February 22, 2013 Ms. Melissa Muscato ... - Duluth, Georgia · City of Duluth Department of...

February 22, 2013

City of Duluth Department of Planning & Developmentj Ms. Melissa MuscatoDevelopment & Project ManagerCity Hall, 2nd Floor3167 Main StreetDuluth, Georgia 30096

Dear Ms. Muscato:

In accordance with our engagement letter, we have prepared a market analysis and projections

of occupancy, average daily rate (ADR) and cash flow for a proposed 100-unit select-service

hotel to be located in downtown Duluth, Georgia. This report sets forth our findings and the

support for our conclusions.

EXECUTIVE SUMMARY

Metropolitan Atlanta Overview

R With a population of nearly 5.5 million, the 28-county Atlanta-Sandy Springs-Marietta metropolitan statistical area (Atlanta MSA) is the ninth largest in theUnited States. It serves as a center of commerce, finance, culture andtransportation for the Southeast.

R The economy of the MSA is dominated by the trade and services sectors, witha relatively minor contribution from manufacturing. Total nonagriculturalemployment for the Atlanta MSA contracted at a compound annual rate of 1.0percent over the past five years, caused primarily by a precipitous drop in 2009. July 2010 was the first month to show positive growth in employment (ascompared to the same month in the prior year) since April 2008. Growth of 1.3and 1.5 percent were experienced in 2011 and 2012, respectively.

R Critical to the metropolitan area’s positioning is an extensive transportationnetwork, including the world’s busiest and one of its largest airports. Over 95million passengers were served in 2012.

PKF Consulting USA, LLC * 4314 Pablo Oaks Court * Jacksonville, FL 32233

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City of Duluth Department of Planning & DevelopmentFebruary 22, 2013Page 2

Site and Neighborhood Evaluation

R Duluth is located approximately 23 miles northeast of downtown Atlanta. It hada 2010 population of 26,600.

R The City of Duluth has identified four potential hotel sites in the downtown area.

R Downtown Duluth is relatively vibrant, with numerous shops, restaurants andbusinesses lining Main Street. Revitalization of the downtown area is beingapproached in phases. The first two included development of the town greenfollowed by construction of a new 44,000-square foot city hall and pedestrianimprovements around Church Cemetery. The third phase of revitalization is toencompass The Block, a 3.3-acre parcel including the former city hall andwarehouse space. It is to be redeveloped into a restaurant district with eight toten outlets and perhaps a salon or spa. Completion of The Block by the endof 2015 is a critical assumption to our analysis.

Recommended Facilities

R There are no hotels within the Duluth city limits at present. Thus, given thepioneering nature of the subject, we recommend pursuing development of arelatively small (approximately 100 units) select-service hotel with a strong, highquality brand with broad appeal to business travelers and leisure guests alikeand which will help drive demand through its reservation system. Thiscombination of size, orientation and branding will help minimize project costsand the financial risks of the project.

R Amenities prototypical of the brand selected should be provided with perhaps anexpanded complement of meeting space, say 1,500 to 2,000 square feet. Someselect-service brands require the inclusion of a restaurant. For purposes ofanalysis, we have assumed such a property would offer a restaurant leased toand operated by a third party.

R Again because of the subject’s pioneering nature, we believe it is critical to itssuccess to be distinguished from the competitors via design elements andsupport amenities. There are clear synergies resulting from the presence ofseveral hotels at a given location. A single hotel is therefore challenged to gainadequate market exposure, absent a unique location or physical characteristics.

R For purposes of this analysis, we have assumed a January 1, 2015 openingdate.


Supply and Demand Analysis

R There are six properties with a total of 716 guest rooms which would potentiallycompete with the subject hotel. Three of the hotels are located proximate to theInterstate 85 (I-85)/Sugarloaf Parkway interchange while the other three are inthe Johns Creek area.

R Market area occupancy and ADR were 67.3 percent and $97.76, respectively,for 2012. The properties garner 56 percent of their accommodated demandfrom business travelers, 22 percent from groups and 22 from leisure guests. The Sugarloaf properties tend to perform best.

R We have identified no additions to the competitive supply of guest rooms otherthan the subject hotel.

R Considering recent trends in the market, base growth rates are expected to bemoderately strong at the beginning of the projection period, tapering thereafter. An additional level of “supply-driven” growth is anticipated to be generated bythe opening of the subject.

Estimated Levels of Utilization

R The proposed hotel is expected to achieve penetration levels approximating itsfair market share in all three demand segments.

R Projected market penetration, occupancy, ADR and revenue per available room(RevPAR) are presented in the table below:

ESTIMATED MARKET PENETRATION, OCCUPANCY, AVERAGE DAILY RATE AND REVPARPROPOSED 100-UNIT SELECT-SERVICE HOTEL

2015 THROUGH 2019

Average Daily Rate

YearOccupancy

Penetration1 OccupancyConstant

2012 DollarsInflated Dollars2

RevPAR(Inflated $)

2015 88% 59% $ 96.00 $105.00 $61.95 2016 97 66 98.00 110.25 72.772017 100 69 100.00 116.00 80.042018 98 69 100.00 119.50 82.462019 96 69 100.00 123.00 84.87

1 Presented as a percentage of fair market share.

2 Inflated annually at 3.0 percent and rounded to the nearest $0.25. Inflation rates were based on theresults of recent investor surveys and forecasts by the U.S. Congressional Budget Office.


Financial Projections

R Projected cash flows from operations before debt service and income taxes, ininflated dollars, are depicted in the following table.

PROJECTED CASH FLOWS FROM OPERATIONSBEFORE DEBT SERVICE AND INCOME TAXES

PROPOSED 100-UNIT SELECT-SERVICE HOTEL2015 THROUGH 2019

YearInflatedDollars

2015 $546,000 2016 752,0002017 865,0002018 892,0002019 917,000

The projected cash flows generate an unleveraged internal rate of return (IRR) of 7.29 percent

and a leveraged IRR of 9.76 percent based on typical investment parameters and development

cost. These returns are unlikely to be sufficient to entice a qualified hotel developer to pursue

the project. Accordingly, some level of incentive must be considered if the property is to reach

fruition.

The foregoing projections of occupancy and ADR reflect the performance of the hotel on any

of the four sites being considered. In other words, these levels could be achieved on the least

desirable site. It is important to note, however, that the projections could differ depending upon

the site selected. As noted, it is our belief that development of The Block is critical to the

subject property’s viability. Accordingly, immediate proximity to restaurants, retail and

entertainment options could enhance the proposed property’s performance. It is our

recommendation that the projections be updated and adjusted once a specific site and brand

have been selected.


METROPOLITAN ATLANTA OVERVIEW

An analysis of the economic characteristics of a given market area is critical in assessing

historical and future growth patterns and their impact on levels of lodging demand. Such an

analysis also contributes to a proper evaluation of market risks. For instance, a market heavily

oriented towards a single demand generator (e.g., a military installation) often carries a high

level of inherent risks. Conversely, a market having a diverse economy typically is less

vulnerable to downturns. Further, the sheer size of a market can impact risks through its ability

to recover from conditions of oversupply.

The City of Atlanta is the capital of Georgia and, along with its surrounding metropolitan area,

is the largest and most important city in the southeastern United States. Once a second-tier

city along with Memphis and Birmingham, Atlanta’s progressive leadership in the 1960s and

1970s placed the area at the forefront of the trend toward migration to the Sunbelt which began

at that time and continues today. In so doing, Atlanta unseated the region’s traditional major

cities, New Orleans and Miami, and became one of the principal metropolitan areas in the

United States.

Today, Atlanta is the primary center for commerce, finance, culture, transportation and the

federal government within the Southeast. The maps on the following pages depict the

metropolitan statistical area’s location within the state and region, and the subject’s location

within the metropolitan area.

Population: Population growth is an important factor in determining the economic strength

of a given area. Although the growth of a local population is not related directly to room-night

demand for hotels, it does reflect employment growth and future employment concentration

which, in turn, typically influence levels of commercial room-night demand.

The 28-county Atlanta MSA is the ninth largest in the United States with an estimated 2012

population of nearly 5.5 million. During the period from 2007 to 2012, the population of the

MSA grew at a compound annual rate of 1.6 percent. Gwinnett County, which encompasses

the subject site, contains approximately 15.6 percent of metropolitan Atlanta’s population. It

grew 2.2 percent compounded annually over the past five years, reflecting one of the strongest

rates within the MSA. Atlanta’s exceptional suburban growth is due largely to the high quality

of life, lower taxation and abundant supply of good quality housing available in the surrounding

areas at reasonable prices. Nonetheless, a resurgence of in-town development has occurred

in recent years as commute times have increased due to traffic congestion.

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The following table depicts population characteristics for Gwinnett County, the MSA, the state

and the nation.

POPULATIONGWINNETT COUNTY, THE ATLANTA MSA, GEORGIA AND THE UNITED STATES

2007, 2012 AND 2017(in thousands)

2007 2012

CompoundAnnual Change

2007-2012 2017

CompoundAnnual Change

2012-2017

Gwinnett County 764.1 853.2 2.2% 995.0 3.1%Atlanta MSA 5,048.7 5,469.6 1.6 6,031.6 2.0Georgia 9,350.0 9,961.9 1.3 10,715.7 1.5United States 301,231.2 314,659.2 0.9 3306738.0 1.0

Gwinnett County’s Share of MSA 15.1% 15.6% 16.5%

Source: Wood & Poole Economics, Inc. - 2013 CEDDS

Employment and Economy: The Atlanta MSA’s economy is distinguished from the national

economy by its greater concentration of trade and service employment, and relatively small

component of manufacturing employment. The overall composition of the area’s economy

therefore is well-diversified and has tended to partially insulate the city from the effects of past

national recessions and other cyclical downturns. Nonetheless, the recession at the beginning

of the decade’s focus on technology and telecommunications, in combination with the

slowdown in travel spurred by the recession and the September 11, 2001 terrorist attacks, was

particularly damaging to the Atlanta economy. Similarly, recent economic conditions have had

a substantial negative effect on the metropolitan area.

Employment by nonagricultural industry for the Atlanta MSA in 2007 and 2012 (preliminary) is

depicted in the following table.


