January 3, Mr. Howard Stephenson President Utah Taxpayers Association 656 East S Suite R Draper, UT 84020

Transcription

1 January 3, 2014 Mr. Howard Stephenson President Utah Taxpayers Association 656 East S Suite R Draper, UT Re: HREC Lodging Impact Analysis Proposed Convention Center Hotel Salt Lake City, UT Dear Mr. Stephenson: Pursuant to our engagement letter dated February 5, 2013, Hospitality Real Estate Counselors, Inc. ( HREC ) has evaluated the potential lodging revenue impacts (positive, negative or neutral) resulting from development of the proposed Convention Center Hotel (the Hotel ) to be located in downtown Salt Lake City. The potential impact was analyzed generally as it relates to the downtown Salt Lake City lodging market, and specifically as it relates to the anticipated competitive set of the proposed Hotel s comparable lodging facilities. Hunden Strategic Partners assisted HREC in the preparation of this study. Their contribution involved surveying group meeting planners and completing a comparative analysis of the Salt Palace Convention Center to other centers. Purpose The impact analysis and accompanying written consulting report is for the use of the Utah Taxpayers Association in assessing the potential room revenue impact of the new hotel development. It is our understanding that our analysis may also be made available as a public document. Brief Development Project Summary and Assumptions Based on information reviewed and conversations with Visit Salt Lake, we assume the proposed Hotel would offer 1,000 guestrooms, 80,000 to 100,000 square feet of in-house meeting and banquet facilities, multiple food and beverage outlets, and other amenities typical of an upscale full-service convention hotel. The Hotel would be located directly adjacent to or attached to the Salt Palace (currently numerous sites proposed). Strategic Advisory Group ( SAG ) estimates the prototypical total cost to develop a Convention Center Hotel of this magnitude would be roughly $335,000,000 ($335,000 per guestroom). 1 Based on the current status of the project, we have assumed construction could be complete and the Hotel could be operating by January Strategic Advisory Group, Convention Headquarter Hotel Financial Model Assessment, January

2 Executive Summary Major Conclusions and Findings The following section summarizes HREC s major conclusions and findings relative to this engagement. The reader/user of this transmittal letter is advised to read the remaining sections of this letter and the attached report to understand the presented summary of findings. Key Findings 1. The proposed Hotel is forecasted to negatively impact (capture) 330,000 room nights from the competitive set from 2017 to 2021, equating to an estimated room revenue loss of $70,000,000. The room revenue loss consists of lost room nights as well as diminished average daily rate growth. The total hotel revenue loss over the same period is estimated at approximately $105,000,000. Stated another way, for every room captured at the Hotel from 2017 to 2021, 27% is anticipated to come at the direct expense of the existing competitive set. Additionally, for every dollar of room revenue captured by the proposed Hotel from 2017 to 2021, nearly 32 cents (one third) is forecasted to be at the direct expense of the existing hotels comprising the competitive set of Salt Lake City hotels. 2. The proposed 1,000-room Hotel would represent a roughly 22% increase in lodging supply for the competitive set. The last opening of an upscale full-service hotel in the Salt Lake City CBD was in A 1,000 room increase to the relatively small downtown market would be significant, specifically considering the competitive set s continued lower occupancy as compared to the nationwide urban location average (as defined by STR). 3. Specific to meeting space in the competitive set, the proposed Hotel would increase supply by roundly 36-46%, and contain the largest ballroom for the competitive market. The significant increase in hotel meeting space is expected to create substantial competition for in-house groups within the downtown market, especially in off-season periods. For example, competitive hotels are expected to experience additional competition for catering demand and in-house groups in December when the Convention Center is particularly slow but certain hotels are hosting holiday events/parties. 4. Based on HREC s interpretation of the roughly five-year old HVS Study 2, the implied total negative room night impact from their study equates to roundly 343,000 over the first five calendar years. Utilizing the applicable year s average daily rates from the study, this would equate to roundly $48 million in negative room revenue impact. However, as will be discussed in this report, we believe this understates the room revenue impact. 2 H&R Valuation Services, Inc. DBA HVS, Market Study - Proposed Salt Palace Convention Center Headquarter Hotel, December 16,

3 5. HREC s analysis forecasts negative impacts from the proposed Hotel from 2017 through 2021, its first five years of operations. The potential for negative impact may likely extend beyond the five year projection period, and the Salt Lake City hotel market may never fully recover; though impacts are difficult to reliably quantify that far in the future. 6. Due to the inherent cyclicality of the national convention group market as a result of its strong correlation to overall economic conditions, magnified negative impact from additional competitive pressure during future economic recessions or lodging cycle downturns may occur in the downtown Salt Lake City market. 7. HREC s impact analysis assumes additional positive room night demand growth over the projection period if the Hotel is built. Moreover, the impact analysis assumes certain levels of new demand will be generated from convention center and in-house groups, as well as from current unaccommodated demand. However, two economic recessions have occurred in the past 13 years, and should another occur either during the forecast period (2013 to 2021) or after, the assumed induced demand and total negative impact levels on the existing lodging marketplace may increase materially. 8. The Hotel is forecasted to increase the Salt Palace s convention attendance and total room revenue in the downtown Salt Lake City market, but this increase is expected come at the expense of the existing hotels. 9. The national convention group market has changed significantly over the past five years. There is a general hospitality industry consensus that the economic recovery following the recession has been driven by transient demand and that group demand may never recover to the peak levels experienced in The development of the Hotel is expected to have a negative impact on all downtown Salt Lake City hotels. Certain hotels will be negatively impacted to a greater extent than others. In particular, properties on the exterior of downtown or with expanded meeting space may likely experience a more severe impact than average. 3

