The College recently received a one million dollar grant from the Redevelopment Assistance Capital Program (RACP), a Pennsylvania Commonwealth grant program, to assist with funding the renovation of the factory. The program is administered by the Office of the Budget for the acquisition and construction of regional economic, cultural, civic, recreational, and historical improvement projects. The grant is a 100% match, therefore the total budget for the project is two million dollars. Lafayette will secure one million equity funding from their capital accounts, according to Vice President of Finance and Administration and Treasurer, Roger Demareski.
The first step in analyzing the cost of the overall project is to assess the current building structure. In 2018, The Harman Group, a engineering and construction services company, completed and released a reuse feasibility study which determined possible reuses of these buildings and approximated a rough remediation scheme. The group found that it would cost roughly $176,000 to get the Rope Factory (Building A) and the Rinek Cordage Company building (Building C) back to a good working state, prior to modification and reuse. These estimates were based on observations of exposed views of structural elements. Further and deeper analysis of the structure and materials would be necessary to attain a more accurate cost estimate for the repair of the building.
Given our intention to turn the current site into a hotel and a cafe, our economic analysis will be more geared towards hotel construction and development. Additionally, the calculations that follow combine the cost of the hotel and cafe. These are five key phases to Hotel Development. The first three are pre-construction, the fourth is the actual construction and the final is post construction. During the pre-construction phase the costs are driven by hiring professionals with expertise in real estate development, project management, financial planning and hotel management. The costs in the construction phase are driven by purchasing materials, hiring the physical labor, a general contractor, tools, machinery, equipment and professionals to oversee the construction as well as fees to obtain building permits and approvals. The material costs are especially volatile as they are subject to market conditions. Global supply chain issues caused by the Covid-19 pandemic cause materials like lumber and steel to experience significant increase in prices which seriously impact construction budgets and schedule. Finally, the costs of the last step is driven by hiring individuals to manage the property which includes operations, sales and marketing, and maintenance.
Here are the five key steps of hotel development:
- Conceptual/Planning
This is the very beginning of the entire process. Here, developers identify the scope, budget and timeline of the project. These will be very rough estimates and are subject to change as more information and details are discovered. Developers also gather their team, determine project objectives and strategize building ownership as well as the financial, developmental and operational structure of the hotel. This where developers consider brands to manage and operate the hotel. This process creates the foundation of the construction process.
- Feasibility
Here, the scope, budget and schedule of the project are refined and highly-detailed. The economic, environmental, physical, market and financial feasibility of the project are also analyzed. During this phase, many designs of the hotel are created by architects. Out of these designs, the one that best balances financial feasibility and overall quality of the space is chosen.
This design forms the basis cost estimates, cash flows and financial documents such as a pro forma. This helps investors evaluate a property’s expenses, revenues and potential profit.
- Procurement
During procurement, many aspects of the planning and feasibility phases are finalized. The equity vs debt ratio is decided. This essentially determines how much of their own capital the owners invest and how much money will come in the form of a loan. Financing is secured and the brand which will operate the hotel is chosen. Architect, design, construction contractor, owner’s representative and construction team are selected. This procurement concludes the pre-construction phase.
- Construction
This is when the actual construction occurs. The construction team prepares the site, purchases materials and takes the design from paper and into physical reality. In the case of adaptive reuse, much of the construction will be focused on retrofitting the existing structure to increase safety, durability and match the new purpose of the building. This involves structural analysis calculating and determining the effects of loads and internal forces on a structure. Here, architectural and design teams are responsible for maintaining the overall atmosphere and heritage of the Rinek Rope Factory. This can be done by recycling and repurposing existing materials and factory equipment so that the legacy of the Rinek Family and Easton and the are at the core of the building’s design. The rope factory inspired design and architecture is key to the hotel’s success. Furthermore, the team is also tasked with completing quality reviews and ensuring that the budget, schedule and scope are adhered to as best as possible. This stage is concluded with the receipt of occupancy permits and approvals.
- Operational/Asset Management
In this phase, hotel operations and staffing begin. The hotel management team ensures the front office, housekeeping, food and beverage, and maintenance departments perform their roles amply to deliver a great guest experience and meet revenue and occupancy goals. This is a critical part of the development process as it determines the long term success of the project
Now that a clear understanding of the general development process has been established, we would like to take a more detailed look at what the development of both The Rinek and the Cordage Cafe would cost. We decided to complete a cost-comparison analysis to get actual cost estimates and determine whether this idea would be financially feasible. While no two adaptive reuse projects are the same and each building has unique characteristics and challenges which will lead to varying costs, we believe a comparable cost estimate would achieve a closer economic assessment of what it would take to turn The Rinek into reality. The Foundation Hotel is similar in size and scope to The Rinek, and as such we decided to use it as a comparator to complete a cost comparison.
