155 Main Street, Kenora, ONTARIO MARKET POSITION STUDY ... · 155 Main Street in Kenora, Ontario...

Proposed Quality Inn Hotel 155 Main Street, Kenora, ONTARIO

MARKET POSITION STUDY WITH

OPERATING PROJECTIONS AND INDICATION OF

SUPPORTABLE VALUE

Prepared For:

Mr. Martin Leger Mr. Fadel Chidiac

President Kenricia Properties Inc.

155 Main Street Kenora, Ontario

M5T 3A3

Consulting

PPrreeppaarreedd bbyy::

November 2007

November 1, 2007 Mr. Martin Leger Mr. Fadel Chidiac President Kenricia Properties Inc. 155 Main Street Kenora, Ontario M5T 3A3 RE: MARKET POSITION STUDY WITH OPERATING PROJECTIONS AND INDICATION OF

SUPPORTABLE VALUE, KENRICIA HOTEL, KENORA, ONTARIO

Dear Client:

In accordance with the terms of our engagement, PKF Consulting has completed the research and

analysis relating to the Market Position Study with Operating Projections and Indication of Supportable

Value for the 66-room Kenricia Hotel, renovated and branded as a Quality Hotel. The Hotel is located at

155 Main Street in Kenora, Ontario commencing operation on January 1, 2009.

The entire study, including all findings and conclusions, pertains to the Kenora market area and is based

on our knowledge and information with respect to current and projected economic data, expected growth

in the supply of and demand for hotel accommodation, proposed construction of facilities, which could be

deemed to be competitive, and the status of the competitive market as at the completion of our field work

on September 24, 2007.

Projected operating results herein are based on an evaluation of the present economy of the area, but do

not take into account or make provision for the effect of any sharp rise or decline in local, provincial, or

national economic conditions. To the extent that wages and other operating expenses may increase over

the economic life of the hotel, it is expected that room rates would be adjusted to compensate for the

increases. Projections for the subject property assume the subject will operate under a Choice Hotels

Quality Hotel Franchise Agreement and will commence its first full year of operation as at January 1,

2009.

As in all studies of this type, the projected operating results are based on competent and efficient

Consulting

St. Patrick Tower30 St. Patrick Street

8th FloorToronto, Ontario

M5T 3A3Tel: (416) 360-5000Fax: (416) 777-1567

[email protected]: www.pkfcanada.com

Market Position Study with Operating Projections PKF Consulting Proposed Quality Hotel, Kenora, Ontario November 2007

management and presume no significant change in the competitive position of the accommodation

industry in the immediate area except as set forth in this report. The estimates are subject to uncertainty

and variation and we do not represent them as results that will be achieved. They have, however, been

conscientiously prepared on the basis of available information and our experience in the industry.

This report has been prepared solely for the use of Kenricia Properties Inc. in assessing the projected

market position, operating performance and indication of supportable value of the subject renovated and

branded Kenricia Hotel, in Kenora, Ontario. The report will be used to support an application for financing

and it may not be used for any other purpose.

As is customary in assignments of this nature, neither our name nor the material submitted may be

included in any prospectus, press release, offering, or representation in connection with the sale of

securities or participation interests to the public, without our prior written consent. It is a requirement of

professional practice that we review the final draft of any prospectus or offering memorandum containing

references to this study. In connection with the permitted uses and as an advice to third parties, this

report may not be disassembled or rearranged in any manner that would allow for presentation of only a

portion of the report.

Yours truly,

FOR INTERNAL DISCUSSION PURPOSES ONLY

PKF CONSULTING

SUBJECT PHOTOS

View Arriving From Lakeview Drive

Exterior View

(Corner of Main Street and Second Street)

Subject

SUBJECT PHOTOS

Room Product

Room Product

SUBJECT PHOTOS

Main Stairwell

Corridor

SUBJECT PHOTOS

Bathroom

Bathroom

SUBJECT PHOTOS

Extension Off Lobby

Front Desk and Lobby

SUBJECT PHOTOS

Restaurant

Bar/Lounge

SUBJECT PHOTOS

Proposed Meeting Space

Proposed Meeting Space

SUBJECT PHOTOS

Covered/Underground Parking

Laundry Room

SUBJECT PHOTOS

Commercial Space

Lower Level


TABLE OF CONTENTS LETTER OF TRANSMITTAL 1.0 INTRODUCTION AND SCOPE OF STUDY.................................................................................... 1 2.0 SITE EVALUATION AND PROPERTY DESCRIPTION ................................................................. 3 3.0 ECONOMIC OVERVIEW............................................................................................................... 10 4.0 ACCOMMODATION SUPPLY ANALYSIS ................................................................................... 26 5.0 ACCOMMODATION DEMAND ANALYSIS.................................................................................. 28 6.0 SUPPLY AND DEMAND IMPLICATIONS .................................................................................... 33 7.0 OPERATING PROJECTIONS....................................................................................................... 39 8.0 INDICATION OF SUPPORTABLE VALUE........................................................................................44

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Market Study with Operating Projections PKF Consulting Proposed Quality Hotel, Kenora, Ontario November, 2007

1.0 INTRODUCTION AND SCOPE OF STUDY

In September 2007, PKF Consulting was retained by Kenricia Properties Inc. to prepare a Market Position

Study with Operating Projections and Indication of Supportable Value for the 66-room Kenricia Hotel

renovated and branded as a Quality Hotel. The hotel is located at 155 Main Street in Kenora, Ontario.

The objectives of this assignment have been to:

• Evaluate the market potential, within the Kenora area, for the subject Kenricia Hotel renovated and branded as a Quality Hotel.

• Project the future occupancy, average daily room rate, and operating performance of the subject hotel

allowing for economic conditions, and supply/demand growth prospects; and • Prepare an indication of supportable value for the renovated and branded Kenricia hotel as a Quality

Hotel. In order to complete the market study, the work programme has involved the following steps:

• Discussions with hotel ownership and management and review of physical facility; • A review of economic conditions affecting the various segments of accommodation demand for

Kenora area hotels, including information on Ontario generally, and the City of Kenora specifically; • A review of the existing City of Kenora accommodation market including an assessment of facilities

offered and proposed, published room rates, proposed types and timing of expansion, new development and renovations and market demand segmentation;

• An estimate of future growth in supply of, and demand for, hotel accommodation in the competitive

market area; • An identification of tourism demand trends in the market area; • Discussions with the municipal Economic Development and Planning Officials in the City of Kenora;

• Select discussions with property managers and representatives of competitive accommodation properties;

• Discussions with major demand generators in the area such as local or regional industries and

recreational facilities and attractions;

• A preparation of market penetration rates by market segment that may be achieved by the subject hotel for the period from January 1, 2009 to December 31, 2013;

• A projection of the share of demand which can reasonably be attracted by the subject over the projection period 2009 to 2013;

• Average Daily Room Rate projections for the subject hotel;

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• Based on study research and findings, preparation of a five year pro forma operating statement for the subject hotel for the period from January 1, 2009 to December 31, 2013;

• Preparation of an indication of supportable value for the renovated and branded subject hotel; • Documentation of study research, findings and conclusions.

The findings and conclusions based on the aforementioned research programme are presented in the

following sections.

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2.0 SITE AND DEVELOPMENT PROGRAM

2.1 Introduction This site section examines the location characteristics of the subject hotel in order to ascertain its

suitability from a market and operational perspective. Exhibit 2-1 illustrates the location of the subject site. 2.2 Site Location and Description As identified in Exhibit 2-1, the subject is situated on a corner lot with the corner intersection being Main

Street and Second Street. As such the subject is fronting the southeast side of Main Street and the

northeast side of Second Street.

The site receives municipal services and is situated on a moderate southeast to northwest sloping grade,

which is rectangular in appearance and shape. As per discussions with planning, the site as a hotel is

considered a legal and conforming use. In addition, city officials have indicated the subject’s current

parking facilities are considered sufficient for the proposed renovated and branded Quality Hotel.

2.3 Zoning and Property Legal Description

The site location is zoned GC – General Commercial, a designation that permits hotel/conference centre

use. It is assumed that the improvements will be developed in such a fashion as to constitute a legal

conforming use. The legal description is as follows: PLAN 3 BLK 2 PARTS LOT 6,7,9 AND ALL LOT 8, City of Kenora. The current site plan is provided in Exhibit 2-2.

2.4 Access, Egress & Visibility

As noted, the subject is situated on a corner lot at the intersection of Main Street and Second Street in

downtown Kenora. As such the subject is fronting the southeast side of Main Street and the northeast

side of Second Street. Main Street is a two-way lane that runs northeast/southwest and intersects with

Second Street, which is a two-way lane that runs northwest/southeast. Northeast bound Main Street

becomes Lake view Drive, which becomes Highway 17 after reaching the southwest side of Pearson

Street West. Highway 17 is a primary east/west throughway, which merges in to the trans Canada

Highway (Hwy – 1). The Trans-Canada Highway is a federal-provincial highway system that joins all ten

provinces of Canada.

Guests travelling to the subject from the west would follow the Trans Canada Highway, continuing west

as Hwy-1 becomes Hwy-17, Lakeview Drive and finally Main Street where they will have reached the

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subject hotel at 155 Main Street. Access/Egress to the subject hotel is provided directly via Main Street

and/or Second Street. Alternatively guests arriving from the east via Highway 17 will turn left onto

Provincial Secondary Route 658/Veterans Drive (1.28km), left onto Rabbit Lake Road (0.16km), right onto

Reddit Road. which become Mellick Avenue (1.0km), left onto 11th Street North (0.5km), right onto Main

Street, arriving at the subject hotel.

Visitors accessing the subject hotel from the United States will typically enter Canada via the Fort Francis

and/or Rainy River Border Crossings. Once visitors have entered Canada they generally proceed

northwest along Hwy 11, merge heading north onto Hwy 17 and continue along Provincial Secondary

Route 658/Veterans Drive (1.28km), left onto Rabbit Lake Road (0.16km), right onto Reddit Road. which

become Mellick Avenue (1.0km), left onto 11th Street North (0.5km), right onto Main Street, arriving at the

subject hotel

2.5 Surrounding Land Uses In terms of the subject’s accessibility to existing and potential demand generators within downtown

Kenora, the location of the subject property is considered to be good. The site is located less then 0.25

kilometres east of Lake of the Woods, and traffic wishing to access the waterfront can do so with ease as

it is roughly a 5-minute walk. The subject is located in the core of Downtown Kenora and is bordered on

all sides by commercially oriented facilities consisting of retail outlets, food and beverage outlets, and

office space. Four of the areas primary transportation linkages, being railroad, vehicular, aviation and

marine are located within approximately 3km of the subject site.

In addition, the City of Kenora announced it received approval of a $25 million downtown and waterfront

revitalization plan. The purpose of the Project is to address tourist friendly services such as

streetscaping, wayfinding, parking, and accessibility in the downtown core. In an effort to improve the

attractiveness of the City to visitors, to improve services to both visitors and residents, and to create a

more pedestrian friendly and accessible environment in the City’s core, the City of Kenora is planning to

develop its harbourfront and downtown core. Design alternatives address the need to enhance

downtown Kenora with infrastructure upgrades, develop heritage preservation strategies and pursue

public/private partnership opportunities. The City anticipates beginning the first phase of the plan in early

2008, however, the city had not indicated any formal plans as of September 2007. As such, we have not

considered the specific enhancements when projecting the subject hotels future operating performance,

but have assumed that the general environment in the downtown core would be improved.

The subject property’s location places the hotel within a short distance of a number of area attractions,

businesses, transportation and food and beverage facilities. The following summarizes the area

information associated with the above listed attractions:

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Area Attractions: • Kenora Recreational Centre • Lake of the Woods Harbour Front • Tourist Visitation Centre • Kenora Bass International • Harbour Front Seasonal Conerts

• Lake of the Woods Museum • Blue Heron Gift Shop • M.S. Kenora Boat Cruise • Kenora Movie Theatre • Murals and Artists

Area Businesses: • City Hall • Chamber of Commerce • Lake of the Woods District Hospital • TD Canada Trust

• Bank of Montreal • CIBC • Royal Bank • Scotia Bank

Area Transportation: • River Air • Kenora Air • Greyhound Bus Station

• Local Taxi Service • Train Station

Area Restaurants & Lounges: • Boston Pizza • Quizno’s Subs • Casey’s Bar and Restaurant

• Hap’s on the Harbourfront • Hing’s Chinese Food • Dino’s Restaurant

2.6 Existing Facility Review In the late 1800’s the Hilliard House burned down to the ground, making place for the Kenricia Hotel. The

Kenricia Hotel, then called the Tourist Hotel in its early ages, was owned by the Hudson Bay Company.

They started constructing the hotel in 1907 and celebrated its grand opening in August of 1910.

Throughout the years the Kenricia Hotel has represented one of Kenora’s main landmarks. As such, in

the year 2007 the Kenricia Hotel received an official heritage designation from the City of Kenora. The

City of Kenora has indicated that the Kenricia Hotel received this designation because it’s architectural

features represent the reaction to Victorian frivolity (high society and intellectualism) through a return to

classical traditions. This era (1900 to 1930) is referred to as Edwardian Classicism.

