A 264 Key Hotel 9 Crosby Street New York, NY BBG, Inc. 112 Madison Avenue, 11 th Floor New York, NY 10016

Transcription

1 A P P R A I S A L R E P O R T A 264 Key Hotel 9 Crosby Street New York, NY R E Q U E S T E D B Y 9 Crosby LLC c/o Mr. Danny Avidan 261 Madison Avenue, 27th Floor New York, NY P R E P A R E D B Y BBG, Inc. 112 Madison Avenue, 11 th Floor New York, NY E F F E C T I V E D A T E O F V A L U E As Is December 31, 2017

2 March 19, Crosby LLC c/o Mr. Danny Avidan 261 Madison Avenue, 27th Floor New York, NY Re: Appraisal File No. A 264 Key Hotel 9 Crosby Street New York, NY Dear Mr. Avidan: In accordance with your request, the undersigned have prepared an appraisal report of the abovecaptioned property for the purpose of estimating the as is fair value of the subject property s fee simple interest. The subject is a 25-story, 264-key hotel completed in The subject contains a gross building area of 121,165 square feet. In addition to hotel rooms, the subject contains a 5,000 SF restaurant known as Nomo Kitchen, which is located in a greenhouse space, a lobby bar, nightclub located off the lobby, a meeting room on the second floor, and a meeting room/private dining room located in the lobby. The gallery and terrace offer 2,500 SF of meeting space. The subject is located on the west side of Lafayette Street through to the east side of Crosby Street between Howard and Grand Streets in the Soho neighborhood of New York County, City and State of New York. The subject is identified on the tax maps of New York County as Block 233 Lot 2. The site measures 14,470 square feet and is zoned M1-5B. In May 2016, new management arrived and made several improvements, including adding one key (a PH unit with private outdoor space that was completed during 2017), opening a nightclub, refurbishment of the lobby, restaurant, and common areas with new furnishings, art, decor, walls and flooring, added revenue in the form of a $25 amenity fee, and lowered expenses. However, in mid-2017, a new Revenue Manager was hired and the hotel saw a downward trend in ADR. After recognizing the mismanagement of the hotel, several management positions have been replaced recently including the Revenue Manager, the Marketing Manager as well as the General Manager. Ownership expects improved performance with the new management team in place. Further, new management plans to generate additional business from the hotel's association with Preferred Hotels & Resorts, which was not done by prior management.

3 Mr. Danny Avidan Page 2 March 19, 2018 Ownership is planning to begin a $15 million renovation to the F&B outlets, lobby and guest rooms. This will include the addition of two revenue generating F&B outlets, consisting of a casual bistro/lounge and a live music venue with a bar. Ownership is also planning to renovate the existing restaurant to have an open kitchen. Further, the lobby will be moved to the ground level and the guest rooms will be upgraded by replacing all soft goods, furniture, flooring and adding fresh, modern art work. Given the subject's zoning and character of the area and based on the performance of the existing hotel, the current use as a hotel, assuming the planned renovation takes place, is the highest and best use. This conclusion is based upon the physical characteristics of the subject property, the nature of the subject's location, the current zoning and general trends affecting the property. Our analyses, opinions and conclusions were developed, and this report has been prepared, in conformance with the Standards of Professional Practice and Code of Professional Ethics of the Appraisal Institute, the Uniform Standard of Professional Appraisal Practice (USPAP), and Title XI (with amendments) of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). After carefully considering all available information concerning the subject property and all apparent factors affecting value, we have concluded at the following value estimate for the subject property: Value Type Date Value As Is Fair Value December 31, 2017 $246,300,000 The opinions of value expressed herein are subject to the certification, assumptions and limiting conditions, and all other information contained in the following written appraisal report. Thank you for the opportunity to serve you. Sincerely, Joel Leitner, MAI, CRE Managing Director State Certified General Appraiser # Michelle Zell, MAI Senior Appraiser (212) mzell@lbbgres.com State Certified General Appraiser #

4 SUBJECT PROPERTY PHOTO 9 CROSBY STREET

5 SUMMARY OF SALIENT FACTS AND CONCLUSIONS Subject Property: Building Description: A 264 Key Hotel 9 Crosby Street New York, NY The subject is a 25-story, 264-key hotel completed in The subject contains a gross building area of 121,165 square feet. In addition to hotel rooms, the subject contains a 5,000 SF restaurant known as Nomo Kitchen, which is located in a greenhouse space, a lobby bar, nightclub located off the lobby, a meeting room on the second floor, and a meeting room/private dining room located in the lobby. The gallery and terrace offer 2,500 SF of meeting space. The subject is located on the west side of Lafayette Street through to the east side of Crosby Street between Howard and Grand Streets in the Soho neighborhood of New York County, City and State of New York. The subject is identified on the tax maps of New York County as Block 233 Lot 2. The site measures 14,470 square feet and is zoned M1-5B. In May 2016, new management arrived and made several improvements, including adding one key (a PH unit with private outdoor space that was completed during 2017), opening a nightclub, refurbishment of the lobby, restaurant, and common areas with new furnishings, art, decor, walls and flooring, added revenue in the form of a $25 amenity fee, and lowered expenses. However, in mid-2017, a new Revenue Manager was hired and the hotel saw a downward trend in ADR. After recognizing the mismanagement of the hotel, several management positions have been replaced recently including the Revenue Manager, the Marketing Manager as well as the General Manager. Ownership expects improved performance with the new management team in place. Further, new management plans to generate additional business from the hotel's association with Preferred Hotels & Resorts, which was not done by prior management. Ownership is planning to begin a $15 million renovation to the F&B outlets, lobby and guest rooms. This will include the addition of two revenue generating F&B outlets, consisting of a casual bistro/lounge and a live music venue with a bar. Ownership is also planning to renovate the existing restaurant to have an open kitchen. Further, the lobby will be moved to the ground level and the guest rooms will be upgraded by replacing all soft goods, furniture, flooring and adding fresh, modern art work.

6 Location: The subject is situated on the west side of Lafayette Street through to the east side of Crosby Street between Howard and Grand Streets in the Soho section of Manhattan, New York. Block/Lot: Block 233, Lot 2 Site Area: Zoning: Flood Hazard Status: Marketing Time: Exposure Time: Property Rights Appraised: 14,470± square feet M1-5B Zone X, an area of minimal flooding per Flood Insurance Rate Map # F. Between six months and one year. Between six months and one year. Fee simple Date of Inspection: January 26, 2018 Fair value Conclusions: Value Type Date Value As Is Fair Value December 31, 2017 $246,300,000

7 TABLE OF CONTENTS INTRODUCTION... 1 IDENTIFICATION OF THE SUBJECT PROPERTY...1 PURPOSE OF THE APPRAISAL...1 INTENDED USER...1 INTENDED USE...2 PROPERTY RIGHTS APPRAISED...2 DATES OF VALUE ESTIMATES...2 HISTORY OF THE SUBJECT PROPERTY...2 EXPOSURE TIME...3 ESTIMATE OF REASONABLE MARKETING TIME...3 DEFINITION OF FAIR VALUE...4 DEFINITION OF REAL ESTATE-RELATED FINANCIAL TRANSACTION...4 SCOPE OF WORK...4 CURRENT ECONOMIC CONDITIONS... 7 AREA ECONOMIC ANALYSIS - NEW YORK CITY... 9 CULTURE AND RECREATION EDUCATIONAL AND PROFESSIONAL FACILITIES TRANSPORTATION SUMMARY HOTEL MARKET ANALYSIS SUBJECT PROPERTY PRODUCTIVITY ANALYSIS PERFORMANCE THE SUBJECT S COMPETITIVE POSITION MAP OF COMPETITIVE SET NEIGHBORHOOD DESCRIPTION ZONING SUMMARY ASSESSED VALUE AND REAL ESTATE TAXES SUBJECT PROPERTY PHOTOS BUILDING DESCRIPTION HIGHEST AND BEST USE APPRAISAL VALUATION PROCESS INCOME CAPITALIZATION APPROACH RENOVATION COSTS SALES COMPARISON APPROACH

8 COMPARABLE SALES ADJUSTMENT GRID ADDENDA APPRAISER'S STATE CERTIFICATION SENSITIVITY ANALYSIS HISTORICAL VALUES PURCHASE PRICE ALLOCATION ASSUMPTIONS AND LIMITING CONDITIONS CERTIFICATION QUALIFICATIONS APPRAISER'S STATE CERTIFICATION

9 INTRODUCTION INTRODUCTION IDENTIFICATION OF THE SUBJECT PROPERTY The subject is a 25-story, 264-key hotel completed in The subject contains a gross building area of 121,165 square feet. In addition to hotel rooms, the subject contains a 5,000 SF restaurant known as Nomo Kitchen, which is located in a greenhouse space, a lobby bar, nightclub located off the lobby, a meeting room on the second floor, and a meeting room/private dining room located in the lobby. The gallery and terrace offer 2,500 SF of meeting space. The subject is located on the west side of Lafayette Street through to the east side of Crosby Street between Howard and Grand Streets in the Soho neighborhood of New York County, City and State of New York. The subject is identified on the tax maps of New York County as Block 233 Lot 2. The site measures 14,470 square feet and is zoned M1-5B. In May 2016, new management arrived and made several improvements, including adding one key (a PH unit with private outdoor space that was completed during 2017), opening a nightclub, refurbishment of the lobby, restaurant, and common areas with new furnishings, art, decor, walls and flooring, added revenue in the form of a $25 amenity fee, and lowered expenses. However, in mid-2017, a new Revenue Manager was hired and the hotel saw a downward trend in ADR. After recognizing the mismanagement of the hotel, several management positions have been replaced recently including the Revenue Manager, the Marketing Manager as well as the General Manager. Ownership expects improved performance with the new management team in place. Further, new management plans to generate additional business from the hotel's association with Preferred Hotels & Resorts, which was not done by prior management. Ownership is planning to begin a $15 million renovation to the F&B outlets, lobby and guest rooms. This will include the addition of two revenue generating F&B outlets, consisting of a casual bistro/lounge and a live music venue with a bar. Ownership is also planning to renovate the existing restaurant to have an open kitchen. Further, the lobby will be moved to the ground level and the guest rooms will be upgraded by replacing all soft goods, furniture, flooring and adding fresh, modern art work. PURPOSE OF THE APPRAISAL To estimate the as is fair value of the subject property s fee simple interest. INTENDED USER This Appraisal is to be used by ASRR CAPITAL LTD in its immediate and periodic reports, to be published in Tel Aviv Stock Exchange in We confirm that we have given our full consent to the inclusion of the Appraisal in its entirety within the ASRR CAPITAL LTD immediate and periodic reports to be published in the Tel Aviv Stock Exchange in 2018 or disclosed to the Israeli Security Authority and the Tel Aviv Stock Exchange. BBG, INC. 1

10 INTRODUCTION INTENDED USE The Intended Use is for asset management. PROPERTY RIGHTS APPRAISED The property rights appraised are the fee simple interest. A fee simple estate can be defined as: "an absolute fee; a fee without limitations to any particular class of heirs or restrictions, but subject to the limitations of eminent domain, escheat, police power, and taxation. An inheritable estate." DATES OF VALUE ESTIMATES The date of our as is valuation is December 31, Michelle Zell, MAI inspected the property on January 26, HISTORY OF THE SUBJECT PROPERTY The land was purchased in 2005 and the hotel was constructed between 2007 and It opened in February 2011 as part of Morgans Hotel Group. 9 Crosby LLC, an entity composed of Rotem Rosen and Alex Sapir, in partnership with Buddha Bar founder/owner Gerard Guez, acquired the subject from a financial institution that foreclosed on the property on March 6, 2015 for $200M (per the deed). The contract was signed in June When the current ownership took control of the hotel and its management, any existing clientele information was unavailable and no reservations or events were scheduled. As a result, the hotel suffered decreased occupancy and ADR throughout 2015 and early A new management team took over the property in May 2016 and made vast improvements to the asset. Significant changes include renovations to the lobby, restaurant, and common areas, adding a key (a PH unit) which was completed during 2017, reopening the nightclub in late 2017, and adding a $25 amenity fee which raised the revenue significantly, while cutting significant expenses. The new PH unit has luxurious high-end finishes and significant outdoor space, and also functions as a private event space and room. The addition of the amenity fee of $25, which has no associated expenses, has increased the hotel s Other Income by $1.3 million in 2017 to a total of $1.7 million. Ownership projects $2.1 million in Other Income in In May 2016, new management arrived and made several improvements, including adding one key (a PH unit with private outdoor space that was completed during 2017), opening a nightclub, refurbishment of the lobby, restaurant, and common areas with new furnishings, art, decor, walls and flooring, added revenue in the form of a $25 amenity fee, and lowered expenses. However, in mid-2017, a new Revenue Manager was hired and the hotel saw a downward trend in ADR. After recognizing the mismanagement of the hotel, several management positions have been replaced recently including the Revenue Manager, the Marketing Manager as well as the General Manager. Ownership expects improved performance with the new management team in place. Further, new management plans to generate additional business from the hotel's association with Preferred Hotels & Resorts, which was not done by prior management. BBG, INC. 2

11 INTRODUCTION Ownership is planning to begin a $15 million renovation to the F&B outlets, lobby and guest rooms. This will include the addition of two revenue generating F&B outlets, consisting of a casual bistro/lounge and a live music venue with a bar. Ownership is also planning to renovate the existing restaurant to have an open kitchen. Further, the lobby will be moved to the ground level and the guest rooms will be upgraded by replacing all soft goods, furniture, flooring and adding fresh, modern art work. EXPOSURE TIME Exposure time has been defined, as the estimated length of time the real property interest appraised would have been offered in the market prior to the hypothetical consummation of a sale at fair value on the effective date of appraisal; a retrospective estimate based on an analysis of past events assuming a competitive and open market. Exposure time is always presumed to precede the effective date of appraisal. It is our opinion that a normal exposure time for the subject property is between six months and one year. This conclusion is predicated on interviews with brokers and other real estate industry sources and on information obtained in the verification process. The value reported herein presumes such an exposure time. ESTIMATE OF REASONABLE MARKETING TIME Given the subject's present condition and location and the marketing times for similar properties, we estimate the marketing time for the subject to be between six months and one year. EXTRAORDINARY ASSUMPTIONS According to The Dictionary of Real Estate Appraisal (6th Edition), an Extraordinary Assumption is "An assumption, directly related to a specific assignment, as of the effective date of the assignment results, which, if found to be false, could alter the appraiser's opinions or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal, or economic characteristics of the subject property; or about conditions external to the property such as market conditions or trends; or about the integrity of data used in an analysis." This appraisal is subject to the following extraordinary assumptions: Ownership embarks on the renovation plan in 2018 which includes renovating the restaurant and lobby, installing 2 new F&B outlets, and renovating the rooms, at a total budget of $15,000,000. Any significant change to the plan, timing or budget might impact the values herein. HYPOTHETICAL CONDITIONS According to The Dictionary of Real Estate Appraisal (6th Edition), a Hypothetical Condition is 1. A condition that is presumed to be true when it is known to be false; 2. A condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis. Hypothetical conditions are contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or BBG, INC. 3

12 INTRODUCTION trends; or about the integrity of data used in an analysis." In the development of our opinions of value, we have applied the following Hypothetical Condition: None. DEFINITION OF FAIR VALUE IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price). That definition of fair value emphasis that fair value is a market-based measurement, not an entity-specific measurement. When measuring fair value, an entity uses the assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk. As a result, an entity s intention to hold an asset or to settle or otherwise fulfil a liability is not relevant when measuring fair value. The IFRS explains that a fair value measurement requires an entity to determine the following: (a) the particular asset or liability being measured; (b) for a non-financial asset, the highest and best use of the asset and whether the asset is used in combination with other assets or on a stand-alone basis; (c) the market in which an orderly transaction would take place for the asset or liability; and (d) the appropriate valuation technique(s) to use when measuring fair value. The valuation technique(s) used should maximise the use of relevant observable inputs and minimize unobservable inputs. Those inputs should be consistent with the inputs a market participant would use when pricing the asset or liability. DEFINITION OF REAL ESTATE-RELATED FINANCIAL TRANSACTION 1 Any transaction involving: The sale, lease, purchase, investment in or exchange of real property, including interests in property, or the financing thereof; or The refinancing of real property or interests in real property; or The use of real property or interests in property as security for a loan or investment, including mortgage-backed securities. SCOPE OF WORK BBG, Inc. has been retained by 9 Crosby LLC to prepare a market valuation of the subject property. Within the course of this assignment, the appraisers have: Researched and investigated the subject's location in terms of its economic activity, development patterns, and future trends and related their impact on the subject s hotel. Determined the Highest and Best Use of the subject property based on an analysis of all relevant factors U.S.C. 3350(5) (FIRREA section 1121(5) BBG, INC. 4

13 INTRODUCTION Analyzed the subject s historical operating statements. Researched the comparable hotel market to determine an ADR and occupancy rate for the subject s proposed hotel. Analyzed comparable hotel expenses to project a cash flow for the hotel portion. Researched comparable hotel sales to determine a value via the Sales Comparison Approach. Reconciled the values to conclude to an as is fair value as of December 31, BBG, INC. 5

14 AREA ANALYSIS AREA MAP BBG, INC. 6

15 AREA ANALYSIS CURRENT ECONOMIC CONDITIONS 2 At a time when one might have expected the New York City economy to stop growing due to a shortage of space and workers, it appears to be growing faster. According to household-based data from the U.S. Bureau of Labor Statistics (BLS), which record the employment status of those living in the city, including the self-employed and those who commute out, the number of employed residents of New York City increased by 101,760 (2.6%) in the year to August 2017, but the local labor force increased by 88,730 (2.1%). With crowding increasing and housing costs rising, the labor force had increased by just 18,730 over 24 months from August 2014 to August 2016, but it appears workers are somehow moving to New York City in large numbers once again. From August 2007 to August 2017, New York City added 371,800 workers and 360,250 employed residents, gains of 9.6% and 9.8%, respectively. Meanwhile, Moody s Economy.com reports the city s total population increased by just 37,140 (0.4%) in the year to the third quarter of 2017, and the number of households increased by 19,810 (0.6%). Household average income was up 2.1% from a year earlier. Recently released American Community Survey (ACS) data from the U.S. Census Bureau provide a longer-term perspective on the economic characteristics of NYC residents. From 2006 to 2016, according to this source, the number of city residents age 16 or more increased by 435,320 (6.7%); but the number in the civilian labor force increased by 387,400 (9.6%), and the number employed rose by 401,440 (10.8%). The number of workers commuting by public transportation increased by 318,245 (16.3%), with 40,135 (11.3%) more walking to work and 31,860 (22.4%) more working at home but just 27,105 (3.2%) more were driving alone, offset by fewer people carpooling. The additional jobs are at the high and low end, with an increase of 322,630 (23.8%) in city residents working in management, business, science, and arts occupations and 122,910 (15.0%) working in service occupations. The median work earnings of all workers increased 0.2% after adjustment for inflation, to $36,871, but the median work earnings of males working full-time year-round increased 3.9% to $51,487, and the median work earnings of females working full-time year-round increased 10.1%, to $50,234. The mean NYC household work earnings rose to $101,177 in total in 2016, up 10.7% from a decade earlier after adjustment for inflation. This includes roommates, as high rents cause people to squeeze into housing units. Median household income for all households rose 6.4% to $58,856, and the city s poverty rate fell from 19.2% to 18.9%. Current Employment Statistics (CES) data from the BLS on the number of people holding wage and salary jobs in New York City (including those who commute in) show an increase of 90,800 (2.1%) in the year to August 2017, including a gain of 90,300 (2.4%) for the private sector, about the same as in the previous 12 months. CES data by sector for the office-based segments were mixed in the year to August The Finance and Insurance sector added 2,600 jobs (0.8%) in the year to August, including an increase of 1,500 (0.8%) in the high-paid Securities, Commodity Contracts, and Other Financial Investments industry. The Professional and Business Services sector added 25,100 jobs (3.4%), but a key industry in this sector in the city s recent boom, Computer Systems Design and Related Services, added just 100 jobs (0.1%). The Information sector lost 5,600 jobs (2.8%), including a decrease of 1,700 (3.1%) in the Motion Picture and 2 Reis November 2017 BBG, INC. 7

16 AREA ANALYSIS Sound Recording industry. The city s sizable and largely government-funded Health Care and Social Assistance sector added 24,700 jobs (3.6%) in the year to August 2017, due to soaring employment in the Home Health Care industry (up 14,700 or 11.0%). The Colleges and Universities industry added 5,900 jobs (4.5%). The Arts, Entertainment, and Recreation sector was up 3,400 jobs (4.0%). The local economy is also growing as the sectors cited above bring more money into the city. The Accommodation and Food Services sector added 13,000 jobs (3.7%), with Construction and related sectors up 5,200 (3.5%), but Retail Trade lost 3,200 jobs (0.9%) despite a gain of 1,000 (1.3%) in the Food and Beverage Store industry. Outlook Moody s Economy.com predicts population growth will remain limited to about 40,000 (0.5%) per year going forward, but the number of households is forecast to rise faster as moderating housing costs allow more people to move out on their own. The number of households is anticipated to rise 146,600 over five years. But employment growth is projected to slow to just 40,420 (0.9%) in 2018 and stall out entirely in BBG, INC. 8

17 AREA ANALYSIS AREA ECONOMIC ANALYSIS - NEW YORK CITY The New York Metropolitan Statistical Area (MSA) consists of the City of New York's five counties and the counties of Westchester and Rockland. The subject property is located in the City of New York, New York County (Manhattan). New York City's five boroughs cover 309 square miles. New York City is the nation s center for finance, the arts, media, fashion, and telecommunications. The borough of Manhattan, or New York County, forms the central political, financial, and cultural core of the City and is the economic growth engine for the Greater New York region. Seventy-five percent of the City s employees work in Manhattan, which is home to the Midtown and Downtown business districts. The City s other boroughs are the Bronx, Brooklyn, Queens, and Staten Island (otherwise known as Bronx, Kings, Queens, and Richmond Counties). They also have strong, albeit significantly smaller, economies than Manhattan. Brooklyn and Queens have the largest economies behind Manhattan. POPULATION Est 2022 Overall 7,071,639 7,322,564 8,008,278 8,175,133 8,645,259 8,944,519 % Change 3.55% 9.36% 2.08% 5.75% 3.46% Bronx 1,168,972 1,203,789 1,332,648 1,385,108 1,475,915 1,534,568 % Change 2.98% 10.70% 3.94% 6.56% 3.97% Brooklyn 2,230,936 2,300,664 2,465,323 2,504,700 2,668,187 2,767,532 % Change 3.13% 7.16% 1.60% 6.53% 3.72% Manhattan 1,428,285 1,487,536 1,537,201 1,585,873 1,656,943 1,703,058 % Change 4.15% 3.34% 3.17% 4.48% 2.78% Queens 1,891,325 1,951,598 2,229,379 2,230,722 2,367,950 2,455,385 % Change 3.19% 14.23% 0.06% 6.15% 3.69% Staten Island 352, , , , , ,976 % Change 7.63% 17.09% 5.63% 1.61% 1.62% Source: , US Census; 2017 The Nielsen Company New York City is home to more than 8 million people in over 3 million households. Brooklyn is the most populous borough with 31% of the City's population. Manhattan's 1.66 million residents, at 49,100 residents per square mile, make it one the most densely populated residential area in the nation. While the 1980's and 1990's saw the continuing trend of migration of city residents to neighboring suburbs, due primarily to high housing costs and density of living, the total population was bolstered by the large number of immigrants arriving in the city each year. The 5.75% increase in the City s census population from 2010 to 2017 can be attributed to the decrease in unemployment rate as well as increasing appeal of the City. In addition, more accurate Census counts may have benefited New York during this Census period. The City s population now totals 42% of the state s total population. Except for Staten Island, each of New York City s five boroughs has a population greater than 1,400,000. The city s population is expected to continue growth over the next 5 years. BBG, INC. 9