EMPLOYMENT BY NONAGRICULTURAL INDUSTRYATLANTA MSA2007 AND 2012(in thousands)

2007 2012 Compound Employment Employment Annual

Industry Number Percent Number Percent Change

TTU1 562.7 22.9% 543.5 23.3% (0.7%)PBS2 410.9 16.7 417.9 17.9 0.3Government 324.7 13.2 311.7 13.3 (0.8 )EHS3 259.8 10.6 295.6 12.6 2.6Leisure & Hospitality 234.9 9.6 222.0 9.5 (1.1 )Manufacturing 175.5 7.1 150.3 6.4 (3.1 )Financial Activities 162.5 6.6 135.2 5.8 (3.6 )Other Services 97.8 4.0 93.8 4.0 (0.8 )Construction 139.0 5.7 87.2 3.7 (8.9 )Information 85.6 3.5 78.7 3.4 (1.7 )Mining & Logging 2.0 0.1 1.3 0.1 (8.3 )

Total 2,455.4 100.0% 2,337.2 100.0% (1.0%)

1 Trade, Transportation & Utilities2 Professional & Business Services3 Education & Health Services

Source: U.S. Department of Labor, Bureau of Labor Statistics

Between 2007 and 2012, total nonagricultural employment for the Atlanta MSA contracted at

a compound annual rate of 1.0 percent. After experiencing robust growth during the late 1990s

and into 2000, employment growth slowed in 2001 and a 1.9 percent decline (42,700 jobs)

occurred during 2002. Several major employers (including Lockheed Martin, Coca-Cola,

AT&T, BellSouth and Delta) announced cutbacks during this period. While the economy was

already showing signs of weakening prior thereto, the September 11th terrorist attacks

compounded and solidified in the minds of many that the country was in a recession. It directly

impacted Atlanta by causing weakened demand for air transportation and reduced convention

activity. Job losses began in earnest in September 2001 and continued through 2003.

Employment levels began increasing in January 2004 (rising 1.4 percent for the year), and

more than 186,000 jobs were added from 2005 to 2007. In response to the most recent

national economic recession, numerous companies cut jobs resulting in a decline of 26,000

jobs in 2008, 135,500 in 2009 and 19,900 in 2010. July 2010 was the first month to show

positive growth in employment (as compared to the same month in the prior year) since April

2008 and 28,900 jobs were added in 2011 reflecting a 1.3 percent increase from 2010. Based

on preliminary estimates, growth of 1.5 percent (34,200 jobs) was experienced in 2012.

Forecasts by Woods & Poole Economics, Inc. indicate employment growth for the MSA of 1.8

percent compounded annually through 2020. Compound annual employment growth for


Gwinnett County is estimated at 2.3 percent. Graphical depictions of 2012 employment by

sector and the annual new job growth for the past five years are presented below.

During 2011, certain key sectors, namely TTU and manufacturing, turned a corner and are now

expanding. Due to the above, plus the continued expansion of the PBS and EHS sectors,

unemployment rates have dropped. As of November 2012, the unemployment rates for the

MSA and state were 8.0 and 8.4 percent, respectively. Comparatively, the unemployment rate

for the United States was 7.4 percent while that of Gwinnett County was 7.1 percent.

Despite the recent job losses, the mid- to long-term prospects for the MSA are quite favorable.

Thirteen of the Fortune 500 largest industrial and service corporations have their corporate

headquarters in the Atlanta area, and economic development officials throughout the Atlanta

MSA actively court both domestic and international corporate relocations. The city has

developed a national reputation as one which cooperates well with the private sector. The

MSA offers low costs, a high quality of life, several major colleges and universities, a temperate

climate, a good transportation network, a diversified economy and a well-developed

infrastructure which make the prospect of doing business in the area attractive to companies

thinking about establishing operations in the Southeast. Several national and international

nonprofit organizations, including the American Cancer Society, Habitat for Humanity

International, CARE International and the Boys & Girls Clubs of America, have chosen to locate

their headquarters in Atlanta, recognizing the city’s relatively low cost of doing business in

conjunction with its increasing prominence. Baxter International announced in April 2012 that

it will be building a plasma “factory” in Covington that will employ 1,500.

The Atlanta region’s top non-governmental employers are listed in the following table.


LARGEST EMPLOYERSMETROPOLITAN ATLANTA

Employer Product/ServiceNumber ofEmployees

Delta Air Lines Airline headquarters/hub operation 28,000Wal-Mart Stores Retail stores 26,000Emory University Higher education and healthcare 21,671AT&T Communications holding company 19,245United Parcel Service Logistics 10,849WellStar Health System Healthcare 9,931The Home Depot Retail stores 9,000Georgia Institute of Technology Higher education and research 8,372Lockheed Martin Aeronautics Military aircraft manufacturing 7,800Cox Enterprises, Inc. Media and communications 6,885

Source: Atlanta Business Chronicle, February 24-March 1, 2012

The presence of AmericasMart-Atlanta (with 6.2 million square feet of showroom and exhibit

hall space in the Merchandise, Gift and Apparel Marts) in conjunction with an excellent

transportation network and warehouse stock enable Atlanta to serve as a regional and national

center for wholesale trade and distribution.

Atlanta is one of the nation’s premier convention sites, and convention activity has a substantial

impact on the local economy as the city annually hosts in excess of three million attendees.

Its popularity is due in large measure to the presence of five major convention hotels in the

central business district (CBD) as well as the Georgia World Congress Center (GWCC) which

opened in 1976. Expansions of the GWCC were completed in 1985, 1992 and 2002. The

center now offers 1.4 million square feet of exhibit space. Another development which

supports Atlanta’s position as a convention destination is the Georgia Dome, a 71,200-seat

domed stadium proximate to the GWCC which opened in 1992. With 102,000 square feet of

floor space, the Dome is able to host conventions and trade shows in addition to Atlanta

Falcons football games, other sporting events and concerts. Smaller convention venues which

are located throughout the metropolitan area include the Georgia International Convention

Center in College Park, Gwinnett Center in Gwinnett County and Cobb Galleria Centre in Cobb

County.

Office Market: 2012 represented the best year since 2007 for the Atlanta office market. The

following table profiles the metropolitan speculative office market as of year-end 2012. The

subject site is located in the Northeast Atlanta sector. Positive absorption of 2,767,061 square

feet counteracted the delivery of 789,822 square feet during the year. Currently, there are

1,124,097 square feet of office space under construction in the metropolitan area, of which

344,476 square feet are in the Northeast Atlanta sector.


METROPOLITAN ATLANTA OFFICE MARKET

FIRST QUARTER 2012

Sector

Existing

Square Feet

Percent

Vacant

YTD

Absorption

Downtown 27,694,279 18.1% ( 322,476)Midtown 22,239,335 15.6 752,769Buckhead 20,495,788 16.3 448,683Central Perimeter 29,079,020 18.3 1,820,396North Fulton 27,677,670 17.1 ( 256,068)Northeast Atlanta 23,405,902 19.1 235,129Northlake 18,102,183 14.4 ( 135,198)Northwest Atlanta 35,891,439 16.9 ( 76,230)South Atlanta 13,282,159 13.3 188,044West Atlanta 3,309,481 26.2 112,011

Totals/Average 221,177,256 17.0% 2,767,061

Source: Colliers International

Transportation: The Atlanta MSA’s infrastructure and accessibility are enhanced by the

convergence of three interstate highways (Interstates 20, 75 and 85) and a circumferential

highway (Interstate 285) providing access to most of the metropolitan area. Interstate 20 (I-20)

travels in an east/west manner connecting Interstate 95 (I-95) in South Carolina with

Interstate 10 in western Texas. Interstate 75 (I-75) links the Canadian border at Sault Ste.

Marie, Michigan with Miami, Florida, while I-85 connects I-95 in Virginia with Montgomery,

Alabama. Georgia Highway 400 (GA 400) is a heavily traveled commuter route which extends

from the northern suburbs to I-85 just north of downtown Atlanta.

As the largest hub of air travel in the United States and main hub of operations for Delta Air

Lines, Hartsfield-Jackson Atlanta International Airport is the world’s busiest and among its

largest. It is the largest employment center in Georgia, with approximately 58,000 persons

employed by airlines, vendors, terminal operations and regulatory agencies. In October 2008,

Delta merged with Northwest Airlines to form what at the time was the world’s largest

commercial carrier. In May 2011, Southwest Airlines announced it had completed its

acquisition of AirTran Airways which has its largest hub of operations in Atlanta. This move

will enable the nation’s dominant low-cost carrier to enter the Atlanta market when the two

companies are fully integrated by the end of 2014.

2000 marked the beginning of a decade-long, $5.4 billion expansion of the airport. The

expansion program is designed to meet an expected passenger load of 121 million by 2015.

Major features of the expansion include completion of a fifth runway (which opened in May

2006) and moving the rental car complex to a 67.5-acre site off Camp Creek Parkway. The


rental car facility is connected to the passenger terminal by an automated people mover. Also

part of the plan was construction of a new international terminal (Maynard H. Jackson Jr.

International Terminal) on the east side of the airport. This facility is accessed from I-75 and

opened in May 2012.

The following table depicts historic passenger activity.

PASSENGER ACTIVITYHARTSFIELD-JACKSON ATLANTA INTERNATIONAL AIRPORT

2007 THROUGH 2012

Number of Passengers PercentYear Domestic International Total Change

2007 79,796,551 8,897,291 88,693,842 -2008 80,416,839 9,180,491 89,597,330 1.0%2009 79,061,501 8,832,195 87,893,696 (1.9 )2010 80,099,037 9,139,022 89,238,059 1.52011 82,532,069 9,856,954 92,389,023 3.52012 85,632,354 9,854,343 95,486,697 3.4

Compound Annual Change 1.5%

Source: Hartsfield-Jackson Atlanta International Airport

Public transportation is provided by the Metropolitan Atlanta Rapid Transit Authority (MARTA)

system of buses and commuter rail. The Cobb Community Transit and Gwinnett County

Transit bus systems serve the two respective counties and connect with MARTA at strategic

points.

Conclusion: Atlanta has a well-developed transportation and commercial services

infrastructure which will enable it to remain the regional center for commerce and trade in the

Southeast for the foreseeable future. Although the massive growth experienced during the

1980s and 1990s in virtually every sector of the economy has slowed, Atlanta continues to

attract new businesses and sustain net in-migration. Clearly, the city has not been immune to

the severe national economic downturn. Still, as the focal point of the Southeast, and the only

city of national and international stature within the region, Atlanta’s long-term prospects appear

favorable.


SITE AND NEIGHBORHOOD EVALUATION

The neighborhood within which a hotel operates can have a significant impact on its operating

performance. Emerging neighborhoods experiencing substantial growth can generate

increasing levels of demand and provide an environment characterized by newer development

and, more importantly, popular support facilities (e.g., restaurants, retail, entertainment, etc.).

