Proposed Pacific Shores Resort & Spa

Transcription

1 NARRATIVE APPRAISAL REPORT Proposed Pacific Shores Resort & Spa 1600 STROULGER ROAD NANOOSE BAY, BRITISH COLUMBIA SUBMITTED TO:PR OPOSED Mr. Rafer Strandlund Transtide Investments Limited Partnership 3378 Douglas Street Victoria, BC, V8Z 3L3 +1 (250) ext. 217 PREPARED BY: HVS Consulting & Valuation DBA: MM&R Valuation Services, Inc. 145 West 17th Street, Suite 400 North Vancouver, BC, V7M 3G4 +1 (604) September-2016

2 September 20, 2016 HVS VANCOUVER 145 West 17th Street, Suite 400 North Vancouver, BC, V7M 3G4 +1 (604) (604) FAX Mr. Rafer Strandlund Transtide Investments Limited Partnership 3378 Douglas Street Victoria, BC, V8Z 3L3 Re: Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia HVS Reference: Dear Mr. Strandlund: In response to your request, we herewith submit our narrative appraisal report pertaining to the above-captioned proposed hotel. We have inspected the real estate and analyzed the market conditions in the area of Nanoose Bay, British Columbia. The subject property is already improved with all the facilities and amenities required for the operation of an upscale full-service resort. The proposed subject hotel will result from a change in the ownership and management structure of the property without any substantial change in the physical plant, aside from a $3.6- million renovation. Based on our analysis, it is our opinion that the prospective as converted market value of the fee simple interest in the real and personal property of the Proposed Pacific Shores Resort & Spa, as of January 1, 2018, in Canadian dollars, will be: $23,300,000 TWENTY-THREE MILLION THREE HUNDRED THOUSAND DOLLARS Superior results through unrivaled hospitality intelligence. Everywhere. The analysis is based on the extraordinary assumption that the subject property will be converted to a resort operation under single ownership and the management of a professional resort management company as of January 1, This appraisal does not address unforeseeable events that would alter the proposed project and/or the market conditions reflected in the analyses; we assume that no significant changes, other than those anticipated and explained in this report, will take place between the date of the inspection and the date of the prospective market value. The use of this extraordinary assumption has affected the assignment results. We have made no other extraordinary assumptions specific to this appraisal; however, several important general assumptions have been made that apply to this appraisal and our valuations of proposed hotels in general. These aspects are set forth in the "Assumptions and Limiting Conditions" chapter.

3 We hereby certify that we have no undisclosed interest in the property and that our employment and compensation are not contingent upon our findings. This study is subject to the comments made throughout this report and to all assumptions and limiting conditions set forth herein. Sincerely, MM&R Valuation Services, Inc. Jason Wight, AIC Candidate Member, Vice President +1 (604) ext. 224 Carrie Russell, AACI, MAI, RIBC, Managing Director +1 (604) ext. 225

4 Table of Contents SECTION TITLE PAGE 1. Summary of Salient Data and Conclusions 5 2. Nature of the Assignment 7 3. Description of the Site and Neighbourhood Description of the Proposed Improvements Market Area Analysis Supply and Demand Analysis Projection of Occupancy and Average Rate Highest and Best Use Approaches to Value Income Capitalization Approach Sales Comparison Approach Reconciliation of Value Indications Statement of Assumptions and Limiting Conditions Certification 118 Addenda Cost Approach Commercial Building Strata Plan Zoning Map and Zoning Bylaw Canadian Hotel Sales Qualifications

5 1. Summary of Salient Data and Conclusions Project: Location: Interest Appraised: Highest and Best Use As Improved : Proposed Pacific Shores Resort & Spa 1600 Stroulger Road Nanoose Bay, British Columbia, V9P 9B7 Fee simple Full-service resort lodging facility LAND DESCRIPTION Area: Zoning: Legal Description: acres or 489,844 square feet CRM Commercial 101 of 116 Strata units of Strata Plan VIS2036 (See Addenda Specific Strata #s) IMPROVEMENTS DESCRIPTION Expected Conversion Date: January 1, 2018 Property Type: Full-service resort lodging facility Guestrooms: 143 Food and Beverage Facilities: A restaurant and lounge Additional Facilities: An indoor pool, hot tub, and sauna, an outdoor whirlpool, a fitness centre, a spa, an outdoor patio and barbecue/picnic area, and vending areas September-2016 Summary of Salient Data and Conclusions Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 5

6 SUMMARY OF VALUE PARAMETERS Number of Years to Stabilize: Three (after opening) Stabilized Year: 2020 VALUATION ASSUMPTIONS Mortgage Interest Rate: 5.0% Amortization Period: 20 years Debt Service Constant: Loan-to-Value Ratio: 60% Inflation Rate: 2.0% Equity Yield Rate: 17.0% Terminal Capitalization Rate: 9.5% Selling Expenses: 1.0% Holding Period: 10 years Calculated Discount Rate: 11.2% Derived Capitalization Rates: 5.0% (Year 1), 9.9% (Deflated Stabilized) VALUE OPINIONS AS OF JANUARY 1, 2018 Income Capitalization Approach: $23,300,000 Sales Comparison Approach: $20,000,000 to $35,300,000 Cost Approach: Not Applicable Prospective When Converted Market Value: $23,300,000 ASSIGNMENT CONDITIONS Extraordinary Assumptions: The analysis is based on the extraordinary assumption that the subject property will be converted to a resort operation under single ownership and the management of a professional resort management company as of January 1, This appraisal does not address unforeseeable events that would alter the proposed project and/or the market conditions reflected in the analyses; we assume that no significant changes, other than those anticipated and explained in this report, will take place between the date of the inspection and the date of the prospective market value. The use of this extraordinary assumption has affected the assignment results. We have made no other extraordinary assumptions specific to this appraisal; however, several important general assumptions have been made that apply to this appraisal and our valuations of proposed hotels in general. These aspects are set forth in the "Assumptions and Limiting Conditions" chapter. September-2016 Summary of Salient Data and Conclusions Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 6

7 2. Nature of the Assignment Subject of the Appraisal The subject of this appraisal is the fee simple interest in a 489,844-square-foot (11.25-acre) site improved with a full-service resort lodging facility known as the Pacific Shores Resort & Spa. This valuation assumes that the subject property, which currently functions as a strata-titled timeshare involving numerous owners, will be converted to a resort operation under single ownership and the management of a professional resort management company as of January 1, The subject property is already improved with all the facilities and amenities required for the operation of an upscale full-service resort. The proposed subject hotel will result from a change in the ownership and management structure of the property without any substantial change in the physical plant, aside from a $3.6- million renovation. Throughout this report, the term subject property is used to refer to the property as it physically existed at the time of our property inspection on July 20, 2016, and the term proposed subject property is used to refer to the future incarnation of the subject property following the renovation and conversion to a fee simple ownership structure under professional resort management as is assumed to exist as of January 1, The subject site is currently improved with four townhouse buildings, two apartment buildings, a commercial building, a workshop, and a parkade. The townhouses and the apartments are currently used for timeshare purposes, but this valuation assumes that they will be converted for use within a standalone resort lodging facility. The property contains the appropriate parking capacity and all the necessary back-of-the-house space for a resort development. The proposed subject property is assumed to open on January 1, 2018, with 143 guestrooms, a restaurant and lounge, an indoor pool, hot tub, and sauna, an outdoor whirlpool, a fitness centre, a spa, an outdoor patio and barbecue/picnic area, and vending areas. The subject site is located at 1600 Stroulger Road in Nanoose Bay, British Columbia. September-2016 Nature of the Assignment Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 7

8 Property Rights Appraised The property rights appraised are the fee simple ownership of the land and improvements, including the furniture, fixtures, and equipment. The fee simple estate is defined as "absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat." 1 The Proposed Pacific Shores Resort & Spa is appraised as an open and operating facility. Pertinent Dates Ownership, Franchise, and Management Assumptions The effective date of the prospective when converted market value opinion is January 1, All monetary projections are expressed in inflated dollars. Jason Wight and Carrie Russell, AACI, MAI, RIBC, inspected the subject property on July 20, The subject property is known as Strata Plan VIS2036, which involves numerous ownership entities that own full, quarter, and eighth shares. This study assumes that the resort will be under one owner and operate as a 143 guestroom resort with a restaurant, a spa, meeting space, a pool and whirlpool, and a fitness centre. At the time of the study, Transtide Investments Limited Partnership owned Strata Numbers , and the other units are comprised of 63 strata units owned by individual owners. Our analysis assumes that the existing property management agreement can be terminated upon sale and that a professional resort-operating company will manage the proposed subject hotel throughout the assumed holding period for a fee consistent with current market standards. For this valuation, the total management fee is assumed to be 3.0% of total revenue, which is the going rate for professional resort management. The proposed subject resort will operate as an independent property and will not be subject to franchise fees. Objective of the Appraisal The objective of the report is to develop an opinion of the proposed subject property s as converted prospective market value. The resort is assumed to switch from a timeshare operating model to a traditional resort where the entire guestroom inventory is available for rent daily and the property is under single ownership and management. 1 The Dictionary of Real Estate Appraisal, 6th Edition (Chicago: Appraisal Institute, 2015). September-2016 Nature of the Assignment Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 8

9 The Appraisal Institute of Canada provides the following definition of market value: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. 1. buyer and seller are typically motivated; 2. both parties are well informed or well advised, and acting in what they consider their own best interests; 3. a reasonable time is allowed for exposure in the open market; 4. payment is made in terms of cash in Canadian dollars or in terms of financial arrangements comparable thereto; and 5. the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. 2 The Appraisal Institute defines prospective market value as a value opinion effective as of a specified future date. 3 Intended Use of the Appraisal Identification of the Client and Intended User(s) Assignment Conditions This narrative appraisal report asset valuation purposed of the proposed subject property. The client for this engagement is Transtide Investments Limited Partnership. This report is intended for the addressee firm, and it may not be distributed to or relied upon by other persons or entities. Extraordinary assumption is defined in CUSPAP as follows: Extraordinary assumptions refer to a hypothesis, either supposed or unconfirmed, which, if not true, could alter the appraiser s opinions and conclusions. Comment: Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal, or economic characteristics of the proposed subject property; or about conclusions external to the property, such as market conditions, trends or the integrity of the data used in an analysis. 4 2 Canadian Uniform Standards of Professional Appraisal Practice (Appraisal Institute of Canada, 2012), pg Ibid. 4 Canadian Uniform Standards of Professional Appraisal Practice (Appraisal Institute of Canada, 2012), pg. 60. September-2016 Nature of the Assignment Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 9

10 The analysis is based on the extraordinary assumption that the subject property will be converted to a resort operation under single ownership and the management of a professional resort management company as of January 1, This appraisal does not address unforeseeable events that would alter the proposed project and/or the market conditions reflected in the analyses; we assume that no significant changes, other than those anticipated and explained in this report, will take place between the date of the inspection and the date of the prospective market value. The use of this extraordinary assumption has affected the assignment results. We have made no other extraordinary assumptions specific to this appraisal; however, several important general assumptions have been made that apply to this appraisal and our valuations of proposed hotels in general. These aspects are set forth in the "Assumptions and Limiting Conditions" chapter. Marketing and Exposure Periods The concepts of marketing period and exposure period are similar and simply reflect different perspectives on time. Exposure period is defined as the estimated length of time that the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at its market value, as of the date of value. The exposure period is a retrospective opinion based on an analysis of past events and assumes a competitive and open market. Marketing period refers to the amount of time necessary to market the hotel subsequent to our date of value for it to sell for the appraised value, and thus is a prospective opinion. In our opinion, the exposure period for the proposed subject property, prior to our date of value, will be less than or equal to 12 months, and the marketing period for the proposed subject property, subsequent to our date of value, will be less than or equal to 12 months. The marketing and sale process for hotels is extremely efficient. Brokers specializing in hotel transactions actively solicit potential buyers on an ongoing basis and maintain databases on hotel investor criteria. According to the brokers interviewed, the current period from when a property is listed to when the sale closes is typically six to nine months. Brokers are able to electronically produce marketing materials, elicit interest, schedule property tours, accept offers, and select a buyer in approximately 90 to 120 days. Following the execution of a purchase and sale agreement, the due diligence and closing period is typically 90 days. With operating performance remaining strong, investors are actively seeking hotel properties; however, market uncertainty has caused some market participants to withdraw to the sidelines. Financing is still readily available, but underwriting has become more stringent than what was evident in The marketing process has also lengthened somewhat, reflecting the shift from a seller's market to a buyer's market. September-2016 Nature of the Assignment Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 10

11 Competency Scope of Work Our qualifications are included as an addendum to this report. These qualifications reflect that we have the competence required to complete this engagement. Our knowledge and experience is appropriate for the complexity of this assignment. The methodology used to develop this appraisal is based on the market research and valuation techniques set forth in the textbooks authored by Hospitality Valuation Services for the American Institute of Real Estate Appraisers and the Appraisal Institute: The Valuation of Hotels and Motels, 5 Hotels, Motels and Restaurants: Valuations and Market Studies, 6 The Computerized Income Approach to Hotel/Motel Market Studies and Valuations, 7 Hotels and Motels: A Guide to Market Analysis, Investment Analysis, and Valuations, 8 and Hotels and Motels Valuations and Market Studies All information was collected and analyzed by the staff of MM&R Valuation Services, Inc. Information such as site plans and floor plans were supplied by the client. 2. The subject site was evaluated from the viewpoint of its utility for the development and operation of a hotel. The potential existence of surplus or excess land was investigated. We have reviewed adjacent uses, regional and local accessibility attributes, and visibility characteristics. A study of the local neighbourhood was undertaken to determine its boundaries, land uses, recent developments, and lifecycle stage. Other aspects of the land, such as soil and subsoil conditions, nuisances, hazards, easements, encroachments, zoning, and the current flood zone of the property, have been evaluated. 3. The subject property's improvements were inspected to evaluate their current condition, quality of construction, and design and layout, including any items of physical deterioration or functional obsolescence. A list of facilities and amenities that the property offers has been compiled, and 5 Stephen Rushmore, The Valuation of Hotels and Motels (Chicago: American Institute of Real Estate Appraisers, 1978). 6 Stephen Rushmore, Hotels, Motels and Restaurants: Valuations and Market Studies (Chicago: American Institute of Real Estate Appraisers, 1983). 7 Stephen Rushmore, The Computerized Income Approach to Hotel/Motel Market Studies and Valuations (Chicago: American Institute of Real Estate Appraisers, 1990). 8 Stephen Rushmore, Hotels and Motels: A Guide to Market Analysis, Investment Analysis, and Valuations (Chicago: Appraisal Institute, 1992). 9 Stephen Rushmore and Erich Baum, Hotels and Motels Valuations and Market Studies (Chicago: Appraisal Institute, 2001). September-2016 Nature of the Assignment Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 11

12 past upgrades of each area of the hotel have been investigated. Recent capital expenditures, as well as planned future upgrades, have been reviewed. The remaining economic life of the hotel has been estimated. 4. The surrounding economic environment, on both an area and neighbourhood level, has been reviewed to identify specific hostelryrelated economic and demographic trends that may have an impact on future demand for hotels. 5. Dividing the market for hotel accommodations into individual segments defines specific market characteristics for the types of travellers expected to use the area's hotels. The factors investigated include purpose of visit, average length of stay, facilities and amenities required, seasonality, daily demand fluctuations, and price sensitivity. 6. An analysis of existing and proposed competition provides an indication of the current accommodated demand, along with market penetration and the degree of competitiveness. Unless noted otherwise, we have inspected the competitive lodging facilities summarized in this report. 7. Documentation for an occupancy and average rate projection is derived using the build-up approach based on an analysis of lodging activity. 8. A detailed projection of income and expense made in accordance with the Uniform System of Accounts for the Lodging Industry sets forth the anticipated economic benefits of the proposed subject property. 9. The appraisal considers the following two approaches to value: sales comparison and income capitalization. We investigated numerous improved sales in the market area and also spoke with buyers, sellers, brokers, property developers, and public officials. Because lodging facilities are income-producing properties that are normally bought and sold on the basis of capitalization of their anticipated stabilized earning power, the greatest weight is given to the value indicated by the income capitalization approach. Most hotel investors employ a similar procedure in formulating their purchase decisions; the income capitalization approach thus most closely reflects the rationale of typical buyers. The value conclusion conveyed in this narrative report is based on this investigation and analysis. September-2016 Nature of the Assignment Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 12

13 3. Description of the Site and Neighbourhood The suitability of the land for the operation of a lodging facility is an important consideration that affects a property's economic viability and overall value. Size, topography, access, visibility, and the availability of utilities are factors that have a direct impact on the desirability of a particular site. The subject site is located along the waterfront in Nanoose Bay, British Columbia, in the northwest quadrant of the intersection formed by Stroulger Road and Beaver Creek Wharf Road. Nanoose Bay is located within the Parksville Qualicum Beach area, which stretches along the sheltered Strait of Georgia on Vancouver Island; Nanoose Bay is situated at the south end of the beach area. Physical Characteristics The subject site measures approximately acres, or 489,844 square feet. The parcel's adjacent uses are set forth in the following table. FIGURE 3-1 SUBJECT PARCEL'S ADJACENT USES Direction North East South West Adjacent Use Strait of Georgia Residential/Beaver Creek Wharf Road Residential/NW Bay Road Stroulger Road Topography and Site Utility The subject site slopes downward toward the ocean to the west and north. The shape of the parcel permits efficient use of the site for the layout of the building and site improvements, including ingress and egress. Upon completion of the conversion into a singular resort operation, the subject site will contain land that could be sold, entitled, or developed for an alternative use. The valuation of the excess land is outside the scope of this study, and the value of the excess land is not considered in our value conclusion. September-2016 Description of the Site and Neighbourhood Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 13

14 VIEW OF SUBJECT SITE AERIAL PHOTOGRAPH September-2016 Description of the Site and Neighbourhood Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 14

15 Access and Visibility It is important to analyze the site in regard to ease of access with respect to regional and local transportation routes and demand generators. The subject site is readily accessible from a variety of local roads and highways. MAP OF REGIONAL ACCESS ROUTES It is relatively easy to gain access to Vancouver Island and the Regional District of Nanaimo in particular. The region is accessible from the mainland by ferry and air service and from other Island destinations by road and by rail. Nanoose is situated on Highway 19, one of Vancouver Island's main highways, which runs north/south along the island. The Nanaimo Airport is located approximately 46 kilometres southeast of Nanoose Bay in Cassidy. In addition, Nanaimo has two primary ferry terminals: the Departure Bay Terminal, which serves the Nanaimo-to-Horseshoe Bay route, and the Duke Point Terminal in the city's south end, which serves the Nanaimo-to-Tsawwassen route. September-2016 Description of the Site and Neighbourhood Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 15