Cost Comparison:
According to CRS Data, The entire Rinek lot is approximately 72,745 square feet (1.67 acres) in area and located at 991 Bushkill Drive in Easton. With the help of Professor Almeida, visiting assistant professor and professional architect, we were able to create a sketch of The Rinek. The proposed design is a three story building with approximately 90 rooms. As for the Detroit Foundation Hotel, it is 95,000 square feet in area 5 floor high with 100 rooms. The redevelopment cost for transforming it from a fire station to a hotel was $28 million. Construction costs were totaled $20.5 million which surpassed their $19 million budget. The hotel also features a restaurant and bar, a meeting room, boardroom and an event space on the fifth floor. It should be noted that the original fire station was too small to accommodate the number of hotel rooms that would make the project financially feasible and as such they had to purchase the four-story building next door and join the two buildings. This presented structural challenges and increased the cost of construction. Furthermore, the entire Foundation Hotel building is 95,000 square feet. Meanwhile, the entire Rinek Rope parcel of land is 72,745 square feet and the main factory building is roughly 18,000 square feet in area. The main factory would have to be extended horizontally, as shown in the sketch, so as to improve the financial feasibility of the project. We would dedicate 9,745 square feet to accommodate the Easton Emergency Squad, which would leave us with 63,000 for The Rinek and Cordage Cafe.
| Hotel Comparison | The Foundation Hotel | The Rinek + Cordage Cafe | ||
| Rooms | 100 | 90 | ||
| Square Feet | 95,000 | 63,000 | ||
| Floors | 5 | 3 | ||
| Metrics | Cost/Unit | Overall Cost |
| Per Room | $280,000.00 | $28,000,000.00 |
| Per Area | $294.74 | $18,568,421.05 |
| Per Floor | $5,600,000.00 | $16,800,000.00 |
Average Estimated Cost: $20,189,473.68
Using the average of the cost per room, cost per square foot and cost per floor and the assumption that Rinek will require similar work per each unit, it is estimated that the cost of the project will be around $20.2 million. With the 10% tax incentive from the historic habilitation tax credit, the cost would decrease to roughly $18.2 million. This certainly supersedes the original $2 million dollar redevelopment budget, however this building will be income generating and this could justify investing the project.
The boutique hotel market has grown into a $12.4 billion market in the United States as of 2019. While the revenue per available room (RevPAR) for these types of hotels are lower in the short-term for these hotels, they boast increased returns in the long term.
| Revenue Metrics | |
| RevPAC | $100 |
| Average Occupancy | 70% |
| Rooms | 90 |
| Days per Year | 365 |
| Gross Revenue | $2,299,500.00 |
Using a average RevPAR of $100, which is roughly $14 above the average RevPAR in the United States from 2018 which is 85.96 and average occupancy of 70% , which is 4% higher than the national average, the hotel would generate revenue $2,299,500.00 per year from rooms. We used more optimistic RevPAR and occupancy rates for two main reasons. The first was to account for our positive/bullish outlook on the performance of the hotel given the success of hotels on other college campuses [hotel]. The second reason was to account for the additional revenue that would be generated by the cafe which will be a singular entity as well as other sources including revenue from food and beverage services, events and gift shops.
| Expenses | ||
| Gross Revenue | $2,299,500.00 | |
| Operating Expenses | 40% | $919,800.00 |
| NOI | $1,379,700.00 | |
Normally, a mortgage is normally a property’s biggest cost. However, since Lafayette owns it, that cost would be eliminated. Other expenses include insurance, taxes, capital expenditures, utility, staff salaries, labor, food and beverage inventory, marketing and technology services such as hotel management software fees. Luxury hotels typically have operating expenses account for 44% of their revenue. Using an operating expense rate of 40, the estimated net operating income for Rinek Hotel would be $919,800.00. This would result in a Net Operating Income of $1,379,700.00 annually.
| Payback Analysis | |
| Initial Investment | $18,170,526.32 |
| NOI | $1,379,700.00 |
| Simple Payback | 13.17 |
Given the initial investment of $18.2 million and yearly cash flows of $1.4 million the simple payback period is 13 years. This means that it will take 13 years for the hotel to recover its initial investment. While this period might be long in the eyes of an average investor, Lafayette is an institution that has been around for 195 years and plans to be around for another 195 years. Therefore, this payback period is feasible for the college and could be made even more attractive by the inclusion of alumni donations, tax incentives and additional local development grants.
Continue to the sketches here.