FEASIBILITY STUDY Proposed Hotel and Conference Center

FEASIBILITY STUDY

Proposed Hotel and Conference Center

U.S. HIGHWAY 377 KELLER, TEXAS

SUBMITTED TO:PR OPOSED

Ms. DeAnna Reaves City of Keller Texas 1100 Bear Creek Parkway, Post Office Box 770 Keller, Texas, 76248 +1 (817) 743-4020

PREPARED BY:

HVS Consulting and Valuation Services Division of TS Worldwide, LLC 2601 Sagebrush Drive, Suite 101 Flower Mound, Texas 75028 +1 (214) 724-7995

August-2013

August 23, 2013 Ms. DeAnna Reaves City of Keller Texas 1100 Bear Creek Parkway, Post Office Box 770 Keller, Texas, 76248

Re: Proposed Hotel and Conference Center Keller, Texas HVS Reference: 2013020674

Dear Ms. Reaves: Pursuant to your request, we herewith submit our feasibility study pertaining to the above-captioned property. We have inspected the real estate and analyzed the hotel market conditions in the Keller, Texas area. We have studied the proposed project, and the results of our fieldwork and analysis are presented in this report. We have also reviewed the proposed improvements for this site. Our report was prepared in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP), as provided by the Appraisal Foundation. We hereby certify that we have no undisclosed interest in the property, and our employment and compensation are not contingent upon our findings. This study is subject to the comments made throughout this report and to all assumptions and limiting conditions set forth herein.

Sincerely, TS Worldwide, LLC

Jane L. Rogers, Vice President [email protected], +1 (214) 724-7995 State Appraiser License (TX) 1380015 G

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Table of Contents

SECTION TITLE PAGE

1. Executive Summary 4 2. Description of the Site and Neighborhood 13 3. Market Area Analysis 22 4. Supply and Demand Analysis 45 5. Description of the Proposed Project 69 6. Projection of Occupancy and Average Rate 75 7. Projection of Income and Expense 83 8. Feasibility Analysis 102 9. Statement of Assumptions and Limiting Conditions 114 10. Certification 117

Addenda Penetration Explanation i Explanation of the Simultaneous Valuation Formula v

Qualifications Copy of Appraisal License

August-2013 Executive Summary Proposed Hotel and Conference Center – Keller, Texas 4

1. Executive Summary

Although a specific site has not yet been chosen, for the purposes of this study, we have assumed that the subject of the feasibility study is a 261,360-square-foot (6.00-acre) parcel to be improved with a select-service lodging facility and conference center; the hotel is expected to be affiliated with a national brand. The property is expected to open on January 1, 2015 and is anticipated to feature 140 rooms, a restaurant and lounge, a full-service kitchen, 14,000 square feet of meeting space, an outdoor pool, an outdoor whirlpool, an exercise room, and a business center. The hotel will also feature all necessary back-of-the-house space. The proposed subject property will be the first hotel located in the city of Keller and is expected to benefit from its location along the U.S. Highway 377 corridor. The property is also anticipated to offer a state-of-the-art conference center that should become a leading choice for mid-sized corporate meetings, civic events, and SMERFE-related events, such as weddings, bar and bat mitzvah celebrations, and charity galas. The expected strength of the chosen brand should allow the proposed subject property to successfully compete with any existing or future hotel developments located along the Highway 114 corridor. The subject site’s location is assumed to be U.S. Highway 377, Keller, Texas, 76248. The effective date of the report is August 23, 2013. The subject site and other potential sites were inspected by Jane L. Rogers on August 1, 2013. The proposed subject property is still in the very early planning stages; neither a specific site nor a developer has yet been selected for the proposed subject property. Details pertaining to management terms were not yet determined at the time of this report; therefore, our forecast fees represent a blended average of what would be expected on a base-fee and incentive-fee basis. We have assumed a market-appropriate total management fee of 3.0% of total revenues in our study. We recommend that the proposed subject property operate as an upscale, hotel and conference center. Appropriate brands include, but are not limited to, Hyatt Place, Aloft, Courtyard by Marriott, and Hilton Garden Inn. However, a specific franchise affiliation and/or brand has yet to be finalized. The manufacturing and aviation industries, tourism, and local corporations and entities such as Deloitte University, Fidelity Investments, Lockheed Martin, and

Subject of the Feasibility Study

Pertinent Dates

Ownership, Franchise, and Management Assumptions

Summary of Hotel Market Trends


UPS serve as the primary sources of lodging demand in this area. In 2009, demand levels decreased concurrent with the deepening national recession, resulting in a modest occupancy decline. Demand levels rebounded in 2010, and strong growth continued through 2012. However, the introduction of the Hilton Garden Inn in September of 2011 prevented occupancy levels from illustrating a similar sharp rise that year and caused occupancy levels to remain relatively flat in 2012. The latest year-to-date data for 2013 show strong occupancy increases, despite the introduction of additional new supply, reflecting the strength of the local economy. The following table provides a historical perspective on the supply and demand trends for a selected set of hotels, as provided by Smith Travel Research.

FIGURE 1-1 HISTORICAL SUPPLY AND DEMAND TRENDS (STR)

YearAverage Daily Room Count

Available Room Nights Change

Occupied Room Nights Change Occupancy

Average Rate Change RevPAR Change

2008 739 269,735 — 172,418 — 63.9 % $142.42 — $91.04 — 2009 739 269,735 0.0 % 166,799 (3.3) % 61.8 127.76 (10.3) % 79.00 (13.2) %2010 739 269,735 0.0 183,928 10.3 68.2 128.07 0.2 87.33 10.52011 781 285,229 5.7 201,886 9.8 70.8 131.85 3.0 93.32 6.92012 866 316,090 10.8 222,565 10.2 70.4 132.89 0.8 93.57 0.3

4.0 % 6.6 % (1.7) % 0.7 %

Year-to-Date Through June

2012 866 156,746 — 111,883 — 71.4 % $133.13 — $95.03 — 2013 913 165,300 5.5 % 120,076 7.3 % 72.6 139.74 5.0 % 101.51 6.8 %

Hotels Included in Sample

Marriott Dallas Fort Worth Solana 294 Jun 1990 Jun 1990Hampton Inn Suites North Fort Worth Alliance Airport 102 Feb 1999 Feb 1999Holiday Inn Express & Suites DFW Grapevine 95 Mar 2000 Mar 2000Hilton Dallas Southlake Town Square 248 Jun 2007 Jun 2007Hilton Garden Inn Fort Worth Alliance Airport 127 Sep 2011 Sep 2011Hampton Inn & Suites Trophy Club 94 Apr 2013 Apr 2013

Total 960

Source: STR Global

Year

Opened

Average Annual Compounded Change: 2008-2012

Number Year

of Rooms Affiliated

The following tables reflect our estimates of operating data for hotels on an individual basis. These trends are presented in detail in the Supply and Demand Analysis chapter of this report.

FIGURE 1-2 PRIMARY COMPETITORS – OPERATING PERFORMANCE

Est. Segmentation Estimated 2010 Estimated 2011 Estimated 2012

Property Occ. RevPAR Occ. RevPAR RevPARRevPAR Change

Occupancy Penetration

Yield Penetration

Hilton Dallas Southlake Town Square 248 50 % 25 % 25 % 248 72 % $167.00 $120.24 248 76 % $176.00 $133.76 248 79 % $179.00 $141.41 5.7 % 108.5 % 145.2 %Hilton Garden Inn Fort Worth Alliance Airport 127 70 5 25 0 0 0.00 0.00 37 41 108.00 44.28 127 63 104.00 65.52 48.0 86.5 67.3Marriott Solana Dallas Fort Worth Westlake 294 60 25 15 294 66 105.00 69.30 294 71 109.00 77.39 294 72 110.00 79.20 2.3 98.9 81.3

Sub-Totals/Averages 669 58 % 22 % 21 % 542 68.7 % $134.71 $92.61 579 71.2 % $139.58 $99.40 669 72.9 % $136.74 $99.66 0.3 % 100.1 % 102.4 %

Secondary Competitors 102 70 % 5 % 25 % 66 64.0 % $104.00 $66.56 66 72.0 % $102.00 $73.44 66 72.0 % $103.00 $74.16 1.0 % 98.9 % 76.2 %

Totals/Averages 771 59 % 20 % 21 % 608 68.2 % $131.57 $89.77 646 71.3 % $135.68 $96.73 735 72.8 % $133.73 $97.36 0.7 % 100.0 % 100.0 %

Occ.Average

RateNumber

of Rooms

Weighted Annual Room Count

Weighted Annual Room CountCo

mm

erci

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Mee

ting

and

G

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Leis

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Average Rate


Average Rate

FIGURE 1-3 SECONDARY COMPETITORS – OPERATING PERFORMANCE


Total

PropertyNumber

of RoomsCompetitive

Level Occ.Average

Rate RevPAR Occ.Average


Rate RevPAR

Hampton Inn & Suites North Fort Worth Alliance Airport 102 70 % 5 % 25 % 65 % 66 64 % $104.00 $66.56 66 72 % $102.00 $73.44 66 72 % $103.00 $74.16

Totals/Averages 102 70 % 5 % 25 % 65 % 66 64.0 % $104.00 $66.56 66 72.0 % $102.00 $73.44 66 72.0 % $103.00 $74.16


mm

erci

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Mee

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Based on our analysis presented in the Projection of Occupancy and Average Rate chapter, we have chosen to use a stabilized occupancy level of 72% and a base-year rate position of $110.00 for the proposed subject property. The following table reflects a summary of our market-wide and proposed subject property occupancy and average rate projections.

FIGURE 1-4 MARKET AND SUBJECT PROPERTY AVERAGE RATE FORECAST

Year

Base Year 72.8 % — $133.73 — — $110.00 82.3 %2013 72.6 6.0 % 141.75 — 6.0 % 116.60 82.32014 73.9 5.0 148.84 — 5.0 122.43 82.32015 68.6 4.5 155.54 58.0 % 4.5 127.94 82.32016 70.6 4.0 161.76 64.0 4.0 133.06 82.32017 71.8 3.5 167.42 70.0 3.5 137.71 82.32018 72.5 3.0 172.45 72.0 3.0 141.85 82.3

Average Rate Growth

Area-wide Market (Calendar Year) Subject Property (Calendar Year)

Average Rate

Average Rate Penetration

Average Rate Growth

Average Rate OccupancyOccupancy

The following table summarizes the proposed subject property’s forecast, reflecting fiscal years and opening-year rate discounts as applicable. FIGURE 1-5 FORECAST OF AVERAGE RATE

Year

2015 58 % $127.94 3.0 % $124.102016 64 133.06 1.5 131.062017 70 137.71 0.0 137.712018 72 141.85 0.0 141.85

OccupancyAverage Rate

Before Discount DiscountAverage Rate After Discount

Our positioning of each revenue and expense level is supported by comparable operations or trends specific to this market. Our forecast of income and expense is presented in the following table.

Summary of Forecast Occupancy and Average Rate

Summary of Forecast Income and Expense Statement

FIGURE 1-6 DETAILED FORECAST OF INCOME AND EXPENSE

2015 (Calendar Year) 2016 2017 Stabilized 2019

Number of Rooms: 140 140 140 140 140

Occupancy: 58% 64% 70% 72% 72%

Average Rate: $124.10 $131.06 $137.71 $141.85 $146.10

RevPAR: $71.98 $83.88 $96.40 $102.13 $105.19

Days Open: 365 365 365 365 365

Occupied Rooms: 29,638 %Gross PAR POR 32,704 %Gross PAR POR 35,770 %Gross PAR POR 36,792 %Gross PAR POR 36,792 %Gross PAR POR

REVENUE

Rooms $3,678 69.6 % $26,271 $124.10 $4,286 70.9 % $30,614 $131.05 $4,926 72.0 % $35,186 $137.71 $5,219 72.2 % $37,279 $141.85 $5,375 72.2 % $38,393 $146.09

Food 1,020 19.3 7,287 34.42 1,128 18.7 8,055 34.48 1,241 18.1 8,863 34.69 1,305 18.0 9,323 35.47 1,344 18.1 9,602 36.54

Beverage 355 6.7 2,533 11.96 384 6.4 2,746 11.76 416 6.1 2,970 11.62 435 6.0 3,108 11.82 448 6.0 3,201 12.18

Other Operated Departments 197 3.7 1,406 6.64 208 3.4 1,487 6.36 220 3.2 1,571 6.15 228 3.2 1,631 6.21 235 3.2 1,680 6.39

Rentals & Other Income 37 0.7 268 1.26 40 0.7 283 1.21 42 0.6 299 1.17 44 0.6 311 1.18 45 0.6 320 1.22

Total Revenues 5,287 100.0 37,765 178.39 6,046 100.0 43,185 184.87 6,844 100.0 48,888 191.34 7,231 100.0 51,651 196.54 7,448 100.0 53,197 202.42

DEPARTMENTAL EXPENSES *

Rooms 912 24.8 6,512 30.76 973 22.7 6,950 29.75 1,037 21.1 7,408 29.00 1,080 20.7 7,716 29.36 1,113 20.7 7,948 30.24

Food & Beverage 1,030 74.9 7,356 34.74 1,090 72.1 7,789 33.34 1,154 69.7 8,242 32.26 1,199 68.9 8,564 32.59 1,235 68.9 8,821 33.57


Total 2,103 39.8 15,019 70.95 2,231 36.9 15,934 68.21 2,365 34.5 16,891 66.11 2,459 34.0 17,562 66.82 2,532 34.0 18,088 68.83

DEPARTMENTAL INCOME 3,184 60.2 22,746 107.44 3,815 63.1 27,251 116.66 4,480 65.5 31,998 125.24 4,773 66.0 34,090 129.72 4,915 66.0 35,108 133.59

UNDISTRIBUTED OPERATING EXPENSES

Administrative & General 489 9.3 3,494 16.51 516 8.5 3,683 15.76 543 7.9 3,879 15.18 563 7.8 4,020 15.30 580 7.8 4,141 15.76

Marketing 259 4.9 1,850 8.74 273 4.5 1,950 8.35 287 4.2 2,054 8.04 298 4.1 2,128 8.10 307 4.1 2,192 8.34

Franchise Fee 349 6.6 2,496 11.79 407 6.7 2,908 12.45 468 6.8 3,343 13.08 496 6.9 3,541 13.48 511 6.9 3,647 13.88

Prop. Operations & Maint. 203 3.8 1,453 6.86 241 4.0 1,722 7.37 282 4.1 2,016 7.89 293 4.0 2,089 7.95 301 4.0 2,152 8.19

Utilities 223 4.2 1,593 7.52 235 3.9 1,679 7.19 248 3.6 1,768 6.92 257 3.5 1,833 6.97 264 3.5 1,888 7.18

Total 1,524 28.8 10,886 51.42 1,672 27.6 11,942 51.12 1,828 26.6 13,059 51.11 1,906 26.3 13,613 51.80 1,963 26.3 14,021 53.35

HOUSE PROFIT 1,660 31.4 11,860 56.02 2,143 35.5 15,309 65.54 2,651 38.9 18,938 74.12 2,867 39.7 20,477 77.92 2,952 39.7 21,088 80.24

Management Fee 159 3.0 1,133 5.35 181 3.0 1,296 5.55 205 3.0 1,467 5.74 217 3.0 1,550 5.90 223 3.0 1,596 6.07

INCOME BEFORE FIXED CHARGES 1,502 28.4 10,727 50.67 1,962 32.5 14,014 59.99 2,446 35.9 17,472 68.38 2,650 36.7 18,927 72.02 2,729 36.7 19,492 74.17

FIXED EXPENSES

Property Taxes 254 4.8 1,815 8.57 260 4.3 1,860 7.96 268 3.9 1,916 7.50 276 3.8 1,973 7.51 285 3.8 2,033 7.73

Insurance 61 1.1 433 2.04 62 1.0 446 1.91 64 0.9 459 1.80 66 0.9 473 1.80 68 0.9 487 1.85

Reserve for Replacement 106 2.0 755 3.57 181 3.0 1,296 5.55 274 4.0 1,956 7.65 289 4.0 2,066 7.86 298 4.0 2,128 8.10

Total 420 7.9 3,003 14.19 504 8.3 3,602 15.42 606 8.8 4,331 16.95 632 8.7 4,513 17.17 651 8.7 4,648 17.69

NET INCOME $1,081 20.5 % $7,724 $36.49 $1,458 24.2 % $10,412 $44.57 $1,840 27.1 % $13,141 $51.43 $2,018 28.0 % $14,415 $54.85 $2,078 28.0 % $14,844 $56.48

*Departmental expenses are expressed as a percentage of departmental revenues.

FIGURE 1-7 TEN-YEAR FORECAST OF INCOME AND EXPENSE

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Number of Rooms: 140 140 140 140 140 140 140 140 140 140

Occupied Rooms: 29,638 32,704 35,770 36,792 36,792 36,792 36,792 36,792 36,792 36,792

Occupancy: 58% 64% 70% 72% 72% 72% 72% 72% 72% 72%

Average Rate: $124.10 % of $131.06 % of $137.71 % of $141.85 % of $146.10 % of $150.48 % of $155.00 % of $159.65 % of $164.44 % of $169.37

RevPAR: $71.98 Gross $83.88 Gross $96.40 Gross $102.13 Gross $105.19 Gross $108.35 Gross $111.60 Gross $114.95 Gross $118.40 Gross $121.95

REVENUE

Rooms $3,678 69.6 % $4,286 70.9 % $4,926 72.0 % $5,219 72.2 % $5,375 72.2 % $5,537 72.2 % $5,703 72.2 % $5,874 72.2 % $6,050 72.2 % $6,231 72.2 %

Food 1,020 19.3 1,128 18.7 1,241 18.1 1,305 18.0 1,344 18.1 1,385 18.0 1,426 18.0 1,469 18.0 1,513 18.0 1,558 18.1

Beverage 355 6.7 384 6.4 416 6.1 435 6.0 448 6.0 462 6.0 475 6.0 490 6.0 504 6.0 519 6.0

Other Operated Departments 197 3.7 208 3.4 220 3.2 228 3.2 235 3.2 242 3.2 250 3.2 257 3.2 265 3.2 273 3.2


Total 5,287 100.0 6,046 100.0 6,844 100.0 7,231 100.0 7,448 100.0 7,672 100.0 7,902 100.0 8,139 100.0 8,383 100.0 8,634 100.0

DEPARTMENTAL EXPENSES*

Rooms 912 24.8 973 22.7 1,037 21.1 1,080 20.7 1,113 20.7 1,146 20.7 1,180 20.7 1,216 20.7 1,252 20.7 1,290 20.7

Food & Beverage 1,030 74.9 1,090 72.1 1,154 69.7 1,199 68.9 1,235 68.9 1,272 68.9 1,310 68.9 1,350 68.9 1,390 68.9 1,432 68.9


Total 2,103 39.8 2,231 36.9 2,365 34.5 2,459 34.0 2,532 34.0 2,608 34.0 2,687 34.0 2,767 34.0 2,850 34.0 2,936 34.0



Administrative & General 489 9.3 516 8.5 543 7.9 563 7.8 580 7.8 597 7.8 615 7.8 634 7.8 653 7.8 672 7.8

Marketing 259 4.9 273 4.5 287 4.2 298 4.1 307 4.1 316 4.1 326 4.1 335 4.1 345 4.1 356 4.1

Franchise Fee 349 6.6 407 6.7 468 6.8 496 6.9 511 6.9 526 6.9 542 6.9 558 6.9 575 6.9 592 6.9

Prop. Operations & Maint. 203 3.8 241 4.0 282 4.1 293 4.0 301 4.0 310 4.0 320 4.0 329 4.0 339 4.0 349 4.0

Utilities 223 4.2 235 3.9 248 3.6 257 3.5 264 3.5 272 3.5 280 3.5 289 3.5 297 3.5 306 3.5

Total 1,524 28.8 1,672 27.6 1,828 26.6 1,906 26.3 1,963 26.3 2,022 26.3 2,083 26.3 2,145 26.3 2,209 26.3 2,276 26.3

HOUSE PROFIT 1,660 31.4 2,143 35.5 2,651 38.9 2,867 39.7 2,952 39.7 3,041 39.7 3,133 39.7 3,227 39.7 3,323 39.7 3,422 39.7

Management Fee 159 3.0 181 3.0 205 3.0 217 3.0 223 3.0 230 3.0 237 3.0 244 3.0 251 3.0 259 3.0


FIXED EXPENSES

Property Taxes 254 4.8 260 4.3 268 3.9 276 3.8 285 3.8 293 3.8 302 3.8 311 3.8 320 3.8 330 3.8

Insurance 61 1.1 62 1.0 64 0.9 66 0.9 68 0.9 70 0.9 72 0.9 75 0.9 77 0.9 79 0.9

Reserve for Replacement 106 2.0 181 3.0 274 4.0 289 4.0 298 4.0 307 4.0 316 4.0 326 4.0 335 4.0 345 4.0

Total 420 7.9 504 8.3 606 8.8 632 8.7 651 8.7 670 8.7 690 8.7 711 8.7 732 8.7 754 8.7

NET INCOME $1,081 20.5 % $1,458 24.2 % $1,840 27.1 % $2,018 28.0 % $2,078 28.0 % $2,141 28.0 % $2,205 28.0 % $2,271 28.0 % $2,339 28.0 % $2,409 28.0 %1 1 1 1 1 1 1 1 1 1


% of

Gross


As illustrated, the hotel is expected to stabilize at a profitable level. Please refer to the Forecast of Income and Expense chapter of our report for a detailed explanation of the methodology used in deriving this forecast. The proposed subject hotel has an opportunity to serve an unrepresented niche in the market. While the greater Metroplex market offers a wide complement of convention centers and meeting and group-focused hotels with sizeable amounts of meeting space, the Keller and Southlake areas remain underserved by branded, conference center hotels such as the proposed subject property. Based on our market analysis, there is adequate market support for the proposed hotel and conference center in Keller. Our conclusion is based primarily on the long-term strength of this hotel market and its ongoing growth. The steady increase of demand and average rate indicates that the market will successfully absorb the new supply from this proposed hotel. The proposed hotel sites are located proximate to both corporate and leisure demand generators and will offer an appropriate array of facilities and amenities that will allow the property to perform well across all market segments. Our conclusion is also predicated on the assumption that another conference facility will not be built in Keller. Our research indicates that the city can support a hotel, with or without an attached conference center, but that the current demand for meeting and group events is not great enough to support two conference facilities. Based on these parameters, the feasibility of the subject project is confirmed. “Extraordinary Assumption” is defined in USPAP as follows:

An assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser’s opinions or conclusions. Comment: Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal, or economic characteristics of the subject property; or about conclusions external to the property, such as market conditions or trends; or about the integrity of the data used in an analysis.1

The analysis is based on the extraordinary assumption that the described improvements have been completed as of the stated date of opening. The reader should understand that the completed subject property does not yet, in fact, exist as of the date of this report. Our feasibility study does not address unforeseeable events that could alter the proposed project and/or the market conditions reflected in the analyses; we assume that no significant changes, other than those anticipated and explained in this report, will take place between the date of inspection and stated date of opening. We have made no other extraordinary 1 Appraisal Institute, Uniform Standards of Professional Appraisal Practice, 2012 – 2013 ed.

Feasibility Conclusion

Assignment Conditions


assumptions specific to this feasibility study. However, several important general assumptions have been made that apply to this feasibility study and our studies of proposed hotels in general. These aspects are set forth in the Assumptions and Limiting Conditions chapter of this report. “Hypothetical Condition” is defined in USPAP as follows:

That which is contrary to what exists but is supposed for the purpose of analysis. Comment: Hypothetical conditions assume conditions contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis. 2

We have made no assumptions of hypothetical conditions in our report. We have not made any jurisdictional exceptions to the Uniform Standards of Professional Appraisal Practice in our analysis or report. This feasibility report is being prepared for use in the development of the proposed subject property. The client for this engagement is City of Keller Texas. This report is intended for the addressee firm, and may not be distributed to or relied upon by other persons or entities. The methodology used to develop this study is based on the market research and valuation techniques set forth in the textbooks authored by Hospitality Valuation Services for the American Institute of Real Estate Appraisers and the Appraisal Institute, entitled The Valuation of Hotels and Motels,3 Hotels, Motels and Restaurants: Valuations and Market Studies,4 The Computerized Income Approach to Hotel/Motel Market Studies and Valuations,5 Hotels and Motels: A Guide to

2 Appraisal Institute, Uniform Standards of Professional Appraisal Practice, 2012 – 2013 ed. 3 Stephen Rushmore, The Valuation of Hotels and Motels. (Chicago: American Institute of Real Estate Appraisers, 1978). 4 Stephen Rushmore, Hotels, Motels and Restaurants: Valuations and Market Studies. (Chicago: American Institute of Real Estate Appraisers, 1983). 5 Stephen Rushmore, The Computerized Income Approach to Hotel/Motel Market Studies and Valuations. (Chicago: American Institute of Real Estate Appraisers, 1990).

Intended Use of the Feasibility Study

Identification of the Client and Intended User(s)

Scope of Work


Market Analysis, Investment Analysis, and Valuations,6 and Hotels and Motels – Valuations and Market Studies.7

1. All information was collected and analyzed by the staff of TS Worldwide, LLC. Information was supplied by the client and/or the property’s development team.

2. The subject site has been evaluated from the viewpoint of its physical utility for the future operation of a hotel, as well as access, visibility, and other relevant factors.

3. The subject property's proposed improvements have been reviewed for their expected quality of construction, design, and layout efficiency.

4. The surrounding economic environment, on both an area and neighborhood level, has been reviewed to identify specific hostelry-related economic and demographic trends that may have an impact on future demand for hotels.

5. Dividing the market for hotel accommodations into individual segments defines specific market characteristics for the types of travelers expected to utilize the area's hotels. The factors investigated include purpose of visit, average length of stay, facilities and amenities required, seasonality, daily demand fluctuations, and price sensitivity.

6. An analysis of existing and proposed competition provides an indication of the current accommodated demand, along with market penetration and the degree of competitiveness. Unless noted otherwise, we have inspected the competitive lodging facilities summarized in this report.

7. Documentation for an occupancy and average rate projection is derived utilizing the build-up approach based on an analysis of lodging activity.

8. A detailed projection of income and expense made in accordance with the Uniform System of Accounts for the Lodging Industry sets forth the anticipated economic benefits of the subject property.

9. A feasibility analysis is performed that compares the net present value of the forecast cash flows to the development cost of the hotel.

6 Stephen Rushmore, Hotels and Motels: A Guide to Market Analysis, Investment Analysis, and Valuations (Chicago: Appraisal Institute, 1992). 7 Stephen Rushmore and Erich Baum, Hotels and Motels – Valuations and Market Studies. (Chicago: Appraisal Institute, 2001).

August-2013 Description of the Site and Neighborhood Proposed Hotel and Conference Center – Keller, Texas 13

2. Description of the Site and Neighborhood

The suitability of the land for the operation of a lodging facility is an important consideration affecting the economic viability of a property and its ultimate marketability. Factors such as size, topography, access, visibility, and the availability of utilities have a direct impact on the desirability of a particular site. Six sites were identified by the City of Keller Economic Development Department as available for hotel development. Of these, we have determined that four are most suitable for the development of a hotel and conference center. The advantages and disadvantages of these sites are discussed below. AERIAL VIEW OF SITE #1 (THE SHOPS AT MARSHALL RIDGE)

This site comprises approximately 60 acres and enjoys frontage along U.S. Highway 377 (Main Street). It is located approximately three miles southwest of the intersection of State Highway 170 (Alliance Gateway Freeway) and State Highway 114. The site is also proximate to the Alliance Gateway and Circle T Ranch mixed-use developments, which are expected be signicant corporate and meeting and group demand generators. Although the master plan for this project includes a variety of retail and restaurant outlets, this site is somewhat distant from the established shopping and entertainment districts of Old Town Keller and Keller Town Center. The presence of a railroad track on the west side of U.S. Highway 377 is not expected to have a significant impact on the attractiveness of this site for a hotel development since measures can be taken in the construction of the property to reduce the amount of noise transmission into the hotel.

Potential Site Analysis


AERIAL VIEW OF SITE #2 (SOUTH MAIN STREET)

This site comprises approximately 19.4 acres and also benefits from its location along U.S. Highway 377. This site enjoys the advantage of being located just south of Old Town Keller and proximate to the Keller Sports Complex, which could be an important demand generator. The South Main Street corridor offers a variety of dining and shopping options, and the development of new medical facilities in the area should provide some hotel demand. This site is also located roughly four miles east of the Texas Health Harris Hospital Alliance. The primary disadvantage of this site is its relative distance from the State Highway 114 corridor. AERIAL VIEW OF SITE #3 (1807 KELLER PARKWAY)

This site measures approximately 10.7 acres and is located on the north side of FM 1709, which is the main east/west thoroughfare through Keller and Southlake. This site is located roughly one mile east of Keller Town Center and four and one-half miles west of Southlake Town Square; therefore, a hotel at this site could expect to accommodate leisure demand from these sources. Although the site’s FM 1709 location would afford the property very good visibility, there is a lack of


corporate demand generators in the immediate area, and FM 1709 does not provide access to the corporate demand generators along State Highway 114. However, the widening of Davis Street will improve the accessibility of this site. AERIAL VIEW OF SITE #4 (KELLER TOWN CENTER)

This site measures approximately 3.3 acres and benefits from its location within the Keller Town Center mixed-use development. This site shares many of the same attributes as Site #3, but the added benefit of being within the Town Center is offset by the site’s location adjacent to the Tom Thumb grocery store, which would significantly detract from a hotel’s view. Furthermore, this site is not large enough to accommodate a hotel and conference center; however, the site would be suitable for an upscale, select-service hotel with a modest amount of meeting space. As noted, all four of these sites are suitable for hotel development, and three are large enough to support a hotel and conference center. However, for the purposes of our analysis, we have chosen to use Site #1, located within the planned Shops at Marshall Ridge mixed-use development (in the northeast quadrant of the intersection formed by U.S. Highway 377 and Keller Haslet Road), as the basis for our projections due to its proximity to existing corporate-demand generators and the growing U.S. Highway 114 commercial corridor. The remainder of this study is based on the assumption that a portion of this larger site will be subdivided for the development of the proposed subject property. We note that while a hotel and conference center would be feasible on another site, the occupancy and rate projections would likely differ somewhat because each site would provide a slightly different mix of demand generators. This site is in the city of Keller, Texas. We have assumed that the subject site will measure approximately 6.00 acres, or 261,360 square feet. The parcel's adjacent uses are set forth in the following table.