Conversely, a declining neighborhood or, in some cases, a mature one relative to a nearby

emerging one, can be detrimental to a property’s operations. In this section, we address the

location, access and development characteristics of the subject neighborhood.

While the subject will be influenced by activities throughout the area extending from the I-85/

Sugarloaf Parkway interchange westward to Johns Creek, its immediate neighborhood is

focused on activities within the City of Duluth, specifically downtown Duluth. The city had a

2010 population of 26,600 and encompasses 10.1 square miles. It is located approximately

23 miles northeast of downtown Atlanta.

Four sites in the downtown area, as listed below and depicted on the map on the following

page, have been identified by the City for potential hotel development.

R Site A - Proximate to the southeast quadrant of the intersection of Hill and WestLawrenceville streets.

R Sites B & C - In the northeast and northwest quadrants of the intersection of HillStreet and Ridgeway Road, respectively.

R Site D - Across Main Street from City Hall.

Downtown Duluth is located approximately four miles northwest of I-85 via Duluth Highway.

It is relatively vibrant, with numerous shops, restaurants and businesses lining Main Street.

These include the Red Clay Theatre, a 257-seat live music venue managed Eddie Owen who

helped launch the careers of the Indigo Girls, Sugarland and John Mayer. Plans call for

expanding the Red Clay Theatre to include additional gathering space, a bar and potentially

a restaurant. Downtown also is site of festivals (Duluth Fall Festival, BeerFest Duluth,

Halloween on the Green) and events (SummerStage Concerts, No Reason Block Party, Flicks

on the Bricks) throughout the summer and fall months.




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Revitalization of the downtown area is being approached in phases. The first two included

development of the town green followed by construction of a new 44,000-square foot city hall

and pedestrian improvements around Church Cemetery. On the northern edge of the town

green is the Duluth Festival Center which includes two 960-square foot meeting rooms.

The third phase of revitalization is to encompass The Block, a 3.3-acre parcel in the southeast

quadrant of the intersection of Hill and West Lawrenceville streets including the former city hall

and warehouse space. It is to be redeveloped into a restaurant district with eight to ten outlets

and perhaps a salon or spa, with completion anticipated in approximately 30 months. Hotel

Site A is within The Block. A prospective developer has proposed construction of 350 luxury

apartments on the west side of downtown, west of Hardy Industrial Boulevard, concurrent with

redevelopment of The Block. Future plans with market-driven timing call for 185 residential

condominiums or townhomes on the north side of Hill Street (including Hotel Site C) and street-

level retail (40,000 square feet) with office space (100,000 square feet) above lining both sides

of Main Street between City Hall and Hardy Industrial Boulevard (including Hotel Site D).

Completion of The Block by the end of 2015 is a critical assumption to our analysis.

Other key developments in the surrounding area which could influence the performance of the

subject include the following:

R Located at the northern edge of Duluth is the headquarters for AGCO, one of theMSA’s Fortune 500 firms and a global manufacturer of agricultural machinery. AGCO generates some 2,000 room-nights of hotel demand annually.

R The Payne-Corley House is a popular venue for weddings and other socialevents. It is located just east of downtown Duluth.

R Gwinnett Medical Center recently purchased a vacant shopping center adjacentto its Duluth campus at the intersection of Pleasant Hill and Howell Ferry roadsin the western portion of the city. It is to be redeveloped into an outpatientcampus which could offer diagnostic, urgent care, rehabilitation and ambulatorysurgery services, with a focus on professional athlete rehabilitation.

R In 2012, Primerica broke ground on a 344,476-square foot headquarters withinthe Legacy office park at the intersection of Meadowbrook Parkway and DuluthHighway. It is to be completed by mid-2013.

R Gwinnett Center and The Arena at Gwinnett Center comprise a convention andentertainment complex situated on 80 acres at the intersection of SugarloafParkway and Satellite Boulevard. The campus includes: a convention centerfeaturing an exhibit hall with 50,000 square feet of unobstructed space, a


21,600-square foot ballroom and assorted breakout rooms; a 708-seatperforming arts center; and the 13,000-seat Arena at Gwinnett Center. TheJacqueline Casey Hudgens Center for the Arts also is located adjacent to thecenter and serves as additional space for smaller social events with 2,200square feet of indoor meeting space and a 28,000-square foot outdoor SculptureGarden. The convention center and performing arts sections of the complexwere constructed in 1992. The ballroom complex opened in 2002, and thearena opened in 2003. Development of a headquarters hotel has beenproposed.

Although removed from the existing focal points of lodging development, the neighborhood

offers an array of amenities within walking distance and proximity to a major demand generator

(AGCO). Further, the various festivals hosted by the city as well as the event venues (Duluth

Festival Center and the Payne-Corely House) should prove to be sources of lodging demand.

Still, the downtown area likely lacks a sufficient critical mass of commercial activity to

adequately support a new hotel. Development of The Block will substantially mitigate this

concern, through the offering of eight to ten new dining/entertainment options.

RECOMMENDED FACILITIES

There are no hotels within the Duluth city limits at present. Thus, given the pioneering nature

of the subject, we recommend pursuing development of a relatively small (approximately 100

units) select-service hotel with a strong, high quality brand with broad appeal to business

travelers and leisure guests alike and which will help drive demand through its reservation

system. Examples of such brands include Hampton Inn & Suites, Courtyard by Marriott, Hilton

Garden Inn, SpringHill Suites by Marriott, Aloft and Hyatt Place. This combination of size,

orientation and branding will help minimize project costs and the financial risks of the project.

Amenities prototypical of the brands mentioned (complimentary breakfast or a restaurant

serving breakfast, swimming pool, exercise room, sundry shop, business center and guest

laundry) should be provided with perhaps an expanded complement of meeting space, say

1,500 to 2,000 square feet. Brands such as Courtyard by Marriott and Hilton Garden Inn

require the inclusion of a restaurant. For purposes of this analysis, however, we have assumed

such a property would offer a restaurant leased to and operated by a third party. Such an

arrangement would allow the property to realize the benefits of a full-service property without

the incremental risks and operating costs.

Again because of the subject’s pioneering nature, we believe it is critical to its success to be

distinguished from the competitors via design elements and surrounding support amenities.


There are synergies that result from the presence of numerous hotels in proximity to one

another. Further, it has been clearly established that the presence of immediately adjacent

support amenities (e.g., restaurants, retail, entertainment, etc.) can have a substantial positive

effect on a property’s operations. Perhaps the best examples of this are hotels located within

a “lifestyle” retail complex. These properties typically perform measurably better than

physically similar hotels located on the periphery of the complex. For this reason, it is our

recommendation that proximity to support amenities be a prime consideration in site selection.

For purposes of this analysis, we have assumed a January 1, 2015 opening date.

HOTEL INVESTMENT MARKET OVERVIEW

In the analysis of hotel investments, it is essential to understand overall market trends and their

potential impact on a given property. The following paragraphs outline factors influencing the

current hotel investment market.

Throughout the 1980s, hotels were developed at a record pace. The unparalleled activity was

due to several factors, the most prominent of which were a highly favorable tax code,

substantial availability of funds through savings and loan establishments, and the introduction

of a large number of new limited-service brands. The resulting oversupply caused many hotels

to decline in value during the early 1990s as net operating income levels plummeted. In

addition, the failure of numerous lending institutions placed vast numbers of assets in the

hands of federal regulators, many of which were disposed of at below-market values.

In the mid-1990s, market conditions improved. In fact, until late 1998, there were far more

willing buyers than willing sellers, particularly with the advent of several highly capitalized real

estate investment trusts (REITs) and other large equity groups targeting the hotel industry.

After several years of declining occupancy, the nation’s lodging industry began improving in

1992. Continued gains in occupancy and stronger rate growth were experienced from 1993

through 1995, with ADR increasing at a pace in excess of inflation in 1994 and 1995. Strong

rate growth was upheld in 1996, but occupancy began a slight decline. This trend continued

through 1999, and in 2000 a slight increase in occupancy was experienced as well.

Occupancy, ADR and RevPAR all dropped in 2001 and 2002. Since 2002, national supply and

demand conditions have changed as depicted below.


OCCUPANCY, AVERAGE DAILY RATE AND REVPARNATIONAL LODGING MARKET2002 THROUGH JANUARY 2013

Year OccupancyPercentChange

AverageDaily Rate

PercentChange RevPAR

PercentChange

2002 59.0% - $ 83.19 - $49.04 -2003 59.1 0.2% 83.11 (0.1%) 49.11 0.1%2004 61.3 3.7 86.24 3.8 52.88 7.72005 63.1 2.9 90.95 5.5 57.39 8.52006 63.3 0.3 97.89 7.6 61.96 8.02007 63.1 (0.3 ) 104.04 6.3 65.61 5.92008 60.3 (4.4 ) 106.96 2.8 64.49 ( 1.7 )2009 54.5 (9.6 ) 98.17 (8.2 ) 53.50 (17.0 )2010 57.5 5.5 98.06 (0.1 ) 56.43 5.52011 59.9 4.2 101.85 3.9 61.02 8.12012 61.4 2.5 106.10 4.2 65.17 6.8

YTD 1/12 49.2% - $100.84 - $49.64 -YTD 1/13 51.0 3.6% 105.96 5.1% 54.02 8.8%

Source: Smith Travel Research and PKF Consulting USA

RevPAR was down 2.9 percent in 2002, primarily as a result of deteriorating economic

conditions. Occupancies dropped precipitously after the September 11, 2001 terrorist attacks

and then rebounded. However, it was not until 2005 that RevPAR returned to pre-September

11th levels. Occupancy levels began to decline in mid-2007, a trend which did not reverse until

2010.

Total returns on hotel investments as reported by NCREIF demonstrate the steady

improvement in industry performance through the end of 2006. The consistent decline in

returns which began thereafter was punctuated by a dramatic plunge at the end of 2008. The

following chart presents the median rolling one-year total return for the period from the second

quarter of 2008 through the third quarter of 2012.


PKF Hospitality Research is projecting supply and demand growth at 0.5 and 3.0 percent,

respectively, for 2012, resulting in an occupancy increase of 2.6 percent. ADR is projected to

increase 4.2 percent, resulting in RevPAR growth of 6.8 percent. Projections for 2013 call for

RevPAR to increase 6.0 percent.

