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HomeMy WebLinkAbout[06b] Hotel Feasibility StudyJLe94 CITY OF ST. JOSEPH wvrvu. cityof stioseph.com Administrator Date: December 11, 2013 Judy Weyrens Memo To: Members of the EDA Mayor City Administrator Weyrens Rick Schultz Memo From: Cynthia Smith- Strack - MDG, Inc. Councilors RE: Hospitality Feasibility Report RFP Solicitation Steve Frank Bob Loso Renee Symanietz Update: Dale Wick As a follow up from the previous meeting I have met with an individual investor interested in securing an Americlnn franchise for development in St. Joseph. The investor is willing to split EDA the study cost 50/50 with the EDA providing two reports are developed. One which includes Doug Danielson information of general interest to EDA and one with detailed financial and market positioning Steve Frank analysis which would include proprietary information and be available only to investors. Larry Hosch Gary Osberg In the 'unlikely event' (investor's language) a project doesn't result the confidential study would Dale Wick be available for purchase by another investor. The investor would like to initiate construction of a hotel this summer (2014). I have contacted both companies who submitted proposals for a study. Each indicate an approximate month -long process. 1. LHR has indicated they can produce two deliverables versus one comprehensive deliverable under the same proposal submitted in the Fall of 2013 (cost $8,500). 2. The other proposer, Hospitality Consulting Group, has revised its bid (cost $10,450). Please find attached a copy of each of the proposals. The prospective investor prefers the LHR proposal as there is a team of consultants versus an individual consultant producing the study. Finally, as directed, I have contacted both groups (GTI Properties and Walz Properties LLC) with real property adjacent to 1 -94 and south of Minnesota Street regarding participation in the hotel study. The property owners have not indicated an interest in participating in a study at this time. As an alternative to study participation I alluded to the potential for the EDA to rescind an offer extended to the property owners on October 13, 2010. At that time the EDA agreed to participate in master planning and platting of the subject properties as follows: initial participation of $1,000 at the time of concept plan completion, an additional $1,000 when /if the concept plan was accepted by the City Council, and a final $1,000 when a complete preliminary plat application was filed with the City Administrator. At this time the EDA has reimbursed the property owners $1,000. The remaining $2,000 pledged could be rescinded in favor of participation in the hotel feasibility study. �I Recommendation: My recommendation is to proceed with the feasibility study with 50% participation by the interested investor and development of two receivable documents. The 50% participation amounts to $4,250 /entity. I further recommend the EDA rescind its offer to pay up to $2,000 for master plan and plat development by GTI and Walz Properties. Finally, I recommend LHR as the feasibility consultant do to favorable pricing and the fact the project contact has been in touch with me on numerous occasions since we initially solicited proposals. The contact from Hospitality Consultants has not reached out for an update on the project. In addition, LHR has a team of consultants who will work on the project and our investment partner prefers LRH. At this time we have a balance of $23,454 in our Business Development/TIF capital project (line item EDA1307). The City's portion of the study would be credited to this capital project. Action: The EDA must first decide whether or not to pursue a study without participation by the property owners. Additional action would follow. LHR HOSPITALITY MANAGEMENT PROPOSAL $8,500 W Response to Request for Proposal Hotel Feasibility Report St. Joseph, Minnesota Prepared for: Ms. Cynthia Smith Strack EDA Director — City of St. Joseph PO Box 668 St. Joseph, Minnesota 56374 -0668 HOSPITALITY MANAGEMENT Presented by: Douglas G. Rohde President /Chief Executive Officer LHR Hospitality Management 360 North Robert Street, Suite 700 Saint Paul, Minnesota 55101 651- 340 -1880 dougC@Iodpehotels.com September 27, 2013 September 27, 2013 Ms. Cynthia Smith Strack EDA Director, City of St. Joseph PO Box 668 St. Joseph Minnesota 56374 -0668 Re: Response to Request for Proposal — Hotel Feasibility Report, St. Joseph, Minnesota Dear Ms. Smith Strack: It is our pleasure to be offered the opportunity to participate in the Request for Proposal for a Hotel Feasibility Report for St. Joseph, Minnesota. LHR Hospitality Management (LHR) understands the scope of the services in the RFP is to determine if a hotel is feasible by the private sector at the proposed site (Interstate 94 and CSAH 2 in St. Joseph) and if not, to determine the financial gap and if it could be filled by public incentives. LHR is committed to fulfill that pledge as proposed in the RFP and understands that the proposal is a firm and irrevocable offer. LHR Hospitality Management is a highly successful Developer, Operator and Owner of Hotels, Restaurants, Entertainment Venues and Golf Courses. We operate thirteen venues in six states, with approximately 500 employees and $30 million in revenue. LHR Management's vision is to provide a consistent experience for every guest while at the same time looking for opportunities to exceed expectations and achieve solid financial performance. LHR provides a rewarding and engaging work experience for our staff. LHR is service minded and directly engages in each community that they are present. Our company's headquarters is local which provides market familiarity and benefits in efficient hands on support that minimizes overhead expenses. On behalf of LHR Hospitality Management we thank you for the opportunity and look forward to presenting to the City Council Member of St. Joseph. Sincerely, LHR Hospitality Management iz-e4 Douglas G. Rohde President & CEO 1 7 !.