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HomeMy WebLinkAboutCUP 12-05; Alps Innovation Staybridge Suites & Holiday Inn; Conditional Use Permit (CUP) (6)Market Analy^ Proposed 133-Room H Irin and 106-Room Staybridge Suites to be Located in Carlsbad, California Prepared For: Mr Ken Payne Prime Group Construction, Inc. 3045 Wilson Road Bakersfield, Califomia 93304 Prepared By: PKF Consulting USA Los Angeles, California OITY Op 10 2012 Date of the Report: September 4, 2012 File No. 52110 PKF CONSULTING USA www.pkfc.com pKr September 4, 2012 CONSULTING USA Mr. Ken Payne Prime Group Construction, Inc. 3045 Wilson Road Bakersfield, California 93304 Dear Mr. Payne: In accordance with our agreement, we have concluded our analysis of potential market demand and prepared statements of estimated annual operating results for the proposed 133- room Holiday Inn and 106-room Staybridge Suites hotels to be located in Carlsbad, California. The conclusions reached are based on our present knowledge of the competitive lodging market as of the completion of our fieldwork in July and August 2012. The following report summarizes our findings and reflects the conclusion of our analysis. As in all studies of this type, the estimated results are based upon competent and efficient management and presume no significant changes in the competitive market from that as set forth in this report. Since our results are based on estimates and assumptions that are subject to uncertainty and variation, we do not represent them as results that will actually be achieved. It is expressly understood that the scope of our study and report thereon do not include the possible impact of zoning or environmental regulations, licensing requirements or other restrictions concerning the project, except where such matters have been brought to our attention and disclosed in the report. The terms of this engagement are such that we have no obligation to revise this report to reflect events or conditions which occur subsequent to the date of completion of our fieldwork; however, we are available to discuss the necessity for revision in view of changes in the economy or market factors which have a material effect on the proposed property. This report was prepared to assist you in analyzing the potential market position ofthe subject hotels. It is subject to the Statement of General Assumptions and Limiting Conditions presented in the Addenda, as well as to the assumptions presented herein. Sincerely, PKF Consulting USA Bruce Baltin Senior Vice President PKF Consulting USA 1865 S. Figueroa Street, Suite 3500 | Los Angeles, CA 90017 TEL: 213-680-0900 I FAX: 213-623-8240 | www.pkfc.com TABLE OF CONTENTS Page Number SECTION I INTRODUCTION l-l OVERVIEW OF THE MARKET STUDY 1-1 ASSUMPTIONS USED FOR PROJECTIONS 1-1 METHODOLOGY 1-1 AREA REVIEW 1-2 MARKET RESEARCH 1-2 PREPARATION OF MARKET SUPPLY AND DEMAND ESTIMATES 1-2 SUBJECT OCCUPANCY AND AVERAGE DAILY RATE PROJECTIONS 1-3 ESTIMATED ANNUAL OPERATING RESULTS 1-3 SUMMARY OF CONCLUSIONS 1-3 HISTORICAL MARKET PERFORMANCE AND MARKET SHARE ESTIMATES 1-3 133-Room Holiday Inn 1-4 106-Room Staybridge Suites 1-5 SECTION II ANALYSIS OF SITE LOCATION 11-1 LOCATION 11-1 ACCESS AND VISIBILITY 11-5 RELATIONSHIP TO DEMAND GENERATORS 11-5 Corporate Demand 11-5 Group Demand 11-5 Leisure Demand 11-5 SITE CONCLUSIONS 11-5 FACILITIES RECOIVIMENDATIONS 11-6 BASIS FOR ANALYSIS 11-6 133-ROOM HOLIDAY INN 11-6 Overall Quality Level 11-6 Holiday Inn Brand 11-6 Subject Hotel Description 11-6 Guest Rooms 11-7 Meeting Space 11-7 Other Facilities and Amenities 11-8 Management and Affiliation 11-8 106-ROOM STAYBRIDGE SUITES li-8 Overall Quality Level 11-8 Staybridge Suites Brand il-9 Subject Hotel Description 11-9 Guest Rooms 11-9 Other Facilities and Amenities 11-10 Management and Affiliation 11-10 SECTION III AREA REVIEW AND NEIGHBORHOOD ANALYSIS III-2 INTRODUCTION III-2 San Diego County Overview III-2 Ill TABLE OF CONTENTS Page Number Employment III-3 Regional Infrastructure III-5 Highways 111-5 San Diego International Airport III-5 Tourism III-6 Downtown and Gaslamp III-6 San Diego Convention Center III-7 Convention Center Expansion II1-8 Visitor Activity 111-10 Lodging Market III-l 1 INTRODUCTION 111-13 ECONOMIC AND DEMOGRAPHIC OVERVIEW III-l 3 Transportation III-l 3 Population 111-14 Economy 111-14 Commercial Office and Industrial Space 111-15 Commercial Development 111-16 Tourist Attractions III-l 7 Carlsbad State Beach 111-17 LEGOLAND 111-17 The Flower Fields at Carlsbad III-l 8 Carlsbad Premium Outlets 111-18 The Crossings Carlsbad Golf Course 111-18 Art Splash 111-18 CONCLUSION 111-18 SECTION IV HOTEL MARKET ANALYSIS IV-1 OVERVIEW IV-1 MARKET ANALYSIS IV-1 Competitive Supply IV-1 Additions to Supply IV-14 HOTEL ROOMS DEMAND IV-14 Historical Performance ofthe Competitive Supply IV-15 MIX OF DEMAND IV-16 Summary of Demand Growth and Market Occupancies IV-17 PROJECTED MARKET PERFORMANCE OF THE SUBJECT HOTELS IV-19 Penetration Analysis IV-19 Penetration of Subject Hotels IV-19 133-Room Holiday Inn IV-19 Corporate Demand IV-19 Leisure Demand IV-20 Group Demand IV-20 Overall Mix, Penetration, and Occupancy IV-20 106-Room Staybridge Suites IV-23 Corporate Demand IV-23 Leisure Demand IV-23 Group Demand IV-23 IV TABLE OF CONTENTS Page Number Overall Mix, Penetration, and Occupancy IV-23 AVERAGE DAILY RATE IV-26 Competitive Market IV-26 Average Daily Rate and Yield for the Subjects IV-26 133-Room Holiday Inn IV-26 Conversion to a Fiscal Year Basis IV-27 106-Room Staybridge Suites IV-27 Conversion to a Fiscal Year Basis IV-28 SECTION V STATEMENTS OF ESTIMATED ANNUAL OPERATING RESULTS V-1 BASIS OF PROJECTIONS V-1 133-ROOM HOLIDAY INN V-1 Income and Expense Estimates V-1 Operating Statistics of Comparable Hotels V-2 REPRESENTATIVE YEAR ESTIMATE V-5 Departmental Revenues and Expenses V-5 Rooms Department V-5 Rooms Expense V-5 Food and Beverage Revenue and Expense V-6 Other Revenue and Expense V-7 Rentals and Other Income V-8 Undistributed Operating Expenses V-8 Administrative and General V-8 Marketing V-9 Property Operations and Maintenance V-9 Energy and Utility Costs V-10 Fixed Charges V-10 Management Fees V-10 Property Taxes V-10 Insurance V-11 Reserves for Replacement V-11 REPRESENTATIVE YEAR OPERATING STATEMENT V-11 ESTIMATED ANNUAL OPERATING RESULTS V-13 Inflation V-13 Statement of Estimated Annual Operating Results V-13 106-ROOM STAYBRIDGE SUITES V-16 Income and Expense Estimates V-16 Operating Statistics of Comparable Hotels V-16 REPRESENTATIVE YEAR ESTIMATE V-19 Departmental Revenues and Expenses V-19 Rooms Department V-19 Rooms Expense V-19 Food and Beverage Revenue and Expense V-20 Other Revenue and Expense V-20 Rentals and Other Income V-21 Undistributed Operating Expenses V-21 Administrative and General V-22 TABLE OF CONTENTS Page Number Marketing V-22 Property Operations and Maintenance V-23 Energy and Utility Costs V-23 Fixed Charges V-23 Management Fees V-23 Property Taxes V-24 Insurance V-24 Reserves for Replacement V-24 REPRESENTATIVE YEAR OPERATING STATEMENT V-25 ESTIMATED ANNUAL OPERATING RESULTS V-27 Inflation V-27 Statement of Estimated Annual Operating Results V-27 Section I INTRODUCTION Proposed Holiday Inn & Staybridge Suites, Carlsbad, Califomia Section I - Introduction I-l INTRODUCTION OVERVIEW OF THE MARKET STUDY PKF Consulting has been retained by Prime Group Construction, Inc. to conduct a study of the potential market demand and prepare statements of estimated operating results for the development of a 133-room Holiday Inn and a 106-room Staybridge Suites hotel to be located at the intersection of Palomar Airport Road and Innovation Way in Carlsbad, California. As a component of this analysis, after we have identified the potential market demand in the greater Carlsbad lodging market, we have then provided our projections of the occupancy and average daily room rate the proposed subjects could reasonably be expected to achieve for their first five years of operation. Given these projections, we have also estimated the subjects' annual operating results including total operating revenues and expenses, net income from operations, and ratio to total revenues for ten years of operation. For the purpose of our analysis, we have assumed that both hotels would be open and available for occupancy by September 1, 2013. This report represents the culmination of our market research, analysis, and assessments relative to the potential market demand for the proposed hotels. ASSUMPTIONS USED FOR PROJECTIONS Our analysis was based on the following set of assumptions: • The proposed hotels are to be located at the intersection of Palomar Airport Road and Innovation Way; • The proposed hotels will be a 133-room full-service Holiday Inn and a 106-room extended-stay Staybridge Suites; • The subjects will offer facilities and services consistent with their respective quality level; • Both hotels will offer meeting space consistent with their respective brand and positioning; • The Holiday Inn property will contain a three-meal restaurant; • The subjects will be affiliated with the abovementioned nationally recognized brands; and, • The hotels will open on September 1, 2013. METHODOLOGY In conducting the study, we: • Physically inspected the proposed subjects' site as well as existing and planned surrounding developments; • Assessed the impact of the proposed subjects' accessibility, visibility, and location relative to demand generators and overall marketability; Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section I - Introduction 1-2 • Researched and analyzed current economic and demographic trends in San Diego County with a focus on the Carlsbad area to determine the trends' impact on future lodging demand within the market; • Identified the existing and proposed competitive supply of lodging facilities in and around Carlsbad; • Reviewed the historical performance levels for the competitive lodging supply on a composite basis; • Estimated the anticipated growth in demand for, and supply of, lodging accommodations in the competitive market area; • Prepared a forecast of the potential annual occupancy and average daily rate for the first five years of operation of the proposed subjects; and, • Prepared statements of estimated annual operating results for the subject hotels for the ten-year period from September 1, 2013 through August 31, 2023. Several sources were used in compiling the background information and preparing the analysis contained in this report. These resources included Trends in the Hotel Industry, published by PKF Consulting; data on the local lodging market gathered through direct interviews with managers of the competitive properties; data provided by sources in the lodging chains with which the competitive properties are affiliated; and economic data on the region from various local governmental and planning entities. AREA REVIEW We gathered and analyzed relevant economic, demographic, and development data relative to the greater San Diego County and the City of Carlsbad. The purpose of this analysis was to ascertain the economic climate in which the proposed subject hotels will operate and create a basis for projecting future economic conditions as they relate to the proposed subject hotels. MARKET RESEARCH We have reviewed our database and conducted primary market research relative to the proposed hotels' competitive market and prepared a five-year history of occupancy and average daily rate trends. To obtain data on current conditions, market mix, and likely future results, we conducted primary research in the area including interviews with representatives of the competitive hotels and planning officials. Data on proposed projects was also researched and reviewed to determine the likelihood of future additions to supply. PREPARATION OF MARKET SUPPLY AND DEMAND ESTIMATES We analyzed historical growth and the characteristics of each of the principal segments of demand for lodging accommodations and researched the potential additions to supply. Then, using the information gathered in our research, we projected the growth in demand Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section I - Introduction 1-3 from 2012 to 2019 for the competitive market, and combined the estimated future supply and demand to reach our conclusions ofthe overall market potential. SUBJECT OCCUPANCY AND AVERAGE DAILY RATE PROJECTIONS After completing our estimates of the market area's supply and demand, we estimated the share ofthe market that each ofthe proposed subject hotels should reasonably be expected to capture for their first five years of operation. From this we derived their respective annual occupancy percentages. After considering the historical average daily rate trends in the market and the projected market position for the proposed hotels, the proposed properties' average daily rates were projected from their estimated opening in 2013 through 2017. ESTIMATED ANNUAL OPERATING RESULTS Based on our analysis of market demand and the estimated occupancy and average daily room rates for the proposed hotels, we have estimated revenues and expenses for the hotels for their first ten years of operation. These estimates result in a "bottom line" of income before fixed charges of interest, depreciation, amortization, and income taxes. SUMMARY OF CONCLUSIONS Based on our existing knowledge ofthe City of Carlsbad and the overall San Diego County hotel markets coupled with our research relative to this assignment, we are of the opinion that an opportunity exists for the development ofthe 133-room Holiday Inn and 106-room Staybridge Suites hotels at the subject site. The Carlsbad hotel market consists of several local area demand generators, which include the following: 1) corporate/commercial demand generated from businesses located in the CarlsbadA/ista area, as well as sales people making calls in the area; 2) leisure demand generated by pleasure travelers visiting family, friends, and nearby attractions within Carlsbad, San Diego County and other Southern California areas; and 3) group demand arising from business and association meetings as well as social events. The area immediately surrounding the subject site is comprised of an array of office, industrial and retail developments. The business and industrial districts within the City of Carlsbad and neighboring City of Vista generate sufficient short and long term demand to support the addition of a new hotel product to the market. Further, attractions such as LEGOLAND and the beach generate strong leisure demand during the summer months, which often has existing hotels booked to capacity. It is our opinion that with the proposed subjects' recommended facilities and amenities, the hotels will be well positioned to capture demand from the corporate, leisure, and group demand segments as well as generate additional demand for the area. HISTORICAL MARKET PERFORMANCE AND MARKET SHARE ESTIMATES We have analyzed the performance and mix of demand for the hotel properties with which the proposed subjects are expected to compete. Considering economic and market Proposed Holiday Inn & Staybridge Suites, Carlsbad, Califomia Section I - Introduction 1-4 indicators, we have estimated the market area's supply of and demand for hotel room nights and have estimated the share of the market that the proposed hotels should each reasonably be expected to capture for their first five years of operation. Based upon an analysis of the sources of demand available to the subject properties and their estimated competitive position, we have estimated the occupancy percentage and average daily rate that could potentially be achieved in a representative year, in current value dollars, and over the first five years of operation individually for each property. 133-Room Holiday Inn We estimate the subject hotel could achieve a stabilized occupancy rate of 76 percent and an average daily rate of $128.00, in current value (2012) dollars. This places the subject similar to the average of the competitive market as stabilized in terms of occupancy. Our projection of average daily rate is slightly below that of the competitive market average and is considered reasonable as the higher rated properties in the competitive set are located closer to the beach. Furthermore, this rate is within the range of comparable properties located throughout Carlsbad and similar markets in San Diego County and Southern California. The following table outlines our estimates of occupancy, average daily rate, and the resulting revenue yield for the subject. It should be noted that figures are rounded to the nearest dollar amounts. Projected Market Performance of the Subject Hotel Annual Percent Occupied Percent Occupancy Average Percent Percent Market Revenue Year Supply Change Rooms Change Percentage Daily Rate Change REVPAR change Penetration Yield 2013 16,060 N/A 10,400 N/A 65% $132.00 3.0% $ 85.48 N/A 92% 86% 2014 48,545 202.3% 32,100 208.77o 66 136.00 3.0 89.93 5.27o 101 96 2015 48,545 0.0 35,200 9.7 73 140.00 3.0 101.51 12.9 108 102 2016 48,545 0.0 36,800 4.5 76 144.00 3.0 109.16 7.5 109 104 2017 48,545 0.0 36,800 0.0 76 148.00 3.0 112.19 2.8 106 100 CAAG 31.9% 37.2% 2.9% 7.07o Source: PKF Consulting USA The estimates of revenues, costs, and expenses are based on the subject's specific facilities and services and its operational characteristics. As a basis for our projections, we have analyzed the operating results of lodging properties with similar characteristics that are believed to operate with efficient management and proper control of costs and expenses. The following table summarizes the estimated operating results for the first ten years of operation for the proposed 133-room Holiday Inn hotel to be located in Carlsbad, California. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section I - Introduction 1-5 Summary of Estimated Annual Operating Results Total Net Operating Ratio to Year Revenue Inconne Total Revenues 2013/14 $5,208,000 $1,408,000 27% 2014/15 5,805,000 1,734,000 30% 2015/16 6,310,000 1,977,000 31% 2016/17 6,575,000 2,094,000 32% 2017/18 6,756,000 2,144,000 32% 2018/19 6,976,000 2,226,000 32% 2019/20 7,198,000 2,307,000 32%, 2020/21 7,384,000 2,350,000 32% 2021/22 7,606,000 2,425,000 32% 2022/23 7,831,000 2,498,000 32% 10S-Room Staybridge Suites We estimate the subject hotel could achieve a stabilized occupancy rate of 78 percent and an average daily rate of $140.00, in current value (2012) dollars. This places the subject above the average of the competitive market as stabilized in terms of occupancy, which we consider reasonable given the subject's smaller room count as compared to the other properties in the competitive market as well as its extended-stay positioning within a highly corporate market. Our projection of average daily rate places the property above that of the competitive market average and we consider this reasonable for the same reasons. This rate is also within the range of comparable extended-stay properties located in Carlsbad and similar Southern California markets during peak years, which have begun to bounce back after suffering declines during the economic downturn. The following table outlines our estimates of occupancy, average daily rate, and the resulting revenue yield for the subject. It should be noted that figures are rounded to the nearest dollar amounts. Projected Market Performance of the Subject Hotel Annual Percent Occupied Percent Occupancy Average Percent Percent Market Revenue Year Supply change Rooms change Percentage Daily Rate Change REVPAR Change Penetration Yield 2013 12,775 N/A 8,400 N/A 66% $144.00 3.0% $ 94.68 N/A 93% 96% 2014 38,690 202.9% 26,000 209.5% 67 149.00 3.0 100.13 5.7% 103 106 2015 38,690 0.0 28,100 8.1 73 153.00 3.0 111.12 11.0 108 111 2016 38,690 0.0 30,200 7.5 78 158.00 3.0 123.33 11.0 113 116 2017 38,690 0.0 30,200 0.0 78 162.00 3.0 126.45 2.5 109 112 CAAG 31.97o 37.7% 3.0% 7.5% Source: PKF Consulting USA The estimates of revenues, costs, and expenses are based on the subject's specific facilities and services and its operational characteristics. As a basis for our projections, we have analyzed the operating results of lodging properties with similar characteristics that are believed to operate with efficient management and proper control of costs and expenses. The following table summarizes the estimated operating results for the first ten years of operation for the proposed 106-room Staybridge Suites hotel to be located in Carlsbad, California. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section I - Introduction 1-6 Total Net Operating Ratio to Year Revenue Income Total Revenues 2013/14 $3,865,000 $1,479,000 38% 2014/15 4,208,000 1,665,000 40 2015/16 4,651,000 1,932,000 42 2016/17 4,928,000 2,105,000 43 2017/18 5,082,000 2,177,000 43 2018/19 5,234,000 2,244,000 43 2019/20 5,388,000 2,309,000 43 2020/21 5,540,000 2,372,000 43 2021/22 5,693,000 2,432,000 43 2022/23 5,878,000 2,522,000 43 Proposed Holiday Inn & Staybridge Suites, Carlsbad, Califomia Section II ANALYSIS OF SITE LOCATION AND FACILITIES RECOMMENDATIONS Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section II - Analysis of Site Location and Facilities Recommendations II-l ANALYSIS OF SITE LOCATION LOCATION The subject site is located in the City of Carlsbad in San Diego County, California. The city is bordered on the north by Oceanside, on the east by Vista and Lake San Marcos, on the south by Encinitas, and on the west by the Pacific Ocean. The proposed hotels' site is located at the southeast corner of Palomar Airport Road and Innovation Way. The subject site benefits from its excellent location just east of El Camino Real, a major artery that runs through several cities of San Diego County, and only one mile east of the McClellan-Palomar Airport. The bordering uses of the subject site are listed below. North: The site is bound to the north by Palomar Airport Road, followed by an office/industrial park. Further north, less than two miles, is the Carlsbad Oaks North master-planned corporate business park. South: The subject site is bound to the south by office and industrial space, followed by residential uses. East: The subject site is bound to the east by Innovation Way, followed by an undeveloped commercial site. Further east, approximately one mile is the McClellan-Palomar Airport. Wesf: The subject site is bound to the west by an undeveloped site, followed by. El Fuerte Street and commercial development. LEGOLAND and The Crossings at Carlsbad golf course are located approximately 3.5 miles west ofthe site. An area map and aerial view illustrating the subject site location are presented in the following pages. Proposed Holiday Inn & Staybridge Suites, Carlsbad, Califomia Section II — Analysis of Site Location and Facilities Recommendations II-2 ^' AvB . .S11 I Or \ •^lipad AW Subject Site 7 4 I t s - Sl o» V,' It H . Acacia ..I %\ ..-^-S n PKr CONSULTING USA Site Map Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section II — Analysis of Site Location and Facilities Recommendations II-3 Proposed Holiday Inn <& Staybridge Suites, Carlsbad, California Section II-Analysis of Site Location and Facilities Recommendations II-4 i 1-1 PKf CONSULTING USA Site Plan Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section II - Analysis of Site Location and Facilities Recommendations II-5 ACCESS AND VISIBILITY The subject site is located east of El Camino Real in the southeast quadrant of the intersection of Innovation Way and Palomar Airport Road in Carlsbad, California. The site is located in a predominately commercial and residential area. Primary access to the site is afforded via Palomar Airport Road, a thoroughfare connecting the site to Interstate 5. In addition to the Palomar Airport, air service is provided by the San Diego International Airport, which is located approximately 35 miles south of Carlsbad. Given the location ofthe site, the hotels will have no visibility from highways but excellent visibility from Palomar Airport Road. RELATIONSHIP TO DEMAND GENERATORS Corporate Demand Lodging demand in Carlsbad is primarily driven by commercial business. The proposed Holiday Inn and Staybridge Suites are well situated to tap commercial demand based on their proximity to the city's multiple office buildings and major employers, including Callaway Golf, Invitrogen Corporation, Carlsbad Unified School District, ViaStat, Inc., City of Carlsbad, LEGOLAND California, Isis Pharmaceuticals, Gemological Institute of America, and TaylorMade. Group Demand Relative to the existing hotel supply in the market area, the subjects' visibility, accessibility, and new product is ideally situated to capture group demand emanating from the large collection of office buildings in the immediate area. The subjects will also benefit by group overflow from the major resorts in the area by offering a high-quality product at a lower price point. Leisure Demand Also to the west of the subject site are several major area attractions that generate leisure demand for hotel accommodations. These include LEGOLAND theme park, Carlsbad Company Stores, Tamarack State Beach, the three lagoons of Carlsbad (Buena Vista Lagoon, Agua Hedionda Lagoon, and Batiquitos Lagoon) and downtown Carlsbad, where travelers will find a wide range of restaurants and retail stores. SITE CONCLUSIONS The proposed subject hotels will benefit from their excellent visibility and access off of Palomar Airport Road, as well as their proximity to local office parks. In addition, the subject hotels will benefit from their proximity to leisure demand generators, such as LEGOLAND and the beach. Given the site's location and the characteristics and demand patterns of the Carlsbad market, the proposed site is well-suited for a midscale full-service hotel and a midscale extended-stay hotel. