Schuette Becky Feasibility Report

Litchfield Motel Feasibility Report

Prepared by: Becky Schuette April 18, 2009 WRIT3562W

To: Adam Werner, Litchfield Motel Owner From: Becky Schuette Date: April 18, 2009 Subject: Litchfield Motel Feasibility Report

I am pleased to submit the attached copy of the feasibility report regarding the business model for the Litchfield Motel. Summarize the report’s findings. I studied three options to improve the business model of the Litchfield Motel: implementing cost-cutting factors, selling the Motel, and converting the property into apartments. Analyzed through initial and longterm costs, time commitments, and marketability, the report concludes that the most suitable option for the Litchfield Motel is to convert the current property into apartments. Through my research, I believe the next step would be to obtain an official contractors bid proposal and also file for a business equity line of credit or loan. I wish you success in your current business venture. Please contact me with any further questions.

Encl: Report

C on ten ts

Summary...............................................................................................................4 2

Introduction.......................................................................................................4-5 Addressing the Problem..................................................................................................... .........5 Project Scope..................................................................................................................... ..........5 Background Methodology......................................................................................5 Limitations............................................................................................................5 Study of Feasible Options ...................................................................................6-8 Implementing Cost-Cutting Factors........................................................................... ................6 Selling the Motel.............................................................................................. ...........................7 Converting the property into apartments.............................................................................. ..7-8 Conclusion and Recommendation .....................................................................8-9 Appendix .........................................................................................................10-15 Interviews..................................................................................................................... ........10-14 .............................................................................................................................. Work Cited........................................................................................................................... ......15

Figures Included in Report Figure 1.1: Litchfield Renter Median.......................................................................................... .7 Figure 1.2: Comparisons of Feasible Options............................................................. ................8

Su mma ry Based on concluded research, the Litchfield Motel should convert the current property into apartments. This report evaluates three different business model decisions based on the current problems facing the Litchfield Motel. Current economic conditions play a large role in determining the most feasible business model for the Litchfield Motel. 3

For the past three years, the profit margin of the Litchfield Motel has been decreasing at a rapid rate; as a result the Litchfield Motel is losing money and cannot sustain its current business model. To ensure success, the Litchfield Motel must change its current business model to prevent bankruptcy. Consequently, I evaluated three possible solutions: 1. Implementing various cost-cutting measures to save on monthly operating expenses, with no upfront costs. 2. Selling the property through a local realtor, with tough market challenges, and minimal upfront costs. 3. Converting the property into apartments at an upfront cost of $150,000, but would take advantage of the demand for rental housing. I recommend the third alternative, converting the property into apartments, because this will provide a long-term solution to the current Litchfield Motel business model. The minor advantages of implementing cost-cutting factors or selling the property are not sufficient to justify their decreasing investment value.

In tro duc tio n In this feasibility report, three possible solutions have been studied to make a conclusion regarding the current business model of the Litchfield Motel. As the Litchfield Motel struggles with a decreasing profit margin, three viable solutions that were studied are: implementing cost-cutting factors, selling the Motel, or converting the current property into apartments. Financial analyses as well as market analysis of each solution were important factors that helped determine the most feasible solution for the Litchfield Motel’s business model. This includes the study of upfront costs, long-term costs, market demands and an evaluation of current business expenses and profits. 4

For the past three years, the profit margin of the Litchfield Motel has been decreasing at a rapid rate; as a result the Litchfield Motel is losing money and cannot sustain its current business model. To ensure success, the Litchfield Motel must change its current business model to prevent bankruptcy. Adam Werner, owner of the Litchfield Motel, is interested in feasible options to make an educated decision regarding the future of the Litchfield Motel.

Pr oje ct Sco pe Ba ckg rou nd Met hod olo gy The information for this study has been collected through the following procedures: ○

Primary Data- Primary data was collected through interviews with local residents and occupations pertaining to the development of this study. Interviews with the Litchfield Motel owner, local realitor, a contractor, and a resident of Litchfield looking for a rental property, all contributed to the final conclusion.

○

Secondary Data- Various data was taken from governmental websites, and consumer reports.

Li mit ati ons Due to private ownership, getting exact financial figures was not available, and findings are based on an estimate provided by the owner of the Litchfield Motel. Calculations are based on approximations and are subject to change. The proposed solution is based on the current economic market, which is at an unstable point. Market trends are only projections, and not definite conclusions, therefore, the proposed solution may be affected by any unforeseen shifts in the market.

