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A RESTRICTED USE APPRAISALREPORTOF

THE VALUE IN USE AS A GOING CONCERN OFTHE CROWN INNLOCATED AT321 W. 5TH AVENUEPINE BLUFF, ARKANSAS 71601-4213

AS OFDECEMBER 5, 2006

PREPARED FORMS. ERICA BERNSON / MS. KAROLINA BRZOZOWSKATHE NATIONAL REPUBLIC BANK OF CHICAGO1201 WEST HARRISON STREETCHICAGO, ILLINOIS 60607


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321 W. 5th AVENUEPINE BLUFF, ARKANSAS 71601


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SUBJECT REARUBJECT FRONT

LOBBY

TYPICAL STAIRWAY

LIVING QUARTERS

TYPICAL CORRIDOR


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TYPICAL SUITE TYPICAL SUITE BATHROOM

LAUNDRY ROOMEETING ROOM

PARKING LOTOOL


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WALNUT STREET NORTHSUBJECT ON RIGHT WALNUT STREET SOUTHSUBJECT ON LEFT

5TH AVENUE WESTSUBJECT ON RIGHT5TH AVENUE EASTSUBJECT ON LEFT

4TH AVENUE EASTSUBJECT ON RIGHT4TH AVENUE WESTSUBJECT ON LEFT


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December 8, 2006

Ms. Erica Bernson / Ms. Karolina BrzozowskaThe National Republic Bank of Chicago1201 West Harrison StreetChicago, Illinois 60607

RE: The Crown Inn321 W. 5th AvenuePine Bluff, Arkansas 71601-4213

Dear Mss. Bernson and Brzozowska:

Pursuant to your request, we have completed a Restricted Use Appraisal Report of the property locatedat the above address.

The subject property is briefly described as a 92(71 rentable) room, five story masonry constructed limitedservice hotel. The building was originally constructed in 1966. The subject contains 38,100 square feetThe subject is situated on a 58,415 square foot site, zoned B-5, Central Business District. Jurisdictionsgoverning the subject include the City of Pine Bluff, Jefferson County and the State of Arkansas.

The accompanying report describes the method of appraisal and contains data gathered in ourinvestigation.

This is a Restricted Use Summary Appraisal report which is intended to comply with the reportingrequirements set forth under Standards Rule 2-2 (c) of the Uniform Standards of Professional AppraisalPractice(USPAP) for a Restricted Use Appraisal Report. As such, it presents only a minimal presentationof information and is limited in its scope of discussion of the data, reasoning, and analysis that were usedin the appraisal process to develop the appraisers opinion of value.

(Continued)

One Pierce Place, Suite 225 E, Itasca, Illinois 60143 - (630) 792-1330 fax: (630) 792-1339


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Page Two

Supporting documentation concerning the data, reasoning and analysis is retained in our files.

In our opinion, the Value in Use as a Going Concern of the subject property, expressly subject to allAssumptions and Limiting Conditions contained in this report, as of December 5, 2006 is:

SIX HUNDRED FIFTEEN THOUSAND DOLLARS($615,000)This appraisal report is predicated upon the subject being free and clear of environmental contaminationand being in conformance with all applicable building, health and safety codes.

Respectfully submitted,

Peter MantiCertified General Real Estate Appraiser

License No. #153.0000760

Expiration Date 09/30/2007

Email: [email protected]

William DaddonoCertified General Real Estate Appraiser

License No. #153.0001117

Expiration Date 09/30/2007

Email: [email protected]


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TABLE OF CONTENTS

SCOPE OF WORK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1INTENDED USER/INTENDED USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2DEFINITION OF VALUE IN USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2GOING CONCERN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5LEGAL DESCRIPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

HISTORY OF THE SUBJECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6HOTEL AND MOTEL - LODGING INDUSTRY OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

FDIC STATE OF ARKANSAS ECONOMIC PROFILE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18REGIONAL MAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21NEIGHBORHOOD ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22REAL ESTATE TAX ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26SITE DESCRIPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27FLOOD ZONES DEFINED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29SIDWELL MAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30DESCRIPTION AND ANALYSIS OF THE IMPROVEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

APPROACHES TO VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

THE INCOME CAPITALIZATION APPROACH TO VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38HOSTOPERATING STATISTICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47HISTORICAL OPERATING STATEMENTS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

ADDENDA

LETTER OF ENGAGEMENTLEGAL DESCRIPTION

REALQUEST.COM PROPERTY DETAILS REPORTREAL ESTATE TAX INFORMATION

SUPPLIED FINANCIAL INFORMATIONQUALIFICATIONS OF THE APPRAISERSASSUMPTIONS AND LIMITING CONDITIONSCERTIFICATION


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SCOPE OF WORK

In preparing this appraisal report, we inspected the subject site, the exterior improvements and the

interior. The interior inspection consisted of the common areas and the interior of 5 rooms. We have

assumed that the balance of the rooms are in similar condition. The inspection was conducted on

December 5, 2006.

It is our understanding that the intended use of this the restricted use report is an aid in underwriting

loan classification and/or asset disposition. Per the agreement with you, we analyzed the Income Approach

to Value. The Income Approach was considered vital to an income producing property like the subject

property. Income properties are typically acquired or sold on the basis of their income producing

capabilities. Therefore, we concluded the primary approach to value is the Income Approach. The income

and expense information was derived from Federal Tax Returns that were provided to us by the client

We have assumed that they represent the actual financial position of the subject. This restricted use

appraisal report sets forth only our conclusions. Supporting documentation is retained in the workfile.


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INTENDED USER/INTENDED USE

For the sole purpose of assisting the client, The National Republic Bank of Chicago, in order aid in

underwriting, loan classification and/or asset disposition.

REAL ESTATE APPRAISED: Crown Inn321 W. 5th AvenuePine Bluff, Arkansas 71601-4213

INTEREST VALUED: Fee Simple

EFFECTIVE DATE OF VALUE: December 5, 2006

DATE OF INSPECTION: December 5, 2006

ESTIMATED EXPOSURE TIME: About six to twelve months

ESTIMATED MARKETING TIME: About six to twelve months

PURPOSE OF THE APPRAISAL

The purpose of this appraisal is to provide the appraiser's best estimate of the market value of the

subject Value in Use as a Going Concern as of the effective date.

DEFINITION OF VALUE IN USE

The Appraisal of Real Estate: 12th Edition, defines value in use as:

"Use value, is a concept based on the productivity of an economic good. Use value is the

value a specific property has for a specific use. Use value focuses on the contributory value

of the real estate to the enterprise of which it is a part, without regard to its highest and

best use or the monetary amount that might be realized upon its sale."

The Appraisal of Real Estate further elucidates: Use value may vary, depending on the management of

the property and external conditions such as changes in the business.


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DEFINITION OF VALUE IN USE- Continued

For example, a manufacturing plant designed around a particular assembly process may have one use

value before a major change in assembly technology and another use value afterward.

Real property may have a use value and a market value. An older factory that is still used by the origina

firm may have considerable use value to that firm, but only a nominal market value for another use.

Use-value appraisal assignments may be performed to value assets, including real property, for mergers

acquisitions, or security issues. This type of assignment is particularly common in appraising industria

real estate when the existing business enterprises include real property.

Court decisions and specific statutes may also create the need for use-value appraisals. For instance, many

states require agricultural-use appraisals of farmland for property tax purposes rather than value

estimates based on highest and best use.

When appraising a type of property that is not commonly exchanged or rented, it may be difficult to

determine whether an estimate of market value or use value is appropriate. Such properties, called

limited market properties, can cause special problems for appraisers. A limited market property is a

property that has relatively few buyers at a particular time. Large manufacturing plants, for example, are

limited market properties and typically appeal to relatively few potential purchasers.

Many limited-market properties include structures with unique physical designs, special construction

materials, or layouts that restrict their utility to the use for which they were originally built.


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DEFINITION OF VALUE IN USE - Continued

These properties usually have limited conversion potential and, consequently, are often called special

purpose of special design properties. Examples of such properties include houses of worship, museums

schools, public buildings and clubhouses.

Limited market properties may be appraised for market value based on their current use or the most likely

alternative use. Due to the relatively small market and the lengthy market exposure needed to sell such

properties, there may be little evidence to support a market value estimate based on their current use.

Nonetheless, if a market exists, the appraiser must search diligently for whatever evidence of market value

is available.

If a property's current use is so specialized that there is no demonstrable market for its, but the use is

viable and likely to continue, the appraiser may render an estimate of use value. Such an estimate should

not be confused with a market value estimate. If no market can be demonstrated, or if data are not

available, the appraiser cannot estimate a market value, and should state this in his or her report.

However, it is sometimes necessary to estimate market value in these situations for legal purposes.

In these cases, appraisers must comply with the legal requirement, relying on their judgement rather than

direct market evidence."