Several industry trends are evident:

R New construction has been limited over the past few years. According to STR,supply contracted 0.1 percent in 2005 while demand grew at a rate of 2.8percent. Demand growth in 2006 was only slightly more than supply. In 2007,for the first time in several years, supply exceeded demand. Supply grew 1.3percent while demand grew 1.0 percent. The gap widened in 2008, with supplyup 2.6 percent and demand down 1.2 percent. Nonetheless, from a historicalperspective, supply growth was still minimal. The dearth of financing combinedwith poor economic fundamentals should insure modest supply growth for theforeseeable future. In fact, many projects that were in the development pipelinehave been delayed indefinitely.

R As often happens during cyclical downturns, substantial equity is beingassembled for the purpose of acquiring distressed assets. An increasingnumber of mortgage defaults and/or breaches of debt covenants bodes well foropportunistic buyers. Thus far, however, there have been few quality assets forsale.


R Until 2007, demand for sites by condominium developers in coastal and/or resortlocations had severely limited the construction of hotels in these environments. In fact, the inventory of hotel rooms actually shrunk in some markets as hotelswere converted to condominium use. In 2007 this situation largely subsided. The exodus of speculators from the market left a severe imbalance betweensupply and demand in many areas.

R Major hotel companies have a renewed interest in developing new brands. Hilton’s Home2 Suites, Choice Hotels’ Cambria Suites, Starwood’s Aloft andElement brands and Global Hyatt Corporation’s Hyatt Place have garneredconsiderable attention.

R Due in part to the massive demand for residential product and competition formaterials from other countries, construction costs increased at a dramatic pacefrom 2003 through 2007. This situation eased somewhat during the latter halfof 2007 as transactions became increasingly difficult to finance and theresidential market collapsed. As a result, construction costs have declined aconsiderable degree.

R Prompted by the troubles of the sub-prime mortgage market, securitizedmortgage lending came to a dramatic halt. Thus, the massive debt availabilitythat characterized the industry in recent years has diminished considerably. Infact, debt capital is extremely scarce and terms are far more stringent. Loan-to-value ratios are now in the 60 percent range for new construction with debtservice coverage ratios as high as 1.4 to 1.6. Many loans are now relationshipdriven rather than asset driven, with only the strongest borrowers gainingtraction.

The performance of the industry over the past three years suggests the worst may be over.

Though occupancy and ADR levels are still below peak levels, they are nonetheless

consistently improving. RevPAR growth for 2011 was quite strong, and a significant gain was

realized in 2012 as well.

SUPPLY AND DEMAND ANALYSIS

The supply and demand analysis involves a qualitative and quantitative evaluation of the

lodging facilities in the Duluth area with which the proposed select-service hotel would

potentially compete for various segments of demand. This section includes a description of

the existing supply of, and demand for, hotel rooms in the subject market area, identification

of proposed competitive properties, and a discussion of the growth potential of area demand

by segment. The analysis is for the period through 2019 to encompass the first five full years

of operation for the subject following its anticipated opening by January 1, 2015.


Understanding the relationship between supply and demand is a critical component of any

market study, particularly with respect to hotels. Unlike other property types, hotels essentially

lease their rooms on a daily basis. While this characteristic allows for an immediate response

to changes in market conditions, it also requires a high level of management intensity. There

is an inverse relationship between occupancy and ADR, and raising or lowering rates typically

has an immediate impact on room-nights sold. Effective management entails finding the proper

balance that allows for the maximization of revenue.

In this section we first identify the subject property’s competitive set (e.g., those hotels that tend

to compete for the same sources of demand). We then identify relevant demand sources,

analyze historical growth patterns and assess the potential for growth (or lack thereof) in

demand by segment. The result is a projection of future market performance. Lastly, we

conclude with a projection of occupancy and ADR for the subject property, taking into

consideration its competitive strengths and weaknesses relative to the overall market.

Obviously, some hotels are more directly competitive than others based on their locations,

facilities, branding, etc. This disparity in the level of competitiveness can be handled in a

number of ways. Some consultants assign a percentage to each property and include only a

portion of their guest rooms in the competitive set. This technique, while theoretically sound,

is highly subjective and the overall analysis can be extremely sensitive to the assumptions

made. Alternatively, we have chosen to address this issue through our projected penetration

rates. For example, the introduction of a new property that is only marginally competitive will

have a limited impact on the subject property’s penetration level, whereas a directly competitive

property will likely have a substantial effect. Regardless of the method employed, properly

assessing the relationship between supply and demand and its impact on the subject property

and market occupancy requires a level of professional judgment.

Existing Competitive Facilities: We have identified six properties with a total of 716 guest

rooms which would potentially compete with the subject 100-unit select-service hotel. These

include the highest quality, most strongly branded select-service hotels located closest to

downtown Duluth. Three of the hotels are located proximate to the I-85/Sugarloaf Parkway

interchange while the other three are in the Johns Creek area. The Sugarloaf Parkway

interchange (Exit 108) is the most vibrant, growing interchange in the area. From a lodging

location perspective, it is the most desirable. Sugarloaf Parkway runs along the northern

entrance of the Sugarloaf Mills with a number of restaurant and retail uses nearby as well as

growing mixed-use centers and office parks. The three competitors at the interchange tend

to perform at a higher level than the Johns Creek properties, in large part due to their proximity

to an extensive array of support amenities and the presence of I-85.


Although additional lodging facilities are located in the market area, they are not considered

directly competitive due to disparities in terms of markets served, quality of facilities, services

offered and/or rate structure. Accordingly, a guest who patronizes one of the competitive

properties is not likely to be the same type of traveler who, under normal market conditions,

would choose these other facilities.

The map on the following page depicts the location of each property in relation to downtown

Duluth. The tables on the page after the map provide a summary profile of the defined

competitive properties. Additional information on the competitors is provided in the following

paragraphs.

R The 127-unit Hampton Inn Atlanta-Lawrenceville-I-85-Sugarloaf is locatedacross Sugarloaf Parkway from the Sugarloaf Mills mall. Benefitting from thislocation and a strong brand, it is the market leader with respect to occupancyand RevPAR. The property’s lobby, breakfast area and meeting rooms are inthe final stages of renovation.

R The Hilton Garden Inn Atlanta NE/Gwinnett Sugarloaf was the first hotel toopen at the I-85/Sugarloaf Parkway interchange. Its lobby was renovated inJune 2012, and refurbishment of its meeting space and 122 guest roomspresently is underway.

R The 143-room Holiday Inn Gwinnett Center is located adjacent to theconvention center/arena complex. As such, it accommodates a disproportionateshare of group and leisure demand which in turns places downward pressureon its ADR. The hotel opened as a prototype for the chain’s then new design,and it has continued to serve as a testing ground for the brand’s look and feel. The brand’s Hub lobby/restaurant concept was implemented in 2011, and carpetis to be replaced throughout the hotel this year.

R The Hyatt Place Atlanta/Duluth/Johns Creek was converted from anAmeriSuites in May 2007 and underwent a complete renovation at that time. The 122-room hotel is located at the center of Technology Park/Johns Creek,a 1900-acre mixed-use development that currently has some 5.8 million squarefeet of office/technology/medical/professional space. Despite the vastemployment base, however, the Johns Creek submarket performs poorly.




www.delorme.com

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SUMMARY OF COMPETITIVE PROPERTIESDULUTH AREA

PROPOSED 100-UNIT HAMPTON INN & SUITES

Estimated 2012 Estimated 2012Number Year Percent Average Demand Segmentation Total Sq. Ft.

Name of Property of Units Opened Occupancy Daily Rate RevPAR1 Commercial Group Leisure Meeting Space Amenities

Hampton Inn Atlanta-Lawrenceville- I-85-Sugarloaf

127 2003 75%-79% $100-$104 $75-$79 60% 20% 20% 1,200 C-E-F-G

Hilton Garden Inn Atlanta NE/ Gwinnett Sugarloaf

122 2001 70-74 105-109 75-79 55 25 20 1,780 A-B-C-D-F

Holiday Inn Gwinnett Center 143 2004 70-74 85-89 60-64 25 35 40 1,725 A-B-C-D-FHyatt Place Atlanta/Duluth/ Johns Creek

122 1997 55-59 95-99 55-59 70 15 15 1,020 A-B-C-E-F-G

Hilton Garden Inn Atlanta North/ Johns Creek

122 1999 60-64 105-109 65-69 75 15 10 1,400 A-B-C-E-F

Holiday Inn Express Hotel & Suites Atlanta-Johns Creek

80 2002 50-54 85-89 40-44 70 15 15 625 C-F-G

Total/Averages 716 67.3% $97.76 $65.82 56% 22% 22%

Estimated 2012 Market PenetrationFair Market Estimated 2012 Market Share Percentage2 as a Percentage of Fair Market Share3 RevPAR

Name of Property Share Total Commercial Group Leisure Total Commercial Group Leisure Penetration4

Hampton Inn Atlanta-Lawrenceville- I-85-Sugarloaf

17.74% 20.83% 22.28% 18.72% 19.26% 117% 126% 106% 109% 120%

Hilton Garden Inn Atlanta NE/ Gwinnett Sugarloaf

17.04 18.24 17.88 20.48 16.86 107 105 120 99 115

Holiday Inn Gwinnett Center 19.97 21.97 9.79 34.55 40.62 110 49 173 203 98 Hyatt Place Atlanta/Duluth/Johns Creek 17.04 14.44 18.02 9.73 10.01 85 106 57 59 84 Hilton Garden Inn Atlanta North/Johns Creek 17.04 16.21 21.67 10.92 7.49 95 127 64 44 104 Holiday Inn Express Hotel & Suites Atlanta-Johns Creek

11.17 8.31 10.36 5.60 5.76 74 93 50 52 67

Notes: Amenities Key

1 Occupancy × average daily rate. A = Restaurant(s) E = Outdoor Swimming Pool 2 Property’s accommodated demand ÷ total demand accommodated in market. B = Lounge(s) F = Complimentary High-Speed 3 Market share percentage ÷ fair market share. C = Exercise Room Internet Access 4 Property's RevPAR ÷ market RevPAR. D = Indoor Swimming Pool G = Complimentary Breakfast

Source: Properties concerned and PKF Consulting USA


R The 122-room Hilton Garden Inn Atlanta North/Johns Creek is the occupancyleader amongst the Johns Creek hotels and achieves the highest ADR of allcompetitors. In 2012, the property accommodated over 1,800 room-nights ofAGCO demand. A full-service bar was added to the hotel in 2012.

R The Holiday Inn Express Hotel & Suites Atlanta-Johns Creek underwent acomplete renovation approximately a year ago. The 80-unit hotel achieves themarket’s lowest occupancy and RevPAR despite its small size. This is areflection of its weaker branding (as compared to the competitors) and the poorstate of the Johns Creek submarket.