16 Northwest Bay Road provides vehicular access to the subject site from the main highway, Highway 19. To reach the subject site, motorists on Highway 19 turn right onto Northwest Bay Road and continue northwest for approximately 7.5 kilometres. This road leads motorists to Beaver Creek Wharf Road, which connects to Stroulger Road, where the subject site is located on the left. The subject site is located in a private area, but it is only a 15-minute drive from the downtown Parksville area, which features shops and attractions for guests, and 30 minutes away from the Horne Lake Caves, a popular tourist attraction. The subject site is not visible from the highway; however, the secluded nature of the property is a virtue for this kind of resort, not a disadvantage. Airport Access Neighbourhood The proposed subject hotel will be served by the Nanaimo Airport, which is located approximately 46 kilometres southeast of the subject site in Cassidy. To reach the subject site from the airport, motorists follow signs to Highway 1 and travel north on this thoroughfare to the exit for Highway 19. Once on Highway 19, motorists continue northwest for approximately 38 kilometres until they reach Northwest Bay Road, where they turn right and continue north for another 7.5 kilometres to the subject site. The proposed subject property will also served by the Qualicum Beach Airport, which is located 23 kilometres west of the subject site. This airport is served by KD Air Corp., Orca Airways, and Sunwest Helicopters. The surrounding neighbourhood often has an impact on a hotel's status, image, class, and style of operation, and it sometimes affects a hotel's ability to attract and properly serve a particular market segment. This section of the report investigates the subject neighbourhood and evaluates any pertinent location factors that could affect the proposed subject hotel's future occupancy, average rate, and overall profitability. The neighbourhood that surrounds the subject site is generally defined by the Strait of Georgia to the north, Beaver Creek Wharf Road to the east, Northwest Bay Road to the south, and Island Highway East to the west. The neighbourhood is characterized by restaurants, office buildings, and retail shopping centres along the primary thoroughfares and residential areas along the secondary roadways. The subject site is located 15 minutes from the Parksville downtown area, which will allow guests to easily experience the shops and restaurants in that area. In general, this neighbourhood is in the growth stage of its life cycle. Many changes are happening in the neighbourhood, mainly as a result of the Fairwinds development plan, which is the biggest development project in Nanoose Bay. This project has the potential to double the population over the next 20 years. The development would see the addition of a significant amount of new residential housing, as well as community parks, a mixed-use village, and a marina. The Fairwinds land area contains approximately 287 hectares of undeveloped land, September-2016 Description of the Site and Neighbourhood Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 16

17 MAP OF NEIGHBOURHOOD which will divided and developed over six phases until This new development will bring in new visitors and create an appealing location for people to come and stay. The conversion of the subject property to a traditional resort operation will have a positive influence on the area; the property is in character with and complements surrounding land uses. Given the remote location and the natural scenery surrounding the property, a full-service resort is an appropriate use of the site and in line with the character of the Nanoose Bay area. Moreover, the supportive nature of the surrounding community is conducive to the operation of a hotel. Proximity to Local Demand Generators and Attractions The subject site is located near the area's primary generators of lodging demand. Some of these demand generators are listed in the following chart, which includes the respective distance from and drive time to the subject site. Overall, the subject site is well situated with respect to demand generators. September-2016 Description of the Site and Neighbourhood Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 17

18 FIGURE 3-2 ACCESS TO DEMAND GENERATORS AND ATTRACTIONS Demand Generator Approximate Distance (km) From Subject Property Approximate Driving Time from Subject Property (Minutes) Fairwinds Golf Club 12.0 SE 13 Arbutus Grove Provincial Park 15.9 SE 16 Paradise Acres Ranch 6.3 S 8 Moorecroft Regional Park 7.2 E 9 Red Gap 6.0 SE 7 Horne Lake Caves 10.0 W 14 Downtown Parksville 7.0 W 10 Schooner Cove 9.8 E 11 The subject property is located in proximity to major demand generators and attractions, making it a convenient property for tourists to stay at. The site is close to attractions but still located in a private waterfront location, allowing visitors to embrace the beautiful nature surrounding them while remaining close to many restaurants, shops, and attractions for when the mood takes them. Utilities Soil and Subsoil Conditions Nuisances and Hazards Flood Zone The subject property is reportedly served by all the necessary utilities. Geological and soil reports were not provided to us or made available for our review during the preparation of this report. We are not qualified to evaluate soil conditions other than by a visual inspection of the surface; no extraordinary conditions were apparent. We were not informed of any site-specific nuisances or hazards, and there were no visible signs of toxic ground contaminants at the time of our inspection. Because we are not experts in this field, we do not warrant the absence of hazardous waste. We urge the reader to obtain an independent analysis of these factors. According to the BC Ministry of Forests, Lands, and Natural Resource Operations, the subject site is not located in a flood-plain zone. September-2016 Description of the Site and Neighbourhood Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 18

19 Zoning Easements and Encroachments Conclusion According to the local planning office, the subject site is zoned as follows: CRM Commercial. The subject site is zoned for commercial use. This zoning designation allows for most commercial uses, including restaurants, neighbourhood pubs, tourist stores, and hotels and motels. We assume that all the necessary permits and approvals have been secured (including any applicable liquor licences) and that the subject property has been constructed in accordance with local zoning ordinances, building codes, and all other applicable regulations. This zoning information should be verified before any physical changes are made to the property. We are not aware of any easements attached to the property that would significantly affect the utility of the site or the marketability of this project. We have analyzed the issues of size, topography, access, visibility, and the availability of utilities. The subject site is favourably located along the water while still close to Highway 19 and the services available in Parksville. In general, the subject site is well suited to a resort development. The access, the visibility, and the topography are conducive to the effective operation of a resort lodging facility. September-2016 Description of the Site and Neighbourhood Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 19

20 4. Description of the Proposed Improvements The quality of a lodging facility's physical improvements has a direct influence on marketability, attainable occupancy, and average room rate. The design and functionality of the structure can also affect operating efficiency and overall profitability. This section investigates the proposed physical improvements and personal property in an effort to determine how they are expected to contribute to attainable cash flows. Project Overview The Proposed Pacific Shores Resort & Spa will be a full-service resort lodging facility containing 143 rentable units. Currently, the property is functioning as a timeshare and not as a resort; however, this valuation assumes that the subject property will be converted to a traditional resort operation where the entire guestroom inventory is available for rent daily and the property is under single ownership and the management of a professional resort management company as of January 1, The subject site is currently improved with four townhouse buildings, two apartment buildings, a commercial building, a workshop, and a parkade. The townhouses and the apartments are currently used for timeshare purposes, but this valuation assumes that they will be converted for use within a standalone resort lodging facility. September-2016 Description of the Proposed Improvements Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 20

21 PACIFIC SHORES RESORT & SPA EXTERIOR September-2016 Description of the Proposed Improvements Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 21

22 Summary of the Facilities The following table summarizes the facilities that are assumed to be available at the proposed subject property. FIGURE 4-1 PROPOSED FACILITIES SUMMARY Guestroom Configuration Studio 48 1 Bedroom 48 2 Bedroom 47 Total 143 Food & Beverage Facilities Smoke 'N Water Number of Units Indoor Meeting & Banquet Facilities TBD Amenities & Services Indoor Swimming Pool Fitness Centre Spa Guest Laundry Area Sauna BBQ Area Outdoor Whirlpool Vending Areas Site Improvements and Hotel Structure Once guests enter the site, ample parking is available on surface lots throughout the resort and within a parkade. The site improvements include signage at the entrance of the resort. Landscaping is located throughout the resort; trees, bushes, and flower beds are featured. The landscaping is visually appealing and was well maintained at the time of our inspection. Roadways and walkways are present throughout the resort, connecting the lodging buildings, the commercial building (which includes the front desk area, the spa, and the restaurant), the pool and whirlpool areas, and the beachfront. Overall, the site improvements at the property are in good condition. The resort guestrooms are located in five buildings located throughout the property. These buildings include Block 200, 300, 400, 500, 600, and 700. The commercial building is located near the entrance to the resort and currently houses the restaurant, the spa, the meeting space, and the check-in area. Other structures include a pool and barbeque area, a 69-stall parkade, a workshop, and a washroom/shower facility. Overall, the buildings are appropriate for a resort development. We assume that all structural components meet local building codes. September-2016 Description of the Proposed Improvements Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 22

23 Lobby The lobby and front-desk operations are located in the commercial building. The lobby is appropriate and large enough for a resort of this size. The lobby walls are finished with paint, and the floor is finished with tile. The front desk features a patterned laminate countertop on top of a cement base. All the property management and telephone systems, as well as other technology, are appropriately installed for the effective management of hotel operations. The furnishings and finishes in this space should offer an appropriate first impression, and the design of the space should foster adequate efficiency. LOBBY Food and Beverage Facilities The property offers a full-service restaurant called Smoke 'N Water, which is located along the oceanfront. Smoke 'N Water features a variety of cuisines ranging from southern cooking to forno-baked pizza. The restaurant is open for breakfast, lunch, and dinner, and it hosts full-scale banquets, weddings, and other events. Smoke 'N Water has a cozy feel and is furnished with wood and warm colours, creating a relaxed and inviting atmosphere for visitors. The restaurant is currently leased out. For this study, we assume that the restaurant will be resort-operated throughout the projection period. September-2016 Description of the Proposed Improvements Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 23

24 DINING AREA Meeting and Banquet Space The resort currently has a variety of rooms within the commercial building that can be used as meeting space. At the time of our inspection, only a portion of this space was being used for meetings and banquets. The meeting space has carpeted floors and windows looking out onto the property. September-2016 Description of the Proposed Improvements Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 24

25 MEETING ROOM Recreational Amenities Guestrooms The recreational facilities on the property comprise a fitness area and an indoor pool with an outdoor whirlpool. Restrooms and a sauna are present off the pool area. In addition, there is a spa that is currently leased out. For this study, we assume that the resort management will operate the spa. The resort primarily features two-bedroom units, but there is the ability of "lockoff" these units to create a studio unit and a one-bedroom unit. For this study, we assume that the resort will rent out the guestroom inventory as 47 two-bedroom units, 46 one-bedroom units, and 46 studio units. The floors are carpeted, the beds have white linens, and the sitting areas are comfortable. The guestroom bathrooms are the standard size. The have a shower-in-tub, a commode, and a single sink with vanity area featuring a granite countertop. The floors are finished with tile, and the walls are finished with paint. The showers have a unique stone tile finish, and the sinks feature an external bowl instead of a built in sink. The bathroom amenities include a hairdryer and complimentary toiletries. Overall, the bathroom design should appeal to the resort traveller. September-2016 Description of the Proposed Improvements Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 25

26 SAMPLE GUESTROOM The resort features exterior corridors that are wide and functional, permitting the easy passage of housekeeping carts. Back-of-the-House Environmental Capital Expenditures The property is served by the necessary back-of-the-house space, including an inhouse laundry facility, administrative offices, and a kitchen. These spaces are adequate for a resort of this type and will allow for the efficient operation of the property under competent management. We assume that the property has been constructed in compliance with all pertinent codes. Our analysis assumes that, following the transition to a traditional full-service resort lodging facility, the property will require ongoing upgrades and periodic renovations in order to maintain its competitive level in this market. We assume that approximately $3.6 million will be invested into the property to update the guestrooms and common areas to an upscale level, which will be required to achieve the projections reflected in this report. The following table shows an estimate of the allocation of the $3.6-million dollars assumed for this report. The cost estimate is based on the HVS/ JN&A Hotel Development Cost Guide. September-2016 Description of the Proposed Improvements Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 26

27 RENOVATION COST ESTIMATE Upscale Low High Average Selected Unit Type Unit Total Guestrooms Rooms $12,013 $14,993 $13,481 $14,000 Guestroom Per 143 $2,002,000 Bathrooms Guestrooms Total $5,259 $7,626 $6,363 $7,000 Guestroom 143 $1,001,000 $3,003,000 Per Room $21,000 Public Spaces $178,460 $245,387 $205,298 $200,000 Total 1 $200,000 Public Spaces Total $200,000 Meeting Rooms $314,964 $408,938 $358,445 $350,000 Total 1 $350,000 Function Spaces Total $350,000 Guest Amenities Exercise Room $25,726 $35,128 $30,145 $30,000 Total 1 $30,000 Swimming Pool Guest Amenities Total $43,520 $65,861 $53,616 $50,000 Total 1 $50,000 $80,000 Total: $3,633,000 Per Room: $25,406 Conclusion Overall, the subject property is well designed and appropriate for conversion to a full-service resort lodging facility. The layout of support areas and guestrooms is conducive to the efficient operation of a resort lodging facility. All typical and market-appropriate features and amenities appear to be included at the resort. We assume that the resort renovation will be fully complete as of the specified opening date. Moreover, we assume that the resort staff will be adequately trained to allow for a successful opening and that pre-marketing efforts will have introduced the product to major local accounts at least six months in advance of the opening date. September-2016 Description of the Proposed Improvements Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 27

28 5. Market Area Analysis The economic vitality of the market area and the neighbourhood surrounding the subject site is an important consideration in forecasting lodging demand and future income potential. Economic and demographic trends that reflect the amount of visitation provide a basis from which to project lodging demand. The purpose of the market area analysis is to review available economic and demographic data to determine whether the local market will experience economic growth, stability, or decline. In addition to predicting the direction of the economy, the rate of change must be quantified. These trends are then correlated based on their propensity to reflect variations in lodging demand, with the objective of forecasting the amount of growth or decline in visitation by individual market segment (e.g., commercial, meeting and group, and leisure). Market Area Definition The market area for a lodging facility is the geographic region where the sources of demand and the competitive supply are located. The subject site is located in the community of Nanoose Bay and the province of British Columbia. Nanoose Bay is a rural community with 5,000 residents. It is located just off Highway 19 on the east coast of Vancouver Island. Vancouver Island, the largest North American island in the Pacific Ocean, has a population of 750,000, including small rural communities and modern urban centres, such as Nanaimo. The island is roughly 460 kilometres long and about 100 kilometres wide with 3,440 kilometres of coastline. Vancouver Island is divided into six regional districts that stretch from south to north: the Capital District, Cowichan Valley, Alberni- Clayoquot, Nanaimo, Comox-Strathcona, and Mount Waddington. Nanoose Bay is part of the Regional District of Nanaimo, the second most heavily populated region on Vancouver Island. Nanoose Bay runs along the Strait of Georgia with Parksville to the north and the city of Nanaimo to the south. Located at the south end of the Parksville Qualicum Beach region, Nanoose Bay offers many opportunities for nature-based activities, such as hiking among old fir and red arbutus trees, walking along the waterfront, and climbing through the Horne Lake Caves. September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 28

29 NANOOSE BAY September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 29

30 MAP OF MARKET AREA Provincial and National Overview The following table summarizes historical and forecasted economic indicators for British Columbia and Canada. FIGURE 5-1 ECONOMIC INDICATORS BRITISH COLUMBIA VS. CANADA Real GDP Growth (% Change) f 2017f 2018f 2019f 2020f Canada 2.2 % 2.5 % 1.2 % 1.6 % 2.2 % 2.0 % 2.0 % 2.0 % 2.0 % British Columbia Employment Growth (% Change) f 2017f 2018f 2019f 2020f Canada 1.4 % 0.6 % 0.9 % 0.6 % 1.1 % 1.1 % 1.1 % 1.0 % 1.0 % British Columbia Unemployment Rate (%) f 2017f 2018f 2019f 2020f Canada 7.1 % 6.9 % 6.9 % 7.3 % 7.0 % 6.5 % 6.2 % 6.0 % British Columbia Source: The Conference Board of Canada Metropolitan Outlook Spring 2016 Avg. Annual Growth Avg. Annual Growth September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 30

31 British Columbia Overview British Columbia is Canada s third most populous province with 4.6 million people; most of the population resides in the southeast corner of the province. As the westernmost province of Canada, BC marks the western terminus of the transcontinental railways and the Trans-Canada Highway, and it is also home to major international seaports. The resource sector, particularly the forestry and mining industries, plays a dominant role in the province s economy. In 2015, British Columbia is estimated to have achieved GDP growth of 2.3%, and even stronger GDP growth of 2.7% and 3.4% is projected for 2016 and 2017, respectively the strongest growth rates of any province in the country. According to the Conference Board of Canada, manufacturing will act as the anchor for the provincial economy over the next several years. The strengthening of the US economy and the depreciation of the Canadian dollar are expected to boost demand for the province s products, offsetting weaker demand from the Asia- Pacific region. In addition, the $8-billion federal shipbuilding contract for noncombat vessels that is underway at the Seaspan Shipyard in North Vancouver will contribute to manufacturing growth. At the same time, mining output growth is expected to be minimal, limited by the oversupply of several key commodities. Construction activity is expected to join the manufacturing sector in leading growth for the province. In 2015, housing starts exceeded expectations with an increase of nearly 11%, and they are projected to keep trending upwards in This year, approximately 32,700 units will begin construction the most since Construction of the $36-billion Pacific NorthWest LNG Terminal could also commence in The project is currently awaiting approval from the Federal Government; approval is dependent on the project s environmental reassessment and how it meets new rules for greenhouse gas emissions and impacts on indigenous peoples. Assuming this project receives approval, the output is projected to grow by 3.2% in 2017 and 6.7% in The development of the Site C Clean Energy Project in Northeastern BC is expected to galvanize the provincial economy in the years to come. This major $8.8-billion infrastructure project, which will establish the third dam and hydroelectric generating station on the Peace River, has received approval and cleared most regulatory hurdles. Construction began in the summer of 2015 and will continue through to In addition to stimulating economic development and generating government revenues, the project will create approximately 10,000 person years of direct employment during construction. Once established, the Site C Dam will provide 1,100 megawatts of dependable capacity and produce about 5,100 gigawatt hours of electricity each year for the province s integrated electricity system. The facility will provide a source of clean energy to the province for more than 100 years. September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 31

32 The Province of British Columbia is looking to the liquefied natural gas (LNG) sector for long-term economic growth. The LNG strategy involves major private investments into infrastructure, including liquefaction facilities and pipelines in Northern British Columbia. Although the long-term outlook for this sector is still positive, many large natural gas projects in the province have been put on hold until commodity prices recover. As of the date of this appraisal, no final investment decision has been made for a major LNG project. Should another LNG project go forward in addition to the Pacific NorthWest LNG Terminal in the next two years, the province would likely see even stronger GDP, spending, and employment growth than what is currently projected. Canada Overview The Canadian economy did not realize much growth in Hampered by the downturn in the oil and gas sector, the highly energy-dependent economy registered growth of only 1.2%, which was the weakest increase since Despite uncertainty around commodity prices, export growth has been increasing, suggesting that the long-promised effects of the low Canadian dollar may finally be taking hold. With the downturn in the oil sector still acting as a drag on growth, the Conference Board of Canada forecasts an increase of only 1.6% in the national GDP for 2016, although stronger growth of 2.2% is forecasted for The national unemployment rate remained at 6.9% in 2015 but is projected to increase to 7.3% in The low Loonie is expected to benefit many sectors of the Canadian economy, particularly manufacturing. The weaker dollar and the increase in demand from the US have started to stimulate Canada s export sector; however, strong growth is not forecasted in the near term because the slide in oil prices is hurting energy exports. Moreover, business investments will continue to fall, led by large cutbacks in the energy sector. Oil-related firms are expected to cut capital expenditures and investments by close to 15% in 2016, following on the 25% reduction that took place in The sluggish economy is expected to cause further declines in building construction activity as a result of low business confidence and uncertainty in global financial markets. As such, total business investment is expected to decrease another 2.4% in 2016 following on the drop of 7.8% seen in Elevated household debt is restraining consumers, who are now borrowing at the slowest pace in three decades. A drop in oil prices usually translates into more disposable income, which could positively affect consumer spending. However, the weak dollar is raising the cost of imports, so a rise in the cost of food could eat up the money that consumers save at the pump. September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 32

