Pre-Feasibility Study for Using Municipal Property for Business

PROMISE: Municipal PROperty Management In South-Eastern Cities

South East Europe

Work Package 6: Developing Projects on Municipal Real Property Management

Activity 6.3: Develop a pre-feasibility study of a classified property for business use purpose

Deliverable 6.3 Pre-Feasibility Study of Bucharest former City Hall building- business purpose

Version 2.0 ● April 10, 2012

The Pre-feasibility Study of the Bucharest City Hall building for business purpose is a deliverable corresponding to Work package 6 of the PROMISE project and presents the results of investigating the possibilities to ensure an efficient use of the former City Hall building based on an effective management of this property.

Academy of Economic Studies of Bucharest

Piata Romana 6, sector 1

RO-010374 Bucharest, ROMANIA

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Last edited: April 10, 2012

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Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0

Pre-Feasibility Study of Bucharest former City Hall building- business purpose

Academy of Economic Studies of Bucharest, Romania

PROMISE Project

Version: 2.0 Date Created: April 10, 2012

Project Coordinator: Prof. George Petrakos Email: [email protected] Telephone: +302421074468

Project Financial Manager: Dr. Ageliki Anagnostou Email: [email protected] Telephone: +302421074596

Table of Contents 1. Executive Summary ______8 2. Purpose and Structure of the Pre-Feasibility Study ______9 3. Pre-Feasibility Study ______10 4. REFERENCES ______11166

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Document History Revision History Revision Number Revision Date Summary of Changes Author Version 1.0 December 5, 2011 Document created Alina (Iosif) Balalia, Raluca Petrescu, Daniela Constantin, Ion Gh. Rosca, Dorel Ailenei, Zizi Goschin Version 1.1 January 31, 2012 Applied updates submitted Alina (Iosif) Balalia, Raluca by Daniela Constantin Petrescu, Daniela Constantin, Constantin Mitrut, Marius Profiroiu, Liviu Vlad Version 2.0 April 10,2012 Document Finalized Alina (Iosif) Balalia, Raluca Petrescu, Daniela Constantin, Ion Gh. Rosca, Dorel Ailenei, Radu Ioan Reference Documents Please see the following documents for more information: Document Name Version Author IFRS 13 Fair value measurement, 21 st century real 2011 Ernst & Young estate values “Implications for the real estate and construction industries” Romanian Market Real Estate Review, Bucharest 2010 Colliers International Bucharest City Reports 2011 Jones Lang Lasalle Development and conversion on hotel segment 2011 Micut C. (pdf presentation), Sixth edition of the HRB expert conference - Hospitality Forum ( in Romanian: Dezvoltarea si conversia pe segmentul hotelier) European Green City Index – Assessing the 2009 Siemens environmental impact of Europe’s major cities

Distribution List This document has been distributed to:

Name Position Company/Institution SEE JOINT TECHNICAL SECRETARIAT SEE JTS SEE JTS Greek Unit of Audit and Control Single Paying Ministry of Finance and Authority Economy LP. University of Thessaly, DPRD, Greece Project Lead University of Thessaly Partner PP1. Municipality of Athens Development Project partner Municipality of Athens Agency, S.A., Greece PP2. Academy of Economic Studies of Project partner Academy of Economic Studies of Bucharest, Romania Bucharest PP3. Municipality of Bucharest, Romania Project partner Municipality of Bucharest PP4. Province of Rimini, Italy Project partner Province of Rimini PP5. University of National and World Economy Project partner University of National and World Sofia, Bulgaria Economy Sofia PP6. Institute of Technologies and Development Project partner Institute of Technologies and Foundation, Bulgaria Development Foundation PP7. Sofia Municipality, Bulgaria Project partner Sofia Municipality PP8. Trikala Municipal Enterprise for Social Project partner Trikala Municipal Enterprise for Development , DEKA, Greece Social Development IPA PP1. City of Zagreb, Croatia Project partner City of Zagreb 10% ERDF PP1.University of Tirana, Albania Project partner University of Tirana 10% ERDF PP2. Municipality of Tirana, Albania Project partner Municipality of Tirana 10% ERDF PP3. Municipality of Cajetina, Serbia Project partner Municipality of Cajetina

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Executive Summary The Pre-Feasibility Study of Bucharest former City Hall building describes the analysis undertaken in order to identify the solutions for the efficient use of this building for business purposes, based on its effective management on behalf of municipality. It is constructed within the Activity 6 – Pilot Actions, in implementing the project: “PROMISE: Municipal PROperty Management In South-Eastern Cities”. The PROMISE project has been approved by the Community Initiative: South East Europe: Transnational Cooperation Programme, and it will be implemented during the period: March 2009 - May 2012. The current document has been commissioned by the Academy of Economic Studies of Bucharest and it serves as deliverable of the Pilot Action 6.3 - Develop a pre-feasibility study of a classified property for business use purpose. This document has been designed for delivering such a study, which focuses on a real property belonging to Bucharest Municipality with the business purpose in view. The study has analyzed three different scenarios for the efficient use of the former Bucharest City Hall building for business purpose. These scenarios have taken into consideration the authorities intentions on the use of the building and the purposes of the historical buildings within the Old City Centre area. In addition, a high importance was allocated to Zonal Urban Plan that specifies certain rules that have to be obeyed by the management of an historical building. For each scenario both a market analysis and a financial analysis are conducted. In order to obtain a complex and well documented pre –feasibility study regarding Bucharest City Hall building (BCHb) three scenarios have been constructed, as follows: the first is a mix between offices at the upper levels and retail space at the ground floor of the BCHb; the second is composed of offices at the upper levels and museum at the ground floor; and the third scenario is projected for hotel destination. Bucharest, in general, and the Old City Center, in particular, has enough potential for new office and retail lettable spaces and the area is considered an attractive variant for tenants. Also, hotel could be an attractive variant for investors as far as they are aware of the necessary level of investment and the large payback period. Finally, the financial analysis indicated that the best scenario that could be adopted for the BCHb for business purpose is the mix of offices and retail (first scenario).

Purpose and Structure of the Pre-Feasibility Study This study aims to expose and analyze three main hypotheses regarding the efficient use of the former City Hall building. In this final version of the study a classical model of development appraisal is developed in order to expose the scenario that leads to the best use of the former Bucharest City Hall building. With this purpose in view the study has been structured into three main parts, namely the initiation phase, the pre-feasibility and the final report. Part 1 of this pre-feasibility study starts with the description of some general aspects regarding Bucharest and a consistent exposure on the Bucharest City Hall building site, ending with a SWOT analysis. Moreover, the three scenarios are expressed and the regulatory framework of the BCHb is presented. Part 2 is the most representative for the pre-feasibility study as it contains two major and representative directs of analysis, namely the market analysis and the financial analysis. Well documented market analysis was conducted for each scenario. Starting with the national perspective on each market and continuing with the analysis up to the particular area of the BCHb, the major characteristics of office, retail and hotel were revealed. The financial analysis implied calculations of the most representative indicators used in this type of study, such as net present value, internal rate of return, payback period and others. The final part of the study is more like a synthesis of all the study, including the comparative summary between the three scenarios and a sensitivity analysis. Concluding, the pre-feasibility study results indicated, by financial indicators comparison, that the BCHb could have its best use for business purpose as a mix of offices and retail.

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Pre-Feasibility Study According to the WP 6 of the project, ERDF PP1 (AEDA), ERDF PP3 (AESB), ERDF PP5 (UNWE) with ERDF PP6 ( ITDF), ERDF PP8 (DEKA) and 10% ERDF PP1 (UnTi) have to carry out the Pilot Actions proposed in WP6, which will deliver pre-feasibility studies for the use of a real property belonging to their respective municipalities. At the project partners meeting in Bucharest, each partner above mentioned proposed a piece of real property that will be the object of study. The pre-feasibility study will investigate the proposed municipal real property either for social, business, or administrative use purposes. The aim of the study is to demonstrate that it is possible to ensure the opportunity cost minimization/earnings maximization and thus, the most efficient use and management of a property. This pre-feasibility study is referring to the Bucharest former City Hall building, which will be entitled within this material as BCHb, and contains three main parts, namely: Initiation phase, Pre – feasibility study and Report for the municipality revealing the overall profits/ benefits of the project. Moreover, within these main parts, subthemes have been developed in accordance with the general structure usually used in practice for this kind of pre – feasibility studies.

A. INITIATION PHASE – DETERMINATION OF THE PRELIMINARY DEVELOPMENT CONCEPT

1. General aspects A series of aspects related to Urban Planning Framework in Romania are associated with two major concepts – among others -, respectively the General Urban Plan and the Zonal Urban Plan. The General Urban Plan is a project that is part of the territorial planning and the development of settlements. More specifically, The General Urban Plan is the legal framework for implementation the development programs and activities in accordance with Law 350/2001, amended by Law 289/2006. The General Urban Plan includes the analysis, regulations and the Local Regulation of Town Planning Local Rules for the entire administrative territory of the basic unit, both inside and outside the city.

Short-term regulations included by the General Urban Plan relate to the determination and delimitation of the territory inside the city in relation to the administrative territory of the locality, to the establishment of the means of land inside the city usage, to functional zoning correlated with the network traffic, to the delimitation of areas affected by public servants, to the modernization and the development of technical infrastructure, to the establishment of the protected historical areas and protection of historical monuments. The medium and long- term regulations included by the General Urban Plan refer to future developments within the locality, territorial development directions and the routes of movement and equipment corridors provided in the planning plans of the national, regional and county territory. The Zonal Urban Plan is a project with a specific detailed regulatory character of the urban development of an area in the locality (covering all functions: housing, services, production, circulation, green spaces, public institutions, etc.) and it ensures the correlation of the complex urban development of the area with the General Urban Plan specifications in the locality. By the Zonal Urban Plan, the objectives, actions, priorities, planning regulations (permissions and restrictions) necessary to be applied in land use and construction conformation in the studied area, are established. In what concerns the development strategies, in Bucharest, according to the Sustainable Development Plan of the Bucharest Municipality 2009-2012, mainly three types of areas that require implementation of urban regeneration strategies and operations, can be distinguished: • Historical areas (protected built areas) - fallen / damaged (the area where the BCHb is placed) • Destructured urban areas • Areas of collective housing. The most important area of protected buildings is represented by the historical centre. The Historical Centre area occupies approximately 50 ha, in the geographical centre of the city and it is located between: • bd. Elisabeta – North- Hristo Botev street – East

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• bd. Corneliu Coposu and Splaiul Independenei - South • Calea Victoriei - West. The specific character of the area results from its value as an architectural sanctuary that should be preserved and promoted in the European Union. The sectorial development policies refer to utilities and public services policy, investment policy, traffic policy, rent policy, urban environment policy, and institutional development policy. In what concerns the zonal policies, in terms of formulating development policies on areas of intervention, the Historical Centre is structured as follows: • Zone 1 – area with a predominant commercial character situated along Lipscani street, between Smardan street and I. C. Bratianu boulevard • Zone 2 – offices area along Elisabeta and Carol boulevards • Zone 3 – offices area - the financial centre • Zones 4 and 5 – offices development along Splaiul Independentei • Zone 6 - offices in the area of Hristo Botev street and Calea Mosilor street • Zones 7, 8 and 9 - mainly with recreational, and cultural character • Zone 10 – residential character • Zone 0 - commercial aisle along important highly circulated streets with commercial character. In each area separately, development policies should lead to preservation of the essential character, to the renovation of the existing building fund and to stimulate investment and location of those functions / activities that provide specificity and value to the place. The rehabilitation project of the historical area aims to restore the historical climate (but with modern amenities), stimulating economic and social activities and preserving an important part of Bucharest's architectural and archaeological heritage. The pre-feasibility study is focused on the Bucharest City Hall building (BCHb), an historical monument placed in the main area of Romania’s capital. Within the list of historical monuments in Bucharest, the BCHb occupies the 969th position, being registered with the

following code: BII mA18688. The BCHb is under the private property of Bucharest Municipality and the administration of the Bucharest Municipality.

2. Analysis of Bucharest City Hall building site The urban and spatial analysis of the local area surrounding the BCHb (figure 1) was undertaken by six different directions of analysis: • Socio-economic profile • Urban grain/block structure and use mix • Open space system • Access • Massing / Density • Building topology, landmarks, significant building and view corridors. Throughout this section, we summarize the findings of these directions of analysis focusing on how they affect the urban characteristics (i.e. building structure, access public realm), which will influence the detailed development strategy.

Figure 1. The Bucharest City Hall building

Socio-economic profile The population surrounding BCHb is predominantly represented by retirees with small families (as owners of the dwellings located in the area) and young professionals renting properties in

Page 13 of 118 Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0 this central location. The proximity to the Cismigiu park and the subway stations (University and Izvor) makes the entire area a desirable location for rented accommodation. The degree of socio-economic complexity in the area, in particular the amount of working age population should be taken into account in terms of proposed economic activities. A wider range of employment opportunities and improved services targeted towards the local population should be a priority of any development scheme. Urban grain/block structure and use mix The urban fabric of the area is typified by adaptable use mixes around the BCHb site, supporting a variety of uses, with different “flows” of activities at different times. The post-communist developments are based on refurbishments of old iconic buildings (usually hotels) and newly- built large and tall block structures (usually office buildings). Despite these developments, the area as a whole has maintained its medium rise and original structures by its designation as conservation area despite enormous economic pressure. The area involves a large and varied mix of uses covering a wide range of activities which define certain areas of similar characteristics interposed by zones of transition. The variety and adaptability of uses in the analysed area are evident on the main roads that are bordering its zones: Splaiul Unirii Blvd., Victoriei Blvd. And Regina Elisabeta Blvd., where the built environment forming the outer edges has mainly a mixed use, of commercial and retail at the ground floor and residential at the upper levels. The built environment of these zones is shaping both internal and external spaces, and has mostly adapted to suit the most profitable economic function. Then the building use determines the pedestrian flows and access as well as the character of the public realm. As illustrated in figure 2, the majority of uses in the BCHb area are mixed use (commercial and retail at ground level and residential covering the upper stories) - approximately 70%, followed by offices and retail/leisure premises and public buildings.

Figure 2. Map revealing the uses of building within the BCHb area Source: own elaboration, based on the Bucharest city map

The proximity to the Bucharest’s Historical Center had consequences on the development of hotels, restaurants and bars on the large boulevards margining or crossing the BCHb’s area. Open space system The build environment shapes the voids that create open spaces. These spaces are characterised by their transitory and inflexible character, by the changing atmosphere varying from day to night, weekday to weekend and summer to winter. Within the BCHb site, there is not a lack of green space, but a need to maintain it and to make it more enjoyable. The challenge of the project is to create a link between these green spaces, residential, commercial and other land spaces in the area that are disrupted so that these spaces to be enjoyable for residents and visitors. The BCHb site is located in between two major

Page 15 of 118 Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0 green spaces (Cismigiu garden and Izvor park) and its usage should take the most of this location. Opportunities exist in improving the connectivity between different uses of area in order to create a more eligible environment. In this respect, a possibility is created thought the refurbishment of the beautiful architectural structures located on the secondary streets situated on the premises of the BCHb site (figure 3). The majority of the area’s residential houses and blocks with pre-communist architecture are left in derelict state by their unsolved legal situation or by the lack of funding of their residents.

Figure 3. Selection of buildings situated on the premises of the BCHb site

Within an area of 1 km around the BCHb a diversity of institutions and businesses are to be found. Some of them are listed as follows: • Military Circle (Cercul Militar) • Romanian National Archives (Arhivele Nationale ale Romaniei) • National Institute of Justice (Institutul National al Magistraturii) • National college “Gheorghe Lazar” (Colegiul National Gheorghe Lazar) • University of Bucharest (Universitatea din Bucuresti) • Ganeral Inspectorate of Romanian Police (Inspectoratul General al Politiei Romaniei) • Postal Office • Exim Bank • CEC Palace (Palatul CEC) • National Museum of History of Romania (Muzeul National de Istorie al Romaniei) • Romanian Lotery Palace (Palatul Loteriei Romane) • Hotel Novotel

• Hotel Cismigiu • Hotel Capsa • Odeon Theater (Teatru Odeon) • Bulandra Theater (Teatru Bulandra) • Comedy Theater (Teatru de Comedie) • State Office for Inventions and Marks (Oficiul de Stat pentru Inventii si Marcii (OSIM)) • Victoria Shop Center (Magazin Victoria) • Victor Babes Institute (Institutul Victor Babes) • National Opera (Opera Nationala) Access The area surrounding the BCHb site is generally well served by public transport. The BCHb is placed in an historical area that is accessible by numerous means of transport, such as metro (Universitate, Unirii) or buses (61, 66, 69, 70, 85, 90, 91, 92,163,336,601). The connectivity needs within the area consist of clear circulation paths nourished and shaped by quality commercial and retail ground floor developments. The quality of sidewalks is poor especially at the big boulevards level, due to the redevelopment schemes that are biting from the sidewalks and the lack of parking spaces in the area shrinking the walking paths even deeper. Opportunities exist in improving the big boulevard’s sidewalks by replacing the pavement, designing better walking and cycling spaces, as well as using art to endow them with life. The area presents several points for improvement of pedestrian movement. Conflicts of use between pedestrians, cyclists and drivers emerge in certain areas, such as Regina Maria Blvd., which links the Universitatii area with the Cismigiu garden, and the Victoria Blvd., which is crossing border the analysed area on the East side (figure 4).

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Figure 4. Map representing the main streets network within the BCHb site Source: own elaboration, based on the Bucharest city map

Design of pedestrian movement and improvement of links within the Old City Center’s area could create a better connectivity between the BCHb site and the Old City Center’s commercial district. Massing / density The area surrounding the BCHb has a range of building heights, with a close connection with their location and use. The developments bordering the big boulevards have 8 up to 10 levels and are mixed-use, while the dwellings scattered in between these boulevards have lower heights, around 3 - 4 levels. Building density from a horizontal perspective is made up of historical buildings that have little interstitial space and are mainly used as residential or small offices, whereas vertical density is represented through towers and high blocks used as mixed-use and offices with a few residential blocks scattered between them. Building topology, landmarks, significant building and view corridors The built environment of the area surrounding the BCHb has not been undergoing major urban changes for years. Except are the new refurbishments of the old hotels on the Victoriei Blvd.

(Capitol, Grand Hotel du Boulevard, Ramada, Novotel and Eden Spa Grand Hotel) and the development of office buildings (Bucharest Financial Plaza) that were reconfigured after the collapse of the communism in the 90’s. The building uses in the area can be mainly divided in commercial, leisure and hotels at the ground floor and residential at the upper levels. The residential buildings are not located on the borders of the pedestrian paths, where the economic pressure made the commercial and leisure developments more feasible than residential ones. Due to lack of planning legislation and implementation, the last 20 years saw-from the urban planning point of view-the economic feasibility taking over the social and general development of the area. In the latter years, the legislation managed to enter into force and all planning permissions are required to follow a general development plan for each area and for the central area in particular. The area surrounding the BCHb has several landmarks: University square on the West, Cismigiu Garden and the Royal Palace on the North, Splaiul Unirii Blvd. and the Parliament building on the South and the Old City Center, CEC building and the History Museum on the South-Eastern side. From the landmarks point of view, the analysed site is in the middle of the general points of interest – at approx. 500 m from the Old City Center and at less than 1 km from the Izvor and University metro stations on the west, Royal palace and the Athenaeum on the North and the Parliament building on the South. The Royal palace on the North (near Cismigiu garden) and the Parliament building on the South are significant landmarks for visitors, being very important pieces of national cultural heritage as well as remembrances of the country’s past regimes. The Old City Center represents the focus point of the Bucharest’s development strategy, and restorations are conducted with the purpose of keeping the historical heritage and restoring the beauty of its surroundings. This old area of the city was mainly reconstructed approximately one year ago, being intensively circulated by pedestrians. Concluding this overview analysis, a SWOT analysis is presented in table 1.

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Table 1. SWOT analysis regarding BCHb Strengths (to be defended and built thought Weaknesses (to be addressed thought the the redevelopment): redevelopment): • Wonderful location on the Regina • Derelict buildings in the analysed Elisabeta Boulevard overlooking the area disrupts city fabric and beautiful Cismigiu garden; attractiveness; • Location as a connnectivity point • Need of medium and long-term between the most important development strategy for the central landmarks within the center of area as a whole and for the individual Bucharest: Parliament building, Royal parts-including the BCHb’s area. Palace, Old City Center; • Good level of connectivity through public transport (bus stations at less than 100 m from the site and two metro stations at 300 and 800 m from the BCHb’s site) – connecting with the two major metro lines. Opportunities (to be maximized thought the Threats (to be mitigated through the redevelopment): redevelopment): • New multi-use building can unlock • The site will remain unused as the potential to incorporate varied development is reliant on the actual activities at different times; economic climate; • Connect the variety of community • Social and political pressure will and social identities surrounding the dictate what is developed on and site. around the site. Source: own elaboration

3. Regulatory framework applying to BCHb The BCHb is under the private property and administration of the Bucharest Municipality. A series of regulatory documents related to its status refer to: • Law no. 215/2001 on local public administration in Romania. (Legea nr. 215/2001 a administraţiei publice locale din România) • Law 286/2006 amending the Law no. 215/2001 on local public administration in Romania. (Legea 286/2006 ce modifică Legea nr. 215/2001 a administraţiei publice locale din România).

• Law no. 350/2001 on spatial planning and urbanism as amended by Law no. 289/2006, as amended. (Legea nr. 350/2001 privind amenajarea teritoriului și urbanismul modificată și completată cu Legea nr. 289/2006, cu modificările ulterioare). • Law no. 422/2001 on the protection of historical monuments, republished in Monitorul Oficial al României no. 938/20.11.2006 (Legea nr. 422/2001 privind protejarea monumentelor istorice, republicată în Monitorul Oficial al României nr. 938/20.11.2006). • Law 454/2006 for approving the Government Ordinance no. 21/2006 on the concession regime of the historical monuments. (Legea 454 / 2006 pentru aprobarea Ordonanței Guvernului nr. 21/2006, privind regimul concesionării monumentelor istorice). • Emergency Ordinance no. 34/19.04.2006 on the assignment of public acquisition contracts, concession contracts of public works, and concession contracts of services. (Ordonanţa de Urgenţă nr. 34/19.04.2006 privind atribuirea contractelor de achiziţie publică, a contractelor de concesiune de lucrări publice şi a contractelor de concesiune de servicii) • Law 50/1991 on the authorization of construction works, republished in Monitorul Oficial al României no. 933/13.04.2004. (Legea 50/1991 privind autorizarea lucrărilor de construcții, republicată în Monitorul Oficial al României nr. 933/13.04.2004). • Law no. 261/07.07.2009 on approving the Government Emergency Ordinance no. 214/2008 for amending and supplementing Law no. 50/1991 on the authorization of construction works. (Legea nr. 261/07.07.2009 privind aprobarea Ordonanței de Urgență a Guvernului nr. 214/2008 pentru modificarea și completarea Legii nr. 50/1991 privind autorizarea executării lucrărilor de construcții).

