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  • 1. The Mass Appraisal of Hotels BY TIM WILMATH, MAI, AND KEN ENGEL, CFET he mass appraisal technique was developed to enable assessors toaccomplish the challenging task of esti- is possible through the use of regression analysis or ranking analysis.mating a value for each of the thousands Hotel Segmentationof properties in their jurisdictions. The The first step in the mass appraisal ofIAAO defines mass appraisal as: “The hotels is to segment them into differentprocess of valuing a group of properties categories. The best way to do this is toas of a given date using common data, follow industry classifications. In generalstandardized methods, and statistical all hotels can be put into one of the fol-testing.” (IAAO 1999) In plain English, lowing categories:mass appraisal is simply the automation • Resortof the single-property appraisal ap-proach. Many property types are ideal for • Luxurythe application of mass appraisal, such as • Full Servicesingle family homes. However, becauseof the complexities involved in valuing • Limited Servicehotels, many assessors find themselves • Extended Stay (also known asperforming single-property appraisals all-suite)rather than utilizing mass appraisal. With reliable data, the assessor can • Convention Hotelscreate mass appraisal models that incor-porate all of the elements that make up Resort Hotelsa hotel’s value. Creating income models Resort hotels are generally distinguishedcan be accomplished by utilizing local through their use of special recreationaldata and industry sources. Cost models facilities. For example, a golf resort, as thecan be created using the Marshall & Swift name implies, would offer its guests accesscost manuals (annual). Creating sales to a golf course, a pro shop, and usually thecomparison approach models can be dif- option of taking lessons. A health resortficult due to the lack of sales; however, it may offer extensive facilities with exerciseTim Wilmath, MAI, is Director of Valuation Process for the Hillsborough County PropertyAppraiser’s Office in Tampa Florida.Ken Engel, CFE, is a Commercial Analyst with the Hillsborough County Property Appraiser’sOffice.Journal of Property Tax Assessment and Administration • Volume 2, Issue 1 15
  • 2. themselves through impeccable facilities and extensive concierge and personal guest services. Full Service HotelsPhoto courtesy of Saddlebrook Resort, Tampa, FLequipment, trainers, therapeutic massages, Full service hotels differentiate them-and various other health-related amenities. selves from limited service hotels byThe objective of these hotels is to make offering in-house dining facilities andtheir facilities an end destination, and not cocktail lounges, and by providing anecessarily dependent on other attractions wider range of amenities like swimmingin the area to draw guests. Most resort ho- pools and fitness centers. Many catertels offer extensive amenities in addition to business travelers and have on-siteto those that support their theme, such as meeting rooms or conference centers.indoor and outdoor swimming pools, sau- Business amenities like desks and Inter-nas, spas, exercise facilities, restaurants and net access may be provided in rooms.lounges, and on-site retail shopping. Limited Service HotelsLuxury Hotels The goal of limited service hotels is toA luxury hotel is a full service hotel with provide a clean, comfortable room atexceptional amenities, rooms, and service. an affordable rate. They do not provideThey generally are not theme oriented, but full dining facilities. Some have smallmany offer day spas and tennis facilities kitchens and may offer free breakfastas part of their amenity packages. They for guests. They cater to families, leisureoften provide a multitude of luxurious travelers, and budget conscious businessamenities including elegant rooms and travelers. Many are affiliated with a na-fine dining opportunities. They usually tional chain. Amenities are limited butcontain a choice of restaurants and may may include a pool. These hotels usuallyoffer on-site shopping facilities as well. have fewer and smaller rooms than fullThe finest of these hotels distinguish service hotels.16 Journal of Property Tax Assessment and Administration • Volume 2, Issue 1
  • 3. Extended Stay or Suite Hotels Quality Classes Individual hotels within each of these segments can be further subdivided into quality classes. These classes should reflect location, condition, age, ameni- ties, and overall quality. For example, a class “A” property usually has the most desirable location, generally receives the highest income, is typically newer, and contains extensive amenities and supe- rior construction quality and condition. A class “B” hotel may be slightly olderThese hotels are designed to appeal to or less maintained, lack some of thetravelers who need accommodations amenities, and/or may have an inferiorfor a week at a time. The amenities are location and income to its class “A” coun-more like those found in an apartment terpart. A class “C” hotel may be anothersuch as fully equipped kitchens. They level lower in these attributes.usually do not have a restaurant but mayhave a small commercial kitchen for Approaches to Value—Massbreakfast preparation. The better-quality Appraisalproperties are generally affiliated witha national chain. They typically charge Of the three approaches to value, the in-weekly rates