The table on the following page depicts trends in occupancy, ADR, RevPAR, supply and

demand for the defined competitive supply since 2006. As shown, both room demand and

ADR declined significantly in 2009. This was due to the reduction in travel caused by the

economic downturn and, in turn, operators discounting rate while unsuccessfully trying to

maintain occupancy levels. A surge in business travel led to strong occupancy growth in 2010,

but with rates for 2010 negotiated in 2009 before it was known market occupancy would

rebound, ADR declined further in 2010. Nonetheless, RevPAR increased 4.4 percent that year

and has been fairly robust since.

Supply Additions: Based on our fieldwork, we have identified no additions to the competitive

supply other than the subject. There are, however, three projects of note as described below.

R A 117-unit Residence Inn by Marriott is under construction proximate to thenorthwest quadrant of the I-85/Sugarloaf Parkway interchange and is to becompleted by September 2013. It has not been included as a supply additiondue to its extended stay orientation.

R A 234-unit Embassy Suites has been proposed for development along SatelliteBoulevard at the entrance to Gwinnett Center, but the developer has beenunsuccessful in securing financing and the project is unlikely to reach fruition inthe near to mid-term.

R As previously noted, a headquarters hotel has been proposed at GwinnettCenter. The hotel would be affiliated with Marriott and likely include 250 to 300rooms. It has not been included as a supply addition due to its preliminarynature, large size and full-service orientation.

Should any competitive supply additions occur beyond the subject, the estimates of occupancy

(and possibly ADR) contained herein would thus be affected and a revision might be required.

HISTORICAL OCCUPANCY, ADR, REVPAR, SUPPLY AND DEMANDDEFINED COMPETITVE SUPPLY

DULUTH AREA

Year January February March April May June July August September October November December Total Year YTD Dec % Change % Change YTD2006 65.3% 66.2% 70.1% 68.3% 68.4% 71.3% 71.8% 68.2% 67.2% 72.7% 65.6% 50.5% 67.1% 67.1% - -2007 57.9 60.7 70.2 67.3 73.7 74.3 69.0 65.5 69.1 72.8 68.6 54.8 67.0 67.0 -0.2% -0.2%2008 60.7 65.6 68.9 80.0 68.6 67.9 72.2 69.2 63.9 69.7 54.5 51.9 66.1 66.1 -1.4 -1.42009 51.5 57.8 59.2 63.3 59.4 59.5 61.6 57.8 62.8 65.3 56.5 51.8 58.9 58.9 -10.9 -10.92010 52.3 60.0 69.8 63.5 65.0 67.2 68.3 68.5 65.9 68.6 60.8 51.4 63.4 63.4 7.8 7.82011 52.6 63.1 68.7 64.1 62.8 65.8 65.4 70.2 63.0 68.8 63.9 51.5 63.3 63.3 -0.2 -0.22012 58.7 64.1 68.8 71.0 68.8 67.0 69.9 75.2 69.8 75.9 64.5 54.1 67.3 67.3 6.3 6.3Avg 57.0% 62.5% 68.0% 68.2% 66.7% 67.6% 68.3% 67.8% 66.0% 70.5% 62.1% 52.3% 64.7% 64.7%

Year January February March April May June July August September October November December Total Year YTD Dec % Change % Change YTD2006 $91.72 $93.82 $95.36 $93.73 $94.25 $93.10 $90.20 $94.64 $93.95 $98.70 $96.46 $90.76 $93.97 $93.97 - -2007 101.01 108.99 104.07 103.74 99.62 101.98 103.19 103.09 102.50 105.96 99.75 96.97 102.58 102.58 9.2% 9.2%2008 107.65 109.17 107.33 110.10 106.68 106.51 102.66 102.68 105.63 109.10 100.70 98.18 105.76 105.76 3.1 3.12009 102.50 101.13 101.41 100.01 91.86 95.96 91.48 93.13 93.29 95.60 89.86 87.13 95.26 95.26 -9.9 -9.92010 91.97 92.91 96.12 91.09 91.37 93.29 89.37 94.07 92.93 94.54 91.42 86.61 92.28 92.28 -3.1 -3.12011 94.33 98.01 99.71 99.20 95.66 98.92 93.26 108.16 96.38 99.07 93.84 89.36 97.44 97.44 5.6 5.62012 96.70 99.01 96.34 99.99 97.07 99.33 95.99 97.80 97.48 103.15 95.64 93.00 97.76 97.76 0.3 0.3Avg $97.99 $100.43 $100.01 $100.03 $96.82 $98.50 $95.27 $99.21 $97.48 $100.98 $95.44 $91.78 $97.94 $97.94

Year January February March April May June July August September October November December Total Year YTD Dec % Change % Change YTD2006 $59.86 $62.11 $66.85 $64.06 $64.51 $66.34 $64.73 $64.53 $63.17 $71.74 $63.25 $45.79 $63.07 $63.07 - -2007 58.49 66.20 73.01 69.81 73.41 75.79 71.17 67.47 70.86 77.14 68.41 53.17 68.74 68.74 9.0% 9.0%2008 65.30 71.67 73.90 88.06 73.15 72.36 74.15 71.10 67.54 76.01 54.92 50.96 69.90 69.90 1.7 1.72009 52.76 58.46 60.07 63.27 54.56 57.10 56.37 53.80 58.59 62.43 50.76 45.14 56.08 56.08 -19.8 -19.82010 48.06 55.73 67.13 57.85 59.41 62.65 61.05 64.42 61.20 64.81 55.59 44.50 58.55 58.55 4.4 4.42011 49.60 61.85 68.53 63.59 60.03 65.11 61.02 75.88 60.76 68.18 60.00 46.03 61.71 61.71 5.4 5.42012 56.80 63.45 66.26 70.97 66.77 66.60 67.10 73.53 68.01 78.25 61.72 50.29 65.82 65.82 6.7 6.7Avg $55.84 $62.78 $67.97 $68.23 $64.55 $66.56 $65.08 $67.25 $64.30 $71.22 $59.23 $47.98 $63.41 $63.41

Year January February March April May June July August September October November December Total Year YTD Dec % Change % Change YTD2006 22,258 20,104 22,258 21,540 22,258 21,540 22,258 22,258 21,540 22,258 21,540 22,258 262,070 262,070 - -2007 22,258 20,104 22,258 21,540 22,258 21,540 22,258 22,258 21,540 22,258 21,540 22,258 262,070 262,070 0.0% 0.0%2008 22,258 20,104 22,258 21,540 22,258 21,540 22,258 22,258 21,540 22,258 21,540 22,258 262,070 262,070 0.0 0.02009 22,258 20,104 22,258 21,540 22,258 21,540 22,258 22,258 21,540 22,258 21,540 22,258 262,070 262,070 0.0 0.02010 22,258 20,104 22,258 21,540 22,258 21,540 22,258 22,258 21,540 22,258 21,540 22,258 262,070 262,070 0.0 0.02011 22,258 20,104 22,258 21,540 22,258 21,540 22,258 22,258 21,540 22,258 21,540 22,258 262,070 262,070 0.0 0.02012 22,258 20,104 22,196 21,480 22,196 21,480 22,196 22,196 21,480 22,196 21,480 22,196 261,458 261,458 -0.2 -0.2Avg 22,258 20,104 22,249 21,531 22,249 21,531 22,249 22,249 21,531 22,249 21,531 22,249 261,983 261,983

Year January February March April May June July August September October November December Total Year YTD Dec % Change % Change YTD2006 14,527 13,309 15,604 14,722 15,234 15,349 15,974 15,178 14,482 16,178 14,123 11,231 175,911 175,911 - -2007 12,888 12,211 15,614 14,495 16,402 16,007 15,350 14,568 14,891 16,205 14,771 12,205 175,607 175,607 -0.2% -0.2%2008 13,501 13,198 15,325 17,229 15,261 14,634 16,077 15,413 13,772 15,507 11,749 11,552 173,218 173,218 -1.4 -1.42009 11,457 11,622 13,184 13,627 13,219 12,818 13,714 12,858 13,528 14,536 12,168 11,531 154,262 154,262 -10.9 -10.92010 11,631 12,060 15,545 13,679 14,472 14,466 15,205 15,244 14,185 15,259 13,097 11,436 166,279 166,279 7.8 7.82011 11,704 12,687 15,299 13,807 13,969 14,178 14,564 15,616 13,579 15,318 13,772 11,466 165,959 165,959 -0.2 -0.22012 13,073 12,885 15,267 15,246 15,267 14,402 15,516 16,688 14,986 16,837 13,861 12,003 176,031 176,031 6.1 6.1Avg 12,683 12,567 15,120 14,686 14,832 14,551 15,200 15,081 14,203 15,691 13,363 11,632 169,610 169,610

Note: The room count at the Hilton Garden Inn Atlanta North/Johns Creek was reduced by two in March 2012.

Source: Smith Travel Research

Demand

Occupancy

ADR

RevPAR

Supply


Principal Sources of Demand: The principal sources of demand for transient lodging

accommodations for the defined competitive set are the commercial, group and leisure

segments. From our analysis of the operating performance of the existing competitive

properties, it is estimated that the total demand accommodated by these properties in 2012

was segmented as follows:

ESTIMATED ACCOMMODATED DEMAND SEGMENTATIONDEFINED COMPETITIVE SUPPLY

DULUTH AREA2012

Demand SegmentAnnual Accommodated

Room-NightsPercent of

Total Demand

Commercial 98,600 56%Group 39,100 22 Leisure 38,100 22

Total 175,800 100%

Seasonality of Demand: The subject market area is moderately seasonal. As with most

commercial markets, December and January typically are the weakest months of the year due

to the holidays. The table and graphs on the following page profile the trend in seasonality for

the defined competitive supply from January 2011 through December 2012.

With the exception of being somewhat lighter during the summer months and holiday periods,

commercial demand is fairly consistent on a year-round basis and generally is concentrated

on Monday through Thursday nights. Group meetings are most prevalent during the spring and

fall months, while social groups are more evenly spread throughout the year. Leisure demand

is concentrated during the summer months, particularly on weekends, and corresponds with

typical vacation practices.