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B. PRE-FEASIBILITY PHASE

1. The current state of the Bucharest City Hall building Build between 1906 and 1911, the BCHb is structured in basement, ground floor and 4 floors. It has the following dimensions of the construction plans: • length on the Elizabeth Blvd 89.18 m - 65.00; • length of 65,00 m on the Elie Radu street and Anghel Saligny street; • height of 20.80 m and 25.80 m above the local festivities hall; • total built surface = 21.992 m2 ; • built from the ground surface Ac = 3.814 m2. • height: basement 3.5 m, ground floor 4.8 m, first floor: 5.4 m, second floor: 4.65 m, third floor: 4.10 m, fourth floor 3.55 m • total volume of the building: 97.506 m3 The U shape of the BCHb is illustrated in figure 5.

11.71 0.71 1.40 0.46 1.37 10.65 8.49 1.69 0.67 0.74

0.57 0.51 0.22 0.49 4.55 0.97 0.91 4.03 0.62 0.62 4.51 4.56

6.38 2.34 3.44 2.67

3.16 5.88 0.60 8.00 2.23 6.46 1.18 0.53 0.98 0.57 0.98 0.18 1.94 1.22 0.98 0.68 2.30 1.86 2.29 2.21 1.80 2.41 0.72 0.76 0.82 0.56 0.13 0.56 0.69 0.67 0.69 0.69 1.21 0.52 0.52 2.96 6.86 0.65 0.19

7.24 1.90 0.89 5.27 0.51 3.12 0.42 3.62 2.77 0.46 2.27 4.86 2.22

2.00 1.04 0.98 0.84 1.74 0.72 2.86 0.33 2.98 2.98

2.52 3.62 1.91 3.63 3.42 1.52 0.31 0.31 6.76 0.29 5.71 5.18 5.20 7.28 0.38 5.10 6.20 2.58 1.83 1.83 0.39 6.21 1.78 0.36 4.96 2.05 1.77 4.36 0.10 0.94 1.72

0.33 0.12 0.14 0.32 1.42 1.46 3.30 1.58 2.38 2.84 2.85 5.30 1.46 1.43 1.40 1.40 1.37 1.53 1.14 0.63 0.26 0.18 2.11 1.37 0.35 1.86 0.98 2.22 0.34 0.34 0.41 0.58 0.62 1.94 0.33 0.49 1.13 1.67 0.65 0.62 0.75 1.88 1.58 2.38 2.84 5.05 0.69 0.84 0.51 1.58 1.07 0.99 0.83

5.83 0.14 0.65 5.44 0.65 1.40 2.00

1.92 3.36 1.85 1.56 2.31 1.44 1.48 2.29 1.50 1.39 1.39 1.33 3.49 2.99

4.64 0.63 0.39

0.72 4.72 4.56 0.87 0.34 2.08 1.75 1.11 0.31 0.43 1.57 0.28 1.63 6.08 5.74 0.47 1.82 0.18 2.14 0.55 2.56 0.68 1.790.51 1.52 2.54 4.99

3.19 4.75 2.98 0.37 0.33

0.33 0.16 2.90 0.37 0.610.94 1.33 1.33 0.44 1.35 1.90 1.92 2.05 1.78 1.52 2.03 0.66 2.81 2.14 1.11 1.76 2.99 5.33 0.42 0.87 2.04 0.52 0.46

0.77 5.45 1.88 0.58 1.17 0.69 1.09 2.12 3.15 4.90 0.68 4.88 0.56 0.51 2.10 1.07 1.86 3.62 1.30 1.00 18.61 18.60

3.35 0.81 1.19 2.94 1.98 1.11 1.81 3.30 1.71 0.87 0.93 1.41 1.42 0.34 0.20 0.27 0.30 0.30 3.14 0.87 0.24 0.94 1.51 1.83 1.56 0.72 5.31 0.29 16.80 2.08 0.21 1.30 1.93 16.56 0.21 2.05 1.45 1.45 5.43 2.11 1.50 6.42 1.65 0.90 0.99 0.92 0.90 1.41 1.42 0.70 4.09 1.70 2.13 1.74 1.52 1.52 3.51 0.81 1.69 2.29 0.86 2.19 0.35 1.77 1.54 2.40 1.58 0.57 0.551.66 1.11 0.77 0.82 2.02 1.79 1.62 0.64 0.80 1.09 0.67

0.47 0.17 0.36 0.50 0.50 0.42 0.16 4.60 4.52 0.43 2.10 0.56 1.44 0.63 0.53 1.36 0.16 0.69 2.09 2.32 0.86 2.18 1.78 1.44 1.65 4.87 5.47 0.70

5.36 2.27 2.02 1.83 1.62 1.71 0.42 4.87 1.52 1.63 1.87 2.14 1.76 1.82 4.07 4.10 4.10 1.46 1.46 7.79 1.40 1.55 1.26 0.16 1.06 5.79 1.39 0.20 5.44

0.21 28.13 0.21 1.55 1.39 1.50 0.90 2.92 0.57

0.86 5.30 17.71 5.12 1.58 1.88 1.53

1.77 1.70 1.83 1.71 1.71 2.31 1.78 2.19 1.65 2.53 1.83 2.00 1.68 1.73 1.71 3.10 1.00 2.79 0.49 2.22 1.19 2.24 0.55 0.61 0.48 2.15 2.02 0.92 0.60 1.87 0.47 0.44 0.66 0.47

0.32 0.52 0.34 0.75 4.78 4.81 0.29 0.46 1.64 1.65 1.40 1.47 1.50 0.81 0.93 0.47 8.00 1.97 0.230.40 0.57 0.34 0.35 64.16 2.83 3.80 3.71 3.74 3.84 7.18 3.99 3.72 0.89 2.01 29.89 2.15 8.02 3.22 29.67 2.90 0.93 0.76 3.11 3.05 1.52 2.52 1.46 0.66 63.65 0.59 1.64 0.30 1.72 1.76

2.96 0.80 1.09 0.31 0.41 5.37 5.41 5.35 0.49 5.35 0.50 4.81 0.44 4.85 1.34 3.38 0.29 4.50 4.18 6.57 4.50 3.49 3.49 4.57 38.05 0.51

6.18 0.52 0.52 0.82 0.14 0.560.32 0.420.53 0.190.41 0.31 2.08 0.69 0.89 0.79 0.84 1.32 1.68 3.44 1.64 3.33 1.59 0.91 3.68 0.62 4.57 0.72 1.90 0.67 4.77 0.66 1.20 3.82 1.16 2.14 0.39 0.32 0.53

1.93 4.89 2.22 0.83 2.26 1.14 3.38 3.36 10.18 0.95 0.26 0.57 0.58 0.49 0.58 0.53 3.12 0.52 0.31 0.65 2.71 1.59 4.48 0.59 1.79 1.56 5.41 1.30 4.66 0.37 16.55 4.71 0.95

0.89 0.89 5.42 1.15 1.60 1.18 0.62 0.13 0.32 1.56 5.43 2.09 1.38 1.07 1.07 2.93 2.92 2.92 1.72

1.73 4.76 1.12 1.47 1.37 1.48 0.47 0.50 0.50 0.38 0.46 0.48 0.15 0.11 0.34 0.89 0.93 3.96 0.541.82 1.99 0.83 1.20 0.77 1.20 0.79 2.06 1.64 0.68 1.64 1.49 1.57 0.75 4.10 2.17 1.75 1.78 16.93 0.97 0.97 0.85 0.60 2.81 0.55 2.98 0.61 1.62 1.45 1.45 1.67 1.45 0.64 1.34 1.07 2.38 3.00 0.56

0.55 0.56 0.41

2.50 0.62 0.40 0.48 4.62 1.54 2.66 2.81 0.39

4.43 0.29 0.54 0.30 1.49 0.13 2.00 0.59 2.75 1.31 2.00 0.31 3.96 1.41 5.36 4.84 1.84 0.73 4.67 5.42 2.62 4.82 0.60 2.52 0.94 3.55 1.68 28.43 2.73 0.72 1.57

16.48 1.59 1.71 1.79 1.58 2.12 1.60 2.87

0.60 0.57 1.85 0.55 3.57 4.21 0.24 0.19 3.05 0.99 1.55 1.07 2.14 3.02 0.17

0.18 3.13 6.53 1.07 1.07 1.07 3.42 3.30 0.35 0.88 1.49 1.50 1.50 2.64 7.19 1.41 1.38

4.87 0.40 6.72 1.35 1.33 3.33 4.38 0.76 1.25 0.77 0.25 1.52 1.05 2.12 13.19 4.79 1.96 0.26 16.76 0.19 16.62 0.99

1.98 5.40 1.57 1.53 1.56 1.57 1.79 1.33 5.39 3.72 3.48 1.52 1.51 1.51 3.08 3.09

13.13 9.67

0.94 1.17 1.72 1.52 1.53 1.31 1.58 1.37 1.65 1.35 0.57 0.35 0.21 1.74 2.05

1.11 1.58 1.41 1.72 1.45 1.63 1.39 1.58 1.25 3.31 3.12 1.42 0.71 1.80 2.74 1.05 0.78 1.29 1.30 1.40 3.12 2.97 0.65 1.13 0.61 0.92 1.13 1.39 0.37 1.39 0.54 2.93

0.53 0.62 0.18 0.60 1.97 1.49 1.90 0.67 0.61 0.58 2.33 2.06 0.51 0.32 0.48 6.52 5.00 3.09 3.10 2.37 6.06 2.28 0.32 0.36 0.80

2.10 1.47

5.95 0.87 0.58 5.80 0.49 2.95 4.99 0.84 1.97 0.12 0.75 5.41 1.23 1.42 2.05 1.72 2.09 1.05 1.92 1.86 0.78 5.38 0.76 1.61 2.13 2.06 1.01 3.77 0.88 0.50 0.31 0.62 3.40 0.45 0.39 0.37 1.44 1.41 1.41 0.88 0.11 2.95 2.95 2.50 1.03 2.18 1.76 4.92 1.46 4.89 1.74 1.36 4.65 4.62 4.65 4.68 0.99 0.12

0.12 0.13 2.60 4.64 4.70 0.33 0.47 0.61 0.45 0.20 0.470.22 0.280.33 0.510.47 0.170.60 0.51 0.49 2.68

2.61 0.80 1.35 0.75 1.00 0.93 3.65 0.75 1.55 1.23 1.34 1.97 1.85 1.09 1.53 1.26 0.90 0.95 1.53 4.49 1.39 0.90 1.49 1.30 1.26 1.30 3.39 0.70 1.39 3.71 1.39 1.16 0.79 3.19 0.99 1.01 1.50 1.50 2.50 3.32 1.65 2.75 1.61 1.60 1.59 2.00 2.62

2.48 1.96 2.14 1.93 0.44 0.64 1.07 0.61 0.55 0.56 0.53 0.54 0.61 0.46 2.16 0.64 0.65 2.68 21.50 16.72 13.97 13.14 7.11 0.71

1.84 0.74 6.99 1.83 0.75 4.27 1.35 1.38 2.98 2.68 1.87 1.30 10.59 1.39 2.43 3.19 2.010.53 1.80 3.89 3.71 3.89 1.97 0.71 0.471.85 1.97 1.48 1.23 1.53 1.95 0.90 1.56 1.53 0.30 5.17 1.39 3.67 0.81 1.35 0.75 1.06 0.88 5.17 2.57 2.90 0.59 2.90 0.43 0.09 2.31

1.33 0.18 0.53 0.480.43 1.48 0.23 2.40 3.24

3.22 0.52 3.24 1.35 1.70 3.30 1.58 4.37 4.08 0.79 2.91 1.49 1.96 1.45 0.85 1.46 3.42 0.51 0.96 3.75 0.96 1.47 1.47 1.44 1.28 1.80 1.40 2.27 1.55 4.50 1.50 4.58 1.41 3.35 1.39 1.00 2.24 0.49 1.78 1.70 0.73 1.22 0.42 0.26 0.40 0.59 0.61

0.61 0.65 0.46 0.42 0.46 0.49 0.43 7.78 2.05 2.25 4.36 0.65 5.11 1.24 5.23 4.41 6.03 2.77 4.73 2.48 0.44 0.76 4.30 1.34 0.71 0.88 1.28 0.85 1.40 5.53 2.27 1.50 2.46 1.49 1.41 1.47 0.65 1.23 1.39 2.49 0.48

2.00 6.28

0.35 0.55 0.510.44 0.51 0.64 0.56 0.69 2.49 1.47 1.27 1.43 1.58 1.40 2.50 1.47 2.07 1.84 0.79 2.58 1.49 0.66 0.73 1.45 0.84 1.41 1.46 1.46 3.42 0.67 3.98 4.05 11.29 11.33

3.09 0.61 0.47 0.53 0.140.19 0.56 0.47 14.46 5.38 5.33 5.33 5.39 5.39 5.32 1.35 5.37 5.40 1.33 1.38 1.48 7.12 6.87 6.23 8.69 3.03 3.19 6.34 0.50 0.350.510.35 0.40 0.640.27 7.87 2.01 2.10 1.28 2.01 2.02 1.30 2.15 2.12 1.95 0.69 9.32 9.26 1.80

2.14 1.32 2.49 1.13 1.24 2.39 1.07 1.30 2.53 1.37 1.85

3.21 3.55 3.96 0.400.18 0.49 0.82 2.15 3.34 0.72 1.95 1.08 0.72 3.31 0.97 1.98 1.75 1.47 1.70 1.53 1.71 1.62 1.57 1.61 1.75 2.15 1.88 1.90 1.42 1.51 0.73 0.70

1.79 1.86 4.10 1.75 1.93 1.99 1.79 1.49 1.75 1.48 1.78 1.63 1.85 1.56 1.83 2.08 0.56 1.31 3.91 4.04 2.11 1.79 4.07 1.76 1.90 0.72 1.33 2.18 1.59 1.64 0.70 1.96 1.38 0.72 0.70

2.26 1.82 3.41 2.99 1.83 2.90 1.83 3.10 3.65 1.71 2.38

11.46 19.19 27.89 18.88 11.57

88.98

Figure 5. The BCHb plan Source: own elaboration, based on the Bucharest City Hall building plan provided by the Municipality of Bucharest, as partner within the PROMISE project

The building is currently under consolidation and representative refurbishment works are in progress. The cost of consolidation and refurbishment works for the entire building were budgeted at 15.501.045 Euro excluding V.A.T. at an average 2012 exchange rate1. This investment project implies new aspects of the building, both interior and exterior. The interior space will benefit of new type of windows, new floors and new aspects of the walls.

2. The analysed scenarios for the Bucharest City Hall building The scenarios taken into account for this pre- feasibility study are launched in accordance to two main elements: - the authorities intentions on the use of the building; - the purposes of the historical buildings within the Old City Centre area. It is highlighted that the Municipality of Bucharest intends to create a historical museum of the municipality inside the BCHb. So, the second scenario takes this aspect into consideration. The three scenarios are as follows: - mix of business offices (upper floors) and retail area (ground floor); - mix of business offices (upper floors) and museum (ground floor); - entirely hotel.

3. The Office Market analysis Bucharest city center delimited by Victoriei, Romana and Unirii Sq. mainly comprises a mix of old communist and various architectural style buildings. Other central residential neighborhoods consists of blocks of flats with a height regime of 4 up to 8 floors, their vast majority were built before the 90’s and do not benefit of extensive green areas. Bucharest has an average of only 2,5 sqm green area per inhabitant in comparison with the European regulation that stands at 12 sqm., positioning the Bucharest city on the 28’th place out of 30 most green cities in Europe2.

1 According to the contract signed between the Municipality of Bucharest and the constructor. 2 Siemens, 2009. European Green City Index – Assessing the environmental impact of Europe’s major cities, available at: http://www.nwe.siemens.com/denmark/internet/dk/presse/Documents/Green_City_Index_report.pdf [Accessed at 12.02.2012].

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General Overview In 2005-2006 the office sector started to develop at a higher pace as a response to the growing demand. The construction of Opera Center and Europa House was completed in the early 2000’s, when on the market there were erected only two other modern office buildings: Neocity Tower and International Business Center i.e. located in close proximity of BCHb, in Universitate area. Considering that till 2000 only four modern office buildings were erected in Bucharest, the new developments were in high demand. Office spaces are prevalent occupied by banks, IT&C companies and services suppliers, including law firms, accounting, advertising firms, pharmaceutical and medical field. Most developers choose to develop office projects in former industrial platforms located in the periphery. Due to the high demand, the booming economic conditions, relaxed financing criteria’s and availability of funds, rents rose sharply starting with 2006, with a peak in mid 2008. Once the economic crisis started to affect the Romanian market, the demand of new office units came to stagnation. Asking prices/ rents started to decrease at a higher pace in 2009 and slightly further down during the first semester of 2010, the office market activity being characterized low, mainly due to high asking prices/ rents to meet developer’s expectations to counterbalance construction costs, as well as a low demand caused by the uncertainty of the general economic conditions. Moreover, it has been noticed a reluctance from the banks to release new loans in the above described conditions. Due to the low supply levels during 2009-2010, the office market is more stable at the moment. The demand for quality space has increased slowly and the vacancy rate is lower than in 2010. However, overall the market is not a balanced one and the supply is significant higher than the demand. The few new buildings delivered on the market during 2011 have a satisfactory occupancy rate both due to the top facilities offered, but also due to the financial incentives available for committed tenants.

The Colliers consultants sustain that the level of real estate investments in 2010 registered a significant growth in the volume of transactions, from 100 million in 2009 to 500 million euros.3 DTZ consultancy company carried out a study that revealed an increase of 77% of the total volume of real estate investments in Romania in the first quarter of 2011 compared with the last quarter of 2010.4 The same company estimated that about 23.5 million euros were traded in Romania in the second quarter of 2011, focusing on residential and office sectors, representing a decrease of 87 % compared to the first quarter. In the first half of 2011, the volume of total investments reached the value of 213.94 million euros, representing an increase of 14 % compared with same period in 2010.5 As regards the trend of real estate market in Romania in 2012 is expected to register the highest yields in Central and Eastern Europe (CEE) of over 10%, compared with the estimated level of return on equity in the region (4%).6 According to the same study, the increasing growth in the CEE is supported by the low level of vacancy, high demand and limited number of projects in developing countries. Because of scarce supply of medium to large size plots of land situated in the central areas of the city, the number of office and retail developments under construction is scanty, the majority of large scale projects being built in newly established office submarkets. Therefore though the development of office buildings was not concentrated in a single area in Bucharest, the Central Business District of Victoriei Sq.-Charles de Gaulle Sq. area is recognized as Central Business District, along - side several secondary sub-markets that have emerged starting with 2007, namely Central area (Unirii Sq. – Universitatii Sq.), north part (Presei Libere Sq.) and Pipera area. Less representative areas for office market are related to south part of Bucharest (Sudului Sqr.), east (Colentina) and west part (Iuliu Maniu). In figure 6, the divisions of the Bucharest city into office areas are represented.

3 http://www.wall-street.ro/articol/Real-Estate/100442/Cel-mai-pesimist-scenariu-Investitiile-imobiliare-ar-putea- creste-cu-30.html [Accessed 11.10.2011] 4 http://www.ziare.com/casa/investitii-imobiliare/investitiile-in-imobiliare-au-crescut-cu-77-la-suta-in-primul- trimestru-1098439 [Accessed 11.10.2011] 5 http://www.ziare.com/casa/investitii-imobiliare/investitiile-in-imobiliare-ar-putea-depasi-500-de-milioane-de-euro- in-2011-1109846 [Accessed 11.10.2011] 6 http://www.capital.ro/detalii-articole/stiri/erste-piata-imobiliara-din-romania-cea-mai-rentabila-din-regiune-in- 2012-pe-fondul-chiriilor.html [Accessed 03.10.2011].

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Figure 6. Bucharest Submarkets Breakdown in terms of rent, number of projects, supply & vacancy rate Source: CBRE, 2012. Market View Bucharest Office. Available at:: [Accessed 12.02.2012], p.4.

Based on the map presented above, the table number 2 summarizes the Bucharest submarkets by the sum of leasable area, average of asking rent, average of service charge, number of projects in the area and estimated vacancy rate. The table includes an overview on the top classes (A, B, C) of office buildings for each area; A being the highest class. For the elaboration of this table a market research was conducted at the end of January 2012, as follows: - consulting annual reports of the representative real estate and retail companies; - consulting each web page of the real estate and retail buildings existing in each area; - using direct contact with the developers where the data were not available; - centralizing the information and calculating the most representative indicators.

Table 2. Bucharest submarkets by various characteristics

Submarket Sum of Letable area Average of Asking Rent Average of Service No. of Estimated sqm Euro/sqm/month charge Euro/sqm/month projects Vacancy Rate CBD 207,350 17 4 17 A 181,250 18 4 12 10% B 20,100 15 3 4 C 6,000 13 3 1 Center 196,350 15 3 29 A 100,550 17 4 12 10% B 78,600 14 3 15 C 17,200 10 4 2 North 414,450 15 3 21 A 337,450 16 3 13 10% B 77,000 13 3 8 North Pipera 547,700 12 3 16 A 426,300 12 3 13 20% B 121,400 12 3 3 Ea st 73,050 12 3 9 A 49,150 13 3 5 20% B 23,900 12 3 4 South 10,000 11 3 1 10% A 10,000 11 3 1 W e st 171,000 12 3 7 A 105,000 15 4 4 10% B 66,000 10 3 3 Grand Total 1,619,900 14 3 100 14% Source: own elaboration, based on market research

The above analysis takes into consideration the first 100 largest modern office projects and not the entire specific market, narrowing the search down to buildings with a leasable area higher than 2,100 sqm. In terms of value, since the total modern office stock is estimated at 2.1 M at the beginning of year 2012, the analysis contains approximately 80% of the total leasable area. Needless to say, the high percentage gratifies a satisfactory level of relevancy. The Old City Centre area is represented with dark green colour within the table 2. So, the average rent that is required by the developers is of 15.1 euro/sqm/month, plus a medium service charge of 3.6 euro/sqm/month. The further step within this analysis is to make a similar table for the buildings that are both leasable and historical, to be as much comparable as possible with the BCHb. Based on the map exposed in figure 6 regarding the Bucharest submarkets of real estate and retail market, the table number 3 contains the most representative real estate projects for each area. Moreover, for each building is indicated the letable area, major tenants (were possible), asking rent and service charge.