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GOING CONCERN

As defined by The Appraisal of Real Estate, 12th Edition:

"Going-concern value is the value created by a proven property operation; it is considered a

separate entity to be valued with an established business."

This value is distinct from the value of real estate only. Going-concern value includes an intangible

enhancement of the value of an operating business enterprise which is associated with the process of

assembling the land, building, labor, equipment, and marketing operation. This process leads to an

economically viable business that is expected to continue.

Going-concern appraisals are commonly conducted for hotels and motels, restaurants, bowling alleys

industrial enterprises, retail stores, and similar properties. In appraising these properties, the physica

real estate assets are integral parts of an ongoing business, so market values for the land and building are

difficult, if not impossible, to segregate from the total value of the business."

LEGAL DESCRIPTION

The Uniform Standards of Professional Appraisal Practice(USPAP) requires that the subject property be

identified by any credible means. We have included the subjects civic address, property record card and

a map of the subjects location herein. If there was a legal description available for our review, we wil

have placed a copy in the Addenda section of this report.


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HISTORY OF THE SUBJECT

According to Jefferson County records the ownership is currently vested in Aniketan Corporation. There

have been no recorded transfers of the subject property in the past three years. The property history was

provided by conversations with the owner's representatives, county tax records and county deed records

We have not performed a title search, and therefore, do not warrant the title history as presented herein

Consequently, any person or entity contemplating an interest in the property should rely solely upon either

a title search, or legal opinion.

HIGHEST AND BEST USE - AS VACANT

The subject site is zoned B-5, Central Business District. This zoning classification would permit the

construction of a variety of commercial uses, a hotel would be permitted under its current zoning. Based

upon the size, configuration, and topography of the site, it could be improved with many types of

commercial structures. Based on occupancy levels, it appears that it would be financially feasible to

develop the site with a commercial building. Since development of the site is physically possible, legally

permissible, and financially feasible, it follows that the maximally productive use for the subject site would

be to develop it with a commercial building.


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HIGHEST AND BEST USE - AS IMPROVED

The subject property is currently improved with a hotel and pursuant to the City of Pine Bluff Zoning

Department, its current improvement represents a legal use of the site. The current improvement exists

on the property so its existence is physically possible. The property should be able to retain its current use

with adequate maintenance for many years. The site has sufficient utility and there appears to be

sufficient demand. The maximally productive use of the subject site would be to maintain the current

improvements for the balance of its economic life.

CONCLUSION

The highest and best use of the subject would be to maintain the current improvements for the balance of

its economic life. The current improvements substantially enhance the total property value making the

demolition and redevelopment of the site for another use unfeasible.


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HOTEL AND MOTEL - LODGING INDUSTRY OVERVIEW

The hotel industry in the US consists of about 30,000 companies that operate 50,000 individual locations

with combined annual revenue of $90 billion. Large US companies include Marriott International

Starwood Hotels, and Hilton Hotels. The industry is moderately concentrated; the fifty largest companies

hold about forty-five percent of the market. The majority of hotels are affiliated with a chain. A typica

hotel has about $7 million of annual revenue and 100 employees.

COMPETITIVE LANDSCAPE

Demand is driven by business and tourist travel, which is closely linked to the state of the economy. The

profitability of individual companies depends on efficient operations, since many costs are fixed, and on

good marketing. Big companies have economies of scale in operations, can more easily raise capital and

have strong name recognition. Small companies can compete effectively through favorable locations and

specialty services. The industry requires large amounts of capital but operations are labor-intensive

average annual revenue per employee is $65,000.

PRODUCTS, OPERATIONS & TECHNOLOGY

Major sources of revenue are room fees, food, alcoholic drinks, and merchandise sales. Room fees account

for seventy percent of revenue, food for fifteen percent, and alcohol five percent. The basic operations o

hotels and motels consist of providing sleeping accommodations, housekeeping, maintenance, and a variety

of personal services. In addition, hotels may provide restaurants, meeting rooms, event hosting, business

services, and resort services like golf, tennis, swimming pools, fitness centers, etc. The operating expenses

of a hotel are related mainly to labor, putting a premium on efficient personnel management. Revenues

depend both on occupancy rates and the prices charged for rooms. A combined measure of productivity

is the revenue per available room (RevPAR - the occupancy rate multiplied by ADR).


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HOTEL AND MOTEL - LODGING INDUSTRY OVERVIEW-Continued

While most companies own and operate their own hotels, other arrangements are also common. Some

hotel companies get the majority of their revenue as management fees. Companies may franchise their

brand to other owners, manage hotels that belong to other owners, or lease hotels from other owners.

Large franchisers include Cendant and Choice Hotels. Some companies also manage time-share

properties.

Computer and communications systems are essential for most hotels to acquire guests via the large

reservation systems, provide guest services, and track reservations, guests, and room charges. Because

of the large proportion of business travelers and increasing use of the Internet by tourists, many hotels

have installed Internet access networks, including wireless networks. With greater cell phone use, hotels

may also install indoor cell antennas.

SALES & MARKETING

About sixty percent of customers are business travelers and forty percent are tourists. Instead of trying

to appeal to all travelers, hotels usually specialize in a particular market segment, which is typically

defined by price, service level, and location. General price categories are upscale (more than $80 per

night); mid-scale ($55 to $80); and economy (under $55). Service levels are full service, limited service, and

all-suites. Location categories include urban, suburban, airport, and resort, among others. The large

chains often have several brands that operate in different or overlapping segments.

Marketing takes various forms, depending on the type of hotel and customer. Loyalty programs reward

customers who use the same hotel chain on repeat trips. Some hotels draw a substantial amount o

business locally by hosting events and business meetings, and therefore advertise locally.


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Most hotels, however, attract customers from farther away and therefore can not effectively advertise

directly to customers (except for resort hotels that use magazine ads). Instead, hotels rely heavily on

networks of travel agents and reservation systems, including Internet systems like Travelocity and

Expedia. A primary attraction of the franchise chains (aside from name recognition) is participation in

their national reservation systems.

Franchiser marketing efforts include national TV and print advertising, and agreements or alliances with

travel agents and Internet reservation systems, airlines, corporations, credit card companies, business

groups, and travel groups (like AAA).

FINANCE & REGULATION

Revenue for many hotels is highly seasonal and depends on the health of both the local and national

economy. The industry is capital-intensive and therefore sensitive to interest rates and capita

availability.

Franchise agreements allow a local hotel operator to get name recognition, a reservation system, and

advice in effective hotel management. In exchange, the operator typically pays the hotel company an

initial franchise fee (usually from $250 to $600 per guest room), as well as annual revenue royalties (three

to six percent) and reservation and marketing fees (two to four percent of revenue). Some franchise

agreements also include royalties on food and beverage sales. Franchisees must also meet certain

operating and service standards.


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The operations of hotels and motels are largely regulation-free, except for local ordinances and state

franchise laws. Hotels that serve food must meet a variety of health regulations. Because of a lack o

workers who will accept the low pay offered for many hotel jobs, some hotels are tempted to employ

undocumented workers.

REGIONAL & INTERNATIONAL ISSUES

Many of the large hotel chains have international operations. Although business travel is scattered around

the county, tourist travel is more concentrated in Southern states that have year-round facilities, such as

Florida.

HUMAN RESOURCES

Most jobs in hotels require few special skills and pay is accordingly low. The average wage in 2004 was

just over $10 per hour, compared to $15 per hour for all US workers. Annual personnel turnover in the

hotel and restaurant industry is a high seventy percent, largely because of the low pay.

QUARTERLY INDUSTRY UPDATE

LODGING PRICES CONTINUE TO RISE

Lodging prices have soared in 2005, and when combined with rising gas prices, have made travel more

expensive. Lodging prices increased 2.6 percent in June, 2005, over a year ago, according to government

sources. Prices have rebounded in the last two years following the economic downturn of the first years

of the decade. Experts warn that leisure travelers will be more cost-conscious in the months ahead as gas

prices continue to eat up travel budgets.


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SMALL BUSINESS TRAVELERS SHUN HOTEL AMENITIES

Despite spending over twenty days on the road each year, small business travelers dont take advantage

of deluxe accommodations or the newest technologies offered at hotels, according to the American Small

Business Travelers Alliance. Almost eighty percent of travelers book standard rooms in hotels and are

reluctant to spend more on deluxe rooms or suites; only nineteen percent feel the investments in

technologies such as broadband are important or useful. Experts believe hotels must connect with smal

business owners and employees by understanding their unique travel needs if they hope to increase their

loyalty and usage.

INDUSTRY EMPLOYMENT, WAGES UP

The economic rebound finally hit the travel industry in the last two years, leading hotels to increase

employment and wages in an effort to keep up with demand.

Employment rose 1.8 percent in June, 2005, over a year ago, and was up 1.6 percent in 2004 following four

years of negative growth; wages rose 1.2 percent to $10.33 an hour in June.

