5.3.4.1 Presentation and classification under urban development policy
The redevelopment of the Spitzbunker site in Neunkirchen includes setting up retail space and at- tracting a hotel, for which a developer but no operator has been found (see Figure 29). Within the scope of potential CDF funding, the operating rents on the site should be reasonable to assist devel- opment of the hotel. Its development and operation should be imparted via public tender procedure, and the willingness to use funding from the CDF for financing should be part of the invitation to ten- der.
Figure 29 – Planned hotel and retail usage of the Spitzbunker site (source: KomCon)
The CDF funding serves to cover part of the investment costs and thereby reduce the ongoing costs of capital. Cash flows are expected from the operation of the hotel (revenues from accommodations and board). The project is part of the Urban Development Concept 2020. It falls under Article 8 of Regulation (EC) No 1080/2006 of the European Parliament and of the Council dated 5 July 2006 on the ERDF “these strategies shall promote sustainable urban development through activities such as:
strengthening economic growth, the rehabilitation of the physical environment, brownfield redevel- opment, the preservation and development of natural and cultural heritage, the promotion of entre-
preneurship, local employment and community development, and the provision of services to the population taking account of changing demographic structures”, as the attraction of a hotel will
strengthen local business and tourism. In accordance with the current Operational Programme ‘Saar- land’, the project is classified under priority axis 3, business area 2 (“Sustainable urban and regional
development and resource protection – Expansion of tourism infrastructure through the development of natural and cultural heritage and the creation of additional growth potential”). This reaffirms the
eligibility of the project for funding by the CDF.
5.3.4.2 Financial analysis
In addition to retail space, a hotel should be developed upon the Spitzbunker site in Neunkirchen, its construction should be financed by the CDF. This is a classic building project for a speciality property classified under the business area of “Local Business”. The revolving element required for financing by the CDF comes from the revenues for providing board and accommodation to hotel guests. The funding recipients are the investors of the hotel, who would first have to put up an investment amount of EUR 1 million from private sources to finance the purchase price of the land and ancillary construction costs. The final investor and the subsequent operator of the urban hotel should be found via a European-wide tender procedure.
Figure 30 – Business plan for the Spitzbunker urban hotel project in Neunkirchen (in euro)
In detail, this is the construction of a five-storey hotel with 40 double rooms. The one-time capital expenditure for the construction of the hotel amounts to EUR 4.3 million according to the estimates of a project developer based in the Saarland. This partial financing should come from the CDF and the additional, aforementioned investment sum of EUR 1 million will presumably be financed from the equity capital of the investors, so the CDF should (only) provide the direct construction costs. To calculate the ongoing revenues from the hotel operation, it is assumed to be running at 65% of ca- pacity. Assuming an average price of EUR 68 for an overnight stay, reflecting the charge for double rooms, their rental as single rooms and special conditions for travel groups, the assumed capacity utilisation of 65% results in calculated sales revenues from overnight stays and breakfast of
0
500.000
1.000.000
1.500.000
2.000.000
2.500.000
2010 2012 2014 2016
20182020 2022 2024 2026
Income
Expenditures
EUR 650,000 p.a. In addition, the sale of food and beverage is assumed to count for EUR 250,000 p.a., bringing total calculated revenues from hotel operation to EUR 900,000 p.a. In turn, yearly run- ning costs for personnel, materials and energy are calculated to be EUR 525,600, though KomCon did not break this figure down further. Further assuming the construction costs totalling EUR 4.3 million are split evenly between the years 2010 and 2011, this results in the following revenue-expenditure progression (see Figure 30).
Based on these premises, with the twelve-month construction period beginning in 2010, and looking at a period of 15 years, the project IRR for the urban hotel is 3.93%, given the concrete cash flows shown in Figure 31.
Year 2010 2011 2012 2013 ... 2027
Cash flow -2.150.000 -2.150.000 374.400 374.400 374.400 374.400
Figure 31 – Cash flows for Spitzbunker urban hotel project in Neunkirchen (in euro)
In considering this moderate yield, which is still well below that of commercial project financing, sev- eral points need to be kept in mind. First, it is clear that the revenue potential is determined by the capacity utilisation assumptions for the hotel. It is therefore quite unclear whether the planned utili- sation rate of 65% can be reached. Furthermore, the calculation does not consider price increases (personnel, materials, energy expenses, as well as room prices). Finally, it must be considered that the resulting net revenues are not only for the CDF; the other investors require returns on their capi- tal employed. In this project, they are still investing EUR 1 million. Therefore, only approx. 81% of the total investment (EUR 5.3 million) need to be financed through the CDF, which will thus get only that share of the cash flows.
5.3.4.3 Legal analysis
In terms of volume, this investment is not a “large project” according to Article 39 of Regulation (EC) No 1083/2006. No land acquisition is foreseen for this project, so Article 7(1b) of Regulation (EC) No 1080/2006 does not apply.
As is clear in the project description, the EUR 1 million needed for land acquisition should come from the hotel operator as equity capital. The funding from the CDF totalling EUR 4.3 million should exclu- sively be used to finance the construction measures themselves. It something changes in this setup, this has to be considered at the fund level. Since there is only one other project which contains land acquisition funding at present, there is still plenty of flexibility.
State aid laws also have to be complied with in this project, because involving private investors is a central component of its implementation.