4 The following charts detail the proposed Hotel s occupied room summary including the Hotel s occupied rooms at the expense of the existing competitive hotels in 2017 and from 2017 to Proposed Convention Center Hotel's Occupied Room Summary 8% Convention Center Induced In House Induced 50% 18% 3% Unaccommodated Demand Demand Growth 21% Impact Source: HREC Hospitality Real Estate Counselors Proposed Convention Center Hotel's Occupied Room Summary 27% 17% Convention Center Induced In House Induced 18% Unaccommodated Demand Demand Growth 35% 3% Impact Source: HREC Hospitality Real Estate Counselors 4

5 The following charts detail the proposed Hotel s total projected room revenue. In 2017 and from 2017 through 2021, $0.53 and $0.32, respectively, of every dollar earned at the Convention Center Hotel, is forecasted to come at the expense of the existing downtown competitive hotels Proposed Convention Center Hotel Total Room Revenue 53% Impact New Revenue Source: HREC Hospitality Real Estate Counselors Proposed Convention Center Hotel Total Room Revenue 32% Impact New Revenue Source: HREC Hospitality Real Estate Counselors 5

6 Methodology 1. This study evaluates the potential room night and room revenue impacts to the downtown Salt Lake City full-service lodging market by the proposed Hotel, comparing market projections with and without the Hotel. Projected market growth rates and estimates of unaccommodated and induced demand over the forecast period are accounted for and are applicable in both scenarios. The impact of the proposed Hotel is then quantified for existing hotels in the market. 2. As mentioned, we evaluated the amount of new induced and unaccommodated room nights and room revenue from the proposed Hotel. We requested detailed and specific information from Visit Salt Lake to utilize in this analysis; HREC received the documentation requested to specifically determine a reasonable amount of induced convention center group lodging demand. Furthermore, we accounted for induced demand from in-house groups as well as unaccommodated demand. 3. HREC reviewed and evaluated two other studies (STR Study 3 and the HVS Study) previously completed for the proposed Hotel, and noted the following: a. The STR Study was completed over three years ago and the HVS Study was completed nearly five years ago. Both studies are not directly relevant today, particularly due to significant changes in the national convention group market and local Salt Lake City lodging market conditions. b. The STR Study of the performance and impact of new convention center hotels opening in other national market areas cannot be used to directly and reliably forecast the potential impact in Salt Lake City due to fundamental and significant differentiating micro-economic factors. c. The HVS Study does not specifically address impact issues on the existing marketplace, except for one table that identifies the estimated occupancy and ADR performance of the competitive set of hotels both with and without the Convention Center Hotel. HREC has extracted an implied impact to the existing hotels from this table. d. HREC believes that the most reliable forecast of potential lodging impact should be derived from the micro market and property specific analysis undertaken in this study. The micro analysis should include primary, detailed research into the past and anticipated future performance of Salt Lake City hotels and intensive discussions with and factual input from these Salt Lake City area hotel and marketing professionals. 3 David L. Corsun, Ph.D. in conjunction with STR Analytics, Salt Lake City Convention Hotel Comparative Performance Economic Review Phase I Report, February 18,

7 Summary Overview of HREC Analysis and Methodology To determine the potential impact of the proposed Convention Center Hotel, HREC conducted thorough research related to the existing downtown Salt Lake City lodging supply and demand conditions and a detailed review of convention demand captured by the Salt Palace Convention Center ( SPCC ). We have also reviewed and considered other national hotel markets results where convention center hotels have opened in recent years. HREC also requested, received and analyzed detailed information from Visit Salt Lake s Lost Business Report for booking years 2010, 2011, 2012, and August YTD 2013 with a primary focus on groups that reportedly did not book in Salt Lake City due to the lack of a major convention center hotel. Lost business due to the lack of a major convention center hotel was also received and analyzed for expected attendance year 2012 (instead of booking year). The detailed reports were compared with actual bookings and occupancy of the SPCC. Additionally, a number of the groups that were lost due to the lack of a major convention center hotel were interviewed to determine the likelihood of the groups attending Salt Lake City with and without the Hotel. Extensive Downtown Salt Lake City Property-Specific Primary Research and Analysis HREC interviewed General Managers and/or Directors of Sales/Marketing at most study relevant Salt Lake City area hotels, either in-person or by phone. Our research and interviews relative to this engagement further highlighted and supported HREC s premise of the need for a focused micro market analysis. In particular, area managers relayed thoughts, concerns, and market data to assist HREC in projecting the competitive market results with and without the proposed Hotel. Representatives from Salt Lake City, Salt Lake County and Visit Salt Lake were also interviewed. Competitive Set Examination and Impact HREC prepared a supply and demand analysis to determine the potential impact to the proposed Hotel s anticipated competitive set of lodging facilities. We based our selection of properties constituting the competitive set on factors such as size (guestrooms and meeting/function space), quality, price point and location. Our competitive set analysis considers the existing and future supply and demand conditions, competitive strengths and weaknesses of each hotel and the proposed Hotel, and a comparison of the future competitive set performance both with and without the new Hotel. The difference in projected room revenue operating performance of the competitive set with and without the proposed Hotel determines the total impact (positive, negative or neutral) on an aggregated level across the competitive set. Convention Center Hotel Additions to Other Markets (Secondary Consideration) We completed a macro analysis of other metropolitan areas where convention center hotels were opened. In each market area, we analyzed significant occurrences and compared them to the downtown Salt Lake City marketplace. Our analysis included an 7

