Feasibility Analysis of a

Potential New Hotel/Conference Center in Hendricks County, Indiana

Conventions, Sports & Leisure ("CSL") has completed a report related to a feasibility study concerning the potential development of a hotel and conference center ("Center") in Hendricks County, Indiana.  The attached report presents our research, analysis and findings and is intended to assist the Hendricks County Convention and Visitors Bureau ("CVB") in evaluating the viability of Center development.

The analysis presented in this report is based on estimates, assumptions and other information developed from industry research, data provided by the CVB, surveys of potential facility users, discussions with industry participants and analysis of competitive/comparable facilities and communities.  The sources of information, the methods employed, and the basis of significant estimates and assumptions are stated in this report.  Some assumptions inevitably will not materialize and unanticipated events and circumstances may occur.  Therefore, actual results achieved will vary from those described and the variations may be material.

The findings presented herein are based on analysis of present and near-term conditions in the Hendricks County area as well as existing interest levels by a new Center's potential base of users and latent demand characteristics. Any significant future changes in the characteristics of the local community, such as growth in population, corporate inventory, competitive inventory and visitor amenities/attractions, could materially impact the key market conclusions developed as a part of this study.  As in all studies of this type, the estimated results are based on competent and efficient management of the potential Center and assume that no significant changes in the event markets or assumed immediate and local area market conditions will occur beyond those set forth in this report.  Furthermore, all information provided to us by others was not audited or verified and was assumed to be correct.

This report has been prepared for the internal use of the CVB and should not be relied upon by any other party.  The report has been structured to assist CVB representatives in evaluating event market demand and the potential financial and economic impact characteristics of a potential Center in Hendricks County and should not be used for any other purpose.  This report, its findings or references to CSL may not be included or reproduced in any public offering statement or other financing document.

We sincerely appreciate the assistance and cooperation we have been provided in the compilation of this report and would be pleased to be of further assistance in the interpretation and application of our findings.

Very truly yours,

CSL International

EXECUTIVE SUMMARY

This summary outlines the key findings associated with a feasibility study of a potential new hotel and conference center ("Center" or "hotel/conference center") in Hendricks County, Indiana.  Conventions, Sports and Leisure International ("CSL") was retained by the Hendricks County Convention and Visitors Bureau ("CVB") to conduct the study.  The full report should be reviewed in its entirety to gain an understanding of the study methods, limitations and implications.

Introduction and Background

In 2002, the CVB originally hired CSL to conduct a feasibility study of a potential convention center.  The study was completed in 2003 with results indicating market support (both via non-local and local demand) for the project.  However, study results also suggested that a public/private partnership with a hotel partner would likely better suit the financial and economic conditions and resources present in the County for the purpose of creating additional convention space to drive new visitation and associated economic activity.

In subsequent years, the CVB took steps to further advance the project, including the purchase of a site parcel for the facility and preliminary work to identify and solicit a private partner.  Some discussions with potential partner candidates were conducted and additional planning steps were undertaken.

In late 2007, the CVB commissioned CSL to conduct a comprehensive follow-up study of the project. Several issues are believed to have facilitated this, including:

1.   The evolving nature of the project under consideration.  The subject facility studied under the initial feasibility study represented a stand-alone, publicly-owned convention center, while the current project reflects a combined lodging facility and conference center with integrated operations controlled largely by the hotel partner.

2.   The eminent opening of the Indianapolis International Airport's new Midfield Terminal, which was not specifically considered during the first study due to uncertainty at the time with its ultimate completion timeframe, scope and related infrastructure enhancements.

3.   New economic development projects that have materialized in the County since the first study, including the development of the Metropolis retail complex; continued growth of corporate, retail and residential industries, new lodging property development and roadway enhancements.

4.   The length of time that has elapsed since the research and analysis was conducted for the initial feasibility study.  In addition to substantial local market changes over the five-year timeframe, substantial changes have occurred within the convention/conference and lodging industries overall, including recovery from 9/11 and a national economic downturn and the more recent upheaval in the credit/equity markets.

