SHR, LLC. ADDENDUM to the COMPREHENSIVE MARKET STUDY REPORT LONGVIEW, WASHINGTON FEBRUARY, Prepared Exclusively For:

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1 SHR, LLC Strategic Hospitality Resources, LLC ADDENDUM to the COMPREHENSIVE MARKET STUDY REPORT LONGVIEW, WASHINGTON FEBRUARY, 2015 Management Research Marketing Michael R Hool, CPA, ISHC President mhool.shr@gmail.com Fax: E. Willow Rd. Milwaukee, Wisconsin Prepared Exclusively For: Longview Public Development Authority Prepared By: Strategic Hospitality Resources, LLC (SHR) Michael R. Hool, CPA, ISHC President, SHR An HMI Network Representative Gregory R. Hanis, ISHC President, HMI Professionally Serving the United States & Canada for Over 13 Years Hospitality Marketers International a Hotel Service Network with Offices in Milwaukee, Wisconsin Fort Myers, Florida hmi@hospitalitymarketers.com

2 The information in this Addendum to the Comprehensive Market Study dated February, 2015, can be used as an advisory tool in evaluating financial and development decisions for this project. The results provided in this Addendum are based on the development of an 80-room limited-service style hotel as discussed in the Comprehensive Hotel Market Study. Should a decision be made to develop a hotel with additional or fewer rooms, the results, including Gross Profit, Return Results and Benchmark Development Cost amounts contained in the following report, will need to be adjusted accordingly. BRAND AFFILIATION Brand Affiliation with a national or strong regional hotel brand is recommended. This would help to attract travelers passing through the area as they would be familiar with the brand. Per the engagement letter, in alphabetical order, various upper midscale, limited-service style hotel brands are listed below and are not limited to these: Best Western Plus Best Western Hotels Comfort Suites Choice Hotels International Combined MainStay Suites & Sleep Inn Choice Hotels Intl. Country Inn & Suites Carlson Rezidor Hotels International Fairfield Inn & Suites Marriott Hotels International GrandStay Hotel & Suites GrandStay Hospitality Hampton Inn & Suites Hilton Hotels International Holiday Inn Express IHG Hotels Lexington by Vantage, a Collection of Hotels Inns & Suites HMI will gladly discuss potential brands for this hotel with the developer. Areas of Franchise Protection should also be addressed when choosing brand affiliation. As large an area of protection as possible should be negotiated. The Areas of Franchise Protection were highlighted in the Issues and Risks section of this report. Brand Affiliation in this market is recommended and necessary to be competitive. This affiliation will dictate the design of the property, amenities offered, and rate positioning. A branded hotel would assist in positioning the subject hotel to best capture the Corporate/Commercial and Social/Leisure markets. HMI can assist in identifying appropriate mid-scale or upper midscale brands for this hotel if desired.

3 PRELIMINARY OPERATIONAL PROFORMA The following Preliminary Operating Proforma depicts the Projected Performance of the proposed upper midscale hotel in Longview, Washington. It is based on the Occupancy and Average Daily Room Rates established in the Comprehensive Hotel Market Study prepared by HMI in February, A preliminary scenario was developed for the 80-room upper midscale limited service hotel. The expense amounts and the GOP in the chart below were calculated by applying the average of the performance results from the Smith Travel Research Host Report on the US Lodging Market for the operational year 2013 based on property location, style (limited-service), upper midscale, US, and chain affiliation. PRELIMINARY OPERATIONAL PROFORMA Revenue $1,720,541 $2,161,238 $2,607,554 Departmental Expenses $426,350 $535,555 $646,152 Undistributed Operating Expenses $420,500 $528,207 $637,286 Gross Operating Profit $870,938 $1,094,019 $1,319,944 *Note: GOP is before Fixed Costs of P&I, Real Estate Tax, Insurance, Management Fees, Franchise Fees & Reserve for Replacement. Source: HMI In a full Operational Proforma and Investment Analysis, the results in the chart would be expanded with greater detail and would forecast the cash flow after debt service. 2