SEASONALITY TRENDSDEFINED COMPETITIVE SUPPLY

DULUTH AREAJANUARY 2011 THROUGH DECEMBER 2012

Occupancy Average Daily RateMonth 2011 2012 2011 2012

January 52.6% 58.7% $ 94.33 $ 96.70 February 63.1 64.1 98.01 99.01March 68.7 68.8 99.71 96.34April 64.1 71.0 99.20 99.99May 62.8 68.8 95.66 97.07June 65.8 67.0 98.92 99.33July 65.4 69.9 93.26 95.99August 70.2 75.2 108.16 97.80September 63.0 69.8 96.38 97.48October 68.8 75.9 99.07 103.15November 63.9 64.5 93.84 95.64December 51.5 54.1 89.36 93.00

Annual 63.3% 67.3% $ 97.44 $ 97.76



Due to typical commercial travel patterns, the market often fills mid-week. Special events,

group activity and leisure travel patterns can also result in strong occupancies on occasional

weekends. The following table presents daily occupancy and ADR patterns for the three-year

period ended December 2012.

OCCUPANCY AND ADR BY DAY OF THE WEEKDEFINED COMPETITIVE SUPPLY

DULUTH AREATHREE YEARS ENDED DECEMBER 2012

Day of the Week Occupancy ADR

Sunday 40.5% $ 92.53 Monday 68.2 103.10Tuesday 79.7 105.28Wednesday 77.4 104.88Thursday 64.9 99.72Friday 61.1 80.50Saturday 61.4 77.81

Three-Year Average 64.7% $ 95.86


It is estimated that the defined market reaches capacity on 80 nights per year and

unaccommodated demand approximates 10 to 25 percent of inventory on fill-days.

Accordingly, some 12,000 room-nights of unaccommodated demand were included in our

analysis.

Future Demand: Future room-night demand for the commercial, group and leisure segments

was estimated based upon an analysis of key economic and demographic indicators. For each

segment, relevant factors were identified and weighted according to their relative impact on

demand. The annual growth rates estimated for each segment are discussed in the following

paragraphs.

Commercial Demand: This segment consists of demand generated by vendors, service

representatives, corporate executives and other visitors to area businesses and industries.

Transient government demand also is included here. Those commercial travelers on a per

diem tend to choose lower-priced facilities offering a good price/value relationship (and often

including complimentary food and beverage), while business people on an expense account

consider the quality of the accommodations to be more important than the price charged. In

general, business travelers pay the highest rates available in the market, although certain

accounts may negotiate lower rates in return for a guaranteed level of demand.


Commercial demand is generated by the area’s large and growing base of corporate firms.

Major corporate employers in Gwinnett County include AGCO, Primerica Financial Services,

NCR Corporation, Fiserv and Scientific-Atlanta. The county has a disproportionate share of

technology-oriented companies including Scientific-Atlanta, EMS Technologies, Broadcom and

National Semiconductor. Gwinnett County, which is part of the Northeast Atlanta office/

industrial submarket, has experienced significant expansion in the corporate sector in recent

years and has participated in the area’s strong economic recovery, experiencing the largest

occupancy gains in industrial and office space in the Atlanta MSA. The submarket also has

the largest amount of industrial space under construction. In 2012, Primerica broke ground on

a new 344,476-square foot headquarters at the Legacy office park, at the corner of

Meadowbrook Parkway and Duluth Highway. In addition, construction began on a 560,000-

square foot Mitsubishi Electric facility at the Huntcrest Business Center located on Satellite

Boulevard. International Paper expanded in the county as well, leasing 356,000 square feet

on Horizon Drive at the I-85/Lawrenceville Suwanee Road interchange. In nearby Norcross,

FedEx Ground has expanded into a new 215,000-square foot, $55-million distribution center

and Hyundai Construction Americas, Inc. announced the relocation of its Americas

headquarters. Also, RockTenn, now the third Fortune 500 company headquartered in Gwinnett

County, announced that it would expand its operations in Norcross adding 500 new jobs.

Commercial demand levels tend to reflect trends in employment. Employment for the MSA

decreased at a compound annual rate of 1.0 percent between 2007 and 2012. It increased 1.3

percent in 2011, however, and another 1.5 percent in 2012. Woods & Poole forecasts growth

of 1.8 percent compounded annually through 2020 for the MSA and 2.3 percent for Gwinnett

County. Overall, commercial demand growth is anticipated to be moderate throughout the

period analyzed.

Group Demand: Group demand accruing to the subject market area is generated by

conventions, conferences, trade shows and the like hosted by Gwinnett Center as well

corporate meetings/training activity, SMERF (social, military, ethnic, religious and fraternal)

groups such as family reunions and weddings, and youth sports teams. Faith-based groups,

corporations and associations are the primary users of Gwinnett Center. According to a

representative of the Gwinnett Convention and Visitors Bureau, faith-based groups account for

47 percent of group business county-wide. Those properties at the I-85/Sugarloaf Parkway

interchange benefit most from Gwinnett Center due to their proximity thereto.

A degree of “supply-driven” growth in the group segment is expected to be generated by the

full-service Marriott as Gwinnett Center and The Arena at Gwinnett Center will be able to attract

more events with the addition of on-site lodging facilities. Based on discussions with


representatives of Gwinnett Center, the facility currently generates 20,000 to 25,000 room-

nights of demand annually. In addition, there is room for an eventual Phase III expansion

which would include an additional 75,000-square feet of exhibit hall space between the existing

exhibit hall and the Arena as well as a parking deck. In any event, most of the incremental

demand generated by the expansion of the facility or the addition of a hotel is likely to accrue

to properties in the immediate vicinity.

Leisure Demand: The leisure demand segment consists primarily of highway motorists en

route to other destinations on I-85, friends and relatives of local residents, visitors to local

attractions and those attending events. Concerts at The Arena at Gwinnett Center are a

primary generator of the latter. Two entertainment industry publications recently ranked it

among the top 10 arenas in the world based on box office sales and attendance figures for live

entertainment.

Festivals held in Duluth include the Duluth Fall Festival (including a parade, carnival,

entertainment and road race) held the last weekend in September, BeerFest Duluth slated for

the first Saturday in June and Halloween on the Green (including trick or treating, a costume

contest, a kids zone, hay rides, entertainment and a car show) the last Saturday in October.

In April, the PGA Champions Tour will return to the Atlanta area for the first time since 2000

with the Greater Gwinnett Championship at TPC Sugarloaf in Duluth. This should result in a

near-term boost in leisure demand. Thereafter, leisure demand growth is anticipated to be

moderate due to a lack of any indication otherwise.

Overall Demand Growth: The segmented growth rates and overall lodging demand growth

anticipated for the subject lodging market area are as shown in the following table. The higher

rates of growth in 2015 reflect the opening of the subject which should draw a level of demand

to the market by its presence and in-house marketing efforts.


ESTIMATED ANNUAL GROWTH RATES BY SEGMENT AND TOTAL DEMANDDEFINED COMPETITIVE SUPPLY

DULUTH AREA2012 THROUGH 2019

Commercial Group Leisure TotalPercent Percent Percent Percent

Year Change Amount Change Amount Change Amount Change Amount

2012 - 106,4001 - 41,8001 - 39,6001 - 187,8001

2013 3.0% 109,600 3.0% 43,100 4.0% 41,200 3.2% 193,9002014 2.5 112,300 2.5 44,200 2.0 42,000 2.4 198,5002015 3.6 116,400 3.8 45,800 3.4 43,400 3.6 205,6002016 2.0 118,700 2.0 46,700 2.0 44,300 2.0 209,7002017 2.0 121,000 2.0 47,700 1.5 45,000 1.9 213,7002018 2.0 123,400 2.0 48,600 1.5 45,600 1.9 217,6002019 2.0 125,800 2.0 49,600 1.5 46,300 1.9 221,700

1 Includes unaccommodated demand as discussed herein.

Estimated Relationship of Supply to Demand: Based on the foregoing discussion of growth

in demand for transient lodging facilities in the market area, together with our analysis of

existing and foreseeable supply characteristics, the following table indicates resulting market

occupancy levels estimated for the defined competitive supply from 2012 through 2019.

ESTIMATED RELATIONSHIP OF SUPPLY TO DEMANDDEFINED COMPETITIVE SUPPLY

DULUTH AREA2012 THROUGH 2019

Estimated Estimated Annual Estimated Rooms Supply Demand in Room-Nights Market Area

Year Daily Annual TotalB Accommodated OccupancyC

2012 7161 261,340 187,800 175,800 67%2013 716 261,340 193,900 181,400 692014 716 261,340 198,500 185,800 712015 8162 297,840 205,600 199,100 672016 816 297,840 209,700 203,000 682017 816 297,840 213,700 206,800 692018 816 297,840 217,600 210,600 712019 816 297,840 221,700 214,500 72

A Includes unaccommodated demand which, due to capacity constraints, is turned away fromthe market.

C Based on estimated levels of accommodated demand in the market area. Rounded to thenearest whole percentage point.

1 Existing competitive supply.

2 First full year of operation for the subject 100-unit select-service hotel.


ESTIMATED LEVELS OF UTILIZATION

Projected levels of occupancy and average daily rate for the subject hotel are discussed in

detail in this section. The bases of the estimates were determined through the evaluation of

the subject property’s competitive position, future supply and demand, and fair share

penetration rates, which are also presented.

Estimated Occupancy and Market Segmentation: Prospective levels of utilization for the

subject hotel have been analyzed for its first five full years of operation, 2015 through 2019.

Our quantitative analysis anticipated the hotel’s ability to capture future market area demand

in terms of its “fair share” percentage of the competitive room supply. Fair market share is

based on the ratio of the hotel’s available guest rooms to the total market supply.

As discussed previously, there are 716 rooms in the competitive market. This number will

increase to 816 in 2015 following the opening of the subject 100-unit hotel. Accordingly, the

subject‘s fair market share will be 12.25 percent (100 ÷ 716). This fair market share is

expected to remain constant through 2019 based on our assumption no other competitive

supply additions will occur. The existing competitive properties’ estimated 2012 penetration

as a percentage of fair market share and market capture percentage are depicted by the

following graphs.

The proposed subject is anticipated to achieve a market penetration levels approximating its

fair market share in all three demand segments. Its overall penetration is projected to range

between 88 and 100 percent of fair market share during the period analyzed. These

projections are based on the following factors:


R The recommended brands are highly appealing to both business and leisuretravelers.

R The Hilton HHonors and Marriott Rewards frequent traveler programs areamong the most popular. This factor should render the subject appealing tocommercial and leisure guests who participate in such programs. Should aHilton brand be selected, however, this benefit may be mitigated to some extentby the presence of three other Hilton properties in the competitive set.

R The subject is unlikely to perform as well from an occupancy standpoint as thethree Sugarloaf Parkway competitors which offer proximity to I-85, GwinnettCenter and numerous office parks.