BUSINESS REBOUND HURTING CUSTOMER SERVICE

The positive business growth and activity in the lodging industry over the last two years is damaging

customer service and loyalty, according to a new study. Guest satisfaction remained flat in June but

declined overall since the first half of 2004, according to Market Metrix Research. Guest loyalty has fallen

as more guests are having negative experiences with hotel staff and service. Experts believe the huge

increase in travel activity and lodging demand over the last two years is catching hotels and motels

without adequate staff to accommodate guests.


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MARKETING SPENDING UP AT US HOTELS

To reach their customer base more effectively, hotels changed marketing tactics and increased spending

in 2004. Marketing spending at US hotels jumped four percent in 2004, with the average hotel spending

almost $1,900 per available room on marketing, according to PKF Hospitality Research. The majority of

the increase comes from a jump in labor costs as hotels look to boost customer service and amenities to

keep guests loyal and happy. Hotels have also turned from traditional advertising vehicles such as

brochures and billboards and invested more in trade shows, loyalty programs, and guest amenities.

BUSINESS CHALLENGES

CRITICAL ISSUES

SENSITIVITY TO ECONOMIC CONDITIONS

With sixty percent of occupancy associated with business travel, hotels are very sensitive to the health of

the national economy. Since a large part of hotel costs are fixed or only partly variable, the profitability

of the industry can rapidly drop during periods of economic sluggishness. During the 2002 recession

airline traffic dropped sharply. In response, the average hotel room rate dropped two percent and revenue

per available room dropped two percent.

< Hurricane Katrina and its resulting spike in gasoline prices will cut into fourth quarterUS lodging demand growth and occupancy, but it will also work to boost occupancybecause of decreased room supply, analysts say.


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VULNERABILITY TO ENERGY PRICES

Hotels are very vulnerable to rising energy costs and unscheduled energy shortages. The costs associated

with operating a hotel are generally fixed and not overly dependent on occupancy rates. Energy is one o

the largest operating costs of hotels; a typical hotel spends ten percent of its energy budget for hot water

twenty to forty percent for heat, the remainder for electricity. These costs can be reduced by implementing

energy audits and conservation programs.

TRENDS AND OPPORTUNITIES

BUSINESS TRENDS

CHAIN CONSOLIDATION

With less capital available and lower hotel profits expected during the next few years, consolidation is

expected to slow but not stop. The marketing efficiencies available to large chains will continue to drive

acquisitions. The number of unaffiliated, independent hotels have decrease by more than thirty percent

in the past decade. National reservation systems have become an almost essential source of business for

most hotels, and a primary reason why hotels affiliate with national and regional franchises.

MORE CORPORATE SERVICES

Building on relationships with business travelers, hotels are providing a wider array of business services

Among the most popular are technical support for corporate meetings, catered corporate functions, food

service, business communications, printing and copying services, rewards programs for corporations, and

extended-stay facilities for corporate employees. Many hotels are offering customized meeting packages

to lure business travelers to their locations.


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Demand for T1 lines, wireless Internet, and high-speed Internet access in rooms is becoming the norm for

hotel meeting planners. LCD and data projectors are rapidly becoming the new standard for meetings

EXTENDED-STAY

Over the past eleven years, the small US hotel segment of extended-stay, popular for those staying in a

hotel five or more nights, has consistently outperformed other hotel segments in terms of hotel occupancy

rates. By 2006, there will be about 300,000 extended-stay rooms, representing six percent of all hote

rooms in the US. In the last decade, the number of extended-stay rooms has increased four hundred

percent; this success may be attributed to lower guest turnover and operating costs. These hotels offer

lower prices than traditional hotels, efficiency kitchens, and limited maid service.

ENVIRONMENTAL ISSUES

Business travelers are driving a growing environmental awareness, or green movement in hotels and

motels, impacting the frequency of laundry operations, the types of lighting in guest rooms, and packaging

of bathroom supplies. Conservation efforts, like washing linens only on customer request, reduce

environmental impact and hotel operations expenses.

DESIGNER HOTELS

Designer hotels have become the latest trend, as big hotels look for ways to be innovative. Many hotel

brands, even some of the more traditional luxury brands, are successfully launching a designer image. For

example, Starwood is aggressively marketing its designer hotels under the Wbrand and Four Seasons.


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SURCHARGES RISING AT UPSCALE HOTELS

In the last five years, hotels, especially in the full service segment, have been introducing or increasing

surcharges to increase revenues. Surcharges are determined by the individual hotel and not the brand

or franchiser. Some of the more popular are fees for cancellation, early departure, resort, amenities, loca

and toll-free phone calls, room service, and master folio fees for maintaining an organizations direct

billing, according to PricewaterhouseCoopers.

INDUSTRY OPPORTUNITIES

NEW SYSTEMS TARGET CUSTOMERS

Hotels are using new Customer Relationship Management (CRM) programs to retain business travelers

CRM helps hotels target and personalize marketing efforts and loyalty program strategies, better

leveraging marketing dollars. Lodging firms successfully use frequent guest programs to lure business

travelers loyalty, particularly in the luxury segment. One popular tactic, one-upmanship, allows

travelers to earn points to stay in expensive hotels.

LOYALTY PROGRAMS

Hotels are leveraging more customer data to create better customer loyalty incentives. Many hotel chains

are aggressively pushing loyalty programs onto business travelers. Loyalty programs give incentives to

travelers to repeat business, and provide a way for hotels to quickly accumulate information about their

target market. Many hotel chains are discovering that their databases are currently inadequate for

marketing purposes.


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SMART KEY CARDS

Hotels typically use electronic locks with magnetic stripes, but smart card systems will dominate

Although more expensive to buy than mag-stripe (10 cents a card), smart cards (up top $5 a card) increase

guest spending and loyalty by offering automatic services for preferences, like room temperature and radio

stations. Smart cards can also generate more revenue as they can be used for purchases, like dinner.

ADA COMPLIANCE

A major existing, yet untapped, customer base in the hospitality industry are travelers with disabilities

Many disabled travelers say they would travel more if hotels provided them with adequate

accommodations, according to Harris Interactive. Travelers with disabilities might practically double their

travel spending, generating $8.4 billion for lodging, if hotels met their needs. Some lodging issues include

the need for more rooms near amenities and appropriately trained staff members.

TIME-SHARE RESORTS

Rather than rent rooms for a night or two, some hotel companies are selling them. Time-share properties

function almost exactly like hotels, with housekeeping, services, and maintenance. Located in resort areas

these properties collect monthly operating fees from the rooms owners, who may have paid upward of

$50,000 for the right to occupy them for one week each month.


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Banks and thrifts based in Arkansas posted a recordquarterly net income of $139 million in second quarter2006, up from $127 million the previous quarter.

The states large institutions reported strong rates of loangrowth that helped increase net interest income by $38

million (10 percent) from the year-ago level.1 This

improvement in earnings was constrained by a $36 millionincrease (10.5 percent) in noninterest expenses duringthe same period.

Slightly more than half (54 percent) of all Arkansas-basedFDIC-insured institutions reported higher second quarterearnings this year than last. However, the seven largestinstitutions were responsible for the majority of the growthin earnings (see Chart 1). Institutions holding assets lessthan $1 billion (community institutions) reported modestgrowth in quarterly net income of almost 7 percent duringthe year ending June 30, 2006, compared to a 24 percentincrease among large institutions.

The majority of Arkansas-based FDIC-insured institutionscontinue to report deteriorating net interest margins.

The median net interest margin (NIM) for allFDIC-insured institutions headquartered in Arkansas fellto 3.93 percent, a decline of 9 basis points during the pastyear. Almost three of every four (70 percent) institutionsreported some NIM compression during the past year (seeChart 2).

NIM compression reported by the states banks and thriftscan be attributed to several factors: rising short-terminterest rates, a flat yield curve, an increase in deposit

costs, and a growing dependence on potentially volatile,interest-sensitive liabilities to fund loan growth.2 Noncorefunding typically is more sensitive to changes in marketinterest rates than core funding; as a result,Arkansas-based FDIC-insured institutions could

1Large institutions are defined as those holding $1 billion or more in total assets.

2Arkansas-based FDIC-insured institutions reported a median ratio of non-core funding to total

assets of 28 percent in second quarter 2006, ranking eighth nationally.

Fall 2006

Arkansas

FDIC-insured institutions headquartered in Arkansas reported a second consecutive quarter of record earnings.