A new Hendricks County hotel/conference center, as envisioned, would act as an economic generator and a   public   resource   for   the   local   community,   hosting   conventions,   conferences,   tradeshows, public/consumer shows, meetings, banquets and other events of both a non-local and local nature.  The project would be hoped to draw new visitors (both event and non-event related overnight stays) to the County through the creation of a differentiated hotel and conference facility product.  A critical goal of the project is to maximize the amount of "incremental" visitation and associated economic spending (over existing activity) generated by virtue of its development and operation.  In many cases, a public/private partnership offers an opportunity to create a "hotel/conference center" solution for a community through a lower public sector contribution of capital, while also removing any ongoing operational funding obligation from the public sector (which is typically necessary under a stand-alone convention center model).

Local Conditions and Market Demand

The strength of the local market, in terms of its socioeconomic attributes, can provide an indication of a community's ability to draw and accommodate large numbers of convention, conference, tradeshow, consumer show, meeting and other event attendees.  A community's hospitality infrastructure in terms of hotels, restaurants, entertainment, transportation, amenities and other such factors contribute heavily to the  potential  success  of  an  event  facility.    Similarly,  analysis  of  economic  and  demographic  data pertaining to a market area assists in forecasting future trends that will impact the demand for lodging accommodations at area hostelries.

Population growth in Hendricks County (along with many other demographic metrics such as corporate base) over the past two decades has been significantly higher than that of the rest of Indiana and United States, reflecting outward growth emanating from the Indianapolis metropolitan area.   Projections for future years also indicate continued growth, particularly in the eastern third of the county.

In November 2008, Indianapolis Airport will debut the new $1.1 billion Midfield Terminal.   This new facility will feature a new passenger terminal, concourses, a parking garage and airfield.   The new Terminal is the largest development initiative in the City of Indianapolis' history.  In addition to the new terminal being developed, significant infrastructure improvements are also underway with a reconfiguration of Interstate 70 and two new interchanges off of Interstate 70, one at the new terminal entrance and the second at the next exit to the west (in Hendricks County) at Six Points Road.

Currently, the Hendricks County lodging supply is comprised primarily of limited and select-service hotels, with limited amounts of meeting and function space.  Most of the hotels are located in the eastern third of the county, concentrated primarily in Plainfield near the Interstate with several properties in Brownsburg.  It is believed the limited-service nature of the Hendricks County lodging supply reflects the price sensitivity in the marketplace.

Since the former layout of the Indianapolis International Airport provides access and exit points on the eastern side of the airport's property, and since the majority of the commercial and retail developments are located along the main traffic routes into and out of the airport, full-service and upscale limited- service hotel supply is generally located outside of Hendricks County.   However, the opening of the Midfield Terminal (and its new primary access point, the Airport Interchange, closer to Hendricks County) is anticipated to drive new full-service lodging supply to the west side of the airport, including a full- service Westin and potentially one or more new full-service properties.  It is believed that this shift of access to the west side of the Airport (from the current access point to the east) could importantly lead to a "perceptual shift" over the long-term as what is generally considered an "airport hotel".  Presently, the  large  majority  of  "airport  hotels"  are  clustered  near  the  Interstate  465/Airport  Expressway intersection.  New development planning in the airport area suggests that parcels near the new Airport Interchange exit (and near Hendricks County/Plainfield) could be attractive candidates for future hotel development.

With regard to the competitive landscape in the state for a new conference center project in Hendricks County, the level of competition in terms of facilities is considered "average" relative to the estimated

number of rotating events, and is also generally commensurate with overall population and corporate base.    Certain  states  in  the  country  are  estimated  to  possess  an  over-supply  of  convention  and conference facilities (relative to measures such as rotating events, population and corporate base); however, indicators reviewed do not suggest that Indiana is positioned this way.