R The subject will offer a unique setting within walking distance of an array ofservice amenities including numerous restaurants and the Red Clay Theatre. This should help mitigate the locational disadvantages noted above and renderit popular with visitors to residents in surrounding neighborhoods.

R The subject will be well located to capture wedding and other social eventgroups using the Duluth Festival Center or the Payne-Corley House as theirvenue. Likewise, it will be ideally suited to capture any demand generated bythe festivals held in downtown Duluth.

R While further removed from Gwinnett Center than the Sugarloaf Parkwayproperties, the subject will be close enough to garner some demand therefrom.

R The subject will be the second smallest hotel in the competitive set. This shouldenable it to more easily maintain occupancy levels during non-peak periods.

R A representative of AGCO expressed an interest in having a property proximateto their headquarters. As previously noted, the company generates some 2,000room-nights of demand annually. This includes both individual visitors andtraining groups.

Based on the foregoing considerations and assuming competent management, the penetration

rates by segment and the resulting estimated occupancy and corresponding room-nights for

the subject were projected as shown on the following page. The stabilized occupancy

represents a long-term average. Year-to-year fluctuations can be expected in actuality, and

the property may in fact achieve occupancies and/or rates (as discussed below) higher than

those depicted here during the first five years of our analysis.

ESTIMATED MARKET PENETRATION, OCCUPANCY AND MARKET SEGMENTATIONPROPOSED 100-UNIT SELECT-SERVICE HOTEL

DULUTH, GEORGIA

2015 2016 2017 2018 2019Commercial

Market Area Accommodated Demand 111,400 113,600 115,900 118,100 120,500

Subject's Capture Percentage 10.56% 11.87% 12.12% 11.86% 11.60%

Room-Nights Captured 11,800 13,500 14,000 14,000 14,000

Penetration as a Percentage of Fair Market Share 86% 97% 99% 97% 95%

Group





Leisure





Total





Market Segmentation

Commercial 55.1% 55.8% 55.6% 55.6% 55.6%Group 22.9% 22.7% 22.6% 22.6% 22.6%Leisure 22.0% 21.9% 21.8% 21.8% 21.8% Total 100.0% 100.0% 100.0% 100.0% 100.0%

Projected Occupancy 59% 66% 69% 69% 69%


Estimated Average Daily Rate: The estimates of future average daily rates for the proposed

Hampton Inn & Suites are based on the following factors:

R The competitive advantages and disadvantages outlined previously;

R Anticipated rate structure relative to the competitive lodging supply; and

R Estimated economic inflation of 3.0 percent per annum.

Average daily rates for each of the competitive properties in 2012 were as follows:

ESTIMATED 2012 AVERAGE DAILY RATESDEFINED COMPETITIVE SUPPLY

DULUTH AREA

PropertyAverage

Daily Rate

Hampton Inn Atlanta-Lawrenceville-I-85-Sugarloaf $100-$104Hilton Garden Inn Atlanta NE/Gwinnett Sugarloaf 105-109Holiday Inn Gwinnett Center 85-89Hyatt Place Atlanta/Duluth/Johns Creek 95-99Hilton Garden Inn Atlanta North/Johns Creek 105-109Holiday Inn Express Hotel & Suites Atlanta-Johns Creek 85-89

Market Average $97.76

Considering the subject’s pioneering location, it may need to offer rates lower than its brand

peers in order to fully penetrate the market. Nonetheless, a strong brand, small size and

unique setting should enable it to achieve an ADR approximating the market average. Thus,

assuming competent management, the subject property’s ADR has been projected as depicted

in the following table. The lower rates in 2015 and 2016 reflect discounting to induce trial.


ESTIMATED AVERAGE DAILY RATEPROPOSED 100-UNIT SELECT-SERVICE HOTEL

2015 THROUGH 2019

YearConstant

2012 DollarsInflated Dollars1

2015 $ 96.00 $105.00 2016 98.00 110.252017 100.00 116.002018 100.00 119.502019 100.00 123.00

1 Inflated annually at 3.0 percent and rounded to the nearest $0.25. Inflationrates were based on the results of recent investor surveys and forecastsby the U.S. Congressional Budget Office.

The foregoing projections of occupancy and ADR reflect the performance of the hotel on any

of the four sites being considered. In other words, these levels could be achieved on the least

desirable site. It is important to note, however, that the projections could differ depending upon

the site selected. As noted, it is our belief that development of The Block is critical to the

subject property’s viability. Accordingly, immediate proximity to restaurants, retail and

entertainment options could enhance the proposed property’s performance.

FINANCIAL PROJECTIONS

Bases of Financial Projections: Estimates of cash flow before debt service and income

taxes have been prepared for the property’s first five years of operation, 2015 through 2019.

All projections and calculations were based on an analysis of the proposed facilities, operating

data for comparable hotels, the experience of the consultants and industry statistics for similar

type properties.

In preparing the financial projections, stabilized year amounts were projected first on the bases

presented in the following table. The fixed and variable components of each line item were

then estimated and the projections for the years prior to stabilization were prepared. The fixed

and variable components presented in the table were based on industry standards and the

consultants’ experience.


BASES OF PROJECTIONS AND FIXED AND VARIABLE COMPONENT PERCENTAGES

Line Item Basis Fixed Variable

Rentals & Other Income (Net) $1.00/occupied room 5% 95%Rooms Payroll $16.50/occupied room 70 30Rooms Other Expense $9.00/occupied room 35 65Administrative & General $2,300/available room 75 25Management Fees 4.0% of total revenues 0 100Franchise Fees 10.0% of guest room revenues 0 100Marketing $900/available room 75 25Utility Costs $4.75/occupied room 65 35Property Operation & Maintenance $1,200/available room 75 25Property Taxes $111,000 annually 100 0Insurance $300/available room 100 0Replacement Reserve 4.0% of total revenues 0 100

Each line item was evaluated on the most appropriate basis for that particular revenue or

expense. For example, rooms department payroll was projected on a "per occupied room"

basis versus a percentage basis since increases in average daily rate do not result in

corresponding increases in payroll. The following notes explain the basis and assumptions

used in each line item of the financial projections which, unless otherwise noted, were prepared

based on the above listed factors.

Prospective revenues and expenses were first prepared and expressed in constant 2012

dollars. These amounts were then inflated at 3.0 percent annually and rounded to the nearest

thousand dollars. The 3.0 percent inflation rate was selected based upon recent investor

surveys and forecasts by the U.S. Congressional Budget Office. Statements were then

prepared in inflated dollars (Exhibit I). If higher or lower inflation rates are experienced, these

statements would thus be affected and a revision would be appropriate.

All account classifications generally conform to the definitions prescribed by the American

Hotel and Motel Association in the Uniform System of Accounts for the Lodging Industry. All

percentage relationships presented in the following pages were computed on the basis of the

financial projections expressed in 2012 dollars. All dollar amounts are expressed in 2012

dollars unless otherwise noted.

Revenues:

Room revenue is a factor of occupancy and average daily rate, both of which are driven by

the competitive market environment, as discussed in the Estimated Levels of Utilization section

of this report. The projected levels of occupancy, average daily rates and total annual guest

room sales are depicted in the financial analyses presented as Exhibit I.


Rentals and other income is usually presented net of expenses and includes miscellaneous

items such as vending machines, newspapers, postcards, etc. It also includes

telecommunications income and expenses. Rentals and other income has been projected to

stabilize at $1.00 per occupied room.

Based on the foregoing, total revenues are projected at approximately $97.00 per occupied

room in year one, stabilizing at $101.00 per room.

Departmental Expenses:

Rooms payroll includes regular pay, overtime pay, vacation pay, severance pay, incentive

pay, holiday pay and bonuses for employees of the rooms department. Employee benefits

such as payroll taxes, payroll-related insurance expense, pension and other related expenses

are also included in rooms payroll. Specifically, rooms department personnel include the

following as appropriate:

Rooms division managerFront office: Front office manager Room clerks

Night clerksHousekeeping: Housekeeper and assistantsSecurity officers

Rooms payroll has been projected to stabilize at $16.50 per occupied room.

Rooms other expenses include commissions, contract cleaning, guest transportation, laundry/

dry cleaning, linen, operating supplies, reservations, uniforms and miscellaneous other

expenses of the rooms department. Complimentary services such as breakfast or cocktails

are also included here. Rooms other expenses are estimated to stabilize at $9.00 per

occupied room.

Total rooms department expenses are projected to stabilize at $25.50 per occupied room.

Undistributed Operating Expenses:

Administrative and general expenses (A&G) tend to be a "catch-all" for items not easily

classified. In theory, these expenses should benefit the entire property. Salaries and wages

are a significant component of A&G and include the general manager, resident manager,

manager's office personnel, night auditors, receiving clerks, timekeepers and personnel in the

accounting, human resources, data processing and transportation departments. Other typical

expenses classified as A&G include the following:


Credit card commissionsData processing servicesDues and subscriptionsHuman resources (training, relocating, etc.)Operating suppliesPostage and delivery charges

ContributionsProfessional feesProvision for doubtful accountsTravel and entertainmentCash overages and shortagesOther expenses not classified elsewhere

Administrative and general expenses are projected to stabilize at $2,300 per available room.

Management fees reflect the cost of management services and supervision of the property.

Competition for management contracts has increased in recent years. As a result, fees

charged have declined. Management fees usually include both base and incentive

components with base fees calculated on total revenue and the incentive fee calculated as a

percentage of profit. Recent trends have been towards lower base fees and greater incentive

fees. Regardless of the fee structure employed, the total fees paid typically range between two

and five percent of total revenues. Management fees are 100 percent variable and have been

projected at 4.0 percent of total revenues.

Franchise fees include royalties, national marketing assessments and frequent traveler

program fees paid to the franchisor. Chain fees are 100 percent variable and have been

projected at 10.0 percent of guest room revenues based on the typical fees for a select service

franchise.

Marketing expenses consists of four categories: sales, reservations, advertising/

merchandising, and fees/commissions. With respect to sales and reservations, wages and

benefits are a significant expense. Marketing expense varies widely depending upon property

type. In a convention-oriented hotel, sales salaries may contribute the bulk of expenditures.

These expenses have been projected to stabilize at $900 per available room.

Utility costs include electricity, gas, oil, coal, steam, water and sewage. Particular attention

is given to local utility charges when projecting this item. The fixed portion of utility costs is

based upon the amount of public space in a property. Hotels with extensive meeting space

and numerous food and beverage outlets tend to have a higher fixed percentage than rooms

only properties. This line item has been projected to stabilize at $4.75 per occupied room.

