Travelers 27.0% 15.0%
Facilities/Amenities
Restaurants/Bar Spazzizi's Remington's
Palm Pavilion Garden Court
Loggia Lounge Lobby Bar
Cafe Cabana
Total Meeting Space (Sq. Ft.) 40,000 Sq. Ft. 25,000 Sq. Ft.
Largest Room/Ballroom (Sq. Ft.) 12,960 . 10,080 Sq. Ft.
Total number of meeting rooms/
divisions 20 Meeting Rooms 14 Meeting Rooms
Swimming Pool Yes Yes
Exercise Room Fitness Center Yes Yes
Gift Shop Yes Yes
Golf No No
Occupancy
1996 75% 73%
1995 72% 72%
Average Daily Rate
1996 $108.00 $150.00
1995 $101.00 $135.00
<PAGE>
PROFILE OF COMPETITIVE LODGING SUPPLY
Scottsdale, Arizona
Property Nam Renaissance Cottonwood Resort Red Lion's La Posada
Resort
Address 6160 North Scottsdale Road 4949 E. Lincoln Drive
Opening Year 1980 1978 Reopened in 1982
Affiliation Renaissance Hotels Red Lion Hotels
Management Renaissance Hotels Red Lion Hotels
Ownership Not Available Independent
Total Number of Rooms 171 262
Number Standard
Guest Rooms 65 252
Number of Suites 106 10
Number of Villas 0 0
Estimated 1995 Market Mix
Commercial Individuals 10.0% 5.0%
Corporate Meeting Group 30.0% 15.0%
Other Meeting Groups 30.0% 60.0%
Discretionary Travelers 30.0% 20.0%
Facilities/Amenities
Restaurants/Bar Not Available Garden Terrace Restaurant
The Terrace Lounge
Total Meeting Space
(Sq. Ft.) 8,000 Sq. Ft. 14,000 Sq. Ft.
Largest Room/Ballroom
(Sq. Ft.) N/a 7,582 Sq. Ft.
Total number of
meeting rooms/
divisions N/a 14 Meeting Rooms
Swimming Pool Yes Yes
Exercise Room Fitness
Center Yes Yes
Gift Shop Yes Yes
Golf No No
Occupancy
1996 84% 79%
1995 88% 83%
Average Daily Rate
1996 $118.00 $120.00
1995 $114.00 $112.00
<PAGE>
[Map, Identified Competitive Supply, Scottsdale]
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The following paragraphs describe these properties and how they
compete with the Regal McCormick Ranch.
Radisson Resort Scottsdale
The 317-room resort was originally opened in 1977 as the Registry
Resort. The ownership of the resort changed in December 1994, and
the resort became a Radisson franchise. New ownership has
invested $6 million into a complete soft goods renovation of the
guest rooms, the meeting spaces and the public areas. The resort
offers approximately 30,000 square feet of banquet and meeting
space. Among its competitors, the resort achieved a slightly
higher occupancy, but a much lower average daily rate in 1995.
Based upon a physical inspection of this property it appears to
be in good condition. Given its extensive meeting and banquet
space, its brand name identity, and suite accommodations, this
property is able to effectively compete with the subject property
for room night demand generated by all major market segments. In
addition, given the extent of its meeting facilities, it is more
capable of booking larger groups. However, for those leisure
Travelers seeking a more intimate resort, the subject property
certainly has a competitive advantage.
Red Lion's La Posada Resort Hotel
The 262-room resort was opened in 1978 and became a Red Lion
property in 1982. The standard guest rooms are approximately 500
square feet in size which offer the leisure traveler more
spacious accommodations. The resort offers 14,000 square feet of
banquet and meeting space. The Red Lion benefits from its large
resort style swimming pool, which allows the property to attract
a high level of tour group related demand during the summer
off-season.
In 1996, Doubletree Hotels merged with Red Lion Hotels and, as a
result, this property may be reflagged as a Doubletree. This
would certainly provide the property with a name brand
competitive advantage allowing it to effectively capture more
room night demand from the individual leisure traveler market
segment.
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Among its competitors, the resort achieved a higher occupancy and
a higher average rate in 1995. The property's performance in 1995
and 1996 was positively impacted by the Saudi Royal Family which
occupied 60 rooms at rack rates from November 1994 through
February 1996. It is likely that rates at this property will
decrease in 1997 due to the loss of such high-rated room blocks.
The Scottsdale Hilton Resort and Spa
The 232-room resort was opened in 1975. Present ownership
acquired the property in January 1995 and plans to invest $5
million into a complete renovation. These renovations include
soft goods in the guest rooms, meeting spaces and public areas as
well as the resort's exterior facade. The accommodations at the
resort consist of 187 rooms and 45 villas. Each villa is
approximately 1,400 square feet and includes two bedrooms. The
resort offers approximately 14,000 square feet of banquet and
meeting space.
The hotel began accommodating a 42-room flight crew from British
Airways in July 1996. Management is accommodating this low-rated
flight crew demand to offset the potential disruption of the
upcoming renovations.
The Scottsdale Hilton Resort and Spa is located proximate to the
subject property and competes with the subject property for room
night demand generated by all market segments. This property has
a nice layout with the lobby opening up directly onto the
swimming pool patio and extensive meeting and banquet space which
allows it to effectively compete for large meeting group room
night demand. However, based upon a physical inspection of the
property, it appears to be in poor condition. This has certainly
had a negative impact on the property's ability to compete with
the other hotels within the competitive supply. Following the
planned renovation, and given the Hilton brand name identity and
worldwide reservations system, the Scottsdale Hilton Resort and
Spa is expected to effectively compete with the subject property
for room night demand generated by all major market segments.
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Stouffer Cottonwoods Resort
The 171-room resort was opened in 1980. Accommodations at the
property include 106 suites and 65 guest rooms. The resort offers
approximately 8,000 square feet of banquet and meeting space. The
property benefits from its location next to a small upscale
retail center, which helps the property attract additional levels
of leisure and group related demand.
This property comprises numerous non-contiguous buildings which
are connected by small walking paths and roads. While this hotel
has the Stouffer's brand name identity and reservation system,
unlike the subject property, this hotel lacks a "resort-like"
atmosphere given its location within the retail complex. However,
it is able to offer suite accommodations, and for the leisure
traveler seeking the convenience of a shopping center, this
property has a competitive advantage.
Scottsdale Plaza Resort
The 404-room resort originally opened in 1975 as a Sheraton
resort. Ownership terminated its affiliation with Sheraton in
1991 and the hotel has been operating as an independent property
ever since. The 404 guest rooms at the resort consists of 224
standard rooms which range from 375 to 495 square feet and 170
suites which range from 575 to 3,100 square feet. The resort's
average daily rates benefit from its relatively high inventory of
suites.
Based upon a physical inspection of this hotel, it appears to be
in good condition. It has a slight competitive advantage over
other properties within the competitive supply, including the
subject property, due to its extensive meeting and banquet space,
and suite accommodations. Management indicated a desire to
position this property more like a resort-conference center in an
effort to further differentiate it from other properties which
comprise the competitive supply. Given the size of this property
and the extent of its facilities, it is able to effectively
compete with the subject property for room night demand generated
by all major market segments.
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Doubletree Paradise Valley Resort
The 387-room resort was re-flagged as a Doubletree from a Wyndham
in July 1995. The resort has been affiliated with both Loews
Hotels and Wyndham Hotels since its original opening in 1984.
Ownership is considering plans to invest $8 million into a
two-year renovation of the property that will include all guest
rooms, public spaces and conversion of an adjacent office
building into corporate offices and meeting space. The property
currently has the largest meeting and banquet facilities among
the competitive set with 40,000 square feet.
Based upon a physical inspection, thisproperty is in good
condition. This property has a competitive advantage among the
competitive supply given its extensive meeting and banquet space.
This enables the property to book larger meeting groups. In
addition, the reflagging of this property as a Doubletree has
positively impacted management's ability to capture additional
room night demand generated by the leisure market segment. This
property will continue to compete directly with the subject
property for room night demand generated by all major market
segments.
The planned renovation of the property is expected to allow the
property to achieve higher occupancy and average rates in the
coming years.
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ADDITIONS TO SUPPLY
Based upon discussions with area hotel operators, tourism
industry experts, and representatives from the Scottsdale Zoning
and Development Agency, there are a number of limited service and
full-service luxury properties which are currently under review
or in the process of breaking ground in the Scottsdale market
area. While these new properties, given their market orientation,
price, and location, may not directly compete with the subject
property, the addition of new hotel rooms is expected to have an
impact on overall market occupancy and average rates. As a
result, a discussion of new development activity is warranted as
any new additions to overall rooms supply may negatively impact
certain market segment demand growth.
The following discusses two potential additions to supply that
would be expected to have a direct impact upon the identified
competitive supply.
SCOTTSDALE WATERFRONT
Located on the southeast corner of the intersection between
Camelback Road and Scottsdale Road, the Scottsdale Waterfront is
a mixed-use development that will include approximately 700,000
square feet of retail, restaurant and entertainment space, and
approximately 100,000 square feet of office space. Part of this
development includes a 300-room full-service hotel.
Adjacent to the Scottsdale Fashion Square, a major commercial
retail center, to the north and overlooking the Arizona Canal to
the south, the site is favorably located in downtown Scottsdale.
The Scottsdale Waterfront project is expected to be anchored by a
Nordstrom department store that will be separately developed by
Westcor Partners, owners of the adjacent Fashion Square Mall. The
much-anticipated department store will be connected to the
Scottsdale Fashion Square via a bridge over Camelback Road and is
expected to generate significant retail activity. The remainder
of the project, including the hotel component, is being developed
by Scottsdale Waterfront Venture Partners, a partnership of three
companies.
The project is located within Scottsdale's waterfront
redevelopment area, which was set up to encourage development
along the banks of the Arizona Canal. To support the waterfront
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project, the City of Scottsdale has budgeted between $5 million
and $6 million to improve and landscape the adjacent canal area.
The developers expect to begin construction of the Scottsdale
Waterfront in the fall of 1996 and have scheduled an opening date
in March 1998. However, issues such as the separate ownership of
the site's land has complicated and may delay the timing of the
development. Given the location of this property and its proposed
market orientation, we believe that this proposed development
will compete to a limited degree with the subject property.
KIERLAND
The 714-acre Kierland master-planned community is located in the
vicinity of Greenway Parkway and Scottsdale Road in northeast
Phoenix. At full build-out, the Kierland development is planned
to include a 27-hole golf course, 450 single-family housing
units, 750 multi-family housing units, two million square feet of
office space and 69 acres of retail, restaurant, and
entertainment space. The City of Phoenix has also approved the
planned development of a 1,050-room full-service convention hotel
located in the community. While the developer is unlikely to
build the entire entitlement in the project's first phases, the
hotel is initially estimated to include 400 to 800 rooms with
sizable amounts of banquet and meeting facilities.
The Kierland project is being developed by a partnership between
the Herberger family and Dallas-based Woodbine Development
Corporation. The developer plans to operate the hotel as a joint
venture between Woodbine and a national hotel operator. Our
fieldwork indicates that several hotel companies that are
underrepresented in the Scottsdale market have shown considerable
interest in the property. Woodbine plans to announce an
operator-partner in early 1997 and open the hotel sometime in
late 1998. This development schedule appears aggressive based on
the size of the proposed property and the current status of the
project. While the addition of approximately 800 rooms will
likely have an impact on the overall lodging market and may
negatively affect future growth in both occupancy and average
rates, given its location, market orientation, and price
structure we believe that this proposed property will compete
with the subject property.
Other projects on the horizon include:
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- Four Seasons Hotel and Resort has been proposed at
Troon North in Scottsdale. The accommodations at the
upscale resort is expected to consist of 170
full-service rooms and 130 time-share villas. The
developers plan to open the resort in winter 1997. The
resort is expected to compete with other high-end
properties in the area, including the Arizona Biltmore,
the Phoenician Resort, and the Princess. Because of the
size and market orientation of the proposed project,
however, during the off-peak summer months this property
is likely to indirectly compete with the subject
property.
- A full-service hotel has been proposed on the northeast
corner of Indian School Road and Scottsdale Road, the
site of Scottsdale's first high school. Development of
the Scottsdale High site is also expected to include
three other limited service hotels. The developer of
this project was also responsible for building the
Marriott Suites in Scottsdale. Given the location of
this property and the inclusion of the three
limited-service hotels as part of the development, we do
not believe this hotel will provide direct competition
to the subject property.
According to our fieldwork and discussions with
representatives from the Scottsdale Office of Economic
Development, including the above-mentioned projects, there are a
total of 17 hotels which are currently under review for
development. Eight of these proposed additions would be limited
service properties. This represents approximately 3,500
additional hotel rooms which are likely to be constructed within
the Scottsdale market area over the next five years. While the
majority of these properties are not considered to be direct
competitors with the subject property, and have not been included
as part of the identified competitive supply, we believe that the
proposed addition of 3,500 rooms would have a negative impact on
the occupancy and average daily rates achieved by all hotels in
the Scottsdale market area. Consequently, this negative impact is
expected to impact the identified competitive supply of hotel
properties as pressure to fill hotel rooms during the off-peak
summer months is expected to intensify.
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While a total of 3,500 new hotel rooms are proposed for
development, our experience has shown that not all proposed
hotels are likely to actually be constructed. Many times zoning
restrictions, development approvals, and the ability to secure
financing may derail proposed hotel developments. As a result, we
have assigned a "probability of development" to each of the
proposed projects which are on file with the Scottsdale
Department of Planning. On the basis of this analysis, of the
proposed 3,500 hotel rooms scheduled to be developed over the
next three years, we have assumed the completed development of
approximately 2,000 rooms.
In order to quantify the effect of these additions on
the subject property and the identified competitive set, we have
evaluated each of the proposed hotels' degree of competitiveness
based upon location, market orientation, pricing structure, and
brand affiliation. On the basis of this analysis, we have assumed
the addition of a total of 450 additional rooms to our
competitive supply over a three year period beginning in 1997 and
continuing through 1999. We have phased in these additional rooms
according to the volume of development proposed for each year. As
a result, we have assumed the addition of 50 rooms in 1997, and
200 rooms in both 1998 and 1999.
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C.2 LODGING SUPPLY AND DEMAND ANALYSIS
OVERALL DEMAND TRENDS IN THE SCOTTSDALE/PARADISE VALLEY LODGING MARKET
The purpose of this analysis is to evaluate historical
demand trends in the defined competitive market. We have
completed interviews with the management of the hotels in the
competitive supply and have collected statistics on the
occupancy, average daily rate, market mix and origin of demand
for the competitive hotels to estimate total accommodated demand
by market segment.
In the mid-1980s, a large number of new hotels and resorts
were developed in the greater Scottsdale area. During this
period, the large increase in available hotel supply outpaced the
growth in demand, resulting in declining market occupancies and
average daily rates. The performance of the hotel industry in the
area was further impacted by the weak national and local economy
in the early 1990's, by the Persian Gulf War in 1991, and by the
negative press related to Arizona's unwillingness to approve the
Martin Luther King holiday.
In the past four years, lodging demand in the Scottsdale
area has experienced exceptionally strong growth as evidenced by
increased occupancy, average daily rate and revenue per available
room (REVPAR) levels achieved by the hotels in the area. This
growth in lodging demand in the market is attributable to the
underlying growth in the regional and national economies, the
successful marketing efforts by the Phoenix Convention and
Visitors Bureau, the state's approval of the Martin Luther King
holiday, and the negative events in other popular leisure and
meeting group destinations, such as California, Florida, and
Hawaii.
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Historical Occupancy
Scottsdale/Paradise Valley Market Area
- -----------------------------------------------------------------------------
Calendar Year Occupied Room Nights Annual Occupancy
- ------------------ ------------------------------ ---------------------------
1986 742,396 50.5%
1987 905,914 54.9%
1988 1,541,238 62.5%
1989 1,625,394 63.7%
1990 1,697,978 65.2%
1991 1,663,547 62.2%
1992 1,786,833 63.8%
1993 2,049,355 73.2%
1994 2,132,984 76.2%
1995 2,176,747 77.7%
- ------------------ ------------------------------ ---------------------------
CAG (86-95) 12.7% N/A
- ------------------ ------------------------------ ---------------------------
Source: Office of Economic Development Scottsdale Arizona
CAG: Compound Annual Growth
As indicated in the preceding table, the aggregate
Scottsdale occupancy was 77.7 percent in 1995. Occupancy rates
achieved in the market varied widely during the eighties, but in
general, have been climbing since bottoming out in 1986 at 50.5
percent. Occupancy rate increases occurred from 1988 to 1990
supported by strong economic conditions, limited additions to
supply and stronger marketing of the community. In 1993 occupancy
levels climbed ten percentage points to 73.2 percent and further
increased in 1994 to 76.2 percent. Between 1986 and 1995,
occupied room nights increased at compound annual rate of
approximately 12.7 percent. For 1996, occupancy is expected to
remain in the mid to upper seventy percent range.
LODGING DEMAND IN THE IDENTIFIED COMPETITIVE SUPPLY
As indicated previously, we have identified seven hotels
(including the subject) as the competitive supply for the Regal
McCormick Ranch. The purpose of the analysis that follows is to
evaluate the historical supply and demand trends of the market in
which the subject hotel competes. We have completed interviews
with management of the competitive hotels and have collected
statistics on the occupancy, average rate, and market mix of the
competitive hotels to estimate total accommodated demand by
market segment.
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Demand within this competitive set of hotels located within
the "Scottsdale Road Resort Corridor" and the "Lincoln
Drive/Paradise Valley" market core emanates from four primary
segments:
Individual Commercial Business Travelers from
local, state and national firms having bases or
facilities in the region.
Corporate Meeting Groups which includes
incentive award programs, board meetings, sales seminars
and other group meetings that are booked by
corporations.
Other Meeting Groups includes group meetings
that are booked by national, regional, state, and local
associations, governmental organizations, and special
interest groups.
Leisure Individual Travelers includes leisure
Travelers to the area, friends and relatives of local
residents, travel packages from wholesalers, tour &
travel groups and flight crews.
The table below summarizes our estimate of the
aggregate market demand accommodated by the identified
competitive supply for year-end 1995 and estimated year-end 1996.
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Historical Growth in Lodging Demand
in the Competitive Supply
- ------------------------------------------------------------------------------
1995 Estimated 1996 % Chg.*
Room Nts % Total Room Nts % Total 95-96
--------- ------- ---------- ------- --------
Commercial Individuals 57,400 11% 56,400 10% -1.7%
Leisure Individual
Travelers 133,300 25% 129,500 24% -2.9%
Corporate Meeting Groups 173,300 32% 193,800 36% 11.8%
Other Meeting Groups 172,000 32% 159,200 30% -7.4%
------- --- ------- --- -----
Total Occupied Demand 536,000 100% 539,000 100% 0.6%
Total Available Supply 692,770 694,668 0.3%
Market Occupancy 77.4% 77.6%
Market Average Rate $110.50 $122.00 10.4%
Market REVPAR $85.50 $94.50 10.5%
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Source: Arthur Andersen
Note: Totals may not add due to rounding.
* Compound Annual Growth
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As illustrated in the preceding table, in 1996, there
has been some shifting of overall market mix among the
competitive supply. Management of the hotels in the competitive
supply indicated that this shift in market mix was effected to
support demand growth in the higher rated Corporate Group and
Leisure Individual Traveler segments of demand. As a result,
average rates have increased by more than ten percent. Overall
market occupancy among the competitive supply was relatively flat
in 1996. The lack of strong occupancy growth in the last two
years is reflective of the seasonal nature of the market and
increasing levels of unsatisfied demand in the market during the
peak and the shoulder seasons.
Our analysis of future demand growth includes assumptions of
base growth in demand, unsatisfied demand, and induced demand.
The following paragraphs define these sources of demand growth.
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Base Growth in Demand
Base growth in demand is that growth related to the strength
of the local economy. This growth assumption incorporates demand
generated by other factors, such as the addition of a new
convention center, new office development and absorption,
improved transportation access to the market area, etc. Our
assumptions take into account historical demand trends and the
factors contributing to these trends. On the basis of our
interviews with management and on our analysis of economic growth
in the local market, base growth by market segment is estimated
for each year.
Unsatisfied Demand
During peak periods of demand, many Travelers in search of
convenient accommodations among the hotels in the competitive
supply are required to use alternative hotels due to lack of
capacity in the immediate area. These groups and individuals will
seek lodging in one of the other properties in the market area or
will leave the immediate market. Those room nights that are not
accommodated in the immediate market may be referred to as
"unsatisfied demand."
The peak season in Scottsdale comprises a total of
approximately 120 days. During this period, most of the
properties within the identified competitive supply experience
occupancy levels in excess of 90 percent. Based upon interviews
with local area hotel operators and representatives from the
Scottsdale Office of Economic Development, on average,
approximately thirty percent of the accommodated demand during
this period may be classified as unsatisfied demand. As a result,
we have assumed a total of approximately 65,000 room nights of
unsatisfied demand during 1996. As new hotel rooms are added to
the market area over the next five years, we expect much of this
unsatisfied demand to be absorbed by the additions to supply.
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Induced Demand
Induced demand is defined as new room nights generated by
the addition of new hotels to the market area or by the
repositioning and marketing of an existing hotel to fulfill
consumer needs not previously met by the existing supply. The
anticipated addition of approximately 2,000 room nights to the
Scottsdale market area over the next five years is expected to
generate a percentage of induced demand which will impact the
identified competitive supply and the subject property. As
discussed previously, we have assumed that only 450 of the total
2,000 rooms will compete directly with the subject property. We
have further assumed that these additional rooms will impact the
competitive supply over a three year period from 1997 through to
1999. Based upon an analysis of the new properties expected to
open, we believe that a total of approximately 30,000 room nights
of demand will be induced over this three year period.
DEMAND SEGMENTATION AND ESTIMATED DEMAND GROWTH
Accommodated demand in the competitive hotel supply has been
segmented into four major market segments: Commercial Individual
Travelers; Corporate Meeting Groups; Other Meeting Groups; and
Leisure Individual Travelers . On the basis of our interviews
with management at the subject property and its competition, and
based upon an analysis of economic trends in the market, we have
estimated future growth in demand in the competitive supply by
market segment. The following paragraphs define the individual
market segments and our estimates of demand growth. A detailed
analysis of supply and demand growth for the market is presented
on the following page.
Commercial Individual Travelers
This segment of demand consists of individual Travelers
staying within the competitive supply who are traveling for
business purposes, including government employees. Medium-sized
businesses and offices in Scottsdale generate the majority of
this demand among the competitive supply. The majority of
commercial individual demand occurs between Monday and Thursday,
and commercial individual demand is accommodated throughout the
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year, with the spring and the fall months serving as the busiest
periods for business travel. The high rates charged by the
properties in the competitive supply during the peak winter
season discourages some commercial individual demand in the
market.
Commercial individual demand in the area has benefited from
Scottsdale's success in diversifying and expanding its economic
base as well as from the strong business conditions in the
Phoenix metropolitan area. This segment of demand accounted for
approximately 11 percent of total accommodated demand among the
competitive lodging supply at the end of 1995. This segment
decreased slightly by one percent in 1996 from the levels
achieved in 1995.
We estimate that there were approximately 3,200 room nights
of unsatisfied commercial individual traveler demand in 1996.
This demand occurs primarily during the months between January
and May when hotels within the competitive supply generally
prefer to accommodate corporate meeting group demand which tends
to book rooms at a higher rate. As a result, demand within the
commercial individual traveler market segment is effectively
turned away. Acknowledging the opening of approximately 450
additional rooms beginning in 1997 and continuing over a three
year period, we expect that some of this unsatisfied demand will
be absorbed. Thereafter, we expect unsatisfied demand to increase
with overall market growth.
Given the continued expansion of Scottsdale's economy and
the current and planned construction of new commercial office
space in the market; commercial individual demand is projected to
exhibit some growth into the foreseeable future. In the demand
projections, we have assumed a base growth rate of three percent
from 1996 to 1999. Thereafter, we believe that growth in this
segment will stabilize at a more conservative two percent each
year.
Induced demand is new demand attracted to the market by the
sales efforts of a new addition to the competitive supply or by
the development of a local attraction. As indicated earlier, we
have assumed the addition of 450 rooms to the competitive supply.
We have assumed that these additions to supply will induce
approximately 300 room nights of commercial individual demand in
1997, 1,500 room nights in 1998, and an additional 2,000 room
nights in 1999.
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Overall, the commercial individual traveler segment is
estimated to increase at a compound annual rate of 4.2 percent
between the 1996 and 2001. We expect this segment of demand to
account for approximately 69,300 room nights by 2001, or 11
percent of total accommodated demand.
Leisure Individual Travelers
This segment of demand includes leisure Travelers to the
area, friends and relatives of local residents, travel packages
from wholesalers, tour & travel groups and flight crews staying
at the hotels in the competitive supply. As a result, demand in
this segment occurs throughout the year although it is busiest
during the peak and shoulder seasons when the weather in
Scottsdale is comfortable. Leisure Individual Traveler demand
accounted for approximately 25 percent of total accommodated
demand in the competitive supply in 1995, and is expected to
decrease to 24 percent by year-end 1996.
However, demand in this segment is expected to decrease
slightly by approximately three percent in 1996 over the levels
achieved in 1995. Based upon conversations with local hotel
operators, this decrease in leisure demand may be attributed to a
decrease in travel to the area during the summer due to the
popularity of the Summer Olympic games which were held in
Atlanta. In addition, the departure of a large leisure-oriented
group (Saudi Royal Family) which had accommodated 60 rooms per
night at the Red Lion between 1994 and 1995, departed in February
1996 and were not immediately replaced by leisure demand.
Scottsdale has traditionally been a popular leisure
destination because of its climate and its numerous resorts,
spas, and golf courses. In the past two years, favorable national
and local economic conditions have led to a booming tourism
industry based on increased visitor counts and expenditures.
Interviews with management representatives in the competitive
supply indicated that international visitation has also increased
in recent years. The recent introduction of British Airways
direct flights from London to Phoenix is expected to continue
this trend.
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We have estimated that base growth in demand in the leisure
individual traveler segment will increase by 2.5 percent annually
between 1996 and 1999. Thereafter we expect growth to increase at
two percent annually. We estimate that there were approximately
23,000 room nights of unsatisfied demand in this market segment
in 1996. Acknowledging the opening of additional hotel rooms
beginning in 1997, we expect unsatisfied demand to be
approximately 12,400 room nights by 1999. Thereafter, unsatisfied
demand is expected to increase with overall market growth.
In addition, we expect that the new hotel rooms will induce
approximately 3,000 room nights of demand from this market
segment in 1998, 4,400 room nights in 1999, and 2,100 room nights
in the year. Thereafter, induced demand is expected to increase
with overall market growth.
Overall, the Leisure Individual Traveler segment is
estimated to increase at a compound annual rate of 4.6 percent
between the 1996 and 2001. We expect this segment to account for
approximately 162,000 room nights by 2001, or 25 percent of total
accommodated demand.
Corporate Meeting Groups
This segment of demand includes incentive award programs,
board meetings, sales seminars and other group meetings that are
booked by corporations. Due to the direct airline service
availability and the quality of amenities, the Scottsdale market
is able to attract corporate meeting groups from throughout the
country. Much of the corporate meeting group demand is generated
by companies that are holding incentive meetings programs that
involve a combination of recreation and actual group meetings.
Incentive meetings are often annual awards programs for "top
salespeople" and involve large banquets and planned group
recreational activities such as golf. Incentive travel is
typically less price-sensitive than other types of corporate
meeting groups. Because these meetings are an "incentive", most
corporations prefer to book groups during the peak season
(January to April) when the weather in the area is most
temperate. The majority of corporate meeting group demand is
accommodated during weekdays between Monday and Friday. The
corporate meeting group segment also typically generates
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additional leisure individual demand as group attendees extend
their trips for leisure purposes.
Corporate meeting group demand accounted for approximately
36 percent of total accommodated demand among the competitive
lodging supply in 1996. This represents an increase of
approximately 20,491 room nights or 11.8 percent over the levels
achieved in 1995. With the continued health of the national
economy and the development of commercial real estate and hotels
in the area, this segment of demand is expected to grow as
companies increase their annual meeting budgets and as new
lodging supply opens in the market. In the projections, we have
assumed a base growth rate of three percent between 1996 and
1997, decreasing to 2.5 percent in 1998, and stabilizing at a
rate of two percent, thereafter.
We estimate that there were approximately 26,000 room nights
of unsatisfied corporate meeting group demand in 1996. Based upon
conversations with local hotel operators, most of the room night
demand generated from this market segment occurs during the peak
winter months from January through to May. Given the relative
strength of this demand segment coupled with a limited supply of
hotel rooms, there exists a large percentage of unsatisfied
demand. However, as new rooms are added to the competitive supply
beginning in 1997, it is estimated that approximately 10,000 room
nights of unsatisfied demand will be absorbed by 1999.
Thereafter, we expect unsatisfied demand to increase with overall
market growth.
We have assumed that the proposed additions to supply will
induce approximately 100 room nights of corporate meeting group
demand in 1997, 3,900 room nights in 1998, 6,000 room nights of
demand in 1999, and 2,500 room nights in the year 2000.
Thereafter, induced demand is expected to increase with overall
market growth.
Overall, the corporate meeting groups segment is estimated
to increase at a compound annual rate of 3.8 percent between the
1996 and 2001. We expect this segment to account for
approximately 233,500 room nights by 2001, or 36 percent of total
accommodated demand.
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Other Meeting Groups
Other Meeting Groups demand includes group meetings that are
booked by national, regional, state, and local associations and
special interest groups. Association meetings are often annual
conventions which include exhibits, general session assemblies,
workshops and large banquets. California, New York, Washington
D.C. and Arizona are major sources of association-related groups
to the Scottsdale market. Other association meetings include
bi-annual board meetings of association executives, or smaller
regional workshops sponsored by a large association. The other
meeting groups market segment is typically more price-sensitive
than the corporate group segment, and therefore will book during
the shoulder and off seasons in order to receive lower hotel
rates.
Other meeting groups demand also includes SMERFS (social,
military, educational, religious, fraternal and sports) groups
which are typically the most price-sensitive source of group
demand. Because of their price-sensitive nature, very little
other meeting group demand is accommodated in the competitive
supply during the peak and shoulder seasons. SMERFS-related
demand is an important component of off-peak seasonal demand and
the hotels among the competitive supply aggressively market to
this segment to support occupancy.
We estimate that other meeting group demand accounted for
approximately 30 percent of total accommodated demand among the
competitive lodging supply in 1996. Demand in this segment is
expected to decrease by approximately 7.4 percent in 1996 from
the levels achieved in 1995. The decrease in demand exhibited by
this market segment is due primarily to an overall shift in
market mix by management of the hotel properties within the
competitive supply. Given the limited availability of rooms
during the peak-season, coupled with the opportunity to maintain
higher rate structures, hotels within the identified competitive
set are shifting their marketing efforts to the less
price-sensitive market segments. As a result, we have assumed a
conservative base growth rate of two percent from 1996 to 2001.
We estimate that there were approximately 13,000 room nights
of unsatisfied demand in this market segment in 1996.
Acknowledging the opening of additional hotel rooms beginning in
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1997, we expect unsatisfied demand to decrease from 13,000 to
7,000 room nights by 1999. Thereafter, unsatisfied demand is
expected to increase with overall market growth.
While existing hotels have expressed their reluctance to
accommodate room night demand from this more price-sensitive
market segment, we expect that the addition of new hotel rooms
will likely induce additional demand from this market segment
especially during the summer and off-season. We expect these new
additions to supply to induce approximately 1,200 room nights of
demand in 1998, increasing to approximately 3,600 room nights by
the year 2000. Thereafter, induced demand is expected to increase
with overall market growth.
Overall, the Other Meeting Groups market segment is
estimated to increase at a compound annual rate of three percent
between the 1996 and 2001. We expect this segment to account for
approximately 184,700 room nights by 2001, or 28 percent of total
accommodated demand.
Conclusion
As discussed in the area analysis of this report, the
general economic trends in the market have continued to exhibit
strong growth, which lends additional support to the level of
displaced demand in the market. Our analysis indicates that
overall demand growth will continue to increase in the
competitive market, but that much of this growth in demand will
continue to be unaccommodated within the competitive supply of
hotels until new hotel additions alleviate the current capacity
constraints and capture this unsatisfied demand.
All indications suggest that corporate meeting planners
still consider Scottsdale an ideal locale for corporate meeting
functions as bookings into 1998 remain strong. In addition,
growth is expected to continue from the leisure individual
traveler segment as more international Travelers make their way
to the Scottsdale market area.
Overall, we expect demand within the competitive supply to
increase at a compound annual rate of approximately 3.8 percent
between 1996 and 2001. However, given the seasonal nature of
demand within the Scottsdale market area and the addition of new
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hotel rooms, market occupancy is expected to remain relatively
flat over the next five years with a slight decrease expected in
1998 and 1999 as these new hotels are absorbed into the market..
C.3 ESTIMATED OCCUPANCY AND AVERAGE ROOM RATE
We have prepared detailed estimates of average annual
occupancy and average daily room rate for the subject property
from January 1, 1997 through December 31, 2000. The following
section presents our analysis of estimated future occupancy and
average daily room rate.
Hotel operators expect some limited growth in average rates
over the next two years, but caution that Scottsdale is
approaching its average rate peak as competing destinations
including Hawaii and Florida are presenting meeting planners with
more affordable options. As more limited service properties are
added to the Scottsdale market area, we expect to see downward
pressure on average daily rates.
MARKET PENETRATION & AVERAGE ANNUAL OCCUPANCY
This analysis uses the concept of "fair" share and market
penetration. By forming a penetration analysis of market lodging
demand, the future average annual occupancy at the subject Regal
McCormick Ranch is estimated. Using this technique, the property
is first evaluated compared to its competition, then its
potential market share is calculated on the basis of its relative
appeal to each market segment. A hotel's "fair" share of market
demand is said to be equal to its fair share of supply; i.e. a
100-room hotel in a market of 1,000 rooms would have a "fair"
share of demand of ten percent of total market demand. A "market
penetration" of 100 percent indicates a property is capturing its
exact "fair" share of demand. Penetration in excess of, or lower
than, 100 percent indicates a hotel is likely to be viewed more
or less favorably than the competition by the respective market
segment and thus accommodates more or less than its fair share.
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The following table presents our estimates of the year-end
1996 market penetration by demand segment for the subject and for
the hotels in the identified competitive lodging supply.
---------------------------------------------------------------------------
Estimated 1996 Penetration By Market Segment
For The Identified Competitive Supply
---------------------------------------------------------------------------
Leisure Corporate Other
Commercial Individual Meeting Meeting
Hotel Name Individuals Travelers Groups Groups
---------------------------------------------------------------------------
Subject Property 49% 127% 127% 69%
Renaissance Cottonwood 103% 90% 120% 110%
Scottsdale Plaza Resort 45% 39% 118% 127%
Red Lion La Posada 49% 127% 42% 172%
Hilton Inn Scottsdale 294% 128% 85% 35%
Doubletree Resort 92% 101% 134% 49%
Radisson Resort Scottsdale 99% 129% 72% 122%
---------------------------------------------------------------------------
By combining the above information with our market and
property analysis we calculate the future occupancy of the
subject hotel by market segment for the estimation period 1997 to
2001. A detailed penetration analysis of the subject hotel is
presented on the following page. The following paragraphs
summarize our penetration analysis and estimates of future demand
at the Regal McCormick Ranch by market segment.
Commercial Individual Travelers
In 1995, the Hilton Inn Scottsdale, the Renaissance
Cottonwood, and the subject property all exceeded their fair
share of demand penetrating the Commercial Individual Traveler
segment by 294, 103 and 103 percent, respectively. We estimate
that by year-end 1996, due to a shifting in overall market mix,
the subject property will fall short of capturing its fair share
of demand leaving the Hilton and the Renaissance Cottonwood as
the market leaders within this segment. Both of these hotels,
given their strong brand name recognition, location proximate to
downtown Scottsdale, and room type variety, are more apt to
capture in excess of their fair share of demand from this market
segment.
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During peak periods, the subject property will continue to
accommodate overflow commercial individual Travelers. The hotel
however, because of its resort amenities and distance from
downtown Scottsdale, will never be considered a commercial hotel.
We do expect management of the subject property to continue its
marketing effort towards this segment especially in light of the
recent commercial development which has been occurring in the
Scottsdale market area. Given the scheduled room renovation
planned for year-end 1996 and the continued marketing of the
Regal Class VIP room product, we expect the subject property to
improve its penetration of this demand segment.
We estimate that the subject hotel will achieve a
penetration rate of 53 percent throughout the projection period.
Occupied demand in this segment is expected to equal six percent
of total occupied demand at a stabilized occupancy of 77 percent.
Leisure Individual Travelers
In 1995, the subject property achieved the highest
penetration of the leisure individual traveler segment among its
competitors with an overall penetration rate of 179 percent. By
year-end 1996, we expect this penetration rate to decrease to
approximately 127 percent of fair market share. This decrease in
penetration is due to a number of factors including the recently
completed $6 million dollar room renovation at the Radisson
Resort, a shifting in the overall market mix at the subject
property, and increased competition from well-established name
brand properties including the Hilton Inn, the Red Lion La
Posada, and the Doubletree Paradise Valley. Nevertheless, this
127 percent penetration rate represents one of the highest
overall rates among the competitive supply.
Given its relatively small size (125-rooms), the subject
property is able to differentiate itself from its competitors by
offering individual leisure Travelers a more "intimate" resort
experience. The hotel's location adjacent to the McCormick Ranch
Golf Club, views of Camelback lake, and the planned renovation of
all existing guest rooms together provide the subject property
with a distinct competitive advantage. As a result, we expect the
Regal McCormick to continue to exceed its fair share of demand
from the Leisure Individual Traveler market segment.
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However, the addition of new hotel rooms into the
competitive supply is expected to impact the subject property's
ability to increase its penetration of this market segment. We
estimate that the subject will be able to achieve a penetration
rate of 126 percent throughout the projection period. Occupied
demand in this segment is expected to equal 31 percent of total
occupied demand at a stabilized occupancy of 77 percent.
Corporate Meeting Groups
In 1995, the subject property achieved a penetration rate of
103 percent of the corporate meeting groups market segment. By
year-end 1996 we expect this penetration rate to increase to 127
percent. The corporate meeting group demand segment has exhibited
strong growth over the past few years. While the subject property
is small in size and does not have extensive meeting facilities
compared to other properties within the competitive supply, it
has benefited by accommodating smaller groups and overflow group
demand during peak periods.
Comparatively, however, the subject property is at somewhat
of a disadvantage given the limited extent of available meeting
space. With the proposed addition to supply of larger properties
with more extensive meeting space and banquet facilities,
(including the Kierland Convention Center, the Four Seasons, and
the Waterfront Hotel), we expect increased competition for room
night demand from this market segment. While the subject property
is expected to continue to attract smaller groups and to
accommodate overflow demand, due to increased competition from
new properties, we estimate that the subject hotel will
experience a slight decline in its penetration rate of this
demand segment. In a stabilized year we estimate that the subject
property will achieve a penetration rate of 125 percent. Occupied
demand in this segment is expected to equal 44 percent of total
occupied demand in a stabilized year at an occupancy of 77
percent.
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Other Meeting Groups
In 1995, the Red Lion La Posada, the Radissson Resort, the
Renaissance Cottonwood, and the Scottsdale Plaza all exceeded
their fair share of demand. All of these properties have
extensive meeting and banquet facilities which enable them to
accommodate both the higher-rated corporate meeting groups as
well as the more price-sensitive association or social meeting
groups. Given the subject property's size and limited meeting
room space, this is not possible. As a result, room night demand
from this market segment is turned away in favor of the less
price-sensitive corporate group demand.
However, in July of 1996, the subject property completed the
construction of a 3,024 square-foot lakeside pavilion. This
outdoor pavilion can accommodate approximately 350 people and may
be used for a variety of purposes including receptions,
luncheons, lectures, and as general break-out space. This added
space is expected to help the subject property maintain its
competitive position by enabling management to pursue additional
social catering functions without displacing groups from the main
ballroom.
In 1995, the subject property achieved a penetration rate of
69 percent of fair share. Demand in this segment represented
approximately 20 percent of total occupied rooms. Given the
addition of the new pavilion which should allow for added
flexibility in terms of group bookings, we estimate that the
subject hotel will achieve a penetration rate of 70 percent
throughout the projection period. Occupied demand in this segment
is expected to equal 20 percent of total occupied demand at a
stabilized occupancy of 77 percent.
The estimated market mix of the subject hotel in a
representative year, at 77 percent occupancy, is presented on the
following table:
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- -----------------------------------------------------------------------------
Estimated Market Segmentation In A Stabilized Year (2000)
Regal McCormick Ranch
- -----------------------------------------------------------------------------
Occupied Percent of
Room Total Penetration
Market Segment Nights Occupancy Rate
- ----------------------------------------- ------------------- ---------------
Commercial Individual
Travelers 1,900 5% 53%
Leisure Individual Travelers 10,800 31% 126%
Corporate Meeting Groups 15,500 44% 125%
Other Meeting Groups 6,800 19% 70%
- ----------------------------------------- ------------------- ---------------
Total 35,000 100% 102%
- -----------------------------------------------------------------------------
Source: Arthur Andersen/Market Interviews
- -----------------------------------------------------------------------------
Our estimates of the overall market penetration and
resulting occupancy for the subject hotel from 1996 through
December 31, 2001 are presented on the following table.
-----------------------------------------------------------------
Estimated Penetration And Occupancy
Regal McCormick Ranch
-----------------------------------------------------------------
Estimated Overall Estimated
Penetration Rate Occupancy
Year
---------------- ------------------------------- ----------------
1996 102% 79%
1997 101% 79%
1998 102% 78%
1999 102% 75%
2000 102% 77%
2001 102% 77%
-----------------------------------------------------------------
Source: Arthur Andersen
-----------------------------------------------------------------
As indicated in the preceding table, we estimate that the
subject property will achieve an overall penetration rate of 102
percent at stabilization, resulting in a 77 percent stabilized
occupancy level in 2000. The assumed addition 450 new hotel rooms
between 1997 through 1999 will likely have an impact on occupancy
levels achieved among properties within the competitive supply.
With limited room for occupancy growth during the peak-seasonal
months, and increasing competition during the shoulder and
off-peak seasonal period, occupancy is expected to decrease
slightly in 1998 and 1999.
PROJECTED AVERAGE DAILY ROOM RATE
Due to weak hotel market conditions in the early 1990s,
average daily rates in the Scottsdale lodging market exhibited
little growth. Increased competition due to the addition of new
hotels in the mid-1980s and decreased visitation due to the
national recession resulted in competitive rate negotiations for
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both group and individual demand. However, the average daily room
rates in the identified competitive supply have exhibited
substantial growth during the past three years.
As is illustrated in the following table, over the last ten
years average room rates have increased at a compound annual rate
of approximately five percent. However, between 1994 and 1995
average rates increased by almost ten percent. The 1996 average
room rate is estimated to be approximately $119.75 which
represents a six percent increase over the average rate achieved
by hotels in 1994. It should be noted, however, that the peak
average rate season occurs between January through to May, while
the lowest average rate months occur in July and August.
- -------------------------------------------------------
Historical Average Daily Rates
Scottsdale/Paradise Valley Market Area
- -------------------------------------------------------
Calendar Average Room Rate
Year
- -------------------------------------------------------
1986 $75.00
1987 $75.75
1988 $84.00
1989 $89.50
1990 $92.25
1991 $94.50
1992 $94.70
1993 $101.00
1994 $104.00
1995 $112.50
- -------------------------------------------------------
CAG 4.61%
- -------------------------------------------------------
Over the past two years, the management of hotels in the
competitive supply have increased published rack rates and group
rates as a result of strong demand and future bookings.
Additionally, the sales departments of the competitive supply
have targeted less price-sensitive corporate and association
groups for future group bookings and have closed out room rate
discounts during the shoulder season.
In 1995, the aggregate average daily rate achieved by the
identified competitive supply was approximately $110.50. We
estimate that by year-end 1996, the average daily rate achieved
by the competitive supply will increase by 10.4 percent to
approximately $122.00.
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While average daily rates have exhibited healthy growth over
the past few years, the assumed addition of 450 new hotel rooms
is likely to result in increased pressure for the hotels in the
competitive supply. Based upon conversations with local hotel
operators and representatives from the Office of Tourism and
Economic Development, there is some concern that Scottsdale has
reached its average rate peak or effective ceiling. As average
daily rates in Scottsdale have substantially increased over the
last several years, average rates in many competing resort
destination markets have decreased. Any additional growth in
average rates may result in Scottsdale pricing itself out of the
competitive resort destination market. However, we believe that
management at the subject will be able to support rate growth
after the completion of renovations in 1996. Growth in the
average daily room rate by market segment for the subject hotel
is summarized in the following paragraphs.
Commercial Individual Travelers
The average room rate in the commercial individual traveler
segment was approximately $100.00 in 1995 at the subject
property. This represented an increase of 20 percent over the
rate achieved by this segment in 1994. This increase in average
daily rate is largely due to the favorable Scottsdale market
conditions experienced by all properties in the competitive
supply. Given a limited supply of hotel rooms during the
peak-season and continued growth from this demand segment, the
subject property has been able to effectively achieve a higher
average daily rate.
In 1996, we estimate that the subject property will achieve
an average room rate of $105.00 which represents an increase of
five percent over the level achieved in 1995. However, while we
do expect some additional growth in average daily rates in 1997
after completion of renovations, this growth is expected to
moderate over the next five years due to increasing competition
from the additions to supply. We estimate that the average daily
rate in this segment will increase by 7.0 percent in 1997, 5.0
percent in 1998, and 3.5 percent thereafter.
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Leisure Individual Travelers
The average room rate in the leisure individual traveler
segment was approximately $106.00 in 1995 at the subject hotel.
This represented a nine percent increase over the rate achieved
by this segment in 1994.
In 1996, we estimate that the subject property will achieve
an average room rate of $116.00. Given the planned guest room
renovation scheduled to be completed by year-end 1996, we
estimate that the average room in this segment will increase by
7.0 percent in 1997, 5.0 percent in 1998, and 3.5 percent
thereafter.
Corporate Meeting Groups
The average room rate in the Corporate Meeting Group segment
was approximately $114.00 in 1995 at the subject hotel. This
represented a seven percent increase over the rate achieved by
this segment in 1994.
In 1996, we estimate that the subject property will achieve
an average room rate of $132.00. We expect the subject property
to experience increased competition for corporate meeting group
room night demand beginning in 1998 as new, larger properties are
added to the competitive supply. We estimate that the average
daily rate in this segment will increase by 7.0 percent in 1997,
5.0 percent in 1998, and 3.5 percent thereafter.
Other Meeting Groups
The average room rate in the other meeting groups segment
was approximately $97.00 in 1995 at the subject hotel. This
represented a slight one percent increase over the rate achieved
by this segment in 1994.
We estimate that the average room rate in this segment will
increase 7.0 percent in 1997 and 7.0 percent in 1997, 5.0 percent
in 1998 and 3.5 percent thereafter.
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The following table presents our estimates of average daily
room rate for the Regal McCormick Ranch.
- -----------------------------------------------------------------
Estimated Average Daily Room Rate
Regal McCormick Ranch
- -----------------------------------------------------------------
Year Average Rate % Growth
- ----------------- ------------------------- ---------------------
1995 $106.00 ----
1996 119.00 12%
1997 127.00 5%
1998 133.50 4%
1999 138.50 3%
2000 143.00 3%
2001 148.00 3%
- ----------------- ------------------------- ---------------------
Source: Arthur Andersen
- -----------------------------------------------------------------
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D. THE APPRAISAL PROCESS
The purpose of this appraisal is to estimate the "as is"
market value the subject property in accordance with accepted
value estimating procedure. "The valuation process is a
systematic procedure employed to provide the answer to a client's
question about real property value. It is a model of appraisal
activity, reflecting an understanding of value and the methods
used in the value estimation."3
There are three traditional approaches involved in the
valuation of real property. These are known as the cost approach,
the sales comparison approach, and the income capitalization
approach. Each of the three approaches is related to the other,
as they involve the gathering and analysis of sales, cost, and
income data that pertain to the property being appraised.
Although all three valuation procedures are given consideration,
the inherent strengths and weaknesses of each approach and the
nature of the subject property must be evaluated to determine
which will provide the most supportable estimates of market
value. The appraiser may select one approach or reconcile two or
three approaches to arrive at a final value estimate.
D.1 THE COST APPROACH
Valuation by the cost approach is based on the principle of
substitution. This principle asserts that an informed investor
will not pay more for a property than the cost to build a
substitute property of equivalent utility. Therefore, the cost
approach, when utilized in an appraisal, estimates the cost of
reproducing or replacing the subject property including
improvements and land, less an allowance for depreciation based
upon the physical condition, functionality, and economic
environment or the building. Although this approach is
particularly applicable to owner-occupied or special-use
properties in the absence of an investor market, it also
recognizes and establishes the relationship between cost and
market-derived values.
- ----------------
3 American Institute of Real Estate Appraisers, The Appraisal
of Real Estate Appraisal, Chicago, Illinois, 1989, p. 73.
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In the subject appraisal, the building is now operating as a
business in the production of income to the various components
which comprise the total operation of a hotel. Although the
replacement cost of the subject hotel could be established, the
estimate of market depreciation is a very subjective
consideration which significantly affects the value indication.
The depreciation estimate could only be realistically estimated
by comparison to other approaches, thereby reducing the cost
approach to coincide with one of the other approaches, and losing
the objectivity of the approach as a third measure of value. In
our opinion, an informed and experienced purchaser would not rely
on the cost approach in establishing an indication of market
value for the subject property. Therefore, this approach has not
been included in our analysis.
D.2 SALES COMPARISON APPROACH
The sales comparison approach estimates market value on the
basis of a comparative analysis of recent sales of improved
properties that are similar in function, size, income production,
and use to the appraised property. This approach to value assumes
that the market will determine a price for the subject in the
same manner that it determines the price for comparable,
competitive properties. To apply the sales comparison approach,
the appraiser employs a number of appraisal principles, including
the principle of substitution which holds that the value of a
property that is replaceable in the marketplace tends to be set
by the cost of acquiring an equally desirable substitute
property. Additional considerations include examination of market
conditions prevailing at the time of sale as compared to those at
the date of valuation.
To develop the sales comparison approach, we researched the
subject market and the surrounding region for recent sales of
similarly-improved properties. From our research, we have
selected several sales for further analysis and direct comparison
with the Regal McCormick Ranch. These sales represent the most
recent sales of improved properties and are considered to be
competitive alternatives in the marketplace. We identified four
comparable hotel sales. All of the properties selected are
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Regal McCormick Ranch Page 91
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considered up-scale, full-service properties all of which are
located within the greater Phoenix market area.
We have made adjustments to the price paid per room on the
basis of a comparison of each hotel relative to the subject
hotel. Our analysis of the market recognizes primary factors
which affect the pricing of hotels including: adjustments related
to renovations planned at the time of purchase, interest
appraised, strength of the local lodging market, size and extent
of the facilities, condition of the facilities, and other risk
factors such as the property's location relative to demand
generators and area attractions and the ease of access to the
hotel.
We also made adjustments for the leasehold position at the
subject property. Most of the comparable sales were fee simple
transactions. The Regal McCormick Ranch is subject to a ground
lease. In order to adjust for the premium that would be paid for
a fee simple hotel property, we made a downward adjustment to the
price of all fee simple transactions. This downward adjustment
was calculated by using the subject property's stabilized ground
rent of $433,000, which has been reflected in constant 1996
dollars. This amount was capitalized at 11 percent (based upon
the property's assumed terminal capitalization rate) to arrive at
a deduction to the comparable sales price of $3.9 million. We
deducted this amount from the preliminary adjusted price per room
to arrive at the overall adjusted price per room with a leasehold
assumption.
Presented on the following page is a summary of each
comparable sale and our adjustments. Tables detailing pertinent
information related to each comparable sale are presented in the
Addenda of this report.
<PAGE>
Sales Comparison Adjustment Grid
REGAL MCCORMICK RANCH
Hotel Name Hilton Resort and Spa (a) Royal Palms Resort (b)
Location cottsdale, Arizona Phoenix, Arizona
Interest Transferred Leasehold Fee Simple
Number of Units
(Rooms/Suites) 242 120
Occupancy 74% N/A
Average Daily Rate $81.83 N/A
Date of Sale Dec-94 Oct-95
Sales Price $19,000,000 $11,500,000
Sales Price Per Room $78,512 $95,833
Gross Room Revenue
Multiplier (GRRM) 3.5 N/A
OTHER ADJUSTMENTS (1)
Transaction
Market Conditions 20.0% 10.0%
PRELIMINARY ADJUSTED
PRICE PER ROOM $94,215 $105,417
Location & Strength
of Lodging Market 0.0% 10.0%
Extent and Quality
of the Facilities -5.0% 0.0%
Condition of the
Facilities/Age 20.0% 0.0%
ADJUSTED PRICE PER ROOM $108,300 $116,000
-------- --------
Ground Lease (2) ($32,500)
OVERALL ADJUSTED PRICE PER
ROOM - LEASEHOLD $108,300 $83,500
-------- --------
<PAGE>
Sales Comparison Adjustment Grid
REGAL MCCORMICK RANCH
Hotel Name Mesa Pavilion Hilton (c) Ritz-Carlton
Location Mesa, Arizona Phoenix, Arizona
Interest Transferred Fee Simple Fee Simple
Number of Units
(Rooms/Suites) 263 281
Occupancy 72% 78%
Average Daily Rate $95.00 $140.00
Date of Sale Jul-95 May-96
Sales Price $20,000,000 $37,000,000
Sales Price Per Room $76,046 $131,673
Gross Room Revenue
Multiplier (GRRM) 3.0 3.3
OTHER ADJUSTMENTS (1)
Transaction Market Conditions 10.0% 0.0%
PRELIMINARY ADJUSTED PRICE PER ROOM $83,650 $131,673
Location & Strength of Lodging Market 15.0% 5.0%
Extent and Quality of the Facilities 5.0% -10.0%
Condition of the Facilities/Age 10.0% 0.0%
ADJUSTED PRICE PER ROOM $108,700 $125,100
-------- --------
Ground Lease (2) ($15,000) ($14,000)
OVERALL ADJUSTED PRICE PER ROOM -
LEASEHOLD $93,700 $111,100
-------- --------
Note:
(1) A negative adjustment indicates that the comparable sale
had a superior location, size & extent of facilities,
condition or location than that of the subject. As a
result, the sale price must be adjusted downward to make
the sale comparable with the subject property. A positive
adjustment indicates that the comparable sale was inferior
to that of the subject and the price per room must be
increased.
(a) The sales price was adjusted to reflect the buyers planned
$5 million dollar renovation of the property
(b) The sales price was adjusted upwards to reflect the buyers
anticipated investment of $8 million in capital
expenditures.
(c) We have adjusted the sales price upwards slightly to
reflect the buyer intention to spend $3,500,000 on capital
expenditures
(2) Adjustment for ground lease at the subject property.
Stabilized rent of $433,000 was capitalized at 11 percent
to arrive at a value of $3.9 million. This value of the
ground lease was deducted on a per room basis from each
property to adjust for the fee simple position of the
comparable sales.
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Regal McCormick Ranch Page 92
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The following paragraphs briefly present a rationale for the
major adjustments made to the price per room of each identified
comparable sale.
Hilton Resort and Spa (Scottsdale, Arizona)
This 232-room resort was opened in 1975. The accommodations
at the resort consist of 187 rooms and 45 villas. Each villa is
approximately 1,400 square feet and includes two bedrooms. The
resort offers approximately 14,000 square feet of banquet and
meeting space. This resort is located approximately three blocks
south of the subject property on Scottsdale Road. In 1994,
Trammell Crow Company sold this hotel to the Griffin Group for
$14,000,000 or approximately $57,850 per room. At the time of
purchase, the property was in fair to poor condition. The buyer
indicated that, at the time of the purchase, approximately $5
million in renovations were planned to upgrade the property.
Renovations planned include the replacement of soft goods in the
guest rooms, meeting space and public areas as well as an upgrade
to the resort's exterior facade. As a result, we have adjusted
the sales price upwards to $19,000,000 or $78,512 per room.
- This sales transaction occurred in late 1994. To reflect
the difference in transaction market conditions for lodging
properties as they compare to 1996, we have applied a
positive 20 percent adjustment to the sales price.
- Taking into consideration the quality and extent of the
facilities at the Hilton including the amount of meeting and
banquet space, variety of guest room accommodations, and
health club facilities, we have adjusted the sales price per
room downwards slightly by five percent to make this
property more comparable to the subject property.
- Based upon a physical inspection of the Hilton Resort and
Spa, the condition of the facilities at this property are
somewhat inferior to the subject property. As a result, we
have applied a positive 20 percent adjustment to the sales
price per room.
- Considerate of the fact that this transaction involved the
exchange of a leasehold interest, no leasehold adjustment
was applied.
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Regal McCormick Ranch Page 93
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On the basis of this analysis, the adjusted price per room
of this hotel is estimated to be $108,300 per room.
Royal Palms Inn (Phoenix, Arizona)
The Royal Palms Inn is a 120- room resort property which was
originally built in 1949. In October 1995, the Royal Palms Inn
Corporation sold this property to Royal Ventures LLC for a total
adjusted sale price of $11,500,000, or $95,833 per room. This
adjusted sale price reflects the buyers intention to invest
approximately $8 million to completely renovate the property to
its old-style grandeur including the expansion of all public
areas, meeting rooms, and refurbishing of all guest rooms. It is
the buyer's intention to reposition this property as a four star
luxury resort. It is scheduled to re-open in January of 1997.
- Transaction Market conditions for lodging properties in
1995 were less optimistic than present market conditions.
Therefore, to make this sales transaction comparable to the
subject property, we have applied a positive ten percent
adjustment to the sales price per room.
- The Royal Palms Inn is located west of the subject
property, outside of the main resort corridor. As a result,
we applied a positive ten percent adjustment to the sales
price per room to compensate for the property's slightly
inferior location.
- Considerate of the fact that this was a fee simple
transaction, in order to make it comparable to the subject
property, a negative adjustment of $32,500 was applied to
the sales price per room.
On the basis of this analysis, and following the ground
lease adjustment, the adjusted price per room of this hotel is
estimated to be $83,500 per room.
<PAGE>
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Mesa Pavilion Hilton (Mesa, Arizona)
The Mesa Pavilion Hilton is a full-service corporate hotel
located in Mesa, Arizona adjacent to the area's largest shopping
mall and 9-hole golf course.
In August of 1995, the property was purchased by Sun Quorum
Hotels and Resorts from the Mutual Life Insurance Co. for
approximately $16,500,000. According to the buyer, at the time of
the purchase, the hotel was in need of a $3.5 million interior
renovation including all guestrooms and public areas. As a
result, we have adjusted the sales price to $20,000,000 or
$76,045 per room.
- The Mesa Pavilion Hilton is located approximately ten miles
east of the Phoenix Metropolitan Area. While it is
considered a first-class hotel, it is not considered a
resort property. Additionally, the Mesa lodging market is
somewhat inferior to the Scottsdale resort market.
Therefore, we have applied a positive fifteen percent
adjustment to the sales price per room.
- Transaction Market conditions for lodging properties in
1995 were less optimistic than present market conditions.
Therefore, to make this sales transaction comparable to the
subject property, we have applied a positive ten percent
adjustment to the sales price per room.
- Considerate of the fact that the Hilton Pavilion is not a
resort property and therefore lacks certain resort-like
amenities, we applied a positive five percent adjustment to
the sales price per room in order to make this property
comparable to the subject hotel.
- While the Hilton Pavilion was built in 1986 and will
undergo a $3.5 million renovation, the condition of the
facilities is believed to be somewhat inferior to the
facilities at the subject property. As a result, we applied
a positive ten percent adjustment to the sales price per
room.
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Regal McCormick Ranch Page 95
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- Considerate of the fact that this was a fee simple
transaction, in order to make it comparable to the subject
property, a negative adjustment of $15,000 was applied to
the sales price per room.
On the basis of this analysis, the adjusted price per room
of this hotel is estimated to be $93,700 per room.
Ritz-Carlton (Phoenix, Arizona)
The Ritz-Carlton is a luxury, commercial hotel located
within the Camelback Esplanade complex in the center of the
Camelback business and retail district. This 281-room property
comprises more than 18,000 square-feet of meeting space, an
outdoor swimming pool, a small fitness center, two restaurants
and a lobby lounge, and a business center.
In May of 1996, Aldrich Eastman Watch (AEW) sold this
property to the Pivotal Group and investment advisor William E.
Simon & Sons Realty for a total price of $37,000,000 or $132,000
per room. According to sources close to the deal, the $37 million
spent to acquire the Ritz-Carlton represents the largest
acquisition price for a single property in the Phoenix area in
1996.
- The Ritz-Carlton is a first-class, luxury property which
may be considered superior to the subject property in terms
of level of service and the quality and extent of
facilities. As a result, we applied a negative ten percent
adjustment to the sales price per room to make this property
comparable to the subject property.
- The Ritz-Carlton is primarily a commercial transient hotel
located in the Camelback business and retail district. This
sub-market is not as strong as the Scottsdale resort lodging
market. To compensate for this, we applied a positive five
percent adjustment to the sales price per room.
<PAGE>
Regal McCormick Ranch Page 96
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- Considerate of the fact that this was a fee simple
transaction, in order to make it comparable to the subject
property, a negative adjustment of $15,000 was applied to
the sales price per room.
On the basis of this analysis, the adjusted price per room of
this hotel is estimated to be $111,100 per room.
Information has been presented on several comparable hotel sales
which are considered to be relatively similar to the Regal
McCormick Ranch. After adjustments, the comparable hotel sale
transactions indicate a unit price range for the subject hotel
from $108,000 to $111,00 per room.
We have given the most weight on the price per room indications
of the Hilton Resort and Spa and the Ritz-Carlton given their
market orientation, location, quality and extent of facilities.
However, since both the Hilton Resort and Spa and subject
property both represent leasehold interests and are located
within the same local lodging market, more weight was given to
the sale of the Hilton. On the basis of an analysis of these
sales, we have estimated the market value of the leasehold
interest in the subject property by this approach to be
approximately $110,000 per room, or $13,750,000 (rounded) as of
January 1, 1997.
CONCLUSION BY THE SALES COMPARISON APPROACH
On the basis of this analysis, we have estimated the market value
of the leasehold interest in the subject hotel, via the Sales
Comparison Approach to be $13,750,000 as of January 1, 1997.
<PAGE>
Regal McCormick Ranch Page 97
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D.3 INCOME APPROACH
The income approach to value converts anticipated future benefits
into an estimate of present value. In this respect, the process
is very similar to pricing in other capital markets. The approach
requires the careful estimation of future benefits -- income
before debt service, residual values, etc. -- and application of
investor yield or return requirements. The income approach brings
together reasoned estimates of future revenues and expenses with
the investor's yield requirements. These yield requirements, in
turn, reflect varieties of risk, including property type,
location, local market conditions, and so forth.
Yield and direct capitalization techniques are conventionally
used to convert future benefits to value -- the discounted cash
flow (DCF) technique and the overall capitalization rate (OAR)
technique. The DCF technique entails (1) modeling the future
performance of the subject, over a specific holding period, (2)
estimating the future value (reversionary value) at the end of
the holding period, and (3) converting the stream of periodic
benefits and reversionary value, through a discounting process at
investor yields, to a present value. The selection of an
appropriate discount rate is essential to this process.
By comparison, direct capitalization using an overall rate (OAR)
converts a single, "normalized" year's income or income before
debt service into a value by dividing the appropriate
capitalization rate into the normalized income. Subsequent
adjustments are then made to take into consideration variations
from normalized operations. In order to value the Regal McCormick
Ranch, we have utilized only the discounted cash flow method for
the income approach. The direct capitalization method has not
been used because most investors do not use it as a tool to
analyze value from income. In addition, it is difficult to
reflect future increases in occupancy and room rate using direct
capitalization. Finally, using a "normalized" or stabilized net
operating income is highly speculative and can produce erroneous
results.
The discussion on the following pages provide a summary of our
projection of revenues, expenses, discount rates, capitalization
rates, and many of the other assumptions which are incorporated
in the income approach. The discussion of revenues and expenses
begins with an examination of historical trends. Finally,
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Regal McCormick Ranch Page 98
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estimates are made with regard to the appropriate projection of
revenues, expenses, and capital items.
HISTORICAL FINANCIAL PERFORMANCE
The historical operating results for the subject hotel for the
years ended 1994 and 1995 is presented on the following page. The
next page presents the historical operating results for the
subject hotel through year-to-date September 30, 1995 and 1996.
ESTIMATED OPERATING RESULTS
Estimates of income and expenses, in current dollars, have been
prepared for the subject hotel from January 1, 1997 through
December 31, 2007. Our financial projections are based upon an
analysis of the historical operating results of the subject and
on the performance of comparable hotels. A representative year of
operation, expressed in 1996 dollars, is first established and
then adjusted to account for inflation and the varying levels of
occupancy for each year in the projection period. The
representative level of occupancy at the hotel is estimated to be
79 percent. The following paragraphs describe the assumptions and
bases of our estimates.
Inflation Assumption
In order to estimate future inflation of revenues and expenses at
the subject hotel, we have reviewed the historical inflation of
the consumer price index - urban markets (CPI-U).
<PAGE>
Recast of Historical Financial Statements
REGAL MCCORMICK RANCH
1994 Actual Income Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 125
Available Rooms (Annually) 45,625
Occupancy Percentage 88.3%
Occupied Rooms 40,280
Average Room Rate $98.25
REVENUES
Rooms $3,957,612 45.5% $31,661 $98.25
Food 2,056,802 23.6% 16,454 51.06
Beverage 578,334 6.6% 4,627 14.36
Telephone 200,352 2.3% 1,603 4.97
Recreation 5,157 0.1% 41 0.13
Villa Rentals (1) 1,592,504 18.3% 12,740 39.54
Rentals and Other
Income (Net) (2) 308,441 3.5% 2,468 7.66
----------- ----------- ----------- -----------
Total Revenues $8,699,202 100.0% $69,594 $215.97
DEPARTMENTAL EXPENSES
Rooms $742,356 18.8% $5,939 $18.43
Food & Beverage 1,879,517 71.3% 15,036 46.66
Telephone 102,832 51.3% 823 2.55
Recreation 25,074 486.2% 201 0.62
Villa Rentals (1) 1,320,496 82.9% 10,564 32.78
----------- ----------- ----------- -----------
Total Departmental Expenses $4,070,275 46.8% $32,562 $101.05
TOTAL DEPARTMENTAL INCOME $4,628,927 53.2% $37,031 $114.92
UNDISTRIBUTED OPERATING
EXPENSES
Administrative & General $737,620 8.5% $5,901 $18.31
Sales and Marketing 520,601 6.0% 4,165 12.92
Management Fees 349,682 4.0% 2,797 8.68
Franchise Fees 132,331 1.5% 1,059 3.29
Energy 332,639 3.8% 2,661 8.26
Property Operations &
Maintenance 308,319 3.5% 2,467 7.65
----------- ----------- ----------- -----------
Total Undistributed
Operating $2,381,192 27.4% $19,050 $59.12
INCOME BEFORE FIXED CHARGES $2,247,735 25.8% 17,982 55.80
FIXED CHARGES
Property Taxes $161,136 1.9% $1,289 $4.00
Personal Property Taxes 21,604 0.2% 173 0.54
Insurance 21,224 0.2% 170 0.53
Equipment Rent (3) 47,558 0.5% 380 1.18
Ground Rent (4) 316,609 3.6% 2,533 7.86
----------- ----------- ----------- -----------
Total Fixed Charges $568,131 6.5% $4,545 $14.10
INCOME BEFORE RESERVE $1,679,604 19.3% $13,437 $41.70
=========== =========== =========== ===========
Recast of Historical Financial Statements
REGAL MCCORMICK RANCH
1995 Actual Income
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 125
Available Rooms (Annually) 45,625
Occupancy Percentage 86.2%
Occupied Rooms 39,341
Average Room Rate $106.02
REVENUES
Rooms $4,170,786 48.2% $33,366 $106.02
Food 1,942,194 22.4% 15,538 49.37
Beverage 508,647 5.9% 4,069 12.93
Telephone 210,337 2.4% 1,683 5.35
Recreation 4,475 0.1% 36 0.11
Villa Rentals (1) 1,605,859 18.6% 12,847 40.82
Rentals and Other
Income (Net) (2) 211,501 2.4% 1,692 5.38
----------- ----------- ----------- -----------
Total Revenues $8,653,799 100.0% $69,230 $219.97
DEPARTMENTAL EXPENSES
Rooms $757,184 18.2% $6,057 $19.25
Food & Beverage 1,770,425 72.2% 14,163 45.00
Telephone 107,256 51.0% 858 2.73
Recreation 9,198 205.5% 74 0.23
Villa Rentals (1) 1,296,572 80.7% 10,373 32.96
----------- ----------- ----------- -----------
Total Departmental Expenses $3,940,635 45.5% $31,525 $100.17
TOTAL DEPARTMENTAL INCOME $4,713,164 54.5% $37,705 $119.80
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General $730,820 8.4% $5,847 $18.58
Sales and Marketing 446,699 5.2% 3,574 11.35
Management Fees 347,315 4.0% 2,779 8.83
Franchise Fees 173,658 2.0% 1,389 4.41
Energy 305,762 3.5% 2,446 7.77
Property Operations
& Maintenance 293,302 3.4% 2,346 7.46
----------- ----------- ----------- -----------
Total Undistributed
Operating $2,297,556 26.5% $18,380 $58.40
INCOME BEFORE FIXED CHARGES $2,415,608 27.9% 19,325 61.40
FIXED CHARGES
Property Taxes $165,877 1.9% $1,327 $4.22
Personal Property Taxes 16,770 0.2% 134 0.43
Insurance 25,304 0.3% 202 0.64
Equipment Rent (3) 46,739 0.5% 374 1.19
Ground Rent (4) 333,663 3.9% 2,669 8.48
----------- ----------- ----------- -----------
Total Fixed Charges $588,353 6.8% $4,707 $14.96
INCOME BEFORE RESERVE $1,827,255 21.1% $14,618 $46.45
=========== =========== =========== ===========
Notes:
The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen.
(1) Represents percentage of revenue
received and associated expenses for rental of
privately owned condominiums located adjacent to hotel property
(2) Includes A.V. rentals, meeting room rentals, lease payments from
gift shop operator, in-room movies etc.
(3) Includes rental payments of use of phone switch, copiers,
computer system, pagers, etc.
<PAGE>
Recast of Historical Financial Statements
REGAL MCCORMICK RANCH
Year-To-Date September 30, 1995
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 273
Available Rooms (Daily) 125
Available Rooms (Annually) 34,125
Occupancy Percentage 88.1%
Occupied Rooms 30,060
Average Room Rate $104.40
REVENUES
Rooms $3,138,400 48.8% $25,107 $104.40
Food 1,364,599 21.2% 10,917 45.40
Beverage 361,862 5.6% 2,895 12.04
Telephone 154,404 2.4% 1,235 5.14
Recreation 4,475 0.1% 36 0.15
Villa Rentals (1) 1,248,915 19.4% 9,991 41.55
Rentals and
Other Income (Net) (2) 159,323 2.5% 1,275 5.30
----------- ----------- ----------- -----------
Total Revenues $6,431,978 100.0% $51,456 $213.97
DEPARTMENTAL EXPENSES
Rooms $571,911 18.2% $4,575 $19.03
Food & Beverage 1,273,465 73.8% 10,188 42.36
Telephone 82,778 53.6% 662 2.75
Recreation 9,136 204.2% 73 0.30
Villa Rentals (1) 999,967 80.1% 8,000 33.27
----------- ----------- ----------- -----------
Total Departmental
Expenses $2,937,257 45.7% $23,498 $97.71
TOTAL DEPARTMENTAL INCOME $3,494,721 54.3% $27,958 $116.26
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General $536,143 8.3% $4,289 $17.84
Sales and Marketing 452,736 7.0% 3,622 15.06
Franchise Fees 128,929 2.0% 1,031 4.29
Management Fees 257,857 4.0% 2,063 8.58
Energy 233,653 3.6% 1,869 7.77
Property Operations
& Maintenance 227,260 3.5% 1,818 7.56
----------- ----------- ----------- -----------
Total Undistributed
Operating $1,836,578 28.6% $14,693 $61.10
INCOME BEFORE
FIXED CHARGES $1,658,143 25.8% 13,265 55.16
FIXED CHARGES
Property Taxes $124,408 1.9% $995 $4.14
Personal Property Taxes 12,507 0.2% 100 0.42
Insurance 18,194 0.3% 146 0.61
Equipment Rent (3) 34,812 0.5% 278 1.16
Ground Rent (4) 251,072 3.9% 2,009 8.35
----------- ----------- ----------- -----------
Total Fixed Charges $440,993 6.9% $3,528 $14.67
INCOME BEFORE RESERVE $1,217,150 18.9% $9,737 $40.49
=========== =========== =========== ===========
<PAGE>
Recast of Historical Financial Statements
REGAL MCCORMICK RANCH
1995 Actual Income
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 274
Available Rooms (Daily) 125
Available Rooms (Annually) 34,250
Occupancy Percentage 79.2%
Occupied Rooms 27,130
Average Room Rate $117.47
REVENUES
Rooms $3,187,078 46.2% $25,497 $117.47
Food 1,614,436 23.4% 12,915 59.51
Beverage 450,640 6.5% 3,605 16.61
Telephone 177,294 2.6% 1,418 6.53
Recreation 0 0.0% 0 0.00
Villa Rentals (1) 1,273,825 18.5% 10,191 46.95
Rentals and
Other Income (Net) (2) 192,849 2.8% 1,543 7.11
----------- ----------- ----------- --------
Total Revenues $6,896,122 100.0% $55,169 $254.19
DEPARTMENTAL EXPENSES
Rooms $616,864 19.4% $4,935 $22.74
Food & Beverage 1,466,245 71.0% 11,730 54.05
Telephone 77,331 43.6% 619 2.85
Recreation 448 #DIV/0! 4 0.02
Villa Rentals (1) 968,540 76.0% 7,748 35.70
----------- ----------- ----------- --------
Total Departmental
Expenses $3,129,428 45.4% $25,035 $115.35
TOTAL DEPARTMENTAL
INCOME $3,766,694 54.6% $30,134 $138.84
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General $588,454 8.5% $4,708 $21.69
Sales and Marketing 549,743 8.0% 4,398 20.26
Franchise Fees 173,270 2.5% 1,386 6.39
Management Fees 277,152 4.0% 2,217 10.22
Energy 242,484 3.5% 1,940 8.94
Property Operations
& Maintenance 250,416 3.6% 2,003 9.23
----------- ----------- ----------- --------
Total Undistributed
Operating $2,081,519 30.2% $16,652 $76.72
INCOME BEFORE
FIXED CHARGES $1,685,175 24.4% 13,481 62.11
FIXED CHARGES
Property Taxes $126,900 1.8% $1,015 $4.68
Personal Property Taxes 10,876 0.2% 87 0.40
Insurance 20,942 0.3% 168 0.77
Equipment Rent (3) 38,162 0.6% 305 1.41
Ground Rent (4) 254,966 3.7% 2,040 9.40
----------- ----------- ----------- --------
Total Fixed Charges $451,846 6.6% $3,615 $16.65
INCOME BEFORE RESERVE $1,233,329 17.9% $9,867 $45.46
=========== =========== ========== =========
Notes:
The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen.
(1) Represents percentage of revenue
received and associated expenses for rental of
privately owned condominiums located adjacent to hotel property.
(2) Includes A.V. rentals, meeting room rentals, lease payments from gift
shop operator, in-room movies etc.
(3) Includes rental payments of use of phone switch, copiers,
computer system, pagers, etc.
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- ---------------------- ---------------------
Year CPI-U
---- -----
1988 4.4%
1989 4.6%
1990 6.1%
1991 3.1%
1992 2.9%
1993 2.7%
1994 2.7%
1995 2.5%
- ---------------------- ---------------------
On the basis of historical inflation rates and on our estimates
of future inflation, we have assumed an inflation assumption of
3.5 percent, compounded annually, from a base year of 1996.
Revenue
Rooms Revenue is based upon the estimates of average
annual occupancy and room rates as described previously
in this report.
Food Revenue is derived from estimated sales food in the
restaurants, cafes, lounges, room service and banquet
facilities. Food revenue also includes any miscellaneous
revenue such as public room rental and corkage fees.
On the basis of the analysis of the historical operating
results and the results of comparable hotels, we assume
that the subject hotel will achieve food revenue in a
representative year of $68.00 per occupied room, in
constant 1996 dollars. Food revenue is estimated to be
80 percent variable with occupancy and is adjusted to
account for inflation and occupancy levels throughout
the projection period.
Beverage Revenue is derived from estimated sales of all
alcoholic beverages in the restaurants, cafes, and
lounges, room service and banquet facilities. On the
basis of the analysis of the historical operating
results and the results of comparable hotels, we assume
that the subject hotel will achieve beverage revenue of
$16.00 per occupied room, in a representative year in
constant 1996 dollars. Beverage revenue is estimated to
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Regal McCormick Ranch Page 100
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be 80 percent variable with occupancy and is adjusted to
account for inflation and occupancy levels throughout
the projection period.
Telephone Revenue includes the revenue derived from long
distance and local telephone calls, as well as any per
call charges applied to credit card or other calls.
Revenue in this category in a representative year is
estimated to equal $5.80 per occupied room, in constant
1996 dollars. Telephone revenue is estimated to be 90
percent variable with occupancy and is adjusted to
account for inflation and varying occupancy levels
throughout the projection period.
Villa Rentals includes all revenue associated with the
operation of Four Peaks Management Company which
oversees the rental of 51 privately owned Shores
Condominiums located adjacent to the subject property.
These two- and three-bedroom condominiums are rented out
on a daily, weekly, and monthly basis on behalf of the
individual owners. While rental of these condominium
units is not reflected in the subject property's
assessment of occupancy, the hotel may elect to use
vacant units during oversell periods. Villa revenues
represented on the income statement represent a
percentage of shared revenues between the management
company and the condominium owners. Revenue generated by
the rental of these condominium units has remained
relatively stable over the last few years. We estimate
that revenue in this category, in a representative year,
will equal approximately $1,650,000 in constant 1996
dollars. Villa Rental revenue is estimated to be ten
percent variable with occupancy and is adjusted to
account for inflation throughout the projection period.
Rental and Other Income, Net includes all miscellaneous
income (net of expenses) including interest income,
concierge commissions, photo commission, and other
miscellaneous items. This category also includes rental
income from the rental of the lobby gift shop, in-room
movies, meeting room rentals, vending machine sales, and
guest valet sales. On the basis of our analysis of
historical leases and miscellaneous revenue, we estimate
that rental and other income, net of expenses, will be
$5.80 per occupied room in a representative year, in
constant 1996 dollars. Revenue in this category is
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Regal McCormick Ranch Page 101
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assumed to be 70 percent variable with occupancy and is
adjusted to account for inflation and varying occupancy
levels throughout the projection period.
Departmental Expenses
Rooms Departmental Expense includes salaries and wages
for the front desk, housekeeping, reservations, bell
staff and laundry, plus fringe benefits. Other operating
expenses in the rooms department include linen, cleaning
supplies, recreation and health club, guest supplies,
uniforms, reservations expenses, security, equipment
leases, and travel agent commissions.
Rooms department expense is estimated based upon the
historical rooms departmental expenditures at the
subject hotel, comparisons to other similar properties,
and our estimates of occupancy and average rate over the
estimation period. We estimate that rooms departmental
expenditures will equal 19.5 percent of departmental
sales, in a representative year. Expenses are estimated
to be 55 percent variable with occupancy and are
adjusted to account for inflation and occupancy levels
throughout the projection period.
Food and Beverage Expense includes the cost of goods
sold (food and beverages), labor and related benefits,
and other operating expenses. Labor costs include
departmental management, cooks and kitchen personnel,
service staff, banquet staff, and bartenders. Other
operating expenses include china, glass, silver, linens,
restaurant and kitchen supplies, menus and printing, and
special promotions. Labor costs are analyzed on a fixed
versus variable basis, as are other operating costs. The
cost of goods sold was considered completely variable as
a ratio to sales.
Food and beverage expense is estimated to be 67.5
percent of combined food and beverage revenue in a
representative year. Food and beverage expenditures are
estimated to be 55 percent variable with occupancy and
are adjusted to account for inflation and occupancy
levels throughout the projection period.
<PAGE>
Regal McCormick Ranch Page 102
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Telephone Expenses are estimated based upon an analysis
of historical operating results at the subject hotel and
an analysis of the expenses of comparable hotels. We
estimate that telephone expenditures will equal
approximately 50 percent of departmental revenue in a
representative year. Telephone expenses are estimated to
be 50 percent variable with occupancy and are adjusted
to account for inflation and occupancy levels throughout
the projection period.
Villa Rentals includes all expenses associated with the
operation and rental of the Shores Condominiums,
including payroll and related expenses for general
maintenance and housekeeping. Other expenses include
operating supplies and equipment, laundry, and
advertising and marketing. We assume that departmental
expenditures in this category will equal approximately
82 percent of revenue in a representative year. Expenses
are assumed to be 10 percent variable with occupancy and
are adjusted to account for inflation and occupancy
levels throughout the projection period.
Undistributed Operating Expenses
Administrative and General Expense includes payroll and
related expenses for the general manager, personnel and
training, clerical staff, controller and accounting
staff. Other administrative and general (A&G) expenses
include office supplies, computer services, accounting
and legal fees, travel expenses and liability insurance.
We reflected this expense under fixed costs. Credit card
commissions were classified as an A&G expense, and are
directly variable with sales.
A&G expenses are estimated based upon actual operating
results of comparable hotels and historical expenses
recorded by the hotel. We estimate that A&G expenses
will equal approximately 8.5 percent of total sales, or
$6,370 per available room, in a representative year, in
constant 1996 dollars. Estimates are estimated to be 80
percent fixed and are adjusted to account for inflation
and occupancy levels throughout the projection period.
<PAGE>
Regal McCormick Ranch Page 103
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Marketing Expense includes payroll and related expenses
for the sales and marketing staff, direct sales
expenses, advertising and promotion and travel expense
for the sales staff. Marketing expenses are estimated
based upon actual operating results of comparable hotels
and historical expenses recorded by the hotel. We
estimate that marketing expenditures will equal
approximately 6.8 percent of total sales or $5,100 per
available room, in a representative year in constant
1996 dollars. Estimates are estimated to be 85 percent
fixed and are adjusted to account for inflation and
occupancy levels throughout the projection period.
Management Fee Expense has been estimated to be four
percent of gross revenue on the basis of the management
agreement currently in existence.
Franchise Fee Expense has been estimated to be three
percent of gross revenues on the basis of the franchise
agreement currently in existence.
Energy Costs includes the expenditure for electricity,
fuel, water, waste removal and related operating
supplies. On the basis of historical energy costs at the
hotel and the actual energy expenses recorded by
comparable hotels, we assume that the energy expense
will equal $2,600 per room, in a representative year, in
constant 1996 dollars. Energy expenditures are estimated
to be 90 percent fixed and are adjusted to account for
inflation and occupancy levels throughout the projection
period.
Property Operations and Maintenance Expense includes
payroll and related expenses, as well as other expenses
necessary for painting, decorating, and repairs of the
building, grounds and equipment. This expense is
estimated based upon historical property operations and
maintenance expenses at the subject hotel and actual
expenses at comparable hotels. On the basis of
historical maintenance costs at the hotel and on
expenses reported by comparable hotels, we estimate that
the maintenance expense will equal $2,500 per room in a
representative year, in constant 1996 dollars. Property,
operations and maintenance expenditures are estimated to
<PAGE>
Regal McCormick Ranch Page 104
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be 90 percent fixed and are adjusted to account for
inflation and occupancy levels throughout the projection
period.
Fixed Charges
Property Taxes are estimated based upon the current
property tax assessment and tax bill for 1994 and 1995.
A more detailed analysis of historical and current
property taxes is presented earlier in this report.
Ground Rent is calculated according the terms set forth
in the lease agreement which requires a minimum rental
payment of $90,000 annually, payable in four quarterly
installments. The Lessee is also responsible to pay the
Lessor a percentage rent equal to the greater of eight
percent of the gross room sales or four percent of the
total sales (excluding telephone, Villa, Credit Card and
Travel Agency revenues). The $90,000 represents a
minimum rental payment and is included as a part of the
percentage rental payment.
Insurance on building and contents against damage was
estimated based upon the historical expenses incurred at
the subject hotel. We estimate that insurance costs will
equal $200 per available room, in constant 1996 dollars.
Expenses are adjusted to account for inflation
throughout the projection period.
Equipment Rental includes rental of computer equipment,
copy machines, fax machines, and other miscellaneous
operating equipment and is based upon historical
expenses at the property. We estimate that equipment
rental costs will equal $375 per room, in constant 1996
dollars. Expenses are adjusted to account for inflation
throughout the projection period.
Reserve for Replacement provides a fund for the
replacement of furniture, fixtures and equipment. We
assume that the reserve for replacement will equal four
percent of total revenue throughout the projection
period, consistent with industry practice.
<PAGE>
Regal McCormick Ranch Page 105
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Capital Expenditures - We have estimated the capital
expenditures required to renovate the property. These
capital expenditures are assumed as a deduction from
operating income. A more detailed analysis of the
capital expenditures assumed is presented in section B.1
(Description and Analysis of the Property) of this
report.
Income Before Debt Service
Estimated operating results for the subject property to the level
of profit before debt service, income taxes, depreciation and
other capital costs, are presented on the following pages.
<PAGE>
REGAL MCCORMICK RANCH
Statement of Estimated
Income and Expenses
1997
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 125
Available Rooms (Annually) 45,625
Occupancy Percentage 79%
Occupied Rooms 36,200
Average Room Rate $127.00
REVENUES
Rooms $4,597,400 46.5% $36,779 $127.00
Food 2,545,600 25.7% 20,365 70.32
Beverage 599,000 6.1% 4,792 16.55
Telephone 217,300 2.2% 1,738 6.00
Villa Rentals (1) 1,716,800 17.4% 13,734 47.43
Rentals and Other
Income (Net) (2) 217,100 2.2% 1,737 6.00
----------- ----------- ----------- -----------
Total Revenues $9,893,200 100.0% $79,146 $273.29
DEPARTMENTAL EXPENSES
Rooms $867,700 18.9% $6,942 $23.97
Food & Beverage 2,120,300 67.4% 16,962 58.57
Telephone 108,500 49.9% 868 3.00
Villa Rentals (1) 1,407,800 82.0% 11,262 38.89
----------- ----------- ----------- -----------
Total Departmental
Expenses $4,504,300 45.5% $36,034 $124.43
TOTAL DEPARTMENTAL INCOME $5,388,900 54.5% $43,111 $148.86
UNDISTRIBUTED OPERATING
EXPENSES
Administrative & General $827,100 8.4% $6,617 $22.85
Sales and Marketing 661,500 6.7% 5,292 18.27
Management Fees 395,700 4.0% 3,166 10.93
Franchise Fees 296,800 3.0% 2,374 8.20
Energy 336,500 3.4% 2,692 9.30
Property Operations
& Maintenance 323,600 3.3% 2,589 8.94
----------- ----------- ----------- -----------
Total Undistributed
Operating Expenses $2,841,200 28.7% $22,730 $78.49
INCOME BEFORE FIXED CHARGES $2,547,700 25.8% 20,382 70.38
FIXED CHARGES
Property Taxes $164,300 1.7% $1,314 $4.54
Personal Property Taxes 23,100 0.2% 184 0.64
Insurance 26,500 0.3% 212 0.73
Equipment Rent (3) 48,500 0.5% 388 1.34
Ground Rent (4) 367,800 3.7% 2,942 10.16
----------- ----------- ----------- -----------
Total Fixed Charges $630,200 6.4% $5,042 $17.41
INCOME BEFORE RESERVES $1,917,500 19.4% $15,340 $52.97
Reserve for Replacement
of FF&E $395,700 4.0% $3,166 10.93
Capital Expenditures 250,000 2.5% 2,000 6.91
----------- ----------- ----------- -----------
Total Reserves
and Capital Exp $645,700 6.5% $5,166 $17.84
INCOME BEFORE DEBT SERVICE $1,271,800 12.9% $10,174 $35.13
=========== =========== =========== ===========
REGAL MCCORMICK RANCH
Statement of Estimated
Income and Expenses
1998
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 125
Available Rooms (Annually) 45,625
Occupancy Percentage 78%
Occupied Rooms 35,500
Average Room Rate $133.50
REVENUES
Rooms $4,739,300 46.6% $37,914 $133.50
Food 2,593,900 25.5% 20,751 73.07
Beverage 610,300 6.0% 4,882 17.19
Telephone 221,000 2.2% 1,768 6.23
Villa Rentals (1) 1,773,400 17.5% 14,187 49.95
Rentals and Other
Income (Net) (2) 221,600 2.2% 1,773 6.24
----------- ----------- ----------- -----------
Total Revenues $10,159,500 100.0% $81,276 $286.18
DEPARTMENTAL EXPENSES
Rooms $888,500 18.7% $7,108 $25.03
Food & Beverage 2,171,100 67.8% 17,369 61.16
Telephone 111,200 50.3% 890 3.13
Villa Rentals (1) 1,454,200 82.0% 11,634 40.96
----------- ----------- ----------- -----------
Total Departmental
Expenses $4,625,000 45.5% $37,000 $130.28
TOTAL DEPARTMENTAL INCOME $5,534,500 54.5% $44,276 $155.90
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General $852,700 8.4% $6,822 $24.02
Sales and Marketing 682,600 6.7% 5,461 19.23
Management Fees 406,400 4.0% 3,251 11.45
Franchise Fees 304,800 3.0% 2,438 8.59
Energy 347,600 3.4% 2,781 9.79
Property Operations
& Maintenance 334,300 3.3% 2,674 9.42
----------- ----------- ----------- -----------
Total Undistributed
Operating Expenses $2,928,400 28.8% $23,427 $82.49
INCOME BEFORE
FIXED CHARGES $2,606,100 25.7% $20,849 73.41
FIXED CHARGES
Property Taxes $170,100 1.7% $1,360 $4.79
Personal Property Taxes 23,900 0.2% 191 0.67
Insurance 27,500 0.3% 220 0.77
Equipment Rent (3) 50,200 0.5% 402 1.41
Ground Rent (4) 379,100 3.7% 3,033 10.68
----------- ----------- ----------- -----------
Total Fixed Charges $650,800 6.4% $5,206 $18.33
INCOME BEFORE RESERVES $1,955,300 19.2% $15,642 $55.08
Reserve for Replacement
of FF&E $406,400 4.0% $3,251 11.45
Capital Expenditures 250,000 2.5% 2,000 7.04
----------- ----------- ----------- -----------
Total Reserves
and Capital Exp $656,400 6.5% $5,251 $18.49
INCOME BEFORE
DEBT SERVICE $1,298,900 12.8% $10,391 $36.59
=========== =========== =========== ===========
REGAL MCCORMICK RANCH
Statement of Estimated
Income and Expenses
1999
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 125
Available Rooms (Annually) 45,625
Occupancy Percentage 75%
Occupied Rooms 34,400
Average Room Rate $138.50
REVENUES
Rooms $4,764,400 46.4% $38,115 $138.50
Food 2,618,300 25.5% 20,946 76.11
Beverage 616,100 6.0% 4,929 17.91
Telephone 222,300 2.2% 1,778 6.46
Villa Rentals (1) 1,829,900 17.8% 14,639 53.19
Rentals and Other
Income (Net) (2) 224,400 2.2% 1,795 6.52
----------- ----------- ----------- -----------
Total Revenues $10,275,400 100.0% $82,203 $298.70
DEPARTMENTAL EXPENSES
Rooms $904,100 19.0% $7,233 $26.28
Food & Beverage 2,209,000 68.3% 17,672 64.22
Telephone 113,300 51.0% 906 3.29
Villa Rentals (1) 1,500,500 82.0% 12,004 43.62
----------- ----------- ----------- -----------
Total Departmental
Expenses $4,726,900 46.0% $37,815 $137.41
TOTAL DEPARTMENTAL INCOME $5,548,500 54.0% $44,388 $161.29
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General $877,100 8.5% $7,017 $25.50
Sales and Marketing 703,300 6.8% 5,626 20.44
Management Fees 411,000 4.0% 3,288 11.95
Franchise Fees 308,300 3.0% 2,466 8.96
Energy 358,700 3.5% 2,870 10.43
Property Operations
& Maintenance 344,900 3.4% 2,759 10.03
----------- ----------- ----------- -----------
Total Undistributed
Operating Expenses $3,003,300 29.2% $24,026 $87.31
INCOME BEFORE
FIXED CHARGES $2,545,200 24.8% $20,362 73.99
FIXED CHARGES
Property Taxes $176,000 1.7% $1,408 $5.12
Personal Property
Taxes 24,700 0.2% 198 0.72
Insurance 28,400 0.3% 227 0.83
Equipment Rent (3) 52,000 0.5% 416 1.51
Ground Rent (4) 381,200 3.7% 3,049 11.08
----------- ----------- ----------- -----------
Total Fixed Charges $662,300 6.4% $5,298 $19.25
INCOME BEFORE RESERVES $1,882,900 18.3% $15,063 $54.74
Reserve for
Replacement of FF&E $411,000 4.0% $3,288 $11.95
Capital Expenditures 0 0.0% 0 0.00
----------- ----------- ----------- -----------
Total Reserves and
Capital Exp $411,000 4.0% $3,288 $11.95
INCOME BEFORE DEBT SERVICE $1,471,900 14.3% $11,775 $42.79
=========== =========== =========== ===========
Notes:
(1) Represents percentage of revenue received and associated
expenses for rental of privately owned condominiums located
adjacent to hotel property.
(2) Includes A V rentals, meeting room rentals, lease payments
from gift shop operator, in-room movies etc.
(3) Includes rental payments for use of phone switch, copiers,
computer system, pagers, etc.
(4) Ground lease payments represent the greater of 8% of rooms
revenue or 4% of total sales less telephone, Villa, Credit
Card, and Travel Agency Revenue.
<PAGE>
REGAL MCCORMICK RANCH
Statement of Estimated
Income and Expenses
2000
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 125
Available Rooms (Annually) 45,625
Occupancy Percentage 77%
Occupied Rooms 35,000
Average Room Rate $143.00
REVENUES
Rooms $5,005,000 46.5% $40,040 $143.00
Food 2,747,400 25.5% 21,979 78.50
Beverage 646,400 6.0% 5,171 18.47
Telephone 233,700 2.2% 1,870 6.68
Villa Rentals (1) 1,897,100 17.6% 15,177 54.20
Rentals and Other
Income (Net) (2) 235,100 2.2% 1,881 6.72
----------- ----------- ----------- -----------
Total Revenues $10,764,700 100.0% $86,118 $307.56
DEPARTMENTAL EXPENSES
Rooms $944,500 18.9% $7,556 $26.99
Food & Beverage 2,307,800 68.0% 18,462 65.94
Telephone 118,300 50.6% 946 3.38
Villa Rentals (1) 1,555,600 82.0% 12,445 44.45
----------- ----------- ----------- -----------
Total Departmental
Expenses $4,926,200 45.8% $39,410 $140.75
TOTAL DEPARTMENTAL
INCOME $5,838,500 54.2% $46,708 $166.81
UNDISTRIBUTED OPERATING
EXPENSES
Administrative & General $910,900 8.5% $7,287 $26.03
Sales and Marketing 729,700 6.8% 5,838 20.85
Management Fees 430,600 4.0% 3,445 12.30
Franchise Fees 322,900 3.0% 2,583 9.23
Energy 371,900 3.5% 2,975 10.63
Property Operations &
Maintenance 357,600 3.3% 2,861 10.22
----------- ----------- ----------- -----------
Total Undistributed
Operating Expenses $3,123,600 29.0% $24,989 $89.25
INCOME BEFORE
FIXED CHARGES $2,714,900 25.2% $21,719 $77.57
FIXED CHARGES
Property Taxes $182,200 1.7% $1,457 $5.21
Personal Property Taxes 25,600 0.2% 205 0.73
Insurance 29,400 0.3% 235 0.84
Equipment Rent (3) 53,800 0.5% 430 1.54
Ground Rent (4) 400,400 3.7% 3,203 11.44
----------- ----------- ----------- -----------
Total Fixed Charges $691,400 6.4% $5,531 $19.75
INCOME BEFORE RESERVES $2,023,500 18.8% $16,188 $57.81
Reserve for Replacement
of FF&E $430,600 4.0% $3,445 $12.30
Capital Expenditures 0 0.0% 0 0.00
----------- ----------- ----------- -----------
Total Reserves and
Capital Exp $430,600 4.0% $3,445 $12.30
INCOME BEFORE DEBT SERVICE $1,592,900 14.8% $12,743 $45.51
=========== =========== =========== ===========
<PAGE>
REGAL MCCORMICK RANCH
Statement of Estimated
Income and Expenses
2001
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 125
Available Rooms (Annually) 45,625
Occupancy Percentage 77%
Occupied Rooms 35,000
Average Room Rate $148.00
REVENUES
Rooms $5,180,000 46.5% $41,440 $148.00
Food 2,843,600 25.5% 22,749 81.25
Beverage 669,100 6.0% 5,353 19.12
Telephone 241,900 2.2% 1,935 6.91
Villa Rentals (1) 1,963,500 17.6% 15,708 56.10
Rentals and Other
Income (Net) (2) 243,300 2.2% 1,946 6.95
----------- ----------- ----------- -----------
Total Revenues $11,141,400 100.0% $89,131 $318.33
DEPARTMENTAL EXPENSES
Rooms $977,600 18.9% $7,821 $27.93
Food & Beverage 2,388,600 68.0% 19,109 68.25
Telephone 122,400 50.6% 979 3.50
Villa Rentals (1) 1,610,100 82.0% 12,881 46.00
----------- ----------- ----------- -----------
Total
Departmental Expenses $5,098,700 45.8% $40,790 $145.68
TOTAL
DEPARTMENTAL INCOME $6,042,700 54.2% $48,342 $172.65
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General $942,800 8.5% $7,542 $26.94
Sales and Marketing 755,300 6.8% 6,042 21.58
Management Fees 445,700 4.0% 3,566 12.73
Franchise Fees 334,200 3.0% 2,674 9.55
Energy 384,900 3.5% 3,079 11.00
Property Operations
& Maintenance 370,100 3.3% 2,961 10.57
----------- ----------- ----------- -----------
Total Undistributed
Operating Expenses $3,233,000 29.0% $25,864 $92.37
INCOME BEFORE
FIXED CHARGES $2,809,700 25.2% $22,478 $80.28
FIXED CHARGES
Property Taxes $188,500 1.7% $1,508 $5.39
Personal Property Taxes 26,500 0.2% 212 0.76
Insurance 30,400 0.3% 243 0.87
Equipment Rent (3) 55,700 0.5% 445 1.59
Ground Rent (4) 414,400 3.7% 3,315 11.84
----------- ----------- ----------- -----------
Total Fixed Charges $715,500 6.4% $5,724 $20.44
INCOME BEFORE RESERVES $2,094,200 18.8% $16,754 $59.83
Reserve for Replacement
of FF&E $445,700 4.0% $3,566 $12.73
Capital Expenditures 0 0.0% 0 0.00
----------- ----------- ----------- -----------
Total Reserves and
Capital Exp $445,700 4.0% $3,566 $12.73
INCOME BEFORE DEBT SERVICE $1,648,500 14.8% $13,188 $47.10
=========== =========== =========== ===========
REGAL MCCORMICK RANCH
Statement of Estimated
Income and Expenses
2002
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 125
Available Rooms (Annually) 45,625
Occupancy Percentage 77%
Occupied Rooms 35,000
Average Room Rate $153.00
REVENUES
Rooms $5,355,000 46.5% $42,840 $153.00
Food 2,943,100 25.5% 23,545 84.09
Beverage 692,500 6.0% 5,540 19.79
Telephone 250,400 2.2% 2,003 7.15
Villa Rentals (1) 2,032,200 17.6% 16,258 58.06
Rentals and Other
Income (Net) (2) 251,800 2.2% 2,014 7.19
----------- ----------- ---------- -----------
Total Revenues $11,525,000 100.0% $92,200 $329.29
DEPARTMENTAL EXPENSES
Rooms $1,011,800 18.9% $8,094 $28.91
Food & Beverage 2,472,200 68.0% 19,778 70.61
Telephone 126,700 50.6% 1,014 3.62
Villa Rentals (1) 1,666,500 82.0% 13,332 47.61
----------- ----------- ----------- -----------
Total Departmental
Expenses $5,277,200 45.8% $42,218 $150.78
TOTAL DEPARTMENTAL INCOME $6,247,800 54.2% $49,982 $178.51
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General $975,800 8.5% $7,806 $27.88
Sales and Marketing 781,700 6.8% 6,254 22.33
Management Fees 461,000 4.0% 3,688 13.17
Franchise Fees 345,800 3.0% 2,766 9.88
Energy 398,400 3.5% 3,187 11.38
Property Operations
& Maintenance 383,000 3.3% 3,064 10.94
----------- ----------- ----------- -----------
Total Undistributed
Operating Expenses $3,345,700 29.0% $26,766 $95.59
INCOME BEFORE
FIXED CHARGES $2,902,100 25.2% $23,217 $82.92
FIXED CHARGES
Property Taxes $195,100 1.7% $1,561 $5.57
Personal Property Taxes 27,400 0.2% 219 0.78
Insurance 31,500 0.3% 252 0.90
Equipment Rent (3) 57,600 0.5% 461 1.65
Ground Rent (4) 428,900 3.7% 3,431 12.25
----------- ----------- ----------- -----------
Total Fixed Charges $740,500 6.4% $5,924 $21.16
INCOME BEFORE RESERVES $2,161,600 18.8% $17,293 $61.76
Reserve for Replacement
of FF&E $461,000 4.0% $3,688 $13.17
Capital Expenditures 0 0.0% 0 0.00
----------- ----------- ----------- -----------
Total Reserves
and Capital Exp $461,000 4.0% $3,688 $13.17
INCOME BEFORE
DEBT SERVICE $1,700,600 14.8% $13,605 $48.59
=========== =========== =========== ===========
Notes:
(1) Represents percentage of revenue received and associated
expenses for rental of privately owned condominiums located
adjacent to hotel property.
(2) Includes A V rentals, meeting room rentals, lease payments
from gift shop operator, in-room movies etc.
(3) Includes rental payments for use of phone switch, copiers,
computer system, pagers, etc.
(4) Ground lease payments represent the greater of 8% of rooms
revenue or 4% of total sales less telephone, Villa, Credit
Card, and Travel Agency Revenue.
<PAGE>
REGAL MCCORMICK RANCH
Statement of Estimated
Income and Expenses
2003
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 125
Available Rooms (Annually) 45,625
Occupancy Percentage 77%
Occupied Rooms 35,000
Average Room Rate $158.50
REVENUES
Rooms $5,547,500 46.5% $44,380 $158.50
Food 3,046,100 25.5% 24,369 87.03
Beverage 716,700 6.0% 5,734 20.48
Telephone 259,200 2.2% 2,074 7.41
Villa Rentals (1) 2,103,300 17.6% 16,826 60.09
Rentals and Other
Income (Net) (2) 260,600 2.2% 2,085 7.45
----------- ----------- ---------- -----------
Total Revenues $11,933,400 100.0% $95,467 $340.95
DEPARTMENTAL
EXPENSES
Rooms $1,047,200 18.9% $8,378 $29.92
Food & Beverage 2,558,700 68.0% 20,470 73.11
Telephone 131,100 50.6% 1,049 3.75
Villa Rentals (1) 1,724,800 82.0% 13,798 49.28
----------- ----------- ----------- -----------
Total Departmental
Expenses $5,461,800 45.8% $43,694 $156.05
TOTAL
DEPARTMENTAL INCOME $6,471,600 54.2% $51,773 $184.90
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General 1,010,000 8.5% $8,080 $28.86
Sales and Marketing 809,100 6.8% 6,473 23.12
Management Fees 477,300 4.0% 3,818 13.64
Franchise Fees 358,000 3.0% 2,864 10.23
Energy 412,300 3.5% 3,298 11.78
Property Operations
& Maintenance 396,400 3.3% 3,171 11.33
----------- ----------- ----------- -----------
Total Undistributed
Operating Expenses $3,463,100 29.0% $27,705 $98.95
INCOME BEFORE
FIXED CHARGES $3,008,500 25.2% $24,068 $85.96
FIXED CHARGES
Property Taxes $202,000 1.7% $1,616 $5.77
Personal
Property Taxes 28,300 0.2% 227 0.81
Insurance 32,600 0.3% 261 0.93
Equipment Rent (3) 59,600 0.5% 477 1.70
Ground Rent (4) 443,900 3.7% 3,551 12.68
----------- ----------- ----------- -----------
Total Fixed Charges $766,400 6.4% $6,131 $21.90
INCOME BEFORE RESERVES $2,242,100 18.8% $17,937 $64.06
Reserve for
Replacement of FF&E $477,300 4.0% $3,818 $13.64
Capital Expenditures 0 0.0% 0 0.00
----------- ----------- ----------- -----------
Total Reserves
and Capital Exp $477,300 4.0% $3,818 $13.64
INCOME BEFORE
DEBT SERVICE $1,764,800 14.8% $14,118 $50.42
=========== =========== =========== ===========
REGAL MCCORMICK RANCH
Statement of Estimated
Income and Expenses
2004
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 125
Available Rooms (Annually) 45,625
Occupancy Percentage 77%
Occupied Rooms 35,000
Average Room Rate $164.00
REVENUES
Rooms $5,740,000 46.5% $45,920 $164.00
Food 3,152,700 25.5% 25,222 90.08
Beverage 741,800 6.0% 5,934 21.19
Telephone 268,300 2.2% 2,146 7.67
Villa Rentals (1) 2,176,900 17.6% 17,415 62.20
Rentals and
Other Income (Net) (2) 269,700 2.2% 2,158 7.71
----------- ----------- ---------- -----------
Total Revenues $12,349,400 100.0% $98,795 $352.84
DEPARTMENTAL EXPENSES
Rooms $1,083,900 18.9% $8,671 $30.97
Food & Beverage 2,648,300 68.0% 21,186 75.67
Telephone 135,700 50.6% 1,086 3.88
Villa Rentals (1) 1,785,200 82.0% 14,282 51.01
----------- ----------- ----------- -----------
Total Departmental
Expenses $5,653,100 45.8% $45,225 $161.52
TOTAL DEPARTMENTAL INCOME $6,696,300 54.2% $53,570 $191.32
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General 1,045,400 8.5% $8,363 $29.87
Sales and Marketing 837,400 6.8% 6,699 23.93
Management Fees 494,000 4.0% 3,952 14.11
Franchise Fees 370,500 3.0% 2,964 10.59
Energy 426,700 3.5% 3,414 12.19
Property Operations
& Maintenance 410,300 3.3% 3,282 11.72
----------- ----------- ----------- -----------
Total Undistributed
Operating Expenses $3,584,300 29.0% $28,674 $102.41
INCOME BEFORE
FIXED CHARGES $3,112,000 25.2% $24,896 $88.91
FIXED CHARGES
Property Taxes $209,000 1.7% $1,672 $5.97
Personal
Property Taxes 29,300 0.2% 235 0.84
Insurance 33,700 0.3% 270 0.96
Equipment Rent (3) 61,700 0.5% 494 1.76
Ground Rent (4) 459,500 3.7% 3,676 13.13
----------- ----------- ----------- -----------
Total Fixed Charges $793,200 6.4% $6,346 $22.66
INCOME BEFORE RESERVES $2,318,800 18.8% $18,550 $66.25
Reserve for
Replacement of FF&E $494,000 4.0% $3,952 $14.11
Capital Expenditures 0 0.0% 0 0.00
----------- ----------- ----------- -----------
Total Reserves
and Capital Exp $494,000 4.0% $3,952 $14.11
INCOME BEFORE
DEBT SERVICE $1,824,800 14.8% $14,598 $52.14
=========== =========== =========== ===========
REGAL MCCORMICK RANCH
Statement of Estimated
Income and Expenses
2005 Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 125
Available Rooms (Annually) 45,625
Occupancy Percentage 77%
Occupied Rooms 35,000
Average Room Rate $170.00
REVENUES
Rooms $5,950,000 46.5% $47,600 $170.00
Food 3,263,000 25.5% 26,104 93.23
Beverage 767,800 6.0% 6,142 21.94
Telephone 277,700 2.2% 2,222 7.93
Villa Rentals (1) 2,253,100 17.6% 18,025 64.37
Rentals and Other
Income (Net) (2) 279,100 2.2% 2,233 7.97
----------- ----------- ---------- -----------
Total Revenues $12,790,700 100.0% $102,326 $365.45
DEPARTMENTAL EXPENSES
Rooms $1,121,800 18.9% $ 8,974 $32.05
Food & Beverage 2,741,000 68.0% 21,928 78.31
Telephone 140,400 50.6% 1,123 4.01
Villa Rentals (1) 1,847,700 82.0% 14,782 52.79
----------- ----------- ----------- -----------
Total Departmental
Expenses $5,850,900 45.7% $46,807 $167.17
TOTAL DEPARTMENTAL
INCOME $6,939,800 54.3% $55,518 $198.28
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General 1,082,000 8.5% $8,656 $30.91
Sales and Marketing 866,700 6.8% 6,934 24.76
Management Fees 511,600 4.0% 4,093 14.62
Franchise Fees 83,700 3.0% 3,070 10.96
Energy 441,700 3.5% 3,533 12.62
Property Operations
& Maintenance 424,700 3.3% 3,397 12.13
----------- ----------- ----------- -----------
Total Undistributed
Operating Expenses $3,710,400 29.0% $29,683 $106.01
INCOME BEFORE
FIXED CHARGES $3,229,400 25.2% $25,835 $92.27
FIXED CHARGES
Property Taxes $216,400 1.7% $1,731 $6.18
Personal Property Taxes 30,400 0.2% 243 0.87
Insurance 34,900 0.3% 279 1.00
Equipment Rent (3) 63,900 0.5% 511 1.83
Ground Rent (4) 475,500 3.7% 3,804 13.59
----------- ----------- ----------- -----------
Total Fixed Charges $821,100 6.4% $6,569 $23.46
INCOME BEFORE RESERVES $2,408,300 18.8% $19,266 $68.81
Reserve for
Replacement of FF&E $511,600 4.0% $4,093 $14.62
Capital Expenditures 0 0.0% 0 0.00
----------- ----------- ----------- -----------
Total Reserves
and Capital Exp $511,600 4.0% $4,093 $14.62
INCOME BEFORE
DEBT SERVICE $1,896,700 14.8% $15,174 $54.19
=========== =========== =========== ===========
Notes:
(1) Represents percentage of revenue received and associated
expenses for rental of privately owned condominiums located
adjacent to hotel property.
(2) Includes A V rentals, meeting room rentals, lease payments
from gift shop operator, in-room movies etc.
(3) Includes rental payments for use of phone switch, copiers,
computer system, pagers, etc.
(4) Ground lease payments represent the greater of 8% of rooms
revenue or 4% of total sales less telephone, Villa, Credit
Card, and Travel Agency Revenue.
<PAGE>
REGAL MCCORMICK RANCH
Statement of Estimated
Income and Expenses
2006 Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 125
Available Rooms (Annually) 45,625
Occupancy Percentage 77%
Occupied Rooms 35,000
Average Room Rate $176.00
REVENUES
Rooms $6,160,000 46.5% $49,280 $176.00
Food 3,377,200 25.5% 27,018 96.49
Beverage 794,700 6.0% 6,358 22.71
Telephone 287,400 2.2% 2,299 8.21
Villa Rentals (1) 2,332,000 17.6% 18,656 66.63
Rentals and
Other Income (Net) (2) 288,900 2.2% 2,311 8.25
----------- ----------- ---------- -----------
Total Revenues $13,240,200 100.0% $105,922 $378.29
DEPARTMENTAL
EXPENSES
Rooms $1,161,100 18.8% $ 9,289 $33.17
Food & Beverage 2,836,900 68.0% 22,695 81.05
Telephone 145,300 50.6% 1,162 4.15
Villa Rentals (1) 1,912,400 82.0% 15,299 54.64
----------- ----------- ----------- -----------
Total
Departmental Expenses $6,055,700 45.7% $48,446 $173.02
TOTAL DEPARTMENTAL
INCOME $7,184,500 54.3% $57,476 $205.27
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General 1,119,900 8.5% $8,959 $32.00
Sales and Marketing 897,000 6.8% 7,176 25.63
Management Fees 526,600 4.0% 4,237 15.13
Franchise Fees 397,200 3.0% 3,178 11.35
Energy 457,100 3.5% 3,657 13.06
Property Operations
& Maintenance 439,500 3.3% 3,516 12.56
----------- ----------- ----------- -----------
Total
Undistributed Operating
Expenses $3,840,300 29.0% $30,722 $109.72
INCOME BEFORE
FIXED CHARGES $3,344,200 25.3% $26,754 $95.55
FIXED CHARGES
Property Taxes $223,900 1.7% $1,791 $6.40
Personal
Property Taxes 31,400 0.2% 251 0.90
Insurance 36,100 0.3% 289 1.03
Equipment Rent (3) 66,100 0.5% 529 1.89
Ground Rent (4) 492,200 3.7% 3,937 14.06
----------- ----------- ----------- -----------
Total Fixed Charges $849,700 6.4% $6,798 $24.28
INCOME BEFORE RESERVES $2,494,500 18.8% $19,956 $71.27
Reserve for
Replacement of FF&E $529,600 4.0% $4,237 $15.13
Capital Expenditures 0 0.0% 0 0.00
----------- ----------- ----------- -----------
Total Reserves
and Capital Exp $529,600 4.0% $4,237 $15.13
INCOME BEFORE
DEBT SERVICE $1,964,900 14.8% $15,719 $56.14
=========== =========== =========== ===========
REGAL MCCORMICK RANCH
Statement of Estimated
Income and Expenses
2007 Per
Occupied
Amount Ratio Per Room Room/Day
Number of
Days Open/Year 365
Available Rooms
(Daily) 125
Available Rooms
(Annually) 45,625
Occupancy
Percentage 77%
Occupied Rooms 35,000
Average Room Rate $182.00
REVENUES
Rooms $6,370,000 46.5% $50,960 $182.00
Food 3,495,400 25.5% 27,963 99.87
Beverage 822,500 6.0% 6,580 23.50
Telephone 297,500 2.2% 2,380 8.50
Villa Rentals (1) 2,413,600 17.6% 19,309 68.96
Rentals and Other
Income (Net) (2) 299,000 2.2% 2,392 8.54
----------- ----------- ---------- -----------
Total Revenues $13,698,000 100.0% $109,584 $391.37
DEPARTMENTAL EXPENSES
Rooms $1,201,700 18.9% $ 9,614 $34.33
Food & Beverage 2,936,200 68.0% 23,490 83.89
Telephone 150,400 50.6% 1,203 4.30
Villa Rentals (1) 1,979,300 82.0% 15,834 56.55
----------- ----------- ----------- -----------
Total
Departmental Expenses $6,267,600 45.8% $50,141 $179.07
TOTAL DEPARTMENTAL INCOME $7,430,400 54.2% $59,443 $212.30
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General 1,159,100 8.5% $9,273 $33.12
Sales and Marketing 928,400 6.8% 7,427 26.53
Management Fees 547,900 4.0% 4,383 15.65
Franchise Fees 410,900 3.0% 3,287 11.74
Energy 473,100 3.5% 3,785 13.52
Property Operations
& Maintenance 454,900 3.3% 3,639 13.00
----------- ----------- ----------- -----------
Total
Undistributed Operating
Expenses $3,974,300 29.0% $31,794 $113.55
INCOME BEFORE
FIXED CHARGES $3,456,100 25.2% $27,649 $98.75
FIXED CHARGES
Property Taxes $231,800 1.7% $1,854 $6.62
Personal
Property Taxes 32,500 0.2% 260 0.93
Insurance 37,400 0.3% 299 1.07
Equipment Rent (3) 68,400 0.5% 547 1.95
Ground Rent (4) 509,400 3.7% 4,075 14.55
----------- ----------- ----------- -----------
Total Fixed Charges $879,500 6.4% $7,036 $25.13
INCOME BEFORE RESERVES $2,576,600 18.8% $20,613 $73.62
Reserve for Replacement
of FF&E $547,900 4.0% $4,383 $15.65
Capital Expenditures 0 0.0% 0 0.00
----------- ----------- ----------- -----------
Total Reserves
and Capital Exp $576,900 4.0% $4,383 $15.65
INCOME BEFORE
DEBT SERVICE $2,028,700 14.8% $16,230 $57.96
=========== =========== =========== ===========
Notes:
(1) Represents percentage of revenue received and associated
expenses for rental of privately owned condominiums located
adjacent to hotel property.
(2) Includes A V rentals, meeting room rentals, lease payments
from gift shop operator, in-room movies etc.
(3) Includes rental payments for use of phone switch, copiers,
computer system, pagers, etc.
(4) Ground lease payments represent the greater of 8% of rooms
revenue or 4% of total sales less telephone, Villa, Credit
Card, and Travel Agency Revenue.
<PAGE>
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INVESTMENT CLIMATE OVERVIEW
In establishing valuation parameters to apply to the projected
operating cash flow from the proposed property, we have
researched the current market for hotel investments. Arthur
Andersen conducts a survey of a select group of hotel companies,
investors, developers, investment bankers, and brokers. Our most
recent survey was conducted at the end of the third quarter of
1996.
Our surveys indicate that the investment climate has undergone
significant changes over the last five years. After the economic
recession in the early 1990s, the number of hotel sales
transactions increased significantly between 1993 and 1995. The
price per room of lodging property has increased significantly as
well. In the early 1990s, the primary buyers of hotel assets were
opportunity funds and individual investors lured by the low
prices as a percentage of the replacement cost. New lodging
REITs, established in the early 1990s, also began to invest
heavily into hotel assets. During 1995 and 1996 the larger REITS
(such as Patriot American Hospitality; Starwood Lodging Trust;
FelCor Suite Hotels, Inc.; and HPT) accounted for a large share
of the transactions involving full-service lodging properties.
These organizations must maintain the level of acquisition
achieved in the past and, therefore, have been paying
increasingly higher prices for lodging assets. In addition, many
of the recent REIT acquisitions were completed as part of a
portfolio which, attracted by the opportunity to purchase more
assets in one fell swoop, often resulted in aggressive pricing
parameters.
As the health of the overall U.S. lodging industry has improved,
so has the interest in acquiring lodging assets. The activity of
the REITS, combined with the strategic interests of hotel
companies and the interest of equity investors, has resulted in a
competitive acquisition market.
These changes in the investment market have resulted in a
significant shift in the criteria used to evaluate a potential
transaction. Terminal capitalization and discount rates assumed,
which averaged 11-12 percent and 14-16 percent, respectively in
1991, decreased to an average of 10-11 percent and 12-13 percent,
respectively in early 1996. Investors interviewed in the third
quarter of 1996, however, indicated that investment parameters
may currently be at the "low-point" of this real estate cycle.
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Investors interviewed admitted that although recent acquisitions
have been structured using aggressive investment parameters, they
are likely to re-evaluate the assumptions and investment
parameters used in the near future.
The following table summarizes the results of our investor survey
completed at the end of the Third Quarter 1996.
- --------------------------------------------------------------
Arthur Andersen Hotel Investor Survey - Third Quarter 1996
- --------------------------------------------------------------
Range
-----
Free and Clear Discount Rates 12.0%-15.0%
Terminal Capitalization Rates 10.0%-12.5%
Going-In Capitalization Rates 10.0%-11.0%
Equity Return Req. (leveraged) 20.0%-30.0%
Equity Return Req. (unleveraged) 12.0%-18.0%
Cash on Cash Return Requirements 10.0%-17.5%
- --------------------------------------------------------------
DISCOUNTED CASH FLOW ANALYSIS
The discounted cash flow (DCF) technique converts the projected
stream of benefits, either before or after financing, as
appropriate, into a present value. Once the projection of net
income or cash flow is accomplished, a discount rate and
capitalization rate at reversion must be chosen. The selection of
these rates is necessarily subjective, since investor criteria
for the acquisition of real property is subject to variation, and
no organized property exchange exists.
Discount Rates
A free and clear discount rate is used to discount future
earnings without regard to any leverage or financing. Since there
has been a general lack of hotel financing over the last several
years, most of the larger hotel transactions have involved all
cash purchases. Discount rates (or internal rate-of-return
requirements) typically vary by a number of factors: long-term
investor-return requirements on alternative investments; type and
motivation of investor; property type -- e.g., hotel, apartments,
etc.; and local market area conditions. Our survey of investor
<PAGE>
Regal McCormick Ranch Page 108
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criteria indicated that investors are currently assuming discount
rates that range from 12 to 13 percent. The survey average for
free and clear discount rates was 12.5 percent. After giving full
consideration to these surveys as well as to the type of property
being appraised, its competitiveness in its market place, and
general market conditions, a discount rate of 13 percent, applied
to income before debt service, is judged to be appropriate.
TERMINAL CAPITALIZATION RATES
The "exit" capitalization rate at reversion is used to convert
the projected stream of income beyond the last year of the
projection period into a value at the end of the projection
period. Our investor surveys revealed capitalization rates
ranging from 10.0 to 12.5 percent. The Scottsdale lodging market
has reflected strong growth over the last year and is expected to
reflect continued upside potential in the near term. Our analysis
reflects the upside potential of the market in the estimates of
future cash flow projections and considers the subject hotel's
ability to reflect improved operations as a result of overall
market growth. We have adjusted the terminal capitalization rate
to reflect the fact that the property represents a leasehold
interest. On the basis of this analysis, a terminal
capitalization rate of 11 percent is judged to be appropriate for
the subject hotel.
Conclusion by Discounted Cash Flow Analysis
Application of the discounted cash flow technique to the total
projected net income for the appraised property yields a market
value estimate of the leasehold interest in the subject of
$13,770,000. The table on the following page presents our
discounted cash flow analysis.
<PAGE>
Discounted Cash Flow Analysis
REGAL MCCORMICK RANCH
SCOTTSDALE, ARIZONA
Net Present Value
Income Before Residual Discount Income Before
Year Debt Service Value(1) Factor(2)&(3) Debt Service
- ---- -------------- --------- ------------- ----------------
1997 $1,271,800 0.8850 $1,125,487
1998 1,298,900 0.7831 1,017,229
1999 1,471,900 0.6931 1,020,101
2000 1,592,900 0.6133 976,955
2001 1,648,500 0.5428 894,740
2002 1,700,600 0.4803 816,830
2003 1,764,800 0.4251 750,147
2004 1,824,800 0.3762 686,417
2005 1,896,700 0.3329 631,383
2006 1,964,900 $17,889,445 (4) 0.2946 5,848,859
----------
Value at January 1, 1997: $13,770,000
Value Per Room: $110,160
(1) Income Before Debt Service in the exit year was capitalized
at 11.0 percent.
(2) Income was discounted to net present value
using 13.0 percent discount rate.
(3) Analysis uses end-point discounting.
(4) A sales commission of 3.0 percent was assumed.
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E. RECONCILIATION AND FINAL VALUE ESTIMATE
Valuation of the appraised property has been developed by the
direct sales comparison approach and the income approach. Various
appraisal techniques and methods were utilized in these analyses
and the fee simple value estimates derived by each approach is
summarized as follows:
- --------------------------- -------------------- -----------------------
Amount Price Per Room
Cost Approach N/A N/A
Sales Comparison Approach $13,750,000 $110,000
Income Approach $13,770,000 $110,160
- --------------------------- -------------------- -----------------------
The Cost Approach is most useful when valuing new or nearly new
properties or when appraising special purpose properties. The
reliability of this approach is diminished as buildings and other
forms of improvement increase in age and begin to depreciate. The
resulting loss in value becomes increasingly difficult to
accurately quantify. The cost approach was therefore not utilized
in valuing the subject property.
The Sales Comparison Approach is frequently a good indicator of
value, especially when a sufficient number of relevant
transactions with reliable information on each is available. The
sales comparison approach was used as an indicator of the
reliability of results obtained from the income capitalization
approach.
The Income Capitalization Approach is generally considered the
most applicable method for estimating the value of investment
properties, as it incorporates the economic motivations of buyers
and sellers in the analysis. The reliability of this approach is
enhanced when adequate data are available to assure proper
development of the income, expense, and capitalization rate
analyses.
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Regal McCormick Ranch Page 110
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Based upon the research and analyses performed in the development
of these approaches, and with primary emphasis on the income
approach, it is our opinion that the market value of the
leasehold interest in the appraised property as a going concern,
as of January 1, 1997 is:
--THIRTEEN MILLION SEVEN HUNDRED SEVENTY THOUSAND DOLLARS--
($13,770,000)
In accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP), prepared by The Appraisal Standards
Board of The Appraisal Foundation, it is necessary to identify
and separately value any personal property, fixtures, or
intangible items that are not real property but are included in
the appraisal. Personal property and fixtures in a hotel consists
of a variety of components including bedroom case-goods, bathroom
fixtures, restaurant and kitchen equipment, signage, computers
and other related items. Our physical inspection of the property
indicated that these items were generally in good condition
relative to the age of the property.
We estimate that the replacement cost for the furniture,
fixtures, and equipment at the subject hotel is approximately
$18,000 per room, in constant 1996 dollars. This estimate is
based upon industry averages. Assuming an average useful life of
eight years and an effective age of three years, the value of the
furniture, fixtures, and equipment is estimated to be
approximately $11,250 per room. On the basis of this analysis,
the value of the personal property for the subject hotel is
estimated to be $1,417,500.
Since a hotel's furniture, fixtures, and equipment is such an
integral component of the facility's ability to generate income
and is seldom removed from the property or sold separately, the
value produced by the separation of the personal property
component from the real property is not particularly meaningful.
<PAGE>
Regal McCormick Ranch Page 111
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F. ADDENDA
<PAGE>
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F.1 HOTEL SALES COMPARABLES
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Name: ROYAL PALMS RESORT
Location: Phoenix, Arizona
Grantor (Seller): Royal Palms Inn Corp.
Grantee (Buyer): VLM Partnership (Royal Ventures LLC)
Date of Sale: October 10,1995
Sales Price: $11,500,000 (Adjusted)
Property Rights Conveyed: Fee Simple
Number of Rooms: 120
Year Built: 1949
Price per Room: $95,833
Occupancy (1995): N/A
Average Rate (1995): N/A
Est. Gross Room Revenue (1995): N/A
Est. Net Income Before Debt
Svc. (1995): N/A
Overall Capitalization Rate: N/A
Comments:
This hotel was purchased for $3,500,000 or approximately
$29,167 per room. However, given the relatively poor
condition of this "old-style" resort, at the time of the
purchase, the buyer planned to invest to renovate the
property. As a result, we have adjusted the sales price
upwards by $8 million. The adjusted sales price, including
the renovation, is $11,500,000 or $95,833 per room. After
acquiring the property, the buyer increased the amount of
the planned renovation and is currently in the final stages
of a $15 million renovation which will allow the property
to re-open in January 1997 as a five star, luxury resort.
This property, when completely renovated, will compete with
the subject property for room night demand generated by all
major market segments.
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Regal McCormick Ranch Page 114
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Name: MESA PAVILION HILTON
Location: Mesa, Arizona
Grantor (Seller): Mutual Life Insurance Company
Grantee (Buyer): Sun Quorum Hotels and Resorts
Date of Sale: July 1995
Sales Price: $20,000,000
Property Rights Conveyed: Fee Simple
Number of Rooms: 263
Year Built: 1986
Price per Room: $76,045
Occupancy (1994): 72 percent
Average Rate (1994): $95.00
Est. Gross Room Revenue (1994): $6,566,058
Est. Net Income Before
Debt Svc. (1994): N/A
Overall Capitalization Rate: N/A
Comments:
The Mesa Pavilion Hilton is a full-service corporate hotel
in Mesa, Arizona. Located adjacent to the areas largest
shopping mall and a 9-hole golf course, this first class
suburban hotel contains 263-rooms including 62 suites,
23,000 square-feet of meeting and banquet space, an outdoor
swimming pool, a restaurant, two cocktail lounges, a
fitness center, a beauty salon, and a giftshop.
In August of 1995, the property was purchased by Sun Quorum
Hotels and Resorts from the Mutual Life Insurance Co. for
approximately $16,500,000. According to the buyer, at the
time of the purchase, the hotel was in need of a $3.5
million interior renovation including all guestrooms and
public areas. As a result, we have adjusted the sales price
to $20,000,000, or $76,045 per room.
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Name: RITZ-CARLTON
Location: Phoenix, Arizona
Grantor (Seller): Aldrich Eastman Waltch
Grantee (Buyer): Pivotal-Simon Group
Date of Sale: May 1996
Sales Price: $37,000,000
Property Rights Conveyed: Fee Simple
Number of Rooms: 281
Year Built: 1988
Price per Room: $131,673
Occupancy (1995): 78 percent
Average Rate (1995): $140.00
Est. Gross Room Revenue (1995): $11,200,098
Est. Net Income Before Debt
Svc. (1995): $3,000,000
Overall Capitalization Rate: 8%
Comments:
The Ritz-Carlton is a luxury, commercial hotel located
within the Camelback Esplanade complex in the center of the
Camelback business and retail district. This 281-room
property comprises more than 18,000 square-feet of meeting
space, an outdoor swimming pool, a small fitness center,
two restaurants and a lobby lounge, and a business center.
The sales price paid was for the hotel only, and was not
calculated as part of a purchase price allocation.
In May of 1996, Aldrich Eastman Watch (AEW) sold this
property to the Pivotal Group and investment advisor
William E. Simon & Sons Realty for a total price of
$37,000,000 or $132,000 per room. According to sources
close to the deal, the $37 million spent to acquire the
Ritz-Carlton represents the largest acquisition price for a
single property in the Phoenix area in 1996.
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Name: HILTON RESORT AND SPA
Location: Scottsdale, Arizona
Grantor (Seller): Trammell Crow Company
Grantee (Buyer): Merv Griffin Group
Date of Sale: December 1994
Sales Price: $14,000,000
Property Rights Conveyed: Leasehold
Number of Rooms: 242
Year Built: N/A
Price per Room: $57,851
Occupancy (1993): 74.2 percent
Average Rate (1993): $81.83
Est. Gross Room Revenue (1993): $5,363,208
Est. Net Operating Income (1993): N/A
Overall Capitalization Rate: N/A
Comments:
Present ownership acquired the property in December 1994
and at the time of the purchase had planned to invest $5
million into a complete renovation. The renovation was
planned to include soft goods in the guest rooms,
meeting spaces and public areas as well as upgrade to
the resort's exterior facade. The accommodations at the
resort consist of 187 rooms and 45 villas. Each villa is
approximately 1,400 square feet and includes two
bedrooms. The resort offers approximately 14,000 square
feet of banquet and meeting space.
This property is located approximately two miles south
of the subject property and competes directly with the
subject property for room night demand generated by all
major market segments. While this property has the
benefit of the Hilton brand name, extensive meeting and
banquet facilities, and suite accommodations, the
property is poor shape. This has had a negative impact
on the property's ability to capture its fair share room
night demand. It is expected that following the
renovation, this property will be better able to compete
with the subject property for room night demand
generated by the leisure individual traveler market
segment.
<PAGE>
Regal McCormick Ranch Page 117
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F.2 SUBJECT PROPERTY PHOTOGRAPHS
<PAGE>
Regal McCormick Ranch Page 100
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Subject Property
Main Lobby of Subject Property
<PAGE>
Regal McCormick Ranch Page 119
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Subject Property Swimming Pool and Patio
New Outdoor Pavilion at Subject Property
<PAGE>
Regal McCormick Ranch Page 120
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Typical Guestroom at Subject Property
Model Guestroom Following Renovation
<PAGE>
Regal McCormick Ranch Page 121
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F.3 COMPETITIVE HOTEL PHOTOGRAPHS
<PAGE>
Regal McCormick Ranch Page 122
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Scottsdale Plaza Resort
Hilton Resort and Spa
<PAGE>
Regal McCormick Ranch Page 123
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Red Lion La Posada Resort
Doubletree Paradise Valley Resort
<PAGE>
Regal McCormick Ranch Page 124
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Radisson Resort Scottsdale
Renaissance Cottonwood Resort
<PAGE>
Regal McCormick Ranch Page 125
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F.4 PROPERTY LEGAL DESCRIPTION
<PAGE>
PARCEL NO. 1:
- ------------
That portion of the West half of Section 2, Township 2 North,
Range 4 East of the Gila and Salt River Base and Meridian,
Maricopa County, Arizona, described as follows:
COMMENCING at the West quarter corner of said Section 2,
thence North 01[degree] 44' 00" West along the West line of
the Northwest quarter of said Section 2, 1354.77 feet;
thence South 77[degree] 53' 35" East 75.18 feet to the TRUE
POINT OF BEGINNING;
thence South 77[degree] 53' 35" East, 206.63 feet; thence
South 59[degree] 41' 30" East, 164.48 feet; thence South
34[degree] 07' 00" East, 187.22 feet; thence South
33[degree] 24' 30" West, 112.61 feet; thence South
06[degree] 46' 00" East, 101.71 feet; thence South
61[degree] 46' 00" East, 169.11 feet; thence South
39[degree] 22' 30" East, 135.55 feet; thence South
88[degree] 16' 00" West, 347.72 feet; thence South
01[degree] 44' 00" East, 15.00 feet; thence South
88[degree] 16' 00" West, 20.00 feet; thence South
01[degree] 44' 00" East, 77.33 feet; thence North
88[degree] 16' 00" East, 35.00 feet; thence South
27[degree] 45' 44" East, 31.90 feet; thence South
01[degree] 44' 00" East, 260.00 feet; thence South
88[degree] 16' 00" West, 120.00 feet; thence North
01[degree] 44' 00" West, 120.00 feet; thence South
88[degree] 16' 00" West, 175.00 feet; thence North
01[degree] 44' 00" West, 941.00 feet to the TRUE
POINT OF BEGINNING.
EXCEPT all subterranean groundwaters contained within,
underlying and which may be produced in said lands as reserved in
Deed recorded in Docket 10454, page 1036, records of Maricopa
County, Arizona.
PARCEL No. 2:
- ------------
A non-exclusive easement for use of Entry Lake for recreational
purposes and a non-exclusive easement for access in, upon and
over any land lying between the Entry Lake and Parcel No. 1, as
created by instrument recorded in Docket 10454, paGe 1042,
records of Maricopa County, Arizona.
<PAGE>
Regal McCormick Ranch Page 127
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F.5 LEASE (Ground)
<PAGE>
LEASE NO. 4102
THIS LEASE, made as of this 31st day of August, 1978,
by and between Fred E. Trotter, H. C Eichelberger and Wade H.
Mcvay, Trustees Under the Will and of the Estate of James
Campbell, Deceased, in their fiduciary and not in their
individual capacities, whose place of business and post office
address is Suite 500, 828 Fort Street Mall, Honolulu, Hawaii,
hereinafter called the "Lessor", and ARI, INC., an Ohio
corporation, whose address is 29425 Chagrin Boulevard, Cleveland,
Ohio 44122, hereinafter called the "Lessee".
W I T N E S S E T H
ARTICLE I
---------
Demise
------
1. Premises. The Lessor, in consideration of the rent
--------
hereinafter reserved and of the covenants herein contained and on
the part of the Lessee to be observed and performed, hereby
demises and leases unto the Lessee, and the Lessee hereby accepts
and rents the parcel of land described on Exhibit A attached
hereto, hereinafter sometimes called the "premises", subject to
the exceptions in Exhibit "B" attached hereto.
2. Term. The term of this lease for and during which the
----
Lessee shall have and hold the premises hereinabove described,
together with the rights, easements, privileges and appurtenances
thereunto belonging or appertaining, subject to the covenants and
conditions hereinafter contained, shall be for a term of
fifty-five (55) years commencing on September 1, 1978.
3. Options to Extend. Lessee shall have the right to
-----------------
extend the terms of this leas for two
separate and successive 10-year periods if (a) at the time of
exercise of the options an event of default as defined in Article
VIII shall not have occurred and (b) written notice of the
extension is given the Lessor by the Lessee at any time prior to
the last year of the term of the lease as to the first 10-year
extension, and at any time during the original term of the lease
or prior to the last year of the first extension period as to the
second 10-year extension. Nothing herein shall be construed to
prohibit Lessee from exercising the options for the first and
second extensions simultaneously. The parties hereto intend that
the options to extend are part of the Lessee's estate for all
purposes and, for example, shall not be considered an executory
contract. This expression of intent is a prime inducement for the
execution of this Lease by Lessee.
47
<PAGE>
ARTICLE II
----------
Rental
------
1. Rent. Lessee will pay to Lessor net, over and above all
----
taxes, assessments and other charges payable
hereunder by Lessee, rent, consisting of base rent and percentage
rent, as follows:
(a) Base Rent. An annual base rent of Ninety Thousand
---------
Dollars ($90,000.00) payable without any
setoff or deduction whatever and without prior demand in
equal quarterly installments, each in advance, on the first
days of September, December, March, and June, commencing
September 1, 1978.
(b) Percentage Rent.
---------------
(i) In addition to the base rent, Lessee agrees
to pay to Lessor during the term of the lease or any
extension thereof, percentage rent equal to 8% of the gross
room rentals or 4% of total sales derived by Lessee from
operations on the premises, whichever amount is greater,
reduced by the amount of base rent paid for the period for
which the percentage rent is being computed; provided,
however, that the foregoing percentage of gross room
rentals and total sales is subject to adjustment in the
event that the Lessee shall refinance a loan or obtain
additional financing and shall require the Lessor to
execute a Fee Mortgage, as defined in and required by
Article VI-A hereof, as follows:
(aa) At the time of refinancing or additional
financing, as above defined, the percentage of gross room
rentals arid total sales then in effect is subject to
revision in the following circumstances: If the principal
balance of the new mortgage loan exceeds the principal
balance of the prior mortgage loan, that excess will be
multiplied by 35%. The product of that multiplication will
then be divided by the average annual gross room rentals,
and total sales, for the previous three lease years and the
results will be multiplied by the interest rate of the new
loan. The results of the foregoing steps will then be added
to the percentage of gross room rentals and total sales to
which the Lessor has been entitled in the computation of
percentage rent and the sum will be the new percentage of
gross room rentals and total sales to be used in computing
percentage rent.
(bb) The Lessor's revised percentage
rent will remain in effect unless and until the
Lessee refinances or obtains additional financing again on
a Fee
48
<PAGE>
Mortgage basis, in which event the same procedure will
apply for recalculating the percentage of gross room
rentals and total sales to be used in computing percentage
rent.
The following example is intended to clarify the intent and
affect of the agreement:
(cc) Assume that Lessee has obtained a permanent
Fee Mortgage in the amount of $7.5 million.
(dd) Assume that ten years after completion of
the hotel, Lessee refinances by a Fee Mortgage in the
amount of $9,000,000, paying off the original loan, the
principal balance of which was $6.7 million, and that the
interest rate of the new loan is 9.5%.
(ee) Assume that during the previous three lease
years gross room rentals were $3.9 million, $4.1 million
and $4.3 million, respectively; total sales were $9.4
million, $9.0 million, and $8.2 million, respectively.
Based on the foregoing assumptions, the percentage would be
revised as follows:
(ff) Loan Proceeds:
$9.0 million
6.7 million
---
$2.3 million
(gg) Average annual gross room rentals and total
sales:
Gross Room Rentals Total Sales
------------------ -----------
$ 3.9 million $9.4 million
4.1 million 9.0 million
4.3 million 8.2 million
---- ----
$12.3 million $26.6 million
divided by divided by
3 = $4.1 million 3 = $8.9 million
(hh) Incremental percentage of gross room rentals
or total sales payable to Lessor as percentage rent:
Gross Room Rentals
------------------
49
<PAGE>
$2,300,000 x .35 = $805,000
$805,000 x .095 divided by
$4,100,000 = .0187
Total Sales
-----------
$2,300,000 x .35 = $805,000
$805,000 x .095 divided by
$8,900,000 = .0086
(ii) Lessor's revised percentage of gross room
rentals and total sales equals:
Gross Room Rentals
------------------
8.00 = Original and Existing Percentage of Gross Room Rentals
1.87 = Incremental Percentage
----
9.87 = Revised Percentage of Gross Room Rentals
Total Sales
-----------
4.00 = Original and Existing Percentage of Total Sales
.86 = Incremental Percentage
----
4.86 = Revised Percentage of Total Sales
Under the example the percentage rent, from the date of
such refinancing or additional financing until new
refinancing or additional financing on a Fee Mortgage basis
is obtained by the Lessee, would be 9.87% of the gross room
rentals or 4.86% of the total sales, reduced by the amount
of base rent previously paid for the period for which the
percentage rent is being computed.
(ii) The term "gross room rentals" as used herein
shall mean all gross monies, rents, receipts, proceeds and
compensation of every kind whatsoever produced by the use
or occupancy of all or any part of the premises, and all
improvements thereon now or hereafter existing, by the
public or others for lodging, dwelling or residential
purposes, all without deduction of any expenses whatsoever.
In no event shall total "complimentary" room use during any
one year exceed 3% of the total room-nights available for
guest use during such year. Lessee shall maintain accurate
records of "complimentary" room use and shall provide
Lessor with copies thereof or access thereto at Lessor's
request. The term "total sales" as used herein means the
total amounts received by Lessee from all income producing
use being made of the premises. However, total sales shall
exclude revenue derived from the telephone department,
50
<PAGE>
condominium rentals; credit card company, travel agent, and
tour operator commissions; and local, state, and federal
taxes which are collected as a percentage of sales.
(iii) Lessee shall deliver to Lessor:
(A) Within 30 days after the end of each
quarter of a calendar year:
(1) A statement in writing signed by
the principal accounting officer of the Lessee setting
forth the gross room rentals and total sales for the
previous quarter derived by Lessee, and
(2) A check for the amount of the
excess, if any, of the percentage rent for such quarter
over the base rent paid for such quarter; and
(B) Within 120 days after the expiration of
each calendar year during the term:
(1) A statement in writing, duly sworn
to by its chief accounting officer and prepared by an
independent certified public accountant, setting forth the
gross room rentals and total sales during such calendar
year derived by Lessee, and accompanied by a payment to
Lessor of the excess of percentage rent, if any, payable
for such period as determined by such statement over the
percentage rent for such period actually paid by Lessee,
and
(2) To the extent required by the
holder of any permanent loan on the premises, annual
financial statements, certified by an independent certified
public accountant of the Lessee for its fiscal year most
recently ended.
(iv) Lessee shall keep at the premises accurate
books and records of gross room rentals and total sales,
all in accordance with the Lessee's regular system of
accounting. For a period not to exceed three years after
the receipt of the statement required in subparagraph 1(b)
(iii)(B)(l) and on reasonable notice, at reasonable times
and with the opportunity to have a representative present,
Lessee shall permit Lessor or its agents to have access to
and to inspect its books and records containing information
pertaining to said gross room rentals and total sales for
the purpose of examination and verification, including any
tax returns of the Lessee. The acceptance and retention by
Lessor of the yearly statements or any of them and the
acceptance and retention by Lessor of payments of
percentage rent, if any, accompanying such yearly
statements, shall not preclude Lessor from subsequently
questioning such yearly statements or any of them nor
preclude Lessor from employing independent accountants to
audit such yearly statements or any of
51
<PAGE>
them, provided that such questioning or audit must occur
within the three-year period hereinabove mentioned in this
subparagraph.
(v) Lessee shall provide in any management
agreement for the furnishing of such statements and reports
by such manager as will allow Lessee to meet reporting
requirements to the Lessor as described herein.
(vi) If, upon an audit by independent auditors
selected by Lessor of the books and records of Lessee or
its manager, a statement dealing with percentage rent is
found to be incorrect to the extent of more than 2% of the
amount reported, Lessee shall pay for such audit. If such
audit shall show a deficiency for the period covered, the
amount thereof shall be paid promptly by Lessee, together
with interest at the rate specified herein for overdue
rent. If such audit shall show rent to be overpaid, the
excess shall be applied on any amounts then due to Lessor
by Lessee and the balance, if any, shall be refunded to
Lessee.
(vii) At Lessee's option, exercisable only during
the first twelve months of the lease term, Lessee may
adjust the end of the lease year (and the quarters thereof)
on which percentage rent is reported from the end of a
calendar year as now required to the end of a fiscal year
coinciding with Lessee's fiscal year, regardless of whether
the first such period has less than twelve full calendar
months. Percentage rent for a period shorter than twelve
full calendar months at the beginning and the end of the
lease term shall be ratably computed.
(c) Overdue Rent. All overdue rent shall bear interest at
------------
the rate specified in paragraph 7 of Article XII.
ARTICLE III
-----------
Lessor's Covenants
------------------
The Lessor hereby represents, warrants and covenants with
the Lessee as follows:
1. Quiet Enjoyment. Upon payment by the Lessee of the rent
---------------
as aforesaid and upon observance and performance
of the covenants and conditions by the Lessee hereinafter
contained, the Lessee shall peaceably hold and enjoy said
premises for the term hereby demised.
2. Authority. Neither the execution of this lease nor the
---------
consummation of the transactions contemplated hereby shall:
52
<PAGE>
(a) Violate any provision of law or judgment, writ,
injunction, order or decree of any court of governmental
authority relating to Lessors; or
(b) Result in the creation or imposition of any lien
or encumbrance upon the premises or breach any instrument
affecting the premises except this lease and the rights
granted Lessee by it; or
(c) Result in or constitute a breach or default (or an
occurrence which, by the lapse of time and/or the giving of
notice, would constitute a breach or default) under any
indenture, contract, other commitment or restriction to
which Lessor is a party or by which it is bound; or
(d) Require any consent, vote or approval which has
not been or, at the time of the transaction involved, shall
not have been given or taken.
3. No Violation of Agreements. Neither Lessee's operation
--------------------------
of the hotel as contemplated by this lease or the operation of the retail
or service facilities for which subletting is permitted under paragraph 9 of
Article IV hereof violates any agreement of any type to which the
Lessor is a party, or to which the premises would be subject.
4. Lien or Encumbrance. No lien or encumbrance upon the
-------------------
premises shall be created or imposed except this Lease and the rights
granted Lessee by it.
ARTICLE IV
----------
Lessee's Covenants
------------------
The Lessee hereby represents, warrants and covenants
with the Lessor as follows:
1. Payment of Rent. The Lessee will pay all the rents and
---------------
other charges herein reserved in lawful currency of the United
States of America at the times and in the
manner aforesaid to the Lessor, or to such other person or
corporation as shall be designated by the Lessor in writing,
without any deduction and without any notice or demand.
2. Taxes and Assessments. (a) Lessee will pay and
---------------------
discharge, without notice or demand, before the same become delinquent,
all taxes and assessments of every description to which the premises or any
part thereof or improvements thereon of Lessor or Lessee, in
respect thereof, are now, or, during said term, may be assessed
or become liable, whether
53
<PAGE>
assessed or payable by Lessor or Lessee, including without
limiting the generality of the foregoing, all real or personal
property taxes or assessments, all hotel room taxes and other
taxes levied by reason of the particular use of the premises made
by the Lessee or anyone claiming under the Lessee and all other
excise taxes payable by reason of Lessee's payment hereunder or
Lessor's receipt hereunder of rent, taxes or any other outgoings
of any description whatever, but excluding income taxes of
Lessor. All such taxes shall be prorated as of the dates of
commencement and expiration respectively of this lease. With
respect to any assessment made under any betterment or
improvement law which may be payable in installments, Lessee
shall be required to pay only such installments of principal
together with interest on unpaid balances thereof as shall be
applicable to periods covered by the term of this lease. Lessee
will also pay all conveyance and transfer taxes imposed by the
State of Arizona or by any city, county or other political
subdivision thereof or by any agency or instrumentality of any of
the foregoing in respect to this lease. Nothing herein contained
shall prevent the Lessee from contesting in good faith, by any
appropriate proceedings commenced before the same becomes
delinquent, the validity or amount of any such tax or assessment,
nor require the payment thereof until the final determination of
such contest; provided, however, that the Lessee will pay all
such taxes and assessments, together with all interest,
penalties, fines and costs accrued thereon or imposed in
connection therewith, forthwith upon the commencement of
proceedings to foreclose any lien which attached to the demised
premises or any part thereof as security therefor or within such
further time as may be duly allowed by any stay of such
foreclosure proceedings; provided, further, that if the Lessee
shall fail to pay any such taxes or assessments as herein
provided, the Lessor may at any time thereafter pay the same,
together with any interest, penalties, fines and costs accrued
thereon or imposed in connection therewith, and the Lessee will
repay to the Lessor, upon demand therefor the full amount so paid
by the Lessor, together with interest.
(b) The provisions of this lease shall not be deemed
to require Lessee to pay municipal, county, state or federal
capital stock levy, estate, succession, inheritance, gift or
transfer taxes of Lessor, or corporation franchise taxes imposed
upon any corporate owner of the fee of the premises. It is agreed
that in the event the state in which the premises is located or
any taxing authority thereunder changes or modifies the system of
taxing real estate so as to tax the rental income from real
estate in lieu of or in substitution (in whole or in part) for
the general real estate taxes and so as to impose a liability
upon Lessor for the amount of such tax, then Lessee shall be
liable under this lease for the payment of taxes so imposed
during the term of this lease to the same extent as though the
alternative tax was a tax upon the value of the premises. In
order to determine the amount of such alternative tax for which
Lessee shall be liable, the premises shall be considered as if it
were the only asset of Lessor, and the rent paid hereunder shall
be considered as if it were the only income of Lessor.
54
<PAGE>
In the event that any tax pursuant to the foregoing
shall not be an alternative tax, but shall be a tax or license
fee or other outgoing on the privilege of the renting, leasing or
letting by Lessor to Lessee of the premises covered by this
Lease, or on the rents payable by Lessee to Lessor hereunder,
Lessee shall not be obligated by this Lease to pay such tax,
license fee, or other outgoing, but if such tax, license fee or
other outgoing is nevertheless required to be paid by Lessee, the
Lessor agrees to adjust rent so that the net effect to Lessee
shall not be altered by such non-alternative form of tax, license
fee or other outgoing.
3. Rates and Other Charges. Lessee at Lessee's expense
-----------------------
will pay and discharge, or will cause to be paid or
discharged, when due and without any notice or demand, all
charges, duties and rates, and other outgoings of every
description for electricity, gas, telephone, refuse collection,
sewage disposal, water or any other utilities or services to
which the premises, or any part thereof, or improvement thereon,
of Lessor or Lessee in respect thereof, may during said term be
assessed or become liable, whether assessed to or payable by
Lessor or Lessee. Lessee will also pay to Lessor on demand,
interest on all delinquent rates and charges hereunder payable by
Lessee to Lessor from the respective due dates thereof until
fully paid.
4. Improvements Required by Law. The Losses will at its
----------------------------
own expense during the whole of said term make, build,
maintain and repair all fences, roads, curbs, sidewalks, sewers,
drains, parkways and parking areas and other improvements which
may be lawfully required to be made, built, maintained and
repaired upon or adjoining or in connection with or for the use
of the demised premises or any part thereof, except as otherwise
provided herein. Nothing herein contained shall prevent the
Lessee from contesting in good faith, by any appropriate
proceedings prosecuted in diligent and timely manner, the
validity of any such legal requirements nor, if so permitted, by
the applicable laws or ordinances, defer the performance thereof
until the final determination of such contest; provided, however,
that said premises or any interest therein shall not thereby be
jeopardized, and the Lessee shall indemnify and hold the Lessor
harmless from all such legal requirements and all interest,
penalties, fines and costs accrued thereon or imposed in
connection therewith; provided, further, that if the Lessee shall
fail to perform such legal requirements as herein provided, the
Lessor may at its option perform the same together with payment
of any interest, penalties, fines and costs accrued thereon or
imposed in connection therewith, and the Lessee will repay to the
Lessor on demand the cost or performance and the amount so paid
by the Lessor, together with interest.
5. Repair of Improvements. Subject to the provisions
----------------------
hereinafter contained in Article V relating to insurance of
buildings and in Article VII relating to condemnation, the Lessee
will at its own expense from time to time and
55
<PAGE>
at all times during said term well and substantially repair,
maintain, and keep all building and other improvements at any
time during said term existing on the demised land, including
without limitation all landscaping thereon, with all necessary
reparations whatsoever, in good order and such condition as may
be required for a first class facility constructed in accordance
with the plans and specifications approved by the Lessor or as
hereinafter provided, reasonable wear and tear excepted, provided
that:
(a) Lessee shall not be in default in the
performance of Lessee's covenants contained in paragraph 5 of
this Article IV if Lessee shall commence within 60 days after the
receipt of notice and thereafter diligently prosecute all work
necessary to repair and make good all defects required by the
terms of this lease to be repaired and made good by the Lessee of
which notice shall be given by the Lessor. If the Lessee shall
refuse or neglect to commence such repairs within said period and
thereafter to diligently prosecute the same, the Lessor may make
such repairs or cause the same to be made and shall not be
responsible to the Lessee for any loss or damage that may be
caused to the property or business of the Lessee by reason
thereof, and if the Lessor shall make such repairs or cause the
same to be made, the Lessee shall pay forthwith on demand to the
Lessor the cost thereof with interest.
(b) Lessee may from time to time during said term
demolish, remove, and dispose of any and all buildings and
improvements constructed on the demised land; provided, however,
Lessee has made all necessary financial arrangements to construct
and within a reasonable time after any such demolition Lessee
shall construct on the demised land buildings or other
improvements having a value when completed of not less than the
value of the buildings or other improvements so demolished except
as provided in Article V.
6. Observance of Laws. The Lessee will during the whole of
------------------
said term keep the demised premises in a strictly clean and
sanitary condition and observe and perform all laws, ordinances,
rules and regulations whether now or hereafter made by any
governmental authority for the time being applicable to said
premises or the use thereof, and will indemnify the Lessor
against all actions, suits, claims and damages by whomsoever
brought or made by reason of the nonobservance or nonperformance
of said laws, ordinances, rules and regulations or of this
covenant. Nothing herein contained shall prevent the Lessee from
contesting in good faith, by any appropriate proceedings
prosecuted in diligent and timely manner, the validity of any
such laws, ordinances, rules and regulations nor, if so
permitted, by the applicable laws or ordinances, defer the
performance thereof until the final determination of such
contest; provided, however, that said premises or any interest
therein shall not thereby be jeopardized, and the Lessee shall
indemnify and hold the Lessor harmless from all such laws and all
interest, penalties, fines and costs accrued thereon or imposed
in connection therewith; provided, further, that if the Lessee
shall fail to perform any such
56
<PAGE>
laws as herein provided, the Lessor may at its option perform the
same and make payment of any interest, penalties, fines and costs
accrued thereon or imposed in connection therewith, and the
Lessee will repay to the Lessor on demand the cost of such
performance and the amount so paid by the Lessor, together with
interest.
7. Inspection of Premises. The Lessee will permit the
----------------------
Lessor and its agents at all reasonable times during said
term to enter the demised premises and examine the state of
repair and condition thereof, with the Lessee afforded an
opportunity to have a representative present.
8. Waste and Unlawful Use. The Lessee will not knowingly
----------------------
make or suffer any strip or waste or unlawful, improper or
offensive use of the demised premises or any part thereof.
9. Assignment and Sublease. (a) Lessee may not
-----------------------
assign this lease or sublet the premises or any part thereof
without the prior written consent of Lessor, which consent will
not be unreasonably withheld; provided, however, that Lessee,
without any additional consent being required from Lessor, may
assign its entire leasehold interest herein to a limited
partnership with not more than thirty-five (35) limited partners,
which limited partnership shall assume all of the obligations of
this lease, and shall deliver a counterpart original of a
document in form for recordation pursuant to which such limited
partnership assignee agrees to assume and perform all the terms
and conditions of this lease on Lessee's part from and after the
effective date of such assignment, and shall enter into a
management agreement with Associated Inns & Restaurants Company
of America ("AIRCOA") retaining AIRCOA as an independent
contractor to provide management for the hotel. In the event of
an assignment to a limited partnership as provided herein, the
assignee shall be entitled to all benefits hereof with the same
force and effect as if such assignee were the original Lessee
hereunder and the following exculpatory provisions shall apply
for the benefit of such assignee.
(b) This lease and any other agreement,
obligation or liability made, entered into or incurred by or. on
behalf of such partnership with the Lessor or its assigns, binds
only the assets of the partnership (which assets shall not
include the net worth or assets, of either the persons or
entities, or both, who or which from time to time may be partners
of the partnership), and no partner, general or limited, or agent
of the partnership assumes or shall be held to any personal
liability therefor. Without limiting the generality of the
foregoing, execution of any agreement or the making or entering
into or incurring of any liability by any one or more of the
general partners, who or which may at any time be general
partners of such partnership, shall not constitute their personal
or individual obligations, either jointly or severally, in any
capacity whatsoever; no general partner shall be sued or named,
nor shall service or
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process be made against any general partner except as may be
necessary to secure jurisdiction of the partnership and any
property of the partnership, nor shall a deficiency or other
judgment be taken against any such general partner, and if any
such judgment is taken against any such general partner, the same
shall be vacated and satisfied at the earliest opportunity nunc
pro tunc; and in the event an amount less thant the amount set
forth in any judgment is recovered, the docket shall be satisfied
insofar as any general partner is concerned, and the holder of
the judgment shall waive, abandon and forfeit any and all further
rights it may or could have against any general partner. These
exculpatory provisions shall be applicable to any warranty,
covenant or agreement contained in the instruments referred to
herein or imposed by statute or at common law. These exculpatory
provisions shall inure to the benefit of and be enforceable by or
on behalf of the partnership or by any partner or agent of the
partnership and its or their respective heirs, representatives,
successors and assigns. The successors and assigns of the
partnership, its agents and partners shall include, but shall not
be limited to any partnership, corporation, association or other
person or entity which assumes or agrees to perform all or part
of the obligations imposed by this lease or a related instrument
on the partnership, its agents or partners, whether such
assumption occurs by agreement or consent or by operation of law
and whether such assumption follows a dissolution of the
partnership or incorporation of the partnership or is in
connection with a merger or consolidation affecting the
partnership or its successors or assigns.
(c) Lessor hereby expressly consents without any
further act required of it to any existing sublease of space
within the premises and agrees that Lessee may, with the prior
written consent of Lessor, enter into subsequent subleases of
space available on the premises for retail and/or service
operations such as food and beverage facilities, beauty shop,
barber shop, gift shop, flower shop, sundries area,
transportation and travel or other services or businesses
customarily found in hotels similar to the operation as from time
to time conducted on the premises.
10. Costs and Expenses of Lessor and Lessee. The Lessee
---------------------------------------
will pay to the Lessor all costs and expenses, including
reasonable attorneys' fees, incurred or paid by the Lessor in
enforcing any of the covenants and conditions herein contained,
in recovering possession of the demised premises or any part
thereof or in collecting any delinquent rent, taxes or other
charges hereunder payable by the Lessee, or incurred by or
imposed upon the Lessor by or in connection with any litigation
commenced by or against the Lessee (other than condemnation
proceedings) to which the Lessor shall, without fault, be made
party. Conversely, the Lessor will pay to the Lessee all costs
and expenses, including reasonable attorneys' fees, incurred or
paid by Lessee in enforcing any of the covenants and conditions
herein contained or incurred by or imposed upon the Lessee by or
in connection with any
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litigation commenced by or against the Lessor (other than
condemnation proceedings) to which the Lessee shall, without
fault, be made party.
11. Indemnity. The Lessee will indemnify and hold the
---------
Lessor harmless from and against all claims for property
damages, personal injury or wrongful death, arising out of or in
connection with the use or occupancy of the demised premises by
the Lessee or any other person claiming by, through or under it,
or any accident or fire on said premises, or any nuisance made or
suffered thereon, or any failure of the Lessee to maintain said
premises in a safe condition, and the Lessee will also reimburse
the Lessor for all costs and expenses, including reasonable
attorney's fees, paid or incurred by the Lessor in connection
with the defense of any such claims, except that Lessee shall not
be obligated to indemnify or hold Lessor harmless for any loss,
damage, cost or expense caused by the Lessor's willful act or
negligence.
12. Liability Insurance. At no cost to the Lessor, the
-------------------
Lessee will effect and maintain or cause to be effected and
maintained during the whole of said term a policy or policies of
comprehensive general liability insurance covering the Lessor and
the Lessee with respect to personal injury (including death) and
property damage occurring on or by reason of the use of the
demised premises in form and with coverage satisfactory to and
approved by the Lessor, with minimum single limit of not less
than FIVE MILLION DOLLARS ($5,000,000) in any insurance company
or companies reasonably satisfactory to the Lessor, and will from
time to time upon receiving the same deposit promptly with the
Lessor copies or evidence of such policies of insurance and every
receipt for premiums paid thereon. Lessor reserves the right to
review periodically during the term of this lease the adequacy of
the aforementioned coverage based on practices in the State of
Arizona and to require increases in coverages if justified by
sound business judgment.
13. Bond and Indemnity Against Liens. (a) Prior to the
--------------------------------
commencmnt of any construction oil the demised premises of
any building or other improvement or any remodeling, replacement
or alteration of or addition to any building on said premises,
the cost of which construction, remodeling, replacement, addition
or alteration exceeds TWENTY-FIVE THOUSAND DOLLARS ($25,000), the
Lessee will obtain the written approval by the Lessor of plans
for such work and deposit with the Lessor satisfactory evidence
that the contractor for such construction has obtained a bond
from a financially responsible and recognized surety naming the
Lessor and the Lessee as obligees as their respective interests
may appear, in an amount not less than one hundred per cent
(100%) of the total construction cost thereof and in form and
with surety satisfactory to the Lessor, guaranteeing that such
construction shall be free and clear of all mechanics' and
materialmen's liens; provided that the Lessee may, in lieu of
such lien bond, provide other comparable security in form and
substance
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reasonably acceptable to the Lessor guaranteeing that such
construction shall be free and clear of all mechanics' and
materialmen's liens. Prior to commencing any construction on the
demised premises, the Lessee shall also furnish evidence showing
to the reasonable satisfaction of the Lessor that the Lessee has
or will have available to it sufficient funds to pay the cost of
such construction.
(b) The Lessee will promptly discharge or cause
to be discharged every attachment, judgment, lien, charge or
encumbrance of any nature which may be filed against the demised
premises or any improvements thereon, or to which the demised
premises or any erection or improvement thereon or the estate of
the Lessee therein at any time during said term shall become
subject, other than any permitted mortgage of this lease as
herein provided. Nothing herein contained shall prevent the
Lessee from contesting in good faith, by any appropriate
proceedings prosecuted in diligent and timely manner, the amount
or validity of any such attachment, judgment, lien, charge or
encumbrance nor, if so permitted, by the applicable laws or
ordinances, require the payment thereof until the final
determination of such contest; provided, however, that said
premises or any interest therein shall not thereby be
jeopardized, and the Lessee shall indemnify and hold the Lessor
harmless from all such attachments, judgments, liens, charges and
encumbrances and all interest, penalties, fines and costs accrued
thereon or imposed in connection therewith; provided, further,
that if the Lessee shall fail to pay any such attachment,
judgment, lien, charge or encumbrance as herein provided, the
Lessor may at its option pay the same together with any interest,
penalties, fines and costs accrued thereon or imposed in
connection therewith, and the Lessee will repay to the Lessor on
demand the full amount so paid by the Lessor, together with
interest.
14. Surrender. At the end of said term or sooner
---------
determination of this lease, the Lessee will peaceably
deliver up to the Lessor possession of the land hereby demised
together with all buildings and other permanent improvements
thereon by whomsoever made, in good repair, order and condition,
except as provided in Articles V and VII hereof; provided,
however, that if the Lessee shall not then be in default
hereunder, it may prior to termination of this lease remove from
the demised premises any furnishings and trade fixtures installed
by it during said term upon condition that the Lessee shall at
its own expense repair to the satisfaction of the Lessor, prior
to termination of this lease, all damage caused by such removal.
15. Encroachment. Lessee acknowledges that the fence
------------
around the tennis courts and flood lights on the premises
encroach upon the adjoining property known as "The Shores" a
condominium project, and Lessee agrees that Lessee has the sole
obligation to use its best efforts to eliminate such encroachment
or to obtain an easement for the same at Lessee's expense on or
before December 31, 1978; and, in any event, Lessee agrees to
hold Lessor
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harmless from and against all claims, demands or damages arising
out of or in connection with such encroachment.
ARTICLE V
---------
Insurance of Buildings
----------------------
1. Fire and Other Insurance. At no cost to the Lessor, the
------------------------
Lessee will at all times during said term keep or cause all
buildings on the demised land to be kept insured against loss or
damage by fire and the risks covered by the Standard Extended
Coverage Endorsement, including demolition costs, and rental
insurance in an amount sufficient in the event of damage or
destruction to pay at least the next one (1) year's rent
(including the base rent and the average of the percentage rent
paid over the preceding three lease years) hereunder with all
real property taxes, assessments and other charges, in an
insurance company or companies reasonably satisfactory to Lessor,
and such other insurance as is customarily maintained for
comparable projects, in an amount sufficient to prevent Lessor or
Lessee from becoming co-insurers under provisions of applicable
policies of insurance, but in any event in an amount not less
than eighty percent (80%) of the full insurable value thereof
(replacement value without any deduction for depreciation),
excluding the cost of improvements below ground level and other
matters customarily not insured (e.g., architects' fees,
foundations, etc.) and will pay all premiums thereon when due and
will from time to time upon receiving the same deposit promptly
with the Lessor all policies of such insurance or true copies
thereof and every receipt for premiums paid thereon.
2. Payment of Insurance Proceeds. Every policy of such
-----------------------------
insurance shall be issued to cover and insure all the
interests in said buildings of the Lessor, the Lessee and the
mortgagee, if any, as their respective interests shall appear,
and, except for any rental value, use and occupancy, or personal
property insurance of the Lessee and except for any single
casualty for which the proceeds do not exceed $25,000 (or such
greater or lesser figure as may be established by Lessee's
mortgagee), shall be made payable in case of loss or damage to a
bank or trust company authorized by law to exercise corporate
trust powers in the State of Arizona and having its principal
office in Arizona as shall from time to time be designated by
Lessee with the approval of Lessor, which approval of the Lessor
will not be unreasonably withheld, as trustee of all proceeds of
such insurance; provided, however, that in the event such
proceeds have been made payable to or otherwise required to be
made available to a Leasehold Mortgagee or Fee Mortgagee, then
any such mortgagee shall be the recipient of such funds and
references hereinafter to trustee shall refer to such mortgagee.
Said trustee shall have no obligation whatsoever to effect,
maintain or renew such insurance, nor to attend to any claim for
loss or damage thereunder or
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the collection of any proceeds thereof, nor to incur any expense
therefor, and shall be responsible only for the proper custody
and application as herein provided of all proceeds of such
insurance that shall actually come into its possession, and all
fees and expenses of said trustee for or in connection with its
services shall be paid by the Lessee.
3. Use of Insurance Proceeds. In case said buildings or
-------------------------
any part thereof shall be destroyed or damaged by fire or
other such casualty herein required to be insured against, then
and as often as the same shall happen, all proceeds of such
insurance, including the interest therein of the Lessor and the
Lessee, excluding the proceeds of any rental value, use and
occupancy, or personal property insurance, shall be available for
and used with all reasonable dispatch by the Lessee, in
accordance with customary construction loan disbursement
procedures, in rebuilding, repairing or otherwise reinstating the
building or buildings so destroyed or damaged in a good and
substantial manner so that it shall be of the same usefulness,
value and utility as immediately before such damage or
destruction, provided, however, that there shall be no obligation
imposed upon Lessee to rebuild or restore beyond the extent of
insurance proceeds received, aud further provided, however, in
case (i) any buildings on the demised land shall be so destroyed
or damaged during the last 10 years of the lease term, measured
at the time of the occurrence, (ii) the cost of such repair or
restoration would exceed $1,000,000 and (iii) if in the sound
reasonable judgment of Lessee the buildings cannot be timely and
adequately restored, repaired or reconstructed so that it shall
be of the same usefulness, value and utility as immediately
before such damage or destruction, capable of producing after the
payment of all operating expenses thereof, the base rent,
percentage rent and other charges herein reserved, the debt
service charges on any then existing Fee and Leasehold Mortgages
and after the performance of all covenants, terms agreements and
provisions herein and by law provided to be performed and paid by
the Lessee, a fair and reasonable net annual income as determined
by Lessee in its sole discretion, then the Lessee may at its own
expense promptly remove from the demised premises all buildings,
improvements and trade fixtures and restore said premises to
good, orderly and sanitary condition and even grade and may then
surrender this lease, and such insurance proceeds shall thereupon
be applied: first, in payment of any amount necessary to obtain
the release of any Fee or Leasehold Mortgage; second, to the cost
of demolition and removal of the buildings, improvements and
trade fixtures after deducting from such cost any salvage value;
third, to the Lessor in an amount equal to the lesser of the
remaining insurance proceeds or the Lessor's interest in the
insurance proceeds; and fourth, the balance if any, to the
Lessee. The respective interests of the Lessor and the Lessee in
any proceeds of such insurance payable for loss or damage to any
such building shall be fixed and determined as of the date of
such loss or damage as follows:
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(a) The interest of the Lessor therein shall be
the value on the date of such loss or damage of the reversionary
interest of the Lessor in any such building (taking the then
existing date of expiration of the term of this lease, and
assuming the total value of such building is equal to the total
insurance proceeds payable for loss or damage), computed at
compound interest at a rate equal to the immediately preceding 5
year average of the Federal Reserve Rediscount Rate for the Tenth
District or such other district as shall then be used by banks in
Arizona as applicable thereto (but not more than eight per cent
(8%) per annum), with any fractional year to be rounded to the
nearest whole; provided, however, that the interest of the Lessor
shall include all proceeds of such insurance payable for or on
account of any building or part hereof constructed by the Lessor.
(b) The interest of the Lessee shall be the
balance of such insurance proceeds after first deducting
therefrom the amount of the interest of the Lessor therein as
hereinbefore defined.
4. Rental Insurance Proceeds. The amount of any rental
-------------------------
insurance proceeds shall serve as security for the Lessee's
payment of rent, taxes, rates, charges and other sums due
hereunder and the Lessor shall be entitled to receive an
assignment of so much thereof as is necessary to assure such
payment, subject and subordinate to any assignment to the holder
of a Fee Mortgage.
ARTICLE VI
----------
Leasehold Mortgages
-------------------
1. Consent to Leasehold Mortgages. Lessee may from time to
------------------------------
time and at any time, but only with the prior written
consent of Lessor, which consent will not be unreasonably
withheld, assign this lease by way of one or more mortgages,
deeds of trust or other transfer for security, including, without
limitation, second leasehold mortgages, wraparound mortgages and
construction loans or permanent loans, (herein called a
"Leasehold Mortgage") to any lending institution defined as any
commercial bank, trust company, savings and loan association,
real estate investment trust, pension fund or trust, or insurance
company with assets of not less than $100,000,000 (herein, with
its successors and assigns thereof, called the "Leasehold
Mortgagee"); provided, however, that every Leasehold Mortgage
shall be expressly subject and subordinate to all the terms,
covenants, conditions and provisions of this lease, which shall
control in case of any conflict with the provisions of such
mortgage, and no Leasehold Mortgage shall in any way encumber or
otherwise affect Lessor's interest in the demised premises or
under this lease nor be deemed to constitute a waiver of any
rights of Lessor hereunder; provided, further, that upon
execution of any Leasehold Mortgage or assignment thereof a fully
executed copy of such
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<PAGE>
mortgage or assignment, together with a written statement of the
place in which the same is recorded or filed for record and its
number or other identification of record and of the post office
address of the Leasehold Mortgagee or assignee and a true copy of
the note, bond or other evidence of the obligation thereby
secured, shall be delivered promptly to Lessor, and upon such
delivery the Leasehold Mortgage or assignment thereof shall have
the effect on Lessor as is provided herein in the enforcement of
any terms, covenants, conditions or provisions hereof or of any
rights or remedies herein or by law provided. The Leasehold
Mortgagee may enforce such mortgage and acquire title to the
leasehold estate in any lawful way, aud pending foreclosure of
such mortgage may take possession of and rent said premises, or
cause any person having the relationship of an independent
contractor to the mortgagee to take possession of and rent said
premises, and upon foreclosure thereof (or in the event of any
sale or other transfer thereof in lieu of foreclosure) may
without further consent of the Lessor sell and assign the
leasehold estate by assignment in which the assignee shall
expressly assume and agree to observe and perform all the
covenants of the Lessee herein contained, and such assignee may
make a purchase money mortgage of this lease to the assignor or
any other lending institution; provided, however, that upon the
execution of any such mortgage or assignment, a true copy thereof
shall be delivered promptly to the Lessor, and no other or
further assignment of this lease for which any provision hereof
requires the written consent of the Lessor shall be made without
such consent. The Leasehold Mortgagee and any independent
contractor to the Leasehold Mortgagee shall be liable to perform
the obligations herein imposed on the Lessee only during the
period it has possession or ownership of the leasehold estate.
Nothing herein or in any Leasehold Mortgage shall subordinate or
be deemed to require or provide for the subordination to the lien
of such mortgage of any estate, right, title or interest of
Lessor in or to the demised premises or this lease.
2. Protection of Leasehold Mortgagee. During the
---------------------------------
continuance in effect of any Leasehold Mortgage as a lien on Lessee's
leasehold estate hereunder:
(a) Lessor and Lessee shall not enter into any
agreement providing for or accept a surrender or modification of
this lease which would decrease the term, increase the rent,
extend the time for payment or accelerate the payment of rent or
otherwise increase the liability of Lessee without the prior
consent in writing of the Leasehold Mortgagee.
(b) Lessor, upon serving upon Lessee any notice of
default or any other notice under the provisions of or with
respect to this lease, shall also serve a copy of such notice
upon the Leasehold Mortgagee, and no notice by Lessor to Lessee
hereunder shall be deemed to have been duly given unless and
until a copy thereof has been so served. The Leasehold Mortgagee
shall thereupon have the same period,
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<PAGE>
after service of such notice upon it, for remedying any default
or causing the same to be remedied, as is given Lessee after
service of such notice upon it, plus in each case an additional
period of sixty (60) days after the expiration thereof and,
anything herein contained to the contrary notwithstanding, if the
Leasehold Mortgagee shall have paid to Lessor all rent and other
payments herein provided for then in default, and shall have
complied or shall be engaged diligently in the work of complying
with all the other requirements of this lease, if any, then in
default and as to which notice has been given and shall complete
the same, then and in such event Lessor shall not be entitled to
and shall not serve any notice terminating this lease; provided,
however, that this shall not in any way affect, diminish or
impair the right of Lessor, subject to the provisions of this
Article VI, to terminate this lease or to enforce any other
remedy upon the non-payment of any sum thereafter payable by
Lessee or upon any other subsequent default in the performance of
any of the obligations of Lessee hereunder.
(c) Any Leasehold Mortgagee, in case Lessee shall be
in default hereunder, shall within the period and otherwise as
herein provided, have the right to remedy such default, or cause
the same to be remedied, and Lessor shall accept such performance
by or at the instance of the Leasehold Mortgagee as if the same
had been made by Lessee. For such purpose Lessor and Lessee
hereby authorize the Leasehold Mortgagee to enter upon the
demised premises and to exercise any rights and powers of Lessee
or Leasehold Mortgagee under this lease, and subject to the
provisions of this lease, any of the mortgagee's rights and
powers under the Leasehold Mortgage.
(d) For the purposes of this Article VI, no default
shall be deemed to exist in respect of the performance of work
required to be performed, or of acts to be done, or of conditions
to be remedied, if adequate steps shall, in good faith, have been
commenced promptly to rectify the same and shall be prosecuted to
completion with diligence and continuity, and any default
consisting of Lessee's failure promptly to discharge any
unpermitted lien, charge or encumbrance against the demised
premises junior in priority to any Leasehold Mortgagee shall be
deemed to be remedied if any appropriate action shall be
instituted to foreclose within the period herein provided for
remedying such default and thereafter prosecuted in a diligent
and timely manner.
(e) Anything herein contained to the contrary
notwithstanding, upon the occurrence of any default under this
lease, other than a default in the payment of money, Lessor shall
take no action to effect a termination of this lease without
first giving to the Leasehold Mortgagee written notice thereof
and a reasonable time thereafter within which either (i) to
obtain possession of the mortgaged property (including possession
by a receiver) and to cure such default after obtaining
possession, in the case of a default susceptible of being cured
by the Leasehold Mortgagee, or (ii) to institute, prosecute and
complete foreclosure proceedings or otherwise
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acquire Lessee's interest under this lease with diligence, in the
case of a default not susceptible of being cured by the Leasehold
Mortgagee or that may be cured by such proceedings; provided,
however, that (1) the Leasehold Mortgagee shall not be obligated
to continue such possession or to continue such foreclosure
proceedings after such default shall have been cured, and (2)
nothing herein contained shall preclude Lessor, subject to the
provisions of this Article VI, from exercising any rights or
remedies under this lease with respect to any other default by
Lessee during the pendency of such foreclosure proceedings. Any
default by Lessee not susceptible of being cured by the Leasehold
Mortgagee shall be deemed to have been waived by Lessor upon
completion of such foreclosure proceedings or upon such
acquisition of Lessee's interest in this lease.
(f) In case of termination of this lease by reason of
a default hereunder, Lessor shall give written notice thereof
promptly to every Leasehold Mortgagee, and if the Leasehold
Mortgagee shall have paid, or arranged to the reasonable
satisfaction of Lessor for the payment of, all rent and other
charges due and payable by Lessee under this lease as of the date
of such termination, together with the rent and other charges
which but for such termination would have become so due and
payable from the date of such termination through the date of the
request by the Leasehold Mortgagee referred to below, less the
sum of all rent and other charges paid to Lessor by sublessees,
tenants and concessionaires pursuant to the last sentence of this
sub-paragraph (f), and shall have arranged to the reasonable
satisfaction of Lessor for the curing of any default (excepting a
default of Lessee which is not susceptible of being cured by the
Leasehold Mortgagee including, without limitation, the removal of
any unpermitted liens junior in priority to the mortgage of the
Leasehold Mortgagee), then Lessor, upon the written request of
the Leasehold Mortgagee given any time prior to sixty (60) days
after such notice of termination, aud upon payment of all
expenses, including attorneys' fees, incident thereto, will
execute and deliver to the Leasehold Mortgagee a new lease of the
demised premises, including the buildings, structures and other
improvements then located thereon. If more than one Leasehold
Mortgagee makes written request upon Lessor for a new lease as
herein provided, the new lease shall be delivered to the
Leasehold Mortgagee requesting such new lease whose mortgage was
prior in lien, and the written request of the holder of any
mortgage subordinate in lien shall be void and of no force and
effect. Said new lease shall be for a term equal to the remainder
of the term of this lease before giving effect to such
termination, and shall contain the same covenants, agreements,
terms, provisions and limitations as this lease, subject only to
the encumbrances set forth herein and acts done or suffered by
the Lessee, except that the liability of the Leasehold Mortgagee
under said new lease shall be limited to its period of ownership
thereof, provided the party to whom said new lease is assigned by
the Leasehold Mortgagee executes and delivers to Lessor at the
time of such assignment an assumption, without limitation as to
duration of liability, of all of the terms, covenants, agreements
and conditions of said new lease. Upon the
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execution and delivery of said new lease the new lessee, in its
own name or in the name of Lessor, may take all appropriate steps
as shall be necessary to remove the Lessee from the demised
premises, but Lessor shall not be subject to any liability for
the payment of any fees, including counsel fees, costs or
expenses, in connection therewith; and said new lessee shall pay
all such fees, including reasonable counsel fees, costs and
expenses, or, on demand, make reimbursement therefor to Lessor.
Termination of this lease shall not forthwith terminate any
subleases, tenancies and concessions then subsisting with respect
to the demised premises, all of which shall continue in full
force and effect for a period of ninety (90) days thereafter
subject to the payment directly to Lessor as the same accrue of
all rents and other charges thereunder payable for any part of
said period, and in case of the request by the Leasehold
Mortgagee for said new lease as herein provided all such
subleases, tenancies and concessions shall continue in full force
and effect under said new lease unless terminated by the
Leasehold Mortgagee at its option within said ninety (90) day
period. Said new lease shall in any event be subject to any
subleases, tenancies and concessions which are not subject to
termination by reason of Lessor having recognized them and agreed
to accept attornment thereunder.
(g) Lessor consents to a provision in the Leasehold
Mortgage for an assignment of the rents, issues and profits of
Lessee from the demised premises to the Leasehold Mortgagee,
provided that such assignment to the Leasehold Mortgagee shall be
therein expressed to be subject and subordinate to all remedies,
rights and interests of Lessor under this lease.
(h) Notices, demands and requests from Lessor to the
Leasehold Mortgagee shall be mailed to the address furnished
Lessor pursuant to paragraph 1 of this Article VI, and those from
the Leasehold Mortgagee to Lessor shall be mailed to the address
designated pursuant to the provisions of paragraph 9 of Article
XII hereof. Such notices, demands and requests shall be given in
the manner described in paragraph 9 of Article XII and shall in
all respects be governed by the provisions of that paragraph.
(i) Anything herein contained to the contrary
notwithstanding, the provisions of this Article VI shall inure to
the benefit of any holder of a Leasehold Mortgage.
3. Lessor's Option on Mortgage Default. Lessee shall
-----------------------------------
provide in every Leasehold Mortgage the right of the Lessor
at its option, and Lessor is hereby granted the right to the
extent provided by such Leasehold Mortgage, in case of any
default by Lessee under such mortgage continuing beyond any
period of grace therein provided for remedying such default and
the maturity or acceleration by the Mortgagee of the debt thereby
secured, to acquire by assignment all right, title and interest
of the mortgagee in and to the mortgaged property under such
mortgage upon payment by Lessor of the principal amount of
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indebtedness and all interest, advances, costs and other sums thereby
secured.
4. Participation in Arbitration. In any circumstances
----------------------------
where arbitration is provided for under the Lease, Lessor
agrees that Lessor will give any Leasehold Mortgagee notice of
any demand by Lessor for any arbitration, and Lessor will
recognize any such Leasehold Mortgagee, in the order of their
priority if there is more than one, as a proper party to
participate in the arbitration, whether or not the Lessee
participates therein.