Surveys completed with 100 state/regional convention and conference planners suggest strong interest in using a potential new Hendricks County hotel/conference center.   Measured levels of interest have strongly improved relative to the 2003 convention center feasibility study survey.  It is believed that this is a result of several factors, including but not limited to (1) a better "definition" of the potential Hendricks County project; (2) joining the studied hotel and conference center concept "under one roof"; and (3) clarification and certainty involved with the Midfield Terminal project, among other issues.  The analysis suggests that a large portion of this market demand is currently "unmet" in Hendricks County, and would therefore represent a significant level of new non-local conference activity to the local community.  Survey results stress the importance of an appropriately sized and branded full-service hotel that is physically integrated with the conference center.

Site/Location Issues

As important as size and configuration, the site of a hotel/conference facility can have a significant impact on the facility's success.  An assessment was conducted of potential areas/locations within the County that would be the best candidate areas to focus planning efforts, as well as to provide a basis for the analysis of financial and economic issues that are relevant to both public and private sector return on investment considerations.

Under a public/private partnership project such as the hotel/conference center development that is the subject of this report, the requirements and preferences of the private partner will have significant influence on the ultimate location.  In all likelihood, a prospective hotel developer/operator partner(s) will be looking for a site/location that will be able to maximize non-conference center hotel room demand, as the conference center component itself will not likely drive the majority of room night demand in the hotel.   As such, locations near highly-visible and highly-trafficked roadway arteries and other demand generators will likely be more attractive from the hotel partner's perspective.

With the opening of the new Midfield Terminal, the vast majority of new hotel development that is planned for the area is set to occur adjacent to or in close proximity of the new terminal.  Specifically, there are several new full-service products proposed or under development near airport, specifically on the airport campus or in the Ameriplex Business Park adjacent to the airport.  Due to the opening of the Midfield terminal, it is expected that it will lead to a shift in perception of what an "airport property" is, as evidenced by proposed hotel and retail projects near the new Airport Interchange to the west of the Terminal (which will be the new primarily vehicular access point).  The next I-70 exit to the west beyond the Airport Interchange will be in the southeast portion of Hendricks County (in Plainfield).

In regard to a new hotel/conference center in Hendricks County, tying the project in to the airport as an "airport property" will best position the product for economic impact and interest by private sector investors.  It is believed that other locations such as at or near Metropolis, located in Plainfield, and off of I-74 in Brownsburg offer some advantages, but less than that of the I-70/Airport location.   Areas adjacent to I-70 near Six Points Road and 267 intersections will best position a project in the County in terms of visibility and accessibility to attract transient and group demand.  Since this would be a public/private partnership, the requirements/preferences of the private partner will be critical; as such, the ultimate site parcel (or site parcels) must be available for negotiation

Development Options

Understanding the unique market demand characteristics associated with the County and the expected financial and economic interests of both public sector and potential private sector participants, three development scenarios were identified.   They include two traditional, mid-priced full-service hotel properties and one quasi-full-service (select service) property.  A fourth, alternate development scenario was also considered at the request of the CVB (relating to a property purchase and land swap), but it is not believed that this presents a viable option for the County in its pursuit of a potential hotel/conference center under a public/private partnership model. Further detail is provided in the report.

Considered Development Scenarios

 

 

SCENARIO 1

 

SCENARIO 2

 

SCENARIO 3

 

 

 

Type:

Full-service

 

Full-service

 

Quasi-full-service

Prototype Brand Examples:

Doubletree, Sheraton, Four Points

by Sheraton

 

Doubletree, Sheraton, Four Points

by Sheraton

 

Hyatt Place, Cambria Suites, aloft,

Holiday Inn

Guestrooms:

250

 

200

 

120

Conference Space (in SF): Ballroom

Meeting Space

Total Sellable Space

 

20,000

10,000

30,000

 

 

15,000

7,000

22,000

 

 

12,000

5,000

17,000


Cost, Financial and Valuation Analysis

Analyses were conducted pertaining to order-of-magnitude construction costs, asset valuation, financial operating  characteristics,  and  project  valuation  estimates  with  respect  to  the  three  development scenarios considered for a potential new Hendricks County hotel/conference center.  Estimates of operating performance were generated for the various development scenarios by projecting the potential cash flow generating capability of each facility.  The cash flows were then converted to an estimated current market value, which can then be compared to the estimated construction costs as a test of each scenario's feasibility.  If the market value of the facility is greater as compared to the construction costs, the project is deemed feasible.   Conversely, if the construction costs are greater as compared to the estimated market value, a "feasibility gap" exists.  In instances where a feasibility gap exists, financial incentives by the public sector will likely be necessary to attract a potential developer.

