October 17, 1997
Goldman Sachs Mortgage Company
85 Broad Street
New York, New York 10004
Goldman Sachs Credit Partners, L.P.
85 Broad Street
New York, New York 10004
GMAC Commercial Mortgage Corporation
100 S. Wacker, Suite 400
Chicago, Illinois 60606
Subject: Appraisal of the proposed Venetian Casino Resort and the proposed
Grand Canal Shops in Las Vegas, Nevada
Ladies and Gentlemen:
Pursuant to our engagement letter, we submit herewith our narrative appraisal
report of the referenced property. We have inspected the site, evaluated the
retail and casino hotel market conditions in the Las Vegas area and considered
the local forces influencing property values. The casino hotel and the mall are
assumed to be separately demised.
Based on the available data, along with our analyses, opinions and conclusions,
we are of the opinion that the market value of the fee simple interest in the
proposed Venetian Casino Hotel, exclusive of the mall and as if completed would
be:
ONE BILLION ONE HUNDRED MILLION DOLLARS
$1,100,000,000
The market value of the fee simple interest in the proposed Venetian Casino
Hotel, exclusive of the mall and upon stabilization would be:
ONE BILLION THREE HUNDRED MILLION DOLLARS
$1,300,000,000
Goldman Sachs Mortgage Company
Goldman Sachs Credit Partners, L.P.
GMAC Commercial Mortgage Corporation
October 17, 1997
Page 2
The value of the proposed Grand Canal shops as if completed, has been estimated
as:
TWO HUNDRED TWENTY MILLION DOLLARS
$220,000,000
The value of the proposed Grand Canal shops upon stabilization, has been
estimated as:
TWO HUNDRED FORTY EIGHT MILLION DOLLARS
$248,000,000
Landauer acknowledges that the value reported by the appraiser will be used and
reprinted for dissemination with regard to (a) borrowings being made from banks
and/or institutional lenders for the purpose of developing the property and (b)
in connection with a public offering or private placement of securities. The
attached Assumptions and Limiting Conditions contain a limitation regarding
dissemination of the appraisal.
At present the contiguous tradeshow and convention facility, the Sands
Exposition and Convention Center (SECC) encroaches onto 1.59 acres of the tax
parcels that include the subject site and is owned by an entity related to the
subject's current ownership. In order to maximize the allowable density of the
site, the related parties have entered into cross easement agreements that
enable them to maximize densities and to take advantage of the complementary
pattern of parking utilization. The contiguous convention center would be a
significant demand generator for any casino hotel project, regardless of theming
or market orientation. We are of the opinion that any other prudent buyer would
seek to negotiate a physical connection to the convention center and share
parking.
We have made certain assumptions regarding the aforementioned encroachment and
provision of parking facilities as indicated in an unsigned copy the Reciprocal
Easement, Use and Operating Agreement (REA) issued June 24, 1997. This agreement
is between Interface Group-Nevada, Inc. (Interface), which is the current owner
of the SECC, and Las Vegas Sands, Inc. (LVSI), which owns the subject land upon
which it or one or more affiliates plans to develop the subject Venetian (Phase
I) resort and the Lido (Phase II) resort. Based upon our review of that draft
document, the following assumptions were made for a market value development.
Goldman Sachs Mortgage Company
Goldman Sachs Credit Partners, L.P.
GMAC Commercial Mortgage Corporation
October 17, 1997
Page 3
1.) The site area utilized in our valuation is based on the survey by Horizon
Surveys dated September 9, 1997.
2.) The legal description defining the retail mall component of the Venetian
mixed-use project was not available for our review. In preparing this valuation,
we have assumed that the retail mall component will be separately and legally
demised into a single unit comprising the bundle of rights characteristic of fee
simple ownership which would permit transfer of ownership unimpeded by the
entities holding title to the casino hotel.
3.) Leasing plans, building plans and related data provided by the developer and
used in this valuation are assumed to accurately reflect the project as
proposed. Furthermore, the values derived in this report assume that all
proposed improvements are completed in a timely manner.
4.) The REA places the onus of providing 800 convenient parking spaces on the
owner/developer of the two-phased development which includes the subject site.
The SECC will be obliged to pay only ordinary maintenance charges on the spaces
used.
5.) We understand from conversations with representatives of LVSI that the
County has tentatively approved an approximately 3,940 space garage for the
subject Venetian casino hotel and retail project, to be augmented by a second
3,000 space garage to be constructed with the Phase II hotel. No other project
has the combination of convention space, guest rooms and retail space as is
proposed for the subject property. The ratio of parking spaces at Caesar's
Palace suggests that the 6,940 spaces may be too few for both phases of the
subject. Our cost estimates and forecasts assume that the planned Phased I
parking structure of 3,940 spaces is expanded by 560 spaces and that,
o if the Phase I structure is inadequate, surface lots on the Lido site (Phase
II) would be used until construction began on an expanded Phase II garage and
o a shuttle service to a temporary off-site location could be operated by the
Venetian and the SECC during the construction of the Phase II parking garage.
6.) There will be a series of reciprocal easements granted between the subject
and the SECC regarding access, egress, parking and common area maintenance.
These easements will exist in perpetuity and benefit the subject property.
Goldman Sachs Mortgage Company
Goldman Sachs Credit Partners, L.P.
GMAC Commercial Mortgage Corporation
October 17, 1997
Page 4
The appraisal report is further subject to the attached specific conditions and
assumptions, changes in which may materially affect the value conclusions
reported herein.
We certify that we have no interest in the property and that our employment and
compensation are not contingent upon our findings and conclusions. The following
appraisal report is subject to the assumptions and limiting conditions made
throughout the report.
Sincerely,
LANDAUER ASSOCIATES, INC.
Karen Johnson, MAI Rodney A. Wycoff, CRE, MAI
Managing Director Senior Managing Director
John R. Forbes, MAI Charles P. Gardner, MAI
Manager Managing Director
APPRAISAL OF THE PROPOSED
VENETIAN CASINO AND GRAND CANAL SHOPS
ON LAS VEGAS BOULEVARD SOUTH
IN LAS VEGAS, NEVADA
TABLE OF CONTENTS
Page
No.
---
SUMMARY OF SALIENT DATA AND CONCLUSIONS......................................1
SUBJECT RENDERING............................................................4
ASSUMPTIONS AND LIMITING CONDITIONS..........................................5
CERTIFICATION................................................................7
INTRODUCTION.................................................................8
Identification of the Property.............................................8
Purpose of the Appraisal...................................................8
History of the Property/Background of the Engagement.......................8
Property Rights Appraised..................................................9
Definition of Market Value................................................10
Marketing and Exposure Period.............................................11
Date of Value Estimate....................................................11
Scope of the Assignment...................................................12
DESCRIPTIVE SECTION
Regional Analysis.........................................................13
The Visitor's Industry....................................................18
Neighborhood Analysis.....................................................32
Site Analysis.............................................................36
Improvement Description...................................................46
Highest and Best Use......................................................51
VALUATION SECTION...........................................................56
Combined Cost Approach....................................................57
Casino Hotel Cost Analysis................................................74
Casino Hotel Sales Comparison Approach....................................74
Gaming Analysis...........................................................78
Hotel Analysis............................................................86
Casino Hotel Income Approach.............................................104
Retail Market Analysis...................................................126
Retail Cost Approach.....................................................149
Retail Sales Approach....................................................150
Retail Income Approach...................................................151
Valuation of Retail Mall's Development Rights............................169
ADDENDA
Engagement Letter
Photographs of the Subject Property
Photographs of Selected Casino Hotels
Photographs of Retail Competitors
Proposed Additions to Supply
Comparable Land Sales
Bovis Construction Detail
Hotel Investment OUTLOOK
Casino Hotel Discounted Cash Flow Analysis "As Stabilized"
Qualifications of the Appraisers
1
SUBJECT RENDERING
SUMMARY OF SALIENT DATA AND CONCLUSIONS
CASINO HOTEL COMPONENT
Subject: Proposed 3,036 room Casino Resort Hotel
with 342,000 net square feet of meeting
space (500,000 square feet gross).
Purpose of the Appraisal: To estimate the market value of the fee
simple interest in the Venetian Casino Resort
as if completed and as if stabilized based on
economic conditions prevailing on October 17,
1997.
Location: 3355 Las Vegas Boulevard South, Las Vegas,
Nevada.
Site: 1,344,378 square feet, or approximately 30.86
acres.
Improvements: Piers, foundations, structural steel.
Zoning: H-1 which permits gaming and hotel use by
right.
Highest and Best Use: Resort Casino connected to the Sands
As Vacant Exposition and Convention Center.
Property Rights Appraised: Fee Simple Interest.
Marketing Period: Twelve to eighteen months.
Indications of Value:
As if Completed Upon Stabilization
Income Approach: $1,100,000,000 $1,300,000,000
Per Unit $362,200/Room $428,000/Room
Sales Comparison Approach: Not Applicable Not Applicable
Cost Approach: $1,133,000,000 Not Applicable
Per Unit: $373,000 Per Room Not Applicable
Valuation Date: April 1, 1999 April 1, 2001
Final Market Value Conclusion $1,100,000,000 $1,300,000,000
2
SUBJECT RENDERING
MALL COMPONENT
Subject: Grand Canal Shops is a proposed, unanchored
specialty regional mall to be physically
situated within the Venetian, a casino hotel
currently under construction.
Purpose of the Appraisal: To estimate the prospective value upon
completion and value upon stabilization of
the leased fee interest in the subject
property based on market conditions existing
on October 17, 1997, the date of the most
recent inspection.
In addition, the fee simple interest in the
development rights to construct the mall as
proposed will be estimated.
Location: Within the Venetian, a proposed mega-resort
currently under construction near the
southeastern corner of Las Vegas Boulevard
South and Sands Avenue in Las Vegas, Clark
County, Nevada.
Site: The subject comprises a portion of the
Venetian mega-resort and will be situated
above street grade on the second and third
levels of the resort, immediately above the
ground level casino.
Improvements: A two-level, unanchored specialty regional
mall comprising 500,000 square feet of gross
leasable area (GLA).
Zoning: H-1 which permits gaming and hotel use by
right, and includes commercial shops and
stores.
Highest and Best Use:
As Vacant Given the legal entity which is the subject
of this appraisal, an "As Vacant" H&BU
conclusion is not warranted.
As Improved As proposed with an unanchored specialty
regional mall to function in conjunction with
the proposed Venetian mega-resort and
connected to the Sands Expo and Convention
Center (SECC).
Property Rights Appraised: Leased Fee and Fee Simple Interests.
Marketing Period: Twelve months.
3
SUBJECT RENDERING
Indications of Value:
Upon Completion Upon Stabilization
--------------- ------------------
Income Capitalization Approach: $220,000,000 $248,000,000
Per Unit $507 PSF $531 PSF
Sales Comparison Approach: Not applicable Not applicable
Cost Approach: $187,000,000 Not applicable
Valuation Date: April 1, 1999 April 1, 2000
Final Value Conclusion: $220,000,000 $248,000,000
Value of Development Rights: $ 33,000,000 Not applicable
4
[Picture of
The Venetian
Las Vegas, Nevada]
5
ASSUMPTIONS AND LIMITING CONDITIONS
This report is made expressly subject to the following conditions and
stipulations:
1. Date and definitions of value, together with other definitions and
assumptions on which our analyses are based, are set forth in
appropriate sections of this report. These are to be considered part
of these limiting conditions as if included here in their entirety.
2. The conclusions stated herein, including values which are
expressed in terms of the U. S. Dollar, apply only as of the date of
value and are based on prevailing physical and economic conditions
and available information at that time. Economic projections do not
represent forecasting of future events. Rather, they reflect a
method commonly used by investors to gauge the effect of anticipated
trends on investment yields. No representation is made as to the
effect of subsequent events which may significantly alter the
conclusions reported herein.
3. Title to the property is assumed to be marketable. The property is
considered as being under responsible ownership and free of all
encumbrances except as specifically discussed herein.
4. Information reported herein has been obtained from reliable sources
and, when feasible, has been verified. The appraisers reserve the
right to make appropriate revisions in the event of discovery of
additional or more accurate data.
5. No responsibility is accepted by Landauer for considerations
requiring expertise in other fields. Included in this category are
ownership, legal description and other legal matters, survey of
property boundaries, geologic considerations including soils and
seismic stability, civil, structural or other engineering, and
identification of hazardous or toxic substances. Data furnished or
obtained from public sources relative to these matters has been
adopted and is assumed to be correct.
6. Except where specifically noted, we have no cause to expect the
existence of undisclosed easements, encroachments or defects in
title, access, geology, structural integrity or mechanical systems.
Any need for further study indicated by our investigation has been
disclosed to the client and/or noted in the report; results of any
such studies furnished have been accepted and the source identified.
Maps and other graphic materials reproduced herein are for
illustrative purposes only and are not to be relied on for factual
information.
6
ASSUMPTIONS AND LIMITING CONDITIONS
7. The appraisers have inspected the subject property with the due
diligence expected of a professional real estate appraiser. The
appraisers are not qualified to detect hazardous waste and/or toxic
materials. Any comment by the appraisers that might suggest the
possibility of the presence of such substances should not be taken
as confirmation of the presence of hazardous waste and/or toxic
material. Such determination would require investigation by a
qualified expert in the field of environmental assessment.
The presence of substances such as asbestos, urea-formaldehyde foam
insulation or other potentially hazardous material may affect the
value of a property. The appraisers' value estimate is predicated on
the assumption that there is no such material on or in the property
that would cause a loss in value.
No responsibility is assumed for any environmental conditions, or
for any expertise or engineering knowledge required to discover
them. The appraisers' descriptions and resulting comments are the
result of the routine observations made during the appraisal.
8. This appraisal covers only the real and personal property
described herein. Unless specifically stated to the contrary, it
does not include consideration of mineral rights or related right of
entry, nor tenant's personal property or the removal thereof. Values
reported herein are not intended to be valid in any other context,
nor are any conclusions as to unit values applicable to any other
property or utilization than that specifically identified herein.
9. By reason of this assignment, testimony, attendance in court, any
government or other hearing with reference to the property is not
required without prior arrangements having been made relative to
such additional employment.
10. Use and disclosure of the contents of this report is governed by
the Bylaws and Regulations of the Appraisal Institute. The Appraisal
Institute reserves the right to authorize its representatives to
review this report and its supporting documentation. Except as set
forth in the engagement letter to which these limiting conditions
are attached, confidential distribution of copies of this report in
its entirety may be made subject to the sole control of the
addressee, however, excerpts may not be given to any third party
without prior written consent.
11. Except as set forth in the engagement letter to which these
limiting conditions were attached, neither all nor any part of the
contents of this report (especially any conclusions as to value, the
identity of the appraisers or the firm with which they are
connected, any reference to the Appraisal Institute or to the MAI or
SRA designation) shall be disseminated to the general public through
advertising or sales media, public relations media, news media or
any other public means of communication without prior written
consent.
CERTIFICATION
The undersigned certify that to the best of their knowledge and belief:
7
CERTIFICATION
The statements of fact contained in this appraisal report and upon which the
analyses, opinions and conclusions expressed herein are based are true and
correct. This report is made subject to the Assumptions and Limiting Conditions
set forth on the preceding pages which contain all of the limiting conditions
(imposed by the terms of the assignment or by the appraiser) affecting the
analyses, opinions and conclusions in this report.
Employment and compensation for making this appraisal are in no way contingent
upon the value reported, and we certify that we have no direct or indirect
current or prospective personal interest or bias in the subject matter of this
appraisal report or to the parties involved.
No one other than the undersigned prepared the analyses, opinions or conclusions
concerning real estate that are set forth in this report.
This report has been made in conformity with the requirements of the Code of
Professional Ethics and the Standards of Professional Practice of the Appraisal
Institute. The use of this report is subject to the requirements of the
Appraisal Institute relating to reviews by its duly authorized representatives.
As of the date of this report, Rodney A. Wycoff, MAI; Charles P. Gardner, MAI,
John R. Forbes, MAI, and Karen Johnson, MAI, have completed the requirements of
the continuing education program of the Appraisal Institute.
Karen Johnson, MAI personally inspected the property which is the subject of
this report on February 10, 1997, March 7, 1997, August 4, 1997, and October 17,
1997. Rodney A. Wycoff, MAI, inspected the property on January 29, 1997. John R.
Forbes, MAI inspected the property on July 30, 1997. Charles P.Gardner, MAI
inspected the property on August 15, 1997.
Karen Johnson, MAI Rodney A. Wycoff, CRE, MAI
Managing Director Senior Managing Director
Nevada Certified General
Real Estate Appraiser License 02113
John R. Forbes, MAI Charles P. Gardner, MAI
Manager Managing Director
8
INTRODUCTION
INTRODUCTION
Identification of the Property
The subject property is located at 3355 Las Vegas Boulevard South in what is
commonly referred to as Las Vegas, Nevada. The municipality governing the
subject property is Clark County. The subject is currently recorded on the
County's property tax records as all or portions of account numbers
162-16-202-008 and 162-16-301-001.
The boundary lines of two tax parcels have not yet been relocated so that the
Sands Exposition and Convention Center technically encroaches on 1.59 acres of
the subject site. A copy of the proposed site area is presented in the survey on
page 37.
Upon completion, the subject property, to be known as the Grand Canal Shops,
will be physically situated within the proposed Venetian hotel casino
development which is currently under construction. The majority of the space in
the Grand Canal Shops is to be located one floor above the casino floor.
We have made certain assumptions regarding the elimination of the aforementioned
encroachment and provision of parking facilities and utilities as indicated in
an unsigned copy of the Reciprocal Easement, Use and Operating Agreement (REA)
issued June 24, 1997.
Purpose of the Appraisal
The purpose of this appraisal is to estimate the market value of the fee simple
interest in the proposed Venetian Resort casino hotel, as if completed and upon
stabilization.
The appraisal is also intended to estimate the prospective value upon completion
and the value upon stabilization of the leased fee interest in the proposed mall
to be known as the Grand Canal Shops. In addition, the fee simple interest in
the development rights to construct the proposed mall will be estimated.
All values will be based upon market conditions existing on October 17, 1997,
the most recent date of inspection.
History of the Property/Background of the Engagement
In the late 1950's, the first low-rise buildings of the Sands Hotel were
constructed on the larger assemblage comprised of approximately 59.0 acres which
includes the subject site. Additional buildings, and eventually a circular tower
were added in the 1960's and 1970's.
The Sands Hotel and its excess land were purchased in 1989 for $110,000,000 by
an affiliate of The Interface Group, doing business as Las Vegas Sands, Inc. An
additional $18,500,000 was funded at
9
INTRODUCTION
purchase for recapitalization and capital improvements. The total investment in
the original 59.0 acre property was therefore $128,500,000.
To increase the large parcel's frontage on the Strip, the 1.53 acre Tam
O'Shanter Motel was bought in early 1996 for $12,400,000, or $8,104,575 per
acre, increasing the assemblage to 60.5 acres. This parcel is held under
different ownership (Silver State Realty Trust) but is controlled by the same
principal as the larger parcel.
In 1990, approximately 13.7 acres of excess land on the eastern boundary of the
assemblage were developed with the Sands Exposition and Convention Center (SECC)
at a cost of $55,000,000. In 1994, the lower level parking garage of the SECC
was converted into an additional 411,400 square feet of exhibit and meeting
space at a cost of $15,500,000. The conversion of the former parking garage
brought the net exhibit and meeting space total to 966,400 square feet.
Pre-function areas bring the revenue producing space up to 1,001,400 square
feet.
In early 1996, the SECC was transferred between affiliates. Las Vegas Sands
Inc. (LVSI) sold the subject to the Interface Group - Nevada, Inc.
(Interface) for $66,594,000, its approximate book value.
Between December 1996 and March 1997 the existing Sands Hotel and Casino complex
was demolished at a total cost of approximately $6,000,000 to make way for two
mega casino resorts, to be named the Venetian and the Lido. These casino hotels
are planned to be physically connected to each other through the Grand Canal
Shops and their respective casino floors and to the SECC by a common wall and
indoor corridor. Parking facilities and a utility plant are to be shared also.
The proposed Venetian Casino Hotel and the proposed retail mall that is to be
separately demised are the subject of this appraisal.
Property Rights Appraised
The property rights appraised for the casino hotel are what in mixed-use
developments are considered to be a fee simple estate. A fee simple estate is
defined as absolute ownership unencumbered by any other interest or estate;
subject only to the limitations of eminent domain, escheat, police power and
taxation.
The intent of the REA is to eliminate the current Interface land encroachment of
the Sands Expo Center onto 1.59 acres of the subject site's tax parcel by
modifying the parcel boundary lines. Our appraisal assumes that this has been
completed.
10
INTRODUCTION
The property interest appraised for the mall in this report is the leased fee
estate, defined in The Dictionary of Real Estate Appraisal, Third Edition, 1993,
published by the Appraisal Institute, as: An ownership interest held by a
landlord with the right of use and occupancy conveyed by lease to others. The
rights of the lessor (the leased fee owner) and leased fee are specified by
contract terms contained within the lease.
The larger two-phased development is also encumbered by the obligation to
provide no fewer than 800 parking spaces to the Sands Exposition and Convention
Center. We have assumed that one half, or 400 spaces, will be the obligation of
the subject's developer and operator. The remaining 400 spaces can be provided
on surface lots on the Phase II site until that phase is completed.
The remaining easements assumed for the market value estimate are typical of
those encumbering regional malls and the individual fee components of mixed-used
developments.
Definition Of Market Value
For the purpose of this appraisal, Market Value is defined as follows:
The most probable price which a property should bring in a competitive and open
market under all conditions requisite to a fair sale, the buyer and seller each
acting prudently and knowledgeably, and assuming the price is not affected by
undue stimulus. Implicit in this definition is the consummation of a sale on a
specific date and the passing of title from seller to buyer under conditions
whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property
sold unaffected by special or creative financing or sales
concessions granted by anyone associated with the sale.(1)
- ---------
(1) Standards of Professional Appraisal Practice of the Appraisal Institute" and
Uniform Standards of Professional Appraisal Practice," The Appraisal Foundation,
1994.
11
INTRODUCTION
As further clarification, NCREIF believes that it is reasonable under current
market conditions to assume up to one year to sell a property. Conversely, a
marketing period of three years would typically not be appropriate under the
Market Value definition. Further, Market Value does not assume a "liquidation
sale" (forced sale) which would place undue emphasis on time and cash.(2)
An estimate of market value requires that the appraisal reflect the attitudes
and behavior of typical investors and developers. Also, an estimate of market
value considers the continuous attempt of market participants to maximize real
estate values, generate increased revenues and reduce risk. The market value
indications included in the Valuation Section are based upon the above
requirements.
Marketing and Exposure Period
There are a number of gaming operators actively looking for casino resort
representation on the Strip in Las Vegas. We estimate that the actual marketing
period for the casino hotel component would require no more than twelve months.
However, due diligence periods prolong the effective marketing period by up to
six months. A total marketing and due diligence period of twelve to eighteen
months is deemed appropriate for the casino hotel component. The retrospective
exposure period is estimated to be the same.
Las Vegas' diversification into a more mainstream destination, recent
development and investment activity indicates that there are a number of retail
mall operators who would like to take advantage of the visitor volume along the
Strip. The investment market for regional malls has been active over the last
several years on a national basis. Most properties that have sold in the last
two years, if priced appropriately, have been on the market for less than one
year. The Korpacz Real Estate Investor Survey (Second Quarter 1997) indicates an
average marketing time of 10.44 months for regional mall facilities across the
U.S., up marginally from the 10.11 months reported last quarter, and a slight
increase from 9.94 months reported one year ago.
We estimate that the reasonable time necessary to market the subject at the
stated value would be approximately one year. The necessary exposure time, which
precedes the date of value and is referenced in the definition of market value,
is also estimated at approximately one year.
Date of Value Estimate
The casino hotel is valued as of April 1, 1999, the estimated date of completion
of the improvements, and as of April 1, 2001, its estimated date of
stabilization.
- --------------
(2) "CREIF Claification Statement Regarding 'Market Value'", National Council of
Real Estate Investment Fiduciaries, 1991.
12
INTRODUCTION
The mall is valued as of April 1, 1999, the estimated date of completion of the
improvements, and as of April 1, 2000, its estimated date of stabilization.
Each value estimate rendered is based upon economic conditions prevailing as of
October 17, 1997, the most recent date of inspection.
The site or model room was inspected on January 29, February 10, March 7, August
4, 1997 and October 17, 1997, by Karen Johnson, MAI. Mr. Rodney A. Wycoff, MAI,
CRE, inspected the site on January 29, 1997. Mr. John A. Forbes, MAI, inspected
the subject site and model room on July 28, 1997. Mr. Charles R. Gardner, MAI,
inspected the site and model room on August 15, 1997.
Scope of the Assignment
The scope of this appraisal involved the systematic research and analysis
necessary to reach a market value estimate for the land underlying the proposed
Venetian Resort and the Grand Canal Shops.
Our investigation included a thorough market overview in order to gauge the
current condition of the Las Vegas casino resort and convention market.
Historical development and absorption trends were analyzed. A summary of
projects currently planned and proposed was developed and their status in the
planning/approvals process was reviewed. We reviewed the current market for
vacant land on the Las Vegas Strip. Because of the dated or less desirable
nature of the land sales comparables, a residual technique was also considered.
Cost estimates prepared by Bovis were reviewed.
A diligent search was performed for comparable improved sales for each component
of the project, however, the difference between these assets and the subject
properties were so great as to preclude meaningful comparisons.
Income estimates were prepared based on income and expenses of relatively
comparable assets. Current investor requirements were researched.
Last, final value estimates were reached based on the above analyses, influenced
by the most reliable and appropriate data. This full narrative report is the
result of our findings and analyses.
REGIONAL ANALYSIS
Geographical, social, political and economic trends are the factors that have
the most profound effect upon the real estate market. The following is a
discussion of these trends as they affect the economic
13
REGIONAL ANALYSIS
base and strength of the Las Vegas Metropolitan Statistical Area (MSA) and the
City of Las Vegas in particular.
Geographical
The subject is located within the most southern region of Nevada consisting of
Clark and Nye Counties. Combined with Mohave County in Arizona, Clark and Nye
Counties comprise the Las Vegas Metropolitan Statistical Area (MSA). The City of
Las Vegas is within the 864 square mile Las Vegas Valley of Clark County. Clark
County is approximately 7,910 square miles, most of which is undeveloped desert
and wildlife ranges owned by the Federal Government. To the north of Clark
County is Lincoln County, to the west is Nye County, also to the west and south
is California, and the Colorado River and Lake Mead are a natural eastern border
separating the county and state from Mohave County in Arizona. Las Vegas is
approximately 290 miles north-east of Los Angeles.
Population
Since 1980, the Las Vegas MSA has experienced an average compound annual growth
rate of 4.9 percent per year. Historical population figures and projections are
shown in the following table.
Las Vegas MSA
Compound
Annual
Year Population Growth
--------------- ------------- ---------------
1980 538,000 N/A
1990 875,000 5.0%
1995 1,144,000 5.5%
1st Qtr. 1997 1,219,000 3.2%
Est. 2000 1,352,000 3.5%
Source: DRI/McGraw-Hill, U.S. Markets Review.
14
REGIONAL ANALYSIS
Since 1970, the City proper has experienced population growth at an average
compound annual rate of 4.8 percent per year. The City's population figures and
estimates are shown in the following table.
City of Las Vegas
Compound
Annual
Year Population Growth
--------------- ------------- --------------
1970 125,787 --
1980 164,674 2.7%
1990 258,295 4.6%
July 1996 401,703 7.6%
Source: Clark County Comprehensive Planning Department
Population in the City of Las Vegas has increased significantly since 1970 and
will continue to do so due to economic expansion. By the year 2000, DRI
estimates that population will increase to 1.35 million residents, an increase
of nearly 55% over 1990. Booming population growth will be driven by economic
growth. Along with the hotel, gaming and recreation industry, business and
personal services, trade, state and local government, transportation,
communications and utilities are areas of the economy that are expected to grow.
Employment
During 1996, total employment increased 8.1%. Much of this increase is the
result of new casino openings and construction of new properties. In absolute
numbers, the industry that created the most new jobs during 1996 was services,
but construction, trade and durable goods manufacturing grew at faster
percentage rates. Many new manufacturing firms relocated to Las Vegas from
California in the early 1990's as a result of the recessionary period California
experienced. Now that California's economy is recovering, the rate of growth in
local manufacturing jobs is expected to decline, but this should have little
effect on the Las Vegas economy. Current casino openings are expected to
increase services employment by about 15,000 jobs in both 1997 and 1998.
15
REGIONAL ANALYSIS
Presented below is historical employment and unemployment data pertaining to the
Las Vegas MSA. The labor force has grown, on average, at a compound rate of 11.5
percent annually over the last four years, while the number of people employed
has grown at a greater rate of 12.0 percent per year. This has resulted in a
substantial decrease in the unemployment rate.
Employment and Unemployment
Las Vegas MSA
Compound
1st Qtr. Annual Growth
Year 1992 1994 1996 1997 Since 1992
-------------------- ---------- --------- --------- ----------- --------------
Labor Force 422,800 572,000 648,000 654,000 11.5%
Employment 394,050 535,392 614,952 620,646 12.0%
Unemployment 28,750 36,608 33,048 33,354 3.8%
Unemployment Rate 6.8% 6.4% 5.1% 5.1%
Source: DRI/McGraw-Hill
The unemployment rate decreased from 1992 to 1994 by 0.4 percent. The current
unemployment rate is 5.1 percent, down from 6.8 percent in 1992. By comparison,
unemployment rate for the State of Nevada is presently 5.0 percent, while the
U.S. unemployment rate is 5.2 percent.
Nevada is one of the fastest growing states in the country. Due to a number of
factors including lower corporate and personal tax burdens, a lower cost of
doing business and the community's pro-business attitude, Nevada has been ranked
first as the fastest growing economy in the west by the DRI/McGraw Hill Regional
Forecast Summary over the last three years. It is forecasted to maintain that
ranking through 2001.
The MSA's economic vitality is closely related to the visitor industry which
directly provides, at the least, one out of three area jobs. Las Vegas is one of
the nation's favorite vacation destinations. During 1996, 29.7 million people
visited Las Vegas and spent $22.5 billion in the area including gaming revenues.
New developments increase employment opportunities, which in turn allow for
growth in related services.
The Las Vegas MSA has been striving to diversify its employment base
particularly in the manufacturing, distribution/warehousing and finance,
insurance and real estate (FIRE) sectors. Local planners forecast that the
greatest percentage increases in job growth will occur in the non-gaming areas.
However, in terms of absolute numbers, the visitor industry is likely to
continue to add the greatest number of new jobs.
This is evident from a review of the top ten employers in Las Vegas provided
below.
16
REGIONAL ANALYSIS
Las Vegas MSA
Major Employers
Company Business Type
- -----------------------------------------------------------------------
1. MGM Grand Hotel, Casino Operations
2. Mirage Casino-Hotel Hotel, Casino Operations
3. University of Nevada--Las Vegas Education Services
4. Treasure Island at the Mirage Hotel, Casino Operations
5. Caesar's Palace Hotel, Casino Operations
6. Excalibur Hotel & Casino Hotel, Casino Operations
7. Hilton Corporation Hotel, Casino Operations
8. Luxor Hotel & Casino Hotel, Casino Operations
9. Circus Circus Casino Hotel, Casino Operations
10. The Monte Carlo Hotel, Casino Operations
Source: DRI/McGraw-Hill U.S. Markets Review, 1st Qtr. 1997.
Because of the relative importance of the visitor industry to Las Vegas' economy
and to the success of the proposed project, the local gaming market and the
local hotel market will be discussed at length in a separate section titled "The
Visitor Industry".
Transportation
Freeways
Las Vegas is served by two major freeways and a number of smaller highways.
Interstate 15 extends north from the east/west 40 freeway through the southern
portion of the state and city and is the primary road link to Los Angeles.
Interstate 215 extends north and south through the central portion of the metro
area and is a branch of the 95 and 93 freeways. State Highways 159 and 160 form
a loop around the western and southern portions of the city. Highway 582 is a
link between Las Vegas and Henderson. And highways 146, 147 and 167 help provide
additional highway circulation to immediate surrounding areas. By the year 2000,
Las Vegas traffic counts are expected to increase by at least 30 percent above
1996 levels. As a result, Clark County is attempting to maintain and upgrade its
roadways through regular improvements.
17
REGIONAL ANALYSIS
Airports
The McCarran International Airport has an important role in Clark County's
business and development growth plan. McCarran is ranked the 10th busiest
airport in the United States, accommodating almost 30.5 million travelers in
1996, an increase of 8.7 percent above 1995 levels. From 1988 through 1996,
total passenger count at the airport increased at a substantial compound annual
growth rate of 8.8 percent.
Since airport traffic is increasing at such rates, Clark County has committed to
spending $450 million in improvements to accommodate for anticipated future
levels of passenger traffic. During 1997 the ticketing lobby was expanded by 150
lineal feet to increase the number of ticket counter positions, and a general
aviation runway was expanded to accommodate full-size commercial carriers,
bringing the total number of runways to four. In summer of 1998 the first 26
gates of a 50-gate "D" Terminal expansion will be completed, along with a
baggage handling expansion and a new people mover system. Because of its
superlative air service, Las Vegas has an advantage over many other convention
and vacation destinations. Its demonstrated commitment to expanding its visitor
serving infrastructure bodes well for future growing in tourism to the area.
Other Surface Transportation
Las Vegas is accessible via railroad for both freight and passenger service.
Both Union Pacific and Amtrak have lines running into the County and City
connecting Las Vegas with Los Angeles, Phoenix and Salt Lake City.
A number of bus lines are available in Las Vegas, some of which are the
following: Greyhound, Las Vegas-Tonapah-Reno Stage Line, Ray & Ross, Sun Valley,
Westside Charter Service, Funbus Luxury Travel and the Gray Line Tours. Also
available in the intracity is the Las Vegas Transit System.
Conclusion and Trends
Las Vegas continues to be one of the fastest growing cities in the nation. Along
with rapid growth in tourism, the Las Vegas market also continues to expand into
other industries as well. Strong growth in tourism is projected to continue for
the next five years. A pro-business atmosphere and favorable tax climate will
support the growth of professional and service industries. Employment is strong
and will continue to strengthen as the economy diversifies.
THE VISITOR INDUSTRY
Presented in the following subsections are discussions of the three critical
components of the Las Vegas Visitor Industry: the convention market, the gaming
market and the hotel market.
18
THE VISITOR INDUSTRY
THE CONVENTION MARKET
Due to warm weather, the presence of two major convention centers, an extensive
hotel inventory with comparatively low room rates, affordable airfares and the
appeal of gaming, Las Vegas now hosts more major national conventions and trade
shows than any other destination. Two of the nation's five largest convention
centers are located in Las Vegas: the Las Vegas Convention Center and the Sands
Exposition & Convention Center. The Sands Exposition & Convention Center (SECC)
is located next to the subject site and boasts 935,000 square feet of prime
exhibit space. In addition to the exhibit space, the SECC also offers 23 meeting
rooms totaling 31,400 square feet and a superior location within one block of
the Strip.
As planned, the subject casino hotel will connect to this facility via a hallway
and pre-function space. The subject's largest ballroom, the 80,000 square foot
Grand Ballroom will share a common wall with the SECC near its Hall C. The
subject's 342,000 square feet of meeting and pre-function space will be
distinguished from the SECC space by a higher level of finish. The combination
of the SECC's exhibition facilities and the subject's highly finished meeting
facilities will enable the combined properties to attract a new market segment
for which meetings, seminars, professional accreditation classes or sit-down
meals functions are of primary importance.
The Las Vegas Convention Center (LVCC) has approximately 1,300,000 square feet
of indoor, finished area broken out as follows: 761,522 square feet of exhibit
space, 149,862 square feet of meeting space, 85,200 square feet of
lobby/registration space, a 14,623 square foot restaurant and 288,793 square
feet of access, circulation and support areas. An expansion broke ground in July
of 1997 to increase exhibit space by 279,000 square feet and to add 42,400
square feet of meeting space. The expansion could be completed as early as May
1998.
The following table is a ten-year summary of the conventions, attendance and
revenue that have occurred in Las Vegas at the two major centers and in the
city's hotels.
19
THE VISITOR INDUSTRY
Citywide Convention Statistics
Number of Annual Non-Gaming Annual
Year Conventions Attendance Growth Rate Economic Impact Growth Rate
- -------------------------------------------------------------------------------
1987 556 1,677,716 -- $1,197,168,704 --
1988 681 1,702,158 1.5% 1,242,227,536 3.8%
1989 711 1,508,842 -11.4% 1,140,912,624 -8.2%
1990 1,011 1,742,194 15.5% 1,358,243,318 19.1%
1991 1,655 1,794,444 3.0% 1,482,327,551 9.1%
1992 2,199 1,969,435 9.8% 1,693,074,125 14.2%
1993 2,443 2,439,734 23.9% 2,253,526,873 33.1%
1994 2,662 2,684,171 10.0% 3,034,267,004 34.7%
1995 2,826 2,924,879 9.0% 3,359,162,165 10.7%
1996 3,827 3,305,507 13.0% 3,943,105,480 17.4%
Source: Las Vegas Convention and Visitors Authority.
Convention attendance growth and non-gaming economic revenue have increased at
annual compound average growth rates of 7.8 percent and 14.2 percent,
respectively over the last ten years. Growth in attendance and non-gaming impact
was positive in all but one year. The relatively low growth rate in 1991
coincided with the start of a national recession. A significant contributor to
the increase in 1993 was the maturation of the Sands Expo Center and opening of
an expansion to the Las Vegas Convention Center.
Statistics from the Las Vegas Conventional Visitors Authority (LVCVA) indicate
that through July 1997, attendance at conventions in Las Vegas increased by 3.6
percent over the first seven months of 1996. Future growth will be facilitated
by the 1.0 million square feet of meeting space now under construction at the
LVCC, the Subject, the MGM Grand, Caesar's, Bellagio, Paris and Project
Paradise.
Over the past decade the number of new groups coming to Las Vegas has increased
at a compound annual average rate of 28.3 percent per year as depicted in the
table on the following page.
20
THE VISITOR INDUSTRY
Las Vegas City-Wide Convention and Trade Show Summary
New Versus Repeat Groups
Calendar Year No. Conventions New Repeat Repeat 5 plus
- ------------- --------------- ------------- ---------- -------------
1976 325 38.5% 125 41.5% 135 20.0% 65
1981 515 51.8% 267 32.2% 166 15.9% 82
1986 564 50.0% 282 35.5% 200 14.5% 82
1991 1,655 80.6% 1,334 12.4% 205 7.0% 116
1996 3,827 89.0% 3,406 7.0% 268 3.9% 149
Compound Annual Growth Rates
1976 to 1996 8.6% -- 11.6% -- 2.3% 2.8%
1986 to 1996 21.1% -- 28.3% -- 3.0% 6.2%
1991 to 1996 18.3% -- 20.6% -- 5.5% 5.1%
Source: Las Vegas Convention and Visitors Authority.
New group business is being attracted to Las Vegas. During 1996, nearly 90
percent of the groups meeting in Las Vegas had not previously met there. In
absolute numbers, the number of new groups has doubled over the past five years.
However, when expressed as a percentage rate of growth the figure has moderated
slightly from the 28.3 percent rate over a ten year period to a 20.6 percent
over the five year period. Many of the new groups are being retained, as
demonstrated by the consistent growth in the number of repeat groups. Las Vegas
has been very successful in attracting and retaining new group business.
21
THE VISITOR INDUSTRY
THE GAMING MARKET
Las Vegas tourism is driven primarily by its gaming. The legalization of
gambling in many states has not had a negative impact on gaming revenues in the
state of Nevada, Clark County or Las Vegas. In fact, gaming revenues in Clark
County have steadily increased over the years as the following table depicts.
Clark County
Gross Gaming Revenue
- -----------------------------------------------
Gross Percentage
Year Gaming Change
Revenues
- -----------------------------------------------
1987 $2,789,336,000 $ --
1988 3,136,901,000 12.5%
1989 3,430,851,000 9.4%
1990 4,104,001,000 19.6%
1991 4,152,407,000 1.2%
1992 4,381,710,000 5.5%
1993 4,727,424,000 7.9%
1994 5,430,651,000 14.9%
1995 5,717,567,000 5.3%
1996 5,783,735,000 1.2%
Compound 8.4%
Annual Growth
Source: Las Vegas Convention and Visitors Authority, January 1997.
The proliferation of gaming outside of Las Vegas, particularly in the Southern
and Midwestern States has promoted the social acceptance of gaming in these new
markets. Due to a conscious shift in market orientation, Las Vegas has shaken
off its former reputation as the vice capital of the country and has emerged as
a mainstream destination, billing itself as America's Entertainment Superstore.
In a 1996 survey by the American Society of Travel Agents, Las Vegas unseated
Orlando as the Number 1 tourist destination. The "must see" quality of the
newest mega resorts enabled Clark County gaming revenues to increase at a
compound average annual growth rate of 8.4 percent between 1987 and 1996.
22
THE VISITOR INDUSTRY
Through June 1997, gaming revenues in Clark County had increased by 5.1 percent
over the first half of 1996. In absolute dollars, Clark County's gaming revenues
are already $147,871,000 ahead of the first half of last year. During 1996,
total gaming receipts grew by only $76,168,000 over the previous year. The slow
growth in 1996 is attributed to lackluster performance on the Strip.
The following table presents gaming revenue by area in Las Vegas and contrasts
performance in 1996 with 1995. Las Vegas revenues appear to have reached a level
of stabilization, if further growth in revenues is going to occur, casino
operators believe that the number of guest rooms and gaming facilities must
increase.
Las Vegas
Gaming Revenue by Area
County 1995 1996 Change
- --------------------------------------------------------------------------
Clark County $5,717,567,000 $5,783,735,000 1.2%
Las Vegas MSA 4,557,331,000 4,618,674,000 1.3%
Strip 3,610,477,000 3,579,673,000 -0.9%
Downtown 641,853,000 678,852,000 5.8%
Boulder Strip 305,001,000 360,149,000 18.1%
Source: Las Vegas Convention and Visitors Authority, January 1997.
The decline in 1996 for "Strip" gaming revenues was caused almost entirely by a
fairly isolated double digit decline in the month of November. Through October,
the year-to-date growth had been positive. December 1996 figures showed an
increase over the prior December. Local observers attribute the decline to 1) a
major swing in Baccarat play and 2) erroneous odds making on two nationally
televised prize fights. There are a handful of international high stakes
Baccarat players that can affect citywide annual gaming revenues.
Through July, 1997, Gaming revenues along the Strip are up 4.6 percent over the
first seven months of 1996. Still, this cumulative growth rate of 4.6 percent
lags behind the 6.8 percent rate of growth in number of occupied hotel rooms.
The changing profile of the Las Vegas visitor is reflected in the changes in the
gaming revenue when expressed on a "per occupied room night" basis. This is
presented in the following table.
23
THE VISITOR INDUSTRY
Clark County
Gaming Revenue Per Hotel Room Night
Estimated Room
Gaming Revenue Nights Occupied Revenue Per
Year (in 000's) (in 000's) Occupied Night
- ----------------------------------------------------------------
1991 $4,152,407 22,530 $184
1992 $4,381,710 23,430 $187
1993 $4,727,424 24,617 $192
1994 $5,430,651 28,208 $193
1995 $5,717,567 28,695 $199
1996 $5,783,735 30,638 $189
Source: Las Vegas Convention and Visitors Authority.
The rate of growth in gaming receipts, when expressed on a per occupied room
basis, is not keeping pace with inflation or the cost to construct many of these
new highly themed mega-resorts. Even if the decline in 1996 is omitted as an
aberration, the compound annual rate of growth was only 2.0 percent per year
between 1991 and 1995. If 1996 is indicative of the new market's profile, the
rate of growth in gaming revenues per occupied room has been only 0.5 percent
per year.
Through July 1997, the gaming revenue per occupied room night declined to $188
from $191 for the same period of the previous year, a 1.5 percent decline. The
trend appears to be broadly based.
Hotel room revenues, food and beverage revenues, and retail sales have, however,
been increasing at rates faster than inflation. From the standpoint of investors
and the lending community, this diversification is a positive change.
It is expected that Las Vegas will continue to attract a broader profile of
visitors in the future as more themed hotels, restaurants and retail centers are
developed. Visitor expenditures will be consumed by many attractions other than
gaming. Therefore, and thus, gaming revenues per occupied room night will likely
be flat or decrease at a moderate rate until the full extent of the new market
profile has been felt.
24
THE VISITOR INDUSTRY
THE LODGING MARKET
The Las Vegas lodging market has experienced unprecedented growth during the
1980's due to the evolution of the casino/hotel.
Las Vegas Area
Hotel/Motel Inventory,
Rooms Available as of December 31
------------------------------------------------
Year Number of Percentage
Hotel/Motel Rooms Change
------------------------------------------------
1987 58,474 --
1988 61,394 5.0%
1989 67,391 9.8%
1990 73,730 9.4%
1991 76,879 4.3%
1992 76,523 -0.5%
1993 86,053 12.5%
1994 88,560 2.9%
1995 90,046 1.7%
1996 99,072 10.0%
Source: Las Vegas Convention and Visitors Authority, January 1997.
Over the ten year period, the rooms inventory in Las Vegas grew at a compound
annual rate of 6.0 percent. During 1996 the 1,500 room Stratosphere Hotel opened
in April, followed by the 3,014 room Monte Carlo in June. These two properties
and additions to the Luxor and Circus Circus are largely responsible for the
significant (10.0) percent increase in the room inventory when the number of
rooms open as of December 31, 1996 is compared to that same date in 1995. With
the opening of the New York-New York Hotel and Casino, the Las Vegas lodging
market crossed the 100,000 room threshold on January 3, 1997.
As of July 31, 1997, there were approximately 103,916 rooms available, a 10.5
percent increase over July 31 of 1996.
25
THE VISITOR INDUSTRY
Historical Performance
The historical occupancy performance of the aggregate Las Vegas hotel and motel
market from 1987 through 1996 is presented in the following table.
Las Vegas Metro-Wide
Historical Occupancy Performance
Hotel Motel City-Wide
Year Occupancy Performance Occupancy Performance Occupancy Percentage
- --------------------------------------------------------------------------------
1987 87.0% 74.0% 83.4%
1988 89.3% 73.7% 85.1%
1989 89.8% 72.5% 85.2%
1990 89.1% 69.8% 84.7%
1991 85.2% 62.6% 80.3%
1992 88.8% 66.1% 83.9%
1993 92.6% 69.7% 87.6%
1994 92.6% 73.2% 89.0%
1995 91.4% 72.4% 88.0%
1996 93.4% 75.7% 90.4%
Source: Las Vegas Convention and Visitors Authority.
Despite the pace of additions, hotel and motel occupancy rates improved between
1987 and 1996. Over the long term, the pace of growth in demand has outstripped
the rate of growth in supply. However, through July 1997, the overall metro-wide
occupancy rate has declined from 91.6 percent to 87.9 percent. This is
attributable mainly to recent increases in supply. According to statistics from
the Convention and Visitors Bureau, demand increased by 6.8 percent through July
whereas supply increased by 10.5 percent. Moderation in Las Vegas' growth rate
may also be a function of the decline in summer tourism throughout the Desert
Southwest. Tourist traffic is reported to be well below last year's levels in
the communities surrounding the Grand Canyon, in the national parks, Southern
Utah and as far north and east as Durango Colorado. These destinations are
popular with international tourists, primarily Europeans, who may be suffering
from a form of "sticker shock" because of the recent strength of the dollar.
Conversely, the number of Americans vacationing overseas has increased because
of the strength of the dollar.
Given the 6.8 percent growth rate in demand, we believe that talk of Las Vegas'
hotel market having reached its saturation point is premature. In virtually any
other community, a 6.8 percent growth rate in
26
THE VISITOR INDUSTRY
demand qualifies as "booming" growth. The market appears to be experiencing a
lag between the rate of growth in supply and the rate of growth in demand. Many
of the new rooms are rooms-only expansions to existing resorts and have not
added to the base of attractions. Based on current construction, the rate of
growth in supply will continue to fall off in the second half of 1997. The only
significant addition to open between now and the third quarter of 1998 is a
1,200 room expansion to Caesar's Palace.
The Las Vegas lodging market's performance is particularly successful when
contrasted against the performance of hotels and motels on a national basis.
Occupancy
Las Vegas vs. National Average
Year National Occupancy Las Vegas Occupancy Net Difference
- -------------------------------------------------------------------------------
1994 65.2% 89.0% 36.5%
1995 65.5% 88.0% 34.4%
1996 65.2% 90.4% 25.2%
Source: Las Vegas Convention and Visitors Authority, March 1997.
As is evidenced by the growth in demand, these new properties have demonstrated
the strong ability to induce significant demand into the Las Vegas market. These
hotels, through their themed attractions and extensive national and
international marketing efforts, have greatly broadened the potential Las Vegas
visitor market.
The cost of constructing these new mega-resorts is significant. As indicated in
a previous table, the increased levels of capital expenditures are not
translating into higher gaming revenue when expressed on a per occupied room
basis. Thus, mega-resort operators are recognizing that the increased costs must
be borne by improved profitability in the rooms, food and beverage, and
entertainment departments. Pricing these items at "below cost" can no longer be
recovered by increased gaming revenues.
27
THE VISITOR INDUSTRY
According to the Las Vegas Convention and Visitors Bureau, the average daily
room rate in Las Vegas is approximately $45. This figure factors complimentary
rooms in at zero revenue, when in fact the casino departments are required to
"buy" the rooms from the hotel rooms department at a predetermined rate. This
$45 rate is based on intercept interviews and not on any total room revenue or
transient occupancy tax figures. We consider it unreliable and meaningless.
More reliable data is available from the Nevada Gaming Abstract. For Clark
County, the 132 gaming properties reported an average daily room rate of $61.27
in fiscal 1995/96. These properties accounted for 83,067 rooms, which equates to
93 percent of the inventory of 89,300 rooms as estimated by the Convention and
Visitors Bureau as of December 31, 1995 (December 31 is the mid-point of the
fiscal year and would be less likely to overstate the average number of rooms
available during the year).
For the 40 Strip Casino hotels with gaming revenues in excess of $1,000,000, the
average daily room rate in fiscal 1995/96 was $74.32. The 19 largest casino
hotels with gaming revenues of $72,000,000 and over, had an average daily room
rate of $79.19 in fiscal 1995/96. Presented in the following table is a summary
of the growth in the average daily room rate for this category.
Average Daily Room Rates for Strip Hotels
with $72.0 M Plus in Gaming Revenues
Average Daily Percent
Fiscal Year Rate Change
- --------------------------------------------------------------
1993/94 $66.20 N/A
1994/95 $74.61 12.7%
1995/96 $79.19 6.1%
Compound Annual Growth 9.4%
While growing at a rate that is roughly three times that of inflation, these
rates were still well below those at other major convention destinations.
One of the reasons that Las Vegas' average rates are so low is that most of the
casino hotels have not constructed a material amount of meeting space on-site.
