HOSPITALITY REAL ESTATE BROKERAGE GROUP MARKET UPDATE FALL 2007 Earle Wason, CCIM Peter Annon, CPA Joe Cardillo, Broker Associate Wendy Casey, Licensed Real Estate Administrator We are pleased to announce with this market update the implementation of our newly designed web site, which provides a fully functional and integrated system to provide pertinent property and market data to inform, educate and evaluate properties that we are offering for sale. It can be accessed at www.hospitalityrealestate.com. I am also very proud of our “Group”; well-educated and experienced business professionals that offer diverse backgrounds that can provide sellers and buyers of hotel properties the best service and value available in our industry. Wendy Casey, whom many of you know, has been my associate since February of 2000 and has been instrumental in helping me complete and organize many of the 130 + properties that I have brokered over the past 15 years. Wendy is a licensed real estate broker in New Hampshire and provides our clients and customers with exceptional service. Peter Annon, a CPA and Joe Cardillo, Broker associate, with real estate licenses in multiple states, both offer a wide ranging level of talents that greatly benefit our firm’s clients. We continue to enjoy excellent relationships with some of the fastest growing hotel companies in the Northeast. As with all successful companies, they exhibit a positive corporate culture in addition to demonstrating a robust and harmonious relationship between the management and staff. We look forward to continuing to provide them with the market knowledge, expertise and skills necessary to help them succeed. In reviewing some of the issues facing the hotel real estate market in New England, it appears that not much has changed in the last year but may vary greatly depending on the properties market segment and location. I am sure you have continued to hear about transactions occurring in New England with sales prices in the $140,000 to nearly $400,000 per room price range, and capitalization rates at 6% or lower, but this is far from the norm throughout New England. While it is true that new construction activity has been expanding, construction costs are escalating and it is now common place to see mid-market and upper-level limited-service franchise hotels construction cost range from $90,000 to $150,000 or more per room and, as a result, some new projects are being “shelved” or planned for later construction start dates. The newly constructed hotels are affecting older properties as they become outdated at a faster rate. In the near term there will be increased sales activity of older well-located hotel properties. Most of the really good locations in New England have been built upon or have values too great to be justified for hotel construction. Therefore, many of the older properties are well suited for major remodeling and conversion to upper franchise brands or possibly demolished and replaced entirely, especially the case with exterior-corridor properties. It is important to note that the major restaurant chains, drug stores, automobile dealerships and big box retailers are all willing to pay more for their sites than can be justified by the hotel companies. This is another reason why the stronger brands such as Marriott and Hilton are in such demand as they build in more tertiary locations. Rising interest rates and credit tightening are starting to impact values, but well-located, well-run and improved hotels continue to sell at very significant levels. Also of note are two other areas of concern that could begin to affect values: the increase in labor costs as a percentage of revenue, and the large increases in energy costs. These are eventually going to affect a property’s net operating income and therefore its value. Another changing market involves the owner/operator properties. While smaller motels, under $1,000,000 to $1,200,000 price range, are in high demand and selling for multiples approaching 4 times the revenues, owner-operated full-service properties have become much more difficult to sell. It seems that the difficulties in operating food and beverage facilities and the slowing residential sales market (where most buyers acquire the equity to purchase) have created this problem. This is all the more reason when selling these types of properties to hire an experienced, knowledgeable and aggressive hotel broker. We are very fortunate to have a Broker on our staff who is a Certified Public Accountant. He can provide both our sellers and buyers help in structuring transactions that can benefit them and work closely with their accounting advisors. In this update he reports on tax deferred exchanges and the benefit of exchanging into Tenant In Common interests or TIC’s. “A tax-deferred exchange, as defined in Section 1031 of the Internal Revenue Code, offers investors one of the last great opportunities to build wealth and save taxes. A taxdeferred exchange is a transaction in which an owner of real property, held for investment, sells one property and acquires another property without paying any taxes. By completing an exchange, the investor can dispose of their investment property, use all of their equity to acquire replacement investment property, defer the federal and state tax that would ordinarily be paid and leverage all of their equity into the replacement property. Some Section 1031 rules: Both your old and new properties must qualify as investment or business use, in other words “like kind”. You must buy a property equal or higher in value than the one you sold and if you have debt on the old property, you must have at least that much debt on the new property. The IRS mandates that you use an independent Qualified Intermediary to prepare legal documents and hold the proceeds from the sale, so that you do not have access to the funds. Your sales contract must indicate that a 1031 exchange will be completed. The title to the new property must be exactly as you held title to your old property. You have 45 days to identify the properties you may want to buy. You have 180 days from the closing date to purchase one or more of the properties from the 45-day list. 1031 Tenants in Common Exchange (TIC) In 2002 a ruling by the IRS greatly expanded the pool of available properties for individual investors. The ruling pertained to joint tenant in common legal structures, which allow individuals to own a fractional interest in a property, such as an office building, apartment complex or shopping center. By allowing investors to pool their resources they can purchase larger, higher valued and better positioned properties than they might otherwise have access. Typically these more prestigious properties can open doors to high quality lessees, such as fortune 500 companies and government entities, reducing owner tenant risk. TIC’s are a good match for investors who cannot find a suitable property in the 45 day grace period, do not want to pay taxes, are seeking diversification and a steady cash flow without management responsibilities.” Here are some of the sales we have transacted since our last market update It further solidifies the large variation in price range per room, but it is also indicative of the newly constructed or higher quality properties ability to capture market share and acquire higher average daily rates. 78 room, Comfort Suites, interior-corridor, sold at 3.5 times room revenue, $80,000 per room 150 room, interior limited-service Days Inn Hotel sold at 2.75 times revenue, $45,000 per room 60 Room Super 8 Motel/leased land, $38,000 per room, 3 times room revenue 40 room franchised hotel, interior/exterior corridor $35,000 per room and leased restaurant 70 room Super 8 hotel, resort area $39,000 per room, 3.4 times room revenues and 9% cap rate Properties currently under agreement: 150 room franchised hotel with leased restaurant $50,000/room 3.35 times room revnues and 9% cap rate Well known Multi-million Dollar Mt. Washiongton Valley, New Hampshire Condominium Development with well-established rental program and amenities to include multiple indoor and outdoor pools, health club and expansive Mountain and Valley views. Properties For Sale: Wason Associates is currently offering a number of excellent hotel buying opportunites throughout New England. Please visit our "Property Listings" page for further details. Wason Associates offer owners and buyers the following services: Seller representation with specific emphasis on marketing, negotiating, transaction structuring and transaction management. Areas of expertise include1031 tax deferred exchanges, installment sales, sale leasebacks and other creative means to structure transactions to maximize after tax proceeds. We also offer a strong track record for confidential brokerage of hotel facilities in circumstances where the owner is concerned about staffing issues or any negative affects that can be created when a property is openly marketed for sale. Buyer representation for those looking to purchase specifically targeted properties. Real Estate counseling for owners who have both long term and short term goals to sell. By becoming involved well before a property becomes actively for sale two to three years prior- we can often make recommendations that will enhance value and help owners reach specific targeted selling prices. As always we are happy to meet in confidence with owners to review values, our marketing program and brokerage fees. We are confident that when the time has arrived to sell we can achieve the best price possible, within a reasonable period of time, and provide the experience and expertise to comfortably guide you through the selling process. Please contact us if I can assist you in any way.