St udy of Fe asi ble Op tio ns 5

Implementing Cost-Cutting Factors Based on current operations, the Litchfield Motel could implement numerous cost-cutting factors to decrease business expenses. Switching the incandescent light bulbs to compact fluorescent in each of the 17 rooms of the Motel could save a total of $2,500 over the course of the light bulbs. It would also save on energy costs, decreasing the amount of energy used by lighting by 75%. The Motel would also be purchasing fewer light bulbs due to a compact fluorescents longer lifespan of 10 times that of an incandescent bulb (Compact Fluorescent Light Bulbs 2009). To change all the light bulbs would require an upfront cost of $320.45. Switching to a low-flow toilet would also cut monthly utility costs. A low-flow toilet would decrease the overall water consumption by $1,800 each year. This however would include an upfront cost of $3,600 (Love 2009). By laying off 2 employees that currently work at the Motel part-time, the motel overhead would decrease significantly. There would be less overhead in wages paid, workman’s compensation, and taxes. This would save an estimated monthly cost of $4,500 (Werner 2009). The disadvantage to cutting employee’s would result in understaffing and put more responsibilities on the owner. By implementing these three cost-cutting factors, there is an overall upfront cost of $3,920.45; while this is minimal, the understaffed motel would not run as efficiently, which may lead to dissatisfied customers. The long-term costs are also minimal, but may not result in significantly higher profit margins due to current market demand for a motel room in Litchfield is very weak due to the competition of new and larger hotels (Werner, 2009).

Sell the Litchfield Motel The local real-estate market in Litchfield is similar to many other areas of Minnesota. “The nationwide commercial real estate market is up compared to the prior three months” (Real Estate Attorney Minnesota 2009). According to an 6

interview with real estate agent Chad Loche, the Litchfield market is still significantly weak despite recent activity being higher the last few months ” (Loche 2009). Currently there is an excess amount of commercial properties on the market in Litchfield. Loche recommends $10,000 to $20,000 in curb appeal updates to the Motel before putting it on the market. These updates would include a new roof, landscaping improvements, and exterior painting. With improvements, he would list the property at $345,000 (Loche 2009). Selling at this price with improvements made and closing costs, there would be a net loss of about one percent. Loche estimates the property to sit on the market for 12 to 18 months before a qualified offer is made (Loche 2009). The owner, Adam Werner, should be prepared to lose up to five percent of his total investment due to low interest in commercial properties and high renovation costs for a new owner. If a profit is desired, Loche recommends waiting about 5 years to sell the property, when the market is more likely to shift to a seller’s market. If the property is sold within the next year, long-term costs would include the six percent realtor’s fees, and most likely a loss in Mr. Werner’s total investment (Loche 2009).

Convert the Property to Apartments With the current rising demand for rental units, converting the Litchfield Motel to apartments is a well considered solution to the Motel’s struggling business model. In an interview with Myron Schuette, a local Contractor, he estimated the cost of this renovation to be $150,000 including labor and an average material cost .With this option, the Motel could be turned into 8 rental units each having 800 square feet. Units would have two bedrooms, one bathroom, and a laundry room (Schuette 2009). According to other comparable rental units in the area, Mr. Werner could charge a monthly rent of $800 plus utilities. This renovation would take about two months to complete, which would result in a loss of 2 months 7

revenue due to a non-functioning motel. There is also a possibility of the renovation taking longer because of change orders and unexpected turns in the project. With the current tax-credits being offered, now is a good time to do this renovation. There is a potential for tax credits in energy efficient windows, siding, roofing, insulation, and a geo-thermal heating system. Long-term costs of the renovation would be paid by tenant rental prices. There would be no need for employees, therefore no worker’s compensation, unemployment tax, or wages will need to be paid. The current market demand for rental units is significantly higher than previous years. As seen in Figure 2, the median rental rate in Litchfield is $619, therefore the new rentals would be competitively priced, with an ideal location on the lake.The town of Litchfield has a high percentage of renters. 29% of Litchfield’s population is renters, compared to the state’s average of 25% (Litchfield Minnesota Houses and Residents 2008).

Co ncl usi on an d Re com men dat ion

Figure 1.1 Medium Rental Price in Litchfield (Litchfield Minnesota Houses and Residents 2008)

The Litchfield Motel offers a great investment opportunity. As seen in Figure 1.2, the three solutions examined identify opportunities and risks for the current owner. Implementing cost-cutting factors has minimal initial costs, and no long term costs. While the time commitment is minimal, the overall demand for renting a hotel room is down due to the surrounding competition. The risk for implementing the cost-cutting factors is minimal but will not support the competitive market. Selling the property in the current market conditions will result in a loss of investment due to the decreasing property values. There are moderate initial and long-term costs associated with this option, but if the owner can afford to retain the property for five years, the 8

market value should rebound to make a profit. The solution to turn the Litchfield Motel into apartments is the most feasible option considering costs, the current market, and time commitment. While the initial cost is highest of the three options, the market demand is the most promising. Since the demand for rental units in Litchfield is high, apartments are sure to sustain a profit. The time commitment for the renovation is also shorter than the timeframe for the Motel to sell on the commercial real estate market. Criteria

Initial Cost ($) Long-term Cost($)

Time Commitment for desired results (months) Market Demand

Implement CostCutting Measures

Sell the Property

$3,920.45

$10,000-$20,000 for improvements

None

Loss of up to 5% of investment

Immediately

12-18 months

Unaffected

Poor

Convert to Apartments $150,000 None-paid by tenant, monthly profit of $3,500 2 months

Very high

Figure 1.2 Comparisons of Feasible Options Studied (Litchfield Minnesota Houses and Residents 2008).