33 The Liberals were elected to a majority government in October 2015, providing a degree of certainty regarding the policy direction that the country will be going in. In March 2016, the Liberal government released its first federal budget, projecting a $29-billion deficit in 2016/17 and shortfalls of $29 billion and $23 billion in 2017/18 and 2018/19, respectively. The figures released were in contrast to the Liberal Party s campaign platform, which called for only modest deficits of no more than $10 billion over the course of their mandate with a promise to balance the books by 2019/20. A large portion of the new spending measures introduced in the budget is targeted for infrastructure. In addition, the deficit spending will also help boost household income through the new Canada Child Benefit Program. The government s stimulus initiatives are expected to increase nominal GDP growth by 0.4% in 2016 and 0.3% in The long-term prospects for the Canadian economy are favourable as a result of ongoing investments to further develop the country's large and varied resource base. Internationally competitive business tax rates and ongoing capital and immigration inflows are all helping to create a supportive economic environment. Major Business and Industry To provide an additional context for understanding the nature of the regional economy, the major employers in the proposed subject property s market are listed in the following table. FIGURE 5-2 MAJOR EMPLOYERS Firm 1 School District #68 2,135 2 Nanaimo Regional General Hospital 1,600 3 Vancouver Island University 1,030 4 British Columbia Ferry Services Inc Shaw Cable City of Nanaimo McDonalds Nordia Walmart Regional District of Nanaimo 288 Source: Invest Nanaimo Number of Employees September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 33

34 Nanoose Bay is located between the tourist destination of Parksville and the economic hub of Nanaimo, and it does not have many major industries outside of tourism. Despite the close proximity, the businesses located in Nanaimo are not expected to create much lodging demand in Nanoose Bay. The Canadian Forces Maritime Experimental Test Range has been located in Nanoose Bay since 1967 on land owned by the government. This site is used for testing torpedoes launched from the air and from ships and submarines. This site is also used for testing sonar, sonobuoys, and other maritime warfare equipment. In addition to being used by the Canadian Forces, this facility is used by the US Navy. Nanoose Bay was chosen for this test range because unarmed torpedoes could easily be recovered from the ocean bottom. There are four test ranges at the facility the largest one, Whiskey Golf, is 24 kilometres long and eight kilometres wide. The range tests approximately 300 to 400 torpedoes each year, and 57 people are employed at the facility. Given the location along the Georgia Strait, boating plays an important role in the local economy. Two marinas are located in Nanoose Bay: the Beachcomber Marina and the Schooner Cove Marina. The Beachcomber is a small private marina that offers moorings that can be used year round; it also offers public launch facilities. The Schooner Cove Marina is the larger of the two marinas; it offers 360 moorings and can accommodate boats up to 65 feet in length. In addition to the marinas, Nanoose Bay is home to the Schooner Cove Yacht Club (SCYC) and the Nanoose Power & Sail Squadron (NPSS). In 2015, a proposal was submitted to add 26 berths to the Beachcomber Marina, an expansion that would require 63 additional parking spaces but would create necessary additional space within the marina. Overall, Nanoose Bay offers a rural atmosphere with beautiful natural scenery. The community offers several accommodations and each year attracts tourists who travel far to partake in the exceptional bird-watching opportunities and walk along the sandy beaches that the area has on offer. September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 34

35 Unemployment Statistics The following table presents historical unemployment rates that are pertinent to the subject market area. FIGURE 5-3 UNEMPLOYMENT STATISTICS Year British Columbia Canada % 8.3 % Source: Statistics Canada Unemployment in British Columbia has declined steadily since 2009 aside from a minor increase in Convention Activity A convention centre serves as a gauge of visitation trends to a particular market. Convention centres also generate significant levels of demand for area hotels and serve as a focal point for community activity. Typically, hotels within the closest proximity to a convention centre up to three miles away will benefit the most. Hotels serving as headquarters for an event benefit the most by way of premium rates and hosting related banquet events. During the largest of conventions, peripheral hotels may benefit from compression within the city as a whole. The Vancouver Island Conference Centre was built in 2008 and is located 32 kilometres southeast of the proposed subject property. The conference centre, which is part of the Port of Nanaimo Centre, offers 38,000 square feet of meeting space spread over three storeys. The convention centre also offers 300 belowground parking stalls. September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 35

36 VANCOUVER ISLAND CONFERENCE CENTRE FIGURE 5-4 VANCOUVER ISLAND CONFERENCE CENTRE DELEGATE DAYS Year Delegate Days Percentage Change , ,415 (21.9)% , % , % ,535 (29.8)% , % , % Source: Chemistry Consulting The number of delegate days at the Vancouver Island Convention Centre has fluctuated since the facility opened in mid The facility registered its strongest year in 2012, when the number up delegate days doubled relative to the previous year. Fewer delegate days were produced in 2013, but the number was nevertheless strong relative to the facility s track record. In 2014, the Vancouver Island Convention Centre saw slight growth, and 2015 was an especially strong year for delegate days. September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 36

37 The top management and sales personnel at the conference centre has changed recently, which may give the conference centre a renewed focus. The year-overyear fluctuations in delegate days and the difficulty sustaining consistent growth are attributable to the competition from the nearby markets of Vancouver, Victoria, and Whistler, as well as the insufficient number of guestrooms for larger conferences in Nanaimo. Airport Traffic Airport passenger counts are important indicators of lodging demand. Depending on the type of service provided by a particular airfield, a sizable percentage of arriving passengers may require hotel accommodations. Trends showing changes in passenger counts also reflect local business activity and the overall economic health of the area. The proposed subject resort will be served by the Nanaimo Airport, which is located approximately 46 kilometres southeast of the subject site in Cassidy. The Nanaimo Airport opened in 1999 and handled 312,000 passengers in The airport provides service to both Vancouver and the Lower Mainland 12 times a day. In addition, there are four non-stop flights to Calgary via both WestJet and Air Canada Express. The Nanaimo Seaplane Terminal is located in the Pioneer Waterfront Plaza and provides flights to downtown Vancouver and Vancouver International Airport through Baxter Air and Harbour Air. The Qualicum Beach Airport, a secondary airport that is located within 16 kilometres of the subject site, serves Qualicum and the Parksville area. This facility has one asphalt runway and two scheduled airlines schedules: KD Air Corp. and Orca Airways. KD Air Corp. offers four non-stop flights to Vancouver daily, and Orca Airways flies to Vancouver three times a day. September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 37

38 The following table illustrates recent operating statistics for the Nanaimo Airport. FIGURE 5-5 PASSENGER TRAFFIC NANAIMO AIRPORT Year Passenger Percent Percent Traffic Change* Change** , , % 10.4 % , , , , , *Percentage change from the previous year **Compound annual change from first year of data Source: Chemistry Consulting Major Projects FIGURE 5-6 MAJOR PROJECTS Project Company Value Sandstone Towne Centre - South Nanaimo Lands Northwest Properties $1,000 Oceanview Golf Resort & Spa Cable Bay Lands Inc. 100 Nanaimo Sewage Plant Upgrades Regional District of Nanaimo 86 Nanaimo Gateway Project Howard Johnson Hotels 80 E&N Rail Service Track Restoration Island Corridor Foundation 70 Wood Fuel Pellet Facility TimberWest Forest Corp. 60 Pheasant Glen Resort Development Pheasant Glen 50 Nanimo Casino Expansion Great Canadian Gaming Corporation 50 Nanaimo District Office BC Hydro 49 Vancouver Island University Vancouver Island University 38 Source: BC Major Projects Inventory September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 38

39 US Currency In past year, the low Canadian dollar has helped attract an abundance of US travellers to the region. When the Canadian dollar rose above parity with the US dollar, the number of US visitors to the region dropped, and many Canadian travellers took advantage of the new economic incentive, sidestepping destinations in British Columbia in favour of travelling south of the border. This situation is now in reverse. The Canadian dollar has decreased to record lows while the US economy has continued to improve, which has resulted in an increase in travellers to the area. This positive trend is expected to continue through the near term. Canadian travellers are showing a preference for travelling to domestic markets, as the low value of the Canadian dollar makes travelling south of the border an expensive proposition for Canadians. During our interviews, market participants indicated that they have noted an increase in domestic travellers and a resurgence in American visitation, which is a positive sign for the market. Travel Market Intentions Travel market intentions are a strong indicator of lodging demand in Canada. The trend data compiled by the Conference Board of Canada and the Canadian Tourism Research Council show the changes in overnight travel within both provincial and metropolitan markets. The data are then segmented according to traveller type and origin. The changes that occur in overnight travel have a direct relationship with specific types of lodging demand in the subject market. Along with total travel expenditures, the following table summarizes the overnight travel forecasts for British Columbia compared to national expectations. September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 39

40 FIGURE 5-7 OVERNIGHT VISIT FORECASTS CANADA & BRITISH COLUMBIA Overnight Travel Forecasts (% Change) 2015e 2016f 2017f 2018f 2019f Avg Annual % Change Canada Domestic 1.9 % 2.1 % 2.8 % 2.4 % 2.2 % 2.3 % Business Pleasure United States Overseas Total Total Expenditures (millions) $46,462 $48,783 $51,546 $54,105 $56, British Columbia Domestic 3.0 % 3.0 % 3.0 % 2.9 % 2.1 % 2.8 % Business Pleasure United States Overseas Total Total Expenditures (millions) $10,432 $11,045 $11,688 $12,328 $12, Source: Conference Board of Canada Travel Market Outlook, Spring 2016: Metropolitan Focus National Trends in Overnight Visitation In 2014, total overnight travel in Canada increased 2.2%. This rate of growth appears to be modest, but it becomes more impressive when the negative impact that the long, cold winter had in the first half of the year is taken into account. Convention activity, increased consumer confidence, and enlarged air traffic capacity helped to lift business travel in this part of the year. Falling oil prices and the resulting consumer uncertainty marred the second half of Lower price inflation and fuel prices took some of the edge off the negative impact, but high levels of household debt (particularly in Alberta), weak wage gains, and uncertainty with respect to layoffs and real estate markets led to a decline in domestic leisure and business traffic in the second half of Overnight travel to Canada from the United States grew only slightly in Air traffic increased 6.0%, but declines in all other modes of travel offset this gain. On a more positive note, overseas traffic increased a substantial 9.3% in 2014 with an increase in visitation from every region of the world. Improvements in the global economy, favourable exchange rates, and increased air-traffic capacity all contributed to the sharp rise in overseas visitation. China led the rest of the world in growth in overnight visits to Canada with an increase of nearly 30% in September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 40

41 In 2015, the total number of overnight visits to the country exceeded 134 million, representing an increase of 2.6% over the previous year. US visitors accounted for the largest increase; visitation was up an estimated 7.7% in this segment, reaching over 13 million overnight stays. This strong growth can be attributed to the weak Canadian dollar and low fuel prices. Lower fuel prices also played a role in the 1.9% increase in domestic overnight visitation that is estimated to have taken place in Growth within this segment is significant since domestic overnight visits also accounted for more than 84% of total overnight visits in Domestic leisure visitation is estimated to have increased 2.6% in Lower fuel prices are leaving more disposable income for households and making Canadian destinations more attractive for both domestic and foreign travellers. However, slumping oil prices suppressed the growth in domestic business overnights, which are estimated to have grown a mere 0.6% in Altogether, total expenditures on overnight visits in the country amounted to an estimated $46.5 billion in Although the overall performance for the country as a whole was fairly strong, 2015 was marked by great variation in regional performances; oil-producing provinces fared worse than provinces with more diversified economies and export sectors. The weak Canadian dollar and increased air capacity will support the growth in domestic overnights through This segment is projected to grow at rates between 2.1% and 2.8% per year in this period, held in check by household and businesses financial concerns. Within this segment, domestic business travel is projected to increase 1.5% and 2.5% in 2016 and 2017, respectively. At the same time, the depreciated Canadian dollar, the strengthened US economy, and increased access and marketing will support further gains in visitation from the US, albeit at a less robust rate than in Likewise, increased air capacity, particularly from European countries, will support strong growth in overseas visitation, which will nonetheless taper because emerging economies are struggling as a result of low commodity prices and the slowdown in China. In descending order of size, the largest sources of the increase in overnight visitation to Canada in 2016 are expected to be India, China, Mexico, and the United Kingdom. Over the four-year forecast, travel expenditures are expected to grow at a strong pace between 5.7% and 4.8% as travel prices increase. September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 41

42 Provincial Trends in Overnight Visitation In 2014, BC saw a healthy increase in overnight visitation. In all, the total number of overnight visits was up 3.6% for the province that year, which is considerably stronger than the national average of 2.2%. The largest rate of growth was in overseas visits, which increased 9.2% over the prior year. The increase in overseas visitation came largely from Asian countries, supported by increased consumer confidence and improved global economic conditions. Direct air-traffic capacity to BC from abroad also improved though more frequent flights and additional routes. Domestic travel grew by 3.3% in 2014, led by a rise in leisure overnight stays. The drop in fuel prices in the second half of the year and the weakened Canadian dollar made visits south of the border less attractive for Canadians. At the same time, US visitations grew a modest 2.7% with the pickup in the US economy and the improvements in air capacity. BC again experienced healthy growth in overnight visitation in The total number of overnight visits is estimated to have increased 3.9% that year. Since the drop in the price of oil, BC has become the new economic growth engine for the country, attracting more business travel both domestically and internationally. A shorter and milder winter in 2015 also contributed to the increase in overnight visitation, as this translates into a longer season for resorts and vacation destinations. Favourable exchange rates for international visitors and lower transportation costs are also promoting a rise in overnight stays in the province, particularly from the United States. US visitation led the growth in overnight visits to the province in 2015; this segment is estimated to have increased a robust 7.6% that year. Moreover, growing disposable incomes, increased consumer confidence, and strong economic output have stimulated growth in tourism expenditures. From 2016 through 2019, overseas visitation is projected to sustain the strongest growth rates of the three segments, owing to increased air capacity and marketing efforts, along with the depreciated Canadian dollar. The Women's World Hockey Championships are expected to boost visitation to the province in 2016, just as the Women's FIFA World Cup matches did in The total number of overnight visits in the province is projected to exceed 22 million in Tourist Attractions The market benefits from the presence of a variety of tourist and leisure attractions in the area. The peak season for tourism in this area is from May to September. During other times of the year, weekend demand comprises travellers passing through en route to other destinations and people visiting friends, relatives, and other similar weekend demand generators. September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 42

43 The primary attractions in the area include the following: Given the location on the coast of Vancouver Island, Nanoose Bay is a popular destination for all types of water activities. The area is a sought-after location for canoeing, sailing, windsurfing, kayaking, and fishing. Additionally, Nanoose Bay is a popular location for clam digging and bird-watching. Hiking trails are a big tourist attraction in Nanoose Bay. Nanoose Hill, located on the north shore of Nanoose Harbour, is a popular trail that offers hikers a view of the ocean. The Northwest Bay Trails, located on the east side of Highway 19A, offer several trails that run through the forest. These trails are suitable for hiking and mountain biking, or visitors can rent a horse at a nearby stable and experience these trails on horseback. The Notch is one of the most popular Northwest Bay Trails because of the Garry oak and arbutus trees. Provincial Parks are also popular tourist destinations within Nanoose Bay. Rathtrevor Beach Provincial Park is known for its swimming beaches, camping, and bird-watching. This park offers 2.1 kilometres of beaches and is home to more than 150 different bird species. The camp sites at Rathtrevor Beach Provincial Park include hot showers, gas barbeques in covered beachside picnic shelters, and firewood for guests. Englishman River Falls Provincial Park is a 97-hectare park that offers several walking trails and features a canyon between two beautiful waterfalls. This provincial park offers 105 vehicle/tent sites. The Fairwinds Golf & Country Club is the only oceanfront golf course on Vancouver Island. It is located 12 kilometres from the subject site. This 18-hole course was voted Vancouver Island's best golf course in The Fairwinds Golf & Country Club belongs to the Fairwinds Community & Resorts, which features the golf course, a community centre with a saltwater pool, and a marina. In 2012, Nanoose Bay was recognized by the Guinness Book of World Records for being home to the world s largest gnome, which stands 7.91 metres tall. Ron Halek built the friendly giant in 1998 after being inspired by a book on gnomes that his wife Disa had written. His intention was to gain the attention of visitors, whom he hoped wosuld attend the go-cart track that he had set up on the property. The gnome has brought business into the area as people frequently stop to take pictures. September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 43

44 FAIRWINDS GOLF & COUNTRY CLUB Conclusion Nanoose Bay is experiencing a period of economic strength and expansion, primarily led by the Fairwinds development projects and the strengthening of the tourism sector in the Parksville area. Our market interviews and research indicate that tourism has been rapidly growing, as event participation and the number of patrons at local businesses have been increasing. The outlook for the market area is positive. September-2016 Market Area Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 44

45 6. Supply and Demand Analysis In the lodging industry, price varies directly, but not proportionately, with demand and inversely, but not proportionately, with supply. Supply is measured by the number of guestrooms available, and demand is measured by the number of rooms occupied. The net effect of supply and demand moving toward equilibrium results in a prevailing price, or average rate. The purpose of this section is to investigate current supply and demand trends, as indicated by the current competitive market, and to set forth a basis for the projection of future supply and demand growth. Definition of Subject Hotel Market National and Provincial Trends Overview The proposed subject resort is expected to compete with a set of resorts based on various factors, including location, price point, product quality, length of stay (such as an extended-stay focus vs. non-extended-stay focus), room type (all-suite vs. standard), age, and brand. We have reviewed these pertinent attributes and established the expected competitive set based upon this review. Our review of the proposed subject property s specific competitive set within the Nanoose Bay area begins after our review of national occupancy, average rate, and RevPAR trends. The supply and demand trends within the immediate area have the most direct effect on the proposed subject property s local lodging market, but conditions in the national lodging market also influence individual markets. We have reviewed national lodging trends to provide a context for the forecast of the supply and demand for the proposed subject property s competitive set. The following graphs present annual hotel occupancy and average rate data for Canada since 2006 and the percentage change in supply and demand. These statistics come from STR, an independent research firm that compiles and publishes data on the lodging industry. September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 45

46 FIGURE 6-1 NATIONAL OCCUPANCY AND AVERAGE RATE TRENDS $155 66% $145 $135 $125 $124 $129 $133 $126 $129 $128 $130 $133 $137 $144 $141 $147 65% 64% 63% 62% $115 61% $105 60% $95 $85 $75 $65 $92 $94 $89 $90 $84 $85 $84 $80 $78 $79 $81 $ July 2015 July 2016 Average Rate ($) RevPAR ($) Occupancy (%) 59% 58% 57% 56% 55% The national hotel market is in a healthy position. In 2013, the market noted record demand levels and a RevPAR on par with 2008, the prior peak in the performance cycle. Demand has grown steadily since Although the rate of growth in occupied room nights slowed to 0.2% in 2015, the Canadian lodging industry nonetheless sustained another record-breaking year for hotel demand. In 2015, the market-wide occupancy slipped slightly given greater growth in new supply in the market, but robust ADR growth contributed to further gains in RevPAR. While on the whole these results are positive, it is worth noting that regional performances varied more widely in The province of Alberta saw a significant decline in occupancy that year, whereas Ontario and British Columbia experienced growth in both occupancy and ADR. September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 46