Physical Characteristics


FIGURE 2-1 SUBJECT PARCEL'S ADJACENT USES

Direction

North Vacant Land

South Vacant LandEast Residential

West U.S. Highway 377

Adjacent Use

AERIAL PHOTOGRAPH

Primary vehicular access to the proposed subject property is expected to be provided by U.S. Highway 377. The topography of the entire parcel is generally flat; however, the exact shape of the proposed hotel and conference center's site has not been determined. Upon completion of construction, the subject site is not expected to contain any significant portion of undeveloped land that could be sold, entitled, and developed for alternate use. The site is expected to be fully developed with site or building improvements, which will contribute to the overall profitability of the hotel.

Site Utility


It is important to analyze the site in regard to ease of access with respect to regional and local transportation routes and demand generators. The subject site is readily accessible to a variety of local and county roads, as well as state and interstate highways.

MAP OF REGIONAL ACCESS ROUTES

Primary regional access routes serving the Dallas/Fort Worth Metroplex include Interstates 20, 30, 35, and 45, as well as U.S. Highways 67, 75, and 287. Interstate 20 traverses the southern sector of the metro area and extends to such cities as Abilene and Midland to the west and Shreveport, Louisiana to the east. Interstate 30 commences in west Fort Worth and, after serving as a major east/west route through the metro area, extends in a northeasterly direction to Greenville and Texarkana. Interstate 35, which divides into eastern and western sections when passing through the respective Dallas and Fort Worth metro areas, provides access to Oklahoma City to the north and Austin and San Antonio to the south. Interstate 45 commences near Downtown Dallas and extends in a southeasterly direction, providing access to the Houston metropolitan area. The subject market is served by a variety of additional local highways, which are illustrated on the map.

Access and Visibility


From Interstate 35W, motorists take the State Highway 170 (Alliance Gateway Freeway) Exit and proceed northeast on this thoroughfare for approximately five miles to U.S. Highway 377. Motorists execute a right turn onto U.S. Highway 377 and travel south for approximately one and one-half miles to the subject site, which is located on the motorists’ left-hand side. The subject site is located along a major north/south highway near a busy intersection. The proposed subject property is expected to have adequate signage at the street; thus, the proposed hotel should benefit from very good visibility from within its local neighborhood. Overall, the subject site benefits from very good accessibility, and the proposed hotel is expected to enjoy very good visibility attributes. The proposed subject property will be served by the Dallas/Fort Worth International Airport, which is located approximately ten miles to the east of Keller. The proposed subject property will also be served by Dallas Love Field, which is located approximately 24 miles to the southeast of Keller. The neighborhood surrounding a lodging facility often has an impact on a hotel's status, image, class, style of operation, and sometimes its ability to attract and properly serve a particular market segment. This section of the report investigates the subject neighborhood and evaluates any pertinent location factors that could affect its future occupancy, average rate, and overall profitability. The proposed subject property's neighborhood is generally defined as the U.S. Highway 377 corridor extending between State Highway 114 to the north to Mt. Gilead Road to the south. In general, this neighborhood is in the growth stage of its life cycle, with development occurring in the commercial and residential sectors. Within the immediate proximity of the site, land use is primarily commercial and residential in nature. The neighborhood is characterized by industrial parks, office buildings, retail shopping centers, and residential areas. Some specific businesses and entities located in the Alliance Gateway industrial park include UPS Supply Chain Services, Nestlé, TD Ameritrade, LG Electronics, Safeway, and Lockheed Martin. Although a large portion of the Circle T Ranch mixed-use development fronting U.S. Highway 377 is currently undeveloped, tenants within the larger project include the Westlake Academy, Deloitte University, and Fidelity Investments. Major changes in this neighborhood include the planned expansion of the Westlake Corners retail center and the expected development of The Shops at Marshall Ridge. In general, we would characterize the neighborhood as 35% industrial use, 35% residential use, 15% vacant, 5% retail/restaurant use, 5% office use, and 5% other. The proposed subject property's opening should be a positive influence on the area; the hotel will be in character with and will complement surrounding land uses.

Airport Access

Neighborhood


MAP OF NEIGHBORHOOD

Overall, the supportive nature of the development in the immediate area is considered appropriate for and conducive to the operation of a hotel. The subject site will reportedly be served by all necessary utilities. Geological and soil reports were not provided to us or made available for our review during the preparation of this report. We are not qualified to evaluate soil conditions other than by a visual inspection of the surface; no extraordinary conditions were apparent. We were not informed of any site-specific nuisances or hazards, and there were no visible signs of toxic ground contaminants at the time of our inspection. Because we are not experts in this field, we do not warrant the absence of hazardous waste and urge the reader to obtain an independent analysis of these factors. According to the Federal Emergency Management Agency map illustrated below, the subject site is located in flood zone X.

Utilities

Soil and Subsoil Conditions

Nuisances and Hazards

Flood Zone


COPY OF FLOOD MAP AND COVER

The flood zone definition for the X designation is as follows: areas outside the 500-year flood plain; areas of the 500-year flood; areas of the 100-year flood with average depths of less than one foot or with drainage areas less than one square mile and areas protected by levees from the 100-year flood. According to the local planning office, the subject property is zoned as follows: C - Commercial. This zoning designation allows for most commercial uses, including offices, retail establishments, restaurants, and hotels and motels. We assume that all necessary permits and approvals will be secured (including the appropriate liquor license if applicable) and that the subject property will be constructed in accordance with local zoning ordinances, building codes, and all other applicable regulations. Our zoning analysis should be verified before any physical changes are made to the site. We are not aware of any easements attached to the property that would significantly affect the utility of the site or marketability of this project.

Zoning

Easements and Encroachments


We have analyzed the issues of size, topography, access, visibility, and the availability of utilities. The recommended site enjoys a favorable location within a planned mixed-use development along U.S. Highway 377, proximate to a number of corporate demand generators. In general, the site should be well suited for future hotel use, with acceptable access, visibility, and topography for an effective operation. We note that sites #2, #3, and #4 would also be well suited for future hotel use.

Conclusion

August-2013 Market Area Analysis Proposed Hotel and Conference Center – Keller, Texas 22

3. Market Area Analysis

The economic vitality of the market area and neighborhood surrounding the subject site is an important consideration in forecasting lodging demand and future income potential. Economic and demographic trends that reflect the amount of visitation provide a basis from which to project lodging demand. The purpose of the market area analysis is to review available economic and demographic data to determine whether the local market will undergo economic growth, stabilize, or decline. In addition to predicting the direction of the economy, the rate of change must be quantified. These trends are then correlated based on their propensity to reflect variations in lodging demand, with the objective of forecasting the amount of growth or decline in visitation by individual market segment (e.g., commercial, meeting and group, and leisure). The market area for a lodging facility is the geographical region where the sources of demand and the competitive supply are located. The subject site is located in the city of Keller, the county of Tarrant, and the state of Texas. Keller is a fast-growing, affluent suburb located northeast of Fort Worth that has been recognized over the past several years by a number of leading publications for its high quality of life. The city has a well-established retail presence, anchored by such districts as Old Town Keller and the Keller Town Center. Although the city lacks a strong corporate presence, Keller benefits from its proximity to the corporate centers in Southlake, Westlake, AllianceTexas, Trophy Club, and other surrounding communities, including Fort Worth. As the western anchor city of the Dallas/Fort Worth Metroplex, Fort Worth identifies itself as "Where the West Begins." Glass-and-steel skyscrapers share the sidewalks of Downtown with renovated historic districts such as the Fort Worth Stockyards National Historic District and Sundance Square. The city's namesake is Major General William Worth, who proposed a fort along the Trinity River, later to be established and named after him in 1849. Fort Worth has grown from a dusty town along the famed Chisholm Trail to one of the largest cities in Texas and the sixteenth-largest city in the nation.

Market Area Definition


FORT WORTH

The proposed subject property’s market area can be defined by its Combined Statistical Area (CSA): Dallas-Fort Worth, TX. The CSA represents adjacent metropolitan and micropolitan statistical areas that have a moderate degree of employment interchange. Micropolitan statistical areas represent urban areas in the United States based around a core city or town with a population of 10,000 to 49,999; the MSA requires the presence of a core city of at least 50,000 people and a total population of at least 100,000 (75,000 in New England). The following exhibit illustrates the market area.


MAP OF MARKET AREA

A primary source of economic and demographic statistics used in this analysis is the Complete Economic and Demographic Data Source published by Woods & Poole Economics, Inc., a well-regarded forecasting service based in Washington, D.C. Using a database containing more than 900 variables for each county in the nation, Woods & Poole employs a sophisticated regional model to forecast economic and demographic trends. Historical statistics are based on census data and information published by the Bureau of Economic Analysis. Projections are formulated by Woods & Poole, and all dollar amounts have been adjusted for inflation, thus reflecting real change. These data are summarized in the following table.

Economic and Demographic Review

FIGURE 3-1 ECONOMIC AND DEMOGRAPHIC DATA SUMMARY

Average AnnualCompounded Change

2000 2010 2012 2020 2000-10 2010-12 2012-20

Resident Population (Thousands)Tarrant County 1,456.9 1,817.7 1,884.3 2,159.9 2.2 % 1.8 % 1.7 %Dallas-Fort Worth-Arlington, TX MSA 5,192.4 6,403.1 6,693.5 7,884.1 2.1 2.2 2.1Dallas-Fort Worth, TX CSA 5,519.8 6,763.2 7,063.6 8,296.0 2.1 2.2 2.0State of Texas 20,944.5 25,257.1 26,193.8 30,061.8 1.9 1.8 1.7United States 282,162.4 309,349.7 315,387.6 341,069.5 0.9 1.0 1.0

Per-Capita Personal Income*Tarrant County $33,964 $36,444 $37,649 $41,256 0.7 1.6 1.2Dallas-Fort Worth-Arlington, TX MSA 38,069 39,795 40,988 44,372 0.4 1.5 1.0Dallas-Fort Worth, TX CSA 37,372 39,351 40,550 44,025 0.5 1.5 1.0State of Texas 31,752 35,877 37,002 40,642 1.2 1.6 1.2United States 33,771 36,700 37,571 41,366 0.8 1.2 1.2

W&P Wealth IndexTarrant County 103.1 102.0 102.4 101.5 (0.1) 0.2 (0.1)Dallas-Fort Worth-Arlington, TX MSA 115.0 111.4 111.6 109.6 (0.3) 0.1 (0.2)Dallas-Fort Worth, TX CSA 112.5 109.9 110.1 108.5 (0.2) 0.1 (0.2)State of Texas 95.1 99.1 99.4 99.1 0.4 0.1 (0.0)United States 100.0 100.0 100.0 100.0 0.0 0.0 0.0

Food and Beverage Sales (Millions)*Tarrant County $2,185 $2,975 $3,185 $3,950 3.1 3.5 2.7Dallas-Fort Worth-Arlington, TX MSA 7,496 10,001 10,755 13,574 2.9 3.7 3.0Dallas-Fort Worth, TX CSA 7,779 10,324 11,094 13,981 2.9 3.7 2.9State of Texas 25,694 33,628 35,916 44,533 2.7 3.3 2.7United States 341,525 406,373 427,462 498,869 1.8 2.6 1.9

Total Retail Sales (Millions)*Tarrant County $21,176 $24,797 $27,088 $33,261 1.6 4.5 2.6Dallas-Fort Worth-Arlington, TX MSA 74,167 85,222 93,918 118,667 1.4 5.0 3.0Dallas-Fort Worth, TX CSA 77,960 89,209 98,237 123,829 1.4 4.9 2.9State of Texas 269,662 309,560 339,214 420,754 1.4 4.7 2.7United States 3,613,909 3,818,137 4,113,614 4,810,490 0.6 3.8 2.0

* Inflation Adjusted

Source: Woods & Poole Economics, Inc.


The U.S. population has grown at an average annual compounded rate of 1.0% from 2010 through 2012. The county’s population has grown at a quicker pace than the nation’s population; the average annual growth rate of 1.8% between 2010 and 2012 reflects a gradually expanding area. Following this population trend, per-capita personal income increased slowly, at 1.6% on average annually for the county between 2010 and 2012. Local wealth indexes have remained stable in recent years, registering a relatively near average 102.4 level for the county in 2012. Food and beverage sales totaled $3,185 million in the county in 2012, versus $2,975 million in 2010. This reflects a 3.5% average annual change, which is stronger than the 3.1% pace recorded in the prior decade, the latter years of which were adversely affected by the recession. The strong growth recorded in the period 2010 to 2012 reflects the impact of the recovery on the local economy. Over the long term, the pace of growth is forecast to moderate to a more sustainable level of 2.7%, which is forecast through 2020. The retail sales sector demonstrated a similar pattern, with a minimal annual increase of 1.6% in the decade 2000 to 2010, followed by an increase of 4.5% in the period 2010 to 2012. A more normalized increase of 2.6% average annual change is expected in county retail sales through 2020. The characteristics of an area's workforce provide an indication of the type and amount of transient visitation likely to be generated by local businesses. Sectors such as finance, insurance, and real estate (FIRE); wholesale trade; and services produce a considerable number of visitors who are not particularly rate-sensitive. The government sector often generates transient room nights, but per-diem reimbursement allowances often limit the accommodations selection to budget and mid-priced lodging facilities. Contributions from manufacturing, construction, transportation, communications, and public utilities (TCPU) employers can also be important, depending on the company type. The following table sets forth the county workforce distribution by business sector in 2000, 2010, and 2012, as well as a forecast for 2020.

Workforce Characteristics

FIGURE 3-2 HISTORICAL AND PROJECTED EMPLOYMENT (000S)

Average AnnualCompounded Change

Percent Percent Percent PercentIndustry 2000 of Total 2010 of Total 2012 of Total 2020 of Total

Farm 1.5 0.2 % 1.7 0.2 % 1.7 0.2 % 1.8 0.1 % 1.2 % 0.1 % 0.8 %Forestry, Fishing, Related Activities And Other 0.6 0.1 0.6 0.1 0.7 0.1 0.7 0.1 1.4 1.2 0.6Mining 8.3 0.9 22.7 2.2 23.5 2.2 28.3 2.3 10.6 1.8 2.3Utilities 1.5 0.2 2.0 0.2 2.1 0.2 2.4 0.2 2.7 3.7 1.6Construction 54.3 6.2 58.2 5.6 55.7 5.2 62.4 5.1 0.7 (2.2) 1.4Manufacturing 100.8 11.4 84.0 8.1 85.6 8.0 85.5 7.0 (1.8) 1.0 (0.0)Total Trade 146.5 16.6 152.1 14.6 155.2 14.6 180.4 14.8 0.4 1.0 1.9 Wholesale Trade 39.9 4.5 43.5 4.2 45.0 4.2 49.1 4.0 0.9 1.7 1.1 Retail Trade 106.6 12.1 108.6 10.5 110.2 10.3 131.3 10.8 0.2 0.7 2.2Transportation And Warehousing 66.8 7.6 68.6 6.6 70.0 6.6 74.4 6.1 0.3 1.0 0.8Information 22.2 2.5 17.9 1.7 18.4 1.7 19.0 1.6 (2.2) 1.5 0.4Finance And Insurance 44.7 5.1 66.3 6.4 68.7 6.4 81.8 6.7 4.0 1.8 2.2Real Estate And Rental And Lease 25.3 2.9 40.4 3.9 45.6 4.3 50.5 4.2 4.8 6.2 1.3Total Services 316.3 35.9 413.5 39.8 426.9 40.1 508.3 41.8 2.7 1.6 2.2

Professional And Technical Services 44.9 5.1 64.9 6.3 70.4 6.6 84.6 7.0 3.7 4.1 2.3Management Of Companies And Enterprises 3.3 0.4 4.9 0.5 4.9 0.5 5.8 0.5 4.2 0.1 2.0Administrative And Waste Services 63.3 7.2 75.0 7.2 77.9 7.3 91.9 7.6 1.7 1.9 2.1Educational Services 11.0 1.3 18.1 1.7 18.4 1.7 22.7 1.9 5.1 0.7 2.6Health Care And Social Assistance 68.1 7.7 90.9 8.8 93.2 8.7 113.9 9.4 2.9 1.3 2.5Arts, Entertainment, And Recreation 16.4 1.9 24.6 2.4 25.2 2.4 29.9 2.5 4.2 1.2 2.2Accommodation And Food Services 62.0 7.0 76.6 7.4 77.3 7.3 86.9 7.2 2.1 0.5 1.5Other Services, Except Public Administration 47.3 5.4 58.6 5.6 59.7 5.6 72.7 6.0 2.2 1.0 2.5

Total Government 93.4 10.6 110.4 10.6 111.0 10.4 119.5 9.8 1.7 0.3 0.9 Federal Civilian Government 13.8 1.6 14.0 1.4 13.9 1.3 14.3 1.2 0.2 (0.4) 0.3 Federal Military 4.8 0.5 5.0 0.5 5.0 0.5 5.0 0.4 0.5 (0.8) 0.1 State And Local Government 74.8 8.5 91.3 8.8 92.1 8.6 100.2 8.2 2.0 0.4 1.1

TOTAL 882.1 100.0 % 1,038.3 100.0 % 1,065.1 100.0 % 1,215.0 100.0 % 1.6 % 1.3 % 1.7 %

MSA 3,423.8 — 3,946.1 — 4,076.1 — 4,751.0 — 1.4 % 1.6 % 1.9 %U.S. 165,370.9 — 172,936.0 — 175,736.3 — 195,598.1 — 0.5 0.8 1.3

Source: Woods & Poole Economics, Inc.

2000-2010 2010-2012 2012-2020


Woods & Poole Economics, Inc. reports that during the period from 2000 to 2010, total employment in the county grew at an average annual rate of 1.6%. This trend was above the growth rate recorded by the MSA and also outpaced the national average. More recently, the pace of total employment growth in the county accelerated to 1.3% on an annual average from 2010 to 2012, reflecting the initial years of the recovery. Of the primary employment sectors, Total Services recorded the highest increase in number of employees during the period from 2010 to 2012, increasing by 13,436 people, or 3.2%, and rising from 39.8% to 40.1% of total employment. Of the various service sub-sectors, Health Care And Social Assistance and Administrative And Waste Services were the largest employers. Strong growth was also recorded in the Real Estate And Rental And Lease sector, as well as the Total Trade sector, which expanded by 12.9% and 2.0%, respectively, in the period 2010 to 2012. Forecasts developed by Woods & Poole Economics, Inc. anticipate that total employment in the county will change by 1.7% on average annually through 2020. The trend is above the forecast rate of change for the U.S. as a whole during the same period. The following table reflects radial demographic trends for our market area measured by three points of distance from the subject property.

Radial Demographic Snapshot


FIGURE 3-3 DEMOGRAPHICS BY RADIUS

Population 2017 Projection 9,229 62,965 167,110 2012 Estimate 7,408 51,514 138,909 2000 Census 1,077 12,636 48,687 1990 Census 1,102 10,319 26,053

Growth 2012-2017 24.6% 22.2% 20.3% Growth 2000-2012 587.8% 307.7% 185.3% Growth 1990-2000 -2.3% 22.5% 86.9%

Households 2017 Projection 2,786 20,364 54,822 2012 Estimate 2,263 16,872 45,924 2000 Census 362 4,303 16,090 1990 Census 351 3,369 8,727

Growth 2012-2017 23.1% 20.7% 19.4% Growth 2000-2012 525.1% 292.1% 185.4% Growth 1990-2000 3.1% 27.7% 84.4%

Income2012 Est. Average Household Income $103,821 $95,194 $105,4482012 Est. Median Household Income 79,470 77,179 87,5382012 Est. Per Capita Income 31,721 31,233 34,906

2012 Est. Civ Employed Pop 16+ by Occupation 3,932 27,133 72,257 Architect/Engineer 95 654 1,863 Arts/Entertain/Sports 74 478 1,274 Building Grounds Maint 74 525 1,552 Business/Financial Ops 317 1,974 4,972 Community/Soc Svcs 43 297 923 Computer/Mathematical 201 1,229 3,478 Construction/Extraction 74 745 1,886 Edu/Training/Library 295 2,056 5,024 Farm/Fish/Forestry 1 15 78 Food Prep/Serving 119 916 2,631 Health Practitioner/Tec 128 1,028 2,960 Healthcare Support 65 428 1,029 Maintenance Repair 116 883 2,516 Legal 42 217 579 Life/Phys/Soc Science 9 76 319 Management 599 3,821 11,463 Office/Admin Support 575 4,126 9,926 Production 170 1,140 2,838 Protective Svcs 62 430 1,063 Sales/Related 573 3,967 10,593 Personal Care/Svc 129 808 1,975 Transportation/Moving 168 1,318 3,316

0.00 - 1.00 miles 0.00 - 3.00 miles 0.00 - 5.00 miles

Source: The Nielsen Company


This source reports a population of 138,909 within a five-mile radius of the subject property, and 45,924 households within this same radius. Average household income within a five-mile radius of the subject property is currently reported at $105,448, while the median is $87,538. The following table illustrates historical and projected employment, households, population and average household income data as provided by REIS for the overall Fort Worth market.


FIGURE 3-4 HISTORICAL & PROJECTED EMPLOYMENT, HOUSEHOLDS, POPULATION, AND HOUSEHOLD INCOME STATISTICS

Year

2000 801,930 — 204,716 — 157,319 — 637,880 — 1,743,570 — $82,121 — 2001 790,700 (1.4) % 205,139 0.2 % 149,022 (5.3) % 652,070 2.2 % 1,784,080 2.3 % 83,913 2.2 %2002 785,130 (0.7) 206,059 0.4 146,330 (1.8) 665,590 2.1 1,822,680 2.2 83,844 (0.1)2003 784,170 (0.1) 209,718 1.8 144,585 (1.2) 677,290 1.8 1,856,900 1.9 86,011 2.62004 804,970 2.7 215,376 2.7 143,523 (0.7) 688,460 1.6 1,890,040 1.8 91,101 5.92005 825,130 2.5 223,518 3.8 144,737 0.8 708,250 2.9 1,950,700 3.2 95,762 5.12006 851,670 3.2 230,624 3.2 149,442 3.3 724,690 2.3 1,993,650 2.2 101,604 6.12007 873,170 2.5 236,438 2.5 150,638 0.8 742,150 2.4 2,042,480 2.4 106,597 4.92008 872,370 (0.1) 236,867 0.2 145,862 (3.2) 758,190 2.2 2,088,250 2.2 108,161 1.52009 838,870 (3.8) 231,272 (2.4) 132,693 (9.0) 772,580 1.9 2,127,960 1.9 100,509 (7.1)2010 850,500 1.4 236,063 2.1 134,424 1.3 787,230 1.9 2,159,280 1.5 107,705 7.22011 879,370 3.4 245,471 4.0 138,753 3.2 804,770 2.2 2,199,230 1.9 109,831 2.02012 909,330 3.4 253,341 3.2 144,344 4.0 821,610 2.1 2,245,390 2.1 114,040 3.8

Forecasts2013 935,050 2.8 % 259,964 2.6 % 146,916 1.8 % 840,560 2.3 % 2,292,620 2.1 % $115,724 1.5 %2014 964,400 3.1 269,280 3.6 149,037 1.4 860,940 2.4 2,342,580 2.2 120,250 3.92015 999,090 3.6 280,255 4.1 152,003 2.0 883,280 2.6 2,393,800 2.2 126,998 5.62016 1,029,700 3.1 290,019 3.5 154,445 1.6 906,240 2.6 2,446,910 2.2 133,227 4.92017 1,051,490 2.1 297,490 2.6 155,317 0.6 928,220 2.4 2,498,990 2.1 137,518 3.2

Average Annual Compound Change2000 - 2012 1.1 % 1.8 % (0.7) % 2.1 % 2.1 % 2.8 %2000 - 2007 1.2 2.1 (0.6) 2.2 2.3 3.82007 - 2010 (0.9) (0.1) (3.7) 2.0 1.9 0.32010 - 2012 3.4 3.6 3.6 2.2 2.0 2.9

Forecast 2012 - 2017 2.9 % 3.3 % 1.5 % 2.5 % 2.2 % 3.8 %

% ChgIndustrial

Employment % ChgTotal

Employment % ChgOffice

Employment % ChgHousehold

Avg. Income % Chg

Source: REIS Report, 1st Quarter, 2013

Households % Chg Population


For the Fort Worth market, of the roughly 900,000 persons employed, 28% work in offices and are categorized as office employees, while 16% are categorized as industrial employees. Total employment decreased by an average annual compound rate of -0.9% during the recession of 2007 to 2010, followed by an improvement of 3.4% from 2010 to 2012. By comparison, office employment reflected compound change rates of -0.1% and 3.6%, during same respective periods. Total employment is expected to expand by 2.8% in 2013, while office employment is forecast to expand by 2.6% in 2013. Forecasts for the period 2012 through 2017 anticipate total employment will improve at an average annual compound rate of 2.9%, and office employment is forecast to improve by 3.3% on average annually during the same time frame. The number of households are forecast to improve by 2.5% on average annually between 2012 and 2017. Population is forecast to expand during this same time frame, at an average annual compounded rate of 2.2%. Household average income is forecast to grow by 3.8% on average annually between 2012 through 2017. The following table presents historical unemployment rates for the proposed subject property’s market area. FIGURE 3-5 UNEMPLOYMENT STATISTICS

Year

2003 6.3 % 6.6 % 6.7 % 6.0 %2004 5.6 5.8 6.0 5.52005 5.1 5.2 5.4 5.12006 4.7 4.8 4.9 4.62007 4.3 4.3 4.4 4.62008 4.9(S) 5.0(S) 4.9(G) 5.82009 7.6(S) 7.7(S) 7.5(G) 9.32010 8.3(S) 8.2(S) 8.2(D) 9.62011 7.8(E) 7.8(E) 7.9(D) 8.92012 6.6(E) 6.7(E) 6.8(D) 8.1

Recent Month - Jun2012 7.2 % 7.3 % 7.5 % 8.2 %2013 6.6 6.7 6.9 7.6

U.S.State

* Letters shown next to data points (if any) reflect revised population controls and/or model re-estimation implemented by the BLS.

Source: U.S. Bureau of Labor Statistics

County MSA

Unemployment Statistics


The unemployment rate for the U.S. fluctuated within the narrow range of 4.6% to 6.0% in the period spanning from 2002 to 2007. The recession and financial crisis in 2007 and 2008 resulted in heightened unemployment rates from 2008 through 2010. Job growth resumed in 2010, generating a decline in the unemployment rate from 2011 through early 2013, and an unemployment rate near 7.6% has been in place for most of 2013. This positive trend reflects steady progress by the U.S. economy. Locally, the unemployment rate was 6.6(E)% in 2012; for this same area in 2013, the most recent month’s unemployment rate was registered at 6.6%, versus 7.2% for the same month in 2012. Unemployment rates in this area declined mid-decade, concurrent with the general recovery trend after a difficult period earlier in the decade. Unemployment began to rise in 2008, concurrent with the national economic slowdown, and continued rising through 2010; however, the unemployment rate decreased in 2011 and 2012 as the economy rebounded. The most recent comparative period illustrates further improvement, indicated by the lower unemployment rate in the most recent available data for 2013. Local economic development officials noted the importance of the manufacturing and aerospace industries as major sources of employment within the greater Fort Worth area. Our interviews with economic development officials reflect a promising outlook for the long term. Providing additional context for understanding the nature of the regional economy, the following table presents a list of the major employers in the subject property’s market. FIGURE 3-6 MAJOR EMPLOYERS

Number ofRank Firm Employees

1 American Airlines, Inc. 22,1692 Texas Health Resources 18,8663 Lockheed Martin Corporation 14,9884 Naval Air Station Joint Reserve Base 11,3505 Fort Worth ISD 11,0006 Arlington ISD 8,1267 The University of Texas at Arlington 6,2398 City of Fort Worth 6,1959 JPS Health Network 4,87210 Cook Children's Health Care System 4,826

Source: Fort Worth Chamber of Commerce, 2012

Major Business and Industry


The following bullet points highlight major demand generators for this market: • The parent company of American Airlines, Inc. and American Eagle Airlines,

Inc., AMR Corporation moved its headquarters from JFK International Airport to Dallas/Fort Worth International Airport in 1980, and the company has been a leading employer in the region ever since. American Airlines occupies 19 of the 29 gates in the airport’s International Terminal D, in addition to the entirety of Terminals A and C; American Eagle operates out of Terminal B. Along with to its headquarters offices and ample operations through the airport, AMR also executes the majority of its training operations at its DFW facilities. AMR, reportedly the world's third-largest carrier, voluntarily filed for Chapter 11 reorganization in November of 2011. As part of the planned restructuring, AMR is seeking a merger with US Airways; however, in August of 2013, the U.S. Department of Justice filed suit to block the proposed merger, which had previously been approved by the European Commission. AMR has announced plans to contest the government's suit.

• AllianceTexas, developed by Hillwood - a Perot Company, is a 17,000-acre, master-planned community located in north Fort Worth. AllianceTexas features a variety of industrial, office, retail, and residential spaces and is anchored by the Alliance Global Logistics Hub, which is a multi-modal inland port. The development is home to more than 320 companies, employing approximately 31,000 people. The Fort Worth Alliance Airport was the nation's first airport dedicated solely to industrial use. Notable tenants at the airport and the inland port include BNSF Railway, Bell Helicopter Textron, the U.S. Drug Enforcement Administration, DynCorp International, and FedEx Express. In May of 2013, Motorola announced plans to open a manufacturing facility at AllianceTexas to produce the Moto X smartphone. This plant will be owned and operated by Flextronics International Ltd. and is expected to create 2,000 new jobs.