For example the 3,000 room Monte Carlo has only 35,000 square feet of meeting
space. With little commercial demand, these hotels mostly rely on the Las Vegas
Convention Center and the Sands Expo Center for mid-week convention businesses.
These facilities do not generate demand every day and therefore the "under
equipped" hotels must fill-in with very low-rated tour and travel business.
The recent imbalance between the rates of growth in supply and demand in 1997
has resulted in lower average daily room rates during the late Spring and Summer
months. Summer is traditionally the
28
THE VISITOR INDUSTRY
lowest priced season because of the national decline in convention activity and
the softening of leisure demand due to the high temperatures of Las Vegas. It
should not be surprising that the temporary imbalance in supply and demand is
being felt most during the summer months, particularly in room rates. With the
Fall seasonal increase in convention activity, more temperate weather, and the
deceleration in the rate of supply growth, the current discounting should abate.
The discounting has affected the bottom of the market most severely. During the
Second Quarter of 1997, the Mirage, the Treasure Island and MGM Grand were all
able to maintain or improve their average daily rates. In the third quarter of
1997, Mirage Resorts increased its net income by 12 percent, led by the Mirage,
which posted a 19 percent increase in revenues and a 35 percent increase in cash
flow. Rio reported an 81 percent increase in earnings which is attributable to
the rapid market acceptance of its expansion. Analyst Todd Jordan of Raymond
James and Associates said that Rio was able to increase room rates by about 10
to 15 percent. Analyst Naomi Talish of Merrill Lynch and Co. said that the MGM
Grand cut rates by about 5 percent for the third quarter but was running at 100
percent occupancy. The gaming divisions of Hilton and ITT have or are expected
to report strong third quarter performance, due mainly to the strength of
operations in Las Vegas. Only Circus Circus appears to be suffering. Earnings
per share were expected to decline 15 percent despite their recent rooms
expansions.
Las Vegas' competitive destinations will also facilitate room rate growth. The
room rates in competitive convention destinations are likely to continue to show
real growth in the near term due to the current shortage of rooms. A January 3,
1997, article in U.S.A. Today titled "Hotel Shortage Hits Big Cities" indicated
that hoteliers are forgoing the discounted group business associated with major
conventions in favor of higher rated commercial demand. The city of Chicago
recently lost its bid to host a major Tradeshow 200 event, the Pittcon
Scientific Convention, because of an inability to procure a 26,000-room block
for exhibitors and attendees. Rising rates and availability issues in the
competitive cities bode well for the Las Vegas hotel industry, which could
accommodate the Pittcon room block in ten hotels with room to spare.
FUTURE GROWTH
Future growth is fundamentally favorable. Diversification of its market away
from the core gamblers' market to "Middle America" continues to attract
first-time visitors. While the number of international visitors is small
relative to the total, potential for growth from this market is immense.
Europeans in particular are awed by the scale and spectacle of the mega-resorts
and are adding Las Vegas to the Western tour circuit that previously included
only Los Angeles, the Grand Canyon, Yosemite and San Francisco.
Presented in the following chart is a summary of the states and countries of
origin for visitors to Las Vegas between 1990 and 1996.
29
THE VISITOR INDUSTRY
Origin of Visitors by Place of Residence
1990 1991 1992 1993 1994 1995 1996
-----------------------------------------------------
U.S.
Total 90% 88% 85% 85% 86% 87% 82%
Eastern States 9% 9% 10% 8% 9% 10% 9%
Southern States 13% 14% 13% 11% 12% 12% 12%
Midwestern States 17% 15% 17% 17% 14% 13% 15%
Western States 51% 48% 45% 49% 50% 51% 46%
California 33% 33% 30% 32% 33% 35% 30%
Arizona 4% 5% 4% 6% 5% 3% 4%
Other 14% 11% 10% 11% 12% 12% 12%
No Zip Code Given 0% 1% 1% 0% 1% 1% 0%
Foreign
Total 10% 12% 15% 15% 14% 13% 18%
Canada 4% 5% 6% 6% 6% 5% --
Germany -- 2% 3% 3% 4% 1% --
England 2% 2% 2% 2% 2% 3% --
Other European 2% 2% 3% 2% 2% 2% --
Other Non-European 2% 2% 2% 2% 2% 2% --
Source: Las Vegas Convention and Visitors Bureau
The percentage of foreign visitation previously peaked in 1992 and 1993 and then
declined with a resurgence in the percentage of visitors from California. In
1996, the percentage of foreign visitation spiked upward again. Detail has not
been provided in the most recent publication that would indicate the countries
of origin that contributed to the gain. The table also shows an uneven pattern
for California, which has consistently been the largest single market for Las
Vegas. The effects of California's restructuring are reflected in the decline in
percentage contributions in 1992; its recovery pattern is evidenced from the
gradual increase until 1995. The decline in the percentage contribution in 1996
is not a reflection of worsening economic conditions in this source market. San
Diego and Orange Counties finally recovered the jobs lost since the 1989
employment peak in mid-to-late-1996. Los Angeles County is expected to fully
regain its lost jobs by 1997. We believe that the percentage decline from
California in 1996 is related to the high levels of repeat visitation from this
market, and the absence of newly opened "must-see" attractions in 1996. It is
noteworthy that Las Vegas' tremendous
30
THE VISITOR INDUSTRY
growth in recent years has been achieved in spite of a severe and prolonged
recession in its primary source market.
California's increasing ethnic diversity bodes well for the gaming industry in
Las Vegas. According to surveys conducted for the Travel Industry Association of
America (TIAA) and presented at the 1997 Outlook for Travel and Tourism, the
propensity to take gambling vacations is greater among Hispanic and Asian
Americans than among Anglo Americans.
While there is no data in the TIAA report on the number of Hispanic Americans
that have the wherewithal to vacation, the members of this ethnic group that do
vacation stay longer than average (5.1 versus 4.5 nights) and spend considerably
more per trip ($559 versus $421). Asian Americans spend the highest amount of
any group, at $678 per trip.
Presented in the following table is evidence of California's broad demographic
trends.
Ethnicity of Visitors to Las Vegas
1990 1991 1992 1993 1994 1995 1996
-----------------------------------------------------------
Ethnicity
White 85% 83% 85% 85% 80% 79% 81%
African American 6% 6% 4% 4% 7% 7% 6%
Asian/Asian 4% 5% 5% 5% 7% 7% 7%
American
Hispanic/Latino 4% 6% 5% 5% 6% 6% 5%
Other 1% 0% 1% 0% 1% 1% 1%
Source: Las Vegas Convention and Visitors Bureau
Conclusion
The Convention and Gaming components of Las Vegas' tourism industry are showing
strong levels of growth, although at levels that are somewhat below the nearly
double digit rates of growth of the previous decade. Recent concerns about Las
Vegas' ability to absorb new hotel rooms seems unfounded in light of the 6.8
percent rate of increase in occupied rooms through July, 1997. A short term
imbalance in supply and demand growth rates will be reflected in lower average
daily room rates during the summer of 1997. Over the long term, average daily
room rates are likely to grow at a faster rate than inflation due to the meeting
space that is being added with new properties and the absence of any downward
pressure from competitive convention destinations. Demand fundamentals are good
and the Convention Center expansion and airport expansion will facilitate
further growth. Based on historical performance, the Las Vegas lodging market
appears capable of absorbing additional rooms.
31
THE VISITOR INDUSTRY
NEIGHBORHOOD ANALYSIS
The subject site is located in the Strip neighborhood of Las Vegas, more
specifically in the most desirable portion of the Strip which extends from
Spring Mountain Road /Sands Drive in the north to Tropicana Avenue in the south.
Up until the recent bankruptcy of the Stratosphere, a casino hotel's site on the
Strip was not considered paramount to success. In fact, the success of two
non-Strip properties, the Hard Rock Cafe Hotel and Casino and the Rio Hotel and
Casino, appeared to indicate that a Strip location was
32
NEIGHBORHOOD ANALYSIS
not even crucial for success. It should be noted that the Hard Rock has only 340
hotel rooms and that its chain-branded concept and Paradise Road location has
not yet been tested with a mega hotel. Initially the Rio Hotel and Casino
started with 549 hotel rooms. Its concept, an outsized guest room with a large
seating area, was perceived of as a good value. Through superlative management,
this property, located on the "wrong" side of the I-15 Freeway, was able to
garner an impressive array of Zagat awards for "Best Room," "Best Food" and
"Best Service".
For a while, it appeared that as long as the casino hotel was in Las Vegas, it
was bound to be a success. In late December 1995, a few months before the first
phase of the Stratosphere project was completed, a public offering raised $78.0
million to finance the second phase of the project and was oversubscribed in a
matter of weeks. While mechanical problems with some of the tower's thrill rides
and inadequate vertical lift may have contributed to its poor market acceptance,
the primary reason for its underperforming projections and subsequent bankruptcy
is attributed to its location. Grand Casinos, Inc., which bought out the
project's developer during the "anywhere in Vegas" euphoria, acknowledges that
the Stratosphere is "two blocks north of success".
A January 27, 1997, article in the Las Vegas Business Press titled "High Tech
Future for the Strip" indicated that "the limits of the Strip may be Russell
Road at the south and Sahara Avenue in the north; lenders have a tendency to
avoid risky areas. And risky on the Strip means anywhere in the vicinity of the
Stratosphere Tower."
The fall-out of the Stratosphere bankruptcy has caused problems even for
developers attempting projects south of Sahara Avenue. A New Jersey based horse
racing concern, ITB, which bought a 20-acre parcel on the Strip just north of
Riviera in February 1996, was stymied in its attempts to finance a major casino
resort and has announced that it will renovate the El Rancho rather than
redevelop the site. A second parcel on the northwest corner of Sahara Avenue and
the Strip fell out of escrow earlier this year due to the prospective
developer's inability to obtain financing.
33
NEIGHBORHOOD ANALYSIS
Numerous buyers who are active in the market confirmed that the core and most
desirable area of the Strip is located between Spring Mountain/Sands Boulevard
and Tropicana Avenue. The subject property is at the northern end of this core
area, across from two of the most successful casino resorts in Las Vegas, the
Mirage and Treasure Island. According to the same Las Vegas Business Press
article ". . .the next best thing to being a Mirage is to be next to the Mirage.
That means that companies will build near popular locations like Spring Mountain
and the Strip."
Land prices in this core area will present a barrier to many developers. The few
blocks at either end of this core area appear to be acceptable substitutes, but
would be expected to be priced well below the core area. Judging from the
interest in acquiring The Frontier for redevelopment, the area for which
financing could likely be obtained for a new mega resort development is somewhat
larger, likely marked by Convention Center Drive on the North and Russell Road
on the south. Opportunities for new development on the south end of this area
are somewhat limited. Circus Circus controls the west side of the Strip between
Tropicana and Russell Road. The east side of the Strip consists of a number of
small parcels that back up to the airport. With each block south, the depth and
utility of these east side parcels decreases. Both sides of the Strip in this
southerly area are subject to a veritable "wildcard" in the form of FAA
approvals. While the FAA has the right to review all plans for buildings over 9
stories tall in Clark County, approvals for the conditional use permit height
variances are by no means certain in these areas near the airport. Circus
Circus' Project Paradise development was delayed by several months due to the
FAA's review of the variance to permit a 450 foot height.
With the exception of the Circus Circus development in this southerly area, the
majority of the new mega-resort developments can be expected to occur as
redevelopments in the core and northerly areas of the Strip.
Immediate Environs
The immediate neighborhood surrounding the subject contains uses that are geared
to Las Vegas' 30 million visitors per year.
To The North
Immediately to the North of the subject is the remainder of the larger parcel
formerly occupied by the Sands or assembled by its owners, with one exception.
The owners of the Rosewood Grill restaurant declined to sell their property to
the Sands current owner This parcel, with 100 feet of frontage on the strip and
a depth averaging 304 feet, provides a partial separation of the Venetian
(subject) and Lido project sites. This 0.64 acre site is a low density use that
is unlikely ever to be expanded to more than its current two stories. To the
north of the Lido section of the larger Sands
34
NEIGHBORHOOD ANALYSIS
assemblage is Sands Avenue/ Spring Mountain Road. A second "hold-out" occupies
approximately 2.0 acres on the corner of this intersection. It is possible that
the existing two-story Vagabond motel and one-story retail could be replaced
with a mid-rise structure but it is unlikely that the developer of such a
non-gaming facility could afford to pay a market rate for the site. (In order to
obtain a non-restricted gaming license, state law requires that a casino provide
a minimum of 200 rooms.)
North, across Sands Avenue is excess land belonging to the Desert Inn upon which
ITT Sheraton planned to build a Planet Hollywood Casino hotel. This 3,200-room
highly-themed project has been put on a slow track with the hostile take-over
attempt launched by Hilton. (Hilton has vowed not to go forward with the project
because of the costliness of licensing the Planet Hollywood name). However, this
site is a likely candidate for redevelopment. In the meantime, the views to the
north will be of the Desert Inn Golf Course and Desert Inn Hotel which is was
undergoing a significant renovation at the time of our inspection.
To the East
To the immediate east of the Venetian site is the Sands Exposition and
Convention Center (SECC), an approximately one million square foot tradeshow and
convention venue. This facility is a significant demand generator for hotel
guests, gamblers, restaurant patrons and retail customers. Beyond the SECC is
Koval Lane and a multi-family residential development. The Las Vegas Convention
Center is approximately two miles to the northeast.
To the South
Immediately South of the subject is Harrah's 35-story hotel tower and one of its
parking structures, and, fronting on the Strip, the Casino Royale. This small
free-standing casino pre-dates the minimum hotel room requirement and is
equivalent to a two-story structure. With only 3.23 acres, it is unlikely that
this parcel could be redeveloped to its highest and best use without being
assembled by the subject or Harrah's to the south.
To the West
Located to the West of the Subject site is the Las Vegas Strip, the Casino
Royale and Rosewood Restaurant, as mentioned above. The site plan for the
subject provides for approximately 490 feet of frontage on Las Vegas Boulevard
South (the Strip). On the opposite side of the Strip due West, is the Mirage
Resort, a major local attraction. To the northwest is the Treasure Island
Resort, also a major local "must see". The west facing hotel rooms in the
Venetian Resort will have excellent views of the Volcano eruptions on the
Mirage's front lawn. Many will also have views of the pirate ship battle in
front of Treasure Island. Due to the fact that both attractions were designed to
draw
35
NEIGHBORHOOD ANALYSIS
people in from the street, the views from the subject will be better than from
either of the two "hosting" resorts for the same reason that a theater's loge
seating provides better views than from backstage.
To the northwest across from the intersection of Sands Avenue and the Strip, the
name of the east-west street changes to Spring Mountain. On the northwest corner
is one of Las Vegas' largest malls, the Fashion Show Mall. This mall is anchored
by a diverse mix of major department stores: Neiman Marcus, Saks Fifth Ave,
Robinson's May, Macy's and Dillards. The roster of in-line stores is very
diverse as well to have the broadest market appeal. These stores run the gamut
from Bally and Luis Vuitton to Miller's Outpost and Casual Corner. Because of
the success of this facility and location, an expansion is contemplated. A
recent Las Vegas Business Press article indicates that the sales at this mall
approximate $500 per square foot.
Conclusion
The subject's larger neighborhood, the Las Vegas Strip, is the premier location
for casino hotel development. The subject site enjoys a very good location
within its neighborhood due to its location within the core area extending from
Spring Mountain/Sands to Tropicana. The proximity of the Sands Expo Center, and
the views it will offer of two of Las Vegas' major attractions should enable a
hotel on this site to avoid much of the low-rated tour and travel demand that
other, more remote casino hotels rely on mid-week, and should achieve
significant room rate premiums.
36
SITE ANALYSIS
SITE ANALYSIS
Physical Location
Location
The subject property is located in the most desirable portion of the Strip
neighborhood of Las Vegas, Clark County, Nevada. The site is located
approximately 1,000 feet south of the intersection of Spring Mountain Road/Sands
Avenue with the Strip, between Las Vegas Boulevard South to the west and the
Sands Expo Center to the east.
Shape and Dimension
The subject is an irregularly shaped parcel, with approximately 490 feet of
frontage along Las Vegas Boulevard South and approximately 60 feet of frontage
along Sands Avenue. As indicated by the proposed parcel map prepared by Martin &
Martin, the site is to contain a gross area of approximately 30.86 acres or
approximately 1,344,378 square feet. Please refer to the proposed parcel map on
the following page.
Topography
Prior to the commencement of excavations on April 21, 1997, the site was mostly
level and situated at street grade.
Environment and Soil
The site was previously improved in the 1950's, 60's and 70's with the Sands
Hotel. When it was demolished, all asbestos was removed as well as all
underground storage tanks. Once excavations began however, some contaminated
water and soil was found. A letter from Converse Environmental Consultants
Southwest, Inc., dated August 7, 1997, indicates that "this soil contamination
is relatively immobile and will become more so as soon as the new buildings are
constructed above it. If no human intervention is taken to remediate the soil at
an accelerated pace, the soil will likely naturally degrade by biological
attenuation over the next 15 to 30 years."
The contaminated groundwater is being treated with an on-site filtering process
and is being released into the storm drains. A permanent "dewatering" system
will be constructed as part of the physical plant. According to Converse, "The
length of time it will take to remediate the contaminated groundwater is
unknown; however an estimate can be made of 10 to 15 years to remediate the
aquifer." The cost of this dewatering is presently $5,600 per month. It is
possible
37
SITE ANALYSIS
[SANDS/VENETIAN PHASE MAP]
38
SITE ANALYSIS
that the permanent facility may be less expensive to operate. However, for the
purposes of this appraisal, we have assumed that the cost continues for 15
years. To the annual cost of $67,200 we have added a 20 percent premium for
ongoing consulting and supervision, which increases the annual cost of
mitigation to approximately $80,600. This expense will be included in our cash
flow forecast.
Numerous surrounding improvements are of very dense highrise construction
suggesting that soils are of adequate loadbearing capacity to support
improvements which are consistent with the highest and best use of the property.
No signs of soil problems were noted in our inspection.
Because it is located in such an urbanized area, we have also assumed that the
site is free of any desert tortoise environmental issues.
Access
The Sands hotel had direct access from both north- and south-bound traffic on
Las Vegas Boulevard South. The site also has access from both east- and
west-bound traffic along Sands Avenue. While we have not been provided with a
site plan showing the specific curb cuts, we have assumed that the subject will
share a traffic light on Las Vegas Boulevard South with the Mirage Resort, which
is due west. The majority of automobiles are expected to enter the site from the
rear on a driveway from Sands Avenue or Koval Lane. At present the subject's
developers are attempting to negotiate easements for a shared driveway with
Harrah's from Koval Lane along the southern boundary of the site.
Utilities
All municipal utilities and services necessary to support the subject are in
service and include water, sewer, electrical, gas and telephone.
Streets
Las Vegas Boulevard South extends along the western border of the property. It
is a publicly dedicated right-of-way consisting of six lanes traveling north and
south with a center turn lane and median. Las Vegas Boulevard South is improved
with asphalt paving, concrete curbs, medians, gutters, sidewalks, street
lighting, and has a width of approximately 100 feet. Las Vegas Boulevard extends
north into the City of Las Vegas.
Sands Avenue meets the subject at the eastern border of the property. It is a
publicly dedicated right-of-way consisting of four lanes and a center turning
lane traveling east and west, changing names at Las Vegas Boulevard to Spring
Mountain Road. Sands Avenue is improved with asphalt
39
SITE ANALYSIS
paving, concrete curbs and sidewalks in front of the subject and a gravel
shoulder opposite the entrance to the subject. At Spring Mountain Road, it
provides northbound access and southbound egress from I-15. Arrivals from the
South would likely exit I-15 at Flamingo, to the south of the subject. Sands
Avenue continues east to Paradise Road, the neighborhood's second north-south
arterial and the generally less congested one. Airport arrivals would be equally
as likely to use Paradise Road and to avoid I-15 and the Strip.
Legal Characteristics
Zoning
The subject is zoned H-1, Limit Resort and Apartment District, as designated by
Clark County, Nevada. The purpose of the H-1 district is to provide areas for
hotel and/or apartment development. The building standards for the H-1 zone are
summarized as follows:
FAR (Floor Area Ratio)No minimum or maximum stated.
Building Height Limit 100 feet or higher with a conditional use permit.
Building Setbacks Front: 10 feet.
Side: 5 feet plus one foot for every story above
40 feet.
Rear: none.
Site Coverage 60 percent.
Parking Requirements Guest room parking requirements:
1.0 spaces for each guest room for each room up to
500 rooms.
0.5 spaces for each guest room from 501 to 1,000
rooms.
0.25 spaces for each guest room above 1,001 rooms.
Non guest room, public area parking requirements:*
20 spaces for each 1,000 square feet for the first
40,000 square feet of floor space.
10 spaces for each 1,000 square feet from 401,001
square feet to 100,000 square feet of floor area.
5 spaces for each 1,000 square feet in excess of
100,001 square feet of floor area.
Administrative office parking requirements:
40
SITE ANALYSIS
One space for every 300 square feet of floor area.
*Includes casino, showroom, bars, lounges, commercial shops and stores,
dining rooms and related spaces.
According to County Planning documentation, the two-phased subject project would
require 8,914 parking spaces. Tentative approval was granted for a 22 percent
variance along with the overall project approval on December 16, 1996, pending
the findings of a traffic and parking study. On March 19, 1997, the preliminary
traffic survey was rejected by County Planning. Building permits for the
foundations and structural steel have been obtained on the basis of a
pre-development agreement that essentially requires the developer to accede to
the County's subsequent decisions or requirements on parking and traffic issues.
It should be noted that the combined project was approved, not the individual
phases.
If the County elects to build an elevated crosswalk at the interchange of the
Strip and Spring Mountain Road/Sands Avenue, the developer of the subject two
phased development will be responsible for 25 percent of the structure's cost.
Since we do not believe this elevated crosswalk will be developed until The
Planet Hollywood and Lido projects are completed, we have not included its cost
in our analysis.
Parking
The parking code appears obsolete, given the increasing densities and
walkability of the core Strip area. The County has tentatively approved an
approximately 3,940 space garage to be shared by the subject Phase I casino
hotel and retail project and the Sands Exposition and Convention Center (SECC).
There are approximately 57 spaces at the SECC, for a total of 3,997 in Phase I.
These are to be augmented by a second 3,000 space garage to be constructed with
the Phase II hotel. Our survey of ten Strip mega-resorts indicates that
significant numbers of variances have been granted to other projects. We were
unable to obtain the exhaustive square footage data necessary to quantify the
exact requirements of each property to determine how the variances are being
applied. A summary of our parking survey is presented on the following page.
From the data gathered, we were able to draw the following conclusions.
LANDAUER 41
REAL ESTATE COUNSELORS SITE ANALYSIS
PARKING ANALYSIS
Percent
Project Name Required "As built" Variance
Casino Hotel Projects with little retail or meeting space
Mirage and Treasure Island (shared) 7,707 9,715 26%
Monte Carlo 3,306 4,210 27%
New York New York 3,368 3,469 3%
Circus Circus before Addition 4,040 5,878 45%
Circus Circus, after '97 Addition 4,290 5,100 19%
Excalibur and Luxor, before Luxor Addition 7,270 9,923 36%
Excalibur and Luxor, after '97 Luxor Addition 7,739 7,500 -3%
Average, using most current data for each project
Casino Projects with significant retail or meeting space
Las Vegas Hilton 3,556 3,628 2%
Bally's existing 3,840 2,885 -25%
Paris, approved 3,885 4,750 22%
----- -----
Combined resorts that will share parking 7,725 7,635 -1%
MGM Grand 7,811 8,043 3%
Convention Center 479 (348) -173%
----- -----
MGM After expansion 8,290 7,695 -7%
Caesar's and Phase I Shops at the Forum 4,448 3,806 -14%
Entire project after Phase II Shops at the Forum 4,588 6,000 31%
Entire project after rooms and Forum Expansion 4,888 8,350 71%
Average, using most current data for each project
Retail Projects
Fashion Show Mall 3,021 3,312 10%
Subject
The Venetian (Phase I), as planned 4,876 3,997 -22%
The Venetian and Lido (Phases I and II), as planned 8,914 6,997 -22%
Landauer Assumption for subject
Phase I 4,876 4,554 -7%
Hotel Ratio
Project Name Rooms er Room Comments
Casino Hotel Projects with little retail or meeting space
Mirage and Treasure Island (shared) 5,944 1.6 Includes employee parking across street.
Monte Carlo 3,002 1.4 Have never used entire garage capacity:
New York New York 2,035 1.7 Per planning documents
Circus Circus before Addition 2,764 2.1
Circus Circus, after '97 Addition 3,764 1.4
Excalibur and Luxor, before Luxor Addition 6,558 1.5
Excalibur and Luxor, after '97 Luxor Addition 8,432 0.9 Includes employee parking across street
Average, using most current data for each project 1.4
Casino Projects with significant retail or meeting space
Las Vegas Hilton 3,174 1.1 157,500 sf meeting space, 1 showroom
Bally's existing 2,814 1.0 152,000 sf meeting space, 2 showrooms
Paris, approved 3,220 1.5 150,000 sf meeting space
-----
Combined resorts that will share parking 6,034 1.3 Includes employee parking off-site
MGM Grand 5,000 1.6 125,000 sf meeting space, boxing arena, 2 showrooms
Convention Center 54 -6.4 340,000 net sf meeting space, 54 suites, new pool
-----
MGM After expansion 5,054 1.5
Caesar's and Phase I Shops at the Forum 1,519 2.5 235,000 sf retail, 110,000 sf meeting, boxing arena
Entire project after Phase II Shops at the Forum 1,519 3.9 521,000 sf retail, 110,000 sf meeting, boxing arena
Entire project after rooms and Forum Expansion 2,719 3.1
Average, using most current data for each project 1.8
Retail Projects
Fashion Show Mall N/A N/A 717,000 square feet of retail space
216 sf retail space per parking space
Subject
The Venetian (Phase I), as planned 3,036 1.3 1,400,000 sf meeting, 415,000 sf retail, 1 showroom
The Venetian and Lido (Phases I and II), as planned 6,000 1.2
Landauer Assumption for subject
Phase I 3,036 1.5
42
SITE ANALYSIS
o The survey of "As Built" facilities will probably not provide a reliable
indication of the current market standard. Anecdotal evidence suggests that,
with the increasing densities and traffic congestion on the Strip, fewer air
arrivals are renting automobiles, preferring to take cabs or walk from casino
to casino instead. The Chief Engineer at the Monte Carlo, which has operated
at 95 percent plus occupancy levels since it opened one year ago, indicated
that they have yet to use all of the spaces in their garage. This property
was built with an effective ratio of 1.4 spaces per guest room.
o Parking requirements are trending downward. The total number of parking
spaces at the Luxor decreased when the 1,874 rooms were added in early 1997
due to a loss of surface spaces used for the expansion. Prior to the
expansion, the effective ratio between the Luxor and Excalibur (which share
parking) had been 1.5 spaces per guest room. After the expansion, the ratio
dropped to 0.9 spaces per guest room. When Circus Circus added 1,000 rooms at
its fairly remote location near the north end of the Strip, it was not
required to add any additional parking. Since 1995 its effective ratio has
dropped from 2.1 spaces per guest room to 1.4 spaces per room.
o Based on the approval process for Caesar's Palace expansion and the Paris
project, it appears to be quite common to return to the Planning Authority to
request a variance such that a parking structure be different than was
originally approved.
o For the existing properties, the effective parking ratios for the five
traditional casino hotels surveyed ranged from 0.9 spaces per room for the
Excalibur/Luxor to 1.7 at New York- New York.
o Excluding Caesar's, the average ratio for the casino hotels with 125,000 to
340,000 square feet of meeting space was actually lower at 1.3 spaces per
room. Caesar's was however significantly higher, at 2.5 before the recent
round of expansions to both the retail space and the guest rooms. Upon
completion of the guest room expansion the parking ratio at Caesar's will
have increased from 2.5 spaces per room to 3.1 spaces per room and will be 71
percent over local codes. The parking space relationship at the Fashion Show
Mall indicates Caesar's would need no more than 2,412 spaces for its retail
space. The average relationship of 1.3 spaces per guest room for casino
hotels with meeting space suggest that no more than 3,535 spaces are needed
for the casino hotel for a total, assuming no complimentary usage, of 5,947
spaces, versus the 8,350 planned. The planned parking at Caesar's appears an
overimprovement relating to future rooms and retail expansions.
o Parking requirements for the mixed-use project's employees may be a bigger
factor than for the guests. The overlap between the day and swing shifts
means both shifts require parking in the late afternoon. At least three
properties provide parking for their employees off-site.
The interpretation of these ratios relative to the subject property is
problematic. A significant component (23 percent) of the subject's 500,000
square feet of mall space will be leased to show room or restaurant operators.
These uses are not likely to generate any more vehicular traffic
43
SITE ANALYSIS
than is typical for a casino hotel. It is the incremental 386,920 square feet of
merchandise oriented retail space that is atypical for this market, along with
the demands of the SECC.
Demand patterns demonstrated at other convention and tradeshow facilities in the
county indicate that many of the attendees at the subject property will be
guests of the hotel or other hotels within walking distance. Representatives of
the SECC have informed us that the pattern of usage between a casino hotel and
the SECC is a complementary one. For attendees not staying at any one of the
24,000 rooms in the immediate vicinity of the SECC, parking demand coincides
with show hours which are typically daytime business hours. In order to maximize
the contiguous hotels' average daily rates, hotel operators are likely to
provide show managers with discounted room rates only during the week days,
pushing the actual show dates into the weekdays. Thus, parking demand from the
SECC's attendees is likely to occur weekdays during daylight hours, as is
reported to be the case currently. Peak casino hotel demand occurs during the
weekends and in the evening hours, since guests of non-Strip hotels and local
residents flock to the mega resorts.
Based on the minimum number of spaces at Caesar's however, we have concluded
that a greater number of parking spaces should be included in the Venetian
project than are planned for the Phase I parking structure. We are of the
opinion that a parking ratio of 1.5 should be provided with the Venetian
project, or 4,556 spaces total. For the purposes of this appraisal, we have
assumed that the proposed 3,940 space parking garage is increased by 560 spaces
to a total of 4,500 spaces. The remaining 56 spaces are to be found at the SECC
or in surface areas. If this were to be found to be inadequate, additional
parking would be provided in surface lots on the site of the proposed Lido hotel
until construction starts on Phase II. Some 1,500 spaces could be constructed on
the 14 acre site.
At present, the subject leases parking spaces for construction workers and truck
storage on the surface lot that is the future site of the Planet Hollywood
casino hotel. Construction is not scheduled to start on that project for at
least two years. Any construction related parking shortages could be alleviated
by requiring employees to park in the remote lot.
Assessed Valuation and Taxes
As depicted by the proposed Parcel Map, the subject site will include:
All but the easterly 1.59 acres of tax parcel 162-16-301-001 A portion
along its south side of tax parcel 162-16-002-008
Property taxes are paid in arrears and are measured on a June 30th measurement
date basis. Land taxes are based on a standard price per foot as computed for
the area by the Clark County assessor's office.
44
SITE ANALYSIS
The Clark County assessor weighs strip frontage feet into the assessment
formula. The complete parcels are currently assessed at an average of $1,200,000
per acre and the average equalization rate is 35 percent as depicted in the
following table.
Assessed Value 1996/7 Tax Year
------------------------------------------
Taxable
PIN 162-016- Land Improvements Total Value Taxes
----------------- ----- ----- -----
301-001 $12,267,400 $767,440 $13,034,840 $37,242,400 $357,937
202-008 4,857,690 0 4,857,690 13,879,110 133,392
----------- -------- ----------- ----------- --------
Total $17,125,090 $767,440 $17,892,530 $51,121,510 $491,329
*Includes $48,450 in assessed value for personal property.
Properties are generally appraised by the assessor's office every three years
and adjusted with inflationary adjustments during non-appraisal years. Land is
subject to reassessment if improved upon or if it becomes out of equalization
with surrounding properties. It is reasonable to assume that the tax obligation
for the subject site will increase in the near term as assessed values along the
Strip increase. The improvements will likely be assessed at the values reported
on building permits.
Earthquake
The subject is not located in an earthquake hazard zone.
Flood Hazards
The site is an area zoned "X", outside of the 500 year flood zone, according to
the Flood Insurance Rate Maps of the Federal Emergency Management Agency, on Map
32003 1225 B recorded September 29, 1989.
Easements
As is typical for mixed-use developments and is becoming increasingly common in
Las Vegas, the subject site is envisioned to be encumbered by a series of mutual
easements with the contiguous convention center that will enhance its functional
utility. The subject site will be favored with a zero lot line and access egress
easements such that it may connect seamlessly to the 1.0 million square foot
Sands Expo Center. This is a key source of hotel guests, gamblers, restaurant
patrons and retail customers. The opportunity to walk from the Expo Center to
the hotel and back without ever getting
45
SITE ANALYSIS
hot, cold, wet or windblown would provide any casino hotel with a competitive
advantage. In exchange, the owners of the subject are to provide the owners of
the Expo Center with no fewer than 800 parking spaces at a convenient location.
This has been factored into our cost estimates. These easements will enable the
density of the site to be maximized.
Legal Descriptions
See Addenda.
Conclusion
Given the subject's central Strip location, ease of access, proximity to the
Sands Expo Center and overall configuration, it is our opinion that the subject
site possesses suitable characteristics for development of a mega resort.
IMPROVEMENT DESCRIPTION
Introduction
The proposed Venetian Resort will have approximately 3,036 suites, a casino of
approximately 116,200 square feet, a 2,000 seat show room and approximately
342,000 square feet of meeting space. The casino hotel will envelop the air
rights for the proposed Grand Canal Shops, a 500,000 square foot specialty
retail center. The mall is to be separately demised. Both components will be
46
IMPROVEMENT DESCRIPTION
physically connected to the Sands Exposition and Convention Center which has
966,400 square feet of exhibit and meeting space.
The six major buildings on the site are as follows:
o A podium low-rise structure will contain the casino, hotel lobby, banquet
and meeting facilities, the retail mall, and support areas. The podium
low-rise building will have a basement and three levels above that with the
roof top recreation/pool deck at level 3. The low rise building contains
approximately 1,950,000 square feet of gross building area.
o The rooms tower, a "Y" shaped building that protrudes from the podium
low-rise building will contain approximately 3,036 all-suite guest rooms. The
tower is comprised of levels 3 through 36 and contains approximately
2,800,000 square feet of space.
o A Congress Center (which may be referred to in plans and drawings
alternately as Hall D or the East Building) will connect to the SECC. The
Congress Center contains approximately 540,000 square feet of gross building
area.
o A parking garage containing 3,940 spaces.
o A central plant containing chillers, boilers, emergency generators, cooling
towers and miscellaneous other mechanical/electrical equipment. The central
plant contains approximately 80,000 square feet of area.
A separate value has not been estimated for the parking garage or central plant
as neither component could produce income without such facilities. A complete
description of the structural and mechanical systems as provided by Leherer
McGovern Bovis is contained in the Addenda.
The basic construction for each structure is steel framed Class A, excellent
quality construction. Our review of the balance of the Bovis document indicates
that the interior finish will be of a very high quality with extensive use of
marble, millwork and other architectural treatments common to buildings in
Venice.
47
IMPROVEMENT DESCRIPTION
Casino Hotel Component
Renderings provided to us and the model we viewed at the Preview Center
indicated that the building facades will be based upon the landmarks of Venice
and will feature a great deal of ornamentation to authenticate their appearance.
A canal water feature with gondolas, traversed by a replica of the Rialto Bridge
will provide a focal point for the project from the street.
The basic guest unit will be a 700 square foot suite that is separated into a
bedroom and sitting area by a sunken living room. The guest room bath will have
marble floors and counter, a separate tub and shower, and a vanity door
separating the toilet from the remainder of the bathroom. In size and finish,
the guest room is equivalent to the prototypical junior suite of a Four Seasons
hotel. Presented in the following table is a summary of the proposed hotel's
facilities
Guest Rooms No. Keys Sq. Ft.
- ----------- -------- -------
Double Queen bedded rooms 955 775
Single King bedded rooms 1,760 700
Jr. Suites 95 900
Hospitality Suites 27 1400-1500
Two Bay Suites 145 1400-1550
Three Bay Suites 30 2200
Four Bay Suites 18 2900
Presidential 6 4050
-------- ---------
Total Guest Rooms 3,036 N/A
Meeting Space: Sq. Feet
--------
Hall D 106,070
Grand Ballroom 80,000
Meeting Rooms 81,207
Pre-function area 38,327
Offices 36,769
---------
Total Meeting Space 342,373
Access and Circulation, Restrooms 89,541
Storage 66,914
---------
Total with Supporting Facilities 498,828
Number of Seats in Show room 2,000
Casino Area (SF) 116,183
Number Table Games 118
Number of Gaming Devices 2,500
Number of leased restaurant outlet in
Casino/Hotel (only) 7
Net rentable area of restaurant space in
Casino/Hotel (only) 87,158
Net rentable area or other retail in
Casino/Hotel (only) 9,530
Photographs of the typical guest unit are presented on the following page
48
IMPROVEMENT DESCRIPTION
SUBJECT
[Photo Omitted]
Guest Unit in Preview Center
[Photo Omitted]
Guest Bath in Preview Center
49
IMPROVEMENT DESCRIPTION
Mall Component
The Grand Canal Shops, as proposed, will comprise an enclosed, unanchored
specialty regional mall containing a total gross leasable area (GLA) of 500,000
square feet. According to the leasing plan and pro forma rent roll provided by
the developer, the mall will consist of the following entities:
o mall shops totaling 358,920 square feet of GLA on two levels leased to
predominantly upscale, specialty retailers;
o a variety of full service restaurants totaling 68,313 square feet of GLA,
also on two levels, and planned to be leased to marquee operators/chefs;
o a food court containing 9,435 square feet GLA and 9,562 square feet of
common area;
o an entertainment venue known as Billboard Live! comprising 25,770 square
feet of GLA on two levels (an additional 24,230 square feet will be
situated on the casino level);
o a two-level, detached retail annex building fronting along the Strip and
containing 28,000 square feet of GLA.
A copy of the leasing plan depicting the layout and possible tenant demising has
been placed on the following page. Detailed building plans, which show specific
building materials, design, etc., were not available for review. It is assumed
the facility will constitute a Class A retail project with functional design and
heavily themed interiors which are consistent and competitive with the primary
retail shopping facilities in the area, particularly the Forum Shops.
Based upon marketing materials provided by the developer, the mall's interior
characteristics will comprise heavily-themed and decorated exterior facades with
features that capture the essence of Venice, Italy. Mall patrons will stroll
along a reproduction of Venice's Grand Canal and St. Marks Square, the focal
points of the mall, as they shop. Of dramatic interest will be a 70 foot high,
artificially lit ceiling, creating a simulated sky illusion. Mall shops will
designed with two story exterior facades, but the second level, if leased and
built-out, will be accessible only from inside the store.
The mall structure will be situated on the second and third levels of the
Venetian casino hotel, and immediately above the ground level casino. Directly
adjacent to the casino hotel and retail mall complex will be the Sands Expo and
Convention Center; direct and convenient access will be available to the mall
and casino hotel for convention attendees.
50
IMPROVEMENT DESCRIPTION
[Map Omitted]
Illustrative Retail Leasing Plan
THE VENETIAN
LAS VEGAS, NEVADA
51
HIGHEST AND BEST USE
HIGHEST AND BEST USE
Highest and best use is defined as follows:
The reasonably probable and legal use of vacant land or an improved
property, which is physically possible, appropriately supported,
financially feasible, and that results in the highest value. The four
criteria the highest and best use must meet are legal permissibility,
physical possibility, financial feasibility, and maximum profitability.(3)
In developed urban neighborhoods like the subject, the highest and best use is
typically that use which is permitted by zoning, the specific plan, the general
plan and/or private deed restrictions. Determination of the highest and best use
of a site depends upon the quantity, quality and durability of the income stream
of the development anticipated.
The determination of highest and best use includes an analysis of the subject
property as though it were vacant and an analysis as it is currently improved.
The definition of each analysis is as follows:
Highest and Best Use of land or a site as though vacant - Among all
reasonable, alternative uses, the use that yields the highest present land
value, after payments are made for labor, capital and coordination. The
use of a property based on the assumption that the parcel of land is
vacant or can be made vacant by demolishing any improvements.(4)
Highest and Best Use of property as improved - The use that should be made
of a property as it exists. An existing property should be renovated or
retained "As Is" so long as it continues to contribute to the total market
value of the property, or until the return from a new improvement would
more than offset the cost of demolishing the existing building and
constructing a new one.(5)
- ------------------
(3) The Dictionary of Real Estate Appraisal, Third Edition, Chicago: Appraisal
Institute, 1993 (pp. 171).
(4) Ibid pp. 171.
(5) Ibid pp. 171.
52
HIGHEST AND BEST USE
As Vacant
Legally Permissible
Under the zoning ordinances established by Clark County, the subject is zoned
H-1, as previously described in The Land subsection of the Physical Description
section, and allows only for the development of a hotel, resort, inn, or motel.
This zone has a maximum height of 100 feet or nine stories and a maximum site
coverage of 60 percent. The height limit may be increased with a conditional use
permit after a review by the FAA of flight paths at McCarran International
Airport. Conditional use permits (CUP's) can also be sought to change the land
use to a number of alternative uses including multiple family residential,
retail, institutional buildings, casinos and office buildings. Specifically
omitted are single family residences and industrial buildings. Parking
requirements vary depending upon the specific uses and their respective areas
included in a development.
Physically Possible
The subject site encompasses a total land area of approximately 30.86 acres
situated along the east side of Las Vegas Boulevard, south of Spring Mountain
Road/Sands Avenue with an irregular rectangular shape and a greater depth than
width. The site has nearly 490 feet of frontage along Las Vegas Boulevard,
directly opposite of the Mirage Hotel. Other adjacent uses include restaurant,
retail and casino hotels, generally determined by site area. Larger, multi-acre
sites tend to attract casino/hotels.
The subject, due to its size, dimension and access would be able to support a
variety of uses which would conform to the zoning regulations and surrounding
uses. The comparatively large size would indicate a casino hotel development,
possibly incorporating mixed use retail and convention facilities as indicated
by the recent development of large Strip sites. Alternatives, subject to CUP
approval, include office park and retail mall.
Financially Feasible/Maximally Productive
As a vacant site under current zoning, only a lodging use would be allowed under
the existing H-1 classification subject to a 60 percent lot coverage and
9-story/100 foot height maximums. Conditional use permits could be obtained in
order to increase site density. In fact, many of the recently completed resort
developments along the Strip have obtained CUPs for higher density. The trend of
the newest projects and those under construction reflects increasing land
utilization and density.
As previously indicated, 1996 city-wide hotel and motel occupancy rates in Las
Vegas are strong with an area average of 90.4 percent. The hotel sector
indicated an average occupancy of 93.4
53
HIGHEST AND BEST USE
percent. The average daily rate has been increasing at a compound annual rate of
9.4 percent since fiscal 1993/94 due to the recent completion of several large
resort-oriented casino hotel properties.
Recent activity for prominent casino hotel developments along the Strip appear
to be occurring between Reno Avenue (south of Tropicana Avenue) and Spring
Mountain Road. An exception is the Stratosphere Tower located several blocks
north which has been well publicized for its financial difficulties. This
evidence seems to support a large scale resort-oriented casino hotel for the
subject core Strip site.
The alternative land uses considered for this comparatively large tract of land
located along Las Vegas Boulevard include an office park and/or retail mall.
While there has been much discussion in the city concerning the lack of first
generation Class A office space, virtually no new office space has been
completed with, or is planned for, a Las Vegas Boulevard address. The office
market has clearly ceded this location to other uses, notably casino hotel and
retail, and is expanding near the airport or suburban centers.
Retail use for a site of the subject's size could entail a regional mall similar
to the 840,000 square foot Fashion Show Mall located along the west side of the
Strip at Spring Mountain Road. Another prominent Strip located mall is the
475,000 square foot Forum Shops at Caesar's which is part of Caesar's Palace and
adjacent to the Mirage. This mall makes a strong case for retail development
ancillary to casino hotel development as opposed to a free standing regional or
subregional mall. Due to the size of the subject site, development with a
dedicated retail mall would add a substantial amount of retail space to "The
Strip".
The primary indication of the subject's land use is best suggested by a review
of the recently completed resort projects along Las Vegas Boulevard as well as
planned new projects. Additionally, many of the existing casino hotel projects
are planning for expansions of their sites, which would increase their
respective overall land utilization. Projects such as Caesar's Palace, Harrah's,
The Las Vegas Hilton, and Luxor have added hotel towers of between 25 and 35
stories on underutilized portions of their original sites. It should be noted
that many of these new projects include several complementary components in
addition to hotel rooms such as meeting rooms, retail arcades, entertainment
centers and/or a "thrill ride". This is in response to the market's demand for a
more balanced entertainment offering. The table on the following page summarizes
these projects.
54
HIGHEST AND BEST USE
SUMMARY OF SELECTED RECENT/PLANNED PROJECTS
LAS VEGAS BOULEVARD RESORTS
Year Building No. Rooms/ Casino Meeting Land
Project/Location Completed Height Rooms/AC Area in SF Area in SF Area in AC
- ---------------------------- --------- -------- --------- ---------- ---------- ----------
New Projects
- ------------
New York, New York 1996 48 2,035 84,000 N/A 20
NEC Tropicana & LVB 102
Monte Carlo 1995 32 3,024 90,000 35,000 46
WS LVB, North of Tropicana 66
MGM Grand 1993 32 5,005 171,500 120,000 79
NWC Tropicana & LVB 63
Luxor Las Vegas 1993/95 30 4,500 100,000 20,000 64
SWC Tropicana & LVB 70
Treasure Island 1993 36 2,900 78,400 18,000 120
SWC Spring Mountain & LVB 50
Mirage 1989 29 3,044 95,500 82,000 See Above
WS LVB, South of Spring Mountain 50
Under Development
- -----------------
Bellagio 1998 35 3,000 N/A N/A 120
SWC Flamingo & LVB 25
Paris 1999 40+ 2,900 85,000 160,000 24
ES LVB, South of Flamingo 121
Notes:
MGM Grand land area is net of 33-acre amusement park.
Luxor Las Vegas includes recent room addition.
Treasure Island and Mirage share the site.
Bellagio is planned for subsequent hotel phases.
Paris improvement height is a preliminary estimate; Eiffel Tower replica will be
54 stories.
Source: Landauer Associates, Inc., March 1997.
55
HIGHEST AND BEST USE
The data on the table shows some interesting trends. Primarily, newer projects
reflect increasing land utilization as expressed in hotel units developed per
land acre. Each of these developments has received a variance to the height
limit, with the newest projects over 35 stories. As well-located Las Vegas
Boulevard land values increase, and core Strip land has been consumed, casino
hotel developers have shown a notable trend towards greater densities. Virtually
all of these projects are located along the Strip between Spring Mountain
Road/Sands Avenue and just south of Tropicana Avenue. This area has generally
been acknowledged as the primary activity center of the Strip and has the
greatest pedestrian and vehicular traffic.
Of particular note to the subject are the recently completed New York-New York
and proposed Paris projects. Both are on comparatively smaller sites of 20 and
24 acres, respectively, which support the density proposed for the subject.
These two projects indicate hotel development ratios of 102 and 121 rooms per
acre, nearly double the average of the remaining hotel projects listed,
excluding Bellagio. Improvement heights are 48 and over 40 stories,
respectively. Paris will have a replica of the Eiffel Tower which is planned to
reach 54 stories. We feel that the densities of these two projects provide the
best indication of the subject's highest, best and most productive use.
Not shown on this chart is the planned Convention Center for the MGM Grand
Hotel. This resort is planning to redevelop a portion of its amusement park with
an approximately 380,000 square foot Convention Center to enable it to replace
low-rated tour and travel business with more lucrative meetings business.
Conclusion - As If Vacant
In consideration of the subject's location, size, surrounding uses, zoning,
hotel market characteristics and recent development trends, it is our opinion
that the highest, best and most productive use of the subject 30.86-acre site is
for development with a casino hotel. This would reflect a hotel room ratio of
over 100 rooms per land acre and a building height in excess of 35 stories.
Consistent with recent trends, the development would incorporate mixed uses of
casino, meeting and retail space of appropriate size in consideration of the
massing of the project. This land use would return the greatest value to the
land through the synergy resulting from additional ancillary uses demanded by
the evolving Las Vegas tourism market.
56
VALUATION
VALUATION
The appraisal process is the orderly program in which the data used to estimate
the value of the subject property is acquired, classified, analyzed and
presented. The purpose of the appraisal, the type of property, and the adequacy
and reliability of the data are analyzed; these considerations influence the
weight given to each of the techniques in valuation. There are three approaches
to valuation. They are:
1. The Cost Approach
2. The Sales Comparison Approach
3. The Income Approach
In the Cost Approach, the cost of acquiring similarly suited land and
constructing a comparable building are estimated. The resultant land and
construction cost estimates, combined with an adequate return for
entrepreneurial profit and the project's carrying costs, produces an estimate of
the replacement cost (as if new) of the whole property. From this estimate of
"replacement cost new," the depreciation attributable to wear and tear is
estimated and deducted. The Cost Approach is best suited to new or proposed
properties such as the subject property.
The Sales Comparison technique is generally the easiest to understand as it
involves analyzing the prices paid for reasonably similar products. It is most
commonly used for residential and industrial appraisals, where there are large
numbers of truly similar products in existence and a sufficient number of
comparable sales transactions. The subject mixed-use project is fairly unique,
even before the physical connection to the Sands Exposition and Convention
Center is taken into account. Only Caesar's Palace with its Forum Shops has the
same combination of casino hotel and retail use. Comparisons to sales of more
typical mixed-use projects, i.e. projects that combine office and retail or
office and hotel uses are not relevant because of the disparity of income
potential and the basic buyer profile. In order to be even remotely meaningful,
a Sales Comparison Approach must analyze the project's components separately.
The lack of comparable mixed-use project sales has ramifications for the Income
Approach as well. It is not possible to extract market derived capitalization
rates or survey market participants in order to derive investment parameters for
the overall project. While the basic assumptions on the market's health are
relevant to both the casino hotel and the mall, estimations of the stream of
income require separate analysis for each component. As appropriate, casino
hotel or retail investment parameters must be applied.
57
COMBINED COST APPROACH
THE COST APPROACH
In the Cost Approach, the cost of acquiring similarly suited land and
constructing a comparable building are estimated. In the case of the subject,
Landauer Associates, Inc. has previously appraised the land. Relevant excerpts
from that separate document have been repeated here in order to comply with
FIRREA requirements. Cost estimates for the mixed-use project have been
estimated by Leherer McGovern Bovis Inc. (Bovis) and allocated by them between
the casino hotel, mall and central plant components. As the Bovis estimate is
based on the subject's specific architectural plans and specifications, and is
based on actual bids for the work from various subcontractors, we will rely on
this estimate. The allocated cost for the individual components will later be
compared to available cost data on recent casino hotel or mall construction.