Hypothetical  construction  costs  were  estimated  for  each  scenario.    It  is  important  to  note  that construction cost figures included herein assume no cost for land or development profit, often referred to as entrepreneurial profit.  Inclusion of these costs would likely result in an overall increase ranging from

20 to 30 percent.  Additionally, these cost figures should be considered preliminary and order-of- magnitude.     Further  planning  relating  to  the  programmatic  elements,  product  branding, site/infrastructure, environmental, and architectural design and costing services will be required to fully estimate ultimate project costs.

The following exhibit presents the estimated order-of-magnitude hard construction costs for the assumed

Hendricks County hotel/conference center under each of the three development scenarios.

Order-of-Magnitude Construction Cost Estimates by Scenario

 

SCENARIO 1

 

SCENARIO 2

 

SCENARIO 3

 

 

 

Type:

Full-service

 

Full-service

 

Quasi-full-service

Guestrooms:

250

 

200

 

120

Est. Construction Costs:

 

 

Per Room - Low

Per Room - High

Conference Center (net) Total - Low

Total - High

 

 

 

$150,000

$175,000

 

 

$9,500,000

 

 

$47,000,000

$53,000,000

 

 

 

 

$150,000

$175,000

 

 

$6,500,000

 

 

$36,500,000

$41,000,000

 

 

 

 

$125,000

$140,000

 

 

$5,500,000

 

 

$20,500,000

$22,500,000

 

Note:  Per room figures noted above represent current typical hard and soft construction costs for new branded prototypes similar to those under consideration by scenario.  Certain efficiencies have been assumed in constructing both the hotel and the integrated conference space simultaneously, which is reflected in a reduction in the "conference center" cost line item.  Construction cost estimates do not include cost of land or entrepreneurial profit.  Figures presented represent order-of-magnitude estimates.  Detailed architectural concept, design and costing analysis would be required  to specifically project construction costs for a potential new Hendricks County project. Presented in 2008 dollars.

For  Scenario  1,  according  to  construction  cost  information  relative  to  the  hotel  brands  under consideration, the potential range of construction costs is estimated to range from a low of $150,000 per room to a high of $175,000 per room.  Total construction costs for the 250-room hotel, including the attached conference center, would range from $47 million to $53 million.  It should be noted that certain efficiencies relative to constructing both the hotel and the attached conference center simultaneously are factored into the total costs for the two components.  Specifically, we have applied a roughly 20 percent discount to the hard construction costs for each facility component, based on the assumption that both are constructed simultaneously as opposed to being constructed as individual, stand-alone units.

With similar assumptions, total construction costs for Scenario 2, the 200-room hotel, including the attached conference center, could range from $36.5 million to $41 million, with the per room costs similar to the 250-room scenario.  Since brand affiliation and function space square footage per room in both scenarios is similar, this appears reasonable.

With regard to Scenario 3, according to construction cost information relative to the hotel brands under consideration, the potential range of construction costs could range from a low of $125,000 per room to a high of $140,000 per room.  Total construction costs for the 120-room hotel, including the attached conference center, could range from $20.5 million to $22.5 million.  It should be noted that certain efficiencies relative to constructing both the hotel and the attached conference center simultaneously are factored into the total costs for the two facility components.  Similar to the traditional full-service scenarios, we have applied a roughly 20 percent discount to the hard construction costs for each facility component, based on the assumption that both are constructed simultaneously as opposed to being constructed as individual, stand-alone units.