47 FIGURE 6-2 CHANGE IN NATIONAL ROOM SUPPLY AND DEMAND 5.0% 4.8% 66.0% 65.0% 3.0% 3.0% 2.9% 3.0% 64.0% 1.0% 1.2% 1.1% 1.9% 1.5% 1.5% 1.3% 1.2% 2.1% 1.6% 0.5% 0.5% 0.5% 1.0% 0.2% 63.0% 62.0% % Change -1.0% -0.6% 61.0% 60.0% Occupancy -3.0% 59.0% 58.0% -5.0% 57.0% -6.4% 56.0% -7.0% 55.0% Available Room Nights Occupied Room Nights Occupancy (%) The conservatism of Canada s banking sector has generally kept supply growth in check over the past nine years. From 2012 to 2014, the supply increased by only 0.5%, well below the historical average of 1.0%. The positive demand trends coupled with the limited amount of new supply allowed the national occupancy level to rebound. In 2015, the country saw a stronger supply increase of 1.0%, which was greater than the demand growth for the same period, resulting in a slight drop in occupancy. At the same time, the national ADR grew by 4.5% in 2015, establishing a new ADR record for the country. The trends established in the last few years indicate that the market continues to move in a positive direction. The year-to-date figures generally indicate a continuation of the results of 2015: the occupancy is holding steady but with little upward movement while the ADR continues to climb, resulting in overall growth in RevPAR. September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 47

48 FIGURE 6-3 BRITISH COLUMBIA OCCUPANCY & AVERAGE RATE TRENDS $185 70% $165 $145 $125 $134 $144 $136 $135 $139 $145 $158 $153 $166 68% 66% 64% 62% $105 $85 $65 $115 $106 $102 $93 $87 $85 $82 $80 $ July 2015 July 2016 Average Rate ($) RevPAR ($) Occupancy (%) 60% 58% 56% 54% British Columbia showed strong RevPAR growth in 2010, largely as a result of the strong rate increases achieved during the Winter Olympic and Paralympic Games in Vancouver. A decline in RevPAR was expected in 2011 with the normalization of demand following the major event. The average rate declined back to 2009 levels, but the occupancy remained relatively unscathed. The RevPAR then remained stable through 2012 until the market began to see stronger RevPAR growth in In 2014 and 2015, the British Columbia lodging market realized robust increases in RevPAR, supported by the resurgence of American travel to Canada with the downward slide in the Loonie, combined with a surge in the number of travellers from China, India, and Brazil. Solid gains in both occupancy and ADR were realized in these years, and additional gains are expected for 2016, as supported by the year-to-date performance. September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 48

49 SUPPLY Based on an evaluation of the occupancy, rate structure, market orientation, chain affiliation, location, facilities, amenities, reputation, and quality of each area hotel, as well as the comments of management representatives, we have identified three properties that are expected to be primarily competitive with the proposed subject hotel. Additional lodging facilities are judged to be only secondarily competitive. Although the facilities, rate structures, or market orientations of these hotels prevent their inclusion among the primary competitive supply, they are expected to compete with the proposed subject property to some extent. The following table summarizes the important operating characteristics of the future primary competitors and the weighted aggregate of the secondary competition. This information was compiled from personal interviews, inspections, lodging directories, and our in-house library of operating data. The primary competition table also sets forth each property s penetration factors. Penetration is the ratio between a specific hotel s operating results and the corresponding data for the market. If the penetration factor is greater than 100%, the property is performing better than the market as a whole. Conversely, if the penetration rate is less than 100%, the hotel is performing at a level below the market-wide average. September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 49

50 FIGURE 6-4 PRIMARY COMPETITORS OPERATING PERFORMANCE Est. Segmentation Estimated 2014 Estimated 2015 Number of Weighted Annual Room Weighted Annual Room Property Rooms Count Occ. Average Rate RevPAR Count Occ. Average Rate RevPAR Leisure e Meetin ng and Grou oup Comme mercial Occupancy Penetration Kingfisher Resort & Spa Courtenay % 20 % 0 % % $180 - $190 $80 - $ % $190 - $200 $90 - $ % % The Shorewater Resort Tigh-Na-Mara Seaside Spa Resort & Conference Centre Parksville Sub-Totals/Averages % 23 % 0 % % $ $ % $ $ % 86.1 % Secondary Competitors % 17 % 4 % % $ $ % $ $ % % Totals/Averages % 21 % 1 % % $ $ % $ $ % % Specific occupancy and average rate data are used in our analysis, but ranges are presented in the above table to preserve confidentiality. Yield Penetration

51 The following map illustrates the location of the proposed subject property and its future competitors. MAP OF COMPETITION September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 51

52 Our survey of the primarily competitive hotels in the local market shows a range of lodging types and facilities. Each primary competitor was inspected and evaluated. Descriptions of our findings are presented below. September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 52

53 PRIMARY COMPETITOR #1 - KINGFISHER RESORT & SPA COURTENAY Kingfisher Resort & Spa Courtenay 4330 Island Highway South Courtenay, BC FIGURE 6-5 Year ESTIMATED HISTORICAL OPERATING STATISTICS Wtd. Annual Room Count Occupancy Average Rate RevPAR Occupancy Penetration Yield Penetration Est % $170 - $180 $70 - $ % % Est Est The Kingfisher Oceanside Resort & Spa is located just south of Courtenay on the Old Island Highway. The property is well known for its spa. Approximately 70% of guests use the spa facilities, with an average of 1.5 treatments per guest. Couples or girlfriends often frequent this adult-oriented property on a get-a-way together. Albertans are a large market for the resort given the ease of access to Comox from Edmonton and Calgary. The spa operation helps to mitigate the seasonality of the market. September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 53

54 PRIMARY COMPETITOR #2 - THE SHOREWATER RESORT The Shorewater Resort 3295 Island Highway West Qualicum Beach, BC FIGURE 6-6 Year ESTIMATED HISTORICAL OPERATING STATISTICS Wtd. Annual Room Count Occupancy Average Rate RevPAR Occupancy Penetration Yield Penetration Est % $160 - $170 $70 - $ % % Est Est The Shorewater Resort is a 23-unit beachfront property located in Qualicum Beach, British Columbia. The property overlooks the Strait of George and the snow-capped Coastal Mountain Range, and it is located approximately 2.1 kilometres away from Comox Ferry Terminal, Spider Lake Provincial Park, and the Qualicum Beach Museum. Each unit features a private beachfront, a picnic area with a gas barbeque, and a private patio. In addition, the units are equipped with full kitchenettes. September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 54

55 PRIMARY COMPETITOR #3 - TIGH-NA-MARA SEASIDE SPA RESORT & CONFERENCE CENTRE PARKSVILLE Tigh-Na-Mara Seaside Spa Resort & Conference Centre Parksville 1155 Resort Drive Parksville, BC FIGURE 6-7 Year ESTIMATED HISTORICAL OPERATING STATISTICS Wtd. Annual Room Count Occupancy Average Rate RevPAR Occupancy Penetration Yield Penetration Est % $150 - $160 $75 - $ % % Est Est The Tigh-Na-Mara Seaside Spa Resort & Conference Centre Parksville is owned by strata investors and independently operated. The traditional log-constructed units include one- and two-bedroom spa bungalows, log cottages, and ocean-view condos overlooking the Georgia Strait and the Coastal Mountains in Vancouver Island. The facilities include an indoor pool and whirlpool, a sauna, a fitness room, a gift shop, a health spa, tennis courts, a business centre, and approximately 10,000 square feet of meeting space. The hotel opened in 1980 and was renovated in 2003; the upgrades included the addition of the 20,000-square-foot Grotto Spa. This hotel benefits from being located centrally in Parksville on Vancouver Island and near six 18-hole golf courses. The hotel looks out onto the Pacific Ocean and has direct access to three kilometres of the sandy Rathtrevor Beach, which offers the warmest ocean swimming in Canada. September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 55

56 Secondary Competitors We have also reviewed other area lodging facilities to identify any that would compete with the proposed subject hotel on a secondary basis. The room count of each secondary competitor is weighted based on the hotel's assumed degree of competitiveness in the future with the proposed subject hotel. By assigning degrees of competitiveness, we can assess how the proposed subject hotel and its future competitors may react to various changes in the market, such as new supply, changes to demand generators, and renovations or franchise changes among the existing supply. The following table sets forth the pertinent operating characteristics of the secondary competitors. September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 56

57 FIGURE 6-8 SECONDARY COMPETITORS OPERATING PERFORMANCE Est. Segmentation Estimated 2014 Estimated 2015 Property Total Weighted Annual Weighted Annual Number of Competitive Room Room Rooms Level Count Occ. Average Rate RevPAR Count Occ. Average Rate RevPAR Leisure Meeting and Group Commerc rcial Brentwood Bay Lodge & Spa Victoria % 20 % 10 % 50 % % $200 - $210 $140 - $ % $210 - $220 $150 - $160 Long Beach Lodge Resort Tofino Painted Boat Resort Poets Cove Resort & Spa South Pender Island Rockwater Secret Cove Resort Halfmoon Bay Sooke Harbour House Totals/Averages % 17 % 4 % 50 % % $ $ % $ $ Specific occupancy and average rate data are used in our analysis, but ranges are presented in the above table to preserve confidentiality.

58 We have identified six resorts that are expected to compete with the proposed subject hotel on a secondary level. These properties are expected to compete on a secondary level on the basis of their location relative to the proposed subject property. Moreover, these properties are located in busier seasonal tourist markets and cater to a higher-end market. Supply Changes Supply Conclusion Demand Analysis Using Market Segmentation It is important to consider any new hotels that may have an impact on the proposed subject hotel s operating performance. On the basis of our research, the proposed subject hotel is the only new resort that is expected to open in the region. We have identified various properties that are expected to be competitive to some degree with the Proposed Pacific Shores Resort & Spa. We have also investigated potential increases in the competitive supply in this Nanoose Bay submarket. The Proposed Pacific Shores Resort & Spa should enter a dynamic market of varying product types and price points. Next, we present our forecast for demand change, using the historical supply data presented as a starting point. For the purpose of analyzing demand, the overall market is divided into individual segments based on the nature of travel. Based on our fieldwork, area analysis, and knowledge of the local lodging market, we estimate the distribution of accommodated room-night demand in 2015 as follows. FIGURE 6-9 ACCOMMODATED ROOM-NIGHT DEMAND (BASE YEAR) Market Segment Market-wide Accommodated Demand Percentage of Total Leisure 63, % Meeting and Group 17, Commercial Total 81, % Using the distribution of accommodated hotel demand as a starting point, we will analyze the characteristics of each market segment in an effort to determine future trends in room-night demand. September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 58

59 Leisure Segment Leisure demand consists of individuals and families spending time in an area or passing through en route to other destinations. The travel purposes include sightseeing, recreation, and visiting friends and relatives. Leisure demand also includes room nights booked through Internet sites like Expedia, Hotels.com, and Priceline even though leisure may not be the purpose of the stay; this demand may also include business travellers and group and convention attendees who use these channels to take advantage of any discounts that may be available on these sites. Leisure demand is strongest Friday and Saturday nights and all week during holiday periods and the summer months. These peak periods represent the inverse of commercial visitation trends, underscoring the stabilizing effect of capturing weekend and summer tourist travel. Future leisure demand is related to the overall economic health of the region and the nation. Trends showing changes in provincial and regional unemployment and disposable personal income correlate strongly with leisure travel levels. Future leisure demand is related to the overall economic health of the primary source cities for visitation, such as Vancouver and Victoria, and international origin countries, such as the United States, China, Japan, and Korea. Given the favourable exchange rate for international visitors, the market is projected to see strong growth. The increased purchasing power of these international visitors is making extended stays in Canada and travel within Canada more affordable to them. This bodes well for the market, which can increasingly draw from the major metropolitan centres like Victoria and Vancouver, which are well-known international destinations, by marketing directly to international visitors wanting to experience Vancouver Island. Leisure demand is also closely tied to economic health of a region and growth in per-capita and disposable income. British Columbia has become the economic growth engine of Canada, and these favourable economic times are giving a boost to intraprovincial and regional travel. Vancouver Island is a destination for both domestic and international vacationers, and this positions the competitive market well for continued growth. Considering both current and historical trends, we project leisure demand to increase 11.0% in 2016, 3.0% in 2017, and 2.0% in each year thereafter. Meeting and Group Segment The meeting and group market includes meetings, seminars, conventions, trade association shows, and similar gatherings of ten or more people. Peak convention demand typically occurs in the spring and fall. Although there are numerous classifications within the meeting and group segment, the primary categories considered in this analysis are corporate groups, associations, and SMERFE (social, military, ethnic, religious, fraternal, and educational) groups. Corporate groups typically meet during the business week, most commonly in the spring and fall months. These groups tend to be the most profitable for hotels, as they typically pay higher rates and usually generate ancillary revenues, including food and September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 59

60 beverage and/or banquet revenue. SMERFE groups are typically price-sensitive and tend to meet on weekends and during the summer months or holiday season, when greater discounts are usually available; these groups generate limited ancillary revenues. Association demand is generally divided on a geographical basis, with national, regional, and provincial associations representing the most common sources. Professional associations and/or those supported by members' employers often meet on weekdays, while other associations prefer to hold events on weekends. The profile and revenue potential of associations varies depending on the group and the purpose of the meeting or event. Future meeting and group demand is closely related to growth in the leisure segment and include events such as wedding and family reunions. It should be noted that these events are booked in advance; thus, growth in this segment tends to lag slightly behind increases in leisure demand. Considering both current and historical trends, we project meeting and group demand to grow 6.0% in 2016 and 2.0% in each year thereafter. Commercial Segment Commercial demand consists mainly of individual businesspeople passing through the subject market or visiting area businesses, in addition to high-volume corporate accounts generated by local firms. Brand loyalty (particularly frequenttraveller programs), as well as location and convenience with respect to businesses and amenities, influence lodging choices in this segment. Companies typically designate hotels as preferred accommodations in return for more favourable rates, which are discounted in proportion to the number of room nights produced by a commercial client. Commercial demand is strongest Monday through Thursday nights, declines significantly on Friday and Saturday, and increases somewhat on Sunday night. It is relatively constant throughout the year, with marginal declines in late December and during other holiday periods. All the economic and demographic data presented earlier have some influence on commercial lodging demand. The trends that have the most direct correlation are changes in total employment and air passenger counts. The market area will benefit from the ongoing care and maintenance required in nearby major operations, such as the E&N Railway, BC Ferries, sawmills, and pulp and paper plants. Considering both current and historical trends, we project commercial demand to growth 1.0% per year throughout the projection period. September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 60

61 Base Demand Growth Rates The purpose of segmenting the lodging market is to define each major type of demand, identify customer characteristics, and estimate future growth trends. Starting with an analysis of the local area, three segments were defined as representing the proposed subject property s lodging market. Various types of economic and demographic data were then evaluated to determine their propensity to reflect changes in hotel demand. Based on this procedure, we forecast the following base annual growth rates for each demand segment. FIGURE 6-10 BASE ANNUAL DEMAND GROWTH PROJECTION BY SEGMENT Market Segment Annual Growth Rate Leisure 11.0 % 3.0 % 2.0 % 2.0 % 2.0 % Meeting and Group Commercial Base Demand Growth 9.8 % 2.8 % 2.0 % 2.0 % 2.0 % Accommodated Demand and Marketwide Occupancy We reviewed the market dynamics in the proposed subject property s competitive environment in order to project growth rates for each market segment. Then, using the calculated potential demand for the market, we determined the marketwide accommodated demand based on the inherent limitations of demand fluctuations and other factors in the market area. The following table details our projection of lodging demand growth for the subject market, including the total number of occupied room nights and any residual unaccommodated demand in the market. September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 61

62 FIGURE 6-11 FORECAST OF MARKET-WIDE OCCUPANCY Leisure Total Demand 63,048 69,984 72,083 73,525 74,995 76,495 Growth Rate 11.0 % 3.0 % 2.0 % 2.0 % 2.0 % Meeting and Group Total Demand Growth Rate Commercial Total Demand Growth Rate 17,044 18,067 18,428 18,797 19,173 19, % 2.0 % 2.0 % 2.0 % 2.0 % % 1.0 % 1.0 % 1.0 % 1.0 % Totals Total Demand 81,003 88,970 91,440 93,259 95,115 97,008 Overall Demand Growth 9.8 % 2.8 % 2.0 % 2.0 % 2.0 % Market Mix Leisure Meeting and Group Commercial 77.8 % 78.7 % 78.8 % 78.8 % 78.8 % 78.9 % Existing Hotel Supply Proposed Hotels Proposed Subject Property ¹ Change to Existing Hotels Sooke Harbour House A Available Room Nights per Year 147, , , , , ,035 Nights per Year Total Supply Rooms Supply Growth 0.7 % 2.0 % 34.4 % 0.0 % 0.0 % Market-wide Occupancy 54.8 % 59.8 % 60.2 % 45.7 % 46.6 % 47.5 % ¹ A Opening in January 2018 of the 100%-competitive, 143-room Proposed Subject Property Change of room count in October 2016 of the 50%-competitive Sooke Harbour House September-2016 Supply and Demand Analysis Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 62

63 Property Kingfisher Resort & Spa Courtenay 90 % 83 % 0 % 88 % Leisure Commercial Overall 7. Projection of Occupancy and Average Rate Along with average rate results, the occupancy levels that a hotel achieves are the foundation of the property s financial performance and market value. The number of guests drives most of a lodging facility s other revenue sources (such as food, beverages, other operated departments, and rentals and other income), and many expense levels vary with occupancy. To a certain degree, occupancy attainment can be manipulated through management. For example, hotel operators may choose to lower rates in an effort to maximize occupancy. Our forecasts reflect an operating strategy that we believe a typical professional hotel management team would implement to achieve an optimal mix of occupancy and average room rate. Penetration Rate Analysis Historical Occupancy Penetration Rates by Market Segment The proposed subject property's forecasted market share and occupancy levels are based upon the hotel s anticipated competitive position within the market as quantified in the penetration rate. The penetration rate is the ratio of a property s market share to fair share. In the following table, the occupancy penetration rates attained by the primary competitors and the aggregated secondary competition are set forth for each segment for the base year. FIGURE 7-1 BASE-YEAR OCCUPANCY PENETRATION RATES Meeting and Group The Shorewater Resort achieved the highest penetration rate in the leisure segment, the Tigh-Na-Mara Seaside Spa Resort & Conference Centre Parksville attained the highest penetration rate in the meeting and group segment, and the secondary competition led the market with the highest commercial penetration rate. September-2016 Projection of Occupancy and Average Rate Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 63

64 Forecast of Proposed Subject Property s Occupancy Because the supply and demand balance for the competitive market is dynamic, there is a circular relationship among the penetration factors of each hotel in the market. The performance of individual new hotels has a direct effect upon the aggregate performance of the market and consequently upon the calculated penetration factor for each hotel in each market segment. The same is true when the performance of existing hotels changes, either positively (following a refurbishment, for example) or negatively (as when a poorly maintained or marketed hotel loses market share). A hotel s penetration factor is calculated as the achieved market share of demand divided by the fair share of demand. Thus, if one hotel s penetration performance increases, thereby increasing its achieved market share, this leaves less demand available in the market for the other hotels to capture, and the penetration performance of one or more of those other hotels consequently declines (the amount of demand available for capture remaining constant). This type of market share adjustment takes place every time there is a change in supply or a change in the relative penetration performance of one or more hotels in the competitive market. Our projections of penetration, demand capture, and occupancy performance for the proposed subject property account for these types of adjustments to market share within the defined competitive market. The following tables set forth, by market segment, the projected adjusted penetration rates for the proposed subject property and each hotel in the competitive set. FIGURE 7-2 LEISURE SEGMENT ADJUSTED PENETRATION RATES Hotel Kingfisher Resort & Spa Courtenay 90 % 90 % 90 % 92 % 89 % 88 % The Shorewater Resort Tigh-Na-Mara Seaside Spa Resort & Conference Centre Parksville Secondary Competition Proposed Subject Property Within the leisure segment, the proposed subject property is projected to stabilize capturing more than its fair share of demand. The highway-adjacent location and the full complement of leisure-oriented amenities, including a pool and a barbeque area, will contribute to this strong performance, as will the waterfront location. September-2016 Projection of Occupancy and Average Rate Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 64