5. Certificates. Lessor and Lessee will from time to time
------------
at reasonable intervals, within (30) days after request by
each other or any Leasehold Mortgagee, certify in writing to each
other and the Leasehold Mortgagee (a) that this lease is in full
force and effect in accordance with its provisions herein set
forth and unmodified or, if modified, stating all modifications
thereof, (b) the dates to which rents and taxes hereunder have
been paid, and (c) whether or not to the best knowledge of the
certifying party the other party is in default in any respect
hereunder and, if so, specifying each such default of which the
certifying party has knowledge.
6. Modifications Required for Financing. Lessor and
------------------------------------
Lessee acknowledge that Lessee will from time to time engage
in financing that will involve a mortgaging of its leasehold
estate and that the terms and conditions of this lease are of
concern to a Leasehold Mortgagee. Lessor agrees that, if
requested by a prospective Leasehold Mortgagee and by the Lessee,
the Lessor will agree to modifications and amendments to this
lease, provided such modifications and amendments do not decrease
the Lessee's obligations under this lease or decrease the
Lessor's rights under this lease in any material and adverse
respect.
7. Exercise of Options to Extend. Lessor and Lessee
-----------------------------
acknowledge that a permitted mortgagee as the Lessee's
attorney-in-fact may exercise the options to extend contained in
this Lease and for that purpose Lessee hereby irrevocably
appoints a permitted mortgagee as its attorney-in-fact to execute
such papers on behalf of Lessee to the extent that Lessee has not
previously exercised one or both of the aforementioned options to
extend.
ARTICLE VI-A
------------
Fee Mortgages
-------------
1. Consent to Fee Mortgage. In addition to
-----------------------
Lessee's right to encumber its leasehold estate as
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provided in Article VI, Lessee shall have the right, subject to
the conditions described herein and in conjunction with Lessee's
mortgaging of its leasehold estate, to require Lessor once only
to encumber by mortgages or deeds of trust or other transfers for
security including, without limitation, second leasehold
mortgages, wraparound mortgages and construction loans or
permanent loans (the "Fee Mortgage") the fee of the premises,
under which the fee title to the premises shall be subordinated
to the rights of the holder of the indebtedness secured by such
Fee Mortgage, on the following terms and conditions:
(a) Lessee shall not be in material default under the
terms of this lease at the time any such request is made or at
the time Lessor is required to execute the Fee Mortgage.
(b) The Lessor shall not be liable for the payment of
any obligation secured by the Fee Mortgage, nor for any expenses
in connection therewith, and the note secured by the Fee Mortgage
shall expressly negate any personal obligation of the Lessor or
any right to have recourse against the Lessor.
(c) The obligation secured by the Fee Mortgage (i)
shall constitute the personal obligation of the Lessee (subject
to the limitations of Article IV, Paragraph 9(b)) until fully
satisfied, (ii) shall run only to a lending institution, defined
as any commercial bank, trust company, savings and loan
association, real estate investment trust or insurance company
with assets of not less than $100,000,000, (iii) shall not exceed
75 percent of the combined fair market value of the premises
and/or the proposed improvements, as determined by the lender,
and (iv) shall be repayable in equal monthly stallments of
principal and interest over a period of time not to extend beyond
the term of this lease, including the duration of any options to
extend that have been exercised.
(d) The Fee Mortgage shall secure only a note executed
by the Lessee for the purpose of obtaining (i) a construction
loan for the construction, reconstruction, enlargement,
alteration, renovation or repair of the improvements on the
premises, (ii) a permanent loan to repay such construction loan,
or (iii) loans, the total balances of which shall not exceed 75%
of the combined fair market value of the premises and
improvements as determined by the lender.
(e) The Fee Mortgage, or related loan agreements,
securing a note executed by the Lessee for the purpose expressed
in (i) or (ii) (but not (iii) of paragraph 1(d) of this Article
VI-A, shall require that the proceeds of the loan shall be used
only for construction costs on the premises or for the
refinancing of the balance of loans obtained to pay such
construction costs. "Construction costs" for purposes of this
lease shall mean all costs of Lessee incurred in connection with
the construction of improvements upon the real estate including,
without limitation, all building and site improvements and
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building equipment therein; building permits, premiums for fire,
extended coverage, builder's risk, public liability, performance
bond, labor and material payment bond, property and other
insurance or bonds during construction; interest accrued on or
imputed to borrower during the course of such construction in
respect of monies borrowed in connection with such construction;
architectural and engineering fees, accounting fees, appraisal
fees, charges and premiums for searching and insuring title;
printing and duplicating expenses incurred in connection with
such construction, commitment fees, standby fees, mortgage
brokerage fees, mortgage finders fees, accounting, legal,
printing and duplicating expenses, title insurance costs, survey
costs, closing and recording costs, consultation and development
fees, pre-opening and/or pre-sale expenses, real estate taxes,
furniture, fixtures and equipment to be utilized with the
improvements to be constructed upon the premises and the rent
under this lease during the period of construction.
(f) The mortgage, in all cases, shall provide for, or
comply with, the following:
(i) Before exercising any right of acceleration
of maturity, or any right of foreclosure against the Lessor's fee
interest, as distinguished from Lessee's leasehold estate, the
holder of the Fee Mortgage will give Lessor at least 20 days'
written notice of all defaults claimed (in addition to notice to
Lessee) and the holder of the Fee Mortgage will not thereafter
exercise such right of acceleration or foreclosure so long as
Lessor makes payments of all current installments of principal
and interest and cures any other defaults reasonably curable by
Lessor (which shall not include defaults such as the bankruptcy
or insolvency of the Lessee);
(ii) The holder of the Fee Mortgage shall consent
to the use of fire or other casualty insurance or condemnation
awards, in accordance with the provisions of this lease, for the
restoration or repair of any damage caused by fire, casualty, or
a taking in condemnation; and
(iii) No provision shall prohibit Lessor's sale
of its interest in the premises and this lease or provide for the
acceleration of the indebtedness by reason of such a sale.
(g) Lessee shall furnish Lessor with a true copy of
the Fee Mortgage, the note secured thereby, and all other
documents required by the lender.
2. Payment of Fee Mortgage. Lessee covenants to and
-----------------------
agrees with Lessor that all sums which fall due under any
note secured by any Fee Mortgage on either Lessor's or Lessee's
interest in the premises, or both, will be paid as and when due
and that the Lessee as borrower will comply with all its
obligations under the mortgage and the related loan documents.
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3. Waiver of Marshalling. Lessor hereby waives for
---------------------
itself, its successors and assigns, in the event of
foreclosure of any Fee Mortgage, any equitable rights, otherwise
available to it in respect to marshalling of assets hereunder, so
as to require the separate sales of the fee estate and leasehold
estate encumbered thereby or to require the Fee or Leasehold
Mortgagee to exhaust its remedies as against either the fee
estate or leasehold estate or proceeding against the other and,
further in the event of such foreclosure, Lessor does hereby
expressly consent to an offer at the option of the Leasehold
Mortgagee to sell either separately or together the fee estate
and leasehold estate, or otherwise, and to the merger prior to
sale of the leasehold estate into the fee estate in order that
the fee estate may be sold free and clear of such leasehold
estate.
ARTICLE VII
-----------
Condemnation
------------
1. Consequences of Condemnation. In the event at any time
----------------------------
or times during said term the demised premises or any part
thereof shall be taken or condemned by any authority having the
power of eminent domain, then and in every such case the estate
and interest of the Lessee in any part of the demised premises so
taken or condemned shall at once cease and determine; and the
base rent herein reserved for the land hereby demised shall be
reduced for and during the unexpired balance of said term,
effective as of the date when the Lessee shall by reason of such
taking or condemnation lose the right to possession of such part
of the land hereby demised, to a fair rental, taking into account
the extent of the loss of the premises, the economic effect on
Lessor and Lessee of such loss and all other relevant
circumstances. The Lessor and Lessee shall attempt to agree upon
the reduction in rent caused by the condemnation but if Lessor
and Lessee cannot reach agreement upon the reduction in rent
within ninety (90) days after the date of the taking, the matter
shall be determined by appraisal under the provisions set forth
in paragraph 3 of Article XII hereof.
2. Compensation and Damages. In every such case of taking
------------------------
or condemnation of the demised premises or any part thereof,
all compensation and damages payable for or on account of any
land hereby demised shall be payable first to the Fee Mortgagee
and then to and be the sole property of the Lessor, and the
Lessee shall have no interest in or claim to such compensation or
any part thereof whatsoever. Any amount so paid to the Fee
Mortgagee for which Lessee is primarily liable shall then
constitute an obligation owing by Lessee to Lessor, and such
obligation (plus interest on the unpaid balance of such
obligation at the same annual rate of interest as was specified
in the note secured by the Fee Mortgage) shall be payable by
Lessee to Lessor in equal monthly
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installments in such amount as to fully amortize such obligation
over the remainder of the original term of the note secured by
the Fee Mortgage, but with the right reserved to the Lessee to
prepay such obligation, in whole or in part, at any time without
penalty.
All compensation and damages payable for or on account
of any building or buildings and other improvements on the
demised land shall be payable first to the Fee and Leasehold
Mortgagees and then to the Lessor and the Lessee as their
respective interests shall appear, and said respective interests
in such compensation and damages payable for or on account of any
such building or other improvement shall be fixed and determined
as of the date when the Lessee shall by reason of such taking or
condemnation lose the right to possession of such part of the
demised premises so taken or condemned as follows:
(a) The interest of the Lessor therein shall be the
value on said date of the reversionary interest in said buildings
and improvements taken (valued on the assumptions that the total
value of the building and improvements taken is equal to the
total compensation and damages therefor and that said buildings
and improvements would revert to the Lessor at the then existing
date of expiration of the term of this lease), computed at
compound interest at a rate equal to the immediately preceding 5
year average of the Federal Reserve Rediscount Rate for the Tenth
District or such other district as shall then be used by banks in
Arizona as applicable thereto (but not more than eight per cent
(8%) per annum), with any fractional year to be rounded to the
nearest whole.
(b) The Lessee's interest therein shall be the balance
of such compensation and damages after first deducting therefrom
the amount of the interest of the Lessor therein as hereinbefore
defined.
3. Partial Taking of Improvements. In the event only part
------------------------------
of any building or improvement on the demised land shall be
so taken or condemned, and Lessee shall not terminate this lease
under paragraph 4 of this Article VII, then and in every such
case, notwithstanding the foregoing provisions of this Article
VII, all compensation and damages payable for or on account of
said building or improvement on the demised premises, including
both the interest of the Lessor and the Lessee, shall be payable
to such bank or trust company or other lending institution
authorized by law to exercise corporate trust powers in the State
of Arizona and having its principal office in Arizona as shall be
designated by the Lessee with the approval of the Lessor, which
approval the Lessor will not unreasonably withhold, as trustee of
all such compensation and damages, provided, however, that in the
event such compensation and damages have been made payable to or
otherwise required to be made available to a Leasehold Mortgagee
or Fee Mortgagee, then any such mortgagee shall be the recipient
of such funds and references hereinafter to Trustee shall refer
to such mortgagee. Such compensation and damages shall be
available for and used with all reasonable dispatch by the Lessee
in accordance with
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customary construction loan disbursement procedures, in
rebuilding, repairing or otherwise reinstating or replacing said
building or improvement on the balance of the demised land in a
good and substantial manner so that it shall have as close to the
same usefulness, value and utility as before the taking as
reasonably possible; provided, however, that there shall be no
obligation imposed on Lessee to rebuild or restore beyond the
extent of the compensation and damages received. Said trustee
shall have no obligation whatsoever to attend to any claim for
such compensation or damages or the collection thereof, nor to
incur any expense therefor, and shall be responsible only for the
proper custody and application as herein provided of all such
compensation and damages that shall actually come into its
possession.
4. Termination of Lease. In the event only part of the
--------------------
demised premises shall be so taken or condemned or in the
event of a taking of an easement or of an interest less than a
fee, including, but not limited to, a change in grade, road
widening or closing of access from any highway, and the demised
premises after such taking are economically unsuitable for the
purposes of the Lessee as determined by Lessee in its discretion,
then and in every such case the Lessee shall have the right, by
giving written notice thereof to the Lessor within seventy-five
(75) days after such event, to terminate this lease effective
upon loss of the right to possess the land and buildings (or
portion thereof) taken or condemned, provided, however, that all
Fee Mortgages, if any, shall have been satisfied in full. Upon
such termination the Lessee shall be relieved of all further
obligations under this lease, except that the Lessee shall pay
all rent and real property taxes to the date of such termination.
5. Condemnation of Leasehold Interest. If the whole or
----------------------------------
any part of the demised premises or of the Lessee's interest
in this lease shall be taken for a specified or limited period by
any duly constituted authority or under police or war powers, the
term of this lease shall not be reduced or affected in any way
and the Lessee shall continue to pay in full the rent provided
for herein in the manner and at the times herein specified and,
except only to the extent that the Lessee is prohibited from so
doing by reason of any order of the condemning authority, the
Lessee shall continue to perform and observe all of the other
covenants, agreements, terms and provisions of this lease as
though such taking had not occurred. In the event of any such
taking, the Lessee shall be entitled to receive the entire amount
of any award made for such taking, whether such award is paid by
way of damages, rent or otherwise, unless such limited or
specified period shall extend beyond the expiration date of the
term of this lease in which case such award shall be divided
between Lessor and Lessee with Lessee entitled to receive that
portion of the award attributable to the remaining term of this
lease and with Lessor entitled to receive the balance, provided,
however, that the award payable to the Lessee under the
provisions of this sentence shall be assigned and paid over to a
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bank or trust company appointed and compensated as in paragraph 3
of this Article VII provided and such trustee shall set aside so
much thereof as shall be necessary to secure the timely payment
and discharge of any obligation of Lessee to Lessor under this
paragraph 5 and shall disburse therefrom to Lessor such sums as
are required to effect such payment and discharge and such
trustee shall disburse to Lessee any amount received by it in
excess of the amount required so to secure Lessor.
6. Loss of Business Damages. Notwithstanding the
------------------------
foregoing provisions of this Article VII, the Lessee shall
have the right to claim and recover from the condemning
authority, but not from the Lessor and not if the effect of such
claim and recovery would be to reduce the compensation or damages
payable to the Lessor, such compensation or damages as may be
separately awarded or recoverable by the Lessee in its own right
on account of any and all damage by reason of any condemnation to
its business or its property not covered under this lease or to
property not taken or condemned and for or on account of any cost
or loss to which the Lessee might be put in removing the
building, its furnishings and equipment.
7 Cooperation. Lessor and Lessee shall cooperate to obtain
-----------
the maximum total award or settlement in the condemnation or
taking, and both Lessor's and Lessee's counsel shall be entitled
to participate in the negotiations and proceedings. However, no
settlement can be made or an agreement reached without the prior
written consent of Lessor.
ARTICLE VIII
------------
Defeasance
----------
1. Events and Consequences of Default. This demise
----------------------------------
is upon the express condition that if any one or more of the
following events of default shall occur, to wit:
(a) The Lessee shall fail to pay the rent herein
reserved or any part hereof, and such failure shall continue for
a period of thirty (30) days after written notice thereof given
by the Lessor to the Lessee; or
(b) The Lessee shall fail to observe or perform any
other of the covenants herein contained and on the part of the
Lessee to be observed and performed, and such failure shall
continue for a period of sixty (60) days after written notice
thereof given by the Lessor to the Lessee; or
(c) The Lessee shall abandon the demised premises; or
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<PAGE>
(d) The Lessee shall become bankrupt or insolvent, or
seek protection under any provision of the Bankruptcy Act, or if
any assignment be made of Lessee's property for the benefit of
its creditors, or if the property subject to this lease shall be
taken upon execution; then and in case of any such event of
default the Lessor may, upon the occurrence of such event of
default or at any time thereafter during the continuance of such
default, at its option, terminate this lease by giving written
notice thereof to the Lessee, and upon such termination the
Lessor may then or at any time thereafter re-enter the demised
premises or any part thereof in the name of the whole and
thereupon take possession of the said premises and all
improvements thereon and may expel and remove from the demised
premises the Lessee and those claiming under the Lessee, and the
Lessee's and its effects (but not, however, any tenant whose
rights Lessor has in writing recognized and from whom Lessor is
obliged to accept attornment), without service of notice or
resort to any legal process and without being deemed guilty of
any trespass or becoming liable for any loss or damage which may
be occasioned thereby, or may then or at any time thereafter
bring an action for summary possession of said premises or any
part thereof as provided by law, all without prejudice to any
other remedy or right of action which the Lessor may have for
arrears of rent or for any preceding or other breach of contract.
For the purpose of subparagraph (b) of this paragraph 1, the
Lessor will not take advantage of any remedy provided by this
lease for a default by the Lessee if steps shall have in good
faith been commenced to rectify the default within the sixty (60)
day period described in such subparagraph, such steps are
calculated to succeed in curing the default and are prosecuted to
completion with diligence and continuity.
2. Acceptance of Rent Not Waiver. The acceptance of rent
-----------------------------
by the Lessor or its agent shall not be deemed to be a
waiver by it of any breach by the Lessee of any covenant herein
contained or of the right of the Lessor to re-enter for breach of
condition. The waiver by the Lessor of any breach shall not
operate to extinguish the covenant or condition the breach
whereof has been waived nor be deemed to be a waiver by the
Lessor of its right to declare a forfeiture of this lease for any
subsequent breach thereof.
ARTICLE IX
----------
Operation of Premises
---------------------
1. Management of Hotel. The hotel shall be fully staffed
-------------------
by competent management and service personnel. Lessee shall
keep the hotel open for business throughout the term of this
lease and shall operate it continuously as a first-class hotel.
During the entire term of any Fee or Leasehold Mortgage placed on
the premises, Associated Inns & Restaurants Company of
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America, an Ohio corporation, shall be obligated to manage the
hotel operations.
2. Use. Lessee agrees that the premises shall be used
---
only for hotel purposes, together with its ancillary uses,
and for such other or different purposes as may be approved by
Lessor, which approval shall not be unreasonably withheld.
3. Deck Parking. Lessor shall have the right at any time
------------
during the terms of this lease to provide and to maintain at
its own expense automobile parking for the hotel in a parking
structure located on the premises either above or below ground,
or both above and below ground, and to withdraw from this lease
that portion of the premises previously used for surface parking
purposes, without any reduction in the rent payable hereunder,
provided however, that such deck parking concept, including
without limitation its effect upon taxes and assessments,
maintenance expenses, aesthetics, landscaping, light, air and
view, and all of the plans related thereto, shall be subject to
the prior approval of the Lessee and its Fee and Leasehold
Mortgagees. Without limiting the foregoing, Lessee's approval may
be withheld unless it is given reasonable assurances that any
increase in its net cost of operations shall have been provided
for.
4. Zoning, Easements, Etc. At the Lessee's request and
----------------------
upon its representation that such action is reasonably
necessary for the development of the premises, Lessor agrees to
join with the Lessee, if required, in the execution,
acknowledgement and delivery of (a) such applications,
amendments, petitions, and requests for zoning, rezoning,
waivers, adjustments or variances as may be necessary or
desirable to carry out any approved future development of the
premises; (b) such maps, plats, plans, diagrams and surveys as
may be necessary or desirable to comply with planning, zoning and
subdivision ordinances of the City of Scottsdale, County of
Maricopa; (c) such grants of easements in, on, under and across
the premises as may be necessary or desirable to provide adequate
service to the Lessee and its subtenants of natural gas,
electricity, water, sewer, telephone and other utility services;
and (d) such grants of easements or deeds for right-of-way
purposes as may be necessary or desirable to provide public ways
as may be required by the City of Scottsdale, County of Maricopa.
No grant of easement, and of right-of-way or grant or dedication
of a fee interest shall in any way reduce the rent payable
hereunder. Lessor agrees to execute, acknowledge and deliver such
instruments, without special compensation therefor, and Lessee
agrees to pay the costs and expenses of preparing, filing and
recording such instruments.
ARTICLE X
---------
Restrictive Covenants
---------------------
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1. Restriction on Lessee's Manager. Lessee agrees that it
-------------------------------
shall obtain from AIRCOA a covenant that AIRCOA will not
directly or indirectly own, operate or manage any hotel or motel
operation within two miles of the premises for the term of this
lease; provided, however, that Lessor will reasonably consider a
waiver of this covenant if Lessee and AIRCOA present a written
proposal to Lessor which shows to the satisfaction of Lessor that
the direct or indirect ownership, operation or management of any
hotel or motel operation by AIRCOA within two miles of the
premises would not result in the diminution of the rent which
Lessor would otherwise reasonably expect to receive under this
lease. In satisfaction of the covenant contained in this Article
X hereof AIRCOA agrees that it will not directly or indirectly
own, operate or manage any hotel or motel operation within two
miles of the premises during the term of this lease.
2. Management Fee. In the event Lessee is in default under
--------------
this lease for failure to pay the rent or for failure to pay
any monetary obligation under this lease, AIRCOA agrees that
one-half of its fee under its management agreement with Lessee
shall be withheld by Lessee and paid to Lessor to the extent that
there is any rent or such other monetary obligations due and
payable under this lease. AIRCOA and Lessee acknowledge that such
management fee is presently 4% of gross room rentals as defined
in this lease and agree further that said management agreement
shall not be amended or terminated prior to its presently
established expiration date without the Lessor's consent.
ARTICLE XI
----------
Security
--------
As security for the payment of all sums and the
performance of all covenants by Lessee under this lease, Lessee
does (a) hereby grant to Lessor a security interest in all
fixtures, equipment, machinery, furniture, appliances and other
chattels, and inventory, together with all replacements and
proceeds thereof, located or used on the premises for the hotel
operation, whether now owned or hereafter acquired, and, to the
extent permitted by the lease documents, a security interest in
any leasehold interest that Lessee may have in and to any of such
property, and (b) agrees to execute and deliver such other and
further documents as Lessor may request to evidence and perfect
such security interest of record, with the form and substance of
such other and further documents to be reasonably satisfactory to
counsel for Lessor. Lessor agrees that such security interest
shall be subject and subordinate to any security interest now or
hereafter obtained by any Fee Mortgagee and only to the extent
permitted by any Fee Mortgagee.
ARTICLE XII
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<PAGE>
-----------
Miscellaneous
-------------
1. Lessor's Approval. In every case where this lease
-----------------
provides that the approval, consent or acceptance of the
Lessor is necessary before the Lessee may act, a failure to
disapprove in writing, within thirty (30) working days after
Lessor's receipt of Lessee's request, shall be construed as
approval, provided that written notice to that effect shall have
been given to Lessor upon the submission to it of the request for
approval, consent and acceptance. No such approvals may be
withheld unreasonably and, in making such determination of
reasonableness, all facts and circumstances surrounding the
request and the general customs in hotel development and
operations may be considered. All disputes as to the
reasonableness of a disapproval shall be settled by agreement, if
possible, and, if not, by arbitration as provided herein.
2. Arbitration. Wherever this lease provides that a
-----------
controversy shall be settled by arbitration, the provisions
of this paragraph 2 shall apply. Such arbitrations shall be held
in the City of Scottsdale, County of Maricopa, State of Arizona.
The arbitration shall be conducted according to the rules and
practices of the American Arbitration Association from time to
time in force. The submission and agreement to arbitrate shall be
specifically enforceable. Arbitration may proceed in the absence
of either party if notice of the proceedings has been given to
such party. The parties agree to abide by all awards rendered in
such proceedings. Such awards shall be final and binding on all
parties. All awards made in any arbitration may be made the basis
of declaratory or other judgment and of the issuance of
execution, on filing the same with the clerk of one or more
courts, state or federal, having jurisdiction over the party
against whom such an award is rendered, or its property. No party
shall be considered in default hereunder during the pendency of
arbitration proceedings relating to such default.
3. Appraisal. Whenever this lease provides that the rent
---------
shall be determined by appraisal, such appraisal shall be made by
three (3) impartial real estate appraisers who are Members of the
Appraisal Institute or who hold similar qualifications, and the
Lessor and Lessee within ten days thereafter shall each appoint
one appraiser and give written notice to the other party, and in
case either party shall fail to do so within ten days after
appointment of the first appraiser, the party naming the first
appraiser may apply to any person then sitting as Chief Judge of
the Superior Court for the County of Maricopa, State of Arizona,
for appointment of a second appraiser, and the two appraisers so
appointed in either manner shall appoint a third appraiser, and
in case of their failure to do so within ten days after
appointment of the second
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<PAGE>
appraiser either party may have a third appraiser appointed by
such Judge, and the three appraisers so appointed shall proceed
to determine such rent, and the decision of said appraisers or a
majority of them shall be final, conclusive and binding on the
parties, except as provided herein and by law. The appraisers
shall be required to set forth in a written instrument to be
delivered to the parties their specific findings and
conclusions. A dissenting appraiser shall set forth his findings
and conclusions as well. Any provision of law to the contrary
notwithstanding, the parties shall have a right to apply to the
Chief Judge of tue Superior Court of the County of Maricopa,
State of Arizona, to have the appraisers' determination set aside
or modified if said Court shall conclude that it is arbitrary,
capricious or based upon erroneous findings of fact or
conclusions not supported by the facts. Any determination by the
appraisers shall be effective unless and until set aside by final
judicial action. Lessor and Lessee shall each pay the fees of its
own appraiser and attorneys and shall each pay one-half of all
other proper costs and expenses of such appraisal and of any
judicial action permitted by law or this paragraph.
4. Rights of First Refusal. (a) Lessee shall not sell,
-----------------------
assign or transfer, all or any part of its interest in this
lease without first offering to sell, assign or transfer such
interest to Lessor by giving written notice to Lessor of Lessee's
intent to sell, assign or transfer such interest, setting out in
the notice the terms of the proposed sale, assignment or
transfer. Lessor shall have the right and option to accept the
offer on substantially the same terms and conditions as set out
in the notice at any time within 30 days after receipt of such
notice. If Lessor does not accept such offer within such period
of 30 days, the Lessee shall be free for a period of 90 days
thereafter to sell, assign or transfer the interest on terms and
subject to the conditions outlined in the notice but not
otherwise, and if not so sold, assigned or transferred within
such 90-day period, the interest shall not be dealt with again by
Lessee without first offering to sell, assign or transfer to
Lessor as provided in this paragraph. In the event of any
permitted transfer, the aforesaid right of first refusal shall
apply to any and all subsequent transfers to any proposed
transferee.
(b) Lessor shall not sell, assign or transfer, all or
any part of its fee interest in the premises subject to this
lease without first offering to sell, assign or transfer such
interest to Lessee by giving written notice to Lessee of Lessor's
intent to sell, assign or transfer such interest, setting out in
the notice the terms of the proposed sale, assignment or
transfer. Lessee shall have the right and option to accept the
offer on substantially the same terms and conditions as set out
in the notice at any time within 30 days after receipt of such
notice. If Lessee does not accept such offer within such period
of 30 days, then Lessor shall be free for a period of 90 days
thereafter to sell, assign or transfer the interest on terms and
subject to the conditions outlined in the notice but not
otherwise, and if not so sold, assigned or transferred within
such 90-day period,
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<PAGE>
the interest shall not be dealt with again by Lessor without
first offering to sell, assign or transfer to Lessee as provided
in this paragraph. In the event of any permitted transfer, the
aforesaid right of first refusal shall apply to any and all
subsequent transfers to any proposed transferee.
5. Assumption of Risk. The Lessee will and does hereby
------------------
assume all risk of loss or damage to furnishings, furniture,
fixtures, supplies, merchandise and other property, by whomsoever
owned, stored or placed in the demised premises and does hereby
agree that the Lessor shall not be responsible for loss or damage
to any such property other than as a result of negligence or
fault chargeable to the Lessor, aud the Lessee hereby agrees to
indemnify and save harmless the Lessor from and against any and
all claims for such loss or damage, other than damage caused by
negligence or fault of the Lessor or its agents.
6. Holding Over. If the Lessee shall, with the consent of
------------
the Lessor, remain in possession of the demised premises
after the expiration of said term and without executing any
extension or renewal of this lease, Lessee shall be deemed to
occupy said premises as a tenant from month-to-month with each
month's rent to be one-twelfth (1/12) of the annual base rent
paid for the year preceding the expiration date, and at a
percentage rent calculated on a monthly basis at the same rate as
existed during the year preceding the expiration date and subject
to all the other covenants, conditions and provisions herein
contained insofar as the same are applicable to a month-to-month
tenancy.
7. Interest. Unless another rate of interest shall be
--------
specified, all sums due hereunder, including rent, shall
bear interest at the maximum rate of interest allowed by law or
one percent (1%) per month, whichever is less.
8. Definitions. The term "premises" as used herein means
-----------
and includes (except where such meaning would be clearly
repugnant to the context) the land hereby demised and all
buildings and other improvements now or at any time hereafter
built on the land hereby demised.
9. Notices. Any notice or demand to be given to or served
-------
upon either the Lessor or the Lessee in connection with this
lease shall be deemed to have been sufficiently given or served
for all purposes by being sent as registered or certified mail,
postage prepaid, addressed to such party or its agent at its post
office address hereinbefore specified or at such other post
office address as such party may from time to time designate in
writing to the other party, or by being delivered personally to
any officer of such party within the State of Arizona, and any
such notice or demand shall be deemed conclusively to have been
given or served on the date of such personal delivery or three
(3) days after such registration or certification.
80
<PAGE>
10. Real Estate Brokers. Each party represents to the other
-------------------
that it has dealt with no real estate brokers or salesmen
with respect to this lease, and each party agrees to hold the
other party harmless from all damages, including attorneys' fees,
resulting from any claims that may be asserted against the other
party by any broker, finder, or other person, as a result of
action by the indemnifying party.
11. Mutuality. This lease shall not be deemed to lack
---------
mutuality by virtue of any condition contained herein,
whether or not such condition must be fulfilled to the
satisfaction of the party for whose benefit it is intended. Each
such condition shall be deemed to require the parties to use
their good faith efforts to fulfill the same. The parties also
hereby mutually acknowledge that, in addition to all other
considerations of this lease, they have received other good and
valuable consideration in return for their promise that, pending
fulfillment of such conditions, this lease shall remain in force
and binding upon them.
12. Entire Agreement, Construction. This lease embodies all
-----------------------------
of the representations, warranties, covenants and agreements
of the parties in relation to the subject matter hereof, and no
representations, warranties, covenants, understandings or
agreements all or otherwise in relation thereto exists between
the parties except as herein expressly set forth. This lease
shall be construed according to its fair meaning and neither for
nor against either party.
13. Governing Law. This lease shall be governed by and
-------------
construed in accordance with the laws of the State of Arizona.
14. Non-Merger. There shall be no merger of this lease or
----------
of the leasehold estate created thereby with the fee estate
in and to the premises by reason of the fact that this lease or
the leasehold estate created thereby or any interest in either
thereof, may be held directly or indirectly by or for the account
of any person who shall own the fee estate in and to the
premises, or any portion thereof, and no such merger shall occur
unless and until all persons at the time having any interest in
the fee estate and all persons having any interest in this lease
or the leasehold estate including the Leasehold Mortgagee and Fee
Mortgagee shall join in a written instrument effecting such
merger.
15. Invalidity. If any provision of this lease or the
----------
application thereof to any person or circumstances shall to
any extent be invalid or unenforceable, the remainder of this
lease, or the application of such provision to person or
circumstances other than those as to which it is invalid or
unenforceable, shall not be affected thereby, and each provision
of this lease shall be valid and be enforced to the fullest
extent permitted by law.
81
<PAGE>
16. Notice of Transfer of Lessor's Interest. If the Lessee
---------------------------------------
in good faith believes there has been any change in or
transfer of Lessor's interest in or to the demised premises,
whether voluntary or involuntary or by the act of the Lessor or
by operation of law, and Lessee has received no notice of such
transfer, Lessee shall send notice to Lessor, which notice shall
contain a summary of the facts upon which Lessee determines that
Lessor has changed or transferred its interest in or to demised
premises and shall be under no obligation to pay any rents
thereafter accruing until notified by Lessor in writing of such
change in title or that there has been no such change in title
and being given satisfactory proof thereof, and the withholding
of such rents in the meantime shall not be deemed a default upon
the part of the Lessee, nor shall the Lessor's bankruptcy,
insolvency, assignment for the benefit of creditors or the
appointment of a receiver or trustee affect this Lease so long as
the covenants on the part of Lessee to be performed are being
performed by the Lessee with the exception of the right to defer
rents as hereinabove mentioned in this paragraph.
17. Article and Paragraph Headings. The article and
------------------------------
paragraph headings herein are inserted only for convenience
and reference and shall in no way define, limit or describe the
scope or intent of any provision of this lease.
18. Successors and Assigns. All the terms, covenants and
----------------------
conditions of this lease shall inure to the benefit of and
be binding upon the Lessor, its successors and assigns, and the
Lessee, its successors and permitted assigns, to the same extent
as said terms, covenants and conditions inure to the benefit of
and are binding upon the Lessor and the Lessee respectively. The
terms "Lessee" and "Lessor" herein or any pronoun used in place
thereof shall mean and include the singular or plural number, and
jointly and severally individuals, firms and corporations, and
their and each of their respective successors and permitted
assigns, according to the context hereof. In all cases of
assignment or mortgage by the Lessee, whether or not the consent
of the Lessor is required, the Lessee shall give notice in
writing to the Lessor of such action.
IN WITNESS WHEREOF, the parties hereto have caused
these presents to be executed as of the day and year first above
written.
===============================
H.C. Eichelberger
===============================
Fred E. Trotter
===============================
W.H. McVay
82
<PAGE>
Trustees under the Will and of the
Estate of James Campbell, Deceased
(Lessors)
AIRCOA shall be deemed liable for compliance only with the
provisions of Article IV Paragraph 9(a), Article IX Paragraph 1,
and Article X Paragraphs 1 and 2 of this Lease.
AIRCOA ARI, INC.
By ==================== By ========================
Its Vice President Its Vice President
Pursuant to the requirements of A.R.S. ss. 33-401, the identity
of the Lessor-trust is more particularly set forth in Exhibit "C"
attached hereto and incorporated herein by reference.
<PAGE>
Regal McCormick Ranch Page 128
- -----------------------------------------------------------------------
F.6 INDEMNIFICATION
<PAGE>
AIRCOA Hotel Partners, L.P.
March 11, 1997
BY TELECOPY-212-708-6523
Arthur Andersen LLP
1345 Avenue of the Americas
New York, New York 10105
Attn: Mr. Thomas McConnell
Mr. James W. Hire
Hire & Associates
1383 Solitude Lane
Evergreen, CO 80439
Mr. Anthony C. Dimond
Miramar Asset Management Inc.
617 Veterans Boulevard, Suite 212
Redwood City, CA 94063
Houlihan Lokey Howard & Zukin
1930 Century Park West
Los Angeles, CA 90067
Attn: John Schoenfeld
Re: Arthur Andersen Appraisals/AIRCOA Hotel Partners, L.P. ("AHP")
Ladies and Gentlemen:
This letter is to confirm certain agreements and approvals
of Arthur Andersen LLP ("AA") and the AIRCOA Parties and HLHZ (as
defined below) related to certain uses by AHP's Special Advisory
Committee (the "Special Committee") of AA's appraisal of certain
real property and improvements owned by AHP (the "Appraisal")
prepared in connection with a loan to AHP by the Hongkong and
Shanghai Bank (the "HSBC Loan"). This letter supplements that
certain letter dated February 18, 1997, by AHP to AA, the terms
of which are incorporated herein by reference. The following has
been agreed to by AHP and the Special Committee (collectively,
the "AIRCOA Parties"), and the Special Committee's financial
advisors Houlihan, Lokey, Howard & Zukin ("HLHZ") (collectively,
the "AIRCOA Parties") and AA:
1. AA agrees that copies of the Appraisal may be
provided to the Special Committee and HLHZ for review in
connection with the acquisition of limited partnership interests
in AHP by Regal Hotel Management, Inc. AA acknowledges that HLHZ
and the Special Committee have indicated to AHP an intent to rely
upon the Appraisals in connection with consideration of the
transaction described above and that AHP intends for HLHZ and the
Special Committee to so rely.
2. The AIRCOA Parties acknowledge their agreement to the
procedures performed as described in the accompanying Appraisal and
accept responsibility for the sufficiency of those procedures for
85
<PAGE>
their purposes. Consequently, AA makes no representation
regarding the sufficiency of the procedures described therein for
the purpose for which the accompanying Appraisal was originally
requested, for the AIRCOA Parties' or HLHZ's purposes, or for any
other purpose. Had AA been engaged to perform additional
procedures, other matters might have come to AA's attention that
would have been reported to the AIRCOA Parties. Furthermore, AA
has not performed any procedures subsequent to the date of
Appraisal and therefore AA accepts no responsibility for events
and circumstances occurring after that date.
3. The Appraisal is being provided to the AIRCOA
Parties and HLHZ for informational purposes only. The AIRCOA
Parties should complete their own due diligence in connections
with the transaction described above to the extent they consider
necessary. It is understood that the reading of the accompanying
Appraisal does not substitute for the AIRCOA Parties' own due
diligence.
4. By acceptance of this letter, the AIRCOA Parties
and HLHZ agree that neither AA nor any of its affiliates,
partners, employees or representatives shall have any liability
to them relating to the use of the accompanying Appraisal, except
to the extent such liability arises from AA's gross negligence or
willful misconduct.
5. This letter and the accompanying Appraisal are
intended solely for the use of AIRCOA Parties and HLHZ and should
not be used by those who have not agreed to the procedures and
taken responsibility for the sufficiency of the procedures for
their purposes.
6. In connection with the transaction described above,
AA consents to including, to the extent required by federal
securities laws, a copy of the Appraisal and/or a summary thereof
or a reference thereto in the Schedule 13E-3 and related proxy
statement with the Securities and Exchange Commission by AHP or
the Special Committee, provided that AA shall have the right to
approve the content of any summary of the Appraisals, such
approval not to be unreasonably withheld.
7. This letter does not modify or amend in any respect
the engagement letter dated February 19, 1997 among HLHZ, AIRCOA
Hospitality Services, Inc., and AIRCOA Hotel Partners, L.P.
86
<PAGE>
Please indicate your acceptance of these arrangements
by signing and returning a copy of this letter to AA.
AIRCOA HOTEL PARTNERS, L.P.
By: AIRCOA Hospitality Services, Inc.,
General Partner
By: ===============================
Name:
Title:
By: ==============================
Name:
Title:
AIRCOA HOSPITALITY SERVICES, INC.
a Delaware corporation
By: ===============================
Name:
Title:
By: ==============================
Name:
Title:
ARTHUR ANDERSEN LLP
By: ===============================
Name:
Title:
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
By: ==============================
Name:
Title:
AHP SPECIAL COMMITTEE
By: ===============================
Name:
By: ==============================
Name:
<PAGE>
Arthur Andersen LLP
Appraisal of:
SHERATON INN BUFFALO AIRPORT
CHEEKTOWAGA, NEW YORK
As of:
JANUARY 1, 1997
Prepared For:
AIRCOA Hotel Partners, L.P.
Special Committee
March 31, 1997
Prepared By:
ARTHUR ANDERSEN LLP
Hospitality Industry Consulting Services Group
<PAGE>
[Letterhead of Arthur Andersen]
April 15, 1997
Mr. James W. Hire
Hire & Associates
1383 Solitude Lane
Evergreen, CO 80439
Mr. Anthony C. Dimond
Miramar Asset Management, Inc.
617 Veterans Boulevard, Suite 212
Redwood City, CA 94063
Re: Appraisal of Sheraton Inn Buffalo Airport; Cheektowaga, New York
As of January 1, 1997
Gentlemen:
As requested, we have completed an "as is" appraisal of the
leasehold interest in the above-referenced property. The reader
is advised that our Firm has not audited, examined, reviewed or
applied agreed-upon procedures to the financial data contained in
the accompanying report unless specifically noted. We have relied
on information, including but not limited to industry statistics,
relevant market, demographic and financial data assembled by us
through direct research conducted by our staff or from secondary
sources as well as information provided by you. While these
sources of information are generally recognized as authoritative
in the field or otherwise considered reliable, we have not
audited this information nor do we warrant its completeness or
accuracy. The opinion of market value subject to stabilized
occupancy expressed herein is subject to the assumptions and
limiting conditions set forth in the body of the accompanying
report.
We understand that our valuation will be used to assist you in
determining the fair market value for internal purposes and may
not be disclosed to a third party without the prior written
consent of Arthur Andersen LLP.
Based upon our research and analysis, it is our opinion that the
"as is" market value of the leasehold interest, including
furniture, fixtures and equipment, as of January 1, 1997 is
-- Fourteen Million Dollars --
($14,000,000)
We appreciate the opportunity to serve you. Please call if you
have any questions or if we can be of further assistance.
Very truly yours,
/s/ Arthur Andersen LLP
<PAGE>
Sheraton Inn Buffalo Airport Page i
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TABLE OF CONTENTS
SUMMARY OF CRITICAL FACTS AND CONCLUSIONS.......................iii
GENERAL ASSUMPTIONS AND LIMITING CONDITIONS.......................v
CERTIFICATION..................................................viii
A. INTRODUCTION..................................................9
A.1 SUBJECT PROPERTY IDENTIFICATION..............................9
A.2 OWNERSHIP HISTORY............................................9
A.3 PURPOSE AND FUNCTION OF THE VALUATION.......................11
A.4 PROPERTY RIGHTS APPRAISED...................................12
A.5 EFFECTIVE DATE OF THE VALUATION.............................14
A.6 EXPOSURE PERIOD.............................................14
A.7 SCOPE OF THE APPRAISAL......................................15
A.8 SPECIAL ASSUMPTIONS.........................................16
B. ANALYSIS OF THE SUBJECT PROPERTY AND ITS MARKET..............17
B.1 DESCRIPTION AND ANALYSIS OF THE PROPERTY....................17
Location.......................................................17
Legal Description..............................................17
Land...........................................................17
Property Improvements..........................................18
Property Inspection............................................26
Past Renovation and Capital Requirements.......................28
Property Taxes.................................................29
Zoning.........................................................31
B.2 AREA ANALYSIS...............................................33
Economic and Demographic Indicators............................34
Employment.....................................................36
Office Market Overview.........................................38
Transportation.................................................39
Tourism........................................................41
Convention and Trade Show Market...............................43
B.3 HIGHEST AND BEST USE ANALYSIS...............................44
Highest and Best Use of The Land as if Vacant..................44
Highest and Best Use of The Property As Currently Improved.....46
Conclusion and Reconciliation of Highest and Best Use..........48
C. ANALYSIS OF COMPETITIVE LODGING SUPPLY AND DEMAND............49
C.1 COMPETITIVE LODGING SUPPLY..................................49
Identified Competitive Supply..................................49
Additions To Supply............................................58
C.2 LODGING SUPPLY AND DEMAND ANALYSIS..........................62
Overall Demand Trends in the Buffalo Lodging Market............62
Lodging Demand in the Identified Competitive Supply............64
Demand Segmentation And Estimated Demand Growth................66
C.3 ESTIMATED OCCUPANCY AND AVERAGE ROOM RATE...................72
Market Penetration & Average Annual Occupancy..................72
Projected Average Daily Room Rate..............................78
<PAGE>
Sheraton Inn Buffalo Airport Page ii
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D. THE APPRAISAL PROCESS........................................81
D.1 THE COST APPROACH...........................................81
D.2 SALES COMPARISON APPROACH...................................82
Conclusion by the Sales Comparison Approach....................90
D.3 INCOME APPROACH.............................................91
Historical Financial Performance...............................92
Estimated Operating Results....................................96
Investment Climate Overview...................................107
Discounted Cash Flow Analysis.................................108
E. RECONCILIATION AND FINAL VALUE ESTIMATE....................111
F. ADDENDA.....................................................113
F.1 HOTEL SALES COMPARABLES...................................114
F.2 SUBJECT PROPERTY PHOTOGRAPHS...............................120
F.3 COMPETITIVE HOTEL PHOTOGRAPHS..............................128
F.4 PROPERTY LEGAL DESCRIPTION.................................132
F.5 GROUND LEASE...............................................133
F.6 FLOOD INSURANCE RATE MAP...................................134
F.7 PROPERTY TAX BILLS.........................................135
F.8 INDEMNIFICATION............................................136
<PAGE>
Sheraton Inn Buffalo Airport Page iii
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SUMMARY OF CRITICAL FACTS AND CONCLUSIONS
Property Name: Sheraton Inn Buffalo Airport
Property Address: 2040 Walden Avenue
Cheektowaga, New York 14225
Property Location: Located on Walden Avenue, adjacent northeast
of Exit 52 at Interstate 90
Property Type: A high-rise, full-service hotel
Number of Rooms: 292 rooms
Owner of Record: Buffalo Operating Parcel 102.02-1-29.2
Partnership:
Zola Thaddeus & One Parcel 102.02-1-27
Buffalo Inn Parcel 102.02-1-27./A
Association: Parcel 102.02-1-27./B
Year-End Occupancy:
1994 89.4 percent
1995 82.9 percent
1996 (Estimated) 85.0 percent
Year-End Average Rate:
1994 $65.49
1995 $65.34
1996 (Estimated) $66.00
Interest Appraised: Leasehold
Land Area: 341,510-square feet (7.84 acres)
Building Area: 215,492-square feet
Year Completed: March 12, 1973
Highest and Best Use:
Land as though vacant: Hold for hotel or commercial development
Land as improved: Hotel use with renovations
Date of Valuation: January 1, 1997
Date of Inspection: November 7, 1996
<PAGE>
Sheraton Inn Buffalo Airport Page iv
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Value Indications (Including Furniture, Fixtures, and Equipment):
$ Amount $ Per Room
-------- ----------
Cost Approach: n/a n/a
Sales Comparison Approach: $13,432,000 $46,000
Income Approach: $13,930,000 $47,705
----------- ----------
Reconciled Value Indication: $14,000,000 $47,945
=========== ==========
<PAGE>
Sheraton Inn Buffalo Airport Page v
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GENERAL ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal report is subject to the following general
assumptions and limiting conditions:
1. No investigation has been made of, and no responsibility is
assumed for, the legal description of the property being
valued or legal matters, including title or encumbrances.
Title to the property is assumed to be good and marketable
unless otherwise stated. The property is assumed to be free
and clear of any liens, easements, or encumbrances unless
otherwise stated.
2. Information furnished by others, upon which all or portions
of this appraisal are based, is believed to be reliable but
has not been verified in all cases. No warranty is given as
to the accuracy of such information.
3. It is assumed that all required licenses, certificates of
occupancy, consents, or other legislative or administrative
authority from any local, state, or national government or
private entity or organization has been or can readily be
obtained or renewed for any use on which the value
estimates contained in this report are based.
4. Full compliance with all applicable federal, state, and
local zoning, use, occupancy, environmental, and similar
laws and regulations is assumed unless otherwise stated.
5. No responsibility is taken for changes in market
conditions, and no obligation is assumed to revise this
report to reflect events or conditions which occur
subsequent to the appraisal date hereof.
6. The opinion of value is predicated on the financial structure
prevailing as of the date of this appraisal.
7. Responsible ownership and competent property management
are assumed.
8. Areas and dimensions of the property were obtained from
sources believed to be reliable. Maps or sketches, if included in
this report, are only to assist the reader in visualizing the
property, and no responsibility is assumed for their accuracy. No
independent surveys were conducted.
9. It is assumed that there are no hidden or un-apparent
conditions of the property, subsoil, or structures that
render it more or less valuable. No responsibility is
assumed for such conditions or for arranging engineering
studies that may be required to discover them.
10. No soil analysis or geological studies were ordered or made
in conjunction with this report, nor was an investigation
made of any water, oil, gas, coal, or other subsurface
mineral and use rights or conditions.
<PAGE>
Sheraton Inn Buffalo Airport Page vi
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11. Neither Arthur Andersen LLP nor any individual signing
or associated with this report shall be required by reason
of this report to give further consultation, provide
testimony, or appear in court or at other legal proceedings
unless specific arrangements therefore have been made.
12. This report has been made only for the purpose stated and
shall not be used for any other purpose. Neither this
report nor any portions thereof (including, without
limitation, any conclusions as to value or the identity of
Arthur Andersen LLP or any individuals signing or
associated with this report or the professional
associations or organizations with which they are
affiliated) shall be disseminated to third parties by any
means without the prior written consent and approval of
Arthur Andersen LLP.
13. The date of value to which the opinions expressed in this
report apply is set forth in the opinion letter at the
front of this report. Our value opinion is based on the
purchasing power of the U.S. dollar as of that date. We
have no obligation to update our findings and conclusions
for changes in market conditions which occur subsequent to
our fieldwork.
14. Our study and report will be based on assumptions and
estimates which are subject to uncertainty and variation.
These estimates are often based on data obtained in
interviews with third parties, and such data are not always
completely reliable. Therefore, while our estimates will be
conscientiously prepared on the basis of our experience and
the data available to us, we make no warranty of any kind
that the financial results projected will, in fact, be
achieved.
15. Unless otherwise stated in this report, no hazardous
material, which may or may not be present on or near the
property, was observed. We have no knowledge of the existence of
such materials on or in the property; however, we are not
qualified to detect such substances. The presence of potentially
hazardous substances, such as asbestos, urea-formaldehyde foam
insulation, or industrial wastes, may affect the value of the
property. The value estimates herein are predicated on the
assumption that there is no such material on, in, or near the
property that would cause a loss in value. No responsibility is
assumed for any such conditions or for any expertise or
engineering knowledge required to discover them. The client
should retain an expert in this field if further information is
desired.
16. This appraisal has been made in conformance with the
Uniform Standards of Professional Appraisal Practice of The
Appraisal Foundation.
17. The allocation in this report of the total valuation among
components of the property applies only to the program of
utilization stated in this report. The separate values for
any components may not be applicable for any other purpose
and must not be used in conjunction with any other
appraisal.
18. Arthur Andersen consents to including, to the extent
required by federal securities laws, a copy of the
Appraisal and/or a summary thereof or a reference thereto
in the Schedule 13E-3 and related proxy statement with
Securities and Exchange Commission by AHP or the Special
Committee, provided that Arthur Andersen shall have the
right to
<PAGE>
Sheraton Inn Buffalo Airport Page vii
- --------------------------------------------------------------------
approve content of any summary of the Appraisals, such
approval not to be unreasonably withheld otherwise, this
report and parts thereof, and any additional material
submitted, may not be used in any prospectus or printed
material used in connection with the sale of securities or
participation interests in any Public Offering, Securities
and Exchange Commission filing, or other public document.
19. Arthur Andersen LLP's maximum liability relating to
services rendered under this report (regardless of form of
action, whether in contract, negligence, or otherwise)
shall be limited to the charges paid to Arthur Andersen LLP
for the portion of its services or work products giving
rise to liability. In no event shall Arthur Andersen LLP be
liable for consequential, special, incidental, or punitive
losses, damages, or expenses (including, without
limitation, lost profits, opportunity costs, etc.) even if
it has been advised of their possible existence.
20. The Americans with Disabilities Act became effective
January 26, 1992. We did not make any observations or
interpretations on compliance with the ADA. It is possible that a
compliance survey of the property, together with a detailed
analysis of the requirements of the ADA could reveal that the
property is not in compliance with the requirements of the Act.
If so, this fact could have a negative effect upon the value of
the property. Since we have no direct evidence relating to this
issue, we did not consider possible non-compliance with the
requirements of ADA in estimating the value of the property.
21. The rooms utilization at the subject property currently
attributed to contracts with airlines to house flight crews is
assumed to remain intact throughout the projection period. The
property is heavily reliant on these contracts (approximately 40
percent of total demand) which are generally renewed on an annual
basis. According to property management, this business is
considered to be dependable, and the subject hotel is presumed to
be the hotel of choice in this segment on the basis of its
location and amenities/facilities. In the future, should this
assumption not hold true, our value estimates and conclusions
provided herein could be influenced and may need to be re-
addressed.
<PAGE>
Sheraton Inn Buffalo Airport Page viii
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CERTIFICATION
We certify that to the best of our 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 our personal, unbiased professional analyses, opinions
and conclusions.
- -- we have present no prospective interest in the property that
is the subject of this report, and we have no personal
interest or bias with respect to the parties involved.
- -- our compensation is not contingent on an action or event
resulting from the analyses, opinions, or conclusions in, or
the use of, this report.
- -- Peter Chang made a personal inspection of the property on
November 7, 1996. Both Thomas McConnell and Peter Chang
provided significant professional assistance to the persons
signing this report.
- -- our 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
Supplemental Standards of Professional Practice of the
Appraisal Institute and the Uniform Standards of Professional
Appraisal Practice of The Appraisal Foundation;
- -- the use of this report is subject to the requirements of the
Appraisal Institute relating to review by its duly authorized
representatives;
- -- neither all nor any part of the contents of this report
(especially any conclusions as to value or the identify of
the appraiser) 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.
- -- this appraisal assignment was not based on a requested
minimum valuation, a specific valuation, or the approval of a
loan.
Respectfully submitted,
/s/ Roger Cline /s/ Brian Ginsberg
- ------------------------- ---------------------------
Roger Cline Brian Ginsberg M.A.I.
Partner New York Certification No. I - 477
/s/ Thomas McConnell /s/ Peter Chang
- ------------------------- ---------------------------
Thomas McConnell Peter Chang
Senior Manager Consultant
<PAGE>
Sheraton Inn Buffalo Airport Page 9
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A. INTRODUCTION
A.1 SUBJECT PROPERTY IDENTIFICATION
Property Address: 2040 Walden Avenue
Cheektowaga, New York 14225
Tax Reference (Parcel Number): 102.02-1-29.2
102.02-1-27
102.02-1-27./A
102.02-1-27./B
Deed Reference (Parcel Number): 102.02-1-29.2
102.02-1-27
102.02-1-27./A
102.02-1-27./B
Current Owner of Record: Buffalo Operating Parcel 102.02-1-29.2
Partnership:
Zola Thaddeus & One Parcel 102.02-1-27
Buffalo Inn Parcel 102.02-1-27./A
Association: Parcel 102.02-1-27./B
A.2 OWNERSHIP HISTORY
The Sheraton Inn Buffalo Airport ("Sheraton Inn") was originally
developed in March 13, 1973 on leased property by Arthur L.
Duggan of Boston, Massachusetts. The property leasehold was sold
by Arthur L. Duggan, under Archris Hotel Partnership, to Buffalo
Inn Associates, a Colorado general partnership, on November 3,
1981. On December 31, 1986, the leasehold was transferred to
AIRCOA Hotel Partners.
AIRCOA Hotel Partners, L.P., a Delaware limited partnership
("AHP" or the "Partnership") was organized in December 1986, by
AIRCOA Hospitality Services, Inc. ("AHS" or the "General
Partner") to acquire, own, operate and sell hotels and resort
properties. The Partnership owns and operates the Sheraton Inn
through an operating partnership (the "Buffalo Operating
Partnership L.P.") which was acquired in 1986.
<PAGE>
Sheraton Inn Buffalo Airport Page 10
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The Partnership owns a 99 percent limited partner interest in the
Buffalo Operating Partnership L.P. which holds title to the
Sheraton Inn. AHS, a wholly owned subsidiary of Richfield
Hospitality Services, Inc. ("Richfield"), is also the one percent
General Partner of the Buffalo Operating Partnership L.P.
Richfield operates the subject property for the Partnership under
a management agreement, which is described herein.
<PAGE>
Sheraton Inn Buffalo Airport Page 11
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A.3 PURPOSE AND FUNCTION OF THE VALUATION
The purpose of this report is to estimate the market value of the
leasehold estate in the subject property. Arthur Andersen has
been engaged by the Special Committee of AIRCOA Hotel Partners,
L.P. (AHP) for the purpose of assisting them in assessing the
value of the individual properties owned by the Partnership.
As used herein, market value is defined as1 :
"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 the sale as of a specified date and the
passing of title from seller to buyer under conditions
whereby:
a. buyer and seller are typically motivated;
b. both parties are well informed or well advised, and
acting in what they consider their best interests;
c. a reasonable time is allowed for exposure in the open
market;
d. payment is made in terms of cash and United States
dollars or in terms of financial arrangements comparable
thereto; and
e. 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."
This appraisal has been prepared in compliance with the
Appraisal Standards Board requirements and is a self-contained
appraisal report. The report contains all information significant
to the solution of the appraisal problem and reports all
significant date in comprehensive detail.
- ---------------
1 Uniform Standards of Professional Appraisal Practice, Appraisal
Foundation, 1990 Edition.
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Sheraton Inn Buffalo Airport Page 12
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A.4 PROPERTY RIGHTS APPRAISED
The property rights appraised are the ownership of the leasehold
value. The leasehold value reflects the tenant's interest or
right to use and occupy the real estate by virtue of a lease
agreement. Copies of the leases are provided in the addenda of
this report as section F.5 Ground Leases. Following is an
abstract of the lease terms.
Ground Lease 1
--------------
Demised Premise: Referenced in Addenda section F.5 Ground Leases
Landlord: Thaddeus Zola, Chester Zola, Clara Zola, and Stella
Juzdowski
Tenant: Buffalo Operating Partnership, L.P., a Delaware
limited partnership
Dated: May 11, 1970
Term/Renewal Options: One 30 year term and option to extend term for three
additional consecutive period of ten years
Base Rent/Percentage
Rent: The rent is calculated as the greater of an annual
base rent of $30,000 or one-half of the sum of:
1) 3.0 percent of annual gross rooms revenue and
2) 1.0 percent of gross food and beverage revenue
Restrictions: Tenant shall be liable for all property taxes
during the term. Ground lease is subordinated to
mortgage payments
Ground Lease 2
--------------
Demised Premise: Referenced in Addenda section F.5 Ground Leases
Landlord: Joseph A. Malecki and Josephine Gloria Malecki
Tenant: Buffalo Operating Partnership, L.P., a Delaware
limited partnership
Dated: May 11, 1970
Term/Renewal
Options: One 30 year term and option to extend term for
three additional consecutive period of ten
years
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Sheraton Inn Buffalo Airport Page 13
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Ground Lease 2 (Continued)
--------------------------
Base Rent/Percentage
Rent: The rent is calculated as the greater of an annual
base rent of $30,000 or one-half of the sum of:
1) 3.0 percent of annual gross rooms revenue and
2) 1.0 percent of gross food and beverage revenue
Restrictions: Tenant shall be liable for all property taxes
during the term. Ground lease is subordinated to
mortgage payments
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Sheraton Inn Buffalo Airport Page 14
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A.5 EFFECTIVE DATE OF THE VALUATION
The effective date of this value estimate is January 1, 1997. The
property was inspected by Peter Chang on November 7, 1996.
A.6 EXPOSURE PERIOD
Exposure period refers to the amount of time which a property
would have been on the market prior to the date of appraisal for
it to sell at the appraised value. The current marketplace has
been somewhat characterized by illiquidity and capital restraints
which has affected the time in which real estate takes to sell.
The market for most types of properties was much more active in
the 1980s due to greater availability of credit and greater
investor optimism. The volume of transactions of hotel properties
diminished in 1991 and 1992, and there was less investment and
development activity in the marketplace. Since then, the markets
have shown improvement and there has been a significant increase
in sales activity. Most of the investors with whom we have spoken
agreed that an exposure period of between six months and one year
would be sufficient in order to maximize the price for a property
such as the subject.
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Sheraton Inn Buffalo Airport Page 15
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A.7 SCOPE OF THE APPRAISAL
As part of this assignment, the appraisers made a number of
independent investigations and analyses. In conducting our
investigation, various governmental planning agencies and the
local Chamber of Commerce were contacted for demographic data,
land policies and trends, and growth estimates. Neighborhood data
were supplemented by physical inspection of the defined area.
Information regarding zoning, utilities, and other limitations on
site utilization was obtained from the client and through the
appropriate agencies. Both the site and the surrounding area was
inspected to determine suitability for hotel use. All phases of
the local lodging market were analyzed for past trends and
current data. Estimated income and occupancy levels, expenses,
and income structures are based upon this market evidence.
A diligent search for comparable data was conducted, and
comparable information was obtained from both public and private
sources. In the case of comparable sales data, attempts were made
to contact the buyers or sellers or other knowledgeable third
parties to verify that the transactions were at arm's length,
cash equivalent, and market reflective. Because there was a
limited number of comparable hotel sales in the subject market
area, we extended our search to other markets. The sales
comparison approach was employed, however, we did not place much
reliance on it but used it as a test of reasonableness. The cost
approach was not utilized as it is considered to have limited
reliability due to the difficulty in estimating the significant
depreciation and external obsolescence present at the subject
Sheraton Inn. The income capitalization approach was given
primary emphasis as there was sufficient data for its
application, and it reflects the typical investor's behavior.
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Sheraton Inn Buffalo Airport Page 16
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A.8 SPECIAL ASSUMPTIONS
This appraisal and the value estimates set forth herein place
significant reliance upon operating information and capital
improvement costs provided by the property owner. All
owner-provided materials have been presumed to be accurate and
reliable. We have also performed our analyses based upon the
underlying assumption that rooms utilization currently attributed
to contracts with airlines to house flight crews is assumed to
remain intact throughout the projection period. The property is
heavily reliant on these contracts (approximately 40 percent of
total demand) which are generally renewed on an annual basis.
According to property management, this business is considered to
be dependable, and the subject hotel is presumed to be the hotel
of choice in this segment on the basis of its location and
amenities/facilities. In the future, should this assumption not
hold true, our value estimates and conclusions provided herein
could be influenced and may need to be re-addressed.
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Sheraton Inn Buffalo Airport Page 17
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B. ANALYSIS OF THE SUBJECT PROPERTY AND ITS MARKET
This section of the report presents a description and analysis of
the subject property's location, improvements, physical
condition, need for capital expenditures, property taxes, and
zoning. In addition, this section of the report presents a review
of the subject's market area and an analysis of the property's
highest and best use.
B.1 DESCRIPTION AND ANALYSIS OF THE PROPERTY
LOCATION
The subject of the appraisal is a 7.84-acre parcel of land that
is improved by a 292-unit hotel. The property, built in 1973 and
known as the Sheraton Inn Buffalo Airport, is located on the
north-side of Walden Avenue in Cheektowaga, New York and is
adjacent to the Walden Galleria and the New York
Thruway/Interstate 90. The civic address of the property is 2040
Walden Avenue, Cheektowaga, New York 14225.
LEGAL DESCRIPTION
A detailed legal description is provided in the addenda of this
report as section F.4 Property Legal Description.
LAND
Size and Configuration: The subject site is relatively
rectangular in shape and contains 341,510 square feet, or 7.84
acres.
Frontage and Accessibility: The property maintains four two-way
entrances and has approximately 678 linear feet of frontage on
Walden Avenue. The property is located approximately 100 yards
from the intersection of Walden Avenue and Exit 52 at Interstate
90. The subject property has good access to Interstate 90, Walden
Avenue, and Union Road, which are all main thoroughfares in the
Buffalo area.
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Sheraton Inn Buffalo Airport Page 18
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Topography: According to the Cheektowaga Engineer's Office
and our physical inspection, the subject site is at street grade
level.
Floodplain: According to an April 8, 1983 Flood Insurance Rate
Map (FIRM) prepared by the Federal Emergency Management Agency
(FEMA), the subject site is located in Zone C, which is
designated as "an area of minimal flooding". As such, the subject
site is not located in a potentially hazardous flood zone. A copy
of the FIRM is provided in section F.6 of the addenda.
Utilities and Public Services: All utilities are available
to the site including public gas, water, sewer, telephone, and
electric.
Easements and Encroachments: Typical utility and access
easements exist throughout the subject site. We are not aware of
any easements which negatively impact the subject.
Development on Neighboring Sites: The surrounding development is
predominantly commercial and retail. Cheektowaga Central School
(Kindergarten through High School) and the Walden Galleria mall
comprises the western and eastern regions that surround the
subject property, respectively. The subject is situated along the
north-side of Walden Avenue, and land uses along the south-side
of Walden Avenue comprise an Olive Garden restaurant, Pier 1
retail outlet, Kids R Us, Borders book store, K-Mart,
Truck-Equipper, and a Sunoco gasoline station.
PROPERTY IMPROVEMENTS
General
The Sheraton Inn is a single, concrete structure that comprises a
nine-story tower ("guest tower") and a two-story building ("main
building"). The total gross building area is approximately
215,492 square feet. Completed in 1973, the property comprises
292 guest units of which 237 units are located in the guest
tower. The remaining 55 guest units are located in the main
building. Also contained within the main building structure is
the lobby, an indoor courtyard and swimming pool, 12,216 square
feet of meeting space, three food and beverage outlets, gift
shop, and executive and sales offices. The following paragraphs
present further details on the facilities and services at the
hotel.
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Sheraton Inn Buffalo Airport Page 19
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Guest Rooms
At present the hotel contains 292-guest room units, of which 32
percent are king-bedded rooms. Double-double bedded units account
for approximately 68 percent of the total inventory. In addition,
approximately 19 percent of the total inventory are Preferred
Quarters, which are guest rooms dedicated to frequent business
travelers. The following table details the number of rooms by
type.
- --------------------------------------------------
Current Suites Configuration of the Subject Hotel
- --------------------------------------------------
King Rooms 81
Double-Double Rooms 199
Suites 12
- --------------------------------------------------
Total Number of Rooms 292
- --------------------------------------------------
All of the guest room units are situated on double-loaded,
interior corridors with a majority of the inventory in the guest
room tower. The remaining inventory is located in the main
building, which comprises a two-story structure that surrounds an
interior courtyard. The following are available in each guest
room.
o Typically finished with carpeted floors and wall-papered
walls. Furnished with king or queen-beds, night tables with
reading lamps, a lounge chair or queen-size sofa bed, a
standing lamp, a study desk with a table lamp, a luggage
stand, and an armoire with a two-drawer bureau;
o Bathrooms have one lavatory with a vanity/mirror unit, a
tiled tub and shower area, and tiled floors;
o Depending on the room type, amenities include a coffee
maker, mini-refrigerator, remote-controlled television with
on-screen programming and Spectra-vision, and blow dryer;
and
o All Preferred Quarters include a stocked refrigerator
free-of-charge, nightly turndown service, a pass to the
Preferred Travelers Club, complimentary newspaper, and are
located in upper floors of the tower complex with superior
views.
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Sheraton Inn Buffalo Airport Page 20
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Food and Beverage Outlets
There are three food and beverage outlets at the property:
o The Grille on Walden is the main eating facility at the
property, which serves three meals a day. This 120-seat
outlet offers primarily American cuisine during breakfast
and lunch and a Steakhouse themed-menu during dinner;
o Twigs Bar and Grille is a 115-seat food and beverage outlet
that is open from 12 PM until 1 AM. This sports
bar/restaurant offers an open bar, a small eating area for
"finger" snacks, a 50-inch television, and a pool table;
and
o H2O Bar is a beverage outlet located adjacent to the
swimming pool area and offers an open bar.
Meeting and Banquet Space
The property contains approximately 12,216-square feet of
dedicated meeting space. The following table details the meeting
space available at the subject Sheraton Inn:
- --------------------------------------------------------------
Meeting Room or Location/ Number of Square
Ballroom Name Floor Divisions Feet
- --------------------------------------------------------------
Presidential
Ballroom Main Floor/1 5 6,300
McKinley Main Floor/1 0 1,440
Upper Courtyard Main Floor/1 0 800
Lower Courtyard Main Floor/1 0 1,800
Jefferson Room 238/2 0 308
Lincoln Room 237/2 0 252
Washington Room 250/2 0 576
Governors Room 801/8 0 432
Eisenhower Room 132/1 0 308
- --------------------------------------------------------------
Total Meeting Space - - 12,216
- --------------------------------------------------------------
The present configuration of the meeting space is considered to
be efficient and adequate for the number of groups that are
booked at the subject hotel and the size of its guest room
inventory. The meeting facility maintains a separate entrance and
is located in a part of the building that is dedicated for
function and meeting activities. The conditions of the meeting
rooms are relatively good.
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Sheraton Inn Buffalo Airport Page 21
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Gift Shop
The gift shop is located adjacent to the lobby and offers a
selection of souvenirs, snacks, toiletries, and periodicals.
Recreational Facilities
The hotel has an exercise room, a sauna, a game room, and an
all-season indoor pool located in a tropical courtyard with a
domed retractable roof.
Preferred Travelers Club
The subject hotel maintains a proprietary club for frequent
business travelers: The Preferred Travelers Club. Enrollment in
this club is free, and membership benefits depend on the number
of stays per year. In general, membership benefits include room
night and restaurant discounts, upgrades to Preferred Quarters,
and gift certificates to Walden Galleria. In addition, all
members have access to a private clubroom. This clubroom offers
an executive meeting room, an open bar, a pool table, free
continental breakfast, free cocktails and hors d'oeuvres, and a
lounge serviced by professionally trained Preferred Travelers
Club staff.
Other Services
The subject property offers 425 parking spaces, complimentary
shuttle service to and from the Greater Buffalo Airport and
Amtrak stations, an on-premise rental car agency, and
valet/laundry services.
Presented in the following two pages are layouts of the main
building and a guest tower floor plan, respectively.
<PAGE>
Main Building Layout
<PAGE>
Sheraton Inn Buffalo Airport Page xxxv
<PAGE>
Guest Tower Floor Layout
<PAGE>
Sheraton Inn Buffalo Airport Page 24
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Structural Systems:
Floor-Area Ratio
("FAR"): 0.63 (Please note that zoning is not
governed by FAR ratios )
Floors: Nine
Foundation: Reinforced concrete slabs and footings
Building Frame: Steel columns and masonry block
Roofing System: Flat, rubber membrane covered water proofing over
concrete slabs and gravel throughout the hotel; the
courtyard has a retractable domed roof made of steel
columns and reinforced glass
Exterior Walls: Painted brick walls
Mechanical Systems:
HVAC System: The property has a two-pipe system capable of
providing heating and cooling. The heating type is via forced
air, and the cooling type is a centralized system. Each guest
room has individual thermostat controls and individual fan
coil units. The following summarizes the main components of
the heating and air-conditioning system.
Heating System:
-- Guest Rooms: Two H-2500A Raypak boilers with an
output capacity of 1.3 million BTUs per
hour and two 250 gallon storage tanks
-- Meeting and Public
Space: Two H-3500A Raypak boilers with an
output capacity of 3.5 million
BTUs per hour
Cooling System:
-- Guest Rooms,
Meeting and
Public Space: A Baltimore Aircoil cooling tower and
16 Carlye air compressors with output
capacities ranging from six to 10 tons
Fire Protection System: The property maintains a Simplex
System Model 8201 fire monitoring system which is located at
the front desk. Each guest room contains a sprinkler and a
heat and smoke detector. In the guest corridors, there is a
sprinkler every four feet, and the meeting spaces and other
public areas appear to contain an adequate number of
sprinklers and heat and smoke detectors.
<PAGE>
Sheraton Inn Buffalo Airport Page 25
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Elevators:
Passenger Elevators: There are two elevators with 2,500 lb.
capacity that travel from the lobby to the
eighth floor in the guest towers
-- Cab Manufacturer: Westinghouse
-- Control Manufacturer: Westinghouse
-- Age: 1972
Service Elevators: There is one elevator with 3,500 lb.
capacity that travels from the basement to
the eighth floor in the guest towers
-- Cab Manufacturer: Westinghouse
-- Control Manufacturer: Westinghouse
-- Age: 1972
Plumbing: Domestic water is provided by the Erie County Water
Authority direct to the hotel.
Electrical System: Service is provided via a volt transformer
vault owned by NYSEG (New York State Electric and Gas). An
emergency generator is maintained for instances where the main
power supply is interrupted and is powered by a diesel fuel
engine.
Interior Finishes:
Floor Coverings:
Lobby: Ceramic tile with carpet inlay
Meeting Rooms: Carpet (padded)
Guest Rooms: Carpet (padded)
Corridors: Carpet (padded)
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Sheraton Inn Buffalo Airport Page 26
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Walls and Partitions:
Lobby: Painted brickwall covered with wall-
vinyled drywall
Meeting Space: Insulated drywalls covered with wall
vinyl; division separators are steel
flywalls covered with carpeting
Guest Rooms: Insulated drywalls covered with wall
vinyl; each room contains a connecting
door
Corridors: Insulated drywalls covered with wall
vinyl, wood trimmings, and carpeting
PROPERTY INSPECTION
We completed an in-depth tour of the property's physical plant
including 1) the property exterior and parking; 2) the public
space, lobby, meeting space, and food and beverage facilities;
and 3) the back-of-the-house space including kitchens, storage
rooms, housekeeping, laundry, administrative offices, and
mechanical and electrical equipment. In addition, we toured four
guest rooms including a duplex suite, a Preferred Quarter, an
unrenovated double-double-bedded room, and a renovated
king-bedded room.
In general, the subject property has a product offering that is
adequate for the needs of its guests. The product maintains a
standard service and price/value quality that is expected in
first-class, full-service hotels. The following provides a
summary of our November 7, 1996 inspection1. Each area was rated
on a scale of excellent, good, average, and poor:
o The building exterior was repainted in early 1992 and
appears to be in good condition.
o The roof appears to be in good condition and has been in
place since 1987. Each year after winter, the maintenance
crew inspects and cleans the roof. However, management has
indicated that a "patch-up" job was performed in 1996.
Prior to the repairs, leaks occurred in the boiler and
laundry room.
- --------------
1 Inspection of the subject property does not purport to be
exhaustive nor is its judgment about the physical condition
definitive; it is not a substitute for a thorough and
accurate engineering study.
<PAGE>
Sheraton Inn Buffalo Airport Page 27
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o The lobby and checkin area are in average condition.
Although the furniture was refurbished in late 1992, the
design of the area is outdated and does not provide the
level of ambiance and quality exhibited by many
competitors. Overall, the area will need a renovation or
upgrade in the near future.
o The overall public area was in good condition.
o Twigs Bar and Grille is in excellent condition as it
received an overhaul renovation in 1992 and is
well-appointed for the sports bar theme portrayed. The
amenities and meals served are adequate. The Grille on
Walden is in good condition. However, the design is
somewhat outdated, and as the subject's main dining area,
this outlet will need to be upgraded in the future in order
to provide a level of quality service and value that is
competitive with other hotels. The H2O Bar was built in
early 1996 and is in excellent condition.
o The guest rooms, including the Preferred Quarters, are in
average to good condition. A majority of the rooms in the guest
tower were renovated in 1992. Although this renovation included
new vinyl, carpet, furniture, and soft goods, it was not
comprehensive. The materials utilized were not of good quality
and appeared to be dated. In addition, the high level of
occupancy at the hotel has had a negative impact on the product
offering. The guest rooms in the main building (floor 1 and 2)
have not been renovated since 1987. As such, the rooms appear to
be tired and effects of "wear and tear" are apparent.
Furthermore, the original fixtures in all the bathrooms are
outdated and did not function well, and the hotel phone system
has not been upgraded to be voice mail and fax/modem compatible.
o The Preferred Travelers Clubroom is in excellent condition.
The area received an overhaul renovation in 1992. This
lounge is attractively appointed and creates a high level
of price/value. Major renovation upgrades include new
vinyl, furniture and fixtures, carpet, and lights.
o The meeting facility is in good condition. The ballrooms
and meeting rooms are attractively appointed, well laid
out, and well-positioned throughout the property.
o The courtyard area and the swimming pool are in good condition.
<PAGE>
Sheraton Inn Buffalo Airport Page 28
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PAST RENOVATION AND CAPITAL REQUIREMENTS
The property expended approximately $630,582 in capital
improvements between 1994 and 1996 to maintain the property's
competitive positioning. For 1997, the property has budgeted
$459,670 in capital costs, which are estimated to be funded from
reserve for replacement. Presented in the following is a detail
of these capital expenditures.
Estimated Breakdown of Historical
and Proposed Capital Expenditures
(1994-1997)
Description Expenditures
1994 Actual $231,062
Telephone System Upgrade (Switch Box)
Parking Improvement (Curbing Concrete, Lights)
1st and 2nd Fl Rooms Drapes
Banquet Equipment Replacement
HVAC Upgrade (Air Quality System)
Shuttle Van
Mattresses/Box Springs (Selected Rooms)
1995 Actual $244,059
Key Card Lock Upgrades (All Rooms)
Guest Bathroom Electrical/Lighting Units
Kitchen Equipment
Public Area Carpeting and Tile
Public Area Furniture
Meeting Space Carpeting
Building Exterior Improvements (Painting)
Installation of New Property Signage
Parking Improvement (Painting and Tar Patch-Up)
1996 Actual $155,461
Front Desk Retrofit
Replacement of Cooling Tower Unit
Replacement of A/C Compressors (2 Units)
PMS/PO Computer System Unit Installation
Kitchen Equipment
Computer Software/Accounting
Replacement of Boiler Room Roof
1997 Budgeted $459,670
1st/2nd Fl Rms (Soft and Selected Case Goods)
3rd-5th Fl Rms (Bathroom Sinks)
Condensor Water Tank
Lobby Renovation (Soft and Selected Case Goods)
Replacement of A/C Compressors (1 Unit)
Guest Elevator Roofs (2 Units)
Housekeeping Area Carpeting and Upgrade
Grille on Walden (Refurbishment)
Actual Capital Costs Expended (1994-1996) $630,582
Budgeted Capital Costs (1997) $459,670
Total 1994-1997 $1,090,252
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Sheraton Inn Buffalo Airport Page 29
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On the basis of our analysis of the competitive lodging market
and an inspection of the subject property, we believe that the
proposed capital expenditures by Richfield Hospitality are
adequate. Although there are areas throughout the subject that
can be upgraded further, on a cost-benefit basis, we do not
believe it will be economical to implement these improvements.
The subject is currently operating at a high occupancy and
healthy average rates. Should ownership upgrade the product
offering, we do not believe that the subject's performance will
improve to a point where the return on investment is feasible.
PROPERTY TAXES
The subject property is under the taxing jurisdiction of the Town
of Cheektowaga. Real estate taxes are assessed on a calendar year
basis and are payable annually. The real estate tax comprises
County, State, Fire, Sewage, and garbage taxes. The city does not
levy a separate tax on the value of the personal property
(furniture, fixtures, and equipment), but there is a school tax.
Please note that due to the numerous types of taxes levied on the
subject, we have included copies of past tax bills for reference
as F.7 Property Tax Bills.
Real Estate Taxes
Taxing Jurisdiction: Town of Cheektowaga, New York
Tax Account Number: Parcel 102.02-1-29.2
Parcel 102.02-1-27
Parcel 102.02-1-27./A
Parcel 102.02-1-27./B
Current Tax Year: Jan 1 through December 31, 1996
Tax Rates Established: December 1 prior to tax year
Current Tax Rate1 Tax Description Tax Rate
(Per $1,000 --------------- --------
of assessed value): County Tax $2.445645
State Mandate $7.469459
Library Purpose $1.092876
General Town $8.591317
General Garbage $2.836325
<PAGE>
Sheraton Inn Buffalo Airport Page 30
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Assessments
Established: The assessed value of the hotel for tax purposes is
assumed to be 65.18 percent of fair market value.
Reevaluations: The fair market value of the property is assessed on a
random basis and is only performed when a
reassessment decision has been made.
The following table illustrates the assessed values and real
estate taxes from 1994 to 1996.
- ---------------------------------------------------
Year Assessed Value Real Estate Taxes1
- ---------------------------------------------------
1994 $10,149,800 $279,830.39
1995 10,149,800 284,524.61
1996 10,149,800 284,113.73
- ---------------------------------------------------
1. Includes all taxes.
We have assumed that real estate taxes will increase with
inflation. According to discussions with the real estate
appraiser at the Assessor's Office, it is not foreseeable that
real estate taxes will increase significantly in the future, and
as such, an assumption of inflationary increases is reasonable.
School Taxes
Taxing Jurisdiction: Town of Cheektowaga, New York
Tax Account Number: Parcel 102.02-1-29.2
Parcel 102.02-1-27
Parcel 102.02-1-27./A
Parcel 102.02-1-27./B
Current Tax Year: July 1, 1996 through June 30, 1997
Tax Rates
Established: June 1 prior to tax year
Current Tax Rate: $18.882316 per $1,000 of assessed value
Assessments
Established: The assessed value of the hotel for tax purposes is
assumed to be 65.18 percent of fair market value.
Reevaluations: The fair market value of the property is assessed
on a random basis and is only performed when a
reassessment decision has been made.
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Sheraton Inn Buffalo Airport Page 31
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The following table illustrates the computation of the school
taxes for the last three years.
- ------------------------------------------------------
Tax Rate
Tax Year Assessed Value (Per $1,000) School Taxes
- ------------------------------------------------------
1994 $10,149,800 17.079140 $173,349.88
1995 10,149,800 17.976470 182,457.60
1996 10,149,800 18.882316 191,651.73
- ------------------------------------------------------
Similar to real estate taxes, we have assumed that school taxes
will increase at the inflation rate. The real estate appraiser at
the Assessor's Office also believes that inflationary growth
rates are reasonable based on historical increases.
ZONING
The Sheraton Inn is governed by the zoning ordinances of the Town
of Cheektowaga, New York. It is located in a zoning district
titled C or Retail Business District. The purpose of this zoning
intent is to provide a district which would allow for the sale of
goods and services to the general public within enclosed
buildings. The goods and services offered within this district
typically generate large volumes of traffic or are conducted from
large complexes. These areas are typically isolated from
residential areas by the transitional zoning district or abut the
rear of residential areas, have direct access to main roads, and
usually take the form of plazas.
Permitted uses include but are not limited to retail sales,
laundromats, uses related to personal apparel, restaurants,
amusement/recreational centers, banks, and hotel/motels.
Accessory uses include shops for the limited manufacturing or
processing of articles incidental to the conduct of a retail
business and accessory garage for the installation of motor
vehicle equipment.
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Sheraton Inn Buffalo Airport Page 32
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Restrictions and Requirements
The following summarizes the restrictions and requirements that
the subject Sheraton Inn must conform to under its existing
zoning.
Minimum Lot Size - As required to meet parking and yard
requirements
Minimum Frontage - 50 feet
Minimum Yards
Side Yards - 10 feet
- Where a side yard is used for two-way
vehicular access, it shall not be less
than 30 feet wide with no more than a
24 foot wide driveway
Rear Yards - 10 feet
Maximum Building
Height - 30 feet
Maximum F.A.R. - n/a
Maximum Lot
Coverage - n/a
Parking
Requirements - 5 spaces for each 25 feet of net floor area
- 2 spaces for each 5 seats
- 5 spaces for each 100 square feet of net
standing room only area
On the basis of the zoning code, the property site plan, our
physical inspection of the subject property, and discussions with
local zoning representatives, the property appears to conform
with all general and specific zoning requirements.
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B.2 AREA ANALYSIS
The Area Analysis provides information on market conditions as
they currently exist in the Buffalo Market Area ("Buffalo"). In
general, the Buffalo area includes Downtown Buffalo and the
suburbs such as Tonawanda, Amherst, Williamsville, Cheektowaga,
and Lackawanna. Economic and sociological trends provide insights
relating to the strength of the local market area; a review of
such trends has been completed to direct and support our
estimates of future market growth in the lodging industry.
The following section of the report outlines general trends in
the market. We consulted with the Greater Buffalo Partnership
(the Camber of Commerce), Convention and Visitors Bureau, and
other local sources for much of the following information. When
possible, information was verified directly from the primary
sources.
The Buffalo area, the location of the subject, is part of Erie
County and situated in the northern part of Western New York
State. Buffalo is located approximately 22 miles south of the
Niagara Falls, 110 miles southeast of Toronto, and 393 miles
northwest of New York City. As a key point of entry, Buffalo is
characterized as the center for trade between the United States
and Canada. In 1994 and 1995, World Trade magazine ranked Buffalo
as the fifth top trading city with $23.1 and $29.8 Billion of
trade volume respectively, behind Los Angeles and New York.
Approximately 14 percent of all Canada-US trade crosses at the
Peace Bridge, which connects Buffalo and Canada's Fort Erie. In
the leisure area, Buffalo is known for its Art Deco architecture,
sport events, and Naval and Servicemen's Park. With its proximity
to Niagara Falls, Buffalo also draws a substantial amount of
tourist demand from the area.
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ECONOMIC AND DEMOGRAPHIC INDICATORS
This section summarizes historical trends in several key economic
and demographic indicators in the Buffalo market area. The
following table presents historical trends in Population, Retail
Sales, Eating and Drinking Sales, and Median Household Effective
Buying Power.
Summary of Economic and Demographic Statistics
For the Buffalo Market Area
CAG(1)
1991 1995 1991-1995
Population (000's)
Erie County (2) 964 961 -0.1%
New York State 18,166 18,158 0.0%
United States 253,629 264,901 1.1%
Retail Sales ($000's)
Erie County (2) $6,873,197 $8,235,294 4.6%
New York State $122,445,952 $137,770,964 3.0%
United States $1,821,385,936 $2,355,241,609 6.6%
Eating & Drinking
Sales ($000's)
Erie County (2) $724,504 $818,695 3.1%
New York State $12,517,081 $14,414,637 3.6%
United States $189,192,158 $241,780,257 6.3%
Median Household Effective
Buying Income (EBI)
Erie County(2) $29,594 $28,943 -0.6%
New York State $35,506 $33,848 -1.2%
United States $32,073 $32,238 0.1%
Source: Sales and Marketing Management, Survey of Buying Power
Note: (1) Compound Annual Growth
(2) Statistics in the Buffalo area represents over 70
percent of Erie County.
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Population
Population growth in Erie County exhibited a minimal change of a
- -0.1 percent compound annual rate between 1991 and 1995 and is
line with New York State, which also experienced no growth for
the same period. The United States, similarly, exhibited a
minimal increase of 1.1 percent compound annual increase for the
same period. This population change in Erie County is correlated
to business trends in the Buffalo area. Although there have been
a few relocation of smaller companies out of the Buffalo area,
especially in the Downtown market, overall new business growth
has been minimal.
Retail Sales
Total retail sales in Erie County grew 4.6 percent, compound
annually, between the year 1991 and 1995. The County's compound
annual growth rate surpassed New York State by 1.6 percentage
points. Retail has always been a mainstay industry in Buffalo,
representing over 90 percent of total retail sales in Erie
County. In addition, many retail establishments in Buffalo are
targeted to tourists; as such, trends reflected in retail sales,
to a degree, also measures tourism growth. According to the
Buffalo Partnership, there over 4,000 retail establishments in
the Buffalo area.
Eating and Drinking Sales
Eating and drinking sales trends, to a limited degree, reflect
the strength of the hotel industry and the level of visitation to
the area. Growth in eating and drinking sales also reflects the
growth in the ability of residents to spend money on luxury
items. Eating and drinking place sales include the sales of all
establishments selling prepared food and beverage items for
consumption on the premises or for take out, as well as lunch
counters and stands selling food and drinks for immediate
consumption. During the period from 1991 to 1995, Erie County
eating and drinking sales increased by a compound annual growth
rate of 3.1 percent, while the State of New York experienced
similar growth of 3.6 compounded annual. In comparison,
nationwide compound annual sales for the same period outpaced
Erie County and New York State by 3.2 and 2.7 percentage points,
respectively.
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Median Household Effective Buying Income (EBI)
Estimates of median household effective buying income reflect the
growth in the economy and the living standards of area residents.
According to the Sales and Marketing Management Survey of Buying
Power, the median household EBI of Erie County exhibited minimal
change. Between 1991 and 1995, median income for the County
changed on an average annual basis of -0.6 percent. Similarly,
New York State exhibited a compound annual decline of 1.2 percent
for the same period. In 1995, the median household EBI in the
State and nationwide were 1.17 and 1.11 times greater than Erie
County, respectively.
EMPLOYMENT
Employment and Unemployment
Trends in employment is an excellent indicator of the overall
health of a local economy. The following table presents a summary
of the trends in employment and unemployment in the local market
area for the last several years.
- -------------------------------------------------------------------------
Growth in Employment and Unemployment
- -------------------------------------------------------------------------
Buffalo-Niagara Falls MSA New York State
------------------------------ -------------------------------
Labor Total % Labor Total %
Force Enpl. Unempl. Force Empl. Unempl.
---------------------------------------------------------------
1990 588,652 559,590 4.9% 8,827,000 8,368,000 5.2%
1991 584,388 544,004 6.9% 8,723,000 8,097,000 7.2%
1992 579,415 536,908 7.3% 8,645,000 7,911,000 8.5%
1993 579,023 540,298 6.7% 8,650,558 7,973,256 7.8%
1994 576,268 541,140 6.1% 8,573,242 7,980,520 6.9%
1995 569,027 538,255 5.4% 8,493,429 7,955,265 6.3%
CAG (1) -0.7% -0.8% -0.8% -1.0%
- --------------------------------------------------------------------------
Source: Department of Labor and US Bureau of Labor Statistics
Notes: (1) Compound Annual Growth
(2) MSA is Metropolitan Statistical Area and consists
of Erie County and Niagara County.
- -------------------------------------------------------------------
The labor force and total employment in the Buffalo-Niagara MSA
has steadily declined between 1990 and 1995, exhibiting a
compound annual decrease of 0.7 and 0.8 percent, respectively.
This, however, is in line with statewide trends as labor force
and employment also declined during the same period at average
annual rates of 0.8 and 1.0 percent. On the
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basis of these trends, the unemployment rate in the
Buffalo-Niagara MSA decreased 1.5 percentage points between 1991
and 1995, which is indicative of an increasingly strong economy.
Employment by Industry Sector
Employment by industry sector details the number of individuals
employed in a market area by each major industry category. An
analysis of the trends in employment by industry sector can
provide insights on the most important industries in the local
market area and which sectors have reflected recent growth or
declines. The following table presents a summary of trends in
non-agricultural employment by industry sector for the subject
market area.
- -------------------------------------------------------------------
Employment by Industry Sector
(1990-1995)
Buffalo Market Area
- -------------------------------------------------------------------
Compound
1990 1995 Annual Growth
---------------------------------------
Construction 22,900 19,800 -2.9%
Manufacturing 97,700 91,200 -1.4%
Transportation/Utilities 27,200 26,100 -0.8%
Wholesale/Retail Trade 136,600 130,900 -0.8%
F.I.R.E. (1) 29,300 28,000 -0.9%
Services 144,400 155,600 1.5%
Government 89,600 87,400 -0.5%
------ ------ ---
Total Employment 547,700 539,000 -0.3%
- -------------------------------------------------------------------
Source: Western New York Almanac, 1996-1997
Notes: (1) Fire, Insurance, and Real Estate
- -------------------------------------------------------------------
In 1995, the Wholesale/Retail Trade and Services sectors
comprised the largest industries by employment, representing 24.3
and 28.9 percent of total employment respectively. The services
sector is the only sector which reflected compound annual growth
of 1.5 percent in total employment between 1990 and 1995. Total
employment declined by 0.3 percent, compounded annually, during
the same period. Construction and manufacturing represented the
largest declines, registering 2.9 and 1.4 percent compounded
annual decreases between 1990 and 1995.
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The following table summarizes the ten largest employers in the
Buffalo market area that generate demand for lodging
accommodations.
- --------------------------------------------------------
Company Name No. Employees
- --------------------------------------------------------
Delphi Harrison Thermal Systems 6,800
State University of New York ("SUNY")
at Buffalo 5,409
Marine Midland Bank 4,628
Powertrain Group of General Motors Corp. 4,200
Buffalo General Hospital 2,894
American Axle & Manufacturing Inc. 2,800
M&T Bank 2,768
Ford Motor Co. 2,500
Dresser-Rand Co. 2,400
Millard Fillmore Health System 2,319
- --------------------------------------------------------
Source: Chamber of Commerce
- --------------------------------------------------------
OFFICE MARKET OVERVIEW
An important indicator of the strength of the Buffalo lodging
environment is the strength of the market for office space.
According to the Society of Industrial and Office Realtors,
Downtown Buffalo's Class "A" and "B" vacancy rates grew higher
into the double-digits at 17.5 and 21.4 percent, respectively,
while rental rates have remained stagnant. Outside the Commercial
Business District ("CBD"), vacancy decreased in both Class "A"
and "B" space and is approximately four percent. Class "A" rental
rates outside the CBD has also risen by $0.50 percent to $16.50
per square foot. For year-end 1996, vacancy outside the CBD area
is expected to further decrease by one to five percentage points
while rental rates are expected to increase minimally.
Similarly, vacancy rates for industrial space have been positive.
In 1995, vacancy rates in the Buffalo suburbs, which has the
highest concentration of industrial space, declined to 2.9
percent while net absorption was 908,937 square feet. Total
inventory of industrial space in the suburbs was 67,425,000
square while only 1,938,626 square feet were vacant. For year-end
1996, vacancy rates are expected to increase slightly as some
50-100,000 square feet of speculative development will be
concentrated in the suburban area.
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TRANSPORTATION
Roadway System
The Buffalo area is served by two concentric beltways, which are
composed of various major roadways throughout the area. This
roadway system includes the New York State Thruway, Kensington
Expressway, Aurora Expressway, and various local avenues and
corridors. The following provides a summary of each roadway.
New York Thruway/Interstate 90 is a four-lane, two-way,
high-speed interstate highway and comprises the outer
beltway. It is the principal east/west thoroughfare for New
York State and provides access for traffic from states west
and east of New York and Canada via Queen Elizabeth Way
("QEW"). This thruway is a crucial component for the
Buffalo lodging market as it is the primary avenue of
travel for Buffalo's major lodging feeder markets, such as
Cleveland, Pittsburgh, Boston, Toronto, and New York.
Kensington Expressway is a four-lane, two-way, high-speed,
local highway and comprises the inner beltway. This
east/west thruway provides access for traffic between the
Greater Buffalo International Airport and Downtown Buffalo.
The Kensington Expressway is most traveled by local
traffic.
Aurora Expressway provides access between the Buffalo area
and East Aurora. This four-lane, two way local highway
begins at the southern part of the outer beltway (New York
Thruway/Interstate 90) and travels south, ending at East
Aurora. East Aurora is a large demand generator for the
Buffalo lodging market in terms of commercial transient
demand.
Local Avenues and Corridors provide access for cross
beltway and town traffic. These two to four lane, two-way
corridors include Main Street, Genesee Avenue,
Sycamore/Walden Avenue, and Broadway.
Public Transportation
Although majority of the lodging demand travels by car, the
Buffalo area also offers an extensive system of public
transportation. The Downtown and Greater Buffalo areas are served
by an intricate public bus system that covers over to 100 square
miles. In addition, a rapid transport system is offered from
Downtown Buffalo to SUNY at Buffalo Main Street Campus. As one of
the largest cities in Western New York, Buffalo also maintains
two Amtrak train stations, which provide access to major cities
throughout the nation. These stations are located in Downtown
Buffalo and Depew, which is approximately two miles from the
subject property.
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Airport
The Buffalo area is served by the Greater Buffalo International
Airport ("GBIA") and is located in the northwestern part of the
region. The airport provides scheduled flights on many major U.S.
airlines, including but not limited to US Air, Delta,
Continental, United, and Northwest. Direct flights from major
cities include Boston, Chicago, Los Angeles, New York, San
Francisco, Vancouver, and Washington DC. As indicated in the
table below, passenger enplanement and deplanement at the airport
decreased by a respective 2.8 and 2.6 percent, compounded
annually, between 1990 and 1995. In contrast, the number of
flights to GBIA increased at a compound annual rate of 0.1
percent during the same period. Overall, GBIA has exhibited a
declining trend in passenger emplanements and deplanements.
According to GBIA authorities, the airport has experienced
increasing competition from airports in Cleveland and Toronto,
where the facilities are bigger, and low-fare airlines are
offered.
- --------------------------------------------------------------
Trends in Air Passenger Activity at the
Greater Buffalo International Airport
- --------------------------------------------------------------
Year Enplanement Deplanement Flights
---- ----------- ----------- -------
1990 1,703,224 1,703,696 66,574
1991 1,686,240 1,586,513 69,151
1992 1,582,489 1,579,975 75,081
1993 1,538,143 1,531,700 74,858
1994 1 1,723,989 1,736,926 68,001
1995 1,477,351 1,492,465 66,842
CAG 2
(1990-1995) -2.8% -2.6% 0.1%
- --------------------------------------------------------------
Source: Greater Buffalo International Airport
Note: (1) Enplanement and deplanement figures were
abnormally high during this period
as a result of Continental Airline's
promotion of Peanut fares.
(2) Compound Annual Growth
- --------------------------------------------------------------
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Presently, the GBIA is undergoing a $187.4 million core airport
improvement plan. While the new terminal will have fewer gates
than the existing airport, the design will allow for easy
expansion as demand dictates. Slated for completion by October
1997, details for this core modernization plan include:
o A new 15-gate terminal that will replace the two existing
terminals;
o A centralized concession area which will connect the main
ticketing lobby and the concourse areas;
o A three level parking structure, comprising 1,300 parking
spaces; and
o A modern design and layout, which will allow for further
expansion capabilities.
TOURISM
Besides being one of the largest trading cities in the US,
Buffalo also offers a vast mixture of attractions that are
considered some of the best nationwide. Starting at the Downtown
Waterfront, which is slated to undergo a $27.0 million dollar
revitalization program, is a span of public walkways, parks,
harbors, and marinas that border Lake Erie, one of the Great
Lakes. Located a few blocks south in Downtown Buffalo are sports
facilities, such as the newly opened Marine Midland Arena,
gardens, museums, and many nationally famous buildings known for
their Art-Deco and new age architecture. For shoppers, Buffalo
also offers over 4,000 retail establishments, including the
200-plus stores Walden Galleria, and the sports enthusiast can
find sports for all-seasons ranging from skiing to sailing on the
lake.
Just 20-minutes by car north of Buffalo is the Niagara Falls
area, which offers attractions such as the Falls, outlet mall
shopping, and countless recreational activities and amusement
parks/museums. The Niagara Falls are estimated to host
approximately 11 million visitors annually. As a comparison,
Disney World hosts approximately 12 million visitors per year. In
addition, the Niagara Falls area on the Canadian side has
recently approved for the development of a casino. The new casino
is expected to be developed by converting an existing commercial
building. Based on our analysis and discussions with industry
professional, this new development is not expected to impact the
Buffalo lodging market. The Niagara Falls Visitors Bureau
anticipates that the demand generated from this new casino will
consist of only day travelers.
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Attractions
Buffalo and Erie County Naval and Servicemen's Park: This
Buffalo waterfront attraction is the largest inland naval
park of its kind in the nation. Visitors can tour the decks
of the USS Little Rock, a flagship of the Sixth Fleet, and
USS Croaker, a battle-decorated World War II submarine. In
addition, there is a military museum which pays special
tribute to all branches of the military.
Albright-Knox Art Gallery: Considered one of the nation's
finest museums for modern art, the Albright-Know features
works by the Picasso, Van Gogh, Matisse, Derain, Monet,
Renoir, and Warhol.
Theodore Roosevelt Inaugural National Historic Site at the
Wilcox Mansion: On August 14, 1901, Theodore Roosevelt was
inaugurated as the 26th president of the United States
following the assassination of President William McKinley
in the library of Wilcox Mansion. As a tribute to Teddy
Roosevelt, each August this mansion becomes the grand site
of the Teddy Bear Picnic.
Our Lady of Victory Basilica and National Shrine: Our Lady
of Victory Basilica and National Shrine is a Italian
Renaissance structure of the Virgin Mary housed in a shrine
which were constructed by Father Nelson H. Baker. In 1926,
the shrine was elevated to a Minor Basilica by Pope Pius
XI, making it the second of such churches in the United
States.
Walden Galleria: The Walden Galleria is one of the largest
indoor retail malls in western New York, offering over 200
stores, an international food court, and 12 theaters. Major
anchors include Kaufmann's, Lord & Taylor, and the Bon-Ton.
Spectator Sports
Served by the 700,000-square foot Marine Midland Arena and the
newly opened, $122.5 million Crossroads Arena, Buffalo is the
beacon of spectator sports for central and western New York.
Among Buffalo's professional sports teams are the Buffalo Bills
(four time AFC champions), the Buffalo Sabres, the Buffalo
Bandits (Major Indoor Lacrosse League champs), and the Buffalo
Blizzard (the new expansion team of the National Professional
Soccer League). In addition, Buffalo is frequently chosen to host
numerous national sports events, such as the World University
Games in 1993 and the World Veterans Games in 1995.
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CONVENTION AND TRADE SHOW MARKET
Total convention/meeting space in the Buffalo area exceeds
200,000 square feet. This space is offered by two convention
hotels in the Downtown area and four full-service hotels in the
suburbs. In addition, the city also features a 100,000-plus
square foot convention facility, comprising 62,720 square feet of
prime exhibit space.
As presented in the following table, total conventions between
1990 and 1995 ranged between 165 and 151 while total hotel rooms
occupied has increased by almost 50 percent during the same
period.
- --------------------------------------------------------
Growth in Convention and Trade Show Demand
Buffalo Area
- --------------------------------------------------------
Hotel Rooms
Conventions Delegates Occupied
----------------------------------------------
1990 165 165,550 87,891
1991 170 110,608 96,473
1992 134 103,338 127,147
1993 150 102,885 105,788
1994 128 106,820 100,248
1995 151 150,703 133,801
- --------------------------------------------------------
Source: Greater Buffalo Convention and Visitors Bureau
- --------------------------------------------------------
CONCLUSION
Although, over the past years, the overall Buffalo area has
exhibited soft demographic and economic growth, these trends,
especially in convention, office market, employment related
activities, have primarily affected the Downtown lodging market.
Based on our field investigation and interviews, the suburban
market, which is the Sheraton's competitive environment, has been
relatively strong, fueled by healthy tourism and office markets.
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B.3 HIGHEST AND BEST USE ANALYSIS
The validity of an appraisal is dependent upon the consideration
and conclusion of highest and best use.2 Often expressed as "the
most profitable legal use," the concept requires a thoughtful
analysis of many factors. Vacant land value is directly related
to its highest and best use. On the other hand, an improved
property may have the same or a different highest and best use
than the land supporting the improvements when considered as
vacant land. Therefore, for improved property, both highest and
best use decisions must be separately considered, both as vacant
land and as improved property. In addition to a conclusion for
both the vacant land and improved property, sale and lease
comparisons are usually made with properties having similar
highest and best uses as the subject.
Four parameters for consideration in this regard relate to
1) legality of use, 2) physical possibilities, 3) financial
feasibility, and 4) maximum economic production. Single uses,
interim uses, legal non-conforming uses, speculative uses or
excess land determinations require further analysis.
HIGHEST AND BEST USE OF THE LAND AS IF VACANT
Legally permissible uses are those limited by zoning, easements
and rights-of-way, deed restrictions, building codes, and
environmental controls. These restrictions have been discussed in
section B.1 Description and Analysis of the Property. As
mentioned earlier in the zoning section of this report, the
subject site is located in a zoning district titled C or Retail
Business District.
Physically possible uses are limited by size, design, topography,
flood possibilities and physical capacities. The subject site is
approximately 341,510 square feet or 7.84 acres. It is relatively
rectangular in shape, at street grade and does not lie in a flood
zone.
- ---------------
2 Highest and Best Use: "The reasonably probable and legal
use of vacant land or an improved property, which is physically
possible, appropriately supported, financially feasible, and that
results in the highest value. (American Institute of Real Estate
Appraisers, The Dictionary of Real Estate Appraisal, Second
Edition, Copyright 1993, Page 171.
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Drainage and topography are acceptable for a variety of uses as
are the shape and frontage of the site. Although we are
unqualified to render an opinion of the physical load-bearing
capacity of the land or its freedom from hazardous materials, no
nuisances were obvious at the time of inspection.
Financially feasible uses must be supported by sufficient demand
in the neighborhood to create a sufficient return to invest over
the long term. In analyzing each highest and best use
alternative, the income potential from those legally permissible
and physically possible uses were considered. The income from the
highest and best use should be sufficient to satisfy investor
requirements and operating expenses, thereby providing a return
on the land.
Predominant land uses in the neighborhood provide indications of
profitable land uses for the location of the subject property.
The subject property is located contiguous to the Walden Galleria
mall and in proximity to the intersection of Walden Avenue and
the New York Thruway/Interstate 90, with good access to major
roadways. Development in this area is oriented toward
retail-intensive and commercial uses, such as shopping malls,
power centers, hotels, and other retail uses. A number of uses,
including hotel and retail/commercial establishments, would
conform with the subject's surrounding development.
Based upon the surrounding properties, both hotel and
retail/commercial uses are financially feasible. Hotel average
daily rates (ADR) and occupancies are currently strong in the
subject neighborhood. ADR's among the subject's competitive set
range from $73 to $77 while occupancies range from 69 percent to
73 percent. Likewise, the retail market in the Buffalo area is
realizing healthy vacancy rates. According to the ULI Market
Profiles 1996, vacancy for all anchored and unanchored retail
space in the Buffalo area is approximately 13.0 percent vacancy
in year-end 1995. Retail space widely used in the subject
neighborhood, such as grocery-anchored centers and large region
malls, are estimated to have lower vacancy rates ranging from six
to seven percent for the same period. These rates are estimated
to remain relatively stable for year-end 1996, as new supply is
expected to be absorbed by expanding retail chains such as Tops,
Wegmans, Home Depot, and more. In addition, retail sales in the
subject neighborhood alone rose by approximately nine percent in
1996 and is expected to achieve similar results by year-end 1996.
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As such, on the basis of the above information and our research
of operating statistics for the local market, as well as national
averages, both through property surveys and published investor
surveys, as well as analyzing the income potential from these
property types, it is our opinion that both uses are financially
feasible. We conclude that the highest and best use of the land
as vacant is for some type of commercial development commensurate
with hotel or retail development.
HIGHEST AND BEST USE OF THE PROPERTY AS CURRENTLY IMPROVED
The subject property is currently improved with a hotel
containing 292 rooms. In light of the existing improvements, a
contrast with other uses is made for the optimal use which is
also physically suitable for the site, legally permissible,
economically feasible and the most profitable usage of the site.
As earlier indicated, the highest and best use of a property as
improved may differ from the highest and best use of the land as
if vacant. The "as improved" analysis assists in the
identification of the use that is projected to provide the
greatest overall property return on invested capital, as well as
in the identification of comparable properties. Typical choices
for improved property include the following usage alternatives:
1. Demolition of the improvements
2. Remodeling or renovation
3. Continued usage, as is
The four tests of highest and best use are applied to each of the
above alternatives. All three options are legally permissible and
physically possible. The test of financial feasibility is that
the use must provide a return equal to or greater than the amount
needed to meet all operating expenses, financial obligations, and
capital expenditures. In addition, the use must be maximally
productive, or that use which produces the highest value,
consistent with the rate of return warranted by the market for
that use. Using current investor expectations, consideration of
all three scenarios was made.
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Demolition of the Improvements
The implication in a highest and best use analysis is that the
existing improvements should be retained and/or renovated as long
as those improvements continue to contribute to the total value
of the property; or until the return from a new improvement would
more than offset the cost of demolishing the existing
improvements and constructing alternative facilities. An analysis
of the subject property reveals that the existing improvements do
continue to contribute to the overall value of the subject, with
no alternative use available to the site which would provide a
return greater than the return on current improvements after
consideration of the cost to raze the current improvements and
build an alternate use. Therefore, demolition of the improvements
is not considered warranted, nor optimal from a highest and best
use standpoint.
Remodeling or Renovation
For 1997, the subject property is expected to undergo $459,670
worth of capital improvements, of which will be funded from
reserves, to maintain its competitive positioning. Discussed in
section B.1 Description and Analysis of the Property, the subject
Sheraton Inn underwent approximately $630,582 in capital
expenditures between 1994 and 1996. Presently, the property
provides a product offering that is adequate and competitive.
Continued Usage As Is
As an alternative to demolition, the existing improvements could
be converted to an alternate use or left as-is. Again applying
the four tests to this premise, it would be physically possible,
as well as legally permissible to convert the improvements to
another use. However, as discussed previously, the current use as
a hotel is the most maximally productive use currently available
to the property. Obviously then, converting to an alternative use
would lessen the return, and therefore, any such use would fail
to be the most profitable alternative.
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CONCLUSION AND RECONCILIATION OF HIGHEST AND BEST USE
From the three options presented, one remains feasible for the
subject. Demolition of the improvements was eliminated as an
option since the existing improvements provide substantial
contributory value to the property. The condition of the subject
does not require extraordinary remodeling or renovations and is
adequate for the property to compete effectively in the Buffalo
lodging market. Therefore, continued use "as is" is the indicated
highest and best use of the subject as currently improved. Also,
given current market conditions, it is our opinion that the
highest and best use of the site, as vacant, is for development
with a commercial use commensurate with hotel or retail uses. In
conclusion, the highest and best use of the subject property is
as currently improved.
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Sheraton Inn Buffalo Airport Page 49
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C. ANALYSIS OF COMPETITIVE LODGING SUPPLY AND DEMAND
C.1 COMPETITIVE LODGING SUPPLY
There are over 10,000 available hotel rooms in the Buffalo area,
generally separated into three areas of concentration: Downtown
Buffalo, the airport/Cheektowaga, and Amherst. Lodging properties
in the area include limited-service, extended-stay, and
full-service hotels/suites. The properties, therefore, vary
considerably in terms of location, facilities and amenities,
market orientation, services provided, and published rates. The
subject hotel and its primary competitors are located in the
suburban area of Buffalo ("suburban market"), such as the
airport/Cheektowaga area and Amherst. This area is characterized
by commercial, retail, education, and residential usage, such as
single family homes and condominiums, and is proximate to various
demand generators such as companies, airport, and education
institutions. Relative to the Downtown lodging market, the
suburban market is by far more healthy. The Downtown market has
suffered over the past years as it does not possess a strong
commercial segment that can sustain occupancy during the season
when demand is the softest.
IDENTIFIED COMPETITIVE SUPPLY
In order to evaluate the subject hotel's position within the
market, we have identified a competitive supply on the basis of
quality and extent of facilities, location, market orientation
and revenue potential. We identified four hotels as the primary
competition and two secondary competitors for the Sheraton Inn.
Primary competitors compete with the subject in all segments
while secondary competitors typically compete only in one
segment. Presented on the following page is a map illustrating
the location of the subject hotel and its identified competitive
set. The tables on the following pages following it present
pertinent operating information and facilities descriptions of
each competitive hotel.
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PROFILE OF COMPETITIVE LODGING SUPPLY
Property Name Sheraton Inn Buffalo Airport Hampton Inn Galleria
(Subject Hotel)
Address 2040 Walden Avenue, Cheektowaga, NY 1745 Walden Avenue,
Cheektowaga, NY
Opening Year March, 1973 March, 1985
Affiliation Sheraton Hampton Inn
Management Richfield Hospitality Blendall Hotel Corporation
Ownership Richfield Hospitality Benderson Development
Total Number of
Rooms (incl. suites) 292 Rooms 133 Rooms
Number of Suites 12 Suites 0 Suites
1996 Published Room Rate Single Double Standard Deluxe
Structure
Rack $129.00 $144.00 $73.00 $99.00
Corporate $110.00 $125.00 $66.00 $85.00
Government $74.00 $84.00 $66.00 $85.00
Weekend $89.00 $89.00 $66.00 $85.00
Estimated 1996 Market Mix Percentage
Commercial Individual Travelers 30% 65%
Leisure Individual Travelers 16% 35%
Groups 16% 0%
Contract 39% 0%
Facilities/Amenities
Restaurants The Grille on Walden None
Twigs Bar and Grille None
Lounges H2O Bar Lounge (Breakfast Only)
Total Meeting Space (Sq. Ft.) 12,216 Sq. Ft. Boardroom Available
Largest Room/Ballroom (Sq. Ft.) 6,300 Sq. Ft. n/a
Total number of meeting rooms/
divisions 8 Meeting Rooms n/a
Swimming Pool Yes Yes
Exercise Room/Fitness Center Yes Yes
Gift Shop/Newsstand Yes No
Business Center Yes No
Estimated Occupancy (1)
-1996 (Estimated) 85% 81%
-1995 83% 75%
-1994 89% n/a
Estimated Average Room Rate(1)
-1996 (Estimated) $66.00 $68.50
-1995 $65.34 $63.25
-1994 $65.49 n/a
Notes: (1) Hampton Inn opened in March 1995.
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PROFILE OF COMPETITIVE LODGING SUPPLY
Property Name Holiday Inn Airport Marriott Amherst
Address 4600 Genesee Street, 1340 Millersport Highway,
Cheektowaga, NY Amherst, NY
Opening Year 1969 1981
Affiliation Holiday Inn Marriott International
Management Hart Hotels Boykin Lodging Company
Ownership Hart Hotels Boykin Lodging Company
Total Number of
Rooms (incl. suites) 207 Rooms 356 Rooms
Number of Suites 4 Suites 6 Suites
1996 Published Room Rate Single Double Single Double
Structure
Rack $89.00 $89.00 $132.00 $142.00
Corporate $79.00 $79.00 $119.00 $129.00
Government $74.00 $74.00 $84.00 $84.00
Weekend $79.00 $79.00 $69.00 $79.00
Estimated 1996 Market Mix Percentage
Commercial Individual Travelers 35% 60%
Leisure Individual Travelers 30% 20%
Groups 30% 20%
Contract 5% 0%
Facilities/Amenities
Restaurants DALTS Classic American Grille Panache Restrauant
Lounges DALTS Classic American Grille Blizzards Bar
Night Club
Total Meeting Space (Sq. Ft.) 4,672 Sq. Ft. 11,474 Sq. Ft.
Largest Room/Ballroom (Sq. Ft.) 3,520 Sq. Ft. 8,100 Sq. Ft.
Total number of meeting room/
divisions 6 meeting rooms 10 meeting rooms
Swimming Pool Yes Yes
Exercise Room/Fitness Center Yes Yes
Gift Shop/Newsstand Yes Yes
Business Center No No
Estimated Occupancy
-1996 (Estimated) 62% 75%
-1995 56% 73%
-1994 67% 76%
Estimated Average Room Rate
-1996 (Estimated) $65.50 $93.00
-1995 $61.04 $91.79
-1994 $58.97 $85.94
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PROFILE OF COMPETITIVE LODGING SUPPLY
Property Name Radisson Hotel & Suites Hilton Buffalo
Address 4243 Genesee Street, 120 Church Street
Cheektowaga, NY Buffalo, NY
Opening Year 1967 1980
Affiliation Radisson Hilton
Management Dynamics Enterprise Buffalo Hilton Hotel
Development Venture
Ownership Dynamics Enterprise Buffalo Hilton Hotel
Development Venture
Total Number of
Rooms (incl. suites) 274 Rooms 475 Rooms
Number of Suites 61 Suites 8 Suites
1996 Published Room Rate Single Double Single Double
Structure
Rack $132.00 $142.00 $107.00 $119.00
Corporate $115.00 $125.00 $100.00 $100.00
Government $84.00 $94.00 $75.00 $99.00
Weekend $69.00-$114.00 $69.00-$114.00 $79.00 $89.00
Estimated 1996 Market Mix Percentage
Commercial Individual Travelers 40% 12%
Leisure Individual Travelers 30% 23%
Groups 24% 55%
Contract 6% 10%
Facilities/Amenities
Restaurants Cafe on the Promenade Justine's
Pranzo Ristorante The Atrium
The Cafe
Lounges The Lobby Bar Le Club
Kixx Nightclub Charlie's Saloon
Total Meeting Space (Sq. Ft.) 18,589 Sq. Ft. 23,885 Sq. Ft.
Largest Room/Ballroom (Sq. Ft.)6,327 Sq. Ft. 6,240 Sq. Ft.
Total number of meeting room/
divisions 14 Meeting Rooms 19 Meeting Rooms
Swimming Pool Yes Yes
Exercise Room/Fitness Center Yes Yes
Gift Shop/Newsstand Yes Yes
Business Center Yes Yes
Estimated Occupancy
-1996 (Estimated) 71% 64%
-1995 70% 65%
-1994 69% 65%
Estimated Average Room Rate
-1996 (Estimated) $80.00 $69.60
-1995 $78.50 $68.29
-1994 $78.46 $66.84
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PROFILE OF COMPETITIVE LODGING SUPPLY
Property Name Hyatt Regency Buffalo
Address Two Fountain Plaza, Buffalo, NY
Opening Year 1984
Affiliation Hyatt Regency
Management Hyatt Regency
Ownership West Genesee Hotel Association
Total Number of
Rooms (incl. suites) 400 Rooms
Number of Suites 12 Suites
1996 Published Room Rate Single Double
Structure
Rack $125.00 $150.00
Corporate $109.00 $109.00
Government $74.34 $99.00
Weekend $79.00 $89.00
Estimated 1996 Market Mix Percentage
Commercial Individual Travelers 20%
Leisure Individual Travelers 5%
Groups 75%
Contract 0%
Facilities/Amenities
Restaurants The Bakery
E.B. Green's Steakhouse
Genesee Sports Bar and Grill
Lounges Cafe Petit Deli
Total Meeting Space (Sq. Ft.) 17,557 Sq. Ft.
Largest Room/Ballroom (Sq. Ft.)10,125 Sq. Ft.
Total number of meeting room/
divisions 19 Meeting Rooms
Swimming Pool Yes
Exercise Room/Fitness Center Yes
Gift Shop/Newsstand Yes
Business Center Yes
Estimated Occupancy
-1996 (Estimated) 55%
-1995 59%
-1994 65%
Estimated Average Room Rate
-1996 (Estimated) $85.00
-1995 $76.30
-1994 $73.16
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Sheraton Inn Buffalo Airport Page 55
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The competitive set of hotels, including the subject, represent a
unique lodging market. These properties are generally
characterized as being full-service hotels, affiliated with a
major national hotel chain. In addition, these hotels comprise
the bulk of the Buffalo lodging supply. Each of the properties
maintain average daily rates ("ADR(s)") in excess of national
averages, and also maintain high annual occupancies. According to
Smith Travel Research, in 1995, the U.S. lodging industry as a
whole achieved an ADR of approximately $67 with a 66 percent
occupancy, the best year in a decade. Comparatively, the
competitive set achieved superior results with a combined ADR of
approximately $74 during 1995, with a combined average occupancy
of approximately 69 percent. The following paragraphs describe
these properties and how they compete with the Sheraton Inn.
Primary Competitors
Hampton Inn Galleria
The Hampton Inn Galleria is the only limited-service hotel that
is directly competitive with the subject Sheraton Inn. It is
located less than a quarter mile west of the subject on Walden
Avenue. Opened in March 1995, this new property offers a rooms
product that is superior to the subject and an
amenities/facilities package that is on par with first-class,
full-service hotels in the area. Due to its proximity and quality
rooms product, the property has had a negative impact on the
Sheraton Inn's performance since its opening, especially in the
transient market. Performance at the Hampton Inn has exceeded
management's expectation, achieving stabilization quickly since
opening. As presented in the previous table, the growth in
occupancy and average rate is expected to be strong, achieving
RevPAR increases by 20 percent between 1995 and 1996.
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Sheraton Inn Buffalo Airport Page 56
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Holiday Inn Airport
The Holiday Inn Airport is located adjacent to the Greater
Buffalo International Airport on Genesee Avenue and is
approximately three miles north of the subject hotel. The Holiday
Inn recently underwent a $3.0 million core modernization program.
Renovations included a replacement of all case goods and soft
goods in the guest rooms, a refurbished and upgraded lobby, the
reconstruction and "re-theming" of a food and beverage outlet
which was destroyed in a fire, and the installation of a new
exterior and porte cochere. The Holiday Inn Airport provides an
amenities/facilities package that is comparable but not superior
to the subject. The property is a typical two level Holiday Inn
and offers a smaller inventory of function space. As, such, the
recent improvement plan has only increased the property's
competitiveness in the full-service hotel market. Between 1995
and 1996, RevPAR is expected to increase by 18 percent as a
result of growth in both average rate and occupancy.
Marriott Amherst
The Marriott is located in Amherst, approximately eight miles
north or a ten minute drive from the subject Sheraton Inn. In
late 1995 and early 1996, this property underwent a $3.0 million
renovation. The renovation included an upgrade of all case goods
and soft goods in the guest rooms, a refurbishment of the lobby,
and a replacement of soft goods in the function space. Among the
competitive set, this property is one of the subject's top direct
competitors. Although the property maintains a better product
offering than the subject, both properties provide a similar
facilities/amenities package and product sizing. In addition, the
Marriott is considered the top performer in the market, achieving
RevPARs that are generally 20 percent above the next closest
competitor. Located adjacent to the New York Thruway/Interstate
90 outer beltway and in Amherst, the Marriott benefits from two
markets. The Amherst market is supported by SUNY at Buffalo and
various large corporations situated in the northern sector of the
market. From Interstate 90, the Marriott also caters to demand
from the south, such as the subject's main commercial market near
the airport and in East Aurora.
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Sheraton Inn Buffalo Airport Page 57
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Radisson Hotel & Suites
The Radisson Hotel & Suites is located directly adjacent to the
airport on the south side of Genesee Avenue and is approximately
three miles north of the subject hotel. The Radisson is maintains
a product offering on par to the subject in terms of sizing,
condition, and quality. This property is very competitive with
the subject in the commercial and groups segments. It has not
undergone any significant renovations in the past years but
consistently maintains a quality product. In 1995 and 1996, the
property is estimated to achieve RevPAR similar to the subject at
approximately $56 for both years.
Secondary Competitors
Hilton Buffalo
Located in Downtown Buffalo, the Hilton is one of two
full-service hotels in the Downtown area with a full inventory of
dedicated meeting space (approximately 23,885 square feet). The
property is approximately 12 miles east of the subject or 15-20
minutes by car. It is situated on Church Street, east of the
Buffalo Skyway and the Waterfront. The Hilton is estimated to be
directly competitive with the subject in the groups and contract
segment and is also a hotel of choice for the convention center
due to its proximity. The property is larger than the Sheraton
Inn but offers a product similar in scope. Although the Hilton is
the oldest operating hotel in Downtown Buffalo, the property has
consistently maintained a competitive product offering.
Hyatt Regency Buffalo
The Hyatt Regency is the other hotel in Downtown Buffalo with a
large inventory of meeting space of approximately 17,557 square
feet. The property is located at Fountain Plaza and is physically
connected to the convention center by a walkway. Among the
competitive set, this property offers one of the best product
offerings in the area. This property is the premier first-class,
full-service hotel in the area and as a result achieves one of
the highest average rates in the market. Nevertheless,
penetration at the property has been lackluster, and as such, a new
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Sheraton Inn Buffalo Airport Page 58
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management team has been recently appointed. The Hyatt is only
competitive with the subject in the groups segment and minimally
in the commercial segment.
ADDITIONS TO SUPPLY
In addition to analyzing existing demand, it is important to
discuss any new hotel development that would potentially have an
impact on the subject. Based on our research and discussions with
local area lodging experts, we discovered two developments which
would have a significant impact on the subject property. The
following discusses the status of these developments.
Under-Construction Homewood Suites
Benderson Development, one of the largest developers in Western
New York, is constructing an extended-stay hotel on a parcel of
land on Dick Road, across from the Comfort Suites, also a
Benderson property, near the airport. Upon completion, Benderson
Development will have a total of three relatively new properties
in the area: Hampton Inn Galleria, the Comfort Suites, and
Homewood Suites. Since this new property is expected to direct
its marketing efforts towards extended-stay travelers, we do not
foresee any direct competitive threat once the property opens. As
such, we expect the hotel to be only 50 percent competitive with
the subject Sheraton Inn, assuming that it competes for the
contract demand segment and, occasionally, for individual
business and leisure travelers. The new Homewood Suites is
expected to include the following attributes:
o Estimated opening date of mid-1997;
o Limited-service, extended-stay hotel;
o Expected to be positioned at a 1996 average rate of $65 to
$70;
o Expected to include 72 salable all-suite keys; and
o Amenities comparable to existing lodging supply but is
expected to cater to long-term guests.
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Sheraton Inn Buffalo Airport Page 59
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Proposed AmeriSuites Development
Prime Hospitality, a national hotel owner and developer, has
proposed to develop a AmeriSuites hotel in the Amherst area. The
property is expected to conform to the configurations of the
AmeriSuites prototype. On the basis of our discussions, the site
is located between Maple Road and North Bailey Road on a 3.9-acre
parcel of land. Prime currently has a contract to purchase the
land from the existing owner. The purchase is expected to be
closed by Spring of 1997. Due to its anticipated marketing
positioning and location, the proposed AmeriSuites is expected to
be directly competitive with the subject in all market segments
and is expected to include the following attributes:
o Estimated opening date of January 1, 1999;
o Limited-service, mid-market, all-suite product;
o Expected to be positioned at a 1996 average rate of $65
to $75;
o Estimate 128 keys; o Limited meeting facilities and no
food and beverage outlet; and o Amenities comparable to
existing lodging supply.
As a result, we have factored the preceding proposed properties
into our estimates, which are presented in the following table.
Non-Competitive Proposed Hotels
In addition to the above proposed hotels, we have also identified
other proposed projects which are not competitive or considered
to be speculative. These proposed developments include:
Sleep Inn: This economy, limited service property has been
proposed at a site adjacent to the airport on Holtz Road.
According to the building and planning department, the
development has been approved and is expect to begin
construction by the end of this year. This property is not
expected to be competitive as it will marketed towards
budget conscious travelers.
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Sheraton Inn Buffalo Airport Page 60
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Airport Hotel: As part of the Greater Buffalo
International Airport improvement plan, airport authorities
have designated a site for the development of a hotel on
airport premise. According to the property management
department of the Niagara Frontier Transportation
Authority, Hart Hotels has acquired the rights to develop
the hotel site. However, Hart Hotels does not plan to
develop the land within the next five years as it is not
economically feasible at present. Should it be developed,
the new property is expected to be an Embassy Suites.
Hospital Hotel: A specialized hotel has been proposed for
development at the Roswell Park Memorial Institute and the
Buffalo General Hospital in Downtown Buffalo by Medical
Inns of America. This hotel is expected to only cater to
hospital guests and patients. Construction is expected to
begin by late 1997/early 1998, and the property will likely
be managed by a national chain. Since the property will be
marketed to hospital related guests and patients and is
located in Downtown Buffalo, it is not expected to be
competitive. Furthermore, the project is currently in the
preliminary development stage.
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Sheraton Inn
Estimated Growth in Average Daily Room Supply
Market Area: Cheektowaga, New York
Avg. Daily
Opening Total Rooms Avail.
------------
Existing Competitive Supply Year Rooms 1996
Subject Hotel 1973 292 292
Hampton Inn Galleria 1995 133 133
Holiday Inn Airport 1969 207 207
Marriott Amherst 1981 356 356
Radisson Hotel & Suites 1967 274 274
Hilton Buffalo(1) 1980 234 234
Hyatt Regency Buffalo(1) 1984 198 198
Proposed Additions to Supply
AmeriSuites Hotel 1999 128 0
Homewood Suites(1) 1997 36 0
Change in Supply
AVERAGE DAILY ROOMS AVAILABLE 1,858 1,694
% Change in Supply
ANNUAL SUPPLY (ROOM NIGHTS) 618,128
Additions
to Average Daily Rooms
-------------------------------
Existing Competitive Supply 1997 1998 1999 2000 2001
Subject Hotel 0 0 0 0 0
Hampton Inn Galleria 0 0 0 0 0
Holiday Inn Airport 0 0 0 0 0
Marriott Amherst 0 0 0 0 0
Radisson Hotel & Suites 0 0 0 0 0
Hilton Buffalo(1) 0 0 0 0 0
Hyatt Regency Buffalo(1) 0 0 0 0 0
Proposed Additions to Supply
AmeriSuites Hotel 0 0 128 0 0
Homewood Suites(1) 18 18 0 0 0
Change in Supply 18 18 128 0 0
AVERAGE DAILY ROOMS AVAILABLE 1,712 1,730 1,858 1,858 1,858
% Change in Supply 1.1% 1.0% 6.9% 0.0% 0.0%
ANNUAL SUPPLY (ROOM NIGHTS) 624,698 631,268 677,988 677,988 677,988
Notes
(1) Estimated as 50 percent competitive with the subject hotel.
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C.2 LODGING SUPPLY AND DEMAND ANALYSIS
OVERALL DEMAND TRENDS IN THE BUFFALO LODGING MARKET
In order to examine the overall demand trends in the Buffalo
lodging market, we have presented in the following a composite of
predominantly 11 full-service hotels. This composite represents
some of the largest and/or most competitive lodging properties
throughout the area and as such is a reliable "barometer" of the
area's lodging market. (Please note that this composite is
different from the competitive lodging supply, in which the
subject competes. The competitive lodging supply will be
discussed detailed in the following section.) On the basis of
this composite, the Buffalo lodging market has exhibited healthy
trends over the past years. For year-end 1996, the area is
expected to achieve occupancy and average rates of approximately
69 percent and $75, respectively. Although occupancy has
decreased by approximately 2.5 percentage points between 1994 and
1996, average rates for the composite has increased by three
percent, compounded annually, for the same period. As such, this
increase has compensated for the occupancy decline as RevPAR
(Rooms Revenue Per Available Room) increased by a compound annual
rate of 1.3 percent between 1994 and 1996 while daily available
rooms increased by 2.6 percent, compounded annually, for the same
period.
The following table exhibits overall growth in daily available
rooms, rooms revenue, occupancy, and average rate in the Buffalo
market area between year-end 1994 and 1996
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Historical Trends in the Buffalo Area 1
Occupancy and Average Rate
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Daily Annual Annual
Available Rooms Annual Average Annual
Rooms Revenue Occupancy Rate RevPAR 2
----------------------------------------------------------
1994 2,538 $46,839,679 71.3% $70.88 $50.54
1995 2,650 48,175,831 68.2% $73.01 $49.79
1996 3 2,671 50,498,569 68.8% $75.34 $51.83
CAG 4 2.6% - 2.5% Points 3.1% 1.3%
(1994-96)
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Source: Buffalo Area hotels
Notes: (1) Includes Hilton Buffalo, Hyatt Regency Buffalo,
Radisson Suites Downtown, Sheraton Inn Buffalo
Airport, Radisson Hotel & Suites, Marriott Amherst,
Holiday Inn Downtown, Holiday Inn Airport, Holiday
Inn Gateway, Residence Inn, and Hampton Inn Galleria
(opening March 1995).
(2) Rooms Revenue Per Available Room
(3) Estimated Year-End
(4) Compound Annual Growth
(5) The above hotels do not represent the competitive
set but rather a composite set of hotels that
represent the overall Buffalo lodging environment.
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Seasonality also has a substantial influence on the overall
lodging supply. The following presents the monthly occupancy for
the composite hotels for 1994 through 1995.
[GRAPHIC RE HISTORICAL MONTHLY OCCUPANCY]
Source: Buffalo Area hotels, Arthur Andersen
Seasonal demand as evidenced is distinctly different between the
peak and off-peak seasons. Comparing August and January, which
reflects the highest and lowest points of fluctuation
respectively, monthly occupancies exhibited a difference of over
30 percentage points. Based on our field investigation and
research, peak season for the Buffalo lodging supply is general
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characterized as between late April through October while the
remaining months are considered off-peak season.
LODGING DEMAND IN THE IDENTIFIED COMPETITIVE SUPPLY
As indicated previously, we have identified seven hotels
(including the subject) as the competitive supply for the
Sheraton Inn Buffalo Airport. The purpose of the analysis that
follows is to evaluate the historical and present supply and
demand trends of the market in which the subject hotel competes.
We have completed interviews with management of the competitive
hotels and have collected statistics on the occupancy, average
rate, and market mix of the competitive hotels to estimate total
accommodated demand by market segment. The following summarizes
our estimate of the aggregate market demand accommodated by the
identified competitive supply for estimated years-ended 1994 and
1996.
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Historical Growth in Lodging Demand
in the Competitive Lodging Supply
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-----------------------------------------------
1994 Estimated 1996
------------------ -----------------
Room % Room % CAG 2
Nts Total 1 Nts Total 1 94-96
------------------ ----------------- ----------
Commercial
Individual 150,357 36% 170,002 39% 6.3%
Leisure Individual 85,027 20% 97,313 22% 7.0%
Groups 133,629 32% 124,556 28% -3.5%
Contract 47,244 11% 47,456 11% 0.2%
------ -- ------ -- ---
Total Occupied
Demand 416,257 100% 439,327 100% 2.7%
Total Daily
Available Supply 1,995 2,128 3.3%
Market Occupancy 72.9% 70.9% -
Market Average Rate $72.72 $76.56 2.9%
Market RevPAR $52.68 $54.28 1.5%
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Source: Arthur Andersen
Note: (1) Totals may not add due to rounding.
(2) Compound Annual Growth
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Our analysis of future demand growth includes assumptions of base
growth in demand, unsatisfied demand, and induced demand. The
following paragraphs define these sources of demand growth.
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Base Growth in Demand
Base growth in demand is that growth related to the strength of
the local economy. This growth assumption incorporates demand
generated by other factors, such as the addition of a new
convention center, new office development and absorption,
improved transportation access to the market area, etc. Our
assumptions take into account historical demand trends and the
factors contributing to these trends. On the basis of our
interviews with management and our analysis of economic growth in
the local market, base growth by market segment is estimated for
each year.
Unsatisfied Demand
During peak periods of demand, many travelers in search of
convenient accommodations among the hotels in the competitive
supply are required to use alternative hotels due to lack of
capacity in the immediate area. These groups and individuals will
seek lodging in one of the other properties in the market area or
will leave the immediate market. Those room nights that are not
accommodated in the immediate market may be referred to as
"unsatisfied demand."
The Buffalo market area, as discussed previously, is exhibiting
relatively strong occupancy rates, and hotels are often
"sold-out" during the peak season. As such, a strong level of
unaccommodated demand is currently present in the lodging market.
Based on our research and discussions with industry professional,
this unaccommodated demand can be estimated between five to ten
percent of total accommodated or occupied rooms, depending on the
market segment.
Induced Demand
Induced demand is defined as new room nights generated by the
addition of new hotels to the market area or by the repositioning
and marketing of an existing hotel to fulfill consumer needs not
previously met by the existing supply. Induced demand may also
include room nights generated by special events which are not
expected to remain permanently in the market area.
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It is estimated that induced demand to this competitive market
will occur as a result of the addition of the proposed 72-room
Homewood Suites, at 50 percent competitiveness, in July 1, 1997
and the directly competitive 128-room AmeriSuites in January 1,
1999. These additions are expected to produce demand from their
reservation system and internal marketing efforts. However, these
induced room nights are not expected to impact the market
significantly. Induced demand was only estimated for the
Commercial Individual Travelers and Leisure Individual Travelers
segments as both properties are small, limited-service hotels and
are expected to cater to only transient demand.
DEMAND SEGMENTATION AND ESTIMATED DEMAND GROWTH
Accommodated demand in the competitive hotel supply has been
segmented into four major market segments: Commercial Individual
Travelers, Leisure Individual Travelers, Groups, and Contract. On
the basis of our interviews with management of the subject and
its competition and based upon an analysis of economic trends in
the market, we have estimated future growth in demand in the
competitive supply by market segment. The following paragraphs
define the individual market segments and our estimates of demand
growth. A detailed analysis of supply and demand growth for the
market is presented at the end of this section.
Commercial Individual Traveler
This segment of demand includes individual business travelers
visiting companies and other organizations located in the Buffalo
market area. Much of the corporate demand accommodated by the
hotels in the competitive supply is generated by companies
located in Amherst, East Aurora, and near the airport. The
largest corporate accounts in the area include General Motors'
Powertrain Group division, Moog Inc., Fisher Price, and SUNY at
Buffalo. These room nights may be booked at both published and
discounted room rates. Many organizations in the market area have
accounts with the hotels in the competitive supply; the hotels in
the market area offer large organizations a price discount in
order to secure a higher percentage of an organization's business
and volume. Crucial criteria in the selection of lodging
accommodation for this segment of demand are amenities, quality
of service and
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facilities, and location. In general, commercial transient demand
generally occurs throughout the year, except during the holidays.
Due to nature of this segment's "on-demand" travel needs, there
are few distinct patterns of seasonality exhibited, although
travel during the winter months is sometimes curtailed due to
weather and difficult travel conditions often exhibited.
Management at all properties also indicated that the typical
length of stay is approximately one to two days. The highest
periods of demand in this segment are generally Tuesdays through
Thursdays.
This segment represented the largest source of demand for the
competitive supply. For year-end 1996, it is estimated to
accounted for approximately 39 percent of total accommodated
demand among the competitive lodging supply. In contrast to
historical trends, we project underlying base demand growth in
this segment to grow at 1.0 percent in 1997, stabilizing at 1.5
percent in 1998 and thereafter. Therefore, the overall commercial
individual traveler segment is estimated to increase at a
conservative compound annual rate of 1.8 percent between the 1996
and 2001. Our estimates were formed on the basis that commercial
individual travelers are not expected to post significant growth
in the future. The current trend indicate a gradual decline of
corporations in the area as a result of mergers, acquisitions,
and relocations. Based on our discussions with professionals in
the industry, this trend is expected to continue, and occupancy
growth will result mainly from room night penetration increases.
As such, we expect this segment of demand to account for 38
percent of total accommodated room nights by the stabilized year
of 2000.
Leisure Individual Travelers
This segment of demand includes individual travelers that are
visiting the market area on vacation or for other non-commercial
reasons, such as couples, repeat guests, and families. Demand
generators in the area are the Niagara Falls, Buffalo and Erie
County Naval Servicemen's Park, professional spectator sports
(football, indoor soccer, and hockey), and Lake Erie. This
segment of demand includes leisure travelers booking suites and
guest rooms at rack rates during special events and also includes
individuals seeking discounted rates and special packages offered
by hotels during weekends and off peak season (November through
April). Visitors include travelers from eastern Ontario (Canada),
Pittsburgh, Cleveland, Boston, and
<PAGE>
Sheraton Inn Buffalo Airport Page 68
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metropolitan New York area. International travelers visiting the
Buffalo-Niagara Falls area generally limited or considered
"pass-throughs" on their way to a major city like Toronto or New
York. During the football and hockey season, the area also
receives a large number of visitors from central and western New
York State and southern Ontario. Overall, the highest
concentration of travelers occur in the summer months, resulting
in a high number of "sold-out" days.
Leisure individual traveler demand accounted for approximately 22
percent of total accommodated demand among the competitive
lodging supply for estimated year-end 1996. We have projected
base demand growth at 2.0 percent in 1997, increasing to 2.5
percent in 1999, and stabilizing at 2.0 percent in 2000 and
thereafter. As such, the leisure individual traveler segment is
estimated to increase at a compound annual rate of 2.5 percent
between 1996 and 2001. We expect this segment to account for
approximately 23 percent of total accommodated demand by the
stabilized year, 2000.
Groups
This segment of demand includes guest rooms that are accommodated
by groups that are in the Buffalo area for meetings and
conferences. The room nights are generally pre-booked in this
segment and sold at package rates, including function space,
rooms, and meals. Due to the large volumes booked, all room rates
are generally discounted. For year-end 1996, this segment is
estimated to represent 28 percent, the second largest of the
segments, of the existing market mix. The following is a list of
Group subsegments:
o Corporate;
o Board Meetings;
o Social and Fraternal Gathering;
o Associations; and
o Convention-Related.
Groups demand among the competitive supply is generated by
corporations in the market area, associations, and the convention
center, although the majority of convention rooms nights are
<PAGE>
Sheraton Inn Buffalo Airport Page 69
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absorbed by the Downtown hotels. Demand generally occurs
throughout the year, with a high concentration during the summer
months. Base growth in demand is estimated at 2.5 percent in 1997
and 2.0 percent in 1998 and thereafter. Based on these estimates,
the groups segment is forecasted to increase at a compound annual
rate of 1.9 percent between 1996 and 2001. We expect this segment
to remain at approximately 28 percent of total accommodated
demand in 2000, the stabilized year.
Contract
Contract travelers generally require accommodations for one or
two nights while enroute to their final destination. Within the
defined market area, the contract segment consists primarily of
airline and railroad crews. These crews are awaiting the next
flight or train on which they will be working. Due to the nature
of the clientele and the source of business, rates for this
segment are negotiated to include a large number of rooms booked
for a lengthy period of time. Accordingly, rates overall are much
lower than those experienced in other demand segments. Based on
our discussions with management in the competitive set, contracts
are generally negotiated and signed for a one year term in the
market. The subject hotel, by far, accommodates the majority of
this demand within the defined market, primarily due to its
location near the airport and management's willingness to
negotiate sharply discounted rates. The subject's location
adjacent to the Walden Galleria mall is also a positive factor in
attracting airline crew business. Presently, the subject Sheraton
Inn has contracts with United Airlines, Airborne Express, UPS,
Conrail, US Air, and American Airlines.
The contract segment is estimated to represent approximately 11
percent of total demand for year-end 1996. Based demand is
expected to grow at 1.5 percent throughout the projection period.
As such, this segment is expected to account for approximately 11
percent of total accommodated demand in 2000, the stabilized
year.
<PAGE>
Sheraton Inn
Estimated Growth in Lodging Supply and Demand
Market Area: Cheektowaga, New York
Compound
Annual
Estimated
Growth
1996 1997 1998 1999 2000 2001 (1996-2001)
Commercial Individual 1.0% 1.5% 1.5% 1.5% 1.5%
Travelers
Gross Demand 178,266 180,000 182,600 185,200 187,900 190,600
Less Unsatisfied
Demand 8,500 8,600 8,700 8,800 9,000 10,200
------ ------ ------ ------ ------ ------
Net Demonstrated
Demand 169,7661 71,400 173,900 176,400 178,900 180,400
Plus: Induced Demand 0 400 1,000 4,600 4,800 4,800
------ ------ ------ ------ ------ ------
TOTAL SEGMENT
DEMAND 169,7661 71,800 174,900 181,000 183,700 185,200 1.8%
Growth over Previous
Year 1.2% 1.8% 3.5% 1.5% 0.8%
% of Total Market
Demand 39% 38% 38% 38% 38% 38%
Leisure Individual
Travelers 2.0% 2.5% 2.5% 2.0% 2.0%
Gross Demand 102,911 105,000 107,600 110,200 112,300 114,500
Less Unsatisfied
Demand 5,800 5,900 6,000 6,100 6,200 7,400
------ ------ ------ ------ ------ ------
Net Demonstrated
Demand 97,111 99,100 101,600 104,100 106,100 107,100
Plus Induced Demand 0 300 600 3,000 3,000 3,000
------ ------ ------ ------ ------ ------
TOTAL SEGMENT
DEMAND 97,111 99,400 102,200 107,100 109,100 110,100 2.5%
Growth over Previous
Year 2.4% 2.8% 4.8% 1.9% 0.9%
% of Total Market
Demand 22% 22% 22% 23% 23% 23%
Groups 2.5% 2.0% 2.0% 2.0% 2.0%
Gross Demand 129,354 132,600 135,200 137,800 140,500143,200
Less Unsatisfied Demand 5,000 5,100 5,200 5,200 5,300 6,400
------ ------ ------ ------ ------ ------
Net Demonstrated Demand 124,354 127,500 130,100 132,600135,200 136,800
Plus Induced Demand 0 0 0 0 0 0
------ ------ ------ ------ ------ ------
TOTAL SEGMENT DEMAND124,354127,500130,100 132,600 135,200136,800 1.9%
Growth over Previous
Year 2.5% 2.0% 1.9% 2.0% 1.2%
% of Total Market Demand 28% 29% 29% 28% 28% 28%
Contract 1.5% 1.5% 1.5% 1.5% 1.5%
Gross Demand 47,423 48,100 48,800 49,500 50,200 51,000
Less Unsatisfied Demand 0 0 0 0 0 0
8
<PAGE>
------ ------ ------ ------ ------ ------
Net Demonstrated Demand 47,423 48,100 48,800 49,500 50,200 51,000
Plus Induced Demand 0 0 0 0 0 0
------ ------ ------ ------ ------ ------
TOTAL SEGMENT DEMAND47,423 48,100 48,800 49,500 50,200 51,000 1.5%
Growth over Previous Year 1.4% 1.5% 1.4% 1.4% 1.6%
% of Total Market Demand 11% 11% 11% 11% 11% 11%
TOTAL MARKET DEMAND
Gross Demand 457,953465,700 474,200 482,700 490,900499,300
Less Unsatisfied 19,300 19,600 19,800 20,100 20,500 24,000
------ ------ ------ ------ ------ ------
Net Demonstrated Demand 438,653 446,100 454,400 462,600470,400 475,300
Plus Induced Demand 0 700 1,600 7,600 7,800 7,800
------ ------ ------ ------ ------ ------
TOTAL MARKET DEMAND438,653446,800 456,000 470,200 478,200483,100 1.9%
Growth over Previous Year .9% 2.1% 3.1% 1.7% 1.0% 1.9%
ANNUAL SUPPLY (ROOM NIGHTS)618,128624,698 631,268 677,988677,988 677,988
1.9%
Growth over Previous Year 1.1% 1.1% 7.4% 0.0% 0.0%
MARKET OCCUPANCY 71% 72% 72% 69% 71% 71%
<PAGE>
Sheraton Inn Buffalo Airport Page 71
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Conclusion
Overall, the lodging market in the Buffalo area is strong.
However, occupancy levels in the competitive lodging supply are
somewhat constrained by patterns of seasonal visitation. As a
result, demand for accommodations in the competitive market is
expected to increase at a conservative rate. Coupled with the
entry of a highly competitive AmeriSuites in 1999, occupancy is
expected to decline to 69 percent in 1999 and stabilize in 2000
at 71 percent and thereafter.
<PAGE>
Sheraton Inn Buffalo Airport Page 72
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C.3 ESTIMATED OCCUPANCY AND AVERAGE ROOM RATE
We have prepared detailed estimates of average annual occupancy
and average daily room rate for the subject property from January
1, 1997 through December 31, 2000. The following table provides
the historical occupancy and average daily rates achieved at the
subject Sheraton Inn from year-end 1989 to estimated 1996.
- ------------------------------------------------------------------------
Historical Occupancy and Average Rates
at the Sheraton Inn Buffalo Airport
- ------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996
--------------------------------------------------------------
Occupancy 66.4% 75.5% 76.3% 77.5% 85.6% 89.4% 82.9% 85.0%
ADR $60.37 $65.91 $72.52 $71.83 $65.86 $65.49 $65.34 $66.00
RevPAR $40.09 $49.76 $55.33 $55.67 $56.38 $58.55 $54.17 $56.10
- ------------------------------------------------------------------------
Source: Subject Property
- ------------------------------------------------------------------------
The following section presents our analysis of estimated future
occupancy and average daily room rate.
MARKET PENETRATION & AVERAGE ANNUAL OCCUPANCY
This analysis uses the concept of "fair" share and market
penetration. By forming a penetration analysis of market lodging
demand, the future average annual occupancy at the subject
Sheraton Inn Buffalo Airport is estimated. Using this technique,
the property is first evaluated compared to its competition, then
its potential market share is calculated on the basis of its
relative appeal to the market segment. A hotel's "fair" share of
market demand is said to be equal to its fair share of supply;
i.e. a 100-room hotel in a market of 1,000 rooms would have a
"fair" share of demand of ten percent of total market demand. A
"market penetration" of 100 percent indicates a property is
capturing its exact "fair" share of demand. Penetration in excess
of, or lower than, 100 percent indicates a hotel is likely to be
viewed more or less favorably than the competition by the
respective market segment and thus accommodates more or less than
its fair share.
The following table presents our estimates of the year-end 1996
market penetration by demand segment for the subject and for the
hotels in the identified competitive lodging supply.
<PAGE>
Sheraton Inn Buffalo Airport Page 73
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- ------------------------------------------------------------------------
Estimated 1996 Penetration By Market Segment
For The Identified Competitive Supply
- ------------------------------------------------------------------------
CommercLeisure
Individual Individual Overall
Hotel Name Travelers Travelers Groups Contract Penetration
- ------------------------------------------------------------------------
Subject Property 92% 85% 66% 433% 120%
Primary
Competitors
Hampton Inn
Galleria1 92% 180% 0% 0% 114%
Holiday Inn
Airport 78% 117% 92% 40% 87%
Marriott Amherst 164% 95% 75% 0% 106%
Radisson Hotel
& Suites 103% 135% 84% 55% 99%
Secondary
Competitors
Hilton Buffalo 28% 94% 175% 84% 90%
Hyatt Regency
Buffalo 40% 17% 205% 0% 78%
- ------------------------------------------------------------------------
Source: Arthur Andersen/Market Interviews
- ------------------------------------------------------------------------
By combining the above information with our market and property
analysis, we have calculated the future occupancy of the subject
hotel by market segment for the estimation period from 1997 to
2001. A detailed penetration analysis of the subject hotel is
presented on the following page. The following paragraphs
summarize our penetration analysis by market segment.
<PAGE>
Sheraton Inn
Penetration Analysis
Market Area: Cheektowaga, New York
Estimated
1996 1997 1998 1999 2000 2001
------ ------ ------ ------ ------ ------
ANNUAL SUPPLY (ROOM NIGHTS)618,128624,698631,268 677,988 677,988 677,988
SIZE OF SUBJECT PROPERTY 292 292 292 292 292 292
FAIR SHARE (SUPPLY) 17.2% 17.1% 16.9% 15.7% 15.7% 15.7%
Commercial Individual
Travelers
Total Demand 169,766 171,800 174,900 181,000 183,700 185,200
Fair Share of Demand 29,272 29,311 29.529 28,453 28,878 29,114
Penetration Rate 91% 92% 92% 90% 90% 90%
------ ------ ------ ------ ------ ------
Demand Captured 26,779 27,000 27,200 25,600 26,000 26,100
% of Total Demand Captured 30% 31% 31% 31% 31% 31%
Leisure Individual Travelers
Total Demand 97,111 99,400 102,200 107,100 109,100 110,100
Fair Share of Demand 16,744 16,959 17,255 16,836 17,151 17,308
Penetration Rate 85% 92% 95% 92% 90% 90%
------ ------ ------ ------ ------ ------
Demand Captured 14,210 15,600 16,500 15,500 15,400 15,600
% of Total Demand Captured 16% 18% 19% 19% 18% 18%
Groups
Total Demand 124,354 127,500 130,100 132,600 135,200 136,800
Fair Share of Demand 21,442 21,753 21,965 20,845 21,254 21,505
Penetration Rate 66% 66% 66% 66% 66% 66%
------ ------ ------ ------ ------ ------
Demand Captured 14,201 14,400 14,500 13,700 13,900 14,100
% of Total Demand Captured 16% 16% 16% 17% 17% 17%
Contract
Total Demand 47,423 48,100 48,800 49,500 50,200 51,000
Fair Share of Demand 8,177 8,206 8,239 7,781 7,891 8,017
Penetration Rate 433% 370% 365% 360% 360% 360%
------ ------ ------ ------ ------ ------
Demand Captured 35,403 30,400 30,100 28,000 28,400 28,800
% of Total Demand Captured 39% 35% 34% 34% 34% 34%
TOTAL MARKET DEMAND
Total Demand 438,653 446,800 456,000 470,200 478,200 483,100
Fair Share Demand 75,634 76,229 76,989 73,916 75,173 75,944
Penetration Rate 120% 115% 115% 112% 111% 111%
----- ------ ------ ------ ----- -----
Demand Captured 90,593 87,400 88,300 82,800 83,700 84,600
ESTIMATED OCCUPANCY 85% 82% 83% 78% 79% 79%
MARKET OCCUPANCY 71% 72% 72% 69% 71% 71%
<PAGE>
Sheraton Inn Buffalo Airport Page 75
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Commercial Individual Travelers
The commercial individual travelers segment is expected to
comprise 31 percent of total accommodated demand in the
stabilized year. Penetration of commercial demand at the subject
is estimated to increase to 92 percent in 1997 as management
plans to shift its marketing emphasis away from contract demand
to higher-rated commercial and leisure transient segments.
However, the penetration rate is expected to decline to 90
percent in 1999 and thereafter as a result of the entry of
AmeriSuites, which is expected to be highly competitive in this
segment. For year-end 1996, the subject's penetration rate was 92
percent. In contrast, the market leader, the Hampton Inn
Galleria, achieved a penetration rate of 192 percent for the same
period. The following subject attributes were crucial in
forecasting future penetration rates for this segment:
o An adequate but somewhat tired product offering in respect
to the competitive lodging supply;
o Affiliation with a nationally-recognized hotel chain;
o Extensive meeting and banquet facilities and boardrooms
offering state of the art audio-visual equipment; and
o Renewed marketing focus on the commercial segment.
Leisure Individual Travelers
In the stabilized year, the leisure individual travelers segment
is expected to comprise 18 percent of total accommodated demand.
Similarly, penetration rates in 1997 and 1998 are expected to
increase to 92 and 95 percent respectively as a result of a shift
of demand from the lower-rate contract segment. The subject
hotel's penetration rate is estimated to decline to 92 percent in
1999 and stabilize at 90 percent by 1999 due to the entry of the
AmeriSuites hotel. Similar to the commercial transient segment,
penetration of this segment is expected to increase due to the
implementation of marketing focus by capturing more higher rated
leisure and commercial transient demand. For year-end 1996,
penetration at the subject property is estimated to be 85
percent. For the same period, the Hampton Inn Galleria was also
the market
<PAGE>
Sheraton Inn Buffalo Airport Page 76
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leader in this segment achieving a penetration rate of 180
percent. The following attributes were considered in forecasting
future penetration rates:
o Affiliation with a nationally-recognized hotel chain, with
an extensive reservation system;
o Location proximate to the New York Thruway/Interstate 90 and
Walden Galleria, one of the largest enclosed malls in the area;
and
o Renewed marketing emphasis in this segment.
Groups
The groups market is projected to represent approximately 17
percent of total accommodated demand in the stabilized year. The
penetration of fair market share in this segment during the
stabilized year is expected to remain consistent with historical
year-end 1996 results of 66 percent. The subject's distant
location from Downtown Buffalo will continue to negatively impact
the subject's penetration in this segment. In contrast, the
Hilton Buffalo and Hyatt Regency, properties that are adjacent to
the Downtown convention center, are estimated to achieve
extremely high penetration rates in this segment for year-end
1996, posting rates of 175 and 205 percent respectively.
Estimates of penetration in this segment were based on the
following factors:
o Complete meeting facilities and boardrooms offering state
of the art audio-visual equipment;
o Proximate location to corporations but away from downtown
convention center;
o Adjacent to Walden Galleria; and
o Full-service amenities and facilities.
Contract
The subject property is estimated to accommodate 34 percent of
contract demand in the stabilized year. Penetration of this
segment is expected to decrease as a result of management's
active strategy to reduce lower-rated crew business. Management
indicated that they intend to
<PAGE>
Sheraton Inn Buffalo Airport Page 77
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gradually "phase-out" the lower-rated US Air account, which
generates approximately 10,500 room nights annually. Based on
discussions with management and our analysis, we estimate this
phasing process to occur over the next three years, with a
majority of the cancellation occurring in the 1997 and 1998. In
addition, management has also indicated that a contract has been
signed with American Airlines for 4,500 room nights per year
beginning at the outset of 1997. The remaining demand is expected
to be replaced by higher-rated leisure and commercial transient
demand, which were discussed in the previous paragraphs. On the
basis of the preceding, we have estimated penetration to decrease
from 433 percent in 1996 to a stabilized 360 percent in 1999,
continuing to capture contract demand far above its fair share.
This represents an approximately 21 percent drop in accommodated
contract room nights from 35,403 in 1996 to 28,000 in 1999.
The estimated market mix of the subject hotel in a stabilized
year, at 79 percent occupancy, is presented on the following
table:
- ----------------------------------------------------------------------
Estimated Market Segmentation In A Stabilized Year
Sheraton Inn Buffalo Airport
- ----------------------------------------------------------------------
Occupied Percent of Penetration
Market Segment Room Nights Room Nights Rate
- ----------------------------------------------------------------------
Commercial Individual
Travelers 26,100 31% 90%
Leisure Individual Travelers 15,600 18% 90%
Groups 14,100 17% 66%
Contract 28,800 34% 360%
- ----------------------------------------------------------------------
Total 84,600 100% 111%
- ----------------------------------------------------------------------
Source: Arthur Andersen/Market Interviews
- ----------------------------------------------------------------------
Our estimates of the overall market penetration and resulting
occupancy for the subject hotel from 1997 through December 31,
2001 are presented on the following table.
<PAGE>
Sheraton Inn Buffalo Airport Page 78
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Estimated Penetration And Occupancy
Sheraton Inn Buffalo Airport
- -----------------------------------------------------
Estimated Overall Estimated
Year Penetration Rate Occupancy
- -----------------------------------------------------
1996 120% 85%
1997 115% 82%
1998 115% 83%
1999 112% 78%
2000 111% 79%
2001 111% 79%
- -----------------------------------------------------
Source: Arthur Andersen
- -----------------------------------------------------
PROJECTED AVERAGE DAILY ROOM RATE
Growth in the average daily room rate by market segment for the
subject hotel is summarized in the following paragraphs. Please
note that all operational expenses are increased at inflationary
growth rates of 3.5 percent.
Commercial Individual Travelers
The average room rate in the commercial individual traveler
segment is estimated to be approximately $81.75 in 1996 at the
subject hotel. This represents an 0.8 percent decrease over the
rate achieved by this segment in 1994. This decrease is a result
of the entry of the Hampton Inn Galleria, which offers a superior
guest room product at a lower price, into the market. We estimate
that the average room rate growth in this segment will be 2.5
percent in 1997 and stabilize at an inflationary 3.5 percent in
1998 and thereafter. Management is expected to implement
discounting policies in this segment in 1997 in order to increase
penetration in this segment.
Leisure Individual Travelers
In 1996, the average room rate in this segment is estimated to be
approximately $84.24, which was a 2.2 percent decline from 1995.
Similarly, this decrease was in large part due to the entry of
the proximate Hampton Inn property, which was primarily marketed
to the leisure and commercial transient markets. Similarly, we
estimate that average room rate growth in this segment will be
2.5 percent in 1997 and stabilize at an inflationary factor of
3.5 percent
<PAGE>
Sheraton Inn Buffalo Airport Page 79
- --------------------------------------------------------------------
throughout the remainder of the projection period. Consistent
with management's renewed marketing focus in this segment, room
rates are expected to be discounted in 1997 in order to increase
accommodated demand.
Groups
In the groups segment, average room rate is estimated to register
an increase of 5.2 percent from $71.52 to $75.24 in between 1995
and 1996. This increase was due in part to recent rate increases
by the Marriott Amherst in this segment. Coupled with a limited
number of full-service hotels in the suburban Buffalo market
area, Marriott's rate increases in effect also created
opportunities for increases at the other full-service properties,
notably the subject hotel and the Radisson Suites and Hotel.
Nevertheless, on the basis of future market changes and the
recent rate increases at the subject property, we expect rate
growth during the projection period to be consistent with
inflation. Room rates are expected to growth at an average annual
rate of 3.0 percent in 1997 and 3.5 percent for the remainder of
the projection period.
Contract
Average room rate is estimated to increase from $41.71 in 1995 to
$43.05 in 1996, posting an increase of approximately 3.2 percent.
We estimate rate increases to be the greatest in this segment.
Based on the recent addition of the American Airline contract
(estimated at $45 per night) and the gradual "phasing-out" of the
low-rated US Air account (estimated at $37.50 per night), average
room rate in this segment is expected to increase at 4.0 percent
in 1997 and 1998. In 1999, this increase is estimated to lessen
to 3.7 percent, and rate growth is expected to stabilize at
inflationary levels in 2000 and thereafter.
<PAGE>
Sheraton Inn Buffalo Airport Page 80
- --------------------------------------------------------------------
The following table presents our estimates of average daily room
rate for the Sheraton Inn Buffalo Airport.
- ---------------------------------------------------
Estimated Average Daily Room Rate
Sheraton Inn Buffalo Airport
- ---------------------------------------------------
Year Average Rate % Growth
- ---------------------------------------------------
1996 (Estimated) $66.00 --
1997 69.50 5.3%
1998 72.50 4.3%
1999 75.00 3.4%
2000 77.50 3.3%
2001 80.50 3.9%
- ---------------------------------------------------
Source: Arthur Andersen
- ---------------------------------------------------
Coupled with rate increases in the groups segment and the gradual
shift of demand from lower-rated contract demand to the leisure
and commercial transient segments, average daily rate is expected
to exhibit the strongest growth in 1997 and 1998, registering
growth rates of 5.3 and 4.3 percent respectively.
<PAGE>
Sheraton Inn Buffalo Airport Page 81
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D. THE APPRAISAL PROCESS
The purpose of this appraisal is to estimate the "as is" market
value of the subject property in accordance with accepted value
estimating procedure. "The valuation process is a systematic
procedure employed to provide the answer to a client's question
about real property value. It is a model of appraisal activity,
reflecting an understanding of value and the methods used in the
value estimation."3
There are three traditional approaches involved in the valuation
of real property. These are known as the cost approach, the sales
comparison approach, and the income capitalization approach. Each
of the three approaches is related to the other, as they involve
the gathering and analysis of sales, cost, and income data that
pertain to the property being appraised. Although all three
valuation procedures are given consideration, the inherent
strengths and weaknesses of each approach and the nature of the
subject property must be evaluated to determine which will
provide the most supportable estimates of market value. The
appraiser is then free to select one approach to arrive at a
final value estimate.
D.1 THE COST APPROACH
Valuation by the cost approach is based on the principle of
substitution. This principle asserts that an informed investor
will not pay more for a property than the cost to build a
substitute property of equivalent utility. Therefore, the cost
approach, when utilized in an appraisal, estimates the cost of
reproducing or replacing the subject property including
improvements and land, less an allowance for depreciation based
upon the physical condition, functionality, and economic
environment or the building. Although this approach is
particularly applicable to owner-occupied or special-use
properties in the absence of an investor market, it also
recognizes and establishes the relationship between cost and
market-derived values.
- ------------------
3 American Institute of Real Estate Appraisers, The Appraisal
of Real Estate Appraisal, Chicago, Illinois, 1989, p.73.
<PAGE>
Sheraton Inn Buffalo Airport Page 82
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In the subject appraisal, the building is now operating as a
business in the production of income to the various components
which comprise the total operation of a hotel. Although the
replacement cost of the subject hotel could be established, the
estimate of market depreciation is a very subjective
consideration which significantly affects the value indication.
The depreciation estimate could only be realistically estimated
by comparison to other approaches, thereby reducing the cost
approach to coincide with one of the other approaches, and losing
the objectivity of the approach as a third measure of value. In
our opinion, an informed and experienced purchaser would not rely
on the cost approach in establishing an indication of market
value for the subject property. Therefore, this approach has not
been included in our analysis.
D.2 SALES COMPARISON APPROACH
The Sales Comparison Approach estimates market value based upon a
comparative analysis of recent sales of improved properties that
are similar in function size, income production, and use to the
appraised property. This approach to value assumes that the
market will determine a price for the Sheraton Inn Buffalo
Airport in the same manner that it determines the price for
comparable properties. To apply the sales comparison approach,
the appraiser employs a number of appraisal techniques, including
the principle of substitution which holds that the value of a
property that is replaceable in the marketplace tends to be set
by the cost of acquiring an equally desirable property.
Additional considerations include examination of market
conditions prevailing at the time of sale as compared to those at
the date of valuation. The following pages explain the
application of the sales comparison approach to the subject
property.
In general, to develop the sales comparison approach we would
research the subject market and the surrounding region for recent
sales of similarly improved properties. However, since there was
only one comparable full-service hotel transaction that occurred
between 1994 and 1996 in the subject market and the surrounding
region, we expanded our search to include secondary and tertiary
cities throughout the United States concentrating on the
northeast. From our search, we have selected several sales for
further analysis and direct comparison with the Sheraton Inn
Buffalo Airport. These sales represent the most recent sales of
improved
<PAGE>
Sheraton Inn Buffalo Airport Page 83
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properties and are considered to be competitive alternatives in
the marketplace. We have identified five comparable hotel sales.
All of the hotels are full-service properties with substantial
meeting space, located in secondary to tertiary city markets that
are comparable to Buffalo, and are affiliated with national hotel
chains.
We have made adjustments to the price paid per room on the basis
of a comparison of each hotel relative to the subject hotel. Our
analysis of the market recognizes primary factors which affect
the pricing of hotels including:
1. Transaction Market Conditions: analyzes the condition of
the market for hotel transactions and terms at the time of the
sale;
2. Fee Simple or Leasehold: analyzes where the transfer of
ownership was fee simple or leasehold;
3. Location and Strength of Local Lodging Market: analyzes
the market environment in which the hotel competes. The
property's locational characteristics are also taken into
consideration;
4. Extent and Quality of Facility: analyzes the characteristics
of the product offering; and
5. Condition of Facilities/Age: analyzes the condition and age
of the product offering.
Presented on the following page is a summary of each comparable
sale and our adjustments. Tables detailing pertinent information
related to each comparable sale are presented in the Addenda of
this report.
<PAGE>
- -------------------------------------------------------------------------------
Sales Comparison Adjustment Grid
Sheraton Inn
- -------------------------------------------------------------------------------
Hotel Name Ramada Inn Hyatt Days Inn Hilton Sheraton
Buffalo Airport Regency Airport Hotel Metrodome
Location Lancaster, New Pittsbur Philadel Allentow Minneapol
York gh, PA phia, PA n, PA is, MN
Interest Fee Simple Leasehol Fee Fee Fee
Transferred d Simple Simple Simple
Number of Units 123 400 175 224 254
(Rooms/Suites)
Occupancy 48% 58% 72% 78% 85%
Average Daily $55.46 $86.00 $67.20 $60.59 $72.00
Rate
Date of Sale Dec. 95 Apr. 96 Feb. 96 Aug. 96 Aug. 96
Sales Price (1) $1,840,000 $26,500, $5,932,0 $7,500,0 $18,000,0
000 00 00 00
Sales Price Per $14,959 $66,250 $33,897 $33,482 $70,866
Room
Gross Room 1.5 3.6 1.9 2.0 3.2
Revenue
Multiplier (GRRM)
OTHER
ADJUSTMENTS (2)
Transaction 10.0% 0.0% 0.0% 0.0% 0.0%
Market
Conditions
Fee Simple -5.0% 0.0% -5.0% -5.0% -5.0%
or
Leasehold
Strength of 10.0% 0.0% 10.0% 10.0% -15.0%
Local
Lodging
Market
Extent and 25.0% -15.0% 10.0% 5.0% -5.0%
Quality of
the
Facilities
Condition 25.0% -15.0% 10.0% 5.0% -10.0%
of the
Facilities/
Age
11
ADJUSTED PRICE $24,700 $46,400 $44,100 $40,200 $49,600
======= ======= ======= ======= =======
PER ROOM
Notes:
(1) Hyatt Regency includes $7.0 million capital improvement costs.
(2) A negative adjustment indicates that the comparable sale had a
superior location, size & extent of facilities, condition or
location than that of the subject. As a result, the sale
price must be adjusted downward to make the sale comparable
with the subject property. A positive adjustment indicates
that the comparable sale was inferior to that of the subject
and the price per room must be increased.
Insert Sales Adjustment Grid - Slscomp.xls
<PAGE>
Sheraton Inn Buffalo Airport Page 85
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The following paragraphs briefly present a rationale for the
major adjustments made to the price per room of each identified
comparable sale.
Ramada Inn Buffalo Airport (Lancaster, New York)
The Ramada Inn Buffalo Airport is a 123-room full-service hotel
located near the Greater Buffalo International Airport. This
property was purchased on December 31, 1995 by Charter Motor Inn
from Buffalo Realty, and the sales price was $14,959 per room.
Five adjustments were made to the sales price:
o Transaction Market Conditions: the sales price was
increased by 10.0 percent. According to discussions with the
sales agent, the market for hotel transactions in Buffalo was
still relatively weak in 1995;
o Fee Simple or Leasehold: the sales price was decreased by
5.0 percent as this was a fee simple transaction, which included
land ownership;
o Strength of Local Lodging Market: the sales price was
adjusted upwards of 10 percent. The property is situated in an
area of the Buffalo lodging market that contains an abundant
number of mid-tier, full-service hotels. As a result, the
immediate market in which this property competes is extremely
competitive;
o Extent and Quality of Facility: the sales price was
adjusted upwards of 25 percent to compensate for the limited
facilities/amenities offered in respect to the subject property;
and
o Condition of Facilities/Age: increased sales price by 25
percent. The property was in poor condition during the time of
sale. Although capital costs were not revealed, the new owner had
apparently invested a substantial amount of capital expenditures
to improve the product.
On the basis of our adjustments and analysis, the adjusted price
per room of this hotel is estimated to be $24,700 per room.
<PAGE>
Sheraton Inn Buffalo Airport Page 86
- --------------------------------------------------------------------
Hyatt Regency (Pittsburgh, Pennsylvania)
The Hyatt Regency is a 400-room hotel, located in downtown
Pittsburgh. This property was sold on a leasehold basis to a
limited partnership, in which HOST Marriott and Interstate Hotels
hold a 95 and 5.0 percent interest respectively, for $18.5
million on April 1, 1996. The seller was Elteq Partners I Limited
Partnership. Interstate Hotels will manage the property, and HOST
Marriott has invested approximately $8.0 million in capital
improvement costs. The sales price, including capital costs, is
$66,250 per room. Two adjustments were made to the sales price:
o Transaction Market Conditions: no adjustment was made as
the transaction occurred in 1996;
o Fee Simple or Leasehold: no adjustment was made as the
transaction was on a leasehold basis;
o Strength of Local Lodging Market: no adjustment was made
as the Pittsburgh lodging market condition is similar to Buffalo;
o Extent and Quality of Facility: the sales price was
decreased by 15 percent as the new owner had invested $8.0
million in capital costs to upgrade and expand the facilities;
and
o Condition of Facilities/Age: the sales price was decreased
by 15 percent. Although the property was built in 1968, the
capital costs included an overhaul upgrade of all soft and case
goods throughout the property.
On the basis of our adjustments and analysis, the adjusted price
per room of this hotel is estimated to be $46,400 per room.
<PAGE>
Sheraton Inn Buffalo Airport Page 87
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Days Inn Airport (Philadelphia, Pennsylvania)
The 177-room Days Inn is located near the Philadelphia
International Airport. This property was sold by Beacon
Properties Corporation to the Starwood Lodging Trust on June 28,
1996. The transaction was fee simple. Starwood plans to upgrade
this property to a mid-tier full-service hotel under another
affiliation, although the capital improvement costs have yet to
be determined. On a per room basis, the sales price was $33,897.
Five adjustments were made:
o Transaction Market Conditions: no adjustment was made as
the property was sold in 1996;
o Fee Simple or Leasehold: the sales price was decreased by
5.0 percent as this was a fee simple transaction;
o Strength of Local Lodging Market: the sales price was
increased by 10 percent. Relative to the Buffalo, the lodging
market condition in Philadelphia is soft;
o Extent and Quality of Facility: the sales price was
adjusted upwards of 10 percent to compensate for a smaller
inventory of facilities and amenities offered; and
o Condition of Facilities/Age: the sales price was adjusted
upwards of 10 percent. The property was reportedly in need of
major capital improvements.
On the basis of our adjustments and analysis, the adjusted price
per room of this hotel is estimated to be $44,100 per room.
<PAGE>
Sheraton Inn Buffalo Airport Page 88
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Hilton Hotel (Allentown, Pennsylvania)
The 224-room Hilton Hotel was purchased by Starwood Lodging Trust
from Hotels of Distinction Ventures, Inc. on August 15, 1996 for
$7.5 million. The property was purchased on a fee simple basis
and is located in Downtown Allentown. The sales price was $33,482
per room. Five adjustments were made:
o Transaction Market Conditions: no adjustment was made as
the property was sold in 1996;
o Fee Simple or Leasehold: the sales price was decreased by
5.0 percent. The interest transferred was fee simple;
o Strength of Local Lodging Market: the sales price was
increased by 10 percent. The Allentown lodging market condition
was reportedly soft;
o Extent and Quality of Facility: the sales price was
adjusted upwards of 5.0 percent to compensate for a smaller
inventory of meeting facilities; and
o Condition of Facilities/Age: the sales price was adjusted
upwards of 5.0 percent. The property was reportedly in need of
soft goods upgrades.
On the basis of our adjustments and analysis, the adjusted price
per room of this hotel is estimated to be $40,200 per room.
<PAGE>
Sheraton Inn Buffalo Airport Page 89
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Sheraton Metrodome (Minneapolis, Minnesota)
The Sheraton Metrodome is a 254-room hotel, located in downtown
Minnesota. This property was sold on August 15, 1996 to the
Starwood Lodging Trust from the Hotels of Distinction Ventures,
Inc. The transfer was on a fee simple basis, and the sales price
was $70,866 per room.
Five adjustments were made:
o Transaction Market Conditions: no adjustment was made as
the property was sold in 1996;
o Fee Simple or Leasehold: the sales price was decreased by
5.0 percent. The interest transferred was fee simple;
o Strength of Local Lodging Market: the sales price was
decreased by 15 percent. Currently the Minneapolis lodging market
is exhibiting healthy growth as a result of strong tourism and
convention demand. On a RevPAR basis this property outperformed
the subject property;
o Extent and Quality of Facility: the sales price was
decreased by 5.0 percent as this property provides a more
extensive array of facilities; and
o Condition of Facilities/Age: the sales price was decreased
by 10 as this Sheraton was reportedly in good condition.
On the basis of our adjustments and analysis, the adjusted price
per room of this hotel is estimated to be $49,600 per room.
Information has been presented on several comparable hotel sales
which are considered to be relatively similar to the Sheraton Inn
Buffalo Airport. After adjustments, the comparable hotel sale
transactions indicate a unit price range for the subject hotel
from $24,700 to $49,600 per room. We have given the most weight
on the price per room indications of the Hyatt Regency, Days Inn
Airport, Hilton Hotel, and the Sheraton Metrodome as these
properties are more comparable in terms of size,
facilities/amenities offered, and are the most recent. On the
basis of an analysis of these sales, we have estimated the market
value of the leasehold interest in the subject property by this
approach to be approximately $46,000 per room, or $13,432,000
(rounded) as of January 1, 1996.
<PAGE>
Sheraton Inn Buffalo Airport Page 90
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CONCLUSION BY THE SALES COMPARISON APPROACH
Utilizing the Price Per Room approach, we have estimated the
market value of the property to be $13,432,000. Utilizing the
Gross Rooms Revenue Multiplier approach, we estimated the market
value to be $13,662,000, based on the gross rooms revenue in
1995, which is in line with the Sale Comparison Approach.
Generally, the Gross Rooms Revenue Multiplier approach is used as
a benchmarking method rather than an actual valuation
instruments. On the basis of this analysis, we have estimated the
market value of the leasehold interest in the subject hotel, via
the Sales Comparison Approach to be $13,432,000 as of January 1,
1996.
<PAGE>
Sheraton Inn Buffalo Airport Page 91
- --------------------------------------------------------------------
D.3 INCOME APPROACH
The income approach to value converts anticipated future benefits
into an estimate of present value. In this respect, the process
is very similar to pricing in other capital markets. The approach
requires the careful estimation of future benefits -- income
before debt service, residual values, etc. -- and application of
investor yield or return requirements. The income approach brings
together reasoned estimates of future revenues and expenses with
the investor's yield requirements. These yield requirements, in
turn, reflect varieties of risk, including property type,
location, local market conditions, and so forth.
Yield and direct capitalization techniques are conventionally
used to convert future benefits to value -- the discounted cash
flow (DCF) technique and the overall capitalization rate (OAR)
technique. The DCF technique entails (1) modeling the future
performance of the subject, over a specific holding period, (2)
estimating the future value (reversionary value) at the end of
the holding period, and (3) converting the stream of periodic
benefits and reversionary value, through a discounting process at
investor yields, to a present value. The selection of an ap
propriate discount rate is essential to this process.
By comparison, direct capitalization using an overall rate (OAR)
converts a single, "normalized" year's income or income before
debt service into a value by dividing the appropriate capi
talization rate into the normalized income. Subsequent
adjustments are then made to take into consideration variations
from normalized operations. In order to value Sheraton Inn
Buffalo Airport, we have utilized only the discounted cash flow
method for the income approach. The direct capitalization method
has not been used because most investors do not use it as a tool
to analyze value from income. In addition, it is difficult to
reflect future increases in occupancy and room rate using direct
capitalization. Finally, using a "normalized" or stabilized net
operating income is highly speculative and can produce erroneous
results.
The discussion on the following pages provide a summary of our
projection of revenues, expenses, discount rates, capitalization
rates, and many of the other assumptions which are incorporated
in the income approach. The discussion of revenues and expenses
begins with
<PAGE>
Sheraton Inn Buffalo Airport Page 92
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an examination of historical trends. Finally, estimates are made
with regard to the appropriate projection of revenues, expenses,
and capital items.
HISTORICAL FINANCIAL PERFORMANCE
The historical operating results for the subject hotel for the
years ended 1994 and 1995, year-to-date September 30, 1995 and
1996, and Trailing 12 Months As of September 30, 1996 are
presented on the following pages.
<PAGE>
Recast of Historical Financial Statements
Sheraton Inn
1994 Actual Income
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 292
Available Rooms (Annually) 106,580
Occupancy Percentage 89.4%
Occupied Rooms 95,292
Average Room Rate $65.49
REVENUES
Rooms $6,240,244 67.5% $21,371 $65.49
Food 2,171,733 23.5% 7,437 22.79
Beverage 614,024 6.6% 2,103 6.44
Telephone 184,804 2.0% 633 1.94
Rentals and Other
Income (Net) 35,351 0.4% 121 0.37
---------- ------ ------- ------
Total Revenues $9,246,156 100.0% $31,665 $97.03
DEPARTMENTAL EXPENSES
Rooms $1,514,460 24.3% $5,187 $15.89
Food & Beverage 1,813,611 65.1% 6,211 19.03
Telephone 84,267 45.6% 289 0.88
---------- ------ ------- ------
Total Departmental
Expenses $3,412,338 36.9% $11,686 $35.81
TOTAL DEPARTMENTAL
INCOME $5,833,818 63.1% $19,979 $61.22
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $751,785 8.1% $2,575 $7.89
Sales and Marketing 485,015 5.2% 1,661 5.09
Management Fees 371,466 4.0% 1,272 3.90
Franchise Fees 370,873 4.0% 1,270 3.89
Energy 584,630 6.3% 2,002 6.14
Property Operations &
Maintenance 436,798 4.7% 1,496 4.58
---------- ------ ------- ------
Total Undistributed
Operating $3,000,567 32.5% $10,276 $31.49
INCOME BEFORE FIXED
CHARGES $2,833,251 30.6% 9,703 29.73
FIXED CHARGES
Real Estate Taxes $279,830 3.0% $958 $2.94
13
<PAGE>
School Taxes 167,749 1.8% 574 1.76
Insurance 26,477 0.3% 91 0.28
Equipment Rent 25,054 0.3% 86 0.26
Ground Rent 212,576 2.3% 728 2.23
---------- ------ ------- ------
Total Fixed Charges $711,686 7.7% $2,437 $7.47
INCOME BEFORE RESERVE $2,121,565 22.9% $7,266 $22.26
---------- ------ ------- ------
---------- ------ ------- ------
1995 Actual Income
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 292
Available Rooms (Annually) 106,580
Occupancy Percentage 82.9%
Occupied Rooms 88,348
Average Room Rate $65.34
REVENUES
Rooms $5,772,605 67.6% $19,769 $65.34
Food 2,013,580 23.6% 6,896 22.79
Beverage 527,659 6.2% 1,807 5.97
Telephone 172,799 2.0% 592 1.96
Rentals and Other
Income (Net) 48,612 0.6% 166 0.55
---------- ------ ------- ------
Total Revenues $8,535,255 100.0% $29,230 $96.61
DEPARTMENTAL EXPENSES
Rooms $1,422,644 24.6% $4,872 $16.10
Food & Beverage 1,681,772 66.2% 5,759 19.04
Telephone 77,877 45.1% 267 0.88
---------- ------ ------- ------
Total Departmental
Expenses $3,182,293 37.3% $10,898 $36.02
TOTAL DEPARTMENTAL
INCOME $5,352,962 62.7% $18,332 $60.59
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $778,916 9.1% $2,668 $8.82
Sales and Marketing 452,343 5.3% 1,549 5.12
Management Fees 343,064 4.0% 1,175 3.88
Franchise Fees 343,309 4.0% 1,176 3.89
Energy 603,321 7.1% 2,066 6.83
Property Operations &
Maintenance 462,645 5.4% 1,584 5.24
---------- ------ ------- ------
14
<PAGE>
Total Undistributed
Operating $2,983,598 35.0% $10,218 $33.77
INCOME BEFORE FIXED
CHARGES $2,369,364 27.8% 8,114 26.82
FIXED CHARGES
Real Estate Taxes $284,525 3.3% $974 $3.22
School Taxes 177,903 2.1% 609 2.01
Insurance 34,587 0.4% 118 0.39
Equipment Rent 25,054 0.3% 86 0.28
Ground Rent 195,750 2.3% 670 2.22
---------- ------ ------- ------
Total Fixed Charges $717,819 8.4% $2,458 $8.12
INCOME BEFORE RESERVE $1,651,545 19.3% $5,656 $18.69
Notes:
The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen. (1) Rentals and Other Income includes
video game center, parking fees, vending machine, movie sales and
swimming pool/health club operation. (2) Real Estate Taxes
include taxes for the County, State, Town, Library, Hydrant,
Sewer, Garbage, and Drainage. (3) Ground Rent includes lease
payments on two parcels of land.
