ISHC Mid-Year Symposium Feasibility Study Tutorial for Condo-Hotel Ownership

1. ISHC Mid-Year SymposiumFeasibility Study Tutorial for Condo-Hotel Ownership Greg Bohan & Scott Steilen April 27, 2006

2. Overarching Issues to Consider When Performing Analysis • Variations of condo lodging/mixed-use product • No real history of performance • Real estate premium of brand • Availability of operators • It still must pencil as a hotel • Overwhelming majority of projects done at upscale to luxury level – middle to lower market remains relatively untested

3. Key Differences: Condo Hotel v. Traditional Hotel Analysis • Residential component and analysis required to evaluate pricing, absorption, brand premium, etc. • Impact of the business structure of the project on the lodging performance • Allocation of revenues and expenses among the various stakeholders • Development program • Other design considerations and their impact on performance

4. Key Differences: Condo Hotel v. Traditional Hotel Analysis • Rental program participation by unit owners • Length of rental agreements • Owner usage – allowable nights and rate • Access to and utilization of amenities by stakeholders • Market positioning • Development Cost • Return Analysis

5. Four Differences to Discuss in Greater Detail • Residential Analysis • Business Structure Impact • Allocations • Cost & Return Analysis

6. Residential Analysis • Survey the competitive condo landscape • Identify most comparable projects • Analyze unit mix, unit size, pricing and absorption trends • Analyze lodging brand “premium” in comparable projects • Recommend appropriate unit mix, sizes, pricing and absorption

7. Residential Factors to Consider • We all know that buyers are looking for income to cover expenses; however, in the jargon of the industry, it is a LIFESTYLE purchase • Potential for appreciation – with current real estate market cannot be a repeat of what happened with timeshare in the 80’s • No matter what people say, buyers want it to be a good investment

8. Residential Factors to Consider • Location - Must be in a location where a second or third home is desirable, typically: • Beachfront resort location • Mountain ski location • Other resort location (e.g., Orlando or Las Vegas) • International gateway cities where it can be a “pied a terre” • Other vibrant urban locations with a host of attractions • Location - Areas where it may not make sense: • Secondary cities with minimal overriding appeal • Suburban locations • Areas where high-quality product cannot be supported

9. Residential Factors to Consider • Facilities and Amenities – balance between an attractive residence AND a functional hotel unit: • Quality and durable finishes – very discerning buyers at this price point; must stand up to “hotel” use • Package – must have brand standard FF&E • 5 fixture baths, where possible • Fully amenitized kitchens (room for latitude here) • Flexible living and sleeping areas • Latest in technology • Availability of full hotel and concierge services – spa, recreational, dining, shopping & errands, etc.

10. Business Structure Impact • Rental program participation by unit owners • Not all of the available rooms may be salable by the manager • Length of rental agreements • Are the rental agreements long enough to enable management to solicit group business? • What assumptions are used for agreement turnover? • Owner usage • How many nights does an owner get to use their unit and when? • What rate does an owner pay for usage?

11. Business Structure Impact • Access to and Utilization of Amenities • Project’s amenities (e.g. spa, restaurant, etc.) will also be used by residents or other stakeholders • Analysis must consider usage from both a programming and operations perspective

12. Allocations • Commentary about NYC cooperative hotels in the 1960’s and 1970’s: • Sherry Netherland, Stanhope and Carlisle – structure • Trouble on the ever-so-fashionable upper east side more than 30 years ago • Revenue and expense sharing parameters are all over the place – no 2 deals seem to be alike • Some standardization by the major brands that are doing condo-hotels

13. Allocations • Examples of major allocation methods • Room revenues • Food, Beverage and Other Revenues • Rooms departmental expenses • Food, Beverage and Other expenses • Administrative and General • Marketing • Property Operations and Maintenance • Real Estate Taxes and Fees • Reserves (critical)

14. Cost and Return Analysis • Development cost driven higher by necessity of larger units and residential/lodging duality of purpose • Allocation of cost may be an issue in a mixed-use project • Differences between equity and debt requirements • Cash up front from buyers of units – so equity requirements are met using buyer’s cash, not developer’s cash

15. Cost and Return Analysis • Operating returns to developer with common areas is minimal or negative • Owners getting 50% or more of the biggest profit engine – Room Revenues • Food and beverage profits are small at best and not existent often • Meeting space generates no significant profit • If developer doesn’t make the desired return on the sale of the units, there may be no return

16. ISHC Mid-Year SymposiumFeasibility Study Tutorial for Condo-Hotel Ownership Greg Bohan & Scott Steilen April 27, 2006