65 FIGURE 7-3 MEETING AND GROUP SEGMENT ADJUSTED PENETRATION RATES Hotel Kingfisher Resort & Spa Courtenay 83 % 83 % 84 % 86 % 84 % 82 % The Shorewater Resort Tigh-Na-Mara Seaside Spa Resort & Conference Centre Parksville Secondary Competition Proposed Subject Property Within the meeting and group segment, the proposed subject property is projected to stabilize capturing more than its fair share of demand. The beachfront location, meeting space and food and beverage offerings will support a strong performance in this segment. FIGURE 7-4 COMMERCIAL SEGMENT ADJUSTED PENETRATION RATES Hotel Kingfisher Resort & Spa Courtenay 0 % 0 % 0 % 0 % 0 % 0 % The Shorewater Resort Tigh-Na-Mara Seaside Spa Resort & Conference Centre Parksville Secondary Competition Proposed Subject Property Owing to the leisure and group focus of the property, the subject resort is not expected to capture any commercial demand. These positioned segment penetration rates result in the following market segmentation forecast. FIGURE 7-5 MARKET SEGMENTATION PROPOSED SUBJECT PROPERTY Leisure 80 % 80 % 80 % Meeting and Group Total 100 % 100 % 100 % The proposed subject hotel's occupancy forecast is set forth as follows. The adjusted projected penetration rates are used as a basis for calculating the amount of captured market demand. September-2016 Projection of Occupancy and Average Rate Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 65

66 FIGURE 7-6 OCCUPANCY FORECAST PROPOSED SUBJECT PROPERTY Market Segment Leisure Demand 73,525 74,995 76,495 Market Share 23.6 % 26.5 % 27.4 % Capture 17,373 19,890 20,989 Penetration 92 % 104 % 107 % Meeting and Group Demand 18,797 19,173 19,556 Market Share 23.7 % 25.7 % 27.5 % Capture 4,460 4,925 5,387 Penetration 93 % 100 % 108 % Commercial Demand Market Share 0.0 % 0.0 % 0.0 % Capture Penetration 0 % 0 % 0 % Total Room Nights Captured 21,833 24,815 26,376 Available Room Nights 52,195 52,195 52,195 Subject Occupancy 42 % 48 % 51 % Market-wide Available Room Nights 204, , ,035 Fair Share 26 % 26 % 26 % Market-wide Occupied Room Nights 93,259 95,115 97,008 Market Share 23 % 26 % 27 % Market-wide Occupancy 46 % 47 % 48 % Total Penetration 92 % 102 % 106 % Based on our analysis of the proposed subject hotel and the market area, we have selected a stabilized occupancy level of 51%. The stabilized occupancy is intended to reflect the anticipated results of the property over the hotel s remaining economic life given all the normal changes in the life cycle of the hotel. The stabilized occupancy thus excludes from consideration any abnormal relationship between supply and demand, as well as any nonrecurring conditions that would result in unusually high or low occupancies. Although the proposed subject property may operate at occupancies above this stabilized level, we believe that it is equally possible for new competition and temporary economic downturns to force the occupancy below this selected point of stability. September-2016 Projection of Occupancy and Average Rate Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 66

67 Average Rate Analysis Competitive Position One of the most important considerations in estimating the value of a lodging facility is a supportable forecast of the attainable average room rate, which is more formally defined as the average rate per occupied room. Average rate can be calculated by dividing the total rooms revenue achieved during a specified period by the number of rooms sold during the same period. The projected average rate and the anticipated occupancy percentage are used to forecast rooms revenue, which in turn provides the basis for estimating most other income and expense categories. Although the average rate analysis presented here follows the occupancy projection, these two statistics are highly correlated. In actuality, one cannot project occupancy without making specific assumptions regarding average rate. This relationship is best illustrated by revenue per available room (RevPAR), which reflects a property's ability to maximize rooms revenue. The following table summarizes the base-year average daily rate (ADR) and RevPAR of the proposed subject property s future primary competitors. FIGURE 7-7 BASE-YEAR AVERAGE RATE AND REVPAR OF THE COMPETITORS Property Estimated 2015 Average Room Rate Average Room Rate Penetration Rooms Revenue Per Available Room (RevPAR) Kingfisher Resort & Spa Courtenay $190 - $ % $90 - $ % The Shorewater Resort Tigh-Na-Mara Seaside Spa Resort & Conference Centre Parksville Average - Primary Competitors $ % $ % Average - Secondary Competitors Overall Average $ $ RevPAR Penetration The primary competitive market realized an ADR of $ in the 2015 base year, up from the 2014 level of $ The Long Beach Lodge Resort Tofino (a secondary competitor) achieved the highest ADR in the local competitive market, by a modest margin, because of its location in the Tofino area and quality of product. Within the primary competitive set, the King Fisher Resort & Spa achieved the highest ADR because of its amenities and quality guestrooms. Other important factors affecting rate performance in this market include the apartment-style guestrooms at various properties, which include multiple bedrooms and kitchen facilities, and the oceanfront locations of some of the competitive properties. September-2016 Projection of Occupancy and Average Rate Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 67

68 Taking into account this competitive environment, we have positioned the proposed subject property with a base-year ADR of $ The selected rate position takes into consideration the oceanfront location, the variety of the guestroom types (which will include studio, one-bedroom, and two-bedroom units), and the assumed upscale quality of the guestrooms and resort amenities following the $3.6-million renovation that is to be completed before the projected conversion date. The market-wide ADR has seen positive growth since We expect the market to realize strong ADR growth in 2016 as demand continues to grow with the low Loonie driving an increase in travel from destinations throughout Canada, the US, and overseas. The rate of ADR growth is projected to moderate in 2017, and inflationary growth is assumed for the remainder of the projection period. The following table sets forth the base-year ADR that is positioned for the proposed subject hotel and the base-year ADR attained by the competitive market, along with the growth factors that are applied to each room rate through the stabilized year. As a context for understanding the ADR growth factors, note that we have applied a base underlying inflation rate of 2.0% per year throughout the projection period. FIGURE 7-8 ADR FORECAST MARKET AND SUBJECT PROPERTY Year Area-wide Market (Calendar Year) Occupancy Average Rate Growth Average Rate Occupancy Subject Property (Calendar Year) Average Rate Growth Average Rate Average Rate Penetration Base Year 54.8 % $ $ % % % % The market should experience rate growth through the near term. The subject property's ADR is projected to increase in line with market trends because the renovated upscale facility and resort amenities are already reflected in the positioned base-year ADR. The proposed subject hotel is projected to realize an ADR penetration rate of 105.6% throughout the projection period. September-2016 Projection of Occupancy and Average Rate Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 68

69 Summary of Occupancy and ADR Projections The following table summarizes the projected occupancy and average room rate performance of the proposed subject property through the first three years of operation. This forecast reflects calendar years beginning on January 1, 2018, which corresponds with our financial projection. FIGURE 7-9 FORECAST OF OCCUPANCY, AVERAGE RATE, & REVPAR Year Occupancy Average Rate RevPAR % $ $ September-2016 Projection of Occupancy and Average Rate Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 69

70 8. Highest and Best Use The concept of highest and best use is a fundamental element in the determination of the value of real property either as if vacant or as improved it is the premise upon which value is based. Highest and best use is defined as follows: The reasonably probable use of property that results in the highest value. The four criteria that the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity. 10 The highest and best use is a product of competitive forces in the marketplace. The principle of balance holds that real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium. This principle applies to relationships among various property components as well as the relationship between the costs of production and the property's productivity. The point of economic balance is achieved when the combination of land and building is optimal (i.e., when no marginal benefit or utility is achieved by adding another unit of capital). The law of increasing returns holds that larger amounts of the agents of production produce greater net income up to a certain point, after which the law of diminishing returns is applied. As Improved The subject property is already improved with all the facilities and amenities required for the operation of an upscale full-service resort; only a renovation is necessary to bring the property up to the competitive standards of the regional resort market. The proposed subject hotel will result from a restructuring of the ownership and management structure of the property without any substantial change in the physical plant. 10 The Dictionary of Real Estate Appraisal, 6th Edition (Chicago: Appraisal Institute, 2015). September-2016 Highest and Best Use Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 70

71 9. Approaches to Value In appraising real estate for market value, three approaches to value are considered: income capitalization, cost, and sales comparison. Basic summaries of each approach are provided as follows; please refer to the introduction of each respective chapter for additional description. Income Capitalization Approach Sales Comparison Approach The income capitalization approach analyzes a property's ability to generate financial returns as an investment. The appraisal estimates a property's operating cash flow, and the result is utilized in a direct capitalization technique and a discounted-cash-flow analysis. The income capitalization approach is often selected as the preferred valuation method for operating properties because it most closely reflects the investment rationale of knowledgeable buyers. The sales comparison approach estimates the value of a property by comparing the hotel to similar properties that sold on the open market. To obtain a supportable estimate of value, the sale price of a comparable property must be adjusted to reflect any dissimilarity between the comparable hotel and the property being appraised, including both transaction and property characteristics. The sales comparison approach is most useful in the case of simple forms of real estate where the properties are homogeneous and the adjustments are few and relatively simple to compute, such as vacant land and single-family homes. In the case of hotels and other complex investments where the adjustments are numerous and more difficult to quantify, the sales comparison approach loses much of its reliability. Cost Approach Reconciliation The cost approach estimates market value by computing the current cost of developing the property. The value of the land is then added to the estimated development cost of the improvements. The cost approach is most reliable for estimating the value of new and proposed properties. The final step in the valuation process is the reconciliation and correlation of the value indications. The factors that are considered in assessing the reliability of each approach include the purpose of the appraisal, the nature of the proposed subject property, and the reliability of the data used. In the reconciliation, the applicability and supportability of each approach are considered and the range of value indications is examined. The most significant weight is given to the approach that produces the most reliable solution and most closely reflects the criteria used by typical investors. September-2016 Approaches to Value Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 71

72 10. Income Capitalization Approach The income capitalization approach is based on the principle that the value of a property is indicated by its net return, otherwise known as the present worth of future benefits. The future benefits of hotels and other income-producing properties are net income before debt service and depreciation (as estimated by a forecast of income and expense) and any anticipated reversionary proceeds from a sale. These future benefits can be converted into an indication of market value through a capitalization process and a discounted-cash-flow analysis. Methodology Using the income capitalization approach, the proposed subject hotel has been valued by analyzing the local market for transient accommodations, examining future competition, and developing a forecast of income and expense that reflects anticipated income trends and cost components through a stabilized year of operation. The forecast of income and expense is expressed in current dollars for each year. The stabilized year is intended to reflect the anticipated operating results of the property over the hotel s remaining economic life given any or every applicable stage of build-up, plateau, and decline in the normal life cycle of the hotel. Thus, income and expense estimates from the stabilized year forward exclude from consideration any abnormal relationship between supply and demand, as well as any nonrecurring conditions that would result in unusual revenues or expenses. The stabilized year's net income is then extended into an 11-year forecast of income and expense by applying the assumed underlying inflation rate to each revenue and expense item from the stabilized year forward, unless otherwise noted. The 11-year forecast of net income forms the basis of a mortgage-equity and discounted-cash-flow analysis, in which ten years of net income and a reversion derived from the capitalized eleventh year's net income are discounted back to the date of value and summed to derive an estimate of market value. The 10-year period reflects the typical holding period for hotels and other large real estate assets. In addition, the 10-year period provides for the stabilization of income streams and the comparison of yields with alternative types of real estate. The forecasted income streams reflect the future benefits of owning specific rights in income-producing real estate. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 72

73 Because the value is unknown but the loan-to-value ratio and the market rates of return can be estimated, the value is computed by way of a linear algebraic equation. The algebraic equation that solves for the total property value using a 10-year mortgage-equity technique was developed by Suzanne R. Mellen, CRE, MAI, FRICS, ISHC, Senior Managing Director of the San Francisco office of HVS. A complete discussion of the technique is presented in her article entitled Simultaneous Valuation: A New Technique. 11 Comparable Operating Statements In order to project future income and expense for the Proposed Pacific Shores Resort & Spa, we have relied on a sample of individual comparable operating statements from our database of hotel statistics. In these statements, which are provided below, the financial data are presented according to the three most common measures of industry performance: ratio to sales (RTS), amounts per available room (PAR), and amounts per occupied room night (POR). These historical income and expense statements are used as benchmarks in our forthcoming forecast of income and expense. 11 Suzanne Mellen, "Simultaneous Valuation: A New Technique," Appraisal Journal (April 1983). September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 73

74 FIGURE 10-1 COMPARABLE OPERATING STATEMENTS: RATIO TO SALES Comp 1 Comp 2 Comp 3 Comp 4 Comp 5 Subject Stabilized $ Year: 2012/ / / / Number of Rooms: 40 to to to to to Occupied Rooms: 12,282 20,212 12,980 3,811 8,612 26,619 Days Open: Occupancy: 63% 55% 68% 23% 71% 51% Average Rate: $180 $262 $180 $217 $214 $231 RevPAR: $114 $145 $123 $49 $153 $118 REVENUE Rooms 24.1 % 48.3 % 96.1 % 29.4 % 27.5 % 59.1 % Food & Beverage Other Operated Departments Rentals & Other Income Total DEPARTMENTAL EXPENSES* Rooms Food & Beverage Other Operated Departments Total DEPARTMENTAL INCOME OPERATING EXPENSES Administrative & General Marketing Property Operations & Maintenance Utilities Total HOUSE PROFIT Management Fee INCOME BEFORE FIXED CHARGES FIXED EXPENSES Property Taxes Insurance Reserve for Replacement Total NET INCOME 14.3 % 3.2 % 42.2 % 15.1 % 13.3 % 20.9 % * Departmental expense ratios are expressed as a percentage of departmental revenues September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 74

75 FIGURE 10-2 COMPARABLE OPERATING STATEMENTS: AMOUNTS PER AVAILABLE ROOM Comp 1 Comp 2 Comp 3 Comp 4 Comp 5 Subject Stabilized $ Year: 2012/ / / / Number of Rooms: 40 to to to to to Occupied Rooms: 12,282 20,212 12,980 3,811 8,612 26,619 Days Open: Occupancy: 63% 55% 68% 23% 71% 51% Average Rate: $180 $262 $180 $217 $214 $231 RevPAR: $114 $145 $123 $49 $153 $118 REVENUE Rooms $41,676 $52,931 $44,986 $17,969 $55,880 $42,984 Food & Beverage 92,994 44, , ,113 22,338 Other Operated Departments 35,708 10, ,182 37,460 5,585 Rentals & Other Income 2, ,153 1,075 2,876 1,862 Total 172, ,528 46,820 61, ,329 72,768 DEPARTMENTAL EXPENSES Rooms 14,701 17,247 7,018 8,338 27,030 14,892 Food & Beverage 68,226 39, ,494 73,742 16,754 Other Operated Departments 24,249 5, ,469 21,402 4,468 Total 107,176 62,300 7,115 33, ,174 36,113 DEPARTMENTAL INCOME 65,717 47,228 39,705 27,786 81,155 36,655 OPERATING EXPENSES Administrative & General 14,240 14,791 4,807 5,827 19,607 6,300 Marketing 5,068 4,251 2,911 2,806 3,908 2,450 Property Operations & Maintenance 2,815 3,237 4,070 1,151 5,244 3,200 Utilities 3,322 3,877 2,319 3,460 5,796 3,000 Total 25,445 27,385 14,109 13,244 34,555 14,950 HOUSE PROFIT 40,272 19,843 25,596 14,542 46,600 21,705 Management Fee 5,187 3,286 1,405 1,833 6,100 2,183 INCOME BEFORE FIXED CHARGES 35,085 16,557 24,191 12,709 40,500 19,522 FIXED EXPENSES Property Taxes 2,406 7,253 1,927 1,061 3, Insurance 1,001 1, , Reserve for Replacement 6,916 4,381 1,873 2,443 8,133 2,911 Total 10,322 13,044 4,438 3,504 13,404 4,338 NET INCOME $24,763 $3,513 $19,753 $9,205 $27,096 $15,185 September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 75

76 FIGURE 10-3 COMPARABLE OPERATING STATEMENTS: AMOUNTS PER OCCUPIED ROOM Comp 1 Comp 2 Comp 3 Comp 4 Comp 5 Subject Stabilized $ Year: 2012/ / / / Number of Rooms: 40 to to to to to Occupied Rooms: 12,282 20,212 12,980 3,811 8,612 26,619 Days Open: Occupancy: 63% 55% 68% 23% 71% 51% Average Rate: $180 $262 $180 $217 $214 $231 RevPAR: $114 $145 $123 $49 $153 $118 REVENUE Rooms $ $ $ $ $ $ Food & Beverage Other Operated Departments Rentals & Other Income Total DEPARTMENTAL EXPENSES Rooms Food & Beverage Other Operated Departments Total DEPARTMENTAL INCOME OPERATING EXPENSES Administrative & General Marketing Property Operations & Maintenance Utilities Total HOUSE PROFIT Management Fee INCOME BEFORE FIXED CHARGES FIXED EXPENSES Property Taxes Insurance Reserve for Replacement Total NET INCOME $ $17.38 $79.13 $ $ $81.57 September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 76

77 For the comparable hotels, the departmental income ranges from 38.0% to 84.8% of total revenue, and the house profit ranges from 18.1% to 54.7% of total revenue. We refer to the comparable operating data in our discussion of each line item later in this section of the report. Fixed and Variable Component Analysis HVS uses a fixed and variable component model to project the revenue and expense levels for a lodging facility. This model is based on the premise that hotel revenues and expenses have one component that is fixed and another that varies directly with occupancy and facility usage. A projection can be made by taking a known level of revenue or expense and calculating the fixed and variable components. The fixed component is then increased in tandem with the underlying rate of inflation while the variable component is adjusted for a specific measure of volume, such as total revenue. The actual forecast is derived by adjusting each year s revenue and expense by the amount fixed (the fixed expense multiplied by the inflated base-year amount) plus the variable amount (the variable expense multiplied by the inflated base-year amount) multiplied by the ratio of the projection year s occupancy to the base-year occupancy (in the case of departmental revenue and expense) or the ratio of the projection year s revenue to the base year s revenue (in the case of undistributed operating expenses). Fixed expenses remain fixed, increasing only with inflation. Our discussion of the revenue and expense forecast in this report is based upon the output derived from the fixed and variable model. This forecast of revenue and expense is accomplished through a systematic approach following the format of the Uniform System of Accounts for the Lodging Industry. Each category of revenue and expense is estimated separately and combined at the end in the final statement of income and expense. Inflation Assumption A general rate of inflation must be established that will be applied to most revenue and expense categories. The following table shows the historical consumer price index (CPI) for the province of British Columbia and Canada. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 77

78 FIGURE 10-4 CONSUMER PRICE INDEX BRITISH COLUMBIA & CANADA Year Provincial Consumer Price Index Percent Change From Previous Year % % (0.1) YTD June YTD June % % Avg. Annual Comp. Change, % 1.7 % Source: Statistics Canada National Consumer Price Index Percent Change From Previous Year As a further check, we reviewed the national inflation forecasts of several Canadian banks. FIGURE 10-5 NATIONAL INFLATION FORECASTS 2016f 2017f Scotiabank Group 2.1 % 2.0 % BMO Capital Markets RBC TD Canada Trust CIBC Updated: Q Core CPI Forecasts September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 78