Estimate of Land Value
There are six possible valuation techniques that may be used to value land. They
are:
1. Sales Comparison
2. Allocation
3. Extraction
4. Subdivision Development
5. Land Residual
6. Ground Rent Capitalization
The Sales Comparison technique is the most commonly used. However, when there
are an inadequate number of comparable sales, other techniques are applied. In
the case of the subject property, the comparables are either very dated, poorly
located, too complicated, or too small to be considered "good" comparables. The
number and magnitude of adjustments is considerable. For this reason, we will
also consider the land residual methodology.
While this is normally a fairly academic technique used only by appraisers, we
believe a larger number of local market participants are utilizing this
technique. Considerable data on casino net income levels and construction costs
are available in the annual reports of the publicly traded gaming companies.
We reviewed the available body of information on consummated sales of large,
comparable H-1 zoned parcels on the Las Vegas strip. The large sales
transactions within the subject's core Strip neighborhood pre-date the opening
of the previous wave of mega-casino resorts and were influenced by the concerns
regarding overbuilding that preceded the opening of the MGM Grand, the Luxor,
and Treasure Island in 1994. Asking prices have appreciated considerably since
then, both in the core Strip area and the secondary or peripheral areas.
58
COMBINED COST APPROACH
In the absence of truly comparable current sales it is an acceptable alternative
to rely on transactions that are in escrow, rejected offers and asking prices.
The paucity of truly comparable consummated transactions requires that we
consider an imputed price, a very small but recent sale, an asking price, as
well as sales in secondary locations.
These transactions are summarized in the chart on the following page. The
locations of these sales are depicted in the Map on its facing page. Detailed
data sheets may be found in the Addenda to this report.
We are aware of one proposed transaction that was announced on August 3, 1997,
which would have involved the sale of a 50 percent interest in the 715 room
Desert Inn and Country Club, plus the site of the proposed Planet Hollywood Mega
resort to investor Marvin Davis. An October 17 article indicated that this
proposed transaction may now be moot.
This proposed transaction was precipitated by the hostile take-over attempt
launched by Hilton in February to take control of ITT Sheraton. In order to
thwart this attempt, ITT Sheraton is selling-off a number of significant assets
many of which they will continue to manage. The seller is under duress. The
transaction is structured more along the lines of a participating loan, an issue
which has caused the recent obstacle in the negotiations. According to the
October 17, 1997 article, "Mr. Davis insisted on the provision because he felt
ITT's $400 million valuation for the Desert Inn was high and he wanted a safety
valve, according to people familiar with the situation. People close to Mr.
Davis said that ITT's change of heart come about because the company's
accountants wouldn't condone recording the agreement as an outright sale as long
as the provision was part of the deal. An ITT spokesman said the company never
intended to account for the transaction as a sale because it is a joint
venture." If the 715-room resort failed to produce $25 million in earnings
before interest, taxes and dividends in the year 2001, the buyer could have
forced ITT Sheraton to buy back his 50 percent equity interest in that component
for $100 million plus a 10 percent return on his investment. If the buyer
elected not to become involved in the development of the 34-acre Planet
Hollywood site, he could compel the seller to buy back his 50 percent interest
in the land for $50 million. ITT valued the asset at $400 million, but was
willing to sell a 50 percent interest in it for $150 million. However, the
aggregate $150 million investment was to be accompanied by a commitment for the
partnership to provide $100 million in bank financing to the seller for general
corporate purposes. The loan was expected to be obtained largely on the basis of
the new partner's balance sheet. More information on this sale is in the Sales
Analysis section. Data on this highly unusual transaction is provided for
informational purposes only and has not been included in our analysis.
59
COMBINED COST APPROACH
COMPARABLE LAND SALES SUMMARY
Sale Sales
No. Location Date Price Acres $/Acre Zoning
--- --------------------- ------- ----------- ------- ---------- ------
1 Monte Carlo Casino 9/95 $146,000,000 45.72 $3,193,351 H-1
Las Vegas, Nevada
2 N.W. Corner Harmon Listing $66,000,000 11.32 $5,830,389 H-1
Strip
Las Vegas, Nevada
3 La Quinta Carrows 3/97 $13,500,000 2.06 $6,553,398 H-1
Las Vegas, Nevada
4 S.W. Corner Las Vegas 8/95 $80,000,000 47.29 $1,691,690 H-1
Blvd. South & Hacienda
Las Vegas, Nevada
5 N.W. Corner Las Vegas 3/95 $73,000,000 73.74 $989,965 H-1
Blvd. & Russell Road
Las Vegas, Nevada
6 2755 Las Vegas Blvd. 1/95 $43,500,000 20.86 $2,085,331 H-1
Las Vegas, Nevada
7 2600, 2601 Las Vegas 10/95 $61,738,500 66.04 $934,865 H-1
Blvd. South
Las Vegas, Nevada
[Map Omitted]
Land Sales Map
60
COMBINED COST APPROACH
Land Sales Adjustments
Each sale must be reviewed to determine whether adjustments are necessary in
order to render a price that is more meaningful to the subject property. A
number of adjustments are generally considered when evaluating any land sales
comparables. For the key non-physical adjustments, The Appraisal of Real Estate
prescribes a series of adjustments and the sequence in which they should be
made. A second set of adjustments is generally made having to do with the
physical characteristics of the site. These adjustments are not made
sequentially; thus the order in which they are considered is of less importance.
Presented in the following paragraphs are the discussions of the sales and the
necessary adjustments. The value conclusion will be compared to value indicated
by the residual methodology.
Comparable Sale Number 1 is an imputed fair market price of the site later
developed with the Monte Carlo. This roundly 44 acre site was contributed into a
partnership with Gold Strike Casinos by Mirage Resorts in 1994 and was valued at
$47.0 million or $1,068,181 per acre in setting up the partnership.(6) In March,
1995, Circus Circus announced its intention to acquire Gold Strike, which, among
other things, included their 50 percent interest in the Monte Carlo development.
In addition to the interest in the Monte Carlo Site, Gold Strike owned two
casinos in Jean, Nevada, one in Henderson, Nevada, and a 50 percent interest in
a riverboat in Elgin, Illinois. The corporate acquisition was valued at roundly
$477,475,000 after discounting the stock component of the transaction by 30
percent. We have estimated the value of Gold Strike's other assets at
approximately $397,000,000 based on published data on Earnings Before Income
Taxes (EBIT). The details of the transaction and our assumptions are included in
the data sheet in the Addenda. Our analysis indicates that Circus Circus paid
approximately $80,475,000 for a 50 percent interest in the Monte Carlo, which
was at that time, the land and plans. The 100 percent interest in the project,
still in its nascence, would be $160,950,000. After an estimate of $14,650,000
for the Monte Carlo's design, engineering and architectural fees (5 percent of
cost), it appears that the land was valued at roundly $146,000,000, or
$3,193,351 per acre. An approximately 2.0 acre parcel, the former Desert Rose
motel, was acquired in early 1995 bringing the total site size to 45.72 acres.
This imputed price of $3,193,351 would need to be adjusted for two years'
improvement in market conditions. Data collected by Comps Inc. aggregates
information on sales for the Strip and Paradise Road (combined) market.
According to this data, the average price per acre has increased at a compound
annual rate of 34 percent between the year ended 12/31/94 and the year ended
12/31/96. The median price per foot has increased at a rate of 46 percent over
the course of 1995 and 1996.
- -------------------
(6) Mirage had acquired this site as part of a larger acquisition of the 163.6
acre Dunes hotel and golf course from the bankruptcy court in December 1993 for
$75,000,000 or $458,575 per acre. Due to the distressed nature of the sale, and
the unwillingness of other investors to make such a large expenditure at the
time when Las Vegas had 12,000 rooms under construction, this was approximately
one-half of what was generally considered to be market value at the time, even
for such a large parcel.
61
COMBINED COST APPROACH
These high rates of appreciation are consistent with anecdotal comments made by
prospective buyers regarding Paradise Road and Las Vegas Boulevard in the
extreme south between Blue Diamond and Lake Mead sites, but are probably less
representative of central Strip appreciation. The vast majority of the Comps
Inc. transactions occurred in lower priced areas, as is indicated by the average
sales price of only $645,559 per acre. To check these broader market-wide
indicators, we will compare two sets of sales transaction data under
consideration.
Our first paired sale transaction is the purchase by the New York-New York
partnership of the Rodeway Inn in February, 1995. In order to increase the Strip
frontage and utility of the site, the resort developers paid $8,000,000 or
$3,864,734 per acre for a 2.07 acre parcel. In February, 1997, this same
partnership put the 2.06 acre parcel occupied by the La Quinta Carrows into
escrow for $13,500,000 or $6,553,398 per acre, included in our analysis as sale
Number 3. This price does not include any costs for buying out the remaining
term of the restaurant's lease on the site that actually fronts on Las Vegas
Boulevard. The remaining term of the lease is unknown and the lessee is a
competitor of the buyer. Even without factoring in a lease buy-out, these two
transactions indicate that the rate of appreciation between early 1995 and early
1997, for a core strip location would be at least 30 percent.
The second paired transaction we will consider is in a secondary location and
involves one of the two distinct parcels included in Comparable Sale Number 7.
The price per acre in the sale which was negotiated in May 1995 and consummated
in October 1995 was $934,865 per acre for both sites, which straddled Las Vegas
Boulevard South. Gordon Gaming, which kept title to the westerly parcel, was
required to buy-out a lease immediately for $3,500,000, which brought the cost
of their 39.17 acre site up to $1,024,219 per acre. The company's owner, Mr.
Bill Bennett, developed serious health problems after completing the
transaction, and has scaled back development plans for the sites he assembled at
the north end of the Strip. In late 1996, the 39.17 acre site fell out of escrow
at a price of $55,000,000 or $1,404,136 per acre. The company's Chief Counsel
indicated that negotiations were underway with another buyer at the same
approximate price. This escrowed price indicates appreciation of approximately
32 percent over a one year period. It could be argued that the separation of the
two parcels contributed to the increase in price, however, we understand that
either could have been purchased separately. Since the parcel fell out of
escrow, it could be argued that the current asking price is too high, and that
its eventual sales price will be lower.
After considering the Strip/Paradise Road sample for the area-wide appreciation
figures, the buyer motivation for the assemblage value comparison, and the
lapsed escrow of the latter paired transaction, we will temper our estimates of
the average rate of appreciation to a uniform 25 percent per year for the years
1995 and 1996, for all of the transactions, regardless of location. For 1997
however, we believe that the number of new rooms under construction has caused
this to abate to 20 percent per year.
62
COMBINED COST APPROACH
The imputed price of the Monte Carlo partnership purchase transaction will be
adjusted upward for 16 months at an annual rate of 25 percent and ten months at
20 percent. No other adjustments are warranted.
The adjusted price for Sale Number 1 becomes $5,000,000 per acre.
Comparable Number 2 is a listing involving an 11.32 acre parcel on the Northwest
corner of Harmon and the Strip. The owner, who is reported to be ineligible for
a gaming license, is asking from $66,000,000 (or $5,830,000 per acre) to
$100,000,000 (or $8,834,000 per acre) for the site. The lower asking price was
reported to have been conditioned upon the seller retaining air rights over the
site in order to develop a retail component. The higher asking price is for the
entire bundle of rights. We spoke with one investor who reported offering
$60,000,000 that was rejected summarily. An article on June 22 in the Las Vegas
Sun on a prospective San Francisco themed resort indicated that Harvey's Casino
Resorts offered $80.0 million (or $7,067,138 per acre) for the site and was
rejected. We were unable to substantiate this account. Presumably, the rejected
offer was for an unencumbered fee simple interest.
A number of investors or brokers commented that it was too small for mega resort
development. Harmon Road precludes assemblage to the South without a sky bridge.
The land owner to the North is the owner of the common areas associated with a
timeshare project known as the Jockey Club. Redevelopment with that northerly
land owner would likely be problematic because of the approximately 14,000
individual timeshare owners' concerns about parking and access and egress to
their units.
Because of our inability to substantiate the rejected offer, and the relatively
small size of this site, we will employ the lowest asking price of $66,000,000
or $5,830,000 per acre but will not adjust for conditions of sale. Interest in
the site by Harvey's and the prospective developer of the San Francisco themed
casino resort refutes the assertion that the site is too small. We will make no
other adjustments to this sale.
The adjusted price of Comparable Number 2 becomes $5,800,000 per acre.
Comparable Number 3 involves a very small parcel, of 2.06 acres that was
recorded on March 17, 1997, for $13,500,000 or $6,553,400 per acre. On March 17,
1997, La Quinta Development Partners sold its fee simple interest in the 1.48
acre La Quinta motel site to the partnership that owns New York New York, which
will use the site for a new rooms tower. The transaction also included La
Quinta's leased fee interest in the contiguous 0.58 acre parcel that actually
fronts on the Strip, and the assignment of the associated lease. The original
lessee's interest was assigned to Victoria Partners the developers of the Monte
Carlo, its northerly neighbor and competitor. We were unable to obtain a copy of
the original lease to ascertain its remaining term. The original lease was
signed
63
COMBINED COST APPROACH
in March, 1979. La Quinta Development Partners signed a confidentiality
agreement which they interpret to mean that they may not discuss any aspect of
the sale.
This sale supports our contention that strip land prices have appreciated
considerably over the past two years, as described earlier. In addition, this
most recent transaction, at $6,553,400 per acre, demonstrates that sellers are
increasingly aware of the huge profit potential of core Strip real estate.
Six months have elapsed since the sale was recorded. We will adjust this sale
for 6 months of appreciation at an annual rate of 20 percent.
To estimate an appropriate adjustment for the assemblage value, we will compare
the assemblage value adjustment of an earlier New York, New York assemblage. The
2.07 acre Rodeway Inn parcel that was acquired in February, 1995 cost the owners
of New York New York $3,864,734 per acre. The original 17.62 acre parcel was
acquired in late 1992 for $1,789,843 per acre. If we adjust this sale upward for
two years' appreciation at 20 percent, the equivalent price in early 1995 values
grows to $2,577,000 per acre. This $1,287,734 difference suggests a 33 percent
discount for the smaller sale. The imputed value of the Monte Carlo transaction
of $3,193,319 per acre reflects a discount of 34 percent from the 2.07 Desert
Rose Motel acquisition at $4,830,917 per acre, a few months before the Gold
Strike acquisition was announced.
For the current La Quinta transactions, we will adjust the sale downward by 40
percent to account for the assemblage premium. As will be shown in the residual
value analysis, it could easily be argued that there is no need for an
adjustment, as the entire parcel, built out at the density that it is, could be
worth as much as $14,400,000 per acre.
One more adjustment would be required for the lease buy-out. The lease buy-out
to Gordon Gaming for the as yet unbuilt St. Andrews golf attraction on the
westerly portion of Sale Number 7 was $3,500,000. The lease-buy-out for the
Wet'n Wild water theme park on the easterly component of that transaction
started at $7.0 million and declined as the improvements depreciated. While both
parcels were significantly larger than the 0.58 acre restaurant site involved in
Comparable Sale Number 3, neither involved buying out a direct competitor. There
were no improvements on the St. Andrews Golf site, and the cost of the Wet'n
Wild improvements were the basis of the buy-out.
We will assume that the cost of buying out the remaining term of the restaurant
lease is approximately $1,000,000. This equates to an approximately 7 percent
adjustment. Because of the two story, stick frame construction, we will estimate
demolition costs at one-third of the high rise rate, or $2,775 per guest room
(8,333 x .333) for a 114-room property. Demolition costs are estimated at
roundly $300,000, or 3 percent of the sales price per acre.
The adjusted price per acre of Sale Number 3 becomes $5,000,000.
Sale Number 4 is of the 47.3 acre site formerly occupied by the Hacienda Hotel.
This site was acquired in August, 1995 by Circus Circus for $80,000,000 or
$1,691,650 per acre with the intent to
64
COMBINED COST APPROACH
redevelop the site. No adjustments are necessary for interest conveyed,
financing or conditions of sale. The price was set eight months earlier, in
January of 1995, by a former Circus Circus executive, Mr. Bill Bennett, who was
forced to relinquish the deal due to a perceived conflict of interest. This
history is important for two reasons: 1) it establishes that there was no
assemblage motivation in the setting of a sale price; and 2) the number of
months used for the market condition adjustment should be greater than would be
suggested by the date escrow closed. This sale should be adjusted for a market
condition adjustment for two years.
When paired with Sale Number 5, the Hacienda sale provides our first indication
of the magnitude of location adjustments.
The Hacienda sold at the approximate same time as Sale Number 5, which is
located immediately south. The primary differences between Sales 4 and 5 are in:
site improvements, size, and location.
Unless the cash flow generated by the Hacienda increased materially after its
sale, the value of the interim use was not likely to have offset the costs
associated with demolishing the 1,115-room hotel; and the mitigation of any
environmental issues caused by the 363-space Recreational Vehicle park.(7) The
remaining differences are in size and location.
Sale Number 5 involved a 73-acre parcel that sold in March 1995 for $989,965 per
acre. We can find no evidence from other sales that the entirety of this 70
percent price differential is attributable to the increase in size from a 40- to
45- acre site to a 70- to 75-acre site. We believe that the primary reason that
Sale Number 4 sold at a premium over Sale Number 5 was because Sale Number 5 is
1,000 lineal feet further South. We will attribute 20 percentage points of the
price differential to the size issue, and 50 percentage points of the
differential to location.
The 1,000 foot distance had ramifications from an air rights standpoint as well
as a traffic perspective. The seller of the Hacienda expressed a belief that
both sales are affected by the sites' proximity to McCarran Airport and the
uncertainty caused by the FAA's ability to limit the building height. While any
building in Clark County requires FAA approval to exceed 100 feet (or 9
stories), this approval is not a formality in the vicinity of the airport. Until
the approval was granted in April, 1997, for the height variance, the FAA would
make no prognostications as to whether it would likely permit a significant
variance or the recommended 167 feet (approximately 17 stories). The Hacienda's
tower was only 11 stories tall. However, the Luxor, located immediately north of
the Hacienda was approved for 30 stories, which is the current average height
for the existing major casino resorts.
- ---------------
(7) Circus Circus would not disclose demolition costs, or the EBITDA of the
Hacienda during its interim operation. The costs of demolishing the Sands,
combined with asbestos and underground storage tank clean up suggest that the
Hacienda's demolition costs could be $9,300,000 (1,115 x $8,333).
65
COMBINED COST APPROACH
We will split the remaining 50 percent adjustment evenly between a location
factor relating to distance from the core area and a zoning adjustment for the
FAA issue. These adjustments will be made at a rate of 25 percent for each 1,000
feet a site is located in the "wrong" direction.
At a rate of 25 percent for every 1,000 lineal feet of distance, Sale Number 4,
the Hacienda, would need to be adjusted upward for location and for the FAA
related zoning issue by 63 percent (for each), since it is located approximately
2,500 feet south of Tropicana (2,500/1,000 x .25). Sale Number 2 would require
88 percent location and zoning adjustments, since it is 3,500 feet south of
Tropicana (3,500/1,000 x .25). Prior to the location and FAA zoning issues, the
time of sale adjustments must be applied.
The adjusted price per acre for Comparable Sale Number 4 becomes $6,700,000,
compared to an adjusted price per acre for Comparable Sale Number 5 of
$4,900,000.
Comparable Number 6 is the 20.86 acre site of the El Rancho Casino hotel, which
sold in January of 1996 for $2,285,331 per acre. The developers, a New Jersey
group, intended to redevelop the site with the Orion project, which was to have
210,000 square feet of casino space, 300,000 square feet of retail space, and
2,400 hotel rooms. Shortly after this transaction they attempted to purchase an
additional 15.0 acres on the back side of the El Rancho site, but allowed that
transaction to fall out of escrow when they encountered difficulties in
obtaining financing in the wake of the negative publicity surrounding the
Stratosphere.
Seller financing was provided for $16,500,000 or 40 percent of the purchase
price. The first $6,500,000 note to the seller was paid off within two months of
the transaction. No cash equivalent adjustment is warranted. This sale requires
a market condition adjustment for the nearly two years that have transpired
since it occurred, and a 163 percent locational adjustment to account for its
6,500 foot distance from the northern boundary of the core Strip area (6,500 /
1,000 x .25). When compared to Comparable Sale Number 7, which is immediately
north of Comparable 6, and particularly in light of the events that have
transpired since then, it appears that the out-of-town buyers of Comparable 6
over-paid for it.
The adjusted price per acre of Comparable Number 6 is $8,000,000, which provides
the high end of the range.
Comparable Sale Number 7 is immediately north of Comparable 6 but spans both
sides of the Strip. This 66.04 acre assemblage was technically acquired by
Gordon Gaming which then flipped the easterly and smaller of the two parcels to
Sahara Gaming as part of a 1031 tax free exchange. Sahara Gaming traded a
separate 22 acre site on the east side of Paradise for the easterly site
included in this comparable sale, in conjunction with their sale of the Sahara
Hotel to Gordon Gaming. There is no need for a cash equivalency adjustment, as
the Howard Hughes Corporation received $61,738,500 in cash ($934,865 per acre)
for the site.
66
COMBINED COST APPROACH
The 66.04 acre comparable is located approximately 7,500 feet north of the
Spring Mountain/Sands Avenue intersection, and so should be adjusted upward 188
percent for its inferior location (7,500/1,000 x .25.)
Both parcels were affected by leases, although the lessee for the parcel on the
western side of the Strip had not yet constructed any improvements. The cost of
lease buy-out for the westerly parcel was $3,500,000. Sahara Gaming negotiated a
stepped down lease buy-out, starting at $7,000,000 which diminished to a nominal
sum over time. It had no imminent plans for development, and sought only to keep
a foothold on the Strip. Demolition costs for the Wet'n Wild improvements were
estimated by the buyer at $1,500,000. The subject is a vacant, buildable site
with no leases encumbering it. To adjust this sale to be comparable to the
subject requires recognizing the two years appreciation, leasehold buy-outs, and
demolition costs. We will assume however that a prudent buyer would have allowed
the water theme park to operate during his design, approval and financing phase,
and that this savings in the buy-out formula would offset the demolition costs.
The transaction will be adjusted upward for a net $10,500,000 for the lease
buy-outs and demolition costs. This equates to $158,995 per acre, or 11 percent
of the time-adjusted price per acre. Because of the comparable's approximately
66 acre size, we will adjust this comparable upward by 20 percent, as was done
for Sales Comparable 5.
The adjusted price of Comparable Number 7 equates to $4,600,000 per acre.
Land Sales Comparison Analysis
After adjustments, the range of prices for our land sales comparables ranged
from roundly $4,600,000 to $8,000,000 per acre, with an average price of
$5,700,000 per acre. Unfortunately all of the sales were either extremely
complicated, or required significant levels of adjustment. The
67
COMBINED COST APPROACH
Land Sale Adjustment Grid
Comparable 1 Comparable 2 Comparable 3 Comparable 4 Comparable 5 Comparable 6 Comparable 7
Imputed Value Listing La Quinta Site Hacienda Site NWC Russell El Rancho Site NWC Sahara &
Monte Carlo NWC Harmon next to NYNY Redevelopment Wet'n Wild Site
Transaction Details
Sales Price $ 146,000,000 $ 66,000,000 $ 13,500,000 $ 80,000,000 $73,000,000 43,500,000 $ 61,738,500
Date of Sale Sep-95 listing Mar-96 Jan-95 Mar-95 Jan-96 Oct-95
Site Size in Acres 45.72 11.32 2.06 47.29 73.74 20.86 66.04
Price per Acre $ 3,193,351 $ 5,830,389 $ 6,553,398 1,691,690 989,965 $2,085,331 $ 934,865
Sequential Adjustments
Interest Conveyed -- -- -- -- -- -- --
Adjusted Price
Financing Terms -- -- -- -- -- -- --
Adjusted Price
Conditions of Sale -- 0% 0% -- -- -- --
Adjusted Price 5,830,389 6,553,398
Market Conditions 1.56 1.00 1.10 1.73 1.68 1.44 1.53
Adjusted Price 4,967,435 5,830,389 7,208,738 2,918,165 1,660,253 2,997,663 1,431,512
Non-sequential Adjustments
Location -- -- -- 63% 88% 1.63 188%
Zoning -- -- -- 63% 88% -- --
Assemblage -- 0% -40% -- -- -- --
Demolition -- 0% 3% 0% -- 5% 0%
Interim Use -- 0% 0% 0% -- -- 0%
Lease Buy-outs -- 0% 7% -- -- -- 11%
Size -- 0% 0% -- 20% -- 20%
Other -- -- -- -- -- -- --
------------ ---------- ----------- ----------- ---------- ---------- ----------
Net non-sequential
Adjstmnts 0 0% -30% 125% 195% 168% 219%
-- -- (2,162,621) 3,647,706 3,237,494 5,021,086 3,129,383
------------ ---------- ----------- ----------- ---------- ---------- ----------
Adjusted Value 4,967,435 5,830,389 5,046,117 6,565,870 4,897,747 8,018,749 4,560,895
5,000,000 5,800,000 5,000,000 6,600,000 4,900,000 8,000,000 4,600,000
Range 4,600,000 to 8,000,000
Average 5,698,172
Rounded 5,700,000
68
COMBINED COST APPROACH
three closest sales, which required the lowest total percentage adjustments,
ranged from $5,000,000 to $5,800,000 per acre, with an average of $5,250,000 per
acre.
In addition to the sales verification process, we spoke with a number of
developers who are attempting to purchase sites in the core Strip area. Two
participants, unwilling to pay more than $3,000,000 per acre, have been unable
to find anything with an acceptable location in that price range. A third buyer,
who wishes to remain anonymous, has begun the painstaking process of assembling
a site. When the assemblage is complete, and after demotion and mitigation
costs, this buyer expects to have spent between $5,000,000 and $7,000,000 per
acre.
The subject parcel is fairly unique. It is located in the core Strip area, and
will offer better views of the Mirage and Treasure Island attractions than are
available from either of those resorts. More importantly perhaps its physical
proximity to the 1.0 million square foot Sands Expo Center, which will provide a
significant source of higher rated mid-week business. As there was no empirical
way to determine an appropriate adjustment for this factor, none was included in
our analysis. The subject's assumed easements situation can be likened to a golf
resort site, in which the golf course itself has already been developed and the
hotel developer needs only to purchase a hotel pad. This adds a premium to the
hotel site over sites that are close to, but not part, of the golf course.
However, in consideration of the magnitude of the adjustments, we will select a
value near the average of $5,250,000 per acre or $162,000,000. From this, we
will deduct the cost of one-half of the 800 parking spaces that are required in
the easement ($3,600,000) and the cost of the environmental mitigation
($700,000). The net value is therefore $157,700,000 rounded or approximately
$5,100,000 per acre. To check this value, we performed a residual analysis.
Land Residual Analysis
As part of our residual analysis, we estimated the residual land value of two
recently completed mega resorts utilizing available data on earnings before
income taxes, depreciation and amortization (EBITDA) and reported construction
costs. We also prepared a residual estimate for a fairly generic but upscale
casino resort project to determine the site's market value. (To employ the
Venetian's cost and pro-formas would be to produce an estimate of "Investment
Value".) The current parcelization proposed for the subject assemblage assumes a
two-phase development in which the site area for Phase I is 30.9 acres, as it
will contain the shared power plant. The Phase II Lido site, comprised of the
remaining 13.7 acres, would be smaller than is typical for mega-resort
development on a stand-alone basis. For our residual analysis that is intended
to determine market value, we will assume a more even apportionment of the
larger parcel into two like sized parcels. For our residual analysis, we will
assume a site size for the subject of 22.3 acres.
69
COMBINED COST APPROACH
The Venetian's cost estimates are based upon a facility that will have a larger
guest room and significantly higher quantities of meeting space and retail space
than are typical for the Las Vegas market today. These enhancements should,
logically contribute to a higher stream of income from the property. However, a
more generic product, as described in the Highest and Best Use section, will be
assumed for the subject.
To estimate a "market cost" for the more generic product assumed, we will
increase the per room cost estimate of New York-New York by 20 percent, to
approximately $270,000 per key. This compares to the Venetian cost budget of
approximately $293,000 per key for the casino hotel only. For a 3,000 room
project, the total hard and soft costs are estimated at $810,000,000.
The Monte Carlo opened on June 21, 1996. In its first full 193 days of
operation, its partners reported that it generated $49,100,000 in EBITDA. We
assumed that any "novelty effect" would be offset by the likely inefficiency in
the initial months' operation. On an annual basis, it appears that the Monte
Carlo will have an EBITDA of approximately $92,900,000. This estimate appears
conservative relative to other Circus Circus managed hotels given the Monte
Carlo's superior location. An appropriate capitalization rate for a typical
market standard product is estimated in the Casino Hotel Income Approach as 17
percent. The estimated value for the Monte Carlo is $546,000,000, rounded
(92,900,000 / .17)
As related in the Casino Hotel Cost Analysis, the total hard and soft
construction costs of the Monte Carlo were $293,000,000. Deducting this from the
estimated value produces a value of the land and entrepreneurial profit of
$257,000,000 ($550.0 - 293.0). According to the annual reports, Circus Circus
took no developer's fee for managing the construction of this hotel. We will
however factor in entrepreneurial profit, which we have estimated at 25 percent
of the hard and soft costs of $293,000,000, or roundly $73,250,000. The residual
land value is $179,750,000. With a site size of 45.72 acres, the residual land
value is $3,933,000 or $3,900,000 per acre, rounded.
As of the writing of this appraisal, only 179 days operating data was available
on the EBITDA for New York-New York. We will annualize the 179 days EBITDA of
$70,600,000 without factoring in any seasonality. This equates to $144,000,000
in EBITDA annually [70,600,000 / (179/365)]. As with the Monte Carlo, this
assumes that any novelty effect in the revenues is offset by inefficiencies in
the initial month's operations. Applying a 17 percent capitalization rate to
this figure yields a value of approximately $847,000,000 (144,000,000/.17).
As described in the Casino Hotel Cost Analysis, hard and soft costs for New
York-New York were $460,000,000 leaving $387,000,000 in value for land and
entrepreneurial profit. Deducting entrepreneurial profit of approximately
$92,000,000 (20 percent) leaves a value for the land of $295,000,000. With a
total site area of 20.5 acres, the residual value is approximately $14,400,000
per acre.
70
COMBINED COST APPROACH
Clearly, the density of development has profound effects on value estimates
using the residual approach. We question whether the Monte Carlo would be
constructed on 45.7 acres of core Strip land given today's market conditions.
The EBITDA differential indicates to us that the consumer market prefers highly
themed casino resorts that are attractions in and of themselves. The Monte
Carlo, a low-cost project with very little in the way of sightseeing
attractions, is not as successful as New York New York, which is a sightseeing
attraction.
To estimate an appropriate level of EBITDA for a theoretical high-end property,
we utilized the blended results of its nearest neighbors, the Mirage and
Treasure Island. While the Mirage is one of the most profitable resorts on a per
room basis, the Treasure Island resort has an EBITDA that is very consistent
with average mega-resort performance. The 1996 Annual Report for Mirage Resorts
indicated that the combined EBIDTA for these properties in 1996 was $354,400,000
or approximately $59,623 per hotel room. (New York-New York will likely have an
EBITDA of approximately $70,760 per room.) We will multiply this figure by the
assumed 3,000 rooms for a EBITDA for the theoretical generic project of
$178,900,000 (rounded). Applying a capitalization rate of 17 percent derives a
value of approximately $1,052,000,000 for the generic project.
After deducting the assumed hard and soft costs of roundly $810,000,000 (as
described earlier) from the estimated value of $1,052,000,000, we are left with
$242,000,000 in value for the generic product's land and entrepreneurial profit.
We estimated entrepreneurial profit of $121,500,000 on this nearly billion
dollar deal, 15 percent of the hard and soft costs. This is more than eight
times the amount at which Marriott bought out Doubletree Hotels' early 1997
contract to acquire the Renaissance Hotel Company in a deal of a similar scale.
The residual land value is $120,500,000 or $5,400,000 per acre, assuming an even
split of the larger 44.6 acre site.
The residual values calculations are summarized in the following table:
Monte Carlo New York New York Theoretical Subject
-------------- ------------------- -----------------
EBITDA $92,900,000 $144,000,000 $178,900,000
Capitalization Rate .17 .17 .17
Estimated Value $546,000,000 $847,000,000 $1,052,000,000
Cost $293,000,000 $460,000,000 $810,000,000
Entrepreneurial $73,250,000 $92,000,000 $121,500,000
Profit ------------ ------------ --------------
Land Value $179,750,000 $295,000,000 $120,500,000
Acres 45.7 20.5 22.3
Value Per Acre $3,933,000 $14,390,000 $5,404,000
Rounded $3,900,000 $14,400,000 $5,400,000
Using a residual methodology, the average price per acre is $7,900,000. The
generic analysis assumed a per key cost that was 20 percent greater than the New
York-New York project, but an EBITDA that is 16 percent lower on a per room
basis.
71
COMBINED COST APPROACH
From the residual technique, we estimate a value of $5,400,000 per acre or
$120,150,000, based on the most generic assumption of our residual calculations.
From this, we must deduct The Phase I share (50 percent) of the cost of the
developer's obligation to provide the SECC with 800 parking stalls or $3,600,000
and the environmental mitigation of $700,000. This reduces the concluded value
via the residual analysis to $115,850,000 rounded or $5,200,000 per acre.
Land Value Conclusion
The residual methodology indicates that the conclusion reached via an analysis
of comparable sales yields a price per acre that is economically viable. We will
conclude to a rounded figure of $155,000,000 or $5,000,000 per acre for the
subject's 30.86 acre site.
72
COMBINED COST APPROACH
Replacement Cost Estimate
Replacement costs are based upon the actual budgeted costs associated with
developing the project, as provided and warranted by the construction manager,
Lehrer McGovern Bovis Inc. (Bovis). The budgeted costs include all hard and soft
costs, inclusive of financing fees and holding expenses during the development
period.
We have allocated the cost of the central plant among the two components based
upon their floor area. The mall air rights occupy an envelope of approximately
970,000 square feet. The improved portions of the combined components are
comprised of 5,290,000 square feet. Approximately 17.6 percent, or $11,760,000
of the central plant cost will be allocated to the mall. The balance, or
$55,141,000 will be allocated to the cost of the casino hotel.
As mentioned earlier, we believe that the subject's shared parking average
should be expanded by 560 spaces. We will allocate the full cost of this extra
parking to the mall, as we believe that it is the retail component that
precipitates this need. Based on line item estimates prepared by Bovis, we
estimate the hard and soft costs of parking at $8,000 per unit or $4,480,000
total. This will be applied to the cost of the retail component, bringing its
total hard and soft cost estimate to 10 percent for the casino hotel component
and 20 percent for the retail component. The casino hotel component is nearly
six times the investment of the mall component and is owned in fee simple
estate. The mall component is located in air rights that afford the owner less
control than would normally be associated with a leased fee estate. The blended
entrepreneurial profit is 12 percent.
The cost estimates for the individual components will be compared to the recent
cost of other similar projects in the Valuation sections for each component.
The Bovis cost data is summarized in the accompanying table on the following
page.
LANDAUER 73
REAL ESTATE COUNSELORS COMBINED COST APPROACH
COST APPROACH SUMMARY
Hotel/Casino Retail Mall Central Plant Total Project
---------------------- --------------------- ---------------------- ----------------------
% % % %
($) of Total ($) of Total ($) of Total ($) of Total
---------------------- --------------------- ---------------------- ----------------------
Total Construction .......... 402,155,191 38.62% 78,921,170 7.58% 66,687,867 6.40% 547,764,228 52.61%
Additional CM Costs ......... 38,503,086 3.70% 416,972 0.04% 213,517 0.02% 39,133,575 3.76%
Theming ..................... 22,036,054 2.12% 19,379,321 1.86% 0 0.00% 41,415,375 3.98%
FF&E ........................ 57,367,180 5.51% 187,508 0.02% 0 0.00% 57,554,688 5.53%
Gaming Equipment ............ 26,873,836 2.58% 0 0.00% 0 0.00% 26,873,836 2.58%
Other Equipment ............. 21,427,933 2.06% 0 0.00% 0 0.00% 21,427,933 2.06%
Signage & Graphics .......... 5,178,310 0.50% 107,965 0.01% 0 0.00% 5,286,275 0.51%
Design ...................... 30,530,626 2.93% 4,769,167 0.46% 0 0.00% 35,299,793 3.39%
Permits & Fees .............. 10,023,231 0.96% 1,687,228 0.16% 0 0.00% 11,710,459 1.12%
Pre-Openings ................ 40,335,267 3.87% 1,573,000 0.15% 0 0.00% 41,908,267 4.02%
Soft Costs .................. 17,348,094 1.67% 12,453,906 1.20% 0 0.00% 29,802,000 2.86%
Consumer Experience ......... 9,000,000 0.86% 3,000,000 0.29% 0 0.00% 12,000,000 1.15%
Construc. Admin. ............ 6,472,211 0.62% 1,264,116 0.12% 0 0.00% 7,736,327 0.74%
Contingency ................. 28,788,502 2.76% 4,230,560 0.41% 0 0.00% 33,019,062 3.17%
Working Capital ............. 20,000,000 1.92% 0 0.00% 0 0.00% 20,000,000 1.92%
Financing ................... 98,343,800 9.44% 11,980,000 1.15% 0 0.00% 110,323,800 10.60%
--------------------- --------------------- ---------------------- -----------------------
Subtotal - Cost New ......... $834,383,321 80.13% $139,970,913 13.44% $66,901,384 6.43% $1,041,255,618 100.00%
Allocation of Plant ......... $55,141,000 $11,760,000 ($66,901,000) $0
Additional Parking .......... $0 $4,480,000 $0 $4,480,000
-- ---------- --
$889,524,000 $156,211,000 $0 $1,045,735,000
Entrepreneurial Profit at ... $88,952,000 10.00% $31,242,000 20.00% $0 0.00% $120,194,000 11.49%
TOTAL COST NEW .............. $978,476,000 $187,453,000 $0 $1,165,929,000
LESS: Physical Depreciation 0
Functional & External Obsolescence 0
--------------
Cost New Less Total Depreciation 1,165,929,000
PLUS: Land Value $155,000,000
INDICATED VALUE $1,320,929,000
$1,321,000,000 (Rd)
74
CASINO HOTEL SALES
CASINO HOTEL COST ANALYSIS
As indicated in the prior section, the allocated cost for the casino hotel
component before land and profit is $889,524,000, or $293,000 per room. To check
the reasonableness of this cost estimate, we reviewed actual costs on the Monte
Carlo and the New York New York projects, as well as the budgeted cost of the
Bellagio and Project Paradise that are now under construction. The data used is
from annual reports of the relevant gaming companies.
The Monte Carlo is a middle market product, consistent with Circus Circus'
orientation in that market. (Mirage Resorts, Inc. was a passive partner in the
development of the project.) The total costs, including land and all financing
and pre-opening expenses, have been reported in the annual reports for Mirage
and Circus Circus as $350,000,000. From this, the book value of the land
contribution must be deducted ($47,000,000), along with another roundly
$10,000,000 that was expended to purchase a 2.0 acre site formerly occupied by
the Desert Inn Motel. The hard and soft costs were a total of $293,000,000
(350.0 - 47.0 - 10.0), or $97,213 per guest room.
The New York-New York project has a reported cost of $460,000,000. On a per room
basis, this cost was $226,000 per guest room, well over twice the cost reported
for the Monte Carlo. At 2,035 rooms, New York-New York has a lower ratio of
rooms for the casino and public spaces provided, and that construction costs on
a relatively tight site would be higher.
The 3,000-room Bellagio, now under construction, has a budgeted cost of $1.4
billion dollars, or $466,666 per guest unit, including land, capitalized
interest and pre-opening costs. The project will occupy an 118 acre site, the
equivalent of the combined site of the Mirage and Treasure Island Resorts. Much
of the site will be taken up by a lake featuring over 1,000 fountains.
Bellagio's high-end suites will be clustered in low density units along the
lake. It is not clear at what basis the land value was included in the cost
estimate. If the treatment is consistent with book value reported in the Monte
Carlo partnership contribution, the land cost comprises $139,000,000 of this
budget, and reduces the real and personal improvement cost to $420,000 per guest
unit. The budget for artwork accounts for $20,000 per guest unit, or $60.0
million total. The 1996 annual report indicates that the "standard guest rooms
will be 15 to 20 percent larger than guest rooms of most other luxury hotels",
from which we infer that Bellagio will have a 575 to 600 square foot unit. The
guest bathroom will be similar to the subject's with a separate tub and shower
and extensive use of marble. The resort will include a 156,000 square foot
casino, 40,000 to 60,000 square feet of retail space and 14 restaurants, two of
which will be operated by the owners of Le Cirque in Manhattan. Without the
artwork, the remaining improvements and soft costs could approximate $400,000
per unit, 77 percent more than at the New York-New York, and 45 percent more
than the subject. If the land were included at a market value basis, the
improvement cost estimates would be much lower.
Excluding the Four Seasons Hotel, the cost of the 3,800-room Project Paradise is
budgeted at $800,000,000 or $210,000 per room. If the entire Hacienda site is
included at its book value from
75
CASINO HOTEL SALES
the 1995 acquisition, the cost of the real and personal property improvements
declines to $189,000 per guest unit. The signature feature of this project is to
be a 10 acre tropical environment which is to include a very large wave pool
that will feature a surfing ride. The casino area is to be 124,900 square feet,
but the meeting and retail components of this project are nominal. We expect
that from a "finish" standpoint the Project Paradise will most closely resemble
the Luxor.
On balance, the allocation portion to the subject's casino hotel component is
consistent with the projects that have recently been completed or are now under
construction. The subject's budget of $292,900 per room (exclusive of land and
entrepreneurial profit and not including the mall) places it above the Monte
Carlo, the New York-New York and Paradise projects but well below the Bellagio
project.
If all of the land value is allocated to the hotel component, the total project
cost with 10 percent entrepreneurial profit becomes $1,133,000,000 or $373,000
per room.
76
CASINO HOTEL SALES
CASINO HOTEL SALES COMPARISON ANALYSIS
Though we performed a diligent search, we were unable to find any comparable
sales of significant casino resorts.
As mentioned in the land sales analysis, the pending sale of a 50% interest in
the Desert Inn, its golf course and 34 acres of excess land for $150,000,000 was
announced in early August, but as of the October 17 date of our last inspection,
to have run into serious obstacles as indicated in the Land Valuation section.
The transaction is clouded by the partial interest involved, the apparent
discount from the seller's valuation, a ten percent guaranteed return to the
seller, a pre-determined sell-back provision favoring the buyer, and most
importantly the obvious absence of a willing seller. In order to avert a hostile
take-over attempt launched by Hilton in late January, ITT Sheraton first shed
non-core assets and in recent months has begun to sell off some of its hotel
inventory as well. In 1993, the ITT Sheraton paid $160,000,000 for the Desert
Inn and its vacant land, and over the past 18 months, has spent approximately
$190,000,000 on renovating the property for a total investment of $350,000,000.
Although ITT Sheraton values the assets at $400 million, ITT is now willing to
sell a 50 percent interest for $150,000,000. The allocation of $100,000,000 of
the transaction to the existing hotel and golf course indicates that the 100
percent basis for these components is only $200,000,000 or approximately what
was spent on the renovation. Two days after the announcement regarding the
Desert Inn, Hilton increased its take-over offer from $55 to $70 per share,
matching ITT's buy-back offer.
In addition to the $150,000,000 cash infusion, the new joint venture will borrow
$100,000,000, largely on the strength of the buyer's balance sheet. During 1996,
the property generated only $8,000,000 in EBITDA. The buyer's sell-back option
will be triggered if the property fails to make $25,000,000 in annual EBITDA in
2001. In the first year of post-renovation operations, the property is forecast
to do $133,000,000 in total revenues. If we apply a generic mega resort 30
percent EBITDA ratio on to the projected income, EBITDA would equate to nearly
$39,900,000. The going-in capitalization rate that could be extracted using this
market derived EBIDTA ratio would be 20 percent, further evidence of the duress
that the seller was under.
At $200,000,000 for a 100 percent interest, the Strip's only golf resort would
be priced at approximately $266,000 per key. Even without the recent development
in negotiations, we consider this to be meaningless as an indicator of market
value.
The Hard Rock Cafe founder, Peter Morton, announced that he has negotiated the
buy-out of Harvey's, his partner in that venture, for $45,000,000. Assuming no
discounting or premiums were associated with the sale of this partial interest
of 40 percent, this suggests a 100 percent interest price of $112,500,000. There
are approximately 8.0 acres of excess land associated with this transaction,
bought with the anticipation of eventually expanding the 340-room hotel to 700
rooms. Acquired at a cost of approximately $979,000 per acre, the estimated
market value of this excess land today is
77
CASINO HOTEL SALES
approximately $2,000,000 per acre, or $16,000,000 (assuming 25 percent
appreciation per year since the acquisition of this land in 1993). Our
allocation of value for the existing casino hotel component would be $96,500,000
or $283,800 per room. This is exclusive of the Hard Rock restaurant, which was
not part of the casino hotel partnership.
In October, 1996, a 100 percent interest in the Sahara Hotel and Casino sold, as
part of the 1031 tax free exchange that involved vacant land parcels to the
west, south and east. Having acquired the vacant land to the south for the
seller, the buyers of the Sahara exchanged that vacant land for a parking lot
immediately east of the Sahara, across Paradise. The sales price for the
2,035-room casino hotel, net of the easterly parking lot, was $128,000,000 or
$62,899 per key. (The easterly parking lot was acquired for $17,000,000.) Some
881 of the rooms were built in 1960 and earlier, and have since been demolished.
In essence, the transaction involved 1,154 rooms located on 17.54 acres with
excess land for redevelopment. The equivalent cost per key is $110,918 for the
1,154 rooms completed since 1988. This comparable is located relatively far
north, and is closer to the Stratosphere than to the subject property.
A recent article in the Wall Street Journal indicated that the Trump Plaza in
Atlantic City was being marketed at a price of $1,000,000,000. In that article
industry observers publicly expressed doubts that the property will fetch a
price near the asking price. We have assumed that the billion dollar asking
price includes the 500-room Trump Regency Hotel, which is connected to the Trump
Plaza by a sky bridge and is covered under the same gaming license. The asking
price for the combined buildings would be approximately $946,000 per room. A 51
percent interest in the off-Boardwalk Trump Castle sold in March 1997 for
$125,000,000 to Colony Capital. This suggests that a 100 percent interest in the
1,250 room castle would be $245,100,000 or $196,078 per room. Neither the asking
price of the Trump Plaza or the off-Boardwalk sales price are of any use in
estimating a value for the subject property.
Because of the complicated nature of these transactions or their general lack of
comparability, we are unable to conclude to a value or range of values via the
Sales Comparison Approach. We will rely on the Cost and Income Approaches.
78
GAMING ANALYSIS
GAMING ANALYSIS
Introduction
During the eight year period from July 1, 1989 (fiscal 1990) to June 30, 1996,
gaming receipts for the largest casino hotels in the Strip area of Las Vegas
increased from $1,679,059,959 to $3,289,623,000. This equates to a compound
average rate of growth of 10.1 percent per year. The volume level used to define
this top tier is $72,000,000 in gaming revenue. The number of properties in this
mega resort category has increased by 60 percent. In fiscal year 1990 there were
13 properties in the top casino revenue producing tier, in fiscal year 1997
there were 21 properties.
Presented in the following table is data on the total casino floor area
available compared to total gaming receipts for the largest category of casinos.
Growth in Casino Floor Area
and Gaming Receipts for Strip Casinos
with Revenues of $72 Million or Greater
1989/90 through 1990/91
Number of Square Feet of Percent Gaming Percent
Fiscal Year Locations Casino Area Change Revenue Change
- ----------- --------- ----------- ------ ------- ------
1989 / 90 13 868,908 0.0% 1,679,059,959 0.0%
1990 / 91 14 1,047,746 20.6% 2,069,556,867 23.3%
1991 / 92 14 1,075,956 2.7% 1,984,080,337 -4.1%
1992 / 93 15 1,160,730 7.9% 2,213,054,478 11.5%
1993 / 94 19 1,574,777 35.7% 2,761,356,425 24.8%
1994 / 95 19 1,590,186 1.0% 3,086,131,427 11.8%
1995 / 96 19 1,648,288 3.7% 3,194,527,007 3.5%
1996 / 97 21 1,820,000(E) 10.4% 3,289,623,000 3.0%
Compound Annual
Growth Rate N/A N/A 11.3% N/A 10.1%
(E) Estimated, based on planning data
Source: Nevada Gaming Abstract
The average size of a casino in this top category has grown from 66,916 to
86,700 square feet, or nearly 30 percent. Growth in gaming revenue has been
accomplished by growth in the supply of casino area. Over the prior seven years
ended in fiscal 1996, the compound annual rate of growth in supply and demand
had been equal at 11.3 percent. As indicated in the "Tourism Industry" section,
much of the lackluster 1996/97 revenue growth is attributable to declines in
Baccarat and sports pool win. Over the twelve month period from July 1, 1996 to
June 30, 1997, Baccarat revenues were
79
GAMING ANALYSIS
down 10.7 percent or $93,719,000. For the most recent year, Baccarat win
accounted for 16 percent of the total gaming revenue.
Revenue from wagering in the sports pool was down even further showing a 59
percent or $28,753,000 decline. With a net increase of two casinos, revenues in
Twenty-one, Craps and Roulette were up by 7.8, 4.2 and 2.4 percent respectively.
Slot machine revenues were up by 4.3 percent. We see no indicators that the
number of gamblers is falling off or that the average amount wagered is changing
such that the rate of growth in casino revenues (3.0 percent) would be less than
half of the growth in the number of hotel guests (7.3 percent). While we are
cognizant of modest changes in gambling behavior, it appears that the nominal
growth in gaming revenues during fiscal 1996/97 for this top category of casinos
is an aberration.
When expressed on a "per square foot of casino area" basis, gaming revenues have
declined slightly from $1,930 per square foot in 1989/90 versus $1,807 per
square foot in 1996/97. These figures are not adjusted for inflation. This
decline could be explained by an increase in the amount of floor area per device
or table, or a decline in the average amount wagered per patron. Also, the data
for fiscal 1996/97 appears to be somewhat aberrant, as was discussed earlier.
When the data presented earlier on gaming receipts per occupied room is
considered, it appears that the declining square foot of casino area revenue
measure is a function of the broader market profile. Per visitor hotel and
retail expenditures have increased.
Over the long term, and assuming that the new mega-resorts added are of a "must
see" quality, the fundamentals for growth in gaming revenues are good as
outlined earlier. California's economy is continuing its recovery, and its
ethnic diversification bodes well for the industry. Convention space at the Las
Vegas Convention Center and strip hotels are being expanded. The expansion of
the airport will facilitate increases in air lift. We are of the opinion that,
over the next seven years, the percentage rate of growth in gaming revenues for
these mega casinos will decline as will the percentage rate of growth in their
supply. In absolute square footage and dollars however, casino capacity and
casino revenue should demonstrate levels of growth that are similar to the prior
seven years.