►� --% Joel C. Cairy Executive Vice President of Operations & COO Organization of RFP I. A brief description of the presenting firm or department. II. Names, contact numbers, and email addresses of professionals who will be involved in the project. III. History of the presenting organization including number of similar projects completed in the previous five (5) years and simple aggregate percentage of your firms' total receivables similar projects have comprised over the previous five (5) years. IV. Abbreviated qualifications and experience of all involved in the project. V. A detailed description of the approach or process that your firm will undertake to specifically accomplish the following in a concise, clear, and simple manner: a. Assess historic, present, and future demand and supply of hotel accommodations. L The hotel feasibility study must evaluate the local market /trade area and conclude whether the proposed site is suitable for hotel development. ii. The hotel feasibility study shall examine the local competitive market with regard to existing and proposed demand for hotel accommodation. iii. The hotel feasibility study shall determine which market segments are likely to experience growth. iv. The hotel feasibility study shall provide an opinion on whether there is likely to be favorable or unfavorable changes in the local hotel market. b. Discuss the demand for other hotel facilities, such as meeting areas, restaurants, bars, and recreational facilities and recommend the optimal development strategy. L The feasibility study shall recommend appropriate facilities, highlighting the number of guestrooms that the market can sustain with an indication of the number of food and beverage outlets, meeting space, recreational facilities, and parking facilities that should be developed. ii. While the feasibility study may highlight existing facilities in comparable hotels within the local market, the feasibility study shall comment upon the facilities that are not available and are required by the current market and what may be required in the future. iii. The feasibility study shall address the competitive positioning of the subject hotel in relation to the market. c. Review and suggest the appropriate brand strategy for the subject site. d. Produce an Internal Rate of Return calculation and supporting written discussion which concludes whether or not a project is financially feasible at the proposed location with and /or without public incentive. If public incentive needed to fill a gap, identification of the extent of gap likely. e. Estimate operating income and expenses for ten years following the opening of the hotel if the study concludes a hotel is financially feasible at the proposed location. VI. An itemized table illustrating proposed fee(s) and a timeline corresponding to individual elements as required by #5 above (approach /process). In addition the proposal shall include a statement specifying a "not to exceed" cap on the project, including all associated expenses. VII. A summary of three (3) similar projects conducted for municipalities within the previous five (5) years. VIII. Brief references (contact name, phone number, and email address) from municipal clients for whom your organization has completed similar projects. 2 Z6 I. A brief description of the presenting firm or department. LHR's success is founded on our experience in developing and managing all aspects of limited- and full - service hotels including all national franchised, independent and boutique properties, restaurants, golf courses, waterparks and other entertainment venues. Our expertise is the force behind the strong financial results with an emphasis in producing top line revenues and exceeding each venues market set by 1104 market share. With over sixty years of proven hospitality leadership our status has presented us as one of the leaders in hospitality management and is a 'Top 100 Hotel Management Company" and a 'Top 100 Hotel Owner and Operator" as ranked by Hotel Business magazine. National and International hospitality experience in managing properties from 60 to 1,700 guestrooms and upwards of 30,000 square feet of convention and event space provides a depth of experience to master any hotel, restaurant, golf course or entertainment venue operation from a limited service setting to a major metropolitan full service sector. From consulting services to complete venue management, LHR has a profitable solution. LHR prides itself in offering a full range of "hands -on" venue management services, spanning the entire investment cycle. LHR has a proven track record of identifying economically viable hotel/ restaurant opportunities that are profitable to both investors and the company. We have the ability and the experience to handle all phases of construction. LHR has the industry resources to conduct market and /or full feasibility studies and identify viable opportunities and ultimately identify the most appropriate hotel or venue product, brand and size based upon our analysis. With experience in all aspects of hotel, restaurant, and entertainment venue management including extensive operations, sales and catering experience we can advise existing properties on development and execution of profitable Business Plans. Having been affiliated with more than 300 hotels over the years, both nationally and internationally LHR has the experience to manage on a global level. Based in Saint Paul, Minnesota, we have excellent access to all regions of the US, and take pride in the fact that one of our Senior Management Team will conduct personal property visits. On -going visits and interaction with the regional staff provides assistance as needed to enhance the guest's experience and produce excellent bottom -line results. Timely reviews maximize the overall well -being and future viability of our hotels, restaurants and entertainment venues. II. Names, contact numbers, and email addresses of professionals who will be involved in the project. All professionals who will be involved in the project office out of our downtown St. Paul corporate headquarters, located at: 360 North