18 AREA ANALYSIS MANHATTAN POPULATION TRENDS, Description 2010 Census 2017 Estimate % Change Projection % Change Population 1,585,873 1,656, % 1,703, % Households 763, , % 826, % Family Households 308, , % 333, % Source: The Nielsen Company Claritas estimates the 2017 population for Manhattan at 1,656,943 and projects a small increase by The number of households in Manhattan is also projected to increase 3.08% between 2017 and 2022 from 802,140 to 826,825. These statistics are reflective of stable, mature market. NEW YORK CITY ECONOMY AND EMPLOYMENT New York City has a thriving diversified economy which explains its economic resiliency and ability to recover from economic downturns at a faster than national average rate. As the single largest regional urban economy in the country, New York City is the leading job hub for finance, communication, real estate and hospitality industries in the U.S. New York is also a major manufacturing center and shipping port and has a thriving technological sector. The city s comprehensive economic diversification strategy has proven to be effective. The traditional core sectors of the city s economy finance and real estate remain the foundation of the city s economic strength. The importance of financial service industry to the overall wellbeing of the city cannot be overstated. At 20% of the city s economic output, the contribution of financial services is at least twice that of the next top-grossing industry. Although the industry represents only 9% of the city s private sector jobs, it accounts for nearly a third of the private sector payroll. It also pays at least $8 billion, or 18%, of the city s annual tax revenues. The financial services industry generates even greater economic impact due to what is known as the economic multiplier effect, which is a standard economic measure of the additional indirect and induced jobs, wages and demand in non-financial services industries resulting from an increase or decrease in financial services industry employment. Real estate is a significant component of the New York City economy. A booming real estate market has also brought tremendous growth to the value of construction projects across the city. One notable example is the entirely new neighborhood of Hudson Yards, the single largest private real estate development in the history of the United States. When complete, the new west side neighborhood will provide over 25 million square feet of new office, retail, and residential space. Significant public investment has already gone into the recently-opened 7 subway extension and Hudson Park, reflecting a historic step towards delivering critical infrastructure and beautiful green open space to the West Side. The City also demonstrated its commitment to working with the private sector to bring online 60 million square feet of new commercial office space citywide. Much of that will come out of the East Midtown rezoning, which will bring state-of-the-art, high rise commercial buildings to the 73-block area around Grand Central Station. The hospitality industry which is sensitive to economic fluctuations, lost relatively few jobs during the last recession. This was due in part to technological advances in room pricing, which BBG, INC. 10

19 AREA ANALYSIS allowed hoteliers to quickly adjust room rates in order to reduce the inventory of unused rooms and maximize revenues. The post-recession return of the business traveler, in combination with a successful marketing campaign by the City, has meant that local growth in this sector outpaced the nation as a whole. Between 2009 and 2013, hotel jobs in New York City rose by more than 17%, about three times the comparable U.S. rate. Since 2010, the number of Manhattan hotel rooms has shot up by an unprecedented 26 percent to just shy of 91,500 rooms, hospitality analytics firm STR reported. That supply came along with a record 58.3 million visitors in the city in 2015, a number projected as 59.7 million in Multiple hotels have been developed recently. Hotel brands such as Marriott s Courtyard and Hilton s Hampton Inn, as well as smaller chains, have invested aggressively to develop their chains on side streets in neighborhoods such as Chelsea and the Garment District. Newcomers in the last year include the Lam Group s 128- key Aloft in the Financial District, Palmetto Hospitality s Hampton Inn just south of Times Square, and Raber Enterprises 150-room Even Hotel on West 35th Street. The segment, where room rates range from about $200 to $300 a night, has seen the largest increase in supply of any of the city s hotel sectors in the past three years, while simultaneously operating at near-record occupancies. Employment As of October 2017, Manhattan s unemployment rate was 4.4% slightly above 3.9% of the national rate, yet below the New York State s unemployment rate of 4.6%. These statistics indicate a decrease in unemployment since 2012 as a result of the moderate recovery from the recession, and a slight increase in the past year. The following table illustrates historical and current unemployment rates: BBG, INC. 11

20 AREA ANALYSIS UNEMPLOYMENT RATES Year Brooklyn Bronx Queens Manhattan NYC NYS USA % 9.7% 7.1% 7.6% 8.0% 6.1% 5.8% % 10.6% 7.4% 7.5% 8.3% 6.4% 6.0% % 9.2% 6.3% 6.2% 7.1% 5.8% 5.5% % 7.6% 5.2% 5.1% 5.8% 5.0% 5.1% % 6.7% 4.5% 4.3% 5.0% 4.5% 4.6% % 6.8% 4.5% 4.3% 5.0% 4.6% 4.6% % 7.6% 5.0% 4.9% 5.6% 5.4% 5.8% % 12.0% 8.4% 8.4% 9.3% 8.3% 9.3% % 12.0% 8.6% 8.6% 9.5% 8.6% 9.6% % 11.9% 8.1% 7.8% 9.1% 8.3% 8.9% % 12.4% 8.3% 8.0% 9.3% 8.5% 8.1% % 11.7% 7.7% 7.5% 8.8% 7.7% 7.4% % 9.7% 6.3% 6.1% 7.2% 6.3% 6.2% % 7.7% 5.0% 4.8% 5.7% 5.3% 5.5% % 6.2% 3.9% 3.9% 5.2% 4.5% 4.5% 2017 (Oct.) 5.0% 6.6% 4.3% 4.4% 4.9% 4.6% 3.9% Source: NYS Department of Labor, Bureau of Labor Statistics UNEMPLOYMENT TRENDS 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% Brooklyn Bronx Queens Manhattan NYC NYS USA 0.0% New York City s employment base has historically enjoyed the distinction as an international center of business, commerce, tourism, and culture. The FIRE (finance, insurance, and real estate) and services (including the professions of legal, engineering services, consulting, tourism, recreation, health care, computers and data processing) segments are considered the primary sources of white collar, or office prone, employment in the region. BBG, INC. 12

21 AREA ANALYSIS NEW YORK CITY S LARGEST EMPLOYERS Employer # of Employees Verizon Communications, Inc. (VZ) 177,300 J.P.Morgan Chase & Co. (JPM) 241,359 International Business Machines Corp. (IBM) 379,592 Citigroup Inc. (C) 241,000 Philip Morris International (PM) 82,500 MetLife Inc. (MET) 68,000 PepsiCo Inc. (PEP) 271,000 American International Group Inc. (AIG) 65,000 Prudential Financial Inc. (PRU) 48,331 Pfizer Inc. (PFE) 78,300 Source: Crain's Book of Lists New York City is also the center of media (journalism and publishing), arts, fashion, and design. Businesses in New York City can capitalize on the synergy created from the presence of more than 200,000 companies, the access to investment capital and consumers, and the City s attractive quality of life. Companies in New York City include headquarters and regional offices of leading world companies including 52 Fortune 500 firms the highest of any city in the United States making New York the nation s headquarters capital. NYC EMPLOYMENT BY INDUSTRY (2000 S) Construction M anufacturing Trade, Transportation, and Utilities Information Financial Activities Professional and Business Services Education and Health Services Leisure and Hospitality Other Services Government Total 3, , , , , , , , , , , ,454.8 Source: New York State Department of Labor 2017 (Oct) From 2006 to October 2017, decreases in private employment in the city were seen in only a few of the sectors. There were increases in most sectors, which include Education and Health Services, Professional and Business Services, and Government. The remaining sectors of employment have remained relatively stable. Office-using employment amounts to approximately 30% of total New York City employment, reflective of the financial and services orientation of the local economy. New York City s prime office inventory is concentrated in Manhattan south of Central Park within the two major submarkets of Downtown and Midtown. Brooklyn s central business district in Downtown Brooklyn is anchored by Brooklyn Borough Hall and MetroTech Center, a 16-acre urban corporate campus. Long Island City in Queens is located across the East River from Midtown Manhattan and has long been a center of manufacturing, distribution, and industrial services BBG, INC. 13

22 AREA ANALYSIS MANHATTAN ECONOMY AND EMPLOYMENT Total private sector employment in Manhattan was over 2,000,000 in the past year, the highest level of any borough, representing 60.0% of the City s total. Private sector employment increased by 16.5% in the past decade, and is now 7.0% above its pre-crisis level in The biggest employers in 2017 are Education and Health Services, Professional and Business Services, Leisure and Hospitality, and Trade, Transportation, and Utilities. In the past decade, average private sector wages rose by 7.0%, after adjusting for inflation, compared to an increase of 3.3% citywide. Manhattan was the only borough to see wages rise over this time period, with wages falling in the other boroughs between 1% and 8%. The strongest wage growth over this period occurred in Finance and Insurance estimate of average household income in New York City is $88,462 and median household income of $55,536 Manhattan and Queens had the lowest unemployment rate across the five boroughs, with a 3.9% average in the past year and 4.4% unemployment rate as of October During the financial crisis, the annual average unemployment rate in Manhattan peaked at 8.6% in 2010 and has continued a strong decline since then. Over 80% of individuals between the ages of were in the labor force in the past year, the highest across the five boroughs. Big business is dominant in the borough: 20.1% of workers are employed in a firm with more than 500 employees, and 22.5% of workers are employed in a firm with less than 20 employees. These are the highest and lowest shares respectively amongst the five boroughs. Manhattan has more Fortune 1000 company headquarters than any county in the country. Manhattan is also home to the City s creative sector, accounting for 92.5% of all creative economy employees. This share is even higher within certain subsectors, such as Television and Broadcasting and Advertising and Marketing. Three out of Manhattan s five fastest growing businesses are in Advertising and Marketing. Manhattan dominates the City s patent activity which has increased 198.8% since OCTOBER 2017 LABOR FORCE DATA Labor Force Employed Unemployed Unemployment (000 s) (000 s) (000 s) Rate Bronx County (Bronx) % Kings County (Brooklyn) 1, , % New York County (Manhattan) % Queens County (Queens) 1, , % Richmond County (Staten Island) % New York City 4, , % Source: NYS Department of Labor New York City Personal Income Average household income in New York City increased by 53.5% between 2000 and 2017 from $57,645 to $88,462. This is higher than the 48.3% increase experienced by New York State. NYC & STATE HOUSEHOLD INCOME Source: The Nielsen Company New York City New York State 2000 Census 2017 Estimate 2000 Census 2017 Estimate Average Household Income $57,645 $88,462 $61,489 $91,198 Median Household Income $38,846 $55,536 $44,138 $62,222 BBG, INC. 14

23 AREA ANALYSIS Manhattan is the most affluent borough in New York City with a 2017 estimated average household income level of $134,059. The next highest borough in terms of average household income is Staten Island at $94,071. The following table illustrates per capita income figures for New York City and the various boroughs. NYC HOUSEHOLD INCOME Average Household Income 2000 Average Household Income 2017 (est) % Change Bronx $38,885 $51, % Brooklyn $46,279 $77, % Manhattan $83,976 $134, % Queens $54,663 $79, % Staten Island $67,698 $94, % New York City $57,645 $81, % Source: The Nielsen Company, U.S. Census As evident, Manhattan exhibits the highest average income among the New York City boroughs and is nearly twice the level of the United States overall. Manhattan accounts for nearly 20% of New York State s total income. The borough is home to nine of the wealthiest big city neighborhoods in the nation, testifying to its affluence. Nearly all of Manhattan s zip codes below 96th Street have median household incomes well above the national median. The most affluent concentrations of households border Central Park on Manhattan s West Side between 77th and 91st Streets and on the East Side along Fifth, Park, and Madison Avenues between 60th and 96th Streets. Other affluent pockets include the southern tip of Manhattan at Battery Park City and the communities surrounding Lower Manhattan s Financial District such as TriBeCa. In contrast, the area north of Central Park, as well as portions of the Lower East Side, is where residents with the lowest median household incomes reside. CULTURE AND RECREATION New York City offers an unsurpassed variety of cultural activities. New York is a worldrenowned center of culture, entertainment, and shopping. New York contains hundreds of museums, art galleries, theaters, restaurants, and retail stores. The City is home to such musical institutions as the New York City Symphony, Carnegie Hall, Lincoln Center, Brooklyn Academy of Music, and Metropolitan Opera and, with its many Broadway and off-broadway plays and musicals, is the performing arts capital of the world. Several world-famous dance troupes are located in New York including the Alvin Ailey Company and Dance Theater of Harlem. World class museums include the Metropolitan Museum of Art, Museum of Modern Art, The Guggenheim, and Museum of Natural History. Other attractions include the Statue of Liberty, New York Aquarium, Bronx Zoo, Brooklyn Botanical Gardens, Empire State Building, United Nations, New York Stock Exchange, and many others, which draw millions of visitors each year. New York City has significant parkland including Central Park, an 843-acre oasis in Manhattan; Prospect Park in Brooklyn; and Jamaica Bay National Wildlife Refuge in Queens. New York City has teams in every major professional sport. BBG, INC. 15

24 AREA ANALYSIS EDUCATIONAL AND PROFESSIONAL FACILITIES New York City has 173 schools of higher education including 21 two-year colleges, 45 four-year colleges, professional schools, law schools, and vocational schools. Manhattan is home to some of the most prominent educational institutions in the nation including Columbia University, New York University, The Juilliard School, and Manhattan School of Music. The CUNY (City University of New York) system offers an affordable education in its 6 community colleges and 11 campuses with 4-year and graduate programs across all 5 boroughs. Notable colleges and universities located outside Manhattan include Pratt Institute in Brooklyn a well-recognized school of art and architecture; St. John s University and Queens College in Queens; and Fordham University in the Bronx. New York City also has two of the most highly regarded public high schools in the nation Stuyvesant and Bronx Science. As in most urban areas, the City s public primary and secondary education system is considered only fair overall with a wide range in quality of education from district to district. New York City has 75 short-term general hospitals, many of which are affiliated with local professional universities. World famous research hospitals include NYU-Cornell, Rockefeller, Columbia, and New York Hospital. Other highly ranked hospitals include Memorial Sloan- Kettering Cancer Center, Mount Sinai Hospital, New York Eye and Ear Infirmary, and New York Presbyterian Hospital. TRANSPORTATION New York City is served by the most diverse transportation system in the United States. The region s transportation network links the area to the regional, national, and global commerce and trade. A brief synopsis of the area s transportation system follows: RAIL SYSTEM As the densest urban area in the country, New York City is served by the biggest transit network, and is one of the only places where one does not need a car to get around. Rail systems include: NYC Subway System: The Metropolitan Transportation Authority (MTA) runs the 660-mile subway system servicing approximately 5 million passengers on an average weekday and approximately 1.6 billion passengers a year. NYC Transit operates approximately 6,485 cars 24 hours a day throughout Manhattan, Queens, Brooklyn, and the Bronx. The 26 subway routes are interconnected, and many lines feature express trains, across-the-platform transfers to local trains, and "skip-stop" express service. MTA capital projects include extending the 7 line beyond Times Square to Hudson Yards (the West Side) and the Second Avenue subway. Metro North: Based in the landmark Grand Central Terminal in Midtown Manhattan, the MTA Metro North Railroad is the second busiest commuter line in the United States, providing approximately 281,000 customer trips each weekday and some 80 million trips per year. With 384 route miles and 775 miles of track, Metro North goes to 120 stations distributed in seven counties in New York State--Dutchess, Putnam, Westchester, Bronx, New York (Manhattan), Rockland, and Orange--and two counties in the state of Connecticut- BBG, INC. 16

25 AREA ANALYSIS -New Haven and Fairfield. Metro North is currently in discussions to extend service to Penn Station. Long Island Railroad (LIRR): The MTA runs this commuter railroad along 11 branch lines from the eastern tip of Long Island to Pennsylvania Station (Penn Station) in Manhattan and Atlantic Terminal in Brooklyn. The LIRR is the busiest commuter railroad in North America, carrying an average of 324,000 customers each week day on 728 daily trains. Annual ridership is approximately 81 million persons per year. The LIRR is current constructing the $8.2 billion East Side Access, which will provide a new terminal at Grand Central Station, reducing travel times to Midtown Manhattan for millions of commuters. New Jersey Transit (NJT): NJT runs 11 lines from its terminals in New York-Penn Station, Newark, and Hoboken. NJT is the fourth busiest commuter railroad in the United States, providing approximately 276,000 customer trips each weekday and 78 million trips per year. With 536 miles, NJT goes to 151 stations primarily in Northern New Jersey. From Penn Station, NJT offers direct service along the Northeast Corridor Line to Trenton, the North Jersey Coast Line to Bay Head, and Montclair-Boonton Line to Hackettstown. Riders can also transfer at Secaucus, Hoboken, and Newark for service into New York City. Amtrak: Amtrak serves New York as the national provider of intercity rail service. Amtrak s predominant service from Penn Station is its Northeast Corridor Line (the busiest line in the U.S.), including high-speed Acela service, which includes stops in the major cities of Boston, Philadelphia, Baltimore, and Washington D.C. Amtrak also provides daily service to upstate New York, New England, Chicago, Miami, and New Orleans. In 2010, there were 8.9 million boardings and alightings at Penn Station, by far the highest of any Amtrak station in the country. Port Authority Trans-Hudson (PATH): PATH carries 70% of all commuters entering New York City from New Jersey. Major station stops include Newark, Harrison, Hoboken, and Jersey City in New Jersey, and the World Trade Center and Penn Station in New York City. Approximately 259,000 commuters use the PATH each weekday. The annual passenger trips for 2010 were 73.9 million. BUS SYSTEM New York City Transit: MTA offers bus service in New York City s five boroughs, handling 2.4 million riders daily and 738 million annually. 208 local and 36 express bus routes operate in the five boroughs, covering 2,109 miles. Port Authority Bus Terminals: Regional bus lines serve approximately 57 million passengers a year, with most service to and from New Jersey. The Port Authority operates two bus terminals in New York, one at 42 nd Street, and one at the George Washington Bridge. Both provide several transfers to New York City transit routes. Bus lines include New Jersey Transit, Bolt Bus, Greyhound, Peter Pan, and Coach USA. BBG, INC. 17

26 AREA ANALYSIS AIRPORTS The New York area is home to the busiest airport system in the United States and second biggest in the world. The three major airports that service New York City are: John F. Kennedy Airport (JFK) is located in the southeastern section of Queens County on Jamaica Bay and consists of 7 terminals and 151 aircraft gates. More than 90 airlines operate at JFK, and it is a major hub for JetBlue Airways, American Airlines, and Delta Air Lines. It is less than 15 miles by highway from Midtown Manhattan, and there is rail service via the AirTrain. In 2011, JFK handled the most international passenger air traffic in North America, and it also serves as a vital international freight gateway. Newark Liberty International Airport (EWR) is located in Essex and Union Counties between the New Jersey Turnpike (accessible from Exits 13A and 14), U.S. Routes 1 & 9, and Interstate 78. Rail service is also available from Penn Station via Amtrak and New Jersey Transit. The airport is about 16 miles from Midtown Manhattan and consists of about 2,027 acres. Newark is a hub for United Airlines, as well as FedEx. In the future, the Port Authority plans to rebuild Terminal B and build a new Terminal A. LaGuardia Airport (LGA) consists of 680 acres and 72 aircraft gates. A $830 million redevelopment program in 2000 included expanding and modernizing the Central Terminal Building, reconfiguring and widening roadways, improving runways and taxiways, constructing a passenger terminal in the east end, airline modernization of gate areas and passenger service areas, and other rehabilitation projects. The Port Authority plans to break ground on a new Central Terminal Building in VEHICLE SYSTEM There are several bridges and tunnels that provide access for automobiles and trucks to and through the island of Manhattan. Hudson River Crossings include the Lincoln Tunnel (connecting Weehawken, NJ and Midtown Manhattan), the Holland Tunnel (connecting Jersey City and Downtown Manhattan), and the George Washington Bridge (Interstate 95 connecting Fort Lee, NJ, and Northern Manhattan). East River Crossings include the Brooklyn Battery Tunnel (connecting Brooklyn and the Financial District), the Queens Midtown Tunnel (connecting Queens and Midtown), the Brooklyn Bridge (connecting Brooklyn and Lower Manhattan), the Manhattan Bridge (connecting Brooklyn and Lower Manhattan), the Williamsburg Bridge (connecting Williamsburg and Lower Manhattan), the Queensboro Bridge (connecting Long Island City and Midtown Manhattan). Major Road and Highways linking Manhattan include Interstate 78 (via the Holland Tunnel from New Jersey), Interstate 95 (via the George Washington Bridge from New Jersey to the Cross Bronx Expressway and New England), the Henry Hudson Parkway (to the Bronx and BBG, INC. 18

27 AREA ANALYSIS points north), and Interstate 495 (via the Queens Midtown Tunnel from Long Island). The FDR Drive, Harlem River Drive, West Side Highway, and Henry Hudson Parkway also serve as major routes along Manhattan s coast. SUMMARY Pushing the limits is a good description of New York City as a whole, as housing prices soar, the infrastructure becomes less reliable, and young people begin to plan their lives elsewhere. Population growth is projected at just about 45,000 (0.5%) per year, with the number of households rising by about 29,000 (about 0.9%) per year. Total employment is anticipated to rise by 43,860 (1.0%) in 2017 and 48,940 (1.1%) in 2018 but by around zero in 2020 and BBG, INC. 19