80
GAMING ANALYSIS
Presented in the following table is a summary of the casinos planned as part of
the proposed mega resorts:
Planned Additions To The Casino Supply
Name of Project Square Feet Projected Date of Opening
- --------------- ----------- -------------------------
Bellagio 156,000 August 1, 1998
Project Paradise 124,900 December 1, 1998
The Venetian 116,000 April 1, 1999
Paris 70,000 July 1, 1999
Aladdin Redevelopment 130,000(1) July 1, 2000
Lido 90,000 July 1, 2001
Planet Hollywood 90,000(E) July 1, 2002
(1) The plans submitted call for a 259,000 square foot casino to serve 3,256
hotel rooms and 550,000 square feet of retail space. We believe that the
ultimate design will be less ambitious with regard to the casino component.
(E) Estimate by Landauer Associates, based on generic casino size
Source: Annual Reports for Mirage Resorts, Circus Circus, Landauer
Associates and Clark County Planning
While the casino components of the projects that will open during calendar 1998
are relatively large, only 6,800 rooms (77 percent) of the 8,756 rooms added
will likely have a significant amount of casino space associated with their
openings. In 1999, 6,037 rooms or 78 percent of the planned hotels will likely
have a significant amount of casino space. Thus, the potential number of hotel
guests (prospective gamblers) will be increasing at a similar rate.
Based upon the above proposed additions, we have estimated that the mega-hotel
casino inventory will grow as follows:
Projected Growth in Casino Space and Gaming Revenues
for Strip Casino Hotels with Gaming Revenues of $72M or Greater
Fiscal Year Square Feet Percent Change Gaming Revenue Percent Change
----------- ----------- -------------- -------------- --------------
1996/97 1,820,000 10.4% 3,289,623,000 3.0%
1997/98 1,820,000 0.0% 3,454,104,150 5.0%
1998/99 2,064,858 13.5% 3,799,510,000 10.0%
1999/00 2,286,900 10.8% 4,179,460,000 10.0%
2001/02 2,416,900 5.7% 4,430,230,000 6.0%
2002/03 2,506,900 3.7% 4,651,740,000 5.0%
2003/04 2,596,900 3.6% 4,814,550,000 3.5%
2004/05 2,686,900 3.5% 4,983,060,000 3.5%
Compound Annual
Growth Rate 5.7% 6.1%
Source: Landauer Associates
81
GAMING ANALYSIS
Between fiscal 1990 and fiscal 1997, casino space grew by 951,000 square feet.
We are forecasting a growth in space of 866,900 square feet between fiscal 1997
and fiscal 2005. Mega casino revenues grew by 1.6 billion dollars between fiscal
1990 and fiscal 1997. We are forecasting mega casino revenue growth of 1.7
billion dollars between fiscal 1997 and fiscal 2005.
Within the category that encompasses the mega resorts, there are properties that
are more or less successful than the others. The most highly themed or
amenitized products achieve the greatest relative market penetrations. The
Venetian, with its Grand Canal Shops, will have foot traffic levels that are
comparable or greater than any other location in Las Vegas, in a highly
amenitized, high end product. Cross references to annual reports indicate that
the following properties comprised the top quartile of the 19 mega hotels with
gaming receipts in excess of $72 million:
Caesar's Palace
The Mirage
Treasure Island
The MGM Grand
In 1996/97, we expect that the results of New York-New York will be reflected in
the top quartile of this largest gaming category. To test the assumptions for
the casino projections prepared by the subject's developer, we have compared the
number and type of devices and units planned for the subject property with those
of the top quartile resorts. This is depicted in the table on the following
page. Because we believe that New York-New York will fall within the top
quartile on future reports, we have included its count as well.
LANDAUER 82
REAL ESTATE COUNSELORS GAMING ANALYSIS
MIX OF GAMING DEVICES, GAMES AND TABLES
5
Caesar's MGM Mirage NY-NY Treasure Average % Total Subject % Total
Slots
5Cent 75 475 301 232 269 270 11% 0 0%
10Cent 0 37 0 0 0 7 0% 0 0%
25Cent 1104 2108 1090 1342 1207 1,370 55% 1200 48%
50Cent 47 75 46 27 60 51 2% 200 8%
1Dollar 619 875 615 713 556 676 27% 950 38%
Megabucks 12 22 11 8 14 13 1% 28 1%
5Dollar 77 67 122 72 66 81 3% 100 4%
25Dollar 21 20 16 11 9 15 1% 22 1%
100Dollar 15 19 11 4 3 10 0% 0 0%
500Dollar 4 4 2 0 0 2 0% 0 0%
Other Slots 6 18 11 16 36 17 1% 0 0%
---- ---- ---- ---- ---- ----- ----
Total 1980 3720 2225 2425 2220 2,514 100% 2500 100%
Games
Craps 13 17 10 8 7 11 9% 12 10%
Roulette 13 18 12 7 9 12 10% 10 8%
Twentyone 69 101 70 43 56 68 56% 72 60%
Keno 1 2 2 1 2 2 1% 1 1%
Wheel of Fortune 2 3 2 1 1 2 1% 2 2%
Bingo 0 0 0 0 0 -- 0% 0 0%
Mini-Baccarat 2 7 4 3 1 3 3% 5 4%
Baccarat 11 15 10 0 3 8 6% 4 3%
Race Book 1 1 1 0 1 1 1% 1 1%
Sports Parlay 0 0 0 0 0 -- 0% 0 0%
Sports Pool 1 1 1 0 1 1 1% 1 1%
Caribbean Stud 2 4 3 2 4 3 2% 4 3%
Let it Ride 2 2 2 2 2 2 2% 4 3%
Pai Gow 4 2 4 1 1 2 2% 2 2%
Sic Bo 0 0 0 0 0 -- 0% 0 0%
Pai Gow Poker 6 6 4 2 3 4 3% 3 2%
Other 1 3 1 3 1 2 1% 0 0%
--- --- --- -- -- --- --- --- ---
Games 128 182 126 73 92 120 100% 121 100%
Tables 0 20 31 0 0 10 N/A 9 N/A
- --- -- - - -- ---
Combined 128 202 157 73 92 130 N/A 130 N/A
SF Casino Area 171,500 95,500 84,000 78,400
Source: Nevada State Gaming Control Board, Non-restricted Count Report as of
July 1, 1997, and Venetian Pro-forma
83
GAMING ANALYSIS
As demonstrated in the preceding table, the subject has 2,500 machines planned,
compared to 2,514 for the top quartile. The primary difference between the
subject's planned devices and the top performing properties is in the nickel
denomination slot machines. We concur with the subject's developers that these
are being phased out at the better quality strip resorts, and that the space
from these machines would be better utilized with higher denomination machines.
Likewise, the decision to concentrate the number of devices in the most popular
denominations, and to eschew the highest denomination exotic machines also
appears reasonable.
In the table games, the subject's developers again plan to provide the highest
ratio of the most popular games. Because of the highly volatile nature of
baccarat win, the developers of the Venetian have planned a ratio of baccarat
tables that is at the average win per unit demonstrated by the larger 19 hotel
sample, versus the average for the top quartile. The subject's developers hope
to avoid the pitfalls associated with the periodic losses to large stakes
players. From a cash flow management standpoint for a single casino asset, the
philosophy is a sound one.
Presented in the following table is data on the average house win per unit for
the various table types and devices.
LANDAUER 84
REAL ESTATE COUNSELORS GAMING ANALYSIS
FORECAST OF SUBJECT'S GAMING REVENUES
Top Quartile Market Average, '96 $ Forecast for Subject restated in 1996 and 1997 $
Top Quartile Annual Win/Unit Win/Unit Annual
No. Units Win/Unit Revenues No Units 1996 $ 1997 $ Revenues
Slots
5Cent 270 22.6 $ 6,099.7 0 0 $ --
10Cent 7 37.8 279.6 0 -- -- --
25Cent 1,370 33.8 46,308.6 1200 33.8 34.8 41,776.8
50Cent 51 44.8 2,285.4 200 44.8 46.1 9,228.8
1Dollar 676 67.6 45,652.3 950 67.6 69.6 66,146.6
Megabucks 13 130.0 1,742.0 28 130.0 133.9 3,749.2
5Dollar 81 93.3 7,539.3 100 93.3 96.1 9,609.9
25Dollar 15 103.2 1,589.1 22 103.2 106.3 2,338.5
100Dollar 10 196.1 2,039.9 0 -- -- --
500Dollar 2 N/A -- 0 -- -- --
Other Slots 17 N/A -- 0 -- -- --
Total 2,514 $113,535.9 2,500 $ 132,849.8
0.0% 3.0%
Games
Craps 11 $ 1,840.0 $ 20,240.0 12 1,840.0 1,895.2 $ 22,742.4
Roulette 12 872.7 10,298.4 10 872.7 898.9 8,988.8
Twentyone 68 582.5 39,494.5 72 582.5 600.0 43,198.2
Keno 2 1,230.1 1,968.1 1 1,230.1 1,267.0 1,267.0
Wheel of Fortune 2 422.3 760.1 2 422.3 435.0 869.9
Bingo -- -- 0 -- -- --
Mini-Baccarat 3 1,900.7 6,462.2 5 1,900.7 1,957.7 9,788.6
----------------------------------------
Baccarat 8 9,666.3 75,397.3 4 | 7,177.1 7,392.4 29,569.7 |
----------------------------------------
Race Book 1 3,797.3 3,037.8 1 3,797.3 3,911.2 3,911.2
Sports Parlay -- -- 0 -- -- --
Sports Pool 1 2,185.6 1,748.5 1 2,185.6 2,251.2 2,251.2
Caribbean Stud 3 760.0 2,280.0 4 760.0 782.8 3,131.2
Let it Ride 2 579.9 1,159.8 4 579.9 597.3 2,389.2
Pai Gow 2 2,412.4 5,789.8 2 2,412.4 2,484.8 4,969.5
Sic Bo -- -- -- 0 -- -- --
Pai Gow Poker 4 862.9 3,624.2 3 862.9 888.8 2,666.4
Other 2 0 -- -- --
Games 120 $172,260.8 121 $135,743.3
0.0% -4.2%
Tables 10 $ 187.9 $ 1,916.7 9 $ 200.9 206.9 $ 1,862.3
Combined 130 $287,713.4 130 $270,455.4
Source: Nevada State Gaming Control Board and Developer's Pro-Forma
85
GAMING ANALYSIS
SUBJECT GAMING REVENUE FORECAST
The win per device or table forecasts for the subject property are consistent
with the top quartile performance (when expressed in same year 1996 dollars)
with one exception, baccarat revenues. Consistent with the developer's intention
of eschewing the risks associated with high stakes baccarat play, the subject's
developers have forecast baccarat win per table that is 26 percent below that of
the top quartile. We concur with the developer's estimates of stabilized year
gaming revenue estimates for the subject property. In a stabilized year of
operations, we are forecasting that the subject property will have gaming
revenues of $262,374,000 in 1996 currency. As subsequent revenue and expense
estimates were prepared in calendar 1997 dollars we will inflate our stabilized
year estimate by 3.0 percent to convert it into "like kind" 1997 dollars. This
equates to $270,245,000 in calendar 1997 dollars.
The rapid absorption and market success of New York - New York indicates, that
if properly designed, a highly themed, well amenitized casino resort experiences
almost no ramp up period because of the "must see" quality of the physical
asset. Only engineering problems, such as those that occurred at the Luxor, or
operational problems, such as those that occurred at the 5,000 room The MGM
Grand, appear to dilute the reception of these products. We theorize that there
is a slight novelty effect associated with the opening of a new mega casino
resort that abates with the subsequent opening of one or more new resorts. We
will apply a temporary three percent premium to the subject's first year of
operation. Thereafter, all growth will be at the rate of inflation.
86
HOTEL ANALYSIS
HOTEL ANALYSIS
INTRODUCTION
The pattern of absorption of new casino hotels in Las Vegas has been one of
trade-up. The newest most highly themed resorts fill first, the oldest least
amenitized resorts fill last. Fortunately, the excitement generated by the new
resort openings has been adequate to ensure that most properties, regardless of
quality level, perform at occupancies that are well above national averages.
Because of the trade-up phenomenon, it is most relevant to look at larger market
trends in analyzing the supply and demand for casino hotels. For that reason, we
will focus our analysis on Clark County's casino hotels with gaming revenues in
excess of $1.0 million.
LAS VEGAS MARKET CONDITIONS
To identify historical trends in the absorption of casino hotels, we analyzed
data from the Nevada Gaming Abstract (annual reports). We deemed this
information more reliable than that published by the Las Vegas Convention and
Visitors Authority (LVCVA) because it is compiled from data gathered in reports
required of all gaming license holders as compared to the partial sampling and
econometric modeling used by the LVCVA. In addition, the data from the Nevada
Gaming Abstract provides the only reliable indicator of average daily room
rates. We will consider the LVCVA data, which is released monthly, in order to
establish current rates of growth and projected casino openings.
Within the category of "Casino hotels with gaming receipts in excess of
$1,000,000" there were an average of 83,067 hotel rooms available for the year
ended June 30, 1996. This compares to data from the LVCVA indicating that, on
December 31, 1995, the mid-point of the 95/96 fiscal year, there were 89,300
rooms in the Las Vegas area rooms inventory. Thus, it would appear that the
Gaming abstract survey accounts for approximately 93 percent of the total
supply.
On a macro level, the supply of casino hotel rooms in Clark County grew at a
compound annual rate of 8.1 percent between fiscal 1990 and 1996, compared to a
rate of growth in occupied rooms of 8.5 percent. The average daily rate for all
of Clark County's casino hotels grew from $49.74 in fiscal 1990 to $61.27 in
fiscal 1996. This equates to a compound annual rate of growth of 3.5 percent
over the past six fiscal years. This is depicted in the following table.
87
HOTEL ANALYSIS
Historical Growth in Supply and Demand for Casino Hotels in Clark County,
Nevada
Supply Demand Market Indicators
------ ------ -----------------
Fiscal Available Percent Occupied Percent Occupancy Average Percent
Year Room Nights Change Room Nights Change Daily Change
Rate
- --------------------------------------------------------------------------------
1990 18,970,042 -- 16,989,431 -- 89.6% $49.74 --
1991 22,915,738 20.8% 20,008,704 17.8% 87.3 48.28 -2.9%
1992 23,830,547 4.0 20,870,279 4.3 87.5 47.37 -1.9%
1993 23,606,425 -0.9 21,534,405 3.2 91.2 49.09 3.6
1994 26,462,021 12.1 24,787,688 15.1 93.7 52.30 6.5
1995 29,361,881 11.0 26,904,615 8.5 91.6 57.75 10.4
1996 30,319,491 3.3 27,756,503 3.2 91.6 61.27 6.1
---- ---- ----
Compound
Annual Change 8.1% 8.5% 3.5%
Source: Nevada Gaming Abstract
In response to the nearly 21 percent increase in supply in fiscal 1991, the
average daily room rate declined moderately. We attribute the nominal decline in
rate the following year to the national recession, which is generally considered
to have commenced at the same approximate time as the invasion of Kuwait in
July, 1990 and to have continued through the summer of 1992. That the Clark
County market could have almost completely absorbed a cumulative 25 percent
increase in the casino hotel room inventory during a national recession is
remarkable. Under more favorable economic conditions in fiscal 1994, the rate of
growth in demand outpaced that of supply. In fiscal 1995, the market appeared to
have focused on average daily rate, which grew 10.4 percent. During the 1996
fiscal year, supply and demand grew at the same pace, but the rate of increase
in the average daily room rate was twice the rate of national inflation.
A great deal has appeared in the local Las Vegas and national press regarding
the absorption of rooms in Las Vegas and declining room rates following the
current round of additions. The above data refutes the contention that this is
the first time that Las Vegas has added rooms faster than the market's ability
to absorb them.
The trending information from the LVCVA indicates that for the six month period
from July 1, 1996 to December 31, 1996, the number of occupied rooms grew by 7.2
percent. From January through June, their sample indicated a rate of growth in
demand of 7.3 percent. We forecast that for the fiscal
88
HOTEL ANALYSIS
year ended June 30, 1997, the number of occupied room nights will have grown at
a rate of 7.2 percent.
The number of casino hotel rooms in inventory will have grown by 7.8 percent due
to the April 1996 opening of the Stratosphere; the mid-June opening of the
3,014-room Monte Carlo; the late December opening of expansions at the Luxor
(1,950 rooms), Circus Circus (1,000 rooms) and the Orleans (840 rooms); the
January 1997 opening of the 2,035-room New York-New York and a 1,025-room
expansion to the Rio Suites Hotel. The increase of 6,010 rooms in December or
January was only partially offset by the demolition of the 1,150-room Hacienda.
Because of the slight imbalance in supply and demand growth rates, casino hotel
occupancy in Clark County should fall nominally for the fiscal year ended June
30, 1997 to 90.5 percent.
Articles in local and national media indicate that average rates are falling in
response to softer market conditions. However, annual and quarterly reports for
Mirage Resorts and the MGM Grand indicated that rate growth was healthy during
the July 1996 to December 1996 period, and that room revenues during the two
quarters from January to June were better than or consistent with the previous
year. These negative comments, which first appeared in the late spring, pertain
mainly to the most recent quarter and the onset of hot weather. Our review of
data collected by a Las Vegas Business Press columnist who regularly "shops" a
sample of hotels indicates that rates that are being quoted to the individual
leisure traveler in May, June and July were in fact 15 to 20 percent below the
same Tuesdays or Saturdays of the previous year.
Such promotional pricing will affect only the individual leisure component that
is booked through the hotel's 1-800 numbers and travel agents. Contractual
convention and wholesale tour room rates will not decline. On balance the lower
rates will affect only a portion of one quarter of the fiscal year ended June
30. We estimate that the annual rate of growth in room rate for fiscal 1997 will
decline to 4.0 percent from the 6.1 percent achieved in fiscal 1996.
Relatively low rates will continue to be offered during the hot weather months.
In July however, the Monte Carlo will have marked its first year of operation,
and the net increase in the rooms inventory will have declined. Harrah's
expansion in Fall 1997 and the opening of Bellagio in Spring of 1998 will be the
most significant additions to supply in the 1998 fiscal year. This, combined
with continued improvements in Southern California's economy should allow growth
in demand to catch up with that of supply. As the citywide convention calendar
enters its busy Fall quarter and operators recognize the improvement in market
conditions, a gradual retreat from the discounting policies should occur.
Over the long term, we feel that the fundamental market conditions for Las Vegas
are favorable. The airport is being expanded to increase air capacity. During
the next quarter, construction is scheduled to begin on a 320,000 square foot
expansion to the Las Vegas Convention Center. The MGM Grand, recognizing the
rate premiums accruing to group meeting business, has commenced
89
HOTEL ANALYSIS
construction on its own 380,000 square foot Convention Center. Caesar's
expansion will double its meeting space. The Bellagio and Paradise are both
planned to include up to 100,000 square feet of meeting space. The market's
reliance on wholesale tour and travel business is likely to diminish somewhat.
Southern California, Las Vegas' primary source market, has still not fully
recovered from the restructuring of its formerly defense driven economy.
Southern California continues also to regain its glamour as an international
tourist destination, whereby increasing the number of international visitors
that are likely to make a side trip to Las Vegas. And, the proportionately
greater rates of increase in its Hispanic and Asian populations, with their
greater propensity to gamble, bode well for the gaming industry.
ADDITIONS TO THE COMPETITIVE SUPPLY
Presented in the Addenda are summaries of the hotels and casino hotels that may
be developed in Las Vegas over the next three years. From this list prepared by
the LVCVA we identified those properties that are likely to have gaming licenses
and further sorted these projects into primary (mega resort) and secondary
competitors. The timing of these proposed casino hotel developments was
estimated to yield the chart summarizing probable increases in supply on a
fiscal year basis.
LANDAUER 90
REAL ESTATE COUNSELORS HOTEL ANALYSIS
ADDITIONS TO SUPPLY
FY FY FY FY FY FY FY
1997 1998 1999 2000 2001 2002 2003 Cumulative
Primary Supply
Stratosphere 1,250 -- -- -- -- -- -- 1,500
Monte Carlo 2,750 -- -- -- -- -- -- 3,000
Luxor expansion 975 975 -- -- -- -- -- 1,950
Circus expansion 500 500 -- -- -- -- -- 1,000
Rio Expansion 427 598 -- -- -- -- -- 1,025
NY-NY 1,018 1,018 -- -- -- -- -- 2,035
Ceasars expans -- 700 500 -- -- -- -- 1,200
Harrahs expansion -- 740 247 -- -- -- -- 986
Hacienda/Paradise (575) (575) 1,900 1,900 -- -- -- 2,650
Bellagio -- -- 3,000 -- -- -- -- 3,000
Sands/Venetian (715) -- 759 2,277 -- -- -- 2,321
DI inventory reduction -- (106) -- -- -- -- -- (106)
Four Seasons @ Paradise -- -- -- -- -- -- -- --
Paris -- -- 750 2,250 -- -- -- 3,000
Marriott @ MGM Grand -- -- -- -- 1,500 -- -- 1,500
Ritz @ MGM Grand -- -- -- -- 500 -- -- 500
Lido -- -- -- -- -- 3,000 -- 3,000
Planet Hollywood -- -- -- -- -- -- 3,000 3,000
Aladdin -- (1,095) -- -- 3,000 -- -- 1,905
San Francisco Theme -- -- -- -- -- -- -- --
Unnamed -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- 0
- ------------------------------------------------------------------------------------------------
0 5,630 2,754 7,156 6,427 5,000 3,000 3,000 33,466
Secondary Supply
Sportsman's Manor 466 -- -- -- -- -- -- 466
Holiday Casino Boardwalk 330 -- -- -- -- -- -- 440
Comfort Inn/Best Western/ -- -- -- -- -- -- -- --
Las Vegas Club 185 -- -- -- -- -- -- 185
Orleans expansion 420 420 -- -- -- -- -- 840
Hawthorne Suites -- -- -- -- -- -- -- --
Sunset Station -- 527 -- -- -- -- -- 527
Marriott Suites -- -- -- -- -- -- -- --
Residence Green Valley -- -- -- -- -- -- -- --
Amerisuites -- -- -- -- -- -- -- --
Residence Inn Hughes Cen -- -- -- -- -- -- -- --
Seven Circles Resort -- -- 307 -- -- -- -- 307
Polo Towers -- -- -- -- -- -- -- --
Embassy Suites -- -- -- -- -- -- -- --
Unnamed -- -- -- 250 -- -- -- 250
Lake Las Vegas -- -- 700 -- 500 500 -- 1,700
-- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------
Aggregatge Sub-set 1,401 947 1,007 250 500 500 -- 4,715
Total 7,031 3,701 8,163 6,677 5,500 3,500 3,000 38,181
91
HOTEL ANALYSIS
Of the proposed properties that are not presently under construction, it is
unlikely that all will be built or that they will be built within the time frame
originally announced. For example, the 3,200 room Planet Hollywood project was
recently delayed by two years and no longer appears on the Convention and
Visitors' Authority list. Circus Circus is receiving a great deal of criticism
from major institutional investors for its rapid rooms expansion on Las Vegas
Boulevard. We question whether these same investors will endorse the
construction of an entirely different quality development such as a Four Seasons
at this time. We have not included the Four Seasons as an addition to supply. A
suburban project, the Ritz-Carlton Mountain Spa has no financing and is
currently in the market for both debt and equity investment.
Presented in the following table are our estimates for the future rates of
growth in supply, demand, market occupancy and average daily room rates.
Projected Growth in Supply and Demand For
Casino Hotels in Clark County, Nevada
Supply Demand Market Indicators
------ ------ -----------------
Fiscal Available Percent Occupied Percent Occupancy Average Percent
Year Room Change Room Nights Change Daily Change
Nights Rate
- --------------------------------------------------------------------------------
1997 32,885,650 7.8% 29,755,000 7.2% 90.5% $63.72 4.0%
1998 34,236,500 4.1% 31,540,300 6.0% 92.1% $65.95 3.5%
1999 37,215,800 8.7% 33,748,100 7.0% 90.7% $68.26 3.5%
2000 39,652,900 6.5% 35,773,000 6.0% 90.2% $70.65 3.5%
2001 41,660,400 5.1% 37,382,800 4.5% 89.7% $73.12 3.5%
2002 42,937,900 3.1% 38,691,200 3.5% 90.1% $75.68 3.5%
2003 44,032,900 2.6% 39,465,000 2.0% 89.6% $78.33 3.5%
Compound Annual 5.0% 4.8% 3.6%
Change
Source: Landauer Associates, Inc.
The rate of growth in supply for the seven years from fiscal 1997 through 2003
is forecast to decline to 5.0 percent. Demand is forecast at a nominally lower
rate of 4.8 percent. In absolute numbers, the cumulative increase in demand for
casino hotel room nights over the seven year period from fiscal 1997 to fiscal
2002 is forecast to be slightly lower than the cumulative growth during the
seven year period from fiscal 1990 to 1996 at 9,710,000 room nights, compared to
historical growth of 10,767,100 room nights over the prior seven year period.
92
HOTEL ANALYSIS
Mega Resort Performance
Occupancies among large Strip hotels are even higher than the countywide
average. According to the Nevada Gaming Abstract, the 19 Strip hotels with
revenues in excess of $72 million have achieved an average occupancy of 94.2
percent over the past four years compared to the countywide casino hotel average
of 90.4 percent. This is because the large mega-hotels are themselves
attractions. Most recently, in fiscal 1995/96, these properties achieved an
average daily room rate of $79.19.
The newer or better quality properties have consistently reported occupancy
levels and average daily room rates above the preceding averages. For a seven
hotel sample comprised of the Mirage, the MGM Grand, Caesar's Palace, Treasure
Island, the Las Vegas Hilton, the Flamingo Hilton, and Bally's Grand, the
aggregate annual occupancy in calendar 1996 was 94 percent at an average daily
rate of $105. Room rates are held down by the volume rates negotiated for tour
wholesalers, which constitute somewhere between one-quarter to one-third percent
of the total market mix. For the two most comparable hotels, the Mirage and
Caesar's Palace, the blended 1996 occupancy was 93 percent at an average daily
rate of $140.
The subject property will have the best attributes of each of these properties,
and none of their shortcomings. For example, the Mirage and Caesar's Palace,
with a combined total of 4,813 rooms, currently have only 200,000 square feet of
convention space between the two of them (excluding prefunction areas). This
equates to a ratio of approximately 41.5 square feet of space per guest room,
compared to the subject's ratio of 88 square feet per room (net). Neither is
located next to a one million square foot convention center, or has an average
guest room size approaching 700 square feet, as planned for the subject.
Our estimate of the average daily rate for the property will be "built up" based
on its superior physical attributes and its likely market segmentation.
CONVENTION/TRADESHOW DEMAND
Las Vegas is the most popular tradeshow and convention destination in the
country. In 1996, Las Vegas hosted 18 percent of the nation's 200 largest
tradeshows, and because of the relatively large size of the Las Vegas events,
rented fully 24.9 percent of the square feet of exhibit space leased on a
national basis as part of these 200 shows. Las Vegas' popularity can be
attributed to its:
o very large room inventory,
o two major tradeshow facilities,
o relatively low cost of air transportation,
o relatively low room rates, and
o entertainment amenities.
93
HOTEL ANALYSIS
National Convention Rate Comparisons
For the largest groups in the tradeshow and convention business, Las Vegas
competes with and is compared to the cities of: New York, Chicago, Atlanta,
Dallas, New Orleans, and Anaheim. For smaller and regional shows, the cities of
San Francisco, San Diego and San Antonio are popular among groups for whom
entertainment amenities are important. Average daily room rates in these
destinations are considerably higher than are being achieved in Las Vegas, even
among the major convention hotels that attract relatively little individual
corporate or leisure travel.
To ascertain average daily rates and rate movement, we reviewed a national list
of major convention hotels with a minimum size of 900 rooms, and selected the
largest properties from the six key tradeshow destinations. The hotels were
selected to produce a sample with the same approximate representation as the
cities represent of the six competitive tradeshow destinations. Landmark hotels,
such as the Waldorf Astoria in New York, were omitted. Occupancy and average
rate data gathered by Smith Travel Research indicates that there is very little
difference between the average daily room rates at the competitive convention
hotels. The six city tradeshow sample, which was comprised of 17 hotels with an
average size of 1,497 rooms, had an average annual occupancy in 1996 of 77.4
percent at an average daily room rate of $140.42.
We selected a second sample of hotels from the three sunbelt regional
destinations (San Francisco, San Antonio, San Diego), with a minimum size of 600
rooms. The nine hotels in that sample had a slightly smaller average size (1,108
rooms) as would be expected in cities with smaller convention venues. In 1996,
these properties achieved an average annual occupancy of 75.3 percent at an
average daily room rate of $139.25.
Because of their large size, none of these properties would likely be a first
choice for an individual corporate traveler. The sample occupancies are at or
near their capacity levels because of the lack either of weekend appeal, or
corporate weekday demand for their respective destinations. Thus the average
daily room rates of these convention hotels reflect group rates, which comprise
at least 60 percent of their overall mix of business.
Over the past two years, a shortage in commitable hotel rooms in competitive
destinations has emerged and average daily room rates have grown at rates well
above inflation. Year-to-date results through May 1997 indicate that the average
daily rates at the primary competitive set increased by 6.5 percent to
approximately $150; rates at the secondary set are likely to grow by 10.0
percent, to $155, by year-end 1997. Occupancy, already at 77 percent for the
primary competitive tradeshow destinations, is likely to reach that for the
sunbelt destinations. In the aggregate, these 26 hotels are likely to achieve an
average daily rate of $152 during 1997.
94
HOTEL ANALYSIS
Show/Convention Manager Survey
To test these nationally oriented convention hotel rates for reasonableness in
the Las Vegas market, we surveyed the show managers of the top 175 of the
Tradeshow 200 events. This cut-off point was established because of the
relatively small exhibit space requirements of these smaller shows. For example,
the show which occupied the 175th position required only 152,000 square feet of
exhibit space. Still, this show had an estimated 9,800 attendees in 1996 of
which 4,000 were exhibit personnel.
We faxed a survey to Show Managers which was limited to one page to increase the
likelihood of a response. Questionnaires were faxed out twice. We received
responses covering a total of 51 shows, for a 29 percent response rate. Six
responses were discarded since the answers were incomplete or non-responsive. Of
the remaining 45 responses, 31 of these were for shows that are not regularly
held in Las Vegas, and 14 were for shows that are regularly held in Las Vegas.
Three of the responses were for groups that rotated to Las Vegas in 1997. These
responses were included in both analyses.
The show managers whose groups did not meet in Las Vegas were queried as to
propensity to move. Twelve groups, or 39 percent of the out-of-town sample,
indicated that they "never" move; the majority of these hold their shows in New
York or Chicago. The average rate paid by attendees of shows that are
permanently housed in cities outside of Las Vegas is the highest. For the 1997
room blocks, the average rate in the housing block was estimated by the show
managers at approximately $162.
Approximately eight respondents, or 26 percent of the sample, indicated their
shows move primarily when they outgrow the facility, the rooms inventory, or to
take advantage of more attractive destination or less expensive destinations.
For semi-permanent shows, the average rate in the 1997 block was indicated as
$127. Managers of eleven shows, (35 percent) indicated that their show changes
destinations annually based on a geographical rotation. For these shows the
average daily rate to be paid in 1997 was $126.
95
HOTEL ANALYSIS
Three of these rotating shows held their events in Las Vegas during 1997. This
data was then combined with the responses for the permanent shows held in Las
Vegas to arrive at estimates of the current level of convention/tradeshow group
room pricing in Las Vegas. This data is summarized in the following table.
Tradeshow Manager Survey - Rates in Room Blocks
- -----------------------------------------------
Category Low High Average
- -------- --- ------------
National Shows:
Permanent Shows $95 $233 $162
Semi-permanent Shows 75 155 127
Rotate Annually 76 181 126
National Sample Average 84 197 139
Las Vegas shows permanent 60 187 137
Las Vegas shows -total 64 182 132
Despite Las Vegas' reputation for relatively inexpensive hotel rates, it is
interesting to note that the Las Vegas' average citywide tradeshow rate was only
$7.00 or 5.0 percent below that of the national sample and was above the rates
quoted for the semi-permanent shows and the rotating shows. For major tradeshows
and conventions, Las Vegas' convention rates may be less expensive than New York
or Chicago, but are generally at or above prevailing rates in Dallas, Atlanta,
New Orleans, San Francisco, San Diego and San Antonio.
Across the country, the demand "fill pattern" for convention centers is from the
locus of the event venue, out, with demand levels diminishing as distance from
the center increases. Physically proximate headquarters hotels are the first to
fill, followed by other large hotels in which the ancillary social functions and
hospitality suites are located. As such, the rates at the headquarters hotels
are typically at the high end of the range for the hotels in the room block.
This explains the premium between the national average of $139 as indicated by
the show manager's survey, and the national sample of major tradeshow and
sunbelt convention hotels, which is likely to have an average daily room rate of
$152 in 1997.
If the show manager survey form had been specific enough, we would expect a
premium to exist between the most proximate convention hotel as compared to
other hotels with significant room blocks. For a convention at San Francisco's
Muscone Center for example, we would expect to see a show or convention rate at
the Marriott at Muscone Center that would be higher than that of the Westin St.
Francis or the San Francisco Hilton. (All three hotels were included in our
national trend sample.)
96
HOTEL ANALYSIS
For any event at the Sands Exposition and Convention Center (SECC), the subject
property will enjoy the prime headquarters position. Among the significant
mega-resorts, it will be second only to the Las Vegas Hilton in terms of
proximity to the Las Vegas Convention Center. Thus, even before the subject's
planned suite style room is taken into account, the rates at the subject
property would be expected to fall within the high end of the range presented by
both the national and local survey data.
For events held at the SECC, the subject property will benefit from a longer
length of stay than is typical for a convention block. At least a portion of an
exhibitor's personnel are required to be at the show site during move-in and
move-out to supervise the set up of the booth. This, the least rate sensitive
segment of convention demand, generally has a 4.0 night length of stay compared
to 3.0 to 3.4 for the typical attendee. Because of the long hours worked during
a show, proximity to the show site is typically more important than hotel room
cost.
That the average convention rate for Las Vegas shows is above the effective
average daily rate of the most relevant seven casino hotels is a function of the
discounts granted to wholesale tour companies that many of these hotels rely
upon to maintain their occupancy levels. With little or no meeting space of
their own, these other properties have no choice but to rely on tour wholesalers
to generate a base of mid-week demand. Depending on the quality of the hotel,
these wholesale rates can range from $50 to $60 per night. The nature of these
very low-rated, volume contracts is such that the hotels may not close out dates
due to citywide convention demand. Thus, convention group room blocks are lower
than would ordinarily be desirable to maximize the average daily rate.
Group Rate Forecasts For The Subject Project
Our tradeshow manager survey queried respondents as to the room rate that they
believed a typical exhibitor would pay for the smallest unit, a 700 square foot
suite, that was seamlessly connected to the tradeshow facility. For the show
managers that hosted events in Las Vegas, the question on propensity to move was
omitted in favor of one asking what rate an attendee would pay for the same
suite. The suite was described as being "suitable for closing a deal" but no
detail was provided as to the very high level of finish planned. Respondents
were allowed to check-off a pre-defined rate category. The lowest category
provided was $125 to $129. The highest provided was from $400 to $450. Rate
ranges below $250 were stated in $25 intervals Rate ranges above $250 were
stated in $50 intervals. In compiling the responses, all "averages" were first
calculated based on the lowest rate in the range, then increased to reflect the
midpoint of the range. The responses by group category are presented in the
following table.
97
HOTEL ANALYSIS
Tradeshow Manager Survey - Rates for the Subject
Category Exhibitor Attendee
- -------- --------- --------
National Permanent Shows, (No's) $295 N/A
Semi-permanent Shows (Maybes) 307 N/A
Rotate Annually (Probables) 293 N/A
National Sample Average 297 N/A
Las Vegas shows - permanent 245 181
Las Vegas Shows -total 250 N/A
For the groups that move to an alternate destination when they outgrow a
Center's exhibit space or the rooms inventory, or as better or less expensive
venues become available, the average rate estimated by show manager for an
exhibitor would be $307. This compares to a low-end average rate of $293 for the
shows that rotate locations regularly. Managers of shows that are permanently
based in Las Vegas estimated the exhibitor's rate at $245. When the three hotels
that rotated into Las Vegas were included, the average exhibitor's rate
increased to $250.
The show managers that held events in Las Vegas in 1996 indicated that a typical
attendee would be more rate sensitive and would pay on average $181 for the same
suite. This is 28 percent lower than estimated for the typical exhibitor.
The sample guest suite in the subject's Preview Center separates the living and
sleeping areas by a change in elevation and does not have a solid wall screening
the bedroom. We do not know whether such a configuration would qualify as being
"suitable for closing a deal" for all of the respondents, so we will weigh the
estimates for the typical attendee more heavily than for the exhibitors.
(Business entertainment would not be an issue for a typical attendee.) We
estimate that, among exhibitors and attendees of conventions and shows at the
contiguous SECC, the average rate that would be paid for the subject suite would
be $190, approximately 5.0 percent above the attendee-only response and
approximately 24 percent below the average for the exhibitors.
The subject property will receive a portion of its demand from the city-wide
shows and conventions taking place at the Las Vegas Convention Center. Because
the subject will not enjoy the same headquarters hotel premium, we will estimate
the citywide convention rate at $160, approximately 16 percent lower than the
rate estimated for SECC shows.
The subject property will also appeal to groups that do not require large
amounts of meeting or exhibit space and can be contained within the hotel's
approximately 342,000 square feet of meeting
98
HOTEL ANALYSIS
space. These facilities are only slightly smaller than the second tier of
convention centers in secondary cities such as Philadelphia, Atlantic City,
Miami Beach, Houston, Denver, San Antonio, San Diego, etc., etc. We estimate
that the average daily rate that could be achieved for this kind of business
would be lower than SECC business because of the greater number of venue choices
for them. We estimate the average daily rate for this "self-contained" group
business at $160.
Leisure Rate Forecasts For The Subject
On June 14, the results of the annual frequent traveler survey conducted by the
Zagat Hotel and Restaurant Guide were released. Las Vegas was named as the best
vacation value in the United States. What is most interesting about the Zagat
survey is that room rates in Las Vegas were found to have increased 38 percent
over the prior two years, compared to a national average of 16 percent over the
same time period. (These increases refer to the rates quoted for more volatile
individual corporate or leisure travel.) Still, Las Vegas is rated as the best
vacation value, indicating that it is the destination's package of hotel
product, entertainment and pricing that is responsible for Las Vegas'
popularity.
We have reviewed the room rates published in the American Automobile
Association's (AAA) guide book and the rates published in the Official Hotel and
Resort Guide for the seven casino hotels identified earlier, as well as a
smaller sampling of quoted weekday and weekend rates as surveyed by a Las Vegas
newspaper columnist. Based on this data, we estimate that the weekday rates for
the two most comparable casino hotels ranged from $79 to $399, depending on the
season. Weekend average daily rates ranged from $109 to $399. The five secondary
competitors had published rates ranging from $59 to $269 on weekdays, and from
$99 to $269 on weekends.
As these rates applied to conventional guest rooms, it would be reasonable to
assume a premium could be obtained for a significantly larger suite. There is
only one casino hotel in Las Vegas that is marketed as an all suite product, The
Rio. The Rio guest unit is a basically square oversized room, which we estimate
to be 450 square feet in size, but which has no separation whatsoever between
the living and sleeping area. It is also located in a secondary site 1.5 miles
west of the Strip in a neighborhood surrounded by industrial and strip center
retail uses. Despite these drawbacks, it is consistently rated as the best
quality hotel in Las Vegas by the Zagat Guide, indicating a strong preference
for an all-suite gaming product.
99
HOTEL ANALYSIS
There are three non-gaming all-suite hotels in Las Vegas. These are the Alexis
Park Hotel, the Residence Inn, and the Crowne Plaza Suites. To ascertain what a
suite premium might be worth we compared these products to similarly oriented
non-gaming hotels with conventional rooms products. These were: The Courtyard by
Marriott, the St. Tropez and the Holiday Inn Emerald Springs. In this non-gaming
market, there were both occupancy and average daily room rate premiums accruing
to the suite products. The all-suite hotels achieved a sub-set occupancy that
was 3.7 percentage points higher than the conventional hotel products, at an
average daily room rate that was 7.7 percent greater. The combined effect of
these premiums was an increase in the revenue per available room of 12.5
percent.
We will estimate a range for individual leisure weekend rates of $145 to $240
with an annual average weekend rate of $180 for the subject property. The
average weekday rate is estimated to range from $105 to $145, and will be
estimated at an average of $115 (slow season) annually.
Casino use complimentary demand has been factored in at an internal rate of
$171. It is the local convention for the casino department to be billed at the
prevailing market rate for the dates on which rooms were "comped".
Annual Occupancy And Average Daily Rate Forecasts
Compared to other mega-resort properties in Las Vegas, the subject will have the
following competitive advantages:
o Suite style guest rooms averaging 700 square feet, compared to standard
hotel room sizes of 360 to 380 square feet.
o A seamless indoor connection to 1.0 million square feet of exhibit and
convention space.
o The highest ratio of on-site meeting space to guest rooms of any other
mega-resort in Las Vegas. Including only its meeting facilities, the subject
will have 106 square feet of space per guest room compared to the most
comparable Strip resorts that have only 41.5 square feet of space per guest
room.
o A retail center that is nearly as large as the newly expanded Shops at the
Forum at Caesar's Palace that will feature indoor canals and singing
gondoliers.
o Views from many of its rooms of two of the largest attractions in Las Vegas,
the Mirage's Volcanoes and the Pirate Battle at Treasure Island.
A luxury level of finish compared to a predominant moderate quality competitive
field.
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HOTEL ANALYSIS
We were unable to identify any disadvantages to the subject property.
Our research indicates that there are significant rate premiums accruing to a
convention/tradeshow orientation and an all-suite configuration. We forecast
that the subject's superior attributes will be manifested primarily in its
average daily room rate.
Our estimate of the stabilized year occupancy and average daily room rate was
formulated after considering the likely market segmentation of the subject and
the rate analyses discussed above. We estimated demand based on the likely
number of shows or self-contained conventions, seasonality, weekday/weekend
demand patterns and average lengths of stay. This analysis is summarized in the
following table.
Estimation Of Average Daily Rate
Occupied
Length Room Room
Rate of Calculation Events of Stay Block Nights A.D.R Revenue
- ------------------- ------ ------- ----- ------ ------ -------
Expo Center Exhibitors 34 4.0 2100 285,600 $190 $54,264,000
Expo Center Attendees 34 3.4 400 46,200 190 8,785,600
Citywide Sell-Out 15 3.0 2400 108,000 160 17,280,000
Self-Contained Group 30 3.0 2300 207,000 160 33,120,000
Leisure - Weekend 30 2.0 2300 138,000 180 24,840,000
Leisure - Weekday 34 1.0 1900 64,600 115 7,429,000
Casino Complimentaries 365 1.0 550 200,750 171 34,328,250
-------- --- -----------
1,050,150 $171 $180,046,850
Available 365 1 3036 1,108,140
94.8%
The first category of group business was estimated based upon the SECC's
show/convention calendar for 1998. In 1997, the SECC will host 41 to 45 events
of various sizes with the largest and most relevant of these groups being the
anchor tenants that use all of the halls and meeting space. There will be 17
such "anchor" tenants in 1997. The SECC budget for 1998 shows a similar level of
activity. However, with the addition of the Venetian Casino Hotel and its hotel
quality meeting space for pre- and post- show social functions, the number of
large users increases to 34 in 1999. We concur that the number of large users
can be expanded to 34 events.
A survey of SECC event participants indicated that exhibitors stayed an average
of 4.0 days, and attendees an average of 3.4 days
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HOTEL ANALYSIS
We will estimate that, with virtually no individual corporate demand in these
larger casino hotels, fully 2,500 rooms of the subject's inventory are available
in the SECC group room block. The majority of this block, or 2,100 rooms, are
expected to be rented to exhibitors, with an average length of stay of 4.0 days.
The remaining 400 rooms are expected to be rented to attendees with an average
length of stay of 3.4 nights. These have been factored in at the $190 rate as
estimated earlier.
In the SECC's 1998 bookings, 68 percent of the events were scheduled such that
the peak room blocks (show days) occurred on weekdays and 32 percent had peak
room blocks on weekends. This factor is relevant in estimating the weekend
leisure component. SECC shows are estimated to close out 11 weekends to leisure
business.
For major citywide conventions, we estimate that there are 15 conventions each
year that consume a block of 2,400 rooms at the subject for 3.0 nights. The
length of stay has been reduced to 3.0 nights because of the historically lower
average length of stay for citywide convention attendees. These room nights have
been estimated at an average daily rate of $160 as outlined in the
Convention/Tradeshow analysis. We estimate that one third of these events (five)
are also likely to involve weekends. Thus, the non-group weekend calendar is
reduced by another five weekends per year.
With the 342,000 square foot conference center, we estimate that the subject's
sales force can sell the subject hotel to an average of two and one half groups
each month, or 30 per year, with a guest room requirement of 2,300 rooms. As
with the other non-exhibitor group demand, we have estimated an average length
of stay of 3.0 nights. The self-contained group room rate was estimated earlier
at $160. These groups will also consume some weekends. We estimate that 20
percent of the groups (or 6 groups) will meet over a weekend.
Leisure demand was broken out between weekdays and weekends. There are
potentially 30 remaining weekends that are not forecast to be booked for SECC,
in-house or citywide conventions. We estimate that 2,300 rooms will be sold with
a 2.0 night minimum length of stay required at an average daily rate of $180.
Weekday leisure demand consists primarily of attractively priced filler business
during interruptions in the convention schedule. We estimated that an average of
1,900 rooms could be sold on 34 "soft" weekdays, most of which will occur during
hot weather months. The average length of stay during these value priced periods
is estimated at 1.0 night. We estimated the average weekday rate at $115, as
outlined on the previous page.
The net effect of these assumptions is a stabilized occupancy of 95 percent per
year at an average daily rate, in 1997 currency, of $171. The mix of demand at
the hotel will be 63 percent group and 18 percent individual leisure. Casino use
is estimated at 19 percent of the total occupied room
102
HOTEL ANALYSIS
nights. The weighted average group rate is $175 compared to a weighted average
leisure rate of $159 and an internal casino department rate of $171.
Occupancy Stabilization
Initial year occupancies for the two most recently opened hotels, the Monte
Carlo and New York, New York have both been reported in the 98 to 99 percent
range. However, due to the subject property's luxury orientation and the
somewhat lower countywide occupancy projected during the subject's initial year
of operation, we are forecasting a slightly lower occupancy for that fiscal
year. For the subject's first year of operation, we are forecasting an occupancy
of 93 percent. Thereafter, we expect that trial usage will establish the value
of the subject's significantly larger room size and the subject will stabilize
at 95 percent occupancy.
Rate Growth And Stabilization
On a national level, full-service hotel room rates are likely to continue to
show real growth, particularly in the large convention and luxury segments. This
is attributable to the absence of any significant levels of new construction. At
present only one large convention hotel is under construction, an 800-room Hyatt
to be constructed next to McCormick Center. The absence of new hotels is a
function of still uneconomic market conditions in major cities. Even with the
significant levels of real growth achieved over the past two years, there are
few markets nationally where construction costs for a new convention hotel could
be justified in today's market conditions. Thus, we forecast that real growth in
national convention hotel room rates will continue albeit at lower rates than in
the recent past. We estimate that by 1999, the average daily rate of the
national convention hotel sample will have increased by 6.0 percent per year
from $152 to $171. After deflating back to today's 1997 dollars this real growth
equates to a rate of $160. Our stabilized year room rate estimate reflects a 6.9
percent premium over the anticipated stabilized rate for convention hotels
nationally.
For the subject however, we are forecasting a long term inflation rate of 3.5
percent per year, with no real growth in local casino resort room rates during
the foreseeable future. This is based on the countywide historical rate of
growth since fiscal 1990 and the assumed additions to supply.
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HOTEL ANALYSIS
However, we are forecasting that it will be necessary to discount the subject's
room rates in its initial two years of operations. Our estimates of the rate
growth are provided in the following table.
Forecast Rate Growth For the Subject
Inflated Discount Discounted
Period Inflation Rate Factor Discount Rate
- ------ --------- ---- ------ -------- ----
Stabilized 1997 - $171.00 - - -
Calendar 1998 3.50% $177.00 - - -
Calendar 1999 3.50% $183.00 - - -
1st Qtr.2000 Adj. 0.88% $185.00 - - -
Fiscal 1999/00 -- $185.00 (10%) ($18.00) $167.00
Fiscal 2000/01 3.50% $191.00 (5%) ($10.00) $181.00
Fiscal 2001/02 3.50% $198.00 - - $198.00
Fiscal 2002/03 3.5.0% $205.00 - - $205.00
Fiscal 2003/04 3.5.0% $212.00 - - $212.00
Source: Landauer Associates.
In summary our occupancy and average daily rate projections for the subject
property are as follows:
Summary of Forecast Rate and Occupancy
Fiscal Year Occupancy Average Daily Rate
----------- --------- ------------------
1999/00 93% $167
2000/01 95% $181
2001/02 95% $198
2002/03 95% $205
2003/04 95% $212
Source: Landauer Associates.
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HOTEL INCOME APPROACH
CASINO HOTEL INCOME CAPITALIZATION APPROACH
The Income Capitalization Approach is defined in the Dictionary of Real Estate
(third edition), Appraisal Institute as follows:
A set of procedures through which an appraiser derives a valuation
indication for income-producing property by converting anticipated
benefits (cash flows and reversion) into property value. This conversion
can be accomplished in two ways. One year's income expectancy can be
capitalized at a market-derived capitalization rate or a capitalization
rate that reflects a specified income pattern, return on investment, and
change in the value of the investment. Alternatively, the annual cash
flows for the holding period and the reversion can be discounted at a
specified yield rate.
For the purpose of our valuation of the subject, we have utilized the discounted
cash flow methodology as this is more appropriate for a property that has not
yet stabilized.
METHODOLOGY
To estimate the income and expenses incurred in the operation of the subject we
first estimate the revenues and expenses for a typical or stabilized year of
operation for the hotel. In order to develop this estimate we interviewed the
project's developers, and reviewed and analyzed income and expense data
available in the annual reports of Mirage Resorts, The MGM Grand, Inc., The
Nevada Gaming Abstract and other publicly traded companies. In addition, we
analyzed the historical operating results of several non-gaming convention
oriented hotels.
The format used in this analysis is consistent with that in the annual reports
of the publicly traded gaming companies.
From this analysis we then developed our estimate of the expected operating
performance of the casino hotel over what may be considered the typical holding
period of an investor, which is assumed to be ten years. Through the holding
period, the amount for each income and expense item is adjusted to reflect such
factors as changes in casino patronage, the hotel's average rate, occupancy, and
inflation, and the variable and fixed components of each item.