<PAGE>
Recast of Historical Financing Statements
Sheraton Inn
Year-To-Date September 30, 1995
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 304
Available Rooms (Daily) 292
Available Rooms (Annually) 88,768
Occupancy Percentage 76.4%
Occupied Rooms 67,793
Average Room Rate $65.46
REVENUES
Rooms $4,437,562 68.9% $15,197 $65.46
Food 1,458,603 22.7% 4,995 21.52
Beverage 371,511 5.8% 1,272 5.48
Telephone 131,401 2.0% 450 1.94
Rentals and Other
Income (Net) 38,830 0.6% 133 0.57
---------- ------ ------- ------
Total Revenues $6,437,907 100.0% $22,048 $94.96
DEPARTMENTAL EXPENSES
Rooms $1,092,811 24.6% $3,743 $16.12
Food & Beverage 1,248,614 68.2% 4,276 18.42
Telephone 59,831 45.5% 205 0.88
---------- ------ ------- ------
Total Departmental
Expenses $2,401,256 37.3% $8,223 $35.42
TOTAL DEPARTMENTAL
INCOME $4,036,651 62.7% $13,824 $59.54
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $582,534 9.0% $1,995 $8.59
Sales and Marketing 341,511 5.3% 1,170 5.04
Management Fees 258,783 4.0% 886 3.82
Franchise Fees 262,928 4.1% 900 3.88
Energy 431,830 6.7% 1,479 6.37
Property Operations &
Maintenance 325,675 5.1% 1,115 4.80
---------- ------ ------- ------
Total Undistributed
Operating $2,203,261 34.2% $7,545 $32.50
INCOME BEFORE FIXED
CHARGES $1,833,390 28.5% 6,279 27.04
FIXED CHARGES
Real Estate Taxes $345,683 5.4% $1,184 $5.10
16
<PAGE>
School Taxes 0 0.0% 0 0.00
Insurance 24,832 0.4% 85 0.37
Equipment Rent 18,211 0.3% 62 0.27
Ground Rent 149,347 2.3% 511 2.20
---------- ------ ------- ------
Total Fixed Charges $538,073 8.4% $1,843 $7.94
INCOME BEFORE RESERVE $1,295,317 20.1% $4,436 $19.11
---------- ------ ------- ------
---------- ------ ------- ------
Year-to-Date September 30, 1996
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 304
Available Rooms (Daily) 292
Available Rooms (Annually) 88,768
Occupancy Percentage 77.4%
Occupied Rooms 68,732
Average Room Rate $66.28
REVENUES
Rooms $4,555,465 69.0% $15,601 $66.28
Food 1,519,175 23.0% 5,203 22.10
Beverage 382,261 5.8% 1,309 5.56
Telephone 118,910 1.8% 407 1.73
Rentals and Other
Income (Net) 23,798 0.4% 82 0.35
---------- ------ ------- ------
Total Revenues $6,599,609 100.0% $22,601 $96.02
DEPARTMENTAL EXPENSES
Rooms $1,063,593 23.3% $3,642 $15.47
Food & Beverage 1,203,953 63.3% 4,123 17.52
Telephone 54,700 46.0% 187 0.80
---------- ------ ------- ------
Total Departmental
Expenses $2,322,246 35.2% $7,953 $33.79
TOTAL DEPARTMENTAL
INCOME $4,277,363 64.8% $14,649 $62.23
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $606,351 9.2% $2,077 $8.82
Sales and Marketing 361,090 5.5% 1,237 5.25
Management Fees 265,185 4.0% 908 3.86
Franchise Fees 270,794 4.1% 927 3.94
Energy 472,719 7.2% 1,619 6.88
Property Operations &
Maintenance 396,679 6.0% 1,358 5.77
---------- ------ ------- ------
17
<PAGE>
Total Undistributed
Operating $2,372,818 36.0% $8,126 $34.52
INCOME BEFORE FIXED
CHARGES $1,904,545 28.9% 6,522 27.71
FIXED CHARGES
Real Estate Taxes $354,718 5.4% $1,215 $5.16
School Taxes 0 0.0% 0 0.00
Insurance 29,602 0.4% 101 0.43
Equipment Rent 24,029 0.4% 82 0.35
Ground Rent 153,259 2.3% 525 2.23
---------- ------ ------- ------
Total Fixed Charges $561,608 8.5% $1,923 $8.17
INCOME BEFORE RESERVE $1,342,937 20.3% $4,599 $19.54
Notes:
The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen. (1) Rentals and Other Income includes
video game center, parking fees, vending machine, movie sales and
swimming pool/health club operation. (2) Real Estate Taxes
include taxes for the County, State, Town, Library, Hydrant,
Sewer, Garbage, and Drainage. (3) Ground Rent includes lease
payments on two parcels of land.
<PAGE>
Recast of Historical Financial Statements
Sheraton Inn
Trailing 12 Months As of September 30, 1996
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 292
Available Rooms (Annually) 106,580
Occupancy Percentage 83.8%
Occupied Rooms 89,287
Average Room Rate $65.97
REVENUES
Rooms $5,890,508 67.7% $20,173 $65.97
Food 2,074,152 23.8% 7,103 23.23
Beverage 538,409 6.2% 1,844 6.03
Telephone 160,308 1.8% 549 1.80
Rentals and Other
Income (Net) 33,580 0.4% 115 0.38
---------- ------ ------- ------
Total Revenues $8,696,957 100.0% $29,784 $97.40
DEPARTMENTAL EXPENSES
Rooms $1,393,426 23.7% $4,772 $15.61
Food & Beverage 1,637,111 62.7% 5,607 18.34
Telephone 72,746 45.4% 249 0.81
---------- ------ ------- ------
Total Departmental
Expenses $3,103,283 35.7% $10,628 $34.76
TOTAL DEPARTMENTAL
INCOME $5,593,674 64.3% $19,156 $62.65
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $802,733 9.2% $2,749 $8.99
Sales and Marketing 471,922 5.4% 1,616 5.29
Management Fees 349,466 4.0% 1,197 3.91
Franchise Fees 351,175 4.0% 1,203 3.93
Energy 644,210 7.4% 2,206 7.22
Property Operations &
Maintenance 533,649 6.1% 1,828 5.98
---------- ------ ------- ------
Total Undistributed
Operating $3,153,155 36.3% $10,798 27.33
INCOME BEFORE FIXED
CHARGES $2,440,519 28.1% $8,358 $27.33
FIXED CHARGES
Real Estate Taxes $293,560 3.4% $1,005 $3.29
19
<PAGE>
School Taxes 177,903 2.0% 609 1.99
Insurance 39,357 0.5% 135 0.44
Equipment Rent 30,872 0.4% 106 0.35
Ground Rent 199,662 2.3% 684 2.24
---------- ------ ------- ------
Total Fixed Charges $741,354 8.5% $2,539 $8.30
INCOME BEFORE RESERVE $1,699,165 19.5% $5,819 $19.03
Notes:
The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen. (1) Rentals and Other Income includes
video game center, parking fees, vending machine, movie sales and
swimming pool/health club operation. (2) Real Estate Taxes
include taxes for the County, State, Town, Library, Hydrant,
Sewer, Garbage, and Drainage. (3) Ground Rent includes lease
payments on two parcels of land.
<PAGE>
Sheraton Inn Buffalo Airport Page 96
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ESTIMATED OPERATING RESULTS
Estimates of income and expenses, in current dollars, have been
prepared for the subject hotel from January 1, 1997 through
December 31, 2007. Our financial projections are based upon an
analysis of the historical operating results of the subject and
on the performance of comparable hotels. A higher emphasis was
put on year-end 1995 and Last Trailing 12 Months Ending September
30, 1996 ("LTM 1996"), which represented the most recent calendar
year operating results. A representative year of operation,
expressed in 1996 dollars, is first established and then adjusted
to account for inflation and the varying levels of occupancy for
each year in the projection period. The representative level of
occupancy at the hotel is estimated to be 85 percent. The
following paragraphs describe the assumptions and basis of our
estimates.
Inflation Assumption
In order to estimate future inflation of revenues and expenses at
the subject hotel, we have reviewed the historical inflation of
the U.S. consumer price index - urban markets (CPI-U).
- -----------------------------
Year CPI-U
---- -----
1988 4.4%
1989 4.6%
1990 6.1%
1991 3.1%
1992 2.9%
1993 2.7%
1994 2.7%
1995 2.5%
- -----------------------------
On the basis of historical inflation rates and on our estimates
of future inflation according to the economical conditions in the
subject market area, we have assumed an underlying inflation
assumption of 3.5 percent, compounded annually, from a base year
of 1996.
<PAGE>
Sheraton Inn Buffalo Airport Page 96
- --------------------------------------------------------------------
Revenue
Rooms Revenue is based upon the estimates of average annual
occupancy and room rates as described previously in this
report.
Food Revenue is derived from estimated food sales in the
Grille on Walden, Twigs Bar and Grille, room service and
banquet facilities (catering and sales). Food revenue also
includes any miscellaneous revenue such as public room
rental and corkage fees. Our estimate is based upon an
analysis of actual operations of comparable hotels and on
historical food sales.
On the basis of the analysis of the historical operating
results and the results of comparable hotels, we assume
that the subject hotel will achieve food revenue of $23.00
per occupied room, in 1996 dollars at a stabilized
occupancy of 85 percent. Food revenue is estimated to be 40
percent variable with occupancy and is adjusted to account
for inflation and occupancy levels throughout the
projection period. We have estimated food sales to be
relatively fixed as the subject property presently
accommodates a high number of local restaurant patrons from
the surrounding areas.
Beverage Revenue is derived from estimated sales of all
alcoholic beverages in the Grille on Walden, Twigs Bar and
Grille, the H2O Bar, and lounges, room service and banquet
facilities. Our estimate is based upon the actual
operations of comparable hotels and upon an analysis of
historical beverage sales.
On the basis of the analysis of the historical operating
results and the results of comparable hotels, we assume
that the subject hotel will achieve beverage revenue of
$6.00 per occupied room, in 1996 dollars at a stabilized
occupancy of 85 percent. Beverage revenue is estimated to
be 40 percent variable with occupancy and is adjusted to
account for inflation and occupancy levels throughout the
projection period. Likewise, beverage sales are relatively
fixed due to the high number of local patrons that solicit
the subject's food and beverage outlets.
<PAGE>
Sheraton Inn Buffalo Airport Page 97
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Telephone Revenue includes the revenue derived from long
distance and local telephone calls, as well as any per call
charges applied to credit card or other calls. Revenue in
this category is estimated to equal $1.90 per occupied
room, in 1996 dollars at a stabilized occupancy of 85
percent. Telephone revenue is estimated to be 95 percent
variable with occupancy and is adjusted to account for
inflation and varying occupancy levels throughout the
projection period.
Rental and Other Income, Net includes all miscellaneous
income (net of expenses) including interest income,
concierge commissions, photo commission, and other
miscellaneous items. This category also includes rental
income from the video game center, parking fees, vending
machines, movie rentals, and health club. On the basis of
our analysis of historical leases and miscellaneous
revenue, we estimate that rental and other income, net of
expenses, will be $0.37 per occupied room at a stabilized
level of occupancy in constant 1996 dollars. Revenue in this
category is assumed to be 35 percent variable with occupancy
and is adjusted to account for inflation and varying
occupancy levels throughout the projection period.
Departmental Expenses
Rooms Departmental Expense includes salaries and wages for
the front desk, housekeeping, reservations, bell staff and
laundry, plus fringe benefits. Other operating expenses in
the rooms department include linen, cleaning supplies,
recreation and health club, guest supplies, uniforms,
reservations expenses, security, equipment leases and
travel agent commissions.
Rooms department expense is estimated based upon the
historical rooms departmental expenditures at the subject
hotel, comparisons to other similar properties, and our
estimates of occupancy and average rate over the estimation
period. We estimate that rooms departmental expenditures
will equal 23.5 percent of departmental sales or $15.51 per
occupied room, in a representative year at 85 percent
occupancy. Expenses are
<PAGE>
Sheraton Inn Buffalo Airport Page 99
- --------------------------------------------------------------------
estimated to be 25 percent variable with occupancy and are
adjusted to account for inflation and occupancy levels
throughout the projection period.
Food and Beverage Expense includes the cost of goods sold
(food and beverages), labor and related benefits, and other
operating expenses. Labor costs include departmental
management, cooks and kitchen personnel, service staff,
banquet staff, and bartenders. Other operating expenses
include china, glass, silver, linens, restaurant and
kitchen supplies, menus and printing, and special
promotions. Labor costs are analyzed on a fixed versus
variable basis, as are other operating costs. The cost of
goods sold was considered completely variable as a ratio to
sales.
Food and beverage expense is estimated to be 63.5 percent
of combined food and beverage revenue in a representative
year at 85 percent occupancy. Food and beverage
expenditures are estimated to be 35 percent variable with
occupancy and are adjusted to account for inflation and
occupancy levels throughout the projection period.
Telephone Expenses are estimated based upon an analysis of
historical operating results at the subject hotel and an
analysis of the expenses of comparable hotels. We estimate
that telephone expenditures will equal approximately 46
percent of departmental revenue in a representative year.
Telephone expenses are estimated to be 50 percent variable
with occupancy and are adjusted to account for inflation
and occupancy levels throughout the projection period.
Undistributed Operating Expenses
Administrative and General Expense includes payroll and
related expenses for the general manager, personnel and
training, clerical staff, controller and accounting staff.
Other administrative and general (A&G) expenses include
office supplies, computer services, accounting and legal
fees, travel expenses and liability insurance. We reflected
this expense under fixed costs. Credit card commissions
were classified as an A&G expense and are directly variable
with sales.
<PAGE>
Sheraton Inn Buffalo Airport Page 100
- --------------------------------------------------------------------
A&G expenses are estimated based upon actual operating
results of comparable hotels and historical expenses
recorded by the hotel. We estimate that A&G expenses will
equal approximately 8.9 percent of total sales or $2,686
per available room at a stabilized occupancy of 85 percent
in constant 1996 dollars. Estimates are estimated to be 95
percent fixed and are adjusted to account for inflation and
occupancy levels throughout the projection period.
Sales and Marketing Expense includes payroll and related
expenses for the sales and marketing staff, direct sales
expenses, advertising and promotion and travel expense for
the sales staff. Marketing expenses are estimated based
upon actual operating results of comparable hotels and
historical expenses recorded by the hotel. We estimate that
marketing expenditures will equal approximately 5.3 percent
of total sales or $1,599 per available room at a stabilized
occupancy of 85 percent in 1996 dollars. Estimates are
estimated to be 95 percent fixed and are adjusted to
account for inflation and occupancy levels throughout the
projection period.
Management Fee Expense has been estimated to be 3.0 percent
of gross revenue on the basis of industry averages although
the current management fee charged by Richfield Hospitality
is 4.0 percent, which is slightly high.
Franchise Fee Expense has been estimated to be 6.0 percent
of gross rooms revenue on the basis of industry averages
and the current management fee charged by the ITT Sheraton
franchise.
Energy Costs includes the expenditure for electricity,
fuel, water, waste removal and related operating supplies.
On the basis of historical energy costs at the hotel and
the actual energy expenses recorded by comparable hotels,
we assume that the energy expense will equal $2,050 per
room in a representative year in constant 1996 dollars.
Energy expenditures are estimated to be 100 percent fixed
and are adjusted to account for inflation and occupancy
levels throughout the projection period.
<PAGE>
Sheraton Inn Buffalo Airport Page 101
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Property Operations and Maintenance Expense includes
payroll and related expenses, as well as other expenses
necessary for painting, decorating, and repairs of the
building, grounds and equipment. This expense is estimated
based upon historical property operations and maintenance
expenses at the subject hotel and actual expenses at
comparable hotels. On the basis of historical maintenance
costs at the hotel and on expenses reported by comparable
hotels, we estimate that energy expense will equal $1,550
per room in a representative year in constant 1996 dollars.
Energy expenditures are estimated to be 100 percent fixed
and are adjusted to account for inflation and occupancy
levels throughout the projection period.
Fixed Charges
Real Estate Taxes and School Taxes are estimated in
accordance with the current property tax assessment and tax
bills for 1996. Based on our discussion with the tax
assessor's office, both real estate and school taxes are
not expected to inflate significantly in the future.
According to the Cheektowaga Real Property Appraiser,
assumed inflationary (3.5 percent) increases on 1996 taxes
are deemed to be appropriate for future tax estimates. A
more detailed analysis of historical and current taxes is
presented earlier in this report.
Insurance on building and contents against damage was
estimated based upon the historical expenses incurred at
the subject hotel. We estimate that insurance costs will
equal $100 per available room in constant 1996 dollars.
Expenses are adjusted to account for inflation throughout
the projection period.
Equipment Rental includes rental of computer equipment,
copy machines, fax machines, and other miscellaneous
operating equipment and were based upon historical expenses
at the property. On the basis of historical equipment
rental expenditures at the subject hotel, we estimate that
equipment rental costs will equal $85 per room in 1996
dollars. Expenses are adjusted to account for inflation
throughout the projection period.
<PAGE>
Sheraton Inn Buffalo Airport Page 102
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Ground Rent was estimated on the basis of the current two
lease contracts in place. As discussed in the section B.1
Description and Analysis of the Property of this report,
ground rent is based on the greater of a base rent or a
percentage rent. Base rent is estimated for both leased
parcels at a combined $60,000 per annum. Percentage rent,
in both leases, is estimated at one-half of the sum of :1)
3.0 percent of annual gross rooms revenue and 2) 1.0
percent of gross food and beverage revenue. We have applied
the percentage rent formula in our estimate of ground rent
throughout the projection period.
Reserve for Replacement provides a fund for the replacement
of furniture, fixtures and equipment. We assume that the
reserve for replacement will equal 4.0 percent of total
revenue throughout the projection period, consistent with
industry practice.
Capital Expenditures are assumed to be covered by funds
from reserve for replacement. Although there are areas
throughout the subject that can be upgraded further, on a
cost-benefit basis, we do not believe it will be economical
to implement these improvements. (See Section B.1 Past
Renovation and Capital Requirements for further detail.)
Income Before Debt Service
Estimated operating results for the subject property to the level
of profit before debt service, income taxes, depreciation and
other capital costs, are presented on the following pages.
<PAGE>
Sheraton Inn
Statement of Estimated
Income and Expenses
1997
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 292
Available Rooms (Annually) 106,580
Occupancy Percentage 82%
Occupied Rooms 87,400
Average Room Rate $69.50
REVENUES
Rooms $6,074,300 67.8% $20,802 $69.50
Food 2,126,200 23.7% 7,282 24.33
Beverage 554,700 6.2% 1,900 6.35
Telephone 172,200 1.9% 590 1.97
Rentals and Other
Income (Net) 34,200 0.4% 117 0.39
---------- ------ ------- ------
Total Revenues $8,961,600 100.0% $30,690 $102.54
DEPARTMENTAL EXPENSES
Rooms $1,441,500 23.7% $4,937 $16.49
Food & Beverage 1,705,400 63.6% 5,840 19.51
Telephone 80,500 46.8% 276 0.92
---------- ------ ------- ------
Total Departmental
Expenses $3,227,400 36.0% $11,053 $36.93
TOTAL DEPARTMENTAL
INCOME $5,734,200 64.0% $19,638 $65.61
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $810,300 9.0% $2,775 $9.27
Sales and Marketing 482,500 5.4% 1,652 5.52
Management Fees 268,800 3.0% 921 3.08
Franchise Fees 364,400 4.1% 1,248 4.17
Energy 619,600 6.9% 2,122 7.09
Property Operations &
Maintenance 468,400 5.2% 1,604 5.36
---------- ------ ------- ------
Total Undistributed
Operating Expenses $3,014,000 33.6% $10,322 $34.49
INCOME BEFORE FIXED
CHARGES $2,720,200 30.4% $9,316 $31.12
21
<PAGE>
FIXED CHARGES
Real Estate Taxes $293,200 3.3% $1,004 $3.35
School Taxes 198,000 2.2% 678 2.27
Insurance 30,200 0.3% 104 0.35
Equipment Rent 25,700 0.3% 88 0.29
Ground Rent 206,117 2.3% 706 2.36
---------- ------ ------- ------
Total Fixed Charges $753,217 8.4% 2,580 $8.62
INCOME BEFORE RESERVES $1,966,983 21.9% $6,736 $22.51
Reserve for Replacement
of FF&E $358,500 4.0% $1,228 $4.10
Capital Expenditures 0 0.0% 0 0.00
---------- ------ ------- ------
Total Reserves and
Capital Exp 358,500 4.0%1227.73973 $4.10
INCOME BEFORE DEBT
SERVICE $1,608,483 17.9% $5,509 $18.40
1998
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 292
Available Rooms (Annually) 106,580
Occupancy Percentage 83%
Occupied Rooms 88,300
Average Room Rate $72.50
REVENUES
Rooms $6,401,800 68.1% $21,924 $72.50
Food 2,209,400 23.5% 7,566 25.02
Beverage 576,400 6.1% 1,974 6.53
Telephone 179,900 1.9% 616 2.04
Rentals and Other
Income (Net) 35,600 0.4% 122 0.40
---------- ------ ------- ------
Total Revenues $9,403,100 100.0% $32,202 $106.49
DEPARTMENTAL EXPENSES
Rooms $1,495,700 23.4% $5,122 $16.94
Food & Beverage 1,771,300 63.6% 6,066 20.06
Telephone 83,800 46.6% 287 0.95
---------- ------ ------- ------
Total Departmental
Expenses $3,350,800 35.6% $11,475 $37.95
TOTAL DEPARTMENTAL
INCOME $6,052,300 64.4% $20,727 $68.54
22
<PAGE>
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $839,100 8.9% $2,874 $9.50
Sales and Marketing 499,600 5.3% 1,711 5.66
Management Fees 282,100 3.0% 966 3.19
Franchise Fees 384,100 4.1% 1,315 4.35
Energy 641,200 6.8% 2,196 7.26
Property Operations &
Maintenance 484,800 5.2% 1,660 5.49
---------- ------ ------- ------
Total Undistributed
Operating Expenses $3,130,900 33.3% $10,722 $35.46
INCOME BEFORE FIXED
CHARGES $2,921,400 31.3% $10,005 $33.08
FIXED CHARGES
Real Estate Taxes $303,400 3.2% $1,039 $3.44
School Taxes 204,900 2.2% 702 2.32
Insurance 31,300 0.3% 107 0.35
Equipment Rent 26,600 0.3% 91 0.30
Ground Rent 216,271 2.3% 741 2.45
---------- ------ ------- ------
Total Fixed Charges $782,471 8.3% $2,680 $8.86
INCOME BEFORE RESERVES $2,138,929 22.7% $7,325 $24.22
Reserve for Replacement
of FF&E $376,100 4.0% $1,288 $4.26
Capital Expenditures 0 0.0% 0 0.00
---------- ------ ------- ------
Total Reserves and
Capital Exp 376,100 4.0%1,288.0137 $4.26
INCOME BEFORE DEBT
SERVICE $1,762,829 18.7% $6,037 $19.96
1999
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 292
Available Rooms (Annually) 106,580
Occupancy Percentage 78%
Occupied Rooms 82,800
Average Room Rate $75.00
REVENUES
Rooms $6,210,000 67.3% $21,267 $75.00
Food 2,230,700 24.2% 7,639 26.94
Beverage 581,900 6.3% 1,993 7.03
Telephone 175,200 1.9% 600 2.12
23
<PAGE>
Rentals and Other
Income (Net) 36,000 0.4% 123 0.43
---------- ------ ------- ------
Total Revenues $9,233,800 100.0% $31,623 $111.52
DEPARTMENTAL EXPENSES
Rooms $1,524,400 24.5% $5,221 $18.41
Food & Beverage 1,794,000 63.8% 6,144 21.67
Telephone 84,000 48.0% 288 1.01
---------- ------ ------- ------
Total Departmental
Expenses $3,402,400 36.8% $11,652 $41.09
TOTAL DEPARTMENTAL
INCOME $5,831,400 63.2% $19,971 $70.43
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $865,800 9.4% $2,965 $10.46
Sales and Marketing 515,500 5.6% 1,765 6.23
Management Fees 277,000 3.0% 949 3.35
Franchise Fees 372,600 4.0% 1,276 4.50
Energy 663,700 7.2% 2,273 8.02
Property Operations &
Maintenance 501,800 5.4% 1,719 6.06
---------- ------ ------- ------
Total Undistributed
Operating Expenses $3,196,400 34.6% $10,947 $38.60
INCOME BEFORE FIXED
CHARGES $2,635,000 28.5% $9,024 $31.82
FIXED CHARGES
Real Estate Taxes $314,000 3.4% $1,075 $3.79
School Taxes 212,100 2.3% 726 2.56
Insurance 32,400 0.4% 111 0.39
Equipment Rent 27,500 0.3% 94 0.33
Ground Rent 212,377 2.3% 727 2.56
---------- ------ ------- ------
Total Fixed Charges $798,377 8.6% $2,734 $9.64
INCOME BEFORE RESERVES $1,836,623 19.9% $6,290 $22.18
Reserve for Replacement
of FF&E $369,400 4.0% $1,265 $4.46
Capital Expenditures 0 0.0% 0 0.00
---------- ------ ------- ------
Total Reserves and
Capital Exp 369,400 4.0% 1,265.068493 $4.46
INCOME BEFORE DEBT
SERVICE $1,467,223 15.9% $5,025 $17.72
24
<PAGE>
Notes:
(1) Capital Expenditures are assumed to be covered by Reserve for
Replacement of FF&E.
Sheraton Inn
Statement of Estimated
Income and Expenses
2000
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 292
Available Rooms (Annually) 106,580
Occupancy Percentage 79%
Occupied Rooms 83,700
Average Room Rate $77.50
REVENUES
Rooms $6,486,800 67.4% $22,215 $77.50
Food 2,318,300 24.1% 7,939 27.70
Beverage 604,800 6.3% 2,071 7.23
Telephone 183,200 1.9% 627 2.19
Rentals and Other
Income (Net) 37,400 0.4% 128 0.45
---------- ------ ------- ------
Total Revenues $9,630,500 100.0% $32,981 $115.06
DEPARTMENTAL EXPENSES
Rooms $1,581,700 24.4% $5,417 $18.90
Food & Beverage 1,863,400 63.7% 6,382 22.26
Telephone 87,400 47.7% 299 1.04
---------- ------ ------- ------
Total Departmental
Expenses $3,532,500 36.7% $12,098 $42.20
TOTAL DEPARTMENTAL
INCOME $6,098,000 63.3% $20,884 $72.86
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $896,600 9.3% $3,071 $10.71
Sales and Marketing 533,900 5.5% 1,828 6.38
Management Fees 288,900 3.0% 989 3.45
Franchise Fees 389,200 4.0% 1,333 4.65
Energy 686,900 7.1% 2,352 8.21
Property Operations &
Maintenance 519,400 5.4% 1,779 6.21
---------- ------ ------- ------
Total Undistributed
25
<PAGE>
Operating Expenses $3,314,900 34.4% $11,352 $39.60
INCOME BEFORE FIXED
CHARGES $2,783,100 28.9% $9,531 $33.25
FIXED CHARGES
Real Estate Taxes $325,000 3.4% $1,113 $3.88
School Taxes 219,500 2.3% 752 2.62
Insurance 33,500 0.3% 115 0.40
Equipment Rent 28,500 0.3% 98 0.34
Ground Rent 221,502 2.3% 759 2.65
---------- ------ ------- ------
Total Fixed Charges $828,002 8.6% 2,836 $9.89
INCOME BEFORE RESERVES $1,955,099 20.3% $6,696 $23.36
Reserve for Replacement
of FF&E 385,200 4.0% $1,319 $4.60
Capital Expenditures 0 0.0% 0 0.00
---------- ------ ------- ------
Total Reserves and
Capital Exp 385200 4.0% 1,319.17808 $4.60
INCOME BEFORE DEBT
SERVICE $1,569,899 16.3% $5,376 $18.76
---------- ------ ------- ------
---------- ------ ------- ------
2001
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 292
Available Rooms (Annually) 106,580
Occupancy Percentage 79%
Occupied Rooms 84,600
Average Room Rate $80.50
REVENUES
Rooms $6,810,300 67.6% $23,323 $80.50
Food 2,409,200 23.9% 8,251 28.48
Beverage 628,500 6.2% 2,152 7.43
Telephone 191,600 1.9% 656 2.26
Rentals and Other
Income (Net) 38,900 0.4% 133 0.46
---------- ------ ------- ------
Total Revenues $10,078,500 100.0% $34,515 $119.13
DEPARTMENTAL EXPENSES
Rooms $1,641,200 24.1% $5,621 $19.40
Food & Beverage 1,935,500 63.7% 6,628 22.88
Telephone 91,000 47.5% 312 1.08
26
<PAGE>
---------- ------ ------- ------
Total Departmental
Expenses $3,667,700 36.4% $12,561 $43.35
TOTAL DEPARTMENTAL
INCOME $6,410,800 63.6% $21,955 $75.78
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $928,400 9.2% $3,179 $10.97
Sales and Marketing 552,800 5.5% 1,893 6.53
Management Fees 302,400 3.0% 1,036 3.57
Franchise Fees 408,600 4.1% 1,399 4.83
Energy 710,900 7.1% 2,435 8.40
Property Operations &
Maintenance 537,500 5.3% 1,841 6.35
---------- ------ ------- ------
Total Undistributed
Operating Expenses $3,440,600 34.1% $11,783 $40.67
INCOME BEFORE FIXED
CHARGES $2,970,200 29.5% $10,172 $35.11
FIXED CHARGES
Real Estate Taxes $336,400 3.3% $1,152 $3.98
School Taxes 227,200 2.3% 778 2.69
Insurance 34,700 0.3% 119 0.41
Equipment Rent 29,500 0.3% 101 0.35
Ground Rent 231,806 2.3% 794 2.74
---------- ------ ------- ------
Total Fixed Charges $859,606 8.5% $2,944 $10.16
INCOME BEFORE RESERVES $2,110,595 20.9% $7,228 $24.95
Reserve for Replacement
of FF&E $403,100 4.0% $1,380 $4.76
Capital Expenditures 0 0.0% 0 0.00
---------- ------ ------- ------
Total Reserves and
Capital Exp 403100 4.0% 1,380.47945 $4.76
INCOME BEFORE DEBT
SERVICE $1,707,495 16.9% $5,848 $20.18
---------- ------ ------- ------
---------- ------ ------- ------
27
<PAGE>
2002
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 292
Available Rooms (Annually) 106,580
Occupancy Percentage 79%
Occupied Rooms 84,600
Average Room Rate $83.50
REVENUES
Rooms $7,064,100 67.6% $24,192 $83.50
Food 2,493,500 23.9% 8,539 29.47
Beverage 650,500 6.2% 2,228 7.69
Telephone 198,300 1.9% 679 2.34
Rentals and Other
Income (Net) 40,300 0.4% 138 0.48
---------- ------ ------- ------
Total Revenues $10,446,700 100.0% $35,776 $123.48
DEPARTMENTAL EXPENSES
Rooms $1,698,600 24.0% $5,817 $20.08
Food & Beverage 2,003,200 63.7% 6,860 23.68
Telephone 94,200 47.5% 323 1.11
---------- ------ ------- ------
Total Departmental
Expenses $3,796,000 36.3% $13,000 $44.87
TOTAL DEPARTMENTAL
INCOME $6,650,700 63.7% $22,776 $78.61
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $960,900 9.2% $3,291 $11.36
Sales and Marketing 572,100 5.5% 1,959 6.76
Management Fees 313,400 3.0% 1,073 3.70
Franchise Fees 423,800 4.1% 1,451 5.01
Energy 735,800 7.0% 2,520 8.70
Property Operations &
Maintenance 556,400 5.3% 1,905 6.58
---------- ------ ------- ------
Total Undistributed
Operating Expenses $3,562,400 34.1% $12,200 $42.11
INCOME BEFORE FIXED
CHARGES $3,088,300 29.6% $10,576 $36.50
FIXED CHARGES
Real Estate Taxes $348,200 3.3% $1,192 $4.12
School Taxes 235,100 2.3% 805 2.78
Insurance 35,900 0.3% 123 0.42
Equipment Rent 30,500 0.3% 104 0.36
28
<PAGE>
Ground Rent 239,900 2.3% 822 2.84
---------- ------ ------- ------
Total Fixed Charges $889,600 8.5% $3,047 $10.52
INCOME BEFORE RESERVES $2,198,700 21.0% $7,530 $25.99
Reserve for Replacement
of FF&E $417,900 4.0% $1,431 $4.94
Capital Expenditures 0 0.0% 0 0.00
---------- ------ ------- ------
Total Reserves and
Capital Exp 417900 4.0%1,431.16438 $4.94
INCOME BEFORE DEBT
SERVICE $1,780,800 17.0% $6,099 $21.05
---------- ------ ------- ------
---------- ------ ------- ------
Notes:
(1) Capital Expenditures are assumed to be covered by Reserve for
Replacement of FF&E.
29
<PAGE>
Sheraton Inn
Statement of Estimated
Income and Expenses
2003
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 292
Available Rooms (Annually) 106,580
Occupancy Percentage 79%
Occupied Rooms 84,600
Average Room Rate $86.00
REVENUES
Rooms $7,275,600 67.5% $24,916 $86.00
Food 2,580,800 23.9% 8,838 30.51
Beverage 673,300 6.2% 2,306 7.96
Telephone 205,200 1.9% 703 2.43
Rentals and Other
Income (Net) 41,700 0.4% 143 0.49
---------- ------ ------- ------
Total Revenues $10,776,600 100.0% $36,906 $127.38
DEPARTMENTAL EXPENSES
Rooms $1,758,100 24.2% $6,021 $20.78
Food & Beverage 2,073,300 63.7% 7,100 24.51
Telephone 97,500 47.5% 334 1.15
---------- ------ ------- ------
Total Departmental
Expenses $3,928,900 36.5% $13,455 $46.44
TOTAL DEPARTMENTAL
INCOME $6,847,700 63.5% $23,451 $80.94
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $994,500 9.2% $3,406 $11.76
Sales and Marketing 592,100 5.5% 2,028 7.00
Management Fees 323,300 3.0% 1,107 3.82
Franchise Fees 436,500 4.1% 1,495 5.16
Energy 761,600 7.1% 2,608 9.00
Property Operations &
Maintenance 575,800 5.3% 1,972 6.81
---------- ------ ------- ------
Total Undistributed
Operating Expenses $3,683,800 34.2% $12,616 $43.54
INCOME BEFORE FIXED
CHARGES $3,163,900 29.4% $10,835 $37.40
30
<PAGE>
FIXED CHARGES
Real Estate Taxes $360,400 3.3% $1,234 $4.26
School Taxes 243,300 2.3% 833 2.88
Insurance 37,200 0.3% 127 0.44
Equipment Rent 31,600 0.3% 108 0.37
Ground Rent 248,300 2.3% 850 2.93
---------- ------ ------- ------
Total Fixed Charges $920,800 8.5% $3,153 $10.88
INCOME BEFORE RESERVES $2,243,100 20.8% $7,682 $26.51
Reserve for Replacement
of FF&E $431,100 4.0% $1,476 $5.10
Capital Expenditures 0 0.0% 0 0.00
---------- ------ ------- ------
Total Reserves and
Capital Exp 431100 4.0% 1476.36986 $5.10
INCOME BEFORE DEBT
SERVICE $1,812,000 16.8% $6,205 $21.42
---------- ------ ------- ------
---------- ------ ------- ------
31
<PAGE>
2004
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 292
Available Rooms (Annually) 106,580
Occupancy Percentage 79%
Occupied Rooms 84,600
Average Room Rate $89.50
REVENUES
Rooms $7,571,700 67.6% $25,930 $89.50
Food 2,671,100 23.9% 9,148 31.57
Beverage 696,900 6.2% 2,387 8.24
Telephone 212,400 1.9% 727 2.51
Rentals and Other
Income (Net) 43,200 0.4% 148 0.51
---------- ------ ------- ------
Total Revenues $11,195,300 100.0% $38,340 $132.33
DEPARTMENTAL EXPENSES
Rooms $1,819,600 24.0% $6,232 $21.51
Food & Beverage 2,145,900 63.7% 7,349 25.37
Telephone 100,900 47.5% 346 1.19
---------- ------ ------- ------
Total Departmental
Expenses $4,066,400 36.3% $13,926 $48.07
TOTAL DEPARTMENTAL
INCOME $7,128,900 63.7% $24,414 $84.27
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,029,300 9.2% $3,525 $12.17
Sales and Marketing 612,800 5.5% 2,099 7.24
Management Fees 335,900 3.0% 1,150 3.97
Franchise Fees 454,200 4.1% 1,555 5.37
Energy 788,200 7.0% 2,699 9.32
Property Operations &
Maintenance 596,000 5.3% 2,041 7.04
---------- ------ ------- ------
Total Undistributed
Operating Expenses $3,816,400 34.1% $13,070 $45.11
INCOME BEFORE FIXED
CHARGES $3,312,500 29.6% $11,344 $39.15
FIXED CHARGES
Real Estate Taxes $373,000 3.3% $1,277 $4.41
School Taxes 251,900 2.3% 863 2.98
Insurance 38,500 0.3% 132 0.46
Equipment Rent 32,700 0.3% 112 0.39
32
<PAGE>
Ground Rent 257,000 2.3% 880 3.04
---------- ------ ------- ------
Total Fixed Charges $953,100 8.5% $3,264 $11.27
INCOME BEFORE RESERVES $2,359,400 21.1% $8,080 $27.89
Reserve for Replacement
of FF&E $447,800 4.0% $1,534 $5.29
Capital Expenditures 0 0.0% 0 0.00
---------- ------ ------- ------
Total Reserves and
Capital Exp 447800 4.0% 1533.56164 $5.29
INCOME BEFORE DEBT
SERVICE $1,911,600 17.1% $6,547 $22.60
---------- ------ ------- ------
---------- ------ ------- ------
33
<PAGE>
2005
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 292
Available Rooms (Annually) 106,580
Occupancy Percentage 79%
Occupied Rooms 84,600
Average Room Rate $92.50
REVENUES
Rooms $7,825,500 67.6% $26,800 $92.50
Food 2,764,600 23.9% 9,468 32.68
Beverage 721,300 6.2% 2,470 8.53
Telephone 219,800 1.9% 753 2.60
Rentals and Other
Income (Net) 44,700 0.4% 153 0.53
---------- ------ ------- ------
Total Revenues $11,575,900 100.0% $39,643 $136.83
DEPARTMENTAL EXPENSES
Rooms $1,883,300 24.1% $6,450 $22.26
Food & Beverage 2,221,000 63.7% 7,606 26.25
Telephone 104,400 47.5% 358 1.23
---------- ------ ------- ------
Total Departmental
Expenses $4,208,700 36.4% $14,413 $49.75
TOTAL DEPARTMENTAL
INCOME $7,367,200 63.6% $25,230 $87.08
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,065,300 9.2% $3,648 $12.59
Sales and Marketing 634,200 5.5% 2,172 7.50
Management Fees 347,300 3.0% 1,189 4.11
Franchise Fees 469,500 4.1% 1,608 5.55
Energy 815,800 7.0% 2,794 9.64
Property Operations &
Maintenance 616,800 5.3% 2,112 7.29
---------- ------ ------- ------
Total Undistributed
Operating Expenses $3,948,900 34.1% $13,524 $46.68
INCOME BEFORE FIXED
CHARGES $3,418,300 29.5% $11,707 $40.41
FIXED CHARGES
Real Estate Taxes $386,000 3.3% $1,322 $4.56
School Taxes 260,700 2.3% 893 3.08
Insurance 39,800 0.3% 136 0.47
Equipment Rent 33,800 0.3% 116 0.40
34
<PAGE>
Ground Rent 266,000 2.3% 911 3.14
---------- ------ ------- ------
Total Fixed Charges $986,300 8.5% $3,378 $11.66
INCOME BEFORE RESERVES $2,432,000 21.0% $8,329 $28.75
Reserve for Replacement
of FF&E $463,000 4.0% $1,586 $5.47
Capital Expenditures 0 0.0% 0 0.00
---------- ------ ------- ------
Total Reserves and
Capital Exp 463000 4.0% 1585.61644 $5.47
INCOME BEFORE DEBT
SERVICE $1,969,000 17.0% $6,743 $23.27
---------- ------ ------- ------
---------- ------ ------- ------
Notes:
(1) Capital Expenditures are assumed to be covered by Reserve for
Replacement of FF&E.
35
<PAGE>
Sheraton Inn
Statement of Estimated
Income and Expenses
2006
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 292
Available Rooms (Annually) 106,580
Occupancy Percentage 79%
Occupied Rooms 84,600
Average Room Rate $95.50
REVENUES
Rooms $8,079,300 67.5% $27,669 $95.50
Food 2,861,400 23.9% 9,799 33.82
Beverage 746,500 6.2% 2,557 8.82
Telephone 227,500 1.9% 779 2.69
Rentals and Other
Income (Net) 46,300 0.4% 159 0.55
---------- ------ ------- ------
Total Revenues $11,961,000 100.0% $40,962 $141.38
DEPARTMENTAL EXPENSES
Rooms $1,949,200 24.1% $6,675 $23.04
Food & Beverage 2,298,700 63.7% 7,872 27.17
Telephone 108,100 47.5% 370 1.28
---------- ------ ------- ------
Total Departmental
Expenses $4,356,000 36.4% $14,918 $51.49
TOTAL DEPARTMENTAL
INCOME $7,605,000 63.6% $26,045 $89.89
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,102,600 9.2% $3,776 $13.03
Sales and Marketing 656,400 5.5% 2,248 7.76
Management Fees 358,800 3.0% 1,229 4.24
Franchise Fees 484,700 4.1% 1,660 5.73
Energy 844,400 7.1% 2,892 9.98
Property Operations &
Maintenance 638,400 5.3% 2,186 7.55
---------- ------ ------- ------
Total Undistributed
Operating Expenses $4,085,300 34.2% $13,991 $48.29
INCOME BEFORE FIXED
CHARGES $3,519,700 29.4% $12,054 $41.60
36
<PAGE>
FIXED CHARGES
Real Estate Taxes $399,500 3.3% $1,368 $4.72
School Taxes 269,800 2.3% 924 3.19
Insurance 41,200 0.3% 141 0.49
Equipment Rent 35,000 0.3% 120 0.41
Ground Rent 275,300 2.3% 943 3.25
---------- ------ ------- ------
Total Fixed Charges $1,020,800 8.5% $3,496 $12.07
INCOME BEFORE RESERVES $2,498,900 20.9% $8,558 $29.54
Reserve for Replacement
of FF&E $478,400 4.0% $1,638 $5.65
Capital Expenditures 0 0.0% 0 0.00
---------- ------ ------- ------
Total Reserves and
Capital Exp 478400 4.0% 1638.35616 $5.65
INCOME BEFORE DEBT
SERVICE $2,020,500 16.9% $6,920 $23.88
---------- ------ ------- ------
---------- ------ ------- ------
37
<PAGE>
2007
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 292
Available Rooms (Annually) 106,580
Occupancy Percentage 79%
Occupied Rooms 84,600
Average Room Rate $99.00
REVENUES
Rooms 8,375,400 67.6% $28,683 $99.00
Food 2,961,500 23.9% 10,142 35.01
Beverage 772,600 6.2% 2,646 9.13
Telephone 235,500 1.9% 807 2.78
Rentals and Other
Income (Net) 47,900 0.4% 164 0.57
---------- ------ ------- ------
Total Revenues $12,392,900 100.0% $42,441 $146.49
DEPARTMENTAL EXPENSES
Rooms $2,017,400 24.1% $6,909 $23.85
Food & Beverage 2,379,200 63.7% 8,148 28.12
Telephone 111,900 47.5% 383 1.32
---------- ------ ------- ------
Total Departmental
Expenses $4,508,500 36.4% $15,440 $53.29
TOTAL DEPARTMENTAL
INCOME $7,884,400 63.6% $27,001 $93.20
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,141,200 9.2% $3,908 $13.49
Sales and Marketing 679,400 5.5% 2,327 8.03
Management Fees 371,800 3.0% 1,273 4.39
Franchise Fees 502,500 4.1% 1,721 5.94
Energy 873,900 7.1% 2,993 10.33
Property Operations &
Maintenance 660,800 5.3% 2,263 7.81
---------- ------ ------- ------
Total Undistributed
Operating Expenses $4,229,600 34.1% $14,485 $50.00
INCOME BEFORE FIXED
CHARGES $3,654,800 29.5% $12,516 $43.20
FIXED CHARGES
Real Estate Taxes $413,500 3.3% $1,416 $4.89
School Taxes 279,200 2.3% 956 3.30
Insurance 42,600 0.3% 146 0.50
Equipment Rent 36,200 0.3% 124 0.43
38
<PAGE>
Ground Rent 284,900 2.3% 976 3.37
---------- ------ ------- ------
Total Fixed Charges $1,056,400 8.5% $3,618 $12.49
INCOME BEFORE RESERVES $2,598,400 21.0% $8,899 $30.71
Reserve for Replacement
of FF&E $495,700 4.0% $1,698 $5.86
Capital Expenditures 0 0.0% 0 0.00
---------- ------ ------- ------
Total Reserves and
Capital Exp 495700 4.0% 1,697.60274 $5.86
INCOME BEFORE DEBT
SERVICE $2,102,700 17.0% $7,201 $24.85
---------- ------ ------- ------
---------- ------ ------- ------
Notes:
(1) Capital Expenditures are assumed to be covered by Reserve for
Replacement of FF&E.
<PAGE>
Sheraton Inn Buffalo Airport Page 107
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INVESTMENT CLIMATE OVERVIEW
In establishing valuation parameters to apply to the projected
operating cash flow from the proposed property, we have
researched the current market for hotel investments. Arthur
Andersen conducts a survey of a select group of hotel companies,
investors, developers, investment bankers, and brokers. Our most
recent survey was conducted at the end of the third quarter of
1996.
Our surveys indicate that the investment climate has undergone
significant changes over the last five years. After the economic
recession in the early 1990s, the number of hotel sales
transactions increased significantly between 1993 and 1995. The
price per room of lodging property has increased significantly as
well. In the early 1990s, the primary buyers of hotel assets were
opportunity funds and individual investors lured by the low
prices as a percentage of the replacement cost. New lodging
REITs, established in the early 1990s, also began to invest
heavily into hotel assets. During 1995 and 1996 the larger REITS
(such as Patriot American Hospitality; Starwood Lodging Trust;
FelCor Suite Hotels, Inc.; and HPT) accounted for a large share
of the transactions involving full-service lodging properties.
These organizations must maintain the level of acquisition
achieved in the past and, therefore, have been paying
increasingly higher prices for lodging assets. In addition, many
of the recent REIT acquisitions were completed as part of a
portfolio which often resulted in aggressive pricing parameters.
These changes in the investment market have resulted in a
significant shift in the criteria used to evaluate a potential
transaction. Terminal capitalization and discount rates assumed,
which averaged 11-12 percent and 14-16 percent, respectively in
1991, decreased to an average of 10- 12.5 percent and 12-15
percent, respectively in early 1996. Investors interviewed in the
third quarter of 1996, however, indicated that investment
parameters may currently be at the "low-point" of this real
estate cycle. Investors interviewed admitted that although recent
acquisitions have been structured using aggressive investment
parameters, they are likely to re-evaluate the assumptions and
investment parameters used in the near future.
<PAGE>
Sheraton Inn Buffalo Airport Page 108
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The following table summarizes the results of our investor survey
completed at the end of the Third Quarter 1996.
- ------------------------------------------------------------
Arthur Andersen Hotel Investor Survey - Third Quarter 1996
- ------------------------------------------------------------
Range
Free and Clear Discount Rates 12.0%-15.0%
Terminal Capitalization Rates 10.0%-12.5%
Going-In Capitalization Rates 10.0%-11.0%
Equity Return Req. (leveraged) 20.0%-30.0%
Equity Return Req. (unleveraged) 12.0%-18.0%
Cash on Cash Return Requirements 10.0%-17.5%
- ------------------------------------------------------------
DISCOUNTED CASH FLOW ANALYSIS
The discounted cash flow (DCF) technique converts the projected
stream of benefits, either before or after financing, as
appropriate, into a present value. Once the projection of net
income or cash flow is accomplished, a discount rate and
capitalization rate at reversion must be chosen. The selection of
these rates is necessarily subjective, since investor criteria
for the acquisition of real property is subject to variation, and
no organized property exchange exists.
Discount Rates
A free and clear discount rate is used to discount future
earnings without regard to any leverage or financing. Discount
rates (or internal rate-of-return requirements) typically vary by
a number of factors: long-term investor-return requirements on
alternative investments; type and motivation of investor;
property type -- e.g., hotel, apartments, etc.; and local market
area conditions. Our survey of investor criteria indicated that
investors are currently assuming discount rates that range from
12 to 15 percent. The survey average for free and clear discount
rates was 12.5 percent. After giving full consideration to these
surveys as well as to the type of property being appraised, its
competitiveness in its market place, and general market
conditions, a discount rate of 14.0 percent, applied to income
before debt service, is judged to be appropriate. A slightly high
discount rate was applied to the subject Sheraton Inn to
<PAGE>
Sheraton Inn Buffalo Airport Page 109
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compensate for the following risks: 1) although the property
has been maintained well, it is dated in comparison to the
competition, and 2) the property is highly reliant on a high
number of contract demand which must be renewed annually.
Terminal Capitalization Rates
The "exit" capitalization rate at reversion is used to convert
the projected stream of income beyond the last year of the
projection period into a value at the end of the projection
period. Our investor survey revealed capitalization rates ranging
from 10.0 to 12.5 percent, with a survey average of approximately
11.0 percent. Similar to the discount rate, the capitalization
rate was formulated on the basis that the subject property is
dated and is operating in a market that is not impervious to
additional hotel supply. On the basis of this analysis, a
terminal capitalization rate of 11.0 percent is judged to be
appropriate for the subject hotel.
Conclusion by Discounted Cash Flow Analysis
Application of the discounted cash flow technique to the total
projected net income for the appraised property yields a market
value estimate of the leasehold interest in the subject of
$13,930,000. The table on the following page presents our
discounted cash flow analysis.
<PAGE>
Discounted Cash Flow Analysis
Sheraton Inn
Cheektowaga, New York
Discount Net Present Value
Income Before Residual Factor (2) Income Before
Year Debt Service Value (1) & (3) Debt Service
1997 $1,608,483 0.8772 $1,410,950
1998 1,762,829 0.7695 1,356,439
1999 1,467,223 0.6750 990,333
2000 1,569,899 0.5921 929,506
2001 1,707,495 0.5194 886,819
2002 1,780,800 0.4556 811,309
2003 1,812,000 0.3996 724,143
2004 1,911,600 0.3506 670,129
2005 1,969,000 0.3075 605,483
2006 2,020,500 $18,541,991 (4) 0.2697 5,546,605
----------
Value at January 1, 1997: $13,930,000
Value per Room: $47,705
Notes:
(1) Income Before Debt Service in the exit year was capitalized at 11.0
percent.
(2) Income was discounted to net present value using a 14.0 percent
discount rate.
(3) Analysis uses end-point discounting.
(4) A sales commission of 3.0 percent was assumed.
<PAGE>
Sheraton Inn Buffalo Airport Page 111
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E. RECONCILIATION AND FINAL VALUE ESTIMATE
Valuation of the appraised property has been developed by the
direct sales comparison approach and the income approach. Various
appraisal techniques and methods were utilized in these analyses
and the fee simple value estimates derived by each approach is
summarized as follows:
- -------------------------------------------------------
Amount Price Per Room
------ --------------
Cost Approach N/A N/A
Sales Comparison
Approach $13,432,000 $46,000
Income Approach $13,930,000 $47,705
- ----------------------------------------------------------
The Cost Approach is most useful when valuing new or nearly new
properties or when appraising special purpose properties. The
reliability of this approach is diminished as buildings and other
forms of improvement increase in age and begin to depreciate. The
resulting loss in value becomes increasingly difficult to
accurately quantify. The cost approach was therefore not utilized
in valuing the subject property.
The Sales Comparison Approach is frequently a good indicator of
value, especially when a sufficient number of relevant
transactions with reliable information on each is available. The
sales comparison approach was used as an indicator of the
reliability of results obtained from the income capitalization
approach.
The Income Capitalization Approach is generally considered the
most applicable method for estimating the value of investment
properties, as it incorporates the economic motivations of buyers
and sellers in the analysis. The reliability of this approach is
enhanced when adequate data are available to assure proper
development of the income, expense, and capitalization rate
analyses.
<PAGE>
Sheraton Inn Buffalo Airport Page 112
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Based upon the research and analyses performed in the development
of these approaches, and with primary emphasis on the income
approach, it is our opinion that the market value of the
leasehold interest in the appraised property as a going concern,
as of January 1, 1997 is:
-- FOURTEEN MILLION DOLLARS --
($14,000,000)
In accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP), prepared by The Appraisal Standards
Board of The Appraisal Foundation, it is necessary to identify
and separately value any personal property, fixtures, or
intangible items that are not real property but are included in
the appraisal. Personal property and fixtures in a hotel consists
of a variety of components including bedroom case-goods, bathroom
fixtures, restaurant and kitchen equipment, signage, computers
and other related items. Our physical inspection of the property
indicated that these items were generally in good condition
relative to the age of the property.
We estimate that the replacement cost for the furniture,
fixtures, and equipment at the subject hotel is approximately
$12,500 per room, in constant 1996 dollars. This estimate is
based upon industry averages. Assuming an average useful life of
eight years and an effective age of four years, the value of the
furniture, fixtures, and equipment is estimated to be
approximately $6,250 per room. On the basis of this analysis, the
value of the personal property for the subject hotel is estimated
to be $1,825,000.
Since a hotel's furniture, fixtures, and equipment is such an
integral component of the facility's ability to generate income
and is seldom removed from the property or sold separately, the
value produced by the separation of the personal property
component from the real property is not particularly meaningful.
<PAGE>
Sheraton Inn Buffalo Airport
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F. ADDENDA
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
F.1 HOTEL SALES COMPARABLES
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
Name: RAMADA INN BUFFALO AIRPORT
Location: Lancaster, New York
Grantor (Seller): Buffalo Realty
Grantee (Buyer): Charter Motor Inn
Date of Sale: December 31, 1995
Sales Price: $1,840,000
Property Rights Conveyed: Fee Simple
Number of Rooms: 123
Year Built: 1976
Price per Room: $14,959
Occupancy (1995): 48 percent
Average Rate (1995): $55.46
Est. Gross Room Revenue
(1995): $1,195,141
Est. Net Income Before
Debt Svc. (1995): $330,000
Overall Capitalization Rate: 17.9%
Comments: Although total capital
improvement costs were not
disclosed, the property has
undergone extensive renovations
(including soft goods and case
goods) and has been
repositioned as a Ramada Inn
Limited. The Ramada is located
adjacent to the airport.
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
Sheraton Inn Buffalo Airport
Name: HYATT REGENCY
Location: Pittsburgh, Pennsylvania
Grantor (Seller): Elteq Partners I Limited Partnership
Grantee (Buyer): Limited Partnership which HOST Marriott
owns 95 percent and Interstate Hotels
owns 5.0 percent
Date of Sale: April 1, 1996
Sales Price: $26,500,000 (Includes renovations; see
comments)
Property Rights Conveyed: Leasehold
Number of Rooms: 400
Year Built: 1968
Price per Room: $66,250
Occupancy (1995): 58 percent
Average Rate (1995): $86.00
Est. Gross Room Revenue
(1995): $7,282,000
Est. Net Income Before
Debt Svc. (1995): $1,400,000
Overall Capitalization Rate: 7.6% (Excludes renovations)
Comments: This property was purchased by a
limited partnership, which HOST
Marriott was the majority owner.
Property is expected to be converted
into a Marriott franchised hotel and
managed by Interstate Hotels. The
total sales consideration was $18.5
million. Estimated capital improvement
costs consist of $8.0 million, and
property was closed for renovations from
April 1 through July 1.
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
Name: DAYS INN AIRPORT
Location: Philadelphia, Pennsylvania
Grantor (Seller): Beacon Properties Corp.
Grantee (Buyer): Starwood Lodging Trust
Date of Sale: February 1, 1996
Sales Price: $5,932,000
Property Rights Conveyed: Fee Simple
Number of Rooms: 175
Year Built: 1985
Price per Room: $33,897
Occupancy (1995): 71.5 percent
Average Rate (1995): $67.20
Est. Gross Room Revenue
(1995): $3,069,000
Est. Net Income Before
Debt Svc. (1995): $859,000(1)
Overall Capitalization Rate: 14.5 percent
Comments: Property was purchased in conjunction with the
Doubletree Guest Suites, which also is located in
the airport area. Both properties were purchased
for a total of $21.1 million in cash and $1.8
million in partnership units. Starwood plans to
reflag the asset at the upper-end of the mid-
priced market. At the time of sale, the property
offered a, 115-seat restaurant and lounge and
3,000 square feet of meeting space. It is located
approximately one mile from the Philadelphia
International Airport.
Notes:
(1) A 4.0 percent reserves for replacement was deducted.
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
Name: THE HILTON HOTEL
Location: Allentown, Pennsylvania
Grantor (Seller): Hotels of Distinction Ventures, Inc.
Grantee (Buyer): Starwood Lodging Trust
Date of Sale: August 15, 1996
Sales Price: $7,500,000
Property Rights Conveyed: Fee Simple
Number of Rooms: 224
Year Built: 1988
Price per Room: $33,482
Occupancy (1995): 77.5 percent
Average Rate (1995): $60.59
Est. Gross Room Revenue
(1995): $3,839,000
Est. Net Operating Income
Before Debt Svc. (1995): $848,000 (1)
Overall Capitalization Rate: 11.3%
Comments: The Hilton was part of a nine-hotel portfolio,
purchased from Hotels of Distinction Ventures,
Inc. at approximately $135 million cash. The
Allentown Hilton is a full-service hotel situated
in downtown, Allentown. The property offers a
restaurant, a bar/lounge, and meeting space that
can accommodate more than 650 people and is
considered one of the best facilities in the area.
Starwood has not disclosed any plans for capital
improvements.
Notes:
(1) A 4.0 percent reserves for replacement was deducted.
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
Name: SHERATON METRODOME
Location: Minneapolis, Minnesota
Grantor (Seller): Hotels of Distinction Ventures, Inc.
Grantee (Buyer): Starwood Lodging Trust
Date of Sale: August 15, 1996
Sales Price: $18,000,000
Property Rights Conveyed: Fee Simple
Number of Rooms: 254
Year Built: 1980
Price per Room: $70,866
Occupancy (1995): 85.3 percent
Average Rate (1995): $72.00
Est. Gross Room Revenue
(1995): $5,694,000
Est. Net Income Before
Debt Svc. (1995): $1,840,000 (1)
Overall Capitalization Rate: 10.2%
Comments: The Sheraton was part of a nine-hotel portfolio,
purchased from Hotels of Distinction Ventures,
Inc. at approximately $135 million cash. The
property is situated adjacent to the University of
Minnesota and offers 7,825 square feet of
meeting space, one main dining outlet, a
beverage lounge, and an executive level.
Starwood has not disclosed plans for any capital
improvements.
Notes:
(1) A 4.0 percent reserves for replacement was deducted.
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
F.2 SUBJECT PROPERTY PHOTOGRAPHS
<PAGE>
Sheraton Inn Buffalo Airport
Lobby/Reception
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
Double-Double Bedded Room
King Bedded Room
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
Shower/Bath Area
Toilet/Vanity Area
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
The Grille on Walden
Twigs Bar and Grille
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
Ballroom
Courtyard/Meeting Area
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
Swimming Pool
Gift Shop
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
Fitness Room
Game Room
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
F.3 COMPETITIVE HOTEL PHOTOGRAPHS
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
Hampton Inn Galleria
Holiday Inn Airport
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
Marriott Amherst
Radisson Hotel & Suites
<PAGE>
Sheraton Inn Buffalo Airport
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Hilton Buffalo
Hyatt Regency Buffalo
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Sheraton Inn Buffalo Airport
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F.4 PROPERTY LEGAL DESCRIPTION
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EXHIBIT A
LEGAL DESCRIPTION
(Buffalo-Parcels I and II)
All of the right, title and interest of the Assignor in and
under the following:
A. Ground Lease Agreement dated May 8, 1970 between JOSEPH
MALECKI and JOSEPHINE GLORIA MALECKI, as Landlord, and
CONSOLIDATED MOTOR INNS, INC., as tenant, a memorandum of which
Ground Lease Agreement was recorded in the Erie County Clerk's
Office on December 31, 1970 in Liber 7759 of Deeds, page 305, as
assigned to C.T.W. Holding Corporation, a New York corporation
("C.T.W."), by Assignment of Lease recorded on October 21, 1971
in Liber 7853 of Deeds at Page 95, as amended by Amendment to
Ground Lease Agreement, dated March 19, 1973 and recorded on
November 15, 1973 in Liber 8111 of Deeds, page 474 in said
Clerk's office, as assigned to Archris Hotel Partnership-Buffalo,
a California limited partnership ("Archris"), by Assignment of
Leases recorded November 15, 1973 in Liber 8111 of Deeds at Page
481, further assigned to C.T.W. by Assignment of Leases recorded
January 29, 1974 in Liber 8134 of Deeds at Page 49 as amended by
Second Amendment to Ground Lease Agreement, dated January 28,
1974 and recorded on January 29, 1974 in Liber 8133 of Deeds,
page 551, as assigned to Archris by Assignment of Leases recorded
January 29, 1974 in Liber 8133 of Deeds at Page 555, further
assigned to Archris Hotel Partnership-Buffalo, a partnership by
Assignment of Leases recorded September 22, 1978 in Liber 8699 of
Deeds at Page 127, further assigned to Arthur L. Duggan by
Assignment of Leases recorded November 8, 1979 in Liber 8850 of
Deeds at Page 679, further assigned to Buffalo Inn Associates, a
Colorado general partnership ("Buffalo"), by Assignment recorded
November 4, 1981 in Liber 9077 of Deeds at Page 574, and further
assigned by that certain unrecorded Assignment dated December 31,
1986 between Buffalo and AIRCOA Hotel Partners, L.P., a Delaware
limited partnership, covering premises situate in the Town of
Cheektowaga, Erie County, New York, more particularly described
as Parcel I in this Exhibit A.
B. Ground Lease Agreement dated May 11, 1970 between
JOHN ZOLA, CHESTER ZOLA, and THADDEUS ZOLA and CLARA ZOLA, as
Landlord, and CONSOLIDATED MOTOR INNS, INC., as Tenant, a
Memorandum of which Ground Lease Agreement was
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recorded in the Erie County Clerk's office on February 8, 1971 in
Liber 7768 of Deeds, page 587, as assigned to C.T.W. by Assignment of
Lease recorded on October 21, 1971 in Liber 7853 of Deeds at Page 99,
as amended by Amendment to Ground Lease Agreement, recorded on
November 15, 1973 in Liber 8111 of Deeds, page 477 in said
Clerk's office as assigned to Archris by Assignment of Leases
recorded November 15, 1973 in Liber 8111 of Deeds at Page 481,
further assigned to C.T.W. by Assignment of Leases recorded
January 29, 1974 in Liber 8134 of Deeds at Page 49 as amended by
Second Amendment to Ground Lease Agreement, recorded in said
Clerk's office on January 29, 1974 in Liber 8133 of Deeds, page
535, as assigned to Archris by Assignment of Leases recorded
January 29, 1974 in Liber 8133 of Deeds at Page 555, further
assigned to Archris Hotel Partnership-Buffalo, a partnership, by
Assignment of Leases recorded September 22, 1978 in Liber 8699 of
Deeds at Page 127, further assigned to Arthur L. Duggan by
Assignment of Leases recorded November 8, 1979 in Liber 8850 of
Deeds at Page 679, and further assigned to Buffalo by Assignment
recorded November 4, 1981 in Liber 9077 of Deeds at Page 574, and
further assigned by that certain unrecorded Assignment dated
December 31, 1986 between Buffalo and AIRCOA Hotel Partners,
L.P., a Delaware limited partnership, recorded November
4, 1981 in Liber 9077 of Deeds at Page 574, covering premises
situate in the Town of Cheektowaga, Erie County, New York, more
particularly described as Parcel II in this Exhibit A.
C. All buildings, structures and improvements erected
on all those tracts or parcels of land described in this Exhibit
A.
D. All right, title and interest of the Assignor in
and to the land lying in the streets and roads adjoining said
premises.
PARCEL I
ALL THAT TRACT OR PARCEL OF LAND, situate in the Town
of Cheektowaga, County of Erie and State of New York, being part
of Lot No. 16, Township 11, Range 7 of the Holland Land Company's
Survey and more particularly bounded and described as follows:
BEGINNING at a point in the northeasterly line of New
Walden Avenue distant 331.60 feet northwesterly, as measured
along said line of New Walden Avenue, from the point of its
intersection with a line drawn parallel with the easterly line of
said Lot No. 16 at the distance of 20 chains 76 links westerly
therefrom, as measured parallel with the northerly line of said
Lot No. 16; running thence northerly parallel
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with the easterly line of said Lot No. 16, 539.17 feel
to the northerly line of lands conveyed to John Zola and
Valentina, his wife by deed recorded in the Erie County Clerk's
office in Liber 2688 of Deeds at page 192; thence westerly along
the northerly line of land so conveyed to Zola 322.12 feet to the
northwesterly corner of land so conveyed to Zola; thence
southerly along the westerly line of lands so conveyed to Zola,
being parallel with the easterly line of said Lot No. 16, 411.06
feet to the northeasterly line of New Walden Avenue; thence
southeasterly along said line of New Walden Avenue 345 feet to
the point of beginning.
EXCEPTING THEREFROM that part thereof bounded and
described as follows:
BEGINNING at the southeasterly corner of premises
above described; running thence northerly parallel with the
easterly line of said Lot No. 16, 190.04 feet; thence at right
angles westerly 65 feet; then southerly parallel with the
easterly line of said Lot No. 16, 160.50 feet to the
northeasterly line of New Walden Avenue; thence southeasterly
along said line of New Walden Avenue, 71.40 feet to the point of
beginning.
PARCEL II
ALL THAT TRACT OR PARCEL OF LAND, situate in the Town
of Cheektowaga, Count of Erie and State of New York, being part
of Lot No. 16, Township 11, Range 7 of the Holland Land Company's
Survey and more particularly bounded and described as follows:
BEGINNING at a point in the northeasterly line of New
Walden Avenue where the same is intersected by a line drawn
parallel with the easterly line of said Lot No. 16, and distant
20.76 chains westerly therefrom, as measured parallel with the
northerly line of said Lot No. 16, said point also being on the
easterly line of lands conveyed to John Zola and Valentina Zola,
his wife, by deed recorded in the Erie County Clerk's office in
Liber 2688 at page 192; thence northerly parallel with the
easterly line of said Lot No. 16 and along the easterly line of
lands so conveyed to said Zolas, 708.185 feet to the northeast
corner thereof; thence westerly parallel with the northerly line
of said Lot No. 16 and along the northerly line of lands so
conveyed to said Zolas, 203.28 feet to the east bounds of a
former road 40 links wide; thence southerly parallel with the
east line of said Lot No. 16 and along the east bounds of said
former road, 26.40 feet to the southerly bounds of said road;
thence westerly parallel with the northerly line of said Lot No. 16
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and along the southerly bounds of said former road, and also
being along the northerly line of lands so conveyed to John Zola
and Valentina Zola, his wife by deed aforesaid, 98.30 feet to the
northeast corner of the lands conveyed to Joseph A. Malecki by
deed recorded in Erie County Clerk's Office in Liber 7086 of
Deeds at page 101; thence southerly parallel with the easterly
line of said Lot No. 16 and along the easterly line of lands so
conveyed to Joseph A. Malecki, 349.13 feet to a point, said point
being distant 190.04 feet northerly from the northeasterly line
of New Walden Avenue as measured along a prolongation southerly
of said easterly line; thence westerly at right angles with the
last described line, 65 feet to a point; thence southerly
parallel with the easterly line of said Lot No. 16 and along the
easterly line of lands so conveyed to Joseph A. Malecki, 160.50
feet to a point in the northeasterly line of New Walden Avenue
distant 403 feet northwesterly from the point of beginning as
measured along said northeasterly line of New Walden Avenue;
thence southeasterly along the northeasterly line of New Walden
Avenue, 2.28 feet to an angle point therein; thence continuing
southeasterly along said northeasterly line of New Walden Avenue
400.72 feet to the point or place of beginning.
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F.5 GROUND LEASES
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EXHIBIT C
GROUND LEASE AGREEMENT
THIS LEASE dated , 1970, between ?? ZOLA and JOHN L.
CHESTER ZOLA, ?? of 915 Boncliff Alden, New York (hereinafter
called "Landlord"), and ?? MOTOR INNS, INC. (hereinafter called
"Tenant").
WITNESSETH:
1. DEMISED PREMISES. Landlord hereby leases to ?? and
tenant hereby ?? from Landlord the premises located on Walden
Avenue, near the New York Thruway, in the town of Cheektowaga,
New York, more particularly described in ?? "A" and shown
outlined on Schedule "B" together with all improvements erected
thereon and all rights and appurtenances thereunto belonging
(hereinafter referred to as the "Demised Premises"). The parties
hereto agree that this Lease sets forth all agreements, covenants
and conditions between the parties and supersedes any prior oral
or written agreements between the parties with respect to the
Demised Premises. The following schedules are attached to this
Lease and ?? a part hereof:
Schedule A - Legal Description
Schedule B - Plan
Schedule C - Title Exceptions
Schedule D - Adjoining Land
2. TERM. (a) Preliminary Term. The Preliminary Term of
this Lease shall be divided into two (2) periods as ??
(i) An Interim Period commencing the date of
execution of this Lease and expiring five (5) months after such
date, unless Tenant elects to extend such Interim Period from
month to month, for no more than three (3) additional months.
(ii) A Construction period commencing on the
expiration of the Interim Period and expiring on the earlier of
(A) the expiration of twelve (12) months from delivery of vacant
possession of the Demised Premises to ?? after commencement of
the Construction Period, or (3) the date upon which Tenant opens
a building upon the Demised Premises for business with the
public.
(b) Principal Term. The Principal Term of this Lease
shall commence on expiration of the Preliminary Term and shall
expire on the last day of the month next ?? the expiration of
thirty (30) years from the commence date of the Principal Term.
3. RENEWAL OPTION. Landlord grants to Tenant the option
to extend the Principal term of this Lease for three (3) ??
consecutive periods of ten (10) years each on the terms and
conditions as set forth in this Lease for the Principal Term.
Such option may be exercised by Tenant, by ?? notice to Landlord
at least six (6) months before the ?? of the then current term.
The exercise by Tenant of
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each such option shall be effective only if there shall be no
existing ?? default at the time of such exercise.
4. MINIMUM RENT. Throughout the Principal Term here ?? Tenant
agrees to pay to Landlord the annual net minimum rent of Thirty
Thousand Dollars ($30,000.00), in equal monthly installments in
advance on the first day of each calendar month. All payments of
rent shall be made to Landlord at the address provided in Section
28 hereof or to such other person or at such other place which
Landlord shall designate.
5. PERCENTAGE RENT. In addition to the annual minimum rent
referred to above, Tenant shall pay to Landlord percentage rent
equal to one-half of the amount by which the total of three
percent (3%) of annual gross rooms revenue and one percent (1%) of
gross food and beverage revenue derived from operation of any
motor inn at the Demised Premises exceeds the minimum rent
payable for the same period. The percentage rent owing Landlord,
if any, shall be paid within ninety (90) days after the
expiration of each calendar during the Principal Term of this
Lease, at which time Tenant shall submit a detailed statement,
certified to be true and complete by the certified public
accountant who regularly audits Tenant's books, showing the
aggregate amounts of Tenant's gross room revenues and gross food
and beverage revenues ?? from operation of any such motor inn at
the Demised Premises during the preceding year. Landlord or its
agents shall ?? the right, from time to time during regular
business hours after three (3) days prior written notice, to
examine Tenant's records and books relating to Tenant's
operations at the Demised Premises for the purpose of verifying
such statement.
6. REAL ESTATE TAXES AND ASSESSMENTS.
(a) Throughout the Construction Period and Principal
Term hereof, Tenant shall pay before they become delinquent, all
real estate taxes and assessments imposed upon the Demised
Premises (hereinafter referred to as "tax ??
(b) Landlord shall promptly forward to Tenant all
bills for taxes in time to permit tenant to obtain all discounts
and avoid all penalties.
(c) all taxes for the beginning and ending years of
this Lease shall be prorated between Landlord and Tenant.
Landlord shall make arrangements with the appropriate taxing
authorities to cause the Demised Premises to be taxed as a
separate entity. Any assessments payable in installments may be
paid in such installments over the longest period of time
permissible by law and Tenant shall be liable solely for those
payments accruing during the period of effectiveness of this
Lease.
(d) Tenant may contest any tax it is required to pay
and may file protests or otherwise proceed in the ?? of the
Landlord, but Tenant shall indemnify Landlord for any loss or
liability incurred by reason of such contest.
(e) Nothing in this Lease shall be contr??
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as placing upon Tenant any obligation to pay any income tax on rents,
transfer tax, inheritance tax, capital gain tax, franchise tax or
corporate stock tax, or any other tax excepting real estate taxes
on the Demised Premises.
7. LANDLORD'S TITLE. Landlord covenants that he has fee
simple title to the Demised Premises and full right and authority
to make this Lease; that the Demised Premises are free and clear
of all liens, restrictions, Leases and encumbrances, except as set
forth in Schedule "C" hereof; that there are no laws, ordinances,
governmental rules, title restrictions or other matters which would
limit operation of any lawful retail or service business or motor
inn with off street parking on the Demised Premises; and that
Tenant shall have quiet and peaceful possession and enjoyment of
the Demised Premises and of all rights and appurtenances
thereunto belonging. Landlord further covenants that the
leasehold granted hereby is good and marketable and such as will
be insured without exception, other than as set forth on Schedule
"C" at regular rates.
8. VIOLATIONS. Landlord shall comply with all notices of
all governmental authorities having jurisdiction over the Demised
Premises so that at the date of commencement of the Preliminary
Term of this Lease there shall be no violation of any laws,
ordinances, rules, or regulations of any governmental authority
having jurisdiction over the Demised Premises. Landlord shall
also pay and discharge all assessments for public improvements if
such assessments are presently pending against the Demised
Premises or if such Improvements have been authorized at the date
of execution of this Lease or if work leading to such assessments
has been commenced or completed prior to the date of execution of
this Lease.
9. SURVEY, TESTS, PERMITS. At any time following
execution of this Lease tenant may enter upon the Demised
Premises for the purpose of making surveys, maps or contour ??
test borings, and such other engineering or similar studies as
Tenant may deem necessary. All acts performed by Tenant pursuant
to the terms of this Section shall be in accordance with all
laws, rules and regulations applying thereto, and Tenant shall
indemnify Landlord against any loss, damage, claims, penalties or
liabilities, arising by reason of such entry upon the Demised
Premises by tenant or its agents ?? such Interim Period, Tenant
shall also attempt to obtain all permits, franchises, financing
utility services and ?? rights and agreements which it may deem
necessary to the development of the Demised Premises. If Tenant,
for any rea?? in Tenant's sole judgment, determines that the
Demised Premises are not suitable for Tenant's proposed
development, Tenant may cancel and terminate this Lease at any
time prior to the expiration of the Interim Period of the
Preliminary Term, by giving Landlord notice in writing of such
election to ?? and terminate this Lease, such notice to be
effective immediately; thereupon neither the Construction Period
nor the Principal Term shall commence, this Lease shall become
null and void, and the parties hereto shall have no further
liability to each other, except that tenant shall promptly repair
any damage to the Demised Premises caused by any tests or
studies.
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10. POSSESSION. Landlord shall deliver vacant possession of
the Demised Premises to Tenant, as required by Sections 7 and 8
hereof, within ninety (90) days after receipt of notice from
Tenant that Tenant has waived its right to terminate this Lease,
as provided in Section 9 above, and confirming the commencement
date of the Construction Permit of the Preliminary Term. Tenant
agrees to surrender possession of the ground constituting part of
the Demised Premises to Landlord as the expiration or termination
of this Lease free and clear of all mortgages or liens to secure
the ??? of money suffered or created by Tenant. At Tenant's
option Tenant may also surrender or created by Tenant. At
Tenant's option Tenants may also surrender possession of the
buildings ??? on such ground.
11. RIGHT OF FIRST REFUSAL. If Landlord shall receive at
any time after execution of this Lease, from any third party an
acceptable bona fide offer to purchase the Demised Premises, or
any part thereof, Landlord shall submit a ??? copy of such offer
to Tenant giving Tenant thirty (30) days within which to elect to
meet such offer. If Tenant elects to meet such offer it shall
give Landlord written notice and settlement shall be held within
ninety (90) days ?? whereupon Landlord shall convey to Tenant
the premises ??? are the subject of said offer. At such
settlement Landlord shall deliver to Tenant a Warranty Deed with
covenants as acts of Grantor, sufficient to convey to Tenant fee
simple title to such premises free and clear of all liens,
restrictions and encumbrances except as set forth on Schedule
"C", or suffered or placed against the Demised Premises by Tenant.
Landlord shall pay for Federal and state documentary ??? and
other transfer taxes.
12. COMPLIANCE WITH LAWS. Tenants shall indemnify, ??? and
hold Landlord harmless from any fines, penalties, claims or damages
arising by reason of the violation by Tenant or any laws,
ordinances, orders, requirements or regulations of any Federal,
State, County or Municipal Authorities having jurisdiction over the
Demised Premises. Tenant may contest the validity of any such
law, order, ordinance, requirement or regulation in its name or
in the name of Landlord.
13. IMPROVEMENTS UPON DEMISED PREMISES.
(a) Tenant agrees to accept the Demised in the
condition existing at the beginning of the Preliminary Term of
this Lease. Tenant may, at any time after commencement of the
Construction Period of this Lease, destroy, ?? alter or make any
improvements upon the Demised Premises.
(b) Landlord herewith appoints and ???? Tenant as
Landlord's attorney-in-fact to apply for and ??? from any
governmental authority having jurisdiction any ???? or licenses
which may be necessary in connection with the destruction,
removal, alteration, or construction of any improvements which
Tenant chooses to effect upon the Demise Premises.
(c) Neither Landlord nor Tenant shall be under
any obligation to construct or maintain any improvement upon the
Demised Premises, but any monies received by Landlord as
competition for damage or loss to improvements on the Demised
Premises shall be paid to Tenant and are hereby to Tenant, except
as to any damage or loss prior to the commencement of the
Construction Period of the Preliminary
(d) Landlord and Tenant shall not permit any
mechanic's liens, or similar liens, for labor or ??? to remain
upon the Demised Premises. Landlord or Tenant contest the
validity of any such lien or claim, if made upon final
determination of its contest, shall pay any ???? judgment, decree
or lien and cause the same to be ??? of record without cost to
Landlord.
14. TENANT'S FIXTURES. Any buildings, improvements,
fixtures which may be placed in or upon the Demised Premises by,
for, or under the Tenant are to remain Tenant's property. Tenant may
remove the same at any time before or upon vacating the Demised
Premises.
15. UTILITIES. Tenant shall pay all charges for utility
services furnished to the Demised Premises.
16. PUBLIC LIABILITY. Tenant shall save Landlord harmless
from any liability or expense of any nature arising from injury to
person or property on or about the Demised Premises or in
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connection with Tenant's occupancy of the Demised Premises,
excepting any such liability or expense caused by acts or
omissions of Landlord. Tenant, at Tenant's sole cost and expense,
shall maintain and keep in effect, from and ??? the commencement of
the Construction Period of the term of this Lease, insurance against
claims for personal injury (including death) or property damages,
under a policy of public liability insurance, with limits not
less than $1??? $500,000 in respect of bodily injury (including
death) a ??? $50,000 for property damage, naming both Landlord
and Tenant as the insured parties.
17. CASUALTY. The respective obligations of Landlord and
Tenant shall not be affected by fire or other casualty, Landlord
agrees that it shall take no claim against Tenant, its employees
servants, or agents in connection with any casualty damaging the
Demised Premises, except for the continued payment of rent.
18. EMINENT DOMAIN.
(a) If all or any portion of the Demised Premises
is taken by any right of eminent domain, Landlord agrees to give
immediate notice thereof to Tenant.
(b) If all or any portion of the Demised Premises
shall be so taken, Tenant may terminate this Lease by giving
written notice to Landlord within thirty (30) days of receipt
from Landlord of notice of such taking. Upon such termination
both parties shall be released from any further liability under this
Lease and Tenant shall be entitled to a refund of any rent or
other sums paid in advance.
(c) If Tenant does not terminate this Lease
then rent shall abate in proportion to the square feet of ground
Premises hereunder that is taken.
(d) Whether or not this Lease is terminated as
herein provided, each party may make claim for his ??? award as
his interest may appear, however, in any event, Landlord hereby
assigns to Tenant any compensation award made for damage to or
taking of improvements on the Demised Premises and for the value
of Tenant's leasehold interest.
19. MORTGAGE.
(a) Tenant may, from time to time, ???? this
Lease and at its election in connection with any ??? mortgage
grant a first mortgage secured upon Landlord's fee title interest
in the Demised Premises and upon the ??? of Joseph and Josephine G.
Malecki adjoining thereto as described in Exhibit "D" attached
hereto, provided that such first mortgage is granted to a
recognized mortgage lending institution, such as a bank, savings
institution, annuity, trust, pension or retirement fund,
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insurance company, ??? or institution similar thereto, for the
purpose of financing or refinancing the cost of constructing and
equipping any buildings or other improvements erected or to be
erected on any portion of the Demised Premises and the land
described in Exhibit "D". Landlord shall upon demand, join in any
mortgages and accompanying documents and execute any and
all instruments which counsel for the mortgagee may deem necessary to
accomplish the same, in default of which Tenant is the ??? appointed
Landlord's true and lawful attorney-in-fact to ?? any papers and
documents necessary to effectuate the same in the name of
Landlord and as the act and deed of Landlord and this authority
is declared to be coupled with an int??? and irrevocable. Any
such mortgages and instruments given in connection therewith shall
provide that Landlord shall not incur, at any time, any personal
liability or obligation of any kind whatsoever to the mortgagee
other than the ??? of the lien of the first mortgage against the
Demised Premises and Landlord's fee title interest therein.
(b) Provided Landlord receives notice ??? the
existence of each such mortgage and the names and ??? of the
mortgagees, Landlord shall deliver to each mortgagee a copy of any
notice of default Landlord might send to Tenant.
(c) Landlord may not terminate this Lease by
reason of any default of tenant until Landlord shall given each
mortgagee:
(i) notice of such default, and
(ii) the right to elect to receive a
new Lease of the Demised Premises for a term equal to the then
unexpired term of this Lease with the same covenant and
conditions as this Lease, such right of election to in effect for
thirty (30) days following the expiration of any grace period
granted Tenant and to be conditioned upon curing of Tenant's
default by such mortgagee.
(d) If any mortgagee so requests, Landlord shall
execute and deliver any reasonable modification ??? Lease not
affecting the rent or other sums payable by Tenant hereunder or the
length of the Principal Term hereof.
20. ADJUSTMENT OF ANNUAL MINIMUM RENT.
(a) Landlord and Tenant agree that the net
minimum rent established under Section ? of this Lease is to be
subject to revision, in recognition of the part ??? expectations that
long-term economic trends indicate that the real value of the
rent provided for herein is likely ??? diminish. Accordingly, it is
agreed that such rent shall at intervals of five (5) years,
beginning on the sixth (6) anniversary of the commencement of the
Principal Term of Lease, be adjusted for the following five-year
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period, by multiplying the agreed upon present annual net minimum
??? of $30,000 by a fraction, the numerator of which shall be the
Price Index on the sixth (6th) anniversary of the commencement of
the Principal Term of this Lease and quinquinially????
thereafter, and the denominator of which shall be Price Index at
the date of commencement of the Principal of this Lease.
(b) The term "Price Index" shall refer the
official Consumers' Price Index - U.S. Average, all ??? published by
the Bureau of Labor Statistics, U.S. Department of Labor (1957 -
1959 - 100).
(c) If the Bureau of Labor Statistics shall cease
to publish such Index, in its present form, and ?? calculated on
the present basis, a comparable index or an ?? reflecting changes
in the cost of living determined in a ??? manner shall be chosen by
agreement of the parties. If parties are unable to agree upon
the selection of an app?? index, the matter shall be referred to
arbitration under rules of the American Arbitration Association
then in effect and the decision of the arbitration shall be
final and binding on all parties. Each party shall pay half the
expense of such arbitration proceedings.
(d) However, in no event shall the annual net
minimum rent ever be reduced below $30,000.00.
(e) Whenever such rental shall be required to be
adjusted pursuant to the terms hereof, the parties ?? to execute
such supplemental documents as may reasonably required to confirm
the then current rental to be payable hereunder.
21. RENT DURING INTERIM PERIOD OF PRELIMINARY TERM. ??
execution of this Lease, Tenant hereby agrees to pay as for the
Interim Period of the Preliminary Term the sum of $5,000. Tenant
shall have the right and option to extend the Interim Period of
the Preliminary Term beyond the or ??? period of five months, as set
forth in Section 2(a)(i) a ??? from month to month, but for no
more than three months, giving written notice to Landlord prior
to the expiration ??? of the then current term of the Interim Period
together ??? payment of One Thousand Dollars ($1,000)
for each month ?? elects to extend such Interim Period.
22. ??????????? THE PAYMENT
(a) Tenant agrees to pay to landlord ????count of
the net minimum rent owing for the thirtieth ?? year of the
Principal Term of this Lease, the sum of ?????? which sum shall
be paid on the first day of the Construction?? Period of the
Preliminary Term.
(b) Tenant also agrees to pay to Landlord on
account of the net minimum rent owing for the twenty-ninth (29th)
year of the Principal Term of this Lease, the sum of??? $30,000,
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which sum shall be paid in twelve, equal, consecutive, monthly
installments commencing on the first day of the Construction
Period of the Preliminary Term.
23. STANDARD OF OPERATIONS. Any motor inn which may be
constructed by Tenant on the Demised Premises shall ???
constructed and operated under a franchise granted by Shelton??
Inns, Inc. and in accordance with the standards required such
franchise agreement; provided, that if Tenant is unable?? to
obtain or maintain such Sheraton franchise Tenant shall
nevertheless, construct, maintain and operate any such motor inn in
accordance with standards substantially similar to those established
by sheraton Inns, Inc. as of the date of this Lease. This Section 23
shall be applicable only so long as any mortgage upon the Demised
Premises and the improvement?? which may be constructed thereon,
created by Tenant and ?? in by Landlord pursuant to Section 19 above,
is or remain?? in effect.
24. FIRE INSURANCE. Tenant hereby agrees to maintain such
fire insurance as may be required by any mortgagee ?? the Demised
Premises and any improvements which Tenant may construct
thereon.
25. ASSIGNMENT. Tenant may assign this Lease or ??? the
whole or any part of the Demised Premises, from time to time.
26. ATTORNMENT.
(a) If the Landlord shall acquire rights to ?? of
the Demised Premises prior to expiration or termination of this
Lease, no sublessees shall be disturbed in their possession?? in
accordance with the terms of their respective ?? except for such
causes as would entitle Tenant to disturb such possession.
(b) Landlord grants to all sublessees of ??
Tenant the same rights for removal of property, fixtures,
improvements as Tenant has pursuant to the terms of this Lease???
(c) Landlord agrees to execute for ??????? any
documents required by sublessees to confirm their rights??
pursuant hereto and appoints Tenant its attorney-in-fact ??? execute
the same.
27. DEFAULT. It is agreed that no default on the part?? of
either party shall be deemed to have occurred unless the?? other
party shall have given notice of the alleged default ?? and
(i) with respect to alleged ?? of rent,
Tenant shall not have remedied such alleged default???? within
thirty (30) days after receipt of such notice, and
(ii) with respect to any other alleged
default, the other party shall not have within sixty (60) days
14
<PAGE>
after receipt of such notice commenced action to ??? such default
and diligently prosecuted such action there??.
28. NOTICE. Any notices, which either party may ?? or be
required to give the other party shall be sent by registered or
certified mail, return receipt requested, and all notices so sent
shall be deemed duly given when deposited?? in the United States
mail, postage prepaid and addressed as?? follows:
(i) To Landlord: Mr. & Mrs. Thaddeus
915 Bencliff Drive
Alden, New York
(ii) To Tenant: c/o President
1315 South Allen Street
State College, PA. ????
29. BROKERS COMMISSIONS. Landlord agrees to pay the
commissions due any real estate brokers with whom it has ??? and to
save Tenant harmless from any such claims.
30. SHORT FORM. Concurrently with the execution of Lease,
the parties hereto shall execute a Short Form Lease?? Tenant
shall record said short form at its own cost and expense but, as a
condition precedent to the binding effectiveness of this Lease
upon Tenant, Landlord shall furnish proof satisfactory to Tenant
the Landlord's title is in accordance ??? the covenants of this
Lease. If Tenant elects to terminate this Lease pursuant to
Section 9, Tenant shall execute such documents as may be
necessary to make this Lease and such Short Form terminated of
record.
31. BINDING EFFECT. All terms, covenants, conditions?? and
agreements contained in this Lease shall extend to an??? be
binding upon the parties hereto and their respective ???
executors, administrators, successors and assigns. Neither
Tenant nor any principal of Tenant, whether disclosed or
undisclosed, shall have any personal liability with respect to this
Lease or the Demised Premises, and if Tenant is in breach or
default with respect to its obligations or otherwise under this
Lease, Landlord shall look solely to the Demised Premises and the
rents, issues and profits to be ??? therefrom, and the building and
other improvements and personal property located thereon.
15
<PAGE>
IN WITNESS WHEREOF, the Landlord has hereunto set his
hand and seal and the Tenant has caused this Lease to be executed by
its duly, authorized officers and hereto has affixed its common
corporate seal the day and year first above written.
Witness: __________________ LESSOR: _____________________
Thaddeus Zola
_________________________ ______________________
John Zola Clara Zola
__________________________ LESSEE: CONSOLIDATED MOTOR INN
Attest____________________ ________________________
Secretary President
16
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
F.5 GROUND LEASES
<PAGE>
[Insert Ground Leases]
<PAGE>
Sheraton Inn Buffalo Airport
F.6 FLOOD INSURANCE RATE MAP
<PAGE>
[Insert Flood Insurance Rate Map]
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
F.7 PROPERTY TAX BILLS
<PAGE>
[Insert Property Tax Bills]
<PAGE>
Sheraton Inn Buffalo Airport
- --------------------------------------------------------------------
F.8 INDEMNIFICATION
<PAGE>
[Insert Indemnification Letter]
<PAGE>
Appraisal of:
SHERATON INN LAKESIDE
KISSIMMEE, FLORIDA
As of:
March 31, 1997
Prepared For:
AIRCOA Hotel Partners, L.P.
Special Committee
March 1, 1997
Prepared By:
ARTHUR ANDERSEN LLP
Hospitality Industry Consulting Services Group
<PAGE>
March 31, 1997
Mr. James W. Hire
Hire & Associates
1388 Solitude Lane
Evergreen, CO 80439
Mr. Anthony C. Dimond
Miramar Asset Management, Inc.
617 Veterans Boulevard, Suite 212
Redwood City, CA 94063
Re: Appraisal of Sheraton Inn Lakeside; Kissimmee, Florida
As of January 1, 1997
Gentlemen:
As requested, we have completed an appraisal of the fee simple
interest in the above-referenced property. The reader is advised
that our Firm has not audited, examined, reviewed or applied
agreed-upon procedures to the financial data contained in the
accompanying report unless specifically noted. We have relied on
information, including but not limited to, industry statistics,
relevant market, demographic and financial data assembled by us
through direct research conducted by our staff, or from secondary
sources as well as information provided by you. While these
sources of information are generally recognized as authoritative
in the field or otherwise considered reliable, we have not
audited this information nor do we warrant its completeness or
accuracy. The opinion of market value expressed herein is subject
to the assumptions and limiting conditions set forth in the body
of the accompanying report.
We understand that our valuation will be used to assist you in
determining the fair market value for internal purposes and may
not be disclosed to a third party without the prior written
consent of Arthur Andersen LLP.
<PAGE>
Based upon our research and analysis, it is our opinion that the
market value of the fee simple interest, including furniture,
fixtures and equipment, as of January 1, 1997 is:
-- TWENTY EIGHT MILLION DOLLARS
($28,000,000)
We appreciate the opportunity to serve you. Please call if you
have any questions or if we can be of further assistance.
Very truly yours,
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
<PAGE>
Sheraton Inn Lakeside Page i
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
SUMMARY OF CRITICAL FACTS AND CONCLUSIONS.................................iii
GENERAL ASSUMPTIONS AND LIMITING CONDITIONS.................................v
CERTIFICATION............................................................viii
A. INTRODUCTION............................................................1
A.1 SUBJECT PROPERTY IDENTIFICATION........................................1
A.2 OWNERSHIP HISTORY......................................................1
A.3 PURPOSE AND FUNCTION OF THE VALUATION..................................3
A.4 PROPERTY RIGHTS APPRAISED..............................................4
A.5 EFFECTIVE DATE OF THE VALUATION........................................4
A.6 EXPOSURE PERIOD........................................................4
A.7 SCOPE OF THE APPRAISAL.................................................4
A.8 SPECIAL ASSUMPTIONS AND LIMITING CONDITIONS............................5
B. ANALYSIS OF THE SUBJECT PROPERTY AND ITS MARKET.........................8
B.1 DESCRIPTION AND ANALYSIS OF THE PROPERTY...............................8
Location.................................................................8
Legal Description........................................................8
Land.....................................................................8
Property Improvements...................................................10
Property Inspection.....................................................15
Past Renovation and Capital Requirements................................16
Property Taxes..........................................................18
Zoning..................................................................22
B.2 AREA ANALYSIS.........................................................24
Economic and Demographic Indicators.....................................25
Employment..............................................................27
Transportation..........................................................29
Tourism and Recreation..................................................31
Convention and Trade Show Market........................................35
Conclusion..............................................................37
B.3 HIGHEST AND BEST USE ANALYSIS.........................................38
Highest and Best Use of The Land as if Vacant...........................38
Highest and Best Use of The Property As Currently Improved..............40
Conclusion and Reconciliation of Highest and Best Use...................42
C. ANALYSIS OF COMPETITIVE LODGING SUPPLY AND DEMAND......................43
C.1 COMPETITIVE LODGING SUPPLY............................................43
Identified Competitive Supply...........................................45
Additions To Competitive Lodging Supply.................................54
Other Additions to Supply in the Orlando Lodging Market.................55
Conclusion..............................................................57
C.2 LODGING SUPPLY AND DEMAND ANALYSIS....................................58
Overall Demand Trends in the Orlando Lodging Market.....................58
Lodging Demand in the Identified Competitive Supply.....................60
Demand Segmentation And Estimated Demand Growth.........................63
C.3 ESTIMATED OCCUPANCY AND AVERAGE ROOM RATE.............................70
Market Penetration & Average Annual Occupancy...........................70
Projected Average Daily Room Rate.......................................77
D. THE APPRAISAL PROCESS..................................................81
D.1 THE COST APPROACH.....................................................81
D.2 SALES COMPARISON APPROACH.............................................82
D.3 INCOME APPROACH.......................................................89
Historical Financial Performance........................................90
Estimated Operating Results.............................................93
Investment Climate Overview............................................104
Discounted Cash Flow Analysis..........................................105
E. RECONCILIATION AND FINAL VALUE ESTIMATE..............................108
F. ADDENDA
F.1 HOTEL SALES COMPARABLES
F.2 SUBJECT PROPERTY PHOTOGRAPHS
F.3 COMPETITIVE HOTEL PHOTOGRAPHS
F.4 PROPERTY LEGAL DESCRIPTION
F.5 INDEMNIFICATION
<PAGE>
SUMMARY OF CRITICAL FACTS AND CONCLUSIONS
Property Name: Sheraton Inn Lakeside
Property Address: 7769 W. Irlo Bronson Memorial Highway
Kissimmee, Florida 34747
Property Location: US-192, Walt Disney World Maingate area
Property Type: Two-story, double-loaded, exterior-
corridor, full-service hotel
Number of Rooms: 651-rooms
Owner of Record: Lakeside Operating Partnership, LP
Year-End Occupancy
1995 78 percent
1996 (Estimated) 84 percent
Year-End Average Rate
1995 $48.00
1996 (Estimated) $50.00
Interest Appraised: Fee Simple
Land Area: 1,166,101-square feet (26.77 acres)
Building Area: 303,428-square feet
Year Completed: 1973 - 1982
Highest and Best Use:
Land as though vacant: Commercial development
Land as improved: Hotel
Date of Valuation: January 1, 1997
Date of Inspection: November 6, 1996
January 18, 1997
Value Indications (Including Furniture, Fixtures, and Equipment):
$ Amount $ Per Room
-------- ----------
Cost Approach: N/A N/A
Sales Comparison Approach: $28,000,000 $43,000
Income Approach: $28,020,000 $43,000
----------- -------
Reconciled Value Indication: $28,000,000 $43,000
=========== =======
<PAGE>
GENERAL ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal report is subject to the following general
assumptions and limiting conditions:
,
1. No investigation has been made of, and no responsibility
is assumed for, the legal description of the property
being valued or legal matters, including title or
encumbrances. Title to the property is assumed to be
good and marketable unless otherwise stated. The
property is assumed to be free and clear of any liens,
easements, or encumbrances unless otherwise stated.
2. Information furnished by others, upon which all or
portions of this appraisal are based, is believed to be
reliable but has not been verified in all cases. No
warranty is given as to the accuracy of such
information.
3. It is assumed that all required licenses, certificates
of occupancy, consents, or other legislative or
administrative authority from any local, state, or
national government or private entity or organization
has been or can readily be obtained or renewed for any
use on which the value estimates contained in this
report are based.
4. Full compliance with all applicable federal, state, and
local zoning, use, occupancy, environmental, and similar
laws and regulations is assumed unless otherwise stated.
5. No responsibility is taken for changes in market
conditions, and no obligation is assumed to revise this
report to reflect events or conditions which occur
subsequent to the appraisal date hereof.
6. The opinion of value is predicated on the financial
structure prevailing as of the date of this appraisal.
7. Responsible ownership and competent property management are assumed.
8. Areas and dimensions of the property were obtained from
sources believed to be reliable. Maps or sketches, if
included in this report, are only to assist the reader
in visualizing the property, and no responsibility is
assumed for their accuracy. No independent surveys were
conducted.
9. It is assumed that there are no hidden or un-apparent
conditions of the property, subsoil, or structures that
render it more or less valuable. No responsibility is
assumed for such conditions or for arranging engineering
studies that may be required to discover them.
10. No soil analysis or geological studies were ordered or
made in conjunction with this report, nor was an
investigation made of any water, oil, gas, coal, or
other subsurface mineral and use rights or conditions.
11. Neither Arthur Andersen LLP nor any individual signing
or associated with this report shall be required by
reason of this report to give further consultation,
provide testimony, or appear in court or at other legal
proceedings unless specific arrangements therefore have
been made.
12. This report has been made only for the purpose stated
and shall not be used for any other purpose. Neither
this report nor any portions thereof (including, without
limitation, any conclusions as to value or the identity
of Arthur Andersen LLP or any individuals signing or
associated with this report or the professional
associations or organizations with which they are
affiliated) shall be disseminated to third parties by
any means without the prior written consent and approval
of Arthur Andersen LLP.
13. The date of value to which the opinions expressed in
this report apply is set forth in the opinion letter at
the front of this report. Our value opinion is based on
the purchasing power of the U.S. dollar as of that date.
We have no obligation to update our findings and
conclusions for changes in market conditions which occur
subsequent to our fieldwork.
14. Our study and report will be based on assumptions and
estimates which are subject to uncertainty and
variation. These estimates are often based on data
obtained in interviews with third parties, and such data
are not always completely reliable. Therefore, while our
estimates will be conscientiously prepared on the basis
of our experience and the data available to us, we make
no warranty of any kind that the financial results
projected will, in fact, be achieved.
15. Unless otherwise stated in this report, no hazardous
material, which may or may not be present on or
near the property, was observed. We have no knowledge
of the existence of such materials on or in the
property; however, we are not qualified to detect such substances.
The presence of potentially hazardous substances, such as
asbestos, urea-formaldehyde foam insulation, or industrial wastes,
may affect the value of the property. The value estimates
herein are predicated on the assumption that
there is no such material on, in, or near the property
that would cause a loss in value. No responsibility is assumed
for any such conditions or for any expertise or engineering knowledge
required to discover them. The client should retain an expert in
this field if further information is desired.
16. This appraisal has been made in conformance with the Uniform Standards
of Professional Appraisal Practice of The Appraisal Foundation.
17. The allocation in this report of the total valuation
among components of the property applies only to the
program of utilization stated in this report. The
separate values for any components may not be applicable
for any other purpose and must not be used in
conjunction with any other appraisal.
18. Arthur Andersen consents to including, to the
extent required by federal securities laws, a copy of the
Appraisal and/or a summary thereof or a reference thereto in the
Schedule 13E-3 and related proxy statement with the Securities
and Exchange Commission by AHP or the Special Committee, provided
that Arthur Andersen shall have the right to approve the content of
any summary of the Appraisals, such approval not to be unreasonably
withheld. Otherwise, this report and parts thereof, and any
additional material submitted, may not be used in any prospectus
or printed material used in connection with the sale of
securities or participation interests in any Public Offering,
Securities and Exchange Commission filing, or other public
document.
19. Arthur Andersen LLP's maximum liability relating to
services rendered under this report (regardless of form
of action, whether in contract, negligence, or
otherwise) shall be limited to the charges paid to
Arthur Andersen LLP for the portion of its services or
work products giving rise to liability. In no event
shall Arthur Andersen LLP be liable for consequential,
special, incidental, or punitive losses, damages, or
expenses (including, without limitation, lost profits,
opportunity costs, etc.) even if it has been advised of
their possible existence.
20. The Americans with Disabilities Act became effective
January 26, 1992. We did not make any observations or
interpretations on compliance with the ADA. It is
possible that a compliance survey of the property,
together with a detailed analysis of the requirements of
the ADA could reveal that the property is not in
compliance with the requirements of the Act. If so, this
fact could have a negative effect upon the value of the
property. Since we have no direct evidence relating to
this issue, we did not consider possible non-compliance
with the requirements of ADA in estimating the value of
the property.
21. The financial forecasts presented are included solely to
assist in the development of the value conclusion
presented. These presentations do not include all
disclosures required by guidelines established by the
American Institute of Certified Public Accountants for t
the presentation of a financial forecast. The actual
results may vary from the forecasts, the variations may
be material. In accordance with the terms of the
engagement, this report and the accompanying forecasts
are restricted to internal use and may not be shown to
any third party for any purpose, without prior approval
from Arthur Andersen LLP.
<PAGE>
CERTIFICATION
We certify that to the best of our 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 our personal, unbiased professional
analyses, opinions and conclusions.
- -- we have present no prospective interest in the property
that is the subject of this report, and we have no
personal interest or bias with respect to the parties
involved.
- -- our compensation is not contingent on an action or
event resulting from the analyses, opinions, or conclusions in,
or the use of, this report.
- -- Sheila Bjornstad and EJ Park, made personal inspections of
the property on November 6, 1996. David Randell made a
personal inspection on January 18, 1997.
- -- As of the date of this report, David Randell, MAI, CCIM
has completed the requirements of the continuing education
program of the Appraisal Institute.
- -- our 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
Supplemental Standards of Professional Practice of the
Appraisal Institute and the Uniform Standards of
Professional Appraisal Practice of The Appraisal
Foundation.
- -- the use of this report is subject to the State of Florida
relating to review by the Real Estate Affiliation
subcommittee of the Florida Real Estate Commission, as
well as the requirements of the Appraisal Institute
relating to review by its duly authorized representatives.
- -- neither all nor any part of the contents of this report
(especially any conclusions as to value or the identify of
the appraiser) 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.
- -- this appraisal assignment was not based on a
requested minimum valuation, a specific valuation, or the
approval of a loan.
Respectfully submitted,
David Randell, MAI, CCIM
State Certification No.0001184
<PAGE>
Page 1
A. INTRODUCTION
A.1 SUBJECT PROPERTY IDENTIFICATION
The Sheraton Inn Lakeside is comprised of detached lodging
buildings containing a total of 651 rooms. The property was
developed in various stages beginning in 1973 when the first 200
rooms were completed. The last phase was completed in 1982. In
addition tot he rooms, the hotel has two restaurants, two pools
and a small meeting area. The property contains 26.77 acres and
fronts along US-192 (Irlo Bronson Memorial Highway), about two
miles from Walt Disney World. A more detailed description is
discussed in section B.1. Description and Analysis of the
Property.
Property Address: 7769 W. Irlo Bronson Memorial Highway
Kissimmee, Florida 34747
Tax Reference: Account # R032527-000000110000
Account # R032527-000000960000
Account # R032527-000000190000
Deed Reference: 03-25-27-0000-0019-0000
03-25-27-0000-0096-0000
03-25-27-0000-0011-0000
Current Owner of Record: Lakeside Operating Partnership, LP
A.2 OWNERSHIP HISTORY
The Lakeside Operating Partnership, L.P. is a limited partnership
established as the ownership entity of the subject property.
AIRCOA Hotel Partners, L.P. (the Partnership) is a
publicly-traded limited partnership formed to acquire, own and
operate hotel properties and holds a 99 percent limited partner
interest in the Lakeside Operating Partnership, L.P. AIRCOA
Hospitality Services, Inc., which is a wholly-owned subsidiary of
Richfield Hospitality Services, Inc., holds a one percent general
partnership interest in both the Partnership and in the Lakeside
Operating Partnership,
<PAGE>
Page 2
L.P. This hotel was developed and has been
owned by an AIRCOA-related entity since inception in 1973.
<PAGE>
Page 3
A.3 PURPOSE AND FUNCTION OF THE VALUATION
The purpose of this report is to estimate the market value of the
fee simple estate in the subject property. Arthur Andersen LLP
has been engaged by the Special Committee of AIRCOA Hotel
Partners, L.P. (AHP) for the purpose of assisting them in
assessing the value of the individual properties owned by the
partnership.
As used herein, market value is defined as1:
"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 the sale as of a
specified date and the passing of title from seller to
buyer under conditions whereby:
a. buyer and seller are typically motivated;
b. both parties are well informed or well advised,
and acting in what they consider their
best interests;
c. a reasonable time is allowed for exposure in the open market;
d. payment is made in terms of cash and United States dollars
or in terms of financial arrangements comparable thereto;
and
e. 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."
This appraisal has been prepared in compliance with the Appraisal
Standards Board requirements and is a self-contained appraisal
report. The report contains all information significant to the
solution of the appraisal problem and reports all significant
date in comprehensive detail.
- --------------
1 Uniform Standards of Professional Appraisal Practice, Appraisal
Foundation, 1990 Edition.
<PAGE>
Page 4
A.4 PROPERTY RIGHTS APPRAISED
The property rights appraised are the fee simple ownership of the
land and improvements, including the furniture, fixtures, and
equipment.
A.5 EFFECTIVE DATE OF THE VALUATION
The effective date of this value estimate is January 1, 1997. The
property was inspected by Sheila Bjornstad and EJ Park on
November 6, 1996. David Randell made an inspection on January 18,
1997.
A.6 EXPOSURE PERIOD
Exposure period refers to the amount of time which a property
would have been on the market prior to the date of appraisal for
it to sell at the appraised value. The current marketplace has
been characterized by illiquidity and capital restraints,
particularly on the part of banks. The volume of transactions of
hotel properties diminished in 1991 and 1992, and there was less
investment and development activity in the marketplace. Since
then, however, the markets have shown improvement and there has
been a significant increase in sales activity. Most of the
investors with whom we have spoken agreed that an exposure period
of between six months and one year would be sufficient in order
to maximize the price for a property such as the subject.
A.7 SCOPE OF THE APPRAISAL
As part of this assignment, the appraisers made a number of
independent investigations and analyses. In conducting our
investigation, various governmental planning agencies, the
Convention and Visitors Bureau, and the local Chamber of Commerce
were contacted for demographic data, land policies and trends,
and growth estimates. Neighborhood data were supplemented by
physical inspection of the defined area. Information regarding
zoning, utilities, and other limitations on site utilization was
<PAGE>
Page 5
obtained through the appropriate government agencies. Both the
site and the surrounding area was inspected to determine
suitability for hotel use. All phases of the local lodging market
were analyzed for past trends and current data. Estimated income
and occupancy levels, expenses, and income structures are based
upon this market evidence.
A diligent search for comparable sales transactions was
conducted, and information was obtained from both public and
private sources. In the case of comparable sales data, attempts
were made to contact the buyers or sellers or other knowledgeable
third parties to verify that the transactions were at arm's
length, cash equivalent, and market reflective. The sales
comparison approach was employed, however, we did not place much
reliance on it but used it as a test of reasonableness. The cost
approach was not utilized as it is considered to have limited
reliability due to the difficulty in estimating the significant
depreciation and external obsolescence present at the subject
Sheraton Inn Lakeside. The income capitalization approach was
given primary emphasis as there was sufficient data for its
application and because it reflects the typical investor's
behavior.
A.8 SPECIAL ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal is subject to the following special assumptions
and limiting conditions.
1. The Orlando lodging market has over 84,000
hotel/motel rooms and most major US franchise affiliations
already have significant representation. For example, there are
over 15 Ramada Inn Hotels in the Orlando area. Such a high
representation in the market area limits the competitive benefit
that may accrue to any hotel through affiliation. On the other
hand, the subject hotel is currently only one of three Sheraton
Hotels in the Orlando market area. The low number of Sheraton
hotels in the market is a competitive advantage for the subject
hotel enabling it to achieve a higher percentage of demand
generated by the reservations system than many other hotels which
are affiliated with other "well-represented" brands.
2. In the early 1990s, tourism travel to Florida decreased
significantly as a result of highly publicized acts of
crime and violence to foreign tourists. Over the last
two years, international tourism has rebounded,
supporting growth for lodging
<PAGE>
Page 6
demand in the Orlando market area. However, the possibility of
renewed crime and its impact on tourism is a real threat to the
Orlando market area. We have not considered the impact
of such an event in our projections.
3. This analysis is based on owner-provided physical
description of the improvements. Any determination of
building size or other physical characteristics contrary
to the assumptions may impact the value conclusions
report.
4. This appraisal and the value estimates set forth
herein place significant reliance upon operating information
provided by the property owner. All owner-provided materials have
been presumed to be accurate. Significant differences in the
historical performance of the subject property, relative to that
indicated in the financial statements and other information
provided to use, could influence the value estimates and
conclusions provided herein...
5. Because of the current occupancy level of the subject
property, our guest room inspection was limited to room
availability/. For instance, a sample of each type of
lodging unit (selected by management) was inspected. We
have assumed the elements of the property inspected are
reasonably representative of any property components not
seen or not inspected in detail.
6. We have necessarily relied upon information provided by management
with regard to certain descriptive information. For instance,
we have assumed that management's estimates of building
size, ages, etc. are accurate.
7. The analysis and value estimates set forth herein are
based upon the underlying assumption that AIRCOA Hotel
Partners, L.P., or alternative comparable management
group, continues to control and manage the subject
property, but that the subject property is operated as
an individual hotel, and would not benefit from the cost
reduction associated with shared management and
marketing of a portfolio of hotels.
8. The subject site comprises three parcels of
adjoining land. The largest parcel of the three contains a
majority of the hotel's improvements. The two secondary parcels
are currently vacant. The smallest parcel is a narrow strip of
land that is improved with an access road that leads to a dead
end. The larger of the two secondary parcels is approximately two
acres in size and fronts Irlo Bronson Memorial Highway (US-192).
This parcel could be considered excess land as a number of
development options are possible including: expansion of the
current improvements, development of a new convention center, or
sale to a third party (most likely to a chain-affiliated
restaurant).
However, management indicated that no immediate plans
are in place for expansion and/or development of this parcel. An
expansion of the hotel or development of additional meetings
facilities has not been considered by management due to the
uncertain beneficial aspects of expanding the current
<PAGE>
Page 7
property. Management has also indicated that a sale to
and development by a third party is likely to have a negative
impact on the existing property. As this parcel fronts US-192,
development by a third party will significantly decrease the
visibility of the Sheraton Lakeside Inn from the main road. Due
to current zoning regulations, management will not be able to
increase signage. Furthermore, a development by a
chain-affiliated restaurant will likely result in strong
competition for the subject hotel's restaurants and may attribute
to a significant drain on the hotel's food and beverage revenues.
Due to the assumed negative impact on property value of
the above mentioned options, we have not ascribed
additional value to the excess land.
9. This appraisal report was prepared by Sheila Bjornstad,
Thomas McConnell, and EJ Park.
<PAGE>
Page 8
B. ANALYSIS OF THE SUBJECT PROPERTY AND ITS MARKET
This section of the report presents a description and analysis of
the subject property's location, improvements, physical
condition, need for capital expenditures, property taxes, and
zoning. In addition, this section of the report presents a review
of the subject's market area and an analysis of the property's
highest and best use.
B.1 DESCRIPTION AND ANALYSIS OF THE PROPERTY
LOCATION
The subject of the appraisal is a 26.77-acre parcel of land that
is improved by a 651-unit hotel. The property, built in phases
(1973-1982) and known as the Sheraton Inn Lakeside, is located on
the west-side of Kissimmee, Florida, along US-192 also known as
Irlo Bronson Memorial Highway. The subject hotel is located
approximately two miles west of Interstate 4 (I-4) and 10 miles
west of the Florida Turnpike. The street address of the property
is 7769 W. Irlo Bronson Memorial Highway (US-192), Kissimmee,
Florida.
LEGAL DESCRIPTION
A detailed legal description is provided in the addenda of this
report.
LAND
Size and Configuration: The subject site is irregular
in shape and contains 1,166,101 square feet (sq.ft.), or
26.77-acres including two adjoining parcels. The subject
comprises three parcels of land; Parcel one contains much of the
subject's improvements and is the largest lot. Parcel two is
adjacent to the larger parcel and is currently vacant. Management
had proposed to build a conference center on the vacant lot but
no immediate plans are in the pipeline. Parcel three is the
smallest of the three lots and is
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improved by a vacant access road. The road leads to a
dead-end as parcel two is currently vacant.
Frontage and Accessibility: The subject has frontage on US-192,
also known as the Irlo Bronson Memorial Highway which is a
four-lane divided roadway. US-192 is the primary east-west
thoroughfare accessing Kissimmee and Osceola Counties. The
property is located at the corner of Foromosa Garden Boulevard,
directly across from Amazing China, a theme park. Along US-192,
Walt Disney World Resort Maingate is approximately 1.5 miles east
of the subject property. Interstate 4 is a major artery that
leads to Orlando to the north and Tampa to the south. Access to
I-4 is located approximately two miles to the east of the
property.
Topography: The subject site is generally level with a slight
downward slope to the west into an adjoining four-acre lake.
Reportedly, the ownership of the Black Lake extends into about
one-half way.
Management offers paddle boat rentals on Black Lake
Floodplain: The subject property is categorized as Flood Zone A.
Flood Zone A is defined as 105 feet above sea level.
Approximately 40 percent of the subject parcel is below a flood
zone. There is an area of the parking lot behind the tennis
courts and where the buildings 8 and 15 meet. The storm-drains in
this area overflow approximately 20 to 25 times per year after
particularly heavy storms. This takes about one day to drain.
Management indicated that the reason for the flooding is due to
the elimination of a drainage ditch that was eliminated with the
development of the adjoining property. According to management,
the drainage problem can be eliminated with the construction of a
new drainage ditch. The flooding does not encroach upon the
buildings past the parking lot level. As a result, this does not
seem to cause any damage to the structural foundation of the
buildings. Please refer to the flood plain map attached.
Utilities and Public Services: Utilities are available
to the site including public gas, water, sewer, telephone, and
electricity. Gas is provided by People's Gas. Water and
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sewage is provided by Kissimmee Utility Authority.
Electricity is provided by Florida Power.
Easements and Encroachments: Typical utility and access
easements exist through the subject site. We are not aware of any
easements which negatively impact the subject.
Development on Neighboring Sites: The subject parcel contains a
lake called the Black Lake that is approximately four acres in
size. The northwest side of the parcel has frontage to the Black
Lake. Amazing China, a theme park is located directly across
US-192 from the subject hotel. To the southeast side of the
subject hotel, there is a driving range. The subject hotel has
frontage to US-192 which is densely populated by hotels, motels,
restaurants and other retail shops. The Irlo Bronson Memorial
Highway is a highly developed commercial and lodging market due
to the location near the Disney Maingate entrance that has
commercial and direct access from US-192.
PROPERTY IMPROVEMENTS
General
The Sheraton Inn Lakeside comprises 15 separate lodging buildings
and a commercial building that houses restaurants, lobby, guest
services, a gift shop, and a meeting room. All the guest room
buildings are two-story structures with exterior corridors. The
hotel was originally built in 1973 as a 200-room property
(Buildings 1, 2, 3, 4, and 5 and the commercial building) and
expanded in three additional phases. The remaining phases were
developed as follows:
1977 - 100 rooms (Buildings 6 and 7)
1980 - 176 rooms (Buildings 8, 9, 14, and 15)
1982 - 176 rooms (Buildings 10, 11, 12, and 13)
1987 - 1 room converted to storage
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The commercial building was expanded and renovated in
1989.
Guest Rooms
At present, the hotel contains 651-guest room units, of
which 49 rooms are king-bedded rooms. Double-double bedded units
account for approximately 93 percent of the total inventory. This
is due to a high percentage of families traveling with children.
The following table details the number of rooms by type of rooms.
- ----------------------------------------------------------------------
Current Room Configuration of the Sheraton Inn Lakeside
King Rooms 49
Double-Double Rooms 602
Total Number of Rooms 651
- ----------------------------------------------------------------------
The guest rooms are in relatively good condition and
have benefited from on-going renovations. TVs were replaced in
1995 and refrigerators and in-room-safes are currently in the
process of being replaced. All rooms are equipped with
individually-controlled HVAC units, coffee makers, voice mail, on
command video, and electronic door locks.
Food and Beverage Outlets
The subject hotel contains four food and beverage (F&B)
restaurant outlets. All of the restaurant outlets were renovated
in 1989. Hurricane Sam's Bar can seat 42 people and is open from
5:00 PM. The carpet was replaced in 1995. The bar includes a pool
table and gives the ambiance of a sports bar. Aruba's Island
Grill is a Caribbean-themed restaurant that serves only dinner.
This outlet, which overlooks Black Lake, can seat up to 100
people. This restaurant was re-carpeted in 1996 and appears to be
in good condition. The section of the restaurant that overlooks
the lake used to be an outer deck that was incorporated into the
restaurant with scenic windows and parquet wood flooring. The
Greenhouse is a 275-seat, buffet-style restaurant open for
breakfast and dinner. The restaurant flooring is a combination of
quarry tiles and carpet. The tiles are scheduled to be replaced
in 1997 with ceramic porcelain tiles. Two pool-side Gazebo
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bars serve refreshments and snacks and are seasonal.
The Corner Market is a combination of a deli and mini-market. A
Pizza Hut Express franchise is operated within the Corner market
and is available for take-out or in-room delivery.
Meeting and Banquet Space
The property contains approximately 1,560-square feet
of dedicated meeting space in one room. This room was constructed
in 1989 as part of the expansion of the commercial building. The
Waterfront Room is in relatively good condition.
- ----------------------- ------------- -------------------- -----------------
Meeting Room or Location/ Number of Square
Ballroom Name Floor Divisions Feet
- ----------------------- ------------- -------------------- -----------------
The Waterfront Room 1 2
1,560
- ----------------------- ------------ -------------------- ----------------
Total Meeting Space 1 2
1,560
- ----------------------- ------------ -------------------- ----------------
Recreational Facilities
The subject hotel is placed around three pools, two of
which are heated. In addition, there are two children's pools,
two playgrounds, two electronic game rooms, four lighted tennis
courts, an 18-hole miniature golf course, and paddle boat rides
on Black Lake. Beach volleyball and basketball courts are also
available on the property.
Parking Lot
Surface parking is available throughout the property
and contains a total of 750 parking spaces. The parking lot was
resealed in 1995, and is in a relatively good condition. A
portion of the parking lot, an area in front of buildings 8 and
15 gets flooded after heavy storms. A more detailed description
is given in the Floodplain section of the report.
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Other Services
The subject Sheraton Inn Lakeside offers the following
services as part of the amenities offered at the Hotel. A high
percentage of families with children make the following amenities
invaluable: Herbie Kids Program is available for hotel guests
which provides supervised activity and entertainment for
children; same day film processing; rental cars; video camera
rental; and admission tickets for near-by attractions are
available for sale at the Guest Services desk in the reception
area. The hotel provides scheduled free shuttle transportation to
Walt Disney World Theme Park to all hotel guests. Twenty four
hour valet service for dry cleaning and laundry as well as two
coin-operated guest laundry rooms, each with six units, are
available.
Structural Systems:
Floor-Area Ratio: 0.26
Floors: Guest room Buildings: 2 Floors
Commercial Building: A combination of 1 and 2 Floors
Foundation: Poured concrete footings
Building Frame: Masonry Block and reinforced steel center beams
Roofing System: Built-up asphalt with rock ballast
Exterior Walls: Plaster, plate glass, and store front panel windows
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Mechanical Systems:
HVAC System: All the guest rooms have individual
through-the-wall heating and air-conditioning units. These
General Electric models are a combination of heat pump and
electrical units that are more energy efficient than older
models. The commercial building has 20 roof-top HVAC units.
These Carrier brand air conditioning units are standard
electric heat prototype. The following summarizes the
boilers that support the hot water system.
Boilers:
-- Guest Rooms: Two Teledyne Larrs boilers
Four Rudd boilers
Two Lochinvar boilers
-- Meeting and Public Space: One Glashield boiler
One Rheem boiler
Two Teledyne Larrs boilers
Three Weben boilers
Fire Protection System: All guest-room and public areas
are fully sprinklered. Heat and smoke detectors are hard-wired in
all guest-rooms and public area. Each room has one smoke detector
and two sprinkler heads. One sprinkler head is in the bathroom
and the other over the vanity.
Plumbing: Domestic water is provided by Kissimmee
Utility Authority directly to the hotel via an eight inch water
main located in the commercial building.
Electrical System: Service is provided via five 7,000
volt transformer vaults owned by Florida Power. Transformers are
located throughout the property. There are no emergency
generators located on the property. An uninterrupted power supply
supports computers and 52 terminals.
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Interior Finishes:
Floor Coverings:
Lobby: A combination of carpet and tile
Meeting Rooms: A combination of carpet and tile
Guest Rooms: Carpet
Corridors: Individually poured concrete floor slabs
Walls and Partitions:
Lobby: Sheetrock/vinyl/paint
Meeting Space: Sheetrock/vinyl/paint
Guest Rooms: Sheetrock on metal studs with wall vinyl
Corridors: Sheetrock on metal studs with wall vinyl
PROPERTY INSPECTION
We completed an in-depth tour of the property's
physical plant including 1) the property exterior and parking
lot; 2) the public space, lobby, meeting space, and food and
beverage facilities; and 3) the back-of-the-house space including
kitchens, storage rooms, housekeeping, laundry, administrative
offices, and mechanical and electrical equipment.
Renovations to the subject property were underway
in various stages at the time of inspection. These renovations
included, but were not limited to, guest-room soft goods,
replacement of wall lamps, guest-room walls, in-room-safes,
in-room refrigerators, painting of the exterior columns, and
landscaping. The roofing was under final stages of being approved
for major renovation. A Teine Lock electronic lock systems were
installed in 1993.
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We toured three guest rooms (343, 507, and 742)
that reflect different phases of renovation. The hotel is
undergoing a soft good renovation in both renovated and
unrenovated rooms that were toured. Due to the high level of
humidity, moldiness has historically been a problem at the
subject property. Some wall vinyl was pealing, curling, and
staining due to the mildew. Management is in the process of
replacing the wall vinyl with a mold-resistant textured wall
treatment. The individual HVAC units emit condensation which
leaks across the concrete guest room walkways. Over the years,
this leakage has resulted in the erosion of the concrete slabs
which is unattractive. This erosion does not appear to present a
hazard.
In addition, there are 21 exterior stairwells in
guest room buildings and two in the commercial building. The
walkways connecting the different buildings are poured concrete
slabs supported by corrugated metal buried in concrete. The
exterior columns were repainted in early 1996 and landscaping
program was on-going.
PAST RENOVATION AND CAPITAL REQUIREMENTS
The following section covers some of the major
renovation programs at the subject Sheraton in the past three
years. The subject property underwent a significant renovation in
1993 that included the upgrade of much of the existing
facilities.
Mattress springs were rebuilt in 1995 and 1996 and this
reconstruction should extend the life of each mattress for
another four to five years. Management indicated that this
process helps to extend usage at a third of the cost of
purchasing new mattresses. Carpet for the 176 guest rooms in the
four buildings (these four buildings were excluded from the 1993
renovation as they were built in 1982) were replaced in 1996.
Wall lamps were currently in the process of being
replaced with bedside lamps. The guest room wall vinyl was in the
process of being treated to fight moldiness and brighten the
room. Exterior columns have been repainted in early 1996. One
hundred
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poolside/lakeside rooms are scheduled for renovation in
1997. These rooms show signs of wear and tear due to higher usage
as they are in higher demand. The soft goods in the guest rooms,
including bed covers and drapery are scheduled for replacement.
The parking lot was resealed in 1995 and is scheduled
to be resealed in 1997. A master plan to replace the roofing for
the buildings is in the process of being approved. The commercial
building roof is planned to be replaced in 1997. Building 15 and
the laundry building's roofs were replaced with three-ply, hot
mopped asphalt in 1995. The current roofs are built-up asphalt
with rock ballast.
- -------------------------------------------------------------------------------
Historical and Budgeted Capital Expenditure
Sheraton Inn Lakeside
1993 1994 1995 1996 1997 Budgeted
Rooms &
Corridors $1,126,868 $32,404 $31,375 $575,915 $695,725
Public Areas 22,331 5,603 67,965 84,160 232,300
Back of House 46,960 397,479 10,721 155,139 69,294
------ ------- ------ ------- ------
Total $1,196159 $435,486 $110,061 $815,214 $997,319
% of Revenue 8.7% 3.5% 0.9% 6.1% 7.0%
- --------------- -------- ---------- -------- ------- ---------
Source: Richfield Management
Reserve for replacement of FF&E on the basis of
management contract is four percent. We have assumed capital
expenditures of $940,000 in 1997 and $370,000 in 1998 above and
beyond the assumed annual reserve of four percent. This estimate
is assumed to bring the property to a level where it can
effectively maintain and achieve the operating performance
estimated. Based on our inspection of the property, we believe
that the property is in need of replacing roofs of all but two
buildings (laundry building and building 15). We have assumed
that the replacement will occur during 1997 and 1998. 200 new
toilets were replaced in 1996 and additional toilets are assumed
to be installed by 1998. The guest room wall treatment is assumed
to be finished in 1997. The additional $1.3 million capital
expenditure during 1997 and 1998 is assumed to cover the above
costs and maintain the subject's competitiveness in the market.
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PROPERTY TAXES
The subject property is under the taxing jurisdiction
of Osceola County Taxing Authority. Real estate taxes are
assessed on a calendar year basis and are payable annually.
Personal Property taxes (furniture, fixtures, and equipment) are
also assessed on a calendar year basis and are payable annually.
Other taxes include a Business Occupational Tax, Fire and Rescue
(FR) Funding Tax, Intangible Tax, and the US-192 Beautification
Tax. If the taxes are paid in the December of the tax year, the
hotel receives a four percent discount on the taxes billed. We
have assumed that the management will take advantage of this
discount throughout the projection period.
Real Estate Taxes
Taxing Jurisdiction: Osceola County
Tax Account Number: R032527-000000110000
R032527-000000960000
R032527-000000190000
Current Tax Year: January 1, 1996 to December 31, 1996
Tax Rates Established: The current tax rate was established
in 1995 with no increase in 1996 and
the rate increase is expected to be
minimal in 1997.
Current Tax Rate: $17.3785 per $1,000 of assessed value.
Assessments Established: The assessed value of the hotel for
tax purposes is assumed to be 100
percent of market value.
Reevaluations: The market value of the property is
reassessed every year. Commercial
properties are appraised
annually utilizing the income
approach. Based on the operating
performance of the subject hotel,
the value will fluctuate to
reflect both positive and negative
growth. The sales comparison
approach is taken into consideration
with more emphasis on the
income approach.
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The following table illustrates the computation of the
real estate taxes for the last three years.
- ---------- --------------- -------------- ---------------- ---------------------
Year Assessed Tax Rate Real 4% Discount
Value Estate Taxes to Taxes
- ---------- --------------- -------------- ---------------- ---------------------
1994 17.3085 not taken
$24,751,677 $428,424
1995 17.2745 $400,635
24,158,631 417,328
1996 17.3785 404,209
24,228,247 421,051
- ---------- ------------ ------------ ---------------- -----------------
Source: Tax Appraiser's Office
In the State of Florida, real estate taxes are eligible
for a four percent discount if the bills are paid by the December
of the tax year. Based upon our interviews with management, we
have assumed that the subject hotel will continue to take
advantage of this discount in the projection period.
The projected property taxes reflect the estimated
operating results of the Sheraton Inn Lakeside. The tax rate has
changed at a compound annual rate of .02 percent from 1994
through 1996. On the basis of this, we have assumed the tax rate
to remain at its current rate over the projection period and is
increased at an inflationary rate. The property value is
reassessed every year and is influenced by the hotel's operating
performance. We have assumed an increase and then a decrease in
the property's assessed value over the projection period. This is
based on the anticipated market conditions and increased demand
that will largely drive the hotel's revenues. With the strong
market conditions expected in the next three years to come, we
have estimated an increase of five percent increase in the
assessed value in 1997, 2.5 percent in 1998 and 1999. In years
2000 and 2001, assessed value was estimated to decrease by two
percent due to relatively moderate projected market conditions.
Personal Property Taxes
Taxing Jurisdiction: Osceola County
Tax Account Number: P0000-7608-000000
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Current Tax Year: January 1, 1996 to December 31, 1996
Tax Rates Established: The current tax rate had been established
in 1995 with no increase in 1996 and the rate
increase in 1997 is expected to be minimal.
Current Tax Rate: $17.3785 per $1,000 of assessed value.
Assessments Established: The assessed value for tax purposes
is assumed to be 100 percent of market value.
Reevaluations: The market value of the property is reassessed
every year.
The following table illustrates the computation of the
personal property taxes for the last three years.
- --------- ---------------- ------------- ---------------- ---------------------
Year Assessed Tax Rate Real 4% Discount
Value Estate Taxes to Taxes
- --------- ---------------- ------------ ----------------- ---------------------
1994 1,918,057 17.3085 $33,199 not taken
1995 2,202,851 17.2745 34,598 $33,214
1996 1,797,393 17.3785 32,236 29,987
- --------- --------------- ----------- ---------------- --------------------
Source: Tax Appraiser's Office
As with property taxes, in the State of Florida,
personal property taxes are eligible for a four percent discount
if the bills are paid prior to the December of the tax year.
Based upon our interviews with management, we have assumed that
the subject hotel will continue to take advantage of this
discount in the projection period.
The subject hotel files a return every year with the
Tax Appraiser's Office of the self-assessed value of all tangible
and personal property. The Personal Property department of the
tax authority calculates the taxes due based on this filed value.
The assessment is made every year. The tax rate has changed at a
compound annual rate of .02 percent from 1994 through 1996. On
the basis of this, we have assumed the tax rate to remain at its
current rate. We have assumed an increase and then a decrease in
the personal property's assessed value much like that of the real
estate's value change over the projection period.
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With the strong market conditions expected in the next
three years to come, we have estimated an increase of five
percent increase in the assessed value in 1997, 2.5 percent in
1998 and 1999. In years 2000 and 2001, assessed value was
estimated to decrease by two percent due to relatively moderate
projected market conditions.
OTHER TAXES
The property is subject to four other taxes: FR Taxes,
Business Occupational Tax, Intangible Tax, and the US-192
Beautification Tax. These taxes are levied on annual basis and
each tax has different tax rates. FR Taxes are levied annually on
vacant or improved land and it is a funding for fire and rescue.
The rates for FR Taxes are $16.50 per acre in 1996. There were no
increase in rates between 1995 and 1996, and the rate was raised
in 1995 by 18 percent over the 1994 rates. According to the
Special Assessment Division of the Tax Appraiser's Office,
minimal increase is expected in 1997.
Business Occupational Tax is a set-amount, license fee
that is levied on the number of hotel rooms and each F&B outlet.
This is an annual tax whose taxing authority is the Department of
Business and Professional Regulation, Division of Hotel and
Restaurants in Tallahassee. Intangible Tax is another annual tax
that is levied on the total dollar amount of Loans, Notes, and
Account Receivable that the hotel holds. The rate for Intangible
Tax is .002 percent of the total amount.
In 1996, the local Beautification Tax was established
to fund aesthetic improvements along the US-192 corridor. This is
a 20-year project with multiple phases that is funded by a tax
imposed on commercial and retail property owners along US-192 to
support improvements. The US-192 corridor has been zoned into
five areas that will be taxed at varying levels.
Currently, the taxes that are levied for the US-192
Beautification Tax are for Phase 1 Capital and Phase 1
Maintenance. Phase 1 Capital is the funding necessary to
redesign the area, construct new signage, install tropical
landscaping, and place brick sidewalks
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in the area. Phase 1 Maintenance is the funding needed
to maintain these facilities. Due to the longevity of the
project, the assessment division was unable to provide us with
specific rates going forward as 1996 is the first year for this
tax. The master plan is anticipated to be worked out over the
next two years.
In projecting forward, we have estimated the Other
Taxes by assuming the current tax rate throughout the projection
period. The Other Taxes are calculated in the same manner that
the real estate and personal property taxes are calculated. As
indicated earlier, the income approach is utilized in estimating
the assessed value.
ZONING
The subject hotel is currently zoned as an Agricultural
Conservation/Tourist Service Center (AC/TSC). The technical
zoning is a hybrid that designates the area with TSC use on an AC
zone. The TSC zoning includes hotels, motels, restaurants, gift
shops, and timeshare developments. The AC/TSC is a conditional
use, which entails that change in use must be approved by local
government.
Restrictions and Requirements
There are no apparent limitations to the building area
or height of structures within the TSC zoning ordinance. However,
the TSC zoning designation is subject to conditional use
limitations. As indicated earlier, developments planned on
conditional-use properties require review and recommendation by
the Planning Commission and must be approved by the Board of
County Commissions.
The following summarizes the restrictions and
requirements that the subject Sheraton Inn Lakeside must conform
to under its existing zoning.
- Land area of not less than 3.5 acres;
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- Building setback lines from US-192 not less than 50
feet unless greater setbacks are required by
State law or by other local ordinances and
resolutions;
- Open spaces between the right-of-way of all other
thoroughfares and building setback lines
shall not be less than 25 feet;
- Open spaces between adjacent property lines and
building setback lines shall not be less
than 25 feet; and
- Over-development of the landscape with buildings,
structures and paving is not permitted.
On the basis of the zoning code, the property site
plan, our physical inspection of the subject property, and
discussions with local zoning representatives, the property
appears to be in conformance with all general and specific zoning
requirements.
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B.2 AREA ANALYSIS
The Area Analysis provides information on market
conditions as they currently exist in the Kissimmee/Orlando area.
Economic and sociological trends provide insights relating to the
strength of the local market area; a review of such trends has
been completed to direct and support our estimates of future
market growth in the lodging industry.
The following section of the report outlines general
trends in the market. We consulted with the Chamber of Commerce,
Convention and Visitors Bureau, and other local sources for much
of the following information. When possible, information was
verified directly from the primary sources.
The subject hotel is located in Kissimmee, Florida. The
subject's lodging market is near Walt Disney World's Maingate and
is one of the Orlando's primary lodging submarkets. Interstate 4
connects Kissimmee to Orlando and the other two important lodging
submarkets; Lake Buena Vista and International Drive. Kissimmee
is located in Osceola County.
The Orlando MSA comprises: Orange, Osceola, and
Seminole Counties and includes the City of Orlando. Orlando MSA
covers approximately 2,558 square miles (sq.mi.) in Orange (910
sq.mi.), Seminole (298 sq.mi.), and Osceola (1,350 sq.mi.)
Counties. Orlando is located 135 miles south of Jacksonville, 85
miles northeast of Tampa, and 185 miles north of Miami. The
physical and economic forces that have historically shaped the
Orlando market includes the presence of Walt Disney World, Sea
World, Universal Studios, and other tourist attractions.
Originally an agricultural area, Orlando began diversifying in
1956 when the predecessor of the Martin Marietta corporation
opened a defense plan and brought 11,000 skilled employees to the
area. The most significant economic impact occurred in 1971 when
Walt Disney World opened.
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ECONOMIC AND DEMOGRAPHIC INDICATORS
This section summarizes historical trends in several
key economic and demographic indicators in the Kissimmee market
area. The following table presents historical trends in
population, retail sales, eating and drinking sales, and median
household effective buying power.
- --------------------------------------------------------------------------------
Summary of Economic and Demographic Statistics
For the Subject Hotel's Market Area
CAG (1)
1990 1995 1990-1995
---- ---- ---------
Population (000's)
Osceola County 111.8 138.5 4.4%
Orlando MSA 1,104.8 1,416.7 5.1%
Florida 13,218.3 14,348.1 1.7%
United States 250,812.0 264,900.9 1.1%
Retail Sales ($000's)
Osceola County $866,824 $1,439,914 10.7%
Orlando MSA 9,895,768 15,104,519 8.8%
Florida 105,303,987 145,664,914 6.7%
United States 1,807,182,519 2,355,241,609 5.4%
Eating & Drinking Sales
($000's)
Osceola County $160,689 $238,772 8.2%
Orlando MSA 1,240,059 1,856,279 8.4%
Florida 11,008,331 14,261,133 5.3%
United States 182,107,195 241,780,257 5.8%
Median Household Effective
Buying Income (EBI)
Osceola County $20,621 $28,483 6.7%
Orlando MSA 28,067 32,933 3.2%
Florida 25,914 29,664 2.7%
United States 27,912 32,238 2.9%
Source: Sales and Marketing Management, Survey of Buying Power.
Note: (1) Compound Annual Growth
- --------------------------------------------------------------------------------
Population
Population growth has been exceptional within the
Orlando MSA since the opening of Walt Disney World on October 1,
1971. Between 1970 and 1980, the population
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increased by 54.5 percent and increased another 69.7
percent between 1980 and 1993. The tremendous growth has fueled
and supported the growth in service businesses. The growing
presence of movie studios is also cited as the reason for recent
growth in the economy. The compound annual growth (CAG) in the
Orlando MSA population between 1990 and 1995 was 5.1 percent.
Population projections by Woods and Poole Economics, Inc.
indicate that as the Orlando economy begins to mature and
broaden, the growth rate is expected to moderate over the next
three years to a rate of about 2.5 percent. As population growth
rate declines, regional labor supply tightens and
service-dependent businesses may compete for fewer available
people. On a positive note, infrastructure capacity may not be as
heavily taxed as it develops on a more concurrent basis with the
slower growth in population.
Growth of the population in Osceola County has been
slightly lower than that of the MSA as a whole. Between 1990 and
1995, population in Osceola was 4.4 percent (compared to the
Orlando MSA at 5.1 percent). This growth; however, is
significantly higher than that of Florida and the US which
increased at an average annual rate of 1.7 and 1.1 percent,
respectively during the same period.
Retail Sales
The 10.7 percent compound annual growth rate in retail
sales in Osceola County between 1990 and 1995 outpaced those of
the Orlando MSA, Florida, and US. The tremendous growth in retail
volume may be attributed to the population growth as well as the
strong tourism base. The high concentration of retail and
restaurant establishments has also benefited from the recent
surge in lodging and tourism demand. With the optimistic outlook
for tourism growth in the foreseeable future, this trend is
expected to continue for the next few years.
Eating and Drinking Sales
The sales at eating and drinking places within Orlando
MSA reflected the highest compound annual growth rate at 8.4
percent. Osceola County was a close second at 8.2
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percent, outpacing those of Florida and US. The strong growth in the
area's economy has been well supported by the growth in
employment, population and continued commercial development. With
the completion of planned expansion and other attractions in
Metro Orlando area, the positive growth is expected to continue
for the near term.
Median Household Effective Buying Income (EBI)
The EBI in Osceola County was significantly higher than
those of Orlando MSA, Florida and US. This may indicate that the
local market area has begun to attract upscale residential
development in the recent years. Celebration, a self-contained,
residential community planned by Disney is currently under
development in Osceola County. This project is expected to
continue to attract a more affluent community to Oceola County.
In 1990, Osceola County's EBI was well below the national
average, but in 1995, the gap has closed significantly.
EMPLOYMENT
Employment and Unemployment
Trends in employment are an excellent indicator of the
overall health of a local economy. The following table presents a
summary of the trends in employment and unemployment in the local
market area for the last several years.
- ----------------------------------------------------------
Growth in Employment and Unemployment
Orlando MSA
- ----------------------------------------------------------
Labor Total Empl. %
Force Unempl.
---------------- --------------------- ----------------
1990 680,176 644,127 5.3%
1991 677,265 633,243 6.5%
1992 688,347 634,146 7.2%
1993 723,264 678,422 6.2%
1994 742,994 701,387 5.6%
1995 751,170 717,367 4.5%
CAG* 2.0% 2.2%
- ------------------------------------------------------------------
Source: Economic Development Commission of
Mid-Florida, Inc.
<PAGE>
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Metro Orlando is one of the fastest growing major
employment markets in the nation and is projected to be a leader
in employment growth through the year 2010. Woods and Poole
Economics, Inc. ranks Orlando first among 40 metropolitan areas
as both a population-growth center and an employment-growth
center. Between 1995 and 2005, Woods and Poole projects the
Orlando area will have 28 percent (2.5 percent CAG) growth in
employment and 33.4 percent (2.9 percent CAG) growth in
population. The unemployment rate in the Orlando MSA has declined
steadily over the past five years and this trend is expected to
continue through the year 2000.
Employment by Industry Sector
Employment by industry sector details the number of
individuals employed in a market area by each major industry
category. An analysis of the trends in employment by industry
sector can provide insights on which are the most important
industries in the local market area and which sectors have
reflected recent growth or declines. The following table presents
a summary of trends in employment by industry sector for the
Orlando MSA.
- --------------------------------------------------------------------------------
Employment by Industry Sector (1990-1994)
Orlando MSA (in thousands)
- --------------------------------------------------------------------------------
1990 1994 % Change
----------------- ------------------ ------------------
Manufacturing
58.3 50.6 -3.5%
Construction
39.4 36.4 -2.0%
Transportation,
Communication & Util. 31.7 38.3 4.8%
Finance, Insurance
& Real Estate 35.8 41.5 3.0%
Trade 159.3 169.0 1.5%
Services 212.5 271.1 6.3%
Government 73.2 79.4 2.1%
---- ---- ----
Total Employment 610.6 686.8 3.0%
- --------------------------------------------- ------------------ ---------------
Source: Florida Department of Labor and Employment Security: DRI/McGraw -
Hill US Market Review
The services sector comprises approximately 40 percent
of the employees in Orlando MSA in 1994. The lodging and
entertainment industry acts as a huge draw to the area
<PAGE>
Page 29
and is the primary cause of population and employment growth. At the current
growth rate, the metro area will add about 152,000 new jobs
between 1994 and 1998.
Major Employers
The following table summarizes the largest employers in
the Orlando MSA (1996).
- ----------------------------------------- -------------------------------------
Company Name No. of Employees
Walt Disney World Co. 36,000
Publix Super Markets, Inc. 10,480
Florida Hospital 8,523
Orlando Regional Healthcare System 7,131
AT&T 6,000
Winn Dixie Stores, Inc. 5,374
Universal Studios Florida 3,900
Lockheed Martin Electronics & Missiles 3,777
Columbia Park Health System 3,500
Sprint/United Telephone- FL 3,086
Wal-Mart 2,800
Sea World of Florida 2,700
- ------------------------------------------------------------------------------
Source: Opportunity Orlando 1996
Orlando's largest employer is Walt Disney World which
is also the primary demand generator for lodging demand. The size
of the travel/leisure industry plays a major role in the MSA's
growth. With the number of planned expansion and new tourism
projects proposed in the area (see Tourism section to follow),
the employment trends appear very promising.
TRANSPORTATION
Transportation is becoming increasingly important to
the Orlando area. The availability of transportation in a
tourism-based economy is crucial. The expansion of the Orlando's
International Airport is expected to be beneficial to the tourism
industry.
Orlando's developing distribution industry is due
largely to the region's central location within the state. The
convergence of five major state and interstate roadways, the
availability of rail service, the expanding international and
airport facilities and the
<PAGE>
Page 30
coastal shipping facilities at Cape Canaveral (less
than one hour east of Orlando) have helped to establish the area
as a major distribution hub for the state.
Roadway System and Public Transportation
Orlando's infrastructure is moving forward to meet the
demands of the growing population. Rapid population growth and
ever increasing tourist trade have made the road infrastructure
one of the most important issues in Orlando. The traffic along
most of the major thoroughfares are heavily congested at
rush-hour and with the expected increase in tourist demand, the
situation is not expected to improve. A proposal for a high-speed
magnetic transit system (Florida Overland Express) running
between the airport and I-Drive has received state approval but
remains unfinanced. This project has been stagnate for years with
lack of financing.
Airport
Orlando International Airport is the eighth largest
port of entry for international visitors in the continental US,
accommodating more than 2.4 million international passengers
annually. The airport is served by over 18 airlines and an
average of 850 commercial operations per day, including direct
international flights. It is Florida's top airport in domestic
traffic, with non-stop service to 69 domestic cities.
The Orlando market has been increasing steadily over
the ten-year period between 1985 and 1995 reflecting, a compound
annual growth of 8.4 percent. Between 1985 and 1995, domestic
passenger volume increased at a compound annual rate of 7.6
percent. The airport completed an $800 million expansion
including the construction of a $61 million third runway, two
six-story parking garages with 3,500 spaces, and an expanded
automated transit system. With the expected increase in
tourism-related visitors to greater Orlando area, the Airport is
expected to continue its trend in positive growth.
According to the International Air Transport
Association's March 25, 1996 report, Orlando has the world's
fourth best airport - and was ranked the best in north America
<PAGE>
Page 31
in overall convenience and facilities. In addition, Orlando placed
number one among North American airports for convenient ground
transportation, shopping, and restaurants. The following table
presents passenger activity for the years 1985, 1990, and 1995 at
the Orlando International Airport.
- --------------------------------------------------------------------------------
Trends in Air Passenger Activity at the
Orlando International Airport
- --------------------------------------------------------------------------------
Year Domestic International Total
1985 9,644,959 369,106 10,034,065
1990 16,608,277 1,789,552 18,397,830
1995 20,026,680 2,436,052 22,462,732
Compound Annual Growth
1985 - 1995 7.6% 20.8% 8.4%
1990 - 1995 3.8% 6.4% 4.1%
- --------------------------------------------------------------------------------
Source: Greater Orlando Aviation Authority 1996
TOURISM AND RECREATION
Tourism has played a major role in central Florida's
economic development. Orlando has been, and is expected to
continue to be, one of the most popular tourism and convention
markets in the country as well as the world. The lodging and
related industries have exhibited strong growth due to the
expansion of tourism-related business in the area. Tourism helps
to finance Florida government, since sales taxes paid by tourists
are a major source of revenue to the state's general fund. This
has allowed the state to maintain the second lowest level of
direct taxation on business in the Southeast.
The following table summarizes trends in visitation to the
Orlando area:
<PAGE>
Page 32
- --------------------------------------------------------------------------------
Total Tourist Visitation
Orlando MSA (000's)
- --------------------------------------------------------------------------------
Annual
Year Percentage
Orange Osceola Seminole Total Change
1992 Actual
22,633.5 8,539.2 1,671.9 32,844.5 n/a
1993 Actual
23,071.9 8,639.6 1,528.4 33,239.9 1.2%
1994 Actual
23,895.9 8,586.4 1,478.8 33,961.0 1.2%
1995 Actual
25,742.4 9,566.2 1,655.1 36,963.6 8.8%
1996
Estimated 27,202.0 10,117.6 1,773.8 39,093.4 5.8%
1997
Estimated 27,807.0 10,645.7 1,841.5 40,294.2 3.1%
1998
Estimated 29,257.0 11,160.4 1,931.1 42,348.5 5.1%
1999
Estimated 30,914.2 11,735.9 2,037.7 44,687.8 5.5%
2000
Estimated 31,745.1 12,239.4 2,111.5 46,096.2 3.2%
- --------------------------------------------------------------------------------
* Totals may not add due to rounding.
Source: Orange/Orlando Convention Visitors Bureau,
Fishkind & Associates, Inc.
Attractions
Walt Disney World (WDW) is the single most important
generator of tourist visitation to Orlando and continues to be
the driving force behind Orlando's economic growth. The top three
most visited tourist attractions in the U.S. are Walt Disney
World theme parks, all of which are located in Orlando; EPCOT
Center, MGM Studios and Magic Kingdom. These three parks received
approximately 29 million visitors in 1994.
The Walt Disney World Animal Kingdom, which is expected
to open in 1998, will be the largest of all Disney theme parks in
the world, combining thrill rides, exotic landscapes, and close
encounters with large herds of wild animals. This new attraction
will likely spur an increase in visitation in a manner similar to
the opening of the EPCOT center in 1983. The following table
summarizes the attendance numbers for some of the Orlando's main
attractions and the US theme park rankings.
<PAGE>
Page 33
- ------------------------------------------------------------------------------
Orlando Attraction Attendance (1994) U.S. Theme Park Leaders (1994)
- -------------------------------- ----------------------------------------
- -------------------------------- ----------------------------------------
Attraction Millions Attraction Ranking
Magic Kingdom 11.2 Magic Kingdom - WDW, FL 1.
EPCOT Center 9.7 EPCOT Center - WDW, FL 2.
Disney-MGM Studios 8.0 Disney-MGM Studios -WDW, FL 3.
Universal Studios Florida 7.7 Universal Studios,
Orlando, FL 4.
Sea World 4.6 Sea World, Orlando, FL 5.
Church Street Station 1.5 Universal Studios
Hollywood, CA 6.
Wet'N Wild 1.3 Six Flags Great Adventure,
Jackson, NJ 7.
Disney Typhoon Lagoon 1.2 Busch Gardens, Tampa, FL 8.
Mystery Fun House/Starbase 0.5 Sea World of California,
San Diego, CA 9.
Discovery Island 0.4 Cedar Point, Sandusky,
Ohio 10.
- ------------------------------------------------------------------------------
Source: Orlando/Orange County CVB Source: Amusement Business
Orlando has some of the most diverse and large
attractions in the world in terms of size and the number of
attendees. The following table summarizes the Walt Disney World
Resort's current and proposed main attractions and lodging
accommodations.
- --------------------------------------------------------------------------------
Walt Disney World Overview
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Walt Disney World (WDW) Walt Disney World (WDW)
Resort Main Attractions Lodging Accommodations
- Blizzard Beach - Waterpark - Contemporary Hotel
- Broadway at the Top - Evening entertainment - Grand Floridian
- Character Dining - Day/Evening entertainment - Shades of Green
(military-only hotel)
- Discovery Island - Zoological Park - Polynesian Resort
- Disney MGM Studios Theme Park - Wilderness Lodge
- Disney Village - Restaurants and shops - Ft. Wilderness Resort
& Campground
- EPCOT Center - Theme Park - Dixie Landing Resort
- Hoop-De-Doo Musical Revue -
Evening entertainment - Port Charles Resort
- Disney's Village Resort
- Magic Kingdom Park - Theme Park - Vacation Club Resort
- Mickey's Tropical Luau - Evening
Entertainment - Caribbean Beach Resort
- Pleasure Island - Evening Entertainment - Yacht Club Resort
- WDW BoardWalk Inn
- Polynesian Luau - Evening Entertainment - Beach Club Resort
- River Country - Waterpark - All-Star Sports Resort
- Typhoon Lagoon - Waterpark - All-Star Music Resort
- --------------------------------------------------------------------------------
WDW Proposed Attractions WDW Proposed Lodging Accommodation
- Disney Institute - Disney Institute Hotel (457-rooms)
- WDW 25-year Celebrations (1996-1997) - Disney's Coronado Resort
- WDW Rainforest Cafe & character shop (1,900-rooms & suites)
- WDW Mickey's Toontown Fair - Disney Magic I
at Magic Kingdom (Disney's first cruise ship)
- WDW International Sports Complex - Disney Magic II (Disney's
- WDW Animal Kingdom second cruise ship)
- -------------------------------------------------------------------------------
Source: Orange/Orlando CVB
<PAGE>
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- - The following summarizes some of the current and
proposed attractions excluding the Disney related attractions in
the Orlando area:
- - Universal Studio Florida: A movie studio and theme park
with more than 40 rides, shows, restaurants and shops.
- - Sea World of Florida: A marine life park that features
Shamu, the killer whale, combining entertainment and education.
- - Busch Gardens: An African theme park that features
thrill rides, shows and one of the nation's largest zoos.
- - Kennedy Space Center Spaceport USA: It is the launch
and primary landing site of the US Space shuttle.
- - Typhoon Lagoon: This water park houses the world's
largest wave lagoon.
- - Wet'N Wild: This six-acre water park is adjacent to Silver
Springs and is located on I-Drive.
- - Discovery Island Zoological Park: This park exhibits
many species of mammals, birds, and reptiles.
- - Pleasure Island: An entire island of night time
entertainment featuring bars and restaurants.
- - Guinness Museum of World Records: This museum is slated
to open in 1997.
- - Universal Studio's E-Zone: An entertainment complex
with nightclubs and bars.
- - Universal Studio's Island of Adventure: The second gated
attraction for Universal with themes including Seuss
Landing, Popeye and Pals, Marvel Comics Characters and
Jurassic Park.
Spectator Sports
Walt Disney Co. is building an $87 million multi-sports
facility, the International Sports Complex in Osceola County,
which will open in 1997. This sports complex is expected to
induce a significant number of room nights to the area over the
projection period. The Atlanta Braves will begin spring training
at the new complex in 1998. The Amateur Athletic Union (AAU)
moved its operations from Indianapolis to Orlando in early 1996.
Orlando is the home of the Orlando Magic, Orlando Cubs, and
Orlando Solar Bears.
<PAGE>
Page 35
CONVENTION AND TRADE SHOW MARKET
Statistics provided by the Orlando/Orange County
Convention and Visitors Bureau confirm the area's growing
importance as one of the nation's premier meeting and convention
destination. The convention center was built in four phases. Upon
the completion of the Phase one retrofit of the convention
center, it will rank as the sixth largest convention destination
in the country with 1.1 million sq.ft. of dedicated meeting
space.
In March, 1978, Orange County Board of Commissioners
enacted a County Ordinance to establish a Tourist Development
Council, provide a referendum for a Tourist Development Tax, and
adopt a Tourist Development Plan. Seventy acres of land was
donated by Orlando Central Park. The current convention center
opened in 1988 at 180,000 sq. ft. During the various phases of
expansion, Orlando has managed to grow and strengthen its
position as one of the top convention and meeting destinations.
The convention center expanded twice in 1996, the first phase in
January, and the second phase in August. The Phase one retrofit
will bring the building built in Phase one into compliance and
conformance with the current life safety codes. The following
table summarizes the different timing and the added space of each
phase.
- --------------------------------------------------------------------------------
Orange County Convention Center
- --------------------------------------------------------------------------------
Date Cost Exhibit Space Meeting Space Total
(Sq. Ft.) (Sq.Ft.) (Sq. Ft.)
Finished (million)
------------- -------------- -------------- -------------- ---------
Phase 1
Feb/1983 $54.0 150,000 30,000 180,000
Phase 2
Jan/1989 83.5 150,000 50,000 380,000
Phase 2-A
Dec/1990 13.0 105,000* 380,000
Phase 3
Jan/1996 205.0 433,400 813,400
Phase 4
Aug/1996 210.0 367,200 1,180,600
Phase 1
Retrofit** Jan/1998 26.0 1,100,600
- --------------------------------------------------------------------------------
* Renovated lobby, registration, Vietnam Memorial Courtyard, and a
new box office
**It requires to bring Phase 1 buildings into compliance and
conformance with Life Safety Codes.
Source: Orange/Orlando CVB
According to the CVB officials, seasonality in demand
is diminishing as Orlando becomes a year-round meeting
destination. The two peak seasons for meetings in
<PAGE>
Page 35
Orlando are
from January to March and from September to October. The spring
peak season typically has the highest number of meetings and the
fall season, especially September, has historically exhibited the
highest average number of delegates per meeting.
In 1995 Orlando hosted 17,951 meetings and trade shows.
This represented a 20 percent increase in the number of meetings
and trade shows over 1994 and a 90 percent increase since 1990.
- -------------------------------------------------------------------
Growth in Convention and Trade Show Demand
Orlando MSA
- -------------------------------------------------------------------
Number of Number of
Meetings Delegates
----------------------------------------------------
1,265,680
1990 9,490
1,308,887
1991 9,869
1,406,000
1992 10,036
1,435,158
1993 12,796
2,085,519
1994 14,952
2,667,807
1995 17,951
- -------------------------------------------------------------------
Source: Orlando/Orange County Convention Visitor Bureau
The expansion of the convention center is expected to
support growth in terms of both the number of meetings hosted and
the number of average size of meetings. This is expected to
enable the center to compete for large national conventions with
destinations such as Dallas, Chicago, New York, and New Orleans.
The expansion should also enable the center to host a large
number of "dark days," when some events may be "setting up" while
other programs are running.
Convention demand is accommodated primarily in the
I-Drive and Lake Buena Vista markets and rarely overflows to the
subject's submarket. However, increased convention demand in the
I-Drive and Lake Buena Vista lodging markets results in displaced
leisure and wholesale demand. These are the two segments that the
subject's submarket have historically focused on. With the
anticipated increase in convention demand, the subject's
submarket will benefit from the displaced demand.
<PAGE>
Page 37
CONCLUSION
By any definition a boomtown, Orlando MSA has
experienced a heavy level of growth in the past decade,
transforming Central Florida into an internationally recognized
metropolitan area. As one of the most dynamic and diverse markets
in the nation, the area steadily attracts new residents and new
and existing businesses. The number of developments outstanding
for the next three years to come will sustain Orlando's
tremendous growth levels of the past decade. The growth in
lodging demand for the area will support a strong economy but the
Orlando MSA will continuously have to reinvent and promote new
attractions to maintain its level of high demand to the area.
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B.3 HIGHEST AND BEST USE ANALYSIS
The validity of an appraisal is dependent upon the
consideration and conclusion of highest and best use2 . Often
expressed as "the most profitable legal use," the concept
requires a thoughtful analysis of many factors. Vacant land value
is directly related to its highest and best use. On the other
hand, an improved property may have the same or a different
highest and best use than the land supporting the improvements
when considered as vacant land. Therefore, for improved property,
both highest and best use decisions must be separately
considered, both as vacant land and as improved property. In
addition to a conclusion for both the vacant land and improved
property, sale and lease comparisons are usually made with
properties having similar highest and best uses as the subject.
The parameters for consideration relate to legality of
use, physical possibilities, financial feasibility, and maximum
economic production. Single uses, interim uses, legal
non-conforming uses, speculative uses or excess land
determinations require further analysis.
HIGHEST AND BEST USE OF THE LAND AS IF VACANT
Legally permissible uses are those limited by zoning,
easements and rights-of-way, deed restrictions, building codes,
and environmental controls. These restrictions have been
discussed in Section B.1 (Description and Analysis of the
Property). As mentioned earlier in the zoning section of this
report, the subject site is zoned AC/TSC.
- ----------------
2 Highest and Best Use: " the reasonably probable and
legal use of vacant land or an improved property, which is
physically possible, appropriately supported, finacially
feasible, and that results in the highest use. (American
Institute of Real Estate Appraisers, The Dictionary of Real
Estate Appraisal, Second Edition, Copy right 1993, Page 171
<PAGE>
Page 39
Physically possible uses are limited by size, design,
topography, flood possibilities and physical capacities. The
subject site contains approximately 1,166,101 square feet, or
26.77 acres. It is slightly irregular in shape, with a vacant out
parcel of approximately two acres.
Drainage and topography are acceptable for a variety of
uses as are the shape and frontage of the site. Although we are
unqualified to render an opinion of the physical load-bearing
capacity of the land or its freedom from hazardous materials, no
nuisances were obvious at the time of inspection.
Financially feasible uses must be supported by
sufficient demand in the neighborhood to create a sufficient
return to invest over the long term. In analyzing each highest
and best use alternative, the income potential from those legally
permissible and physically possible uses were considered. The
income from the highest and best use should be sufficient to
satisfy investor requirements and operating expenses, thereby
providing a return on the land.
Predominant land uses in the neighborhood provide
indications of profitable land uses for the location of the
subject property. The subject property is located along the
US-192 "strip" that offers a number of lodging and retail
facilities. Development in this area is oriented toward
retail-intensive and lodging use, such as shopping malls,
restaurants, hotels, and other retail uses. A number of uses,
including hotel, would conform with the subject's surrounding
development.
Hotel average daily rates (ADR) and occupancies are
currently stronger than the past year in the subject
neighborhood. Average rates among the subject's competitive set
range from $45 to $60 while occupancies range from 75 percent to
85 percent. The Disney attractions in Orlando area as well as the
positive market movement are the driving forces behind this
market. In researching operating statistics for the local market,
as well as national averages, both through property surveys and
published investor surveys, as well as analyzing the income
potential from these property types, it is our opinion that hotel
use is financially feasible. Therefore, we conclude that the
highest and best use of the land as vacant is for some type of
commercial development commensurate with hotel development.
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Page 40
HIGHEST AND BEST USE OF THE PROPERTY AS CURRENTLY IMPROVED
The subject property is currently improved with a hotel
containing 651 rooms. In light of the existing improvements, a
contrast with other uses is made for the optimal use which is
also physically suitable for the site, legally permissible,
economically feasible and the most profitable usage of the site.
As earlier indicated, the highest and best use of a
property as improved may differ from the highest and best use of
the land as if vacant. The "as improved" analysis assists in the
identification of the use that is projected to provide the
greatest overall property return on invested capital, as well as
in the identification of comparable properties. Typical choices
for improved property include the following usage alternatives:
1. Demolition of the improvements
2. Remodeling or renovation
3. Continued usage, as is
The four tests of highest and best use are applied to
each of the above alternatives. All three options are legally
permissible and physically possible. The test of financial
feasibility is that the use must provide a return equal to or
greater than the amount needed to meet all operating expenses,
financial obligations, and capital expenditures. In addition, the
use must be maximally productive, or that use which produces the
highest value, consistent with the rate of return warranted by
the market for that use. Using current investor expectations,
consideration of all three scenarios was made.
<PAGE>
Page 41
Demolition of the Improvements
The implication in a highest and best use analysis is
that the existing improvements should be retained and/or
renovated as long as those improvements continue to contribute to
the total value of the property; or until the return from a new
improvement would more than offset the cost of demolishing the
existing improvements and constructing alternative facilities. An
analysis of the subject property reveals that the existing
improvements do continue to contribute to the overall value of
the subject, with no alternative use available to the site which
would provide a return greater than the return on current
improvements after consideration of the cost to raze the current
improvements and build an alternate use. Therefore, demolition of
the improvements is not considered warranted, nor optimal from a
highest and best use standpoint.
Remodeling or Renovation
Management performs periodic maintenance and
renovations to various parts of the hotel in order to maintain
its competitive nature. The subject property was constructed in
phases between 1973 and 1982. Considering the age and its high
occupancy, the building is in relatively good condition. In 1995
and 1996, individual AC and heating units were replaced in all
guest rooms and new laundry equipment were purchased to increase
efficiency. Guest room carpets were replaced in 1996 and exterior
building columns were repainted. Management is in the process of
securing bids for the replacement of the roofs and this is
scheduled to be completed in 1997. Beyond these improvements,
further major renovation or remodeling of the current
improvements does not appear to be necessary.
Continued Usage As Is
As an alternative to demolition, the existing
improvements could be converted to an alternate use or left
as-is. Again applying the four tests to this premise, it would be
<PAGE>
Page 42
physically possible, as well as legally permissible to convert
the improvements to another use. However, as discussed
previously, the current use as a hotel is the most maximally
productive use available to the property. Obviously then,
converting to an alternative use would lessen the return to the
land, and therefore, any such use would fail to be the most
profitable alternative.
CONCLUSION AND RECONCILIATION OF HIGHEST AND BEST USE
From the three options presented, one remains feasible
for the subject. Demolition of the improvements was eliminated as
an option since the existing improvements provide substantial
contributory value to the property. The current condition of the
subject does not require substantial remodeling and renovation.
Therefore, continued use "as is" is the indicated highest and
best use of the subject as currently improved. Obviously then,
converting to an alternative use would lessen the return to the
land, and therefore, any such use would fail to be the most
profitable alternative. In conclusion, the highest and best use
of the subject property is as currently improved as a mid-priced
resort.
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C. ANALYSIS OF COMPETITIVE LODGING SUPPLY AND DEMAND
C.1 COMPETITIVE LODGING SUPPLY
According to the Orlando and Orange County Convention
and Visitors Bureau, there were approximately 84,323 available
hotel rooms in the Orlando Metropolitan area (including Orange,
Osceola, and Seminole Counties) at the end of 1995. Despite an
economic recession, total available room supply has increased at
a compound annual rate of 3.5 percent between 1989 and 1995. The
following table summarizes the historical growth in overall
available lodging supply in the Orlando Metropolitan Area.
- --------------------------------------------------------------
Historical Trends in Available Supply
Orlando Metropolitan Area
- --------------------------------------------------------------
Available
Room Supply
1989 68,500
1990 76,300
1991 77,511
1992 78,929
1993 80,112
1994 82,000
1995 84,327
- --------------------------- ----------------------------------
CAG* 1990-1995 3.5%
- --------------------------- ----------------------------------
Source: OOCCVB
Note: *Compound Annual Growth
Available supply is located throughout the metropolitan
region; however, there are a number of primary submarkets for the
leisure and tourist demand attracted to the area. The four major
tourist submarkets include Disney, Lake Buena Vista,
International Drive (I-Drive) and the Irlo Bronson Memorial
Highway (US-192). Disney owns and operates 16,300 rooms in and
around its resort complex. These hotels are the most successful
in the Orlando area achieving occupancies over 90 percent at
average rates far above the overall market. Lake Buena Vista is
the second most popular lodging submarket in the area. The hotels
in this submarket are located on Disney-owned land, and
therefore, are subject to zoning and other restrictions set into
place by Disney. However, the affiliation with Disney offers the
hotels in this submarket with benefits:
<PAGE>
Page 44
guests of the hotels in Lake Buena Vista may enter
Disney attractions one hour earlier than the general public and
are provided with frequent shuttle service to and from the parks.
The I-Drive submarket is the third most popular lodging
node in Orlando, primarily due to the large amount of commercial
and retail development and the number of tourist attractions
nearby, including Universal Studio, Wet'N Wild, and Sea World.
US-192 submarket which includes the subject's competitive supply,
benefits from its proximity to the Disney Maingate Entrance. The
availability of good retail, restaurants, and commercial retail
along the US-192, with easy access to Disney attractions make
this submarket desirable to leisure travelers.
The west sections of Disney's Maingate is clustered
with hotels, more retail, restaurants, and resort amenities. The
area east of Maingate has a more suburban appearance with a
higher percentage of residences as US-192 extends east towards
downtown, Kissimmee.
The hotels located in the Lake Buena Vista and the
I-Drive markets are the first to fill during high demand periods
and the average daily rates achieved reflect the premium that
these properties command over the US-192 submarket. The US-192
submarket is considered less desirable than the Lake Buena Vista
properties and the hotels on the International Drive. When
citywide conventions are hosted in Orlando, the convention hotels
(which are located in the I-Drive market) will be the first to
sell out. During convention programs, leisure demand displaced by
these hotels is usually accommodated by the other hotels along
I-Drive and at Lake Buena Vista. After the I-Drive and Lake Buena
Vista submarkets are sold out, the displaced leisure demand
overflows to the US-192 submarket. This pattern of demand
overflow is also the case during high leisure (non-convention)
demand periods.
<PAGE>
Page 45
IDENTIFIED COMPETITIVE SUPPLY
In order to evaluate the subject hotel's position
within the market, we have identified a competitive supply on the
basis of quality and extent of facilities, location, market
orientation, and revenue potential. The subject hotel is located
along US-192, west of I-4 and the Disney Maingate Entrance. We
have identified six hotels that are located along US-192 near the
Maingate Entrance as the competition for the Sheraton Inn
Lakeside. Presented on the following page is a map illustrating
the location of the subject hotel and its identified competitive
supply. The tables on the following pages present pertinent
operating information and facilities descriptions of each
competitive hotel.
<PAGE>
Map of Competitive Lodging Supply
<PAGE>
PROFILE OF COMPETITIVE LODGING SUPPLY
Property Name Sheraton Inn Lakeside
Address 7769 W. Irlo Bronson Memorial
Highway
Opening Year 1973
Affiliation Sheraton Hotels, Inns, Resorts &
All-Suites
Management Sheraton Hotels, Inns, Resorts &
All-Suites
Ownership Lakeside Operating Partnership
Total Number of Rooms
(incl. suites) 651 Rooms
Number of Suites n/a Suites
1996 Published Room Rate Structure Low High
Rack ___ ____
$75.00 $95.00
Estimated 1996 Market Mix Percentage
Wholesale 41%
Leisure Individual Travelers 47%
Groups 12%
Facilities/Amenities
Restaurants Aruba's Island Grill
The Green House
The Corner Market
Lounges Hurricane Sam's Lounge
Total Meeting Space (Sq. Ft.) 1,560 Sq. Ft.
Largest Room/Ballroom (Sq.Ft.) 1,560 Sq. Ft.
Total number of meeting
rooms/divisions 1 Meeting Rooms
Swimming Pool Yes
Exercise Room/Fitness Center n/a
Gift Shop/Newsstand Yes
Guest Services Yes
Complimentary Shuttle to
Disney Attractions? Yes
Estimated Occupancy
-1996 Est. 78%
-1995 Act. 84%
<PAGE>
Estimated Average Room Rate
1996 Est. $50.00
1995 Act $48.00
<PAGE>
<TABLE>
PROFILE OF COMPETITIVE LODGING SUPPLY
<S> <C> <C>
Property Name The Inn at Maingate Holiday Inn Nikki Bird
Address 3011 Maingate Lane 7300 Irlo Bronson Memorial Highway
Opening Year 1984 1974
Affiliation None Holiday Inn Worldwide
Management Oceanic Management Holiday Inn Worldwide
Ownership Maingate Ventures LLP Holiday Inn Worldwide
Total Number of Rooms
(incl. suites) 580 Rooms 529 Rooms
Number of Suites 12 Suites n/a Suites
1996 Published Room Low High Low High
Room Rate Structure ___ ____ ___ ____
Rack $59.00 - $69.00 $79.00 - $89.00 $59.00 $89.00-$119.00
Wholesale $35.00 - $40.00 $35.00 - $40.00 $40.00 $45.00
Estimated 1996 Market Mix Percentage
Wholesale 40% 30%
Leisure Individual Travelers 40% 55%
Groups 20% 15%
Facilities/Amenities
Restaurants Humphrey's Dining Room Angel's Diner
Little Humphrey's Cafe Rock'n Roll Buffet
Harvey's Deli Pizza Hut
Lounges TJ's Lounge Angel's Sports Bar
Total Meeting Space (Sq. Ft.) 3,000 Sq.Ft. 1,700 Sq.Ft.
Largest Room/Ballroom (Sq.Ft.) 600 Sq.Ft. 1,450 Sq. Ft.
<PAGE>
Total number of meeting
rooms/divisions 6 Meeting Rooms 2 Meeting Rooms
Swimming Pool Outdoor 3
Exercise Room/Fitness Center Yes n/a
Gift Shop/Newsstand Yes Yes
Guest Services Yes Yes
Complimentary Shuttle to
Disney attractions? Yes Yes
Estimated Occupancy
1996 Est. 75% 85%
1995 Act. 63% 73%
Estimated Average
Daily Room Rate
1996 Est. $45.00 $49.00
1995 Act. $47.00 $49.50
<PAGE>
PROFILE OF COMPETITIVE LODGING SUPPLY
Property Name Holiday Inn at Maingate West Hilton Gateway
Address 76011 Black Lake Road 7470 West Irlo Bronson
Memorial Highway
Opening Year 1990 1973
Affiliation Holiday Inn Worldwide Hilton Hotels Corporation
Management Holiday Inn Worldwide Hilton Hotels Corporation
Ownership Holiday Inn Worldwide Global Management
Total Number of Rooms
(incl. suites) 287 Rooms 500 Rooms
Number of Suites n/a Suites 21 Suites
1996 Published Room Low High Low High
Room Rate Structure ___ ____ ___ ____
Rack $47.00 $69.00 $60.00 $125.00
Estimated 1996 Market Mix Percentage
Wholesale 40% 35%
Leisure Individual Travelers 45% 35%
Groups 15% 30%
Facilities/Amenities
Restaurants The Palms Restaurant Palms Restaurant
Deli Bar
Lounges Buckingham's Lounge Ficus Lounge
Total Meeting Space (Sq. Ft.) n/a Sq.Ft. 6,800 Sq.Ft.
Largest Room/Ballroom (Sq.Ft.) n/a Sq.Ft. 1,998 Sq. Ft.
<PAGE>
Total number of meeting
rooms/divisions n/a Meeting Rooms 6 Meeting Rooms
Swimming Pool Yes 2
Exercise Room/Fitness Center n/a Yes
Gift Shop/Newsstand Yes Yes
Guest Services Yes Yes
Complimentary Shuttle to
Disney attractions? Yes Yes
Estimated Occupancy
1996 Est. 83% 80%
1995 Act. 76% 72%
Estimated Average
Daily Room Rate
1996 Est. $48.00 $51.00
1995 Act. $47.00 $49.00
<PAGE>
PROFILE OF COMPETITIVE LODGING SUPPLY
Property Name Ramada Inn Resort Holiday Inn Hotel and Suites
Address 2950 Reedy Creek Blvd. 5678 Irlo Bronson Memorial Highway
Opening Year 1973 1973
Affiliation Ramada Franchise Systems, Inc. Holiday Inns Worldwide
Management Ramada Franchise Systems, Inc. Holiday Inns Worldwide
Ownership Samoth USA Maingate Management
Total Number of Rooms
(incl. suites) 391 Rooms 614 Rooms
Number of Suites 4 Suites 54 Suites
1996 Published Room Low High Low High
Room Rate Structure ___ ____ ___ ____
Rack $49.00 $79.00 $125.00 $135.00
Wholesale $25.00 - $35.00 $35.00 - $45.00 $65.00 - $79.00 $69.00 - $99.00
Group $35.00 - $40.00 $35.00 - $15.00 $45.00 - $60.00 $55.00 - $65.00
Estimated 1996 Market Mix Percentage
Wholesale 39% 25%
Leisure Individual Travelers 41% 65%
Groups 20% 10%
Facilities/Amenities
Restaurants Cafe Terrace The Vinyard Cafe
Oasis Snack Bar Food Court
Lounges The Lounge n/a
Total Meeting Space (Sq. Ft.) 5,050 Sq.Ft. n/a/ Sq.Ft.
Largest Room/Ballroom (Sq.Ft.) 2,230 Sq.Ft. n/a Sq. Ft.
<PAGE>
Total number of meeting
rooms/divisions 3 Meeting Rooms n/a Meeting Rooms
Swimming Pool 2 2
Exercise Room/Fitness Center Yes Yes
Gift Shop/Newsstand Yes Yes
Guest Services Yes Yes
Complimentary Shuttle to
Disney attractions? Yes Yes
Estimated Occupancy
1996 Est. 80% 85%
1995 Act. 71% 79%
Estimated Average
Daily Room Rate
1996 Est. $48.00 $60.00
1995 Act. $42.50 $50.50
</TABLE>
<PAGE>
Page 51
The following paragraphs describe these properties and
how they compete with the Sheraton Inn Lakeside.
The Inn at Maingate
This property is an interior-corridor, high-rise
structure located approximately one-fourth of one mile from the
subject Sheraton. In the past, this hotel was direct competition
for the subject. After the termination of the Radisson
affiliation in early 1996, the property was operated as an
independent property. The loss of the major chain affiliation has
negatively impacted the hotel's operating performance and its
ability to compete. Management indicated that in order to support
occupancy after the loss of the Radisson affiliation, they were
forced to more aggressively market to the group and wholesale
segments of demand. The hotel competes with the subject property
for wholesale and tour group demand.
GENCOM is reportedly in the process of purchasing the
property and is scheduled to close the transaction in January
1997 at a cost of $25 million. The new owners plan to convert the
hotel to a DoubleTree affiliation. The property is in need of
renovation and the new owners are considering an $8 million
renovation of the existing facilities and an addition of 20,000
sq.ft. of dedicated meeting space.
Holiday Inn Nikki Bird Resort
This property is the closest hotel (along US-192 West)
to the Disney Maingate Entrance. As a result, when the hotel was
built in 1974, it was named the Holiday Inn Maingate. In 1990,
another Holiday Inn hotel was developed in the market area and
was referred to as the Holiday Inn Maingate West. To avoid
confusion, management changed the name of the property to the
Holiday Inn Nikki Bird Resort; the Nikki Bird refers to a parrot
mascot theme which is prevalent throughout the hotel.
Page 52
The hotel is in good condition. Similar to the subject,
all guest rooms are located in low-rise, exterior-corridor guest
room buildings. Management indicated that this hotel competes
with the subject primarily for the higher-rated transient leisure
traveler segment of demand.
Hilton Gateway
This property consists of a modern tower building and a
number of low-rise, exterior-corridor buildings. The hotel is
located approximately one-half mile to the east from the subject
property along US-192. The Hilton Gateway is scheduled to convert
to a Ramada Plaza affiliation as of December 1996. Management
indicated that the Hilton franchise has contributed little to the
overall demand accommodated by the hotel. The owners of this
property also own the Ramada Plaza Resort located in the I-Drive
market. This conversion should enable the owners to more
effectively cross-sell the two properties. Traditionally,
management focused on achieving high average rates rather than
occupancy due to the cost of Hilton affiliation - in the past the
hotel has been the market leader in average rates. The conversion
to a Ramada Plaza affiliation is part of management's plans to
reposition the hotel to compete within a moderately-priced
market. Upon completion of its repositioning efforts of the
property, the Ramada Plaza will become increasingly competitive
with the subject hotel for all segments of demand.
Holiday Inn Hotel and Suites
This hotel is located along US-192, approximately four
miles to the east of the Sheraton Lakeside Inn. The neighborhood
surrounding the Holiday Inn is less commercial and more
residential in nature than the subject's market area and has a
lower concentration of retail and restaurant establishments.
Similar to the subject hotel, this property is a low-rise,
exterior-corridor structure.
This hotel is the pilot site for Holiday Inn
Corporation's "KidSuites" concept - the hotel has a total of
54"KidSuites." These "KidSuites" have separate sleeping area for
the
<PAGE>
Page 53
children. The "Kids" room contains bunk beds, a separate TV,
and a VCR. This concept is part of management's rate-driven
strategy to aggressively market to the leisure segment of demand.
The "KidSuites" product has been well received by the market.
According to management, Orlando has traditionally been a blue
collar market with heavy emphasis on families traveling with
children as a source of demand. Holiday Inn has always enjoyed
strong presence with this market segment and competes for the
higher-rated leisure transient and wholesale segments of the
business. New programs like "KidSuites" will help further
strengthen this hotel's presence in the market.
Ramada Inn Resort
This hotel is an interior-corridor, high-rise
structure, situated approximately one-half mile from the subject
property. The Ramada Inn Resort was purchased by Samoth USA in
June 1996 as a part of an eight-hotel portfolio that also
includes the Holiday Inn Maingate West, another competitor for
the subject.
The property is currently in the process of a major
renovation and repositioning program. According to management,
the renovation is budgeted to total approximately $1.5 million
and includes upgrades to the lobby area, soft goods in the guest
rooms, and public bathrooms. In the past, this property relied
heavily on the wholesale segment of demand and achieved low
average rates as a result. According to management, the focus on
wholesale is being shifted towards higher-rated demand segments
in the attempt to increase revenues. Upon completion of the
renovation, and with new rate-oriented strategy in place, the
hotel should be able to command higher rates; the hotel is
expected to become a direct competitor for Sheraton for all
segments.
Management is in the process of finalizing plans for an
addition of 150 guest rooms which is budgeted to cost
approximately $2 million. According to management, the owners
have obtained financing for the expansion and the additional
rooms are scheduled for an early 1999 completion.
<PAGE>
Page 54
Holiday Inn Maingate West
Built in 1990, this property was the latest addition to
the subject's competitive supply and is the smallest in size
(with 278 rooms). The hotel is located adjacent to the subject
Sheraton, but is set back further from US-192 than the subject.
Rather than having direct access to the Irlo Bronson Memorial
Highway, the hotel must be accessed via Black Lake Road. The
Holiday Inn Maingate West was recently purchased by Samoth USA as
a part of a portfolio of eight hotels that include the Ramada Inn
Resort Maingate. The General Manager of the Ramada Inn Resort
Maingate is the Regional Operations Manager who oversees six
properties in the Orlando area, including the Holiday Inn
Maingate West, Holiday Inn Express-International Drive, Ramada
Inn Resort Maingate, Ramada Resort Maingate in Kissimmee, Econo
Lodge Maingate Hawaiian Resort, and Econo Lodge Maingate East.
Due to its small size, this hotel does not cater to the
group or wholesale segments of demand; the property competes
directly with the subject hotel for the transient leisure segment
of demand.
ADDITIONS TO COMPETITIVE LODGING SUPPLY
There are two developments that are likely to generate
increased competition for the subject Sheraton Lakeside and the
properties in the identified competitive supply. We have assumed
two additions in our supply and demand analysis: 1) a 190-room
Comfort Suites and 2) a 150-room expansion of the existing Ramada
Inn Resort Maingate.
Comfort Suites
This new addition to the competitive supply is located
approximately one-fourth of one mile east of the subject hotel,
along US-192. This 190-unit, all-suite property broke ground in
the spring of 1996 and is scheduled to open in spring of 1997.
The Comfort
<PAGE>
Page 55
Suites is anticipated to be three-story,
exterior-corridor structures with no dedicated meeting space,
with a separate commercial building. With its new facilities,
all-suite orientation, and proximity to the subject, this new
hotel is expected to compete directly with the Sheraton Lakeside
Inn for the leisure transient segment of demand.
Ramada Inn Resort Maingate
As indicated earlier, this hotel is in the process of
finalizing plans for a 150-room expansion. Management indicated
that construction cost of the expansion are expected to total $2
million. Financing is, reportedly, in place and the hotel has
received zoning approvals. We have assumed that this expansion
will be completed by 1999.
OTHER ADDITIONS TO SUPPLY IN THE ORLANDO LODGING MARKET
As indicated earlier, the US-192 lodging market
benefits greatly from overflow demand displaced from the Disney,
Lake Buena Vista, and International Drive submarkets. As a
result, the hotels located in these lodging markets present
indirect competition for the subject hotel. There are a larger
number of hotels proposed for development throughout the Orlando
metro area that will have an indirect impact on the hotels in the
identified competitive supply. As these lodging markets expand
and grow, it is likely that some of these additions will absorb
unsatisfied demand that is currently being displaced to the
US-192 submarket. The following paragraphs highlight the major
lodging developments proposed for development in the Orlando
area.
Caribe Royale
This 1,200-all-suite, independent hotel opened in
October 1996 and an additional 500 suites are scheduled to be
completed in 1997. The property is located along the northern end
of International Drive near Lake Buena Vista. The hotel enjoys
good visibility and direct access from the road. Currently, the
property's immediate neighborhood is under-developed, however,
according to the local authorities, this area is expected to be
<PAGE>
Page 56
developed with lodging, retail, and commercials facilities in the
future. This hotel is geographically too far from the subject
hotel to have influence or become a direct competitor. However,
this hotel's absorption of overflow demand from the Lake Buena
Vista and I-Drive properties may decrease the displaced demand
that would have overflowed to the US-192 submarket.