Page 27 of 118 Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0

Table 3. The most representative real estate projects for each area of Bucharest

Project Development Location Submarket Letable area Major Tenants Asking Rent Service Charge Class No. sqm Euro/sqm/month Euro/sqm/month

17 BRD Tower Victoriei Sq. CBD 27,700 BRD-GSG - - A 24 America House Victoriei Sq. CBD 23,500 Deloitte, BCR, 18.0 5.0 A 25 Lakeview Barbu Vacareascu CBD 23,000 PwC, RBS Romania, Colgate Palmolive, Euroest Romania - - A 29 Charles de Gaulle Plaza Aviatorilor Sq. CBD 20,000 Raiffeisen, Unicredit, Vodafone - - A 30 Euro Tower Barbu Vacareascu CBD 16,500 Avon, ArcelorMittal, Banca Romaneasca si Schneider Electric 18.0 3.0 A 32 Crystal Tower Victoriei Sq. CBD 15,400 ING, Sole Events - - A 37 Europe House Victoriei Sq. CBD 14,000 White&Case, Orange 19.0 4.5 A 41 Bucharest Corporate Center Victoriei Sq. CBD 12,000 Generali, IBM, 18.0 4.5 A 43 Metropolis Center Victoriei Sq. CBD 11,400 Advent, BERD, Citroen 21.0 4.0 A 57 Victoria Center Calea Victoriei CBD 8,350 Citibank, Ursus, Chartis, Eteba, Aon, Jones Lang LaSalle 20.0 4.5 A 61 Buzesti Business Center Victoriei Sq. CBD 7,500 info not provided 15.0 3.5 B 71 Uzinexport Building Victoriei Sq. CBD 6,000 info not provided 13.0 3.0 C 77 Art Center Primaverii Charles de Gaulle Sq. CBD 5,000 info not provided 20.0 3.5 A 78 Floreasca Business Center Calea Floreasca CBD 5,000 info not provided 14.0 3.0 B 81 Grand Office Floreasca Calea Floreasca CBD 4,400 info not provided 12.0 3.5 A 84 Floreasca Office Center Calea Floreasca CBD 4,000 info not provided 14.0 4.0 B 86 Barbu Vacarescu Offices Barbu Vacareascu CBD 3,600 info not provided 16.0 3.0 B 19 Bucharest Financial Plaza Calea Victoriei Center 26,700 GTS Telecom, BCR - - A 23 Bucharest Tower Center Victoriei Sq. Center 24,000 Vacant due to litigation issue 20.0 3.0 A 31 Central Business Park Serban Voda Center 15,500 Saatchi&Saatchi 13.0 3.8 B 39 Turturelelor 11 Unirii Blvd. Center 13,400 RVA, Rosal, Casa de Insolventa Transilvania 8.0 3.5 C 55 Avrig Business Center Avrig Center 9,600 info not provided 14.0 3.0 B 58 Modern Business Center Universitate Sq. Center 8,000 info not provided 14.0 4.0 B 60 Excelsior Business Center Universitate Sq. Center 7,500 info not provided 16.5 4.0 A 62 Unimed Building Rosetti Center 7,200 info not provided 15.5 3.6 B 66 Maria Rosetti Tower Maria Rosetti Center 6,600 info not provided 18.0 3.0 A 68 Izvor Business Center Izvor Center 6,500 info not provided 16.0 4.5 A 69 Victory Business Center Delea Noua Center 6,500 info not provided 11.0 3.5 A 70 UTI Business Center Vasile Lascar Center 6,000 info not provided 19.0 4.5 A 74 Nouveau Lipscani Center 5,400 info not provided 15.0 2.5 B 75 Pallazo Italia Universitate Sq. Center 5,200 info not provided 14.0 3.9 A 76 Atlantis Business Center Victoriei Sq. Center 5,000 info not provided 16.0 4.5 B 80 Unicenter VB Matei Basarab Center 4,800 info not provided 13.5 3.0 B 83 Unirii Building Unirii Sq. Center 4,000 info not provided 12.0 2.0 B 85 Academiei Center Universitate Sq. Center 3,800 info not provided 12.0 3.5 C 87 Bectro Center Sfanta Vineri Center 3,400 info not provided 15.0 4.5 B 88 Filipescu Office Building Universitate Sq. Center 3,300 info not provided 17.5 4.0 A 91 Floreasca Center Calea Floreasca Center 3,200 info not provided 13.0 3.0 B 92 Astoria Business Center Romana Sq. Center 3,150 info not provided 19.0 4.0 A 93 Dacia Offices Dacia Center 3,000 info not provided 14.0 2.0 B 94 Avantgarde Office Building Iancu de Hundoara Center 2,600 info not provided 17.0 3.0 A 95 Oscar One Center Ernest Brosteanu Center 2,500 info not provided 15.0 3.0 B 96 Romana Office Romana Sq. Center 2,500 info not provided 21.0 3.5 A 97 Dacia Center Dacia Center 2,400 info not provided 14.0 3.0 B 98 Ilion Business Center Traian Center 2,400 info not provided 14.0 2.5 B 100 Batistei Office Building Universitate Sq. Center 2,200 info not provided 16.0 4.0 B

2 Petrom City Straulesti North 71,000 Petrom, IBM - - A 9 City Gate Presei Sq. North 43,000 Millennium Bank, Romtelecom, Microsoft, Hoffman LaRoche 18.0 3.0 A 10 Platinum Business & Convention Center Baneasa North 40,000 Pfizer 17.0 3.5 A 12 Floreasca Business Park Barbu Vacareascu North 36,000 Oracle, Holcim, DHL, L’Oreal, Xerox, Colliers, GE, G&T, Honeywell 17.0 4.0 A 13 S-Park Presei Sq. North 32,500 Heineken, Good Year, Cargill 16.0 3.0 A 20 Baneasa Business&Technology Park Baneasa North 26,000 Ruukki, BMW Group 17.0 4.0 A 21 Bucharest Business Park Presei Sq. North 24,800 BAT, NNDKP, TNT, MSD, Western Union, Coca Cola, Sony, IBM 16.0 3.0 A 26 Nusco Tower Barbu Vacareascu North 22,000 Volskbank, Oracle, Bayer, Centrofarm 18.0 4.0 A 28 Victoria Park Baneasa North 20,500 KPMG, Sandoz, Siveco, Zentiva 13.0 3.5 A 34 Art Business Center 6 Baneasa North 15,000 - 12.0 4.0 B 36 World Trade Center Presei Sq. North 14,000 Canon, Michelin, Samsung 13.0 5.0 B 47 Baneasa Business Center Baneasa North 10,500 Volskbank Leasing, Bosch 15.0 4.0 B 52 IPA Floreasca Aurel Vlaicu North 10,000 info not provided 14.5 2.5 B 53 Eliade Tower Calea Floreasca North 9,700 info not provided 12.5 2.5 B 56 Art Business Center 5 Nicolae Caramfil North 9,500 info not provided 12.5 4.0 B 65 Baneasa Airport Tower Baneasa North 6,800 info not provided 15.0 3.5 A 72 Sanda Office Aerogarii North 5,900 info not provided 14.0 3.5 B 73 Biharia Offices Baneasa North 5,500 info not provided 13.0 3.0 A 79 Pechea Offices Baneasa North 5,000 info not provided 11.0 1.0 A 82 Aviatiei Center Nicolae Caramfil North 4,350 info not provided 16.0 3.0 A 99 Metropol Building Aurel Vlaicu North 2,400 info not provided 13.0 2.0 B 1 IRIDE Business Park Pipera North Pipera 98,000 Cosmote, Orange, Raiffeisen, P&G, JTI, Nestle, Whirlpool 13.0 2.7 B 3 Novo Park Pipera North Pipera 65,000 Kraft, P&G, Hewlett-Packard, Raiffeisen si GarantiBank 11.0 2.5 A 4 BOC Tower Pipera North Pipera 57,600 Banca Romaneasca, Intel, Honeywell, Gfk 14.0 3.5 A 6 BOB Tower Pipera North Pipera 50,000 Bancpost, Raiffeisen, Codfidis 11.0 3.5 A 8 Global City Pipera North Pipera 47,000 Total Soft, Ford Romania, ICAP, Coca-Cola 12.0 3.5 A 11 Twin Towers Barba Center Pipera North Pipera 39,000 Renault Technologie Roumanie 10.5 3.0 A 14 North Center I&II Pipera North Pipera 29,300 Vodafone 10.5 3.5 A 15 Conect Business Park Pipera North Pipera 27,700 Domo, Eos KSI - - A 16 Cubic Center Pipera North Pipera 27,700 Mic.ro, OBI 9.5 2.9 A 18 Swan Office Park Pipera North Pipera 26,800 Flanco, Emag - - A 27 North Gate Pipera North Pipera 21,500 Renault Technologie Roumanie 18.0 3.0 A 35 Multigalaxy Business Center I Pipera North Pipera 14,300 info not provided 12.0 3.5 A 38 Fabrica de Glucoza Pipera North Pipera 13,400 Computerland - - B 40 Pipiera Business Tower Pipera North Pipera 13,300 Lidl, PHD, Siemens 13.0 3.5 A 49 Construdava Pipera North Pipera 10,000 Impact, Sanador 10.0 4.0 B 64 Multigalaxy Business Center II Pipera North Pipera 7,100 info not provided 12.0 3.5 A 42 Delenco Business Center Delea Noua East 11,500 Unicredit 12.0 2.8 A 44 City Business Center Nerva Traian East 11,000 Astra Asigurari, Romania Libera 12.0 3.5 B 45 Phoenix Tower Vitan Sq. East 10,600 - 12.5 3.0 A 48 Rams Business Center Pantelimon East 10,300 Elcomer 11.5 2.5 A 54 Olympia Tower Muncii Sq. East 9,600 Eureko, Mega Image 15.0 4.5 A 63 Phonix Tower Vitan East 7,150 info not provided 12.5 3.2 A 67 Helios Business Center Theodor PalladBlvd.y East 6,500 info not provided 9.5 3.0 B 89 Belvedere Office Building Baba Novac East 3,200 info not provided 14.0 3.5 B 90 Eos Business Park Nicolae Canea East 3,200 info not provided - - B 50 Sun Plaza Offices Sudului Sq. South 10,000 Regina Maria, Farmaciile Dona 11.0 3.0 A

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5 West Gate Park Militari West 55,000 Alba Bank, City Bank 12.0 3.0 A 7 Sema Parc Semanatoarea West 48,000 Cosmote, Pagini Auri 6.5 2.5 B 22 Anchor Plaza Drumul Taberei West 24,600 Carrefour, Anchor Grup - - A 33 Opera Center Eroilor West 15,400 Adecco, GlaxoSmithKline, Cushman & Wakefield, Renault, CMU 18.5 4.0 A 46 Global Business Center Politehnica West 10,500 IBM - - B 51 The Grand Offices 13 Septembrie West 10,000 Straberg, Bombardier - - A 59 TATI Center 13 Septembrie West 7,500 info not provided 12.5 2.5 B Source: own elaboration, based on market research

2012 Office pipeline In 2011 the completion rate of office spaces started to weaken at a minimum 130,000 sqm, 52% less than 2010 when 270,000 sqm’s of office space were delivered. The most important projects delivered in 2011 were Willbrook Platinum and Convention Center (38.000 sqm’s, north area), North Point (27.000 sqm’s, north area) and Crystal Tower (15.000 sqm’s, CBD). Nowadays, the modern office stock (Class A, B and C) cumulates 2.1 million square meters out of which about 1.85 million square meters of Class A and B. Since the economic crisis is still tumbling, it is expected that 2012 will be a rough year with a similar or even worse perspective than the previous year in which many developers may delay their projects due to lack of financing and prelease arrangements. The most important projects that are currently under construction and likely to be completed in 2012 include Sky Tower, AFI Business Park-west area, Hermes Business Park, Unicredit Headquarters and Cathedral Plaza for which the delivery was postponed due to legal issues. Out of major or unpredictable changes in the economic sector that may appear, the 2012 new office supply is estimated to be around 220,000 sqm (table 4), over passing the descendent trend started in 2011. Table 4. The 2012 new office supply Development Submarket Letable area sqm

Sky Tower North 37,000 Anchor Metropol Plaza West 36,000 North Point North 27,300 Art Business Center-extension North 18,900 Hermes Business Campus-first phase North Pipera 18,000 Cathedral Plaza Center 15,000 Herastrau Business Center-first phase North 15,000 Unicredit Headquarters North 15,000 AFI Offices-first phase West 11,000 West Gate-phase three West 10,500 Plevnei 141 West 7,000

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Aviatorilor BC North 4,000 BVO Verdi's Offices North 2,500 Monolit Center Center 2,300 Total 219,500 Source: own elaboration, based on market research

Looking further ahead, 2012’s pipeline will contribute with an overall of 10% to the present supply of modern offices of 2.1 million sqm’s, reaching by the beginning of 2013 the level of 2.3 million sqm’s built in Bucharest over a period of 10 years (figure 7).

Figure 7. The evolution of the supply of modern offices in Bucharest in the last 10 years Source: own elaboration, based on CBRE, 2012. Market View Bucharest Office. Available at:: [Accessed 12.02.2012], p.4.

Offices Villas The economic crises had different impact over the standard modern office stock than that of office space situated in a more architectural and historic meaningful villa. In case of modern stock office the vacancy rate plumed from a minimum 5% before the crises to a maximum 15% to 30% in some submarkets and slowly decreased to an average of 18%. ESOP consultancy firm is one of the most active pretenders on the office space villa sector covering over 1,433 units which stand for 487,000 sqm’s of leasable area. According to ESOP consultants in the crisis period, the office villa submarket evolution witnessed an opposite trend which contributed to a significant decrease in terms of vacancy rate from a staggering 26-29% in central areas to a minimum 15-18% and from 32-35% in semi central areas, before

© AESB. All rights reserved. Page 32 of 118 Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0 the crises, to a 22-26% in Q2 2011. In other words, the vacancy rate of modern office building grew over 500% meanwhile the vacancy rate of villas dropped 30% from the beginning of 2008. The above presented situation roused as a normal consequence to the change in companies preference where before the crises the location in a central area of the city meant a must have. The majority of those companies are midlevel players with 10 up to 50 employees for which the image and representativeness of the building is an important decision factor. For the last 3 years companies were driven by the necessity of cost cutting solutions were the rent reduction and negotiation of the flexibility of engagement terms implies one of the mass relocation factors in the market. This factor drove the activity of middle turnover companies to a more financially feasible location and facility, making the villa the new needed compromise solution of modern glass office building. As direct consequence the vacancy rate of offices situated in refurbished villas dropped in all three budget categories, comparing the Q1 and Q2 of 2011 (figure 8).

Figure 8. The vacancy rate of offices situated in refurbished villas by budget categories Source: based on the opinion of ESOP consultants

Although the difference in trends seems highly discrepant, we have to take into consideration the effect of new supply, which in case of modern office piled up with over 1million sqm. since the beginning of 2008 in detriment of villas, where the new supply is close to nonexistent. Advantages and disadvantages when choosing a villa over a modern office building Tenants like attorney, advertising, consulting firms and embassies prefer villas for their architecture and historic prestige while large backup provider companies are constrained to

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Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0 choose modern office buildings. The decision may be influenced by what type of activity does the lessee actuates. Most of the villas built in the interwar period are usually situated in central areas and ensure lower rents than modern offices. Modern offices in central areas of the city with a rent below 11 Euro/sqm/month are scarce, totaling just 10% of the specific supply; meanwhile in case of historic villas the level slightly surpasses 50%. Such profuse supply in central areas together with an affordable rent can be considered two of the most relevant triggering factors when choosing a location. A summary of the advantages and disadvantages when choosing a villa rather than a modern office building is exposed in figure 9.

Figure 9. Advantages and disadvantages of choosing a villa rather than a modern office building Source: own elaboration, based on market research

Advantages • Flexibility of terms of engagement: companies often want flexible contractual terms such as small lease periods with unilateral possibility to terminate the agreement at any date depending on the financial situation of the company. Most companies agree on a minimum 12 months lease period with extension possibility. The typical lease length in case of modern office stock starts from 3 to 5 years with a 3 months deposit.

• Budget: when it comes to leasing an office space in a villa the first decision factor is the allowed budget. In many cases a villa is owned by an individual who inherited the property and not by a company. In these cases the ownership title can balance the negotiation power in favor of the tenant, especially where owners are experiencing financial difficulties. Another cost cutting expense that a tenant may benefit from is free parking in close proximity of the lease property for which they are not obliged to pay any additional fee. On the other hand, free parking can represent a major disadvantage when the office is located in a more central and crowded area. • Maintenance charge: villas are well known for having an efficient low level service charge and companies can decide to internalize the maintenance cost and spend less than 50% in comparison to the average service charge required within a modern office. The latter usually varies between 2 and 4.5 Euro/sqm/month. • Leasable area: Middle sizes companies are frequently looking for leasable areas between 100 and 500 sqm’s, areas that are hard to find in a modern office building and are generally leased on a higher unitary rent. For those small companies for which a central location is vital for its general welfare, the villa seems to be the single solution since the majority of modern office supply emerges on the north area of the city. Another feature of which the tenant can benefit from is the additional courtyard that comes with the lease of the entire building, which in many cases can represent an appreciated leisure area. Disadvantages Leasable area: The large part of historic buildings in Bucharest were built before the 40’s, having surfaces up to 1,000 sqm’s that are no longer suitable to accommodate more than 100 employees (if we take into consideration the European regulation of 8 to 12 sqm’s per person). Before the economic crisis, companies were rapidly growing their staff and the former tenants of individual villas were forced to relocate in larger office areas that can absorb the present and future needs. It is undisputable that the same pattern will be repeated at the first signs of economic recovery or growth (figure 10). In this respect, a strong example represents ING Bank Headquarters which use to be, till 2011, situated in Kiseleff Palace in CBD area. Due to their organic growth, according to company’s

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Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0 representatives, the bank moved their headquarters together with other departments, which were scattered over the city, in the newly built Crystal Tower building.

Figure 10. Connection between the economic period and real estate trends Source: own elaboration, based on market research

• Interior layout: Because of the incompatibility between the initial use and their present use, numerous historic units were refurbished in order to be adapted to the modern office needs. But still, most of those units do not concur with the efficiency of open space layout within a modern office building that unavoidable leads to a high rate of inefficient use. One of the disadvantages of interior layout when it comes to historic villas is represented by large commune areas which cannot be used as office space. Therefore, for the same leased area, tenants can pay a higher unitary rent for a villa with a poor interior layout than for a modern equivalent. In some cases the difference can reach up to 20%. • Parking units: The lack of underground of above ground parking units represents a major setback not just in terms of comfort but also by limiting the number of employees. • Utilities: Used as office space a historic villa can be the cause of additional cost for appropriate technical services such as internet, fix telephone line or air conditioning. A tenant must also take into consideration other relevant features of the building such as: refurbishments, general maintenance, installations, courtyard, air conditioning, interior partition etc. Although the level of rent and location can have important influences over the result, in general lines, the number of employees is the main decision factor and for companies searching for a leasable area less than 1,000 sqm’s a villa represents an excellent substitute for modern offices.

Finally, a summary of the main general lease conditions for office market are presented in figure 11.

Figure 11. Overview on lease conditions for office market Source: own elaboration, based on market research

Contract lease length: 3 to 5 years Currency of payments: considered in Euro but paid in nation currency, Ron Deposit: 3 months Payment frequency: monthly Indexation: annually with Euro CPI Rent review: no general practice Agency charges: equivalent of 1 to 2 months of the first year rent Landlord’s obligations: initial fit-out, insurance, property tax (debatable) Tenant’s obligation: maintenance, utilities, refurbishment expenses (debatable)

4. The retail market analysis Shopping Centers Since mid-2008 the development of shopping centers proved to become more difficult as a consequence to preventive financing, increase of vacancy rates, decreasing rents and unsatisfying yields. The retail market is slowly recovering from the hush previous period that affected all real estate sectors, based on the last few months’ measurable signs of stability or even expansions. Large retail chains with sufficient financial control now started to take

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Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0 advantage of low land prices and construction costs by implementing an ambitious expansion strategy for 2012. In 2011 the majority of shopping centers applied strategies to endorse customer traffic by changing the mixt of tenants, negotiating rents or extending contracts and even replacing some of the weaker tenants, thus contributing to a lower vacancy rate and attractive secure mixt. Only few developments with relatively inappropriate location still struggle to join the overall imposed trend. Supply The Bucharest shopping center stock is dominated by units with more than 40,000 sqm. GLA, followed by those with areas between 20,000 and 40,000 sqm. GLA. According to real estate agencies Q4 2011 brought over 200,000 sqm of new retail supply on the market. A centralization of the existing shopping centers in Bucharest is presented in table 5. Table 5. The existing Shopping Centers in Bucharest

1 AFI Cotroceni Park 2 Baneasa Shopping Center 3 Bucuresti Mall 4 Centrul Comercial Bucuresti Est 5 City Mall 6 Cocor Luxury Store 7 Colosseum Retail Park-first phase

8 Fashion House

9 Grand Arena

10 Iris Shopping City

11 Jollie Ville

12 Liberty Center

13 Militari Shopping Center

14 Plaza Romania

15 Sun Plaza

16 Unirea Shopping Center

17 Vitantis Retail Park

Source: own elaboration, based on market research

Demand After a stagnant year the demand for prominent retail units has started growing in 2012. Similar to previous years, international retailers played an important role for 2011 demand by continuing their expansion in Bucharest and also in the rest of the country. The most active players on the market were food retailers like Mega Image, Lidl or Carrefour and fashion retailers such as Inditex brands, H&M, C&A and NewYorker. Most of them continue to focus on shopping centers, excluding the retail street sector for the moment. Prime units are targeted by both existing retailers/ developers and also by newcomers. Due to the instability of current economic situation and high newcomer’s competition, numerous Romanian traditional retailers are already facing difficulties and are reducing their operations in order to avoid insolvency or in some cases even bankruptcy. As direct consequence, in the near future, the retail market will slowly become more and more dependent on international retailers. Rents At the beginning of 2012, the prime shopping center rents and prime high street rents range between 60 and 80 Euro/sqm/month. For the past year rent levels followed a constant trend with no major deviations to be seen in the next year. However, remote variations can appear in some cases based on financing, location, tenant mix and the power of negotiation of both parties. Other types of rents continue to be applied such as turnover rents especially to anchors and large size retailers, whilst hypermarket, DIY and cash & carry operators were the most active in recent land transactions throughout the country. The evolution of the rental level of shopping centers during the last 5 years is exposed in figure 12.