Robert Street, Suite 700, Saint Paul, Minnesota 55101. The main office and fax number are as follows: 651 - 340 -1880 and 651 - 340 -1624. Mr. Douglas G. Rohde President & CEO C 715 - 222 -8788 douQ@lodaehotels.com Mr. Joel Cairy Executive Vice President & COO C 952- 452 -0626 Joel @lodeehotels.com �J 27 Mr. Mike Tozier Chief Financial Officer C 952 - 240 -1733 Tozier6 @comcast.net Mr. Doug Karle Vice President of Operations C 612 - 396 -6403 dougk @lhrhospitality.com Melia Nagel Executive Assistant C 612 - 251 -3028 melia@lhrhospitality.com III. History of the presenting organization including number of similar projects completed in the previous five (5) years and simple aggregate percentage of your firms' total receivables similar projects have comprised over the previous five (5) years. Hotel Feasibility and Market Study History - Approximately five percent (5.0 %) of LHR's total receivables is derived from Hotel Feasibility and Market Studies. • Hotel for Menahga, Minnesota, June 2013 • Two Hotel Projects in Milwaukee, Wisconsin, March 2013 • Hotel Feasibility and Market Analysis in Madison, Wisconsin, October 2010 • Hotel Feasibility and Market Analysis in Statesville, North Carolina, June 2010 • Hotel Feasibility and Market Analysis for Pine City, Minnesota, January 2008 • Feasibility Analysis and Product Development Recommendation in Biwabik, Minnesota, September 2007 • Product Analysis and Repositioning Study in Tofte, Minnesota, January 2007 • Hotel Feasibility and Market Analysis in Duluth, Minnesota, October 2006 Current Hotel / Venue Management Contracts • Holiday Inn, Elk River, Minnesota • The Lodge at Crooked Lake, Siren, Wisconsin • Suburban Extended Stay, Coralville, Iowa • Econo Lodge, River Falls, Wisconsin • University Inn, Minneapolis, Minnesota • Super 8, Monticello, Minnesota • Astoria Hotel and Event Center, Dickinson, North Dakota • Best Western Plus, Dickinson, North Dakota • Quality Inn and Suites, Dickinson, North Dakota • Four Points by Sheraton, Minot, North Dakota • Astoria Hotel and Suites, Glendive, Montana • The Links at Northfork, Ramsey, Minnesota • Wildwoods Indoor Water Park, Elk River, Minnesota IV. Abbreviated qualifications and experience of all involved in the project. Douglas G. Rohde, President & Chief Executive Officer Mr. Rohde's vision began in 2001 upon the purchase of the Siren, Wisconsin property and Village concept. Expanding upon this concept, he and his business partner Joel Cairy founded Lodge Hotels & Resorts, known as LHR Hospitality Management in 2004 and with that designed and 4 M developed The Lodge at Brainerd Lakes in Baxter, Minnesota. Mr. Rohde primarily oversees the Operations and Development of each property. Prior to operating his own venue management and development company he served as Vice President of the North Central Region for Sunstone Hotel Properties where he was an executive in a company with 70 hotels that carried 13 different brands, General Manager, Director of Sales and Marketing and Food & Beverage Manager at various properties for Larken Hotels, Hilton Hotels Corporation and Marriott Hotels Corporations. He obtained a Bachelor of Science Degree in Hotel and Restaurant Management from the University of Wisconsin, Stout. He has also served on several boards throughout the hospitality industry and is very involved in tourism legislation throughout Wisconsin and Minnesota. Joel C. Cairy, Executive Vice President & Chief Operating Officer Mr. Cairy joined LHR in May 2004 as a business partner and Chief Operating Officer, focusing on Sales, Marketing and Development. He worked with Doug Rohde to design and develop The Lodge at Brainerd Lakes. Mr. Cairy has served as the Director of Hotel Administration and Corporate Travel at Northwest Airlines Worldwide where he achieved over $11 Million in hotel contract cost savings for the Company. He has held Director of Sales and Marketing positions with Holiday Inn where his team was responsible for $12 Million in sales, Larken Hotels where he increased a Hotel's average daily rate by $16 in one year, Hyatt, Best Western as well as in the private club sector. He obtained a Bachelor of Science Degree in Occupational Safety from the University of Wisconsin, Platteville. Mr. Cairy has also served on several boards throughout the hospitality industry and is very involved in tourism legislation in Minnesota. Mike Tozier, Chief Financial Officer Initially serving as an independent financial consultant, Mr. Tozier joined LHR on a permanent basis in November 2008 as the Chief Financial Officer and Corporate Controller where he oversees the accounting and payroll functions for all venues, in addition to the corporate offices which consists of $90 Million in hotel assets, over $30 Million in annual revenue and managing over 380 employees. Mr. Tozier is a Certified Public Accountant, private business owner in the golf course industry and industry consultant and has over seventeen years of banking experience, most recently serving as the Senior Vice President, Chief Financial Officer and Treasurer for the Northern Region Banks of the Marquette Financials Company, a privately held company consisting of $5.9 Billion in total assets and managing over $1 Billion in investments. He has also held the position of Director of the Minnesota Golf Course Owners Association and is a member of the Wisconsin and American Institute of Certified Public Accountants. Mr. Tozier attended the University of Wisconsin in Green Bay. Doug Karle, Vice President, Operations Mr. Karle began his career with LHR in December 2006 as General Manager at one of our managed full- service properties prior to being promoted to Vice President of Operations at the corporate level. His background includes over ten years in the hotel industry with both Embassy Suites and Holiday Inns where he increased service and quality scores to propel his hotel into F �9 the Top 60 of all Holiday Inns as well as leading the Hotel to beat Gross Operating Profit by 21% of budget through implementation of excellent cost and labor controls. He volunteers his time as the