All Star Resort
This hotel is the lowest-rated hotel of the Disney
properties and is expected to expand its current 3,200 rooms by
an additional 1,900 guest rooms. This mega-resort is located
within Walt Disney World complex and is reportedly achieving
occupancy in high 90s. Due to the size of the hotel and its prime
location, the All Star Resort was not considered to be directly
competitive with the subject property.
Coronado Springs Resort
Scheduled to open in the fall of 1997, this 1,900-room
hotel is being developed within the Walt Disney World Complex.
Reportedly, Disney plans to market this hotel as the first
moderately-priced convention hotel in the Orlando market with
95,000 sq.ft. of dedicated meeting space. Due to the size and its
convention orientation, this hotel is not expected to be directly
competitive with the subject property.
Loews Hotels
Two new Loews Hotels, the Loews Portofino Bay Hotel and
the Loews Royal Bali Hotel are scheduled for development in
conjunction with the Universal Studios' expansion program. A
total of approximately 2,000 rooms (Loews Portofino Bay-750 rooms
and Loews Royal Bali-1,200 rooms) are expected to be added in
1999 and 2000, respectively. These hotels are not expected to be
directly competitive with the subject property.
<PAGE>
Page 57
CONCLUSION
The available supply in the Orlando market area has
undergone significant expansion over the past decade. Total
available supply increased at a compound annual rate of 3.5
percent between 1989 and 1995. There are a large number of
proposed new lodging developments that are being considered for
development in the area over the next five years.
Within the competitive lodging supply, there are two
new projects proposed for development including the Comfort
Suites and an expansion of the Ramada Inn Resort Maingate. These
additions to supply are expected to result in increased
competition for the subject hotel, especially if demand growth
moderates or becomes more conservative.
<PAGE>
Page 58
C.2 LODGING SUPPLY AND DEMAND ANALYSIS
OVERALL DEMAND TRENDS IN THE ORLANDO LODGING MARKET
The Orlando MSA is largely driven by the tourism and
convention market. The negative publicity Florida received in
early 1990s due to crimes targeted toward tourists had a
significant impact on the tourism market. Up until and including
1994, tourism to Orlando reflected little growth. However, the
market has exhibited a strong recovery in 1995 and 1996.
The following table exhibits historical trends in
overall growth in occupied demand, occupancy, and average room
rates in the Orlando MSA between 1990 and 1995 and year-to-date
September 1996 and 1995.
- -----------------------------------------------------------------------------
Historical Trends in Orlando MSA Market Area
Occupancy and Average Rate
- -----------------------------------------------------------------------------
- ------------ ---------------------- -------------------- --------------------
Occupied Room Avg.
Nights Occupancy Rate
- ------------ --------------------------- --------------- --------------------
1990
21,165,620 75.3% $66.00
1991
20,086,975 70.8% 65.00
1992
21,558,660 74.1% 64.00
1993
20,837,702 72.2% 64.00
1994
21,057,624 71.3% 66.00
1995
22,566,195 74.0% 67.00
CAG* 1.3%
1990-1995 0.3%
- ------------ --------------------------- --------------- --------------------
YTD Sep/1995 18,138,224 77.4% 68.62
YTD Sep/1996 19,216,121 82.3% 72.35
Percent
Change 5.9% 5.4%
- -------------------------------------------------------------------------------
Source: Smith Travel Research, Florida Division of Hotel & Restaurants
Note: * Compound Annual Growth
As indicated in the preceding table, occupied demand in
the Orlando lodging market reflected very little growth between
1990 and 1995, increasing at a compound annual rate of 1.3
percent. During this period, overall available supply in Orlando
increased at a compound annual rate of two percent. As a result,
average market occupancies
<PAGE>
Page 59
have declined slightly from the levels achieved in
1990. Demand and occupancy in 1996, however, has exhibited strong
growth. During the first nine months of 1996, occupied demand
increased by nearly six percent resulting in a five percentage
point gain in metro-wide occupancy.
The development of new and expanded tourist attractions
in the near future should support continued growth in lodging
demand to the Orlando area. The following summarizes some of
these major developments planned or underway.
- - Walt Disney World will celebrate it's 25th Anniversary
Celebration in 1997 and has been aggressively promoting
special events related to this anniversary;
- - An International Sports Complex is being developed by Walt
Disney World along US-192 near the subject hotel. This
complex is expected to open in 1997 and will accommodate
team-sport events sponsored by the Amateur Athletic Union
(AAU). Representatives at the Orlando CVB expect this
development (along with the relocation of the AAU to
Orlando) to generate a significant amount of group and
leisure demand for the hotels in the Orlando area;
- - The new Animal Kingdom theme park, which is being developed
by Walt Disney World, is expected to open in 1998;
- - The completion of the 1.1 million sq.ft. expansion and
renovation of the Orange County Convention Center is scheduled to
be completed in 1998. Upon completion, this center will be the
sixth largest convention facility in US; and
- - The addition of two new attractions at Universal Studios
are expected to open over the next several years; the
Entertainment Zone is expected to open in 1998 and Island of
Adventure is scheduled for a 1999 completion.
<PAGE>
Page 60
LODGING DEMAND IN THE IDENTIFIED COMPETITIVE SUPPLY
As indicated previously, we have identified seven
hotels (including the subject) as the competitive supply for the
Sheraton Inn Lakeside. The purpose of the analysis that follows
is to evaluate the historical and present supply and demand
trends of the market in which the subject hotel competes. We have
completed interviews with management of the competitive hotels
and have collected statistics on the occupancy, average rate, and
market mix of the each property to estimate total accommodated
demand by market segment. The table below summarizes our estimate
of the aggregate market demand accommodated by the identified
competitive supply for estimated years-ended 1995 and 1996.
- --------------------------------------------------------------------------------
Historical Growth in Lodging Demand
in the Competitive Supply
- --------------------------------------------------------------------------------
------------------------- ---------------------------
1995 Estimated 1996
---------------------- ----------------------
Percent
Room Nts % Total Room Nts % Total Change
---------------------- ---------------------------------
Wholesale 335,500 35% 374,400 35% 11.6%
Leisure Individuals 465,200 48% 516,900 48% 11.1%
Group 160,400 17% 179,800 17% 12.1%
------- --- ------- ---
961,000 100% 1,071,100 100% 11.5%
Total Occupied Demand
Total Available Supply 1,309,255 1,309,255 0.0%
Market Occupancy 73.4% 81.8%
Market Average Rate $48.00 $51.00 6.3%
Market REVPAR $35.00 $41.50 18.6%
- --------------------------------------------------------------------------------
Source: Arthur Andersen
Note: Totals may not add due to rounding.
The aggregate market occupancy and average rate within
the competitive supply increased significantly in 1996. This
strong growth was supported by an increase in demand generated by
the international market. The United Kingdom (UK) has been, in
the past, a major source of leisure and wholesale demand for the
Orlando market. Leisure travel from the UK decreased
significantly in the early 1990s due to
<PAGE>
Page 61
the perceived risk of crime in Florida. In 1996,
leisure travel from the UK increased significantly. Management of
the hotels in the competitive supply indicated that this positive
trend is expected to continue over the next several years.
The Orlando Convention Center just completed a 370,000
sq. ft. expansion of dedicated meeting space in 1996. This
expansion should enable the city to accommodate larger convention
programs, as well as a greater number of meeting events. As a
result, the lower-rated wholesale and leisure business may be
displaced by the increase in convention demand.
Our analysis of future demand growth includes
assumptions of base growth in demand, unsatisfied demand, and
induced demand. The following paragraphs define these sources of
demand growth.
Base Growth in Demand
Base growth in demand is the growth related to
the strength of the local economy. This growth assumption
incorporates demand generated by other factors, such as the
addition of a new convention center, new office development and
absorption, and improved transportation access to the market
area, etc. Our assumptions take into account historical demand
trends and the factors contributing to these trends. On the basis
of our interviews with management and on our analysis of economic
growth in the local market, base growth by market segment is
estimated for each year.
As indicated earlier, there are a large number of new
tourist attractions under development which are expected to open
over the next several years. Management of the hotels in the
competitive supply and industry experts indicated that lodging
demand has historically reflected strong growth (resulting from
renewed interest in the market area) in the years that these new
attractions open. However, occupied demand is expected to
decrease or remain flat in the years following the opening of a
new attraction. Between 1997 and 1999 base growth in demand is
expected to be
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Page 62
strong due to the opening of a number of new
tourist attractions. After 1999, however, there are new tourist
attractions scheduled to open and, as a result, demand and
occupancy in the area is expected to decrease in 2000 and 2001.
To reflect this, we have assumed no base growth in demand in
these years.
Unsatisfied Demand
During peak periods of demand, many travelers
in search of convenient accommodations among the hotels in the
competitive supply are required to use alternative hotels due to
lack of capacity in the immediate area. These groups and
individuals will seek lodging in one of the other properties in
the market area or will leave the immediate market. Those room
nights that are not accommodated in the immediate market may be
referred to as "unsatisfied demand."
The identified competitive supply is largely
affected by the overflow demand generated from the Lake Buena
Vista and I-Drive submarkets. The unsatisfied demand from these
two sub-markets is first absorbed by the US-192 submarket. When
the hotels in the US-192 market sell out, the overflow demand is
accommodated elsewhere and can then be considered unsatisfied
demand to the identified competitive supply. As indicated
earlier, there are a number of additions to supply proposed or
under development in the Orlando area over the next decade. While
growth in lodging demand is strong, the market is expected to
support these additions to supply. However, should base growth in
lodging demand decrease in the Lake Buena Vista and I-Drive
submarkets, overflow demand to the US-192 submarket is expected
to decrease. As a result, we expect overflow demand, and
therefore occupancy among the hotels in the identified
competitive supply is expected to decline slightly. To reflect
the decrease in overflow demand, we have increased unsatisfied
demand in each segment in the years 2000 and 2001.
<PAGE>
Page 63
Induced Demand
Induced demand is defined as new room nights generated by the
addition of new hotels to the market area, or by the
repositioning and marketing of an existing hotel to fulfill
consumer needs not previously met by the existing supply. Induced
demand may also include room nights generated by special events
which are not expected to remain permanently in the market area.
DEMAND SEGMENTATION AND ESTIMATED DEMAND GROWTH
Accommodated demand in the competitive hotel supply has
been segmented into three major market segments: wholesale,
leisure traveler, and group. On the basis of our interviews with
management of the subject and its competition, and based upon an
analysis of economic trends in the area, we have estimated future
growth in demand in the competitive supply by market segment. The
following paragraphs define the individual market segments and
our estimates of future demand growth. A detailed analysis of
supply and demand growth for the market is presented on the
following page.
<PAGE>
<PAGE>
Page 64
<TABLE>
Sheraton Inn Lakeside
Estimated Growth In Lodging Supply and Demand
Market Area: Kissimmee, Florida
Estimated
1996 1997 1998
---- ---- ----
<S> <C> <C>
Wholesale 4.0% 3.0%
Gross Demand 414,400 431,200 457,000
Less: Unsatisfied Demand 40,000 30,000 30,900
------- ------- -------
Net Demonstrated Demand 374,400 401,200 413,000
Plus: Induced Demand 0 2,400 3,500
------- ------- -------
TOTAL SEGMENT DEMAND 374,400 403,600 416,500
Growth over Previous Year 7.8% 3.2%
% of Total Market Demand 35% 35% 36%
Leisure Travelers 4.0% 3.0%
Gross Demand 571,900 595,000 612,600
Less: Unsatisfied Demand 55,000 45,000 45,000
------- ------- -------
Net Demonstrated Demand 516,900 550,000 567,600
Plus: Induced Demand 0 6,300 11,600
------- ------- -------
TOTAL SEGMENT DEMAND 516,900 556,300 579,200
Growth over Previous Year 7.6% 4.1%
% of Total Market Demand 48% 49% 49%
Group 6.0% 4.0%
Gross Demand 192,400 203,900 212,100
Less: Unsatisfied Demand 12,600 28,400 39,500
------- ------- -------
Net Demonstrated Demand 179,800 175,500 172,600
Plus: Induced Demand 0 2,200 3,100
------- ------- -------
TOTAL SEGMENT DEMAND 179,800 177,700 175,700
<PAGE>
Growth over Previous Year -1.2% -1.1%
% of Total Market Demand 17% 16% 15%
TOTAL MARKET DEMAND
Gross Demand 1,178,700 1,230,100 1,268,600
Less: Unsatisfied Demand 107,600 103,400 115,400
--------- --------- ---------
Net Demonstrated Demand 1,071,000 1,126,700 1,153,200
Plus: Induced Demand 0 10,900 18,200
--------- --------- ---------
TOTAL MARKET DEMAND 1,071,000 1,137,600 1,171,400
Growth over Previous Year 6.2% 3.0%
ANNUAL SUPPLY (ROOM NIGHTS) 1,309,255 1,378,605 1,378,605
Growth over Previous Year 5.3% 0.0%
MARKET OCCUPANCY 82% 83% 85%
<PAGE>
Sheraton Inn Lakeside
Estimated Growth In Lodging Supply and Demand
Market Area: Kissimmee, Florida
Compound
Annual
Estimated Growth
1999 2000 2001 (1996-2001)
---- ---- ---- -----------
Wholesale 3.0% 0.0% 0.0%
Gross Demand 457,000 457,000 457,000
Less: Unsatisfied Demand 27,800 35,800 37,800
------- ------- -------
Net Demonstrated Demand 429,200 421,200 419,200
Plus: Induced Demand 6,500 8,600 8,600
------- ------- -------
TOTAL SEGMENT DEMAND 435,700 429,800 427,800 2.7%
Growth over Previous Year 4.6% -1.4% -0.5%
% of Total Market Demand 36% 36% 36%
Leisure Travelers 3.0% 0.0% 0.0%
Gross Demand 630,700 630,700 630,700
Less: Unsatisfied Demand 41,300 51,300 57,300
------- -------- -------
Net Demonstrated Demand 589,400 579,400 573,400
Plus: Induced Demand 13,600 15,400 15,400
------- ------- -------
TOTAL SEGMENT DEMAND 603,000 594,800 588,800 2.6%
Growth over Previous Year 4.1% -1.4% -1.0%
% of Total Market Demand 49% 49% 49%
Group 3.0% 0.0% 0.0%
Gross Demand 218,500 218,500 218,500
Less: Unsatisfied Demand 43,200 47,200 51,200
<PAGE>
------- ------- -------
Net Demonstrated Demand 175,300 171,300 167,300
Plus: Induced Demand 5,600 7,600 7,600
------- ------- -------
TOTAL SEGMENT DEMAND 180,900 178,900 174,900 -0.6%
Growth over Previous Year 3.0% -1.1% -2.2%
% of Total Market Demand 15% 15% 15%
TOTAL MARKET DEMAND
Gross Demand 1,306,200 1,306,200 1,306,200
Less: Unsatisfied Demand 112,300 134,300 146,300
--------- --------- ---------
Net Demonstrated Demand 1,193,900 1,171,900 1,159,900
Plus: Induced Demand 25,700 31,600 31,600
--------- --------- ---------
TOTAL MARKET DEMAND 1,219,600 1,203,500 1,191,500 2.2%
Growth over Previous Year 4.1% -1.3% -1.0%
ANNUAL SUPPLY (ROOM NIGHTS) 1,433,355 1,433,355 1,433,355 1.8%
Growth over Previous Year 4.0% 0.0% 0.0%
MARKET OCCUPANCY 85% 84% 83%
<PAGE>
Sheraton Inn Lakeside
Penetration Analysis
Market Area: Kissimmee, Florida
Estimated
1996 1997 1998 1999 2000 2001
---------- ---- ---- ---- ---- ----
ANNUAL SUPPLY (ROOM NIGHTS) 1,309,255 1,378,605 1,378,605 1,433,355 1,433,355 1,433,355
SIZE OF SUBJECT PROPERTY 651 651 651 651 651 651
FAIR SHARE (SUPPLY) 18.% 17.2% 17.2% 16.6% 16.6% 16.6%
Wholesale
Total Demand 374,400 403,600 416,500 435,700 429,800 427,800
Fair Share of Demand 67,949 69,564 71,788 72,228 71,250 70,919
Penetration Rate 120% 110% 105% 101% 101% 101%
-------- ---------- --------- --------- --------- ---------
Demand Captured 81,800 76,200 579,200 73,000 72,000 71,900
% of Total Demand Captured 41% 38% 38% 37% 37% 38%
Leisure Travelers
Total Demand 516,900 556,300 579,200 603,000 594,800 588,800
Fair Share of Demand 93,812 95,883 99,830 99,963 98,603 97,609
Penetration Rate 100% 105% 102% 102% 101% 101%
--------- --------- --------- --------- --------- ---------
Demand Captured 93,800 100,200 101,800 102,000 99,600 98,600
% of Total Demand Captured 47% 50% 51% 52% 52% 52%
Groups
Total Demand 179,800 177,700 175,700 180,900 178,900 174,900
Fair Share of Demand 32,632 30,628 30,283 29,989 29,657 28,994
Penetration Rate 73% 75% 70% 70% 70% 70%
--------- --------- --------- --------- --------- ---------
Demand Captured 23,900 23,000 21,200 21,000 20,800 20,300
% of Total Demand Captured 12% 12% 11% 11% 11% 11%
<PAGE>
TOTAL MARKET DEMAND
Total Demand 1,071,100 1,137,600 1,171,400 1,219,600 1,203,500 1,191,500
Fair Share of Demand 194,393 196,076 201,901 202,180 199,511 197,521
Penetration Rate 103% 102% 98% 97% 96% 97%
--------- --------- --------- --------- --------- ---------
Demand Captured 199,500 199,400 198,400 196,000 192,400 190,800
ESTIMATED OCCUPANCY 84% 84% 83% 82% 81% 80%
MARKET OCCUPANCY 82% 83% 85% 85% 84% 83%
</TABLE>
<PAGE>
Page 65
Wholesale
This segment of demand includes travelers visiting the
attractions and entertainment facilities in the Orlando market
area. These travelers book through wholesalers and package
operators, who negotiate discounted rates with hotels by
guaranteeing bulk business. Based upon the past performance and
room night potential exhibited by a wholesale operator,
management of the hotel will increase or decrease the contract
negotiated rate and/or the size of the room allotment.
The wholesale segment can be categorized into
international and domestic demand. At the end of 1995,
international travelers accounted for approximately 55 percent of
total wholesale demand accommodated within the competitive
supply. The United Kingdom (UK) and Canada are the largest
sources of international wholesale demand for the Orlando market.
As indicated earlier, international travel decreased in the early
1990s due to the negative publicity associated with
tourist-targeted crime. However, over the last two years,
international wholesale demand has reflected strong growth.
Domestic wholesale demand is generated by large travel
agencies and package operators such as Liberty Travel, Kingdom
Tours, and Funway. Although domestic wholesale demand is
generated from areas throughout the nation, with the cities of
New York, Miami, and Chicago being the largest geographic sources
of wholesale demand for Orlando.
The wholesale segment is the lowest-rated segment of
demand, and therefore, it is the first to be displaced during
peak demand periods. During the early 1990s, management of the
hotels in the competitive supply aggressively marketed to this
segment in order to support occupancy. Due to the recent strength
of the overall lodging market, management of the hotels in the
competitive supply are planning to decrease the number of
wholesale allotments in 1997 and 1998 in order to accommodate the
higher-rated leisure traveler segment of demand.
<PAGE>
Page 66
This segment of demand accounted for approximately 35
percent of total accommodated demand among the competitive
lodging supply at the end of 1996. Occupied demand increased by
12 percent in 1996 over the levels achieved in 1995. We estimate
that base growth in demand in the wholesale segment will be four
percent in 1997, and three percent in 1998 and 1999. As indicated
earlier, there are no new attractions planned to open after 1999
that are expected to generate new demand to the market area.
Management of the hotels in the competitive lodging supply
indicated that in the past, demand has tended to decrease or
remain flat in the years following the opening of a new
attraction. With no new tourist attractions, demand is expected
to decrease in the years 2000 and 2001. To reflect this, we have
assumed no base growth in demand in these years.
We estimate that there were approximately 40,000 room
nights of unsatisfied demand in the wholesale segment at the end
of 1996. The addition of the 190-room Comfort Suites is expected
to absorb unsatisfied demand in 1997 and 1998. As a result,
unsatisfied demand is expected to decline approximately 10,000
room nights in 1997. Similarly, the expansion of the Ramada Inn
Resort Maingate is expected to absorb approximately 3,000 room
nights of unsatisfied demand in 1999. Thereafter, we assume that
unsatisfied demand will increase throughout the projection
period.
The addition of the Comfort Suites and the expansion of
the Ramada Inn Resort Maingate are expected to induce new
wholesale demand to the identified competitive lodging supply. By
the year 2000, we estimate that these hotels will induce
approximately 8,600 room nights of new lodging demand to the
market.
Overall, the wholesale segment is estimated to
increase at a compound annual rate of 2.7 percent between 1996
and 2001. We expect this segment of demand to account for
approximately 427,800 room nights by 2001, or 36 percent of total
accommodated demand.
<PAGE>
Page 67
Leisure Travelers
This segment of demand includes travelers that are
visiting the market area on vacation or for other non-commercial
reasons. It includes leisure travelers booking suites and guest
rooms at rack rates during peak demand periods as well as
travelers seeking discounted rates and special packages offered
by the hotels during slow periods. The slow periods for leisure
travel to Orlando market include the months of January, February,
May, and the period from September through December 20. Although
Orlando's year-round warm weather and the numerous attractions
draw leisure travelers throughout the year, demand is strongest
during the summer months and holidays when children are out of
school and families are on vacation.
Leisure traveler demand accounted for approximately 48
percent of total accommodated demand among the competitive
lodging supply at the end of 1996. Demand in this segment
increased by 11 percent in 1996 over the levels achieved in 1995.
As indicated earlier, Walt Disney World has been aggressively
promoting its 25th Anniversary Celebration and the opening of the
new Animal Kingdom theme park. These new attractions are expected
to generate new demand in the leisure segment. As a result, we
estimate that base growth in demand in the leisure traveler
segment will be four percent in 1997, and three percent in 1998
and 1999. We estimate that base growth in demand will remain flat
after 1999 as there are new attractions scheduled for opening in
these years.
We estimate that there were approximately 55,000 room
nights of unsatisfied demand in the leisure traveler segment at
the end of 1996. Unsatisfied demand is expected to increase each
year unless additional rooms supply is developed that can absorb
some of this demand. The addition of the 190-room Comfort Suites
is expected to absorb approximately 10,000 room nights of leisure
demand in 1997. The 150-room expansion of the Ramada Inn Resort
Maingate is also expected to absorb unsatisfied demand in 1999.
Thereafter, we estimate that unsatisfied demand will increase
throughout the projection period.
<PAGE>
Page 68
As indicated earlier induced demand is new demand
generated by the sales and marketing effort of a new lodging
facility opening in the market area. The Comfort Suites is
expected to induce approximately 6,300 room nights of leisure
demand in 1997 and 5,300 room nights in 1998. The expansion of
the Ramada Inn Resort Maingate is also expected to induce new
leisure demand to the competitive lodging supply. We expect this
addition to supply to induce approximately 2,000 room nights in
1999 and 1,800 room nights in 2000.
Overall, the leisure traveler segment is estimated to
increase at a compound annual rate of 2.6 percent between 1996
and 2001. We expect this segment to account for approximately
588,800 room nights by 2001, or 49 percent of total accommodated
demand.
Group
This segment of demand includes groups of 15 room
nights or more that are booked through the sales department of a
hotel. This segment includes corporate and associations meetings
held at the hotels in the competitive supply. This segment also
includes groups generated by religious organizations, high
schools, fraternal organizations, sports teams, and tour groups
booked through motorcoach operators.
The opening of the Walt Disney International Sports
Complex in 1997 is expected to generate new group demand to
competitive supply. The Amateur Athletic Union (AAU) and other
sports organizations are expected to sponsor and hold events at
the sports facilities, and therefore, are likely to require
accommodations in the market area.
This segment of demand accounted for approximately 17
percent of total accommodated demand among the competitive
lodging supply at the end of 1996. Demand in this segment
increased by 12 percent in 1996 over the levels achieved in 1995.
We estimate that base growth in demand in the leisure traveler
segment will be six percent in 1997, four percent in 1998, and
three percent in 1999. Thereafter, we have assumed that this
segment will reflect no base growth in demand.
<PAGE>
Page 69
We estimate that there were approximately 12,600 room
nights of unsatisfied demand in this market segment at the end of
1996. Management of the hotels in the competitive supply have
attempted to decrease demand accommodated by this price-sensitive
segment in order to target the more profitable leisure individual
traveler demand.
Overall, the group segment is estimated to remain
relatively flat throughout the projection period. We expect this
segment to account for approximately 174,900 room nights by 2001,
or 15 percent of total accommodated demand.
Conclusion
Lodging demand in the subject property's submarket is
expected to show positive growth through 1999. The addition of
new attractions is expected to support growth in occupancy among
the competitive supply despite the addition of a 190-room Comfort
Suites Hotel. By 1998, we estimate aggregate market occupancy to
increase to 85 percent. However, thereafter, demand accommodated
in the market is expected to decrease as the incidence of
overflow demand lessens due to supply additions in adjacent
markets. Industry experts indicated that when new attractions
open, demand for lodging accommodations reflects a short term
surge or increase. However, demand has typically exhibited a
slight decline in the years following the opening of new
attractions.
In addition, there are a number of new lodging
facilities proposed or under development in the general market
area including the expansion of the All Star Resort, the Loews
Hotels, and additions within the Lake Buena Vista and I-Drive
submarkets. When these hotels open, the overflow demand that is
sustaining the US-192 submarket is expected to decrease to
pre-1997 levels. As a result of these trends, we estimate that
the aggregate market occupancy will decrease slightly to 83
percent by the end of 2001.
<PAGE>
Page 70
C.3 ESTIMATED OCCUPANCY AND AVERAGE ROOM RATE
We have prepared detailed estimates of average annual
occupancy and average daily room rate for the subject property
from January 1, 1997 through December 31, 2001. The following
table provides the historical occupancy and average daily rates
achieved at the subject Sheraton Inn Lakeside from year-end 1990
to estimated 1996.
- --------------------------------------------------------------------------------
Historical Occupancy, Average Rate, and REVPAR
Sheraton Inn Lakeside
- --------------------------------------------------------------------------------
--------------------------------------------------------------------------
1996
1990 1991 1992 1993 1994 1995 Estimated
-------- ---------- --------- ---------- --------- --------- ---------
Occupancy
86% 83% 78% 82% 76% 78% 84%
ADR
$60.50 $65.50 $56.00 $53.00 $51.00 $48.00 $50.00
REVPAR
$52.00 $54.50 $43.50 $43.50 $39.00 $37.50 $42.00
- ------------------ ---------- --------- ---------- --------- -------------------
Source: Property Management
The following section presents our analysis of
estimated future occupancy and average daily room rate.
MARKET PENETRATION & AVERAGE ANNUAL OCCUPANCY
This analysis uses the concept of "fair" share and
market penetration. By forming a penetration analysis of market
lodging demand, the future average annual occupancy at the
subject Sheraton Inn Lakeside is estimated. Using this technique,
the property is first evaluated and compared to its competition,
then its potential market share is calculated on the basis of its
relative appeal to the market segments. A hotel's "fair" share of
market demand is said to be equal to its fair share of supply;
i.e. a 100-room hotel in a market of 1,000 rooms would have a
"fair" share of demand of ten percent of total market demand. A
"market penetration" of 100 percent indicates a property is
capturing its exact "fair" share of demand. Penetration in excess
of, or lower than, 100 percent indicates a hotel is likely to be
viewed more or less favorably than the competition by the
respective market segment and thus accommodates more or less than
its fair share.
<PAGE>
Page 71
The following table presents our estimates of the
year-end 1996 market penetration by demand segment for the
subject and for the hotels in the identified competitive lodging
supply.
- --------------------------------------------------------------------------------
Estimated 1996 Penetration By Market Segment
For The Identified Competitive Supply
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Leisure Overall
Wholesalers Individuals Group Penetration
- --------------------------------------------------------------------------------
Sheraton Inn Lakeside 120% 100% 73% 103%
Holiday Inn Nikki
Bird 89% 118% 93% 104%
Inn at the Maingate 105% 76% 109% 92%
Ramada Inn Resort
Maingate 109% 83% 116% 98%
Hilton Gateway 98% 71% 175% 98%
Holiday Inn Hotel
and Suites 74% 140% 62% 104%
Holiday Inn
Maingate West 116% 95% 91% 101%
- --------------------------------------------------------------------------------
Source: Arthur Andersen/Market Interviews
By combining the above information with our market and
property analysis, we calculate the future occupancy of the
subject hotel by market segment for the estimation period 1997 to
2001. A detailed penetration analysis of the subject hotel is
presented on the following page. The following paragraphs
summarize our penetration analysis by market segment.
<PAGE>
Page 72
<TABLE>
Sheraton Inn Lakeside
Penetration Analysis
Market Area: Kissimmee, Florida
Estimated
1996 1997 1998 1999 2000 2001
---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
ANNUAL SUPPLY (ROOM NIGHTS) 1,309,255 1,378,605 1,378,605 1,433,355 1,433,355 1,433,355
SIZE OF SUBJECT PROPERTY 651 651 651 651 651 651
FAIR SHARE (SUPPLY) 18.% 17.2% 17.2% 16.6% 16.6% 16.6%
Wholesale
Total Demand 374,400 403,600 416,500 435,700 429,800 427,800
Fair Share of Demand 67,949 69,564 71,788 72,228 71,250 70,919
Penetration Rate 120% 110% 105% 101% 101% 101%
-------- ---------- --------- --------- --------- ---------
Demand Captured 81,800 76,200 579,200 73,000 72,000 71,900
% of Total Demand Captured 41% 38% 38% 37% 37% 38%
Leisure Travelers
Total Demand 516,900 556,300 579,200 603,000 594,800 588,800
Fair Share of Demand 93,812 95,883 99,830 99,963 98,603 97,609
Penetration Rate 100% 105% 102% 102% 101% 101%
--------- --------- --------- --------- --------- ---------
Demand Captured 93,800 100,200 101,800 102,000 99,600 98,600
% of Total Demand Captured 47% 50% 51% 52% 52% 52%
Groups
Total Demand 179,800 177,700 175,700 180,900 178,900 174,900
Fair Share of Demand 32,632 30,628 30,283 29,989 29,657 28,994
Penetration Rate 73% 75% 70% 70% 70% 70%
--------- --------- --------- --------- --------- ---------
Demand Captured 23,900 23,000 21,200 21,000 20,800 20,300
% of Total Demand Captured 12% 12% 11% 11% 11% 11%
TOTAL MARKET DEMAND
Total Demand 1,071,100 1,137,600 1,171,400 1,219,600 1,203,500 1,191,500
Fair Share of Demand 194,393 196,076 201,901 202,180 199,511 197,521
Penetration Rate 103% 102% 98% 97% 96% 97%
--------- --------- --------- --------- --------- ---------
Demand Captured 199,500 199,400 198,400 196,000 192,400 190,800
ESTIMATED OCCUPANCY 84% 84% 83% 82% 81% 80%
MARKET OCCUPANCY 82% 83% 85% 85% 84% 83%
</TABLE>
<PAGE>
Page 73
Wholesale
The subject Sheraton Inn Lakeside achieved the highest
penetration in the wholesale segment in 1996. Because of the
hotel's large size relative to its competitors, management has
and will continue to aggressively market to the wholesale
segment. However, management indicated that they plan to decrease
the penetration rate in this segment over the projection period
in order to support growth in the higher-rated leisure individual
segment. With strong market conditions anticipated, management of
the Sheraton Inn Lakeside was able to renegotiate the terms of
the wholesale contracts in 1996. As a result of the
renegotiation, the size of room allotment blocks were decreased
for a number of large accounts. In addition, management reduced
the number of wholesale contracts, eliminating accounts that
historically did not generate significant demand for the
property. On the basis of the repositioning, we estimate that
penetration rate in this segment will decrease from 120 percent
in 1996 to approximately 101 percent of fair share in a
representative year. Occupied demand in this segment is expected
to decrease from 41 percent of total occupied demand to 38
percent of accommodated demand in the year 2001.
Leisure Travelers
The Holiday Inn Hotel and Suites achieved the highest
penetration in this segment. This hotel has benefited from the
appeal of the high number of suites and their new "Kid Suites"
program. In 1996, the subject property has achieved 100 percent
of its fair market share of leisure traveler demand. The subject
hotel has enjoyed a strong presence within the competitive supply
due to the Sheraton affiliation. As indicated earlier, management
has focused much of its efforts on the wholesale segment of
demand in the past. However, due to the strong growth of leisure
demand in the Orlando market, management plans to reposition the
hotel to target the higher-rate leisure travelers segment to
support growth in revenue.
Management plans to rename the hotel as "Sheraton
Lakeside Village," and market the hotel as a self-contained
resort which should support growth in demand in the
<PAGE>
Page 74
leisure traveler segment. Management is also considering introducing a
food court on the property; they indicate that the availability
of a selection of chain affiliated fast food restaurants is an
amenity.
Sheraton Inn Lakeside is part of Disney's "Good
Neighborhood Program." This program started in 1996 with the
Disney hotels experiencing a shortage of available guest rooms.
When the Disney hotels are full, guests requesting lodging
accommodation will be referred to any one of the "Good Neighbor
Program" participating hotels. A total of 24 properties in
Orlando area participate in the program. As a "Good Neighbor,"
the Sheraton allocates a block of rooms for Disney at $59.00 per
room per night. Management indicated that being part of the
program will enable the property to support growth in the leisure
segment of demand.
However, as indicated earlier, a 190-room Comfort
Suites hotel is under construction and expected to open in 1997.
This hotel is expected to aggressively market to the leisure
traveler segment of demand and should present direct competition
to the subject. This addition to supply, together with the Ramada
Inn Resort Maingate, should present increased competition for the
subject as management attempts to reposition the property.
We estimate that the subject hotel will be able to
increase the penetration rate in this segment to 105 percent of
fair market share in 1997. After the addition of the Comfort
Suites, however, the penetration rate in this segment is expected
to decrease due to the increase in competition. By the end of
1999, we estimate that the penetration rate of leisure traveler
demand will decrease to 101 percent of fair market share. Despite
the increase in competition from the new additions to supply, we
expect demand in this segment to increase from approximately
94,000 room nights in 1996 to 97,600 room nights by the year
2001. In a representative year, we estimate that this segment of
demand will account for approximately 52 percent of total
occupancy.
<PAGE>
Page 75
Group
The Hilton Gateway achieved the highest penetration in
this segment due to its interior-corridor layout of the main
building and because the hotel contains approximately 8,100
sq.ft. of dedicated meeting space. Historically, the subject
property did not achieve its fair share in the group segment. The
hotel has only one meeting room, and therefore cannot compete
with the hotels in the competitive supply for corporate and
association meetings. In addition, all guest rooms at the subject
hotel have exterior corridors. A number of organized groups, such
as high-school, sports, and church groups, prefer
interior-corridor buildings; this policy is due to the fact that
many of the attendees are minors and require supervision and
chaperones. Hotels with interior-corridor guest rooms are easier
for chaperones to supervise and control. As a result of these
competitive disadvantages, the Sheraton has achieved much less
than its fair market share in this segment; in 1996 the hotel
achieved a penetration rate of 73 percent of fair market share.
As indicated earlier, management of the subject hotel
is attempting to reposition the property to accommodate the
higher-rated leisure segment of demand. Due to the repositioning
policy and the competitive disadvantage of the hotel, we estimate
that the penetration rate of this segment of demand will decrease
over the projection period. By the year 2000, we estimate that
the subject hotel will achieve a penetration rate of 70 percent
of fair market share in this segment of demand. On the basis of
this analysis, occupied demand in this segment is expected to
decrease from 12 percent of occupied demand in 1996 to 11 percent
of total demand in a representative year.
Our estimates of the overall market penetration and
resulting occupancy for the subject hotel from December 31, 1995
through December 31, 2001 are presented in the following table:
<PAGE>
Page 76
-------------------------------------------------------------------------------
Estimated Penetration And Occupancy
Sheraton Inn Lakeside
-------------------------------------------------------------------------------
Estimated Overall Estimated
Penetration Rate Occupancy
Year
-------------- ---------------------------------- -----------------------------
106% 78%
1995
103% 84%
1996
102% 84%
1997
98% 83%
1998
97% 82%
1999
96% 81%
2000
97% 80%
2001
-------------------------------------------------------------------------------
Source: Arthur Andersen
<PAGE>
Page 77
PROJECTED AVERAGE DAILY ROOM RATE
In order to estimate future average room rates for the
Sheraton Lakeside, we have reviewed the historical trends
exhibited by the subject and the overall market. The following
table summarizes historical occupancy for the subject hotel and
for the Orlando MSA for the years 1990 through estimated 1996.
- ---------------------------------------------------------------------------
Estimated Average Daily Room Rate
Sheraton Inn Lakeside vs. Orlando MSA
- -------------------------------------------------------------------
Year Subject Hotel Orlando MSA
- ----------------------- --------------------- ---------------------
1992
$56.00 $64.00
1993
53.00 64.00
1994
51.00 66.00
1995
48.00 67.00
1996
Est. 50.00 71.00
Compound Annual
Growth (1992-96) -2.8% 2.6%
- -------------------------------------------- --------------------
Source: Arthur Andersen
As indicated in the preceding table, the average daily
room rate at the subject property has decreased by nearly $6.00
between 1992 and 1996. During the same period, average room rates
exhibited by the aggregate Orlando MSA increased at a compound
annual rate of 2.6 percent. As indicated earlier, the US-192
lodging market benefits from overflow demand from the I-Drive and
Lake Buena Vista lodging markets. During the early 1990s, a
number of new hotels opened outside of the competitive supply in
Lake Buena Vista and near I-Drive. This increase in available
supply, combined with conservative growth in leisure and tourist
travel to Orlando, resulted in increased competition for lodging
demand. As a result, occupancies at the subject hotel and the
other hotels in the US-192 lodging market decreased.
In order to support occupancy during this period,
management of the hotels in the competitive supply aggressively
marketed to the lower-rated wholesale and groups segments of
demand. This shifting in positioning significantly impacted the
overall average rates achieved. Over the last two years, however,
the US-192 lodging
<PAGE>
Page 78
submarket has experienced strong growth in
demand, especially in the leisure segments. The aggregate market
occupancy of the hotels in the competitive supply increased from
73 percent in 1995 to an estimated 82 percent in 1996. As a
result of the recent strength and market growth, management has
adjusted the pricing policies for each segment and source of
demand as well as the published rates. In addition, management
has attempted to shift the market segmentation to increase demand
occupied in the higher-rate leisure segment by controlling and
limiting demand in the wholesale and groups segments. This
repositioning is expected to enable management to significantly
increase the average rate achieved over the next two to three
years.
Our estimates of growth in the average daily room rate
by market segment for the subject hotel is summarized in the
following paragraphs.
Wholesale
The average room rate in the wholesale segment is
estimated at approximately $45.00 to be the end of 1996. This
represents an increase of 3.4 percent over the rate achieved by
this segment in 1995. Rates in this segment are expected to
reflect strong growth in 1997, increasing approximately ten
percent. As indicated earlier, management renegotiated contract
rates with wholesale and package operators for 1997 and was able
to increase rates charged. On the basis of this analysis, we
estimate that the average room rate in this segment will increase
five percent in 1998. Thereafter, we assume that average rates
will increase at an inflationary rate of 3.5 percent each year.
Leisure Traveler
As indicated earlier, this segment of demand is the
highest-rated segment for the subject hotel. The average room
rate in the leisure individual segment is estimated at
approximately $55.50 in 1996, nearly $10 higher than the
wholesale and group segments. Rates in this segment increased by
9.2 percent over the rate achieved by in
<PAGE>
Page 79
1995. Demand in this segment is expected to be strong
in the market due to the large number of new tourist attractions
opening in the market area such as the Animal Kingdom Theme Park
and the 25th Anniversary Celebration at Disney World. As a
result, rates in this segment are expected to continue to reflect
strong growth in 1997 and 1998. We estimate that the average rate
in this segment will increase by approximately 8.5 percent in
1997 and 5.5 percent in 1998. Thereafter, we assume that the rate
in this segment will increase at a rate commensurate with
inflation.
Group
The average room rate in the group segment of demand
is estimated to be approximately $46.50 in 1996. Average rates in
this segment reflected no growth in 1996 over that achieved in
1995. However, rates in this segment are expected to reflect
strong growth in 1997 and 1998. The completion of the
International Sports Complex near the US-192 submarket in 1997 is
expected to generate a significant volume of new group demand for
the hotels in the competitive supply. The majority of these
groups seek interior-corridor hotels and are unlikely to seek
accommodations at the subject hotel. However, pressure during
peak demand periods and increased occupancy during the off season
generated by these groups should enable property management to
support rate increases. On the basis of this analysis, we
estimate that the average room rate in this segment will increase
by five percent in 1997 and 1998. Thereafter, we assume that the
rate in this segment will increase at a rate commensurate with
inflation.
The following table presents our estimates of average
daily room rate for the Sheraton Inn Lakeside.
<PAGE>
Page 80
- ----------------------------------------------------------------------
Estimated
Average Daily Room Rate
Sheraton
Inn Lakeside
- ----------------------------------------------------------------------
Year Average Rate % Growth
- ------------------ ------------------------- -------------------------
1995 $48.00 ----
1996 50.00 4.2%
1997 55.00 10.0%
1998 58.00 5.5%
1999 60.50 4.3%
2000 62.50 3.3%
2001 64.50 3.2%
- ------------------ ------------------------- -------------------------
Source: Arthur Andersen
<PAGE>
Page 81
D. THE APPRAISAL PROCESS
The purpose of this appraisal is to estimate the "as
is" market value the subject property in accordance with accepted
value estimating procedure. "The valuation process is a
systematic procedure employed to provide the answer to a client's
question about real property value. It is a model of appraisal
activity, reflecting an understanding of value and the methods
used in the value estimation."3
There are three traditional approaches involved in the
valuation of real property. These are known as the cost approach,
the sales comparison approach, and the income capitalization
approach. Each of the three approaches is related to the other,
as they involve the gathering and analysis of sales, cost, and
income data that pertain to the property being appraised.
Although all three valuation procedures are given consideration,
the inherent strengths and weaknesses of each approach and the
nature of the subject property must be evaluated to determine
which will provide the most supportable estimates of market
value.
D.1 THE COST APPROACH
Valuation by the cost approach is based on the
principle of substitution. This principle asserts that an
informed investor will not pay more for a property than the cost
to build a substitute property of equivalent utility. Therefore,
the cost approach, when utilized in an appraisal, estimates the
cost of reproducing or replacing the subject property including
improvements and land, less an allowance for depreciation based
upon the physical condition, functionality, and economic
environment or the building. Although this approach is
particularly applicable to owner-occupied or special-use
properties in the absence of an investor market, it also
recognizes and establishes the relationship between cost and
market-derived values.
- ----------------
3 American Institute of Real Estate Appraisers, The Appraisal of
Real Estate Appraisal, Chicago, Illinois, 1989, p.73.
<PAGE>
Page 82
In the subject appraisal, the building is now operating
as a business in the production of income to the various
components which comprise the total operation of a hotel.
Although the replacement cost of the subject hotel could be
established, the estimate of market depreciation is a very
subjective consideration which significantly affects the value
indication. The depreciation estimate could only be realistically
estimated by comparison to other approaches, thereby reducing the
cost approach to coincide with one of the other approaches, and
losing the objectivity of the approach as a third measure of
value. In our opinion, an informed and experienced purchaser
would not rely on the cost approach in establishing an indication
of market value for the subject property. Therefore, this
approach has not been included in our analysis.
D.2 SALES COMPARISON APPROACH
The Sales Comparison Approach estimates market value
based upon a comparative analysis of recent sales of improved
properties that are similar in function, size, income production,
and use to the appraised property. This approach to value assumes
that the market will determine a price for the Sheraton Inn
Lakeside in the same manner that it determines the price for
comparable properties. To apply the sales comparison approach,
the appraiser employs a number of appraisal techniques, including
the principle of substitution which holds that the value of a
property that is replaceable in the marketplace tends to be set
by the cost of acquiring an equally desirable property.
Additional considerations include examination of market
conditions prevailing at the time of sale as compared to those at
the date of valuation. The following pages explain the
application of the sales comparison approach to the subject
property.
To develop the sales comparison approach, we researched
the subject market and the surrounding region for recent sales of
similarly improved properties. From our research, we have
selected several sales for further analysis and direct comparison
with the Sheraton Inn Lakeside. These sales represent the most
recent sales of improved properties and are considered to be
competitive alternatives in the marketplace. We
<PAGE>
Page 83
identified four comparable hotel sales. All of the
hotels are full service properties in Florida and have taken
place within the last two years. Three of the comparables are
considered to be direct competition for the subject.
We have made adjustments to the price paid per room on
the basis of a comparison of each transaction relative to the
subject hotel. Our analysis of the market recognizes primary
factors which affect the pricing of hotels including: adjustments
related to renovations planned at the time of purchase, interest
appraised, strength of the local lodging market, size and extent
of the facilities, condition of the facilities, and other risk
factors such as the property's location relative to demand
generators and area attractions and the ease of access to the
hotel. Presented on the following page is a summary of each
comparable sale and our adjustments. Tables detailing pertinent
information related to each comparable sale are presented in the
Addenda of this report.
<PAGE>
Page 84
<TABLE>
SALES COMPARISON ADJUSTMENT GRID
SHERATON IN LAKESIDE
Hotel Ramada In Resort Maingate(2) Holiday Inn Hotel and Suites
---------------------------- ----------------------------
<S> <C> <C>
Location Kissimme, FL Kissimmee, FL
Interest Transferred Fee Simple Fee Simple
Number of Units (Rooms/Suites) 190 668
Occupancy 80% 75%
Average Daily Rate $48.00 $48.00
Rooms Revenue $5,466,240 $8,777,520
Date of Sale Jun-96 Mar-94
Sales Price $15,000,000 $35,000,000
Sales Price Per Room $38,462 $52,395
Gross Room Revenue Multiplier (GRRM) 2.7 4.0
OTHER ADJUSTMENTS (1)
Transaction Market Conditions 0.0% 10.0%
Location & Strength of Local Market 0.0% 0.0%
Extent and Quality of the Facilities 0.0% -5.0%
Condition of the Facilities/Age -5.0% 0.0%
ADJUSTED PRICE PER ROOM $36,500 $55,000
======= =======
<PAGE>
SALES COMPARISON ADJUSTMENT GRID
SHERATON IN LAKESIDE
Raddisson Twin Towers The Inn at Maingate Bahia Mar Resort & Yachting Center
--------------------- ------------------ ----------------------------------
Orlando, FL Kissimmee, FL Fort Lauderdale, FL
Fee Simple Fee Simple Fee Simple
742 580 298
69% 75% 85%
$64.00 $45.00 $87.00
$11,959,853 $7,144,875 $8,043,542
Nov-95 Jan-97 Jun-94
$37,625,000 $25,000,000 $29,250,000
$50,708 $43,103 $98,154
3.1 3.5 3.6
5.0% 0.0% 10.0%
-10.0% 0.0% -10.0%
<PAGE>
-10.0% -10.0% -20.0%
-5.0% 0.0% -15.0%
$40,600 $38,800 $63,800
Note:
(1) A negative adjustment indicates that the comparable sale
had a superior location, size & extent of facilities,
condition or location than that of the subject. As a
result, the sale price must be adjusted downward to make
the sale comparable with the subject property. A positive
adjustment indicates that the comparable sale was inferior
to that of the subject and the price per room must be
increased.
(2) The sale included 8 properties for $78 million, the average
price per room was $34667. Utilizing this figure and the
size of the Ramada, the price would equal t$13,500,000.
However, the new owners planned a $1.5 million renovation
on the hotel t the time of purchase. Therefore, the
transaction price is estimated to be $15,000,000 prior to
adjustment.
(3) The sale price includes $10.5 million renovation.
</TABLE>
<PAGE>
Page 85
The following paragraphs briefly present a rationale
for the major adjustments made to the price per room of each
identified comparable sale.
Ramada Inn Resort Maingate (Kissimmee, FL)
The Ramada Inn Resort Maingate was purchased by Samoth
USA as a part of an eight-hotel portfolio for $78 million. Six
properties out of this portfolio are located in the Orlando
market including the Ramada Inn Resort Maingate and the Holiday
Inn Maingate West, both of which are considered to be the
subject's competitors.
Samoth USA purchased the 2,250-room portfolio from
Buckingham International PLC for an estimated $34,667 per room in
June of 1996. Samoth USA has not allocated or determined
individual prices for each hotel within the portfolio. Due to the
relative similarities of each hotel in the portfolio, we have
estimated the allocated price by dividing the $78 million
purchase price by the total number of rooms in the portfolio. On
the basis of this analysis, we have estimated the adjusted
purchase price for Ramada Inn Resort Maingate to be $13,500,000.
However, the owners planned a $1.5 million renovation at the time
of purchase. The cost of the transaction, including the
acquisition price and renovations, is estimated to total
$15,000,000.
Upon completion of the renovation, this hotel will be
in superior condition to that of the subject Sheraton. To reflect
this relatively superiority, we have adjusted the sales price per
room downward by five percent. Based on this analysis, the
adjusted price per room of this hotel is estimated to be $36,500
per room.
Holiday Inn Hotel and Suites (Kissimmee, FL)
This hotel is located on the intersection of US-192 and
World Drive, which is the direct access road to Walt Disney World
Resort. The Holiday Inn is approximately four miles east of the
subject property along Irlo Bronson Memorial Highway. Maingate
Investors Partners purchased the hotel in March of 1994 for $35
million or $52,395 per room.
<PAGE>
Page 86
- - The transaction market conditions have much improved since
1995 and the purchase price has been adjusted to reflect
this improvement.
- - The property was in need of renovations at the time of the
transaction. The purchase price of $35 million included the
renovation cost of $5 million. This renovation included an
upgrade of the existing facilities including the guest rooms
and the public area. We have adjusted the sales price per
room downward by five percent.
The hotel also underwent renovations in 1996 that
included converting 55 guest rooms to "Kid Suites." These Kid
Suites are oversized rooms that have a separate sleeping area for
children with bunk beds and/or single beds, TV, and VCR. The
children's rooms are shaped like "forts" with partial walls that
separate the children's sleeping area from the rest of the room.
The current owner of the hotel also owns Holiday Inn SunSpree
Resorts in Lake Buena Vista. On the basis of this analysis, the
adjusted price per room of this hotel is estimated to be $55,000
per room.
Radisson Twin Towers (Orlando, FL)
Malayan United Industries purchased the hotel for
$37,625,000 or $50,708 per room in November, 1995. Reportedly,
the property was in excellent condition at the time of the sale.
The transaction market conditions have improved since 1995 and
the purchase price has been adjusted to reflect the improvements.
The property is located along I-Drive, near Universal Studio's
entrance, and enjoys good access and visibility from the road.
- - The transaction market conditions have much improved since
1995 and the purchase price has been adjusted to reflect
this improvement.
- - The I-Drive submarket is considered superior to the
subject's submarket in terms of proximity to the Orange
Convention Center and other major attractions readily
available. The I-Drive submarket demands a premium of
approximately $10
<PAGE>
Page 87
average rate above the subject's
submarket. The compare the Radisson to the subject hotel, we
have adjusted the price per room downward by five percent to
account for these superior market conditions.
- - The Radisson Twin Towers is a modern high-rise hotel with
interior corridors. The property features 58,000 sq.ft. of
meeting space, junior Olympic size outdoor swimming pool,
exercise room, extensive food and beverage facilities and
other amenities. The property is superior in terms of the
subject. To reflect this, we have adjusted the sales price
per room downward by 10 percent.
- - Sales price did not include any renovation cost as the
property was in excellent condition. Built in 1972, this
hotel underwent a partial renovation in early 1996 that
included the upgrade of the public area and guest rooms in
one tower. This hotel is considered to be superior in
condition to that of the subject Sheraton and to reflect
this difference, we have adjusted the sales price per room
downward by five percent.
On the basis of this analysis, the adjusted price per room of
this hotel is estimated to be $40,600 per room.
The Inn at Maingate (Kissimmee, FL)
This pending sale, which is expected to close in January 1997,
should be the most recent transaction in the Orlando market area.
Reportedly, this 580-room property is to be purchased by GENCOM
for $25 million. The purchase price will includes the cost of a
planned $8 million renovation to upgrade the existing facilities
and to construct 20,000 sq. ft. of additional meeting space.
After the termination of the Radisson affiliation in January
1996, the property was operated as an independent hotel.
Reportedly, upon completion of the renovation, the new owner
plans to convert the hotel to a DoubleTree affiliation.
<PAGE>
Page 88
This property is a full-service hotel including 3,000 sq. ft. of
meeting space, a large pool area, restaurants, and other
amenities. Upon completion of the planned renovations and the
addition, this hotel will be able to accommodate large groups as
well as leisure demand. Upon completion of the renovation, the
extent and quality of the facilities offered by the Inn at
Maingate will be superior to that of the subject. To reflect this
relative difference, we have adjusted the sales price per room
downward by approximately 10 percent.
On the basis of this analysis, the adjusted price per room of
this resort hotel is estimated to be $38,800 per room.
Information has been presented on several comparable hotel sales
which are considered to be relatively similar to the Sheraton Inn
Lakeside. After adjustments, the comparable hotel sale
transactions indicate a unit price range for the subject hotel
from $36,500 to $55,000 per room. We have placed the more weight
on the price per room indications of The Inn at Maingate. This
hotel is within the competitive supply and competes for a similar
client profile. On the basis of an analysis of these sales, we
have estimated the market value of the fee simple interest in the
subject property by this approach to be approximately $43,000 per
room, or $28,000,000 as of January 1, 1997.
<PAGE>
Page 89
D.3 INCOME APPROACH
The income approach to value converts anticipated future benefits
into an estimate of present value. In this respect, the process
is very similar to pricing in other capital markets. The approach
requires the careful estimation of future benefits -- income
before debt service, residual values, etc. -- and application of
investor yield or return requirements. The income approach brings
together reasoned estimates of future revenues and expenses with
the investor's yield requirements. These yield requirements, in
turn, reflect varieties of risk, including property type,
location, local market conditions, and so forth.
Yield and direct capitalization techniques are conventionally
used to convert future benefits to value -- the discounted cash
flow (DCF) technique and the overall capitalization rate (OAR)
technique. The DCF technique entails (1) modeling the future
performance of the subject, over a specific holding period, (2)
estimating the future value (reversionary value) at the end of
the holding period, and (3) converting the stream of periodic
benefits and reversionary value, through a discounting process at
investor yields, to a present value. The selection of an
appropriate discount rate is essential to this process.
By comparison, direct capitalization using an overall rate (OAR)
converts a single, "normalized" year's income or income before
debt service into a value by dividing the appropriate
capitalization rate into the normalized income. Subsequent
adjustments are then made to take into consideration variations
from normalized operations. In order to value the Sheraton Inn
Lakeside, we have utilized only the discounted cash flow method
for the income approach. The direct capitalization method has not
been used because most investors do not use it as a tool to
analyze value from income. In addition, it is difficult to
reflect future increases in occupancy and room rate using direct
capitalization. Finally, using a "normalized" or stabilized net
operating income is highly speculative and can produce erroneous
results.
<PAGE>
Page 90
The discussion on the following pages provide a summary of our
projection of revenues, expenses, discount rates, capitalization
rates, and many of the other assumptions which are incorporated
in the income approach. The discussion of revenues and expenses
begins with an examination of historical trends. Finally,
estimates are made with regard to the appropriate projection of
revenues, expenses, and capital items.
HISTORICAL FINANCIAL PERFORMANCE
The historical operating results for the subject hotel for the
years ended 1994 and 1995 is presented on the following page. The
next page presents the historical operating results for the
subject hotel through year-to-date October 27, 1995 and 1996.
<PAGE>
Page 91
<TABLE>
Recast of Historical Financial Statements
Sheraton Inn Lakeside
1994 Actual Income
Per Occupied
Amount Ratio Per Room Room/Day
<S> <C> <C>
Number of Days Open/Year 365
Available Rooms (Daily) 615
Available Rooms (Annually 224,475
Occupancy Percentage 77.2%
Occupied Rooms 173,227
Average Room Rate $50.21
REVENUES
Rooms $9,206,836 73.7% $14,970 $53.15
Food 1,537,953 12.3% 2,501 8.88
Beverage 346,806 2.8% 564 2.00
Telephone 274,657 2.2% 447 1.59
Corner Market 588,506 4.7% 957 3.40
Rentals and Other Income (Net)(3) 536,360 4.3% 872 3.10
---------- -------- ------- -------
Total Revenues $12,491,118 100.0% $20,311 $72.11
DEPARTMENTAL EXPENSES
Rooms $2,904,769 31.6% $4,723 $16.77
Food & Beverage 1,378,847 73.2% 2,242 7.96
Telephone 165,655 60.3% 269 0.96
Corner Market 361,687 61.5% 588 2.09
---------- ------ -------- -------
Total Departmental Expenses $4,810,958 38.5% $7,823 $27.77
TOTAL DEPARTMENTAL INCOME $7,680,160 61.5% $12,488 $44.34
<PAGE>
Per Occupied
Amount Ratio Per Room Room/Day
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,033,961 8.3% $1,681 $5.97
Sales and Marketing 634,854 5.1% 1,032 3.66
Management Fees 499,658 4.0% 812 2.88
Franchise Fees 552,446 4.4% 898 3.19
Energy 725,366 5.8% 1,179 4.19
Property Operations & Maintenance 663,115 5.3% 1,078 3.83
---------- ------ --------- --------
Total Undistributed Operating $4,109,400 32.9% $6,682 $23.72
INCOME BEFORE FIXED CHARGES $3,750,760 28.6% 5,806 20.61
FIXED CHARGES
Property Taxes & Personal
Property Taxes (2) $523,443 4.2% $851 $3.02
Other Taxes (3) 876 0.0% 1 0.01
Insurance 65,084 0.5% 106 0.38
Equipment Rent 27,103 0.2% 44 0.16
- ---------- ------ --------- ------- --------
Total Fixed Charges $616,506 4.9% $1,002 $3.56
INCOME BEFORE RESERVE $2,954,254 23.7% $10,807 $17.05
========== ====== ========= =======
<PAGE>
Recast of Historical Financial Statements
Sheraton Inn Lakeside
1994 Actual Income
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 615
Available Rooms (Annually 224,475
Occupancy Percentage 78.3%
Occupied Rooms 175,831
Average Room Rate $47.94
REVENUES
Rooms $8,922,751 73.8% $14,509 $50.75
Food 1,581,691 13.1% 2,572 9.00
Beverage 315,448 2.6% 513 1.79
Telephone 303,038 2.5% 493 1.72
Corner Market 544,413 4.5% 885 3.10
Rentals and Other Income (Net)(3) 424,461 3.5% 690 2.41
---------- -------- ------- -------
Total Revenues $12,091,802 100.0% $19,661 $68.77
DEPARTMENTAL EXPENSES
Rooms 2,951,965 33.1% $4,800 $16.79
Food & Beverage 1,426,734 75.2% 2,320 8.11
Telephone 157,618 52.0% 256 0.90
Corner Market 361,858 66.5% 588 2.06
---------- ------ -------- -------
Total Departmental Expenses $4,898,175 40.5% $7,965 $27.86
TOTAL DEPARTMENTAL INCOME $7,193,627 59.5% $11,697 $40,91
<PAGE>
1995 Actual Income
Per Occupied
Amount Ratio Per Room Room/Day
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,016,612 8.4% $1,653 $5.78
Sales and Marketing 641,926 5.3% 1,044 3.65
Management Fees 483,672 4.0% 786 2.75
Franchise Fees 535,364 4.4% 871 3.04
Energy 725,558 6.0% 1,180 4.13
Property Operations & Maintenance 791,466 6.5% 1,287 4.50
---------- ------ --------- --------
Total Undistributed Operating $4,194,598 34.7% $6,820 $23.86
INCOME BEFORE FIXED CHARGES $2,999,029 24.8% 4,876 17.06
FIXED CHARGES
Property Taxes & Personal
Property Taxes (2) $490,220 4.1% $797 $2.79
Other Taxes (3) 1,303 0.0% 2 0.01
Insurance 77,086 0.6% 125 0.44
Equipment Rent 31,236 0.3% 51 0.18
- ---------- ------ --------- ------- --------
Total Fixed Charges $599,845 5.0% $975 $3.41
INCOME BEFORE RESERVE $2,399,184 19.8% $3,901 $13.64
========== ====== ========= =======
Notes:
The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen. (1) Includes rental income from
timeshare sales desk and the gift shop. Other Income includes
vending and movie commissions, valet revenue, and other
miscellaneous revenues.
(2) In 1995, $1,500 Fee and $506 underaccrual from 1994.
(3) Includes intangible tax, business occupational tax, FR tax, and the 192 beautification tax.
</TABLE>
<PAGE>
Page 93
ESTIMATED OPERATING RESULTS
Estimates of income and expenses, in current dollars, have been
prepared for the subject hotel from January 1, 1997 through
December 31, 2007. Our financial projections are based upon an
analysis of the historical operating results of the subject and
on the performance of comparable hotels. A representative year of
operation, expressed in 1996 dollars, is first established and
then adjusted to account for inflation and the varying levels of
occupancy for each year in the projection period. The
representative level of occupancy at the hotel is estimated to be
84 percent. The following paragraphs describe the assumptions and
bases of our estimates.
Inflation Assumption
In order to estimate future inflation of revenues and expenses at
the subject hotel, we have reviewed the historical inflation of
the consumer price index-urban markets (CPI-U).
- ---------------------- ---------------------
Year CPI-U
---- -----
1988 4.4%
1989 4.6%
1990 6.1%
1991 3.1%
1992 2.9%
1993 2.7%
1994 2.7%
1995 2.5%
- ---------------------- ---------------------
On the basis of historical inflation rates and on our estimates
of future inflation, we have assumed an inflation assumption of
3.5 percent, compounded annually, from a base year of 1996.
Revenue
Rooms Revenue is based upon the estimates of average
annual occupancy and room rates as described previously
in this report.
<PAGE>
Page 94
Food Revenue is derived from the estimated sales of food
in the restaurants, cafes, lounges, room service, and
banquet facilities in the hotel. Food revenue also
includes any miscellaneous revenue such as public room
rental and corkage fees. Our estimate is based upon an
analysis of actual operations of comparable hotels and
on historical food sales at the subject.
On the basis of the analysis of the historical operating
results and the results of comparable hotels, we assume
that the subject hotel will achieve food revenue of
$8.00 per occupied room, in 1996 dollars, in the
representative year. Food revenue is estimated to be 90
percent variable with occupancy and is adjusted to
account for inflation and occupancy levels throughout
the projection period.
Beverage Revenue is derived from the estimated sales of
all alcoholic beverages in the restaurants, cafes,
lounges, room service, and banquet facilities. On the
basis of the analysis of the historical operating
results and the results of comparable hotels, we assume
that the subject hotel will achieve beverage revenue of
$1.70 per occupied room, in 1996 dollars, in the
representative year. Beverage revenue is estimated to be
90 percent variable with occupancy and is adjusted to
account for inflation and occupancy levels throughout
the projection period.
Telephone Revenue includes the revenue derived from long
distance and local telephone calls, as well as any "per
call" charges applied to credit card or other calls.
Revenue in this category is estimated to equal $1.50 per
occupied room, in 1996 dollars, in the representative
year. Telephone revenue is estimated to be 100 percent
variable with occupancy and is adjusted to account for
inflation and varying occupancy levels throughout the
projection period.
Corner Market includes all revenue associated with the
operation of the deli, mini-market and Pizza Hut
operation located in the main building of the
<PAGE>
Page 95
property. We estimate that revenue in this department will
equal $667,800, or $3.50 per occupied room, in the
representative year, in constant 1996 dollars. Corner
Market revenue is estimated to be 80 percent variable
with occupancy and is adjusted to account for inflation
and varying occupancy levels throughout the projection
period.
Rental and Other Income, Net includes all miscellaneous
income (net of expenses) including interest income,
concierge commissions, photo commissions, vending and
movie commissions, valet revenue, and other
miscellaneous items. This category also includes rental
income form the gift shop and timeshare sales desk.
Other income also include vending and movie commissions,
valet revenue, and other miscellaneous revenues. On the
basis of our analysis of historical leases and other
income, we estimate that rental and other income, net of
expenses, will be $2.45 per occupied room at a
representative level of occupancy, in constant 1996
dollars. Revenue in this category is assumed to be 50
percent variable with occupancy and is adjusted to
account for inflation and varying occupancy levels
throughout the projection period.
Departmental Expenses
Rooms Departmental Expense includes salaries and wages
for the front desk, house-keeping, reservations, bell
staff, and laundry, plus fringe benefits. Other
operating expenses in the rooms department include
linen, cleaning supplies, recreation and health club,
guest supplies, uniforms, reservations expenses,
security, equipment leases, and travel agent
commissions.
Rooms department expense is estimated based upon the
historical rooms departmental expenditures at the
subject hotel, comparisons to other similar properties,
and our estimates of occupancy and average rate over the
estimation period. We estimate that rooms departmental
expenditures will equal 31.5 percent of departmental
sales, in the representative year. Expenses
<PAGE>
Page 96
are estimated to be 55 percent variable with occupancy and
are adjusted to account for inflation and occupancy
levels throughout the projection period.
Food and Beverage Expense includes the cost of goods
sold (food and beverages), labor and related benefits,
and other operating expenses. Labor costs include
departmental management, cooks and kitchen personnel,
service staff, banquet staff, and bartenders. Other
operating expenses include china, glass, silver, linens,
restaurant and kitchen supplies, menus and printing, and
special promotions. Labor costs are analyzed on a fixed
versus variable basis, as are other operating costs. The
cost of goods sold was considered completely variable as
a ratio to sales.
Food and beverage expense is estimated to be 78 percent
of combined food and beverage revenue in the
representative year. Food and beverage expenditures are
estimated to be 55 percent variable with occupancy and
are adjusted to account for inflation and occupancy
levels throughout the projection period.
Telephone Expenses are estimated based upon an analysis
of historical operating results at the subject hotel and
on an analysis of the expenses of comparable hotels. We
estimate that telephone expenditures will equal
approximately 55 percent of departmental revenue in the
representative year. Telephone expenses are estimated to
be 60 percent variable with occupancy and are adjusted
to account for inflation and occupancy levels throughout
the projection period.
Corner Market includes all expenses associated with the
operation of the deli, mini-market, and Pizza Hut
operation. We assume that departmental expenditures in
this category will equal approximately 65 percent of
revenue in a representative year of operation. Expenses
are assumed to be 65 percent variable with occupancy and
are adjusted to account for inflation and occupancy
levels throughout the projection period.
<PAGE>
Page 97
Undistributed Operating Expenses
Administrative and General Expense includes payroll and
related expenses for the general manager, personnel and
training, clerical staff, controller and accounting
staff. Other administrative and general (A&G) expenses
include office supplies, computer services, accounting
and legal fees, travel expenses, and liability
insurance. Credit card commissions were classified as an
A&G expense, and are directly variable with sales.
A&G expenses are estimated based upon actual operating
results of comparable hotels and on the historical
expenses recorded by the hotel. We estimate that A&G
expenses will equal approximately 8.3 percent of total
sales in the representative year or $1,624 per available
room, in constant 1996 dollars. Estimates are estimated
to be 85 percent fixed and are adjusted to account for
inflation and occupancy levels throughout the projection
period.
Marketing Expense includes payroll and related expenses
for the sales and marketing staff, direct sales
expenses, advertising and promotion, and travel expense
for the sales staff. Marketing expenses are estimated
based upon actual operating results of comparable hotels
and on the historical expenses recorded by the hotel. We
estimate that marketing expenditures will equal
approximately 4.5 percent of total sales in a
representative year, or $894 per available room, in 1996
dollars. Estimates are estimated to be 85 percent fixed
and are adjusted to account for inflation and occupancy
levels throughout the projection period.
Management Fee Expense has been estimated to be four
percent of gross revenue on the basis of a review of the
management contract.
Franchise Fee Expense has been estimated to be six
percent of rooms revenue on the basis of a review of the
franchise agreement. The
<PAGE>
Page 98
current agreement will terminate as of 2003. We have
assumed that upon termination of the Sheraton franchise, the
subject hotel would be affiliated with a similar US-based chain
and will pay a similar franchise royalty fee.
Energy Costs include the expenditure for electricity,
fuel, water, waste removal and related operating
supplies. On the basis of historical energy costs at the
hotel and the actual expenses recorded by comparable
hotels, we assume that the energy expense will equal
$1,180 per room in a representative year, in constant
1996 dollars. Energy expenditures are estimated to be 90
percent fixed and are adjusted to account for inflation
and occupancy levels throughout the projection period.
Property Operations and Maintenance Expense (POM)
includes payroll and related expenses, as well as other
expenses necessary for painting, decorating, and repairs
of the building, grounds and equipment. This expense is
estimated based upon historical property operations and
maintenance expenses at the subject hotel and on actual
expenses of comparable hotels. We estimate that the POM
expense will equal $1,300 per room in a representative
year, in constant 1996 dollars. Expenditures are
estimated to be 90 percent fixed and are adjusted to
account for inflation and occupancy levels throughout
the projection period.
Fixed Charges
Property Taxes and Other Taxes are estimated based upon
the current property tax assessment and on the actual
tax bills for 1994 and 1995. A more detailed analysis of
historical and current property taxes is presented in
Section B of this report.
Insurance on building and contents against damage was
estimated based upon the historical expenses incurred at
the subject hotel. We estimate that insurance costs will
equal $90 per available room, in constant 1996 dollars.
<PAGE>
Page 99
Expenses are adjusted to account for inflation
throughout the projection period.
Equipment Rental includes rental of computers, copy
machines, and Pizza Hut equipment were based upon
historical expenses at the property. We estimate that
equipment rental costs will equal $45 per room, in 1996
dollars. Expenses are adjusted to account for inflation
throughout the projection period.
Reserve for Replacement provides a fund for the
replacement of furniture, fixtures and equipment. We
assume that the reserve for replacement will equal four
percent of total revenue throughout the projection
period, consistent with industry practice.
Capital Expenditures We have estimated the capital
expenditures required to renovate the property. These
capital expenditures are assumed as a deduction from
operating income. A more detailed analysis of the
capital expenditures assumed is presented in section B.1
of this report (Description and Analysis of the
Property).
Income Before Debt Service
Estimated operating results for the subject property to the level
of profit before debt service, income taxes, depreciation and
other capital costs, are presented on the following pages.
<PAGE>
<TABLE>
Recast of Historical Financial Statements
Sheraton Inn Lakeside
Year-To-Date October 31, 1995
Per Occupied
Amount Ratio Per Room Room/Day
<S> <C> <C>
Number of Days Open/Year 304
Available Rooms (Daily) 615
Available Rooms (Annually 186,960
Occupancy Percentage 82.1%
Occupied Rooms 153,532
Average Room Rate $48.08
REVENUES
Rooms $7,814,328 73.8% $12,706 $50.90
Food 1,385,307 13.1% 2,253 9.02
Beverage 281,163 2.7% 457 1.83
Telephone 272,347 2.6% 443 1.77
Corner Market 469,812 4.4% 764 3.06
Rentals and Other Income (Net)(3) 364,327 3.4% 592 2.37
---------- -------- ------- -------
Total Revenues $10,587,284 100.0% $17,215 $68.96
DEPARTMENTAL EXPENSES
Rooms $2,536,713 32.5% $4,125 $16.52
Food & Beverage 1,211,143 72.7% 1,969 7.89
Telephone 136,227 50.0% 222 0.89
Corner Market 307,559 65.5% 500 2.00
---------- ------ -------- -------
Total Departmental Expenses $4,191,642 39.6% $6,816 $27.30
TOTAL DEPARTMENTAL INCOME $6,395,642 60.4% $10,399 $41.66
<PAGE>
Per Occupied
Amount Ratio Per Room Room/Day
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $846,324 8.0% $1,376 $5.51
Sales and Marketing 588,353 5.6% 957 3.83
Management Fees 423,505 4.0% 689 2.76
Franchise Fees 468,859 4.4% 762 3.05
Energy 630,346 6.0% 1,025 4.11
Property Operations & Maintenance 644,321 6.1% 1,048 4.20
---------- ------ --------- --------
Total Undistributed Operating $3,601,708 34.0% $5,856 $23.46
INCOME BEFORE FIXED CHARGES $2,793,934 26.4% 4,543 18.20
FIXED CHARGES
Property Taxes & Personal
Property Taxes (2) $407,443 3.8% $663 $2.65
Other Taxes (3) 1,303 0.0% 2 0.01
Insurance 62,962 0.6% 102 0.41
Equipment Rent 26,298 0.2% 43 0.17
- ---------- ------ --------- ------- --------
Total Fixed Charges $498,006 4.7% $810 $3.24
INCOME BEFORE RESERVE $2,295,928 21.7% $3,733 $14.95
========== ====== ========= =======
<PAGE>
Year-To-Date October 31, 1996
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 305
Available Rooms (Daily) 615
Available Rooms (Annually 198,555
Occupancy Percentage 87.4%
Occupied Rooms 173,517
Average Room Rate $50.52
REVENUES
Rooms $8,766,487 75.2% $14,254 $50.52
Food 1,322,770 11.3% 2,151 7.62
Beverage 289,444 2.5% 471 1.67
Telephone 243,653 2.1% 396 1.40
Corner Market 469,812 5.3% 1,008 3.57
Rentals and Other Income (Net)(3) 619,906 3.5% 670 2.38
---------- -------- ------- -------
Total Revenues $11,654,396 100.0% $18,950 $67.17
DEPARTMENTAL EXPENSES
Rooms $2,673,948 30.5% $4,348 $15.41
Food & Beverage 1,263,634 78.4% 2,055 7.28
Telephone 137,779 56.5% 224 0.79
Corner Market 395,027 63.7% 642 2.28
---------- ------ -------- -------
Total Departmental Expenses $4,479,388 38.4% $7,269 $25.76
TOTAL DEPARTMENTAL INCOME $7,184,008 61.6% $11,681 $41.40
<PAGE>
Per Occupied
Amount Ratio Per Room Room/Day
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $893,881 7.7% $1,453 $5.15
Sales and Marketing 540,390 4.6% 879 3.11
Management Fees 466,207 4.0% 758 2.69
Franchise Fees 525,931 4.5% 855 3.03
Energy 629,061 5.4% 1,023 3.63
Property Operations & Maintenance 663,681 5.7% 1,079 3.82
---------- ------ --------- --------
Total Undistributed Operating $3,719,151 31.9% $6,047 $21.43
INCOME BEFORE FIXED CHARGES $3,464,857 29.7% 5,634 19.97
FIXED CHARGES
Property Taxes & Personal
Property Taxes (2) $424,300 3.6% $690 $2.45
Other Taxes (3) 2,021 0.0% 3 0.01
Insurance 70,897 0.6% 115 0.41
Equipment Rent 30,570 0.3% 50 0.18
- ---------- ------ --------- ------- --------
Total Fixed Charges $527,788 4.5% $858 $3.04
INCOME BEFORE RESERVE $2,937,069 22.2% $4,776 $16.93
========== ====== ========= =======
Notes:
The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen. (1) Includes rental income from
timeshare sales desk and the gift shop. Other Income includes
vending and movie commissions, valet revenue, and other
miscellaneous revenues. (2) Includes intangible tax, business
occupational tax, FR tax, and the 192 beautification tax.
<PAGE>
Sheraton Inn Lakeside
Statement of Estimated
Income and Expenses
1997
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 651
Available Rooms (Annually 237,615
Occupancy Percentage 84%
Occupied Rooms 199,400
Average Room Rate $55.00
REVENUES
Rooms $10,967,000 75.7% $16,846 $55.00
Food 1,643,900 11.4% 2,525 8.24
Beverage 349,300 2.4% 537 1.75
Telephone 309,600 2.1% 476 1.55
Corner Market 716,100 4.9% 1,100 3.59
Rentals and Other Income (Net)(1) 494,800 3.4% 760 2.48
---------- -------- ------- -------
Total Revenues $14,480,700 100.0% $22,244 $72.62
DEPARTMENTAL EXPENSES
Rooms $3,187,400 29.1% $4,896 $15.98
Food & Beverage 1,531,200 76.8% 2,352 7.68
Telephone 167,300 54.0% 257 0.84
Corner Market 462,400 64.6% 710 2.32
---------- ------ -------- -------
Total Departmental Expenses $5,348,300 36.9% $8,216 $26.82
TOTAL DEPARTMENTAL INCOME $9,132,400 63.1% $14,028 $45.80
<PAGE>
Per Occupied
Amount Ratio Per Room Room/Day
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,101,400 7.6% $1,692 $5.52
Sales and Marketing 606,800 4.2% 932 3.04
Management Fees 579,200 4.0% 890 2.90
Franchise Fees 658,000 4.5% 1,011 3.30
Energy 798,600 5.5% 1,227 4.01
Property Operations & Maintenance 879,900 6.1% 1,352 4.41
---------- ------ --------- --------
Total Undistributed Operating $4,623,900 31.9% $7,103 $23.19
INCOME BEFORE FIXED CHARGES $4,508,500 31.1% $6,925 22.61
FIXED CHARGES
Property Taxes $424,400 2.9% $652 $2.13
Personal Property Taxes 31,500 0.2% 48 0.16
Other Taxes (2) 73,600 0.5% 113 0.37
Insurance 60,600 0.4% 93 0.30
Equipment Rent (3) 30,300 0.2% 47 0.15
---------- ------ ------- --------
Total Fixed Charges $620,400 4.3% $953 $3.11
INCOME BEFORE RESERVE $3,888,100 26.9% $5,973 $19.50
Reserve for Replacement of FF&E $579,200 4.0% $890 $2.90
Capital Expenditures 940,000 6.5% 1,444 4.71
------- --------- ------- --------
$1,519,200 10.5% $2,334 $7.62
INCOME BEFORE DEBT SERVICE $2,368,900 16.4% $3,639 $11.88
========== ========= ======= ========
<PAGE>
1998
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 651
Available Rooms (Annually 237,615
Occupancy Percentage 83%
Occupied Rooms 198,400
Average Room Rate $58.00
REVENUES
Rooms $11,507,200 76.1% $17,676 $58.00
Food 1,693,700 11.2% 2,602 8.54
Beverage 359,900 2.4% 553 1.81
Telephone 318,800 2.1% 490 1.61
Corner Market 738,200 4.9% 1,134 3.72
Rentals and Other Income (Net)(1) 510,800 3.4% 785 2.57
---------- -------- ------- -------
Total Revenues $15,128,600 100.0% $23,239 $76.25
DEPARTMENTAL EXPENSES
Rooms $3,289,700 28.6% $5,053 $16.58
Food & Beverage 1,580,300 77.0% 2,427 7.97
Telephone 172,600 54.2% 265 0.87
Corner Market 477,000 64.6% 733 2.40
---------- ------ -------- -------
Total Departmental Expenses $5,519,600 36.5% $8,479 $27.82
TOTAL DEPARTMENTAL INCOME $9,609,000 63.5% $14,760 $48.43
<PAGE>
Per Occupied
Amount Ratio Per Room Room/Day
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,139,100 7.5% $1,750 $5.74
Sales and Marketing 627,500 4.1% 964 3.16
Management Fees 605,100 4.0% 929 3.05
Franchise Fees 690,400 4.6% 1,061 3.48
Energy 826,200 5.5% 1,269 4.16
Property Operations & Maintenance 910,200 6.0% 1,398 4.59
---------- ------ --------- --------
Total Undistributed Operating $4,798,500 31.7% $7,371 $24.19
INCOME BEFORE FIXED CHARGES $4,810,500 31.8% $7,389 24.25
FIXED CHARGES
Property Taxes $435,400 2.9% $668 $2.19
Personal Property Taxes 32,300 0.2% 50 0.16
Other Taxes (2) 71,800 0.5% 110 0.36
Insurance 62,800 0.4% 96 0.32
Equipment Rent (3) 31,400 0.2% 48 0.16
---------- ------ ------- --------
Total Fixed Charges $633,300 4.2% $973 $2.19
INCOME BEFORE RESERVE $4,177,200 27.6% $6,417 $21.05
Reserve for Replacement of FF&E $605,100 4.0% $929 $3.05
Capital Expenditures 370,000 2.4% 568 1.86
------- --------- ------- --------
$975,100 6.4% $1,498 $4.91
INCOME BEFORE DEBT SERVICE $3,202,100 21.2% $4,919 $16.14
========== ========= ======= ========
<PAGE>
1999
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 651
Available Rooms (Annually 237,615
Occupancy Percentage 82%
Occupied Rooms 196,000
Average Room Rate $60.00
REVENUES
Rooms $11,760,00 76.0% $18,065 $60.00
Food 1,733,900 11.2% 2,663 8.85
Beverage 368,400 2.4% 566 1.88
Telephone 326,000 2.1% 501 1.66
Corner Market 756,500 4.9% 1,162 3.86
Rentals and Other Income (Net)(1) 524,400 3.4% 805 2.68
---------- -------- ------- -------
Total Revenues $15,470,200 100.0% $23,764 $78.93
DEPARTMENTAL EXPENSES
Rooms $3,381,800 28.8% $5,195 $17.25
Food & Beverage 1,624,500 77.3% 2,495 8.29
Telephone 177,400 54.4% 273 0.91
Corner Market 489,800 64.7% 752 2.50
---------- ------ -------- -------
Total Departmental Expenses $5,673,500 36.7% $8,715 $28.95
TOTAL DEPARTMENTAL INCOME $9,796,700 63.3% $15,049 $49.98
<PAGE>
Per Occupied
Amount Ratio Per Room Room/Day
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,176,700 7.6% $1,808 $6.00
Sales and Marketing 648,200 4.2% 996 3.31
Management Fees 618,800 4.0% 951 3.16
Franchise Fees 705,600 4.6% 1,084 3.60
Energy 854,000 5.5% 1,312 4.36
Property Operations & Maintenance 940,900 6.1% 1,445 4.80
---------- ------ --------- --------
Total Undistributed Operating $4,944,200 32.0% $7,595 $25.23
INCOME BEFORE FIXED CHARGES $4,852,500 31.4% $7,389 24.76
FIXED CHARGES
Property Taxes $435,400 2.8% $668 $2.22
Personal Property Taxes 32,300 0.2% 50 0.16
Other Taxes (2) 71,800 0.5% 110 0.37
Insurance 65,000 0.4% 100 0.33
Equipment Rent (3) 32,500 0.2% 50 0.17
---------- ------ ------- --------
Total Fixed Charges $636,600 4.1% $978 $3.25
INCOME BEFORE RESERVE $4,215,900 27.3% $6,476 $21,51
Reserve for Replacement of FF&E $618,800 4.0% $951 $3.16
Capital Expenditures 0 0.0% 0 0.00
--------- --------- ------- --------
$618,800 4.0% $951 $3.16
INCOME BEFORE DEBT SERVICE $3,597,100 23.3% $5,525 $18.35
========== ========= ======= ========
<PAGE>
Sheraton Inn Lakeside
Statement of Estimated
Income and Expenses
2000
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 651
Available Rooms (Annually 237,615
Occupancy Percentage 81%
Occupied Rooms 192,400
Average Room Rate $62.00
REVENUES
Rooms $11,928,800 75.9% $18,324 $62.00
Food 1,764,800 11.2% 2,711 9.17
Beverage 375,000 2.4% 576 1.95
Telephone 331,200 2.1% 509 1.72
Corner Market 771,500 4.9% 1,185 4.01
Rentals and Other Income (Net)(1) 538,700 3.4% 827 2.80
---------- -------- ------- -------
Total Revenues $15,710,000 100.0% $24,132 $81.65
DEPARTMENTAL EXPENSES
Rooms $3,464,300 29.0% $5,322 $18.01
Food & Beverage 1,664,200 77.8% 2,556 8.65
Telephone 181,500 54.8% 279 0.94
Corner Market 500,800 64.9% 769 2.60
---------- ------ -------- -------
Total Departmental Expenses $5,810,800 37.0% $8,926 $30.20
TOTAL DEPARTMENTAL INCOME $9,899,200 63.0% $15,206 $51.45
<PAGE>
Per Occupied
Amount Ratio Per Room Room/Day
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,214,500 7.7% $1,866 $6.31
Sales and Marketing 669,000 4.3% 1,028 3.48
Management Fees 628,400 4.0% 965 3.27
Franchise Fees 715,700 4.6% 1,099 3.72
Energy 882,200 5.6% 1,355 4.59
Property Operations & Maintenance 972,000 6.2% 1,493 5.05
---------- ------ --------- --------
Total Undistributed Operating $5,081,800 32.3% $7,806 $26.41
INCOME BEFORE FIXED CHARGES $4,817,400 30.7% $7.400 25.04
FIXED CHARGES
Property Taxes $426,300 2.7% $655 $2.22
Personal Property Taxes 31,600 0.2% 49 0.16
Other Taxes (2) 68,700 0.4% 105 0.36
Insurance 67,200 0.4% 103 0.35
Equipment Rent (3) 33,600 0.2% 52 0.17
---------- ------ ------- --------
Total Fixed Charges $627,400 4.0% $964 $3.26
INCOME BEFORE RESERVE $4,190,000 26.7% $6,436 $21.78
Reserve for Replacement of FF&E $628,400 4.0% $965 $3.27
Capital Expenditures 0 0.0% 0 0.00
--------- --------- ------- --------
$628,400 4.0% $965 $3.27
INCOME BEFORE DEBT SERVICE $3,561,600 22.7% $5,471 $18.51
========== ========= ======= ========
<PAGE>
Sheraton Inn Lakeside
Statement of Estimated
Income and Expenses
2001
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 651
Available Rooms (Annually 237,615
Occupancy Percentage 80%
Occupied Rooms 190,800
Average Room Rate $64.00
REVENUES
Rooms $12,211,200 75.9% $18,758 $64.00
Food 1,812,900 11.3% 2,785 9.50
Beverage 385,200 2.4% 592 2.02
Telephone 339,900 2.1% 522 1.78
Corner Market 793,100 4.9% 1,218 4.16
Rentals and Other Income (Net)(1) 555,200 3.4% 853 2.91
---------- -------- ------- -------
Total Revenues $16,097,500 100.0% $24,727 $84.37
DEPARTMENTAL EXPENSES
Rooms $3,569,100 29.2% $5,482 $18.71
Food & Beverage 1,714,500 78.0% 2,634 8.99
Telephone 186,900 55.0% 287 0.98
Corner Market 515,500 65.0% 792 2.70
---------- ------ -------- -------
Total Departmental Expenses $5,986,000 37.2% $9,195 $31.37
TOTAL DEPARTMENTAL INCOME $10,111,500 62.8% $15,532 $53.00
<PAGE>
Per Occupied
Amount Ratio Per Room Room/Day
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,255,400 7.8% $1,928 6.58
Sales and Marketing 691,600 4.3% 1,062 3.62
Management Fees 643,900 4.0% 989 3.37
Franchise Fees 732,700 4.6% 1,125 3.84
Energy 912,400 5.7% 1,401 4.78
Property Operations & Maintenance 1,005,100 6.2% 1,544 5.27
---------- ------ --------- --------
Total Undistributed Operating $5,241,100 32.6% $8,051 $27.47
INCOME BEFORE FIXED CHARGES $4,870,400 30.3% $7,481 25.53
FIXED CHARGES
Property Taxes $417,800 2.6% $642 $2.19
Personal Property Taxes 31,000 0.2% 48 0.16
Other Taxes (2) 68,700 0.4% 105 0.36
Insurance 69,600 0.4% 107 0.36
Equipment Rent (3) 34,800 0.2% 53 0.18
---------- ------ ------- --------
Total Fixed Charges $621,900 3.9% $955 $3.26
INCOME BEFORE RESERVE $4,248,500 26.4% $6,526 $22.27
Reserve for Replacement of FF&E $643,900 4.0% $989 $3.37
Capital Expenditures 0 0.0% 0 0.00
--------- --------- ------- --------
$643,900 4.0% $989 $3.37
INCOME BEFORE DEBT SERVICE $3,604,600 22.4% $5,537 $18.89
========== ========= ======= ========
<PAGE>
Sheraton Inn Lakeside
Statement of Estimated
Income and Expenses
2002
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 651
Available Rooms (Annually 237,615
Occupancy Percentage 80%
Occupied Rooms 190,800
Average Room Rate $66.00
REVENUES
Rooms $12,592,800 75.8% $19,344 $66.00
Food 1,876,400 11.3% 2,882 9.83
Beverage 398,700 2.4% 612 2.09
Telephone 351,800 2.1% 540 1.84
Corner Market 820,900 4.9% 1,261 4.30
Rentals and Other Income (Net)(1) 574,600 3.5% 883 3.01
---------- -------- ------- -------
Total Revenues $16,615,200 100.0% $25,523 $87.08
DEPARTMENTAL EXPENSES
Rooms $3,694,000 29.3% $5,674 $19.36
Food & Beverage 1,774,500 78.0% 2,726 9.30
Telephone 193,400 55.0% 297 1.01
Corner Market 533,500 65.0% 820 2.80
---------- ------ -------- -------
Total Departmental Expenses $6,195,400 37.3% $9,517 $32.47
TOTAL DEPARTMENTAL INCOME $10,419,800 62.7% $16,006 $54.61
<PAGE>
Per Occupied
Amount Ratio Per Room Room/Day
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,299,300 7.8% $1,996 $6.81
Sales and Marketing 715,800 4.3% 1,100 3.75
Management Fees 664,600 4.0% 1,021 3.48
Franchise Fees 755,600 4.5% 1,161 3.96
Energy 944,300 5.7% 1,451 4.95
Property Operations & Maintenance 1,040,300 6.3% 1,598 5.45
---------- ------ --------- --------
Total Undistributed Operating $5,419,900 32.6% $8,325 $28.41
INCOME BEFORE FIXED CHARGES $4,999,900 30.1% $7,680 26.20
FIXED CHARGES
Property Taxes $432,400 2.6% $664 $2.27
Personal Property Taxes 32,100 0.2% 49 0.17
Other Taxes (2) 71,100 0.4% 109 0.37
Insurance 72,000 0.4% 111 0.38
Equipment Rent (3) 36,000 0.2% 55 0.19
---------- ------ ------- --------
Total Fixed Charges $643,600 3.9% $989 $3.37
INCOME BEFORE RESERVE $4,356,300 26.2% $6,692 $22.83
Reserve for Replacement of FF&E $664,600 4.0% $1,021 $3.48
Capital Expenditures 0 0.0% 0 0.00
--------- --------- ------- --------
$664,600 4.0% $1,021 $3.48
INCOME BEFORE DEBT SERVICE $3,691,700 22.2% $5,671 $19.35
========== ========= ======= ========
<PAGE>
Sheraton Inn Lakeside
Statement of Estimated
Income and Expenses
2003
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 651
Available Rooms (Annually 237,615
Occupancy Percentage 80%
Occupied Rooms 190,800
Average Room Rate $68.50
REVENUES
Rooms $13,069,800 75.8% $20,076 $68.50
Food 1,942,100 11.3% 2,983 10.18
Beverage 412,700 2.4% 634 2.16
Telephone 364,100 2.1% 559 1.91
Corner Market 849,600 4.9% 1,305 4.45
Rentals and Other Income (Net)(1) 594,700 3.5% 914 3.12
---------- -------- ------- -------
Total Revenues $17,233,000 100.0% $26,472 $90.32
DEPARTMENTAL EXPENSES
Rooms $3,823,300 29.3% $5,873 $20.04
Food & Beverage 1,836,600 78.0% 2,821 9.63
Telephone 200,200 55.0% 308 1.05
Corner Market 552,200 65.0% 848 2.89
---------- ------ -------- -------
Total Departmental Expenses $6,412,300 37.2% $9,850 $33.61
TOTAL DEPARTMENTAL INCOME $10,820,700 62.8% $16,622 $56.71
<PAGE>
Per Occupied
Amount Ratio Per Room Room/Day
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,344,800 7.8% $2,066 7.05
Sales and Marketing 740,900 4.3% 1,138 3.88
Management Fees 689,300 4.0% 1,059 3.61
Franchise Fees 784,200 4.6% 1,205 4.11
Energy 977,300 5.7% 1,501 5.12
Property Operations & Maintenance 1,076,700 6.2% 1,654 5.64
---------- ------ --------- --------
Total Undistributed Operating $5,613,200 32.6% $8,622 $29.42
INCOME BEFORE FIXED CHARGES $5,207,500 30.2% $7,999 $27.29
FIXED CHARGES
Property Taxes $447,600 2.6% $687 $2.35
Personal Property Taxes 33,200 0.2% 51 0.17
Other Taxes (2) 73,600 0.4% 113 0.39
Insurance 74,500 0.4% 115 0.39
Equipment Rent (3) 37,300 0.2% 57 0.20
---------- ------ ------- --------
Total Fixed Charges $666,200 3.9% $1,023 $3.49
INCOME BEFORE RESERVE $4,541,300 26.4% $6,976 $23.80
Reserve for Replacement of FF&E $689,300 4.0% $1,059 $3.61
Capital Expenditures 0 0.0% 0 0.00
--------- --------- ------- --------
$689,300 4.0% $1,059 $3.61
INCOME BEFORE DEBT SERVICE $3,852,000 22.4% $5,917 $20.19
========== ========= ======= ========
<PAGE>
Sheraton Inn Lakeside
Statement of Estimated
Income and Expenses
2004
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 651
Available Rooms (Annually 237,615
Occupancy Percentage 80%
Occupied Rooms 190,800
Average Room Rate $71.00
REVENUES
Rooms $13,546,800 75.9% $20,809 $71.00
Food 2,010,100 11.3% 3,088 10.54
Beverage 427,100 2.4% 656 2.24
Telephone 376,800 2.1% 579 1.97
Corner Market 879,300 4.9% 1,351 4.61
Rentals and Other Income (Net)(1) 615,500 3.4% 945 3.23
---------- -------- ------- -------
Total Revenues $17,855,600 100.0% $27,428 $93.58
DEPARTMENTAL EXPENSES
Rooms $3,957,100 29.2% $6,078 $20.74
Food & Beverage 1,900,900 78.0% 2,920 9.96
Telephone 207,200 55.0% 318 1.09
Corner Market 571,500 65.0% 878 3.00
---------- ------ -------- -------
Total Departmental Expenses $6,636,700 37.2% $10,195 $34.78
TOTAL DEPARTMENTAL INCOME $11,218,900 62.8% $17,233 $58.80
<PAGE>
Per Occupied
Amount Ratio Per Room Room/Day
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,391,900 7.8% $2,138 7.30
Sales and Marketing 766,800 4.3% 1,178 4.02
Management Fees 714,200 4.0% 1,097 3.74
Franchise Fees 812,800 4.6% 1,249 4.26
Energy 1,011,500 5.7% 1,554 5.30
Property Operations & Maintenance 1,114,400 6.2% 1,712 5.84
---------- ------ --------- --------
Total Undistributed Operating $5,811,600 32.5% $8,927 $30.46
INCOME BEFORE FIXED CHARGES $5,407,300 30.3% $8,306 $28.34
FIXED CHARGES
Property Taxes $463,200 2.6% $712 $2.43
Personal Property Taxes 34,400 0.2% 53 0.18
Other Taxes (2) 76,100 0.4% 117 0.40
Insurance 77,200 0.4% 119 0.40
Equipment Rent (3) 38,600 0.2% 59 0.20
---------- ------ ------- --------
Total Fixed Charges $689,500 3.9% $1,059 $3.61
INCOME BEFORE RESERVE $4,717,800 26.4% $7,247 $24.73
Reserve for Replacement of FF&E $714,200 4.0% $1,097 $3.74
Capital Expenditures 0 0.0% 0 0.00
--------- --------- ------- --------
$714,200 4.0% $1,097 $3.74
INCOME BEFORE DEBT SERVICE $4,003,600 22.4% $6,150 $20.98
========== ========= ======= ========
<PAGE>
Sheraton Inn Lakeside
Statement of Estimated
Income and Expenses
2005
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 651
Available Rooms (Annually 237,615
Occupancy Percentage 80%
Occupied Rooms 190,800
Average Room Rate $73.50
REVENUES
Rooms $14,023,800 75.9% $21,542 $73.50
Food 2,080,500 11.3% 3,196 10.90
Beverage 442,000 2.4% 679 2.32
Telephone 390,000 2.1% 599 2.04
Corner Market 910,100 4.9% 1,398 4.77
Rentals and Other Income (Net)(1) 637,000 3.4% 978 3.34
---------- -------- ------- -------
Total Revenues $18,483,400 100.0% $28,392 $96.87
DEPARTMENTAL EXPENSES
Rooms $4,095,600 29.2% $6,291 $21.47
Food & Beverage 1,967,400 78.0% 3,022 10.31
Telephone 214,500 55.0% 329 1.12
Corner Market 591,500 65.0% 909 3.10
---------- ------ -------- -------
Total Departmental Expenses $6,869,000 37.2% $10,551 $36.00
TOTAL DEPARTMENTAL INCOME $11,614,400 62.8% $17,841 $60.87
<PAGE>
Per Occupied
Amount Ratio Per Room Room/Day
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,440,600 7.8% $2,213 $7.55
Sales and Marketing 793,600 4.3% 1,219 4.16
Management Fees 739,300 4.0% 1,136 3.87
Franchise Fees 841,400 4.6% 1,292 4.41
Energy 1,047,000 5.7% 1,608 5.49
Property Operations & Maintenance 1,153,400 6.2% 1,772 6.05
---------- ------ --------- --------
Total Undistributed Operating $6,015,300 32.5% $9,240 $31.53
INCOME BEFORE FIXED CHARGES $5,599,100 30.3% $8,601 $29.35
FIXED CHARGES
Property Taxes $479,400 2.6% $736 $2.51
Personal Property Taxes 35,600 0.2% 55 0.19
Other Taxes (2) 78,800 0.4% 121 0.41
Insurance 79,900 0.4% 123 0.42
Equipment Rent (3) 39,900 0.2% 61 0.21
---------- ------ ------- --------
Total Fixed Charges $713,600 3.9% $1,096 $3.74
INCOME BEFORE RESERVE $4,885,500 26.4% $7,505 $25.61
Reserve for Replacement of FF&E $739,300 4.0% $1,136 $3.87
Capital Expenditures 0 0.0% 0 0.00
--------- --------- ------- --------
$739,300 4.0% $1,136 $3.87
INCOME BEFORE DEBT SERVICE $4,146,200 22.4% $6,369 $21.73
========== ========= ======= ========
<PAGE>
Sheraton Inn Lakeside
Statement of Estimated
Income and Expenses
2006
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 651
Available Rooms (Annually 237,615
Occupancy Percentage 80%
Occupied Rooms 190,800
Average Room Rate $76.00
REVENUES
Rooms $14,500,800 75.9% $22,275 $76.00
Food 2,153,300 11.3% 3,308 11.29
Beverage 457,500 2.4% 703 2,40
Telephone 403,700 2.1% 620 2.12
Corner Market 942,000 4.9% 1,447 4.94
Rentals and Other Income (Net)(1) 659,300 3.4% 1,013 3.46
---------- -------- ------- -------
Total Revenues $19,116,600 100.0% $29,365 $100.19
DEPARTMENTAL EXPENSES
Rooms $4,238,900 29.2% $6,511 $22.22
Food & Beverage 2,036,300 78.0% 3,128 10.67
Telephone 222,000 55.0% 341 1.16
Corner Market 612,200 65.0% 940 3.21
---------- ------ -------- -------
Total Departmental Expenses $7,109,400 37.2% $10,921 $37.26
TOTAL DEPARTMENTAL INCOME $12,007,200 62.8% $18,444 $62.93
<PAGE>
Per Occupied
Amount Ratio Per Room Room/Day
UNDISTRIBUTED OPERATING EXPENSES
Sales and Marketing 821,400 4.3% 1,262 4.31
Management Fees 764,700 4.0% 1,175 4.01
Franchise Fees 870,000 4.6% 1,336 4.56
Energy 1,083,600 5.7% 1,665 5.68
Property Operations & Maintenance 1,193,800 6.2% 1,834 6.26
---------- ------ --------- --------
Total Undistributed Operating $6,224,500 32.6% $9,561 $32.62
INCOME BEFORE FIXED CHARGES $5,782,700 30.2% $8,883 $30.31
FIXED CHARGES
Property Taxes $496,200 2.6% $762 $2.60
Personal Property Taxes 36,800 0.2% 57 0.19
Other Taxes (2) 81,600 0.4% 125 0.43
Insurance 82,600 0.4% 127 0.43
Equipment Rent (3) 41,300 0.2% 63 0.22
---------- ------ ------- --------
Total Fixed Charges $738,500 3.9% $1,134 $3.87
INCOME BEFORE RESERVE $5,044,200 26.4% $7,748 $26.44
Reserve for Replacement of FF&E $764,700 4.0% $1,175 $4.01
Capital Expenditures 0 0.0% 0 0.00
--------- --------- ------- --------
$764,700 4.0% $1,175 $4.01
INCOME BEFORE DEBT SERVICE $4,279,500 22.4% $6,574 $22.43
========== ========= ======= ========
<PAGE>
Sheraton Inn Lakeside
Statement of Estimated
Income and Expenses
2007
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 651
Available Rooms (Annually 237,615
Occupancy Percentage 80%
Occupied Rooms 190,800
Average Room Rate $78.50
REVENUES
Rooms $14,977,800 75.8% $23,007 $78.50
Food 2,228,700 11.3% 3,424 11.68
Beverage 473,500 2.4% 727 2.48
Telephone 417,800 2.1% 642 2.19
Corner Market 975,000 4.9% 1,498 5.11
Rentals and Other Income (Net)(1) 682,400 3.5% 1,048 3.58
---------- -------- ------- -------
Total Revenues $19,755,200 100.0% $30,346 $103.54
DEPARTMENTAL EXPENSES
Rooms $4,387,300 29.3% $6,739 $22.99
Food & Beverage 2,107,600 78.0% 3,237 11.05
Telephone 229,800 55.0% 353 1.20
Corner Market 633,600 65.0% 973 3.32
---------- ------ -------- -------
Total Departmental Expenses $7,358,300 37.2% $11,303 $38.57
TOTAL DEPARTMENTAL INCOME $12,396,900 62.8% $19,043 $64.97
<PAGE>
Per Occupied
Amount Ratio Per Room Room/Day
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,543,200 7.8% $2,371 8.09
Sales and Marketing 850,100 4.3% 1,306 4.46
Management Fees 790,200 4.0% 1,214 4.14
Franchise Fees 898,700 4.5% 1,380 4.71
Energy 1,121,500 5.7% 1,723 5.88
Property Operations & Maintenance 1,235,600 6.3% 1,898 6.48
---------- ------ --------- --------
Total Undistributed Operating $6,439,300 32.6% $9,891 $33.75
INCOME BEFORE FIXED CHARGES $5,957,600 30.2% $9,151 $31.22
FIXED CHARGES
Property Taxes $513,600 2.6% $789 $2.69
Personal Property Taxes 38,100 0.2% 59 0.20
Other Taxes (2) 84,400 0.4% 130 0.44
Insurance 85,500 0.4% 131 0.45
Equipment Rent (3) 42,800 0.2% 66 0.22
---------- ------ ------- --------
Total Fixed Charges $764,400 3.9% $1,174 $4.01
INCOME BEFORE RESERVE $5,193,200 26.3% $7,977 $27.22
Reserve for Replacement of FF&E $790,200 4.0% $1,214 $4.14
Capital Expenditures 0 0.0% 0 0.00
--------- --------- ------- --------
$790,200 4.0% $1,214 $4.14
INCOME BEFORE DEBT SERVICE $4,403,000 22.3% $6,763 $23.08
========== ========= ======= ========
</TABLE>
<PAGE>
Page 104
INVESTMENT CLIMATE OVERVIEW
In establishing valuation parameters to apply to the projected
operating cash flow from the proposed property, we have
researched the current market for hotel investments. Arthur
Andersen conducts a survey of a select group of hotel companies,
investors, developers, investment bankers, and brokers. Our most
recent survey was conducted at the end of the third quarter of
1996.
Our surveys indicate that the investment climate has undergone
significant changes over the last five years. After the economic
recession in the early 1990s, the number of hotel sales
transactions increased significantly between 1993 and 1995. The
price per room of lodging property has increased significantly as
well. In the early 1990s, the primary buyers of hotel assets were
opportunity funds and individual investors lured by the low
prices as a percentage of the replacement cost. New lodging
REITs, established in the early 1990s, also began to invest
heavily into hotel assets. During 1995 and 1996 the larger REITS
(such as Patriot American Hospitality; Starwood Lodging Trust;
FelCor Suite Hotels, Inc.; and HPT) accounted for a large share
of the transactions involving full-service lodging properties.
These organizations must maintain the level of acquisition
achieved in the past and, therefore, have been paying
increasingly higher prices for lodging assets. In addition, many
of the recent REIT acquisitions were completed as part of a
portfolio which, attracted by the opportunity to purchase more
assets in one fell swoop, often resulted in aggressive pricing
parameters.
As the health of the overall U.S. lodging industry has improved,
so has the interest in acquiring lodging assets. The activity of
the REITS, combined with the strategic interests of hotel
companies and the interest of equity investors, has resulted in a
competitive acquisition market.
These changes in the investment market have resulted in a
significant shift in the criteria used to evaluate a potential
transaction. Terminal capitalization and discount rates assumed,
which averaged 11-12 percent and 14-16 percent, respectively in
1991, decreased to an average of 10-11 percent and 12-13 percent,
respectively in early 1996.
<PAGE>
Page 105
Investors interviewed in the third quarter of 1996,
however, indicated that investment parameters may currently be at
the "low-point" of this real estate cycle. Investors interviewed
admitted that although recent acquisitions have been structured
using aggressive investment parameters, they are likely to
re-evaluate the assumptions and investment parameters used in the
near future.
The following table summarizes the results of our investor survey
completed at the end of the Third Quarter 1996.
- ---------------------------------------------------------------
Arthur Andersen Hotel Investor Survey - Third Quarter 1996
- ---------------------------------------------------------------
Range
Free and Clear Discount Rates 12.0%-15.0%
Terminal Capitalization Rates 10.0%-12.5%
Going-In Capitalization Rates 10.0%-11.0%
Equity Return Req. (leveraged) 20.0%-30.0%
Equity Return Req. (unleveraged) 12.0%-18.0%
Cash on Cash Return Requirements 10.0%-17.5%
- --------------------------------------------------------------
DISCOUNTED CASH FLOW ANALYSIS
The discounted cash flow (DCF) technique converts the projected
stream of benefits, either before or after financing, as
appropriate, into a present value. Once the projection of net
income or cash flow is accomplished, a discount rate and
capitalization rate at reversion must be chosen. The selection of
these rates is somewhat subjective, since investor criteria for
the acquisition of real property is subject to variation, and no
organized property exchange exists.
Discount Rates
A free and clear discount rate is used to discount future
earnings without regard to any leverage or financing. Since there
has been a general lack of hotel financing over the last several
years, most of the larger hotel transactions have involved all
cash purchases. Discount rates (or internal rate-of-return
requirements) typically vary by a number of
<PAGE>
Page 106
factors: long-term
investor-return requirements on alternative investments; type and
motivation of investor; property type - e.g., hotel, apartments,
etc.; and local market area conditions. Our survey of investor
criteria indicated that investors are currently assuming discount
rate that range from 12 to 15 percent.
After giving full consideration to these surveys as well as to
the type of property being appraised, its competitiveness in its
market place, and general market conditions, a discount rate of
14 percent, applied to net cash flow before debt service, is
judged to be appropriate.
Terminal Capitalization Rates
The "exit" capitalization rate at reversion is used to convert
the projected stream of income beyond the last year of the
projection period into a value at the end of the projection
period. Our investor surveys revealed capitalization rates
ranging from 10.0 to 12.5. The Orlando market has reflected
strong growth over the last year and is expected to exhibit
continued upside potential in the near term. Our analysis
reflects the upside potential of the market in the estimates of
future cash flow projections and considers the subject hotel's
ability to reflect improved operations as a result of the overall
market growth.
The subject hotel was originally built in 1973 with expansions in
1977, 1980 and 1982. By the year 2007, much of the physical plant
will be 35 years old. It is likely than an investor would select
a more conservative residual capitalization rate to reflect the
overall age of the subject property at the end of 2007. To
reflect the age of the property, we have assumed a cap rate
within the upper end of the range indicated by our investor
survey. On the basis of this analysis, we have judged a terminal
capitalization rate of 11.5 percent to be appropriate for the
subject Sheraton Hotel.
Conclusion by Discounted Cash Flow Analysis
Application of the discounted cash flow technique to the total
projected net income for the appraised property as presented on
the following pages yields a fee simple value estimate for the
subject at January 1, 1997 of $28,000,000.
<PAGE>
Page 107
<TABLE>
Discounted Cash Flow Analysis
Sheraton Inn Lakeside
Kissimmee, Florida
Net Present Value
Income Before Residual Discount Income Before
Year Debt Service Value (1) Factor (2) & (3) Debt Service
- ---- -------------- ---------- ---------------- -----------------
<S> <C> <C>
1997 $2,368,900 0.8772 $2,077,982
1998 3,202,100 0.7695 2,463,912
1999 3,597,100 0.6750 2,427,940
2000 3,561,600 0.5921 2,108,753
2001 3,604,600 0.5194 1,872,116
2002 3,691,700 0.4556 1,681,889
2003 3,852,000 0.3996 1,539,403
2004 4,003,600 0.3506 1,403,498
2005 4,146,200 0.3075 1,274,989
2006 4,279,500 $37,138,348 (4) 0.2697 11,172,208
----------
Value at January 1, 1997:$28,020,000
Value Per Room: $43,041
Notes:
(1) Income Before Debt Service in the exit year was capitalized
at 11.5 percent. (2) Income was discounted to net present value
using a 14.0 percent discount rate.
(3) Analysis uses end-point discounting.
(4) A sales commission of 3.0 percent was assumed.
</TABLE>
<PAGE>
Page 108
E. RECONCILIATION AND FINAL VALUE ESTIMATE
Valuation of the appraised property has been developed by the
direct sales comparison approach and the income approach. Various
appraisal techniques and methods were utilized in these analyses
and the fee simple value estimates derived by each approach is
summarized as follows:
- ---------------------------------------------------- --------------------
Amount Price Per Room
Cost Approach N/A N/A
Sales Comparison Approach $28,000,000 $43,000
Income Approach $28,020,000 $43,000
- -------------------------------------------------------------------------
The Cost Approach is most useful when valuing new or nearly new
properties or when appraising special purpose properties. The
reliability of this approach is diminished as buildings and other
forms of improvement increase in age and begin to depreciate. The
resulting loss in value becomes increasingly difficult to
accurately quantify. The cost approach was therefore not utilized
in valuing the subject property.
The Sales Comparison Approach is frequently a good indicator of
value, especially when a sufficient number of relevant
transactions with reliable information on each is available. The
sales comparison approach was used as an indicator of the
reliability of results obtained from the income capitalization
approach.
The income capitalization approach is generally considered the
most applicable method for estimating the value of investment
properties, as it incorporates the economic motivations of buyers
and sellers in the analysis. The reliability of this approach is
enhanced when adequate data are available to assure proper
development of the income, expense, and capitalization rate
analyses.
<PAGE>
Page 109
Based upon the research and analyses performed in the development
of these approaches, and with primary emphasis on the income
approach, it is our opinion that the market value of the fee
simple interest in the appraised property as a going concern, as
of January 1, 1997 is:
TWENTY EIGHT MILLION DOLLARS
($28,000,000)
In accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP), prepared by The Appraisal Standards
Board of The Appraisal Foundation, it is necessary to identify
and separately value any personal property, fixtures, or
intangible items that are not real property but are included in
the appraisal. Personal property and fixtures in a hotel consists
of a variety of components including bedroom case-goods, bathroom
fixtures, restaurant and kitchen equipment, signage, computers
and other related items. Our physical inspection of the property
indicated that these items were generally in good condition
relative to the age of the property.
We estimate that the replacement cost for the furniture,
fixtures, and equipment at the subject hotel is approximately
$12,000 per room, in constant 1996 dollars. This estimate is
based upon a industry averages. Assuming an average useful life
of eight years and an effective age of five years, the value of
the furniture, fixtures, and equipment is estimated to be
approximately $4,500 per room. On the basis of this analysis, the
value of the personal property for the subject hotel is estimated
to be $2,929,500.
Since a hotel's furniture, fixtures, and equipment is such an
integral component of the facility's ability to generate income
and is seldom removed from the property or sold separately, the
value produced by the separation of the personal property
component from the real property is not particularly meaningful.
<PAGE>
F. ADDENDA
F.1 HOTEL SALES COMPARABLES
Name: RAMADA INN RESORT MAINGATE
Location: Kissimmee, FL
Grantor (Seller): Buckingham International, PLC
Grantee (Buyer): Samoth USA
Date of Sale: June 1996
Sales Price: $15,000,000 (including the
$1.5 million renovation)
Property Rights Conveyed: Fee Simple
Number of Rooms: 390
Year Built: 1973
Price per Room: $38,462
Occupancy (1996): 80 percent
Average Rate (1996): $48.00
Est. Gross Room Revenue (1996): $5,466,240
Est. Net Income Before Debt Svc.: n/a
Overall Capitalization Rate: n/a
Comments:
The Ramada Inn Resort Maingate was purchased by
Samoth USA as a part of an eight-hotel
portfolio for $78 million. Six properties out
of this portfolio are located in the Orlando
market including the Ramada Inn Resort Maingate
and the Holiday Inn Maingate West, both of
which are considered to be the subject's
competition. Samoth USA purchased the entire
portfolio from Buckingham International PLC for
an estimated $34,667 per room in June of 1996.
Samoth USA has not allocated or determined
individual prices for each hotel within the
portfolio. We have estimated the allocated
price by dividing the $78 million by the total
number of rooms in the portfolio.
The property is in the process of undergoing
$1.5 million renovation to expand the hotel's
dedicated meeting space and upgrade its
facilities. This renovation price is included
in the adjusted sales price.
<PAGE>
Name: THE INN AT MAINGATE
Location: Kissimmee, FL
Grantor (Seller): Maingate Joint Venture, LP
Grantee (Buyer): GENCOM
Date of Sale: Pending, January 1997
Sales Price: $25 million (Including $8 million renovation)
Property Rights Conveyed: Fee Simple
Number of Rooms: 580
Year Built: 1984
Price per Room: $43,103
Occupancy (1996): 75 percent
Average Rate (1996): $45.00
Est. Gross Room Revenue (1996): $7,144,875
Est. Net Income Before Debt Svc.: n/a
Overall Capitalization Rate: n/a
Comments:
This hotel is included in the subject hotel's
competitive supply and is located within
one-fourth of one mile from the Sheraton.
Reportedly, GENCOM is to purchase this hotel
in January 1997 for $25 million. The planned
$8 million renovation will include the upgrade
of the existing facilities and an addition of
20,000 sq.ft. of meeting space. After the
termination of the Radisson affiliation in
January 1996, the property was operated as an
independent hotel. Upon completion of the
planned renovation, the new owners plan to
convert the hotel to a DoubleTree affiliation.
The renovation cost is included in the
purchase price.
<PAGE>
Name: HOLIDAY INN HOTEL AND SUITES
Location: Kissimmee, FL
Grantor (Seller): Friendship Management Co.
Grantee (Buyer): Maingate Investors Partners LP
Date of Sale: March 1994
Sales Price: $35,000,000
Property Rights Conveyed: Fee Simple
Number of Rooms: 668
Year Built: 1973
Price per Room: $52,395
Occupancy (1994): 75 percent
Average Rate (1994): $48.00
Est. Gross Room Revenue (1994): $8,775,520
Est. Net Income Before Debt Svc.: n/a
Overall Capitalization Rate: n/a
Comments:
This hotel is located on the intersection of
US-192 and World Drive, which is the direct
access road to World Disney World Resort. The
Holiday Inn is approximately four miles east of
the subject property along Irlo Bronson
Memorial Highway. Maingate Investors Partners
purchased the hotel in March of 1994 for $35
million or $52,395 per room. The property was
in need of renovations at the time of the
transaction. The purchase price of $35 million
included the renovation cost of $5 million.
This renovation included an upgrade of the
existing facilities including guest rooms and
the public area.
The hotel underwent another renovations in 1996
that included converting 55 guest rooms to "Kid
Suites." These Kid Suites are oversized rooms
that have a separate sleeping area for children
with bunk beds and/or single beds, a TV, and a
VCR. The children's rooms are shaped like
"forts" with partial walls that separate the
children's sleeping area from the rest of the
room. The hotel is a pilot site for the Holiday
Inns' "Kid Suites" concept, and as a Holiday
Inn affiliation, enjoys strong market presence.
The property has been highly popular due to the
availability of suites and is very well
maintained. The current owner also owns Holiday
Inn SunSpree Resorts in Lake Buena Vista.
<PAGE>
Name: RADISSON TWIN TOWERS HOTELS AND CONFERENCE
CENTER
Location: Orlando, FL
Grantor (Seller): Bank of America
Grantee (Buyer): Malayan United Industries
Date of Sale: November 1995
Sales Price: $37,625,000
Property Rights Conveyed: Fee Simple
Number of Rooms: 742
Year Built: 1972
Price per Room: $50,708
Occupancy (1995): 69 percent
Average Rate (1995): $63.71
Est. Gross Room Revenue (1995): $12,103,785
Est. Net Operating Income : n/a
Overall Capitalization Rate: n/a
Comments:
The hotel has two identical high-rise
buildings, thus the name, twin towers. The
property is located along I-Drive and has
good access and visibility. The hotel is
situated near Universal Studio's entrance
and features 58,000 sq.ft. of meeting
space. The property also offers a junior
Olympic size outdoor swimming pool,
jacuzzi, exercise room, several food and
beverage outlets, and 24-hour room service.
The property sold in late November 1995,
and was, reportedly, in excellent condition
at the time.
<PAGE>
F.2 SUBJECT PROPERTY PHOTOGRAPHS
<PAGE>
Paste Photograph # 1 Here
Main Entrance
Paste Photograph #2 Here
Building Exterior
<PAGE>
Paste Photograph # 3 Here
Remodeled Guest Room
Paste Photograph #4 Here
Patio outside of the Meeting Room facing the Black Lake
<PAGE>
Paste Photograph # 5 Here
Mini Mart
Paste Photograph #6 Here
Aruba, Caribbean themed Restaurant
<PAGE>
F.3 COMPETITIVE HOTEL PHOTOGRAPHS
<PAGE>
Paste Photograph # 1 Here
The Inn at Maingate
Paste Photograph #2 Here
Hilton Gateway
<PAGE>
Paste Photograph # 3 Here
Ramada Inn Resort Maingate
Paste Photograph #4 Here
Holiday Inn Resort Nikki Bird
<PAGE>
Paste Photograph # 5 Here
Holiday Inn Maingate West
Paste Photograph #6 Here
Holiday Inn Hotels and Suites
<PAGE>
F.4 PROPERTY LEGAL DESCRIPTION
<PAGE>
F.4 PROPERTY LEGAL DESCRIPTION
<PAGE>
WARRANTY DEED
THIS WARRANTY DEED made and executed the 20th day of
February, 1987, by Orlando Lakeside Associates Limited, a limited
partnership existing under the laws of the State of Florida, and
having its principal place of business at AIRCOA Tower at
Metropoint, 4600 South Ulster Street, Suite 1200, Denver,
Colorado 80237 ("Grantor"), to AIRCOA Hotel Partners, [Limited?],
a Delaware limited partnership ("Grantee"), whose post office
address is c/o Associated Inns & Restaurants Company of America,
AIRCOA Tower at Metropoint, 4600 South Ulster Street, Suite 1200,
Denver, Colorado 80237. Wherever used herein the terms "Grantor"
and "Grantee" include each of the parties to this instrument and
their successors and assigns.
WITNESSETH: That Grantor, for and in consideration of
the sum of Ten and No/100 Dollars and other valuable
consideration, the receipt whereof is hereby acknowledged, by
these presents does grant, bargain, sell, alien, remise, release,
convey and confirm unto Grantee, all that certain land situate in
Osceola County, Florida and more particularly described in
Exhibit A attached hereto and by this reference made a part
hereof (the "Property").
TOGETHER with all the tenements, hereditaments and
appurtenances thereto belonging or in anywise appertaining.
TO HAVE AND TO HOLD, the same in fee simple forever.
AND Grantor hereby covenants with Grantee that it is
lawfully seized of the Property in fee simple; that it has good,
right and lawful authority to sell and convey the Property; that
it hereby fully warrants the title to the Property and will
defend the same against the lawful claims of all persons
whomsoever; and that the Property is free of all encumbrances,
except for those items set forth on Exhibit B attached hereto and
by this reference made a part hereof.
2
<PAGE>
IN WITNESS WHEREOF Grantor has caused these presents
to be executed in its name, by its proper general partner
thereunto duly authorized, the day and year first above written.
Orlando Lakeside Associates
Limited, a Florida limited
partnership
By: AIRCOA Hotel Partners, L.P., a
Delaware limited partnership,
general partner
By: Associated Inns &
Restaurants Company of
America, a Delaware
corporation, general
partner
--------------------------
By:_____________ President
ATTEST: __________________
Signed and delivered in the
presence of:
- ---------------------------
- ---------------------------
STATE OF NEW YORK )
) ss.
COUNTY OF NEW YORK )
On the 20th day of February, 1987, before me
personally came Frank D. Palmer and David Kleinkopf to me known,
who being by me duly sworn, did depose and say that they reside
in Denver, Colorado and Denver, Colorado, respectively, that they
are the Vice President and Assistant Secretary, respectively, of
Associated Inns & Restaurants Company of America, a Delaware
corporation, which is the corporation described in and which
executed the foregoing Warranty Deed as general partner of AIRCOA
Hotel Partners, L.P., a Delaware limited partnership, as general
partner of Orlando Lakeside Associates Limited, a Florida limited
partnership, named as grantor in the foregoing Warranty Deed;
that they know the seal of said corporation; that the seal
affixed to said document is such corporate seal; that it was so
3
<PAGE>
affixed by order of the board of directors of said corporation
and that they signed their names thereto by like order.
--------------------------
Notary Public
This Instrument prepared by:
[Holmes?], Roberts & Owen
1700 Broadway, Suite 1800
Denver, Colorado 80290
4
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
(Lakeside)
PARCEL 1:
BEGINNING AT THE SOUTHEAST CORNER OF THE SW 1/4 OF NE 1/4 OF
SECTION 3, TOWNSHIP 25 SOUTH, RANGE 27 EAST, OSCEOLA COUNTY,
FLORIDA, RUN N 89 deg. 32' 12" E. ALONG THE SOUTH LINE OF THE NE
1/4 OF SAID SECTION 3, 358.0 FEET; RUN THENCE N 00 deg. 27' 48"
W, 70 0 FEET; RUN THENCE N 30 deg. 27' 48" W, 63.0 FEET; RUN
THENCE N 29 deg. 32' 12" E, 152.0 FEET; RUN THENCE N 27 deg. 32'
53" W, 129.44 FEET; RUN THENCE N 76 deg. 11' 17" W, 140.0 FEET;
RUN THENCE N 11 deg. 18' 00" W, 96.0 FEET; RUN THENCE N 78 deg.
44' 00" E, 80.0 FEET; RUN THENCE N 43 deg. 48' 43" E, 159.17
FEET; TO THE SOUTHWESTERLY RIGHT-OF-WAY LINE OF OLD STATE ROAD
NO. 520; RUN THENCE NORTHWESTERLY ON A 1096.28 FOOT RADIUS CURVE
CONCAVE TO THE LEFT, 848.00 FEET (CHORD N 59 deg. 14' 30" W,
827.76 FEET); RUN THENCE S 43 deg. 48' 43" W, 336.28 FEET, TO THE
NORTHEASTERLY RIGHT-OF-WAY LINE OF NEW STATE ROAD NO. 530; RUN
THENCE S 46 deg. 11' 17" E, ALONG SAID RIGHT-OF-WAY LINE, 523.0
FEET; RUN THENCE N 43 deg. 48' 43" E, 201.91 FEET; THENCE RUN S
76 deg. 11' 17" E, 223.43 FEET; RUN THENCE S 00 deg. 27' 48" F,
228.40 FEET TO A POINT ON THE SOUTH LINE OF AFORESAID SW 1/4; RUN
THENCE N 89 Deg. 32' 12" E, 202.91 FEET, TO THE POINT OF
BEGINNING.
PARCEL 2:
FROM THE SOUTHEAST CORNER OF THE SW 1/4 OF NE 1/4 OF SECTION 3.
TOWNSHIP 25 SOUTH, RANGE 27 EAST, OSCEOLA COUNTY, FLORIDA, THENCE
RUN S 89 deg. 32' 12" W, ALONG THE SOUTH LINE OF SAID SW 1/4 OF
NE 1/4 202.91 FEET, TO THE POINT OF BEGINNING; CONTINUE S 89 deg.
32' 12" W, 215.0 FEET, TO THE NORTHEASTERLY RIGHT-OF-WAY LINE OF
NEW STATE ROAD NO. 530; RUN THENCE N 46 Deg. 11' 17" W, ALONG
SAID RIGHT-OF-WAY LINE, 199.0 FEET; RUN THENCE N 43 deg. 48' 43"
E, 201.91 FEET; RUN THENCE S 76 deg. 11' 17" E, 223.43 FEET; RUN
THENCE S 00 deg. 27' 48" E, 228.40 FEET TO THE POINT OF
BEGINNING.
PARCEL 3:
FROM THE SOUTHEAST CORNER OF THE SW 1/4 OF THE NE 1/4 OF SECTION
3, TOWNSHIP 25 SOUTH, RANGE 27 EAST, OSCEOLA COUNTY, FLORIDA, RUN
N 89 deg. 32' 12" E, ALONG THE SOUTH LINE OF THE NE 1/4 OF SAID
SECTION 3, 358.0 FEET TO THE POINT OF BEGINNING; CONTINUE N 89
deg. 32' 12" E, 295.08 FEET TO THE WESTERLY RIGHT-OF-WAY LINE OF
OLD STATE ROAD NO. 530; RUN THENCE N 20 deg. 46' 17" W, ALONG
SAID RIGHT-OF-WAY LINE, 427.18 FEET TO THE POINT OF CURVE OF A
5
<PAGE>
1096.28 FEET RADIUS CURVE TO THE LEFT; RUN THENCE ALONG SAID
CURVE, 111.68 FEET; RUN THENCE S [40?] deg. 48' 43" W, 159.17
FEET; RUN THENCE S 78 deg. 44' 00" W, 80.0 FEET; RUN THENCE S 11
deg. 10' 00" E, 96.0 FEET; RUN THENCE S 76 deg. 11' 17" E, 140.0
FEET; RUN THENCE S 27 deg. 32' 53" E, 179.44 feet; RUN THENCE S
29 deg. 32' 12" W, 152.0 feet; RUN THENCE S 30 deg. 27' 48" E,
63.0 feet; RUN THENCE S 00 deg. 27' [3?]8 E, 70.0 FEET TO THE
POINT OF BEGINNING.
6
<PAGE>
Conveyance to AHP
EXHIBIT B
MATTERS TO WHICH TITLE IS SUBJECT
(Lakeside)
1. Taxes for 1987 and subsequent years.
2. That certain right of way established pursuant to that
certain Right of Way Agreement, between Steed Family
Groves, Inc., and Lancaster Corporation as recorded
December 31, 1965 in Official Records Book 142, Page 43,
Public Records of Osceola County, Florida.
3. That certain right of way established pursuant to that
certain Dedication of Right of Way as recorded on October
28, 1971 in Official Records Book 228, Page 613 and
subsequently reaffirmed pursuant to that certain Joinder in
and Reaffirmation of Right of Way as recorded on August 20,
1975 in Official Records Book 315, Page 266, Public Records
of Osceola County, Florida.
4. Easement in favor of Florida Power Corporation as recorded
in Official Records Book 251, Page 127, Public Records of
Osceola County, Florida.
5. The Right of Ronald E. Dowdy d/b/a House of Imports under
that certain unrecorded Lease between the said Ronald E.
Dowdy d/b/a House of Imports and Orlando Lakeside Associates
Ltd. d/b/a Sheraton-Lakeside Inn dated May 26, 1982.
6. Any claim to any portion of the land described herein lying
below the mean high water line of Black Lake as of the date
of the State of Florida being admitted to the Union.
7. Cablevision Television Installation and Service Agreement
as recorded on August 27, 1984 in Official Records Book
763, Page 680, Public Records of Osceola County, Florida.
8. Fire Protection Agreement as recorded on August 22, 1986 in
Official Records Book 783, Page 175, Public Records of
Osceola County, Florida.
9. Survey prepared by Johnston's Engineers, Inc., dated
December 19, 1986, Job #204-07 shows the following:
(a) 25 foot building set back line on the Easterly and
Northerly lot lines adjacent to Old State Road #530;
(b) 15 foot building set back line on the Northwesterly lot
line;
7
<PAGE>
(c) 35 foot building set back line on the Southwesterly lot
line;
(d) 25 foot building set back line on the Southerly lot
line;
(e) Encroachment of tennis courts into building set back
line on South lot line, also a portion of the tennis
courts encroaches into 30 foot roadway assessment as
recorded in Official Records Book 142, Pages 43
through 45, Public Records of Osceola County, Florida;
and
(f) Chain link fence encroaches into building set back
lines on South lot line, Easterly and Northeasterly
lot lines along Old State Road #530.
10. Mortgage executed by Lake Gateway Motor Inn, Inc., a Florida
corporation and Orlando S.L., Ltd., an Ohio limited
partnership, by its general partner Associated Inns &
Restaurants Company of America, in favor of The Equitable
Life Mortgage and Realty Investors, a Massachusetts
Voluntary Association of the type commonly known as the
Massachusetts Business Trust, dated December 1, 1976, filed
December 2, 1976 in Official Records Book 345, Page 698,
given to secure the original sum of $4,700,000.00, said
Mortgage subsequently assigned by Assignment of Mortgage
recorded in Official Records Book 363, Page 718 in favor of
The Equitable Life Assurance Society of the United States,
Public Records of Osceola County, Florida.
11. Mortgage executed by Lake Gateway Motor Inn, Inc., a
Florida corporation and Orlando S.L., Ltd., an Ohio limited
partnership in favor of The Equitable Life Assurance
Society of the United States, a New York corporation, dated
October 12, 1979, filed October 16, 1979 in Official
Records Book 454, Page 340 of the Public Records of Osceola
County, Florida, given to secure the original sum of
$3,100,000.00.
12. Consolidation and Modification Agreement between Lake
Gateway Motor Inn, Inc., a Florida corporation, Orlando
S.L., Ltd., an Ohio limited partnership and The Equitable
Life Assurance Society of the United States as recorded on
June 12, 1980 in Official Records Book 483, Page 354, Public
Records of Osceola County, Florida. (Consolidates and
modifies the mortgages described in numbers 11 and 12
above.)
13. Financing Statement naming The Equitable Life Assurance
Society of the United States as secured party, recorded in
Official Records Book 4[5?]4, Page 357 and continuation
thereof as recorded on September 28, 1984 in Official
8
<PAGE>
Records Book 756, Page 2903, Public Records of Osceola
County, Florida.
14. Financing Statement naming The Equitable Life Assurance
Society of the United States and The Equitable Life Mortgage
and Realty Investors as secured party, recorded in Official
Records Book 363, Page 714, said financing statement
subsequently assigned to The Equitable Life Assurance
Society of the United States by Assignment as recorded in
Official Records Book 363, Page 718, Public Records of
Osceola County, Florida.
15. Financing Statement naming The Equitable Life Assurance
Society of the United States and The Equitable Life Mortgage
and Realty Investors as secured party, recorded in Official
Records Book 363, Page 716, said financing statement
subsequently assigned to The Equitable Life Assurance
Society of the United States by Assignment as recorded in
Official Records Book 363, Page 718, Public Records of
Osceola County, Florida.
16. Financing Statement naming Equico Lessor, Inc. as secured
party, recorded in Official Records Book 562, Page 495,
Public Records of Osceola County, Florida.
17. Financing Statement naming Equico Lessors, Inc. as secured
party, recorded in Official Records Book 562, Page 501,
Public Records of Osceola County, Florida.
18. Rights and claims of parties in possession not shown of
public record.
9
<PAGE>
F.5 INDEMNIFICATION
10
<PAGE>
AIRCOA
HOTEL PARTNERS, L.P.
March 11, 1997
BY TELECOPY - 212-708-6523
Arthur Andersen LLP
1345 Avenue of the Americas
New York, New York 10105
Attn: Mr. Thomas McConnell
Mr. James W. Hire
Hire & Associates
1383 Solitude Lane
Evergreen, CO 80439
Mr. Anthony C. Dimond
Miramar Asset Management Inc.
617 Veterans Boulevard, Suite 212
Redwood City, CA 94063
Houlihan Lokey Howard & Zukin
1930 Century Park West
Los Angeles, CA 90067
Attn: John Schoenfeld
Re: Arthur Andersen Appraisals/AIRCOA Hotel Partners, L.P.
("AHP")
Ladies and Gentlemen:
This letter is to confirm certain agreements and approvals of
Arthur Andersen LLP ("AA") and the AIRCOA Parties and HLHZ (as
defined below) related to certain uses by AHP's Special Advisory
Committee (the "Special Committee") of AA's appraisal of certain
real property and improvements owned by AHP (the "Appraisal")
prepared in connection with a loan to AHP by the Hongkong and
Shanghai Bank (the "HSBC Loan"). This letter supplements that
certain letter dated February 18, 1997, by AHP to AA, the terms
of which are incorporated herein by reference. The following has
been agreed to by AHP and the Special Committee (collectively,
the "AIRCOA Parties"), and the Special Committee's financial
advisors Houlihan, Lokey, Howard & Zukin ("HLHZ") (collectively,
the "AIRCOA Parties") and AA:
1. AA agrees that copies of the Appraisal may be provided to
the Special Committee and HLHZ for review in connection
with the acquisition of limited partnership interests in
AHP by Regal Hotel Management, Inc. AA acknowledges that
HLHZ and the Special Committee have indicated to AHP an
intent to rely upon the Appraisals in connection with
consideration of
11
<PAGE>
the transaction described above and that AHP intends for
HLHZ and the Special Committee to so rely.
2. The AIRCOA Parties acknowledge their agreement to the
procedures performed as described in the accompanying
Appraisal and accept responsibility for the sufficiency of
those procedures for their purposes. Consequently, AA makes
no representation regarding the sufficiency of the
procedures described therein for the purpose for which the
accompanying Appraisal was originally requested, for the
AIRCOA Parties' or HLHZ's purposes, or for any other
purpose. Had AA been engaged to perform additional
procedures, other matters might have come to AA's attention
that would have been reported to the AIRCOA Parties.
Furthermore, AA has not performed any procedures subsequent
to the date of Appraisal and therefore AA accepts no
responsibility for events and circumstances occurring after
that date.
3. The Appraisal is being provided to the AIRCOA Parties and
HLHZ for informational purposes only. The AIRCOA Parties
should complete their own due diligence in connections with
the transaction described above to the extent they consider
necessary. It is understood that the reading of the
accompanying Appraisal does not substitute for the AIRCOA
Parties' own due diligence.
4. By acceptance of this letter, the AIRCOA Parties and HLHZ
agree that neither AA nor any of its affiliates, partners,
employees or representatives shall have any liability to
them relating to the use of the accompanying Appraisal,
except to the extent such liability arises from AA's gross
negligence or willful misconduct.
5. This letter and the accompanying Appraisal are intended
solely for the use of AIRCOA Parties and HLHZ and should
not be used by those who have not agreed to the procedures
and taken responsibility for the sufficiency of the
procedures for their purposes.
6. In connection with the transaction described above, AA
consents to including, to the extent required by federal
securities laws, a copy of the Appraisal and/or a summary
thereof or a reference thereto in the Schedule 13E-3 and
related proxy statement with the Securities and Exchange
Commission by AHP or the Special Committee, provided that AA
shall have the right to approve the content of any summary
of the Appraisals, such approval not to be unreasonably
withheld.
12
<PAGE>
7. This letter does not modify or amend in any respect the
engagement letter dated February 19, 1997 among HLHZ,
AIRCOA Hospitality Services, Inc., and AIRCOA Hotel
Partners, L.P.
Please indicate your acceptance of these arrangements by signing
and returning a copy of this letter to AA.
AIRCOA HOTEL PARTNERS, L.P.
By: AIRCOA Hospitality
Services, Inc., general
partner
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
AIRCOA HOSPITALITY SERVICES, INC.
a Delaware corporation
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
ARTHUR ANDERSEN LLP
By:______________________________
Name:
Title:
HOULIHAN, LOKEY, HOWARD &
ZUKIN, INC.
By:______________________________
Name: John A. Schoenfeld
Title: Co-Director, Real Estate
Group
13
<PAGE>
AHP SPECIAL COMMITTEE
By:______________________________
Name: James W. Hire
By:______________________________
Name: Anthony C. Dimond
14
<PAGE>
F.5 INDEMNIFICATION
<PAGE>
Arthur Andersen LLP
Appraisal of:
REGAL UNIVERSITY INN
DURHAM, NORTH CAROLINA
As of:
JANUARY 1, 1997
Prepared For:
AIRCOA Hotel Partners, L.P.
Special Committee
March 31,1997
Prepared By:
ARTHUR ANDERSEN LLP
Hospitality Industry Consulting Services Group
<PAGE>
[Letterhead of Arthur Andersen]
March 31, 1997
Mr. James W. Hire
Hire & Associates
1383 Solitude Lane
Evergreen, CO 80439
Mr. Anthony C. Dimond
Miramar Asset Management, Inc.
617 Veterans Boulevard, Suite 212
Redwood City, CA 94063
Re: Appraisal of Regal University Inn; Durham, North Carolina
As of January 1, 1997
Dear Gentlemen:
As requested, we have completed an appraisal of the fee simple
interest in the above-referenced property. The reader is advised
that our Firm has not audited, examined, reviewed or applied
agreed-upon procedures to the financial data contained in the
accompanying report unless specifically noted. We have relied on
information, including but not limited to industry statistics,
relevant market, demographic and financial data assembled by us
through direct research conducted by our staff or from secondary
sources as well as information provided by you. While these
sources of information are generally recognized as authoritative
in the field or otherwise considered reliable, we have not
audited this information nor do we warrant its completeness or
accuracy. The opinion of market value subject to stabilized
occupancy expressed herein is subject to the assumptions and
limiting conditions set forth in the body of the accompanying
report.
We understand that our valuation will be used to assist you in
determining the fair market value for internal purposes and may
not be disclosed to a third party without the prior written
approval of Arthur Andersen L.L.P.
Based upon our research and analysis, it is our opinion that the
market value of the fee simple interest, including furniture,
fixtures and equipment, as of January 1, 1997 is
-- Fifteen Million, Eight Hundred Thousand Dollars
($15,800,000)
We appreciate the opportunity to serve you. Please call if you
have any questions or if we can be of further assistance.
Very truly yours,
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
<PAGE>
Regal University Hotel, Durham, North Carolina Page i
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TABLE OF CONTENTS
SUMMARY OF CRITICAL FACTS AND CONCLUSIONS.......................iii
GENERAL ASSUMPTIONS AND LIMITING CONDITIONS......................iv
CERTIFICATION...................................................vii
A. INTRODUCTION..................................................1
A.1 SUBJECT PROPERTY IDENTIFICATION..............................1
A.2 OWNERSHIP HISTORY............................................1
A.3 PURPOSE AND FUNCTION OF THE VALUATION........................1
A.4 PROPERTY RIGHTS APPRAISED....................................3
A.5 EFFECTIVE DATE OF THE VALUATION..............................3
A.6 EXPOSURE PERIOD..............................................3
A.7 SCOPE OF THE APPRAISAL.......................................3
B. ANALYSIS OF THE SUBJECT PROPERTY AND ITS MARKET...............5
B.1 DESCRIPTION AND ANALYSIS OF THE PROPERTY.....................5
Location........................................................5
Legal Description...............................................5
Land............................................................5
Property Improvements...........................................6
Property Inspection............................................10
Past Renovations and Capital Requirements......................11
Property Taxes.................................................12
Zoning.........................................................15
B.2 AREA ANALYSIS...............................................17
Economic and Demographic Indicators............................18
Employment.....................................................20
Office Market Overview.........................................22
Transportation.................................................23
Tourism and Recreation.........................................25
Convention and Trade Show Market...............................26
Conclusion.....................................................27
B.3 HIGHEST AND BEST USE ANALYSIS...............................28
Highest and Best Use of The Land as if Vacant..................28
Highest and Best Use of The Property As Currently Improved.....30
Conclusion and Reconciliation of Highest and Best Use..........32
C. ANALYSIS OF COMPETITIVE LODGING SUPPLY AND DEMAND............33
C.1 COMPETITIVE LODGING SUPPLY..................................33
Identified Competitive Supply..................................33
Additions To Supply............................................40
C.2 LODGING SUPPLY AND DEMAND ANALYSIS..........................42
Overall Demand Trends in the Durham, North Carolina
Lodging Market.................................................42
Lodging Demand in the Identified Competitive Supply............42
Demand Segmentation And Estimated Demand Growth................45
C.3 ESTIMATED OCCUPANCY AND AVERAGE ROOM RATE...................54
Market Penetration & Average Annual Occupancy..................54
Projected Average Daily Room Rate..............................60
<PAGE>
Regal University Hotel, Durham, North Carolina Page ii
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D. THE APPRAISAL PROCESS........................................63
D.1 THE COST APPROACH...........................................63
D.2 SALES COMPARISON APPROACH...................................64
D.3 INCOME APPROACH.............................................69
Historical Financial Performance...............................70
Estimated Operating Results....................................74
Investment Climate Overview....................................85
Discounted Cash Flow Analysis..................................86
E. RECONCILIATION AND FINAL VALUE ESTIMATE.....................89
F. ADDENDA......................................................91
F.1 HOTEL SALES COMPARABLES....................................92
F.2 SUBJECT PROPERTY PHOTOGRAPHS................................97
F.3 COMPETITIVE HOTEL PHOTOGRAPHS..............................101
F.4 PROPERTY LEGAL DESCRIPTION.................................105
F.5 INDEMNIFICATION............................................111
<PAGE>
Regal University Hotel, Durham, North Carolina Page iii
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SUMMARY OF CRITICAL FACTS AND CONCLUSIONS
Property Name: Regal University Hotel
Property Address: 2800 Campus Walk Avenue
Durham, North Carolina 27705
Property Location: The hotel is situated on 2800 Campus Walk
Avenue. Campus Walk Avenue connects to
Moreene Road. The site is located adjacent to
North Carolina Route 15/501, access to which is
obtained from Moreene Road.
Property Type: A four story, full-service hotel operated by
Richfield Management
Number of Rooms: 322-rooms
Owner of Record: Durham Operating Partnership
Interest Appraised: Fee Simple
Land Area: 460,864-square feet (10.58 acres)
Building Area: 241,000-square feet
Year Completed: 1982 (Extension added in 1986)
Highest and Best Use:
Land as though vacant: Hold for future hotel development
Land as improved: Hotel
Date of Valuation: January 1, 1997
Date of Inspection: November 6, 1996
Value Indications (Including Furniture, Fixtures, and Equipment):
$ Amount $ Per Room
Cost Approach: n/a n/a
Sales Comparison Approach: $ 15,778,000 $ 49,000
Income Approach: $ 15,800,000 $ 49,068
------------ --------
Reconciled Value Indication: $ 15,800,000 $ 49,068
============ ========
<PAGE>
Regal University Hotel, Durham, North Carolina Page iV
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GENERAL ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal report is subject to the following general
assumptions and limiting conditions:
1. No investigation has been made of, and no responsibility is
assumed for, the legal description of the property being
valued or legal matters, including title or encumbrances.
Title to the property is assumed to be good and marketable
unless otherwise stated. The property is assumed to be free
and clear of any liens, easements, or encumbrances unless
otherwise stated.
2. Information furnished by others, upon which all or portions
of this appraisal are based, is believed to be reliable but
has not been verified in all cases. No warranty is given as
to the accuracy of such information.
3. It is assumed that all required licenses, certificates of
occupancy, consents, or other legislative or administrative
authority from any local, state, or national government or
private entity or organization has been or can readily be
obtained or renewed for any use on which the value
estimates contained in this report are based.
4. Full compliance with all applicable federal, state, and
local zoning, use, occupancy, environmental, and similar
laws and regulations is assumed unless otherwise stated.
5. No responsibility is taken for changes in market
conditions, and no obligation is assumed to revise this
report to reflect events or conditions which occur
subsequent to the appraisal date hereof.
6. The opinion of value is predicated on the financial structure
prevailing as of the date of this appraisal.
7. Responsible ownership and competent property management are
assumed.
8. Areas and dimensions of the property were obtained from
sources believed to be reliable. Maps or sketches, if included in
this report, are only to assist the reader in visualizing the
property, and no responsibility is assumed for their accuracy. No
independent surveys were conducted.
9. It is assumed that there are no hidden or un-apparent
conditions of the property, subsoil, or structures that
render it more or less valuable. No responsibility is
assumed for such conditions or for arranging engineering
studies that may be required to discover them.
10. No soil analysis or geological studies were ordered or made
in conjunction with this report, nor was an investigation
made of any water, oil, gas, coal, or other subsurface
mineral and use rights or conditions.
11. Neither Arthur Andersen LLP nor any individual signing or
associated with this report shall be required by reason of
this report to give further consultation, provide
<PAGE>
Regal University Hotel, Durham, North Carolina Page v
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testimony, or appear in court or at other legal proceedings
unless specific arrangements therefore have been made.
12. This report has been made only for the purpose stated and
shall not be used for any other purpose. Neither this
report nor any portions thereof (including, without
limitation, any conclusions as to value or the identity of
Arthur Andersen LLP or any individuals signing or
associated with this report or the professional
associations or organizations with which they are
affiliated) shall be disseminated to third parties by any
means without the prior written consent and approval of
Arthur Andersen LLP.
13. The date of value to which the opinions expressed in this
report apply is set forth in the opinion letter at the
front of this report. Our value opinion is based on the
purchasing power of the U.S. dollar as of that date. We
have no obligation to update our findings and conclusions
for changes in market conditions which occur subsequent to
our fieldwork.
14. Our study and report were based on assumptions and
estimates which are subject to uncertainty and variation.
These estimates are often based on data obtained in
interviews with third parties, and such data are not always
completely reliable. Therefore, while our estimates were
conscientiously prepared on the basis of our experience and
the data available to us, we make no warranty of any kind
that the financial results projected will, in fact, be
achieved.
15. Unless otherwise stated in this report, no hazardous
material, which may or may not be present on or near the
property, was observed. We have no knowledge of the existence of
such materials on or in the property; however, we are not
qualified to detect such substances. The presence of potentially
hazardous substances, such as asbestos, urea-formaldehyde foam
insulation, or industrial wastes, may affect the value of the
property. The value estimates herein are predicated on the
assumption that there is no such material on, in, or near the
property that would cause a loss in value. No responsibility is
assumed for any such conditions or for any expertise or
engineering knowledge required to discover them. The client
should retain an expert in this field if further information is
desired.
16. This appraisal has been made in conformance with the
Uniform Standards of Professional Appraisal Practice of The
Appraisal Foundation.
17. The allocation in this report of the total valuation among
components of the property applies only to the program of
utilization stated in this report. The separate values for
any components may not be applicable for any other purpose
and must not be used in conjunction with any other
appraisal.
18. Arthur Andersen LLP consents to including, to the extent
required by federal securities laws, a copy of the
Appraisal and/or summary thereof or a reference thereto in
the Schedule 13E-3 and related proxy statement with the
Securities and Exchange Commission by AHP or the Special
Committee, provided that Arthur Andersen shall have the
right to approve the content of any summary of the
Appraisals, such approval not to be unreasonably. This
report and parts thereof, and any additional material
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Regal University Hotel, Durham, North Carolina Page vi
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submitted, may not be used in any prospectus or printed
material used in connection with the sale of securities or
participation interests in any Public Offering, Securities
and Exchange Commission filing, or other public document.
19. Arthur Andersen LLP's maximum liability relating to
services rendered under this report (regardless of form of
action, whether in contract, negligence, or otherwise)
shall be limited to the charges paid to Arthur Andersen LLP
for the portion of its services or work products giving
rise to liability. In no event shall Arthur Andersen LLP be
liable for consequential, special, incidental, or punitive
losses, damages, or expenses (including, without
limitation, lost profits, opportunity costs, etc.) even if
it has been advised of their possible existence.
20. The Americans with Disabilities Act became effective
January 26, 1992. We did not make any observations or
interpretations on compliance with the ADA. It is possible that a
compliance survey of the property, together with a detailed
analysis of the requirements of the ADA could reveal that the
property is not in compliance with the requirements of the Act.
If so, this fact could have a negative effect upon the value of
the property. Since we have no direct evidence relating to this
issue, we did not consider possible non-compliance with the
requirements of ADA in estimating the value of the property.
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Regal University Hotel, Durham, North Carolina Page vii
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CERTIFICATION
We certify that to the best of our 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 accompanying limiting conditions and assumptions,
and are our personal, unbiased professional analyses, opinions
and conclusions.
- -- We have no present or prospective interest in the property
that is the subject of this report, and we have no personal
interest or bias with respect to the parties involved.
- -- Our 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.
- -- Our analyses, opinions, and conclusions were developed, and
this report has been prepared, in conformity with the
requirements of the Uniform Standards of Professional
Appraisal Practice;
- -- As of the date of this report, M. Donald Poore, Jr., MAI, has
completed the requirements of the continuing education program
of the Appraisal Institute.
- -- A personal inspection of the property that is the subject of
this report was made by Jeffrey Summers and Niall Kelly on
November 6, 1996 M. Donald Poore, Jr., MAI, did not personally
inspect the property.
- -- Jeffrey Summers and Niall Kelly provided significant professional
assistance to the persons signing this report.
- -- The use of this report is subject to the requirements of the
Appraisal Institute relating to review by its duly authorized
representatives.
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Regal University Hotel, Durham, North Carolina Page viii
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- -- Neither all nor any part of the contents of this report
(especially any conclusions as to value or the identify of
the appraiser) 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.
/s/ Roger S. Cline
--------------------------
Roger S. Cline
Partner
/s/ M. Donald Poore
--------------------------
M. Donald Poore, MAI
Director, Valuation Services Group
North Carolina Certified
Appraiser No. A1084
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Regal University Hotel, Durham, North Carolina Page 1
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A. INTRODUCTION
A.1 SUBJECT PROPERTY IDENTIFICATION
Property Address: 2800 Campus Walk Avenue
Durham, North Carolina 27705
Tax Reference: Property Account # 2021395/1
Personal Property Account # 6354880/1
County Assessor's Parcel Number: 02-287-01-019
Current Owner of Record: Durham Operating Partnership, L.P.
A.2 OWNERSHIP HISTORY
AIRCOA Hotel Partners, L.P., a Delaware limited partnership
("AHP" or the "Partnership") was organized in December 1986, by
AIRCOA Hospitality Service, Inc. ("AHS" or the "General Partner")
to acquire, own, operate and sell hotels and resort properties.
The Partnership owns and operates the Regal University Inn
through an operating company. The property is currently owned by
Durham Operating Partnership, L.P., a Delaware Limited
Partnership whose offices are located at 5775 DTC Boulevard,
Suite 300, Englewood, Colorado 80111. The title was last
transferred on February 20, 1987 from Aircoa Hotel Partners, L.P.
The partnership owns a 99 percent limited partner interest in the
Durham Operating Partnership L.P. which holds title to the Regal
University Inn. AHS, a wholly owned subsidiary of Richfield
Hospitality Services, Inc. ("Richfield"), is also the one percent
General Partner of the Durham Operating partnership, L.P.
Richfield operates the subject property for the Partnership under
a management agreement, which is described herein.
A.3 PURPOSE AND FUNCTION OF THE VALUATION
The purpose of this report is to estimate the market value of the
fee simple estate in the subject property. Arthur Andersen LLP
has been engaged by the Special Committee of AIRCOA Hotel
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Regal University Hotel, Durham, North Carolina Page 2
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Partners, L.P (AHP) for the purpose of assisting them in
assessing the value of the individual properties owned by the
partnership.
As used herein, market value is defined as1:
"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 the sale as of a specified date and the
passing of title from seller to buyer under conditions
whereby:
a. buyer and seller are typically motivated;
b. both parties are well informed or well advised,
and acting in what they consider their best interests;
c. a reasonable time is allowed for exposure in the
open market;
d. payment is made in terms of cash and United States
dollars or in terms of financial arrangements comparable
thereto; and
e. 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."
This appraisal has been prepared in compliance with the Appraisal
Standards Board requirements and is a self-contained appraisal
report. The report contains all information significant to the
solution of the appraisal problem and reports all significant
data in comprehensive detail.
- --------
1 Uniform Standards of Professional Appraisal Practice, Appraisal
Foundation, 1990 Edition.
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Regal University Hotel, Durham, North Carolina Page 3
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A.4 PROPERTY RIGHTS APPRAISED
The property rights appraised are the fee simple ownership of the
Regal University Hotel, including the land and improvements,
including furniture, fixtures, and equipment.
A.5 EFFECTIVE DATE OF THE VALUATION
The effective date of this value estimate is January 1, 1997. The
property was inspected by Jeffrey Summers and Niall Kelly on
November 6, 1996.
A.6 EXPOSURE PERIOD
Exposure period refers to the amount of time which a property
would have been on the market prior to the date of appraisal for
it to sell at the appraised value. The current marketplace has
been characterized by illiquidity and capital restraints,
particularly on the part of banks, which has affected the time in
which real estate takes to sell. The market for most types of
properties was much more active in the 1980s due to greater
availability of credit and greater investor optimism. The volume
of transactions of hotel properties diminished in 1991 and 1992,
and there was less investment and development activity in the
marketplace. Since 1993, the markets have shown significant
improvement and there has been a marked increase in sales
activity. Most of the investors with whom we have spoken agreed
that an exposure period of between six months and one year would
be sufficient in order to maximize the price for a property such
as the subject.
A.7 SCOPE OF THE APPRAISAL
As part of this assignment, the appraisers made a number of
independent investigations and analyses. In conducting our
investigation, various governmental planning agencies and the
local Chamber of Commerce were contacted for demographic data,
land policies and trends, and growth estimates. Neighborhood data
were supplemented by physical inspection of the defined area.
Information regarding zoning, utilities, and other limitations on
site utilization was obtained from the client and through the
appropriate agencies. Both the site and the surrounding area was
inspected to determine suitability for hotel use. All phases of
the local
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Regal University Hotel, Durham, North Carolina Page 4
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lodging market were analyzed for past trends and current data.
Estimated income and occupancy levels, expenses, and income
structures are based upon this market evidence.
A diligent search for comparable data was conducted, and
comparable information was obtained from both public and private
sources. In the case of comparable sales and rental data,
attempts were made to contact the buyers or sellers or other
knowledgeable third parties to verify that the transactions were
at arm's length, cash equivalent, and market reflective. Because
there was a limited number of comparable hotel sales in the
subject market area, we extended our search to other markets. The
sales comparison approach was employed; however, we did not place
significant reliance on it but used it as a test of
reasonableness. The cost approach was not utilized as it is
considered to have limited reliability due to the difficulty in
estimating the significant depreciation and external obsolescence
present at the Regal University Hotel. The income capitalization
approach was given primary emphasis as there was sufficient data
for its application and it reflects the typical investor's
behavior.
Our analysis was based upon reasonable assumptions of future
activities, including the continuation of the Richfield
Management Contract and the Regal Hotel affiliation. Changes in
these assumptions and the economy would be likely to affect the
value estimate of the hotel.
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Regal University Hotel, Durham, North Carolina Page 5
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B. ANALYSIS OF THE SUBJECT PROPERTY AND ITS MARKET
This section of the report presents a description and analysis of
the subject property's location, improvements, physical
condition, need for capital expenditures, property taxes, and
zoning. In addition, this section of the report presents a review
of the subject's market area and an analysis of the property's
highest and best use.
B.1 DESCRIPTION AND ANALYSIS OF THE PROPERTY
LOCATION
The subject of the appraisal is a 10.58-acre parcel of land that
is improved by a 322-unit hotel. The property, built in 1982 and
known as the Regal University Hotel, is located to the north of
Campus Walk Avenue in Durham, North Carolina. The civic address
of the property is 2800 Campus Walk Avenue, Durham, North
Carolina 27705.
LEGAL DESCRIPTION
A detailed legal description is provided in the addenda of this
report.
LAND
Size and Configuration: The subject site is irregular in
shape and contains 460,864 square feet, or 10.58 acres.
Frontage and Accessibility: The subject has frontage on Campus
Walk Avenue. The neighborhood in which the subject hotel is
located is to the west of downtown Durham, North Carolina. The
neighborhood is bounded to the west by Route 15/501; to the north
by Route 85/501; to the east by Route 147; and to the south by
interstate 40. The subject facility is located approximately one
and one-half miles west of the Duke University Medical Center at
the interchange of Campus Walk Avenue and Moreene Road with Route
15/501.
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Regal University Hotel, Durham, North Carolina Page 6
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The area surrounding the subject property is predominantly
residential with commercial land uses located beside the
interchange of Route 15/501 with Campus Walk Avenue and Moreene
Road, and Route 147 and Route 15/501.
Topography: The subject parcel is irregular in shape and contains
10.58 acres. The topography of the site is slightly sloping on
the perimeter at an angle. The site is somewhat below grade from
its primary ingress and egress on Campus Walk Avenue. The
improvements, however, are situated on relatively level terrain
with reasonably good access from Campus Walk Avenue and Moreene
Road, as well as North Carolina Route 15/501.
Flood plain: The property, according to the Durham City
Department of Engineering, is not located in a flood hazard area.
The Department of Engineering further noted that the property
does not lie in the floodway. The property is located on FEMA Map
Number 37063C -0064G (effective February 1996), Map Panel 64 of
280.
Utilities and Public Services: All utilities are available
to the site including public gas, water, sewer, telephone, and
electric.
Easements and Encroachments: Typical utility and access
easements exist through the subject site. We are not aware of any
easements which negatively impact the subject.
Development on Neighboring Sites: There is limited development to
the west and north of the subject hotel. To the west is Moreene
Road and its intersection with Route 15/501. Route 15/501
proceeds to traverse north of the subject hotel. The other areas
surrounding the Regal University Hotel are made up of primarily
residential properties.
PROPERTY IMPROVEMENTS
General
The Regal University Hotel is a 322-unit full-service property
located on 10.58 acres. The Hotel bedroom block, which is located
at the rear of the building, is four stories high. The front of
the building, in which the conference and banqueting facilities
are located, is three stories high. It contains a restaurant, a
lounge, an indoor swimming pool and approximately 14,000 square
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Regal University Hotel, Durham, North Carolina Page 7
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feet of meeting space. The hotel was developed in phases;
the original building opened in 1982 with 228 guest rooms. The
remaining 94 guest rooms were added in 1986. The subject hotel
changed affiliation, from Sheraton to Regal as of August 1996.
Guest Rooms
At present the hotel contains 322- guest room/suite units, of
which 43 percent are king-bedded rooms. Double-double bedded
units account for approximately 54 percent of the total
inventory. The following table details the number of rooms by
type of room.
- --------------------------------------------------------
Current Suites Configuration of the Subject Hotel
- --------------------------------------------------------
King Rooms 140
Double-Double Rooms 176
Suites 6
- --------------------------------------------------------
Total Number 322
- --------------------------------------------------------
All the guest rooms at the hotel have been recently renovated.
This included the replacement of carpets, wallpapering and soft
goods. The case goods in the rooms have not been replaced. Guest
amenities include a radio, television with remote control,
telephone, desk and chair. Sixteen guestrooms have kitchenettes,
and these rooms are primarily designed for long term guests at
the hotel.
Food and Beverage Outlets
There are two food and beverage outlets within the subject hotel,
both of which are located on the ground floor. The Bel Gusto
restaurant, which is newly renovated and has an Italian theme, is
the hotel's only restaurant; Breakfast, Lunch and Dinner are
served there. The Lobby Lounge, situated adjacent to Bel Gusto,
is the hotel bar, and light snacks can also be obtained there.
Meeting and Banquet Space
The property contains 13,816-square feet of dedicated meeting
space. The following table details the meeting space available at
the Regal University Hotel:
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Regal University Hotel, Durham, North Carolina Page 8
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- -------------------------------------------------------------------
Meeting Room or Location/ Number of Square
Ballroom Name Floor Divisions Feet
- -------------------------------------------------------------------
Greenbriar Ballroom 2 4 3,868
Brightleaf Ballroom 3 4 3,868
Executive Ballroom 1 1 760
Conference Suites (7) 1/2 1 760 (each)
- -------------------------------------------------------------------
Total Meeting Space 13,816
- -------------------------------------------------------------------
Recreational Facilities
The subject hotel has an indoor pool with sun deck and whirlpool,
exercise equipment, health spa, beauty salon and gift shop.
Other Services
The Regal University Hotel has 378 parking spaces which are
provided free of charge. The hotel also provides complimentary
transportation services to Raleigh-Durham International airport.
Structural Systems:
Floor-Area Ratio: 0.52 (FAR = Building Area SF divided by Land Area SF)
Floors: The bedroom block, which is located at the rear of the
building, has four stories. The front of the building,
where the conference and banqueting facilities are
located, has three floors.
Foundation: Poured concrete footings
Building Frame: Block, reinforced steel and concrete pillars
Roofing System: Mansard facia, composition built-up
Exterior Walls: Stucco, plate glass, steel frame windows
Mechanical Systems:
HVAC System: There are 322 General Electric independent
through-the-wall heating and air conditioning units. The air
in public spaces is recycled through eight Carrier Air units
that are located on the roof of the property.
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Regal University Hotel, Durham, North Carolina Page 9
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Boilers:
-- Guest Rooms: N/A
-- Meeting and Public Space: N/A
Chillers:
-- Guest Rooms: N/A
-- Meeting and Public Space: N/A
Fire Protection System: All areas are fully covered by a
sprinkler system, with the current sprinkler system being
installed in 1991. Heat and smoke detectors, located
throughout the building, are connected to a fire control panel
at the front desk.
Elevators:
Passenger Elevators: There are four elevators that travel from
the lobby to the third floor.
-- Cab Manufacturer: Otis
-- Control Manufacturer: Otis
-- Age: 1982
Service Elevators: There is one elevator that travels from the
kitchen on the ground floor to the service
stations on each of the three floors.
-- Cab Manufacturer: Otis
-- Control Manufacturer: Otis
-- Age: 1982
Plumbing: Domestic water is provided by City Water - Town of
Durham direct to the hotel via an eight-inch water main
located at the street level. There is a separate eight-inch
water main that feeds the hotel for the sprinkler system.
Electrical System: Service is provided via a 277/480 volt
transformer vault owned by Duke Power. There are in-house
transformers to break this down to 120 volts. There is no
emergency generator.
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Regal University Hotel, Durham, North Carolina Page 10
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Interior Finishes:
Floor Coverings:
Lobby: Hardwood
Meeting Rooms: Carpet
Lobby: Hardwood
Corridors: Carpet
Walls and Partitions:
Lobby: Sheetrock and vinyl
Meeting Space: Wall vinyl
Guest Rooms: Wall vinyl
Corridors: Wall vinyl
PROPERTY INSPECTION
We completed an in-depth tour of the property's physical plant
including 1) the property exterior and parking; 2) the public
space, lobby, meeting space, and food and beverage facilities;
and 3) the back-of-the-house space including kitchens, storage
rooms, housekeeping, laundry, administrative offices, and
mechanical and electrical equipment. In addition, we toured guest
rooms including suites, king and double-double guest room types.
We also inspected the variations of these room types, such as
those with kitchenettes and the variety of suites.
A significant renovation of the property occurred over the last
year. This renovation is effectively the first full renovation
that the hotel has undergone since it was first opened.
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Regal University Hotel, Durham, North Carolina Page 11
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The lobby of the hotel has been renovated in the last year and it
provides a very good impression with new case goods and
carpeting. New lighting fixtures have also been put in place in
the lobby area. The Bel Gusto restaurant was completely
renovated, which involved the painting of murals on the walls and
the acquisition of new furniture, save for the original tables.
The floor was also tiled in line with the "terrace" theme of the
restaurant.
The bedrooms have been refurbished with new carpets and wall
vinyl. The soft furnishings in the rooms have been replaced;
however the original case goods are still in place. The case
goods are in need of replacement, as they are showing their age.
Many rooms, in particular the king-bedded rooms, appear sparsely
furnished, due to the size of the rooms and a relative lack of
furniture in them. The bedroom segment of the room is over 300
square feet, and the case goods are small in size. The mattresses
on the beds are in need of replacement. The bathrooms have not
been renovated since the hotel opened and they appear old and
dated, which negatively impacts the otherwise renovated sense of
the guestrooms.
PAST RENOVATIONS AND CAPITAL REQUIREMENTS
The capital expenditures history for the Regal University is
presented below. The budgeted expenditure for 1997 is also
included.
- -----------------------------------------------------------------------------
Capital Expenditure History
Regal University Hotel, Durham
- -----------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Rooms & Corridors $ 24,383 $ 424,940 $ 1,932,639 $ 133,701 $ 50,000
Public Areas 36,694 99,257 55,762 778,935 92,300
Back of House 37,904 19,481 67,494 52,906 55,000
------ ------ ------ ------ ------
Total $ 98,981 $ 543,678 $ 2,055,895 $ 965,542 $ 197,300
======== ========= =========== ========= =========
% of Gross Revenue 1.7 % 8.3 % 30 % 12 % N/A
- -----------------------------------------------------------------------------
Source: Regal University Hotel
- -----------------------------------------------------------------------------
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Regal University Hotel, Durham, North Carolina Page 12
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The capital plan for 1997 involves the replacement of air
conditioning units for the ballroom and 24 guestrooms. The
ballroom doors and wall vinyl are to be replaced. Other
banqueting material such as tables, chairs and a temporary dance
floor are to be bought.
Two rooms, Rooms 485 and 486, which have been out of order for a
number of years, are to be completely renovated. The roof is to
be repaired and two laundry dryers are to be replaced. Other
items to be acquired or repaired are two new PC's, a re-sealing
of the front entrance and circle, and a renovation of public
restrooms and the parliament suite.
In the financial projections, a balloon expense of $500,000 has
been added to the third year of projections, on top of the
reserve for replacement. This is in order to cover any
significant once-off renovations that may occur above that
covered by the reserve. Any decision, such as to completely
renovate all bathrooms and/or corridors, would result in a larger
sum than the reserve being required. Such renovation will be
required in the future in order to maintain the competitiveness
of the property and this lump sum is for such an occurrence.
PROPERTY TAXES
The subject property is under the taxing jurisdiction of Durham
City and County Tax Authority. Real estate taxes are assessed on
a calendar year basis and are payable annually. Personal Property
taxes (furniture, fixtures, and equipment) are also assessed on a
calendar basis and are payable annually.
Real Estate Taxes
Taxing Jurisdiction: Durham City and County
Tax Account Number: Property Account # 2021395/1
Current Tax Year: January 1 through December 31
Tax Rates Established: The tax rates are established annually.
Current Tax Rate: $1.6397 per $100 of assessed value.
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Regal University Hotel, Durham, North Carolina Page 13
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Assessments
Established: The assessed value currently used by the tax authorities
for the hotel is $5,584,239.
Reevaluations: The next assessment of market value of the hotel, by the
authorities, is planned for 2000.
The table on the following page depicts the computation of the
real estate taxes.
- ---------------------------------------------------------------------------
Year Assessed Value Tax Rate/ Real Estate Taxes
$100 of value
- -------------------------------------------------------------------------
1994 $ 5,584,239 1.6237 $ 90,671
1995 5,584,239 1.6227 90,615
1996 5,584,239 1.6397 91,565
- ---------------------------------------------------------------------------
In 1993, the subject's tax assessment increased to $10,023,234.
This figure was contested and reduced to the current $5,584,239,
with this assessment remaining stable for the last three years.
The Durham County Tax office stated that the next assessment
would occur in 2000. Given the renovation of the property, it is
logical to assume that the next assessment will result in an
increased assessed value for the hotel.
Understanding the likelihood that the assessment value and tax
rates will increase, the estimation of future real estate taxes
has been linked to the prospective financial analysis at a fixed
rate of revenue. The revenues are estimated to improve and the
property's real estate taxes have been estimated to increase
accordingly. However, given the fact that the tax rates are set
every year and the value of the assessment of the hotel in 2000
is unknown, it is difficult to predict with accuracy what the
exact real estate tax amounts will be.
Personal Property Taxes
Taxing Jurisdiction: Durham City and County Tax Authority
Tax Account Number: Personal Property Account # 6354880/1
Current Tax Year: January 1 through December 31
Tax Rates Established: The tax rates are established on an annual basis.
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Regal University Hotel, Durham, North Carolina Page 14
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Current Tax Rate: $1.6397 per $100 of assessed value.
Assessments Established: Tangible personal property tax
returns are prepared annually. The
majority of these assets are classified
by estimating useful life and assigning
various depreciation percentages based
on the year placed in operation. This
method is in accordance with general
guidelines set by the Department of
Revenue.
Reevaluations: Annually as explained above.
The following table illustrates the computation of the personal
property taxes for the last three years.
- ---------------------------------------------------------------------------
Year Assessed Value Tax Rate/ Real Estate Taxes
$100 of value
- ---------------------------------------------------------------------------
1994 $ 1,057,956 1.6237 $ 17,178
1995 959,530 1.6227 15,570
1996 1,492,085 1.6397 24,466
- ---------------------------------------------------------------------------
An extensive renovation of the subject has recently been
completed, and it is anticipated that additional upgrades to
items classified as furniture, fixture and equipment will occur
over the next few years. Hence, given the estimated increase
allocated in the replacement reserve, and the corresponding
decrease in the older asset base, we have estimated that personal
property taxes will increase. As depreciation percentages change
yearly, it is extremely difficult to estimate such calculations
over a prolonged period of time, thus we have tied the increases
in the personal property taxes to the increased revenue of the
hotel by reflecting personal property taxes as a fixed percentage
of revenue.
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ZONING
The Regal University Hotel is governed by the zoning ordinance of
the City of Durham, North Carolina. The subject property is
located in the commercial district titled General Office and
Institutional District (O&I-2). The primary purpose and intent of
this district is to establish employment and community service
activities. Support facilities and residential are allowed when
compatible with surrounding uses. This zoning district is
designed for use on sites near major or minor thoroughfares. The
primary permitted uses include accessory buildings, banks and
financial institutions, clubs, lodges, laboratories, funeral
homes and other similar related uses. Minor uses which are
subject to the approval of the Board of Adjustment include
boarding houses, commercial dorms, hotels/motels, towers for
transmitting electronic signals and other similarly related uses.
There are no proposed or pending zoning changes expected to
impact the subject hotel. The Regal University Hotel did have a
different zoning classification, Hotel-Motel (HM), which was
changed in 1993.
Restrictions and Requirements
The following summarizes the restrictions and requirements to
which the Regal University Hotel must conform under its existing
zoning.
Minimum Lot Size 20,000 square feet
Minimum Lot Width 60 Feet
Minimum Front Setback 35 Feet
Minimum Side Setback 20 Feet
Minimum Rear Setback 25 Feet
Maximum Building
Height Building height up to 35 feet with 20 foot sideyards
Building height up to 50 feet with 25 foot sideyards
Building height up to 90 feet with 50 foot sideyards
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Regal University Hotel, Durham, North Carolina Page 16
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Building height over 90 to a maximum of
145 feet with 75 foot sideyards and
approval of the Board of Adjustment.
Parking Requirements One space per unit plus one
space for every four seats of restaurant
area.
On the basis of the zoning code, the property site plan, our
physical inspection of the subject property, and discussions with
local zoning representatives, the property appears to be in
conformance with all general and specific zoning requirements.
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B.2 AREA ANALYSIS
The Area Analysis provides information on market conditions as
they currently exist in the Durham, North Carolina area. Economic
and sociological trends provide insights relating to the strength
of the local market area; a review of such trends has been
completed to direct and support our estimates of future market
growth in the lodging industry.
The following section of the report outlines general trends in
the market. We consulted with the Chamber of Commerce, Convention
and Visitors Bureau, and other local sources for much of the
following information. When possible, information was verified
directly from the primary sources.
The Durham County (MSA) comprises Durham City and most of
Research Triangle Park. Durham is located in the north central
portion of Piedmont North Carolina, approximately equi-distant
between Atlanta and New York. The Blue Ridge Mountains are 150
miles west and the Atlantic coast is 150 miles east. Durham,
which was once prominent for its tobacco production, has
developed into a city renowned for its medical, biotechnological
and electronics industries, as well as a city of education.
Duke University and North Carolina Central University are located
in Durham. The University of North Carolina at Chapel Hill is 11
miles away, and North Carolina State University is located just
over 20 miles away at Raleigh, the State Capital. The population
of Durham includes approximately 145,000 people in the city, and
195,000 in the entire county. There are 125 million people within
a 750-mile radius of the city.
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ECONOMIC AND DEMOGRAPHIC INDICATORS
This section summarizes historical trends in several key economic
and demographic indicators in the Durham, North Carolina market
area. The following table presents historical trends in
Population, Retail Sales, Eating and Drinking Sales, and Median
Household Effective Buying Power.
- --------------------------------------------------------------------
Summary of Economic and Demographic Statistics
For the Subject Hotel's Market Area
- --------------------------------------------------------------------
CAG (1)
1990 1995 1990-1995
---- ---- ---------
Population (000's)
City 138,200 145,800 1.1%
County 184,000 195,300 1.2%
State 6,693,100 7,257,800 1.6%
United States 250,812,000 264,900,900 1.1%
Retail Sales ($000's)
City $1,192,736 $1,586,419 5.9%
County 1,392,829 1,846,000 5.8%
State 45,755,966 65,780,996 7.5%
United States 1,807,182,519 2,355,241,609 5.4%
Eating & Drinking Sales ($000's)
City $125,774 $147,001 3.2%
County 145,000 187,052 5.2%
State 4,514,364 6,462,277 7.4%
United States 182,107,195 241,780,257 5.8%
Median Household Effective
Buying Income (EBI)
City $24,228 $29,783 4.2%
County 28,615 33,083 2.9%
State 23,488 29,253 4.5%
United States 27,912 32,238 2.9%
- --------------------------------------------------------------------
Source: Sales and Marketing Management, Survey of Buying Power.
Note: (1) Compound Annual Growth
- --------------------------------------------------------------------
Population
Review of trends in population can often provide insights
relating to overall economic growth in the region. Between 1990
and 1995, population in the city of Durham reflected a compound
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annual increase of 1.1 percent, this was equal to the growth rate
for the whole of the United States. The compound annual growth
rate in the county was higher than that of the city. This
reflects the growth that has taken place in the surrounding area,
as a result of the entrance of new companies and the continued
development in areas such as Research Triangle Park.
Retail Sales
There are a number of shopping malls and centers in the Durham
City and County area. The compound annual growth for both the
city and the county has been above that experienced across the
United States. The sales in the county area have increased from
approximately $1.4 billion in 1990 to $1.85 billion in 1995. The
increase in sales can be largely attributed to the increase in
the number of people working and living in the vicinity coupled
with increasing affluence of the local populace.
Eating and Drinking Sales
Eating and drinking sales include the sales of all establishments
selling prepared food and beverage items for consumption on the
premises or for take out, as well as lunch counters and stands
selling for immediate consumption. The level of eating and
drinking sales in the county has increased at a compound annual
rate, between 1990 and 1995, of 5.2%. The level of increase for
the City of Durham has not been as high, at 3.2%. This is
primarily as a result of developments occurring outside the city.
The downtown area of the city is slowly beginning to go through
redevelopment. There are plans for more restaurant, bar and
retail development, which should positively affect the level of
spending that occurs in the city in the future.
Median Household Effective Buying Income (EBI)
The compound annual growth rate for the county, between 1990 and
1995, is lower than that of the city, state or country. However,
the actual median income in the county is higher than all the
other benchmarks. This reflects the level of earnings that is
associated with the biotechnological and electronics industries.
A large proportion of those companies that are situated in and
around Durham are involved in these industries.
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EMPLOYMENT
Employment and Unemployment
Trends in employment are an excellent indicator of the overall
health of a local economy. The following table presents a summary
of the trends in employment and unemployment in the local market
area for the last several years.
- ---------------------------------------------------------------------------
Growth in Employment and Unemployment
- ---------------------------------------------------------------------------
Durham County North Carolina
------------------------------- -----------------------------
Labor Total % Labor Total %
Force Empl. Unempl. Force Empl. Unempl.
------------------------------- -----------------------------
1990 495,700 469,100 5.3% 3,468,282 3,323,957 4.2%
1991 507,300 472,300 6.9% 3,512,454 3,307,735 5.8%
1992 519,600 490,600 5.6% 3,547,805 3,334,507 6.0%
1993 528,700 511,670 3.2% 3,556,611 3,380,985 4.9%
1994 544,500 522,354 4.0% 3,589,556 3,432,810 4.4%
1995 549,625 554,550 -0.1% 3,636,142 3,478,588 4.3%
CAG* 2.1% 3.4% 0.9% 0.9%
- ---------------------------------------------------------------------------
Source: Department of Labor and United States Bureau of Labor Statistics
Note: CAG - Compound Annual Growth
- ---------------------------------------------------------------------------
Durham has developed dramatically over the past few years, to the
extent that the labor force available within the county is not
sufficient for all the available work. This resulted in a
negative unemployment rate in 1995, a year that saw employment in
the county expand by 6.2 percent. This area is attracting more
companies to the area and more people to the labor pool. Among
the companies that arrived in the area in the first six months of
1996 are AT&T Solutions, Bekaert Fibre Technologies, and City
Search. Other companies are currently expanding, such as Beltmann
Moving and Storage and, Blue Cross Blue Shield of North Carolina.
The increased level of technology- and information-based
employment does not come without its difficulties for the area.
There are a significant number of people who cannot benefit from
the incoming employment as a result of their lack of skills.
Furthermore, hotels are faced with the difficulty of trying to
employ staff in a market that offers higher paying employment, with
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Regal University Hotel, Durham, North Carolina Page 21
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more regular work hours than the employment available in hotels.
This is a significant problem for all the hotels in the area and
impacts both service and payroll levels.
Employment by Industry Sector
Employment by industry sector details the number of individuals
employed in the market area by each major industry category. An
analysis of the trends in employment by industry sector can
provide insights on which are the most important industries in
the local market area and which sectors have reflected recent
growth or declines. The following table presents a summary of
trends in employment by industry sector for the subject market
area.
- --------------------------------------------------------------------
Employment by Industry Sector (1990-1995)
Durham County, North Carolina
- --------------------------------------------------------------------
1990 1995 % Change
---------------------------------------
Manufacturing 78,000 81,258 0.8%
Construction 24,800 28,517 2.8%
Transportation, Communication
& Util. 22,700 23,233 0.5%
Finance, Insurance & Real Estate 24,800 26,467 1.3%
Retail and Wholesale Trade 98,700 115,392 3.2%
Services 119,600 160,375 6.0%
Government 100,500 119,308 3.5%
------- ------- ---
Total Employment 469,100 554,550 3.4%
======= =======
- -------------------------------------------------------------------
Source: Greater Durham Chamber of Commerce
- -------------------------------------------------------------------
The Retail and Wholesale Trade, Services and Government sectors
currently represent over 70 percent of the employment in the
Durham County area. The Services sector is the largest of these
three, representing 29 percent of the employment in the market
area. This segment of employment has also seen the most
significant compound annual growth rate from 1990 to 1995, with
six percent growth. These strong growth patterns reflect the
change in employment patterns in the area, from industrial- to
service-based.
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Regal University Hotel, Durham, North Carolina Page 22
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Major Employers
The following table summarizes the largest employers in Durham
County that generate demand for lodging accommodations.
- -----------------------------------------------------------------------
Company Name No. of Employees
- -----------------------------------------------------------------------
Duke University 19,500
IBM 11,000
NorTel 8,300
Glaxo Wellcome 3,979
Blue Cross and Blue Shield of North Carolina 2,222
Durham Hospital Corporation 2,004
VA Medical Center 1,700
Research Triangle Institute 1,450
U.S. Environmental Protection Agency 1,400
- -----------------------------------------------------------------------
Source: Greater Durham Chamber of Commerce
- -----------------------------------------------------------------------
Duke University is the largest employer in the county, and it
attracts significant numbers to the hotel market. Among the types
of clientele attracted by the University are the following:
people attending conferences and courses at the University,
parents attending events, visiting sports teams, people visiting
friends and relatives at the hospitals, and people doing business
with the University.
IBM, the second largest employer in the area, is located in the
Research Triangle Park and was one of the initial anchor
companies when the park opened. IBM has contracts with hotels in
the area, particularly those around the Research Triangle Park.
OFFICE MARKET OVERVIEW
Overall City/County Office Market Area
An important indicator of the strength of the Durham County
lodging environment is the strength of the market for office
space. The advent of Research Triangle Park during the early
1960's, resulted in Durham becoming an important location for
research and medical endeavors. The park started with speculative
development of office buildings. The park succeeded and as a
result spawned more development in the surrounding area. This
positive development trend has yet to return to downtown Durham;
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however the local authorities are attempting to help the
redevelopment and invigoration of the downtown area.
Many office buildings are still built speculatively, however, the
emphasis now is on built-to-suit and the development of sites by
the owners for their own use. The most prominent users of office,
retail and industrial space are well-known international
businesses such as IBM, Rhone-Poulenc, NorTel and Glaxo Wellcome.
The following table illustrates the trends in available office
space, absorption, and vacancy in Durham County market area. The
information below refers to buildings built for leasing purposes
only, not those owner occupied.
- ------------------------------------------------------------------------
Market Trends in Office Space
Durham County, North Carolina
- ------------------------------------------------------------------------
Existing Space Vacancy Annual Net
-----------------------
Year Square Feet* Square Feet Percent Absorption (Sq. Ft.)
- ----------------------------------------------------------------
1992 7,947,300 715,257 9 % -
1993 8,048,300 724,347 9 % 91,910
1994 8,081,000 646,480 8 % 110,567
1995 8,081,000 646,480 8 % -
- ------------------------------------------------------------------------
Source: Greater Durham Chamber of Commerce
* This represents property that was constructed for
rental only rather than owner occupied.