Figure 12. The evolution of the Shopping Centers Rental Level (euro/sqm/mth)* *for average size units

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Source: own elaboration, based on Cushmann & Wakefield, 2011. Marketbeat- Romanian Real Estate Market Report. Available at: < http://www.industrial- properties.ro/upload/articole/romania_marketbeat_spring_2011.pdf> [Accessed 15.02.0212]

Market pipeline forecast With over 300,000 sq. m of new retail space delivered in 2011, it is expected that Bucharest in the two to four years to record a moderate increase in the shopping center sector, as no more than 13 projects are recently being announced. After facing tremendous setback due to financial difficulties, the developers must turn once again to temperate expansion without excluding the analysis of sustainability potential. Approximately 174,000 sq. m’s are presently under construction and with a delivery due in 2013 and 2014, while the forecasted construction dimension for the next four years is represented in figure 13.

Figure 13. The forecasted construction surfaces for the next four years Source: own elaboration, based on market research

A list of representative projects announced for completion is included in table 6. Table 6. Representative projects for the Bucharest retail market Planned & Under Construction Shopping Size Submarket Completion Centers sq. m’s 1 Baneasa Shopping City -extension - - - 2 Colentina Mall 66,000 North East 2014 3 Colosseum Retail Park-second phase 107,000 North West 2014 4 Cora Alexandriei - - -

5 Dambovita Center - - - 6 Galleria - - - 7 Mega Mall 70,000 Center East 2012 8 AFI Golden City 30,000 North West 2015 9 ParkLake Plaza 67,000 Center East 2013 10 Promenada Mall 33,000 North 2013 11 Victoria City Center 68,000 North West 2012 12 Metropola Center 132,000 Center West 2015 13 Bucur Obor 40,000 Center 2013 Source: own elaboration, based on market research

High street retail The on-street activity was dominated by supermarkets which leased premises throughout the city (Mega Image and Shop & Go - over 15 units opened in 2011, Carrefour Express - 3 units and Carrefour Market - 5 units). The luxury and upmarket sector saw the opening of the first Valentino shop in Romania, plus a relocation of the Stefanel within a villa in Romana Square. A great deal of demand started rising for the segment of retail units located on main streets with intensive pedestrian traffic in prime or secondary areas with low vacancy rate. Rents for high street retail properties were under pressure in 2011 and followed the downward trend in annual comparison. The highest rents are obtained in Bucharest’s Magheru and Balcescu Boulevards, the main high streets in Romania, with a rent of 50-80 euro per sq. m, followed by Calea Victoriei with 50-70 euro per sq. m, depending on numerous factors such as access, exposure, size of space, etc. The improvement of Bucharest historical central persisted throughout 2011, as new leisure units opened, accounting for more than 50% of the total available spaces; while the fashion and other services continued their positive trend. The area continues to develop due to the advance infrastructure rehabilitation works and the refurbishment of buildings that are mainly leased to tenants who have established a business. The evolution of rent level has been fluctuating with rents falling down throughout 2009 and 2010 and slightly increasing during 2011 with monthly rents between 25 and 50 Euro per sq. m.

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One of the major disadvantages of high street market in Bucharest remains the lack of large area units suitable for accommodating anchor tenants. The average units have areas lower than 150 sq. m. while larger units are scarce or dividend on several floors minimizing the visibility and attractiveness of the shops. In 2010 many of the tenants continued to restructure their business by terminating of renegotiating their lease contracts according to their own financial performance. In general terms the high street rent level remained stable during 2011 in comparison with 2010. The high street merchandise & tenant mix continues to be dominated by banks, pharmacies, casinos and show-rooms (auto, mobile phone dealers and interior decorations), while the fashion component, the essence of the high street retail, capable of creating pedestrian traffic, has a limited representation.

5. The hotel market analysis Supply Prior to the crisis, Bucharest accommodation supply experienced constant growth and reached the peak. Since the crisis began a gradually decline has been perceived, as a direct consequence to postponed or even suspended projects affected by the economic downturn and harsh imposed financing conditions. 2010 revealed the openings of the two newest five star hotels in Bucharest, namely the 53 room Grand Hotel Continental at the beginning of the year and towards the end of the year, the 45 units Epoque Hotel located close to the Cismigiu Park and BCHb, adding less than 100 units to the 2010 supply. Over the last three years the total room supply in Bucharest has grown across all-star levels. Based on table 7, it can be noticed the significant increase in the supply of 2 star accommodation which has been the fastest growing hotel sector in Bucharest in recent years, with a growth rate of over 40%. However, taking into consideration the absolute change in the number of rooms between 2008 and 2010, the four star class contributed additionally with 489 rooms, meaning 38% of the new room supply.

Table 7. Bucharest hotel supply in 2008, 2009 and 2010 Rate 2008 2009 2010 No. of Hotel size (no. of rooms) Affiliated % hotels rooms <51 50-100 >100 5 star 1,908 1,895 2,061 11 1 4 6 1,830 89% 4 star 4,776 5,545 5,265 36 11 12 13 1,854 35% 3 star 2,373 2,640 2,589 51 34 12 5 308 12% 2 star 760 912 1,093 23 15 6 2 - - 1 star 299 375 397 10 7 2 1 - - Total 10,116 11,367 11,405 131 68 36 27 3,992 35% Source: Micut, C., 2011. Dezvoltarea si conversia pe segmentul hotelier (pdf presentation), Sixth edition of the HRB expert conference - Hospitality Forum, available at: [Accessed 18.02.2012].

Corresponding to table number 7, the figure 14 illustrates that the hotel supply in Bucharest is dominated by four and three star units, holding 69% of the supply market measured by the number of rooms.

Figure 14. Hotel supply evolution 2008 -2010 (no. of rooms)

Source: representation based on Jones Lang Lasalle Bucharest City Reports (quarterly), 2011. Available at:< http://www.joneslanglasalle-romania.com> [Accessed 22.02.2012].

The five-star market accounts for 18% of the market and the majority of all these rooms are located in the Bucharest city center. The affiliated sector accounts for 35% of all hotels in

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Bucharest, the vast majority of them including four and five star hotels. The most recent situation on hotel supply by hotel classes is represented in figure 15.

Figure 15. Hotel supply in Bucharest in 2010 (no. of rooms) Source: representation based on Jones Lang Lasalle Bucharest City Reports (quarterly), 2011. Available at: http://www.joneslanglasalle-romania.com [Accessed 22.02.2012].

One of the most recent rebranding project additions was the 88 room 4 star hotel, formerly known as Bucharest City Unirii Square Hotel, which opened its doors in August 2011 under the name of Doubletree by Hilton, under a franchise agreement. In 2011 the number of hotels remained constant, but the room record decreased mainly due to reorientation in use of Rin Grand Hotel from 1,459 rooms, totaling 115,000 sq. m., to 580 rooms. In the figure number 16 information regarding future expected openings is illustrated.

Figure 16. The situation on future expected openings in Bucharest Source: own elaboration, based on market research

In the near future it is expected that Bucharest hotel supply will experience only negligible growth, since a high number of developments are still on hold. Demand Bucharest is mainly a business destination and this segment represents over 80% of the hotel market clientele. The main feeder market is European Union that accounts around 95% of the foreign visitors that arrive in Bucharest by plane on regular airline flights and low-cost carriers through Baneasa and Henri Coanda airports. The segment of four and five stars hotel was strongly affected by the economic crisis. As the international companies had reduced considerable the budgets allocated for business travels, the turnover of four and five star hotels, which target especially the foreign business clientele, had highly decreased. If the increase in overnights in 2010 was slightly higher than in 2009, for the following year a significant increase in tourist overnights was registered; reaching a level similar to year 2008, at about 2 million.

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Figure 17. Overnights in Bucharest during the 2005 -2011 period Source: own elaboration, based on the TEMPO database of the National Institute of Statistics, 2011.

The growth of demand along Regina Elisabeta Boulevard is being absorbed by the new hotel additions, such as the former Cismigiu Hotel with 67 apartments and Boulevard Hotel counting 18 apartments and 48 rooms. Key rates Like other capital cities during the crisis period, Bucharest has registered a decrease in the average daily rate and occupancy due to higher capital costs and frozen credit markets. In the period right after 2008, the economic slowdown trend started and the business travelers, representing the main market for Bucharest hotels, have reduced their length of stay and travel expenses. The accommodation market began to mark quantifiable improvement in 2010, with an overall occupancy rate increasing by over 11% and reaching a level of 56.5%. The highest increase was for 4 star hotels, while the lowest increase was for 5 star hotels. While the overall Old City Center hotel market is characterized by stability and feasibility, the market is still highly seasonal. As it can be seen in the figure number 18, since the hotel market is based on business travel, the occupancy indicator highly varies by season. The lowest level of occupancy is met in January and August, and the highest level belongs to May, June, October and November. January and December are generally known as the weakest months due to impact of the holydays period, the end/start of the year when many companies are involved in planning activities and therefore fewer company executives are travelling. Occupancy levels at this time of the year can reach below the 40% occupancy rate.

Figure 18. Occupancy rate per month/year Source: own elaboration, based on Micut C., 2011. Development and conversion for hotel segment (Dezvoltarea si conversia pe segmentul hotelier) (pdf presentation), Sixth edition of the HRB expert conference - Hospitality Forum, available at: [Accessed 18.02.2012].

The figure number 19 illustrates the annual evolution of occupancy rate for Bucharest accommodation market from 2008 to 2011. As the data indicates, the total occupied rooms have increased in the last year with an annual rate of 10%, exceeding annual supply growth. Despite the moderately low market occupancy rate (using rounded numbers, ranging from 50% in 2010 to 65% in 2008), the growth in occupied rooms is a positive indicator as long as the demand within the local market is increasing.

Source: own elaboration, based on Micut C., 2011. Development and conversion for hotel segment (Dezvoltarea si conversia pe segmentul hotelier) (pdf presentation), Sixth edition of the HRB expert conference - Hospitality Forum, available at: [Accessed 18.02.2012].

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Regarding the occupancy by category within Bucharest, especially 4 star and 5 star hotels, the figure number 20 captures the situation of the last three years.

Figure 20. Occupancy by category in Bucharest Source: own elaboration, based on Micut C., 2011. Development and conversion for hotel segment (Dezvoltarea si conversia pe segmentul hotelier) (pdf presentation), Sixth edition of the HRB expert conference - Hospitality Forum, available at: [Accessed 18.02.2012].

Over three consecutive years the landlords lowered their room rate causing a severe decline in revenue per available room. For the first time after 2 years, growth bounced back in 2011, with hotels recording an increase both in occupancy and average daily rate (figure 21), leading to an escalation in revenue per available room (figure 22).

Figure 21. Average daily rate for the Bucharest accommodation market from 2008 to 2011 Source: own elaboration, based on Micut C., 2011. Development and conversion for hotel segment (Dezvoltarea si conversia pe segmentul hotelier) (pdf presentation), Sixth edition of the HRB expert conference - Hospitality Forum, available at: [Accessed 18.02.2012].

Figure 22. Average revenue per available room for the Bucharest accommodation market from 2008 to 2011 Source: own elaboration, based on Micut C., 2011. Development and conversion for hotel segment (Dezvoltarea si conversia pe segmentul hotelier) (pdf presentation), Sixth edition of the HRB expert conference - Hospitality Forum, available at: [Accessed 18.02.2012].

In the particular case of 4 star hotels, the average daily rate is quite similar within 2009 – 2011 period (figure 23) and the revenue per available room is marking an increase (figure 24). The 5 star hotel category registers fluctuations in what concerns the average daily rate and revenue per available room, showing a slightly increase.

Figure 23. Evolution of the average daily rate by category for the Bucharest accommodation market Source: own elaboration, based on Micut C., 2011. Development and conversion for hotel segment (Dezvoltarea si conversia pe segmentul hotelier) (pdf presentation), Sixth edition of the HRB expert conference - Hospitality Forum, available at: [Accessed 18.02.2012].

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Figure 24. Evolution of the revenue per available room by category for the Bucharest accommodation market Source: own elaboration, based on Micut C., 2011. Development and conversion for hotel segment (Dezvoltarea si conversia pe segmentul hotelier) (pdf presentation), Sixth edition of the HRB expert conference - Hospitality Forum, available at: [Accessed 18.02.2012].

Overall occupancy rate and average daily rate indicate a market that, in general terms, consents for appropriate profitability of the operational section of the business. Outlook For 2012 it is expected a positive GDP evolution of 1.6%, according to the European Commission; and an increase of 1.8%, estimated by the IMF. Given the tight correlation between the country’s GDP and the accommodation demand, it is expected that the macro- economic conditions in Romania to improve the business travel, and to particularly pick up the conference demand in Bucharest. As financing remains a major impediment and construction costs have started to escalate and no major project is being started, a remarkable increase of supply for the four five star hotel market in the next period is not expected yet to appear. Additionally, the existing hotels will try to find ways to increase their competiveness and market share by affiliation options, higher CAPE and extended marketing efforts. The slow revitalization of the hotel sector is revealed as an increase in occupancy level, while average room rates have to endure constant pressure with no expectancy of near future major improvement. It is expected that the moderate growth rate of revenue per available room to continue in 2012 endorse by the rising occupancy rate. According to market leaders, it is expected that corporate expenses on meeting and events to increase with 9-10%, so that the occupancy will continue the recovery with an estimated

© AESB. All rights reserved. Page 50 of 118 Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0 increase of 6% and the revenue per available room will also catch up the trend with an estimated 3.5% increase. At this point, it is of great importance that authorities to focus on the development of tourist infrastructure, such as airport expansions and hotel developments, to support the long-term growth and sustainability. Current competitive market The trend within the hotel market is presented as an antithetic situation, on one hand the economic class, and on the other hand, the luxury class. As exposed in Hospitality Forum in 2011, the hotel rooms needed within Bucharest during the following four years are concentrated on the economy type and, on the opposite side, on the luxury class. So, the pre-feasibility study is focused on the four and five star hotels that represent the subject’s competitive market.

Figure 25. Prediction regarding the need for hotel rooms in Bucharest Source: Micut C., 2011. Development and conversion for hotel segment (Dezvoltarea si conversia pe segmentul hotelier) (pdf presentation), Sixth edition of the HRB expert conference - Hospitality Forum, available at: [Accessed 18.02.2012].

In the subsequent sections, the existing supply of four and five star hotel accommodation in center Bucharest is reviewed. IN addition, it was taken into consideration the supply of conference and meeting spaces and any potential new hotel supply within the area.

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6. Highest and Best Use Analysis of the Bucharest City Hall building The purpose of this part of the study is to investigate the variants allocated to the Bucharest City Hall building and to select the most feasible option for the business use. Two out of three scenarios analysed imply a mixed use of the BCHb, namely offices and museum, and offices and retail; the third scenario being entirely designed as hotel destination. Reported to this study, “feasibility” will be determined by examining the highest and best use of the asset (BCHb). According to the 2011 International Valuation Standards (http://www.ivsc.org) the highest and best use is the use of an asset that maximizes its productivity and that is possible, legally permissible and financially feasible. The highest and best use may be for continuation of an asset’s existing use or for some alternative use. This is determined by the use that a market participant would have in mind for the asset when formulating the price that would be willing to bid. The determination of the highest and best use involves consideration of the following: • To establish whether a use is possible, regard will be put on what would be considered reasonable by market participants. • To reflect on the requirement to be legally permissible; any legal restrictions on the use of the asset, for example zoning designations, need to be taken into account. • To accomplish the requirement of being financially feasible, meaning that the use of the asset that is physically possible and legally permissible will generate sufficient return to a typical market participant, after taking into account the costs of conversion to that use, over and above the return on the existing use (Erst&Young, 2011). Market conditions that influence the building typology The following section is a brief summary of the market considerations for mixed use development in the principal market of office, residential, retail and hotel accommodation. Office • Separate pedestrian and lift access and designated car parking for the commercial portion of the development • Residential occupants tend to accept office tenancies since they are less likely to generate disturbing factors, such as noise and parking traffic. Residential

• Mixed residential & retail developments have more success if they operate in distinct buildings • Convenience and accessibility to shops, cafes and restaurants is one factor to be taken into consideration. Retail • Retail tenancies can insure active street lanscaping and vivacious atmosphere • Extended operation schedule • Retail tenancies, such as convenience stores and restaurants, have a greater ability to impact upon the amenity of residential occupants than office uses. Hotel accommodation • Accommodation needs differ greatly to that of other uses • Should be design to include a high number of amenities. Successful implementation of this mixed use development relays in assessing of the economic and amenity synergy between prospective uses. Below the potential connection between different uses from the economic (table 8) and amenity point of view is assessed (table 9). Table 8. Economic synergy assessment

Source: Adelaide City Council. Guide to Mixed Use Development, Available at: [Accessed 02.03.2012], p. 27.

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Table 9. Amenity synergy assessment

Source: Adelaide City Council. Guide to Mixed Use Development, Available at: [Accessed 02.03.2012], p. 27.

Space Use and Needs Analysis After conducting on an analysis of the physical condition of the building and the current space utilization, the current design and organization of the building, focused on interior spaces, are assessed in accordance with the three proposed scenarios needs and uses of the spaces. All the projections of the scenarios take into consideration that no additional divisions of the building are allowed, respecting the initial interior structure. The current interior arrangement of the BCHb space is subject of significant interior renovations that have already been started in recent years (as detailed in 1. The current state of the Bucharest City Hall building of this study) This section is divided into the following two directions: • Analysis of current space organization and use • Proposed layout

Analysis of the current space organization and use The building contains three major different noticeable uses within approximately 21,992 sq. m of built space or 14,145 sq. m of usable area7. The major building space uses refer to the following: • Offices • Circulation (corridors, stairs, etc.) • Storage (including basement). According to the Bucharest City Hall representatives and received plans8, the ground floors have approximately the same quantity of buildable square footage, namely 3,814 sq. m and the basement area is estimated at 2,922 sq. m. (table 10).

7 Is an estimation taking into account the internal area of the premises by using the interior plans of the ground floor and first floor of the BCHb. The plans do not mention the usable area of the interior space, but indicates the width and length of each room. Based on these two variables the area of each room has been calculated. 8 During the elaboration of the pre-feasibility study, the Bucharest Academy of Economic Studies team had the support of the Municipality of Bucharest, as partners within the PROMISE project, and a couple of formal addresses were formulated in order to receive some particular pieces of information.

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Table 10. The BCHb dimensions Built Floor Floors area Usable area height sq. m sq. m m Basement 2,922 1,879 3.50 Ground floor 3,814 2,719 4.80 1f 3,814 2,857 5.40 2f 3,814 2,857 4.65 3f 3,814 2,857 4.10 4f 3,814 2,857 3.55 Total 21,992 14,145 Source: own elaboration, based on the BCHb plans provided by the Municipality of Bucharest, as partner within the PROMISE project

While the BCHb provides space that is usable for the various administrative office functions housed within, but doesn’t mean that the manner of using it is efficient or supportive for a modern office environment. While building circulation does provide sufficient access to offices on the first and other floors, the interior partition of the building lacks in open areas. All rooms are arranged alongside the access corridor excluding any possibility of creative partitioning. Below are two descriptions of information analyzing the entire current space of BCHb. The figure 26 and figure 27 presents information in diagrams that specify the particular use of each room on each floor of the building, using color coding by each category9. This information is also summarized in table 11, which exposes the uses of spaces on each floor, as well as the total area of uses for the whole building.

9 The BCHb ground floor is described in figure 26, and the other four floors have the same representation as in figure 27. The plans for the BCHb basement were not available in order to be analyzed.

Figure 26. BCHb administrative use, ground floor diagram Source: own elaboration, based on the BCHb plans provided by the Municipality of Bucharest, as partner within the PROMISE project

Figure 27. BCHb administrative use, first floor diagram (same as for the 2nd, 3rd and 4th floors) Source: own elaboration, based on the BCHb plans provided by the Municipality of Bucharest, as partner within the PROMISE project

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Table 11. Summary of the BCHb current space use

Groundfloor Usable area % No. of rooms Firstfloor Usable area % No. of rooms sq.m sq.m Usable 1,525 56.1% 42 Usable 1,758 61.2% 35 Storage 19 0.7% 4 Storage 18 0.6% 3 Bath 40 1.5% 2 Bath 66 2.3% 4 Staircase 158 5.8% 5 Staircase 152 5.3% 5 Elevator 90 3.3% 2 Elevator 90 3.1% 2 Access corridor 887 32.6% 1 Access corridor 787 27.4% 1 Total 2,719 1 56 Total 2,871 100% 50

Building Usable area % No. of rooms sq.m Usable 8,558 60.2% 182 Storage 92 0.6% 16 Bath 306 2.2% 18 Staircase 766 5.4% 25 Elevator 450 3.2% 10 Access corridor 4,033 28.4% 5 Total aboveground 14,204 100% 256 plus basement 1,879 Total building 16,083 Source: own elaboration, based on the available plans received from the Bucharest Municipality, as partner within the PROMISE project

A very important aspect that has also impact on the current pre-feasibility study is that the administrative spaces encountered within the BCHb are not entirely allocated to the Municipality of Bucharest. The BCHb administrative spaces are mainly attributed to the Municipality of Bucharest, and the other part is occupied by offices of the Prefecture of

Bucharest. In consequence, the subject of our analysis comprises a major part of the building that excludes half of the BCHb south western section, where the offices of the Prefecture of Bucharest are placed. According to the Municipality of Bucharest the excluded section will most certainly remain at its present use as administrative office space, and therefore cannot be subject of any proposed scenario. So, refreshing the situation exposed in the above table, the summary of the current space that represents the subject of this pre- feasibility study is presented in table 12.

