JUNE 2011

ECONOMIC FEASIBILITY STUDY

Muncie Downtown Hotel

Prepared by the

BALL STATE UNIVERSITY

Center for Business and Economic Research

ANALYSIS BY

Michael J. Hicks, PhDJoshua Doane

COPYRIGHT © 2011 CENTER FOR BUSINESS AND ECONOMIC RESEARCH, BALL STATE UNIVERSITY

This study assesses the feasibility of a full-service hotel in downtown

Muncie, Indiana, in 2010-2011. The feasibility of such a commercial proj-

ect hinges on both the cost of constructing or retro-fitting such a facility

in downtown Muncie, the costs of operation and the expected revenues

from operating the facility.

To perform this study we review the site specific data of downtown Mun-

cie, regional data, demographics, traffic and other demand-side indicators.

We then provide an analysis of competitive conditions and review existing

operational proposals. We end with a conclusion regarding the feasibility

of a full-service hotel in downtown Muncie, Indiana.

Introduction

Center for Business and Economic Research | Ball State University4

Economic Feasibility Study: Muncie Downtown Hotel 5

THE MUNCIE COMMUNITY

The Muncie community roots are steeped in manufacturing, stemming from a natural gas utilization boom in the 1880s. The emergence of the Ball Corporation as well as other manufactur-ers in the 20th century helped grow the community. However, a steady decline in this sector has greatly diminished employment opportunities. Population has experienced a decline in part due to the decrease in these manufacturing, blue-collar jobs.

The City of Muncie has a population of 67,791, comprising nearly 60 percent of the Delaware County population of 115,192. The civilian labor force within the county is 54,619 and 20.4 percent of the county holds a bachelor’s degree or higher.

An effort to revitalize the downtown area, accompanied by the addition of an Ivy Tech Community College campus, has al-lowed the once deteriorating area to begin rebuilding. The main downtown attractions include the Muncie Children’s Museum, Cornerstone Center for the Arts, and Muncie Civic Theater, as well as a modest number of restaurants and shops. Also located downtown are the Horizon Convention Center, the Chamber of Commerce, and various business offices.

The north side of Muncie houses Ball State University, with a 22,000 student population. Ball State has provided significant economic growth and sustainment in the Muncie community in the past century and will only continue to contribute more. Through many activities, the Muncie community and Ball State University are intertwined.

DOWNTOWN ACCESS

Currently, a full-service hotel does not exist immediately downtown. The only hotels with moderate to large occupancy

capacities are located north of downtown, and north of Ball State University’s campus. However, these hotels are not full service (i.e. no restaurant/bar contained within), and dining is instead a short drive from the hotel. A drive distance in excess of three miles is necessary to arrive at any downtown destination from the overwhelming majority of Muncie hotels. Full-service lodg-ing in Muncie is a non-existent market.

Traffic Volume

Indiana Department of Transportation surveys provide 2006 traffic count data for roads proximal to a full-service hotel site in downtown Muncie. These data illustrate (as shown in Figure 1) that along the two main western traffic feeder routes of Kilgore and McGalliard (IN-32, IN-332) traffic west of Tillotson saw average traffic of 12,540 and 23,930 automobiles daily. However, at Tillotson (the western edge of Ball State University campus), traffic dropped to 6,460 along IN-32 (IN-332 transitions to a county road at that point, and so data is not collected). To the east, along IN-67, daily traffic saw a high of 19,960 daily automobiles north of the IN-32. This traffic drops to 12,280 daily automobiles, north of McGalliard. However, to the west of IN-67, traffic into downtown Muncie shrinks dramatically. At its lowest measured point, just east of Madison, only 2,830 vehicles pass along IN-32 daily, while just to the west we observe a high of 6,010 along IN-32 at its closest point to a potential full-service hotel site.

Since the INDOT traffic counts, the community has seen a probable rise in traffic counts due to the location of Ivy Tech in a downtown location. While some of this gain has been offset by job losses in the region, it is likely that daily traffic counts are 1,000 automobiles greater than observed in 2006.

To be feasible, it is clear a full-service downtown hotel in the Muncie area will require destination, not casual visitation .

Proposed Full-Service Downtown Hotel

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Signage, Accessibility, & Visibility

Muncie’s distance from I-69 (approximately 13 miles) suggests little casual visitor traffic from travelers should be anticipated.