- ------------------------------------------------------------------------
The office space occupancies have strengthened throughout the
last six years. During the early 1990's, office space vacancy
rates increased to 15 percent; however since then the vacancy
rate has been below 10 percent. This indicates the strength of
demand for office space in this region.
TRANSPORTATION
Roadway System and Public Transportation
Durham, North Carolina is served by two interstates, I-40 and
I-85. There are five North Carolina Highways that connect to
Durham, Routes 54, 55, 98, 147 and 751. There are also three U.S.
highways around the Raleigh-Durham area, these being US 15, US 70
and US 501.
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Amtrak provides train service within North Carolina. There is bus
service provided around the city by DATA (Durham Area Transit
Authority). Greyhound and Trailways also provide bus services to
other destination. There is also a significant airport facility
which is described in greater depth below.
Airport
Raleigh-Durham International Airport (RDU), located 13 miles
southeast of Durham between I-40 and US 70, is North Carolina's
second busiest airport. AirSouth, American, American Eagle,
Continental, Delta, Delta Express, Midway, Northwest, TWA,
United, United Express, USAir, USAir Express and Valujet airline
companies provide over 320 scheduled flights daily.
- ---------------------------------------------------------------------------
Trends in Air Passenger Activity at the
Raleigh-Durham International Airport, North Carolina
- ---------------------------------------------------------------------------
Number of Passengers Cargo (Tons)
- ---------------------------------------------------------------------------
Year Enplaned Deplaned Total Enplaned Deplaned Total
- ---------------------------------------------------------------------------
1990 4,651,202 4,614,793 9,265,995 38,834 36,034 74,868
1991 4,698,513 4,683,043 9,381,556 41,642 36,060 77,702
1992 4,977,071 4,948,293 9,925,364 47,415 40,190 87,605
1993 4,862,285 4,833,601 9,695,886 49,497 44,296 93,793
1994 4,497,600 4,500,654 8,998,254 58,436 52,085 110,521
1995 2,962,701 2,974,434 5,937,135 54,213 54,174 108,387
- ---------------------------------------------------------------------------
CAG* -8.6 -8.4 -8.5 6.9 8.5 7.7
- ---------------------------------------------------------------------------
Source: Raleigh-Durham International Airport
*: Compound Annual Growth
- ---------------------------------------------------------------------------
The dramatic decrease in passenger volume between 1994 and 1995
was as a result of American Airlines decision to cease using
Raleigh-Durham International Airport (RDU) as a hub. However, RDU
results for the first half of 1996 were up, with passenger
traffic up 12.3 percent and Cargo business was up 3.5 percent on
the previous year's business. In 1996, the airport was
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Regal University Hotel, Durham, North Carolina Page 25
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rated the top airport in North America for business travelers in
a survey conducted by the International Air Transport
Association.
TOURISM AND RECREATION
The number of visitors to this region has grown over the last few
years. A large number of the conferences are taking place in the
city, this has been driven by businesses in the Research Triangle
Park and the celebrity of the medical institutions present in
Durham. Tourism has been able to benefit from the numbers of
people who have come to the region for business and stayed for
pleasure afterward. Six percent of the visitors to the area are
foreign, one-third of whom are Canadian. The growth in the number
of visitors to the area is likely to continue for the foreseeable
future.
- --------------------------------------------------
Total Tourist Visitation
Durham, North Carolina
- --------------------------------------------------
Year Total
1990 2,300,000
1991 2,500,000
1992 2,650,000
1993 3,200,000
1994 3,450,000
1995 3,970,000
Compound Annual Growth
1990 - 1995 11.5%
- ---------------------------------------------------
Source: Durham Convention and Visitors Bureau
- ---------------------------------------------------
Attractions
Durham has a vibrant arts scene which is aided by the presence of
three universities. Among the major events and festivals taking
place are the American Dance Festival, the Bull Durham Blues
Festival, North Carolina International Jazz Festival, and the
Summer Festival for Creative Arts.
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There are also visitor attractions in and around Durham, such as
the University campuses, in particular Duke. There is also the
Museum of Life and Science, Hayti Heritage Center and the Bennett
Place State Historic Site, the location of one of the American
Civil War's largest and final surrenders between the conflicting
parties.
Spectator Sports
Sports enthusiasts in Durham can enjoy three Atlantic Coast
Conference schools (Duke, UNC, N.C. State) in the Greater Durham
area. The Duke University campus is located proximate to the
subject. The Durham Bulls Baseball team, a class A farm club for
the Atlanta Braves, also enjoy a strong local following. The
Bulls are one of the highest drawing minor league baseball teams
in the country. The Bulls opened their new stadium in 1995 in
downtown Durham within three miles of the subject.
In 1994, the Pan-Africa - U.S.A. International Track and Field
Meet took place in Durham and featured five Olympic gold
medalists. The Triangle will host the 1997 World Special Olympic
Games.
Public Parks/ Facilities
The city provides nine neighborhood recreation centers, 57 parks,
72 tennis courts, 30 baseball/softball fields, five swimming
pools, and approximately 1,800 acres of park land in the area.
Durham also has eight golf courses (four of which are private),
two riding stables, and three racquetball clubs.
CONVENTION AND TRADE SHOW MARKET
The most significant conference facilities available in Durham
are at the Civic Center which contains approximately 43,000
square feet. The Civic Center was constructed in 1989 and boasts
state-of-the-art facilities. Other facilities available include
the Carolina Theater (39,000 square feet), Durham Arts Council
building (29,000 square feet) and the Bryan Center at Duke
University (28,000 square feet).
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Convention and trade show business is developed from two primary
sources: the Medical conference market and the Research Triangle
Park businesses. There are a number of hotels in the market place
which also specifically target this business, among them, the
Sheraton Imperial and the Regal University Hotel.
- -------------------------------------------------------------------
Growth in Convention and Trade Show Demand
Durham, North Carolina
- -------------------------------------------------------------------
Number of Number of Number of
Year Events Delegates Room Nights
1990 81 90,490 122,089
1991 158 140,797 189,964
1992 340 143,998 194,283
1993 414 164,210 221,554
1994 439 186,676 251,864
1995 606 177,933 240,069
- -------------------------------------------------------------------
Source: Durham Convention and Visitors Bureau
- -------------------------------------------------------------------
CONCLUSION
There has been significant development in Durham, North Carolina.
This has been spearheaded by the growth and success of the
Research Triangle Park, as well as the continued achievements of
those involved in the Medical field in the region.
The development over the last few years has been very
significant. Development in the region is likely to continue to
grow; however, it is expected to occur at a slower rate than at
present.
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Regal University Hotel, Durham, North Carolina Page 28
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B.3 HIGHEST AND BEST USE ANALYSIS
The validity of an appraisal is dependent upon the consideration
and conclusion of highest and best use.1 Often expressed as "the
most profitable legal use," the concept requires a thoughtful
analysis of many factors. Vacant land value is directly related
to its highest and best use. On the other hand, an improved
property may have the same or a different highest and best use
than the land supporting the improvements when considered as
vacant land. Therefore, for improved property, both highest and
best use decisions must be separately considered, both as vacant
land and as improved property. In addition to a conclusion for
both the vacant land and improved property, sale and lease
comparisons are usually made with properties having similar
highest and best uses as the subject.
The parameters for consideration relate to legality of use,
physical possibilities, financial feasibility, and maximum
economic production. Single uses, interim uses, legal
non-conforming uses, speculative uses or excess land
determinations require further analysis.
HIGHEST AND BEST USE OF THE LAND AS IF VACANT
Legally permissible uses are those limited by zoning, easements
and rights-of-way, deed restrictions, building codes, and
environmental controls. These restrictions have been discussed in
Section B.1 (Description and Analysis of the Property). As
mentioned earlier in the zoning section of this report, the
subject site is O&I-2.
Physically possible uses are limited by size, design, topography,
flood possibilities and physical capacities. The subject site is
approximately 460,800 square feet. It is slightly irregular in
shape, below street grade and lies outside the limits of the
100-year flood plain.
- --------
1 Highest and Best Use: "The reasonably probable and legal
use of vacant land or an improved property, which is physically
possible, appropriately supported, financially feasible, and that
results in the highest value. (American Institute of Real Estate
Appraisers, The Dictionary of Real Estate Appraisal, Second
Edition, Copyright 1993, Page 171.
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Regal University Hotel, Durham, North Carolina Page 29
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Drainage and topography are acceptable for a variety of uses as
are the shape and frontage of the site. Although we are
unqualified to render an opinion of the physical load-bearing
capacity of the land or its freedom from hazardous materials, no
nuisances were obvious at the time of inspection.
Financially feasible uses must be supported by sufficient demand
in the neighborhood to create a sufficient return to invest over
the long term. In analyzing each highest and best use
alternative, the income potential from those legally permissible
and physically possible uses were considered. The income from the
highest and best use should be sufficient to satisfy investor
requirements and operating expenses, thereby providing a return
on the land.
Predominant land uses in the neighborhood provide indications of
profitable land uses for the location of the subject property.
The subject site is located close to Duke University Campus, and
in particular, the medical facilities on campus. It is in close
proximity to Routes 15/501, 147 and Interstate 40, with good
access to major roadways. Development in the immediate area is
primarily residential. However, the property is close to the hub
of Durham's suburban shopping area. Under the current zoning, a
number of uses, including hotel and office, would conform with
the subject's surrounding development.
Based upon the surrounding properties, both hotel and office uses
are potentially financially feasible. Hotel average daily rates
(ADR) and occupancies are currently very strong in the subject
neighborhood. Average daily rates among the subject's competitive
set range from $64 to $104 while occupancies range from 67
percent to 81 percent. The proximity of the subject property to
Duke University gives it access to a significant demand generator
for hotel services. Furthermore, there are insufficient hotels to
accommodate all the demand generated by all the offices in and
around Research Triangle Park on the southern side of Durham,
thus the hotel gains further business from this generator.
The current office market has a vacancy rate of 8 percent, which
has dropped from the mid-teens in 1990. However, the demand for
office space is primarily centered in and around Research
Triangle Park. Market rents in the Research Triangle Park average
between $17 and $17.50 per square foot, whereas rents to the
northwest of Durham, the location of the subject
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Regal University Hotel, Durham, North Carolina Page 30
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hotel, between $15.50 and $16.00 per square foot. In researching
operating statistics for the local market, as well as national
averages, both through property surveys and published investor
surveys, as well as analyzing the income potentials from these
property types, it is our opinion that both uses are financially
feasible. Therefore, we conclude that the highest and best use of
the land as vacant is for hotel or office development.
HIGHEST AND BEST USE OF THE PROPERTY AS CURRENTLY IMPROVED
The subject property is currently improved with a hotel
containing 322 rooms. In light of the existing improvements, a
contrast with other uses is made for the optimal use which is
also physically suitable for the site, legally permissible,
economically feasible and the most profitable usage of the site.
As earlier indicated, the highest and best use of a property as
improved may differ from the highest and best use of the land as
if vacant. The "as improved" analysis assists in the
identification of the use that is projected to provide the
greatest overall property return on invested capital, as well as
in the identification of comparable properties. Typical choices
for improved property include the following usage alternatives:
1. Demolition of the improvements
2. Remodeling or renovation
3. Continued usage, as is
The four tests of highest and best use are applied to each of the
above alternatives. All three options are legally permissible and
physically possible. The test of financial feasibility is that
the use must provide a return equal to or greater than the amount
needed to meet all operating expenses, financial obligations, and
capital expenditures. In addition, the use must be maximally
productive, or that use which produces the highest value,
consistent with the rate of return warranted by the market for
that use. Using current investor expectations, consideration of
all three scenarios was made.
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Regal University Hotel, Durham, North Carolina Page 31
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Demolition of the Improvements
The implication in a highest and best use analysis is that the
existing improvements should be retained and/or renovated as long
as those improvements continue to contribute to the total value
of the property; or until the return from a new improvement would
more than offset the cost of demolishing the existing
improvements and constructing alternative facilities. An analysis
of the subject property reveals that the existing improvements do
continue to contribute to the overall value of the subject, with
no alternative use available to the site which would provide a
return greater than the return on current improvements after
consideration of the cost to raze the current improvements and
build an alternate use. Therefore, demolition of the improvements
is not considered warranted, nor optimal from a highest and best
use standpoint.
Remodeling or Renovation
A significant renovation of the hotel occurred between August and
October of 1995, which has successfully allowed for the
repositioning of the property in the marketplace as a Regal
hotel. The property, which was first constructed in 1982, had not
been renovated to a significant degree until this point in time.
There are plans for continued work to be carried out in the
future in order to preserve and improve the property. Hence,
further, major renovation or remodeling of the current
improvements is not required at this time.
Continued Usage As Is
As an alternative to demolition, the existing improvements could
be converted to an alternate use or left as-is. Again applying
the four tests to this premise, it would be physically possible,
as well as legally permissible to convert the improvements to
another use. However, as discussed previously, the current use as
a hotel is the most maximally productive use available to the
property.
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Regal University Hotel, Durham, North Carolina Page 32
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CONCLUSION AND RECONCILIATION OF HIGHEST AND BEST USE
From the three options presented, one remains feasible for the
subject. Demolition of the improvements was eliminated as an
option since the existing improvements provide substantial
contributory value to the property. The good condition of the
subject means that substantial remodeling and renovation is not
required. Therefore, continued use "as is" is the indicated
highest and best use of the subject as currently improved. Also,
given current market conditions, it is our opinion that the
highest and best use of the site, as vacant, is for hotel or
office development.
In conclusion, the highest and best use of the subject property
is as currently improved, with continuous work on aspects of the
product, such as bathrooms, in order to maintain and improve the
market success of the product.
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C. ANALYSIS OF COMPETITIVE LODGING SUPPLY AND DEMAND
C.1 COMPETITIVE LODGING SUPPLY
There are two primary sub-markets in the Durham lodging market.
The two sub-markets are the Research Triangle Park and Duke
University. The Research Triangle Park market is
business-oriented and at its peak during the week. The Duke
University market creates demand throughout the week with medical
and conference business, and there is further weekend business
with sports events. Durham has, according to the Greater Durham
Chamber of Commerce, 47 lodging facilities with approximately
5,500 guest rooms. Over half of these rooms have been built since
1986. Durham has approximately 300,000 net square feet of meeting
space in major hotel convention centers and several conference
facilities.
IDENTIFIED COMPETITIVE SUPPLY
In order to evaluate the subject hotel's position within the
market, we have identified a competitive supply on the basis of
quality and extent of facilities, location, market orientation
and revenue potential. We identified five hotels as the primary
competition for the Regal University Hotel. Presented on the
following page is a map illustrative the location of the subject
hotel and its identified competitive set. The tables on the pages
following it present pertinent operating information and
facilities descriptions of each competitive hotel.
<PAGE>
[Map of Competitive Lodging Supply]
<PAGE>
PROFILE OF COMPETITIVE LODGING SUPPLY
Property Name Regal University Hotel Washington Duke
Inn & Golf Club
Address 2800 Campus Walk Avenue, Durham 3001 Cameron
Boulevard, Durham
Opening Year 1982 1989
Affiliation Regal n/a
Management Richfield Hospitality Services Carnival Cruise
Lines and Hotels
Ownership Durham Operating Partnership Carnival Cruise
Lines and Hotels
Total Number of
Rooms (incl. suites) 322 Rooms 171 Rooms
Number of Suites 6 Suites 7 Suites
Estimated 1996 Market
Mix Percentage
Commercial Individual
Travelers 13% 25%
Leisure Individual
Travelers 14% 20%
Government & Preferred
Commercial 20% 20%
Conference Group 33% 33%
Group Contract 2% 2%
Facilities/Amenities
Restaurants Bel Gusto Fairview Restaurant
Terrace-on-the-Green
Lounges Lobby Bar Bull Durham Bar
Total Meeting Space
(Sq. Ft.) 13,816 Sq.Ft. 5,450 Sq.Ft.
Largest Room/Ballroom
(Sq.Ft.) 3,868 Sq.Ft. 4,000 Sq. Ft.
Total number of meeting
rooms/divisions 10/16 Meeting Rooms 13 Meeting Rooms
Swimming Pool Yes Yes
Exercise Room/Fitness
Center Yes No
Gift Shop/Newsstand Yes Yes
Business Center No Yes
Estimated Occupancy
-1996 73% 78%
-1995 79% 76%
-1994 79% 74%
Estimated Average
Daily Room Rate
-1996 $63.50 $104.00
-1995 $50.80 $100.00
-1994 $47.35 $95.00
<PAGE>
**
PROFILE OF COMPETITIVE LODGING SUPPLY
Property Name Sheraton Imperial Durham Hilton
Address P.O.Box 13099, Research 3800 Hillsborough Road,
Triangle Park Durham
Opening Year 1986 1987
Affiliation Sheraton Hilton
Management ITT Sheraton Corporation Hilton Hotels
Corporation
Ownership n/a RentHotel Durham
Total Number of Rooms
(incl. suites) 331 Rooms 154 Rooms
Number of Suites 21 Suites 10 Suites
Estimated 1996 Market
Mix Percentage
Commercial Individual
Travelers 20% 25%
Leisure Individual
Travelers 10% 20%
Government & Preferred
Commercial 20% 25%
Conference Group 35% 20%
Group Contract 15% 10%
Facilities/Amenities
Restaurants Cascades Restaurant Tipton's Restaurant
Lounges Lobby Bar Tipton's Lobby Bar
Blue Chips Nightclub
Total Meeting Space
(Sq. Ft.) 30,000 Sq.Ft. 4,697 Sq.Ft.
Largest Room/Ballroom
(Sq.Ft.) 10,080 Sq.Ft. 3,312 Sq.Ft.
Total number of meeting
rooms/divisions 8/21 Meeting Rooms 3/7 Meeting Rooms
Swimming Pool Lap pool, in adjacent Outdoor pool with
health club whirlpool
Exercise Room/Fitness
Center Yes, in adjacent health club Yes
Gift Shop/Newsstand Yes No
Business Center Yes No
Estimated Occupancy
-1996 74% 77%
-1995 69% 72%
-1994 65% 68%
Estimated Average
Daily Room Rate
-1996 $94.00 $84.00
-1995 $85.00 $80.00
-1994 $77.00 $73.00
<PAGE>
PROFILE OF COMPETITIVE LODGING SUPPLY
Property Name Omni Hotel & Civic Center Marriot Research
Triangle Park
Address 201 Foster Street, Durham 4700 Guardian Drive,
Durham
Opening Year 1989 1988
Affiliation Omni Marriott
Management Shaner Hotel Group Marriott
Hotel Corporation
Ownership Shaner Hotel Group Marriott
Hotel Corporation
Total Number of Rooms
(incl. suites) 187 Rooms 224 Rooms
Number of Suites 3 Suites 4 Suites
Estimated 1996 Market
Mix Percentage
Commercial Individual
Travelers 20% 50%
Leisure Individual
Travelers 10% 10%
Government & Preferred
Commercial 10% 34%
Conference Group 30% 4%
Group Contract 30% 2%
Facilities/Amenities
Restaurants Lobby Restaurant JW's
Lounges The Lounge JW's Bar
Total Meeting
Space (Sq. Ft.) 41,656 Sq.Ft.* 3,982 Sq. Ft.
Largest
Room/Ballroom
(Sq.Ft.) 14,080 Sq.Ft.* 3,200 Sq. Ft.
Total number of
meeting
rooms/divisions 8/13 Meeting Rooms 6 Meeting Rooms
Swimming Pool No No
Exercise Room/Fitness
Center No Yes
Gift Shop/Newsstand Yes Yes
Business Center No Yes
Estimated Occupancy
-1996 67% 81%
-1995 65% 79%
-1994 57% 73%
Estimated Average
Daily Room Rate
-1996 $74.00 $78.57
-1995 $77.00 $87.00
-1994 $72.00 $80.00
* The conference space mentioned as being part of the
hotel, is part of the Civic Center, managed by the hotel
<PAGE>
Regal University Hotel, Durham, North Carolina Page 38
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The following paragraphs describe these properties and the manner
in which they compete with the Regal University Hotel.
Washington Duke Inn and Golf Club
This hotel is the most direct competition to the Regal University
Hotel. This hotel's close proximity to the Duke University campus
results in direct competition for the business generated by Duke
University. Furthermore, the hotel is one of the most recent
additions to the market, opening in 1989. It is the only hotel in
the area with its own golf course.
The hotel contains 171 well appointed rooms and suites, a
restaurant, a lounge, an estimated 6,000 square feet of meeting
space, an outdoor pool, tennis and an 18-hole golf course. This
hotel has a distinct advantage as it is able to capture the
largest segment of the leisure market, while still capitalizing
on its location relative to the Duke Medical Center and
University for non-leisure business.
The Golf course provides an added attraction for those
organizations desiring to hold conferences or meetings in the
area. The facility has the highest average rate in the market.
The hotel is in excellent condition and has good access and
visibility from Cameron Boulevard.
Durham Hilton Inn
The 152-room Durham Hilton Inn is located approximately one mile
north of the subject property. This hotel is focused primarily on
the commercial segment. This hotel is very competitive with the
subject hotel. As a result of its size, the Hilton is able to
command a slightly higher rate, particularly in the commercial
segment.
The Durham Hilton Inn was built in 1987, and it contains 152
rooms, a restaurant, a lounge, and approximately 4,900 square
feet of meeting space. It also has an outdoor pool, a sauna and
an exercise room. This hotel has excellent access and visibility
from Interstate 85, as well as Route 15/501. At the time of
report writing, this hotel was pending sale.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 39
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The Omni-Durham Hotel and Convention Center
The Omni-Durham Hotel and Civic Center is located in the downtown
district of Durham, attached, and with full access to, the City
Civic Center. As a result, the Omni does not have any true
meeting space of its own. However, management of the Omni manages
the Civic Center convention facilities for the City of Durham.
This hotel was originally developed in 1989. It has 187 guest
rooms, a restaurant, a lounge, and as a result of the Convention
Center, meeting and exhibit space of approximately 50,000 square
feet. This hotel is primarily a group-oriented facility and has
captured approximately 75 percent of that market. It is
noteworthy, however, that this hotel has captured very little of
the Medical market segment.
This hotel is in excellent condition and is considered to be in a
good location relative to the group market, but secondary in
terms of the leisure and medical markets. This hotel was sold in
June of 1996, the new owners are the Shaner hotel group.
Sheraton Imperial Hotel and Convention Center
The Sheraton Imperial Hotel and Convention Center is located at
the southern end of Research Triangle Park. It is a ten-story
high rise full service hotel with 331 guest rooms and 21 suites.
The hotel has 20 separate meeting rooms, totaling 30,000 square
feet, all on one level. The hotel also has a restaurant, a bar
and an adjacent health club to which hotel guests have access.
There are also outside tennis courts and a billiard room. The
hotel is in good condition.
This hotel has, as a result of its location in the Research
Triangle Park, a very significant level of transient commercial
business as well as a very significant conference market due to
its extensive meeting space. This Sheraton has captured a
significant portion of the weekend business that the Regal
University Hotel lost as a result of its flag change from
Sheraton.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 40
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Marriott - Research Triangle Park
This hotel is located in Research Triangle Park, and contains 224
rooms and limited conference facilities. The property, which is
eight years old, has been renovated continuously in a piecemeal
manner, and as a result is in good condition.
As a result of the limited conference facilities, the hotel
places significant focus on the commercial individual market.
Mid-week, the hotel reportedly averages 98% occupancy,
predominantly from commercial individuals. This hotel also
captures a lot of business as a result of Marriott's honored
guest program. The most significant business generator is the IBM
facility which is located close by in the Research Triangle Park.
ADDITIONS TO SUPPLY
Nine new lodgings projects are projected for opening in the
Durham area in the next 18 months, increasing the supply of
Durham guest rooms by approximately 1,100, or 20% overall. These
projects all involve the construction of limited service
properties. As such, they are not seen as direct competition to
the full-service Regal University Hotel. The following table
lists the proposed developments.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 41
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- --------------------------------------------------------------------------
Proposed Hotel Developments
Durham, North Carolina
- --------------------------------------------------------------------------
Rooms Brand Location Proposed Opening
- --------------------------------------------------------------------------
125 Comfort Suites I-40 & New Page Road Mid-1997
125 Courtyard by Marriott Highway 54 Late-1997
120 Extended Stay Southsquare Mid-1997
of America
125 Homestead RTP Park Forty Plaza Early-1997
120 Homewood Suites 15/501 & I-40 Early-1998
72 Studio Plus Highway 54 Late-1996
280 Teer Project Miami Blvd. & I-40 Early-1998
132 Teer Project Miami Blvd. & I-40 Early-1998
Total 1,099
- --------------------------------------------------------------------------
Source: Durham Convention and Visitors Bureau
- --------------------------------------------------------------------------
The strength of the local market in which the subject property
competes is primarily a result of the large room night demand
generated by business, medical and university related demand. No
new hotel developments have been proposed in the same competitive
set as the subject in the Durham area, save for the Marriott
Courtyard. However, we are of the opinion that the strength of
this market combined with the availability of land in the area
and the relatively low barriers to entry are likely to attract
new competition at some point during the period covered by our
analysis. As a result of there being no new properties, apart
from the Marriott Courtyard, available for analytical purposes we
have assumed the addition of a 200-unit hotel to open in 1998. In
order to account for the assumed mid-year opening we have
included 100 rooms in the 1998 supply and demand analysis. The
remaining 100 have been added to the 1999 supply. This assumed
new hotel addition increase the number of available rooms in the
competitive supply to 1,552 rooms in 1998 and 1,652 rooms in
1999.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 42
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C.2 LODGING SUPPLY AND DEMAND ANALYSIS
OVERALL DEMAND TRENDS IN THE DURHAM, NORTH CAROLINA LODGING MARKET
The occupancy level in the Durham, North Carolina lodging market
has increased by over 17 percentage points during the last five
years, reflecting strong demand growth. The average daily rate
increased approximately $16 over the same period of time, an
overall 30 percent increase. This growth in the overall lodging
market was primarily a result of improvements in the economic
strength of the area, but also reflects a resurgence in the
strength of the overall hotel market in the US. The local
economic growth has been fueled by the success of companies in
Research Triangle Park, and the renowned excellence of the
medical hospitals in the area.
The following table exhibits overall growth in occupied demand,
occupancy, and average room rates in Durham County, North
Carolina between 1990 and 1995.
- ----------------------------------------------------
Historical Trends in Durham County, North Carolina
Occupancy and Average Rate
- ----------------------------------------------------
- ------------------------------------------------
Occupancy Avg. Rate
- ------------------------------------------------
1990 56.29% $ 52.36
1991 59.32% 53.80
1992 60.94% 53.87
1993 66.28% 55.02
1994 71.46% 56.76
1995 73.90% 68.24
CAG* 1990-1995 5.4%
Source: Durham Convention & Visitors Bureau
* CAG: Compound Annual Growth
- ----------------------------------------------------
LODGING DEMAND IN THE IDENTIFIED COMPETITIVE SUPPLY
As indicated previously, we have identified five hotels as the
primary competitive supply for the Regal University Hotel. The
purpose of the analysis that follows is to evaluate the
<PAGE>
Regal University Hotel, Durham, North Carolina Page 43
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historical and present supply and demand trends of the market in
which the subject hotel competes. We have completed interviews
with management of the competitive hotels and have collected
statistics on the occupancy, average rate, and market mix of the
competitive hotels to estimate total accommodated demand by
market segment. The table below summarizes our estimate of the
aggregate market demand accommodated by the identified
competitive supply for 1994 and estimated year-end 1996.
- -----------------------------------------------------------------------
Historical Growth in Lodging Demand
in the Competitive Supply
- -----------------------------------------------------------------------
1994 Estimated 1996
------------------ ------------------ CAG*
Room Nts % Total Room Nts % Total 94-96
------------------ ------------------ -----
Commercial Individuals 79,735 23% 93,957 25% 8.5%
Leisure Individuals 43,441 12% 50,155 13% 7.5%
Govt./Preferred
Commercial 73,674 21% 82,180 22% 5.6%
Group Conference 91,633 26% 98,572 26% 3.7%
Group Contract 65,163 18% 53,577 14% -9.3%
------ ---- ------ ---- -----
Total Occupied Demand 353,646 100% 378,441 100% 3.4%
Total Available Supply 506,255 506,255
Market Occupancy 69.9% 74.8%
Market Average Rate $ 71.16 $ 85.24 9.4%
Market Revpar $ 49.71 $ 63.72 13.2%
- -----------------------------------------------------------------------
Source: Arthur Andersen
Note: Totals may not add due to rounding.
* Compound Annual Growth
- -----------------------------------------------------------------------
The increasing rates in the market place are a result of the
increasing demand for hotel accommodation in the Durham market.
Furthermore, the hotels within this competitive set are
attempting to increase the amount of higher-rated business they
capture. This is shown by significant growth in the compound
annual growth rates for the commercial and leisure individual
segments and the reduction in the availability offered to the
lower-rated group markets. This trend is likely to continue as
long as demand remains high.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 44
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Our analysis of future demand growth includes assumptions of base
growth in demand, unsatisfied demand, and induced demand. The
following paragraphs define these sources of demand growth.
Base Growth in Demand
Base growth in demand is that growth related to the strength of
the local economy. This growth assumption incorporates demand
generated by other factors, such as the addition of a new
convention center, new office development and absorption,
improved transportation access to the market area, etc. Our
assumptions take into account historical demand trends and the
factors contributing to these trends. On the basis of our
interviews with management and on our analysis of economic growth
in the local market, base growth by market segment is estimated
for each year.
Unsatisfied Demand
During peak periods of demand, many travelers in search of
convenient accommodations among the hotels in the competitive
supply are required to use alternative hotels due to lack of
capacity in the immediate area. These groups and individuals will
seek lodging in one of the other properties in the market area or
will leave the immediate market. Those room nights that are not
accommodated in the immediate market may be referred to as
"unsatisfied demand". The unsatisfied demand occurs most often
during the week when transient demand fills the hotels from
Research Triangle Park through Durham City and its surrounding
areas. Unsatisfied demand also occurs when there are large
sporting events or commencement events occurring at the
universities in the vicinity.
Induced Demand
Induced demand is defined as new room nights generated by the
addition of new hotels to the market area or by the repositioning
and marketing of an existing hotel to fulfill consumer needs not
previously met by the existing supply. Induced demand may also
include room nights generated by special events which are not
expected to remain
<PAGE>
Regal University Hotel, Durham, North Carolina Page 45
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permanently in the market area. An example of this will be
the staging of the 1997 World Special Olympics in the Triangle.
DEMAND SEGMENTATION AND ESTIMATED DEMAND GROWTH
Accommodated demand in the competitive hotel supply has been
segmented into five major market segments: 1) Commercial
Individual Travelers; 2) Leisure Individual Travelers; 3)
Government and Preferred Commercial; 4) Group Conference, and 5)
Group Contract. On the basis of our interviews with management of
the subject hotel and its competition, and based upon an analysis
of economic trends in the market, we have estimated future growth
in demand in the competitive supply by market segment. The
following paragraphs define the individual market segments and
our estimates of demand growth. A detailed analysis of supply and
demand growth for the market is presented on the following page.
Commercial Individual Traveler
This segment of demand includes individual business travelers
visiting companies and other organizations located in the Durham,
North Carolina market area. Much of the corporate demand
accommodated by the hotels in the competitive supply is generated
by companies located in the market area. These room nights may be
booked at both published and discounted room rates.
This demand is largely driven by the businesses located in
Research Triangle Park and its surroundings. This segment is
highly seasonal, with the spring and fall months reflecting the
strongest demand for roomnights. The greatest demand for rooms
during the week in this segment is from Monday night through
Thursday night.
<PAGE>
Regal University Hotel
Estimated Growth In Lodging Supply and Demand
Market Area: Durham, North Carolina
Estimated
1996 1997 1998
---- ---- ----
Commercial Individual Travelers 5.0% 4.0%
Gross Demand 98,800 103,700 107,800
Less: Unsatisfied Demand 5,000 5,300 5,500
----- ----- -----
Net Demonstrated Demand 93,800 98,400 102,300
Plus: Induced Demand 1,200 3,600
------ ----- -----
TOTAL SEGMENT DEMAND 93,800 99,600 105,900
Growth over Previous Year 6.2% 6.3%
% of Total Market Demand 25% 25% 26%
Leisure Individual Travelers 2.0% 2.0%
Gross Demand 51,500 52,500 53,600
Less: Unsatisfied Demand 1,500 1,500 1,500
----- ----- -----
Net Demonstrated Demand 50,000 51,000 52,100
Plus: Induced Demand 0 115 350
----- ----- -----
TOTAL SEGMENT DEMAND 50,000 51,115 52,450
Growth over Previous Year 2.2% 2.6%
% of Total Market Demand 13% 13% 13%
Government & Preferred Commercial 5.0% 4.0%
Gross Demand 86,500 90,800 94,400
Less: Unsatisfied Demand 4,500 4,700 4,900
----- ----- -----
Net Demonstrated Demand 82,000 86,100 89,500
Plus: Induced Demand 0 800 2,400
----- ----- -----
TOTAL SEGMENT DEMAND 82,000 86,900 91,900
Growth over Previous Year 6.0% 5.8%
% of Total Market Demand 22% 22% 22%
Group Conference 4.0% 4.0%
Gross Demand 102,100 106,200 110,400
Less: Unsatisfied Demand 3,600 3,700 3,800
----- ----- -----
Net Demonstrated Demand 98,500 102,500 106,600
Plus: Induced Demand 0 600 1,800
----- ----- -----
TOTAL SEGMENT DEMAND 98,500 103,100 108,400
Growth over Previous Year 4.7% 5.1%
% of Total Market Demand 26% 26% 26%
Group Contract 1.0% 1.0%
Gross Demand 53,750 54,300 54,800
Less: Unsatisfied Demand 250 300 300
----- ----- -----
Net Demonstrated Demand 53,500 54,000 54,500
Plus: Induced Demand 350 1,000
----- ----- -----
TOTAL SEGMENT DEMAND 53,500 54,350 55,500
Growth over Previous Year 1.6% 2.1%
% of Total Market Demand 14% 14% 13%
TOTAL MARKET DEMAND
Gross Demand 392,650 407,500 421,000
Less: Unsatisfied Demand 14,850 15,500 16,000
------ ------ ------
Net Demonstrated Demand 377,800 392,000 405,000
Plus: Induced Demand 0 3,065 9,150
----- ----- -----
TOTAL MARKET DEMAND 377,800 395,065 414,150
Growth over Previous Year 4.6% 4.8%
ANNUAL SUPPLY (ROOM NIGHTS) 506,255 520,855 566,480
Growth over Previous Year 2.9% 8.8%
MARKET OCCUPANCY 75% 76% 73%
Regal University Hotel
Estimated Growth In Lodging Supply and Demand
Market Area: Durham, North Carolina
Compound
Annual
Estimated Growth
1999 2000 2001
---- ---- ---- -----------
Commercial Individual Travelers 4.0% 3.0% 2.0%
Gross Demand 112,100 115,500 117,800
Less: Unsatisfied Demand 5,700 5,900 6,000
----- ----- -----
Net Demonstrated Demand 106,400 109,600 111,800
Plus: Induced Demand 6,200 6,400 6,400
----- ----- -----
TOTAL SEGMENT DEMAND 112,600 116,000 118,200 4.7%
Growth over Previous Year 6.3% 3.0% 1.9%
% of Total Market Demand 26% 26% 26%
Leisure Individual Travelers 1.0% 1.0% 1.0%
Gross Demand 54,100 54,600 55,100
Less: Unsatisfied Demand 1,500 1,500 1,500
----- ----- -----
Net Demonstrated Demand 52,600 53,100 53,600
Plus: Induced Demand 600 600 600
----- ----- -----
TOTAL SEGMENT DEMAND 53,200 53,700 54,200 1.6%
Growth over Previous Year 1.4% 0.9% 0.9%
% of Total Market Demand 12% 12% 12%
Government & Preferred Commercial 4.0% 3.0% 2.0%
Gross Demand 98,200 101,100 103,100
Less: Unsatisfied Demand 5,100 5,300 5,400
----- ----- -----
Net Demonstrated Demand 93,100 95,800 97,700
Plus: Induced Demand 4,000 4,100 4,100
----- ----- -----
TOTAL SEGMENT DEMAND 97,100 99,900 101,800 4.4%
Growth over Previous Year 5.7% 2.9% 1.9%
% of Total Market Demand 22% 22% 23%
Group Conference 4.0% 3.0% 2.0%
Gross Demand 114,800 118,200 120,600
Less: Unsatisfied Demand 4,000 4,100 4,100
----- ----- -----
Net Demonstrated Demand 110,800 114,100 116,500
Plus: Induced Demand 3,000 3,100 3,100
----- ----- -----
TOTAL SEGMENT DEMAND 113,800 117,200 119,600 4.0%
Growth over Previous Year 5.0% 3.0% 2.0%
% of Total Market Demand 26% 26% 26%
Group Contract 1.0% 1.0% 1.0%
Gross Demand 55,300 55,900 56,500
Less: Unsatisfied Demand 300 300 300
----- ----- -----
Net Demonstrated Demand 55,000 55,600 56,200
Plus: Induced Demand 1,750 1,800 1,800
----- ----- -----
TOTAL SEGMENT DEMAND 56,750 57,400 58,000 1.6%
Growth over Previous Year 2.3% 1.1% 1.0%
% of Total Market Demand 13% 13% 13%
TOTAL MARKET DEMAND
Gross Demand 434,500 445,300 453,100
Less: Unsatisfied Demand 16,600 17,100 17,300
------ ------ ------
Net Demonstrated Demand 417,900 428,200 435,800
Plus: Induced Demand 15,550 16,000 16,000
------ ------ ------
TOTAL MARKET DEMAND 433,450 444,200 451,800 3.6%
Growth over Previous Year 4.7% 2.5% 1.7%
ANNUAL SUPPLY (ROOM NIGHTS) 602,980 602,980 602,980 3.6%
Growth over Previous Year 6.4% 0.0% 0.0%
MARKET OCCUPANCY 72% 74% 75%
<PAGE>
Regal University Hotel, Durham, North Carolina Page 47
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We estimate that this segment of demand will account for
approximately 25 percent of total accommodated demand among the
competitive lodging supply by the end of 1996, a slight increase
from 24 percent of the market in the competitive lodging supply
in 1995. This is a result of the increased demand for rooms from
Commercial Travelers in the market place and an effort by local
hoteliers to shift demand into higher-rated segments. This
segment of demand represents the highest rate available to the
hotels, thus as the demand for rooms grow, the management of the
hotels attempt to gain as much of the higher-rated demand as
possible. This involves releasing booking availability from
lower-rated segments.
We estimate that base growth in demand in this segment will be
five percent in 1997, four percent in 1998 and 1999, three
percent in 2000, and two percent thereafter. The underlying
assumptions for these base growth assumptions are that there is
space still available at Research Triangle Park, and there is
still growth occurring in the area. However, it is assumed that
the demand will temper over time as spaces fill and prices rise.
We estimate that there will be approximately 5,000 room nights of
unsatisfied commercial individual traveler demand at the end of
1996. This demand will occur during peak periods when the market
is sold out, mainly mid-week, particularly Thursdays. This is
also further emphasized by seasonal demand surges, particularly
in the spring and fall. The unsatisfied demand is expected to
increase even with the advent of new properties into the market.
This is because the new properties are predominantly limited
service properties, and this segment of the market is less likely
to use the limited service properties.
The addition of the Courtyard by Marriott and other hotels into
the market place is likely to attract new commercial individual
traveler demand to the competitive supply. This is as a result of
the brand affiliation that is associated with these new hotels.
Furthermore, the existence of a strong market in Durham is very
likely to attract the development of a full service hotel in the
near future.
Overall, the commercial individual traveler segment is estimated
to increase at a compound annual rate of 4.7 percent between the
1996 and 2001. We expect this segment of demand to
<PAGE>
Regal University Hotel, Durham, North Carolina Page 48
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account for approximately 118,200 room nights by 2001, or 26
percent of total accommodated demand.
Leisure Individual Travelers
This segment of demand includes individual travelers that are
visiting the market area on vacation or for other non-commercial
reasons. This segment of demand includes leisure travelers
booking suites and guest rooms at rack rates during special
events and also includes individuals seeking discounted rates and
special packages offered by the hotels during weekends and the
summer periods. Demand in this segment occurs throughout the
year, but is at its height during weekends. The business is,
during the school year, primarily driven by the events being held
at the Universities in the area, such as sporting events, parents
weekend and Commencement at the Universities. Other special
events in the area that attract leisure demand on weekends and
during the summer months are the music and arts festivals. The
Durham Bulls Minor League Baseball team, with its newly
constructed ballpark, also generates leisure demand. The area has
also played host to other significant sporting events, the next
being the 1997 World Special Olympics.
Leisure Individual Traveler demand will account for approximately
13 percent of total accommodated demand among the competitive
lodging supply at the end of 1996. Demand for room nights in this
segment is estimated to increase by sixteen percent in 1996 over
the levels achieved in 1995. This is as a result of the increased
demand for rooms in the market place. This segment of demand
represents a high rate segment and, as such, management will
target this segment over other lower-rated segments as long as
demand continues.
We estimate that base growth in demand in this segment will be
two percent in 1997 and 1998, and one percent from 1999 through
2001. The growth forecast is low as Durham's hotel market is not
tourism driven, and much of the leisure demand is event and time
specific.
We estimate that there will be approximately 1,500 room nights of
unsatisfied demand in the leisure individual traveler segment at
the end of 1996. This demand occurs during peak
<PAGE>
Regal University Hotel, Durham, North Carolina Page 49
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periods when the market is sold out. Full occupancy in this
market segment occurs during popular University events such as
large sporting events, homecoming or graduation ceremonies. It is
estimated that unsatisfied demand will remain constant, as the
growth in numbers attending events is likely to be consumed by
the addition of new supply to the market.
The addition of the Courtyard by Marriott and other hotels into
the market place are likely to attract a very small amount of
induced leisure individual traveler business to the competitive
supply. This is as a result of the brand affiliation that is
associated with these new hotels.
Overall, the leisure individual traveler segment is estimated to
increase at a compound annual rate of 1.6 percent between the
1996 and 2001. We expect this segment to account for
approximately 54,200 room nights by 2001, or 12 percent of total
accommodated demand.
Government and Preferred Commercial
This segment of demand includes business travelers who are able
to avail themselves of contracted rates that have been brokered
by their companies. Many organizations in the market area have
accounts with the hotels in the competitive supply; the hotels in
the market area offer large organizations a price discount in
order to secure a higher percentage of an organization's business
and volume. There are many companies in the Research Triangle
Park area which have organized such packages, such as IBM,
Rhone-Poulenc and Glaxo Wellcome. This segment also includes
those travelers that have business with state and/or federal
authorities. Examples of state and federal organizations located
in and around Durham are North Carolina's State Education
Assistance Authority as well as the Environmental Protection
Agency, which is headquartered in the area.
This segment also includes a small segment that is important to
those hotels located around Duke University, such as the Regal
University Hotel. This business is related to the medical market,
and it involves people who are staying for treatment at the
hospitals, people visiting those staying at the hospitals and
<PAGE>
Regal University Hotel, Durham, North Carolina Page 50
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those temporarily working at the hospitals. In 1996, this
business will represent approximately seven percent of total
occupied rooms at the Regal University Hotel.
Demand associated with this segment occurs primarily during the
week, from Monday night through Thursday night. The medical
portion of this segment is evenly spread throughout the week,
balanced between patients and visitors.
This segment of demand will account for approximately 23 percent
of total accommodated demand among the competitive lodging supply
at the end of 1996. Demand in room nights in this segment
increased by 11 percent in 1996 over the levels achieved in 1995.
We estimate that base growth in demand in this segment will be
five percent in 1997, four percent in 1998 and 1999, three
percent in 2000, and two percent thereafter. The underlying
assumptions for these base growth rates are that there is space
still available at the Research Triangle Park, and there is still
growth in the area. However, it is assumed that demand will ease
over time as spaces fill and prices rise.
We estimate that there will be approximately 4,500 room nights of
unsatisfied demand in this market segment at the end of 1996.
This demand occurs during peak periods when the market is sold
out, primarily during mid-week periods and on certain weekends
throughout the year. As this segment has a lower rate than the
Commercial Individual traveler or the Leisure Individual
traveler, hotels are less likely to keep open occupancy for
demand in this segment. The strongest levels of demand in this
segment occur at the same time as demands in higher-rated
segments. Unsatisfied demand is expected to increase each year,
as the level of new supply is not expected to be sufficient to
accommodate all the demand that will occur at given pressure
points in the week and season.
The addition of the Courtyard by Marriott and other hotels into
the market place are likely to attract a very small amount of
induced leisure individual traveler business to the competitive
supply. This is as a result of the brand affiliation that is
presented by these new hotels.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 51
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Overall, the Government and Preferred Commercial segment is
estimated to increase at a compound annual rate of 4.4 percent
between the 1996 and 2001. We expect this segment to account for
approximately 101,800 room nights by 2001, or 23 percent of total
accommodated demand.
Group Conference
This segment of demand includes groups of ten or more booking
through the sales office of the hotel. The group segment is made
up of commercial, leisure and medical markets. The commercial
business is primarily generated by the businesses that are
located in the area. There is more demand for conference space
than supply, hence business that may want to locate around the
offices in Research Triangle Park is using the facilities at the
Regal University Hotel. Leisure groups are usually linked to the
universities. These include visiting sports teams and other
groups. The medical group and conference market is strong as a
result of the hospitals in the area. The Convention and Visitors
Bureau has also made a significant contribution to the group
segment, with the compound annual growth for conferences booked
through the Bureau is 40 percent from 1990 to 1996. The actual
number of conventions and conferences in the community wide has
had a compound annual growth of 15 percent over the same period
of time.
The demand occurs throughout the year, with the sporting events
being predominantly confined to the University scholastic year.
Furthermore, as a result of the strength of demand from the
individual segments which pay higher rates, availability for
conferences and groups is being pushed to Fridays and weekends by
local hotel management.
This segment of demand will account for approximately 26 percent
of total accommodated demand among the competitive lodging supply
at the end of 1996. Demand in room nights in this segment is
expected to increase by one percent in 1996 over the levels
achieved in 1995. This represents the consolidation of group
business within the market. While there is more group and
conference business available in the market place, the hotels in
this competitive set are attempting to attract the higher-rated
individual customer.
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Regal University Hotel, Durham, North Carolina Page 51
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We estimate that base growth in demand in this segment will be
four percent in 1997, 1998 and 1999, three percent in 2000, and
two percent thereafter. The base growth percentages are estimated
to be tied to the level of business occurring in the area. As
such, they are closely tied to the growth rates achieved in the
individual business segments.
We estimate that there will be approximately 3,600 room nights of
unsatisfied demand in this market segment at the end of 1996.
This is as result of demand occurring when the conference
facilities are already booked or when the rooms have already been
booked by higher rated individual customers. This usually occurs
during midweek periods and particularly in the spring and fall.
Unsatisfied demand is expected to increase each year as the
current proposed properties do not involve the building of
sufficient conference and banqueting space to satisfy the growing
demand.
The addition of the new hotels into the market is likely to
induce a small amount of business into the market. However, the
induced demand is not expected to be significant since, as
previously stated, properties that are being built do not involve
large amounts of conference and banqueting space.
Overall, the Group Conference segment is estimated to increase at
a compound annual rate of 4.0 percent between the 1996 and 2001.
We expect this segment to account for approximately 119,600 room
nights by 2001, or 26 percent of total accommodated demand.
Group Contract
This segment of demand primarily consists of airline contracts
and other fixed contracts. This includes the flight crews and
distressed passengers generated by the airlines serving
Raleigh-Durham International Airport. This segment is very
price-sensitive, although it typically represents an important
business segment because it generates demand throughout the year.
However, the hotels in the competitive supply are reducing
availability for contracts, because as the market continues to
strengthen, they do not require low-rated guaranteed rooms.
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Regal University Hotel, Durham, North Carolina Page 52
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This segment of demand is expected to account for approximately
14 percent of total accommodated demand among the competitive
lodging supply at the end of 1996. Demand in room nights for this
segment has decreased by 23 percent in 1996 over the levels
achieved in 1995. This is as a direct result of the move by
hotels in this competitive set to attract higher-rated business.
We estimate that base growth in demand in this segment will be
one percent throughout the projection period. The base growth
percentages are estimated to grow at this low level because the
amount of contract business is not expected to grow at the same
rate as business in general.
We estimate that there will be approximately 250 room nights of
unsatisfied demand in this market segment at the end of 1996.
This demand occurs during peak periods when the market was sold
out. Unsatisfied demand is not expected to increase dramatically
as the new hotels entering the market will take up most of this
business.
There is expected to be a small amount of induced demand that
will result from the entrance of the new hotels into the market.
Overall, the Group Contract segment is estimated to increase at a
compound annual rate of 1.6 percent between the 1996 and 2001. We
expect this segment to account for approximately 58,000 room
nights by 2001, or 13 percent of total accommodated demand.
Conclusion
Overall, we estimate that the market will continue to achieve
moderate growth with a compound annual growth rate of 3.6 percent
between 1996 and 2001. Growth in the supply of hotels is
expected, but primarily in the limited service end of the market.
The hotels in this competitive set do not compete directly with
limited service properties. As a result, there is likely to be a
small amount of dilution of business to these properties and,
equally, this competitive set is likely to experience some
induced demand as a result of the additions. The continued growth
will result in greater emphasis being placed upon the individual
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Regal University Hotel, Durham, North Carolina Page 54
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segments in the market which pay higher rates. However, it
is also estimated that continued growth in lodging demand in the
market will result in the development of a full service property
in the next five years which will compete with the subject. This
assumption has been factored into our estimates.
C.3 ESTIMATED OCCUPANCY AND AVERAGE ROOM RATE
We have prepared detailed estimates of average annual occupancy
and average daily room rate for the subject property from January
1, 1997 through December 31, 2001. The following section presents
our analysis of estimated future occupancy and average daily room
rate.
MARKET PENETRATION & AVERAGE ANNUAL OCCUPANCY
This analysis uses the concept of "fair" share and market
penetration. By forming a penetration analysis of market lodging
demand, the future average annual occupancy at the subject Regal
University Hotel is estimated. Using this technique, the property
is first evaluated compared to its competition, then its
potential market share is calculated on the basis of its relative
appeal to each market segment. A hotel's "fair" share of market
demand is said to be equal to its fair share of supply; i.e. a
100-room hotel in a market of 1,000 rooms would have a "fair"
share of demand of ten percent of total market demand. A "market
penetration" of 100 percent indicates a property is capturing its
exact "fair" share of demand. Penetration in excess of, or lower
than, 100 percent indicates a hotel is likely to be viewed more
or less favorably than the competition by the respective market
segment and thus accommodates more or less than its fair share.
The following table presents our estimates of the year-end 1996
market penetration by demand segment for the subject and for the
hotels in the identified competitive lodging supply.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 55
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- ----------------------------------------------------------------------
Estimated 1996 Penetration By Market Segment
For The Identified Competitive Supply
- ----------------------------------------------------------------------
Corpor- Govt. Group
Hotel Name ate Leisure &. Pref. Con- Overall
Indi- Indi- Com- fer- Group Pene-
viduals viduals mercial ence Contract tration
- ----------------------------------------------------------------------
Regal University
Hotel 50% 101% 88% 115% 160% 98%
Washington Duke
Inn 105% 157% 96% 132% 15% 104%
Sheraton Imperial 80% 75% 91% 133% 105% 99%
Hilton Durham 104% 155% 119% 79% 73% 103%
Omni Hotel 72% 68% 41% 103% 190% 90%
Marriott Research 218% 82% 170% 17% 15% 108%
- ----------------------------------------------------------------------
Source: Arthur Andersen/Market Interviews
- ----------------------------------------------------------------------
By combining the above information with our market and property
analysis we calculate the future occupancy of the subject hotel
by market segment for the estimation period 1996 to 2001. A
detailed penetration analysis of the subject hotel is presented
on the following page. The following paragraphs summarize our
penetration analysis by market segment.
Commercial Individual Travelers
In 1996, the subject hotel is expected to achieve a market
penetration of 50 percent in this segment which represents a
decline from the 1995 penetration rate of 61 percent. Among the
competition, the highest penetration rate achieved will be that
of the Marriott in Research Triangle Park. This hotel will
achieve an estimated penetration rate of 218 percent, followed by
the Washington Duke Inn at 105 percent and the Sheraton at 104
percent. The Marriott has been able to achieve such a high level
of penetration as a result of its location and the business it
gains from the Marriott brand name. The Sheraton is largely able
to do the same; however it concentrates more on the group and
conference segments. The Washington Duke Inn is, in most
respects, the finest hotel in the area and is very popular with
commercial travelers. This hotel is also situated on a golf
course which enhances its attractiveness. The subject hotel
suffered a significant decrease in its penetration of this
segment for two reasons. Firstly, the subject hotel increased its
rate significantly over last year and secondly, the subject hotel
changed affiliation, from Sheraton to Regal. In doing
<PAGE>
Regal University Hotel
Penetration Analysis
Market Area: Durham, North Carolina
Estimated
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
ANNUAL SUPPLY
(ROOM NIGHTS) 506,255 520,855 566,480 602,980 602,980 602,980
SIZE OF SUBJECT
PROPERTY 322 322 322 322 322 322
FAIR SHARE (SUPPLY) 23.2% 22.6% 20.7% 19.5% 19.5% 19.5%
Commercial Individual
Travelers
Total Demand 93,800 99,600 105,900 112,600 116,000 118,200
Fair Share of Demand 21,776 22,475 21,972 21,947 22,610 23,039
Penetration Rate 50% 55% 60% 65% 65% 65%
------ ------ ------- ------- ------- -------
Demand Captured 11,000 12,400 13,200 14,300 14,700 15,000
% of Total Demand
Captured 13% 15% 16% 17% 17% 17%
Leisure Individual
Travelers
Total Demand 50,000 51,115 52,450 53,200 53,700 54,200
Fair Share of Demand 11,608 11,534 10,882 10,369 10,467 10,564
Penetration Rate 101% 110% 110% 110% 110% 110%
------ ------ ------ ------ ------ ------
Demand Captured 11,700 12,700 12,000 11,400 11,500 11,600
% of Total Demand
Captured 14% 15% 14% 14% 13% 13%
Government & Preferred
Commercial
Total Demand 82,000 86,900 91,900 97,100 99,900 101,800
Fair Share of Demand 19,037 19,609 19,067 18,926 19,472 19,842
Penetration Rate 88% 93% 98% 102% 102% 102%
------ ------ ------ ------ ------ -------
Demand Captured 16,800 18,200 18,700 19,300 19,900 20,200
% of Total Demand
Captured 20% 21% 22% 23% 23% 23%
Group Conference
Total Demand 98,500 103,100 108,400 113,800 117,200 119,600
Fair Share of Demand 22,867 23,264 22,490 22,181 22,844 23,312
Penetration Rate 115% 120% 127% 132% 132% 132%
------ ------- ------- ------- ------- -------
Demand Captured 26,300 27,900 28,600 29,300 30,200 30,800
% of Total Demand
Captured 31% 33% 34% 35% 35% 35%
Group Contract
Total Demand 53,500 54,350 55,500 56,750 57,400 58,000
Fair Share of Demand 12,420 12,264 11,515 11,061 11,188 11,305
Penetration Rate 160% 110% 95% 85% 85% 85%
------ ------ ------ ------ ------ ------
Demand Captured 19,900 13,500 10,900 9,400 9,500 9,600
% of Total Demand
Captured 23% 16% 13% 11% 11% 11%
TOTAL MARKET DEMAND
Total Demand 377,800 395,065 414,150 433,450 444,200 451,800
Fair Share of Demand 87,708 89,146 85,925 84,486 86,581 88,063
Penetration Rate 98% 95% 97% 99% 99% 99%
------- ------- ------- ------- ------- -------
Demand Captured 85,700 84,700 83,400 83,700 85,800 87,200
ESTIMATED OCCUPANCY 73% 72% 71% 71% 73% 74%
MARKET OCCUPANCY 75% 76% 73% 72% 74% 75%
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Regal University Hotel, Durham, North Carolina Page 57
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this, the hotel lost access to the powerful ITT Sheraton
reservation system. The Regal University Hotel recently completed
a significant renovation which should make it more marketable and
improve its penetration within this segment for the future. We
estimate that the subject hotel will achieve a penetration rate
of 65 percent in a stabilized year of operation. Occupied demand
in this segment is expected to equal 17 percent of total occupied
demand in the stabilized year.
Leisure Individual Travelers
The subject hotel, in 1996, is expected to attain a penetration
rate of 101 percent in this market segment relative to the
competitive supply. This will be a drop from a penetration rate
of 128 percent in 1995. This can be primarily attributed to a
significant increase in rate. The highest market penetration
achieved in this segment will be that of the Washington Duke Inn
at 157 percent, followed by the Hilton at 155 percent. All three
of these hotels benefit from the Leisure Individual business that
is generated, primarily, by the Universities in the area,
particularly Duke. However, this market segment represents the
smallest overall segment of the market.
The improvements made at the Regal University Hotel should allow
it to increase its penetration in this market and we estimate
that the subject hotel will have a stabilized penetration rate of
110 percent in a stabilized year of operation. Occupied demand in
this segment is expected to equal 13 percent of total occupied
demand in the stabilized year.
Government & Preferred Commercial
The Regal University Hotel is expected to achieve a penetration
rate of 88 percent in this segment in 1996. This will be a drop
from a market penetration rate of 134 percent in 1995. The hotel
with the highest penetration in this segment in 1996, will be the
Marriott Research Triangle Park at an estimated 170 percent,
followed by the Hilton Durham with 119 percent. Both of these
hotels will be able to achieve this penetration as a result of
their location, the product they are offering, their location and
the strength of their brand reservation system.
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Regal University Hotel, Durham, North Carolina Page 58
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As a result of the improvements that have occurred in the Regal
University Hotel, such as the renovation and an aggressive new
marketing style, we estimate that the subject hotel will improve
its penetration rate in this segment. We estimate that the
subject hotel will achieve a penetration rate in this segment of
102 percent in a stabilized year of operation. Occupied demand in
this segment is expected to equal 23 percent of total occupied
demand in the stabilized year.
Group Conference
The subject hotel is expected to achieve a market penetration
rate of 115 percent in this segment in 1996. This represents an
increase over the previous year's penetration rate of 91 percent.
The highest market penetration expected to be achieved in this
segment in 1996 is 133 percent by the Sheraton Imperial, followed
by 132 percent expected to be achieved by the Washington Duke
Inn. The Sheraton's ability to achieve high penetration in this
segment is a result of its conference space, with over 30,000
square feet, combined with more than 300 rooms and its location
beside Research Triangle Park. The Washington Duke Inn does well
as a result of its close proximity to Duke University and its
added attraction of being situated on a golf course.
As a result of its renovation, the Regal University Hotel is
expected to improve its penetration rate in this segment. Demand
in this segment is expected to equal 35 percent of total occupied
demand in the stabilized year, increasing from its current level
of 31 percent. We estimate that the subject hotel will achieve a
penetration rate of 132 percent in this segment in the stabilized
year of operation.
Group Contract
The subject hotel in 1996 is expected to attain a penetration
rate of approximately 160 percent in this segment. This is second
in the market to the Omni Hotel which has a penetration rate of
190 percent in this segment. Both the subject and the Omni have
historically offered low rates for group contract business. The
Group Contract market is,
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Regal University Hotel, Durham, North Carolina Page 58
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primarily, comprised of airline crews. This business is very
price-sensitive, thus, the lower-rated hotels in the market
capture a larger share of this market.
The renovation and active effort to improve the position of the
Regal University Hotel in the market is expected to result in the
reduction of group contract business at the subject hotel, with
management indicating that certain airline crew contracts will
not be renewed upon their expiration. Hence, we estimate that the
subject hotel will reduce its penetration rate in this segment to
85 percent in a stabilized year of operation. Demand in this
segment is expected to equal 11 percent of total occupied demand
in the stabilized year.
The estimated market mix of the subject hotel in a representative
year, at a stabilized 74 percent occupancy, is presented on the
following table:
- ------------------------------------------------------------------------
Estimated Market Segmentation In A Stabilized Year
Regal University Hotel, Durham
- ------------------------------------------------------------------------
Occupied Percent of Penetration
Market Segment Room Nights Total Occupancy Rate
- ------------------------------------------------------------------------
Corporate Individual Travelers 15,000 17% 65%
Leisure Individual Travelers 11,700 13.5% 110%
Government & Pref. Commercial 20,300 23.5% 102%
Group Conference 30,800 35% 132%
Group Contract 9,600 11% 85%
----- -- --
Total 87,400 100% 99%
- ------------------------------------------------------------------------
Source: Arthur Andersen
- ------------------------------------------------------------------------
Our estimates of the overall market penetration and resulting
occupancy for the subject hotel from 1996 through December 31,
2001 are presented on the following table.
- --------------------------------------------------------
Estimated Penetration And Occupancy
Regal University Hotel, Durham
- --------------------------------------------------------
Estimated Overall Estimated
Year Penetration Rate Occupancy
- --------------------------------------------------------
1996 98% 73%
1997 95% 72%
1998 97% 71%
1999 99% 71%
2000 99% 73%
2001 99% 74%
- --------------------------------------------------------
Source: Arthur Andersen
- --------------------------------------------------------
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Regal University Hotel, Durham, North Carolina Page 60
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PROJECTED AVERAGE DAILY ROOM RATE
Growth in the average daily room rate by market segment for the
subject hotel is summarized in the following paragraphs.
Commercial Individual Travelers
The average room rate in the commercial individual traveler
segment is estimated to finish at approximately $92.00 for 1996
at the subject hotel, the highest rated segment at this hotel.
This will represent a 14.8 percent increase over the rate
achieved in this segment in 1995. The substantial growth in rate
has occurred because of two significant factors. First, the hotel
has been renovated, which has allowed management of the hotel to
charge higher rates for the improved product. Second, the
strength of demand in the market has been such that the increase
in rates has been readily accepted by the market.
We estimate that the average room rate in this segment will
increase 4.0 percent in 1997 and 3.5 in 1998. The continued
increase in rates in this segment is expected to be possible due
to the expected continued strength in demand and the further
establishment of the Regal brandname within the market. We assume
that average rates will increase at 3.5 percent each year,
thereafter, or the assumed rate of inflation. The additions to
supply are expected to dilute the effects of continued increased
demand, resulting in slower rate growth than has been experienced
in the last year.
Leisure Individual Traveler
The average room rate in the Leisure Individual Traveler segment
is expected to be approximately $76.80 in 1996 at the subject
hotel. This represents a 13.0 percent increase over the rate
achieved by this segment in 1995, increasing nine dollars. There
was a smaller increase in rate in this segment between 1994 and
1995 of approximately four dollars. The increases in this segment
are a result of the same factors that have affected the rate in
the Commercial Individual segment. The renovation has allowed the
hotel to charge a higher rate, which has been further supported
by the strength of demand in the market.
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Regal University Hotel, Durham, North Carolina Page 61
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We estimate that the average room rate in this segment will
increase 3.5 percent from 1996 through 2001. Growth in demand is
expected to continue; however it is expected to occur at a slower
rate than over the last two years, hence our expectations of only
inflationary rate increases in this segment.
Government & Preferred Commercial
This segment, which includes medical-related demand, represents
an important demand segment, particularly to the Regal University
Hotel. The Regal's average room rate in this segment is expected
to be approximately $66.20 in 1996, up from $50.87 in 1995, and
$43.61 in 1994. This represents percentage increases of 30.0
percent and 16.0 percent, respectively.
The renovation of the Regal has enhanced its attractiveness to
this clientele base. However, future supply additions to the
market are likely to absorb the continued growth in demand. As a
result, we estimate that the average room rate in this segment
will increase 4.0 percent in 1997 and 3.5 percent thereafter.
Group Conference
The average room rate in the Group Conference segment is
estimated to be approximately $73.21 in 1996 at the subject
hotel, up from $61.60 in 1995, and $57.49 in 1994. For 1996, this
represents an 18.8 percent increase over the rate achieved in
1995. The Regal University Hotel has good conference space, which
enables it to hold a competitive advantage in the market place,
particularly in relation to those hotels competing for Duke
University business. As a result of the upturn in economic
activity in the area, demand in this segment has also increased,
and rates have increased accordingly. Furthermore, the renovation
of the subject property in the recent past has assisted in
increasing the group conference segment rate.
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Regal University Hotel, Durham, North Carolina Page 62
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We estimate that the average room rate in this segment will
increase 4.0 percent in 1997 and 3.5 thereafter. While increases
in demand are expected to continue, the level of rate growth is
expected to be constrained by the arrival of new properties in
the market place.
Group Contract
The average room rate in the Group Contract segment is the lowest
of all segments. In 1996, the subject is estimated to achieve a
group contract segment rate of $35.28, against $30.61 in 1995 and
$26.60 in 1994. This segment is comprised primarily of airline
crews, which are very price sensitive. In times of weak demand,
such business is very popular among hotels as it ensures
occupancy. However, in times of strong demand, this type of
business is not as coveted as the rooms occupied by this
lower-rated form of business could be sold to other demand at
higher rates.
Management of the Regal University Hotel has been attempting to
increase the room rate it achieves in this segment in an effort
to either force the contracted business away, leaving such
occupancy available for the use of higher rated business, or
force this segment to pay rates closer to those achieved in other
segments. Therefore, we estimate that there will be a 4.5 percent
increase in the rate charged to contract business in 1997, with
an estimated 3.5 percent increase per year thereafter.
The following table presents our estimates of average daily room
rate for the Regal University Hotel, Durham.
- ---------------------------------------------------
Estimated Average Daily Room Rate
Regal University Hotel, Durham
- ---------------------------------------------------
Year Average Rate % Growth
- ---------------------------------------------------
1995 $52.87 ----
1996 65.71 24.0%
1997 71.50 8.8%
1998 75.00 4.9%
1999 78.50 4.7%
2000 81.50 3.8%
2001 84.50 3.7%
- ---------------------------------------------------
Source: Arthur Andersen
- ---------------------------------------------------
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Regal University Hotel, Durham, North Carolina Page 63
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D. THE APPRAISAL PROCESS
The purpose of this appraisal is to estimate the "as is" market
value of the subject property in accordance with accepted value
estimating procedures. "The valuation process is a systematic
procedure employed to provide the answer to a client's question
about real property value. It is a model of appraisal activity,
reflecting an understanding of value and the methods used in the
value estimation."1
There are three traditional approaches involved in the valuation
of real property. These are known as the cost approach, the sales
comparison approach, and the income capitalization approach. Each
of the three approaches is related to the other, as they involve
the gathering and analysis of sales, cost, and income data that
pertain to the property being appraised. Although all three
valuation procedures are given consideration, the inherent
strengths and weaknesses of each approach and the nature of the
subject property must be evaluated to determine which will
provide the most supportable estimates of market value. The
appraiser is then free to select one approach to arrive at a
final value estimate.
D.1 THE COST APPROACH
Valuation by the cost approach is based on the principle of
substitution. This principle asserts that an informed investor
will not pay more for a property than the cost to build a
substitute property of equivalent utility. Therefore, the cost
approach, when utilized in an appraisal, estimates the cost of
reproducing or replacing the subject property including
improvements and land, less an allowance for depreciation based
upon the physical condition, functionality, and economic
environment of the building. Although this approach is
particularly applicable to owner-occupied or special-use
properties in the absence of an investor market, it also
recognizes and establishes the relationship between cost and
market-derived values.
In the subject appraisal, the building is now operating as a
business in the production of income to the various components
which comprise the total operation of a hotel. Although the
replacement cost of the subject hotel could be established, the
estimate of market depreciation
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Regal University Hotel, Durham, North Carolina Page 64
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is a very subjective consideration which significantly affects the
value indication. The depreciation estimate could only be
realistically estimated by comparison to other approaches,
thereby reducing the cost approach to coincide with one of the
other approaches, and losing the objectivity of the approach as a
third measure of value. In our opinion, an informed and
experienced purchaser would not rely on the cost approach in
establishing an indication of market value for the subject
property. Therefore, this approach has not been included in our
analysis.
D.2 SALES COMPARISON APPROACH
The sales comparison approach estimates market value on the basis
of a comparative analysis of recent sales of improved properties
that are similar in function, size, income production, and use to
the appraised property. This approach to value assumes that the
market will determine a price for the subject in the same manner
that it determines the price for comparable, competitive
properties. To apply the sales comparison approach, the appraiser
employs a number of appraisal principles, including the principle
of substitution which holds that the value of a property that is
replaceable in the marketplace tends to be set by the cost of
acquiring an equally desirable substitute property. Additional
considerations include examination of market conditions
prevailing at the time of sale as compared to those at the date
of valuation. The following pages explain the application of the
sales comparison approach to the subject property.
To develop the sales comparison approach, we researched the
subject market and the surrounding region for recent sales of
similarly improved properties. From our research, we have
selected several sales for further analysis and direct comparison
with the Regal University Hotel, Durham. These sales represent
the most recent sales of improved properties and are considered
to be competitive alternatives in the marketplace. We identified
five comparable hotel sales. The hotels chosen are branded
properties that have been sold during the previous two years in
North Carolina, thus ensuring a level of compatibility.
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Regal University Hotel, Durham, North Carolina Page 65
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We have made adjustments to the price paid per room on the basis
of a comparison of each hotel relative to the subject hotel. Our
analysis of the market recognizes primary factors which affect
the pricing of hotels including: adjustments related to
renovations planned at the time of purchase, interest appraised,
strength of the local lodging market, size and extent of the
facilities, condition of the facilities, and other risk factors
such as the property's location relative to demand generators and
area attractions and the ease of access to the hotel. Presented
on the following page is a summary of each comparable sale and
our adjustments. Tables detailing pertinent information related
to each comparable sale are presented in the Addenda of this
report.
<PAGE>
SALES COMPARISON ADJUSTMENT GRID
Regal University Hotel, Durham, North Carolina
Hotel Name Durham Hilton Omni Hotel and Civic Center
------------- ---------------------------
Location Durham, NC Durham, NC
Interest Fee Simple Lease (2)
Number of Rooms 152 187
Occupancy 74% 67%
Average Daily Rate $75.00 $74.00
Rooms Revenue $3,087,462 $3,384,083
REVPAR $20,312 $18,097
Date of Sale Under Contract Jul-96
Sales Price $11,100,000 $9,950,000
Sales Price Per Room $73,026 $53,209
ADJUSTMENTS (1)
Transaction Market Conditions 0.0% -10.0%
Size & Extent of Facilities -10.0% -5.0%
Condition of Facilities 0.0% 0.0%
Market Strength & Positioning -15.0% 0.0%
Location -5.0% 5.0%
ADJUSTED PRICE PER ROOM $51,118 $47,888
SALES COMPARISON ADJUSTMENT GRID
Regal University Hotel, Durham, North Carolina
Hotel Name Marriot Crabtree Valley Marriot Hotel Exec. Park (3)
------------
- ---------------------------
Location
Raleigh, NC Charlotte, NC
Interest Fee Simple Fee Simple
Number of Rooms 375 298
Occupancy 77% 77%
Average Daily Rate $70.00 $85.00
Rooms Revenue $7,377,563 $7,118,997
REVPAR $19,674 $23,889
Date of Sale May-94 Feb-95
Sales Price $18,700,000 $15,800,000
Sales Price Per Room $49,867 $53,020
ADJUSTMENTS (1)
Transaction Market Conditions 5.0% 5.0%
Size & Extent of Facilities 0.0% 0.0%
Condition of Facilities 0.0% 0.0%
Market Strength & Positioning 5.0% -5.0%
Location 0.0% 0.0%
ADJUSTED PRICE PER ROOM $54,853 $53,020
Note: (1) A negative adjustment indicates that the
comparable sale had a superior location, size & extent of
facilities than that of the subject. As a result, the sale price
must be adjusted downward to make the sale comparable with the
subject property. A positive adjustment indicates that the
comparable sale was inferior to that of the subject and the price
per room must be increased.
(2) The Omni-Durham has an air rights lease for 60 years. The annual
rent hasbeen capitalised at ten percent and deducted from the sale
price.
(3) Includes various adjustments for capital improvements, working
capital, transaction costs, and for the payment of liabilities.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 67
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The following paragraphs briefly present a rationale for the
major adjustments made to the price per room of each identified
comparable sale.
Durham Hilton (Durham, North Carolina)
This hotel is currently under contract for sale. The price for
this property is estimated to be approximately $11.1 million.
This hotel is located on Hillsborough Road, a busy thoroughfare
that has a large number of businesses on it, and which leads
directly into downtown Durham. It is approximately five minutes
away from the subject hotel. This hotel also benefits from the
Hilton brandname and reservation system. Furthermore, as a
smaller property, the Hilton is able to protect its room rate
more easily. As a result of these factors, the price per room of
the Durham Hilton has been adjusted downward. On the basis of
this analysis, the adjusted price per room of this hotel is
estimated to be $51,118 per room.
Omni Hotel and Civic Center (Durham, North Carolina)
This hotel was sold in June of 1996. This hotel is located in the
center of downtown Durham. It is built atop the Civic Center and
Convention Center. The hotel currently has a 60-year air rights
lease. It is approximately ten minutes away from the subject
hotel. The hotel has a distinct competitive advantage over all
the other hotels in the area, in that it has direct access to the
convention center facilities. However, downtown Durham is
currently not considered a prime business location. The hotel is
also linked to the city through a lease for the air rights above
the civic center in which the hotel resides. On the basis of this
analysis, the adjusted price per room of this hotel is estimated
to be $47,888 per room.
Marriott Hotel Crabtree Valley (Raleigh, North Carolina)
The Marriott Hotel Crabtree Valley sold in May of 1994 for
approximately $18.7 million. As the sale occurred over two years
ago, we have adjusted the sales price upward to account for
inflation and improvements in the overall investment market since
the date of sale. This property is in a suburban/highway location
approximately 15 minutes from the Research Triangle Park and the State
Capital, Raleigh. Relative to the subject hotel this location is
<PAGE>
Regal University Hotel, Durham, North Carolina Page 68
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inferior, and therefore we have adjusted the price per room
upward. The adjusted sales price per room for this hotel is
estimated to be $54,853.
Marriott Hotel Executive Park (Charlotte, North Carolina)
The Marriott Hotel Executive Park, is located approximately
fifteen minutes from the subject hotel near the intersection of
Interstate 77 and Tyvola/Fairview Road. This hotel is located
adjacent to the Hilton Inn. The sales price includes
approximately $600,000 in capital commitments to convert a
nightclub on the lobby level to meeting space and to upgrade the
lobby. We have adjusted the price per room upward slightly to
reflect the inflation and changes in market conditions since the
time of the sale, which was February, 1995. The adjusted sales
price per room for this hotel is estimated to be $53,020.
Information has been presented on several comparable hotel sales
which are considered to be relatively similar to the Regal
University Hotel, Durham. After adjustments, the comparable hotel
sale transactions indicate a unit price range for the subject
hotel from $47,888 to $54,853 per room.
We have given the most weight on the price per room indications
of the two properties located in Durham, North Carolina, the
Hilton and the Omni. This is because these properties are direct
competitors of the subject property, actually being part of the
Regal University Hotel's competitive set, and because in the case
of the Omni, the transaction was very recent, or as in the case
of the Durham Hilton, pending. These properties give a closer
prospective view of what price the Regal might achieve should it
be sold. On the basis of an analysis of these sales, we have
estimated the market value of the fee simple interest in the
subject property by this approach to be approximately $49,000 per
room, or $15,778,000 (rounded) as of January 1, 1997. This figure
represents a combination between the two prices achieved as both
of these hotels have issues which, for better or worse, do not
effect the Regal. This price represents a balance on these
factors.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 69
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D.3 INCOME APPROACH
The income approach to value converts anticipated future benefits
into an estimate of present value. In this respect, the process
is very similar to pricing in other capital markets. The approach
requires the careful estimation of future benefits -- income
before debt service, residual values, etc. -- and application of
investor yield or return requirements. The income approach brings
together reasoned estimates of future revenues and expenses with
the investor's yield requirements. These yield requirements, in
turn, reflect varieties of risk, including property type,
location, local market conditions, and so forth.
Yield and direct capitalization techniques are conventionally
used to convert future benefits to value -- the discounted cash
flow (DCF) technique and the overall capitalization rate (OAR)
technique. The DCF technique entails (1) modeling the future
performance of the subject, over a specific holding period, (2)
estimating the future value (reversionary value) at the end of
the holding period, and (3) converting the stream of periodic
benefits and reversionary value, through a discounting process
at investor yields, to a present value. The selection of an
appropriate discount rate is essential to this process.
By comparison, direct capitalization using an overall rate (OAR)
converts a single, "normalized" year's income or income before
debt service into a value by dividing the appropriate
capitalization rate into the normalized income. Subsequent
adjustments are then made to take into consideration variations
from normalized operations. In order to value the Regal
University Hotel, Durham, we have utilized only the discounted
cash flow method for the income approach. The direct
capitalization method has not been used because most investors do
not use it as a tool to analyze value from income. In addition,
it is difficult to reflect future increases in occupancy and room
rate using direct capitalization. Finally, using a "normalized"
or stabilized net operating income is highly speculative and can
produce erroneous results.
The discussion on the following pages provide a summary of our
projection of revenues, expenses, discount rates, capitalization
rates, and many of the other assumptions which are
<PAGE>
Regal University Hotel, Durham, North Carolina Page 70
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incorporated in the income approach. The discussion of
revenues and expenses begins with an examination of historical
trends. Finally, estimates are made with regard to the
appropriate projection of revenues, expenses, and capital items.
HISTORICAL FINANCIAL PERFORMANCE
The historical operating results for the subject hotel for the
years ended 1994 and 1995 are presented on the following page.
The next page presents the historical operating results for the
subject hotel through year-to-date September 3, 1996 and 1995,
the most recent financial data available to us at the time of our
fieldwork.
The performance to date in 1996 has been slightly lower than that
predicted in the 1996 forecast. However, the budget prepared for
1997 has significant performance increases over the forecasts for
1996. Many of these forecasted improvements are based upon the
renovation of the property and the Regal brandname. It is not
possible as yet, to say whether the Regal brandname will help
financial performances significantly in 1997.
<PAGE>
Recast of Historical Financial Statements
Regal University Hotel
1994 Actual Income
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 322
Available Rooms (Annually) 117,530
Occupancy Percentage 78.8%
Occupied Rooms 92,601
Average Room Rate $47.37
REVENUES
Rooms $4,386,565 67.7% $13,623 $47.37
Food 1,608,792 24.8% 4,996 17.37
Beverage 248,413 3.8% 771 2.68
Telephone 180,196 2.8% 560 1.95
Rentals and Other Income (Net) 60,162 0.9% 187 0.65
---------------------------------------------
Total Revenues $6,484,128 100.0% $20,137 $70.02
DEPARTMENTAL EXPENSES
Rooms $1,436,175 32.7% $4,460 $15.51
Food & Beverage 1,546,015 83.2% 4,801 16.70
Telephone 106,758 59.2% 332 1.15
---------------------------------------------
Total Departmental Expenses $3,088,948 47.6% $9,593 $33.36
TOTAL DEPARTMENTAL INCOME $3,395,180 52.4% $10,544 $36.66
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $709,944 10.9% $2,205 $7.67
Sales & Marketing 512,224 7.9% 1,591 5.53
Management Fees 259,364 4.0% 805 2.80
Franchise Fees 172,747 2.7% 536 1.87
Energy 332,892 5.1% 1,034 3.59
Property Operations &
Maintenance (1) 334,553 5.2% 1,039 3.61
- ------------------------------------------------------------------------------
Total Undistributed Operating $2,321,724 35.8% $7,210 $25.07
INCOME BEFORE FIXED CHARGES $1,073,456 16.6% $3,334 $11.59
FIXED CHARGES (2)
Property Taxes $49,445 0.8% $154 $0.53
Personal Property Taxes 17,527 0.3% 54 0.19
Insurance 54,541 0.8% 169 0.59
Equipment Rent & Other Expenses 101,473 1.6% 315 1.10
- ------------------------------------------------------------------------------
Total Fixed Charges $222,986 3.4% $693 $2.41
INCOME BEFORE RESERVE $850,470 13.1% $2,641 $9.18
==============================================
Notes:
The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen.
(1) Includes an amount for Major Maintenance Fixed Charge
(2)Depreciation and amortization has not been included in these
re-casts
Recast of Historical Financial Statements
Regal University Hotel
1995 Actual Income
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 322
Available Rooms (Annually) 117,530
Occupancy Percentage 78.6%
Occupied Rooms 92,355
Average Room Rate $50.78
REVENUES
Rooms $4,690,233 68.5% $14,566 $50.78
Food 1642,158 24.0% 5,100 17.78
Beverage 264,722 3.9% 822 2.87
Telephone 193,802 2.8% 602 2.10
Rentals and Other Income (Net) 60,273 0.9% 187 0.65
-----------------------------------------------
Total Revenues $6851,188 100.0% $21,277 $74.18
DEPARTMENTAL EXPENSES
Rooms $1,546,869 33.0% $4,804 $16.75
Food & Beverage 1568,399 82.2% 4,871 16.98
Telephone 110,365 56.9% 343 1.20
-----------------------------------------------
Total Departmental Expenses $3,225,633 47.1% $10,017 $34.93
TOTAL DEPARTMENTAL INCOME $3,625,555 52.9% $11,259 $39.26
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $709,183 10.4% $2,202 7.68
Sales & Marketing 570,433 8.3% 1,772 6.18
Management Fees 274,076 4.0% 851 2.97
Franchise Fees 138,506 2.0% 430 1.50
Energy 338,184 4.9% 1,050 3.66
Property Operations &
Maintenance(1) 388,273 5.7% 1,206 4.20
-----------------------------------------------
Total Undistributed Operating $2,418,655 35.3% $7,511 $26.19
INCOME BEFORE FIXED CHARGES $1,206,900 17.6% $3,748 $13.07
FIXED CHARGES (2)
Property Taxes $120,177 1.8% $373 $1.30
Personal Property Taxes 17,240 0.3% 54 0.19
Insurance 58,458 0.9% 182 0.63
Equipment Rent & Other Expenses 110,738 1.6% 344 1.20
-----------------------------------------------
Total Fixed Charges $306,613 4.5% $952 $3.32
INCOME BEFORE RESERVE $900,287 13.1% $2,796 $9.75
===============================================
Notes:
The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen.
(1) Includes an amount for Major Maintenance Fixed Charge
(2) Depreciation and amortization has not been included in these
re-casts
<PAGE>
Recast of Historical Financial Statements
Regal University Hotel
Year-To-Date September 31, 1995
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 273
Available Rooms (Daily) 322
Available Rooms (Annually) 87,906
Occupancy Percentage 78.9%
Occupied Rooms 69,371
Average Room Rate $51.71
REVENUES
Rooms $3,587,000 69.2% $11,140 $51.71
Food 1,211,800 23.4% 3,763 17.47
Beverage 181,800 3.5% 565 2.62
Telephone 153,000 3.0% 475 2.21
Rentals and Other Income (Net) 46,700 0.9% 145 0.67
-------------------------------------------
Total Revenues $5,180,300 100.0% $16,088 $74.68
DEPARTMENTAL EXPENSES
Rooms $1,140,900 31.8% $3,543 $16.45
Food & Beverage 1,167,900 83.8% 3,627 16.84
Telephone 85,100 55.6% 264 1.23
-------------------------------------------
Total Departmental Expenses $2,393,900 46.2% $7,434 $34.51
TOTAL DEPARTMENTAL INCOME $2,786,400 53.8% $8,653 $40.17
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $507,000 9.8% $1,575 $7.31
Sales & Marketing 434,296 8.4% 1,349 6.26
Franchise Fees 103,403 2.0% 321 1.49
Management Fees 207,249 4.0% 644 2.99
Energy 264,300 5.1% 821 3.81
Property Operations
& Maintenance(1) 273,100 5.3% 848 3.94
-------------------------------------------
Total Undistributed Operating $1,789,348 34.5% $5,557 $25.79
INCOME BEFORE FIXED CHARGES $997,052 19.2% $3,096 $14.37
FIXED CHARGES
Property Taxes $97,198 1.9% $302 $1.40
Personal Property Taxes 12,944 0.2% 40 0.19
Insurance 44,642 0.9% 139 0.64
Equipment Rent & Other Expenses 80,406 1.6% 250 1.16
-------------------------------------------
Total Fixed Charges $235,190 4.5% $730 $3.39
INCOME BEFORE RESERVE $761,862 14.7% $2,366 $10.98
===========================================
Notes:
The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen.
(1) Includes an amount for Major Maintenance Fixed Charge
(2) Depreciation and amortization has not been included in these
re-casts
Recast of Historical Financial Statements
Regal University Hotel
Year-To-Date September 31, 1996
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 274
Available Rooms (Daily) 322
Available Rooms (Annually) 88,228
Occupancy Percentage 76.2%
Occupied Rooms 67,237
Average Room Rate $61.84
REVENUES
Rooms $4,157,900 70.8% $12,913 $61.84
Food 1,297,800 22.1% 4,030 19.30
Beverage 214,600 3.7% 666 3.19
Telephone 151,400 2.6% 470 2.25
Rentals and Other Income (Net) 53,000 0.9% 165 0.79
- -----------------------------------------------
Total Revenues $5,874,700 100.0% $18,244 $87.37
DEPARTMENTAL EXPENSES
Rooms $1,304,600 31.4% $4,052 $19.40
Food & Beverage 1,248,900 82.6% 3,879 18.57
Telephone 84,600 55.9% 263 1.26
- -----------------------------------------------
Total Departmental Expenses $2,638,100 44.9% $8,193 $39.24
TOTAL DEPARTMENTAL INCOME $3,236,600 55.1% $10,052 $48.14
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $626,400 10.7% $1,945 $9.32
Sales & Marketing 430,543 7.3% 1,337 6.40
Management Fees 117,957 2.0% 366 1.75
Franchise Fees 235,100 4.0% 730 3.50
Energy 272,100 4.6% 845 4.05
Property Operations &
Maintenance 279,800 4.8% 869 4.16
- -----------------------------------------------
Total Undistributed Operating $1,961,900 33.4% $6,093 $29.18
INCOME BEFORE FIXED CHARGES $1,274,700 21.7% $3,959 $18.96
FIXED CHARGES
Property Taxes $70,769 1.2% $220 $1.05
Personal Property Taxes 18,870 0.3% 59 0.28
Insurance 43,652 0.7% 136 0.65
Equipment Rent & Other Expenses 92,270 1.6% 287 1.37
- -----------------------------------------------
Total Fixed Charges $225,561 3.8% $701 $3.35
INCOME BEFORE RESERVE $1,049,139 17.9% $3,258 $15.60
===============================================
Notes:
The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen.
(1) Includes an amount for Major Maintenance Fixed Charge
(2) Depreciation and amortization has not been included in these
re-casts
<PAGE>
Recast of Historical Financial Statements
Regal University Hotel
Trailing 12 Months As of September 30, 1996
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 366
Available Rooms (Daily) 322
Available Rooms (Annually) 117,852
Occupancy Percentage 76.6%
Occupied Rooms 90,221
Average Room Rate $58.31
REVENUES
Rooms $5,261,133 69.7% $16,339 $58.31
Food 1,728,158 22.9% 5,367 19.15
Beverage 297,522 3.9% 924 3.30
Telephone 192,202 2.5% 597 2.13
Rentals and Other Income (Net) 66,573 0.9% 207 0.74
----------------------------------------------
Total Revenues $7,545,588 100.0% $23,434 $86.63
DEPARTMENTAL EXPENSES
Rooms $1,710,569 32.5% $5,312 $18.96
Food & Beverage 1,649,399 81.4% 5,122 18.28
Telephone 109,865 57.2% 341 1.22
----------------------------------------------
Total Departmental Expenses $3,469,833 46.0% $10,776 $38.46
TOTAL DEPARTMENTAL INCOME $4,075,755 54.0% $12,658 $45.18
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $828,583 11.0% $2,573 $9.18
Sales & Marketing 566,680 7.5% 1,760 6.28
Management Fees 288,630 3.8% 896 3.20
Franchise Fees 166,357 2.2% 517 1.84
Energy 345,984 4.6% 1,074 3.83
Property Operations &
Maintenance (1) 394,973 5.2% 1,227 4.38
----------------------------------------------
Total Undistributed Operating $2,591,207 34.3% $8,047 $28.72
INCOME BEFORE FIXED CHARGES $1,484,548 19.7% $4,610 $16.45
FIXED CHARGES (2)
Property Taxes $93,748 1.2% $291 $1.04
Personal Property Taxes 23,166 0.3% 72 0.26
Insurance 57,468 0.8% 178 0.64
Equipment Rent & Other Expenses 122,602 1.6% 381 1.36
----------------------------------------------
Total Fixed Charges $296,984 3.9% $922 $3.29
INCOME BEFORE RESERVE $1,187,564 15.7% $3,688 $13.16
==============================================
Notes:
The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen.
(1) Includes an amount for Major Maintenance Fixed Charge
(2) Depreciation and amortization has not been included in these
re-casts
Recast of Historical Financial Statements
Regal University Hotel
Management Budget for 1997
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 322
Available Rooms (Annually) 117,530
Occupancy Percentage 68.8%
Occupied Rooms 80,902
Average Room Rate $73.52
REVENUES
Rooms $5,948,000 68.8% $18,472 $73.52
Food 2,172,000 25.0% 6,745 26.85
Beverage 297,000 3.4% 925 3.68
Telephone 194,000 2.2% 602 2.40
Rentals and Other Income (Net) 61,300 0.7% 190 0.76
- ---------------------------------------------
Total Revenues $8,673,100 100.0% $26,935 $107.21
DEPARTMENTAL EXPENSES
Rooms $1,601,400 26.9% $4,973 $19.79
Food & Beverage 1,831,900 74.2% 5,689 22.64
Telephone 118,300 61.0% 367 1.46
- ---------------------------------------------
Total Departmental Expenses $3,551,600 40.9% $11,030 $43.90
TOTAL DEPARTMENTAL INCOME $5,121,500 59.1% $15,905 $63.30
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $868,100 10.0% $2,696 $10.73
Sales & Marketing 714,364 8.2% 2,219 8.83
Management Fees 346,900 4.0% 1,077 4.29
Franchise Fees 172,136 2.0% 535 2.13
Energy 372,900 4.3% 1,158 4.61
Property Operations &
Maintenance (1) 438,700 5.1% 1,362 5.42
- ---------------------------------------------
Total Undistributed Operating $2,913,100 33.6% $9,047 $36.01
INCOME BEFORE FIXED CHARGES $2,208,400 25.5% $6,858 $27.30
FIXED CHARGES (2)
Property Taxes $101,488 1.2% $315 $1.25
Personal Property Taxes 17,784 0.2% 55 0.22
Insurance 53,680 0.6% 167 0.66
Equipment Rent & Other Expenses 178,909 2.1% 556 2.21
- ---------------------------------------------
Total Fixed Charges $351,861 4.1% $1,093 $4.35
INCOME BEFORE RESERVE $1,856,539 21.4% $5,766 $22.95
=============================================
Notes:
The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen.
(1) Includes an amount for Major Maintenance Fixed Charge
(2) Depreciation and amortization has not been included in these
re-casts
<PAGE>
Regal University Hotel, Durham, North Carolina Page 74
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ESTIMATED OPERATING RESULTS
Estimates of income and expenses, in current dollars, have been
prepared for the subject hotel from January 1, 1997 through
December 31, 2007. Our financial projections are based upon an
analysis of the historical operating results of the subject and
on the performance of comparable hotels. A representative year of
operation, expressed in 1996 dollars, is first established and
then adjusted to account for inflation and the varying levels of
occupancy for each year in the projection period. The
representative level of occupancy at the hotel is estimated to be
74 percent. The following paragraphs describe the assumptions and
bases of our estimates.
Inflation Assumption
In order to estimate future inflation of revenues and expenses at
the subject hotel, we have reviewed the historical inflation of
the consumer price index - urban markets (CPI-U).
- -----------------------------
Year CPI-U
---- -----
1988 4.4%
1989 4.6%
1990 6.1%
1991 3.1%
1992 2.9%
1993 2.7%
1994 2.7%
1995 2.5%
- -----------------------------
On the basis of historical inflation rates and on our estimates
of future inflation, we have assumed an inflation assumption of
3.5 percent, compounded annually, from a base year of 1996.
Revenue
Rooms Revenue is based upon the estimates of average annual
occupancy and room rates as described previously in this
report.
Food Revenue is derived from estimated food sales in the
restaurant, lounge, room service and banquet facilities.
Food revenue also includes any miscellaneous
<PAGE>
Regal University Hotel, Durham, North Carolina Page 75
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revenue such as public room rental and corkage fees. Our
estimate is based upon an analysis of actual operations of
comparable hotels and on historical food sales.
On the basis of the analysis of the historical operating
results and the results of comparable hotels, we assume
that the subject hotel will achieve food revenue of $22.50
per occupied room, in 1996 dollars at a stabilized
occupancy of 74 percent. Food revenue is estimated to be 50
percent variable with occupancy and is adjusted to account
for inflation and occupancy levels throughout the
projection period.
Beverage Revenue is derived from estimated sales of all
alcoholic beverages in the restaurant, lounge, room service
and banquet facilities. Our estimate is based upon the
actual operations of comparable hotels and upon an analysis
of historical beverage sales.
On the basis of the analysis of the historical operating
results and the results of comparable hotels, we assume
that the subject hotel will achieve beverage revenue of
$3.50 per occupied room, in 1996 dollars at a stabilized
occupancy of 74 percent. Beverage revenue is estimated to
be 60 percent variable with occupancy and is adjusted to
account for inflation and occupancy levels throughout the
projection period.
Telephone Revenue includes the revenue derived from long
distance and local telephone calls, as well as any per call
charges applied to credit card or other calls. Revenue in
this category is estimated to equal $2.20 per occupied
room, in 1996 dollars at a stabilized occupancy of 74
percent. Telephone revenue is estimated to be 100 percent
variable with occupancy and is adjusted to account for
inflation and varying occupancy levels throughout the
projection period.
Rental and Other Income, Net includes all miscellaneous income
(net of expenses) including interest income, concierge
commissions, vending machine commission, and other
miscellaneous items. This category also includes rental
income from the health and beauty clinic that is located on
the premises. On the basis of our analysis
<PAGE>
Regal University Hotel, Durham, North Carolina Page 76
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of historical leases and miscellaneous revenue, we estimate
that rental and other income, net of expenses, will be
$0.82 per occupied room at a stabilized level of occupancy
in constant 1996 dollars. Revenue in this category is
assumed to be 50 percent variable with occupancy and is
adjusted to account for inflation and varying occupancy
levels throughout the projection period.
Departmental Expenses
Rooms Departmental Expense includes salaries and wages for the
front desk, housekeeping, reservations, bell staff and
laundry, plus fringe benefits. Other operating expenses in
the rooms department include linen, cleaning supplies,
recreation and health club, guest supplies, uniforms,
reservations expenses, security, equipment leases and
travel agent commissions.
Rooms department expense is estimated based upon the
historical rooms departmental expenditures at the subject
hotel, comparisons to other similar properties, and our
estimates of occupancy and average rate over the estimation
period. We estimate that rooms departmental expenditures
will equal 28.5 percent of departmental sales, in a
representative year at 74 percent occupancy. Expenses are
estimated to be 35 percent fixed with occupancy and are
adjusted to account for inflation and occupancy levels
throughout the projection period.
Food and Beverage Expense includes the cost of goods sold
(food and beverages), labor and related benefits, and other
operating expenses. Labor costs include departmental
management, cooks and kitchen personnel, service staff,
banquet staff, and bartenders. Other operating expenses
include china, glass, silver, linens, restaurant and
kitchen supplies, menus and printing, and special
promotions. Labor costs are analyzed on a fixed versus
variable basis, as are other operating costs. The cost of
goods sold was considered completely variable as a ratio to
sales.
Food and beverage expense is estimated to be 79 percent of
combined food and beverage revenue in a representative year
at 74 percent occupancy. Food and
<PAGE>
Regal University Hotel, Durham, North Carolina Page 77
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beverage expenditures are estimated to be 60 percent
variable with occupancy and are adjusted to account for
inflation and occupancy levels throughout the projection
period.
Telephone Expenses are estimated based upon an analysis of
historical operating results at the subject hotel and an
analysis of the expenses of comparable hotels. We estimate
that telephone expenditures will equal approximately 59
percent of departmental revenue in a representative year.
Telephone expenses are estimated to be 50 percent variable
with occupancy and are adjusted to account for inflation
and occupancy levels throughout the projection period.
Undistributed Operating Expenses
Administrative and General Expense includes payroll and
related expenses for the general manager, personnel and
training, clerical staff, controller and accounting staff.
Other administrative and general (A&G) expenses include
office supplies, computer services, accounting and legal
fees, travel expenses and liability insurance. We reflected
this expense under fixed costs. Credit card commissions are
classified as an A&G expense, and are directly variable
with sales.
A&G expenses are estimated based upon actual operating results
of comparable hotels and historical expenses recorded by
the hotel. We estimate that A&G expenses will equal
approximately ten percent of total sales or $2,651 per
available room at a stabilized occupancy of 74 percent in
constant 1996 dollars. Administrative and General Expenses
are estimated to be 90 percent fixed and are adjusted to
account for inflation and occupancy levels throughout the
projection period.
Marketing Expense includes payroll and related expenses for
the sales and marketing staff, direct sales expenses,
advertising and promotion and travel expense for the sales
staff. Marketing expenses are estimated based upon actual
<PAGE>
Regal University Hotel, Durham, North Carolina Page 78
- --------------------------------------------------------------------
operating results of comparable hotels and historical
expenses recorded by the subject hotel. We
estimate that marketing expenditures will equal
approximately 7.9 percent of total sales or $2,134 per
available room at a stabilized occupancy of 74 percent in
1996 dollars. Marketing expenses are estimated to be 80
percent fixed and are adjusted to account for inflation and
occupancy levels throughout the projection period.
Management Fee Expense has been estimated to be four percent
of gross revenue on the basis of the Richfield management
contract.
Franchise Fee Expense has been estimated to be two percent of
rooms revenue on the basis of the Regal franchise
agreement.
Energy Costs include expenditures for electricity, fuel,
water, waste removal and related operating supplies. On the
basis of historical energy costs at the hotel and the
actual energy expenses recorded by comparable hotels, we
assume that the energy expense will equal $1,100 per room
in a representative year in constant 1996 dollars. Energy
expenditures are estimated to be 90 percent fixed and are
adjusted to account for inflation and occupancy levels
throughout the projection period.
Property Operations and Maintenance Expense includes
payroll and related expenses, as well as other expenses
necessary for painting, decorating, and repairs of the
building, grounds and equipment. This expense is estimated
based upon historical property operations and maintenance
expenses at the subject hotel and actual expenses at
comparable hotels. On the basis of historical maintenance
costs at the hotel and on expenses reported by comparable
hotels, we estimate that the property operations and
maintenance expense will equal $1,250 per room in a
representative year in constant 1996 dollars. Property
operation and maintenance expenditures are estimated to be
90 percent fixed and are adjusted to account for inflation
and occupancy levels throughout the projection period.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 79
- --------------------------------------------------------------------
Fixed Charges
Property Taxes are estimated based upon the current property
tax assessment and tax bill for 1994 and 1995. A more
detailed analysis of historical and current property taxes
is presented earlier in this report.
Insurance on building and contents against damage was
estimated based upon the historical expenses incurred at
the subject hotel. We estimate that insurance costs will
equal $195 per available room in constant 1996 dollars.
Expenses are adjusted to account for inflation throughout
the projection period.
Equipment Rental includes rental of computer equipment, copy
machines, fax machines, and of mini-vans for the transport
of guests to and from the airport, as well as other
miscellaneous operating equipment and were based upon
historical expenses at the property. On the basis of
historical equipment rental expenditures at the subject
hotel and an analysis of the expiration date of certain
rental contracts currently in-place, we estimate that
equipment rental costs will equal $310 per room in 1996
dollars. Expenses are adjusted to account for inflation
throughout the projection period.
Reserve for Replacement provides a fund for the replacement
of furniture, fixtures and equipment. We assume that the
reserve for replacement will equal four percent of total
revenue throughout the projection period, consistent with
industry practice.
Capital Expenditures - We have estimated the capital
expenditures required to further renovate the property.
These capital expenditures are assumed as a deduction from
operating income. A more detailed analysis of the capital
expenditures assumed is presented in section B.1
(Description and Analysis of the Property) of this report.
A capital expense of $500,000 has been included in year
three of the financial model in order to represent costs
likely to be incurred for further renovation.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 80
- --------------------------------------------------------------------
Income Before Debt Service
Estimated operating results for the subject property to the level
of profit before debt service, income taxes, depreciation and
other capital costs, are presented on the following pages.
<PAGE>
Regal University Hotel
Statement of Estimated
Income and Expenses
1997
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 322
Available Rooms (Annually) 117,530
Occupancy Percentage 72%
Occupied Rooms 84,700
Average Room Rate $71.50
REVENUES
Rooms $6,056,100 70.1% $18,808 $71.50
Food 2,003,900 23.2% 6,223 23.66
Beverage 310,700 3.6% 965 3.67
Telephone 192,900 2.2% 599 2.28
Rentals and Other
Income (Net) 73,100 0.8% 227 0.86
----------------------------------------------
Total Revenues $8,636,700 100.0% $26,822 $101.97
DEPARTMENTAL EXPENSES
Rooms $1,797,400 29.7% $5,582 $21.22
Food & Beverage 1,823,600 78.8% 5,663 21.53
Telephone 115,700 60.0% 359 1.37
----------------------------------------------
Total Departmental Expenses $3,736,700 43.3% $11,605 $44.12
TOTAL DEPARTMENTAL INCOME $4,900,000 56.7% $15,217 $57.85
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General $863,700 10.0% $2,682 $10.20
Sales & Marketing 690,900 8.0% 2,146 8.16
Management Fees 345,500 4.0% 1,073 4.08
Franchise Fees 151,400 1.8% 470 1.79
Energy 365,500 4.2% 1,135 4.32
Property Operations &
Maintenance (1) 415,300 4.8% 1,290 4.90
-----------------------------------------------
Total Undistributed Operating
Expenses $2,832,300 32.8% $8,796 $33.44
INCOME BEFORE FIXED CHARGES $2,067,700 25.9% $6,421 $24.41
FIXED CHARGES
Property Taxes $116,600 1.4% $362 $1.38
Personal Property Taxes 21,700 0.3% 67 0.26
Insurance 65,000 0.8% 202 0.77
Equipment Rent & Other Expenses 103,300 1.2% 321 1.22
-----------------------------------------------
Total Fixed Charges $306,600 3.5% $952 $3.62
INCOME BEFORE RESERVES $1,761,100 20.4% $5,469 $20.79
Reserve for Replacement of FF&E $345,500 4.0% $1,073 $4.08
Capital Expenditures 0 0.0% 0 00.00
-----------------------------------------------
Total Reserves and
Capital Exp. $345,500 4.0% $1,073 $4.08
INCOME BEFORE DEBT SERVICE $1,415,600 16.4% $4,396 $16.71
==============================================
Notes:
(1) Includes an amount for Major Maintenance Fixed Charge
(2) Depreciation and amortization has not been included in these
re-casts
Regal University Hotel
Statement of Estimated
Income and Expenses
1998
Per
Amount Ratio Per Room Occupied
Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 322
Available Rooms (Annually) 117,530
Occupancy Percentage 71%
Occupied Rooms 83,400
Average Room Rate $75.00
REVENUES
Rooms $6,255,000 70.3% $19,425 $75.00
Food 2,058,400 23.1% 6,393 24.68
Beverage 318,700 3.6% 990 3.82
Telephone 196,600 2.2% 611 2.36
Rentals and Other
Income (Net) 75,000 0.8% 233 0.90
-------------------------------------------
Total Revenues 8,903,700 100.0% $27,651 106.76
DEPARTMENTAL EXPENSES
Rooms $1,842,000 29.4% $5,720 $22.09
Food & Beverage 1,870,300 78.7% 5,808 22.43
Telephone 118,800 60.4% 369 1.42
-------------------------------------------
Total Departmental Expenses $3,831,100 43.0% $11,898 $45.94
TOTAL DEPARTMENTAL INCOME $5,072,600 57.0% $15,753 $60.82
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $890,400 10.0% $2,765 $10.68
Sales & Marketing 712,300 8.0% 2,212 8.54
Management Fees 356,100 4.0% 1,106 4.27
Franchise Fees 187,700 2.1% 583 2.25
Energy 377,700 4.2% 1,173 4.53
Property Operations &
Maintenance (1) 429,200 4.8% 1,333 5.15
-------------------------------------------
Total Undistributed Operating $2,953,400 33.2% $9,172 $35.41
INCOME BEFORE FIXED CHARGES $2,119,200 23.8% $6,581 $25.41
FIXED CHARGES
Property Taxes $120,700 1.4% $375 $1.45
Personal Property Taxes 22,400 0.3% 70 0.27
Insurance 67,300 0.8% 209 0.81
Equipment Rent & Other Expenses 106,900 1.2% 332 1.28
-------------------------------------------
Total Fixed Charges $317,300 3.6% $985 $3.80
INCOME BEFORE RESERVES $1,801,900 20.2% $5,596 $21.61
Reserve for Replacement of FF&E $356,100 4.0% $1,106 $4.27
Capital Expenditures 0 0.0% 0 0.00
-------------------------------------------
Total Reserves and Capital Exp. $356,100 4.0% $1,106 $4.27
INCOME BEFORE DEBT SERVICE $1,445,800 16.2% $4,490 $17.34
===========================================
Notes:
(1) Includes an amount for Major Maintenance Fixed Charge
(2) Depreciation and amortization has not been included in these
re-casts
Regal University Hotel
Statement of Estimated
Income and Expenses
1999
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 322
Available Rooms (Annually) 117,530
Occupancy Percentage 71%
Occupied Rooms 83,700
Average Room Rate $78.50
REVENUES
Rooms $6,570,500 70.5% $20,405 $78.50
Food 2,134,100 22.9% 6,628 25.50
Beverage 330,500 3.5% 1,026 3.95
Telephone 204,200 2.2% 634 2.44
Rentals and Other
Income (Net) 77,800 0.8% 242 0.93
- --------------------------------------------------
Total Revenues $9,317,100 100.0% $28,935 $111.32
DEPARTMENTAL EXPENSES
Rooms $1,910,800 29.1% $5,934 $22.83
Food & Beverage 1,939,800 78.7% 6,024 23.18
Telephone 123,200 60.3% 383 1.47
- --------------------------------------------------
Total Departmental
Expenses $3,973,800 42.7% $12,341 $47.48
TOTAL DEPARTMENTAL INCOME $5,343,300 57.3% $16,594 $63.84
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General $931,700 10.0% $2,893 $11.13
Sales & Marketing 745,400 8.0% 2,315 8.91
Management Fees 372,700 4.0% 1,157 4.45
Franchise Fees 197,100 2.1% 612 2.35
Energy 391,000 4.2% 1,214 4.67
Property Operations &
Maintenance (1) 444,400 4.8% 1,380 5.31
- --------------------------------------------------
Total Undistributed
Operating $3,082,300 33.1% $9,572 $36.83
INCOME BEFORE FIXED CHARGES $2,261,000 24.3% $7,022 $27.01
FIXED CHARGES
Property Taxes $125,000 1.3% $388 $1.49
Personal Property Taxes 23,200 0.2% 72 0.28
Insurance 69,600 0.7% 216 0.83
Equipment Rent &
Other Expenses 110,700 1.2% 344 1.32
- --------------------------------------------------
Total Fixed Charges $328,500 3.5% $1,020 3.92
INCOME BEFORE RESERVES $1,932,500 20.7% $6,002 $23.09
Reserve for Replacement
of FF&E $372,700 4.0% $1,157 $4.45
Capital Expenditures 500,000 5.4% 1,553 $5.97
- --------------------------------------------------
Total Reserves
and Capital Exp. $872,700 9.4% $2,710 $10.43
INCOME BEFORE DEBT SERVICE $1,059,800 11.4% $3,291 $12.66
==================================================
Notes:
(1) Includes an amount for Major Maintenance Fixed Charge
(2) Depreciation and amortization has not been included in these
re-casts
<PAGE>
Regal University Hotel
Statement of Estimated
Income and Expenses
2000
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 322
Available Rooms (Annually) 117,530
Occupancy Percentage 73%
Occupied Rooms 85,800
Average Room Rate $81.50
REVENUES
Rooms $6,992,700 70.8% $21,716 $81.50
Food 2,235,900 22.6% 6,944 26.06
Beverage 347,200 3.5% 1,078 4.05
Telephone 216,600 2.2% 673 2.52
Rentals and Other
Income (Net) 81,500 0.8% 253 0.95
----------------------------------------------
Total Revenues $9,873,900 100.0% $30,664 $115.08
DEPARTMENTAL EXPENSES
Rooms $2,009,400 28.7% $6,240 $23.42
Food & Beverage 2,037,400 78.9% 6,327 23.75
Telephone 129,100 59.6% 401 1.50
----------------------------------------------
Total Departmental
Expenses $4,175,900 42.3% $12,969 $48.67
TOTAL DEPARTMENTAL INCOME $5,698,000 57.7% $17,696 $66.41
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General $987,400 10.0% $3,066 $11.51
Sales & Marketing 789,900 8.0% 2,453 9.21
Management Fees 395,000 4.0% 1,227 4.60
Franchise Fees 209,800 2.1% 652 2.45
Energy 405,700 4.1% 1,260 4.73
Property Operations
& Maintenance (1) 461,000 4.7% 1,432 5.37
----------------------------------------------
Total Undistributed
Operating $3,248,800 32.9% $10,089 $37.86
INCOME BEFORE FIXED CHARGES $2,449,200 24.8% $7,606 $28.55
FIXED CHARGES
Property Taxes $129,300 1.3% $402 $1.51
Personal Property Taxes 24,000 0.2% 75 0.28
Insurance 72,100 0.7% 224 0.84
Equipment Rent &
Other Expenses 114,500 1.2% 356 1.33
----------------------------------------------
Total Fixed Charges $339,900 3.4% $1,056 $3.96
INCOME BEFORE RESERVES $2,109,300 21.4% $6,551 $24.58
Reserve for Replacement
of FF&E $395,000 4.0% $1,227 $4.60
Capital Expenditures 0 0.0% 0 0.00
----------------------------------------------
Total Reserves and
Capital Exp. $395,000 4.0% $1,227 $4.60
INCOME BEFORE DEBT SERVICE $1,714,300 17.4% $5,324 $19.98
==============================================
Notes:
(1) Includes an amount for Major Maintenance Fixed Charge
(2) Depreciation and amortization has not been included in these
re-casts
Regal University Hotel
Statement of Estimated
Income and Expenses
2001
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 322
Available Rooms (Annually) 117,530
Occupancy Percentage 74%
Occupied Rooms 87,200
Average Room Rate $84.50
REVENUES
Rooms $7,368,400 71.0% $22,883 $84.50
Food 2,332,900 22.9% 7,245 26.75
Beverage 362,800 3.5% 1,127 4.16
Telephone 227,900 2.2% 708 2.61
Rentals and Other
Income (Net) 85,100 0.8% 264 0.98
--------------------------------------------
Total Revenues $10,377,100 100.0% $32,227 $119.00
DEPARTMENTAL EXPENSES
Rooms $2,101,700 28.5% $6,527 $24.10
Food & Beverage 2,129,200 79.0% 6,612 24.42
Telephone 134,600 59.1% 418 1.54
--------------------------------------------
Total Departmental Expenses $4,365,500 42.1% $13,557 $50.06
TOTAL DEPARTMENTAL INCOME $6,011,600 57.9% $18,670 $68.94
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $1,037,700 10.0% $3,223 $11.90
Sales & Marketing 815,800 7.9% 2,534 9.36
Management Fees 415,100 4.0% 1,289 4.76
Franchise Fees 221,100 2.1% 687 2.54
Energy 42,600 4.1% 1,306 4.82
Property Operations &
Maintenance (1) 477,900 46.9% 1,484 5.48
--------------------------------------------
Total Undistributed Operating $3,388,200 32.7% $10,522 $38.86
INCOME BEFORE FIXED CHARGES $2,623,400 25.3% $8,147 $30.08
FIXED CHARGES
Property Taxes $133,900 1.3% $416 $1.54
Personal Property Taxes 24,900 0.2% 77 0.29
Insurance 74,600 0.7% 232 0.86
Equipment Rent &
Other Expenses 118,600 1.1% 368 1.36
--------------------------------------------
Total Fixed Charges $352,000 3.4% $1,093 $4.04
INCOME BEFORE RESERVES $2,271,400 21.9% $7,054 $26.05
Reserve for Replacement
of FF&E $415,100 4.0% $1,289 $4.76
Capital Expenditures 0 0.0% 0 0.00
--------------------------------------------
Total Reserves and Capital Exp $415,100 4.0% $1,289 $4.76
INCOME BEFORE DEBT SERVICE $1,856,300 17.9% $5,765 $21.29
============================================
Notes:
(1) Includes an amount for Major Maintenance Fixed Charge
(2)Depreciation and amortization has not been included in these
re-casts
Regal University Hotel
Statement of Estimated
Income and Expenses
2002
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 322
Available Rooms (Annually) 117,530
Occupancy Percentage 74%
Occupied Rooms 87,200
Average Room Rate $87.50
REVENUES
Rooms $7,630,000 71.0% $23,696 $87.50
Food 2,414,600 22.5% 749 27.69
Beverage 375,500 3.5% 1,166 4.31
Telephone 235,900 2.2% 733 2.71
Rentals and Other
Income (Net) 88,100 0.8% 274 1.01
- -----------------------------------------------
Total Revenues $10,744,100 10.0% $33,367 $123.21
DEPARTMENTAL EXPENSES
Rooms $2,175,300 28.5% $6,756 $24.95
Food & Beverage 2,203,700 79.0% 6,844 25.27
Telephone 139,300 59.1% 433 1.60
- -----------------------------------------------
Total Departmental Expenses $4,518,300 42.1% $14,032 $51.82
TOTAL DEPARTMENTAL INCOME $6,225,800 57.9% $19,335 $71.40
UNDISTRIBUTED OPERATING
EXPENSES
Administrative & General $1,074,000 10.0% $3,335 $12.32
Sales & Marketing 844,400 7.9% 2,622 9.68
Management Fees 429,800 4.0% 1,335 4.93
Franchise Fees 228,900 2.1% 711 2.63
Energy 435,300 4.1% 1,352 4.99
Property Operations &
Maintenance (1) 494,700 4.6% 1,536 5.67
- -----------------------------------------------
Total Undistributed
Operating $3,507,100 32.6% $10,892 $40.22
INCOME BEFORE FIXED CHARGES $2,718,700 25.3% $8,443 $31.18
FIXED CHARGES
Property Taxes $138,500 1.3% $430 $1.59
Personal Property Taxes 25,700 0.2% 80 0.29
Insurance 77,200 0.7% 240 0.89
Equipment Rent &
Other Expenses $122,700 1.1% 381 1.41
- -----------------------------------------------
Total Fixed Charges $364,100 3.4% $1,131 $4.18
INCOME BEFORE RESERVES $2,354,600 21.9% $7,312 $27.00
Reserve for Replacement
of FF&E $429,800 4.0% $1,335 $4.93
Capital Expenditures 0 0.0% 0 0.00
- -----------------------------------------------
Total Reserves and
Capital Exp $429,800 4.0% $1,335 $4.93
INCOME BEFORE DEBT SERVICE $1,924,800 17.9% $5,978 $22.07
===============================================
Notes:
(1) Includes an amount for Major Maintenance Fixed Charge
(2)Depreciation and amortization has not been included in these
re-casts
<PAGE>
Regal University Hotel
Statement of Estimated
Income and Expenses
2003
Per
Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 322
Available Rooms (Annually) 117,530
Occupancy Percentage 74%
Occupied Rooms 87,200
Average Room Rate $90.50
REVENUES
Rooms $7,891,500 71.0% $24,508 $90.50
Food 2,499,100 22.5% 7,761 28.66
Beverage 388,600 3.5% 1,207 4.46
Telephone 244,200 2.2% 758 2.80
Rentals and
Other Income (Net) 91,200 0.8% 283 1.05
- ---------------------------------------------------
Total Revenues $11,114,700 100.0% $34,518 $127.46
DEPARTMENTAL EXPENSES
Rooms $2,251,400 28.5% $6,992 $25.82
Food & Beverage 2,280,800 79.0% 7,083 26.16
Telephone 144,200 59.0% 448 1.65
- ---------------------------------------------------
Total Departmental
Expenses $4,676,400 42.1% $14,523 $53.63
TOTAL DEPARTMENTAL
INCOME $6,438,300 57.9% $19,995 $73.83
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General $1,111,600 10.0% $3,452 $12.75
Sales & Marketing 874,000 7.9% 2,714 10.02
Management Fees 444,600 4.0% 1,381 5.10
Franchise Fees 236,700 2.1% 735 2.71
Energy 450,500 4.1% 1,399 5.17
Property Operations &
Maintenance (1) 512,000 4.6% 1,590 5.87
- ---------------------------------------------------
Total Undistributed
Operating $3,629,400 32.7% $11,271 $41.62
INCOME BEFORE
FIXED CHARGES $2,808,900 25.3% $8,723 $32.21
FIXED CHARGES
Property Taxes $143,400 1.3% $445 $1.64
Personal Property Taxes 26,600 0.2% 83 0.31
Insurance 79,900 0.7% 248 0.92
Equipment Rent &
Other Expenses 127,000 1.1% 394 1.46
- ---------------------------------------------------
Total Fixed Charges $376,900 3.4% $1,170 $4.32
INCOME BEFORE RESERVES $2,432,000 21.9% $7,553 $27.89
Reserve for Replacement
of FF&E $444,600 4.0% $1,381 $5.10
Capital Expenditures 0 0.0% 0 0.00
- ---------------------------------------------------
Total Reserves and
Capital Exp $444,600 4.0% $1,381 $5.10
INCOME BEFORE DEBT SERVICE $1,987,400 17.9% $6,172 $22.79
===================================================
Notes:
(1) Includes an amount for Major Maintenance Fixed Charge (2)
Depreciation and amortization has not been included in these
re-casts
Regal University Hotel
Statement of Estimated
Income and Expenses
2004
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 322
Available Rooms (Annually) 117,530
Occupancy Percentage 74%
Occupied Rooms 87,200
Average Room Rate $93.50
REVENUES
Rooms $8,153,200 71.0% $25,320 $93.50
Food 2,586,600 22.5% 8,033 29.66
Beverage 402,200 3.5% 1,249 4.61
Telephone 252,700 2.2% 785 2.90
Rentals and Other
Income (Net) 94,400 0.8% 293 1.08
--------------------------------------------------
Total Revenues $11,489,100 100.0% $35,680 $131.76
DEPARTMENTAL EXPENSES
Rooms $2,330,200 28.6% $7,237 $26.72
Food & Beverage 2,360,600 79.0% 7,331 27.07
Telephone 149,200 59.0% 463 1.71
--------------------------------------------------
Total Departmental
Expenses $4,840,000 42.1% $15,031 $55.50
TOTAL DEPARTMENTAL
INCOME $6,649,100 57.9% $20,649 $76.25
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General $1,150,500 10.0% $3,573 $13.19
Sales & Marketing 904,600 7.9% 2,809 10.37
Management Fees 459,600 4.0% 1,427 5.27
Franchise Fees 244,600 2.1% 760 2.81
Energy 466,300 4.1% 1,448 5.35
Property Operations &
Maintenance (1) 529,900 4.6% 1,646 6.08
--------------------------------------------------
Total Undistributed
Operating $3,755,500 32.7% $11,663 $43.07
INCOME BEFORE
FIXED CHARGES $2,893,600 25.2% $8,986 $33.18
FIXED CHARGES
Property Taxes $148,400 1.3% $461 $1.70
Personal Property Taxes 27,600 0.2% 86 0.32
Insurance 82,700 0.7% 257 0.95
Equipment Rent &
Other Expenses 131,400 1.1% 408 1.51
--------------------------------------------------
Total Fixed Charges $390,100 3.4% $1,211 $4.47
INCOME BEFORE RESERVES $2,503,500 21.8% $7,775 $28.71
Reserve for Replacement
of FF&E $459,600 4.0% $1,427 $5.27
Capital Expenditures 0 0.0% 0 0.00
--------------------------------------------------
Total Reserves
and Capital Exp. $459,600 4.0% $1,427 $5.27
INCOME BEFORE
DEBT SERVICE $2,043,900 17.8% $6,348 $23.44
==================================================
Notes:
(1) Includes an amount for Major Maintenance Fixed Charge
(2) Depreciation and amortization has not been included in these
re-casts
Regal University Hotel
Statement of Estimated
Income and Expenses
2005
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 322
Available Rooms (Annually) 117,530
Occupancy Percentage 74%
Occupied Rooms 87,200
Average Room Rate $97.00
REVENUES
Rooms $8,458,400 71.0% $26,268 $97.00
Food 2,677,100 22.5% 8,314 30.70
Beverage 416,300 3.5% 1,293 4.77
Telephone 261,500 2.2% 812 3.00
Rentals and Other
Income (Net) 97,700 0.8% 303 1.12
- ----------------------------------------------------
Total Revenues $11,911,000 100.0% $36,991 $136.59
DEPARTMENTAL
EXPENSES
Rooms $2,411,800 28.5% $7,490 $27.66
Food & Beverage 2,443,200 79.0% 7,588 28.02
Telephone 154,400 59.0% 480 1.77
- ----------------------------------------------------
Total Departmental
Expenses $5,009,400 42.1% $15,557 $57.45
TOTAL DEPARTMENTAL
INCOME $6,901,600 57.9% $21,434 $79.15
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General $1,190,800 10.0% $3,698 $13.66
Sales & Marketing 936,300 7.9% 2,908 10.74
Management Fees 476,400 4.0% 1,480 5.46
Franchise Fees 253,800 2.1% 788 2.91
Energy 482,600 4.1% 1,499 5.53
Property Operations &
Maintenance (1) 548,400 4.6% 1,703 6.29
- ----------------------------------------------------
Total Undistributed
Operating $3,888,300 32.6% $12,075 $44.59
INCOME BEFORE
FIXED CHARGES $3,013,300 25.3% $9,358 $34.56
FIXED CHARGES
Property Taxes $153,600 1.3% $477 $1.76
Personal Property Taxes 28,500 0.2% 89 0.33
Insurance 85,600 0.7% 266 0.98
Equipment Rent &
Other Expenses 136,000 1.1% 422 1.56
- ----------------------------------------------------
Total Fixed Charges $403,700 3.4% $1,254 $4.63
INCOME BEFORE RESERVES $2,609,600 21.9% $8,104 $29.93
Reserve for Replacement
of FF&E $476,400 4.0% $1,480 $5.46
Capital Expenditures 0 0.0% 0 0.00
- ----------------------------------------------------
Total Reserves and
Capital Exp. $476,400 4.0% $1,480 $5.46
INCOME BEFORE DEBT SERVICE $2,133,200 17.9% $6,625 $24.46
====================================================
Notes:
(1) Includes an amount for Major Maintenance Fixed Charge
(2) Depreciation and amortization has not been included in these
re-casts
<PAGE>
Regal University Hotel
Statement of Estimated
Income and Expenses
2006
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 322
Available Rooms (Annually) 117,530
Occupancy Percentage 74%
Occupied Rooms 87,200
Average Room Rate $100.50
REVENUES
Rooms $8,763,600 71.0% $27,216 $100.50
Food 2,770,800 22.9% 8,605 31.78
Beverage 430,900 3.5% 1,338 4.94
Telephone 270,700 2.2% 841 3.10
Rentals and
Other Income (Net) 101,100 0.8% 314 1.16
- -----------------------------------------------------
Total Revenues $12,337,100 100.0% $38,314 $141.48
DEPARTMENTAL EXPENSES
Rooms $2,496,200 28.5% $7,752 $28.63
Food & Beverage 2,528,700 79.0% 7,853 29.00
Telephone 159,800 59.0% 496 1.83
- -----------------------------------------------------
Total Departmental
Expenses $5,184,700 42.0% $16,102 $59.46
TOTAL DEPARTMENTAL INCOME $7,152,400 58.0% $22,212 $82.02
UNDISTRIBUTED
OPERATING EXPENSES
Administrative & General $1,232,500 10.0% $3,828 $14.13
Sales & Marketing 969,100 7.9% 3,010 11.11
Management Fees 493,500 4.0% 1,533 5.66
Franchise Fees 262,900 2.1% 816 3.01
Energy 499,500 4.0% 1,551 5.73
Property Operations &
Maintenance (1) 567,600 4.6% 1,763 6.51
- -----------------------------------------------------
Total Undistributed
Operating $4,025,100 32.6% $12,500 $46.16
INCOME BEFORE
FIXED CHARGES $3,127,300 25.3% $9,712 $35.86
FIXED CHARGES
Property Taxes $159,000 1.3% $494 $1.82
Personal Property Taxes 29,500 0.2% 92 0.34
Insurance 88,600 0.7% 275 1.02
Equipment Rent &
Other Expenses 140,800 1.1% 437 1.61
- -----------------------------------------------------
Total Fixed Charges $417,900 3.4% $1,298 $4.79
INCOME BEFORE RESERVES $2,709,400 22.0% $8,414 $31.07
Reserve for Replacement
of FF&E $493,500 4.0% $1,533 $5.66
Capital Expenditures 0 0.0% 0 0.00
- -----------------------------------------------------
Total Reserves
and Capital Exp. $493,500 4.0% $1,533 $5.66
INCOME BEFORE DEBT SERVICE $2,215,900 18.0% $6,882 $25.41
=====================================================
Notes:
(1) Includes an amount for Major Maintenance Fixed Charge
(2) Depreciation and amortization has not been included in these
re-casts
Regal University Hotel
Statement of Estimated
Income and Expenses
2007
Per Occupied
Amount Ratio Per Room Room/Day
Number of Days Open/Year 365
Available Rooms (Daily) 322
Available Rooms (Annually) 117,530
Occupancy Percentage 74%
Occupied Rooms 87,200
Average Room Rate $104.00
REVENUES
Rooms $9,068,800 71.0% $28,164 $104.00
Food 2,867,800 22.9% 8,906 32.89
Beverage 446,000 3.5% 1,385 5.11
Telephone 280,200 2.2% 870 3.21
Rentals and Other
Income (Net) 104,600 0.8% 325 1.20
----------------------------------------------------
Total Revenues $12,767,400 100.0% $39,650 $146.42
DEPARTMENTAL
EXPENSES
Rooms $2,583,600 28.5% $8,024 $29.63
Food & Beverage 2,617,200 79.0% 8,128 30.01
Telephone 165,400 59.0% 514 1.90
----------------------------------------------------
Total Departmental
Expenses $5,366,200 42.0% $16,665 $61.54
TOTAL DEPARTMENTAL
INCOME $7,401,200 58.0% $22,985 $84.88
UNDISTRIBUTED OPERATING
EXPENSES
Administrative
& General $1,275,600 10.0% $3,961 $14.63
Sales & Marketing 1,003,000 7.9% 3,115 11.50
Management Fees 510,700 4.0% 1,586 5.86
Franchise Fees 272,100 2.1% 845 3.12
Energy 517,000 4.0% 1,606 5.93
Property Operations &
Maintenance (1) 587,500 4.6% 1,825 6.74
----------------------------------------------------
Total Undistributed
Operating $4,165,900 32.6% $12,938 $47.77
INCOME BEFORE
FIXED CHARGES $3,235,300 25.3% $10,048 $37.10
FIXED CHARGES
Property Taxes $164,500 1.3% $511 $1.89
Personal Property Taxes 30,600 0.2% 95 0.35
Insurance 91,700 0.7% 285 1.05
Equipment Rent &
Other Expenses 145,700 1.1% 453 1.67
----------------------------------------------------
Total Fixed Charges $432,500 3.4% $1,343 $4.96
INCOME BEFORE RESERVES $2,802,800 22.0% $8,704 $32.14
Reserve for Replacement
of FF&E $510,700 4.0% $1,586 $5.86
Capital Expenditures 0 0.0% 0 0.00
----------------------------------------------------
Total Reserves
and Capital Exp. $510,700 4.0% $1,586 $5.86
INCOME BEFORE
DEBT SERVICE $2,292,100 18.0% $7,118 $26.29
====================================================
Notes:
(1) Includes an amount for Major Maintenance Fixed Charge
(2) Depreciation and amortization has not been included in these
re-casts
<PAGE>
Regal University Hotel, Durham, North Carolina Page 85
- --------------------------------------------------------------------
INVESTMENT CLIMATE OVERVIEW
In establishing valuation parameters to apply to the projected
operating cash flow from the proposed property, we have
researched the current market for hotel investments. Arthur
Andersen conducts a survey of a select group of hotel companies,
investors, developers, investment bankers, and brokers. Our most
recent survey was conducted at the end of the third quarter of
1996.
Our surveys indicate that the investment climate has undergone
significant changes over the last five years. After the economic
recession in the early 1990s, the number of hotel sales
transactions increased significantly between 1993 and 1995. The
price per room of lodging property has increased significantly as
well. In the early 1990s, the primary buyers of hotel assets were
opportunity funds and individual investors lured by the low
prices as a percentage of the replacement cost. New lodging
REITs, established in the early 1990s, also began to invest
heavily into hotel assets. During 1995 and 1996 the larger REITS
(such as Patriot American Hospitality; Starwood Lodging Trust;
FelCor Suite Hotels, Inc.; and HPT) accounted for a large share
of the transactions involving full-service lodging properties.
These organizations must maintain the level of acquisition
achieved in the past and, therefore, have been paying
increasingly higher prices for lodging assets. In addition, many
of the recent REIT acquisitions were completed as part of a
portfolio which, attracted by the opportunity to purchase more
assets in one fell swoop, often resulted in aggressive pricing
parameters.
As the health of the overall U.S. lodging industry has improved,
so has the interest in acquiring lodging assets. The activity of
the REITS, combined with the strategic interests of hotel
companies and the interest of equity investors, has resulted in a
competitive acquisition market.
These changes in the investment market have resulted in a
significant shift in the criteria used to evaluate a potential
transaction. Terminal capitalization and discount rates assumed,
which averaged 11-12 percent and 14-16 percent, respectively in
1991, decreased to an average of 10-11 percent and 12-13 percent,
respectively in early 1996. Investors interviewed in the third
quarter of 1996, however, indicated that investment parameters
may currently be at the "low-point" of this real estate cycle.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 86
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Investors interviewed admitted that although recent
acquisitions have been structured using aggressive investment
parameters, they are likely to re-evaluate the assumptions and
investment parameters used in the near future.
The following table summarizes the results of our investor survey
completed at the end of the Third Quarter 1996.
- -----------------------------------------------------------
Arthur Andersen Hotel Investor Survey - Third Quarter 1996
- -----------------------------------------------------------
Range
Free and Clear Discount Rates 12.0%-15.0%
Terminal Capitalization Rates 10.0%-12.5%
Going-In Capitalization Rates 10.0%-11.0%
Equity Return Req. (leveraged) 20.0%-30.0%
Equity Return Req. (unleveraged) 12.0%-18.0%
Cash on Cash Return Requirements 10.0%-17.5%
- ------------------------------------------------------------
DISCOUNTED CASH FLOW ANALYSIS
The discounted cash flow (DCF) technique converts the projected
stream of benefits, either before or after financing, as
appropriate, into a present value. Once the projection of net
income or cash flow is accomplished, a discount rate and
capitalization rate at reversion must be chosen. The selection of
these rates is somewhat subjective, since investor criteria for
the acquisition of real property is subject to variation, and no
comprehensive, organized lodging property exchange exists.
Discount Rates
A free and clear discount rate is used to discount future
earnings without regard to any leverage or financing. Since there
has been a general lack of hotel financing over the last several
years, most of the larger hotel transactions have involved all
cash purchases. Discount
<PAGE>
Regal University Hotel, Durham, North Carolina Page 87
- --------------------------------------------------------------------
rates (or internal rate of return requirements) typically vary by
a number of factors: long-term investor-return requirements on
alternative investments; type and motivation of investor;
property type -- e.g., hotel, apartments, etc.; and local market
area conditions. Our survey of investor criteria indicated that
investors are currently assuming discount rate that range from 12
to 15 percent. The survey average for free and clear discount
rates was 14 percent.
After giving full consideration to these surveys as well as to
the type of property being appraised, its competitiveness in its
market place, and general market conditions, a discount rate of
12.5 percent, applied to net cash flow before debt service, is
judged to be appropriate due to the strength of the Durham, North
Carolina market and the constant high performances achieved
there.
Terminal Capitalization Rates
The "exit" capitalization rate at reversion is used to convert
the projected stream of income beyond the last year of the
projection period into a value at the end of the projection
period. Our investor surveys revealed capitalization rates
ranging from 10.0 to 12.5 percent, with a survey mean average of
approximately 11 percent. The Durham, North Carolina market has
reflected strong growth over the last year and is expected to
reflect continued upside potential in the near term. Our analysis
reflects the upside potential of the market in the estimates of
future cash flow projections and considers the subject hotel's
ability to reflect improved operations as a result of overall
market growth. We have adjusted the terminal capitalization rate
downwards by one-half of a basis point to reflect the added
upside potential of the property. On the basis of this analysis,
a terminal capitalization rate of 10.5 percent is judged to be
appropriate for the subject hotel.
Conclusion by Discounted Cash Flow Analysis
Application of the discounted cash flow technique to the total
projected net income for the appraised property yields a market
value estimate of the fee simple interest in the subject of
$15,900,000. The table on the following page presents our
discounted cash flow analysis.
<PAGE>
Discounted Cash Flow Analysis
Regal University Hotel
Durham, North Carolina
Net Present Value
Income Before Residual Discount Income Before
Year Debt Service Value (1) Factor (2) & (3) Debt Service
- ---- -------------- ----------- ---------------- --------------
1997 $1,415,600 0.8889 $1,258,311
1998 1,445,800 0.7901 1,142,360
1999 1,059,800 0.7023 744,331
2000 1,714,300 0.6243 1,070,229
2001 1,856,300 0.5549 1,030,115
2002 1,924,800 0.4933 949,446
2003 1,987,400 0.4385 871,400
2004 2,043,900 0.3897 796,598
2005 2,133,200 0.3464 739,025
2006 2,215,900 $21,174,638 (4) 0.3079 7,203,026
-----------
Value at January 1, 1997: $15,800,000
Value Per Room: $49,068
Notes:
(1) Income Before Debt Service in the exit year was capitalized
at 10.5 percent.
(2) Income was discounted to net present value
using a 12.5 percent discount rate.
(3) Analysis used end-point discounting.
(4) A sales commission of 3.0 percent was assumed.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 89
- --------------------------------------------------------------------
E. RECONCILIATION AND FINAL VALUE ESTIMATE
Valuation of the appraised property has been developed by the
direct sales comparison approach and the income approach. Various
appraisal techniques and methods were utilized in these analyses
and the fee simple value estimates derived by each approach is
summarized as follows:
- -------------------------------------------------------
Amount Price Per Room
------ --------------
Cost Approach N/A N/A
Sales Comparison
Approach $15,778,000 $49,000
Income Approach $15,800,000 $49,068
- ----------------------------------------------------------
The Cost Approach is most useful when valuing new or nearly new
properties or when appraising special purpose properties. The
reliability of this approach is diminished as buildings and other
forms of improvement increase in age and begin to depreciate. The
resulting loss in value becomes increasingly difficult to
accurately quantify. The cost approach was therefore not utilized
in valuing the subject property.
The Sales Comparison Approach is frequently a good indicator of
value, especially when a sufficient number of relevant
transactions with reliable information on each is available. The
sales comparison approach was used as an indicator of the
reliability of results obtained from the income capitalization
approach.
The income capitalization approach is generally considered the
most applicable method for estimating the value of investment
properties, as it incorporates the economic motivations of buyers
and sellers in the analysis. The reliability of this approach is
enhanced when adequate data are available to assure proper
development of the income, expense, and capitalization rate
analyses.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 90
- --------------------------------------------------------------------
Based upon the research and analyses performed in the development
of these approaches, and with primary emphasis on the income
approach, it is our opinion that the market value of the fee
simple interest in the appraised property as a going concern, as
of January 1, 1997 is:
-- FIFTEEN MILLION, EIGHT HUNDRED THOUSAND DOLLARS --
($15,800,000)
In accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP), prepared by The Appraisal Standards
Board of The Appraisal Foundation, it is necessary to identify
and separately value any personal property, fixtures, or
intangible items that are not real property but are included in
the appraisal. Personal property and fixtures in a hotel consists
of a variety of components including bedroom case-goods, bathroom
fixtures, restaurant and kitchen equipment, signage, computers
and other related items. Our physical inspection of the property
indicated that these items were generally in good condition
relative to the age of the property.
We estimate that the replacement cost for the furniture,
fixtures, and equipment at the subject hotel is approximately
$17,000 per room, in constant 1996 dollars. This estimate is
based upon industry averages. Assuming an average useful life of
eight years and an effective age of four years, the value of the
furniture, fixtures, and equipment is estimated to be
approximately $8,500 per room. On the basis of this analysis, the
value of the personal property for the subject hotel is estimated
to be $2,730,000.
Since a hotel's furniture, fixtures, and equipment is such an
integral component of the facility's ability to generate income
and is seldom removed from the property or sold separately, the
value produced by the separation of the personal property
component from the real property is not particularly meaningful.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 91
- --------------------------------------------------------------------
F. ADDENDA
<PAGE>
Regal University Hotel, Durham, North Carolina Page 92
- --------------------------------------------------------------------
F.1 HOTEL SALES COMPARABLES
<PAGE>
Regal University Hotel, Durham, North Carolina Page 93
- --------------------------------------------------------------------
Name: DURHAM HILTON
Location: Durham, North Carolina
Grantor (Seller): City Hotels
Grantee (Buyer): American General Hospitality
Date of Sale: Pending
Sales Price: $11,100,000
Property Rights Conveyed: Fee Simple
Number of Rooms: 152
Year Built: 1987
Price per Room: $73,026
Occupancy (1995): 74 percent
Average Rate (1995): $74.47
Est. Gross Room Revenue (1995): $3,068,000
Est. Net Income Before
Debt Svc. (1995): $1,040,000
Overall Capitalization Rate: 10.0%
Comments:
This hotel is currently under contract for sale. The price
for this property is estimated to be approximately $11.1
million. This hotel is located on Hillsborough Road, a busy
thoroughfare that has a large number of businesses on it,
and which leads directly into downtown Durham. It is
approximately five minutes away from the subject hotel.
This hotel also benefits from the Hilton brandname and
reservation system. Furthermore, as a smaller property, the
Hilton is able to protect its room rate more easily.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 94
- --------------------------------------------------------------------
Name: OMNI HOTEL & CIVIC CENTER
Location: Durham, North Carolina
Grantor (Seller): Allan Nester
Grantee (Buyer): Shaner Hotel Group
Date of Sale: June 1996
Sales Price: $10,350,000
Property Rights Conveyed: Leasehold
Number of Rooms: 187
Year Built: 1989
Price per Room: $53,209
Occupancy (1995): 67 percent
Average Rate (1995): $74.00
Est. Gross Room Revenue (1995): $3,380,000
Est. Net Income Before
Debt Svc. (1995): $1,300,000
Overall Capitalization Rate: 12.0%
Comments:
This hotel was sold in June of 1996. This hotel is located
in the center of downtown Durham. It is built atop the Civic
Center and Convention Center. The hotel currently has a 60
year air rights lease. It is approximately ten minutes away
from the subject hotel. The hotel has a distinct competitive
advantage over all the other hotels in the area, in that it has
direct access to the convention center facilities.
However, downtown Durham is currently not considered a prime
business location. The hotel is also linked to the city
through a lease for the air rights above the civic center in
which the hotel resides.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 95
- --------------------------------------------------------------------
HOTEL SALES COMPARABLES
Name: Marriott Hotel Executive Park
Location: Charlotte, NC
Grantor: The Travelers Insurance
Grantee: Host Marriott Corporation
Date of Sale: February 1995
Sales Price: $15,800,000
Property Rights Conveyed: Fee Simple
Number of Rooms: 298
Year Built: 1983
Price per Room: $53,020
Est. Gross Room Revenue: $7,119,000
Occupancy (1994): 77 percent
Average Rate (1994): $85.00
Est. Net Operating
Income (1994): $1,810,000
Overall Capitalization
Rate: 11.5%
Comments:
Located adjacent to the Hilton Inn, the Marriott is
approximately 15 minutes from the Uptown area and five minutes
from the SouthPark area. Opened in 1983, this hotel is one of
the oldest full-service hotels in the South Charlotte area.
The hotel is operated by Interstate Hotels Corporation and in
1994, Interstate began plans to purchase the property. Host
Marriott purchased the property instead and has kept
Interstate on as manager of the hotel under a Marriott
franchise.
The $15.8 million purchase price includes costs for the
upgrade of the public area and the conversion of the lobby
former nightclub to new meeting space. In addition, management
indicated that the hotel will likely undergo a renovation of
the soft goods in the guest rooms within the next year.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 96
- --------------------------------------------------------------------
HOTEL SALES COMPARABLES
Name: Marriott Crabtree Valley
Location: Raleigh, NC
Grantor: California Federal Savings and Loan
Grantee: Potomac Limited Partnership
Date of Sale: May 1994
Sales Price: $18,700,000
Property Rights Conveyed: Fee Simple
Number of Rooms: 375
Year Built: 1980
Price per Room: $49,867
Est. Gross Room Revenue: $7,342,500
Occupancy (1994): 77 percent
ADR (1994): $70.00
Est. Net Operating
Income (1994): $2,215,200
Overall Capitalization
Rate: 11.8%
Comments:
This hotel is located in a suburban area approximately ten
minutes from downtown Raleigh and the Raleigh/Durham
International Airport. The hotel is located approximately 15
minutes from the Research Triangle Office Park in which there
is another Marriott Hotel. Therefore, this property attracts
demand from smaller office developments in the immediate area.
Reportedly the hotel was in good condition at the time of the
sale.
The hotel was originally owned by Potomac Hotel Limited
Partnership (PHLP), but California Federal Savings and Loan
obtained title through foreclosure proceedings. The lender
marketed the hotel for sale and received numerous offers. PHLP
executed its right of first refusal to purchase the hotel at
the highest price offered. Because the hotel was marketed
aggressively on the open market and because the highest price
was paid by the grantee, this sale is considered to be an
arms-length transaction.
<PAGE>
Regal University Hotel, Durham, North Carolina Page 97
- --------------------------------------------------------------------
F.2 SUBJECT PROPERTY PHOTOGRAPHS
<PAGE>
Regal University Hotel, Durham, North Carolina Page 98
- --------------------------------------------------------------------
The subject hotel (front view)
The subject hotel (rear and side view with highway)
<PAGE>
Regal University Hotel, Durham, North Carolina Page 99
- --------------------------------------------------------------------
Guest Bedroom
Case goods in Guest Bedroom
<PAGE>
Regal University Hotel, Durham, North Carolina Page 100
- --------------------------------------------------------------------
Guest Bathroom
Kitchen area in Guest Suite
<PAGE>
Regal University Hotel, Durham, North Carolina Page 101
- --------------------------------------------------------------------
F.3 COMPETITIVE HOTEL PHOTOGRAPHS
<PAGE>
Regal University Hotel, Durham, North Carolina Page 102
- --------------------------------------------------------------------
The Durham Hilton
The Washington Duke Inn Hotel
<PAGE>
Regal University Hotel, Durham, North Carolina Page 103
- --------------------------------------------------------------------
The Omni Durham and Civic Center
The Sheraton Imperial Hotel and Convention Center
<PAGE>
Regal University Hotel, Durham, North Carolina Page 104
- --------------------------------------------------------------------
The Marriott Hotel at Research Triangle Park
<PAGE>
Regal University Hotel, Durham, North Carolina Page 105
- --------------------------------------------------------------------
F.4 PROPERTY LEGAL DESCRIPTION
<PAGE>
BOOK 1350 PAGE 312
Tax Lot No. _______________ Parcel Identifier No. ______________
Verified By ___________ County on the ____ day of _________, 19__
by ______________________________________________________________
- -----------------------------------------------------------------
Mail after recording to Lauren Tarr, c/o Holme Roberts & Owen,
1700 Broadway, Suite 1800, Denver, Colorado 80290. This
instrument was prepared by Richard M. Groves, Esq., Holme Roberts
& Owen, 1700 Broadway, Suite 1800, Denver, Colorado 80290 Brief
description for the Index _________________________________
- -----------------------------------------------------------------
NORTH CAROLINA SPECIAL WARRANTY DEED
SPECIAL WARRANTY DEED made this 20th day of February, 1987, by
and between AIRCOA Hotel Partners, L.P., a Delaware limited
partnership ("Grantor") whose address is AIRCOA Tower at
Metropoint, 4600 South Ulster Street, Suite 1200, Denver,
Colorado 80237 and Durham Operating Partnership, L.P., a Delaware
limited partnership ("Grantee") whose address is AIRCOA Tower at
Metropoint, 4600 South Ulster Street, Suite 1200, Denver,
Colorado 80237.
The designation Grantor and Grantee as used herein shall include
said parties, their heirs, successors, and assigns, and shall
include singular, plural, feminine or neuter as required by
context.
WITNESSETH, that the Grantor, for the sum of $10.00 and other
good and valuable consideration paid by the Grantee, the receipt
of which is hereby acknowledged, has and by these presents does
grant, bargain, sell and convey unto the Grantee in fee simple,
all that certain parcel of land situated in the City of Durham,
Durham County, North Carolina and more particularly described in
Exhibit A attached hereto and by this reference made a part
hereof.
The property hereinabove described was acquired by Grantor by
instrument recorded in the Office of the Registrar of Deeds of
Durham County, North Carolina in Book 1350, Page 241.
TO HAVE AND TO HOLD the aforesaid lot or parcel of land and all
privileges and appurtenances thereto belonging to the Grantee in
fee simple forever.
And the Grantor covenants with the Grantee, that Grantor is
seized of the premises in fee simple, has the right to convey the
same in fee simple, that title is marketable and free and clear
of all encumbrances, and that Grantor will warrant and
04529
<PAGE>
BOOK 1350 PAGE 313
defend the title against the lawful claims of all persons
claiming by, through or under the said Grantor, except for the
exceptions set forth on Exhibit B attached hereto and by this
reference made a part hereof.
IN WITNESS WHEREOF, the Grantor has hereunto set his hand and
seal, or if corporate, has caused this instrument to be signed in
its partnership name by its duly authorized general partner the
day and year first above written.
AIRCOA HOTEL PARTNERS, L.P.,
a Delaware limited partnership
WITNESS: ______________ [SEAL]
By: Associated Inns & Restaurants
Company of America, a Delaware
corporation, as general
partner Attest:
By: /s/______________[SEAL] /s/___________________ [SEAL]
Vice President Asst. Secretary
SEAL-STAMP NORTH CAROLINA, Durham County.
I, ________________________, a Notary Public,
hereby certify that ________________________, and
______________________, personally came before me
this day and acknowledged that they are the Vice
President and _____________ Secretary,
respectively, of Associated Inns & Restaurants
Company of America, a Delaware corporation, as
general partner of AIRCOA Hotel Partners, L.P., a
Delaware limited partnership and, that by
authority duly given and as the act and deed of
said corporation, the foregoing instrument was
signed in its name by its Vice President sealed
with its corporate seal and attested by its
________________ Secretary, all in said
corporation's capacity as the general partner in,
and in the name and for and on behalf of, AIRCOA
Hotel Partners, L.P. a Delaware limited
partnership.
[SEAL] Witness my hand and official stamp or seal, this
20th day of February, 19__.
My commission expires: ___June 23, 1988_________
<PAGE>
______________________ Notary Public
[SEAL]
- ----------------------------------------------------------------
The foregoing Special Warranty Deed is certified to be correct.
This instrument and this certificate are duly registered at the
date and time and in the Book and Page shown on the first page
hereof.
_______________________ REGISTER OF DEEDS FOR DURHAM COUNTY
By_____________________ Deputy-Register of Deeds
RMGD/DF9 3-5-87
[SEAL] [SEAL]
<PAGE>
BOOK 1350 PAGE 314
EXHIBIT A
---------
LEGAL DESCRIPTION
-----------------
(Durham)
Property located in Durham County, North Carolina, and being more
particularly described as follows:
BEGINNING at an iron pipe in the northern right of way line of
Middleton Street (said iron pipe being located in a westerly
direction along the northern right of way line of Middleton
Street 1077.5 feet from the western right of way line of LaSalle
Street) and running thence along the northern right of way line
of Middleton Street the following courses and distances: N
83(degree) 29' 56" W 2.24 feet to an iron pipe, thence along the
arc of a circular curve to the right having a radius of 270.00
feet a distance of 56.53 feet to an iron pipe, thence N
72(degree) 58' 32" W 100.00 feet to an iron pipe, thence along
the arc of a circular curve to the left having a radius of 330.00
feet a distance of 190.07 feet to an iron pipe, thence S
74(degree) 01' 28" W 124.96 feet to an iron pipe, thence along
the arc of a circular curve to the right having a radius of
295.00 feet a distance of 82.42 feet to an iron pipe, thence N
89(degree) 21' 11" W. 69.93 feet to an iron pipe, thence leaving
said right of way line and running N 14(degree) 02' 44" E 252.37
feet to an iron pipe, thence N 32(degree) 48' 34" E 100.19 feet
to an iron pipe, thence N 22(degree) 12' 46" E 100 feet to an
iron pipe, thence N 15(degree) 24' 44" E 100 feet to an iron
pipe, thence N 13(degree) 23' 59" E 204.84 feet to an iron pipe,
thence N 17(degree) 25' 00" E 99.83 feet to an iron pipe, thence
N 21(degree) 36' 41" E 99.44 feet to an iron pipe, thence N
24(degree) 48' 18" E 83.43 feet to an iron pipe, thence S
46(degree) 27' 23" E 496.62 feet to an iron pipe, thence S
11(degree) 37' 26" W 139.85 feet to an iron pipe, thence S
40(degree) 53' 38" W 93.65 feet to an iron pipe, thence N
85(degree) 80' 55" W 57.40 feet to an iron pipe, thence S
07(degree) 25' 56" W 574.71 feet to the point and place of
BEGINNING.
AW3/SLMD
Legal Docs. Only
(2/3/87)
<PAGE>
BOOK 1350 PAGE 315
Assignment to DOP
EXHIBIT B
---------
MATTERS TO WHICH TITLE IS SUBJECT
---------------------------------
(Durham)
1. The lien of all taxes for the year 1987 and thereafter which
are not yet due and payable.
2. Deed of Trust executed to Donald A. Donadio, Trustee for
Aetna Life Insurance Company, dated March 29, 1983 and
recorded in Book 1109, Page 721, Durham County Registry;
together with all indebtedness of whatsoever nature secured
or to be secured thereby and the terms, conditions and
stipulations contained in such instrument.
3. Assignment of Rents and Leases as recorded in Book 1109,
Page 767, Durham County Registry.
4. UCC Financing Statements for fixtures recorded in Book 1109,
Page 767, Durham County Registry.
5. UCC Financing Statement for fixtures recorded in Book 84,
Page 3855, Durham County Registry.
6. Deed of Trust and Security Agreement in the amount of
$________________ executed to _______________________,
Trustee for Bankers Trust Company, dated ___________ __,
1987 and recorded on _____________ __, 1987 in Book ____,
Page ____, Durham County Registry; together with all
indebtedness of whatsoever nature secured or to be secured
thereby and the terms, conditions and stipulations contained
in such instrument.
7. Assignment of Leases, Rents and Other Income from AIRCOA
Hotel Partners, L.P., a Delaware limited partnership to
Bankers Trust Company as recorded on _________ __, 1987 in
Book ____, Page ____, Durham County Registry.
8. Security Agreement from AIRCOA Hotel Partners, L.P., a
Delaware limited partnership to Bankers Trust Company as
recorded on ___________ __, 1987 in Book ____, Page ____,
Durham County Registry.
<PAGE>
BOOK 1350 PAGE 316
9. UCC Financing Statement naming AIRCOA Hotel Partners, L.P.,
a Delaware limited partnership, as debtor and Bankers Trust
Company as secured party, recorded on ____________ __, 1987
in Book ____, Page ____, Durham County Registry.
10. UCC Financing Statement naming Durham Operating
Partnership, L.P., a Delaware corporation, as debtor and
Bankers Trust Company as secured party recorded on
___________ __, 1987 in Book ____, Page ____, Durham County
Registry.
11. Subject to major storm drainage lines crossing subject
property.
12. Subject to underground gas lines crossing subject property;
electric transformers located upon subject property; and
any other ordinary and usual utility easements.
13. Rights of others entitled thereto in and to the continued,
uninterrupted flow of the stream that borders subject
property.
14. Easement twenty-five (25) feet in width crossing the
eastern and central portions of subject property as shown
on survey entitled "Durham Operating Partnership" by
Triangle Surveyors, Inc., dated December 15, 1986.
NOTE: Asphalt parking areas and carport located on subject
property encroach onto said easement.
15. Encroachment of the concrete sign located on subject
property upon property adjoining on the west.
16. Easement to Duke Power Company recorded in Book 1077, Page
7, Durham County Registry.
17. Rights and claims of parties in possession not shown of
public record.
B-2
<PAGE>
Regal University Hotel, Durham, North Carolina Page 111
- --------------------------------------------------------------------
F.5 INDEMNIFICATION
<PAGE>
AIRCOA
- -----------------------------------------------------------------
HOTEL PARTNERS, L.P.
March 11, 1997
BY TELECOPY - 212-708-6523
- --------------------------
Arthur Andersen LLP
1345 Avenue of the Americas
New York, New York 10105
Attn: Mr. Thomas McConnell
Mr. James W. Hire
Hire & Associates
1383 Solitude Lane
Evergreen, CO 80439
Mr. Anthony C. Dimond
Miramar Asset Management Inc.
617 Veterans Boulevard, Suite 212
Redwood City, CA 94063
Houlihan Lokey Howard & Zukin
1930 Century Park West
Los Angeles, CA 90067
Attn: John Schoenfeld
Re: Arthur Andersen Appraisals/AIRCOA Hotel Partners, L.P.
("AHP")
Ladies and Gentlemen:
This letter is to confirm certain agreements and approvals of
Arthur Andersen LLP ("AA") and the AIRCOA Parties and HLHZ (as
defined below) related to certain uses by AHP's Special Advisory
Committee (the "Committee") of AA's appraisal of certain real
property and improvements owned by AHP (the "Appraisal") prepared
in connection with a loan to AHP by the Hongkong and Shanghai
Bank (the "HSBC Loan"). This letter supplements that certain
letter dated February 18, 1997, by AHP to AA, the terms of which
are incorporated herein by reference. The following has been
agreed to by AHP and the Special Committee (collectively, the
"AIRCOA Parties"), and the Special Committee's financial advisors
Houlihan, Lokey, Howard & Zukin ("HLHZ") (collectively, the
"AIRCOA Parties") and AA:
1. AA agrees that copies of the Appraisal may be provided to
the Special Committee and HLHZ for review in connection with
the acquisition of limited partnership interests in AHP by
Regal Hotel Management, Inc. AA acknowledges that HLHZ and
the Special Committee have indicated to AHP an intent to
rely upon the Appraisals in connection with consideration
of the transaction described above and that AHP intends for
HLHZ and the Special Committee to so rely.
2. The AIRCOA Parties acknowledge their agreement to the
procedures performed as described in the accompanying
Appraisal and accept responsibility for the sufficiency of
those procedures for their purposes. Consequently, AA makes
no representation regarding the sufficiency of the
procedures described therein for the purpose for which the
accompanying Appraisal was originally requested, for the
AIRCOA Parties' or HLHZ's purposes, or for any other
purpose.
<PAGE>
Had AA been engaged to perform additional procedures, other
matters might have come to AA's attention that would have
been reported to the AIRCOA Parties. Furthermore, AA has
not performed any procedures subsequent to the date of
Appraisal and therefore AA accepts no responsibility for
events and circumstances occurring after that date.
3. The Appraisal is being provided to the AIRCOA Parties and
HLHZ for informational purposes only. The AIRCOA Parties
should complete their own due diligence in connections with
the transaction described above to the extent they consider
necessary. It is understood that the reading of the
accompanying Appraisal does not substitute for the AIRCOA
Parties' own due diligence.
4. By acceptance of this letter, the AIRCOA Parties and HLHZ
agree that neither AA nor any of its affiliates, partners,
employees or representatives shall have any liability to
them relating to the use of the accompanying Appraisal,
except to the extent such liability arises from AA's gross
negligence or willful misconduct.
5. This letter and the accompanying Appraisal are intended
solely for the use of AIRCOA Parties and HLHZ and should
not be used by those who have not agreed to the procedures
and taken responsibility for the sufficiency of the
procedures for their purposes.
6. In connection with the transaction described above, AA
consents to including, to the extent required by federal
securities laws, a copy of the Appraisal and/or a summary
thereof or a reference thereto in the Schedule 13E-3 and
related proxy statement with the Securities and Exchange
Commission by AHP or the Special Committee, provided that AA
shall have the right to approve the content of any summary
of the Appraisals, such approval not to be unreasonably
withheld.
7. This letter does not modify or amend in any respect the
engagement letter dated February 19, 1997 among HLHZ,
AIRCOA Hospitality Services, Inc., and AIRCOA Hotel
Partners, L.P.
Please indicate your acceptance of these arrangements by signing
and returning a copy of this letter to AA.
AIRCOA HOTEL PARTNERS, L.P.
By: AIRCOA Hospitality Services, Inc., general partner
By: /s/___________________________
Name: Joel W. Hiser
Title: Sr. Vice President
By: /s/___________________________
Name:
Title:
AIRCOA HOSPITALITY SERVICES, INC.
a Delaware corporation
By: /s/___________________________
Name: Joel W. Hiser
Title: Sr. Vice President
ARTHUR ANDERSEN LLP
By: /s/___________________________
Name:
Title:
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
By: /s/___________________________
Name: John A. Schoenfeld
Title: Co-Director, Real Estate Group
AHP SPECIAL COMMITTEE
By: /s/___________________________
Name: James W. Hire
By: /s/___________________________
Name: Anthony C. Dimond
Title:
By: /s/___________________________
Name:
Title:
<PAGE>
Arthur Andersen LLP
Appraisal of:
AURORA INN
AURORA, OHIO
As of:
JANUARY 1, 1997
Prepared For:
AIRCOA Hotel Partners, L.P.
Special Committee
March 31, 1997
Prepared By:
ARTHUR ANDERSEN LLP
Hospitality Industry Consulting Services Group
<PAGE>
[Letterhead of Arthur Andersen]
March 31, 1997
Mr. James W. Hire
Hire & Associates
1383 Solitude Lane
Evergreen, CO 80439
Mr. Anthony C. Dimond
Miramar Assest Management, Inc.
617 Veterans Boulevard, Suite 212
Redwood City, CA 94063
Re: Appraisal of Aurora Inn; Aurora, Ohio
As of January 1, 1997
Dear Gentlemen:
As requested, we have completed an appraisal of the fee simple
interest in the above-referenced property in "As Is" condition.
The reader is advised that our Firm has not audited, examined,
reviewed or applied agreed-upon procedures to the financial data
contained in the accompanying report unless specifically noted.
We have relied on information, including but not limited to
industry statistics, relevant market, demographic and financial
data assembled by us through direct research conducted by our
staff or from secondary sources as well as information provided
by you. While these sources of information are generally
recognized as authoritative in the field or otherwise considered
reliable, we have not audited this information nor do we warrant
its completeness or accuracy. The opinion of market value subject
to stabilized occupancy expressed herein is subject to the
assumptions and limiting conditions set forth in the body of the
accompanying report.
We understand that our valuation will be used to assist you in
determining the fair market value for internal purposes and may
not be disclosed to a third party, without the prior written
approval of Arthur Andersen LLP.
Based upon our research and analysis, it is our opinion that the
market value of the fee simple interest, including furniture,
fixtures and equipment, as of January 1, 1997 is:
-- Four Million Five Hundred Sixty Thousand Dollars
($4,560,000)
<PAGE>
We appreciate the opportunity to serve you. Please call if you
have any questions or if we can be of further assistance.
Very truly yours,
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
<PAGE>
Aurora Inn Page i
- -------------------------------------------------------------------------
TABLE OF CONTENTS
SUMMARY OF CRITICAL FACTS AND CONCLUSIONS............................iii
GENERAL ASSUMPTIONS AND LIMITING CONDITIONS............................v
CERTIFICATION.......................................................viii
A. INTRODUCTION......................................................10
A.1 SUBJECT PROPERTY IDENTIFICATION..................................10
A.2 OWNERSHIP HISTORY................................................10
A.3 PURPOSE AND FUNCTION OF THE VALUATION............................11
A.4 PROPERTY RIGHTS APPRAISED........................................12
A.5 EFFECTIVE DATE OF THE VALUATION..................................12
A.6 EXPOSURE PERIOD..................................................12
A.7 SCOPE OF THE APPRAISAL...........................................12
A.8 SPECIAL ASSUMPTIONS..............................................13
B. ANALYSIS OF THE SUBJECT PROPERTY AND ITS MARKET...................15
B.1 DESCRIPTION AND ANALYSIS OF THE PROPERTY.........................15
Location...........................................................15
Legal Description..................................................15
Land...............................................................15
Property Improvements..............................................16
Property Inspection................................................20
Past Renovation and Capital Requirements...........................21
Property Taxes.....................................................22
Zoning.............................................................25
B.2 AREA ANALYSIS....................................................26
Economic and Demographic Indicators................................26
Employment.........................................................31
Office Market Overview.............................................33
Transportation.....................................................33
Tourism and Recreation.............................................35
Convention and Trade Show Market...................................36
Conclusion.........................................................36
B.3 HIGHEST AND BEST USE ANALYSIS....................................37
Highest and Best Use of The Land as if Vacant......................37
Highest and Best Use of The Property As Currently Improved.........39
Conclusion and Reconciliation of Highest and Best Use..............41
C. ANALYSIS OF COMPETITIVE LODGING SUPPLY AND DEMAND.................42
C.1 COMPETITIVE LODGING SUPPLY.......................................42
Identified Competitive Supply......................................42
Additions To Supply................................................46
C.2 LODGING SUPPLY AND DEMAND ANALYSIS...............................47
Overall Demand Trends in the Aurora Lodging Market.................47
Lodging Demand in the Identified Competitive Supply................47
Demand Segmentation And Estimated Demand Growth....................50
C.3 ESTIMATED OCCUPANCY AND AVERAGE ROOM RATE........................56
Market Penetration & Average Annual Occupancy......................56
<PAGE>
Aurora Inn Page ii
- -------------------------------------------------------------------------
Projected Average Daily Room Rate..................................61
D. THE APPRAISAL PROCESS.............................................63
D.1 THE COST APPROACH................................................63
D.2 SALES COMPARISON APPROACH........................................64
D.3 INCOME APPROACH..................................................71
Historical Financial Performance...................................72
Estimated Operating Results........................................75
Investment Climate Overview........................................85
Discounted Cash Flow Analysis......................................86
E. RECONCILIATION AND FINAL VALUE ESTIMATE..........................89
F. ADDENDA...........................................................91
F.1 HOTEL SALES COMPARABLES..........................................92
F.2 SUBJECT PROPERTY PHOTOGRAPHS.....................................96
F.3 COMPETITIVE HOTEL PHOTOGRAPHS...................................101
F.4 PROPERTY LEGAL DESCRIPTION......................................102
F.5 INDEMNIFICATION.................................................103
<PAGE>
Aurora Inn Page iii
- -------------------------------------------------------------------------
SUMMARY OF CRITICAL FACTS AND CONCLUSIONS
Property Name: Aurora Inn
Property Address: 3020 Shawnee Trail
Post Office Box 197
Aurora, Ohio 44202
Property Location: The subject property is located on
a 3.275+/- acre site situated in
the southeast quadrant of
Chillicothe Road (State Route 306)
and Garfield Road (State Route 82).
Shawnee Trail bisects this quadrant
diagonally, with the subject
being north and east of Shawnee
Trail.
Property Type: A two story full service hotel
with restaurant, lounge and
meeting facilities.
Number of Rooms: 69 guest rooms
Owner of Record: Aurora Inn Operating Limited
Partnership
Year-End Occupancy:
1994 63.9 percent
1995 66.6 percent
1996 (Estimated) 67.9 percent
Year-End Average Rate:
1994 $75.40
1995 $85.82
1996 (Estimated) $88.50
Interest Appraised: Fee Simple
Land Area: 142,659-square feet (3.275 acres)
Building Area: 32,650-square feet
Year Completed: 1963
Highest and Best Use:
Land as though vacant: Hold for future hotel development
Land as improved: Hotel
Date of Valuation: January 1, 1997
<PAGE>
Aurora Inn Page iv
- -------------------------------------------------------------------------
Date of Inspection: December 19, 1996
Value Indications (Including Furniture, Fixtures, and Equipment):
$ Amount $ Per Room
-------- ----------
Cost Approach: n/a n/a
Sales Comparison Approach: $4,620,000 $67,000
Income Approach: $4,560,000 $66,087
---------- -------
Personal Property Allocation $172,500 $2,500
Reconciled Value Indication: $4,560,000 $66,087
========== =======
<PAGE>
Aurora Inn Page v
- -------------------------------------------------------------------------
GENERAL ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal report is subject to the following general
assumptions and limiting conditions:
1. No investigation has been made of, and no responsibility
is assumed for, the legal description of the property
being valued or legal matters, including title or
encumbrances. Title to the property is assumed to be
good and marketable unless otherwise stated. The
property is assumed to be free and clear of any liens,
easements, or encumbrances unless otherwise stated.
2. Information furnished by others, upon which all or
portions of this appraisal are based, is believed to be
reliable but has not been verified in all cases. No
warranty is given as to the accuracy of such
information.
3. It is assumed that all required licenses, certificates
of occupancy, consents, or other legislative or
administrative authority from any local, state, or
national government or private entity or organization
has been or can readily be obtained or renewed for any
use on which the value estimates contained in this
report are based.
4. Full compliance with all applicable federal, state, and
local zoning, use, occupancy, environmental, and similar
laws and regulations is assumed unless otherwise stated.
5. No responsibility is taken for changes in market
conditions, and no obligation is assumed to revise this
report to reflect events or conditions which occur
subsequent to the appraisal date hereof.
6. The opinion of value is predicated on the financial structure
prevailing as of the date of this appraisal.
7. Responsible ownership and competent property management
are assumed.
8. Areas and dimensions of the property were obtained from
sources believed to be reliable. Maps or sketches, if
included in this report, are only to assist the reader
in visualizing the property, and no responsibility is
assumed for their accuracy. No independent surveys were
conducted.
9. It is assumed that there are no hidden or un-apparent
conditions of the property, subsoil, or structures that
render it more or less valuable. No responsibility is
assumed for such conditions or for arranging engineering
studies that may be required to discover them.
10. No soil analysis or geological studies were ordered or
made in conjunction with this report, nor was an
investigation made of any water, oil, gas, coal, or
other subsurface mineral and use rights or conditions.
11. Neither Arthur Andersen LLP nor any individual signing
or associated with this report shall be required by
reason of this report to give further consultation,
provide testimony, or appear in court or at other legal
<PAGE>
Aurora Inn Page vi
- -------------------------------------------------------------------------
proceedings unless specific arrangements therefore have
been made.
12. This report has been made only for the purpose stated
and shall not be used for any other purpose. Neither
this report nor any portions thereof (including, without
limitation, any conclusions as to value or the identity
of Arthur Andersen LLP or any individuals signing or
associated with this report or the professional
associations or organizations with which they are
affiliated) shall be disseminated to third parties by
any means without the prior written consent and approval
of Arthur Andersen LLP.
13. The date of value to which the opinions expressed in
this report apply is set forth in the opinion letter at
the front of this report. Our value opinion is based on
the purchasing power of the U.S. dollar as of that date.
We have no obligation to update our findings and
conclusions for changes in market conditions which occur
subsequent to our fieldwork.
14. Our study and report will be based on assumptions and
estimates which are subject to uncertainty and
variation. These estimates are often based on data
obtained in interviews with third parties, and such data
are not always completely reliable. Therefore, while our
estimates will be conscientiously prepared on the basis
of our experience and the data available to us, we make
no warranty of any kind that the financial results
projected will, in fact, be achieved.
15. Unless otherwise stated in this report, no hazardous
material, which may or may not be present on or
near the property, was observed. We have no knowledge
of the existence of such materials on or in the
property; however, we are not qualified to detect
such substances. The presence of potentially
hazardous substances, such as asbestos, urea-formaldehyde
foam insulation, or industrial wastes, may
affect the value of the property. The value estimates
herein are predicated on the assumption that
there is no such material on, in, or near the property
that would cause a loss in value. No responsibility is
assumed for any such conditions or for any expertise or
engineering knowledge required to discover them. The
client should retain an expert in this field if further
information is desired.
16. This appraisal has been made in conformance with the Uniform
Standards of Professional Appraisal Practice of The Appraisal
Foundation.
17. The allocation in this report of the total valuation
among components of the property applies only to the
program of utilization stated in this report. The
separate values for any components may not be applicable
for any other purpose and must not be used in
conjunction with any other appraisal.
18. Arthur Andersen LLP consents to including, to the extent required
by federal securities laws, a copy of the Appraisals and/or
summary thereof or a reference thereto in the Schedule 13E-3
and related proxy statement with the Securities and Exchange
Commission by AHP or the Special Committee, provided that
Arthur andersen shall have the right to approve the content of any
summary of the Appraisals, such approval not to be unreasonably
withheld. Otherwise, this report and parts thereof, and any
<PAGE>
Aurora Inn Page vii
- -------------------------------------------------------------------------
additional material submitted, may not be used in any
prospectus or printed material used in connection with
the sale of securities or participation interests in any
Public Offering, Securities and Exchange Commission filing,
or other public document.
19. Arthur Andersen LLP's maximum liability relating to
services rendered under this report (regardless of form
of action, whether in contract, negligence, or
otherwise) shall be limited to the charges paid to
Arthur Andersen LLP for the portion of its services or
work products giving rise to liability. In no event
shall Arthur Andersen LLP be liable for consequential,
special, incidental, or punitive losses, damages, or
expenses (including, without limitation, lost profits,
opportunity costs, etc.) even if it has been advised of
their possible existence.
20. The Americans with Disabilities Act became effective
January 26, 1992. We did not make any observations or
interpretations on compliance with the ADA. It is
possible that a compliance survey of the property,
together with a detailed analysis of the requirements of
the ADA could reveal that the property is not in
compliance with the requirements of the Act. If so, this
fact could have a negative effect upon the value of the
property. Since we have no direct evidence relating to
this issue, we did not consider possible non-compliance
with the requirements of ADA in estimating the value of
the property.
<PAGE>
Aurora Inn Page viii
- -------------------------------------------------------------------------
CERTIFICATION
We certify that to the best of our 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 our personal, unbiased professional
analyses, opinions and conclusions.
- -- we have present no prospective interest in the property
that is the subject of this report, and we have no
personal interest or bias with respect to the parties
involved.
- -- our compensation is not contingent on an action or event
resulting from the analyses, opinions, or conclusions in,
or the use of, this report.
- -- Sheila Bjornstad and James Sullivan made personal inspections
of the property on December 19, 1996. Roger Cline, Michael S.
Kendzior and Brian E. Ginsberg have not inspected the subject
property.
- -- our 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
Supplemental Standards of Professional Practice of the
Appraisal Institute and the Uniform Standards of
Professional Appraisal Practice of The Appraisal
Foundation;
- -- the use of this report is subject to the requirements of the
Appraisal Institute relating to review by its duly authorized
representatives;
- -- neither all nor any part of the contents of this report
(especially any conclusions as to value or the identify of
the appraiser) 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.
- -- this appraisal assignment was not based on a requested minimum
valuation, a specific valuation, or the approval of a loan.
Respectfully submitted,
/s/ Brian E. Ginsberg /s/ Roger S. Cline
- ----------------------------- --------------------------------
Brian E. Ginsberg, MAI Roger S. Cline
Review Appraiser
Manager, Valuation Services /s/ Michael S. Kendzior
--------------------------------
Michael S. Kendzior MAI
Contributing Appraisers Review Appraiser
Sheila M. Bjornstad Certified General Appraiser State of Ohio
James T. Sullivan License # 391889
<PAGE>
Aurora Inn Page 10
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A. INTRODUCTION
A.1 SUBJECT PROPERTY IDENTIFICATION
Property Address: 3020 Shawnee Trail
Aurora, Ohio 44202
Tax Reference: Account # 03-025-10-00-018-000
Account # 03-025-10-00-019-000
Deed Reference: Volume 1048 Page 0921
Current Owner of Record: Aurora Inn Operating Partnership
A.2 OWNERSHIP HISTORY
AIRCOA Hotel Partners LP (AHP) acquired its interest in the
Aurora Inn pursuant to a Hotel Contribution Agreement dated
December 30, 1986 between AHP(Grantee) and Newpart, LP (Grantor).
This agreement was supplemented and amended by several succeeding
documents. On February 20, 1987, AHP transferred its ownership
interest to Aurora Inn Operating Partnership in a deed recorded
in the Portage County Clerk's Office in Volume 1048, Page 0921.
This was a related-party transfer.
<PAGE>
Aurora Inn Page 11
- -------------------------------------------------------------------------
A.3 PURPOSE AND FUNCTION OF THE VALUATION
The purpose of this report is to estimate the market value of the
fee simple estate in the subject property. Arthur Andersen LLP
has been engaged by the Special Committee of AIRCOA Hotel
Partners, L.P. (AHP) for the purpose of assisting them in
assessing the value of the individual properties owned by the
partnership. We have estimated the market value of the property
"as-is" assuming existing management agreements.
As used herein, market value is defined as1:
"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 the sale as of a
specified date and the passing of title from seller to
buyer under conditions whereby:
a. buyer and seller are typically motivated;
b. both parties are well informed or well advised,
and acting in what they consider their best
interests;
c. a reasonable time is allowed for exposure in
the open market;
d. payment is made in terms of cash and United States
dollars or in terms of financial arrangements comparable
thereto; and
e. 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."
This appraisal has been prepared in compliance with the Appraisal
Standards Board requirements and is a self-contained appraisal
report. The report contains all information significant to the
solution of the appraisal problem and reports all significant
date in comprehensive detail.
- ------------------
1 Uniform Standards of Professional Appraisal Practice, Appraisal
Foundation, 1990 Edition.
<PAGE>
Aurora Inn Page 12
- -------------------------------------------------------------------------
A.4 PROPERTY RIGHTS APPRAISED
The property rights appraised are the fee simple ownership of the
land and improvements, including furniture, fixtures, and
equipment.
A.5 EFFECTIVE DATE OF THE VALUATION
The effective date of this value estimate is January 1, 1997. The
property was inspected by Sheila Bjornstad and James Sullivan on
December 19, 1996.
A.6 EXPOSURE PERIOD
Exposure period refers to the amount of time which a property
would have been on the market prior to the date of appraisal for
it to sell at the appraised value. The current marketplace has
been characterized by illiquidity and capital restraints,
particularly on the part of banks, which has affected the time in
which real estate takes to sell. The market for most types of
properties was much more active in the 1980s due to greater
availability of credit and greater investor optimism. The volume
of transactions of hotel properties diminished in 1991 and 1992,
and there was less investment and development activity in the
marketplace. Since then, the markets have shown improvement and
there has been a significant increase in sales activity. Most of
the investors with whom we have spoken agreed that an exposure
period of between six months and one year would be sufficient in
order to maximize the price for a property such as the subject.
A.7 SCOPE OF THE APPRAISAL
As part of this assignment, the appraisers prepared a complete
self-contained appraisal report. In completing the appraisal,
they have made a number of independent investigations and
analyses. In conducting our investigation, various governmental
planning agencies and the local Chamber of Commerce were
contacted for demographic data, land policies and trends, and
growth estimates. Neighborhood data were supplemented by physical
inspection of the defined area. Information regarding zoning,
utilities, and other limitations on site utilization was obtained
from the client and through the appropriate agencies. Both the
site and the surrounding area was inspected to determine
suitability for hotel use. All phases of the local lodging market
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Aurora Inn Page 13
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were analyzed for past trends and current data. Estimated income
and occupancy levels, expenses, and income structures are based
upon this market evidence.
A diligent search for comparable data was conducted, and
comparable information was obtained from both public and private
sources. In the case of comparable sales and rental data,
attempts were made to contact the buyers or sellers or other
knowledgeable third parties to verify that the transactions were
at arm's length, cash equivalent, and market reflective. Because
there were a limited number of comparable hotel sales in the
subject market area, we extended our search to other markets. The
sales comparison approach was employed. However, we did not place
much reliance on it but used it as a test of reasonableness. The
cost approach was not utilized as it is considered to have
limited reliability due to the difficulty in estimating the
significant depreciation and external obsolescence present at the
subject Aurora Inn. In addition, the lack of comparable
commercial land sales in the Aurora area would make an estimate
of land value somewhat subjective. The income capitalization
approach was given primary emphasis as there was sufficient data
for its application and it reflects the typical investor's
behavior.
A.8 SPECIAL ASSUMPTIONS
The client has requested that a separate business value
allocation not be included in this report.
The following factors may have a direct impact on the value of
the subject. The subject property will be reassessed by computer
analysis in 1997 and by property inspection in 2000. The results
of these reassessments could significantly raise the real estate
taxes at the subject property. The county assessor would not
provide the appraisers with any estimates as to how taxes would
change at the subject over the coming years. The subject
occupancy and ADR will be affected by the 103 room Hampton Inn
currently under construction in Solon, Ohio (approximately 10
miles west of subject hotel). The appraisers have learned that
management is currently planning a major expansion and renovation
of the subject property. This expansion would include the
addition of 70 guest rooms. Since the development of these rooms
has not been approved by the Aurora Town Planning Board and is
also contingent upon financing, we have not included this
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Aurora Inn Page 14
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expansion in our appraisal analysis. However, if this expansion
does take place, a new appraisal is recommended,
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Aurora Inn Page 15
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B. ANALYSIS OF THE SUBJECT PROPERTY AND ITS MARKET
This section of the report presents a description and analysis of
the subject property's location, improvements, physical
condition, need for capital expenditures, property taxes, and
zoning. In addition, this section of the report presents a review
of the subject's market area and an analysis of the property's
highest and best use.
B.1 DESCRIPTION AND ANALYSIS OF THE PROPERTY
LOCATION
The subject of the appraisal is a 3.275+/- acre parcel of land
that is improved by a 69-unit full service hotel. The property
was completely rebuilt in 1963 after it was destroyed by fire and
is known as the Aurora Inn. It is situated in the southeast
quadrant of Chillicothe Road (State Route 306) and Garfield Road
(State Route 82). Shawnee Trail bisects this quadrant diagonally,
with the subject being north and east of Shawnee Trail. The civic
address of the property is 3020 Shawnee Trail in Aurora, Ohio.
LEGAL DESCRIPTION
A detailed legal description is provided in the addenda of this
report.
LAND
Size and Configuration: The subject site is irregular in shape and
contains 142,659 square feet, or 3.275 acres.
Frontage and Accessibility: The subject has frontage on Shawnee
Trail and Garfield Road. The property is located approximately 15
feet from the intersection of Shawnee Trail and Garfield Road.
The subject property has excellent access and is situated at the
intersection of the two major roads in Portage County
(Chillicothe Road and Garfield Road). Chillicothe Road (306) is a
major north/south thoroughfare that intersects Interstates 80 and
422 (major east/west thoroughfares that provide access to cities
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throughout Ohio and the Midwest). Garfield Road is a major
east-west thoroughfare that provides access to many neighboring
communities.
Topography: The topography of the site is generally flat and
on-grade.
Floodplain: According to the Federal Emergency Management
Agency, the subject is located in Zone X, outside the 500 year
plain.
Utilities and Public Services: All utilities are available
to the site including public gas, water, sewer, telephone, and
electric.
Easements and Encroachments: Typical utility and access
easements exist through the subject site. We are not aware of any
easements which negatively impact the subject.
Development on Neighboring Sites: The subject property is a
triangular shaped property that borders a school and single
family residential homes to the east. A small bed and breakfast
with spa is located west of the subject across Shawnee Trail.
Development in the subject neighborhood is primarily single
family residential with interspersed retail and commercial uses
situated on the major thoroughfares.
PROPERTY IMPROVEMENTS
General
The subject site is improved with a two story full service hotel
encompassing 32,650 SF and constructed in 1963. It is equipped
with 69 guest rooms, an indoor pool, an outdoor pool, tennis
courts, an 86 seat restaurant, a 25 seat lounge and public
meeting facilities consisting of approximately 3,500 square feet.
Guest Rooms
At present the hotel contains 69 guest rooms, of which 52 percent
are king or queen-bedded rooms. Double-double bedded units
account for approximately 48 percent of the total inventory. The
following table details the number of rooms by type.
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- ----------------------------------------------------------------------
Current Suites Configuration of the Subject Hotel
King Rooms 11
Queen Rooms 25
Double-Double Rooms 33
Preferred Quarters (included) 9
Total Number of Rooms 69
- ---------------------------------------- --------------------- -------
The subject guest rooms are in average to good condition. The
case goods are in good condition and feature dark wood night
stand, desk, TV cabinet and dresser. The bedspreads and curtains
are a floral design and are 3-4 years old. The seating chairs are
somewhat old and need to be replaced. All of the rooms were newly
carpeted in 1996. The bathrooms feature combination shower/tub,
commode and single bowl sink in a vanity. The floors of all
bathrooms were replaced last year, however, the wrong cement
mixture was used and floors are in the process of being
regrouted. Fifty of the tub enclosures have been replaced with
new plastic composite material. The remaining rooms are scheduled
to have the ceramic tile finish replaced with the new tub
enclosures over the coming year. In addition, there are nine
rooms considered the "Preferred Quarters". These rooms are the
largest available and contain additional amenities.
Food and Beverage Outlets
The subject property features an 86 seat restaurant (The Quilted
Cupboard) and a 25 seat lounge. The restaurant currently features
an Amish theme with quilts sewn by local artisans hanging on the
walls. The carpet and seat cushions were replaced in 1996.
According to management, the concept of the restaurant will
change in 1997. As part of this change the name of the restaurant
will change to Aurora Inn Dining which will have a more "old
world" ambiance. The renovation will include the replacement of
wall coverings and shutters in January 1997. The restaurant
serves breakfast, lunch and dinner seven days a week between the
hours of 7 AM and 10 PM. The restaurant is a successful operation
which provides approximately 40% of the gross revenue for the
subject property. This revenue is generated from guests staying
at the hotel, as well as outside diners from the neighboring
community.