Presented in the following text is a brief discussion of the basis used in
developing our estimate of the stabilized year operating statement for the
subject, expressed in 1997 value dollars.
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HOTEL INCOME APPROACH
Departmental Revenues
Revenue to the facility is categorized by the department from which it is
derived. Only direct operating expenses associated with each department are
charged to the operating departments. General overhead items which are
applicable to the overall operation of the facility are classified as
undistributed operating expenses.
Casino Revenue and Expense
Casino revenue was estimated earlier based on the number and denomination of
devices and table types planned, and on the average win for the top quartile of
casino hotels with gaming revenues in excess of $72 million in calendar 1996.
Due to the "must see" nature of this project, we are of the opinion that the
casino's first year will be slightly higher than the stabilized year due to a
novelty effect, and have factored in a modest premium in that year.
Promotional Allowances
Promotional allowance is the generally accepted accounting term for
complimentary cocktails, meals, overnight accommodations and in-house
entertainment for wagering patrons. These items are reported at their market
cost and are deducted from Gross Revenue to produce a Net Revenue figure that
relates to the actual revenues received at the property. While they are not
included in the casino departmental expense figures, they are billed to the
Casino department before being netted out and are carefully monitored to ensure
that the recipients of the complimentaries are in fact wagering amounts
commensurate with the value of the promotional items. Presented in the following
table is a summary of the promotional allowances as published in annual reports
for casino companies whose primary enterprises are in Clark County.
Promotional Allowances
Cost As a % of
Comparable Net Revenues
- ---------- ------------
MGM Grand, Las Vegas 6.7%
Mirage Resorts, Inc. 9.4%
Circus Circus FY 97 4.8%
Strip Casinos, Gaming Revenues > $72 M 9.0%
Source: Annual Reports and the Nevada Gaming Abstract
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HOTEL INCOME APPROACH
Promotional Allowances have been estimated at $45,908,000 or 9.3 percent of net
revenues and are premised on the following:
An average of 550 rooms each night are used by the casino for notable casino
patrons at the average daily rate of $171, or $34,328,500
Approximately 50 percent of the beverage sales are assumed to be generated
as casino department give-aways, or $9,475,000.
25 percent of the room service sales are estimated to be associated with
complimentaries issued by the casino department, or $2,105,000.
Because the restaurants and show room will be leased out, it will be necessary
for the subject to purchase meals from the tenants on behalf of the casino
guests. Since these are actual casino expenditures, these are handled as a
casino departmental expense. In year one, we have assumed that the casino
employees will be slightly more generous as they attempt to build a clientele of
core gamblers. We have factored in a modest inefficiency factor for that year.
Casino expense consists of: licensing costs, casino employee salaries and wages,
employee benefits, contract cleaning, uniforms, and other items related to the
casino department. Presented in the following table is a summary of the casino
departmental expenses for some of the publicly traded gaming corporations,
comparable casino hotels and the aggregate performance for all casinos on the
Strip with Gaming revenues in excess of $72 million.
Casino Department Expenses
Expense a % of
Comparable Casino Revenues
- ---------- ---------------
MGM Grand, Las Vegas 45.0%
Mirage Resorts, Inc. 51.0%
Circus Circus, FY 97 46.1%
Strip Casinos, Gaming Revenues > $72 M 38.2%*
* Promotional Allowances (14.6%) and bad debt (4.4) deducted from expense to
obtain a "like kind" comparison.
Source: Annual Reports and Nevada Gaming Abstract
The casino company that operates with the highest level of complimentary
expense, Mirage Resorts, also has the highest expense ratio in its casino
department. Mirage Resorts is the most upscale operator in the sample, and
targets a great deal of high stakes Baccarat play at their namesake property. In
foregoing the revenues associated with high stakes Baccarat play, the operators
of the subject property
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HOTEL INCOME APPROACH
will also avoid the costs associated with attracting such play. These include
private jet air transportation to Las Vegas, discounted markers, and lavish
entertainment while in Las Vegas.
The developer has forecast an expense ratio of 45.3 percent of revenues,
including bad debt expense, or 43.3 percent excluding bad debt expense. To
facilitate comparisons to the results of publicly traded companies, we have
shown bad debt expense as a separate line item. Also included within the
developer's forecast is a budget of approximately $10.0 million dollars for the
purchase of food and entertainment complimentaries from the tenant operations.
We estimate that the subject property will have a casino expense ratio of
approximately 45 percent.
Room Revenue and Expense
Room revenue is based on the number of occupied rooms multiplied by the average
daily room rate for each respective year as presented in this report. As
indicated in our previous analysis we estimated the average daily rate for the
subject hotel for a stabilized year to be $171 with the hotel achieving a
stabilized occupancy level of 95 percent. Due to the clustering of other new
hotel openings, we forecast however that the subject property will achieve an
occupancy of 93 percent in its first twelve months of operation, and that it
will be necessary to discount room rates in the initial two years of operation
until the market returns to equilibrium. The average room rate will be
discounted by ten percent in year one and by five percent in year two.
Rooms expense consists of front desk and housekeeping salaries and wages,
employee benefits, commissions, contract cleaning, in-room amenities, guest
transportation, laundry and dry cleaning, linen, operating supplies, reservation
costs, uniforms, and other items related to the rooms department. Presented in
the following table is a summary of the rooms departmental expenses for
reasonably comparable casino hotels and large, non-gaming convention oriented
hotels.
Rooms Department Expenses
Comparable Cost Per Cost As a %
Occupied Room of Rooms Sales
------------- --------------
MGM Grand, Las Vegas $27.00 27.2%
Mirage Resorts, Inc. 30.00 29.2%
Strip Casinos, Gaming Revenues > $72 M 29.00 36.4%
Convention Hotel A 31.00 29.6%
Convention Hotel B 35.00 26.7%
Convention Hotel C 27.00 18.4%
Convention Hotel D 31.00 23.6%
Convention Hotel E 34.00 21.9%
Source: Annual reports and hotels surveyed.
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HOTEL INCOME APPROACH
The rooms departments of the casino hotel operators appear to be very similar to
the results being achieved by non-gaming convention hotels. Because of the
component of relatively fixed costs, higher room rates generally translate into
more profitable rooms departments. For example, while Comparable B has a $35
cost per occupied room, its expense ratio is 26.7 percent. Its average daily
room rate then is approximately $131 ($35/26.7%). Comparable A, with a cost of
$31 per occupied room, has an expense ratio of 29.2 percent. Its average daily
room rate is lower, at approximately $105. The second most profitable rooms
department, at Comparable Hotel E, has the highest average daily rate of
approximately $155 and an expense ratio of only 21.9 percent. Comparable Hotel C
is an anomaly; its reservations department expense is included in the Marketing
department and so is understated relative to the other comparables.
For the subject, with its relatively high average daily rate, the primary areas
of increased cost are in the areas of: increased travel agent's commissions due
to the higher ADR and increased housekeeping labor costs associated with larger
guest room size. These are not, however, significant components of the overall
cost. To take into account these factors, we will increase the highest cost per
occupied room by 15 percent. We estimate the rooms cost for the subject at
$40.50 per occupied room, which on a stabilized year average daily rate of $171
equates to a 23.7 percent expense ratio. In the initial years, during which the
hotel is expected to be required to discount its rates, the expense ratio will
be higher. Also, in year one, we have factored in a slight inefficiency factor.
Food and Beverage Revenues and Expenses
Food and Beverage Revenues are based on revenue from the banquet, cocktail
lounge and room service operations. Banquet room rental charges are also
included. All restaurant outlets are assumed to be leased to third parties.
These categories include sales to guests of the hotel and demand from outside
sources for the food and beverage and banquet facilities. Since the majority of
Las Vegas' casinos have little or no meeting space, comparisons to these
properties are of limited use. The following chart outlines the banquet,
cocktail lounge, and room service revenues for comparable but non-gaming
convention hotels.
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HOTEL INCOME APPROACH
Food and Beverage Revenue Indicators
On a per occupied room basis
----------------------------
Banquets
per
SF meeting Cocktail Room Total Food
area Lounges Service Restaurant & Beverage
---- ------- ------- ---------- ----------
MGM Grand,Las Vegas N/A N/A N/A N/A $42.00
Mirage Resorts, Inc. N/A N/A N/A N/A $75.00
Strip Hotels, Gamin see $18.00 see $42.00 $60.00
Revenue -- $72 M Restaurant Restaurant
Convention Hotel A $122.00 $5.00 $6.00 $19.00 $54.00
Convention Hotel B $57.00 $6.00 $5.00 $55.00 $100.00
Convention Hotel C $149.00 $5.00 $4.00 $21.00 $73.00
Convention Hotel D $105.00 $9.00 $5.00 $12.00 $55.00
Convention Hotel E $110.00 $3.00 $5.00 $24.00 $88.00
Source: Annual Reports, Nevada Gaming Abstract and Landauer Associates
Food and Beverage revenues at the casino hotels are, in general, lower than are
typical in a large, convention hotel. This is likely to be a function of the
lack of meeting space and the loss leader pricing of many of the casino hotel
buffets or restaurants. Based on the central tendency of the Convention Hotels,
we will forecast banquet revenues at $100 per square foot. With approximately
350,000 square feet of function and pre-function area, this equates to
$38,771,000 in banquet sales annually, in 1997 dollars.
A second difference between the convention hotels and the casino hotels is in
cocktail lounge (beverage) sales. At $18.00 per occupied room, the average
beverage sales per occupied room for all Strip Casino Hotels with gaming
revenues in excess of $72 Million was twice the amount sold at the Convention
Hotel with the highest per occupied room beverage sales. We estimate that
beverage sales at the subject will approximate $18.00 per occupied room. In a
typical year at 95 percent occupancy, this equates to $18,949,000.
The annual reports do not provide specific information on the Room Service
department. We have knowledge of results for specific casino hotels, but, due to
confidentiality requirements, we are not permitted to disclose these. Because of
the entertainment of VIP casino patrons, Room Service revenues at casino hotels
are significantly greater than indicated by the Convention Hotel sample.
(Complimentaries in this department are typically 40 to 50 percent of total
revenues.) We have estimated room service revenues of $8.00 per occupied room.
In a typical year at 95 percent
110
HOTEL INCOME APPROACH
occupancy, this equates to $8,422,000 in 1997 dollars.
For the stabilized year, we have estimated in-house food and beverage revenues
at approximately $66,143,000 expressed in 1997 dollars, which equates to
approximately $63 per occupied room.
The subject's restaurants are to be leased to third party operators. On the
casino/ground floor level, the subject property is expected to have a 20,000
square foot "coffee" shop," a minimum of five fine dining restaurants in 52,000
square feet of space, and 15,000 square feet of food court space. At present,
the developers are negotiating with famous name operators for these spaces: the
Cheesecake Factory for the coffee shop space, and celebrity chefs such as
Wolfgang Puck, Emeril LeGasse, and Joachim Spliehal of Pinot for the fine dining
spaces. We have assumed that there is a mix of name and non name operators, such
that leased restaurant sales equate to $27.00 per occupied room for a total food
and beverage sales of $90.00 per occupied room. This is 20 percent greater than
the chain wide sales per occupied room reported for Mirage Resorts Inc. but is
lower than one of the convention hotels. The quantity of on-site meeting space
and presence of some "name" operators should offset the effects of the
additional competition posed by the Mall's restaurant tenants. Banquet sales
account for 59 percent of the operated food and beverage revenues and 41 percent
of the leased and operated outlets. Even for the most comparable casino hotels
(with some meeting space), banquet revenues generally account for fewer than
fifteen percent of total food and beverage revenues.
The MGM Grand leases a number of its restaurant outlets, hence its relatively
low in-house food and beverage sales. Two of the Convention Hotels (C and D) are
located next to or are connected to a large specialty retail mall with numerous
restaurants and would face a similar level of outside competition as the subject
property's hotel outlets. However, the convention hotels seldom receive high
levels of outside patronage in their restaurant outlets, unlike the restaurants
in casino hotels which are utilized by the non-guest patrons of the casino.
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HOTEL INCOME APPROACH
Food and beverage expenses were calculated on the historical operating results
of comparable casino hotel food and beverage facilities.
Food and Beverage Departmental Expenses
Comparable Departmental Banquets as a
Expense Ratio % of F&B Sales
MGM Grand, Las Vegas 58.2% N/A
Mirage Resorts, Inc. 63.5% N/A
Strip Casinos, Gaming Revenues > $72 M 63.2% N/A
Convention Hotel A 75.2% 43.0%
Convention Hotel B 78.0% 25.0%
Convention Hotel C 73.8% 56.0%
Convention Hotel D 66.9% 52.0%
Convention Hotel E 65.7% 61.0%
Source: Annual reports and hotels surveyed.
The casino hotels have "low" expense ratios relative to the convention hotels
because of their high component of beverage sales. Banquet sales, in which the
staffing, quantity of and menu items to be served are all known well in advance,
are also relatively profitable. The subject property will generate 59 percent of
its outlet sales in banquets, and 29 percent in beverage. Its expense ratio
should be at the low end of the ranges presented. For a stabilized year of
operation, this expense is expected to equate to 63.0 percent of food and
beverage revenue for the subject property.
Leased Restaurants
The percentage rent will be applied to the revenue estimate of $27.00 per
occupied room or $28,424,000 for the leased outlets. We estimate that the
percentage rent charged will be 8.0 percent of gross sales. We estimate the
rental income for the subject to be $2,274,000 for a stabilized year of
operation. This equals to $26.10 per square foot of rentable area in 1997
dollars. Recoveries at $14.00 per square foot increase the rental income by
$1,220,000 (87,158 S.F. x $14.00) to a total of $3,494,000. However, such
pass-throughs are not typically sufficient to cover all shared costs of
occupancy, estimated at $16.00 per square foot.
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HOTEL INCOME APPROACH
Billboard Live!
The space to be occupied by the show room tenant, Billboard Live!, is located
across four floors of the core commercial building. Of the 50,000 square feet of
space, we understand that 24,230 square feet is to be demised as part of the
casino hotel, thus the tenant will be paying rent to two entities. The total
annual rent of $1,260,000 equates to a per square foot rent of $25.20. The
hotel's share of the rent is $610,600. This rental rate is fixed for the
duration of the seven year lease. CAM charges of $14.00, or $339,000, are fixed
for seven years also; in year eight, they will be adjusted for inflation.
As with the restaurant CAM cost recoveries, the CAM charges are not likely to
completely recoup the common area charges. Expenses of $10.00 per square foot
has been factored in, that is projected to grow at the same rate as inflation.
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HOTEL INCOME APPROACH
Gift Shop, Logo Store
The subject property will operate two small retail outlets, one to sell items
with the Venetian logo as is the custom in Las Vegas, and the other to sell
toiletries, sundry items and other souvenirs. Specific data on operated retail
outlets was available only for Mirage Resorts and one convention hotel. For the
other casino hotels and convention hotels, it is typically aggregated with other
minor operated departments. For Mirage Resorts, in-house retail sales were
$22.22 per occupied room. The one convention hotel for which separate income
data was available was affiliated with a Disney theme park. Operated retail
sales for this hotel were approximately $60 per occupied room in 1995.
Recognizing that the subject property will not cater to adults that are
traveling with children, and that the Grand Canal Shops will compete for
souvenir shopping dollars, we estimate that the subject's operated retail
operations will generate sales of approximately $10.00 per occupied room, or
$10,502,000 in revenue. Expenses for the Disney-affiliated operation are
approximately 61 percent and 65 percent for Mirage Resorts. We estimate that the
departmental expense for the subject's operated retail will be 62 percent.
Telephone and Other Revenue and Expense
Telephone revenue is derived from the use of telephones within guest rooms,
faxing charges, and other telecommunications services. Data for the casino
hotels was aggregated with other minor operated departments; separate
departmental results are not published. Confidential information on the results
for specific casino hotels indicates that for the better quality hotels on the
Strip, telephone revenues averaged between $6.00 and $7.00 in 1996. The subject
is planned to have dual phone lines to each guest room and in-room Fax machines.
However, convention hotel results suggest that most business is being conducted
face to face at conventions.
The stabilized year telephone revenue for the subject property was estimated to
be $6.00 per occupied room.
Telephone Departmental Revenues and Expenses
Revenues per Expense as a %
Comparable Occupied Room of Telephone Sales
- ---------- ------------- ------------------
MGM Grand, Las Vegas N/A N/A
Mirage Resorts, Inc. N/A N/A
Strip Casinos, Gaming Revenues > &72 M N/A N/A
Convention Hotel A $4.30 47%
Convention Hotel B $4.70 55%
Convention Hotel C $7.50 46%
Convention Hotel D $4.55 74%
Convention Hotel E $4.30 60%
Source: Annual reports and hotels surveyed.
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HOTEL INCOME APPROACH
Telephone expense includes the cost of calls, operation of the telephone
switchboard and any telephone service charges. The convention hotels had
telephone expenses ranging from 46 to 74 percent of telephone revenues. For a
stabilized year of operation, we have estimated telephone expenses to be 55
percent for the subject property.
Undistributed Operating Expenses
Undistributed operating expenses are those expenses associated with the general
operation of a hotel. These expenses include administrative and general,
marketing, management fees, energy, and property operations and maintenance.
These expenses are relatively unaffected by fluctuations in occupancies and room
rates. Due to the highly fixed nature of these expenses, they are examined both
as percentages of net sales and as dollar amounts per available room.
Administrative Expenses
In a typical (non-gaming) hotel, expenses in this category include salaries and
wages associated with the operation of the administrative function of the
property, cash overages and shortages, credit card commissions, accounting
functions, data processing, executive office expenses, general insurance,
professional fees, travel and supplies. For gaming properties, the reporting
convention is to aggregate these administrative and general expenses with
marketing, utility, repairs and maintenance, and property tax expenses. We will
convert the non-gaming hotel results to the gaming industry's accounting
convention.
Administration Revenues and Expenses
Expense per Expense as a %
Comparable Available Room of Net Revenues
---------- -------------- ---------------
MGM Grand, Las Vegas $18,817 12.2%
Mirage Resorts, Inc. $19,385 11.9%
Strip Casinos, Gaming Revenues > $72 M $22,687 18.4%
Convention Hotel A $10,350 23.9%
Convention Hotel B $23,100 26.0%
Convention Hotel C $12,550 20.7.%
Convention Hotel D $11,550 18.9%
Convention Hotel E $13,650 18.7%
Source: Annual reports and hotels surveyed.
1
115
HOTEL INCOME APPROACH
On a per room basis, Undistributed Expenses as indicated by the convention hotel
comparables bracketed the range of the casino hotels. However when expressed as
a percent of total sales, the casino hotels were more efficient, with
Undistributed Expenses consuming a maximum of 17.3 percent of total sales. On a
per room basis, the results for the MGM Grand and Mirage Resorts, Inc.
demonstrate the advantages of size. The average casino hotel with gaming
revenues of $72 million had an average size of 2,385 rooms. The MGM Grand has
approximately 4,970 rooms in their rentable inventory (some have been taken
out-of-order for offices and storage), and, excluding their 300-room property in
Laughlin, the average Mirage property has 2,703 rooms.
With 3,036 rooms, the subject's Administrative and General Expense should fall
in the low end of the casino hotel range, particularly since the accounting and
human resources expenses associated with restaurant outlet personnel will be the
responsibility of the restaurant tenants. We estimate that in a typical year,
the subject's administrative expenses will approximate $19,000 per available
room, which equates to 11.7 percent of net revenues.
116
HOTEL INCOME APPROACH
Provision for Doubtful Accounts
The annual reports for the publicly traded gaming companies generally separate
bad debt or provisions for doubtful accounts from the casino department. For the
Mirage Resorts, Inc., this expense was 1.1 percent of net revenues. For the MGM
Grand, this expense was aggregated with "discounts" and was reported at 5.0
percent of net revenues. The Nevada Gaming abstract indicates that bad debt
expense averaged 2.6 percent for the 19 casino hotels with gaming revenues in
excess of $72 million. We estimate a stabilized year bad debt expense of 2.0
percent of net revenues for the subject property.
Corporate Expenses (Management Fees)
The annual reports of the publicly traded gaming companies report corporate
oversight expense which we equate to a management fee for these highly
specialized properties. The corporate expense charged back to the MGM Grand of
$10,313,000 equated to 1.3 percent of net sales. For the Mirage Resorts,
corporate expenses of $31,580,000 equated to 2.3 percent of total sales. No
comparable data is available from the Nevada Gaming abstract, it is assumed to
be buried in the Administrative line item, which may further explain the higher
expense ratio of the sample of 19 Strip hotels. We have estimated corporate
expenses at 1.5 percent of net revenues.
Reserve for Replacement
Reserves for replacement are not typically listed on an owner's income statement
in a casino hotel venture. EBIDTA does not include any reserves for the
replacement of short lived items. This is the custom in the local market.
Returns to the investor are relatively high to take capital expenditures into
account, which are funded from cash flow on an as-needed basis.
The cost of replacing short-lived items is included in the investment
parameters. We have not included a reserve for replacement in our statements.
Estimated Stabilized Year Operating Results
Presented on the following page is our estimate of the subject hotel's
stabilized year operating results based on the aforementioned analysis.
LANDAUER 117
REAL ESTATE COUNSELORS HOTEL INCOME APPROACH
Stabilized Year Estimate
1997 Dollars % Total Margin
Revenue
Casino $270,460,000 55.0%
Hotel 180,017,000 36.6%
Food & Beverage 66,143,000 13.4%
Leased Restaurants 3,494,000 0.5%
Billboard, Live! 950,000 0.2%
Gift Shop, Logo Store 10,502,000 2.1%
Telephone, Other 6,316,000 1.3%
Gross Revenues $537,882,000 109.3%
------------
Less Promotional Allowances 45,908,000 9.3%
------------
Net Revenues $491,974,000 100.0%
Departmental Expenses
Casino $121,710,000 24.7% 45%
Hotel 42,636,000 8.7% 24%
Food & Beverage 41,670,090 8.5% 63%
Leased Restaurants 1,395,000 0.3% 61%
Billboard, Live! 388,000 0.1% 41%
Gift Shop, Logo Store 6,511,000 1.3% 62%
Telephone 3,474,000 0.7% 55%
------------
Total Departmental Expenses $217,784,090 44.3%
------------
Departmental Profit $274,189,910 55.7%
------------
Other Expenses
Administration 57,684,000 11.7%
Provision for Doubtful Accounts 9,839,000 2.0%
Corporate Expense 7,380,000 1.5%
------------
$ 74,903,000 15.2%
Earnings before Interest, Income taxes,
Depreciation and Amortization 199,286,910 40.5%
118
HOTEL INCOME APPROACH
Statements of Estimated Annual Operating Results
FY 99/01 FY 00/01 FY 01/02 FY 02/O3 FY 03/04 FY 04/05 FY05/06 FY 06/07
Revenue
Casino $301,026 $302,488 $313,075 $324.032 $335,373 $347,112 $&59,260 $371,835
Hotel 172,105 190,545 208,441 215,675 223,223 231,036 239,122 247,491
Banquets, Bar and Room Service 67,900 73,976 76,565 79,245 82,018 84,889 87,860 90,935
Leased Restaurants 3,776 3,908 4,045 4,186 4,333 4,484 4,641 4,804
Billboard, Level 950 950 950 950 950 950 950 1,077
Gift Shop, Logo Store 11,348 11,746 12,157 12,582 13,023 13,478 13,950 14,438
Telephone, Other 6,825 7,064 7,311 7,567 7,832 8,106 8,390 8,683
-------- -------- -------- -------- -------- -------- -------- --------
Gross Revenues $563,931 $590,675 $622,543 $644,237 $666,752 $690,055 $714,173 $739,263
Less Promotional Allowances 52,089 51,344 53,141 55,001 56,926 58,919 60,981 63,115
-------- -------- -------- -------- -------- -------- -------- --------
Net Revenues $511,842 $539,331 $569,402 589,235 $609,825 $631,136 $653,192 $676,148
Departmental Expenses
Casino $134,150 $136,123 $140,887 $145,818 $150,922 $156,204 $161.671 $167,330
Hotel 48,376 47,685 49,354 51,081 52,869 54,720 56,635 58,617
Banquets, Bar and Room Service 47,280 46,605 48,236 49,924 51,671 53,480 55,352 57,289
Leased Restaurants 1,507 1,560 1,615 1,671 1,730 1,790 1,853 1,918
Billboard, Level 419 434 449 465 481 498 515 533
Gift Shop, Logo Store 7,036 7,282 7,537 7,801 8,074 8,356 8,649 8,951
Telephone 3,754 3,885 4,021 4,162 4,308 4,459 4,615 4,776
-------- -------- -------- -------- -------- -------- -------- --------
Total Departmental Expenses $242,523 $243,574 $252,099 $260,922 $270,055 $279,507 $289,289 $299,415
Departmental Profit $269,320 $295,757 $317,303 $328,313 $339,T71 $351,629 $363,903 $376,733
Other Expenses
Administration 68,567 64,515 66,773 69,110 71,529 74,032 76,623 79,305
Provision for Doubtful Accounts 10,632 11,004 11,389 11,788 12,200 12,627 13,069 13,527
Corporate Expense 8,374 8,254 8,543 8,842 9,151 9472 9,803 10,146
-------- -------- -------- -------- -------- -------- -------- --------
Total Other Expenses $ 87,572 $ 83,773 $ 86,705 $ 89,740 $ 92,881 $ 96,131 $ 99,496 $102,978
Earnings before Interest, Income taxes,
Depreciation and Amortization $181,748 $211,984 $230,598 $238,573 $246,890 $255,498 $264,407 $273,755
FY 07/08 FY 08/09 FY 09/10
Revenue
Casino $384,U9 $398,318 $412,260
Hotel 256,154 265,119 274,398
Banquets, Bar and Room Service 94,118 97,412 100,821
Leased Restaurants 4,972 5,146 5,326
Billboard, Level 1,077 1,077 1,077
Gift Shop, Logo Store 14,944 15,467 16,008
Telephone, Other 8,987 9,302 9,627
-------- -------- --------
Gross Revenues $765,100 $791,841 $819,517
Less Promotional Allowances 65,324 67,611 69,977
-------- -------- --------
Net Revenues $699,775 $724,230 $749,540
Departmental Expenses
Casino $173,186 $179.248 $1 a5,521
Hotel 60,669 62,792 64,990
Banquets, Bar and Room Service 59,294 61,369 63,517
Leased Restaurants 1,985 2,054 2,126
Billboard, Level 552 571 591
Gift Shop, Logo Store 9,265 9,589 9,925
Telephone 4,943 5,116 5,295
-------- -------- --------
Total Departmental Expenses $309,894 $320,740 $331,966
Departmental Profit $389,881 $403,490 $417,574
Other Expenses
Administration 82,081 84,954 87,927
Provision for Doubtful Accounts 14,000 14,490 14,997
Corporate Expense 10,501 10.869 11,249
-------- -------- --------
Total Other Expenses $106,583 $110,313 $114,174
Earnings before Interest, Income taxes,
Depreciation and Amortization $283,299 $293,177 $303,400
119
HOTEL INCOME APPROACH
Statements of Estimated Annual Operating Results
FY 99/01 FY 00/01 FY 01/02 FY 02/03 FY 03/04 FY 04/05 FY 05/06 FY 06/07
Revenues as a Percent of Total
Casino 58.8% 56.1% 55.0% 55.0% 55.0% 55.0% 55.0% 55.0%
Hotel 33.6% 35.3% 36.6% 36.6% 36.6% 36.6% 36.6% 36.6%
Banquets, Bar and Room Service 13.3% 13.7% 13.4% 13.4% 13.4% 13.5% 13.5% 13.4%
Leased Restaurants 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7%
Billboard, Live! 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.1% 0.2%
Gift Shop, Logo Store 2.2% 2.2% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%
Telephone, Other 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%
Gross Revenues 110.2% 109.5% 109.3% 109.3% 109.3% 109.3% 109.3% 109.3%
Less Promotional Allowances 10.2% 9.5% 9.3% 9.3% 9.3% 9.3% 9.3% 9.3%
Net Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Departmental Expense Ratios
Casino 44.6% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0%
Hotel 28.1% 25.0% 23.7% 231% 23.7% 23.7% 23.7% 23.7%
Banquets, Bar and Room Service 69.6% 63.0% 63.0% 63.0% 63.0% 63.0% 63.0% 63.0%
Leased Restaurants 39.9% 39.9% 39.9% 39.9% 39.9% 39.9% 39.9% 39.9%
Billboard, Live! 44.1% 45.7% 47.3% 48.9% 50.6% 52.4% 54.3% 49.5%
Gift Shop, Logo Store 62.0% 62.0% 62.0% 62.0% 62.0% 62.0% 62.0% 62.0%
Telephone 55.0% 55.0% 55.0% 55.0% 55.0% 55.0% 55.0% 55.0%
Total Departmental Expenses 43.0% 41.2% 40.5% 40.5% 40.5% 40.5% 40.5% 40.5%
Departmental Profit 52.6% 54.8% 55.7% 55.7% 55.7% 55.7% 55.7% 55.7%
Other Expenses as a Percent of Gross Sales
Administration 13.4% 12.0% 11.7% 11.7% 11.7% 11.7% 11.7% 11.7%
Provision for Doubtful Accounts 2.1% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Corporate Expense 1.6% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%
Total Other Expenses 17.1% 15.5% 15.2% 15.2% 15.2% 15.2% 15.2% 15.2%
Earnings before Interest, Income taxes,
Depreciation and Amortization 35.5% 39.3% 40.5% 40.5% 40.5% 40.5% 40.5% 40.5%
FY 07/08 FY 08/09 FY 09/10
Revenues as a Percent of Total
Casino 55.0% 55.0% 55.0%
Hotel 36.6% 36.6% 36.6%
Banquets, Bar and Room Service 13.4% 13.5% 13.5%
Leased Restaurants 0.7% 03% 0.7%
Billboard, Live! 0.2% 0.1% 0.1%
Gift Shop, Logo Store 2.1% 2.1% 2.1%
Telephone, Other 1.3% 1.3% 1.3%
Gross Revenues 109.3% 109.3% 109.3%
Less Promotional Allowances 9.3% 9.3% 9.3%
Net Revenues 100.0% 100.0% 100.0%
Departmental Expense Ratios
Casino 45.0% 45.0% 45.0%
Hotel 23.7% 23.7% 23.7%
Banquets, Bar and Room Service 63.0% 63.0% 63.0%
Leased Restaurants 39.9% 39.9% 39.9%
Billboard, Live! 51.3% 53.1% 54.9%
Gift Shop, Logo Store 62.0% 62.0% 62.0%
Telephone 55.0% 55.0% 55.0%
Total Departmental Expenses 40.5% 40.5% 40.5%
Departmental Profit 55.7% 55.7% 55.7%
Other Expenses as a Percent of Gross Sales
Administration 11.7% 11.7% 11.7%
Provision for Doubtful Accounts 2.0% 2.0% 2.0%
Corporate Expense 1.5% 1.5% 1.5%
Total Other Expenses 15.2% 15.2% 15.2%
Earnings before Interest, Income taxes,
Depreciation and Amortization 40.5% 40.5% 40.5%
120
HOTEL INCOME APPROACH
In a stabilized year, we are forecasting that the subject property will generate
an EBITDA ratio of approximately 40.6 percent. On a per room basis, in 1997
dollars, we are forecasting an EBITDA for the casino hotel component of
approximately $65,789 per room. Due to the leasing of many of its restaurant
outlets, New York-New York has an EBITDA ratio of approximately 52 percent. On a
per room basis, its annualized 1997 EBITDA would be $70,760. The blended results
between the Mirage and Treasure Island produce an EBITDA ratio of 32.1 percent,
and a per room indicator of $59,620. If the Mirage is considered alone, its
EBITDA margin is 32.9 percent and its EBITDA equates to $77,924 per room. In
1996 and while its casino lobby and attraction were under construction, the MGM
Grand has an EBITDA ratio of 33 percent and an EBITDA indicator of $50,820 per
room.
We have forecast an EBITDA for the subject that, on a per room basis, is below
that of the Mirage and New York-New York, but above that of the MGM Grand and
Treasure Island. Because of the leased restaurant operation, the ratio of EBITDA
appears "high".
ESTIMATED ANNUAL OPERATING RESULTS FOR THE HOLDING PERIOD
The previous analysis provided for the income and expenses incurred in the
operation of the subject in the representative year. In the following analysis,
we provide estimated income and expenses for the subject during each year of the
holding period anticipated for a typical investor. Our estimate of the
performance for the subject in the representative year is used as a basis for
our analysis, considering the effect of inflation, business development, and
varying occupancy.
Holding Period
For our analysis we have used a holding period of ten years, representing the
period from April 1, 1999 to March 31, 2009. In today's investment climate, this
holding period is considered appropriate by most investors.
Inflation
To portray price level changes during the holding period, we have assumed an
inflation rate of 3.5 percent from 1997 onward. This rate reflects the consensus
of the opinion of several well-recognized economists for the current long-term
outlook for the future movement of prices and is consistent with the inflation
rates over the past ten years.
It should be noted that inflation is caused by many factors and that
unanticipated events and circumstances can affect the forecasted rate.
Therefore, the estimated operating results computed over the projection period
can vary from the actual operating results, and the variations may be material.
121
HOTEL INCOME APPROACH
Our assumption of an annual inflation factor is intended only to portray an
expected long-term trend in price movements over the projection period rather
than at one point in time.
Estimating an Appropriate Capitalization Rate
There have been no sales of single new mega casino resorts. Current rules of
thumb prescribe that gaming properties should transact at multipliers of 5.0 to
7.0 times the Earnings Before Income Taxes, Depreciation and Amortization
(EBITDA) which equates to a capitalization rate range of 14.3 percent (1 / 7) to
20 percent (1 / 5).
To determine an appropriate capitalization rate that is specific to a new mega
resort on the best section of the Strip, we will use the band of investment
technique. This technique is based upon assumptions of debt to equity ratios,
interest rates, and rates of return to the owner. To determine an appropriate
debt to equity ratio, we talked to a lending officer with Bank of America's
Gaming department. The interest rates charged are a function of debt to equity
ratios and are influenced by the size and number of other casino hotel projects
a borrower may have. Larger gaming companies with representation in numerous
markets are perceived to have less risk than one casino company. However, a very
good core Strip location would be deemed to also reduce risk.
Prior to its opening, the New York-New York loan was arranged at an
approximately 50 percent loan to value basis with a floating interest rate that
is 175 basis points over LIBOR.
The MGM Grand was able to retire its construction financing at a floating rate
that is approximately 250 basis point over LIBOR. The loan to value was typical,
which we infer from other comments made to be approximately 55 to 60 percent.
The Rio, which is not on the strip and is a single property enterprise, is
currently paying an interest rate that is 300 basis points over LIBOR. This is
attributable to its highly leveraged position during the expansion. Prior to its
taking on more debt for the expansion, the Rio's interest rate was only 200
basis points over LIBOR.
As of the date of value, LIBOR was approximately 6.1 percent on a one-year note.
Thus, the interest rates discussed ranged from a low of 7.85 percent for New
York New York, to a high of 9.1 for The Rio. It is interesting to note that
these rates, which are floating, are lower than the fixed rates for full-service
hotels. The most recent issue of the Landauer Hotel Investment Outlook indicates
that the average interest rate for a full-service hotel loan is approximately
8.79 percent, based on an average loan to value ratio of 64 percent. We
attribute the relatively low casino hotel interest rates to the increasing
diversification of the stream of income and the perceived strength of the Las
Vegas market. Bank of America sponsored a conference for Gaming lenders in late
February of 1997. A March 3, 1997 Las Vegas Business Press cover story reported
that a representative of PNC Bank "was
122
HOTEL INCOME APPROACH
comforted by the diversification of the Las Vegas casino revenue away from
straight gaming...`Many of the casinos have shown increased cash flow despite
the decline in gaming win. They have more room, food and entertainment
revenue--it is a better balanced source of cash flow' ".
We will assume that the a casino resort property receives a loan to value ratio
of 60 percent. To take into account that today's rates may be relatively low
from a historical standpoint, we will assume that an appropriate interest rate
for a generic stand alone mega resort with a core Strip location would be 9.0
percent. Given that this rate is currently being paid by the Rio, with its
off-strip location and relatively highly leveraged situation, this appears to be
a conservative assumption. We will assume a 20 year amortization schedule and
monthly payments, which yields a debt constant of .10797. For the subject
property, with its as yet unproven room rate assumption, we will increase the
interest rate to 9.5 percent. The debt constant for the Venetian Resort is
assumed to be .11186.
On the equity side, we will assume that the owner of a typical mega casino
resort would expect a 26 percent return on his equity. For the Venetian, we will
assume that the as yet unproven room rate will increase the return expectations
of the owner. We will increase the equity return rate to 28 percent. This
compares to an average leveraged yield rate of 21.4 percent for generic
full-service hotels at this time.
These assumptions yield capitalization rates of 17.0 and 18.0 percent, as
indicated in the following calculation:
Generic Mega Resort Venetian Resort
------------------- ---------------
Debt: 60% x .10797 = .06478 .11186 .06712
Equity: 40% x .26 = .10400 .28 .11200
Total 100% x .16878 .17912
Rounded .17 .18
For our land residual analysis that is based on a more generic product, we would
employ a 17.0 percent stabilized year capitalization rate. For The Venetian,
with a projected ADR that has national precedent but not local precedent, a
capitalization rate of 18.0 percent will be used.
123
HOTEL INCOME APPROACH
Value of the Reversion
To estimate the value of the subject using a discounted cash flow analysis, it
is assumed that the property will be sold at the end of the holding period. The
value of the property at that time is obtained through capitalization of the net
operating income of the property in the 11th year.
Terminal Capitalization Rate
It is our opinion that, if already stabilized, an overall capitalization rate of
18.0 percent would be warranted for the Venetian. This rate would be adjusted to
20.0 percent for the terminal rate upon reversion, 200 basis points higher than
the current overall rate. The higher terminal rate reflects the increased age of
the improvements at the end of the holding period coupled with the market's
preference for new or significantly renovated products.
Net Proceeds Upon Sale (Reversion)
The following analysis provides for the net proceeds upon sale of the subject in
the eleventh year. The estimated net operating income for the eleventh year is
$303,400,000. Next, to convert this income stream into a reversion valuation,
the reversionary capitalization rate of 21.0 percent must be applied. Lastly, to
obtain the net proceeds upon sale of the property, we have deducted a sales
commission of 2.0 percent associated with brokerage fees and miscellaneous
closing costs. Our calculation of the proceeds upon sale is as follows:
Calculation of Reversionary Value
Adjusted net operating income (in 000's) $303,400
Divided by: Reversionary Capitalization rate 20.0%
----------
Reversionary value $1,517,000
Less: Sales commissions @ 2.0% $30,340
----------
Net proceeds upon sale $1,486,660
Rounded, in 000's $1,487,000
124
HOTEL INCOME APPROACH
Discount Rate
The discount rate reflects the overall rate of return expected by the investor,
weighing the relative risking of the investment in relation to other investment
vehicles and the perceived risk of each component in the operation of the
facility. In order to estimate an appropriate discount rate for the subject, we
have reviewed several investor surveys that report both capitalization and
discount rates for more typical hotel investments. The results are presented in
the following table.
Capitalization and Discount Rate Results
Average
Average Overall Discount
Capitalization Rate Rate Spread
------------------- ---- ------
Landauer - Hotel Investor Outlook 9.5% 13.5% 4.0%
1997
CB Commercial 0.0 12.7 2.7
First Quarter 1997 National Survey
Korpacz Real Estate Investor Survey 10.61 13.35 2.74
First Quarter 1997
Full Service Hotel Market
PKF Consulting 11.1% 14.1% 3.0%
Hospitality Investment Survey
2nd Quarter 1997, All property types
Average 10.3% 13.4% 3.1%
Source: Publications referenced
The average discount rate for the non-gaming hotels based on these surveys was
between 12.7 and 14.1 percent, with the "spread" between going in overall
capitalization rates and the discount rates ranging from 2.7 to 4.0 percent.
Because of the relatively higher range of discount rates appropriate for gaming
properties, we are of the opinion that a 22 percent discount rate is appropriate
to value the subject property, 4.0 percentage points higher than the overall
capitalization rate used herein and slightly above the assumed rate of
inflation.
125
HOTEL INCOME APPROACH
Valuation Calculation - Discounted Cash Flow
To estimate the value of the subject considering the current operations of the
hotel and the projected performance of the facility through the holding period,
we have used a discounted cash flow analysis. Presented in the following table
is our cash flow estimated for the subject for the ten year holding period,
along with the value of the reversion deriving a final value estimate.
Discounted Cash Flow Analysis
Fiscal Income Before Present Present
Year Other Deductions Value Factor Value Amount
---- ---------------- ------------ ------------
2000 $181,748,000 0.8197 $ 148,974
2001 211,984,000 0.6719 142,424
2002 230,598,000 0.5507 126,992
2003 238,573,000 0.4514 107,692
2004 246,890,000 0.3700 91,349
2005 255,498,000 0.3033 77,487
2006 264,407,000 0.2486 66,729
2007 273,755,000 0.2038 55,781
2008 283,299,000 0.1670 47,316
2009 293,177,000 0.1369 40,136
----------
Stabilized $ 903,878
Reversion $1,487,000 0.1369 $ 203,569
----------
Net Present Value $1,107,448
Value, rounded $1,100,000
Note: Figures may not foot due to rounding.
Source: Landauer Associates, Inc.
The value estimated for the Casino hotel in our income approach is approximately
$1,100,000,000 or $362,300 per key.
126
HOTEL INCOME APPROACH
RECONCILIATION
The estimated "as completed" derived in our income approach of $1,100,000 is
within 3.0 percent of the value estimated via the Cost Approach.
Thus, based on the income generated from the casino hotel operations and its
value upon sale, the "as is" market value of the fee simple interest in the
Venetian hotel through the Income Capitalization Approach as of the date of
completion is:
ONE BILLION ONE HUNDRED MILLION DOLLARS
$1,100,000,000
The "as stabilized" market value of the fee simple interest in the subject may
be estimated by commencing the holding period on April 1, 2001, the year in
which the discounting of the average daily rate is forecast to cease. This "as
stabilized" discounted cash flow analysis is contained in the Addenda to this
document. We estimate that as of April 1, 2001, the stabilized value of the
casino hotel improvements will be:
ONE BILLION THREE HUNDRED MILLION DOLLARS
$1,300,000,000
ESTIMATION OF PERSONALTY (FURNITURE, FIXTURES AND EQUIPMENT)
We estimate the value of the furniture, fixtures and equipment (FF&E) of the
subject property based on the cost estimates provided by Bovis. The cost of the
owned personal property was estimated by them as $105,670,000 and is exclusive
of any entrepreneurial profit.
127
RETAIL MARKET ANALYSIS
RETAIL MARKET ANALYSIS
Introduction
Typically, in the valuation of a retail center the goal of a retail market
analysis is to evaluate trade area demand for goods and services, the buying
power the center may attract and the impact of competition. Specifically, the
retail sales potential the center is likely to generate is forecast utilizing
the findings from the market analysis. In this instance, however, it is not
possible to estimate meaningful retail sales volumes and performance
characteristics for the subject, since its merchant/leasing strategy, tenant mix
and actual leasing square footage has not been finalized at this point in the
development process. However, in light of the evidence uncovered during our
research, the subject's overall performance will be predominantly driven by the
Las Vegas visitor market and minimally by the resident market. Therefore, our
assessment of retail market conditions focuses primarily on the visitor market
in terms of developing relevant demand generators applicable to the subject.
Demographic Summary
Key demographic and economic data relevant to the retail market, discussed in
detail in previous sections of this report, is recapitulated in the highlights
which follow:
o Since 1980, the Las Vegas MSA's population has experienced a compound annual
growth rate of 4.9 percent per year. By the Year 2000, the MSA's population
is estimated to reach 1,352,000 persons.
o Population growth will remain strong due to the on-going economic expansion
of most employment sectors in the MSA, including the hotel/gaming/recreation
industry, business and personal services, trade, state and local government,
transportation, communications and utilities.
o The labor force has grown, on average, 11.5 percent annually over the last
four years while the number of people employed has grown better than 12.0
percent per year.
o Nevada has been ranked first as the fastest growing economy in the west by
the DRI/McGraw Hill Regional Forecast Summary each of the last three years;
it is expected to remain first through 2001.
o During 1996, 29.7 million people visited Las Vegas and spent $22.5 billion
in the area, including gaming revenues.
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RETAIL MARKET ANALYSIS
o The visitor industry is likely to maintain its prime role as the generator
of new jobs which is evident by the fact that, as of 1997's first quarter,
nine of the top ten Las Vegas employers are casino hotel operators.
o Though tourism in Las Vegas is driven mainly by gaming, it has also emerged
as a mainstream family destination, fueled by the "must see" mega-resorts and
attractions erected over the last ten years.
o The diversification of its market away from serious gamblers to "Middle
America" continues to attract first-time visitors, and the potential growth
from the international visitor market, currently small relative to the total
visitor market at present, is immense.
o The Las Vegas lodging market is highly successful as contrasted to hotel
occupancies on a national basis (e.g., 90.4% vs. 65.2% in 1996).
o Although rooms inventory, currently at 101,106 rooms in January 1997, grew
at a compound annual rate of 6.0 percent over the last ten years, occupancy
rates improved during the same time frame, indicating demand for lodging in
the Las Vegas market has outpaced supply.
o Overall, the new mega-resort casino hotels, through their themed attractions
and marketing efforts, have significantly broadened the potential Las Vegas
visitor market.
o Ranked by either number of square feet of exhibit space rented or by the
number of shows, Las Vegas is the most popular tradeshow destination in the
U.S. In 1996, 36 of the nation's 200 largest tradeshows, representing an 18
percent market share, were held in Las Vegas.
o Tradeshow managers and exhibitors selecting convention city destinations
seek facilities having sophisticated tie-ins with shopping, restaurants and
entertainment. Las Vegas' transition from a single purpose (gaming)
destination to an entertainment superstore is undoubtedly a prime factor
behind its continuing popularity and market dominance.
General Observations - Las Vegas Visitor Market
In addition to becoming the nation's largest visitor market, Las Vegas has also
evolved over the years from an adults only destination into a much more
diversified family destination. Gaming, the euphemism for gambling, while still
the economic lifeblood of the visitor market, has become one of many
entertainment options available to visitors. Along with becoming the fastest
growing major metropolitan area in the nation, Las Vegas witnessed the
introduction of mega-resort properties such as the Mirage, Excalibur, Luxor,
Treasure Island and the MGM Grand during the 1987 to 1993 period, which
represented the evolution of traditional hotel casinos into self-contained
resort destinations featuring high levels of amenities for the entire family
housed in 2,000 to 4,000 room
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RETAIL MARKET ANALYSIS
hotels with large casinos, retail shops, family activity centers and an array of
food and beverage offerings.
The latest wave of casino hotel development, such as New York, New York and the
recently completed Monte Carlo, along with Bellagio (under construction) and the
announced plans for the Venetian/Lido and Paris, continues to feature the
heavily-themed mega-resort trend which offers high value entertainment and a
wide range of amenities, and seeks to capture market share by upstaging its
competitors. Retailing has become a highly regarded recent addition to the list
of offerings casino hotels employ to generate visitor traffic, though gaming
will likely remain the prime purpose of a Las Vegas visit. However, the current
trend of placing significant reliance upon scale (property size) and fantasy
(theme/decor) to differentiate among products (casino hotels), and appeal to a
wide consumer base, appears well established.
Visitor Expenditures
Each year the Las Vegas Convention and Visitor's Authority prepares a composite
study of visitors to Las Vegas based upon random interviews and surveys
independently conducted throughout the city. Findings relevant to this valuation
are presented in the following table.
Average Trip Expenditures
1996 1995 1994 1993 Average
---- ---- ---- ---- -------
Shopping $ 63.51 $ 66.18 $74.52 $67.95 $68.04
Food & Drink $110.92 $101.39 $99.96 $82.33 $96.65
Source: Las Vegas Convention & Visitors Authority
As depicted in the preceding table, during an average 4.7 day stay (3.7 nights)
in Las Vegas, average per person expenditures on food and drink have shown an
upward trend in spending over the past four years while shopping has remained
relatively stable, although declining slightly from 1994.
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RETAIL MARKET ANALYSIS
Las Vegas Retail Market Overview
Until the opening of Boulevard Mall in 1967, Las Vegas residents and visitors
had limited alternatives in terms of regional shopping centers. Over the past
thirty years, however, numerous large-scale shopping facilities have been
developed. Department stores currently serving the market include Macy's,
Bullock's, Dillard's, J.C. Penney, Robinsons-May, Mervyn's, Neiman Marcus, Saks
Fifth Avenue and Sears. Big box retailers such as Wal-Mart, Kmart and Target are
also present. Major shopping facilities over 100,000 square feet in Clark County
are summarized in the table which follows:
Retail Space Summary - Clark County, Nevada
As Of December 1996
Number of Properties 185
Total Rentable Sq.Ft. 21,689,210
Percent Vacant 5.38%
New Construction (sq.ft.) 902,212
Under Construction (sq.ft.) 682,494
Planned Construction (sq.ft.) 2,571,451
Source: Las Vegas Perspective 1997
Retail sales volumes and growth characteristics for Clark County are depicted in
the following table:
Clark County Retail Sales
($ Billions)
1992 1993 1994 1995 1996 CAG(1)
---- ---- ---- ---- ---- ----
$8.74 $9.85 $11.68 $13.25 $14.52 10.7%
(1) Compound Annual Growth; Source: Las Vegas Perspective 1997
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RETAIL MARKET ANALYSIS
As indicated in the preceding table, retail sales from all merchandise sources
has increased 10.7% on a compound annual basis since 1992. Furthermore,
according to Sales and Marketing Management's 1996 Survey of Buying Power, Clark
County ranks 42nd in total retail sales as compared to the top 250 major U.S.
metropolitan areas.
A profile of mall shoppers, however, supports the minimal impact residents have
had upon the Strip's two primary shopping facilities:
1996 Mall Visits - Clark County Residents
Weekly Monthly Seldom Never
------ ------- ------ -----
Forum Shops 0.0 8.6 41.4 50.0
Fashion Show Mall 1.4 18.1 38.7 41.8
Boulevard Mall 7.3 34.2 42.1 16.4
Meadows Mall 4.5 39.4 40.6 20.0
Galleria at Sunset 3.2 20.4 27.6 48.8
Source: Las Vegas Perspective 1997
As depicted, resident shoppers tend to avoid the Strip in favor of the suburban
malls. Detailed descriptions of each competitive property are provided in the
sections which follow.
Retail Competition - Overview
From a retail standpoint, the competitive environment in which the Grand Canal
Shops will function comprises a variety of competitive facilities within the
marketplace. On the Strip, these competitors constitute retailers situated in
two existing major shopping facilities, retail offerings within the major casino
hotels, and other small scale retail stores and plazas along the Strip's
streetfront (primarily local independent operators that sell T-shirts, film,
gifts and other souvenirs). Additional competition will come from major new
retail projects planned for the Strip within to-be-built and existing casino
hotels. And three traditional major malls in the metropolitan retail market
represent competition, as well. Finally, the factory outlet concept has been
recently introduced into Las Vegas which will add an additional competitive
element to the area's existing and planned retail mix.
