The Mass Appraisal of Hotels in Florida

Presented By: Tim Wilmath, MAI

& Ken Engel, CFE

Hillsborough County Property Appraiser’s Office

Prepared For: IAAO 71st Annual International Conference

September 19th, 2005

• How do you apply mass appraisal to hotels?

• Classifying Hotels

• Creating Income Models

• What about business value?

• Treatment of Personal Property

• Cost Approach

• Sales Comparison Approach

Mass Appraisal of Hotels

What is Mass Appraisal?

IAAO definition:

“The process of valuing a group of properties

as of a given date using common data,standardized

methods, and statistical testing”

Tim and Ken’s definition:

“The process of automating the

single property appraisal approach”

Develop income models using benchmarks from industry publications such as PKF Trends in the Hotel Industry, Smith Travel Research’s The Host Study, local market surveys, and state sales tax reports.

Hotel Valuation using Mass Appraisal

Classification of Hotels

Resort Hotels

Luxury Hotels

Full Service Hotels

Limited-Service Hotels

Convention Hotels

Classification of Hotels

Resort Hotels

Recreational facilities

Golf Resort

Tennis Resort

Health Resort

Extensive amenities

Classification of Hotels

Luxury Hotels

Full Service Hotel

Fine Dining

On-site shopping

Concierge & guest services

Exceptional amenities

Classification of Hotels

Full Service Hotels

In-house dining & cocktail lounge

Swimming Pool & Fitness

Meeting rooms

Conference centers

Excellent amenities

Classification of Hotels

Limited-Service Hotels

Clean Comfortable room

Affordable rate

Continental breakfast

Pool & fitness room

Limited amenities

Classification of Hotels

Extended Stay or Suite Hotels

Week-long stay

Apartment like

Small kitchen

Affordable rates

Limited amenities

Classification of Hotels

Convention Hotels

Near convention center

Large # rooms

Ample meeting space

Banquet facilities

Restaurants and lounges

Income Approach

•Most widely used for valuing hotels Reflects market behavior• reliable data readily available• results in equity

Income Approach

Sources of Income Data

• Actual I&E from surveys

• PKF Trends in the Hotel Industry

• STR The Host Study

• Government Sales Tax Reports

Income Approach

Actual Income & expenses

• Ensure income is stabilized

• Exclude certain expenses

• Impute reserves

•Impute mgt. & Franchise fee

Income Approach

PKF’s Trends in the Hotel Industry

• Select by region, age, etc.

• Exclude property taxes

• Impute reserves

•Impute mgt. & Franchise fee

Income Approach

Smith Travel Research The Host Study

• Select by region, age, etc.

• Exclude property taxes

• Impute reserves

•Impute mgt. & Franchise fee

Income Approach

State Sales Tax Records• Actual gross income reported to state by hotels• Business name and address• Past years available• Non-taxable income not reported

Income Approach

Capitalization Rate• Korpacz Real Estate Investor Survey• CB Richard Ellis National Investor Survey• Realty Rates.com • USRC Hotel Investment Survey• Extraction from Comp Sales

Income Approach

Reconciliation of income data• Income• Expenses• Capitalization rate

ADR Other Income Total Income Ratio of O.I. Avg. Occ.to ADR

PKF Trends Average of all $63.55 $2.58 $66.13 4.06% 62.7%Top 25% $78.90 $3.28 $82.18 4.16% 71.3%Over $70.00 $85.47 $3.75 $89.22 4.38% 66.4%$50 - $70.00 $59.13 $2.27 $61.40 3.84% 61.6%Under $50.00 $43.46 $1.68 $45.14 3.86% 60.7%South Atlantic $61.84 $2.27 $64.11 3.67% 64.9%

STR Host Study Resort $95.26 $8.82 $104.08 9.26% 63.50%(based on 2002 results) Upscale $95.02 $5.05 $100.07 5.31% 68.40%

Mid-Price $68.25 $2.74 $70.99 4.01% 61.10%Economy $54.70 $1.86 $56.56 3.40% 61.40%Budget $43.18 $1.43 $44.61 3.31% 62.80%South Atlantic $72.70 $3.76 $77.26 5.17% 64.00%

Conclusions A $130.00 $11.00 $141.00 8.46% 65.00%B $105.00 $7.00 $112.00 6.67% 65.00%C $90.00 $5.00 $95.00 5.56% 65.00%D $80.00 $3.00 $83.00 3.75% 65.00%E $70.00 $5.00 $75.00 7.14% 60.00%F $45.00 $3.00 $48.00 6.67% 60.00%G $23.00 $2.00 $25.00 8.70% 60.00%

Limited/Economy

Income Approach

Cost Approach

Sales Comparison Approach

• Obtain information regarding the circumstances of sale• Obtain financial and physical aspects of the hotel• Allocate the price between real estate, FF&E, and business• Extract and apply appropriate adjustments

Sales Comparison Approach

O’Neill found four key variablesthat explain hotel prices•Number of rooms• Net operating income•Average daily room rate• Occupancy

John W. O’Neill, MAI, CHE, Ph.D., created mass appraisal models for hotels using Stepwise Regression.He used 327 hotel sales nationwide from 1990 -2002

Sales Comparison Approach

Tampa - Hillsborough County• 21st largest market in the United States• 200+ hotels throughout the county• 17 hotel sales since 9/11• Approximately 6 sales per year• 5 hotel categories (full service, limited service, etc)

Sales Comparison Approach

Ranking Analysis

• Comparable sales are ranked in descending or ascending order

• Determine the relative position of the subject in the array

• Comparables are identified as either inferior or superior to subject

• Bracket the probable value range of the subject.