Chair of the Restaurant Committee of the Veterans for Foreign Wars of White Bear Lake where he oversees all operations of the bar and restaurant which grosses $2 Million annually. He enforced cost of goods based pricing and implemented new systems to forecast revenue ultimately decreasing cost of goods sold from 54% to 32 %. He also comes to us with an extensive legal and commercial property management background. Mr. Karle attended the University of Minnesota and holds a degree in Geography with an emphasis in Urban Planning. Melia E. Nagel, Executive Assistant / Human Resources Ms. Nagel joined LHR in March 2006 after over ten years at the hotel property and corporate meeting planning level. She has been in the Sales and Catering departments of Hilton and luxury, independent hotels where she was responsible for the high - profile political groups and four of the Hotel's Top Ten Accounts. As well as working in all departments at a mountain resort in Colorado. Ms. Nagel obtained a Bachelor of Science Degree in Aviation Business Administration from Embry Riddle Aeronautical University in Prescott, Arizona. V. A detailed description of the approach or process that your firm will undertake to specifically accomplish the requirements as specified in item #5 in the RFP. The two principals of LHR have over sixty years of combined experience in the hospitality industry. Having experience ranging from hourly support positions all the way up to management at the hotel and corporate level, as well as experience in operating limited- and full- service branded and independent properties, they have the qualifications to back their research and recommendations when it comes to market analysis and facility recommendations. We take a hands on approach by personally visiting the proposed market and conducting one -on -one interviews with city leaders, industry leaders, Chamber of Commerce leaders, Visitor Bureaus, and local proposed competitor facilities, to name a few. We also talk to leaders at local top businesses to determine their needs as it relates to hotel accommodations and function space. We rely on industry standard reports and data from Smith Travel Research and Woods and Poole. We also access State / County / Municipal public records. Based upon our findings we will produce a Ten -Year Proforma based upon the size and type of facility recommended. We will determine what type of hotel branding, if any, would be necessary and address the impacts to the hotel, as well as the area market based upon such branding. The Scope of Our Services addresses the following areas: • Target Customers Needs and Preferences • Product Positioning • Comparable Facilities and Competitors in Other Markets • Product Design Recommendations: Sizing, Space Allocations and Expandability • Related Facilities • Brand Analysis and Recommendations (Franchise or Independent) • General Pricing /Cost Summary • General Market Review and Marketing Strategies 6 2() 1. SITE & SURROUNDING AREA • Location • Maps and Aerial Photographs • Region, State, County, City and Site 2. GENERAL AREA MARKET TRENDS • Comparison of Market vs. Other Markets • Comparison of Demographics within 50, 100, 150 and 200 Miles • Population, Households and Age Groups • Income and Effective Buying Power • Major Employers and Employment • Airport Passenger, Water, Rail and Bus Traffic • Interstate and Highway Traffic • Area Growth - Industrial Space, Office Space, Retail Sales and Residential Sales • New Business and Industry • Tourist Attraction Attendance • Convention Attendance 3. PROPOSED DEVELOPMENT ANALYSIS • Access and Visibility • Parcel Size, Configuration • Surrounding Land Uses • Proximity to Demand Generators • Building and Zoning Regulations • Utilities, Water and Sewer • Site Preparation 4. SUPPLY ANALYSIS —HOTEL COMPETITION • Hotels, Resorts, Restaurants, Conference Centers • Area Visitor Attractions • Competitor Profiles & Performance • Proposed Additions /Deletions to /from the Supply 5. DEMAND ANALYSIS - ATTRACTIONS & DEMAND GENERATORS • Demand Generators for Attractions, Sports and Recreation Facilities • Demand Generators for Hotel • Demand Generators for Restaurant and Bar • Demand Generators for Conference Facilities • Population by Distance from Proposed Site • Projected Occupancy for Proposed Hotel • Attendance Patterns and Visitor Profiles, Area Major Events • Feeder Markets & Driving Distances • Evaluation of Office of Tourism, Chamber and Convention and Visitor Bureau Destination Promotion • Past and Future Visitor and Convention Growth • Related Developments • Area Revitalization and Development 6. SUPPLY AND DEMAND TRENDS • Industry Outlook and Trends: Lodging, Restaurants, Conference Facilities • Lodging Industry Performance Growth: National, Regional, State, Metro and Local • Restaurant Performance Growth • Conference Facilities Space Utilization Growth • Visitor Attraction Attendance Growth • Recreation Growth • Fair Share and Penetration of Demand • Seasonality and Length of Stay 7 '31 • Estimate of Unsatisfied Demand • Past and Future Supply and Demand Growth Z RECOMMENDATIONS FOR PROPOSED DESIGN DEVELOPMENT • Target Customers Needs and Preferences • Product Positioning • Comparable Facilities and Competitors Other Markets • Product Design Recommendations: Sizing, Space Allocations and Expandability • Marketing Strategies • Related Facilities VI. An itemized table illustrating proposed fee(s) and a timeline corresponding to individual elements as required by #5 above (approach /process). In addition the proposal shall include a statement specifying a "not to exceed" cap on the project, including all associated expenses. FEASIBILITY ANALYSIS TO INCLUDE: 1. Assesses historic, present, and future demand and supply of hotel accommodation; 2. Considers the demand for other hotel facilities, such as meeting areas, restaurants, bars, and recreational facilities and recommends the optimal development strategy; 3. Reviews and suggests the appropriate brand strategy for the subject site; 4. Includes an Internal Rate of Return calculation and supporting written