Proximity to Demand Generators

Ball State University is approximately two miles from downtown. With a student population of approximately 22,000, a substantial demand is generated from relatives’ visitation. Furthermore, two main performance venues on Ball State’s campus create further demand for hotels. Emen’s Auditorium, seating of 3,500, and Sursa Performance Hall, seating of 600, provide locations for regional, national, and international talents to perform. Other demand generators include the Horizon Convention Center, located downtown, which holds various events and conventions throughout the year. Currently, out-of-town attendees of trade shows, weddings, or other meetings at the Horizon Convention must stay at least four miles from the convention center. The new Ivy Tech downtown location will likely also provide more demand in the coming years. A host of companies in the down-town area require overnight stays due to meetings with out-of-town guests, customers, employees, etc.

Utilities

The Muncie community has a full array of utilities available, as provided by companies in Table 1.

TABLE 1—UTILITY PROVIDERS IN MUNCIE

Utility ProviderElectric Indiana Michigan PowerGas VectrenTelephone AT&T, ComcastWater Indiana-American Water Co.

FIG. 1—TRAFFIC VOLUME IN MUNCIE AREA, 2006

36735

32

332

32

McGalliard Rd.

Walnut St.

Kilgore Ave.

Jackson St.

Tillotson Ave.

Memorial Dr.

Madison St.

Ball StateUniversity

19,960

2,8306,010

23,930

12,540

6,460

12,280

Downtown Muncie

City Park

Ball State Campus

Automobiles per Day

Economic Feasibility Study: Muncie Downtown Hotel 7

Five different hotels in the Muncie community would be consid-ered competitive with a full-service offering and are all currently recommended for patrons of the Horizon Convention Center. Of course, these hotels are not full service, but their price point, brand recognition, and quality of facilities makes them popular choices for visitors. Another five hotels are not currently recom-mended venues of the Horizon Convention Center for various reasons but are nonetheless present in the Muncie market. All of the hotels are approximately three to four miles from downtown.

A few reports have been completed in the past to analyze hotel and travel in the Muncie area. First, a Hotelligence report uses the five competitive hotels in Muncie for analysis of the market. Second, a Smith Travel Research report uses a mix of competi-tive hotels, the Days Inn Muncie, and the Holiday Inn Express Muncie for its analysis of the market. The difference in samples does provide sometimes significantly different results. A third report, from Certec Inc., looks at the economic impact of the tourism industry on Muncie and Delaware County.

Supply & Demand Analysis

FIG. 2—HOTEL ACCOMMODATIONS IN MUNCIE

COMPETITIVE HOTELS ROOMS

A. Comfort Inn and Suites 48B. Fairfield Inn and Suites 65C. Hampton Inn and Suites 87D. Holiday Inn Express 76E. Signature Inn 101

Total 377OTHER AREA HOTELS

F. Best Western 59G. Days Inn 62H. Lees Inn 87J. Super 8 62K. Ball State University Hotel 24

Total 294

32

332

32

McGalliard Rd.

Walnut St.

Kilgore Ave.

Jackson St.

Tillotson Ave.

Memorial Dr.

Madison St.

Ball StateUniversity

Delaware Co.Airport

HeekinPark

Downtown

McCulloch Park

Minnetrista

Tuey Park

to I-69

F

HJB

CD

GA E

Competitive Hotels

Other Hotels

332 McGalliard Rd.

Tillotson Ave.Bethel Ave.

K

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Comfort Inn & Suites Fairfield Inn & Suites

Hampton Inn & Suites Holiday Inn Express

Signature Inn Best Western

Days Inn Lees Inn

Super 8 Ball State University Hotel

F

H

J

B

C D

G

A

E

Economic Feasibility Study: Muncie Downtown Hotel 9

RESEARCH AREA

Occupancy Rate and ADR

The Smith Travel Research found a 54.8 percent occupancy rate for January 2009 to September 2009 in its sample of hotels. The ADR for hotels in the area differed between the Hotelligence and Smith reports, with findings of $94.15 and $78.66 respectively. The likely more accurate ADR is the $94.15 due to the sample of hotels more closely aligning to that of a full-service offering.

Research Area Trend

The Smith Travel Research found comparison trends within its sample. A consideration should be made that the time period be-ing analyzed is largely in the context of an economy in recession.

Sample includes Holiday Inn Express & Suites Muncie, Fairfield Inn Muncie, Days Inn Muncie, Holiday Inn Express Gas City, Hampton Inn Muncie, and Comfort Inn and Suties Muncie.

COMMERCIAL GUEST DEMAND

Travel-related contributions to Delaware County, by 2008 esti-mates, are $186.9 million—$130.2 million of which was spent while in the county. A further breakdown of this $130.2 million is shown in Figure 3.