• The oil and gas industry has provided a major source of both revenue and employment within the Fort Worth and greater Tarrant County areas. The Barnett Shale is a natural gas deposit that may contain up to 30 trillion cubic feet of gas, covering 17 counties and extending west and south of Tarrant County. As a result, a large influx of oil and gas companies, as well as petrochemical, drilling, and geological firms, has moved into the area. According to a study conducted by The Perryman Group, the total regional effect of Barnett Shale activity included $11.1 billion in annual output in 2011. In addition to the rental income and jobs created, royalties are being paid to local land owners, who are in turn putting that money into the local economy. In recent news, Chesapeake Energy was included in FORTUNE's 2013 list of the "100 Best Companies to Work For."


The Fort Worth-Arlington Metropolitan Division boasts one of the strongest economies in the U.S. The breadth of employers and companies in the area has positively contributed to the economic rebound of the market area. Fort Worth benefits from diverse major technology and government industries and is a major manufacturing center for the North Texas region, anchored by Lockheed Martin and Alcon Laboratories. Three Fortune 500 companies call Fort Worth home, including AMR, D.R. Horton, and RadioShack. Although drilling activity in the Barnett Shale has slowed in recent years, energy exploration remains a major factor for the area's economy. Future development projects, including the continued commercial expansion along the State Highway 114 and U.S. Highway 377 corridors and a variety of new retail and residential projects in Keller and the surrounding communities, are expected to further support the area's economic growth in the future. Trends in occupied office space are typically among the most reliable indicators of lodging demand, as firms that occupy office space often exhibit a strong propensity to attract commercial visitors. Thus, trends that cause changes in vacancy rates or in the amount of occupied office space may have a proportional impact on commercial lodging demand and a less direct effect on meeting demand. The following table details office space statistics for the pertinent market area.

FIGURE 3-7 OFFICE SPACE STATISTICS – MARKET OVERVIEW

Submarket

1 Northeast 151 7,109,000 5,253,600 26.1 % $18.352 Southeast 98 5,573,000 4,703,600 15.6 17.263 Southwest 21 1,721,000 1,528,200 11.2 17.564 Northwest 40 2,991,000 2,611,100 12.7 19.285 CBD 38 7,867,000 6,946,600 11.7 22.70

Totals and Averages 348 25,261,000 21,043,100 16.7 % $19.52

Inventory Occupied Office Space

Vacancy Rate

Average Asking Lease RateBuildings Square Feet


The greater Fort Worth market comprises a total of 25.3 million square feet of office space. For the 1st Quarter of 2013, the market reported a vacancy rate of 16.7% and an average asking rent of $19.52. The subject property is located in the Northeast submarket, which houses 7,109,000 square feet of office space. The submarket's vacancy rate of 26.1% is above the overall market average. The average asking lease rate of $18.35 is below the average for the broader market.

Office Space Statistics


The following table illustrates a trend of office space statistics for the overall Fort Worth market and the Northeast submarket.


FIGURE 3-8 HISTORICAL AND PROJECTED OFFICE SPACE STATISTICS – GREATER MARKET VS. SUBMARKET

Year

2000 23,910,000 — 21,464,000 — 10.2 % $17.47 — 6,529,000 — 5,693,000 — 12.8 % $18.66 — 2001 23,353,000 (2.3) % 20,119,000 (6.3) % 13.8 17.85 2.2 % 6,647,000 1.8 % 5,577,000 (2.0) % 16.1 19.51 4.6 %2002 23,676,000 1.4 19,939,000 (0.9) 15.8 17.68 (1.0) 6,814,000 2.5 5,724,000 2.6 16.0 18.90 (3.1)2003 23,895,000 0.9 19,501,000 (2.2) 18.4 17.25 (2.4) 6,814,000 0.0 5,315,000 (7.1) 22.0 18.24 (3.5)2004 24,438,000 2.3 19,768,000 1.4 19.1 17.12 (0.8) 6,917,000 1.5 5,105,000 (4.0) 26.2 18.00 (1.3)2005 24,561,000 0.5 20,705,000 4.7 15.7 17.19 0.4 7,008,000 1.3 5,445,000 6.7 22.3 17.78 (1.2)2006 24,530,000 (0.1) 21,371,000 3.2 12.9 18.11 5.4 6,995,000 (0.2) 5,827,000 7.0 16.7 18.70 5.22007 24,499,000 (0.1) 21,786,000 1.9 11.1 19.03 5.1 7,191,000 2.8 6,307,000 8.2 12.3 18.93 1.22008 24,915,000 1.7 21,537,000 (1.1) 13.6 19.61 3.0 7,191,000 0.0 5,818,000 (7.8) 19.1 19.26 1.72009 25,054,000 0.6 20,829,000 (3.3) 16.9 19.12 (2.5) 7,115,000 (1.1) 5,656,000 (2.8) 20.5 18.17 (5.7)2010 25,003,000 (0.2) 20,685,000 (0.7) 17.3 19.13 0.1 7,065,000 (0.7) 5,401,000 (4.5) 23.5 18.18 0.12011 25,206,000 0.8 20,740,000 0.3 17.7 19.27 0.7 7,103,000 0.5 5,066,000 (6.2) 28.7 18.19 0.12012 25,261,000 0.2 20,901,000 0.8 17.3 19.36 0.5 7,109,000 0.1 5,154,000 1.7 27.5 18.18 (0.1)

Forecasts2013 25,482,000 0.9 % 21,228,000 1.6 % 16.7 % 19.73 1.9 % 7,109,000 0.0 % 5,244,000 1.7 % 26.2 % $18.40 1.2 %2014 25,598,000 0.5 21,436,000 1.0 16.3 20.22 2.5 7,109,000 0.0 5,288,000 0.8 25.6 18.76 2.02015 25,808,000 0.8 21,718,000 1.3 15.8 20.75 2.6 7,178,000 1.0 5,386,000 1.9 25.0 19.15 2.12016 26,100,000 1.1 22,101,000 1.8 15.3 21.50 3.6 7,248,000 1.0 5,497,000 2.1 24.2 19.63 2.52017 26,427,000 1.3 22,377,000 1.2 15.3 22.32 3.8 7,308,000 0.8 5,601,000 1.9 23.4 20.13 2.5

Average Annual Compound Change2000 - 2012 0.5 % (0.2) % 0.9 % 0.7 % (0.8) % (0.2) %2000 - 2007 0.3 0.2 1.2 1.4 1.5 0.22007 - 2010 0.7 (1.7) 0.2 (0.6) (5.0) (1.3)2010 - 2012 0.5 0.5 0.6 0.3 (2.3) 0.0

Forecast 2012 - 2017 0.9 % 1.4 % 2.9 % 0.6 % 1.7 % 2.1 %

Fort Worth Market Northeast SubmarketAvailable

Office Space % ChgOccupied

Office Space % ChgVacancy

RateAsking

Lease RateVacancy

RateAsking

Lease Rate % Chg% ChgAvailable

Office Space % ChgOccupied

Office Space


% Chg


The inventory of office space in the Fort Worth market increased at an average annual compound rate of 0.5% from 2000 through 2012, while occupied office space contracted at an average annual rate of -0.2% over the same period. During the period of 2000 through 2007, occupied office space expanded at an average annual compound rate of 0.2%. From 2007 through 2010, occupied office space contracted at an average annual compound rate of -1.7%, reflecting the impact of the recession. The onset of the recovery is evident in the 0.5% average annual change in occupied office space from 2010 to 2012. From 2012 through 2017, the inventory of occupied office space is forecast to increase at an average annual compound rate of 1.4%, with available office space expected to increase 0.9%, thus resulting in an anticipated vacancy rate of 15.3% as of 2017. A convention center serves as a gauge of visitation trends to a particular market. Convention centers also generate significant levels of demand for area hotels and serve as a focal point for community activity. Typically, hotels within the closest proximity to a convention center – up to three miles away – will benefit the most. Hotels serving as headquarters for an event benefit the most by way of premium rates and hosting related banquet events. During the largest of conventions, peripheral hotels may benefit from compression within the city as a whole. The Metroplex's primary meeting facilities are the Dallas Convention Center and the Fort Worth Convention Center. Locally, the Grapevine Convention Center is a flexible, multi-use facility with 23,500 square feet of space. Convention demand in this market is driven primarily by the presence of the Gaylord Texan Resort's extensive meeting and group facilities. Area hotels such as the Embassy Suites and Great Wolf Lodge also offer sizable meeting facilities, as does the Hilton DFW Lakes, which is a certified conference center.

Convention Activity


FORT WORTH CONVENTION CENTER

Airport passenger counts are important indicators of lodging demand. Depending on the type of service provided by a particular airfield, a sizable percentage of arriving passengers may require hotel accommodations. Trends showing changes in passenger counts also reflect local business activity and the overall economic health of the area. Dallas/Fort Worth International Airport is one of the nation's largest airports and serves as headquarters for American Airlines. In February of 2011, the $2-billion DFW International Airport Terminal Renewal and Improvement Program (TRIP) commenced; TRIP is a seven-year plan to improve Terminals A, B, C, and E. Upgrades will include concessions upgrades, security check-point enhancements, ticket counter reconfigurations, parking improvements, restroom renovations, lighting improvements, and jet bridge and ramp equipment upgrades; additionally, heating and cooling, electrical, and plumbing systems will be replaced. The first phase of the project, the renovation of Terminal A, will be completed by 2014, and the entire project is scheduled for completion by the end of 2017. In 2012, construction began on a new entry/exit plaza for vehicular traffic that will be completed in 2014. The following table illustrates recent operating statistics for the Dallas/Fort Worth International Airport, which is the primary airport facility serving the proposed subject property’s submarket.

Airport Traffic


FIGURE 3-9 AIRPORT STATISTICS - DALLAS/FORT WORTH INTERNATIONAL AIRPORT

Year

2003 53,253,607 — — 2004 59,412,217 11.6 % 11.6 %2005 59,176,265 (0.4) 5.42006 60,226,138 1.8 4.22007 59,802,556 (0.7) 2.92008 57,093,187 (4.5) 1.42009 56,030,457 (1.9) 0.92010 56,905,600 1.6 1.02011 57,773,610 1.5 1.02012 58,590,633 1.4 1.1

Year-to-date, Jun2012 28,731,069 — — 2013 29,808,573 3.8 % —

*Annual average compounded percentage change from the previous year

**Annual average compounded percentage change from first year of data

Change**Passenger

Change*TrafficPercent Percent

Source: Dallas/Fort Worth International Airport

FIGURE 3-10 LOCAL PASSENGER TRAFFIC VS. NATIONAL TREND

-8%-6%-4%-2%0%2%4%6%8%

10%12%14%

2004 2005 2006 2007 2008 2009 2010 2011 2012

Cha

nge

in P

ass

enge

r Act

ivit

y

Source: HVS, Local Airport Authority

Loca l Passenger Volume National Passenger Volume


This facility recorded 58,590,633 passengers in 2012. The change in passenger traffic between 2011 and 2012 was 1.4%. The average annual change during the period shown was 1.1%. The following table illustrates recent operating statistics for the Dallas Love Field, which is the secondary airport facility serving the proposed subject property’s submarket. FIGURE 3-11 AIRPORT STATISTICS – DALLAS LOVE FIELD

Year

2003 5,588,930 — — 2004 5,889,756 5.4 % 5.4 %2005 5,909,599 0.3 2.82006 6,874,717 16.3 7.12007 7,953,385 15.7 9.22008 8,060,792 1.4 7.62009 7,744,522 (3.9) 5.62010 7,960,809 2.8 5.22011 7,982,844 0.3 4.62012 8,173,927 2.4 4.3

Year-to-date, Jun2012 4,034,938 — — 2013 4,137,309 2.5 % —

*Annual average compounded percentage change from the previous year

**Annual average compounded percentage change from first year of data

Passenger Percent

Source: Dallas Love Field

Traffic Change*Percent

Change**

Dallas Love Field Airport is a public airport located northwest of Dallas, Texas. Love Field was the primary airport for Dallas until Dallas/Fort Worth International Airport opened in 1974. Love Field was designated as a Texas State Historical Site in 2003 and celebrated 90 years in the aviation industry in 2007. This facility is now Dallas’s secondary airport and is primarily serviced by Southwest Airlines, as well as United Express (formerly Continental Express) and Delta Connection. Love Field launched a $519-million capital improvement project in June of 2009, through a joint venture between the City of Dallas and Southwest Airlines. The timing of the capital project's completion will coincide with the end of federal restrictions on how far planes can fly from the airport in 2014; the project will double the airport's capacity from its current four million passengers per year to eight million. Additional improvements include replacing existing terminals


with a 20-gate concourse, an expanded baggage-claim area, a remodeled lobby, and a new ticketing wing. Air traffic registered 8,173,927 passengers in 2012. The change in passenger traffic between 2011 and 2012 was 2.4%. The market benefits from a variety of tourist and leisure attractions in the area. The peak season for tourism in this area is from May to September, as well as during the months of January and February when the Fort Worth Stock Show and Rodeo occurs just west of Downtown Fort Worth. During other times of the year, weekend demand comprises travelers passing through en route to other destinations, people visiting friends or relatives, and other similar weekend demand generators. Primary attractions in the area include the following: • Downtown Fort Worth offers many attractions including its convention center

and the Bass Performance Hall, as well as Sundance Square and the Fort Worth Water Gardens. Downtown has preserved the architecture and rich heritage of the city's colorful past through the Sundance Square development, a 35-block collection of graciously restored buildings from the turn of the 20th century, featuring restaurants, stores, boutique shops, and more.

• Major attractions on the north side of Fort Worth include Cabela’s and the Texas Motor Speedway. Cabela’s is a major retailer of hunting and camping products. Its 230,000-square-foot Forth Worth showroom features museum-quality animal displays, aquariums, and trophy animals. Cabela’s also features banquet and meeting facilities on site. Texas Motor Speedway is a major North Texas attraction, hosting multiple events including truck auctions, car shows, and multiple major races per year. In addition, the Speedway offers driving schools along with driving and riding experiences.

• The Fort Worth Stockyards, anchored by the legendary Billy Bob’s Texas honky-tonk, features numerous attractions, including many food and beverage options, a plethora of retail shops, several hotels and bed-and-breakfast establishments, multiple museums, and the Cowtown Coliseum and the Stockyards Championship Rodeo arena.

• Major tourism attractions on the west side of Fort Worth include the Fort Worth Botanic Garden, the Colonial Country Club, and the Will Rogers Memorial Center. The 109-acre Fort Worth Botanic Garden features over 2,500 species of native and exotic plants in 21 specialty gardens. The facility also offers an on-site restaurant and gift shop. The Colonial Country Club hosts the annual Colonial Golf Tournament every May. The Clubhouse building, which was renovated in 2008, hosts numerous special events, including weddings, business events, and social gatherings. The Will Rogers Memorial Center hosts the annual Fort Worth Stock Show and Rodeo and features four art galleries, three theaters, a variety of restaurants, and seven museums,

Tourist Attractions


including the Kimbell Art Museum and the National Cowgirl Museum and Hall of Fame.

TEXAS MOTOR SPEEDWAY

This section discussed a wide variety of economic indicators for the pertinent market area. The Dallas/Fort Worth Metroplex is experiencing a period of economic strength and expansion, led by the energy and aerospace industries, as well as the manufacturing and transportation sectors. The significant presence of federal and local government entities also supply consistent economic benefits to the Metroplex. Furthermore, many of the corporations or institutions that support this area, such as American Airlines, Lockheed Martin, FedEx, and Fidelity Investments, are renowned entities working with a multitude of clients. The local market appears to be trending similarly to the broader national patterns of economic recovery, as evidenced by a variety of economic indicators including the unemployment rate and housing starts. The outlook for the market area is positive. Our analysis of the outlook for this specific market also considers the broader context of the national economy. The U.S. economy entered a recession in December of 2007, which worsened in the fall of 2008 when the financial crisis shocked the world economy. The U.S. fell into economic decline for most of 2009, but the nation’s gross domestic product (GDP) and corporate profits began to

Conclusion


grow again in the third quarter of 2009. In 2010, the economy experienced three consecutive quarters of annualized economic growth in excess of 3%, reflecting a rebound from the recession. Since that time, the U.S. economy has grown at fluctuating rates, as evidenced in the following table.

FIGURE 3-12 UNITED STATES GDP GROWTH RATE

0.5

3.6 3.01.7

-1.8

1.3

-3.7

-8.9

-5.3

-0.3

1.4

4.02.3 2.2 2.6 2.4

0.1

2.51.3

4.1

2.01.3

3.1

0.4

2.5

-10.0-8.0-6.0-4.0-2.00.02.04.06.0

2007 2008 2009 2010 2011 2012 2013Source: tradingeconomics.com, Bureau of Economic Analysis

Gross domestic product (GDP) increased at a rate of 2.5% in the first quarter of 2013, reflecting a welcome lift in economic activity, following a period of weak growth in the fourth quarter. The acceleration in the first quarter was largely attributed to an increase in private inventory investment, increased personal consumption expenditures, and an increase in goods and services export activity. Motor vehicle output and activity in the services sector also contributed to real GDP growth. These positive trends occurred despite a decrease of 8.4% in real federal government expenditures and investment, coupled with the 11.5% decline in national defense spending. As previously discussed, the national unemployment rate remained near 7.6% for much of 2013. Our forecasts to follow in this report reflect the optimism regarding the U.S. economy that prevails at this time.

August-2013 Supply and Demand Analysis Proposed Hotel and Conference Center – Keller, Texas 45

4. Supply and Demand Analysis

In the lodging industry, price varies directly, but not proportionately, with demand and inversely, but not proportionately, with supply. Supply is measured by the number of guestrooms available, and demand is measured by the number of rooms occupied; the net effect of supply and demand toward equilibrium results in a prevailing price, or average rate. The purpose of this section is to investigate current supply and demand trends, as indicated by the current competitive market, and to set forth a basis for the projection of future supply and demand growth. The 140-room Proposed Hotel and Conference Center will be located in Keller, Texas. The greater market surrounding the subject site offers 284 hotels and motels, spanning 28,110 rooms. The two largest hotels are the 1,511-room Gaylord Texan and the 605-room Great Wolf Lodge. Of this larger supply set, the proposed subject property is expected to compete with a smaller set of hotels based on various factors. These factors may include location, price point, product quality, length of stay (such as an extended-stay focus vs. non-extended-stay focus), room type (all-suite vs. standard), hotel age, or brand, among other factors. We have reviewed these pertinent attributes and established an expected competitive set based upon this review. Our review of the proposed subject property’s specific competitive set within the Keller area begins after our review of national occupancy, average rate, and RevPAR trends. The proposed subject property’s local lodging market is most directly affected by the supply and demand trends within the immediate area. However, individual markets are also influenced by conditions in the national lodging market. We have reviewed national lodging trends to provide a context for the forecast of the supply and demand for the proposed subject property’s competitive set. Smith Travel Research (STR) is an independent research firm that compiles data on the lodging industry, and this information is routinely used by typical hotel buyers. Figure 4-1 presents annual hotel occupancy and average rate data since 1987. Figures 4-2 and 4-3 illustrate the more recent trends, categorized by geography, price point, type of location, and chain scale. The statistics include occupancy, average rate, and rooms revenue per available room (RevPAR). RevPAR is calculated by multiplying occupancy by average rate and provides an indication of how well rooms revenue is being maximized.

Definition of Subject Hotel Market

National Trends Overview


FIGURE 4-1 NATIONAL OCCUPANCY AND AVERAGE RATE TRENDS

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

$0

$20

$40

$60

$80

$100

$120

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: STR

RevPAR Average Rate Occupancy


FIGURE 4-2 NATIONAL OCCUPANCY AND AVERAGE RATE TRENDS – YEAR-TO-DATE DATA

United States 60.9 % 61.8 % 1.5 % $105.27 $109.49 4.0 % $64.09 $67.69 5.6 %

RegionNew England 57.0 % 57.9 % 1.6 % $120.80 $123.76 2.5 % $68.91 $71.70 4.1 %Middle Atlantic 62.9 63.8 1.5 143.00 148.69 4.0 89.89 94.83 5.5South Atlantic 62.5 63.5 1.6 106.62 110.38 3.5 66.65 70.10 5.2East North Central 56.0 56.7 1.1 89.93 93.22 3.7 50.40 52.83 4.8East South Central 56.8 57.4 1.0 79.43 81.79 3.0 45.12 46.91 4.0West North Central 55.6 55.4 (0.3) 82.78 85.05 2.7 46.02 47.15 2.5West South Central 61.8 62.9 1.8 89.77 94.16 4.9 55.49 59.28 6.8Mountain 59.3 60.2 1.6 98.89 101.35 2.5 58.62 61.05 4.2Pacific 66.5 68.1 2.4 123.23 130.30 5.7 81.93 88.74 8.3

PriceLuxury 70.6 % 71.6 % 1.4 % $175.42 $182.09 3.8 % $123.78 $130.30 5.3 %Upscale 65.1 65.5 0.6 127.45 132.08 3.6 83.01 86.56 4.3Midprice 61.7 62.7 1.5 100.06 103.68 3.6 61.75 64.97 5.2Economy 55.3 56.7 2.4 73.90 77.24 4.5 40.90 43.78 7.0Budget 54.5 55.4 1.6 57.26 59.90 4.6 31.21 33.18 6.3

LocationUrban 69.0 % 70.2 % 1.8 % $149.82 $156.75 4.6 % $103.30 $109.98 6.5 %Suburban 61.4 62.6 2.0 89.04 92.17 3.5 54.63 57.67 5.6Airport 68.4 70.6 3.2 94.76 98.02 3.1 64.83 69.17 6.7Interstate 53.7 53.6 (0.1) 72.67 74.68 2.8 38.99 40.01 2.6Resort 64.3 65.3 1.5 146.49 154.30 5.3 94.25 100.72 6.9Small Metro/Town 52.5 52.9 0.8 82.96 85.33 2.9 43.53 45.12 3.6

Chain ScaleLuxury 73.9 % 75.5 % 2.1 % $274.40 $289.47 5.5 % $202.83 $218.56 7.8 %Upper Upscale 71.6 72.5 1.3 154.38 160.97 4.3 110.50 116.77 5.7Upscale 71.2 72.1 1.1 116.08 121.27 4.5 82.70 87.38 5.7Upper Midscale 62.6 63.3 1.1 95.91 99.01 3.2 60.04 62.64 4.3Midscale 54.1 55.1 1.8 73.26 75.20 2.6 39.66 41.42 4.4Economy 53.3 54.1 1.5 51.08 52.92 3.6 27.25 28.64 5.1Independents 57.0 58.1 1.9 103.35 107.23 3.8 58.93 62.28 5.7

2012 2013 % Change

Occupancy - Thru June Average Rate - Thru June RevPAR - Thru June

Source: STR - June 2013 Lodging Review

2012 % Change2012 20132013 % Change


FIGURE 4-3 NATIONAL OCCUPANCY AND AVERAGE RATE TRENDS – CALENDAR YEAR DATA

United States 59.9 % 61.4 % 2.5 % $101.85 $106.10 4.2 % $61.02 $65.17 8.2 % Region

New England 61.2 % 61.6 % 0.7 % $120.66 $126.80 5.1 % $73.84 $78.13 8.6 %Middle Atlantic 65.4 66.5 1.8 145.05 150.55 3.8 94.80 100.15 8.1South Atlantic 59.4 60.9 2.5 100.20 103.28 3.1 59.50 62.86 7.0East North Central 56.5 58.5 3.6 88.20 92.28 4.6 49.82 53.98 8.4East South Central 55.5 56.4 1.5 77.22 79.47 2.9 42.89 44.78 5.7West North Central 56.2 57.4 2.2 80.92 83.82 3.6 45.48 48.13 6.5West South Central 58.1 60.6 4.4 84.80 88.78 4.7 49.23 53.81 8.5Mountain 59.1 59.2 0.2 93.39 96.57 3.4 55.20 57.20 8.4Pacific 65.6 67.9 3.5 119.05 125.98 5.8 78.06 85.49 10.3

Price Luxury 68.3 % 69.7 % 2.0 % $167.35 $173.50 3.7 % $114.26 $120.86 8.2 %Upscale 63.9 65.5 2.4 124.88 129.09 3.4 79.80 84.51 7.4Midprice 60.5 62.1 2.6 96.51 100.30 3.9 58.37 62.27 8.0Economy 53.9 55.6 3.1 72.78 76.12 4.6 39.24 42.30 7.2Budget 54.9 56.1 2.1 54.54 57.49 5.4 29.97 32.26 7.2

Location Urban 67.5 % 69.5 % 2.9 % $147.44 $153.94 4.4 % $99.53 $106.91 8.2 %Suburban 60.1 61.8 2.7 86.18 89.86 4.3 51.81 55.49 8.4Airport 66.3 68.1 2.7 91.01 94.70 4.1 60.37 64.49 7.1Interstate 53.3 54.6 2.4 71.66 74.18 3.5 38.22 40.53 6.7Resort 61.8 63.3 2.3 135.45 141.60 4.5 83.75 89.60 9.8Small Metro/Town 53.5 54.5 1.9 84.06 86.72 3.2 44.95 47.26 6.3

Chain ScaleLuxury 71.0 % 73.2 % 3.1 % $262.64 $274.51 4.5 % $186.43 $200.98 11.2 %Upper Upscale 69.3 70.9 2.3 147.99 154.36 4.3 102.60 109.43 6.6Upscale 69.5 70.9 2.0 111.70 116.88 4.6 77.64 82.87 8.0Mid-scale w/ F&B 61.3 63.0 2.8 93.93 97.41 3.7 57.58 61.36 8.6Mid-scale w/o F&B 53.2 54.8 3.0 72.34 74.45 2.9 38.50 40.79 3.0Economy 53.4 54.3 1.8 50.47 52.50 4.0 26.94 28.52 6.0Independents 56.8 58.3 2.6 101.24 105.12 3.8 57.49 61.27 6.5

2012% Change % Change

Occupancy Average Rate RevPAR

2011 2012 2012 % Change2011 2011

Source: STR - December 2012 Lodging Review


The onset of the recession in December of 2007 first became evident in lodging trends in the spring of 2008 as demand levels decreased from the peak recorded in the previous year. The pace of decline sped up in the fall of 2008, as both corporate and consumer spending fell dramatically in the wake of the financial crisis and in response to intensifying recessionary pressures. Continued increases in lodging supply, which grew by 2.7% in 2008 and 3.2% in 2009, combined with demand decreases, resulted in a national average occupancy of 55.1% in 2009, a historic low. Aggressive price cuts and discounting that were implemented in the face of falling occupancy levels caused average rate to decrease by 8.8% in that same year. The resulting $53.71 RevPAR recorded in 2009 was on par with the level recorded in 2004. Demand growth resumed in 2010, led by select markets that had recorded positive growth trends in the fourth quarter of 2009. The pace of demand growth accelerated through the year; in 2010, lodging demand in the U.S. increased by 7.7% over that registered in 2009. A return of business travel and some group activity contributed to these positive trends. The resurgence in demand was partly fueled by the significant price discounts that were widely available in the first half of 2010. These discounting policies were largely phased out in the latter half of the year, balancing much of the early rate loss. Average rate decreased by only 0.1% in 2010 when compared to 2009. Strong demand growth continued in 2011 and 2012, at 5.0% and 3.0%, respectively. Demand increased 2.3% in the year-to-date through June 2013 period. Average rate rebounded by respective rates of 3.7% and 4.2%, in 2011 and 2012, followed by a 4.0% increase in the year-to-date through June 2013 period. In 2012, occupancy reached 61.4% (exceeding the ten-year average); moreover, occupancy is on track to gain another point in 2013. Average rate finished the year just over $106 in 2012, with year-to-date trends suggesting that another $4 to $5 gain in rate in 2013 is likely. Demand and average rates should continue to strengthen in the near term. These trends, combined with the low levels of supply growth anticipated through 2014, should boost occupancy to just over 63% by year-end 2014. On a national average, strengthening occupancy levels should also permit hotels to increase room rates beyond the 4.2% achieved in 2012. HVS forecasts U.S. average rate growth of 4.5% for 2013 and 5.0% for 2014. As previously noted, Smith Travel Research (STR) is an independent research firm that compiles and publishes data on the lodging industry, routinely used by typical hotel buyers. STR has compiled historical supply and demand data for a group of hotels considered applicable to this analysis for the proposed subject property. This information is presented in the following table, along with the market-wide occupancy, average rate, and rooms revenue per available room (RevPAR). RevPAR is calculated by multiplying occupancy by average rate and provides an indication of how well rooms revenue is being maximized.