The subject hotel surpasses in height and presence other more traditional landmark buildings such as the

City Hall and local churches. As previously noted, the subject is visible to traffic arriving from across the

bay and presents a strong street presence as a result of its large structure and landmass.

Since the 1930’s the subject has received the following enhancements;

• 1930 - New wing added.

• 1960 - Removal of verandas.

• 1961 - Original rotunda was divided in half to accommodate the Fountain Room cocktail lounge in

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which there was an actual fountain, which has since been removed. Enclosed retail space on

street level added, 1961.

• 1964 – English Dining Room was remodelled with the wall between the dining room and the grill

room being removed, and a sliding wall being installed between the Upper Dining Room and the

rest of the room. Addition of parking lot and banquet hall. Kitchen remodelled after a fire in

kitchen.

• 1965 – Open cage elevator replaced by new enclosed elevator. Fountain removed.

• 1966 – The mixed lounge was remodelled.

• 1967 – Lobby remodelled with mosaic floor being installed.

• 1969 – 14 rooms remodelled on the 4th floor. Basement entrance from the parking lot was

modernized.

• 1970 – Entrance from the basement to the lobby was re-routed. Checkerboard Lounge

remodelled.

• 1971 – Dance floor built in lounge.

In recent history the subject hotel has operated with limited nightly rentals and has focussed its attention

on long-term monthly leases. In addition to the rooms department, the Kenricia Hotel operates a bar and

lounge (Club Neptune) and restaurant, which predominantly service the local community as compared to

hotel patrons. As at the date of our inspection the property had been closed due to fire safety concerns.

The client has indicated that since September 2007 the Kenricia Hotel has been brought up to code

concerning utilities at the property, of which Fire Saftey was included.

The client has indicated that the subject hotel is in need of renovation and is considering branding the

subject hotel as a Quality Hotel. As such, the client has developed a proposed renovation facility

program for the Kenricia Hotel. The following section outlines this program.

2.7 Proposed Re-Branding Facility Program 2.7.1 Quality Inn Hotel Brand Quality Inn Hotel’s are positioned to compete in the midscale lodging segment. Choice Hotels, the parent

company of the Quality Inn Brand, has indicated that the Quality Inn Hotel brand was established in 1941

and is one of the first hotel chains. The international chain boasts professional service, clean

accommodations, a signature Quality Sleeper bed by Serta mattress, new bedding and high speed

Internet. Typically the brand appeals to both the leisure and business travelers.

The Quality Inn Hotel Brand has a history of being selected as a conversion brand for midscale hotels

looking to strengthen their position in the market. Part of the attractiveness of the brand is that Quality

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Inn Hotel’s are part of the Choice hotels International family of brands. With more then 60 years

experience, Choice Hotels is one of the world’s largest franchisors, with over 5,300 properties open or

under development worldwide.

The brand is considered by Choice Hotels to deliver competitive rate performance with a competitive

development cost. As well, Choice Hotel’s national multi-brand marketing campaign, a central

reservation system, a guest loyalty program “Choice Privileges” and a service organization focused on

supporting profitability support Choice Hotels.

The subject’s affiliation with a brand is important, as it is generally understood that brands create value for

consumers. The subject hotel will enter into a primary competitive market that is currently 100.0%

branded. In order to compete with existing brands the subject property will require a brand that is well

recognized and creates a strong awareness among consumers of quality. As noted by the University of

Cornell, consumers who affiliate with brands assume a sense of loyalty and typically are less price

sensitive and more willing to purchase and generate a positive word of mouth. Given the dominant

leisure segment of the Kenora area these attributes provided by a brand affiliation will support the

success of the subject hotel.

2.7.2 Proposed Renovation Program

Upon completion of the renovation, the Quality Inn Hotel will provide the following product mix;

Hotel Component

• The subject hotel will provide a total of 66-units spread evenly over three floors. Approximate

guest room configurations are projected as follows;

o 3 units at 450+ sq.ft.

o 27 units at 275 to 325 sq.ft.


(Note: Projections are based of floor plans provided by the client, which did not indicate exact

dimensions. As such, the above listed configurations should be considered as rough estimates.)

Restaurant and Lounge Component

• 100-seat franchise affiliated restaurant located northeast adjacent to the lobby area with access

egress gained via the lounge and/or lobby area. Current indications are that the developer will

operate a Smitty’s franchise in the restaurant encompassing the 30- seat Lounge, located

northwest as an extension off the main restaurant with access egress gained via the northwest

Main Street Entrance.

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Meeting Conference Space

• The subject is expected to provide approximately 2,500 sq.ft. of rentable meeting conference

space. Meeting conference space will be located within the northeast corridor of the ground floor

and will replace the existing disco and billiard hall.

Recreational/Other Space

• In addition to direct revenue generating floor space, approximately 600 sq.ft. is expected to be

allocated toward a fitness centre.

Spa Component:

• A 3,000 Gross sq.ft. spa is being proposed, which will house approximately 4 treatment rooms,

reception area, retail space and 2 change rooms. The client has indicated that the location of the

spa has not been finalized, however, the location has been narrowed down to either the

basement or the second floor. The spa is anticipated to be leased out to a third party and our

projections have reflected this.

Commercial Lease Space

• The subject hotel is expected to lease available floor space, located within the basement, main

floor and first floor, to commercial tenants. As such, it is projected that approximately 5,000 sq. ft.

will be allocated toward commercial, retail and office lease space.

As at the date of our market research the property improvement plan was being prepared by Choice

Hotel’s. Based on our discussions with the Client and Choice Hotels the following assumptions have

been carried forward through our projections;

• The renovated subject property will provide a rooms product, meeting space and public space

that satisfies Choice Hotels Brand Standards for a Quality Inn Hotel.

• The renovated subject property will provide a restaurant and lounge that satisfies Smitty’s

Canada Brand Standards for a Smitty’s Restaurant.

• The renovated subject property will provide commercial lease space that satisfies market

expectations short of tenant improvements.

2.8 Conclusion

In summary, the subject is considered to be well located from a market perspective with its main attributes

being its location in downtown Kenora, its close proximity to a number of key leisure demand generators

and its excellent site lines from across the bay. Based on these considerations, the subject hotel is

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expected to compete effectively for market demand within both corporate/commercial and leisure/tourist

demand segments.

Subject Property

EXHIBIT 2-1 KENRICIA HOTEL LOCATION

EXHIBIT 2-2

SITE PLAN

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3.0 ECONOMIC OVERVIEW 3.1 Introduction The market potential of hotel properties is influenced by National, Provincial and local economic

conditions. Accordingly, the analysis has included a review of recent economic performance in Canada,

the Province of Ontario, and the City of Kenora, in order to assess potential implications for the subject

property. In addition to economic fundamentals, we have reviewed and summarized travel and tourism

trends in Canada generally and in the Province of Ontario.

3.2 National Economic Overview During the latter 1990’s, Canada enjoyed one of its strongest periods of economic growth. Throughout

this period Canadians saw an unemployment rate of 6.4% (the lowest level in twenty-five years), the first

government surplus in twenty-six years, the first back-to-back surplus in half a century, and Gross

Domestic Product (GDP) growth that led all G-7 countries.

In 2000, Canada began to feel the impacts of an economic downturn in the United States. Figures from

the Conference Board of Canada reveal that in the fourth quarter of 2000, the U.S. economy grew at an

annualized rate of only 1.4%, which represented the slowest pace of economic activity in four years.

The most significant effect of the decrease in U.S. demand was a decline in exports, predominantly in

automobiles and auto parts. Federal and provincial tax cuts, combined with the significant decline in

interest rates from the Bank of Canada, increased domestic demand helping to offset the impact of the

U.S. economic downturn and to maintain positive GDP growth in the first half of 2001. Then, both the

Canadian and U.S. economies suffered a significant blow from the tragic events of September 11th, most

notably in the transportation, securities, manufacturing, and hospitality industries. A recession was

feared. However, as a result of stimulative monetary conditions, strong consumer spending and vigorous

residential construction in the fourth quarter of 2001, the economy posted real GDP growth of 0.5% in

2001.

The Canadian economy saw positive GDP growth of 3.2% in 2002, with a surge in both the labour and

housing markets. In 2003, a number of factors including: the slowing U.S. economic situation, the surging

of the Canadian dollar against its U.S. counterpart and the SARS outbreak, all contributed to a slow down

in the Canadian economy, with the country posting year-end GDP growth of approximately 2.0%.

Fortunately, the slowdown was short lived. Acceleration of U.S. GDP growth in the latter quarter of 2003

supported a Canadian recovery in the first three quarters of 2004. However, by the fourth quarter of

2004, Canadian economic growth once again slowed, this time due in large part to a fall in net exports,

resulting from the strength in the Canadian currency.

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While the stronger dollar has cut Canada’s competitiveness for many exporters, in recent years, there is a

positive side to the equation in the form of reduced costs for importing goods. In September 2007, the

dollar reached parity with the US for the first time since 1976. Investment in machinery and equipment

continues to be buoyed by the strength of the dollar and the need for Canadian businesses to continue to

restructure. The only blemish comes from residential construction, which has been declining over most of

2006 and will continue to do so for much of 2007.

Overall, Canadian GDP rose 2.6% in 2006. With low financing rates and surging household wealth,

household spending has outpaced income for most of the past decade. The current forecast would see

households add modestly to savings for the first time since 1995, bringing the aggregate savings rate

from the current 1.5 per cent to average about 2 per cent annually in 2007 and 2008. While this is a

modest turnaround, it would occur at a time when the incentive to keep spending is strong. Financing

rates remain cheap, especially for longer terms, and household wealth is sustained by rising home prices

and an excellent performance in the stock market. As such, real consumer spending is expected to post

growth of 3.3 per cent in 2007 and 3.1 per cent in 2008, following an estimated gain of 3.8 per cent in

2006.

Looking forward, the current outlook completed by the Conference Board, has revised U.S. economic

growth for 2007 down to 2.2 per cent. This is due in large part to the impact of the housing price

correction occurring south of the border and its effect on the debt-laden American consumer.

Inescapably, Canada will feel the repercussions of weaker U.S. homebuilding and consumer spending,

particularly in sectors that supply the residential construction industry. Lumber and other materials

immediately come to mind, but the transportation sector will also suffer. In addition, softer U.S. demand

will hurt already-strained exporters and manufacturers as well as domestic sectors catering to American

tourists. Given the importance of the U.S. economy on the world stage, repercussions of softer growth will

be felt globally. This is forecast to result in an easing of commodity prices, hurting profits in Canada and

perhaps setting back investment spending.

However, Canada’s domestic economy has enough momentum that it should perform well despite the

hiccup in U.S. growth. Canadian households are enjoying the combined effects of exceptional gains in

after-tax income and the steep rise in purchasing power that comes with a strong dollar. Moreover, while

housing prices may be softening in the United States, they are still rising in Canada, adding to the wealth

effect. Profits have also continued to rise, resulting in unabated growth in business investment spending,

while the federal and provincial governments, perhaps surprised by better than- expected revenues, are

likely to keep spending growth strong.

Going forward, losses in the real trade balance will continue to erode GDP. Data revisions, a weaker U.S.

economy and the unexpected strength in imports saw Canada’s GDP experience 2.7 percent growth in

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2006, down 0.4 percentage points. A stable exchange rate and a recovering U.S. economy will help

generate growth of 2.7 per cent in 2007, and an even stronger 3.4 per cent is forecast for 2008 (Table 3-

1).

TABLE 3-1 CANADIAN KEY ECONOMIC INDICATORS

Percentage Change

2004 2005 2006 2007 (f) 2008 (p) Real GDP 3.0% 3.1% 2.7% 2.7% 3.4% Unemployment Rate 7.2% 6.8% 6.3% 6.1% 6.0% Disposable Income 2.9% 4.2% 6.4% 5.1% 3.9% Consumer Price Index - 2.2% 2.0% 2.4% 2.1%

Source: Conference Board of Canada – Summer 2007

3.3 National Travel Forecast Canada’s tourism industry suffered significant losses over the first three Quarters of 2003. These losses

were largely due to travellers’ perceptions regarding SARS, and to a lesser extent a resistance to travel

due to threats of terrorism and the ongoing War in Iraq. In 2004, as the fears of SARS diminished, the

global economy heated up and with pent up travel demand overnight visitation from all inbound travel

segments grew at an average of 4.1% as summarized in Table 3-2.

According to Statistics Canada, domestic travellers were the source of growth in 2005, as Canadians

increased their tourism spending by 9.4% over 2004, representing the largest gain since 2000. In 2005,

international travel growth remained strong from the overseas segment, however Canada continued to

loose market share from overnight US travellers.

According to the International Travel Account, Americans spent 8.6% less in Canada in 2005, during

which time the value of the Canadian dollar increased 7.4% relative to the U.S. dollar. Several factors

including the rising Canadian dollar and gasoline prices may hinder the travel industry’s ability to grow in

the years ahead. The weakening of the U.S. travel market is a serious concern for the industry.

Overnight travel by U.S. residents to Canada was down 5% in 2005, compared to 2004. Same day visits

by U.S. residents travelling by automobile were down 39% in 2005 versus 2000. In 2006, same day visits

by U.S. residents were down 11% versus the 2005 same day visits. There is expectation that with the

implementation of the U.S. Western Hemisphere Travel Initiative (WHTI), the number of visitors to

Canada from the U.S. will continue to decline.

