January 3, 2014 Mr. Howard Stephenson President Utah Taxpayers Association 656 East 11400 S Suite R Draper, UT 84020 Re: HREC Lodging Impact Analysis Proposed Convention Center Hotel – Salt Lake City, UT Dear Mr. Stephenson: Pursuant to our engagement letter dated February 5, 2013, Hospitality Real Estate Counselors, Inc. (“HREC”) has evaluated the potential lodging revenue impacts (positive, negative or neutral) resulting from development of the proposed Convention Center Hotel (the “Hotel”) to be located in downtown Salt Lake City. The potential impact was analyzed generally as it relates to the downtown Salt Lake City lodging market, and specifically as it relates to the anticipated competitive set of the proposed Hotel’s comparable lodging facilities. Hunden Strategic Partners assisted HREC in the preparation of this study. Their contribution involved surveying group meeting planners and completing a comparative analysis of the Salt Palace Convention Center to other centers. Purpose The impact analysis and accompanying written consulting report is for the use of the Utah Taxpayers Association in assessing the potential room revenue impact of the new hotel development. It is our understanding that our analysis may also be made available as a public document. Brief Development Project Summary and Assumptions Based on information reviewed and conversations with Visit Salt Lake, we assume the proposed Hotel would offer 1,000 guestrooms, 80,000 to 100,000 square feet of in-house meeting and banquet facilities, multiple food and beverage outlets, and other amenities typical of an upscale full-service convention hotel. The Hotel would be located directly adjacent to or attached to the Salt Palace (currently numerous sites proposed). Strategic Advisory Group (“SAG”) estimates the prototypical total cost to develop a Convention Center Hotel of this magnitude would be roughly $335,000,000 ($335,000 per guestroom).1 Based on the current status of the project, we have assumed construction could be complete and the Hotel could be operating by January 2017. 1 Strategic Advisory Group, Convention Headquarter Hotel Financial Model Assessment, January 2013. 1 Executive Summary – Major Conclusions and Findings The following section summarizes HREC’s major conclusions and findings relative to this engagement. The reader/user of this transmittal letter is advised to read the remaining sections of this letter and the attached report to understand the presented summary of findings. Key Findings 1. The proposed Hotel is forecasted to negatively impact (capture) 330,000 room nights from the competitive set from 2017 to 2021, equating to an estimated room revenue loss of $70,000,000. The room revenue loss consists of lost room nights as well as diminished average daily rate growth. The total hotel revenue loss over the same period is estimated at approximately $105,000,000. Stated another way, for every room captured at the Hotel from 2017 to 2021, 27% is anticipated to come at the direct expense of the existing competitive set. Additionally, for every dollar of room revenue captured by the proposed Hotel from 2017 to 2021, nearly 32 cents (one third) is forecasted to be at the direct expense of the existing hotels comprising the competitive set of Salt Lake City hotels. 2. The proposed 1,000-room Hotel would represent a roughly 22% increase in lodging supply for the competitive set. The last opening of an upscale full-service hotel in the Salt Lake City CBD was in 2001. A 1,000 room increase to the relatively small downtown market would be significant, specifically considering the competitive set’s continued lower occupancy as compared to the nationwide urban location average (as defined by STR). 3. Specific to meeting space in the competitive set, the proposed Hotel would increase supply by roundly 36-46%, and contain the largest ballroom for the competitive market. The significant increase in hotel meeting space is expected to create substantial competition for in-house groups within the downtown market, especially in off-season periods. For example, competitive hotels are expected to experience additional competition for catering demand and in-house groups in December when the Convention Center is particularly slow but certain hotels are hosting holiday events/parties. 4. Based on HREC’s interpretation of the roughly five-year old HVS Study2, the implied total negative room night impact from their study equates to roundly 343,000 over the first five calendar years. Utilizing the applicable year’s average daily rates from the study, this would equate to roundly $48 million in negative room revenue impact. However, as will be discussed in this report, we believe this understates the room revenue impact. 2 H&R Valuation Services, Inc. DBA HVS, Market Study - Proposed Salt Palace Convention Center Headquarter Hotel, December 16, 2008. 2 5. HREC’s analysis forecasts negative impacts from the proposed Hotel from 2017 through 2021, its first five years of operations. The potential for negative impact may likely extend beyond the five year projection period, and the Salt Lake City hotel market may never fully recover; though impacts are difficult to reliably quantify that far in the future. 