Historical Supply and Demand Data

FIGURE 4-4 HISTORICAL SUPPLY AND DEMAND TRENDS

YearAverage Daily Room Count

Available Room Nights Change

Occupied Room Nights Change Occupancy

Average Rate Change RevPAR Change

2008 739 269,735 — 172,418 — 63.9 % $142.42 — $91.04 — 2009 739 269,735 0.0 % 166,799 (3.3) % 61.8 127.76 (10.3) % 79.00 (13.2) %2010 739 269,735 0.0 183,928 10.3 68.2 128.07 0.2 87.33 10.52011 781 285,229 5.7 201,886 9.8 70.8 131.85 3.0 93.32 6.92012 866 316,090 10.8 222,565 10.2 70.4 132.89 0.8 93.57 0.3

4.0 % 6.6 % (1.7) % 0.7 %

Year-to-Date Through June

2012 866 156,746 — 111,883 — 71.4 % $133.13 — $95.03 — 2013 913 165,300 5.5 % 120,076 7.3 % 72.6 139.74 5.0 % 101.51 6.8 %

Hotels Included in Sample

Marriott Dallas Fort Worth Solana 294 Jun 1990 Jun 1990Hampton Inn Suites North Fort Worth Alliance Airport 102 Feb 1999 Feb 1999Holiday Inn Express & Suites DFW Grapevine 95 Mar 2000 Mar 2000Hilton Dallas Southlake Town Square 248 Jun 2007 Jun 2007Hilton Garden Inn Fort Worth Alliance Airport 127 Sep 2011 Sep 2011Hampton Inn & Suites Trophy Club 94 Apr 2013 Apr 2013

Total 960

Source: STR Global

Year

Opened

Average Annual Compounded Change: 2008-2012

Number Year

of Rooms Affiliated


It is important to note some limitations of the STR data. Hotels are occasionally added to or removed from the sample, and not every property reports data in a consistent and timely manner; these factors can influence the overall quality of the information by skewing the results. These inconsistencies may also cause the STR data to differ from the results of our competitive survey. Nonetheless, STR data provide the best indication of aggregate growth or decline in existing supply and demand; thus, these trends have been considered in our analysis. Opening dates, as available, are presented for each reporting hotel in the previous table. The STR data for the competitive set reflect an overall market occupancy level of 70.4% in 2012, which compares to 70.8% for 2011. The overall average occupancy level for the calendar years presented equates to 67.2%. The manufacturing and aviation industries, tourism, and local corporations and entities such as Deloitte University, Fidelity Investments, Lockheed Martin, and UPS serve as the primary sources of lodging demand in this area. In 2009, demand levels decreased concurrent with the deepening national recession, resulting in a modest occupancy decline. Demand levels rebounded in 2010, and strong growth continued through 2012. However, the introduction of the Hilton Garden Inn in September of 2011 prevented occupancy levels from illustrating a similar sharp rise that year and caused occupancy levels to remain relatively flat in 2012. The latest year-to-date data for 2013 show strong occupancy increases, despite the introduction of additional new supply, reflecting the strength of the local economy. The STR data for the competitive set reflect an overall market average rate level of $132.89 in 2012, which compares to $131.85 for 2011. The average across all calendar years presented for average rate equates to $132.56. Average rate in the local market declined in 2009, and this downward trend continued through the first part of 2010, along with the contraction of the national economy. However, average rates began to rebound in the second half of 2010, and this positive trend continued through 2012 as the national and local lodging markets began to normalize. The latest year-to-date 2013 data illustrate modest month-over-month increases, indicating that rate recovery is underway as economic conditions strengthen and demand levels continue to rise. These occupancy and average rate trends resulted in a RevPAR level of $93.57 in 2012. Monthly occupancy and average rate trends are presented in the following tables. Seasonality


FIGURE 4-5 MONTHLY OCCUPANCY TRENDS

Month 2008 2009 2010 2011 2012 2013

January 58.9 % 52.0 % 59.0 % 69.4 % 66.6 % 70.1 %

February 67.2 56.3 67.0 74.9 74.2 74.8

March 65.2 55.0 69.5 74.8 71.9 69.2

April 75.2 68.4 73.8 72.1 74.8 76.9

May 59.8 60.2 67.9 74.8 68.3 69.3

June 76.1 71.2 72.9 79.2 72.9 75.7

July 58.3 57.9 66.9 73.2 67.4 —

August 61.8 59.8 66.6 66.5 67.5 —

September 65.9 73.7 65.6 67.9 66.8 —

October 75.1 72.3 77.2 74.3 78.5 —

November 55.4 64.0 71.5 70.2 74.2 —

December 48.9 51.6 60.5 55.4 62.3 —

Annual Occupancy 63.9 % 61.8 % 68.2 % 70.8 % 70.4 % —

Year-to-Date 67.0 % 60.5 % 68.3 % 74.2 % 71.4 % 72.6 %

Source: STR Global

FIGURE 4-6 MONTHLY AVERAGE RATE TRENDS

Month 2008 2009 2010 2011 2012 2013

January $145.13 $138.36 $124.20 $130.37 $131.49 $137.17

February 141.58 137.48 127.89 152.50 131.91 139.42

March 143.83 133.97 126.73 133.46 129.18 136.19

April 153.04 134.80 137.94 138.78 140.46 148.34

May 141.54 125.71 123.86 126.87 133.65 137.50

June 145.21 128.97 127.96 132.93 131.83 138.61

July 131.86 117.23 122.06 126.09 125.58 —

August 133.00 121.78 128.00 127.61 129.54 —

September 140.43 125.73 130.03 126.89 132.16 —

October 148.64 122.79 130.50 130.72 140.91 —

November 147.10 130.35 136.35 136.00 139.10 —

December 131.77 118.02 118.83 120.21 126.26 —

Annual Average Rate $142.42 $127.76 $128.07 $131.85 $132.89 —

Year-to-Date $145.30 $132.89 $128.27 $135.56 $133.13 $139.74

Source: STR Global


The illustrated monthly occupancy and average rates patterns reflect important seasonal characteristics. We have reviewed these trends in developing our forthcoming forecast of market-wide demand and average rate. In most markets, business travel, including individual commercial travelers and corporate groups, is the predominant source of demand on Monday through Thursday nights. Leisure travelers and non-business-related groups generate a majority of demand on Friday and Saturday nights. Based on an evaluation of the occupancy, rate structure, market orientation, chain affiliation, location, facilities, amenities, reputation, and quality of each area hotel, as well as the comments of management representatives, we have identified several properties that are expected to be primarily competitive with the proposed subject property. If applicable, additional lodging facilities may be judged only secondarily competitive; although the facilities, rate structures, or market orientations of these hotels prevent their inclusion among the primary competitive supply, they are expected to compete with the proposed subject property to some extent. The following table summarizes the important operating characteristics of the future primary competitors and the aggregate secondary competitors (if applicable). This information was compiled from personal interviews, inspections, lodging directories, and our in-house library of operating data. The table also sets forth each property’s penetration factors; penetration is the ratio between a specific hotel’s operating results and the corresponding data for the market. If the penetration factor is greater than 100%, the property is performing better than the market as a whole; conversely, if the penetration is less than 100%, the hotel is performing at a level below the market-wide average.

Patterns of Demand

SUPPLY

FIGURE 4-7 PRIMARY COMPETITORS – OPERATING PERFORMANCE




mm

erci

al

Mee

ting

and

G

roup

Leis

ure

Weighted Annual Room CountProperty Occ. RevPAR Occ. RevPAR RevPAR

RevPAR Change


Yield Penetration

Hilton Dallas Southlake Town Square 248 50 % 25 % 25 % 248 72 % $167.00 $120.24 248 76 % $176.00 $133.76 248 79 % $179.00 $141.41 5.7 % 108.5 % 145.2 %Hilton Garden Inn Fort Worth Alliance Airport 127 70 5 25 0 0 0.00 0.00 37 41 108.00 44.28 127 63 104.00 65.52 48.0 86.5 67.3Marriott Solana Dallas Fort Worth Westlake 294 60 25 15 294 66 105.00 69.30 294 71 109.00 77.39 294 72 110.00 79.20 2.3 98.9 81.3

Sub-Totals/Averages 669 58 % 22 % 21 % 542 68.7 % $134.71 $92.61 579 71.2 % $139.58 $99.40 669 72.9 % $136.74 $99.66 0.3 % 100.1 % 102.4 %

Secondary Competitors 102 70 % 5 % 25 % 66 64.0 % $104.00 $66.56 66 72.0 % $102.00 $73.44 66 72.0 % $103.00 $74.16 1.0 % 98.9 % 76.2 %

Totals/Averages 771 59 % 20 % 21 % 608 68.2 % $131.57 $89.77 646 71.3 % $135.68 $96.73 735 72.8 % $133.73 $97.36 0.7 % 100.0 % 100.0 %

Occ.Average

RateNumber

of Rooms



mm

erci

al

Mee

ting

and

G

roup

Leis

ure

Average Rate


Average Rate


The following map illustrates the locations of the proposed subject property and its future competitors.

MAP OF COMPETITION

Our survey of the primarily competitive hotels in the local market shows a range of lodging types and facilities. Each primary competitor was inspected and evaluated. Descriptions of our findings are presented below.


PRIMARY COMPETITOR #1 - HILTON DALLAS SOUTHLAKE TOWN SQUARE

FIGURE 4-8 ESTIMATED HISTORICAL OPERATING STATISTICS

YearWtd. Annual Room Count Occupancy

Average Rate RevPAR


Yield Penetration

Estimated 2010 248 72 % $167 $120 105.5 % 133.9 %Estimated 2011 248 76 176 134 106.6 138.3Estimated 2012 248 79 179 141 108.5 145.2

The Hilton Dallas Southlake Town Square is owned and operated by H & C Southlake Hilton LLC. Facilities include Copeland's Restaurant, the Coffee Spot, the Terrace Retreat Spa, an indoor pool, a fitness center, a business center, and 15,000 square feet of meeting space. The hotel has not required renovations since its opening in June of 2007. This hotel benefits from its location within the Town Square mixed-use development in Southlake, which includes upscale office space and retail outlets, as well as numerous restaurants. Overall, the property appeared to be in very good condition. Its accessibility is inferior to that of the subject site, and its visibility is inferior to the expected visibility of the Proposed Hotel and Conference Center.

Hilton Dallas Southlake Town Square 1400 Plaza Place Southlake, TX


PRIMARY COMPETITOR #2 - HILTON GARDEN INN FORT WORTH ALLIANCE AIRPORT



Average Rate RevPAR


Yield Penetration

Estimated 2011 37 41 % 108 44 57.5 % 45.8 %Estimated 2012 127 63 104 66 86.5 67.3

The Hilton Garden Inn Fort Worth Alliance Airport is owned by JMR Alliance LLC and is operated by PHD Hospitality, Inc. Facilities include the Great American Grill, the Pavilion Lounge, the Pavilion Pantry, an outdoor pool and whirlpool, an exercise room, a business center, a guest laundry facility, and 2,475 square feet of meeting space. The hotel, which opened in 2011, has not undergone any major renovations since its opening. This hotel benefits from its strong brand affiliation and location across from the Fort Worth Alliance Airport. Overall, the property appeared to be in very good condition. Its accessibility is similar to that of the subject site, and its visibility is superior to the expected visibility of the Proposed Hotel and Conference Center.

Hilton Garden Inn Fort Worth Alliance Airport 2600 WestPort Parkway Forth Worth, TX


PRIMARY COMPETITOR #3 - MARRIOTT SOLANA DALLAS FORT WORTH WESTLAKE



Average Rate RevPAR


Yield Penetration

Estimated 2010 294 66 % $105 $69 96.7 % 77.2 %Estimated 2011 294 71 109 77 99.6 80.0Estimated 2012 294 72 110 79 98.9 81.3

The Marriott Solana is owned by Thomas Maguire Partners and is operated by Marriott International. Facilities include the Cielo restaurant, Starbucks, an outdoor pool and whirlpool, a business center, a guest laundry facility, and 12,314 square feet of meeting space. Hotel guests also have complimentary access to the adjacent Solana Fitness Center. The hotel, which opened in 1990, was updated in 2009; upgrades included new guestroom softgoods and flat-panel televisions. This hotel benefits from its strong brand affiliation and its extensive meeting space. Overall, the property appeared to be in very good condition. Its accessibility is similar to that of the subject site, and its visibility is similar to the expected visibility of the Proposed Hotel and Conference Center.

Marriott Solana Dallas Fort Worth Westlake 5 Village Circle Westlake, TX


We have also reviewed other area lodging facilities to determine whether any may compete with the proposed subject property on a secondary basis. To represent the secondary competitors, we have used the data set from the STR trend that excludes the primary competitors. This set has been weighted to reflect the different facilities, market positions, branding, and other factors that are expected to be less competitive with the proposed subject property than those of the primary competitors. The following table sets forth the pertinent operating characteristics of the secondary competitors.

Secondary Competitors

FIGURE 4-11 SECONDARY COMPETITOR(S) – OPERATING PERFORMANCE

Est. Segmentation Estimated 2010 Estimated 2011 Estimated 2012Weighted

Annual Room CountCo

mm

erci

al

Mee

ting

and

G

roup

Leis

ure



Total

PropertyNumber

of RoomsCompetitive

Level Occ.Average



Rate RevPAR

Hampton Inn & Suites North Fort Worth Alliance Airport 102 70 % 5 % 25 % 65 % 66 64 % $104.00 $66.56 66 72 % $102.00 $73.44 66 72 % $103.00 $74.16

Totals/Averages 102 70 % 5 % 25 % 65 % 66 64.0 % $104.00 $66.56 66 72.0 % $102.00 $73.44 66 72.0 % $103.00 $74.16


mm

erci

al

Mee

ting

and

G

roup

Leis

ure




We have identified one hotel that is expected to compete with the proposed subject property on a secondary level. The Hampton Inn & Suites North Fort Worth Alliance Airport is anticipated to be competitive on the basis of its brand affiliation and location; however, this hotel offers a limited-service product without a significant amount of meeting space. It is important to consider any new hotels that may have an impact on the proposed subject property’s operating performance. Based upon our research and inspection (as applicable), new supply considered in our analysis is presented in the following table.

FIGURE 4-12 NEW SUPPLY

Total

Proposed PropertyNumber

of Rooms Competitive

LevelEstimated

Opening Date Developer Development Stage

Proposed Hotel and Conference Center 140 100 % January 1, 2015 0 Early DevelopmentHampton Inn & Suites Trophy Club 94 65 April 1, 2013 0 Recently Opened

Totals/Averages 234

The Hampton Inn & Suites Trophy Club recently opened on a site approximately four miles from the subject site. Due to this hotel's limited-service product type with very little meeting space, it has been weighted as secondarily competitive. Although no new competitive supply has been confirmed for Keller and the surrounding areas, we note that there is a strong likelihood of new supply being built over the course of the next several years as the market continues to grow and mature. We also note that Deloitte University has the potential to expand its lodging supply by 250 units, thereby reducing the amount of overflow demand currently accommodated by area hotels. Thus, we have considered these factors qualitatively in our positioning of the proposed subject property's stabilized occupancy level, even though no new supply is anticipated to open in the immediate future. While we have taken reasonable steps to investigate proposed hotel projects and their status, due to the nature of real estate development, it is impossible to determine with certainty every hotel that will be opened in the future, or what their marketing strategies and effect in the market will be. Depending on the outcome of current and future projects, the future operating potential of the proposed subject property may be positively or negatively affected. Future improvement in market conditions will raise the risk of increased competition. Our

Supply Changes


forthcoming forecast of stabilized occupancy and average rate is intended to reflect such risk. We have identified various properties that are expected to be competitive to some degree with the proposed subject property. We have also investigated potential increases in competitive supply in this Keller submarket. The Proposed Hotel and Conference Center should enter a dynamic market of varying product types and price points. Next, we will present our forecast for demand change, using the historical supply data presented as a starting point. The following table presents the most recent trends for the subject hotel market as tracked by HVS. These data pertain to the competitors discussed previously in this section; performance results are estimated, rounded for the competition, and in some cases weighted if there are secondary competitors present. In this respect, the information in the table differs from the previously presented STR data and is consistent with the supply and demand analysis developed for this report.

FIGURE 4-13 HISTORICAL MARKET TRENDS

Year

Est. 2010 151,487 — 222,030 — 68.2 % $131.57 — $89.77 — Est. 2011 167,980 10.9 % 235,619 6.1 % 71.3 135.68 3.1 % 96.73 7.8 %Est. 2012 195,401 16.3 268,385 13.9 72.8 133.73 (1.4) 97.36 0.7

Avg. Annual Compounded

Accommodated Room Nights % Change

Room Nights Available

Market RevPAR % Change% Change% Change

Market Occupancy Market ADR

For the purpose of demand analysis, the overall market is divided into individual segments based on the nature of travel. Based on our fieldwork, area analysis, and knowledge of the local lodging market, we estimate the 2012 distribution of accommodated-room-night demand as follows.

Supply Conclusion

DEMAND

Demand Analysis Using Market Segmentation


FIGURE 4-14 ACCOMMODATED ROOM NIGHT DEMAND

Marketwide

Market Segment

Commercial 114,752 59 %Meeting and Group 39,525 20Leisure 41,124 21

Total 195,401 100 %

Accommodated Demand

Percentage of Total

The market’s demand mix comprises commercial demand, with this segment representing roughly 59% of the accommodated room nights in this Keller submarket. The remaining portion comprises meeting and group at 20%, with the final portion leisure in nature, reflecting 21%. Using the distribution of accommodated hotel demand as a starting point, we will analyze the characteristics of each market segment in an effort to determine future trends in room-night demand. Commercial demand consists mainly of individual businesspeople passing through the subject market or visiting area businesses, in addition to high-volume corporate accounts generated by local firms. Brand loyalty (particularly frequent-traveler programs), as well as location and convenience with respect to businesses and amenities, influence lodging choices in this segment. Companies typically designate hotels as “preferred” accommodations in return for more favorable rates, which are discounted in proportion to the number of room nights produced by a commercial client. Commercial demand is strongest Monday through Thursday nights, declines significantly on Friday and Saturday, and increases somewhat on Sunday night. It is relatively constant throughout the year, with marginal declines in late December and during other holiday periods. A major factor considered in the development of our growth rates for the commercial segment is the presence of a multitude of companies along and near the U.S Highway 377 and State Highway 114 corridors. The continued office and industrial development occurring in the AllianceTexas, Circle T Ranch, and Solana mixed-use developments should stimulate demand growth in the future. Moreover, the continued population growth in Keller and surrounding communities and the necessary infrastructure to support that growth are likely to fuel increases in commercial demand over the long term. Considering both current and historical trends, we project demand change rates of 6.0% in 2013, 5.0% in

Commercial Segment


2014, and 4.0% in 2015. After these first three projection years, we have forecast demand change rates of 3.0% in 2016 and 2.0% in 2017. The meeting and group market includes meetings, seminars, conventions, trade association shows, and similar gatherings of ten or more people. Peak convention demand typically occurs in the spring and fall. Although there are numerous classifications within the meeting and group segment, the primary categories considered in this analysis are corporate groups, associations, and SMERFE (social, military, ethnic, religious, fraternal, and educational) groups. Corporate groups typically meet during the business week, most commonly in the spring and fall months. These groups tend to be the most profitable for hotels, as they typically pay higher rates and usually generate ancillary revenues including food and beverage and/or banquet revenue. SMERFE groups are typically price-sensitive and tend to meet on weekends and during the summer months or holiday season, when greater discounts are usually available; these groups generate limited ancillary revenues. Association demand is generally divided on a geographical basis, with national, regional, and state associations representing the most common sources. Professional associations and/or those supported by members' employers often meet on weekdays, while other associations prefer to hold events on weekends. The profile and revenue potential of associations varies depending on the group and the purpose of their meeting or event. Meeting and group demand in this market is partially driven by the local corporate entities in the area. As such, the high concentration of aviation, logistics and transportation, manufacturing, and professional services firms is expected to continue to bolster group room-block needs locally. Furthermore, recruiting and training activities associated with Deloitte University should continue providing overflow demand in the near future. A significant portion of meeting and group demand in the market is associated with SMERFE-related sources. A measurable percentage of the market make-up comprises first-class, suburban residential neighborhoods; as such, the area is attractive for weddings and reunions. We expect modest growth to occur in this segment in the near term and then to intensify in 2015 and beyond following the opening of the subject hotel and conference center. Considering both current and historical trends, we project demand change rates of 4.0% in 2013, 3.0% in 2014, and 5.0% in 2015. After these first three projection years, we have forecast demand change rates of 8.0% in 2016 and 6.0% in 2017. Leisure demand consists of individuals and families spending time in an area or passing through en route to other destinations. Travel purposes include sightseeing, recreation, or visiting friends and relatives. Leisure demand also includes room nights booked through Internet sites such as Expedia, hotels.com, and Priceline; however, leisure may not be the purpose of the stay. This demand

Meeting and Group Segment

Leisure Segment


may also include business travelers and group and convention attendees who use these channels to take advantage of any discounts that may be available on these sites. Leisure demand is strongest Friday and Saturday nights and all week during holiday periods and the summer months. These peak periods represent the inverse of commercial visitation trends, underscoring the stabilizing effect of capturing weekend and summer tourist travel. Future leisure demand is related to the overall economic health of the region and the nation. Trends showing changes in state and regional unemployment and disposable personal income correlate strongly with leisure travel levels. Leisure demand in the area is primarily driven by the multitude of cultural and historic attractions in the Dallas/Fort Worth Metroplex, as well as by the vast number of entertainment and sports venues including Texas Motor Speedway, the Fort Worth Stockyards, AT&T Stadium, the American Airlines Center, and Hawaiian Falls Water Park. Shopping districts such as Old Town Keller, Keller Town Center, Southlake Town Square, and Grapevine Mills also draw weekend leisure visitors throughout the year. The expansion of retail offerings in the area, including the planned Shops at Marshall Ridge and Westlake Corners, should contribute to future growth in this segment over the long term. Considering both current and historical trends, we project demand change rates of 6.0% in 2013, 4.0% in 2014, and 3.0% in 2015. After these first three projection years, we have forecast demand change rates of 2.0% in 2016 and 1.0% in 2017. The purpose of segmenting the lodging market is to define each major type of demand, identify customer characteristics, and estimate future growth trends. Starting with an analysis of the local area, three segments were defined as representing the subject property’s lodging market. Various types of economic and demographic data were then evaluated to determine their propensity to reflect changes in hotel demand. Based on this procedure, we forecast the following average annual compounded market-segment growth rates.

FIGURE 4-15 AVERAGE ANNUAL COMPOUNDED MARKET SEGMENT GROWTH RATES

Annual Growth RateMarket Segment

Commercial 6.0 % 5.0 % 4.0 % 3.0 % 2.0 % 1.0 % 1.0 %Meeting and Group 4.0 3.0 5.0 8.0 6.0 4.0 2.0Leisure 6.0 4.0 3.0 2.0 1.0 0.5 0.5

Base Demand Growth 5.6 % 4.4 % 4.0 % 3.8 % 2.6 % 1.5 % 1.1 %

2016 20182017 20192013 2014 2015

Conclusion


A table presented earlier in this section illustrated the accommodated-room-night demand in the subject property’s competitive market. Because this estimate is based on historical occupancy levels, it includes only those hotel rooms that were used by guests. Latent demand reflects potential room-night demand that has not been realized by the existing competitive supply; this type of demand can be divided into unaccommodated demand and induced demand. Unaccommodated demand refers to individuals who are unable to secure accommodations in the market because all the local hotels are filled. These travelers must defer their trips, settle for less desirable accommodations, or stay in properties located outside the market area. Because this demand did not yield occupied room nights, it is not included in the estimate of historical accommodated-room-night demand. If additional lodging facilities are expected to enter the market, it is reasonable to assume that these guests will be able to secure hotel rooms in the future, and it is therefore necessary to quantify this demand. Unaccommodated demand is further indicated if the market is at all seasonal, with distinct high and low seasons; such seasonality indicates that although year-end occupancy may not average in excess of 70%, the market sells out many nights during the year. The following table presents our estimate of unaccommodated demand in the subject market. FIGURE 4-16 UNACCOMMODATED DEMAND ESTIMATE

Market Segment

Commercial 114,752 5.4 % 6,229Meeting and Group 39,525 3.1 1,233Leisure 41,124 5.5 2,269

Total 195,401 5.0 % 9,732

Accommodated Room Night Demand

Unaccommodated Demand Percentage

Unaccommodated Room Night Demand

Our interviews with market participants found that the market generally sells out on midweek nights and during certain weekends during the peak travel season, as well as sporadically within other periods throughout the year. A portion of this demand, which is currently turned away, should return to the market concurrent with the supply increase. Accordingly, we have forecast 5.0% of the base-year demand to be classified as unaccommodated based upon an analysis of monthly and weekly peak demand and sell-out trends.

Latent Demand

Unaccommodated Demand


Induced demand represents the additional room nights that are expected to be attracted to the market following the introduction of a new demand generator. Situations that can result in induced demand include the opening of a new manufacturing plant, the expansion of a convention center, or the addition of a new hotel with a distinct chain affiliation or unique facilities. Although increases in demand are expected in the local market, we have accounted for this growth in the determination of market segment growth rates rather than induced demand. Based upon a review of the market dynamics in the subject property’s competitive environment, we have forecast growth rates for each market segment. Using the calculated potential demand for the market, we have determined market-wide accommodated demand based on the inherent limitations of demand fluctuations and other factors in the market area. The following table details our projection of lodging demand growth for the subject market, including the total number of occupied room nights and any residual unaccommodated demand in the market.

Induced Demand

Accommodated Demand and Market-wide Occupancy


FIGURE 4-17 FORECAST OF MARKET OCCUPANCY

132,828 136,813 139,549 140,945 142,354Unaccommodated Demand 7,211 7,427 7,576 7,651 7,728

140,039 144,240 147,125 148,596 150,082Growth Rate 4.0 % 3.0 % 2.0 % 1.0 % 1.0 %

44,456 48,012 50,893 52,929 53,9881,387 1,498 1,588 1,652 1,685

45,843 49,511 52,481 54,581 55,6725.0 % 8.0 % 6.0 % 4.0 % 2.0 %

46,695 47,629 48,105 48,346 48,5882,577 2,628 2,655 2,668 2,681

49,272 50,257 50,760 51,014 51,2693.0 % 2.0 % 1.0 % 0.5 % 0.5 %

Base Demand 223,979 232,455 238,548 242,220 244,929Unaccommodated Demand 11,175 11,554 11,818 11,971 12,094Total Demand 235,154 244,008 250,366 254,190 257,023less: Residual Demand 827 2,552 4,889 6,293 7,336Total Accommodated Demand 234,327 241,456 245,477 247,897 249,687Overall Demand Growth 9.1 % 3.0 % 1.7 % 1.0 % 0.7 %Market Mix

59.6 % 59.1 % 58.8 % 58.5 % 58.4 %19.5 20.3 21.0 21.5 21.721.0 20.6 20.3 20.1 19.9735 735 735 735 735

Proposed Hotel and Conference Center ¹ 140 140 140 140 140

Hampton Inn & Suites Trophy Club ² 61 61 61 61 61

Available Rooms per Night 341,786 341,786 341,786 341,786 341,786

Nights per Year 365 365 365 365 365

Total Supply 936 936 936 936 936Rooms Supply Growth 17.6 % 0.0 % 0.0 % 0.0 % 0.0 %

Marketwide Occupancy 68.6 % 70.6 % 71.8 % 72.5 % 73.1 %

¹ Opening in January 2015 of the 100% competitive, 140-room Proposed Hotel and Conference Center² Opening in April 2013 of the 65% competitive, 94-room Hampton Inn & Suites Trophy Club

Commercial

2016 2017 2018 20192015

Base Demand

Growth Rate

Total Demand

Total Demand

Total Demand

Meeting and GroupBase DemandUnaccommodated Demand

Growth Rate

LeisureBase DemandUnaccommodated Demand

Totals

Proposed Hotels

CommercialMeeting and GroupLeisureExisting Hotel Supply

These room-night projections for the market area will be used in forecasting the proposed subject property's occupancy and average rate in Chapter 6.

August-2013 Description of the Proposed Project Proposed Hotel and Conference Center – Keller, Texas 69

5. Description of the Proposed Project

The quality of a lodging facility's physical improvements has a direct influence on marketability, attainable occupancy, and average room rate. The design and functionality of the structure can also affect operating efficiency and overall profitability. This section investigates the subject property's proposed physical improvements and personal property in an effort to determine how they are expected to contribute to attainable cash flows. The Proposed Hotel and Conference Center is anticipated to be a select-service lodging facility containing 140 rentable units. The property is forecast to open on January 1, 2015. The proposed subject property will be the first hotel located in the city of Keller and is expected to benefit from its location along the U.S. Highway 377 corridor. The property is also anticipated to offer a state-of-the-art conference center that should become a leading choice for mid-sized corporate meetings, civic events, and SMERFE-related events, such as weddings, bar and bat mitzvah celebrations, and charity galas. The expected strength of the chosen brand should allow the proposed subject property to successfully compete with any existing or future hotel developments located along the Highway 114 corridor. Based on information provided by the proposed subject property’s development representatives, the following table summarizes the facilities that are expected to be available at the proposed subject property.

Project Overview

Summary of the Facilities


FIGURE 5-1 PROPOSED FACILITIES SUMMARY

Guestroom Configuration

King 65 Queen/Queen 75

Total 140

Food & Beverage Facilities

Restaurant TBDLounge TBDIndoor Meeting & Banquet Facilities

Grand Ballroom 9,000 Meeting Rooms 4,000 Boardrooms 1,000

Total 14,000

Amenities & Services

Infrastructure

Parking Spaces 140 ElevatorsLife-Safety SystemsConstruction Details

Exercise RoomBusiness Center

Sprinklers, Smoke DetectorsTBD

TBD

Outdoor Swimming PoolOutdoor Whirlpool

Square Footage

Number of Units

Seating Capacity

Once guests enter the site, ample parking is expected to be available on a surface lot around the perimeter of the hotel. Site improvements should include freestanding signage, which should be located at the entrance to the site (additional signage should be placed on the exterior of the building). We assume that all signage will adequately identify the property and meet the chosen brand standards. Planned landscaping should allow for a positive guest impression and competitive exterior appearance. Sidewalks should be present along the front entrance and around the perimeter of the hotel. Other site improvements are expected to include an outdoor pool with sundeck, a barbeque and picnic area, and a trash area toward the rear of the property. Overall, the anticipated site improvements for the property should be adequate.