Property operation and maintenance expenses include wages and benefits for maintenance

personnel, building supplies, electrical and mechanical equipment, engineering supplies,

grounds and landscaping, operating supplies, waste removal, swimming pool maintenance and

uniforms. Also included is the cost of materials and labor relating to painting, decorating and

repairing FF&E. The replacement of FF&E is not included. Property operations and

maintenance expenses are projected to stabilize at $1,200 per available room. Since the hotel


is new at the beginning of the projection period, these expenses are expected to be lower in

the first two years of operation.

Fixed Charges:

Property taxes are estimated to be approximately $111,000 per available room throughout the

period analyzed based on the assessment of comparable Gwinnett County hotels.

Insurance includes the cost of insuring the buildings and contents against damage or

destruction by fire, weather, or other causes as well as general liability insurance. Insurance

has been estimated at $300 per available room.

Reserve for replacement of fixed assets represents an amount set aside each year in

anticipation of needed capital improvements. This line item is almost always calculated as a

percentage of total revenue and is usually set forth in management contracts. Most properties

reserve anywhere from three to five percent of revenues. The amount is often lower in the

early years of operation, increasing thereafter as the property ages. Reserve for replacement

of fixed assets has been projected at 2.0 percent of total revenues in the first year of the

projection period, 3.0 percent in the second year and 4.0 percent thereafter based on industry

norms.

Investment Summary: Based on the foregoing, we have prepared an investment summary

as presented as Exhibit II reflecting hypothetical return levels given certain investment

parameters. The following assumptions were employed:

INVESTMENT SUMMARY ASSUMPTIONS

Assumption Amount

Project costs $11,500,000Interest rate 6.00 percent per annumTerminal capitalization rate 9.25 percentSales costs 2.0 percentAmortization period (monthly payments) 20 yearsDebt ratio 65 percent

As depicted by the investment summary, the project would generate an unleveraged internal

rate of return (IRR) of 7.61 percent and a leveraged IRR of 9.76 percent. These return levels

are not sufficient to attract a qualified developer. Based on our most recent investor survey,

and our observation of other development projects, an unleveraged IRR of 10.00 to 12.00

percent and a leveraged IRR of 15.00 to 18.00 percent would likely be required.


We have also prepared a discounted cash flow analysis (Exhibit III). As depicted, the projected

cash flows support development costs of $9,000,000, or $90,000 per room. Total development

costs for a select-service property, including land, are likely to approximate $115,000 per key.

Obviously, these returns will vary depending upon the actual project costs and debt terms.

Returns of this magnitude are not sufficient to meet the yield requirements of most hotel

investors. Thus it will be necessary to provide economic incentives to bridge the gap.

Incentives could take the form tax abatements, tax increment financing, direct investment in

project infrastructure (e.g. parking), free or bargain priced land, etc. The precise value of the

incentives will vary depending upon the project costs and deal structure. Nonetheless, it can

be assumed that the benefits would materially alter investment returns.

TERMS AND CONDITIONS

The projections of occupancy, average daily rate and cash flow presented in this report are

based on estimates, assumptions and other information developed from research of the market

as of February 22, 2013, knowledge of the industry and other factors including certain

information provided by you. Some assumptions inevitably will not materialize, and

unanticipated events and circumstances may occur; therefore, actual results achieved during

the period covered by our analysis may vary from the estimates, and these variations may be

material. Further, the performance estimates assume the hotel will be professionally and

effectively managed.

PKF Consulting USA, LLC will make no representations or warranty as to the accuracy or

completeness of the information contained within this report, including any estimates, and shall

have no liability for any representations (expressed or implied) contained herein. This report

is intended for your internal information only. Otherwise, neither our report, nor any reference

to our firm, may be included or quoted in any offering circular or registration statement,

prospectus, sales brochure or appraisal.

* * * * * * *


We appreciate your consideration of PKF Consulting USA for professional services. Please

contact us should you have any questions regarding this report.

Sincerely,

PKF Consulting USA, LLC

EXHIBIT I

PROPOSED 100-UNIT SELECT-SERVICE HOTELDULUTH, GEORGIA

PROJECTED CASH FLOW FROM OPERATIONS BEFOREDEBT SERVICE AND INCOME TAXES

EXPRESSED IN THOUSANDS OF INFLATED DOLLARS2015 THROUGH 2019

2015 2016 2017 2018 2019Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent

Revenues: Rooms $2,261 99.0% $2,656 99.0% $2,921 99.0% $3,010 99.0% $3,098 99.0% Rentals and Other Income (Net) 24 1.0 27 1.0 29 1.0 30 1.0 31 1.0

2,285 100.0 2,683 100.0 2,951 100.0 3,040 100.0 3,129 100.0

Departmental Expenses: Rooms 659 28.8 710 26.4 745 25.2 767 25.2 790 25.2

Gross Operating Income 1,626 71.2 1,974 73.6 2,206 74.8 2,273 74.8 2,339 74.8

Undistributed Operating Expenses: Administrative and General 240 10.5 255 9.5 267 9.0 275 9.0 283 9.0 Management Fees 91 4.0 107 4.0 118 4.0 122 4.0 125 4.0 Franchise Fees 226 9.9 266 9.9 292 9.9 301 9.9 310 9.9 Marketing 94 4.1 100 3.7 104 3.5 107 3.5 111 3.5 Utility Costs 124 5.4 133 4.9 139 4.7 143 4.7 147 4.7 Property Operation and Maintenance 105 4.6 122 4.5 139 4.7 143 4.7 148 4.7

881 38.5 982 36.6 1,059 35.9 1,091 35.9 1,123 35.9

Cash Flow From Operations Before Fixed Charges 746 32.6 992 37.0 1,147 38.9 1,182 38.9 1,216 38.9

Fixed Charges: Property Taxes 122 5.3 125 4.7 129 4.4 133 4.4 137 4.4 Insurance 33 1.4 34 1.3 35 1.2 36 1.2 37 1.2

154 6.8 159 5.9 164 5.6 169 5.6 174 5.6

Cash Flow From Operations Before Reserve For Replacement of Fixed Assets 591 25.9 833 31.0 983 33.3 1,013 33.3 1,042 33.3

Reserve For Replacement of Fixed Assets 46 2.0 80 3.0 118 4.0 122 4.0 125 4.0

Cash Flow From Operations Before Debt Service and Income Taxes $546 23.9% $752 28.0% $865 29.3% $892 29.3% $917 29.3%

Statistics: Number of Rooms 100 100 100 100 100 Percentage of Occupancy 59% 66% 69% 69% 69% Average Daily Rate $105.00 $110.25 $116.00 $119.50 $123.00

Notes: - Percentages of departmental expenses are to departmental revenue; all other percentages are to total revenue. - Totals may not add due to rounding.

EXHIBIT I-A

PROPOSED 100-UNIT SELECT-SERVICE HOTELDULUTH, GEORGIA

PROJECTED ROOMS DEPARTMENTAL INCOMEEXPRESSED IN THOUSANDS OF INFLATED DOLLARS

2015 THROUGH 2019

2015 2016 2017 2018 2019Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent

Rooms Department: Room Revenue $2,261 100.0% $2,656 100.0% $2,921 100.0% $3,010 100.0% $3,098 100.0% Payroll and Related Expenses 434 19.2 462 17.4 482 16.5 496 16.5 511 16.5 Other Expenses 224 9.9 248 9.3 263 9.0 271 9.0 279 9.0

Departmental Income $1,602 70.9% $1,946 73.3% $2,177 74.5% $2,243 74.5% $2,308 74.5%

Notes: - Percentages of departmental expenses are to departmental revenue. - Totals may not add due to rounding.

EXHIBIT II

INVESTMENT SUMMARYPROPOSED 100-UNIT SELECT-SERVICE HOTEL

DULUTH, GEORGIA

Assumptions:Loan Amortization Period (months): 240 Equity Amount: $4,025,000Interest Rate (monthly): 0.50% Debt Amount: $7,475,000Cost per Room: $115,000 Monthly Payment: $53,553Rooms: 100 Terminal Capitalization Rate: 9.25%Total Costs: $11,500,000 Sales Costs: 2.00%Equity Percent: 35.00%Debt Percent: 65.00%

One Two Three Four Five Six Seven Eight Nine TenCash Flow Before Debt Service $546,000 $752,000 $865,000 $892,000 $917,000 $945,000 $973,000 $1,004,000 $1,033,000 $1,061,000

Annual Debt Service (monthly amortization) 642,639 642,639 642,639 642,639 642,639 642,639 642,639 642,639 642,639 642,639

Cash Flow After Debt Service -96,639 109,361 222,361 249,361 274,361 302,361 330,361 361,361 390,361 418,361

Cash On Cash Return -2.40% 2.72% 5.52% 6.20% 6.82% 7.51% 8.21% 8.98% 9.70% 10.39%

Unleveraged Internal Rate Of Return n/a n/a 0.35% 2.89% 4.47% 5.52% 6.30% 6.85% 7.27% 7.61%

Leveraged Internal Rate Of Return n/a n/a n/a n/a 1.97% 4.90% 6.89% 8.19% 9.08% 9.76%

Debt Service Coverage 0.85 1.17 1.35 1.39 1.43 1.47 1.51 1.56 1.61 1.65

Note: The foregoing is based upon market, financial and costs assumptions that may differ materially from actual circumstances. Accordingly, these projections should not be construed as results which will actually be achieved.

EXHIBIT III

DISCOUNTED CASH FLOW ANALYSISPROPOSED 100-UNIT SELECT-SERVICE HOTEL

DULUTH, GEORGIA

A) Present Value of Annual Cash Flows:

Cash Flow Available For Present Value

Debt Service and Factor @Year Income Taxes 11.25% Present Value

2015 $546,000 0.8989 $491,0002016 752,000 0.8080 608,0002017 865,000 0.7263 628,0002018 892,000 0.6528 582,0002019 917,000 0.5868 538,0002020 945,000 0.5275 498,0002021 973,000 0.4741 461,0002022 1,004,000 0.4262 428,0002023 1,033,000 0.3831 396,0002024 1,061,000 0.3443 365,000

4,995,000

B) Present Value of Reversion:

2025 cash flow of: $1,092,000capitalized at 9.25% $11,805,000

Less 2% sales costs 236,000

Net reversionary value 11,569,000

X Present value factor 0.3443

Present Value of Reversion 3,983,000

Supported Development Costs $8,978,000 Rounded $9,000,000

Per Room $90,000

February 22, 2013 Ms. Melissa Muscato ... - Duluth, Georgia · City of Duluth Department of...

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