that are below those of com- come approach is the preferred methodparable full service hotels. to value hotels. The price a buyer is will- ing to pay for a hotel property is directlyConvention Hotels tied to its income potential. Although the sales comparison approach and cost approach serve important functions in the hotel valuation process, ultimately the income approach is given the most weight. In mass appraisal, the three approach- es to value are applied through the use of “models.” Models are intended to simu- late market behavior. After reviewing all available data, these models are created and then applied across classes of hotels. This method of assigning models to hotelPhoto courtesy of Saddlebrook Resort, Tampa, FL properties can result in a reliable and equitable assessment.Convention hotels, as one might expect, Income Approachare usually located near convention cen-ters. They generally have a large number For most commercial properties, theof rooms. Since they are geared for meet- income approach can be used to esti-ing groups, they usually contain ample mate value by capitalizing rental income.meeting space and banquet facilities. However, capitalizing hotel rent is notThey typically have several restaurants possible because entire hotels are notand lounges, with some providing leased. In addition, a hotel earns its rev-nighttime entertainment. They gener- enue not only from room rental but alsoally provide ample business and leisure from food and beverage sales, and mis-amenities. cellaneous services such as telephone,Journal of Property Tax Assessment and Administration • Volume 2, Issue 1 17
  • 4. laundry, and fitness centers, for example. accomplished within a mass appraisalFor hotels, these revenues and the asso- model.ciated expenses can be used to measure To create mass appraisal models forthe value of the entire operation, or what hotels using the income approach, fouris known as the going concern. key items are required: an estimate of The going concern includes the gross revenue, occupancy, expenses, andvalue of the real estate, the value of the a capitalization rate. Once obtained, thispersonal property, and the value of the data can be used for each of the five hotelbusiness. The real estate derives value classes. The following are sources thatfrom its location and ability to house can be employed to estimate income,guests. The personal property derives occupancy, and expenses:value by allowing the owner/manager to • Actual income submitted by thegenerate revenue from its use, and the taxpayerbusiness derives value from its ability tosuccessfully run the entire operation. • PKF—Trends in the Hotel IndustryThese three items are needed for a (annual)hotel to operate successfully. Since busi- • Smith Travel Research (STR)—ness value is not assessed and personal The Host Study (annual)property is usually assessed separately, itis necessary to exclude these items from • State sales tax recordsthe final assessment. To accomplish this,the value of the entire going concern is Actual Income and Expensesestimated and then allocated to each of Actual income and expense statementsits three components. This task can be submitted by the taxpayer are the bestFigure 1. Typical Hotel Income and Expense Statement18 Journal of Property Tax Assessment and Administration • Volume 2, Issue 1
  • 5. source of a hotel’s operating history. excluded from the direct capitalizationCare should be taken when reviewing approach, such as depreciation, interest,a hotel’s actual income and expenses and capital expenditures. For propertybecause the goal when creating models assessment purposes, the expenses areis an estimate of a “stabilized” income also adjusted to exclude property From year to year, a hotel’s ac- (This expense will be included by “load-tual revenue and expenses may fluctuate ing” the capitalization rate with the localdue to weather, poor versus superior tax rate.)management, renovations, and other Many hotel operating statements do notfactors. Similarly, financial statements include expenses that should be includedoften include expenses that should be in a direct capitalization approach, suchFigure 2. Sample Page from PKF’s Trends in the Hotel Industry © 2003 Pannell Kerr Forster. Reprinted with permission.Journal of Property Tax Assessment and Administration • Volume 2, Issue 1 19
  • 6. as reserves for replacement, manage- information is available to the assessor, itment expense, and franchise fee. Once can be extremely valuable in determin-reviewed and adjusted, actual income ing a hotel’s actual revenue.and expense data submitted by taxpayersshould be compiled and segregated by ho- PKF Trendstel class. Figure 1 shows a typical income Another excellent source of hotel perfor-and expense statement for a hotel. mance is PKF’s Trends in the Hotel Industry In some states, assessors have access (annual). This yearly publication reportsto sales tax data from the government hotel revenue, expenses, and profit dataagency responsible for collecting sales for each of the five hotel categories withtax. This data is typically confidential and further breakdowns for geographic re-not available to the general public. If this gion. Data in each of these categoriesFigure 3. A Sample Page from Smith Travel Research’s The Host Study © 2003 Smith Travel Research. Reprinted with permission.20 Journal of Property Tax Assessment and Administration • Volume 2, Issue 1