discussion which concludes whether or not a project is financially feasible at the proposed location (with and /or without public incentive); 5. Includes an analysis of what financial gap may exist that could be filled by public incentives; and, 6. Estimates operating income and expenses for ten years following the opening of the hotel if the study concludes a hotel is financially feasible at the proposed location. COST OF SERVICES The work outlined above is proposed to be completed for $8,500.00 (eight thousand five hundred dollars), including the cost of out -of- pocket expenses for long- distance telephone, postage, photocopying, and printing with payment as follows: an initial deposit in the amount of $4,250.00 (four thousand two hundred and fifty dollars) would be required along with the signed contract prior to commencement of work by LHR and the balance of the contract due in installments billed at LHR's discretion. Outside data purchased, travel expenses and additional expenses (outside of the Work Product listed below) are included in the total cost of the project. The cost of the project shall not exceed $8.500.00 (eight thousand five hundred dollars), including all associated expenses. WORK PRODUCT The following meetings and report preparations are included in the Scope of Services provided by LHR: • Minimum of one (1) site visit to proposed location • meeting with Client via telephone or in person to finalize study objectives • meeting with Client in person to discuss draft report • meeting with Client in person to review final report findings and final report preparation Findings will be presented in bound report format and will be suitable for lender review and a PDF file of the report will be provided. COMPLETION TIME The work outlined will be completed within ninety (90) days upon receipt of the contract and initial deposit in our offices, and specified start date, unless delayed by unexpected emergencies, forces beyond the control of one or both parties or by written agreement of the parties. 8 3z VII. A summary of three (3) similar projects conducted for municipalities within the previous five (5) years. To date our hotel feasibility studies have been conducted for private investors, owners, and / or developers. However we have worked with municipalities in accessing potential markets for our own Market Studies. • Hotel for Menahga, Minnesota, June 2013 o We were contracted by a private investor to complete a full market study for a potential full - service lake front hotel in downtown Menahga, Minnesota. Though the results of the study showed the market would support such a venture, the size of the land could not support what was recommended. The results of our study helped the customer hold off on his decision to move forward with his plans until other arrangements could be made. • Two Hotel Projects in Milwaukee, Wisconsin, March 2013 o A local private developer contracted us to conduct a Hotel Feasibility and Market Analysis for two different hotel projects in Milwaukee, Wisconsin. One in downtown Milwaukee and the other in the East Side neighborhood of Milwaukee. Our conclusions supported each development and the developer is continuing to move forward in the process. • Hotel Feasibility and Market Analysis in Statesville, North Carolina, June 2010 o We were contracted by a private investor to assess the potential and demand for a historic, boutique hotel in downtown Statesville, North Carolina. Specifically purchasing and reopening an existing building that had once housed a hotel. The results of our study determined it was a good market to support such a redevelopment project however the investor was unable to obtain the necessary financing. 9 33 VIII. References a. Municipal References (Though we work closely with Municipalities in many of our Studies, the majority of our clients are private investors, owners and developers.) Mr. John Edmonds Director, Minnesota Office of Tourism 121-7 th Place East Suite 100 Saint Paul, Minnesota 55101 651 - 757 -1844 Senator Sheila Harsdorf (Former Chair of Wisconsin Tourism) 10`h Senate District, Wisconsin Room 18 S State Capitol PO Box 7882 Madison, Wisconsin 53707 608 - 266 -7745 sen.harsdorf@Iegis.wisconsin.gov 30 3y b. Private Clients Mr. Sheldon Sagedahl C/O West Central Telephone Association 14 Main St, PO Box 237 Menahga, MN 56464 218 - 837 -6021 / sheldons @wcta.net Hotel Feasibility in Menahga, Minnesota Mr. Dave Graf Owner, Settle Inn Hotels & Suites, GuestHouse Suite Hotels Aberdeen, South Dakota 605 - 228 -1488 / dave @nvc.net We have provided feasibility work and management services. Mr. Richard Jacobson Vice President, Midwest Division, Kraus - Anderson Construction Company PO Box 158, 8625 Rendova Street NE Circle Pines, Minnesota 55014 763 - 792 -3618 rich.*acobson @krausanderson.com We have provided feasibility work, joint ventured development opportunities, and accommodations and event facilities. Mr. Kirk Pfeffer Owner, Lonestar Alliance / Holiday Inn Elk River 800 Bering Drive, Suite 350 Houston TX 77057 (713) 783 -5388 / kirk @lonestaralliance.com We have provided management services and joint ventured on hospitality projects. HOSPITALITY CONSULTING GROUP PROPOSAL $10,500 IS HOSPITALITY CONSULTING GROUP September 24, 2013 January 29, 2014 (Revised) Ms. Cynthia Smith Strack EDA Director City of St. Joseph P.O. Box 668 St. Joseph, MN 56374 -0668 RE: Proposal for feasibility study for a hotel in St. Joseph, MN Dear Cynthia: We understand that the St. Joseph Economic Development Authority wants to encourage the development of a hotel to be located at an interchange on interstate 94. The location along I -94 should provide demand for a new lodging facility that will supplement demand from local commercial activity and leisure demand The hotel industry was greatly impacted by the recent recession. Travel budgets were one of the first expenses cut by businesses in an attempt to maintain profitability in the face of rapidly declining sales as the recession deepened in 2009. Loss of net worth, job loss or fear of job loss, and other economic uncertainties kept many leisure travelers at home, which further impacted the hotel industry. The industry began to recover in the second quarter of 2010 and has continued to improve in every quarter since then. This upturn in the industry and the resulting positive outlook for hotel earnings has begun to stimulate new hotel development, although lenders and investors still remain cautious. One reason for this caution is the fact that existing hotels can still be purchased at below replacement cost, although this gap is narrowing as hotel prices continue to rise. • Another factor that must be evaluated when considering new hotel development is the popularity of limited service hotels compared to full service hotels. Limited service hotels are less expensive to construct because they do not have restaurants, bars or significant amounts of meeting space. 