8 examination of the existing lodging supply performance prior to a convention center hotel opening and actual results subsequent to the addition of the convention center hotel. HREC also interviewed individual hotels and/or relevant personnel at Convention & Visitors Bureaus in other markets where convention center hotels have opened. Additionally, we interviewed major convention center hotel brand representatives familiar with the development, performance and impact of convention center hotels. Finally, we reviewed an impact study prepared for the Salt Lake Convention and Visitors Bureau by STR Analytics. We do hereby certify that we have no undisclosed interest in this engagement, and our employment and compensation are not contingent on our findings and conclusions. Our findings are subject to all normal assumptions and limiting conditions, which are included in the attached report. Our conclusions are also subject to the project specific assumptions contained throughout the attached report. This letter is to be used only in conjunction with the attached written study. If you have any questions or comments concerning our conclusions and findings, please contact the undersigned. Sincerely, HOSPITALITY REAL ESTATE COUNSELORS, INC. John Basting Senior Associate Mark Lukens, MAI Senior Vice President Michael Cahill, CRE, MAI, FRICS, CHA CEO & Founder Encl.: Summary Report 8

9 TABLE OF CONTENTS Lodging Impact Analysis Proposed Convention Center Hotel Salt Lake City, UT I. UNDERSTANDING LODGING IMPACT STUDIES...10 II. SALT PALACE OVERVIEW...13 III. IV. PROPOSED CONVENTION CENTER HOTEL OVERVIEW Overview of Project...21 Proposed Convention Center Hotel Studies Presented and Reviewed...21 Projected Performance of Convention Center with Convention Center Hotel...24 LODGING MARKET OVERVIEWS National Lodging Market...27 Salt Lake City Lodging Market...29 V. IMPACT ANALYSIS Latent Demand...34 Projected Demand Growth...36 Impact to Occupancy and ADR...37 VI. SUMMARY IMPACT CONCLUSIONS...39 VII. STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS...41 VIII. CERTIFICATION...43 ADDENDA Referenced Tables Professional Qualifications: Michael Cahill, CRE, MAI, FRICS, CHA; Mark Lukens; John Basting 9

10 I. UNDERSTANDING LODGING IMPACT STUDIES Defining Impact Traditional Usage Impact is defined as the potential change (positive, neutral or negative) related to one or more existing hotel properties from the addition of new competitive lodging supply. Traditionally, the concept of measuring the impact of new hotel development has been related to protecting franchisees rights as it pertains to territorial encroachment 4. Specifically, when a new hotel is proposed with a franchise under the same parent company as an existing hotel in the same competitive market, the potential impact to the existing hotel is evaluated. Similar methodology is applied when an existing hotel is converted to a brand within the same parent company as another existing hotel in the same competitive market. For an existing hotel owner, the issue of potential impact is meaningful from the perspective that certain of their current accommodated demand or top-line revenue stream could be cannibalized by the proposed hotel. For the parent company, franchise fees are generated from the sale of hotel rooms in a market. As such, certain cannibalization may be acceptable to the parent company, if the net result is incremental franchise fees. However, the existing hotel owner s investment could be negatively impacted. Impact Relative to the Proposed Convention Center Hotel With respect to the proposed Hotel, the potential impact can be evaluated in the same conceptual manner, with certain differences noted. First, the branding for the Hotel is currently undetermined but we assume the Hotel will be flagged by a major brand such as Marriott, Hilton, or Hyatt. As such, the impact of developing the new property may not be specific to one or more lodging facilities within the same parent company, but rather those properties that may directly compete with the proposed hotel. Once the branding for the new Hotel is solidified, certain hotels in the market may be affected more than others in the form of incremental impact. Additionally, the concept of territorial encroachment applies due to the size and scope of the proposed Hotel, and the type of lodging demand such a facility typically accommodates. The proposed Hotel would be located attached to or adjacent to the SPCC and would likely directly compete for local, regional and national group demand due the scope of its product offering and location in downtown Salt Lake City next to the SPCC. Lastly, the issue of potential cannibalization is important to understand. The current hotel owners in the downtown Salt Lake City competitive set (this set includes Sheraton, Red Lion, Hotel Monaco, Doubletree, Radisson, Hilton, Marriott City Creek and City Center, Little America, and Grand America), made privately funded investments that have the potential to be negatively impacted, resulting in decreased revenues from lost lodging demand and correspondingly decreased taxes paid to respective taxing agencies. 4 Lori E. Raleigh and Rachel J. Roginsky, eds. Hotel Investments: Issues & Perspectives, Fourth Edition (Lansing, MI: American Hotel & Lodging Educational Institute, 2006)