Presented in the following subsections are the relevant critical components of
the Las Vegas retail market as they relate to the Grand Canal Shops.
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RETAIL MARKET ANALYSIS
[MAP OMITTED]
RETAIL COMPETITION MAP
133
RETAIL MARKET ANALYSIS
[MAP OMITTED]
RETAIL COMPETITION MAP
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RETAIL MARKET ANALYSIS
GRAND CANAL SHOPS
LAS VEGAS, NEVADA
Site
Area Total GLA No.
Name / Location Year Open (Acs) (Sq.Ft.) Stores Anchors
--------------- --------- ----- -------- ------ -------
Subj. Grand Canal Shops Under n/a 500,000 Approx. None
Las Vegas Blvd. construc. 60
So. & Sands Ave.
- --------------------------------------------------------------------------------
1. Forum Shops 1992 9 243,172 150 None
9155 Las Vegas (Expanded (233,000
Blvd. So. 1997) sq.ft.
expansion
opened
8/29/97)
2. Fashion Show Mall 1981 34 819,400 111 Neiman Marcus
Las Vegas Blvd. (Renovated (200,000 Saks 5th Ave.
So.& Spring Mountain 1993) sq.ft. Dillard's
Rd. expansion Robinsons-May
planned w/2 Macy's
additional
anchors)
3. Boulevard Mall 1967 78 1,131,000 135 Macy's
Maryland Pkwy. & (Renovated Sears
Desert Inn Rd. 1992) J.C. Penney
Dillard's
4. The Meadows 1978 82 950,096 144 Macy's
Meadows Lane & (Renovated Dillard's
Valley View Rd. 1995) J.C. Penney
Sears
5. Galleria at Sunset 1996 95 1,300,000 124 Dillard's
Stephanie St. & J.C. Penney
Sunset Rd., Mervyn's
Henderson, NV Robinsons-May
6. Belz Factory 1993 72 530,000 72 None
Outlet World
Las Vegas Blvd.
So. & Warm Springs Rd.
7. Las Vegas Factory 1992 28 230,000 49 None
Stores
Las Vegas Blvd.
So. & Serene Ave.
- --------------------------------------------------------------------------------
Sources: 1997 Directory of Major Malls, 1997 Shopping Center Directory;
compiled by Landauer Assocs., Inc.
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RETAIL MARKET ANALYSIS
Primary Competition
Two existing large-scale retail centers located on the Strip and in close
proximity to the subject represent the primary competition.
The Forum Shops is a 1992-built, unanchored, enclosed specialty retail mall
which is attached to Caesars Palace casino hotel. This 243,172 square foot
one-level mall (Phase I) underwent a 233,000 square foot expansion (Phase II)
which opened August 29, 1997. Phase I also includes a small lower level occupied
by a high tech multi-media "motion simulator" ride experience and a video
arcade. The entire center is situated on a ground leased, 12.98-acre site on the
west side of the Strip between the Mirage and Caesars Palace casino hotels.
Shoppers and other patrons can enter the mall from the Strip via a moving
sidewalk (people-mover) or from Caesars Palace, which shares a 5,500 space
parking garage with the retail mall.
The project presents an elaborate, ancient Roman-themed streetscape environment
with classic columns and arches, fountains and statuary, plus a barrel-vaulted
simulated sky-lit ceiling which cycles through a 24-hour day every two hours.
Several large public spaces in Phase I serve as central squares or common areas,
and include the Festival Fountain Plaza attraction, seemingly monumental marble
sculptures of mythical Roman gods which come to life in an animated laser light
show.
Phase I is currently 100 percent leased by 76 tenants (Banana Republic is
expected to open by October, 1997) and was substantially pre-leased when it
opened in May, 1992. Year-end historical occupancies were reported at 94.4
percent (1993), 97.5 percent (1994) and 100.0 percent (1995 & 1996). High-end
specialty retailers in Phase I include Armani, Versace, Gucci, Dior, Louis
Vuitton, Estee Lauder, Bulgari, Guess? and Escada. Major name-brand restaurants
include Spago, Planet Hollywood and The Palm. Major retailers announced as
taking space in the Phase II expansion include Niketown (30,000 sq.ft., 3-level
store), FAO Schwartz (54,000 sq.ft., three levels), and a Virgin Megastore (two
levels, 35,000 sq.ft.). Other high-end shops include Alfred Dunhill, Fendi,
Lalique and Polo/Ralph Lauren. Restaurants include Caviarteria, The Cheesecake
Factory and Chinois, a Wolfgang Puck enterprise. Plans for a proposed Phase III
of approximately 450,000 square feet, although announced, are uncertain at this
time due to zoning changes which likely would be required in order to expand the
facility.
Fashion Show Mall is a traditional (i.e., non-themed), enclosed, two-level
regional mall situated on a 34 acre site at the NWC of Las Vegas Boulevard South
and Spring Mountain Road. Comprising a gross leasable area (GLA) of
approximately 819,400 square feet, the mall is anchored by five department
stores (unowned): Dillards (126,095 sq.ft.), Macy's (134,104 sq.ft.), Neiman
Marcus (100,000 sq.ft.), Robinsons-May (108,278 sq.ft.) and Saks Fifth Avenue
(63,961 sq.ft.). The mall-owned GLA is 100 percent leased to 111 retail shops
(approx. 85 percent), four restaurants and a food court. The center initially
opened in 1981 and was expanded/renovated in 1993. Noteworthy retailers include
Bally, Louis Vuitton, Ann Taylor, Mondi, Nicole Miller, Abercrombie & Fitch and
The Disney
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RETAIL MARKET ANALYSIS
Store. Full-service restaurants are Morton's of Chicago, Dive!, Sfuzzi and
Chin's; each of the latter three face, and are directly accessible from, the
Strip. Recently announced expansion plans indicate an additional 200,000 square
feet of mall shop space, and perhaps one to two anchors, is proposed on an
adjacent tract which is currently not owned.
Secondary Competition
On and off the Strip are a variety of retail developments, and a handful of
existing and proposed casino hotel-related retail facilities, that present
secondary forms of competition to the subject.
Las Vegas Showcase is a newly opened (July 1997) facility that can best be
described as a festival entertainment-retail venue. Located just north of the
juncture of the Strip (east side) and Tropicana Boulevard, this four floor and
lower level 192,000 square foot facility is situated in front of the MGM Grand
and opposite New York, New York, both casino hotel mega-resorts. The primary
tenants are:
1. World of Coca Cola Las Vegas (30,000 sq.ft. on four levels), a Coke
corporate showcase featuring memorabilia, an interactive experience, a
two-level logo merchandise shop and a 100-foot tall Coke bottle;
2. Official All Star Cafe (35,000 sq.ft. on four levels), a sports
star-oriented full service restaurant;
3. M&M's World (30,000 sq.ft., four levels), a candy showcase featuring
Ethel M. chocolates (Fall, 1997 opening);
4. Gameworks (55,000 sq.ft., lower level), a state-of-the-art video arcade and
restaurant, featuring a 75-foot climbing wall (Gameworks is a joint venture
among Sega, Dreamworks and Universal Studios);
5. United Artists Theaters (40,000 sq.ft.), a multi-screen cinema located in
a detached, multi-level parking garage.
Tower Shops at Stratosphere comprises a 1996-built, 121,381 square foot,
unanchored enclosed retail center situated above the casino floor of the
Stratosphere casino hotel. Located on Las Vegas Boulevard South at the NEC of
Sahara Boulevard, this facility lies at the northern end of the Strip, slightly
beyond its traditional boundaries. Given its slightly off-Strip location, the
retail mall's primary drawing power stems from its physical attachment to The
Stratosphere Tower, a 1,149-foot tall, free-standing observation tower, the
tallest in the U.S., offering panoramic views of the Las Vegas Valley with
inside and outside observation decks, rotating restaurant/cocktail lounge, and
two thrill rides, all atop the tower. Patrons seeking entry to the elevator
banks servicing the observation tower must walk through the Tower Shops mall.
Tenants represent a fairly typical mix of mall-oriented national and regional
chain stores (e.g., Victoria's Secret, Footaction USA, Bath & Body Works,
Bernini Sport), and
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RETAIL MARKET ANALYSIS
local operators, as well. At the time of our inspection, we counted forty shops,
of which five were vacant and six had signage indicating a new tenant was to
open soon.
Masquerade Village, opened in February 1997, comprises approximately 120,000
square feet of unanchored retail shops (21 stores) located in the Rio Suites
casino hotel, which is off the Strip on the west side of I-15, at the NEC of
West Flamingo Road and Valley View Boulevard. Nicole Miller, Guess? Footwear,
Speedo Authentic Fitness and Reel Outfitters, an Orvis outlet, are the most
noteworthy tenants.
Planned New Retail Projects on the Strip
Major new retail projects announced for locations on the Strip, and to be
developed in conjunction with new hotels, include the following:
o The Grand Canal Shops within the 3,000 suite Venetian will comprise a
specialty retail mall located on the second and third levels of the casino
hotel. The mall's design, as proposed, will present a heavily themed Venetian
streetscape with squares, arcades and palazzo facades, and feature a replica
of Venice's canal including gondolas. Phase I of this project, currently
under construction, is scheduled to open in late Spring 1999, with the second
phase, an additional 3,000 suite hotel to be known as the Lido, plus Phase II
of the retail mall (approx. 250,000 sq.ft.), to open approximately a year
later.
o An announced redevelopment of the Aladdin casino hotel will include a retail
segment of approximately 450,000 square feet of leasable area in a ground
level configuration. The retail component is scheduled to open with the rest
of the Aladdin's redevelopment in the fall of 1999. While the Aladdin is
scheduled to close in November, 1997 definitive plans for the proposed
development are not yet available.
o The planned Paris casino hotel is expected to comprise a retail component of
approximately 250,000 square feet with a Parisian street theme and
attractions. Although details of the project are unknown at this writing,
announcements indicate it is scheduled to open in 1999.
o A redevelopment of the current theme park attraction at the MGM Grand with a
retail/entertainment center is expected to total 300,000 square feet,
according to press releases, and highlight nightclubs, entertainment, themed
restaurants, retail stores and other attractions. A Fourth Quarter 1998
completion is anticipated.
Hotel-Related Retail
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RETAIL MARKET ANALYSIS
Traditionally, casino hotels on the strip have maintained a limited supply of
retail offerings comprised primarily of gift shops, sundry stores, apparel and
logo merchandise shops. Recently-opened casino hotels, such as New York New York
and Monte Carlo, contain traditional limited hotel retail offerings, but with an
emphasis on a wide range of food services and branded restaurants, some with
entertainment venues.
Of the new hotels currently under construction, Bellagio is expected to include
approximately 40,000 to 60,000 square feet of high-end restaurant and retail
uses, including restaurants with brand name images.
Bally's and MGM Grand each opened a retail concourse after they installed a
monorail connecting the two properties; the shops are designed to lead patrons
to the monorail station at each facility. The MGM Grand also developed a retail
and restaurant area of approximately 115,000 square feet called Studio Walk
between the main casino and its outdoor theme park attraction. In early 1997,
Circus Circus opened a 40,000 square feet retail area with approximately 14
stores and two new restaurants adjacent to its enclosed amusement park
attraction, Grand Slam Canyon. In the Spring of 1997, Luxor casino hotel opened
a similar sized area of retail shops in their facility called the Giza Galleria.
Suburban Regional Malls
In addition to Fashion Show Mall, there are three traditional, department
store-anchored regional shopping malls within the Las Vegas suburbs.
o Boulevard Mall, located approximately three miles east of the Strip at
Maryland Parkway and Desert Inn Road, opened in 1967 and was last
expanded/renovated in 1992. Containing a total GLA of 1,131,000 square feet,
and anchored by Macy's, Sears, J.C. Penney and Dillard's, this one-level
enclosed mall is well leased with significant emphasis on ladies' fashion
tenants.
o Meadows Mall, at Meadows Lane and Valley View Road, approximately five miles
northwest of the subject, comprises approximately 950,096 square feet of GLA
on two-levels. Anchored by Macy's, Dillard's, J.C. Penney and Sears, this is
a traditional enclosed regional shopping mall in an area primarily
characterized by commercial and residential development. The center is
typical of suburban regional shopping centers in that it is surrounded by
surface parking and is located in close proximity to a major roadway (Route
95, directly north of the center). An extensive interior and exterior
renovation, and remerchandizing program commenced in 1994 and was completed
by mid-1995.
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RETAIL MARKET ANALYSIS
o Galleria at Sunset opened in 1996 at Sunset Road and Stephanie Street in
Henderson, a suburban community which is immediately southeast of Las Vegas.
The development totals 1.3 million square feet of GLA and is anchored by
Dillard's, J.C. Penney, Mervyn's and Robinsons-May.
Factory Outlet Malls
Two factory outlet retail centers, located on Las Vegas Boulevard but south of
the airport, have come on-line in recent years:
o Las Vegas Factory Stores opened in 1992 with 250,000 square feet of retail
space in an unenclosed strip mall. Among the more prominent tenants are VF
Factory Outlet, Geoffrey Beene, Van Heusen, Spiegel and Mikasa. The center is
located about five miles south of Tropicana Avenue, considered the southern
boundary of the Strip's prime area.
o Belz Factory Outlet World, about three miles from the Strip's southern
boundary, opened in November 1993 with 315,000 square feet of enclosed retail
area. Prominent outlet stores include Nike, Eddie Bauer, Fila, Reebok,
Nautica, Lenox, Royal Doulton and Waterford Wedgewood. An outparcel building
erected this year is occupied by a Saks Off Fifth outlet store.
o Finally, a 400,000 to 450,000 square foot factory outlet center to be known
as Fashion Outlet of Las Vegas is planned in conjunction with the proposed
Primadonna Resort development at the California/Nevada state line, which is
an approximate thirty minute drive from the Las Vegas Strip.
Retail Use of Subject Site
In terms of forecasting performance characteristics, the location of the
Venetian casino hotel and Grand Canal Shops retail mall project demonstrates a
number of identifiable strengths:
o The development enjoys a mid-Strip setting between the Fashion Show Mall and
the Forum Shops, the two dominant retail facilities on the Strip. These
existing, historically productive retail destinations serve as quasi-anchors
on either side of the Venetian site, are each within a few minutes stroll
from the subject and are highly visible. With the addition of the subject
project, these three properties will constitute a conveniently accessible
triangular mass of retail interest for visitors.
o The project site features extensive frontage along the east side of Las
Vegas Boulevard South, offering excellent visibility to pedestrians and
vehicles.
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RETAIL MARKET ANALYSIS
o The site's mid-Strip location has a total of 33,000 existing, under
construction and planned hotel rooms within a ten minute walk.
o The Sands Expo and Convention Center, to expand by 400,000 square feet to
1.4 million square feet of exhibition and meeting space, will be situated
adjacent and physically connected to the Venetian casino hotel and Grand
Canal Shops.
o The Las Vegas Convention Center has also announced plans to remodel and
expand by 300,000 square feet to 1.6 million square feet of exhibition space
by February, 1998, which will likely generate additional visitors to the
market.
o Under existing conditions, most pedestrians appear to travel the western
side of the Las Vegas Boulevard. A planned skybridge connecting the east and
west sides of the street at the project site's location should enable the
subject to take full advantage of the existing heavy pedestrian traffic.
Capture Rate Assessment
A model of sales performance for the Grand Canal Shops has been developed
utilizing a capture rate method whereby retail spending by visitors and
residents combined with per capita expenditure levels are forecast. In
developing the sales volume model, consideration was also given to the retail
environment on the Strip, which is characterized as quite healthy, evidencing
low vacancies and very high sales productivity in the two major competing
centers, Fashion Show Mall and the Forum Shops. Beyond the Strip, the three
regional mall centers are also well maintained, well occupied and appear to be
performing acceptably.
Our analysis focuses primarily upon tourist related spending since the subject
mall is assumed to be primarily targeted to visitors rather than local
residents.
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RETAIL MARKET ANALYSIS
Methodology
The method used to project sales volumes at the Grand Canal Shops relies upon
the following factors and assumptions:
1. Four segments are assumed to constitute the population of potential
shoppers at the project:
a) Venetian hotel guests,
b) Sands Expo & Convention Center attendees,
c) other Las Vegas visitors and
d) Clark County residents.
2. Visitor growth is projected to increase five percent in 1997, consistent with
average growth patterns to date, and three percent thereafter. Thus, in
FY2000, visitors to Las Vegas will total 33,343,300 persons. Based upon
historical patterns, Clark County residents are projected to increase five
percent per year to 1,317,800 persons in FY2000.
3. The number of Venetian hotel guests has been projected at 550,000 guests
per annum, based upon assumptions presented previously in this report. To
reiterate:
3,036 Phase I hotel rooms x 365 nights x 93% occupancy = 1,053,080
occupied rooms;
1,053,080 occupied rooms x 1.75 DOF(1) = 1,842,890 guests;
1,842,890 guests / 3.4 night ALS(2) = 550,000 potential hotel guests
(Rd).
(1)DOF = double occupancy factor; (2)ALS = average length of stay (nights).
4. SECC exhibitors and attendees not staying at the Venetian casino hotel are
estimated at 990,000 persons, based on a total of 1.15 million SECC
attendees. Furthermore, we have assumed that 160,000 of the attendees will
stay at the Venetian (included in the 530,000 total potential guests
estimate).
5. Other visitors totaling 31,823,300 persons comprise the remaining population
of the visitor's segment; i.e., 33,343,300 total visitors less 530,000 hotel
guests and 990,000 SECC attendees.
6. Each hotel guest at the Venetian is assumed to make an average of 1.5 trips
through the retail mall during an average 4.7 day/3.4 night stay in Las
Vegas.
7. Given the mall's close proximity to the convention center and its variety of
shops, restaurants, attractions and amenities, we estimate that 75 percent of
the Expo attendees will visit the mall during their stay.
8. Of the remaining visitors to Las Vegas, 35 percent are assumed to
patronize the mall at least once.
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RETAIL MARKET ANALYSIS
9. Per capita expenditures, which are utilized to generate annual sales for
each segment, have been estimated at $30.00 for hotel guests, $25.00 for
Expo Center attendees, $15.00 for other visitors and $10.00 for residents.
10. Given the non-growth pattern displayed over the last three years, no change
in retail spending expenditures by visitors is assumed. Thus, retail
spending of $68.00 per trip, based on the four year average has been
employed.
11. Retail sales in Clark County totaled $14,517,812,000 in 1996.
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RETAIL MARKET ANALYSIS
RETAIL SALES FORECAST - THE GRAND CANAL SHOPS
Expo Other Visitor
Segment Hotel Guests Attendees Visitors Subtotal Residents Total
------------ ----------- -------------- -------------- --------------- ---------------
No. in Segment (Annually) 530,000 990,000 31,823,300 33,343,300 1,317,800 34,661,100
No. Visits to The Grand Canal Shops 1.50 0.75 0.35 0.50
Implied Annual Traffic 795,000 742,500 11,138,155 12,675,655 658,900 13,334,555
Per Capita Expenditure by Segment $30.00 $25.00 $15.00 $10.00
Annual Sales by Segment $23,850,00 $18,562,500 $167,072,325 $209,484,825 $6,589,000 $216,073,825
Per Trip Retail Spending (1996) $68.00 $68.00 $68.00 nap
Total Spending by Segment $36,040,000 $67,320,000 $2,163,984,400 $2,267,344,400 $12,250,467,600 $14,517,812,000
Implied Capture Rate by Segment 66.2% 27.6% 7.7% 9.2% 0.05% 1.49%
Total Annual Sales (FY2000) $216,073,825
Retail Sq. Ft 358,920
Retail Sales PSF $602.01
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RETAIL MARKET ANALYSIS
As indicated in the accompanying table, the implied capture rate equates to 9.2
percent for all visitors and less than 1 percent for residents. The overall
implied capture rate for total retail spending in Clark County is also
approximately 1.5 percent of 1996's total expenditure.
Utilizing a total GLA of 358,920 square feet of mall shop space indicates a
retail sales forecast for the Grand Canal Shops of $602.00 per square foot
(rounded), which is slightly higher than the 1996 performance of the Fashion
Show Mall ($500 psf in 1996) and approximately half of the sales volume at the
Forum Shops ($1,218 psf in 1996).
Obviously, the key variables in the forecast model are the annual segment count,
the number of visits to the mall and the per capita expenditure by each segment.
Given the resulting implied capture rate of approximately 9.2 percent of total
visitor spending, and an insignificant portion of resident spending, we consider
the capture forecast to be reasonable and achievable as long the retail tenants
selected by ownership to occupy the mall fit an appropriate merchandising mix
and a professional marketing plan is applied.
Furthermore, should the eventual size of the mall GLA vary (i.e., increase or
decrease) from our projection, the net impact would be minor since the mall's
size is independent of the total sales volume forecast. For example, if the
retail GLA were reduced in size to say, 275,000 square feet, the sales per
square foot would then be approximately $786 per square foot, which is still
bracketed by the comparable data.
Leasing Analysis
The developer's pro forma rent roll has been analyzed in detail and is discussed
in the paragraphs which follow. As indicated in the accompanying chart, four
categories of retailers are expected to lease space at the subject - retail,
restaurant, food court and an entertainment/showcase venue. Although copies of
numerous letters of intent soliciting prospective tenants were provided, only
seven were signed, which is not atypical at this point in the development
process. Overall, we have placed most reliance on the pro forma rent roll
provided by the developer in determining the square foot size and layout of the
mall.
According to information provided by the developer, only one tenant has signed a
lease to date. Billboard Live!, an entertainment venue with full service
restaurant and logo retail goods, has signed a lease for 50,000 square feet of
leasable space on three levels. The two upper levels will be in the mall (25,770
sq.ft.), while the tenant's ground floor will be at the casino level (24,230
sq.ft.). The lease term is for twenty years with two, five-year options to
renew. Minimum rent is fixed during the initial term at $1,260,000 per annum, or
$25.20 psf of total area leased. Percentage rent is payable as follows:
145
RETAIL MARKET ANALYSIS
Gross food and beverage sales : 8% over a natural breakpoint;
Retail sales : 12.5%, $0 to $4 million in sales;
14.0%, $4 to $8 million;
15.0%, over $8 million.
The tenant is responsible for an operating expense recovery charge of $700,000
($14.00 psf), which is fixed through Year 6 of the lease term, and escalates at
CPI, thereafter.
The proposed lease documents reviewed for retail and restaurant tenants are
generally similar to the preceding lease description for Billboard Live!, except
for the following:
o Retail and restaurant tenants will pay an operating expense recovery
charge of $25.00 and $20.00 per square foot of main floor area leased,
respectively, increasing annually by the CPI;
o Minimum rent increases every second year, based on the CPI;
o A marketing/promotional fund contribution of $3.00 per square foot
of leased area will apply;
o Lease terms will be ten years.
No details regarding the structure of leases with food court tenants was
provided.
LANDAUER 146
REAL ESTATE COUNSELORS RETAIL MARKET ANALYSIS
MINIMUM RENT ANALYSIS - THE GRAND CANAL SHOPS
RETAIL
SQ.FT. of GLA MIN. RENT PSF TOTAL MIN. RENT
---------------------------------- --------------------- --------------------------------
UNIT NO. Main Mezz. Total Main Mezz. Main Mezz. Total
-------- ---------------------------------- --------------------- --------------------------------
1006 530 530 $200.00 $106,000 $0 $106,000
1196 550 550 $175.00 $ 96,250 $0 $96,250
1002 570 570 $200.00 $114,000 $0 $114,000
1053 575 575 $200.00 $115,000 $0 $115,000
0 1200 600 600 $150.00 $90,000 $0 $90,000
to 1197 605 605 $150.00 $90,750 $0 $90,750
1,000 1172 625 625 $200.00 $125,000 $0 $125,000
1203 770 770 $150.00 $115,000 $0 $115,500
1166 796 795 1,590 $250.00 $25.00 $198,750 $19,875 $218,825
1168 800 800 1,600 $200.00 $25.00 $160,000 $20,000 $180,000
1162 800 800 $175.00 $140,000 $0 $140,000
1150 800 800 $200.00 $160,000 $0 $160,000
1208 940 940 $130.00 $122,200 $0 $122,200
1142 950 950 1,900 $125.00 $25.00 $118,750 $23,750 $142,500
1018 955 955 $150.00 $143,250 $0 $143,250
- ----------------------------------------------------------------------------------------------------------------------
Min. 530 $125.00
Max. 955 $250.00
Avg. 724 $174.45
- ----------------------------------------------------------------------------------------------------------------------
1038 1,045 1,045 $85.00 $88,825 $0 $88,825
1037 1,125 1,125 $200.00 $225,000 $0 $225.000
1042 1,170 1,170 $135.00 $157,950 $0 $157,950
1164 1,205 1,205 2,410 $150.00 $25.00 $180,750 $30,125 $210,875
1032 1,225 1,225 $115.00 $140,875 $0 $140,875
1158 1,315 1,315 2,630 $150.00 $25.00 $197,250 $32,875 $230,125
1,001 1036 1,330 1,330 $120.00 $159,600 $0 $159,000
to 1161 1,365 1,365 $80.00 $109,200 $0 $109,200
2,000 1144 1,405 1,405 $80.00 $112,400 $0 $112,400
1051 1,425 1,425 2,850 $150.00 $25.00 $213,750 $36,625 $249,375
1178 1,510 1,510 3,020 $125.00 $25.00 $188,750 $37,750 $226,500
1058 1,580 1,580 $80.00 $126,400 $0 $126,400
1195 1,595 1,595 3,190 $120.00 $25.00 $191,400 $39,875 $231,275
1170 1,735 1,735 $80.00 $138,800 $0 $138,800
1020 1,780 1,780 3,580 $110.00 $25.00 $195,800 $44,500 $240,300
1182 2,000 2,000 $120.00 $240,000 $0 $240,000
- ----------------------------------------------------------------------------------------------------------------------
Min. 1,045 $80.00
Max. 2,000 $200.00
Avg. 1,426 $116.91
- ----------------------------------------------------------------------------------------------------------------------
1040 2,025 2,025 $120.00 $243,000 $0 $243,000
1022 2,275 2,275 4,550 $100.00 $25.00 $227,500 $56,875 $284,375
1060 2,460 2,460 4,920 $150.00 $25.00 $369,000 $61,500 $430,500
1034 2,650 2,650 $110.00 $291,500 $0 $291,500
2,001 1028 2,705 2,705 5,410 $110.00 $25.00 $297,550 $67,625 $365,175
to 1062 2,745 2,745 5,490 $125.00 $25.00 $343,125 $68,825 $411,750
4,000 1206 3,365 3,365 6,730 $90.00 $25.00 $302,850 $84,125 $386,975
1204 3,400 3,400 6,800 $90.00 $25.00 $306,000 $85,000 $391,000
1026 3,650 3,650 7,300 $100.00 $365,000 $91,250 $456,250
1180 3,780 3,780 7,560 $110.00 $25.00 $415,800 $94,500 $510,300
1158 3,995 17,215 21,210 $100.00 $100.00 $399,500 $1,721,500 $2,121,000
- ----------------------------------------------------------------------------------------------------------------------
Min. 2,025 $90.00
Max. 3,995 $150.00
Avg. 3,005 $107.74
- ----------------------------------------------------------------------------------------------------------------------
1174 4,220 4,220 8,440 $90.00 $25.00 $379,800 $105,500 $485,300
1064 4,600 4,600 9,200 $100.00 $25.00 $460,000 $115,OO0 $575,000
1054 4,755 4,755 $80.00 $380,400 $0 $380,400
1052 5,310 5,310 $80.00 $424,800 $0 $424,800
4,001 1024 5,590 5,590 11.180 $80.00 $25.00 $447,200 $139,750 $586,950
+ 1046 6.500 6,560 13,120 $75.00 $25.00 $492,000 $164,000 $656,000
1198 7,000 7,000 $90.00 $630,000 $0 $630,000
1050 7,075 7,075 14,150 $70.00 $25.00 $495,250 $176,875 $672,125
1210 15,000 15,000 30,000 $75.00 $25.00 $1,125,000 $375,000 $1,500,000
1184 22,300 37,500 59,800 $60.00 $60.00 $1,338,000 $2,250,000 $3,588,000
N/A 2,608 1,662 4,270 $75.00 $25.00 $195,600 $41,550 $237,150
1010 36,000 36,000 72,000 $60.00 $25.00 $2,160,000 $900,000 $3,060,000
- ----------------------------------------------------------------------------------------------------------------------
Min. 2,608 $60.00
Max. 36,000 $100.00
Avg. 11,170 $70.47
- ----------------------------------------------------------------------------------------------------------------------
Subtotal/Avg. 187,743 171,177 358,920 $88.69 $40.21 $16,651,075 $5,883,050 $23,534,125 $65.57
Annex 10,000 18,000 28,000 $200.00 $100.00 $2,000,000 $1,800,000 $3,800,000 $135.71
Totals/Avg. 197,743 189,177 386,920 $94.32 $45.90 $18,651,075 $8,683,050 $27,334,125 $70.65
RESTAURANT
1030 3,065 6,000 9,065 $50.00 $153,250 $0 $153,250
1154 4,380 7,280 11,660 $50.00 $219,000 $0 $219,000
1160 8,335 3,000 11,335 $50.00 $416,750 $0 $416,750
1194 4,555 4,555 9,110 $50.00 $227,750 $0 $227,750
1202 5,155 2,500 7,655 $50.00 $257,750 $0 $257,750
N/A 15,000 4,466 19,488 $50.00 $750,000 $0 $750,000
---- ------ ----- ------ ------ -------- -- --------
6
Subtotal/Avg. 40,490 27,823 68,313 $50.00 $0.00 $2,024,500 $0 $2,024,500 $29.64
TOTALS/AVG. 238,233 217,000 455,233 $86.79 $40.01 $20,675,575 $8,683,050 $29,358,625 $64.49
1157 17,770 8,000 25,770 $25.20 $25.20 $447,804 $201,600 $649,404 $25.20
1186 18,997 18,997 TBD $0 $0 $0
----
GRAND TOTAL 275,000 225,000 500,000 Total GLA $21,123,379 $8,884,650 $30,008,029 $62.39
(9,562) Food Court Common Area
490,438 Total Net GLA
147
RETAIL MARKET ANALYSIS
Conclusion of Market Rent and Terms
In estimating market rent for the subject mall, the leasing plan was reviewed
and analyzed. Although rental rates typically vary by location and use of the
tenant space within a retail center, they generally fall within a range dictated
by size of the area leased, which is the case in this instance. As indicated in
the accompanying chart (Minimum Rent Analysis), the average minimum rental rates
for each category of retail, based on main level area leased is summarized as
follows:
Sq.Ft. of GLA Rent PSF
------------- --------
0 to 1,000 $174
1,000 to 2,000 $117
2,001 to 4,000 $108
Over 4,000 $ 70
As depicted in the chart, the overall average rental rate for main level retail
space, as projected by the developer, is $88.69 psf, and is $40.21 psf, on
average, for the mezzanine level. On an overall weighted average basis, the
rental rate for both levels (358,920 square feet of GLA) is $65.57 psf, which is
well supported by the overall average rental rate recently achieved at Phase II
of the Forum Shops, of $64.00 psf. In this case, utilization of a weighted
average rental rate is reasonable, versus an estimate of specific rents based on
size, since specific locational and size fluctuations at the subject mall are
currently unknown.
Restaurant space is projected to lease at a rental rate of $29.64 per square
foot of total area leased (main and mezzanine levels), which is in line with the
most recent rents achieved for restaurant space, averaging approximately $33.00
per square foot, at one of the primary competitors.
Food court space will be assigned a market rental rate of $85.00 per square
foot, based on recent food court leases signed at competitive regional centers,
which ranged from approximately $75.00 to $90.00 per square foot.
All leases will be structured with ten year terms, semi-annual CPI increases and
fixed operating expense recoveries of $25.00 and $20.00 per square foot for
retail/food court and restaurant tenants, respectively, based on the proposed
lease documents examined and our knowledge of leasing patterns at similar retail
facilities. Additional assumptions relevant to the property's income flow will
be discussed in the Income Approach section.
148
RETAIL MARKET ANALYSIS
Occupancy Cost Analysis
In addition to the preceding, we have also given consideration to occupancy
costs in selecting market rental rates to apply to mall space at the subject.
Occupancy costs per square foot are the total cost (i.e., base and percentage
rents, operating expense charges and recoveries, and all other charges) incurred
by a tenant to occupy its space. Such an analysis provides an indication of the
tenant's ability to pay a certain level of rent; in other words, a measure of
affordability. Rule-of-thumb standards in the industry hold that most retailers
can afford to pay between 10 to 20 percent of their gross sales as occupancy
costs. Using the estimates we have selected for the subject mall, and a 15
percent occupancy cost factor, produces the following results:
Estimated Market Rent PSF $ 65.57
Plus: Recovery Charge PSF + 25.00
Promotional Fund PSF + 3.00
-------
Total Occupancy Cost $ 93.57
(Division Sign) Estimated
Retail Sales
Volumes PSF /$609.50
Implied Occupancy Cost Factor 15.4%
On the basis of the preceding analysis, the total occupancy costs projected for
the subject mall are within the 10 to 20 percent industry standard.
Furthermore as discussed earlier, any variance (increase or decrease) in the
mall's GLA would result in a concomitant change in the rental rate projected. In
other words, using the example cited earlier, a reduction in the retail GLA to
say, 275,000 square feet and retail sales of $786 per square foot, a 15 percent
occupancy cost would suggest a rental rate of $90.00 per square foot is
appropriate ($786 x 15% - $28 = $90). And, the last few leases signed at Forum
Shops were reportedly at $112 per square foot, which is supportive of the $90
per square foot rental rate of the subject mall if a smaller GLA size is used.
149
RETAIL MARKET ANALYSIS
Employing historical sales volumes at competitive centers, we have also
considered projected occupancy costs for restaurant and food court tenants.
The results also support the rental rates selected:
Restaurants Food Court
----------- ----------
Sales PSF $500.00(1) $800.00(1)
Occupancy Cost Factor x 15% x 15%
------- -------
Imputed Occupancy Cost PSF $ 75.00 $120.00
Less: Estimated Min. Rent PSF ( 26.64) ( 85.00)
Recovery Charge PSF ( 20.00) ( 25.00)
Promotional Fund PSF ( 3.00) ( 3.00)
------- -------
Net Remaining $ 22.36 $ 7.00
(1) Based on sales volumes at competitive centers.
Note also that in the income approach section which follows, an estimate of
potential gross income is derived, utilizing the market rents and terms
projected for the subject mall. In Year One of the analysis, a sales volume of
$460 per square foot is implied for all occupied space, which increases to $478
per square foot in Year Two. [The implied sales volumes psf are derived by the
formula: PGI / 15% Occupancy Cost Factor / Sq.Ft. Leased]. We believe these
performance characteristics are achievable, and our rental rates reasonable,
given the comparable data reviewed.
150
RETAIL COST ANALYSIS
COST ANALYSIS FOR MALL
Bovis has budgeted the cost allocation for the retail component of the mixed-use
project at approximately $312 per square foot, inclusive of the mall's pro-rata
of the central plant's construction costs and the additional parking
necessitated by the retail component (156,211 million / 500,000 sf). For
purposes of comparison this estimate is exclusive of entrepreneurial profit and
land or air rights value. The only comparable cost data available which is also
reasonably similar is for the Forum Shops Phase II expansion, an existing
specialty retail project with heavily themed design elements. According to the
information available to us, the Phase II addition was originally budgeted at
$90 million for 250,000 square feet of mall space, or $360 per square foot,
which is in line with the budgeted costs for the subject retail mall.
151
RETAIL MARKET ANALYSIS
SALES ANALYSIS FOR MALL
A discussion of comparable retail mall sales is included in the income approach
section of the retail valuation. Given the overall nature the subject mall
(i.e., the mall inter-relationship with the casino hotel), a distinct sales
comparison approach is not meaningful, in our view. It is unlikely that a
potential buyer of the completed mall (or its development rights) would consider
comparable shopping center sales as relevant in reaching a purchase decision,
given the unique characteristics of the project. Comparisons with the market
sales would likely focus on investment parameters, however, much as we have
accomplished within the income approach.
152
RETAIL INCOME APPROACH
INCOME APPROACH
The income approach is based upon the premise that property value is represented
by the present worth of anticipated future benefits to be derived from
ownership. After considering the various methods relied upon by the market place
for converting a stream of expected income into value, the technique known as
discounted cash flow (DCF) analysis will be utilized. This kind of cash flow
analysis involves the projection of revenue and expenses over an estimated
holding period; then the resulting cash flows, and any estimated future value of
the reversion, are discounted at an appropriate rate to arrive at a total
present value. We have utilized Pro-Ject(TM) lease-by-lease analysis software to
assist in our evaluation.
REVENUES
Minimum Rent: As discussed in the retail market overview section of this report,
our analysis of minimum rent for the subject property incorporates an
examination of the developer's pro forma rental rates, an analysis of market
rents in place at competitive properties, and a forecast of the retail market
capacity and reasonable expenditure capture rate for the subject.
To recapitulate, market rents at the subject are estimated as follows:
Type Space Rent PSF
---------- --------
Retail shops ............. $65.57
Restaurants .............. $29.64
Food Court ............... $85.00
Billboard Live! .......... $25.20
Growth Rates (Revenue & Expenses): Based on the investor's survey conducted by
Korpacz and Associates (see rate selection chart presented later in this
section), and our review of regional shopping center sales over the last few
years, most investors expect inflationary growth ranging from 3 to 4 percent per
year. In this analysis, we have assumed a growth rate for revenues and expenses
of 3.5 percent per year throughout the projection.
Overage Rent: Although the developer expects to structure leases with a
percentage rent clause, we believe it unlikely that investors would give credit
to this highly speculative source of income, particularly in a proposed project
without a track record of sales. Thus, we have excluded overage rent from the
analysis.
153
RETAIL INCOME APPROACH
Rent Escalations: Typically, a lease will be structured with some form of rent
escalation (increase or step). In this analysis, all proposed leases will be
structured with CPI steps applied on a semi-annual basis, based upon an
examination of the lease documents proposed at the subject and our knowledge of
lease structures in the competitive marketplace. The signed lease with Billboard
Live! is fixed at $1,260,000 per annum, or $25.20 per square foot, based upon
50,000 square feet of total occupied area; the leased portion allocated to the
retail mall is 25,770 square feet.
Expense Recoveries: Based on the proposed lease structure, retail and food court
tenants will pay a fixed expense recovery of $25.00 per square foot of main
floor area leased, growing annually at the expense growth rate selected.
Restaurant tenants' expense recovery is based upon a $20.00 per square foot
charge, growing annually at CPI, per the proposed leases. The Billboard Live!
recovery is fixed at $14.00 per square foot until the seventh year, then
increases annually at CPI, thereafter.
Other Income: Although miscellaneous income might be generated during the
holding period, we have included no other income in our forecast since the mall
has no performance history in this category.
VACANCY AND CREDIT LOSS
Our forecast assumes that the retail mall will be 80 percent pre-leased and
occupied by the completion of construction; our projected opening date for the
mall is April 1, 1999. By the second year of operations, 100 percent occupancy
is assumed, which is consistent with the success of the Forum Shops and Fashion
Show Mall, the primary competition. In line with typical investor practice,
however, we have factored vacancy and collection loss into our valuation model,
based on our opinion that the subject should be capable of achieving and
maintaining stabilized occupancy of 93 percent after the initial lease-up in
Year One.
Furthermore, we have assumed a 70 percent retention rate at lease expiration for
all tenants. Thus, entering speculative lease renewals into the cash flow model
utilizing ten year terms and three months of speculative downtime equates to an
average lag vacancy of one month (3 months x 30% speculative renewal).
154
RETAIL INCOME APPROACH
EXPENSES
Operating Expenses
Our estimate of operating expenses utilizes the developer's Year One budget,
which is based upon estimates built-up by Forest City Enterprises, Inc., an
experienced mall management company. Expenses will also be compared to the
stabilized operating expenses of comparable retail centers in the submarket. As
shown in the accompanying tables, forecasted operating expenses are higher than
expenses at Centers A and B, and slightly below those at Center C. The subject's
expense ratio over the holding period, of approximately 28 percent on average,
is adequately supported by the comparable data, however.
Insofar as the mall's operating budget has been projected by an experienced mall
manager, we have generally relied on their category estimates, where
appropriate. However, utilities and taxes, estimated at $1.50 and $1.95 per
square foot, respectively, have been prorated, based upon the occupancy forecast
and total mall GLA. Furthermore, although the utilities expense per square foot
at the comparables are higher ($1.77 and $1.86 psf for Centers A & B,
respectively), we have relied on the budgeted expense, given the unquantifiable
impact the proposed privately-owned power plant will potentially have on this
expense category at the subject. Taxes are based upon the per square foot tax
cost at the Forum Shops. The management fee is reflective of standard industry
practice for regional mall facilities.
The promotional/marketing fund expense, net of the tenants' contribution of
$3.00 per square foot, is estimated as follows:
$1,173,000 Promotional/marketing fund budget
- 605,128 Less: Tenant contribution in Year One (201,709 sf x $3.00 psf)*
----------
$ 570,000 Net expense (Rd), Year One
(*253,595 total sf, main flr. x 80% occupancy)
$1,214,055 Year Two expense (Year One budget, plus inflation)
- 788,680 Less: Tenant contribution (253,595 sf x $3.11 psf)
----------
$ 425,375 Net expense (Rd), Year Two
Thereafter, the promotional fund expense will increase annually, based on the
expense growth rate selected.
LANDAUER 155
REAL ESTATE COUNSELORS RETAIL INCOME APPROACH
YEAR ONE PRO FORMA ANALYSIS & FORECAST
THE GRAND CANAL SHOPS
DEVELOPER'S PRO FORMA LANDAUER FORECAST
----------------------- ---------------------
(Dollars) $ PSF (Dollars) $ PSF
INCOME Minimum Rent 27,296,975 107.47 22,508,760 81.85
Overage Rent 6,112,300 24.06 0 0.00
Reimbursements 6,350,000 25.00 4,918,628 17,89
---------- ------ ---------- -----
Total Income 39,759,275 156.53 27,427,388 99.74
Less: Lease-Up Vacancy 7,951,855 (31.31) 0 0.00
---------- ------ ---------- -----
Effective Gross Income 31,807,420 125.23 27,427,388 99.74
EXPENSES
Cleaning 747,800 2.94 747,800 2.72
On-Site Mgmt. Staff 369,000 1.45 369,000 1.34
Insurance 175,000 0.69 175,000 0.64
Security 660,000 2.60 660,000 2.40
Utilities 380,393 1.50 595,332 2.16
Customer Service 185,000 0.73 185,000 0.67
General & Administrative 128,000 0.50 128,000 0.47
Parking & Loading Dock 500,000 1.97 500,000 1.82
Miscellaneous 327,607 1.29 462,200 1.68
Taxes 495,300 1.95 773,932 2.81
Repairs & Maintenance 1,409,540 5.55 1,409,540 5.13
Food Court 261,100 1.03 261,100 0.95
Other 134,620 0.53 In Misc. 0.00
Marketing Fund 759,460 2.99 570,000 2.24
Management Fee 636,148 2.50 548,546 1.99
---------- ---- ---------- -----
Total Expenses 7,168,968 28.22 7,385,450 29.08
Expense Ratio 22.5% 26.9%
NET INCOME
24,638,452 97.00 20,041,938 78.91
Mall GLA (1) 254,000 sq.ft. 275,000 sq.ft.
(1) Inclusive of food court common area & annex ground floor.
156
RETAIL INCOME APPROACH
COMPARABLE EXPENSE ANALYSIS
Mall "A" Mall "B" Mall "C"
YE 1995 YE 1995 YE 1996
($ PSF) ($ PSF) ($ PSF)
------- ------- -------
INCOME Minimum Rent 30.73 nav 62.34
Overage Rent 1.80 nav 25.25
Reimbursements 13.07 nav 23.84
Other Income 0.88 nav 0.92
------ -------
Total Income 46.49 nav 112.36
EXPENSES General Operating 12.61 10.05 20.11
Taxes 0.73 1.37 1.95
Repairs & Maintenance In Oper. 0.05 5.51
Advertising & Promotions 0.71 2.45 2.99
Other 0.21 0.45 0.53
------ ----- -----
Total Expenses 14.26 14.36 31.09
Expense Ratio 30.7% nav 27.7%
NET INCOME 32.23 nav 81.27
157
RETAIL INCOME APPROACH
Capital Expenses
Leasing Commissions: During the lease-up period (Years One and Two), a fixed
leasing commission of $2.0 million will apply, based upon the leasing agreement
with the developer's outside broker. Upon releasing and renewal, brokerage fees
have been projected at 5 percent for new tenants and 2.5 percent for renewals,
with a blended rate of 3.25 percent. The rates used are based on typical
commission rates, with a 70 percent probability of renewing.
Tenant Improvement Allowance: The developer's construction budget allocates a
tenant improvement allowance totaling $8.3 million or approximately $30.00 per
square foot of main floor area (based on 275,000 sf). We have forecast a tenant
allowance of $10.7 million, based on the $40.00 per square foot workletter
reportedly provided to tenants at Forum Shops. Workletter costs are deducted
during the lease-up period in Years One and Two. Thereafter, new tenants leasing
second generation space will receive a $20.00 per square foot workletter. Thus,
based on a 70 percent retention ratio, the weighted average for speculative
renewals is $6.00 per square foot.
The provision of a tenant improvement allowance is a relatively new expense for
regional mall owners. In this instance, we have relied upon a similar project's
workletter costs, as supported by the developer's construction budget, to
project the workletter during the lease-up phase of the project. We have assumed
this amount as reasonable given the likelihood that initial tenants leasing
space in the subject will be offered an inducement to sign leases, whereas,
later arriving tenants will not receive a workletter allowance.
Capital Reserves: Given the new construction status of the subject property, we
have assumed a structural reserve of $0.15 per square foot, increasing annually
at the rate of inflation, which is applied to the building's total physical area
of 929,656 gross square feet, based on architectural figures submitted by the
developer.
PROJECTION PERIOD
While actual holding periods for real estate investments vary depending upon a
variety of factors, we have found that investors generally analyze income
streams before acquisition based on 7-, 10- or 15-year projection periods.
Reasons for selection of a projection period include investor expectations,
lease terms, investment philosophy and type of property, among others. In this
instance, we have projected a ten year holding period with the reversion based
upon the average NOI during Years 11 through 13, which accounts for releasing
risk.
158
RETAIL INCOME APPROACH
CASH FLOW
Our cash flow estimates for the projection period beginning April 1, 1999 are
presented in the accompanying table.