  • 7. include average daily rates, number of Capitalization Rateshotel rooms, and the top hotels versus An important component of the directaverage hotels. In addition, revenue is capitalization process is the estimate offurther stratified by room revenue, food the capitalization rate (cap rate). Twoand beverage income, telecommunica- techniques are suggested for estimatingtions income, and miscellaneous revenue. cap rates for hotels.Expenses are similarly segregated. For modeling purposes, the data • Extraction from salesfrom PKF’s Trends should be adjusted to • Industry surveysexclude property taxes and include an Extracting capitalization rates fromestimate of reserves for replacements. hotel sales provides a good indicationA sample page from the Trends report is of local activity. Sales of hotels are com-shown in figure 2. plicated by the potential inclusion of personal property and/or business value.Smith Travel Research The recorded sales price may or may notSmith Travel Research sells a variety of reflect consideration for the real estatepublications related to hotel performance. only. Often purchasers perform salesOne of the most helpful to appraisers is price allocations (separating real estate,The Host Study. This report provides in- personal property, and business) for in-come and expense items broken down by come tax purposes. Unfortunately, therehotel type, geographic region, and other is rarely any indication on a deed whethercategories. A sample page from The Host a sales price has been allocated. OnlyStudy is shown in figure 3. through research and/or verification can As with other income and expense in- the appraiser be sure what the recordedformation, the data from The Host Study price included. Often these purchaseshould be adjusted to exclude property details are reported in the Securities andtaxes. One difference between The Host Exchange Commission (SEC) filings orStudy and PKF’s Trends is that The Host a company’s annual report (such as theStudy includes a reserve for replacement excerpt from Highland Hospitality’s 2003expense while Trends does not. annual report in figure 4).Figure 4. Hotel Annual Report Describing Purchase Price AllocationJournal of Property Tax Assessment and Administration • Volume 2, Issue 1 21
  • 8. Industry publications provide an ex- the most knowledgeable and respectedcellent source of capitalization rates for appraisers disagree about the best wayhotels. A few of these sources include: to measure business value. Over time,Korpacz Real Estate Investor Survey, CB several techniques have evolved that iso-Richard Ellis National Investor Survey, Real- late business value. A summary of Investor Survey, and USRC Hotel methods follows:Investment Survey. Capitalization ratesfrom these sources (such as the sample Cost Approach Methodreport from in figure Since the cost approach inherently5), along with extracted hotel sale cap excludes business value, it is an excel-rates, provide the appraiser or assessor a lent approach for isolating the value ofreliable indication of overall rates. Simi- the real estate. Simply comparing thelar to revenue and expenses, cap rates final value via the cost approach to thevary depending on hotel type and class, value of the going concern (excludingand should be stratified accordingly. personal property) could indicate the presence of business value. The cost ap-Business Value proach does have limitations, however.In most jurisdictions, only real estate As properties get older, it can be difficultand personal property are assessed. to measure depreciation. For new hotels,However, a hotel is more than “sticks this approach is excellent and for olderand bricks.” It is an operating business ones it still provides an excellent checkthat provides services to its customers on other methods.above and beyond the rental of the realestate. Consequently, the assessor must Rushmore Approachunderstand both the hotel industry and This method was developed by Stephentechniques for excluding or removing Rushmore, president of Hospitalityany business value in order to accu- Valuation Services International. Inrately estimate a hotel’s value. Some of this method, the management fee andFigure 5. Cap Rate Indices from *2nd Quarter 2004 Data © 2004 Reprinted with permission.22 Journal of Property Tax Assessment and Administration • Volume 2, Issue 1
  • 9. franchise fee are deducted from the net generating capability is attributable tooperating income, and the capitalized the business, not the real estate. Thevalue of these two fees is considered busi- difficulty in applying this techniqueness value (more on this approach later). comes in selecting truly comparableThis technique to isolate intangibles has hotels for comparison and confidentlybeen used successfully in many court attributing revenue differences to man-cases and, in the authors’ experience, is agement versus location, condition, orthe best approach for excluding business other factors.value in a mass appraisal model. Proxy MethodBusiness Start-up Costs Method This approach imputes a rent for theAlso known as the Business Enterprise various profit centers (rooms, restau-Approach, this theory suggests that in rants, laundry, retail space, and such).addition to deducting a management This rent is then capitalized to obtain anfee and franchise fee, a deduction estimate of value for each of these vari-should be made to reflect the original ous areas. These individual