28 AREA ANALYSIS HOTEL MARKET ANALYSIS The subject s lodging market is analyzed in the following section. The following data sources are relied upon: NYC Hotel Market Analysis, Existing Conditions and 10-Year Outlook published by the New York City Department of Planning; PWC Manhattan Lodging Index, 3 rd Quarter 2017; Assorted reports prepared by STR; PWC & RERC Investor Surveys; 3 rd Quarter 2017; and NEW YORK CITY HOTEL MARKET OVERVIEW According to the NYC Hotel Market Analysis, Existing Conditions and 10-Year Outlook published by the New York City Department of Planning New York City is one of the world s most popular travel destinations and in 2016, welcomed a record-breaking 60.7 million travelers. Notably, New York City is the largest market in the United States for international travelers, who tend to stay longer and spend more money. According to the most recent figures from the U.S. Department of Commerce s National Office of Travel and Tourism, New York saw over 10 million foreign visitors in 2015, almost twice as many as second place Miami and representing 26 percent of all visitors to the city. As a result, New York City is one of the largest and most diversified hotel markets in the United States and, over the past several years, has experienced an unprecedented hotel construction boom that has delivered more new hotel rooms than any other market in North America. As recently as 2013, New York City was the fifth largest hotel market in the nation, measured by room count, ranking behind Las Vegas, Orlando, Chicago and Washington, D.C. However, according to Smith Travel Research, the addition of over 12,000 hotel rooms since that time has catapulted New York to third place behind Las Vegas and Orlando with enough hotel rooms currently in the development pipeline to surpass Orlando and become the second largest national market. BBG, INC. 20

29 AREA ANALYSIS NEW YORK CITY HOTEL AND ROOM SUPPLY A particularly distinguishing factor of the current hotel boom in New York is its occurrence across the entire city and not just Manhattan. While Manhattan continues to be the unrivaled focus of the New York City hotel market, each of the four other boroughs has also seen, during the past decade, delivery of new hotel properties and room count increases that are unmatched in recent history. Since 2010, Queens and Brooklyn have both seen hotel room count increases of over 50 percent, with similar growth rates in the smaller markets of the Bronx and Staten Island. In recent years, more of this hotel development has taken place in areas of the city that are zoned for Light Manufacturing. This unprecedented boom in hotel room supply has begun to put pressure on room rates across New York City, which in 2016 fell slightly below those in Occupancy rates, however, have remained stable for the past four years and remain among the highest of all major U.S. hotel markets. BBG, INC. 21

30 AREA ANALYSIS NEW YORK CITY HOTEL AND ROOM SUPPLY CHANGE BY BOROUGH In addition to accommodating millions of business and leisure travelers from around the world, New York City s hotels are also, of course, businesses themselves that employ tens of thousands of city residents. As part of a thriving tourism industry cluster, the New York City hotel workforce cleans and maintains facilities, prepares and serves food, helps guests, markets services and manages operations. According to Smith Travel Research (STR), there are currently over 115,530 hotel rooms in over 630 hotel properties in the five boroughs of New York City. Just over 80 percent of these rooms are in Manhattan. Over the past decade, the New York City hotel market has been in the midst of a substantial growth in supply, with 42 percent growth in new hotel rooms since Much of this growth has happened in areas outside of Manhattan, recently creating well-established hotel districts in areas of Brooklyn and Queens. In the four boroughs outside Manhattan, hotel development is concentrated in a relatively small number of submarkets notably, Long Island City, LaGuardia/Flushing, and Jamaica/JFK in Queens; and Downtown Brooklyn/Gowanus and Williamsburg/Greenpoint in Brooklyn. These five submarkets together account for almost 70 percent of all hotel properties and 82 percent of all hotel rooms outside of Manhattan. Hotels outside Manhattan tend to be smaller on average as well as offer fewer amenities related to meetings and business activity. HOTEL DEMAND DRIVERS The hotel industry in New York City depends on demand from both domestic United Statesbased travelers and overseas visitors. Although the Great Recession impacted travel, especially by U.S. residents, overall visitation to New York City has recovered significantly since then, reaching record levels in Specifically, visitors to New York City grew from 47 million in 2007 to 60.7 million in 2016, an increase of almost 30 percent for the period. BBG, INC. 22

31 AREA ANALYSIS While Manhattan s position as a global business and cultural center makes it one of the largest and most dynamic hotel markets in the world, Brooklyn, Queens, and to some extent the Bronx and Staten Island s hotel markets are characterized by spillover demand as well as the following development drivers: Proximity to Manhattan Access to public transportation (principally subway lines) Presence of services and amenities in neighborhood Significant office or commercial market Existing critical mass of hotels in neighborhood (most hotel are market followers not market leaders) Room rates Proximity to airports and/or other specialized demand PROJECTED DEMAND Based on overall NYC demand of approximately 79.6% leisure and 20.4% business (inclusive of group) demand by borough was reported as follows: NEW YORK CITY EXISTING HOTEL DEMAND, 2016 According to NYC & Company, leisure travel is projected to increase at an average of 1.7% per annum though 2020 which is conservative given the historical growth of 3.1% per annum between 2007 and However, the New York City Office of Management and Budget is projecting visitation to grow by 0.8 percent annually through Using the 1.7% average annual growth rate to project leisure travel through 2028, indicates that demand for hotel rooms will increase to over 83,300 rooms in 2020 and nearly 102,200 rooms in Based on the assumption that current trends continue and leisure travelers prefer to lodge predominantly in Manhattan, followed by Queens and Brooklyn, the share of demand for new rooms in each borough will remain consistent with 2016 trends. The following table shows the leisure hotel demand projections by borough through BBG, INC. 23

32 AREA ANALYSIS NEW YORK CITY PROJECTED LEISURE HOTEL DEMAND Based on the prevalence of employment sectors contributing to New York City s business travel, this analysis uses projected employment growth rates for all non-agriculture employment sectors combined to project business travel growth through According to the New York City Fiscal Year 2018 Budget and Financial Plan Summary, there were more than 4.3 million nonagriculture jobs in New York City in The Fiscal Year 2018 Budget and Financial Plan anticipates non-agricultural employment to grow by 3.8 percent between 2016 and 2020, averaging 0.95 percent growth per year. Between 2020 and 2028, the New York Metropolitan Transportation Council s (NYMTC s) 2050 SED Forecasts project that non-agricultural employment will grow at a much slower rate, of 0.21 percent per year, or 1.8 percent between 2020 and As employment grows, demand for business traveler lodging will also increase. Applying the Budget and Financial Plan and NYMTC employment growth rates to each borough s existing share of business travel demand provides the basis for projecting future business travel hotel demand. As Table 12 shows, demand from business travelers will be able to support more than 20,700 rooms by 2020 and 21,100 rooms by Subtracting off the existing 20,000 room supply shows that increased demand will be able to support nearly 770 additional rooms by 2020, and roughly 1,100 additional rooms by BBG, INC. 24

33 AREA ANALYSIS NEW YORK CITY PROJECTED BUSINESS HOTEL DEMAND These projections align with the U.S. Travel Association s projections for business travel growth. The U.S. Travel Association projects that national business travel will grow by 0.5 percent per year between 2016 and In addition, because New York City is a mature employment center with low annual growth projections between 2016 and 2028, demand for new rooms will be limited. Adding together the existing and projected additional room demand from business and leisure travelers provides gross hotel room demand by borough in 2020 and As the following table demonstrates, there will be demand for nearly 143,600 rooms in New York City by 2028, after accounting for each borough s 2016 occupancy rate. This translates into annual average demand growth of 1.9 percent for the City overall between 2016 and BBG, INC. 25

34 AREA ANALYSIS PROJECTED ROOM DEMAND BY BOROUGH AND TRAVEL TYPE After accounting for the hotel rooms currently under construction, all Boroughs outside of Manhattan show no residual demand through As a matter of fact, in all Boroughs except for Manhattan the number of rooms under construction exceeds the estimated demand through 2028, all while Manhattan is projected to have a residual demand for nearly 9,350 rooms. This is because the estimated hotel demand projections are based on existing and projected demand drivers for hotel rooms by borough, the majority of which is centered on Manhattan. However, the geographic distribution of the hotels in the pipeline, in addition to interviews with hoteliers and developers, suggest that a portion of the demand generated by Manhattan is already spurring development in other boroughs in close proximity to Manhattan, particularly those with transit access. Subtracting off the existing hotel supply shows the gross unmet demand, or additional supportable rooms above the existing supply, but not yet accounting for hotels in the development pipeline. Accounting for the existing room stock as of April 2017, future demand will be able to support approximately 5,700 new rooms by 2020 and 28,000 rooms by BBG, INC. 26

35 AREA ANALYSIS GROSS UNMET ROOM DEMAND BY BOROUGH 2020 AND 2028 The analysis from the NYC Hotel Market Analysis, Existing Conditions and 10-Year Outlook published by the New York City Department of Planning assumes that any rooms currently under construction or in pre-construction would be expected to develop and serve projected unmet demand before any unannounced hotels would come online. However, it should be noted that not all hotels in pre-construction are guaranteed to develop; changes in market conditions may postpone or indefinitely delay development of some of these hotels. Similarly, projects not yet announced may emerge if demand exceeds projections or some of the pre-construction projects fail to get funding or otherwise dissolve. The analysis provided subtracts the number of rooms under construction and in pre-construction from the projected gross unmet demand in order to estimate residual demand by borough. Residual demand represents the net new demand that will be unmet by existing and pipeline hotels, and could result in additional hotel applications and development. Boroughs outside of Manhattan that have more rooms under construction than demanded are shown to have no remaining room demand, but do not show negative demand, based on the assumption that a portion of these rooms are satisfying the excess demand generated by Manhattan. As the following table shows, after accounting for the hotel rooms currently under construction all Boroughs outside of Manhattan show no residual demand through As a matter of fact, in all Boroughs except for Manhattan the number of rooms under construction exceeds the estimated demand through 2028, all while Manhattan is projected to have a residual demand for nearly 9,350 rooms. This is because the estimated hotel demand projections are based on existing and projected demand drivers for hotel rooms by borough, the majority of which is centered on Manhattan. However, the geographic distribution of the hotels in the pipeline, in addition to interviews with hoteliers and developers, suggest that a portion of the demand generated by Manhattan is already spurring development in other boroughs in close proximity to Manhattan, particularly those with transit access. BBG, INC. 27

36 AREA ANALYSIS For example, the hotel inventory in Long Island City and North Brooklyn has grown and is anticipated to continue to grow substantially, driven in part by their proximity to Manhattan. HOTEL DEMAND AFTER CONSTRUCTION 2020 AND 2028 In order to estimate the remaining demand by Borough, this analysis redistributes the City s remaining room demand, among all five boroughs based on each borough s share of rooms in the pipeline. As the following table shows, most of these rooms (49.9 percent), are still anticipated to be located in Manhattan. RESIDUAL ROOM DEMAND BY BOROUGH Accounting for the hotel rooms currently in pre-construction results in no remaining residual demand across all Boroughs. That said, the delivery of pre-construction hotels is somewhat uncertain and will depend on a variety of factors, including market forces and availability of financing, among others. It is entirely possible that some of the pre-construction hotels will not be delivered at all, as is evidenced by a recently terminated Long Island City hotel proposal, BBG, INC. 28

37 AREA ANALYSIS while other hotels in the pre-construction phase may remain idle until after the projected year of In addition, hotels in the pipeline may serve as a replacement to any decrease in the supply of rooms if existing hotels are converted to permanent residences, dorms, or homeless facilities. The market will likely absorb those rooms currently under construction and those in preconstruction that will be built. New York City has a stable and robust hotel market that continues to absorb rooms and maintain high occupancy rates. Furthermore, construction lenders are typically conservative when making loans to hotel developers. Both points indicate that rooms currently under construction are very likely to absorb. If room absorption slows, developers and lenders may delay new hotel starts until occupancy rates and average daily rates return to levels that support new development. OCCUPANCY AND ROOM RATES New York City s robust visitor numbers have led to a commensurate strong demand for hotel rooms, as reflected by annual average occupancy rates that are among the highest of any urban market in the United States. While occupancy rates have remained stable in New York City, room rates have faced some pressure in the past two years and have seen small declines. PROJECTED PIPELINE OF HOTELS According to data from the New York City Department of Buildings that was provided to the Consultant Team by the New York City Department of City Planning, there are currently 276 hotels with 37,986 rooms in the supply pipeline across New York City. These include hotels that are both under construction and in pre-construction, with hotels in pre-construction encompassing both those projects that have filed an application with the Department of Buildings and those that are in pre-application. Projects under construction are relatively certain to finalize, whereas projects in the pre-construction process are less likely to go to completion. Manhattan has the largest share of rooms in the pipeline (18,958 rooms), followed by Queens (10,286 rooms), and Brooklyn (6,707 rooms). Of these, 34% of hotels and 30% of rooms will be located in M districts. Most of the pipeline rooms in Staten Island are scheduled to be located in M districts (87%), compared to 43% in Brooklyn, 36% in Queens, 22% in Manhattan, and 18% in the Bronx. TRENDS IN HOTEL TYPE & SERVICES In addition to the increasing geographic diversity of New York City s hotel market, reflecting the hotel construction boom in particular in Brooklyn and Queens, several other notable changes have occurred within the city s hotel supply since 2007, including a shift in the mix of hotel typologies, a change in overall average hotel size measured by number of rooms, and a modest redistribution by borough and commensurate shift in Manhattan s market share. With the recent boom in hotel supply, there has also been a notable downward shift in the average age of hotel properties in the city. As of 2017, the average hotel property in Manhattan is 34 years old, while in the other boroughs the average hotel property is 14 years old. The median hotel age in Manhattan has decreased from 15 years to eight years. In Brooklyn, the average hotel property is BBG, INC. 29

38 AREA ANALYSIS eight years old, while the median hotel property is only six years old. As of the first quarter of 2017, just over half of the 115,500 hotel rooms in the five boroughs of New York City are categorized by STR as Upscale. These include such hotel brands as Marriott, Hilton, Sheraton, Club Quarters, and Doubletree, in addition to independent properties like the High Line Hotel, the Roosevelt Hotel, the Roger Smith and the William Vale. Despite a 56 percent increase in the inventory of Upscale rooms in the past decade, the share of the inventory classified as Upscale actually dropped slightly from 52.6 to 52.4 percent. Midscale class hotel rooms were the only scale that saw its share increase in the past decade. Midscale hotel rooms make up the next second largest segment of the inventory at a 20 percent share, while the inventory of Luxury and Economy class rooms trails at 15 percent and 12 percent respectively. While all classes of hotel rooms have seen considerable growth over the past decade, the inventory of Midscale hotel rooms in the five boroughs has almost doubled in the past decade. In comparison, the inventory of Economy class hotels increased by 26 percent, the inventory of Luxury by 49 percent, and the inventory of Upscale by 56 percent. Despite absolute growth across all four typologies of hotels, Midscale saw its share of rooms grow by 4 percent the past decade, while all other typologies saw their respective shares drop, with Economy experiencing the steepest decline at just over 3 percent. NEW YORK CITY HOTEL ROOMS BY TYPOLOGY 2007 & 2017 NEW YORK CITY HOTEL MARKET OUTLOOK Some real estate analysts and private developers have expressed concern about oversupply in the New York City hotel market, noting that banks are not financing new hotel projects until the current pipeline is absorbed. Others, including Jones Lang LaSalle (JLL) and Lodging Econometrics, are more confident about future growth. Citing New York s position as a global center of business and tourism and the resiliency of the local hotel market, JLL projects absorption of new hotel supply by the end of 2018 and a rebound in growth. Many developers however, indicate that supply in New York City, in its entirety and in particular in boroughs other than Manhattan, has been catching up with demand. New York City experienced little to no hotel development between 1997 and 2007, despite steady increases in demand. Over the past ten years, room supply has been catching up with growing and pent up demand. As supply and demand reach equilibrium, as evidenced by steady occupancy rates and flat RevPAR, hotel development should slow down. However, increases in tourism and employment will continue to put pressure on the development of new rooms, albeit at a much slower rate than BBG, INC. 30

39 AREA ANALYSIS indicated by recent supply trends. The New York City Hotel Market Analysis by the New York City Department of Planning projects that tourism and business travel growth between 2016 and 2028 will generate demand for nearly 28,000 additional rooms in New York City through 2028, after accounting for the existing supply of hotel rooms. This translates into annual average demand growth of 1.9 percent for the City overall. This is more than the conservative projection used by New York City Office of Management and Budget (OMB) to project Transient Occupancy Tax (TOT) revenues (0.83 percent), and less than New York City s historic annual visitation growth rate of 3.1 percent. Based on these demand estimates, the nearly 24,200 rooms under construction and 13,800 rooms in various stages of pre-construction will likely satisfy demand through Although Manhattan remains the primary borough for hotel demand, the geographic distribution of hotels in the pipeline, in addition to interviews with hoteliers and developers, suggest that a portion of the demand generated by Manhattan is already spurring development in other boroughs in close proximity to Manhattan, particularly those with transit access. Some submarkets will likely continue to expand, while others may slow down due to short- and mid-term saturation, high land prices, or shortages of developable and/or attractive sites, near required transit and other amenities sought by travelers. Still other markets currently unknown, may emerge. Projecting demand at the borough-level allows for flexibility in development based on market saturation, emerging market conditions, and diminishing availability of suitable sites. Development in areas outside of Manhattan will likely continue to be clustered around transit infrastructure, as well as shared between commercial corridors and M1 districts that are proximate to those commercial areas. Clearly the M1 districts have been an important area for new supply to take place and this supply has adequately addressed the needs of the tourism industry to date. In the short-term, recent developments and the existing pipeline will likely accommodate the growing demand. NYC HOTEL DEVELOPMENT OUTLOOK The following report was prepared by NYCgo.com, and covers the hotel development outlook for New York City. This report covers nearly 260 hotel properties and projects that have opened since January 2015 or are currently in the development and renovation pipeline. They can be found in neighborhoods and boroughs across New York City. From the Bronx to Staten Island, the City continues to attract new developments in luxury hotels, boutique and lifestyle brands, independent and affiliated properties, ranging in size from just 14 to over 600 rooms. Paired with the City s existing world-class inventory, great options exist at every price point and length of stay. From one night to extended stay, from family suites to business class accommodations, from pod-like quarters to spacious penthouses, New York City has rooms to suit all travelers needs and preferences. Today the active inventory for visitor accommodations stands at over 115,100 rooms with more than 27,000 rooms in the short and long-term pipelines. The opportunities for any business, group or independent leisure traveler are immense. BBG, INC. 31

40 AREA ANALYSIS Since the beginning of 2017 we have seen 30 new hotels open with a total of approximately 5,500 rooms added to the city s dynamic supply. There are still a dozen properties slated to open before year end with another 2,300 rooms in the pipeline. Among the new additions this year we can find new pod hotels in Brooklyn and Manhattan, luxury and upscale properties with a modern vibe, as well as boutiques and independents including 1 Hotel Brooklyn Bridge, Luma Hotel Times Square, The Whitby, Ian Schrager s first Public Hotel, Joie de Vivre s Hotel 50 Bowery, and the Life Hotel. Marriott s Moxy opened in Times Square with 612 rooms, and important brands found a welcome across the boroughs including the 600-room DoubleTree by Hilton Times Square West, Hilton Garden Inns, Crowne Plaza, Four Points by Sheraton and Wyndham Garden Hotel. Conversions and modernizations were also a highlight bringing new life to the NoMad area and other neighborhoods. The multi-use pattern of residences or dual brand properties also continues to support development. The boroughs are well represented so far in 2017, with seven new hotels in Queens, five in Brooklyn, and two openings in the Bronx. Many Queens properties have opened in response to anticipated demand stemming from the ongoing reconstruction of LaGuardia Airport. Others opened in Long Island City (the Estate at Ravel, The Vue) because of the neighborhood s developing range of activities and its proximity to midtown Manhattan just a 10-minute subway ride away. The current development pipeline featuring new entries and many updates includes over 140 projects across the five boroughs representing the full spectrum of hotel experiences. New proposals are planned throughout the City, covering all five boroughs. While we record a number of unnamed projects at this time, most are already well above ground in their building as developers work with brands and management companies to find the best match. Global brands are also making NYC home (Riu, Pestana, ibis Styles and others). Many hotels in the pipeline are competing for the City s growing leisure visitor base. The Moxy in Times Square (a 600-room hotel opened in September, featuring a carousel and rooftop minigolf course) and the Hoxton in Williamsburg serving as excellent examples of the opportunities arising. Other proposals are in centrally located financial centers (Lower Manhattan) and future development projects, like Hudson Yards. BBG, INC. 32

41 AREA ANALYSIS PWC MANHATTAN LODGING INDEX 3Q 2017 In projecting rates and occupancy based on the subject s use as a hotel property, we have utilized current market information on the Manhattan lodging market. The following information is abstracted from PriceWaterhouseCoopers 3 rd Quarter 2017 Manhattan Lodging Index. Continuing declines in room rates outweighed improving occupancy levels in Manhattan hotels during the third quarter, extending a pattern established last year. Although supply growth appears to have finally peaked, Q3 marks the tenth quarter of declining RevPAR since the beginning of Although supply growth may no longer be the top threat to the Manhattan lodging market, several other factors, including perceived political uncertainty and international travel restrictions, as well as a profound shift in demand segmentation, remain real concerns. Despite these, demand growth during the quarter of 3.4 percent outpaced an increase in supply of 2.2 percent, resulting in occupancy being up 1.2 percent. A continued lack of pricing power resulted in a 2.3 percent drop in average daily rate ( ADR ). As a result, revenue per available room ( RevPAR ) declined 1.1 percent. Through the first nine months of this year, RevPAR was down 1.3 percent. Source: PwC, based on STR data In the third quarter, higher-priced hotels in the Luxury and Upper Upscale classes had greater occupancy growth and less severe offsetting declines in ADR, resulting in them outperforming hotels in the Upscale and Upper Midscale classes. Luxury hotels were the only segment that saw RevPAR growth, at 1.5 percent. RevPAR performance in Upper Upscale hotels was relatively unchanged, declining 0.1 percent. Hotels in the Upscale and Upper Midscale classes reported decreases in RevPAR of 3.5 and 2.8 percent, respectively. BBG, INC. 33

42 AREA ANALYSIS Hotel performance throughout the five Manhattan submarkets was largely mixed. All neighborhoods reported decreases in ADR, but hotels in the Upper Manhattan and Midtown East submarkets had increases in occupancy that offset those declines. Hotels in Midtown East reported the strongest performance, a 2.3 percent increase in RevPAR; however, similarly to last quarter, this neighborhood experienced both the largest increase in occupancy, at 7.0 percent, coupled with the greatest decline in ADR, at 4.4 percent. The Upper Manhattan neighborhood saw RevPAR growth of 0.3 percent. Lower Manhattan, Midtown South and Midtown West experienced RevPAR declines of 1.0, 2.8 and 3.3 percent, respectively. Year-to-date, Upper Manhattan is the only neighborhood to report positive RevPAR performance, at just 0.4 percent. On a RevPAR basis, Midtown West and Midtown South have been the weakest, which may be indicative of the effects of a disproportionate amount of the new supply entering into these neighborhoods. Similarly, for both the full-service and limited-service segments, occupancy levels increased while ADR decreased, resulting in declining RevPAR levels. Full-service hotels were once again hit the hardest, with a 1.1 percent drop in RevPAR, while limited-service hotels saw a 0.8 percent decline. Through the first three quarters of the year, limited-service hotels increased RevPAR by 0.3 percent, while full-service hotels experienced a decline of 1.6 percent. Last quarter saw a reversal in the recent trend of outperformance by independent properties, compared to chain-affiliated hotels. The same appears to be true this quarter. Both independent and chain-affiliated hotels reported occupancy growth but RevPAR declines. However, with less occupancy growth in independent hotels, and a more dramatic drop in ADR, independent properties experienced a more pronounced decline in RevPAR performance, declining 2.2 percent, compared to just 0.4 percent for chain affiliated properties. Source: PwC, based on STR data BBG, INC. 34

