Microtel report complete

</element><element id="paragraph-1" type="body"><![CDATA[In accordance with your request we have prepared an analysis with respect to the potential impact on the Chester hotel market of the development of a new, approximately 80-room Microtel Inn & Suites. It is our understanding that the developers of the potential hotel have proposed the use of Tax Increment Financing (TIF) funds as part of their financing process.

We are not offering an opinion as to the appropriateness of TIF incentives as they have proven to be beneficial to communities in some instances and detrimental in other instances. We are assuming that the potential developer has used the "but for" argument essentially stating that they could not justify the development "but for" or without the assistance of TIF.

Scope of the Assignment:

Chester has a very limited commercial/franchised hotel supply consisting of one, 46-room Best Western located at 2150 State Street in Chester. As part of our research we toured the hotel and interviewed the property ownership/management with respect to historical levels of operations - primarily occupancy, average daily rate (ADR), seasonality of demand, and demand mix.

Given the limited hotel supply in Chester, we also gathered occupancy and ADR data with respect to several other franchised hotels in the broader market area and we also attempted to determine if these hotels were accommodating measurable demand that is being lost to the immediate Chester market due to the lack of desired franchise or due to the perceived condition of the Best Western. The hotels from which specific data was obtained include the following.

Best Western - Chester, IL (46 Rooms)

The Microtel Inn & Suites - Ste. Genevieve, MO (47 Rooms)

Comfort Inn - Perryville, MO (49 Rooms)

America&#39;s Best Value Inn - Perryville, MO (60 Rooms)

Super 8 Motel - Perryville, MO (56 Rooms)

Holiday Inn Express - Sparta, IL (74 Rooms)

Super 8 Motel - Pickneyville, IL (47 Rooms)

Super 8 Motel - DuQuoin,, IL (38 Rooms)

America&#39;s Best Value Inn - Murphysboro, IL (39 Rooms)

We also considered franchised hotels in the Carbondale, IL market but determined that the demand dynamics were sufficiently different as to render the data meaningless. We did not consider any hotels operating without a national or regional franchise or national affiliation, as the Best Western is technically an affiliation and not a franchise.

The hotel brands represented, with the exception of the Holiday Inn Express, would be directly competitive with a Microtel in most hotel markets assuming that the age of the hotels and the physical condition of the properties were comparable. In a typical hotel market a Holiday Inn Express would compete with a Hampton Inn and a Marriott Fairfield Inn on a primary basis; and a Comfort Inn and Best Western on a secondary basis depending on the quality of the Comfort Inn and Best Western. In this instance the Holiday Inn Express represents the top of the market and has been include in the analysis due to the lack of a true primary competitive set.

Room Night Demand:

The economic success of any hotel depends on several basic factors including the overall market room night demand; the available demand for a specific hotel property type; the ability of the hotel to penetrate the available demand; the ability of a hotel to attain a sustainable ADR; the strength of "other income" or non-rooms revenue; and the ability of management to operate the hotel within the parameter defined by the available revenues. While the ability of management is important it has been listed last because even the very best management cannot successfully operate a hotel from a financial perspective if the market demand and the market rate tolerance does not allow for development of a sustainable revenues stream.

In a multi-layered market such as the St. Louis CBD hotel sub-market the hotel types generally include budget hotels, limited-service hotels, select-service hotels, full-service hotels, convention and large group hotels, extended-stay hotels, and all-suites hotels which can be positioned as a full-service or group property. Hotels of each type compete with similar hotels on a primary basis, and additional hotels on a secondary basis, and attract a specific type of demand with well defined price sensitivities.

Other markets are defined by specific hotel types. For example the I-65 hotel sub-market in west St. Louis and southwest St. Charles Counties is a limited-service and select-service market. Of the fifteen (15) hotels in the defined market area two (2) are extended-stay, two (2) are full-service and eleven (11) hotels are either select or limited-service. The market was developed based on the characteristics of the market demand and the price sensitivity of the demand.

In a small, limited demand market, such as that represented by Chester area, the demand is relatively limited and not multi-layered to the extent that a variety of hotel types can be supported. Therefore, hotel development tends to address the predominant type and quality of demand with the limited supply serving the total spectrum of available demand. In these markets, the price sensitivity of demand plays a greater role in defining the hotel product than in a more multi-layered market.