In terms of overall travel volumes, Canada hosted about 120.4 million overnight visits in 2006.

Approximately 8-in-every-10 of Canada’s overnight visitors are comprised of Canadians travelling in their

own country -- with a further 12.4% from the US and 4.9% from overseas markets (Figure3-1).

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Source: Conference Board of Canada Travel Markets Outlook, Autumn 2006

Recent studies on WHTI have estimated that from 2005 to 2010, the number of U.S. arrivals in Canada

could potentially decline by 14.1 million and result in a $3.6 billion revenue loss. The US government has

been unwilling to extend the dates, however, a recent announcement in the summer of 2007 indicates

that the implementation of the WHTI for air, land and sea crossings has been postponed until 2009. In

the mean time the Canadian industry’s efforts are focusing on implementation issues and clearing up

some of the travel-dampening confusion that has resulted from erroneous media reports about the WHTI.

On an international basis, growth in the overseas market continues to be strong. China has recognized

Canada as an approved tourism destination as of January 2005. Approved Destination Status (ADS)

allows Chinese residents in groups of five or more individuals to travel to Canada using a tourist exit visa.

Without ADS, only Chinese visitors traveling on an individual basis, for business, family or pleasure, could

obtain exit visas to Canada. A total of 81 countries have already been approved and another 10

countries, including Canada, are still in negotiations.

According to Statistics Canada, there were 95,000 Chinese visitors to Canada in 2002, growing by 7.2%

to 102,000 in 2004 and a further 15.2% to 117,500 in 2005. During the first Quarter of 2006, Chinese

visitors to Canada showed a 17.4% increase compared to the first Quarter in 2005. In 2005, China

overtook both Hong Kong and Taiwan and is now the third largest Asia market for visitors to Canada,

after Japan and South Korea. It is anticipated that China will be among the top overseas origin markets

for Canada by 2010. In 2004, the University of Quebec in Montreal Tourism Watch Network reported that

only 6.1% of Chinese residents have a credit card and the Chinese average income per capita in urban

FIGURE 3-1OVERNIGHT VISITS TO CANADA BY ORIGIN

2006

Overseas4.9%

United States12.4%

Domestic82.7%

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areas was equivalent to $675 per month, which could dampen the potential number of travellers coming

to Canada.

The visitation growth experienced in the overseas market is partly due to the rising number of South

Korean travellers to Canada. This emerging market generated 180,000 person-trips in 2005, behind

Japan (424,000), but ahead of China (117,500). The Korean traveller tends to have a higher disposable

income than for the Chinese traveller, access to the Internet, and is aged between 20 to 35 years old.

The Australian market is also showing growth, with 202,000 Australians visiting Canada in 2005, up

12.3% from the 179,800 visitors in 2004. Wholesalers, including Scenic Tours, Trafalgar, Adventure

World, Talpacific, Intrepid, RailPlus and Creative Holidays are offering more extensive itineraries in the

Rockies, Whistler, Western Canada, Eastern Canada and Alaska geared to small-group travel, and soft

adventure.

Yesawich, Pepperdine, Brown & Russell “YPB&R”, a market research company based in Orlando,

Florida, reported that in the U.S., corporate meetings were expected to increase and individual corporate

travel to decrease in 2006. The results are based on a survey conducted in 2005 among the active

traveling population, estimated at 120 million households in the U.S. As for leisure travel, family and multi-

household travel, also dubbed as “togethering”, is expected to increase over the next few years. Time

poverty, tendency to travel shorter distances, quest for authenticity (acting on convictions), preference for

customization, desire to try new destinations, increased debt ratio, increasing Canadian dollar and

soaring gas prices, are factors potentially involved in the decrease in number of U.S travellers to Canada.

While 40.0% of the surveyed respondents were afraid to fly after 9/11, none of them still had safety

concerns in 2005. In terms of preferred destinations for 2006, Canada came in fourth position behind

Europe, Australia and Caribbean countries. Generally, there is an increased motivation for island

destinations, as well as parks/mountains and urban cities.

In 2005, Canada’s tourism industry made solid progress, particularly on the domestic front. Indeed, the

recovery of Canadian consumer confidence and improving economic conditions for travel helped the

tourism industry offset a nearly 5.0% decline in U.S. visits. Combined with strong gains in overseas travel,

overnight visits to Canada increased by an estimated 3 per cent in 2005.

According to the most recent Travel Markets Outlook report published by the Conference Board of

Canada, growth in overnight travel within Canada is expected to slow in 2007. Without the added benefit

of tax cuts and government funding, growth in Canadian domestic travel is expected to fall to 3.0 per cent

in 2007, down from 4.2 per cent in 2006. In addition to slower domestic travel, U.S. travel to Canada will

continue to slide. A variety of factors will contribute to an expected decline in American overnight visits of

8.2 per cent this year.

15


However, the Conference Board of Canada continues to project overall travel growth of 1.6% in 2007.

The following table summarizes the Conference Board of Canada’s projections for overall travel growth

for the 2004 to 2010 period. In particular, we are looking at a recovery in U.S. travel commencing in

2009.

TABLE 3-2 NATIONAL OVERNIGHT TRAVEL FORECAST (% CHANGE)

2004

actual 2005 (e) 2006 (f) 2007 (f) 2008 (f) 2009 (f) 2010 (f)

Domestic Origin 2.6% 4.1% 4.2% 3.0% 4.0% 3.3% 3.7% United States Origin 6.3% -5.3% -3.4% -8.2% -3.8% 4.8% 3.7% Overseas Origin 27.3% 5.3% 0.1% 4.8% 4.5% 4.4% 4.8% Total Visitation 4.1% 2.7% 2.9% 1.6% 3.1% 3.6% 3.8% Source: Conference Board of Canada Travel Markets Outlook, Spring 2007

3.4 Provincial Economic Overview

In 2000, the Province of Ontario realized real GDP growth of 5.3%, outperforming the Canadian economy

for the fourth straight year, trailing only the provinces of Newfoundland and Alberta. The deterioration of

the U.S. economy coupled with the events of September 11th and subsequent impacts on economic

conditions south of the border had a negative impact on Ontario’s economic situation, most notably in the

area of exports. However, strong consumer spending and housing starts, led to real GDP growth of 0.2%

in the fourth quarter of 2001, allowing the province to avoid a recession. The Ontario economy benefited

from disposable income increases and strong consumer spending in 2002. In the second quarter of

2002, consumer confidence measures had reached their highest level in 10 years. Ontario’s real GDP

grew by 3.8% in 2002.

The slowdown in the economy over the summer of 2003 was more pronounced in Ontario’s

manufacturing dependent regions as companies adjusted to the appreciation of the Canadian dollar and

the outbreak of SARS. Ontario’s economy ended 2004 posting 3.0% growth in GDP. The Conference

Board of Canada reported that real GDP increased by 2.8% in 2005.

According to the most recent Provincial Outlook published by the Conference Board of Canada, the

economic outlook for Ontario will remain tempered over the near term. This is primarily due to weakening

consumer demand in the U.S. and its impact on the manufacturing sector in Canada, particularly in the

auto sector. Real GDP at market prices is expected to advance by 1.9% in 2007, a significant downward

revision from the 2.9% forecast in the summer of 2006 and 3.4% in 2008.

Table 3-3 provides a summary of several key economic indicators for the Province of Ontario for the 2004

to 2008 period.

16


TABLE 3-3 ONTARIO KEY ECONOMIC INDICATORS

Percentage Change 2004 2005 2006 2007 (f) 2008 (p) Real GDP 3.0% 2.8% 1.9% 2.3% 3.4% Personal Disposable Income 3.3% 3.8% 5.1% 3.9% 4.0% CPI 1.9% 2.2% 1.8% 2.2% 2.1% Source: Conference Board of Canada – Summer 2007

Consumer spending is expected to remain strong given the increased purchasing power provided by

federal income tax cut in 2006. This has helped to support gains in personal disposable income, with

forecasts that it will decrease from 5.1% in 2006 to 3.9% in 2007 before increasing to 4.0% in 2008.

Ontario’s economy faces many challenges in 2007, and there remain serious concerns regarding a

decline in residential investment, as well as a weakening trade surplus due to a rising Canadian dollar.

The higher valued dollar is negatively impacting the manufacturing sector, which accounts for 20.0% of

the Ontario economy. Ontario’s exports performance has been hammered by the difficulties in the

manufacturing sector. Job losses in manufacturing reached 55,730 in 2006 after losing 36,000 jobs in

2005. The Conference Board of Canada estimates that the sector will lose another 19,000 jobs in 2007.

The automotive sector represents more than 30% of Ontario’s exports with 135,000 direct jobs, supported

primarily by three major American producers: General Motors, Daimler Chrysler and Ford. Together, they

account for more than 65% of auto production in Ontario. The challenges the “big three” face in light of

the downturn in manufacturing is therefore critical to the well being of the Ontario economy. The

American producers’ market share losses over the last ten years, higher gasoline prices, increased

pension costs and loss in global competitiveness has also affected the auto industry. Nonetheless, the

Ontario-based auto manufacturers have announced government-supported major new investments of

several billion dollars. The investments will be used to build new facilities; to increase production

capacities at existing facilities; to move toward flexible manufacturing processes; and to research newer

sources of fuel technology. The Ontario automotive sector hopes to be more competitive as it becomes

more responsive to changing demand.

The woes of the “big three” automakers in recent years has been offset by the growth of Japanese based

automakers in Ontario. In June 2005, Toyota announced that it would build an $800 million assembly

plant in Woodstock, Ontario, directly employing 2,000 people. This represents Toyota’s second assembly

plant in the province. In May 2006, Honda unveiled its plans for a $154 million new engine plant in

Alliston, creating 340 jobs directly. This plant will be Honda’s third in Ontario, and is reflective of Honda’s

optimism on the North American automotive sector.

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3.5 Ontario Travel Forecast

At its peak in 2000, approximately 107 million trips were taken in Ontario, including same-day and

overnight visitation, generating $17.1 billion in revenues. However, since that time, the Ontario tourism

industry has endured some difficult times as a result of socio-economic issues such as the 9/11 Terrorist

attacks, and the Iraq War and the resultant economic slowdown witnessed in the United Sates, as well as

problems closer to home, specifically the SARS crisis in 2003.

However, following a substantial decrease in travel in 2003, the Province did see some recovery in

tourism demand, ending 2004 with a year over year gain in travel of 7.2%. Inbound Overseas travel led

this growth with a 34.3% gain in 2004. In 2005, it is estimated that the travel industry in Ontario grew by

3.5%, with a 5.1% improvement in the domestic market and an 8.3% gain in the overseas market.

However, with the appreciation of the Canadian dollar, rising gasoline prices, and an increase in

American travel to overseas markets, overnight demand from U.S. markets declined by 3.4% in 2005.

For the first three months of 2007, U.S. border crossings to Ontario were down by 21.1% over the same

period of 2006 – almost 55% fewer entries for the period than 2001, the peak year for U.S. border

crossings in Ontario in the last four decades.

Looking forward, the Conference Board’s projections for Ontario’s tourism industry have become more

subdued. Continued struggles in the provincial economy, are expected to curb potential growth in

business and leisure trips within the province next year. As a result, growth in overnight visits to Ontario is

forecast to soften in 2007 to 2%, slowing down from the 3% gain that was expected for 2006.

According to the Conference Board, healthy consumer spending and business investment continue to

support economic and travel activity in the province. However, despite an expected improvement in the

Ontario economy, growth in travel within the province is expected to slow, largely as a result of less

stimulus from tax cuts and slower growth in disposable income. Moreover, the struggling manufacturing

sector is putting the recovery of the overall provincial economy at risk. Thus, growth in overnight domestic

visits in Ontario is expected to ease to 2.7 per cent in 2007. Ontario’s business travel market, in

particular, is expected to lose some steam in 2007, expanding by a modest 2.2 per cent. Toronto enjoyed

a strong year for meetings and conventions in 2006, which contributed to an estimated 6 per cent rise in

the number of overnight business trips to Ontario. In comparison, the outlook for 2007 remains

considerably softer, with fewer large conventions on the books.

The outlook for Ontario’s international markets remains quite mixed. Overnight U.S. visits to the province

continue to decline, as challenges for this market are escalating. In addition to the pending

implementation of passport requirements, lower consumer confidence, high-energy prices, a weakening

18


job market and falling housing prices are exacerbating the weakness in U.S. travel. By contrast, overseas

travel to Ontario continues to see solid growth, fuelled by the strong performance of the province’s Asian

markets. Overseas visits are expected to grow 4.8 per cent in 2007 and continue expanding at a similar

pace over the medium term.

Table 3-4 provides domestic and international overnight travel forecasts for total visitation to Ontario for

the 2004 to 2008 period, provided by The Conference Board of Canada and the Canadian Tourism

Research Institute.