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section II - Analysis of Site Location and Facilities Recommendations II-6 FACILITIES RECOMMENDATIONS BASIS FOR ANALYSIS We have analyzed the overall Carlsbad lodging market. Our comments concerning facility recommendations for the subject hotels are based on the parameters set forth by the developer, as well as our analysis of the competitive hotels and the recommended positioning of the proposed hotels within the competitive market. The following provides a general scope of facilities that should be considered for the subject properties under their proposed brands of Holiday Inn and Staybridge Suites. 133-ROOM HOLIDAY INN Overall Quality Level The subject will be competing on the local level with nine hotels located within Carlsbad and two hotels located in the neighboring City of Vista. To appropriately position the hotel within the competitive market, the overall quality level should be at or above the competitive hotels. Holiday Inn Brand Holiday Inn is an internationally recognized midscale full-service lodging chain that is part of the Intercontinental Hotels Group family of brands. Holiday Inn has currently 1,234 hotels and 225,337 hotel rooms HolidQUInn ^^'-'^'^^ the world, and 254 hotels in the pipeline. The brand is known to ^ be the hotel designed to meet the needs of a diverse group of travelers by providing the services business travelers need, while also offering leisure travelers a comfortable atmosphere where they can relax and enjoy amenities such as restaurants, swimming pools, and comfortable lounges. As part of Intercontinental Hotels Group's diverse portfolio of hotel brands, guests of Holiday Inn hotels are invited to participate in InterContinental's Priority Club Rewards, the chain's frequent stay program. With rewards that include free overnight stays, this incentive strengthens the loyalty of the Intercontinental traveler and provides a competitive advantage over independent hotels and smaller chains. Subject Hotel Description The Holiday Inn brand has evolved over the years and has recently completed a brand image re-launch around the world to remain competitive. The new Holiday Inn identity offers a modern look, with contemporary lobbies and refreshed guestrooms. Most Holiday Inn properties offer facilities and amenities such as a three meal restaurant, meeting space, business center, fitness room, swimming pool, grab-n-go market, complimentary meals for children, and complimentary high speed internet access. The new Holiday Inn guestrooms feature plush beds with triple-sheeted bedding, a well-lit work desk, and flat panel televisions with cable TV. Other amenities offered in the rooms include cordless phone with speaker and voicemail, coffee maker, complimentary newspaper delivery every morning, iron/ironing board, and hairdryer. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section II - Analysis of Site Location and Facilities Recommendations II-7 We have assumed that the subject will be developed as a Holiday Inn consisting of 133 units in an interior corridor structure with a presumed opening date of September 1, 2013. It is our understanding that the proposed Holiday Inn will be structured to meet the basic requirements of a typical Holiday Inn, therefore, the following facilities are assumed and recommended. Guest Rooms The proposed Holiday Inn will consist of 133 guestrooms. Based on the existing and proposed competitive hotel supply as well as the mix of demand in the competitive market, we recommend a mix of suites and standard guestrooms with king and double-double or double-queen beds. Given its positioning, we recommend a mix of 55.0 percent double- double or double-queen rooms, 40.0 percent king rooms, and 5.0 percent suites. Proposed Holiday Inn Room Types No. of Rooms Double Double/Queen 73 King 53 Suites 7 Total 133 Source: PKF Consulting Individual guest units should offer either king-size beds or two double or queen beds in approximately 350 to 400 square feet of guestroom space. Guestroom amenities should include those comparable to a modern Holiday Inn hotel. Therefore, we recommend that the guest rooms contain a flat-screen, remote-controlled television with on-command movie options, ample sized working desk and chair; telephone with two lines and voicemail; wireless internet access; coffee maker; hairdryer; in-room safe; iron and ironing board; complimentary toiletries; and other amenities consistent with a midscale full-service hotel. The suites should be larger in size, approximately 480 to 550 square feet, and offer separate sitting areas. Food and Beverage According to the plans provided, the property will offer an approximately 1,100 square foot restaurant. As a full service hotel, we are assuming that the restaurant will be open for breakfast, lunch, and dinner. The hotel should also feature a lobby lounge serving cocktails and light fare as well as provide in-room dining. Back ofthe house production areas would service all food and beverage services, including meeting rooms. Meeting Space According to the plans provided, the property will offer approximately 3,300 square feet of meeting space. The following table shows the meeting space provided at the competitive properties. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section II - Analysis of Site Location and Facilities Recommendations 11-8 Meeting Space of the Primary Competitive Market Square Feet # (Rounded) Rooms SF/Room Homewood Suites Carlsbad 1,800 145 12 Hampton Inn Carlsbad 600 94 6 Courtyard Carlsbad 1,290 145 9 Residence Inn Carlsbad 1,200 121 10 Hyatt Place Vista/Carlsbad 1200 150 8 Grand Pacific Palisades 10,000 90 in Hilton Garden Inn Carlsbad 5,000 161 31 Carlsbad by the Sea 6,810 149 46 Hyatt House Carlsbad (frmr Hyatt Summerfield) 525 97 5 West Inn & Suites Carlsbad 300 86 3 TownePlace Suites Vista/Carlsbad 1,874 94 20 Average 2,782 24 Source: PKF Consulting Given the size of the site and the proposed room count, the primary demand generators in the market, and positioning as a mid-level full-service property, it is our opinion that 3,300 square feet of meeting space is adequate for the subject property. This space will serve mainly to accommodate small functions for SMERF and corporate groups and is within the range provided in the properties within the competitive set. All available meeting space should be equipped with wireless internet access, independently controlled lighting, and a good quality sound system. Other Facilities and Amenities Other amenities at the proposed subject property should include a fitness room, an outdoor pool, a convenience market, and high speed wireless internet throughout the property. The fitness center should include cardio equipment, strength equipment, and core and balance kits. Management and Affiliation We have assumed that the property will be managed by a third party operator. We are not aware of who the operator will be, but have assumed a management team familiar with the operation of a midscale full-service hotel. As such, the property will be subject to a franchise fee and a management fee. 106-ROOM STAYBRIDGE SUITES Overall Quality Level Similar to the Holiday Inn, the subject will be competing on the local level with nine hotels located within Carlsbad and two hotels located in the neighboring City of Vista. To appropriately position the hotel within the competitive market, the overall quality level should be at or above the competitive hotels. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California STAYBRIDGE! 'SUITE S Section II - Analysis of Site Location and Facilities Recommendations II-9 Staybridge Suites Brand Staybridge Suites is an all-suite hotel chain part of the Intercontinental Hotels Group family of brands that has been designed to meet the needs of upscale extended stay guests. There are currently 181 hotels with a total of 19,748 rooms, and 88 hotels in the pipeline. The properties feature multiple suite types with comfortable and stylish accommodations. As part of Intercontinental Hotels Group's diverse portfolio of hotel brands, guests of Staybridge Suites hotels are invited to participate in InterContinental's Priority Club Rewards, the chain's frequent stay program. With rewards that include free overnight stays, this incentive strengthens the loyalty of the Intercontinental traveler and provides a competitive advantage over independent hotels and smaller chains. Subject Hotel Description The Staybridge Suites brand features contemporary extended-stay facilities and amenities. The properties offer multiple suite types including deluxe studio, one-bedroom, and two bedroom/two bath. The suites feature fully-equipped kitchens, flat screen television with cable TV and DVD player, work desk with lamp, in-room movies, speaker phone with voicemail, and complimentary wireless internet access. Public spaces in the properties within a 100 to 149 room count include the brand's signature residential atmosphere with a Living Room/Great Room and fireplace for social gatherings. Other typical facilities and amenities include fitness center, business services, complimentary wireless internet access in public spaces, swimming pool, barbeque grills, dry cleaning pick up/laundry, on-site guest self-laundry facilities, complimentary hot breakfast buffet daily, and complimentary evening cocktails. We have assumed that the subject will be developed as a Staybridge Suites consisting of 106 units in an interior corridor structure with a presumed opening date of September 1, 2013. It is our understanding that the proposed Staybridge Suites will be structured to meet the basic requirements of a typical Staybridge Suites, therefore, the following facilities are assumed and recommended. Guest Rooms The proposed Staybridge Suites will consist of 106 guestrooms. We have not seen development plans for the property but have assumed a mix of suites including deluxe studios, one-bedroom, and two-bedroom/two-bath. Guestroom amenities should include those comparable to the Staybridge Suites prototype, including: • Fully equipped kitchen including stove, full size refrigerator, dishwasher, microwave oven, pots, pans, dishes, and glassware • 27" flat screen television with cable TV, premium channels, and In-room movies • Work desk • Sleeper sofa • DVD player Proposed Holiday Inn & Staybridge Suites, Carlsbad, Califomia Section II - Analysis of Site Location and Facilities Recommendations 11-10 • iPod docking station • Speakerphone with voicemail • Hairdryer • Iron/ironing board Food and Beverage Based on the Staybridge Suites prototype we are assuming that the property will provide complimentary breakfast and dinner snacks and drinks. Therefore, although a restaurant is not included in the plans, an allocation for a dining area within the lobby is assumed. Other Facilities and Amenities Other amenities at the proposed subject property should include a fitness room, business services, a convenience market, and high speed wireless internet throughout the property. As previously mentioned, as it is the Staybridge Suites standard, we are assuming that the subject will offer complimentary hot breakfast buffet and an evening cocktails reception. Management and Affiliation We have assumed that the property will be managed by a third party operator. We are not aware of who the operator will be, but have assumed a management team familiar with the operation of an all-suites, extended stay hotel. As such, the property will be subject to a franchise fee and a management fee. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section III AREA REVIEW Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section III — Area Review lll-l c a a n PKr CONSULTING USA Regional Map Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section III - Area Review II1-2 AREA REVIEW AND NEIGHBORHOOD ANALYSIS INTRODUCTION The economic climate of the market area encompassing the subject property is an important consideration in forecasting hotel demand and income potential. Historic economic and demographic trends that highlight the amount of visitation or other economic trends provide a basis for hotel demand projections. The purpose of this section is to review available economic and demographic data to determine whether the subjects' regional and local market areas might experience future economic growth. San Diego County Overview The San Diego Metropolitan Statistical Area (MSA), which consists of San Diego County, is located approximately 125 miles south of Los Angeles and is immediately north of the Mexican border. The San Diego community, once dominated by the presence of nearby Naval, Air Force, and Marine bases, as well as the defense-related aerospace industry, has diversified. San Diego has developed into one of America's foremost centers of technology, particularly in the emerging biomedical field. Manufacturing has shifted towards elec- tronics, computers, instrumentation and other high technology products, and development of such sectors as services, research and development, and health services has been strong. San Diego is home to LEGOLAND, the San Diego Wild Animal Park, SeaWorld, and the San Diego Zoo. Additional activities in the region include beaches, casinos, racetracks, numerous shopping venues, dozens of golf facilities, and the San Diego Convention Center. These attractions provide for a popular destination amongst international/ domestic tourists and business travelers. Throughout the periods of economic growth and decline, these sources continue to be major drivers of tourism activity and, ultimately, hotel demand. San Diego is one ofthe most populous counties in California and in the United States. The State of California's Department of Finance reported that San Diego County had an estimated aggregate population of approximately 3.2 million persons as of 2010. The following table illustrates the historical population growth for San Diego County from 1999 to 2010. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section III - Area Review III-3 Population Growth Year Persons 1999 2,889,900 2000 2,864,408 2001 2,921,273 2002 2,972,832 2003 3,011,526 2004 3,038,579 2005 3,064,113 2006 3,098,269 2007 3,100,132 2008 3,146,274 2009 3,208,466 2010 3,224,432 CAAG' 1.0% 'CAAG = Compound Average Annual Growth Source: California Department of Finance Employment San Diego has become increasingly known as an education, technology, and research-and- development center. The county has campuses of the University of California and the state college system, as well as at least five privately supported colleges and universities. In addition, the Scripps Clinic and Research Foundation, the Salk Institute, U.S. Medical Center, and the Veterans Administration Hospital, all are located in the North City area and have spawned numerous research and development firms in the health sciences. The area also boasts more than 100 firms connected with oceanographic research. For many years, the San Diego area economy was heavily dependent on military spending and aerospace contracts. Although the military influence remains strong, aerospace employment plunged from 43,900 jobs in 1990 to 16,300 jobs in 1995. Two out of every three aerospace jobs disappeared. These losses were made up for by increases in trans- portation, public utilities services, and government, as well as in high-technology manu- facturing and services. A summary of the major employers within San Diego County is presented in the table on the following page. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section III — Area Review 1II-4 Major Employers San Diego County Company Industry Over 10,000 Employees Marine Corps Base, Camp Pendleton Government/Defense Federal Government and State of California Government United States Navy, San Diego Military/Defense University of California, San Diego Education County/City of San Diego Government San Diego, Unified School District Government Sharp Health Care Healthcare Scripps Health Healthcare Scripps Mercy Hospital Healthcare 5,000 fo J0,000 Employees North Island Naval Air Station Military/Defense QUALCOMM, Inc. Telecommunication Kaiser Foundation Hospital Healthcare San Diego State University Education United States Postal Service Shipper San Diego Naval Medical Center Healthcare Sempra Energy Utility J,000 fo 4,999 Employees San Diego Community College District National Steel & Shipbuilding Co. Grossmont Union High School District SBC Communications, Inc. Northrop Grumman YMCA of San Diego County Science Applications International Corp. General Dynamics NASSCO Palomar Pomerado Health San Diego County Sheriff's Dept. Rady Children's Hospital AT&T, Inc. Solar Turbines General Atomics Education Ship Builders Education Telecommunication Defense/Technology Recreation Research and Development, Technical Ship Builders Health Technology Law Enforcement Healthcare Telecommunication Research and Development, Technical Defense/Technology Source: Greater San Diego Chamber of Commerce, San Diego SourceBook 20/0 Changes in the overall economic climate in Southern California and the Greater United States pushed the unemployment rate to a record annual high of 10.6 percent in 2010 for San Diego County. Since then, the unemployment rate has been slowly trending down, with 2011 ending in a 10.0 percent rate. As of June 2012, the unemployment rate in San Diego County was 9.2 percent, down from 10.4 percent in June 2011. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section HI - Area Review 1II-5 San Diego Employment Statistics Year Labor Force Employment Unemployment Rate 1998 1,313,300 1,266,900 46,400 3.5% 1999 1,351,900 1,309,800 42,100 3.1 2000 1,376,000 1,322,200 53,800 3.9 2001 1,409,700 1,350,700 59,000 4.2 2002 1,450,500 1,375,800 74,700 5.2 2003 1,468,200 1,391,700 76,500 5.2 2004 1,484,200 1,413,900 70,300 4.7 2005 1,492,600 1,427,900 64,700 4.3 2006 1,525,800 1,469,100 56,800 4.0 2007 1,542,500 1,471,600 70,900 4.6 2008 1,587,900 1,469,600 118,300 7.5 2009 1,552,000 1,402,400 149,600 9.6 2010 1,557,500 1,393,200 164,300 10.6 2011 1,583,800 1,426,100 157,700 lO.O CAAG 1.50% 1.00% 8.90% Jun-11 1,583,700 1,419,400 164,300 10.4 Jun-12 1,600,200 1,452,400 147,800 9.2 Source: California Employment Development Department, Bureau of Labor Statistics Regional Infrastructure Transportation within San Diego County includes an efficient and expanding freeway system, various railroad lines, and public transportation featuring a light rail transit system, an international airport, as well as smaller general aviation airports and the deep-water port of San Diego. Highways The San Diego area enjoys a superior system of public highways. There are four major freeways running north to south in San Diego and three running east-west. The major north-south routes are Interstate 5, Interstate 15, Interstate 805, and State Highway 163. The three main east-west routes are Interstate 8, Highway 52, and State Highway 94. Interstate 5 originates from the south at the Mexican border and is a major artery through the South Bay, downtown. Mission Bay, La Jolla, and North County areas of San Diego. The freeway continues northward through Los Angeles, Central California, and the north coastal states before terminating in Vancouver, Canada. State Route 163 runs north - south, connecting the northeastern suburbs of the city with the downtown area where the route terminates. Highway 52 connects Interstate 5 from La Jolla with Interstate 15 and east San Diego County, and forms the bottom of the "Golden Triangle" of University City. Highway 94 originates on the eastern edge of downtown at 17th Avenue and G Street and extends east across most of the state. State Route 56, connects the inner cities along the I- 15 to the 1-5. This route provides access to and from the developing regions of inland San Diego County and is the only east-west route between Highways 52 and 76. San Diego International Airport The San Diego International Airport (Lindbergh Field) provides primary air transportation to and from the proposed hotels market area. The following carriers provide regular flights to Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section III-Area Review II1-6 and from San Diego International Airport: American, Continental, Delta, JetBlue, Northwest, TransWorld Airways, United, and USAir. These airlines offer direct flights to Los Angeles, San Francisco, Boston, New York, Phoenix, Las Vegas, Dallas, Chicago, Seattle, and many other cities. San Diego International Airport at Lindbergh Field Year Enplaned Deplaned Total 2000 7,915,899 7,904,443 15,820,342 2001 7,613,593 7,570,739 15,184,332 2002 7,471,644 7,460,210 14,931,854 2003 7,637,193 7,623,598 15,260,791 2004 8,200,687 8,176,617 16,377,304 2005 8,692,694 8,679,827 17,372,521 2006 8,759,668 8,722,273 17,481,941 2007 9,040,280 9,016,691 18,056,971 2008 9,061,155 9,064,478 18,125,633 2009 8,472,781 8,501,391 16,974,172 2010 8,456,176 8,433,446 16,889,622 2011 8,441,957 8,448,765 16,890,772 CAAG 0.6% 0.6% 0.6% YTD 05/11 3,283,242 3,303,677 6,586,919 YTD 05/12 3,411,380 3,410,450 6,821,830 % Change 3.9% 3.2% 3.6%, Source: San Diego County Regional Airport Authority San Diego International Airport is the 30th busiest airport in the country in terms of passengers and the busiest single-runway commercial service airport in the nation. On any given day, approximately 50,000 domestic and international passengers arrive or depart San Diego International Airport. The Airport accommodates approximately 521 arrivals and departures each day, 96.0 percent of which are for passenger service. Southwest maintains the largest passenger numbers, at 38.5 percent of total passengers. It is estimated that visitors arriving by air to San Diego spend $2 billion each year in the region. San Diego International Airport at Lindbergh Field had approximately 16.9 million airport passengers in 2010, a 0.5 percent decline from 2009. A small increase in passenger activity was seen in 2011 over 2010. As of May 2012, total passenger traffic is up 3.6 percent from the previous period last year. Tourism San Diego's temperate climate, ocean-side location, and numerous tourist attractions have made the city a popular destination. In recent years, San Diego has been able to increase visitor traffic in its off-season, which occurs from September to May, in order to complement the peak summer months. Downtown and Gaslamp During the past decade, downtown San Diego has emerged as an important tourist destination with the development of Seaport Village, Horton Plaza, Balboa Park, the Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section III - A rea Review IU- 7 Convention Center, and the evolution of the Gaslamp Quarter. The Del Mar Fairgrounds and Racetrack and LEGOLAND also attract visitors to the northern part ofthe county. The 26 square block revitalization of Downtown is the biggest redevelopment project in the history of San Diego. It is in the process of revitalizing a long-neglected section of downtown, with the ballpark as the anchor attraction to draw more than three million visitors annually and stimulate other developments such as restaurants, shops, offices, galleries, parking, housing, parks and promenades. Overall, the development has trans- formed an area of long-abandoned warehouses and vacant lots into a vibrant "Ballpark District" with bistros and boutiques, renovated lofts, a variety of businesses and entertain- ment attractions and public amenities. San Diego Convention Center Since opening in 1989, the San Diego Convention Center has drawn millions of convention delegates into the city and has generated billions of dollars in economic benefits for the San Diego Region. The convention center is credited with helping to fuel the rapid growth in the city's transient occupancy tax imposed on hotel and motel rooms. Besides filling local hotel rooms and providing customers for convention-related businesses, supporters say the convention center has become an asset for the entire city. Its car and boat shows and other popular events attract thousands of locals, and the center's proximity to the historic Gaslamp Quarter helped convert that district into a lively restaurant and entertainment mecca. The Convention Center has demonstrated a high level of success in capturing convention demand, though the 2008-2009 downturn impacted this market along with every other convention market. According to the San Diego Convention and Visitors Bureau, the events of 2011 generated 704,000 hotel room nights. For 2012, sixty-five conventions are forecast to generate approximately 763,000 room nights and $654.3 million in direct attendee spending. A study completed by CIC Research indicated that 30 to 40 percent of hotel room nights that attendees' book are not part of the official block. These patterns are projected to continue as travelers are more price sensitive amidst the economic downturn. The following presents historical and current bookings as of June 2012. Please note, projected bookings comprise definite plus tentative and reflect the most current data available from SDCCC. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section III-Area Review 1II-8 San Diego Convention Center Actual and Advanced Bookings Fiscal Room Nights Year Definite Tentative Total Goal 2000 502,000 N/A 502,000 475,000 2001 519,000 N/A 519,000 475,000 2002 564,000 N/A 564,000 550,000 2003 736,000 N/A 736,000 600,000 2004 741,000 N/A 741,000 650,000 2005 826,000 N/A 826,000 700,000 2006 730,000 N/A 730,000 760,000 2007 738,000 N/A 738,000 760,000 2008 678,000 N/A 678,000 760,000 2009 741,00 N/A 741,000 760,000 2010 696,000 N/A 696,000 760,000 2011 704,000 N/A 704,000 760,000 2012* Def + Tentative 742,000 760,000 2013 Def + Tentative 665,000 760,000 2014 Def + Tentative 650,000 760,000 2015 Def + Tentative 664,000 760,000 2016 Def + Tentative 705,000 760,000 2017 Def + Tentative 725,000 760,000 * Based on current convention Source: San Diego Convention bookings as of June 2012 Center Corporation Convention Center Expansion An expansion of the San Diego Convention Center has been under evaluation for some time. In 2009, San Diego Mayor Jerry Sanders created the Citizens' Task Force on the San Diego Convention Center Project, and appointed Stephen Cushman and San Diego Convention S- r.^ft '^^f fc..'"TaMBSa^jjBJWa&fcia^fct Center Corporation Board Chair Jll^l^^lyfe^^AMh^^^^^^^S^^^I^PpP Cheryl Kendrick to co-chair the task force. The group was charged with evaluating the feasibility of expanding the Center. After conducting extensive research and holding 11 public meetings, the task force concluded that an expanded Center would attract additional and larger conventions to San Diego. Because of the limited size of the current Center, San Diego loses out on hundreds of thousands of hotel room visits, as well as the accompanying visitor spending at restaurants, shops, and visitor attractions. If approved, the $550 million project is slated to begin in 2013 and be completed by 2017. On April 6, 2010, the Board of Port Commissioners granted its consent to the San Diego Convention Center Corporation to acquire Fifth Avenue Landing's leasehold that was needed to pursue entitlements for the Convention Center's expansion. The Board approved a resolution consenting to a $12.5 million Deed of Trust secured by the leasehold interest. Additionally, the Board granted an amended lease to the San Diego Convention Center Corporation that expires June 30, 2024. Financing continues to be evaluated, with a May Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section III - Area Review 111-9 12th meeting where the Mayor called for hotels to establish a Convention Center Assessment District that would assess a one to three percent surcharge which would raise as much as $30 million annually that would be applied towards funding the expansion. This measure was passed. Collectively, these actions provide a framework for the Convention Center to work with the Port to design and entitle the expansion project, including its environmental review. The Mayor's Citizen Task Force estimated that the expansion is expected to generate $698 million of economic activity annually in addition to the $1.3 billion a year the Convention Center already generates. The table below provides a brief overview ofthe proposed SDCC expansion plan, and the total net facilities available following the completion of the proposed expansion. San Diego Convention Center Existing Proposed Phase III Description SF Expansion Upon Completion Prime Exhibit Space 525,701 225,000 750,701 Sails Pavilion 90,000 -90,000 Total Ballroom Space 81,700 80,000 161,700 Total Meeting Room Space 118,700 100,100 218,000 Totai Indoor Rentable Space 816,101 405,100 1,221,201 Source: San Diego Convention Center When completed, San Diego's bayside Convention Center will have the largest contiguous exhibit hall on the West Coast with 750,701 square feet of space, as well as the largest ballroom in a convention facility on the West Coast with 80,000 square feet. The following presents additional detail on the expansion: Convention Center Program: • Exhibition Space: Add 225,000 square feet of sub-dividable space with 30-foot clear ceilings that connects to the existing Phase 2 exhibit halls with direct access and the ability to accommodate a single trade show. • Meeting Rooms: Add 101,000 square feet of new space, located on a single level with a ceiling height of 27 feet. • Multi-Purpose/Ballroom: Add 80,000 square feet divisible into approximately six smaller rooms and with a ceiling height of 35 feet. • Total New Leasable Area: 405,100 square feet. • Support area (circulation, pre-function, food service, exiting, vertical circulation, restrooms, storage, staging, support, AN, electric & mechanical rooms, other B.O.H) as required, including kitchen of approximately 13,000 to 17,000 square Proposed Holiday Inn & Staybridge Suites, Carlsbad, Califomia Section III - Area Review III-l 0 feet adjacent to the ballroom. A net increase of 22 truck docks to serve the expansion. • Freight Elevators: approximately eight large, trade show elevators for the expansion. The expansion would also add a beautiful public park on top of the building, as well as additional pedestrian access through the center and to the waterfront park. Visitor Activity The San Diego visitor industry is the third largest industry in San Diego County, employing approximately 160,000 San Diegans. Visitors spend approximately $7 billion annually at thousands of businesses in the County. This equates to $17 billion in economic impact for the region, and thus a very important piece ofthe economic health ofthe region. San Diego's temperate climate, ocean-side location, and numerous tourist attractions have made the city a popular destination. Today, San Diego is one of the top five leisure vacation destinations in the U.S. and a top 10 business destination as measured by visitor- days. Over the last several decades, San Diego has been able to increase visitor traffic in the off-season (September to May) to complement the peak summer months. Several national events brought San Diego into the spotlight, which had the effect of positively impacting the area's tourism industry including the America's Cup, which began in late 1994 and extended into 1995, the Republican National Convention which was held in August 1996, and the Super Bowl which was held in January 1998 and again in January 2003. Downtown San Diego has emerged as an important tourist destination with the development of Seaport Village, Horton Plaza, the Convention Center, and the evolution of the Gaslamp Quarter. The Del Mar Fairgrounds and Racetrack also attract visitors to the northern part ofthe county. LEGOLAND, which opened in March 1999 in Carlsbad, is the first paid admission attraction introduced in several decades. Due to the great recession in 2008 and 2009, overnight visitors, visitor spending and attraction attendance in San Diego County dipped in 2009. The following table presents a summary of the most recent data available for visitor activity between 2002 and 2011. As shown, although suffering declines in 2009 and 2010, visitor spending has seen a 4.4 percent compound average annual increase over the nine year period. San Diego County finished 2011 with increases of 3.8 percent and 5.4 percent in overnight visitor counts and visitor spending, respectively, over the previous year. This marks the second consecutive year of increases, following two years of flat to negative patterns seen in 2008 and 2009. According to LAEDC, the number of overnight visitors to San Diego County is expected to increase in 2012 to 15.8 million, or 1.3. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section III-Area Review III-l 1 The table below presents a summary of the most recent data available for visitor activity between 2002 and 2011. Overnight visitor spending Attraction Year Visitors (millions) Attendance 2002 15,045,000 $5,037 11,979,297 2003 15,369,000 5,332 11,755,109 2004 15,672,000 5,517 11,786,992 2005 15,724,000 7,224 12,858,628 2006 15,812,000 7,718 13,435,612 2007 14,138,000 7,289 12,678,208 2008 15,160,000 7,916 13,572,384 2009 14,435,000 6,958 13,185,402 2010 15,125,000 7,080 12,695,468 2011* 15,700,000 7,400 Not available CAAG 0.57o 4.4% *Preliminary Source: San Diego Convention and Visitors Bureau; CIC Research Lodging Market The following table sets forth our estimate of historical and projected supply, demand, occupancy, and average room rate for the overall San Diego market. We are aware that the previously defined market area as a whole contains approximately 17 million annual hotel rooms. However, the table presented below includes the sum of our aggregated sub markets, representing approximately 80 percent ofthe total existing lodging supply. San Diego County Annual Percent Occupied Percent Market Average Percent Percent Year Supply Change Rooms Change Occupancy Daily Rate Change REVPAR Change 2006 11,676,761 N/A 8,829,077 N/A 75.6% $161.70 N/A $122.27 N/A 2007 11,858,850 1.6% 8,894,775 0.7% 75.0 171.95 6.3% 128.97 5.5% 2008 12,269,597 3.5 8,838,933 -0.6 72.0 175.01 1.8 126.07 -2.2 2009 12,999,840 6.0 8,619,023 -2.5 66.3 151.61 -13.4 100.52 -20.3 2010 13,185,625 1.4 9,220,879 7.0 69.9 146.83 -3.2 102.68 2.2 2011 E 13,260,815 0.6 9,584,480 3.9 72.3 151.19 3.0 109.28 6.4 2012 F 13,392,975 1.0 9,799,591 2.2 73.2 158.87 5.1 116.24 6.4 CAAG 2.3% 1.8%. -0.3%. -0.8%, Source: PKF Consultin gUSA As can be seen, 2010 ended on a positive note in terms of occupancy and revenue per available room (RevPAR) with 2011 projected to have ended 2011 reflecting an accelerated recovery. The overall San Diego hotel market achieved an estimated occupancy rate of 69.9 percent for year-end 2010, correlating to a 7.0 percent growth in occupied room nights amidst supply growth of 1.4 percent. Average daily rate (ADR) decreased an estimated 3.2 percent to $146.83. Despite the decrease in ADR, RevPAR saw an increase of approximately 2.2 percent. We estimate the overall San Diego hotel market occupancy to have ended year 2011 at a 72.3 percent, correlating to a 3.9 percent increase in occupied room nights. Average daily rate is estimated to have increased by 3.0 percent to $151.19. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section III - Area Review III-l2 In 2012, rooms supply is projected to increase by 1.0 with the introduction of the Hyatt Place Vista, Hilton Carlsbad, Marriott Courtyard Oceanside, and Seacoast Imperial Beach. With the San Diego County market recovering strong, we are projecting fast absorption of the new supply and estimating a 2.2 percent increase in occupied room nights, resulting in a 73.2 percent occupancy, and a 5.1 percent increase in ADR to $158.87. This will result in a 6.4 percent increase in RevPAR to $116.24. CONCLUSIONS Despite the damage triggered by the recession in 2008 and 2009, San Diego's return to positive growth in 2010 and 2011 reflect significant upside within the recovery. These recent trends as well as long term historical trends in economic and demographic data suggest that the long-term future prospects for the San Diego MSA continue to be favorable. Additionally, natural amenities, such as the weather and attractive coastal characteristics, will continue to attract entrepreneurial employers and a well-educated work force to the area. San Diego has been defined by economic diversification, revitalization of aging communities, scarcity of land, and good weather. San Diego County continues to present a viable place to do business, and is expected to continue to recover along with the rest of Southern California. Proposed Holiday Inn & Staybridge Suites, Carlsbad, Califomia Section III - A rea Review III-13 CITY OF CARLSBAD INTRODUCTION Known as the "Village by the Sea," Carlsbad is situated along North County's scenic coastline and surrounded by mountains, lagoons, and the Pacific Ocean. It is bordered on the north by Oceanside, on the east by Vista and Lake San Marcos, and on the south by Encinitas and encompasses approximately 42 square miles of land. The driving distance to downtown San Diego and Orange County is approximately 35 miles, and the distance to Los Angeles is approximately 90 miles. As of January 2011, Carlsbad's population was over 106,000 people. Carlsbad boasts the best of a scenic coastal community with a thriving business environment. The city was incorporated on July 16, 1952. Historically an agricultural community, Carlsbad has evolved into a growing community that is home to corporations from a variety of sectors, namely technology, biomedical, light manufacturing and tourism. Despite the modernization, this coastal community has retained much of its natural beauty and small town charm, which contributes to a higher quality of life for its residents. Located along the San Diego North County coastline, Carlsbad is renowned for its dynamic business environment. With its high-quality education, recreation, and residential components, Carlsbad has attracted corporate headquarters for national and international organizations such as Jazzercise, Inc., Jenny Craig, the Gemological Institute of America, K2 Inc., Isis Pharmaceuticals, Invitrogen, and Sunrise Medical. Boasting a healthy tourism base, Carlsbad is also home to more than 20 golf companies in the industry, including Acushnet and Taylor Made-Adidas Golf. ECONOMIC AND DEMOGRAPHIC OVERVIEW Transportation Carlsbad is most popularly accessed by car via the San Diego Freeway (Interstate-5) and Vista Way (Highway 78), two major access roads to Carlsbad. Also within Carlsbad is the Palomar Airport which opened in March of 1959. The regional airport offers daily commuter flights on propeller planes to Los Angeles International Airport, and to Phoenix, Arizona. Larger carriers such as United Express and Sky West also offer service out of Palomar Airport. In addition to the Palomar Airport, air service is provided by the San Diego Airport, which is located approximately 35 miles south of Carlsbad. San Diego County also offers the San Diego Coaster, which runs along the same tracks as Amtrak but stops more frequently. The San Diego Coaster is a commuter train linking North County to downtown San Diego. Carlsbad has two stops for the San Diego Coaster within its borders. The McClellan-Palomar Airport, which is located in Carlsbad, is a gateway to and from San Diego's North County, and serves corporate aircraft, and commercial services. McClellan- Palomar is an ideal spot for North County airline passengers who want to avoid a long commute and the congestion of downtown San Diego. The airport is an important part of the community with its $108 million per year contribution to the local economy. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section III-Area Review III-14 Population Carlsbad's population has been steadily increasing over the last 12 years. The population of San Diego County increased 1.0 percent annually since 1999 with Carlsbad increasing 2.7 percent annually over the same period. The following table illustrates the historical population growth in Carlsbad and San Diego County. Historical Population (rounded) 1999-2011 Year Carlsbad San Diego County 1999 77,600 2,789,600 2000 78,300 2,825,000 2001 83,400 2,867,100 2002 88,200 2,901,200 2003 90,800 2,926,800 2004 93,000 2,935,700 2005 95,100 2,941,800 2006 98,600 2,947,200 2007 101,100 2,975,700 2008 103,400 3,019,300 2009 104,700 3,053,800 2010 105,400 3,105,100 2011 106,555 3,140,100 CAAG' 2.7% 1.0% 'CAAG = Compound Average Annual Growth Source: US Census Bureau Economy The total employment in Carlsbad increased from 38,763 persons in 2000 to approxi- mately 46,300 persons in 2008. Carlsbad's business community is supported by a number of corporations that have made this city their home. The following table details the Carlsbad's major employers organized by number of employees, as per the City's most recent update. City of Carlsbad - Major Employers Company Product/Service Employees Callaway Golf Golf Equipment/Apparel 1,600 LifeTech Research & Development 1,300 Carlsbad Unified School District School District 950 Gemological Institute of America Gemological School/Mfr. 800 LEGOLAND Amusement Park 700 Taylor Made Golf Company Golf Equipment 645 La Costa Resort & Spa Resort 604 City of Carlsbad Government 603 Park Hyatt Aviara Resort 600 Acushnet Golf Equipment 535 ViaSat, Inc. Communications 450 Zimmer Dental Dental Implants 400 San Diego Gas & Electric Utilities 325 Beckman Coulter, Inc. Biomedical Testing Equipment 300 Ortho Organizers, Inc. Orthodontic Supplies 250 Modern Postcard Postcard Printing 250 Source: Carlsbad Chamber oi Commerce Proposed Holiday Inn & Staybridge Suites, Carlsbad, Califomia Section III - A rea Review III-15 The City of Carlsbad's unemployment rate is one of the lowest in California, averaging 4.6 percent between 2005 and 2011. As a comparison, the average unemployment rate for San Diego County over the same time period was nearly 7.0 percent. The unemployment rates for the city of Carlsbad and San Diego County by the end of 2011 were 6.6 percent and 10.0 percent, respectively. Unemployment Rates Year Carlsbad San Diego County 2005 2.8% 4.3% 2006 2.6 4.0 2007 3.0 4.5 2008 3.9 6.0 2009 6.5 9.7 2010 7.0 10.5 2011 6.6 10.0 Average 4.6% 7.0% YTD 06/11 6.9%. 10.4% YTD 06/12 6.1% 9.2% Source: Employment Development Department The city generates revenues through the collection of transient occupancy tax (TOT) from guests staying at hotels and motels. Carlsbad imposes a 10.0 percent room tax, slightly lower than the 10.5 percent imposed by the City of San Diego. The following table presents transient occupancy tax revenues collected by the city. City of Carlsbad Transient Occupancy Tax (TOT) Revenues Fiscal Year Carlsbad 2000-2001 $9,235,400 2001-2002 8,445,000 2002-2003 8,302,700 2003-2004 8,933,500 2004-2005 10,031,600 2005-2006 11,510,100 2006-2007 10,504,400 2007-2008 13,383,600 2008-2009 12,747,800 2009-2010 11,486,300 2010-2011 10,860,000 CAAG 1.6% CAAG = Compound Average Annual Growth Source: Dean Runyan Associates, City of Carlsbad Although experiencing declines from 2007 to 2011, conditions have started to improve in Carlsbad and, as per the City's 2011-2012 Preliminary Operating Budget, transient occupancy tax (TOT) is projected to increase by 5.3 percent in fiscal year 2011-2012. Commercial Office and Industrial Space As San Diego County is built out and traffic remains congested, Carlsbad has recently become a positive alternative for developers, business owners and residents. There are over Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section III—Area Review 111-16 5.5 million square feet of commercial office space in Carlsbad, with an additional 539,000 square feet proposed. Carlsbad is already a primary choice given its proximity to both the San Diego and Orange County business markets. However, Carlsbad, much like the rest of San Diego County, has been negatively impacted by current economic woes. Although improving prom previous periods, Carlsbad's direct vacancy rate for Q2 2012 was still higher than the North County total at 23.4 and 19.1 percent, respectively. However, Carlsbad was one of seven submarkets in San Diego County experiencing significantly strong demand in 2011, reporting net absorption of positive 275,482 square feet. Asking rental rates as of the second quarter of 2012 are $2.03, a 3.0 percent decrease from the fourth quarter of 2011. Any new construction will likely favor build-to-suit activity over multi-tenant speculative projects. In terms of industrial space, which includes research and development facilities, Carlsbad has the second largest inventory in San Diego County, with approximately 15.0 million square feet within 484 buildings. Total vacancy as of Q2 2012 is 13.9 percent, down from 14.4 percent the previous quarter. Net absorption for the quarter was positive 63,687 square feet. Vacancy in Carlsbad is higher than the county average of 10.5 percent. However, improvements are apparent with 108,030 square feet of net absorption year-to- date. Asking lease rates are the highest in the North County submarket and in the top five of the county at $0.98 per square foot triple net. Commercial Development With the recent economic downturn, which forced many businesses to downsize resulting in increased commercial space vacancies throughout the nation, many office, retail, and industrial projects that were planned to be developed were put on hold. The Carlsbad Oaks North master-planned corporate business park, which is slated to bring a projected two million square feet of office, R&D and industrial development to the City of Carlsbad, is one of these projects. The 400 plus-acre, master-planned development is located on Faraday Avenue, between El Camino Real and Melrose Drive, in Carlsbad. The original master-plan includes elevated building pads that offer ocean views and superior access to Interstate 5 via Palomar Airport Road and Faraday Avenue. The industrial development features 220 acres of natural open space. In addition, TechBilt Companies, the developer, plans to develop R&D/flex and industrial buildings on the site, which will be offered for lease. These buildings will range in size from 20,000 square feet to 160,000 square feet. Out of the 414 acres, 220 will be preserved as open space. As of the date of this report, grading has been completed for the 27 lots, which range in size from 2.3 to 20.8 acres. Construction of the Isis Pharmaceuticals research and development facility in Carlsbad Oaks North is now finished and they have moved into the space. However, there has not been any additional development action in the last year. Thus, there is no timeline for completion of the project at this time. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section III - Area Review III-17 Following is a map of the most recent site plan provided by Colliers International and The TechBilt Companies. Tourist Attractions Carlsbad plays host to many cultural and recreational events throughout the year. Some of the attractions that the city offers include the Carlsbad State Beaches, LEGOLAND theme park, PGA golf tournaments, the Museum of Making Music, Company Stores, annual Flower Fields, and the bi-annual Carlsbad Village Faire. In addition, the city offers over seven miles of pristine beaches and over 150 acres of parks for a variety of outdoor and nautical activities. The following section describes major tourist attractions located within the city. Carlsbad State Beach The Carlsbad State Beach, also known as the Tamarack State Beach, begins at Tamarack Avenue and extends for four miles. The beach offers BBQ facilities as well as jogging trails. To the south of the Carlsbad State Beach is the South Carlsbad State Beach which is 1.5 miles south of Palomar Airport Road. This beach is more isolated and does not offer the facilities of the Carlsbad/Tamarack State Beach. LEGOLAND The largest tourist attraction in Carlsbad is LEGOLAND, which opened in spring of 1999. LEGOLAND is an amusement park themed after the popular toy building blocks. The target Proposed Holiday Inn & Staybridge Suites. Carlsbad, California Section III-Area Review III-l 8 age for this park is children between the ages of 2 and 12 years old. The park rests on 128- acres and includes the recently developed Sea Life Aquarium and Land of Adventure. The Park averages two million visitors a year. In August 2005, the Park was sold to Thomson S.A. Blackstone Capital Partners and remains privately owned and operated. The Flower Fields at Carlsbad The Flower Fields are 50-acres of Giant Tecolote Ranunculus flowers that are located on a hillside east of Interstate 5. The flowers bloom seasonally from early March to early May and attract over 200,000 visitors annually. Carlsbad Premium Outlets With over 85 stores ranging from restaurants to Polo Ralph Lauren and Crate and Barrel, the Carlsbad Premium Outlets are located off of Interstate 5. The stores are open daily from 10:00 am to 9:00 pm and offer outlet shopping. The center attracts approximately 8 million shoppers per year and has the third largest volume of sales among outlet malls in the U.S. The Crossings Carlsbad Golf Course To the east of LEGOLAND, near the corner of Palomar Airport Road and College Boulevard, the City of Carlsbad has developed a high-end, public daily fee golf course, the Crossings at Carlsbad. This 18-hole championship public course designed by Greg Nash is nestled among more than 1,000 acres of Carlsbad's coastal terrain and natural habitat. The Crossings also offers a 28,000-square-foot clubhouse complete with a golf shop, banquet facilities, a spacious fireplace-lit dining room, full-service kitchen and an outdoor deck with ocean views. Art Splash Art Splash is an annual event organized by a local Carlsbad non-profit organization to raise funds for arts and music in North County schools. Art Splash is based upon 16* century Italian street paintings, also known as Madonnari, in which artists create colorful sidewalk images using chalk as their primary medium. Established in 2002, Art Splash occurs over two days in the fall and attracts more than 30,000 people to the area. The event is held on Armada Drive, off Palomar Airport Road in Carlsbad. CONCLUSION With historically strong economic stability, the city of Carlsbad has been an attractive area for businesses, as evident by new development within the past five years. In conjunction with commercial and recreational projects like the Carlsbad Oaks North Business Park, The Crossings Golf Course, and new mixed-use commercial space on South Melrose Drive and the surrounding area, the Carlsbad area offers a significant amount of leisure-related activities, such as convenient access to the ocean, theme parks and shopping. Furthermore, the area's proximity to popular destinations, such as San Diego and Los Angeles, make them a desirable place to vacation. Proposed Holiday Inn & Staybridge Suites, Carlsbad, Califomia Section III - Area Review III-l 9 Due to the slow economy, forecasted revenues from development related activities have been reduced. The long-term forecast should look more attractive as the economy improves. The creation of new jobs will likely occur with companies moving into the newly available commercial office and industrial space. Furthermore, with the existing base of tourist attractions, travel to the area is also expected to remain strong. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV MARKET ANALYSIS Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Marlcet Analysis IV-1 HOTEL MARKET ANALYSIS OVERVIEW The future performance of a hotel is directly related to the supply of and demand for hotel rooms within the subject's market area. Accordingly, an analysis of the local area's hotel market is a key component of the analysis of the subject. The following is a discussion of the competitive hotel market for the proposed Holiday Inn and Staybridge Suites hotels in Carlsbad. MARKET ANALYSIS Competitive Supply In order to identify the competitive market for the proposed subjects, we analyzed the overall Carlsbad lodging market. Given the defining characteristics ofthe proposed subject hotels and their local market, we selected eleven properties containing 1,332 rooms that represent the local market in which the subject hotels will compete. Nine of these properties are located in Carlsbad and two of them are located in the neighboring City of Vista. The selection of the competitive supply was based on each property's location, number of guestrooms, size of meeting space, support facilities and amenities, room rate structure, and market orientation relative to the subject property. It should be noted that there are other higher and lower quality hotels in Carlsbad that have been excluded due to their positioning outside of the subject's competitive set. The following chart presents the competitive set for the proposed hotels in Carlsbad. A map indicating their locations, a description of each of the competitive hotels and a discussion ofthe potential additions to the competitive supply are presented on the subsequent pages. Competitive Supply Map Code Property Number of Rooms Subject 1 Proposed Holiday Inn 133 Subject 2 Proposed Staybridge Suites 106 1 Homewood Suites Carlsbad 145 2 Hampton Inn Carlsbad 94 3 Courtyard Carlsbad 145 4 Residence Inn Carlsbad 121 5 Hyatt Place Vista/Carlsbad 150 6 Grand Pacific Palisades 90 7 Hilton Garden Inn Carlsbad 161 8 Carlsbad by the Sea 149 9 Hyatt House Carlsbad 97 10 West Inn & Suites 86 11 TownePlace Suites Vista/Carlsbad 94 Total Competitive Supply (not including subjects) 1,332 Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Market Analysis IV-2 Ocaan PKf CONSULTING USA Competitive Set Map Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Market Analysis IV-3 Competitive Property Number One Homewood Suites Carlsbad Location Address: 2223 Palomar Airport Road Carlsbad, California 92011 Distance from Subject: 1.1 miles west Description Date opened: Guestrooms: Stories: 2008 145 guestrooms (all suites) 3 Amenities Picture Heated outdoor swimming pool and whirlpool Fitness room Complimentary hot breakfast buffet Complimentary evening reception with light meal and beverages Business Center Gift/snack shop 1,800 SF of meeting space Room Amenities: o Spacious two-room suites Full kitchen High speed Internet access Clock radio with MP3 connection 32" LCD HD television with premium channels and pay-per-view Two telephones with Dataport and voicemail Iron and ironing board Condition & Renovations The property opened in 2008 and is in very good condition. The carpets are scheduled to be replaced throughout the property within the next year. Historical Performance In 2011, this property performed above the market average in terms of occupancy and below the market average in terms of average daily rate. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Market Analysis IV-4 Competitive Property Number Two Location Description Address: 2229 Palomar Airport Road Date opened: 2007 Carlsbad, California 92011 Guestrooms: 94 guestrooms Stories: 3 Distance from Subject: 1.1 miles west Amenities Picture Outdoor heated pool and whirlpool Fitness room Business Center Complimentary hot breakfast buffet and "On-the-go" breakfast bags Monday- Friday High speed Internet access throughout property Coffee/Tea in Lobby 24 hours 24-hour "Suite shop" for snacks and beverages Coin operated laundry Approximately 600 SF of Meeting facilities Room Amenities: o Coffee and tea maker o Work desk with ergonomic chair o Cloud 9 Hampton bed experience o Portable lap desk o 32" flat panel TV with premium channels and pay-per-view movies o Alarm clock radio o Iron and ironing board Condition & Renovations The property opened in 2007 and is in good condition. Historical Performance In 2011, this property performed above the market average in terms of occupancy and below the market average in terms of average daily rate. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Market Analysis IV-5 Competitive Property Number Three Marriott Court [yard Carlsbad Location Description Address: 5835 Owens Avenue Date opened: 2000 Carlsbad, California 92008 Guestrooms: 145 guestrooms including 6 suites Distance from Subject: 1.9 miles southwest Stories: 3 Amenities Picture Courtyard Cafe serving breakfast Coastal Lounge serving dinner Heated outdoor swimming pool and whirlpool 1,290 SF of Meeting facilities Fitness Center Wireless Internet in public areas Business services Coffee in Lobby Gift/Newsstand Coin operated laundry Room Amenities: o Wired and wireless high speed internet access o Work desk o TV with premium channels and movies on-demand o Wet bar o Coffee and tea maker o Alarm clock o Pull-out sofa bed on king rooms Condition & Renovations The property had a lobby renovation in 2007. A refreshment of the lobby and restaurant were completed in 2011. Historical Performance In 2011, this property performed below the market average in terms of both occupancy and average daily rate. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Market Analysis IV-6 Competitive Property Number Four Residence Inn Carlsbad Location Description Address: 2000 Faraday Avenue Date opened: 1999 Carlsbad, California 92008 Guestrooms: 121 guestrooms (all suites) Distance from Subject: 1.9 miles northwest Stories: 3 Amenities Picture Heated outdoor swimming pool Fitness Center Heated outdoor swimming pool and whirlpool Complimentary breakfast buffet Coffee in Lobby Evening reception Wireless Internet in public areas 1,200 SF of Meeting facilities Room Amenities: o Pull-out sofa bed o Full kitchen o Work desk o Wired and wireless high-speed Internet access o Coffee and tea maker o Alarm clock o Two-line phone with voicemail o TV with premium channels o Hairdryer o Iron and ironing board o Fireplace Condition & Renovations In 2005 the guestrooms were renovated including new furniture, carpet, and granite countertops on the kitchen area. A renovation of the guestroom bathrooms and change of appliances is scheduled for the third quarter of 2012. Historical Performance In 2011, the Residence Inn Carlsbad performed above the market average in terms of occupancy and below the market average in terms of average daily rate. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Market Analysis IV-7 Competitive Property Number Five Hyatt Place Vista/Carlsbad Location Description Address: 2645 South Melrose Drive Date opened: 2012 Vista, CA 92081 Guestrooms: 150 Stories: 6 Distance from Subject: Approximately 1.5 miles northeast Facilities & Amenities Picture Approximately 1,200 SF meeting space Outdoor pool and whirlpool Fitness center Complimentary hot breakfast Bakery Cafe Grab N' Go Guest kitchen serving freshly prepares appetizers and entrees Complimentary internet access throughout property Business center Room Amenities: o Hyatt Grand Bed o Complimentary High-speed internet access o 42" flat screen HDTV o Oversized corner sofa o Large desk area o Mini-refrigerator o Iron and ironing board o Two telephones with voicemail o Coffee maker o Hairdryer o Alarm clock with MP3 player Condition & Renovations The property opened in July 2012 and is in excellent condition. Historical Performance The Hyatt Place Vista/Carlsbad opened in july 2012. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Market Analysis IV-8 Competitive Property Number Six Grand Paci1 ic Palisades Location Description Address: 508 Armada Drive Date opened: 1999 Carlsbad, California 92008 Guestrooms: 90 guestrooms including 36 suites Distance from Subject: 4.7 miles west Stories: 2 Amenities • 10,000 SF of Meeting/banquet facilities • Adults-only Olympic sized outdoor pool • Three hydro-spas Picture Karl Strauss Brewery Restaurant open for three meals Fitness Center Children's interactive water park Activity center and game room Business Center Free shuttle to Twenty/20 Grill and Wine Bar at Sheraton Room Amenities: o Wireless Internet access o Microwave and refrigerator in most rooms Work desk 32" flat screen LCD television Phone with voicemail Hair dryer, Iron and ironing board Condition & Renovations The property is in good condition. Within the last year carpets have been replaced in all rooms and a portion of the rooms have been upgraded to Deluxe. Microwaves and mini-refrigerators were also added to all rooms. Historical Performance In 2011, the Grand Pacific Palisades Hotel performed above the market in terms of occupancy, and below in terms of average daily rate. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Market Analysis IV-9 Competitive Property Number Seven Hilton Garden Inn Location Description Address: 6450 Carlsbad Boulevard Date opened: 2000 Carlsbad, California 92011 Guestrooms: 161 guestrooms, including 1 suite Distance from Subject: 4.7 miles west Stories: 3 Facilities & Amenities Picture 6,700 SF of indoor/outdoor Meeting/banquet facilities, including a 3,500 SF ballroom Outdoor pool, whirlpool spa Fitness room Full-service restaurant, serving three meals Lounge Evening room service 24-Hour Business Center On-site convenience store Bicycle rental Babysitting services Complimentary shuttle within five-mile radius Airport Shuttle Room Amenities: o Coffee Maker o Refrigerator and microwave o Complimentary Hi-Speed wired and wireless Internet o Complimentary Remote printing to business center o 32" LCD Flat Panel TV with In-room Movies o Iron and ironing board . ^1 1 ^ Condition & Renovations The property is in good condition. The property has upgraded design features as compared with the standard Hilton Garden Inn. Construction of an additional 3,500 square foot oceanfront ball- room was completed in early 2006. Between 2008 and 2011, the property had a soft goods room renovation, carpet replacement through- out the building, an update to the lobby furniture, and a renovated gift shop. Historical Performance In 2011, the Hilton Garden Inn performed above the market average in terms of both occupancy and average daily rate. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Market Analysis IV-10 Competitive Property Number Eight Carlsbad Hotel by the Sea (Formerly Holiday Inn Carlsbad) Location Description Address: 850 Palomar Airport Road Carlsbad, California Distance from the Subject: 4.6 miles west Date Opened: 1982 Guestrooms: 148 Stories: 2 Amenities Picture 6,810 SF of Meeting Space Outdoor pool, whirlpool spa Fitness Center TGIFridays, An American Grill restaurant sen/ing three meals/day Room service Lounge On site laundry Business Center Rental car desk Room Amenities: o Microwave o Refrigerator o Voice Mail o High Speed Internet o 27" TV with in-room movies Condition & Renovations As of January 1, 2011, the former Holiday Inn Carlsbad is now known as the Carlsbad Hotel by the Sea. The property is in good condition. Historical Performance In 2011, the Carlsbad Inn by the Sea (formerly Holiday Inn Carlsbad) performed below the competitive market average in terms of both occupancy and average daily rate. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Market Analysis IV-11 Competitive Property Number Nine Hyatt House Carlsbad (Formerly Hyatt Summerfield Suites) Location Description Address: 5010 Avenida Encinas Date opened: 2000 Carlsbad, CA 92008 Guestrooms: 97 (All suites) Stories: 3 Distance from Subject: Approximately 5.4 miles west Facilities & Amenities Picture 525 SF of meeting facilities Complimentary hot breakfast Evening social with food and beverages 24-hour guest market Grocery shopping service Shuttle to LEGOLAND Fitness center Outdoor pool and whirlpool Business center Complimentary wireless internet access in common areas Outdoor BBQ pit and patio Room Amenities o 32" Flat screen television Fully equipped kitchen Pull-out sofa bed Flexible and spacious work area Complimentary wired and wireless internet Complimentary remote printing Iron and ironing board Coffee maker Hair dryer Alarm clock Two-line cordless telephone with voicemail Condition & Renovations The property converted from a Hyatt Summerfield Suites to a Hyatt House in 2011. The rooms and some of the common areas were remodeled at the time of conversion. The property is in good condition. Historical Performance In 2011, the Hyatt House performed below the competitive market average in terms of both occupancy and average daily rate. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Market Analysis IV-12 Competitive Property Number Ten West Inn Carlsbad Location Description Address: 4970 Avenida Encinas Date opened: 2005 Carlsbad, California 92008 Guestrooms: 86 guestrooms including 36 suites Distance from Subject: 5.3 miles northwest Stories: 3 Amenities Picture Heated pool and Jacuzzi Fitness Center Complimentary breakfast buffet Shuttle service within Carlsbad Two restaurants Underground parking Approx. 300 SF of meeting space Room Amenities: o Refrigerator and microwave o Wetbar o High speed wired and wireless Internet access o Coffee and tea maker o Work desk o High definition TV o DVD/CD player Condition & Renovations Historical Performance The property opened in 2005 and is in very good condition. The carpets were replaced in 2010. In 2011, the West Inn had an occupancy slightly below that of the competitive market average and an average daily rate above that of the market average. Proposed Holiday Inn & Staybridge Suites. Carlsbad, California Section IV- Hotel Market Analysis IV-13 Competitive Property Number Eleven TownePlace Suites Vista Location Description Address: 2201 South Melrose Drive Vista, California 92081 Distance from the Subject: 2.2 miles east Date opened Guestrooms Stories Configuration June 2010 94 3 Interior corridor Amenities Picture • 1,874 SF of meeting facilities • Wireless internet Business center Fitness center Outdoor pool and whirlpool BBQ and picnic area Continental breakfast On site laundry Complimentary parking Room Amenities: o Two bedroom suites o Fully equipped kitchens o Stainless steel appliances o Work desk and ergonomic chair o 32-inch LCD televisions o Premium cable/satellite Condition & Renovations The property opened in June 2010 and is in very good condition. Historical Performance In 2011, the TownePlace Suites performed below the market average in terms of both occupancy and average daily rate. The property open in mid- 2010 and is in the process of reaching stabilization. Proposed Holiday Inn & Staybridge Suites. Carlsbad, California Section IV- Hotel Marlcet Analysis IV-14 Additions to Supply In conducting our investigations regarding the potential for additions to supply within the subjects' competitive market, we identified one potential addition to supply that is considered competitive with the subject hotels, a 99-room Fairfield Inn Hotel. The hotel is to be developed on a 2.49 acre site located on the south side of Palomar Oaks Way, south of Palomar Airport Road and east of West Oaks Way. The project is expected to break ground in the fourth quarter of 2012 and is anticipated to open towards the end of 2013. We have included this hotel as an addition to supply in our projections. The 250-room LEGOLAND Hotel is scheduled to open in the summer of 2013. The hotel will be located on the premises ofthe LEGOLAND Amusement Park and will be positioned to attract mostly family leisure business visiting the park. It is our opinion that this property will not greatly compete with the subject hotels due to the proposed positioning of the property in terms of rate and target demand base, which will be mostly leisure. Further, with the opening of the hotel, the Park is expected to open more days throughout the year, bringing additional leisure demand to the area. Additionally a 150-room Springhill Suites is planned to be developed in the neighboring City of Oceanside. A construction loan is in place for the development and permits are now in process. The hotel is to be developed on a 5.4 acre site that is located less than two blocks from the beach. The remainder portion of the site is intended for condo or apartment units and retail space at a later date. Construction of the hotel is anticipated to begin in the first quarter of 2013, with completion anticipated by April 2014. Although we do note this as an addition to supply in the Carlsbad/Oceanside market, we have not included it in our projections of the competitive market due to its distance from the subject hotels. HOTEL ROOMS DEMAND Demand for hotel rooms is categorized in three ways: • Demonstrated Demand: the demand already captured at competitive hotels; • Induced Demand: the demand that does not presently seek accommodations in the competitive market, but could be persuaded to do so through marketing efforts, room rates, facilities, services and amenities. • Unsatisfied Demand: the demand that seeks accommodations in the market but is not satisfied due to one of a number of factors: sell-outs during peak season; lack of a particular type of accommodation; lack of meeting space; or high room rates. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV-Hotel Market Analysis IV-15 Historical Performance of the Competitive Supply The aggregate average annual available and occupied rooms, resulting occupancy levels, average daily rate, and revenue per available room (RevPAR) for this sample set between 2007 and 2011, and year-to-date through June 2012 are presented in the following table. Historical Market Performance of the Competitive Supply Annual Percent Occupied Percent Market Average Percent Percent Year Supply Change Rooms Change Occupancy Daily Rate Change REVPAR Change 2007 312,805 N/A 254,317 N/A 81.3% $150.21 N/A $122.13 N/A 2008 397,120 27.0% 299,112 1 7.6% 75.3 145.78 -3.0% 109.80 -10.17o 2009 397,120 0.0 296,885 -0.7 74.8 133.62 -8.3 99.89 -9.0 2010 417,195 5.1 324,106 9.2 77.7 131.33 -1.7 102.03 2.1 2011 431,430 3.4 327,989 1.2 76.0 132.89 1.2 101.03 -1.0 CAAG 8.4% 6.6% -3.0% -4.6% 6/11 ytd 431,430 N/A 326,285 N/A 75.6% $129.13 N/A $97.66 N/A 6/12 ytd 457,710 6.1% 325,718 -0.2% 71.2% 130.20 0.8% 92.65 -5.1% Source: PKF Consulting USA As reflected in the table above, annual rooms supply increased by 27.0 percent in 2008 with the opening of the Homewood Suites and the annualized addition of the Hampton Inn, which opened towards the end of 2007. Rooms supply further increase by 5.1 percent in 2010 and 3.4 percent in 2011 with the annualized addition of the TownePlace Suites Vista. In 2012, rooms supply increased by 6.1 percent with the opening ofthe Hyatt Place Vista/Carlsbad. During the five-year period, the market has demonstrated an increase in occupied rooms with a compound average annual increase of 6.6 percent. The increase can be attributed to the unsatisfied demand that existed in the market and the completion of additional commercial office and industrial space within Carlsbad. However, the growth in supply exceeded the increase in demand for 2008, as market occupancy dropped to 75.3 percent. In 2009, the market suffered a slight decline in occupied room nights of 0.7 percent, resulting in an occupancy of 74.8 percent, which can be mostly attributed to the economic downturn. As the economy began to improve and the new supply was absorbed into the market, demand for rooms as demonstrated by occupied room nights, increased by 9.2 percent from 2009 to 2010, bringing the occupancy rate up to 77.7 percent. In 2011, the market suffered a slight decline in occupied room nights of 1.2 percent, resulting in an occupancy rate of 76.0 percent. For the historical period, the market's average daily rate (ADR) decreased by a compound annual average of 3.0 percent. The recent economic recession played a role in hotels reducing rates to dnve occupancy and this is evidenced by the market performance in 2009, when rates dropped significantly by 8.3 percent. Revenue per available room (RevPAR) over the five year period saw a compound average annual decrease of 4.6 percent. Years 2008 and 2009 showed sharp declines in RevPAR of 10.1 percent and 9.0 percent, respectively, due to decreases in both occupancy and ADR during the two years. The market began to recover in 2010 with an increase in RevPAR of 2.1 percent, which was mainly driven by the increase in occupancy, as ADR continued to decline in 2010. In Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV-Hotel Market Analysis IV-16 2011, although ADR showed growth of 1.2 percent, RevPAR suffered a 1.0 percent decrease due to a decrease in market occupancy. MIX OF DEMAND The demand captured by the competitive supply is derived primarily from the corporate/ commercial market segment. The following table summarizes the mix of demand for the competitive market in 2011. Competitive Market 2011 Mix of Demand Market Segment Room Nights Ratio Commercial 188,200 57% Leisure 95,600 29 Group 44,100 13 Total 328,000 100% Source: PKF Consulting USA Corporate demand in the market is derived from office and retail space, research and development, biotech, and service firms located in Carlsbad and North San Diego County. In 2011, the corporate segment accounted for 57.0 percent, or approximately 188,200 room nights of captured demand in the market. The introduction of the Hyatt Place Vista into the market is anticipated to induce 4,000 otherwise unsatisfied