Based on the results of this feasibility study, I recommend that the Litchfield Motel be converted into apartments. The next step is to consult a general 9

contractor to obtain an official bid proposal. In the meantime, consult with your bank about obtaining a business line of credit or loan if needed.

Ap pen dix 10

Feasibility Study Interview Mr. Adam Werner – Litchfield Motel owner/final decision maker Goal: To gain accurate information regarding the background of the Motel, finances and costeffective measures that is currently implemented. Thank you for agreeing to participate in a feasibility study interview. I am currently researching the feasibility options for the Litchfield Motel. The current owner can’t sustain the Motel’s current business model without experiencing a deficit margin. The Litchfield Motel much change its business model, therefore the options being studied are: implementing cost-cutting factors, converting the motel into apartments, or selling the property. The purpose of this interview is to help provide information that will aid in making an informed decision based on the answers you provide and other research options. Your responses are highly valuable and greatly appreciated. Please feel free to contact me with any questions you may have.

1. How many rooms are in the motel? 17 rooms that range in size from 150 sq feet to 175 sq feet. 2. What is your yearly profit/deficit percentage? Currently we roughly have a yearly 12% profit margin. This is down significantly from past years which averaged about 25% 3. What are your monthly operating costs? Operating costs average out to be about $10,500 a month which includes: utilities, mortgage, insurance, taxes, wages, product purchases 4. What is the yearly overhead? I would estimate this to be $125,000 5. What is the upraised value of the property? $480,000 according to an appraisal done in 2007 6. How much is owed on the motel mortgage? $250,000 7. What cost-effective upgrades could be made to save on energy costs? Installing energy efficient heating systems, low-flow toilets, insulate attic, change to energy efficient light bulbs, 8. What measures have you taken in the past to cut cost? Downsize employee ratios, during slower business months we shut down heat/cooling/water to any extra vacant rooms. 9. Were these measures effective? Yes, it saved on utility bills and employee compensation

Thank you for your time and responses. The information you have supplied will help make an informed decision regarding the new business model for the Litchfield Motel, which will be compiled into a final feasibility report.

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Feasibility Study Interview Mr. Myron Schuette – Litchfield Contractor of 20 years Goal: To obtain financial costs and timelines regarding the renovation of the Litchfield motel into an apartment complex. Thank you for agreeing to participate in a feasibility study interview. I am currently researching the feasibility options for the Litchfield Motel. The current owner can’t sustain the Motel’s current business model without experiencing a deficit margin. The Litchfield Motel much change its business model, therefore the options being studied are: implementing cost-cutting factors, converting the motel into apartments, or selling the property. The purpose of this interview is to help provide information that will aid in making an informed decision based on the answers you provide and other research options. Your responses are highly valuable and greatly appreciated. Please feel free to contact me with any questions you may have. 1. What would your bid be to turn the motel into apartments? I would estimate it to be approximately $150,000. This would include labor and average material costs.

2. How many units would be incorporated in the floorplan? 8 3. How many bedrooms/bathrooms are in each unit? 2 bedrooms/1 bathroom and 1 laundry room 4. What is the total square footage of each unit? 800 sq. feet 5. What is the itemized breakdown for materials and labor? This can’t be determined at this point, but percentage wise it is a breakdown of 40% labor cost to 60% material cost 6. What are some salvageable materials within the motel? Bathtubs and toilets, most plumbing with a few upgrades, ceiling and attic insulation, “free-span” trusses, doors and a few existing walls. 7. How long would it take to complete the construction project? Estimated 2 months of full-time work 8. If a timeline isn’t met, are there reimbursement opportunities? No, due to unexpected turns in the project, a contractor is not responsible for change orders. 9. What are some energy-saving upgrades that could be implemented? Windows (especially with the tax credit being offered), siding, insulation, and heating and cooling system upgrade,

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10. What are some other factors that may influence the expense or time commitment for turning the Litchfield Motel into apartments? Change orders always delay a project, along with inspections,

Thank you for your time and responses. The information you have supplied will help make an informed decision regarding the new business model for the Litchfield Motel, which will be compiled into a final feasibility report.

