Schuette Becky Feasibility Report

8/14/2019 Schuette Becky Feasibility Report

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Litchfie ldtchfie ldMoteltel Feasibility Report

Prepared by: Becky Schuette

April 18, 2009

WRIT3562W

To: Adam Werner, Litchfield Motel Owner


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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 reports 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 long-

term 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

Con ten ts2


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Summary...............................................................................................................4

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 .....................................................................8-9Appendix .........................................................................................................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 ryBased 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

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economic conditions play a large role in determining the most feasible business

model for the Litchfield Motel.

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 nIn 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 Motels business model. This includes the

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study of upfront costs, long-term costs, market demands and an evaluation of

current business expenses and profits.

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 peBa 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 onsDue 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.

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St udy of Fe asi ble Op tio nsImplementing 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, workmans compensation, and taxes. This would save an estimated

monthly cost of $4,500 (Werner 2009). The disadvantage to cutting employees

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 competitionof new and larger hotels (Werner, 2009).

Sell the Litchfield Motel

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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

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 improvementsmade 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

sellers market. If the property is sold within the next year, long-term costs would

include the six percent realtors fees, and most likely a loss in Mr. Werners 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 Motels 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

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(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

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 workers 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

Litchfields population is renters, compared to the states average of 25% (Litchfield

Minnesota Houses and Residents 2008).

Concl usi on an dRe com men dat ion

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

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Figure 1.1 Medium Rental Price in Litchfield (Litchfield

Minnesota Houses and Residents 2008)


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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 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 Implement Cost-

Cutting Measures

Sell the Property Convert to

Apartments

Initial Cost ($)$3,920.45 $10,000-$20,000 for

improvements$150,000

Long-term Cost($)None Loss of up to 5% of

investmentNone-paid bytenant, monthlyprofit of $3,500

Time Commitment fordesired results(months)

Immediately 12-18 months 2 months

Market DemandUnaffected Poor Very high

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Figure 1.2 Comparisons of Feasible Options Studied

(Litchfield Minnesota Houses and Residents 2008).


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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

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.

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Ap pen dixFeasibility Study Interview

Mr. Adam Werner Litchfield Motel owner/final decision maker

Goal: To gain accurate information regarding the background of the Motel, finances and cost-

effective 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 cant sustain the Motels 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

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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. 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.



business model without experiencing a deficit margin. The Litchfield Motel much change itsbusiness model, therefore the options being studied are: implementing cost-cutting factors,





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 cant 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-timework

8. If a timeline isnt met, are there reimbursement opportunities? No, due to unexpected turns

in the project, a contractor is not responsible for change orders.

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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,

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 withinspections,





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.




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




1. What percentage do you charge for realtors 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 Litchfields 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.

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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.

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. Its 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, realitors

fees, 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

sellers 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 buyers 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.





Ms. Stephanie Schuette Prospective Renter in the Litchfield area

Goal: To learn about renters needs and desires when looking for a property to rent.



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business model, therefore the options being studied are: implementing cost-cutting factors,



and other research options. Your responses are highly valuable and greatly appreciated. Please feelfree 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.




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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 somethinglike: 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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Documents

Schuette Becky Feasibility Report