FALL 20061FEDERALDEPOSITINSURANCECORPORATION

$-

$50

$100

$150

2Q-01 2Q-02 2Q-03 2Q-04 2Q-05 2Q-06

Source: FDIC (aggregate data; all insured institutions headquartered in Arkansas)

NetIncom

e,

inMillions

Chart 1: Large Bank Performance Driving RecordEarnings Among Arkansas-Based Institutions

Total Assets < $1Billion

Total Assets > $1 Billion

3.5

4.0

4.5

5.0

2Q-01 2Q-02 2Q-03 2Q-04 2Q-05 2Q-06

NetInterestMar

gin(percent)

Note: NIM = net interest margin

Source: FDIC (median figures; all insured institutions headquartered in Arkansas)

Total Assets < $1 Billion

Total Assets > $1 Billion

Chart 2: Large Banks and Community Banks Based

in Arkansas Are Reporting NIM Compression

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2Q-03 2Q-04 2Q-05 2Q-06

Chart 3: Economic Growth Is Slowing in Arkansas

Arkansas Employment Growth

Year-over-YearEm

ployment

Growth(perce

nt)

Source: Bureau of Labor Statistics (non-seasonally adjusted employment data)


27/155

experience further pressure on NIMs should rates continueto rise.

The Arkansas economic expansion is decelerating.

Employment in the state expanded 1.2 percent in secondquarter 2006 from a year ago, marking the ninth

consecutive quarter of growth that has exceeded 1 percent.Growth is being driven by growth in the government andprofessional and business services sectors.

The rate of job growth continues to trend down from themost recent peak in third quarter 2005 (see Chart 3). Thisdeceleration is attributed to mounting job losses in themanufacturing sector and slowing growth in the stateslargest employment sector of trade, transportation, andutilities.

Growth slows in the Arkansas housing market.

Similar to the nation, the Arkansas housing market is

beginning to experience a slowdown in home sales. TheArkansas Realtors Association reported that sales of newand existing homes in July were down approximately 10.6percent from one year ago, the fifth consecutive month

in which home sales were down.3 Much of the weaknessappears tied to poor sales of new homes, particularly intheFayetteville-Springdale-Rogersmetropolitanstatistical area.

Home-price appreciation in Arkansas is also beginningto slow. Year-over-year home prices were 8.0 percenthigher in second quarter 2006, down 81 basis points fromthe most recent peak in third quarter 2005 (see Chart 4).

FDIC-insured institutions headquartered in Arkansas areexperiencing slowing demand for residential real estateloans. Median year-over-year residential real estate growthfell to 1.8 percent during the year ending second quarter2006, down from 4.3 percent the previous year (see Chart5).

Housing affordability has remained relatively high inArkansas during recent years, because per capita incomegrowth has generally kept pace with the rate of home-priceappreciation. As a result, Arkansas households, unlikethose elsewhere in the nation, have largely avoided theuse of nontraditional mortgages, such as interest-only andnegative amortization products. In fact, Arkansas throughMay of this year ranked last in the nation with the ratioof nontraditional mortgages to total nonprime mortgages

originated and securitized of only 12 percent.4

3David Smith, States Home Sales Down in July, Arkansas Democrat-Gazette, September

6, 2006.4Based on data obtained from LoanPerformance.com.

Going forward, the pace of home sales in Arkansas coulddecline further if mortgage rates rise or job growthdeclines. Although, it does not appear likely that housingprices will drop significantly across Arkansas, somesubmarkets and price ranges could experience imbalancesthat might result in increased inventories of unsold homes,

longer selling times, and possible price declines. One areathat merits close monitoring is theFayetteville-Springdale-Rogers metropolitan statisticalarea, where more than 6,000 homes were on the market

in June.5 At the current sales pace, it would take ninemonths to exhaust that supply. In addition, an estimated19,300 residential lots are currently in the pipeline, or

enough new lots to supply the area for 8.9 years.6

0

2

4

6

8

10

12

14

16

2Q-01 2Q-02 2Q-03 2Q-04 2Q-05 2Q-06

Year-over-YearHome-Pr

ice

Appreciation(percent)

Source: Office of Federal Housing Enterprise Oversight

Arkansas

United States

Chart 4: Home-Price AppreciationIs Beginning to Cool In Arkansas

-3

0

3

6

2Q-01 2Q-02 2Q-03 2Q-04 2Q-05 2Q-06

Source: FDIC (median figures; all insured institutions headquartered in Arkansas)

Year-over-YearGrowth

Rate(percent)

Chart 5: Arkansas-Based InstitutionsReport Slowing Demand for Home Loans

Residential Real Estate

Loan Growth

5David Smith, State Home Sales Post June Falloff, Arkansas Democrat-Gazette, July 20,

2006.6Lana Flowers, Benton Countys Unsold Homes Double from Last Year, Northwest Arkansas

Morning News, July 28, 2006.


State Profile


28/155

Arkansas at a GlanceECONOMIC INDICATORS (Change from year ago, unless noted)

20042005Q2-05Q1-06Q2-06Employment Growth Rates1.1%1.8%1.8%1.3%1.2%Total Nonfarm (share of trailing four quarter employment in parentheses)

-1.2%-1.4%-1.5%-2.6%-2.0%Manufacturing (17%)1.1%5.0%4.3%3.6%2.6%Other (non-manufacturing) Goods-Producing (5%)1.9%2.3%2.4%1.9%1.8%Private Service-Producing (61%)0.9%2.2%2.3%2.6%1.9%Government (17%)

5.64.94.94.65.2Unemployment Rate (% of labor force)20042005Q2-05Q1-06Q2-06Other Indicators6.7%4.4%4.6%7.0%7.5%Personal Income4.8%14.8%12.2%2.7%-1.6%Single-Family Home Permits

18.7%-16.1%-67.4%-22.9%-38.3%Multifamily Building Permits13.2%23.6%15.3%16.5%17.9%Existing Home Sales5.8%8.0%8.1%8.5%8.0%Home Price Index8.6810.859.602.483.41Nonbusiness Bankruptcy Filings per 1000 people (quarterly annualized level)

BANKING TRENDS

20042005Q2-05Q1-06Q2-06General Information168161163159159Institutions (#)

40,68744,36442,28045,59346,697Total Assets (in millions)02122New Institutions (# < 3 years)

3233333636Subchapter S Institutions 20042005Q2-05Q1-06Q2-06Asset Quality

2.341.992.131.911.72Past-Due and Nonaccrual Loans / Total Loans (median %)1.501.421.461.391.35ALLL/Total Loans (median %)1.501.831.441.751.72ALLL/Noncurrent Loans (median multiple)0.200.150.100.020.06Net Loan Losses / Total Loans (median %)

20042005Q2-05Q1-06Q2-06Capital / Earnings9.809.939.9210.059.96Tier 1 Leverage (median %)1.091.011.101.001.05Return on Assets (median %)1.521.381.491.321.34Pretax Return on Assets (median %)4.144.044.083.953.97Net Interest Margin (median %)5.666.085.986.456.74Yield on Earning Assets (median %)1.572.061.982.492.77Cost of Funding Earning Assets (median %)0.160.140.120.090.06Provisions to Avg. Assets (median %)

0.720.760.780.750.74Noninterest Income to Avg. Assets (median %)2.812.942.832.872.88Overhead to Avg. Assets (median %)

20042005Q2-05Q1-06Q2-06Liquidity / Sensitivity60.661.762.261.563.3Loans to Assets (median %)25.027.527.627.628.0Noncore Funding to Assets (median %)12.312.612.313.012.8Long-term Assets to Assets (median %, call filers)

4565496574Brokered Deposits (number of institutions)5.23.94.74.04.9Brokered Deposits to Assets (median % for those above)

20042005Q2-05Q1-06Q2-06Loan Concentrations (median % of Tier 1 Capital)79.280.376.378.980.4Commercial and Industrial

170.6181.5175.9188.9202.6Commercial Real Estate40.547.146.957.667.1Construction & Development4.04.24.44.24.8Multifamily Residential Real Estate

117.1130.3120.3124.5125.9Nonresidential Real Estate154.0145.9146.9140.3139.0Residential Real Estate

55.451.252.750.149.7Consumer41.944.947.844.448.4Agriculture

BANKING PROFILE

InstitutionsAsset

DistributionDeposits

($ millions)Institutions in

MarketLargest Deposit Markets113 (71.1% )< $250 million26,94652Memphis, TN-MS-AR

39 (24.5% )$250 million to $1 billion9,79937Little Rock-North Little Rock, AR7 (4.4% )$1 billion to $10 billion6,36530Fayetteville-Springdale-Rogers, AR-MO

0 (0% )> $10 billion3,51423Fort Smith, AR-OK1,95715Jonesboro, AR


State Profile


29/155

320221

REGIONAL MAP


30/155320222

NEIGHBORHOOD ANALYSIS

The Dictionary of Real Estate Appraisal, Fourth Edition, defines neighborhood as:A group of complementary land uses; a congruous grouping of inhabitants, buildings, or

business enterprises.