11 It should be noted that our study focuses solely on the potential impacts to lodging revenues for existing hotels, and does not estimate impacts relative to taxes. Types of Impact Impact is generally identified by analyzing the potential for a change in revenues (positive, negative or neutral) at one or more existing lodging facilities due to the addition of new competitive supply. Impact can be estimated by evaluating the potential for lost market penetration, fewer annual accommodated room nights, and diminished average room rates or annual average room rate growth. Additional impact issues related to existing hotels could include the need for increased marketing expenditures and increased capital expenditures (renovation, refurbishment) related to market share retention. With respect to the potential change in revenues for existing hotel facilities, there exist two generally accepted types of impact; base impact and incremental impact. Base impact is typically defined as the effect new competitive supply has on one or more existing properties primarily occurring from the size and type of the new hotel addition. New competitive supply could result from the development of a new lodging facility within a competitive market, or from the conversion of a previously non-competitive facility to a brand and/or a quality level that is commensurate with the existing competitive supply. With respect to the proposed Hotel, the base impact results from the addition of approximately 1,000 new upper upscale hotel rooms and 80,000 to 100,000 square feet of meeting facilities. Incremental impact in the traditional sense is typically defined as the effect new competitive supply within a similar parent branding company has on one or more existing hotels due to diluted demand captured from that parent company s central reservations system and/or distribution channels. Specific to this analysis, we have not quantified incremental impact since the new hotel brand has yet to be determined and we are focusing on the impact to the identified competitive market, not an individual property. As mentioned previously, this may eventually cause individual downtown Salt Lake City properties to be impacted in total at levels above or below average impact. Impact can be measured in multiple ways, including the following: Room Revenue impacts can be measured in occupied room nights ( occupancy ), average daily room rate ( ADR ), revenue per available room ( RevPAR ) or total room revenue. Total Revenue impacts, including food & beverage sales, meeting room rentals, spa revenues, retail sales, etc. Profit impacts are generally more difficult to quantify for a market, but individual hoteliers can usually measure given forecasted revenue impact as a base and then applying their own understanding of an individual hotel s profitability. 11

12 Expense impacts can be measured in operating costs (sales and marketing) and capital expenditures (renovation and/or refurbishment), but are difficult to estimate for a market, as individual hoteliers may react differently. For this engagement, HREC is primarily estimating room revenue impacts, though we also forecast total hotel revenue impact based on average industry multipliers. Room revenue impacts are the most supportable; total revenue impacts are typically based on multiples of room revenue and profit and expense impacts are generally more propertyspecific. Impact Mitigation As previously mentioned, changes to existing hotel revenue streams can be impacted both positively and negatively from the addition of a new convention center hotel. Additionally, there exists the possibility of impact mitigation, or the ability of an existing hotel or new hotel to partially or fully eliminate negative impacts. Natural mitigation of some negative impacts will occur during periods of peak demand, when excess (unaccommodated) demand exists in the current marketplace. We have evaluated such by considering seasonal periods of peak demand in the Salt Lake City marketplace specifically at the SPCC, which typically includes the months of June through August, with other weeks/months showing moderate compression depending on the year as well as during large conventions, such as Outdoor Retailers. The impacted hotels may be able to mitigate negative revenue impacts through increased spending related to sales and marketing efforts and/or a renovation/refurbishment of the existing facilities; in this case, expense and profit impacts would still exist. The proposed Hotel may induce new demand to the marketplace and/or capture demand previously unaccommodated in the market. With respect to the proposed Hotel, the question to be answered in this analysis is how much of the demand captured by the proposed Hotel would be composed of induced and unaccommodated demand as opposed to demand captured from existing competitive properties. 12

13 II. SALT PALACE OVERVIEW The SPCC is located in downtown Salt Lake City between South Temple, 200 South, 200 West, and West Temple. The convention center was expanded in 2005 (completed in 2006) by approximately 200,000 square feet and currently contains approximately 679,000 square feet of net rentable space including 515,000 square feet of exhibit space, a 45,000 square foot ballroom, and over 115,000 square feet of meeting rooms. The SPCC competes on a national and regional basis for convention center groups. According to Visit Salt Lake and Hunden Strategic Partners (co-project consultants), the following cities contain convention centers and are considered to varying degrees, competitive and/or comparable to Salt Lake City. The bolded cities are identified by both Visit Salt Lake and Hunden Strategic Partners. Salt Palace Comparables/Competition Visit Salt Lake and Hunde n Strategic Partners Side by Side City Visit Salt Lake Hunden Strategic Partners Anaheim X X Austin X X Baltimore X Charlotte X Denver X X Fort Worth X Houston X Indianapolis X X Louisville X Los Angeles X Nashville X X Omaha X Phoenix X X Portland X Reno X Sacramento X San Antonio X X San Diego X X San Francisco X Seattle X X St. Louis X Tampa X Vancouver X Source: Visit Salt Lake, Hunden Strategic Partners As detailed, Visit Salt Lake and Hunden Strategic Partners both selected Anaheim, Austin, Denver, Indianapolis, Nashville, Phoenix, San Antonio, San Diego, and Seattle as either competitive or comparable to Salt Lake City as a convention destination. Additionally, Hunden Strategic Partners provided insight on total hotel room count near, the largest walkable convention hotel to, and total function space at the Salt Palace compared to other competitive or comparable cities, which is detailed in the following tables. 13

14 Salt Lake City Comparables and/or Competitors City Walkable Hotel Room Count* Walkable Rooms per 1,000 SF of Exhibit Space CBD Hotel Room Count* CBD Rooms per 1,000 SF of Exhibit Space Omaha , Phoenix 1, , Austin, TX 4, , Fort Worth (Tarrant County) 1, , Louisville 2, , Charlotte 1, , Tampa 1, , Indianapolis 5, , Sacramento 1, , Orange County, CA 1,2 7, , Portland 1, , Nashville 3, , Seattle 4, , Denver 4, , San Francisco 7, , San Diego 5, , San Antonio 5, , Average 3, , Salt Lake City 2, , Amount Needed to Reach Average 785 2, ,545 # of Walkable Hotels Avg. Walkable Room Count/ Hotel # of CBD Hotels Avg. CBD Room Count/ Hotel *Includes quality hotels suitable for meeting attendees 1 Area wide - not city wide hotels 2 Used the Anaheim Resort District in place of the CBD Sources: Hunden Strategic Partners, Smith Travel Research, Mpoint, Cvent 14