159
RETAIL INCOME APPROACH
THE GRAND CANAL SHOPS
CASH FLOW ANALYSIS, AS OF APRIL 1, 1999
($000)
- ------ Yr. 1 Year 1 Year 2 Year 3 Year 4 Year 5
INCOME GLA Avg. Rent 2000 2001 2002 2003 2004
- -----------------------------------------------------------------------------------------------------------------------------------
Minimum Rent: Retail 500,000 $45.02 19,274.4 25,635.8 27,008.6 27,461.7 28,932.3
Restaurant 1,783.0 1,783.0 1,910.0 1,910.0 2,046.0
Food Court 802.0 802.0 859.1 859.1 920.3
Billboard Live! 649.4 649.4 649.4 649.4 649.4
----- ----- ----- ----- -----
Total Minimum Rent 22,508.8 28,870.1 30,427.0 30,880.1 32,547.9
Recoveries: Retail 3,720.7 5,078.9 5,256.7 5,440.7 5,631.1
Restaurant 713.3 738.2 764.1 790.8 818.5
Food Court 235.9 244.1 252.7 261.5 270.7
Billboard Live! 248.8 248.8 248.8 248.8 248.8
----- ----- ----- ----- -----
Total Recoveries 4,918.6 6,310.1 6,522.2 6,741.8 6,969.0
Total Revenue 27,427.4 35,180.2 36,949.3 37,621.9 39,517.0
Less: Vacancy/Credit Loss 0.0 (2,462.6) (2,586.4) (2,633.5) (2,766.2)
--- -------- -------- -------- --------
Effective Gross Income (EGI) 27,427.4 32,717.6 34,362.8 34,998.4 36,750.8
- --------
EXPENSES
- --------
Percent
PSF of EGI
----- ------
Cleaning $1.50 2.7% 747.8 934.8 967.5 1,001.3 1,036.4
Mall Management Staff $0.74 1.3% 369.0 461.3 477.4 494.1 511.4
Insurance $0.35 0.6% 175.0 218.8 226.4 234.3 242.5
Security $1.32 2.4% 660.0 825.0 853.9 883.8 914.7
Utilities $1.19 2.2% 595.3 919.6 951.8 985.1 1,019.5
Customer Service $0.37 0.7% 185.0 231.3 239.3 247.7 256.4
General & Administrative $0.26 0.5% 128.0 160.0 165.6 171.4 177.4
Parking / Loading Dock $1.00 1.8% 500.0 625.0 646.9 669.5 692.9
Miscellaneous & Other $0.92 1.7% 462.2 577.8 598.0 618.9 640.6
Taxes $1.55 2.8% 773.9 1,195.4 1,237.3 1,280.6 1,325.4
Repairs & Maintenance $2.82 5.1% 1,409.5 1,761.9 1,823.6 1,887.4 1,953.5
Food Court CAM $0.52 1.0% 261.1 326.4 337.8 349.6 361.9
Marketing Fund $1.14 2.1% 570.0 425.4 440.3 455.7 471.6
Management Fee $1.10 2.0% 548.5 654.4 687.3 699.8 735.0
----- --- ----- ----- ----- ----- -----
Total Operating Expenses $14.77 26.9% 7,385.5 9,316.8 9,652.9 9,979.2 10,339.2
- ---------------------
NET OPERATING INCOME $40.08 73.1% 20,041.9 23,400.8 24,709.9 25,009.2 26,411.6
- ---------------------
Tenant Improvements $17.34 31.6% 8,669.7 2,043.5 0.0 0.0 0.0
Leasing Commissions $3.40 6.2% 1,699.9 400.7 0.0 0.0 0.0
Capital Reserves $0.28 0.5% 139.4 144.3 149.4 154.6 160.0
- ---------
CASH FLOW $19.07 34.8% 9,532.9 20,812.2 24,560.6 24,854.6 26,251.6
- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
REVERSION Cap Rate: 10.00% Reversion: $296,267.0 GENERAL Revenue Growth: 3.50%
CALCULATION Sales Cost: 1.00% Less Sales Cost: (2,962.7) ASSUMPTIONS Expense Growth: 3.50%
---------- Tax Growth: 3.50%
Net Value: $293,304.3
- ------ Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13
INCOME 2005 2006 2007 2008 2009 2010 2011 2012
- -----------------------------------------------------------------------------------------------------------------------------------
Minimum Rent: Retail 29,417.6 30,992.9 31,512.9 33,200.4 33,757.4 33,299.4 36,286.3 38,304.1
Restaurant 2,046.0 2,191.7 2,191.7 2,347.8 2,347.8 2,305.5 2,595.7 2,686.6
Food Court 920.3 985.8 985.8 1,056.1 1,056.1 1,037.0 1,167.6 1,208.4
Billboard Live! 649.4 649.4 649.4 649.4 649.4 649.4 649.4 649.4
----- ----- ----- ----- ----- ----- ----- -----
Total Minimum Rent 33,033.3 34,819.9 35,339.8 37,253.7 37,810.7 37,291.3 40,699.0 42,848.5
Recoveries: Retail 5,828.2 6,032.2 6,243.3 6,461.8 6,688.0 6,484.7 7,020.0 7,415.0
Restaurant 847.2 876.8 907.5 939.3 972.1 922.3 1,041.4 1,077.8
Food Court 280.1 290.0 300.1 310.6 321.5 277.4 313.2 324.1
Billboard Live! 248.8 248.8 257.5 266.5 275.8 285.5 295.5 305.8
----- ----- ----- ----- ---- ----- ----- -----
Total Recoveries 7,204.2 7,447.7 7,708.4 7,978.1 8,257.4 7,969.8 8,670.0 9,122.8
Total Revenue 40,237.5 42,267.6 43,048.2 45,231.9 46,068.1 45,261.1 49,369.0 51,971.4
Less: Vacancy/Credit Loss (2,816.7) (2,958.7) (3,013.4) (3,166.2) (3,224.8) (3,168.3) (3,455.8) (3,638.0)
-------- -------- -------- -------- -------- -------- -------- --------
Effective Gross Income (EGI) 37,420.9 39,308.9 40,034.8 42,065.6 42,843.3 42,092.8 45,913.1 48,333.3
- --------
EXPENSES
- --------
Cleaning 1,072.6 1,110.2 1,149.0 1,189.3 1,230.9 1,274.0 1,318.6 1,364.7
Mall Management Staff 529.3 547.8 567.0 586.8 607.4 628.6 650.6 673.4
Insurance 251.0 259.8 268.9 278.3 288.1 298.1 308.6 319.4
Security 946.7 979.8 1,014.1 1,049.6 1,086.4 1,124.4 1,163.7 1,204.5
Utilities 1,055.2 1,092.2 1,130.4 1,170.0 1,210.9 1,174.3 1,276.5 1,342.5
Customer Service 265.4 274.7 284.3 294.2 304.5 315.2 326.2 337.6
General & Administrative 183.6 190.0 196.7 203.6 210.7 218.1 225.7 233.6
Parking / Loading Dock 717.2 742.3 768.3 795.2 823.0 851.8 881.6 912.5
Miscellaneous & Other 663.0 686.2 710.2 735.1 760.8 787.4 815.0 843.5
Taxes 1,371.8 1,419.8 1,469.5 1,520.9 1,574.2 1,526.5 1,659.5 1,745.3
Repairs & Maintenance 2,021.9 2,092.6 2,165.9 2,241.7 2,320.1 2,401.3 2,485.4 2,572.4
Food Court CAM 374.5 387.6 401.2 415.2 429.8 444.8 460.4 476.5
Marketing Fund 488.1 505.2 522.9 541.2 560.1 579.7 600.0 621.0
Management Fee 748.4 786.2 800.7 841.3 856.9 841.9 918.3 966.7
----- ----- ----- ----- ----- ----- ----- -----
Total Operating Expenses 10,688.8 11,074.4 11,449.0 11,862.4 12,263.6 12,466.1 13,090.1 13,613.6
- ---------------------
NET OPERATING INCOME 26,732.1 28,234.4 28,585.8 30,203.3 30,579.7 29,626.7 32,823.1 34,719.8
- ---------------------
Tenant Improvements 0.0 0.0 0.0 0.0 0.0 3,141.0 819.5 0.0
Leasing Commissions 0.0 0.0 0.0 0.0 0.0 11,756.4 3,421.3 0.0
Capital Reserves 165.6 171.4 177.4 183.6 190.1 196.7 203.6 210.7
- ---------
CASH FLOW 26,566.5 28,063.0 28,408.4 30,019.7 30,389.6 14,532.6 28,378.7 34,509.1
- ---------
- ------------------------------------------------------------------------------------------------------------------------------------
REVERSION Cap Rate: 10.00% Reversion: $296,267.0 GENERAL Revenue Growth: 3.50%
CALCULATION Sales Cost: 1.00% Less Sales Cost: (2,962.7) ASSUMPTIONS Expense Growth: 3.50%
---------- Tax Growth: 3.50%
Net Value: $293,304.3
160
RETAIL INCOME APPROACH
DISCOUNTED CASH FLOW ANALYSIS
Once the income stream over the projection period is determined, the next step
is to discount the periodic cash flow and the reversion at the end of the
holding period to an indicated value as of the valuation date. The following
definitions and assumptions were employed in our analysis.
Net Operating Income: Net income remaining after all
expenses but before capital items; i.e., tenant
improvement costs, leasing commissions, and capital
expenditures.
Cash Flow: Income available after all capital items, including
reserves, leasing commissions and tenant
improvements, if applicable.
Overall Rate: A rate which reflects the relationship of the first
year's net income to total value, derived by dividing
the net income by the indicated value.
Discount Rate: A rate of return used to estimate the present
value of future cash flows including the reversion (less
sales proceeds) of the property at the end of the
holding period. The discount rate is alternately called
an Internal Rate of Return.
Terminal
Capitalization
Rate: An overall rate applied to the projected net operating
income at the end of the holding period to determine the
amount of the reversion. A disposition fee is usually
deducted from the reversion.
Holding Period: A holding period is the term of ownership of an
investment, also referred to as the projection period
for the purposes of analysis and valuation.
Rate Selection
The selection of appropriate Discount Rates and Terminal Capitalization Rates
for use in arriving at an estimate of value is a judgmental process. Regional
malls and specialty retail centers throughout the country have an international
market appeal. Competition with many other investment vehicles has an influence
on rates of return required by investors. The discount rate derived by analyzing
competitive money market rates of return forms some basis upon which to predict
a rate of return. Rates of return of long-term treasury bonds and corporate
industrial bonds are compared to the assumed holding period of the subject
property.
For real estate investments, rates may be influenced by risk, degree of
liquidity, burden of management, tax benefits, and future appreciation or
depreciation. Adjustments must be made to the safe rates
161
RETAIL INCOME APPROACH
(government bonds, etc.) to compensate for these factors. Consequently, yields
required for real estate are almost always higher than those for non-real estate
investments.
Investment criteria for the national regional mall market are analyzed in the
following table. Various investors were interviewed by Peter F. Korpacz and
Associates, Inc. The criteria was current as of the Second Quarter 1997.
Summary of Investor Criteria - National Regional Mall Market
Second Quarter 1997
Key Indicators Current Quarter Last Quarter Year Ago
- -------------- --------------- ------------ --------
Discount Rate (IRR):
Range 10.50% - 14.00% 10.00% - 14.00% 10.00% - 14.00%
Average 11.75% 11.69% 11.50%
Overall Cap. Rate:
Range 7.00% - 11.00% 7.00% - 11.00% 6.25% - 11.00%
Average 8.57% 8.57% 8.17%
Rent Growth Rate:
Range 0.00% - 4.00% 0.00% - 4.00% 0.00% - 4.00%
Average 2.86% 2.64% 2.64%
Expense Growth Rate:
Range 3.00% - 4.00% 3.00% - 4.00% 3.00% - 4.00%
Average 3.75% 3.78% 3.89%
Residual Cap. Rate:
Range 7.50% - 11.00% 7.50% - 11.00% 7.00% - 11.00%
Average 8.78% 8.76% 8.56%
As indicated in the preceding table, Internal Rates of Return for the nationwide
regional mall market range from 10.50 to 14.00 percent, with an average of 11.75
percent. Initial capitalization rates range from 7.00 to 11.00 percent, with an
average of 8.57 percent. Residual capitalization rates show a range of 7.50 to
11.00 percent, with an average of 8.78 percent, which is 0.21 percentage points
above the average going-in rate.
162
RETAIL INCOME APPROACH
On average, investor yield requirements for regional malls have increased 25
basis points over the last twelve months, an indication of the general
perception that the retail market continues to cause investors concern, with the
primary focus that of sluggish retail sales and the financial instability of
tenants.
Rental growth rates selected by the investors in the Korpacz survey range from
0.0 to 4.0 percent, with an average of 2.86 percent. Expense growth rates are
expected to outpace revenue rates over the near-term; a range of 3.0 to 4.0
percent, and an average of 3.75 percent, is evidenced.
In addition to the investor survey, we have reviewed recent transfers of
regional shopping centers in order to examine rates and other investment
parameters from the market. The table which follows summarizes the data:
163
RETAIL INCOME APPROACH
Indication of Investment Parameters - Shopping Center Transactions
Price Price to Sales Sale No. of Anchors
No. Location PSF IRR OAR Ratio (1) Date (No. in Sale)
- --- -------- --- --- --- ----------- ---- -------------
1. Texas $469 11.25% 6.5% 1.16 1/97 Five (None)
2. Florida $262 12.00% 8.0% 0.94 12/96 Four (None)
3. Minnesota $248 12.50% 8.0% 1.06 12/96 Four(1)
4. Michigan $112 18.50% 12.5% 0.49 12/96 n/a (None)
5. Tennessee $42 22.10% 15.4% 0.18 12/96 n/a (All)
6. Illinois $421 n/a 7.9% 1.10 12/96 n/a (None)
7. California $126 20.10% 10.4% 0.44 12/96 n/a (None)
8. Oklahoma(2) n/a 13.00% 11.0% n/a 12/96 Two(2);
11.50% 10.3% n/a (None)
9. California $123 15.20% 9.1% 0.47 11/96 n/a(2)
10. Montana $109 15.80% 9.9% 0.47 11/96 n/a(2)
11. Southeast U.S. $486 10.70% 6.1% 1.13 11/96 n/a (None)
12. Illinois $274 n/a 8.9% 0.86 11/96 n/a (None)
13. Tennessee $80 n/a 9.9% 0.33 11/96 n/a (None)
14. Texas $183 n/a 9.0% 0.80 11/96 n/a (None)
15. Georgia $247 n/a 9.4% 0.79 8/96 Four (None)
16. California $234 n/a 10.3% 0.69 6/96 n/a (None)
17. Virginia $147 12.00% 9.3% 0.54 5/96 n/a (None)
18. Connecticut n/a n/a 6.8% n/a 3/96 n/a (None)
19. California $355 n/a 7.6% 1.18 3/96 n/a(1)
20. Pennsylvania $75 10.50% 13.0% 0.36 3/96 n/a
21. New York $263 11.00% 7.7% 0.66 12/95 Four(2)
22. New York $690 n/a n/a 1.09 12/95 n/a (None)
23. Texas $327 11.40% 6.6% 1.01 9/95 n/a (None)
(1) Ratio of purchase price psf to mall sales psf.
164
RETAIL INCOME APPROACH
The sales presented indicate discount rates (IRR) ranging from 10.5 to 22.1
percent, and average of 13.84 percent. Initial capitalization rates range from
6.11 to 15.4 percent, with an average of 9.29 percent. Overall rates varied
considerably due to a number of factors. Most often, the inclusion or exclusion
of anchor department stores in the sale, as well as with expansion opportunities
of a center, are the dominant issues influencing the center's derived rates.
Lower rates often reflect an investor's expectation that development profit from
a potential increase in cash flow can be earned if expansion of the center is
possible.
Yield requirements for all types of investment-grade properties throughout the
U.S. have generally decreased slightly over the past year. Competition for the
most sought after properties appears steady due to a variety of factors,
including the scarcity of good quality investment real estate, the desire for an
adequate hedge against inflation, and the quest for a safe haven for investment
capital. Arising out of concerns over troubled real estate markets and
overbuilding, investor cash flow projections today tend to be more "realistic",
incorporating assumptions and probabilities that conform to actual market
experience and predicated upon moderate future expectations.
Despite the fact that regional malls remain the top property preference for
investors, yield rates for these properties have remained stagnant over the
recent past. Demand for these properties remains strong; however, owners have
been reluctant to place their best properties on the market. The best malls,
that is Class A malls located in or adjacent to the largest markets, still trade
at the low end of the range. Grade B malls trade in the middle to upper range of
the yield and cap rate indicators. Although the subject mall is considered an
investment-grade property of Class A quality, its future occupancy and eventual
performance are highly speculative at this juncture.
These factors increase the risk in the subject mall to a potential acquirer. The
Korpacz survey indicates equity IRRs (discount rates) ranging from 15.00 to
14.00 percent with an average of 11.75 percent, as of 1997's second quarter.
Given the speculative nature of developing and leasing the subject mall, it is
reasonable to consider a rate well above the average. In our opinion, a discount
rate of 13.00 percent is reasonable and adequately supported.
Maintaining consistency with the discount rate selection, the residual
capitalization rate should be above the indicated mid-point of both the sales
cited in the transactions table, as well as the Korpacz survey. Thus, we have
chosen 10.00 percent as our residual capitalization rate.
165
RETAIL INCOME APPROACH
INCOME APPROACH CONCLUSION
Value Upon Completion
Based on the preceding rates and assumptions, as indicated on the accompanying
matrix (based on varying terminal capitalization and discount rates), a market
value indication of $220,000,000 (rounded), is derived for the subject mall via
the DCF method and indicative of a derived overall rate which averages 10.87
percent during the first five years of the holding period. The indicated value
represents a price to sales ratio of 0.73 percent ($440 psf / $602 psf), which
is in line with the transaction data cited.
166
RETAIL INCOME APPROACH
Discounted Cash Flow Matrix Property Name: The Grand Canal Shops Equity Value: $220,032,024
Value Upon Completion Net Rentable Area: 500,000 Equity Value Per SF (Rd): $440.00
Avg. Annual NOI Growth: 4.92%
Capitalization Rate
(Reversion): 10.00% Avg. Annual CF Growth: 10.47%
Discount Rate: 13.00% % of Reversion to Value: 39.67%
Sales Commission: 1.00% Annual Growth PV to Reversion: 3.02%
Capitalization Rates
9.00% 9.25% 9.50% 9.75% 10.00%
11.50% $254,604,503 $251,362,217 $248,290,578 $245,376,459 $242,608,046
11.75% $250,370,974 $247,200,497 $244,196,887 $241,347,309 $238,640,209
12.00% $246,228,706 $243,128,292 $240,191,057 $237,404,450 $234,757,173
12.25% $242,175,433 $239,143,382 $236,270,913 $233,545,750 $230,956,845
12.50% $238,208,953 $235,243,611 $232,434,340 $229,769,134 $227,237,189
Discount 12.75% $234,327,124 $231,426,881 $228,679,282 $226,072,585 $223,596,224
Rates 13.00% $230,527,865 $227,691,151 $225,003,738 $222,454,141 $220,032,024
13.25% $226,809,147 $224,034,435 $221,405,761 $218,911,891 $216,542,714
13.50% $223,169,000 $220,454,803 $217,883,459 $215,443,979 $213,126,472
13.75% $219,605,507 $216,950,376 $214,434,989 $212,048,597 $209,781,524
14.00% $216,116,802 $213,519,326 $211,058,560 $208,723,987 $206,506,143
14.25% $212,701,069 $210,159,874 $207,752,427 $205,468,439 $203,298,650
14.50% $209,356,542 $206,870,290 $204,514,894 $202,280,287 $200,157,411
10.25% 10.50% 10.75% 11.00%
11.50% $239,974,677 $237,466,707 $235,075,387 $232,792,763
11.75% $236,065,163 $233,612,738 $231,274,379 $229,042,310
12.00% $232,239,032 $229,840,802 $227,554,117 $225,371,373
12.25% $228,494,228 $226,148,879 $223,912,616 $221,778,001
12.50% $224,828,753 $222,535,004 $220,347,942 $218,260,291
Discount 12.75% $221,240,660 $218,997,266 $216,858,216 $214,816,396
Rates 13.00% $217,728,058 $215,533,806 $213,441,612 $211,444,517
13.25% $214,289,107 $212,142,814 $210,096,349 $208,142,905
13.50% $210,922,015 $208,822,531 $206,820,698 $204,909,858
13.75% $207,625,039 $205,571,245 $203,612,976 $201,743,719
14.00% $204,396,486 $202,387,289 $200,471,543 $198,642,876
14.25% $201,234,704 $199,269,042 $197,394,806 $195,605,762
14.50% $198,138,089 $196,214,926 $194,381,212 $192,630,849
===========================================================================================================================
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7
NOI $20,041,937 $23,400,769 $24,709,935 $25,009,201 $26,411,577 $26,732,101 $28,234,429
Cash Flow $9,532,899 $20,812,237 $24,560,554 $24,854,592 $26,251,557 $26,566,480 $28,063,011
OAR 9.11% 10.64% 11.23% 11.37% 12.00% 12.15% 12.83%
C on C 4.33% 9.46% 11.16% 11.30% 11.93% 12.07% 12.75%
===========================================================================================================================
================================================================================
Yr 8 Yr 9 Yr 10 Yr 11-13
NOI $28,585,783 $30,203,281 $30,579,651 $32,389,854
Cash Flow $28,408,366 $30,019,654 $30,389,597 $25,806,821
OAR 12.99% 13.73% 13.90% 14.72%
C on C 12.91% 13.64% 13.81% 11.73%
================================================================================
[Overall Rates Line Graph Omitted] [Cash on Cash Line Graph Omitted]
5 Year Average 10.87% 5 Year Average 9.64%
10 Year Average 11.99% 10 Year Average 11.34%
167
RETAIL INCOME APPROACH
Value Upon Stabilization
Given the level of occupancy projected, stabilization occurs in the second year
of the holding period. Although only one actual lease has been signed at the
subject to date, this valuation assumes that the property will be aggressively
marketed and managed, and that the leaseable space is offered at market rates.
In light of the range of occupancies in peer properties surveyed for this
assignment, the 93 percent stabilized occupancy projected for the subject is
considered reasonable. Furthermore, in estimating the stabilized value, we have
adjusted our discount and residual cap rates downward by 50 basis points to
reflect the elimination of lease-up risk by Year Two. Thus, value upon
stabilized occupancy, derived by discounting the cash flow for FY2001 through
FY2010, and reversion, at 12.50 and 9.50 percent, respectively, is estimated at
$248,000,000 (rounded). A discounted cash flow and valuation matrix reflecting
our stabilized projections have been placed on the pages which follow.
168
RETAIL INCOME APPROACH
THE GRAND CANAL SHOPS
CASH FLOW ANALYSIS, AS OF APRIL 1, 2000
($000)
Yr. 1 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
INCOME NRA Avg. Rent 2001 2002 2003 2004 2005 2006
- -----------------------------------------------------------------------------------------------------------------------
Minimum Rent: Retail 500,000 $58.84 26,095.3 26,533.0 27,953.9 28,422.8 29,944.9 30,447.2
------- ------ -------- -------- -------- -------- -------- --------
Restaurant 1,845.4 1,845.4 1,976.8 1,976.8 2,117.6 2,117.6
Food Court 830.0 830.0 889.2 889.2 952.5 952.5
Billboard Live! 649.4 649.4 649.4 649.4 649.4 649.4
-------- -------- -------- -------- -------- --------
Total Minimum Rent 29,420.1 29,857.8 31,469.2 31,938.2 33,664.4 34,166.7
Recoveries: Retail 5,078.9 5,256.7 5,440.7 5,631.1 5,828.2 6,032.2
Restaurant 738.2 764.1 790.8 818.5 847.2 876.8
Food Court 244.1 252.7 261.5 270.7 280.1 290.0
Billboard Live! 248.8 248.8 248.8 248.8 248.8 248.8
-------- -------- -------- -------- -------- --------
Total Recoveries 6,310.1 6,522.2 6,741.8 6,969.0 7,204.2 7,447.7
Total Revenue 35,730.1 36,380.1 38,211.0 38,907.2 40,868.6 4,614.4
Less: Vacancy/Credit Loss (2,501.1) (2,546.6) (2,674.8) (2,723.5) (2,860.8) (2,913.0)
-------- -------- -------- -------- -------- --------
Effective Gross Income (EGI) 33,229.0 33,833.5 35,536.3 36,183.7 38,007.8 38,701.4
Year 7 Year 8 Year 9 Year 10 Year 11 Year 12
INCOME 2007 2008 2009 2010 2011 2012
- ----------------------------------------------------------------------------------------------------
Minimum Rent: Retail 32,O77.7 32,615.8 32,173.4 35,059.2 37,008.8 38,304.1
-------- ---------- -------- -------- -------- --------
Restaurant 2,268.4 2,268.4 2,227.5 2,508.0 2,595.7 2,686.6
Food Court 1,020.3 1,020.3 1,001.9 1,128.1 1,167.6 1,208.4
Billboard Live! 649.4 649.4 649.4 649.4 649.4 649.4
-------- ---------- -------- -------- -------- --------
Total Minimum Rent 36,015.9 36,554.0 36,052.2 39,344.7 41,421.5 42,848.5
Recoveries: Retail 6,243.3 6,461.8 6,265.4 6,782.5 7,164.3 7,415.0
Restaurant 907.5 939.3 891.1 1,006.2 1,041.4 1,077.8
Food Court 300.1 310.6 268.0 302.6 313.2 324.1
Billboard Live! 257.5 266.5 275.8 285.5 295.5 305.8
-------- ---------- -------- -------- -------- --------
Total Recoveries 7,708.4 7,978.1 7,700.3 8,376.8 8,814.3 9,122.8
Total Revenue 43,724.2 44,532.2 43,752.5 47,721.4 50,235.8 51,971.4
Less: Vacancy/Credit Loss (3,060.7) (3,117.3) (3,062.7) (3,340.5) (3,516.5) (3,638.0)
-------- ---------- -------- -------- -------- --------
Effective Gross Income (EGI) 40,663.5 41,414.9 40,689.8 44,380.9 46,719.3 48,333.3
EXPENSES
Percent
PSF EGI
------ -------
Cleaning $ 1.87 2.8% 934.8 967.5 1,001.3 1,036.4 1,072.6
Mall Management Staff $ 0.92 1.4% 461.3 477.4 494.1 511.4 529.3
Insurance $ 0.44 0.7% 218.8 226.4 234.3 242.5 251.0
Security $ 1.65 2.5% 825.0 853.9 883.8 914.7 946.7
Utilities $ 1.84 2.8% 919.6 951.8 985.1 1,019.5 1,055.2
Customer Service $ 0.46 0.7% 231.3 239.3 247.7 256.4 265.4
General & Administrative $ 0.32 0.5% 160.0 165.6 171.4 177.4 183.6
Parking /Loading Dock $ 1.25 1.9% 625.0 646.9 669.5 692.9 717.2
Miscellaneous & Other $ 1.16 1.7% 577.8 598.0 618.9 640.6 663.0
Taxes $ 2.39 3.6% 1,195.4 1,237.3 1,280.6 1,325.4 1,371.8
Repairs & Maintenance $ 3.52 5.3% 1,761.9 1,823.6 1,887.4 1,953.5 2,021.9
Food Court CAM $ 0.65 1.0% 326.4 337.8 349.6 361.9 374.5
Marketing Fund $ 0.85 1.3% 425.4 440.3 455.7 471.6 488.1
Management Fee $ 1.33 2.0% 664.6 676.7 710.7 723.7 760.2
------ --- ------- ------- ------- ------- -------
Total Operating Expenses $18.65 28.1% 9,327.0 9,642.3 9,990.1 10,327.9 10,700.5
NET OPERATING INCOME $47.80 71.9% 23,902.0 24,191.2 25,546.1 25,855.8 27,307.3
Tenant Improvements $ 0.00 0.0% 0.0 0.0 0.0 0.0 0.0
Leasing Commissions $ 0.00 0.0% 0.0 0.0 0.0 0.0 0.0
Capital Reserves $ 0.29 0.4% 144.3 149.4 154.6 160.0 165.6
CASH FLOW $47.52 71.5% 23,757.7 24,041.8 25,391.5 25,695.8 27,141.7
Percent
PSF EGI
------ -------
Cleaning 1,110.2 1,149.0 1,189.3 1,230.9 1,274.0 1,318.6 1,364.7
Mall Management Staff 547.8 567.0 586.8 607.4 628.6 650.6 673.4
Insurance 259.8 268.9 278.3 288.1 298.1 308.6 319.4
Security 979.8 1,014.1 1,049.6 1,086.4 1,124.4 1,163.7 1,204.5
Utilities 1,092.2 1,130.4 1,170.0 1,210.9 1,174.3 1,276.5 1,342.5
Customer Service 274.7 284.3 294.2 304.5 315.2 326.2 337.6
General & Administrative 190.0 196.7 203.6 210.7 218.1 225.7 233.6
Parking /Loading Dock 742.3 768.3 795.2 823.0 85l.8 881.6 912.5
Miscellaneous & Other 686.2 710.2 735.1 760.8 787.4 815.0 843.5
Taxes 1,419.8 1,469.5 1,520.9 1,574.2 1,526.5 1,659.5 1,745.3
Repairs & Maintenance 2,092.6 2,165.9 2,241.7 2,320.1 2,401.3 2,485.4 2,572.4
Food Court CAM 387.6 401.2 415.2 429.8 444.8 460.4 476.5
Marketing Fund 505.2 522.9 541.2 560.1 579.7 600.0 621.0
Management Fee 774.0 813.3 828.3 813.8 887.6 934.4 966.7
------- ------- ------- ------- ------- ------- ------
Total Operating Expenses 11,062.3 11,461.6 11,849.3 12,220.6 12,511.9 13,106.2 13,613.6
NET OPERATING INCOME 27,639.1 29,201.9 29,565.5 28,469.2 31,869.0 33,613.1 34,719.8
Tenant Improvements 0.0 0.0 0.0 3,034.8 791.8 0.0 0.0
Leasing Commissions 0.0 0.0 0.0 11,358.8 3,305.6 0.0 0.0
Capital Reserves 171.4 177.4 183.6 190.1 196.7 203.6 210.7
CASH FLOW 27,467.7 29,024.5 29,381.9 13,885.6 27,575.0 33,409.5 34,509.1
REVERSION Cap. Rate: 9.50% Reversion: $353,822.1 GENERAL Revenue Growth: 3.50%
CALCULATION Sales Cost: 1.00% Less Sales Cost: (3,538.2) ASSUMPTIONS Expense Growth: 3.50%
---------- Tax Growth: 3.50%
Net Value: $350.283.9
169
RETAIL INCOME APPROACH
Discounted Cash Flow Matrix Property Name: The Grand Canal Shops Equity Value: $247,948,001
Stabilized Value Net Rentable Area: 500,000 Equity Value Per SF (Rd): $496.00
Avg. Annual NOI Growth: 3.47%
Capitalization Rate (Reversion): 9.50% Avg. Annual CF Growth: 3.47%
Discount Rate: 12.50% % of Reversion to Value: 43.94%
Sales Commission: 1.00% Annual Growth PV to Reversion: 3.62%
Capitalization Rates
8.50% 8.75% 9.00% 9.25% 9.50%
11.00% $286,948,745 $283,009,372 $279,288,854 $275,769,444 $272,435,267
11.25% $282,321,537 $278,469,800 $274,832,048 $271,390,931 $268,130,926
11.50% $277,794,459 $274,028,217 $270,471,211 $267,106,476 $263,918,832
11.75% $273,365,008 $269,682,180 $266,203,952 $262,913,738 $259,796,692
12.00% $269,030,752 $265,429,308 $262,027,945 $258,810,439 $255,762,276
Discount 12.25% $264,789,324 $261,267,291 $257,940,927 $254,794,367 $251,813,415
Rate 12.50% $260,638,423 $257,193,880 $253,940,700 $250,863,368 $247,948,001
12.75% $256,575,812 $253,206,887 $250,025,124 $247,015,349 $244,163,983
13.00% $252,599,314 $249,304,185 $246,192,119 $243,248,272 $240,459,365
13.25% $248,706,813 $245,483,706 $242,439,660 $239,560,158 $236,832,208
13.50% $244,896,250 $241,743,437 $238,765,780 $235,949,078 $233,280,623
13.75% $241,165,622 $238,081,420 $235,168,563 $232,413,157 $229,802,773
14.00% $237,512,980 $234,495,751 $231,646,145 $228,950,573 $226,396,872
9.75% 10.00% 10.25% 10.50%
11.00% $269,272,073 $266,267,039 $263,408,592 $260,686,261
11.25% $265,038,101 $262,099,917 $259,305,059 $256,643,289
11.50% $260,894,657 $258,021,691 $255,288,869 $252,686,182
11.75% $256,839,495 $254,030,157 $251,357,861 $248,812,817
12.00% $252,870,428 $250,123,173 $247,509,930 $245,021,128
Discount 12.25% $248,985,332 $246,298,654 $243,743,033 $241,309,108
Rate 12.50% $245,182,140 $242,554,572 $240,055,178 $237,674,802
12.75% $241,458,841 $238,888,955 $236,444,431 $134,116,312
13.00% $237,813,479 $235,299,887 $232,908,909 $230,631,788
13.25% $234,244,153 $231,785,501 $229,446,783 $227,219,432
13.50% $230,749,012 $228,343,981 $226,056,269 $223,877,496
13.75% $227,326,255 $224,973,562 $222,735,635 $220,604,276
14.00% $223,974,130 $221,672,526 $219,483,195 $217,398,118
=============================================================================================================
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6
NOI $23,902,029 $24,191,171 $25,546,133 $25,855,843 $27,307,324 $27,639,130
Cash Flow $23,757,700 $24,041,790 $25,391,524 $25,695,823 $27,141,703 $27,467,712
OAR 9.64% 9.76% 10.30% 10.43% 11.01% 11.15%
C on C 9.58% 9.70% 10.24% 10.36% 10.95% 11.08%
=============================================================================================================
=================================================================================================
Yr 7 Yr 8 Yr 9 Yr 10 Yr 11
NOI $29,201,903 $29,565,542 $28,469,247 $31,869,022 $33,613,104
Cash Flow $29,024,486 $29,381,915 $13,885,581 $27,574,982 $33,409,514
OAR 11.78% 11.92% 11.48% 12.85% 13.56%
C on C 11.71% 11.85% 5.60% 11.12% 13.47%
=================================================================================================
[Overall Rates Line Graph Omitted] [Cash on Cash Line Graph Omitted]
5 Year Average 10.23%
10 Year Average 11.03%
170
VALUATION OF DEVELOPMENT RIGHTS
VALUE OF THE RETAIL MALL'S DEVELOPMENT RIGHTS
The structural configuration and specific design of the retail mall, as
proposed, is relatively unique, particularly in the Las Vegas market. We are
referring here to a combination of the physical placement of the retail mall
atop the casino podium and also within an envelope of ownership that is separate
from, though closely related to, the remaining functional components; i.e., the
casino hotel and the Sands expo center. Typically, a retail project similar in
scope to the subject mall most likely would be erected on its own parcel of
land. Furthermore, the fee simple owner of the land could then either sell or
lease the site for development, or develop the project and hold or sell the
leased fee interest.
In this case, however, the creation of a separate ownership interest in the
retail portion of the project (i.e., the retail condominium interest), gives the
owner of the development rights (i.e., the owner of the right to develop the
project, as proposed), an interest in any value remaining after development and
leasing costs are expended, and the project is completed and operational. In
essence, the owner of the development rights possesses an interest similar to a
leasehold in the land, if the retail mall were being developed on leased land,
or a leasehold under terms of a master lease.
In deriving a value estimate for these rights, we have utilized the developer's
cost budget for the retail mall, adjusted for additional costs related to
insufficient parking spaces, plus entrepreneurial profit, to estimate total
development costs, which are then deducted from the value upon completion
estimate. A table summarizing our value estimate is provided on the following
page.
The $33 million value estimate derived represents the right to develop the
retail mall in the Venetian mega-resort.
171
VALUATION OF DEVELOPMENT RIGHTS
VALUE OF THE RETAIL MALL'S DEVELOPMENT RIGHTS
DEVELOPMENT COSTS - RETAIL MALL %
($) of Total
---------- --------
Total Construction ................................. 78,921,170 56.38%
Additional CM Costs................................. 416,972 0.30%
Therming ................................. 19,379,321 13.85%
FF&E ................................. 187,508 0.13%
Signage ................................. 107,965 0.08%
Design ................................. 4,769,167 3.41%
Permits & Fees ................................. 1,687,228 1.21%
Pre-Opening ................................. 1,573,000 1.12%
Soft Costs ................................. 12,453,906 8.90%
Consumer Experience................................. 3,000,000 2.14%
Construc. Admin. ................................. 1,264,116 0.90%
Contingency ................................. 4,230,560 3.02%
Financing ................................. 11,980,000 8.56%
---------- ------
Subtotal $139,970,913 100.00%
Plus: Additional Parking 4,480,000
Central Plant 11,760,000
Developer's Profit at 20.00% 31,242,183
------------
TOTAL DEVELOPMENT COST $187,453,096
VALUE UPON COMPLETION $220,000,000
INDICATED VALUE OF DEVELOPMENT RIGHTS $32,546,904
(Rd) $33,000,000
ADDENDA
Engagement Letter
[LETTERHEAD OF LANDAUER REAL ESTATE COUNSELORS]
June 30, 1997
Goldman Sachs Credit Partners L.P.
85 Broad Street
New York, NY 10004
Goldman Sachs Mortgage Company
85 Broad Street
New York, NY 10004
GMAC Commercial Mortgage Corporation
100 S. Wacker
Suite 400
Chicago, IL 60606
Re: Venetian Casino Resort Project Appraisal
Dear Sirs:
Thank you for the opportunity to respond to your request for a proposal to
appraise the Phase I retail, casino and hotel components of the Venetian Casino
Resort project. We are pleased to submit the following proposal to provide you
with a market value appraisal of the captioned real estate.
For 50 years, Landauer Real Estate Counselors has been committed to providing
its clients with sound, independent advice and opinions based on solid
information and insightful research. Landauer has been the industry leader in
analyzing and interpreting the real estate market since 1946 when James D.
Landauer counseled our first client, CBS, Inc. Today, Landauer annually provides
a wide range of real estate services to clients worldwide pertaining to over $80
billion of real estate assets.
We understand that the appraisal will be used for underwriting purposes. The
proposed project is to include a 3,037 key hotel, an approximately 100,000
square foot casino hotel, one showroom and 415,000 square feet (net) of retail
space. The retail centre will constitute a condominium unit within the proposed
Venetian Casino Resort. The condominiumized interest includes portions of three
floors.
It is our understanding that we are to appraise the fee simple interest in the
entire project and separately, the retail centre.
This letter presents the objective and scope of our work, our relevant appraisal
experience, client references, appraisal methodology, as well as the time
requirements and fees for our services.
[LETTERHEAD OF LANDAUER REAL ESTATE COUNSELORS]
Goldman Sachs Credit Partners L.P.
Goldman Sachs Mortgage Company
GMAC Commercial Mortgage Corporation
June 30, 1997
Page 2
The assignment will be staffed by two very senior members of Landauer's Los
Angeles staff. Complete summaries of the qualifications of Vincent Vassallo,
MAI, and Karen L. Johnson, MAI, both Managing Directors, are attached. In
addition to having appraised the Sands Expo Center and the land underlying the
Venetian project, Ms. Johnson prepared an investment value appraisal of the
Bally's assets in Las Vegas as part of the acquisition of Bally's by Hilton and
a market value appraisal of the land underlying the Wet n'Wild water park on the
Las Vegas Strip. Off the strip, Ms. Johnson has appraised the land for a
proposed casino hotel and entertainment center in Henderson, Nevada and other
parcels in Northwest and Southwest Las Vegas. Specifically, Mr. Vassallo has
appraised the Aladdin Hotel and Casino, and Fashion Showcase Mall in Las Vegas.
He is very familiar with Clark County's growth and development, having appraised
the land for planned residential communities such as Seven Hills, Green Valley,
Sun Ridge, and Mountain Spa. Outside of Clark County, Mr. Vassallo has appraised
numerous retail properties in Manhattan Beach, Redondo Beach, Sherman Oaks,
Rancho Palos Verde and Marina Del Rey. Mr. Vassallo and Ms. Johnson have
extensive resources to draw from within the Landauer organization. Two members
of Landauer's staff edited the Urban Land Institute text titled "Shopping
Centers and Other Retail Properties."
Our valuation will be presented in a self contained narrative format, in
compliance with current FIRREA guidelines, containing a complete description of
the property, along with pertinent exhibits and photographs. In the report, the
economic development of Las Vegas will be discussed in depth along with recent
trends in the gaming, convention, lodging and retail (including, without
limitation, shopping malls) industries. The assignment will comprise the entire
Phase I project consisting of the hotel, retail, and casino components as noted;
the engagement will also include a valuation of the retail centre alone.
Specific to the retail component, recent specialty retail lease comparables will
be listed, thoroughly analyzed and compared to the subject project. The most
recent cost estimates for the retail component, including the allocation for
common area costs, will be reviewed. If meaningful comparables can be
identified, cost estimates for other, similar retail developments will be
utilized as a check on value conclusions. If retail sales comparables can be
found, we will perform a Sales Comparison Approach along with any other
applicable alternative method of valuation. An Income Approach will be performed
utilizing data from the rental comparables and local expense data. For this
purpose, we expect to review and consider the projections for the project
provided by you, it being understood, however, that we will make such
adjustments to the projections for purposes of our appraisal, as we deem
appropriate, based upon our independent research.
All valuation work conducted by Landauer Associates is prepared in conformity
with and is subject to the requirements of the Code of Professional Ethics and
Standards of Professional Conduct of the Appraisal Institute, including the
Uniform Standards of Professional Appraisal Practice. The attached Certification
and Assumptions and Limiting Conditions will be included in our report. This
proposal and the report will be contingent upon your acceptance of them.
[LETTERHEAD OF LANDAUER REAL ESTATE COUNSELORS]
Goldman Sachs Credit Partners L.P.
Goldman Sachs Mortgage Company
GMAC Commercial Mortgage Corporation
June 30, 1997
Page 3
We will furnish you with five copies of our report within approximately four
weeks of your authorization to proceed and the receipt of retainer.
Our fee for an appraisal of the Phase I project is $37,000. In the event that
the project or deal structure with regard to common area allocations and
maintenance expenses changes materially during the conduct of this appraisal,
it will be necessary for us to revise our estimate of value. The fees for
professional time incurred in such an iterative process are not included in
this quotation. This and any additional analysis requested by the client
subsequent to that which is described in this contract, will be billed at our
prevailing hourly rates, which are set forth below. Preparation for court
testimony, depositions, or other proceedings relevant to our value opinion,
and actual time devoted to the proceeding, will be billed at our prevailing
hourly rates plus reimbursement of reasonable out-of-pocket expenses.
HOURLY FEE SCHEDULE
Senior Managing Director $250
Managing Director $200
Director $110
Analyst $ 60
Reasonable travel costs and incidental out-of-pocket expenses are
reimbursable in addition to our fee. We estimate that these will not exceed
$2,000.
We require a retainer of $12,000 prior to the start of the assignment. With
the issuance of the draft document, an additional $12,000, plus the
out-of-pocket expenses to date will be billed. Upon the delivery of the final
document, the remaining fees will be billed.
If the assignment is terminated prior to completion of the assignment, we
will bill only for the actual time and reasonable out-of-pocket expenses
incurred to the point of termination.
Please indicate your acceptance of this proposal, and provide authorization
to proceed by signing the enclosed copy of this letter and returning it to us
with the required retainer. Upon receipt of your authorization we will
schedule the necessary personnel to begin the assignment. We will keep you
informed of any circumstances which may effect our estimated delivery date.
It is our understanding that the appraisal will be used, and we consent to
its use, in connection with one or more financings of the Venetian Casino
Report and/or the retail centre (as well as the sale of any such financings
in whole or in part, or participations or securities representing interests
in any such financings) and that they will be relied upon, and we consent to
reliance thereon, by Goldman Sachs & Co., Goldman Sachs Mortgage Company,
Goldman Sachs Credit Partners L.P., GMAC Commercial Mortgage Corporation or
any of their affiliates; initial and subsequent holders from time to time of
any debt and/or
[LETTERHEAD OF LANDAUER REAL ESTATE COUNSELORS]
Goldman Sachs Credit Partners L.P.
Goldman Sachs Mortgage Company
GMAC Commercial Mortgage Corporation
June 30, 1997
Page 4
debt securities secured, directly or indirectly, by the Venetian Casino Report
and/or the retail centre; any indenture trustee, service or other agent acting
on behalf of such holders of such debt and/or debt securities; any rating
agencies; and the institutional provider(s) from time to time of any liquidity
facility or credit support for such financings.
We further understand that offering materials used from time to time in
connection with the offer and sale of any such financings in whole or in part,
participations or securities may contain references to Landauer Associates, Inc.
who prepared the appraisal, subject to our right to approve all such references
prior to publication or use of such materials. We require a reasonable time to
review the offering materials each time our work is referenced and our consent
will not be unreasonably delayed or withheld.
Without limiting the foregoing, it is our intent to allow you to use and reprint
the appraisal for dissemination (a) in connection with borrowings being made
from banks and/or other institutional lenders in connection with the development
of the property and (b) in connection with a public offering or private
placement of securities. The attached Assumptions and Limiting Conditions
contain a limitation regarding dissemination of the appraisal. When a client
desires to include or refer to our appraisal, report or opinion ("Opinion") in a
prospectus, registration statement, offering circular, proxy statement or other
similar document ("Offering Material") in connection with an offer to sell,
exchange or purchase securities or similar interest, or in connection with a
merger, liquidation, or other corporate transaction, we require, as a condition
of any such use, that we be permitted to review and approve any such reference,
(it being understood that the appraisal report may be included in its entirety
in the Offering Material without our consent). We require a reasonable time to
review such references and our consent and approval will not be unreasonably
delayed or withheld. If the Opinion is referred to or included in a registration
statement filed with the Securities and Exchange Commission (the "SEC"), we
agree to provide executed consents to be filed as an exhibit to the registration
statement.
Landauer's fee is not contingent upon the occurrence of any outside event or
third party act, and is due and payable upon the rendering of the services
agreed to herein, including the delivery of the completed report in form and
substance reasonably acceptable to you. If written comments are not received
within 30 days of the delivery, report is deemed acceptable to the client.
Payments not received within 30 days of our invoice will be considered
delinquent.
[LETTERHEAD OF LANDAUER REAL ESTATE COUNSELORS]
Goldman Sachs Credit Partners L.P.
Goldman Sachs Mortgage Company
GMAC Commercial Mortgage Corporation
June 30, 1997
Page 5
We appreciate this opportunity to be of service to you on this assignment. If
you have additional questions, please do not hesitate to call.
Sincerely,
LANDAUER ASSOCIATES, INC.
/s/ Rodney A. Wycoff /s/ Karen L. Johnson
- ----------------------------- ----------------------------
Rodney A. Wycoff, CRE, MAI Karen L. Johnson, MAI
Senior Managing Director Managing Director
Agreed and accepted for Goldman Sachs Credit Partners L.P.
/s/ [ILLEGIBLE]
- ----------------------------- ----------------------------
By: Signature Date
- ----------------------------- ----------------------------
Name (Type or print) Title
----------------------------
Phone No.
Agreed and accepted for Goldman Sachs Mortgage Company
/s/ Marc K. Furstein 7/24/97
- ----------------------------- ----------------------------
By: Signature Date
Marc K. Furstein
Vice President
- ----------------------------- ----------------------------
Name (Type or print) Title
----------------------------
Phone No.
[LETTERHEAD OF LANDAUER REAL ESTATE COUNSELORS]
Goldman Sachs Credit Partners L.P.
Goldman Sachs Mortgage Company
GMAC Commercial Mortgage Corporation
June 30, 1997
Page 6
Agreed and accepted for GMAC Mortgage Corporation
/s/ Vacys Garbonkus
- ----------------------------- ----------------------------
By: Signature Date
- ----------------------------- ----------------------------
Name (Type or print) Title
----------------------------
Phone No.
[LETTERHEAD OF LANDAUER REAL ESTATE COUNSELORS]
LIMITING CONDITIONS
This report is made expressly subject to the conditions and
stipulations following:
1. Date and definitions of value, together with other definitions and
assumptions on which our analyses are based, are set forth in appropriate
sections of this report. These are to be considered part of these limiting
conditions as if included here in their entirety.
2. The conclusions stated herein, including values which are expressed in
terms of the U. S. Dollar, apply only as of the date of value and are
based on prevailing physical and economic conditions and available
information at that time. Economic projections do not represent
forecasting of future events. Rather, they reflect a method commonly used
by investors to gauge the effect of anticipated trends on investment
yields. No representation is made as to the effect of subsequent events
which may significantly alter the conclusions reported herein.
3. Title to the property is assumed to be marketable. The property is
considered as being under responsible ownership and free of all
encumbrances except as specifically discussed herein.
4. Information reported herein has been obtained from reliable sources and,
where feasible, has been verified. The appraisers reserve the right to
make appropriate revisions in the event of discovery of additional or more
accurate data.
5. No responsibility is accepted by Landauer for considerations requiring
expertise in other fields. Included in this category are ownership, legal
description and other legal matters, survey of property boundaries,
geologic considerations including soils and seismic stability, civil,
structural or other engineering, and identification of hazardous or toxic
substances. Data furnished or obtained from public sources relative to
these matters has been adopted and is assumed to be correct.
6. Except where specifically noted, we have no cause to expect the existence
of undisclosed easements, encroachments or defects in title, access,
geology (the California coastal region is prone to earthquakes),
structural integrity or mechanical systems. Any need for further study
indicated by our investigation has been disclosed to the client and/or
noted in the report; results of any such studies furnished have been
accepted and the source identified. Maps and other graphic materials
reproduced herein are for illustrative purposes only, and are not to be
relied on for factual information.
7. The appraisers have inspected the subject property with due diligence
expected of a professional real estate appraiser. The appraisers are not
qualified to detect hazardous waste and/or toxic materials. Any comment by
the appraisers that might suggest the possibility of the presence of such
substances should not be taken as confirmation of the presence of
hazardous waste and/or toxic material. Such determination would require
investigation by a qualified expert in the field of environmental
assessment.
[LETTERHEAD OF LANDAUER REAL ESTATE COUNSELORS]
The presence of substances such as asbestos, urea-formaldehyde foam
insulation or other potentially hazardous material may affect the value of
the property. The appraisers' value estimate is predicated on the
assumption that there is no such material on or in the property that would
cause a loss in value.
No responsibility is assumed for any environmental conditions, or for any
expertise or engineering knowledge required to discover them. The
appraisers' descriptions and resulting comments are the result of the
routine observations made during the appraisal.
8. This appraisal covers only the real property described herein. Unless
specifically stated to the contrary, it does not include consideration of
mineral rights or related right of entry, nor personal property or the
removal thereof. Values reported herein are not intended to be valid in
any other context, nor are any conclusions as to unit values applicable to
any other property or utilization than that specifically identified
herein.
9. By reason of this assignment, testimony or attendance in court or at any
government or other hearing with reference to the property is not required
without prior arrangements having been made relative to such additional
employment.
10. Use and disclosure of the contents of this report is governed by the
Bylaws and Regulations of the Appraisal Institute. The Appraisal Institute
reserves the right to authorize its representatives to review this report
and its supporting documentation. Except as set forth in the engagement
letter to which these limiting conditions are attached, confidential
distribution of copies of this report in its entirety may be made subject
to the sole control of the addressee, however, excerpts may not be given
to any third party without prior written consent.
11. Except as set forth in the engagement letter to which these limiting
conditions are attached, neither all nor any part of the contents of this
report (especially any conclusions as to value, the identity of the
appraisers, or the firm with which they are connected, or any reference to
the Appraisal Institute or to the MAI or SRA designation) shall be
disseminated to the general public through advertising or sales media,
public relations media, news media, or any other public means of
communication without prior written consent.
12. The Americans with Disabilities Act ("ADA") became effective January 26,
1992. Landauer has not made a specific compliance survey and analysis of
this property to determine whether or not it is in conformity with the
various detailed requirements of the ADA. It is possible that a compliance
survey of the property, together with a detailed analysis of the
requirements of the ADA, could 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 effect upon the value of the property. Since we
have no direct evidence relating to this issue, we did not consider
possible non-compliance with the requirements of ADA in estimating the
value of the property.
[LETTERHEAD OF LANDAUER REAL ESTATE COUNSELORS]
EXHIBIT A
[Date]
TO: Las Vegas Sands, Inc.
201 East Sands Ave.
Las Vegas, Nevada 98109
Venetian Casino Resort, LLC
(Address)
Re: Venetian Casino Resort
Ladies & Gentlemen:
At your request, this letter will serve to confirm that Landauer Associates,
Inc. has prepared a full narrative appraisal report, dated [date] (the
"Appraisal Report"), estimating the market value of the Venetian Casino Resort
including the retail component and the value of the retail component as separate
entities as of [date], the date of value.
Our appraisal assignment was to estimate the market value of the fee simple
interest in the overall Venetian Casino Resort as well as condominium unit in
the retail component as if completed.
In the process of preparing our Appraisal Report, we inspected the property;
interviewed representatives of Las Vegas Sands, Inc. and the Venetian Casino
Report, LLC; reviewed and considered the projections for the project provided by
Las Vegas Sands, Inc. analyzed revenue and expense comparables and made
adjustments to such projections as we deemed necessary based upon our
independent research; reviewed, thoroughly analyzed and compared to the subject
project recent, relevant sales; reviewed the project cost budget; and [undertook
such other applicable alternative methods of valuation as we deemed necessary].
As specified in the Appraisal Report, the value opinion reported below is
qualified by certain assumptions, limiting conditions, certifications, and
definitions which are set forth in the report. Please note that this letter is
provided as a supplement to our Appraisal Report which is available for your
review under separate cover.
The property was inspected by and the report was prepared by Vincent D.
Vassallo, Jr, and Karen L. Johnson with the assistance of other members of
Landauer's professional staff.
[LETTERHEAD OF LANDAUER REAL ESTATE COUNSELORS]
Las Vegas Sands, Inc.
Venetian Casino Resort, LLC
[Date]
Page Two
As a result of our analysis, and as set forth in our appraisal report dated
[date], we estimate that the market value of the Venetian Casino Resort, as of
[date], was:
-------------------------
($xxxxxxxxxxx)
and the market value of the Venetian Retail Centre as a separate entity as of
[date), was:
-------------------------
($xxxxxxxxxxx)
We hereby affirm that between the date of the Appraisal Report (date) and the
date hereof, [nothing has come to the attention of the undersigned which would
invalidate or render incorrect any of the assumptions, estimates or conclusions
included in the Appraisal Report.]