BOUNDARIESThe subject is located in the downtown of Pine Bluff, Arkansas. For purposes of this report, the

neighborhood boundaries are best described as follows:

NORTH State Route 65EAST S. Main StreetSOUTH Business 65WEST S. Mulberry Street

The neighborhood is primarily influenced by the presence of the downtown area. A map highlighting

these boundaries follows:


31/155320223

NEIGHBORHOOD ANALYSIS-Continued

ACCESSPrimary access to the neighborhood is from 5th Avenue. 5th Avenue is a four-lane east/west thoroughfare

that is also downtown's Business 65 bypass. Road access to the subject property is very good.

TRANSPORTATIONThe area is serviced by the Pine Bluff Transit Authority, which provides public transportation via bus

routes.

EMPLOYMENT

PUBLIC SERVICESSchools, fire and police protection are all considered average for the neighborhood.

LAND USENeighborhood land uses primarily include a mix of commercial, industrial land and residential uses. Other

land use characteristics are summarized in the following outline format:


32/155320224


Predominant Age of Improvements 15 to 60 yearsPredominant Quality and Condition AverageApproximate Percent Developed 98%Median Home Value $51,800Approximate Percent Owner Occupied 66.03%Life Cycle Stage StabilityInfrastructure/Planning AveragePredominant Location of Undeveloped Land NonePrevailing Direction of Growth NoneSubject's Immediate Surrounding Land Use

North Industrial/CommercialSouth Residential/CommercialEast CommercialWest Residential/Commercial

DEMOGRAPHIC FACTORSThe subject is located in Jefferson County which falls within the Pine Bluff, AR Metropolitan Statistica

Area (MSA) as defined by the U.S. Census Bureau. The area is further delineated as Census Trac

#05069001000. The following data was extracted from Anysiteonline.com and provides insight into the

subject's county.

DEMOGRAPHIC DATACENSUS TRACT #05069001000

Population Total # of Households Average Household Income

2000 84,278 844 $41,440

2005 83,106 843 $50,046

2010 (projection) 82,384 844 $57,091


33/155320225


The 2005 Average Household Income for the subject's neighborhood was $31,195. This is 37.62% below

the MSAs Average Income of $50,046. Jefferson County's Average Income for 2005 was $50,046 which

is 37.67% higher than the subject's neighborhood.

TRENDSThe subjects neighborhood increased in population 0.01% from 2000 to 2005. From 2005 to 2010, the

increase is anticipated to be 0.04% with an annual average of 0.008%.

Overall, the preceding data clearly indicates that the subjects neighborhood is in the stabilization stage

of the life cycle. This trend is expected to continue in the future. Additionally, the area has continued to

be a viable area for service oriented commercial uses and industrial uses.

DEVELOPMENT ACTIVITYDuring the last five years, the subjects neighborhood has experienced a small amount of new development

activity and there remains a small amount of vacant land available for development as well as older

structures available for removal.

OUTLOOK AND CONCLUSIONSThe neighborhood is in the stability stage of its life cycle. Recent development activity has been evident

but limited. Given the history of the neighborhood and its proximity to major thoroughfares and the

interstate, it is our opinion that the values in the subjects neighborhood are expected to remain stable in

the near future.


34/155320226

REAL ESTATE TAX ANALYSIS

Real estate tax assessments are under the jurisdiction of Jefferson County for the subject. Real estate

taxes represent ad valorem taxes, meaning a tax applied in proportion to value. The real estate taxes for

an individual property may be determined by dividing the assessor's estimated market value to arrive at

the equalized value. The equalized value is multiplied by the current tax rate to determine the tax

liability.

The assessed value for the subject property is based on 20.0% of the assessor's estimated market value

For reference purposes, the subject property has been assigned three permanent index numbers (52290

55770 and 79130). The 2005 for 2006 tax liability is $5,077.82, and is indicated as having been paid.


35/155320227

SITE DESCRIPTION

CIVIC ADDRESS: 321 W. 5th AvenuePine Bluff, Arkansas 71601-4213

LAND AREA: 58,415 square feet

SOURCE OF LAND SIZE: Assessor records (Jefferson County)

CONFIGURATION: Functional

TOPOGRAPHY: Level

DRAINAGE: Adequate

ENVIRONMENTAL HAZARDS: Environmental evaluation is beyond our scope ofexpertise. A qualified engineer should be consultedon this matter. No obvious hazardous materials or

conditions were observed during our inspectionThe appraisers were not provided with anEnvironmental Site Assessment report; howeveran inspection of the subject property did notindicate any adverse environmental conditions.

GROUND STABILITY: We were not furnished a soil analysis to review butpredicate that the soils load bearing capacity is

sufficient to support the existing structure. We didnot observe any evidence to the contrary during ourinspection of the property.

STREETS, ACCESS, FRONTAGEStreet 5th Avenue Walnut Street 4th AvenueFrontage 212.0 feet 370.0 feet 145.0 feetPaving Asphalt Asphalt AsphaltCurbs/Gutters Yes Yes YesSidewalks Yes Yes NoLanes 4 Lanes 2 Lanes 2 LanesDirection of Traffic East/West North/South East/WestCondition Average Average AverageTraffic Control Stop Light Stop Light Stop SignAccess Average Average AverageVisibility Average Average Average


36/155320228

SITE DESCRIPTION-Continued

LEGALZONING DESIGNATION: B-5, Central Business District

CONFORMANCE: Based on our inspection, a review of site plans, anda discussion with the City of Pine Bluff zoningofficial, the current use of the site constitutes alegal use of the subject.

EASEMENTS, ENCUMBRANCES,ENCROACHMENTS, ETC.: There were no apparent adverse easements

encroachments, restrictions or the like, observed orreported to us. Typical utility easements are

assumed. This appraisal is subject to there beingno adverse conditions form any such factorsimpacting the subject.

There is a 16 foot wide asphalt alley that bisectsthe sites lots; it is indistinguishable from the parkingarea and is deemed not to affect value.

UTILITIES: The following are primary utility providers in thecommunity:

Water: MunicipalSewer: MunicipalElectricity: Pine Bluff EnergyNatural Gas: Centerpoint EnergyLocal Telephone: AT&T


37/155320229

FLOOD ZONES DEFINED

Flood zones are geographic areas that the Federal Emergency Management Agency (FEMA) has defined

according to varying levels of flood risk.

These zones are depicted on a communitys Flood Hazard Boundary Map (FIRM). Each zone reflects the

severity or type of flooding in the area.

The subject is located in a zone C, which is defined as:

Zones B, C and X are the flood insurance rate zones that correspond to areas outside the 100-year floodplains, areas of 100-year sheet flow flooding where average depths are less than 1

foot, areas of 100-year stream flooding where the contributing drainage area is less than 1

square mile, or areas protected from the 100-year flood by levees. No BFEs or depths are

shown within this zone.

Flood insurance is not required.


38/155


39/155320231

DESCRIPTION AND ANALYSIS OF THE IMPROVEMENTS

The following description is based on our inspection of the property, discussions with current ownershipand a review of Jefferson County records.

CIVIC ADDRESS: 321 W. 5th AvenuePine Bluff, Arkansas 71601-4213

CURRENT USAGE: Lodging/Motel

NUMBER OF BUILDINGS: One

HOTEL GROSS BUILDING AREA: 38,100 square feet

SOURCE OF SQUARE FEET INFORMATION: Jefferson County Records/ Appraiser measuremen

CONFIGURATION: Functional

STORIES: Five

YEAR BUILT: 1966

TYPE/QUALITY OF CONSTRUCTION: The subject is considered to be a Average Class Cconstruction Limited Service Hotel.

FOUNDATION: Poured, reinforced concrete footing

STRUCTURAL FRAME: Concrete block/Elevated slab

EXTERIOR WALLS/WINDOWS: A combination of masonry veneer andtextured stucco that has been paintedDoors and windows are glass encased in a metalsash.


40/155320232

DESCRIPTION AND ANALYSIS OF THE IMPROVEMENTS-Continued

INTERIOR DESCRIPTIONINTERIOR PARTITIONING: Concrete block

CEILING COVER: Acoustical material and tile

WALL COVER: Vinyl wall coverings and paint

FLOOR COVER: Primarily commercial grade carpet in the generaloffice, corridors and hotel rooms with some ceramictile in lobby area and bathrooms.

LIGHTING: A combination of suspended and recessedflorescent and incandescent lighting withincandescent lamps in guest rooms.

BATHROOM FIXTURES: Bathrooms include an enclosed bathtub withshowerhead and whirlpool, toilet, and vanity cabinetwith a lay-in sink; fixtures are vitreous china.

OTHER SPECIAL FEATURES: The subject has a lobby area that features awaiting area, washroom and there are areas forvending and ice machines throughout.

CONDITION: The interior condition of the improvementsis considered to be in fair overallcondition.