corporate room nights in 2012. An additional 15,200 room nights are estimated to be induced into the market between 2013 and 2014 with the opening of the subject hotels and the Fairfield Inn. For the projection period, we have estimated growth in the corporate market segment of 4.0 percent in of 2012 and 2013. Beginning in 2014, and for the remainder of our projections, we estimate that this market segment will grow 3.0 percent annually, the general level of economic growth. Leisure demand consists primarily of travelers visiting various tourist attractions within Carlsbad and San Diego including LEGOLAND, the Flower Fields in the Spring, Carlsbad Company Stores, the beach, the San Diego Zoo, and Wild Animal Park. This segment comprises a significant amount of domestic weekend and summer travel as well as some international travel. In 2011, the leisure market segment accounted for 29.0 percent of total demand, or approximately 95,600 room nights of captured demand. Southern California residents make up a significant portion of this demand. For the projection period, we have projected growth in the leisure market segment to be 4.0 percent in 2012 and 2013, and 3.0 percent in 2014 and for the remainder of the projection period. Additionally we have induced a total of 12,000 leisure room nights (primarily summertime) into the market between 2012 and 2014 as a result of the opening ofthe Hyatt Place Vista/Carlsbad, the Fairfield Inn, and the subject hotels. Group demand in the competitive market is typically characterized by corporate groups that hold annual meetings, usually for the purposes of educating their members, promoting their products, or discussing legislation that may affect the organization, as well as leisure Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Market Analysis lV-17 groups coming for social engagements. The group market segment generated approxi- mately 44,100 room nights in 2011, representing roughly 13.0 percent of captured demand. For the projection period, we have forecasted an increase in the group market segment of 3.0 percent annually. With the opening of the Hyatt Place Vista/Carlsbad, Fairfield Inn, and the subject hotels, it is projected that approximately 1,900 group room nights will be induced into the market between 2012 and 2014. Summary of Demand Growth and Market Occupancies The competitive market reached a peak occupancy of 81.3 percent in 2007. The market has since fluctuated from a low of 74.8 percent to a high of 77.7 due to a combination of the deteriorating economy and new additions to supply. The market ended 2011 at an occupancy rate of 76.0 percent. We estimate the market will remain constant in 2012 at a 76 percent occupancy. With the introduction of the subject hotels, we project the market occupancy to decrease to 71 percent in 2013. In 2014, we estimate the market occupancy will further decrease to 65 percent with the annualized addition of the subject hotels and the opening of the Fairfield Inn, which is expected to occur towards the end of 2013. As the new supply is absorbed into the market, we estimate that market occupancy will increase to 67 percent in 2015, 69 percent in 2016, 71 percent in 2017, 74 percent in 2018, and achieve a stabilized level of 76 percent occupancy in 2019, when the additions to supply will be fully absorbed into the market. While the market may fluctuate above and below this number, we are of the opinion that an occupancy of 76 percent is appropriate for this particular market considering the supply and demand patterns, seasonality, and mix of business within the competitive market. This stabilized occupancy is in line with the average historical occupancy of the competitive market and the current market dynamics. The projected future growth in supply and demand is presented in the following table. We have also provided the actual performance of the competitive market in 2011 as a basis of comparison. Proposed Holiday Inn & Staybridge Suites, Carlsbad, Califomia Section IV-Hotel Market Analysis lV-18 Proposed Holiday Inn Carlsbad Competitive Market Estimated Future Growth in Lodging Supply and Demand 2011 -2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 ROOMS SUPPLY 1,143 Addition$/(Deletions) to Supply Proposed Holiday Inn Carlsbad Hyatt Place Vista/Carlsbad Proposed Staybridge Suites Fairfield Inn Palomar Oaks Way 72 44 78 35 9 89 71 90 Curriulative Rooms Supply 1,182 1,254 1,420 1,670 1,670 1,670 1,670 1,670 1,670 1,670 Total Annual Rooms Supply Growth Over the Prior Year 431,430 3.4% 457,710 6.1% 518,300 13.2% 609,550 17.6% 609,550 0.0% 609,550 0.0% 609,550 0.0% 609,550 0.0% 609,550 0.0% 609,550 0.0% DEMONSTRATED DEMAND IN BASE YR Commercial Leisure Group 188,222 95,630 44,136 57% 29%. 13% TOTAL DEMONSTRATED DEMAND 327,989 100% INDUCED/(UNSATISFIED) DEMAND Commercial Leisure Group 4,000 1,000 500 4,200 2,500 600 11,000 8,500 800 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 TOTAL INDUCEDAUNSATISFIED) DEMAND 5,500 7,300 20,300 0 0 0 0 0 0 GROWTH RATES Commercial Leisure Group 4.0% 4.0% 3.0% 4.0% 4.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% PROIECTED DEMAND Commercial Demonstrated lnduced/(Unsatisfied) 188,222 0 195,751 4,000 207,741 4,200 218,300 11,000 236,179 0 243,264 0 250,562 0 258,079 0 265,821 0 273,796 (7,006) Total Growth Over Prior Year 188,200 N/A 199,800 6.2% 211,900 6.1% 229,300 8.2% 236,200 3.0% 243,300 3.0% 250,600 3.0% 258,100 3.0% 265,800 3.0% 266,800 0.4% Leisure Demonstrated InducedAUnsatisfied) 95,630 0 99,455 1,000 104,474 2,500 110,183 8,500 122,243 0 125,911 0 129,688 0 133,579 0 137,586 0 141,714 (3,626) Total Growth Over Prior Year 95,600 N/A 100,500 5.1% 107,000 6.5% 118,700 10.9% 122,200 2.9% 125,900 3.0% 129,700 3.0% 133,600 3.0% 137,600 3.0% 138,100 0.4% Group Demonstrated InducedAUnsatisfied) 44,136 0 45,460 500 47,339 600 49,377 800 51,683 0 53,233 0 54,830 0 56,475 0 58,169 0 59,914 (1,533) Total Growth Over Prior Year 44,100 N/A 46,000 4.3% 47,900 4.1% 50,200 4.8% 51,700 3.0% 53,200 2.9% 54,800 3.0% 56,500 3.1% 58,200 3.0% 58,400 0.3% Total Market Demand Growth Over Prior Year 327,900 N/A 346,300 5.6% 366,800 5.9% 398,200 8.6% 410,100 3.0% 422,400 3.0% 435,100 3.0% 448,200 3.0% 461,600 3.0% 463,300 0.4% Market Occupancy 76% 76% 71% 65% 67% 69% 71% 74% 76% 75% Source: PKF Consulting USA Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Market Analysis lV-19 PROJECTED MARKET PERFORMANCE OF THE SUBJECT HOTELS Penetration Analysis Our estimates of occupancy are based on our survey of competitive hotels, an analysis of the segmentation of demand in the market area, and our assessment of the subject properties' market position. The "penetration rate" of a hotel is the percentage of room nights captured relative to the property's "fair share." The hotel's "fair share" is determined by dividing the subject property's number of guest rooms by the total number of guest rooms in the competitive market (including the subject property). Factors indicating a hotel would possess competitive advantages suggest a market penetration in excess of 100 percent of fair market share, while competitive weaknesses are reflected in penetration rates of less than 100 percent. However, other factors besides competitive weaknesses could result in penetrations of less than 100 percent. The actual penetration of each market segment by the subject property may deviate from fair market share for the following reasons: • The competitive advantages or disadvantages of the subject hotel versus the competition taking into consideration such factors as location, room rate structure, room size, quality and extent of amenities offered, chain affiliation, quality of management, marketing efforts and image; • The characteristics, composition and needs of each market segment; • The restraint on demand captured due to capacity constraints during certain periods of the week or season, or due to the accommodation of certain market segments; and, • Management decisions concerning target markets. Estimated occupancy levels for the subject hotels have been projected on the basis of a penetration analysis. Our estimate of the subject hotels' performance utilizes a September 1, 2013 opening date. Penetration of Subject Hotels Our estimates of the subject hotels' penetration by each segment of demand are presented in the paragraphs below. 133-Room Holiday Inn Corporate Demand Corporate travelers in this market select hotel accommodations based on room and overall hotel amenities, location relative to their destination, and area amenities. The subject hotel is ideally situated proximate to Carlsbad business parks, which will allow it to effectively compete for high-rated corporate demand. As such, we anticipate the subject will over- penetrate this market. We project the subject to obtain a 110 percent penetration of the corporate segment upon opening in 2013. We project the subject's penetration of this Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Market Analysis IV-20 segment to increase to 120 percent in 2014, 125 percent in 2015, and 128 percent in 2016. We project the subject's penetration of this segment to decrease to 125 percent in 2017, 120 percent in 2018, and reach its stabilized level of penetration of 115 percent in 2019 and for the remainder of the projection period. Although we project the property's occupancy to stabilize in 2016, its penetration level will continue to change between 2017 and 2019 as the competitive market will still be moving towards stabilization. Leisure Demand Leisure travelers are concerned with the hotel's proximity to area leisure attractions. Room size is also an important consideration for the leisure traveler as it balances with the hotel's amenities and orientation. While the subject hotel is expected to benefit from compression created during periods of high demand, we do not believe it will over-penetrate the leisure segment due to its distance from the ocean and competition from local hotels, such as the Hilton Garden Inn who generally target the leisure guest. Most leisure travelers, when given the option, would prefer to be beachfront. However, the Holiday Inn branding coupled with its freeway accessibility and location near many of San Diego's attractions will provide the subject with approximately 10,800 leisure room nights on a stabilized annual basis. We project the subject to obtain a 70 percent penetration of the leisure segment upon opening in 2013. We project the subject's penetration of this segment to increase to 80 percent in 2014 and further increase to 90 percent in 2015 and remain at this level in 2016. We project the subject's penetration of this segment to decrease to 85 percent in 2017 and stabilize at this level for the remainder of the projection period. Although the subject will underpenetrate this market segment, it will obtain enough demand to remain competitive. Group Demand Group demand consists of travelers who book blocks of rooms exceeding ten rooms per night. The purpose of the group traveler's visit is to meet with other members of a corporate, leisure, or association group to further the group's goals. These travelers often require meeting space at the hotels in which they are staying. The subject property will include approximately 3,300 square feet of indoor meeting space which will allow it to cater to small and medium-sized groups. We have estimated that the subject will penetrate the group market at 60 percent in 2013, 65 percent in 2014, and 70 percent in 2015, and stabilize at this level for the remainder of our projection period. Although below its fair share, this still allows the subject to capture a reasonable portion of the market's group room nights given its proposed meeting and event facilities. Overall Mix, Penetration, and Occupancy The estimated stabilized market mix and penetration for the proposed 133-room Holiday Inn hotel are presented in the following table. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV— Hotel Market Analysis lV-21 Proposed Holiday Inn Carlsbad Stabilized Mix of Demand and Market Penetration Market Segment Room Nights Ratio Penetration Corporate 24,400 66% 115% Leisure 9,300 29 85 Group 3,300 9 70 Total 37,000 100% 100% Source: PKF Consulting Combining our estimates of the three penetration rates for the proposed hotel, we estimate that the subject property will achieve below its fair share of market demand upon its opening in 2013, with the penetration rate estimated at 92 percent. This equates to an occupancy level of 65 percent during its first year of operation. By the second year of operation, the subject's penetration rate is expected to increase to 101 percent of its fair share, equal to an occupancy of 66 percent in 2014. The following year the subject is projected to achieve 108 percent penetration as occupancy is estimated to increase to 73 percent. In 2016, the subject's penetration is expected to slightly increase to 109 percent and reach its stabilized level of occupancy of 76 percent. The subject is expected to remain at this level of occupancy of 76 percent for the remainder of our projection period. However, its penetration rate is projected to decrease to a stabilized level of 100 percent by 2019. This is due to the fact that the market is still moving towards stabilization after 2016. The following table sets forth projected penetration for the subject from 2013 through 2017. Proposed Holiday Inn & Staybridge Suites, Carlsbad, Califomia Section IV- Hotel Market Analysis lV-22 Proposed Holiday Inn Carlsbad Market Penetration and Projected Occupancy 2013 2014 2015 2016 2017 2018 2019 TOTAL ROOMS AVAILABLE Proposed Holiday Inn Carlsbad Competitive Market Fair Share of Supply ESTIMATED TOTAL MARKET DEMAND Commercial Leisure Croup TOTAL FAIRSHARE OF DEMAND Commercial Leisure Group TOTAL SUBJECT PENETRATION Commercial Leisure Group ROOM NIGHTS CAPTURED Commercial Leisure Group TOTAL CAPTURED DEMAND 16,060 48,545 48,545 48,545 48,545 48,545 48,545 518,300 609,550 609,550 609,550 609,550 609,550 609,550 3.1% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 211,900 229,300 236,200 243,300 250,600 258,100 265,800 107,000 118,700 122,200 125,900 129,700 133,600 137,600 47,900 50,200 51,700 53,200 54,800 56,500 58,200 366,800 398,200 410,100 422,400 435,100 448,200 461,600 366,800 398,200 410,100 422,400 435,100 448,200 461,600 6,600 18,300 18,800 19,400 20,000 20,600 21,200 3,300 9,500 9,700 10,000 10,300 10,600 11,000 I, 500 4,000 4,100 4,200 4,400 4,500 4,600 II, 400 31,800 32,600 33,600 34,700 35,700 36,800 110% 120% 70% 80% 607o 65% 125% 90% 70% 128% 90% 70% 125% 85% 70% 120% 115% 85% 85% 707o 707o 7,200 21,900 23,500 24,800 24,900 24,700 24,300 2,300 7,600 8,800 9,000 8,800 9,000 9,300 900 2,600 2,900 3,000 3,100 3,100 3,200 10,400 32,100 35,200 36,800 36,800 36,800 36,800 MARKET SHARE CAPTURED 2.8% 8.1% 8.6% 8.7% 8.5% 8.2% 8.0% OVERALL MARKET PENETRATION 92% 1017o 108% 1097o 106% 103% 100% SUBJECT OCCUPANCY 65% 66% 73% 767o 76% 76% 76% MARKET MIX Commercial 69% 687o 67% 67% 68% 67% 667o Leisure 227o 24% 257o 24% 247o 24% 25% Group 97o 87o 8% 87o 87o 8% 97.. TOTAL 100% 1007o 100% 100% 100% 100% 100% - - - - Source: PKF Consulting USA Proposed Holiday Inn & Staybridge Suites, Carlsbad, Califomia Section IV-Hotel Market Analysis IV-23 106-Room Staybridge Suites Corporate Demand As previously mentioned, corporate travelers in this market select hotel accommodations based on room and overall hotel amenities, location relative to their destination, and area amenities. We anticipate the subject to obtain a 120 percent penetration of the corporate segment upon opening in 2013. We project the subject's penetration of this segment to increase to 135 percent in 2014 and further increase to 140 percent in 2015, and 145 percent in 2016. We anticipate the subject's penetration to decrease to 142 percent in 2017, 137 percent in 2018, and reach its stabilized penetration of 130 percent in 2019 and thereafter. We have estimated a higher penetration level of this segment for this property due to its lower room count as well as its proposed extended-stay facilities, which are becoming very popular amongst longer-stay business travelers. As with the Holiday Inn, the subject will feature amenities and facilities that will be pleasing to the corporate travelers. Leisure Demand As with the Holiday Inn, we anticipate that the subject will penetrate the leisure market below its fair share of the competitive market due to its location further from the beach. We have estimated a leisure penetration of 65 percent in 2013, 70 percent in 2014, 75 percent in 2015, and 80 percent in 2016. In 2017, we project penetration of this segment to decrease to 75 percent and stabilize at this level, as the subject reaches its stabilized mix of demand and the market moves towards stabilization. Group Demand We have assumed that the subject hotel will contain approximately 800 square feet of meeting space, which will allow it to cater to small groups. Based on this, we anticipate that the subject will underpenetrate the group segment. We have estimated that the subject will penetrate the group market at 30 percent in 2013, 35 percent in 2014, and reach its stabilized level of penetration of 40 percent in 2015 and for the remainder of the projection period. Although below its fair share, this still allows the subject to capture a reasonable portion ofthe market's group room nights given its proposed facilities. Overall Mix, Penetration, and Occupancy The estimated stabilized market mix and penetration for the proposed 106-room Staybridge Suites hotel are presented in the following table. Proposed Staybridge Suites Carlsbad stabilized Mix of Demand and Market Penetration Market Segment Room Nights Ratio Penetration Corporate 22,000 73% 130% Leisure 6,600 22 75 Group 1,500 5 40 Total 30,100 100% 102% Source: PKF Consulting Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV-Hotel Market Analysis lV-24 Combining our estimates of the three penetration rates for the proposed hotel, we estimate that the subject property will achieve below its fair share of market demand upon its opening in 2013, with the penetration rate estimated at 93 percent. This equates to an occupancy level of 66 percent during its first year of operation. By the second year of operation, the subject's penetration rate is expected to increase to 103 percent of its fair share, equal to an occupancy of 67 percent in 2014. The following year the subject is projected to achieve 108 percent penetration as occupancy is estimated to increase to 73 percent. In 2016, the subject's penetration is expected to increase to 113 percent and reach its stabilized level of occupancy of 78 percent. The subject is expected to remain at this level of occupancy of 78 percent for the remainder of our projection period. However, its penetration rate is projected to decrease to a stabilized level of 102 percent by 2019. As with the Holiday Inn, this is due to the fact that the market is still moving towards stabilization after 2016. The following table sets forth projected penetration for the subject from 2013 through 2017. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV-Hotel Market Analysis lV-25 Proposed Staybridge Suites Carlsbad Market Penetration and Projected Occupancy 2013 2014 2015 2016 2017 2018 2019 TOTAL ROOMS AVAILABLE Proposed Staybridge Suites Carlsbad Competitive Market Fair Share of Supply ESTIMATED TOTAL MARKET DEMAND Commercial Leisure Group TOTAL FAIR SHARE OF DEMAND 12,775 38,690 38,690 38,690 38,690 38,690 38,690 518,300 609,550 609,550 609,550 609,550 609,550 609,550 2.5% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 211,900 229,300 236,200 243,300 250,600 258,100 265,800 107,000 118,700 122,200 125,900 129,700 133,600 137,600 47,900 50,200 51,700 53,200 54,800 56,500 58,200 366,800 398,200 410,100 422,400 435,100 448,200 461,600 Commercial Leisure Group 5,200 2,600 1,200 14,600 7,500 3,200 15,000 7,800 3,300 15,400 8,000 3,400 15,900 8,200 3,500 16,400 8,500 3,600 16,900 8,700 3,700 TOTAL 9,000 25,300 26,100 26,800 27,600 28,500 29,300 SUBJECT PENETRATION Commercial Leisure Group 120% 65% 30% 135% 70% 35% 140% 75% 40% 145% 80% 40% 142% 75% 40% 137% 75% 40% 130% 75% 40% ROOM NIGHTS CAPTURED Commercial Leisure Group 6,300 1,700 400 19,600 5,300 1,100 21,000 5,800 1,300 22,400 6,400 1,400 22,600 6,200 1,400 22,400 6,400 1,400 21,900 6,600 1,500 TOTAL CAPTURED DEMAND 8,400 26,000 28,100 30,200 30,200 30,200 30,000 MARKET SHARE CAPTURED 2.3% 6.57o 6.9% 7.17o 6.970 6.77o 6.57o OVERALL MARKET PENETRATION 93% 103% 108% 113% 109% 106% 102% SUBJECT OCCUPANCY 66% 67% 73% 78% 78% 78% 78% MARKET MIX Commercial Leisure Group 75% 20% 5% 75% 20% 4% 75% 21% 5% 74% 21% 5% 75% 21% 5% 74% 21% 5% 73% 22% 57o TOTAL 100% 100% 100% 100% 100% 1007o 1007o Source: PKF Consulting USA Proposed Holiday Inn & Staybridge Suites, Carlsbad, Califomia Section IV-Hotel Market Analysis IV-26 AVERAGE DAILY RATE Competitive Market We have also estimated the average daily rate (ADR) ofthe competitive market based upon our analysis of the historical rates achieved, interviews with management of the competitive properties, the anticipated impact of the new supply entering the market, and the changing economic conditions. Following three years of decline, the competitive market finished 2011 with a 1.2 percent increase in average daily rate (ADR), resulting in a market average daily rate of $132.89. We have estimated that the average daily rate will grow by 2.3 percent in 2012. We project that from 2013 and thereafter, the market ADR will grow at the general level of inflation, or 3.0 percent. Based on the foregoing analysis, the following table summarizes our estimates of future supply, accommodated demand, occupancy, average daily rate, and RevPAR for the competitive market from 2012 to 2019. Projected Market Performance of the Competitive Supply Annual Percent Occupied Percent Market Average Percent Percent Year Supply Change Rooms Change Occupancy Daily Rate Change REVPAR Change 2012 457,710 6.1% 346,300 5.6% 76% $136.00 2.3% $102.90 1.8% 2013 518,300 13.2 366,800 5.9 71 140.00 2.9 99.08 -3.7 2014 609,550 17.6 398,200 8.6 65 143.00 2.1 93.42 -5.7 2015 609,550 0.0 410,100 3.0 67 148.00 3.5 99.57 6.6 2016 609,550 0.0 422,400 3.0 69 152.00 2.7 105.33 5.8 2017 609,550 0.0 435,100 3.0 71 157.00 3.3 112.07 6.4 2018 609,550 0.0 448,200 3.0 74 161.00 2.5 118.38 5.6 2019 609,550 0.0 461,600 3.0 76 166.00 3.1 125.71 6.2 CAAG 4.2% 4.27o 2.9% 2.9% Source: PKF Consulting USA Average Daily Rate and Yield for the Subjects Our derivation of the average daily rate for the subject properties in a stabilized year of operation is based on the historical average daily rates achieved by the market and information concerning the other hotel properties in the competitive supply. Consider- ations were also given to the comparison of the other competitive properties with the subjects in terms of quality of facility, location, and mix of demand. 