The lounge is called "The Tavern" and has eight stools at the
bar, five stools at a central counter and 25 chairs with tables.
The Tavern has a through the wall gas fireplace. The other side
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Aurora Inn Page 18
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of the wall is a fireplace in the lobby seating area. The decor
of the tavern is dark old wood giving it an "old world" look. The
tavern is open daily from 11 AM to 1 AM. The management sponsors
specials and micro-brew nights to increase local and guest
patronage.
Meeting and Banquet Space
The property contains approximately 3,500+/- square feet of
dedicated meeting space. The following table details the meeting
space available at the Aurora Inn:
- ----------------------------- ------------- -------------------- -----------
Meeting Room or Location/ Number of Divisions Square
Ballroom Name Floor Feet
- ----------------------------- ------------- -------------------- -----------
The Ball Room 1 0 1,333
The Veranda Room 1 0 800
The Hudson/Garfield Room 2 1 651
The Eldridge Room 2 1 276
The Shawnee Room 2 1 462
- ----------------------------- ---------- -- --------------- ---- --------- -
Total Meeting Space 0 0 3,522
- ----------------------------- ---------- -- --------------- ---- --------- -
Recreational Facilities
The subject property features an indoor pool/outdoor pool with
separate kiddie pool and two outdoor tennis courts. Also
available are an indoor whirlpool, sauna and locker facilities.
The property is located near golf courses, shopping, Sea World of
Ohio and Geauga Lake Amusement Park.
Other Services
The subject property offers a Breakfast in Bed special. It
includes a bed tray morning room service with continental
breakfast and newspaper, at no additional charge. There are nine
rooms considered the "Preferred Quarters". These rooms are
larger, and contain a small refrigerator, coffee maker, hair
dryer, cable TV and room service. Upon a guest's arrival they are
provided with bottled water and a fresh fruit plate.
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Aurora Inn Page 19
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Structural Systems:
Floor-Area Ratio: 0.23 (FAR = Building Area SF divided
by Land Area SF)
Floors: 2
Foundation: Basement with concrete block walls and
poured concrete floors.
Building Frame: Wood frame with masonry exterior
Roofing System: Wood truss "A" frame with asphalt composite
shingles. The entire roof was replaced in
1995 and has a 25 year guarantee.
Exterior Walls: Aluminum Siding combined with painted
brick face (white) in main building.
Mechanical Systems:
HVAC System: The public space has a central hot and chilled
water, a three pipe system with gas fired boilers and
circulating fans. The guest rooms have individual through
the wall heating/cooling units. Fifty percent of these units
were replaced in 1996 and the remaining 50% will be replaced
in 1997. The following summarizes the boilers and chillers
that support the heating and air-conditioning system.
Boilers:
-- Meeting and Public Space: Weil McLain gas fired boiler (1983)
Chillers:
-- Meeting and Public Space: Worthington R22 Chiller
-- Meeting and Public Space: Marley 4800 B cooling tower
Hot Water Heaters:
-- Meeting, Public Space
and Rooms: AO Smith hot water heaters (1994)
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Fire Protection System:. There are hard wire smoke detectors
and lighted exit signs located in the hallways. Guest rooms
are equipped with battery operated smoke detectors. The subject
property is not sprinklered.
Elevators: The subject property does not have any elevators.
Plumbing: Domestic water is provided by the City of Aurora
direct to the hotel via a three inch water main located in
the boiler room on the lower level of the hotel.
Electrical System: Service is provided via a 12,208 volt
transformer situated in a vault owned by Ohio Edison. An
emergency generator is located in the mechanical room for
instances where the main power supply is interrupted.
Interior Finishes:
Floor Coverings:
Lobby: Carpet/Parquet/Tile over wood
Meeting Rooms: Carpet
Corridors: Carpet
Walls and Partitions:
Lobby: Sheet rock against cement block
Meeting Space: Sheet rock against cement block
Guest Rooms: Sheet rock against cement block
Corridors: Sheet rock against cement block
PROPERTY INSPECTION
We completed an in-depth tour of the property's physical plant
including 1) the property exterior and parking; 2) the public
space, lobby, meeting space, and food and beverage facilities;
and 3) the back-of-the-house space including kitchens, storage
rooms, housekeeping, laundry, administrative offices, and
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Aurora Inn Page 21
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mechanical and electrical equipment. In addition, we toured three
guest rooms including a king bedded room, queen bedded room and a
double/double bedded room.
The subject guest rooms are in average to good condition. The
case goods are in good condition and include a night stand, desk,
TV cabinet and dresser. The bedspreads and curtains are a floral
design and are 3-4 years old. The seating chairs are somewhat old
and need to be replaced. All of the rooms were newly carpeted in
1996. The bathrooms feature combination shower/tub, commode,
single bowl sink in a vanity. The floors of all bathrooms were
replaced last year, however, the wrong cement mixture was used
and floors are in the process of being regrouted. Fifty of the
tub enclosures have been replaces with new plastic composite
material. The remaining rooms are scheduled to replace the
ceramic tile finish with the new tub enclosures over the coming
year.
PAST RENOVATION AND CAPITAL REQUIREMENTS
In 1994 and 1995, the owners spent $289,546 in various
renovations and capital repairs. In 1996 , $333,994 was budget
for renovations and capital items. Listed below are some of the
major capital expenditure over the past three years.
1. New asphalt roofing in 1995.
2. New carpeting for all public areas of the hotel in 1996.
3. New POS system.
4. $30,000 in kitchen upgrades and new seating cushions.
5. New carpeting and wallpaper in the ballroom in 1996.
6. 50 new bathtubs in 1996.
7. New bathroom floor tiles in all bathrooms.
8. 50% of all units received new HVAC units (the remaining 50%
will be replaced in 1997).
9. Public bathrooms are to be renovated in 1997.
10. A new pool deck and pool heater will be installed in 1997.
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Aurora Inn Page 22
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According to management there are plans to expand and renovate
the hotel in the upcoming year. They intend to reconfigure the
entrance, expand the lobby, incorporate a hallway to the
ballroom, enclose the outside patio, and construct seventy new
guest rooms. We have not considered the seventy room expansion in
our valuation analysis, because it has not yet been approved by
management or the Town Planning Board. Based on conversations
with the management, we have included a $300,000 capital
expenditure in our valuation analysis for 1997 based on projects
which have currently been approved by management.
PROPERTY TAXES
The subject property is under the taxing jurisdiction of Portage
County Taxing Authority. Real estate taxes are assessed on a
calendar year basis and are payable bi-annually. Personal
Property taxes for furniture, fixtures, inventory, equipment, and
supplies used in business are also assessed on a calendar year
basis and are payable biannually.
Real Estate Taxes
Taxing Jurisdiction: Portage County
Tax Account Number: 03-025-10-00-018-000
03-025-10-00-019-000
Current Tax Year: January 1, 1996 to December 31, 1996
Tax Rates Established: Tax rates are established annually after
each election.
Current Tax Rate: $92.49 per $1,000 of assessed value.
Assessments Established: The assessed value of the hotel for tax
purposes is assumed to be 35 percent of
market value. The Ohio State Legislators
had established various inflationary
credits applicable to real estate
taxes.
Reevaluations: The market value of the property is
reassessed every six years property to
property with the last reassessment in
1994 and every three years via computer.
The following table illustrates the computation of the real
estate taxes for the last four years.
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Aurora Inn Page 23
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- ------------- ------------------- ------------------ ------------
Year Market Value Assessed Value Tax Rate
- ------------- ------------------- ------------------ ------------
1992 $1,509,514 $528,330 $87.76
1993 1,509,514 528,330 88.39
1994 1,731,629 606,070 90.77
1995 1,731,629 606,070 91.10
1996 1,731,629 606,070 92.49
- ------------- ------------------- ------------------ ------------
- ------------- ----------------- ---------------------
Year Credits Real Estate Taxes
Payable
- ------------- ----------------- ---------------------
1992 $17,930 $28,436
1993 18,052 28,647
1994 26,405 28,608
1995 24,862 30,351
1996 24,938 31,118
- ------------- ----------------- ---------------------
The subject property will be reassessed by computer analysis in
1997 and by property inspection in 2000. The results of these
reassessments could significantly raise the real estate taxes at
the subject property. The county assessor would not provide the
appraisers with any estimates as to how taxes would change at the
subject over the coming years. After reviewing the subject's
property's historical assessments and real estate taxes, we have
concluded that an annual property tax increase of 3.5 percent is
reasonable over the financial projection period.
Personal Property Taxes
Taxing Jurisdiction: Portage County
Tax Account Number: 03-10053
03-09353
Current Tax Year: January 1, 1996 through December 31, 1996
Tax Rates Established: Tax rates are established annually
after each election
Current Tax Rate: $91.10 per $1,000 of assessed value.
Assessments Established: The assessed value of the personal
property for tax purposes is
assumed to be 25 percent of depreciated
value. There is a $10,000 exemption.
Personal property taxes are levied at the same rate as real
estate taxes or $91.19 per $1,000 of assessed value. Personal
property tax rates are determined annually by Portage County and
the City of Aurora. Tangible personal property that qualifies for
the personal property tax include furniture, fixture, and
equipment, as well as other tangible assets necessary to operate
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Aurora Inn Page 24
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the business. Tangible personal property tax returns are sent out
at the beginning of each calendar year and submitted by April 30
the of the same year. The following table illustrates the
computation of the personal property taxes for the last four
years.
- -------- ----------------- ----------- ---------------------
Year Taxable Value Tax Rate Personal Taxes
Payable
- -------- ----------------- ----------- ---------------------
1992 $58,880 $87.87 $5,170
1993 59,329 88.39 5,244
1994 60,540 88.39 5,343
1995 55,160 90.77 5,007
1996 59,050 91.10 5,379
- -------- ----------------- ----------- ---------------------
In our analysis, we have assumed that personal property taxes
will be inflated by 3.5 percent over the projection period.
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Aurora Inn Page 25
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ZONING
The Aurora Inn is located in the C2 Commercial Shopping District.
This district was developed to encourage planned and integrated
grouping of establishments which will offer retail convenience
and comparison goods and provide personal and professional
services for the community area.
Restrictions and Requirements
The following summarizes the restrictions and requirements that
the subject Aurora Inn must conform to under its existing zoning.
Minimum Lot Size not stipulated
Minimum Frontage 150 feet from any public right of way
Minimum Yards not stipulated
Maximum Building Height 35 feet
Maximum F.A.R. not stipulated
Maximum Lot Coverage not stipulated
Parking Requirements Permitted in front yards but no
less fifty feet from any public
right of way, or ten feet from
a property line when it is not
adjacent to a public thoroughfare.
On the basis of the zoning code, the property site plan, our
physical inspection of the subject property, and discussions with
local zoning representatives, the property appears to be in
conformance with all general and specific zoning requirements. It
should be noted that the City of Aurora is in the process of
changing their zoning regulations to be effective in the summer
of 1997, which will have an effect on the proposed expansion of
the subject hotel, since the proposed renovations and expansion
must be approved by the City Planning Commission. Under the
current regulations "as-of-right" development is not permitted
and all projects must be approved by the town. We are not privy
to whether or not the new zoning regulations will permit an
expansion of the hotel "as of right" or whether it will have to
seek town approval.
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B.2 AREA ANALYSIS
The Area Analysis provides information on market conditions as
they currently exist in the Aurora area. Economic and
sociological trends provide insights relating to the strength of
the local market area. A review of such trends has been completed
to direct and support our estimates of future market growth in
the lodging industry.
The following section of the report outlines general trends in
the market. We consulted with the Aurora Chamber of Commerce,
Convention and Visitors Bureau, Department of Economic
Development and other local sources for much of the following
information. When possible, information was verified directly
from the primary sources.
The subject is located in Portage County and is in the city of
Aurora. Aurora is approximately 15 miles northwest of Akron and
20 miles southeast of Cleveland, the largest city in Ohio. The
Akron MSA consists of Aurora and Portage County where the subject
is located.
ECONOMIC AND DEMOGRAPHIC INDICATORS
This section summarizes historical trends in several key economic
and demographic indicators in the Aurora market area. The
following table presents historical trends in population, retail
sales, eating and drinking sales, and median household effective
buying power.
<PAGE>
AREA MAP
<PAGE>
NEIGBORHOOD MAP
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Aurora Inn Page 29
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Summary of Economic and Demographic Statistics
For the Subject Hotel's Market Area
CAG (1)
1991 1995 1991-1995
---- ---- ---------
Population (000's)
Portage County 143.2 150.7 1.3%
Akron MSA 658.6 682.7 0.9%
Ohio 10,864 11,173.3 0.79%
United States 250,812 264,900.9 1.4%
Retail Sales ($000's)
Portage County $712,018 $1,210,886 14.2%
Akron MSA 4,335,153 6,523,113 10.8%
State 73,205,986 104,899,945 9.4%
United States 1,807,182,519 2,335,241,609 6.6%
Eating & Drinking
Sales ($000's)
Portage County $60,827 $133,980 21.8%
Akron MSA 454,734 755,208 13.5%
State 7,184,239 11,827,030 13.3%
United States 182,107,195 241,780,257 7.3%
Median Household
Effective Buying
Income (EBI)
Portage County $31,166 $32,737 1.2%
Akron MSA 27,387 32,170 4.1%
State 27,201 31,899 4.1%
United States 27,912 32,238 3.7%
Source: Sales and Marketing Management, Survey of Buying Power.
Note: (1) Compound Annual Growth
- ------------- ------------------------------------------------------------
Population
Between 1991 and 1995, population growth in Portage County was
similar to that of the U.S. and exceeded both that of Akron and
the state as a whole.
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Aurora Inn Page 30
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Retail Sales
Portage County retail sales have far exceeded the Akron MSA, the
state, and that of the national average. The strong increases, in
conjunction with the stable population growth, are indicative of
the increasing disposable income in the market area.
Eating and Drinking Sales
Eating and drinking sales have increased at an even faster rate
than that of the retail sector. Corporate entertaining and the
continued expansion of the tourist market have fueled the rapid
expansion of this sector. Between 1991 and 1995, eating and
drinking sales have increased at an annual rate of 21.8 percent
in the county of Portage, and at an annual rate of 13.5% percent
in the Akron MSA.
Median Household Effective Buying Income (EBI)
Median household effective buying income in the subject area has
increased at a rate slightly lower than the national average.
However, the EBI slightly exceeds that of the MSA, state and
national averages. This is a result of its suburban location,
serving primarily as a bedroom community of Cleveland. Stable to
moderate growth is consistent with the growth patterns of most
mature suburban communities throughout the nation.
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EMPLOYMENT
Employment and Unemployment
Trends in employment are an excellent indicator of the overall
health of a local economy. The following table presents a summary
of the trends in employment and unemployment in the local market
area for the last several years.
- ---------------------------------------------------------------------------
Growth in Employment and Unemployment
- ---------------------------------------------------------------------------
Portage County
-----------------------------------------------
Labor Force Total Empl. % Unempl.
--------------- --------------- ---------------
1991 76,394 71,913 5.9%
1992 78,496 73,014 7.0%
1993 78,711 74,170 5.8%
1994 80,747 76,617 5.1%
1995 80,945 77,572 4.2%
CAG 1.5% 1.9%
1991 - 95
Ohio
----------------------------------------------
Labor Force Total Empl. % Unempl.
-------------- --------------- ---------------
1991 5,438,380 5,088,524 6.4%
1992 5,496,075 5,094,796 7.3%
1993 5,490,527 5,130,907 6.5%
1994 5,541,163 5,234,222 5.5%
1995 5,584,352 5,318,252 4.8%
CAG 0.7% 1.1%
1991 - 95
- --------------- --------------- --------------- --------------- -----------
Source: Department of Labor and United States Bureau of Labor Statistics
Note: CAG: Compound Annual Growth
- --------------- -----------------------------------------------------------
Unemployment levels in both Portage County and the State of Ohio
have remained below that of the national average. Unemployment
rates have decreased slightly over the past five years, due to an
improving local and state economy fueled by seasonal tourism and
corporate expansion in the area.
Employment by Industry Sector
Employment by industry sector details the number of individuals
employed in a market area by each major industry category. An
analysis of the trends in employment by industry sector can
provide insights on which are the most important industries in
the local market and which sectors have reflected recent growth
or declines. The following table presents a summary of trends in
employment by industry sector for the subject market area.
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Aurora Inn Page 32
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- --------------------------------------------------------------------------
Employment by Industry Sector (1990-1995)
Akron MSA (000's)
- --------------------------------------------------------------------------
1990 1995 % Change
----------- ----------- -------------------
Manufacturing 66.8 65.8 -1.5%
Construction 10.4 11.7 12.5%
Mining 0.6 0.4 -33.3%
Transportation,
Communication & Util. 13.8 14.6 5.8%
Finance, Insurance
& Real Estate 10.9 12.3 12.8%
Wholesale Trade 15.1 16.8 11.3%
Retail Trade 54.1 60.0 10.9%
Services 68.8 84.3 22.5%
Government 44.7 46.1 3.1%
- ---------- ---- ---- ----
Total Employment 285.1 311.9 9.4%
- --------------------------------------------- ------------------ ---------
Source: Bureau of Labor Statistics
- ---------------- ---------------------------------------------------------
The strongest sectors of growth in employment over the last five
years respectively are Services; Finance, Insurance, Real Estate;
Construction; Wholesale and Retail Trade. The strength of these
industries, specifically Services; Construction; and Finance,
Insurance and Real Estate indicate the strength of the local
economy because of the nature of the funds that stimulate growth
in these industries. The growth of these industries at such a
rapid rate indicates a growing percentage of expendable income
and strong local economy. Specifically, the lodging industry is
included in the Services sector, the fastest growing area of the
economy over the last five years.
Major Employers
The following table summarizes the largest employers in the
Aurora area that generate demand for lodging accommodations.
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Aurora Inn Page 33
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- ------------------------------------------- ------------------
Company Name No. Employees
- ------------------------------------------- ------------------
Sea World of Ohio 1520
Geauga Lake Amusement Park 1360
Geauga Lake 1000
Aurora Farms Factory Outlets 300
Rotek 250
Lucas Aerospace Power Equipment 100
Omega Pultrusion Corporation 100
McMaster Carr 90
OEM-Miller Corporation 75
Furon- Industrial Processing Strategies 70
- ------------------------------------------- ------------------
Source: Chamber of Commerce
- ---------------------------------------------------------------
As indicated in the preceding table, the largest employers in the
Aurora area are Sea World, Geauga Lake Amusement Park and Geauga
Lake, all of which draw tourists to the area. Area hotel
operators and officials indicate that Sea World and Geauga Lake
Park are the largest two demand generators for overnight room
accommodations in the area. In additional to this seasonal
employment, area officials indicate that there are several
corporations in and around the area that use accommodations to
lodge company employees and clients.
OFFICE MARKET OVERVIEW
The office market in Aurora is not of significant importance on
the local lodging industry. Aurora is a suburban community with
its economy supported predominately by tourism and a strong
retail trade.
TRANSPORTATION
Roadway System and Public Transportation
Major roadways to the Aurora area include State Route 306 and
State Route 82. State Route 82 provides routes in and out of the
city to the east and west. State Route 306 provides a more
important northern connection to the newly expanded State Highway
422 with direct access to downtown Cleveland. In addition, Route
306 connects Aurora to Interstate 80, 76 and 271; and therefore
to the rest of the Midwest and northeast. The expansion of State
Highway 422 in the early 1990's has fueled Aurora's growth
providing greater access to the suburbs of Cleveland.
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Airport
The Aurora area is serviced by both the Portage County Airport
and the Cleveland - Hopkins International Airport. The Portage
County Airport is the closest airport to the subject property
with limited commercial service. The major commercial airport
that serves the area is the Cleveland - Hopkins International
Airport, less than 40 minutes away by car. The follow tables
highlight the air passenger activity at the Cleveland -Hopkins
International Airport between 1991 and 1995.
- ----------------------------------------------------------------------------
Trends in Air Passenger Activity at the
Cleveland - Hopkins International Airport
- ----------------------------------------------------------------------------
Year Enplanements Deplanements Total
1991 4,087,165 4,055,479 8,142,644
1992 4,470,511 4,465,268 8,935,779
1993 4,689,335 4,724,516 9,413,851
1994 5,530,253 5,601,273 11,131,526
1995 5,570,790 5,685,075 11,255,865
% Change from
1991 - 1995 36% 40% 38%
- ------------------ ---------------------------------------------------------
Source: Cleveland Department of Operations
As indicated in the preceding table, the passenger traffic at the
Cleveland - Hopkins International Airport has increased
significantly over the past five years. During the period between
1991 - 1995, total passenger counts increased at a compound
annual average of 8.4 percent. This strong increase in passenger
traffic is indicative of the increasing prominence of Cleveland
as a destination city and the growth of Cleveland as a center for
many major corporate activities. While much of the traffic at the
Cleveland - Hopkins International Airport may never visit Aurora,
the increase in passenger activity is a positive indicator of the
economic growth occurring in the area. According to interviews
with local hotel operators, the increase in passenger activity
falls in line with the increase in accommodations provided by
local facilities for overnight guests in the past five years.
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TOURISM AND RECREATION
The dominant tourist attractions in the Aurora area are Sea World
of Ohio, Geauga Lake and the Geauga Lake Amusement Park. In
additional to the wide range of activities available at the Sea
World complex, there are a variety of outdoor activities that are
extremely popular with residents and non - residents alike. In
the summer months, Lake Geauga is popular for swimming, boating
and other water sports. Tinker Creek State Park is popular for
campers and hikers with a 700 acre state preserve. Other nearby
attractions include the Aurora Farms Factory Outlets, tourist
attractions along Lake Geauga and major sporting and cultural
events in and around Cleveland including the Cleveland Indians
Baseball team and the Rock and Roll Hall of Fame.
Attractions
The major attractions in this area are the Aurora Farms Factory
Outlets, including over 70 premium stores, the Geauga Lake
Amusement Park and Sea World of Ohio. In addition the Aurora
Center for the Fine Arts, Aurora Historical Society and Aurora
Center Historical District offer insight on the way this Western
Reserve farming community developed.
Spectator Sports
Two major spectator sports are available to Aurora residents and
visitors alike by means of a short trip into downtown Cleveland.
The Cleveland Indians professional baseball team draws fans to
the new 42,000 seat Jacobs Field, the site of the 1995 World
Series. In addition, basketball fans flock to the new Gund Arena
seating 21,000, to watch the Cleveland Cavaliers. Cleveland lost
their professional football team to Baltimore at the end of the
1995/96 season. However, there are presently negotiations to
build a new $220 million dollar stadium, and possibly retain
another professional football team.
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Public Parks/ Facilities
Two local parks exist in the Aurora area. The 300 acre, city
owned Sunny Lake Park attracts those looking to picnic and day
hike around this quaint local park. The larger 700 acre, state
owned Tinkers Creek State Park offers a wide variety of hiking
and camping opportunities for the more adventurous. Both
facilities are open to the public year round.
CONVENTION AND TRADE SHOW MARKET
Aurora is limited in the convention and show trade marketplace.
The summer attracts small meetings that often coincide with
vacation plans. No major convention center serves the immediate
Aurora area.
CONCLUSION
Overall, the Aurora area has experienced positive growth over the
past five years. The addition of Sea World of Ohio, in
conjunction with the expansion of the Geauga Lake Amusement Park
have supported favorable growth of the demographic and employment
statistics in the area. As the local tourism trade continues to
expand, both the hospitality industry, as well as all other
sectors of the local economy will continue to expand. In
addition, the lakes and parks in the area provide a strong base
of seasonal leisure activities for the vicinity. Based upon a
historical analysis of the demographic and economic trends in the
area; a continued favorable outlook for the Aurora economy is
forecasted, which should result in positive growth for tourism
destinations and local lodging in the area.
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B.3 HIGHEST AND BEST USE ANALYSIS
The validity of an appraisal is dependent upon the consideration
and conclusion of highest and best use.1 Often expressed as "the
most profitable legal use," the concept requires a thoughtful
analysis of many factors. Vacant land value is directly related
to its highest and best use. On the other hand, an improved
property may have the same or a different highest and best use
than the land supporting the improvements when considered as
vacant land. Therefore, for improved property, both highest and
best use decisions must be separately considered, both as vacant
land and as improved property. In addition to a conclusion for
both the vacant land and improved property, sale and lease
comparisons are usually made with properties having similar
highest and best uses as the subject.
The parameters for consideration relate to legality of use,
physical possibilities, financial feasibility, and maximum
economic production. Single uses, interim uses, legal
non-conforming uses, speculative uses or excess land
determinations require further analysis.
HIGHEST AND BEST USE OF THE LAND AS IF VACANT
Legally permissible uses are those limited by zoning, easements
and rights-of-way, deed restrictions, building codes, and
environmental controls. These restrictions have been discussed in
Section B.1 (Description and Analysis of the Property). As
mentioned earlier in the zoning section of this report, the
subject site is located in the C2 Commercial Shopping District.
- ---------------
1 Highest and Best Use: "The reasonably probable and legal use of
vacant land or an improved property, which is physically possible,
appropriately supported, financially feasible, and that results
in the highest value. (American Institute of Real Estate
Appraisers, The Dictionary of Real Estate Appraisal, Second
Edition, Copyright 1993, Page 171.
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Aurora Inn Page 38
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Physically possible uses are limited by size, design, topography,
flood possibilities and physical capacities. The subject site is
approximately 142,659 square feet. It is irregular in shape. The
subject is located on a triangular parcel in the southeast
quadrant of Chillicothe Road (State Route 306) and Garfield Road
(State Route 82). Shawnee Trail bisects this quadrant diagonally,
with the subject being north and east of Shawnee Trail.
Drainage and topography are acceptable for a variety of uses as
are the shape and frontage of the site. Although we are
unqualified to render an opinion of the physical load-bearing
capacity of the land or its freedom from hazardous materials, no
nuisances were obvious at the time of inspection.
Financially feasible uses must be supported by sufficient demand
in the neighborhood to create a sufficient return to invest over
the long term. In analyzing each highest and best use
alternative, the income potential from those legally permissible
and physically possible uses was considered. The income from the
highest and best use should be sufficient to satisfy investor
requirements and operating expenses, thereby providing a return
on the land.
Predominant land uses in the neighborhood provide indications of
profitable land uses for the location of the subject property.
The subject property borders a school and single family
residential to the east. A small bed and breakfast with spa is
located west of the subject across Shawnee Trail. Most of the
development in the subject neighborhood is single family
residential with retail commercial uses situated on the major
thoroughfares.
Based upon the surrounding properties, hotel uses are potentially
financially feasible. Hotel average daily rates (ADR) and
occupancies are currently very strong in the subject
neighborhood. ADR's among the subject's competitive set range
from $58 to $90 while occupancies range from 59 percent to 69
percent. In researching operating statistics for the local
market, as well as national averages, both through property
surveys and published investor surveys, as well as analyzing the
income potentials from these property types, it is our opinion
that hotel uses are financially feasible. Therefore, we conclude
that the highest and best use of the land as vacant is for new
development commensurate with hotel use.
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HIGHEST AND BEST USE OF THE PROPERTY AS CURRENTLY IMPROVED
The subject property is currently improved with a hotel
containing 69 rooms. In light of the existing improvements, a
contrast with other uses is made for the optimal use which is
also physically suitable for the site, legally permissible,
economically feasible and the most profitable usage of the site.
As earlier indicated, the highest and best use of a property as
improved may differ from the highest and best use of the land as
if vacant. The "as improved" analysis assists in the
identification of the use that is projected to provide the
greatest overall property return on invested capital, as well as
in the identification of comparable properties. Typical choices
for improved property include the following usage alternatives:
1. Demolition of the improvements
2. Remodeling or renovation
3. Continued usage, as is
The four tests of highest and best use are applied to each of the
above alternatives. All three options are legally permissible and
physically possible. The test of financial feasibility is that
the use must provide a return equal to or greater than the amount
needed to meet all operating expenses, financial obligations, and
capital expenditures. In addition, the use must be maximally
productive, or that use which produces the highest value,
consistent with the rate of return warranted by the market for
that use. Using current investor expectations, consideration of
all three scenarios was made.
Demolition of the Improvements
The implication in a highest and best use analysis is that the
existing improvements should be retained and/or renovated as long
as those improvements continue to contribute to the total value
of the property; or until the return from a new improvement would
more than offset the cost of demolishing the existing
improvements and constructing alternative facilities. An analysis
<PAGE>
Aurora Inn Page 40
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of the subject property reveals that the existing improvements do
continue to contribute to the overall value of the subject, with
no alternative use available to the site which would provide a
return greater than the return on current improvements after
consideration of the cost to raze the current improvements and
build an alternate use. Therefore, demolition of the improvements
is not considered warranted, nor optimal from a highest and best
use standpoint.
Remodeling or Renovation
Based on discussions with management there are plans to renovate
and expand the subject hotel in 1997. As of the date of this
appraisal, most of these renovations have not been approved by
corporate management and are thus not included in our valuation
analysis. The impetus behind the proposed renovation and
expansion is to capitalize on the extensive unsatisfied demand in
the subject market, particularly in the leisure travel demand
segment during the summer months. The proposed renovations
include the addition of seventy new guest rooms and a general
renovation of the hotel lobby to improve access to the ballroom
and provide additional banquet space.
As discussed earlier in this report, there are several approved
capital projects, which will substantially enhance the appearance
and market appeal of the subject property in 1997.
Continued Usage As Is
As an alternative to demolition, the existing improvements could
be converted to an alternate use or left as-is. Again, applying
the four tests to this premise, it would be physically possible
and legally permissible to convert the improvements to another
use. However, as discussed previously, the current use as a hotel
is the most maximally productive use available to the property.
Obviously then, converting to an alternative use would lessen the
return to the land, and therefore, any such use would fail to be
the most profitable alternative.
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CONCLUSION AND RECONCILIATION OF HIGHEST AND BEST USE
From the three options presented, one remains feasible for the
subject. Demolition of the improvements was eliminated as an
option since the existing improvements provide substantial
contributory value to the property. The legal permissibility and
financial feasibility of the planned expansion were not
considered in this report. Until a determination can be made on
the feasibility of the expansion, the appraisers believe that
continued use "as is" with on-going capital projects to maintain
the quality and market appeal of the subject improvements is the
indicated highest and best use of the subject as currently
improved. Also, given current market conditions, it is our
opinion that the highest and best use of the site, as vacant, is
for development with a commercial use commensurate with hotel
uses.
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C. ANALYSIS OF COMPETITIVE LODGING SUPPLY AND DEMAND
C.1 COMPETITIVE LODGING SUPPLY
The subject property is located in the city of Aurora in Portage
County. According to the Portage Convention and Visitors Bureau,
there are currently 30 hotels and bed and breakfast facilities
located in the Portage County area. These facilities are located
in different cities throughout the county and not all are
considered to present direct competition with the subject hotel.
The subject property is located a few miles from Sea World of
Ohio and Geauga Lake and benefits as one of the few hotels very
close to these facilities.
IDENTIFIED COMPETITIVE SUPPLY
In order to evaluate the subject hotel's position within the
market, we have identified a competitive supply on the basis of
quality and extent of facilities, location, market orientation
and revenue potential. We identified two hotels as the primary
competition for the Aurora Inn. Presented on the following page
is a map illustrative the location of the subject hotel and its
identified competitive set. The tables on the following pages
present pertinent operating information and descriptions of each
competitive hotel.
<PAGE>
Map of Competitive Lodging Supply
<PAGE>
PROFILE OF COMPETITIVE LODGING SUPPLY
Property Name HOLIDAY INN KENT BEST WESTERN WOODLAND
_____________ ________________ _____________________
Address 4363 State Route 43, Kent 800 N. Aurora Rd., Aurora
Opening Year 1972 1975
Affiliation Holiday Inn Best Western
Ownership Kent Hotel Corp Hotel Development Corp
Total Number of Rooms 154 142
1996 Published Room
Rate Structure
Single Double Single Double
Rack (in-season) $99 $99 $160 $160
Rack (off-season) $69 $73 $80 $80
Corporate -- -- -- --
Estimated 1996 Market Mix Percentage
Leisure Individual Travelers 43% 31%
Commercial Individual Travelers 38% 44%
Groups 19% 25%
Facilities/Amenities
Restaurants Arthur's Cafe Seasons at Aurora
Lounge Arthur's Cafe Seasons at Aurora
Total Meeting Space (Sq. Ft.) 6,100 6,000
Largest Room/Ballroom (Sq. Ft.) 4,000 2,000
Total number of meeting rooms/divisio 8 8
Swimming Pool outdoor indoor
Exercise Room/Fitness Center yes yes
Gift Shop/Newsstand no yes
Business Center no no
complimentary buffet continental breakfast,
Other Resort Amenities breakfast video room
Estimated Occupancy
1996(est.) 59% 61%
1995 51% 59%
Estimated Average Room Rate
1996 (est.) $58.00 $79.50
1995 $54.00 $79.50
<PAGE>
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The following paragraphs describe these properties and how they
compete with the Aurora Inn.
Holiday Inn Kent
The Holiday Inn is located Kent, Ohio and is approximately 16
miles from subject property on State Route 43. According to
management, the Holiday Inn derives a significant portion of its
demand from Kent University and commercial travelers from the
companies and industrial facilities located between Aurora and
Kent. This hotel has been renovated in the last several years. It
contains 154 rooms including two suites. Their facilities include
meeting rooms, a restaurant and lounge, an exercise room and
outdoor swimming pool. We anticipate that the Holiday Inn will
continue to compete with the subject property for
university-related and commercial demand. Due to the hotel's
distance from area attractions and Sea World, this property
presents little competition for leisure related demand. Overall,
the facilities did not appear to be dated and in need of further
renovation.
Best Western Woodlands
The Best Western Aurora Woodlands Resort is located approximately
two miles from the subject hotel, along North Aurora Road, one
quarter mile from the entrance for Sea World of Ohio. The
property contains 142 guest rooms with 6 suites, along with an
indoor swimming pool and sauna, exercise room, video game room,
restaurant and lounge. Management of this hotel is very active in
the community which has been an advantage when marketing to
commercial demand. In addition, the Best Western accommodates a
large volume of tour and other groups because of its location
proximate to Sea World. Overall the facility appears to have
significant levels of deferred maintenance. According to
management there are plans to renovate 50 rooms, however this has
not been approved.
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ADDITIONS TO SUPPLY
In analyzing the existing competitive environment, it is
important to discuss any new hotel development that would
potentially impact the subject's performance. In the course of
our fieldwork, we have discovered the possibility of the
construction of two hotels in 1997. A 55,800 square foot Hampton
Inn is under construction in the City of Solon industrial service
district. This 103-room hotel will be one and one-half miles from
the freeway and approximately seven miles from Aurora. According
to the developer, construction has begun and completion is
anticipated for late 1997. It will attract many of the business
travelers to the Solon industrial areas. This hotel will most
likely be more competitive with the Best Western Woodland than
the subject hotel.
The second hotel proposed for development is a Comfort Inn.
Developers have met with approval from the Planning Board of
Twinsburg, however, financing is not complete and construction
has not begun. This facility, if constructed, would compete with
subject hotel for commercial travelers, because of its proximity
to the industrial areas. According to subject property
management, there has also been discussion of a 30 to 60 room
expansion of the Bed and Breakfast Inn and Spa located across the
street from the subject. At this time, expansion plans have not
been presented to the Planning Commission. For the purpose of our
supply and demand analysis, we have assumed the addition of the
Hampton Inn to the competitive lodging supply.
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C.2 LODGING SUPPLY AND DEMAND ANALYSIS
OVERALL DEMAND TRENDS IN THE AURORA LODGING MARKET
The aggregate lodging market in Aurora has grown over the past
two years. Occupied demand in Aurora increased 7.4 percent
between 1995 and 1996, while average room rates have also
increased 14.9 percent during the same period.
LODGING DEMAND IN THE IDENTIFIED COMPETITIVE SUPPLY
As indicated previously, we have identified three hotels
(including the subject) as the primary competitive supply for the
Aurora Inn. The purpose of the analysis that follows is to
evaluate the historical and present supply and demand trends of
the market in which the subject hotel competes. We have completed
interviews with management of the competitive hotels. We have
also collected statistics on the occupancy, average rate, and
market mix of the competitive hotels in order to estimate total
accommodated demand by market segment. The table below summarizes
our estimate of the aggregate market demand accommodated by the
identified competitive supply for estimated years-ended 1995 and
1996.
<PAGE>
Aurora Inn Page 48
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- ------------------------------------------------------------------------------
Historical Growth in Lodging Demand
in the Competitive Supply
- ------------------------------------------------------------------------------
1995 Estimated 1996
-------------------- --------------------- Percent
Room Nts % Total Room Nts % Total Change
---------- --------- ----------- --------- ----------
Commercial Individuals 25,037 33% 29,954 37% 19.6%
Leisure Individuals 34,026 45% 33,805 42% -.6%
Groups 16,371 22% 17,279 21% 5.5%
------ --- ------ --- ----
Total Occupied Demand 75,434 100% 81,038 100% 7.4%
Total Available Supply 131,765 131,765
Market Occupancy 57.2% 61.5%
Market Average Rate $63.68 $73.18 14.9%
Market Revpar** $36.45 $44.97 23.4%
- ------------------------------------------------------------------------------
Notes: Totals may not add due to rounding.
* Compounded Annual Growth
**
- ------------------------------------------------------------------------------
Source: Arthur Andersen
- ------------------------------------------------------------------------------
As indicated in the preceding table, the overall hotel demand in
Aurora has grown between 1995 and 1996. The largest segment of
demand in the market is leisure-related business due to the
proximity of Sea World and Geauga Lake. However, the commercial
individual traveler segment of demand reflects the largest
increase in 1996, growing by 19.6 percent over 1995. As total
occupied demand has grown, average room rates have exhibited a
strong growth. Overall, room rates increased 14.9 percent, or
$9.50, in 1996.
Our analysis of future demand growth includes assumptions of base
growth in demand, unsatisfied demand, and induced demand. The
following paragraphs define these sources of demand growth.
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Aurora Inn Page 49
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Base Growth in Demand
Base growth in demand is that growth related to the strength of
the local economy. This growth assumption incorporates demand
generated by other factors, such as the addition of a new
convention center, new office development and absorption,
improved transportation access to the market area, etc. Our
assumptions take into account historical demand trends and the
factors contributing to these trends. On the basis of our
interviews with management and on our analysis of economic growth
in the local market, base growth by market segment is estimated
for each year.
Unsatisfied Demand
During peak periods of demand, many travelers, in search of
convenient accommodations among the hotels in the competitive
supply, are required to use alternative hotels due to lack of
capacity in the immediate area. These groups and individuals will
seek lodging in one of the other properties in the market area or
will leave the immediate market. Those room nights that are not
accommodated in the immediate market may be referred to as
"unsatisfied demand." In 1996, we estimate there will be a total
of 40,900 room nights of unsatisfied demand. Our calculations,
include the addition of the Hampton Inn. However it does not
include the possible expansion of the subject property and the
addition of other hotels to the competitive market. These
expansions have not been approved by their respective Planning
Boards. With the inclusion of these properties there is likely to
be less room nights of unsatisfied demand.
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Induced Demand
Induced demand is defined as new room nights generated by the
addition of new hotels to the market area or by the repositioning
and marketing of an existing hotel to fulfill consumer needs not
previously met by the existing supply. Induced demand may also
include room nights generated by special events which are not
expected to remain permanently in the market area. In 1998 and
1999, we estimate that a number of new room nights will be
induced into the competitive supply, which are attributed to the
opening of the Hampton Inn in Solon. In 1998 and 1999, we
estimate that approximately 4,500 and 7,200 will be induced into
the Aurora market, respectively. The opening of the Hampton Inn
is expected to result in strong demand from the commercial
travelers segment, due to location in the Solon Industrial
Service District.
DEMAND SEGMENTATION AND ESTIMATED DEMAND GROWTH
Accommodated demand in the competitive hotel supply has been
segmented into three major market segments: Commercial Individual
Travelers, Leisure Individual Travelers, and Groups. On the basis
of our interviews with management of the subject and its
competition and based upon an analysis of economic trends in the
market, we have estimated future growth in demand in the
competitive supply by market segment. The following paragraphs
define the individual market segments and our estimates of demand
growth. A detailed analysis of supply and demand growth for the
market is presented on the following page.
<PAGE>
<TABLE>
Aurora Inn
Estimated Growth in Lodging Supply and Demand
Market Area: Aurora, Ohio
Compound
Annual
Estimated Growth
1996 1997 1998 1999 2000 2001(1996-2001)
__________ _____ ______ _____ _____ _____ ___________
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial Individual Travelers 2.0% 2.0% 2.0% 2.0% 2.0%
Gross Demand 34,500 35,200 35,900 36,600 37,300 38,000
Less: Unsatisfied Demand 4,500 4,600 3,000 3,350 3,900 4,600
_______________________ _______ ______ _______
Net Demonstrated Demand 30,000 30,600 32,900 33,250 33,400 33,400
Plus Induced Demand 0 3,000 4,800 4,900 5,000
_______________________ _______ ______ _______
TOTAL SEGMENT DEMAND 30,000 30,600 35,900 38,050 38,300 38,4005.1%
Growth over Previous Year 2.0% 17.3% 6.0% 0.7%0.3%
% of Total Market Demand 37% 37% 36% 37% 37% 37%
Leisure Individual Travelers 2.0% 2.0% 2.0% 2.0% 2.0%
Gross Demand 67,600 69,000 70,400 71,800 73,200 74,700
Less Unsatisfied Demand 33,800 34,500 25,000 26,000 27,000 28,500
______________ ________ _______ _______ _______
Plus: Induced Demand 0 0 1,500 2,400 2,400 2,400
______________ ________ _______ _______ _______
TOTAL SEGMENT DEMAND 33,800 34,500 46,900 48,200 48,600 48,6007.5%
Growth over Previous Year 2.1% 35.9% 2.8% 0.8% 0.0%
% of Total Market Demand 42% 42% 47% 46% 47% 46%
Groups 1.5% 1.5% 1.5% 1.5% 1.5%
Gross Demand 19,900 20,200 20,500 20,800 21,100 21,400
Less Unsatisfied Demand 2,600 2,600 2,600 3,100 3,600 3,800
______________ _______ ______ ______ ______
Net Demonstrated Demand 17,300 17,600 17,900 17,700 17,500 17,600
Plus Induced Demand 0 0 0 0 0
______________ ______ ______ ______ ______
TOTAL SEGMENT DEMAND 17,300 17,600 17,900 17,700 17,500 17,6000.3%
Growth over Previous Year 1.7% 1.7% -1.1% -1.1% 0.6%
% of Total Market Demand 21% 21% 18% 17% 17% 17%
TOTAL MARKET DEMAND
Gross Demand 122,000124,400 126,800 129,200 131,600 134,100
Less Unsatisfied Demand 40,900 41,700 30,600 32,450 34,500 36,900
______________ _______ _______ _______ _______
Net Demonstrated Demand 81,100 82,700 96,200 96,750 97,100 97,200
Plus Induced Demand 0 0 4,500 7,200 7,300 7,400
______________ _______ _______ _______ _______
TOTAL MARKET DEMAND 81,100 82,700 100,700 103,950 104,400 104,600 5.2%
Growth over Previous Year 2.0% 21.8% 3.2% 0.4% 0.2%
ANNUAL SUPPLY (ROOM NIGHTS) 131,765 131,765 168,265 168,265 168,265 168,2655.0%
Growth over Previous Year 0.0% 27.7% 0.0% 0.0% 0.0%
MARKET OCCUPANCY 62% 63% 60% 62% 62% 62%
</TABLE>
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Commercial Individual Traveler
This segment of demand includes individual business travelers
visiting companies and other organizations located in the Aurora
market area. Much of the corporate demand accommodated by the
hotels in the competitive supply is generated by companies
located in the market area. These room nights may be booked at
both published and discounted room rates. Many organizations in
the market area have accounts with the hotels in the competitive
supply. The hotels in the market area offer large organizations a
price discount in order to secure a higher percentage of an
organization's business and volume.
Commercial demand runs year round but is especially strong from
October to April. Commercial demand is generated from Kent State
University, and various corporations located in the area. The
University's demand stems from guest lectures or individuals with
business in conjunction with the university. Besides the
university, a number of corporations provide another source of
commercial demand to the marketplace. These companies include
Automated Packaging, Alltell Phone Systems, Curtis Lehear, and
Inland Still.
This segment of demand accounted for approximately 37 percent of
total accommodated demand among the competitive lodging supply at
the end of 1996. Demand in this segment increased by 19.6 percent
in 1996 over the levels achieved in 1995. There has been a
greater emphasis by the hotels to market to this segment in the
past few years.
We estimate that there were approximately 4,500 room nights of
unsatisfied commercial individual traveler demand at the end of
1996. This demand occurs during peak periods when the market was
sold out. Unsatisfied demand is expected to decrease as a result
of the opening of the Hampton Inn. By 1999, we estimate that the
unsatisfied demand will decrease to approximately 3,000 room
nights per year. Thereafter, we estimate that unsatisfied demand
will increase each year.
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In 1998 and 1999, we estimate that a number of room nights will
be induced into the marketplace as result of the opening of the
Hampton Inn. We estimate that approximately 3,000 rooms will be
induced in 1998 and the total number of room nights induced into
the market will increase to 4,800 room nights by 1999.
Overall, the commercial individual traveler segment is estimated
to increase at a compound annual rate of 5.1 percent between the
1996 and 2001. We expect this segment of demand to account for
approximately 38,400 room nights by 2001, or 37 percent of total
accommodated demand.
Leisure Individual Travelers
This segment of demand includes individual travelers that are
visiting the market area on vacation or for other non-commercial
reasons. This segment of demand includes leisure travelers
booking suites and guest rooms at rack rates during special
events and also includes individuals seeking discounted rates and
special packages offered by the hotels during weekends. Demand in
this segment occurs throughout the year, but is busier during the
summer months, generated by the various amusement parks and
recreational facilities in the Aurora area.
The Aurora market area is located within 500 miles of 55 percent
of the U.S. population and conveniently located to all major
attractions in Ohio. Demand is generated from families visiting
Sea World of Ohio, Geauga Lake Amusement Park, and Aurora Farms
Factory Outlets. Families generally spend one to two days during
the peak season of the summer. During the peak period the hotels
in the competitive supply are likely to sell-out. The remainder
of the year is characterized by low leisure demand, because of
the seasonal nature of the amusement facilities.
However, additional leisure demand may be generated from recent
extension of the Sea World and Geauga Lake seasons by
approximately one month, from early May to the end of September.
Aurora's City Planning is also reviewing a proposal for an
enclosed $3 million ice-skating rink. Demand is also generated
the from bus tours to the area's factory outlet centers with 70
stores.
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Leisure Individual Traveler demand accounted for
approximately 42 percent of total accommodated demand among the
competitive lodging supply at the end of 1996. Demand in this
segment decreased slightly by 0.7 percent in 1996 over the levels
achieved in 1995. Management indicated that this decline was due
to the heavy rains in the month of June.
We estimate that there were approximately 33,800 room nights of
unsatisfied demand in the leisure individual traveler segment at
the end of 1996. This demand occurs during peak periods when the
market was sold out in the summer. Unsatisfied demand is expected
to decrease as a result of the opening of the Hampton Inn. By
1999, we estimate that the unsatisfied demand will decrease to
approximately 25,000 room nights per year. However, from 1999 to
2001 we estimate that the number of room nights which are
unsatisfied will grow by approximately five percent.
In 1998 and 1999, we estimate that a number of room nights will
be induced into the marketplace as result of the opening of the
Hampton Inn. We estimate that approximately 1,500 rooms will be
induced in 1998 and the total number of room nights induced into
the market will increase to 2,400 room nights by 1999.
Overall, the leisure individual traveler segment is estimated to
increase at a compound annual rate of 7.5 percent between the
1996 and 2001. We expect this segment to account for
approximately 48,600 room nights by 2001, or 46 percent of total
accommodated demand.
Groups
This segment of demand includes night demand associated with
corporate board meetings, training seminars, special events, and
small workshops, from major employers in the market area. Hotel
demand from this segment is often accommodated at a discounted
room rate dependent upon the number of rooms guaranteed by each
company and the potential for ancillary group-related revenues.
Demand from these groups occur primarily during the mid-week
(Monday through Thursday). Also included in this segment are
social, military, educational, religious, fraternal, state and
regional groups. Demand from these groups occur primarily during
weekend.
<PAGE>
Aurora Inn Page 55
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This segment of demand accounted for approximately 21 percent of
total accommodated demand among the competitive lodging supply at
the end of 1996. Demand in this segment increased by 5.5 percent
in 1996 over the levels achieved in 1995.
We estimate that there were approximately 2,600 room nights of
unsatisfied demand in this market segment at the end of 1996.
This demand occurs during peak periods when the market was sold
out. Despite the opening of a new Hampton Inn, unsatisfied demand
is expected to increase each year. Hampton Inn hotels do not have
sufficient meeting rooms to attract groups, and therefore, it is
unlikely that this hotel will be able to attract all groups that
were turned away.
Overall, the group segment is estimated to remain stable between
the 1996 and 2001. We expect this segment to account for
approximately 17,600 room nights by 2001, or 17 percent of total
accommodated demand.
Conclusion
Overall, the lodging market in Aurora has grown over the past two
years. Demand for accommodations in the competitive supply is
expected to continue to reflect conservative growth in the
marketplace. We estimate that aggregate market demand will
outpace the addition of new space in the marketplace. Total
market demand is estimated to increase at a compound annual rate
of five percent between 1996 and 2001. During the same period,
supply is estimated to remain constant. As a result, market
occupancy is estimated to remain constant at 62 percent in 1996
to 2001.
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C.3 ESTIMATED OCCUPANCY AND AVERAGE ROOM RATE
We have prepared detailed estimates of average annual occupancy
and average daily room rate for the subject property from January
1, 1997 through December 31, 2001. The following section presents
our analysis of estimated future occupancy and average daily room
rate.
MARKET PENETRATION & AVERAGE ANNUAL OCCUPANCY
This analysis uses the concept of "fair" share and market
penetration. By forming a penetration analysis of market lodging
demand, the future average annual occupancy at the subject Aurora
Inn is estimated. Using this technique, the property is first
evaluated compared to its competition, then its potential market
share is calculated on the basis of its relative appeal to the
market segment. A hotel's "fair" share of market demand is said
to be equal to its fair share of supply; i.e., a 100-room hotel
in a market of 1,000 rooms would have a "fair" share of demand of
ten percent of total market demand. A "market penetration" of 100
percent indicates a property is capturing its exact "fair" share
of demand. Penetration in excess of, or lower than, 100 percent
indicates a hotel is likely to be viewed more or less favorably
than the competition by the respective market segment and thus
accommodates more or less than its fair share.
The following table presents our estimates of the year-end 1996
market penetration by demand segment for the subject and for the
hotels in the identified competitive lodging supply.
- ----------------------------------------------------------------------------
Estimated 1996 Penetration By Market Segment
For the Identified Competitive Supply
- ----------------------------------------------------------------------------
- ---------------- -------------- -------------- ------------ ----------------
Hotel Name Corporate Leisure Groups Overall
Individuals Individuals Penetration
- ---------------- -------------- -------------- ------------ ----------------
Subject Property 111% 120% 100% 112%
Best Western
Woodlands 83% 104% 115% 98%
Holiday Inn Kent 112% 87% 85% 96%
- ---------------- -------------- -------------- ------------ ----------------
Source: Arthur Andersen / Market Interviews
- ----------------------------------------------------------------------------
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Aurora Inn Page 57
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By combining the above information with our market and property
analysis, we calculate the future occupancy of the subject hotel
by market segment for the estimation period 1997 to 2001. A
detailed penetration analysis of the subject hotel is presented
on the following page. The following paragraphs summarize our
penetration analysis by market segment.
<PAGE>
<TABLE>
Aurora Inn
Penetration Analysis
Market Area: Aurora, Ohio
Estimated
1996 1997 1998 1999 2000 2001
_________ ______ _______ ______ _____ _____
<S> <C> <C> <C> <C> <C> <C> <C>
ANNUAL SUPPLY (ROOM NIGHTS) 131,765 131,765 168,265 168,265 168,265 168,265
SIZE OF SUBJECT PROPERTY 69 69 69 69 69 69
FAIR SHARE (SUPPLY) 19.1% 19.1% 15.0% 15.0% 15.0% 15.0%
Commercial Individual Travelers
Total Demand 30,000 30,600 35,900 38,050 38,300 38,400
Fair Share of Demand 5,734 5,849 5,373 5,695 5,733 5,748
Penetration Rate 111% 112% 115% 115% 115% 115%
______ ______ ______ ______ _____ ______
Demand Captured 6,400 6,600 6,200 6,500 6,600 6,600
% of Total Demand Captured 37% 37% 37% 38% 38% 38%
Leisure Individual Travelers
Total Demand 33,800 34,500 46,900 48,200 48,600 48,600
Fair Share of Demand 6,460 6,594 7,020 7,214 7,274 7,274
Penetration Rate 120% 120% 115% 115% 115% 115%
_____________ ______ _______ ______ ______
Demand Captured 7,700 7,900 8,100 8,300 8,300 8,300
% of Total Demand Captured 44% 45% 48% 48% 48% 48%
Groups
Total Demand 17,300 17,600 17,900 17,700 17,500 17,600
Fair Share of Demand 3,307 3,364 2,679 2,649 2,619 2,634
Penetration Rate 100% 95% 95% 95% 95% 95%
______ ______ ______ _______ ______ ______
Demand Captured 3,300 3,200 2,500 2,500 2,500 2,500
% of Total Demand Captured 19% 18% 15% 14% 14% 14%
TOTAL MARKET DEMAND
Total Demand 81,100 82,700 100,700 103,950 104,400 104,600
Fair Share of Demand 15,501 15,807 15,072 15,559 15,626 15,656
Penetration Rate 112% 112% 111% 111% 111% 111%
_____________ ______ ______ ______ ______
Demand Captured 17,400 17,700 16,800 17,300 17,400 17,400
ESTIMATED OCCUPANCY 69% 70% 67% 69% 69% 69%
MARKET OCCUPANCY 62% 63% 60% 62% 62% 62%
</TABLE>
<PAGE>
<PAGE>
Aurora Inn Page 59
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Commercial Individual Travelers
The subject hotel is expected to continue to receive more than
its fair share of demand in the commercial individual traveler
segment relative to that accommodated by the hotels in the
competitive supply. In 1996, The Holiday Inn Kent received the
highest market penetration rate with 112 percent. This hotel
competes for the commercial individual demand from the university
and industrial commercial area that are located in between Kent
and Aurora. Commercial individual travelers demand is expected to
comprise 37 percent of demand at the subject, Aurora Inn, for
year-end 1996, which represent a market penetration of 111
percent. In the past the management of the subject hotel has not
aggressively marketed to this segment. However, there has still
been strong growth in the last two years for this segment.
Management has started an aggressive campaign to attract this
segment and has established contracts with several of the major
corporations in the market area. Throughout the projection
period, we estimate that the number of commercial room nights
captured at the subject hotel will grow by two and a half
percent. As a result, market penetration at the property is
expected to increase slightly from 111 percent in 1996 to 115
percent in 2001. Occupied demand in this segment is expected to
equal 38 percent, or 6,600 rooms of total occupied demand in
2001.
Leisure Individual Travelers
The subject hotel achieved the highest penetration in this
segment in 1996. The hotel is ideally located in proximity to Sea
World and Geauga Lake for summertime family vacationers, and has
many amenities including tennis courts, kiddie swimming pool and
indoor and outdoor swimming pools which are attractive to leisure
travelers. During the spring, the subject is able to draw
weddings and other groups, including bus tours to outlets and
antiquing. The subject is also able to generate demand from the
local community with party packages for beer festivals, wine
tasting, and New Years Eve. The hotel is frequently sold out and
cannot accommodate any more demand during the summer months. As a
result, given this seasonality for leisure demand, there appears
to be an effective maximum on the subject property's ability to
accommodate leisure-related demand. The addition of the Hampton
Inn is expected to induce new leisure demand to the market. As a
result of this addition to supply, we estimate that the
<PAGE>
Aurora Inn Page 60
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penetration rate will decrease from 120 percent in 1997 to 115
percent in 2001. Occupied demand in this segment is expected to
equal 48 percent, or 8,300 rooms of total occupied demand in
2001.
Groups
The Best Western Woodlands has been the strongest in penetrating
this segment of demand. The facilities and the location are
strong attractions to this segment of demand. They have been able
to attract groups through special pricing and being adjacent to
the Sea World property. The subject hotel currently attracts its
fair share of group demand. However, management is targeting
commercial travelers as a source of growth, and plans to reduce
the number of room nights accommodated by the price-sensitive
groups segment of demand. We estimate that the penetration rate
will decrease to 95 percent in 1997 and will remain stable
throughout the projection period. Occupied demand in this segment
is expected to equal 15 percent, or 2,500 rooms of total occupied
demand in 2001.
The estimated market mix of the subject hotel in a representative
year, at 69 percent occupancy, is presented on the following
table:
- -----------------------------------------------------------------------
Estimated Market Segmentation In A Stabilized Year (2000)
Aurora Inn
- -----------------------------------------------------------------------
Occupied Percent of Penetration
Market Segment Room Nights Total Occupancy Rate
- ------------------ ---------------- ------------------- --------------
Corporate
Individual
Travelers 6,600 38% 115%
Leisure
Individual
Travelers 8,300 48% 115%
Groups 2,500 14% 95%
- ------------------ ----------------------------------------------------
Total 17,400 100% 111%
- -----------------------------------------------------------------------
Source: Arthur Andersen/Market Interviews
- ---------------- ------------------------------------------------------
Our estimates of the overall market penetration and resulting
occupancy for the subject hotel from 1995 through December 31,
2001 are presented on the following table.
<PAGE>
Aurora Inn Page 61
- -------------------------------------------------------------------------
-------------------------------------------------------
Estimated Penetration And Occupancy
Aurora Inn
-------------------------------------------------------
Estimated Overall Estimated
Year Penetration Rate Occupancy
------------- ------------------------ ----------------
1995 116% 67%
1996 112% 69%
1997 112% 70%
1998 111% 67%
1999 111% 69%
2000 111% 69%
2001 111% 69%
------------- ------------------------ ----------------
Source: Arthur Andersen
---------------- --------------------------------------
PROJECTED AVERAGE DAILY ROOM RATE
Growth in the average daily room rate by market segment for the
subject hotel is summarized in the following paragraphs.
Commercial Individual Travelers
The average room rate in the commercial individual traveler
segment was approximately $64.50 in 1996 at the subject hotel.
This represented an increase over the rate achieved by this
segment in 1995. We estimate that the average room rate in this
segment will increase three percent in 1997 and two percent in
1998 and 1999. Due to the property's proximity to major sources
of corporate demand and its price-sensitive nature, growth is
projected to be conservative. Thereafter, we assume that average
rates will increase by 2.5 percent each year.
Leisure Individual Traveler
The average room rate in the leisure individual traveler was
approximately $118.50 in 1996 at the subject hotel. We estimate
that the average room rate in this segment will increase three
percent in 1997 and two percent in 1998 and 1999. Thereafter, we
assume that average rates will increase by approximately 2.5
percent each year.
<PAGE>
Aurora Inn Page 62
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Groups
The average room rate in the groups segment was approximately
$71.00 in 1996 at the subject hotel. We estimate that the average
room rate in this segment will increase by two percent each year
from 1997 to 1999. Thereafter, we assume that average rates will
increase by approximately 2.5 percent each year.
The following table presents our estimates of average daily room
rate for the Aurora Inn.
- -------------------------------------------------------------------
Estimated Average Daily Room Rate
Aurora Inn
- -------------------------------------------------------------------
Year Average Rate % Growth
- -------------- ------------------------- -------------------------
1995 $85.82 ----
1996 89.50 4.3%
1997 92.50 3.4%
1998 96.00 3.8%
1999 98.00 2.1%
2000 100.00 2.0%
2001 103.00 3.0%
- -------------- ------------------------- -------------------------
Source: Arthur Andersen
- -------------- -------------------------------------- -----------------
<PAGE>
Aurora Inn Page 63
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D. THE APPRAISAL PROCESS
The purpose of this appraisal is to estimate the "as is" market
value the subject property in accordance with accepted value
estimating procedure. "The valuation process is a systematic
procedure employed to provide the answer to a client's question
about real property value. It is a model of appraisal activity,
reflecting an understanding of value and the methods used in the
value estimation.3
There are three traditional approaches involved in the valuation
of real property. These are known as the cost approach, the sales
comparison approach, and the income capitalization approach. Each
of the three approaches is related to the other, as they involve
the gathering and analysis of sales, cost, and income data that
pertain to the property being appraised. Although all three
valuation procedures are given consideration, the inherent
strengths and weaknesses of each approach and the nature of the
subject property must be evaluated to determine which will
provide the most supportable estimates of market value. The
appraiser is then free to select one approach to arrive at a
final value estimate.
D.1 THE COST APPROACH
Valuation by the cost approach is based on the principle of
substitution. This principle asserts that an informed investor
will not pay more for a property than the cost to build a
substitute property of equivalent utility. Therefore, the cost
approach, when utilized in an appraisal, estimates the cost of
reproducing or replacing the subject property including
improvements and land, less an allowance for depreciation based
upon the physical condition, functionality, and economic
environment or the building. Although this approach is
particularly applicable to owner-occupied or special-use
properties in the absence of an investor market, it also
recognizes and establishes the relationship between cost and
market-derived values.
- ------------
3 American Institute of Real Estate Appraisers. The Appraisal
of Real Estate, Chicago, Illinois, 1989, p. 73.
<PAGE>
Aurora Inn Page 64
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In the subject appraisal, the building is now operating as a
business in the production of income to the various components
which comprise the total operation of a hotel. Although the
replacement cost of the subject hotel could be established, the
estimate of market depreciation is a very subjective
consideration which significantly affects the value indication.
The depreciation estimate could only be realistically estimated
by comparison to other approaches, thereby reducing the cost
approach to coincide with one of the other approaches, and losing
the objectivity of the approach as a third measure of value. In
our opinion, an informed and experienced purchaser would not rely
on the cost approach in establishing an indication of market
value for the subject property. Therefore, this approach has not
been included in our analysis.
D.2 SALES COMPARISON APPROACH
The Sales Comparison Approach estimates market value based upon a
comparative analysis of recent sales of improved properties that
are similar in function size, income production, and use to the
appraised property. This approach to value assumes that the
market will determine a price for the Aurora Inn in the same
manner that it determines the price for comparable properties. To
apply the sales comparison approach, the appraiser employs a
number of appraisal techniques, including the principle of
substitution which holds that the value of a property that is
replaceable in the marketplace tends to be set by the cost of
acquiring an equally desirable property. Additional
considerations include examination of market conditions
prevailing at the time of sale as compared to those at the date
of valuation. The following pages explain the application of the
sales comparison approach to the subject property.
To develop the sales comparison approach, we researched the
subject market and the surrounding region for recent sales of
similarly improved properties. From our research, we have
selected several sales for further analysis and direct comparison
with the Aurora Inn. These sales represent the most recent sales
of improved properties and are considered to be competitive
alternatives in the marketplace. We identified three comparable
hotel sales, which are primarily located throughout the Midwest.
<PAGE>
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We have made adjustments to the price paid per room on the basis
of a comparison of each hotel relative to the subject. Our
analysis of the market recognizes primary factors which affect
the pricing of hotels including adjustments related to
renovations planned at the time of purchase, interest appraised,
strength of the local lodging market, size and extent of the
facilities, condition of the facilities, and other risk factors
such as the property's location relative to demand generators and
area attractions and the ease of access to the hotel. Presented
on the following page is a summary of each comparable sale and
our adjustments. Tables detailing pertinent information related
to each comparable sale are presented in the Addenda of this
report.
<PAGE>
<TABLE>
SALES COMPARISON ADJUSTMENT GRID
AURORA INN, AURORA, OH
Subject
Hotel Name Aurora Inn Holiday Inn Clarion Hotel Hampton Inn
__________ ___________ _____________ ___________
<S> <C> <C> <C> <C>
Location Aurora, OH Strongville, OHWorthington, OH Indianapolis, IN
Interest Transferred Fee Simple Fee Simple Fee Simple Fee Simple
Number of Units (Rooms/Suites 69 299 215 129
Occupancy 69% 68% 58% 74%
Average Daily Rate $89.75 $53.00 $55.00 $59.00
Rooms Revenue $1,559,644 $3,933,225 $2,503,353 $2,066,843
Date of Sale Oct. 95 Jan. 95 Sep. 95
Adjusted Sales Price $5,037,000 $11,400,000 $7,070,000 $7,701,549
Adjusted Sales Price Per Room $73,000 $38,127 $32,884 $59,702
Gross Room Revenue
Multiplier (GRRM) 3.2 2.9 2.8 3.7
OTHER ADJUSTMENTS (1)
Transaction Market Conditions 4.5% 4.5% 4.5%
Location & Strength of Local Market 35.0% 45.0% 10.0%
Extent and Quality of the Facilities 10.0% 20.0% 10.0%
Size of the Facilities 5.0% 5.0% 0.0%
ADJUSTED PRICE PER ROOM $58,900 $57,400 $74,300
_______ ________ _______
Note:
(1) A negative adjustment indicates that the comparable sale had a superior location, size &
extent of facilities, condition or location than that of the subject. As a result, the
sale price must be adjusted downward to make the sale comparable with the subject
property. A positive adjustment indicates that the comparable sale was inferior to that
of the subject and the price per room must be increased.
</TABLE>
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Aurora Inn Page 67
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The following paragraphs briefly present a rationale for the
major adjustments made to the price per room of each identified
comparable sale.
Holiday Inn (Strongsville, Ohio)
This property is located in Strongsville, Ohio, a suburb of
Cleveland. This original purchase price of the hotel was
$7,900,000. The hotel was purchased from International Hotel
Investors Limited by Impac Hotel Group with the intention of
renovating and upgrading the property to a Holiday Inn Select.
This buyer indicated that approximately $3.5 million was spent on
the property to renovate/upgrade the parking lot, public spaces,
meeting space, and replace select case goods and soft goods in
the guest rooms. We have adjusted the original sales price to
$11,400,000 or $38,100 per room, to reflect this capital
investment. Four additional adjustments were made to the sales
price per room:
- Transaction Market Conditions: the sales price per room was
increased by 4.5 percent. This adjustment accounts for inflation
and changes in the market for transaction s since October 1995.
- Location and Strength of Local Market: the sales price per
room was increased by 35 percent. The property is situated in a
suburb of Cleveland. This market is price-sensitive than Aurora
as exhibited by the low average rates achieved by the property.
- Extent and Quality of the Facilities: the sales price per
room was increased by ten percent, to account for the superior
amenities at the subject property.
- Size: the sales price per room was increased by five percent
to account for the larger size of the comparable..
On the basis of this analysis, the adjusted price per room
of the Holiday Inn Strongsville is estimated to be $58,900 per
room.
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Aurora Inn Page 68
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Hilton Inn - now Clarion Hotel (Worthington, OH)
This property is located in Worthington, Ohio. The original
purchase price of the hotel was $5,070,000. The hotel was
purchased from Orlando Hotel Association by Boulevard Motel
Corporation c/o Clarion Hotel with the intention of renovating
the property. Shortly after purchase, the hotel was converted to
a Clarion Hotel. The buyer indicated that approximately $2
million was spent on the property to renovate. The renovation
included a reduction of room count from 231 to 215 to increase
business amenities, and a soft goods upgrade. On the basis of
this, we adjusted the sales price to $7,070,000. Four additional
adjustments were made to the sales price per room.
- Transaction Market Conditions: the sales price per room was
increased by 7.5 percent. This adjustment accounts for inflation
and changes in the market for transaction since January 1995.
- Location and Strength of Local Market: the sales price per
room was increased by 45 percent. This property is located in a
suburban area of Ohio and is not able to command as high an
occupancy and daily rate as the subject, since it does not have
the same proximity to tourism.
- Extent and Quality of the Facilities: the sales price
per room was increased by twenty percent. Even though it
is full-service hotel, this property has fewer amenities
than the subject.
- Size: the sales price per room was increased by five percent
to account for the comparable's much larger size.
On the basis of this analysis, the adjusted price per room
of the Clarion Hotel Worthington is estimated to be $57,400 per
room.
<PAGE>
Aurora Inn Page 69
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Hampton Inn (Indianapolis, IN)
The Hampton Inn, which is located in the Castleton area with
visibility from Interstate 69. It was purchased from U.S. Lodging
of Indianapolis, L.P. at a sales price of $7,065,000. The buyer
was Equity Inns Partnership, a real estate investment trust. At
time of sale, the property was in good condition, with
approximately $637,000 of renovations planned. We have adjusted
the original sales price to $7,702,000 or $59,700 per room, to
reflect additional capital cost intended for investment into the
property. Four additional adjustments were made to the sales
price per room:
- Transaction Market Conditions: the sales price per room was
increased by 4.5 percent. This adjustment accounts for inflation
and changes in the market for transaction s since September 1995.
- Location and Strength of Local Market: the sales price per
room was increased by 25 percent. Even though the property is
visible from the interstate, it is not able to command as high a
daily rate as the subject.
- Extent and Quality of the Facilities: the sales price per
room was increased by fifteen percent. This is property is a
limited-service facility and has fewer amenities in comparison to
the subject hotel.
On the basis of this analysis, the adjusted price per room of the
Hampton Inn Indianapolis is estimated to be $74,300 per room.
Information has been presented on several comparable hotel sales
which are considered to be relatively similar to the Aurora Inn.
After adjustments, the comparable hotel sale transactions
indicate a unit price range for the subject hotel from $57,400 to
$74,300 per room.
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We have based our analysis on the range of sale prices of the
Holiday Inn, Clarion Hotel, and the Hampton Inn. On the basis of
an analysis of these sales, we have estimated the market value of
the fee simple interest in the subject property by this approach
to be approximately $67,000 per room, or $4,620,000 (rounded) as
of January 1, 1997.
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D.3 INCOME APPROACH
The income approach to value converts anticipated future benefits
into an estimate of present value. In this respect, the process
is very similar to pricing in other capital markets. The approach
requires the careful estimation of future benefits -- income
before debt service, residual values, etc. -- and application of
investor yield or return requirements. The income approach brings
together reasoned estimates of future revenues and expenses with
the investor's yield requirements. These yield requirements, in
turn, reflect varieties of risk, including property type,
location, local market conditions, and so forth.
Yield and direct capitalization techniques are conventionally
used to convert future benefits to value -- the discounted cash
flow (DCF) technique and the overall capitalization rate (OAR)
technique. The DCF technique entails (1) modeling the future
performance of the subject, over a specific holding period, (2)
estimating the future value (reversionary value) at the end of
the holding period, and (3) converting the stream of periodic
benefits and reversionary value, through a discounting process at
investor yields, to a present value. The selection of an
appropriate discount rate is essential to this process.
By comparison, direct capitalization using an overall rate (OAR)
converts a single, "normalized" year's income or income before
debt service into a value by dividing the appropriate
capitalization rate into the normalized income. Subsequent
adjustments are then made to take into consideration variations
from normalized operations. In order to value the Aurora Inn, we
have utilized only the discounted cash flow method for the income
approach. The direct capitalization method has not been used
because most investors do not use it as a tool to analyze value
from income. In addition, it is difficult to reflect future
increases in occupancy and room rate using direct capitalization.
Finally, using a "normalized" or stabilized net operating income
is highly speculative and can produce erroneous results.
The discussion on the following pages provides a summary of our
projection of revenues, expenses, discount rates, capitalization
rates, and many of the other assumptions which are incorporated
in the income approach. The discussion of revenues and expenses
begins with an examination of historical trends. Finally,
<PAGE>
Aurora Inn Page 72
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estimates are made with regard to the appropriate projection of
revenues, expenses, and capital items.
HISTORICAL FINANCIAL PERFORMANCE
The historical operating results for the subject hotel for the
years ended 1994 and 1995 is presented on the following page. The
next page presents the historical operating results for the
subject hotel through year-to-date November 31, 1995 and 1996.
<PAGE>
<TABLE>
Recast of Historical Financial Statements
Aurora Inn - Aurora, Ohio
1994 Actual Income
Per Occupied
Amount Ratio Per Room Room/Day
____________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Days Open/Year 365
Available Rooms (Daily) 69
Available Rooms (Annually) 25,185
Occupancy Percentage 63.9%
Occupied Rooms 16,096
Average Room Rate $75.40
REVENUES
Rooms $1,213,635 46.1% $17,589 $75.40
Food & Beverage 1,262,859 48.0% 18,302 78.46
Telephone 22,332 0.8% 324 1.39
Swimming Pool(1) 114,809 4.4% 1,664 7.13
Rentals and Other
Income (Net)(2) 16,841 0.6% 244 1.05
_______ _______ _______ _______
Total Revenues $2,630,476 100.0% $38,123 $163.42
DEPARTMENTAL EXPENSES
Rooms $231,138 19.0% $3,350 $14.36
Food & Beverage 781,457 61.9% 11,325 48.55
Telephone 34,702 155.4% 503 2.16
Swimming Pool 51,146 44.5% 741 3.18
_______ _______ _______ _______
Total Departmental
Expenses $1,098,443 41.8% $15,919 $68.24
TOTAL DEPARTMENTAL INCOME $1,532,033 58.2% $22,203 $95.18
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $278,876 10.6% $4,042 $17.33
Sales and Marketing 207,441 7.9% 3,006 12.89
Management Fees 105,219 4.0% 1,525 6.54
Energy 179,184 6.8% 2,597 11.13
Property Operations &
Maintenance 113,814 4.3% 1,649 7.07
_______ _______ _______ _______
Total Undistributed
Operating $884,534 33.6% $12,819 $54.95
INCOME BEFORE FIXED CHARGES $647,499 24.6% 9,384 40.23
FIXED CHARGES
Property Taxes $28,800 1.1% $417 $1.79
Personal Property Taxes 5,343 0.2% 77 0.33
Insurance on Building &
Contents 4,906 0.2% 71 0.30
_______ _______ _______ _______
Total Fixed Charges $39,049 1.5% $566 $2.43
INCOME BEFORE RESERVE $608,450 23.1% $8,818 $37.80
_______ _______ _______ _______
Notes:
The above operating statements have been summarized into the uniform system of accounts.
These statements have not been audited by Arthur Andersen.
(1) Includes Membership and Guest fees to the swimming pool club. This department also
includes rental fees paid for the use of the pool.
(2) Includes vending and sundry sales, salvage sales, no show revenue, rents, and other
miscellaneous income.
Recast of Historical Financial Statements
Aurora Inn - Aurora, Ohio
1995 Actual Income
Per Occupied
Amount Ratio Per Room Room/Day
____________________________________________________________________________
Number of Days Open/Year 365
Available Rooms (Daily) 69
Available Rooms (Annually) 25,185
Occupancy Percentage 66.6%
Occupied Rooms 16,776
Average Room Rate $85.82
REVENUES
Rooms $1,439,652 51.3% $20,865 $85.82
Food & Beverage 1,200,785 42.8% 17,403 71.58
Telephone 27,925 1.0% 405 1.66
Swimming Pool(1) 124,966 4.4% 1,811 7.45
Rentals and Other
Income (Net)(2) 15,284 0.5% 222 0.91
_______ _______ _______ _______
Total Revenues $2,808,612 100.0% $40,705 $167.42
DEPARTMENTAL EXPENSES
Rooms $256,326 17.8% $3,715 $15.28
Food & Beverage 815,679 67.9% 11,821 48.62
Telephone 41,454 148.4% 601 2.47
Swimming Pool 58,601 46.9% 849 3.49
_______ _______ _______ _______
Total Departmental
Expenses $1,172,060 41.7% $16,986 $69.87
TOTAL DEPARTMENTAL INCOME $1,636,552 58.3% $23,718 $97.55
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $343,891 12.2% $4,984 $20.50
Sales and Marketing 237,738 8.5% 3,445 14.17
Management Fees 112,339 4.0% 1,628 6.70
Energy 175,942 6.3% 2,550 10.49
Property Operations &
Maintenance 125,818 4.5% 1,823 7.50
_______ _______ _______ _______
Total Undistributed
Operating $995,728 35.5% $14,431 $59.35
INCOME BEFORE FIXED CHARGES $640,824 22.8% 9,287 38.20
FIXED CHARGES
Property Taxes $30,000 1.1% $435 $1.79
Personal Property Taxes 5,007 0.2% 73 0.30
Insurance on Building &
Contents 5,846 0.2% 85 0.35
_______ _______ _______ _______
Total Fixed Charges $40,853 1.5% $592 $2.44
INCOME BEFORE RESERVE $599,971 21.4% $8,695 $35.76
_______ _______ _______ _______
Notes:
The above operating statements have been summarized into the uniform system of accounts.
These statements have not been audited by Arthur Andersen.
(1) Includes Membership and Guest fees to the swimming pool club. This department also
includes rental fees paid for the use of the pool.
(2) Includes vending and sundry sales, salvage sales, no show revenue, rents, and other
miscellaneous income.
<PAGE>
Recast of Historical Financial Statements
Aurora Inn - Aurora, Ohio
Trailing 12 Months As of November 30, 1996
Per Occupied
Amount Ratio Per Room Room/Day
____________________________________________________________________________
Number of Days Open/Year 365
Available Rooms (Daily) 69
Available Rooms (Annually) 25,185
Occupancy Percentage 67.9%
Occupied Rooms 17,102
Average Room Rate $88.09
REVENUES
Rooms $1,506,595 51.7% $21,835 $88.09
Food & Beverage 1,190,381 40.9% 17,252 69.60
Telephone 48,835 1.7% 708 2.86
Swimming Pool(1) 135,268 4.6% 1,960 7.91
Rentals and Other
Income (Net)(2) 30,776 1.1% 446 1.80
_______ _______ _______ _______
Total Revenues $2,911,855 100.0% $42,201 $170.26
DEPARTMENTAL EXPENSES
Rooms $269,262 17.9% $3,902 $15.74
Food & Beverage 813,578 68.3% 11,791 47.57
Telephone 35,746 73.2% 518 2.09
Swimming Pool 58,046 42.9% 841 3.39
_______ _______ _______ _______
Total Departmental
Expenses $1,176,632 40.4% $17,053 $68.80
TOTAL DEPARTMENTAL INCOME $1,735,223 59.6% $25,148 $101.46
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $320,742 11.0% $4,648 $18.75
Sales and Marketing 226,013 7.8% 3,276 13.22
Management Fees 116,474 4.0% 1,688 6.81
Energy 173,081 5.9% 2,508 10.12
Property Operations &
Maintenance 130,510 4.5% 1,891 7.63
_______ _______ _______ _______
Total Undistributed
Operating $966,820 33.2% $14,012 $56.53
INCOME BEFORE FIXED CHARGES $768,403 26.4% 11,136 44.93
FIXED CHARGES
Property Taxes $31,819 1.1% $461 $1.86
Personal Property Taxes 5,007 0.2% 73 0.29
Insurance on Building &
Contents 5,789 0.2% 84 0.34
_______ _______ _______ _______
Total Fixed Charges $42,615 1.5% $618 $2.49
INCOME BEFORE RESERVE $725,788 24.9% $10,519 $42.44
_______ _______ _______ _______
Notes:
The above operating statements have been summarized into the uniform system of accounts.
These statements have not been audited by Arthur Andersen.
(1) Includes Membership and Guest fees to the swimming pool club. This department also
includes rental fees paid for the use of the pool.
(2) Includes vending and sundry sales, salvage sales, no show revenue, rents, and other
miscellaneous income.
Recast of Historical Financial Statements
Aurora Inn - Aurora, Ohio
1997 Reforcast as of Sept. 1996
Per Occupied
Amount Ratio Per Room Room/Day
____________________________________________________________________________
Number of Days Open/Year 365
Available Rooms (Daily) 69
Available Rooms (Annually) 25,185
Occupancy Percentage 68.2%
Occupied Rooms 17,176
Average Room Rate $87.24
REVENUES
Rooms $1,498,500 51.6% $21,717 $87.24
Food & Beverage 1,197,100 41.2% 17,349 69.70
Telephone 48,900 1.7% 709 2.85
Swimming Pool(1) 132,100 4.5% 1,914 7.69
Rentals and Other
Income (Net)(2) 28,300 1.0% 410 1.65
_______ _______ _______ _______
Total Revenues $2,904,900 100.0% $42,100 $169.12
DEPARTMENTAL EXPENSES
Rooms $264,800 17.7% $3,838 $15.42
Food & Beverage 804,600 67.2% 11,661 46.84
Telephone 34,800 71.2% 504 2.03
Swimming Pool 57,700 43.7% 836 3.36
_______ _______ _______ _______
Total Departmental
Expenses $1,161,900 40.0% $16,839 $67.65
TOTAL DEPARTMENTAL INCOME $1,743,000 60.0% $25,261 $101.48
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $322,700 11.1% $4,677 $18.79
Sales and Marketing 216,100 7.4% 3,132 12.58
Management Fees 116,200 4.0% 1,684 6.77
Energy 177,200 6.1% 2,568 10.32
Property Operations &
Maintenance 133,700 4.6% 1,938 7.78
_______ _______ _______ _______
Total Undistributed
Operating $965,900 33.3% $13,999 $56.23
INCOME BEFORE FIXED CHARGES $777,100 26.8% 11,262 45.24
n/a
Notes:
The above operating statements have been summarized into the uniform system of accounts.
These statements have not been audited by Arthur Andersen.
(1) Includes Membership and Guest fees to the swimming pool club. This department also
includes rental fees paid for the use of the pool.
(2) Includes vending and sundry sales, salvage sales, no show revenue, rents, and other
miscellaneous income.
</TABLE>
<PAGE>
Aurora Inn Page 75
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ESTIMATED OPERATING RESULTS
Estimates of income and expenses, in current dollars, have been
prepared for the subject hotel from January 1, 1997 through
December 31, 2007. Our financial projections are based upon an
analysis of the historical operating results of the subject and
on the performance of comparable hotels. A representative year of
operation, expressed in 1996 dollars, is first established and
then adjusted to account for inflation and the varying levels of
occupancy for each year in the projection period. The
representative level of occupancy at the hotel is estimated to be
69 percent. The following paragraphs describe the assumptions and
basis of our estimates.
Inflation Assumption
In order to estimate future inflation of revenues and expenses at
the subject hotel, we have reviewed the historical inflation of
the consumer price index - urban markets (CPI-U).
- ---------------------- ---------------------
Year CPI-U
---- -----
1988 4.4%
1989 4.6%
1990 6.1%
1991 3.1%
1992 2.9%
1993 2.7%
1994 2.7%
1995 2.5%
- ---------------------- ---------------------
On the basis of historical inflation rates and on our estimates
of future inflation, we have assumed an inflation assumption of
three percent, compounded annually, from a base year of 1996.
Revenue
Room Revenue is based upon the estimates of average
annual occupancy and room rates as described previously
in this report.
<PAGE>
Aurora Inn Page 76
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Food and Beverage Revenue is derived from estimated
sales food and all alcoholic beverages in the
restaurants, cafes, lounges, room service and banquet
facilities. Food revenue also includes any miscellaneous
revenue such as public room rental and corkage fees. Our
estimate is based upon an analysis of actual operations
of comparable hotels and on historical food and beverage
sales.
On the basis of the analysis of the historical operating
results and the results of comparable hotels, we assume
that the subject hotel will achieve food and beverage
revenue of $70.00 per occupied room day, in 1996 dollars
at a stabilized occupancy of 69 percent. Food revenue is
estimated to be 70 percent variable with occupancy and
is adjusted to account for inflation and occupancy
levels throughout the projection period.
Telephone Revenue includes the revenue derived from long
distance and local telephone calls, as well as any per
call charges applied to credit card or other calls.
Revenue in this category is estimated to equal $2.75 per
occupied room day, in 1996 dollars at a stabilized
occupancy of 69 percent. Telephone revenue is estimated
to be 100 percent variable with occupancy and is
adjusted to account for inflation and varying occupancy
levels throughout the projection period.
Swimming Pool Revenue includes all revenue associated
with the rental fees paid for the use of the pool,
including membership and guest fees to the swimming pool
club. We estimate that revenue in this category will
equal $7.80 per occupied room day, at a stabilized
occupancy of 69 percent, in constant 1996 dollars.
Swimming Pool revenue is estimated to be 10 percent
variable with occupancy and is adjusted to account for
inflation and varying occupancy levels throughout the
projection period.
Rental and Other Income, Net includes all miscellaneous
income (net of expenses) including interest income,
concierge commissions, photo commission, and other
miscellaneous items. This category also includes rental
income from vending and sundry sales, salvage sales, no
show revenue, rents, and other miscellaneous income. On
the basis of our analysis of historical leases and
miscellaneous revenue, we estimate that rental and other
<PAGE>
Aurora Inn Page 77
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income, net of expenses, will be $1.10 per occupied room
day at a stabilized level of occupancy in constant 1996
dollars. Revenue in this category is assumed to be 65
percent variable with occupancy and is adjusted to
account for inflation and varying occupancy levels
throughout the projection period.
Departmental Expenses
Rooms Departmental Expense includes salaries and wages
for the front desk, house- keeping, reservations, bell
staff and laundry, plus fringe benefits. Other operating
expenses in the rooms department include linen, cleaning
supplies, recreation and health club, guest supplies,
uniforms, reservation expenses, security, equipment
leases and travel agent commissions.
Rooms department expense is estimated based upon the
historical rooms departmental expenditures at the
subject hotel, comparisons to other similar properties,
and our estimates of occupancy and average rate over the
estimation period. We estimate that rooms departmental
expenditures will equal 22 percent of departmental
sales, in a representative year at 69 percent occupancy.
Expenses are estimated to be 45 percent variable with
occupancy and are adjusted to account for inflation and
occupancy levels throughout the projection period.
Food and Beverage Expense includes the cost of goods
sold (food and beverages), labor and related benefits,
and other operating expenses. Labor costs include
departmental management, cooks and kitchen personnel,
service staff, banquet staff, and bartenders. Other
operating expenses include china, glass, silver, linens,
restaurant and kitchen supplies, menus and printing, and
special promotions. Labor costs are analyzed on a fixed
versus variable basis, as are other operating costs. The
cost of goods sold was considered completely variable as
a ratio to sales.
Food and beverage expense is estimated to be 70 percent
of combined food and beverage revenue in a
representative year at 69 percent occupancy. Food and
beverage expenditures are estimated to be 45 percent
variable with occupancy and are adjusted to account for
<PAGE>
Aurora Inn Page 78
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inflation and occupancy levels throughout the projection
period.
Telephone Expenses are estimated based upon an analysis
of historical operating results at the subject hotel and
an analysis of the expenses of comparable hotels. We
estimate that telephone expenditures will equal
approximately 70 percent of departmental revenue in a
representative year. Telephone expenses are estimated to
be 50 percent variable with occupancy and are adjusted
to account for inflation and occupancy levels throughout
the projection period.
Swimming Pool includes all expenses associated with the
operation of the swimming pool. We assume that
departmental expenditures in this category would
continue to equal approximately 45 percent of revenue in
a stabilized year of operations. Expenses are assumed to
be 20 percent variable with occupancy and are adjusted
to account for inflation and occupancy levels throughout
the projection period.
Undistributed Operating Expenses
Administrative and General Expense includes payroll and
related expenses for the general manager, personnel and
training, clerical staff, controller and accounting
staff. Other administrative and general (A&G) expenses
include office supplies, computer services, accounting
and legal fees, travel expenses and liability insurance.
We reflected this expense under fixed costs. Credit card
commissions were classified as an A&G expense, and are
directly variable with sales.
A&G expenses are estimated based upon actual operating
results of comparable hotels and historical expenses
recorded by the hotel. We estimate that A&G expenses
will equal approximately 11.5 percent of total sales or
$4,945 per available room at a stabilized occupancy of
69 percent, in constant 1996 dollars. Expenses are
<PAGE>
Aurora Inn Page 79
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estimated to be 90 percent fixed and are adjusted to
account for inflation and occupancy levels throughout
the projection period.
Marketing Expense includes payroll and related expenses
for the sales and marketing staff, direct sales
expenses, advertising and promotion and travel expense
for the sales staff. Marketing expenses are estimated
based upon actual operating results of comparable hotels
and historical expenses recorded by the hotel. We
estimate that marketing expenditures will equal
approximately 7.5 percent of total sales or $3,225 per
available room at a stabilized occupancy of 69 percent,
in 1996 dollars. Expenses are estimated to be 90 percent
fixed and are adjusted to account for inflation and
occupancy levels throughout the projection period.
Management Fee Expense has been estimated to be four
percent of gross revenue based on the management
contract and industry standards.
Energy Costs includes the expenditure for electricity,
fuel, water, waste removal and related operating
supplies. On the basis of historical energy costs at the
hotel and the actual energy expenses recorded by
comparable hotels, we assume that the energy expense
will equal $2,550 per room in a representative year in
constant 1996 dollars. Energy expenditures are estimated
to be 90 percent fixed and are adjusted to account for
inflation and occupancy levels throughout the projection
period.
Property Operations and Maintenance Expense includes
payroll and related expenses, as well as other expenses
necessary for painting, decorating, and repairs of the
building, grounds and equipment. This expense is
estimated based upon historical property operations and
maintenance expenses at the subject hotel and actual
expenses at comparable hotels. On the basis of
historical maintenance costs at the hotel and on
expenses reported by comparable hotels, we estimate that
the this expense will equal $2,000 per room in a
representative year in constant 1996 dollars. These
expenditures are estimated to be 90 percent fixed and
are adjusted to account for inflation and occupancy
levels throughout the projection period.
<PAGE>
Aurora Inn Page 80
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Fixed Charges
Property Taxes are estimated based upon the current
property tax assessment and tax bill for 1994 and 1995.
A more detailed analysis of historical and current
property taxes is presented earlier in this report.
Insurance on building and contents against damage was
estimated based upon the historical expenses incurred at
the subject hotel. We estimate that insurance costs will
equal $90 per available room in constant 1996 dollars.
Expenses are adjusted to account for inflation
throughout the projection period.
Reserve for Replacement provides a fund for the
replacement of furniture, fixtures and equipment. We
assume that the reserve for replacement will equal four
percent of total revenue throughout the projection
period, consistent with industry practice.
Income Before Debt Service
Estimated operating results for the subject property to the level
of profit before debt service, income taxes, depreciation and
other capital costs, are presented on the following pages.
<PAGE>
<TABLE>
Aurora Inn
Statement of Estimated
Income and Expenses
1997
Per Occupied
Amount Ratio Per Room Room/Day
____________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Days Open/Year 365
Available Rooms (Daily) 69
Available Rooms (Annually) 25,185
Occupancy Percentage 70%
Occupied Rooms 17,700
Average Room Rate $92.50
REVENUES
Rooms $1,637,300 52.5% $23,729 $92.50
Food & Beverage 1,269,700 40.7% 18,401 71.73
Telephone 50,100 1.6% 726 2.83
Swimming Pool(1) 140,000 1.5% 2,029 7.91
Rentals and Other
Income (Net)(2) 19,900 0.6% 288 1.12
_______ _______ _______ _______
Total Revenues $3,117,000 100.0% $45,174 $176.10
DEPARTMENTAL EXPENSES
Rooms $353,000 21.6% $5,116 $19.94
Food & Beverage 919,800 69.7% 13,330 51.97
Telephone 34,800 21.9% 504 1.97
Swimming Pool 63,100 45.1% 914 3.56
_______ _______ _______ _______
Total Departmental
Expenses $1,370,700 44.0% $19,865 $77.44
TOTAL DEPARTMENT INCOME $1,746,300 56.0% $25,309 $98.66
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $311,700 10.0% $4,517 $17.61
Sales and Marketing 249,400 8.0% 3,614 14.09
Management Fees 124,700 4.0% 1,807 7.05
Energy 181,500 5.8% 2,631 10.25
Property Operations &
Maintenance 142,400 4.6% 2,064 8.05
_______ _______ _______ _______
Total Undistributed
Operating Expenses $1,009,700 32.4% $14,633 $57.05
INCOME BEFORE FIXED CHARGES $736,600 23.6% $10,675 $41.62
FIXED CHARGES
Property Taxes $33,000 1.1% $479 $1.86
Personal Property Taxes 5,500 0.2% 79 0.31
Insurance on Building &
Contents 6,400 0.2% 93 0.36
_______ _______ _______ _______
Total Fixed Charges $44,900 1.4% $651 $2.54
INCOME BEFORE RESERVES $691,700 22.2% $10,025 $39.08
Reserve for Replacement of FF&E $124,700 4.0% $1,807 $7.05
Capital Expenditures 300,000 9.6% 4,348 16.95
_______ _______ _______ _______
Total Reserves and Capital Exp. $424,700 13.6% $6,155 $23.99
INCOME BEFORE DEBT SERVICE $267,000 8.6% $3,870 $15.08
Notes:
(1) Includes Membership and Guest fees to the swimming pool club. This department also
includes rental fees paid for the use of the pool.
(2) Includes vending and sundry sales, salvage sales, no show revenue, rents, and other
miscellaneous income.
<PAGE>
Aurora Inn
Statement of Estimated
Income and Expenses
1998
Per Occupied
Amount Ratio Per Room Room/Day
____________________________________________________________________________
Number of Days Open/Year 365
Available Rooms (Daily) 69
Available Rooms (Annually) 25,185
Occupancy Percentage 67%
Occupied Rooms 16,800
Average Room Rate $96.00
REVENUES
Rooms $1,612,800 52.3% $23,374 $96.00
Food & Beverage 1,261,000 40.9% 18,275 75.06
Telephone 49,000 1.6% 710 2.92
Swimming Pool(1) 143,500 4.6% 2,080 8.54
Rentals and Other
Income (Net)(2) 19,800 0.6% 287 1.18
_______ _______ _______ _______
Total Revenues $3,086,100 100.0% $14,726 $183.70
DEPARTMENTAL EXPENSES
Rooms $355,200 22.0% $5,118 $21.14
Food & Beverage 925,500 70.6% 13,413 55.09
Telephone 34,900 24.3% 506 2.08
Swimming Pool 64,300 44.8% 932 3.83
_______ _______ _______ _______
Total Departmental
Expenses $1,379,900 44.?% $19,999 $82.14
TOTAL DEPARTMENT INCOME $1,706,200 55.3% $24,728 $101.56
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $308,600 10.0% $4,472 $18.37
Sales and Marketing 246,900 8.0% 3,578 14.70
Management Fees 123,400 4.0% 1,788 7.35
Energy 186,000 6.0% 2,696 11.07
Property Operations &
Maintenance 145,900 4.7% 2,114 8.68
_______ _______ _______ _______
Total Undistributed
Operating Expenses $1,010,800 32.8% $14,649 $60.17
INCOME BEFORE FIXED CHARGES $695,400 22.5% $10,078 $41.39
FIXED CHARGES
Property Taxes $34,000 1.1% $493 $2.02
Personal Property Taxes 5,600 0.2% 82 0.33
Insurance on Building &
Contents 6,600 0.2% 95 0.39
_______ _______ _______ _______
Total Fixed Charges $46,200 1.5% $670 $2.75
INCOME BEFORE RESERVES $649,200 21.0% $9,409 $38.64
Reserve for Replacement of FF&E $123,400 4.0% $1,788 $7.35
Capital Expenditures 0 0.0% 0 0.00
_______ _______ _______ _______
Total Reserves and Capital Exp. $123,400 4.0% $1,788 $7.35
INCOME BEFORE DEBT SERVICE $525,800 17.0% $7,620 $31.30
Notes:
(1) Includes Membership and Guest fees to the swimming pool club. This department also
includes rental fees paid for the use of the pool.
(2) Includes vending and sundry sales, salvage sales, no show revenue, rents, and other
miscellaneous income.
<PAGE>
Aurora Inn
Statement of Estimated
Income and Expenses
1999
Per Occupied
Amount Ratio Per Room Room/Day
____________________________________________________________________________
Number of Days Open/Year 365
Available Rooms (Daily) 69
Available Rooms (Annually) 25,185
Occupancy Percentage 69%
Occupied Rooms 17,300
Average Room Rate $98.00
REVENUES
Rooms $1,695,400 52.3% $24.571 98.00
Food & Beverage 1,325,600 40.9% 19,212 76.62
Telephone 52,000 1.6% 754 3.01
Swimming Pool(1) 148,200 4.6% 2,148 8.57
Rentals and Other
Income (Net)(2) 20,800 0.6% 301 1.20
_______ _______ _______ _______
Total Revenues $3,242,000 100.0% $46,986 $187.40
DEPARTMENTAL EXPENSES
Rooms $370,700 21.9% $5,372 $21.43
Food & Beverage 965,800 70.1% 13,997 55.83
Telephone 36,500 24.6% 529 2.11
Swimming Pool 66,700 45.0% 967 3.86
_______ _______ _______ _______
Total Departmental
Expenses $1,439,700 44.4% $20,865 $83.22
TOTAL DEPARTMENT INCOME $1,802,300 55.6% $26,120 $104.18
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $324,200 10.0% $4,699 $18.74
Sales and Marketing 259,400 8.0% 3,759 14.99
Management Fees 129,700 4.0% 1,880 7.50
Energy 192,200 5.9% 2,785 11.11
Property Operations &
Maintenance 150,700 4.6% 2,184 8.71
_______ _______ _______ _______
Total Undistributed
Operating Expenses $1,056,200 32.6% $15,307 $61.05
INCOME BEFORE FIXED CHARGES $746,100 23.0% $10,813 $43.13
FIXED CHARGES
Property Taxes $35,100 1.1% $508 $2.03
Personal Property Taxes 5,800 0.2% 84 0.34
Insurance on Building &
Contents 6,800 0.2% 98 0.39
_______ _______ _______ _______
Total Fixed Charges $47,700 1.5% $691 $2.76
INCOME BEFORE RESERVES $698,400 21.5% $10,122 $40.37
Reserve for Replacement of FF&E $129,700 4.0% $1,880 $7.50
Capital Expenditures 0 0.0% 0 0.00
_______ _______ _______ _______
Total Reserves and Capital Exp. $129,700 4.0% $1,880 $7.50
INCOME BEFORE DEBT SERVICE $568,700 17.5% $8,242 $32.87
Notes:
(1) Includes Membership and Guest fees to the swimming pool club. This department also
includes rental fees paid for the use of the pool.
(2) Includes vending and sundry sales, salvage sales, no show revenue, rents, and other
miscellaneous income.
<PAGE>
Aurora Inn
Statement of Estimated
Income and Expenses
2000
Per Occupied
Amount Ratio Per Room Room/Day
____________________________________________________________________________
Number of Days Open/Year 365
Available Rooms (Daily) 69
Available Rooms (Annually) 25,185
Occupancy Percentage 69%
Occupied Rooms 17,400
Average Room Rate $100.00
REVENUES
Rooms $1,740,000 52.1% $25,217 $100.00
Food & Beverage 1,370,900 41.1% 19,868 78.79
Telephone 53,900 1.6% 781 3.10
Swimming Pool(1) 152,700 4.6% 2,213 8.78
Rentals and Other
Income (Net)(2) 21,500 0.6% 312 1.24
_______ _______ _______ _______
Total Revenues $3,339,000 100.0% $48,391 $191.90
DEPARTMENTAL EXPENSES
Rooms $382,800 22.0% $5,548 $22.00
Food & Beverage 997,300 70.0% 14,454 57.32
Telephone 37,700 24.7% 546 2.17
Swimming Pool 68,300 45.0% 996 3.95
_______ _______ _______ _______
Total Departmental
Expenses $1,486,500 11.5% $21,543 $85.43
TOTAL DEPARTMENT INCOME $1,852,500 55.5% $26,848 $106.47
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $333,900 10.0% $4,839 $19.19
Sales and Marketing 267,100 8.0% 3,871 15.35
Management Fees 133,600 4.0% 1,936 7.68
Energy 198,000 5.9% 2,870 11.38
Property Operations &
Maintenance 155,300 4.7% 2,251 8.93
_______ _______ _______ _______
Total Undistributed
Operating Expenses $1,087,900 32.6% $15,767 $62.52
INCOME BEFORE FIXED CHARGES $764,600 22.9% $11,081 $43.94
FIXED CHARGES
Property Taxes $36,100 1.1% $523 $2.07
Personal Property Taxes 6,000 0.2% 87 0.34
Insurance on Building &
Contents 7,000 0.2% 101 0.40
_______ _______ _______ _______
Total Fixed Charges $49,100 1.5% $712 $2.82
INCOME BEFORE RESERVES $715,500 21.4% $10,370 $41.12
Reserve for Replacement of FF&E $133,600 4.0% $1,936 $7.68
Capital Expenditures 0 0.0% 0 0.00
_______ _______ _______ _______
Total Reserves and Capital Exp. $133,600 4.0% $1,936 $7.68
INCOME BEFORE DEBT SERVICE $581,900 17.4% $8,433 $33.44
Notes:
(1) Includes Membership and Guest fees to the swimming pool club. This department also
includes rental fees paid for the use of the pool.
(2) Includes vending and sundry sales, salvage sales, no show revenue, rents, and other
miscellaneous income.
<PAGE>
Aurora Inn
Statement of Estimated
Income and Expenses
2001
Per Occupied
Amount Ratio Per Room Room/Day
____________________________________________________________________________
Number of Days Open/Year 365
Available Rooms (Daily) 69
Available Rooms (Annually) 25,185
Occupancy Percentage 69%
Occupied Rooms 17,400
Average Room Rate $103.00
REVENUES
Rooms $1,792,200 52.1% $25,974 $103.00
Food & Beverage 1,412,000 41.1% 20,464 81.15
Telephone 55,500 1.6% 804 3.19
Swimming Pool(1) 157,300 4.6% 2,280 9.04
Rentals and Other
Income (Net) 22,100 0.6% 320 1.27
_______ _______ _______ _______
Total Revenues $3,439,100 100.0% $49,842 $197.65
DEPARTMENTAL EXPENSES
Rooms $394,300 22.0% $5,744 $22.66
Food & Beverage 1,027,200 70.0% 14,887 59.03
Telephone 38,800 24.7% 562 2.23
Swimming Pool 70,800 45.0% 1,026 4.07
_______ _______ _______ _______
Total Departmental
Expenses $1,531,100 44.5% $22,190 $87.99
TOTAL DEPARTMENT INCOME $1,908,000 55.5% $27,652 $109.66
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General 343,900 10.0% $4,984 $19.76
Sales and Marketing 257,900 7.5% 3,738 14.82
Management Fees 137,600 4.0% 1,994 7.91
Energy 204,000 5.9% 2,956 11.72
Property Operations &
Maintenance 160,000 4.7% 2,319 9.20
_______ _______ _______ _______
Total Undistributed
Operating Expenses $1,103,400 32.1% $15,991 $63.41
INCOME BEFORE FIXED CHARGES $804,600 23.4% $11,661 $46.24
FIXED CHARGES
Property Taxes $37,200 1.1% $839 $2.14
Personal Property Taxes 6,200 0.2% 89 0.36
Insurance on Building &
Contents 7,200 0.2% 104 0.41
_______ _______ _______ _______
Total Fixed Charges $50,600 1.5% $733 $2.91
INCOME BEFORE RESERVES $754,000 21.9% $10,928 $43.33
Reserve for Replacement of FF&E $137,600 4.0% $1,994 $7.91
Capital Expenditures 0 0.0% 0 0.00
_______ _______ _______ _______
Total Reserves and Capital Exp. $137,600 4.0% $1,994 $7.91
INCOME BEFORE DEBT SERVICE $616,400 17.9% $8,933 $35.43
Notes:
(1) Includes Membership and Guest fees to the swimming pool club. This department also
includes rental fees paid for the use of the pool.
(2) Includes vending and sundry sales, salvage sales, no show revenue, rents, and other
miscellaneous income.
<PAGE>
Aurora Inn
Statement of Estimated
Income and Expenses
2002
Per Occupied
Amount Ratio Per Room Room/Day
____________________________________________________________________________
Number of Days Open/Year 365
Available Rooms (Daily) 69
Available Rooms (Annually) 25,185
Occupancy Percentage 69%
Occupied Rooms 17,400
Average Room Rate $106.00
REVENUES
Rooms $1,844,400 52.1% $26,730 $106.00
Food & Beverage 1,454,400 41.1% 21,078 83.59
Telephone 57,200 1.6% 829 3.29
Swimming Pool(1) 162,000 4.6% 2,348 9.31
Rentals and Other
Income (Net)(2) 22,800 0.6% 330 1.31
_______ _______ _______ _______
Total Revenues $3,540,800 100.0% $51,316 $203.49
DEPARTMENTAL EXPENSES
Rooms $406,100 22.0% $5,886 $23.34
Food & Beverage 1,058,000 70.0% 15,333 60.80
Telephone 40,000 24.7% 580 2.30
Swimming Pool 72,900 45.0% 1,057 4.19
_______ _______ _______ _______
Total Departmental
Expenses $1,577,000 44.5% $22,855 $90.63
TOTAL DEPARTMENT INCOME 1,963,800 55.5% $28,461 $112.86
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $354,200 10.0% $5,133 $20.36
Sales and Marketing 265,600 7.5% 3,849 15.26
Management Fees 141,600 4.0% 2,052 8.14
Energy 210,100 5.9% 3,045 12.07
Property Operations &
Maintenance 164,800 4.7% 2,388 9.47
_______ _______ _______ _______
Total Undistributed
Operating Expenses $1,136,300 32.1% $16,468 $65.30
INCOME BEFORE FIXED CHARGES $827,500 23.4% $11,993 $17.56
FIXED CHARGES
Property Taxes $38,300 1.1% $555 $2.20
Personal Property Taxes 6,300 0.2% 92 0.36
Insurance on Building &
Contents 7,400 0.2% 107 0.43
_______ _______ _______ _______
Total Fixed Charges $52,000 1.5% $754 $2.99
INCOME BEFORE RESERVES $775,500 21.9% $11,239 $44.57
Reserve for Replacement of FF&E $141,600 4.0% $2,052 $8.14
Capital Expenditures 0 0.0% 0 0.00
_______ _______ _______ _______
Total Reserves and Capital Exp. $141,600 4.0% $2,052 $8.14
INCOME BEFORE DEBT SERVICE $633,900 17.9% $9,187 $36.43
Notes:
(1) Includes Membership and Guest fees to the swimming pool club. This department also
includes rental fees paid for the use of the pool.
(2) Includes vending and sundry sales, salvage sales, no show revenue, rents, and other
miscellaneous income.
<PAGE>
Aurora Inn
Statement of Estimated
Income and Expenses
2003
Per Occupied
Amount Ratio Per Room Room/Day
____________________________________________________________________________
Number of Days Open/Year 365
Available Rooms (Daily) 69
Available Rooms (Annually) 25,185
Occupancy Percentage 69%
Occupied Rooms 17,400
Average Room Rate $109.50
REVENUES
Rooms $1,905,300 52.2% $27,613 $109.50
Food & Beverage 1,198,000 41.0% 21,710 86.09
Telephone 58,900 1.6% 854 3.39
Swimming Pool(1) 166,900 4.6% 2,419 9.59
Rentals and Other
Income (Net)(2) 23,500 0.6% 341 1.35
_______ _______ _______ _______
Total Revenues $1,652,600 100.0% $52,936 $209.92
DEPARTMENTAL EXPENSES
Rooms $418,300 22.0% $6,062 $24.04
Food & Beverage 1,089.700 70.0% 15,793 62.63
Telephone 41,200 24.7% 597 2.37
Swimming Pool 75,100 45.0% 1,088 4.32
_______ _______ _______ _______
Total Departmental
Expenses $1,624,400 44.5% $23,541 $93.35
TOTAL DEPARTMENT INCOME $2,028,400 55.5% $29,396 $116.57
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $364,800 10.0% $5,287 $20.97
Sales and Marketing 273,600 7.5% 3,965 15.72
Management Fees 146,100 4.0% 2,117 8.40
Energy 216,400 5.9% 3,136 12.44
Property Operations &
Maintenance 169,700 4.6% 2,460 9.75
_______ _______ _______ _______
Total Undistributed
Operating Expenses $1,170,600 32.0% $16,965 $67.28
INCOME BEFORE FIXED CHARGES $857,700 23.5% $12,430 $49.29
FIXED CHARGES
Property Taxes $39,500 1.1% $572 $2.27
Personal Property Taxes 6,500 0.2% 95 0.37
Insurance on Building &
Contents 7,600 0.2% 111 0.44
_______ _______ _______ _______
Total Fixed Charges $53,600 1.5% $777 $3.08
INCOME BEFORE RESERVES $804,100 22.0% $11,654 $46.21
Reserve for Replacement of FF&E $146,100 4.0% $2,117 $8.40
Capital Expenditures 0 0.0% 0 0.00
_______ _______ _______ _______
Total Reserves and Capital Exp. $146,100 4.0% $2,117 $8.40
INCOME BEFORE DEBT SERVICE $658,000 18.0% $9,536 $37.82
Notes:
(1) Includes Membership and Guest fees to the swimming pool club. This department also
includes rental fees paid for the use of the pool.
(2) Includes vending and sundry sales, salvage sales, no show revenue, rents, and other
miscellaneous income.
<PAGE>
Aurora Inn
Statement of Estimated
Income and Expenses
2004
Per Occupied
Amount Ratio Per Room Room/Day
____________________________________________________________________________
Number of Days Open/Year 365
Available Rooms (Daily) 69
Available Rooms (Annually) 25,185
Occupancy Percentage 69%
Occupied Rooms 17,400
Average Room Rate $112.50
REVENUES
Rooms $1,957,500 52.1% $28,370 $112.50
Food & Beverage 1,542,900 41.1% 22,361 88.67
Telephone 60,700 1.6% 880 3.49
Swimming Pool(1) 171,900 4.6% 2,491 9.88
Rentals and Other
Income (Net)(2) 24,200 0.6% 351 1.39
_______ _______ _______ _______
Total Revenues $3,757,200 100.0% $54,452 $215.93
DEPARTMENTAL EXPENSES
Rooms $430,800 22.0% $6,243 $24.76
Food & Beverage 1,122,400 70.0% 16,267 64.51
Telephone 42,400 24.0% 614 2.44
Swimming Pool 77,400 45.0% 1,122 4.45
_______ _______ _______ _______
Total Departmental
Expenses $1,673,000 44.5% $24,246 $96.15
TOTAL DEPARTMENT INCOME $2,084,200 55.5% $30,206 $119.78
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $375,700 10.0% $5,445 $21.59
Sales and Marketing 281,800 7.5% 4,084 16.20
Management Fees 150,300 4.0% 2,178 8.64
Energy 222,900 5.9% 3,230 12.81
Property Operations &
Maintenance 174,800 4.7% 2,534 10.05
_______ _______ _______ _______
Total Undistributed
Operating Expenses $1,205,500 32.1% $17,471 $69.28
INCOME BEFORE FIXED CHARGES $878,700 23.4% $12,735 $50.50
FIXED CHARGES
Property Taxes $40,600 1.1% $589 $2.33
Personal Property Taxes 6,700 0.2% 98 0.39
Insurance on Building &
Contents 7,900 0.2% 114 0.45
_______ _______ _______ _______
Total Fixed Charges $55,200 1.5% $800 $3.17
INCOME BEFORE RESERVES $823,500 21.9% $11,935 $47.33
Reserve for Replacement of FF&E $150,300 4.0% $2,178 $8.64
Capital Expenditures 0 0.0% 0 0.00
_______ _______ _______ _______
Total Reserves and Capital Exp. $150,300 4.0% $2,178 $8.64
INCOME BEFORE DEBT SERVICE $673,200 17.9% $9,757 $38.69
Notes:
(1) Includes Membership and Guest fees to the swimming pool club. This department also
includes rental fees paid for the use of the pool.
(2) Includes vending and sundry sales, salvage sales, no show revenue, rents, and other
miscellaneous income.
<PAGE>
Aurora Inn
Statement of Estimated
Income and Expenses
2005
Per Occupied
Amount Ratio Per Room Room/Day
____________________________________________________________________________
Number of Days Open/Year 365
Available Rooms (Daily) 69
Available Rooms (Annually) 25,185
Occupancy Percentage 69%
Occupied Rooms 17,400
Average Room Rate $116.00
REVENUES
Rooms $2,018.400 52.1% $29,252 $116.00
Food & Beverage 1,589,200 41.0% 23,032 91.33
Telephone 62,500 1.6% 906 3.59
Swimming Pool(1) 177,100 4.6% 2,567 10.18
Rentals and Other
Income (Net)(2) 24,900 0.6% 361 1.43
_______ _______ _______ _______
Total Revenues $3,872,100 100.0% $56,117 $222.53
DEPARTMENTAL EXPENSES
Rooms $443,700 22.0% $6,430 $25.50
Food & Beverage 1,156,100 70.0% 16,755 66.44
Telephone 43,700 24.7% 633 2.51
Swimming Pool 79,700 45.0% 1,155 4.58
_______ _______ _______ _______
Total Departmental
Expenses $1,723,200 44.5% $24,974 $99.03
TOTAL DEPARTMENT INCOME $2,148,900 55.5% $31,143 $123.50
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $387,000 10.0% $5,609 $22.24
Sales and Marketing 290,300 7.5% 4,207 16.68
Management Fees 154,900 4.0% 2,245 8.90
Energy 229,600 5.9% 3,327 13.20
Property Operations &
Maintenance 180,100 4.7% 2,610 10.35
_______ _______ _______ _______
Total Undistributed
Operating Expenses $1,241,900 32.1% $17,999 $71.37
INCOME BEFORE FIXED CHARGES $907,000 23.4% $13,145 $52.13
FIXED CHARGES
Property Taxes $41,900 1.1% $607 $2.41
Personal Property Taxes 6,900 0.2% 100 0.40
Insurance on Building &
Contents 8,100 0.2% 117 0.47
_______ _______ _______ _______
Total Fixed Charges $56,900 1.5% $825 $3.27
INCOME BEFORE RESERVES $850,100 22.0% $12,320 $48.86
Reserve for Replacement of FF&E $154,900 4.0% $2,245 $8.90
Capital Expenditures 0 0.0% 0 0.00
_______ _______ _______ _______
Total Reserves and Capital Exp. $154,900 4.0% $2,245 $8.90
INCOME BEFORE DEBT SERVICE $695,200 18.0% $10,075 $39.95
Notes:
(1) Includes Membership and Guest fees to the swimming pool club. This department also
includes rental fees paid for the use of the pool.
(2) Includes vending and sundry sales, salvage sales, no show revenue, rents, and other
miscellaneous income.
Aurora Inn
Statement of Estimated
Income and Expenses
2007
Per Occupied
Amount Ratio Per Room Room/Day
____________________________________________________________________________
Number of Days Open/Year 365
Available Rooms (Daily) 69
Available Rooms (Annually) 25,185
Occupancy Percentage 69%
Occupied Rooms 17,400
Average Room Rate $123.00
REVENUES
Rooms $2,140,200 52.1% $31,017 $123.00
Food & Beverage 1,686,000 41.1% 24,435 96.90
Telephone 66,300 1.6% 961 3.81
Swimming Pool(1) 187,900 4.6% 2,723 10.80
Rentals and Other
Income (Net)(2) 26,400 0.6% 383 1.52
_______ _______ _______ _______
Total Revenues $4,106,800 100.0% $59,519 $236.02
DEPARTMENTAL EXPENSES
Rooms $470,700 22.0% $6,822 $27.05
Food & Beverage 1,226,500 70.0% 17,775 70.49
Telephone 46,400 24.7% 672 2.67
Swimming Pool 84,600 45.0% 1,226 4.86
_______ _______ _______ _______
Total Departmental
Expenses $1,828,200 44.5% $26,496 $105.07
TOTAL DEPARTMENT INCOME $2,278,600 55.5% $33,023 $130.95
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $410,600 10.0% $5,951 $23.60
Sales and Marketing 308,000 7.5% 4,464 17.70
Management Fees 164,300 4.0% 2,381 9.44
Energy 243,600 5.9% 3,530 14.00
Property Operations &
Maintenance 191,000 4.7% 2,768 10.98
_______ _______ _______ _______
Total Undistributed
Operating Expenses $1,317,500 32.1% $19,094 $75.72
INCOME BEFORE FIXED CHARGES $961,100 23.4% $13,929 $55.24
FIXED CHARGES
Property Taxes $44,400 1.1% $644 $2.55
Personal Property Taxes 7,400 0.2% 107 0.43
Insurance on Building &
Contents 8,600 0.2% 125 0.49
_______ _______ _______ _______
Total Fixed Charges $60,400 1.5% $875 $3.47
INCOME BEFORE RESERVES $900,700 21.9% $13,054 $51.76
Reserve for Replacement of FF&E $164,300 4.0% $2,381 $9.44
Capital Expenditures 0 0.0% 0 0.00
_______ _______ _______ _______
Total Reserves and Capital Exp. $164,300 4.0% $2,381 $9.44
INCOME BEFORE DEBT SERVICE $736,400 17.9% $10,672 $42.32
Notes:
(1) Includes Membership and Guest fees to the swimming pool club. This department also
includes rental fees paid for the use of the pool.
(2) Includes vending and sundry sales, salvage sales, no show revenue, rents, and other
miscellaneous income.
</TABLE>
<PAGE>
Aurora Inn Page 85
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INVESTMENT CLIMATE OVERVIEW
In establishing valuation parameters to apply to the projected
operating cash flow from the proposed property, we have
researched the current market for hotel investments. Arthur
Andersen conducts a survey of a select group of hotel companies,
investors, developers, investment bankers, and brokers. Our most
recent survey was conducted at the end of the third quarter of
1996.
Our surveys indicate that the investment climate has undergone
significant changes over the last five years. After the economic
recession in the early 1990s, the number of hotel sales
transactions increased significantly between 1993 and 1995. The
price per room of lodging property has increased significantly as
well. In the early 1990s, the primary buyers of hotel assets were
opportunity funds and individual investors lured by the low
prices as a percentage of the replacement cost. New lodging
REITs, established in the early 1990s, also began to invest
heavily into hotel assets. During 1995 and 1996 the larger REITs
(such as Patriot American Hospitality; Starwood Lodging Trust;
FelCor Suite Hotels, Inc.; and HPT) accounted for a large share
of the transactions involving full-service lodging properties.
These organizations must maintain the level of acquisition
achieved in the past and, therefore, they have been paying
increasingly higher prices for lodging assets. In addition, many
of the recent REIT acquisitions were completed as part of a
portfolio which, attracted by the opportunity to purchase more
assets in one fell swoop, often resulted in aggressive pricing
parameters.
As the health of the overall U.S. lodging industry has improved,
so has the interest in acquiring lodging assets. The activity of
the REITs, combined with the strategic interests of hotel
companies and the interest of equity investors, has resulted in a
competitive acquisition market.
These changes in the investment market have resulted in a
significant shift in the criteria used to evaluate a potential
transaction. Terminal capitalization and discount rates assumed,
which averaged 11-12 percent and 14-16 percent, respectively in
1991, decreased to an average of 10-11 percent and 12-13 percent,
respectively in early 1996. Investors interviewed in the third
<PAGE>
Aurora Inn Page 86
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quarter of 1996, however, indicated that investment parameters
may currently be at the "low-point" of this real estate cycle.
Investors interviewed admitted that although recent acquisitions
have been structured using aggressive investment parameters, they
are likely to re-evaluate the assumptions and investment
parameters used in the near future.
The following table summarizes the results of our investor survey
completed at the end of the Third Quarter 1996.
- --------------------------------------------------------------------
Arthur Andersen Hotel Investor Survey - Third Quarter 1996
- --------------------------------------------------------------------
Range
Free and Clear Discount Rates 12.0%-15.0%
Terminal Capitalization Rates 10.0%-12.5%
Going-In Capitalization Rates 10.0%-11.0%
Equity Return Req. (leveraged) 20.0%-30.0%
Equity Return Req. (unleveraged) 12.0%-18.0%
Cash on Cash Return Requirements 10.0%-17.5%
- --------------------------------------------------------------------
DISCOUNTED CASH FLOW ANALYSIS
The discounted cash flow (DCF) technique converts the projected
stream of benefits, either before or after financing, as
appropriate, into a present value. Once the projection of net
income or cash flow is accomplished, a discount rate and
capitalization rate at reversion must be chosen. The selection of
these rates is necessarily subjective, since investor criteria
for the acquisition of real property is subject to variation, and
no organized property exchange exists.
Discount Rates
A free and clear discount rate is used to discount future
earnings without regard to any leverage or financing. Since there
has been a general lack of hotel financing over the last several
years, most of the larger hotel transactions have involved all
cash purchases. Discount rates (or internal rate-of-return
requirements) typically vary by a number of factors: long-term
<PAGE>
Aurora Inn Page 87
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investor-return requirements on alternative investments; type and
motivation of investor; property type -- e.g., hotel, apartments,
etc.; and local market area conditions. Our survey of investor
criteria indicated that investors are currently assuming discount
rates that range from 12 to 15 percent. After giving full
consideration to these surveys as well as to the type of property
being appraised, its competitiveness in its market place, and
general market conditions, a discount rate of 14 percent, applied
to income before debt service, is judged to be appropriate.
Terminal Capitalization Rates
The "exit" capitalization rate at reversion is used to convert
the projected stream of income beyond the last year of the
projection period into a value at the end of the projection
period. Our investor survey revealed capitalization rates ranging
from 9.5 to 11.0 percent, with a survey average of approximately
10.0 percent. The subject hotel is dependent on leisure travel
with seasonal demand. On the basis of this analysis, a terminal
capitalization rate of 11.5 percent is judged to be appropriate
for the subject hotel.
Conclusion by Discounted Cash Flow Analysis
Application of the discounted cash flow technique to the total
projected net income for the appraised property yields a market
value estimate of the fee simple interest in the subject of
$4,560,000. The table on the following page presents our
discounted cash flow analysis.
<PAGE>
Discounted Cash Flow Analysis
Aurora Inn
Aurora, Ohio
Net Present Value
Income Before Residual Discount Income Before
Year Debt Service Value(1) Factor(2)&(3) Debt Service
____ _____________ __________ _____________ ________________
1997 $267,000 0.8772 $234,211
1998 525,800 0.7695 404,586
1999 568,700 0.6750 383,856
2000 581,900 0.5921 344,532
2001 616,400 0.5194 320,139
2002 633,900 0.4556 288,796
2003 658,000 0.3996 262,961
2004 673,200 0.3506 235,996
2005 695,200 0.3075 213,780
2006 716,600 $6,211,374(4) 0.2697 1,868,778
---------
Value at January 1, 1997: $4,560,000
Value Per Room: $66,087
___________
Notes:
(1) Income Before Debt Service in the exit year was capitalized at
11.5 percent.
(2) Income was discounted to net present value using a 14.0 percent
discount rate.
(3) Analysis uses end-point discounting.
(4) A sales commission of 3.0 percent was assumed.
<PAGE>
Aurora Inn Page 89
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E. RECONCILIATION AND FINAL VALUE ESTIMATE
Valuation of the appraised property has been developed by the
direct sales comparison approach and the income approach. Various
appraisal techniques and methods were utilized in these analyses
and the fee simple value estimates derived by each approach is
summarized as follows:
- --------------------------- ---------------- -----------------------
Amount Price Per Room
Cost Approach N/A N/A
Sales Comparison Approach $4,620,000 $67,000
Income Approach $4,560,000 $66,087
- --------------------------- ---------------- -----------------------
The Cost Approach is most useful when valuing new or nearly new
properties or when appraising special purpose properties. The
reliability of this approach is diminished as buildings and other
forms of improvement increase in age and begin to depreciate. The
resulting loss in value becomes increasingly difficult to
accurately quantify. The cost approach was therefore not utilized
in valuing the subject property.
The Sales Comparison Approach is frequently a good indicator of
value, especially when a sufficient number of relevant
transactions with reliable information on each are available. In
the case of the subject property, the sales comparison approach
was used as an indicator of the reliability of results obtained
from the income capitalization approach, because of the lack of
truly comparable sale in the subject market and the subjective
nature of the adjustments made to the selected comparable sales.
The income capitalization approach is generally considered the
most applicable method for estimating the value of investment
properties, as it incorporates the economic motivations of buyers
and sellers in the analysis. The reliability of this approach is
enhanced when adequate data are available to assure proper
development of the income, expense, and capitalization rate
analyses.
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Aurora Inn Page 89
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Based upon the research and analyses performed in the development
of these approaches, and with primary emphasis on the income
approach, it is our opinion that the market value of the fee
simple interest in the appraised property as a going concern, as
of January 1, 1997 is:
-- FOUR MILLION FIVE HUNDRED SIXTY THOUSAND DOLLARS --
($4,560,000)
In accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP), prepared by The Appraisal Standards
Board of The Appraisal Foundation, it is necessary to identify
and separately value any personal property, fixtures, or
intangible items that are not real property but are included in
the appraisal. Personal property and fixtures in a hotel consist
of a variety of components including bedroom case-goods, bathroom
fixtures, restaurant and kitchen equipment, signage, computers
and other related items. Our physical inspection of the property
indicated that these items were generally in good condition
relative to the age of the property.
We estimate that the replacement cost for the furniture,
fixtures, and equipment at the subject hotel is approximately
$10,000 per room. This estimate is based upon a industry
averages. Assuming an average useful life of eight years and an
effective age of five years, the value of the furniture,
fixtures, and equipment is estimated to be approximately $2,500
per room. On the basis of this analysis, the value of the
personal property for the subject hotel is estimated to be
$172,500.
Since a hotel's furniture, fixtures, and equipment are such an
integral component of the facility's ability to generate income
and is seldom removed from the property or sold separately, the
value produced by the separation of the personal property
component from the real property is not particularly meaningful.
<PAGE>
Aurora Inn
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F. ADDENDA
<PAGE>
Aurora Inn
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F.1 HOTEL SALES COMPARABLES
<PAGE>
Aurora Inn
- -------------------------------------------------------------------------
Name: HOLIDAY INN
Location: Strongsville, OH
Grantor (Seller): International Hotel Investors Limited
Grantee (Buyer): Impac Hotel Group
Date of Sale: October 1995
Sales Price: $7,900,000
Property Rights Conveyed: Fee Simple
Number of Rooms: 299
Year Built: 1972
Price per Room: $26,421
Occupancy: 68 percent
Average Rate: $53.00
Est. Gross Room Revenue: $3,933,225
Overall Capitalization Rate
based on adjusted sale
price: 7.7%
Comments:
This hotel is located in a suburb of Cleveland, Ohio.
Facilities include a restaurant and lounge, indoor/outdoor
pool, exercise room, meeting space up to 1000 people, and
airport transportation. The new owners plan to renovate and
reposition the hotel as a Holiday Inn Select.
Sales price was adjusted to $11,400,000. Buyer intended to
spend $3.5 million in order to refurbish the exterior
parking lot and other rehabilitation to the hotel.
Renovations included some case goods and soft goods
replacement in the guest rooms, and upgrading of the public
space, meeting space, and the lounge.
<PAGE>
Aurora Inn
- -------------------------------------------------------------------------
Name: HAMPTON INN
Location: Indianapolis, IN
Grantor (Seller): U.S. Lodging of Indianapolis, LP
Grantee (Buyer): Equity Inn Partnership
Date of Sale: September 1995
Sales Price: $7,064,513
Property Rights Conveyed: Fee Simple
Number of Rooms: 129
Year Built: 1987
Price per Room: $54,764
Occupancy: 74.4 percent
Average Rate: $59.00
Est. Gross Room Revenue: $2,066,843
Overall Capitalization Rate
based on adjusted sale price: 11.5% to 12.1 percent
Comments:
This hotel is located in the Castleton area with visibility
from Interstate 69. This site includes a retention pond
which reduced the usable area to approximately three acres.
This purchase was part of a package sale. Five of the
hotels were purchased by related parties but were not
considered to be a package deal. At the time of sales, the
hotel was in good condition.
The sales price was adjusted to $7,701,549 to include
required capital cost.
<PAGE>
Aurora Inn
- -------------------------------------------------------------------------
Name: HILTON INN (NOW CLARION HOTEL)
Location: Worthington, OH
Grantor (Seller): Orlando Hotel Association
Grantee (Buyer): Boulevard Motel Corporation
c/o Clarion Hotels (Manor Care)
Date of Sale: January 1995
Sales Price: $5,070,000
Property Rights Conveyed: Fee Simple
Number of Rooms: 215
Year Built: 1975
Price per Room: $23,581
Occupancy (1994): 58 percent
Average Rate (1994): $55.00
Est. Gross Room Revenue: $2,503,353
Overall Capitalization Rate
based on adjusted sale
price: 5.7%
Comments:
The hotel includes a restaurant, a lounge, an indoor
pool, and approximately 7,900 square feet of meeting
space. The property was purchased with the intention to
renovate. Shortly after purchase, he hotel was converted
to a Clarion Hotel. The room count was reduced from 231
to 215 to increase business amenities.
The sales price was adjusted to $7,070,000. Renovations
included the addition of business amenities and a soft
goods upgrade to the property.
<PAGE>
Aurora Inn
- -------------------------------------------------------------------------
F.2 SUBJECT PROPERTY PHOTOGRAPHS
<PAGE>
Aurora Inn
- -------------------------------------------------------------------------
Front of Subject Property
Rear of Subject Property
<PAGE>
Aurora Inn
- -------------------------------------------------------------------------
Subject Hotel Lobby
Typical Corridor
<PAGE>
Aurora Inn
- -------------------------------------------------------------------------
Typical Guest Room
Sample Conference Room
<PAGE>
Aurora Inn
- -------------------------------------------------------------------------
Indoor Kiddie Swimming Pool
Outdoor Tennis Courts
<PAGE>
Aurora Inn
- -------------------------------------------------------------------------
F.3 COMPETITIVE HOTEL PHOTOGRAPHS
Holiday Inn Kent
Best Western Woodland
<PAGE>
Aurora Inn
- -------------------------------------------------------------------------
F.4 PROPERTY LEGAL DESCRIPTION
<PAGE>
F.4 PROPERTY LEGAL DESCRIPTION
EXHIBIT A-2
___________
LEGAL DESCRIPTION
_________________
(Aurora)
Situated in the City of Aurora, County of Portage and State of
Ohio and known as being Block D and the unnumbered parcel of land adjoining
said Block D in the Aurora Land Company's Subdivision of part of Original
Aurora Township Lot No. 25, as shown by the recorded plat in Volume 5 of
Maps, Page 45 of Portage County Records further bounded and described as
follows:
Beginning at a point being the intersection of the southerly
sideline of Garfield Road (60 feet wide) (State Route 82) and the easterly
sideline of Shawnee Trail (60 feet wide) said point being also the
principal point of beginning of the parcel herein described;
Course No. 1
____________
- Thence S 40 deg. 04 min. 00 sec. E, along the easterly sideline
of said Shawnee Trail, 605.94 feet to a point of curvature being the
northerly turnout with Hurd Road (50 feet wide);
Course No. 2
____________
- Thence along the arc of said northerly curved turnout
deflecting to the left having a radius of 204.95 feet, a chord bearing S 57
deg. 03 min 13 sec. E, 119.75 feet, an arc distance of 121.52 feet to a
point being the southwesterly corner of a parcel of land conveyed to the
Board of Education by deed recorded in Volume 439, Page 206 of Portage
County Deed Records;
Course No. 3
____________
- Thence N 00 deg. 37 min. 10 sec. E, along the westerly line of
said Board of Education parcel, 529.45 feet to a point on the southerly
sideline of aforesaid Garfield Road being also the northwesterly corner of
said Board of Education parcel;
Course No. 4
____________
- Thence S 89 deg. 56 min. 00 sec. W, along the southerly
sideline of said Garfield Road, 496.25 feet to the principal point of
beginning and containing 3.275 acres of land be the same more or less but
subject to all legal highways and easements of record. Bearings cited
within the above description are to an assumed meridian and indicate angels
only.
AWS/SLMD
Legal Description Only
(1/31/87)
<PAGE>
Aurora Inn
- -------------------------------------------------------------------------
F.5 INDEMNIFICATON
<PAGE>
Had AA engaged to perform additional procedures, other matters might
have come to AA's attention that would have been reported to the
AIRCOA Parties. Furthermore, AA has not performed any procedures
subsequent to the date of Appraisal and therefore AA accepts no
responsibility for events and circumstances occurring after that date.
3. The Appraisal is being provided to the AIRCOA Parties and HLHZ for
informational purposes only. The AIRCOA Parties should complete their
own due diligence in connections with the transaction described above
to the extent they consider necessary. It is understood that the
reading of the accompanying Appraisal does not substitute for the
AIRCOA Parties' own due diligence.
4. By acceptance of this letter, the AIRCOA Parties and HLHZ agree that
neither AA nor any of its affiliates, partners, employees or
representatives shall have any liability to them relating to the use
of the accompanying Appraisal, except to the extent such liability
arises from AA's gross negligence or willful misconduct.
5. This letter and the accompanying Appraisal are intended solely for the
use of AIRCOA Parties and HLHZ and should not be used by those who
have not agreed to the procedures and taken responsibility for the
sufficiency of the procedures for their purposes.
6. In connection with the transaction described above, AA consents to
including, the extent required by federal securities laws, a copy of
the Appraisal and/or a summary thereof or a reference thereto in the
Schedule 13E-3 and related proxy statement with the Securities and
Exchange Commission by AHP or the Special Committee, provided that AA
shall have the right to approve the content of any summary of the
Appraisals, such approval not to be unreasonably withheld.
7. This letter does not modify or amend in any respect the engagement
letter dated February 19, 1997 among HLHZ, AIRCOA Hospitality
Services, Inc., and AIRCOA Hotel Partners, L.P.
Please indicated your acceptance of these arrangements by signing and
returning a copy of this letter to AA.
AIRCOA HOTEL PARTNERS, L.P.
By: AIRCOA Hospitality Services, Inc.,
general partner
By:
________________________________________________
Name:
Title:
By:
________________________________________________
Name:
Title:
<PAGE>
Appraisal of:
PINE LAKE TROUT CLUB
CHAGRIN FALLS, OHIO
As of:
JANUARY 1, 1997
Prepared For:
AIRCOA Hotel Partners, L.P.
Special Committee
March 31, 1997
Prepared By:
ARTHUR ANDERSEN LLP
Hospitality Industry Consulting Services Group
March 31, 1997
Mr. James W. Hire
Hire & Associates
1383 Solitude Lane
Evergreen, CO 80439
Mr. Anthony C. Dimond
Miramar Assest Management, Inc.
617 Veterans Boulevard, Suite 212
Redwood City, CA 94063
Re: Appraisal of Pine Lake Trout Club; Chagrin Falls, Ohio
As of January 1, 1997
Dear Ms. Lee:
As requested, we have completed an appraisal of the fee simple
interest in the above-referenced property. The reader is
advised that our Firm has not audited, examined, reviewed or
applied agreed-upon procedures to the financial data contained in
the accompanying report unless specifically noted. We have relied
on information, including but not limited to industry statistics,
relevant market, demographic and financial data assembled by us
through direct research conducted by our staff or from secondary
sources as well as information provided by you. While these
sources of information are generally recognized as authoritative
in the field or otherwise considered reliable, we have not
audited this information nor do we warrant its completeness or
accuracy. The opinion of market value subject to stabilized
occupancy expressed herein is subject to the assumptions and
limiting conditions set forth in the body of the accompanying
report.
We understand that our valuation will be used to assist you in
determining the fair market value for internal purposes and may
not be disclosed to a third party without the prior written
approval of Arthur Andersen LLP.
Based upon our research and analysis, it is our opinion that the
market value of the fee simple interest, including furniture, fixtures
and equipment, goodwill and excess land as of January 1, 1997 is
TWO MILLION SIX HUNDRED THOUSAND DOLLARS
($2,600,000)
<PAGE>
We appreciate the opportunity to serve you. Please call if you
have any questions or if we can be of further assistance.
Very truly yours,
ARTHUR ANDERSEN LLP
<PAGE>
Pine Lake Trout Club Page i
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TABLE OF CONTENTS
SUMMARY OF CRITICAL FACTS AND CONCLUSIONS..........................iii
GENERAL ASSUMPTIONS AND LIMITING CONDITIONS..........................v
CERTIFICATION.....................................................viii
A. INTRODUCTION.....................................................9
A.1 SUBJECT PROPERTY IDENTIFICATION.................................9
A.2 OWNERSHIP HISTORY...............................................9
A.3 PURPOSE AND FUNCTION OF THE VALUATION..........................10
A.4 PROPERTY RIGHTS APPRAISED......................................11
A.5 EFFECTIVE DATE OF THE VALUATION................................11
A.6 EXPOSURE PERIOD................................................11
A.7 SCOPE OF THE APPRAISAL.........................................11
A.8 SPECIAL ASSUMPTIONS............................................12
B. ANALYSIS OF THE SUBJECT PROPERTY AND ITS MARKET.................14
B.1 DESCRIPTION AND ANALYSIS OF THE PROPERTY.......................14
Location.........................................................14
Legal Description................................................14
Land.............................................................14
Property Improvements............................................17
Past Renovation and Capital Requirements.........................19
Property Taxes...................................................19
Zoning...........................................................22
B.2 AREA ANALYSIS..................................................23
Economic and Demographic Indicators..............................24
Employment.......................................................26
Transportation...................................................28
Tourism and Recreation...........................................30
Convention and Trade Show Market.................................30
Conclusion.......................................................30
B.3 HIGHEST AND BEST USE ANALYSIS..................................32
Highest and Best Use of The Land as if Vacant....................32
Highest and Best Use of The Property As Currently Improved.......33
Conclusion and Reconciliation of Highest and Best Use............36
D. THE APPRAISAL PROCESS...........................................37
D.1 THE COST APPROACH..............................................37
D.2 SALES COMPARISON APPROACH (VALUATION OF EXCESS LAND)...........38
Conclusion by the Sales Comparison Approach......................42
D.3 INCOME APPROACH................................................43
Historical Financial Performance.................................45
Estimated Operating Results......................................49
Investment Climate Overview......................................59
Discounted Cash Flow Analysis....................................62
E. RECONCILIATION AND FINAL VALUE ESTIMATE........................63
<PAGE>
Pine Lake Trout Club Page ii
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F. ADDENDA.........................................................66
F.1 SUBJECT PROPERTY PHOTOGRAPHS.....................................
F.2 PROPERTY LEGAL DESCRIPTION.......................................
F.3 PROPERTY ZONING REGULATIONS......................................
F.4 EXCESS LAND PURCHASE OPTION
F.5 FIRREA MINIMUM APPRAISAL STANDARDS CHECKLIST.....................
<PAGE>
Pine Lake Trout Club Page iii
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SUMMARY OF CRITICAL FACTS AND CONCLUSIONS
Property Name: Pine Lake Trout Club
Property Address: 17021 Chillicothe Road
Chagrin Falls, Ohio
Property Location: The subject property is located
on 81.1 acres of natural
ponds, streams and woodlands.
It is accessed via an
easement over neighboring land
from Chillicothe Road in
Bainbridge Township, Ohio.
Property Type: The club contains eight cabins
(six month to month rentals and
two daily rentals), a log cabin
dining room, a conference
cabin, a pro-shop and the
main lodge with lounge
and banquet area.
Number of Rooms: Eight cabin suites
Owner of Record: AIRCOA Hotel Partners LP
Year-End Membership:
1994 478
1995 477
1996 (Estimated) 500
Year-End Average Membership Fees:
1994 $992
1995 $993
1996 (Estimated) $975
Interest Appraised: Fee Simple
Land Area: 23.5 acres Trout Club
57.6 acres Excess Land
81.1 acres Total
Building Area: Eight cabins ranging in size
(500 SF - 700 SF)
Dining Cabin (1,200 SF)
Main Lodge (2,000 SF)
Conference Cabin (600 SF)
Pro- Shop (500 SF)
Year Completed: Buildings were primarily
constructed during the 1950's
and 1960's.
<PAGE>
Pine Lake Trout Club Page iv
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Highest and Best Use:
Land as though vacant: Single Family Residential
- Cluster Development
Land as improved: Trout Club - Excess Land for
Residential Development
Date of Valuation: January 1, 1997
Date of Inspection: December 18, 1996
Value Indications (Including Furniture, Fixtures, Equipment):
$ Amount
--------
Cost Approach: N/A
Sales Comparison Approach N/A
Income Approach $2,600,000
Reconciled Value Indication $2,600,000*
* The appraisers have estimated the market value of the 57.6
acres of excess land at $500,000 (See Sales Comparison Approach
(Section D. 2)). However, the owner of this property gave a
purchase option on this parcel to Newpart L.P. on February 18,
1987, amended on February 20, 1987. The option price of the
parcel was set at $10.00 and expires on February 20, 2007.
However, this option can only be exercised if the following
conditions are met:
1. Newpart delivers to AHP evidence satisfactory to AHP that
Newpart has obtained any and all permits, licenses,
variances, or other consents from the proper state and local
authorities necessary to allow the club to continue to be
operated as a hunting or fishing club once the Property is
conveyed or leased to Newport under the option and;
2. Obtaining the release of the property from any mortgage
covering the Property. The Option is subject to and
subordinate to any mortgage now or hereafter encumbering
the property.
Given the existence of this purchase option discussed above, the
appraisers have determined that the current market value of the
excess land is nominal ($10.00).
A full copy of this option agreement and amendment are included
in the Addenda of this report.
<PAGE>
Pine Lake Trout Club Page v
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GENERAL ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal report is subject to the following general
assumptions and limiting conditions:
1. No investigation has been made of, and no responsibility
is assumed for, the legal description of the property
being valued or legal matters, including title or
encumbrances. Title to the property is assumed to be
good and marketable unless otherwise stated. The
property is assumed to be free and clear of any liens,
easements, or encumbrances unless otherwise stated.
2. Information furnished by others, upon which all or
portions of this appraisal are based, is believed to be
reliable but has not been verified in all cases. No
warranty is given as to the accuracy of such
information.
3. It is assumed that all required licenses, certificates
of occupancy, consents, or other legislative or
administrative authority from any local, state, or
national government or private entity or organization
has been or can readily be obtained or renewed for any
use on which the value estimates contained in this
report are based.
4. Full compliance with all applicable federal, state, and
local zoning, use, occupancy, environmental, and similar
laws and regulations is assumed unless otherwise stated.
5. No responsibility is taken for changes in market
conditions, and no obligation is assumed to revise this
report to reflect events or conditions which occur
subsequent to the appraisal date hereof.
6. The opinion of value is predicated on the financial structure
prevailing as of the date of this appraisal.
7. Responsible ownership and competent property management
are assumed.
8. Areas and dimensions of the property were obtained from
sources believed to be reliable. Maps or sketches, if
included in this report, are only to assist the reader
in visualizing the property, and no responsibility is
assumed for their accuracy. No independent surveys were
conducted.
9. It is assumed that there are no hidden or un-apparent
conditions of the property, subsoil, or structures that
render it more or less valuable. No responsibility is
assumed for such conditions or for arranging engineering
studies that may be required to discover them.
10. No soil analysis or geological studies were ordered or
made in conjunction with this report, nor was an
investigation made of any water, oil, gas, coal, or
other subsurface mineral and use rights or conditions.
11. Neither Arthur Andersen LLP nor any individual signing
or associated with this report shall be required by
reason of this report to give further consultation,
provide testimony, or appear in court or at other legal
<PAGE>
Pine Lake Trout Club Page vi
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proceedings unless specific arrangements therefore have
been made.
12. This report has been made only for the purpose stated
and shall not be used for any other purpose. Neither
this report nor any portions thereof (including, without
limitation, any conclusions as to value or the identity
of Arthur Andersen LLP or any individuals signing or
associated with this report or the professional
associations or organizations with which they are
affiliated) shall be disseminated to third parties by
any means without the prior written consent and approval
of Arthur Andersen LLP.
13. The date of value to which the opinions expressed in
this report apply is set forth in the opinion letter at
the front of this report. Our value opinion is based on
the purchasing power of the U.S. dollar as of that date.
We have no obligation to update our findings and
conclusions for changes in market conditions which occur
subsequent to our fieldwork.
14. Our study and report will be based on assumptions and
estimates which are subject to uncertainty and
variation. These estimates are often based on data
obtained in interviews with third parties, and such data
are not always completely reliable. Therefore, while our
estimates will be conscientiously prepared on the basis
of our experience and the data available to us, we make
no warranty of any kind that the financial results
projected will, in fact, be achieved.
15. Unless otherwise stated in this report, no hazardous
material, which may or may not be present on or
near the property, was observed. We have no knowledge
of the existence of such materials on or in the
property; however, we are not qualified to detect
such substances. The presence of potentially
hazardous substances, such as asbestos, urea-formaldehyde
foam insulation, or industrial wastes, may
affect the value of the property. The value estimates
herein are predicated on the assumption that
there is no such material on, in, or near the property
that would cause a loss in value. No responsibility is
assumed for any such conditions or for any expertise or
engineering knowledge required to discover them. The client
should retain an expert in this field if further information
is desired.
16. This appraisal has been made in conformance with the Uniform
Standards of Professional Appraisal Practice of The Appraisal
Foundation.
17. The allocation in this report of the total valuation
among components of the property applies only to the
program of utilization stated in this report. The
separate values for any components may not be applicable
for any other purpose and must not be used in
conjunction with any other appraisal.
18. Arthur Andersen consents to including, to the extent
required by federal securities laws, a copy of the
Appraisal and/or a summary thereof or a reference
thereto in the Schedule 13E-3 and related proxy
statement with the Securities and Exchange Commission
by AHP or the Special Committee, provided that
Arthur Andersen shall have the right to approve the
content of any summary of the Appraisals, such
approval not to be unreasonably withheld. Otherwise,
this report and parts thereof, and any additional
<PAGE>
Pine Lake Trout Club Page vii
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material submitted, may not be used in any prospectus
or printed material used in connection with the
sale of securities or participation interests in any
Public Offering, Securities and Exchange Commission
filing, or other public document.
19. Arthur Andersen LLP's maximum liability relating to
services rendered under this report (regardless of form
of action, whether in contract, negligence, or otherwise)
shall be limited to the charges paid to Arthur Andersen LLP
for the portion of its services or work products giving
rise to liability. In no event shall Arthur Andersen LLP
be liable for consequential, special, incidental, or
punitive losses, damages, or expenses (including, without
limitation, lost profits, opportunity costs, etc.) even
if it has been advised of their possible existence.
20. The Americans with Disabilities Act became effective
January 26, 1992. We did not make any observations or
interpretations on compliance with the ADA. It is
possible that a compliance survey of the property,
together with a detailed analysis of the requirements of
the ADA could reveal that the property is not in
compliance with the requirements of the Act. If so, this
fact could have a negative effect upon the value of the
property. Since we have no direct evidence relating to
this issue, we did not consider possible non-compliance
with the requirements of ADA in estimating the value of
the property.
<PAGE>
Pine Lake Trout Club Page viii
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CERTIFICATION
We certify that to the best of our 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 our personal, unbiased professional
analyses, opinions and conclusions.
- -- we have present no prospective interest in the property
that is the subject of this report, and we have no
personal interest or bias with respect to the parties
involved.
- -- our compensation is not contingent on an action or event
resulting from the analyses, opinions, or conclusions in,
or the use of, this report.
- -- Sheila Bjornstad, James Sullivan and Roger D. Ritley
made personal inspections of the property in
December, 1996. Roger Cline and Brian E. Ginsberg have
not inspected the subject property.
- -- our 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
Supplemental Standards of Professional Practice of the
Appraisal Institute and the Uniform Standards of
Professional Appraisal Practice of The Appraisal
Foundation;
- -- the use of this report is subject to the requirements of
the Appraisal Institute relating to review by its duly
authorized representatives;
- -- neither all nor any part of the contents of this report
(especially any conclusions as to value or the identify of
the appraiser) 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.
- -- this appraisal assignment was not based on a requested
minimum valuation, a specific valuation, or the
approval of a loan.
Respectfully submitted,
/s/ Brian E. Ginsberg, MAI /s/ Roger S. Cline
- ------------------------------ --------------------------------
Brian E. Ginsberg, MAI Roger S. Cline
Review Appraiser
Manager, Valuation Services /s/ Roger D. Ritley
--------------------------------
Roger D. Ritley ASA, MAI, CRE
Contributing Appraisers Review Appraiser
Sheila M. Bjornstad Certified General Appraiser State of Ohio
James T. Sullivan Certification # 383545
<PAGE>
Pine Lake Trout Club Page 9
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A. INTRODUCTION
A.1 SUBJECT PROPERTY IDENTIFICATION
Property Address: Pine Lake Trout Club
17021 Chillicothe Road
Chagrin Falls, Ohio
Tax Reference: Account # 02-011800
Account # 02-011910
Deed Reference: Volume 780 Page 87
Current Owner of Record: AIRCOA Hotel Limited Partnership
A.2 OWNERSHIP HISTORY
AIRCOA Hotel Partners LP (AHP) acquired its interest in the Pine
Lake Trout Club pursuant to a deed dated February 20, 1987
between AHP(Grantee) and Newpart, LP (Grantor). It was recorded
in the Geauga County Offices in Volume 780, Page 87 and was a
related-party transfer.
<PAGE>
Pine Lake Trout Club Page 10
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A.3 PURPOSE AND FUNCTION OF THE VALUATION
The purpose of this report is to estimate the market value of the
fee simple estate in the subject property. Arthur Andersen LLP
has been engaged by the Special Committee of AIRCOA Hotel
Partners, L.P. (AHP) for the purpose of assisting them in
assessing the value of the individual properties owned by the
partnership. We have estimated the market value of the property
"as-is" assuming existing management agreements, and considering
the effect of the purchase option on the overall value of the
subject property.
As used herein, market value is defined as1 :
"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 the sale as of a
specified date and the passing of title from seller to
buyer under conditions whereby:
a. buyer and seller are typically motivated;
b. both parties are well informed or well advised,
and acting in what they consider their best
interests;
c. a reasonable time is allowed for exposure in the
open market;
d. payment is made in terms of cash and United States
dollars or in terms of financial arrangements
comparable thereto; and
e. 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."
This appraisal has been prepared in compliance with the Appraisal
Standards Board requirements and is a self-contained appraisal
report. The report contains all information significant to the
solution of the appraisal problem and reports all significant
date in comprehensive detail.
- -----------
1 Uniform Standards of Professional Appraisal Practice, Appraisal
Foundation, 1990 Edition.
<PAGE>
Pine Lake Trout Club Page 11
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A.4 PROPERTY RIGHTS APPRAISED
The property rights appraised are the fee simple ownership of the
land and improvements, including furniture, fixtures, and equipment.
A.5 EFFECTIVE DATE OF THE VALUATION
The effective date of this value estimate is January 1, 1997. The
property was inspected by James T. Sullivan and Sheila Bjornstad
on December 18, 1996.
A.6 EXPOSURE PERIOD
Exposure period refers to the amount of time which a property
would have been on the market prior to the date of appraisal for
it to sell at the appraised value. The current marketplace has
been characterized by illiquidity and capital restraints,
particularly on the part of banks, which has affected the time in
which real estate takes to sell. The market for most types of
properties was much more active in the 1980s due to greater
availability of credit and greater investor optimism. The volume
of transactions for all property types diminished in 1991 and
1992, and there was less investment and development activity in
the marketplace. Since then, the markets have shown improvement
and there has been a significant increase in sales activity. Most
of the investors with whom we have spoken agreed that an exposure
period of between nine months and one year would be sufficient in
order to maximize the price for a unique property such as the
subject.
A.7 SCOPE OF THE APPRAISAL
As part of this assignment, the appraisers made a number of
independent investigations and analyses. In conducting our
investigation, various governmental planning agencies and the
local Chamber of Commerce were contacted for demographic data,
land policies and trends, and growth estimates. Neighborhood data
were supplemented by physical inspection of the defined area.
Information regarding zoning, utilities, and other limitations on
site utilization was obtained from the client and through the
appropriate agencies. Both the site and the surrounding area was
<PAGE>
Pine Lake Trout Club Page 11
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inspected to determine suitability for development. Estimated
membership levels and fees, ancillary revenue and expenses are
based upon historical data and market evidence.
A diligent search for comparable data was conducted,
and comparable information was obtained from both public and
private sources. In the case of comparable sales and rental data,
attempts were made to contact the buyers or sellers or other
knowledgeable third parties to verify that the transactions were
at arm's length, cash equivalent, and market reflective. Due to
the unique nature of the subject property, the appraisers were
unable to locate any comparable sale information for a trout club
operation. However, the sales comparison approach was employed to
determine the value of the excess land associated with the
subject property. The cost approach was not utilized as it is
considered to have limited reliability due to the difficulty in
estimating the significant depreciation and external obsolescence
present at the subject. The income capitalization approach was
given primary emphasis as there was sufficient data for its
application and it reflects the typical investor's behavior.
A.8 SPECIAL ASSUMPTIONS
In determining the market value of the excess land valued in this
analysis, the appraisers have assumed that the owners can obtain
the requisite state and local permits necessary to subdivide the
parcel from the main club parcel and assure the continued legal
operation of the trout club operation. The determination that the
subject property has 57.6 acres of excess land was based on
conversations with property management. The appraisers have
valued the market value of the 57.6 acres of excess land at
$500,000. However, the owner of this property gave a purchase
option on this parcel to Newpart L.P. on February 18, 1987 and
amended on February 20, 1987. This option price of the parcel was
set at $10.00 and expires on February 20, 2007. However, this
option can only be exercised if the following conditions are met:
1. Newpart delivers to AHP evidence satisfactory to AHP
that Newpart has obtained any and all permits,
licenses, variances, or other consents from the proper
state and local authorities necessary to allow the club to
continue to be operated as a hunting or fishing club once
the Property is conveyed or leased to Newport under the
option and;
2. Obtaining the release of the property from any mortgage
covering the Property. The Option is subject to and
subordinate to any mortgage now or hereafter encumbering
the property.
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Pine Lake Trout Club Page 13
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A full copy of this option agreement and amendment are included
in the Addenda of this report.
In addition, management was unable to provide a definitive
historical analysis of membership rolls for the years 1994 and
1995. Management did provided membership information for 1996,
and information on membership turnover for the previous two
years. With the use of this information, the appraisers were able
to estimate historical membership numbers for 1994 and 1995.
<PAGE>
Pine Lake Trout Club Page 14
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B. ANALYSIS OF THE SUBJECT PROPERTY AND ITS MARKET
This section of the report presents a description and analysis of
the subject property's location, improvements, physical
condition, need for capital expenditures, property taxes, and
zoning. In addition, this section of the report presents a review
of the subject's market area and an analysis of the property's
highest and best use.
B.1 DESCRIPTION AND ANALYSIS OF THE PROPERTY
LOCATION
The subject of the appraisal is an 88.1-acre parcel of land that
is improved by a multi-building trout club complex. The property
was built in stages from the 1930's to the 1960's and is known as
the Pine Lake Trout Club. It is located on the east-side of
Chillicothe Road in Chagrin Falls, Ohio. The civic address of the
property is 17021 Chillicothe Road.
LEGAL DESCRIPTION
A detailed legal description is provided in the addenda of this
report.
LAND
Size and Configuration: The subject site is irregular in shape
and contains 88.1 acres. The appraisers have included a site plan
on the next page which clarifies the shape and layout of the
subject site.
Frontage and Accessibility: The subject property has significant
frontage along Chillicothe Road (Rte 306). However, this is
undeveloped land and heavily forested providing no visibility for
the trout club which lies in the interior of the parcel. Access
to the subject improvements is provided by an access road which
utilizes an easement over a neighboring property. The subject
property has a small sign on Chillicothe Road and can easily be
<PAGE>
Pine Lake Trout Club Page 15
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missed. The rear of the subject site reportedly has access to
Rte. 422 via an easement over a neighboring property.
<PAGE>
[Subject Site Plan]
<PAGE>
Pine Lake Trout Club Page 17
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Topography: The topography of the site is rolling hills with
many streams and ponds interspersed over the parcel.
Floodplain: According to the National Flood Insurance Rate
Map for Geauga County, Ohio Panel No. 390190 0125 B Panel 125 of
150, the subject property lies in Zone X, the area above the
500-year flood plain.
Utilities and Public Services: All utilities are available
to the site including public gas, sewer, telephone, and electric.
The property relies on well water.
Easements and Encroachments: Typical utility and access
easements exist through the subject site. We are not aware of any
easements which negatively impact the subject.
Development on Neighboring Sites: To the west of the subject
property is a nursery/ gardening center. and a private home. The
subject neighborhood is primarily single family residential, with
a significant amount of undeveloped land.
PROPERTY IMPROVEMENTS
General
The existing improvements were constructed primarily during the
1950's and 1960's with the exception of the Log Cabin Dining
Room, which was constructed in the 1930's and renovated and added
to in the 1950's and 1960's. The subject property comprises a
complex of twelve one-story wood frame buildings interspersed
over approximately 23 acres. The subject site has a man-made lake
and a number of streams situated throughout the property. The
main building in the complex is "The Lodge" which was constructed
during the 1960's. This building is wood frame construction and
consists of a bar/lounge area with large wood burning fire place,
a main banquet room which can seat approximately 150 people, a
kitchen, and the manager's office. The building contains
approximately 2,000 SF with an outdoor patio for cocktails in the
summertime. The Log Cabin Dining Room is the only restaurant on
the premises and can seat approximately 40 people. It serves
lunch and dinner only and is closed on Mondays. The conference
cabin is used for small parties and meetings and also houses the
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Pine Lake Trout Club Page 18
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accounting staff for the trout club with approximately 500 SF.
The pro-shop/fishing shack is leased to a fishing pro and sells a
wide array of fishing equipment and accessories. The remaining
buildings on the site are eight one-story wood-frame cabins.
Permanent Rental Cabins
At present, the club contains six cabins which are leased on a
month-to month basis. These cabins are comprised of four
1BR/1Bath units, one 2BR/2Bath unit, and one 2BR/1Bath. All of
these cabins have either oil or gas heat and electricity but are
not air-conditioned. The tenants are responsible for all
utilities and generally furnish their own cabins, with the
exception of two which contain a mix of club and tenant
furniture.
Daily Rental Cabins
At present the club contains two cabins which are leased on a
daily basis. These cabins are comprised of one 2BR/2Bath unit and
one 3BR/2Bath unit. Both of these cabins have gas heat and
electricity but only one is air-conditioned. The cabins are
furnished in a rustic style with a master suite and other
bedrooms with single and double beds. The floors of the bedrooms
and living room are carpeted. The kitchen and bathroom have tile
flooring.
Food and Beverage Outlets
The Log Cabin Dining Room is the only restaurant on the premises
and can seat approximately 40 people. It was originally
constructed in the 1930's with the kitchen added in the 1950's.
The building is an actual log cabin and is constructed of wood
and stone. It serves lunch and dinner only and is closed on
Mondays. The restaurant is very rustic in decor with wood floors
and wood furnishings. The restaurant also has a large gas-fired
fireplace made of stone. The restaurant has a central HVAC
system.
Meeting and Banquet Space
The main building in the complex is "The Lodge" which was
constructed during the 1960's . This building is wood frame
construction and consists of a bar/lounge area with large wood
burning fire place, a main banquet room which can seat
approximately 150 people, a kitchen and the manager's office. The
building contains approximately 2,000 SF with an outdoor patio
for cocktails in the summertime. The building has a central HVAC
system. The conference cabin is used for small parties and
meetings and also houses the accounting staff for the trout club
and is approximately 500 SF. This building also has central HVAC.
<PAGE>
Pine Lake Trout Club Page 19
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Recreational Facilities
The major recreation activity at the subject property is trout
fishing. The ponds and streams on the subject grounds are
annually stocked with fish. Members and their guests fish from
the shore using casting rods and reels using fly lures for bait.
PAST RENOVATION AND CAPITAL REQUIREMENTS
The subject property has not been upgraded in recent years and
there are no current plans for major renovations or additions.
Most of the items in the capital budget are for the repair and
replacement of the existing facilities. Items such as roof
replacement, furnace replacement and furniture replacement are
included in the capital budget.
SUBJECT PROPERTY IMPROVEMENT CONCLUSION
In general, the subject property's improvements are in
average condition and are functional in design given the
property's current use as a trout club. The facility is
well-maintained and its decor and furnishings are in keeping with
the rustic atmosphere of the club. The appraisers did not notice any
apparent deferred maintenance.
PROPERTY TAXES
The subject property is under the taxing jurisdiction of Geauga
County, Ohio. Real estate taxes are assessed on a calendar year
basis and are payable bi-annually. Personal property taxes
(furniture, fixtures, and equipment) are also assessed on a
calendar/fiscal year basis and are payable biannually.
<PAGE>
Real Estate Taxes
Taxing Jurisdiction: Geauga County, Ohio
Tax Account Number: 02-011800
02-011910
Current Tax Year: January 1 through December 31, 1997
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Tax Rates Established: Tax rates are established annually.
1996 Tax Rate: $6.08 per $100 of assessed value.
Assessments Established: The assessed value of the club
for tax purposes is to be 35
percent of market value (based upon
conversations with the assessor). The
market value of the property is
reappraised every three years using
primarily the Sales Comparison Approach.
The last appraisal took place in
January 1996.
The following table illustrates the computation of the real
estate taxes for the last four years.
- --------------- ------------------ --------------------- ----------------
Year Market Value Assessed Value Tax Rate
$100/AV
- --------------- ------------------ --------------------- ----------------
1993 $555,028 $194,260 $6.37
1994 609,429 213,300 6.06
1995 609,429 213,300 5.91
1996 625,800 219,040 6.24
- --------------- ------------- ---- ---------------- ---- ------------ ---
- --------------- ----------------------------
Year Real Estate Taxes
Amount % Chg.
- --------------- ----------------------------
1993 $12,377 --------
1994 12,926 4.43%
1995 12,597 -2.54%
1996 13,318 5.72%
- --------------- -------------- -------------
An analysis of the last four years indicates that taxes have
grown 2.5 percent per annum. Given our projections for increased
membership and income for the subject property, we have applied a
conservative increase of 3.5% percent per annum.
Personal Property Taxes
Taxing Jurisdiction: Geauga County, Ohio
Tax Account Number: N/A
Current Tax Year: January 1 - December 31, 1997
Inventory Report Due: If the tax payer files the personal
property return by April 1, the
county will give a $10,000 exemption
off reported values.
1996 Tax Rate: $106.85 per $100 of assessed value.
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Assessments Established: The assessed value is determined
by annual reporting forms
submitted by the tax payer.
The following table illustrates the computation of the personal
property taxes for the last four years.
------------- ----------------- ----------------- ------------------
Year Assessed Tax Rate Real Estate Taxes
Value /$100 AV
------------- ----------------- ----------------- ------------------
1993 $8,410 $10.34 $870
1994 17,770 10.34 1,839
1995 18,320 10.34 1,895
1996 20,410 10.69 2,182
----------- - ------------- --- ----------- ----- -------------- ---
We have projected that personal property taxes will increase by
3.5% percent per annum over the projection period. However, if
management files returns by April 1 of each year, this expense
will decrease by 50 percent due to the $10,000 exemption given to
on-time filers. We have assumed that management will file all
returns by April 1 of each year in order to benefit from the
exemption.
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Pine Lake Trout Club Page 22
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ZONING
The subject property is presently zoned R3-A Rural Residential by
the Township of Bainbridge. This zoning district limits use to
government buildings and single-family residential homes. Given
the subject's current use as a trout club, it represents a legal
non-conforming pre-existing use.
Restrictions and Requirements
The following summarizes the restrictions and requirements that
the subject must conform to under its existing zoning.
Minimum Lot Size 3 acres
Minimum Lot Width 200 feet
Minimum Yards Front: 100 feet
Side: 50 feet
Rear: 90 feet
Maximum Building Height 2.5 stories or 35 feet
whichever is less
Minimum Dwelling Bulk 1,000 SF
In order to maximize the preservation of the township's natural
resources and provide design flexibility to developers, the R3-A
zone also permits cluster development. A copy of the applicable
regulations for cluster development can be found in the addenda
of this report, listed below are the major factors affecting
development:
- Minimum land area for cluster development shall be nine acres;
and
- Maximum density shall be one (1) unit for each three (3)
acres within the land area designated for cluster
development; provided the maximum density for any single
acre in the cluster development shall not exceed three (3)
units per acre.
As discussed earlier, the subject's current use as a trout club
represents a legal non-conforming use. The zoning regulation does
allow for the development of the 57.6+/- acres of excess land as
residential housing.
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B.2 AREA ANALYSIS
The Area Analysis provides information on market conditions as
they currently exist in Geauga County and the Chagrin Falls area.
Economic and sociological trends provide insights relating to the
strength of the local market area; a review of such trends has
been completed to direct and support our estimates of future
market growth in the lodging industry.
The following section of the report outlines general trends in
the market. We consulted with the Geauga County Chamber of
Commerce, Convention and Visitors Bureau, Economic Development
Bureau and other local sources for much of the following
information. When possible, information was verified directly
from the primary sources.
The subject property is located in Chagrin Falls on the
border of Cuyahoga and Geauga counties. It is a suburban
community in Geauga County roughly ten miles north of the
Cleveland metropolitan area. The Cleveland (MSA) comprises of the
city of Cleveland, Geauga county and the city of Chagrin Falls.
<PAGE>
ECONOMIC AND DEMOGRAPHIC INDICATORS
This section summarizes historical trends in several key economic
and demographic indicators in the Cleveland market area. The
following table presents historical trends in Population, Retail
Sales, Eating and Drinking Sales, and Median Household Effective
Buying Power.
- ----------------------------------------------------------------------------
Summary of Economic and Demographic Statistics
For the Chagrin Falls Market Area
CAG (1)
1991 1995 1991-1995
---- ---- ---------
Population (000's)
Geauga County 81.9 83.6 0.5%
Cleveland MSA 1,825 2,224.2 5.1%
State 10,864 11,173.3 0.7%
United States 250,812 264,900.9 1.4%
Retail Sales ($000's)
Geauga County $356,131 $555,618 11.8%
Cleveland MSA 13,073,662 20,203,077 11.5%
State 73,205,986 104,899,945 9.4%
United States 1,807,182,519 2,335,241,609 6.6%
Eating & Drinking Sales
($000's)
Geauga County $33,015 $55,608 13.9%
Cleveland MSA 1,328,851 2,414,524 16.1%
State 7,184,239 11,827,030 13.3%
United States 182,107,195 241,780,257 7.3%
Median Household Effective
Buying Income (EBI)
Geauga County $37,786 $45,343 4.7%
Cleveland MSA 29,946 33,111 2.5%
State 27,201 31,899 4.1%
United States 27,912 32,238 3.7%
Source: Sales and Marketing Management, Survey of Buying Power.
Note: (1) Compound Annual Growth
- ------------- --------------------------------------------------------------
Population
Between 1990 and 1995, population growth in Geauga County has
been significantly below that of the national average, but is in
line with rural communities within the state. However, during
this period the population in the Cleveland MSA has increased at
a 5.1 percent compound annual rate. This growth can be attributed
<PAGE>
Pine Lake Trout Club Page 24
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to the exceptional economic incentives offered by the state, and
as a result many major corporations have moved their operations
to Cleveland. This growth is expected to continue (albeit at a
slightly slower pace) as long as the state maintains this
incentive policy.
Retail Sales
Retail sales have exhibited strong increases in Geauga County,
the Cleveland MSA and in the state as a whole; far ahead that of
the national rate. These strong increases are indicative of the
increasing amount of disposable income in the market area. This
trend should continue as more individuals, tourists and
corporations explore the benefits of this rapidly expanding area.
Eating and Drinking Sales
Eating and drinking sales have increased at an even faster rate
than that of the retail sector. Corporate entertaining and the
continued expansion of the tourist market have fueled the rapid
expansion of this sector. Between 1991 and 1995, eating and
drinking sales increased at an annual average rate of 13.9
percent in the county of Geauga and 16.1 percent for the
Cleveland MSA. Continued growth is expected as both the local and
state economy flourish with expanding tourism and corporate
expansion.
Median Household Effective Buying Income (EBI)
Median household effective buying income in the subject market
has increased at a rate slightly higher that of the national
average. This growth is due to a combination of the expanded
tourism market in the area, and the rapid growth of the Cleveland
metropolitan area. The median household EBI of residents in
Geauga County are significantly higher than that of the Cleveland
MSA ($45,343 in Geaugu County compared to $33,111 in Cleveland in
1995).
The local market area is considered to be an upscale low density
residential community of suburban Cleveland, which supports this
higher EBI. As a result of this upscale market perception, there
have been signs of growth in new residential development in the
subject market. Our neighborhood inspection indicated that there
were several new subdivisions in the area, with upscale home. In
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Pine Lake Trout Club Page 26
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addition our analysis of raw residential land sales in the
subject market demonstrated a strong upward trend in prices over
the past three years.
EMPLOYMENT
Employment and Unemployment
Trends in employment are an excellent indicator of the overall
health of a local economy. The following table presents a summary
of the trends in employment and unemployment in the local market
area for the last several years.
- -------------------------------------------------------------
Growth in Employment and Unemployment
- -------------------------------------------------------------
Geauga County
---------------------------------------------
Labor Force Total Empl. % Unempl.
-------------- -------------- ---------------
1990 42,855 41,186 3.9%
1991 42,754 40,876 4.4%
1992 43,397 40,855 5.9%
1993 42,465 40,219 5.3%
1994 43,154 41,208 4.5%
1995 43,366 41,708 3.8%
CAG (90-95) 0.3% 0.3%
Ohio
---------------------------------------------
Labor Force Total Empl. % Unempl.
-------------- --------------- --------------
1990 5,408,870 5,099,214 5.7%
1991 5,438,380 5,088,524 6.4%
1992 5,496,075 5,094,796 7.3%
1993 5,490,527 5,130,907 6.5%
1994 5,541,163 5,234,222 5.5%
1995 5,584,352 5,318,252 4.8%
CAG (90-95) 0.8% 1.1%
- -------------------------------------------------------------
Source: Department of Labor and United States Bureau
of Labor Statistics
Note: Compound Annual Growth
- -------------------------------------------------------------
Unemployment levels in both Geauga County and the State
of Ohio have remained below that of the national average.
Unemployment rates have continued to decrease slightly over the
past five years, due to an improving local and state economy
fueled by seasonal tourism and corporate expansion in the area.
This trend is expected to continue into the future with a
positive effect upon all aspects of the hospitality trade
including retail sales, eating and drinking sales, and household
effective buying income.
Employment by Industry Sector
Employment by industry sector details the number of individuals
employed in a market area by each major industry category. An
analysis of the trends in employment by industry sector can
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Pine Lake Trout Club Page 27
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provide insights on which are the most important industries in
the local market area and which sectors have reflected recent
growth or declines. The following table presents a summary of
trends in employment by industry sector for the subject market
area.
- ------------------------------------------------------------------------
Employment by Industry Sector (1990-1995)
Cleveland MSA (000's)
- ------------------------------------------------------------------------
1990 1995 % Change
------------- ------------- -------------------
Manufacturing 242.4 227.4 -6.2%
Construction 40.6 41.4 1.9%
Mining 0.9 1.0 11.1%
Transportation,
Communication & Util. 47.3 44.4 -6.1%
Finance, Insurance
& Real Estate 62.2 69.3 11.4%
Wholesale Trade 68.6 71.0 3.5%
Retail Trade 184.1 190.5 3.5%
Services 285.6 318.2 11.4%
Government 137.8 141.7 2.8%
- ---------- ----- ----- ----
Total Employment 1069.4 1104.9 3.31%
- ------------------------------------------------------------------------
Source: Bureau of Labor Statistics
- ------------------------------------------------------------------------
The strongest sectors of growth in employment over the last five
years respectively are Services; Finance, Insurance and Real
Estate; and Mining. The strength of these industries,
specifically Services; and Finance, Insurance and Real Estate
indicate the strength of the local economy because of the nature
of the funds that stimulate growth in these industries. The
growth of these industries at such a rapid rate indicates a
growing percentage of expendable income and an extremely strong
local economy. Specifically, the lodging industry is included in
the Services sector, the fastest growing area of the economy over
the last five years.
Major Employers
The following table summarizes the largest employers in the
Geauga County area that generate demand for lodging
accommodations.
<PAGE>
Pine Lake Trout Club Page 28
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- -------------------------------------------------- -------------------
Company Name No. Employees
- -------------------------------------------------- -------------------
Sea World of Ohio 1520
Lucas Aerospace Power Equipment 100
Furon- Industrial Processing Strategies 70
Aurora Farms Factory Outlets 300
McMaster Carr 90
Geauga Lake 1000
Geauga Lake Amusement Park 1360
Rotek 250
OEM-Miller Corporation 75
Omega Pultrusion Corporation 100
- ----------------------------------------------------------------------
Source: Chamber of Commerce
- ----------------------------------------------------------------------
As indicated in the preceding table, the largest employers in the
Chagrin Falls area include Sea World of Ohio, the Geauga Lake
Amusement Park and Geauga Lake, all of which are tourist draws
for the area. Area hotel operators and officials indicate that
Sea World and Geauga Lake Park are the largest two demand
generators for overnight room accommodations in the area. In
additional to this seasonal employment, area officials indicate
that there area several corporations in and around the area that
use accommodations to lodge company employees and entertain
clients.
TRANSPORTATION
Roadway System and Public Transportation
Major roadways to the Chagrin Falls Area include State Route 306
and the newly expanded State Highway 422, providing direct access
to downtown Cleveland. The completion of this highway has made
Chagrin Falls a more accessible suburb since the completion of
its expansion in the early 1990's. The new roadway has led to an
increase in residential development in the subject area and
subsequent increase in land values. In addition, Route 306
connects Chagrin Falls to Interstates 80,76 and 271; and
therefore to the rest of the midwest and northeast. As previously
mentioned, the expansion of State Highway 422 in the early 1990's
has helped Chagrin Falls growth and made it a convenient suburb
of Cleveland. As would be expected, the expansion has had a
positive effect on the hospitality market in the area.
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AIRPORT
Residents and business travelers in the Chagrin Falls area are
serviced by both the Chagrin Falls Airport and the Cleveland -
Hopkins International Airport. The Chagrin Falls Airport is the
closest airport to the subject property, but has limited
commercial service. The major commercial airport that serves the
area is the Cleveland - Hopkins International Airport,
approximately 40 minutes away by ground transportation. The
follow table highlights the air passenger activity at the
Cleveland - Hopkins International Airport between 1991 and 1995.
- ----------------------------------------------------------------------------
Trends in Air Passenger Activity at the
Cleveland - Hopkins International Airport
- ----------------------------------------------------------------------------
Year Enplanements Deplanements Total
1991 4,087,165 4,055,479 8,142,644
1992 4,470,511 4,465,268 8,935,779
1993 4,689,335 4,724,516 9,413,851
1994 5,530,253 5,601,273 11,131,526
1995 5,570,790 5,685,075 11,255,865
% Change from
1991 - 1995 36% 40% 38%
- ------------------ ---------------------------------------------------------
Source: Cleveland Department of Operations
As indicated in the preceding table, the passenger traffic at the
Cleveland - Hopkins International Airport has increased
significantly over the past five years. During the period between
1991 - 1995, total passenger counts increased at a compound
annual average of 8.4 percent. This strong increase in passenger
traffic is indicative of the increasing prominence of Cleveland
as a destination city, the growth of Cleveland as a center for
many major corporate activities and the growth of tourist
destinations in the metropolitan area. Although, much of the
traffic at the Cleveland - Hopkins International Airport may
never visit Chagrin Falls, the increase in passenger activity is
a positive indicator of the economic growth occurring in the
area. According to interviews with local hotel operators, the
increase in passenger activity falls in line with the increase in
accommodations provided by local facilities for overnight guests
in the past five years.
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TOURISM AND RECREATION
The dominant tourist attractions in the Chagrin Falls area are
Sea World of Ohio, Geauga Lake and the Geauga Lake Amusement
Park. In additional to the wide range of activities available at
the Sea World complex, there are a variety of outdoor activities
that are extremely popular with residents and non - residents
alike. The appraisers have learned that Sea World plans to expand
its season to include all of May and September. In the summer
months, Lake Geauga is popular for swimming, boating and other
water sports. The Chagrin Falls Park is another destination
popular for campers and hikers who will enjoy this large
preserve. Other nearby attractions to the south include the
Aurora Farms Factory Outlets, tourist attractions along Lake
Geauga and major sporting and cultural events in and around
Cleveland including the Cleveland Indians baseball team and the
Rock and Roll Hall of Fame.
Spectator Sports
Two major spectator sports are available to Chagrin Falls
residents and visitors alike by means of a short trip into
downtown Cleveland. The Cleveland Indians professional baseball
team draws fans from far and wide to the new 42,000 seat Jacobs
Field which was the site of the 1995 World Series. In addition,
basketball fans flock to the new Gund Arena seating 21,000, to
watch the Cleveland Cavaliers. Cleveland, unfortunately, lost
their professional football team to Baltimore at the end of the
1995/96 season, however, as of the date of appraisal plans to
build a new $220 million dollar stadium for the new Cleveland
team are in the proposal stage.
CONVENTION AND TRADE SHOW MARKET
Chagrin Falls is limited in the convention and show trade
marketplace. The summer attracts small meetings that often
coincide with vacation plans. No major convention center serves
the immediate Chagrin Falls area.
CONCLUSION
Overall, the Chagrin Falls area has experienced positive growth
over the past five years. Sea World of Ohio, in conjunction with
the expansion of the Geauga Lake Amusement Park, and the
completion of State Highway 422 has supported favorable growth of
the demographic and employment statistics in the area. As the
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Pine Lake Trout Club Page 31
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local tourism trade continues to expand, both the hospitality
industry, as well as all other sectors of the local economy are
expected to expand and flourish. In addition, the lakes and parks
in the area provide a strong base of seasonal leisure activities
for the vicinity. Based upon a historical analysis of the
demographic and economic trends in the area; a continued
favorable outlook for the Chagrin Falls economy is anticipated,
which should result in positive growth for tourism destinations
and local lodging in the area.
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B.3 HIGHEST AND BEST USE ANALYSIS
The validity of an appraisal is dependent upon the consideration
and conclusion of highest and best use.1 Often expressed as "the
most profitable legal use," the concept requires a thoughtful
analysis of many factors. Vacant land value is directly related
to its highest and best use. On the other hand, an improved
property may have the same or a different highest and best use
than the land supporting the improvements when considered as
vacant land. Therefore, for improved property, both highest and
best use decisions must be separately considered, both as vacant
land and as improved property. In addition to a conclusion for
both the vacant land and improved property, sale and lease
comparisons are usually made with properties having similar
highest and best uses as the subject.
The parameters for consideration relate to legality of use,
physical possibilities, financial feasibility, and maximum
economic production. Single uses, interim uses, legal
non-conforming uses, speculative uses or excess land
determinations require further analysis.
HIGHEST AND BEST USE OF THE LAND AS IF VACANT
Legally permissible uses are those limited by zoning, easements
and rights-of-way, deed restrictions, building codes, and
environmental controls. These restrictions have been discussed in
Section B.1 (Description and Analysis of the Property). As
mentioned earlier in the zoning section of this report, the
subject site is in the R3-A Residential Zone, and is thus a legal
non-conforming use. New development is restricted to
single-family subdivisions using either three-acre minimum lots
or cluster development.
- --------------
1 Highest and Best Use: "The reasonably probable and legal use
of vacant land or an improved property, which is physically
possible, appropriately supported, financially feasible, and
that results in the highest value. (American Institute of Real
Estate Appraisers, The Dictionary of Real Estate Appraisal,
Second Edition, Copyright 1993, Page 171.
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Physically possible uses are limited by size, design, topography,
flood possibilities and physical capacities. The subject site is
approximately 81.1 acres. It is generally regular in shape with
frontage on Chillicothe Road. It is generally rectangular in
shape and is very deep, except the rectangle is not complete
because the parcel does not include a small section of land
currently owned by a gardening center situated at the northwest
corner of the site (see site map for more details). The
topography of the site is rolling hills with heavy vegetation and
streams and ponds located throughout the site. Drainage and
topography are acceptable for a variety of uses as are the shape
and frontage of the site. Although we are unqualified to render
an opinion of the physical load-bearing capacity of the land or
its freedom from hazardous materials, no nuisances were obvious
at the time of inspection.
Financially feasible uses must be supported by sufficient demand
in the neighborhood to create a sufficient return to invest over
the long term. In analyzing each highest and best use
alternative, the income potential from those legally permissible
and physically possible uses were considered. The income from the
highest and best use should be sufficient to satisfy investor
requirements and operating expenses, thereby providing a return
on the land.
Predominant land uses in the neighborhood provide indications of
profitable land uses for the location of the subject property.
The predominant land use in the subject neighborhood is single
family residential, with a significant amount of land still
undeveloped.
Based upon the surrounding neighborhood, as well as physical and
legal restrictions, single family residential use is the only
potentially financially feasible use. Therefore, we conclude that
the highest and best use of the land as vacant is for residential
development most likely utilizing the cluster development
provisions of the zoning code.
HIGHEST AND BEST USE OF THE PROPERTY AS CURRENTLY IMPROVED
The subject property is currently improved with a trout club
containing a main lodge, restaurant , eight residential cabins
and a conference cabin. According to management, the current
improvements utilize 23.5 acres for the trout club operation with
the remaining 57.6+/- acres considered to be excess land.
<PAGE>
Pine Lake Trout Club Page 34
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As earlier indicated, the highest and best use of a property as
improved may differ from the highest and best use of the land as
if vacant. The "as improved" analysis assists in the
identification of the use that is projected to provide the
greatest overall property return on invested capital, as well as
in the identification of comparable properties. Typical choices
for improved property include the following usage alternatives:
1. Demolition of the improvements
2. Remodeling or renovation
3. Continued usage, as is
The four tests of highest and best use are applied to each of the
above alternatives. All three options are legally permissible and
physically possible. The test of financial feasibility is that
the use must provide a return equal to or greater than the amount
needed to meet all operating expenses, financial obligations, and
capital expenditures. In addition, the use must be maximally
productive, or that use which produces the highest value,
consistent with the rate of return warranted by the market for
that use. Using current investor expectations, consideration of
all three scenarios was made.
Demolition of the Improvements
The implication in a highest and best use analysis is that the
existing improvements should be retained and/or renovated as long
as those improvements continue to contribute to the total value
of the property; or until the return from a new improvement would
more than offset the cost of demolishing the existing
improvements and constructing alternative facilities. An analysis
of the subject property reveals that the existing improvements do
continue to contribute to the overall value of the subject, with
no alternative use available to the site which would provide a
return greater than the return on current improvements after
consideration of the cost to raze the current improvements and
build an alternate use. Therefore, demolition of the improvements
is not considered warranted, nor optimal from a highest and best
use standpoint.