CONFIGURATION & ROOM COUNT: The ground floor contains a lobby, office and livingquarters on one side bisected by a drive-throughwith a meeting room and laundry opposite. The2nd and 3rd floors each contain 10 double and 14single bedrooms. The 4th floor has 10 double bed

rooms, 11 single bedrooms and 1 apartment(essentially 3 former rooms that have had interiordoorways and a kitchen installed. The 5th floorhas 21 rooms (unfurnished and stripped out) and1 apartment, 2 rentable apartments and 69 roomstotal.


41/155320233

INTERIOR DESCRIPTION-Continued

EQUIPMENT AND MECHANICAL SYSTEMSHVAC: HVAC in the guestrooms consist of through

the-wall package heating and cooling unitsHeating is provided to the common areas by

gas-fired boiler system, with an electronic centralair-conditioning in the ground floor utility roomHeating and cooling appears adequate.

ELECTRICAL: Electrical service is adequate to meet coderequirements.

ELEVATORS/STAIRWELLS: Elevators are located in the lobby and stairwells atthe end of each guest corridor.

FURNITURE, FIXTURES, &EQUIPMENT (F, F & E): Each room includes chairs, lamps, framed printsone or two beds, a table/desk and night stand

Additionally, each room includes a color televisionAdditional FF&E items include hospitality areafurniture and framed prints and some officefurniture.

CONDITION: The appraisal inspection was limited to avisual examination of the buildingcomponents. It is not possible to ascertain

the integrity of concealed structuralcomponents of the serviceability ofmechanical system; inspections of this typeare beyond the scope of the investigationrequired for this assignment. Mechanicasystems are reportedly in average condition.

The elevators are currently malfunctioning andunder contract for repair (which has beenindicated to be the hydraulic pump).


42/155320234


SITE IMPROVEMENTS

PARKINGNUMBER OF SPACES: 99

SURFACE TYPE/CONDITION: Asphalt, average condition

PARKING RATIO: 1.03 spaces per original guestroom, 1.39 currently

OTHER SITE IMPROVEMENTSAND LANDSCAPING: Average; other site improvements include an 18' x

36' in-ground pool enclosed by a masonry fenceconcrete sidewalks and curbs, concrete pads, lightpoles and an entrance sign. Decorative

landscaping is situated along the north side of 5th Avenue, as well as along the perimeter of thbuilding. Landscaping consists of shrubs, bushesand lawn covering.

DRAINAGE AND RETENTION: Adequate; storm sewer drainage systemsallow site water to be collected and drainedthrough surface drains located in the parking

lot areas.


43/155320235


IMPROVEMENT ANALYSISCONDITION: The overall condition of the improvements

is fair. The property appears to have beenminimally maintained.

DEFERRED MAINTENANCE: Our inspection did not reveal any significantdeferred maintenance, but corridor and stairwayrepainting and recovering are in order. Furniturefixtures and room floor coverings, while adequatewould have to be upgraded to render the subjectfully competitive.

HISTORY OF MAINTENANCE: The historical maintenance expenses reportedto us are consistent with the expenses ofcomparable properties as reported by the

HOST report.

FUNCTIONAL UTILITY: Our inspection did not reveal any significantitems of functional obsolescence.

ADA COMPLIANCE: The owner reported no restrooms to be incompliance with ADA.

ENVIRONMENTAL: We are neither considered experts norcompetent to assess environmental issues.Upon physical inspection of the site and

improvements, no indication "to theuntrained eye" of environmental hazard wasfound.


44/155

1Hotels and Motels: A Guide to Market Analysis, Investment Analysis and Valuation, Stephen Rushmore, Appraisal Institute,

Chicago, Illinois, 1992, page 208

320236

APPROACHES TO VALUE

The valuation of real estate is determined principally through the use of one of three basic approaches to

value: The Replacement Cost Approach, the Income Capitalization Approach and the Sales Comparison

Approach. From the indicated values resulting from these analyses and the weight accorded to each, an

opinion of value is reached, based upon expert judgment within the framework of the appraisal process

The Replacement Cost Approach tends to set an upper limit of value in cases of new properties, since it

is based upon the premise that a property cannot have a value higher than its replacement cost new. Most

properties require a deduction for accrued depreciation that has resulted from deterioration and functional

and external obsolescence. The problem with this approach is that, practically speaking, it often can be

difficult to estimate the amount by which a property has depreciated, particularly for older properties or

property suffering functional or external obsolescence. We find that knowledgeable hotel buyers base their

purchase decisions on economic factors such as projected net income and return on investment. Because

the Cost Approach does not reflect these income-related considerations, and requires a number of highly

subjective depreciation estimates, this approach is given minimal weight in the hotel valuation process

As noted in Hotels and Motels: A Guide to Analysis, Investment Analysis and Valuation, The Cost

Approach is seldom used to value existing hotels and motels. 1 At the client's request, we have not utilized

this approach.


45/155


46/155320238

THE INCOME CAPITALIZATION APPROACH TO VALUE

The Income Capitalization Approach is one of the three traditional approaches utilized by appraisers in

the valuation process. It consists of methods, techniques, and mathematical procedures to analyze an

income-producing propertys ability and capacity to generate net operating income (NOI), and convert the

benefits into an indication of present value. The approach is sometimes referred to as an investment

analysis and is based on the premise that value is the present worth of future benefits to be received from

the property.

The future benefits consist of the net operating income (NOI) from the property plus return of the

investment through a future sale of the property called reversion. These elements are converted into value

by one or more of the capitalization methods. These methods recognize that the present value of the NOI

and reversion, is also the present value of the property producing the income.

As discussed previously in The Valuation Process, the income approach to value is the result of the

analysis of projected gross income for the subject property, less expenses to determine the amount of net

operating income (NOI) for the project that can reasonably be expected. The NOI is then capitalized into

an indication of value.

The first step in the approach is determining the stabilized income that can be achieved by the property

under prudent management. This step directs itself to analyzing the propertys current rental schedule

plus locating and analyzing rent comparables from similar properties in the immediate area, to determine

the maximum gross income for the subject.


47/155320239

INCOME CAPITALIZATION APPROACH - Continued

Total operating expenses for the subject are then estimated from an analysis of the operating expense

history and checked by supporting data from the market. The expenses are deducted from the effective

gross income to arrive at the net operating income (NOI). This figure is converted into a value indication

through a process known as capitalization, including two methods, known as direct capitalization and yield

capitalization.

First in this process is the direct capitalization method. Direct capitalization involves the process o

applying an overall capitalization rate (reflective of the current market) to the NOI, thereby deriving an

indication of current market value. Next is yield capitalization through the use of a discounted cash flow

analysis (DCF). This is the process of estimating the NOI or cash flow to be achieved for a future time

period, typically ten years, plus estimating the future net sales price, or reversion. The cash flows and

reversion are then discounted at a rate required by investors in the market to achieve a market value

estimate. Finally, a reconciliation of these two methods determines the final estimated value for the

income capitalization approach.

RELATION TO APPRAISAL PRINCIPLES

The basic real estate appraisal principles involved in this approach are the principles of Anticipation and

Change, Supply and Demand, Substitution, Balance and Externalities. Other principles are also involved

but these are considered most pertinent and will be discussed briefly in the following paragraphs.

They are important to discuss because the appraiser must understand and consider these principles in

applying the income capitalization approach, in order to properly analyze the market information and

achieve an accurate and reliable value indication.


48/155320240


Anticipation and Change- The principle of anticipation is the fundamental basis of the income

capitalization approach. Value is created by the expectation or anticipation of benefits to be derived in

the future. Value may be defined as the present worth of all rights to these future benefits. All income

capitalization methods, techniques and procedures attempt to forecast future benefits and estimate their

present value.

The approach also focuses on how change affects the value of income producing properties. While

appraisers measure anticipation in future income as shown in the above paragraph, the appraiser must

also consider and measure the possibility of change in this anticipation of income. In order to achieve

sound value indications, investors expectations of changes in income, expenses, and probable increases

or decreases in property value must be carefully addressed and forecast through use of the sales

comparison approach.

Supply and Demand- The principle of supply and demand and the related concept of competition are

particularly relevant in forecasting future benefits and estimating rates of return in the income approach

Both income streams and rates of return are determined in the market. The rents charged by the owners

of the various types of properties usually do not vary greatly from the competing properties offering the

same quality service. If demand is great, high rents and yields will result. On the other hand, if demand

is limited, rents and returns may stabilize or decline. Therefore, in the income approach, appraisers must

consider the demand for a property and how this demand affects supply and all these other factors.


49/155320241


Substitution- The prices, rents, and yield rates of properties tend to be set by competition from equally

desirable substitute properties. The principle of substitution is market oriented and provides the basis

for crucial tests which an appraiser applies in estimating market value. Although anticipation of future

income is the basic premise of value in the income approach, the principle of substitution may be used to

test the validity of this income, and the reliability of the assumptions and data used in applying the

approach.