TABLE 3-4 ONTARIO OVERNIGHT TRAVEL FORECAST (% CHANGE)

Segment 2004 2005 (f) 2006 (f) 2007 (f) 2008 (f) 2009 (f) Domestic Origin 5.2% 5.1% 3.2% 2.7% 3.8% 3.8%

United States Origin 10.9% -3.4% -4.4% -10.8% -3.9% 4.5%

Overseas Origin 34.3% 9.6% 3.0% 4.8% 4.7% 4.5%

Total Visitation 7.2% -8.9% 1.9% 0.6% 2.7% 3.9%

Total Expenditures 11.5% 6.5% 6.5% 1.6% 4.9% 6.7% Travel Price Index 1.74% 3.23% 2.14% 0.99% 1.37% 1.69%

Source: Conference Board of Canada, CTRI Travel Outlook, Spring 2007

3.6 City of Kenora

The City of Kenora is located within the Kenora District and the Lake of the Woods Region, and had an

estimated full-time population of 15,757 in the year 2007, according to Financial Post Market Projections.

City officials have indicated that during the summer months the population can increase by approximately

35.0%-40.0%, as the city’s location bordering Lake of the Woods provides a significant seasonal

residential appeal. The city is located in close proximity to the Manitoba boundary and is approximately a

2.5-hour drive (204 km) from Winnipeg.

Kenora is highly populated with aboriginal people, as it has been for the past several thousand years. In

1861 the Hudson’s Bay Company opened a post on the mainland at Kenora’s current location. In 1878,

the Company surveyed lots for the permanent settlement of Rat Portage and the community held the

name until 1905 when it assumed the name “Kenora”. Gold and the railroad were both important in the

community’s early history as gold was discovered in 1850 and the first Canadian ocean to ocean train

passed through in 1886 on the Canadian Pacific Railway.

Presently the City’s main industries are forestry, tourism and mining. Each of the sectors currently

presents a different state of affairs as mining is considered to be relatively stable, forestry is suffering

economic woes and tourism is showing signs of prosperity and growth. In the year 2005 the city suffered

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the loss of two forestry mills, including 400 jobs at the Abitibi pulp and paper mill. However, city officials

have indicated the loss of the mill has been mitigated by expansion projects at surrounding timber strand

plants. In addition discussions with local hoteliers suggested that occupancy’s were not negatively

impacted in any significant manner, as the mill was not a large producer of room nights.

Local discussions with town officials and real estate professionals suggested that real estate values

surrounding the Lake of the Woods are progressing. Cottages with access to the Lake of the Woods

have been quoted at list prices over half a million dollars. Locals have indicated that affluent communities

in surrounding areas, such as Winnipeg, have an increased interest in real estate associated with Lake of

the Woods. The interest has allegedly lead to some celebrities purchasing cottages on Lake of the

Woods. According to local officials, the real estate growth is anticipated to continue in the near future,

which should positively influence properties in proximity to the Lake of the Woods.

3.6.1 Location & Transportation The City of Kenora is located off of Higway 17, which connects to the Trans Canada Highway. The

Trans-Canada Highway (Hwy-1) is a federal-provincial highway system that joins all ten provinces of

Canada and is a paved two-lane highway with full paved shoulders over most sections and many passing

lanes. The Trans Canada Highway passed through Kenora in 1932. The city’s proximity to HWY-1

provides convienient-connecting links to the areas surrounding highways; Hwy-17, Hwy- 71, Hwy, 671

and Hwy-596. In addition, Hwy-71 is located approximately 18km east of Kenora and is the connection to

the Fort Francis/Rainy River area and therefore provides access to the United States border crossings at

International Falls and Baudette.

Kenora is within a 2.5 hour drive of Winnipeg James Armstrong Richardson International Airport

(approximately 216 km). James Armstrong has one major terminal and handles more than 3 million

passengers annually. The city also provides a local airport, which is operates Bearskin Airlines. Bearskin

Airlines offers regularly scheduled commercial air services to major centers such as Winnipeg and Thunder

Bay, where one can connect with major air carriers for access to virtually any city in the world. In addition to

the above primary airports, Kenora is home to Walsten Air, River Air and Kenora Air.

As previously noted, a Canadian ocean to ocean train passed through in 1886 on the Canadian Pacific

Railway. Currently Canadian Pacific Railway continues to directly service the community of Kenora.

Kenora provides marine access through The Lake of the Woods water ways. The Lake of the Woods

Control Board (LWCB) manages the waters and operates under Canadian federal and provincial legislation

and a Canada-United States treaty.

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Commercial transportation is available throughout Kenora and is provided through the following linkages;

• Commercial Bus Lines and Municipal Transit System • Truck transporation • Car Rental Agencies • Taxi services

The community’s relatively strong transportation networks have made it possible to attract manufacturing,

tourism, industrial and commercial business to the area.

3.6.2 Population & Employment

Annually the area realizes strong population growth during the peak summer period, due in large part to the

popularity of the area as a seasonal and transient travel destination market. In the summer months city

officials have indicated that approximately 35.0% to 40.0% of Kenora’s population are considered non-

permanent residents. The City of Kenora had an estimated full-time population of 15,757 in the year 2007,

according to Financial Post Market Projections. According to Financial Post Market Projections, the full-

time population is anticipated to be 15,425 by the year 2012, approximately a 2.1% decline. This is partially

as a result of the Abitibi Mill closure.

The following table represents the top 10 Major employers in the city of Kenora;

TABLE 3-5 CITY OF KENORA

TOP 10 MAJOR EMPLOYERS Employer # of Employees

1. Public Hospital 460 2. District of Kenora Home for the Aged 245 3. Trus Joist 236 4. Canadian Pacific Railway 210 5. Wal-Mart 200 6. Kenora Patricia Child & Family Services 138 7. City of Kenora 120 8. Canada Safeway 120 9. Kenora Catholic District School Board 120 10. Zellers Inc. 115 Source: City of Kenora

3.6.3 Tourism Development The City of Kenora is a progressive and proactive community that is committed to tourism development.

An initiative that demonstrates the progressive nature of the community is the city’s approval of a

downtown revitalization program. The City of Kenora announced it received approval of a $25 million

downtown and waterfront revitalization plan. The purpose of the Project is to address tourist friendly

21


services such as streetscaping, wayfinding, parking, and accessibility in the downtown core. In an effort

to improve the attractiveness of the City to visitors, to improve services to both visitors and residents, and

to create a more pedestrian friendly and accessible environment in the City’s core, the City of Kenora is

planning to develop its harbourfront and downtown core. Design alternatives address the need to

enhance downtown Kenora with infrastructure upgrades, develop heritage preservation strategies and

pursue public/private partnership opportunities. The City anticipates beginning the first phase of the plan

in early 2008, however, the city has not indicated any formal plans as of September 2007.

Historically the city has supported overall development in the area, however, recent development

initiatives have a stronger focus towards supporting tourism growth in the area. In the nineties the

following developments took place;

• Rat Portage Band and Gaming World International opened the “Golden Eagle Charitable Casino”

(As of field work date closed due to internal management issues, with no foreseeable re-opening

in the near future)

• First condominium projects initiated

• Ministry of Natural Resources (MNR) issues licence to Trus Joist, who will construct

TimberStrand LSL Plant #3 in Kenora.

Since 2001, the following developments have occurred;

• Trus Joist begins construction on its new plant

• Municipal sewer and water lines were extended

• Public Works Yard 150,000 sq.ft. of retail space redevelopment is announced by the city

• Wal-Mart and Canadian Tire confirmed as anchor tenants of new mall on public works site

• $9 million renovation took place at the recreational centre.

The City of Kenora has also undertaken a study to assess the market feasibility of a new Performing Arts

Centre and Conference Centre in downtown Kenora. Recent news indicates the study has been

completed but no formal decisions have been made at this point. Due to the uncertainty of the timing of

the project, we have not considered the Performing Arts Centre and Convention Centre in our projections.

In addition to the city’s commitment to development, local hoteliers have created the Kenora Hotel

Association (KHA). The primary role of the KHA is to monitor and support the growth of the

accommodations industry and tourism as a whole within the City of Kenora. As such, the KHA has

introduced a volunteer “Bed Tax” where participating hoteliers will contribute one dollar per occupied

room night to the KHA. The funds raised through the bed tax are applied towards initiatives (trade shows,

advertising, local and regional marketing, etc.) that support tourism growth within the city of Kenora.

22


Kenora is located in the center of Canada, with access by the Trans-Canada and Canadian Pacific

Railway to the rest of Canada, as well as access to the United States Mid West. As a result, a significant

portion of tourism in Kenora is generated by the U.S. Mid West visitations and regional domestic

visitations. The following table outlines the City of Kenora visitor location origins;

TABLE 3-6 CITY OF KENORA

VISITOR LOCATION ORIGINS Canada %

Ontario 20% Manitoba 19% Alberta 7% British Columbia 6% Quebec 6% Saskatchewan 3% Other Canada 5% Total 66%

United States % Minnesota 4% Wisconsin 3% Other U.S. 18% Total 25%

International % Germany 3% England 1% Other International 5% Total 9% Source: City of Kenora, Visitation Centre

The Kenora area has felt the impacts of the passport confusion created by the Western Hemisphere

Travel Initiative. As table 3-7 indicates, border crossing have declined over the past three years and local

officials have indicated that further decreases are anticipated in the near future.

23


TABLE 3-7 BORDER CROSSINGS STATISTICS

Fort Frances Border Crossing Statistics Year 2002 2003 2004 2005 2006 Vehicles 166,492 181,176 174,892 162,670 154,870 % Change n/a 8.8% -3.5% -7.0% -4.8% Passengers 427,113 416,439 405,799 382,773 368,329 % Change n/a -2.5% -2.6% -5.7% -3.8%

Rainy River Border Crossing Statistics Year 2002 2003 2004 2005 2006 Vehicles 51,712 48,814 46,590 39,720 39,751 % Change n/a -5.6% -4.6% -14.7% 0.1% Passengers 105,830 101,794 98,710 84,379 81,988 % Change n/a -3.8% -3.0% -14.5% -2.8% Source: Sunset County

Fortunately for the Kenora area, visitation overall has not been overwhelmingly negatively impacted by

the decrease in US visitors. Discussions with local tourist officials have indicated that regional and

domestic visitation levels have increased over the same time period and have helped mitigate the loss in

U.S. visitation, which is supported by the stable hotel occupancy levels around 60.0% that have been

achieved by the primary competitive market in the past three years.

The City of Kenora has a number of attractions and events that bring people to the area. Depending on

the season, visitors can pursue a wide range of seasonal opportunities. The following table outlines

examples of tourism products made available in Northern Ontario and more specifically the Kenora area;

24


TABLE 3-8 CITY OF KENORA AND SURROUNDING AREA

TOURISM DEMAND GENERATORS Special Events Attractions Attractions

Harbourfest - First Weekend of August

Fishing for walleye, bass, pike, perch, muskie

Mather-Walls House

Kenora Bass International - Second Weekend of August

Hunting opportunities for moose, bear, whitetail deer, geese, ducks,

partridge and small game

Kenora Harbourfront

Canada Day Celebration Over 200 tourist resorts First Nation Pictographs Can-Am Sno-X Races - January Canoe and Kayak routes Lake of the Woods Museum

North American First Nations Hockey Tournament of Champions -

March/April

Camping Parks and Beaches

Ice Breaker Winter Festival - March/April

Lake of the Woods Boat Tours and float plane tours

Vernon Nature Trails

Kenora Rowig Club Regattas - throughout the summer

M.S. Kenora Tunnel Island Trails

Kenora Home Show - April Bust Tours Golf courses/driving range Lake of the Woods International

Sailing Association Regatta - AugustRotary Goodwill Geyser Retail Stores

"For Crafts Sake" Craft Show & Sale - November

Husky the Musky Assorted Restaurants

Pow-wows - at various reserves throughout the summer

Kenora Recreation Centre Over 700km of groomed snowmobile trails

Source: City of Kenora Recreational boating is also a popular activity on the lake, as visitors will often search for wildlife, enjoy

the scenic views and stop in to Kenora for a visit.

3.6.4 Other Accommodation Demand Generators

The local accommodation industry has historically thrived off of the business generated during the peak

summer months. As noted, visitation to Kenora is highly seasonal, with the core summer months

accounting for approximately over forty percent of total annual visitation. However, the local

accommodation industry does receive support from other sources within the community. Generally

speaking the city of Kenora provides a number of municipal services that are not available within

surrounding regions. The primary example would be the Lake of the Woods District Hospital which was

founded in 1987. Through the years a series of additions and renovations have taken place to meet the

expanding needs of the population. The hospital treats over 30,000 people per year and is the

Northwestern Ontario’s largest hospital outside of Thunder Bay. Other attractors to the area are

education facilities and legal services, which are not readily available to residents in the surrounding

Kenora communities.

25


3.7 Conclusion

General conditions appear to be encouraging for the Canadian and Ontario economies. The Canadian

and Provincial economies have shown positive growth in 2006 with strength in both the consumer and

housing markets. Overall economic growth within the country and the province is expected to continue in

2007. According to city officials, the City of Kenora’s long-term economic outlook for the City remains

positive, especially due to sustained commitment to construction activity and revitalization plans within the

downtown core. The City will face new challenges in the near future as it shifts from a natural resources

based community to a tourism and services focused community.