15 City Omaha Phoenix Austin, TX Fort Worth (Tarrant County) Louisville Charlotte Tampa Indianapolis Sacramento Orange County, CA 1,2 Portland Nashville Seattle Denver San Francisco San Diego San Antonio Average Salt Lake City Amount Needed to Reach Average Salt Lake City Comparables and/or Competitors Largest Walkable Convention Hotel Rooms Year Built/ Expanded Public Participation Hilton Omaha Publicly Owned Sheraton 1, Publicly Owned JW Marriott Austin 1, Private w/subsidy Omni Fort Worth Hotel Private w/subsidy Galt House 1, Private w/subsidy Westin Charlotte Private w/subsidy Marriott Tampa Waterside Hotel & Marina Private w/subsidy JW Marriott Indianapolis 1, Private w/subsidy Sheraton Hotel Grand Sacramento Publicly Owned Hilton Anaheim 1, Privately Owned Doubletree Portland Privately Owned Omni Nashville Hotel Private w/subsidy Sheraton Seattle Hotel 1, Privately Owned Hyatt Regency Denver Convention Ctr. 3 1, Publicly Owned Marriott San Francisco Marquis 1, Privately Owned Grand Hyatt Manchester San Diego 1, Private w/subsidy Grand Hyatt San Antonio 1, Private w/subsidy Marriott Salt Lake City Creek Area wide - not city wide hotels 2 Used the Anaheim Resort District in place of the CBD 3 The 1,231-room Denver Sheraton Hotel is also within walking distance from the Colorado Convention Center but the Hyatt is regarded as the main convention center hotel Sources: Hunden Strategic Partners, Smith Travel Research, Mpoint, Cvent 15

16 City Omaha Phoenix Austin, TX Fort Worth (Tarrant County) Louisville Charlotte Tampa Indianapolis Sacramento Orange County, CA 1,2 Portland Nashville Seattle Denver San Francisco San Diego San Antonio Average Salt Lake City Amount Needed to Reach Average 1 Area wide - not city wide hotels Convention Center Name Salt Lake City Convention Center Comparables and/or Competitors Total Function Space Exhibit SF Ballroom SF Meeting Room SF Number of Breakout Divisions Largest Ballroom SF CenturyLink Center 257, ,760 41,876 22, ,996 Phoenix Convention Center 902, , , , ,600 Austin Convention Center 367, ,052 63,928 56, ,510 Fort Worth Convention Center 365, ,266 28,160 84, ,160 Kentucky International Convention Center 294, ,000 30,160 72, ,160 Charlotte Convention Center 406, ,000 75,000 51, ,000 Tampa Convention Center 278, ,000 36,000 42, ,000 Indiana Convention Center 729, ,000 57, , ,335 Sacramento Convention Center Complex 4 182, ,000 24,282 24, ,282 Anaheim Convention Center 969, ,607 38,058 89, ,058 Oregon Convention Center 369, ,000 59,400 55, ,200 Music City Center 519, ,143 75,400 91, ,500 Washington State Convention Center 327, ,700 63,882 58, ,882 Colorado Convention Center 752, ,000 82,156 91, ,700 Moscone Center 953, ,015 81, , ,294 San Diego Convention Center 817, ,501 81, , ,955 Henry B. Gonzalez Convention Center 616, ,769 89, , , , ,783 61,533 92, ,424 Salt Palace Convention Center 671, ,600 45, , , , ,817 16,533-23, ,576 Entertainment District (Distance to Conv. Ctr.) Old Town (0.6 miles) Legends (0 miles) Sixth Street (0.4 miles) Sundance Square / West Seventh District (0.3 miles) 4th Street Live! (0.1 miles) Uptown Charlotte 3 (0,3 miles) Channel District (0.3 miles) Circle Centre Mall / Wholesale District (0.1 miles) Old Sacramento (1.1 miles) GardenWalk (0.5 miles) Old Town-Chinatown (1.1 miles) Lower Broadway (0.2 miles) Pike Place & Capitol Hill (0.4 / 0.6 miles) Denver Pavilions (0.2 miles) SoMa (South of Market) / Union Square (0.1 / 0.5 miles) Gaslamp Quarter (0.3 miles) River Walk (0.1 miles) City Creek / Gateway Mall (0.1 / 0.4 miles) 2 Used the Anaheim Resort District in place of the CBD 3 Uptown Charlotte area is the closest thing to an entertainment district, yet none really exists here yet 4 Convention officials are close to unveiling plans for a major renovation of the center, which would possibly include the addition of 40,000 square feet of exhibition and event space Sources: Hunden Strategic Partners, Smith Travel Research, Mpoint, Cvent 16