43 AREA ANALYSIS RECENT HOTEL TRANSACTIONS Hotel transactions picked up substantially during the third quarter. After just two sales during the first half of the year, in the third quarter seven transactions occurred. According to Real Capital Analytics, the former Hotel East Houston, now The Ridge Hotel, was sold in July for $16.7 million or approximately $399,000 per key. The hotel was purchased by GPS Realty from Jinsup An. Also in July, the Nederlander Organization sold the DoubleTree Suites by Hilton at 1568 Broadway for $200 million or approximately $411,000 per key. The purchasers were a partnership of Maefield Development, L&L Holding and Fortress Investment Group. FelCor Lodging Trust disposed of two Manhattan properties prior to its August merger with RLJ Lodging Trust. The first property, Morgans Hotel, was transacted for $37 million or approximately $327,000 per key. The buyers, a partnership of Kash Group and Shel Capital plan to convert the property into microunit condominiums. The second property, the Royalton Hotel NYC, was sold to a partnership of Highgate and Rockpoint Group for $55 million or approximately $325,000 per key. In August, Magna Hospitality Group sold the DoubleTree by Hilton, located at 341 West 36th Street, to Ascott Residence Trust for $106 million or approximately $473,000 per key. Also in August, Le Hotels Group sold the Hotel Wales to DLJ Real Estate Capital Partners for $35 million or approximately $393,000 per key. Finally, Apple Core Hotels sold nyma, the New York Manhattan Hotel to a partnership of Capstone Equities and Highgate for $52 million or approximately $304,000 per key. These transactions are displayed in the following table: RECENT AND PLANNED HOTEL OPENINGS/CLOSINGS There were three hotel openings and one hotel closing in Manhattan during the third quarter. In July, the 113-room Morgans hotel, located at 237 Madison Avenue closed. In August, the 109- BBG, INC. 35

44 AREA ANALYSIS room Made Hotel, located at 44 West 29th Street opened. The 618- room MOXY NYC Times Square, located at 475 Seventh Avenue opened in September. Also in September, the 249-room Hilton Garden Inn Financial Center, located at 6 Water Street opened. The following tables summarize the hotels anticipated to open during Q4 2017, 2018 and BBG, INC. 36

45 AREA ANALYSIS BBG, INC. 37

46 AREA ANALYSIS BBG, INC. 38

47 AREA ANALYSIS Manhattan Market Data The following tables summarize current occupancy, ADR, and RevPAR for Manhattan hotels. YTD for all of Manhattan, the average occupancy, ADR, and RevPAR was 86.5%, $258.83, and $ respectively as of September The occupancy increased 0.8% since the prior year. ADR decreased 2.1% since the prior year. RevPAR decreased 1.3% since the prior year. As summarized below, hotels in the subject s Lower Manhattan submarket saw a 1.4% improvement in occupancy and a 2.4% decline in ADR resulting in a 1.0% drop in RevPAR through the first three quarters of 2017 compared to the same period last year. BBG, INC. 39

48 AREA ANALYSIS As indicated below, full-service hotels in Manhattan saw a 0.6% improvement in occupancy to 86.1% and a 2.1% decline in ADR resulting in a 1.6% drop in RevPAR through the first three quarters of 2017 compared to the same period last year. Limited-service properties improved occupancy by 2.0% as of YTD September 2017 to 88.0% while ADR dropped 1.6% resulting in a 0.3% improvement in RevPAR. Independent hotels in Manhattan saw a 0.8% improvement in occupancy to 85.7% and a 2.0% decline in ADR resulting in a 1.2% drop in RevPAR through the first three quarters of 2017 compared to the same period last year. Chain-affiliated hotels in Manhattan saw a 0.8% improvement in occupancy to 87.1% and a 1.6% decline in ADR resulting in a 0.9% drop in RevPAR through the first three quarters of BBG, INC. 40

49 AREA ANALYSIS BBG, INC. 41

50 AREA ANALYSIS LOCAL HOTEL MARKET ANALYSIS The purpose of this section is to link the general market to the subject property and the specific market in which it competes. As a major metropolitan area, New York City draws visitors nationally and internationally from business, leisure and group travel sectors. We will begin our analysis by comparing the subject to the competitive set primarily in terms of physical and locational attributes. In doing so, we will identify the market in which the property competes. Next, we will examine historical occupancy and room rate trends, as well as the factors which will influence the continuation of such. In this analysis, we have relied on secondary data provided by Smith Travel Research, a prominent company which tracks hotel demand factors. SUBJECT PROPERTY PRODUCTIVITY ANALYSIS The subject is a 25-story, 264-room hotel. It was completed in 2011 and was part of the Morgan s Hotel Group until March Now it is known as the NoMo Hotel and is affiliated with the Preferred Hotels & Resorts group. Property Rating In order to assess the subject s strengths and weaknesses with regard to the marketability, we have analyzed the subject in comparison to its competition in terms of its site characteristics and location. In addition, we studied the proposed physical attributes such as building design and construction, as well as non-physical items such as amenities and brand positioning. We should note that the project is compared to full service boutique hotels. Market Standards To determine the market standard, we researched the amenities and services offered by the competitive set; we detail the amenities of each later in the Supply Analysis. Nearly all sectors include a small refrigerator, hair dryer, toiletries, phone, television, and Wi-Fi/internet access. Although the specifics offerings vary, there are common items that most consumers have come to expect. Consumers who choose boutique brands expect unique, high design, trendy restaurants, high quality bath products and linens, and technology connectivity. The general tone in a boutique is intended to be intimate and personal, whereby the staff is highly trained offering consistent service. As the moniker indicates, full-service hotels offer a wide variety of services and amenities to travelers. With commonly recognized flags, most appeal to a broad range of travelling segments, with features to satisfy the demands of business, groups, and leisure categories. While a midscale product will offer a small fitness center, a full-service hotelier provides a wide array of equipment, a pool, plus a spa. This comparison is consistent across nearly all offerings, from the range of services provided by the concierge, to valet parking and casual to formal dining options. BBG, INC. 42

51 AREA ANALYSIS Competitive Position of the Subject Property With the new renovations and art, the subject building is above average and will appeal to the boutique traveler seeking a high-end design hotel. Thus, if priced appropriately, we anticipate that the subject should capture at least its fair share of market demand in this segment. The planned renovation which will include upgraded design in all guest rooms, a more convenient lobby location and the addition of a bistro/lounge as well as a bar/live music venue component will also be a draw and considerable income producing factor. Physical Elements The exterior design, appearance and quality of construction of the subject will appeal towards the high end of the market. Completed in 2011, the project, and FF&E are in excellent condition. The lobby, restaurant, and common areas received an upgrade in 2016, with new art, which makes the hotel look fresh and trendy. Further planned renovations including moving the guest registration area to the main floor. In terms of room size, the average space is similar to the competitive set. The guest rooms are bright and modern, with floor to ceiling windows and excellent views. Ownership has plans to replace the soft goods, furniture, artwork and flooring in the guest rooms. Below is an example of the renovated studio room. In terms of unit-amenities, the subject competes favorably. To this end, guest rooms feature Flat-screen TVs, ipod docking stations, high quality linens and bath products, and wireless internet service. Ownership recently upgraded all guest rooms with Smart TVs, allowing guests to stream entertainment from their phones. BBG, INC. 43

52 AREA ANALYSIS Outside the guest suites to the common areas, travelers will also be pleased to find a consistent modern decor, with trendy design features including a well-regarded restaurant and 2 popular bars as well as several terraces and common spaces for congregating. While we expect most guest will arrive via public transportation, the lack of on-site parking is a slight deficiency, but compensated by the fact that there are numerous parking facilities nearby. Hotel ownership is planning to renovate the hotel s current restaurant to include an open kitchen and add a casual restaurant and a bar/live music venue. In total, the subject will contain three dining venues, each with its own personality. The Bistro & Lounge will be located off the main lobby on the ground floor. This space is expected to be completed in 2018/early The anticipated layout is illustrated below. The 233-seat restaurant will also be the hotel s art showcase, displaying large sculptures and at installations throughout the year. Opening the southern wall to the hotel s allyway connects the restaurant to the street, which will improve ease of access and visibility. There are several layout ownership is considering for the restaurant but all will include dining, bar area and outside seating. This space is expected to be completed in 2018/early BBG, INC. 44

53 AREA ANALYSIS In addition, ownership will be replacing the library off of the lobby to a live music space with a bar/lounge. This new renvenue-generating space is expected to be completed in 2018/early BBG, INC. 45

54 AREA ANALYSIS General Location The subject site is located on Crosby and Lafayette Streets in Soho. In terms of the macro market in New York City, Soho is a well-regarded neighborhood known for its trendy shops and restaurants. Guests will find that Soho has many amenities and cultural institutions within easy walking distance. Thus, as a Boutique hotel, the site is almost ideal to support guests who travel for a variety of purposes. Site Linkages The lynchpin to the success of marketing in Manhattan is easy access to transportation links. In this regard, the subject site is extremely well positioned, with 8 subway lines within several blocks of the parcel. In terms of auto transport, East Houston is a link to the FDR Drive and West Side Highway, which links the subject neighborhood to Brooklyn to the east and New Jersey to the west. CONCLUSION As a Boutique hotel, the subject competes favorably in the overall market, and draws attraction based on its high design, excellent condition, amenities, and proximity to transport. PERFORMANCE A research survey by HVS, a leading hotel information provider, indicates that Manhattan hoteliers are confident that the market will continue to be strong despite a temporary dip in RevPAR due to an increase in supply. To develop a forecast of occupancy and room rates, we have examined the historical interaction of supply and demand of the competitive set, in conjunction with the expected performance of the macro market reported by Smith Travel Research. The forecast accounts for any unexpected market weakness that could occur as a result of a myriad of factors, the primary of which is new supply. In this regard it is likely that continued success will spur other developments, further fueling competition. Furthermore, a slowdown of market expansion including ADRs and occupancy could alter the operating environment significantly. It is our view that investors in lodging properties are generally aware of these trends, and will advance forecasts with consideration of such. BBG, INC. 46

55 AREA ANALYSIS THE SUBJECT S COMPETITIVE POSITION The subject is a 264-key hotel. summarized below. There are 5 hotels considered to be direct competitors, COMPETITIVE SET Name Rooms Year Opened SoHo Grand Hotel Sixty SoHo The Roxy Hotel TriBeCa The Standard East Village Hotel Hugo SoHo Total 918 MAP OF COMPETITIVE SET BBG, INC. 47

56 AREA ANALYSIS THE SOHO GRAND HOTEL The Soho Grand Hotel was completed in 1996 and was one of the first luxury hotels in Soho. It is 17-stories tall and has 353 rooms. There are several bars and restaurants, and a gym. SIXTY SOHO Sixty SOHO is a 12-story 97 room hotel opened in 2001 in Soho. It has a popular restaurant as well as a roof top bar. BBG, INC. 48

57 AREA ANALYSIS ROXY HOTEL TRIBECA (FORMERLY TRIBECA GRAND) Roxy Hotel Tribeca is an 8-story 201 room hotel opened in 2000 in Tribeca. It has a bar, lounge, screening room, and gym. THE STANDARD EAST VILLAGE The Standard East Village is located in Cooper Square (3 Avenue and 5 th Street) and was constructed in The hotel contains 145 rooms. The 21-story hotel is accessed via the original tenement-style building. The hotel features a full-service restaurant with a Michelin starred chef, and a café offering live music. Rooms feature floor to ceiling windows, TV, Bluetooth speakers, 24-hour room service and free wifi. BBG, INC. 49

58 AREA ANALYSIS HOTEL HUGO SOHO Hotel Hugo Soho is located on Greenwich Street and Spring Street. It is a 15-story, 122 room hotel that opened in It has a full restaurant and 2 rooftop bars. Analysis of Comparable Hotels The subject and all of the comparables are newly constructed/renovated, high end, luxury hotels in trendy neighborhoods of downtown Manhattan. The subject and all of the comparables have stylish restaurants and bars that are well regarded by tourists and locals alike. Prior to the transition from Morgan s Hotel Group to NoMo, the subject s occupancy outperformed the competitive set while the ADR and RevPAR underperformed the competitive set. When the current ownership took control of the hotel and its management, any existing clientele information was unavailable and no reservations or events were scheduled. As a result, the hotel suffered decreased occupancy and ADR throughout 2015 and into early When new management arrived in May 2016 the hotel began a dramatic turnaround, with an increase in occupancy from 83.9% in the second half of 2015 to 88.2% in the second half of Similarly, ADR increased from $327 to $333 from 2H 2015 to 2H These improvements resulted in a RevPAR increase of $275 to $297 from 2H 2015 to 2H However, according to ownership, a new Revenue Manager began mid-2017 and at that time, the hotel experienced a downward trend in ADR. This management position has recently been replaced as well as other management positions including the General Manager and Marketing Manager. Ownership believes that the hotel has been mismanaged and that the hotel is slated for growth with new and prudent management in place. Further, ownership is planning to begin a $15 million renovation to the F&B outlets, lobby and guest rooms. This will include the addition of two revenue generating F&B outlets, consisting of a casual bistro/lounge and a live music venue with a bar. Ownership is also planning to renovate the existing restaurant to have an open BBG, INC. 50

59 AREA ANALYSIS kitchen. Further, the lobby will be moved to the ground level and the guest rooms will be upgraded by replacing all soft goods, furniture, flooring and adding fresh, modern art work. The hotel s 2016 and 2017 performance is summarized in the table below, along with the same measurements in the competitive set. The table indicates that the subject s occupancy declined 2.6 percentage points (or -3.0%) to 84.4% while its competitive set improved by 2.0 percentage points (or 2.4%) to 87.8%. The subject s ADR declined 8.6% during 2017 while its competitive set declined 2.3%. Overall, the subject s RevPAR dropped 11.4% during the year while its competitive set remained stable Occupancy ADR RevPAR Occupancy ADR RevPAR Subject 87.0% $ $ % $ $ % Change -3.0% -8.6% -11.4% Competitive Set 85.8% $ $ % $ $ % Change 2.4% -2.3% 0.0% Subject vs. Competitive Set pp -$ $ % -19.9% -24.8% The subject continues to lag the competitive set in both occupancy and rate. Ownership believes with the replacement of several management positions, the hotel is slated to improve. While the expected major renovations to the subject s guest rooms and F&B outlets will occur during Year 1 and part of Year 2, ownership does not expect this to negatively impact the hotel s performance. The addition of the F&B outlets will not disrupt hotel operations and the renovations to the guest rooms will be on a floor by floor basis and as the hotel is not at 100% occupancy, this can be planned for little to no disruption. Therefore, we expect Year 1 to have stable performance. Following the completion of the renovation, we project that the hotel s rate and occupancy will be on par with its competitive set. We note that the Roxy Hotel, one of the hotels in the competitive set, has seen a 19.2% improvement in RevPAR following a recent renovation with a superior F&B program, summarized below. YEARLY HOTEL NAME # ROOMS RevPAR Rank RevPAR Rank % Change % Chg Rank Sixty SoHo 97 $ $ Standard East Village 144 $ $ SoHo Grand 353 $ $ NoMo SoHo 263 $ $ Roxy Hotel 201 $ $ Hotel Hugo 122 $ $ TOTAL 917 $ $ We also note that the hotel s RevPAR decline of 11.4% is notably more than its competitors, proving that the hotel s decline is not market driven, rather a reflection of poor management. BBG, INC. 51

60 AREA ANALYSIS Projected Occupancy Rate The subject s 2016 occupancy of 87.0% dropped 3.4 percentage points to 84.4% in The subject s 2014 and 2015 occupancy were 88.4% and 82.5%, respectively. The competitive set saw an increase in its 2017 occupancy rate to 87.8% compared to 85.7% in Under efficient management, we project the subject can achieve an 87.5% occupancy rate. As the room renovations will be managed as to not interrupt the hotel s operations, we occupancy to remain stable in Year 2 and improve slightly to 88.0% in Year 3 and thereafter. Projected ADR The subject s 2017 ADR was $ compared to $ in We note that the property achieved an ADR of $ in the last quarter of 2016 compared to $ in the last quarter of As previously mentioned, the subject s ADR continues to underperform the competitive set. Ownership has recently replaced many management positions and has added a PH unit and as such, we project that the ADR will improve from 2017 levels to $ in Year 1. Further, ownership believes the planned renovation will be completed by the end of 2018 (Year 1) or early 2019 (Year 2), therefore we project ADR to grow 10.0% in Year 2, 7.0% in Year 3, 4.0% in Year 4, 3.0% in Year 5 and thereafter. Assuming the competitive set s ADR achieves a 3% annual growth, the subject s projections will be on par with its competitive set by Year 3, as summarized below. Projection Year: Average Daily Rate: $ $ $ $ $ RevPAR: $ $ $ $ $ Comp Set ADR w/ 3% Growth $ $ $ $ $ Subject vs. Comp Set -11.3% -4.2% -0.3% 0.7% 0.7% The tables on the following pages summarize the subject s performance in relation to the competitive set. BBG, INC. 52

61 AREA ANALYSIS Source: STR BBG, INC. 53

62 AREA ANALYSIS COMPETITIVE SET STATISTICS Source: STR BBG, INC. 54

63 NEIGHBORHOOD DESCRIPTION NEIGHBORHOOD MAP BBG, INC. 55

64 NEIGHBORHOOD DESCRIPTION NEIGHBORHOOD DESCRIPTION The subject property is located in the Borough of Manhattan, City and State of New York. The area encompassing the subject is Lower Manhattan, which extends south from 14th Street to the Battery. Lower Manhattan is a large area comprised of numerous distinct neighborhoods. Many of these neighborhoods are older ethnic communities which first evolved during the years of immigration in the late 19th and early 20th Centuries. These areas include the Lower East Side, Little Italy, Chinatown, and Greenwich Village. Other Lower Manhattan neighborhoods, such as SoHo, TriBeCa, the East Village, and Flatiron District, have taken form more recently as the result of post-world War II social and economic trends. The subject's specific location is known as SoHo. The subject neighborhood is bounded by Houston Street to the north, Sixth Avenue to the east, Canal Street to the south and the Hudson River to the west. The neighborhoods which surround the subject neighborhood are Little Italy and Chinatown to the east, the West Village to the north, TriBeCa to the south, and the Hudson River to the west. The main street of SoHo is West Broadway, which to the north becomes Fifth Avenue on the other side of Washington Square Park. The primary SoHo properties are in the SoHo-Cast Iron Historic District, which was created in 1973 and is bounded by West Broadway, Broadway and Crosby Street, and Houston and Canal Streets. West Broadway is the district's "main street" with the most famous art galleries, boutiques and restaurants, but the other streets in the district, Prince, Spring, Broome and Grand and Wooster, Greene and Mercer are all considered prominent. Many of the buildings were erected between the 1850's and 1880's. Cast iron parts for the facades were mass-produced locally and this district contains the world's largest collection of such facades, many in the Italianate or French Second Empire styles. The South Village is an area dominated by older loft buildings and tenements. As was the case with several Lower Manhattan neighborhoods, the South Village was originally developed in the early 20th Century for industrial use. Up until the 1950's, this area was the scene of considerable manufacturing activity. By the late 1950's, however, New York City's industrial base was deteriorating due to high costs. This situation was especially true in Manhattan. Much of the South Village was abandoned, but restrictive zoning laws limited any alternative uses in the area. BBG, INC. 56

65 NEIGHBORHOOD DESCRIPTION During the 1960's, artists seeking low rents and large, airy spaces discovered the lofts of NoHo. Landlords who were desperate for rent were willing to, illegally, lease commercial spaces to artists seeking lofts. The artists, in turn, were willing to endure years of near isolation and incur the costs of converting the lofts into living space. Ultimately, zoning amendments were passed to permit living/work quarters for "certified" artists. The main retail thoroughfares in the South Village are Sixth Avenue, Varick Street, Hudson Street, Spring Street, and Prince Street. SoHo to the east is a trendy area, which is very popular with artists and young professionals. To a considerable degree, the pattern of change which occurred in SoHo has been duplicated in the neighboring communities of NoHo, TriBeCa, and the South Village. The subject is located within Manhattan Community District 2, which includes the West Village, SoHo, NoHo and Little Italy. Data from the New York City Department of City Planning shows District 2 to be a growing residential area. Between 1970 and 1980, the population of Community District 2 increased by 3.3%. Between 1980 and 1990, the population increased by 8.1%. The population decreased slightly by 1.1% between 1990 and 2000 and decreased 3.3% between 2000 and BBG, INC. 57

66 NEIGHBORHOOD DESCRIPTION Population data shows Community District 2 to be one of Manhattan's more affluent communities. In 2000, only 5.2% of the District's residents received some form of public assistance. In 2005 and 2014, 9.7% and 8.3% of the District s residents received some form of public assistance. In all of Manhattan, approximately 25% of the population receives public assistance. Most districts in Manhattan are within a range of 15% to 20%. We note, however, that Manhattan, with its mix of very wealthy and very poor residents, exhibits some of the greatest income disparities to be found anywhere. The poorest districts of Manhattan have more than 40% of all residents receiving assistance, while the most affluent districts show percentages below 5%. The total land area of Community District 2 is acres, or 1.4 square miles. Most of the land in the district is used for residential purposes, with multifamily apartments being the greatest land use. There is very little vacant land in the district. Land use in Community District 2 is broken down as follows: Some 20 public, private and parochial schools are located in Community District 2. Houses of worship can be found throughout the area. Washington Square Park, a local landmark, is the largest recreation area in the District. Community District 2 is served by one Police Precinct and six Fire Department Houses. There are six senior citizen centers for the elderly of this area. BBG, INC. 58

67 NEIGHBORHOOD DESCRIPTION The Specific Subject Location The subject property is situated on the west side of Lafayette Street through to the east side of Crosby Street between Howard and Grand Streets in the Soho section of Manhattan, New York. The subject is several blocks north of Canal Street. The 4, 5, 6, N, and R trains are located within 2 blocks of the subject. The subject s location of one of the most desirable residential, retail and hotel areas in New York City. BBG, INC. 59