Balance- The principle of balance is especially significant in applying the income approach, since a good

balance between the types and locations of income producing properties creates and sustains value. An

imbalance in efficient land use may not achieve the highest and best use, and result in a decline in value

A reasonable balance among the four agents of production in a property creates and sustains maximum

profitability and value. If a property is over improved or under improved, its rate of profit may be

adversely affected. Thus, the appraiser must assess this balance in the subject and comparables in order

to properly estimate a reliable conclusion of value from the income approach.

Externalities- This principle again simply means that external factors have an effect on the value of all

types of properties. The influences can be negative or positive, continuously changing in many cases, and

important in the income approach because they can affect the value of the income produced from the

properties. Positive forces include quality transportation, retail facilities and attractive surroundings

Negative forces include high crime rates, pollution and unattractive surroundings. Appraisers must

properly analyze these factors to achieve a reliable estimate of net income for capitalization purposes in

the income approach.


50/155320242

APPLICABILITY AND LIMITATIONS

The Income Capitalization Approach is widely used in income producing properties and is the approach

generally receiving primary reliance by appraisers and investors in these types of properties. For income

producing properties that are bought and sold regularly and typically owned and operated by investors

the income approach provides a very reliable indication of market value.

One of the strengths of the income approach lies in the utilization of the capitalization techniques. First

the direct capitalization method uses stabilized revenues and expenses supported by the market, and an

overall capitalization rate weighted by market comparison. The indication by direct capitalization is thus

market sensitive.

Additionally, the yield capitalization method via the discounted cash flow technique (DCF) directly tracks

the rentals and expenses of existing property operations and potential income to be provided by rental of

any vacant space. Thus, in the DCF analysis, the data used is highly reflective of actual operating

results. This is a popular method most often used by, and reflective of, the requirements of investors in

the market. This is especially true with investment grade properties, or those of the size and quality to

be purchased by the larger regional, national investors and international investors. The key weakness of

the DCF is that is uses forecast data for future operations.


51/155320243


In summary, the income approach is most applicable and reliable with income producing properties

typically owned, operated and exchanged in the market by investors, and when adequate historical

operating income and expense data is available, supported by the market. When adequate operating

history and/or market data is insufficient, the applicability of the income approach may be limited

However, when the appraiser is diligent in the analysis, and when good income and expense data plus

return rates required by investors are available, the income approach is considered to be the best and most

reliable indication of value for income producing properties.

CONCLUSION

The above paragraphs have defined and explained the income capitalization approach and its relation to

value in terms of procedures, valuation principles, applicability and limitations. The following portion of

the appraisal will consider all these factors in developing a value indication for the income capitalization

approach.


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We were supplied with the following historical data:

We have stabilized the subject's occupancy at 33% and the ADR at $35.00.

The subjects average rates for Years 1 through 10 have been projected in the following manner utilizing

a 3.0% per year increase. To account for general inflation.

Year Oc cupancy % Change ADR % Change Room Revenue % Change REVPAR % Change

2004 26.52% 23.82$ 163,707$ 6.32$

2005 25.73% -2.98% 29.69$ 24.64% 197,971$ 20.93% 7.64$ 20.93%


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These average rate estimates will be inserted into our analysis.

Projec t Occ upa ncy - Subjec t Property

Year

Maximum Potential

Overall CompetitiveOccupancy

Subje c t's Estima ted

Market PenetrationFactor

Subjec t's Maximum

Potential AnnualOccupancy

Estimated AnnualOcc upancy (Rounded)

1 33.00% 100% 33.00% 33%

2 33.00% 100% 33.00% 33%

3 33.00% 100% 33.00% 33%

4 33.00% 100% 33.00% 33%

5 33.00% 100% 33.00% 33%

6 33.00% 100% 33.00% 33%

7 33.00% 100% 33.00% 33%

8 33.00% 100% 33.00% 33%

9 33.00% 100% 33.00% 33%10 33.00% 100% 33.00% 33%

Year Estimated*

1 $35.00

2 $36.00

3 $37.00

4 $38.00

5 $39.50

6 $40.50

7 $42.00

8 $43.00

9 $44.50

10 $45.50

* Round ed to the nearest $0.50

Estima ted Ave rage Rates - Subje ct Prop erty


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These average rate estimates have been prepared and will be inserted into our cash flow analysis.

Our estimates of annual occupancy and average daily room rate, as outlined in this section of the report

are predicated on the following assumptions:

1. The subject hotel will be professionally managed and maintained;

2. The subject hotel will be effectively promoted with a well-targeted marketing program throughoutthe analysis period;

3. A continued program of periodic replacement of furniture, fixtures and equipment will continuethroughout the analysis period.

REVIEW OF OPERATING HISTORY

The historical and projected income and expense statements presented on the following page are located

in the Addenda section of this report. Because the historical operating statements are not fully

representative of how the subject property can be expected to perform in the future, we have also reviewed

operating statements from comparable properties in developing the forecast of income and expense. As

will be later discussed in this section, we have adjusted some of the expenses in order to reflect ratios from

comparable statements and industry averages. We now present the following historical operating

performance for the years 2004 and 2005. The tax returns and profit and loss statements are located in

the Addenda section of this report.


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HISTORICAL OPERATING STATEMENTS SUMMARY

Number of Rooms 71 71

Number of Days Open 365 365

Rooms Availab le 25,915 25,915

Number of Oc c upied Rooms 6,873 6,668

Oc c upanc y 26.52% 25.73%

ADR 23.82$ 29.69$

REVPAR 6.32$ 7.64$

2004 2005

Revenue Sales

% of

Gross

Per Availa ble

Room

Per

Occupied

Room Sales

% of

Gross

Per

Available

Room

Per

Occupied

Room

Rooms 163,707$ 100.00% 6.32$ 23.82$ 197,971$ 100.00% 7.64$ 29.69$

Food -$ 0.00% -$ -$ -$ 0.00% -$ -$

Beverage -$ 0.00% -$ -$ -$ 0.00% -$ -$

Banquet Food and Beverage -$ 0.00% -$ -$ -$ 0.00% -$ -$

Telec ommunic ations -$ 0.00% -$ -$ -$ 0.00% -$ -$

Meeting Room Renta l -$ 0.00% -$ -$ -$ 0.00% -$ -$

Other Inc ome(Vending,Meeting Room,Ec t) -$ 0.00% -$ -$ -$ 0.00% -$ -$

Total Revenue 163,707$ 100.00% 6.32$ 23.82$ 197,971$ 100.00% 7.64$ 29.69$

Departmental Expenses

Rooms 11,832$ 7.23% 0.46$ 1.72$ 14,764$ 7.46% 0.57$ 2.21$

Food -$ 0.00% -$ -$ -$ 0.00% -$ -$

Beverage -$ 0.00% -$ -$ -$ 0.00% -$ -$

Telec ommunic ations 13,278$ 8.11% 0.51$ 1.93$ 13,462$ 6.80% 0.52$ 2.02$

Banquet Food and Beverage -$ 0.00% -$ -$ -$ 0.00% -$ -$

Meeting Room Renta l -$ 0.00% -$ -$ -$ 0.00% -$ -$

Other Opera ted Dep ts. & Renta ls -$ 0.00% -$ -$ -$ 0.00% -$ -$

Total Departmental Expenses 25,110$ 15.34% 0.97$ 3.65$ 28,226$ 14.26% 1.09$ 4.23$

Total Departmental Profit 138,597$ 84.66% 5.35$ 20.17$ 169,745$ 85.74% 6.55$ 25.46$

Undistributed Ope rating Expe nses

Administra tive & Genera l 2,075$ 1.27% 0.08$ 0.30$ 1,255$ 0.63% 0.05$ 0.19$

Marketing 1,025$ 0.63% 0.04$ 0.15$ 1,131$ 0.57% 0.04$ 0.17$

Utility Costs 22,762$ 13.90% 0.88$ 3.31$ 24,991$ 12.62% 0.96$ 3.75$

Property Operations & Maintenanc e 25,465$ 15.56% 0.98$ 3.71$ 30,508$ 15.41% 1.18$ 4.58$Total Undistributed Opera ting Exp enses 51,327$ 31.35% 1.98$ 7.47$ 57,885$ 29.24% 2.23$ 8.68$

Gross Operating Profit 87,270$ 53.31% 3.37$ 12.70$ 111,860$ 56.50% 4.32$ 16.78$

Other Expenses

Franc hise Fees -$ 0.00% -$ -$ -$ 0.00% -$ -$

Ground Lease -$ 0.00% -$ 0.00%

Management Fees -$ 0.00% -$ -$ -$ 0.00% -$ -$

Total Other Expenses -$ 0.00% -$ -$ -$ 0.00% -$ -$

Income Before Fixed Charges 87,270$ 53.31% 3.37$ 12.70$ 111,860$ 56.50% 4.32$ 16.78$

Fixed Charges

Real Estate and Sales Taxes 23,654$ 14.45% 0.91$ 3.44$ 16,995$ 8.58% 0.66$ 2.55$

Insuranc e 16,834$ 10.28% 0.65$ 2.45$ 16,409$ 8.29% 0.63$ 2.46$

Reserve For Capita l Rep lac ement 4,000$ 2.44% 0.15$ 0.58$ 4,000$ 2.02% 0.15$ 0.60$

Total Fixed Charges 44,488$ 27.18% 1.72$ 6.47$ 37,404$ 18.89% 1.44$ 5.61$

Amount Availab le For Debt Service 42,782$ 26.13% 1.65$ 6.22$ 74,456$ 37.61% 2.87$ 11.17$

Expense Ratio 73.87% 62.39%


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We also reviewed Smith Travel Research HOSTreport statistics for comparable full service properties, as

presented in the following table. Because the previous historical operating statement is not fully

representative of how the subject property can be expected to perform in the future, we have also reviewed

operating statements from comparable properties in developing the forecast of income and expenses. The

income and expense levels and the department and gross revenue ratios presented in these comparable

statements provide and indication of the levels that are appropriate for the subject property.