Site Improvements and Hotel Structure


The hotel structure is expected to comprise one single building. The exterior of the hotel will likely be finished with stucco. Stairways and elevators should provide internal vertical transportation within the main structure. The hotel's roof will likely be made of wood trusses, covered with plywood and roof tiles or composition shingles. Double-paned windows should reduce noise transmission into the rooms. Heating and cooling is expected to be provided by through-the-wall units and several large units for the public areas. Overall, the anticipated building components are expected to be normal for a hotel of this type and should meet the standards for this market. We assume that all structural components will meet local building codes and that no significant defaults will occur during construction that may impact the future operating potential of the hotel or delay its assumed opening date. Guests are expected to enter the hotel through a single set of automatic doors, which will open to a vestibule, and then through a second set of automatic doors. The lobby should be spacious, appropriate for an upscale hotel and conference center. The lobby walls should be attractively finished with an upscale material that is in line with the chosen brand standards. The front desk should feature a granite countertop and is expected to be installed with appropriate property management and telephone systems. The furnishings and finishes in this space should offer an appropriate first impression, and the design of the space should lend itself to adequate efficiency. The specific design concept will be finalized with input from the pursued future brand for the proposed subject property. We assume that all property management and guestroom technology will be appropriately installed for the effective management of hotel operations. TYPICAL LOBBY

Lobby


We assume that the hotel will be select-service in nature. As such, the hotel is expected to offer a full-service restaurant and lounge and banquet operations. We would expect on-site outlets to be relatively upscale due to the ideal hotel service level and first-class nature. The hotel's primary focus in the food and beverage department will likely be centered on banquet operations. The furnishings of the restaurant and lounge are expected to be of a similar style and finish as lobby and guestroom furnishings. Overall, the hotel is expected to provide a competitive offering of food and beverage facilities for a property of this type. Under a select-service, upscale scope, the proposed hotel should be developed with approximately 14,000 square feet of modern and technologically advanced space. We would expect the integration of a fully divisible grand ballroom and primary meeting space along with additional smaller breakout rooms, secondary meeting rooms, and boardroom-type spaces. We anticipate that public restrooms and pre-function space will be conveniently located near the meeting rooms. The hotel is expected to offer an outdoor pool with sundeck, an outdoor whirlpool, and a fitness area as recreational facilities. Restrooms should be present off of the pool area. Other amenities are anticipated to include a business center, a market pantry, and ice machines on each guestroom floor. Overall, the supporting facilities should be appropriate for a hotel of this type, and we assume that they will meet brand standards. The hotel is expected to feature standard guestroom configurations, and guestrooms should be present on all levels of the property (above the lobby level) within the single building. The guestrooms should be of a standard size and should offer typical amenities for this upscale, select-service product type. The guestrooms are expected to feature modern and contemporary furnishings and appropriate, adequate lighting. In addition to the standard furnishings, rooms should also provide an in-room safe, a refrigerator, and a modern plug-and-play connectivity center (for laptop, MP3 player, camcorder, video game console, etc.). Other amenities will likely include wired and wireless high-speed Internet service and coffee and tea service. Overall, the guestrooms should offer a competitive product for this neighborhood. Guestroom bathrooms should be of a standard size, with a walk-in shower, a commode, and a single bowl sink with vanity area, featuring a granite countertop. The floors will likely be finished with tile, and the walls should be finished with

Food and Beverage Facilities

Meeting and Banquet Space

Recreational Amenities

Additional Amenities

Guestrooms


vinyl wall-covering. Bathrooms are expected to feature a hairdryer and complimentary Bliss Spa toiletries. Overall, the bathroom design is anticipated to be appropriate for a product of this type. TYPICAL GUESTROOM

The interior guestroom corridors should be wide and functional, permitting the easy passage of housekeeping carts. Corridor carpet, vinyl wall-covering, signage, and lighting should be in keeping with the overall look and design of the rest of the property. The hotel is expected to be served by the necessary back-of-the-house space, including an in-house laundry facility, administrative offices, and a full-service kitchen. These spaces should be adequate for a hotel of this type and should allow for the efficient operation of the property under competent management. We assume that the property will be built according to all pertinent codes and brand standards. Moreover, we assume its construction will not create any environmental hazards (such as mold) and that the property will fully comply with the Americans with Disabilities Act. Our analysis assumes that, after its opening, the hotel will require ongoing upgrades and periodic renovations in order to maintain its competitive level in this market. These costs should be adequately funded by the forecasted reserve

Back-of-the-House

ADA and Environmental

Capital Expenditures


for replacement, as long as a successful, ongoing preventive-maintenance program is employed by hotel staff. Overall, the subject property should offer a well-designed, functional layout of support areas and guestrooms. All typical and market-appropriate features and amenities are expected to be included in the hotel's design. We assume that the building will be fully open and operational on the assumed opening date and will meet all local building codes and chosen brand standards. Furthermore, we assume that the hotel staff will be adequately trained to allow for a successful opening and that pre-marketing efforts will have introduced the product to major local accounts at least six months in advance of the opening date.

Conclusion

August-2013 Projection of Occupancy and Average Rate Proposed Hotel and Conference Center – Keller, Texas 75

6. Projection of Occupancy and Average Rate

Along with average rate results, the occupancy levels achieved by a hotel are the foundation of the property's financial performance and market value. Most of a lodging facility's other revenue sources (such as food, beverages, other operated departments, and rentals and other income) are driven by the number of guests, and many expense levels vary with occupancy. To a certain degree, occupancy attainment can be manipulated by management. For example, hotel operators may choose to lower rates in an effort to maximize occupancy. Our forecasts reflect an operating strategy that we believe would be implemented by a typical, professional hotel management team to achieve an optimal mix of occupancy and average rate. The subject property's forecasted market share and occupancy levels are based upon its anticipated competitive position within the market, as quantified by its penetration rate. The penetration rate is the ratio of a property's market share to its fair share. A complete discussion of the concept of penetration is presented in the addenda. In the following table, the penetration rates attained by the primary competitors and the aggregate secondary competitors are set forth for each segment for the base year.

FIGURE 6-1 HISTORICAL PENETRATION RATES

Property

Hilton Dallas Southlake Town Square 92 % 134 % 129 % 109 %Hilton Garden Inn Fort Worth Alliance Airport 103 21 103 87Marriott Solana Dallas Fort Worth Westlake 101 122 70 99Secondary Competition 118 24 117 99

Ove

rall

Com

mer

cial

Mee

ting

and

Grou

p

Leisu

re

The secondary competition achieved the highest penetration rate within the commercial segment. The highest penetration rate in the meeting and group segment was achieved by the Hilton Dallas Southlake Town Square, while the

Penetration Rate Analysis

Historical Penetration Rates by Market Segment


Hilton Dallas Southlake Town Square led the market with the highest leisure penetration rate. Because the supply and demand balance for the competitive market is dynamic, there is a circular relationship between the penetration factors of each hotel in the market. The performance of individual new hotels has a direct effect upon the aggregate performance of the market, and consequently upon the calculated penetration factor for each hotel in each market segment. The same is true when the performance of existing hotels changes, either positively (following a refurbishment, for example) or negatively (when a poorly maintained or marketed hotel loses market share). A hotel’s penetration factor is calculated as its achieved market share of demand divided by its fair share of demand. Thus, if one hotel’s penetration performance increases, thereby increasing its achieved market share, this leaves less demand available in the market for the other hotels to capture and the penetration performance of one or more of those other hotels consequently declines (other things remaining equal). This type of market share adjustment takes place every time there is a change in supply, or a change in the relative penetration performance of one or more hotels in the competitive market. Our projections of penetration, demand capture, and occupancy performance for the subject property account for these types of adjustments to market share within the defined competitive market. Consequently, the actual penetration factors applicable to the subject property and its competitors for each market segment in each projection year may vary somewhat from the penetration factors delineated in the previous tables. The following tables set forth, by market segment, the projected adjusted penetration rates for the proposed subject property and each hotel in the competitive set.

FIGURE 6-2 COMMERCIAL SEGMENT ADJUSTED PENETRATION RATES

Hotel 2012 2013 2014 2015 2016 2017 2018 2019

Hilton Dallas Southlake Town Square 92 % 87 % 83 % 85 % 84 % 83 % 83 % 83 %Hilton Garden Inn Fort Worth Alliance Airport 103 111 110 113 112 111 111 111Marriott Solana Dallas Fort Worth Westlake 101 104 108 111 110 109 109 109Secondary Competition 118 120 114 117 116 115 115 115Proposed Hotel and Conference Center — — — 82 86 90 90 90Hampton Inn & Suites Trophy Club — 85 94 105 109 108 108 108

Forecast of Subject Property’s Occupancy


Within the commercial segment, the proposed subject hotel’s penetration is positioned at a level just below the market average by the stabilized period due to its location proximate to the Alliance Gateway and Circle T Ranch mixed-use commercial developments, as well as the expected strength of the chosen brand in capturing corporate demand associated with travelers loyal to that brand. The proposed subject property is expected to outperform the nearby Hilton Southlake Town Square in the commercial market segment.

FIGURE 6-3 MEETING AND GROUP SEGMENT ADJUSTED PENETRATION RATES

Hotel 2012 2013 2014 2015 2016 2017 2018 2019


The proposed subject property is expected to become a leading choice for corporate and moderately-sized meetings/banquet events given the upscale nature of the proposed function space and its modern, technologically advanced capabilities. The proposed subject property is also anticipated to become the foremost choice for civic and social events due to the current lack of meeting space capable of hosting such events in the immediate area. Therefore, the proposed hotel's penetration level is the positioned above the market-average level by the stabilized year.

FIGURE 6-4 LEISURE SEGMENT ADJUSTED PENETRATION RATES

Hotel 2012 2013 2014 2015 2016 2017 2018 2019


The proposed subject property's leisure penetration rate is positioned appropriately within the range of existing competitors given the hotel's proposed Shops at Marshall Ridge location, among future development of upscale retail and amenities. This location and its position as the only hotel in Keller should allow the property to experience elevated levels of demand on peak weekends, with


weekend-transient leisure supplemented by strong weekend group. The proposed subject property is expected to realize a leisure penetration level above fair share by the stabilized year. These positioned segment penetration rates result in the following market segmentation forecast. FIGURE 6-5 MARKET SEGMENTATION FORECAST – SUBJECT PROPERTY

Commercial 58 % 56 % 54 % 53 % 53 %Meeting and Group 19 22 23 25 25Leisure 23 22 22 22 22

Total 100 % 100 % 100 % 100 % 100 %

2018 201920162015 2017

The proposed subject property's occupancy forecast is set forth as follows, with the adjusted projected penetration rates used as a basis for calculating the amount of captured market demand.


FIGURE 6-6 FORECAST OF SUBJECT PROPERTY'S OCCUPANCY

Market Segment

CommercialDemand 139,548 142,730 144,240 144,899 145,776Market Share 12.3 % 12.9 % 13.5 % 13.5 % 13.5 %Capture 17,198 18,386 19,427 19,516 19,634Penetration 82 % 86 % 90 % 90 % 90 %

Meeting and GroupDemand 45,679 48,990 51,458 53,233 54,089Market Share 12.6 % 14.4 % 16.3 % 17.4 % 17.4 %Capture 5,733 7,077 8,367 9,278 9,427Penetration 84 % 97 % 109 % 117 % 117 %

LeisureDemand 49,099 49,736 49,779 49,764 49,822Market Share 14.2 % 14.8 % 16.0 % 16.0 % 16.0 %Capture 6,956 7,362 7,987 7,985 7,994Penetration 95 % 99 % 107 % 107 % 107 %

Total Room Nights Captured 29,887 32,826 35,782 36,778 37,055

Available Room Nights 51,100 51,100 51,100 51,100 51,100

Subject Occupancy 58 % 64 % 70 % 72 % 73 %

Marketwide Available Room Nights 341,786 341,786 341,786 341,786 341,786

Fair Share 15 % 15 % 15 % 15 % 15 %

Marketwide Occupied Room Nights 234,327 241,456 245,477 247,897 249,687

Market Share 13 % 14 % 15 % 15 % 15 %

Marketwide Occupancy 69 % 71 % 72 % 73 % 73 %

Total Penetration 85 % 91 % 97 % 99 % 99 %

2015 2016 20192017 2018

Based on our analysis of the proposed subject property and market area, we have selected a stabilized occupancy level of 72%. The stabilized occupancy is intended to reflect the anticipated results of the property over its remaining economic life, given all changes in the life cycle of the hotel. Thus, the stabilized occupancy excludes from consideration any abnormal relationship between supply and demand, as well as any nonrecurring conditions that may result in unusually high or low occupancies. Although the subject property may operate at occupancies above this stabilized level, we believe it equally possible for new competition and temporary economic downturns to force the occupancy below this selected point of stability.


One of the most important considerations in estimating the value of a lodging facility is a supportable forecast of its attainable average rate, which is more formally defined as the average rate per occupied room. Average rate can be calculated by dividing the total rooms revenue achieved during a specified period by the number of rooms sold during the same period. The projected average rate and the anticipated occupancy percentage are used to forecast rooms revenue, which in turn provides the basis for estimating most other income and expense categories. Although the average rate analysis presented here follows the occupancy projection, these two statistics are highly correlated; in reality, one cannot project occupancy without making specific assumptions regarding average rate. This relationship is best illustrated by revenue per available room (RevPAR), which reflects a property's ability to maximize rooms revenue. The following table summarizes the historical average rate and the RevPAR of the subject property’s future primary competitors.

FIGURE 6-7 BASE-YEAR AVERAGE RATE AND REVPAR OF THE COMPETITORS

Property

Hilton Dallas Southlake Town Square $179.00 133.9 % $141.41 145.2 %Hilton Garden Inn Fort Worth Alliance Airport 104.00 77.8 65.52 67.3Marriott Solana Dallas Fort Worth Westlake 110.00 82.3 79.20 81.3

Average - Primary Competitors $136.74 102.2 % $99.66 102.4 %Average - Secondary Competitors 103.00 77.0 74.16 76.2

Overall Average $133.73 $97.36

Estimated 2012 Average Room

Rate

Rooms Revenue Per Available

Room (RevPAR)

Average Room Rate Penetration

RevPAR Penetration

The defined primarily competitive market realized an overall average rate of $136.74 in the 2012 base year, declining from the 2011 level of $139.58. The Hilton Dallas Southlake Town Square achieved the highest estimated average rate in the local competitive market, by a significant margin, because of its high-quality, full-service product offering and its desirable location within the popular Town Square area. The selected rate position for the proposed subject property, in base-year dollars, takes into consideration factors such as its expected brand, product type, and conference center facility. We have selected the rate position of $110.00, in base-year dollars, for the proposed subject hotel.

Average Rate Analysis

Competitive Position


As illustrated previously, the average rate for the primarily competitive market averaged $139.58 in 2011, before reaching $136.74 in 2012. Market-wide rates began to trend upward in 2010. We expect average rates to continue to improve because of the rising levels of demand generated by new companies moving into the area, such as Motorola. Based on these considerations, the following table illustrates the projected average rate and the growth rates assumed. As a context for the average rate growth factors, note that we have applied a base underlying inflation rate of 3.0% annually throughout our projection period.

FIGURE 6-8 MARKET AND SUBJECT PROPERTY AVERAGE RATE FORECAST

Year

Base Year 72.8 % — $133.73 — — $110.00 82.3 %2013 72.6 6.0 % 141.75 — 6.0 % 116.60 82.32014 73.9 5.0 148.84 — 5.0 122.43 82.32015 68.6 4.5 155.54 58.0 % 4.5 127.94 82.32016 70.6 4.0 161.76 64.0 4.0 133.06 82.32017 71.8 3.5 167.42 70.0 3.5 137.71 82.32018 72.5 3.0 172.45 72.0 3.0 141.85 82.3

Average Rate Growth

Area-wide Market (Calendar Year) Subject Property (Calendar Year)

Average Rate

Average Rate Penetration

Average Rate Growth

Average Rate OccupancyOccupancy

As illustrated above, a 6.0% rate of change is expected for the subject property's positioned 2012 room rate in 2013. This is followed by growth rates of 5.0% and 4.5% in 2014 and 2015, respectively. The Keller and surrounding markets should enjoy positive rate growth through the near term. The proposed subject property's rate position should reflect growth similar to market trends because of the proposed hotel's new facility, expected strong brand affiliation, and location in an upscale mixed-use development. The proposed subject property’s penetration rate is forecast to reach 82.3% by the stabilized period. The North American lodging market bottomed out in late 2009, at which time demand rebounded and the supply pipeline diminished. In 2010, occupancy rebounded strongly, and by 2011, average rates in most U.S. markets showed increases. In many urban markets, strong occupancy levels are allowing hotel operators to continue to make aggressive average rate gains in 2013, while in some less-robust markets, average rate growth is still constrained by weak demand levels. With demand largely recovered from the correction in 2009, and


new supply remaining muted in 2013 and 2014, markets should be able to support healthy average rate gains in the near term. A new property must establish its reputation and a client base in the market during its ramp-up period; as such, the proposed subject property’s average rates in the initial operating period have been discounted to reflect this likelihood. We forecast 3.0% and 1.5% discounts to the proposed subject property’s forecast room rates in the first two operating years, which would be typical for a new operation of this type. The following occupancies and average rates will be used to project the subject property's rooms revenue; this forecast reflects years beginning on January 1, 2015, which correspond with our financial projections. FIGURE 6-9 FORECAST OF OCCUPANCY, AVERAGE RATE, AND REVPAR

Year

2015 58 % $127.94 3.0 % $124.10 $71.982016 64 133.06 1.5 131.06 83.882017 70 137.71 0.0 137.71 96.402018 72 141.85 0.0 141.85 102.13

OccupancyAverage Rate

Before Discount DiscountAverage Rate After Discount RevPAR

August-2013 Projection of Income and Expense Proposed Hotel and Conference Center – Keller, Texas 83

7. Projection of Income and Expense

In this chapter of our report, we have compiled a forecast of income and expense for the proposed subject property. This forecast is based on the facilities program set forth previously, as well as the occupancy and average rate forecast discussed previously. The forecast of income and expense is expressed in current dollars for each year. The stabilized year is intended to reflect the anticipated operating results of the property over its remaining economic life, given any or all applicable stages of build-up, plateau, and decline in the life cycle of the hotel. Thus, income and expense estimates from the stabilized year forward exclude from consideration any abnormal relationship between supply and demand, as well as any nonrecurring conditions that may result in unusual revenues or expenses. The ten-year period reflects the typical holding period of large real estate assets such as hotels. In addition, the ten-year period provides for the stabilization of income streams and comparison of yields with alternate types of real estate. The forecasted income streams reflect the future benefits of owning specific rights in income-producing real estate. In order to project future income and expense for the proposed subject property, we have included a sample of individual comparable operating statements from our database of hotel statistics. All financial data are presented according to the three most common measures of industry performance: ratio to sales (RTS), amounts per available room (PAR), and amounts per occupied room night (POR). These historical income and expense statements will be used as benchmarks in our forthcoming forecast of income and expense.

Comparable Operating Statements


FIGURE 7-1 COMPARABLE OPERATING STATEMENTS: RATIO TO SALES

Comp 1 Comp 2 Comp 3 Comp 4 Comp 5 Subject

Year: 2012/13 2012 2011 2010/11 2010/11 2012Number of Rooms: 220 to 280 210 to 270 190 to 250 120 to 160 230 to 290 140

Days Open: 365 320 365 351 365 365Occupancy: 79% 72% 74% 70% 73% 72%

Average Rate: $149 $108 $128 $103 $120 $119RevPAR: $118 $77 $95 $72 $87 $86

REVENUE Rooms 79.3 % 72.1 % 87.7 % 71.5 % 78.9 % 72.2 % Food & Beverage 13.0 22.3 9.1 25.4 17.3 24.1 Other Operated Departments 7.7 5.6 3.2 3.0 3.8 3.2 Rentals & Other Income 0.0 0.0 0.0 0.0 0.0 0.6 Total 100.0 100.0 100.0 100.0 100.0 100.0 DEPARTMENTAL EXPENSES* Rooms 15.6 21.8 22.0 24.8 22.8 20.7 Food & Beverage 68.5 67.9 71.9 71.1 60.1 68.9 Other Operated Departments 49.3 35.9 22.8 78.7 70.2 78.5 Total 25.0 32.9 26.5 38.2 31.1 34.0DEPARTMENTAL INCOME 75.0 67.1 73.5 61.8 68.9 66.0OPERATING EXPENSES Administrative & General 7.8 7.7 11.5 7.6 9.4 7.8 Marketing 4.1 7.5 7.1 7.7 5.5 4.1 Franchise Fee 8.4 6.6 0.0 3.9 5.9 6.9 Property Operations & Maintenance 4.2 3.4 4.8 3.8 3.8 4.0 Utilities 3.5 4.6 3.1 4.5 3.4 3.5 Total 27.9 29.8 26.4 27.5 28.0 26.4HOUSE PROFIT 47.1 37.3 47.1 34.3 40.9 39.6Management Fee 3.0 3.0 6.3 3.0 3.0 3.0INCOME BEFORE FIXED CHARGES 44.1 34.4 40.7 31.3 37.9 36.6

* Departmental expense ratios are expressed as a percentage of departmental revenues

Stabilized $


FIGURE 7-2 COMPARABLE OPERATING STATEMENTS: AMOUNTS PER AVAILABLE ROOM





REVENUE Rooms $43,078 $24,707 $34,823 $25,353 $31,885 $31,219 Food & Beverage 7,055 7,638 3,614 9,014 7,004 10,410 Other Operated Departments 4,182 1,926 1,255 1,079 1,523 1,366 Rentals & Other Income 0 0 0 0 0 260 Total 54,315 34,271 39,691 35,446 40,412 43,256 DEPARTMENTAL EXPENSES Rooms 6,709 5,385 7,650 6,281 7,277 6,462 Food & Beverage 4,834 5,184 2,600 6,410 4,208 7,173 Other Operated Departments 2,062 691 286 849 1,069 1,073 Total 13,604 11,260 10,536 13,540 12,554 14,707DEPARTMENTAL INCOME 40,711 23,011 29,155 21,906 27,858 28,548OPERATING EXPENSES Administrative & General 4,236 2,627 4,545 2,683 3,804 3,367 Marketing 2,200 2,566 2,818 2,727 2,215 1,783 Franchise Fee 4,547 2,252 0 1,396 2,388 2,966 Property Operations & Maintenance 2,287 1,180 1,909 1,345 1,554 1,750 Utilities 1,877 1,577 1,223 1,604 1,373 1,535 Total 15,147 10,203 10,495 9,755 11,335 11,400HOUSE PROFIT 25,564 12,808 18,660 12,151 16,523 17,148Management Fee 1,610 1,028 2,495 1,058 1,212 1,298INCOME BEFORE FIXED CHARGES 23,954 11,780 16,164 11,094 15,312 15,850

Stabilized $


FIGURE 7-3 COMPARABLE OPERATING STATEMENTS: AMOUNTS PER OCCUPIED ROOM





REVENUE Rooms $149.44 $107.80 $128.11 $102.74 $119.96 $118.79 Food & Beverage 24.48 33.32 13.29 36.53 26.35 39.61 Other Operated Departments 14.51 8.40 4.62 4.37 5.73 5.20 Rentals & Other Income 0.00 0.00 0.00 0.00 0.00 0.99 Total 188.43 149.52 146.02 143.64 152.04 164.60 DEPARTMENTAL EXPENSES Rooms 23.27 23.49 28.14 25.45 27.38 24.59 Food & Beverage 16.77 22.62 9.57 25.98 15.83 27.29 Other Operated Departments 7.15 3.01 1.05 3.44 4.02 4.08 Total 47.19 49.13 38.76 54.87 47.23 55.96DEPARTMENTAL INCOME 141.23 100.40 107.26 88.78 104.81 108.63OPERATING EXPENSES Administrative & General 14.70 11.46 16.72 10.87 14.31 12.81 Marketing 7.63 11.20 10.37 11.05 8.33 6.78 Franchise Fee 15.77 9.83 0.00 5.66 8.99 11.29 Property Operations & Maintenance 7.93 5.15 7.02 5.45 5.85 6.66 Utilities 6.51 6.88 4.50 6.50 5.17 5.84 Total 52.55 44.52 38.61 39.53 42.64 43.38HOUSE PROFIT 88.68 55.88 68.65 49.24 62.16 65.25Management Fee 5.59 4.49 9.18 4.29 4.56 4.94INCOME BEFORE FIXED CHARGES 83.10 51.40 59.47 44.96 57.60 60.31

Stabilized $


The comparables’ departmental income ranged from 61.8% to 75.0% of total revenue. The comparable properties achieved a house profit ranging from 34.3% to 47.1% of total revenue. We will refer to the comparable operating data in our discussion of each line item, which follows later in this section of the report. HVS uses a fixed and variable component model to project a lodging facility's revenue and expense levels. This model is based on the premise that hotel revenues and expenses have one component that is fixed and another that varies directly with occupancy and facility usage. A projection can be made by taking a known level of revenue or expense and calculating its fixed and variable components. The fixed component is then increased in tandem with the underlying rate of inflation, while the variable component is adjusted for a specific measure of volume such as total revenue. The actual forecast is derived by adjusting each year’s revenue and expense by the amount fixed (the fixed expense multiplied by the inflated base-year amount) plus the variable amount (the variable expense multiplied by the inflated base-year amount) multiplied by the ratio of the projection year’s occupancy to the base-year occupancy (in the case of departmental revenue and expense) or the ratio of the projection year’s revenue to the base year’s revenue (in the case of undistributed operating expenses). Fixed expenses remain fixed, increasing only with inflation. Our discussion of the revenue and expense forecast in this report is based upon the output derived from the fixed and variable model. This forecast of revenue and expense is accomplished through a systematic approach, following the format of the Uniform System of Accounts for the Lodging Industry. Each category of revenue and expense is estimated separately and combined at the end in the final statement of income and expense. A general rate of inflation must be established that will be applied to most revenue and expense categories. The following table shows inflation estimates made by economists at some noted institutions and corporations.

Fixed and Variable Component Analysis

Inflation Assumption


FIGURE 7-4 INFLATION ESTIMATES

June Dec. June Dec. June Dec.Name Firm 2013 2013 2014 2014 2015 2015

Paul Ashworth Capital Economics 1.5 % 1.8 % 1.8 % 2.0 % 2.0 % 2.0 %Ram Bhagavatula Combinatorics Capital 1.6 2.2 2.6 2.8 2.8 3.0Beth Ann Bovino Standard and Poor's 1.3 1.2 2.0 1.9 1.9 1.9Jay Brinkmann Mortgage Bankers Association 1.8 2.0 2.1 2.0 2.1 2.1Michael Carey Credit Agricole CIB 1.5 1.5 1.7 1.6 1.7 1.7Joseph Carson AllianceBernstein 1.9 2.2 2.5 2.5 2.5 2.7Julia Coronado BNP Paribas 1.8 2.0 1.9 2.1 2.3 2.5Mike Cosgrove Econoclast 1.8 1.9 2.1 2.2 2.4 2.4Lou Crandall Wrightson ICAP 1.5 1.6 2.2 2.4 2.4 2.5J. Dewey Daane Vanderbilt University 1.2 2.0 2.0 2.0 2.0 2.0Douglas Duncan Fannie Mae 1.4 1.2 1.6 1.5 1.7 1.9Maria Fiorini Ramirez/Joshua Shapiro MFR, Inc. 1.2 1.0 1.6 1.8 — — Nigel Gault IHS Global Insight 1.4 1.4 1.8 1.7 1.7 1.7Ethan Harris Bank of America Securities- Merrill Lynch 1.8 2.0 1.8 1.2 — — Maury Harris UBS 1.3 1.2 2.0 2.3 — — Jan Hatzius Goldman, Sachs & Co. 1.3 1.2 1.9 1.7 1.9 2.1Tracy Herrick Avidbank 2.8 2.7 2.9 3.0 3.5 4.0Stuart Hoffman PNC Financial Services Group 1.4 1.6 2.4 2.5 2.5 2.5Gene Huang FedEx Corp. 1.4 1.6 2.1 2.2 2.3 2.3Joseph LaVorgna Deutsche Bank Securities, Inc. 2.1 2.4 2.6 2.5 2.5 2.5Edward Leamer/David Shulman UCLA Anderson Forecast 1.4 1.4 2.0 2.2 2.3 2.2John Lonski Moody's Investors Service 1.6 1.6 2.0 2.1 2.2 1.8Dean Maki Barclays Capital 1.7 2.1 2.3 2.3 — — Jim Meil/Arun Raha Eaton Corp. 1.2 1.8 2.0 2.0 2.1 2.2Robert Mellman JP Morgan Chase & Co. 1.3 1.5 1.7 1.7 1.8 1.8Mark Nielson MacroEcon Global Advisors 1.5 1.9 2.3 2.7 3.2 3.5Michael P. Niemira International Council of Shopping Centers 1.9 1.9 2.3 2.5 2.5 2.6Jim O'Sullivan High Frequency Economics 1.4 1.8 2.3 2.4 2.5 2.6Dr. Joel Prakken/ Chris Varvares Macroeconomic Advisers 1.3 1.2 1.6 1.4 1.5 1.6Vincent Reinhart Morgan Stanley 2.0 1.6 1.5 1.7 — — John Ryding/Conrad DeQuadros RDQ Economics 1.5 1.7 2.1 2.3 — — Ian Shepherdson Pantheon Macroeconomic Advisors 1.7 1.6 1.7 1.6 2.0 2.0John Silvia Wells Fargo & Co. 1.4 1.8 2.5 2.2 — — Allen Sinai Decision Economics, Inc. 1.4 1.6 1.8 2.0 2.1 2.3James F. Smith Parsec Financial Management 1.1 1.0 0.8 1.0 1.1 1.0Sean M. Snaith University of Central Florida 1.3 1.0 1.7 1.7 1.6 1.7Sung Won Sohn California State University 1.7 1.8 1.5 1.8 1.7 1.7Neal Soss CSFB 1.4 1.3 1.4 1.8 — — Stephen Stanley Pierpont Securities 1.7 1.9 2.5 2.9 3.0 3.2Susan M. Sterne Economic Analysis Associates Inc. 1.5 2.4 2.6 2.5 2.1 1.9Diane Swonk Mesirow Financial 1.5 1.4 1.5 1.7 1.7 1.8Carl Tannenbaum The Northern Trust 1.4 1.5 1.8 1.9 2.1 2.0Bart van Ark The Conference Board 1.6 1.5 1.5 1.6 1.7 1.8Brian S. Wesbury/ Robert Stein First Trust Advisors, L.P. 1.7 2.2 3.2 3.4 3.7 4.0Lawrence Yun National Association of Realtors 1.2 1.8 2.8 3.2 3.4 3.4Ellen Zentner Nomura Securities International 1.4 1.5 1.9 1.6 — —

1.5 % 1.7 % 2.0 % 2.1 % 2.2 % 2.3 %

Source: wsj.com, July 2, 2013

Projected Increase in Consumer Price Index (Annualized Rate Versus 12 Months Earlier)


As the preceding table indicates, the financial analysts who were surveyed in June of 2013 anticipated inflation rates ranging from 1.1% to 2.8% (on an annualized basis) for June 2013; the average of these data points was 1.5%. The same group expects a slightly higher annualized 2.0% inflation rate for June 2014. These rates are lower than the inflation rate averages for December 2014 and June 2015, shown at 2.1% and 2.2%, respectively. As a further check on these inflation projections, we have reviewed historical increases in the Consumer Price Index (CPI-U). Because the value of real estate is predicated on cash flows over a relatively long period, inflation should be considered from a long-term perspective. FIGURE 7-5 NATIONAL CONSUMER PRICE INDEX (ALL URBAN CONSUMERS)

National Consumer Percent ChangeYear Price Index from Previous Year

2002 179.9 — 2003 184.0 2.3 %2004 188.9 2.72005 195.3 3.42006 201.6 3.22007 207.3 2.82008 215.3 3.82009 214.5 -0.42010 218.1 1.62011 224.9 3.12012 229.6 2.1

Average Annual Compounded Change2002 - 2012: 2.5 %2007 - 2012: 2.1

Source: Bureau of Labor Statistics

Between 2002 and 2012, the national CPI increased at an average annual compounded rate of 2.5%; from 2007 to 2012, the CPI rose by a slightly lower average annual compounded rate of 2.1%. In 2012, the CPI rose by 2.1%, a decrease from the level of 3.1% recorded in 2011. In consideration of the most recent trends, the projections set forth previously, and our assessment of probable property appreciation levels, we have applied underlying inflation rates of 2.5%, 2.5%, and 3.0% thereafter for each respective year following the base year of 2012. This stabilized inflation rate takes into account normal, recurring inflation cycles. Inflation is likely to fluctuate above and


below this level during the projection period. Any exceptions to the application of the assumed underlying inflation rate are discussed in our write-up of individual income and expense items. Based on an analysis that will be detailed throughout this section, we have formulated a forecast of income and expense. The following table presents a detailed forecast through the fifth projection year, including amounts per available room and per occupied room. The second table illustrates our ten-year forecast of income and expense, presented with a lesser degree of detail. The forecasts pertain to years that begin on January 1, 2015, expressed in inflated dollars for each year.