17 According to the tables provided by Hunden Strategic Partners, downtown Salt Lake City contains less than average walkable hotel rooms (defined as within 1,200 feet of the convention center). The addition of the under construction 159-room Hyatt House hotel and proposed 175-room Courtyard by Marriott will partially address the shortage of walkable hotel rooms compared to average. Additionally, Salt Lake City s largest walkable convention hotel is significantly smaller than average. However, this is partially offset by the more than average guestrooms in the CBD. It should be noted that Salt Lake City s walkable convention hotels do not include the Grand America (775 rooms) or Little America (850 rooms) hotels, as they are outside of the defined walkable criteria. These properties distance from the Salt Palace is mitigated to a certain extent by the free TRAX (light rail system) connecting the Grand America and Little America to the Salt Palace. The SPCC contains more than average square feet of total function, exhibit and meeting room space compared to the competitive and comparable convention centers as defined by Hunden Strategic Partners. The one area the Salt Palace is less than average is total ballroom space, however, the Salt Palace s largest ballroom is larger than average. Salt Palace Performance As part of the impact analysis, HREC has analyzed the current SPCC performance to determine what additional demand could reasonably be accommodated at the center if the Hotel is built. The following table outlines the SPCC s annual groups, attendance, and room nights from 2003 through SPCC Groups Historical Groups & Attendance 2003 through 2012 Number of Room Attendance Room Nights Room Nights Year Groups Attendance Nights per Group per Group per Attendee , ,975 3,655 8, , ,729 3,483 7, , ,413 4,787 7, , ,084 4,215 5, , ,358 4,262 5, , ,706 3,203 4, , ,836 2,501 3, , ,281 3,090 6, , ,708 2,948 5, , ,329 4,263 6, Average/Weighted Average , ,842 3,621 6, Source: Visit Salt Lake ( ); HVS Market Study ( ); HREC The SPCC has occupied on average 47 city-wide groups annually from 2003 through The convention center s attendance peaked in 2007 with roughly 222,000 attendees, and the annual room night production peaked in 2012 with over 342,000 room nights. Room nights per attendee has varied over time but on average equated to 1.7 from 2003 to

18 In addition to analyzing the historical performance of the SPCC, we have also compared the historical utilization of the center versus the Lost Business Report, focusing particularly on the lost business due to the lack of a major convention center hotel. As will be detailed further in this report, the Lost Business Report is stated as of the booking year (i.e. Salt Palace books a convention in 2012 that will attend in 2017). To determine how lost business could impact the convention center if the Hotel is built, one must look to the convention center s detailed occupancy report as of the date the group may have attended Salt Lake. The following chart outlines the SPCC s monthly occupancy in 2012 and average monthly occupancy from 2010 to A detailed table of the SPCC s monthly occupancy from 2010 to 2012 can be found in the addendum to this report. 100% SPCC Monthly Occupancy 80% 60% 40% 20% Avg 0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual Figure 1 Source: Visit Salt Lake; HREC It should be noted that the reported occupancy or utilization for the Salt Palace includes all groups making use of the Salt Palace, not just city-wide events booked by Visit Salt Lake. On average from 2010 through 2012, the Salt Palace was 47.5% occupied. However, from year to year this has varied significantly, with 2012 being a highly occupied year at 58%, and 2011 being the lowest occupied year at 40%. According to Scott Beck, the CEO of Visit Salt Lake, optimum utilization for a convention center is 70% - 75% and the national average is 65% 67%. These averages, of course, depend on many factors such as the size and mix of the meeting space, the overall quality of space, and the way the averages are calculated. On average, the peak months for the Salt Palace are June through August, with January, March and May also all being occupied more than the annual average. As expected over holiday season, December is the least occupied month for the Salt Palace at 8.1%. 18

19 Visit Salt Lake provided HREC with the SPCC s Lost Business Report. The report includes groups that did not attend Salt Lake City for a number of reasons; a summary of the 2012 Lost Business Report is included below. SPCC Groups 2012 Report of Lost Business Peak Total Reason # Groups Attendance Room Nights Room Nights TD - Salt Palace not avail.; SPCC Booking.* ,793 40, ,544 Lack of a major convention center hotel/must meet/sleep under 1 roof ,400 37, ,707 Concerns about attendance draw/misperceptions about SLC ,150 32, ,040 Location -Rotational Pattern/preferred warm weather or/meeting near HQ 12 86,700 27, ,516 No response from planner / Planner not awarded contract 7 40,000 9,265 38,663 Hotel rates considered too high / Hotel could not meet rate and/or concessions 6 39,700 17, ,452 Multi-year package offered by competing city or chain. 4 15,400 7,315 30,335 Not enough exhibit space and/or meeting space at SPCC. 4 18,000 8,705 42,313 Board ties to competing destination or problems resolved in original city. 3 9,000 6,910 44,070 Lack of local/regional membership/regional chapter support 3 8,450 3,569 13,076 Requested dates are no longer acceptable to client 2 19,000 7,199 20,778 Meeting cancelled / Economic uncertainty 1 3,000 3,000 10,190 Cost of Airfare. 1 2,500 1,300 6,645 Totals , , ,329 *Excluded from summary of Lost Business Report provided by Visit Salt Lake Source: Visit Salt Lake; HREC As detailed in the preceding table, convention groups provided a wide array of reasons for not bringing their group to Salt Lake City in The report shows that of the 909,329 total room nights lost, 153,707 total room nights are reported as lost due to the lack of a major convention center hotel. Other significant reasons provided to Visit Salt Lake include concerns about attendance draw/misperceptions about SLC ( perception ), turn down or Salt Palace not available, location, and hotel rates are considered too high. The following table outlines the SPCC s Lost Business Report specific to the response Lack of a Major Convention Center Hotel from 2006 to August YTD SPCC Groups Report of Lost Business due to Lack of CC Hotel 2006 through 2013 YTD Room Year Attendance % Ch. Nights % Ch , , , % 186, % , % 213, % , % 145, % , % 186, % , % 174, % , % 153, % Average 84, , YTD Aug 46,500-63,854 - Source: Visit Salt Lake 19

