Saturday, September 8, 2012

Prepared for:

AIRPORTS COUNCIL INTERNATIONAL NORTH AMERICA

2012 Legal Affairs Fall Conference – Calgary

Presented by:

Beth Walters Director, Vancouver Office PKF Consulting Inc. [email protected]

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Part 1 - PKF Consulting Inc.

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Part 2 - Specific Issues that Every Airport Counsel Should Consider in Airport Ground Leases

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PKF International Limited (PKFI) administers the PKF network of legally independent member Accounting and Consulting firms.

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There are around 300 member firms and correspondents in 440 locations in 125 countries providing accounting and business advisory services.

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Today PKF Consulting Inc. is the Preeminent Advisory Firm Serving the Hospitality and Tourism Industry in Canada, the United States and Worldwide

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Sectors • Accommodation • Attractions & Entertainment • Tourism • Foodservice • Clubs

International Project History • Caribbean • South America • Europe Industry Involvement • Memberships and Affiliations • PKF Outlooks • Industry Conferences • Scholarships

Services • Market/Feasibility Studies • Estimates of Value/Appraisals • Acquisitions Due Diligence • Asset Strategies • Operational Reviews • Management Contract, Franchise Agreement Negotiations • Litigation Support • Asset Management/Owners Representation • Strategic Planning • Economic Impact • Industry Assessments • Scholarships 4

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Manages an extensive database of hotel property income statements and room revenue data Identify trends in hotel markets Find answers to hotel business questions Has the technical ability to conduct custom research and the analytical skills to interpret data

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Trends in the Hotel Industry  Developed from over 1,000 annual income statements from hotels across Canada. Information is presented by type, geographic location, rates, and size categories and provides detailed analyses of revenues, expenses and profits.  PKF has the technical ability to conduct custom research and the analytical skills to interpret data  In North America PKF analyzes approximately 7,000 hotel financial statements annually

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Trends in the Canadian Hotel Industry 

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Our Canadian database consists of over 220,000 rooms with almost 1,700 properties participating. Most extensive and up-to-date database in Canada. Plays an important role by allowing contributors to compare their monthly operating statistics with averages for each respective Province and region, to determine the status of the tourism industry and to keep abreast of the general trends in the lodging industry. PKF USA – Horizons database of over 5,000 hotels PKF North America top line databases reflects the performance of almost 7,000 hotels

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PKF Benchmarker  Designed as a reference and management tool for the internal use of companies  Provides a competitive review of hotel performance with respect to ADR, occupancy, RevPAR, as well as financial performance  Benchmarker services are provided to the industry throughout North America

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Hotel owners and developers Hotel management and franchise companies Tourism organizations Financial institutions, insurance companies, and investors Public agencies and governments Attorneys, architects, and land planners

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Example: CHART 1 HISTORIC HOTEL MARKET PERFORMANCE (ANNUAL) 80.0%

$240.00 $220.00 $200.00 $180.00 $160.00 $140.00 $120.00 $100.00 $80.00 $60.00

70.0% 60.0% 50.0% 40.0%

OCCUPANCY (%)

AVERAGE DAILY RATE ($)

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30.0% 2007

2008

2009

*2010

2011

YEARS Average Daily Rate

RevPar

Annual Occupancy

Source: PKF Consulting Inc. Canada

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Example: CHART 2 HOTEL MARKET SEGMENTATION - 2011

19%

25% 13%

42%

Corporate

Meeting/Conference

Leisure

Gov't/Other

Source: PKF Consulting Inc. Canada

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2010 Actual

2011 Actual

2012 Forecast

2013 Projection

Occupancy

60%

61%

62%

63%

ADR

$128

$127

$129

$131

RevPAR

$77

$78

$80

$83

Source: PKF Consulting Inc.

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PKF Canada – provides annual and specific purpose outlook reports PKF USA – Hotel Horizons publishes quarterly regional summaries of 5 year performance and projected revenue 13

Adjusted Net Operating Income Per Available Room ($000's)

$12

$10

11.1

$8

9.3

9.1

9.7

8.4

8.0 $6

$4

$2

$0 2008

2009

2010

2011

2012 (f)

2013 (p)

NOTE: Adjusted Net Operating Income is defined as income after property taxes, insurance, management fees, franchise fees, and capital reserves; but before rent, interest, income taxes, depreciation and amortization. Source: PKF Consulting Inc. 14

Part 2

Are Developer Assumptions Reasonable? 

Physical Plant ◦ Style, Positioning, Mix of Services, Size, Rating

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Future Market Positioning, Impact of New Supply, Future Demand Brand & Management Selection Reasonableness of Projected Operating Costs

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Test Out the Assumptions!  Every Amendment Tends to Change the Outcome of the Deal  Definition of the Product  Examples of Public Financing Subsidies Applicable to Subject Project  Assessing Development Costs  Financing Intentions ◦ Construction Loan, Permanent Loan, Mezzanine – Bridge Financing, Terms, Renewal ◦ Appraisal 

Side Agreements ◦ Parking, Retail, Other Services

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Return Analysis

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What formula allows for financial success for all parties? 1. Airport Owned Hotel ◦ Structure deal with developer for turn key project?

2. Ground Lease ◦ One or two tier? Flat or Escalating? ◦ Leases based on Mix of Other Services Harder to Track ◦ Building & Land Lease

3. Hotel Lease

Deal Based on % of Revenue – Need to Define!

◦ % of Room Revenue? - % of Gross Revenue? - % of NOI? ◦

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Lease Based on Bottom Line 

Less onerous in difficult times

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Share responsibility - Do airports want to take this role?

Lease Negotiations 

How much can a hotel afford to pay? Can the deal be Tightened or Sweetened to meet the Developer IRR goal?

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Confirmation of Responsibility for Capital/Upkeep for a Hotel Lease

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What is included? Adjusted NOI

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Subordinated Fees? Notional Management Fee or Accrual for Capital Replacement

4. Test out details in an Operating Model until Reasonable Balance is Reached! 18

PKF US Offices & Contact:

Other PKF International Offices:

Atlanta Boston Bozeman Chicago Dallas Houston Indianapolis Jacksonville Los Angeles New York Orlando Philadelphia Portland San Francisco Tampa Washington, DC

Austria

PKF Hotel Experts Michael Widmann 43 5120707 [email protected]

China

PKF Consulting Inc. Wingsee Auyeung 86 21 5292 8889 [email protected]

Germany

PKF Hotel Experts Ulf Templin 49 89 290 32 200 [email protected]

Middle East

PKF Hotel Experts PKF The Consulting House Sven Gade 971 4 391002 [email protected]

UK

PKF (UK) LLP Robert Barnard 44(0) 20 7065 0292 [email protected] www.pkf.co.uk

Thomas E Callahan, CoPresident & CEO-West PKF Consulting Inc. USA Suite 1650 425 California Street San Francisco, CA 94104 415 421 5378 [email protected]

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PKF Vancouver Office: Beth Walters, Director Suite 1120 800 West Pender Street Vancouver, BC V6C 2V6 604 689 3833 [email protected] PKF Toronto Office: Brian Stanford, Director David Larone, Director 30 St. Patrick Street 8th Floor Toronto, ON M5T 3A3 416 360 5000 [email protected] [email protected]

Thank you!

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