estimates are“start-up” costs the hotel incurred when then summed to obtain a total real estateit was built. Start-up costs include assem- value estimate. Since few, if any, hotelsbling and training staff and marketing are leased in this fashion, it would bethe new hotel. The premise is that an difficult, if not impossible, to obtain rentowner expects to recapture these costs comparables for the various profit cen-throughout the life of the property and ters. The use of rent comparables fromtherefore they should be amortized and other property types would probably notdeducted annually. be very reliable either because of the Critics of this method argue that there unique nature of these services withinis no indication that a buyer would pay an the hotel environment. Capitalizationowner an additional sum for these costs rates and expenses for the various profitbecause they are already present in the centers (under this lease assumption)annual operating statement. Moreover, would be equally difficult to estimate.for many hotels, the original workforcethat was assembled when the hotel was Business Value Summarynew no longer exists. Hotels historically Of the various options to measure busi-have a very high employee turnover rate ness value, the authors’ jurisdiction usesand they must advertise for, hire, and the Rushmore approach. This methodtrain a large portion of their workforce was chosen to measure and excludeevery year. Since the existing workforce intangibles because it is straightforward,was likely assembled through expendi- easy to understand, and, in the authors’tures in the annual operating budget, experience, the most defendable.and therefore, already accounted for in As indicated previously, this approachthe income approach, critics charge that capitalizes the management fee anddeducting the original operating costs franchise fee to isolate the businesswould represent double counting. value. The premise is that no one would pay more for the business portion of theExcess Profits Method hotel than the cost to replace it. The costThis approach says that if a value en- of replacing business aspects is the costhancement is created due to a hotel’s of hiring a hotel management companysuperior management, it can be mea- to run the hotel and affiliating with asured by comparing its revenue per known “brand.” Many companies andavailable room (RevPAR) against its hotel chains such as Marriott, Hyatt, andcompetition. The premise is that two Hilton provide these services. The costhotels being equal, any superior revenue of hotel management and chain affilia-Journal of Property Tax Assessment and Administration • Volume 2, Issue 1 23
  • 10. tion currently ranges from 3% to 10% of revenues. Since management fees aretotal revenue (Pannell Kerr Forster 2004; based on a percentage of revenue, higherSmith Travel Research 2004). revenues result in higher management Using the Rushmore method, re- fees and ultimately a higher businessmoving the value of the business from value allocation. Conversely, decliningthe going concern is accomplished by revenues would lower the managementcapitalizing the management fee and cost resulting in a lower business valuefranchise fee, then deducting that value estimate.from the value of the going concern. An There are many techniques for mea-alternative method that accomplishes suring and removing business value.the same result is to simply include the Capitalizing the management fee andmanagement fee and franchise fee in franchise fee, in the authors’ view, resultsthe operating expenses of the income in a value that replicates what an investormodel. The inclusion of these costs will would pay for a business. This methodreduce the net operating income (NOI) has seen acceptance in the courts and isand effectively remove the business value widely used in the appraisal industry. Infrom the final value. addition, it is fairly straightforward to These two techniques are demonstrat- apply in the income approach and in aed in figure 6. While Method 2 results mass appraisal the same value for the real estate asMethod 1, several steps are saved by us- Personal Propertying Method 2. A hotel requires significant personal Another benefit of the Rushmore property to operate. This includes roomapproach is that the business value al- furnishings, restaurant fixtures, andlocation rises and falls with the success other miscellaneous furniture, fixtures,or failure of management. Superior and equipment (FF&E). Since most per-management is rewarded with higher sonal property is assessed separately fromFigure 6. Two Techniques for Removing the Business Value from the Going Concern ValueMethod 1. Capitalizing Management Fee and Franchise FeeTotal Revenue $1,000,000Total Expenses (excluding mgt. and franchise fee) $ 700,000Net Operating Income $ 300,000Capitalization Rate (includes tax rate) 12.0 %Total Property Value $2,500,000Business Value CalculationMgt. and Franchise Fee–8% of Revenue $ 80,000Capitalization Rate (includes tax rate) 12.0%Business Value $ 667,000Value of Real Estate & FF&E ($2,500,000 - $667,000) $1,833,000Method 2. Including Management Fee and Franchise Fee in ExpensesTotal Revenue $1,000,000Total Expenses (including mgt. and franchise fee) $ 780,000Net Operating Income $ 220,000Capitalization Rate (includes tax rate) 12.0%Value of Real Estate & FF&E $1,833,00024 Journal of Property Tax Assessment and Administration • Volume 2, Issue 1