26


4.0 ACCOMMODATION SUPPLY ANALYSIS

4.1 MARKET SUPPLY OVERVIEW

The primary supply of competitive hotels located within the City of Kenora is comprised of 5 branded

hotels providing a total of 332 guest rooms as of September 2007. The majority of the competitive set

hotel properties are located approximately 3 km southeast of the subject site off of provincial route

highway 17. Of the two remaining properties one is located approximately 2km north of the subject site

and the other is located approximately 2km west of the subject site. The following section profiles

property facilities and services available at each competitive hotel. Exhibit 4-1 illustrates the locations of

the competitive hotels while Exhibit 4-2 summarizes their facilities and amenities.

TABLE 4-1 PRIMARY COMPETITIVE MARKET

CITY OF KENORA Hotel Number of

Rooms 1. Days Inn Kenora 51

2. Super 8 Kenora 69 3. Best Western Lakeside Inn & Conference Centre 94 4. Travelogde Kenora 43 5. Comfort Inn Kenora 75 Total Number of Rooms 332

The 51-room Days Inn Kenora is a mid-scale property considered to be in fair condition. The property

offers a restaurant and lounge on site, approximately 1,970 sq.ft. of meeting space, fitness room and an

indoor heated pool with a 120ft water slide.

The 69-room Super 8 Kenora is a mid-scale property considered to be in fair condition. In 2007 the

property replaced its pool area with a conference room capable of seating up to 100 people banquet

style. The property does not offer a restaurant within the hotel but shares a site with a Casey’s

Restaurant. Access and egress to the hotel is gained from Lakeview Drive, as such the hotel is the first

property vehicular traffic arriving from the west on Hwy-17 will encounter.

The 94-room Best Western Lakeside Inn & Conference Centre is a mid-scale property in fair condition.

The property is the only hotel within the competitive set to provide direct access to the Lake of the

Woods, as a result the property is able to provide marine docking services. The hotel has a good

location as it is easily visible off 1st Avenue and from across the harbour. In addition to being the market

leading provider of meeting space, approximately 7,000 sq.ft., the Best Western benefits from being

located directly across from the newly renovated recreation centre. The tower property was built in 1968

and is cylinder in shape with large windowpanes surrounding the outside.

27


The Travelodge Kenora is a mid-scale property with 43-rooms. The property is located southeast of the

subject site off of provincial route highway 17. The property is approximately 18 years old and has

received upgrades to the public areas and pool within the last five years. The property offers limited

meeting space facilities, which are typically used for day use purposes. The 75-room Comfort Inn Kenora is a budget property considered to be in fair condition. The property

does not offer a restaurant on site but does provide a continental breakfast. The hotel has limited

meeting space and does not offer any pool or exercise facilities.

4.2 Proposed New Accommodation Supply

Since 2002 the primary competitive market has not witnessed any supply additions. Discussions with

local hoteliers and city planning officials have indicated that no new supply additions, other then the

subject hotel, are anticipated within our projection period. As such we have not reflected any supply

additions in our projections. Additions within the competitive supply have come in the form of minor

expansions and upgrades to public space and common area facilities. Most recently the Super 8

Kenora replaced its pool area with a conference room capable of seating 100 people banquet style.

4.3 Conclusion

The primary competitive existing hotel market consists of 5 branded hotels providing 332 guestrooms.

The competitive market is largely comprised of a mix of budget and mid service properties. The proposed

hotel development would offer a comparable quality product and would offer amenities to compete

effectively within the competitive market. Other then the subject hotel entering the market for its first full year of operation in 2009 at 66-units, we

have not reflected any supply additions in our projections. Additions within the competitive supply have

come in the form of minor expansions and upgrades to public space and common area facilities. Exhibit

4-3 outlines projected supply throughout the projection period.

EXHIBIT 4-1

PRIMARY COMPETITIVE MARKET

TABLE 4-1 PRIMARY COMPETITIVE MARKET

CITY OF KENORA Hotel

1. Days Inn Kenora 2. Super 8 Kenora

3. Best Western Lakeside Inn & Conference Centre 4. Travelogde Kenora 5. Comfort Inn Kenora

SUBJECT PROPERTY

Total Square Footage

Best Western Lakeside Inn & Convention Centre

94 "Waterside" Restaurant &

Lounge

7,085 Indoor Heated Pool, Boat Docking, Room Service, Free Parking,

Complimentary Newspaper, Highspeed Internet Access

Comfort Inn - Kenora

75 Free Continental Breakfast

N/A Free High Speed Internet Access, Free Weekday Paper, Free Local Calls, Free

ParkingDays Inn - Kenora 51 "Forest"

Restaurant1,970 Indoor Heated Pool, 120ft. Water Slide,

Indoor Heated Spa, Exercise Room, Video Arcade

Super 8 Motel - Kenora

69 Free Continental Breakfast

1,500 Business Centre, Free Continental Breakfast, Free High Speed Internet,

Free Parking, BBQ FacilitiesTravelodge Hotel - Kenora

43 Restaurant & Lounge

N/A Indoor/Outdoor Pool, Deck Whirlpool, Sauna, Fitness Room, Fridges and

Microwaves in all roomsSource: PKF Consulting

Conference Room

Meeting Room

5 Meeting Rooms

Meeting Room

2 Meeting Rooms

Hotel Name Number of Rooms

Food & Beverage

Meeting/Convention Space Other Facilities

# Of Rooms

EXHIBIT 4-2FACILITY CHART – PRIMARY COMPETITIVE ACCOMMODATION SUPPLY

CITY OF KENORA

SUPPLY ADDITIONSExisting Supply 332New Projects Supply Probability Impact Timing

KENRICIA HOTEL 66 100.0% 66 2009Subtotal 66 66

Total Supply 398

SUPPLY PROJECTIONS 2006 2007 2008 2009 2010 2011 2012 2013Existing Supply 332 332 332 332 332 332 332 332New Projects

KENRICIA HOTEL 0 0 0 66 66 66 66 66Subtotal 0 0 0 66 66 66 66 66

Total Supply 332 332 332 398 398 398 398 398Change na 0 0 66 0 0 0 0% Change na 0.0% 0.0% 19.9% 0.0% 0.0% 0.0% 0.0%Source: PKF Consulting 20-Oct-07 04:12 PM

SUPPLY PROJECTIONS

EXHIBIT 4-3CITY OF KENORA

28


5.0 ACCOMMODATION DEMAND ANALYSIS

5.1 Competitive Market – Historic Demand Levels

Table 5-1 presents a summary of the historic occupancy and average daily rates achieved by the primary

competitive set from 2002 through 2006 and for year-to-date July 2006 and 2007, the details of which are

provided in Exhibit 5-1.

TABLE 5-1 COMPETITIVE ACCOMMODATION MARKET

HISTORIC OPERATING PERFORMANCE: 2002 – YTD JULY 2007

Competitive Market 2002 2003 2004 2005 2006 2006 July YTD

2007 July YTD

Occupancy 67.9% 58.8% 59.0% 59.4% 63.4% 60.7% 65.9% ADR $78.28 $81.73 $82.37 $86.36 $86.76 $86.25 $88.45 RevPAR $53.17 $48.08 $48.60 $51.32 $55.00 $52.35 $58.27 Available Room Nights 121,180 121,180 121,180 121,180 121,180 70,384 70,384 Occupied Room Nights 82,308 71,288 71,496 72,019 76,821 42,719 46,366 Source: PKF Consulting

As the table summarizes, demand within the Kenora primary competitive market realized a drastic 13.4%

decline in 2003, this was due in part to the outbreak of Severe Acute Respiratory Syndrome (SARS) in

Toronto, which hit the market during the prime spring and summer months in 2003. Ontario as a whole

was impacted negatively by SARS as U.S. and International demand decreased in visitation levels. Since

2003 the market has witnessed moderate occupancy growth until most recently in 2006 when the market

achieved a 6.7% growth in occupied room nights. The growth in 2006 was attributed to the rebounding

tourist sector, as Kenora was able to attract room nights from a number of sources including transient

traffic along the Trans Canada and Lake of the Woods visitations. Year-to-date July 2007 results indicate

continued strong growth in demand for hotel accommodation in the competitive Kenora set over 2006, at

a significant 8.5% rate of increase.

Since 2001 market average daily rates have kept pace with the rate of inflation with annual growth

averaging approximately 2.5%. In 2003, with falling occupancy levels operators achieved an average

daily rate of $81.71 resulting in 4.4% growth over the previous year, however, with an 8 point decrease in

occupancy. Overall the net effect was approximately a 9.5% decrease in REVPAR, however the increase

in rate potentially may have mitigated further losses in REVPAR. Overall rate has not suffered over the

past five years within the competitive set. With the closure of the Abitibi pulp and paper mill in the year

2005 the market was able to hold occupancy levels relative to 2004 and then witnessed growth of 4

percentage points in 2006, which would suggest the mill was not a large producer of room nights.

29


Year-to-date July 2007 results indicate rate growth will continue to hold strong, with a market ADR

increase of 2.5% over the same period in 2006.

Market Segments

Demand for hotel accommodation applicable to the competitive accommodation market in Kenora

consists of four broad demand segments. These include the corporate/commercial segment, the

tourist/leisure segment, the meeting/conference segment and the government/other segment. On the

basis of PKF research and discussions with hotel management, estimated market segmentation for the

primary competitive market for 2006 is presented in the table below.

TABLE 5-2 HISTORIC COMPETITIVE MARKET MIX

CITY OF KENORA 2006 % of Demand

Corporate/Commercial 28,180 36.7% Meeting/Conference 6,862 8.9%

Tourist/Leisure 34,643 45.1% Government/Other 7,136 9.3%

Total 76,821 100.0% Source: PKF Consulting

As illustrated in Table 5-2, it is estimated that the breakdown of sources of rooms demand in 2006 for the

competitive market in the City of Kenora was as follows; 36.7% corporate/commercial, 45.1%

tourist/leisure, 8.9% meeting/conference, 9.3% government/other.

The Corporate/Commercial segment is the second largest generator of rooms demand in the primary

competitive market accounting for 36.7% of demand (28,180 occupied room nights) in 2006. This segment

includes demand from transient commercial travellers, as well as locally generated individual and volume (or

preferred) corporate accounts, but excludes group based corporate activity that is generated for the purpose

of conducting meeting and/or conferences on or near the premises.

Comprising 45.1% of demand (34,643 occupied room nights) in 2006, the Tourist/Leisure segment is the

largest generator of demand in the competitive market. This market consists of demand generated by

transient leisure travellers as well as by individuals and groups whose primary reason for visiting the City of

Kenora market area is for tourist/leisure/recreation purposes. It includes a wide variety of markets including

individuals, families, the “VFR” market (visiting friends or relatives), as well as sports groups that visit the

area for the primary purpose of being involved in sports activities.

The Meeting/Conference segment accounted for 8.9% of occupied room nights (6,862) in the market in

2006. This segment includes rooms demand generated for the purpose of attending meetings, seminars or

conferences on the premises.

30


The Government/Other discount segment generated 9.3% of occupied room nights (7,136 occupied room

nights) in 2006. This segment includes aircrews, rail crews, construction crews, civil servants travelling on

government business and other guests who enjoy discounted rates, such as CAA discounts.

5.2 Competitive Market Projected Demand Levels A brief description of the projected performance of each major market segment is presented below and

detailed projections by market segment are provided in Exhibit 5-2.

5.2.1 Corporate/Commercial

At 36.7% of demand (28,180 occupied room nights) in 2006, the Corporate/Commercial segment is the

second largest generator of rooms demand in the primary competitive market. Based on year-to-date July

2007 results, this segment of demand is projected to realize an increase of 4.0% at year-end 2007. Based

on positive forecasts for the National, Provincial and Metropolitan economies in Canada, the

corporate/commercial segment of demand is projected to realize strong growth throughout the projection

period, resulting in growth rates of 1.0% in 2008, 2.0% in 2010 and 1.0% in 2011 and for the remainder of

the projection period. With the introduction of the Kenricia back into the market in 2009, demand is

projected to increase by 10.0% in this segment in conjunction with the 20.0% increase in supply.

5.2.2 Tourist/Leisure Segment The Tourist/Leisure segment of demand is the largest room night generator in the competitive market,

accounting for 45.1% of demand in 2006. Looking forward, the tourist/leisure segment of demand is

projected to realize a stable growth rate in the range of 1.0% to 4.0% between the 2007 to 2013 period,

with the exception of 2009 at 10.0%. With the introduction of the Kenricia back into the market in 2009,

demand is projected to increase by 10.0% in this segment in conjunction with the 20.0% increase in

supply.

The Conference Board of Canada’s positive travel forecasts for Ontario is a contributory factor. In

addition, newly renovated attractions such as the recreation centre, continued marketing efforts, and

continued interest in The Lake of the Woods are expected to draw tourists to the City on an ongoing

basis.

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5.2.3 Meeting/Conference Segment

Meeting/Conference segment of demand accounted for 8.9% of occupied room nights in 2006. Overall,

this segment of demand is projected to realize a stable growth rate in the range of 0.5% to 3.0% between

the 2007 to 2013 period, with the exception of 2009 at 10.0%. With the introduction of the Kenricia back

into the market in 2009, demand is projected to increase by 10.0% in this segment in conjunction with the

20.0% increase in supply.

The growth is based upon meeting space capacity constraints being moderately addressed by the subject

hotel in 2009 and therefore supporting growth in this segment. In addition, continued investment into the

city and sustained efforts targeted at attracting new businesses will positively impact this segment over the

projection period.