Hotel room night demand is typically segmented into four classifications - commercial/corporate demand, group demand, leisure transient/other demand, and extended-stay demand. In some markets with a strong military presence a military demand classification is specifically identified; however, this is not applicable to the Chester market. Most of the classifications are self-explanatory; however, it should be noted that extended-stay demand is demand that has an average length of stay in excess of five (5) nights. Our research indicates that the majority of the room night demand in the Chester market is commercial/corporate and leisure transient demand. There is minimal and statistically insignificant group demand and no measurable extended-stay demand.

The franchised hotels, as previously identified, contained a total of 456 guest rooms available on an average daily basis in 2010. In 2009, the hotels demonstrated an aggregate occupancy of approximately 55.3 percent with the Holiday Inn Express in Sparta being the occupancy leader due, primarily, to its proximity to the World Shooting & Recreational Complex in Sparta, IL. The Holiday Inn Express was also the ADR leader in the market area. In 2010 the aggregate occupancy declined to approximately 54.9 percent. Year-to-date through August 2011 the aggregate occupancy is approximately 55.2 percent compared to 55.1 percent for the same period in 2010, indicating little growth in demand from 2010 to 2011. The aggregate occupancy is summarized in Table O-1.

Table O-1

Occupancy History

Year Total Rooms Aggregate Occupancy Captured Demand % Change

2009 456 55.3% 92,000

2010 456 54.9% 91,400 -0.7%

YTD 8/2010 456 55.1% 61,200

YTD 8/2011 456 55.2% 61,200 0.2%

Ownership of the Best Western in Chester has publicly stated that its occupancy is approximately 51.8 percent and that is supported by STR Report data. On a fair market share basis, the 46 room hotel would capture approximately 10.1 percent of the total market demand (46 rooms divided by the market total of 456 rooms - 46/456 = 10.1 percent). On a fair share basis the Best Western would have captured approximately 9,229 room nights of demand in 2010. However, based on an annual occupancy of 51.8 percent the Best Western had a market penetration of 94.2 percent, or approximately 5.8 percent below its fair share.

That data collected and analyzed indicated that the Holiday Inn Express penetrated the market at approximately 118.0 percent of fair share due, primarily to its location with respect to the World Shooting & Recreational Complex. The Comfort Inn in Perryville also exceeded 100.0 percent of market penetration with all other hotels having a penetration level below 100.0 percent of fair share.

The hotels that achieved the best market penetration included the Holiday Inn Express and the hotels located along or near the I-55 corridor in Missouri. The Missouri hotels directly benefitted from their location with respect to interstate related demand. The data reviewed indicated a stable level of demand.

Having estimated the base level of demand, it is necessary to analyze the factors that lead to demand growth. Unless there is a valid expectation of demand growth a market cannot anticipate absorbing new hotel product without adversely impacting the performance of one or more of the existing hotels in the competitive supply.

Basically, demand is a result of commercial and industrial growth; addition of new tourist attractions; significant residential and/or population growth; and institutional growth. The easiest factor to address is population growth. Table P-1 summarizes the population growth for the City of Chester; Randolph, Perry and Jackson Counties in Illinois; and Perry County, MO. These counties encompass the location of the hotels considered in the analysis. On an aggregate basis the population of the counties declined approximately 1.2 percent from 1990 to 2009. Randolph County experienced the most significant population decline while Perry County, MO experienced the greatest population growth reflecting population growth and new commercial and industrial development in Perryville, MO.

During the same period, the City of Chester experienced a population decline of approximately 4.6 percent. Often the loss of population within the political boundaries of a city results in an increase in the population of the surrounding county, indicating a shift of the population to new developments beyond the city limits. However, Randolph County also experienced a net population loss over the period. Thus, population growth is not supportive of an increase in room night demand for the broader market or for the immediate Chester market in specific.

Our calls to the various area Chambers of Commerce and various economic development agencies indicated that there is relatively little commercial or industrial expansion anticipated for the broader area over the next three (3) to five (5) years other than commercial development that would specifically support the local residential population. The one exception is the anticipation of the Perryville Chamber of Commerce for minimal industrial growth within the community. Thus, there does not appear to be an expectation for significant growth in the commercial or corporate sectors that would generate new hotel room night demand.

Transient room night demand is closely linked to potential and realized population growth. Based on the population growth over the last twenty (20) years and the expectations for marginal growth over the next ten (10) years changes in population do not support potential growth in room night demand.

Transient demand is also related to the addition of tourist attractions or significant recreational amenities that would generate over night hotel stays. Our research indicated that there are no proposals for development of major tourist or recreational attractions in the defined area. The World Shooting and Recreational Complex is an example of the impact of a recreational or tourist attraction. The complex attracts various shooting events throughout the year and directly generates room night demand. The demand directly supports the Holiday Inn Express in Sparta, IL with excess demand going to other hotels some of which are in the defined supply but many of which are in the Collinsville area with some of the higher rated demand being captured by hotels in St. Louis.