Expenditures per person per day by sector are a snapshot of what consumers are doing in the area and how much money is being spent by them. The average daily expenditures per person can be found in Figure 5.

FIG. 3—PERCENT CHANGE IN OCCUPANCY, ADR, & RevPAR FROM SMITH TRAVEL RESEARCH SAMPLE

6%

0

-3

-6

-9

-12

-15

3

Sept. 2009

July-Sept. 2009

Jan.-Sept. 2009

Oct. 2008-Sept. 2009

ADR

Occupancy

RevPAR

FIG. 4—TRAVEL-RELATED COMMERCIAL CONTRIBUTIONS TO DELAWARE COUNTY

$186.9 millionTotal Travel-Related Contributions-2008

$130.2 millionspent in county

Food & Beverage32% - $41.7 million

Shopping30% - $39.1 million

11%

11%

9%

7%

Transportation$14.3 million

Attractions$14.3 million

Souvenirs$11.7million

Lodging$9.1 million

FIG. 5—AVERAGE DAILY EXPENDITURES PER PERSON

Lodging Attractions VFR Pass Through Campground

$100

$80

$60

$40

$20

$0

2000

200876.25

92.12

42.96

50.69

38.06

45.23

22.6726.58

39.91

47.77

PercentChange 20.8% 18.0% 18.8% 17.2% 19.7%

Center for Business and Economic Research | Ball State University10

AVERAGE ROOM RATE OF

COMPETITIVE HOTELS

From the Smith Travel Research, the running 12-month average daily rate was $78.38 (October 2008 to September 2009), a 3.1 percent increase from last year, while the Hotelligence report indicates an average room rate of $94.15 ( January 2009 to September 2009).

REVPAR OF COMPETITIVE HOTELS

From the Smith Travel Research, the running 12 month average RevPAR was $41.72 (October 2008 to September 2009), a 9.6 percent decrease from last year.

Competitive Environment

FIG. 6—NUMBER OF ROOMS IN COMPETITIVE HOTELS BY PRICE POINTS

30,000

20,000

10,000

0 <$70 $80 $90 $100 $110 $120 $130+

FIG. 7—PERCENT OF ROOMS SOLD & PERCENT OF REVENUE OF COMPETITIVE HOTELS BY PRICE POINTS

A. Percentage of Rooms Sold

$80

$90

$100

17.1%

19.7%

20%

$11015.1%

$12017.1%

$1304.4%

<$706.6%

B. Percentage of Revenue

$80

$90

$100

13.8%

17.9%

20.2%

$11016.7%

$12020.7%

$1306.2%

<$704.6%

PROJECTED MARKET PENETRATION & OCCUPANCY

From Smith Travel Research , the running 12-month occupancy rate for competitive hotels was 53.2 percent (October 2008 to Sep-tember 2009), a 12.4 percent decrease from last year.

Economic Feasibility Study: Muncie Downtown Hotel 11

Market Area Analysis

36735

32

332

32

3

67

McGalliard Rd.

Walnut St.

Kilgore Ave.

Jackson St.

Tillotson Ave.

Memorial Dr.

Madison St.

A

B

C D

EF

G

H

Ball StateUniversity

Delaware Co.Airport

HeekinPark

McCulloch Park

Minnetrista

Tuey Park

to I-69

J K332

69

to Muncie

AREA BUSINESSES A. Saint Gobain Containers (Headquarters)B. Ball Memorial HospitalC. Ontario SystemsD. First Merchant’s Bank (Corporate Headquarters)E. LifetouchF. Sallie MaeG. Keihin AirconH. Magna Powertrain-Magna SteyrJ. Brevini WindK. VAT Group

FIG. 8—AREA BUSINESSES, ATTRACTIONS, & HOTELS

Area Hotel (see Fig. 1)

Cardinal Greenway

Downtown Muncie

INSET—AREA WEST OF MUNCIE

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TRANSPORTATION

Drive distances to downtown are approximately 13 miles from I-69 and a total of 75 miles from the Indianapolis International Airport. Delaware County Airport-Johnson Field is approxi-mately 3.5 miles from downtown. Public transportation via MITS buses exists on various routes throughout the city. Muncie also has a few taxi services and rental car services.

EDUCATION

Education demographics of visitors to Muncie area indicate that most visitors are college graduates (73.6 percent). See Figure 8.

The Muncie Community is home to Ball State University, a state school with attendance of approximately 22,000 students. The Mun-cie community schools system has nine elementary, three middle, and two high schools, comprising a student population of 7,100. Additionally, private schooling exists, such as St. Mary’s and Burris Laboratory Schools, which add a few hundred more students.