6. Due to the inherent cyclicality of the national convention group market as a result of its strong correlation to overall economic conditions, magnified negative impact from additional competitive pressure during future economic recessions or lodging cycle downturns may occur in the downtown Salt Lake City market. 7. HREC’s impact analysis assumes additional positive room night demand growth over the projection period if the Hotel is built. Moreover, the impact analysis assumes certain levels of new demand will be generated from convention center and in-house groups, as well as from current unaccommodated demand. However, two economic recessions have occurred in the past 13 years, and should another occur either during the forecast period (2013 to 2021) or after, the assumed induced demand and total negative impact levels on the existing lodging marketplace may increase materially. 8. The Hotel is forecasted to increase the Salt Palace’s convention attendance and total room revenue in the downtown Salt Lake City market, but this increase is expected come at the expense of the existing hotels. 9. The national convention group market has changed significantly over the past five years. There is a general hospitality industry consensus that the economic recovery following the recession has been driven by transient demand and that group demand may never recover to the peak levels experienced in 2007. 10. The development of the Hotel is expected to have a negative impact on all downtown Salt Lake City hotels. Certain hotels will be negatively impacted to a greater extent than others. In particular, properties on the exterior of downtown or with expanded meeting space may likely experience a more severe impact than average. 3 The following charts detail the proposed Hotel’s occupied room summary including the Hotel’s occupied rooms at the expense of the existing competitive hotels in 2017 and from 2017 to 2021. 2017 Proposed Convention Center Hotel's Occupied Room Summary Convention Center Induced 8% In‐House Induced 18% Unaccommodated Demand 50% 3% Demand Growth 21% Impact Source: HREC ‐ Hospitality Real Estate Counselors 2017 ‐ 2021 Proposed Convention Center Hotel's Occupied Room Summary 27% 17% Convention Center Induced In‐House Induced 18% Unaccommodated Demand Demand Growth Impact 35% 3% Source: HREC ‐ Hospitality Real Estate Counselors 4 The following charts detail the proposed Hotel’s total projected room revenue. In 2017 and from 2017 through 2021, $0.53 and $0.32, respectively, of every dollar earned at the Convention Center Hotel, is forecasted to come at the expense of the existing downtown competitive hotels. 2017 Proposed Convention Center Hotel Total Room Revenue Impact 53% New Revenue Source: HREC ‐ Hospitality Real Estate Counselors 2017 ‐ 2021 Proposed Convention Center Hotel Total Room Revenue 32% Impact New Revenue Source: HREC ‐ Hospitality Real Estate Counselors 5 Methodology 1. This study evaluates the potential room night and room revenue impacts to the downtown Salt Lake City full-service lodging market by the proposed Hotel, comparing market projections with and without the Hotel. Projected market growth rates and estimates of unaccommodated and induced demand over the forecast period are accounted for and are applicable in both scenarios. The impact of the proposed Hotel is then quantified for existing hotels in the market. 2. As mentioned, we evaluated the amount of “new” induced and unaccommodated room nights and room revenue from the proposed Hotel. We requested detailed and specific information from Visit Salt Lake to utilize in this analysis; HREC received the documentation requested to specifically determine a reasonable amount of induced convention center group lodging demand. Furthermore, we accounted for induced demand from in-house groups as well as unaccommodated demand. 3. HREC reviewed and evaluated two other studies (STR Study3 and the HVS Study) previously completed for the proposed Hotel, and noted the following: a. The STR Study was completed over three years ago and the HVS Study was completed nearly five years ago. Both studies are not directly relevant today, particularly due to significant changes in the national convention group market and local Salt Lake City lodging market conditions. b. The STR Study of the performance and impact of new convention center hotels opening in other national market areas cannot be used to directly and reliably forecast the potential impact in Salt Lake City due to fundamental and significant differentiating micro-economic factors. c. The HVS Study does not specifically address impact issues on the existing marketplace, except for one table that identifies the estimated occupancy and ADR performance of the competitive set of hotels both with and without the Convention Center Hotel. HREC has extracted an implied impact to the existing hotels from this table.