79 Considering these historical trends, the projections set forth above, and our assessment of probable property appreciation levels, an underlying inflation rate of 2.0% per year is applied to all appropriate revenue and expense items throughout the projection period. This stabilized inflation rate takes into account normal, recurring inflation cycles. Inflation is likely to fluctuate above and below this level during the projection period. Any exceptions to the application of the assumed underlying inflation rate are identified in the discussion of the individual income and expense items that follows. Summary of Projections Based on analyses that will be detailed throughout this section, we have formulated a forecast of income and expense for the proposed subject hotel. The following table presents the forecast in detail through the third projection year; this table includes amounts per available room and per occupied room. The second table illustrates the full 10-year forecast of income and expense, but it is presented in less detail. The forecast pertains to calendar years that begin on January 1, 2018, and it is expressed in inflated dollars for each year. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 79

80 FIGURE 10-6 DETAILED FORECAST OF INCOME AND EXPENSE 2018 (Calendar Year) 2019 Stabilized Number of Rooms: Occupancy: 42% 48% 51% Average Rate: $ $ $ RevPAR: $ $ $ Days Open: Occupied Rooms: 21,922 %Gross PAR POR 25,054 %Gross PAR POR 26,619 %Gross PAR POR OPERATING REVENUE Rooms $5, % $37,566 $ $6, % $43,790 $ $6, % $47,455 $ Food & Beverage 2, , , , , , Spa , , , Miscellaneous Income , , , Total Operating Revenues 9, , , , , , DEPARTMENTAL EXPENSES * Rooms 2, , , , , , Food & Beverage 2, , , , , , Spa , , , Total 5, , , , , , DEPARTMENTAL INCOME 4, , , , , , UNDISTRIBUTED OPERATING EXPENSES Administrative & General , , , Marketing , , , Prop. Operations & Maint , , , Utilities , , , Total 2, , , , , , GROSS HOUSE PROFIT 2, , , , , , Management Fee , , , INCOME BEFORE NON-OPER. INC. & EXP. 1, , , , , , NON-OPERATING INCOME AND EXPENSE Property Taxes Insurance Reserve for Replacement , , , Total , , , EBITDA LESS RESERVE $1, % $8,167 $53.28 $1, % $13,734 $78.39 $2, % $16,762 $90.04 *Departmental expenses are expressed as a percentage of departmental revenues. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 80

81 FIGURE YEAR FORECAST OF INCOME AND EXPENSE Number of Rooms: Occupied Rooms: 21,922 25,054 26,619 26,619 26,619 26,619 26,619 26,619 26,619 26,619 Occupancy: 42% 48% 51% 51% 51% 51% 51% 51% 51% 51% Average Rate: $ % of $ % of $ % of $ % of $ % of $ % of $ % of $ % of $ % of $ RevPAR: $ Gross $ Gross $ Gross $ Gross $ Gross $ Gross $ Gross $ Gross $ Gross $ OPERATING REVENUE Rooms $5, % $6, % $6, % $6, % $7, % $7, % $7, % $7, % $7, % $7, % Food & Beverage 2, , , , , , , , , , Spa , Miscellaneous Income Total Operating Revenue 9, , , , , , , , , , DEPARTMENTAL EXPENSES* Rooms 2, , , , , , , , , , Food & Beverage 2, , , , , , , , , , Spa Total 5, , , , , , , , , , DEPARTMENTAL INCOME 4, , , , , , , , , , UNDISTRIBUTED OPERATING EXPENSES Administrative & General , , , , , , , Marketing Prop. Operations & Maint Utilities Total 2, , , , , , , , , , GROSS HOUSE PROFIT 2, , , , , , , , , , Management Fee INCOME BEFORE NON-OPER. INC. & EXP. 1, , , , , , , , , , NON-OPERATING INCOME AND EXPENSE Property Taxes Insurance Reserve for Replacement Total EBITDA LESS RESERVE $1, % $1, % $2, % $2, % $2, % $2, % $2, % $2, % $2, % $2, % *Departmental expenses are expressed as a percentage of departmental revenues. % of Gross September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 81

82 Forecast of Income and Expense Rooms Revenue Food and Beverage Revenue The following description sets forth the basis for the forecast of income and expense. We anticipate that it will take three years for the proposed subject property to reach a stabilized level of operation. Each revenue and expense item has been forecast based upon our review of the proposed subject property s operating budget and the comparable income and expense statements. The forecast is based upon calendar years beginning January 1, 2018, and it is expressed in inflated dollars for each year. Rooms revenue is determined by two variables: occupancy and average rate. We projected occupancy and average rate in a previous section of this report. The proposed subject hotel is projected to stabilize with an occupancy level of 51% and an average room rate of $ in Following the stabilized year, the proposed subject property s average room rate is projected to increase with inflation. Food and beverage revenue is generated by a hotel's restaurants, lounges, coffee shops, snack bars, banquet rooms, and room service. In addition to providing a source of revenue, these outlets serve as an amenity that assists in the sale of guestrooms. With the exception of properties with active lounges or banquet facilities that draw local residents, in-house guests generally represent a substantial percentage of a hotel's food and beverage patrons. Although food and beverage revenue varies directly with changes in occupancy, the small portion generated by banquet sales and outside capture is relatively fixed. In the case of the Proposed Pacific Shores Resort & Spa, the food and beverage department will include a restaurant and lounge, and meeting space. The proposed subject hotel's food and beverage operation is expected to be an important component of the hotel. We reviewed the comparable operating statements to position an appropriate revenue level, taking into account the hotel's planned facility and price point. The proposed subject hotel s food and beverage revenue is forecast at $ per occupied room or 31.3% of total revenue in the first projection year, and it is projected to stabilize at $ per occupied room or 30.7% of total revenue in Spa Income The proposed subject hotel s spa revenue is forecast at $36.61 per occupied room or 8.6% of total revenue in the first projection year, and it is projected to stabilize at $33.12 per occupied room or 7.7% of total revenue in September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 82

83 Miscellaneous Income Rooms Expense For the comparable hotels, the miscellaneous revenue ranges from $3.96 to $12.98 per occupied room. Changes in this revenue item through the projection period result from the application of the underlying inflation rate and projected changes in occupancy. The proposed subject hotel s miscellaneous income is projected to stabilize at $11.04 per occupied room in Rooms expense consists of items related to the sale and upkeep of guestrooms and public space. Salaries, wages, and employee benefits account for a substantial portion of this category. Although payroll varies somewhat with occupancy and managers can generally scale the level of service staff on hand to meet an expected occupancy level, much of a hotel's payroll is fixed. A base level of front desk personnel, housekeepers, and supervisors must be maintained at all times. As a result, salaries, wages, and employee benefits are only moderately sensitive to changes in occupancy. Commissions and reservations are usually based on room sales, and thus are highly sensitive to changes in occupancy and average rate. While guest supplies vary 100% with occupancy, linens and other operating expenses are only slightly affected by volume. The proposed subject hotel's rooms expense has been positioned based upon our review of the comparable operating data and our understanding of the hotel's future service level and price point. For the comparable hotels, the rooms expense ranges between 15.6% and 48.4% of rooms revenue or between $28.12 and $ per occupied room. The proposed subject hotel s rooms expense is forecast at 39.1% of rooms revenue (or $95.81 per occupied room) in the first projection year, and it is projected to stabilize at 34.6% of rooms revenue (or $88.33 per occupied room) in Food and Beverage Expense Food expenses consist of items necessary for the primary operation of a hotel's food and banquet facilities. The costs associated with food sales and payroll are moderately to highly correlated to food revenues. Items such as china, linen and uniforms are less dependent on volume. Although the other expense items are basically fixed, they represent a relatively insignificant factor. Beverage expenses consist of items necessary for the operation of a hotel s lounge and bar areas. The costs associated with beverage sales and payroll are moderately to highly correlated to beverage revenues. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 83

84 The proposed subject hotel's food and beverage operation is expected to be efficiently managed and operated at an expense level that is in line with other comparable operations. For the comparable hotels, the food and beverage expense ranges between 68.8 % and 88.1% of food and beverage revenue. The proposed subject hotel s departmental expense ratio is projected stabilize at 75.0% in Spa Expense Administrative and General Expense The proposed subject hotel s spa expense is forecast based on our review of spa income statements from the HVS database. Spa expense is forecast at 83.1% of spa revenue in the first projection year, and it is projected to stabilize at 80.0% of total revenue in Administrative and general expense includes the salaries and wages of all administrative personnel who are not directly associated with a particular department. Expense items related to the management and operation of the property are also allocated to this category. Most administrative and general expenses are relatively fixed. The exceptions are cash overages and shortages; commissions on credit card charges; provision for doubtful accounts, which are moderately affected by the number of transactions or total revenue; and salaries, wages, and benefits, which are very slightly influenced by volume. We reviewed the comparable operating data and took into consideration the expected scope of the facility to position the proposed subject hotel's administrative and general expense at a market- and property-supported level. In the comparable statements, the administrative and general expense ranges from 8.2% to 13.5% of total revenue or from $4,807 to $19,607 per available room. In the first projection year, the proposed subject hotel s administrative and general expense is forecast at $6,434 per available room or 9.8% of total revenue. By the 2020 stabilized year, these amounts change to $6,956 per available room and 8.7% of total revenue. Marketing Expense Marketing expense consists of all costs associated with advertising, sales, and promotion; these activities are intended to attract and retain customers. Marketing can be used to create an image, develop customer awareness, and stimulate patronage of a property's various facilities. The marketing category is unique in that all expense items, with the exception of fees and commissions, are totally controlled by management. Most hotel operators establish an annual marketing budget that sets forth all planned expenditures. If the budget is followed, total marketing expenses can be projected accurately. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 84

85 Marketing expenditures are unusual because although there is a lag period before results are realized, the benefits are often extended over a long period. Depending on the type and scope of the advertising and promotion program implemented, the lag time can be as short as a few weeks or as long as several years. However, the favourable results of an effective marketing campaign tend to linger, and a property often enjoys the benefits of concentrated sales efforts for many months. We reviewed the comparable operating data and took into consideration the expected scope of the facility to position the proposed subject hotel's marketing expense at a market- and property-supported level. For the comparable hotels, the marketing expense ranges from 1.9% to 6.2% of total revenue or from $2,806 to $5,068 per available room. In the first projection year, proposed subject hotel s marketing expense is forecast at $2,502 per available room or 3.8% of total revenue. By the 2020 stabilized year, these amounts change to $2,705 per available room and 3.4% of total revenue. Property Operations and Maintenance Property operations and maintenance expense is another expense category that is largely controlled by management. Except for repairs that are necessary to keep the facility open and prevent damage (e.g., plumbing, heating, and electrical items), most maintenance can be deferred for varying lengths of time. Maintenance is an accumulating expense. If management elects to postpone performing a required repair, they have not eliminated or saved the expenditure; they have only deferred payment until a later date. A lodging facility that operates with a lower-than-normal maintenance budget is likely to accumulate a considerable amount of deferred maintenance. The age of a lodging facility has a strong influence on the required level of maintenance. A new or thoroughly renovated property is protected for several years by modern equipment and manufacturers' warranties. However, as a hostelry grows older, maintenance expenses escalate. A well-organized preventive maintenance system often helps delay deterioration, but most facilities face higher property operations and maintenance costs each year, regardless of the occupancy trend. The quality of initial construction can also have a direct impact on future maintenance requirements. The use of high-quality building materials and construction methods generally reduces the need for maintenance expenditures over the long term. We expect the proposed subject hotel's maintenance operation to be well managed and the associated expense levels to stabilize at a typical level for this kind of property. For the comparable operations, the property operations and maintenance expense ranges from 1.6% to 8.7% of total revenue or from $1,151 to $5,244 per available room. Changes in this expense item through the projection September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 85

86 period result from the application of the underlying inflation rate and projected changes in occupancy. In the first projection year, the proposed subject hotel s property operations and maintenance expense is forecast at $3,268 per available room or 5.0% of total revenue. By the 2020 stabilized year, these amounts change to $3,533 per available room and 4.4% of total revenue. Utilities Expense The utilities consumption of a lodging facility takes several forms, including water and space heating, air conditioning, lighting, cooking fuel, and other miscellaneous power requirements. The most common sources of hotel utilities are electricity, natural gas, fuel oil, and steam. This category also includes the cost of water service. Total energy cost depends on the source and quantity of fuel used. Electricity tends to be the most expensive source, followed by oil and gas. Although all hotels consume a sizable amount of electricity, many properties supplement their utility requirements with less expensive sources, such as gas and oil, for heating and cooking. For the comparable hotels, the utilities expense ranges from 1.9% to 5.7% of total revenue or from $2,319 to $5,796 per available room. The changes in this utilities line item through the projection period are a result of the application of the underlying inflation rate and projected changes in occupancy. In the first projection year, the proposed subject hotel s utilities expense is forecast at $3,064 per available room or 4.7% of total revenue. By the 2020 stabilized year, these amounts change to $3,312 per available room and 4.1% of total revenue. Management Fee Management expense consists of the fees paid to the managing agent contracted to operate the property. Some companies provide management services and a brandname affiliation (first-tier management company), while others provide management services alone (second-tier management company). Some management contracts specify only a base fee (usually a percentage of total revenue), while others call for both a base fee and an incentive fee (usually a percentage of defined profit). Basic hotel management fees are often based on a percentage of total revenue, which means they have no fixed component. While base fees typically range from 2% to 4% of total revenue, incentive fees are deal specific and often are calculated as a percentage of income available after debt service and, in some cases, after a preferred return on equity. The proposed subject hotel s total management fee is forecast at 3.0% of total revenue. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 86

87 Property Taxes Insurance Expense We used the subject property s base-year property tax expense as the foundation for the projection. The proposed subject property s property tax burden is projected to increase with inflation throughout the projection period. The insurance expense category consists of the cost of insuring the hotel and its contents against damage or destruction by fire, weather, sprinkler leakage, boiler explosion, plate glass breakage, and so forth. General insurance costs also include premiums relating to liability, fidelity, and theft coverage. Insurance rates are based on many factors, including building design and construction, fire detection and extinguishing equipment, fire district, distance from the firehouse, and the area's fire experience. Insurance expenses do not vary with occupancy. Based upon the comparable data and the structural attributes of the proposed subject hotel, we project the proposed subject hotel's insurance expense at $773 per available room by the stabilized year (positioned at $700 per available room in base-year dollars). This forecast equates to 1.0% of total revenue on a stabilized basis. In subsequent years, this amount is assumed to increase with inflation. Reserve for Replacement Furniture, fixtures, and equipment are essential to the operation of a lodging facility, and their quality often influences a property's class. This category includes all non-real estate items that are capitalized, rather than expensed. The furniture, fixtures, and equipment of a hotel are exposed to heavy use and must be replaced at regular intervals. The useful life of these items is determined by their quality, durability, and the amount of guest traffic and use. Periodic replacement of furniture, fixtures, and equipment is essential to maintain the quality, image, and income-producing potential of a lodging facility. Because capitalized expenditures are not included in the operating statement but affect an owner's cash flow, a forecast of income and expense should reflect these expenses in the form of an appropriate reserve for replacement. The International Society of Hospitality Consultants (ISHC) oversees a major industry-sponsored study of the capital expenditure requirements for fullservice/luxury, select-service, and extended-stay hotels. The most recent study was published in Historical capital expenditures of well-maintained hotels were investigated through the compilation of data provided by most of the major hotel companies in the United States. A prospective analysis of future capital expenditure requirements was also performed based upon the cost to replace short- and long-lived building components over a hotel's economic life. The study showed that the capital expenditure requirements for hotels vary significantly 12 The International Society of Hotel Consultants, CapEx 2014, A Study of Capital Expenditure in the U.S. Hotel Industry. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 87

88 from year to year and depend upon both the actual and effective ages of a property. The results of this study showed that hotel lenders and investors are requiring reserves for replacement ranging from 4% to 5% of total revenue. Based on the results of this study, our review of the subject asset and comparable lodging facilities, and our industry expertise, we estimate that a reserve for replacement of 4% of total revenue is sufficient to provide for the timely and periodic replacement of the proposed subject property's furniture, fixtures, and equipment. INCOME CAPITALIZATION The proposed subject property upon completion is valued via the income approach through the application of a 10-year mortgage-equity technique and a discounted-cash-flow analysis. The conversion of the proposed subject property's forecasted net income ("EBITDA Less Replacement Reserve") into an estimate of value is based on the premise that investors typically leverage their real estate investments to enhance their equity yield. Typically, the majority of a transaction is capitalized with mortgage financing (50% to 80%), with equity comprising the balance (20% to 50%). The amounts and terms of available mortgage financing and the rates of return that are required to attract sufficient equity capital form the basis for allocating the net income between the mortgage and equity components and deriving a value estimate. To determine what the terms of a hotel loan would be as of the date of value, we interviewed brokers as well as lending officers. At present, lenders who are active in the Canadian market are using loan-to-value ratios of 50% to 70% and amortization periods of 15 to 25 years. The exact terms offered depend on specific factors, such as the property's location, the age and quality of the physical facility, local hostelry market conditions, and (perhaps more significantly) the profile of the borrower. The strongest projects typically command the highest loan-to-value ratios. Interest rates currently range from 4.5% to 6.5%, compounded semiannually. Based on the proposed subject property's quality, location, market setting, and borrower profile, the appropriate loan-to-value ratio for this valuation is 60%. A direct correlation exists between the interest rate and the loan-to-value ratio; at a lower interest rate, a lower loan-to-value ratio is applied. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 88

89 Based on the preceding analysis of the current lodging industry mortgage market and considering specific factors, such as the property's location and local market conditions, it is our opinion that a mortgage with a 5.0% interest rate, a 20-year amortization period, and a mortgage constant is appropriate for the proposed subject property. A mortgage constant is the capitalization rate for debt, the ratio of the annual debt service to the principal amount of the mortgage loan. In simple terms, the mortgage constant is the percentage by which one multiplies the loan to determine the payment. Equity Component The remaining capital required for a hotel investment generally comes from the equity investor. The rate of return that an equity investor expects over a 10-year holding period is known as the equity yield. Unlike the equity dividend, which is a short-term rate of return, the equity yield specifically considers a long-term holding period (generally ten years), annual inflation-adjusted cash flows, property appreciation, mortgage amortization, and the proceeds from a sale at the end of the holding period. To establish an appropriate equity yield rate, we have used two sources of data: past appraisals and investor interviews. Hotel Sales Each appraisal performed by HVS uses a mortgage-equity approach in which income is projected and then discounted to a current value at rates reflecting the cost of debt and equity capital. In the case of hotels that were sold near the date of our valuation, we were able to derive the equity yield rate and unlevered discount rate by inserting the 10-year projection, the total investment (the purchase price and the estimated capital expenditure and/or PIP), and the debt assumptions into a valuation model and solving for the equity yield. The overall capitalization rates for the historical income and projected first-year income are based on the sale price as is. The following table shows a representative sample of hotels that were sold on or about the time that we appraised them, along with the derived equity return and discount rates based on the purchase price and our forecast. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 89