  • 11. annual basis to replace these items as they reach the end of their useful lives (similar to reserves for short-lived real estate items). Although many hotel own- ers do not show this expense on their income statement, the appraiser or assessor should assume these expenses exist by imputing them in the income approach. “Return Of” and “Return On” are terms often used to describe techniquesPhoto courtesy of Saddlebrook Resort, Tampa, FL for removing the personal property from the income approach of a going con-the real estate, the value of the personal cern. “Return Of” is simply recapturingproperty must be excluded from the final the FF&E through a reserve for replace-assessment of the real estate. ment. If you have allowed an expense for For states that assess personal prop- reserves of FF&E, you have accounted forerty, allocating value to the personal the “Return Of.”property is fairly easy, since it has already The “Return On” personal property isbeen valued independently of the real a method of estimating the value of theestate. Deducting the assessed value of FF&E by assigning a portion of the incomethe FF&E from the income approach stream to the personal property and thenis appropriate and achieves the goal of capitalizing it to determine its contributoryseparating its value from the real estate; value. For assessors, a quicker method tohowever, one more step is required. remove the value of the personal property A hotel’s personal property does not is to simply deduct its current assessmentlast forever, and therefore, requires from the value of the going concern.periodic replacement. A prudent Some practitioners argue that both theowner would set aside monies on an assessed value of the FF&E and a “ReturnFigure 7. 2004 Hillsborough County Hotel Models by Type and QualityJournal of Property Tax Assessment and Administration • Volume 2, Issue 1 25
  • 12. On” should be deducted in the income and overall quality should have similarapproach. The argument suggests that models assigned.the FF&E contributes more than just itsassessed value because an owner expects Cost Approachto make a profit on its use. However, this Although the income approach is theprofit has already been considered in the preferred method for estimating theprevious deduction for business value. value of a hotel, the cost approach stillThe management fee and franchise fee serves an important function. For newcover both the cost of operating the hotel hotels and as a check against otherand the personal property. Any business valuation methods, the cost approachvalue resulting from the operation of provides the appraiser or assessor withthe FF&E has already been accounted an excellent alternative. The Marshallfor by capitalizing the management fee & Swift Valuation Service has a completeand franchise fee. Deducting both the as- section on hotels, broken down by hotelsessed value of the personal property and segment (limited service, full service,a “Return On” that same property could and so on.) and quality class. Figurebe considered double counting. 8 is an excerpt from the commercial In the authors’ opinion, imputing an manual.expense for reserves for replacement of Most assessors’ Computer Assistedthe FF&E and deducting the personal Mass Appraisal systems (CAMA) utilizeproperty assessment sufficiently excludes the cost approach. In the authors’ ex-the FF&E from the income approach. perience, the cost approach is the most widely used approach in mass appraisal.Reconciliation Critics of the cost approach will argueOnce all sources of income, occupancy, that depreciation is difficult to measure,expenses, and capitalization rates have particularly in older buildings. Althoughbeen compiled, models for each of the the measurement of depreciation canclasses of hotels can be created. Figure be challenging, the difficulties are not7 provides an example of hotel models insurmountable. A significant differ-for Hillsborough County, Florida, for the ence between the value calculated by the2004 tax year. cost approach and that by the income The total income for each of the mod- approach may indicate the presence ofels is intended to reflect what hotels in obsolescence.each class would actually experience on One point worth mentioning—asses-a stabilized basis. The expenses include sors should be wary of valuations thatreserves for replacement for both real es- contain external obsolescence in thetate and personal property. The expenses cost approach and a deduction for busi-also include a management fee and ness value in the income approach. Itfranchise fee, which effectively removes is unlikely that an investor would pay aany business value. After the models are premium for the business value of a hotelapplied, the personal property assess- suffering from external obsolescence.ment should be deducted, resulting inan estimate of only the real estate. Sales Comparison Approach If available, using a hotel’s actual Aver- The sales comparison approach orage Daily Room Rate (ADR) as a guide market approach is the most direct in-will help the appraiser in assigning the dication of what a hotel would sell for.correct model. Care should be taken However, it is probably the most difficultto ensure a hotel’s actual ADR is stabi- of the three approaches to apply. Usinglized and is not affected by short-term this approach requires the appraiser orissues such as remodeling. Hotels with assessor to:similar locations, condition, amenities,26 Journal of Property Tax Assessment and Administration • Volume 2, Issue 1