68 ZONING ANALYSIS ZONING SUMMARY The subject property is located in an M1-5B Light Manufacturing District as designated by the City of New York. According to the Zoning Handbook, M1 districts are subject to strict performance standards. The uses common to these districts are light industries including knitting mills, research laboratories, and wholesale service facilities. In theory, nearly all industrial uses can locate in M1 areas if they can meet the rigorous performance standards required in the Zoning Resolution. The M1 district is often an industrial front yard or a buffer to adjacent residential or commercial districts. Residential development is not permitted in M1 districts. Certain community facilities are allowed by special permit. Parking and loading requirements vary with district and use. High density M1 districts are exempt from parking requirements; however, accessory parking is required in the M1-1 district. M1-5 districts are mapped in loft areas located in central business districts of Manhattan. The M1-5A and M1-5B districts permit artists to have joint living-work quarters in lofts of the SoHo/NoHo area of Lower Manhattan. Summary of Performance Regulations Maximum Floor Area Ratio Manufacturing or Commercial: 5.0 Community Facility: 6.5 Minimum Side Yard Setback: 8 feet Minimum Rear Yard Setback: 20 feet BBG, INC. 60

69 ZONING ANALYSIS Initial Setback: Maximum Height: 20 feet (narrow street) 15 feet (wide street) 85 feet, or 6 stories Summary of Use Regulations The following uses are permitted in M1 districts: Category Use Group 4 Use Groups 5-14 Use Groups 16 & 17 Permitted Uses Churches, medical offices. The full range of retail, commercial, and recreational uses except for amusement parks. Light manufacturing uses. SUMMARY OF ZONING The subject lot size is 14,470 square feet and the as of right FAR is 5.0, yielding a buildable area of 72,350 square feet. The subject contains a gross building area of 121,165 square feet. As the subject was completed in 2011, we will assume the development plans were approved and the subject conforms to the regulations. It should be noted that we are not experts in the interpretation of complex zoning ordinances. The determination of compliance, however, is beyond the scope of a real estate appraisal. We know of no deed restrictions, private or public, that further limit the subject's use. The research required to determine whether or not such restrictions exist, however, is beyond the scope of this appraisal assignment. Deed restrictions are a legal matter, and only a title examination by an attorney or Title Company can usually uncover such restrictive covenants. Thus, we recommend a title search to determine if any such restrictions do exist. BBG, INC. 61

70 PROPERTY DESCRIPTION ASSESSED VALUE AND REAL ESTATE TAXES Assessments The subject property is designated on the tax maps of the City of New York, Borough of New York, as Block 233, Lot 2. As the tax year runs from July to June of each year, we summarize both the 2017/2018 assessed value and the 2018/2019 assessed value as follows: 2017/2018 Actual Transitional Land $9,767,250 $9,767,250 Building + 29,271,600 28,357,689 Total $39,038,850 $38,124,939 Less ICAP Exemption -$15,332,341 -$15,332,341 Assessed Value $23,706,509 $22,792, /2019 Actual Transitional Land $9,767,250 $9,767,250 Building + 32,389,650 29,346,447 Total $42,156,900 $39,113,697 Less ICAP Exemption -$11,499,256 -$11,499,256 Assessed Value $30,657,644 $27,614,441 BBG, INC. 62

71 PROPERTY DESCRIPTION Tax Rates The City of New York has four tax categories for real properties. The subject is classified as a Class 4 commercial property. The Class 4 tax rate for the 2017/18 tax year is $ per $100 of assessed value. The Class 4 tax rate has been relatively stable over the past 3 years. The tax rates for future tax years have not yet been announced. The chart below illustrates historical tax rates in each class. REAL ESTATE TAX RATES, NEW YORK CITY Year Class 1 Class 2 Class 3 Class / / / / / First-Half 2008/ Second-Half 2008/ / / / / / / / / / Source: New York City Department of Finance Based on the current tax rate of $ per $100 of assessed value, we present the subject s 2017/18 and 2018/2019 assessments. The subject s real estate taxes are projected as follows: Tax Year 17/18 Assessed Value Taxable AV Tax Rate Tax Liability SF Taxes/SF Unabated $38,124,939 $38,124,939 x % = $4,008, ,165 $33.08 Abated $22,792,598 $22,792,598 x % = $2,396, ,165 $19.78 Tax Year 18/19 Assessed Value Taxable AV Tax Rate Tax Liability SF Taxes/SF Unabated $39,113,697 $39,113,697 x % = $4,112, ,165 $33.94 Abated $27,614,441 $27,614,441 x % = $2,903, ,165 $23.96 In Year 1, we will average the abated tax liability from the tax years presented above, for a Year 1 tax of $2,649,898, summarized below. Abated Taxes 17/18 $2,396,414 Abated Taxes 18/19 $2,903,382 Average Taxes Year 1 $2,649,898 BBG, INC. 63

72 PROPERTY DESCRIPTION In order to determine if the taxes are reasonable, we researched tax comparables for hotel properties. Tax comparables are presented as follows: TAX COMPARABLES HOTEL Year Address Built/Renvtd Square Feet Taxes/SF 503 Canal St ,517 $ York St ,283 $ Bowery 1923/ ,665 $ Watts Street ,375 $ Charlton Street ,420 $39.92 Min: $25.83 Max: $39.92 Average: $33.06 The comparables range from $25.83 to $39.92 per square foot. The subject s unabated taxes are within the comparable range. ICAP (formerly ICIP) Exemption The City of New York grants tax exemptions and abatements under the Industrial and Commercial Abatement Plan (ICAP). Partial exemptions from or abatement of Real Estate Taxes for varying periods of up to 25 years are provided for eligible industrial or commercial buildings which are constructed, modernized, rehabilitated, expanded, or otherwise physically improved. A Certificate of Eligibility is issued for projects which meet the program requirements. The program grants long-term real estate tax exemptions for the construction or alteration of eligible industrial or commercial buildings. Qualifying industrial projects may also receive a partial tax abatement for any existing real estate tax liability. For commercial projects, the program provides a full exemption on the increase in assessed value attributable to the improvements for 11 years, followed by four years of exemption declining at 20% per year. Commercial projects in designated "special exemption areas" and all industrial projects receive a full exemption for 16 years, with the exemption declining by ten percent annually for the next nine years. Industrial projects may also be eligible for a partial tax abatement based on the real estate taxes levied in the year prior to commencement of construction. For the first four years, the abatement equals 50% of the real estate tax imposed, followed by eight years in which the abatement declines by 10% every two years. How it Works An exemption is granted on that portion of a property's assessed valuation known as the exemption base. The exemption base for each year is limited to the increase in assessed value solely attributable to improvements made to the commercial or industrial property. Industrial and commercial projects in special areas may also receive protection against future increases on the improvement due to inflation or general appreciation in fair value. Base taxes, as assessed prior to renovation or construction and land valuation taxes are never exempted. Exemptions vary based on a property s location and the nature of the construction project. BBG, INC. 64

73 PROPERTY DESCRIPTION Subject Property Tax Burden As summarized below, the subject is currently in year 9 of a 12-year tax exemption. The exemption base is $19,165,426. The increase in assessed value is fully exempt for 8 years, and then the exemption is phased out by 20% per year for the last 5 years. We utilize an average of the actual taxes for the 2017/18 tax year and the 2018/2019 tax year and apply a 2% increase in the assessed value thereafter. We apply the actual tax burden in our analysis for our year 1 tax projection. Following the expiration of the exemption, we project a 2.5% increase in taxes annually. We discount the tax savings at 5%. The net present value of the tax benefit is $3,700,000. This value is added to our sales comparison approach value. YEAR Discount Rate 5% Annual Rate of Growth (Assessment): 2% PROJECTED A.V. MAXIMUM EXEMPTION % OF EXEMPTION ALLOWED (PHASE OUT) ALLOWABLE EXEMPTION TAXABLE A.V. TAX RATE FULL TAXES NET TAXES TAX SAVINGS 9 $38,124,939 $19,165,426 80% $15,332,341 $22,792, $4,008,456 $2,396,414 $1,612, $39,113,697 $19,165,426 60% $11,499,256 $27,614, $4,112,414 $2,903,382 $1,209, $39,895,971 $19,165,426 40% $7,666,170 $32,229, $4,194,662 $3,388,641 $806, $40,693,890 $19,165,426 20% $3,833,085 $36,860, $4,278,556 $3,875,545 $403, $41,507,768 $19,165,426 0% $0 $41,507, $4,364,127 $4,364,127 $0 PROSPECTIVE VALUE OF TOTAL TAX SAVINGS: ROUNDED: $3,659,735 $3,700,000 BBG, INC. 65

74 PROPERTY DESCRIPTION SITE DESCRIPTION The particulars of the site are summarized as follows: Location: Site Area: Shape: Frontage: Topography: Drainage: Paving: Street Drainage: The subject is situated on the west side of Lafayette Street through to the east side of Crosby Street between Howard and Grand Streets in the Soho section of Manhattan, New York. 14,470± Square Feet L shaped feet on Crosby Street and feet on Lafayette Street. Generally level at street grade. Adequate All roads are paved with asphalt in accordance with New York City standards. All roads appeared to be in satisfactory condition. Street drainage is collected with the utilization of recessed catch basins. The catch basins empty by gravity into the New York City sewer storm system mains. Street Lighting: Street lighting consists of standard lighting fixtures which are 400- watt, sodium vapor fixtures and controlled by photo cells. The lighting fixtures are post mounted as per New York City requirements. Utilities + Services: Water Supply: Water is supplied by the municipality and connected through one 4-inch metered domestic service and 1 6- inch fire protection service. Gas Service: Telephone: Electrical: Refuse, Fire Protection, Police: Consolidated Edison Company Provided by Verizon or similar carriers. Consolidated Edison Company (208-volt service to main building) City of New York Hazardous Substances: We observed no evidence of toxic or hazardous substances during our inspection of the site. However, we are not trained to perform technical environmental inspections and recommend the services of a professional engineer for this purpose. BBG, INC. 66

75 PROPERTY DESCRIPTION Flood Hazard Status: Conclusion: The subject property is located in "Zone X" on the National Flood Insurance Program Rate Map, Community Panel # F. Zone X is an area of minimal flooding. The subject site is similar to other lots located in the immediate subject vicinity. The site conforms to neighboring standards in most respects and there are no negative external factors affecting the site. Based upon the current use of the site, all aspects of the site are functionally adequate. BBG, INC. 67

76 PROPERTY DESCRIPTION SUBJECT PROPERTY PHOTOS VIEW FROM CROSBY STREET BBG, INC. 68

77 PROPERTY DESCRIPTION VIEW FROM LAFAYETTE STREET BBG, INC. 69

78 PROPERTY DESCRIPTION LAFAYETTE STREET BBG, INC. 70

79 PROPERTY DESCRIPTION CROSBY STREET BBG, INC. 71

80 PROPERTY DESCRIPTION LAFAYETTE STREET ENTRANCE CROSBY STREET ENTRANCE BBG, INC. 72

81 PROPERTY DESCRIPTION HOTEL ENTRANCE ENTRANCE TO RESTAURANT BBG, INC. 73

82 PROPERTY DESCRIPTION LOBBY BBG, INC. 74

83 PROPERTY DESCRIPTION NOMO KITCHEN BBG, INC. 75

84 PROPERTY DESCRIPTION NIGHTCLUB BBG, INC. 76

85 PROPERTY DESCRIPTION NIGHTCLUB GYM BBG, INC. 77

86 PROPERTY DESCRIPTION RECEPTION BBG, INC. 78

87 PROPERTY DESCRIPTION NEW PH UNIT BBG, INC. 79

88 PROPERTY DESCRIPTION NEW PH UNIT BBG, INC. 80

89 PROPERTY DESCRIPTION NEW PH UNIT BBG, INC. 81

90 PROPERTY DESCRIPTION ROOF SPACE BBG, INC. 82

91 PROPERTY DESCRIPTION KITCHEN LOBBY ART BBG, INC. 83

92 PROPERTY DESCRIPTION MEETING ROOM TERRACE BBG, INC. 84

93 PROPERTY DESCRIPTION ELEVATORS COMMON HALLWAY BBG, INC. 85

94 PROPERTY DESCRIPTION ROOM BBG, INC. 86

95 PROPERTY DESCRIPTION BATH BBG, INC. 87

96 PROPERTY DESCRIPTION BATH BBG, INC. 88

97 PROPERTY DESCRIPTION GUEST ROOM SITTING AREA BBG, INC. 89

98 PROPERTY DESCRIPTION ROOM BBG, INC. 90

99 PROPERTY DESCRIPTION BUILDING DESCRIPTION The subject is a 25-story, 264-key hotel completed in The subject contains a gross building area of 121,165 square feet. In addition to hotel rooms, the subject contains a 5,000 SF restaurant known as Nomo Kitchen, which is located in a greenhouse space, a lobby bar, nightclub located off the lobby, a meeting room on the second floor, and a meeting room/private dining room located in the lobby. The gallery and terrace offer 2,500 SF of meeting space. The subject is located on the west side of Lafayette Street through to the east side of Crosby Street between Howard and Grand Streets in the Soho neighborhood of New York County, City and State of New York. The subject is identified on the tax maps of New York County as Block 233 Lot 2. The site measures 14,470 square feet and is zoned M1-5B. Ownership is planning to begin a $15 million renovation to the F&B outlets, lobby and guest rooms. This will include the addition of two revenue generating F&B outlets, consisting of a casual bistro/lounge and a live music venue with a bar. Ownership is also planning to renovate the existing restaurant to have an open kitchen. Further, the lobby will be moved to the ground level and the guest rooms will be upgraded by replacing all soft goods, furniture, flooring and adding fresh, modern art work. Below is a summary of the construction and physical characteristics. Physical Description: Foundation: Structural System: Exterior Walls: Roof: Entrances: Windows: The subject is a 25-story boutique hotel that was completed in January There are two below-grade levels. There are setbacks at the eastern and western side of the building at the lobby level. The building is accessed from Crosby Street via a landscaped courtyard where a greenhouse type of structure (garden building) was built. This garden building houses the full-service restaurant, Nomo Kitchen. The hotel has a lobby bar, a gym on the lower level and meeting rooms and terraces on the first floor, as well as a nightclub. The building was built over an older 12-story steel-framed building, which was partially demolished and reinforced. Concrete slab on steel deck with steel beams and girders. Glass and aluminum curtain wall. IRMA roof. Terraces and setbacks are provided with pre-cast concrete pavers on pedestals. Crosby and Lafayette Streets. Aluminum thermal windows. The windows are integral with the curtain wall system. Some vision panels are operable and can swing outwards. For safety reasons, the swing of the windows is limited to 6 from the frame. BBG, INC. 91

100 PROPERTY DESCRIPTION Mechanicals Heating/Cooling Systems: Elevators: Sprinklers/Life Safety: Water/Sewer: Gas Service: Electric Service: Heating and cooling is via water-sourced heat pumps units in the guestrooms and the lower levels of the building. Hot water is produced by a four-module gas-fired boilers and the condenser water is served by a roof-mounted cooling tower. The corridors are cooled and heated by a packaged RTU with gas-heating component. There is one service gearless traction type elevator, three passenger elevators, and a hydraulic freight elevator serving the sub-cellar through the lobby level. Automatic wet fire sprinkler and standpipe system, and fire alarm system. Domestic water is supplied to the building via a booster pump system and domestic hot water is produced by means of plate heat exchangers from hot water produced by the boilers. National Grid gas service. Con Ed electric service. Interior Layout and Finish Lobby: Rest Rooms: Meeting Room: The lobby level of the hotel is on the floor (2nd floor) above the main reception area at the ground floor. Both the reception area and the lobby, which is accessed via a winding open stair and the elevators, have wood flooring, texture-painted gypsum board walls, and painted gypsum board ceilings with decorative appliqués. The lobby at the 2nd floor has access to the terraces at the eastern and western sides. The lobby will be moved to the ground floor as part of the planned renovation. There are four toilet rooms at the ground floor, close to the reception area, and another two in the nightclub. The toilet rooms near the reception area typically have penny tiles and painted gypsum board walls and ceilings. There is a meeting room on the lobby level (2 nd floor). The finishes consist of carpet floors, VWC, and painted gypsum board ceiling. This meeting room has access to the setback facing Lafayette Street. BBG, INC. 92

101 PROPERTY DESCRIPTION Restaurant and Bars: Kitchen: Corridors: Guest Rooms: The main restaurant in the hotel, Nomo Kitchen, is located on the ground floor, and includes the dining area and bar in the garden area. The nightclub is located on the ground floor and is accessible from the lobby. There is also a separate entrance on Lafayette Street. The nightclub was rebranded as the Tiki Room in 2017 and features Tiki style furniture and décor. The main kitchen has quarry floor tiles, grease-resistant acrylic wall panels, and ACTs. This kitchen has commercial type equipment and all the working surfaces are of stainless steel finish. This kitchen, which is located at the subcellar, serves the restaurants and also caters to room service. As part of the renovation, the kitchen will be moved to the ground floor. The finishes in the corridors consists of carpet floors, texture painted walls, and painted gypsum board ceilings. The typical guestroom is furnished with a bed, a wallmounted headboard and a night stand. Floor finishes consist of carpeting and painted gypsum board walls and ceilings. There are 17 guestroom plan types, which are tabulated below: Note this does not include the new PH unit. Guest Room Amenities: Administrative Offices: Flat screen HDTV, ipod Docking Station, desk, 10-foot floor to ceiling windows, marble bath, Malin + Goetz bath products, luxurious bedding, private balcony in penthouse rooms. All units have been upgraded to include smart TVs. The administrative and managerial offices typically have carpet floors, painted gypsum boards walls, and painted ceilings. Some offices, such as the housekeeping and chef s BBG, INC. 93

102 PROPERTY DESCRIPTION office, have VCTs on the floor. Housekeeping/Laundry: Parking: Stairwells: Landscaping: Loading Dock: The housekeeping area is located at the cellar level. This space has VCTs, painted gypsum board walls and open ceiling. As only light washing and drying is conducted in the premises, only a small washer and dryer are provided in the housekeeping area. Most of the laundry is performed by a service vendor. None The building tower has scissors type stairs. Landscaping is provided on the courtyards facing Crosby Street. Specimen trees are planted on the open grade and a metal fence with arched openings and vines is provided along the north side. A trellis system, also covered with vines, is provided over the concrete walkway leading to the main entrance. There is an automatic irrigation system. The loading area is located near the northeastern corner of the ground floor of the building. This loading area, which is recessed from the exterior wall of the building, is accessed from the sidewalk along Lafayette Street. The loading area has concrete floor, painted gypsum board walls and open ceiling. CONDITION The subject was completed in 2011 and is in excellent condition with no observed deferred maintenance or functional obsolescence. The effective age is 7 years and the remaining economic life is 53 years. Summary The information contained in the sections entitled "Site Description" and "Building Description" was obtained from the following sources: Formal field inspection, January 26, Information provided by ownership New York City planning, zoning and assessment records BBG, INC. 94

103 HIGHEST AND BEST USE HIGHEST AND BEST USE The following definition of Highest and Best Use is set forth in The Dictionary of Real Estate Appraisal 6 th edition sponsored by the Appraisal Institute. Highest and Best Use is: 1. The reasonably probable use of property that results in the highest value. The four criteria that the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity. 2. The use of an asset that maximizes its potential and that is possible, legally permissible, and financially feasible. The highest and best use may be for continuation of an asset s existing use or for some alternative use. This is determined by the use that a market participant would have in mind for the asset when formulating the price that it would be willing to bid. 3. The highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future. In determining highest and best use, we have considered the following: The current trends of supply and demand on the market. Current zoning regulations and other possible restrictions. Neighboring land uses. It is to be recognized that in cases where a site has existing improvements on it, the highest and best use may very well be determined to be different from the existing use. The existing use will continue, however, unless and until land value in its highest and best use exceeds the total value of the property in its existing use. In estimating highest and best use, alternative uses are considered and tested for the subject site. Possible Use - An analysis to determine those uses of the subject which can be deemed physically possible; Permissible Use - An investigation into existing zoning regulations, lease terms, and deed restrictions on the site to determine which uses are legally permitted; Feasibility - An analysis to determine which of those uses deemed possible and legal can provide a net return to the owner of the site; Highest and Best Use - Among the feasible uses, which use will provide the highest net return or highest present worth. BBG, INC. 95

104 HIGHEST AND BEST USE As Vacant Legally Permissible The subject property is located in a M1-5B which allows commercial, retail and community facility development as of right. No known zoning change is currently being considered or anticipated. We are not aware of any public or private deed restrictions that preclude development on the site. Our analysis of the market indicates that the subject location supports the current zoning. It is our opinion that the site, if vacant, could be developed for the above legally permitted (and assumed) uses. Physically Possible Financially Feasible Maximally Productive/ Highest and Best Use The subject site is a typical size, offering very good utility for development. All necessary utilities are available, and there are no apparent easements or encroachments that would hinder development. Any of the above legally permitted uses, therefore, are considered physically possible. The subject's location is mixed-use in character, and the subject's neighborhood has seen a good deal of new mixed-use development in recent years. A commercial development would be financially feasible. All legally permissible, physically possible and financially feasible uses of the subject property, as vacant, have been presented and examined. Based on the strong mixed-use location of the site, a commercial development such as a hotel would represent the highest and best use. BBG, INC. 96

105 HIGHEST AND BEST USE As Improved Legally Permissible The subject property is located in a M1-5B which allows commercial, retail and community facility development as of right. No known zoning change is currently being considered or anticipated. The current use conforms to the zoning regulations. Physically Possible Financially Feasible Maximally Productive/ Highest and Best Use The subject site is a typical size, offering very good utility for development. All necessary utilities are available, and there are no apparent easements or encroachments that would hinder development. The subject was constructed in 2011 and is in excellent condition. The subject's location is mixed-use in character, and the subject's neighborhood has seen a good deal of new mixed-use development in recent years. The subject is a successful hotel and the current income provides a return to the land. It would be unreasonable to demolish the existing improvements. The existing use is the most financially feasible use. All legally permissible, physically possible and financially feasible uses of the subject property, as vacant, have been presented and examined. Based on the performance of the existing hotel, the current use, assuming the planned renovation takes place, is the highest and best use. BBG, INC. 97