Summary of Projections

FIGURE 7-6 DETAILED FORECAST OF INCOME AND EXPENSE

2015 (Calendar Year) 2016 2017 Stabilized 2019

Number of Rooms: 140 140 140 140 140

Occupancy: 58% 64% 70% 72% 72%

Average Rate: $124.10 $131.06 $137.71 $141.85 $146.10

RevPAR: $71.98 $83.88 $96.40 $102.13 $105.19

Days Open: 365 365 365 365 365

Occupied Rooms: 29,638 %Gross PAR POR 32,704 %Gross PAR POR 35,770 %Gross PAR POR 36,792 %Gross PAR POR 36,792 %Gross PAR POR

REVENUE

Rooms $3,678 69.6 % $26,271 $124.10 $4,286 70.9 % $30,614 $131.05 $4,926 72.0 % $35,186 $137.71 $5,219 72.2 % $37,279 $141.85 $5,375 72.2 % $38,393 $146.09

Food 1,020 19.3 7,287 34.42 1,128 18.7 8,055 34.48 1,241 18.1 8,863 34.69 1,305 18.0 9,323 35.47 1,344 18.1 9,602 36.54

Beverage 355 6.7 2,533 11.96 384 6.4 2,746 11.76 416 6.1 2,970 11.62 435 6.0 3,108 11.82 448 6.0 3,201 12.18



Total Revenues 5,287 100.0 37,765 178.39 6,046 100.0 43,185 184.87 6,844 100.0 48,888 191.34 7,231 100.0 51,651 196.54 7,448 100.0 53,197 202.42

DEPARTMENTAL EXPENSES *

Rooms 912 24.8 6,512 30.76 973 22.7 6,950 29.75 1,037 21.1 7,408 29.00 1,080 20.7 7,716 29.36 1,113 20.7 7,948 30.24

Food & Beverage 1,030 74.9 7,356 34.74 1,090 72.1 7,789 33.34 1,154 69.7 8,242 32.26 1,199 68.9 8,564 32.59 1,235 68.9 8,821 33.57


Total 2,103 39.8 15,019 70.95 2,231 36.9 15,934 68.21 2,365 34.5 16,891 66.11 2,459 34.0 17,562 66.82 2,532 34.0 18,088 68.83



Administrative & General 489 9.3 3,494 16.51 516 8.5 3,683 15.76 543 7.9 3,879 15.18 563 7.8 4,020 15.30 580 7.8 4,141 15.76

Marketing 259 4.9 1,850 8.74 273 4.5 1,950 8.35 287 4.2 2,054 8.04 298 4.1 2,128 8.10 307 4.1 2,192 8.34

Franchise Fee 349 6.6 2,496 11.79 407 6.7 2,908 12.45 468 6.8 3,343 13.08 496 6.9 3,541 13.48 511 6.9 3,647 13.88

Prop. Operations & Maint. 203 3.8 1,453 6.86 241 4.0 1,722 7.37 282 4.1 2,016 7.89 293 4.0 2,089 7.95 301 4.0 2,152 8.19

Utilities 223 4.2 1,593 7.52 235 3.9 1,679 7.19 248 3.6 1,768 6.92 257 3.5 1,833 6.97 264 3.5 1,888 7.18

Total 1,524 28.8 10,886 51.42 1,672 27.6 11,942 51.12 1,828 26.6 13,059 51.11 1,906 26.3 13,613 51.80 1,963 26.3 14,021 53.35

HOUSE PROFIT 1,660 31.4 11,860 56.02 2,143 35.5 15,309 65.54 2,651 38.9 18,938 74.12 2,867 39.7 20,477 77.92 2,952 39.7 21,088 80.24

Management Fee 159 3.0 1,133 5.35 181 3.0 1,296 5.55 205 3.0 1,467 5.74 217 3.0 1,550 5.90 223 3.0 1,596 6.07


FIXED EXPENSES

Property Taxes 254 4.8 1,815 8.57 260 4.3 1,860 7.96 268 3.9 1,916 7.50 276 3.8 1,973 7.51 285 3.8 2,033 7.73

Insurance 61 1.1 433 2.04 62 1.0 446 1.91 64 0.9 459 1.80 66 0.9 473 1.80 68 0.9 487 1.85

Reserve for Replacement 106 2.0 755 3.57 181 3.0 1,296 5.55 274 4.0 1,956 7.65 289 4.0 2,066 7.86 298 4.0 2,128 8.10

Total 420 7.9 3,003 14.19 504 8.3 3,602 15.42 606 8.8 4,331 16.95 632 8.7 4,513 17.17 651 8.7 4,648 17.69

NET INCOME $1,081 20.5 % $7,724 $36.49 $1,458 24.2 % $10,412 $44.57 $1,840 27.1 % $13,141 $51.43 $2,018 28.0 % $14,415 $54.85 $2,078 28.0 % $14,844 $56.48


FIGURE 7-7 TEN-YEAR FORECAST OF INCOME AND EXPENSE

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Number of Rooms: 140 140 140 140 140 140 140 140 140 140

Occupied Rooms: 29,638 32,704 35,770 36,792 36,792 36,792 36,792 36,792 36,792 36,792

Occupancy: 58% 64% 70% 72% 72% 72% 72% 72% 72% 72%

Average Rate: $124.10 % of $131.06 % of $137.71 % of $141.85 % of $146.10 % of $150.48 % of $155.00 % of $159.65 % of $164.44 % of $169.37

RevPAR: $71.98 Gross $83.88 Gross $96.40 Gross $102.13 Gross $105.19 Gross $108.35 Gross $111.60 Gross $114.95 Gross $118.40 Gross $121.95

REVENUE

Rooms $3,678 69.6 % $4,286 70.9 % $4,926 72.0 % $5,219 72.2 % $5,375 72.2 % $5,537 72.2 % $5,703 72.2 % $5,874 72.2 % $6,050 72.2 % $6,231 72.2 %

Food 1,020 19.3 1,128 18.7 1,241 18.1 1,305 18.0 1,344 18.1 1,385 18.0 1,426 18.0 1,469 18.0 1,513 18.0 1,558 18.1

Beverage 355 6.7 384 6.4 416 6.1 435 6.0 448 6.0 462 6.0 475 6.0 490 6.0 504 6.0 519 6.0



Total 5,287 100.0 6,046 100.0 6,844 100.0 7,231 100.0 7,448 100.0 7,672 100.0 7,902 100.0 8,139 100.0 8,383 100.0 8,634 100.0

DEPARTMENTAL EXPENSES*

Rooms 912 24.8 973 22.7 1,037 21.1 1,080 20.7 1,113 20.7 1,146 20.7 1,180 20.7 1,216 20.7 1,252 20.7 1,290 20.7

Food & Beverage 1,030 74.9 1,090 72.1 1,154 69.7 1,199 68.9 1,235 68.9 1,272 68.9 1,310 68.9 1,350 68.9 1,390 68.9 1,432 68.9


Total 2,103 39.8 2,231 36.9 2,365 34.5 2,459 34.0 2,532 34.0 2,608 34.0 2,687 34.0 2,767 34.0 2,850 34.0 2,936 34.0



Administrative & General 489 9.3 516 8.5 543 7.9 563 7.8 580 7.8 597 7.8 615 7.8 634 7.8 653 7.8 672 7.8

Marketing 259 4.9 273 4.5 287 4.2 298 4.1 307 4.1 316 4.1 326 4.1 335 4.1 345 4.1 356 4.1

Franchise Fee 349 6.6 407 6.7 468 6.8 496 6.9 511 6.9 526 6.9 542 6.9 558 6.9 575 6.9 592 6.9

Prop. Operations & Maint. 203 3.8 241 4.0 282 4.1 293 4.0 301 4.0 310 4.0 320 4.0 329 4.0 339 4.0 349 4.0

Utilities 223 4.2 235 3.9 248 3.6 257 3.5 264 3.5 272 3.5 280 3.5 289 3.5 297 3.5 306 3.5

Total 1,524 28.8 1,672 27.6 1,828 26.6 1,906 26.3 1,963 26.3 2,022 26.3 2,083 26.3 2,145 26.3 2,209 26.3 2,276 26.3

HOUSE PROFIT 1,660 31.4 2,143 35.5 2,651 38.9 2,867 39.7 2,952 39.7 3,041 39.7 3,133 39.7 3,227 39.7 3,323 39.7 3,422 39.7

Management Fee 159 3.0 181 3.0 205 3.0 217 3.0 223 3.0 230 3.0 237 3.0 244 3.0 251 3.0 259 3.0


FIXED EXPENSES

Property Taxes 254 4.8 260 4.3 268 3.9 276 3.8 285 3.8 293 3.8 302 3.8 311 3.8 320 3.8 330 3.8

Insurance 61 1.1 62 1.0 64 0.9 66 0.9 68 0.9 70 0.9 72 0.9 75 0.9 77 0.9 79 0.9

Reserve for Replacement 106 2.0 181 3.0 274 4.0 289 4.0 298 4.0 307 4.0 316 4.0 326 4.0 335 4.0 345 4.0

Total 420 7.9 504 8.3 606 8.8 632 8.7 651 8.7 670 8.7 690 8.7 711 8.7 732 8.7 754 8.7

NET INCOME $1,081 20.5 % $1,458 24.2 % $1,840 27.1 % $2,018 28.0 % $2,078 28.0 % $2,141 28.0 % $2,205 28.0 % $2,271 28.0 % $2,339 28.0 % $2,409 28.0 %1 1 1 1 1 1 1 1 1 1


% of

Gross


The following description sets forth the basis for the forecast of income and expense. We anticipate that it will take four years for the subject property to reach a stabilized level of operation. Each revenue and expense item has been forecast based upon our review of the proposed subject property's operating budget and comparable income and expense statements. The forecast is based upon calendar years beginning January 1, 2015, expressed in inflated dollars for each year. Rooms revenue is determined by two variables: occupancy and average rate. We projected occupancy and average rate in a previous section of this report. The proposed subject property is expected to stabilize at an occupancy level of 72% with an average rate of $141.85 in 2018. Following the stabilized year, the subject property’s average rate is projected to increase along with the underlying rate of inflation. Food and beverage revenue is generated by a hotel's restaurants, lounges, coffee shops, snack bars, banquet rooms, and room service. In addition to providing a source of revenue, these outlets serve as an amenity that assists in the sale of guestrooms. With the exception of properties with active lounges or banquet facilities that draw local residents, in-house guests generally represent a substantial percentage of a hotel's food and beverage patrons. In the case of the Proposed Hotel and Conference Center, the food and beverage department will include a restaurant and lounge; moreover, banquet space is expected to span 14,000 square feet. Although food and beverage revenue varies directly with changes in occupancy, the small portion generated by banquet sales and outside capture is relatively fixed. The comparable statements illustrated food and beverage revenue between #REF!% and #REF!% of rooms revenue, or $13.29 and $36.53 per occupied room. The proposed subject property's food and beverage and banquet operations are expected to be an important component of the hotel. Therefore, based upon our review of comparable operating statements, we have positioned an appropriate revenue level given the hotel's planned facility and price point. We would expect future moderate growth to occur within this category after the hotel's opening. We project food and beverage revenue to be $34.42 and $11.96 per occupied room, respectively, in the first projection year, or respectively 27.7% and 9.6% of rooms revenue. These per-occupied-room amounts increase to $35.47 and $11.82 for respective food and beverage revenue categories by the stabilized year, or respectively 25.0% and 8.3% of rooms revenue. On a percentage of food revenue, beverage revenue is forecast at 34.8% in the first projection year, stabilizing at 33.3%.

Forecast of Income and Expense

Rooms Revenue

Food and Beverage Revenue


According to the Uniform System of Accounts, other operated departments include any major or minor operated department other than rooms and food and beverage. The proposed subject property's other operated departments revenue sources are expected to include the hotel's telephone charges and valet laundry services. Based on our review of operations with a similar extent of offerings, we have positioned an appropriate revenue level for the proposed subject property. The comparable operating statements illustrate other operated departments revenue ranging from 3.6% to 9.7% of rooms revenue and $4.37 to $14.51 per occupied room. We forecast the proposed subject property’s other operated departments revenue to stabilize at 4.4% of rooms revenue or $6.21 per occupied room by the stabilized year, 2018. The rentals and other income sources comprise those other than guestrooms, food and beverage, and the other operated departments. The proposed subject property's rentals and other income revenues are expected to be generated primarily by the hotel's business center services and in-room movie and game charges. Based on our review of operations with a similar extent of offerings, we have positioned an appropriate revenue level for the proposed subject property. Rentals and other income revenue for the comparables ranged #REF! to #REF! of rooms revenue or $#NUM! to $0.00 on a per-occupied-room basis. Changes in this revenue item through the projection period result from the application of the underlying inflation rate and projected changes in occupancy. We forecast the proposed subject property’s rentals and other income to stabilize at $1.18 per occupied room by the stabilized year, 2018. Rooms expense consists of items related to the sale and upkeep of guestrooms and public space. Salaries, wages, and employee benefits account for a substantial portion of this category. Although payroll varies somewhat with occupancy and managers can generally scale the level of service staff on hand to meet an expected occupancy level, much of a hotel's payroll is fixed. A base level of front desk personnel, housekeepers, and supervisors must be maintained at all times. As a result, salaries, wages, and employee benefits are only moderately sensitive to changes in occupancy. Commissions and reservations are usually based on room sales, and thus are highly sensitive to changes in occupancy and average rate. While guest supplies vary 100% with occupancy, linens and other operating expenses are only slightly affected by volume. The comparables illustrated rooms expense ranging between 15.6% and 24.8% of rooms revenue; on a per-occupied-room basis, the range was between $23.27 and $28.14. We have projected rooms expense for the proposed subject property at

Other Operated Departments Revenue

Rentals & Other Income

Rooms Expense


24.8% in the first year (or $30.76 per occupied room), stabilizing at 20.7% in 2018 (or $29.36 per occupied room). The proposed subject property's rooms department expense has been positioned based upon our review of the comparable operating data and our understanding of the hotel's future service level and price point. Food expenses consist of items necessary for the primary operation of a hotel's food and banquet facilities. The costs associated with food sales and payroll are moderately to highly correlated to food revenues. Items such as china, linen and uniforms are less dependent on volume. Although the other expense items are basically fixed, they represent a relatively insignificant factor. Beverage expenses consist of items necessary for the operation of a hotel’s lounge and bar areas. The costs associated with beverage sales and payroll are moderately to highly correlated to beverage revenues. The comparables illustrate food and beverage expense ranging between 60.1% and 71.9% of food and beverage revenue. We have projected a stabilized expense ratio of 68.9% in 2018. The proposed subject property's food and beverage operation is expected to be efficiently managed and operate at an expense level that is in line with other comparable operations. Other operated departments expense includes all expenses reflected in the summary statements for the divisions associated in these categories. This was previously discussed in this chapter. The comparables illustrated other operated departments expense ranging between $1.05 and $7.15 per occupied room. We have projected a stabilized expense ratio of 78.5% in 2018. The proposed subject property's other operated departments revenue sources are expected to include the hotel's telephone charges and valet laundry services. Based on our review of operations with a similar extent of offerings, we have positioned an appropriate revenue level for the proposed subject property. Administrative and general expense includes the salaries and wages of all administrative personnel who are not directly associated with a particular department. Expense items related to the management and operation of the property are also allocated to this category. Most administrative and general expenses are relatively fixed. The exceptions are cash overages and shortages; commissions on credit card charges; provision for doubtful accounts, which are moderately affected by the number of transactions or total revenue; and salaries, wages, and benefits, which are very slightly influenced by volume.

Food and Beverage Expense

Other Operated Departments Expense

Administrative and General Expense


As a percentage of total revenue, the comparable operations indicate an administrative and general expense range from 7.6% to 11.5%, or $2,627 to $4,545 per available room. Based upon our review of the comparable operating data and the expected scope of facility for the proposed subject property, we have positioned the administrative and general expense level at a market- and property-supported level. In the first projection year, we have projected administrative and general expense for the proposed subject property to be $3,494 per available room, or 9.3% of total revenue. By the 2018 stabilized year, these amounts change to $4,020 per available room and 7.8% of total revenue. Marketing expense consists of all costs associated with advertising, sales, and promotion; these activities are intended to attract and retain customers. Marketing can be used to create an image, develop customer awareness, and stimulate patronage of a property's various facilities. The marketing category is unique in that all expense items, with the exception of fees and commissions, are totally controlled by management. Most hotel operators establish an annual marketing budget that sets forth all planned expenditures. If the budget is followed, total marketing expenses can be projected accurately. Marketing expenditures are unusual because although there is a lag period before results are realized, the benefits are often extended over a long period. Depending on the type and scope of the advertising and promotion program implemented, the lag time can be as short as a few weeks or as long as several years. However, the favorable results of an effective marketing campaign tend to linger, and a property often enjoys the benefits of concentrated sales efforts for many months. As a percentage of total revenue, the comparable operations indicate a marketing expense range from 4.1% to 7.7%, or $2,200 to $2,818 per available room. Based upon our review of the comparable operating data and the expected scope of facility for the proposed subject property, we have positioned the marketing expense level at a market- and property-supported level. In the first projection year, we have projected marketing expense for the proposed subject property to be $1,850 per available room, or 4.9% of total revenue. By the 2018 stabilized year, these amounts change to $2,128 per available room and 4.1% of total revenue. As previously discussed, the subject property is expected to be franchised under a national brand, such as Aloft. Costs associated with this franchise are summarized in the introductory chapter in this report.

Marketing Expense

Franchise Fee


Property operations and maintenance expense is another expense category that is largely controlled by management. Except for repairs that are necessary to keep the facility open and prevent damage (e.g., plumbing, heating, and electrical items), most maintenance can be deferred for varying lengths of time. Maintenance is an accumulating expense. If management elects to postpone performing a required repair, they have not eliminated or saved the expenditure; they have only deferred payment until a later date. A lodging facility that operates with a lower-than-normal maintenance budget is likely to accumulate a considerable amount of deferred maintenance. The age of a lodging facility has a strong influence on the required level of maintenance. A new or thoroughly renovated property is protected for several years by modern equipment and manufacturers' warranties. However, as a hostelry grows older, maintenance expenses escalate. A well-organized preventive maintenance system often helps delay deterioration, but most facilities face higher property operations and maintenance costs each year, regardless of the occupancy trend. The quality of initial construction can also have a direct impact on future maintenance requirements. The use of high-quality building materials and construction methods generally reduces the need for maintenance expenditures over the long term. As a percentage of total revenue, the comparable operations indicate a property operations and maintenance expense range from 3.4% to 4.8%, or $1,180 to $2,287 per available room. We expect the proposed subject property's maintenance operation to be well managed, and expense levels should stabilize at a typical level for a property of this type. Changes in this expense item through the projection period result from the application of the underlying inflation rate and projected changes in occupancy. In the first projection year, we have projected property operations and maintenance expense for the proposed subject property to be $1,453 per available room, or 3.8% of total revenue. By the 2018 stabilized year, these amounts change to $2,089 per available room and 4.0% of total revenue. The utilities consumption of a lodging facility takes several forms, including water and space heating, air conditioning, lighting, cooking fuel, and other miscellaneous power requirements. The most common sources of hotel utilities are electricity, natural gas, fuel oil, and steam. This category also includes the cost of water service. Total energy cost depends on the source and quantity of fuel used. Electricity tends to be the most expensive source, followed by oil and gas. Although all hotels consume a sizable amount of electricity, many properties supplement their utility

Property Operations and Maintenance

Utilities Expense


requirements with less expensive sources, such as gas and oil, for heating and cooking. As a percentage of total revenue, the comparable operations indicate a utilities expense range from 3.1% to 4.6%, or $1,223 to $1,877 per available room. The changes in this utilities line item through the projection period are a result of the application of the underlying inflation rate and projected changes in occupancy. In the first projection year, we have projected utilities expense for the proposed subject property to be $1,593 per available room, or 4.2% of total revenue. By the 2018 stabilized year, these amounts change to $1,833 per available room and 3.5% of total revenue. Management expense consists of the fees paid to the managing agent contracted to operate the property. Some companies provide management services and a brand-name affiliation (first-tier management company), while others provide management services alone (second-tier management company). Some management contracts specify only a base fee (usually a percentage of total revenue), while others call for both a base fee and an incentive fee (usually a percentage of defined profit). Basic hotel management fees are often based on a percentage of total revenue, which means they have no fixed component. While base fees typically range from 2% to 4% of total revenue, incentive fees are deal-specific and often are calculated as a percentage of income available after debt service and, in some cases, after a preferred return on equity. Total management fees for the subject property have been forecast at 3.0% of total revenue. Property (or ad valorem) tax is one of the primary revenue sources of municipalities. Based on the concept that the tax burden should be distributed in proportion to the value of all properties within a taxing jurisdiction, a system of assessments is established. Theoretically, the assessed value placed on each parcel bears a definite relationship to market value, so properties with equal market values will have similar assessments and properties with higher and lower values will have proportionately larger and smaller assessments. Depending on the taxing policy of the municipality, property taxes can be based on the value of the real property or the value of the personal property and the real property. We have based our estimate of the proposed subject property's market value (for tax purposes) on an analysis of assessments of comparable hotel properties in the local municipality.

Management Fee

Property Taxes


FIGURE 7-8 COUNTY-ASSESSED VALUE OF COMPARABLE HOTELS

Number Total AssessmentHotel of Rooms Total

Marriott Solana Dallas Fort Worth Westlake294 $1,369,090 $12,130,910 $13,500,000Hilton Dallas Southlake Town Square248 1,618,170 27,257,991 28,876,161Hilton Garden Inn Fort Worth Alliance Airport127 1,001,923 7,750,000 8,751,923

Assessments per RoomMarriott Solana Dallas Fort Worth Westlake $4,657 $41,262 $45,918Hilton Dallas Southlake Town Square 6,525 109,911 116,436Hilton Garden Inn Fort Worth Alliance Airport 7,889 61,024 68,913

Positioned Subject - Per Room 140 $7,500 $60,000 $67,500

Positioned Subject - Total $1,050,000 $8,400,000 $9,450,000

Land Improvements

Source: Tarrant Appraisal District

We have positioned the proposed subject property's future assessment levels based upon the illustrated comparable data. We have positioned the assessment closest to the Hilton Garden Inn because of the similarity in product type; overall, the positioned assessment is well supported by the market data. Tax rates are based on the city and county budgets, which change annually. The most recent tax rate in this jurisdiction was reported at %. The following table shows changes in the tax rate during the last several years. FIGURE 7-9 COUNTY TAX RATES

Personal PropertyYear Tax Rate

2010 2.602332011 2.623062012 2.62306

Source: Tarrant Appraisal District

Based on comparable assessments and the tax rate information, the proposed subject property's projected property tax expense levels are calculated as follows.


FIGURE 7-10 PROJECTED PROPERTY TAX EXPENSE

Year

Positioned $1,050,000 $8,400,000 $0 $9,450,000 2.62 2.62 $247,879

2015 $1,050,000 $8,400,000 $0 $9,450,000 2.69 2.69 $254,0762016 1,050,000 8,400,000 0 9,450,000 2.76 2.76 260,4282017 1,050,000 8,400,000 0 9,450,000 2.84 2.84 268,241

Pers. Prop. TaxTax Rate

PropertyTax RateTotal Forecast

Assessed ValuePersonalLand Improvements

The insurance expense category consists of the cost of insuring the hotel and its contents against damage or destruction by fire, weather, sprinkler leakage, boiler explosion, plate glass breakage, and so forth. General insurance costs also include premiums relating to liability, fidelity, and theft coverage. Insurance rates are based on many factors, including building design and construction, fire detection and extinguishing equipment, fire district, distance from the firehouse, and the area's fire experience. Insurance expenses do not vary with occupancy. Based on comparable data and the structural attributes of the proposed project, we have forecast the proposed subject property's insurance expense at $473 per available room by the stabilized year (positioned at $400 on a per-available-room basis in base-year dollars). This forecast equates to 0.9% of total revenue on a stabilized basis. In subsequent years, this amount is assumed to increase in tandem with inflation. Furniture, fixtures, and equipment are essential to the operation of a lodging facility, and their quality often influences a property's class. This category includes all non-real estate items that are capitalized, rather than expensed. The furniture, fixtures, and equipment of a hotel are exposed to heavy use and must be replaced at regular intervals. The useful life of these items is determined by their quality, durability, and the amount of guest traffic and use. Periodic replacement of furniture, fixtures, and equipment is essential to maintain the quality, image, and income-producing potential of a lodging facility. Because capitalized expenditures are not included in the operating statement but affect an owner's cash flow, a forecast of income and expense should reflect these expenses in the form of an appropriate reserve for replacement. The International Society of Hospitality Consultants (ISHC) undertook a major industry-sponsored study of the capital expenditure requirements for full-service/luxury, select-service, and extended-stay hotels. The most recent findings

Insurance Expense

Reserve for Replacement


of the study were published in a report in 2007.8 Historical capital expenditures of well-maintained hotels were investigated through the compilation of data provided by most of the major hotel companies in the United States. A prospective analysis of future capital expenditure requirements was also performed based upon the cost to replace short- and long-lived building components over a hotel's economic life. The study showed that the capital expenditure requirements for hotels vary significantly from year to year and depend upon both the actual and effective ages of a property. The results of this study showed that hotel lenders and investors are requiring reserves for replacement ranging from 4% to 5% of total revenue. Based on the results of this study, our review of the subject asset and comparable lodging facilities, and our industry expertise, we estimate that a reserve for replacement of 4% of total revenues is sufficient to provide for the timely and periodic replacement of the subject property's furniture, fixtures, and equipment. This amount is ramped up during the initial projection period. In conclusion, our analysis reflects a profitable operation, with net income expected to total 28.0% of total revenue by the stabilized year. The stabilized total revenue comprises primarily rooms and food and beverage revenue, with a secondary portion derived from other income sources. On the cost side, departmental expenses total 34.0% of revenue by the stabilized year, while undistributed operating expenses total 26.3% of total revenues; this assumes that the property will be operated competently by a well-known hotel operator. After a 3.0% of total revenues management fee, and 8.7% of total revenues in fixed expenses, a net income ratio of 28.0% is forecast by the stabilized year.

8 The International Society of Hotel Consultants, CapEx 2007, A Study of Capital Expenditure in the U.S. Hotel Industry.

Conclusion

August-2013 Feasibility Analysis Proposed Hotel and Conference Center – Keller, Texas 102

8. Feasibility Analysis

Return on investment can be defined as the future benefits of an income-producing property relative to its acquisition or construction cost. The first step in performing a return on investment analysis is to determine the amount to be initially invested. For a proposed property, this amount is most likely to be the development cost of the hotel. Based on the total development cost, the individual investor will utilize a return on investment analysis to determine if the future cash flow from a current cash outlay meets his or her own investment criteria and at what level above or below this amount such an outlay exceeds or fails to meet these criteria. As an individual or company considering investment in hotel real estate, the decision to use one’s own cash, an equity partner's capital, or lender financing will be an internal one. Because hotels typically require a substantial investment, only the largest investors and hotel companies generally have the means to purchase properties with all cash. We would anticipate the involvement of some financing by a third party for the typical investor or for those who may be entering the market for hotel acquisitions at this time. In leveraged acquisitions and developments where investors typically purchase or build upon real estate with a small amount of equity cash (20% to 50%) and a large amount of mortgage financing (50% to 80%), it is important for the equity investor to acknowledge the return requirements of the debt participant (mortgagee), as well as his or her own return requirements. Therefore, we will begin our rate of return analysis by reviewing the debt requirements of typical hotel mortgagees. During 2008 and 2009, financing for hotel investments was scarce and difficult to obtain. Lenders began to return to the market in the second quarter of 2010 once it was apparent that the hotel market had bottomed out and was in recovery. Commercial banks and insurance companies began to re-enter the market, and commercial mortgage-backed securities reemerged. From the second quarter of 2010 through the first half of 2011, lenders competed aggressively for the financing of quality, strongly performing hotel assets. The U.S. debt-ceiling turmoil, stock market volatility, and the European Union debt crisis all had a sobering effect on the lending environment in the second half of 2011 and, once again, many lenders retrenched. Lending activity began to pick up again in 2012, and has improved markedly since last fall. With the improvement in hotel performance and the U.S. economy, including the stock market evidencing positive trends, the overall lending environment is currently very active. Commercial banks, mortgage REITs, insurance companies, and CMBS and mezzanine lenders are aggressively

Mortgage Component


pursuing deals. Financing is also becoming more available for hotels that require a turnaround. Data for the mortgage component may be developed from statistics of actual hotel mortgages made by long-term lenders. The American Council of Life Insurance, which represents 20 large life insurance companies, publishes quarterly information pertaining to the hotel mortgages issued by its member companies. Because of the six- to nine-month lag time in reporting and publishing hotel mortgage statistics, it was necessary to update this information to reflect current lending practices. Our research indicates that the greatest degree of correlation exists between the average interest rate of a hotel mortgage and the concurrent yield on an average-A corporate bond. The following chart summarizes the average mortgage interest rates of the hotel loans made by these lenders. For the purpose of comparison, the average-A corporate bond yield (as reported by Moody's Bond Record) is also shown. FIGURE 8-1 AVERAGE MORTGAGE INTEREST RATES AND AVERAGE-A

CORPORATE BOND YIELDS

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2004

-1s

t

2004

-3r

d

2005

-1s

t

2005

-3r

d

2006

-1s

t

2006

-3r

d

2007

-1s

t

2007

-3r

d

2008

-1s

t

2008

-3r

d

2009

-1s

t

2009

-3r

d

2010

-1s

t

2010

-3r

d

2011

-1s

t

2011

-3r

d

2012

-1s

t

2012

-3r

d

2013

-1s

t

Rate

(%)

Sources: American Council of Life Insurance, Moody's Bond Record, HVS

Avg. Interest Rate (%) Avg. A Corp. Bond Yield (%)

The relationship between hotel interest rates and the yields from the average-A corporate bond can be detailed through a regression analysis, which is expressed as follows.