We understand that this letter and the Appraisal Report will be used, and
consent to their use, (a) in connection with borrowings being made from banks
and/or other institutional lenders in connection with the development of the
property and (b) in connection with a public offering or private placement of
securities. We further understand that the offering materials used in connection
with such financings will contain: 1) a reference to our firm and to the
valuation we derived for the property; 2) summary information regarding such
valuation; and 3) this letter. Copies of our Appraisal Report will be made
available to banks for the purpose of evaluating and participating in the Bank
Credit Facility.
We have reviewed the descriptions of our Appraisal Report contained in the
(date) Offering Circular under the captioned sections [" "], and hereby
confirm that the statements therein fairly represent our Appraisal Report.
We hereby consent to the inclusion of such description, and to the references to
Landauer Associates, Inc. and to copies of the Appraisal Report, in the offering
materials referred in the foregoing paragraph. Furthermore, we hereby consent to
being named as experts in such offering materials.
This letter summarizes our opinion of value. The reader is directed to our fully
documented narrative report which contains the text, exhibits, and addenda,
which is available under separate cover.
Sincerely,
LANDAUER ASSOCIATES, INC.
Rodney A. Wycoff, CRE, MAI
Senior Managing Director
Photographs of the Subject Property
SUBJECT
[PHOTO OMITTED]
Subject's Preview Center, looking into construction site
from Las Vegas Boulevard
[PHOTO OMITTED]
Looking north on Las Vegas Boulevard,
in the vicinity of the site
SUBJECT
[PHOTO OMITTED]
Assumed level of architectural detail, as
used in the Preview Center
[PHOTO OMITTED]
Mock up of Canal - brick to be replaced with
larger block in final construction
Photographs of the Selected Casino Hotels
SELECTED CASINO HOTEL PHOTOGRAPHS
[PHOTO OMITTED]
The Mirage
[PHOTO OMITTED]
The Mirage Guest Room
SELECTED CASINO HOTEL PHOTOGRAPHS
[PHOTO OMITTED]
Caesar's Deluxe Guest Room
(see retail photos for exterior)
[PHOTO OMITTED]
Caesar's Deluxe Guest Room
SELECTED CASINO HOTEL PHOTOGRAPHS
[PHOTO OMITTED]
Rio "Suite" Hotel
[PHOTO OMITTED]
Rio Guest Room
SELECTED CASINO HOTEL PHOTOGRAPHS
[PHOTO OMITTED]
MGM Grand
[PHOTO OMITTED]
MGM Guest Room
SELECTED CASINO HOTEL PHOTOGRAPHS
[PHOTO OMITTED]
Treasure Island
[PHOTO OMITTED]
Treasure Island Guest Room
SELECTED CASINO HOTEL PHOTOGRAPHS
[PHOTO OMITTED]
The Monte Carlo
[PHOTO OMITTED]
New York-New York
OTHER RESORTS UNDER CONSTRUCTION
[PHOTO OMITTED]
Bellagio
[PHOTO OMITTED]
Paris Construction
Photographs of Retail Competitors
RETAIL COMPETITION
[PHOTO OMITTED]
Forum Shops and Caesar's Palace
[PHOTO OMITTED]
Interior of Forum Shops
(note Trompel'oeil ceiling)
RETAIL COMPETITION
[PHOTO OMITTED]
Fashion Show Mall
[PHOTO OMITTED]
Boulevard Mall
RETAIL COMPETITION
[PHOTO OMITTED]
Meadows Mall
[PHOTO OMITTED]
Sunset Galleria
Proposed Additions to Supply
Las Vegas
Hotel and Casino Construction Report
Calendar 1997 Openings
Project Location Date of Opening Rooms
- -----------------------------------------------------------------------------------------------------
New York-New York Las Vegas Blvd S. & Tropicana January 2,035
Rio Suites Expansion 3700 W. Flamingo Rd. February 1,025
Budget Suites of America 2219 N. Rancho Drive March 704
Hawthorne Suites Duke Ellington Way & Tropicana June 282
Harrah's Las Vegas 3475 Las Vegas Blvd So. July 986
Budget Suites of America 3655 West Tropicana July 480
Sunset Station Sunset Rd. & Stephanie, Henderson June 450
The Desert Inn Renovation Las Vegas Boulevard N/A (106)
Caesars Palace Expansion 3570 Las Vegas Blvd S. December 1,200
Courtyard by Marriott Green Valley Parkway, Henderson November 154
-----
Total 7,210
* Bold face type indicates that a property is likely to be competitive with a
high-end mega-casino resort.
Source: Las Vegas Convention and Visitors Authority, July 1997, and Landauer
Associates.
Las Vegas
Hotel and Casino Construction Report Continued
Calendar 1998 Openings
Project Location Date of Opening Rooms
- -----------------------------------------------------------------------------------------------------
Marriott Suites Convention Center Dr. January 280
McCarron Plaza Suites** Las Vegas Blvd. & I-215 2nd Quarter 344
AmeriSuites Paradise Rd. & Harmon Ave. 2nd Quarter 200
Residence Inn by Marriott Green Valley Pkwy. & Sunset Rd. 3rd Quarter 126
Bellagio (Mirage Resorts) 3650 Las Vegas Blvd So. 3rd Quarter 3,000
Residence Inn by Marriott Paradise Rd. & Flamingo Rd. 3rd Quarter 300
Polo Towers Time Share** Las Vegas Blvd. So & Harmon 4th Quarter 199
Resort at Summerlin** Summerlin Pkwy. & Rampart Blvd. 4th Quarter 307
Project Paradise Las Vegas Blvd. S. of Russell Rd. 4th Quarter 3,800
Doubletree Hotel** Warm Springs & Pollack 4th Quarter 200
Total: 8,756
**Not Yet Under Construction
Source: Las Vegas Convention and Visitors
Authority, July 1997 and Landauer Associates.
Las Vegas
Hotel and Casino Construction Report Cont.
Calendar 1999 Openings
Project Location Date of Opening Rooms
- -----------------------------------------------------------------------------------------------------
Subject Venetian Resort 3355 Las Vegas Blvd S. 2nd Quarter 3,036
Paris Las Vegas Blvd S. 2nd Quarter 3,000
Ritz Carlton Mountain Spa Rainbow Blvd. & Iron Mountain Rd. 4th Quarter 526
Resort**
Hyatt Lake Las Vegas Lake Las Vegas 4th Quarter 500
Grand Bay Resort Lake Las Vegas 4th Quarter 250
Four Seasons Resort** Las Vegas Blvd. S. of Russell Rd. 4th Quarter 400
Total: 7,713
** Not Yet Under Construction
Source: Las Vegas Convention and Visitors Authority, July 1997
and Landauer Associates, Inc.
Comparable Land Sales
LAND COMPARABLE NO. 1
IDENTIFICATION:
Location: Monte Carlo Casino Site
City, State: Las Vegas, Nevada
Assessor's Parcel No. 162-20-701-020 /after consolidation with
3.0 acre parcel.
Estate: Fee Simple
TRANSACTION DATA:
Sale Date: September 1995
Sale Price: $147,000,000
Terms: Imputed price for 100% interest; part of
company acquisition
Grantor: Gold Strike Resorts
Grantee: Circus Circus Enterprises
Document: Not recorded
SITE DESCRIPTION:
Land Area: 45.72 acres
Improvement of Sale: Vacant w/ plans and approvals
Utilities: All to site
Topography: Level
Zoning: H-1
VALUE INDICATOR:
Price Per Acre: $3,193,351
COMMENTS:
Acquired along with 50% interest in the Elgin Illinois Riverboat,
2 casinos in Jean, NV and 1 casino in Henderson, NV.
See attached work sheet.
Monte Carlo Worksheet
From Circus Circus' annual report on Gold Strike Acquisition
Cash $ 12,000,000
Assumed Debt 165,000,000
17.0 m share stock discounted at 30% (price $25.15 on 3/19 300,475,000
announc.)
Market value acquisition 477,475,000
Assets Acquired:
50% interests in Elgin Riverboat. 8 months EBIT for Circus in '95 was $32.6 m
$ 32.6 / 8 x 12 months = $48.9 / 17% 287,647,059
Estimated for 100% interest in riverboat is $575.3 million
3 casinos; 2 in Jean, 1 in Henderson; 8 months EBIT for Circus in '95 was $12.4
$12.4 / 8 x 12 months = $18.6 / 17% 109,411,765
Estimate is $36.5 million per casino
Value of 50% interest in Monte Carlo, at time plans,
approvals, and dirt 80,416,176
2
Value of 100% interest 160,832,353
160,830,000
Less estimated design fees, arch fees etc. based on Venetian's $34.3
cost on a total project cost of $967.6, or 3.5%) $293.0 5.0% 14,650,000
Dirt Value 146,300,000
Rounded 146,000,000
Acres (gross) 45.72
Price per acre 3,319,351
The Elgin Riverboat is personal property; its dock-side facilities are a
leasehold interest. After the investors have recovered their $112 in investment,
the partnership is required to pay 20 percent of its after tax income to the
city of Elgin and Kane County.
The 17 percent capitalization rate used takes into account the greater dilution
of the income stream in EBIT (depreciation and amortization have been deducted)
but also the offsetting factors relating to the interest involved (personal
property and a leasehold estate in the case of the Riverboat) and the secondary
locations involved in the land based casinos. These casinos receive nearly all
of their net income from gaming operations.
LAND COMPARABLE NO. 2
IDENTIFICATION:
Location: N.W. Corner of Hannon & Strip Site
City, State: Las Vegas, Nevada
Assessor's Parcel No.: 162-20-603-005,006
Estate: Fee Simple
TRANSACTION DATA:
Sale Date: Listing
Sale Price: $66,000,000
Terms: Not applicable
Grantor: R & Z Corporation
Grantee: Not applicable
Document: Not applicable
SITE DESCRIPTION:
Land Area: 11.32 acres
Improvement of Sale: Vacant
Utilities: All to site
Topography: Level
Zoning: H-1
VALUE INDICATOR:
Price Per Acre: $5,830,389
COMMENTS:
Too small for mega resort development, Harmon Street to the south affects
southerly assemblage. Parcel to immediate North is owned by the same
entity that has title to the common areas of the Jockey Club timeshare
project. Joining and developing these two sites would require concessions
to and from the approximately 14,000 individual owners of the timeshare
project.
LAND COMPARABLE NO. 3
IDENTIFICATION:
Location: La Quinta Site
City, State: Las Vegas, Nevada
Assessor's Parcel No.: 162-20-801-002,003
Estate: Fee Simple (1.48 acres) and Leased Fee 0.58
TRANSACTION DATA:
Sale Date: March 1997
Sale Price: $13,500,000
Terms: All cash
Grantor: La Quinta Development Partners
Grantee: MGM Grand & Primadonna
Document: 970317.01522
SITE DESCRIPTION:
Land Area: 2.06 acres
Improvement of Sale: Inn and restaurant
Utilities: All to site
Topography: Level at street grade
Zoning: H-1
VALUE INDICATOR:
Price Per Acre: $6,553,398
COMMENTS:
The fee simple interest in the land which is improved with the
La Quinta Inn was sold concurrently with the ]eased fee
interest in the 0.58-acre Carrows Restaurant site. New York-New
York needs the 2.06-acre site if it is to expand. It is not
clear whether this can be done without the frontage portion
occupied by the restaurant. No information was available on the
costs to buy-out the lease, or demolition costs.
LAND COMPARABLE NO. 4
IDENTIFICATION:
Location: S.W. Corner of Las Vegas Boulevard
South and Hacienda
City, State: Las Vegas, Nevada
Assessor's Parcel No.: 169-29-701-001
Estate: Fee Simple
TRANSACTION DATA:
Sale Date: August 31, 1995
Sale Price: $80,000,000
Terms: All cash
Grantor: Sahara Gaming Corporation dba
as Hacienda Hotel, Inc.
Grantee: Circus Circus, dba Pinkless, Inc.
Document: 9508310249
SITE DESCRIPTION:
Land Area: 47.29 acres
Improvement of Sale: 1,115 room hotel
Utilities: All to site
Topography: Level at street grade
Zoning: H-1
VALUE INDICATOR:
Price Per Acre: $1,691,690
COMMENTS:
This is the sale of the Hacienda Hotel for redevelopment purposes. The
buildings were demolished on December 31, 1996. The sales price was
initially negotiated by another buyer, a former Circus Circus executive
who, due to a conflict of interests, was forced to relinquish the deal to
Circus Circus. The buyer owns the remainder of the block to the south and
most or all of the block to the north. Circus Circus would not disclose
demolition costs or interim EBITDA.
LAND COMPARABLE NO. 5
IDENTIFICATION:
Location: N.W. Corner of Las Vegas Blvd. and
Russell Road
City, State: Las Vegas, Nevada
Assessor's Parcel No.: 162-29-701-002 and 162-29-801-001
TRANSACTION DATA:
Sale Date: March 1995
Sale Price: $73,000,000
Terms: All Cash
Grantor: West State Land
Grantee: Circus Circus Enterprises
Document: 950303:01059
SITE DESCRIPTION:
Land Area: 73.74 acres
Improvement of Sale: Vacant
Utilities: Off-sites installed, available
Topography: Level
Zoning: H-1
VALUE INDICATOR:
Price Per Acre: $989,965
COMMENTS:
This property is located south of Hacienda Hotel/Casino. It is planned for
development of the Millennium project, a multi-phased, multi-property,
gaming development.
LAND COMPARABLE NO. 6
IDENTIFICATION:
Location: 2755 Las Vegas Boulevard South
City, State: Las Vegas, Nevada
Assessor's Parcel No.: 162-09-602-002
Estate: Fee Simple
TRANSACTION DATA:
Sale Date: January 26, 1996
Sale Price: $43,500,000
Terms: All cash and notes
Grantor: Las Vegas Entertainment Network
Grantee: Orion Casino Corporation, a wholly owned
subsidiary of International Thoroughbred
Breeders
Document: 960124-1152 recorded 1/24/96
SITE DESCRIPTION:
Land Area: 20.86 acres
Improvement of Sale: EI Rancho Hotel and Casino
Utilities: All to site
Topography: Level
Zoning: H-1
VALUE INDICATOR:
Price Per Acre: $2,085,331
COMMENTS:
Planning to raze site and redevelop as the Starship Orion Resort with 7
separately owned and operated casinos. Casinos to be structured like
anchor tenants in a shopping mall. The seller received one of the casino
spaces as a continued participatory interest.
LAND COMPARABLE NO. 7
IDENTIFICATION:
Location: 2600 and 2601 Las Vegas Boulevard South
City, State: Las Vegas, Nevada
Assessor's Parcel No.: 162-09-602-001 005 plus 2nd parcel
Fee Simple Fee Simple
TRANSACTION DATA:
Sale Date: October 2, 1995
Sale Price: $61,738,500
Terms: All cash
Grantor: Howard Hughes Corporation
Grantee: The Gordon Gaming Corporation and
Sahara Gaming Corporation
Document: 951002-73
SITE DESCRIPTION:
Land Area: 66.04 acres
Improvement of Sale: Vacant
Utilities: All to site
Topography: Level at street grade
Zoning: H-1
VALUE INDICATOR:
Price Per Acre: $934,865
COMMENTS:
Transaction involving two parcels was negotiated in conjunction with the
20.87 acre Wet'N' Wild site and the 39.17 acre St. Andrews Golf site
parcel located directly across Las Vegas Boulevard South. Cost to buy out
the lease for the as of then undeveloped St. Andrews Golf lease was $3.0
million. Cost to buy out Wet'N Wild lease was $7.0 million if exercised
immediately and stepped down to zero after 4 to 5 years. Rental income
from Wet'N Wild which is open only part of the year, was nominal.
Demolition costs estimated at $1.5 million.
Bovis Construction Detail
VENETIAN PROJECT
STANDARDS DOCUMENT
2. CONSTRUCTION COSTS
SOUTH TOWER
Substructure
Foundations - Tower foundation is a reinforced concrete mat of varying
thickness extending outside of tower perimeter walls.
Basement Construction - excavation is done to the bottom of mat elevation.
Over excavation and fill is done in accordance with Soils Report and
actual ground conditions. Basement perimeter walls, columns, and shear
walls are of reinforced concrete. Footing drains and rubberized asphalt
sheet waterproofing are included around perimeter walls. Wearing slab is
of reinforced concrete on structural fill above mat foundation.
Shell
Superstructure - The Tower structure consists of cast in place reinforced
concrete slabs with bearing walls and columns.
Exterior Closure - The tower is enclosed by unitized curtainwall with
vision and spandrel glass, panelized EIFS, storefront, and entrances with
applied decorative mullions and trim.
Roofing - The roofing system is a membrane system, mechanically attached
and fully adhered, white or gray membrane on structural roof deck of post
tensioned concrete,
Interiors
Interior Partitions - Typical partitions are gypsum board on metal studs,
exit stair enclosures are concrete shear walls and CMU. Suites have
concrete shear walls and 5/8" drywall on metal studs. Mechanical rooms and
shafts are CMU. Firestopping is provided through empty opening and opening
containing cables, pipes, ducts, conduits, and other penetrating items.
Stairways - Stairs are portland cement steps with metal railings as
required by code. Also metal pan stairs with concrete inserts. Decorative
rail and steps are included on stairs in public areas.
3
VENETIAN PROJECT
STANDARDS DOCUMENT
2. CONSTRUCTION COSTS
SOUTH TOWER (continued)
Interior finishes - Wall finishes include painted concrete and drywall
partitions, vinyl wall covering, and stone/marble equivalent. Floors
include carpet, stone/marble equivalent, and sealed and painted concrete
floors in BOH areas. Ceiling finishes include spray-on textured paint on
concrete slabs, acoustic panels, and painted drywall. Suites and corridors
include decorative crown molding, base, chair rail, and panel molding.
Suite finishes are described in more detail under the F,F & E line item.
Services
Conveying Systems - The Tower contains electric gearless traction
passenger and freight elevators with appropriate cab finishes and two-way
communications system.
Plurnbing Systems - Plumbing Fixtures include water closets with turbo
type flush tank, elongated bowl, wall hung urinals of vitreous china with
flush valve, wall hung or counter mounted lavatories and sinks of vitreous
china or stainless steel, showers with hot and cold water mixing valves
with glass shower doors, bathtubs of heavy density acrylic with hot and
cold water mixing valve, with high quality fixtures.
Domestic Water Distribution includes three pressure zones (low rise, mid
zone and high zone -downfeed) with a booster system. A hot water direct
gas fired water heater is used for the high zone. Steam is converted to
hot water for low and mid zones. The system includes copper piping with
backflow preventers and shut-off valves.
Waste System is a sovent, cast iron piping, single stack waste and vent
system. Storm drainage system is a rain water drainage piping system of
cast iron piping.
Heating, Ventilating, and Air Conditioning Systems - Suites have vertical
stacked fan coil units, 2 pipe chilled water with electric heat.
Horizontal fan coil units are used in multiple bay suites. Corridors are
conditioned using roof-mounted air handling units and localized fan coils.
Elevator lobbies and elevator machine rooms are conditioned by fan coil
units located in mechanical rooms. Shafts provide corridor smoke
management with exhaust fans at the tower roof controlled by the smoke
management system. Fans pressurize tower stairwells.
4
VENETIAN PROJECT
STANDARDS DOCUMENT
2. CONSTRUCTION COSTS
SOUTH TOWER (continued)
Fire Protection Systems - Automatic sprinkler system in accordance with
Clark County code and Fire Department and by insurance requirements.
Sprinkler zones to coincide with smoke management zones. Standpipe and
hose system with outlet valves in each stairwell vestibule with
intermediate standpipes in accordance with code requirements. Fire
extinguishers, storage cabinets, and fire blankets by code. Fire detection
and alarm system in accordance with NFPA 72 and Clark County Fire
District. All areas zoned in accordance with smoke management zones.
Electrical Systems - For electrical service and distribution refer to
Central Plant electrical. Lighting includes surface mounted and recessed
lights in corridors plus decorative lighting. Suite lighting includes
surface mounted and recessed lights. Suites include general usage
electrical convenience outlets as well ground fault interrupter outlets
per code. Suites also include service to telephones and TVs. Alarm and
detection systems include self-contained smoke detectors in suites.
Corridors contain smoke detectors and audio/visual devices connected to
building alarm system with system audio alarm systems mounted in corridors
and suites. Stairways contain smoke detectors with alarms activating
pressurization and automatic door closures. Mechanical equipment units
provided with smoke detectors per code.
Suites contain dedicated fax/data and multiple telephone outlets.
5
VENETIAN PROJECT
STANDARDS DOCUMENT
2. CONSTRUCTION COSTS
PODIUM LOWRISE
Substructure
Foundations - Lowrise foundations are reinforced concrete spread footings
of varying sizes per structural engineer calculations.
Basement Construction - The basement includes reinforced concrete
perimeter walls with continuous concrete footings, and structural steel
columns with base plates and anchor bolts to spread footings. Perimeter
footing drains are included per the Soils Report. Standard slab on grade
is included and thickened where walkerduct occurs. Over excavation and
fill is done in accordance with Soils Report and actual ground conditions.
Perimeter footing drains and rubberized asphalt sheet waterproofing is
included.
Shell
Superstructure - The structure is a structural steel frame with concrete
filled metal deck. Cementitious spray-on fireproofing is utilized on steel
frame members.
Exterior Closure - The building enclosure includes fixed window units with
vision and spandrel glass, storefront and entrances with applied decorative
trim. Decorative, themed facades using combination of EIFS shapes and cast
GFRG products.
Roofing - The roofing system is lightweight insulating concrete sandwiching
an insulation board with rubberized asphalt sheet waterproofing. Various
finishes including pool deck and decorative stone or stamped concrete are
used in public areas.
6
VENETIAN PROJECT
STANDARDS DOCUMENT
2. CONSTRUCTION COSTS
PODIUM LOWRISE (continued)
Interiors
Interior Partitions - Exit stair enclosures are concrete shear walls and
CMU. Mechanical rooms and shaft are CMU. Other partitions are drywall and
metal studs. Firestopping is provided through empty opening and opening
containing cables, pipes, ducts, conduits, and other penetrating items.
Stairways - Stairs are portland cement stairs with metal railings required
by code. Also used are metal pan stairs with concrete inserts. Decorative
rail is included in public areas.
Interior Finishes - Interior Finishes for the Podium Lowrise are described
in the F,F&E line item.
Services
Conveying Systems - mix of electric geared traction and hydraulic
passenger and freight elevators with appropriate cab finishes and two-way
communications system. Escalators are included at Casino and at pedestrian
bridges. Moving walkways are included at pedestrian bridges.
Plumbing Systems - The Lowrise uses conventional waste and vent cast iron
piping. All public restrooms have automatic flush valves on urinals and
water closets and electric eye faucets. BOH restrooms have manual flush
valves and faucets. Steam from the Central Plant is converted to hot water
for heating and domestic hot water. Hot and cold water is piped to all
retail spaces.
Heating, Ventilating, and Air Conditioning Systems - The Lowrise is
serviced by multiple VAV air handling units with cooling coils and heating
coils, automatic air side economizers and smoke exhaust fans. Chilled and
hot water is distributed throughout the Lowrise. Conditioned air is
provided to all retail spaces.
7
VENETIAN PROJECT
STANDARDS DOCUMENT
2. CONSTRUCTION COSTS
PODIUM LOWRISE (continued)
Fire Protection Systems - The building includes an automatic sprinkler
system in accordance with Clark County code and Fire Department and by
insurance requirements. Sprinkler zones coincide with smoke management
zones. Standpipe and hose system with outlet valves are located in each
stairwell vestibule with intermediate standpipes in accordance with code
requirements. Fire extinguishers, storage cabinets, and fire blankets are
included by code. Fire detection and alarm system is in accordance with
NFPA 72 and Clark County Fire District. All areas are zoned in accordance
with smoke management zones.
Electrical Systems - For electrical service and distribution refer to
Central Plant electrical section. Lighting at the Casino includes standard
incandescent fixtures as well as specialty fixtures as specified by Casino
interior designer. Offices, administrative areas, and BOH areas use
fluorescent lighting. Lounges and bars include incandescent lighting on
dimmers. General use receptacles are included throughout the building per
code. The alarm and detection system includes audio/visual devices,
detectors, and speakers throughout the building. The Fire Command Center is
located in the Lowrise and includes components as listed in UBC 403. Other
systems include the telephone system, sound system, master antenna
television system, security/surveillance system, and paging system. The
Casino floor includes a walkerduct grid for the data and power connection
of gaming equipment and systems.
8
VENETIAN PROJECT
STANDARDS DOCUMENT
2. CONSTRUCTION COSTS
EAST PROPERTY
Substructure
Foundations - The East Property foundations are reinforced concrete spread
footings of varying sizes per structural engineer calculations.
Basement Construction - The basement includes reinforced concrete perimeter
walls with continuous concrete footing. Cast in place reinforced concrete
columns are used in the Central Plant and in the mezzanine area. Other
areas have structural steel columns on spread footings with base plates and
anchor bolts. Perimeter footing drains per soils report. Over excavation
and fill is done in accordance with the Soils Report and actual ground
conditions. Perimeter footing drains and rubberized asphalt sheet
waterproofing is included.
Shell
Superstructure - Central Plant is of cast in place concrete columns, beams
and shear walls to roof. The Central Plant roof framing is of structural
steel. The mezzanine at elevation 81' is of cast in place concrete columns
and concrete slab. Other areas including meeting rooms, warehouse, and
ballrooms are done with structural steel framing. Ballroom floor is
equipped with tuned mass damper to control vibration.
Exterior Closure - The exterior is done in insulated metal panel to match
existing SECC.
Roofing - The roofing system is a membrane system mechanically attached and
fully adhered.
Interiors
Interior Partitions - Partitions are a combination of 5/8 drywall on metal
studs, concrete shear walls and CMU.
Stairways - Stairs are portland cement stairs with metal railings required
by code. Also metal pan stairs with concrete inserts.
Interior Finishes - Finishes are to match existing SECC in quality and
level of finish.
9
VENETIAN PROJECT
STANDARDS DOCUMENT
2. CONSTRUCTION COSTS
EAST PROPERTY (continued)
Services
Conveying Systems - Building includes hydraulic freight and passenger
elevators.
Plumbing Systems - The East Property uses conventional waste and vent cast
iron piping. All public restrooms have automatic flush valves on urinals
and water closets and electric eye faucets. BOH restrooms have manual flush
valves and faucets. Steam from the Central Plant is converted to hot water
for heating and domestic hot water.
Heating, Ventilating, and Air Conditioning Systems - The East Property is
serviced by multiple roof mounted VAV air handling units with cooling coils
and heating coils, automatic air side economizers. Chilled and hot water is
distributed throughout the East Property. Steam and chilled water is
provided throughout the facility by the Central Plant included in the East
Property. Chilled water is produced by 2,000 ton chillers located in the
basement. Steam is produced on the second level by 700 HP boilers.
Fire Protection Systems - The building includes an automatic sprinkler
system in accordance with Clark County code and Fire Department and by
insurance requirements. Sprinkler zones coincide with smoke management
zones. Standpipe and hose system with outlet valves are in each stairwell
vestibule with intermediate standpipes in accordance with code
requirements. Fire extinguishers, storage cabinets, and fire blankets are
included by code. Fire detection and alarm system is in accordance with
NFPA 72 and Clark County Fire District. All areas are zoned in accordance
with smoke management zones.
Electrical Systems - General electrical service is provided to all areas
including offices, Central Plant, meeting rooms, ballrooms, and BOH.
Overall Electrical Service - The system is 12.5 KV, 3 phase, 4-wire power.
Panels, transformers and equipment are sized for spare capacity. Incoming
power from Nevada Power comes to the on-site main Electric Substation and
is distributed from there to substations located throughout the buildings.
The system is supported by an Emergency Standby system of 1,750 KW diesel
driven, air cooled generators, automatic transfer switches and automatic
paralleling switchgear. The generators we located in the Central Plant.
10
Hotel Investment OUTLOOK
LANDAUER HOTEL INVESTMENT
HOSPITALITY GROUP OUTLOOK
1997 o Volume 6 o No. 1
[GRAPH OF CONSTRUCTION TRENDS OMITTED]
1997 Survey Results
Property Prices Continue to Rise! That is what the results of our HIO survey
for 1997 suggest. Hotel investment is heated, primarily driven by C-Corps and
REITs. The necessity for REITs to continue strong returns to owners requires
continuing growth. The two hotel pair-shared REITs, Starwood Lodging Trust and
Patriot American, have an advantage in their structural efficiency. Wall Street
has acknowledged this by pouring more money into their holdings. With the cost
of capital in some cases at Libor plus 150 basis points, money is relatively
cheap. The result has been to drive property values closer to replacement value.
This has been particularly true for the full-service hotel sector.
There are several regional hotel companies and C-Corps who are making a
play at greater product distribution. Savings and loans as well as regional
banks are once again lending for hotel development. Limited partnership
interests in hotel assets are on the rise leading to more multiple ownership
transactions. Insurance companies and pension funds are also re-entering the
hotel investment arena. Only five years ago, many of these financial sources
viewed the hotel industry as a grave error in their investment strategies. Now
hotels provide returns on par with the technology and residential real estate
sectors. The current trends appear to be sustainable for the foreseeable future.
While prices of existing full-service hotels continue to rise, lenders are
seriously considering requests for capital for new development.
Once again, from a full-service perspective, our survey results are nearly
unanimously positive. Almost everyone agrees that from an operational
perspective this sector has at least one to two strong years ahead, with
continued REVPAR gains in excess of inflation. Largely, investors agree that the
opportunities are in rate, as many markets reach their natural capacity
constraints from an occupancy standpoint.
Augmenting the revenue enhancements are cost efficiencies which have been
gradually engineered by hotel management companies during the leaner years
experienced earlier in the decade. Cash rich hotel companies are again beginning
to focus on Management Information Systems and product expansion/distribution.
Will these investments in capital continue to provide the requisite returns in
economic efficiency? The hard decisions of where to invest capital is best left
to those with experience doing it for other industries. Hoteliers have proved to
be resilient during periods of operational distress. However, they have been
less savvy in the business of directing capital. Labor unions are again gaining
strength in the larger US cities and, given the record lows in unemployment,
this trend is likely to continue. The result: higher operating costs in major
markets. The chains are also outsourcing services traditionally absorbed in
operations. Contractual obligations are therefore a liability more than an asset
of some targeted acquisitions.
To be a participant in the current marketplace, investors indicate an
aggressive approach must be taken. Consistent with this, our survey results show
buyers projecting income growth to be higher than operating expense growth when
developing pro-formas. In addition to the improved operating performance
resulting from positive market conditions, in most instances, buyers are pricing
hotels by applying their company's operating efficiencies to future pro-formas.
The expectation of future potential was well illustrated in several portfolio
transactions in 1996 and early 1997 where the suggested cap rate for the
trailing 12 month income stream was in the five to seven percent range.
These transactions are a reflection of a broader change that is presently
developing within the marketplace. Apparently, when making purchase decisions
investors are not only forecasting operating efficiencies and top line
advancements, but are also incorporating within their pricing parameters the
advantages certain forms of public ownership provide. For instance, the upside
associated with certain transactions also integrates the benefit "paired-shared"
REITs have of recouping certain operating expenses such as management fees. This
is in addition to
Continued on page 3
EQUITY PARAMETERS CAPITALIZATION RATES YIELD RATES
- ----------------- -------------------- --------------------------
Holding Free and
Period (yrs) Overall Terminal Clear Leveraged
- ----------------------------------------------------------------------------------
Survey Average 7.87 9.45% 10.85% 13.50% 18.67%
- ----------------------------------------------------------------------------------
Survey Range 4.00-10.00 7.50-13.00 9.00-12.00 12.00-16.00 15.00-25.00
- ----------------------------------------------------------------------------------
I Year Ago-Average 6.52 10.46% 10.74% 14.20% 21.71%
- ----------------------------------------------------------------------------------
1 Year Ago-Range 3.00-10.00 7.00-14.00 7.00-13.00 10.00-20.00 18.00-25.00
- ----------------------------------------------------------------------------------
DEBT PARAMETERS YIELD RATES
- --------------- ------------------------
Interest Terms Amortization Debt Coverage Loan to
Rate (years) Period Ratio Value
- ----------------------------------------------------------------------------------
Survey Average 8.79 14.20 23.17 1.43 70.00%
- ----------------------------------------------------------------------------------
Survey Range 8.10-9.25 5.00-25.00 20.00-30.00 1.40-1.50 65.00-75.00
- ----------------------------------------------------------------------------------
1 Year Ago-Average 9.57 8.46 21.39 1.44 64.00%
- ----------------------------------------------------------------------------------
1 Year Ago-Range 8.50-11.50 3.00-20.00 15.00-25.00 1.30-1.50 40.00-90.00
- ----------------------------------------------------------------------------------
DISCOUNTED CASH FLOW PARAMETERS INFLATION ESTIMATES:
- ------------------------------- --------------------
Revenue Expenses Selling Costs
- --------------------------------------------------------------------------------
Survey Average 3.54% 3.39% 2.58%
- --------------------------------------------------------------------------------
Survey Range 3.00-4.00 3.00-4.00 1.00-3.50
- --------------------------------------------------------------------------------
[GRAPH OF LANDAUER HOTEL MARKET EQUILIBRIUM FORECAST OMITTED]
page 2
Continued on page 1
[GRAPH OF NATIONAL CAPITALIZATION RATES OMITTED]
their tax friendly structures.
Reports suggest that some REITs are taking advantage of their ownership
structure by deferring costs such as replacement reserves. The long-term
consequences of these cash management tactics are obvious; however, analysts on
Wall Street are "switched on" to such cash flow manipulation and will rate rogue
structures accordingly.
There continues to be concern that some portfolio acquisitions are being
purchased at a premium and that the buying decision is based on broker or
investment banker projections; which typically do not account for economic
downturns. Further, investment decisions are more commonly strategic with
product distribution overriding economics in many cases.
Initial public offerings of new hotel stocks are expected to continue at a
slower pace, being replaced by merger and acquisition activity. This has been
represented by DoubleTree's unsuccessful and Marriott's successful acquisition
of the Renaissance hotel portfolio. Patriot's acquisition of Wyndham is another
example of the activity likely to come. The financial arrangements of such deals
will vary according to the tax implications with stock swaps and partnership
trades proliferating.
While the supply of attractive deals has diminished considerably,
investors hungry for product are considering more complex deals. Properties with
restrictive contractual obligations or properties in need of significant capital
outlays for renovation are now being considered. Investors are looking to
foreign markets for expansion as well. Others are considering resort locations
in the US and Caribbean.
On financing and new development
In the full-service arena, the supply of debt capital continues to
increase dramatically as a result of the high returns delivered by REITs.
Insurance and pension funds have also provided capital to the industry, further
placing "pressure" on The Street. The trend continues toward good quality,
primary location, full-service hotels. Also, the money center banks are
developing conduit programs, as they attempt to break into the more profitable
business of securitization.
Construction spending has grown dramatically over the past 12 months (see
chart). Most of the construction has been in the all-suite and limited-service
sectors up until recently; however, current trends suggest that the full-service
sector will be the primary target of developers. Public assistance and tax
credits are no longer requirements for underwriting. Nonetheless, hurdle rates
for developers remain relatively high in the low to mid-20s.
Survey respondents overwhelmingly answered that the state of the hotel
industry looks positive over the next six months. Virtually all lenders and
investors responded that they will consider new development, leaning heavily
toward first-class and luxury projects. Locations to be considered largely
included Center City, Airport, and Suburban. No respondents suggested that they
were considering highway development. All respondents felt that the availability
of debt and equity has improved. Surprisingly, these same people indicated that
the outlook for equity over the next six months would not be as strong as it
been.
Outlook
Are we back in the 1980's again? Potentially. However, deals in the 1990's
appear to be more carefully calculated and investors are approaching
transactions with more financial savvy. The REITs are generally driving prices
higher because some argue that the "pair-shared" structure is as much as 15
percent more efficient than the traditional C-Corp. If that's the case, count on
a building boom that surpasses the mid-1980's. This supply increase will, in all
likelihood, be met by strong demand growth in both the corporate and leisure
travel segments. Demand for high-quality accommodations will be strong. Suites
will remain popular and, as indicated by our survey participants, full-service
hotels will be back with a vengeance.
Merger and acquisition activity is likely to continue at an accelerated
pace over the next few years. This being the case, funds will largely be
intermediated by Wall Street in the form of REITs, CMBS offerings, mortgage
conduit programs, and various lines of credit for acquisitions. Expect some
interesting marriages among operating companies and more hostile takeover
attempts like Hilton's run at ITT/Sheraton. This will further drive prices up.
Many property owners will correctly choose "now" as the time to sell.
Although the outlook for the hotel industry is strong and the consensus among
our survey participants echoes that sentiment, all bets are off when we enter
the next economic recession.
page 3
[GRAPH OF PROFILE OF ACTIVE INVESTORS OMITTED]
LANDAUER
Hospitality Group
HOSPITALITY COUNSELING
WITH
AN INVESTOR'S PERSPECTIVE
Every effort has been made to provide accurate information. This publication
does not render accounting, appraisal, counseling, investment, legal or other
professional service. If such services are required, a professional should be
engaged.
(C) Hotel Investment OUTLOOK is published by Landauer Associates, Inc.
Permission to reprint these articles is given provided Landauer Associates, Inc.
is referenced and notified prior to use. Robert C. Mullikin, Managing Director
in Landauer's New York office is principal author of the OUTLOOK.
PARTICIPANTS IN THE HOTEL INVESTMENT SURVEY
Adam's Mark Hotels & Resorts
American General Hospitality
B.F. Saul Co.
Bedford Capital Corporation
Bristol Hotel Co.
Chase Securities
Choice Hotels International
Column Financial, Inc.
DoubleTree Hotel Corp.
Eastdil Realty
GMAC Commercial Mortgage Corp.
Hodges Ward Elliott
Host Marriott Corporation
Hotel Partners
InterBank Mortgage Corporation
Loews Hotels
MassMutual
New Castle Hotels
Prime Hospitality Corp.
Remington Hotel Corporation
Starwood Lodging Corporation
Teachers Insurance Annuity (TIAA)
The Camberley Hotel Company
T.J. Fox Associates
USF&G Realty Advisors
White Lodging Services Corp.
Active hotel investors and lenders are welcome to participate in the Hotel
Investment OUTLOOK. In addition to the participants listed, we are grateful for
the comments of those surveyed who expressed no interest in hotels at this time
or who desired not to be acknowledged in the OUTLOOK.
Atlanta Fort Lauderdale Newport Beach
233 Peachtree Street N.E., Suite 1900 100 NE 3rd Avenue, Suite 770 4100 MacArthur Avenue, Suite 310
Atlanta, Georgia 30303 Ft. Lauderdale, Florida 33394 Newport Beach, CA 92660
(404) 659-4040 (954) 764-5403 (714) 851-9594
Boston Los Angeles Scottsdale
One State Street, 6th Floor 707 Wilshire Boulevard, Suite 4950 8282 North Hayden Road, Suite 291
Boston, MA 02109 Los Angeles, California 90017 Scottsdale, AZ 85258
(617) 720-0515 (213) 624-3400 (602) 607-0550
Chicago Miami Sydney, Australia
225 West Washington Street, Suite 1500 269 Giralda Avenue, Suite 201 Level 30, 52 Martin Place
Chicago, Illinois 60606 Coral Gables, Florida 33134 Sydney, NSW 2000 Australia
(312) 899-0100 (305) 591-9122 0ll 612 324 4211
Dallas New York Washington, DC
13760 Noel Road, Suite 930 666 5th Avenue, 25th Floor 8133 Leesburg Pike, Suite 720
Dallas, Texas 75240 New York, New York 10103 Vienna, VA 22182
(972) 866-9090 (212) 621-9500 (202) 337-4680
Casino Hotel Discounted Cash Flow Analysis "As Stabilized
DISCOUNTED CASH FLOW ANALYSIS, UPON STABILIZATION
=================================================
High Discount Rate: Mid Discount Rate: Low Discount Rate:
P.V.@: 23.0% P.V. @: 22.0% P.V. @: 21.0%
------------------- ------------------ ------------------
Net
Year Fiscal Operating P.V. Present P.V. Present P.V. Present
Number Year Income Factor Value Factor Value Factor Value
1.000 2002 230,598 0.8130 187,478 0.8197 189,015 0.8264 190,577
2.000 2003 238,573 0.6610 157,693 0.6719 160,288 0.6830 162,949
3.000 2004 246,890 0.5374 132,675 0.5507 135,964 0.5645 139,363
4.000 2005 255,498 0.4369 111,626 0.4514 115,332 0.4665 119,192
5.000 2006 264,407 0.3552 93,918 0.3700 97,830 0.3855 101,940
6.000 2007 273,755 0.2888 79,055 0.3033 83,024 0.3186 87,227
7.000 2008 283,299 0.2348 66,513 0.2486 70,425 0.2633 74,60l
8.000 2009 293,177 0.1909 55,961 0.2038 59,738 0.2176 63,804
9.000 2010 303,400 0.1552 47,084 0.1670 50,673 0.1799 54,569
10.000 2011 314,019 0.1262 39,619 0.1369 42,989 0.1486 46,677
11.000 2012 0 0.1026 0 0.1122 0 0.1228 0
--------- -------- -------
Subtotal PV From Cash Flow $971,622 $1,005,276 $1,040,899
Reversion 2009 1,593,000 0.1909 304,071 0.2038 324,591 0.2176 346,683
--------- -------- -------
Total PV As Of: 00-Jan-00 $1,275,693 $1,329,869 $1,387,582
Deflated to Appraisal Date @: 3.50%
Months to Appraisal Date: 0 1.0000 1.0000 1.0000
--------- -------- -------
Present Value As Of: 00-Jan-00 $1,275,693 $1,329,869 $1,387,582
Less Renovation Costs (see ASSUMPTIONS) 0 0 0
--------- -------- -------
Adjusted Present Value $1,275,693 $1,329,869 $1,387,582
Rounded: $1,276,000 $1,330,000 $1,388,000
========== ========== ==========
VALUATION WITH REVERSIONARY OAR OF 19.0%
==========================================
Subtotal PV From Cash Flow 971,622 1,005,278 1,040,899
Reversion 2009 1,676,366 0,1909 319,984 0.2038 341,578 0.2176 364,826
--------- -------- -------
Total PV As Of: 00-Jan-00 $1,291,606 $1,346,856 $1,405,725
Deflated to Appraisal Date @: 3.50%
Months to Appraisal Date: 0 1.0000 1.0000 1.0000
--------- -------- -------
Present Value As Of: $1,291,606 $1,346,856 $1,405,725
Less Renovation Costs (see ASSUMPTIONS) 0 0 0
--------- -------- -------
Adjusted Present Value $1,291,606 $1,346,856 $1,405,725
Rounded: $1,292,000 $1,347,000 $1,406,000
========== ========== ==========
REVERSION CALCULATION:
=====================
Hi OAR Low OAR
====== =======
NOI for Year: 2012 $325,010 325,010
Divided by Reversion OAR 0.200 0.190
------ -----
Gross Reversion $1,625,048 $1,710,577
Less Costs of S @: 2.0% 32,501 34,212
------ -----
Net Reversion $1,592,547 $1,676,366
1,593,000 1,676,000
SUMMARY OF VALUES AND KEY STATISTICS, UPON STABILIZATION
Discount Reversion Value 3,036 Year 1 Year 2 Year 3 Year 4
Range Rate OAR (000's) $/Room 2002 2003 2004 2005
----- ---- --- ------- ------ ---- ---- ---- ----
VALUE BEFORE RENOVATIONS:
Low 23.0% 20.0% $1,276,000 $ 420,290 n.m n.m n.m n.m
High 23.0% 19.0% $1,292,000 $ 425,560 n.m n.m n.m n.m
Low 22.0% 20.0% $1,330,000 $ 438,076 n.m n.m n.m n.m
High 22.0% 19.0% $1,347,000 $ 443,676 n.m n.m n.m n.m
Low 21.0% 20.0% $1,388,000 $ 457,181 n.m n.m n.m n.m
High 21.0% 19.0% $1,406,000 $ 463,109 n.m n.m n.m n.m
VALUE AFTER RENOVATIONS:
Low 23.0% 20.0% $1,276,000 $ 420,290 18.1% 18.7% 19.3% 20.0%
High 23.0% 19.0% $1,292,000 $ 425,560 17.8% 18.5% 19.1% 19.8%
Low 22.0% 20.0% $1,330,000 $ 438,076 17.3% 17.9% 18.6% 19.2%
High 22.0% 19.0% $1,347,000 $ 443,676 17.1% 17.7% 18.3% 19.0%
Low 21.0% 20.0% $1,388,000 $ 457,181 16.6% 17.2% 17.8% 18.4%
High 21.0% 19.0% $1,406,000 $ 463,109 16.4% 17.0% 17.6% 18.2%
Qualifications of the Appraisers
[LETTERHEAD OF LANDAUER REAL ESTATE COUNSELORS]
Professional Qualifications
RODNEY A. WYCOFF, CRE, MAI
EXPERIENCE: Landauer Associates, Inc., Los Angeles, California
(since June 1996)
Senior Managing Director. His responsibilities include
coordination of the firm's valuation activities throughout the
western United States and the Pacific Rim. Mr. Wycoff has over
20 years experience in the real estate industry as an
appraiser, consultant, lender, and manager. A specialist in
major investment real estate projects, his professional
background is briefly summarized as follows.
SMS Appraisals (1994-1996)
President. As President of SMS, Mr. Wycoff was responsible for
the general management of this $30M national organization. He
also directed facility management and developed new business
opportunities for Strategic Mortgage Services, the parent
company.
Wycoff & Company (1993-1994)
Mr. Wycoff established an Irvine based consulting practice
specializing in valuation and litigation support services
throughout Southern California. Typical engagements consisted
of valuation, consulting and asset management. The practice
was merged into SMS Appraisals in 1994.
Equitable Real Estate (1989-1993)
Vice President. In his capacities as first Regional Appraiser
and then Vice President of Asset Management for Equitable Real
Estate, Mr. Wycoff was responsible for the valuation and
management of a billion-dollar multi-state real property
portfolio. Typical assignments included all phases of
valuation and asset management including major renovation
projects.
Laventhol & Horwath (1985-1989)
Senior Principal. As director of the San Francisco based
valuation practice, Mr. Wycoff was involved in complex
consulting and valuation assignments involving major
hospitality and real estate projects throughout the western
United States, Hawaii, and the Pacific Rim.
Ginther Wycoff Group (1979-1985)
Principal. Mr. Wycoff was co-owner of this Denver-based
appraisal and consulting practice and specialized in the
valuation of major hotels, office buildings, industrial
developments, and recreational properties. The Ginther Wycoff
Group was purchased by Laventhol & Horwath in 1985.
New York Life Insurance Company (1974-1979)
Assistant Vice President. While employed by New York Life, Mr.
Wycoff served in several capacities in real estate lending,
management and investment, ultimately as Rocky Mountain
Regional Manager based in Denver, Colorado.
PROFESSIONAL
ACTIVITIES: MAI: Member, Appraisal Institute
CRE: American Society of Real Estate Counselors
LICENSE: Certified General Real Estate Appraiser
State of California No. AG007074
CERTIFICATION: Currently certified in the voluntary programs of
continuing education for the designated members
of the Appraisal Institute.
EDUCATION: AB Degree, California State University, San Francisco
[LETTERHEAD OF LANDAUER REAL ESTATE COUNSELORS]
Professional Qualifications
KAREN BRADBURY JOHNSON, MAI
EXPERIENCE: Landauer Associates, Inc., Los Angeles, California
(effective November 1, 1996)
Managing Director. Ms. Johnson's responsibilities include the
day-to-day management of the hospitality consulting practices
and hands on involvement in most assignments. Her professional
background is briefly summarized as follows.
PFK Consulting, Inc., Los Angeles, California (1994-1996)
Vice President. While at PFK Consulting, Ms. Johnson
supervised and prepared appraisals of hotels, casinos, casino
land, spas, and other recreational projects. Ms. Johnson also
authored the chapter on management contracts for the Urban
Land Institute (ULI) Handbook on Hotel Development.
Gloodt Associates, Inc., Chicago, Illinois (1990-1994)
Director. In her capacity as Director of the Hospitality
Consulting practice, Ms. Johnson supervised a staff of three
and was responsible for complex valuation assignments
involving hotels, resorts, and unusual assets such as a
thoroughbred race track and an Apparel Mart. Ms. Johnson
also completed numerous reviews of third-party appraisal
reports for financial institutions to determine valuation
accuracy and compliance with bank and FIRREA reporting
standards
Marriott Hotels, Chicago, Illinois and Washington, D.C.
(1988-1990)
Regional Director, Hotel Development Planning. Ms. Johnson
supervised the midwestern regional office for Marriott's
Marketing Planning department, opining on viability of
proposed corporate developments.
Pannell Kerr Forster, various Southern California Offices
(1982-1988)
Senior Manager. Ms. Johnson began her consulting career with
Pannell Kerr Forster performing feasibility and financial
analyses of hotels, golf courses, spas and other recreational
projects and rose to become the head of the hospitality
consulting practice in San Diego.
EDUCATION: Michigan State University, 1978,
BS, Hotel and Restaurant Administration, Magna Cum Laude
PROFESSIONAL
ACTIVITIES: Member of the Appraisal Institute
LICENSES: Certified General Real Estate Appraiser
States of California, Arizona, Nevada, Colorado and Illinois
CERTIFICATION: Currently certified in the voluntary programs of continuing
education for the desginated members of the Appraisal
Institute.
[LETTERHEAD OF LANDAUER REAL ESTATE COUNSELORS]
Professional Qualifications
JOHN R. FORBES, MAI
EXPERIENCE: Landauer Associates, Inc. Fort Lauderdale, FL (since 1996)
Director, Valuation and Technical Services Division
General real estate consulting, valuation, appraisal and
analysis of investment-grade, commercial real estate on a
national basis for financial institutions, investment
companies and individuals.
Chase Manhattan Bank New York, N.Y. (1990-1996)
Vice President, Real Estate Valuation Services Division.
Responsibilities included: comprehensive analysis, valuation
and performance review of a wide range of investment grade,
commercial real estate for underwriting, loan structuring,
securitization, acquisition/disposition and portfolio
management purposes; facilitation, coordination and quality
control of the external valuation process; and participation
in asset review to monitor credit risk.
Wm. Shubert& Co. Bronx, N.Y. (1990)
The Weitzman Group New York, N.Y. (1989)
Planned Expansion Group White Plains, N.Y. (1987-1988)
Houlihan & O'Malley Appraisal Co., Inc. Bronxville, N.Y.
(1985-1987)
Staff appraiser. Responsible for general real estate
consulting, including appraisals, of wide variety of
commercial and investment-grade properties.
Garthchester Realty Sales in Scarsdale, N.Y. (1985-1986).
Sales associate.
PROFESSIONAL
ACTIVITIES: MAI, Member of the Appraisal Institute
CERTIFICATION: New York State Certified General Real Estate Appraiser
(#4600-3862)
Licensed Real Estate Salesperson, State of New York
EDUCATION: Bachelor of Arts & Master of Arts, Montclair State College,
Montclair, N.J.