Table 12. Summary of the BCHb current space use for the pre – feasibility study

Groundfloor Usable area % No. of rooms Firstfloor Usable area % No. of rooms sq.m sq.m Usable 1,300 54.9% 34 Usable 1,534 61.7% 30 Storage 13 0.6% 3 Storage 10 0.4% 2 Bath 40 1.7% 2 Bath 32 1.3% 2 Staircase 142 6.0% 4 Staircase 141 5.7% 4 Elevator 90 3.8% 2 Elevator 90 3.6% 2 Access corridor 781 33.0% 1 Access corridor 679 27.3% 1 Total 2,366 100.0% 46 Total 2,485 100.0% 41

Building Usable area % No. of rooms sq.m Usable 7,435 60.4% 154 Storage 51 0.4% 11 Bath 169 1.4% 10 Staircase 708 5.7% 20 Elevator 450 3.7% 10 Access corridor 3,496 28.4% 5 Total aboveground 12,308 100.0% 210 plus basement 1,879 Total building 14,187 Source: own elaboration, based on the BCHb plans provided by the Municipality of Bucharest, as partner within the PROMISE project

In the following section, based on the BCHb administrative use diagrams and the table 12 summary, particular layouts in accordance to each scenario will be developed and described. Scenario layouts Scenario 1. Mix of Offices & Retail This scenario respects the current layout of the building since the office use is complementary to the present administrative use of the building. The retail part of the building comprises three spaces with areas larger than 100 sq. m located at the ground floor of the BCHb (figure 28). In this scenario, the floors are proposed to accommodate offices (figure 29).

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Figure 28. Scenario 1, ground floor diagram Source: own elaboration, based on the BCHb plans provided by the Municipality of Bucharest, as partner within the PROMISE project

Figure 29. Scenario 1, first floor diagram (same as for the 2nd, 3rd and 4th floors) Source: own elaboration, based on the BCHb plans provided by the Municipality of Bucharest, as partner within the PROMISE project

The distribution of the spaces within BCHb is adapting to the offices and retail use and its summary is illustrated in table 13. Table 13. Summary of the BCHb offices and retail use Groundfloor Usable area % No. of rooms Firstfloor Usable area % No. of rooms sq.m sq.m Office 919 38.8% 31 Office 1,534 61.7% 30 Retail 381 16.1% 3 Storage 10 0.4% 2 Storage 13 0.6% 3 Bath 32 1.3% 2 Bath 40 1.7% 2 Staircase 141 5.7% 4 Staircase 142 6.0% 4 Elevator 90 3.6% 2 Elevator 90 3.8% 2 Access corridor 679 27.3% 1 Access corridor 781 33.0% 1 Total 2,485 100.0% 41 Total 2,366 100.0% 46

Building Usable area % No. of rooms sq.m Office 7,054 57.3% 151 Retail 381 3.1% 3 Storage 51 0.4% 11 Bath 169 1.4% 10 Staircase 708 5.7% 20 Elevator 450 3.7% 10 Access corridor 3,496 28.4% 5 Total abovegrou 12,308 100.0% 210 plus basement 1,879 Total building 14,187 Source: own elaboration, based on the BCHb plans provided by the Municipality of Bucharest, as partner within the PROMISE project

Scenario 2. Mix of Offices & Museum The hypothesis assumed in this scenario regards that the museum will cover the entire ground floor of the BCHb and the other 4 floors will accommodate offices. The interior partitioning is the same as the one used in the first scenario. The basement in both scenario 1 and scenario 2 are used as storage space. Table 14 captures a synthetic picture on the BCHb offices and museum use, maintaining the same distribution of offices at the upper levels as scenario 1.

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Table 14. Summary of the BCHb offices and museum use

Groundfloor Usable area % No. of rooms Firstfloor Usable area % No. of rooms sq.m sq.m Museum 1,300 54.9% 34 Office 1,534 61.7% 30 Storage 13 0.6% 3 Storage 10 0.4% 2 Bath 40 1.7% 2 Bath 32 1.3% 2 Staircase 142 6.0% 4 Staircase 141 5.7% 4 Elevator 90 3.8% 2 Elevator 90 3.6% 2 Access corridor 781 33.0% 1 Access corridor 679 27.3% 1 Total 2,366 100.0% 46 Total 2,485 100.0% 41

Building Usable area % No. of rooms sq.m Office 6,134 49.8% 120 Museum 1,300 10.6% 34 Storage 51 0.4% 11 Bath 169 1.4% 10 Staircase 708 5.7% 20 Elevator 450 3.7% 10 Access corridor 3,496 28.4% 5 Total abovegrou 12,308 100.0% 210 plus basement 1,879 Total building 14,187 Source: own elaboration, based on the BCHb plans provided by the Municipality of Bucharest, as partner within the PROMISE project

Scenario 3. Hotel The third scenario is corresponding with the hotel use of BCHb. The hotel could be projected as a representative accommodation option within Bucharest and will be branded as a full- service property with 118 accommodation units, including a full-service restaurant, a ballroom, fitness facility and conference room. One of the major decision factors when considering the proposed interior layout delimitation was the hotel classification system developed by the Romanian authorities10. In order for the proposed hotel to be rated at 5 stars quantitative criteria have to be surpassed. The minimum criteria that should be taken into consideration when classifying a hotel are precisely specified in the Romanian legislation. In the following table number 15 some main criteria are presented.

10 Ministry of Regional Development and Tourism.

Table 15. Hotel quantitative classification criteria

Source: Ministry of Tourism, 2002. The Order of Ministry of Tourism no. 510/2002 for the approval of the Methodological norms regarding the classification of structures for receiving tourists, Available at: [Accessed 01.03.2012].

Diagrams of ground floor (figure 30) and the other floors (figure 31), which are similar, compose a general benchmark of projected space needs itemized by identified accommodation use. Each diagram was constructed in concordance with the criteria that need to be accomplished by a 5 star hotel and the BCHb interior space distribution.

Figure 30. Scenario 3, ground floor diagram Source: own elaboration, based on the BCHb plans provided by the Municipality of Bucharest, as partner within the PROMISE project

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Figure 31. Scenario 3, first floor diagram (same as for the 2nd, 3rd and 4th floors) Source: own elaboration, based on the BCHb plans provided by the Municipality of Bucharest, as partner within the PROMISE project

The information expressed through the above representative figures regarding the hotel scenario is summarized in the table number 16.

Table 16. Summary of the BCHb hotel use

Groundfloor Usable area % No. of rooms Firstfloor Usable area % No. of rooms sq.m sq.m Accommodation unit 880 37.2% 22 Accommodation unit 1,043 42.0% 24 Flexible* 271 11.4% 2 Flexible* 419 16.9% 2 Storage 13 0.6% 3 Storage 19 0.8% 3 Bath 40 1.7% 2 Bath 32 1.3% 2 Staircase 142 6.0% 4 Staircase 141 5.7% 4 Elevator 90 3.8% 2 Elevator 90 3.6% 2 Access corridor 781 33.0% 1 Access corridor 679 27.3% 1 Other** 150 6.3% 10 Other** 62 2.5% 3 Total 2,366 100.0% 46 Total 2,485 100.0% 41 *restaurant, a ballroom, fitness facility and conference room *restaurant, a ballroom, fitness facility and conference room ** storage, technical room, etc. ** storage, technical room, etc.

Building Usable area % No. of rooms Unit size distribution sq.m 70 Accommodation unit 5,050 41.0% 118 60 Flexible* 1,948 15.8% 10 60 Storage 90 0.7% 15 50 Bath 169 1.4% 10 40 Staircase 708 5.7% 20 30 27 26 Elevator 450 3.7% 10 Access corridor 3,496 28.4% 5 20 Other** 398 3.2% 22 10 5 Total aboveground 12,308 100.0% 210 0 plus 20-25 sqm 25-50 sqm 50-80 sqm 80-120 sqm basement 1,879 Number of accommodation units Total building 14,187 Source: own elaboration, based on the BCHb plans provided by the Municipality of Bucharest, as partner within the PROMISE project

7. Discounted Cash Flow Analysis The feasibility of investment projects is usually carried out using the technique of discounted cash flow (DCF) analysis which takes into account the time value of money and the risk of investing. The result of the approach is the net present value which is estimated as the sum of all discounted future incoming and outgoing cash flows. The feasibility of each scenario was prepared by analyzing their performance criteria such as net present value (NPV), internal rate of return (IRR), benefit to cost (B/C) ratios and payback period. The procedures for determining the net present value are: • Forecasting the Period and Revenue Growth • Forecasting the Net Cash Flows (remaining cash after all the operating cash expenses are paid) • Estimating the Discount Rate • Calculating Project’s Residual Value.

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The DCF analysis of the first scenario has been described in the following section of the report. The starting date of this analysis is 1 January 2012, because that was the due time of the BCHb investment project.

Scenario 1. Mix of Offices & Retail Project Forecasting the Period and Revenue Growth The forecasting period depends on the project’s competitive position and how long will the project be able to generate excess returns to investors. Ultimately,every project settles into maturity phase. As a rule of thumb, the forecasting period should be 5 years for real estate projects with prelease contracts, low mix complexity, excellent location, visibility, access or any other advantage. We have assumed the period of the project to be five years due to the building’s equitable competitive position validated by strong location, efficient transportation access, architecture and prestige. By looking at the average vacancy rate of 10% for the city center area, we conclude that there is enough demand for additional office spaces to maintain five years of stable growth and occupancy rate. For the office market the rent level is usually indexed annually with the Euro CPD. Market rents are anticipated to increase with the annually CPD as the revenue growth concurs with this indicator. Forecasting the Net Cash Flows refers to the remaining cash after all the operating cash expenses are paid. Income and expenses The gross income estimate for an income producing real estate asset is the potential oranticipated gross income from market rents, services, parking space fees and rentals, and all other forms of income to the real property. To develop income data, the consultant investigated comparable asking rentals of competitive office and retail income producing properties in the same market as the subject. Estimating the Market Rent Office space comparable are typically quoted in rates terms of rental rates rather than prices, and the market converts these “annual values” into “capital values” through application of pertinent capitalization (yield) rates.

According to the 2012 International Valuation Standards the market rent can be define as the estimated amount for which a property would be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. Office section Surveying modern office rental offerings in Bucharest city center a list of comparable rental levels had resulted (table 17). Table 17. Comparable rental levels of BCHb

Submarket Sum of Letable area Average of Asking Rent Average of Service No. of Estimated sqm Euro/sqm/month charge Euro/sqm/month projects Vacancy Rate Center 196,350 15 3 29 A 100,550 17 4 12 10% B 78,600 14 3 15 C 17,200 10 4 2 Source: own elaboration, based on market research

The above table indicates the range of monthly unit rental rates between 8-21 Euro/ sq. m. per month with the average around 15, median at 14, first percentile at 12.5 and third percentile at 16.3 Euro/ sq. m. per month. The survey includes 29 office buildings with an average size of 10,000 sq. m. with only 14% of the buildings covering an area over 10,000 sq. m. It is generally known that office space rent can vary intensely from one office building to another due to several factors that contribute to this differential. Main factors that may affect the rental value of an office building can be divided into several categories and subcategories as shown in table 18.

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Table 18. Factors that may affect the rental value of an office building

Source: own elaboration, based on market research

In the particular case of BCHb, some factors compared to others have a greater impact in estimating the rental level, such as letting area and level of finishes. In estimating the rental value of the subject ana analyis on the specific rental market in a radius of 1 km of the property was conducted. Moreover, the most relevant comparable data were centralized within the table 19.

Table 19. The most relevant office comparable data of BCHb

Crt. No. Illustration Area Level of finishes Asking Rent Office Type sq. m. Euro/ sq. m./month

1 4,100 average 14.0 open space

2 1,568 average 15.0 open space

3 1,534 average 10.0 open space

4 1,482 high 10.1 villa

5 740 average 13.5 open space

6 700 high 8.6 villa

7 590 average 8.0 villa

8 550 luxury 18.2 villa

9 455 high 13.0 administrative

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10 450 luxury 20.0 villa

11 400 average 10.0 open space

12 300 high 16.5 open space

13 284 average 13.0 open space

14 280 average 15.0 open space

15 280 average 15.0 open space

16 188 average 13.0 administrative

SUBJECT 11,927 average to high administrative

Source: own elaboration, based on market research

The assessment of the subject market value was made by using two distinctive methodologies. The first approach is based on qualitative influences by using relative comparison of the subject property with the most similar comparable and therefore attributing it also the most probable market rent. Since the subject building can be divided

© AESB. All rights reserved. Page 70 of 118 Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0 into smaller surfaces and separately leased, it is our considerate that comparable 9 represents the most similar comparable to the analyzed property. The second method is based on a more statistical approach by using the multiple linear regression to estimate the market rent based on the three described variable: area, finishes quality and office type. This approach assumes that a straight-line relationship exists between each independent variable and the dependent variable (market rent). The correlation between the area and the asking rent can be observed in the below graph. The graph includes the influence of the other two factors. As expected the trends of the independent and dependent variables are in negative correlation meaning that the larger the leased area is, the higher the unitary asking rent (figure 32).

Figure 32. Correlation between the asking rent and area of the building Source: own elaboration, based on market research

For the model to function the fallowing notation were made: “1” for average finishes and open space type area, “2” for high finishes and villa type area and “3” for luxury finishes and administrative space type area. Applying the linest excel function the multiple regression equation was obtained: Market Rent = -0.00024*leased area + 2.973055*finishes quality -1.754912*office type + 11.797649

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We have made an estimation of the market rent of the subject property situated in the same area as the selected comparable spaces that has 5 leasable floors of 2,485 sq. m. each, presumed average to high finishes and administrative layout, at 10.4 Euro/ sq. m./month. We stress that the above estimates does not consider other positive features of the building, for instance: excellent access, visibility and prestige, features that will be reflected in the final decision. Upon consideration of competitive projects and current market situation in Bucharest office market, including market and location specificities, the recommendation is to use the current marketable rent level of 13 Euro/ sq. m./month. Retail Section The immediate neighborhood where the subject building is situated comprises a unique retail mix which includes the high street section represented by Magheru Boulevard, Calea Victoriei and historical center, and the Shopping Centre section exemplified by Cocor and Unirea Shopping Centre. Regina Elisabeta Boulevard, although interconnected with Magheru Boulevard, can be included in the category of secondary retail locations reaching an average rent level between 20 and 30 Euro/sq. m./ month. Bellow is the illustration of the three major retail segments of the area (figure 33).

Figure 33. The illustration of the three major retail segments of the City Center area Source: own elaboration, based on the Bucharest city map

Rents for high street retail properties were under pressure in 2011 and fallowed the downward trend in annual comparison. The highest rents are obtained in Bucharest’s Magheru Balcescu Boulevards, the main high streets in Romania, with Euro 50-80 per sq. m, followed by Calea Victoriei with Euro 50-70 per sq. m, depending on numerous factors such as access, exposure, size of space, etc. The Shopping Centre segment in the area is represented by Unirea Shopping Center and Cocor Store. Unirea Shopping Center is structured on five levels having a total leasable area of about 46,000 sq. m. being refurbished in 2000, and till 2009, prior to the opening of fashion store Zara, the merchandise and tenant mix as well as the partitioning could have not been compared to those of a modern shopping mall its benefit being represented only by its location. After the arrival of Zara and afterword a major part of Inditex Group and more recently H&M, the Centre witnessed several major refurbishment and repartitioning works. In the case of Cocor Store, refurbishment works started in 2008 and besides seismic consolidation, the built surface was increased from 10,000 sq. m to 25,000 sq. m, while the leasable area grew from 6,000 sq. m to 10,000 sq. m. In the commercial centres the rent can also be considered to have a stable trend in an average interval of monthly Euro 35 to 60 per sq. m. Although the information presented above can be considered sufficient in estimating the subject’s rental value, we have further extended the analysis to the immediate proximity of our property by extracting the most similar available comparable data. The retail space located at the ground floor of the property building can accommodate leisure units like bakery/cafeteria/ restaurant or even a fashion store since the rest of the building is projected to be used as office space and can easily sustain the retail demand for such shops. We have shown that rental values vary significantly from street to street and can exclusively depend also on access and visibility (table 20). Since the analyzed retail space does not benefit from direct street visibility and in some cases can solely depend on the demand endorse by the building without major inflows from exterior pedestrian traffic, an achievable rent level of 15 Euro/ sq. m/ month would be the recommended. The rent was considered to be closer to what restaurants or fast foods

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Table 20. The most relevant retail comparable data of BCHb

Crt. No. Illustration Area Level of finishes Visibility Asking Rent Comments sq. m. Euro/ sq. m./month groundfloor of 168 sq m at 29.8 Euro/sq m 7 m window to Regina /month and 227 sq m 1 395 average 29.8 Elisabeta Boulevard basement at 13.2 Euro/sq m /month, highly negotiable

7 m window to Calea Victoriei, at 20 m form 90 sq m at basement and 2 190 average 25.3 the junction with Regina 100 sq m at groundfloor Elisabeta Boulevard

3 m window to Actor Ion Brezoianu, at 20 m from 144 sq m at groundfloor 3 167 average 16.2 the junction with Regina and 52 sq m at first floor Elisabeta Boulevard

7 m window to Mihail 4 110 average 19.0 110 sq m at groundfloor Kogalniceanu Boulevard

14 m window to Mihail 5 170 average 23.0 170 sq m at groundfloor Kogalniceanu Boulevard

10 m window to Mihail 6 250 average 16.0 250 sq m at groundfloor Kogalniceanu Boulevard

three uits with areas of SUBJECT 381 average to high no window 110.2 sq m, 137.8 sq m and 133 sq m

Source: own elaboration, based on market research

Vacancy Loss Vacancy and collection loss reflects the reduction of the potential gross income attributable to vacancies and nonpaid rent and should imitate the status of the competitive market. The ongoing vacancy rate expresses the general market trend which in the current period stands at 10% for the city center area and estimated to gradually decrease to 5% in the last year of projection. This type of vacancy can be considered as a provision for loss of rent due to new competitive supply or demand decrease and can be reformulated in terms that the building will not be entirely occupied. The allowance vacancy loss for new lease contract was estimated at 3 months in the first operational year and another 3 months at the expiration date of the lease which will occur in year 4 year. Effective Gross Income Effective gross income is calculated as the potential gross income minus the vacancy and collection loss allowance. Operating Expenses Operating expenses are the necessary expenditures for the real property to function and produce the effective gross income, supposing a competent management. The operating expenses are divided into three categories: Fixed expenses (property tax and building insurance) The property tax is calculated as 1.5% taxation percentage based on its inventory value or market value. In our case we have presumed that the building was fully depreciated at the moment of the study and therefore the major base of taxation would become the sum of all consolidation and refurbishment costs that are added to the remaining accounting value. We have estimated the yearly depreciation based on a useful life of 50 years. The typical insurance for fire, extended coverage and owner’s liability insurance was estimated as 0.2% out of the inventory value of the building. Insurance on other assets like inventory or business liability is restrained to the tenant’s responsibility and therefore was not charged to the operation of the property. Variable expenses (agency commissions, maintenance and repair) Leasing commissions are fees paid to a real estate agency for leasing tenant space. In our analysis the leasing fees were included at the time period they occur, respectively in the first

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Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0 and fourth year of the model. Real estate agencies usually charge a contractual month’s rent for office space, while for retail space a month and a half. Maintenance and repair expenses were estimated 1% of the total annually gross income. They are incurred over the year to sustain the overall physical condition of the property building. On the local market it is well established that all utilities expenses are paid by the tenant through a monthly service charge. Replacement allowance A replacement allowance insures the funds for periodic replacement of building components that wear out more rapidly than the building itself and must be replaced during its exploitation period. Since the building is assumed to be totally refurbished by the date of the first lease contract, no replacement works should be immediately necessary. We have reflected the replacement allowance as an expense in the final capitalization year and therefore influencing the residual value of the property. Net Operating Income After total operating expenses are deducted from the effective gross income, the remaining value is the net operating income. Capitalization Rate (Yield) This rate provides for return on invested capital plus a return on the investment. Investment transactions of office buildings are rare; consequently the market yield is based mainly on estimations, and less on the actual achieved rates. The most recent major office transaction was made at the end of 2010 when investment fund NEPI (New Europe Property Investments) bought Floreasca 169A (Floreasca Business Park) for 101.2 M from developer Portland Trust at a yield of about 8%. The project has a total leasable area of 36,032 sq. m with an average rent of 17.21 Euro/ sq. m excluding any parking income. The estimated yields for prime office buildings in CBD of Bucharest estimated by first five major real estate companies are as follows: 8.0%, 8.0%, 8.25%, 8.5% and 9.0%. Based on this, an appropriate overall capitalization rate is established at 8.25%. Discount Rate A discount rate measures the investment performance over a giving period that accounts for risk and return on capital. A discount rate can be built up using the cap rate if the income and growth both vary at a constant rate. The build up is derived by the formula:

Discount Rate = Capitalization Rate + Constant Rate of Change Thus, if the market extracted capitalization rate was estimated at 8.25% and the constant rate of change is 2.7%, the discount rate is 10.95%. Net Present Value The net present value (NPV) is the sum of the discounted annual cash flows. The cost of consolidation and refurbishment works for the entire building were budgeted at 15.501.045 Euro excluding V.A.T. at an average 2012 exchange rate11. Since the subject of analysis represents about 88% of the total built area of the BCHb, the costs were proportionally divided resulting an initial investment of 13.674.099 Euro. Complex calculations were made in order to obtain the level of the Net Present Value (table 21). Finally, the NPV of the first scenario is of 4,489,030 Euro. Table 21. Calculations of NPV for office and retail use of BCHb

PERFORMANCE CRITERIA Initial Investment Net Operating Income PROJECT TIMELINE Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 13,674,099 898,588 1,663,478 1,758,560 1,109,168 24,334,476

Net Present Value NPV 4,489,030 euro

Internal Rate of Return IRR 19%

Benefit to Cost B/C 1.36

Payback Period PP 9 years

Discounted Payback Period DPP 23 years

11 According to the contract signed between the Municipality of Bucharest and the company that is in charge of the consolidation and refurbishment works of BCHb.