A  detailed  financial  operating  analysis  was  conducted  for  each  development  scenario.    Based  on estimates of net operating income, current market values were generated.  A feasible hotel-based project

is such because its market value outweighs its costs.  It should be noted that land costs have not been included in the total construction cost estimates.  Additionally, a potential investor may not choose to develop a hotel-based project, even if it is feasible, if the feasibility margin does not meet the investor's required rate of return.  The estimated value for the hypothetical facility ranges for each scenario.  Based on the construction cost estimates previously discussed, the current market value for the proposed subject property under all scenarios is less than the estimated cost to construct the facility, resulting in a feasibility gap.  The following exhibit illustrates the breadth of the feasibility gap, assuming both the high and low ends of the ranges for market value and construction costs for all three scenarios.

Feasibility Gap Analysis

Scenario 1:  250-Room Full Service Hotel

 

 

Estimated Value

Low

$31,500,000

High

$35,000,000

Rooms

250

Low/Room

$126,000

High/Room

$140,000

Estimated Cost to Build

$47,000,000

$53,000,000

250

$188,000

$212,000

Feasibility Margin/(Gap)

($15,500,000)

($18,000,000)

 

($62,000)

($72,000)

Scenario 2:  200-Room Full Service Hotel

 

Low

High

Rooms

Low/Room

High/Room

Estimated Value

$26,000,000

$29,000,000

200

$130,000

$145,000

Estimated Cost to Build

$36,500,000

$41,000,000

200

$182,500

$205,000

Feasibility Margin/(Gap)

($10,500,000)

($12,000,000)

 

($52,500)

($60,000)

Scenario 3:  120-Room Quasi-Full-Service Hotel

 

Low

High

Rooms

Low/Room

High/Room

Estimated Value

$12,500,000

$14,000,000

120

$104,167

$116,667

Estimated Cost to Build

$20,500,000

$22,500,000

120

$170,833

$187,500

Feasibility Margin/(Gap)

($8,000,000)

($8,500,000)

 

($66,667)

($70,833)

Note:  The feasibility gap represents the level of incentive, reduced costs or increased value that would need to be induced before the project is considered economically sound.  Under Scenario 3, the operating efficiencies generally realized by a quasi-full-service hotel are significantly impacted by the addition of conf. center.  As such, this scenario appears the least feasible from a per room basis, but requires less financial incentive from a pure dollar amount basis.

The feasibility gap represents the level of incentive, reduced costs or increased value that would need to be induced before the project is considered economically sound from a private sector development standpoint.  From a private development standpoint, whereas a developer would be required to acquire a parcel of land, the project is considered less attractive, and a wider feasibility gap would exist.  As such, we are of the opinion that no prudent investor would develop the proposed subject facility without public- sector participation.

While none of the three development scenarios are considered financially feasible, the quasi-full-service hotel requires the lowest overall public commitment on a total investment basis.  Assuming the highest end of the value range and the lowest construction costs, the total public investment would equate to

$6.5 million.  Based on a similar analysis of the lowest potential public investment per scenario, Scenario

1 would require a total investment of $12 million, while Scenario 2 would require $7.5 million.

Economic Impacts

The following exhibit presents the estimated new annual hotel room night and economic and tax impacts associated for a potential new Hendricks County hotel/conference center under all three development scenarios (in a stabilized year of operations, in 2008 dollars where applicable).

Estimates of Net New Economic & Tax Impacts in Hendricks County

SCENARIO 1                  SCENARIO 2                  SCENARIO 3

ROOM NIGHTS

Conference Space Events - Subject Property                         15,782                            12,156                             10,540

Conference Space Events - Other Hotels                                 6,764                               5,210                               4,517

Other Net Demand - Subject Property                                      33,026                              27,261                             15,004

Total Net New Room Nights in County                               55,572                             44,627                            30,061

 

ECONOMIC IMPACTS

Conference Space Events

Direct Spending                                                             $8,311,423                     $6,357,564                      $3,409,099

Indirect/Induced Spending                                             4,986,854                         3,814,538                        2,045,459

Total Output                                                                  $13,298,277                    $10,172,102                     $5,454,558

Other Hotel Demand

Direct Spending                                                             $4,893,023                     $4,038,787                      $2,222,897