90 FIGURE 10-8 SAMPLE OF HOTELS SOLD Overall Rate Based on Net Operating Income Total Number Date Property Equity Historical Projected Stabilized Location of Rooms of Sale Yield Yield Year Year One Year Full-Service Toronto, ON 260 Sep % 23.0 % 5.7 % 10.1 % 11.2 % Kananaskis, AB 412 Sep Mississauga, ON 325 Sep Regina, SK 224 Jul Toronto, ON 288 May Mississauga, ON 374 Mar Toronto, ON 1365 Jan Vancouver, BC 556 Feb Victoria, BC 477 Jun Kelowna, BC 53 Jun Surrey, BC 76 May Kingston, ON 246 Apr Regina, SK 224 Feb Ottawa, ON 429 Nov Brentwood Bay, BC 33 Sep Vancouver, BC 511 Sep Calgary, AB 525 Sep Source: HVS Investor Interviews During the course of our work, we continuously monitor investor equity-yield requirements through discussions with hotel investors and brokers. While equity still looks to yield high returns for the risk of hotel investment, the low-yield environment, coupled with increased competition for quality assets, has placed downward pressure on equity-yield returns. Equity yield rates are currently in the low to mid teens for high-barrier-to-entry "trophy assets"; in the upper teens for high-quality institutional-grade assets in strong markets; and in the upper teens to the low 20s for quality assets in more typical markets. Equity yields have increased moderately because of higher leverage levels, although competition for quality assets continues to place downward pressure on return requirements. Equity yield rates tend to exceed 20% for aging assets with functional obsolescence and/or other challenging property- or marketrelated issues. Equity return requirements also vary with an investment s level of leverage. Higher loan-to-value ratios are becoming more prevalent, allowing for increased equity returns. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 90

91 Based on the assumed 60% loan-to-value ratio, the risk inherent in achieving the projected income stream, and the age, condition, and anticipated market position of the proposed subject property, it is our opinion that an equity investor is likely to require an equity yield rate of 17.0%. While the lack of attainable yields on alternative investments has continued to put downward pressure on equity yield rates, increasing leverage levels are enabling investors to earn higher returns. Competition for quality assets remains strong among all hotel asset types. These influences are keeping equity yields from increasing significantly. Intense competition for assets in major metro areas is pushing investors to pursue acquisitions with greater upside in secondary and tertiary markets. Value-added acquisitions are also attracting greater interest because of the increasing availability of financing for these types of transactions and the potential for higher returns. Terminal Capitalization Rate Inherent in this valuation process is the assumption of a sale at the end of the 10- year holding period. The estimated reversionary sale price as of that date is calculated by capitalizing the projected eleventh-year net income by an overall terminal capitalization rate. An allocation for the selling expenses is deducted from this sale price, and the net proceeds to the equity interest (also known as the equity residual) is calculated by deducting the outstanding mortgage balance from the reversion. We have reviewed several recent investor surveys. The following chart summarizes the averages presented for terminal capitalization rates in various investor surveys during the past decade. Note that the survey data lag the market and that they do not necessarily reflect the most current market conditions. These statistics are for the US, but the trends are relevant to the Canadian context. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 91

92 Terminal Cap Rate (%) FIGURE 10-9 HISTORICAL TRENDS OF TERMINAL CAPITALIZATION RATES PWC - Full-Service Situs RERC - First Tier PWC - Luxury PWC - Select-Service FIGURE TERMINAL CAPITALIZATION RATES DERIVED FROM INVESTOR SURVEYS Source Data Point Range Average PWC Real Estate Investor Survey - 1st Quarter 2016 Select-Service Hotels 7.5% % 9.0% Full-Service Hotels 7.0% % 8.4% Luxury Hotels 5.5% % 7.3% USRC Hotel Investment Survey - Winter 2016 Full-Service Hotels 6.8% - 9.0% 8.1% Situs RERC Real Estate Report - 2nd Quarter 2016 First Tier Hotels 7.0% % 8.3% The terminal capitalization rate can also be derived using two other methods: the band of investment and the debt coverage ratio. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 92

93 FIGURE BAND OF INVESTMENT Percent Rate of Weighted of Value Return Average Mortgage 60.0% x = 4.7% Equity 40.0% x = 4.0% Overall Capitalization Rate 8.7% Using the previously determined mortgage constant of and an equity dividend of 10.0%, the band of investment yields an overall capitalization rate of 8.7%. FIGURE DEBT COVERAGE RATIO Loan to Mortgage Debt Coverage Overall Value Ratio Constant Ratio Capitalization Rate 60.0% x x 1.8 = 8.5% 60.0% x x 1.9 = 9.0% A debt coverage ratio of 1.8 to 1.9 yields a capitalization rate range of 8.5% to 9.0%. Generally, the terminal capitalization rate is about 50 to 100 basis points above the going-in rate based on the risk associated with time. For this analysis, we have applied a terminal capitalization rate of 9.5%. Our final position for the terminal capitalization rate reflects the current market for hotel investments. In tandem with overall lower return expectations, terminal capitalization rates for quality hotel assets in markets with high barriers to entry have declined to new lows, while terminal capitalization rates for older assets or for those suffering from functional obsolescence and/or weak market conditions remain elevated, reflecting the market's recognition that certain assets have less opportunity for significant appreciation. Mortgage-Equity Method Value Opinion The valuation of the mortgage and equity components is accomplished using an algebraic equation that calculates the exact amount of debt and equity that the hotel will be able to support based on the anticipated cash flow (as estimated by the forecast of income and expense) and the specific return requirements demanded by the mortgage lender (interest) and the equity investor (equity yield). Thus, the anticipated net income (before debt service and depreciation) is allocated to the mortgage and equity components based on market rates of return and loan-to-value ratios. The total of the mortgage component and the equity component equals the value of the property. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 93

94 Using this method of the income capitalization approach with the variables set forth, we estimate the market value of the fee simple interest in the proposed subject property, as of January 1, 2018, to be $23,300,000. Mathematical Proof of Value The value is mathematically proven by confirming that the market-derived yields are met for the lender and the equity participant during the projection period. Using the assumed financial structure set forth in the previous calculations, the market value can be allocated between debt and equity as follows. Mortgage Component (60%) $13,989,000 Equity Component (40%) 9,326,000 Total $23,315,000 The annual debt service is calculated by multiplying the mortgage component by the mortgage constant. Mortgage Component $13,989,000 Mortgage Constant Annual Debt Service $1,103,103 The 11-year forecast of net income and the 10-year forecast of net income to equity are presented in the following table. FIGURE YEAR FORECAST OF NET INCOME & 10-YEAR FORECAST OF NET INCOME TO EQUITY Year EBITDA Less Reserve, Before Debt Service Less: Debt Service EBITDA Less Reserve, to Equity Debt Coverage Ratio Cash-on-Cash Return 2018 $1,168,000 $1,103,000 $65, % ,964,000 1,103, , ,397,000 1,103,000 1,294, ,445,000 1,103,000 1,342, ,494,000 1,103,000 1,391, ,544,000 1,103,000 1,441, ,595,000 1,103,000 1,492, ,647,000 1,103,000 1,544, ,700,000 1,103,000 1,597, ,754,000 1,103,000 1,651, ,809,000 The net proceeds to equity upon sale of the property is determined by deducting sale expenses (brokerage and legal fees) and the outstanding mortgage balance. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 94

95 Projected Yield (Internal Rate of Return) Position Value Over Holding Period Total Property $23,314, % Mortgage 13,989, The equity residual at the end of the tenth year is calculated by deducting brokerage and legal fees and the mortgage balance from the reversionary value. The reversionary value is calculated as the eleventh year's net income capitalized by the terminal capitalization rate. The calculation is shown as follows. 11th Year's EBITDA Less Reserve $2,809,000 Capitalization Rate 9.5% Reversionary Value $29,568,000 Less: Brokerage and Legal Fees $296,000 Mortgage Balance 8,833,000 Net Sale Proceeds to Equity $20,439,000 The discount rate (before debt service), the yield to the lender, and the yield to the equity position have been calculated by computer with the following results. FIGURE TOTAL PROPERTY VALUE AND INTERNAL RATES OF RETURN The position of the total property yield or unlevered discount rate reflects current market conditions for both debt and equity capital. Debt remains available at favourable interest rates, although some lenders have pulled out of the market and underwriting standards have become more stringent. Equity and mezzanine financing is readily available because of the attractive yields that hotels are generating compared to other forms of commercial real estate. The following tables demonstrate that the property receives its anticipated yields, proving that the value is correct based on the assumptions used in this approach. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 95

96 FIGURE VALUE OF THE MORTGAGE COMPONENT Total Annual Present Worth of $1 Discounted Year Debt Service Factor at 4.9% Cash Flow 2018 $1,103,000 x = $1,051, ,103,000 x = 1,001, ,103,000 x = 954, ,103,000 x = 909, ,103,000 x = 866, ,103,000 x = 826, ,103,000 x = 787, ,103,000 x = 750, ,103,000 x = 714, ,936,000 * x = 6,130,000 Value of Mortgage Component $13,988,000 *10th year debt service of $1,103,000 plus outstanding mortgage balance of $8,833,000 FIGURE VALUE OF THE EQUITY COMPONENT Net Income Present Worth of $1 Discounted Year to Equity Factor at 17.0% Cash Flow 2018 $65,000 x = $56, ,000 x = 629, ,294,000 x = 808, ,342,000 x = 716, ,391,000 x = 634, ,441,000 x = 562, ,492,000 x = 497, ,544,000 x = 440, ,597,000 x = 389, ,091,000 * x = 4,596,000 Value of Equity Component $9,327,000 *10th year net income to equity of $1,651,000 plus sales proceeds of $20,440,000 Derived Capitalization Rates The following chart summarizes the averages presented for overall capitalization rates in various investor surveys during the past decade. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 96

97 FIGURE HISTORICAL TRENDS OF OVERALL CAPITALIZATION RATES Overall Cap Rate (%) PWC - Full-Service Situs RERC - First Tier PWC - Luxury PWC - Select-Service FIGURE OVERALL CAPITALIZATION RATES DERIVED FROM SALES AND INVESTOR SURVEYS Source Data Point Range Average HVS Hotel Sales - Full-Service & Luxury 3.2% % 6.7% HVS Hotel Sales - Select-Service & Extended-Stay 4.3% % 8.7% PWC Real Estate Investor Survey - 1st Quarter 2016 Select-Service Hotels 6.5% % 8.4% Full-Service Hotels 6.0% % 7.8% Luxury Hotels 4.0% - 9.0% 6.9% USRC Hotel Investment Survey - Winter 2016 Full-Service Hotels 6.5% - 8.5% 7.6% Situs RERC Real Estate Report - 2nd Quarter 2016 First Tier Hotels 6.5% % 7.7% September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 97

98 The averages illustrated in the previous table are derived from a wide array of data points, and a range of reasonableness extends both lower and higher than the indicated data points. The following table shows the capitalization rates for the proposed subject hotel that have been derived using on our estimate of market value determined via the discounted-cash-flow analysis. Note that the stabilized year's net income has been deflated to first-year dollars. FIGURE DERIVED CAPITALIZATION RATES EBITDA Less Derived Year Reserves Capitalization Rate Forecast 2018 $1,168, % Deflated Stabilized (2018) Dollars 2,304, The derived capitalization rates are considered appropriate for a proposed lodging facility like the Proposed Pacific Shores Resort & Spa. The derived capitalization rates that are based on the forecasted net operating income fall in line with acceptable returns for a hotel of this calibre. These capitalization rates reflect the expectation of continued improvement in profitability over the initial years of the forecast. Investors are acquiring assets at going-in capitalization rates that reflect the anticipation of a future upside since the economy is expected to remain resilient. Discounted-Cash-Flow Analysis Prospective When Converted Market Value The process of converting the projected income stream into an estimate of value via the discounted-cash-flow method is described as follows. 1. An appropriate discount rate is selected to apply to the projected net income before debt service. This rate reflects the "free and clear" internal rate of return to an all-cash purchaser or a blended rate of debt and equity return requirements. The discount rate takes into consideration the degree of perceived risk, anticipated inflation, market attitudes, and rates of return on other investment alternatives, as well as the availability and cost of financing. The discount rate is chosen by reviewing sale transactions and investor surveys and interviewing market participants. 2. A reversionary value reflecting the sale price of the property at the end of the 10-year holding period is calculated by capitalizing the eleventh-year net income by the terminal capitalization rate and deducting typical brokerage and legal fees. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 98

99 3. Each year's forecasted net income before debt service and depreciation and the reversionary sale proceeds at the end of the 10-year holding period are converted to a present value by multiplying the cash flow by the chosen discount rate for that year in the forecast. The sum of the discounted cash flows equates to the value of the proposed subject property. The following chart summarizes the averages presented for discount rates in various investor surveys during the past decade. FIGURE HISTORICAL TRENDS OF DISCOUNT RATES Discount Rate (%) PWC - Full-Service Situs RERC - First Tier PWC - Luxury PWC - Select-Service September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 99

100 FIGURE OVERALL DISCOUNT RATES DERIVED FROM SALES AND INVESTOR SURVEYS Source Data Point Range Average HVS Hotel Sales - Full-Service & Luxury 7.2% % 10.3% HVS Hotel Sales - Select-Service & Extended-Stay 9% % 10.6% PWC Real Estate Investor Survey - 1st Quarter 2016 Select-Service Hotels 9.0% % 10.8% Full-Service Hotels 8.5% % 10.5% Luxury Hotels 6.5% % 9.6% USRC Hotel Investment Survey - Winter 2016 Full-Service Hotels 8.8% % 10.2% Situs RERC Real Estate Report - 2nd Quarter 2016 First Tier Hotels 7.5% % 9.4% The averages illustrated in the previous table are derived from a wide array of data points, and a range of reasonableness extends both lower and higher than the indicated data points. Based on our review of these surveys and sale transactions (see the total property yields shown in the table titled Sample of Hotels Sold) and our interviews with market participants, we have selected a discount rate of 11.2% for our analysis. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 100

101 Using the discount rate set forth, the discounted-cash-flow procedure is summarized as follows. FIGURE DISCOUNTED-CASH-FLOW ANALYSIS WHEN CONVERTED EBITDA Less Discount Discounted Year Reserve 11.2% Cash Flow 2018 $1,168, $1,050, ,964, ,589, ,397, ,744, ,445, ,600, ,494, ,468, ,544, ,347, ,595, ,236, ,647, ,134, ,700, ,040, ,027,000 * ,102,990 Estimated Value $23,314,301 (SAY) $23,300,000 Reversion Analysis 11th Year's EBITDA Less Reserves $2,809,000 Capitalization Rate 9.5% Total Sales Proceeds $29,568,421 Less: Transaction 1.0% 295,684 Net Sales Proceeds $29,272,737 *10th year EBITDA Less Replacement Reserve of $2,754,000 plus sales proceeds of $29,273,000 Conclusion Using the income capitalization approach, the proposed subject property was valued by a mortgage-equity analysis and a straightforward discounted-cash-flow analysis. Based on our review of each method and their inherent strengths and weaknesses, and after giving consideration to investor attitudes and methodologies, we have reconciled the prospective when converted value indication via the income capitalization approach to $23,300,000. September-2016 Income Capitalization Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 101

102 11. Sales Comparison Approach The sales comparison approach is based on the principle of substitution, which defines a property s value as the cost of acquiring an equally desirable substitute (assuming that no costly delay is incurred in making the substitution). Thus, the sales comparison approach can be used to form an opinion of a property s market value from the price at which equally desirable properties have sold, or for which they can be purchased, on the open market. Hotel Investment Market Overview The following overview of the hotel investment market during recent industry investment cycles provides a context for the sales comparison approach. The volume of hotel transactions and the price paid for individual assets are influenced by two principal factors: the availability of capital and the performance of the lodging sector as a whole. When high levels of leverage are available on favourable terms and the industry is performing well, investors are attracted to the market, and both prices and the number of transactions increase. These market conditions often induce sellers to put their properties on the market, further fuelling the pace of transaction activity. Conversely, when the availability of capital declines and interest rates increase, the pace of activity and pricing levels both decrease. When these capital conditions coincide with a downturn in industry performance, the transaction market drops off significantly. In these market conditions, with hospitality investments less appealing to buyers, sellers are typically unwilling to put their properties on the market, electing to wait until market conditions improve. These influences result in a cyclical investment market in which peaks and valleys are recorded in response to changes in capital markets and the economy. September-2016 Sales Comparison Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 102

103 FIGURE 11-1 CANADIAN HOTEL SALES SUMMARY Number of Number of Total Price Per Year Properties Rooms Investment Room ,937 $221,356,000 $37, , ,802,260 29, , ,801,820 52, , ,674,006 52, ,947 1,981,851,306 76, ,090 1,361,322,026 56, , ,284,400 92, , ,537,000 84, , ,815, , ,297 ±500,000,000 ±80, , ,216,100 62, , ,323,675 65, ,713 1,598,651, , ,932 2,712,589, , ,255 4,564,522, , ,558 1,106,530, , ,330 ±375,000,000 ±70, , ,371,376 85, ,058 1,106,872, , ,710 1,073,036, , ,002 2,099,366, , ,165 1,455,172,016 93, ,210 2,202,774, ,994 Source: HVS In Canada, the market for transactions remained strong in The level of investment volume in 2015 was well above the historical average, exceeding the level reached in 2013, the recent peak, which was also marked by big-ticket portfolio transactions. Trade activity was supported by a hotel sector with good liquidity and a climate where buyers and sellers could come to a mutual agreement on values. Buyers were active in markets with high barriers to entry. Lenders continued to leave the door open for increased financing activity, creating a vibrant market for trades. Market conditions in Alberta and Saskatchewan are expected to lead to a cooling of transaction volume in these provinces in 2016, as the gap between the expectations of sellers and the willingness of buyers to pay is likely to widen. The transaction record for 2015 reflects the strength in the Canadian hotel investment market. The investment volume reached $2.2 billion, well above the rolling five-year average of $1.5 billion. September-2016 Sales Comparison Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 103

104 In 2015, both debt and equity sources remain available to finance transactions, which will support transaction activity within the hotel sector. Strong growth in transactions is expected for 2016; however, the sharp decline in oil prices has had a negative impact on GDP growth in Canada, with Alberta being the hardest hit. In these circumstances, buyers may act with greater caution, and sellers may adjust their expectations on asset value. Major urban centres and downtown markets with high barriers to entry are expected to drive volume in The availability of financing, low interest rates, and the weak Canadian dollar are expected to spur an increase in foreign investment, particularly from the United States. Sale History of the Subject Property Comparable Sales The subject property is known as Strata Plan VIS2036, which involves numerous ownership entities that own full, quarter, and eighth shares. This study assumes that the resort will be under one owner and operate as a 143 guestroom resort with a restaurant, a spa, meeting space, a pool and whirlpool, and a fitness centre. At the time of the study, Transtide Investments Limited Partnership owned Strata Numbers , and the other units are comprised of 63 strata units owned by individual owners. To present our selection of comparable sales, we conducted a comprehensive search for recent transactions of hotels that bear comparison to the proposed subject hotel in one or more key areas. When possible, we gave priority to transactions occurring in the same province or region as the proposed subject property. We also considered such factors as operational and physical similarities to the proposed subject resort, including revenue-generating potential. All the data have been verified by HVS or obtained from a verifying source. We have chosen several primary transactions for further review and consideration in the development of an indication of value via this approach. These are illustrated in the following table. FIGURE 11-2 SUMMARY OF SELECTED COMPARABLE SALES Property Location Sale Date Price Rooms Price/Rm Overall Cap Year Opened Delta Lodge at Kananaskis Kananaskis Village, AB Sep-15 $42,500, $103, % 1987 Ramada Victoria Victoria, BC May-15 8,480, , Tunnel Mountain Resort Banff, AB Jun-14 14,250, , % 1970 Travelodge Parksville Parksville, BC Apr-14 3,230, , September-2016 Sales Comparison Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 104

105 MAP OF PRIMARY COMPARABLE SALES These sales are further detailed on the following pages. September-2016 Sales Comparison Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 105