5315 Eureka Road Excelsior, MN 55331 Phone (612) 867 -1649 hcgroup2Cgmail.com -3(o MS. Cynthia Smith Strack Page 2 Therefore, they can offer hotel rooms at rates below what full service hotels have to charge and accordingly are popular with guests who do not want the full service amenities. From a development perspective, limited service hotels tend to dilute a market's demand, making it more difficult to successfully operate a full service hotel. Communities have needs for the public space and other amenities offered by these hotels. Therefore, in markets where a new hotel cannot achieve the room rates required to justify the investment in a full service hotel, communities will often provide some form of subsidy or financial assistance to improve the economics of the hotel project. In the economic feasibility section of our report, we will determine whether the recommended hotel, either limited service or full service, is economically viable on its own and if not, we will present an analysis of any shortfall that may exist. 1. HOSPITALITY CONSULTING GROUP The Hospitality Consulting Group provides market analysis, valuation, litigation support, and brokerage services to the hospitality industry. It was formed by Stephen Sherf in 1999 to provide hands -on consulting services to hospitality clients by highly experienced consultants. Experts in a wide variety of disciplines are available to work on projects where a particular expertise is required. All work is performed by highly experienced professionals; junior staff members are not employed. The bulk of the company's assignments have been in the Midwest, however it has worked on projects throughout the country. We provide practical, hands -on services that are based on a broad range of experiences gained from our many years of work in the cyclical hotel industry. The company is a Subchapter S Corporation that was incorporated in Minnesota in 1999. Its website is: www.hcgroup2.com. 2. CONTACT INFORMATION This project will be performed entirely by Stephen Sherf who is the president of Hospitality Consulting Group. His contact information follows: Stephen W. Sherf, President Hospitality Consulting Group 5315 Eureka Road Excelsior, MN 55331 Phone: (612) 867 -1649 Email: ssherf @hcgroup2.com 3. HISTORY AND HOTEL FEASIBILITY EXPERIENCE Over the last five years, Hospitality Consulting Group has been involved in hotel feasibility studies, hotel valuations, market studies for other real estate ventures, Hospitality Consulting Group 3'1 MS. Cynthia Smith Strack Page 3 casino market studies and litigation support services. The hotel studies numbered 22 and accounted for approximately 55 percent of the company's total fee income. Mr. Sherf has performed over 150 hotel market studies in his career. 4. HOSPITALITY CONSULTING GROUP QUALIFICATIONS All work on this assignment will be performed by Stephen Sherf. He has over 30 years of operational and consulting experience in the hospitality industry. He spent 15 years with a large national public accounting firm, where he was the partner -in- charge of the hospitality consulting division in the upper Midwest. Subsequent to that position, he founded Midwest Hospitality Advisors, a hotel and gaming consulting company that he eventually merged into GVA Marquette Advisors, where he held the position of Senior Vice President. More recently he founded Hospitality Consulting Group. His industry experience includes four years as VP- Development with a regional hotel company. Mr. Sherf has prepared market studies and financial projections for all types of hotels in both large and small markets throughout the United States. Mr. Sherf also has a broad background of consulting assignments for income producing real estate developments that includes market studies, valuations, appraisals, acquisitions and sales. These assignments have included hotels, casinos, golf courses, nursing homes, senior housing, subsidized and market rate housing, convention centers, ice arenas, restaurants and business plans for new ventures. Operating positions held during Mr. Sherf s career include restaurant manager, auditor, Vice President of Development for a hotel company, and Treasurer for a gaming company where he oversaw the operations of three Colorado casinos. He has provided expert witness testimony relating to the valuation of hotels and restaurants and business interruption claims. He has taught continuing education seminars for attorneys and bankers, and has spoken on the subjects of market study techniques and economic impact at gaming and investment conferences. He has been a guest lecturer at the University of Minnesota Graduate School of Business and Stout University. Mr. Sherf received an undergraduate degree in economics and an MBA in finance from Cornell University. He holds a real estate license in Minnesota and Wisconsin and has taken several American Appraisal Institute courses. He is a Certified Public Accountant (inactive) and has held a Colorado gaming license. Hospitality Consulting Group 3� MS. Cynthia Smith Strack Page 4 5. STUDY METHODOLOGY The scope of services that we propose to provide to assist you in evaluating the proposed hotel is described below: A. Assessment of historic, present, and