Y = 0.92561800 X + 1.08736900 Where: Y = Estimated Hotel Mortgage Interest Rate

X = Current Average-A Corporate Bond Yield (Coefficient of correlation is 93%) The July 24, 2013, average yield on average-A corporate bonds, as reported by Moody’s Investors Service, was 4.67%. When used in the previously presented equation, a factor of 4.67 produces an estimated hotel/motel interest rate of 5.41% (rounded). Yields on U.S. treasuries and average-A corporate bonds remain at low levels despite their recent uptick, providing a very favorable financing environment. Interest rates for single hotel assets are currently ranging from 5.5% to 7.0%, depending on the type of debt, loan-to-value ratio, and the quality of the asset and its market. In addition to the mortgage interest rate estimate derived from this regression analysis, HVS constantly monitors the terms of hotel mortgage loans made by our institutional lending clients. Fixed-rate debt is being priced at roughly 200 to 500 basis points over the corresponding yield on treasury notes. As of July 24, 2013, the yield on the ten-year T-bill was 2.5%, indicating an interest rate range from 4.5% to 7.5%. While hotel mortgage interest rates have risen from their recent historic low, they are still at very favorable levels due to the low interest rate environment being maintained by the Federal Reserve. At present, we find that lenders who are active in the market are using loan-to-value ratios of 50% to 75% and amortization periods of 20 to 30 years. Based on our analysis of the current lodging industry mortgage market and adjustments for specific factors, such as the proposed property’s location and conditions in the Keller hotel market, it is our opinion that a 4.75% interest, 30-year amortization mortgage with a 0.062598 constant is appropriate for the proposed subject property. In the mortgage-equity analysis, we have applied a loan-to-value ratio of 65%, which is reasonable to expect based on this interest rate and current parameters. The remaining capital required for a hotel investment generally comes from the equity investor. The rate of return that an equity investor expects over a ten-year holding period is known as the equity yield. Unlike the equity dividend, which is a short-term rate of return, the equity yield specifically considers a long-term holding period (generally ten years), annual inflation- adjusted cash flows, property appreciation, mortgage amortization, and proceeds from a sale at the end

Equity Component


of the holding period. To establish an appropriate equity yield rate, we have used two sources of data: past appraisals and investor interviews. Hotel Sales – Each appraisal performed by HVS uses a mortgage-equity approach in which income is projected and then discounted to a current value at rates reflecting the cost of debt and equity capital. In the case of hotels that were sold near the date of our valuation, we were able to derive the equity yield rate and unlevered discount rate by inserting the ten-year projection, total investment (purchase price and estimated capital expenditure and/or PIP) and debt assumptions into a valuation model and solving for the equity yield. The overall capitalization rates for the historical income and projected first-year income are based on the sales price “as is.” The following table shows a representative sample of hotels that were sold on or about the time that we appraised them, along with the derived equity return and discount rates based on the purchase price and our forecast.


FIGURE 8-2 SAMPLE OF HOTELS SOLD – FULL-SERVICE & LUXURY

Hotel Location

Savoy Suites Washington, DC 154 Mar-13 11.0 % 17.5 % 5.6 % 6.6 %Miami Beach Resort Miami Beach, FL 424 Mar-13 9.4 15.0 — 12.5Sheraton North Houston Houston, TX 420 Mar-13 10.7 17.1 6.6 7.2Intercontinental New Orleans New Orleans, LA 479 Jan-13 10.4 16.6 5.3 6.8Carlyle Suites Washington, DC 173 Dec-12 11.9 19.2 6.8 7.5Eastgate Tower New York, NY 187 Nov-12 10.4 15.2 5.0 6.3Westin Atlanta Perimeter Atlanta, GA 372 Oct-12 11.0 17.3 6.1 8.2Doubletree Cocoa Beach Cocoa Beach, FL 148 Oct-12 11.4 19.0 7.6 8.1Hyatt Regency Mission Bay San Diego, CA 429 Sep-12 11.1 17.8 5.7 7.4Anaheim Hilton Anaheim, CA 1572 Aug-12 11.7 19.7 6.9 8.9Marriott St. Louis Airport St. Louis, MO 601 Jul-12 11.1 17.4 3.7 6.9Hilton Hotel Burlington, VT 258 Jul-12 10.6 17.3 7.8 8.5Westin San Diego San Diego, CA 436 Jul-12 10.2 16.1 5.7 6.1Hilton Boston Financial District Boston, MA 362 Jul-12 10.0 15.8 5.3 6.8Doubletree Denver Southwest Aurora, CO 248 Jul-12 12.2 17.8 7.4 7.7Gaige House Glen Ellen, CA 23 Jun-12 11.8 15.8 1.5 5.1Colony Palms Hotel Palm Springs, CA 57 Jun-12 12.3 19.1 11.7 10.7Embassy Suites Valencia Valencia, CA 156 May-12 10.8 16.4 6.5 7.9Fairmont San Francisco San Francisco, CA 591 Mar-12 10.8 15.7 4.1 6.4Sonoma Mission Inn Sonoma, CA 226 Mar-12 10.1 14.2 4.0 5.5Hotel Palomar San Francisco, CA 196 Jan-12 9.9 15.8 5.4 6.1Hotel Abri San Francisco, CA 91 Jan-12 9.2 13.4 6.2 8.2Ritz-Carlton Cleveland Cleveland, OH 205 Dec-11 11.0 16.6 — 7.0Hilton Crystal City Arlington, VA 386 Dec-11 10.4 15.9 6.6 6.0Park Central Hotel New York, NY 934 Nov-11 10.3 15.4 5.4 5.7Fairmont Dallas Fairmont, TX 545 Aug-11 11.9 21.1 6.3 7.3Hotel Adagio San Francisco, CA 171 Jul-11 10.0 14.1 4.7 6.2Wyndham Princeton Forrestal Plainsboro, NJ 364 Jun-11 13.7 18.8 7.5 —Hilton Suites Lexington Lexington, KY 174 May-11 10.9 17.9 10.0 8.0Red Lion Fifth Avenue Seattle, WA 297 May-11 9.0 12.0 6.0 5.6Embassy Suites Phoenix Tempe, AZ 224 May-11 11.8 18.7 6.3 8.8Xona Suites Scottsdale, AZ 431 Apr-11 13.2 17.4 — 3.6Inn at Morro Bay Morro Bay, CA 98 Apr-11 12.0 15.4 3.6 6.2Sheraton Bay Keauhou Resort Kailua-Kona, HI 521 Apr-11 12.2 14.9 — —Capitol Hill Suites Washington, DC 152 Apr-11 10.7 15.2 5.9 6.4Crowne Plaza Hotel Romulus, MI 364 Mar-11 13.3 17.9 6.6 11.3Hilton Mark Center Alexandria, VA 496 Jan-11 12.1 18.0 4.9 6.2

Source: HVS

Year Year Oneof Rooms of Sale Yield YieldEquity Historical

Overall RateBased on Sales Price

ProjectedPropertyTotal

Number Date


FIGURE 8-3 SAMPLE OF HOTELS SOLD – SELECT UPSCALE & UPPER MIDSCALE

Hotel Location

Holiday Inn Express Tucson, AZ 98 Mar-13 11.5 % 18.7 % 4.4 % 8.5 %Courtyard Shadyside Pittsburg, PA 132 Mar-13 10.5 16.5 8.3 8.7Courtyard Medical Center Houston, TX 197 Feb-13 10.2 16.0 5.7 7.1Courtyard Santa Rosa, CA 138 Feb-13 12.9 22.5 10.2 9.5Holiday Inn Express & Suites San Francisco, CA 252 Feb-13 11.5 18.3 5.6 6.7Holiday Inn Express South Minot, SD 66 Feb-13 12.2 19.9 14.2 14.8Hampton Inn & Suites Ontario, CA 91 Feb-13 11.7 17.1 2.5 9.4Hampton Inn Portland, OR 122 Dec-12 10.0 17.1 9.6 10.1Holiday Inn Southaven Memphis, TN 121 Dec-12 13.0 20.6 11.7 12.6Homewood Suites Conversion New York, NY 241 Nov-13 9.5 13.8 — 11.9Red Lion Denver Southeast Aurora, CO 288 Oct-12 13.5 22.0 — 8.3Hilton Garden Inn Fort Worth, TX 96 Oct-12 10.7 17.1 6.9 9.3Hilton Garden Inn Clarksville, TN 111 Sep-12 11.1 18.4 9.5 10.0Courtyard Ventura Oxnard, CA 166 Aug-12 12.1 19.1 5.6 8.2Hilton Garden Inn Odessa, TX 100 Aug-12 14.1 24.1 9.6 10.9Homewood Suites Egg Harbor Twnshp, NJ 120 May-12 12.1 19.9 — 8.7Hilton Garden Inn Dowell, MD 100 May-12 11.2 18.4 8.4 8.7Hampton Inn & Suites Smyrna, TN 83 May-12 12.0 19.5 9.1 9.1Residence Inn Dallas Arlington Arlington, TX 96 May-12 10.1 16.5 7.9 7.3Courtyard Dallas Arlington Arlington, TX 103 May-12 10.8 17.1 6.5 7.1Hilton Garden Inn Smyrna, TN 112 May-12 11.2 17.9 7.4 8.5Courtyard Upper East Side New York, NY 226 May-12 10.3 14.3 4.4 5.7Courtyard Atlanta, GA 150 Mar-12 10.6 17.7 4.0 7.5Springhill Suites Boise, ID 119 Feb-12 12.4 19.4 6.3 8.3Hilton Garden Inn Lakeshore Birmingham, AL 95 Feb-12 11.2 17.4 9.0 8.2Hilton Garden Inn SE Liberty Birmingham, AL 130 Feb-12 12.1 19.3 7.4 8.7Holiday Inn Express Burlingame Burlingame, CA 146 Dec-11 12.5 19.1 8.7 8.5Springhill Suites Lincolnshire, IL 161 Nov-11 13.1 20.3 8.8 10.5Hampton Inn Orlando, FL 147 Nov-11 10.8 17.0 9.6 9.1Holiday Inn Express Temecula, CA 90 Aug-11 11.9 18.1 2.0 7.4Residence Inn Midtown Atlanta, GA 160 Jul-11 10.2 15.2 6.5 7.0Four Points Times Square New York, NY 244 Jun-11 10.5 15.5 6.3 6.4Hilton Garden Inn Gwinnett Duluth, GA 122 May-11 12.2 18.6 6.9 8.2Homewood Suites Ridgeland, MS 91 May-11 12.8 20.2 8.7 10.2Marriott Courtyard Westside Culver City, CA 260 Apr-11 10.6 13.0 6.5 6.7Holiday Inn Atlanta Gwinnett Pl. Duluth, GA 143 Apr-11 12.0 18.7 6.8 7.6Holiday Inn Express San Diego San Diego, CA 125 Apr-11 10.6 17.3 7.6 8.0

Source: HVS

Overall RateBased on Sales Price

of Rooms of SaleHistorical

TotalProperty Equity Projected

Year Year OneDate

Yield YieldNumber

Investor Interviews - During the course of our work, we continuously monitor investor equity-yield requirements through discussions with hotel investors and brokers. While equity still looks to yield high returns for the risk of hotel investment, the low yield environment, coupled with increased competition for


quality assets, has placed downward pressure on equity yield returns. We find that equity yield rates currently range from a low in the low to mid-teens for high-quality, institutional-grade assets in markets with high barriers to entry to the upper teens for quality assets in more typical markets; equity yield rates tend to near or exceed 20% for aging assets with functional obsolescence and/or other challenging property- or market-related issues. Equity return requirements also vary with an investment’s level of leverage. Higher loan-to-value ratios are becoming more prevalent, allowing for increased equity returns. The following table summarizes the range of equity yields indicated by hotel sales and investor interviews. We note that there tends to be a lag between the sales data and current market conditions, and thus, the full effect of the change in the economy and capital markets may not yet be reflected. FIGURE 8-4 SUMMARY OF EQUITY YIELD OR INTERNAL RATE OF RETURN

REQUIREMENTS

Source Data Point Range Average

HVS Hotel Sales - Full-Service & Luxury 12% - 21.1% 16.7%HVS Hotel Sales - Select Upscale and Upper Midscale 13% - 24.1% 18.2%HVS Hotel Sales - Budget/Economy 16.7% - 26.2% 20.7%

HVS Investor Interviews 12% - 22%

Based on the assumed 65% loan-to-value ratio, the risk inherent in achieving the projected income stream, and the age, condition, and anticipated market position of the subject property, it is our opinion that an equity investor is likely to require an equity yield rate of 18.0%. The lack of attainable yields on alternate investments has continued to put downward pressure on equity yield rates, despite the desire of investors to yield higher returns. Competition for quality assets is increasing amongst all hotel asset types. These influences are keeping equity yields from increasing significantly. Equity return requirements remain elevated for the more challenged hotel assets. Inherent in this valuation process is the assumption of a sale at the end of the ten-year holding period. The estimated reversionary sale price as of that date is calculated by capitalizing the projected eleventh-year net income by an overall terminal capitalization rate. An allocation for the selling expenses is deducted from this sale price, and the net proceeds to the equity interest (also known as the equity residual) are calculated by deducting the outstanding mortgage balance from the reversion.

Terminal Capitalization Rate


We have reviewed several recent investor surveys. The following chart summarizes the averages presented for terminal capitalization rates in various investor surveys during the past decade. Note that survey data lag the market and do not necessarily reflect the most current market conditions. FIGURE 8-5 HISTORICAL TRENDS OF TERMINAL CAPITALIZATION RATES

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Term

inal

Cap

Rat

e (%

)

PWC - Full-Service PWC - Luxury

CRE/RERC - First Tier PWC - Select-Service

FIGURE 8-6 TERMINAL CAPITALIZATION RATES DERIVED FROM INVESTOR SURVEYS

Source Data Point Range Average

PWC Real Estate Investor Survey - 1st Quarter 2013 Select-Service Hotels 5.0% - 12.0% 8.5% Full-Service Hotels 6.0% - 12.0% 8.7% Luxury Hotels 6.0% - 12.0% 8.7%

CRE/RERC Real Estate Report - Spring 2013 First Tier Hotels 6.8% - 12.0% 9.2%

For purposes of this analysis, we have applied a terminal capitalization rate of 9.0%. Our final position for the terminal capitalization rate reflects the current market for hotel investments. In tandem with overall lower return expectations, terminal capitalization rates for quality hotel assets in markets with high barriers


to entry have returned to their 2005 to 2007 lows, while terminal capitalization rates for older assets or for those suffering from functional obsolescence and/or weak market conditions remain elevated, reflecting the market's recognition that certain assets have less opportunity for significant appreciation. As the two participants in a real estate investment, investors and lenders must evaluate their equity and debt contributions based on their particular return requirements. After carefully weighing the risk associated with the projected economic benefits of a lodging investment, the participants will typically make their decision whether or not to invest in a hotel or resort by determining if their investment will provide an adequate yield over an established period. For the lender, this yield will typically reflect the interest rate required for a hotel mortgage over a period of what can range from seven to ten years. The yield to the equity participant may consider not only the requirements of a particular investor, but also the potential payments to cooperative or ancillary entities such as limited partner payouts, stockholder dividends, and management company incentive fees. The return on investment analysis in a hotel acquisition would not be complete without recognizing and reflecting the yield requirements of both the equity and debt participants. The analysis will now calculate the yields to the mortgage and equity participants during a ten-year projection period. The annual debt service is calculated by multiplying the mortgage component by the mortgage constant.

Mortgage Component $13,571,000Mortgage Constant 0.062598 Annual Debt Service $849,513

The yield to the lender based on a 65% debt contribution equates to an interest rate of 4.75%, which is calculated as follows.

Mortgage-Equity Method – Opinion of Net Present Value


FIGURE 8-7 RETURN TO THE LENDER

Total Annual Present Worth of $1 DiscountedYear Debt Service Factor at 4.7% Cash Flow

2015 $850,000 x 0.955025 = $812,0002016 850,000 x 0.912074 = 775,0002017 850,000 x 0.871054 = 740,0002018 850,000 x 0.831878 = 707,0002019 850,000 x 0.794465 = 675,0002020 850,000 x 0.758734 = 645,0002021 850,000 x 0.724611 = 616,0002022 850,000 x 0.692022 = 588,0002023 850,000 x 0.660898 = 562,0002024 11,804,000 * x 0.631175 = 7,450,000

Value of Mortgage Component $13,570,000

*10th year debt service of $850,000 plus outstanding mortgage balance of $10,955,000

The following table illustrates the cash flow available to the equity position, after deducting the debt service from the projected net income. FIGURE 8-8 NET INCOME TO EQUITY

Net IncomeAvailable for Total Annual Net Income

Year Debt Service Debt Service to Equity

2015 $1,081,000 - $850,000 = $231,0002016 1,458,000 - 850,000 = 608,0002017 1,840,000 - 850,000 = 990,0002018 2,018,000 - 850,000 = 1,168,0002019 2,078,000 - 850,000 = 1,228,0002020 2,141,000 - 850,000 = 1,291,0002021 2,205,000 - 850,000 = 1,355,0002022 2,271,000 - 850,000 = 1,421,0002023 2,339,000 - 850,000 = 1,489,0002024 2,409,000 - 850,000 = 1,559,000

In order for the present value of the equity investment to equate to the $7,308,000 capital outlay, the investor must accept a 18.0% return, as shown in the following table.


FIGURE 8-9 EQUITY COMPONENT YIELD

Net Income Present Worth of $1 DiscountedYear to Equity Factor at 18.0% Cash Flow

2015 $231,000 x 0.847490 = $196,0002016 608,000 x 0.718239 = 437,0002017 990,000 x 0.608700 = 603,0002018 1,168,000 x 0.515867 = 603,0002019 1,228,000 x 0.437192 = 537,0002020 1,291,000 x 0.370516 = 478,0002021 1,355,000 x 0.314009 = 425,0002022 1,421,000 x 0.266119 = 378,0002023 1,489,000 x 0.225533 = 336,0002024 17,344,000 * x 0.191137 = 3,315,000

Value of Equity Component $7,308,000

*10th year net income to equity of $1,559,000 plus sales proceeds of $15,785,000

In determining the potential feasibility of the proposed Proposed Hotel and Conference Center, we analyzed the lodging market, researched the area’s economics, reviewed the estimated development cost, and prepared a ten-year forecast of income and expense, which was based on our review of the current and historical market conditions, as well as comparable income and expense statements. The conclusion of this analysis indicates that an equity investor contributing $7,308,000 (roughly 35% of the $20,900,000 development cost) could expect to receive a 18.0% internal rate of return over a ten-year holding period. The proposed subject hotel has an opportunity to serve an unrepresented niche in the market. While the greater Metroplex market offers a wide complement of convention centers and meeting and group-focused hotels with sizeable amounts of meeting space, the Keller and Southlake areas remain underserved by branded, conference center hotels such as the proposed subject property. Based on our market analysis, there is adequate market support for the proposed hotel and conference center in Keller. Our conclusion is based primarily on the long-term strength of this hotel market and its ongoing growth. The steady increase of demand and average rate indicates that the market will successfully absorb the new supply from this proposed hotel. The proposed hotel sites are located proximate to both corporate and leisure demand generators and will offer an appropriate array of facilities and amenities that will allow the property to perform well across all market segments. Our conclusion is also predicated on the assumption that another conference facility will not be built in Keller. Our research indicates that the city can support a hotel, with or without an attached conference

Conclusion


center, but that the current demand for meeting and group events is not great enough to support two conference facilities. Based on these parameters, the feasibility of the subject project is confirmed. We have made no assumptions of hypothetical conditions in our report. The analysis is based on the extraordinary assumption that the described improvements have been completed as of the stated date of opening. The reader should understand that the completed subject property does not yet, in fact, exist as of the date of this report. Our feasibility study does not address unforeseeable events that could alter the proposed project and/or the market conditions reflected in the analyses; we assume that no significant changes, other than those anticipated and explained in this report, will take place between the date of inspection and stated date of opening. We have made no other extraordinary assumptions specific to this feasibility study. However, several important general assumptions have been made that apply to this feasibility study and our studies of proposed hotels in general. These aspects are set forth in the Assumptions and Limiting Conditions chapter of this report. We have not made any jurisdictional exceptions to the Uniform Standards of Professional Appraisal Practice in our analysis or report.

August-2013 Statement of Assumptions and Limiting Conditions Proposed Hotel and Conference Center – Keller, Texas 114

9. Statement of Assumptions and Limiting Conditions

1. This report is set forth as a feasibility study of the proposed subject property; this is not an appraisal report.

2. This report is to be used in whole and not in part. 3. No responsibility is assumed for matters of a legal nature, nor do we

render any opinion as to title, which is assumed to be marketable and free of any deed restrictions and easements. The property is evaluated as though free and clear unless otherwise stated.

4. We assume that there are no hidden or unapparent conditions of the sub-soil or structures, such as underground storage tanks, that would impact the property’s development potential. No responsibility is assumed for these conditions or for any engineering that may be required to discover them.

5. We have not considered the presence of potentially hazardous materials or any form of toxic waste on the project site. The consultants are not qualified to detect hazardous substances, and we urge the client to retain an expert in this field if desired.

6. The Americans with Disabilities Act (ADA) became effective on January 26, 1992. We have assumed the proposed hotel would be designed and constructed to be in full compliance with the ADA.

7. We have made no survey of the site, and we assume no responsibility in connection with such matters. Sketches, photographs, maps, and other exhibits are included to assist the reader in visualizing the property. It is assumed that the use of the described real estate will be within the boundaries of the property described, and that no encroachment will exist.

8. All information, financial operating statements, estimates, and opinions obtained from parties not employed by TS Worldwide, LLC are assumed to be true and correct. We can assume no liability resulting from misinformation.

9. Unless noted, we assume that there are no encroachments, zoning violations, or building violations encumbering the subject property.

10. The property is assumed to be in full compliance with all applicable federal, state, local, and private codes, laws, consents, licenses, and regulations (including a liquor license where appropriate), and that all


licenses, permits, certificates, franchises, and so forth can be freely renewed or transferred to a purchaser.

11. All mortgages, liens, encumbrances, leases, and servitudes have been disregarded unless specified otherwise.

12. None of this material may be reproduced in any form without our written permission, and the report cannot be disseminated to the public through advertising, public relations, news, sales, or other media.

13. We are not required to give testimony or attendance in court by reason of this analysis without previous arrangements, and only when our standard per-diem fees and travel costs are paid prior to the appearance.

14. If the reader is making a fiduciary or individual investment decision and has any questions concerning the material presented in this report, it is recommended that the reader contact us.

15. We take no responsibility for any events or circumstances that take place subsequent to the date of our field inspection.

16. The quality of a lodging facility's on-site management has a direct effect on a property's economic viability. The financial forecasts presented in this analysis assume responsible ownership and competent management. Any departure from this assumption may have a significant impact on the projected operating results.

17. The financial analysis presented in this report is based upon assumptions, estimates, and evaluations of the market conditions in the local and national economy, which may be subject to sharp rises and declines. Over the projection period considered in our analysis, wages and other operating expenses may increase or decrease because of market volatility and economic forces outside the control of the hotel’s management. We assume that the price of hotel rooms, food, beverages, and other sources of revenue to the hotel will be adjusted to offset any increases or decreases in related costs. We do not warrant that our estimates will be attained, but they have been developed based upon information obtained during the course of our market research and are intended to reflect the expectations of a typical hotel investor as of the stated date of the report.

18. This analysis assumes continuation of all Internal Revenue Service tax code provisions as stated or interpreted on either the date of value or the date of our field inspection, whichever occurs first.

19. Many of the figures presented in this report were generated using sophisticated computer models that make calculations based on numbers carried out to three or more decimal places. In the interest of simplicity,


most numbers have been rounded to the nearest tenth of a percent. Thus, these figures may be subject to small rounding errors.

20. It is agreed that our liability to the client is limited to the amount of the fee paid as liquidated damages. Our responsibility is limited to the client, and use of this report by third parties shall be solely at the risk of the client and/or third parties. The use of this report is also subject to the terms and conditions set forth in our engagement letter with the client.

21. Evaluating and comprising financial forecasts for hotels is both a science and an art. Although this analysis employs various mathematical calculations to provide value indications, the final forecasts are subjective and may be influenced by our experience and other factors not specifically set forth in this report.

22. This study was prepared by TS Worldwide, LLC. All opinions, recommendations, and conclusions expressed during the course of this assignment are rendered by the staff of TS Worldwide, LLC as employees, rather than as individuals.

August-2013 Certification Proposed Hotel and Conference Center – Keller, Texas 117

10. Certification

The undersigned hereby certify that, to the best of our knowledge and belief: 1. the statements of fact presented in this report are true and correct; 2. the reported analyses, opinions, and conclusions are limited only by the

reported assumptions and limiting conditions, and are our personal, impartial, and unbiased professional analyses, opinions, and conclusions;

3. we have no (or the specified) present or prospective interest in the property that is the subject of this report and no (or the specified) personal interest with respect to the parties involved;

4. we have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment;

5. our engagement in this assignment was not contingent upon developing or reporting predetermined results;

6. our compensation for completing this assignment is not contingent upon the development or reporting of a predetermined result or direction in performance that favors the cause of the client, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this study;

7. our analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice;

8. Jane L. Rogers personally inspected the property described in this report; 9. Jane L. Rogers has not performed appraisal or consulting work on this

property within the past three years; 10. the reported analyses, opinions, and conclusions were developed, and this

report has been prepared, in conformity with the requirements of the Code of Professional Ethics and the Standards of Professional Appraisal Practice of the Appraisal Institute;

11. the use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives; and

August-2013

12. as of the date of this report, Jane L. Rogers has completed the Standards

and Ethics Education Requirement of the Appraisal Institute for Associate Members.

Proposed Hotel and Conference Center

as of the date of this report, Jane L. Rogers has completed the Standards and Ethics Education Requirement of the Appraisal Institute for Associate Members.

Jane L. Rogers Vice President TS Worldwide, LLC State Appraiser License (TX) 1380015 G

Certification Proposed Hotel and Conference Center – Keller, Texas 118

as of the date of this report, Jane L. Rogers has completed the Standards and Ethics Education Requirement of the Appraisal Institute for Associate

State Appraiser License (TX) 1380015 G

August-2013 Penetration Explanation Proposed Hotel and Conference Center – Keller, Texas i

Penetration Explanation

Let us illustrate the penetration adjustment with an example. A market has three existing hotels with the following operating statistics:

BASE-YEAR OCCUPANCY AND PENETRATION LEVELS

Based upon each hotel’s room count, market segmentation, and annual occupancy, the annual number of room nights accommodated in the market from each market segment can be quantified, as set forth below. MARKET-WIDE ROOM NIGHT DEMAND

The following discussion will be based upon an analysis of the commercial market segment. The same methodology is applied for each market segment to derive an estimate of a hotel’s overall occupancy. The table below sets forth the commercial demand accommodated by each hotel. Each hotel’s commercial penetration factor is computed by:

PropertyNumber

of Rooms Fair Share CommercialMeeting and

Group Leisure Occupancy

Hotel A 100 23.5 % 60 % 20 % 20 % 75.0 % 100.8 %Hotel B 125 29.4 70 10 20 65.0 87.4Hotel C 200 47.1 30 60 10 80.0 107.5

Totals/Average 425 100.0 % 47 % 38 % 15 % 74.4 % 100.0 %

Penetration

Market Segment

Annual Room Night

Demand

Commercia l 54,704 47.4 %Meeti ng and Group 43,481 37.7Leis ure 17,246 14.9

Total 115,431 100.0 %

Percentage of Total

August-2013 Penetration Explanation Proposed Hotel and Conference Center – Keller, Texas ii

1) calculating the hotel’s market share % of commercial demand (commercial room nights accommodated by subject hotel divided by total commercial room nights accommodated by all hotels) and

2) dividing the hotel’s commercial market share % by the hotel’s fair share %. The following table sets forth each hotel’s fair share, commercial market share, and commercial penetration factor. COMMERCIAL SEGMENT PENETRATION FACTORS

If a new 100-room hotel enters the market, the fair share of each hotel changes because of the new denominator, which has increased by the 100 rooms that have been added to the market. COMMERCIAL SEGMENT FAIR SHARE

The new hotel’s penetration factor is projected for its first year of operation. It is estimated that the hotel will capture (penetrate) only 85% of its fair share as it establishes itself in the market. The new hotel’s market share and room night capture can be calculated based upon the hotel’s estimated penetration factor. When the market share of the existing hotels and that of the new hotel are added up, they no longer equal 100% because of the new hotel’s entry into the market. The market share of each hotel must be adjusted to reflect the change in the denominator that comprises the sum of each hotel’s market share.