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HOSTOPERATING STATISTICS

Oc c upanc y (Of Sample) 68.40% 67.70% 66.10% 66.90%

Average Size of Property (Rooms) 109 113 114 62

Average Da ily Ra te 63.36$ 107.59$ 40.49$ 66.36$

Revenue % of Revenue % of Revenue % of Revenue % of RevenueRooms 97.01% 93.70% 97.90% 97.10%

Food 0.00% 0.00% 0.00% 0.00%

Beverage 0.00% 0.00% 0.00% 0.00%

Other Food & Beverage 0.00% 0.00% 0.00% 0.00%

Telec ommunic a tions 0.60% 0.90% 0.70% 0.60%

Other Op era ted Departments 1.10% 2.10% 0.90% 1.00%

Renta ls & Other Inc ome 1.10% 3.30% 0.50% 1.30%

Total Revenue 99.81% 100.00% 100.00% 100.00%

Departmental Expenses

Rooms 23.20% 29.60% 15.40% 24.10%

Food & Beverage 0.00% 0.00% 0.00% 0.00%

Telec ommunic a tions 188.10% 104.30% 255.70% 209.00%

Other Op era ted Depts. & Renta ls 2.60% 2.00% 0.30% 1.00%

Total Departmental Expenses 24.60% 30.60% 17.20% 25.50%

Total Departmental Profit 75.21% 69.40% 82.80% 74.50%

Undistributed Opera ting Expe nses

Administra tive & Genera l 10.60% 10.70% 16.00% 12.10%

Marketing 6.10% 5.60% 1.40% 4.40%

Utility Costs 5.40% 4.50% 6.80% 5.50%

Property Opera tions & Ma intena nc e 5.90% 6.40% 6.60% 6.60%

Total Undistributed Operating Exepenses 28.00% 27.20% 30.80% 28.60%

Gross Operating Profit 47.21% 42.20% 52.00% 45.90%

Other Exepenses

Franc hise Fees 4.40% 0.00% 0.00% 4.40%

Mana gement Fees 4.00% 4.00% 2.20% 4.00%

Total Other Exepenses 8.40% 4.00% 2.20% 8.40%

Inc ome Before Fixed Charges 38.81% 38.20% 49.80% 37.50%

Fixed Charges

Property Ta xes 5.00% 5.00% 6.00% 5.00%

Insura nc e 1.30% 1.30% 1.60% 1.30%

Reserve For Ca p ita l Rep lac ement 4.90% 4.90% 2.70% 4.90%

Total Fixed Charges 11.20% 11.20% 10.30% 11.20%

Amount Available For Debt Servic e 27.61% 27.00% 39.50% 26.30%

Expense Ratio 72.39% 73.00% 60.50% 73.70%

*Averages for franchise feees,managem ent fees,property taxes,insurance and reserve for

ca pita l rep lac eme nt,as repo rted by HOST, reflect only those limited service hote ls in the entire survey

which a ctually repo rted on these items, and this why these items are the same ac ross the entire tab le.

East South Central Independent Price Category-Budget Under 75 Rooms


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ROOM REVENUES

Rooms revenue is determined by two variables: occupancy and average rate. We previously estimated the

subject propertys occupancy and average rate in the Supply and Demand Analysis section of this report

ROOM EXPENSES

Rooms expense consists of items related to the sale and upkeep of guestrooms and public space. Salaries

wages, and employee benefits account for a substantial portion of this category. Although payroll varies

somewhat with occupancy (because managers can schedule maids, bell personnel and house cleaners to

work when demand requires), much of a hotels payroll is fixed. Front desk personnel, public area

cleaners, the housekeeper, and other supervisors must be maintained at all times. As a result, salaries

wages and employee benefits are only moderately sensitive to changes in occupancy.

Commissions represent remuneration to travel agents for booking rooms. Because these fees are based

on a percentage of rooms revenue, they are highly dependent on occupancy and rate. Reservations is a

similar expense that reflects the cost of a franchise reservation system that typically bills as a percentage

of rooms revenue. China, glassware, and linen; operating supplies; other operating expenses; and uniforms

are only slightly affected by changes in volume. This expense has been stabilized at 15.00% of room

revenue based on the historical and market data.

Projected Expense 44,893$

% 0f Room Revenue 15.00%

Per Available Room 1.73$

Per Occupied Room 5.25$

Forecast of Room Expense


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ADMINISTRATIVE AND GENERAL EXPENSES

The administrative and general expense includes accounting fees, attorneys fees, bad debts, bank charges

donations, hotel association dues, subscriptions, and other miscellaneous items. We have stabilized this

expense at 10.00% of gross revenues.

MARKETING EXPENSE

Marketing expense consists of all costs associated with advertising, sales, and promotion; these activities

are intended to attract and retain customers. Marketing can be used to create an image, develop customer

awareness, and stimulate patronage of a propertys various facilities. The marketing category is unique

in that all expense items, with the exception of fees and commissions, are totally controlled by

management. Most hotel operators establish an annual marketing budget that sets forth all planned

expenditures. If the budget is followed, total marketing expense can be projected accurately.

Marketing expenditures are unusual because although there is a lag period before results are realized, the

benefits are often extended over a long period.


% 0f Total Revenue 10.00%



Forecast Administration Expense


60/155320252


Depending on the type and scope of the advertising and promotion program implemented, the lag time can

be as short as a few weeks or as long as several years. However, the favorable results of an effective

marketing campaign tend to linger, and a property often enjoys the benefits of concentrated sales efforts

for many months. Marketing expense can be divided into five categories: sales, reservations, advertising

and merchandising, other marketing activities, and fees and commissions. Together, these categories

include all marketing efforts made by hotel personnel and outside parties. Marketing expenses are fixed

with the exception of reservations, fees and commissions, which are calculated as a percentage of gross

revenue. We have stabilized this expense at 5.00% of gross revenues.

UTILITY EXPENSE

The energy consumption of a lodging facility takes several forms, including water and space heating, air

conditioning, lighting, cooking fuel, and other miscellaneous power requirements. The most common

sources of hotel energy are electricity, natural gas, fuel oil and steam. This category also includes the cost

of water service.

Total energy cost depends on the source and quantity of fuel used. Electricity tends to be the most

expensive source, followed by oil and gas. Although all hotels consume a sizable amount of electricity

many properties supplement their energy requirements with less expensive sources, such as gas and oil

for heating and cooking.





Forecast Marketing Expense


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A large portion of a hotels energy consumption is relatively fixed. Restaurants, kitchens, public areas and

corridors must be continually lighted and climate-controlled, regardless of occupancy. The energy cost of

an additional occupied room (i.e., a few hours of light, television, heat or air conditioning) is minimal. The

following table presents our forecast of the subject propertys utility expense:

PROPERTY OPERATIONS AND MAINTENANCE

Property operations and maintenance expense is another expense category that is largely controlled by

management. Except for repairs that are necessary to keep the facility open and prevent damage (e.g.

plumbing, heating, and electrical items), most maintenance can be deferred for varying lengths of time

Maintenance is an accumulating expense. If management elects to postpone performing a required repair

they have not eliminated or saved the expenditure; they have only deferred payment until a later date

A lodging facility that operates with a lower-than-normal maintenance budget is likely to accumulate a

considerable amount of deferred maintenance.





Forecast Utility Expense


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The age of a lodging facility has a strong influence on the required level of maintenance. A new or

thoroughly renovated property is protected for several years by modern equipment and manufacturers

warrantees. However, as a hostelry grows older, maintenance expenses escalate. A well-organized

preventative maintenance system often helps delay deterioration, but most facilities face higher property

operations and maintenance costs each year, regardless of the occupancy trend. The quality of initia

construction can also have a direct impact on future maintenance requirements. The use of high-quality

building materials and construction methods generally reduces the need for maintenance expenditures