future demand for and supply of hotel accommodations i. We will meet with representatives of the St. Joseph EDA to obtain a full understanding of the objectives and scope of the hotel project. We will inspect the identified site and the surrounding area in order to determine its suitability for hotel development. This analysis will encompass an evaluation of accessibility, visibility, and physical characteristics that might affect the marketability of a hotel. We will identify the pertinent market area from which the hotel is likely to draw based on the area's highways, location of existing hotels and drive times. We will then assemble and analyze economic and demographic data for this market area to evaluate the present economic climate and to estimate future lodging demand growth potential. ii. We will identify the competitive lodging facilities and evaluate the degree to which they would compete with a new hotel in St. Joseph. We will identify other proposed hotel developments, to the extent information is available; assess their probability of completion and the degree to which they will compete with the subject hotel. We will research and quantify the area's lodging demand and break it down into its component segments (commercial, group, leisure, etc.). This analysis will include evaluation of historic hotel industry performance and interviews with representatives of the area's major employers and other large lodging demand generators We will identify the seasonality, room rate structure and occupancy characteristics of the competitive lodging supply. iii. Based on our analysis of the economic and demographic characteristics of the market area, and on industry forecasts, we will develop growth rates for each demand segment and apply them to the base demand levels to determine the likely future level of future demand for the next 10 years. Hospitality Consulting Group -3 q MS. Cynthia Smith Strack Page 5 iv. Based on our analysis of the characteristics and trends identified for the market area, the existing and proposed hotel supply, and industry trends, we will provide an opinion as to whether there is likely to be favorable or unfavorable changes in the St. Joseph lodging market. B. Discussion of demand for other hotel facilities, such as meeting areas, restaurants, bars, and recreational amenities and recommendation of optimal development strategy. Based on our research of the market, we will identify the type of lodging facility (economy, limited service, full service, or extended stay) and the price point that is best suited for the identified market demand. We will recommend the size and quality of hotel, and range of ancillary facilities that are suited to the identified market. These facilities may include food and beverage outlets, indoor pool, meeting rooms, fitness center, business center, in -room kitchens or other facilities and amenities. We will recommend the number of parking spaces the hotel will require, particularly if a large meeting space is recommended. ii. Our recommendations will be developed from our analysis of facilities available at the existing and proposed hotels and the needs of the market as identified from interviews with the area's large employers, education institutions, health care facilities, and business leaders. iii. We will identify the recommended hotel's major competitors and discuss its relative competitive advantages and disadvantages. We will prepare estimates of utilization (occupancy and average daily room rate) for the recommended hotel. C. Brand strategy discussion This task has been eliminated D. Economic Feasibility Analysis and Internal rate of return calculation Utilizing the cash flow projections described in Section E below, we will evaluate the hotel's economic feasibility. Preliminary development costs will be estimated for the recommended hotel and current financing terms will be obtained. The hotel's projected cash flow will be compared to the debt service requirements to determine if sufficient debt coverage exists. The cash on cash return on equity will be calculated by comparing the Hospitality Consulting Group qO MS. Cynthia Smith Strack Page 6 hotel's cash flow after debt service to the amount of equity in the project. We find that this return on equity measure is what most hotel developers and investors utilize in evaluating the feasibility of a new hotel project. A more sophisticated approach to economic feasibility, utilized in appraisals, is the calculation of the project's internal rate of return. We will prepare such a calculation for the recommended hotel, utilizing terminal capitalization rates derived from recent hotel transactions and an appropriate discount rate applied to the project's first 10 years of projected cash flow. If the economic feasibility analysis finds that the recommended project is not viable, we will prepare some alternative analyses that will show the amount by which the project's cost, equity and /or cost of capital would have to be reduced to achieve economic feasibility. E. Estimated revenues, operating expenses, and cash flow We will prepare estimates of room revenue, other revenue, and the operating expenses for the recommended hotel to the level of cash flow available for debt service, for its first ten years of operation. F. (New Task) Estimated revenues, operating expenses, and cash flow for a specific hotel facility and franchise We understand that a developer has shown interest in this hotel project. While the study described above will relate to a generic facility, we will prepare a separate market study report for the specific hotel project that is proposed by the developer. This study will utilize the information, analysis and conclusions developed in the original study. Final Reports (Revised) At the conclusion of our study, we will prepare two final written reports: one addressing the generic hotel recommended for the City of St. Joseph and a confidential report addressing the specific hotel as defined by the developer. Both studies will contain our findings, conclusions, and recommendations as well