HEALTH CARE

The major hospital in Muncie is Ball Memorial Hospital, located just west of the Ball State campus. Growth in health care services in Muncie is expected.

NEIGHBORING MARKETS

Neighboring markets would include: Anderson, approximately 20 miles away; Indianapolis, approximately 50-70 miles away; Ft. Wayne, approximately 75 miles away. See Figure 9.

FIG. 9—EDUCATION OF MUNCIE VISITORS

Post Graduate49.5 %

College Graduate21.4%

Some College20.7%

High School Graduate5.7%

FIG. 10—PROXIMITY TO NEIGHBORING MARKETS

MUNCIE

FT. WAYNE75 miles

ANDERSON20 miles

INDIANAPOLIS50-70 miles

CALENDAR OF MAJOR EVENTS

FEBRUARY

MARCH

APRIL

MAY

JUNE

JULY

OCTOBER

DECEMBER

Downtown Muncie Gras

Acquire the Fire (Ball State Worthern Arena) Dimensions in Jazz (Emens Auditorium)

Softball/Slow Pitch Tournaments (15 events)April through OctoberBall State University CommencementMunciana Class Volleyball TournamentUnited Methodist Church Annual ConferenceBall State Freshman Orientation (approx. 3,000 attendees)Muncie Ironman; AMA National ChampionshipsBall State University Commencement

Ball State Family Weekend and Homecoming

Ball State University Commencement

Other events include Muncie Symphony Orchestra performanc-es, usually two or three home football games beyond homecom-ing and family weekend, various BSU conferences and special events, Emens Auditorium performances, and various Horizon Convention Center events,

ATTRACTIONS

Muncie is home to a handful of venues and attractions. At seating of 11,500, the largest venue in the area is Ball State’s Worthen Arena, which hosts Ball State sporting events as well as occasional concerts and other events. Emens Auditorium, with seating of 3,500, hosts concerts and performances throughout the year, in-cluding the Muncie Symphony Orchestra. Also, the newest venue, Sursa Hall, seats 600 and due to its elegant look and acoustic ap-peal is often reserved for elite musical performances.

Economic Feasibility Study: Muncie Downtown Hotel 13

Attractions beyond the Ball State campus include the Minnetrista Cultural Center, containing a museum and location of historic homes of the Ball Family. Within the Horizon Convention Center is the Muncie Children’s Museum. Also downtown is the Muncie Civic Theatre, which holds various performances throughout the year. The Academy of Model Aeronautics world headquaters is located just outside of downtown Muncie. Minnetrista Cultural center is just minutes from downtown and offers exhibits, program and tours on nature, history, garden, and art subjects.

RECREATION

Some recreational activities include the Cardinal Greenway, a 27 mile bike and walking trail through the heart of Muncie and part of a larger network of biking trails. Also, the Prairie Creek Reservoir and Campground is located southeast of downtown. Heekin Park and Tuhey Park among others are located near downtown and provide some open space for various recreational activities. Finally, the YMCA provides another venue for com-munity recreational events.

The Muncie Sportsplex is approximately 3.5 miles from down-town and features five baseball diamonds and 11 soccer fields. Tournaments are held predominately April through October, and all lodging is currently approximately 6.5 miles away.

FIG. 11—BALL STATE UNIVERSITY CAMPUS

McKinley Ave.

Riverside Ave.

Sursa Hall

Emens Auditorium

Pruis Hall

WorthenArena

32Walnut St.

Franklin St.

High St.

Madison St.

Main St.

Jackson St.

FIG. 12—DOWNTOWN ATTRACTIONS

Ivy Tech

Horizon Convention Center

Ivy Tech

MuncieCivic Theater

CornerstoneCenter for the Arts

FeasibilityMuncie, Indiana does not currently have a full-service hotel, the last of which (The Roberts) closed in 2006. The absence of a full-service hotel downtown is conspicuous given significant increase in downtown commerce and government activity since 2006.

Accommodations for a county of 123,000 and a university of 22,000 student enrollment, is currently provided by fewer than 675 beds in discount/convenience or extended-stay motels with average pricing under $95.

A full-service hotel would likely face pricing points at $130 or higher to remain profitable. The current market demand indicates 20 to 25 percent of booked rooms lie in this range. We believe a full-service hotel is feasible with the following conditions.

1. Any full-service hotel would have to be profitable at an ADR of $130.

2. Any full-service hotel would require significant occupancy commitments from local businesses and governmental operations.

3. Any full-service hotel would have to participate in the most profitable activities associated with convention attendance.