106 APPRAISAL VALUATION PROCESS APPRAISAL VALUATION PROCESS In estimating the fair value of the fee simple, the appraiser has considered the three primary approaches to real estate valuation: the Cost Approach, the Sales Comparison Approach, and the Income Capitalization Approach. The Cost Approach is based on the principle of substitution, which affirms that a prudent and informed purchaser will pay no more for a specific property than the cost of producing a substitute property of equal or similar desirability and utility. It is particularly applicable when the property is new or involves relatively new improvements with little, if any, accrued depreciation, and there is an active market in undeveloped land. It is also relevant in estimating the value of special purpose or use properties for which there is limited or no sale or rental market. This approach is a method of valuation consisting of four basic steps: Estimation of the property s land value, as if vacant. Estimation of the current cost of replacing or reproducing the existing improvements. Estimation and deduction of accrued depreciation from all causes. Adding an entrepreneurial profit, the value of the land, and the depreciated value of the improvements. The Income Capitalization Approach is predicated on the assumption that there is a definite relationship between the amount of income that a property is capable of producing and its value. The Income Capitalization Approach is based on the theory of anticipation, which affirms that value may be defined as the present worth of all rights to future benefits. In the Income Capitalization Approach, earning potential is forecast over a typical investor holding period, and appropriate deductions are made for expenses resulting in the net operating income. In the Sales Comparison Approach, fair value is estimated by comparing the subject property to sales of similar properties. This Approach is based on the principle of substitution and contribution which states that a knowledgeable investor will pay no more for a property than would be paid for a comparable substitute property. This approach produces a value indication by comparing the subject with sales of similar properties. Finally, the approaches to value are reconciled into a final fair value estimate. The strengths and weaknesses of each approach are discussed, and a final value estimate is established. BBG, INC. 98

107 INCOME APPROACH INCOME CAPITALIZATION APPROACH In the Income Capitalization Approach, a property's capacity to generate future benefits is analyzed; the forecasted income is then capitalized into an indication of present value. Commonly used measures of anticipated benefits are: Potential Gross Income: the total potential income attributable to the real property at full occupancy before operating expenses are deducted. It may refer to the level of rental income prevailing in the market or that contractually determined by existing leases. Effective Gross Income: the anticipated income from all operations of real property adjusted for vacancy and collection losses. Net Operating Income: the anticipated net income remaining after all operating expenses are deducted from effective gross income. Equity Dividend: the portion of net income that remains after debt service is paid; this is returned to the equity position. Reversion: A lump-sum benefit an investor expects to receive upon the termination of the investment. Direct vs. Yield Capitalization The income capitalization approach supports two methodologies: direct and yield capitalization. Direct capitalization: A method used to convert an estimate of a single year's income expectancy into an indication of value in one direct step, either by dividing the income estimate by an appropriate rate or by multiplying the income estimate by an appropriate factor. This technique employs capitalization rates and multipliers extracted from sales. Only the first year's income is considered. Yield and value change are implied, but not identified overall. This method is most useful when the property is already operating on a stabilized basis. 3 Yield Capitalization: The capitalization method used to convert future benefits into present value by discounting each future benefit at an appropriate yield rate. This method explicitly considers a series of cash flows (net income over a holding period) over time together with any reversion value or resale proceeds. Since this technique explicitly reflects the investment's income pattern, it is especially suited to multi-tenant properties with varying leasing schedules as well as properties that are not operating at stabilized occupancy. 4 Conclusion The Income Capitalization Approach is based on a discounted cash flow analysis based on a projected 10-year holding period. This analysis relies on market-derived average daily room rates, occupancy rates and expense levels. This method of analysis provides an estimate of the 3 The Appraisal of Real Estate, 14th edition (Chicago, IL: Appraisal Institute) 4 The Appraisal of Real Estate, 14th edition (Chicago, IL: Appraisal Institute) BBG, INC. 99

108 INCOME APPROACH subject and depicts income and expenses each year over the projection period in order to determine annual net operating income levels. The net operating income streams, as well as the residual value, are discounted to a present fair value. HOTEL ANALYSIS The subject contains 264 rooms. A hotel s ability to generate room revenue is determined by annual occupancy rate and average daily room rate. The occupancy of a given hotel may be forecast based on its relative competitiveness with other hotels and its penetration through the market. Individual hotel facilities may operate above or below the area-wide occupancy or average rate, depending upon the particular attributes of the property. As described in our Local Market Analysis, our forecast of ADR, Occupancy, and corresponding RevPAR for the next 5 years is reported below: DISCOUNTED CASH FLOW ANALYSIS Projection Year: Days in Year: Number of Rooms: Rooms Available: 96,360 96,360 96,624 96,360 96,360 Occupied Rooms: 84,315 84,315 85,029 84,797 84,797 Occupancy Rate: 87.5% 87.5% 88.0% 88.0% 88.0% Annual Increase in ADR: n/a 10.0% 7.0% 4.0% 3.0% Average Daily Rate: $ $ $ $ $ RevPAR: $ $ $ $ $ ADDITIONAL REVENUE Although the majority of income generated by the subject property is from guest room rentals, additional revenue sources typical include sales from the restaurant and bars, as well as telephone charges and other miscellaneous sources. INCOME PROJECTIONS In order to estimate income from other sources, we have relied upon income ratios for similar hotels in Manhattan, as well as the owner s projection for 2018 as well as the 2017 historical operating statement. As new management arrived in May 2016 and has implemented several changes, we place more emphasis on the 2018 projections than the 2017 historicals. BBG, INC. 100

109 INCOME APPROACH INCOME AND EXPENSE COMPARABLES Composite - 4 Boutique Hotels (Confidential) - Manhattan Number of Rooms: , % potential Occupied Rooms: 204,582 Days Open: 365 Occupancy: 84.92% Amount per Amount per Average Rate: $ Percentage Available Occupied RevPAR: $ of Revenue Room Room REVENUE (in 000's) Rooms $87, % $132,562 $ Food & Beverage $11, % $17,630 $56.88 Telephone $1, % $2,298 $7.42 Commercial/Restaurant Rentals $8, % $12,908 $41.64 Minibar $ % $1,144 $3.69 Other Income (net) $1, % $2,168 $6.99 Total $111, % $168,711 $ DEPARTMENTAL EXPENSES* Rooms $21, % $32,953 $ Food & Beverage $9, % $13,755 $44.37 Telephone $1, % $1,626 $5.24 Minibar $ % $168 $0.54 Other Expenses $ % $550 $1.77 Total $32, % $49,052 $ DEPARTMENTAL INCOME $78, % $119,659 $ OPERATING EXPENSES $0.00 Administrative & General $9, % $14,047 $45.32 Marketing $4, % $6,945 $22.41 Prop. Operations & Maint. $4, % $6,744 $21.76 Utilities $2, % $4,211 $13.58 Total $21, % $31,947 $ HOUSE PROFIT $57, % $87,712 $ Management Fee $3, % $5,061 $16.33 INCOME BEFORE FIXED CHARGES $54, % $82,651 $ FIXED EXPENSES $0.00 Property Taxes $2, % $4,538 $14.64 Insurance $ % $1,380 $4.45 Reserve for Replacement $4, % $6,748 $21.77 Total $8, % $12,667 $40.86 NET INCOME $46, % $69,984 $ *Departmental expense ratios are expressed as a percentage of departmental revenues. BBG, INC. 101

110 INCOME APPROACH 2016 AND 2017 HISTORICALS AND 2018 BUDGET Rooms Available Rooms Sold ADR Occupancy% RevPAR Operating Revenue: Room Revenue $25,651, % $22,653, % $25,446, % Food and Beverage Revenue $7,510, % $8,047, % $9,379, % Other Operated Departments $379, % $1,716, % $2,097, % Total Operating Revenue $33,541, % $32,417, % $36,923, % Departmental Expenses: Room Expense $9,573, % $9,717, % $9,433, % Food and Beverage Expense $6,211, % $6,111, % $6,160, % Other Operated Expenses $234, % $191, % $245, % Total Departmental Expenses $16,018, % $16,020, % $15,839, % Total Departmental Profit $17,522, % $16,397, % $21,083, % Undistributed Operating Expenses: Administrative and General $2,877, % $2,648, % $2,883, % Sales and Marketing $1,268, % $1,066, % $1,207, % Energy $669, % $679, % $680, % Property Operations & Maintenance $1,601, % $1,493, % $1,517, % Total Undistributed Expense $6,416, % $5,887, % $6,288, % Gross Operating Profit $11,106, % $10,509, % $14,795, % Flow % 33.1% 32.4% 40.1% Management Fees $503, % $485, % $553, % Income before Non Op Inc & Exp $10,602, % $10,023, % $14,241, % Non Op Inc & Exp: Insurance $230, % $211, % $125, % Taxes $1,509, % $2,038, % $2,724, % Other Income ($12,298) 0.0% ($13,919) 0.0% ($14,505) 0.0% Miscellaneous Expense $60, % $5, % $4, % Non Op Inc & Exp $1,787, % $2,241, % $2,839, % EBITDA $8,814, % $7,781, % $11,401, % FF&E Reserves ,258 83,264 $ % $ Budget 96,174 96,360 81,014 83,140 $ $ % 86.3% $ $ EBITDA after FFE $8,814, % $7,781, % $11,401, % Total Salaries and Wages $8,312, % $8,271, % $8,251, % Total Contract Labor $213, % $98, % $17, % Total Incentives $69, % $95, % $96, % Total Salaries, Wages, CL and Bonuses $8,596, % $8,465, % $8,365, % Total Supplemental Pay $906, % $869, % $852, % BBG, INC. 102

111 INCOME APPROACH INCOME PROJECTIONS Rooms Income Full service hotels typically receive 70% of the income from rooms, while the remaining income is produced from food and beverage and other sources. Based on the ADR, occupancy and RevPAR above, the income from rooms represents 69.8% of the total income. The competitive set generates 78.6% of the income from rooms. Ownership s 2016 was 76.5% and 2017 is 69.9% with 68.9% projected in Balancing all sources, our projection appears reasonable. Rooms income is $26,137,650. F&B Income The subject has a strong F&B component, and we expect that a significant portion of income will be derived from the bars and restaurant following the renovation. Lounge and restaurant spaces within boutique hotels typically generate significant income as they cater to both hotel residents and the general public. The subject s Soho location is considered extremely active in terms of night life with a host of restaurants, nightclubs and bars within this destination area. The subject s restaurant, is highly regarded by local residents. The comparable set receives 10.5% of the income from F&B. Ownership s 2018 projection is 25.4% or $9,379,989 with 22.4% and 24.8% historically in 2016 and 2017, respectively. We project F&B revenue of $9,300,000 in Year 1 which is 24.8% of income. We note that the nightclub will have its first year of operations in Year 1. Further, ownership s planned renovations to the existing restaurant and to add two revenue-generating venues is expected to be completed by the end of Year 1 / early Year 2. Therefore, the F&B revenue is projected to grow by 25% in Year 2 to $11,625,000 and by 15% in Year 3 to $13,368,750 as the income from the nightclub and the two new venues is stabilizing. We project the F&B revenue to grow by 3% thereafter. Amenity Fee/Telephone Revenue and Other Operating Departments Income The competitive set indicates that income from other sources including the new amenity fee, telephone/internet charges, in-room mini-bars and other sundry items total food and beverage revenue equates to approximately 3% of total revenue. The subject achieved 5.2% in 2016, which equates to $1,716,950, and projects 5.7% in 2018 or $2,097,038. This increase is due to the $25 amenity fee charges to each guest room. We project the subject will generate 5.6% of the income from other sources or $2,100,000 in Year 1, the majority of which is the amenity fee. We project Other Income to grow by 3% annually. We note that the hotel guest rooms have all recently received upgraded smart televisions. The hotel is considering raising the $25 amenity fee per room to $30 per room for the upgraded room entertainment. DEPARTMENTAL COSTS AND EXPENSES Departmental expenses are those expense items that are attributable to a specific profit center. Departmental expenses are discussed as follows: Rooms - Rooms expense includes all expenses associated with the operation of guest rooms including wages, front desk, housekeeping, linen, guest services, reservations, supplies, decorations, commissions, etc. The 4-hotel competitive set projected rooms expenses at 25%. Ownership s 2016 and 2017 historical expense was 37.3% and 42.9%, respectively, and 37.1% is projected in Based on the foregoing, we project the subject's room's expense at 35% in BBG, INC. 103

112 INCOME APPROACH Year 1, declining to 33% in Year 2 and 30% in Year 3 and thereafter. As the hotel has recently replaced its Revenue Manager, Marketing Manager and General Manager, we project improvement in the Rooms Expense. In addition, we expect the rooms expense as a percentage of revenue to decrease as the ADR increases following renovation. Thus, we project Rooms Expense to decline to 30% in Year 3 and thereafter. Source Projection as % of Rooms Revenue 4 Hotel Competitive Set 25% Owner 2018 Projection 37% Appraiser Projection 35% in Yr 1, 33% in Yr 2, 30% thereafter Restaurant (Food and Beverage) The 4-hotel competitive set indicated a restaurant / lounge expense of 78.02% of food and beverage revenues. Ownership s 2016 and 2017 historical expense was 82.7% and 75.9%, respectively, with 65.7% projected for The decrease is due to the reopening of the nightclub. We project a food and beverage expense of 65.0% of food and beverage revenues. Source Projection as % of Restaurant Revenue 4 Hotel Competitive Set 78.02% Owner 2018 Projection 65.7% Appraiser Projection 65.0% Miscellaneous Income The 4-hotel competitive set has segregated expenses for telephone/internet charges, in-room min-bar costs and other expenses. In total, expenses from these categories equate to approximately 70.73% (telephone), 14.70% (mini-bar) and 25.37% (other) of their corresponding revenue generating items. Ownership s 2016 and 2017 historical expense was 61.9% and 11.2%, respectively, with 11.7% projected for We estimate this as 10.0% of income as there are no expenses associated with the amenity fee, which makes up most of the miscellaneous income. Source Projection as % of Telephone Revenue 4 Hotel Competitive Set: Telephone 70.73% 4 Hotel Competitive Set: Mini-Bar 14.70% 4 Hotel Competitive Set: Other Revenue 25.37% Owner 2018 Projection 11.7% Appraiser Projection 10.0% UNDISTRIBUTED OPERATING EXPENSES Undistributed operating expenses are costs borne by the entire operation and not attributable to any one specific department or profit center. Administrative and General - Included in this category are wages and salaries, equipment rental, customer relations, supplies, dues and subscriptions, contract services, credit card commissions, BBG, INC. 104

113 INCOME APPROACH professional fees, audit fees, licenses and permits, and other items normally associated with this classification. The competitive set indicated administrative and general costs at 8.33% of total revenues. Ownership s 2016 and 2017 historical expense was 8.6% and 8.2%, respectively, with 7.8% projected for We project this expense at 8.0% of total revenues. Source Projection as % of Total Revenue 4 Hotel Competitive Set 8.33% Owner 2018 Projection 7.8% Appraiser Projection 8.0% Marketing and Sales Expense - Marketing expenses include related salaries, brochures, entertainment, promotions, advertising, telephone expense, mailings, etc. The 4-hotel competitive set indicated marketing and sales expenses of 4.12%. Ownership s 2016 and 2017 historical expense was 3.8% and 3.3%, respectively, with a 2018 projection of 3.3%. Based upon market information, we apply a marketing and sales expense of 3.5%. Source Projection as % of Total Revenue 4 Hotel Competitive Set 4.12% Owner 2018 Projection 3.3% Appraiser Projection 3.5% Property Operations and Maintenance - Included in this category are the majority of repair and maintenance expense items and related salaries, supplies, electrical and mechanical repair, plumbing and heating repair, grounds maintenance, etc. The competitive set indicated this expense at 4.0% of total revenues. Typically, the rooms require more upkeep than the commercial components. Ownership s 2016 and 2017 historical expense was 4.8% and 4.6%, respectively, with a 2018 projection of 4.1%. We apply a projection of 4.0% of total revenue. Source 4 Hotel Competitive Set 4.0% Owner 2018 Projection 4.1% Appraiser Projection 4.0% Projection as % of Total Revenue Energy and Utilities Costs - This category includes all energy related expenses such as water, sewer, gas, and electricity. The competitive set indicates energy costs of 2.50% of total revenue. As new construction, we project the subject has energy efficient systems. Ownership s 2016 and 2017 historical expense was 2.0% and 2.1%, respectively, with a 2018 projection of 1.8%. We project this category at 2.0%. Source Projection as % of Total Revenue 4 Hotel Competitive Set 2.5% Owner 2018 Projection 2.1% Appraiser Projection 2.0% BBG, INC. 105

114 INCOME APPROACH FIXED CHARGES Real Estate Taxes As discussed in the Real Estate Assessment and Taxes section of the appraisal, we have projected real estate taxes of $2,649,898 which is the average of the 2017/2018 and 2018/2019 actual taxes. The abated taxes will be applied until the exemption expires, after which point the tax burden will increase 2.5% annually. Insurance The competitive set reports insurance costs at 1.5% of total revenues. Ownership s 2016 and 2017 historical expense was $230,530 and $211,977, respectively. Ownership reports a projected lower insurance expense as it was able to benefit under an umbrella. Ownership provided an invoice with the current insurance liability of $106,806 for the upcoming year. This amount reflects an orderly transaction between market participants. Accordingly, we apply this insurance expense of $106,806, which equates to 0.3% of gross revenues. We grow this expense 2% annually. Management Fees - This category covers the base compensation to a management company for time required to manage the subject property. An incentive management fee is essentially a bonus paid to management companies for achieving a specified profit. Ownership s projection is 1.5%. An industry standard fee of 3.0% of total revenues will be included in our analysis. Reserves for Replacement - We have included a reserve for the replacement of furniture, fixtures, and equipment. According to an analysis completed by ownership using data from HVS, the subject will require a FF&E reserve of approximately 2.15% over the holding period in order to provide for a partial renovation in 6 years and a full renovation in 18 years. We apply a reserve of 3.0% of total revenues, which is considered an industry standard. TOTAL HOTEL OPERATING EXPENSES Our expenses are 71.88% of gross revenue in Year 1. Our competitive set exhibits an average expense ratio of yield a NOI of 58%. Ownership s 2018 projected expense ratio is 69%. Overall our projection appears reasonable. ANALYSIS OF NOI INCREASE Ownership s 2018 projected NOI is $11,401,991 which does not account for FF&E. Our Year 1 NOI is $10,556,421. Based on the improvements made during 2016 and 2017 as well as the recent replacement of several management positions and the anticipated improvements during Years 1 and 2, the property should continue to improve and perform on par with the competitive set. RENOVATION COSTS Per ownership, the renovation costs are $15 million. As most of the work will be completed in year 1 we deduct $11,250,000 in year 1 and $3,750,000 in year 2. Below we present the hotel s historical performance along with the 2018 budget and the BBG proforma. BBG, INC. 106

115 INCOME APPROACH Rooms Available Rooms Sold ADR Occupancy% RevPAR ,258 83,264 $ % $ Budget 96,174 96,360 81,014 83,140 $ $ % 86.3% $ $ BBG Proforma 96,360 84,315 $ % $ Operating Revenue: Room Revenue $25,651, % $22,653, % $25,446, % $26,137, % Food and Beverage Revenue $7,510, % $8,047, % $9,379, % $9,300, % Other Operated Departments $379, % $1,716, % $2,097, % $2,100, % Total Operating Revenue $33,541, % $32,417, % $36,923, % $37,537, % Departmental Expenses: Room Expense $9,573, % $9,717, % $9,433, % $9,148, % Food and Beverage Expense $6,211, % $6,111, % $6,160, % $6,045, % Other Operated Expenses $234, % $191, % $245, % $210, % Total Departmental Expenses $16,018, % $16,020, % $15,839, % $15,403, % Total Departmental Profit $17,522, % $16,397, % $21,083, % $22,134, % Undistributed Operating Expenses: Administrative and General $2,877, % $2,648, % $2,883, % $3,003, % Sales and Marketing $1,268, % $1,066, % $1,207, % $1,313, % Energy $669, % $679, % $680, % $750, % Property Operations & Maintenance $1,601, % $1,493, % $1,517, % $1,501, % Total Undistributed Expense $6,416, % $5,887, % $6,288, % $6,569, % Gross Operating Profit $11,106, % $10,509, % $14,795, % $15,565, % Flow % 33.1% 32.4% 40.1% 41.5% Management Fees $503, % $485, % $553, % $1,126, % Income before Non Op Inc & Exp $10,602, % $10,023, % $14,241, % $14,439, % Non Op Inc & Exp: Insurance $230, % $211, % $125, % $106, % Taxes $1,509, % $2,038, % $2,724, % $2,649, % Other Income ($12,298) 0.0% ($13,919) 0.0% ($14,505) 0.0% $0 0.0% Miscellaneous Expense $60, % $5, % $4, % $0 0.0% Non Op Inc & Exp $1,787, % $2,241, % $2,839, % $2,756, % EBITDA $8,814, % $7,781, % $11,401, % $11,682, % FF&E Reserves $1,126,130 EBITDA after FFE $8,814, % $7,781, % $11,401, % $10,556, % BBG, INC. 107

116 INCOME APPROACH DISCOUNT RATE In order to develop an indication of value by the Income Capitalization Approach, it is necessary to establish an acceptable yield rate to discount the annual cash flows and the reversion value. Typical investors require a rate of return for investment quality property such as the subject which is greater than the safe or "riskless" rates offered for long term treasury notes and bonds or high grade corporate bonds. The difference between an investor's required rate of return and the safe rate is basically the premium necessary to compensate the investor for the added risks of inflation, management, and lack of liquidity offered by a real estate investment. The following rates have been used as market indicators. Survey of Competitive Rates Federal Funds Rate 1.42% Prime Rate 4.50% 10-year Treasury Bond 2.46% 30-year Treasury Bond 2.81% Corporate Bonds (AAA) 3.62% 30-year Municipal Bonds 2.61% The Federal Funds Rate is a foundational rate determining the cost of funds by Federal Reserve banks to depository institutions. The Prime Rate is a base rate posted by large banks for loans to corporations. It is a rate for business loans to banks' most creditworthy customers. It is no longer a lending rate, per se but a base rate, from which other rates are adjusted. The 10- and the 30-year Treasury Notes are long-term obligations that are guaranteed by the federal government. Corporate Bonds are long term securities protected by the creditworthiness of the issuer. Considerate of the tenant, we have utilized AAA quality returns. Municipal Bonds are free of tax liabilities and, therefore, the return is typically less than investment opportunities which are taxable. The Federal Funds Rate is a foundational rate determining the cost of funds by Federal Reserve banks to depository institutions. The Prime Rate is a base rate posted by large banks for loans to corporations. Long term issues such as 10-year Treasury Bonds are guaranteed by the federal government. Corporate Bonds and Utility Bonds are long term securities protected by the creditworthiness of the issuer. Another source of anticipatory yield rates is provided by investment surveys conducted by the Real Estate Research Corporation (RERC) which summarize expected rates of return, including capitalization rates and income and expense growth rates, from a representative sample of institutional investors. The rates reflect acceptable expectations of yields desired by investors currently in the marketplace. Surveys for NYC hotel properties show IRRs averaging 8.9%. BBG, INC. 108