Institutional related demand in the area is generated from activities at the Menard Correctional Center and the Chester Mental Health Center both of which are operated by the State of Illinois as part of the correctional system. These two facilities are well established and have contributed to the overall hotel room night demand with demand from these facilities being captured on a primary basis by the Best Western Hotel. Expansion of these facilities is not anticipated in the near future. In fact, interviews with the officials from the State of Illinois indicated that budget cut backs could adversely impact the operations of the mental health center. Although the prevailing "off the record" opinion is that the facility operations will likely remain in place there is no basis to expect increased demand from this facility. Therefore, the institutionally generated demand in the market will remain stable at best, with the potential for decline.

An additional source of demand for the market is displaced demand. That is demand that should be captured by hotels within the market but is lost due to lack of market capacity of lack of desired hotel brands or hotel types. A primary indication of potential displaced demand is the annual number of "sell-out" nights experienced by the various hotels. Sell-out nights are simply the number of nights that a hotel has sold all of its rooms and is turning away demand. Sell-out nights indicated by the various hotels ranged from "five (5) at the most" to thirty-six (36) with the average being approximately fifteen (15) to eighteen (18) sell-out nights. Management of the Best Western indicated seventeen (17) to twenty (20) sell-out nights on an annual basis. The hotels were not able to quantify the annual turn-away demand but indications were that many of the sell-out nights were concurrent. by industry standards, an average of fifteen (15) to eighteen (18) sell-out nights is not considered to be an indication of significant annual displaced demand.

A final factor for potential expansion of captured demand is the introduction of a hotel brand to the market that is supported by a reservation system not currently represented in the market, or induced demand. It is our understanding that the hotel being considered for the market would operate with benefit of a Microtel Inn & Suites national franchise. This franchise is also represented in the market by the Microtel Inn & Suites in St. Genevieve, MO. Therefore, a new reservation system would not be introduced to the broader market area and most of the reservation system generated demand that the proposed hotel would capture would represent a division of reservation system demand currently captured within the market.

Based on our analysis, we have concluded that the potential for increased room night demand in the market is minimal. When the potential for increased demand is minimal, the introduction of a new hotel would simply divide the existing supply across a broader demand base. Theoretically, all hotels would realize a decline in captured demand. However, in reality some hotels would be more adversely impacted while others, such as the Holiday Inn Express in Sparta, IL would likely experience little or no impact from the expansion of the available rooms.

New Property Absorption:

When a new property is introduced to a market each hotel in the market is considered to be "destabilized" with respect to the competitive supply. The market and the relationship of the various hotels to the market typically re-stablizes in eighteen (18) to thirty (30) months depending on the individual market dynamics. This is referred to as the absorption period, or that period of time require for the hotel supply to adjust to the impact of the new rooms.

Table S-1 presents an analysis of the potential market re-stabilization with the addition of an 80-room hotel to the competitive supply. The 0.0 percent growth rate reflects the recent market history and the alternate scenario reflects the growth rate required for the market to re-stabilize near current market levels. In reality, the market demand growth can be expected to be between the two scenarios but closer to the 0.0 growth rate assumptions. In our opinion, the market will re-stabilize below the current market levels if 80-rooms were added to the supply. The analysis assumes that any new hotel would be added in the second year allowing for a twelve (12) month construction period.

If the proposed hotel were to be absorbed without an adverse impact on overall market occupancy an additional approximately 16,000 room nights of demand would need to be generated and captured by the expanded hotel supply. Given the existing market dynamics such a growth in demand cannot be reasonably anticipated. In general, the addition of new hotel rooms could be expected to erode the aggregate market occupancy for the foreseeable future.

Table S-1

Demand Growth Analysis

Period Rooms Total Available Demand Captured Market Demand Captured Market

Room Nights Growth Demand Occupancy Growth Demand Occupancy

Base 456 166,440 91,400 54.9% 91,400 54.9%

Year 1 456 166,440 0.0% 91,400 54.9% 0.0% 91,400 54.9%

Year 2 536 195,640 0.0% 91,400 46.7% 5.0% 95,970 49.1%

Year 3 536 195,640 0.0% 91,400 46.7% 7.5% 103,168 52.7%

Year 4 536 195,640 0.0% 91,400 46.7% 4.0% 107,294 54.8%

Year 5 536 195,640 0.0% 91,400 46.7% 0.0% 107,294 54.8%

It is also necessary to view the impact on a micro level. That is the impact on the Chester specific market that currently includes only one hotel. The demand accommodated by the existing Best Western is generated from the immediate Chester area plus limited overflow demand generated by the World Shooting & Recreational Complex. The locally generated demand has been relatively constant for the past several years and there are no indications that a significant increase in the demand can be anticipated.

