PKFs Perspective On Attracting Hotel Development to Your Community

1
PKFs Perspective OnAttracting Hotel
Development to Your Community

• Economic Developers Association of Canada
• 34th Professional Development Conference
• PKF Consulting
• September 2002

2
Introduction Who We Are

• Serving the hospitality and tourism industry
  worldwide for over 90 years
• Most comprehensive database in Canada
• Advisory services on 4.0 billion worth of hotel
  assets over the last 36 months

3
Presentation Outline

• The Current Environment
• Accommodation Industry Overview
• The Development Investment Environment
• Attracting Hotel Development to Your Community

4
The Current Environment

• A Time For Cautious Optimism

5
The Current Environment

• One could characterize the current environment
  for hotel development as two-fold

6
The Current Environment

• Despite 9/11, the industry is still in relatively
  good shape.
• The major challenge for development is matching
  investment interest and opportunities.

7
Accommodation Industry Overview

• Market Conditions
• Financial Performance

8
PKF Market OutlookNational
9
PKF Market OutlookMajor Markets vs. Other Markets
10
PKF Market OutlookFull-Service vs.
Limited-Service
11
Annual Profits Per Available Room After Reserves
- U.S. vs. Canada
12
The Development Investment Environment

• Product Development Trends
• Transactions Investments
• Debt Financing Equity Investment

13
Product Development Trends

• Recent/Historical Activity
• Current/Future Potential
• Major Markets vs. Secondary Markets

14
Product Development Potential

• Downscale Limited Service
• Focused Service Products
• Extended Stay
• Renovation/Branding

15
National Transaction Overview
16
Hotel Investment Interest

• Investors are having difficulties finding
  anything to buy.
• The interest in new development is very high.

17
Hotel Investment Interest

• Hotel companies are seldom hotel owners,
  developers or investors, their interests lie in
  managing or franchising properties for a fee.

18
Hotel Investment Interest

• In many communities, the most likely investment
  or developer interest will come from individuals
  or a group of individuals, who have an interest
  in the project and potentially in the community.

19
Financing

• Financial institutions will rarely finance more
  than 50 of a projects supportable value off
  cashflow or 50 of capital costs, which ever is
  less.
• The balance of capital must be invested as equity.

20
Financing

• As the scale of the project increases, so does
  the equity commitment
• 100 unit mid scale hotel, capital costs at 10
  million, equity 5 million.
• 400 room full service hotel in a major downtown
  core, capital costs at 100 million, equity
  50 million.

21
Attracting Hotel Development to Your Community

• The Challenges
• The Opportunities
• The Process

22
The Challenges

• Most communities want a new hotel to service
  existing needs and to assist in attracting new
  investment and development to their community.

23
The Challenges

• Need to differentiate the communitys wants and
  needs from the actual demand which can be
  generated on a year round basis for hotel
  accommodation.
• It is the market and the project economics which
  should dictate the nature of hotel which should
  be developed.

24
The Challenges

• Hotels are seldom the initial catalyst to
  development
• Hotels are developed to service existing
  demonstrated demand, not in advance of the
  creation of demand generators
• Investors will not adopt a build it and they
  will come philosophy.

25
The Challenges

• Over the years, we have seen a number of
  communities, attempt to assist developers with
  unique hotel projects without much success.
• It is our experience that the more unique the
  project, the more difficult it is to secure
  equity and debt financing.

26
The Challenges

• In most cases the promoter of a unique project
  brings little in the way of equity financing.
• They have a concept, potentially some property,
  but are hoping to leverage up both equity and
  debt financing.
• A true developer is one that brings 50 equity to
  the table, not one who is looking for investment.

27
The Challenges

• The challenge to the community is to encourage,
  not stifle these potential opportunities, while
  at the same time not devoting undue time, effort
  and dollars in pursuing dreams as opposed to
  projects.

28
The Opportunities

• Successful Hotel Markets
• A 70 to 75 annual occupancy is required for a
  new project
• Strong commercial demand from area businesses on
  a year round basis
• Strong summer leisure demand, and strong shoulder
  and off season weekend leisure demand.

29
The Opportunities

• In some cases the communitys needs can be
  addressed with the enhancement and upgrading of
  existing properties.
• As more independent hotels consider franchise
  affiliation, the requirements of those brands
  result in an upgrading of the existing product.
• Today, more development of new brands even in a
  highly branded market.

30
The Process

• If it is an objective of your community to
  attract new hotel development, the following
  steps are suggested
• A review of demand generators
• Availability of suitable sites
• Undertake a structured approach to attracting
  interest

31
The ProcessReview of Demand Generators

• Survey the major employers and determine the
  level of business they generate.
• Profile the existing tourist attractions and the
  visitation they attract.
• Assess the level of demand attracted by the
  existing hotels, if overall demand levels are
  low, future prospects for new development may be
  limited.

32
The ProcessAvailability of Suitable Sites

• Zoning, access, visibility and proximity to
  demand generators are key.
• In many communities highway locations, in close
  proximity to commercial concentrations and
  industrial parks, but easily accessed by the
  entire community, make the best sites.

33
The ProcessStructured Approach

• Direct solicitation of local/regional development
  interests
• Inquiries with the major chains (more likely to
  suggest interested franchisees then develop
  themselves)
• If the community controls the subject lands,
  consider a formal RFP process.

34
Summary

• The market and financial prospects for the hotel
  industry are still good.
• In many cases the greatest challenges will not be
  identifying and assessing the opportunities, but
  in identifying and attracting the development
  interest.
• That development interest must demonstrate the
  capability to finance the project from both a
  debt and equity perspective.