117 INCOME APPROACH Survey Type of Product Discount Rate RERC 3rd Quarter 2017 NYC Hotel 8.9% National Hotel 9.0%-10.5% Average 9.80% PWC 3rd Quarter 2017 National Luxury / Upper Upscale Lodging 6.5%-12.0% Average 9.53% In selecting an appropriate discount rate, we have considered the foregoing yields as well as the subject property's location, size, age and condition relative to competing properties. In the development of the discount rate for the subject property, consideration was given to the risk, liquidity, and the time and expense of asset management inherent with income producing property investment. The summation approach was utilized to account for yield expectations associated with these investment considerations. A 3.00% basic rate was used based on the return exhibited by corporate and utility bonds. The 3.00% basic rate is increased by 150 basis points for liquidity, 150 basis points for asset management, and 125 basis points for risk. This results in a 7.25% yield rate. Based on the foregoing, it is our opinion that a 7.25% before tax discount or yield rate would be required by a typical investor for a hotel property like the subject within a strong destination location. The consensus of those actively engaged in the marketplace for hotels is that internal rates of return (based upon forecasting techniques and assumptions similar to those utilized herein) fall within a broad range depending upon numerous risk factors, including, among others: (a) Location: the better the location, the lower the IRR. The subject property is situated within a prime destination, mixed use district with an active cultural and recreational base. The area has excellent accessibility features and convenience to both residential and employment centers and is also considered a destination location for tourism. Overall, this is considered to be a location with below average risk. (b) Physical Characteristics of the Subject Property: the newer the property, the higher the quality of construction and finishes, and the better the design and layout of the physical plant, the lower the IRR. The subject was completed in 2011 and is in excellent condition. Furthermore, the property was refurbished in 2016 and is scheduled for extensive renovation to the F&B and rooms in 2018/early (c) Degree of Forecasted Cash Flow Growth: the greater the growth forecasted, the higher the IRR. After achieving stabilized occupancy levels, a modest rate of cash flow growth is projected based on general inflation expectations. (d) Amount of Equity Investment Required: the greater the required equity investment (that portion of the total acquisition cost not typically funded by conventional financing), the higher the IRR. (e) Length of Projection Period: the longer the projection period, the higher the IRR. We are utilizing a typical 10-year cash flow period. (f) Type of Investment: the riskier the perceived return on investment for a particular type of real estate, the higher the IRR. BBG, INC. 109

118 INCOME APPROACH In our opinion, due to the subject property's: (a) excellent destination location; (b) convenient accessibility from all points; (c) excellent condition and functional utility; and (d) the caution used in forecasting room rates and occupancy, we believe that a 7.25% discount rate is appropriate for the subject property. This rate falls just at the low end of the investor surveys, which is reasonable considering the subjects above average location and condition. HOLDING PERIOD The Third Quarter 2017 PWC survey reported the following holding periods indicated by various investor classes: Investor Forecast Period (years) Owner/Operator 1 to 4 years Real Estate Advisor 5-10 years REIT 5 years Owner/Operator 4 to 6 years Life Insurance Company 10 years Based on the reported forecast periods, while considering time to stabilized operations, we anticipate a holding period of 10 years with the residual value based upon the net operating income in Year 11. TERMINAL CAPITALIZATION RATE AND ESTIMATED REVERSION Terminal capitalization rates as reported by RERC are as follows: Survey Type of Product Terminal Cap Rate Going In Cap Rate RERC 3rd Quarter 2017 NYC Hotel 7.60% 6.80% National Hotel 8.0%-9.0% 6.5%-8.5% Average 8.50% 7.60% PWC 3rd Quarter 2017 National Luxury / Upper Upscale Lodging 5.5% % 4.0% - 9.0% Average 7.18% 7.03% As indicated in the investment surveys, average terminal capitalization rates are 7.2% in the national luxury / upper upscale lodging properties and 8.5% on a total national level as of Q3 2017, while New York City hotels average 7.6%. According to HVS, transaction activity remains strong in Manhattan, with buyers competing heavily for assets, and sellers seeking to maximize their investment gains. High investor interest, particularly from Asia and the Middle East, continues to put downward pressure on capitalization rates, driving hotel values to peak levels. In the table below that summarizes recent hotel sales, transactions of stabilized assets that sold between 2015 and 2017 realized capitalization rates that ranged from 2.3% to 6.8% and averaged 4.7%. As Manhattan is viewed as the nation's top gateway city, hotel investors from all over the world consider it to be an essential and low-risk market for their portfolio. Transaction activity is expected to remain high over the next couple of years due to increased interest from investors and the increasing availability of assets for sale. BBG, INC. 110

119 INCOME APPROACH In order to determine an appropriate cap rate for the hotel portion of the subject property we researched cap rates for hotel properties in New York City. HOTEL SALES Property Sale Date Rooms Price Price Per Unit OAR Comfort Inn Times Square Oct $27,200,000 $348, % The Ridge Hotel Jul $16,750,000 $398, % Stewart Hotel Dec $217,500,000 $351, % Nylo Hotel Jun $140,000,000 $481, % Hilton Garden Inn Chelsea Jul $65,000,000 $384, % Homewood Suites: W 37th Street Jul $169,000,000 $576, % Wyndham Garden Hotel Feb $60,000,000 $485, % Doubletree Times Square: 1568 Broadway (Leasehold) Dec $540,000,000 $1,153, % The Martha Washington Nov $17,250,000 $65, % The GEM Hotel: 135 E Houston Street Apr $17,250,000 $383, % Manhattan at Times Square 790 7th Avenue Feb $1,950,000,000 $1,380, % The Waldorf Astoria: 301 Park Avenue Feb-15 1,413 $1,950,000,000 $1,380, % Sofitel: West 44th Street Nov $257,050,000 $645, % Fairfield Inn and Suites West 33rd Street Sep $135,300,000 $566, % AKA United Nations Sep $68,500,000 $721, % Holiday Inn: 138 Lafayette Street Jul $105,500,000 $464, % Mondrian: 9 Crosby Street Jun $205,000,000 $779, % 373 Fifth Avenue Apr $34,900,000 $498, % Hyatt Union Square Jun $101,000,000 $567, % 125 West 26th Street: Holiday Inn Jun $113,000,000 $500, % 790 7th Ave: Manhattan at Times Square Oct $275,000,000 $413, % 232 West 29th Street Jun $87,500,000 $383, % 410 East 92 Street May $82,000,000 $362, % Park Central Hotel Jan $405,500,000 $434, % Hampton Inn 35 Street Dec $68,241,607 $467, % The Algonquin Jun $85,500,000 $491, % min 42 $65, % max 1,413 $1,380, % avg 329 $564, % Year # of Sales Avg Cap % % % % % % % The hotel cap rates range from 2.3% to 8.4% with an average of 5.2%. Between 2015 and 2017 sales average 4.7%. During 2016 and 2017, sales average 5.6%. We note cap rates decreased dramatically in Hotel transactions have slowed along with most asset types in New York City in 2016 and Based on the subject s status as new construction and excellent location in Soho, as well as the highly regarded restaurant and bars, combined with the upside potential to improve ADR and F&B revenue, we conclude to a terminal cap rate of 5%. The Cash Flow Analysis is presented on the following page. BBG, INC. 111

120 INCOME APPROACH DISCOUNTED CASH FLOW ANALYSIS Projection Year: Days in Year: Number of Rooms: Rooms Available: 96,360 96,360 96,624 96,360 96,360 96,360 96,624 96,360 96,360 96,360 96,624 Occupied Rooms: 84,315 84,315 85,029 84,797 84,797 84,797 85,029 84,797 84,797 84,797 85,029 Occupancy Rate: 87.5% 87.5% 88.0% 88.0% 88.0% 88.0% 88.0% 88.0% 88.0% 88.0% 88.0% Annual Increase in ADR: n/a 10.0% 7.0% 4.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Average Daily Rate: $ $ $ $ $ $ $ $ $ $ $ RevPAR: $ $ $ $ $ $ $ $ $ $ $ REVENUES Rooms $26,137, % $28,751, % $31,024, % $32,177, % $33,142, % $34,137, % $35,257, % $36,215, % $37,302, % $38,421, % $39,682, % Food & Beverage $9,300, % $11,625, % $13,368, % $13,769, % $14,182, % $14,608, % $15,046, % $15,498, % $15,962, % $16,441, % $16,935, % Other Operating Departments $2,100, % $2,163, % $2,227, % $2,294, % $2,363, % $2,434, % $2,507, % $2,582, % $2,660, % $2,740, % $2,822, % Total Revenues $37,537, % $42,539, % $46,621, % $48,241, % $49,689, % $51,179, % $52,811, % $54,296, % $55,925, % $57,603, % $59,439, % DEPARTMENTAL EXPENSES Rooms $9,148, % $9,487, % $9,307, % $9,653, % $9,942, % $10,241, % $10,577, % $10,864, % $11,190, % $11,526, % $11,904, % Food & Beverage $6,045, % $7,556, % $8,689, % $8,950, % $9,218, % $9,495, % $9,780, % $10,073, % $10,375, % $10,687, % $11,007, % Other Operated Departments $210, % $216, % $222, % $229, % $236, % $243, % $250, % $258, % $266, % $274, % $282, % Total Departmental Expenses $15,403, % $17,260, % $18,219, % $18,833, % $19,398, % $19,980, % $20,608, % $21,196, % $21,832, % $22,487, % $23,194, % DEPARTMENTAL INCOME $22,134, % $25,278, % $28,401, % $29,408, % $30,291, % $31,199, % $32,203, % $33,099, % $34,092, % $35,115, % $36,245, % UNDISTRIBUTED EXPENSES Administrative & General $3,003, % $3,403, % $3,729, % $3,859, % $3,975, % $4,094, % $4,224, % $4,343, % $4,474, % $4,608, % $4,755, % Marketing $1,313, % $1,488, % $1,631, % $1,688, % $1,739, % $1,791, % $1,848, % $1,900, % $1,957, % $2,016, % $2,080, % Property Operations & Maintenance $1,501, % $1,701, % $1,864, % $1,929, % $1,987, % $2,047, % $2,112, % $2,171, % $2,237, % $2,304, % $2,377, % Energy & Utilities $750, % $850, % $932, % $964, % $993, % $1,023, % $1,056, % $1,085, % $1,118, % $1,152, % $1,188, % Total Undistributed Expenses $6,569, % $7,444, % $8,158, % $8,442, % $8,695, % $8,956, % $9,242, % $9,501, % $9,786, % $10,080, % $10,401, % INCOME BEFORE FIXED CHARGES $15,565, % $17,834, % $20,242, % $20,966, % $21,595, % $22,243, % $22,961, % $23,598, % $24,305, % $25,035, % $25,843, % FIXED CHARGES Real Estate Taxes $2,649, % $3,146, % $3,632, % $4,119, % $4,418, % $4,529, % $4,642, % $4,758, % $4,877, % $4,999, % $5,124, % Insurance $106, % $108, % $111, % $113, % $115, % $117, % $120, % $122, % $125, % $127, % $130, % Management $1,126, % $1,276, % $1,398, % $1,447, % $1,490, % $1,535, % $1,584, % $1,628, % $1,677, % $1,728, % $1,783, % Total Fixed Expenses $3,882, % $4,531, % $5,141, % $5,680, % $6,024, % $6,182, % $6,347, % $6,510, % $6,680, % $6,855, % $7,037, % INCOME BEFORE RESERVES $11,682, % $13,303, % $15,100, % $15,286, % $15,570, % $16,060, % $16,614, % $17,087, % $17,625, % $18,180, % $18,805, % Reserve For Replacement $1,126, % $1,276, % $1,398, % $1,447, % $1,490, % $1,535, % $1,584, % $1,628, % $1,677, % $1,728, % $1,783, % (Fixtures, Furniture, Equipment) NET OPERATING INCOME $10,556, % $12,027, % $13,702, % $13,838, % $14,079, % $14,525, % $15,029, % $15,459, % $15,947, % $16,451, % $17,022, % ANNUAL EXPENSE RATIO 71.88% 71.73% 70.61% 71.31% 71.66% 71.62% 71.54% 71.53% 71.48% 71.44% 71.36% Renovation Costs $11,250,000 $3,750,000 NET CASH FLOW ($693,579) $8,277,182 $13,702,167 $13,838,834 $14,079,885 $14,525,531 $15,029,917 $15,459,091 $15,947,882 $16,451,957 $17,022,205 Reversion 5.00% Terminal Cap Rate $340,444,108 Sales Costs at 3% -$10,213,323 Net Reversion Value $330,230,785 Reversion Value 7.25% $164,000,264 Discounted Value Of Income 7.25% $82,286,294 Total Present Value $246,286,559 Rounded to $246,300,000 Per Room $932,955 BBG, INC. 112

121 INCOME APPROACH GOING IN CAPITALIZATION RATE ANALYSIS Our value translates into a going in cap rate of 4.3%. This This is at the low end of the comparable investment surveys; however, it is directly supported by the comparable New York sales. Further, there is substantial upside in Year 1 due to the planned renovation. We note that the going in cap rate for Year 2 is 4.9%. Again, this is reasonable based on the subject s location in a prime tourist destination in New York City. Our comparable sales exhibit cap rates ranging from 2.3% to 8.4% with an average of 4.7% for sales during 2015 through FINAL VALUE CONCLUSION Based on our 10-year DCF, our final value conclusion as of December 31, 2017 is $246,300,000. VALUE AS OF DECEMBER 31, 2017 $246,300,000 BBG, INC. 113

122 SALES COMPARISON APPROACH SALES COMPARISON APPROACH In the Sales Comparison Approach, fair value is estimated by comparing the subject property to similar properties that have been sold recently or for which offers to purchase have been made. A major premise of the Sales Comparison Approach is that the fair value of a property is directly related to the prices of comparable, competitive properties. The Sales Comparison Approach is based on the principle of substitution, which implies that a knowledgeable investor will pay no more for a property than the price that would be paid for a substitute property of similar utility and desirability. The procedure involved in this Approach is to research the market for sales of improved properties which are comparable to the subject, select appropriate units of comparison, adjust the sale prices to the subject, and then reconcile the range of adjusted sale prices into a single indication of value for the subject property. Unit of Comparison In order to analyze comparable sales, it is generally necessary to convert the sale prices to an appropriate unit of comparison. This process facilitates price comparisons between properties of different sizes, and it also enables the appraiser to adjust for qualitative differences. Since lodging properties are analyzed by their capacity to generate income per room (RevPAR), it is our view that an analysis of sales of lodging properties based on price per room would result in the most credible indication of value. We researched and analyzed sales of lodging properties in the New York City area over the past year, and presented those which we view as the most competitive in support of our opinion of value. Summary of Comparable Sales Address Sale Date Rooms (Keys) Sale Price Sale Price Per Room 1 The Gansevoort: Park Ave South Dec $200,000,000 $803,213 2 The James: 31 Grand Street Dec $66,300,000 $581,579 3 Smyth Hotel: 85 West Broadway Nov $72,226,000 $722,260 4 Courtyard by Marriott: 133 Greenwich Street Dec $203,345,000 $641,467 5 Standard High Line: 848 Washington Street Oct $340,000,000 $1,005,917 BBG, INC. 114

123 SALES COMPARISON APPROACH COMPARABLE LODGING PROPERTY SALES BBG, INC. 115

124 SALES COMPARISON APPROACH COMPARABLE SALE 1: THE GANSEVOORT: PARK AVENUE SOUTH Source: Public Domain SALE NO: 1 LOCATION: The Gansevoort: Park Ave South HOTEL NAME: New York, NY BLOCK/LOT: 858/45 GBA (ABOVE GRADE): 213,567 KEYS: 249 PROPERTY DESCRIPTION: This is the sale of a 249-key hotel located on the corner of Park Avenue South and East 30th Street on December 12, 2017 for $200,000,000. This equates to a pirice per key of $803,213. This property was built in 2000 and is located in Midtown. The property has a roof top pool and bar, several bars, a restaurant, Exhale spa, salon, and event space. The property will no longer be affiliated with the Gansevoort, and will be rebranded as the Royalton Park Avenue. It was reported that new ownership will invest $40 million into this property. The purchaser has tapped the TAO Group to re-envision the F&B component. SALE DATE: December 21, 2017 YEAR BUILT: 2010 GRANTOR: Douglaston Development GRANTEE: Highgate Hotels LP SALE PRICE: $200,000,000 PRICE PER KEY: $803,213 BBG, INC. 116

125 SALES COMPARISON APPROACH COMPARABLE SALE 2: THE JAMES: 31 GRAND STREET Source: Public Domain SALE NO: 2 LOCATION: The James: 31 Grand Street New York, NY BLOCK/LOT: 22/52 GBA (ABOVE GRADE): 55,479 NUMBER OF UNITS: 114 PROPERTY DESCRIPTION: This is the sale of a 20-story hotel located in Soho. This sale has not yet been recorded and the sale price is based on Costar and the Real Deal. This 114- key, 4-star hotel has a pool with cabanas, rooftop lounge, fitness center, bar/lounge and restaurant operated by David Burke. It offers room service and a business center. The property previously sold in May 2013 for $83.4 million. SALE DATE: December 14, 2017 YEAR BUILT: 2008 GRANTOR: PGIM Real Estate GRANTEE: Thor Equities SALE PRICE: $66,300,000 PRICE PER KEY: $581,579 BBG, INC. 117

126 SALES COMPARISON APPROACH COMPARABLE SALE 3: SMYTH HOTEL: 85 WEST BROADWAY Source: Public Domain SALE NO: 3 LOCATION: Smyth Hotel: 85 West Broadway New York, NY BLOCK/LOT: 136/1401 GBA (ABOVE GRADE): 49,709 NUMBER OF UNITS: 100 PROPERTY DESCRIPTION: A100-key hotel comprising the first nine floors of a 14-story condominium building. It is located in Tribeca on the corner of West Broadway and Chambers Street. The building also contains 6,638 SF of retail space at grade and 15 residential condo units on floors Hotel amenities include a fitness center, Little Park, a restaurant by chef Andrew Carmellini, meeting space, and free wifi. SALE DATE: November 22, 2017 YEAR BUILT: 2009 GRANTOR: Walton Street Capital LLC GRANTEE: Korman Communities SALE PRICE: $72,226,000 PRICE PER KEY: $722,260 BBG, INC. 118

127 SALES COMPARISON APPROACH COMPARABLE SALE 4: COURTYARD BY MARRIOTT: 133 GREENWICH STREET Source: Public Domain SALE NO: 4 LOCATION: Courtyard by Marriott: 133 Greenwich Street New York, NY BLOCK/LOT: 52/8 GBA (ABOVE GRADE): 154,000 NUMBER OF UNITS: 317 PROPERTY DESCRIPTION: This is the sale of the new 317-key hotel located at 133 Greenwich Street in the Financial District on December 22, 2017 for $203,345,000. This equates to a pirice per key of $641,467. This hotel opened on November 30, Note that the seller retained the 2,600 SF retail portion. At the time of the sale the ADR was approximately $300 and the occupancy at that time was approximately 95-96%. Contract was signed October 28, 2016 which results in 55 days under contract. The property is located on the corner of Thames and Greenwich Street in Lower Manhattan. The hotel offers free wifi, a gym, and meeting space. SALE DATE: December 22, 2016 YEAR BUILT: 2016 GRANTOR: Union Investment Real Estate GmbH GRANTEE: Hidrock Properties SALE PRICE: $203,345,000 PRICE PER KEY: $641,467 BBG, INC. 119

128 SALES COMPARISON APPROACH COMPARABLE SALE 5: STANDARD HIGH LINE: 848 WASHINGTON STREET Source: Public Domain SALE NO: 5 LOCATION: Standard High Line: 848 Washington Street New York, NY BLOCK/LOT: 645/11 GBA (ABOVE GRADE): 206,872 NUMBER OF UNITS: 338 PROPERTY DESCRIPTION: This is a 19 story, 338-key hotel that opened in The property straddles the High Line, an immensely popular elevated park that runs from 14th Street to 30th Street. Rooms feature floor to ceiling windows and offer outstanding views of the Hudson River. The hotel features a significant F&B component including a beer garden at the ground level, a roof top bar and club, The Standard Grill, The Living Room bar, and an outdoor plaza with rotating art installations and an ice rink. The property was last valued at $400 million in 2014 but the sale did not close at that time. SALE DATE: October 27, 2017 YEAR BUILT: 2009 GRANTOR: André Balazs Properties GRANTEE: GAW Capital Advisors USA, LLC SALE PRICE: $340,000,000 PRICE PER KEY: $1,005,917 BBG, INC. 120

129 SALES COMPARISON APPROACH ADJUSTMENTS Adjustments to the comparable sales have been considered based on comparison to the subject for property rights, financing terms, conditions of sale, market conditions, location, size, branding, utility/amenities, and condition. Property Rights Appraised: Financing: Conditions of Sale: Market Conditions: Location: The purpose of this adjustment is to account for differences in the property rights which were transferred with the sale. The property rights being valued in this analysis are the fee simple interest of the subject. The comparables are also valued as the fee simple interest and thus no adjustments are warranted. The purpose of adjusting for financing terms is to determine cash equivalent sale prices for the comparable sales. All of the sales were cash transactions or financed at market rates. No adjustments were required. This adjustment refers to the motivations of the buyer and seller involved in a particular transaction. No adjustments were required. All of the comparables have sold in the last quarter of 2017 with the exception of Sale 4 which sold in December Cap rates have remained fairly stable during this time and thus no adjustments are warranted. The subject is well-located in Soho, a hip and trendy neighborhood. The subject has restaurants and bars that appeal to both tourists and local residents. Sale 1 is located on Park Avenue South. This has Park Avenue South frontage; however, the neighborhood is considered inferior in terms of its trendiness and appeal. Thus, we make an upward adjustment. Sale 2 is located in SoHo, like the subject; however, this property is located close to the Holland Tunnel and is considered an inferior location. Thus, we make a small upward adjustment. Sale 3 is located in the trendy neighborhood of TriBeCa, which is considered similar to the subject and thus, does not require an adjustment. Sale 4 is located near the World Trade Center. This location benefits from being within the Financial District; however, the neighborhood is considered inferior in terms BBG, INC. 121