Indirect/Induced Spending                                             2,935,814                         2,423,272                        1,333,738

Total Output                                                                    $7,828,836                     $6,462,060                      $3,556,635

Total

Direct Spending                                                           $13,204,446                    $10,396,351                     $5,631,995

Indirect/Induced Spending                                             7,922,667                         6,237,811                        3,379,197

Total Output                                                                  $21,127,113                    $16,634,162                     $9,011,193

 

TAX IMPACTS

Conference Space Events

County Taxes                                                                    $180,135                         $139,013                        $114,000

City Taxes                                                                            $44,687                           $34,097                           $15,545

Other Hotel Demand

County Taxes                                                                    $301,007                         $248,457                        $136,747

City Taxes                                                                            $43,288                           $35,730                           $19,665

Total

County Taxes                                                                    $481,142                         $387,469                        $250,748

City Taxes                                                                            $87,975                           $69,828                           $35,211

 

Note:  Presented in 2008 dollars for a stabilized year of operations (assumed to occur by the fourth full year).

As presented in the exhibit, estimated total net new annual room nights for Hendricks County generated by a potential new hotel/conference center range from 55,600 in Scenario 1 to 30,100 under Scenario 3. In addition to the new conference center-oriented hotel room night demand (for both the subject hotel and other existing County hotels), it is estimated that the new hotel product could generate a significant level of new hotel room nights (transient and group demand unrelated to conference center activity). Much of this demand would be estimated to be displaced from existing Airport area properties (outside the County), particularly under Scenarios 1 and 2, as they represent full-service hotel products that the County presently does not offer.  As the differentiation of Scenario 3 over existing County hotel product is more limited (and the size of the property is smaller), net new non-conference center hotel room night generation is more modest.

Direct spending, induced/indirect spending and total output have also been estimated as they relate to new visitation generated by the potential new facility.  Scenario 1 is again estimated to generate the highest level of annual economic impacts-more than $21.1 million annually in new economic output (direct, indirect and induced spending) in Hendricks County. Scenarios 2 and 3 are estimated to generate.

$16.6 million and $9.0 million, respectively, in annual total output.  These expenditures result in new tax dollars generated in the County and the City of Plainfield.  Specifically, in terms of County hotel and food and beverage taxes only, the potential facility is estimated to generate between $481,000 and $251,000 in new tax revenue annually.  The City of Plainfield would also benefit from collection of new food and beverage tax revenue.

Other intangible benefits, such as quality of life aspects, greater exposure of the County to visitors, facilitating an amenity that can be attractive for local corporate growth and ancillary economic development issues, have not been quantified in this analysis; however, they are typically important in the consideration of public investment decisions relating to projects of this nature.

Cost/Benefit and Funding Issues

Ultimately, the decision whether the public sector should invest in a facility project such as a potential new hotel/conference center relies on a careful consideration of benefits relative to costs.  The following exhibit presents a summary of key costs and benefits (cast in two primary ways) associated with each of the three development scenarios for a potential new Hendricks County hotel/conference center project.

SCENARIO 1                 SCENARIO 2                  SCENARIO 3

 

BASED ON ANNUAL ECONOMIC OUTPUT

 

Low

Feasibility Gap

$15,500,000

$10,500,000

$8,000,000

Net New Annual Economic Output

$21,127,113

$16,634,162

$9,011,193

Benefits to Costs

1.36

1.58

1.13

 

High

Feasibility Gap

$18,000,000

$12,000,000

$8,500,000

Net New Annual Economic Output

$21,127,113

$16,634,162

$9,011,193

Benefits to Costs

1.17

1.39

1.06


BASED ON INCREMENTAL COUNTY TAX REVENUE AND EQUITY

(NPV of incremental  County tax revenue over 30 years + assumed sale of site)

Low

Feasibility Gap

$15,500,000

$10,500,000

$8,000,000

Net New County Tax Revenue

$9,872,728

$7,950,626

$5,145,184

Contribution  of Existing Site

$1,600,000

$1,600,000

$1,600,000

Benefits to Costs

0.74

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