4. Any full-service hotel will require additional public infrastructure investment in lighting and signage to direct visitors to other downtown activities.

Center for Business and Economic Research | Ball State University14

HUNDEN STRATEGIC PARTNERS REPORT

This report provides a very detailed snapshot of the quantitative needs for a full-service hotel in downtown Muncie. To achieve an average daily room rate at or above $120, a 60-room, full-service hotel must capture an incredibly high percent of the current mar-ket in that price range.

By year three, projections state the average daily rate to be $130+, which currently represents less than 4,500 of the rooms occupied rooms in the Muncie market. The demand for this range will need to more than triple if the Roberts wishes to occupy 14,526 rooms in year three. Furthermore, even if the Roberts can capture 80 precent of the demand in the $130+ range, the demand must quadruple from the 2009 levels. With a $12.7 million dollar budget, the average room invest-ment is $211,000. Though this could certainly be overcome with a long-term investment, the reports indicate the return will be small for the shorter term (five years). Debt coverage ratios will be in a mediocre range. Returns on private equity are not expected to fetch substantially more than ten percent, and equity investors likely require higher, particularly with the risk associated. Re-turns on assets are also not projected to substantially exceed a four percent level.

FROM THE SECOND PROPOSAL

This proposal is slightly more feasible, but a few points should still be addressed. To begin, the proposal cites an acquisition of only $650,000, perhaps a price below what the city expects. Also, this report is not as detailed as the Hunden Strategic Partners report, which provided an in-depth breakdown of projected costs. The underlying assumptions made in this second report should be

questioned because they differ so greatly from the itemized list of the Hunden report.

The developmental costs for this project are far below the first report, at only $5.6 million, or $80,629 per room. Based on an estimated market value of $5 million for the hotel, the difficulties of finding financing are greatly reduced. However, this proposal does not go into as much detail for a starting budget and omits some costs, including legal fees and start-up marketing.

This proposal assumes an average daily rate of $89. Currently, the $90+ price point is 76 percent of the rooms sold in the competitive hotels. With the addition of a 70-room hotel and maintaining that current market demand, the hotel must capture 15.3 percent of the $90+ room market. That amount of market acquisition appears achievable, but questions should be raised about brand equity for a full service hotel at this price point.

The proposal includes 20 apartments at $2,500 per unit and an assumption of full occupancy. The feasibility study has involved researching the hotel industry, not the apartment demand in Muncie. That said, some concern should be had regarding this price and occupancy assumption. The income portion of the op-

Conclusions & ProjectionsTABLE 3—PROJECTED OCCUPATION NEEDED FOR A FULL SERVICE HOTEL

Year 1 Year 2 Year 3 Year 4 Year 5Occupancy 12,155 13,452 14,526 14,526 14,526

Market share, $120+ rooms at given market demand55 % 64.74 71.65 77.37 77.37 77.3760 % 59.34 65.68 70.92 70.92 70.9265 % 54.78 60.63 65.47 65.47 65.47

Economic Feasibility Study: Muncie Downtown Hotel 15

erating budget includes revenue from these apartments, totaling $50,000 per month. Alarmingly, this is more than 25 percent of the income for each given month. If occupancy of these apart-ment units is not realized, or the rates are significantly lowered, then the profit/loss of the Robert’s will be significantly altered. Additional research into the feasibility of this projection should be done, including current market demand and pricing.

Further, a price point for the apartment of $2,500 per unit per month is rather high given the projected room rate of $89. This comes to an average night for an apartment of $82, not much below the room rate.

ALTERNATIVES TO FULL-SERVICE HOTEL

Two independent studies of the feasibility of opening the Roberts Hotel as a full-service, ‘top of market’ hotel in Muncie confirm the remainder of this feasibility analysis, that questions the feasibility of re-opening the Roberts as a full-service hotel. However, alternatives accommodation options to a full service hotel are feasible. We see viable alternative accommodation arrangements providing a downtown hotel presence. In par-ticular, the new hotel construction in the Muncie will likely be accompanied by either the exit or restructuring of one or two old franchise/chain establishments. Thus, the opening of more space within the limited-service hotel range is probable.

The opening of a limited-service brand hotel is unlikely to occur downtown in the absence of the following circumstances. First, the ADR requirements for new a newly constructed limited-service brand hotel may be profitable at the $85-$105 range. This is evidenced by the ADR at several new builds in north Muncie. A strong connection to downtown convention activities is needed. In particular the connections to amenities in downtown Muncie must be sufficient to provide safe and easy access to eating and drinking estab-lishments. Consequentially, the location must be carefully considered.

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