20 From 2006 to 2012, Visit Salt Lake reported that the lost business due to the lack of a major convention center hotel equated to roughly 172,000 average annual room nights. Of the 172,000 potential annual room nights lost, the question arises, how many of these groups would actually come to Salt Lake City and fit into vacant spots in the SPCC if the Hotel were built? To answer this question, a number of the groups from the Lost Business Report were interviewed and we performed a detailed analysis of the Lost Business Report to determine which groups could reasonably be captured by the Salt Palace if the proposed Hotel is built. This analysis is outlined further herein. The following chart details the SPCC s pace booking report as of July 31, 2012 and July 31, A detailed table of the SPCC s pace booking report can be found in the addendum to this report. 350,000 SPCC Room Nights on the Books 300, , , , ,000 50, Figure 2 Source: Visit Salt Lake; HREC Through July 31, 2013, Visit Salt Lake has booked groups that will accommodate 254,000 room nights annually from 2013 to A significant drop off occurs in 2017 which is outside a number of conventions booking windows, specifically for the large Outdoor Retailers show. Future bookings appear relatively in line with or even ahead of the Salt Palace s historic room night production. 20

21 III. PROPOSED CONVENTION CENTER HOTEL OVERVIEW Overview of Project Location The proposed Hotel currently does not have a developer or a brand, but we have assumed a nationally recognized brand would be attached to the property (i.e. Hyatt, Marriott, Hilton, etc). According to the HVS Study completed December 2008, the proposed Hotel will be located on one of three sites adjacent to the Salt Palace. More recent conversations with Visit Salt Lake representatives indicate that four sites are being considered, all of which are adjacent or attached to the Salt Palace. The proposed Hotel would contain significantly more rooms and meeting space than any other lodging facility adjacent to the Salt Palace. Proposed Convention Center Hotel Improvements (Facilities) The proposed Hotel facility information has been derived from a review of the HVS Study, prepared for the Downtown Alliance of Salt Lake and dated December 16, 2008, the SAG Study dated January 21, 2013, and conversations with Visit Salt Lake representatives. In general terms, the proposed Hotel is assumed to offer 1,000 guestrooms, 80,000 to 100,000 square feet of meeting and banquet facilities, multiple food and beverage outlets, a fitness facility, a gift shop, an indoor pool and whirlpool and a business center. The SAG Study estimates the prototypical total cost to develop a convention center hotel of this magnitude would be roughly $335,000,000. Based on the current status of the project, we have assumed the construction would be complete and the hotel would be operating by the start of The timeline is well in line with construction start to finish times of the other various reports. Any changes to the overall scope of the development could result in material changes to our analysis. Based on the proposed development cost of $335,000 per guestroom, we anticipate that the Hotel would meet or exceed the overall quality level and physical plant competiveness of most of the major group hotels currently operating in the Salt Lake City marketplace. Proposed Convention Center Hotel Studies Presented and Reviewed HREC reviewed two studies related to the proposed Convention Center Hotel. The first study reviewed was the HVS Study prepared for the Downtown Alliance. The report is nearly five years old and is not considered directly relevant today. The study s market penetration methodology lacks important components of a comprehensive impact analysis, including: 21

22 An analysis of the impact to existing competitive lodging facilities (both occupancy and average rate) by the proposed Hotel; A detailed analysis of the Lost Business Report to determine what convention center group demand could reasonably be induced into the competitive market; An updated analysis of comparable convention center hotels induced demand. Seven of the nine comparable headquarters hotels were constructed over 20 years ago (range from 1978 to 2005); The results of free market lodging competitive actions fueled by a subsidized hotel threat. The HVS Study does provide insight however, into one perspective of the level of induced demand projected for the proposed Convention Center Hotel. Induced demand is defined as the additional room nights that will be attracted to the market area for one or more specific reasons. 5 In particular, the study projects induced demand levels of 45 room nights per room at the proposed Hotel, leading to a total of 45,000 annual room nights. This equates to 12.3% of the total annual room nights available at the proposed facility. In addition to induced demand, the HVS Study also accounts for unaccommodated demand, or demand that previously desired accommodations in the competitive market, however a lack of available supply existed. Additionally, based on a before and after analysis of projected occupancy and ADR of the competitive set [defined by the HVS Study as the Sheraton, Marriott Downtown, Marriott City Center, Hilton, Grand America, Radisson, Hotel Monaco, Embassy Suites (now the Doubletree), and Little America representing 4,202 guestrooms or 1,533,730 annual room nights] with and without the Hotel, an implied impact can be extracted from the HVS Study. The following table illustrates the projected occupied room night demand for the market with the proposed Convention Center Hotel. For an apples to apples comparison, we then deducted the proposed Hotel s projected occupied rooms to arrive at the total rooms occupied by existing hotels. This is then compared to the total accommodated room nights if the Hotel was not built, according to the HVS Study s projected occupancy. This analysis is illustrated in the following table. HVS Marke t Study Impacted Room Night Analysis Year Competitive Set w/cc Hotel 1,048,120 1,154,242 1,205,588 1,246,530 1,287,339 Less: Room Nights Captured by CC Hotel 140, , , , ,100 Remainder of Competitive Set 907, , , ,430 1,017,239 Less: Competitive Set without CC Hotel 978, ,925 1,016,863 1,038,335 1,061,341 Implied Impacted Room Nights -70,477-90,078-75,951-61,905-44,102 Total Room Night Impact Over Five Years -343,000 Sources: HVS Market Study; HREC - Hospitality Real Estate Counselors 5 Stephen Rushmore, MAI, John W. O Neill, MAI PhD, and Stephen Rushmore, Jr., Hotel Market Analysis and Valuation - International Issues and Software Applications, 2012, Pg