The primary demand sources have been activities associated with the Menard Correctional Center, the Cheater Mental Health Center; the railroad; the Popeye Picnic; the Chester Homecoming event; local reunions, weddings, and other family events; and demand generated by Gilster-Mary Lee Corporation. As mentioned the Best Western does accommodate some overflow demand from the World Shooting Complex when large, competitive shooting events are held. Other demand is small and sporadic throughout the year with most of the additional demand being leisure transient.

No hotel in Chester will effectively penetrate the demand generated by I-55 on the Missouri side of the area as there is a sufficient hotel supply in the highway corridor to accommodate existing demand. The majority of the interstate generated demand is a result of travelers being in the area at the time they elect to stop for an evening.

There is no destination-type property in Chester, nor proposed for Chester, that would entice a guest to travel the distance from I-55 to a Chester hotel. Therefore, from a micro perspective, Chester is a well defined and finite hotel market and the existing demand would be divided between the exiting hotel and any hotel added to the competitive supply.

Based on the publicly revealed 51.8 percent occupancy achieved by the Best Western, the hotel accommodates approximately 8,700 room nights of demand in a typical year. In addition to this base demand, the owner of the Best Western indicated that they experience seventeen (17) to twenty (20) sell-out nights per year. Assuming an average of ten (10) room nights of demand being turned away per sell-out night, and additional 170 to 200 room nights of demand can be estimated for the Chester specific market. This indicates a total of approximately 8,900 room nights of demand available to the market.

If the hotel supply in Chester were increased by 80 rooms, to 126 rooms, the aggregate occupancy for the Chester hotels, assuming a base demand of 8,900 available room nights of demand, would be approximately 20.0 percent. That is a level that would support neither hotel.

If the proposed 80-room hotel captured 100.0 percent of the available demand it would achieve only 30.5 percent occupancy, a level at which hotel development cannot be justified.

The addition of 80 rooms increases the market room night capacity by approximately 174.0 percent. For the market to maintain its current equilibrium demand would have to increase by approximately 15,125 room nights per year. In our opinion, a demand increase of that magnitude is unachievable regardless of the length of the analysis period.

Average Daily Rate (ADR) and Cost of Development:

It is necessary to analyze the potential ADR for a new hotel in the market, with ADR being total rooms revenue divided by the total number of occupied rooms. The Best Western is currently achieving an ADR of approximately $70.00 with the ADR having been flat for the last two years. Published data indicates that the national average ADR for all Best Western hotels is approximately $85.00. This indicates that the Chester Best Western is achieving an ADR that is approximately 82.4 percent of the brand average. The other hotels in the broader competitive supply achieved 2010 ADR&#39;s of approximately 72.7 to 92.0 percent of the respective brand averages.

From 2010 the published brand average ADR for Microtel Inn & Suites was approximately $57.00. If the proposed Microtel achieved the brand average the ADR in 2011 dollars it would be the only hotel in the broader supply, excluding the Holiday Inn Express, to achieve the brand average ADR.

Assuming the Microtel Inn & Suites attained the market average of 51.8 percent occupancy and achieved a $60.00 ADR the annual rooms revenue would be approximately $907,500. Applying an industry average multiplier of 3.0 times rooms revenue to estimate the value of a limited-service hotel, the indicated value would be approximately $2,722,500. Assuming a development cost of $65,000 per room, or $5,200,000, the potential value of the hotel would not justify the cost of development.

Assuming a development cost of $5,200,000, the new hotel would need to achieve an ADR of approximately $99.00 with 60.0 percent occupancy to generate an equivalent market value. In our opinion both the rate and occupancy required to justify the development on a market value basis is unattainable.

Hotel Concepts:

A Best Western hotel is an industry typical property with standard sized guest rooms, approximately 380 square fee. The guestrooms typically have a king bed or two queen or double beds, a television, a desk, a table, a desk chair, a lounge chair or a sofa sleeper, and a standard three fixture bathroom. The existing Best Western generally fits that description. Most of the guestroom furnishings have been replaced in the last two (2) years. Upon a brief inspection the Best Western appeared to be in good physical condition.