5.2.4 Government/Other Segment

The Government/Other segment of demand accounted for 9.3% of occupied room nights in 2006. Overall,

this segment of demand is projected to realize a stable growth rate in the range of 0.5% to 4.0% between

the 2007 to 2013 period, with the exception of 2009 at 5.0%. With the introduction of the Kenricia back

into the market in 2009, demand is projected to increase by 5.0% in this segment in conjunction with the

20.0% increase in supply.

5.3 Overall Demand Table 5-3 summarizes overall demand for the competitive Kenora accommodation market for the 2007 to

2013 period, the details of which are provided in Exhibit 5-2.

TABLE 5-3 OVERALL ACCOMMODATION DEMAND PROJECTIONS

COMPETITIVE SET CITY OF KENORA 2007 2008 2009 2010 2011 2012 2013

Market Occupancy 65.9% 66.5% 60.7% 61.9% 62.5% 63.0% 63.6%Occupied Room Nights 79,825 80,551 88,233 89,880 90,740 91,567 92,403 Demand growth 3.9% 0.9% 9.5% 1.9% 1.0% 0.9% 0.9%

Source: PKF Consulting

As noted, year-to-date July 2007 results for the competitive market indicate a 8.5% increase in demand

over 2006 results for the same period. Based on year-to-date results, overall demand is projected to

increase by 3.9% over 2006 at year-end 2007. With no corresponding increase in supply for year-end

2007, annual occupancy for the Kenora market is projected to increase by 2.5 percentage points to

32


65.9% in 2007. With positive economic and travel outlooks for the domestic and international markets,

overall demand is projected to moderately increase by 0.9% in 2008, resulting in a market occupancy of

66.5%. With new supply addressing capacity constraint within the market in 2009, overall demand is

expected to increase by 9.5%. However, with a corresponding increase in supply of 19.9% in 2009, the

market occupancy percentage is expected to decline to 60.7%. With no projected supply additions for the

remainder of the projection period and demand growth in the range of 0.9% to 1.9%, occupancy is

projected to increase to 61.9% in 2010, 62.5% in 2011, 63.0% in 2012 and 63.6% in 2013.

5.4 Average Daily Room Rates Exhibit 5-2 also provides average daily room rate projections for the competitive market for the 2007 to

2013 period. Based on year-to-date results and City Officials indicated positive economic and travel

outlooks for the City of Kenora, average daily rates are projected to increase by 2.5% in 2007, and by

2.5% over the projection period, which is in line with the current Canadian rate of inflation. This translates

into an anticipated market average daily rate of $93.43 by 2009, the subjects hotels first full year of

operation. The competitive market occupancy and average rate projections are provided in the table

below:

TABLE 5-4 PROJECTED AVERAGE DAILY RATE

CITY OF KENORA 2007 2008 2009 2010 2011 2012 2013

Average Daily Rate $88.93 $91.15 $93.43 $95.77 $98.16 $100.62 $103.13 Rate Growth 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

Source: PKF Consulting 5.5 Conclusion Based on the preceding analysis, Table 5-5 below provides a summary of the occupancy and average

daily rate projections for the competitive market over the projection period, reflecting the re-opening of the

subject Hotel

TABLE 5-5

OVERALL PROJECTIONS CITY OF KENORA

2007 2008 2009 2010 2011 2012 2013 Market Occupancy 65.9% 66.5% 60.7% 61.9% 62.5% 63.0% 63.6%Average Daily Rate $88.93 $91.15 $93.43 $95.77 $98.16 $100.62 $100.62


Year to Date JulyTotal Competitive Market 2002 2003 2004 2005 2006 2006 2007

Rooms 332 332 332 332 332 332 332Annual Occupancy 67.9% 58.8% 59.0% 59.4% 63.4% 60.7% 65.9%Average Daily Rate $78.28 $81.73 $82.37 $86.36 $86.76 $86.25 $88.45RevPar $53.17 $48.08 $48.60 $51.32 $55.00 $52.35 $58.27Available Room Nights 121,180 121,180 121,180 121,180 121,180 70,384 70,384Occupied Room Nights 82,308 71,288 71,496 72,019 76,821 42,719 46,366Rooms Revenue $6,442,963 $5,826,072 $5,889,200 $6,219,312 $6,665,151 $3,684,691 $4,101,030

Market Growth 2002 2003 2004 2005 2006 2006 2007Available Rooms na 0.0% 0.0% 0.0% 0.0% na 0.0%Occupied Room Nights na -13.4% 0.3% 0.7% 6.7% na 8.5%Average Daily Rate na 4.4% 0.8% 4.8% 0.5% na 2.5%

Market Segmentation 2006 %Corporate 28,180 36.7%Mtg/Conv 6,862 8.9%Leisure 34,643 45.1%Gov't/Other 7,136 9.3%Total Market 76,821 100.0%

Source: PKF Consulting 20-Oct-07 04:13 PM


HISTORIC MARKET PERFORMANCE

Demand Projections 2006 2007 2008 2009 2010 2011 2012 2013Corporateoccupied room nights 28,180 29,307 29,600 32,560 33,211 33,543 33,879 34,217demand growth 4.0% 1.0% 10.0% 2.0% 1.0% 1.0% 1.0%Mtg/Convoccupied room nights 6,862 7,068 7,103 7,814 7,931 8,010 8,050 8,091demand growth 3.0% 0.5% 10.0% 1.5% 1.0% 0.5% 0.5%Leisure occupied room nights 34,643 36,028 36,389 40,028 40,828 41,236 41,649 42,065demand growth 4.0% 1.0% 10.0% 2.0% 1.0% 1.0% 1.0%Gov't/Otheroccupied room nights 7,136 7,422 7,459 7,832 7,910 7,950 7,989 8,029demand growth 4.0% 0.5% 5.0% 1.0% 0.5% 0.5% 0.5%

Market Projections 2006 2007 2008 2009 2010 2011 2012 2013Total Demandoccupied room nights 76,821 79,825 80,551 88,233 89,880 90,740 91,567 92,403demand growth 3.9% 0.9% 9.5% 1.9% 1.0% 0.9% 0.9%Total Supplyavailable room nights 121,180 121,180 121,180 145,270 145,270 145,270 145,270 145,270supply growth 0.0% 0.0% 19.9% 0.0% 0.0% 0.0% 0.0%Market Occupancy 63.4% 65.9% 66.5% 60.7% 61.9% 62.5% 63.0% 63.6%Market Average Daily Rate $86.76 $88.93 $91.15 $93.43 $95.77 $98.16 $100.62 $103.13Market RevPar $55.00 $58.58 $60.59 $56.75 $59.25 $61.32 $63.42 $65.60rate growth 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%Source: PKF Consulting 20-Oct-07 04:14 PM


ACCOMMODATION MARKET PROJECTIONS

33


6.0 SUBJECT SUPPLY AND DEMAND IMPLICATIONS – Subject Hotel 6.1 Subject Property Projections The following analysis projects future occupancy and market penetration levels for the proposed subject

property based on numerous factors including economic influences and the actual and projected

supply/demand relationship in the competitive market. Further assumptions include:

No significant changes in the market over the projection period that would impact the current status of the

competitive rooms supply other than as currently identified

The proposed property would operate as a 66-unit Quality Hotel Branded Property, with its first full year of

operation commencing January 1, 2009. In addition, our projections and assumptions reflect the

renovated subject providing the following;

Hotel Component

• Approximate guest room configurations are projected as follows;

o 3 units at 450+ sq.ft.



(Note: Projections are based of floor plans provided by the client, which did not indicate exact

dimensions. As such, the above listed configurations should be considered as rough estimates.)

Restaurant and Lounge Component

• 100-seat franchise affiliated restaurant located northeast adjacent to the lobby area with access

egress gained via the lounge and/or lobby area. Current indications are that the developer will

operate a Smitty’s franchise in the restaurant encompassing the 30- seat Lounge, located

northwest as an extension off the main restaurant with access egress gained via the northwest

Main Street Entrance.

Meeting Conference Space

• The subject is expected to provide approximately 2,500 sq.ft. of rentable meeting conference

space. Meeting conference space will be located within the northeast corridor of the ground floor

and will replace the existing disco and billiard hall.

34


Recreational/Other Space

• In addition to direct revenue generating floor space, approximately 600 sq.ft. is expected to be

allocated toward a fitness centre.

Spa Component:

• A 3,000 Gross sq.ft. spa is being proposed, which will house approximately 4 treatment rooms,

reception area, retail space and 2 change rooms. The client has indicated that the location of the

spa has not been finalized, however, the location has been narrowed down to either the

basement or the second floor. The spa is anticipated to be leased out to a third party and our

projections have reflected this.

Commercial Lease Space

• The subject hotel is expected to lease available floor space, located within the basement, main

floor and first floor, to commercial tenants. As such, it is projected that approximately 5,000 sq. ft.

will be allocated toward commercial, retail and office lease space.

As at the date of our market research the property improvement plan was being prepared by Choice

Hotel’s. Based on our discussions with the Client and Choice Hotels the following assumptions have

been carried forward through our projections;

• The renovated subject property will provide a rooms product, meeting space and public space

that satisfies Choice Hotels Brand Standards for a Quality Inn Hotel.

• The renovated subject property will provide a restaurant and lounge that satisfies Smitty’s

Canada Brand Standards for a Smitty’s Restaurant.

• The renovated subject property will provide commercial lease space that satisfies market

expectations short of tenant improvements.

In projecting occupancy performance of the proposed subject property over the projection period, the

concept of “fair market share” has been utilized. This concept states that a property will attract rooms

demand in the same proportion as its share of rooms supply. The basic assumption is that all things are

equal, however, different properties achieve different levels of market penetration based on various

competitive factors including location, product and facilities, customer preferences, pricing and marketing

strategies. Market penetrations in excess of 100.0% indicate that a hotel possesses competitive

advantages relative to the market as a whole, competitive weaknesses are reflected in penetrations of

less than 100.0%.

Using the concept of “fair market share” described previously in conjunction with the analysis presented

above and the performance of budget and mid-scale properties in Canada, projections for the subject

35


hotel have been determined. In the following paragraphs, the projected competitive position of the

proposed Quality Hotel is assessed for each major market segment to arrive at overall market penetration

and occupancy estimates. Detail is provided in Exhibit 6-1.

6.1.1 Corporate/Commercial

The subject hotel is projected to penetrate the Corporate/Commercial segment at the following levels

shown in Table 6-1:

TABLE 6-1 CORPORATE/COMMERCIAL MARKET PENETRATION BY SUBJECT PROPERTY

2009 2010 2011 2012 2013 Market Penetration 90.0% 92.5% 95.0% 94.1% 93.1%Occupied Room Nights 4,859 5,094 5,284 5,284 5,284

Figures may not be exact due to rounding

The Subject Hotel is projected to capture marginally below its “fair share” of market demand in the

corporate/commercial segment. The subject is well located with respect to local businesses in the

downtown area, specifically the municipal offices and rail station. The subject’s room product and facility

mix should appeal to the corporate/commercial business traveller market. In addition, the subjects brand

affiliation will offer a central reservation system and stay rewards, which are both attractors of this

segment. The subject will have increased competition when pursuing this segment, not felt by other

properties in the market, as it will share a central reservation system with “Comfort Inn Kenora” a Choice

Hotels affiliated brand located within less then one kilometre of the subject.

As indicated above, the subject hotel is expected to penetrate the market at 90.0% in the first year of

operation and to increase its market share to 92.5% of fair share in 2010. The subject hotel’s

corporate/commercial demand is projected to stabilize at 95.0% of fair share or 5,284 occupied room

nights in 2011. 6.1.2 Meeting/Conference

The following Table provides an estimate of market penetration and room nights captured in the

meeting/conference market over the projection period.

TABLE 6-2 MEETING/CONFERENCE MARKET PENETRATION BY SUBJECT PROPERTY


36


The hotel will offer approximately 2,500 square feet of meeting space. The subject hotel is anticipated to

capture more then its “Fair Share” of market demand in this segment as it will enter the market as the

second largest meeting space provider. In addition, the newly constructed facilities are anticipated to

attract higher levels of demand in comparison to the dated product, which is currently provided by the

majority of the competitive set. The subject will primarily compete with the Best Western Lakeside Inn

and the Super 8 Kenora when attracting room night demand in this segment.



meeting/conference demand is projected to stabilize at 123.0% of fair share or 1,634 occupied room

nights in 2011.

6.1.3 Tourist/Leisure

The following chart provides an estimate of market penetration and room nights captured in the leisure

segment over the projection period.

TABLE 6-3 TOURIST/LEISURE MARKET PENETRATION BY SUBJECT PROPERTY

2009 2010 2011 2012 2013 Market Penetration 90.0% 92.5% 95.0% 94.1% 93.1%

Occupied Room Nights 5,974 6,263 6,496 6,496 6,496

The Quality Hotel is expected to successfully penetrate the independent leisure market at levels marginally

below fair market share. The above projections assume that the subject hotel will benefit from a well-

recognized central reservation system that has a demonstrated capability of attracting leisure

demand. The property’s new rooms product and location within downtown Kenora provides trouble-free

access to restaurants, entertainment, retail stores and the harbour, which should make it an attractive

choice for leisure travellers. The subject is anticipated to attract room nights in this segment as it will help to

relieve capacity constraints, within the existing primary accommodations market, currently experienced

during the peak summer months. As previously noted, the subject will have increased competition when

pursuing this segment, not felt by other properties in the market, as it will share a central reservation

system with “Comfort Inn Kenora” a Choice Hotels affiliated brand located within less then one kilometre

of the subject. As indicated above, the subject hotel is expected to penetrate the market at 90.0% in the first year of


tourist/leisure demand is projected to stabilize at 95.0% of fair share or 1,831 occupied room nights in

2011.