23 Based on the information in the HVS Study, the implied impacted room nights for the competitive market equates to negative 343,000 over the first five calendar years of the Hotel s operations. This is 29% of the total rooms the HVS Study projected to be occupied by the Hotel. The same analysis was performed for revenue, as seen below. HVS Market Study Impact Room Revenue Analysis Year Competitive Set w/cc Hotel 146,045, ,877, ,442, ,356, ,815,125 Less: Total Revenue Captured by CC Hotel 23,331,222 43,633,056 48,642,155 51,113,724 52,647,136 Remainder of Competitive Set 122,713, ,244, ,800, ,242, ,167,989 Less: Competitive Set without CC Hotel 132,402, ,313, ,309, ,832, ,909,933 Implied Impacted Revenue -9,688,367-13,069,214-10,509,606-8,590,102-5,741,944 Total Impact Revenue Over Five Years -47,599,000 Sources: HVS Market Study; HREC - Hospitality Real Estate Counselors Based on extracted revenue numbers from the HVS Study, the implied impact on room revenue for the competitive set equates to approximately negative $48,000,000. This represents 22% of the total room revenue the HVS Study projected for the Hotel. It should be noted that the HVS Study projected a slight decrease in ADR for calendar years one and two for the competitive set (excluding the Hotel) if the Hotel is built. However, by year three and on a going forward basis, the HVS Study projected an ADR premium for the competitive set. Additionally, we believe this analysis understates the impact on the competitive properties average rates as the group rooms lost by the competitors are at a rate premium to other business segments (leisure and commercial). The second study HREC reviewed was a Salt Lake City Convention Hotel Comparative Performance Economic Review prepared for the Salt Lake Convention & Visitors Bureau by David L. Corsun in conjunction with STR Analytics ( the STR Study ), dated February 18, This study is a macro overview of the impact that a new convention headquarters hotel would have on the existing lodging of a city like Salt Lake City, Utah. 6 The study analyzes various performance metrics in markets where convention center hotels have opened. We are of the opinion that a macro study of other metropolitan areas where convention center hotels have opened does not provide reliable comparative results, due to the unique characteristics of each market, including: Existing lodging supply conditions prior to the convention center opening; Composition and mix of major demand generators in each different market; Diversity of demand (corporate, group, leisure, government, etc.); National, regional and local economic conditions during the period when each new convention center hotel opened; Convention groups and hotel in-house groups desire to visit the specific market; The ability of the convention center to accommodate additional groups based on scheduling factors, including a seasonality analysis; 6 David L. Corsun, Ph.D. in conjunction with STR Analytics, Salt Lake City Convention Hotel Comparative Performance Economic Review Phase I Report, February 18, 2010, Pg 3. 23

24 Differences in sizes of hotel markets and the cities themselves. Instead of performing a micro analysis, the STR Study s analysis does the contrary and performs an empirical analysis; the report states We have spoken with local representatives and public officials to understand key issues related to the proposed development; however, their opinions and insight were not utilized to alter or adjust projections formulated through the statistical analysis of the data. 7 The analysis focuses on similar markets. As seen in their data, a number of similar markets performed worse through the addition of a convention center hotel, while a number of them performed better. This does not necessarily indicate that Salt Lake City will do better or worse with a convention center hotel, but instead indicates the specific impact for those markets and the average impact for the analyzed markets. Projected Performance of Convention Center with Convention Center Hotel HREC performed a multi-tiered analysis to determine potential room nights that could reasonably be induced to the market if the Hotel is built. Two segments of the market would likely experience induced room nights; 1) convention center groups and 2) inhouse hotel groups. For this portion of the analysis we have focused on convention center groups and the additional room nights they could bring to the market. This analysis included the review of comparable cities convention center performances following the addition of a convention center hotel and a detailed analysis of the Lost Business Report. Although both analyses support our concluded induced room nights, the detailed analysis of the Lost Business Report is given more weight as it considers micro-economic factors explicit to Salt Lake City and the Salt Palace, specifically seasonality of occupancy. As indicated by Visit Salt Lake, the details of the Lost Business Report are considered business intelligence (confidential) and therefore we have summarized our analysis and have not provided names of specific groups within this report. HREC requested and received from Visit Salt Lake the details of the lost business from 2010 to August YTD 2013, including the name of each group, requested total room block, arrival date, departure date, show start date and show end date. For our analysis, we focused on lost groups that reported they would not attend Salt Lake City for a convention due to the lack of a convention center hotel. Additionally, Hunden Strategic Partners (co-project consultants) contacted 20 of the lost groups, 13 of which were interviewed to determine each group s likelihood of attending the Salt Palace if the proposed Convention Center Hotel is constructed. As a base for the detailed lost room night analysis, we have utilized total lost room nights due to the lack of a convention center hotel. Each group was then considered and deducted (if applicable) from the base if: 7 David L. Corsun, Ph.D. in conjunction with STR Analytics, Salt Lake City Convention Hotel Comparative Performance Economic Review Phase I Report, February 18, 2010, Pg 6. 24