133-Room Holiday Inn The subject is anticipated to be a midscale full-service hotel with an attractive design based on the new Holiday Inn standards. Based on this and comparable properties in similar markets, we have estimated that the subject will achieve an opening average daily rate of $132.00 in 2013. In consideration of the proposed amenities and facilities of the subject, as well as its expected positioning in the market, we find this rate reasonable, placing the subject slightly below the competitive market average but within the range of the comparable properties in the competitive set. This rate is expected to increase at a Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV- Hotel Market Analysis IV-27 compound average annual rate of 3.0 percent throughout our projections. This opening rate equates to a stabilized average daily room rate of $128.00 stated in 2012 dollars. The following table outlines our estimates of average daily rate and the resulting revenue yield for the subject. It should be noted that figures are rounded to the nearest dollar amounts. Projected Market Performance of the Subject Hotel Annual Percent Occupied Percent Occupancy Average Percent Percent Market Revenue Year Supply Change Rooms Change Percentage Daily Rate Change REVPAR Change Penetration Yield 2013 16,060 N/A 10,400 N/A 65% $132.00 3.0% $ 85.48 N/A 92% 86% 2014 48,545 202.37o 32,100 208.77o 66 136.00 3.0% 89.93 5.2% 101 96 2015 48,545 0.0 35,200 9.7 73 140.00 3.0 101.51 12.9 108 102 2016 48,545 0.0 36,800 4.5 76 144.00 3.0 109.16 7.5 109 104 2017 48,545 0.0 36,800 0.0 76 148.00 3.0 112.19 2.8 106 100 CAAG 31.9% 37.2% 2.9% 7.0% Source: PKF Consulting USA Conversion to a Fiscal Year Basis As noted eadier, this market study is based on a fiscal year analysis beginning September 1, 2013. Accordingly, we must convert the calendar year forecast into fiscal year periods. To accomplish this for the fiscal year 2012/13, we have taken a weighted average of four months of the calendar year 2012 and eight months of the calendar year 2013 to derive the fiscal year projection. We have then performed this analysis for each subsequent fiscal year. In doing so, it is our calculation that for the first fiscal year, the subject will achieve an ADR of $134.00 with a corresponding occupancy of 66 percent. We have presented our projections of occupancy and ADR for the Subject for the period 2012/13 to 2022/23 in the following table. Proposed Holiday Inn Carlsbad Calendar Year Projections Fiscal Year Conversion Percent Fiscal Percent Year Occupancy ADR Change Year Occupancy ADR Change 2013 65.0% $132.00 -2013/14 66.0% $134.00 - 2014 66.0 136.00 37o 2014/15 71.0 139.00 47o 2015 73.0 140.00 3 2015/16 75.0 143.00 3 2016 76.0 144.00 3 2016/1 7 76.0 147.00 3 2017 76.0 148.00 3 2017/18 76.0 151.00 3 2018 76.0 153.00 3 2018/19 76.0 156.00 3 2019 76.0 157.00 3 2019/20 76.0 161.00 3 2020 76.0 162.00 3 2020/21 76.0 165.00 2 2021 76.0 167.00 3 2021/22 76.0 1 70.00 3 2022 76.0 172.00 3 2022/23 76.0 175.00 3 Note: Average daily rates rounded to the whole dollar Source: PKF Consulting 106-Room Staybridge Suites The subject is anticipated to be an extended-stay hotel with a modern design and attractive facilities and amenities. Based on this and comparable properties in similar markets, we Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section IV-Hotel Market Analysis IV-28 have estimated that the subject will achieve an opening average daily rate of $144.00 in 2013. In consideration ofthe proposed amenities and facilities ofthe subject, as well as its expected positioning in the market, we find this rate reasonable, placing the subject slightly above the competitive market average but within the range of the comparable properties in the competitive set. This rate is expected to increase at a compound average annual rate of 3.0 percent throughout our projections. This opening rate equates to a stabilized average daily room rate of $140.00 stated in 2012 dollars. The following table outlines our estimates of average daily rate and the resulting revenue yield for the subject. It should be noted that figures are rounded to the nearest dollar amounts. Projected Market Performance of the Subject Hotel Annual Percent Occupied Percent Occupancy Average Percent Percent Market Revenue Year Supply Change Rooms Change Percentage Daily Rate Change REVPAR Change Penetration Yield 2013 12,775 N/A 8,400 N/A 66% $144.00 3.0% $ 94.68 N/A 93% 96% 2014 38,690 202.9% 26,000 209.5% 67 149.00 3.0 100.13 5.7% 103 106 2015 38,690 0.0 28,100 8.1 73 153.00 3.0 111.12 11.0 108 111 2016 38,690 0.0 30,200 7.5 78 158.00 3.0 123.33 11.0 113 116 2017 38,690 0.0 30,200 0.0 78 162.00 3.0 126.45 2.5 109 112 CAAG 31.9% 37.7% 3.0% 7.5% Source: PKF Consulting USA Conversion to a Fiscal Year Basis As noted earlier, this market study is based on a fiscal year analysis beginning September 1, 2013. Accordingly, we must convert the calendar year forecast into fiscal year periods. To accomplish this for the fiscal year 2012/13, we have taken a weighted average of four months of the calendar year 2012 and eight months of the calendar year 2013 to derive the fiscal year projection. We have then performed this analysis for each subsequent fiscal year. In doing so, it is our calculation that for the first fiscal year, the subject will achieve an ADR of $147.00 with a corresponding occupancy of 67 percent. We have presented our projections of occupancy and ADR for the Subject for the period 2012/13 to 2022/23 in the following table. Proposed Staybridge Suites Carlsbad Projected Future Performance Calendar Year Projections Fiscal Year Conversion Percent Fiscal Percent Year Occupancy ADR Change Year Occupancy ADR Change 2013 66.0% $144.00 -2013/14 67.0% $147.00 - 2014 67.0 149.00 37o 2014/15 71.0 151.00 3% 2015 73.0 153.00 3 2015/16 76.0 156.00 3 2016 78.0 158.00 3 2016/17 78.0 161.00 3 2017 78.0 162.00 3 2017/18 78.0 166.00 3 2018 78.0 167.00 3 2018/19 78.0 171.00 3 2019 78.0 172.00 3 2019/20 78.0 1 76.00 3 2020 78.0 177.00 3 2020/21 78.0 181.00 3 2021 78.0 183.00 3 2021/22 78.0 186.00 3 2022 78.0 188.00 3 2022/23 78.0 192.00 3 Note: Average daily rates rounded to the whole dollar Source: PKF Consulting Proposed Holiday Inn & Staybridge Suites, Carlsbad, Califomia Section IV-Hotel Market Analysis IV-29 Although it is possible that the subject hotels will experience growth in occupancy and ADRs above those estimated in this report, it is also possible that sudden economic down- turns, unexpected additions to the room supply, or other external factors will force the properties below the selected point of stability. Consequently, the estimated occupancy and ADR levels are representative of the most likely potential operations of the subject hotels over the projected holding period based on our analysis of the market as of the date of this report. Proposed Holiday Inn & Staybridge Suites, Carlsbad, California Section V STATEMENTS OF ESTIMATED ANNUAL OPERATING RESULTS Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V-Statements of Estimated Annual Operating Results V-l_ STATEMENTS OF ESTIMATED ANNUAL OPERATING RESULTS BASIS OF PROJECTIONS To prepare estimates of future operating results for the proposed subject hotels as of September 1, 2013, the starting point or basis is the best estimate of results that could be achieved with good management in a representative year or stabilized market, calculated in 2012 dollars. We estimate that during a representative year, the Holiday Inn property could achieve a stabilized occupancy of 76 percent at an average daily room rate of $128.00, stated in 2012 dollars and that the Staybridge Suites property could achieve a stabilized occupancy of 78 percent at an average daily room rate of $140.00, stated in 2012 dollars. From this base, we considered the effects of inflation, development, and occupancy levels for the projection period starting September 1, 2013 through August 31, 2023, reflecting ten years of operation. The projections are presented on a calendar year basis and the underlying rationale and assumptions used in preparing these estimates are presented in this section. The estimates of revenues, costs and expenses are based on the proposed facilities and services and the operational characteristics thereof. The basis for our projections is the operating results of lodging properties with similar characteristics that are believed to operate with efficient management and proper control over costs and expenses. 133-ROOM HOLIDAY INN The Uniform System of Accounts for Hotels, recommended by the American Hotel and Motel Association and utilized throughout the industry, has been used in the classification of income and expenses for this report. In conformity with this system of account classifications, only direct operating expenses are charged to the operating departments of the subject. The general overhead items that are applicable to operations as a whole are classified as deductions from income and include administrative and general expenses, marketing expenses, utility costs, and property operations and maintenance. Additional costs for management fees, fixed charges, which include real estate taxes and insurance, and reserves for replacement are deducted to derive at the net operating income. Income and Expense Estimates Data from the following sources have been used as a basis for the income and expense estimates. • The market performance (average daily rate and occupancy levels) of the competitive hotels to the subject; and, • Comparable data from five hotels with similar average daily rate, occupancy, size, and market positioning from PKF Consulting's Trends in the Hotel Industry survey (referred to as Comparables "A", "B", "C", "D", and "E".) Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V - Statements of Estimated Annual Operating Results V-2 Operating Statistics of Comparable Hotels An analysis was performed on the operating results of five similarly sized mid-level full- service hotels located within Southern California. All are considered to be comparable with the proposed subject property. The comparable properties range in size from 133 rooms to 171 rooms, with an average room count of 156 rooms. Together these hotels had a composite occupancy of 74.0 percent and an average daily rate of $127.70. The statistical information is taken from actual financials for the comparable hotels for the most recent calendar year available. For reasons of confidentiality, we cannot disclose the identity of the comparable hotels. The following pages contain the operating results of the comparable hotels as mentioned above. Proposed Holiday Inn and Staybridge Suites, Carlsbad, Califomia Section V- Statements ofEstimated Annual Operating Results V-3 Proposed Holiday Inn Carlsbad Operating Results of Comparable Hotels Revenues Rooms Food & Beverage Other Operated Departments Rentals and Other Income Total Revenues Departmental Expenses Rooms Food & Beverage Other Operated Departments Total Departmental Expenses I Departmental Profit Undistributed Expenses Administrative & General Marketing Property Operation and Maintenance Utility Costs Total Undistributed Operating Expenses I Gross Operating Profit I Base Management Fee Fixed Expenses Property Taxes Insurance Total Fixed Expenses I Net Operating Income Before Reserve I Source: PKf Consulting ~ Hotel A Ratio Per Room P.O.R. 90.97o 8.9% 0.1% 0.1% $33,892 3,335 30 35 $126.25 12.42 0.11 0.13 100.0% 37,293 138.92 21.37o 86.9% 446.2% 7,210 2,897 135 26.86 10.79 0.50 27.57o 10,241 38.15 6.5% 48.47o I 18,040 I 2,440 I 72.57o I 27,051 | 100.771 11.17o 4,156 15.48 5.57o 2,059 7.67 3.87o 1,422 5.30 3.7% 1,374 5.12 24.2% 9,011 33.57 67.20 9.09 0.07o 0.67o 0 237 0.00 0.88 0.67o 237 0.88 ] I 41.2% I 15,363 I 57.23 Hotel B Ratio Per Room P.O.R. 86.57o 5.7% 6.9% 1.0% $34,213 2,237 2,741 382 $130.64 8.54 10.46 1.46 100.0% 39,573 151.10 21.3% 118.6% 61.8% 7,272 2,653 1,695 27.77 10.13 6.47 29.47o 11,620 44.37 2.9% 70.6% I 27,953 j 106.73 39.6% I 15,673 59.84 1,157 I 4.42 2.7% 4.17o 1,080 1,627 4.12 6.21 6.8% 2,707 10.34 29.8% I 11,809 I 45.09 Hotel C Ratio Per Room P.O.R. 91.77o 6.8% 1.5% 0.0% $34,790 2,579 564 0 $132.51 9.82 2.15 0.00 100.0% 37,934 144.48 18.37o 78.57o 57.6% 6,374 2,024 325 24.28 7.71 1.24 23.0% 8,723 33.22 77.07o 53.37o 20,214 0.0% 50.5% I 19,168 I 29,210 111.26 12.87o 5,066 19.34 8.07o 3,025 11.52 6.4% 2,520 9.62 9.1% 3,464 13.19 7.0% 2,778 10.61 3.0% 1,131 4.31 4.87o 1,917 7.32 3.6% 1,378 5.25 31.07o 12,280 46.89 23.7% 8,997 34.27 76.99 0.00 1.6% 1.27o 607 438 2.31 1.67 2.8% 1,045 3.98 73.01 Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V-Statements of Estimated Annual Operating Results V-4 Proposed Holiday Inn Carlsbad Operating Results of Comparable Hotels Revenues Rooms Food & Beverage Other Operated Departments Rentals and Other Income Total Revenues Departmental Expenses Rooms Food & Beverage Other Operated Departments Total Departmental Expenses Departmental Profit Undistributed Expenses Administrative & General Marketing Property Operation and Maintenance Utility Costs Total Undistributed Operating Expenses I Gross Operating Profit Base Management Fee Fixed Expenses Property Taxes Insurance Total Fixed Expenses Net Operating Income Before Reserve I Source: PKF Consulting Hotel D Ratio Per Room P.O.R. 91.2% 7.3% 1.5% 0.07o $28,999 2,324 479 0 $115.68 9.27 1.91 0.00 100.0% 31,801 126.86 26.27o 83.67o 55.4% 7,606 1,943 265 30.34 7.75 1.06 30.97o 9,814 39.15 0.0% 39.07o I 69.17o I 21,987 I 87.71 9.5% 3,013 12.02 9.7% 3,093 12.34 3.3% 1,049 4.18 3.7% 1,192 4.76 26.27o 8,347 33.30 Hotel E Ratio Per Room P.O.R. 91.2% 8.0% 0.7% 0.1% $39,712 3,494 326 25 $130.79 11.51 1.07 0.08 100.07o 43,557 143.45 20.67o 113.17o 156.47o 8,169 3,952 510 26.90 13.01 1.68 29.0% 12,631 41.60 Weighted Average Ratio Per Room P.O.R. 90.1% 7.3% 2.3% 0.3% $34,491 2,805 868 152 $127.70 10.39 3.21 0.55 100.0% 38,261 141.65 21.3% 97.3% 70.8% 7,332 2,729 615 27.15 10.10 2.28 27.9% 10,677 39.53 71.0% I 30,927 I 101.85 72.1% 27,585 8.97o 3,857 12.70 10.1% 3,877 14.35 10.2% 4,437 14.61 8.1% 3,105 11.50 5.07o 2,193 7.22 4.6% 1,760 6.51 3.77o 1,591 5.24 3.97o 1,507 5.58 27.7% 12,079 39.78 26.87o 10,249 37.95 0.00 0.07o 0.00 2.0% 1,777 2.17o 1.7% 681 543 2.71 2.17 3.8% 1,224 4.88 4.77o 1.17o 2,027 474 6.67 1.56 5.7% 2,501 8.24 12,416 I 49.53 37.57o| 16,347 I 53.84 I 39.2% 15,001 102.13 H I 42.9% I 13,640 I 54.41 | | 43.3% | 18,848 | 62.07 | | 45.3% | 17,335 | 64.18 | 6.70 2.3% 1.8% 1,126 684 4.16 2.53 4.1% 1,578 5.84 55.54 Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V- Statements of Estimated Annual Operating Results V-5 REPRESENTATIVE YEAR ESTIMATE Presented in the following text is a brief discussion of the basis used in developing our estimate of the Representative Year Operating Statement for the subject. A "representative year" illustrates the hotel's performance as if it were at a stabilized occupancy today, after the anticipated real growth in room rate, with all revenues and expenses expressed in current value dollars. Departmental Revenues and Expenses In the Uniform System of Accounts, revenue to the facility is categorized by the department from which it is derived. In the case of the subject, this includes income from rooms, food and beverage, other operated departments, and the category of rentals and other income. In the Uniform System of Accounts, only direct operating expenses associated with each department are charged to the operating departments. General overhead items which are applicable to the overall operation of the facility are classified as undistributed operating expenses. Rooms Department Rooms revenue is based on the number of occupied rooms multiplied by the average daily room rate for each of the subject's first ten years as presented in this report. As indicated in our previous analysis, we have estimated the stabilized average rate of the subject to be $128.00, stated in 2012 dollars. Stabilized occupancy is estimated at 76 percent; therefore, gross rooms revenue in a representative year is calculated as follows: 133 rooms x 365 days x 76% occupancy x $128.00/day = $4,722,000 (rounded) The following table summarizes the average daily room rates, occupancies, and rooms revenues estimated forthe projection period. Estimated Rooms Revenue Average Annual Rooms Year Daily Rate Occupancy Revenue 2013/14 $134.00 66.07o $4,293,000 2014/15 139.00 71.0 4,791,000 2015/16 143.00 75.0 5,207,000 2016/17 147.00 76.0 5,423,000 2017/18 151.00 76.0 5,570,000 2018/19 156.00 76.0 5,755,000 2019/20 161.00 76.0 5,939,000 2020/21 165.00 76.0 6,087,000 2021/22 1 70.00 76.0 6,271,000 2022/23 175.00 76.0 6,456,000 Rooms Expense Rooms expense consists of salaries and wages, employee benefits, commissions, contract cleaning, guest transportation, laundry and dry cleaning, linen, operating supplies, reservation costs, uniforms, contract services, and other items related to the rooms Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V-Statements of Estimated Annual Operating Results V-6 department. The comparable hotels had rooms expenses ranging from $24.28 to $30.34 per occupied room (POR), with ratios to rooms revenue ranging from 18.3 percent to 26.2 percent. In a representative year, we estimate a rooms expense of $28.00 per occupied room, or a ratio to rooms revenue of 21.9 percent. This incorporates the projected services and amenities at the property, and is within the range of comparables on a POR and ratio to total revenue basis. Rooms Expense Per Occupied Room Ratio to Rms Revenue Comparables A $26.86 21.3% B 27.77 21.3% C 24.28 18.3% D 30.34 26.2% E 26.90 20.6% Weighted Average 27.15 21.3% Subject Stabilized Year $28.00 21.9% Food and Beverage Revenue and Expense Food and Beverage revenue is typically generated by the sale of meals to both hotel guests and outside patrons in the restaurants and lounges; room service; banquet revenues, including banquet room and audio/visual rental income; and other associated revenues. Food & Beverage Revenue Total Amount Per Occupied Room Comparables A $533,664 $12.42 B 382,473 8.54 C 384,293 9.82 D 316,004 9.27 E 566,086 11.51 Weighted Average N/A 10.39 Subject Stabilized Year $922,000 $25.00 Food and beverage revenue will vary depending on the number of food and beverage outlets, and the amount of meeting space. Food and beverage revenue at the subject will be generated from the three-meal restaurant as well as meetings and special events held at the hotel. The comparable properties ranged in food and beverage revenue from $8.54 to $12.42 per occupied room. Based on the assumed restaurant and meeting facilities proposed for the subject, we project food and beverage revenue of approximately $25.00 per occupied room. This equates to a total food and beverage revenue of approximately $922,000 for the subject during a stabilized year, stated in 2012 dollars. We must note that although above the range of the comparables, we find this reasonable as the subject will be located in an area where there are not many accessible restaurants, as well as its anticipated mix of demand which will be heavily based on corporate travelers. Food and Beverage expense includes the cost of food and beverages, payroll and related expenses, and other items such as laundry, linen, china, glassware, silverware, uniform costs, supplies, and other miscellaneous items. Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V-Statements of Estimated Annual Operating Results V-7 Food & Beverage Expense Ratio to F&B Rev. Comparables A 86.9% B 118.6% C 78.5% D 83.67o E 113.17o Weighted Average 97.3% Subject Stabilized Year 80.0% We estimate the subject to achieve an 80.0 percent food and beverage margin for a stabilized year of operation, which is reasonable given our assumptions of the subject's food and beverage facilities and is within the average of properties with comparable facilities. Other Revenue and Expense Other Operated Departments can vary significantly among the comparable properties and the subject depending on the nature of the additional revenue generators. Other operated department revenue is typically generated from guest laundry, business center, health spa, and/or other recreational amenities. Other operated departments at the subject property will include guest services, business services, telecommunications revenue, in room movies, and other miscellaneous income. Other operated departments revenue at the comparable hotels ranged from $0.11 to $10.46 per occupied room. Based upon the various components of this line item, we have estimated the income for the subject to be approximately $1.75 per occupied room in a representative year of operations, which is within the range of the comparables. other Operated Departments Revenue Per Occupied Room Comparables A $0.11 B 10.46 C 2.15 D 1.91 E 1.07 Weighted Average 3.21 Subject Stabilized Year $1.75 Other Operated Departments expenses that are associated with these departments include payroll costs, employee benefits, and other operating supplies. The comparables' other operating expenses ranged from a 55.4 percent to a 446.2 percent expense ratio. For a representative year of operations, we have estimated expenses at approximately 75.0 percent of revenues, which is within the range of the comparables and slightly above the weighted average. Proposed Holiday Inn and Staybridge Suites, Carlsbad, Califomia Section V-Statements of Estimated Annual Operating Results V-8 Other Operated Departments Expense Ratio to O.O.D. Rev. Comparables A 446.2% B 61.8% C 57.67o D 55.47o E 156.4% Weighted Average 70.8% Subject Stabilized Year 75.07o Rentals and Other Income Rentals and Other Income generally reflects the net revenues associated with the rental of offices and stores, concessions, commissions, cash discounts earned, forfeited advance deposits, service charges, interest income, cancellation charges and other. Rentals and other income in the comparable properties ranged from $0.08 to $1.46. Based on this, and our assumptions ofthe subject's facilities, we have estimated rentals and other income revenue of $0.50 per occupied room for the subject on a representative year of operation. This is within the range ofthe comparables and close to the weighted average. Rentals and Other Income Per Occupied Room Per Day Comparables A $0.13 $15 B 1.46 179 C 0.00 0 D 0.00 0 E 0.08 11 Weighted Average 0.55 41 Subject Stabilized Year $0.50 $51 Undistributed Operating Expenses Operating expenses that are not chargeable to a particular operating department are presented as undistributed operating expenses, in accordance with the Uniform System of Accounts for the Lodging Industry. These expenses include administrative and general, franchise fees, marketing, property operations and maintenance, and energy and utilities. These expenses are relatively unaffected by fluctuations in occupancies and ADR. Excluding management fees, which are a fixed percentage based on a contract agreement and market parameters, these expenses are analyzed primarily on a dollar amount per available room (PAR) basis. Administrative and General Expenses in this category include salaries and wages associated with the operation of the administrative function of the property, cash overages and shortages, credit card commissions, bad debt expense, information systems, donations, dues and subscriptions, human resources, loss and damage, security, executive office expenses, professional fees, travel reimbursements, and supplies. The administrative and general expense of the Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V-Statements of Estimated Annual Operating Results V-9 comparable hotels ranged from $3,013 to $5,066 per available room, or 8.0 to 12.8 percent of revenue. We have estimated an administrative and general expense of $3,900 per available room for the subject in a representative year, or 9.1 percent of total revenues. This is within the range of comparables on a per available room and ratio to total revenue basis. Administrative and General Per Available Room Ratio to Total Rev. Comparables A $4,156 11.1% B 5,066 12.8% C 3,025 8.0% D 3,013 9.5% E 3,857 8.9% Weighted Average 3,877 10.1% Subject Stabilized Year $3,900 9.1% Marketing This account is charged with all costs incurred in the connection with the creation and maintenance ofthe image ofthe hotel and the development, promotion, and furtherance of business whether paid for in cash or in hotel trade. This includes the cost of print advertising, the printing of brochures, salaries, wages, and benefits associated with sales and marketing personnel, franchise fees, and other costs associated with sales and promotional programs. The comparable properties ranged from $2,059 to $4,437 per available room. The weighted average for marketing expense for the comparable hotels was $3,105 per available room, or 8.1 percent of total revenue. Based on the chain affiliation for the subject, we estimate marketing costs of approximately $3,600 per available room in a representative year. This is within the range of comparables on per available room and ratio to total revenue basis. Marketing Per Available Room Ratio to Total Rev. Comparables A $2,059 5.57o B 2,520 6.47o C 3,464 9.1% D 3,093 9.7% E 4,437 10.2% Weighted Average 3,105 8.1 7o Subject Stabilized Year $3,600 8.4% Property Operations and Maintenance This category includes the maintenance ofthe building, grounds and landscape, electrical and mechanical equipment, salaries, wages, and benefits of the engineering department staff, refrigeration, operating supplies, cleaning, waste removal and uniforms. The comparable properties ranged from $1,049 to $2,778 per available room. We estimate maintenance expenditures for the subject at $1,800 per available room in a representative Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V - Statements of Estimated Annual Operating Results V-10 year, which is within the range of the comparables on a per available room and ratio to total revenue basis. Property Operation and Maintenance Per Available Room Ratio to Total Rev. Comparables A $1,422 3.87o B 2,778 7.07o C 1,131 3.0% D 1,049 3.3% E 2,193 5.0% Weighted Average 1,760 4.6% Subject Stabilized Year $1,800 4.2% Energy and Utility Costs Energy and utility costs include electric, fuel, steam, water, and sewer charges. The cost of utilities at the comparable hotel properties ranged from $1,192 to $1,917 per available room. In a representative year we estimate a utility cost of $1,500 per available room in 2012 dollars. We find ths number reasonable, as utility costs are property and location specific. Further, it is within the range of the comparables on a per available room basis. utility Costs Per Available Room Ratio to Total Rev. Comparables A $1,374 3.7% B 1,917 4.8% C 1,378 3.6% D 1,192 3.77o E 1,591 3.7% Weighted Average 1,507 3.9% Subject Stabilized Year $1,500 3.5% Fixed Charges Management Fees A management fee is an expense item representing the value of the management services. It is a variable operating expense normally expressed as a percentage of total revenues. Based on comparable hotels and industry standards, we have utilized a management fee of 3.0 percent of total revenues. This equates to a representative year expense of $172,000. Property Taxes The subject property is assessed by the Los Angeles County. The current method of taxation of real property in California is mandated by the Jarvis-Gann Property Tax Initiative, known as Proposition 13, under which real estate taxes were reduced to one percent of the property's full market value as of the 1975/76 fiscal year, plus any voter- approved bond indebtedness. Proposition 13 limits real estate taxes to a 2.0 percent annual increase except upon sale or major alteration of the property. In either of these two events, the property is re-appraised to current market value, usually as evidenced by the sales price or the construction cost. For the purposes of this market study, we have used the tax Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V- Statements of Estimated Annual Operating Results V-11 estimate of 1.1 percent of the hotel's estimated construction cost. We were not provided with total construction cost. Therefore, based on our knowledge of average construction cost for similar properties, we have assumed an estimated construction cost of $130,000 per room. This equates to an estimated property tax of $184,000 in a representative year. Insurance Insurance for liability and building and contents is estimated to be $500 per available room in a representative year of operation, primarily based on our analysis of comparable hotel properties in Southern California and the specific attributes of the proposed subject. The subject's projected insurance expense is also within the range of the comparable hotels detailed in the table below. Insurance Per Available Room Comparables A $ 237 B 1,627 C 438 D 543 E 474 Weighted Average 684 Subject Stabilized Year $500 Reserves for Replacement An additional item not typically listed on an owner's income statement is the amount required for the periodic replacement of certain short-lived items such as carpeting, draperies, and other furniture, fixtures and equipment. We have estimated a reserve for replacements as detailed in the following table. Since the subject property is expected to open in September 1, 2013, we have projected a ramp-up in reserves for replacement from 2.0 percent in 2013/14, to 3.0 percent in 2014/15, and thereafter stabilizing at 4.0 percent of hotel related revenue in 2015/16. Schedule of Reserves for Replacement Reserve Percentage Year ofTotal Revenue 2013/14 2.07o 2014/15 3.0 2015/16 4.0 2016/17 4.0 2017/18 4.0 REPRESENTATIVE YEAR OPERATING STATEMENT The following presents our estimates of annual operating results for the subject property in a representative year in 2012 dollars based on the aforementioned analysis. Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V - Statements of Estimated Annual Operating Results V-12 Proposed Holiday Inn Carlsbad Representative Year of Operation Number of Units: Number of Annual Rooms Available: Number of Rooms Occupied: Annual Occupancy: Average Daily Rate: Revenue Per Available Room: Revenues Rooms Food & Beverage Other Operated Departments Rentals and Other Income Total Revenues Departmental Expenses Rooms Food & Beverage Other Operated Departments Total Departmental Expenses Departmental Profit Undistributed Expenses Administrative & General Marketing Property Operation and Maintenance Utility Costs Total Undistributed Operating Expenses Gross Operating Profit Base Management Fee Fixed Expenses Property Taxes Insurance Total Fixed Expenses Net Operating Income Before Reserve FF&E Reserve Net Operating Income After Reserve Source: PKF Consulting Stated in 2012 Dollars 133 48,545 36,894 76.0% $128.00 $97.28 Amount Ratio Per Room P.O.R. $4,722,000 82.5% $35,504 $127.99 922,000 16.1% 6,932 24.99 63,000 1.1% 474 1.71 18,000 0.3% 135 0.49 5,725,000 100.0% 43,045 155.17 3,907,0001 68.2% 29,376 I 2,470,000 43.17o 18,571 1 72,000 3.0% 1,293 2,047,000 I 35.87o 15,391 229,000 I 4.07o 1,722 1,033,000 21.97o 7,767 28.00 738,000 80.0% 5,549 20.00 47,000 74.6% 353 1.27 1,818,000 31.87o 13,669 49.28 105.90 519,000 9.1% 3,902 14.07 479,000 8.4% 3,602 12.98 239,000 4.2 7o 1,797 6.48 200,000 3.5% 1,504 5.42 1,437,000 25.1% 10,805 38.95 66.95 4.66 184,000 67,000 3.2% 1.27o 1,383 504 4.99 1.82 251,000 4.47o 1,887 6.80 55.48 6.21 $1,818,000 I 31.87o I $13,669 I $49.28 j Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V - Statements of Estimated Annual Operating Results V-13 ESTIMATED ANNUAL OPERATING RESULTS The previous analysis provided for the income and expenses incurred in the operation of the subject in a stabilized year. In the following analysis, we provide estimated income and expenses for the subject during each year of the holding period anticipated for a typical investor. Our estimate of the performance for the subject in the stabilized year is used as a basis for our analysis, considering the effects of inflation, business development, and varying occupancy. Inflation To portray price level changes during the holding period, we have assumed an inflation rate of 3.0 percent throughout the projection period. This rate reflects the consensus of several well-recognized economists for the current long-term outlook for the future movement of prices and is consistent with historical inflation rates. All expenses, save for property taxes, are projected to increase at 3.0 percent throughout the holding period. Property taxes are assumed to inflate at 2.0 percent annually in accordance with California's Proposition 13. It should be noted that inflation is caused by many factors and unanticipated events and circumstances can affect the forecasted rate. Therefore, the estimated operating results computed over the projection period can vary from the actual operating results, and the variations may be material. The following table summarizes the ten-year statement of operating income and ratio to total revenue of income. Total Net Operating Ratio to Year Revenue Income Total Revenues 2013/14 $5,208,000 $1,408,000 277o 2014/15 5,805,000 1,734,000 30 2015/16 6,310,000 1,977,000 31 2016/17 6,575,000 2,094,000 32 2017/18 6,756,000 2,144,000 32 2018/19 6,976,000 2,226,000 32 2019/20 7,198,000 2,307,000 32 2020/21 7,384,000 2,350,000 32 2021/22 7,606,000 2,425,000 32 2022/23 7,831,000 2,498,000 32 Statement of Estimated Annual Operating Results Presented on the following pages are the subject property's estimated annual operating results for the fiscal years of 2013/14 through 2022/23. This time period reflects the first ten years of operation. Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V- Statements ofEstimated Annual Operating Results V-I4 Proposed Holiday Inn Carlsbad Projected Operating Results Fiscal Years BeRinning September 1 Number of Units; Number of Annual Rooms Available: Number of Rooms Occupied: Annual Occupancy: Average Daily Rate: Revenue Per Available Room: Revenues Rooms Food & Beverage Other Operated Departments Rentals and Other Income Total Revenues Departmental Expenses Rooms Food & Beverage Other Operated Departments Total Departmental Expenses Departmental Profit Undistributed Expenses Administrative & General Marketing Property Operation and Maintenance Utility Costs Total Undistributed Operating Expenses I Gross Operating Profit Base Management Fee Fixed Expenses Property Taxes Insurance Total Fixed Expenses Net Operating Income Before Reserve I FF&E Reserve Net Operating Income After Reserve 2013/14 133 48,545 32,040 66.0% $134.00 $88.44 Amount Ratio $4,293,000 82.4% 841,000 16.1% 57,000 1.1% 1 7,000 0.3% 5,208,000 100.0% 1,014,000 23.6% 714,000 84.9% 43,000 75.4% 1,771,000 34.0%. 3,437,000 1,928,000 1 56,000 1,512,000 104,000 $1,408,000 66.0% 545,000 10.5% 503,000 9.7% 251,000 4.8%. 210,000 4.0% 1,509,000 29.0% 190,000 70,000 3.6% 1.3% 260,000 5.0% Source: PKF Consulting Fiscal Years Beginning September 1 2014/15 133 48,545 34,470 71.0% $139.00 $98.69 Amount Ratio $4,791,000 82.5% 932,000 16.1% 63,000 1.1 7o 19,000 0.3% 5,805,000 100.0% 1,081,000 22.6% 767,000 82.3% 48,000 76.2% 1,896,000 32.7% 2015/16 133 48,545 36,410 75.0% $143.00 $107.25 Amount Ratio $5,207,000 82.57D 1,014,000 16.1% 69,000 1.1% 20,000 0.3% 6,310,000 100.0%, 1,144,000 22.0% 816,000 80.5% 52,000 75.4% 2,012,000 31.9% 2016/17 133 48,545 36,890 76.0% $147.00 $111.72 Amount Ratio $5,423,000 82.5%, 1,059,000 16.1% 72,000 1.1% 21,000 0.3% 6,575,000 100.0% 1,186,000 21.9% 847,000 80.0% 54,000 75.0% 2,087,000 31.7% 2017/18 133 48,545 36,890 76.0% $151.00 $114.76 Amount Ratio $5,570,000 82.4% 1,090,000 16.1% 74,000 1.1% 22,000 0.3% 6,756,000 100.0% 1,221,000 21.9% 872,000 80.0% 56,000 75.7% 2,149,000 31.8% 3,909,000 I 67.3% I I 4,298,000 I 68.1%] 4,488,000 4,607,000 I 561,000 9.7% 518,000 8.9% 259,000 4.5% 216,000 3.7% 1,554,000 26.8% 578,000 9.2% 534,000 8.5% 267,000 4.27o 222,000 3.57o 1,601,000 25.47o 595,000 9.0% 550,000 8.47o 275,000 4.2% 229,000 3.5% 1,649,000 25.17o 1 74,000 197,000 3.07. 203,000 I 201,000 72,000 3.57o 1.27o 273,000 4.7% 205,000 74,000 3.27o 1.27o 279,000 4.4% 209,000 76,000 3.27o 1.27o 285,000 4.3% 32.97c, 2,229,000 I 2.07o I I 174,000 I 3.0771 2,357,000 I 2,414,000 I 252,000 263,000 I 4.0% I 270,000 I 68.2% 613,000 9.1% 566,000 8.47o 283,000 4.27o 236,000 3.5% 1,698,000 25.1 % 37.07o I I 2,355,000 | 40.6771 I 2,697,000 | 42.7%1 | 2,839,000 | 43.2%1 | 2,909,000 | 43.177 213,000 79,000 3.2% 1.2% 292,000 4.3% 35.7% 4.0% I 27.07. I I $1,734,000 j 29.9%1 | $1,977,000 | 31.37."] | $2,094,000 | 31.87.1 | $2,144,000 j 31.7% 1 Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V — Statements of Estimated Annual Operating Results V-15 Proposed Holiday Inn Carlsbad Projected Operating Results Fiscal Years Beginning September 1 Number of Units: Numberof Annual Rooms Available: Number of Rooms Occupied: Annual Occupancy: Average Daily Rate: Revenue Per Available Room: Revenues Rooms Food & Beverage Other Operated Departments Rentals and Other Income Total Revenues Departmental Expenses Rooms Food & Beverage Other Operated Departments Total Departmental Expenses Departmental Profit Undistributed Expenses Administrative & General Marketing Property Operation and Maintenance Utility Costs Total Undistributed Operating Expenses I Gross Operating Profit Base Management Fee Fixed Expenses Property Taxes Insurance Total Fixed Expenses Net Operating Income Before Reserve FF&E Reserve I Net Operating Income After Reserve I Source: PKF Consulting 2018/19 133 48,545 36,890 76.0% $156.00 $118.56 Amount Ratio $5,755,000 82.57. 1,123,000 16.17. 76,000 1.17. 22,000 0.3% 6,976,000 100.07. 1,258,000 21.9% 899,000 80.17. 57,000 75.07. 2,214,000 31.7% 4,762,000 I 3,012,000 209,000 I 2,505,000 279,000 $2,226,000 I 68.37. 632,000 9.17. 583,000 8.47. 292,000 4.2% 243,000 3.5% 1,750,000 25.17. 43.2% 3.0% 217,000 81,000 3.17. 1.27. 298,000 4.3% 35.9% 4.0% I 2019/20 133 48,545 36,890 76.07. $161.00 $122.36 Amount Ratio $5,939,000 82.57. 1,157,000 16.1% 79,000 1.1% 23,000 0.3% 7,198,000 100.07. 1,296,000 21.87. 926,000 80.07. 59,000 74.7% 2,281,000 31.77. 3,115,000 I 216,000 I 2,595,000 I $2,307,000 I 651,000 9.07. 601,000 8.37. 300,000 4.27. 250,000 3.57. 1,802,000 25.0% 43.3% 221,000 83,000 3.17. 1.2% 304,000 4.2% 36.17. 32.17. 2020/21 133 48,545 36,890 76.07. $165.00 $125.40 Amount Ratio $6,087,000 82.47. 1,192,000 16.17. 81,000 1.1% 24,000 0.3% 7,384,000 100.0% 1,335,000 21.97. 953,000 79.9% 61,000 75.3% 2,349,000 31.87. 5,035,000 3,179,000 222,000 I 2,645,000 295,000 I 68.27. 670,000 9.1% 619,000 8.4% 309,000 4.2% 258,000 3.5% 1,856,000 25.1 % 43.1% 3.0% 226,000 86,000 3.1% 1.2% 312,000 4.2% 35.8% 4.07. 2021/22 133 48,545 36,890 76.0% $170.00 $129.20 Amount Ratio $6,271,000 82.4% 1,227,000 16.17. 83,000 1.17. 25,000 0.3% 7,606,000 100.07. 1,375,000 21.97. 982,000 80.07. 63,000 75.97. 2,420,000 31.87. 5,186,000 3,275,000 228,000 304,000 1 68.27. 690,000 9.1% 637,000 8.47. 319,000 4.2% 265,000 3.5% 1,911,000 25.17. 43.17. 230,000 88,000 3.0% 1.2% 318,000 4.2% 2022/23 133 48,545 36,890 76.0% $175.00 $133.00 Amount Ratio $6,456,000 82.47. 1,264,000 16.1% 86,000 1.1% 25,000 0.3% 7,831,000 100.07. 1,416,000 21.97. 1,011,000 80.07. 64,000 74.4% 2,491,000 31.87. 5,340,000 3,372,000 I I 3.0% I [ 235,000 4.0% 313,000 $2,350,000 I 31.8771 | $2,425,000] 31.9%~| $2,498,000 68.2% 711,000 9.1% 656,000 3.4% 328,000 4.2% 273,000 3.5% 1,968,000 25.17. 43.1% 235,000 91,000 3.0% 1.2% 326,000 4.2% I 2,729,000 I 35.9%1 | 2,811,000 j 35.9% 1 4.0% 31.9% Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V-Statements of Estimated Annual Operating Results V-16 106-ROOM STAYBRIDGE SUITES The Uniform System of Accounts for Hotels, recommended by the American Hotel and Motel Association and utilized throughout the industry, has been used in the classification of income and expenses for this report. In conformity with this system of account classifications, only direct operating expenses are charged to the operating departments of the subject. The general overhead items that are applicable to operations as a whole are classified as deductions from income and include administrative and general expenses, marketing expenses, utility costs, and property operations and maintenance. Additional costs for management fees, fixed charges, which include real estate taxes and insurance, and reserves for replacement are deducted to derive at the net operating income. Income and Expense Estimates Data from the following sources have been used as a basis for the income and expense estimates. • The market performance (average daily rate and occupancy levels) of the competitive hotels to the subject; and, • Comparable data from five hotels with similar average daily rate, occupancy, size, and market positioning from PKF Consulting's Trends in the Hotel Industry survey (referred to as Comparables "A", "B", "C", "D", and "E".) Operating Statistics of Comparable Hotels An analysis was performed on the operating results of five similarly sized high-quality extended-stay hotels located within Southern California. All are considered to be comparable with the proposed subject property. The comparable properties range in size from 125 rooms to 145 rooms, with an average room count of 137 rooms. Together these hotels had a composite occupancy of 82.2 percent and an average daily rate of $130.58. The statistical information is taken from actual financials for the comparable hotels for the most recent calendar year available. For reasons of confidentiality, we cannot disclose the identity ofthe comparable hotels. The following pages contain the operating results of the comparable hotels as mentioned above. Proposed Holiday Inn and Staybridge Suites, Carlsbad, Califomia Section V-Statements of Estimated Annual Operating Results F-7 7 Proposed Staybridge Suites Carlsbad Operating Results of Comparable Hotels Revenues Rooms Other Operated Departments Rentals and Other Income Total Revenues Departmental Profit Undistributed Expenses Administrative & General Marketing Property Operation and Maintenance Utility Costs Total Undistributed Operating Expenses I Gross Operating Profit Base Management Fee Fixed Expenses Property Taxes Insurance Total Fixed Expenses Hotel A Ratio Per Room P.O.R. 97.8% $39,214 $131.96 1.6% 622 2.09 0.6% 242 0.82 100.0% 40,078 134.86 72.4% 52.47o 1.5% I Net Operating Income Before Reserve I Source: PKF Consulting 44.2% Hotel B Hotel C Ratio Per Room P.O.R. Ratio Per Room P.O.R. 99.3% $36,873 $124.89 98.87o $38,670 $126.80 0.6% 208 0.71 1.27o 467 1.53 0.1% 36 0.12 0.0% 0 0.00 100.0% 37,117 125.72 100.07o 39,137 128.33 Departmental Expenses Rooms 27.1% 10,634 35.78 Other Operated Departments 71.7% 446 1.50 Total Departmental Expenses 27.67o 11,080 37.29 28,998 97.58 75.5% 21,015 70.72 586 1.97 3.47o 2.77o 4.17o 1,082 1,633 3.64 5.49 6.87o 2,715 9.14 17,714 59.61 43.67o 28,036 94.96 79.07o 6.77o 2,690 9.05 8.47o 3,118 10.56 5.87o 2,325 7.82 5.9% 2,189 7.42 4.0% 1,610 5.42 4.37o 1,602 5.42 3.47o 1,358 4.57 4.3% 1,598 5.41 19.9% 7,983 26.86 22.97o 8,507 28.81 52.67o| 19,529 I 66.15 56.6% 1,259 I 4.27 3.5% 3.77o 1.97o 1,365 724 4.62 2.45 5.6% 2,088 7.07 16,182 54.81 47.97o 22,146 1,371 18,745 23.77o 8,728 29.56 20.57o 7,937 26.02 169.6% 354 1.20 63.37o 295 0.97 24.5% 9,081 30.76 21.07o 8,232 26.99 30,905 I 101.34 8.5% 3,309 10.85 6.1% 2,403 7.88 4.1% 1,594 5.23 3.77o 1,453 4.76 22.4% 8,759 28.72 72.62 4.50 3.37o 1.97o 1,300 730 4.26 2.39 5.27o 2,030 6.66 61.47 Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V - Statements of Estimated Annual Operating Results V-18 Proposed Staybridge Suites Carlsbad Operating Results of Comparable Hotels Revenues Rooms Other Operated Departments Rentals and Other Income Total Revenues Departmental Profit Undistributed Expenses Administrative & General Marketing Property Operation and Maintenance Utility Costs Total Undistributed Operating Expenses Gross Operating Profit Base Management Fee Fixed Expenses Property Taxes Insurance Total Fixed Expenses Net Operating Income Before Reserve Source: PKF Consulting Hotel D Ratio Per Room P.O.R. 98.17o $39,268 $129.02 1.47o 546 1.80 0.57o 211 0.69 100.07o 40,025 131.51 76.7% 30,709 48.67o I 19,459 3.0% 1,200 I Departmental Expenses Rooms 22.17o 8,680 28.52 Other Operated Departments 116.47o 636 2.09 Total Departmental Expenses 23.3% 9,316 30.61 100.90 8.57o 3,409 11.20 11.07o 4,389 14.42 4.47o 1,767 5.81 4.2 7o 1,684 5.53 28.17o 11,250 36.96 63.94 3.94 7.37o 0.3 7o 2,931 135 9.63 0.44 7.7% 3,065 10.07 Hotel E Weighted Average Ratio Per Room P.O.R. Ratio Per Room P.O.R. 98.37o $42,075 $140.99 98.47o $39,190 $130.58 1.27o 533 1.79 1.2% 479 1.60 0.5% 210 0.70 0.47o 141 0.47 100.0% 42,817 143.48 100.0% 39,810 132.64 62.8% 7.0% 26,904 90.15 54.57o I 21,707 2,997 I 10.04 3.6% 1,447 5.1% 1.1% 2,186 462 7.33 1.55 6.2% 2,649 8.88 17.17o 7,191 24.09 22.17o 8,675 28.91 55.3% 295 0.99 85.77o 410 1.37 17.5% 7,485 25.08 22.8% 9,086 30.27 82.5% I 35,332 I 118.39 | | 77.27o | 30,724 | 102.37 | 6.2% 2,655 8.90 7.6% 3,044 10.14 7.1% 3,020 10.12 7.2% 2,881 9.60 3.2% 1,372 4.60 4.0% 1,595 5.31 3.2% 1,381 4.63 3.87o 1,497 4.99 19.7% 8,428 28.24 22.67o 9,017 30.04 72.32 4.82 4.5% 1.9% 1,776 742 5.92 2.47 6.37o 2,518 8.39 38.0% I 15,193 I 49.92 I | 49.67o | 21,2581 71.23 | | 44.67Q | 17,742 | 59.11 Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V - Statements of Estimated Annual Operating Results V-I9 REPRESENTATIVE YEAR ESTIMATE Presented in the following text is a brief discussion of the basis used in developing our estimate of the Representative Year Operating Statement for the subject. A "representative year" illustrates the hotel's performance as if it were at a stabilized occupancy today, after the anticipated real growth in room rate, with all revenues and expenses expressed in current value dollars. Departmental Revenues and Expenses In the Uniform System of Accounts, revenue to the facility is categorized by the department from which it is derived. In the case ofthe subject, this includes income from rooms, food and beverage, other operated departments, and the category of rentals and other income. In the Uniform System of Accounts, only direct operating expenses associated with each department are charged to the operating departments. General overhead items which are applicable to the overall operation of the facility are classified as undistributed operating expenses. Rooms Department Rooms revenue is based on the number of occupied rooms multiplied by the average daily room rate for each ofthe subject's first ten years as presented in this report. As indicated in our previous analysis, we have estimated the stabilized average rate of the subject to be $140.00, stated in 2012 dollars. Stabilized occupancy is estimated at 78 percent; therefore, gross rooms revenue in a representative year is calculated as follows: 106 rooms x 365 days x 78% occupancy x $140.00/day = $4,225,000 (rounded) The following table summarizes the average daily room rates, occupancies, and rooms revenues estimated for the projection period. Estimated Rooms Revenue Average Annual Rooms Year Daily Rate Occupancy Revenue 2013/14 $147.00 67.07o $3,810,000 2014/15 151.00 71.0 4,148,000 2015/16 156.00 76.0 4,586,000 2016/17 161.00 78.0 4,859,000 2017/18 166.00 78.0 5,010,000 2018/19 171.00 78.0 5,161,000 2019/20 1 76.00 78.0 5,312,000 2020/21 181.00 78.0 5,463,000 2021/22 186.00 78.0 5,613,000 2022/23 192.00 78.0 5,795,000 Rooms Expense Rooms expense consists of salaries and wages, employee benefits, commissions, contract cleaning, guest transportation, laundry and dry cleaning, linen, operating supplies, reservation costs, uniforms, contract services, and other items related to the rooms Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V - Statements of Estimated Annual Operating Results V-20 department. The comparable hotels had rooms expenses ranging from $24.09 to $35.78 per occupied room (POR), with ratios to rooms revenue ranging from 17.1 percent to 27.1 percent. In a representative year, we estimate a rooms expense of $30.00 per occupied room, or a ratio to rooms revenue of 21.4 percent. This incorporates the projected services and amenities at the property, and is within the range of comparables on a POR and ratio to total revenue basis. Rooms Expense Per Occupied Room Ratio to Rms Revenue Comparables A $35.78 27.1% B 29.56 23.7% C 26.02 20.5% D 28.52 22.1% E 24.09 17.1% Weighted Average 28.91 22.17o Subiect Stabilized Year $30.00 21.4% Food and Beverage Revenue and Expense Food and Beverage revenue is typically generated by the sale of meals to both hotel guests and outside patrons in the restaurants and lounges; room service; banquet revenues, including banquet room and audio/visual rental income; and other associated revenues. Based on the proposed facilities we have not included any food and beverage revenues. Other Revenue and Expense Other Operated Departments can vary significantly among the comparable properties and the subject depending on the nature of the additional revenue generators. Other operated department revenue is typically generated from guest laundry, business center, health spa, and/or other recreational amenities. Other operated departments at the subject property will include guest services, business services, telecommunications revenue, in room movies, and other miscellaneous income. Other operated departments revenue at the comparable hotels ranged from $0.71 to $2.09 per occupied room. Based upon the various components of this line item, we have estimated the income for the subject to be approximately $1.50 per occupied room in a representative year of operations, which is within the range of the comparables. other Operated Departments Revenue Per Occupied Room Comparables A $2.09 B 0.71 C 1.53 D 1.80 E 1.79 Weighted Average 1.60 Subject Stabilized Year $1.50 Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V-Statements of Estimated Annual Operating Results V-21 Other Operated Departments expenses that are associated with these departments include payroll costs, employee benefits, and other operating supplies. The comparables' other operating expenses ranged from a 55.3 percent to a 169.6 percent expense ratio. For a representative year of operations, we have estimated expenses at approximately 80.0 percent of revenues, which is within the range of the comparables and slightly below the weighted average. other Operated Departments Expense Ratio to O.O.D. Rev. Comparables A 71.77o B 169.67o C 63.3% D 116.4% E 55.3% Weighted Average 85.7% Subject Stabilized Year 80.07o Rentals and Other Income Rentals and Other Income generally reflects the net revenues associated with the rental of offices and stores, concessions, commissions, cash discounts earned, forfeited advance deposits, service charges, interest income, cancellation charges and other. Rentals and other income in the comparable properties ranged from $0.12 to $0.82. Based on this, and our assumptions of the subject's facilities, we have estimated rentals and other income revenue of $0.50 per occupied room for the subject on a representative year of operation. This is within the range of the comparables and similar to the weighted average. Rentals and Other Income Per Occupied Room Per Day Comparables A $0.82 $95 B 0.12 13 C 0.00 0 D 0.69 84 E 0.70 72 Weighted Average 0.47 53 Subject Stabilized Year $0.50 $41 Undistributed Operating Expenses Operating expenses that are not chargeable to a particular operating department are presented as undistributed operating expenses, in accordance with the Uniform System of Accounts for the Lodging Industry. These expenses include administrative and general, franchise fees, marketing, property operations and maintenance, and energy and utilities. These expenses are relatively unaffected by fluctuations in occupancies and ADR. Excluding management fees, which are a fixed percentage based on a contract agreement and market parameters, these expenses are analyzed primarily on a dollar amount per available room (PAR) basis. Proposed Holiday Inn and Staybridge Suites, Carlsbad, Califomia Section V - Statements of Estimated Annual Operating Results V-22 Administrative and General Expenses in this category include salaries and wages associated with the operation of the administrative function of the property, cash overages and shortages, credit card commissions, bad debt expense, information systems, donations, dues and subscriptions, human resources, loss and damage, security, executive office expenses, professional fees, travel reimbursements, and supplies. The administrative and general expense of the comparable hotels ranged from $2,655 to $3,409 per available room, or 6.2 to 8.5 percent of revenue. We have estimated an administrative and general expense of $3,300 per available room for the subject in a representative year, or 8.2 percent of total revenues. This is within the range of comparables on a per available room and ratio to total revenue basis. Administrative and General Per Available Room Ratio to Total Rev. Comparables A $2,690 6.7% B 3,118 8.4% c 3,309 8.57o D 3,409 8.5% E 2,655 6.2% Weighted Average 3,044 7.6% Subject Stabilized Year $3,300 8.2% Marketing This account is charged with all costs incurred in the connection with the creation and maintenance ofthe image ofthe hotel and the development, promotion, and furtherance of business whether paid for in cash or in hotel trade. This includes the cost of print advertising, the printing of brochures, salaries, wages, and benefits associated with sales and marketing personnel, franchise fees, and other costs associated with sales and promotional programs. The comparable properties ranged from $2,189 to $4,389 per available room. The weighted average for marketing expense for the comparable hotels was $2,881 per available room, or 7.2 percent of total revenue. Based on the chain affiliation for the subject, we estimate marketing costs of approximately $2,900 per available room in a representative year. This is within the range of comparables on per available room and ratio to total revenue basis. Marketing Per Available Room Ratio to Total Rev. Comparables A $2,325 5.87o B 2,189 5.9% C 2,403 6.1% D 4,389 11.0% E 3,020 7.1% Weighted Average 2,881 7.27o Subject Stabilized Year $2,900 7.27o Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V - Statements of Estimated Annual Operating Results V-23 Property Operations and Maintenance This category includes the maintenance ofthe building, grounds and landscape, electrical and mechanical equipment, salaries, wages, and benefits of the engineering department staff, refrigeration, operating supplies, cleaning, waste removal and uniforms. The comparable properties ranged from $1,372 to $1,767 per available room. We estimate maintenance expenditures for the subject at $1,600 per available room in a representative year, which is within the range of the comparables on a per available room and ratio to total revenue basis. Property Operation and Maintenance Per Available Room Ratio to Total Rev. Comparables A $1,610 4.0% B 1,602 4.3% c 1,594 4.1% D 1,767 4.4% E 1,372 3.2% Weighted Average 1,595 4.0% Subject Stabilized Year $1,600 4.0% Energy and Utility Costs Energy and utility costs include electric, fuel, steam, water, and sewer charges. The cost of utilities at the comparable hotel properties ranged from $1,358 to $1,684 per available room. In a representative year we estimate a representative year utility cost of $1,500 per available room in 2012 dollars. We find ths number reasonable, as utility costs are property and location specific. Further, it is within the range of the comparables on a per available room basis and ratio to total revenue basis. utility Costs Per Available Room Ratio to Total Rev. Comparables A $1,358 3.47o B 1,598 4.37o C 1,453 3.7% D 1,684 4.2% E 1,381 3.2% Weighted Average 1,497 3.8% Subject Stabilized Year $1,500 3.7% Fixed Charges Management Fees A management fee is an expense item representing the value of the management services. It is a variable operating expense normally expressed as a percentage of total revenues. Based on comparable hotels and industry standards, we have utilized a management fee of 3.0 percent of total revenues. This equates to a representative year expense of $129,000. Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V- Statements of Estimated Annual Operating Results V-24 Property Taxes The subject property is assessed by the Los Angeles County. The current method of taxation of real property in California is mandated by the Jarvis-Gann Property Tax Initiative, known as Proposition 13, under which real estate taxes were reduced to one percent of the property's full market value as of the 1975/76 fiscal year, plus any voter- approved bond indebtedness. Proposition 13 limits real estate taxes to a two-percent annual increase except upon sale or major alteration of the property. In either of these two events, the property is re-appraised to current market value, usually as evidenced by the sales price or the construction cost. For the purposes of this market study, we have used the tax estimate of 1.1 percent of the hotel's estimated construction cost. We were not provided with total construction cost. Therefore, based on our knowledge of average construction cost for similar properties, we have assumed an estimated construction cost of $140,000 per room. This equates to an estimated property tax of $158,000 in a representative year. Insurance Insurance for liability and building and contents is estimated to be $700 per available room in a representative year of operation, primarily based on our analysis of comparable hotel properties in Southern California and the specific attributes of the proposed subject. The subject's projected insurance expense is also within the range of the comparable hotels detailed in the table below. Insurance Per Available Room Comparables A $1,633 B 724 C 730 D 135 E 462 Weighted Average 742 Subject Stabilized Year $700 Reserves for Replacement An additional item not typically listed on an owner's income statement is the amount required for the periodic replacement of certain short-lived items such as carpeting, draperies, and other furniture, fixtures and equipment. We have estimated a reserve for replacements as detailed in the following table. Since the subject property is expected to open in September 1, 2013, we have projected a ramp-up in reserves for replacement from 2.0 percent in 2013/14, to 3.0 percent in 2014/15, and thereafter stabilizing at 4.0 percent of hotel related revenue in 2015/16. Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V-Statements of Estimated Annual Operating Results V-25 Schedule of Reserves for Replacement Reserve Percentage Year ofTotal Revenue 2013/14 2.0% 2014/15 3.0 2015/16 4.0 2016/17 4.0 2017/18 4.0 REPRESENTATIVE YEAR OPERATING STATEMENT The following presents our estimates of annual operating results for the subject property in a representative year in 2012 dollars based on the aforementioned analysis. Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V - Statements of Estimated Annual Operating Results V-26 Proposed Staybridge Suites Carlsbad Representative Year of Operation Number of Units: Number of Annual Rooms Available: Number of Rooms Occupied: Annual Occupancy: Average Daily Rate: Revenue Per Available Room: Revenues Rooms Other Operated Departments Rentals and Other Income Total Revenues Departmental Expenses Rooms Other Operated Departments Total Departmental Expenses Departmental Profit Undistributed Expenses Administrative & General Marketing Property Operation and Maintenance Utility Costs Total Undistributed Operating Expenses Gross Operating Profit Base Management Fee Fixed Expenses Property Taxes Insurance Total Fixed Expenses Net Operating Income After Reserve Stated in 2012 Dollars 106 38,690 30,178 78.0% $140.00 $109.20 Amount Ratio Per Room P.O.R. $4,225,000 98.6% $39,858 $140.00 45,000 1.17o 425 1.49 15,000 0.4% 142 0.50 4,285,000 100.0% 40,425 141.99 Net Operating Income Before Reserve FF&E Reserve [ 3,344,000 I 78.0% 1,997,000 I 46.6% 171,000 I 4.0% 31,547 18,840 1,613 905,000 36,000 21.4% 80.0% 8,538 340 29.99 1.19 941,000 22.07o 8,877 31.18 110.81 350,000 8.27o 3,302 11.60 307,000 7.2% 2,896 10.17 1 70,000 4.0% 1,604 5.63 159,000 3.7% 1,500 5.27 986,000 23.0% 9,302 32.67 I 2,358,000 I 55.0% | 22,245 j 78?i4~ I 129,000 I 3.0% I 1,217 I 4W 158,000 74,000 3.7% 1.77o 1,491 698 5.24 2.45 232,000 5.4% 2,189 7.69 66.17 5.67 I $1,826,000 I 42.6% | $17,226 | $60^ Source: PKF Consulting Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V-Statements of Estimated Annual Operating Results V-27 ESTIMATED ANNUAL OPERATING RESULTS The previous analysis provided for the income and expenses incurred in the operation of the subject in a stabilized year. In the following analysis, we provide estimated income and expenses for the subject dunng each year of the holding period anticipated for a typical investor. Our estimate of the performance for the subject in the stabilized year is used as a basis for our analysis, considering the effects of inflation, business development, and varying occupancy. Inflation To portray price level changes during the holding period, we have assumed an inflation rate of 3.0 percent throughout the projection period. This rate reflects the consensus of several well-recognized economists for the current long-term outlook for the future movement of prices and is consistent with historical inflation rates. All expenses, save for property taxes, are projected to increase at 3.0 percent throughout the holding period. Property taxes are assumed to inflate at 2.0 percent annually in accordance with California's Proposition 13. It should be noted that inflation is caused by many factors and unanticipated events and circumstances can affect the forecasted rate. Therefore, the estimated operating results computed over the projection period can vary from the actual operating results, and the variations may be material. The following table summarizes the ten-year statement of operating income and ratio to total revenue of income. Total Net Operating Ratio to Year Revenue Income Total Revenues 2013/14 $3,865,000 $1,479,000 38% 2014/15 4,208,000 1,665,000 40 2015/16 4,651,000 1,932,000 42 2016/17 4,928,000 2,105,000 43 2017/18 5,082,000 2,177,000 43 2018/19 5,234,000 2,244,000 43 2019/20 5,388,000 2,309,000 43 2020/21 5,540,000 2,372,000 43 2021/22 5,693,000 2,432,000 43 2022/23 5,878,000 2,522,000 43 Statement of Estimated Annual Operating Results Presented on the following pages are the subject property's estimated annual operating results for the fiscal years of 2013/14 through 2022/23. This time period reflects the first ten years of operation. Proposed Holiday Inn and Staybridge Suites, Carlsbad, Califomia Section V - Statements of Estimated Annual Operating Results V-28 Proposed Staybridge Suites Carlsbad Projected Operating Results Fiscal Years Beginning September 1 Number of Units: Number of Annual Rooms Available: Number of Rooms Occupied: Annual Occupancy: Average Daily Rate: Revenue Per Available Room: Revenues Rooms Other Operated Departments Rentals and Other Income Total Revenues Departmental Profit Undistributed Expenses Administrative & General Marketing Property Operation and Maintenance Utility Costs Total Undistributed Operating Expenses I Gross Operating Profit Base Management Fee Fixed Expenses Property Taxes Insurance Total Fixed Expenses Net Operating Income Before Reserve FF&E Reserve I Net Operating Income After Reserve I Source: PKF Consulting 2013/14 106 38,690 25,920 67.0% $147.00 $98.49 Amount Ratio $3,810,000 98.6% 41,000 1.1% 14,000 0.4% 3,865,000 100.0% 1,913,000 116,000 I 1,556,000 I $1,479,000 I Departmental Expenses Rooms 884,000 23.2% Other Operated Departments 33,000 80.5% Total Departmental Expenses 917,000 23.7% 367,000 9.5% 323,000 8.4% 1 78,000 4.6% 167,000 4.3% 1,035,000 26.8% 3.0% 163,000 78,000 4.2% 2.0% 241,000 6.2% 40.3% 2.0% Fiscal Years Beginning September 1 2014/15 106 38,690 27,470 71.07o $151.00 $107.21 Amount Ratio $4,148,000 98.6% 45,000 1.1% 15,000 0.4% 4,208,000 100.0% 936,000 22.6% 36,000 80.0% 972,000 23.1% 2015/16 106 38,690 29,400 76.0% $156.00 $118.56 Amount Ratio $4,586,000 98.6% 49,000 1.1% 16,000 0.3% 4,651,000 100.0% 996,000 21.7% 39,000 79.6% 1,035,000 22.3% 2016/17 106 38,690 30,180 78.0% $161.00 $125.58 Amount Ratio $4,859,000 98.6% 52,000 1.1% 1 7,000 0.3% 4,928,000 100.0% 2017/18 106 38,690 30,180 78.0% $166.00 $129.48 Amount Ratio $5,010,000 98.6% 54,000 1.1% 18,000 0.4% 5,082,000 100.07o 1,039,000 21.4%, 1,070,000 21.4% 42,000 80.8% 43,000 79.67o 1,081,000 21.9% 1,113,000 21.9% 3,236,000 76.9% 3,616,000 I 77.7% 378,000 9.0% 333,000 7.9% 184,000 4.47o 1 72,000 4.1% 1,067,000 25.47o 390,000 8.470 343,000 7.4% 189,000 4.1% 1 77,000 3.8% 1,099,000 23.6% 402,000 8.27= 353,000 7.27c. 195,000 4.07o 183,000 3.7% 1,133,000 23.0% 3.0% 152,000 1 72,000 80,000 4.1 7o 1.97o 252,000 6.07o 1 76,000 83,000 3.8% 1.87o 259,000 5.67o 1 79,000 85,000 3.6% 1.7% 264,000 5.4% 1,791,000 I 42.6% I I 2,118,000 1 45.5%"| | 2,302,000 | 46.77.1 126,000 186,000 I 4.07o 197,000 4.07o 3,847,000 I 78.17o| | 3,969,000 j 78.1%! 414,000 8.1% 363,000 7.1% 201,000 4.07o 188,000 3.7% 1,166,000 22.9% 49.57o I I 2,169,000 | 51.5%~| | 2,517,000 | 54.1 %~| | 2,714,000 | 55.1%] | 2,803,000 j 55.2%" 3.0% I 183,000 88,000 3.6% 1.7% 271,000 5.3% 2,380,000 I 46.87. j 203,000 I 4.0% I 38.3% I I $1,665,000 I 39.6%"1 | $1,932,000 | 41.5%"] | $2,105,000 | 42.77.1 I $2,177,000 j 42.8%" Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Section V - Statements of Estimated Annual Operating Results V-29 Proposed Staybridge Suites Carlsbad Projected Operating Results Fiscal Years Beginning September 1 Number of Units: Numberof Annual Rooms Available: Number of Rooms Occupied: Annual Occupancy: Average Daily Rate: Revenue Per Available Room: Revenues Rooms Other Operated Departments Rentals and Other Income Total Revenues Deparfrnental Expenses Rooms Other Operated Departments Total Departmental Expenses Departmental Profit Undistributed Expenses Administrative & General Marketing Property Operation and Maintenance Utility Costs Total Undistributed Operating Expenses I Gross Operating Profit Base Management Fee Fixed Expenses Property Taxes Insurance Total Fixed Expenses Net Operating Income Before Reserve FF&E Reserve Net Operating Income After Reserve I Source: PKF Consulting 2018/19 106 38,690 30,180 78.07. $171.00 $133.38 Amount Ratio $5,161,000 98.67. 55,000 1.1% 18,000 0.3% 5,234,000 100.07. 1,103,000 21.47. 44,000 80.07. 1,147,000 21.97. 4,087,000 I 2,886,000 I 1 57,000 I 209,000 I $2,244,000 I 426,000 8.1 % 374,000 7.1% 207,000 4.07. 194,000 3.7% 1,201,000 22.97. 55.1% 3.0% 1 86,000 90,000 3.67. 1.77. 276,000 5.37. 46.97. 4.0% 2019/20 106 38,690 30,180 78.07. $176.00 $137.28 Amount Ratio $5,312,000 98.67. 57,000 1.17. 19,000 0.47. 5,388,000 100.07. 1,136,000 21.47. 45,000 78.97. 1,181,000 21.97. 2,970,000 I 2,525,000 I 216,000 I $2,309,000 I 439,000 8.17. 386,000 7.2% 213,000 4.07. 1 99,000 3.7% 1,237,000 23.07. 55.17. 1 90,000 93,000 3.5% 1.7% 283,000 5.3% 46.9% I 4.07. 2020/21 106 38,690 30,180 78.07. $181.00 $141.18 Amount Ratio $5,463,000 98.67. 58,000 1.0% 19,000 0.3% 5,540,000 100.07. 1,170,000 21.47. 47,000 81.0% 1,217,000 22.07. 3,050,000 2,594,000 I 222,000 $2,372,000 I 452,000 8.2% 397,000 7.2% 219,000 4.07. 205,000 3.77o 1,273,000 23.07. 194,000 96,000 3.5% 1.7% 290,000 5.2% 46.87. 4.07. 42.87. 2021/22 106 38,690 30,180 78.0% $186.00 $145.08 Amount Ratio $5,613,000 98.67. 60,000 1.17. 20,000 0.47o 5,693,000 100.0% 2,660,000 I $2,432,000 I 4,323,000 I 78.07.1 | 4,440,000 | 78.o"%" 465,000 8.27. 409,000 7.2% 226,000 4.07. 212,000 3.7% 1,312,000 23.07. 54.97. 3.0% 198,000 99,000 3.5% 1.77. 297,000 5.27. 46.7% 4.0% 2022/23 106 38,690 30,180 78.07. $192.00 $149.76 Amount Ratio $5,795,000 98.67. 62,000 1.17. 21,000 0.47. 5,878,000 100.07. 4,587,000 I 3,237,000 1 76,000 I 2,757,000 235,000 $2,522,000 1,205,000 21.57. 1,241,000 21.47. 48,000 80.07. 50,000 80.6% 1,253,000 22.07. 1,291,000 22.07. 78.07. 479,000 8.1% 421,000 7.2% 232,000 3.97. 218,000 3.77. 1,350,000 23.07. 55.1% 3.0% 202,000 102,000 3.4% 1.7% 304,000 5.2% 46.97. 4.0% 42.97. Proposed Holiday Inn and Staybridge Suites, Carlsbad, California Addendum Statement of Assumptions and Limiting Conditions STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS This report is made with the following assumptions and limiting conditions: Economic and Social Trends - The consultant assumes no responsibility for economic, physical or demographic factors which may affect or alter the opinions in this report if said economic, physical or demographic factors were not present as of the date of the letter of transmittal accompanying this report. The consultant is not obligated to predict future political, economic or social trends. Information Furnished by Others - in preparing this report, the consultant was required to rely on information furnished by other individuals or found in previously existing records and/or documents. Unless otherwise indicated, such information is presumed to be reliable. However, no warranty, either express or implied, is given by the consultant for the accuracy of such information and the consultant assumes no responsibility for information relied upon later found to have been inaccurate. The consultant reserves the right to make such adjustments to the analyses, opinions and conclusions set forth in this report as may be required by consideration of additional data or more reliable data that may become available. Hidden Conditions - The consultant assumes no responsibility for hidden or unapparent conditions of the property, subsoil, ground water or structures that render the subject property more or less valuable. No responsibility is assumed for arranging for engineering, geologic or environmental studies that may be required to discover such hidden or unapparent conditions. Hazardous Materials - The consultant has not been provided any information regarding the presence of any material or substance on or in any portion of the subject property or improvements thereon, which material or substance possesses or may possess toxic, hazardous and/or other harmful and/or dangerous characteristics. Unless otherwise stated in the report, the consultant did not become aware of the presence of any such material or substance during the consultant's inspection of the subject property. However, the consultant is not qualified to investigate or test for the presence of such materials or substances. The presence of such materials or substances may adversely affect the value of the subject property. The value estimated in this report is predicated on the assumption that no such material or substance is present on or in the subject property or in such proximity thereto that it would cause a loss in value. The consultant assumes no responsibility for the presence of any such substance or material on or in the subject property, nor for any expertise or engineering knowledge required to discover the presence of such substance or material. Unless otherwise stated, this report assumes the subject property is in compliance with all federal, state and local environmental laws, regulations and rules. Zoning and Land Use - Unless otherwise stated, the projections were formulated assuming the hotel to be in full compliance with all applicable zoning and land use regulations and restrictions. Licenses and Permits - Unless otherwise stated, the property is assumed to have all required licenses, permits, certificates, consents or other legislative and/or administrative authority from any local, state or national govemment or private entity or organization have been or can be obtained or renewed for any use on which the value estimate contained in this report is based. Engineering Survey - No engineering survey has been made by the consultant. Except as specifically stated, data relative to size and area of the subject property was taken from sources considered reliable and no encroachment of the subject property is considered to exist. Subsurface Rights - No opinion is expressed as to the value of subsurface oil, gas or mineral rights or whether the property is subject to surface entry for the exploration or removal of such materials, except as is expressly stated. Maps, Plats and Exhibits - Maps, plats and exhibits included in this report are for illustration only to serve as an aid in visualizing matters discussed within the report. They should not be considered as surveys or relied upon for any other purpose, nor should they be removed from, reproduced or used apart from the report. Legal Matters - No opinion is intended to be expressed for matters which require legal expertise or specialized investigation or knowledge beyond that customarily employed by real estate consultants. STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS (continued) Right of Publication - Possession of this report, or a copy of it, does not carry with it the right of publication. Without the written consent of the consultant, this report may not be used for any purpose by any person other than the party to whom it is addressed. In any event, this report may be used only with proper written qualification and only in its entirety for its stated purpose. Testimony in Court - Testimony or attendance in court or at any other hearing is not required by reason of rendering this report, unless such arrangements are made a reasonable time in advance of said hearing. Further, unless othenA'ise indicated, separate arrangements shall be made concerning compensation for the consultant's time to prepare for and attend any such hearing. Archeological Significance - No investigation has been made by the consultant and no information has been provided to the consultant regarding potential archeological significance ofthe subject property or any portion thereof. This report assumes no portion ofthe subject property has archeological significance. Compliance with the American Disabilities Act - The Americans with Disabilities Act ("ADA") became effective January 26, 1992. We assumed that the property will be in direct compliance with the various detailed requirements of the ADA. Definitions and Assumptions - The definitions and assumptions upon which our analyses, opinions and conclusions are based are set forth in appropriate sections of this report and are to be part of these general assumptions as if included here in their entirety. Dissemination of Material - Neither all nor any part of the contents of this report shall be disseminated to the general public through advertising or sales media, public relations media, news media or other public means of communication without the prior written consent and approval of the consultant(s). Distribution and Liability to Third Parties - The party for whom this report was prepared may distribute copies of this report only in its entirety to such third parties as may be selected by the party for whom this report was prepared; however, portions of this report shall not be given to third parties without our written consent. Liability to third parties will not be accepted. Use in Offering Materials - This report, including all cash flow forecasts, market surveys and related data, conclusions, exhibits and supporting documentation, may not be reproduced or references made to the report or to PKF Consulting in any sale offering, prospectus, public or private placement memorandum, proxy statement or other document ("Offering Material") in connection with a merger, liquidation or other corporate transaction unless PKF Consulting has approved in writing the text of any such reference or reproduction prior to the distribution and filing thereof. Limits to Liability - PKF Consulting cannot be held liable in any cause of action resulting in litigation for any dollar amount which exceeds the total fees collected from this individual engagement. Legal Expenses - Any legal expenses incurred in defending or representing ourselves concerning this assignment will be the responsibility ofthe client.