Sales Comparison Approach

Extracting Cap Rates

• Using market models - extract cap rates from sales

• Considers the market approach without applying adjustments

Reconciliation of Approaches

Cost Approach - Easy to apply - may be difficult to measure depreciation

Market Approach - Information difficult to obtain, allocation of price may be required

Income Approach - Reflects market behavior, reliable data readily available, results in equity

Business Value

Real Estate

Personal Property

Business Value?

What is Business Value?

...A value enhancement that results from items of intangible personal property such as marketing and management skill, an assembled workforce, working capital, trade names, franchises, patents, trademarks, contracts, leases, and operating agreements.

Source: A Business Enterprise Value Anthology.

What is Business Value?

Ways to measure business value

• Cost Approach

• Rushmore Method

• Start-Up Cost Method

• Excess Profit Method

• Proxy Method

Cost Approach MethodComparing the Cost Approach to the Income Approach indicates the value of the Business and Personal Property.

Measuring Business Value

Example:Value Indicated by Income Approach $14,000,000(after deducting value of FF&E)Value Indicated by Cost Approach : -12,000,000Indicated Value of the Business $ 2,000,000

Defense of the Cost ApproachInherently excludes business value, excellent for newer properties and for older properties serves as a check

Criticism of the Cost Approach Difficult to measure depreciation

Measuring Business Value

Rushmore Method - Deducting Management Fee and Franchise Fee from Net Operating Income.

Measuring Business Value

Revenue $1,400,000Management & Franchise Fee (8%) 112,000 Loaded Capitalization Rate 12.50%Indicated Value of the Business $ 896,000

Criticism of the Rushmore MethodManagement fees and franchise fees are nothing more than a normal cost of doing business. They do not go far enough in accounting for business value.

Defense of the Rushmore MethodThe most widely accepted method for hotel valuation and isolating intangibles. See Marriott v. Kansas.

No one would pay more for a business that it would cost to duplicate it.

Measuring Business Value

Start-Up Costs Method - In addition to deducting a management fee and franchise fee, initial start-up costs, such as assembling and training the skilled workforce should be amortized over the life of the property and deducted in the income approach.

Measuring Business Value

Criticism of the Start-Up Costs MethodNo indication that a buyer would compensate an owner for these initial start-up costs. Much of the same costs occur annually and are already present in the annual operating statement.

Defense of the Start Up Costs MethodStart-up costs, a one time expenditure realized during the opening years of a project, benefit the project over the long term. An owner expects to recapture these start up costs.

Measuring Business Value

Excess Profits Method - This approach compares the RevPAR of the subject hotel with its competition. A premium suggests a value enhancement resulting from the reputation and chain affiliation.

Measuring Business Value

RevPar$75.00 $85.00

Criticism of the Excess Profits MethodDifficult to determine if differences in RevPAR exist as a result of the hotel’s reputation and flag, or possibly due to location, building age, quality, amenities, appearance, or location.

Defense of the Excess Profits MethodIf truly comparable properties can be identified, this method provides an excellent indication of the presence and amount of business value.

Measuring Business Value

Proxy Rent Method - This approach imputes a “market rent” for the various profit centers.

Measuring Business Value

Rent?

Criticism of the Proxy Rent MethodDifficult if not impossible to obtain the estimate of market rents for the various profit centers.

Defense of the Excess Profits MethodUsing market rent isolates the real estate component, negating the need to measure business value.

Measuring Business Value

• Cost Approach - Inherently excludes business value, but just as weak as using it to arrive at value.

• Rushmore Method - most widely accepted and easiest to apply.

• Start-Up Cost Method - Controversial, no support for premise that buyers would pay seller for these costs.

• Excess Profit Method - Good approach when applied correctly - however very easy to misinterpret/manipulate

• Proxy Rent Method - Not reliable - no support data

Measuring Business Value

Personal Property

“Return Of” - Recapturing the FF&E by imputing a reserve for replacement - just like real estate.

“Return On” - A method of estimating the value of the FF&E by assigning a portion of the income stream to the personal property and then capitalizing it to determine its contributory value.

or

Instead, simply deduct the assessed value of the personal property from the final value.

Personal Property

Deducting the TPP assessment and

deducting a “Return On”is double-dipping!

Select appropriate models based on class, age, quality, location, amenities, etc. Apply the model, an deduct personal property assessment from the resulting value.

Compare the resulting value to the Cost Approach, and also compare to competing hotels for equity.

Hotel Valuation using Mass Appraisal

Conclusion