as the underlying data and documentation supporting the analyses. A draft version of the final report will be submitted to each party for review. Upon receiving authorization, we will prepare two bound copies of the final production version of both written reports, suitable for distribution. Additional report copies will be available at our production cost. We will also provide one unbound copy of each printed report, along with a version on a hard disc Hospitality Consulting Group y/ MS. Cynthia Smith Strack Page 7 6. FEES AND TIMING Based on the scope of the work outlined, our fee for this engagement will be $10,500 and a draft of the final reports will be available within five weeks of beginning the assignment. The quoted fee includes all expenses incurred on the assignment. Our total billing for this assignment will not exceed $10,500. A detailed project budget is provided below. You may terminate this engagement at any time by so informing us, in which case you would only be responsible for the fees and expenses incurred to that point. St Joseph, MN Hotel Study Project Budget We respectfully request a retainer in the amount of $5,250 to begin work, with the balance of the remaining fee will be due at delivery of the report in draft format. All fees must be paid in full prior to release of the report in final presentation format. 7. SUMMARY OF RECENT SIMILAR HOTEL STUDIES The following are three summaries of similar hotel studies we have performed for municipalities in the last four years: Worthington, Minnesota - Full service hotel and convention center. HCG was engaged by the city to identify the scope of convention facilities that would Hospitality Consulting Group q2- RFP Task Section Hours Fee Fieldwork Ai, Aii 24 $2,640 Demand Analysis Aii 8 880 Growth Projections Aiii 2 220 Opinion on Future Market Aiv 1 110 Facility Recommendation Bi, Bii 2 220 Utilization Estimates Biii 8 880 Brand Strategy C 0 0 Financial Projections E 12 1,320 Economic Feasibility Analysis D 10 1,100 Final Report 28 3,080 Totals 95 $10,450 We respectfully request a retainer in the amount of $5,250 to begin work, with the balance of the remaining fee will be due at delivery of the report in draft format. All fees must be paid in full prior to release of the report in final presentation format. 7. SUMMARY OF RECENT SIMILAR HOTEL STUDIES The following are three summaries of similar hotel studies we have performed for municipalities in the last four years: Worthington, Minnesota - Full service hotel and convention center. HCG was engaged by the city to identify the scope of convention facilities that would Hospitality Consulting Group q2- MS. Cynthia Smith Strack Page 8 meet the community's needs and to recommend the size, quality and amenities for a full hotel adjacent to the center. Our study recommended an 11,000 square foot event center supported by an 80 -room full service hotel. Our study included an economic feasibility analysis and was used to attract a hotel developer. Both the hotel and the convention center are up and operating. Canton, South Dakota - Limited service hotel. HCG recently completed a hotel market study for the City of Canton for their use in attracting a hotel developer. We found that a small limited service hotel could be supported in the community and the city and its EDA are actively pursuing hotel developers. Hibbing, Minnesota - Limited service hotel. HCG recently completed a hotel market study for the City of Hibbing for their use in attracting a hotel developer. Because a large (but aging) full service hotel existed in the market, we recommended a limited service hotel with an adjacent free standing restaurant be developed to meet the community's needs. 8. REFERENCES The follow references can be contacted regarding the hotel projects described above. Mr. Bradley Chapulis Director of Community and Economic Development City of Worthington (507) 372 -8647 bchapulis @worthington.mn.us Mr. Sean Pederson City Manager Canton, SD (605) 987 -2881 sean.pederson(@cantonsd.org Mr. Tom Dicklich City Administrator Hibbing, MN (218) 362 -5930 tdicklich@ci.hibbing.mn.us Our report will be based on estimates, assumptions and other information developed from our research of the market, knowledge of the industry and meetings with Hospitality Consulting Group /-3 MS. Cynthia Smith Strack Page 9 representatives of the St Joseph Economic Development Authority. The sources of information and bases of our estimates and assumptions will be stated in the report The terms of this engagement are such that we will have no obligation to revise the report or the projected operating results to reflect events or conditions that occur subsequent to the completion of our field work in the market. However, we will be available to discuss the necessity for future revision because of changes in the economic or market factors affecting the proposed project. Some assumptions inevitably will not materialize, and unanticipated events and circumstances may occur; therefore, actual results achieved during the period covered by our prospective analyses will vary from those described in our report, and the variations may be material. Further, we will not be responsible for future marketing efforts and other management actions upon which actual results will depend. Our report is intended for the information of the St. Joseph Economic Development Authority and may be used in its entirety in support of financing efforts for the proposed hotel. However, neither the report nor its contents may be referred to or quoted in any registration statement, prospectus, private placement memorandum, appraisal or other investment document without our prior review and written consent. It is agreed that the liability of Hospitality Consulting Group and its employees is limited to the amount of fee paid as liquidated damages. We appreciate the opportunity to submit this proposal. We look forward to working with the St. Joseph EDA on this interesting project. Sincerely, HOSPITALITY CONSULTING GROUP �'� W - '�4 Stephen W. Sherf President vV Hospitality Consulting Group