130 SALES COMPARISON APPROACH of its trendiness and appeal. Thus, we make an upward adjustment. Sale 5 is located over the High Line, an immensely popular tourist destination. Therefore, we make a downward adjustment. Size: Branding: Utility/Amenities: Condition: This adjustment accounts for the difference in size between each of the comparables and the subject property. The subject has 264 guest rooms while the sales range from 100 to 338 guest rooms. Sales 2 and 3 are smaller properties as compared to the subject. While these properties are not able to benefit from economies of scale, they receive upward adjustments. No further adjustments are required. The subject is a boutique hotel, which does not benefit from branding. Sale 4 is a Courtyard by Marriott. This warrants a downward adjustment as it is affiliated with a major international brand. The Standard is a boutique hotel, like the subject, but with a stronger presence with 5 locations including Miami, Florida and Los Angeles, California, and therefore can benefit from branding. Therefore, this sale also warrants a downward adjustment. No further adjustments are warranted. This adjustment accounts for such factors as building height, exterior appeal, frontage and amenities for each comparable. The subject is a modern, hip boutique hotel that is appealing to most travelers. All of the sales, with the exception of Sale 4, are boutique hotels. Sale 4 warrants an upward adjustment. No other adjustments are warranted. The subject was constructed in 2011 and is in excellent condition. It has hip, modern, fashion forward décor that is appealing to most travelers. In addition, the lobby, restaurant, and common areas were recently refreshed with new art, décor, and finishes. Ownership is planning an additional $15 million renovation to include the addition of two F&B outlets, moving the lobby and upgrading the guest rooms. All of the sales were constructed/renovated within the past few years and have a similar hip design. As it was reported that the new owners of Sale 1, The Gansevoort, will be investing $40 million into the property, we apply an upward adjustment. No further adjustments are warranted. BBG, INC. 122

131 SALES COMPARISON APPROACH COMPARABLE SALES ADJUSTMENT GRID Sale No Address: The Gansevoort: Park Ave South The James: 31 Grand Street Smyth Hotel: 85 West Broadway Courtyard by Marriott: 133 Greenwich Street Standard High Line: 848 Washington Street Sale Date: 12/21/ /14/ /22/ /22/ /27/2017 No. Keys: Sale Price: $200,000,000 $66,300,000 $72,226,000 $203,345,000 $340,000,000 Sale Price Per Key: $803,213 $581,579 $722,260 $641,467 $1,005,917 Property Rights: 0% 0% 0% 0% 0% Financing Terms: 0% 0% 0% 0% 0% Conditions of Sale: 0% 0% 0% 0% 0% Market Conditions (Time): 0% 0% 0% 0% 0% Trended Price Per Key: $803,213 $581,579 $722,260 $641,467 $1,005,917 Location: 10% 3% 0% 20% -5% Size: 0% 10% 10% 0% 0% Branding: 0% 0% 0% -10% -5% Utility/Amenities: 0% 0% 0% 25% 0% Condition: 5% 0% 0% 0% 0% Total Adjustments: 15% 13% 10% 35% -10% Adjusted Price Per Key: $923,695 $657,184 $794,486 $865,980 $905,325 Reconciliation UNADJUSTED ADJUSTED LOW $581,579 LOW $657,184 HIGH $1,005,917 HIGH $923,695 AVERAGE $750,887 AVERAGE $829,334 MEDIAN $722,260 MEDIAN $865,980 Before adjustments, the comparable sales show a price range from $581,579 to $1,005,917 per room, with an average of $750,887 and a median of $722,260 per room. After adjustments, the comparable sales show a range of $657,184 to $923,695 per room with an average of $829,334 and a median of $865,980 per room. While there is a wide range represented by the comparable sales, we emphasize Sale 1 as it is similar to the subject in that they are both boutique hotels constructed approximately 7 to 8 years ago and have similar number of rooms. Sale 1 sold for $923,695 after adjustments. We note that this sale was adjusted for location and condition, as it was reported that the new owners would be investing approximately $40 million into the property. Sold on December 21, 2017, this property is one of the most recent sales. Another recent sale that occurred on October 27, 2017, was Sale 5, The Standard, which is located on the High Line. This location is considered superior to the subject in its appeal. This property has a similar number of keys and was built at a similar time to the subject. This property sold for $905,325 after adjustments. With emphasis on these sales as well as the planned $15 million renovation to the subject, we conclude to an as complete value indication of $925,000 per room. We add the NPV of the ICAP to our value. The total value is calculated as follows: BBG, INC. 123

132 SALES COMPARISON APPROACH VALUE CONCLUSION AS COMPLETE Concluded Value Per Key $925,000 Keys 264 Value $244,200,000 Add ICAP Benefits $3,700,000 Final Value Opinion (RD) $248,000,000 SALES COMPARISON APPROACH AS COMPLETED MARCH 31, 2019 $248,000,000 In order to determine the as is value conclusion, we again emphasize Sale 1, The Gansevoort, as this property was sold pre-renovation for $803,213 per key. If this property is only adjusted for location, the adjusted price is $883,534. Therefore, applying a value per key of $880,000, our as is value indication is $236,000,000. Considering the value added from the $15 million planned renovation, the as complete value would be approximately $251,000,000. Therefore, our as complete conclusion is considered reasonable. The as is value is calculated below: VALUE CONCLUSION AS IS Concluded Value Per Key $880,000 Keys 264 Value $232,320,000 Add ICAP Benefits $3,700,000 Final Value Opinion (RD) $236,000,000 SALES COMPARISON APPROACH AS IS DECEMBER 31, 2017 $236,000,000. BBG, INC. 124

133 RECONCILIATION AND FINAL VALUE ESTIMATE RECONCILIATION AND FINAL VALUE ESTIMATE The estimated values arrived at by the approaches to value used in this report are as follows: Approach Value Date Value Conclusion Sales Comparison Approach Sales Comparison Approach As Is Fair value As Complete Fair Value December 31, 2017 March 31, 2019 $236,000,000 $248,000,000 Income Approach As Is Fair Value Based on Renovation Plan December 31, 2017 $246,300,000 The Cost Approach is traditionally a good indicator of value when properties being appraised are new or close to new and during periods when there is little external obsolescence. The cost approach has limited utility in the valuation of existing hotels. The quantification of external and incurable functional obsolescence is based on numerous adjustments. It is our experience that knowledgeable purchasers of complex hotel properties are more concerned with the economics of the investment. Therefore, the cost approach has little significance. In light of its minimal value and the difficulty in quantifying the varying sources of depreciation, we have not utilized the cost approach in estimating the value of the subject property. To estimate the subject property's value via the Income Capitalization Approach, we have analyzed the local market for transient accommodations, examined the competitive environment, projected occupancy and average rate levels, and developed a forecast of income and expense that reflects anticipated income trends and cost components through a stabilized year of operation. Through a discounted cash flow and income capitalization procedure, the value of each component was calculated; the total of the mortgage and equity components equates to the value of the property. Our experience indicates that the procedures used in estimating fair value by the income capitalization approach are comparable to those employed by the hotel investors who constitute the marketplace. For this reason, we believe that the income capitalization approach produces a credible value estimate. The Sales Comparison Approach is considered a reliable indicator of value when few differences exist between the comparable sales and the subject, and the sales data collected is considered to be reliable and accurate. There is continued strong demand for hotel properties in New York City from a variety of investors. However, due to the inherent differences between the subject and the sales, we have utilized the Sales Comparison Approach mainly as a check against our value via the Income Approach. Our value via the Income Approach is well supported by the Sales Comparison Approach. The final value conclusion for the subject property is as follows: Value Type Date Value As Is Fair Value December 31, 2017 $246,300,000 BBG, INC. 125

134 ADDENDA ADDENDA SENSITIVITY ANALYSIS HISTORICAL VALUES PPA CONTINGENT AND LIMITING CONDITIONS CERTIFICATION QUALIFICATIONS APPRAISER'S STATE CERTIFICATION

135 ADDENDA SENSITIVITY ANALYSIS Cap Rate % Change -10% -5% Year 1 DCF 5% 10% 4.50% 4.75% 5.00% 5.25% 5.50% Value $264,500,000 $254,900,000 $246,300,000 $238,500,000 $231,400,000 Occupancy Rate % Change -10% -5% Year 1 DCF 5% 10% 78.75% 83.13% 87.50% 91.88% 96.25% Value $216,900,000 $230,900,000 $246,300,000 $258,800,000 $272,700,000 ADR % Change -10% -5% Year 1 DCF 5% 10% $ $ $ $ $ Value $218,200,000 $232,200,000 $246,300,000 $260,300,000 $274,400,000 Discount Rate % Change -10% -5% Year 1 DCF 5% 10% 6.75% 7.00% 7.25% 7.50% 7.75% Value $256,500,000 $251,300,000 $246,300,000 $241,400,000 $236,600,000 Year 1 DCF ADR % Change % Change in Year 2 % Change 3.00% 5.00% 10.00% 12.00% 15.00% Year 2 ADR ($) $ $ $ $ $ Value $229,100,000 $234,000,000 $246,300,000 $251,200,000 $258,600,000

136 ADDENDA HISTORICAL VALUES Date Value December 31, 2017 $246,300,000 June 30, 2017 $257,000,000 December 31, 2016 $259,000,000 June 30, 2016 $257,000,000 December 31, 2015 $260,000,000 March 6, 2015 $268,000,000 June 30, 2014 $250,000,000

137 ADDENDA PURCHASE PRICE ALLOCATION There are potentially three components that constitute the total value of an asset: real property, personal property including furniture, fixtures & equipment (FF&E) and intangible assets (goodwill, business values). As the subject was recently acquired and rebranded, we do not allocate any value to intangibles or goodwill. The next step in allocating the value is to determine the value of the land and the depreciated value of the improvements. Based on the land sales below we conclude to a value of $750 for the subject s land. This is towards the middle of the range represented by the comparables below. COMPARABLE SALES SUMMARY CHART Sale Address Sale Price Sale Date Zoning Buildable Area Price PSF Buildable Avenue $107,645,000 Aug-17 C2-7A (R8A equivalent) 118,895 $ th Avenue $53,182,370 Apr-17 C6-3A and C6-2A 60,163 $ Spring Street $31,565,000 Jun-17 R7-2 with a C1-5 Overlay 31,051 $1, Greenwich Street $157,000,000 May-17 M ,000 $ East Houston Street $31,746,000 May-17 C6-2A 44,454 $714 The site area is 14,470 square feet and the allowable FAR per zoning is 5.00, yielding a buildable area of 72,350. However the subject was constructed using air rights. According to the NYC Department of Buildings, the new building has a zoning area of 116,805 square feet. We will utilize this value in our land valuation. Based on a zoning area of 116,805 and a land value of $750 per square foot, the value of the land is $87,603,750. Depreciation According to Marshall & Swift, hotels from the same scale have a useful life of 60 years. The table below summarizes the useful life of the building improvements and FF&E for 4 major hotel groups: Hotel group FF&E useful life (yrs) Starwood 3-10 Hyatt 3-20 Melia 3-18 Rezidor 5-20 Buildings in New York City tend to last significantly longer than their useful life and the subject received a refreshing of décor, common areas and the restaurant, which extends the useful life. Based on the data below, we project a useful life of 60 years for the building and 11 years for the FF&E. We apply straight line depreciation. The building is 7 years old. Note the land does not depreciate. Based on a total value of $246,300,000, $158,696,250 is allocated to the building and FF&E.

138 ADDENDA ASSUMPTIONS AND LIMITING CONDITIONS This appraisal report will be prepared with the following general assumptions: 1. Any legal description or plats reported herein are assumed to be accurate. Any sketches, surveys, plats, photographs, drawings or other exhibits are included only to assist the intended user to better understand and visualize the subject property, the environs, and the competitive data. We have made no survey of the property and assume no responsibility in connection with such matters. 2. The appraiser has not conducted any engineering or architectural surveys in connection with this appraisal assignment. Information reported pertaining to dimensions, sizes, and areas is either based on measurements taken by the appraiser or the appraiser s staff or was obtained or taken from referenced sources and is considered reliable. No responsibility is assumed for the costs of preparation or for arranging geotechnical engineering, architectural, or other types of studies, surveys, or inspections that require the expertise of a qualified professional. 3. No responsibility is assumed for matters legal in nature. Title is assumed to be good and marketable and in fee simple unless otherwise stated in the report. The property is considered to be free and clear of existing liens, easements, restrictions, and encumbrances, except as stated. 4. Unless otherwise stated herein, it is assumed there are no encroachments or violations of any zoning or other regulations affecting the subject property and the utilization of the land and improvements is within the boundaries or property lines of the property described and that there are no trespasses or encroachments. 5. BBG, Inc. assumes there are no private deed restrictions affecting the property which would limit the use of the subject property in any way. 6. It is assumed the subject property is not adversely affected by the potential of floods; unless otherwise stated herein. 7. It is assumed all water and sewer facilities (existing and proposed) are or will be in good working order and are or will be of sufficient size to adequately serve any proposed buildings. 8. Unless otherwise stated within the report, the depiction of the physical condition of the improvements described herein is based on visual inspection. No liability is assumed for the soundness of structural members since no engineering tests were conducted. No liability is assumed for the condition of mechanical equipment, plumbing, or electrical components, as complete tests were not made. No responsibility is assumed for hidden, unapparent or masked property conditions or characteristics that were not clearly apparent during our inspection. 9. If building improvements are present on the site, no significant evidence of termite damage or infestation was observed during our physical inspection, unless so stated in the report. No termite inspection report was available, unless so stated in the report. No responsibility is assumed for hidden damages or infestation.

139 ADDENDA 10. Any proposed or incomplete improvements included in this report are assumed to be satisfactorily completed in a workmanlike manner or will be thus completed within a reasonable length of time according to plans and specifications submitted. 11. No responsibility is assumed for hidden defects or for conformity to specific governmental requirements, such as fire, building, safety, earthquake, or occupancy codes, except where specific professional or governmental inspections have been completed and reported in the appraisal report. 12. Responsible ownership and competent property management are assumed. 13. The appraisers assume no responsibility for any changes in economic or physical conditions which occur following the effective date of value within this report that would influence or potentially affect the analyses, opinions, or conclusions in the report. Any subsequent changes are beyond the scope of the report. 14. The value estimates reported herein apply to the entire property. Any proration or division of the total into fractional interests will invalidate the value estimates, unless such proration or division of interests is set forth in the report. 15. Any division of the land and improvement values estimated herein is applicable only under the program of utilization shown. These separate valuations are invalidated by any other application. 16. Unless otherwise stated in the report, only the real property is considered, so no consideration is given to the value of personal property or equipment located on the premises or the costs of moving or relocating such personal property or equipment. 17. Unless otherwise stated, it is assumed that there are no subsurface oil, gas or other mineral deposits or subsurface rights of value involved in this appraisal, whether they are gas, liquid, or solid. Nor are the rights associated with extraction or exploration of such elements considered; unless otherwise stated. Unless otherwise stated it is also assumed that there are no air or development rights of value that may be transferred. 18. Any projections of income and expenses, including the reversion at time of resale, are not predictions of the future. Rather, they are our best estimate of current market thinking of what future trends will be. No warranty or representation is made that these projections will materialize. The real estate market is constantly fluctuating and changing. It is not the task of an appraiser to estimate the conditions of a future real estate market, but rather to reflect what the investment community envisions for the future in terms of expectations of growth in rental rates, expenses, and supply and demand. The forecasts, projections, or operating estimates contained herein are based on current market conditions, anticipated short-term supply and demand factors, and a continued stable economy. These forecasts are, therefore, subject to changes with future conditions. 19. Unless subsoil opinions based upon engineering core borings were furnished, it is assumed there are no subsoil defects present, which would impair development of the land to its maximum permitted use or would render it more or less valuable. No responsibility is assumed for such conditions or for engineering which may be required to discover them.

140 ADDENDA 20. BBG, Inc. representatives are not experts in determining the presence or absence of hazardous substances, defined as all hazardous or toxic materials, wastes, pollutants or contaminants (including, but not limited to, asbestos, PCB, UFFI, or other raw materials or chemicals) used in construction or otherwise present on the property. We assume no responsibility for the studies or analyses which would be required to determine the presence or absence of such substances or for loss as a result of the presence of such substances. Appraisers are not qualified to detect such substances. The client is urged to retain an expert in this field. 21. We are not experts in determining the habitat for protected or endangered species, including, but not limited to, animal or plant life (such as bald eagles, gophers, tortoises, etc.) that may be present on the property. We assume no responsibility for the studies or analyses which would be required to determine the presence or absence of such species or for loss as a result of the presence of such species. The appraiser hereby reserves the right to alter, amend, revise, or rescind any of the value opinions based upon any subsequent endangered species impact studies, research, and investigation that may be provided. 22. No environmental impact studies were either requested or made in conjunction with this analysis. The appraiser hereby reserves the right to alter, amend, revise, or rescind any of the value opinions based upon any subsequent environmental impact studies, research, and investigation that may be provided. 23. The appraisal is based on the premise that there is full compliance with all applicable federal, state, and local environmental regulations and laws unless otherwise stated in the report; further, that all applicable zoning, building, and use regulations and restrictions of all types have been complied with unless otherwise stated in the report; further, it is assumed that all required licenses, consents, permits, or other legislative or administrative authority, local, state, federal and/or private entity or organization have been or can be obtained or renewed for any use considered in the value estimate. 24. Neither all nor any part of the contents of this report nor copy thereof shall be conveyed to the public through advertising, public relations, news, sales, or any other media, without the prior written consent and approval of the appraisers except in connection with reports to the Israeli Securities Authority. This limitation (i) pertains to any valuation conclusions, the identity of the analyst or the firm and any reference to the professional organization of which the appraiser is affiliated or to the designations thereof and (ii) does not limit any such conveyance, publication or any other disclosure to any consultants, attorney or other professionals retained by ASRR in connection with the Asset. 25. Although the appraiser has made, insofar as is practical, every effort to verify as factual and true all information and data set forth in this report, no responsibility is assumed for the accuracy of any information furnished the appraiser either by the client or others. If for any reason, future investigations should prove any data to be in substantial variance with that presented in this report, the appraiser reserves the right to alter or change any or all analyses, opinions, or conclusions and/or estimates of value. 26. If this report has been prepared in a so-called public non-disclosure state, real estate sales prices and other data, such as rents, prices, and financing, are not a matter of public record. If this is such a non-disclosure state, although extensive effort has been expended to verify

141 ADDENDA pertinent data with buyers, sellers, brokers, lenders, lessors, lessees, and other sources considered reliable, it has not always been possible to independently verify all significant facts. In these instances, the appraiser may have relied on verification obtained and reported by appraisers outside of our office. Also, as necessary, assumptions and adjustments have been made based on comparisons and analyses using data in the report and on interviews with market participants. The information furnished by others is believed to be reliable, but no warranty is given for its accuracy. 27. The American Disabilities Act (ADA) became effective January 26, The appraiser has not made a specific compliance survey or analysis of the property to determine whether or not it is in conformity with e various detailed requirements of ADA. It is possible that a compliance survey of the property and a detailed analysis of the requirements of the ADA would reveal that the property is not in compliance with one or more of the requirements of the act. If so, this fact could have a negative impact upon the value of the property. Since the appraiser has no direct evidence relating to this issue, possible noncompliance with the requirements of ADA was not considered in estimating the value of the property. 28. This appraisal report has been prepared for the exclusive benefit of the client. It may not be used or relied upon by any other party, other than as expressly set forth herein. Any other party who is not the identified client within this report who uses or relies upon any information in this report does so at their own risk. 29. The dollar amount of any value opinion herein rendered is based upon the purchasing power and price of the United States Dollar as of the effective date of value. This appraisal is based on market conditions existing as of the date of this appraisal. 30. The right is reserved by the appraiser to make adjustments to the analyses, opinions, and conclusions set forth in this report as may be required by consideration of additional or more reliable data that may become available. No change of this report shall be made by anyone other than the appraiser or appraisers. The appraiser(s) shall have no responsibility for any unauthorized change(s) to the report. 31. If the client instructions to the appraiser were to inspect only the exterior of the improvements in the appraisal process, the physical attributes of the property were observed from the street(s) as of the inspection date of the appraisal. Physical characteristics of the property were obtained from tax assessment records, available plans, if any, descriptive information, and interviewing the client and other knowledgeable persons. It is assumed the interior of the subject property is consistent with the exterior conditions as observed and that other information relied upon is accurate. 32. The submission of this report constitutes completion of the services authorized. It is submitted on the condition the client will provide reasonable notice and customary compensation, including expert witness fees, relating to any subsequent required attendance at conferences, depositions, and judicial or administrative proceedings. In the event the appraiser is subpoenaed for either an appearance or a request to produce documents, a best effort will be made to notify the client immediately. The client has the sole responsibility for obtaining a protective order, providing legal instruction not to appear with the appraisal report and related work files and will answer all questions pertaining to the assignment, the preparation of the report, and the

142 ADDENDA reasoning used to formulate the estimate of value. Unless paid in whole or in part by the party issuing the subpoena or by another party of interest in the matter, the client is responsible for all unpaid fees resulting from the appearance or production of documents regardless of who orders the work, other than in connection with a claim between ASRR and BBG. 33. Use of this appraisal report constitutes acknowledgement and acceptance of the general assumptions and limiting conditions, special assumptions (if any), extraordinary assumptions (if any), and hypothetical conditions (if any) on which this estimate of market value is based. If provided, the estimated insurable value is included at the request of the client and has not been performed by a qualified insurance agent or risk management underwriter. This cost estimate should not be solely relied upon for insurable value purposes. The appraisers are not familiar with the definition of insurable value from the insurance provider, the local governmental underwriting regulations, or the types of insurance coverage available. These factors can impact cost estimates and are beyond the scope of the intended use of this appraisal. The appraisers are not cost experts in cost estimating for insurance purposes.

143 ADDENDA CERTIFICATION The appraisers certify that: Michelle Zell, MAI has personally inspected and prepared the analysis concerning the real estate that is the subject of this appraisal report. Joel Leitner, MAI, CRE, has personally inspected the property and reviewed the analyses, opinions and conclusions concerning the real estate contained in this appraisal report and fully concurs with the final fair value conclusion. The statements of fact contained in this report are true and correct. The appraisal assignment was not based on a requested minimum valuation, a specific valuation, or the approval of a loan. The reported analysis, opinions and conclusions are limited only by the reported assumptions and limiting conditions and are our personal, unbiased professional analyses, opinions and conclusions. The undersigned have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment. We have performed appraisal related services pertaining to the subject within the past 3 years. Our compensation is not contingent on an action or event resulting from the analysis, opinions or conclusions in, or the use of, this report. Our analyses, opinions and conclusions were developed and this report has been prepared in conformity with the requirements of the Code of Professional Ethics and the Standards of Professional Practice of the Appraisal Institute. No one provided significant professional assistance to the persons signing this appraisal report. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. The undersigned s engagement in this assignment was not contingent upon developing or reporting pre-determined results. Our compensation for completing this assignment is not contingent upon the development or reporting of a pre-determined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. Joel Leitner, MAI, CRE, and Michelle Zell, MAI are currently certified under the continuing education program of the Appraisal Institute. They are also certified by the State of New York as a General Real Estate Appraiser. Michelle Zell, MAI Senior Appraiser State Certified General Appraiser # Joel Leitner, MAI, CRE Managing Director State Certified General Appraiser #

144 QUALIFICATIONS ADDENDA

145 ADDENDA

146 APPRAISER'S STATE CERTIFICATION ADDENDA