4 BENCHMARK DEVELOPMENT COSTS The following Benchmark Development Cost chart depicts the support level for this proposed 80-room, upper midscale, limited-service hotel in Longview, Washington. It is based upon the operational projections for Occupancy and Average Daily Room Rates contained in this report. A scenario was developed for the proposed limitedservice, 80-room hotel. Based on the Occupancy and Average Daily Room Rate projections provided in the Comprehensive Hotel Market Study completed in February, 2015, Benchmark Development Costs were calculated. These provide a preliminary indication of viability for developing this hotel. More comprehensive development research should be performed. An Operational Proforma & Investment Analysis should be performed to obtain anticipated operational expenses and fixed cost structuring. This includes debt service, property taxes, insurance, and depreciation to formulate a more thorough analysis of the financial viability of developing this hotel project. Land cost is another factor that will have significant impact on Benchmark Development Costs. Benchmark Development Costs include all costs associated with the proposed hotel s development up to its stabilized year of operation: land costs; land preparation costs; development costs; construction/renovation costs; furniture, fixtures and equipment (FF&E); pre-opening operational and marketing expenses; and cash flow shortages to a stabilized year of operation. Any other associated development costs would also be part of this calculation. A developmental Occupancy factor of 60.0% was used for this upper midscale, limited-service hotel. A factor of $1.42 of Average Daily Room Rate per thousand dollars of development cost was utilized for this 80-room, upper midscale, limited-service style hotel. In this subject market, the proposed hotel (as previously listed) is believed to be in the upper tier of the midscale-range of this ADR Factor. This would be based on land costs, development costs and operational costs (i.e. Real Estate Taxes, Utilities, Wage Scales, etc.). Deviations from the developmental Occupancy and Average Daily Room Rate Factors were calculated based upon Occupancy and Average Daily Room Rate Projections established in this report. With that in mind, the following preliminary Benchmark Development Costs was calculated. 3

5 Upper Midscale, Limited-Service Style Hotel BENCHMARK DEVELOPMENT COST ALLOWABLE ALLOWABLE TOTAL PER ROOM* PROJECT COST* 80 Rooms $94,485 $7,558,823 *These projections will be affected by changes in Projected Occupancy or Projected ADR. Source: HMI Ideally, as the developer calculates development costs for the proposed hotel, the total cost should not surpass these preliminary break-even Benchmark Development Costs. Exceeding these Benchmark Development Costs may indicate that this hotel is not financially feasible to pursue. However, projected development costs below these Benchmark Development Costs may indicate that additional research should be performed by the developer to determine the overall economic feasibility of developing this hotel. The Benchmark Development Cost calculation and the return calculations listed below are only a few of many benchmarks the developer should utilize in determining the feasibility of this hotel project. This benchmark calculation does not take into account any present value calculations. These would be calculated in an actual Operational Proforma or in an Analysis of Cash Flow and Return on Investment. The actual Return on Investment should include returns on both the projected sales value and the Cash Flow analysis. FUTURE VALUATION The following is a preliminary estimate of future valuation for the proposed hotel in Longview, Washington. This would have to be verified in a more comprehensive Operational Proforma & Investment Analysis. Also, it would be verified in a formal appraisal of the proposed hotel. Future valuation of this hotel will depend upon any variations in its operational performance. This future valuation is provided only as a preliminary guideline for this hotel project. The Capitalization Rates utilized in the following calculations are those from the most recent US Realty Consultants Inc. (USRC) Mid-Year 2014 Report. 4