A Microtel Inn & Suites typically offers a mix of three (3) room types - suites in the modern acceptance of the term; rooms with two double beds; and single bedded rooms. The rooms offer a small closet; a television, a small, fixed desk and dresser; a side chair; and a standard three fixture bathroom. the suites also include a sofa sleeper; a larger desk area; a larger dresser; a counter-style bar area; a television; a small refrigerator; and a microwave oven. The suite is not a true suite with distinct rooms; rather they are the modern concept of a suite for a budget hotel with a partial room divider separating the sleeping area from the area with the sofa sleeper. The wall mounted television is positioned to be viewed from all room areas.

A Microtel is designed to be a short-stay hotel, with the exception of the suites which typically are less than 10.0 percent of the total room count. The rooms are undersized with respect to the comparable room sizes of other limited-service hotels. The single bedded rooms have a gross area of approximately 223 square feet compared to an industry average of 285 to 300 square feet. The two bedded rooms have a gross area of approximately 295 square feet compared to the industry average of 350 to 390 square feet. The "suite" has a gross area of approximately 355 square feet. The smaller room sizes are intentional as the concept was developed to be, primarily, a one night stay hotel to be located along major highways or in price sensitive areas with short stay demand.

The prototype property has no meeting or function room, but has a space for a complimentary breakfast. Some Microtels have eliminated some or all of the first floor guestrooms and included meeting space. The Microtel in STe. Genevieve has meeting space for approximately 60 people and the 75-room Microtel in Lehigh Acres, FL has meeting space for 225 people. The Florida property also has a space leased to a full-service restaurant. While a Microtel has a specific prototypical layout, exceptions are granted depending on the specific market dynamics.

In general, the Microtel concept was specifically developed for price sensitive, short stay hotel markets. It is not intended to be a destination lodging property and does not lend itself to accommodation of larger family demand and lacks the amenities typically sought by the business traveler.

Hotel Market Misconception:

There is a commonly held perception that a new, mixed-use development can be lead by the development of a lodging property. While there have been some instances where a hotel has been the first component of a mixed-use project to be constructed many of the other components were in the advanced planning stages and were not totally dependent upon development of the hotel. Other projects have been initiated with the development of a hotel without plans for other components and these have largely been unsuccessful. Strategically, a hotel is constructed at the mid-0point of the development of a mixed-use project and compliments the initial stages of the project and adds fuel for the last stages of the project. To initiate development in a TIF district with a hotel would be ill advised unless the hotel is market justified independent of the other potential development in the TIF district. In this instance the demand dynamics do not provide strong support for the proposed hotel.

Summary and Conclusion:

Our analysis of the market indicates that there is little, if any, reason to anticipate significant room night demand growth in the immediate Chester, IL hotel market for the foreseeable future. Further, the existing level of room night demand is insufficient to support an expansion the the available room supply from 49 to 129 guestrooms with the addition of a new 80-room limited-service budget hotel. It is our opinion that the market dynamics are such and the demand is insufficient to support an expansion of the hotel supply. It is our further opinion that the proposed expansion of supply would result in the eventual failure of one or both of the hotels.

Therefore, it is our opinion that development of a new hotel is not market justified at this time; nor is it likely that the market dynamics will justify development of additional hotel rooms in the immediate future.

Sincerely,

H & H Consulting, Inc.

Gary P. Andreas, Principal

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It should be specifically noted by any prospective mortgagee that any market feasibility or estimates of future cash flows assumes that the property will be competently managed, leased, and maintained by financially sound owners over the expected period of ownership. H&H, Inc. will neither evaluate management or owner&#39;s effectiveness, nor be responsible for future marketing efforts and other management or ownership actions upon which actual results will depend.

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SPECIAL CONDITIONS:

Unless documentation is provided to the contrary, it shall be assumed that there are no hidden environmental conditions that could adversely impact the value or utility of the proposed hotel site. In the event that future investigation determines that the site is affected by environmental hazards or forms of contamination that would adversely impact the development any opinions and conclusions expressed in this report shall be null and void.

It is assumed that the proposed hotel will operate with benefit of a Microtel franchise, or a similar franchise of equal benefit to the market.

The analysis and conclusions assume that there will not be a significant terrorist attack on U.S. soil during the analysis period of sufficient magnitude as to disrupt travel or negatively impact the hospitality industry for an extended period of time. If such an even, or events, occur our conclusions could be adversely impacted and any conclusions in the report shall be null and void pending a thorough market review.

It is expressly stated that neither H&H Consulting, Inc. nor any person employed by H&H Consulting, Inc. has any vested interest in the Chester hotel market or any interest in any existing or proposed hotel in the broader market area. Furthermore, we have no current or past client relationship with any party in the Chester hotel market.