106 Sale #1 Delta Lodge at Kananaskis Kananaskis Village, AB 412 Rooms TRANSACTION DATA Date of Sale: September-15 Interest Conveyed: Fee Simple Buyer: Pomeroy Lodging Seller: Kananaskis Alpine Resort Inc. Sales Price: $42,500,000 Price per Room: $103,155 Occupancy (Apr 1, Mar 31, 2015): 45.5% Average Rate (Apr 1, Mar 31, 2015): $172 RevPAR (Apr 1, Mar 31, 2015): $78 Rooms Revenue Multiplier: 3.6 Reported Capitalization Rate: 7.3% Confirmation: Colliers Hotels PROPERTY DATA Year Opened: 1987 Property Class: Mid-Scale Facilities: # Storeys: 3, # F&B Outlets: 6, Total SF Meeting Space: 21,313 Amenities: Business Centre, Concierge, Gift Shop, Indoor Swimming Pool, Outdoor Swimming Pool, Tennis Court(s), Fitness Centre Condition at Sale: Fair Type of Location: Resort The purchaser plans to invest $26 million over a two-year period. September-2016 Sales Comparison Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 106

107 Sale #2 Ramada Victoria Victoria, BC 92 Rooms TRANSACTION DATA Date of Sale: May-15 Interest Conveyed: Fee Simple Buyer: 123 Gorge Property Co. Seller: Waterway Hotel Company Sales Price: $8,480,000 Price per Room: $92,174 Occupancy: 68.7% Average Rate: $73 RevPAR: $50 Rooms Revenue Multiplier: 5.1 Reported Capitalization Rate: Not Disclosed Confirmation: Colliers PROPERTY DATA Year Opened: 1972 Property Class: Mid-Scale Facilities: # F&B Outlets: 2, Total SF Meeting Space: 3,370 Amenities: Business Centre, Airport/Local Shuttle, Guest Laundry Area, Outdoor Swimming Pool, Fitness Centre Condition at Sale: Unknown Type of Location: Suburban September-2016 Sales Comparison Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 107

108 Sale #3 Tunnel Mountain Resort Banff, AB 95 Rooms TRANSACTION DATA Date of Sale: June-14 Interest Conveyed: Fee Simple Buyer: Banff Caribou Properties Seller: Rainbow Chalet Ltd. Sales Price: $14,250,000 Price per Room: $150,000 Occupancy (Jan 1, Dec 31, 2012): 59.9% Average Rate (Jan 1, Dec 31, 2012): $120 RevPAR (Jan 1, Dec 31, 2012): $72 Rooms Revenue Multiplier: 5.7 Reported Capitalization Rate: 4.5% PROPERTY DATA Year Opened: 1970 Property Class: Mid-Scale Facilities: N/A Amenities: Indoor Swimming Pool, Winter-Related Sports/Activities, Fitness Centre, Indoor Whirlpool, Sauna Condition at Sale: Good Type of Location: Resort September-2016 Sales Comparison Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 108

109 Sale #4 Travelodge Parksville Parksville, BC 84 Rooms TRANSACTION DATA Date of Sale: April-14 Interest Conveyed: Fee Simple Buyer: N/A Seller: N/A Sales Price: $3,230,000 Price per Room: $38,500 Occupancy: 30.7% Average Rate: $106 RevPAR: $32 Rooms Revenue Multiplier: 3.3 Reported Capitalization Rate: Not Disclosed Confirmation: Colliers PROPERTY DATA Year Opened: 1994 Property Class: Budget Facilities: # Storeys: 3, # F&B Outlets: 1, Total SF Meeting Space: 1,012 Amenities: Business Centre, Guest Laundry Area, Concierge, Room Service, Indoor Swimming Pool, Fitness Centre Condition at Sale: Fair Type of Location: Urban September-2016 Sales Comparison Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 109

110 Review of Comparable Sales The following table sets forth the adjustment grid used to account for differences between the properties that transacted and the proposed subject hotel. FIGURE 11-3 COMPARABLE SALES ADJUSTMENT GRID Sale #1 Sale #2 Sale #3 Sale #4 Elements of Comparison Proposed Subject Property Delta Lodge at Kananaskis, Kananaskis Village, AB Ramada Victoria, Victoria, BC Tunnel Mountain Resort, Banff, AB Travelodge Parksville, Parksville, BC Sale Price $42,500,000 $8,480,000 $14,250,000 $3,230,000 Number of Rooms Price per Room $103,155 $92,174 $150,000 $38,452 Year Open Date of Sale September-15 May-15 June-14 April-14 Adjustments for Transaction Characteristics (Per Room) Property Rights Conveyed Fee Simple Fee Simple Fee Simple Fee Simple Fee Simple Adjustment 0.0 % 0.0 % 0.0 % 0.0 % Adjusted Sales Price 103,155 92, ,000 38,452 Financing Terms Cash Equivalent Cash Equivalent Cash Equivalent Cash Equivalent Adjustment 0.0 % 0.0 % 0.0 % 0.0 % Adjusted Sales Price 103,155 92, ,000 38,452 Conditions of Sale Normal Normal Normal Normal Adjustment 0.0 % 0.0 % 0.0 % 0.0 % Adjusted Sales Price 103,155 92, ,000 38,452 Market Conditions Similar Similar Similar Similar Adjustment 0.0 % 0.0 % 0.0 % 0.0 % Adjusted Sales Price 103,155 92, ,000 38,452 Adjusted Price $103,155 $92,174 $150,000 $38,452 Adjustments for Property Characteristics Market Orientation (RevPAR) $ $78.38 $50.37 $71.65 $32.46 Adjustment 50.2 % % 64.4 % % Net Adjust. for Property Characteristics 51, ,324 96, ,070 Final Adjusted Price Per Room $154,984 $215,498 $246,554 $139,522 Given the complex nature of hotel assets, combined with the many variables within a hotel s operations, it is difficult to derive a specific numeric adjustment for an individual characteristic, and any adjustments extracted from sales are often distorted. As such, we have to rely partly on broader sets of data and our own experience when deriving adjustments. Hotel sales are typically transacted less often and are spread over a wider geographic area than other commercial real estate, adding to the complexity of making quantitative adjustments. September-2016 Sales Comparison Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 110

111 Property Rights Conveyed The purpose of this assignment is the valuation of the fee simple interest in the proposed subject property. This adjustment accounts for differences between the interests that were transferred in each comparable sale and those which form the subject of this appraisal. In all the comparable sales, solely a fee simple interest was conveyed in the transaction. As such, no adjustments for property rights conveyed are necessary. Financing Terms The transaction price of a sale may be affected by the financing structure. When necessary, this adjustment converts extraordinary financing to market terms. As all the comparable sales involved cash transactions, no adjustments are necessary for differences in financing terms. Conditions of Sale The motivations of the buyer and/or seller may affect the price paid for a property. This adjustment reconciles any atypical aspects of the transaction in conformance with the definition of market value. All the transactions are considered to have had normal conditions of sale. Market Conditions The purpose of this adjustment is to account for significant changes in external economic conditions between the date of sale and the date of value, including changes in tax laws, investor requirements, mortgage terms, and other factors that might affect real estate value. Given that the selected comparable sales all transacted under similar market conditions, no adjustments were deemed necessary. RevPAR Adjustments Conclusion We have adjusted the per-room sale price for each sale by the percentage differential between the proposed subject hotel s stabilized-year RevPAR deflated to base-year dollars and the RevPAR of each property at the time of sale. RevPAR inherently reflects the relative revenue-producing ability of each comparable sale, as well as differences in physical condition and the passage of time, making it a reliable way to adjust hotel sales. Prior to the adjustments, the comparable sales transacted for amounts ranging from $38,000 to $150,000 per room. Following the quantitative and qualitative adjustments, the selected sales indicate a range from $140,000 to $247,000 per room, which equates to a concluded value via the sales comparison approach of $20,000,000 to $35,300,000 for the 143-room proposed subject property upon completion. September-2016 Sales Comparison Approach Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 111

112 12. Reconciliation of Value Indications The reconciliation, which is the last step in the appraisal process, involves summarizing and correlating the data and procedures employed throughout the analysis. The final value conclusion is arrived at after reviewing the estimates indicated by the income capitalization, sales comparison, and cost approaches. The relative significance, applicability, and defensibility of each indicated value are considered, and the greatest weight is given to that approach deemed most appropriate for the property being appraised. The purpose of this report is to estimate the market value of the fee simple interest in the proposed subject property. Our appraisal involves a careful analysis of the property itself and the economic, demographic, political, physical, and environmental factors that influence real estate values. Income Capitalization Approach To estimate the proposed subject property's value via the income capitalization approach, we have analyzed the local market for transient accommodations, examined the competitive environment, projected occupancy and average rate levels, and developed a forecast of income and expense that reflects anticipated income trends and cost components through a stabilized year of operation. The proposed subject property's projected net income before debt service was allocated to the mortgage and equity components based on market rates of return and loan-to-value ratios. Through a discounted cash flow and income capitalization procedure, the value of each component was calculated; the total of the mortgage and equity components equates to the value of the property. Our nationwide experience indicates that the procedures used in estimating market value by the income capitalization approach are comparable to those employed by the hotel investors who constitute the marketplace. For this reason, we believe that the income capitalization approach produces the most supportable value estimate, and it is given the greatest weight in our final estimate of the proposed subject property's market value. September-2016 Reconciliation of Value Indications Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 112

113 Sales Comparison Approach The sales comparison approach uses actual sales of similar properties to provide an indication of the proposed subject property's value. Although we have investigated a number of sales in an attempt to develop a range of value indications, several adjustments are necessary to render these sale prices applicable to the proposed subject property. The adjustments, which tend to be subjective, diminish the reliability of the sales comparison approach. Moreover, typical hotel investors employ a sales comparison procedure only to establish broad value parameters. The hotel sales outlined earlier in this report indicate an adjusted value range of $140,000 to $247,000 per available room. The income capitalization approach indicates a per room value of $162,900 (rounded). This information supports the value indicated by the income capitalization approach. Cost Approach Value Conclusion We did not employ the cost approach methodology in arriving at a market value estimate for the proposed subject hotel. The cost approach is applicable to proposed hotels that are being developed from the ground up, but in this case the improvements that will make up the proposed subject hotel are already in place. The cost approach thus has little insight to offer the valuation, especially since hotel buyers and sellers in today s market typically eschew the cost approach as a valuation technique. Careful consideration has been given to the strengths and weaknesses of the approaches to value discussed above. In recognition of the purpose of this appraisal, we have given primary weight to the value indicated by the income capitalization approach. Based on our analysis, it is our opinion that the prospective when converted market value of the fee simple interest in the real and personal property of the Proposed Pacific Shores Resort & Spa, as of January 1, 2018, will be: $23,300,000 TWENTY-THREE MILLION THREE HUNDRED THOUSAND DOLLARS The estimate of market value includes the land, the improvements, and the furniture, fixtures, and equipment.p The appraisal assumes that the hotel is open and operational. September-2016 Reconciliation of Value Indications Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 113

114 The analysis is based on the extraordinary assumption that the subject property will be converted to a resort operation under single ownership and the management of a professional resort management company as of January 1, This appraisal does not address unforeseeable events that would alter the proposed project and/or the market conditions reflected in the analyses; we assume that no significant changes, other than those anticipated and explained in this report, will take place between the date of the inspection and the date of the prospective market value. The use of this extraordinary assumption has affected the assignment results. We have made no other extraordinary assumptions specific to this appraisal; however, several important general assumptions have been made that apply to this appraisal and our valuations of proposed hotels in general. These aspects are set forth in the "Assumptions and Limiting Conditions" chapter. September-2016 Reconciliation of Value Indications Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 114

115 13. Statement of Assumptions and Limiting Conditions 1. We note that the development of our value opinion(s) for the proposed subject property assumes this extraordinary assumption: specifically that the described improvements have been completed as of the date of value. The reader should understand that a. The improved subject property does not yet, in fact, exist as of the date of appraisal; b. Certain events need to occur, as disclosed in the report, before the property appraised with the proposed improvements will in fact exist; and c. The financial analysis presented in this report is based upon assumptions, estimates, and evaluations of the market conditions in the local and national economy, which may be subject to sharp rises and declines. Over the projection period considered in our analysis, wages and other operating expenses may increase or decrease due to market volatility and economic forces outside the control of the hotel s management. We assume that the price of hotel rooms, food, beverages, and other sources of revenue to the hotel will be adjusted to offset any increases or decreases in related costs. We do not warrant that our estimates will be attained, but they have been developed on the basis of information obtained during the course of our market research, and they are intended to reflect the expectations of a typical hotel buyer as of the stated date(s) of valuation. 2. This report is to be used in whole and not in part. 3. No responsibility is assumed for matters of a legal nature, nor do we render any opinion as to title, which is assumed to be marketable and free of any deed restrictions and easements. The property is evaluated as though free and clear unless otherwise stated. 4. We assume that there are no hidden or unapparent conditions of the sub-soil or structures, such as underground storage tanks, that would impact the property s development potential. No responsibility is assumed for these conditions or for any engineering that may be required to discover them. September-2016 Statement of Assumptions and Limiting Conditions Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 115

116 5. We have not considered the presence of potentially hazardous materials or any form of toxic waste on the project site. The consultants are not qualified to detect hazardous substances, and we urge the client to retain an expert in this field if desired. 6. We have made no survey of the site, and we assume no responsibility in connection with such matters. Sketches, photographs, maps, and other exhibits are included to assist the reader in visualizing the property. It is assumed that the use of the described real estate will be within the boundaries of the property described and that no encroachment will exist. 7. All information, financial operating statements, estimates, and opinions obtained from parties not employed by MM&R Valuation Services, Inc. are assumed to be true and correct. We can assume no liability resulting from misinformation. 8. Unless noted, we assume that there are no encroachments, zoning violations, or building violations encumbering the subject property. 9. The property is assumed to be in full compliance with all applicable federal, provincial, local, and private codes, laws, consents, licences, and regulations (including a liquor licence where appropriate), and it is assumed that all licences, permits, certificates, franchises, and so forth can be freely renewed or transferred to a purchaser. 10. All mortgages, liens, encumbrances, leases, and servitudes have been disregarded unless specified otherwise. 11. None of this material may be reproduced in any form without our written permission, and the report cannot be disseminated to the public through advertising, public relations, news, sales, or other media. 12. We are not required to give testimony or attend court by reason of this analysis without previous arrangements, and we will make such appearances only when our standard per-diem fees and travel costs are paid in advance. 13. If the reader is making a fiduciary or individual investment decision and has any questions concerning the material presented in this report, it is recommended that the reader contact us. 14. We take no responsibility for any events or circumstances that take place subsequent to either the date of value or the date of our field inspection, whichever occurs first. September-2016 Statement of Assumptions and Limiting Conditions Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 116

117 15. The quality of a lodging facility's on-site management has a direct effect on a property's economic viability. The financial forecasts presented in this analysis assume responsible ownership and competent management. Any departure from this assumption may have a significant impact on the projected operating results. 16. This analysis assumes continuation of all Canada Customs and Revenue Agency tax code provisions as stated or interpreted on either the date of value or the date of our field inspection, whichever occurs first. 17. Many of the figures presented in this report were generated using sophisticated computer models that make calculations based on numbers carried out to three or more decimal places. In the interest of simplicity, most numbers have been rounded to the nearest tenth of a percent. Thus, these figures may be subject to small rounding errors. 18. It is agreed that our liability to the client is limited to the amount of the fee paid as liquidated damages. Our responsibility is limited to the client, and use of this report by third parties shall be solely at the risk of the client and/or third parties. The use of this report is also subject to the terms and conditions set forth in our engagement letter with the client. 19. Evaluating and developing financial forecasts for hotels is both a science and an art. Although this analysis employs various mathematical calculations to provide value indications, the final forecasts are subjective and may be influenced by our experience and other factors not specifically set forth in this report. 20. Our report was prepared in accordance with, and is subject to, the requirements of the Canadian Uniform Standards of Professional Practice (CUSPAP), as provided by the Appraisal Institute of Canada. 21. This study was prepared by MM&R Valuation Services, Inc. All opinions, recommendations, and conclusions expressed during the course of this assignment are rendered by the staff of MM&R Valuation Services, Inc. as employees, not as individuals. September-2016 Statement of Assumptions and Limiting Conditions Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 117

118 14. Certification The undersigned hereby certify that to the best of our knowledge and belief 1. the statements of fact presented in this report are true and correct; 2. the reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and they are our personal, impartial, and unbiased professional analyses, opinions, and conclusions; 3. we have no present or prospective interest in the property that is the subject of this report and no personal interest with respect to the parties involved; 4. we have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment; 5. our engagement in this assignment was not contingent upon developing or reporting predetermined results, the amount of the value estimate, or a conclusion favouring the client; 6. we have the knowledge and experience to complete the assignment competently; 7. our analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Canadian Uniform Standards of Professional Appraisal Practice; 8. Jason Wight and Carrie Russell, AACI, MAI, RIBC personally inspected the property described in this report; 9. no one provided significant professional assistance to the persons signing this report; 10. the reported analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the requirements of the Code of Professional Ethics and the Standards of Professional Appraisal Practice of the Appraisal Institute of Canada; 11. the undersigned are all members in good standing of the Appraisal Institute of Canada; and September-2016 Certification Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 118

119 12. the undersigned have fulfilled the requirements of the Appraisal Institute of Canada Continuing Professional Development Program for members as of the date of this report. Jason Wight Vice President MM&R Valuation Services, Inc. Carrie Russell, AACI, MAI, RIBC Managing Director MM&R Valuation Services, Inc. September-2016 Certification Proposed Pacific Shores Resort & Spa Nanoose Bay, British Columbia 119

120 Cost Approach- Commercial Building As a part of this assignment, we have been asked to provide a value for the commercial building. We consider the depreciated cost approach to be the most appropriate method in valuing the commercial building. The cost approach reflects a set of procedures through which a value indication is derived for the fee simple interest in a property by estimating the current cost to construct a reproduction of, or replacement for, the existing structure; deducting accrued depreciation from the reproduction or replacement cost; and adding the estimated land value plus an entrepreneurial profit. Adjustments may then be made to the indicated fee simple value of the subject property to reflect the value of the property interest being appraised. Our experience with hotel investors shows that this group of buyers and sellers relies upon the methods of the income approach (as well as a review of sales data) when making decisions; the cost approach generally does not play a significant role. However, for the stand alone commercial building, we consider the cost approach to be appropriate. Replacement Cost Replacement cost is the current construction cost of a building with the same utility as the commercial building, but built with modern materials and according to current construction and design standards. In the estimation of development cost for the subject property, the costs of several components of the total property were quantified. The replacement cost of the building improvements was estimated using the Marshall & Swift Cost Estimator and building information provided by ownership. A developer s incentive was considered. We then quantified the physical incurable depreciation of the building. The following table summarizes our estimate of the depreciated cost of the commercial building.

121 DEPRECIATION COST ESTIMATE Item Cost Building, Pre-Opening & Working Capital, Soft Costs $7,543,726 Developer's Incentive 377,186 Total Cost New Estimate $7,920,913 Less Physical Incurable Depreciation-Building 2,404,000 Depreciated Cost $5,516,913 (Rounded) $5,500,000 This estimate has been rounded to $5,500,000. It should be noted that although the data used to compile this estimate is generally reliable, it provides only a rough indication of what the development cost may be. Individuals who require an accurate cost estimate should retain the services of a professional construction cost estimator.

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205 Zoning Map