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2012f 2013f 2014f 2015f 2016f Euro CPI 2.8% 2.7% 2.6% 2.7% 2.7% YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 Crt.No. Section Use Usable area Lettable Estimated Estimated Estimated Estimated Estimated Estimated Estimated Estimated Estimated Estimated area Unitary Rent Annual Rent Unitary Rent Annual Rent Unitary Rent Annual Rent Unitary Rent Annual Rent Unitary Rent Annual Rent

sq.m. sq.m. Euro/sq.m./m Euro/ year Euro/sq.m./m Euro/ year Euro/sq.m./m Euro/ year Euro/sq.m./m Euro/ year Euro/sq.m./m Euro/ year onth onth onth onth onth 1 Basement Storage 1,878 939 3.0 33,804 3.1 34,717 3.2 35,619 3.2 36,581 3.3 37,569 2 Ground floor Retail 381 381 15.0 68,598 15.4 70,450 15.8 72,282 16.2 74,233 16.7 76,238 3 Ground floor Office 1,985 1,985 13.0 309,719 13.4 318,082 13.7 326,352 14.1 335,163 14.4 344,213 4 1 st floor Office 2,485 2,485 13.0 387,727 13.4 398,196 13.7 408,549 14.1 419,580 14.4 430,908 5 2 nd floor Office 2,485 2,485 13.0 387,727 13.4 398,196 13.7 408,549 14.1 419,580 14.4 430,908 6 3 rd floor Office 2,485 2,485 13.0 387,727 13.4 398,196 13.7 408,549 14.1 419,580 14.4 430,908 7 4 th floor Office 2,485 2,485 13.0 387,727 13.4 398,196 13.7 408,549 14.1 419,580 14.4 430,908 8 Courtyard Parking 102 102 50.0 61,200 51.4 62,852 52.7 64,487 54.1 66,228 55.6 68,016 Total ( excluding park ing) 14,186 13,247

Total Gross rental revenue( excluding vacancy & expenses) 2,024,230 2,078,884 2,132,935 2,190,524 2,249,668

Ongoing Vacancy rate 10% 8% 6% 5% 5% Ongoing Vacancy loss 202,423 166,311 127,976 109,526 112,483 New contract vacancy rate 25% 0% 0% 25% 0% New contract vacancy loss 506,057 0 0 547,631 0 Total vacancy rate 35% 8% 6% 30% 5% Total vacancy loss 35% 708,480 8% 166,311 6% 127,976 30% 657,157 5% 112,483

Effective Gross Income 65% 1,315,749 92% 1,912,573 94% 2,004,959 70% 1,533,367 95% 2,137,185

Property tax 1.5% 205,111 202,915 199,720 196,966 192,775 Insurance 0.2% 27,348 27,055 26,629 26,262 25,703 Agent fees(letting/ reletting) 171,544 0 0 185,637 0 Maintenance and repair 1.0% 13,157 19,126 20,050 15,334 21,372 Replacement & Other expenses 2.0% 0 0 0 0 42,744

Expenses 21% 417,161 12% 249,096 12% 246,399 19% 424,199 13% 282,594

Total vacancy & expenses loss 56% 1,125,642 20% 415,406 18% 374,375 49% 1,081,356 18% 395,078

Net Operating Income 44% 898,588 80% 1,663,478 82% 1,758,560 51% 1,109,168 82% 1,854,591

Estimated Capitalization Rate 8.25%

Residual Value € 22,479,886

Anticipated growth 2.70%

Estimated Discount Rate 10.95%

Net Present Value € 18,654,677 NPV/ Usable area € 1,315 Net Operating Income Expenses Total vacancy loss NPV/ Built area € 848 Source: own elaboration

Scenario 2. Mix of Office & Museum For this scenario the layout of the building will be divided between a museum which will occupy the entire ground floor and the rest of the property will be used as office space. As the office market was detailed in the previous parts of the pre- feasibility study, the museum area is the subject that needs to be debated in this section. Museum area According to the Law no.311/2003 on museums and public collections, the proposed museum will be financed from own revenues and state budgetary allotment, subordinated to the Ministry of Culture and National Heritage. Our estimates are based on an extensive analysis of the museum market and of the actual operating results of two of the most representative museums situated in close proximity of the BCHb. As direct comparison we have used the financial statements of the National Museum of History and National Museum of Art. The synthesis of available financial statements of the two museums screening the major groups of revenues and expenses are included in table 22. Our research revealed that trends on the number of visitors in the museum market can be deemed by numerous economic and social factors and any estimation is highly volatile in case of new museums openings where no kind of historic operational data is available.

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Table 22. Synthesis on revenues and expenses of the National Museum of History and National Museum of Art

National Museum of History (MNIR) 2010 % 2009 % 2008 % 2007 % Average Min Max 2010 2008 2007 Revenues N/A N/A N/A N/A 11,347,343 8,636,842 Own Incomes 3,046,821 26.85% 2,119,481 24.54% 25.9% 24.54% 26.85%

Tick ets 127,782 4.19% N/A 4.2% 4.2% 4.2% Research contracts/ services 2,828,945 92.85% N/A 92.8% 92.8% 92.8% Other 90,093 2.96% N/A 3.0% 3.0% 3.0%

Budgetary allotment 8,299,872 73.14% 6,425,810 74.40% 73.7% 73.14% 74.40% Sponsorships 650 0.01% 86,368 1.00% 0.4% 0.01% 1.00%

Expeditures 10,716,958 94.44% 8,582,199 99.37% 96.6% 94.44% 99.37% Staff expeditures 6,073,370 53.52% 4,898,719 57.08% 54.9% 53.52% 57.08% Goods and services 3,892,592 34.30% 2,427,904 28.29% 31.6% 28.29% 34.30% Endownments 667,146 5.88% 1,255,576 14.63% 9.6% 5.88% 14.63% Other expenses 83,850 0.74% 0.4% 0.74% 0.74%

Net Operating Income 630,385 5.56% 54,643 0.63% 3.4% 0.63% 5.56%

National Museum of Art (MNAR) 2010 % 2009 % 2008 % 2007 % Average Min Max 2010 2009 2008 2007 Revenues 18,131,906 19,680,778 25,329,066 21,659,000 Own Incomes 703,069 3.88% 1,225,117 6.22% 2,042,137 8.06% 1,576,000 7.28% 6.54% 3.88% 8.06%

Tick ets 318,421 45.29% 341,321 27.86% 346,099 16.95% 238,000 15.10% 22.43% 15.10% 45.29% Services 296,950 42.24% 769,280 62.79% 1,566,424 76.71% 1,257,000 79.76% 70.13% 42.24% 79.76% Other 87,698 12.47% 114,516 9.35% 129,614 6.35% 81,000 5.14% 7.44% 5.14% 12.47%

Budgetary allotment 16,620,000 91.66% 17,091,000 86.84% 23,102,000 91.21% 19,944,000 92.08% 90.51% 86.84% 92.08% Sponsorships 808,837 4.46% 1,364,661 6.93% 184,929 0.73% 139,000 0.64% 2.95% 0.64% 6.93%

Expeditures 17,703,262 97.64% 18,456,325 93.78% 25,329,066 100.00% 21,659,000 100.00% 98.05% 93.78% 100.00% Staff expeditures 8,389,658 46.27% 9,901,386 50.31% 9,257,099 36.55% 7,664,000 35.38% 41.52% 35.38% 50.31% Goods and services 7,813,608 43.09% 8,139,354 41.36% 12,377,270 48.87% 10,244,000 47.30% 45.49% 41.36% 48.87% Utilities 2,232,995 12.32% 2,704,465 13.74% 2,730,063 10.78% 2,196,000 10.14% 11.63% 10.14% 13.74% Endownments 1,499,996 8.27% 415,585 2.11% 3,694,697 14.59% 3,751,000 17.32% 11.04% 2.11% 17.32%

Net Operating Income 428,644 2.36% 1,224,453 6.22% 0 0.00% 0 0.00% 1.95% 0.00% 6.22%

MNIR+MNAR Average Min Max Museum operational data benchmark Revenues Average Min Max Own Incomes 10.22% 3.88% 26.85% 120% Tick ets 100% 15.96% 4.19% 45.29% Research contracts/ services 80% 78.19% 42.24% 92.85% Other 5.85% 2.96% 12.47% 60% 40% Budgetary allotment 87.31% 73.14% 92.08% Sponsorships 20% 2.47% 0.01% 6.93% 0% Expeditures 97.77% 93.78% 100.00% Staff expeditures 44.08% 35.38% 57.08% Goods and services 42.84% 28.29% 48.87% Endownments 10.77% 2.11% 17.32%

Net Operating Income 2.23% 0.00% 6.22%

Source: own elaboration, based on the Activity report of the National Museum (2006, 2007, 2008) of History and National Museum of Art (2007, 2008, 2009, 2010). Available at: and < http://www.mnar.arts.ro/Rapoarte-de-activitate> [Accessed 17.02.2012].

It is more relevant to analyze the budgetary allotment when determining revenue trends, particularly since this is the major revenue contributor to a museum with a share between 73% and 92% of the total revenues (figure 34). This category of revenue tends to overlook the impact of revenues from sold tickets over the operational activity of the facility.

Figure 34. Average museum revenue breakdown Source: own elaboration, based on the Activity report of the National Museum (2006, 2007, 2008) of History and National Museum of Art (2007, 2008, 2009, 2010). Available at: and < http://www.mnar.arts.ro/Rapoarte-de-activitate> [Accessed 17.02.2012]

However, since the income derived from sold tickets represents one of the starting points for our revenue and expenses budget projection, we have estimated the number of visitors to be proportional with the exhibition area of the museum. We have assumed that the museum component of BCHb will contain the entire ground floor of the building, namely a total usable area of 2,366 sq. m. By comparison with the National Museum of History that comprises a total area of 20,000 sq. m., we estimate that the subject museum should be able to achieve a stabilized annual traffic level of 9,000 visitors, with daily attendance projected at 25 visitors. In order to develop this projected utilization level, we looked at the number of annual visitors of the first five most visited museums in Bucharest. These data are shown in the figure number 35.

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* estimated (for crt. no. 1 55,817 visitors till September, 65,850 visitors till 18 November for crt.no. 2 and 59,835 visitors for crt. no.3 till 24 November) Figure 35. Top 5 most visited museums in Bucharest in 2010 and 2011 Source: National Institute of Statistics, 2011. Database TempoOnline, Section Culture, Museum direction, section ART113A – Visitors in museums and public collections, on counties and localities [RO: Vizitatori in muzee si colectii publice, pe judete si localitati], Available at : [Accessed 10.03.2012].

Based on the performance indicators detailed in the previous two graphs, it is our professional opinion that the proposed museum can capture its fair share of 9,000 annual visitors out of which 30% paid tickets and 70% free entrance. The average entrance fee is estimated at 1.5 Euros, lower than 1.84 Euros for an entrance at the National Museum of History or National Museum of Art taking into account that the subject museum is addressing to a certain niche. Prices and tariffs for the museums services are set by the museum management, excluding the implication of any authority. According to the legislation in force, the entrance fees set by the museum management need to be approved by the authority to which is subordinated. After analyzing the historic charges set by several museums we can conclude that an increase of the entrance fees are really seen and tend to remain at the same level for several years. In estimating the number of potential visitors we have used the estimated return values along the linear trend (using the method of least squares) of historic data for number of visitors in Bucharest. Therefore, the figure 36 contains the number of visitors during 1996- 2010 and the projection for the following 5 years.

Figure 35. Number of museum visitors in Bucharest Source: National Institute of Statistics, 2011. Database TempoOnline, Section Culture, Museum direction, section ART113A – Visitors in museums and public collections, on counties and localities [RO: Vizitatori in muzee si colectii publice, pe judete si localitati], Available at : [Accessed 10.03.2012].

As a result, the number of visitors is estimated to increase with an average of 2.3% per year within the 2012-2015 period. Bucharest has numerous museums, many financed by local authorities, and only 14 that receive budget allotment directly from the Ministry of Culture and Heritage. It is our opinion that the level of financed allotment depends mostly on two major factors: medium to long- term strategy and the approved budget of Ministry of Culture and Heritage. As primary strategy, the museums should decrease its budgetary finance dependency and become more like competitive enterprises. However, with no concrete plan of implementation, no major changes are to be expected in the near future period. The vast majority of museums are struggling to increase their private income through sponsorship, services and entrance fees, and only few are those who have significant income that derive from other sources than budget subsidy. In the table number 23 the historic and projected budget of the Ministry of Culture and Heritage is presented.

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Table 23. The historic and projected budget of the Ministry of Culture and Heritage

Source: National Institute of Statistics, Ministry of Finance, National Commission of Prognosis

Analyzing the trend of the granted museum allotment in years 2010-2011 and the estimated scheduled Budget of Ministry of Culture and Heritage, these projections indicate an overall negative trend over the entire forecast period. For our proposed museum the staff and goods/ services expenditures represents over 80% of the total expenses and are expected to grow year to year based on the estimated average gross earnings change and annual inflation. In these conditions, presuming that the budget allotment fallows a downward trend, the total operating expenses exceeds by far the total income implying a negative operational income. Therefore, our opinion is that the museum has no possibility of self-sustainability and additional financing will be needed from the state budget or local authorities. As a result, the projected museum implies a zero net present value. All projections based on quantitative methods of estimation were subject to a thorough review. We have modified the predictions in situations where compelling evidence that factors have come into play in a market where the model could not possibly predict. In such cases, we have made modest adjustments or declined the model. Office area All assumption and estimates are the same as those used in the first scenario, including the capitalization and discount rate. The pro forma year statement and the five-year statement in Euros are presented in the following section.

Net Present Value The net present value (NPV) is the sum of the discounted annual cash flows. The cost of consolidation and refurbishment works for the entire building were budgeted at 15.501.045 Euro excluding V.A.T. at an average 2012 exchange rate. Since the subject of analysis represents about 88% of the total built area of the building, the costs are proportionally divided resulting an initial investment of 13.674.099 Euro. The NPV of the second scenario is 1,763,084 Euro, including the museum calculations (table 24) and the office calculations (table 25).

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Table 24. Museum calculations of NPV for BCHb

Year 2011 2012f 2013f 2014f 2015f

Estimated Number of visitors evolution 2.3% 2.3% 2.2% 2.2%

Estimated Number of visitors 9,000 9,210 9,420 9,630 9,840

Estimated entrance fee 1.5 1.5 1.5 1.5 2.0

Estimated free admissions % 70% 70% 70% 70% 70%

2011 2012f 2013f 2014f 2015f

Revenues 244,218 247,345 255,666 264,821 273,650 Own Incomes 25,373 10.22% 25,965 10.50% 26,557 10.39% 27,149 10.25% 36,988 13.52%

Tick ets 4,050 15.96% 4,144 15.96% 4,239 15.96% 4,333 15.96% 5,904 15.96% Research contracts/ services 19,838 78.19% 20,301 78.19% 20,764 78.19% 21,227 78.19% 28,919 78.19% Other 1,485 5.85% 1,520 5.85% 1,554 5.85% 1,589 5.85% 2,165 5.85%

Budgetary allotment 216,678 87.31% 219,188 88.62% 226,840 88.73% 235,319 88.86% 234,319 85.63% Sponsorships 2,167 0.89% 2,192 0.89% 2,268 0.89% 2,353 0.89% 2,343 0.86%

Expenditures 238,769 97.77% 247,345 100.00% 255,666 100.00% 264,821 100.00% 273,650 100.00% Staff expenditures 107,640 44.08% 112,484 44.08% 117,433 44.08% 122,717 44.08% 127,994 44.08% Goods and services 104,634 42.84% 107,773 42.84% 110,468 42.84% 113,561 42.84% 116,400 42.84% Endownments 26,299 10.77% 27,088 10.77% 27,765 10.77% 28,543 10.77% 29,256 10.77%

Net Operating Income 5,449 2.23% 0 0.00% 0 0.00% 0 0.00% 0 0.00% Source: own elaboration

Table 25. Office calculations of NPV for BCHb, in scenario 2

PERFORMANCE CRITERIA Initial Investment Net Operating Income PROJECT TIMELINE Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 13,674,099 1,274,363 1,349,486 1,426,846 901,379 19,747,890

Net Present Value NPV 1,763,084 euro

Internal Rate of Return IRR 14%

Benefit to Cost B/C 1.14

Payback Period PP 10 years Discounted Payback Period DPP >100 years

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sq.m. sq.m. Euro/sq.m./m Euro/ year Euro/sq.m./m Euro/ year Euro/sq.m./m Euro/ year Euro/sq.m./m Euro/ year Euro/sq.m./m Euro/ year onth onth onth onth onth 1 Basement Storage 1,878 939 3.0 33,804 3.1 34,717 3.2 35,619 3.2 36,581 3.3 37,569 2 Ground floor Museum 381 3 Ground floor Museum 1,985 4 1 st floor Office 2,485 2,485 13.0 387,727 13.4 398,196 13.7 408,549 14.1 419,580 14.4 430,908 5 2 nd floor Office 2,485 2,485 13.0 387,727 13.4 398,196 13.7 408,549 14.1 419,580 14.4 430,908 6 3 rd floor Office 2,485 2,485 13.0 387,727 13.4 398,196 13.7 408,549 14.1 419,580 14.4 430,908 7 4 th floor Office 2,485 2,485 13.0 387,727 13.4 398,196 13.7 408,549 14.1 419,580 14.4 430,908 8 Courtyard Parking 102 102 50.0 61,200 51.4 62,852 52.7 64,487 54.1 66,228 55.6 68,016 Total ( excluding park ing) 14,186 10,881

Total Gross rental revenue( excluding vacancy & expenses) 1,645,912 1,690,352 1,734,301 1,781,127 1,829,218

Ongoing Vacancy rate 10% 8% 6% 5% 5% Ongoing Vacancy loss 164,591 135,228 104,058 89,056 91,461 New contract vacancy rate 0% 0% 0% 25% 0% New contract vacancy loss 0 0 0 445,282 0 Total vacancy rate 10% 8% 6% 30% 5% Total vacancy loss 10% 164,591 8% 135,228 6% 104,058 30% 534,338 5% 91,461

Effective Gross Income 90% 1,481,321 92% 1,555,124 94% 1,630,243 70% 1,246,789 95% 1,737,757

Property tax 1.5% 169,540 167,724 165,083 162,807 159,343 Insurance 0.2% 22,605 22,363 22,011 21,708 21,246 Agent fees(letting/ reletting) 0 0 0 148,427 0 Maintenance and repair 1.0% 14,813 15,551 16,302 12,468 17,378 Replacement & Other expenses 2.0% 0 0 0 0 34,755

Expenses 13% 206,958 12% 205,638 12% 203,397 19% 345,410 13% 232,721

Total vacancy & expenses loss 23% 371,549 20% 340,866 18% 307,455 49% 879,748 18% 324,182

Net Operating Income 77% 1,274,363 80% 1,349,486 82% 1,426,846 51% 901,379 82% 1,505,035

Estimated Capitalization Rate 8.25%

Residual Value € 18,242,854

Anticipated growth 2.70%

Estimated Discount Rate 10.95%

Net Present Value € 15,630,241 NPV/ Usable area € 1,322 Net Operating Income Expenses Total vacancy loss NPV/ Built area € 860 Source: own elaboration

Scenario 3 Hotel Hotel market penetration and estimates of occupancy Consultants use one of two known methods to analyze competitive positions: the market penetration method and the competitive index method. In order to determine the expected occupancy rate of the proposed accommodation facility, both approaches calculate the obtained specific 5 star market share. Market penetration is based upon our evaluation of the attributes of the subject 118 unit- hotel and the subject site relative to the competitive accommodation market. Market penetration achieved by a hotel is correlated to the proportion of the total hotel room supply in the subject market represented by the property. In the case of the subject hotel, its available rooms will represent 5.7 percent of the rooms in the competitive set upon entry. Factors indicating that a hotel would possess competitive advantages suggest a market penetration index (MPI) in excess of 100 percent of fair market share, whereas competitive disadvantages are reflected in MPI’s of less than 100 percent of fair market share. In 2008 the five stars Bucharest hotel supply counted for 1,908 units with an average occupancy rate situated around 65% while in Q3 the new opened Radisson Blu Hotel, comprising the larges five star facility in Bucharest with 424 units i.e. 22% of total supply, reached an occupancy level of 50% according to company’s representatives. The calculated penetration factor for the hotel was 0.8 of fair market share due to general disadvantages of new market competitor. After its first operational year the hotel slowly begun to recover its fair market share and after 3 years of exploitation managed to stabilize around the market averages performance indicators. We have based our estimates of future market penetration for the subject Hotel on the location, targeted market segments, effective marketing, professional management, and levels of services and amenities offered at the subject property. We have assumed that the Hotel component of the proposed development will be branded as a full-service property and will contain 118 units, a full-service restaurant, a ballroom, fitness facility and conference room. We estimate that the subject 118-unit Hotel should be able to achieve a stabilized occupancy level of 67%. Overall market penetration (percentage of fair share) in the stabilized year (the fourth year of operation) is estimated to be 100 percent.

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Our estimates of future penetration rates and occupancy levels for the subject 118-unit Hotel for the four-year period beginning January 1, 2012 are summarized in figure 36.

Figure 36. GDP and occupancy correlation Source: own elaboration, based on data from the National Commission for Prognosis, IMF, Eurostat

The correlation factor for period 2008-2011 between the country’s GDP and hotel occupancy rate is around 78%. Therefore, by means of forecast of the main economic indicators released by the National Commission of Prognosis, we were able to estimate the future occupancy rate by using also a 3% increase for 2012 according to information provided by market leaders and for the forthcoming years the linear regression function (figure 37, table 26) .