37


6.1.4 Government/Other Discount

Table 6-4 provides an estimate of market penetrations and room nights captured in the

government/airline/rail/other discount market over the projection period.

TABLE 6-4 GOVERNMENT/OTHER MARKET PENETRATION BY SUBJECT PROPERTY


The subject property is expected to achieve marginally below it’s “fair share” of the government/other

discount market demand in its first year of operation. The new rooms product will attract this segment,

however, not at a penetration level above fair share due in part to the price sensitive nature of this

segment.



tourist/leisure demand is projected to stabilize at 95.0% of fair share or 1,252 occupied room nights in

2011. 6.2 Subject Hotel Average Daily Rate Projections

Based on increasing demand levels and stable average daily rate growth within the Kenora market, rates

are projected to continue to increase by 2.5% in 2007 and to continue to realize steady rate growth of

2.5% throughout the remainder of the period. These increases assume a continuation of economic

growth, and corresponding strength in demand for accommodation.

The proposed Quality Inn Hotel as a renovated, chain-affiliated hotel, is expected to command a rate

above the market average. Rate performance at the subject hotel will be enhanced due to its new

product offering combined with a strong central reservation system capable of maximizing rooms

revenue.

Based on the above, the subject property has been projected to achieve and maintain an average rate

above the overall competitive market. The projected average daily room rates for the subject property are

presented in the following table.

38


TABLE 6-5 PROJECTED AVERAGE DAILY ROOM RATES

QUALITY INN HOTEL 2009 2010 2011 2012 2013

Market Average Rate $93.43 $95.77 $98.16 $100.62 $103.13 Rate Penetration 107.0% 107.0% 107.0% 107.0% 107.0%

Subject ADR $100.00 $102.50 $105.06 $107.69 $110.38

6.3 Overall Projections

Based on the preceding analysis, of existing and potential demand, plus estimates of market penetration,

Table 6-6 summarizes the projected occupancy performance of the 66-room subject Quality Inn Hotel for

the period of 2009 through 2013. As indicated, the subject hotel is projected to achieve a 97.5% market

penetration in its third year of operation. The subject hotel is projected to stabilize at close to 14,667

annual occupied room nights for the remainder of the projection. Detailed information on the subject

hotel’s occupancy and rate projections is presented in Exhibit 6-1.

TABLE 6-6 PROJECTED OPERATING PERFORMANCE

QUALITY INN HOTEL, CITY OF KENORA 2009 2010 2011 2012 2013

Market Penetration 91.8% 94.8% 97.5% 96.6% 95.7%Demand Captured 13,428 14,122 14,667 14,667 14,667 Subject Occupancy 55.7% 58.6% 60.9% 60.9% 60.9%Average Daily Rate $100.00 $102.50 $105.06 $107.69 $110.38

ADR Penetration 107.0% 107.0% 107.0% 107.0% 107.0%RevPAR $55.74 $60.09 $63.97 $65.56 $67.20

RevPAR Penetration 98.2% 101.4% 104.3% 103.4% 102.4% Source: PKF Consulting Analysis

Supply 2009 2010 2011 2012 2013KENRICIA HOTEL 66 66 66 66 66Total Supply 398 398 398 398 398Fair Share of Supply 16.6% 16.6% 16.6% 16.6% 16.6%

Demand Projections 2009 2010 2011 2012 2013Corporateoccupied room nights 32,560 33,211 33,543 33,879 34,217fair share of demand 5,399 5,507 5,562 5,618 5,674penetration rate 90.0% 92.5% 95.0% 94.1% 93.1%total demand captured 4,859 5,094 5,284 5,284 5,284ratio to total demand 36.2% 36.1% 36.0% 36.0% 36.0%Mtg/Convoccupied room nights 7,814 7,931 8,010 8,050 8,091fair share of demand 1,296 1,315 1,328 1,335 1,342penetration rate 110.0% 118.0% 123.0% 122.4% 121.8%total demand captured 1,425 1,552 1,634 1,634 1,634ratio to total demand 10.6% 11.0% 11.1% 11.1% 11.1%Leisure occupied room nights 40,028 40,828 41,236 41,649 42,065fair share of demand 6,638 6,771 6,838 6,907 6,976penetration rate 90.0% 92.5% 95.0% 94.1% 93.1%total demand captured 5,974 6,263 6,496 6,496 6,496ratio to total demand 44.5% 44.3% 44.3% 44.3% 44.3%Gov't/Otheroccupied room nights 7,832 7,910 7,950 7,989 8,029fair share of demand 1,299 1,312 1,318 1,325 1,331penetration rate 90.0% 92.5% 95.0% 94.5% 94.1%total demand captured 1,169 1,213 1,252 1,252 1,252ratio to total demand 8.7% 8.6% 8.5% 8.5% 8.5% Total Demandoccupied room nights 88,233 89,880 90,740 91,567 92,403total demand captured 13,428 14,122 14,667 14,667 14,667market occupancy 60.7% 61.9% 62.5% 63.0% 63.6%market penetration 91.8% 94.8% 97.5% 96.6% 95.7%Project Occupancy 55.7% 58.6% 60.9% 60.9% 60.9%

Rate Projections 2009 2010 2011 2012 2013Market Average Daily Rate $93.43 $95.77 $98.16 $100.62 $103.13% Growth 2.5% 2.5% 2.5% 2.5% 2.5%Rate Penetration Subject 107.0% 107.0% 107.0% 107.0% 107.0%Project Average Daily Rate 100.00$ 102.50$ 105.06$ 107.69$ 110.38$ Market RevPar $56.75 $59.25 $61.32 $63.42 $65.60Subject RevPar Penetration 98.2% 101.4% 104.3% 103.4% 102.4%Subject RevPar 55.74$ 60.09$ 63.97$ 65.56$ 67.20$ Source: PKF Consulting 20-Oct-07 04:15 PM

EXHIBIT 6-1KENRICIA HOTELCITY OF KENORA

PROJECT PROJECTIONS

39


7.0 PRO FORMA STATEMENT OF REVENUE AND EXPENSES

7.1 Introduction Based upon the preceding discussion of projected occupancies and average daily rates, a five-year

projection of annual operating results has been prepared for the proposed 66-room Quality Inn Hotel

located in downtown Kenora, Ontario. These projections are presented in Exhibit 7-1, and assume the

first full year of operation commencing January 1st, 2009, with a 12-month fiscal period ending December

31st. Unless otherwise noted, all financial projections in this section are stated in Canadian dollars.

In projecting the subject hotel’s operating results, we have reviewed the historical operating information of

a sample of Northwestern Ontario Properties in order to establish an industry standard for a Quality Hotel

product that is comparable to that proposed.

The average annual inflation rate in Canada the past several years has been at 2.5% or less, and for the

purpose of this analysis, inflation has been projected at 2.5% as an average throughout the five year

projection period. However, inflation has not been used in all revenue and expense categories as the

sole basis of annual increases. The impact of increased/decreased occupancies or sales volumes is also

reflected in revenue end expense projections.

It is further assumed that the subject hotel will be operated under franchise affiliation with the Quality Inn

Hotel brand and will be operated by professional hotel management.

7.2 Operating Departments 7.2.1 Rooms Department Room’s revenue reflects the subject occupancy and average rate projections discussed in Section 6.0.

Room’s expenses include all direct expenses associated with guest room rentals. Detailed projections of

room’s departmental expenses are provided in Exhibit 7-2. Fixed room expenses, expenses that do not

vary with room sale volume, such as management salaries and laundry and front desk have been projected

to increase with inflation. Variable expenses including housekeeper wages, travel agent commissions and

other rooms expenses are projected to change with room sales. Overall, rooms departmental expenses

have been projected at $29.72 per occupied room night, or 29.7% of room revenue in 2009. The expense

to revenue ratio is expected to be maintained at a similar level throughout the projection period.

40


7.2.2 Food and Beverage – Meeting Room Rentals The subject hotel will have an internally operated 130-seat franchise affiliated restaurant and lounge, and

approximately 2,500 square feet of meeting space on site. The client has indicated the franchise

affiliation is anticipated to be a Smitty’s Restaurant, as such, a 8.0% franchise fee (5.0% royalty fee and

3.0% advertising fee) was included within our projections as per Smitty’s Canada ltd. Requirements.

Food and beverage revenues have been projected at $59.00 per occupied room night in Year 1, and

have been increased by inflation over the projection period. Fixed Food and Beverage expenses have

been projected to increase with inflation. Variable expenses, including staff payroll expense, are projected to

change with room sales. Expenses are estimated at $46.53 per occupied room night, in Year 1 or 78.9%

of revenue. The property is projected to maintain a similar expense to revenue ratio over the projection

period. Detailed projections of food and beverage departmental expenses are provided in Exhibit 7-3.

7.2.3 Telephone/Communications Department

Telephone revenues have been projected to be $1.00 per occupied room night in 2009 and inflate

throughout the projection period with departmental expense of 90.0%. See Exhibit 7-4.

7.2.4 Other Operated Departments

Other Operated Departments at the subject hotel will include revenues from guest laundry, in-room

movie/video and other miscellaneous items. Total revenues of other operations have been projected at

$2.50 per occupied room night in 2009 and inflated thereafter by 2.5% per annum. Other Operated

Departments are projected to incur departmental expenses totaling 70.0% of revenue. See Exhibit 7-4

7.2.5 Other Income Net

Other Income Net accounts for other sources of revenues including but not limited to foreign exchange,

interest income and commissions. These other miscellaneous sources of revenues are projected to

generate $1.50 per occupied room night in 2009. Therefore, in the first year of operation, the subject

hotel is projected to generate a total of $20,127 from Other Net Income.

7.2.6 Commercial Leases

Commercial leases accounts for approximately 8,000 gross sq.ft. of rentable commercial space, which

would include a spa (3,000 sq.ft.) as well as retail and office tenants, at 5,000 square feet. Based on

discussions with the client, current tenant lease rates, future improvements to the available space and

local real estate professionals, the subject hotel is projected to receive $72,000 per annum in leased

revenue. This projection assumes a moderate absorption velocity and a stabilized absorption of

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approximately 75.0% of available commercial space.

TABLE 7-1 COMMERCIAL LEASE SPACE

RENOVATED SUBJECT HOTEL Components Sq.Ft. Office/Retail Lease Space 5,000 Spa Lease Space 3,000 Gross Commerical Lease Rentable Square Footage 8,000 At 75.0% Absorption Net Rented Commercial Lease Square Footage 6,000 At Market Driven Rent of $12.00/Sq.Ft. (net) Total Commercial Lease Revenue $72,000.00

7.3 Undistributed Operating Expenses (Exhibit 7-5) 7.3.1 Administrative & General Administrative and General expenses are considered applicable to the entire property and are not

allocated to any operating department. Included in the subject hotel’s A&G expenses are payroll

expenses, credit card commissions and other costs including but not limited to bank charges,

subscriptions, audit fees, etc. Administrative and General expenses have been projected at $2,766 per

available room in the first year of operation. Relative to gross revenue, total A&G expenses at the subject

hotel are expected to stabilize at approximately 7.6% by the property’s third year of operation. 7.3.2 Marketing

Marketing expenses include costs incurred in connection with the creation and maintenance of the image

of the property and the development, promotion, and furthering of new business. Marketing expenses at

the subject hotel include departmental payroll, advertising, sales & promotions and other general

expenses. Marketing expenses have been projected at $1,120 per available room in the first year of

operation and are increased with inflation and occupied room nights thereafter. Relative to gross

revenue, total marketing expenses, at the subject hotel are expected to stabilize at approximately 3.3%.

7.3.3 Property Operation & Maintenance

Property Operation and Maintenance expenses include departmental payroll and all other expenses

directly related to operating and maintaining the physical structure of the property. Property Operation

and Maintenance expenses have been projected at $1,400 per available room in the first year of

operation and are increased with inflation and occupied room nights thereafter. Relative to gross

revenue, total POM expenses at the subject hotel are expected to stabilize at approximately 3.9%.

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7.3.4 Utilities

Utility costs at the subject hotel will include electricity, gas/fuel, water and waste. Accounting for all

expenses combined, the total utility cost at the subject hotel has been projected at $1,250 per available

room in 2009 and inflated by 2.5% per annum thereafter. Relative to gross revenue, total utility expenses

at the subject hotel are expected to stabilize at approximately 3.5% by the third and stabilized year of

operation.

7.4 Fixed Charges Fixed Charge projections for 2009 at the subject Quality Inn Hotel in downtown Kenora include the

following.

7.4.1 Realty Taxes

Realty Taxes have been projected to total $1,500 per room in 2009 and to inflate by 2.5% each year

thereafter.

7.4.2 Insurance Expense

Insurance Expense is estimated at $108 per room in 2009 and to inflate by 2.5% per annum for the

balance of the projection period.