Feasibility Study Interview Mr. Chad Loche – Litchfield Realtor specializing in small commercial properties Goal: To gain valuable research regarding the Litchfield commercial market and the value the current property holds. Thank you for agreeing to participate in a feasibility study interview. I am currently researching the feasibility options for the Litchfield Motel. The current owner can’t sustain the Motel’s current business model without experiencing a deficit margin. The Litchfield Motel much change its business model, therefore the options being studied are: implementing cost-cutting factors, converting the motel into apartments, or selling the property. The purpose of this interview is to help provide information that will aid in making an informed decision based on the answers you provide and other research options. Your responses are highly valuable and greatly appreciated. Please feel free to contact me with any questions you may have.

1. What percentage do you charge for realtor’s fees? 6% 2. What kind of commercial properties have you sold in the past? I sell mostly residential, but a have sold a few store-front properties in town. 3. What do you see in Litchfield’s current market trends? Due to the hard economic times, housing and commercial sales are down significantly from previous years. 4. How high is the demand for rental properties? Rental demand in Litchfield has always been on the high side, with numerous property investors. Demand for rentals is especially high during this time when foreclosures are at record high levels. 5. What is the average length of sale for a commercial property? It is usually around 6 months, but with the current economy, I would estimate it to about 12 months for an offer to be made. 13

6. What are some selling features of this property? Location by the lake and the property has a pond, history of the building (it was the first motel in Litchfield), investment opportunities, and it is located off a main road in Litchfield. It’s location near an elementary school and golf course is also a good selling feature. 7. What are some downfalls of the property? Age of the property which calls for major updates, and competition with 2 newer motels in town. 8. What are some suggestions to make the property sell faster? Aesthetic updates such as exterior painting, new roof, and landscaping.

9. What are some other costs involved to sell the property? Updates, closing costs, realitor’s fee’s, and inspection costs. 10. When would be the ideal time to sell the property? Late spring is usually the busiest time for market movement, but I would recommend waiting if possible until the market shifts to a seller’s market which may be about 5 years from now 11. What is the market demand for a motel? Very low. It can be sold to a prospective investor, but they would take advantage of the buyer’s market and expect to pay a very low price. 12. What is your estimated timeline for it to be on the market? Depending on your motivation to sell, it could take anywhere from 12 to 18 months to obtain a written offer. 13. What price would you list the property at? $345,000 14. Why this price? The appraised value is still higher than this selling price, so it appeals to investors that are looking for a good deal on investment property. This would also leave you with a slight profit from the $305,000 that you bought it for. At this price it may sit on the market for many months with little investor traffic, but all it takes is a motivated buyer.

Thank you for your time and responses. The information you have supplied will help make an informed decision regarding the new business model for the Litchfield Motel, which will be compiled into a final feasibility report.

Feasibility Study Interview Ms. Stephanie Schuette – Prospective Renter in the Litchfield area Goal: To learn about renter’s needs and desire’s when looking for a property to rent. Thank you for agreeing to participate in a feasibility study interview. I am currently researching the feasibility options for the Litchfield Motel. The current owner can’t sustain the Motel’s current business model without experiencing a deficit margin. The Litchfield Motel much change its business model, therefore the options being studied are: implementing cost-cutting factors, converting the motel into apartments, or selling the property. The purpose of this interview is to help provide information that will aid in making an informed decision based on the answers you provide 14

and other research options. Your responses are highly valuable and greatly appreciated. Please feel free to contact me with any questions you may have.

1. How much are you willing to pay for monthly rent? For a new 2 bedroom/1 bath/laundry I would consider paying up to $800 a month plus utilities. 2. How long would you sign a lease for? 1 year 3. What do you look for in an apartment (examples: location, price, amenities, etc.)? Price of rent, and what you get for it. I also look for a good neighborhood and location.

4. What kind of amenities do you look for in an apartment? Laundry IN the unit, is the biggest factor, along with upgraded appliances. A large outdoor area is also important.

Thank you for your time and responses. The information you have supplied will help make an informed decision regarding the new business model for the Litchfield Motel, which will be compiled into a final feasibility report.

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Work Cited Compact Fluorescent Light Bulbs. U.S. Department of Energy. 17 April 2009 . Litchfield Minnesota Houses and Residents. 2008. 17 April 2009 . Loche, Chad. Licensed Realtor Rebecca Schuette. 30 March 2009. Love, Terry. Terry Love's Consumer Toilet Reports. 1 February 2009. 16 April 2009 . Real Estate Attorney Minnesota. April 2009. 19 April 2009 . Schuette, Myron. Licensed Contractor Rebecca Schuette. 29 March 2009. Schuette, Stephanie. Renter Rebecca Schuette. 29 March 2009. Werner, Adam. Litchfield Motel Owner Rebecca Schuette. 25 March 2009.

You can say something like: In an interview with Joe Schmoe, he stated that "the Steelers are definitely the favorites to win the Super Bowl again this year" (Schmoe 2009).

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