Figure 37. Projected subject occupancy Source: own elaboration, based on data from the National Commission of Prognosis, IMF, Eurostat

Table 26. Data on projected subject occupancy Year Market Subject Hotel Penetration Occupancy Occupancy Rate 2012 70% 56% 80% 2013 66% 58% 87% 2014 67% 62% 93% 2015 67% 67% 100% Source: own elaboration, based on data from the National Commission of Prognosis, IMF, Eurostat

As the previous table illustrates, we expect the property to gradually increase its penetration rate reaching the market rate in year 2015, at which time we anticipate occupancy at the subject property to stabilize at 67%. Average Room Rate Analysis We have based the average room rate analysis for the subject Hotel on the estimated average room rates achieved by properties in the competitive market, price points of properties with similar product, and the pricing and discounting policies within the market area. Other factors considered in estimating the average daily room rates were the anticipated market mix of the proposed Hotel and the estimated percentage receiving a discount within each market segment. We estimate that the subject property should be able to achieve an average daily room rate of 100 Euros (in 2011 value) in a representative year of operation. A representative year of operation is a year in which the subject property is projected to have reached a stabilized level of performance. Our projections of occupancy and average daily rate assume that the subject Hotel will have to discount rates heavily, particularly during non-peak demand periods, in order to achieve the projected level of demand. As such, the annual average daily rate level may be well above or below the average rate level at any point in time during the course of the year. The figure 38 illustrates our projected average daily room rates for the subject property for the representative year while table 27 presents the operating period from January 1, 2012 through December 31, 2015.

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The constant level of the estimated ADR concurs with the future opening of Hercesa Hotel and Boulevard Hotel, both located in close proximity of the subject property.

Figure 38. GDP & ADR correlation Source: own elaboration, based on data from the National Commission of Prognosis, IMF, Eurostat

Table 27. Projected average daily room rates for scenario 3 of BCHb Year Estimated Subject change Projected ADR 2012 7.4% 100 2013 1.5% 101 2014 0.7% 102 2015 0.2% 102 Source: own elaboration

In order to remain competitive, the subject property will be obligated to preserve its average daily rate (ADR) in favor of a similar of higher occupancy level which can result in a positive trend of RevPAR variable. Statements of estimated annual operating results Introduction and basis of assumptions On the basis of our analysis of the proposed scenario, and our findings relative to the indicated market demand for accommodations such as the proposed property, we have prepared statements of estimated annual operating results for the project. To develop financial estimates for the first four years of operation, an estimate was first made of annual operating results that could be achieved with competent management in a

© AESB. All rights reserved. Page 92 of 118 Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0 representative or stabilized year in 2011 value euros. From this basis, assumptions regarding inflation, start-up periods, and rates of capture demand were made to derive the statement for period January 1, 2013th rough December 31, 2015. Depending on the activity type of the business we have estimated that after a period of 4 volatile years, the cash flow will stabilize starting with the 5th year. Our estimates are based on an extensive analysis of the accommodation market in Bucharest, especially 4 and 5 stars hotels and of the actual and projected operating results of hotels of a similar size and type operating at occupancy and average room rate levels similar to those projected for the subject property. For our estimates, depending on similar characteristics such as location, rating, amenities, etc., but also on the availability of public data, we have selected Intercontinental Hotel to be the most representative guideline in our estimation. As direct comparison we have used the financial statements of Intercontinental Bucharest Hotel, a five star high rise facility located in Universitatii Square, in walking distance from the old city center and Cismigiu Park (table 28). The hotel was selected as a major benchmark for the subject property due to its similar features such as location, star classification and size. Table 28. Financial statements of the Intercontinental Bucharest Hotel

Facility name Intercontinetal Hotel Height 22 floors Accommodation units 257 guest rooms and 21 suites 8 meeting rooms totaling an area of 1,289.1 Amenities & services sq.ms., three restaurants, health & fitness center and 1,554 sqm.ms. of exhibit space.

2010f 2010 2009 2008

Occupancy rate 62.6% 59.1% 48.4% 50.6%

ADR* N/A 89 95 157

No. of tourists N/A 69,454 60,220 57,643

romanians N/A 11,008 7,857 587 foreigners N/A 58,446 52,363 57,056

No. of employees N/A 274 291 329

No. of employees per unit N/A 0.99 1.05 1.18 * calculated using average yearly exchange rate

Source: www.intercontinental.com

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Intercontinental Bucharest Hotel’s structure of forecasted revenues and expenses for year 2011 and realized for 2010 is presented in table 29, respectively 30. Table 29. Intercontinental Bucharest Hotel’s structure of forecasted revenues and expenses for 2011

Ratio to Per Per 2011f Sales Available Occupied unit unit Night Revenues Rooms 5,171,193 52.4% 18,601 81 Food and Beverage 3,691,215 37.4% 13,278 58 Telecommunication 72,206 0.7% 260 1 Other Operated Departments 545,789 5.5% 1,963 9 Rentals and Other Income 394,771 4.0% 1,420 6 Total Revenues 9,875,174 100.0% 35,522 155

Departmental Costs and Expenses Rooms 1,388,188 26.8% 4,993 22 Food and Beverage 2,274,004 61.6% 8,180 36 Telecommunication 57,104 79.1% 205 1 Other Operated Departments & Rentals 130,489 13.9% 469 2 Total Costs and Expenses 3,849,784 39.0% 13,848 61

Total Operated Departmental Income 6,025,390 61.0% 21,674 95

Undistributed Operating Expenses Administrative and General 1,378,749 14.0% 4,960 22 Marketing 541,070 5.5% 1,946 9 Utility Costs 878,265 8.9% 3,159 14 Property Operation and Maintenance 517,945 5.2% 1,863 8 Total Undistributed Expenses 3,316,029 33.6% 11,928 52

Gross Operating Profit 2,709,361 27.4% 9,746 43

Management Fees 213,313 2.2% 767 3

Income Before Fixed Charges 2,496,048 25.3% 8,979 39

Fixed Charges Property Taxes and Other Municipal Charges 342,623 3.5% 1,232 5 Insurance 99,106 1.0% 356 2 Total Fixed Charges 441,728 4.5% 1,589 7

Net Operating Income 2,054,319 20.8% 7,390 32 Payroll & Related Expenses* Rooms 663,064 12.8% 2,385 10 Food and Beverage 988,461 26.8% 3,556 16 Telecommunication 27,372 37.9% 98 0 Other Operated Departments & Rentals 88,723 9.4% 319 1 Administrative and General 634,984 6.4% 2,284 10 Marketing 229,123 2.3% 824 4 Property Operation and Maintenance 333,656 3.4% 1,200 5 Total Payroll & Related Expenses 2,965,384 30.0% 10,667 47

Source: www.intercontinental.com

Since the payroll & related expenses represent a major cost for the facility, for additional detail we have included its defragmentation per type of department.

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Table 30. Intercontinental Bucharest Hotel’s structure of revenues and expenses for 2010

Ratio to Per Per 2010 sales Available Occupied Room unit Night Revenues Rooms 4,925,533 52.2% 17,718 82 Food and Beverage 3,581,320 38.0% 12,882 60 Telecommunication 66,510 0.7% 239 1 Other Operated Departments 513,076 5.4% 1,846 9 Rentals and Other Income 343,714 3.6% 1,236 6 Total Revenues 9,430,153 95.5% 33,921 157

Departmental Costs and Expenses Rooms 1,259,175 25.6% 4,529 21 Food and Beverage 2,265,850 63.3% 8,151 38 Telecommunication 59,146 88.9% 213 1 Other Operated Departments & Rentals 135,395 15.8% 487 2 Total Costs and Expenses 3,719,566 39.4% 13,380 62

Total Operated Departmental Income 5,710,587 60.6% 20,542 95

Undistributed Operating Expenses Administrative and General 1,350,151 14.3% 4,857 23 Marketing 483,384 5.1% 1,739 8 Utility Costs 748,474 7.9% 2,692 12 Property Operation and Maintenance 624,718 6.6% 2,247 10 Total Undistributed Expenses 3,206,727 32.5% 11,535 53

Gross Operating Profit 2,503,860 26.6% 9,007 42

Management Fees 204,518 2.2% 736 3

Income Before Fixed Charges 2,299,342 24.4% 8,271 38

Fixed Charges Property Taxes and Other Municipal Charges 595,264 6.3% 2,141 10 Insurance 92,876 1.0% 334 2 Total Fixed Charges 688,140 7.3% 2,475 11

Net Operating Income 1,611,202 17.1% 5,796 27

Payroll & Related Expenses* Rooms 625,431 12.7% 2,250 10 Food and Beverage 974,132 27.2% 3,504 16 Telecommunication 26,604 40.0% 96 0 Other Operated Departments & Rentals 89,551 10.5% 322 1 Administrative and General 600,252 6.4% 2,159 10 Marketing 207,606 2.2% 747 3 Property Operation and Maintenance 376,256 4.0% 1,353 6 Total Payroll & Related Expenses 2,899,831 30.8% 10,431 48

Source: www.intercontinental.com

Since the payroll & related expenses represent a major cost for the facility, for additional detail we have included its defragmentation per type of department. In order to accurately estimate the future performance of the subject facility we have subtracted a more detailed departmental cost defragmentation of the comparable hotel (table 31). Table 31. Departmental cost defragmentation of the Intercontinental Bucharest Hotel

Departmental Costs and Expenses 2011f 2,010 2011f 2,010 Rooms 100% 100% Restaurants 100.0% 100.0% Salaries, Wages, and Bonuses 48% 50% Cost of food 36.7% 37.1% Travel Agents Fees 10% 11% Cost of beverage 8.1% 8.9% Other expenses 42% 39% Other costs 0.4% 0.5% Salaries, Wages, and Bonuses 43.5% 43.0% Other expenses 11.3% 10.5%

Telecommunication 100% 100% Other Operated Departments 100.0% 100.0% Direct costs 36% 41% Direct costs 20.3% 19.6% Salaries, Wages, and Bonuses 48% 45% Salaries, Wages, and Bonuses 68.0% 66.1% Other expenses 16% 14% Other expenses 11.8% 14.2%

Undistributed Operating Expenses

Administrative and General 100% 100% Marketing 100.0% 100.0% Employees cafeteria 20% 20% Salaries, Wages, and Bonuses 42.3% 42.9% Salaries, Wages, and Bonuses 46% 44% Other expenses 57.7% 57.1% Credit card charges 8% 7% Other expenses 26% 28%

Property Operation and Maintena 100% 100% Utility Costs 100.0% 100.0% Salaries, Wages, and Bonuses 64% 60% Other expenses 36% 40% Source: www.intercontinental.com

Since the payroll & related expenses represent a major cost for the facility, for additional detail we have included its defragmentation per type of department. In addition, for a better understanding of the general market hotel benchmark, we have also considered the H.O.S.T. (U.S. Hotel Operating Statistics Study). The H.O.S.T. program is the most extensive and definitive database on U.S. hotel industry revenues and expenses. The operating statements of more than 6,200 hotels have been entered into this database, giving the capability to produce custom reports tailored to a variety of client needs. H.O.S.T. contains information on hotel revenues and expenses and presents information by department including rooms, food & beverage, marketing, utility costs, property and maintenance, administrative & general as well as selected fixed charges. The HOST Study is an annual publication that provides an overview of U.S. lodging industry performance along with detailed information on industry revenues and expenses (table 32).

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Table 32. HOST study for 2009 and 2010 H.O.S.T. 2010 2009 2009 MIN MAX AVG Revenues Rooms 63.6% 62.8% 62.7% 62.7% 63.6% 63.0% Food and Beverage 29.1% 29.2% 29.3% 29.1% 29.3% 29.2% Telecommunication 0.5% 0.6% 0.6% 0.5% 0.6% 0.6% Other Operated Departments 4.7% 5.1% 5.5% 4.7% 5.5% 5.1% Rentals and Other Income 2.0% 2.4% 2.0% 2.0% 2.4% 2.1% Total Revenues 100.0% 100.0% 100.0%

Departmental Costs and Expenses Rooms 28.2% 28.0% 25.4% 25.4% 28.2% 27.2% Food and Beverage 76.3% 76.8% 73.1% 73.1% 76.8% 75.4% Telecommunication 136.8% 137.8% 117.4% 117.4% 137.8% 130.7% Other Operated Departments & Rentals 3.5% 3.7% 3.7% 3.5% 3.7% 3.6% Total Costs and Expenses 44.5% 44.5% 41.7%

Total Operated Departmental Income 55.5% 55.5% 58.3%

Undistributed Operating Expenses Administrative and General 9.0% 9.1% 8.5% 8.5% 9.1% 8.9% Marketing 7.2% 7.3% 6.7% 6.7% 7.3% 7.1% Utility Costs 4.4% 4.6% 4.2% 4.2% 4.6% 4.4% Property Operation and Maintenance 5.0% 5.1% 4.6% 4.6% 5.1% 4.9% Total Undistributed Expenses 25.6% 26.1% 24.0%

Gross Operating Profit 29.9% 29.4% 34.3%

Franchise Fees (Royalty) 0.9% 0.8% 0.8% 0.8% 0.9% 0.8% Management Fees 3.0% 3.0% 3.3% 3.0% 3.3% 3.1%

Income Before Fixed Charges 26.0% 25.6% 30.2%

Fixed Charges Property Taxes and Other Municipal Charges 3.6% 4.0% 3.2% 3.2% 4.0% 3.6% Insurance 1.2% 1.3% 1.2% 1.2% 1.3% 1.2% Reserve for Capital Replacement 2.1% 2.2% 2.1% 2.1% 2.2% 2.1% Total Fixed Charges 6.9% 7.5% 6.5%

Net Operating Income 19.1% 18.1% 23.7% Source: HOST studies 2009, 2010. Available on: [Accessed 20.02.2012].

From the analysis of both sources we can conclude that their correlation factor is around 97% which makes them highly congruent. Inevitable, some differences have occurred but having no major effect on the end result (figure 39).

Figure 39. HOST & Comparable structure correlation Source: HOST studies 2009, 2010. Available on: [Accessed 20.02.2012].

For the purpose of our analysis we recommend Intercontinental Hotel statements to be more reliable comparable data and we have used the H.O.S.T. survey only for guidance. Our representative year estimates, which are intended to reflect average performance over the economic life of the property, indicate an occupancy rate of 67 percent at an average daily room rate of approximately 93 Euro in 2011 value i.e. 102 Euro in 2015 value. The representative year statement and the four-year statement in inflated euros are presented on the following section. The underlying rationale and assumptions used in preparing these estimates are presented in the paragraphs that follow. Classification of revenues and expenses All revenues and expenses have been classified as recommended by specialized publications. In conformity with this guideline of account classification, only direct operating expenses are charged to operating departments of the hotel. Overhead items applicable to the entire operation are classified as “Undistributed Operating Expenses” and include such expenses as

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Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0 administrative and general expenses, management fees, marketing, property operation and maintenance, and energy costs. Revenue and expense estimates have been prepared, where appropriate, by means of comparison with actual operating results of other similar hotels. Where necessary, estimates were further revised to reflect the unique characteristics of the market and the project under consideration. Since these estimates are based upon assumptions regarding circumstances and events that have not yet occurred, they are subject to potential variation. Accordingly, we cannot provide any assurances that the estimates will be representative of the results that will actually be achieved during the projection period. Management and marketing For the management and marketing section we have assumed that management understands the importance of effective marketing and would therefore commit the necessary funds and personnel to successfully penetrate the market. The marketing would include a strong preopening sales effort and an aggressive, flexible continuing program that could adjust rapidly to market fluctuations and cycles, and effectively tap the sources of demand relevant to the subject market area. Inflation To portray price level changes, we have assumed a 2.5 to 3.0 percent annual inflation rate over the entire projection period. This rate reflects the current long-term outlook for the future movement of prices. Historical national inflation rates as measured by the Consumer Price Index (CPI) are as detailed in table 33. Table 33. Annual CPI inflation projection and uncertainty range

Year Estimated Annual inflation Estimated Average Annual Estimated Average Annual Estimated average gross inflation of VFE( inflation of administered earnings change vegetables, fruits, eggs) price s 2012 3.0% -4.4% 6.1% 4.5% 2013 2.5% 6.2% 5.9% 4.4% 2014 2.8% N/A N/A 4.5% 2015 2.5% N/A N/A 4.3% Source: National Bank of Romania, National Commission of Prognosis

It should be noted that inflation is caused by many factors, and that unanticipated events and circumstances may affect the forecasted rates. Therefore, the operating results computed over the projection period may vary from those actually achieved.

All operational expenses were categorized in the four above mentioned projections.

Departmental revenues and expenses Rooms Our market analysis indicates that the proposed 118-unit Hotel would be capable of attaining an occupancy rate of 67% (on average) over its analyzed economic life. Our estimates of annual room occupancy for each of the first four years of operation have been summarized in the previous section. In calculating the annual average daily room rate per occupied room attainable during the first four years of operation, we assumed that the market segmentation of accommodated room night demand would not vary enough to substantially affect the rate of any one year over the period of our estimates. Inflated annual average daily room rates for the proposed hotel are presented in the following table. On the basis of comparable operating statistics of similar hotels in the region, we have estimated room departmental expenses for the representative year of operation at 26.2% of room revenue, and for the estimated four-year operation period, as presented in the following table. Food and Beverage Our estimates of food and beverage revenues were prepared on the basis of historical operating results of the selected comparable hotel and average trend published in H.O.S.T. study. We have estimated food and beverage revenue to account for approximately 40% of total revenue in the first operating year. Food and beverage revenue has been estimated at 80 Euro per occupied room. Food and beverage expenses are estimated to be 62.2% of food and beverage sales for the first operational year. This includes the cost of food and beverages consumed, and other expenses incurred in the food and beverage operation, including salaries and wages, associated employee benefits, china, glassware, tableware, and uniforms. As a result of fixed costs, departmental expense ratios are higher during the initial year of our projection, when occupancy levels are lower.

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Telephone Telephone departmental expenses are estimated at 105% of telephone revenue in a representative year of operation, based on the operating results of comparable i.e. proximately 1 Euro per occupied unit. Other Operated Departments Other operated departments revenue is estimated at approximately 3 Euro per occupied room all over the analyzed period. Other operated departments expenses are estimated at 15% of departmental revenue in a previous year of operation, based on the operating results of comparable properties. Undistributed Operating Expenses Operating expenses that are not chargeable to a particular operating department are presented as undistributed operating expenses. These expenses were based on the operating results of comparable hotels and H.O.S.T. study. Administrative and General Administrative and general expenses presented are based on operating results of comparable hotel properties. This expense category includes the salary and wages of the general manager’s office staff, the accounting office staff, cash overages and shortages, credit card commissions, bad debt expenses, data processing, executive office expenses, general and liability insurance, professional fees, and travel. Percentages between 9.6% and 10.3% were projected based on estimated salary and administrative services expected growth sufficient to cover administrative and general expenses. Marketing It is recommended a relatively aggressive marketing campaign for the proposed hotel in its initial years to attempt to penetrate the market and generate new business. Property Operation and Maintenance Property operation and maintenance expenses have been estimated on the basis of actual operating expenses incurred by the comparable hotel of similar size and quality. We estimate a current value cost of 2,100 Euro per available room, or 5.2 percent of total revenue, in a representative year of operation. Utilities The energy costs to operate the proposed Hotel have been estimated on the basis of the proposed facilities and current expenditures by similar hotel properties. For a

© AESB. All rights reserved. Page 102 of 118 Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0 representative year at 56 percent occupancy, utilities costs are estimated to be around 3,400 Euro per available room equivalent to an8.3% ratio to total revenue. Fix Charges Management Fees A base management fee equal to 2% of total revenue has been deducted each year. Subject to a specific agreement that may accompany management, this amount is subject to variation. Real Estate and Property Taxes The real estate taxes have been assumed to be 4.3% of total revenue in the initial year and declining as it is anticipated that the proposed hotel will be subject to depreciation. The property tax is calculated as 1.5% taxation percentage based on its inventory value or market value. In our case we have presumed that the building was fully depreciated at the moment of the study and therefore the major base of taxation would become the sum of all consolidation and refurbishment costs that are added to the remaining accounting value. We have estimated the yearly depreciation based on a useful life of 50 years. Building and Contents Insurance The cost of insuring the proposed Hotel against damage or destruction by fire, weather, or other causes is estimated to be approximately 0.8% of total revenues for the first year. The insurance was estimated as 0.2% out of the inventory value of the building and FE&E. For the FE&E we have estimated the yearly depreciation based on a useful life of 15 years. Reserve for Replacement In a representative year of operation, a reserve for replacement of furniture, fixtures, and equipment has been estimated at 2% of gross revenue. Initial investment In order to estimate the refurbishment cost and furniture, fittings and equipment expenditures necessary to operate the hotel at normal parameters, we have applied prices derive both from the corporate expertise and from the market research performed among reputational local and international contractors (table 34)

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Table 34. Estimation of the refurbishment cost and furniture, fittings and equipment expenditures for hotel use Construction cost

High quality capital city hotel 835 – 1,242 Euro/sq. m. Provincial/ suburban hotel 373 – 447 Euro/sq. m. Comments High quality hotel in excess of 400 bedrooms, conference facilities, extensive restaurant, lounge and foyer areas, leisure facilities including indoor pool, retail and service areas. Costs exclude FF&E. Source: Gardiner & Theobald International Construction Cost Survey, June 2011

Budget hotels 1,045 -1,364 Euro/sq. m. Mid-market-low 1,171 – 1,388 Euro/sq. m. Mid-market-high 1,373 – 1,587 Euro/sq. m. Luxury 1,621 – 1,794 Euro/sq. m. Comments These figures have been calculated from a survey which EC Harris has carried out of construction costs in 50 different countries. Costs are given per sq. m. of gross internal floor area and include for FF&E. Costs may include dry leisure facilities, but not swimming pools. Costs include contractor’s preliminaries and overheads and profits, but no allowance for land costs, land procurement fees, or consultants’ fees. Although all the hotels are ‘international’, and constructed to Western European specification standards, there will always be some differences in specification for the same building constructed in different countries. Source: Elaine Sahlins EMEA Hotels Monitor February 2011 Issue 7

Furniture, Fixtures and Equipment FE&E 13.6% out of the cost of construction Comments Construction cost includes: 45% construction, 25% technical equipment and 9% soft costs. Construction Works: direct and indirect costs, associated with the physical construction and erection of a hotel building. Technical Equipment: Installation of air conditioners, elevators, heating systems, pipelines and networks, etc. Soft Costs: Fees for architect design, planning, obtaining licenses, advisory services, etc. FF&E: Furniture, Fixtures and Equipment and includes all furniture for guestrooms and public areas, wall and floor coverings, etc. OS&E: Operating Supplies & Equipment and includes linen, kitchenware, uniforms, supplies, stationary, accessories, etc. Source: HVS Hotel Development Cost Survey 2010