6 80-Room, Upper Midscale Limited-Service Style Hotel On a Room Revenue Capitalization Rate basis, the average value was calculated at $7,136,418 and ranged from $5,097,442 to $10,194,883. Industry ranges were between 2.8% and 2.0%, with an average of 4.0%. On a Terminal Capitalization Rate basis, the average value was calculated at $13,725,638 and ranged from $11,099,864 to $19,638,220. Industry ranges were between 6.50% and 11.50%, with an average of 9.3%. The replacement cost of constructing the proposed hotel was calculated at $8,076,203. The estimated third year value of the proposed hotel would be $9,629,420 or $120,368 per room. This is based on an average of the above three valuation factors and not on a weighted method to any one of the above valuation models. This increase in valuation ($2,070,597) above the Benchmark Development Cost of $7,558,823 is a 27.4% increase over the three years used in this report s projections, or 9.13% per year. Per discussions with the developer, the current estimated equity investment in the project will be 30% of the total cost of the project. This 30% rate will be applied to the Benchmark Development Cost to arrive at the estimated equity investment of $2,267,647. Comparing this equity amount to the increase in value ($2,070,597) over the Benchmark Development cost of $7,558,823 results in a return of 91.31% or 30.4% per year. SPECIAL NOTE -- The previously calculated and discussed return rates are based on an investment of 30% of the Benchmark Development Cost (the Equity Investment rate/amount provided by the developer) and the total increase in value based on the sales price. It does not take into account any Cash Flow returns from operations. HMI could assist in developing a Cash Flow analysis from an Operational Proforma developed for this hotel project. This would generate a more detailed Cash Flow Analysis and potential Return on Investment Analysis for the hotel. -- Also, HMI could assist in determining the change in the rate of returns if changes were made to the amount of the investment (i.e. an Equity Investment rate/amount other than 30%). HMI could also assist in determining any changes to the Benchmark Development Cost, either higher or lower, based on a specific desired Rate of Return other than the 30.4% annual rate. -- These return calculations do not take into account any present value calculations. These would be accounted for in an actual Operational Proforma or an Analysis of Cash Flow and Return on Investment. -- The actual Return on Investment calculation should include returns on both the projected sales value and Cash Flow analysis for the property. 5

7 SHR, LLC Strategic Hospitality Resources, LLC DISCLAIMER The decisions presented herein were based upon the information available and received at the time this report was compiled. Strategic Hospitality Resources, LLC (SHR) has taken every possible precaution to evaluate this information for its completeness, accuracy and reliability. To the best of its knowledge, SHR feels the information and decisions presented herein are sound and reliable. At the present time of this report, the United States and world economies are in the midst of a recovery from a major recessionary period that ran from This recovery appears to be continuing according to current news reports with most economic indicators indicating growth since Management Research Marketing Michael R Hool, CPA, ISHC President mhool.shr@gmail.com Fax: E. Willow Rd. Milwaukee, Wisconsin Professionally Serving the United States & Canada for Over 13 Years Hospitality Marketers International a Hotel Service Network with Offices in Milwaukee, Wisconsin Fort Myers, Florida SHR is not responsible for effects that occur from future political, economic or social events that ultimately alter these projections. These events should be monitored accordingly and potentially the results of this report may require updating to respond to future events. Also, it should be understood that normal economic and marketplace conditions change constantly. SHR assumes no responsibility for information that becomes outdated once this report is written; nor is it responsible for keeping this information current after February, It should be understood that the results presented in this report are the professional opinion of SHR and are based upon the information available at this time. These opinions infer proper and professional management of the business operation. The opinions also infer that market conditions do not change the information received upon which those opinions have been based. SHR assumes no responsibility for changes in the marketplace. Furthermore, it is presumed that those reading this report completely understand its contents and recommendations. If the reader is unclear of the understanding of the contents, clarification should be received from its writer, SHR. Lastly, SHR assumes that those who receive this report act in accordance with its recommendations. Any deviation from these recommendations is solely the responsibility of those receiving this report. Further questions concerning this report should be directed to SHR. Sincerely, STRATEGIC HOSPITALITY RESOURCES, LLC Michael R. Hool Michael R. Hool, CPA, ISHC President, SHR An HMI Network Representative Gregory R. Hanis Gregory R. Hanis, ISHC President, HMI hmi@hospitalitymarketers.com