<PAGE>
Pine Lake Trout Club Page 35
- -----------------------------------------------------------------------
Remodeling or Renovation
The subject property is in fairly good condition and is
functionally adequate for its current use. A major remodeling or
renovation of the property would adversely affect the rustic
flavor of the property and may have detrimental affect on
membership. General capital repairs such as roof replacements,
painting and update landscape architecture may enhance the
economic viability of the project. The other major issue with any
renovation which expanded the commercial scope of the subject
property may be in violation of zoning restrictions.
Continued Usage As Is
As an alternative to demolition, the existing improvements could
be converted to an alternate use or left as-is. Again applying
the four tests to this premise, it would be physically possible
but not legally permissible to convert the improvements to any
other use but residential. However, as discussed previously, the
current use is the most maximally productive use available to the
property, given the commercial use which is allowed due to the
fact that it predates the zoning resolution. Obviously then,
converting to an alternative use would lessen the return to the
land, and therefore, any such use would fail to be the most
profitable alternative. However, the property has 57.6 acres
which are currently undeveloped and considered excess to the
trout club operation. It is physically possible legally
permissible and financially feasible to develop this land with
single family homes. Although a full feasibility analysis for
this excess land is beyond the scope of this analysis, the
appraisers have accounted for its value by analyzing sales of raw
residential land in the subject market.
<PAGE>
Pine Lake Trout Club Page 36
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CONCLUSION AND RECONCILIATION OF HIGHEST AND BEST USE
From the three options presented, one remains feasible for the
subject. Demolition of the improvements was eliminated as an
option since the existing improvements provide substantial
contributory value to the property. The good condition of the
subject does not require substantial remodeling and renovation.
Therefore, continued use "as is" is the indicated highest and
best use of the subject as currently improved, with the excess
land developed with single family residential homes. Also, given
current market conditions, it is our opinion that the highest and
best use of the site, as vacant, is for single family residential
development.
In conclusion, the highest and best use of the subject property
is as currently improved, with development of the excess land
with single family residential homes at such time when they are
financially feasible.
<PAGE>
Pine Lake Trout Club Page 37
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C. THE APPRAISAL PROCESS
The purpose of this appraisal is to estimate the "as is" market
value the subject property in accordance with accepted value
estimating procedure. "The valuation process is a systematic
procedure employed to provide the answer to a client's question
about real property value. It is a model of appraisal activity,
reflecting an understanding of value and the methods used in the
value estimation."2
There are three traditional approaches involved in the valuation
of real property. These are known as the cost approach, the sales
comparison approach, and the income capitalization approach. Each
of the three approaches is related to the other, as they involve
the gathering and analysis of sales, cost, and income data that
pertain to the property being appraised. Although all three
valuation procedures are given consideration, the inherent
strengths and weaknesses of each approach and the nature of the
subject property must be evaluated to determine which will
provide the most supportable estimates of market value. The
appraiser is then free to select one approach to arrive at a
final value estimate.
D.1 THE COST APPROACH
Valuation by the cost approach is based on the principle of
substitution. This principle asserts that an informed investor
will not pay more for a property than the cost to build a
substitute property of equivalent utility. Therefore, the cost
approach, when utilized in an appraisal, estimates the cost of
reproducing or replacing the subject property including
improvements and land, less an allowance for depreciation based
upon the physical condition, functionality, and economic
environment or the building. Although this approach is
particularly applicable to owner-occupied or special-use
properties in the absence of an investor market, it also
recognizes and establishes the relationship between cost and
market-derived values.
- --------------
2 American Institute of Real Estate Appraisers, The Appraisal
of Real Estate Appraisal, Chicago, Illinois, 1989, p. 73.
<PAGE>
Pine Lake Trout Club Page 37
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In the subject appraisal, the building is now operating as a
business in the production of income to the various components
which comprise the total operation of a club. Although the
replacement cost of the subject facility could be established,
the estimate of market depreciation is a very subjective
consideration which significantly affects the value indication.
The depreciation estimate could only be realistically estimated
by comparison to other approaches, thereby reducing the cost
approach to coincide with one of the other approaches, and losing
the objectivity of the approach as a third measure of value. In
our opinion, an informed and experienced purchaser would not rely
on the cost approach in establishing an indication of market
value for the subject property. Therefore, this approach has
not been included in our analysis.
D.2 SALES COMPARISON APPROACH
The Sales Comparison Approach estimates market value based upon a
comparative analysis of recent sales of improved properties that
are similar in function size, income production, and use to the
appraised property. This approach to value assumes that the
market will determine a price for the Pine Lake Trout Club in the
same manner that it determines the price for comparable
properties. To apply the sales comparison approach, the appraiser
employs a number of appraisal techniques, including the principle
of substitution which holds that the value of a property that is
replaceable in the marketplace tends to be set by the cost of
acquiring an equally desirable property. Additional
considerations include examination of market conditions
prevailing at the time of sale as compared to those at the date
of valuation.
The subject property is a unique commercial property; in fact,
the appraisers were unable to locate any truly comparable
sales transactions either locally or on a regional basis.
Given the subject property is an income produce property and
derives all of its value from its income generating capability,
the appraisers relied exclusively on the income approach in their
valuation of the trout club component of the subject property.
However, the sales comparison approach was employed to determine
a market value for the subject property's 57.6+/- acres of excess
land. To develop the sales comparison approach, we researched the
<PAGE>
Pine Lake Trout Club Page 39
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subject market and the surrounding region for recent sales of
similar undeveloped residential parcels. From our research, we
have selected three sales for further analysis and direct
comparison with the subject's excess land. These sales represent
the most recent sales of undeveloped residential land and are
considered to be competitive sites in the marketplace. In
selecting these sales, the appraiser attempted to employ recent
transactions involving similarly sized parcels with similar
zoning.
We have made adjustments to the price paid per acre on the
basis of a comparison of each site relative to the subject
property. Our analysis of the market recognizes primary factors
which affect the pricing of residential land including
adjustments related to 1) interest appraised, 2) strength of the
local residential market, 3) size, 4) zoning restrictions, 5)
topography, and 6) access. Presented on the following pages is a
summary of each comparable sale and our adjustment grid.
<PAGE>
VALUATION OF EXCESS LAND
PINE LAKE TROUT CLUB
CHAGRIN FALLS, OHIO
LAND VALUATION
SUBJECT SALE 1
------- ------
South Bainbridge
Address Chillicothe Road Chillicothe Road
Pettibone R.I.
City State Bainbridge, Ohio Bainbridge, Ohio
Considerations(3) $200,000
Acres 37.60 39.59
Estimated Lots per Zoning 19.00 1?.00
Sale Date - 01-Mar-95
Zoning R3-A R?-A
$ Per Acre - $5,557
$ Per Lot $16,92?
--------
Unadjusted Range Per Acre $5,557 to $11,250
Median: $8,542
UnAdjusted Range Per Lot $16,923 to $56,250
Overall Median: $33,045
FACTORS CONSIDERED:
- ------------------
Time Market Condition (Yrs. Mos) 15.0%
Adjusted Current Price Acre $6,??1
Adjusted Current Price SF $19,462
Other Adjustments:
- -----------------
Location Similar
0.0%
Site Improvements N/A None
0.0%
Size (Acreage) 57.60 39.59
0.0%
Utilities All Available All Available
0.0%
Accessibility Similar
0.0%
Zoning R3 Similar
0.0%
Total Other Adjustments ?%
Adjusted Price Per Acre $6?????
Adjusted Price Per Buildable Lot $19?????
=============
Adjustable Range Per Acre: $6???? to $10,125
Overall Median $7????
Adjusted Range Per Lot $21,082 to $42,187
Overall Median: $28,??.14
1
<PAGE>
VALUATION OF EXCESS LAND
PINE LAKE TROUT CLUB
CHAGRIN FALLS, OHIO
LAND VALUATION
SALE 2 SALE 3
------ ------
North Bainbridge
Address Haskens Taylor May Roads Chillicothe Road
City State Bainbridge, Ohio Bainbridge, Ohio
Considerations(3) $??7,500 $450,000
Acres 38.27 40.00
Estimated Lots per Zoning 1?.00 8.00
Sale Date 01-Aug-95 01-Jan-96
Zoning R?-A R5-A
$ Per Acre $8,819 $11,250
$ Per Lot $25,962 $?6,250
-------- --------
Unadjusted Range Per Acre
Median:
UnAdjusted Range Per Lot
Overall Median:
FACTORS CONSIDERED:
- ------------------
Time Market Condition (Yrs. Mos) 0.0% 0.0%
Adjusted Current Price Acre $8,819 $11,250
Adjusted Current Price SF $25,962 $56,250
Other Adjustments:
- -----------------
Location Inferior Similar
5.0% 0.0%
Site Improvements Superior None
-15.0% 0.0%
Size (Acreage) 38.27 40.00
0.0% 0.0%
Utilities All Available All Available
0.0% 0.0%
Accessibility Similar Superior
0.0% -5.0%
Zoning Similar Superior
0.0% -20.0%
Total Other Adjustments -10.00% -25.00%
Adjusted Price Per Acre $7,937.03 $8,437.50
Adjusted Price Per Buildable Lot $23,?65.38 $42,187.50
=========== =============
CONCLUDED VALUE PER ACRE $8,000
CONCLUDED VALUE PER LOT $30,000
CONCLUDED VALUE ON PER ACRE BASIS $460,800
========
CONCLUDED VALUE ON PER LOT BASIS $?70,000
========
CONCLUDED VALUE OF EXCESS LAND $?00,000
========
<PAGE>
Pine Lake Trout Club Page 41
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The following paragraphs briefly present a rationale for the
major adjustments made to the price per acre of each identified
comparable sale.
Chillicothe Road - Bainbridge Township
RLT Investment Company purchased this 39.59 acre parcel in March,
1993 for $220,000 or $5,557/acre from H&R Investment Company. The
property is located on the east side of Chillicothe Road north of
Pettibone in the south part of Bainbridge. This sale is in the
R3-A zoning which allows a 3 acre minimal lot size. Based on the
zoning, the appraisers estimated thirteen 3-acre lots could be
approved, with a price of $16,923 per lot. This sale was adjusted
upward 15 percent to reflect improved market conditions since it
occurred in early 1993. In all other aspects, the parcel was
considered similar to the subject property.
Haskins/Taylor May Roads - Bainbridge Township
Pinewood Associates purchased this 38.27 acre R3-A parcel in
August, 1995 for $337,500 or $8,820/acre from George Chirtea. The
property is located on the southeast corner of Haskins and Taylor
May Road and included an older house. Based on the zoning the
appraisers estimated thirteen 3 acre lots could be approved, with
a price of $25,962 per lot. Given the fact that this was a fairly
recent transaction, no adjustment was necessary for market
conditions. The comparable was considered to have an inferior
location to the subject and thus was adjusted upwards 5 percent.
However, a 15% downward adjustment was necessary to account for
the existing house on the parcel. No other adjustments were
warranted.
Chillicothe Road - Bainbridge Township
The Congregationalist Disciple Churches of Chagrin Falls
purchased this 40.0 acre R5-A parcel in January, 1996 for
$450,000 or $11,250/acre from Norman E. Smith. The property is
located on the east side of Chillicothe Road at the
Bainbridge/Russel Townships line. Based on the zoning the
appraisers estimated eight 5 acre lots could be approved with a
price of $56,250 per lot. Given the fact that this was a fairly
recent transaction, no adjustment was necessary for market
conditions. The comparable was considered to have superior access
compared to the subject, due to its frontage on two major roads
<PAGE>
Pine Lake Trout Club Page 42
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requiring a 5% downward adjustment. A further 20 percent
downward adjustment was necessary to account for the comparable's
superior 5 acre zoning which allows for larger more expensive
lots. No other adjustments were necessary.
Information has been presented on three comparable land sales
which are considered to be relatively similar to the subject's
excess land. After adjustments, the comparable land sale
transactions indicate a unit price range for the subject from
$6,390 to $8,437 per acre and $19,461 to $42,187 per lot. We have
given most weight to the value indications of Sales Nos. 2 and 3
based on their recent sale date and close proximity to the
subject. Based upon the above, we have estimated the market value
of the fee simple interest in the subject property's excess land
to be approximately $8,000 per acre or $30,000 per buildable lot.
Using a blended average of these two results the appraisers have
concluded the market value of the excess land (exclusive of
purchase option) to be $500,000 (rounded) as of January 1, 1996.
However, the owner of this property gave a purchase option on
this parcel to Newpart L.P. on February 18, 1987 and amended on
February 20, 1987. This option price of the parcel was set at
$0 and expires on February 20, 2007. However, this option can
only be exercised if the following conditions are met:
1. Newpart delivers to AHP evidence satisfactory to AHP
that Newpart has obtained any and all permits, licenses,
variances, or other consents from the proper state
and local authorities necessary to allow the club to
continue to be operated as a hunting or fishing club once
the Property is conveyed or leased to Newport under the
option and;
2. Obtaining the release of the property from any mortgage
covering the Property. The Option is subject to
and subordinate to any mortgage now or hereafter encumbering
the property.
Given the existence of this purchase option, the appraisers have
concluded the market value of the excess land to be nominal
$0 (rounded) as of January 1, 1996.
A full copy of this option agreement and amendment are included
in the Addenda of this report.
<PAGE>
Pine Lake Trout Club Page 43
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C.3 INCOME APPROACH
The income approach to value converts anticipated future benefits
into an estimate of present value. In this respect, the process
is very similar to pricing in other capital markets. The approach
requires the careful estimation of future benefits -- income
before debt service, residual values, etc. -- and application of
investor yield or return requirements. The income approach brings
together reasoned estimates of future revenues and expenses with
the investor's yield requirements. These yield requirements, in
turn, reflect varieties of risk, including property type,
location, local market conditions, and so forth.
Yield and direct capitalization techniques are conventionally
used to convert future benefits to value -- the discounted cash
flow (DCF) technique and the overall capitalization rate (OAR)
technique. The DCF technique entails (1) modeling the future
performance of the subject, over a specific holding period, (2)
estimating the future value (reversionary value) at the end of
the holding period, and (3) converting the stream of periodic
benefits and reversionary value, through a discounting process at
investor yields, to a present value. The selection of an
appropriate discount rate is essential to this process.
By comparison, direct capitalization using an overall rate (OAR)
converts a single, "normalized" year's income or income before
debt service into a value by dividing the appropriate
capitalization rate into the normalized income. Subsequent
adjustments are then made to take into consideration variations
from normalized operations. In order to value the Pine Lake Trout
Club, we have utilized only the discounted cash flow method for
the income approach. The direct capitalization method has not
been used because most investors do not use it as a tool to
analyze value from income. In addition, it is difficult to
reflect future changes in membership and membership dues using
direct capitalization. Finally, using a "normalized" or
stabilized net operating income is somewhat speculative and can
produce erroneous results.
<PAGE>
Pine Lake Trout Club Page 44
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The discussion on the following pages provide a summary of our
projection of revenues, expenses, discount rates, capitalization
rates, and many of the other assumptions which are incorporated
in the income approach. The discussion of revenues and expenses
begins with an examination of historical trends. Finally,
estimates are made with regard to the appropriate projection of
revenues, expenses, and capital items.
<PAGE>
Pine Lake Trout Club Page 45
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HISTORICAL FINANCIAL PERFORMANCE
The historical operating results for the subject hotel for the
years ended 1994 and 1995 is presented on the following page. The
next page presents the historical operating results for the
subject facility through year-to-date November 30, 1995 and 1996.
The third page presents an estimate of year end 1996 operating
results and the appraiser-projected 1997 operating statement.
<PAGE>
Recast of Historical Financial Statements
Pine Lake Trout Club
1994 Actual Income
Per Member
Amount Ratio(2) Per Annum
Current Membership 478
Maximum Membership 515
Occupancy Percentage(3) 92.82%
REVENUES
Rooms $65,178 $136
Food 400,797 84.55% 838
Beverage 57,138 12.05% 120
Fishing Department 51,076 10.77% 107
Membership 474,040 992
Club Service Charge 82,635 16.23% 173
Other Income 8,607 1.82% 18
-------------------------------------------
Total Revenues $1,139,471 $2,384
DEPARTMENTAL EXPENSES
Rooms $1,604 2.46% 53
Food 348,139 86.86% 728
Beverages 21,020 36.79% 44
Fishing Department 33,337 65.27% 70
-------------------------------------------
Total Departmental Expenses $404,100 35.46% $845
TOTAL DEPARTMENTAL INCOME $735,371 64.54% $1,538
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $208,151 18.27% $435
Sales and Marketing 27,435 2.41% 57
Energy Cost 46,862 4.11% 98
Property Operations & Maintenance 62,656 5.50% 131
------------------------------------------
Total Undistributed Operating $345,104 30.29% $722
INCOME BEFORE FIXED CHARGES $390,2?? ?4.2?% $16
FIXED CHARGES
Management Fee $4?????? 4.00% $95
Taxes and Insurance ??? 1.31% 31
--------------------------- --------------
Total Fixed Charges ? 5.31% $127
INCOME BEFORE RESERVE $3?????? ? $690
Recast of Historical Financial Statements
Pine Lake Trout Club
1995 Actual Income
Per Member
Amount Ratio(2) Per Annum
Current Membership 477
Maximum Membership 515
Occupancy Percentage(3) 92.62%
REVENUES
Rooms $71,292 $149
Food 351,389 74.17% 737
Beverage 54,608 11.53% 114
Fishing Department 39,305 8.30% 82
Membership 473,748 993
Club Service Charge 70,838 15.91% 149
Other Income 11,974 2.53% 25
-------------------------------------------
Total Revenues $1,073,154 $2,250
DEPARTMENTAL EXPENSES
Rooms $4,378 6.14% $9
Food 322,076 91.66% 675
Beverages 27,179 49.77% 57
Fishing Department 28,292 71.98% 59
------------------------------------------
Total Departmental Expenses $381,925 35.59% $801
TOTAL DEPARTMENTAL INCOME $691,229 64.41% $1,449
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $200,743 18.71% 421
Sales and Marketing 31,822 2.97% 67
Energy Cost 47,604 4.44% 100
Property Operations & Maintenance 86,770 8.09% 182
------------------------------------------
Total Undistributed Operating $366,939 34.19% $769
INCOME BEFORE FIXED CHARGES $324,290 30.22% 680
FIXED CHARGES
Management Fee $42,926 4.00% $90
Taxes and Insurance 25,713 2.40% 54
------------------------------------------
Total Fixed Charges $68,639 6.40% $144
INCOME BEFORE RESERVE $255,651 23.82% $536
Notes:
(1) The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen. (2) The ratios utilized in this
analysis relate to the calculation of the applicable revenues and
expenses (See Section D3 of the report for details) (3) Occupancy
was calculated by the ratio of current membership to projected
maximum stabilized membership.
<PAGE>
Recast of Historical Financial Statements
Pine Lake Trout Club
Year-to-date November 30, 1995
Per Member
Amount Ratio(2) Per Annum
Current Membership 477
Maximum Membership 515
Occupancy Percentage(3) 92.62%
REVENUES
Rooms $63,940 $134
Food 302,926 68.92% 635
Beverage 47,465 10.80% 100
Fishing Department 38,564 8.77% 81
Membership 439,514 921
Club Service Charge 62,419 16.03% 131
Other Income 11,288 2.57% 24
-------------------------------------------
Total Revenues $966,116 $2,025
DEPARTMENTAL EXPENSES
Rooms $4,325 6.76% 59
Food 292,384 96.52% 613
Beverages 24,119 50.81% 51
Fishing Department 27,532 71.39% 58
-------------------------------------------
Total Departmental Expenses $348,360 ?????% $730
TOTAL DEPARTMENTAL INCOME $617,7?6 63.94% $1,295
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $182,672 13.91% $383
Sales and Marketing 29,736 3.08% 62
Energy Cost 42,795 4.43% 90
Property Operations & Maintenance 83,036 8.59% 174
------------------------------------------
Total Undistributed Operating $338,239 35.01% $709
INCOME BEFORE FIXED CHARGES $??????? 28.93% $86
FIXED CHARGES
Management Fee $??????? 4.00% $81
Taxes and Insurance ??? 2.02% 34
------------------------------------------
Total Fixed Charges ? ? $122
INCOME BEFORE RESERVE $??????? ? $464
Recast of Historical Financial Statements
Pine Lake Trout Club
Year-to-date November 30, 1996
Per Member
Amount Ratio(2) Per Annum
Current Membership 500
Maximum Membership 515
Occupancy Percentage(3) 97.09%
REVENUES
Rooms $67,626 $135
Food 337,543 74.65% 675
Beverage 49,053 10.85% 98
Fishing Department 38,627 8.54% 77
Membership 452,155 904
Club Service Charge 66,176 15.56% 132
Other Income 2,815 0.62% 6
-------------------------------------------
Total Revenues $1,013,995 $2,028
DEPARTMENTAL EXPENSES
Rooms $8,416 12.44% $17
Food 295,774 87.63% 592
Beverages 25,275 51.53% 51
Fishing Department 29,725 76.95% 59
-------------------------------------------
Total Departmental Expenses $359,190 35.42% $718
TOTAL DEPARTMENTAL INCOME $654,805 64.58% $1,310
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $151,510 14.94% $303
Sales and Marketing 31,395 3.10% 63
Energy Cost 47,837 4.72% 96
Property Operations & Maintenance 93,956 9.27% 188
------------------------------------------
Total Undistributed Operating $324,698 32.02% $649
INCOME BEFORE FIXED CHARGES $330,107 32.56% 660
FIXED CHARGES
Management Fee $40,548 4.00% $81
Taxes and Insurance 16,817 1.66% 34
------------------------------------------
Total Fixed Charges $57,365 5.66 $115
INCOME BEFORE RESERVE $272,742 26.90% $545
Notes:
(1) The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen. (2) The ratios utilized in this
analysis relate to the calculation of the applicable revenues and
expenses (See Section D3 of the report for details) (3) Occupancy
was calculated by the ratio of current membership to projected
maximum stabilized membership.
<PAGE>
Recast of Historical Financial Statements
Pine Lake Trout Club
Trailing 12 Months As of November 30, 1996
Per Member
Amount Ratio(2) Per Annum
Current Membership 500
Maximum Membership 515
Occupancy Percentage(3) 97.09%
REVENUES
Rooms $74,978 $150
Food 386,006 79.36% 772
Beverage 56,196 11.55% 112
Fishing Department 39,368 8.09% 79
Membership 486,389 973
Club Service Charge 74,595 15.49% 149
Other Income 3,501 0.72% 7
-------------------------------------------
Total Revenues $1,121,033 $2,242
DEPARTMENTAL EXPENSES
Rooms $8,469 11.30% 17
Food 325,466 84.32% 651
Beverages 28,335 50.42% 57
Fishing Department 30,485 77.44% 61
-------------------------------------------
Total Departmental Expenses $392,755 35.04% $786
TOTAL DEPARTMENTAL INCOME $728,278 64.96% $1,457
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $169,581 15.13% $339
Sales and Marketing 33,481 2.99% 67
Energy Cost 52,646 4.70% 105
Property Operations & Maintenance 97,690 8.71% 195
------------------------------------------
Total Undistributed Operating $353,398 31.52% $707
INCOME BEFORE FIXED CHARGES $374,880 33.44% 730
FIXED CHARGES
Management Fee $44,829 4.00% $90
Taxes and Insurance 23,007 2.05% 46
------------------------------------------
Total Fixed Charges $67,836 6.05 $136
INCOME BEFORE RESERVE $307,044 ? $614
Recast of Historical Financial Statements
Pine Lake Trout Club
AA Projection of 1997 Year-End Income
Per Member
Amount Ratio(2) Per Annum
Current Membership 500
Maximum Membership 515
Occupancy Percentage(3) 98.06%
REVENUES
Rooms $80,948 $160
Food $404,000 80.00% 800
Beverage $60,600 12.00% 120
Fishing Department $42,925 8.50% 85
Membership $505,000 1,000
Club Service Charge $91,355 18.00% 181
Other Income $10,100 2.00% 20
-------------------------------------------
Total Revenues $1,194,928 $2,366
DEPARTMENTAL EXPENSES
Rooms $8,503 28.00% $17
Food $343,400 85.00% 680
Beverages $30,300 50.00% 60
Fishing Department $32,194 75.00% 64
-------------------------------------------
Total Departmental Expenses $414,397 34.68% $821
TOTAL DEPARTMENTAL INCOME $780,531 65.32% $1,546
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $191,188 16.00% $379
Sales and Marketing $35,848 3.00% 71
Energy Cost $53,772 4.50% 106
Property Operations/Maintenance $101,569 8.50% 201
------------------------------------------
Total Undistributed Operating $382,377 32.00% $757
INCOME BEFORE FIXED CHARGES $398,154 33.32% 788
FIXED CHARGES
Management Fee $47,797 4.00% $95
Taxes and Insurance 22,705 1.90% 45
------------------------------------------
Total Fixed Charges $70,502 5.90 $140
INCOME BEFORE RESERVE $327,652 27.42% $649
Notes:
(1) The above operating statements have been summarized into the
uniform system of accounts. These statements have not been
audited by Arthur Andersen. (2) The ratios utilized in this
analysis relate to the calculation of the applicable revenues and
expenses (See Section D3 of the report for details) (3) Occupancy
was calculated by the ratio of current membership to projected
maximum stabilized membership.
<PAGE>
Pine Lake Trout Club Page 49
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ESTIMATED OPERATING RESULTS
Estimates of income and expenses, in current dollars, have been
prepared for the Pine Lake Trout Club from January 1, 1997
through December 31, 2007. Our financial projections are based
primarily upon an analysis of the historical operating results of
the subject property. A representative year of operation,
expressed in 1996 dollars, is first established and then adjusted
to account for inflation and the varying levels of membership for
each year in the projection period. The current membership of the
club is 500 members. The following paragraphs describe the
assumptions and bases of our estimates.
Inflation Assumption
In order to estimate future inflation of revenues and expenses at
the subject facility, we have reviewed the historical inflation
of the consumer price index - urban markets (CPI-U).
- ---------------------- ---------------------
Year CPI-U
---- -----
1988 4.4%
1989 4.6%
1990 6.1%
1991 3.1%
1992 2.9%
1993 2.7%
1994 2.7%
1995 2.5%
- ---------------------- ---------------------
On the basis of historical inflation rates and on our estimates
of future inflation, we have assumed an inflation assumption of
3.5 percent, compounded annually, from a base year of 1996.
Revenue
Rooms Revenue - The subject room revenue is derived from the
rental of six of the cabins on a month to month basis and two of
the cabins on a daily basis. The chart below outlines the current
rental rates for the cabins.
<PAGE>
Pine Lake Trout Club Page 50
- -----------------------------------------------------------------------
- ----------- ---------------------- ----------------- ---------------------
Cabin Rent Occupancy Annual Revenue
- ----------- ---------------------- ----------------- ---------------------
2 $550 per month 100% $6,600
3 $130 per night 32% $15,184
4 $825 per month 100% $9,900
5 $850 per month 100% $10,200
6 $545 per month 100% $6,540
7 $130 per night 32% $15,184
8 $1000 per month 100% $12,000
9 $445 per month 100% $5,340
- ----------- ---------------------- ----------------- ---------------------
Total $80,948
- ----------- ---------------------- ----------------- ---------------------
The subject's room revenue has historically ranged from 6 percent
to 7 percent of total revenue. In 1994 room revenue was $65,178,
increasing by 9.38 percent to $71,292 in 1995 and increasing by
5.17 percent to $74,978 in 1996. In December 1996, there was
turnover in two of the permanent cabins which permitted
management to raise the rents for 1997, yielding an increase of
7.96 percent and projected 1997 revenue of $80,948. Room Income
is projected to grow by 3.5 percent annually over the projection
period. The occupancy rate for the permanent rentals is expected
to remain at 100 percent, while the daily rentals are expected to
remain at an occupancy rate of 32 percent.
Food Revenue is related to the number of members in the club,
since members are required to spend at least $50 per month at the
restaurant. As such, food revenue was analyzed as a percentage of
membership revenue. In 1994 food revenue was 84.5 percent of
membership revenue, declining to 74.2 percent in 1995. Our
estimate of 1996 food revenue projects that it will be 79.4
percent of membership. In selecting a stabilized estimate of this
expense, we projected that food revenue would be 80 percent of
membership revenue over the entire projection period.
Normally, beverage revenue is derived from estimated sales of all
alcoholic beverages in the restaurants, cafes, and lounges, room
service and banquet facilities of a subject property. However,
the Pine Lake Trout Club does not have a liquor license and
derives its beverage income from the sale of mixed drink setups,
and corkage fees for beer and wine served. On the basis of the
analysis of the historical operating results, we have determined
that beverage revenue has been approximately 12 percent of
<PAGE>
Pine Lake Trout Club Page 51
- -----------------------------------------------------------------------
membership revenue for the past three years. We have thus
projected this trend to continue over the entire projection
period.
Fishing Revenue - The subject stocks its streams and ponds with
fish which is purchased by the pound. The patrons are charged by
the pound for fish taken. The fish taken are cleaned and dressed
by the club for the convenience of the patrons. The club
currently charges $3.95 per lb. of fish caught for this mandatory
service. Revenue in this category has ranged from 8.1 percent of
membership revenue in 1996 to 10.8 percent of membership revenue
in 1994. The appraisers have selected a stabilized estimate of
8.5 percent of membership revenue to be used throughout the
projection period.
Membership Revenue - This category is the largest generator of
income for the club. The club sells different types of membership
with different fees which confer different privileges. The chart
below briefly summarizes the membership types and current fees at
the subject property.
1996 MONTHLY DUES
- --------------- --------------- ---------------- -----------------
Category # of Members Monthly Dues Annual Revenue
- --------------- --------------- ---------------- -----------------
Resident 217 $108.00 $281,132
Non- Resident 75 $ 25.00 $ 22,500
Corporate 174 $95-$90 $158,912
Special 34 $53.00 (avg) $21,735
- --------------- --------------- ---------------- -----------------
Total 500 $448,998
- --------------- --------------- ---------------- -----------------
Membership income is generated from monthly dues, initiation fees
and locker rentals. The chart below illustrates the historical
breakdown of this income.
MEMBERSHIP REVENUE BY CATEGORY
- --------------------- ------------- ------------ -------------
Category 1994 1995 1996
- --------------------- ------------- ------------ -------------
Resident Dues $219,831 $225,087 $243,121
Non- Resident Dues 29,425 26,700 25,230
Corporate Dues 188,778 179,521 158,912
Special Dues 14,446 17,191 21,735
Initiation Fee 10,200 12,101 22,550
Locker Fee 23,940 22,160 21,945
Allowance (12,480) (9,012) (5766)
- --------------------- ------------- ------------ -------------
Total $474,040 $473,748 $487,727
- --------------------- ------------- ------------ -------------
Avg. Rev. per Em. $992 $993 $975
- --------------------- ------------- ------------ -------------
<PAGE>
Pine Lake Trout Club Page 52
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The table presented above demonstrates a trend of increasing
resident members and special members and declining corporate
members and non resident members. Initiation fees have increased
in 1996 reflecting a significant growth in new membership. Locker
fees were also constant over the projection period.
Interestingly, although membership has increased from 478 in 1994
to 500 in 1996, average revenue per member has declined from $992
(1994) to $975 (1996). The reason for this disparity is
attributable to the large increase in new membership in 1996. Due
to the fact that these members joined throughout the year and
thus were not due paying members for the entire twelve month
period, the year end average is somewhat skewed.
The charts below provide an in depth analysis of how the
membership in the club has changed over the past three years and
provides information that allowed the appraisers to make
reasonable assumptions about club membership over the projection
period.
HISTORICAL MEMBERSHIP BY CATEGORY
- --------------- --------------- -------------- ---------------
Category 1994 1995 1996
- --------------- --------------- -------------- ---------------
Resident 193 198 220
Non- Resident 83 78 74
Corporate 172 165 173
Special 30 36 33
- --------------- --------------- -------------- ---------------
Total 478 477 500
- --------------- --------------- -------------- ---------------
HISTORICAL TURNOVER
- --------------- --------------- -------------- ---------------
Category 1994 1995 1996
- --------------- --------------- -------------- ---------------
New Members 43 51 76
Lost Members 77 52 53
- --------------- --------------- -------------- ---------------
Net Members
(year end) 478 477 500
- --------------- --------------- -------------- ---------------
NEW MEMBERS BY CATEGORY
- --------------- --------------- -------------- ---------------
Category 1994 1995 1996
- --------------- --------------- -------------- ---------------
Resident 21 25 42
Non- Resident 6 14 4
Corporate 16 5 28
Special 0 7 2
- --------------- --------------- -------------- ---------------
Total 43 51 76
- --------------- --------------- -------------- ---------------
<PAGE>
Pine Lake Trout Club Page 53
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LOST MEMBERS BY CATEGORY
- --------------- --------------- -------------- ---------------
Category 1994 1995 1996
- --------------- --------------- -------------- ---------------
Resident 30 20 20
Non- Resident 34 19 8
Corporate 12 12 20
Special 1 1 5
- --------------- --------------- -------------- ---------------
Total 77 52 53
- --------------- --------------- -------------- ---------------
Membership Income Projection
Based upon the above analysis, the appraisers have projected that
membership would increase to 505 members in 1997, 510 in 1998 and
stabilize at 515 in 1999 and thereafter. This estimate is based
upon conversations with club management and analysis of
historical membership trends.
Based on our analysis, we project that the increase in new
membership will primarily come from resident members, with small
gains to corporate members and declines in special and
non-resident membership. Initiation fees will also increase over
the next three years as membership grows and then stabilize as
membership remains constant with a constant turnover rate. Locker
revenue is also projected to increase in a similar manner.
Service Charge Income - In addition to food, beverage and fishing
income, the club charges an 18 percent service charge on these
income streams to all its members. In projecting this income, the
appraisers' projected 18 percent of the total of food, beverage
and fishing revenue over the entire projection period. According
to management, this charge is accepted because it pays for the
higher wages necessary to maintain employees and limit turnover.
Other Income - This income is generated primarily by meeting and
banquet room rentals to members, audio-visual rentals and misc.
items such as interest on operating accounts. This income
component has historically ranged from 1.8 percent to 2.5 percent
of membership income. The appraisers have projected other income
to be two percent of membership income over the projection
period.
<PAGE>
Pine Lake Trout Club Page 54
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Departmental Expenses
Rooms Departmental Expense includes payroll, cleaning and laundry
supplies , guest supplies and other related expenses for the two
cabins which are rented on a daily basis. The six cabins rented
on a permanent basis do not contribute to this expense.
Historically this expense has been approximately 28 percent of
the revenue generated by these two rental cabins. The appraisers
have used this percentage to estimate room expense over the
entire projection period.
Food Expense includes the cost of goods sold (food), labor and
related benefits, and other operating expenses. Labor costs
include departmental management, cooks and kitchen personnel,
service staff, and banquet staff. In determining an estimate of
food expenses, the appraisers reviewed the historical food
expense in relation to total food revenue and found that over the
past three years, it has ranged from 84 percent to 91 percent of
total food revenue. The appraisers selected an estimate of 85
percent of food revenue based on recent trends.
Beverage Expense includes the cost of goods sold (setups), labor
and related benefits, and other operating expenses. Labor costs
include departmental management, service staff, banquet staff,
and bartenders. In determining an estimate of beverage expenses,
the appraisers reviewed the historical beverage expense in
relation to total beverage revenue and found that over the past
three years, it has ranged from 11.5 percent to 12.1 percent of
total beverage revenue. The appraisers selected an estimate of 12
percent of beverage revenue based on recent trends.
Fishing Expense includes payroll , cost of fish to stock streams
and ponds, operating equipment and supplies, and other similarly
related items. In determining an estimate of fishing expenses,
the appraisers reviewed the historical fishing expense in
relation to total fishing revenue and found that over the past
three years, it has ranged from 65.0 percent to 77.0 percent of
total fishing revenue. The appraisers selected an estimate of 75
percent of fishing revenue based on recent trends.
<PAGE>
Pine Lake Trout Club Page 55
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Undistributed Operating Expenses
Administrative and General Expense includes payroll and related
expenses for the general manager, personnel and training,
clerical staff, controller and accounting staff. Other
administrative and general (A&G) expenses include office
supplies, computer services, accounting and legal fees, travel
expenses and liability insurance. We reflected this expense under
fixed costs. Credit card commissions were classified as an A&G
expense, and are directly variable with sales. A&G expenses are
estimated based upon historical expenses recorded by the club. We
estimate that A&G expenses will equal approximately 16.0 percent
of total revenue, based on an historical range of 15 percent to
18 percent of total revenue.
Sales and Marketing Expense includes payroll and related expenses
for the sales and marketing staff, direct sales expenses,
advertising and promotion and travel expense for the sales staff.
Marketing expenses are estimated based upon historical expenses
recorded by the club. We estimate that marketing expenditures
will equal approximately three percent of total revenue. This
percentage has been constant over the past two years.
Energy Costs includes the expenditure for electricity, fuel,
water, waste removal and related operating supplies. On the basis
of historical energy costs at the club, we assume that the energy
expense will equal 4.5 percent of total revenue in 1997. This
estimate is consistent with historical ratios ranging from 4.1
percent to 4.7 percent.
Property Operations and Maintenance Expense includes payroll and
related expenses, as well as other expenses necessary for
painting, decorating, and repairs of the building, grounds and
equipment. This expense is estimated based upon historical
property operations and maintenance expenses at the subject
club.. On the basis of historical maintenance costs at the club,
we estimate that the energy expense will equal 8.5 percent of
total revenue. This estimate is consistent with historical ratios
ranging from 5.5 percent to 8.7 percent, with the 1995 and 1996
financial indicating the higher end of the range.
<PAGE>
Pine Lake Trout Club Page 56
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Fixed Charges
Management Fee Expense has been estimated to be four percent of
gross revenue on the basis of industry averages, and historical
figures.
Property Taxes and Insurance - Property Taxes are estimated based
upon the current property tax assessment and tax bill for 1995
and 1996. A more detailed analysis of historical and current
property taxes is presented in Section B.1 of this report.
Insurance on building and contents against damage was estimated
based upon the historical expenses incurred at the subject club.
Expenses are adjusted to account for inflation throughout the
projection period.
Reserve for Replacement provides a fund for the replacement of
furniture, fixtures and equipment. We assume that the reserve for
replacement will equal four percent of total revenue throughout
the projection period, consistent with industry practice.
Capital Expenditures - We have not projected any major capital
expenditures required to renovate the property. All major
expenses are reflected under the property operations and
management expense category with an allowance given for major
capital projects under the reserve for replacement.
Income Before Debt Service
Estimated operating results for the subject property to the level
of profit before debt service, income taxes, depreciation and
other capital costs, are presented on the following pages.
<PAGE>
Summary of Estimates of Income and Expenses
Pine Lake Trout Club
Market Area: Cleveland, Ohio
1997
ASSUMPTIONS
Permanent Rentals 6
Daily Rentals 2
Current Membership 505
Avg Annual Membership 1 cc Per Member $1,000
Avg Monthly Rent for Permanent Rentals $702.50
Avg Daily Rate for Daily Rental $130.00
Permanent Occupancy 100%
Daily Occupancy 32%
Inflation Factor 0.0%
REVENUES
Rooms $80,918
Food 101,000 80.00%
Beverage 60,600 12.00%
Fishing Department 42,925 8.50%
Membership 505,000
Club Service Charge 91,355 18.00%
Other Income 10,100 2.00%
--------- ------
Total Revenues $1,194,928
DEPARTMENTAL EXPENSES
Rooms 8,503 28.00%
Food 313,000 85.00%
Beverage 30,300 50.00%
Fishing Department 32,191 75.00%
--------- ------
Total Departmental Expenses $414,397 31.68%
TOTAL DEPARTMENTAL INCOME $780,531 65.32%
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $191,188 16.00%
Sales and Marketing 35,818 3.00%
Energy Cost 53,772 4.50%
Property Operations & Maintenance 101,569 8.50%
--------- ------
Total Undistributed Operating $382,377 32.00%
INCOME BEFORE FIXED CHARGES $398,154 33.32%
FIXED CHARGES
Management Fee $17,797 4.00%
Taxes and Insurance 22,705
--------- ------
Total Fixed Charges $70,502 5.90%
<PAGE>
INCOME BEFORE RESERVE $427,652 27.42%
Reserve For Replacement $17,797 4.00%
CASH FLOW BEFORE DEBT AND TAXES $279,855 23.42%
========= ======
Summary of Estimates of Income and Expenses
Pine Lake Trout Club
Market Area: Cleveland, Ohio
1998
ASSUMPTIONS
Permanent Rentals 6
Daily Rentals 2
Current Membership 510
Avg Annual Membership 1 cc Per Member $1,035
Avg Monthly Rent for Permanent Rentals $727.09
Avg Daily Rate for Daily Rental $134.55
Permanent Occupancy 100%
Daily Occupancy 32%
Inflation Factor 3.5%
REVENUES
Rooms $83,781
Food 122,280 80.00%
Beverage 63,342 12.00%
Fishing Department 11,867 8.50%
Membership 527,850
Club Service Charge 95,188 18.00%
Other Income 10,557 2.00%
--------- ------
Total Revenues $1,218,165
DEPARTMENTAL EXPENSES
Rooms 8,801 28.00%
Food 358,938 85.00%
Beverage 31,671 50.00%
Fishing Department 33,650 75.00%
--------- ------
Total Departmental Expenses $133,060 34.70%
TOTAL DEPARTMENTAL INCOME $815,105 65.30%
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $199,706 16.00%
Sales and Marketing 37,445 3.00%
Energy Cost 56,167 4.50%
Property Operations & Maintenance 106,091 8.50%
--------- ------
<PAGE>
Total Undistributed Operating $399,413 32.00%
INCOME BEFORE FIXED CHARGES $415,692 33.30%
FIXED CHARGES
Management Fee $19,927 4.00%
Taxes and Insurance 23,500
--------- ------
Total Fixed Charges $73,426 5.88%
INCOME BEFORE RESERVE $342,266 27.42%
Reserve For Replacement $49,927 4.00%
CASH FLOW BEFORE DEBT AND TAXES $292,340 23.42%
========= ======
Summary of Estimates of Income and Expenses
Pine Lake Trout Club
Market Area: Cleveland, Ohio
1999
ASSUMPTIONS
Permanent Rentals 6
Daily Rentals 2
Current Membership 515
Avg Annual Membership 1 cc Per Member $1,071
Avg Monthly Rent for Permanent Rentals $752.54
Avg Daily Rate for Daily Rental $139.26
Permanent Occupancy 100%
Daily Occupancy 32%
Inflation Factor 3.5%
REVENUES
Rooms $86,714
Food 441,345 80.00%
Beverage 66,202 12.00%
Fishing Department 46,893 8.50%
Membership 551,681
Club Service Charge 99,799 18.00%
Other Income 11,034 2.00%
--------- ------
Total Revenues $1,303,666
DEPARTMENTAL EXPENSES
Rooms 9,109 28.00%
Food 375,443 85.00%
Beverage 33,101 50.00%
Fishing Department 35,170 75.00%
--------- ------
<PAGE>
Total Departmental Expenses $452,522 34.71%
TOTAL DEPARTMENTAL INCOME $851,444 65.29%
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $208,587 16.00%
Sales and Marketing 39,110 3.00%
Energy Cost 58,665 4.50%
Property Operations & Maintenance 110,812 8.50%
--------- ------
Total Undistributed Operating $117,173 32.00%
INCOME BEFORE FIXED CHARGES $433,971 33.29%
FIXED CHARGES
Management Fee $52,147 4.00%
Taxes and Insurance 24,332
--------- ------
Total Fixed Charges $76,469 5.87%
INCOME BEFORE RESERVE $357,502 27.42%
Reserve For Replacement $52,147 4.00%
CASH FLOW BEFORE DEBT AND TAXES $305,355 23.42%
========= ======
Summary of Estimates of Income and Expenses
Pine Lake Trout Club
Market Area: Cleveland, Ohio
2000
ASSUMPTIONS
Permanent Rentals 6
Daily Rentals 2
Current Membership 515
Avg Annual Membership 1 cc Per Member $1,109
Avg Monthly Rent for Permanent Rentals $778.87
Avg Daily Rate for Daily Rental $144.43
Permanent Occupancy 100%
Daily Occupancy 32%
Inflation Factor 3.5%
REVENUES
Rooms $89,748
Food 456,792 80.00%
Beverage 68,519 12.00%
Fishing Department 48,531 8.50%
Membership 570,990
Club Service Charge 103,292 18.00%
<PAGE>
Other Income 11,420 2.00%
--------- ------
Total Revenues $1,334,295
DEPARTMENTAL EXPENSES
Rooms 9,427 28.00%
Food 388,273 85.00%
Beverage 34,259 50.00%
Fishing Department 35,401 75.00%
--------- ------
Total Departmental Expenses $468,360 34.71%
TOTAL DEPARTMENTAL INCOME $880,931 65.29%
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $215,887 16.00%
Sales and Marketing 40,479 3.00%
Energy Cost 60,718 4.50%
Property Operations & Maintenance 114,690 8.50%
--------- ------
Total Undistributed Operating $431,774 32.00%
INCOME BEFORE FIXED CHARGES $449,460 33.29%
FIXED CHARGES
Management Fee $53,972 4.00%
Taxes and Insurance 25,173
--------- ------
Total Fixed Charges $79,445 5.87%
INCOME BEFORE RESERVE $370,015 27.42%
Reserve For Replacement $53,972 4.00%
CASH FLOW BEFORE DEBT AND TAXES $316,013 23.42%
========= ======
Summary of Estimates of Income and Expenses
Pine Lake Trout Club
Market Area: Cleveland, Ohio
2001
ASSUMPTIONS
Permanent Rentals 6
Daily Rentals 2
Current Membership 515
Avg Annual Membership 1 cc Per Member $1,148
Avg Monthly Rent for Permanent Rentals $806.13
Avg Daily Rate for Daily Rental $149.18
Permanent Occupancy 100%
<PAGE>
Daily Occupancy 32%
Inflation Factor 3.5%
REVENUES
Rooms $92,890
Food 472,779 80.00%
Beverage 70,917 12.00%
Fishing Department 50,233 8.50%
Membership 590,974
Club Service Charge 106,907 18.00%
Other Income 11,819 2.00%
--------- ------
Total Revenues $1,396,520
DEPARTMENTAL EXPENSES
Rooms 9,757 28.00%
Food 401,863 85.00%
Beverage 35,458 50.00%
Fishing Department 37,675 75.00%
--------- ------
Total Departmental Expenses $484,753 34.71%
TOTAL DEPARTMENTAL INCOME $911,767 65.29%
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $223,443 16.00%
Sales and Marketing 41,896 3.00%
Energy Cost 62,843 4.50%
Property Operations & Maintenance 118,704 8.50%
--------- ------
Total Undistributed Operating $446,886 32.00%
INCOME BEFORE FIXED CHARGES $164,881 33.29%
FIXED CHARGES
Management Fee $55,861 4.00%
Taxes and Insurance 26,055
--------- ------
Total Fixed Charges $81,915 5.87%
INCOME BEFORE RESERVE $382,965 27.42%
Reserve For Replacement $55,861 4.00%
CASH FLOW BEFORE DEBT AND TAXES $327,404 23.42%
========= ======
<PAGE>
Summary of Estimates of Income and Expenses
Pine Lake Trout Club
Market Area: Cleveland, Ohio
2002
ASSUMPTIONS
Permanent Rentals 6
Daily Rentals 2
Current Membership 515
Avg Annual Membership 1 cc Per Member $1,188
Avg Monthly Rent for Permanent Rentals ??
Avg Daily Rate for Daily Rental $151.40
Permanent Occupancy 100%
Daily Occupancy 32%
Inflation Factor 3.5%
REVENUES
Rooms $96,441
Food 489,323 80.00%
Beverage ?? 12.00%
Fishing Department 51,991 8.50%
Membership 611,649
Club Service Charge ?? 18.00%
Other Income 12,2?? 2.00%
--------- ------
Total Revenues $1,419,398
DEPARTMENTAL EXPENSES
Rooms 10,099 28.00%
Food 415,928 85.00%
Beverage 35,700 50.00%
Fishing Department 38,991 75.00%
--------- ------
Total Departmental Expenses $ ?? 34.71%
TOTAL DEPARTMENTAL INCOME $911,697 65.29%
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $231,261 16.00%
Sales and Marketing 43,362 3.00%
Energy Cost 65,043 4.50%
Property Operations & Maintenance 122,859 8.50%
--------- ------
Total Undistributed Operating $462,527 32.00%
INCOME BEFORE FIXED CHARGES $181,151 33.29%
FIXED CHARGES
Management Fee $57,816 4.00%
Taxes and Insurance 26,966
--------- ------
Total Fixed Charges $81,782 5.87%
<PAGE>
INCOME BEFORE RESERVE $396,369 27.42%
Reserve For Replacement $57,816 4.00%
CASH FLOW BEFORE DEBT AND TAXES $338,553 23.42%
========= ======
Summary of Estimates of Income and Expenses
Pine Lake Trout Club
Market Area: Cleveland, Ohio
2003
ASSUMPTIONS
Permanent Rentals 6
Daily Rentals 2
Current Membership 515
Avg Annual Membership 1 cc Per Member $1,229
Avg Monthly Rent for Permanent Rentals 863.55
Avg Daily Rate for Daily Rental $159.80
Permanent Occupancy 100%
Daily Occupancy 32%
Inflation Factor 3.5%
REVENUES
Rooms $99,506
Food 506,153 80.00%
Beverage 75,968 12.00%
Fishing Department 51,811 8.50%
Membership 633,066
Club Service Charge 111,522 18.00%
Other Income 12,661 2.00%
--------- ------
Total Revenues $1,495,987
DEPARTMENTAL EXPENSES
Rooms 10,452 28.00%
Food 430,185 85.00%
Beverage 37,981 50.00%
Fishing Department 40,358 75.00%
--------- ------
Total Departmental Expenses $519,280 34.71%
TOTAL DEPARTMENTAL INCOME $976,708 65.29%
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $239,358 16.00%
Sales and Marketing 44,880 3.00%
Energy Cost 67,319 4.50%
Property Operations & Maintenance 127,159 8.50%
--------- ------
Total Undistributed Operating $478,716 32.00%
<PAGE>
INCOME BEFORE FIXED CHARGES $197,992 33.29%
FIXED CHARGES
Management Fee $59,839 4.00%
Taxes and Insurance 27,910
--------- ------
Total Fixed Charges $87,750 5.87%
INCOME BEFORE RESERVE $410,242 27.42%
Reserve For Replacement $59,839 4.00%
CASH FLOW BEFORE DEBT AND TAXES $350,402 23.42%
========= ======
Summary of Estimates of Income and Expenses
Pine Lake Trout Club
Market Area: Cleveland, Ohio
2004
ASSUMPTIONS
Permanent Rentals 6
Daily Rentals 2
Current Membership 515
Avg Annual Membership 1 cc Per Member $1,229
Avg Monthly Rent for Permanent Rentals 893.78
Avg Daily Rate for Daily Rental $165.40
Permanent Occupancy 100%
Daily Occupancy 32%
Inflation Factor 3.5%
REVENUES
Rooms $102,988
Food 524,479 80.00%
Beverage 78,627 12.00%
Fishing Department 55,694 8.50%
Membership 655,224
Club Service Charge 118,530 18.00%
Other Income 13,404 2.00%
--------- ------
Total Revenues $1,518,347
DEPARTMENTAL EXPENSES
Rooms 10,818 28.00%
Food 445,552 85.00%
Beverage 39,313 50.00%
Fishing Department 41,774 75.00%
--------- ------
Total Departmental Expenses $537,454 34.71%
TOTAL DEPARTMENTAL INCOME $1,010,892 65.29%
<PAGE>
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $247,735 16.00%
Sales and Marketing 46,450 3.00%
Energy Cost 69,676 4.50%
Property Operations & Maintenance 131,609 8.50%
--------- ------
Total Undistributed Operating $495,471 32.00%
INCOME BEFORE FIXED CHARGES $515,421 33.29%
FIXED CHARGES
Management Fee $61,934 4.00%
Taxes and Insurance 28,887
--------- ------
Total Fixed Charges $90,821 5.87%
INCOME BEFORE RESERVE $124,600 27.42%
Reserve For Replacement $61,934 4.00%
CASH FLOW BEFORE DEBT AND TAXES $362,667 23.42%
========= ======
Summary of Estimates of Income and Expenses
Pine Lake Trout Club
Market Area: Cleveland, Ohio
2005
ASSUMPTIONS
Permanent Rentals 6
Daily Rentals 2
Current Membership 515
Avg Annual Membership 1 cc Per Member $1,317
Avg Monthly Rent for Permanent Rentals 925.06
Avg Daily Rate for Daily Rental $171.49
Permanent Occupancy 100%
Daily Occupancy 32%
Inflation Factor 3.5%
REVENUES
Rooms $106,593
Food 524,525 80.00%
Beverage 81,379 12.00%
Fishing Department 57,643 8.50%
Membership 678,157
Club Service Charge 122,679 18.00%
Other Income 13,563 2.00%
--------- ------
Total Revenues $1,602,539
<PAGE>
DEPARTMENTAL EXPENSES
Rooms 11,197 28.00%
Food 461,447 85.00%
Beverage 40,689 50.00%
Fishing Department 43,232 75.00%
--------- ------
Total Departmental Expenses $556,265 34.71%
TOTAL DEPARTMENTAL INCOME $1,046,274 65.29%
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $256,406 16.00%
Sales and Marketing 48,076 3.00%
Energy Cost 72,414 4.50%
Property Operations & Maintenance 136,216 8.50%
--------- ------
Total Undistributed Operating $512,812 32.00%
INCOME BEFORE FIXED CHARGES $553,461 33.29%
FIXED CHARGES
Management Fee $64,102 4.00%
Taxes and Insurance 29,898
--------- ------
Total Fixed Charges $94,000 5.87%
INCOME BEFORE RESERVE $439,461 27.42%
Reserve For Replacement $64,402 4.00%
CASH FLOW BEFORE DEBT AND TAXES $375,360 23.42%
========= ======
Summary of Estimates of Income and Expenses
Pine Lake Trout Club
Market Area: Cleveland, Ohio
2006
ASSUMPTIONS
Permanent Rentals 6
Daily Rentals 2
Current Membership 515
Avg Annual Membership 1 cc Per Member $1,363
Avg Monthly Rent for Permanent Rentals $957.44
Avg Daily Rate for Daily Rental $177.18
Permanent Occupancy 100%
Daily Occupancy 32%
Inflation Factor 3.5%
REVENUES
<PAGE>
Rooms $110,324
Food 561,514 80.00%
Beverage 84,227 12.00%
Fishing Department 59,661 8.50%
Membership 701,892
Club Service Charge 126,972 18.00%
Other Income 14,034 2.00%
--------- ------
Total Revenues $1,658,628
DEPARTMENTAL EXPENSES
Rooms 11,589 28.00%
Food 477,287 85.00%
Beverage 42,114 50.00%
Fishing Department 44,746 75.00%
--------- ------
Total Departmental Expenses $575,735 34.71%
TOTAL DEPARTMENTAL INCOME $1,082,893 65.29%
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General $265,380 16.00%
Sales and Marketing 49,759 3.00%
Energy Cost 74,638 4.50%
Property Operations & Maintenance 140,983 8.50%
--------- ------
Total Undistributed Operating $530,761 32.00%
INCOME BEFORE FIXED CHARGES $552,432 33.29%
FIXED CHARGES
Management Fee $66,345 4.00%
Taxes and Insurance 30,945
--------- ------
Total Fixed Charges $97,290 5.87%
INCOME BEFORE RESERVE $454,913 27.42%
Reserve For Replacement $66,345 4.00%
CASH FLOW BEFORE DEBT AND TAXES $388,497 23.42%
========= ======
<PAGE>
Pine Lake Trout Club Page 59
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INVESTMENT CLIMATE OVERVIEW
In establishing valuation parameters to apply to the projected
operating cash flow from the subject property, we have researched
the current market for similar type investments. Given the unique
nature of the subject property operations, the appraisers
considered national surveys of various property types including
retail, hotel and apartments. The subject property incorporates
various aspects of these property types and thus it was deemed
appropriate to consider all of them in our analysis.
Arthur Andersen conducts a survey of a select group of hotel
companies, investors, developers, investment bankers, and
brokers. Our most recent survey was conducted at the end of the
third quarter of 1996. In addition Peter F. Korpacz Inc. also
periodically surveys real estate investors for investment rate
information on various property types including the multi-family
and retail property types. The following tables summarize the
results of these investor surveys.
==============================================================
ARTHUR ANDERSEN HOTEL INVESTOR SURVEY
THIRD QUARTER 1996
Range
-----
Free and Clear Discount Rates 12.0%-15.0%
Terminal Capitalization Rates 10.0%-12.5%
Going-In Capitalization Rates 10.0%-11.0%
Equity Return Req. (leveraged) 20.0%-30.0%
Equity Return Req. (unleveraged) 12.0%-18.0%
Cash on Cash Return Requirements 10.0%-17.5%
==============================================================
======================================================================
SUMMARY OF DISCOUNT RATES
RETAIL AND APARTMENTS
======================================================================
Publication
Publication Date Low High Average
- ----------- ---- --- ---- -------
Korpacz Investor
Survey (Apts) 3rd Qtr 1996 10.00% 12.50% 11.30%
Korpacz Investor
Survey (Retail) 3rd Qtr 1996 10.00% 14.00% 11.49%
======================================================================
<PAGE>
Pine Lake Trout Club Page 60
- -----------------------------------------------------------------------
======================================================================
SUMMARY OF TERMINAL CAPITALIZATION RATES
RETAIL AND APARTMENTS
======================================================================
Publication
Publication Date Low High Average
- ----------- ---- --- ---- -------
Korpacz Investor
Survey (Apts) 3rd Qtr 1996 8.50% 10.50% 9.32%
Korpacz Investor
Survey (Retail) 3rd Qtr 1996 8.25% 13.50% 9.91%
======================================================================
DISCOUNTED CASH FLOW ANALYSIS
The discounted cash flow (DCF) technique converts the projected
stream of benefits, either before or after financing, as
appropriate, into a present value. Once the projection of net
income or cash flow is accomplished, a discount rate and
capitalization rate at reversion must be chosen. The selection of
these rates is necessarily subjective, since investor criteria
for the acquisition of real property is subject to variation, and
no organized property exchange exists.
Discount Rates
A free and clear discount rate is used to discount future
earnings without regard to any leverage or financing. Since there
had been a general lack of hotel and trout club and overall
recreational facility financing over the last several years, most
of the larger transactions have involved all cash purchases.
Discount rates (or internal rate-of-return requirements)
typically vary by a number of factors: long-term investor-return
requirements on alternative investments; type and motivation of
investor; property type -- e.g., hotel, apartments, etc.; and
local market area conditions. Our review of the selected investor
surveys indicated that investors are currently assuming discount
rates that range from 10 to 18 percent. The survey's average free
and clear discount rates were 14 percent for hotels (including
unleveraged equity returns), 11.3 percent for apartments and
11.49 percent for retail strip centers. After giving
consideration to these surveys, as well as to the type of
property being appraised, its uniqueness, its competitiveness in
its market place, and general market conditions, a discount rate
of 15.0 percent is judged to be appropriate.
<PAGE>
Pine Lake Trout Club Page 61
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Terminal Capitalization Rates
The "exit" capitalization rate at reversion is used to convert
the projected stream of income beyond the last year of the
projection period into a value at the end of the projection
period. Our investor survey revealed capitalization rates ranging
from 8.5 to 13.5 percent, with a survey average of approximately
10.0 percent for hotels, 9.32 percent for apartments and 9.91
percent for retail strip centers. Given the stable nature of the
subject income tempered by the uniqueness of the subject
property, the appraisers selected a conservative terminal cap
rate. On the basis of this analysis, a terminal capitalization
rate of 11.0 percent is judged to be appropriate for the subject
property.
Conclusion by Discounted Cash Flow Analysis
Application of the discounted cash flow technique to the total
projected net income for the appraised property yields a market
value estimate of the fee simple interest in the subject of
$2,600,000. The table on the following page presents our
discounted cash flow analysis.
<PAGE>
Discounted Cash Flow Analysis
Pine Lake Trout Club
Cleveland, Ohio
Net Present Value
Income Before Residual Discount Income Before
Year Debt Service Value(1) Factor(2) & (3) Debt Service
- ---- ------------- -------- --------------- -----------------
1997 $279,855 0.8696 $243,352
1998 292,340 0.7561 221,051
1999 305,355 0.6575 200,776
2000 316,043 0.5718 180,699
2001 327,104 0.4972 162,629
2002 338,553 0.4323 146,366
2003 350,402 0.3759 131,729
2004 362,667 0.3269 118,556
2005 375,360 0.2843 106,701
2006 388,497 $4,010,884(4) 0.2472 1,087,460
---------
Value at January 1, 1997: $2,600,000 RD
Notes:
(1) Income Before Reserve ($454,843) in the exit year was capitalized at
11.0 percent.
(2) Income was discounted to net present value using a 15.0 percent discount
rate.
(3) Analysis uses end-point discounting.
(4) A sales commission of 3.0 percent was assumed.
<PAGE>
Pine Lake Trout Club Page 63
- -----------------------------------------------------------------------
D. RECONCILIATION AND FINAL VALUE ESTIMATE
Valuation of the appraised property has been developed by the
direct sales comparison approach and the income approach. Various
appraisal techniques and methods were utilized in these analyses
and the fee simple value estimates derived by each approach is
summarized as follows:
$ Amount
--------
Cost Approach: N/A
Sales Comparison Approach N/A
Income Approach $2,600,000
Reconciled Value Indication $2,600,000
The Cost Approach is most useful when valuing new or nearly new
properties or when appraising special purpose properties. The
reliability of this approach is diminished as buildings and other
forms of improvement increase in age and begin to depreciate. The
resulting loss in value becomes increasingly difficult to
accurately quantify. The cost approach was therefore not utilized
in valuing the subject property.
The Sales Comparison Approach is frequently a good indicator of
value, especially when a sufficient number of relevant
transactions with reliable information on each is available. Due
to the unique nature of the subject property, the appraisers were
not able to locate any truly comparable sales. However, this
approach was utilized to determine the value of the subject
property's excess land.
The income capitalization approach is generally considered the
most applicable method for estimating the value of investment
properties, as it incorporates the economic motivations of buyers
and sellers in the analysis. The reliability of this approach is
enhanced when adequate data are available to assure proper
development of the income, expense, and capitalization rate
analysis.
<PAGE>
Pine Lake Trout Club Page 61
- -----------------------------------------------------------------------
Based upon our research and analysis, it is our opinion that the
market value of the fee simple interest, including furniture,
fixtures and equipment, goodwill and excess land as of January 1,
1997 is
TWO MILLION SIX HUNDRED THOUSAND DOLLARS
($2,600,000)
In accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP), prepared by The Appraisal Standards
Board of The Appraisal Foundation, it is necessary to identify
and separately value any personal property, fixtures, or
intangible items that are not real property but are included in
the appraisal. Personal property and fixtures in the trout club
consists of a variety of components including cabin case-goods
for two cabins, bathroom fixtures, restaurant and kitchen
equipment, signage, computers and other related items. Our
physical inspection of the property indicated that these items
were generally in good condition relative to the age of the
property.
We estimate that the replacement cost for the furniture,
fixtures, and equipment at the subject club is approximately
$80,000 in constant 1996 dollars. This estimate is based upon our
inspection of the property and a review of the subject property
personal property taxes.
Since the club's furniture, fixtures, and equipment and goodwill
is such an integral component of the facility's ability to
generate income and is seldom removed from the property or sold
separately, the value produced by the separation of the personal
property and goodwill components from the real property is not
particularly meaningful.
<PAGE>
Pine Lake Trout Club
- -----------------------------------------------------------------------
F. ADDENDA
<PAGE>
Pine Lake Trout Club
- -----------------------------------------------------------------------
F.1 SUBJECT PROPERTY PHOTOGRAPHS
<PAGE>
Pine Lake Trout Club
- -----------------------------------------------------------------------
Main Lodge Exterior
Paste Photograph #2 Here
Main Lodge Interior
<PAGE>
Pine Lake Trout Club
- -----------------------------------------------------------------------
Typical Residential Cabin
Typical Residential Cabin
<PAGE>
Pine Lake Trout Club
- -----------------------------------------------------------------------
Dining Cabin Exterior
Dining Cabin Interior
<PAGE>
Pine Lake Trout Club
- -----------------------------------------------------------------------
F.2 PROPERTY LEGAL DESCRIPTION
<PAGE>
EXHIBIT A
---------
(Pine Lake Trout Club)
PARCEL 1: Situated in the Township of Bainbridge, County of
Geauga and State of Ohio and known as being a part of Original
Bainbridge Township Lot No. 20, Tract 1, bounded and described as
follows:
Beginning at a point in the centerline of Chillicothe Road (State
Route 306) 60 feet wide, said point being the southwesterly
corner of a parcel of land conveyed to J. Kirby by deed recorded
in Volume 247, Page 694 of Geauga County Deed Records; Thence S.
87o 37' 00" E, along the southerly line of said J. Kirby parcel
300.00 feet to an iron pin and the principal point of beginning
of the parcel herein described:
Course No. 1 - Thence S. 87o 37' 00" E, continuing along the
southerly line of said J. Kirby parcel and the southerly line of
a parcel of land conveyed to L. and M. Ecsy by deed recorded in
Volume 753, Page 80 of Geauga County Deed Records, 2315.00 feet
to a point on the westerly line of a parcel of land conveyed to
L. and M. Ecsy by deed recorded in Volume 580, Page 840 of Geauga
County Deed Records;
Course No. 2 - Thence S. 3o 21' 25" W., along the westerly line
of said Ecsy parcel, 891.66 feet to a stone, said point being the
northwesterly corner of the Tanglewood Subdivision No. 9, Phase
II as recorded in Volume 11, Page 85 of Geauga County Map
Records;
Course No. 3 - Thence S. 3o 00' 58" W., along the westerly line
of said Tanglewood Reserve Subdivision No. 9, Phase II and the
westerly line of Tanglewood Reserve Subdivision No. 8 as recorded
in Volume 9, Page 142 of Geauga County Map Records, 512.39 feet
to an iron pin at the northeasterly corner of a parcel of land
conveyed to D.C. McClennan by deed recorded in Volume 515, Page
406 of Geauga County Deed Records;
Course No. 4 - Thence N. 87o 40' 30" W., along the northerly line
of said D.C. McClennan parcel and the northerly line of a parcel
of land conveyed to W.C. McClennan by deed recorded in Volume
704, Page 38 of Geauga County Deed Records, 2587.85 feet to a
point in the centerline of said Chillicothe Road passing through
an iron pin distant S. 87o 40' 30" E., 30.00 fee therefrom;
<PAGE>
Course No. 5 - Thence N. 2o 07' 30" E., along the centerline of
said Chillicothe Road, 1106.54 feet to a point being the
southwesterly corner of a parcel of land conveyed to J.R. and
K.S. Andras by deed recorded in Volume 637, Page 1220 of Geauga
County Deed Records;
14
Course No. 6 - Thence S. 87o 37' 00" E., along the southerly line
of said Andras parcel, 300.00 feet to the southeasterly corner
thereof and passing through an iron pin distant 30.00 feet from
the centerline of said Chillicothe Road;
Course No. 7 - Thence N. 2o 07' 30" E., along the easterly line
of said Andras parcel 300.00 feet to the principal point of
beginning and containing 81.822 acres of land be the same more or
less but subject to all legal highways and easements of record.
Parcel No. 2:
Non-Exclusive easement for ingress and egress for the benefit of
Parcel No. 1 herein created and defined by Easement filed
February 3, 1969 in Volume 501 Page 157 of Geauga County Records
over the following described premises:
Situated in the Township of Bainbridge, County of Geauga, and
State of Ohio and being a part of Lot No. 20 of Tract No. 1
within said Township and described as follows:
Beginning at a point in the centerline of Chillicothe Road so
called at the Southwesterly corner of land deeded by Myra L.
Gibbs July, 1932 to H.N. Mills and recorded in Volume 188, Page
491 of Geauga County Records of Deeds. Thence South 87 degrees 37
minutes East through an iron pipe 30 feet therefrom along the
southerly line of Mills land, a distance of 300 feet. Thence
South 2 degrees 7 minutes 30" West, a distance of 30 feet. Thence
North 87 degrees 37 minutes West a distance of 300 feet to the
centerline of said Chillicothe Road. Thence North 2 degrees 7
minutes 30" East along the said road's centerline, a distance of
30 feet to the place of beginning, be the same more or less, but
subject to all legal highways.
Parcel No. 3:
Non-Exclusive Easement for ingress and egress for the benefit of
Parcel No. 1 created and defined by Easement filed June 25, 1976
in volume 589, Page 245 of Geauga County Records over the
following described premises:
<PAGE>
Situated in the Township of Bainbridge, County of Geauga and
State of Ohio: known as being a part of Lot 20, Tract 1 in said
Township and is bounded and described as follows:
Beginning in the east sidelines of Chillicothe Road where the
same is intersected by the south line of land of H.N. Mills, as
recorded in Volume 188, Page 491 of Geauga County Deed Records:
Thence along the east sideline of Chillicothe Road, South 02
degrees 07 minutes and 30 seconds West, a distance of 30.00 feet
to the principal place of beginning: Thence from said principal
place of beginning, South 87 degrees and 37 minutes East, a
15
distance of 150.00 feet to a point; Thence by a line which bears
South 88 degrees 34 minutes and 10 seconds West, a distance of
150.29 feet to the east sideline of Chillicothe Road; Thence
along said sideline, North 02 degrees 07 minutes and 30 seconds
East, a distance of 10.00 feet to the principal place of
beginning.
EXCEPT FOR THE FOLLOWING PARCEL OF LAND:
Situated in the Township of Bainbridge, County of Geauga and
State of Ohio, and known as being a part of Original Bainbridge
Township Lot No. 20, Tract No. 1, bounded and described as
follows:
Beginning at the northeasterly corner of land of Charles E. and
Suzin H. Williams as recorded in Volume 582, Page 396 of Geauga
County Record of Deeds, said point also being on the southerly
line of land of James R. Kirby as recorded in Volume 247, Page
694 of Geauga County Record of Deeds:
Thence S. 87o 37' 00" E. along the southerly line of
said James R. Kirby a distance of 407.00 feet to a point;
Thence S. 23o 02' 00" E. a distance of 315.28 feet to a
point;
Thence S. 30o 48' 00" E. a distance of 288.98 feet to a
point;
Thence S. 81o 30' 32" E. a distance of 906.07 feet to a
point;
Thence S. 31o 38' 00" W. a distance of 261.00 feet to a
point;
<PAGE>
Thence S. 87o 36' 00" W. a distance of 355.00 feet to a
point;
Thence S. 72o 37' 00" W. a distance of 184.00 feet to a
point;
Thence S. 0o 54' 00" W. a distance of 446.00 feet to a
point;
Thence S. 21o 47' 00" W. a distance of 226.00 feet to a
point;
Thence S. 49o 07' 00" W. a distance of 295.00 feet to a
point;
Thence S. 89o 02' 00" W. a distance of 64.00 feet to a
point;
16
Thence N. 25o 08' 00" W. a distance of 492.00 feet to a
point;
Thence N. 16o 21' 00" E. a distance of 411.00 feet to a
point;
Thence N. 30o 48' 00" E. a distance of 109.70 feet to a
point;
Thence N. 23o 02' 00" W. a distance of 321.22 feet to a
point;
Thence N. 87o 37' 00" W. a distance of 368.81 feet to a
point on the easterly line of land of said Charles E. and Suzin
H. Williams;
Thence N. 2o 07' 30" E. along the easterly line and to
the northeasterly corner of land of said Charles E. and Suzin H.
Williams; a distance of 60.00 feet to the place of beginning.
17
<PAGE>
Pine Lake Trout Club
- -----------------------------------------------------------------------
F.3 ZONING REGULATIONS
<PAGE>
ZONING REGULATIONS
------------------
CHAPTER 139
R-3A Rural Residential District
139.01 Establishment. 139.04 Conditions of Cluster
139.02 Use regulations. Development.
139.03 Height, area, yards and 139.05 Conditions of Tennis
bulk. Club.
- -----------------------------------------------------------------
139.01 ESTABLISHMENT.
In accordance with Sections 101.02 and 131.04(b), and to
provide for development of lands within the Township zoned for
residential use, in accordance with the ability of such lands to
support development without central water supply and/or central
sewerage disposal facilities; to prevent pollution of such lands
and neighboring lands and the destruction of the underlying water
table or aquifers by excessive development, and; to protect the
water table or aquifer recharge areas, the R-3A Rural Residential
District is established along with the following regulations.
139.02 USE REGULATIONS.
Same as R-5A District in Section 135.02.
139.03 HEIGHT, AREA, YARDS AND BULK.
(a) Height. Same as R-5A District in Section 135.03(a).
(b) Lot and Yard Requirements. Same as R-5A District in
Section 135.03(b) except the minimum lot area shall be
130,630 square feet (3 acres), and the minimum lot
width shall be 200 feet.
(c) Dwelling Bulk. Same as R-5A District in Section
135.03(c).
(d) Floor Area. Same as R-5A District in Section
135.03(d).
(e) Signs. All signs shall conform to requirements of
Chapter 173.
139.04 REGULATIONS AND STANDARDS FOR CLUSTER DEVELOPMENTS
AS A CONDITIONAL USE
Cluster developments may be permitted in a R-3A District
according to the provisions of Section 135.04 except that
in a R-3A District, the following modifications shall
apply:
19
(a) The minimum land area for a cluster development shall
be nine (9) acres.
(b) The maximum density shall be one (1) unit for each
three (3) acres within the land area designated for a
cluster development, provided that the maximum density
on any single acre in the cluster development shall
not exceed three (3) units per acre.
20
<PAGE>
ZONING REGULATIONS
------------------
CHAPTER 135
R-5A Rural Open Residential District
135.01 Establishment. 135.04 Conditions of Cluster
135.02 Use Regulations. Development.
135.03 Height, area, yards and 135.05 Conditions of Tennis
bulk. Club.
- -----------------------------------------------------------------
135.01. ESTABLISHMENT.
In accordance with Sections 101.02 and 131.04(a), and: to
provide for development of lands within the Township zoned for
residential use which, by reason of adverse ecological
conditions, have a limited capacity to support development; to
prevent pollution of such lands and neighboring lands and the
destruction of the underlying water table or aquifers by
excessive development, and to protect the water table or aquifer
recharge areas, the R-5A Rural Open Residential District is
established along with the following regulations.
135.02. USE REGULATIONS.
(a) Permitted Uses. Only the following uses shall be
permitted:
No Zoning Certificate Required.
Bainbridge Township government buildings and
uses.
Oil and gas wells subject to compliance with
Chapter 731.
Public utility or railroad as exempted by Ohio R.
C. 619.21.
Zoning Certificate Required.
Single-family dwellings including industrialized
units affixed to a permanent foundation but
excluding manufactured homes.
Family home residential facilities as defined and
licensed by the State, permitted by Ohio R. C.
5123.19(D), but subject to single-family
dwelling area, height, yard and architectural
requirements that are uniformly imposed.
Public schools.
Type B family day-care homes as defined by Ohio
R. C. 6134.064.
(b) Conditional Uses. Only the following conditional uses
shall be permitted after obtaining a conditional zoning
certificate in accordance with the provisions of
Chapter 117.12 of this Zoning Resolution:
Churches provided no part of any building or
land for church use shall be used for
business, commercial use or nonchurch related
activities.
Cluster Development.
Governmental buildings and uses.
Private and parochial schools.
<PAGE>
Publicly owned parks, playgrounds or other
recreational facilities but excluding
privately owned facilities.
Cemeteries.
Adult family homes provided all required State
approvals are first obtained relative to such
home, elderly placements, qualifications of
caregivers and facilities, services,
accommodations and continuous monitoring.
Caregivers shall be permanent home residents,
total residents shall not exceed one and
one-half (1.5) persons per bedroom and
placement accommodations shall be on the
first floor unless otherwise approved by the
Zoning Inspector. A minimum of two (2)
environmental options shall be provided, such
as a landscaped yard, gardening, patio or
screened porch, which shall be approved by
the Zoning Inspector for adequacy and safety.
Tennis Club.
(c) Accessory Uses. Only the following accessory uses or
accessory structures shall be permitted after obtaining
a zoning certificate:
Private attached or detached garages and
carports, barns, tool sheds, storage and
utility buildings, and animal shelters.
Private recreational facilities including tennis
courts and skating rinks.
Private swimming pools provided they are fenced
or walled with a fence at least 4 feet in
height completely enclosing the pool or the
yard containing the pool. The fence must be
designed to limit access to children and any
gates must be lockable. The fence must extent
to within three inches of the ground and to
within three inches of any building that is
part of the perimeter of the fenced area.
Wind energy systems including windmills and wind
generators.
Ground mounted satellite dishes and UHF
television antennas, and roof-mounted
satellite dishs and UHF television antennas
extending more than twelve (12) feet in
height above the roof from the point of
anchorage.
HOME OCCUPATION: A Home Occupation as defined
here shall be allowed as a permitted accessory
use in a R-3A and R-5A Residential Zone subject
to the requirements of Sections 135 and 139
respectively and the following regulations.
(1) Statement of Purpose. The purpose of the
Home Occupation section of this resolution is to
provide the opportunity for the use of the
<PAGE>
dwelling unit for limited business
purposes subject to regulations designed
to maintain the residential character of
the dwelling unit, the lot and the
neighborhood; minimize the conflict of the
home occupation use with surrounding
residential uses, and to protect
residential property values.
(2) Definition.
See "Home Occupation" in Chapter
105.02(31).
(3) Regulations for Home Occupations.
The following regulations shall be applied
by the Zoning Inspector in reviewing and
deciding upon any application for a zoning
certificate for a home occupation.
a. There shall be no exterior indication of
the Home Occupation, except as provided
in Section 3(k) and (l).
b. No external alterations, construction,
or reconstruction of the dwelling unit
on the lot to accommodate the home
occupation shall be permitted.
c. There shall be no outside storage of
any kind related to the home
occupation; only commodities produced
within that portion of the dwelling
unit designated for home occupation
shall be sold, such commodities shall
be sold only from within that portion
of the dwelling unit designated for
home occupation use, and no display of
products shall be visible from the
street.
d. Not more than twenty-five (25) percent
of the gross floor area of the dwelling
unit or an accessory building shall be
devoted to the home occupation.
e. Off-street parking spaces in connection
with the home occupation shall not be
located in the front yard setback nor
in the front of the dwelling unit,
except in the driveway, and shall
comply with the requirements of Chapter
169. Additional parking for one
employee as specified in (j) and
Chapter 169 shall be provided and such
parking must be off-street.
f. There shall be no more than one Home
Occupation within any single dwelling
unit or an accessory building on a lot.
g. A Home Occupation as provided in this
section shall be carried on wholly
within the principal dwelling unit or
an accessory building, including
storage of equipment or materials.
h. Any noise, vibration, smoke, electrical
<PAGE>
interference, dust, odors, or heat
shall not be detectable beyond the lot
lines or beyond the walls of the
dwelling unit, if the unit is part of a
multifamily structure.
i. A Home Occupation shall be owned and
operated by the person, or his
immediate family, living and working
within the dwelling unit or an
accessory building.
j. No more than one person shall be
present and working at the Home
Occupation at one time, other than the
residents of the dwelling unit. This
includes people who entered into a
contract to provide services for the
Home Occupation.
k. Signs shall be allowed as provided in
173.09.
l. Any vehicle with a business name or
sign on it shall be parked in a fully
enclosed building except as provided in
Section 3.(e).
(4) Multifamily dwelling units. Home
Occupations that attract customers,
clients, or students to the premises for
sales or services shall not be allowed in
multifamily dwelling units.
(5) Home Occupations that comply with the
above regulations shall be permitted in
any R-3A and R-5A residential district
upon the issuance of a zoning certificate to the
applicant.
135.03 HEIGHT, AREA, YARDS AND BULK.
(a) Height. No building or other structure shall exceed a
height of thirty-five (35) feet or two and one-half
(2.5) stories, whichever is less.
(b) Lot and Yard Requirements. No building or structure
shall be erected, nor shall land be used or developed
unless in conformity with the following requirements.
All dimensions shall be exclusive of streets, or
public rights of way and lands subject to easements of
record:
Feet (except as indicated)
--------------------------
Minimum lot area 217,800 sq. ft. (5 acres)
Maximum lot coverage
Residential 10%
Other 40%
Minimum lot width 250
Minimum front yards 100
Minimum side yard 50
Minimum side yard abutting
a street on corner lot 75
Minimum rear yard depth 90
Minimum front lot lines 60
<PAGE>
(c) Dwelling Bulk. Dwelling shall have a minimum area of
one thousand (1,000) square feet of living space by
outside dimensions, exclusive of porches, garages and
cellars or basements.
(d) Floor Area. Dwellings or structures shall have the
following minimum floor areas:
Bedrooms Square Feet
-------- -----------
1 or 2 1200
Each additional Add 150
(e) Signs. All signs shall conform to requirements of
Chapter 173.
(f) Ground mounted satellite dishes or ground mounted
antennas shall be restricted to rear yards.
(g) Address Numbers. All dwellings must have address
numbers posted at least twenty-four inches (24") above
the finished grade within fifty feet (50') of the road
right-of-way or affixed to a roadside mailbox located
within thirty feet (30') of the lot. Address numbers
must be clearly visible from the road.
135.04 REGULATIONS AND STANDARDS FOR CLUSTER DEVELOPMENT AS
A CONDITIONAL USE
(a) In addition to the purposes set forth in Sections
101.02, 131.04(a) and 135.01, it is a further purpose
of the Township's Zoning Resolution to permit cluster
development when a more flexible arrangement of
buildings and roadways, compared to a conventional
subdivision development, will:
(1) Maximize preservation of natural resources of
the Township such as steep slopes, wetlands and
ponds, woods, drainage courses and streams,
(2) Provide common open space amenities for the
enjoyment of the residents, and
(3) Afford through site design flexibility the
opportunity to offset any potential adverse
impacts of adjacent non-residential uses,
utilities or major highways.
In satisfying the intention of this subsection, a
cluster development shall also comply with the
standards and requirements of subsections (b) through
(q).
<PAGE>
(b) Dwelling units may be in detached, semi-detached or
attached family structures or any combination thereof.
No more than three (3) dwelling units may be attached
in any one building.
(c) Non-commercial recreational uses may be permitted to
the extent that they are designed to serve the
residents of the cluster development, including tennis
courts, ponds, swimming pools, bridle trails, stables,
picnic pavilions, hiking trails, putting greens,
chip-and-putt areas, conventional sports playing
fields, and maintenance buildings.
(d) Sewage facilities shall meet all Geauga County
regulations.
(e) The minimum land area for a cluster development shall
be 15 acres.
(f) The maximum density shall be one (1) unit for each
five (5) acres of land area designated for cluster
development, provided that the maximum density on any
single area in the cluster development shall not
exceed three (3) units per acre.
(g) A minimum of twenty-five (25) percent of the gross land
area shall be devoted to common open space. In
satisfying this requirement, such common open space
shall not include parking lots, access drives, the
minimum space between buildings, space between parking
and buildings, space between parking and property
lines, the minimum spacing between property lines and
buildings or similar land fragments.
An application for a cluster development shall include
a statement or preliminary documents submitted by the
applicant indicating the intended ownership of the
common open space (such as a homeowner's association,
condominium association, or similar entity) and the
manner in which such common open space shall be
preserved and maintained. Based on these statements or
preliminary documents, a conditional use permit may be
issued by the Board of Appeals provided that no
subsequent zoning certificate shall be issued in
response to any application for a proposed dwelling
until the Board of Appeals has approved the
document(s) and/or the restrictive covenant(s) related
to the ownership, preservation, and maintenance of the
common open space. Prior to approving the document(s),
the Board of Appeals may seek the opinion and the
advice of legal counsel.
(h) Minimum Dwelling Arrangements. The following
regulations shall apply. (See Dwelling Arrangements
Illustration)
(1) Overlapping Dwellings. The minimum distance
between the exterior walls of overlapping
dwellings (dwellings which are parallel or within
30 degrees of being parallel) shall be:
<PAGE>
2LA + HA + HB
-------------
4
Where "LA" is the length of dwelling "A"; from
which perpendicular lines intersect dwelling
"B", and "HA" and "HB" are the respective
heights of these dwellings; provided the
perpendicular distance between a wall containing
the principal windows of a dwelling unit and any
other exterior wall shall be at least 50 feet.
(2) Angular Arrangements. The minimum distance
between the exterior walls of overlapping
dwellings which are not parallel or within 30
degrees of being parallel shall be:
2LA + HA + HB + K
-----------------
4
Where the elements are the same as in Paragraph
(1) above and "X" varies with the angle "n"
between dwelling "A" and "B" as follows:
30 deg. to 34 deg. K = 10 feet
35 deg. to 39 deg. K = 20 feet
40 deg. to 49 deg. K = 25 feet
50 deg. to 54 deg. K = 20 feet
55 deg. to 59 deg. K = 10 feet
(3) Non-Overlapping Dwellings. The minimum distance
between the exterior walls of non-overlapping
dwellings shall be:
HA + HB
-------
2
(i) Site coverage with structures, decks, patios, drives,
roads and recreation facilities shall be no more than
fifteen percent (15%) of the total cluster
development.
(j) A minimum of three (3) parking spaces per unit, with
at least one of the required spaces being within a
parking garage. The spaces shall be outside of the
private drive(s) serving the development.
(k) The Township Fire and Police Departments shall
determine that their vehicles have adequate access to
all dwelling units within the cluster development.
(l) Roads, drives and cul-de-sacs may be privately owned
and maintained by the homeowners or publicly dedicated.
Driveway widths may vary, but main drives shall be no
less than 20' in width with no parking permitted on
them. Appropriate county construction standards shall
apply for all main drives whether public or private.
Main drives are equivalent to "local roads"
(residential, light traffic) as shown in Table 1,
Minimum Road Construction for Subdivisions, the Rules
and Regulations and Standard Specifications Adopted by
<PAGE>
The Geauga County Board of Commissioners for the
Construction of Streets, Curbs, Gutters, Sidewalks,
Street Lights, Storm Sewers, and Other Utilities and
Facilities, effective date of August 1, 1984. When
approving the development plan, the Board of Appeals
may waive the requirement that curbs and sidewalks be
constructed when they determine that adequate
alternative means for drainage and pedestrian
movements have been provided in the project.
If a curb is not provided, the edge of the pavement
shall be grassed, seeded and well maintained and the
storm drainage system shall be adequately designed to
prohibit standing water.
If private streets are proposed, the developer shall
submit with the application for a Conditional Zoning
Certificate detailed drawings indicating that road
construction will be in compliance with county
subdivision standards. In addition, the Township
Trustees may require, as part of the application fees,
that sufficient amounts will be placed on deposit to
defray the costs of the Township inspecting the road
during construction and verifying that construction is
in compliance with county standards.
All detailed road construction drawings must be
prepared and certified by a registered professional
civil engineer.
A zoning certificate for individual dwellings or
structures shall not be issued until the roads for
each phase of the development, as necessary to serve
the proposed dwellings or structures, are completed,
inspected, and found to be constructed in accordance
with the approved construction plans and are in good
repair.
(m) No dwelling unit shall be closer than 100 feet to a
front lot line or 90 feet to any other perimeter
property line of the cluster development.
(n) A planning buffer, a natural landscape buffer and/or
earth berming shall be provided at the perimeter of
the cluster development.
(o) Each application shall include a development plan drawn
to scale by a registered professional surveyor,
engineer, architect or landscape architect, certified
by the applicant and his surveyor, engineer, architect
or landscape architect, showing the dimensions and
configuration of the parcel(s), existing and proposed
structures, main drives, driveways, recreational
facilities, open space, parking areas, and easements;
the location and configuration of landscape buffers,
topographical and drainage features and facilities,
vegetation, and soil types; and an erosion and
sediment control plan which has been approved by the
Geauga County
<PAGE>
Soil and Water District.
(p) Prior to being issued a building permit from the County
for any dwelling in a cluster development, the
applicant shall first apply for a zoning certificate
from the Township Zoning Inspector. Such zoning
certificate may be issued if the Inspector determines
that the proposed dwelling or structure complies with
the conditional zoning certificate for the cluster
development. If the Zoning Inspector determines that
the proposed dwelling or structure does not so comply,
the zoning certificate shall not be issued. When not
issued, the applicant may appear before the Township
Zoning Board of Appeals which shall either:
(1) Determine that the proposed dwelling or
structure does substantially comply with
conditional zoning certificate and instruct the
Zoning Inspector to issue the zoning
certificate,
(2) Confirm the ruling of the Zoning Inspector that
the proposed dwelling or structure does not
comply with the conditional zoning certificate,
or
(3) Consider amending the cluster development plan
according to the procedures for Conditional Uses
in Chapter 117.
(q) Ponds and lakes shall be equipped by the developer
with dry hydrant(s) meeting the Bainbridge Fire
Department's specifications, and located per the
direction of the Fire Department.
135.05 CONDITIONS OF TENNIS CLUB.
Private tennis club including accessory buildings,
structures, and uses as provided under paragraph (g) herein. A
private tennis club and accessory buildings, structures, and uses
shall conform with the following conditions:
(a) The minimum lot size shall be ten (10) acres,
calculated exclusive of the area within any road
right-of-way, and shall be held in the same ownership.
(b) Every building and structure shall be set back at
least one hundred (100) feet from the road
right-of-way margin and eighty (80) feet from all
property lines.
(c) The minimum lot frontage shall be one hundred fifty
(150) feet.
(d) The maximum lot coverage shall be forty (40) percent.
(e) Where exterior lighting is provided in or around such
use, it shall be arranged so that no annoying glare is
directed or
<PAGE>
reflected toward other buildings or streets adjacent to the
tennis club.
(f) Retail sales and services shall not be permitted
except those incidental to the running of the complex,
restaurant, snack bar, pro shop, pool and private
parties.
(g) The following accessory facilities shall be permitted
for the use of members and their guests only:
(1) Platform tennis courts
(2) Health club facilities
(3) Bath house, dressing rooms, sanitary facilities
(4) Swimming pool (Maximum 5,000 square feet)
(5) Volleyball courts
(6) Squash and racquetball courts
(h) The following activities will not be permitted:
(1) Picnic grounds
(2) Barbeque pits
(3) Tents, cabins, trailers, and similar structures
used for residential occupancy whether temporary
or permanent.
(i) Membership for each private tennis club shall be
limited to 700 members for each ten (10) acres of
club; however, when a club forms an integral part of a
housing development and so provides the open space
(Section 510.30 and 511.40), the members limit shall
apply to those living outside of the development.
(j) A conditional zoning permit shall be issued for a
period not to exceed five (5) years from the date of
issuance. Application for renewal of such certificate
shall be made 60 days prior to the expiration of such
certificate.
A conditional zoning certificate shall be revoked upon
a change of ownership or lease of the premises unless
a new application is made for such a certificate by
the new owner or lessor within fifteen (15) days of
the date of transfer or lease.
Any failure to comply with the conditions approved by
the Board for the issuance of a conditional zoning
certificate shall constitute a revocation of such
certificate only after a hearing is held.
Reinstatement is not automatic, if a conditional
zoning certificate has been revoked, the procedure set
forth in this Zoning Resolution for the issuance of
another certificate must be followed. See Section
117.12.
<PAGE>
ZONING REGULATIONS
Table 1
-------
MINIMUM ROAD CONSTRUCTION FOR SUBDIVISIONS
Pavement Width Pavement Thickness
-------------- ---------------------------------------
Reinforced Asphalt Concrete Full Depth
Concrete Aggregate Base Asphalt
---------- ---------------- ----------
No 4000 304 301 404 301 404
ROAD CLASS Curbs Curbs Concrete Agg. Base Surf. Base Surf.
- ----------------------- ----- ----- -------- ---- ---- ----- ---- -----
1. Collector Roads 28' 24' 8" 6" 5" 14" 8" 14"
2. Marginal
Access Roads 20' 24' 8" 6" 5" 14" 8" 14"
3. Local Roads
a. Residential,
Light Traffic 24' 20' 7" 6" 4" 14" 6" 14"
b. Residential,
Medium Traffic 26' 22' 8" 6" 5" 14" 7" 14"
c. Commercial and
Indus. Park 20' 24' 9" 6" 6" 14" 8" 14"
A collector road connects local roads with arterial roads.
A marginal access road is parallel to a freeway or arterial road
and provides access to local roads.
A residential light traffic road is dead end rural serving less
than 50 sublots.
A residential medium traffic-road is a dead end road serving more
than 50 sublots, or a road passing a residential area but out of line of
through traffic.
Commercial and industrial park roads are roads in subdivisions
having commercial and/or industrial enterprises served by trucks.
In case of question, the County Engineer will decide on the road
class for construction purposes.
34
<PAGE>
F.4 EXCESS LAND PURCHASE OPTION
<PAGE>
WP-BT/AIRCOA-8 option to purchase 02/18/87
OPTION TO PURCHASE
THIS OPTION TO PURCHASE, dated as of February 29, 1987
is between AIRCOA HOTEL PARTNERS, L.P., a Delaware limited
partnership ("AHP") and NEWPART, L.P. a Colorado limited
partnership ("Newpart").
R E C I T A L S:
A. Pursuant to that certain Hotel Contribution
Agreement, dated ___________, amended, between Newpart and
AHP, Newpart contributed to AHP certain real property,
improvements thereon and other assets comprising the Pine Lake
Trout Club located in Bainbridge, Ohio (the "Club"), in exchange
for limited partnership units in AHP.
B. As a condition to such contribution by Newpart, AHP
agreed to grant to Newpart an option to purchase or lease certain
undeveloped land comprising a portion of the club, as more
particularly described on Exhibit A attached hereto and by this
reference made a part hereof (the "Property").
C. AHP and Newpart desire to set forth their mutual
agreement relative to the granting by AHP to Newpart of an option
to purchase or lease the Property.
NOW, THEREFORE, FOR THE CONSIDERATION STATED BELOW
AND OTHER GOOD AND VALUABLE CONSIDERATION, the receipt and
sufficiency of which are hereby acknowledged, AHP and Newpart
hereby agree as follows:
1. Grant of Option. AHP grants to Newpart an
irrevocable and exclusive option (the "Option"), at the election
of Newpart, to purchase all of the Property on the terms and
condition set forth below.
2. Consideration for Option. As consideration for this
Option, Newpart agrees to pay when due, any and all real and
personal property taxes, insurance premiums, water and sewer
charges, special assessments, other governmental impositions and
all other similar charges relating to the Property (the
"Impositions") incurred by the fee owner of the Property during
the period commencing on the execution date of this Option and
ending on the date the Property is conveyed
<PAGE>
or leased to Newpart under this Option. On or before
thirty (30) days prior to the due date of such Imposition, AHP
shall deliver a notice to Newpart stating the amount of such
Imposition, whereupon Newpart shall, within ten (10) days after
its receipt of such notice, pay to AHP, in cash or other
immediately available funds, the amount of such Imposition.
3. Option Purchase Price. The purchase price for the
Property under this Option shall be Ten and No/100 ($10.00)
Dollars. The monthly rent for the Property under this Option
shall One and No/l00 ($1.00) Dollars.
4. Term of Option. The term of this Option shall be
for a period of five (5) years commencing on the date first set
forth above.
5. Exercise of Option. This Option may be exercised at
any time during the term hereof. This Option shall be exercised
by Newpart executing and delivering to AHP written notice
("Exercise Notice") of Newpart's exercise of this Option at least
three (3) days before the desired closing date for the purchase
of the Property. Such notice shall (i) state that Newpart desires
to purchase the Property, (ii) contain the date, time and place
of such closing, and (iii) include the items described in
Paragraph 6 below.
6. Conditions to Exercise of Option. AHP's obligation
to convey the Property to Newpart is conditioned upon (a) Newpart
delivering to AHP evidence satisfactory to AHP that Newpart has
obtained any and all permits, licenses, variances, or other
consents from the proper state and local authorities necessary to
allow the Club to continue to be operated as a hunting and
fishing club once the Property is conveyed or leased to Newpart
hereunder and (b) obtaining the release of the property from any
mortgage covering the Property. The Option is subject and
subordinate to any mortgage now or hereafter encumbering the
Property.
7. Closing of Purchase of Property. Closing shall occur
at a place and time set forth in the Exercise Notice. At Closing,
Newpart shall deliver to AHP the Purchase Price as determined in
Paragraph 2 above. At Closing, AHP shall execute and deliver to
Newpart any and all documents, instruments and other items
necessary to convey AHP's right, title and interest in the
Property. The parties hereby agree that at the Closing the legal
description of the Property shall be corrected to correspond with
any survey prepared in accordance with any release delivered by
AHP from the holder of any mortgage on the Property. Such
Property shall be conveyed or leased to Newpart free and clear of
any and all liens, encumbrances or charges except for those items
set forth on Exhibit B attached hereto and by this reference made
a part hereof and such other items as maybe agreed to by Newpart.
8. Assignment. The parties hereto agree that AHP may
transfer the Property to Aurora Operating Partnership, L.P., a
Delaware limited partnership, subject to this Option and
Newpart's rights hereunder.
9. Recording of Option. Newpart, at its election,
may record this Option in the real property records of the County
in which the Property is located.
10. Governing Law. This Option shall be governed by
the laws of the State of Ohio.
11. Successors and Assigns. This Option shall be
binding on and shall inure to the benefit of both Newpart and AHP
and their respective successors and assigns.
EXECUTED as of the date first set forth above.
Signed and delivered in AIRCOA HOTEL PARTNERS, L.P., a
the presence of: Delaware limited partnership
_______________________ By: Associated Inns &
Restaurants Company of
America, a Delaware
______________________ corporation, as general
partner
By:_________________________
President
Attest:
Signed and delivered in NEWHART, L.P., a Delaware
the presence of: limited partnership
_______________________ By: Associated Inns &
Restaurants Company of
America, a Delaware
_______________________ corporation, as general
partner
By:_________________________
President
Attest:
PREPARED BY AIRCOA HOTEL
PARTNERS, L.P. AND NEWPART L.P.
<PAGE>
STATE OF NEW YORK )
) ss.
COUNTY OF NEW YORK )
On February 20th, 1987, before me, the undersigned a
Notary Public in and for said County and State, personally
appeared Frank D. Palmer, personally known to me or proved to me
on the basis of satisfactory evidence to be the person who
executed the within instrument as the Vice President President of
Associated Inns & Restaurants Company of America, a Delaware
corporation as general partner of AIRCOA Hotel Partners, L.P., a
Delaware limited partnership, that executed the within
instrument, and acknowledged to me that he executed it.
WITNESS my hand and official seal.
[SEAL] _____________________________
NOTARY PUBLIC in and for said
County and State
STATE OF NEW YORK )
) ss.
COUNTY OF NEW YORK )
On February 20th, 1987, before me, the undersigned a
Notary Public in and for said County and State, personally
appeared David Kleinkopf, personally known to me or proved to me
on the basis of satisfactory evidence to be the person who
executed the within instrument as the Asst. Secretary President
of AIRCOA Equity Interests, Inc., a Colorado corporation, as
managing general partner of Newpart, L.P., a Colorado limited
partnership, that executed the within instrument, and
acknowledged to me that he executed it.
WITNESS my hand and official seal.
[SEAL] _____________________________
NOTARY PUBLIC in and for said
County and State
<PAGE>
Conveyance to AOP
EXHIBIT B
MATTERS TO WHICH TITLE IS SUBJECT
(Pine Lake Trout Club)
1. Real property taxes and assessments for 1987, a lien not yet
due or payable.
2. Reservation contained in Quitclaim Deed recorded in Volume
625, Page 669 of Geauga County Records.
3. Obligations of fee owner contained in Easements filed in
Volume 501, page 157, Volume 589, page 1245 and Volume 453,
page 826 of Geauga County Records.
<PAGE>
AMENDMENT TO OPTION TO PURCHASE
THIS AMENDMENT TO OPTION TO PURCHASE, is entered into
this 20th day of February, 1987, between Aurora Inn Operating
Partnership, L.P., a Colorado limited partnership ("Newpart").
Recitals
A. AIRCOA Hotel Partners, L.P., a Delaware limited
partnership ("AHP") and Newpart are parties to that certain
Option to Purchase (the "Option"), dated as of February 20, 1987
whereby AHP granted Newpart an option to purchase or lease
certain real property comprising a portion of the Pine Lake Trout
Club located in Bainbridge, Ohio and more particularly described
on Exhibit A attached hereto and by incorporated herein by this
reference.
B. AHP assigned its interest in the option to AIOP
pursuant to that certain Assignment and Assumption Agreement,
dated February 20, 1987, between AHP and AIOP.
C. AIOP and Newpart now desire to clarify and amend
the Option.
NOW THEREFORE FOR ThE CONSIDERATION STATED BELOW AND
OTHER GOOD AND VALUABLE CONSIDERATION, the receipt and
sufficiency of which are hereby acknowledged, AIOP and Newpart
hereby amend the Option as follows:
1. Recital C of the Option is hereby amended by
deleting the phrase "or lease" in such recital.
2. Paragraph 2 of the Option is hereby amended by
deleting such paragraph in its entirety and substituting the
following paragraph:
"2. Consideration for Option. As consideration for
this Option, Newpart agrees to pay, when due, an
amount equal to the product or (a) a fraction, the
numerator or which equals the total acreage of the
Property, and the denominator of which equals the
total acreage of the Club, times (b) the "Real
Property Impositions" incurred by the fee owner or the
Club during the period commencing on the execution
date of this Option and ending on the earlier of (i)
the date the Property is conveyed to Newpart under
this Option, or (ii) the expiration of this Option.
For the purposes of this Option, "Real Property
Impositions"
<PAGE>
means any and all (a) real property taxes, special assessments,
other governmental impositions, water and sewer charges and
all other similar charges incurred or imposed on the Club, but
not including any such charges related to,
imposed on or allocable to the personal property,
fixtures or improvements located on or at the Club,
and (b) insurance premiums necessary to maintain the
appropriate insurance at the Club for premises
operations insurance, broad form property damage
insurance and personal injury insurance, but not
including premiums for liquor liability insurance,
automobile insurance, property all-risk insurance for
buildings and content, business interruption insurance
and any other premiums related to or allocable to
insurance for damage or liability arising from
ownership of any personal property, fixtures or
improvements located at the Club. on or before 30 days
prior to the due date of such Real Property
Impositions, AIOP shall deliver a notice to Newpart
Stating the amount of Newpart's obligation for such
Real Property Imposition as determined hereunder,
whereupon Newpart shall, within 10 days after its
receipt of such notice, pay to AIOP in cash and other
immediately available funds, such amount."
3. Paragraph 3 of the Option is hereby amended by
deleting the second sentence contained therein.
4. Paragraph 4 of the Option is hereby amended by
deleting such paragraph in its entirety and substituting the
following paragraph:
"4. Term of Option. The term of this Option shall be
for a period of twenty (20) years commencing on the
date first set forth above.
5. Paragraph 6 of the Option is hereby amended by
deleting the phrase "or lease" contained therein.
6. Paragraph 7 of the Option is hereby amended by
deleting the phrase "or lease" in the fifth sentence of such
paragraph.
7. All of the provisions, terms and obligations of
the Option, as amended hereby shall remain in full force and
effect.
42
<PAGE>
EXECUTED as of the date first set forth above.
Signed and delivered in Aurora Inn Operating Partnership
the presence of: L.P., a Delaware limited
partnership
_______________________ By: Associated Inns &
Restaurants Company of
America, a Delaware
______________________ corporation, as general
partner
By:_________________________
President
Signed and delivered in Newpart, L.P., a Colorado
the presence of: limited partnership
_______________________ By: AIRCOA Equity Interests,
Inc., a Colorado
_______________________ corporation, as general
partner
By:_________________________
President
STATE OF COLORADO )
) ss.
COUNTY OF DENVER )
The foregoing instrument as acknowledged before me
this 29th day of April, 1987, by Lee A. Wadsworth as Vice
President of Associated Inns & Restaurants Company of America, a
Delaware corporation, as general partner of Aurora Inn Operating
Partnership L.P., a Delaware limited partnership.
WITNESS my hand and official seal.
[SEAL] _____________________________
Notary Public
My commission expires: ___________________________
<PAGE>
STATE OF COLORADO )
) ss.
COUNTY OF DENVER )
The foregoing instrument as acknowledged before me this
29th day of April, 1987, by Lee A. Wadsworth as Vice President of
43
<PAGE>
AIRCOA Equity Interests, Inc., a Colorado corporation, as general
partner of Newpart, L.P., a Colorado limited partnership.
WITNESS my hand and official seal.
[SEAL] _____________________________
Notary Public
My commission expires: ___________________________
<PAGE>
F.4 EXCESS LAND PURCHASE OPTION
<PAGE>
F.5 AIRCOA INDEMNIFCATION
<PAGE>
AIRCOA
HOTEL PARTNERS, L.P.
MARCH 11, 1997
BY TELECOPY - 212-708-6523
Arthur Andersen LLP
1345 Avenue of Americas
New York, New York 10105
Attn: Mr. Thomas McConnell
Mr. James W. Hire
Hire & Associates
1383 Solitude Lane
Evergreen, CO 80439
Mr. Anthony C. Dimond
Miramar Asset Management Inc.
617 Veterans Boulevard, Suite 212
Redwood City, CA 94063
Houlihan Lokey Howard & Zukin
1930 Century Park West
Los Angeles, CA 90067
Attn: John Schoenfeld
Re: Arthur Andersen Appraisals/AIRCOA Hotel Partners, L.P.
("AHP")
Ladies and Gentlemen:
This letter is to confirm certain agreements and approvals of
Arthur Andersen LLP ("AA") and the AIRCOA Parties and HLHZ (as
defined below) related to certain uses by AHP's Special Advisory
Committee (the "Special Committee") of AA's appraisal of certain
real property and improvements owned by AHP (the "Appraisal")
prepared in connection with a loan to AHP by the Hongkong and
Shanghai Bank (the "HSBC Loan"). This letter supplements that
certain letter dated February 18, 1997, by AHP to AA, the terms
of which are incorporated herein by reference. The following has
been agreed to by AHP and the Special Committee (collectively,
the "AIRCOA Parties"), and the Special Committee's financial
advisors Houlihan, Lokey, Howard & Zukin ("HLHZ") (collectively,
the "AIRCOA Parties") and AA:
1. AA agrees that copies of the Appraisal may be provided to
the Special Committee and HLHZ for review in connection
with the acquisition of limited partnership interests in
AHP by Regal Hotel Management, Inc. AA acknowledges that
HLHZ and the Special Committee have indicated to AHP an
intent to rely upon the Appraisals in connection with
consideration of the transaction described above and the AHP
intends for HLHZ and the Special Committee to so rely.
2. The AIRCOA Parties acknowledge their agreement to the
procedures performed as described in the accompanying
Appraisal and accept responsibility for the sufficiency of
those procedures for their purposes. Consequently, AA makes
no representation regarding the sufficiency of the
procedures described therein for the purpose for which the
accompanying Appraisal was originally requested, for the
AIRCOA Parties' or HLHZ's purposes, or for any other
purpose. Had AA been engaged to perform additional
procedures, other matters might have come to AA's attention
that would have been reported to the AIRCOA Parties.
Furthermore, AA has not performed any procedures subsequent
to the date of Appraisal and therefore AA accepts no
responsibility for events and circumstances occurring after
that date.
3. The Appraisal is being provided to the AIRCOA Partners and
HLHZ for informational purposes only. The AIRCOA Parties
should complete their own due diligence in connections with
the transaction described above to the extent they consider
necessary. It is understood that the reading of the
accompanying Appraisal does not substitute for the AIRCOA
Parties' own due diligence.
4. By acceptance of this letter, the AIRCOA Parties and HLHZ
agree that neither AA nor any of its affiliates, partners,
employees or representatives shall have any liability to
them relating to the use of the accompanying Appraisal,
except to the extent such liability arises from AA's gross
negligence or willful misconduct.
5. This letter and accompanying Appraisal are intended solely
for the use of AIRCOA Parties and HLHZ and should not be
used by those who have not agreed to the procedures and
taken responsibility for the sufficiency of the procedures
for their purposes.
6. In connection with the transaction described above, AA
consents to including, to the extent required by federal
securities laws, a copy of the Appraisal and/or a summary
thereof or a reference thereto in the Schedule 13E-3 and
related proxy statement with the Securities and Exchange
Commission by AHP or the Special Committee, provided that AA
shall have the right to approve the content of any summary
of the Appraisals, such approval not to be unreasonably
withheld.
47
<PAGE>
7. This letter does not modify or amend in any respect the
engagement letter dated February 19, 1997 among HLHZ,
AIRCOA Hospitality Services, Inc., and AIRCOA Hotel
Partners, L.P.
Please indicate your acceptance of these arrangements by signing
and returning a copy of this letter to AA.
AIRCOA HOTEL PARTNERS, L.P.
By: AIRCOA Hospitality Services, Inc.,
general partner
By: /s/ Joel W. Hiser
_______________________________
Name: Joel W. Hiser
Title: Sr. Vice President
By: _______________________________
Name:
Title:
AIRCOA Hospitality Services, Inc.,
a Delaware corporation
By: /s/ Joel W. Hiser
_______________________________
Name: Joel W. Hiser
Title: Sr. Vice President
By: _______________________________
Name:
Title: Sr. Vice President
ARTHUR ANDERSEN LLP
By: /s/ Roger Cline
_______________________________
Name: Roger Cline
Title: Partner
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
By: /s/ John A. Schoenfeld
_______________________________
Name: John A. Schoenfeld
Title: Co-Director, Real Estate Group
AHP SPECIAL COMMITTEE
By: /s/ James W. Hire
_______________________________
Name: James W. Hire
By: /s/ Anthony C. Diamond
_______________________________
Name: Anthony C. Diamond
<PAGE>
EXHIBIT (b)(3)
<PAGE>
[Letterhead of PKF Consulting]
Via Facsimile (415) 599-9234
Hard Copy to Follow
April 29, 1997
AIRCOA Hotel Partners, LP
c/o Mr. Anthony C. Dimond
Miramar Asset Management, Inc.
617 Veterans Boulevard, Suite 212
Redwood City, CA 91063
Re: AIRCOA Hotel Partners, LP
Dear Mr. Dimond:
Pursuant to your authorization, we have performed an evaluation
of the potential impact on the market value of the following
seven lodging facilities assuming they were to be sold as a
portfolio, rather than individually.
Hotel Name Location
---------- --------
Clarion Four Winds Bloomington, IN
Regal McCormick Ranch Scottsdale, AZ
Sheraton Buffalo Airport Cheektowaga, NY
Sheraton Inn Lakeside Kissimmee, FL
Regal University Hotel Durham, NC
Aurora Inn Aurora, OH
Trout Club Chagrin Falls, OH
Our work program to develop our opinion of the potential impact
on value, if any, assuming the sale of these properties as a
group included reviewing Arthur Andersen's individual appraisal
of the market value of each hotel as of January 1, 1997 as well
interviews with representatives of the following types of
enterprises, all of which are currently involved in the
acquisition of portfolios of properties:
- National "Branded" hotel company;
- Real estate investment trust (REIT); and,
- Private investor/operator of hotels similar
to the AIRCOA portfolio.
<PAGE>
Based on our discussions with representatives of the above
entities, coupled with our review of the Arthur Anderson
appraisals and our general knowledge of the hotel industry, we
are of the opinion that a typical "willing and knowledgeable
investor", would not pay a premium for over the sum of the
individual property values for this group of hotels. To warrant
such a premium, the portfolio must offer some type of synergistic
cost savings or revenue enhancement. Neither of these attributes
are identifiable with this group of properties.
It should be noted that while we have relied upon the Arthur
Anderson appraisal of each hotel for general background
information. We have not performed a review of these appraisals
and express no opinion as to the reasonableness of their value
conclusions.
To the best of our belief, this letter report conforms to the
requirements of the Code of Professional Ethics and Standards of
Professional Appraisal Practice of the Appraisal Institute and
the Uniform Standards of Professional Appraisal Practice (USPAP)
established by the Appraisal Foundation. This letter is subject
to the Certification and Statement of General Assumptions and
Limiting Conditions presented in the Addenda to this letter.
If you have any questions pertaining to the foregoing, or if we
can be of any further assistance, please don't hesitate to call.
Very truly yours,
/s/
Thomas E. Callahan, CPA, CRE, MAI
Executive Vice President
TEC/dld
2
<PAGE>
ADDENDA
<PAGE>
ADDENDUM A
CERTIFICATION OF THE CONSULTANT
<PAGE>
CERTIFICATION OF THE CONSULTANT
I, Thomas E. Callahan, CPA, CREl MAI, 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 properties
that are 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 an action or event
resulting from the analyses, opinions, or conclusions in, or
the use of, this report.
- - My analyses, opinions, and conclusions were developed, and
this report has been prepared, in conformity with the Uniform
Standards of Professional "Appraisal Practice.
- - I have not made a personal inspection of the properties that
are the subject of this report.
- - No one provided significant professional assistance to the
person signing this report.
- - 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.
- - Thomas E. Callahan, CPA, CRE, MAI, is a Certified General Real
Estate Appraiser in the State of California.
- - As of the date of this report, Thomas E. Callahan, CPA, CRE,
MAI, has completed the requirements of the continuing
education program of the Appraisal Institute.
Respectfully submitted,
/s/___________________________
Thomas E. Callahan, CPA, CRE, MAI
Executive Vice President
California Certified General Appraiser #AG9618
<PAGE>
ADDENDUM B
STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS
<PAGE>
STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS
Date of value - The conclusions and opinions expressed in this
report apply to the date of value set forth in the letter of
transmittal accompanying this report. The dollar amount of any
value opinion or conclusion rendered or expressed in this report
is based upon the purchasing power of the American dollar
existing in the date of value.
Economic and Social Trends - The appraiser assumes no
responsibility for economic, physical or demographic factors
which may affect or alter the opinions in this report. If said
economic, physical or demographic factors were not present at the
date of the letter of transmittal accompanying this report. The
appraiser is not obligated to predict future political, economic
or social trends.
Information Furnished by Others - In preparing the report, the
appraiser was required to rely on information furnished by other
individuals or found in previously existing records and/or
documents. Unless otherwise indicated, such information is
presumed to be reliable. However, no warranty, either express or
implied, is given by the appraiser for the accuracy of such
information and the appraiser assumes no responsibility for
information relied upon later found to have been inaccurate. The
appraiser reserves the right to make such adjustments to the
analyses, opinions and conclusions set forth in this report as
may be required by consideration of additional data or more
reliable data that may become available.
Title - No opinion as the title of the subject property is
rendered. Data related to ownership and legal description was
obtained from the attached title report records and is considered
reliable. Title is assumed to be marketable and free and clear of
all liens, encumbrances, easements and restrictions except those
specifically discussed in the report. The property is appraised
assuming it to be under responsible ownership and competent
management, and available for its highest and best use.
Hidden Conditions - The appraiser assumes no responsibility for
hidden or unapparent conditions of the property, subsoil, ground
water or structures that render the subject property more or less
valuable. No responsibility is assumed for arranging for
engineering, geologic or environmental studies that may be
required to discover such hidden or unapparent conditions.
Hazardous Materials - The appraiser has not been provided any
information regarding the presence of any material or substance
on or in any portion of the subject property or improvements
thereon, which material or substance possesses or may possess
toxic, hazardous and/or other harmful and/or dangerous
characteristics. Unless otherwise stated in the report, the
appraiser did not become aware of the presence of any such
material or substance during the appraiser's inspection of the
subject property. However, the appraiser is not qualified to
investigate or test for the presence of such materials or
substances. The presence of such materials or substances may
adversely affect the value of the subject property. The value
estimated in this report is predicted on the assumption that no
such material or substance is present on or in the subject
property or in such proximity thereto that it would cause a loss
in value. The appraiser assumes no responsibility for the
presence of any such substance or material on or in the subject
property, nor for any expertise or engineering knowledge required to
<PAGE>
discover the presence of such substance or material. Unless
otherwise stated, this report assumes the subject property is in
compliance with all federal, state and local environmental laws,
regulations and rules.
Zoning and Land Use - Unless otherwise stated, the subject
property is appraised assuming it to be in full compliance with
all applicable zoning and land use regulations and restrictions.
Licenses and Permits - Unless otherwise stated, the property is
appraised assuming that all required licenses, permits,
certificates, consents or other legislative and/or administrative
authority from any local, state or national government or private
entity or organization have been or can be obtained or renewed
for any use on which the value estimate contained in this report
is based.
Engineering Survey - No engineering survey has been made by the
appraiser. Except as specifically state, data relative to size
and area of the subject property was taken from sources
considered reliable and no encroachment of the subject property
is considered to exist.
Subsurface Rights - No opinion is expressed as to the value of
subsurface oil, gas or mineral rights or whether the property is
subject to surface entity for the exploration or removal of such
materials, except as is expressly stated.
Maps, Plats and Exhibits - Maps, plats and exhibits included in
this report are for illustration only to serve as an aid in
visualizing matters discussed within the report. They should not
be considered as surveys or relied upon for any other purpose,
nor should they be removed from, reproduced or used apart from
the report.
Legal Matters - No opinion is intended to be expressed for
matters which require legal expertise or specialized
investigation or knowledge beyond that customarily employed by
real estate appraisers.
Allocation Between Land and Improvements - The distribution, if
any, of the total valuation in this report between land and
improvements applies only under the stated program of
utilization. The separate allocations for land improvements must
not be used in conjunction with any other appraisal and are
invalid if so used.
Right of Publication - Possession of this report, or a copy of
it, does not carry with it the right of publication. Without the
written consent of the appraiser, this report may not be used for
any purpose by any person other than the party to whom it is
addressed. In any event, this report may be used only with
properly written qualification and only in its entirety for its
stated purpose.
Testimony in Court - Testimony or attendance in court or at any
other hearing is not required by reason of rendering this
appraisal, unless such arrangements are made a reasonable time in
advance of said hearing. Further, unless otherwise indicated,
separate arrangements shall be made concerning compensation for
the appraiser's time to prepare for and attend any such hearing.
B-2
<PAGE>
Structural Deficiencies - The appraiser has personally inspected
the subject property, and except as noted in this report, finds
no obvious evidence of structural deficiencies in any
improvements located on the subject property. However, the
appraiser assumes no responsibility for hidden defects or
non-conformity with specific governmental requirements, such as
fire, building and safety, earthquake or occupancy codes, unless
inspections by qualified independent professionals or
governmental agencies were provide to the appraiser. Further, the
appraiser is not a license engineer or architect and assumes no
responsibility for structural deficiencies not apparent to the
appraiser at the time of this inspection.
Termite/Pest Infestation - No termite or pest infestation report
was made available to the appraiser. It is assumed that here is
no significant termite or pest damage or infestation, unless
otherwise stated.
Income Data Provided by Third Party - Income and expense data
related to the property being appraised was provided by the
client and is assumed, but not warranted, to be accurate.
Asbestos - The appraiser is not aware of the existence of
asbestos in any improvements on the subject property. However,
the appraiser is not trained to discover the presence of asbestos
and assumes no responsibility should asbestos be found in or at
the subject property. For the purposes of this report, the
appraiser assumes the subject property is free of asbestos and
that the subject property meets all federal, state and local laws
regarding asbestos abatement.
Archeological Significance - No investigation has been made by
the appraiser and no information has been provided to the
appraiser regarding potential archeological significance of the
subject property or any portion thereof. This report assumes no
portion of the subject property has archeological significance.
Compliance with the Americans with Disabilities Act - The
Americans with Disabilities Act ("ADA") became effective January
26, 1992. We have not made a specific compliance survey and
analysis of this property to determine whether or not it is in
conformity with the various detailed requirements of the ADA. It
is possible that a compliance survey of the property, together
with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of
the requirements of the Act. If so, this fact could have a
negative effect upon the value of the property. Since we have no
direct evidence relating to this issue, we did not consider
possible non-compliance with the requirements of ADA in
estimating the value of the property.
Definitions and Assumptions - The definitions and assumptions
upon which our analyses, opinions and conclusions are based are
set forth in appropriate sections of this report and are to be
part of these general assumptions as if included here in their
entirety.
Utilization of the Land and/or Improvements - It is assumed that
the utilization of the land and/or improvements is within the
boundaries or property described herein and that there is no
encroachment or trespass.
B-3
<PAGE>
Encroachments - It is assumed that the utilization of the land
and/or improvements is within the boundaries or property
described herein and that there is no encroachment or trespass.
Dissemination of Material - Use and disclosure of the contents of
this reports is governed by the bylaws and regulations of the
Appraisal Institute. Neither all or any pat of the contents of
this report (especially the conclusions as to value, the identity
of the appraiser or the firm with which they are connected, or
any reference to the Appraisal Institute or to the MAI or RM
designations) shall be disseminated to the general public through
advertising or sales media, public relations media, new media or
other public means of communication without the prior written
consent and approval of the appraiser(s).
Distribution and Liability to Third Parties - The party of whom
this appraisal report was prepared may distribute copies of this
appraisal report only in its entirety to such third parties as
may be selected by the party selected by the party for whom this
appraisal report was prepared; however, portions of this
appraisal report shall not be given to third parties without our
written consent. Liability to third parties will not be accepted.
Use in Offering Materials - This appraisal report, including all
cash flow forecasts, market surveys and related data,
conclusions, exhibits and supporting documentation may not be
reproduced or references made to the report or to PKF Consulting
in any sale offering, prospectus, public or private placement
memorandum, proxy statement or other document ("Offering
Material") in connection with a merger, liquidation or other
corporate transaction unless PKF "Consulting has approve din
writing the text of any such reference or reproduction prior to
the distribution and filing thereof.
Limits to Liability - PKF Consulting cannot be held liable in any
cause of action resulting in litigation for any dollar amount
which exceeds the total fees collected from this individual
engagement.
Legal Expenses - Any legal expenses incurred in defending or
representing ourselves concerning this assignment will be the
responsibility of AIRCOA Hotel Partners, LP.
B-4
<PAGE>
EXHIBIT (d)
<PAGE>
[Letterhead of AIRCOA Hotel Partners, L.P.]
July __, 1997
Dear Unitholder:
You are cordially invited to attend a Special Meeting of
holders of units of limited partner interests ("Units") of AIRCOA
Hotel Partners, L.P. ("AHP" and, collectively with its
consolidated subsidiaries, the "Partnership") to be held on
__________________, 1997. At the Special Meeting, the holders of
the Units will vote upon a proposal that will result in the
merger (the "Merger") of Regal Merger Limited Partnership
("Regal"), a wholly owned subsidiary of Regal Hotel Management,
Inc. ("RHM"), with and into AHP. As a result of the Merger, AHP
will become a wholly owned subsidiary of Regal, and the Units
held by persons other than Regal or its affiliates (the "Public
Unitholders") will be converted into the right to receive $3.10
per Class A Unit and $20.00 per Class B Unit, in cash.
The Board of Directors (the "Board") of AIRCOA Hospitality
Services, Inc., the general partner of AHP (the "General
Partner"), and a Special Committee of outside advisors appointed
by the Board to consider the proposal, each have concluded that
the Merger is fair to, and in the best interests of, the Public
Unitholders, and have unanimously approved the Merger. In
arriving at its conclusions, the Special Committee gave due
consideration and significant weight to the fact that its
financial advisor, Houlihan, Lokey, Howard & Zukin, had delivered
to the Special Committee its written opinion that, based upon the
considerations and subject to the assumptions and limitations set
forth therein, the consideration to be received by the Public
Unitholders in the Merger is fair to the Public Unitholders from
a financial point of view. The Board unanimously recommends that
Unitholders vote "FOR" approval of the Merger and the
transactions contemplated thereby.
The Merger must be approved by the holders of a majority of
the aggregate voting power of all Units (where each Class A Unit
represents one vote and each Class B Unit represents one-half
vote), including Units held by Regal and its affiliates. Regal
and its affiliates hold, collectively, approximately 71.0% of the
issued and outstanding Class A Units and approximately 93.6%
(with 100% voting control) of the issued and outstanding Class B
Units and intends to vote such Units "FOR" approval of the
Merger. As a consequence, approval of the Merger is assured,
regardless of how the Public Unitholders vote at the Special
Meeting.
The accompanying Proxy Statement describes in detail the
reasons for the Merger, the manner in which the transactions will
take place, certain tax consequences of the Merger and other
matters. The action to be taken at the Special Meeting is of
great importance and I urge you to read the accompanying
materials carefully. WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL MEETING IN PERSON AND REGARDLESS OF THE NUMBER OF UNITS
YOU OWN, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD
AND MAIL IT AS SOON AS POSSIBLE IN THE BUSINESS REPLY ENVELOPE
PROVIDED.
Very truly yours,
DOUGLAS M. PASQUALE
President and Chief Executive Officer
AIRCOA Hospitality Services, Inc.,
General Partner of AIRCOA Hotel Partners, L.P.
<PAGE>
AIRCOA Hotel Partners, L.P.
5775 DTC Boulevard
Englewood, Colorado 80111
(303) 220-2000
NOTICE OF SPECIAL MEETING OF CLASS A UNITHOLDERS
TO BE HELD __________________, 1997
To the Holders of Class A and Class B Units of Limited Partner
Interests of AIRCOA Hotel Partners, L.P.:
Notice is hereby given that a special meeting of the holders
("Unitholders") of Class A and Class B units of limited partner
interests ("Units") of AIRCOA Hotel Partners, L.P. (the
"Partnership") will be held at 9:00 a.m. (New York City time) on
__________________, 1997 at the offices of Coudert Brothers,
counsel to the Partnership, 1114 Avenue of the Americas, New
York, New York 10036 (the "Special Meeting"), to consider and
approve a proposed merger (the "Merger") of Regal Merger Limited
Partnership ("Regal"), a Delaware limited partnership wholly
owned by Regal Hotel Management, Inc. ("RHM") and formed by RHM
for the purpose of engaging in such transaction, with and into
the Partnership.
By order of the Board of Directors (the "Board") of AIRCOA
Hospitality Services, Inc., general partner of the Partnership,
the close of business on _______________, 1997, has been fixed as
the record date for determination of Unitholders entitled to
notice of, and to vote at, the Special Meeting or any
adjournments or postponements thereof.
Information regarding the matters to be acted upon at the Special
Meeting is contained in the accompanying Proxy Statement. The
Agreement and Plan of Merger, dated May 2, 1997, by and among the
Partnership, the General Partner, Regal and RHM contains the full
terms and conditions of the Merger and is set forth as Annex A to
the Proxy Statement. The Board unanimously recommends that
Unitholders vote "FOR" approval of the Merger and the
transactions contemplated thereby.
Whether or not you plan to attend the Special Meeting in person
and regardless of the number of Units you own, you are urged to
sign and date the enclosed proxy card and mail it as soon as
possible in the stamped, addressed return envelope provided, so
that your Units will be represented and voted at the Special
Meeting.
By order of the Board of Directors of
AIRCOA Hospitality Services, Inc.,
General Partner
__________________________________
Corporate Secretary
July __, 1997
<PAGE>
Preliminary Copy
Subject to Completion, Dated July 3, 1997
AIRCOA HOTEL PARTNERS, L.P.
PROXY STATEMENT
Special Meeting to be held on ___________, 1997
This Proxy Statement and the accompanying Notice of Special
Meeting of Unitholders (collectively, the "Proxy Statement") are
being furnished to the holders ("Unitholders") of Class A and
Class B units of limited partner interests (whether represented
by certificates or depositary receipts, "Units") of AIRCOA Hotel
Partners, L.P., a Delaware limited partnership (together with its
consolidated subsidiaries, the "Partnership"), in connection with
the solicitation of proxies for use at the special meeting to be
held at 9:00 a.m. (New York City time) on __________________,
1997 at the offices of Coudert Brothers, counsel to the
Partnership, 1114 Avenue of the Americas, New York, New York
10036, or at any adjournment or postponement thereof (the
"Special Meeting"). Proxies are being solicited by the
Partnership and AIRCOA Hospitality Services, Inc., the general
partner of the Partnership (the "General Partner"). This Proxy
Statement and the accompanying form of proxy are first being
mailed to Unitholders on or about July __, 1997. Unitholders are
entitled to one vote for each Class A Unit and one-half vote for
each Class B Unit held of record at the close of business on
_______________, 1997 (the "Record Date"), with respect to the
proposal described in the Proxy Statement.
Action may be taken on the proposal described in the Proxy
Statement on the date specified herein, or on any date or dates
to which, by original or later adjournment, the meeting may be
adjourned.
At the Special Meeting, Unitholders will consider and vote
upon a proposal to merge (the "Merger") the Partnership with
Regal Merger Limited Partnership, a Delaware limited partnership
("Regal") wholly owned by Regal Hotel Management, Inc. ("RHM").
RHM is a Delaware corporation indirectly wholly owned by Regal
Hotels International Holdings Limited, a Bermuda corporation and
hotel ownership and management company ("Regal Holdings") and an
indirect parent of each of the General Partner, RHM and Regal
which, together with its affiliates, owns 3,794,646, or
approximately 71.0%, of the outstanding Class A Units, and
888,746, or approximately 93.6%, of the outstanding Class B Units
(and has voting control with respect to 100% of the Class B
Units). Unitholders other than Regal Holdings or its affiliates
are herein referred to as "Public Unitholders." The Merger is
being effected pursuant to an Agreement and Plan of Merger, dated
as of May 2, 1997, by and among Regal, RHM, the General Partner
and the Partnership (the "Merger Agreement"). A COPY OF THE
MERGER AGREEMENT IS ATTACHED HERETO AS ANNEX A. PUBLIC
UNITHOLDERS ARE ENCOURAGED TO READ THE MERGER AGREEMENT
CAREFULLY. Consummation of the Merger is subject to several
conditions. See "The Merger Agreement -- Conditions to the
Merger."
The Merger Agreement provides that, among other things, as
soon as practicable, Regal will be merged with and into the
Partnership, with the Partnership continuing as the surviving
partnership. At the effective time of the Merger (the "Effective
Time"), (i) each issued and outstanding Class A Unit, other than
those held by Regal Holdings or any direct or indirect subsidiary
of Regal Holdings, shall be cancelled, extinguished and retired
and will be converted into the right to receive $3.10 in cash,
without interest, (ii) each issued and outstanding Class B Unit,
other than those held by Regal Holdings or any direct or indirect
subsidiary of Regal Holdings, shall be cancelled, extinguished
and retired and will be converted into the right to receive
$20.00 in cash, without interest, (iii) each outstanding Unit
which is owned by Regal Holdings or any direct or indirect
subsidiary of Regal Holdings shall be and remain a unit of
limited partner interest in the Partnership; (iv) each
outstanding partnership interest, general or limited, of Regal
shall be cancelled, extinguished and retired, and no payment
shall be made thereon; (v) Regal shall cease to exist; and (vi)
the General Partner's general partnership interest in the
Partnership shall be and remain a general partnership interest in
the Partnership. See "The Merger Agreement" for a description of
the Merger and the Merger Agreement. The Partnership and RHM
currently anticipate that the Effective Time will occur on
__________________, 1997.
<PAGE>
-------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION NOR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
-------------
RHM has proposed the Merger because it believes that the
expense both in terms of actual costs and time and attention
required of management with respect to maintaining the
Partnership as a public entity, as well as potential conflict of
interest situations between the Partnership and RHM, can be
eliminated through the Merger. Furthermore, if the Partnership
remains a publicly-traded partnership, it will become taxable as
a corporation under the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code") in the beginning of 1998. In
addition, RHM believes that in order to compete effectively in
the longer term in the markets in which it operates, the
Partnership may need to reposition certain of the Partnership's
properties (the "Properties"), which would require significant
capital expenditures for necessary renovations as well as
improvements that, in its current form, the Partnership will
neither have, nor be able to obtain, sufficient resources to fund
these expenditures. See "Special Factors -- Reasons for the
Merger."
The General Partner believes that the Merger is fair to,
and in the best interests of, the Partnership and the Public
Unitholders, based in part upon the recommendation of a special
committee (the "Special Committee") consisting of the two
independent members of the General Partner's Advisory Committee
(the "Advisory Committee"). The Advisory Committee is established
pursuant to the Agreement of Limited Partnership of the
Partnership (the "Partnership Agreement"). The Board of Directors
of the General Partner and the Special Committee have concluded
that the transactions contemplated by the Merger Agreement are
fair to, and in the best interests of, the Public Unitholders,
and have unanimously approved the Merger Agreement. In arriving
at its conclusions, the Special Committee gave due consideration
and significant weight to the opinion of Houlihan, Lokey, Howard
& Zukin, an investment banking firm acting as the Special
Committee's financial advisor ("Houlihan Lokey"), that, based
upon the considerations and subject to the assumptions and
limitations set forth therein, the consideration to be received
by the Public Unitholders in the Merger (the "Merger
Consideration") is fair to the Public Unitholders (the "Houlihan
Lokey Opinion"). See "Special Factors -- Opinion of Financial
Advisor." A copy of the Houlihan Lokey Opinion is attached hereto
as Annex B. THE BOARD OF DIRECTORS OF THE GENERAL PARTNER
UNANIMOUSLY RECOMMENDS THAT UNITHOLDERS VOTE "FOR" APPROVAL OF
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
See "Special Factors -- Fairness of the Merger; Recommendation of
the Special Committee and Position of Century City and RHM."
On the Record Date, there were 5,340,214 Class A Units
outstanding. Pursuant to the Delaware Revised Uniform Limited
Partnership Act (the "Delaware Act") and the Partnership
Agreement, approval of the Merger Agreement will require the
affirmative vote of the holders of a majority of the aggregate
voting power of all Units entitled to vote thereon (where each
Class A Unit represents one vote and each Class B Unit represents
one-half vote), including the Units held by Regal Holdings and
its affiliates. Regal Holdings has informed the General Partner
that it intends to vote the Class A Units and Class B Units over
which it has voting control, representing approximately 71.0% of
the outstanding Class A Units and 100% of the outstanding Class B
Units, "FOR" approval of the Merger. As a result, approval of the
Merger by the Unitholders is assured, regardless of how the
Public Unitholders vote at the Special Meeting.
-------------
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON
AND REGARDLESS OF THE NUMBER OF UNITS YOU OWN, PLEASE COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY CARD AND MAIL IT AS SOON AS
POSSIBLE IN THE STAMPED, ADDRESSED RETURN
ii
<PAGE>
ENVELOPE PROVIDED. UNITHOLDERS SHOULD NOT SEND IN ANY CERTIFICATES
OR DEPOSITARY RECEIPTS REPRESENTING UNITS AT THIS TIME.
-------------
The date of this Proxy Statement is July __, 1997.
iii
<PAGE>
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION.............................................v
FORWARD-LOOKING STATEMENTS.......................................vi
SUMMARY...........................................................1
Purpose of the Special Meeting..............................1
Date, Time and Place of the Special Meeting.................1
Record Date; Units Entitled to Vote; Quorum.................1
Vote Required...............................................1
Certain Relationships.......................................2
Interests of Certain Persons in the Merger..................2
The Special Committee.......................................3
Fairness of the Transaction; Recommendations................3
Opinion of Financial Advisor................................4
Appraisals..................................................4
PKF Report..................................................4
Reasons for the Merger......................................4
Terms of the Merger.........................................5
Effective Time..............................................5
Sources of Funds; Financing of the Merger...................5
Market Prices of the Class A Units..........................6
No Appraisal Rights.........................................6
Summary of Federal Income Tax Consequences of the Merger....6
Accounting Treatment of the Merger..........................6
SPECIAL FACTORS...................................................7
Background of and Reasons for the Merger....................7
Fairness of the Merger; Recommendation of the Special
Committee and Position of Century City and RHM.........11
Opinion of Financial Advisor...............................17
Appraisals.................................................22
PKF Report.................................................24
Certain Projections of the Partnership.....................24
Structure of the Merger....................................27
Interests of Certain Persons in the Merger; Conflicts
of Interest.............................................28
Relationships Between the Parties..........................28
Plans for the Partnership After the Merger.................29
Certain Effects of the Merger..............................29
Income Tax Consequences....................................30
Accounting Treatment of the Merger.........................31
Regulatory Approvals and Filings...........................31
THE PROXY SOLICITATION...........................................32
Voting and Proxy Procedures................................32
Solicitation of Proxies....................................32
No Appraisal Rights........................................32
Conduct of the Special Meeting.............................33
iv
<PAGE>
THE MERGER AGREEMENT.............................................33
General....................................................33
Expenses of the Merger.....................................33
Effective Time.............................................34
Financing of the Merger....................................34
Conditions to the Merger...................................34
Termination................................................34
Payment for Units..........................................35
THE PARTNERSHIP..................................................35
General Development of Business............................35
Financial Information About Industry Segments..............35
Narrative Description of Business..........................36
Properties.................................................38
Legal Proceedings..........................................39
Beneficial Ownership of Class A Units and Transactions
In Class A Units By Certain Persons.....................39
SUMMARY FINANCIAL DATA...........................................42
Annual Financial Information...............................42
Interim Financial Information..............................48
MARKET FOR PARTNERSHIP'S UNITS; DISTRIBUTIONS....................50
TAX, LEGALITY AND LIABILITY......................................51
DOCUMENTS INCORPORATED BY REFERENCE..............................52
SCHEDULE 1......................................................S-1
ANNEX A - THE MERGER AGREEMENT..................................A-1
ANNEX B - OPINION OF HOULIHAN LOKEY.............................B-1
ANNEX C - CONSOLIDATED FINANCIAL STATEMENTS OF AIRCOA HOTEL
PARTNERS, L.P. AND ITS SUBSIDIARY OPERATING
PARTNERSHIPS..........................................C-1
v
<PAGE>
AVAILABLE INFORMATION
The Partnership is subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, files
reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected
and copied at the Commission's office at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices
located at 7 World Trade Center, Suite 1300, New York, New York
10048 and at Northwestern Atrium Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661. Copies of this material
may also be obtained by mail, upon payment of the Commission's
customary fees, from the Commission's principal offices at 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission also
maintains a Web site at http://www.sec.gov, which contains
certain reports, proxy statements and other information regarding
the Partnership and other registrants that file electronically
with the Commission. The Partnership's Class A Units are listed
on the American Stock Exchange. Copies of reports, proxy
statements and other information may therefore also be inspected
at the offices of the American Stock Exchange, 80 Trinity Place,
New York, New York 10006-1881.
The Partnership, the General Partner and RHM have jointly
filed with the Commission a Schedule 13E-3 Transaction Statement
(the "Schedule 13E-3") pursuant to the Exchange Act, furnishing
certain information with respect to the Merger, in addition to
the information contained in this Proxy Statement, and they may
file further amendments to the Schedule 13E-3. As permitted by
the rules and regulations of the Commission, this Proxy Statement
omits certain information contained in the Schedule 13E-3. For
further information pertaining to the Partnership, the General
Partner and RHM, reference is made to the Schedule 13E-3 and the
exhibits and amendments thereto. Statements contained herein
concerning such documents are not necessarily complete and, in
each instance, reference is made to the copy of such documents
filed as an exhibit to the Schedule 13E-3. Each such statement is
qualified in its entirety by such reference.
The Schedule 13E-3 and any such further amendments,
including exhibits, may be inspected and copies may be obtained
in the same manner as set forth in the preceding paragraph,
except that they will not be available at the regional offices of
the Commission.
FORWARD-LOOKING STATEMENTS
The information set forth in this Proxy Statement under the
captions "Special Factors" and "Summary Financial Data" includes
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, and is subject to the
safe harbor created by that Act. There are several important
factors that could cause actual results to differ materially from
those anticipated by the forward-looking statements contained in
such discussions. Additional information on the risk factors
which could affect the Partnership's financial results is
included in this Proxy Statement and in other documents
incorporated by reference herein.
<PAGE>
SUMMARY
The following is a summary of certain information contained
elsewhere in this Proxy Statement. This summary is qualified in
its entirety by the more detailed information contained, or
incorporated by reference, in this Proxy Statement and the
Annexes hereto. Public Unitholders are urged to read this Proxy
Statement and the Annexes hereto in their entirety. The
information in this Proxy Statement concerning the Partnership
has been provided by the Partnership, and the information
concerning Regal Holdings, RHM and Regal has been provided by
RHM.
Purpose of the Special Meeting
This Proxy Statement is being furnished to Unitholders in
connection with the solicitation of proxies for use at a Special
Meeting of Unitholders. At the Special Meeting, Unitholders will
consider the Merger Agreement and the transactions contemplated
thereby, including the Merger. Pursuant to the terms of the
Merger Agreement, in the Merger, the Partnership will be merged
with Regal, with the Partnership being the entity surviving the
Merger. In the Merger, each Class A Unit held by Public
Unitholders will be converted into the right to receive $3.10 in
cash, and each Class B Unit held by Public Unitholders will be
converted into the right to receive $20.00 in cash. Upon
completion of the Merger, the Partnership will be wholly owned by
Regal Holdings.
Date, Time and Place of the Special Meeting
The Special Meeting of Unitholders will be held at the
offices of Coudert Brothers, counsel to the Partnership, 1114
Avenue of the Americas, New York, New York 10036, on
_____________, 1997 at 9:00 a.m.
(New York City time).
Record Date; Units Entitled to Vote; Quorum
Only record holders of Units at the close of business on
___________, 1997, the Record Date, will be entitled to notice of
and to vote at the Special Meeting. At ________, 1997, there were
5,340,214 Class A Units and 950,000 Class B Units outstanding.
Such Class A Units and Class B Units were held by approximately
1,400 and three holders of record, respectively. The presence in
person, or by properly executed proxy, of the holders of more
than 50 percent of the aggregate voting power of outstanding
Units is necessary to constitute a quorum at the Special Meeting.
Each holder of record of Units on the Record Date is
entitled to cast one vote per Class A Unit and one-half vote per
Class B Unit on each proposal with respect to the Merger properly
submitted for the vote of the Unitholders.
Vote Required
Pursuant to the Delaware Act and the Partnership Agreement,
approval of the Merger Agreement will require the affirmative
vote of a majority of the aggregate voting power of the
outstanding Units entitled to vote thereon (where each Class A
Unit represents one vote and each Class B Unit represents
one-half vote), including Units held by Regal Holdings and its
affiliates (the "Majority Vote Requirement"). Regal Holdings has
informed the General Partner that it intends to vote the Class A
Units and Class B Units over which it has voting control,
representing approximately 71.0% of the outstanding Class A Units
and 100% of the outstanding Class B Units, "FOR" approval of the
Merger. As a result, approval of the Merger by the Unitholders is
assured, regardless of how the Public Unitholders vote at the
Special Meeting.
<PAGE>
Certain Relationships
Each of Richfield Holdings, Inc. ("RHI"), AIRCOA Equity
Interests, Inc. ("AEI"), RHM and Gateway Hotel Holdings, Inc.
("Gateway") share voting and investment power over 3,794,646, or
approximately 71.0% of the Class A Units with Century City. RHI
has direct ownership of 546,740 Class A Units, an indirect
ownership of 650,000 Class A Units through AEI, and indirect
ownership of 3,800 Class A Units through Richfield Hospitality
Services, Inc. ("Richfield"), for a total direct and indirect
ownership of 1,200,540, which represent 22.5% of the Class A
Units. RHI directly owns 200,000 Class B Units. RHM directly owns
1,825,065 Class A Units and 688,746 Class B Units. Buffalo Hotel
Investors, Ltd. ("BHI") directly owns 61,254 Class B Units. AEI
is the managing general partner of BHI. AEI and its affiliates
directly and indirectly own 7.1% of the partnership interests in
BHI.
In addition to its direct interest in the Partnership's
voting securities, RHI indirectly owns 100% of the outstanding
common shares of the General Partner. In February 1989, Novolane,
B.V., a Netherlands company ("Novolane"), and Kingsfield
Investment B.V., a Netherlands company ("Kingsfield"), together
acquired 51% of the voting securities of RHI. Kingsfield sold the
5% interest it held in RHI to an unaffiliated party in 1990.
Novolane currently owns 49.77% of RHI's outstanding voting
securities and 100% of the voting securities of RHM. In December
1994, Regal International Limited purchased 45.58% of RHI's
outstanding voting securities from an unaffiliated entity.
Century City, a Bermuda company, indirectly controls Novolane,
Gateway and Regal International Limited. More than 60% of the
voting stock of Century City is beneficially owned by Mr. Lo Yuk
Sui, a citizen of Hong Kong.
The General Partner directly owns notes, with face values
of $8,100,000, which are convertible into Class A Units at a
price of $16.60 per Class A Unit. Assuming that these were
converted, the General Partner would directly own 9.2% of the
Class A Units. Century City would then indirectly own 73.5% of
the Class A Units.
The principal executive offices of the Partnership, the
General Partner, RHM and Regal are located at 5775 DTC Boulevard,
Englewood, Colorado 80111, telephone (303) 220-2000.
Interests of Certain Persons in the Merger
As of ________________, 1997, approximately 3,794,646
(71.0%) of the Class A Units and approximately 888,746 (93.6%) of
the Class B Units were beneficially owned by Regal Holdings and
its affiliates. Of the approximately 71.0% of Class A Units and
93.6% of Class B Units owned directly or indirectly by Regal
Holdings, 34.2% and 72.5%, respectively, is owned by RHM. See
"The Partnership -- Beneficial Ownership of Class A Units and
Transactions in Class A Units By Certain Persons."
In addition, RHM is interested in the outcome of the Merger
in that, following the Merger, Regal Holdings and its affiliates
would be the sole owners of the Partnership. As sole owners,
Regal Holdings and its affiliates would bear the total risk of
the Partnership's operations but would also receive the entire
benefit, if any, arising from pursuit of the various
opportunities described under "-- Reasons for the Merger." RHM
also would be able to consolidate the Partnership's operations
more fully with those of its other properties owned and managed
by RHM and its affiliates without introducing issues with respect
to potential conflicts of interest, and to realize potential
operating synergies therefrom. If the Partnership were sold to an
unrelated third party, RHM would not have any further
participation in any such opportunities, while, if the current
ownership structure were maintained, it would share any such
benefits with the Public Unitholders. See "Special Factors --
Interests of Certain Persons in the Merger; Conflicts of
Interest."
In proposing and structuring the terms of the Merger, RHM
primarily considered its own interests and not those of the
Public Unitholders, recognizing, however, that the terms and
structure of the Merger transaction would be reviewed by the
Special Committee, and that RHM would not proceed with the Merger
absent a favorable recommendation by the Special Committee with
respect thereto. Neither RHM nor the Special Committee
2
<PAGE>
approached any unaffiliated persons or entities with respect to
the acquisition of the Partnership or any of its assets.
See "Special Factors -- Background of the Merger."
The General Partner and the senior management of the
Partnership have certain interests that may present them with
actual or potential conflicts of interest. Among these are that
(i) the General Partner is controlled by Regal Holdings, an
affiliate of RHM, (ii) the current General Partner is expected to
remain in its current role subsequent to the Merger, and (iii)
the current senior management of the General Partner is expected
to remain in their positions following the Merger. See "Special
Factors -- Interests of Certain Persons in the Merger; Conflicts
of Interest." Both the Partnership and the Special Committee were
advised by separate legal counsel from that of RHM and Regal in
connection with the Merger.
The Special Committee
The Board of Directors of the General Partner (the "Board")
appointed the Special Committee on January 14, 1997 to consider
the fairness of the proposed transaction to the Public
Unitholders. The Special Committee consists of Mr. James W. Hire
and Mr. Anthony C. Dimond, each of whom is an independent member
of the Advisory Committee to the General Partner and is not an
employee of the Partnership or the General Partner or otherwise
affiliated with the Partnership or Regal Holdings. See "Special
Factors -- Background of the Merger."
Fairness of the Transaction; Recommendations
In developing its initial merger proposal of $2.35 per
Class A Unit and $16.80 per Class B Unit, RHM determined that
such initial proposal might reasonably be expected to be found by
a special committee, and its independent financial advisor, to be
fair to the Public Unitholders and, therefore, that such an offer
might reasonably be expected to lead to a successful acquisition
by RHM of the publicly held Units, but did not determine at that
time whether or not such proposal was fair to the Public
Unitholders. Both RHM and the General Partner have interests in
the proposed Merger which conflict with the interests of the
Public Unitholders. See "Special Factors -- Interests of Certain
Persons in the Merger; Conflicts of Interests." Accordingly, the
Special Committee was appointed by the Board to make a
determination with respect to the fairness of the transaction to
the Public Unitholders. See "Special Factors -- Opinion of
Financial Advisor."
The Special Committee concluded that the transactions
contemplated by the Merger Agreement are fair to, and in the best
interests of, the Public Unitholders, and unanimously approved
the Merger Agreement. In arriving at its conclusion, the Special
Committee gave due consideration and significant weight to the
Houlihan Lokey Opinion (confirmed in writing on May 2, 1997)
that, based upon the considerations and subject to the
assumptions and limitations set forth therein, the Merger
Consideration to be received by the Public Unitholders in the
Merger is fair, from a financial point of view, to the Public
Unitholders.
The determinations of the Special Committee, including its
conclusions, recommendations and the material considerations
applicable thereto, were delivered to the Advisory Committee and
the Board at a meeting held on May 2, 1997. The Advisory
Committee and the Board concurred in and adopted both the
material considerations and the conclusions of the Special
Committee. There were no other material considerations applicable
to the deliberations of the Board. Each of the Advisory Committee
and the Board unanimously approved the Merger Agreement on the
basis of the considerations and conclusions of the Special
Committee. See "Special Factors --Fairness of the Merger;
Recommendation of the Special Committee and Position of Century
City and RHM."
THE BOARD OF DIRECTORS OF THE GENERAL PARTNER UNANIMOUSLY
RECOMMENDS THAT UNITHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY.
3
<PAGE>
Opinion of Financial Advisor
Houlihan Lokey, a nationally recognized investment banking
firm, delivered a written opinion to the Special Committee on May
2, 1997, to the effect that, as of such date, and based upon the
assumptions made, general procedures followed, factors considered
and limitations on the review undertaken as set forth in such
opinion, the Merger Consideration of $3.10 in cash per Class A
Unit and $20.00 in cash per Class B Unit to be received by the
Public Unitholders pursuant to the Merger Agreement is fair to
such Public Unitholders from a financial point of view. The full
text of the Houlihan Lokey Opinion is attached as Annex B to this
Proxy Statement. Public Unitholders are urged to read the
Houlihan Lokey Opinion carefully and in its entirety in
conjunction with this Proxy Statement for the assumptions made,
the matters considered and the limits of the review of Houlihan
Lokey. See "Special Factors -- Opinion of Financial Advisor."
Appraisals
Arthur Andersen LLP ("Arthur Andersen") prepared appraisals
of the Properties (the "Appraisals") on behalf of the
Partnership's bank lenders, and authorized the use of such
Appraisals for use by the Special Committee in connection with
its review of the proposed Merger. The Appraisals were prepared
in order to estimate the market value of the fee simple and/or
leasehold estate in the Properties, as requested by the Special
Committee. Arthur Andersen concluded that the aggregate market
value of the Properties was $86,760,000. See "Special Factors
- --Appraisals."
PKF Report
PKF Consulting ("PKF"), a hotel appraisal firm, was
retained by the Special Committee to determine if there was any
additional value to the Partnership as a result of holding a
portfolio of properties that might be purchased as a whole. In
preparing its report, dated April 29, 1997 (the "PKF Report"),
PKF reviewed the Appraisals and interviewed representatives of
various enterprises involved in the acquisition of portfolios of
properties. The PKF Report concluded that a typical "willing and
knowledgeable investor" would not pay a premium over the sum of
the individual property values for this group of hotels. See
"Special Factors -- PKF Report."
Reasons for the Merger
RHM (rather than the General Partner) is the party primarily
initiating, supporting, structuring and negotiating the terms of
the Merger. RHM has proposed the Merger because it believes that
maintaining the Partnership as a public entity is expensive both
in terms of the actual costs of reporting and providing
information to Unitholders and the time and attention required of
management, whose energies might be better spent on other
matters. Furthermore, if the Partnership remains a
publicly-traded partnership, it will become taxable as a
corporation under the Internal Revenue Code in the beginning of
1998. RHM also believes that potential conflict of interest
situations between the Partnership and RHM can be eliminated
through the Merger. In addition, RHM believes that in order to
compete effectively in the longer term in the markets in which it
operates, the Partnership may need to reposition certain of the
Properties, which would require significant capital expenditures
for necessary renovations as well as improvements and that, in
its current form, the Partnership will neither have, nor be able
to obtain, sufficient resources to fund these expenditures.
Century City and RHM believe that the Merger is fair to, and in
the best interests of, the Partnership and the Public
Unitholders, based in part on the determinations of the Special
Committee. See "Special Factors -- Background of and Reasons for
the Merger" and "-- Fairness of the Merger; Recommendation of the
Special Committee and Position of Century City and RHM."
4
<PAGE>
Terms of the Merger
The Merger will be effected pursuant to the terms of the
Merger Agreement. Public Unitholders are urged to read the text
of the Merger Agreement, a copy of which is attached as Annex A
to this Proxy Statement. Upon consummation of the Merger and by
virtue thereof, (i) each issued and outstanding Class A Unit,
other than those held by Regal Holdings or any direct or indirect
subsidiary of Regal Holdings, shall be cancelled, extinguished
and retired and will be converted into the right to receive $3.10
in cash, without interest, (ii) each issued and outstanding Class
B Unit, other than Class B Units owned by Regal Holdings or any
direct or indirect subsidiary of Regal Holdings, shall be
cancelled, extinguished and retired and will be converted into
the right to receive $20.00 in cash, without interest, (iii) each
outstanding Unit which is owned by Regal Holdings or any direct
or indirect subsidiary of Regal Holdings shall be and remain a
unit of limited partner interest in the Partnership, (iv) each
outstanding partnership interest, general or limited, of Regal
shall be cancelled, extinguished and retired, and no payment
shall be made thereon, (v) Regal shall cease to exist, and (vi)
the General Partner's general partnership interest in the
Partnership shall be and remain a general partnership interest in
the Partnership. As a result of the Merger, the Partnership and
its consolidated subsidiaries will become wholly owned
subsidiaries of Regal Holdings and the Public Unitholders will
cease to be limited partners of the Partnership. Because no Class
A Units will be publicly held after the Merger, the Class A Units
will be delisted and will no longer trade on the American Stock
Exchange, and the Partnership will cease to be a separate
reporting company under the Exchange Act.
Closing of the Merger is subject, among other things, to:
(i) the Majority Vote Requirement having been met; (ii) no
withdrawal by Houlihan Lokey of the Houlihan Lokey Opinion or
modification thereof in a manner materially adverse to RHM,
Regal, the Partnership or any Unitholder having occurred; and
(iii) no statute, rule, regulation, executive order, decree or
injunction having been enacted, entered, promulgated or enforced
by any court or governmental authority which prohibits,
restrains, enjoins or restricts the consummation of the Merger.
See "The Merger Agreement."
Effective Time
Under the Merger Agreement, the Merger will become
effective on the date (the "Effective Date") and at the time (the
"Effective Time") that a Certificate of Merger is filed pursuant
to Delaware law. It is anticipated that the Effective Date will
occur on or about _____________, 1997, although there can be no
assurance in this regard. The transfer books for the Class A
Units and Class B Units will be closed as of the close of
business on the Effective Date and no transfer of record can be
made of certificates representing the Class A Units or Class B
Units thereafter other than registrations of transfer reflecting
transfers occurring before the close of business on the Effective
Date. If the Merger cannot be concluded by September 30, 1997
(see "The Merger Agreement -- Termination"), the Special
Committee and the parties to the Merger Agreement may consider
whether or not to extend the time for consummation of the Merger
by amendment or waiver of the applicable condition in the Merger
Agreement for any appropriate reason. See "The Merger Agreement
- -- Effective Time."
Upon consummation of the Merger, Regal Holdings will hold
the entire limited partnership interest in the Partnership. The
Public Unitholders will have no ownership interest in or control
over the Partnership. In addition, the Partnership's registration
of the Class A Units under the Exchange Act will be terminated
and the Partnership will not be required to continue its periodic
reporting requirements under the Exchange Act. See "Special
Factors -- Certain Effects of the Merger" and "Market for
Partnership's Units; Distributions."
Sources of Funds; Financing of the Merger
Approximately $7 million will be required to consummate the
Merger and to pay related fees and expenses. The necessary funds
are expected to be provided by RHM. Such funds will be advanced
to RHM from general funds of Regal Holdings and its affiliates.
See "The Merger Agreement -- Expenses of the Merger" and
"--Financing of the Transaction."
5
<PAGE>
Market Prices of the Class A Units
The Class A Units have been traded on the American Stock
Exchange since July 1987. As reported by the American Stock
Exchange, during the first quarter of 1997, the closing prices of
the Class A Units on the American Stock Exchange ranged from
$1.875 to $2.25 per Class A Unit, and the average trading volume
for such period was approximately 2,900 Class A Units per day. On
December 18, 1996, the date of announcement of the Proposal,
daily trading volume in the Class A Units was approximately
29,100 Class A Units and the closing price per Class A Unit on
the American Stock Exchange increased from $1.50 on December 17,
1996 to a closing price of $2.00 on December 18, 1996. On May 5,
1997, the day the execution of the Merger Agreement was
announced, daily trading volume in the Class A Units was 3,500
Class A Units and the closing price per Class A Unit on the
American Stock Exchange was $2.875. See "Market for Partnership's
Units; Distributions."
No Appraisal Rights
Under the Delaware Act, the only appraisal rights available
to Unitholders are those accorded by contract. Neither the
Partnership Agreement nor the Merger Agreement provides such
appraisal rights to the Public Unitholders in connection with the
Merger.
Summary of Federal Income Tax Consequences of the Merger
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, a Unitholder will
recognize a gain or loss on the conversion of Units in the Merger
to the extent of the difference between the amount realized and
his or her adjusted tax basis in the Units sold. In addition,
upon the conversion by a Unitholder of all his or her Units in
the Merger, any net losses of the Partnership that were suspended
under the passive loss rules of the Internal Revenue Code may be
used to offset income and gain on such conversion.
The foregoing summary is for general information of
Unitholders only as to their tax consequences and does not
purport to be complete. For a more extensive discussion of the
Federal income tax consequences of the Merger, see "Special
Factors -- Income Tax Consequences" below. The consequences to
any particular Unitholder may differ depending upon that
Unitholder's own circumstances and tax position. Certain types of
Unitholders (including, but not necessarily limited to, financial
institutions, tax-exempt organizations and foreign persons) may
be subject to special rules. This discussion does not consider
the effect of any applicable foreign, state or local tax laws.
Each Unitholder is urged to consult his tax advisor as to the
particular tax consequences of the Merger to such Unitholder,
including the application of state, local and foreign tax laws.
For purposes of this summary, Unitholders are assumed to hold
their Units as capital assets (generally, property held for
investment).
Accounting Treatment of the Merger
The acquisition by RHM of the Units will be accounted for
as an acquisition of minority ownership interests of a subsidiary
in accordance with the purchase method of accounting.
Representatives of KPMG Peat Marwick LLP, the principal
accountants for the Partnership, are expected to be present at
the Special Meeting and will be available to respond to
appropriate questions.
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SPECIAL FACTORS
Background of and Reasons for the Merger
Relationship Between RHM and the Partnership
The Partnership was formed in 1986 by the General Partner
to acquire, own and operate hotel and resort properties. The
Partnership acquired its initial portfolio of seven hotel
properties from affiliates of the General Partner substantially
in consideration for Class B Units. In July 1987, the Partnership
issued 1,700,000 Class A Units in an initial public offering at a
price of $18.50 per Class A Unit. In addition, the Partnership
issued 570,270 Class A Units to the General Partner and its
affiliates for cash at the initial public offering price. Since
the initial public offering and prior to 1993, the General
Partner and certain of its affiliates acquired an additional
3,069,944 Class A Units from the Partnership (i) pursuant to the
terms of certain support arrangements which required the General
Partner and such affiliates to contribute additional cash amounts
to the Partnership as necessary to enable the Partnership to make
certain distributions in respect of the Class A Units, (ii) to
pay maturing debt and (iii) to increase the working capital of
the Partnership.
In 1989, Regal Holdings acquired the General Partner and
certain of its affiliates, and thereby acquired beneficial
ownership of the Class A Units and Class B Units held by those
entities. Only two of the Partnership's six hotel and resort
properties bear the "Regal" name, while three properties are
operated under franchise agreements with third party hotel
chains. From time to time in the past, Regal Holdings has
preliminarily considered the possibility of consolidating the
Properties with certain other U.S. properties owned or managed by
affiliates of Regal Holdings, through acquisition, merger or
otherwise.
Costs of Maintaining the Partnership as a Public Partnership
RHM believes that maintaining the Partnership as a public
entity is expensive both in terms of the actual costs of
reporting and providing information to Unitholders and the time
and attention required of management, whose energies might be
better spent on other matters. Furthermore, if the Partnership
remains a publicly-traded partnership, it will become taxable as
a corporation pursuant to the Internal Revenue Code in the
beginning of 1998. RHM also believes that potential conflict of
interest situations between the Partnership and RHM can be
eliminated through the Merger.
Need for Capital Investment; Availability of Financing
The level of competition among mid-market hospitality
properties such as those owned by the Partnership has increased
substantially in recent years, as new properties have been
constructed and others have been renovated to provide for more
modern amenities and a fresher appearance. The General Partner
believes that, to date, the Properties have performed
competitively when compared to other properties, especially on a
"revenue per available rooms" basis. However, RHM believes that,
in order to remain competitive in the longer term, the
Partnership may need to reposition certain of the Properties,
which would require significant capital investments in excess of
the industry norm, 5% of annual revenue, for renovation and
improvements. The Partnership's projected cash flow may not be
sufficient to fund this amount, and the terms of the
Partnership's current bank facilities will not permit the
incurrence by the Partnership of a substantial amount of
additional indebtedness. In addition, RHM and its affiliates have
advised the Partnership they are not required and are unwilling
to make additional capital contributions or provide other
additional financial support to the Partnership in its present
form. RHM and its affiliates have also advised the Partnership
that they would not support any liquidation or dissolution of the
Partnership.
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Class B Unit Conversion
For years prior to 1997, the Class B Units were
subordinated limited partnership units in respect of which
distributions could not be made until certain minimum annual
distributions were made in respect of the Class A Units. Since
1990, the Partnership has not been able to pay the minimum annual
distributions on the Class A Units which would entitle the
holders of Class B Units to receive any distribution. However,
under the terms of the Partnership Agreement, from 1997 through
2001 a minimum of 250,000 Class B Units are to convert
automatically into Class A Units at a conversion rate of $20.00
in market value of Class A Units per Class B Unit (the "Class B
Unit Conversion"). The Class B Unit Conversion is to occur each
year from 1997 through 2001, within 30 days following the
delivery to holders of Class B Units of the Partnership's annual
financial statements for the immediately preceding year. If the
scheduled 1997 conversion of 250,000 Class B Units to Class A
Units had occurred at the market price for the Class A Units on
December 17, 1996 (the day immediately preceding the date of
RHM's proposal to engage in the Merger) of $1.50 per Class A
Unit, there would be 8,673,547 Class A Units outstanding
(compared with 5,340,214 Class A Units currently outstanding). As
discussed below in the "Market for Partnership's Units;
Distributions" section, the Partnership Agreement was amended to
defer the 1997 conversion of Class B Units pursuant to the Class
B Unit Conversion.
The 13D Group
In February 1995, a group of Unitholders reportedly engaged
in the real estate industry (the "13D Group"), filed a Schedule
13D with the Commission pursuant to Section 13(d) of the Exchange
Act. In the Schedule 13D, the 13D Group stated, among other
things, that it may seek to influence management of the
Partnership to engage in a variety of actions, including the
reorganization of the Partnership, the reconfiguration of the
Partnership as a real estate investment trust, the sale of one or
more of the Properties and the change of the Partnership's
distribution policies.
The 13D Group approached the General Partner on several
occasions since the filing of the group's Schedule 13D, during
which the 13D Group requested, and was provided by the
Partnership with, certain public information concerning the
Partnership's assets and operations. According to the Schedule
13D, the members of the 13D Group currently beneficially own
432,300, or 8.1%, of the Class A Units outstanding. Members of
the 13D Group have also proposed to engage in various
transactions with the Partnership, including the purchase and
sale of the Regal University Hotel, Sheraton Inn Buffalo Airport
and Clarion Fourwinds Resort and Marina properties at a purchase
price substantially less than the appraised value thereof, which
proposal was rejected by the General Partner as inadequate; the
purchase and sale of the Partnership's Regal University Hotel at
a price substantially less than the appraised value thereof,
which proposal was rejected by the General Partner as inadequate;
and the exchange of certain of the Properties for limited
partnership units of a hotel limited partnership managed by a 13D
Group member, which the General Partner also determined not to
pursue. On June 24, 1996, representatives of the 13D Group
proposed that the Partnership repurchase the Class A Units held
by the 13D Group at a price of $7.00 per Class A Unit, which
would have represented a 273% premium over the then prevailing
market price of $1.875 per Class A Unit. In view of the
Partnership's business plan and financial condition, as well as
the amount of the proposed purchase price, this proposal was also
rejected by the General Partner. Other than the approaches made
by members of the 13D Group, the General Partner is not aware of
any third party proposals with respect to an acquisition or
similar transaction involving the Partnership since 1994.
RHM Merger Proposal; Appointment of Special Committee
In view of the foregoing circumstances, RHM and its
affiliates determined that the most practical means of (i)
protecting their investment in the Partnership and furthering the
business objectives and plans of the Partnership without the
attention required by management as a result of having public
Unitholders and (ii) providing Public Unitholders with fair value
for their Class A Units and Class B Units was to engage in a
transaction in which the Public Unitholders would be paid cash
for their Units and the Partnership would become wholly owned by
Regal Holdings. On December 16, 1996, the Board of Directors of
RHM authorized its officers to enter into negotiations with the
Partnership regarding the acquisition of all of the Class A Units
and Class B Units not owned by RHM and its affiliates at a price
of $2.35 per Class A Unit and $16.80 per Class B Unit. On the
same date, the Board of
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Directors of the General Partner discussed with the independent
members of the Advisory Committee whether they would be willing
to act as a special committee to consider RHM's proposal.
In late December 1996, the independent members of the
Advisory Committee advised Mr. Douglas Pasquale, President of the
General Partner and RHM, that they would not be willing to serve
as members of a special committee to review the Merger proposal
unless the General Partner agreed to certain conditions,
including that (i) the General Partner authorize the expenditure
of a specified sum to engage independent financial advisors and
legal counsel, (ii) RHM reimburse the Partnership for its
expenses in connection with its acquisition proposal in the event
that a transaction did not result, (iii) the fees payable to each
member for his service on the special committee be increased from
$25,000 to $50,000 and (iv) each special committee member be
entitled to receive his full annual retainer for serving as a
member of the Advisory Committee during 1997, even if the Merger
occurred prior to the end of the year. The General Partner
advised the Advisory Committee members that while it would agree
to cause the Partnership to pay the requested sum for the
retention of financial advisors and legal counsel, it would not
be willing to request RHM to reimburse some portion of the
Partnership's expenses in the event that no transaction were to
occur or to permit the Partnership to pay to the special
committee members the requested fees or excess retainer. The
independent members of the Advisory Committee then resigned from
the Advisory Committee, and pursuant to Section 1.8 of the
Partnership Agreement the sole remaining member of the Advisory
Committee appointed James W. Hire and Anthony C. Dimond to
replace those individuals as members of the Advisory Committee,
and, pursuant to resolutions of the Board passed on January 14,
1997, the General Partner appointed Messrs. Hire and Dimond as
members of the Special Committee.
Consideration and Negotiation of Terms of the Merger
Between January 17, 1997 and January 30, 1997, the Special
Committee received proposals from six separate investment banking
firms to act as financial advisor to the Special Committee in
considering the Merger Proposal of RHM (the "Proposal"), and
investigated several other potential financial advisors who were
eliminated from consideration for reasons including specific
experience, availability and potential conflicts of interest. The
Special Committee decided that three of these proposals warranted
further interviews and negotiations. On February 19, 1997, the
Special Committee decided to retain Houlihan Lokey to act as its
financial advisor in considering the Proposal, and an engagement
letter with Houlihan Lokey was executed. The Special Committee
selected Houlihan Lokey for several reasons, including primarily
the reputation and experience of Houlihan Lokey in performing
engagements of the type contemplated by this transaction,
including work on lodging properties. The Special Committee also
retained Holland & Hart LLP as its legal counsel based on the
firm's reputation and experience in transactions involving public
companies.
The Special Committee reviewed the Appraisals dated January
1, 1997, which Appraisals were prepared at the Partnership's
request by Arthur Andersen, which had appraised the Properties on
behalf of the Partnership's bank lenders. An Appraisal was made
on each of the Partnership's individual Properties (treating Pine
Lake as a separate entity for such purposes). The Appraisals were
determined by the Special Committee to be reasonable for use by
the Special Committee in its deliberations and negotiations. See
"-- Recommendation of the Special Committee -- Arthur Andersen
Appraisals."
The Special Committee then determined that a second hotel
appraisal firm should be retained to perform an analysis of the
Properties as a portfolio, to determine if there was any
additional value to the Partnership as a result of holding a
portfolio of properties that might be purchased as a whole. After
interviewing two such appraisal firms, the Special Committee
determined to retain PKF, in part because of the reputation and
experience of the firm and the principal who would be performing
the analysis, and in part because PKF was already familiar with
the Properties, having had previous experience appraising those
Properties. From time to time, PKF has also performed work on
behalf of the General Partner and its affiliates.
The Special Committee and its legal counsel conducted
certain due diligence on the Partnership and its Properties.
Included in the Special Committee's due diligence efforts were,
without limitation, visits to each of the Properties and
interviews with management at each site, a review of industry
information, the Partnership's filings with the Commission, the
Partnership's significant agreements, historical financial
information, correspondence
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between the Partnership and the 13D Group, the Appraisals, the
minutes of the Board, the Partnership's most recent budget and
forecasts of future operating results and tax related
information.
Houlihan Lokey began its review of the Partnership shortly
after it was retained. Based on its analysis completed through
March 24, 1997, representatives of Houlihan Lokey met with the
Special Committee on March 24, 1997 and March 25, 1997. At the
March 24-25 meeting, Houlihan Lokey described the research it had
performed, and described three different methods that were used
to value the Partnership and the Units. At this and subsequent
meetings, the Special Committee reviewed a number of substantive
and procedural factors relevant to the value of the Units. The
Special Committee then reviewed with Houlihan Lokey and the
Special Committee's legal counsel certain negotiating strategies
that could be used in attempting to increase the price for the
Units held by Public Unitholders set forth in the proposal.
Negotiations between the Special Committee (in consultation
with Houlihan Lokey and the Special Committee's legal counsel)
and RHM commenced at a meeting on March 26, 1997. During these
negotiations, which extended over several weeks, the members of
the Special Committee indicated to representatives of RHM that
they believed that the consideration of $2.35 per Class A Unit
and $16.80 per Class B Unit initially proposed by RHM was
inadequate in general, and that the consideration offered for
each Class B Unit fell substantially short of the $20.00 in
market value of Class A Units into which many of the Class B
Units (including all of the Class B Units held by Public
Unitholders) would become convertible in 1997. The RHM
representatives disagreed, noting that the proposal reflected an
appropriate allocation of the anticipated appraised value of the
Properties, net of indebtedness and holding company and similar
expenses, taking into consideration the scheduled conversion of
Class B Units to Class A Units pursuant to the Class B Unit
Conversion. See "Summary Financial Data -- Annual Financial
Information -- Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Capital
Resources -- Partnership Distributions and Unit Conversions." RHM
also argued that the offered consideration would represent a
substantial premium to the recent trading prices of the Class A
Units. However, RHM indicated that it would nevertheless be
willing to increase its proposed consideration to $2.70 per Class
A Unit, and $20.00 per Class B Unit, held by the Public
Unitholders. On April 7, 1997, the members of the Special
Committee advised RHM that, in their view, the proposed
consideration for the Class A Units remained too low, and that a
higher amount per Class A Unit would be more appropriate.
Finally, after reviewing many factors and determining that the
Merger would be in the best interests of the Public Unitholders,
on April 11, 1997, the Special Committee indicated that it would
be prepared to recommend a price of $3.10 for each Class A Unit,
and $20.00 for each Class B Unit, held by the Public Unitholders
(the "Revised Proposal"), subject to satisfactory resolution of a
number of items, including final negotiation of the Merger
Agreement. RHM agreed that it also would be prepared to proceed
with a transaction on the basis of such terms.
The terms and conditions of the Merger Agreement were then
negotiated by RHM, the Special Committee and their respective
counsel. A number of revisions were made to the initial draft
Merger Agreement prepared by RHM's counsel at the request of the
Special Committee and its counsel, including but not limited to
augmenting the representations and warranties made by RHM while
deleting certain warranties made by the Partnership, adding
certain conditions to the Partnership's obligation to consummate
the Merger, and limiting the remedy of any party for the breach
of a warranty or covenant to the termination of the Merger
Agreement.
Concurrently with the negotiation of the terms and
conditions of the Merger Agreement, the Special Committee also
examined certain claims made by the 13D Group involving
allegations of breaches of fiduciary duty by the General Partner,
which were set forth in the correspondence between the 13D Group
and the General Partner or the Special Committee. The allegations
included the following: (1) the alleged denial to the 13D Group
of access to information of the Partnership; (2) the alleged
payment of excessive administrative, management and financing
fees to the General Partner; (3) the alleged payment of an
excessive guarantee fee to an affiliate of RHM; (4) the alleged
improper allocation of insurance fees; (5) the alleged
inappropriate allocation of overhead expenses; (6) the alleged
failure to make distributions to the Class A Unitholders; (7) the
alleged inappropriately low sales price for Class A Units sold to
RHM and its affiliates; (8) the alleged impacts of the Class B
Unit Conversion; (9) the alleged lack of independent members of
the Advisory Committee; (10) the alleged failure to consider
other alternative transactions; and (11) the alleged
inappropriate timing of the Proposal (collectively, the "13D
Group Allegations"). The Special Committee found no evidence
indicating that there was any basis for a successful claim by the
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Partnership against the General Partner that might result in any
damages being recovered by the Partnership or the Public
Unitholders. When combined with the business judgment of the
Special Committee that the Merger would be a beneficial
transaction to the Public Unitholders, the Special Committee
concluded the Partnership should proceed with the Merger.
From the first official meeting of the Special Committee on
February 3, 1997 until its meeting on May 1, 1997, the Special
Committee officially met a total of 10 times in person or by
telephone. Discussions were also held on an almost daily basis
from the middle of January 1997 to May 1, 1997 in regard to the
Merger. Both members of the Special Committee were actively
involved in the negotiations with RHM, and conducted the
negotiations in an arms-length manner.
After reaching agreement on all of the major issues
relating to the Merger Agreement, the Special Committee prepared
a presentation for the Board, which was given on May 2, 1997. The
presentation included a determination by the Special Committee
that the Merger Agreement was fair to and in the best interests
of the Public Unitholders, and a recommendation from the Special
Committee that the Board approve the Merger Agreement, and that
the Board recommend that the Unitholders approve the Merger
Agreement. This determination and recommendation were subject to
the satisfaction of two conditions: (1) receipt by the Special
Committee of the final Houlihan Lokey Opinion; and (2) receipt by
the Special Committee of the final PKF Report. These conditions
were satisfied later in the day. Based on the Special Committee's
determinations and recommendation, the Advisory Committee and the
Board also approved the Merger as being in the best interests of
the Unitholders and the Board recommended that the Unitholders
approve the Merger. The Merger Agreement was executed by RHM and
the Partnership at the end of the day on May 2, 1997.
Fairness of the Merger; Recommendation of the Special Committee
and Position of Century City and RHM
Recommendation of the Special Committee
As noted above, on May 2, 1997, the Special Committee
conveyed to the Board its determination that the Merger Agreement
was fair to and in the best interests of the Public Unitholders,
and recommended that the Board approve the Merger Agreement, and
that the Board recommend that the Unitholders of the Partnership
approve the Merger Agreement. Among other things, the Special
Committee considered the following factors in making that
determination and recommendation:
Fairness Opinion and Presentations of Houlihan Lokey
The Special Committee placed significant weight on the
Houlihan Lokey Opinion, which concluded that the consideration to
be received by Public Unitholders in connection with the Merger
is fair, from a financial point of view, to such holders. The
Special Committee also placed significant weight on the related
written and oral presentations made by Houlihan Lokey to the
Special Committee in connection with its consideration of the
Proposal and the Revised Proposal. In fact, the consideration to
be received in the Merger by the Public Unitholders holding Class
A Units is above the relevant range of a fair price per Class A
Unit of $l.75 to $2.84, as determined by Houlihan Lokey. The
Houlihan Lokey Opinion was received on May 2, 1997, prior to the
execution of the Merger Agreement. A copy of the Houlihan Lokey
Opinion is attached to this Proxy Statement as Annex B and the
Public Unitholders are urged to read the Houlihan Lokey Opinion
in its entirety. See "-- Opinion of Financial Advisor."
The Special Committee reviewed the methodologies used by
Houlihan Lokey in rendering the Houlihan Lokey Opinion and in
valuing the Partnership, including a discounted cash flow
approach, a net asset value approach, and a market comparison
approach involving public companies that were considered to be
comparable to the Partnership. See "-- Discounted Cash Flow
Value," "-- Net Asset Value," and "-- Market Comparison Value"
below. In addition, the Special Committee reviewed each
substantive factor considered by Houlihan Lokey in rendering its
opinion, including, among others, the prior trading history of
the Partnership's Class A Units, the historical financial
condition and performance of the Partnership, the projected
financial expectations of the
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Partnership, and the performance and condition of public
companies and securities which are comparable to the Partnership
and its securities.
Arthur Andersen Appraisals
The Special Committee reviewed the Appraisals of each of
the Partnership's hotel properties. Appraisals of each of the
Properties were an annual requirement in connection with a loan
to the Partnership by Hongkong and Shanghai Bank and the
Partnership's previous lender, and are also used to calculate the
administration fee of the General Partner as set forth in the
Partnership Agreement. The Special Committee believed that these
uses indicated that the Appraisals were not biased to favor any
party. The Appraisals preliminarily showed an aggregate market
value of $87.3 million for the Properties, which value was
finally determined by Arthur Andersen to be $86.8 million. For
purposes of its negotiations, the Special Committee added
$500,000 to the Partnership's Pine Lake Trout Club property in
order to disregard a last-minute reduction in the appraised value
of such property by Arthur Andersen. The Special Committee
members also visited each of the Properties to gain additional
comfort that the Appraisals were reasonable. The Appraisals were
used primarily in connection with Houlihan Lokey's asset value
liquidation approach and in several of the Special Committee's
models prepared for negotiating purposes only. The Appraisals
were determined by the Special Committee to be recent, prepared
by a reputable real estate appraiser, and prepared in accordance
with procedures deemed by the Special Committee to be reasonable
for purposes of the Special Committee's deliberations.
PKF Report
The Special Committee concluded that while the Appraisals
were conducted appropriately for use by the Special Committee in
its deliberations, they did not take into account any potential
increase in market value of the Properties associated with any
sale of the Properties as a portfolio, rather than individually.
Consequently, the Special Committee retained PKF to perform such
an analysis. The PKF Report concluded that the market value of
the Partnership's resort properties was not any higher assuming
they were to be sold as a portfolio rather than individually. PKF
stated that to warrant such a premium, the portfolio must offer
some type of synergistic cost savings or revenue enhancement, and
PKF concluded that neither of these attributes are identifiable
with the Partnership's portfolio of Properties.
Class B Unit Conversion
The Special Committee reviewed the provisions in the
Partnership Agreement mandating the Class B Unit Conversion and
descriptions of the Class B Unit Conversion in the Partnership's
prospectus for its initial public offering in 1987. The Special
Committee also asked its legal counsel to analyze the likely
effects of the Class B Unit Conversion beginning in 1997. The
Special Committee then considered the significant dilution of
ownership that would be suffered by the Public Unitholders
holding Class A Units due to the Class B Unit Conversion, and the
substantial transfer of capital account balances away from these
Public Unitholders as a result of the Class B Unit Conversion.
The effects of the Class B Unit Conversion were also taken into
account in the Houlihan Lokey Opinion. See "-- Opinion of
Financial Advisor."
Discounted Cash Flow Value
In making its recommendation to the Board, the Special
Committee considered the value of the Partnership assuming a
continuation of the Partnership's business as presently
conducted, and with the existing ownership structure. The Special
Committee reviewed the discounted cash flow analysis conducted by
Houlihan Lokey. See "Opinion of Financial Advisor -- Discounted
Cash Flow Value Analysis."
Net Asset Value
The Special Committee also gave consideration to the net
asset value of the Partnership, which is a liquidation analysis.
The Special Committee reviewed the net asset value analysis
conducted by Houlihan Lokey. See "Opinion of Financial Advisor --
Net Asset Value Analysis."
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Market Comparison Value
The Special Committee also reviewed and considered Houlihan
Lokey's market comparison analysis. See "Opinion of Financial Advisor
- -- Market Comparison Value Analysis."
Absence of Potential Alternative Transactions
In light of Regal Holdings' ownership of approximately
71.0% of the outstanding Class A Units, and approximately 93.6%
of the outstanding Class B Units (and voting control over 100% of
the Class B Units), and in light of RHM's stated position to the
Special Committee that it is not interested in considering
alternative transactions such as the potential sale of part or
all of the Partnership's assets or securities to a third party,
the Special Committee concluded that pursuing such alternative
transactions was not justified. Notwithstanding this conclusion,
the Special Committee did review the history of efforts by the
Partnership to sell certain of its Properties, and the history of
offers by third parties to purchase the Properties, and concluded
that none of those offers indicated that an alternative
transaction, such as a sale of part or all of the Properties to a
third party, would result in a greater valuation of the
Partnership and the Units than that provided by the Merger. As
described below in "-- Comparison with Status Quo," the Special
Committee did consider the alternative of rejecting the Merger,
and continuing the Partnership's business with the current
ownership structure, and concluded that the Merger was
significantly more desirable than that alternative.