FE&E 15.1% out of the cost of construction Source: KPMG Hotel Development Cost 2009, Guideline for new hotel projects in Central and Eastern Europe

We have received the general estimated cost schedule for the subject building which includes consolidation works and total refurbishment with medium quality finishes for office space. The cost amounts to around 13.6 M Euro i.e. 619 Euro/ sq. m. built. The project is divided in two stages: first stage totaling 9.3 M Euro for consolidation works and second stage at 4.37 M in Euro in refurbishment works for the total 19,070 sq. m. above ground

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Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0 section or 229 Euro/sq. m. The cost of the basic investment, excluding the technical equipment and soft categories, cumulates 81% of phase two, 3.54 M Euro equivalent to 185.5 Euro/sq. m. In addition to the executed medium office finishes the initial investment for the proposed hotel needs to include supplementary quality finishes and specific furniture, fixtures and equipment. We estimate an average replacement cost of 1,200 Euro sq. m. built and a weight of 15% for FE&E which stands for a cost of an additional 3.96 M Euro. By excluding all soft costs and technical equipment, the 1,200Euro sq. m. built can be distributed in 45% actual construction cost, equivalent to 540 Euro sq. m. built. Furthermore, the unitary construction cost can be divided into 50% structure/ architectural cost and 50% finishes, resulting an allowance of 270 Euro/sq. m. on hotel quality finishes. We conclude that the additional investment for hotel scenario should stand at 5,572 M Euros: 3.96 M Euros for FE&E and 1.612 M for supplementary finishing works. Capitalization Rate (Yield) This rate provides for return on invested capital plus a return on the investment. As in the case of office market, investment transactions of accommodation unit are rare. According to Colliers International research division, the yields for prime hotels are generally going up by 1.5 - 2ppabove the prime yields for office and retail markets. The consultant selects an appropriate overall capitalization rate of 10,00% in comparison with the estimated office yield of 8.25%. Discount Rate A discount rate measures the investment performance over a giving period that accounts for risk and return on capital. A discount rate can be built up using the cap rate if the income and growth both vary at a constant rate. The buildup is derived by the formula: Discount Rate = Capitalization Rate+ Constant Rate of Change Thus, if the market extracted capitalization rate was estimated at 10,00% and the constant rate of change is 2.7%, the discount rate is 12,70%. Net Present Value The net present value (NPV) is the sum of the discounted annual cash flows. The cost of consolidation and refurbishment works for the entire building were budgeted at 15.501.045 Euro excluding V.A.T. at an average 2012 exchange rate. Since the subject of analysis represents about 88% of the total built area of the building, the costs were

© AESB. All rights reserved. Page 106 of 118 Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0 proportionally divided resulting an initial investment of 13.674.099 Euro. To this value additional works of about 5,572 M Euro are needed for the hotel to operate at projected standards. The NPV of the scenario is -7,133,930 Euro (table 35). Table 35. Calculations of NPV for hotel use of BCHb

PERFORMANCE CRITERIA PROJECT Initial Net Operatin Income Year 0 Year 1 Year 2 Year 3 Year 4 TIMELINE 19,246,099 868,348 937,803 1,167,405 14,328,308

Net Present Value NPV (7,133,930) euro

Internal Rate of Return IRR -3%

Benefit to Cost B/C 0.74

Payback Period PP - years Discounted Payback Per DPP - years

Financial Summary

2012f 2013f 2014f 2015f 2012f-2013f 2013f-2014f 2014f-2015f

4,823,840 5,046,081 5,447,494 5,886,808 4.6% 8.0% 8.1% Total Revenues

1,949,864 2,038,779 2,134,060 2,230,510 4.6% 4.7% 4.5% Total Costs and Expenses

1,530,051 1,585,978 1,646,962 1,706,596 3.7% 3.8% 3.6% Total Undistributed Expenses

135,068 141,290 152,530 164,831 4.6% 8.0% 8.1% Management Fees & Franchise Fees (Royalty

868,348 937,803 1,167,405 1,432,831 8.0% 24.5% 22.7% Net Operating Income

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2012f 2013f 2014f 2015f

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Basis of projection Departmental Costs and Expenses Weight 2012 2013 2014 2015 Weight 2012 2013 2014 2015 Rooms 100% 4.1% 3.8% 4.0% 3.7% Restaurants 100.0% 0.3% 5.0% 5.1% 4.9% Salaries, Wages, and Bonuses 50.0% 4.5% 4.4% 4.5% 4.3% Cost of food 37.0% -4.4% 6.2% 6.2% 6.2% Travel Agents Fees 10.0% 6.1% 5.9% 5.9% 5.9% Cost of beverage 8.0% -4.4% 6.2% 6.2% 6.2% Other expenses 40.0% 3.0% 2.5% 2.8% 2.5% Other costs 0.5% 3.0% 2.5% 2.8% 2.5% Salaries, Wages, and Bonuses 43.0% 4.5% 4.4% 4.5% 4.3% Other expenses 11.5% 3.0% 2.5% 2.8% 2.5%

Telecommunication 100.0% 4.9% 4.7% 4.8% 4.7% Other Operated Departments 100.0% 4.6% 4.5% 4.6% 4.4% Direct costs 40.0% 6.1% 5.9% 5.9% 5.9% Direct costs 20.0% 6.1% 5.9% 5.9% 5.9% Salaries, Wages, and Bonuses 45.0% 4.5% 4.4% 4.5% 4.3% Salaries, Wages, and Bonuses 67.0% 4.5% 4.4% 4.5% 4.3% Other expenses 15.0% 3.0% 2.5% 2.8% 2.5% Other expenses 13.0% 3.0% 2.5% 2.8% 2.5%

Undistributed Operating Expenses

Administrative and General 100.0% 2.5% 4.4% 4.6% 4.4% Marketing 100.0% 3.6% 3.3% 3.5% 3.3% Employees cafeteria 20.0% -4.4% 6.2% 6.2% 6.2% Salaries, Wages, and Bonuses 43.0% 4.5% 4.4% 4.5% 4.3% Salaries, Wages, and Bonuses 45.0% 4.5% 4.4% 4.5% 4.3% Other expenses 57.0% 3.0% 2.5% 2.8% 2.5% Credit card charges 10.0% 6.1% 5.9% 5.9% 5.9% Other expenses 25.0% 3.0% 2.5% 2.8% 2.5%

Property Operation and Maintenance 100.0% 4.0% 3.7% 3.9% 3.7% Utility Costs 100.0% 3.0% 2.5% 2.8% 2.5% Salaries, Wages, and Bonuses 65.0% 4.5% 4.4% 4.5% 4.3% Other expenses 35.0% 3.0% 2.5% 2.8% 2.5%

Statements of Estimated Annual Operating - Results

General assumptions

Estimated no. of units 118 units

Year 2012 2013 2014 2015

Estimated Occupancy Rate 56.0% 58.0% 62.0% 67.0%

Estimated ADR 100.0 101.0 102.0 102.0

Ratio to Per Per Ratio to Per Per Ratio to Per Per Ratio to Per Per 2012f Sales Available Occupied 2013f Sales Available Occupied 2014f Sales Available Occupied 2015f Sales Available Occupied unit unit Night unit unit Night unit unit Night unit unit Night Revenues Rooms 2,411,920 50.0% 20,440 100 2,523,041 50.0% 21,382 105 2,723,747 50.0% 23,083 113 2,943,404 50.0% 24,944 122 Food and Beverage 1,929,536 40.0% 16,352 80 2,018,432 40.0% 17,105 84 2,178,997 40.0% 18,466 90 2,354,723 40.0% 19,955 98 Telecommunication 24,119 0.5% 204 1 25,230 0.5% 214 1 27,237 0.5% 231 1 29,434 0.5% 249 1 Other Operated Departments 265,311 5.5% 2,248 11 277,534 5.5% 2,352 12 299,612 5.5% 2,539 12 323,774 5.5% 2,744 13 Rentals and Other Income 192,954 4.0% 1,635 8 201,843 4.0% 1,711 8 217,900 4.0% 1,847 9 235,472 4.0% 1,996 10 Total Revenues 4,823,840 100.0% 40,880 200 5,046,081 100.0% 42,763 209 5,447,494 100.0% 46,165 226 5,886,808 100.0% 49,888 244

Departmental Costs and Expenses Rooms 652,559 27.1% 5,530 27 677,291 26.8% 5,740 28 704,112 25.9% 5,967 29 730,446 24.8% 6,190 30 Food and Beverage 1,200,081 62.2% 10,170 50 1,259,869 62.4% 10,677 52 1,323,631 60.7% 11,217 55 1,389,005 59.0% 11,771 58 Telecommunication 25,305 104.9% 214 1 26,498 105.0% 225 1 27,771 102.0% 235 1 29,068 98.8% 246 1 Other Operated Departments & Rentals 71,919 15.7% 609 3 75,121 15.7% 637 3 78,546 15.2% 666 3 81,991 14.7% 695 3 Total Costs and Expenses 1,949,864 40.4% 16,524 81 2,038,779 40.4% 17,278 85 2,134,060 39.2% 18,085 88 2,230,510 37.9% 18,903 92

Total Operated Departmental Income 2,873,976 59.6% 24,356 119 3,007,302 59.6% 25,486 125 3,313,433 60.8% 28,080 137 3,656,298 62.1% 30,986 152

Undistributed Operating Expenses Administrative and General 494,468 10.3% 4,190 21 516,397 10.7% 4,376 21 539,919 11.2% 4,576 22 563,622 9.6% 4,776 23 Marketing 385,908 8.0% 3,270 16 398,709 8.3% 3,379 17 412,787 8.6% 3,498 17 426,302 7.2% 3,613 18 Utility Costs 401,247 8.3% 3,400 17 416,234 8.6% 3,527 17 432,488 9.0% 3,665 18 448,360 7.6% 3,800 19 Property Operation and Maintenance 248,428 5.2% 2,105 10 254,638 5.3% 2,158 11 261,768 5.4% 2,218 11 268,313 4.6% 2,274 11 Total Undistributed Expenses 1,530,051 31.7% 12,967 63 1,585,978 31.4% 13,440 66 1,646,962 30.2% 13,957 68 1,706,596 29.0% 14,463 71

Gross Operating Profit 1,343,926 27.9% 11,389 56 1,421,324 28.2% 12,045 59 1,666,471 30.6% 14,123 69 1,949,702 33.1% 16,523 81

Management Fees 96,477 2.0% 818 4 100,922 2.0% 855 4 108,950 2.0% 923 5 117,736 2.0% 998 5 Franchise Fees (Royalty) 38,591 0.8% 327 2 40,369 0.8% 342 2 43,580 0.8% 369 2 47,094 0.8% 399 2

Income Before Fixed Charges 1,208,858 25.1% 10,245 50 1,280,033 25.4% 10,848 53 1,513,941 27.8% 12,830 63 1,784,871 30.3% 15,126 74

Fixed Charges Property Taxes and Other Municipal Charges 205,111 4.3% 1,738 9 202,915 4.0% 1,720 8 199,720 3.7% 1,693 8 196,966 3.3% 1,669 8 Insurance 38,922 0.8% 330 2 38,394 0.8% 325 2 37,866 0.7% 321 2 37,338 0.6% 316 2 Reserve for Replacement 96,477 2.0% 818 4 100,922 2.0% 855 4 108,950 2.0% 923 5 117,736 2.0% 998 5 Total Fixed Charges 340,510 7.1% 2,886 14 342,230 6.8% 2,900 14 346,536 6.4% 2,937 14 352,040 6.0% 2,983 15

Net Operating Income 868,348 18.0% 7,359 36 937,803 18.6% 7,947 39 1,167,405 21.4% 9,893 48 1,432,831 24.3% 12,143 59

Estimated Capitlization Rate 10.0%

Residual Value € 14,328,308

Anticipated growth 2.7%

Estimated Discount Rate 12.7%

Net Present Value € 12,094,337 Net Present Value per Unit € 102,494 Source: own elaboration

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C. REPORT FOR THE MUNICIPALITY REVEALING THE OVERALL PROFITS/BENEFITS OF THE PROJECT

The summary of the overall pre-feasibility study is comprised in table number 36. Table 36. Summary of the main financial values of the pre-feasibility study Scenario 1 2 3

Net Present Value NPV 4,489,030 1,763,084 -7,133,930

Internal Rate of Return IRR 19% 14% -3%

Benefit to Cost B/C 1.36 1.14 0.74

Payback Period PP 9 10 -

Discounted Payback Period DPP 23 >100 - Source: own elaboration

Comparing the NPV and other financial indicators of the three scenarios, the best solution that could be adopted by the Municipality of Bucharest to use the Bucharest City Hall building for business purpose is represented by the first scenario, precisely the mix of offices and retail. Sensitivity Analysis Sensitivity analysis involves changing one or more variables at a time over a possible range of outcomes to evaluate the effect of that change. This allows real estate investors to review each variable's impact upon the investment property's net present value and determine the best possible investment scenario. In our sensitivity analysis we have used the Monte Carlo Simulation. The method is based in the generation of multiple variables to determine the expected value of the NPV and IRR. The general scheme of the Monte Carlo method is divided into three major sections: Estimating Ranges of Values By using a range of possible values, instead of a single presumption, we have created a more realistic image of what value the NPV and IRR might have. The variables, their ranges and probability distribution that we have considered for sensitivity analysis in evaluating the investment property opportunity are exposed in table 37.

Table 37. The premises for sensitivity analysis Probability Mean Stdev Distributions Storage Estimated Unitary Rent ( Euro/sq. m/month) 3.0 1.00 normal Retail Estimated Unitary Rent ( Euro/sq. m/month) 15.0 3.00 normal Office Estimated Unitary Rent ( Euro/sq. m/month) 13.0 2.00 normal Parking Estimated Unitary Rent ( Euro/sq. m/month) 50.0 10.00 normal Estimated Capitalization Rate 8.25% Lognormal Source: own elaboration

For all variables the mean is assumed to be the actual figure that was entered in the model. Monte Carlo will randomize return rates based on a normal distribution for the first 4 variables and lognormal distribution for the capitalization rate (figure 40). For the normal distribution or “bell curve” we have defined the mean and standard deviation to describe the variation about the mean for each variable. The principle implies that values in the middle near the mean are most likely to occur. The lognormal values are positively skewed, not symmetric like a normal distribution.

Figure 40. Capitalization rate assumed frequency chart Source: own elaboration, based on market research

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The Monte Carlo Sensitivity Analysis uses standard deviation as a statistical measure of the range of each variable’s volatility. The higher the standard deviation of a variable, the higher the volatility of the project’s NPV’s and IRR’s will be. Random Values generation for each variable The Monte Carlo can also predict the estimation error, which is proportional to the number of used iterations. The total error is giving by: where σ is the standard deviation of the random variable, and N is the number of iterations. At a number of 10,000 used iterations the NPV’s error stands at 1.9% and only 0.007% in case of the IRR’s. For a better understanding of the model, please find below the table number 38 of the first 50 out of 10,000 iterations. Table 38. The first 50 iterations of the model

Input Values Output Values Nr. Storage Estimated Retail Estimated Office Estimated Parking Estimated Estimated NPV IRR Unitary Rent ( Euro/sq Unitary Rent ( Euro/sq Unitary Rent ( Euro/sq Unitary Rent ( Euro/sq Capitlization Rate Iteration m/month) m/month) m/month) m/month) 1 3.9 16.7 11.9 29.2 8.00% 3,388,711 16.95% 2 3.2 16.6 10.3 54.0 8.00% 1,508,640 13.61% 3 5.1 14.2 13.9 55.3 8.00% 6,498,787 21.92% 4 3.6 14.1 14.0 53.9 9.00% 4,329,439 19.79% 5 3.3 15.8 13.2 46.7 8.00% 5,329,600 20.12% 6 1.4 11.5 16.0 49.1 8.00% 8,888,538 25.38% 7 2.9 19.9 9.6 49.3 9.00% -918,249 9.74% 8 2.0 14.8 13.8 45.3 8.50% 4,851,338 20.01% 9 3.5 17.5 13.2 53.9 8.00% 5,523,391 20.43% 10 3.6 16.9 13.9 40.6 9.00% 4,071,218 19.35% 11 3.6 15.5 14.1 44.8 8.00% 6,605,883 22.08% 12 2.9 16.5 12.2 32.3 8.00% 3,736,343 17.54% 13 3.9 7.7 11.5 62.1 8.25% 2,429,964 15.57% 14 4.4 13.7 13.3 59.0 9.00% 3,585,098 18.51% 15 3.7 17.0 15.2 43.2 8.25% 7,519,492 23.79% 16 3.9 15.4 15.9 31.3 8.00% 8,981,191 25.51% 17 2.2 12.6 13.0 54.5 8.00% 4,966,631 19.55% 18 2.4 7.1 16.6 47.0 8.50% 8,157,646 25.09% 19 1.6 17.8 11.4 41.6 8.00% 2,739,873 15.83% 20 3.3 13.0 9.5 51.5 9.00% -1,286,948 8.92% 21 3.3 11.2 11.3 50.5 8.00% 2,540,771 15.48% 22 2.0 11.9 13.7 59.5 8.00% 5,840,644 20.92% 23 3.2 10.8 12.4 50.9 8.50% 3,106,279 17.07% 24 1.8 17.5 11.6 57.8 8.00% 3,169,992 16.58% 25 4.6 20.3 13.0 52.2 9.00% 3,424,112 18.23% 26 5.3 10.5 12.7 38.8 8.25% 3,974,975 18.25% 27 2.5 16.8 12.0 46.6 8.25% 3,085,319 16.73% 28 3.1 11.4 18.9 59.1 9.00% 10,175,887 28.72% 29 2.6 16.3 12.8 38.7 8.00% 4,644,490 19.03% 30 3.2 17.1 15.6 39.2 8.50% 7,316,673 23.85% 31 3.2 13.7 11.3 57.5 8.50% 1,756,446 14.63% 32 4.0 13.2 15.0 52.3 8.50% 6,658,600 22.86% 33 3.5 14.8 14.8 41.5 8.25% 6,902,188 22.88% 34 3.6 20.1 14.0 68.1 8.50% 5,706,108 21.38% 35 2.5 16.0 12.3 49.6 8.25% 3,540,385 17.51% 36 2.7 16.1 11.1 43.2 8.00% 2,392,047 15.22% 37 3.3 16.0 11.1 45.4 8.25% 1,960,444 14.72% 38 3.2 13.1 11.8 68.8 8.00% 3,537,412 17.20% 39 5.0 16.3 12.0 60.4 8.00% 4,072,580 18.10% 40 2.9 16.4 12.2 52.8 8.25% 3,538,487 17.51% 41 4.7 18.1 11.4 36.7 8.00% 2,962,968 16.22% 42 3.2 17.9 16.8 41.0 9.00% 7,671,521 25.11% 43 2.6 13.7 12.8 35.5 8.50% 3,487,134 17.73% 44 3.5 9.9 14.6 64.5 8.50% 6,067,208 21.95% 45 3.9 20.1 13.1 54.4 8.00% 5,569,294 20.50% 46 2.9 11.8 12.1 52.2 8.25% 3,211,846 16.95% 47 3.4 16.5 12.3 49.9 8.00% 4,228,742 18.36% 48 3.4 14.2 9.0 56.3 9.00% -1,746,657 7.88% 49 2.8 16.7 16.8 62.0 8.00% 10,542,575 27.63% 50 3.6 13.4 18.1 50.8 8.50% 10,564,577 28.46% Source: own elaboration, based on market research

As direct consequence to the variation model, the annually cash flows presents significant deviations as presented in figure 41.

Figure 41. Annually cash- flows during the 5 year projection Source: own elaboration

Other useful information is the Kurtosis and the Skewness of the distribution. The Kurtosis is a relative measure of the shape compared with the shape of a normal distribution. The normal distribution has a Kurtosis of 0. The Kurtosis of the NPV’s is 0.032 and 0.365 for the IRR’s. This indicates that the distribution is somewhat flatter than a normal distribution (figure 42).

Figure 42. The kurtosis and skewness representation Source: www.investopedia.com, mvpprograms.com [Accessed 20.02.2012].

Skewness is a measure of asymmetry. The normal distribution has a skewness of 0. The Skewness of the NPV’s is 0.050 and -0.356 for the IRR’s. This indicates that the tail distribution is extends towards the right (lower values) for the NPV’s and in the case of IRR’s

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Pre-Feasibility Study of Bucharest Former City Hall Building – Business Purpose, PROMISE Project Version 2.0 to the left meaning higher values. The results can be easily plotted to produce the figure number 43.

Figure 43. NPV and IRR frequency and probability Source: own elaboration

The NPV’s values are divided into five categories. The highest frequencies of transactions fall into 2,5 M to 5 M Euro interval (34.8%) and 5 M to 7.5 M (27.0%), which means that most often the estimated NPV can reach a value between 2.5 M and 7.5 M (61.8% probability).The second group of negative NPV’s represents those which occurred only 5.9%. This analysis shows a probability of 94.1% that the project will generate a positive NPV. The median of the resulted population of NPV’s is 4,272,162 Euro and 18.9% for the IRR’s. The average of the resulted population of NPV’s is 4,299,967 Euro and 18.6% for the IRR’s. Superimpose the mean and median on the NPV distribution and can be observed a gap between the two measures of central tendency of 27,805 Euro. Numerically the median appears closer than the mean to what the sensitivity analysis shows. The conclusion of this observation is that the median appears to be more appropriate measure of central tendency for the NPV value. The IRR’s values are divided also into five categories. The highest frequencies of transactions fall into 18 to 22% Euro interval (33.6%) and 14 to 18 % (26.6%), which means that most often the estimated IRR can reach a value between 14 and 22 % (60.2% probability). The second group of negative IRR’s represents those which occurred only 6.0%. This analysis shows a probability of 94.0% that the project will produce a positive IRR.

Acknowledgements. Our thanks are addressed to the Municipality of Bucharest, partner in the PROMISE project, for the provided data and to Mr. Bogdan Balalia, Senior Appraiser who has offered valuable professional clarifications during the elaboration of the pre-feasibility study.

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