PropertyNumber

of Rooms Fair ShareCommercial

Capture

Hotel A 100 23.5 % 16,425 30.0 % 127.6 %Hotel B 125 29.4 20,759 37.9 129.0Hotel C 200 47.1 17,520 32.0 68.1

Totals/Average 425 100.0 % 54,704 100.0 % 100.0 %

Commercial Penetration

Commercial Market Share

PropertyNumber of

Rooms

Hotel A 100 19.0 %Hotel B 125 23.8Hotel C 200 38.1New Hotel 100 19.0

Total 525 100.0 %

Fair Share

August-2013 Penetration Explanation Proposed Hotel and Conference Center – Keller, Texas iii

This adjustment can be mathematically calculated by dividing each hotel’s market share percentages by the new denominator of 97.1%. The resulting calculations reflect each hotel’s new adjusted market share. The sum of the adjusted market shares equals 100%, indicating that the adjustment has been successfully completed. Once the market shares have been calculated, the penetration factors can be recalculated (adjusted market share divided by fair share) to derive the adjusted penetration factors based upon the new hotel’s entry into the market. Note that each existing hotel’s penetration factor actually increases because the new hotel is capturing (penetrating) less than its fair share of demand.

COMMERCIAL SEGMENT PROJECTIONS (YEAR 1)

In its second year of operation, the new hotel is projected to penetrate above its fair share of demand. A penetration rate of 130% has been chosen, as the new hotel is expected to perform at a level commensurate with Hotel A and Hotel B in this market segment. The same calculations are performed to adjust market share and penetration factors. Note that now the penetration factors of the existing hotels decline below their original penetration rates because of the new hotel’s above-market penetration. Also, note that after the market share adjustment, the new hotel retains a penetration rate commensurate with Hotel A and Hotel B, though the penetration rates of all three hotels have declined by approximately nine percentage points because of the reapportionment of demand. Once the market shares of each hotel have been adjusted to reflect the entry of the new hotel into the market, the commercial room nights captured by each hotel may be projected by multiplying the hotel’s market share percentage by the total commercial room-night demand. This calculation is shown below.

PropertyNumber

of Rooms Fair Share

Hist./Proj. Penetration

Factor

Hist./Proj. Market

Share

Adjusted Market

Share

Adjusted Penetration

FactorProjected

Capture

Hotel A 100 19.0 % 127.6 % 24.3 % 25.0 % 131.4 % 13,688Hotel B 125 23.8 129.0 30.7 31.6 132.8 17,299Hotel C 200 38.1 68.1 25.9 26.7 70.1 14,600New Hotel 100 19.0 85.0 16.2 16.7 87.5 9,117

Totals/Average 525 100.0 % 97.1 % 100.0 % 54,704

August-2013 Penetration Explanation Proposed Hotel and Conference Center – Keller, Texas iv

COMMERCIAL SEGMENT PROJECTIONS (YEAR 2)

PropertyNumber

of Rooms Fair Share

Hist./Proj. Penetration

Factor

Hist./Proj. Market

Share

Adjusted Market

Share

Adjusted Penetration

FactorProjected

Capture

Hotel A 100 19.0 % 131.4 % 25.0 % 23.1 % 121.5 % 12,662Hotel B 125 23.8 132.8 31.6 29.3 122.9 16,004Hotel C 200 38.1 70.1 26.7 24.7 64.8 13,507New Hotel 100 19.0 130.0 24.8 22.9 120.3 12,531

Totals/Average 525 100.0 % 108.1 % 100.0 % 54,704

August-2013 Explanation of the Simultaneous Valuation Formula Proposed Hotel and Conference Center – Keller, Texas v

Explanation of the Simultaneous Valuation Formula

The algebraic equation known as the simultaneous valuation formula, which solves for the total property value using a ten-year mortgage and equity technique, was developed by Suzanne R. Mellen, CRE, MAI, FRICS, ISHC, Managing Director of the San Francisco office of HVS. A complete discussion of the technique is presented in her article entitled “Simultaneous Valuation: A New Technique.”9 The process of solving for the value of the mortgage and equity components begins by deducting the annual debt service from the projected income before debt service, leaving the net income to equity for each year. The net income as of the eleventh year is capitalized into a reversionary value using the terminal capitalization rate. The equity residual, which is the total reversionary value less the mortgage balance at that point in time and less any brokerage and legal costs associated with the sale, is discounted to the date of value at the equity yield rate. The net income to equity for each projection year is also discounted back to the date of value. The sum of these discounted values equals the value of the equity component. Because the equity component comprises a specific percentage of the total value, the value of the mortgage and the total property can be computed easily. This process can be expressed in two algebraic equations that set forth the mathematical relationships between the known and unknown variables using the following symbols.

9Suzanne R. Mellen. "Simultaneous Valuation: A New Technique," Appraisal Journal, April, 1983.

August-2013 Explanation of the Simultaneous Valuation Formula Proposed Hotel and Conference Center – Keller, Texas vi

NI = Net income available for debt service V = Value M = Loan-to-value ratio f = Annual debt service constant n = Number of years in the projection period de = Annual cash available to equity dr = Residual equity value b = Brokerage and legal cost percentage P = Fraction of the loan paid off during the projection

period fp = Annual constant required to amortize the entire loan

during the projection period Rr = Overall terminal capitalization rate that is applied to

net income to calculate the total property reversion (sales price at the end of the projection period)

1/Sn = Present worth of $1 factor (discount factor) at the equity yield rate

Using these symbols, the following formulas can be used to express some of the components of this mortgage and equity valuation process. Debt Service – A property's debt service is calculated by first determining the mortgage amount that equals the total value (V) multiplied by the loan-to-value ratio (M). Debt service is derived by multiplying the mortgage amount by the annual debt service constant (f). The following formula represents debt service.

f x M x V = Debt Service Net Income to Equity (Equity Dividend) – The net income to equity (de) is the property's net income before debt service (NI) less debt service. The following formula represents the net income to equity.

NI - (f x M x V) = de Reversionary Value – The value of the hotel at the end of the tenth year is calculated by dividing the eleventh-year net income before debt service (NI11) by the terminal capitalization rate (Rr). The following formula represents the property's tenth-year reversionary value.

August-2013 Explanation of the Simultaneous Valuation Formula Proposed Hotel and Conference Center – Keller, Texas vii

(NI11/Rr) = Reversionary Value Brokerage and Legal Costs – When a hotel is sold, certain costs are associated with the transaction. Normally, the broker is paid a commission and the attorney collects legal fees. In the case of hotel transactions, brokerage and legal costs typically range from 1% to 4% of the sales price. Because these expenses reduce the proceeds to the seller, they are usually deducted from the reversionary value in the mortgage and equity valuation process. Brokerage and legal costs (b), expressed as a percentage of reversionary value (NI11/Rr), are calculated by application of the following formula.

b (NI11/Rr) = Brokerage and Legal Costs Ending Mortgage Balance – The mortgage balance at the end of the tenth year must be deducted from the total reversionary value (debt and equity) in order to determine the equity residual. The formula used to determine the fraction of the loan remaining (expressed as a percentage of the original loan balance) at any point in time (P) takes the annual debt service constant of the loan over the entire amortization period (f) less the mortgage interest rate (i), and divides it by the annual constant required to amortize the entire loan during the ten-year projection period (fp) less the mortgage interest rate. The following formula represents the fraction of the loan paid off (P).

(f - i)/(fp - i) = P If the fraction of the loan paid off (expressed as a percentage of the initial loan balance) is P, then the remaining loan percentage is expressed as 1 - P. The ending mortgage balance is the fraction of the remaining loan (1 - P) multiplied by the initial loan amount (M x V). The following formula represents the ending mortgage balance.

(1 - P) x M x V Equity Residual Value – The value of the equity upon the sale at the end of the projection period (dr) is the reversionary value less the brokerage and legal costs and the ending mortgage balance. The following formula represents the equity residual value.

(NI11/Rr) - (b (NI11/Rr) - ((1 - P) x M x V) = dr Annual Cash Flow to Equity – The annual cash flow to equity consists of the equity dividend for each projection year plus the equity residual at the end of the tenth year. The following formula represents the annual cash flow to equity.

August-2013 Explanation of the Simultaneous Valuation Formula Proposed Hotel and Conference Center – Keller, Texas viii

NI1 - (f x M x V) = de1 NI2 - (f x M x V) = de2

NI10 - (f x M x V) = de10 (NI11/Rr) - (b (NI11/Rr) - ((1 - P) x M x V) = dr

Value of the Equity – If the initial mortgage amount is calculated by multiplying the loan-to-value ratio (M) by the property value (V), then the equity value is one minus the loan-to-value ratio multiplied by the property value. The following formula represents the value of the equity.

(1 - M) V Discounting the Cash Flow to Equity to the Present Value – The cash flow to equity in each projection year is discounted to the present value at the equity yield rate (1/Sn). The sum of these cash flows is the value of the equity (1 - M) V. The following formula represents the calculation of equity as the sum of the discounted cash flows.

(de1 x 1/S1) + (de2 x 1/S2) + . . . + (de10 x 1/S10) + (dr x 1/S10) = (1 - M) V Combining the Equations: Annual Cash Flow to Equity and Discounting the Cash Flow to Equity to the Present Value – The last step is to arrive at one overall equation that shows that the annual cash flow to equity plus the yearly discounting to the present value equals the value of the equity.

((NI1 - (f x M x V)) 1/S1) + ((NI2 - (f x M x V)) 1/S2) + . . . ((NI10 - (f x M x V)) 1/S10) +

(((NI11/Rr) - (b (NI11/Rr)) - ((1 - P) x M x V)) 1/S10) = (1 -M) V Because the only unknown in this equation is the property's value (V), it can be solved readily. Ten-Year Projection of Income and Expense – Because the fixed and variable forecast of income and expense is carried out only to the stabilized year, it is necessary to continue the projection to the eleventh year. In most cases, net income before debt service beyond the stabilized year is projected at an assumed inflation rate. By increasing a property's revenue and expenses at the same rate of inflation, net income remains constant as a percentage of total revenue, and the dollar amount escalates at the annual inflation rate. The ten-year forecast of

August-2013 Explanation of the Simultaneous Valuation Formula Proposed Hotel and Conference Center – Keller, Texas ix

income and expense illustrates the subject property's net income, which is assumed to increase by 3.0% annually subsequent to the hotel's stabilized year of operation. The following values are assigned to the variable components for the purposes of this valuation. SUMMARY OF KNOWN VARIABLES

Annual Net Income NI See Ten-Year ForecastLoan-To-Value Ratio M 65 %Interest Rate i 4.75 %Debt Service Constant f 0.062598Equity Yield Ye 18.0 %Transaction Costs b 3.0 %Annual Constant Required to Amortize the Loan in Ten Years fp 0.125817Terminal Capitalization Rate Rr 9.0 %

The following table illustrates the present worth of a $1 factor at the 18.0% equity yield rate. PRESENT WORTH OF $1 FACTOR AT THE EQUITY YIELD RATE

Year Present Worth of $1Ending Factor at 18.0%

2015 0.8474902016 0.7182392017 0.6087002018 0.5158672019 0.4371922020 0.3705162021 0.3140092022 0.2661192023 0.2255332024 0.191137

August-2013 Explanation of the Simultaneous Valuation Formula Proposed Hotel and Conference Center – Keller, Texas x

Using these known variables, the following intermediary calculations must be made before applying the simultaneous valuation formula. The fraction of the loan paid off during the projection period is calculated as follows.

P = ( 0.0626 - 0.0475 ) / ( 0.12582 - 0.0475 ) = 0.192776 The annual debt service is calculated as f x M x V.

(f x M x V)= 0.0626 x 0.65 x V = ( 0.04069 )V Inserting the known variables into the hotel valuation formula produces the following.

( 1,081,000 - 0.04069 V ) x 0.84746 +( 1,458,000 - 0.04069 V ) x 0.71818 +( 1,840,000 - 0.04069 V ) x 0.60863 +( 2,018,000 - 0.04069 V ) x 0.51579 +( 2,078,000 - 0.04069 V ) x 0.43711 +( 2,141,000 - 0.04069 V ) x 0.37043 +( 2,205,000 - 0.04069 V ) x 0.31393 +( 2,271,000 - 0.04069 V ) x 0.26604 +( 2,339,000 - 0.04069 V ) x 0.22546 +( 2,409,000 - 0.04069 V ) x 0.19106 +

August-2013 Explanation of the Simultaneous Valuation Formula Proposed Hotel and Conference Center – Keller, Texas xi

((( 2,481,000 / 0.090 ) - ( 0.030 x ( 2,481,000 / 0.090 )) - (( 1 - 0.192776 ) x 0.7 x V)) x 0.191064 )= ( 1 - 0.65 )V

Like terms are combined as follows.

$13,218,358 - 0.283108V = (1 - 0.65)V$13,218,358 = 0.63311V

V = $13,218,358 / 0.63311V = $20,878,510

Total Property Value as Indicated by the Income Capitalization Approach (Say) = $20,900,000

HVS, Dallas, Texas Qualifications of Jane Rogers 1

Jane Rogers

HVS CONSULTING AND VALUATION Dallas, Texas GARLAND INDEPENDENT SCHOOL DISTRICT Garland, Texas INTERNATIONAL PRIVATE SCHOOLS Czech Republic, Turkey, Spain ARMADILLO TOURS INTERNATIONAL Austin, Texas CROWN AND ANCHOR London, England AMERICAN LEISURE Dallas, Texas DALLAS HILTON INN Dallas, Texas

EMPLOYMENT

2004 to present

2000 – 2003

1994 – 1999

1988 – 1989

1985 – 1986

1984 – 1985

1981 – 1982


BS – University of Texas at Austin

Post Graduate Studies TEXAS WOMAN’S UNIVERSITY TEXAS A & M – COMMERCE

Certified General Appraiser Classes Completed Basic Real Estate Appraisal – 30 hours Basic Appraisal Procedures – 30 hours Income Property Analysis – 15 hours Uniform Residential Appraisal Report – 15 hours Uniform Standards of Professional Appraisal Practice – 15 hours General Appraiser Income Approach – 60 hours General Appraiser Market Analysis and HBU – 30 hours General Appraiser Site Valuation and Cost Approach – 30 hours General Appraiser Sales Comparison Approach – 30 hours General Appraiser Report Writing and Case Studies – 30 hours Statistics, Modeling and Finance – 15 hours Business Practices and Ethics – 8 hours Report Writing and Valuation Analysis – 40 hours Small Hotel/Motel Valuation – 7 hours Fundamentals of Separating Real, Personal Property, and Intangible Business Assets – 15

hours Online Scope of Work: Expanding Your Range of Services – 7 hours USPAP Updates – 2010, 2012 Arkansas, Louisiana, Texas

EDUCATION AND OTHER TRAINING

STATE CERTIFICATIONS


“Mexico’s Growing Need for Business-Oriented Branded Hotels,” July 2011 “Volatile Trends and Hotel Performance.” Co-authored with Kathleen Donahue, December 2010 “Mexico’s Rising Foreign Direct Investment,” October 2010 “Huatulco – Mexico’s Next Hot Spot?” February 2009 “An Economic Snapshot of Honduras,” January 2009 “Investment in Mexico,” April 2008 “Airport Activity Update,” June 2004 American Hotel & Lodging Association

PUBLISHED ARTICLES

HVS Journal

HVS Journal

HVS Journal

HVS Journal

HVS Journal

HVS Journal

HVS Journal

PROFESSIONAL AFFILIATIONS


EXAMPLES OF COROPRATE AND INSTITUTIONAL CLIENTS SERVED 20|20 Resorts Inc. Aareal Bank AEW Akumal Beach Resort Alabama Life Reinsurance Co. The Andalex Group Anthony’s Key Resort Aztec Group, Inc. Banco de Sabadell BancFirst Bank of America, SA Barclays Bear Stearns Butler Burgher Group Canyon Equity LLC Capital Funding Group Cathay Bank Caxianova Miami Agency CCRE CIBC Citigroup Citizens City of Shreveport CMK BWI, Ltd. Controladora de Negocios, S.A. de C.V. Credit Suisse Cross Development CS First Boston CW Capital Dahlmann Properties Desarollos Delta Desarollos Marinos Desarollos Mega Dowling Company Draz Investments Execution Finance Falconhead Resort, Ltd. Falor Companies Far East National Bank First Commercial Credit Gazit Consultants GBK Real Estate Developers GE Commercial Mortgage Genworth Financial

GICSA GIM Desarrollos Global Hospitality Investments GMAC Commercial Mortgage Goldman Sachs González Soto y Asociados, S.A. de C.V. Gramercy Capital Corporation Greenberg Traurig Grupo Agrisal Grupo Carrousel Grupo Consorcio Grupo Elipse Asesores Grupo Fracsa Grupo ICA Grupo Posadas Grupo Summa Hamister Group Haus Panama Hermes Corporativo, S.A. Hillwood Hotelera Playa Sombrero, S.A. HR Properties Hypo Real Estate IAG Underwriters ING Clarion Partners Inmobiliara Hospitalidad San Rafael Inmobiliara Torres Trujillo Inversiones Turisticas Cancún, S.A. de

C.V. Investar Financial Ixis Capital Markets JCR Capital JPMorgan Chase La Teja Campesina Ladder Capital Laurus Corporation Lehman Brothers Lenexa Hotel LP Logan International Lone Star College M&T Bank Magnolia Hotels Mandarin Oriental Meridia Capital Merrill Lynch MetLife Monte Xanic

Naranza Capital Partners Neptune Hospitality Newcrest Management, LLC Nomura OliverMcMillan Phoenix Hospitality Group PNC Proyecto Esmeralda Resort, S.A. de C.V. Proyecto Inversion Ocotal PIO S.A. Presidian Companies Principal Real Estate Advisors Puerto Progreso-Telchac Raffles Rancho Manzillo, LLC RBS Global Banking & Markets Related Companies RLJ Rolarco Services Sagewood Hospitality SCS SDS Investments Secretaria de Turismo de Sinaloa Sextant Corporate Finance Shearman & Sterling LLP SINERGO Development Group Situs Companies SouthStar Development Partners Southwest Financial Steadfast Companies Stearns Bank Strategic Capital Solutions, LLC Summit Financial Summit Hotel Properties Textron Financial Theater Square LP Todd Interests Trinity Investments Trisula Group UBS UrbanAmerica US Bank Virginia Commerce Bank Walton Street Capital Wells Fargo Westmont Hospitality Group Wilton Partners Z-Resorts


EXAMPLES OF PROPERTIES APPRAISED OR EVALUATED ALABAMA Holiday Inn, Mobile CALIFORNIA Proposed Boutique Hotel, Diablo

Grande Proposed Hotel & Casino, Diablo

Grande Piccadilly Airport Hotel, Fresno COLORADO Hilton, Colorado Springs CONNECTICUT Heritage Inn, Southbury DELAWARE Days Inn, Dover FLORIDA Hilton, Daytona Beach Sierra Suites, Lake Buena Vista Courtyard, Melbourne Courtyard Miami Airport West Doral,

Miami Sheraton Mart, Miami Summerfield Suites Airport, Miami Proposed Hampton Inn, New Smyrna

Beach Hampton Inn, Niceville DoubleTree Orlando at SeaWorld,

Orlando Sierra Suites, Orlando

Staybridge Suites, Orlando Coral Sands Hotel, Ormond Beach SpringHill Suites, Port St. Lucie Hyatt Regency, Sarasota SpringHill Suites by Marriott, Sarasota Royal Palm Crowne Plaza, South Beach Courtyard, Tallahassee HAWAII Hilton Hawaiian Village, Honolulu Kahala Resort, Honolulu Sheraton Keauhou Bay Resort & Spa,

Kailua Prince Hotel, Maui Hilton, Waikoloa Village ILLINOIS Holiday Inn, Hillside INDIANA Hilton, Indianapolis IOWA Hilton Garden Inn, Ames KANSAS Crowne Plaza Kansas City Overland

Park, Lenexa LOUISIANA SpringHill Suites, Bossier City Travelodge, Harvey Proposed Candlewood Suites, Leesville Clarion, Shreveport

MARYLAND Westin, Annapolis Radisson, Baltimore Courtyard by Marriott, Bowie Residence Inn by Marriott, Bowie SpringHill Suites by Marriott, Bowie MICHIGAN Bell Tower Hotel, Ann Arbor MISSISSIPPI Proposed Avalon Hotel, Biloxi Holiday Inn Southaven Central

Memphis, Southaven MISSOURI Colonnade Hotel, Branson Crowne Plaza, Bridgeton Residence Inn Union Hill Downtown,

Kansas City NEW JERSEY Sheraton, Eatontown NEW YORK Holiday Inn Express, Oneonta Proposed Courtyard by Marriott,

Oneonta NORTH CAROLINA Embassy Suites, Cary


NORTH DAKOTA Holiday Inn, Minot Holiday Inn Express Hotel & Suites,

Minot OHIO Proposed Courtyard, Stow OKLAHOMA Proposed Hilton Garden Inn, Lawton OREGON Hilton, Eugene PENNSYLVANIA Proposed Hotel Falcon, Philadelphia SOUTH CAROLINA Marriott, Columbia Value Place, Simpsonville SOUTH DAKOTA Sheraton, Sioux Falls TENNESSEE DoubleTree, Murfreesboro TEXAS Courtyard by Marriott Midway,

Addison

Hampton Inn Beltway, Addison InterContinental Dallas, Addison Holiday Inn, Beaumont Proposed Falconhead Resort, Bee Cave Ye Kendall Inn, Boerne Holiday Inn Express, Cedar Hill Proposed Hotel Cedar Hill, Cedar Hill Courtyard by Marriott LBJ at Josey,

Dallas DoubleTree Market Center, Dallas Fairmont Hotel, Dallas Holiday Inn Market Center, Dallas Homewood Suites, Dallas Le Meridien, Dallas Magnolia Hotel, Dallas Mansion on Turtle Creek, Dallas Proposed Hilton Garden Inn, Dallas Proposed Upscale Hotel, Dallas Hilton Garden Inn, Fort Worth Hyatt Place, Grapevine Hilton Garden Inn, Houston Holiday Inn Westchase, Houston Marriott, Houston Proposed Boutique Hotel, Houston Proposed W, Houston Proposed Mandarin Oriental, Houston Fairfield Inn & Suites, Odessa Hampton Inn, Odessa Holiday Inn Express, Odessa Holiday Inn Hotel & Suites, Odessa Best Western, Plano SpringHill Suites, San Angelo The Fairmount Hotel, San Antonio VERMONT Hilton, Burlington VIRGINIA DoubleTree Airport, Richmond Embassy Suites, Richmond Ramada Plaza, Richmond Wingate, Richmond

WASHINGTON Embassy Suites, Seattle WEST VIRGINIA Embassy Suites, Charleston WISCONSIN Hilton Garden Inn, Appleton Hilton Garden Inn, Green Bay Campus Inn, Madison Crowne Plaza, Madison Hilton Garden Inn, Oshkosh INTERNATIONAL COLUMBIA Proposed Hyatt Place, Bogota COSTA RICA Proposed Focused-Service Hotel,

Central Valley Proposed Mixed-Use Development,

Escazu Proposed Riverwalk Hotel, Escazu Proposed Extended-Stay Hotel,

Heredia Proposed Andaz, Guanacaste Proposed Boutique Resort, Guancaste Proposed Hotel, Guanacaste Tabacon Grand Spa, La Fortuna Proposed Hotel, Liberia Marriott Los Suenos, Playa Herradura Proposed Mandarin Oriental, Rancho

Manzanillo Marriott, San Jose Proposed Hotel, San Jose


GRENADA Proposed Condo Hotel & Residential

Resort, Bacolet Bay HONDURAS Anthony's Key Resort, Roatan Proposed Holiday Inn, San Pedro Sula Proposed Holiday Inn Express,

Tegucigalpa JAMAICA Proposed Full-Service Hotel Wyndham Rose Hall, Montego Bay MEXICO Fairmont Pierre Marques, Acapulco Fairmont Princess, Acapulco Park Royal, Acapulco Cabo San Cristobal, Cabo San Lucas One & Only Palmilla, Cabo San Lucas Proposed Raffles, Cabo San Lucas Proposed Swissotel, Cabo San Lucas Tesoro Resort, Cabo San Lucas Wyndham, Cabo San Lucas Proposed Luxury Hotel & Villa Project,

Campeche All-Inclusive Conversion, Cancun Dreams Resort, Cancun Elan Resort & Spa, Cancun El Pueblito, Cancun Fiesta Americana Condesa Cancun,

Cancun Gran Caribe, Cancun Gran Costa Real, Cancun Hilton Beach and Golf Resort, Cancun Hyatt Cancun Caribe, Cancun Hyatt Regency, Cancun NH Krystal, Cancun Le Meridien, Cancun

Park Royal Piramides, Cancun Proposed Mandarin Oriental, Cancun Proposed Raffles, Cancun Royal, Cancun Secrets Capri, Cancun Westin Soberano, Chihuahua Proposed Hotel, Ciudad Juarez Proposed Quinta Real Hotel, Ciudad

Juarez All-Inclusive Conversion, Cozumel Park Royal, Cozumel Proposed Hotel, Ensenada Hacienda La Gavia Development,

Estado de Mexico Proposed Boutique Hotel Project,

Guadalajara Capella Ixtapa Resort & Spa, Ixtapa NH Krystal, Ixtapa Tesoro Resort, Ixtapa Qualton Resort, Ixtapa Desire Resort & Spa, Los Cabos Esperanza, Los Cabos Park Royal, Los Cabos Proposed Hotel & Residential, Los

Cabos Proposed Luxury Resort, Los Cabos Wyndham Cabo San Lucas, Los Cabos Proposed Thompson Hotel, Los

Veneros Tesoro Resort, Manzanillo Proposed Hotel, Merida Embassy Suites, Mexico City Four Seasons Hotel, Mexico City Proposed Luxury Hotel, Mexico City Sheraton, Mexico City Proposed Santa Lucia Hotel,

Monterrey Gran Porto Real Resort and Spa, Playa

del Carmen Mandarin Oriental, Playa del Carmen Mosquito Beach Hotel, Playa del

Carmen Mosquito Blue Hotel, Playa del Carmen Proposed Condo Hotel, Playa del

Carmen Proposed Hotel, Playa del Carmen

Proposed Hotel ZaZa, Playa del Carmen

Proposed Resort, Playa del Carmen Royal Porto Real, Playa del Carmen Proposed Hotel Project, Playa Mujeres Proposed Luxury Resort, Puerto Los

Cabos Cieba del Mar (Proposed Tides),

Puerto Morelos Paraiso de la Bonita, Puerto Morelos Proposed Resort, Puerto Morelos Penasco del Sol, Puerto Penasco Proposed Hotel, Puerto Pensaco Proposed Puerto Telchac Hotel &

Residential Project, Puerto Progreso Dreams Resort, Puerto Vallarta NH Krystal, Puerto Vallarta Proposed Residential Project, Puerto

Vallarta Qualton Resort, Puerto Vallarta Akumal Beach Resort, Quintana Roo Capella Bahia Maroma Hotel, Riviera

Maya Ikal del Mar, Riviera Maya Mandarin Oriental, Riviera Maya Proposed Capella Punta Maroma,

Riviera Maya Proposed Mandarin Oriental, Riviera

Maya Proposed Park Hyatt, Riviera Maya Proposed St. Regis, Riviera Maya Proposed W Retreat, Riviera Maya El Dorado Ranch Land & Hotel, San

Felipe Proposed Boutique Hotel & Master-

Planned Community, San Miguel de Allende

Proposed Holiday Inn Resort, San Miguel de Allende

Proposed Hotel & Residential, San Miguel de Allende

Proposed Quinta Real Hotel & Residential, San Miguel de Allende

Proposed Hotel, Tijuana Dreams Resort, Tulum Secrets Capri Resort, Tulum


Proposed Sotavento Condominium Hotel and Residential, Zihuatanejo

NETHERLANDS ANTILLES Holiday Beach Hotel, Curacao PANAMA Proposed Holiday Inn Express,

Panama City Proposed Hotel, Panama City PUERTO RICO Courtyard, San Juan Wyndham Condado Plaza Wyndham El San Juan Wyndham El Conquistador ST. KITTS AND NEVIS Proposed Ocean Reef Resort, St. James TURKS AND CAICOS ISLANDS Proposed Hotel & Resort U.S. VIRGIN ISLANDS Carambola Resort, St. Croix

Douglas E. OldmixonCommissioner

Texas Appraiser Licensing and Certification BoardTexas Appraiser Licensing and Certification BoardTexas Appraiser Licensing and Certification BoardTexas Appraiser Licensing and Certification BoardP.O. Box 12188 Austin, Texas 78711-2188

Certified General Real Estate Appraiser

Having provided satisfactory evidence of the qualifications required by theTexas Appraiser Licensing and Certification Act, Texas Occupations Code,Chapter 1103, is authorized to use this title, Certified General Real EstateAppraiser.

Number:

Issued:

1380015

Expires: 11/30/2014

JANE LYNN ROGERS

2601 SAGEBRUSH DRIVE SUITE 101

FLOWER MOUND, TX 75028

Appraiser:

04/08/2013

JANE LYNN ROGERS

TX G

You may wish to laminate the pocket identification card to preserve it.

Inquiry as to the status of this license may be made to:

Texas Appraiser Licensing and Certification BoardP.O. Box 12188

Austin, Tx 78711-2188www.talcb.texas.gov(512) 936-3001

Fax:(512) 936-3899

Douglas E. OldmixonCommissioner

The person named on the reverse is licensed by the Texas Appraiser Licensing and Certification Board.

Texas Appraiser Licensing and Certification BoardTexas Appraiser Licensing and Certification BoardTexas Appraiser Licensing and Certification BoardTexas Appraiser Licensing and Certification BoardP.O. Box 12188 Austin, Texas 78711-2188

Certified General Real Estate Appraiser

Having provided satisfactory evidence of the qualifications required by the Texas Appraiser Licensing and Certification Act, Texas OccupationsCode, Chapter 1103, is authorized to use this title, Certified General Real Estate Appraiser.

Number#:

Issued: Expires:

1380015

11/30/2014

Appraiser:

04/08/2013

JANE LYNN ROGERS

TX G

FEASIBILITY STUDY Proposed Hotel and Conference Center

Documents