Comparison with Status Quo
The Special Committee considered the alternative of
rejecting the Merger, and continuing the Partnership's business
with the current ownership structure. First, the Special
Committee considered the significant dilution of ownership that
would be suffered by the Public Unitholders in the Class B Unit
Conversion, and the substantial shift of capital accounts away
from the Public Unitholders that the Class B Unit Conversion
would likely trigger. The Special Committee then noted the thinly
traded nature of the Class A Units. The Special Committee also
noted that the Partnership is slated under the Internal Revenue
Code to be taxed as a corporation beginning in 1998. Moreover,
the Special Committee reviewed a number of factors related to the
Partnership's business, including: (1) the need for significant
capital expenditures at each of the Properties, as confirmed by
the Special Committee in site visits to each of the Properties;
(2) the projected future financial results of the Partnership;
(3) the risks involved in the hospitality industry generally,
including the risk of a significant downturn in the economy; (4)
the risks involving the Partnership's specific properties and
markets, including the risk of increased competition from new
hotels, including those currently being constructed by Disney in
Orlando, Florida and new resorts being constructed in Scottsdale,
Arizona; and (5) the cost of maintaining the Partnership as a
public partnership.
In summary, the Special Committee concluded that
continuation of the Partnership's business with the current
ownership structure poses significant risks and uncertainties to
the Public Unitholders, and that the price to be received by the
Public Unitholders in the Merger reflects an appropriate premium
to market that makes the Merger an attractive alternative at this
time.
Recent Market Prices
The Special Committee noted that the $3.10 to be received
for each Class A Unit held by a Public Unitholder in the Merger
represents a 106.7% premium over the $1.43 20-day moving average
closing price for the Class A Units on December 17, 1996 (the
business day immediately preceding the announcement of the
Proposal), and a 40.3% premium over the $2.21 20-day moving
average closing price for the Class A Units on May 2, 1997 (the
business day immediately preceding the announcement of the
Revised Proposal).
Book Value
The Special Committee noted the Partnership's December 31,
1996 book value of $2.53 per Class A Unit, based upon the Class A
Unitholders' capital at that date, but believed that such amount
was not representative of a
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fair price for the Class A Units because of the nature of the
Partnership's business and the potential dilutive effect of the
Class B Unit Conversion.
Allegations of Breach of Fiduciary Duty
The Special Committee and its legal counsel investigated
the 13D Group Allegations to determine if they had any potential
value to the Partnership that should be taken into account in
connection with the valuation analysis described above. Following
an investigation by the Special Committee and its legal counsel,
the Special Committee found no evidence indicating that there was
any basis for a successful claim against the General Partner that
might result in any damages being recovered by the Partnership or
the Unitholders, and consequently attributed no value to these
potential claims in connection with its valuation analysis.
Arm's Length Negotiations
The terms of the Merger Agreement, including the price to
be paid for the Units held by Public Unitholders, were determined
through arm's length negotiations between RHM and the Special
Committee, with the assistance of Houlihan Lokey and the Special
Committee's legal counsel.
Appraisal Rights
The Special Committee recognized that the Public
Unitholders will not have appraisal rights under the Merger
Agreement. Appraisal rights with respect to the Merger are not
mandated by the Partnership Agreement or by applicable Delaware
law. Nevertheless, the Special Committee initially requested that
RHM agree to provide appraisal rights in connection with the
Merger, which request RHM declined. The Special Committee
concluded that the benefits to the Public Unitholders of the
Merger were sufficiently great to mandate recommendation of the
Merger, notwithstanding the lack of appraisal rights.
Advantages to RHM
The Special Committee recognized that the Merger would be
advantageous to RHM and its affiliates, which would collectively
own all of the Units following the Merger. The Partnership
probably will be able to achieve significant benefits as a result
of the Merger, including elimination of the need to recognize
fiduciary obligations to the Public Unitholders and elimination
of the costs of maintaining the Partnership's status as a
reporting company under the Exchange Act. The Merger may also
have the effect of preventing, following the effectiveness of the
Merger, any Public Unitholders from having standing to sue the
Partnership for damages based on a derivative claim of a breach
of fiduciary duties. In addition, the Merger avoids the
administrative and accounting costs associated with the Class B
Unit Conversion, as well as recognizing the tax consequences of
the Class B Unit Conversion. The Merger will also simplify the
Partnership's management structure, make it easier to finance and
refranchise hotels in the Partnership's portfolio, make it more
likely that RHM or one of its affiliates will contribute
additional capital to the Partnership to make the necessary
capital improvements at the Properties and increase the potential
benefits of consolidating the Partnership's hotel properties with
other properties of RHM and its affiliates.
Adequacy of Financing
The Special Committee noted that in the Merger Agreement,
RHM represents and warrants with respect to the adequacy of its
financing, and the Special Committee concluded that the Merger
would be adequately financed with little risk that the Merger
would not be consummated by RHM in an expeditious manner.
Merger Agreement
The Special Committee considered the specific terms of the
final Merger Agreement, including changes that had been made in
response to the Special Committee's requests during the
negotiations.
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Unchanged Operations
The Special Committee noted RHM's stated intent that the
Partnership's operations will continue essentially unchanged
after the Merger, with no material adverse impact on employees,
local communities where activities are conducted, or others who
deal with the Partnership and its hotel properties. Applicable
Delaware law permits the directors to consider such other
constituencies in addition to the Unitholders, although the
Special Committee considered the Public Unitholders' interest as
paramount. The Special Committee also was aware that RHM could
reconsider these matters after completion of the Merger.
Other
The Special Committee also reviewed factors including
economies of scale, the structure and tax aspects of the Merger,
financial ratios of the Partnership compared to its competitors,
the impact of the Merger on the Partnership's loan documents and
other contractual obligations, the history of past distributions
to the Class A Unitholders and the likelihood of future
distributions to the Class A Unitholders, the cost of termination
of management contracts and other liquidation costs, the aging
nature of the Properties, and the timing and likelihood of
consummating the Merger.
Procedural Fairness
The Special Committee noted that information was provided
on a continual basis to the Special Committee, and that both
members of the Special Committee played an active role in
negotiations and in the decision-making process. Both members of
the Special Committee are knowledgeable and experienced in the
hospitality industry, and the Special Committee was aware of its
fiduciary responsibilities at all times during the process. The
Special Committee worked closely with its legal counsel and with
Houlihan Lokey in its negotiations.
The Special Committee noted that the Merger has not been
structured so that approval of at least a majority of the Units
held by Public Unitholders is required to approve the Merger. The
Special Committee received advice that it was not legally
necessary to include a majority-of-the-minority voting
requirement, and noted that comparable transactions involving
mergers with controlling equity owners routinely take place
without such voting provisions.
In view of the wide variety of factors considered in its
evaluation of the Merger, the Special Committee did not find it
practicable to, and did not, quantify or otherwise assign precise
relative weights to the individual items described above. Among
the most important factors considered by the Special Committee
were the attractive price negotiated in the Merger, the dilutive
and capital account shifting effects of the impending Class B
Unit Conversion mandated by the Partnership Agreement, the risks
of continuing the Partnership's business with the current
ownership structure, the fact that there were no feasible
alternative transactions, and the Houlihan Lokey Opinion and
presentations.
Position of Century City and RHM With Respect to the Merger
Century City and RHM believe that the Merger is fair to the
Public Unitholders. Century City and RHM unanimously recommend
that holders of Class A Units vote "FOR" approval of the Merger
Agreement and the transactions contemplated thereby.
In reaching their determination to engage in the Merger and
in determining that the Merger is fair to the Public Unitholders,
Century City and RHM considered a number of factors, including
the following:
(i) the Houlihan Lokey Opinion that, as of May 2, 1997,
subject to the assumptions set forth therein, the Merger
Consideration of $3.10 in cash per Class A Unit and $20.00
in cash per Class B Unit to be received by the Public
Unitholders in the Merger is fair to the Public
Unitholders. The full text of the Houlihan Lokey Opinion is
attached as Annex B to this Proxy Statement. Public
Unitholders are urged to, and should, read the Houlihan
Lokey Opinion carefully and in its entirety in conjunction
with this
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Proxy Statement for the assumptions made, the matters considered
and the limits of the review of Houlihan Lokey. See "-- Opinion
of Financial Advisor;"
(ii) in the case of holders of Class A Units, the premium
represented by the Merger Consideration over the trading
price of Class A Units on December 17, 1996 (the business
day immediately preceding the announcement of the Proposal)
and May 2, 1997 (the business day immediately preceding the
announcement of the Revised Proposal).
(iii) the recommendation of the Special Committee and the
determination by Houlihan Lokey (from a financial point of
view) that the Merger Consideration is fair to Public
Unitholders;
(iv) the elimination of the costs to the Partnership of
being a publicly owned entity, including (A) the
distractions to and time demands on management as a
consequence of operating a public entity, (B) the
Partnership's reporting obligations as a reporting entity
under the Exchange Act and the costs and potential
liabilities associated therewith, which are not justified
by the benefits to the Partnership or its Unitholders, and
(C) the fact that if the Partnership remains a
publicly-traded partnership it will become taxable as a
corporation under the Internal Revenue Code in the
beginning of 1998;
(v) the conflicts of interest that exist between RHM and
its affiliates and the Partnership, and the desire to
achieve greater flexibility in affiliated transactions
without the conflicts of interest inherent therein;
(vi) the historically low level of trading in the Class A
Units and the lack of a trading market for the Class B
Units, the limited liquidity in the Units as a result
thereof, and the opportunity the Merger offers the Public
Unitholders to liquidate their holdings in the Partnership;
(vii) the Partnership's existing equity capital structure;
(viii) the all-cash nature of the Merger Consideration;
(ix) the increasing competition in the industry;
(x) the Partnership's possible long-term need to make
significant capital expenditures in connection with a
repositioning of the Properties and the likely difficulty
to satisfy these requirements under the Partnership's
current structure;
(xi) the possible alternatives to the Merger, including
the prospects of continuing to operate as an independent
entity and the possible values to the Unitholders of such
alternatives;
(xii) the lack of cash distributions to Unitholders since
1990, and the possibility that Unitholders may not receive
any distributions of operating cash flow in the future;
(xiii) the opportunity for Unitholders to sell Units
without the cost and commissions normally associated with a
sale; and
(xiv) the terms and conditions of the Merger Agreement,
taken as a whole, and the fact that such terms had been
established through negotiations with an independent
Special Committee, advised by an independent financial
advisor and legal counsel.
In view of the wide variety of factors considered in
connection with its evaluation of the Merger, Century City and
RHM had not found it practicable to, and did not, quantify or
otherwise attempt to assign relative weights to the specific
factors they considered in reaching their determinations,
although Century City and RHM did place special emphasis on the
fairness opinion of Houlihan Lokey. Century City and RHM believe
that the factors described above are favorable to their
determination of fairness.
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As of March 31, 1997, the book value of the Partnership was
$10,949,000, which yields a book value for the Class A Units of
approximately $13,436,000 in the aggregate or $2.52 per Class A
Unit and a book value for the Class B Units of $(2,733,000) in
the aggregate or a deficit of $2.88 per Class B Unit. Century
City and RHM do not believe that the current net book value per
Unit is an accurate indication of value due to its historical
nature. Furthermore, Century City and RHM do not consider
liquidation value to be relevant to their determination of
fairness because the Partnership intends to continue to operate
the business currently conducted by the Partnership as a going
concern. Regal Holdings and its affiliates, which collectively
control approximately 71.0% of the Class A Units and
approximately 93.6% (with 100% voting control) of the Class B
Units (and thus have the ability to determine each matter
submitted to a vote of limited partners), have advised the
Partnership that they intend to vote the Class A Units controlled
by them against any proposal to liquidate the assets of the
Partnership made in the foreseeable future. Therefore, Century
City and RHM evaluated the Partnership on a going concern basis,
although Century City and RHM believed that estimates of future
net revenue, information concerning historical operations,
current operations and the future prospects of the investment
properties held by the Partnership and general economic and
market conditions, which were given considerable weight by them
in their determination of fairness, would also be taken into
account in determining liquidation value. A liquidation of the
Partnership requires the approval of the affirmative vote of the
holders of a majority of the Class A Units and of the aggregate
voting power of all of the outstanding Units.
Opinion of Financial Advisor
Houlihan Lokey delivered a written opinion to the Special
Committee on May 2, 1997, to the effect that, as of such date,
and based upon the assumptions made, general procedures followed,
factors considered and limitations on the review undertaken as
set forth in such opinion, the Merger Consideration of $3.10 in
cash per Class A Unit and $20.00 in cash per Class B Unit to be
received by the Public Unitholders pursuant to the Merger
Agreement is fair to such Public Unitholders from a financial
point of view.
THE FULL TEXT OF THE HOULIHAN LOKEY OPINION IS ATTACHED AS
ANNEX B TO THIS PROXY STATEMENT. PUBLIC UNITHOLDERS ARE URGED TO,
AND SHOULD, READ THE HOULIHAN LOKEY OPINION CAREFULLY AND IN ITS
ENTIRETY IN CONJUNCTION WITH THIS PROXY STATEMENT FOR THE
ASSUMPTIONS MADE, THE MATTERS CONSIDERED AND THE LIMITS OF THE
REVIEW OF HOULIHAN LOKEY.
Pursuant to an engagement letter dated February 19, 1997
between the General Partner and the Partnership, Houlihan Lokey
was engaged to act as financial advisor to the Special Committee
to render an opinion as to the fairness, from a financial point
of view, to the Public Unitholders of the Merger Consideration to
be received by such Unitholders in connection with the Merger.
Houlihan Lokey is a nationally recognized investment banking firm
that is continually engaged in providing financial advisory
services in connection with mergers and acquisitions, leveraged
buyouts, business valuations for a variety of regulatory and
planning purposes, recapitalizations, financial restructurings,
and private placements of debt and equity securities. Houlihan
Lokey has no material prior relationship with the Partnership,
the General Partner or their respective affiliates.
As compensation to Houlihan Lokey for its services, the
Partnership has agreed to pay Houlihan Lokey a fee of $140,000
plus reasonable and accountable out-of-pocket expenses not to
exceed $30,000 in the aggregate without prior approval of the
Special Committee. No portion of Houlihan Lokey's fees is
contingent upon the successful completion of the Merger. The
General Partner has also agreed to indemnify Houlihan Lokey and
related persons against certain liabilities arising out of the
engagement of Houlihan Lokey, including liabilities under Federal
securities laws, and to reimburse Houlihan Lokey for certain
expenses.
The full text of the Houlihan Lokey Opinion, which sets
forth the assumptions made, general procedures followed, factors
considered and limitations on the review undertaken by Houlihan
Lokey in rendering its Opinion, is attached as Appendix B to this
Proxy Statement and is incorporated herein by reference. The
Houlihan Lokey Opinion is directed only to the fairness from a
financial point of view of the Merger Consideration to be
received by the Public Unitholders pursuant to the Merger
Agreement and does not constitute a recommendation to any Public
17
<PAGE>
Unitholder as to how such Public Unitholder should vote with
respect to the Merger Agreement and the transactions contemplated
thereby. The summary of the Houlihan Lokey Opinion set forth in
this Proxy Statement is qualified in its entirety by reference to
the full text of the Houlihan Lokey Opinion. The Public
Unitholders are urged to, and should, read the Houlihan Lokey
Opinion in its entirety.
In connection with the Houlihan Lokey Opinion, Houlihan
Lokey made such reviews, analyses and inquiries as it deemed
necessary and appropriate under the circumstances. Among other
things, Houlihan Lokey: (i) reviewed the Partnership's annual
reports to Unitholders on Form 10-K for each of the five fiscal
years ending December 31, 1996, which the General Partner's
management identified as being the most current audited financial
statements available; (ii) reviewed a copy of the Partnerships'
Class A Depository Units Prospectus dated July 23, 1987; (iii)
reviewed a copy of the Partnership's Offer Letter from RHM dated
December 16, 1996; (iv) reviewed a copy of the Merger Agreement;
(v) reviewed a calculation of the Partnership's Cumulative
Minimum Annual Distributions (as defined in the Partnership
Agreement) as of December 31, 1996; (vi) reviewed a March 20,
1997, letter and the Appraisals upon which Houlihan Lokey relied
in its analysis, which were prepared by Arthur Andersen; (vii)
reviewed the April 29, 1997 PKF Report; (viii) reviewed various
industry reports for the hotel and resort industries; (ix) met
with certain members of the senior management of the General
Partner to discuss the operations, financial condition, future
prospects and projected operations and performance of the
Partnership and met with counsel to the Special Committee to
discuss certain matters; (x) conducted various telephone
conversations and attended Special Committee meetings on February
20, March 24-25, and March 27, 1997; (xi) reviewed forecasts and
projections prepared by the General Partner's management with
respect to the Partnership for the three years ended December 31,
1997 through 1999; (xii) reviewed the historical market prices
and trading volume for the Partnership's publicly traded
securities; (xiii) reviewed certain other publicly available
financial data for certain companies and securities that was
deemed comparable to the Partnership and its securities, and
publicly available prices and premiums paid in other transactions
that were considered similar to the Merger; and (xiv) conducted
such other studies, analyses and inquiries as Houlihan Lokey
deemed appropriate.
Houlihan Lokey used several methodologies to assess the
fairness of the Merger Consideration from a financial point of
view. In connection with the Houlihan Lokey Opinion, Houlihan
Lokey arrived at an estimate as to the enterprise value of the
Partnership and the value of the unaffiliated Units of the
Partnership. The enterprise value of the Partnership was
determined by utilizing a net asset value approach (the "Net
Asset Value Analysis"), a market comparison value approach (the
"Market Comparison Value Analysis"), and a discounted cash flow
value approach (the "Discounted Cash Flow Value Analysis"). After
the valuation of the Partnership was determined, an analysis of
the specific rights and privileges of the Class A and Class B
Units resulted in an estimate of value for the Class A and Class
B Units. This valuation analysis, along with a public trading
price value analysis (the "Public Trading Price Value Analysis"),
provided a basis of comparison to the Merger Consideration. The
following is a summary of the financial analyses utilized by
Houlihan Lokey, and does not purport to be a complete description
of the analyses performed by Houlihan Lokey.
Net Asset Value Analysis
One methodology was a Net Asset Value Analysis, in which
Houlihan Lokey performed an analysis of the value of the
Partnership's underlying assets and liabilities under a
sale/liquidation scenario. This approach allowed Houlihan Lokey
to determine the net equity value of the business by first
determining the value of the Partnership's assets and then
subtracting the value of the Partnership's liabilities.
The Partnership's primary assets include the six hotel and
resort Properties it owns and operates and various current
assets. The Partnership's primary liabilities include its
interest bearing debt and various current liabilities. The value
of the Properties was $86,760,000, as determined by the
Appraisals. PKF also performed an analysis of the six Properties
on a portfolio basis and determined there would be no material
difference in value upon a portfolio basis versus an individual
property basis. Furthermore, the Partnership had current assets
of approximately $6,500,000, interest bearing debt of $52,300,000
and current liabilities of approximately $7,200,000. The net
result of these asset and liabilities values was an equity value
of approximately $33,800,000.
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Since the Net Asset Value Analysis is predicated on a sale
of the Properties or liquidation of the business, various costs
associated with such sale or liquidation must be factored into
determining net equity value. These costs, which are incurred by
the Partnership pursuant to the Partnership Agreement, management
agreements and license/franchise agreements, include a fee
associated with cancellation of management in the amount of
approximately $5,800,000, a disposition fee in the amount of
approximately $900,000 and a license agreement termination fee of
approximately $500,000. Finally, the General Partner is entitled
to a net 1.99% of the equity value available for distribution or
approximately $500,000 under this scenario. The result of these
adjustments produces a net equity value available for limited
partners of approximately $26,200,000.
Market Comparison Value Analysis
An alternative methodology was a Market Comparison Value
Analysis, which considered the capitalization multiples for
certain income and cash flows of a peer group of companies. The
peer group of companies was based on an analysis of dozens of
publicly traded hotel companies. After a review of such hotel
companies, seven were determined to be the most representative
for comparative purposes. The comparable companies selected were
Amerihost Properties, Inc., CapStar Hotel Co., Equity Inns, Inc.,
Renaissance Hotel Group N.V., ShoLodge, Inc., Supertel
Hospitality, Inc., Winston Hotels, Inc., and Wyndham Hotel Corp.
Houlihan Lokey then applied a selected capitalization multiple to
the Partnership's representative income and cash flows to
determine an indication of the value of the Partnership. Such
selected capitalization multiples were based on a comparative
financial analysis of the Partnership and the peer group of
companies. In this analysis, the operational results of the
Partnership were compared to certain publicly available financial
and operating data of the comparable public companies. For each
of the comparable public companies, Houlihan Lokey analyzed,
among other things, market value, interest-bearing debt, cash
flow, and earnings before interest, taxes, depreciation and
amortization ("EBITDA"). On a latest twelve month basis, the
comparable public companies exhibited multiples of cash flow in
the range of 6.1 to 27.6, with a median of 12.3, and multiples of
EBITDA in the range of 6.6 to 16.0, with a median of 12.0.
Houlihan Lokey then made a determination of the relative
risks associated with the business of the Partnership versus
those of the comparable public companies, and made a conclusion
regarding the appropriate relative multiples for the operating
results of the Partnership. Because of the lack of truly
comparable companies due to the inherent differences between the
business and size of the Partnership and the business and size of
the comparable public companies, Houlihan Lokey believed it was
inappropriate to, and therefore did not, rely solely on the
quantitative results of the analysis, and accordingly made
professional judgments regarding the differences between the
Partnership and the comparable public companies that would impact
the appropriate multiples and discount rate and thus the value of
the Partnership. Such comparative analyses formed the basis for
Houlihan Lokey's selection of multiples for the Partnership,
which it determined to be 6.0 times representative cash flow and
8.0 times representative EBITDA.
In utilizing this valuation approach, Houlihan Lokey
multiplied the Partnership's latest twelve months cash flow of
approximately $4,800,000 times the selected cash flow multiple of
6.0 to arrive at an equity value of approximately $28,800,000.
Furthermore, Houlihan Lokey multiplied the Partnership's latest
twelve months EBITDA of approximately $10,000,000 times the
selected EBITDA multiple of 8.0 to arrive at an enterprise value
for the business of approximately $80,000,000. Since EBITDA
reflects a cash flow stream prior to debt service, interest
bearing debt must be subtracted from this approach to arrive at
an equity value. Consequently, $52,300,000 of debt is subtracted
from the total enterprise value of approximately $80,000,000 to
arrive at an equity value of approximately $27,700,000.
In contrast to the Net Asset Value Analysis, the Market
Comparison Value Analysis is not predicated upon a sale of the
Properties or liquidation of the business; consequently, the
various costs (e.g. license agreement termination fee, etc.)
discussed in the Net Asset Value Analysis are not subtracted from
the calculated equity value under the Market Comparison Value
Analysis. However, since RHM is proposing a transaction whereby
the Partnership will continue as a going concern but will be
taken private, certain cost savings associated with going private
can accrue to RHM. Based upon a discussion with management
regarding such potential cost savings, Houlihan Lokey determined
that approximately $3,000,000 of incremental value should be
added to the Market
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Comparison Value Analysis. This provides a range of equity values
of approximately $30,700,000 to $31,800,000. Houlihan Lokey then
subtracted the General Partner's net 1.99% ownership position, or
approximately $600,000, which resulted in a net equity value
available for limited partners in the range of approximately
$30,100,000 to $31,200,000.
Discounted Cash Flow Value Analysis
An additional methodology was a Discounted Cash Flow Value
Analysis, in which Houlihan Lokey analyzed the forecasted and
projected financial information provided by management of the
Partnership for the years 1997 through 1999. These forecasts and
projections were analyzed in light of historical results,
discussions with management and a review of general industry
trends. Houlihan Lokey determined an indicated value of the
Partnership based upon the net present value of the sum of the
discounted stream of projected cash flows and the discounted
projected terminal value of the Partnership based upon a range of
market-based, risk adjusted capitalization multiples. Discount
rates and market capitalization multiples were determined based
upon discount rates and market capitalization multiples for
comparable companies and the risk associated with achieving these
forecasts and projections. The Houlihan Lokey analysis used
discount rates ranging from 9.5% to 11.5% and terminal EBITDA
multiples of 6.0 to 8.0.
The Discounted Cash Flow Analysis resulted in an enterprise
value of the Partnership of approximately $78,000,000. Since the
forecasts and projections utilized represented cash flows prior
to debt service, interest bearing debt was subtracted from this
indication of total value to arrive at an equity value.
Subtracting the Partnership's $52,300,000 of debt resulted in an
equity value of approximately $25,700,000. Similar to the going
concern assumption with the Market Comparison Value Analysis, no
additional costs (e.g. license agreement termination fees) were
deducted in this approach, but the approximately $3,000,000 of
cost savings were added and the $600,000 of general partnership
interests (representing the General Partner's 1.99% interest)
were deducted to arrive at an equity value available for limited
partners in the amount of approximately $28,100,000.
The Net Asset Value, Market Comparison Value and Discounted
Cash Flow Value Analyses resulted in a range of net equity values
available for limited partners of approximately $26,200,000 to
$31,200,000. Houlihan Lokey then determined the fair market value
of Class A and Class B Units based upon the specific rights and
privileges of each security. This analysis considered the fair
market value of the Class A and Class B Units based upon, among
other things, a sale of the Partnership or its assets during the
Class B Unit Conversion period and thereafter, and a discounted
cash flow of the projected value to be received by the Class B
Units upon conversion.
Pursuant to the Partnership Agreement, the Class B Units
are entitled to convert into Class A Units on a specific schedule
over the next four years based upon a conversion value of $20.00
of Class A Units at the then market price for Class A Units.
Consequently, the 950,000 outstanding Class B Units can be valued
based on a discounted cash flow analysis reflecting the projected
stream of converted Class B Units into $20.00 of Class A Unit
value over the next four years. These projected conversion values
were discounted at a risk adjusted rate, reflecting the
short-term nature of the conversion time period and limited risk
associated with receiving the $20.00 of Class A Unit value. This
analysis resulted in an aggregate value of the Class B Units in
the amount of just over $17,000,000, or $17.93 per Class B Unit
based on 950,000 Class B Units outstanding, and assumes that all
Class B Units would ultimately convert into Class A Units.
Subtracting the aggregate Class B Unit value of
approximately $17,000,000 from the total net equity value of
approximately $26,200,000 to $31,200,000 resulted in a Class A
Unit value of approximately $9,200,000 to $14,200,000, or $1.72
to $2.66 per Class A Unit, based on 5,340,214 Class A Units
outstanding.
Furthermore, the value of the Class B Units was also
analyzed assuming a hypothetical sale of the Partnership (at
various points in time) prior to the Class B Unit Conversion of
all the Class B Units into Class A Units. Under this analysis,
the Class B Units which did not convert into Class A Units prior
to the sale of the Partnership have nominal value due to the
level of the unpaid Cumulative Minimum Annual Distributions, which upon
sale or liquidation must be paid to Class A Unitholders,
including those who previously held Class B Units and converted
into Class A Units. As of December 31, 1996, the unpaid Cumulative
Minimum Annual Distributions owed to
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the Class A Unitholders at sale or liquidation of the Partnership
was in excess of $68,000,000. This analysis produced a value for
the Class A Units in the range of approximately $1.99 to $2.84
per Class A Unit.
In determining the relevant range for the Class A Units,
Houlihan Lokey considered a number of factors, including as
mentioned above the full and/or partial conversion of the Class B
Units pursuant to the Class B Unit Conversion as well as the
impact of the accrued Cumulative Minimum Annual Distributions.
The concluded relevant range for the Class A Units was $1.72 to
$2.84 per Class A Unit.
Public Trading Price Value Analysis
Finally, a Public Trading Price Value Analysis of the
Partnership's Class A Units was considered in Houlihan Lokey's
analysis. The Merger Consideration of $3.10 per Class A Unit and
$20.00 per Class B Unit agreed upon in the Merger Agreement
superseded a December 18, 1996 offer of $2.35 per Class A Unit
and $16.80 per Class B Unit. The initial pre-announcement Class A
Unit price of the Partnership was approximately $1.43 per Class A
Unit, based upon a 20-day moving average as of December 17, 1996,
and the post-announcement Class A Unit price of the Partnership
was approximately $1.93 per Class A Unit, based upon a 20-day
moving average as of January 21, 1997. Prior to the announcement
of the Merger Consideration agreed upon in the Merger Agreement,
the Class A Unit price of the Partnership was approximately $2.21
per Class A Unit, based upon a 20-day moving average as of May 2,
1997. The Partnership is less actively traded than most of the
comparable public companies, as indicated by an average daily
trading volume of only 1,000 Class A Units for the month prior to
the initial announcement of the Merger, compared to a median of
18,210 shares for the comparable public companies.
The aforementioned analyses required studies of the overall
market, economic and industry conditions in which the Partnership
operates, and the Partnership's operating results and
distributions to the Class A and Class B Unitholders. Research
into, and consideration of, these conditions were incorporated
into the analyses.
In preparing the Houlihan Lokey Opinion, Houlihan Lokey
relied and assumed, without independent verification, upon the
accuracy and completeness of all the financial and other
information (including financial forecasts and projections)
supplied or otherwise made available to it by the General Partner
and that such information was reasonably prepared and reflected
the best currently available estimates of the future financial
results and conditions of the Partnership and the Properties and
that there had been no material change in the assets, financial
condition, business or prospects of the Partnership and the
Properties since the date of the most recent financial statements
provided to Houlihan Lokey. Houlihan Lokey did not make an
independent appraisal of any of the Properties. The Houlihan
Lokey Opinion is necessarily based on business, economic, market
and other conditions as they existed and could be evaluated by
them at the date of the Houlihan Lokey Opinion.
Houlihan Lokey did not and was not engaged or requested to
initiate any discussions with third parties or to solicit any
third-party indications with respect to a possible acquisition of
the Partnership or all or a portion of the Class A and Class B
Units. Furthermore, Houlihan Lokey did not and was not requested
to negotiate the terms of the Merger Agreement or to advise the
General Partner or the Partnership with respect to alternatives
with respect to the Merger, and Houlihan Lokey did not make any
recommendations as to the form or amount of consideration to be
paid. The terms of the Merger Agreement, including the form and
amount of consideration, were determined on the basis of
arm's-length negotiations between the Special Committee and RHM.
In the Houlihan Lokey Opinion, Houlihan Lokey made its
determination as to the fairness, from a financial point of view,
of the Merger Consideration on the basis of the analyses
described above. No restrictions or limitations were imposed by
the General Partner upon Houlihan Lokey with respect to the
investigation made or the procedures followed in rendering its
opinion. The Houlihan Lokey Opinion is not intended to be and
does not constitute a recommendation to any Public Unitholder as
to whether to accept the Merger Consideration to be received by
such Public Unitholder in connection with the Merger Agreement.
Houlihan Lokey has advised the General Partner and the
Partnership that it used several methodologies to assess the
fairness, from a financial point of view, of the Merger
Consideration. In each of the analyses, the
21
<PAGE>
estimated value of an unaffiliated Unit was lower than the Merger
Consideration, leading Houlihan Lokey to conclude that the Merger
Consideration is fair to the Public Unitholders from a financial
point of view.
The summary set forth above describes the material points
of more detailed analyses performed by Houlihan Lokey in arriving
at its fairness opinion. The preparation of a fairness opinion is
a complex analytical process involving various determinations as
to the most appropriate and relevant methods of financial
analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary
description. In arriving at its opinion, Houlihan Lokey has
advised the General Partner and the Partnership that it did not
attribute any particular weight to any analysis or factor
considered by it, but rather made the qualitative judgments as to
the significance and relevance of each analysis and factor.
Accordingly, Houlihan Lokey believes that its analyses and the
summary set forth herein must be considered as a whole and that
selecting portions of its analyses, without considering all
analyses, or portions of this summary, without considering all
factors and analyses, could create an incomplete view of the
processes underlying the analyses undertaken by it in connection
with the Houlihan Lokey Opinion. Houlihan Lokey has advised the
Special Committee, the General Partner and the Partnership that
in its analyses, Houlihan Lokey made numerous assumptions with
respect to the General Partner, the Partnership, industry
performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the
control of the General Partner and the Partnership. The estimates
contained in such analyses are not necessarily indicative of
actual values or predictive of future results or values, which
may be more or less favorable than suggested by such analyses.
Additionally, analyses relating to the value of businesses or
securities are not appraisals. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty.
Appraisals
Arthur Andersen was engaged by the Partnership to
appraise the real estate portfolio of the Partnership and has
delivered a written summary of its analysis, based upon the
review, analysis, scope and limitations described therein, as to
the fair market value of the Partnership's portfolio as of
January 1, 1997. The Partnership selected Arthur Andersen to
provide the appraisal because of its experience and reputation in
connection with real estate assets, and particularly because of
its experience in appraising the Properties on behalf of the
Partnership's bank lender. The Appraisals, which contain a
description of the assumptions and qualifications made, matters
considered and limitations on the review and analysis, were filed
with the Commission as an exhibit to the Schedule 13E-3 and are
incorporated herein by reference. Certain of the material
assumptions, qualifications and limitations to the Appraisals are
described below.
Summary of Methodologies. At the request of the
Partnership, Arthur Andersen evaluated the Partnership's
portfolio of real estate utilizing the income approach and the
sale comparison approach to valuation. Appraisers typically use
up to three approaches in valuing real property: (i) the cost
approach, (ii) the income approach and (iii) the sales comparison
approach. The type and age of a property, market conditions and
the quantity and quality of data affect the applicability of each
approach in a specific appraisal situation. The value estimated
by the cost approach incorporates separate estimates for the
value of the unimproved site and the replacement cost of
improvements, less observed physical wear and tear and functional
or economic obsolescence. The income approach estimates a
property's capacity to produce income through an analysis of the
rental market, operating expenses and net income. Net income or
free cash flow is used to obtain a reference value through either
a direct capitalization or a discounted cash flow analysis, or a
combination of these two methods. The sales comparison approach
involves a comparative analysis of the subject property with
other similar properties that have sold recently or that are
currently offered for sale in the market. Arthur Andersen relied
principally on the income approach because of the adequacy of
available reliable data and the view of Arthur Andersen that this
approach was the prevalent method relied upon by market
participants. The sales comparison approach was also used, but
primarily as a secondary indicator of the reliability of the
results obtained through the income approach. Arthur Andersen did
not rely upon the cost approach at all, based on Arthur
Andersen's view that this method would be less reliable given the
significant depreciation and external obsolescence present at the
subject Properties.
22
<PAGE>
While the appraisals were prepared for each Partnership's
entire real estate portfolio, Arthur Andersen analyzed the
individual Properties in the real estate portfolio of each
Partnership by, among other things, (i) making an on-site
inspection of each property, (ii) interviewing on-site management
of each property, (iii) evaluating general economic conditions of
the market area in which each property was situated in order to
assess future demand, (iv) identifying, visiting and interviewing
management of competitive hospitality properties for each of the
Properties, (v) interviewing zoning and building officials, local
planners, highway department officials, property assessors and
other persons with respect to each property, (vi) preparing
supply and demand analyses with respect to each property, (vii)
reviewing statistics with respect to sales and transfers of
properties deemed comparable to the Properties and (viii)
evaluating the projected cash flow and income of each property.
In its interviews with management, Arthur Andersen obtained and
evaluated information relating to the condition of each property,
including any deferred maintenance, capital budgets, status of
ongoing or newly planned property additions, reconfigurations,
improvements and other factors affecting the physical condition
of the property improvements.
Income Approach. Arthur Andersen determined a reference
value of the Properties based upon their estimated income,
expenses and free cash flow for a ten year period ending 2006,
and discounting such cash flows and an assumed terminal value of
the Properties at discount rates of 12% to 15%. The discount
rates were based on Arthur Andersen's review and judgment as to
long-term investor return requirements for investments in
hospitality and similar properties. Terminal capitalization rates
of 10% to 12.5% were used by Arthur Andersen based on Arthur
Andersen's review of sales of hospitality properties. Where
appropriate, the capitalization rate used for an individual
property was adjusted to reflect valuation factors unique to the
property, such as age, overall quality and recent improvements.
Sales Comparison Approach. Arthur Andersen compiled
transaction data involving properties similar in type to the
Properties by interviewing sources in local markets to identify
recent sales of hospitality properties, reviewing publicly
available information on acquisitions of self storage properties,
reviewing information provided by management, and contacting
industry sources. Using this data, Arthur Andersen performed a
comparable sales analysis based upon price per room, which was
then adjusted to reflect differences between the Properties and
the comparable properties.
Conclusions. Based on the valuation methodologies described
above, Arthur Andersen assigned a value to the portfolio of real
property assets of each Partnership. The following table sets
forth the final portfolio value conclusion of Arthur Andersen
with respect to each of the Partnerships.
Property Location Rooms Appraised Value
Aurora Inn Aurora, OH 69 $4,560,000
Aurora Inn (Pine Chagrin Falls, OH 8 cabins 2,600,000
Lake Trout Club)
Clarion Fourwinds Bloomington, IN 126 8,030,000
Resort and Marina
Regal McCormick Scottsdale, AZ 125 13,770,000
Ranch
Sheraton Inn Cheektowaga, NY 293 14,000,000
Buffalo Airport
Sheraton Inn Kissimmee, FL 651 28,000,000
Lakeside
Regal University Durham, NC 322 15,800,000
Hotel
==========
Total $86,760,000
23
<PAGE>
Assumptions, Limitations and Qualifications of Portfolio
Appraisals. The Appraisals reflect Arthur Andersen's valuation of
the Properties of the Partnership as of January 1, 1997, in the
context of the information available on such date as well as the
operating information available as of March 31, 1997. Events
occurring after January 1, 1997, and before the closing of the
Merger could affect the Properties or assumptions used in
preparing the Appraisals. Arthur Andersen has no obligation to
update the Appraisals. In connection with preparing the
Appraisals, Arthur Andersen was not engaged to, and did not,
prepare any written report or compendium of its analysis for
internal or external use beyond the Appraisals.
Compensation and Material Relationships. The Partnership
paid Arthur Andersen a fee of $10,000 in connection with the
preparation of the Appraisals. In addition, Arthur Andersen is
entitled to reimbursement for reasonable travel and out-of-pocket
expenses incurred in making site visits and preparing the
Appraisals, and is entitled to indemnification against certain
liabilities, including certain liabilities under federal
securities laws. Such fees were negotiated between the
Partnership and Arthur Andersen and payment thereof is not
dependent upon completion of the Merger. As noted above, Arthur
Andersen has in the past rendered appraisals of the Properties on
behalf of the Partnership's bank lender.
PKF Report
PKF was retained by the Special Committee to determine if
there was any additional value to the Partnership as a result of
holding a portfolio of properties that might be purchased as a
whole. In preparing the PKF Report, PKF reviewed the Appraisals
and interviewed representatives of various enterprises involved
in the acquisition of portfolios of properties. The PKF Report
concluded that a typical "willing and knowledgeable investor"
would not pay a premium over the sum of the individual property
values for this group of hotels. The PKF Report was filed with
the Commission as an exhibit to the Schedule 13E-3 and is
incorporated herein by reference.
Certain Projections of the Partnership
The Partnership provided RHM, the Special Committee and
Houlihan Lokey with certain projected financial data for the
years 1997 through 1999, inclusive. The projected financial data
were not prepared with a view to public disclosure or compliance
with published guidelines of the Commission or the guidelines
established by the American Institute of Certified Public
Accountants regarding projections and are included in this Proxy
Statement only because they are available to Houlihan Lokey, the
Partnership, the General Partner, RHM and its affiliates. Neither
Houlihan Lokey's, RHM's, Regal's, the General Partner's nor the
Partnership's independent auditors, KPMG Peat Marwick LLP,
examined, compiled or applied any procedures with respect to the
projected financial data and express no opinion or any kind of
assurance thereon. Neither Houlihan Lokey, RHM, the Partnership,
the General Partner, Regal nor any of their respective affiliates
or advisors assumes any responsibility for the validity,
reasonableness, accuracy or completeness of the projected
financial data. While presented with numerical specificity, the
projected financial data are based on a variety of assumptions
relating to the business of the Partnership (some of which are
listed below) that, although considered appropriate by the
Partnership at one time, may not be realized. Moreover, the
projected financial data, and the assumptions upon which they are
based, are subject to significant uncertainties and
contingencies, many of which are beyond the control of the
Partnership. Consequently, the projected financial data and the
underlying assumptions are necessarily speculative in nature and
inherently imprecise, and there can be no assurance that
projected financial results will be realized. It is expected that
there will be differences between actual and projected results
and actual results may vary materially from those shown. Neither
Houlihan Lokey, RHM, the Partnership, the General Partner, Regal
nor any of their respective affiliates or advisors intends to
update or otherwise revise the projected financial data. The
inclusion of the projected financial data herein should not be
regarded as an indication that Houlihan Lokey, RHM, the
Partnership, the General Partner, Regal or any of their
respective affiliates or advisors considers it an accurate
prediction of future results. Class A Unitholders are cautioned
not to place undue reliance on the projections, which should be
23
<PAGE>
read together with the information relating to the business,
assets and financial condition of the Partnership included
herein. See "The Partnership," "Summary Financial Data" and
"Index to Financial Statements."
Set forth below is a summary of the projected financial
data prepared by the Partnership and provided to Houlihan Lokey.
AIRCOA HOTEL PARTNERS, L.P.
PROFIT PROJECTION (dollars shown in $000's)
1997
McCormick Pine Sheraton Regal
Ranch Aurora Lake Buffalo University
----- ------ ---- ------- ----------
Available Rooms 125 69 8 292 313
Annual Available
Rooms 45,625 25,185 2,920 106,580 114,245
# Of Occupied
Rooms 35,360 16,875 2,365 90,697 80,902
Annual Average
Occupancy 78% 67% 81% 85% 71%
Average Daily Rate: 130 96 33 69 74
---------------------------------------------------
Departmental
Sales:
Rooms 4,596 1,613 79 6,252 5,788
Food & Beverage 3,335 1,293 475 2,704 2,314
Telephone 245 46 0 167 213
Other Departments 1,502 135 630 24 0
Other Income 245 21 5 56 69
Total Sales 9,923 3,108 1,189 9,203 8,385
---------------------------------------------------
Direct Operating
Expenses:
Rooms 919 282 12 1,503 1,632
Food & Beverage 2,135 840 367 1,725 1,851
Telephone 116 36 0 78 127
Other Departments 1,225 70 34 45 0
Gross Operating
Income: 5,527 1,880 776 5,852 4,774
---------------------------------------------------
Undistributed
Expenses:
Administrative
& General 863 370 184 811 887
Marketing 921 258 30 867 883
Energy Costs 348 185 51 678 369
Operations &
Maintenance 399 140 91 524 441
Total Undistrib-
butable Exp: 2,531 953 356 2,880 2,580
---------------------------------------------------
Gross Operating
Profit 2,996 927 420 2,972 2,194
---------------------------------------------------
Fixed Charges:
Base Management
Fees 397 124 48 368 335
Rent, Tax,
Insur, Other 657 48 16 765 263
Interest 464 191 187 917 508
Depreciation &
Amortization 429 155 81 803 817
Pre-Tax Net
Income1 ,049 408 88 119 271
===================================================
Clarion Sheraton Home
Fourwindss Lakeside Total Office Total
---------- -------- ----- ------ -----
Available Rooms 126 651 1,584
Annual Available
Rooms 45,990 237,615 578,160
# Of Occupied
Rooms 21,656 203,398 451,253
Annual Average
Occupancy 47% 86% 78%
Average Daily Rate: 79 53 69
-----------------------------------------------------
Departmental
Sales:
Rooms 1,710 10,752 30,790 30,790
Food & Beverage 1,375 2,025 13,521 13,521
Telephone 42 291 1,004 1,004
Other Departments 2,375 765 5,431 5,431
Other Income 40 510 946 946
Total Sales 5,541 14,343 51,692 51,692
-----------------------------------------------------
Direct Operating
Expenses:
Rooms 359 3,268 7,976 7,976
Food & Beverage 954 1,546 9,419 9,419
Telephone 31 167 555 555
Other Departments 631 487 2,492 2,492
Gross Operating
Income: 3,566 8,875 31,250 31,250
-----------------------------------------------------
Undistributed
Expenses:
Administrative
& General 705 1,115 4,935 932 5,867
Marketing 420 1,355 4,734 4,734
Energy Costs 225 753 2,609 2,609
Operations &
Maintenance 325 930 2,850 2,850
Total Undistrib-
butable Exp: 1,675 4,153 15,128 932 16,060
-----------------------------------------------------
Gross Operating
Profit 1,891 4,722 16,122 -932 15,190
-----------------------------------------------------
Fixed Charges:
Base Management
Fees 222 574 2,068 2,068
Rent, Tax,
Insur, Other 415 608 2,772 2,772
Interest 520 1,713 4,500 -120 4,380
Depreciation &
Amortization 507 1,814 4,606 4,606
Pre-Tax Net
Income1 227 13 2,176 -812 1,364
=====================================================
25
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
PROFIT PROJECTION (dollars shown in $000's)
1998
McCormick Pine Sheraton Regal
Ranch Aurora Lake Buffalo University
----- ------ ---- ------- ----------
Available Rooms 125 69 7 292 313
Annual Available
Roo 45,625 25,185 2,555 106,580 114,245
# Of Occupied
Rooms (w/Comps) 35,588 16,875 2,120 88,567 80,551
Annual Average
Occupancy 78% 67% 83% 83% 71%
Average Daily Rate 138 95 34 74 78
-------------------------------------------------
Departmental
Sales:
Rooms 4,893 1,595 72 6,594 6,249
Food & Beverage 3,420 1,350 505 2,784 2,442
Telephone 249 50 0 160 227
Other Departments 1,580 100 665 026 0
Other Income 315 20 6 60 74
Total Sales 10,457 3,115 1,248 9,624 8,990
-------------------------------------------------
Direct Operating
Expenses:
Rooms 985 285 10 1,556 1,687
Food & Beverage 2,295 874 390 1,760 1,880
Telephone 135 39 0 73 136
Other Departments 1,209 60 36 47 0
Gross Operating
Income: 5,833 1,857 812 6,188 5,287
-------------------------------------------------
Undistributed
Expenses:
Administrative &
General 890 380 190 840 917
Marketing 960 250 36 905 944
Energy Costs 378 195 56 694 405
Operations &
Maintence 470 144 100 550 495
Total Undistri-
butable Exp: 2,698 969 382 2,989 2,760
-------------------------------------------------
Gross Operating
Profit: 3,135 888 430 3,199 2,527
-------------------------------------------------
Fixed Charges:
Base Management
Fees: 418 125 50 385 360
Rent, Tax, Insur,
Other 701 50 17 803 260
Interest 464 191 187 917 508
Depreciation &
Amortization 429 155 81 803 817
Pre-Tax Net
Income 1,123 367 95 291 583
=================================================
Clarion Sheraton Home
Fourwinds Lakeside Total Office Total
--------- -------- ----- ------ -----
Available Rooms 126 651 1,593
Annual Available
Roo 45,990 237,615 577,795
# Of Occupied
Rooms (w/Comps) 22,576 205,537 451,814
Annual Average
Occupancy 49% 87% 78%
Average Daily Rate 80 57 73
-----------------------------------------------------
Departmental
Sales:
Rooms 1,806 11,644 32,853 32,853
Food & Beverage 1,444 2,148 14,093 14,093
Telephone 44 302 1,032 1,032
Other Departments 2,493 822 5,686 5,686
Other Income 42 534 1,051 1,051
Total Sales 5,829 15,450 54,714 54,714
-----------------------------------------------------
Direct Operating
Expenses:
Rooms 377 3,419 8,319 8,319
Food & Beverage 993 1,611 9,803 9,803
Telephone 32 172 587 587
Other Departments 664 507 2,523 2,523
Gross Operating
Income: 3,763 9,741 33,482 33,482
----------------------------------------------------
Undistributed
Expenses:
Administrative &
General 715 1,151 5,083 200 5,283
Marketing 426 1,475 4,996 4,996
Energy Costs 234 781 2,743 2,743
Operations &
Maintence 331 942 3,031 3,031
Total Undistri-
butable Exp: 1,705 4,349 15,852 200 16,052
----------------------------------------------------
Gross Operating
Profit: 2,058 5,392 17,629 -200 17,429
----------------------------------------------------
Fixed Charges:
Base Management
Fees: 233 618 2,189 2,189
Rent, Tax, Insur,
Other 436 638 2,905 2,905
Interest 520 1,713 4,500 -110 4,390
Depreciation &
Amortization 507 1,814 4,606 4,606
Pre-Tax Net
Income 362 609 3,430 -90 3,340
====================================================
26
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
PROFIT PROJECTION (dollars shown in $000's)
1999
McCormick Pine Sheraton Regal
Ranch Aurora Lake Buffalo University
----- ------ ---- ------- ----------
Available Rooms 125 69 6 292 313
Annual Available
Rooms 45,625 25,185 2,190 106,580 114,245
Of Occupied Rooms
(w/Comps) 34,675 17,377 1,840 86,863 82,967
Annual Average
Occupancy 75% 69% 84% 82% 73%
Average Daily Rate: 139 97 35 77 81
--------------------------------------------------
Departmental
Sales:
Rooms 4,811 1,685 64 6,688 6,749
Food & Beverage 3,595 1,425 530 2,868 2,564
Telephone 255 53 0 184 238
Other Departments 1,602 103 698 27 0
Other Income 315 25 7 62 78
Total Sales 10,578 3,291 1,299 9,829 9,629
--------------------------------------------------
Direct Operating
Expenses:
Rooms 975 295 8 1,551 1,755
Food & Beverage 2,365 918 407 1,810 1,948
Telephone 147 42 0 84 143
Other Departments 1,250 62 38 48 0
Gross Operating
Income: 5,841 1,974 846 6,336 5,783
--------------------------------------------------
Undistributed
Expenses:
Administrative &
General 915 395 200 860 1,011
Marketing 985 260 40 937 1,059
Energy Costs 417 207 60 720 433
Operations &
Maintence 499 150 110 570 530
Total Undistri-
butable Exp: 2,816 1,012 410 3,087 3,033
--------------------------------------------------
Gross Operating
Profit: 3,025 962 436 3,249 2,750
--------------------------------------------------
Fixed Charges:
Base Management
Fees 423 132 52 393 385
Rent, Tax, Insur,
Other 709 53 18 843 273
Interest 464 191 187 917 508
Depreciation &
Amortization 429 155 81 803 817
Pre-Tax Net
Income 1,000 431 98 292 767
==================================================
Clarion Sheraton Home
Fourwinds Lakeside Total Office Total
--------- -------- ----- ------ -----
Available Rooms 126 651 1,582
Annual Available
Rooms 45,990 237,615 577,430
Of Occupied Rooms
(w/Comps) 23,496 205,537 452,755
Annual Average
Occupancy 51% 87% 78%
Average Daily Rate: 81 60 75
----------------------------------------------------
Departmental
Sales:
Rooms 1,903 12,229 34,129 34,129
Food & Beverage 1,516 2,255 14,753 14,753
Telephone 46 312 1,088 1,088
Other Departments 2,618 874 5,922 5,922
Other Income 44 555 1,087 1,087
Total Sales 6,128 16,225 56,979 56,979
----------------------------------------------------
Direct Operating
Expenses:
Rooms 398 3,519 8,501 8,501
Food & Beverage 1,032 1,664 10,145 10,145
Telephone 34 178 627 627
Other Departments 683 529 2,610 2,610
Gross Operating
Income: 3,981 10,335 35,096 35,096
----------------------------------------------------
Undistributed
Expenses:
Administrative &
General 750 1,185 5,316 210 5,526
Marketing 248 1,539 5,068 5,068
Energy Costs 347 802 2,987 2,987
Operations &
Maintence 443 1,004 3,305 3,305
Total Undistri-
butable Exp: 1,788 4,530 16,677 210 16,887
----------------------------------------------------
Gross Operating
Profit: 2,192 5,805 18,420 -210 18,210
----------------------------------------------------
Fixed Charges:
Base Management
Fees 245 649 2,279 2,279
Rent, Tax, Insur,
Other 457 670 3,023 3,023
Interest 520 1,713 4,500 -100 4,400
Depreciation &
Amortization 507 1,814 4,606 4,606
Pre-Tax Net
Income 463 959 4,011 -110 3,901
====================================================
Structure of the Merger
At the Effective Time, (i) each issued and outstanding
Class A Unit, other than those held by Regal Holdings or any
direct or indirect subsidiary of Regal Holdings, shall be
cancelled, extinguished and retired and will be converted into
the right to receive $3.10 in cash, without interest, (ii) each
issued and outstanding Class B Unit, other than those held by
Regal Holdings or any direct or indirect subsidiary of Regal
Holdings, shall be cancelled, extinguished and retired and will
be converted into the right to receive $20.00 in cash, without
interest, (iii) each outstanding Unit which is owned by Regal
Holdings or any direct or indirect subsidiary of Regal Holdings
shall be and remain a unit of limited partner interest in the
Partnership; (iv) each outstanding partnership interest, general
or limited, of Regal shall be cancelled, extinguished and
retired, and no payment shall be made thereon; (v) Regal shall
cease to exist; and (vi) the General Partner's general
partnership interest in the Partnership shall be and remain a
general partnership interest in the Partnership. The Partnership
has been informed by RHM that, following the
27
<PAGE>
Merger, it intends to retain the Partnership's current management
and continue to manage the Partnership as an ongoing business in
the same general manner as it is now being conducted.
Because RHM and its affiliates, who together own
approximately 71.0% of the Class A Units and approximately 93.6%
(with 100% voting control) of the Class B Units, intend to vote
such Units "FOR" approval of the Merger Agreement at the Special
Meeting, the Partnership expects that the Merger and the Merger
Agreement will be approved. The Partnership expects that the
Merger will be consummated on __________________, 1997, or as
promptly as practicable thereafter, assuming that the conditions
to the Merger set forth in the Merger Agreement have been
satisfied or, if permissible, waived. See "The Merger Agreement
- -- Conditions to the Merger."
Interests of Certain Persons in the Merger; Conflicts of Interest
Class A Unitholders should be aware that management and
certain persons associated with the General Partner have certain
interests which may present them with actual or potential
conflicts of interest in connection with the Merger.
RHM is interested in the outcome of the Merger in that,
following the Merger, Regal Holdings and its affiliates would be
the sole owners of the Partnership. As sole owners, Regal
Holdings and its affiliates would bear the total risk of the
Partnership's operations but would also receive the entire
benefit, if any, arising from pursuit of the various
opportunities described under "Summary -- Reasons for the
Merger." RHM also would be able to consolidate the Partnership's
operations more fully with those of its other owned and managed
properties without introducing issues with respect to potential
conflicts of interest, and to realize potential operating
synergies therefrom. If the Partnership were sold to an unrelated
third party, RHM would not have any further participation in any
such opportunities, while, if the current ownership structure
were maintained, it would share any such benefits with the Public
Unitholders.
The General Partner and the senior management of the
Partnership have certain interests that may present them with
actual or potential conflicts of interest. Among these are that
(i) the General Partner is controlled by Regal Holdings, an
affiliate of RHM, (ii) the current General Partner is expected to
remain in its current role subsequent to the Merger, and (iii)
the current senior management of the Partnership and the General
Partner are expected to remain in their positions following the
Merger. Each of the Partnership and the Special Committee was
advised by separate legal counsel from that of RHM and Regal in
connection with the Merger.
It is expected that each of the current officers and key
employees of the Partnership will continue as officers and
employees of the Partnership after the Merger. None of the
current officers and key employees of the Partnership
beneficially own any Units. No executive officer or key employee
of the Partnership owns any equity interest in Regal Holdings or
RHM.
Relationships Between the Parties
Except as set forth in this Proxy Statement, there are no
past, present or proposed material contracts, arrangements,
understandings, relationships, negotiations or transactions
between the Partnership, on the one hand, and RHM and its
affiliates, on the other hand, concerning a merger, consolidation
or acquisition, a tender offer or other acquisition of
securities, or sale or other transfer of a material amount of
assets of the Partnership. However, in the future, the
Partnership's management may review additional information about
the Partnership and, upon completion of any such review, may
propose or develop additional or new plans or proposals or may
propose the acquisition, disposition or refinancing of assets or
other changes in the Partnership's business, structure,
capitalization, management or distribution policy which they
consider to be in the best interests of the Partnership and its
partners.
28
<PAGE>
Plans for the Partnership After the Merger
The Partnership has been informed by RHM that, following
the Merger, RHM intends to cause the business and operations of
the Partnership to continue to be conducted by the Partnership
substantially as they are currently being conducted. Regal
Holdings will, however, continue to evaluate the business and
operations of the Partnership after the consummation of the
Merger and will continue to take such actions as are deemed
appropriate by Regal Holdings, under the circumstances then
existing, to maximize the profitability of the Partnership. The
Partnership has also been informed by Regal Holdings and its
affiliates, which collectively control approximately 71.0% of the
Class A Units and approximately 93.6% (with 100% voting control)
of the Class B Units (and thus have the ability to determine each
matter submitted to a vote of limited partners), that they intend
to vote the Class A Units controlled by them against any proposal
to liquidate the assets of the Partnership made in the
foreseeable future.
Except for the Merger and as otherwise described in this
Proxy Statement, RHM has informed the Partnership that it does
not have any present plans or proposals which relate to or would
result in an extraordinary transaction, such as a merger,
reorganization, liquidation, relocation of any operations of the
Partnership or sale or transfer of a material amount of assets
involving the Partnership or any other change in the
Partnership's structure or business or the composition of its
management. However, in the future, RHM, the General Partner and
the Partnership's management will continually review additional
information about the Partnership and, upon
completion of any such review, may propose or develop additional
or new plans or proposals or may propose the acquisition,
disposition or refinancing of assets (including, without
limitation, general or limited partnership interests in one or
more partnership subsidiaries of the Partnership, real estate
assets held by one or more of such partnership subsidiaries and
property management or asset management and related contracts in
respect of properties controlled by the Partnership, one of its
partnership subsidiaries or an affiliate of the Partnership), the
repositioning of certain of the Properties or other changes in
the Partnership's business, structure, capitalization, management
or distribution policy which they consider to be in the best
interests of the Partnership and its surviving partners.
Certain Effects of the Merger
In the Merger, all of the Class A Units outstanding
immediately prior to the Effective Time (other than Class A Units
held by Regal Holdings and its affiliates) will be converted into
the right to receive $3.10 in cash per Class A Unit, all of the
Class B Units outstanding immediately prior to the Effective Time
(other than Class B Units held by Regal Holdings and its
affiliates) will be converted into the right to receive $20.00 in
cash per Class B Unit, and the Public Unitholders will cease to
have any interest in the Partnership and will therefore not share
in future earnings and growth of the Partnership, if any. As a
result of the Merger, the General Partner and Regal Holdings will
hold the entire equity interest in the Partnership, including the
entire interest in the Partnership's net earnings and book value.
The Class A Units are currently registered under the
Exchange Act. Registration of the Class A Units under the
Exchange Act may be terminated upon application of the
Partnership to the Commission if the Class A Units are neither
listed on a national securities exchange nor held by more than
300 holders of record. Termination of registration of the Class A
Units under the Exchange Act would substantially reduce the
information required to be furnished by the Partnership to
Unitholders and to the Commission and would make certain
provisions of the Exchange Act, such as the short-swing profit
recovery provisions of Section 16(b), the requirement of
furnishing a proxy statement pursuant to Section 14(a) in
connection with Unitholder meetings and the related requirement
of forwarding an annual report to Class A Unitholders and the
requirements of Rule 13e-3 under the Exchange Act with respect to
"going private" transactions, no longer applicable to the
Partnership. Furthermore, the ability of "affiliates" of the
Partnership and persons holding "restricted securities" of the
Partnership to dispose of such securities pursuant to Rule 144
under the Securities Act may be impaired or eliminated. Regal
Holdings presently intends to cause the Partnership to apply for
termination of registration of the Class A Units under the
Exchange Act as soon as the requirements for such termination are
met and to take all permitted actions to make the Partnership
eligible for such termination.
29
<PAGE>
Income Tax Consequences
The following is a brief summary of the material federal
income tax rules applicable to a sale of Units in the Merger. The
summary is for general information only and does not discuss all
of the federal income tax consequences that may be relevant to a
particular Unitholder or to certain Unitholders subject to
special treatment under the federal income tax laws (for example,
foreign persons, tax-exempt entities, life insurance companies or
S corporations). The discussion set forth below is based upon the
Internal Revenue Code, regulations and announcements promulgated
thereunder and published rulings and court decisions, all as in
effect on the date hereof and without giving effect to changes to
the federal tax laws, if any, enacted after the date hereof. DUE
TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH CLASS A
UNITHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO
DETERMINE THE SPECIFIC FEDERAL INCOME TAX CONSEQUENCES OF SELLING
CLASS A UNITS IN THE MERGER, AS WELL AS THE EFFECTS OF STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.
Gain or Loss
A Unitholder 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 tax basis in the Units
sold. The amount realized will equal the amount of cash received
plus the Unitholder's share of the Partnership's liabilities
(including the Partnership's share of the liabilities of
partnerships in which the Partnership is a partner) (determined
under Section 752 of the Internal Revenue Code and the
regulations promulgated thereunder). Generally, the adjusted tax
basis of a Unitholder's Units will be equal to the cost of the
Units to such Unitholder, decreased by the Unitholder's share of
Partnership distributions and losses, and increased by the
Unitholder's share of Partnership income and Partnership
liabilities (including the Partnership's share of the liabilities
of partnerships in which the Partnership is a partner), as
determined under Section 752 of the Internal Revenue Code and the
regulations promulgated thereunder. Set forth below is a summary
of certain information provided to Unitholders by the Partnership
that is relevant to the calculation of a Unitholder's adjusted
tax basis in its Units. THIS SUMMARY IS PROVIDED FOR GENERAL
INFORMATION ONLY, AND IS NOT A SUBSTITUTE FOR INDIVIDUAL TAX
ADVICE. ACCORDINGLY, UNITHOLDERS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS AS TO THE CORRECT DETERMINATION OF THE ADJUSTED TAX
BASIS OF THEIR UNITS.
Summary of Taxable Income (Loss) and
Per Unit Allocations 1987-1996(1)
Income (Loss)
Allocations Distributions Per
Per Class A Unit Class A Unit
---------------- ------------
1987 (0.98) 1.00
1988 (2.92) 2.40
1989 3.22 4.25(2)
1990 (0.79) 1.26
1991 (0.63) 0
1992 (0.29) 0
1993 (0.02) 0
1994 (0.03) 0
1995 (0.13) 0
1996 0.11 0
- -------------
(1) The amounts set forth in this table assume the Class A Unit is
held for the entire year period shown.
(2) Consists of distributable cash flow of $2.35, and a capital
distribution of $1.90. This was the only capital distribution
ever made.
30
<PAGE>
If a Unitholder's share of the Partnership's liabilities
exceed the adjusted tax basis for his or her Units, such
Unitholder's realized gain will include such excess.
Except as described below, gain or loss realized by a
Unitholder who has held the Units as capital assets will be
capital gain or loss and will be long-term capital gain or loss
if such Units have been held for more than one year. 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 upon the sale
of Units may be utilized to offset capital gains from other
sources and may be carried forward, subject to applicable
limitations.
Effect of Passive Loss Rules
Upon the sale by a Unitholder of all his Units in the
Merger, any net losses of the Partnership that were suspended
under the passive loss rules of Section 469 of the Internal
Revenue Code may be used to offset income and gain on such sale.
If a Unitholder's suspended Partnership losses exceed the gain on
the sale of Units, such loss may be applied against any income or
gain of the Partnership for the current year and thereafter may
be applied against any other passive activity income of such
Unitholder in the current year. Thereafter, any excess suspended
losses from prior years will be available to offset income and
gain from any other sources.
In the absence of a complete disposition of all the Units
by a Unitholder, suspended losses of such Unitholder generally
will not be deductible. However, such suspended losses will be
allowed to the extent that any gain recognized on the
transaction, together with other income from Partnership
activities for the Unitholder's taxable year, exceeds losses from
the Partnership's activities for such year.
Accounting Treatment of the Merger
The acquisition of RHM of the Units will be accounted for
as an acquisition of minority ownership interests of a subsidiary
in accordance with the purchase method of accounting.
Regulatory Approvals and Filings
Except as set forth in this Proxy Statement, the
Partnership is not aware of any licenses or regulatory permits
that would be material to the business of the Partnership, taken
as a whole, and that might be adversely affected by the Merger as
contemplated herein, or any filings, approvals or other actions
by or with any domestic (federal or state), foreign governmental,
administrative or regulatory agency that would be required prior
to the Merger as contemplated herein. Should any such approval or
other action be required, it is the Partnership's present
intention to seek such approval or action. The Partnership does
not presently intend, however, to delay the Merger pending the
outcome of any such action or the receipt of such approval
(subject to the conditions in "The Merger Agreement -- Conditions
to the Merger"). There can be no assurance that any such
additional approval or action, if needed, would be obtained
without substantial conditions or that adverse consequences might
not result to the Partnership's business, or that certain parts
of the Partnership's business might not have to be disposed of or
held separate or other substantial conditions complied with in
order to obtain such approval or action or in the event that such
approvals were not obtained or such actions were not taken, any
of which would cause RHM to elect to terminate the Merger,
without conversion of the Units thereunder.
The Partnership and RHM have filed with the Commission a
Schedule 13E-3 pursuant to the Exchange Act, furnishing certain
information with respect to the Merger in addition to the
information contained in this Proxy Statement, and they may file
amendments to the Schedule 13E-3. As permitted by the rules and
regulations of the Commission, this Proxy Statement omits certain
information contained in the Schedule 13E-3. For further
information pertaining to the Partnership, reference is made to
the Schedule 13E-3 and the exhibits and amendments thereto. See
"Available Information."
31
<PAGE>
THE PROXY SOLICITATION
Voting and Proxy Procedures
A proxy enables a Unitholder to be represented at a meeting
at which he would otherwise be unable to participate. The proxy
card accompanying this Proxy Statement is solicited because each
Unitholder is entitled, as a limited partner of the Partnership,
to vote on matters scheduled to come before the Special Meeting.
Units eligible to be voted and for which a proxy card in
the accompanying form is properly signed, dated and returned in
sufficient time to permit the necessary examination and
tabulation of the proxy before a vote is taken will be voted in
accordance with any choice specified. The proxy card permits a
specification of approval, disapproval or abstention as to the
proposal described in this Proxy Statement. Unitholders are urged
to specify their choice by marking an (x) or other mark in the
appropriate box on the proxy card, but where no choice is
specified, eligible Units will be voted as indicated on the proxy
card.
If any matters not specified in this Proxy Statement come
before the Special Meeting, eligible Units will be voted in
accordance with the best judgment of the persons named therein as
proxies. At the time this Proxy Statement was printed, management
of the General Partner was not aware of any other matters to be
voted upon. Only procedural matters may come before the Special
Meeting since the only substantive matters which may be
considered are those with respect to which prior notice is given.
The proxy may be revoked at any time before it is exercised
by submitting a written revocation or a later-dated proxy or
proxy card, attention Corporate Secretary, to AIRCOA Hotel
Partners, L.P., 5775 DTC Boulevard, Englewood, Colorado 80111, or
by attending the Special Meeting in person and so notifying the
meeting inspectors.
The presence in person, or by properly executed proxy, of
the holders of more than 50 percent of the aggregate voting power
of the issued and outstanding Units is necessary to constitute a
quorum at the Special Meeting. Each holder of record of Units on
the Record Date is entitled to cast one vote per Class A Unit and
one-half vote per Class B Unit on each proposal properly
submitted for the vote of the holders of the Units.
Pursuant to the Delaware Act and the Partnership Agreement,
approval of the Merger requires satisfaction of the Majority Vote
Requirement. Abstentions and any unvoted positions in brokerage
accounts will be counted toward the calculation of a quorum, but
are not treated as either a vote for or against the proposal.
Abstentions and unvoted Units will have the same effect as a vote
against the proposal with respect to satisfaction of the Majority
Vote Requirement. Regal Holdings has informed the General Partner
that it intends to vote the Class A Units and Class B Units over
which it has voting control, representing approximately 71.0% of
the outstanding Class A Units and 100% of the outstanding Class B
Units, "FOR" approval of the Merger. As a result, approval of the
Merger by the Unitholders is assured, regardless of how the
Public Unitholders vote at the Special Meeting.
Solicitation of Proxies
Solicitation of proxies from the Unitholders will be made
by the General Partner and will be undertaken principally by use
of the United States Postal Service. The cost of any such
solicitation, including the cost of preparing and mailing proxy
materials, returning the proxies and reimbursing brokerage houses
and nominees for forwarding proxy materials to beneficial owners,
will be borne by the Partnership.
No Appraisal Rights
Under the Delaware Act, the only appraisal rights available
to Unitholders are those accorded by contract. Neither the
Partnership Agreement nor the Merger Agreement provide such
appraisal rights to the Public
34
<PAGE>
Unitholders in connection with the Merger. Therefore, Public
Unitholders may be estopped from making certain claims which
challenge the Merger after the Merger is consummated.
Conduct of the Special Meeting
An agenda will be distributed at the Special Meeting, and
the meeting will be conducted in accordance with the agenda. The
presiding officer's rules will govern the meeting.
THE MERGER AGREEMENT
The following is a summary of certain provisions of the
Merger Agreement, which is attached as Annex A to this Proxy
Statement. Such summary is qualified in its entirety by reference
to the Merger Agreement.
General
The Merger Agreement provides that, at the Effective Time
and subject to the satisfaction of certain other conditions,
Regal will be merged with and into the Partnership. Following the
Merger, the Partnership will continue as the surviving
partnership and the separate existence of Regal shall cease. In
the Merger, (i) each issued and outstanding Class A Unit, other
than those held by Regal Holdings or any direct or indirect
subsidiary of Regal Holdings, shall be cancelled, extinguished
and retired and will be converted into the right to receive $3.10
in cash, without interest, (ii) each issued and outstanding Class
B Unit, other than those held by Regal Holdings or any direct or
indirect subsidiary of Regal Holdings, shall be cancelled,
extinguished and retired and will be converted into the right to
receive $20.00 in cash, without interest, (iii) each outstanding
Unit which is owned by Regal Holdings or any direct or indirect
subsidiary of Regal Holdings shall be and remain a unit of
limited partner interest in the Partnership; (iv) each
outstanding partnership interest, general or limited, of Regal
shall be cancelled, extinguished and retired, and no payment
shall be made thereon; (v) Regal shall cease to exist; and (vi)
the General Partner's general partnership interest in the
Partnership shall be and remain a general partnership interest in
the Partnership.
Expenses of the Merger
It is estimated that the expenses incurred in connection
with the Merger will be approximately as set forth below:
Investment banking fees and expenses (1).... $170,000
Legal fees and expenses (2)................. $700,000
Accounting fees and expenses................ $50,000
Filing fees................................. $ 1,000
Printing and mailing fees................... $25,000
Miscellaneous (3)........................... $42,000
Appraisal fees and expenses................. $12,000
========
Total................................. $1,000,000
- -----------------
(1) Includes the fees and estimated expenses of Houlihan
Lokey (see "Special Factors -- Opinion of Financial
Advisor").
(2) Includes the fees and estimated expenses of counsel to
the Special Committee (see "Special Factors --
Background of the Merger"), counsel to the Partnership
and counsel to RHM and Regal.
(3) Includes paying agent fees for processing transmittals
and payments to holders of Units.
33
<PAGE>
Except as otherwise provided in the Merger Agreement with
respect to indemnification, RHM has agreed to bear the expenses
of each party in connection with the Merger Agreement and the
transactions contemplated thereby, and none of the expenses of
any party to the Merger Agreement is expected to be paid by the
Partnership.
Effective Time
The Merger will become effective at the time of the filing
by the Partnership with the Secretary of State of the State of
Delaware of a certificate of merger in accordance with the
Delaware Act. It is presently anticipated that such filing will
be made on ______________, 1997. Such filing will be made,
however, only upon satisfaction or waiver, where permissible, of
the conditions set forth in the Merger Agreement. See "--
Conditions to the Merger."
Financing of the Merger
Approximately $7 million will be required to consummate the
Merger and to pay related fees and expenses (see "-- Expenses of
the Merger" above). The necessary funds are expected to be
provided by RHM. Such funds will be advanced to RHM from general
funds of Regal Holdings and its affiliates.
Conditions to the Merger
The respective obligations of the Partnership and RHM to
effect the Merger are subject to the satisfaction at or prior to
the Effective Time of the following conditions: (i) the Majority
Vote Requirement having been met; (ii) neither the execution and
delivery of the Merger Agreement by the Partnership nor the
consummation of the transactions contemplated thereby nor
compliance by the Partnership with any of the provisions thereof
shall (x) 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 the Partnership or any direct or indirect
subsidiary of the Partnership under any of the terms, conditions
or provisions of (I) the Partnership Agreement or any other
partnership agreement or charter or bylaws of any direct or
indirect subsidiary of the Partnership or (II) any material note,
bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which the
Partnership or any direct or indirect subsidiary of the
Partnership is a party, or to which any of them, or any of their
respective properties or assets, may be subject, or (y) violate
any judgment, ruling, order, writ, injunction, decree, statute,
rule or regulation applicable to the Partnership or any direct or
indirect subsidiary of the Partnership or any of their respective
properties or assets, except, in the case of each of clauses (x)
and (y) 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 the Partnership and its subsidiaries,
taken as a whole; (iii) no withdrawal by Houlihan Lokey of its
opinion with respect
to the Merger or modification thereof in a manner materially
adverse to RHM, Regal, the Partnership or any Unitholder having
occurred; and (iv) no preliminary or permanent injunction or
other order, decree or ruling issued by a court of competent
jurisdiction or by any administrative agency or commission or
other governmental authority or instrumentality (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 or holding by RHM, its
subsidiaries or affiliates of the Units of the Partnership
following the Merger illegal or otherwise prevent the
consummation of the Merger or make the consummation of the Merger
illegal.
Termination
The Merger Agreement may be terminated and the Merger may
be abandoned notwithstanding approval thereof by the General
Partner and holders of a majority in interest of the Class A
Units, at any time prior to the
34
<PAGE>
Effective Time, if any court of competent jurisdiction in the
United States or other United States governmental body 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.
Payment for Units
At or prior to the Effective Time, RHM will deposit or
cause to be deposited in trust with ____________________ (the
"Paying Agent"), as agent for each holder of record of Units, the
cash which such holders will be entitled to receive in the
Merger. As soon as practicable after the Effective Time, the
Paying Agent will mail to each such holder of record a letter of
transmittal (which will specify that delivery shall be effected,
and risk of loss and title to the Units shall pass, only upon
receipt by the Paying Agent of confirmation of a book-entry
transfer of Units into the Paying Agent's account at The
Depository Trust Company) to be returned to the Paying Agent and
instructions for effecting the surrender of Units in exchange for
$3.10 in cash per Class A Unit and $20.00 in cash per Class B
Unit (in each case without interest). All Units so surrendered
will be cancelled.
Upon surrender of a duly executed letter of transmittal,
each Public Unitholder will receive $3.10 in cash per Class A
Unit and $20.00 in cash per Class B Unit (in each case without
interest) held by such Public Unitholders. Any cash held by the
Paying Agent that remains unclaimed by Public Unitholders six
months after the Effective Time will be delivered to the
Partnership, after which time persons entitled thereto may look,
subject to applicable escheat and other similar laws, only to the
Partnership for payment thereof.
THE PARTNERSHIP
General Development of Business
The Partnership was organized in December 1986 by the
General Partner to acquire, own, operate and sell hotels and
resort properties. The Partnership owns and operates the
Properties through operating partnerships (the "Operating
Partnerships") which were acquired in 1986.
The Partnership owns a 99% limited partner interest in each
of the six Operating Partnerships which hold title to the
Properties and through which the Partnership conducts all of its
operations. The General Partner, a wholly owned subsidiary of
Richfield, is also the 1% general partner of each of the
Operating Partnerships. Richfield operates the Properties for the
Partnership under certain management agreements.
Financial Information About Industry Segments
The Partnership's operations have been in one industry
segment since formation. Revenue has been generated through the
ownership and operation of the Properties. The following table
reflects the sources of revenue and gross operating profit and
total assets for each of the three years ended December 31, 1996,
1995 and 1994.
35
<PAGE>
At and for the Year Ended December 31,
1996 1995 1994
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(In thousands, except percentages)
Rooms $29,038 59.8% $26,810 59.1% $26,863 58.2%
Food and Beverage 12,272 25.3% 11,733 25.8% 12,274 26.6%
Other Property
Operations 7,243 14.9% 6,856 15.1% 7,020 15.2%
------- ------ ------- ------- ------- ------
Total Revenue $48,553 100.0% $45,399 100.0% $46,157 100.0%
======= ====== ======= ======= ======= ======
Gross Operating
Profit $14,625 30.1% $12,799 28.1% $13,566 29.4%
======= ====== ======= ======= ======= ======
Total Assets (as
at December 31 $70,131 $69,406 $73,542
======= ======= =======
December 31)
Gross operating profit represents operating income of the
Partnership before rent, taxes and insurance, management fees,
depreciation, amortization and impairment of property. Gross
operating profit is indicative of the profitability from
operations of the Properties.
Room revenue is significantly impacted by the rates
obtained for rooms and the level of occupancy of the Properties.
Although not in the same proportion, changes in occupancy also
impact revenue generated from food and beverage and other
property operations. Average daily room rates of the Properties
were $64.26, $59.55 and $59.42 in 1996, 1995 and 1994,
respectively. Average occupancy levels for the Properties were
78.3%, 77.6% and 77.9% in 1996, 1995 and 1994, respectively. For
a discussion of the changes in various operating statistics, see
"Summary Financial Data."
Narrative Description of Business
Business
The principal business of the Partnership is the ownership
and operation of six hotel and resort Properties located in
geographically diverse areas of the continental United States.
The Properties are full service facilities serving the vacation,
leisure, meetings, convention and business segments of the hotel
market. In addition to lodging, various guest services are
offered by the Properties including restaurants, lounges, banquet
rooms, valet, concierge, parking and shuttle services. Other
services available at some of the Properties include a marina,
health and fitness facilities, swimming pools, tennis courts,
spas and retail facilities.
Importance of Franchises and Trademarks
Three of the Properties are affiliated with national
franchises and operate under franchise agreements. The benefits
of these franchise agreements include national brand name
recognition and world wide central reservation systems, as well
as operating quality standards and extensive marketing programs.
Two of the Properties are licensed to use the Regal trademark,
which is sub-licensed to the hotels by an affiliate of the
General Partner. The Partnership considers such affiliations and
licenses to be important to the operations and success of the
Properties in regard to customer recognition and satisfaction.
Other properties may be licensed in the future to use the Regal
trademark.
36
<PAGE>
Seasonality of Business
Because of the Properties' locations, occupancy levels are
generally lower in the first and fourth quarters and higher in
the second and third quarters of the year. These fluctuations are
consistent with the normal recurring seasonal patterns of the
industry.
Industry Practices
The Properties periodically offer discounts to contract and
group customers and room rates generally fluctuate during peak
and non-peak times of the year. Deposits are often obtained in
advance for facility rentals and rooms. In addition, a certain
level of capital expenditures, repair and replacement of hotel
property is required under the Partnership's loan agreement.
The Properties are managed by Richfield in accordance with
certain management contracts. Management services provided under
the contracts include operations supervision, strategic business
planning, yield management, sales and marketing oversight,
personnel management and accounting and technical services.
Market Information and Competitive Conditions
According to Smith Travel Research, all of the U.S. lodging
industry performance measures were higher in 1996 than in 1995.
Average daily room rate for the industry increased by 6.4% to
$71.66 and room occupancy increased .3% to 65.7%. The hospitality
industry in the U.S. experienced a slight increase in occupancy
and notable increases in average room rates during 1996. The
increase in average room rates during 1996 was achieved primarily
due to the increase in rooms demand exceeding the increase in
rooms supply. As a result, 1996 rooms revenue exceeded 1995 rooms
revenue. Room revenue per available room (Revpar) was up 6.7%,
slightly above the 6.3% increase for a year ago. Smith Travel
Research estimates that performance ratios in the lodging
industry in 1997 should improve over 1996.
The Partnership's Revpar has consistently exceeded the
industry averages noted above. This is due to occupancy levels
exceeding industry averages, offset by average room rates below
industry averages. The Partnership's operations in certain
markets are price sensitive. The Partnership considers its
primary points of competition to include, but are not limited to,
room rates, location, guest services and responsiveness, adequacy
and appearance of facilities and overall customer satisfaction.
The demand at a particular hotel of the Partnership may be
adversely affected by many factors, including changes in travel
patterns, local and regional economic conditions and the degree
of competition with other hotels in the area.
Regulation
The Operating Partnerships are subject to regulation in
connection with their business, including liquor licensing,
occupational health and safety regulations, environmental
regulations, food service regulation and labor laws. The
Operating Partnerships have not experienced significant
difficulties with regulation in these areas; however, failure to
comply with those regulations could result in loss of licenses,
permits or other authorizations which could adversely impact the
Partnership's operating revenue.
Employees
All hotel personnel are employed by the respective
Operating Partnerships. Richfield processes the payroll on behalf
of the Operating Partnerships. The number of persons employed by
the Operating Partnerships, as of December 31, 1996, was
approximately 990. Management considers employee relations to be
satisfactory.
37
<PAGE>
Properties
The six hotel and resort Properties including the hotel
buildings and leasehold improvements are owned by the Operating
Partnerships. Three of the hotel properties are located on land
owned by the Operating Partnerships, while the other three hotel
properties are located on land leased by the Operating
Partnerships on a long-term basis.
The following table presents certain information for each of the
Properties:
Property Primary Markets Served Area Served Number
of
Rooms
Aurora Inn and Pine Vacation, Greater Cleveland 69
Lake Trout Club Business /Akron, Ohio
("Aurora")
Fourwinds/A Clarion Destination Bloomington/ 126
Resort Resort and Indianapolis,
("Fourwinds") Marina Indiana
Regal McCormick Vacation, Phoenix/ 125
Ranch Meetings Scottsdale,
("McCormick") Arizona
Sheraton Inn Business, Buffalo/ 293
Buffalo Airport Meetings and Niagara Falls,
("Buffalo") Leisure New York
Sheraton Inn Vacation Orlando/Walt 651
Lakeside Disney World,
("Lakeside") Florida
Regal University Business, Raleigh/Durham/ 322
Hotel Meetings, and Chapel Hill
("University") Conventions North Carolina
-----
TOTAL 1,586
=====
The appraised value of the Properties is summarized below:
Appraised Values
December 1996 December 1995 December 1994
------------- ------------- -------------
Aurora Inn & Pine Lake
Trout Club $7,160,000 $7,200,000 $ 7,520,000
Fourwinds/A Clarion
Resort 8,030,000 8,800,000 10,200,000
Regal McCormick Ranch 13,770,000 9,875,000 9,015,000
Sheraton Inn Buffalo
Airport 14,000,000 15,000,000 17,730,000
Sheraton Inn Lakeside 28,000,000 30,000,000 34,000,000
Regal University Hotel 15,800,000 12,000,000 8,025,000
----------- ----------- ----------
Total appraised value $86,760,000 $82,875,000 $86,490,000
=========== =========== ===========
The appraised value for the Pine Lake Trout Club property at
December 1996 reflects a downward revision of $500,000 from the appraised
value shown in the Partnership's Annual Report on Form 10-K for
the year ended December 31, 1996.
The increase in the aggregate appraised value of the
portfolio from 1995 to 1996 was primarily the result of increases
in the fair value of Regal McCormick Ranch and Regal University
Hotel. These increases were due to increased demand for hotel
rooms in the markets in which these hotels are located.
Additionally, Regal University Hotel's appraised value benefited
from a renovation completed in 1996.
38
<PAGE>
The decline in the aggregate appraised value of the
portfolio from 1994 to 1995 was primarily the result of decreases
in the value of the Sheraton Lakeside Inn and the Sheraton Inn -
Buffalo Airport in 1995, and the decline in the Fourwinds Resort
in 1995. These declines are primarily attributable to these
hotels being located in markets with increases in the supply of
available rooms and static demand for hotel rooms. See "Summary
Financial Data."
Legal Proceedings
There are no material pending legal proceedings to which
the Partnership or any of the Operating Partnerships is a party,
except for ordinary and routine litigation incidental to the
business of the Partnership.
Beneficial Ownership of Class A Units and Transactions In
Class A Units By Certain Persons
The following table sets forth information as of ________,
1997 with respect to persons who are known to the Partnership
(based on statements filed with the Commission pursuant to
Section 13(d) or 13(g) of the Exchange Act) to be the beneficial
owner of more than five percent of any class of the Partnership's
voting securities.
Name and address of Amount and nature of Percent of
Title of Class beneficial owner beneficial ownership Class
- -------------- ---------------- -------------------- -----
Class A Units Century City 3,794,646s(1) 71.0%
International Holdings
Limited
Paliburg Plaza Indirect Ownership
68 Ye Woo Street
Hong Kong
Class A Units Regal Hotel 1,825,065 (1) 34.2%
Management, Inc.
5775 DTC Boulevard
Suite 300 Direct Ownership
Englewood, Colorado
80111
Class A Units Gateway Hotel 769,041 (1) 14.4%
Holdings, Inc.
5775 DTC Boulevard
Suite 300 Direct Ownership
Englewood, Colorado
80111
Class A Units AIRCOA Equity 650,000 (1) 12.2%
Interests, Inc.
5775 DTC Boulevard
Suite 300 Direct Ownership
Englewood, Colorado
80111
Class A Units Richfield 546,740 (1)(2) 10.2%
Holdings, Inc.
5775 DTC Boulevard Direct Ownership
Suite 300
Englewood, Colorado
80111
Class A Units Investing Group: 432,300 (3) 8.1%
Direct Ownership
Hatfield Family
Trust, UA
RR1, Box 162
Ridgeland,
South Carolina 29936
(108,700 units 2.04%)
J. Mark Grosvenor
3145 Sports Arena
Boulevard
San Diego, California
92110
(110,000 units 2.06%)
Gerald Loehr Trust
c/o Gerald G. Loehr
P.O. Box 675207
Rancho Santa Fe,
California 92067
(43,500 units .81%)
Gardner-Smith Living
Trust, UA
7825 Fay Avenue,
Suite 250
La Jolla, California
92037
(43,200 units .81%)
Narans Investment
Management, Inc.
3440 South Vance Avenue,
Suite 700
Lakewood, Colorado
80227
(32,200 units .60%)
Blacor, Inc.
8235 Douglas Avenue,
Suite 1300
Dallas, Texas
75225
(37,100 units .69%)
Lance T. Shaner 303
Science Park Road
State College,
Pennsylvania
16803
(37,100 units .69%)
Don W. Cockroft
P.O. Box 770577
Memphis, Tennessee
38177
(10,500 units .20%)
Michael McNulty
8235 Douglas Avenue,
Suite 1300
Dallas, Texas 75225
(10,000 units .20%)
Class B Units Century City 950,000 (4)(5) 100.0%
Internationa
Holdings Limited Indirect Ownership
- ----------------
(1) Each of RHI, AEI, RHM and Gateway share voting and investment
power with Century City. (2) RHI has direct ownership of 546,740
Class A Units, an indirect ownership of 650,000 Class A Units
through AEI, and indirect ownership of 3,800 Class A Units through
Richfield, for a total direct and indirect ownership of
1,200,540, which represent 22.5% of the Class A Units.
(3) Individuals or trusts listed have jointly filed a Schedule
13-D indicating that they are acting as a group. Ownership
information is based on Amendment No. 2 to the Schedule 13-D
filed February 3, 1996.
(4) Class B Units are not listed on any securities exchange or
quoted on Nasdaq; however, they are convertible into Class A
Units under certain conditions as set forth in the
Partnership Agreement. No conversion rights have been
exercisable since the Partnership's inception through the
date hereof.
(5) RHI directly owns 200,000 Class B Units. RHM directly owns
688,746 Class B Units of the Partnership. BHI directly owns
61,254 Class B Units. AEI is the managing general partner of
BHI and therefore BHI is considered an affiliate. AEI and its
affiliates directly and indirectly own 7.1% of the
partnership interests of BHI.
In addition to its direct interest in the Partnership's
voting securities, RHI indirectly owns 100% of the outstanding
common shares of the General Partner. In February 1989, Novolane
and Kingsfield together acquired 51% of the voting securities of
RHI. Kingsfield sold the 5% interest it held in RHI to an
unaffiliated party during 1990. Novolane currently owns 49.77% of
RHI's outstanding voting securities and 100% of the voting
securities of RHM. In December 1994, Regal International Limited
purchased 45.58% of RHI's outstanding voting securities from an
unaffiliated entity. Century City indirectly controls Novolane,
Gateway and Regal International Limited. More than 60% of the
voting stock of Century City is beneficially owned by Mr. Lo Yuk
Sui, a citizen of the Hong Kong.
The General Partner directly owns notes, with face values
of $8,100,000, which are convertible into Class A Units at a
price of $16.60 per Class A Unit. Assuming that these were
converted, the General Partner would directly own 8.4% of the
Class A Units. Century City would then indirectly own 73.5% of
the Class A Units.
As of ___________, 1997, no officers or directors of the
General Partner or any of its affiliates had beneficial ownership
of any equity securities of the Partnership or the General
Partner.
None of Regal Holdings, RHM, Regal or their respective
affiliates have purchased, transferred or sold any Units within
the past 60 days.
For certain information concerning the directors and
executive officers of the General Partner, see Schedule 1 to this
Proxy Statement.
41
<PAGE>
SUMMARY FINANCIAL DATA
Set forth below is a summary of certain combined financial
information with respect to the Partnership, excerpted from the
information in the Partnership's Annual Reports on Form 10-K for
the years ended December 31, 1995 and December 31, 1996 and the
Partnership's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997. More comprehensive financial information is
included in such reports and other documents filed by the
Partnership with the Commission and the following summary is
qualified in its entirety by reference to such reports and other
documents and all of the financial information (including any
related notes) contained therein. These reports and other
documents should be available for inspection or copying as
discussed above under "Available Information."
Annual Financial Information
Years ended December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per unit amounts)
Consolidated
Operations Data
- ---------------
Revenue $ 48,553 45,399 46,157 45,268 42,998
Operating income
(loss)(1) 5,775 (630) 5,122 5,556 4,331
Net income
(loss) (1) 1,009 (5,421) 627 1,120 113
Income (loss)
per unit:
Class A: Net loss (0.02) (1.50) (.10) (.02) (.22)
Class B: Net income 1.14 2.86 1.25 1.27 1.17
Weighted average
number of units
outstanding
Class A 5,340,214 5,340,214 5,340,214 5,340,214 4,490,214
Class B 950,000 950,000 950,000 950,000 950,000
Ratio of earnings
to fixed charges 7.4% (29.8)%(1) 4.8% 8.9% 9.6%
Consolidated
Balance Sheet Data
- ------------------
Working capital
deficit (2) (1,716) (2,452) (7,178) (48,180) (48,771)
Total assets 70,131 69,406 73,542 77,369 78,589
Long-term debt
and affiliate
notes payable (2) 50,604 51,390 46,180 6,000 8,715
Partners' capital 10,761 9,752 15,173 14,546 13,426
Appraised values
of properties 86,760 82,875 86,490 89,530 90,240
Consolidated
Cash Flow Data
- --------------
Capital expenditures 3,847 3,286 2,049 2,353 2,530
Net cash provided
by operating
activities 5,071 3,143 5,568 5,841 4,080
Net cash used in
investing activities (3,847) (3,306) (1,944) (2,394) (2,433)
Net cash provided
(used) by financing
activities (990) 1,018 (5,279) (3,612) (1,391)
(1) Includes a loss for the impairment of the Partnership's
Lakeside property in the amount of $4,789 for the year ended
December 31, 1995.
(2) Certain of the Partnership's indebtedness to unaffiliated
financial institutions was classified as current at December
31, 1993 and 1992.
42
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition
The following discussion should be read in conjunction with
the other financial information contained in this Proxy
Statement.
Results of Operations
The following table reflects certain historical financial
information and operating statistics for the years ended December
31, 1996, 1995 and 1994.
Historical Financial Information
(in thousands, except operating statistics)
1996 1995 1994
---- ---- ----
Revenue:
Rooms $29,038 $26,810 $26,863
Food and beverage 12,272 11,733 12,274
Other property operations 7,243 6,856 7,020
------ ------ -----
Total revenue 48,553 45,399 46,157
Expenses:
Hotel operations 33,928 32,600 32,591
------ ------ ------
Gross operating profit 14,625 12,799 13,566
Other operating expenses (1)(2) 8,850 13,429 8,444
------ ------ -----
Operating income (loss) 5,775 (630) 5,122
Other expense, net (3) (4,766) (4,791) (4,495)
------ ------ ------
Net income (loss) $ 1,009 $(5,421) $ 627
======= ======= ========
Operating Statistics:
Average room rate $64.26 $59.55 $59.42
Average occupancy percent 78.3% 77.6% 77.9%
Number of available rooms 1,586 1,586 1,586
- --------------
(1) Includes rent, taxes and insurance, management fees,
depreciation and amortization, and impairment of property.
(2) 1995 includes impairment loss on the Lakeside property in the amount
of $4,789. No impairment loss was recorded in 1996 or 1994.
(3) Principally comprised of interest expense.
Revenue. Total revenue increased $3,154,000 or 6.9% in
1996, compared to a decrease of $758,000 or 1.6% in 1995. Of
total revenue in 1996, 1995 and 1994, rooms comprised 59.8%,
59.1% and 58.2%, respectively; food and beverage comprised 25.3%,
25.8% and 26.6%, respectively, and other property operations
comprised 14.9%, 15.1% and 15.2%, respectively.
Rooms revenue is primarily a function of the Properties'
occupancy levels and room rates. Rooms revenue increased
$2,228,000 or 8.3% in 1996 due primarily to an increase in
average daily room rates of $4.71 as well as an increase in
occupancy from 77.6% to 78.3%. Rooms revenue decreased $53,000 in
1995 due to a decrease in occupancy from 77.9% to 77.6% offset in
part by an increase in average daily room rates of $.13. Rooms
revenue increases in 1996 were primarily attributable to
increases at Sheraton Lakeside Inn, Regal University Hotel
(formerly Sheraton University Center) and Sheraton Inn - Buffalo
Airport. The leisure market in Orlando improved during 1996,
which resulted in Sheraton Lakeside generating higher average
room rates and increased wholesale business. Regal University
Hotel benefited from its 1995 renovation as well as strong growth
in average rooms rates in the group business and leisure markets
during 1996. While the leisure market continued to be stagnant at
Sheraton Inn - Buffalo Airport, aggressive rate strategies
resulted in improved occupancy in the leisure market.
43
<PAGE>
Rooms revenue decreases in 1995 were primarily attributable
to decreases at the Sheraton Inn Lakeside and Sheraton Inn
Buffalo Airport. The leisure market at Sheraton Inn Lakeside
continued to be impacted by significant competitive pressures,
resulting from an increase in room supply in the Orlando area.
The reduction in rooms revenue at Sheraton Buffalo was due to a
decrease in Canadian leisure activity resulting from declines in
the value of the Canadian dollar and loss of a substantial
airline room contract. The decreases in Lakeside and Buffalo were
mitigated by the impact of increases in rooms revenue, due to
increases in average rate, at Regal McCormick Ranch, Regal
University Hotel and Aurora Inn.
Food and beverage revenue increased $539,000 or 4.6% in
1996 and decreased $541,000 or 4.4% in 1995. Food and beverage
revenue is impacted by room occupancy and the mix of room sales
between leisure, group, contract and business customers. The food
and beverage revenue increase in 1996 resulted primarily from an
increase at Regal McCormick Ranch due to the addition of an
outdoor banquet facility. In addition, food and beverage revenue
benefited from increased banquet revenue at Regal University
Hotel and the increased occupancy at Sheraton Inn - Buffalo
Airport. The primary reason for the decrease in 1995 was related
to increased competition from stand-alone restaurants in the area
surrounding the Regal McCormick Ranch, the smaller percentage
contribution from the Canadian leisure market maintained at the
Sheraton Buffalo and a decrease in banquet activity at both
locations.
Other property operations consist of marina sales and
rentals (at Fourwinds), gift shops, food marts, lease income,
phone charges and other miscellaneous guest services. Other
property operations increased $387,000 or 5.6% in 1996 and
decreased $164,000 or 2.3% in 1995. The 1996 increase in other
property operations was attributable to increased activities at
Regal McCormick Ranch during the first quarter of 1996,
benefiting from Phoenix, Arizona hosting the 1996 Super Bowl and
increases at Sheraton Lakeside's food mart outlet. The 1995
decrease in other property operations was primarily due to storm
damage at the Clarion Fourwinds Resort, which impacted the
"marina-related" revenue.
While the hotel industry continues to be very competitive,
the Properties, as a group, have outperformed the industry when
measuring revenue per available room ("Revpar," calculated as
occupancy percent times average room rate). The Properties'
Revpar, as a group, was $50.32, $46.23 and $46.29 in 1996, 1995
and 1994, respectively. Revpar for the United States hotel
industry, accumulated by Smith Travel Research, was $47.08,
$44.11 and $41.49 in 1996, 1995 and 1994, respectively.
Costs and Operating Expenses. Total operating expenses
decreased $3,251,000 or 7.1% in 1996. The decrease is primarily
attributable to the impairment of the Lakeside property of
$4,789,000 in 1995, and an increase in other operating expenses
of $1,538,000. Excluding the impairment of the Lakeside property,
total operating costs increased primarily as a result of
increases in rooms and administrative and general expenses.
Although rooms expense increased over 1995, rooms expense as a
percent of rooms revenue decreased to 26.8% in 1996 from 27.5% in
1995. This resulted from the increase in rooms revenue being
generated through increased average room rates, rather than
increased occupancy. Food and beverage costs as a percent of food
and beverage revenue decreased to 71.6% in 1996 from 73.1% in
1995. As discussed below, in 1995 additional marketing expenses
were incurred in connection with the repositioning of restaurants
at certain of the Partnership's hotels. The increase in
administrative and general expense is primarily due to increased
legal costs.
Total operating expenses increased $4,994,000 or 12.2% in
1995. This increase is primarily attributable to the impairment
of the Lakeside property of $4,789,000, and an increase in other
operating expenses of $196,000. Excluding the impairment of the
Lakeside property, total operating costs increased primarily as a
result of increased food and beverage costs. Food and beverage
costs as a percent of food and beverage revenue increased to
73.1% in 1995 from 71.4% in 1994. The primary reason for the
increase in this percentage is a result of costs incurred for
promotional campaigns and marketing plans to reposition the
restaurants at the Clarion Fourwinds Resort, Aurora Inn and Regal
McCormick Ranch.
Included in costs and operating expenses in 1995 is a loss
for the impairment of the Lakeside property in the amount of
$4,789,000, recorded in the fourth quarter of 1995. The
circumstances leading up to this impairment loss were primarily a
result of the existing and expected local market conditions, a
decreasing trend in the property's
44
<PAGE>
appraised value and historical operating results in recent years.
This loss was recognized in accordance with the provisions of
Statement of Financial Accounting Standards No. 121, Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
(SFAS No. 121), which was issued by the Financial Accounting
Standards Board in March 1995 and adopted by the Partnership in
the fourth quarter of 1995. The Partnership believes that
expected future cash flows from the operations of its other hotel
properties will be sufficient to recover their carrying values.
The Partnership has no current plans to sell any of its
Properties for less than their carrying values.
Other Expenses. Other expenses decreased $25,000 or .5% in
1996 as compared to an increase of $296,000 or 6.6% in 1995. The
decrease in 1996 is attributable to a decrease in interest
expense of $79,000 due primarily to a lower average interest rate
on the Partnership's first mortgage loan, net of a $54,000
increase in amortization of debt issue costs. The increase in
1995 is primarily attributable to an increase in interest expense
of $191,000 due to higher levels of debt, net of a $123,000
decrease in amortization of debt issue costs.
Liquidity and Capital Resources
Cash Flows. Net cash provided by operating activities was
$5,071,000 in 1996, an increase of $1,928,000 from 1995. This
increase is the result of an increase in cash received from
customers, due to increased hotel revenue, of $2,314,000, a
decrease in interest paid of $885,000, offset by increases in
cash paid to suppliers, vendors and employees of $829,000 and
decrease in other cash receipts of $442,000.
Net cash provided by operating activities was $3,143,000 in
1995, a decrease of $2,425,000 from 1994. This decrease is the
result of a decrease in cash received from customers, due to
lower hotel revenues, of $1,132,000, an increase of $1,013,000 in
interest paid, and an increase in cash paid to employees of
$493,000, offset in part by decreases in cash paid to suppliers
and vendors of $172,000 and increases in other cash receipts of
$41,000.
Net cash used in investing activities increased $541,000 in
1996 due to increases in capital expenditures. Net cash used in
investing activities increased $1,362,000 in 1995 due to
increases in capital expenditures and cash paid for other assets.
Net cash used in financing activities increased $2,008,000
in 1996 due to the closing of the new first mortgage loan in 1995
that generated loan proceeds. Net cash generated by financing
activities increased $6,297,000 in 1995 also due to the closing
of the new first mortgage loan.
The Partnership anticipates funding its 1997 debt service
obligations and capital expenditures through a combination of
operating cash flows and draws on its line of credit, to handle
seasonal demands, as necessary. The Partnership has capital
improvements of approximately $4,600,000 planned in 1997.
Indebtedness. At December 31, 1996 the Partnership had a
working capital deficit of $1,716,000. The Partnership's working
capital requirements are expected to be satisfied through the
management of payables, collection of receivables, and use of the
Partnership's revolving credit line.
On June 8, 1995, the Partnership signed a credit agreement
with a new lender to provide a new $45,000,000 first mortgage
loan and a $1,000,000 revolving credit line. The proceeds of the
$45,000,000 first mortgage loan were used to pay off the existing
mortgage loan and the note payable to bank with the balance
available for certain property renovations and the payment of a
facility fee and closing costs. Regal Holdings, an affiliate of
the General Partner, has provided a limited guarantee for the new
first mortgage loan. The Partnership paid loan guarantee fees of
$225,000 and $230,000 in 1996 and 1995, respectively, to Regal
Holdings. This is an annual fee and is calculated as 0.5% of the
outstanding loan balance at June 8 of each year.
The new credit agreement includes a variety of interest
rate options, the most favorable of which is the Eurodollar Rate
plus 2%, which was 7.53% at December 31, 1996. Repayment of the
new first mortgage loan is
46
<PAGE>
based on a twenty-year amortization with a maturity date at June
2000, while the revolving credit line is renewable annually at
the option of the lender.
A condition of the credit agreement signed by the
Partnership for the first mortgage loan and revolving credit line
required the subordination of the $6,000,000 notes payable to the
General Partner (the "Notes"). The General Partner agreed to this
subordination, and as a result, on September 26, 1995, the Board,
in its capacity as General Partner, and the Advisory Committee of
AHP authorized the extension of the term and deferral of certain
past-due interest on the Notes.
Pursuant to this extension, the Notes, which originally
matured in January 1995 now become due on June 8, 2000, which is
coterminous with the new mortgage loan. Interest accrued on the
Notes after December 31, 1994, was paid at closing. Interest
incurred subsequent to closing continues to be accrued at 12% per
annum and is paid monthly.
The unpaid interest on the Notes accrued prior to January
1, 1995, in the amount of $2,100,000, was converted into debt
pursuant to a new promissory note ("New Note") which will also
mature on June 8, 2000 and is also subordinate to the first
mortgage loan. The New Note accrues interest at the rate of 12%
per annum, payable at maturity.
The Notes and New Note are convertible into Class A Units
of the Partnership at $16.60 per unit. In addition, these notes
stipulate that 25% of any excess cashflow, as defined, will be
applied against the principal portion of the notes outstanding.
The new first mortgage loan contains numerous covenants
requiring, among other matters, the maintenance of a minimum debt
service coverage ratio including the deferral of management fees
payable to an affiliate if this minimum debt service ratio is not
achieved, restrictions on additional indebtedness, limitations on
annual cash distributions to Class A Unitholders, limitations on
the payment of principal on the affiliate notes payable,
prepayment premiums during the first two years, and maintenance
of minimum aggregate capital expenditures equal to 5% of revenue.
Partnership Distributions and Unit Conversions. The
Partnership Agreement provides for periodic distribution of
distributable cash flow, as defined, to the partners subject to
any applicable restrictions and the discretion of the General
Partner. Distributable cash flow is generally defined as cash
flow from operations of the hotel properties. Such cash is
allocated and distributed (net of the General Partner's 1%
general partnership interest in the Operating Partnerships) 99%
to the Class A Unitholders and 1% to the General Partner until
the Class A Unitholders have received defined Minimum Annual
Distributions. The Minimum Annual Distribution is $2.16 per Class
A Unit. Any portion of the Minimum Annual Distribution that is
not paid by the Partnership in any year is added to the
cumulative unpaid Minimum Annual Distribution. The Partnership
has not made any distributions since 1990. Prior to making future
distributions, the Partnership will comply with its capital
expenditure requirements as specified in its mortgage loan
agreement and maintain sufficient working capital balances. At
December 31, 1996, the cumulative unpaid Minimum Annual
Distribution per Class A Unit significantly exceeds the
Partnership's net asset value per unit based on the appraised
values of the Properties. At this time it is unlikely there will
be any excess cash flow to be available for distribution to the
Class A Unitholders in 1997.
The Class B Units entitle each holder of Class B Units
("Class B Unitholder") to a limited partnership interest which is
subordinated to the Class A Units. The Class B Units are
redeemable or convertible in certain circumstances. The Class B
Units do not receive distributions until the Class A Unitholders
receive Minimum Annual Distributions, which have not been made by
the Partnership since 1990. Beginning in 1997, in accordance with
the terms of the Partnership Agreement, and each year thereafter
through 2001, a minimum of 250,000 Class B Units are required to
be converted at a redemption value of $20.00 per Class B Unit, by
issuing Class A Units valued at the then current market price of
a Class A Unit. Therefore, the number of Class A Units to be
issued upon conversion of a Class B Unit pursuant to the Class B
Unit Conversion will be determined at the time of the conversion
by dividing $20.00 by the then current market price of a Class A
Unit. Current market price for this calculation is the average
market price for a Class A Unit during the last five trading days
prior to the conversion.
47
<PAGE>
As discussed below under the "Market for Partnership's Units;
Distributions," the Partnership Agreement was amended to defer
the 1997 conversion of Class B Units pursuant to the Class B Unit
Conversion.
Based on current market prices of the Class A Units, such
required conversion is expected to result in substantial dilution
to the pre-conversion Class A Unitholders. For example, based on
the average closing month end market price of Class A Units
during 1996 of approximately $1.77, the conversion of 250,000
Class B Units in the first year of the required conversion period
would result in an approximate 35% dilution to the Class A
Unitholders upon conversion. The conversion of all 950,000 Class
B Units pursuant to the Class B Unit Conversion would result in
an approximate 67% dilution to the pre-conversion Class A
Unitholders at the $1.77 per unit market price. In addition,
using the same per unit market price for a Class A Unit of $1.77,
affiliate ownership of Class A Units would increase to
approximately 81% and 90% upon conversion of the first 250,000
Class B Units and conversion of all 950,000 Class B Units,
respectively. Changes in the market price of Class A Units do not
result in proportional changes in dilution. The market price of
the Partnership's Class A Units is subject to fluctuations and
there is no assurance that such prices upon conversion pursuant
to the Class B Unit Conversion will approximate the average per
unit market price in 1996.
Pursuant to the Partnership Agreement, the Class A Units to
be issued upon conversion of the Class B Units pursuant to the
Class B Unit Conversion must be identical to the Class A Units
existing prior to the conversion date. The General Partner has,
on the advice of counsel, determined that the Class B Units
convert into identical Class A Units because there are elective
procedures, which are standard practice for publicly-traded
partnerships, that make the Class A Units received upon
conversion fungible for tax purposes with all preexisting Class A
Units.
Property Values. The appraised value of the Properties is
$86,760,000 at December 31, 1996, which exceeds their carrying
values of $62,676,000. In accordance with Statement on Financial
Accounting Standards on Accounting for the Impairment of
Long-Lived Assets, which was issued in 1995, the Partnership
recognized an impairment on the Lakeside property in 1995. The
Partnership has no current plans to sell any of its Properties
for less than their carrying values.
Income Taxes. In accordance with the Revenue Act of 1987,
the Partnership will become a taxable entity in 1998. As a
result, the income of the Partnership will be taxable as a
corporation and distributions from the Partnership will continue
to be taxable to the individual partners. The Partnership
anticipates that it will have an excess of tax basis over book
basis of the Properties at January 1, 1998 of approximately
$1,960,000, which will result in tax deductions in 1998 and later
years. Therefore, the Partnership does not expect that the impact
on net income in 1998 from becoming a taxable entity will be
significant. The Partnership is continuing to evaluate various
alternatives to minimize the impact on the Partnership as a
result of these changes in tax laws.
Inflation. The rate of inflation as measured by changes in
the average consumer price index has not had a material impact on
the revenue or net income of the Partnership in the three most
recent years.
48
<PAGE>
Interim Financial Information
Three months ended March 31,
----------------------------
1997 1996
---- ----
(In thousands, except per unit amounts)
Consolidated Operations Data
- ----------------------------
Revenue $ 12,269 12,368
Operating income 1,342 1,567
Net income 188 372
Income (loss) per unit:
Class A (0.02) 0.02
Class B 0.28 0.29
Weighted average number
of units outstanding
Class A 5,340,214 5,340,214
Class B 950,000 950,000
Ratio of earnings to fixed charges 5.5% 10.9%
Three months ended
March 31, 1997
--------------
(In thousands)
Consolidated Balance Sheet Data
Working capital deficit (1,381)
Total assets 70,450
Long-term debt and affiliate
notes payable 50,322
Partners' capital 10,949
Consolidated Cash Flow Data Three months ended March 31,
- --------------------------- ----------------------------
1997 1996
---- ----
(In thousands, except per unit amounts)
Capital expenditures 818 204
Net cash provided by
operating activities 1,789 1,528
Net cash used in
investing activities (818) (204)
Net cash used by
financing activities (280) (270)
Results of Operations
Partnership revenue for the first three months of 1997
decreased $99,000 or .8% as compared to the first three months of
1996. Average occupancy and daily room rates for the portfolio of
1,586 rooms are summarized as follows:
Three months
ended March 31,
---------------
1997 1996
---- ----
Average occupancy 72.7% 75.9%
Average daily room rates $72.01 $66.45
The decrease in the Properties revenue for the first three
months of 1997 as compared to the first three months of 1996 was
primarily a result of decreased food and beverage revenue offset
by increased room revenue. Food and beverage revenue is
influenced, in part, by occupancy levels at each of the
Properties. For the first three months of 1997, occupancy levels
at the Properties decreased by 4.2% as compared to the first
three months of 1996 which contributed to a decrease in food and
beverage revenue of 4.6% during the same periods. Rooms revenue
is a function of occupancy levels as well as average daily room
rates. For the first three months of 1997, rooms revenue
increased by 1.6% over the first three months of 1996, due to an
increase in average daily rates of 8.4% offset in part by a
decrease in occupancy levels of 4.2% for the same periods.
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Net rooms margin (rooms revenue less rooms expenses)
increased $56,000 or 1.0% for the first three months of 1997 as
compared to the first three months of 1996, as revenue increased
by $116,000 or 1.6% while expenses increased by $60,000 or 3.2%.
The increase in net rooms margin was primarily due to an increase
at Lakeside offset by a decrease at University. The increase in
net rooms margin at Lakeside was generated through an increase in
average daily room rates, primarily in the wholesale market
segment. The decrease at University was primarily due to
decreased occupancy levels that were offset in part by increased
average daily room rates. These changes were a result of
decreased rooms sold in the group market segment, which has
historically provided higher occupancy levels at lower average
daily room rates.
Net food and beverage margin (food and beverage revenue
less food and beverage expenses) increased $28,000 or 3.4% for
the first three months of 1997 as compared to the first three
months of 1996, as revenue decreased $140,000 or 4.6%, while
expenses decreased $168,000 or 7.7%. The increase in net food and
beverage margin was primarily due to an increase at McCormick
exceeding a decrease at Buffalo. The increase in net food and
beverage margin at McCormick was primarily due to the addition of
a catering pavilion at the property during 1996, which increased
banquet revenue, and reductions in payroll costs. The decrease in
net food and beverage margin at Buffalo was primarily due to
changes in the segment mix of the Properties' guests to include
more contract business, which typically does not use the hotel's
food and beverage outlets as much as other segments.
Additionally, Buffalo experienced increased food and payroll
costs.
Revenue from other property operations decreased $75,000 or
3.7% for the first three months of 1997 as compared to the first
three months of 1996. This decrease was primarily a result of a
decrease in occupancy levels at the Properties during the first
three months of 1997.
Operating income for the first three months of 1997
decreased $225,000 or 14.4% compared to the first three months of
1996 as revenue decreased $99,000 or .8% and operating costs
increased $126,000 or 1.2%. The increase in operating costs is
primarily due to increased professional and legal fees, offset in
part by decreased operating costs at the Properties. The
increased professional and legal fees are associated with the
merger transaction discussed below in the "Other Matters"
section.
Interest expense decreased $41,000 or 3.4% for the first
three months of 1997 as compared to the first three months of
1996 as a result of a slight decrease in the average interest
rate (inclusive of amortization of debt issue costs) from 9.13%
to 8.94% and lower average debt levels.
Cash flow from operations differs from net income of the
Partnership due to the effects of depreciation, amortization and
accruals as reflected in the consolidated statements of cash
flows. Net income/(loss) per Class A Unit and the net income per
Class B Unit reflect allocations of the net income as required by
the Partnership Agreement.
Liquidity and Capital Resources
Net cash provided by operating activities for the first
three months of 1997 was $1,789,000, an increase of $261,000 as
compared with the same period in 1996. The increase is primarily
attributable to the increase in cash received from customers of
$528,000 and the decrease in cash paid to suppliers and vendors
of $410,000 offset by an increase in interest paid of $529,000.
Cash used in investing activities increased $614,000 in the first
three months of 1997 compared to the first three months of 1996.
The increase primarily reflects capital expenditures at
McCormick. Cash used in financing activities increased $10,000 in
the first three months of 1997 compared to the first three months
of 1996.
The Partnership had indebtedness at March 31, 1997 of
$51,446,000 as compared to $51,726,000 at December 31, 1996. At
March 31, 1997, the Partnership had a working capital deficit of
$1,381,000 compared to a working capital deficit of $1,716,000 at
December 31, 1996. The Partnership's working capital
requirements, debt service obligations and capital expenditures
are expected to be satisfied through a combination of operating
cash flows and draws on its revolving line of credit. The
Partnership has capital improvements of approximately
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$4,600,000 planned in 1997, of which approximately $800,000 of
improvements were made through March 31, 1997. These improvements
will be primarily funded from hotel operations.
The market value of the Properties differs significantly
from the historical cost of the Properties as reflected in the
Partnership's balance sheet at March 31, 1997. As indicated under
Item 2 in the Partnership's 1996 Form 10-K, the aggregate
appraised value of the Properties at December 31, 1996 was
$87,300,000. The December 1996 appraised value may not be
representative of the appraised value which will be obtained as
of December 31, 1997 and is not necessarily indicative of the
ability of the Partnership to consummate a sale of the Properties
or the actual sale price to be realized from the sale of the
Properties. However, the appraised value does represent the
appraiser's opinion of the most probable price for which the
Properties should sell in a competitive market.
Partnership Distributions and Unit Conversions
The Partnership Agreement provides for periodic
distribution of distributable cash flow, as defined, to the
partners subject to any applicable restrictions and the
discretion of the General Partner. The Partnership has not made
any distributions since 1990. Prior to making future
distributions, the Partnership will comply with its capital
expenditure requirements as specified in its mortgage loan
agreement and maintain sufficient working capital balances. The
Partnership currently has a Minimum Annual Distribution
requirement of $2.16 per Class A Unit. At March 31, 1997, the
cumulative unpaid Minimum Annual Distribution per Class A Unit
significantly exceeds the Partnership's net asset value per unit
based on the December 31, 1996 appraised values of the
Properties. At this time, it is unlikely that there will be any
funds available for distribution to the Class A Unitholders in
1997.
Beginning in 1997, in accordance with the terms of the
Partnership Agreement, and each year thereafter through 2001, a
minimum of 250,000 Class B Units are required to be converted at
a redemption value of $20.00 per Class B Unit, by issuing Class A
Units valued at the current market price of a Class A Unit. As
discussed below under "Market for Partnership's Units;
Distributions," the Partnership Agreement was amended to defer
the 1997 conversion of Class B Units pursuant to the Class B Unit
Conversion.
Based on current market prices of the Class A Units, such
required conversion is expected to result in substantial dilution
to the pre-conversion Class A Unitholders. For example, based on
the average closing month-end market price of Class A Units
during the first quarter of 1997 of approximately $2.04, the
conversion of 250,000 Class B Units in the first year of the
required conversion period would result in an approximate 31%
dilution to the Class A Unitholders upon conversion. The
conversion of all 950,000 Class B Units pursuant to the Class B
Unit Conversion would result in an approximate 64% dilution to
the pre-conversion Class A Unitholders at the $2.04 per unit
market price. In addition, using the same per unit market price
for a Class A Unit of $2.04, affiliate ownership of Class A Units
would increase to approximately 80% and 89% upon conversion of
the first 250,000 Class B Units and conversion of all 950,000
Class B Units, respectively, Changes in the market price of Class
A Units do not result in proportional changes in dilution. The
market price of the Partnership's Class A Units is subject to
fluctuations and there is no assurance that such prices upon
conversion pursuant to the Class B Unit Conversion will
approximate the average per unit market price in the first
quarter of 1997.
Pursuant to the Partnership Agreement, the Class A Units to
be issued upon conversion of the Class B Units pursuant to the
Class B Unit Conversion must be identical to the Class A Units
existing prior to the conversion date. The General Partner has,
on the advice of counsel, determined that Class B Units convert
into identical Class A Units because there are elective
procedures, which are standard practice for publicly-traded
partnerships, that make Class A Units received upon conversion
fungible for tax purposes with all pre-existing Class A Units.
MARKET FOR PARTNERSHIP'S UNITS; DISTRIBUTIONS
Class A Units of the Partnership are traded on the American
Stock Exchange under the symbol AHT. There is no established
public trading market for the Partnership's Class B Units, the
majority of which are held by affiliates of the General Partner.
During 1994 and 1996 the Partnership did not sell any Units.
During 1995, the
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Partnership sold the New Note with a face value of $2,100,000.
The Note and the New Note are convertible into Class A Units at a
price of $16.60 per Class A Unit.
Under certain circumstances described in the Partnership
Agreement, the Class B Units may be converted into Class A Units.
Beginning in 1997, in accordance with the terms of the
Partnership Agreement, and each year thereafter through 2001, a
minimum of 250,000 Class B Units are required to be converted at
a redemption value of $20.00 per Class B Unit, by issuing Class A
Units valued at the then current market price of a Class A Unit.
In accordance with the Partnership Agreement, the number of Class
A Units to be received upon conversion of a Class B Unit pursuant
to the Class B Unit Conversion will be determined by dividing
$20.00 by the average of the closing prices of Class A Units for
the five trading days ending on May 30, 1997. In conjunction with
approval of the Merger transaction, the General Partner has
amended the Partnership Agreement in order to defer the mandatory
conversion of Class B Units into Class A Units pursuant to the
Class B Unit Conversion. The amendment provides that the 250,000
Class B Units scheduled to convert into additional Class A Units
during 1997 will convert on the earliest to occur of (i) any
termination of the definitive Merger Agreement, (ii) the record
date for any vote of the Class A Unitholders (other than the vote
on the Merger), (iii) the record date for any distribution by the
Partnership to holders of Class A Units and (iv) September 30,
1997. In light of the likelihood of completion of the Merger, the
General Partner adopted this amendment in order to avoid
administrative and other issues arising from the issuance of
additional Class A Units pursuant to the Class B Unit Conversion.
The following table sets forth the range of high and low
closing prices of Class A Units for each full quarterly period
for the two most recent years, as reported by the American Stock
Exchange.
For the Quarter Ended High Low
--------------------- ---- ---
March 31, 1995 4 2 7/8
June 30, 1995 3 5/8 2 3/16
September 30, 1995 2 13/16 1 13/16
December 31, 1995 2 1/8 1 1/2
March 31, 1996 2 1 11/16
June 30, 1996 2 1/16 1 11/16
September 30, 1996 2 1/8 1 3/8
December 31, 1996 2 1/8 1 3/8
March 31, 1997 2 1/4 1 7/8
June 30, 1997(1)
- -------------
(1) Through _________, 1997.
As of __________, 1997, the Partnership had approximately
1,400 Class A Unitholders.
The Class A Unitholders have not received any distributions
since 1990. The Class B Units do not receive distributions until
the Class A Unitholders receive Minimum Annual Distributions, as
defined in the Partnership Agreement. In addition, the
Partnership's mortgage loan agreement stipulates certain
limitations on these distributions based on excess cash flow as
defined in the mortgage loan agreement. See "Summary Financial
Data."
TAX, LEGALITY AND LIABILITY
Pursuant to Section 17.4 of the Partnership Agreement,
Coudert Brothers, counsel to the Partnership, and a Delaware
counsel selected by the Partnership will provide an opinion prior
to the Effective Time to the effect that neither the existence
nor the exercise of the power otherwise granted to the
Unitholders or any class thereof or the approval of the Merger by
the Unitholders would (i) cause the Partnership or its Operating
Partnerships to be classified as an association taxable as a
corporation rather than as a partnership for federal income tax
purposes, (ii)
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cause the loss of limited liability of the Partnership under any
operating partnership agreement of the Operating Partnerships or
of the Unitholders as limited partners under the Partnership
Agreement, or (iii) violate the Delaware Act.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Partnership with the
Commission pursuant to the Exchange Act (Commission File No.
1-9563) are incorporated by reference herein:
1. Schedule 13E-3 Transaction Statement dated
June 26, 1997.
2. Annual Report on Form 10-K for the year ended
December 31, 1996.
3. Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997.
THIS PROXY STATEMENT INCORPORATES BY REFERENCE DOCUMENTS
RELATING TO THE PARTNERSHIP WHICH ARE NOT PRESENTED HEREIN OR
DELIVERED HEREWITH. DOCUMENTS RELATING TO THE PARTNERSHIP (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY
STATEMENT IS DELIVERED, ON WRITTEN OR ORAL REQUEST, WITHOUT
CHARGE, FROM AIRCOA HOTEL PARTNERS, L.P., 5775 DTC BOULEVARD,
ENGLEWOOD, COLORADO 80111, ATTN: CORPORATE SECRETARY, TELEPHONE
(303) 220-2000. COPIES OF DOCUMENTS SO REQUESTED WILL BE SENT BY
FIRST CLASS MAIL, POSTAGE PAID, WITHIN ONE BUSINESS DAY OF THE
RECEIPT OF SUCH REQUEST.
All documents filed by the Partnership with the Commission
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange
Act after the date hereof and prior to the date of the Special
Meeting shall be deemed to be incorporated by reference herein
and shall be a part hereof from the date of filing such
documents. Any statements contained in a document incorporated by
reference herein or contained in this Proxy Statement shall be
deemed to be modified or superseded for purposes hereof to the
extent that a statement contained herein (or in any other
subsequently filed document which also is incorporated by
reference herein) modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed to
constitute a part hereof except as so modified or superseded.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED.
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SCHEDULE 1
The General Partner
Set forth below is the name, citizenship, current business
address, principal occupation and employment history for at least
the past five years of each director and executive officer of the
General Partner of the Partnership.
Daniel Bong Shu Yin Daniel Bong has served as a Director
for Century City, a Bermuda corporation
listed in Hong Kong and engaged in
property development and hotel ownership
and management, since 1989. He is
also a Director of the subsidiary
corporations of Century City, Paliburg
International Holdings Limited
("PIHL"), Deputy Chairman of Regal Holdings
and has been a Director of RHM
since 1990. Mr. Bong is responsible for
overseeing the hotel operations and is a
qualified architect. Mr. Bong has served
as President/Chief Executive Officer
of RHI since October 1995 and as a Director
since May 1995. Mr. Bong's
business address is 18th floor, Paliburg
Plaza, 68 Ye Wo Street, Causeway Bay,
Hong Kong. Mr. Bong is a citizen of Canada.
Lawrence Lau Sui Keung Lawrence Lau joined Century City in 1994
and has served as a Director since
1995. He also serves as a Director of
PIHL and Regal Holdings and has been a
Director of RHM since May 1995. Mr. Lau
is in charge of the overall financial
and accounting functions of Century City
and its subsidiaries. Mr. Lau served
as Group Controller (Finance) for Shaw
Brothers (H.K.) Ltd. from 1992 to
1994. From 1989 to 1992 he was Financial
Controller for Regal Pacific
Holdings Limited. Mr. Lau has served
as a Director of RHI since May 1995.
Mr. Lau's business address is 18th floor,
Paliburg Plaza, 68 Yee Wo Street,
Causeway Bay, Hong Kong. Mr. Lau is a
citizen of Canada.
Douglas M. Pasquale Douglas M. Pasquale has served as
President/CEO of the General Partner since
February 1996. He has also served as a
Director, President and Chief Executive
Officer of RHM since May 1995. He previously
served as an Executive Vice
President since February 1992 and was
appointed Chief Financial Officer in
August 1994. Mr. Pasquale joined the
General Partner in 1986 as Vice
President of Investor Services. Mr. Pasquale
did not serve as an officer of the
General Partner from August 1989 to
February 1992, but continued to serve as
Vice President of RHI during this time
period. Mr. Pasquale became a Director
of RHI in February 1993. Mr. Pasquale's
business address is 5775 DTC
Boulevard, Englewood, Colorado 80111. Mr.
Pasquale is a citizen of the United States.
Michael Sheh Michael Sheh has served as Executive Vice
President since February 1997. He
has served as Senior Vice President/
Treasurer of the General Partner since June
1995 and he has served as a Director
and Executive Vice President of RHM
since May 1995. Mr. Sheh served as
Vice President/Treasurer of RHI from
1989 to 1995, and as Senior Vice President
from 1995 to February 1997, when
he was elected Executive Vice President.
He became a Director of RHI in May
1995. Mr. Sheh's business address
is 5775 DTC Boulevard, Englewood,
Colorado 80111. Mr. Sheh is a citizen
of the United Kingdom.
Carol K. Werner Carol K. Werner served as General Counsel,
Secretary and Executive Vice
President of the General Partner from
1989 to March 1995. She also served as
Director, Executive Vice President and
Secretary of RHI and certain affiliates,
including RHM, from 1989 to 1995 and
is currently a director of RHI. Since
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August 1995, Ms. Werner has been working
with the Denver, Colorado office of
Coudert Brothers, an international law
firm. Ms. Werner was an associate of
Coudert Brothers prior to her employment
with the General Partner. Ms.
Werner's business address is 1999
Broadway, Suite 2235, Denver, Colorado
80202. Ms. Werner is a citizen of the
United States.
Anthony Williams Anthony Williams is the Chairman of
the executive committee of Coudert
Brothers, an international law firm, and
has been a partner since 1981. He has
served as a director of RHI and of the
General Partner since 1989. Mr. Williams
was also elected Chairman of RHI and certain
of its affiliates in May 1997. Mr.
Williams' business address is 1114
Avenue of the Americas, New York, New
York 10036. Mr. Williams is a citizen
of the United States.
There are no family relationships between any of the
directors or the executive officers of the General Partner.
Coudert Brothers, an international law firm of which Anthony
Williams and Carol Werner are attorneys, has provided legal
services for the Partnership and affiliates since the beginning
of 1989. Century City, PIHL and Regal Holdings are affiliates of
the Partnership.
Century City International Holdings Limited
Set forth below is the name, citizenship, principal
occupation and employment history for at least the past five
years of each director and executive officer of Century City, the
ultimate parent company of Regal Holdings, RHM and Regal. The
business address of each individual listed below is 18th Floor,
Paliburg Plaza, 68 Ye Wo Street, Causeway Bay, Hong Kong.
Lo Yuk Sui Lo Yuk Sui has served as Chairman and
Managing Director of Century City
since 1989 when Century City was
established in Bermuda as the ultimate
holding company of Century City and its
affiliates (the "Group"). Mr. Lo is
also the chairman and managing director
of Paliburg Holdings Limited ("PHL")
and Regal Holdings. Mr. Lo is a qualified
architect. He is also the chairman of
the Hong Kong Tourist Association and
a Council Member of the Hong Kong
Trade Development Council. Mr. Lo is
a citizen of Hong Kong.
Daniel Bong Shu Yin See "-- The General Partner" above.
Michael Choi Chi Wing Michael Choi Chi Wing has served as
a Director of Century City since January
1996. Mr. Choi was previously with
the Group as a senior executive and
director for seven years prior to 1991.
Mr. Choi rejoined the PHL Group in
1993. He is a qualified architect and
has extensive experience in the property
development and investment business
as well as project management. Mr. Choi
is in charge of the property and construction
related businesses of the Group.
Mr. Choi is also the deputy managing
director of PHL and a director of Regal
Holdings. Mr. Choi is a citizen of the
United Kingdom.
Lawrence Lau Sui Keung See "-- The General Partner" above.
Kenneth Ng Kwai Kai Kenneth Ng Kwai Kai has served as a
Director and Secretary of Century City
since 1989. Mr. Ng joined the Group in
1985. Mr. Ng is in charge of the
company secretarial and corporate finance
functions of the Group. Mr. Ng is a
chartered Secretary. He is also a director
of PHL and the secretary of Regal
Holdings. Mr. Ng is a citizen of Hong Kong.
John Poon Cho Ming John Poon Cho Ming has served as a Director
of Century City since 1993. Mr.
Poon joined the Group in 1990. Mr. Poon is
a qualified solicitor and in addition
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to being the Group General Counsel, he is
also responsible for the Group's
corporate finance functions. Mr. Poon is
a citizen of Canada.
Anthony Chuang Anthony Chuang has served as a non-Executive
Director of Century City since
1993. Mr. Chuang graduated from University
of Notre Dame, South Bend,
Indiana, and has extensive experience
in the commercial field. Mr. Chuang is a
citizen of Hong Kong.
Ng Siu Chan Ng Siu Chan has served as a non-Executive
Director of Century City since
1994. He is also a non-executive director
of PHL. Mr. Ng is the chairman and
general manager of Kowloon Development
Company Limited and a director of
The Kowloon Motor Bus Co. (1993) Limited,
both of which are publicly listed
in Hong Kong. Mr. Ng is a citizen of
the United Kingdom.
Regal Hotel Management, Inc.
Set forth below is the name, citizenship, current business
address, principal occupation and employment history for at least
the past five years of each director and executive officer RHM.
Daniel Bong Shu Yin See "-- The General Partner" above.
Lawrence Lau Sui Keung See "-- The General Partner" above.
Douglas M. Pasquale See "-- The General Partner" above.
Michael Sheh See "-- The General Partner" above.
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Annex B
[LETTERHEAD OF HOULIHAN LOKEY HOWARD & ZUKIN]
May 2, 1997
Aircoa Hospitality Services, Inc.
Special Committee of the Advisory Committee of
Aircoa Hotel Partners, L.P.
Mr. James W. Hire
Hire & Associates
1383 Solitude Lane
Evergreen, CO 80439
Mr. Anthony C. Dimond
Miramar Asset Management Inc.
617 Veterans Boulevard, Suite 212
Redwood City, CA 94063
RE: Aircoa Hotel Partners, L.P.
Gentlemen:
We understand that Aircoa Hotel Partners, L.P. ("Aircoa") is a
limited partnership which was organized in December 1986 by
Aircoa Hospitality Services, Inc. ("AHS," the "General Partner"
or the "Company") to acquire, own and operate hotel and resort
properties. Aircoa owns and operates six hotel and resort
properties (the "Properties") through six operating partnerships
which hold title to the Properties. Aircoa owns a 99 percent
limited partnership interest in each of the six operating
partnerships which hold title to the Properties. AHS is the one
percent general partner of each of the operating partnerships.
AHS is an affiliate of Regal Hotel Management, Inc. ("Regal").
Richfield Hospitality Services, Inc. ("Richfield") operates and
manages each of the Properties under management agreements. The
limited partnership units of Aircoa consist of Class A and Class
B units ("Class A" and "Class B," respectively). The Class A
units are publicly traded and as of December 31, 1996 there were
5,340,214 Class A units outstanding. Of the Class A units, Regal
and its affiliates own or control approximately 3,800,000 units,
or approximately 71 percent of the total outstanding Class A
units. The Class B units are not publicly traded and as of
December 31, 1996, there were 950,000 outstanding. Of the Class B
units, Regal owns or controls approximately 889,000 or
approximately 94 percent of the total outstanding Class B units.
We understand that under the specific terms of the Aircoa
partnership agreement, 250,000 of the Class B units will convert
into Class A units, as of each of the following dates:
(i) in 1997 on the earlier of four dates established in Amendment
No. 1 to the Third Amended and Restated Agreement of Limited Partnership
of Aircoa Hotel Partners, L.P. effective May 2, 1997, (ii) approximately
May 30, 1998 (iii) and approximately May 30, 1999, the balance converting
to Class A units on approximately May 30, 2000. The new Class A units will
participate, on a full pro-rata basis, in the accrued and unpaid
distributions, as well as the future distributions that will
accrue to the Class A units. We understand and you have advised
us that such potential conversion of the Class B units into Class
A units, on a full pro-rata basis, should be assumed for purposes
of our analysis.
We understand that Regal, in connection with the merger into
Aircoa (the "Merger"), intends to acquire the publicly held Class
A units and the non-publicly held Class B units that it does not
currently own or control. In the Merger, the non-Regal Class A
units will be converted into the right to receive cash
consideration of $3.10 per unit. The non-Regal Class B units,
which total 61,254 will be converted into the right to receive
cash consideration of $20.00 per unit. The Merger and other
related transactions disclosed to Houlihan Lokey are referred to
collectively herein
<PAGE>
as the "Transaction." It is our understanding that the Company
has formed the Special Committee (the "Committee") of the Aircoa
Advisory Committee (the "Advisory Committee") to consider certain
matters relating to the Transaction.
Houlihan Lokey has been retained on behalf of, and will report
solely to, the Committee, notwithstanding that Houlihan Lokey's
fees and expenses will be paid by the Company.
You have requested our opinion (the "Opinion") as to the matters
set forth below. The Opinion does not address the Company's
underlying business decision to effect the Transaction. We have
not been requested to, and did not, solicit third party
indications of interest in acquiring all or any part of Aircoa or
its securities or the Class A and Class B units. Furthermore, at
your request, we have not negotiated the Transaction or advised
you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews,
analyses and inquiries as we have deemed necessary and
appropriate under the circumstances. Among other things, we have:
(i) reviewed Aircoa's annual reports to unitholders and on
Form 10-K for the five fiscal years ended December 31,
1996 which the Company's management has identified as
being the most current financial statements available;
(ii) reviewed a copy of the Class A Depository Units Prospectus
dated July 23, 1987;
(iii) reviewed a copy of the Aircoa's Offer Letter from Regal
Hotel Management, Inc. dated December 16, 1996;
(iv) reviewed a copy of the Agreement and Plan of Merger
dated May 2, 1997;
(v) reviewed a calculation of Aircoa's Cumulative Minimum
Annual Distributions as of December 31, 1996;
(vi) reviewed a March 20, 1997 letter and real estate
appraisals, as of January 1, 1997 prepared by Arthur
Anderson LLP, of Aircoa's six operating properties
upon which we have relied in our analysis;
(vii) reviewed the April 29, 1997 opinion by PKF Consulting
regarding PKF's portfolio analysis;
(viii) reviewed various industry reports for the hotel and
resort industries;
(ix) met with certain members of the senior management of
the Company to discuss the operations, financial
condition, future prospects and projected operations
and performance of Aircoa, and met with counsel to
discuss certain matters;
(x) conducted various telephone conversations and attended
Special Committee meetings on February 20, March
24-25, and March 27, 1997;
(xi) reviewed forecasts and projections prepared by
Aircoa's management with respect to Aircoa for the
three years ended December 31, 1997 through 1999;
(xii) reviewed the historical market prices and trading volume
for Aircoa's publicly traded securities;
(xiii) reviewed certain other publicly available financial
data for certain companies and securities that we deem
comparable to Aircoa and its securities, and publicly
available prices and premiums paid in other
transactions that we considered similar to the
Transaction; and
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(xiv) conducted such other studies, analyses and inquiries as we
have deemed appropriate.
We have relied upon and assumed, without independent
verification, that the appraisals of the Properties and the
financial forecasts and projections provided to us have been
reasonably prepared and reflect the best currently available
estimates of the future financial results and condition of
Aircoa, and that there has been no material change in the assets,
financial condition, business or prospects of Aircoa since the
date of the most recent appraisals and financial statements made
available to us.
We have not independently verified the accuracy and completeness
of the information supplied to us with respect to Aircoa and the
Properties and do not assume any responsibility with respect to
it. We have not made any physical inspection or independent
appraisal of any of the Properties or assets of Aircoa. Our
opinion is necessarily based on business, economic, market and
other conditions as they exist and can be evaluated by us at the
date of this letter.
Based upon the foregoing, and in reliance thereon, it is our
opinion that the consideration of $3.10 per unit to be received
by the non-Regal holders of Aircoa Hotel Partners, L.P. Class A
units and the consideration of $20.00 per unit to be received by
the non-Regal holders of Class B units in connection with the
Transaction is fair to them from a financial point of view.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
/s/ Houlihan, Lokey, Howard & Zukin, Inc.
B-3
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF AIRCOA HOTEL PARTNERS, L.P.
AND ITS SUBSIDIARY OPERATING PARTNERSHIPS
INDEX TO FINANCIAL STATEMENTS
Page
Financial Statements Number
Independent Auditor's Report C-2
Consolidated Balance Sheets
December 31, 1996 and December 31, 1995 C-3
Consolidated Statements of Operations
Years Ended December 31, 1996, 1995 and 1994 C-5
Consolidated Statement of Partners' Capital
Years Ended December 31, 1996, 1995 and 1994 C-6
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994 C-7
Notes to Consolidated Financial Statements C-9
<PAGE>
C-2
<PAGE>
Independent Auditors' Report
To the Partners of
AIRCOA Hotel Partners, L.P.:
We have audited the accompanying consolidated balance
sheets of AIRCOA Hotel Partners, L.P. and subsidiary operating
partnerships as of December 31, 1996 and 1995, and the related
consolidated statements of operations, partners' capital and cash
flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are
the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated
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 consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of AIRCOA Hotel Partners, L.P. and subsidiary
operating partnerships as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
February 28, 1997
C-3
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Consolidated Balance Sheets
December 31, 1996 and 1995
(In thousands)
Assets 1996 1995
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 2,350 2,116
Accounts receivable:
Trade 3,305 2,479
Affiliates -- 143
Inventory 373 339
Prepaid expenses 516 482
------- -------
Total current assets 6,544 5,559
------- -------
Property and equipment, at cost:
Land and leasehold improvements 9,427 8,914
Buildings and leasehold improvements 68,499 66,838
Furniture, fixtures and equipment 20,251 18,332
------- -------
98,177 94,084
Less accumulated depreciation and
amortization (35,501) (31,329)
------- -------
Net property and equipment 62,676 62,755
Other assets, including debt issue costs,
net of accumulated amoritzation of $408
in 1996 and $237 in 1995 911 1,092
------- -------
$ 70,131 69,406
======== =======
(Continued)
C-3
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Consolidated Balance Sheets, Continued
Liabilities and Partners' Capital 1996 1995
- ---------------------------------
Current liabilities:
Current installments of long-term debt $ 1,122 1,080
Trade accounts payable 1,284 1,672
Trade accounts payable to affiliates 444 715
Accrued liabilities:
Payroll and related 832 665
Taxes, other than income taxes 513 507
Other 2,223 1,377
Deferred revenue and advance deposits 1,842 1,995
------- -------
Total current liabilities 8,260 8,011
Long-term debt, excluding current
installments 42,504 43,290
Notes payable to affiliates 8,100 8,100
Accrued administration fees, management
fees and interest payable to affiliate 506 253
------- -------
Total liabilities 59,370 59,654
------- -------
Partners' capital:
General partner 245 236
Limited partners:
Class A Unitholders 13,517 13,603
Class B Unitholders (deficit) (3,001) (4,087)
------- -------
Total partners' capital 10,761 9,752
Commitments and contingencies
$ 70,131 69,406
======== ======
See accompanying notes to consolidated financial statements.
C-4
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Consolidated Statements or Operations
Years Ended December 31, 1996, 1995 and 1994
(In thousands, except unit data)
1996 1995 1994
---- ---- ----
Revenue:
Rooms $ 29,038 26,810 26,863
Food and beverage 12,272 11,733 12,274
Other property operations 7,243 6,856 7,020
-------- -------- --------
48,553 45,399 46,157
-------- -------- --------
Costs and operating expenses:
Rooms 7,774 7,366 7,242
Food and beverage 8,790 8,577 8,769
Other property operations 2,947 3,046 3,325
Administrative and general 5,488 4,954 4,793
Marketing 4,184 3,944 4,025
Energy 2,416 2,365 2,307
Property maintenance 2,329 2,348 2,255
Rent, taxes and insurance 2,753 2,743 2,540
Management fees 1,925 1,802 1,835
Depreciation and amortization 4,172 4,095 3,944
Impairment of property -- 4,789 --
-------- -------- --------
42,778 46,029 41,035
-------- -------- ---------
Operating income (loss) 5,775 (630) 5,122
-------- -------- --------
Other income (expenses):
Interest expense, including
amortization of debt issue
costs of $402 in 1996, $348 in
1995 and $471 in 1994 (4,766) (4,791) (4,600)
Gain on insurance settlements -- -- 105
-------- -------- --------
(4,766) (4,791) (4,495)
-------- -------- --------
Net income (loss) $ 1,009 (5,421) 627
======== ======== ========
Class A Unitholders:
Loss per limited partnership unit $ (.02) (1.50) (.10)
======== ======== ========
Weighted average number of
units outstanding 5,340,214 5,340,214 5,340,214
======== ======== ========
Class B Unitholders:
Income per limited
partnership unit $ 1.14 2.86 1.25
======== ======== ========
Weighted average number of
units outstanding 950,000 950,000 950,000
======== ======== ========
See accompanying notes to consolidated financial statements.
C-5
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Consolidated Statements of Partners' Capital
Years Ended December 31, 1996, 1995 and 1994
(In thousands, except unit data)
Limited partners' capital (deficit)
---------------------------------------
Class A Unitholder Class B Unitholders Total
General ------------------ ------------------- partners'
partner Units Capital Units Capital capital
------- ----- ------- ----- ------- -------
Balances at
December 31, 1993 $375 5,340,214 22,157 950,000 (7,986) 14,546
Net income (loss) 1 -- (552) -- 1,178 627
---- --------- ------- ------- ------- -------
Balances at
December 31, 1994 376 5,340,214 21,605 950,000 (6,808) 15,173
Net income (loss) (140) -- (8,002) -- 2,721 (5,421)
---- --------- ------- ------- ------- -------
Balances at
December 31, 1995 236 5,340,214 13,603 950,000 (4,087) 9,752
Net income (loss) 9 -- (86) -- 1,086 1,009
---- --------- ------- ------- ------- -------
Balances at
December 31, 1996 $245 5,340,214 13,517 950,000 (3,001) 10,761
==== ========= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Cash received from customers $ 44,774 43,460 44,592
Cash paid to suppliers and vendors (25,868) (25,054) (25,226)
Cash paid to employees (12,931) (12,916) (12,423)
Interest paid (3,558) (4,443) (3,430)
Other cash receipts 1,654 2,096 2,055
--------- --------- --------
Net cash provided by
operating activities 5,071 3,143 5,568
--------- --------- --------
Cash flows from investing activities:
Capital expenditures (3,847) (3,286) (2,049)
Proceeds from insurance
for damaged property and equipment -- -- 105
Payments for other assets -- (20) --
--------- --------- --------
Net cash used in
investing activities (3,847) (3,306) (1,944)
--------- --------- --------
Cash flows from financing activities:
Proceeds from refinancing -- 45,000 --
Principal payments on long-term debt (990) (42,995) (4,950)
Refinancing costs and other -- (987) (329)
--------- --------- --------
Net cash provided by (used in)
financing activities (990) 1,018 (5,279)
--------- --------- --------
Increase (decrease) in cash
and cash equivalents 234 855 (1,655)
--------- --------- --------
Cash and cash equivalents,
beginning of year 2,116 1,261 2,916
--------- --------- --------
Cash and cash equivalents,
end of year $ 2,350 2,116 1,261
========= ========= ========
(Continued)
C-7
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Consolidated Statements of Cash Flows, Continued
1996 1995 1994
---- ---- ----
Reconciliation of net income (loss)
to net cash provided by
operating activities:
Net income (loss) $ 1,009 (5,421) 627
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization 4,172 4,095 3,944
Impairment of property -- 4,789 -
Amortization of debt issue costs 402 348 471
Gain on insurance settlements -- -- (105)
Decrease (increase) in accounts
receivable relating to operations (683) (24) 284
Decrease (increase) in inventory (34) 62 (25)
Decrease (increase) in prepaid
expenses (34) 16 (124)
Increase in other assets (221) -- --
Increase (decrease) in trade
accounts payable, trade accounts
payable to affiliates, accrued
liabilities accrued administrative
fees, management fees and interest
payable to affiliate relating
to operations 613 (903) 290
Increase (decrease) in deferred
revenue and advance deposits (153) 181 206
Net cash provided by operating
activities $5,071 3,143 5,568
Non-cash investing and financing
activities - the Partnership entered
into capital lease obligations
for equipment of 5,246,000 in 1996.
See accompanying notes to consolidated financial statements.
C-8
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
(1) Summary of Significant Accounting Policies
Basis of Presentation
AIRCOA Hotel Partners, L.P. (the "Partnership") is a
publicly traded limited partnership formed to acquire, own and
operate hotel properties. The Partnership holds a 99% limited
partner interest in six limited partnerships (the "Operating
Partnerships"). Each of the Operating Partnerships owns and
operates a hotel and resort property (the "Properties"). AIRCOA
Hospitality Services, Inc. ("AHS" or the "General Partner"), a
wholly-owned subsidiary of Richfield Hospitality Services, Inc.
("Richfield") holds a 1% General Partner interest in the
Partnership and in each of the Operating Partnerships.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of the Partnership and the accounts of each of the
Operating Partnerships. All significant interpartnership accounts
and transactions have been eliminated.
Cash and Cash Equivalents
Cash equivalents, representing money market accounts,
overnight Eurodollar deposits and repurchase agreements, were
$1,865,000 and $1,965,000 at December 31, 1996 and 1995,
respectively. For purposes of the consolidated statements of cash
flows, the Partnership considers all highly liquid investments
with original maturities of three months or less to be cash
equivalents.
Operating Assets
The Partnership uses an inventory method of accounting for
china, glassware, silver, linen, and uniforms. Under the
inventory method, operating assets are stated at amounts based
upon the physical quantity of such assets on hand using average
costs, less a valuation allowance to reflect deterioration from
use.
Property and Equipment
Property and equipment are stated at cost. Hotel property
renovations and improvements are capitalized. Repairs,
maintenance, and minor refurbishments are charged to expense as
incurred. Interest incurred during construction of facilities or
major renovations is capitalized and amortized over the life of
the related assets. No interest was capitalized in 1996, 1995 or
1994. Upon the retirement or sale of property and equipment, the
cost and related accumulated depreciation are removed from the
respective accounts, and the resulting gain or loss, if any, is
included in operations.
Property and equipment held under leaseholds is amortized
over the shorter of the lease term or the estimated useful life
of the asset.
C-9
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
Depreciation and amortization are calculated using the
straight-line method over the estimated useful lives of the
assets, generally as follows:
Land improvements and leasehold improvements 15 years
Buildings and leasehold improvements 30 years
Furniture, fixtures and equipment 10 years
The Partnership assesses the carrying value of its hotel
properties for impairment when circumstances indicate such
amounts may not be recoverable from future operations. In the
fourth quarter of 1995, the Partnership adopted the provisions of
Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed Of (SFAS No. 121). SFAS No. 121, which was issued by
the Financial Accounting Standards Board in March 1995,
establishes recognition and measurement standards for the
impairment of long-lived assets expected to be held and used and
long-lived assets to be disposed. Generally, assets to be held
and used in operations are considered impaired if the sum of
expected future cash flows is less than the assets' carrying
amount. If an impairment is indicated, the loss is measured based
on the amount by which the assets' carrying value exceeds its
fair value. Assets to be disposed of are reported at the lower of
their carrying value or fair value less estimated selling costs.
In 1994, prior to the adoption of SFAS No. 121, the Partnership
assessed impairment based on the expected future cash flows from
operations of its hotel properties.
Other Assets
Other assets consist principally of debt issue costs,
franchise license costs, and liquor license costs. Debt issue and
franchise license costs are amortized using the straight-line
method over the term of the respective debt or license
agreements.
Deferred Revenue and Advance Deposits
Deferred revenue for facility rentals and advance room
deposits is recognized as revenue when services are provided.
Income Taxes
No current provision or benefit for income taxes is
included in the accompanying consolidated financial statements
since the taxable income or loss of the Partnership is included
in the tax returns of the individual partners of the Partnership.
Current federal income tax regulations will subject the
Partnership to corporate taxation beginning in 1998. Accordingly,
the Partnership utilizes an asset and liability method of
accounting for deferred income taxes. Under the asset and
liability method, deferred income taxes are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax basis expected to be
recovered or settled subsequent to 1997. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years such temporary differences
are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates will be recognized in operations
in the period of the enactment date.
C-10
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
Net Income (Loss) Per Unit
Net income (loss) per limited partnership unit is computed
by dividing the net income (loss) attributable to each class of
units by the weighted average number of units outstanding in each
class during the period. Because of the loss attributable to
Class A Unitholders in 1996, 1995 and 1994, Class A Units
issuable upon conversion of notes payable (see Note 5) and upon
conversion of the Class B Units (see Note 2) were not considered
in the computation, as such conversions would be anti-dilutive.
Risks and Uncertainties
The preparation of the Partnership's consolidated financial
statements in conformity with generally accepted accounting
principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the balance sheet dates and the reported amounts of revenues
and expenses during the reported periods. Actual results could
differ from those estimates.
Certain of the Properties have agreements with various
customers, including airline carriers and tour groups that
require the Properties to provide rooms at specified rates. The
loss of such agreements and customers could adversely impact
revenue.
Reclassifications
Certain amounts in the 1995 and 1994 consolidated financial
statements have been reclassified to conform to the 1996
presentation.
(2) Partnership Units and Allocations
Limited Partnership Units
The Class A Units entitle each Class A Unitholder to a
limited partnership interest in a percentage of the profits and
losses, tax allocations, and distributions of the Partnership, as
described below.
The Class B Units entitle each Class B Unitholder to a
limited partnership interest which is subordinate to the Class A
Units. The Class B Units are redeemable by the Partnership or
convertible into Class A Units, in certain circumstances. The
Class B Units do not receive distributions until the Class A
Unitholders receive defined Minimum Annual Distributions. Through
1996, the Class B Units were convertible into Class A Units to
the extent that distributable cash flow of the Partnership in the
previous year would have been sufficient to pay Minimum Annual
Distributions for the Class A Units, including the Class B Units
to be converted. Beginning in 1997, in accordance with the terms
of the Partnership Agreement, and each year thereafter through
2001, a minimum of 250,000 Class B Units are required to be
converted into Class A Units annually through 2001 at a
redemption value of $20.00 per Class B Unit, by issuing Class A
Units valued at the then current market price of the Class A
Units. Therefore, the number of Class A Units to be issued upon
conversion of a Class B Unit will be determined at the time of
conversion by dividing $20.00 by the then current market price of
a Class A Unit.
C-11
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
Cash Distributions
The Partnership Agreement provides for periodic
distribution of distributable cash flow, as defined, to the
partners at the discretion of the General Partner. Distributable
cash flow is generally defined as cash flow from operations of
the hotel properties. Such cash is allocated and distributed (net
of the General Partner's 1% general partnership interest in the
Operating Partnerships) 99% to the Class A Unitholders and 1% to
the General Partner until the Class A Unitholders have received
defined Minimum Annual Distributions. The Minimum Annual
Distribution is presently $2.16 per Class A Unit. After payment
of the Minimum Annual Distribution, additional cash
distributions, if any, will be allocated 49.5% to the Class A
Unitholders, 49.5% to the Class B Unitholders and 1% to the
General Partner.
Capital transaction proceeds generally consist of net
proceeds from sales and refinancing of the Partnership's hotel
properties. Cash from capital transaction proceeds is allocated
and distributed 99% to the Class A Unitholders and 1% to the
General Partner until the Class A Unitholders have received any
previously unpaid Minimum Annual Distributions, and the
unrecovered capital preference amount, as defined. Capital
transaction proceeds are then allocated and distributed 99% to
the Class B Unitholders and 1% to the General Partner until all
the Class B Units have been redeemed. Subsequent to the
redemption of the Class B Units, capital transaction proceeds are
allocated and distributed 75% to the Class A Unitholders and 25%
to the General Partner. The unrecovered capital preference amount
of a Class A and a Class B Unit at December 31, 1996 is $16.60
and $20.00, respectively.
The Minimum Annual Distribution amount attributable to
Class A Unitholders and the Class B Unitholders sharing
percentage in distributable cash flow are reduced proportionately
based upon distributions of capital transaction proceeds.
The Partnership has not made any distributions since 1990.
At December 31, 1996, the cumulative unpaid Minimum Annual
Distribution per Class A Unit significantly exceeds the
Partnership's net asset value per unit based on the appraised
values of the hotel properties.
Allocation of Income and Losses
Partnership income and losses are allocated among the
partners in accordance with federal income tax provisions based
upon the partners ownership interests, adjusted to reflect
original contribution values agreed upon by the partners and
other basis differences at the inception of the Partnership.
Income and losses are allocated among individual units on a pro
rata basis within each class of units. For financial reporting
purposes, the net income or loss of the Partnership is generally
allocated in accordance with the income tax allocation provisions
described above. In accordance with the Partnership Agreement,
deductions of approximately $1,036,000, $3,056,000 and $1,148,000
in 1996, 1995 and 1994, respectively, were transferred in the
allocation of income (loss) from the Class B Units to the Class A
Units and General Partner. In 1995, such allocation includes the
impact from the impairment of the Lakeside property (see Note 3).
(3) Hotel Property Valuations
The Partnership periodically evaluates the carrying value
of its hotel properties for impairment. These evaluations are
based upon management's estimate of future operating results
considering recent performance and existing and expected local
market conditions. Based on these evaluations, the Partnership
recognized an
C-12
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
impairment of approximately $4,789,000 relating to the Lakeside
property in 1995. The loss was determined based on the excess of
the hotel property's carrying value over its fair value at
December 31, 1995. The fair value of the hotel property was
determined through a third-party appraisal obtained in January
1996. The impairment loss is included in costs and operating
expenses in the accompanying consolidated statements of
operations.
The Partnership believes that the expected future cash
flows from the operations of its other hotel properties will be
sufficient to recover their carrying values. The Partnership has
no current plans to sell any of its properties for less than
their carrying values.
(4) Long-Term Debt
On June 8, 1995, the Partnership signed a credit agreement
with a new lender which provided a $45,000,000 first mortgage
loan and a $1,000,000 revolving credit line. The proceeds of the
$45,000,000 first mortgage loan were used to refinance, on a
long-term basis, the Partnership's existing mortgage loan in the
amount of $38,950,000 and the note payable to bank of $1,790,000
which were due July 31, 1995 and October 31, 1995, respectively,
and to provide approximately $3,000,000 to fund hotel property
renovations. At December 31, 1996 these amounts have been
expended. The balance of the funds were used for the payment of a
facility fee and closing costs.
The first mortgage loan interest rate at December 31, 1996
of 7.53% was based on the current Eurodollar rate plus 2%.
Repayment of the first mortgage loan is based on a twenty-year
amortization with a final maturity date in June 2000. Payments
under this loan consist of monthly installments of $90,000 plus
interest on the unpaid balance. The revolving credit line is
renewable annually at the option of the lender. No amounts have
been drawn on the revolving credit line at December 31, 1996.
Long-term debt is summarized as follows (in thousands):
December 31,
-------------------
1996 1995
---- ----
Mortgage loan $ 43,380 $ 44,370
Capital lease obligation 246 -
------- ------
43,626 44,370
Less current installments (1,122) (1,080)
Long-term debt, excluding current installments $42,504 $43,290
The first mortgage loan and revolving credit line contain
various covenants including: minimum debt service ratios,
restrictions on additional indebtedness, limitations on annual
cash distributions to Class A Unitholders, limitations on the
payment of principal on the affiliate notes payable, prepayment
premiums during the first two years, deferral of management fees
payable to Richfield if minimum debt service ratios are not
achieved, maintenance of a capital expenditure reserve account
equal to 5% of gross revenue, and a maximum loan-to-value ratio
of 65% based on the aggregate appraised values of the
Properties. The Partnership is in compliance with these
covenants for the year ended December 31, 1996. The first
mortgage loan and revolving credit line are subject to certain
limited guarantees of an affiliate of the General Partner. The
first mortgage loan also requires Bank approval of any dilution
in the present ownership interests of affiliates of the General
Partner in the Partnership.
In accordance with the Partnership Agreement, the General
Partner received a 1% financing fee, reduced by the amount of the
financing fee paid to the lender, for arranging the refinancing
of the Partnership's
C-13
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
indebtedness. In addition, the Partnership pays an annual
guarantee fee calculated as .5% of the outstanding loan balance
at June 8 of each year to an affiliate of the General Partner for
the limited guarantee of the first mortgage loan and the
revolving credit line.
Maturities of long-term debt are summarized as follows (in
thousands):
Year ending December 31,
1997 $1,122
1998 1,127
1999 1,131
2000 40,197
2001 49
--
-------
$43,626
=======
(5) Notes Payable to Affiliates
A condition of the credit agreement signed by the
Partnership for the first mortgage loan and revolving credit line
required the subordination of the $6,000,000 notes payable to the
General Partner (the "Notes"), the General Partner has agreed to
this subordination, and as a result, on September 26, 1995 the
Board, in its capacity as General Partner, and the Advisory
Committee of AHP authorized the extension of the term and
deferral of certain past-due interest on the Notes.
Pursuant to this extension, the Notes, which originally
matured in January 1995, are due on June 8, 2000, which is
coterminous with the new mortgage loan. The unpaid interest on
the Notes accrued prior to January 1, 1995, in the amount of
$2,100,000, were converted into a new promissory note ("New
Note") which also matures on June 8, 2000. The New Note accrues
interest at the rate of 12% per annum and is payable at maturity.
Interest accrued on the Notes after December 31, 1994 was paid at
closing. Interest incurred on the Notes subsequent to closing
continues to be accrued at 12% per annum and is paid monthly.
These notes are convertible into Class A Units of the Partnership
at $16.60 per unit. In addition, these notes stipulate that 25%
of any excess cashflow, as defined in the new mortgage loan, will
be applied against the principal of the notes outstanding.
(6) Income Taxes
The Partnership's only significant temporary difference
(which will result in tax deductions in 1998 and later years) is
an excess of the tax basis over the book basis of the Properties
of approximately $4,900,000 and $6,500,000 at December 31, 1996
and 1995, respectively. The Partnership's net deferred tax asset
was approximately $1,960,000 and $2,600,000 at December 31, 1996
and 1995, respectively. The Partnership has established a 100%
valuation allowance on these net deferred tax assets. The change
in the valuation allowance in 1996 and 1995 was a decrease and an
increase of approximately $640,000 and $1,660,000, respectively.
(7) Related Party Transactions and Commitments
Partnership Administration
AHS, as General Partner, is responsible for managing the
business and affairs of the Partnership and the Operating
Partnerships. The General Partner is reimbursed monthly for all
direct operating expenses incurred on
C-14
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
behalf of the Partnership and Operating Partnerships. In
addition, the General Partner receives an annual partnership
administration fee equal to .25% of the independently appraised
value of the hotel properties of the Partnership.
Management Agreements
Richfield operates the hotel properties for the Partnership
in exchange for a management fee equal to 4% of annual gross
revenue from the hotel properties. In addition, the hotel
properties are obligated to reimburse Richfield for payroll,
professional fees, and certain out-of-pocket expenses incurred by
Richfield on their behalf. The management agreements expire in
2012 and can be terminated by the Partnership prior to
expiration, in certain circumstances, by the payment of a fee
equal to three times the management fee paid for the preceding 12
months.
Richfield also provides data processing services and
obtains various types of insurance coverage, on an aggregate
basis, for the hotel properties which it owns or manages. Such
data processing and insurance costs are charged to the hotel
properties.
License Agreements
Two of the hotel properties have license agreements with an
affiliate to operate as Regal Hotels. The license agreements
provide for fees of 2.0% to 2.5% of total sales revenue, as
defined, in 1996 and expire in 2012. In December 1996 and
February 1997, each of the agreements was amended to provide for
a fee of 2.5% throughout the terms of the agreements. The
agreements can be terminated by the Partnership prior to
expiration in certain circumstances, through payment of a
termination fee.
Hotel Property Acquisitions and Dispositions and Partnership Financing
The General Partner receives an acquisition fee equal to 1%
of the purchase price of any hotel property acquired by the
Partnership. Upon the sale of a hotel property, the General
Partner receives either a disposition fee equal to 1% of the
sales price of the hotel property, or a reasonable brokerage fee,
based upon fees for comparable properties in the area, less the
amount of any such brokerage fees paid to third parties. The
General Partner receives a financing fee equal to 1% of the
principal amount of any new Partnership loan, or refinancing of
Partnership debt if the refinancing is completed with a lender
other than the lender whose loan is being refinanced. Such fee is
required to be reduced by the amount of the financing fee paid to
the lender.
Other Arrangements
The General Partner and its affiliates are paid
development, purchasing, and design fees for services performed
in connection with the renovation or expansion of the
Partnership's hotel properties. In addition, an affiliate of the
General Partner receives fees in connection with the bulk
purchase of hotel furnishings, equipment, and supplies.
The Partnership leases a private club and recreational
facility from an affiliate of the General Partner, under an
operating lease. The Partnership receives 90% to 100% of the
available cash flow from operations of the private club and
recreational facility as lease income and management fees. The
lease expires in 2052 and may be
C-15
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
terminated early by the Partnership. The Partnership received
lease income and management fees of $301,000, $256,000 and
$330,000 pursuant to these arrangements in 1996, 1995 and 1994,
respectively.
Subject to the terms of the lease agreement, an affiliate
of the Partnership has an option to purchase 50 undeveloped acres
from the private club for $10. The option is only exercisable if
all the permits and consents from state and local authorities
permit continued operation of the club after conveyance of the 50
acres to the affiliate. The affiliate pays a pro-rata share of
the property taxes on the private club. The private club is
located on a tract of land consisting of approximately 80 acres.
The following amounts resulting from transactions with
affiliates are included in the accompanying consolidated balance
sheets (in thousands):
December 31,
----------------
1996 1995
---- ----
Fees and costs, included in property
and equipment, net $ 1,121 1,123
======= =====
General Partner financing fee $ 112 144
======= =====
Guarantee fee $ 112 115
======= =====
The General Partner financing fee and the guarantee fee
have been capitalized and are included in other assets. The
financing fee is being amortized over the life of the first
mortgage loan, and the annual guarantee fee is being amortized
over twelve months. Amortization relating to the financing and
guarantee fee of $145,000 and $131,000 is included in interest
expense in 1996 and 1995, respectively.
The following amounts resulting from transactions with
affiliates are included in the accompanying consolidated
statements of operations (in thousands):
1996 1995 1994
---- ---- ----
Partnership administration
fee $ 198 209 222
====== ====== =====
Management fees $1,925 1,802 1,835
====== ====== =====
Allocated insurance expense $1,263 1,411 1,505
====== ====== =====
Allocated data processing
cost $ 58 80 45
====== ====== =====
Interest expense $ 972 851 720
====== ====== =====
Lease income $ 301 256 330
====== ====== =====
License fees $ 298 174 132
====== ====== =====
(8) Commitments and Contingencies
Under terms of the Clarion and ITT Sheraton franchises. the
Partnership is committed to make annual payments for franchise
and licensing fees and reservation services. The Clarion license
agreement requires franchise fees equal to 3% of gross room
revenue and expires in 2012. The ITT Sheraton license agreements
require franchise fees equal to 6% of gross room revenue and
expire in 2002. The Sheraton agreements may be terminated by
either party at specified dates. Total franchise fees on the
Clarion and ITT's Sheraton license agreements were $l,131,000,
$1,650,000 and $l,677,000 for 1996, 1995 and 1994, respectively.
Three of the hotel properties are subject to noncancelable
operating land leases which expire between 2000 and 2033. The
leases generally require annual rental payments of a fixed
amount, ranging from $10,000 to $90,000,
C-16
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
plus a contingent amount based upon a percentage of specified
room revenue, food and beverage revenue, or gross revenue, as
defined, ranging from 1% to 8%. The accompanying consolidated
statements of operations include land rent expense of $747,000,
$799,000 and $803,000 for 1996, 1995 and 1994, respectively.
The Class A Units issuable upon conversion of notes payable
and upon conversion of the Class B Units, and the Class A Units
issued pursuant to the General Partner's obligations regarding
cash distributions have certain demand registration rights.
The Partnership is involved in various claims and legal
actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters
will not have a material effect on the consolidated financial
statements of the Partnership.
C-17
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
INDEX TO INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
Page
Financial Statements Number
-------------------- ------
Consolidated Balance Sheets (Unaudited)
March 31, 1997 and December 31, 1996 C-19
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 1997 and 1996 C-21
Consolidated Statement of Partners' Capital (Unaudited)
Three Months Ended March 31, 1997 C-22
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1997 and 1996 C-23
Notes to Consolidated Financial
Statements (Unaudited) C-24
C-18
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
Assets March 31, 1997 December 31, 1996
- ------ -------------- -----------------
Current assets:
Cash and cash equivalents $ 3,041 $ 2,350
Accounts receivable 3,114 3,305
Inventory 386 373
Prepaid expenses 689 516
----------- -----------
Total current assets 7,230 6,544
----------- -----------
Property and equipment, at cost:
Land and leasehold improvements 9,432 9,427
Buildings and leasehold improvements 68,525 68,499
Furniture, fixtures and equipment 21,038 20,251
----------- -----------
98,995 98,177
Less accumulated depreciation
and amortizazation (36,589) (35,501)
----------- -----------
Net property and equipment 62,406 62,676
----------- -----------
Other assets, including debt issue
costs, net of accumulated
amortization of $337 in 1996 and
$237 in 1995 814 911
----------- -----------
$ 70,450 $ 70,131
=========== ===========
C-19
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In Thousands)
Liabilities and Partners' Capital March 31, 1997 December 31, 1996
- --------------------------------- -------------- -----------------
Current liabilities:
Current installments of long-term debt $ 1,124 $ 1,122
Trade accounts payable 948 1,284
Payables to affiliates 591 444
Accrued liabilities:
Payroll 917 832
Taxes, other than income taxes 807 513
Other 2,651 2,223
Deferred revenue and advance deposits 1,573 1,842
-------- --------
Total current liabilities 8,611 8,260
Long-term debt, excluding current
installments 42,222 42,504
Notes payable to affiliates 8,100 8,100
Accrued administration, management fees and
interest payable to affiliate
568 506
-------- --------
Total liabilities 59,501 59,370
-------- --------
Partners' capital:
General Partner 246 245
Limited Partners:
Class A Unitholders 13,436 13,517
Class B Unitholders (deficit) (2,733) (3,001)
-------- --------
Total Partners' capital 10,949 10,761
-------- --------
$ 70,450 $ 70,131
======== ========
See accompanying notes to consolidated financial statements.
C-20
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
(In Thousands, Except Unit Data)
1997 1996
------- ------
Revenue:
Rooms $ 7,433 $ 7,317
Food and beverage 2,877 3,017
Other property operations 1,959 2,034
------- -------
12,269 12,368
------- -------
Costs and operating expenses:
Rooms 1,946 1,886
Food and beverage 2,019 2,187
Other property operations 920 961
Administrative and general 1,519 1,215
Marketing 1,047 1,134
Energy 598 617
Property maintenance 608 573
Rent, taxes and insurance 694 683
Management fees 488 492
Depreciation and amortization 1,088 1,053
------- -------
10,927 10,801
Operating income 1,342 1,567
Interest expense, including
amortization of debt costs (1,154) (1,195)
------- -------
Net income $ 188 $ 372
======= =======
Class A Unitholders:
Income (loss) per limited
partnership unit $ (.02) $ .02
------- -------
Weighted average number of
units outstanding 5,340,214 5,340,214
======= =======
Class B Unitholders:
Income per limited partnership unit $ .28 $ .29
======= =======
Weighted average number of
units outstanding: 950,000 950,000
======= =======
See accompanying notes to consolidated financial statements.
C-21
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
THREE MONTHS ENDED MARCH 31, 1997
(Unaudited)
(In Thousands, Except Unit Data)
Limited Partners' Capital (Deficit)
----------------------------------------
Class A Unitholders Class B Unitholders Total
General ------------------- ------------------- Partners'
Partner Units Capital Units Capital Capital
Balances at
December 31, 1996 $245 5,340,214 $13,517 950,000 $(3,001) $10,761
Net income 1 -- (81) -- 268 188
---- --------- ------- ------- ------- -------
Balances at
March 31, 1996 $246 5,340,214 $13,436 950,000 $(2,733) $10,949
==== ========= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
C-22
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
(In Thousands)
1997 1996
Cash flows from operating activities:
Cash received from customers $11,833 $11,305
Cash paid to suppliers and vendors (6,118) (6,528)
Cash paid to employees (3,081) (3,110)
Interest paid (1,017) (488)
Other cash receipts, net 172 349
------- -------
Net cash provided by operating
activities 1,789 1,528
------- -------
Cash flows from investing activities -
capital expenditures (818) (204)
------- -------
Cash flows from financing activities -
principal payments on long-term debt (280) (270)
Increase in cash and cash equivalents 691 1,054
Cash and cash equivalents at
beginning of period 2,350 2,116
------- -------
Cash and cash equivalents at end
of period $ 3,041 $ 3,170
======= =======
See accompanying notes to consolidated financial statements.
C-23
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
(1) Basis of presentation
AIRCOA Hotel Partners, L.P., a Delaware limited partnership
(the "Partnership") was organized in December 1986 to
acquire, own and operate hotel and resort properties. The
Partnership owns and operates six hotel and resort properties
(the "Properties") through operating partnerships (the
"Operating Partnerships") which were acquired in 1986.
The Partnership holds a 99% limited partner interest in each
of the six Operating Partnerships which hold title to the
Properties and through which the Partnership conducts all of
its operations. AHS, a wholly owned subsidiary of Richfield
Hospitality Services, Inc. ("Richfield"), is also the 1%
General Partner of each of the Operating Partnerships.
Richfield operates the Properties for the Partnership under
certain management agreements.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions to
Form 10-Q and, therefore, do not include all information and
disclosures necessary for a fair presentation of financial
position, results of operations and cash flows in conformity
with generally accepted accounting principles. In the opinion
of management, these financial statements reflect all
adjustments (which include only normal recurring adjustments)
necessary for a fair presentation of the results of
operations and financial position for the interim periods
presented. These interim financial statements should be read
in conjunction with the Annual Report on Form 10-K for the
period ended December 31, 1996. Operating results for the
three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year
ended December 31, 1997.
(2) Merger with affiliate
The Partnership received in December 1996, a written proposal
from an affiliate, Regal Hotel Management, Inc. ("RHM"), to
commence discussions with respect to the possible purchase of
all of the Class A and Class B units not currently owned by
RHM or its affiliates for $2.35 per Class A Unit and $16.80
per Class B Unit. The General Partner of the Partnership
referred consideration of RHM's proposal to a special
committee comprised of the independent members of the
Partnership's Advisory Committee. Pursuant to negotiations,
RHM agreed to increase the merger consideration to $3.10 per
Class A Unit and $20.00 per Class B Unit. The special
committee determined that such increased merger consideration
is fair to, and in the best interests of, unaffiliated
unitholders of the Partnership and recommended approval of
the merger transaction by the Board of Directors of the
Partnership's General Partner. The General Partner's Board of
Directors approved RHM's revised proposal on May 2, 1997.
The acquisition would be made by means of a merger of a
subsidiary limited partnership owned by RHM into the
Partnership. The completion of the merger and the resulting
acquisition of interests of unaffiliated unitholders is
subject to the approval of the merger by unitholders owning a
majority interest of the Partnership's units at a special
meeting. Presently, RHM and its affiliates own 71% of the
Class A Units and 93.6% of the Class B Units. RHM and its
affiliates have agreed to vote in favor of the merger thus
assuring its approval. Although no date has been set for the
special meeting, it is presently expected that the meeting
will be held, and the merger will be consummated, during the
third quarter of 1997.
In conjunction with approval of the merger transaction, the
General Partner has amended the Partnership Agreement in
order to defer the mandatory conversion of Class B Units into
Class A Units. The amendment
C-24
<PAGE>
provides that the 250,000 Class B Units scheduled to convert
into additional Class A Units during 1997 will convert on the
earliest to occur of (i) any termination of the definitive
merger agreement; (ii) the record date for any vote of the
Class A Unitholders, (other than the vote on merger), (iii)
the record date for any distribution by the Partnership to
holders of Class A Units and (iv) September 30, 1997. In
1997, in accordance with the Partnership Agreement, the
number of Class A Units to be received upon conversion of a
Class B Unit will be determined by dividing $20.00 by the
average of the closing prices of Class A Units for the five
trading days ending on May 30, 1997. In light of the
likelihood of completion of the merger, the General Partner
adopted this amendment in order to avoid administrative and
other issues arising from the issuance of additional Class A
Units pursuant to the conversion.
(3) Long-term debt
The Partnership has a first mortgage loan and a $1,000,000
revolving credit line. The first mortgage loan bears interest
at the Eurodollar rate plus 2% (7.5 % at March 31, 1997).
Re-payment of the first mortgage loan is based on a
twenty-year amortization with a maturity date in June 2000.
Payments under this loan consist of monthly installments of
$90,000 plus interest on the unpaid balance. The revolving
credit line is renewable annually at the option of the
lender. No amounts have been drawn on the line at March 31,
1997.
Long term debt is summarized as follows (in thousands):
March 31, December 31,
1997 1996
Mortgage loan $43,110 43,380
Capital lease obligation 236 246
------- ------
43,346 43,626
Less current installments (1,124) (1,122)
------- ------
Long-term debt, excluding current
installments $42,222 42,504
======= ======
The first mortgage loan and revolving credit line contain
various covenants including: minimum debt service ratios,
restrictions on additional indebtedness, limitations on
annual cash distributions to Class A Unitholders, limitations
on the payment of principal on the affiliate notes payable,
prepayment premium during the first two years, deferral of
management fees payable to Richfield if minimum debt service
ratios are not achieved, maintenance of a capital expenditure
reserve account equal to 5% of gross revenue and a maximum
loan-to-value ratio of 65% based on the aggregate appraised
values of the Properties. The first mortgage loan and
revolving credit line are subject to certain limited
guarantees of an affiliate of the General Partner. The first
mortgage loan also requires the Bank's approval of any
dilution in the present ownership interests of affiliates of
the General Partner in the Partnership. The Partnership pays
an annual guarantee fee calculated at .5% of the outstanding
loan balance at June 8th of each year to an affiliate of the
General Partner for the limited guarantee of the first
mortgage loan and the revolving credit line.
(4) Notes payable to affiliates
The Partnership has notes payable of $8,100,000 to AHS that
are subordinate to the first mortgage loan. Notes payable to
AHS consist of notes payable of $6,000,000 and a note payable
of $2,100,000. The notes payable totaling $6,000,000 accrue
interest at 12% per annum, payable monthly, and mature on
June 8, 2000. The note payable for $2,100,000 accrues
interest at 12% per annum, with interest and principal due on
June 8, 2000. The notes payable to AHS are convertible into
Class A Units of the Partnership at $16.60 per unit.
C-25
<PAGE>
In addition, these notes stipulate that 25% of any excess
cash flow, as defined in the first mortgage loan, will be
applied against the principal of the notes outstanding.
(5) Partnership units and allocations
Limited partnership units
The Class A Units entitle each Unitholder to a limited
partnership interest in a percentage of the profits and
losses, tax allocations and distributions of the
Partnership, as described below.
The Class B Units entitle each Unitholder to a limited
partnership interest which is subordinate to the Class A
Units, in certain circumstances. The Class B Units are
redeemable by the Partnership or convertible into Class A
Units, in certain circumstances. The Class B Units do not
receive distributions until the Class A Unitholders receive
defined Minimum Annual Distributions. Beginning in 1997, in
accordance with the terms of the Partnership Agreement, and
each year thereafter through 2001, a minimum of 250,000
Class B Units are required to be converted into Class A
Units annually through 2001 at a redemption value of $20.00
per Class B Unit, by issuing Class A Units valued at the
then current market price of the Class A Units. As
discussed above in Note 2, the Partnership Agreement was
amended to defer the 1997 conversion of Class B Units.
Cash distributions
The Partnership Agreement provides for periodic
distribution of distributable cash flow, as defined, to the
partners at the discretion of the General Partner.
Distributable cash flow is generally defined as cash flow
from operations of the hotel properties. Such cash is
allocated and distributed (net of AHS' 1% general
partnership interest in the Operating Partnerships) 99% to
the Class A Unitholders and 1% to the General Partner until
the Class A Unitholders have received defined Minimum
Annual Distributions. At March 31, 1997, the cumulative
unpaid Minimum Annual Distribution per Class A Unit
significantly exceeds the Partnerships' net asset value per
unit based on the December 31, 1996 appraised values of the
hotel properties.
According to the first mortgage loan, the maximum annual
amount that the Partnership may distribute to the Class A
Unitholders is equal to 50% of excess cash flow as defined
in the mortgage loan agreement. However, if the debt
service coverage ratio, as defined in the mortgage loan
agreement, is greater than 1.50, then the Partnership may
distribute up to 75% of such excess cash flow.
In addition, the Partnership may not make any distributions
to the Class A Unitholders if there are any amounts which
are due and payable under the mortgage loan agreement which
are unpaid.
C-25
<PAGE>
(6) Related party transactions
The following amounts resulting from transactions with
affiliates are included in the accompanying consolidated
statements of operations (in thousands):
For the three
months ended
March 31,
---------
1997 1996
---- ----
Partnership administration fees $ 52 43
======= ====
Management fees $ 488 492
======= ====
Allocated data processing cost $ 11 23
======= ====
Allocated insurance expenses $ 334 358
======= ====
Interest expense $ 243 243
======= ====
Lease income $ 61 46
======= ====
License fees $ 123 94
======= ====
The properties are obligated to reimburse an affiliate for
payroll, professional fees, and certain out-of-pocket
expenses incurred by the affiliate on their behalf.
Affiliates are also paid purchasing and design fees in
connection with renovations of the hotels and purchases of
furnishings, equipment and supplies.
(7) Income taxes
No current provision or benefit for income taxes is
included in the accompanying consolidated financial
statements since the taxable income or loss of the
Partnership is included in the tax returns of the
individual partners of the Partnership.
The Partnership's only significant temporary difference is
an excess of the tax basis over the book basis of the
Partnership's hotels of approximately $4,900,000 which
gives rise to a net deferred tax asset of approximately
$1,960,000. The Partnership has established a 100%
valuation allowance on these net deferred tax assets.
Current federal income tax regulations will subject the
Partnership to corporate taxation beginning in 1998.
C-38
<PAGE>
PRELIMINARY COPY - SUBJECT TO COMPLETION DATED JUNE __, 1997
[FORM OF PROXY CARD - [WHITE]]
[Face of Card].....................................................
AIRCOA HOTEL PARTNERS, L.P.
THIS PROXY IS SOLICITED ON BEHALF OF
AIRCOA HOTEL PARTNERS, L.P.
CENTURY CITY INTERNATIONAL HOLDINGS LIMITED
AND
REGAL HOTEL MANAGEMENT, INC.
SPECIAL MEETING OF UNITHOLDERS - ____________, 1997
The undersigned unitholder of AIRCOA Hotel Partners, L.P.
(the "Partnership") acknowledges receipt of the Proxy Statement
of the Partnership, Century City International Holdings Limited
("Century City") and Regal Hotel Management, Inc. ("RHM"), dated
_________, 1997, and the undersigned revokes all prior proxies
and appoints _____________ and _____________, and each of them
individually, proxies for the undersigned to vote all Class A
units of limited partner interest ("Class A Units") or Class B
units of limited partner interest ("Class B Units") of the
Partnership that the undersigned would be entitled to vote at the
Special Meeting of Unitholders to be held at 9:00 a.m. (New York
City time) on __________________, 1997 at the offices of Coudert
Brothers, counsel to the Partnership, 1114 Avenue of the
Americas, New York, New York 10036, and any adjournments,
postponements or reschedulings thereof, on those matters referred
to in the Proxy Statement.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE. IF NO SPECIFICATIONS ARE MADE, THIS PROXY
WILL BE VOTED FOR THE PROPOSALS REFERRED TO IN (1), (2) AND (3)
BELOW PROVIDED THAT YOU HAVE SIGNED AND DATED THE PROXY CARD.
IN THEIR DISCRETION, THE PROXIES ARE, UNLESS OTHERWISE
INDICATED BELOW, AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS
MAY PROPERLY COME BEFORE THE MEETING ON BEHALF OF THE
UNDERSIGNED.
PLEASE MARK, SIGN AND DATE THIS PROXY CARD ON THE REVERSE
SIDE AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
(continued on reverse side)
[Face of Card].....................................................
***********************
<PAGE>
[Reverse of Card]..................................................
(continued from face of card)
[X] Please mark
your votes as in
this example
- ----------------------------------------------------------------------
The general partner of the Partnership recommends a vote "FOR"
Proposal 1.
- ----------------------------------------------------------------------
1. The Merger. To approve and adopt the Agreement and
Plan of Merger, dated as of May 2, 1997, by and among the
Partnership, AIRCOA Hospitality Services, Inc., the general
partner of the Partnership, RHM and Regal Merger Limited
Partnership, a wholly owned subsidiary of RHM, as described in
the accompanying Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Other Business. To transact such other matters as
may properly come before the Special Meeting.
[ ] AUTHORIZED [ ] NOT AUTHORIZED
Dated: ____________, 1997
_____________________________________________
Signature of Unitholder (Title, if any)
_____________________________________________
Signature of Unitholder (if held jointly)
Please sign exactly as your name or names
appear hereon. If units are held jointly,
each unitholder should sign. When signing as
attorney, executor, administrator, trustee
or guardian, please give full title as such.
If a corporation, please sign in full
corporate name by president or authorized
officers. If a partnership, please sign in
partnership name by authorized person.
Please Mark, Sign, Date and Mail This Proxy Card Promptly, Using
the Enclosed Postage-Paid Envelope.
[Reverse of Card]..................................................
<PAGE>