7.4.3 Royalty Fees

Royalty Fees reflect charges payable to Choice Hotels for use of the Quality Inn Hotel brand, which have

been projected to total 7.5% of rooms’ revenue.

7.4.4 Management Fees and Asset Reserves

Management Fees are projected at 3.0% and Asset Reserves are projected at 4.0% of gross revenue

throughout the projection period.

7.5 Summary of Operating Projections Table 7-1 summarizes the projected revenues, expenses and net operating results for the 66-room Quality

Inn Hotel in downtown Kenora over its first five years of operation. From an occupancy perspective, the

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hotel is projected to stabilize in its third year of operation or in 2011. Net operating income is projected to

total about 19.9% of revenues once the operation is stabilized.

TABLE 7-1 SUMMARY OF OPERATING PROJECTIONS

QUALITY INN HOTEL, CITY OF KENORA 2009 2010 2011 2012 2013

Total Revenues $2,272,573 $2,437,971 $2,586,583 $2,649,499 $2,713,903 Total Expenses $1,855,988 $1,968,756 $2,071,362 $2,123,028 $2,175,972 Net Operating Income $416,585 $469,215 $515,221 $526,471 $537,931 Percentage of Revenue 18.3% 19.2% 19.9% 19.9% 19.8%Source: PKF Consulting

December December December December December2009 2010 2011 2012 2013

Rooms 66 66 66 66 66Available Rooms 24,090 24,090 24,090 24,090 24,090Occupied Rooms 13,418 14,117 14,671 14,671 14,671Occupancy Rate 55.7% 58.6% 60.9% 60.9% 60.9%Average Daily Rate $100.00 $102.50 $105.06 $107.69 $110.38

DEPARTMENTAL REVENUESRooms $1,341,813 59.0% $1,446,966 59.4% $1,541,315 59.6% $1,579,900 59.6% $1,619,364 59.7%Food and Beverage $791,670 34.8% $847,373 34.8% $897,533 34.7% $919,972 34.7% $942,971 34.7%Telephone $13,418 0.6% $14,470 0.6% $15,414 0.6% $15,799 0.6% $16,194 0.6%Other Operated Departments $33,545 1.5% $35,995 1.5% $38,198 1.5% $39,153 1.5% $40,132 1.5%Other Income Net $20,127 0.9% $21,167 0.9% $22,122 0.9% $22,675 0.9% $23,242 0.9%Commercial Leases $72,000 3.2% $72,000 3.0% $72,000 2.8% $72,000 2.7% $72,000 2.7%

Total Revenues $2,272,573 100.0% $2,437,971 100.0% $2,586,583 100.0% $2,649,499 100.0% $2,713,903 100.0%

DEPARTMENTAL EXPENSESRooms $398,801 29.7% $424,733 29.4% $448,167 29.1% $459,371 29.1% $470,856 29.1%Food and Beverage $624,376 78.9% $668,308 78.9% $707,869 78.9% $725,565 78.9% $743,705 78.9%Telephone $12,076 90.0% $12,958 89.6% $13,751 89.2% $14,095 89.2% $14,448 89.2%Other Operated Departments $23,482 70.0% $25,197 70.0% $26,739 70.0% $27,407 70.0% $28,092 70.0%

Total Departmental Expenses $1,058,735 46.6% $1,131,196 46.4% $1,196,526 46.3% $1,226,439 46.3% $1,257,100 46.3%GROSS PROFIT $1,213,838 53.4% $1,306,775 53.6% $1,390,057 53.7% $1,423,060 53.7% $1,456,803 53.7%

UNDISTRIBUTED EXPENSESAdministration & General $182,589 8.0% $189,102 7.8% $195,351 7.6% $200,235 7.6% $205,241 7.6%Marketing $73,920 3.3% $76,557 3.1% $79,087 3.1% $81,064 3.1% $83,091 3.1%Property Operation & Maintenance $92,400 4.1% $97,176 4.0% $101,560 3.9% $104,099 3.9% $106,701 3.9%Energy $82,500 3.6% $86,764 3.6% $90,678 3.5% $92,945 3.5% $95,269 3.5%

Total Undistributed Expenses $431,409 19.0% $449,598 18.4% $466,676 18.0% $478,343 18.1% $490,301 18.1%INCOME BEFORE FIXED CHARGES $782,429 34.4% $857,176 35.2% $923,381 35.7% $944,717 35.7% $966,502 35.6%

FIXED CHARGES Realty , Business Taxes $99,000 4.4% $101,475 4.2% $104,012 4.0% $106,612 4.0% $109,277 4.0%Insurance $7,128 0.3% $7,306 0.3% $7,489 0.3% $7,676 0.3% $7,868 0.3%Franchise Fee Hotel $100,636 4.4% $108,522 4.5% $115,599 4.5% $118,492 4.5% $121,452 4.5%Management Fee $68,177 3.0% $73,139 3.0% $77,597 3.0% $79,485 3.0% $81,417 3.0%Reserve for Asset Replacement $90,903 4.0% $97,519 4.0% $103,463 4.0% $105,980 4.0% $108,556 4.0%

Total Fixed Charges $365,844 16.1% $387,962 15.9% $408,160 15.8% $418,246 15.8% $428,571 15.8%INCOME BEFORE OTHER FIXED CHARGES $416,585 18.3% $469,215 19.2% $515,221 19.9% $526,471 19.9% $537,931 19.8%Source: PKF Consulting 10/20/2007 16:16

EXHIBIT 7-1KENRICIA HOTEL

KENORAPROJECTED OPERATING RESULTS


ROOMS DEPARTMENTAL EXPENSES (Year 1)YEAR ONE 2009

ROOMS 66OCCUPANCY 55.7%AVERAGE DAILY RATE $100.00# OF OCCUPIED ROOMS 13,418 ROOM REVENUE $1,341,813

ROOMS PER SHIFT 17.0 HOURLY RATE (ENTER IN FIRST YEAR DOLLARS) $11.00COST OF HOUSEKEEPERS - YEAR ONE $69,459

SHIFTS PER DAY 1.0 HOURLY RATE (ENTER IN FIRST YEAR DOLLARS) $11.00COST OF HOUSEKEEPERS - YEAR ONE $32,120

SHIFTS PER DAY 3.0 HOURLY RATE (ENTER IN FIRST YEAR DOLLARS) $12.00COST OF FRONT DESK STAFF $105,120

OTHER STAFFING 1.0 ANNUAL COST $25,000OTHER STAFFING COST $25,000

ROOMS DEPT LABOUR COST $231,699 ADD PAYROLL COSTS & BENEFITS 20.0% $46,340TOTAL ROOMS DEPT PAYROLL & BENEFITS $278,038

T.A. COMMISSIONS (% OF ROOM SALES) 1.5% $20,127 LAUNDRY/LINEN/GUEST SUPPLIES ($ORN) $7.50 $100,636TOTAL ROOMS OTHER EXPENSES $120,763

TOTAL ROOMS DEPARTMENT EXPENSES $398,801

TOTAL EXPENSES % of Revenue $ORNLABOUR 20.7% $20.72OTHER 9.0% $9.00TOTAL 29.7% $29.72Source: PKF Consulting

HOUSEKEEPING

LAUNDRY

FRONT DESK

OTHER STAFFING COST(Valet)

TOTAL ROOMS DEPT LABOUR COST

OTHER ROOMS DEPT EXPENSES

10/20/2007 16:18

SEATS SQ.FT SALES/SEAT $ORN REVENUES HOTEL RESTAURANTS/LOUNGES 130 $4,129 $40.00 $536,725 BANQUETING 250 2,500 F&B REVENUE $805 $15.00 $201,272 MEETING ROOM RENTALS $107 $2.00 $26,836 TOTAL BANQUETING REVENUE $912 $17.00 $228,108 ROOM SERVICE/OTHER $2.00 $26,836TOTAL FOOD & BEVERAGE REVENUE $59.00 $791,670

COSTS OF GOODS SOLD % $ORN EXPENSES HOTEL RESTAURANTS/LOUNGES 30.0% $12.00 $161,018 BANQUETING 20.0% $3.40 $45,622 ROOM SERVICE/OTHER 20.0% $0.40 $5,367TOTAL COSTS OF GOODS SOLD 26.8% $15.80 $212,006

PAYROLL & BENEFITS % $ORN EXPENSES MANAGEMENT 5.1% # of Mgt Staff 1 $2.98 $40,000 HOTEL RESTAURANTS/LOUNGES 20.0% $8.00 $107,345 BANQUETING 12.5% $2.13 $28,514 ROOM SERVICE/OTHER 12.5% $0.25 $3,355 KITCHEN 10.0% $5.90 $79,167 BENEFITS 20.0% $3.85 $51,676TOTAL PAYROLL & BENEFITS 39.2% $23.11 $310,056

GENERAL OPERATING EXPENSES 7.5% $4.43 $59,375FRANCHISE FEE RESTAURANT 8.0% $3.20 $42,938TOTAL OPERATING EXPENSES 78.9% $46.53 $624,376

NET DEPARTMENTAL PROFIT 21.1% $12.47 $167,294Source: PKF Consulting 10/20/2007 16:19


FOOD AND BEVERAGE DEPARTMENTAL PROJECTIONS

Telephone $ORN 2009Revenue $1.00 $13,418Expenses $0.90 $12,076Departmental Ratio 90.0%Other Operated Departments $ORN 2009Revenue $2.50 $33,545Expenses $1.75 $23,482Departmental Ratio 70.0%Other Income Net $ORN 2009Revenue $ORN $1.50 $20,127Expenses $ORN $0.00 $0

Commercial Leases $ORN 2009Revenue $ORN $5.37 $72,000


OTHER OPERATED DEPARTMENTS

ADMINISTRATIVE & GENERAL Year One 2009PAYROLL COSTS TOTAL PER ROOM $1,200 $79,200 BENEFITS 25.0% $19,800TOTAL PAYROLL COSTS $1,500 $99,000OTHER A&G EXPENSES CREDIT CARD COMMISSIONS (% OF GROSS REV) 1.5% $34,089 OTHER A&G COSTS ($ PER AVAIL ROOM) $750 $49,500TOTAL 'OTHER A&G' COSTS $1,266 $83,589TOTAL ADMINISTRATIVE & GENERAL $2,766 $182,589% OF GROSS REVENUE 8.0%

MARKETING Year One 2009PAYROLL COSTS TOTAL PER ROOM $350 $23,100 BENEFITS 20.0% $4,620TOTAL PAYROLL COSTS $27,720OTHER MARKETING EXPENSES ADVERTISING($PER AVAIL. RM.) $400 $26,400 SALES/PROMOTION ($ PER AVAIL. RM.) $200 $13,200 GENERAL ($ PER AVAIL. RM.) $100 $6,600TOTAL 'OTHER MARKETING COSTS $46,200TOTAL MARKETING $1,120 $73,920% OF GROSS REVENUE 3.3%

PROPERTY OPERATION & MAINTENANCE Year One 2009PAYROLL COSTS TOTAL PER ROOM $500 $33,000 BENEFITS 20.0% $6,600TOTAL PAYROLL COSTS $1,040 $39,600TOTAL 'OTHER MAINTENANCE COSTS $800 $52,800TOTAL PROPERTY OPERATION & MAINTENANCE $1,400 $92,400% OF GROSS REVENUE 4.1%

ENERGY Year One 2009TOTAL ENERGY $1,250 $82,500% OF GROSS REVENUE 3.6%

OTHER EXPENSES Year One 2009REALTY & BUSINESS TAXES($ PER AVAIL. RM.) $1,500 $99,000INSURANCE($ PER AVAIL. RM.) $108 $7,128FRANCHISE ROYALTY FEE(% OF ROOMS REV) 7.5% $100,636MANAGEMENT FEE(% OF GROSS REV) 3.0% $68,177RESERVE FOR ASSET REPLACEMENT (% OF GROSS REV) 4.0% $90,903Source: PKF Consulting

KENRICIA HOTELEXHIBIT 7- 5

UNDISTRIBUTED EXPENSES

10/23/2007 17:49

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8.0 INDICATION OF SUPPORTABLE VALUE We have also prepared an “Indication of Supportable Value off Cashflow” for the project utilizing the

discounted cashflow approach to valuation and applying market driven capitalization and discount rates.

As shown in Exhibit 8-1, the “Supportable Value off Cashflow” after applying a 11.0% terminal capitalization

rate and an 13% discount rate is $4,428,664 or $67,101 per room. This “Indication of Supportable Value”

should not be construed as “Market Value”.

ROOMS 66INFLATION 2.5%DISCOUNT RATE 13.0%CAPITALIZATION RATE 11.0%

Discount Net PresentYear Year Cash Flow Rate @ 13% Value

1 2009 $416,585 0.885 $368,6602 2010 $469,215 0.783 $367,4643 2011 $515,221 0.693 $357,0744 2012 $526,471 0.613 $322,8955 2013 $537,931 0.543 $291,967

Cashflow Value $2,465,423 Discounted $1,708,060Residual Value $5,012,538 Discounted $2,720,605

Estimate of Value $4,428,664 Per Room $67,101



ESTIMATE OF VALUE CALCULATION (BEFORE TAX AND INTEREST)

NET PRESENT VALUE ANALYSIS

10/20/2007 16:23

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