  • 13. • Obtain information regarding sales comparison approach is the neces- the circumstances surrounding sity to make adjustments for differences the sale between amenities, location, physical • Obtain financial and physical condition, and operating performance. aspects of the hotel These adjustments are often subjective. Since most hotels are bought on the basis • Allocate the price between real of their earning power, access to actual fi- estate, FF&E, and/or business nancial data would be extremely helpful • Extract and apply appropriate in making these adjustments. However, adjustments for differences these data are typically unavailable. between the subject and com- Mass appraisal models for hotels using parable properties stepwise regression have been created by John W. O’Neill, MAI, CHE, PhD, Applying mass appraisal techniques an assistant professor at the Schoolto hotels using the market approach of Hotel, Restaurant and Recreationis particularly difficult due to a lack of at The Pennsylvania State University.sufficient comparable sales. In Tampa, O’Neill created his regression modela fairly large city (ranked 21st among using 327 sales nationwide spanning 12all metropolitan statistical areas in the years (1990-2002). Since the sales dataUnited States), there were only 17 hotel used in O’Neill’s study (2004) is pro-sales during the past three years. Strati- prietary and data on hotel sales outsidefying these sales by property type (full an assessor’s jurisdiction are typicallyservice, limited service, and so forth.) not available, it is unlikely that a similarleaves very few sales for each category. analysis could be performed at the local Further complicating the use of the level. However, the results of O’Neill’sFigure 8. Marshall & Swift’s Hotel Cost Estimates by Segment and Class© 2005 Marshall & Swift, L.P. Reprinted By Permission. Further Reproduction Is Expressly Prohibited.Journal of Property Tax Assessment and Administration • Volume 2, Issue 1 27
  • 14. study can be useful. Not surprisingly, against the value determined by the in-O’Neill’s models indicated that four key come approach.factors affect the selling price of a hotel:number of rooms, net operating income, Conclusionaverage daily room rate, and occupancy. Hotels are one of the most difficultHis analysis indicates the importance of properties to value for appraisers andthe income approach for valuing these assessors alike. These properties areproperty types. complicated by the fact that they are In the absence of sufficient sales to a combination of real estate, personalcreate mass appraisal models for hotels, property, and an operating business.many assessors resort to single-property This article focused on the creation ofappraisal—essentially valuing one hotel mass appraisal models to value a time. Although this method is ac- These models can be created utilizingceptable, it can be time-consuming and readily available data and can be struc-difficult. Assessors should consider a tured to exclude business value.technique known as “ranking analysis.” Because hotels are typically bought and(Appraisal Institute 2001) In ranking sold on their ability to generate revenue,analysis, comparable sales are ranked the income approach is the preferredin descending or ascending order. An approach to value. Data concerningexample from Hillsborough County is average daily room rates, occupancy,shown in figure 9. After reviewing the expenses, and capitalization rates can besales, the assessor then determines the obtained from company financial reportsrelative position of the subject in the and industry publications. This data canarray. The comparables are identified as be used to create mass appraisal incomeeither inferior or superior to bracket the models. Although less reliable than theprobable value range of the subject. income approach, the cost approach The sales comparison approach is provides a valuable check against othertypically the best method to determine valuation methods. The cost approachthe probable sales price of a property. is particularly useful in new hotels andHowever, with the lack of sufficient hotel lends itself very well to mass appraisal.sales, this method is best used as a check Because of a lack of sufficient sales, theFigure 9. Comparable Sales of Limited Service Hotels Ranked by Price Per Room28 Journal of Property Tax Assessment and Administration • Volume 2, Issue 1
  • 15. sales comparison approach is the least expense, occupancies, and profit dataadaptable to mass appraisal. The assessor nationwide. The price for this publica-can use the “ranking analysis” method tion is approximately $295.00to array sales, then bracket the subject STR—Smith Travel Research (www.accordingly. Again, this approach should publishes aprobably only be used as a check against report entitled The Host Study. Similar toincome-approach results. PKF’s Trends report, the Host Study pub- There is an ongoing debate about lication provides in-depth survey resultshow to separate the three aspects of for hotel income, expense, and othera hotel property’s value, that of real benchmarks. The price for this publica-estate, personal property, and the ongo- tion is approximately $ business. For personal property, it is Hospitality Internet Media, L.L.C.’sthe authors’ opinion that imputing an is a Web site thatexpense for reserves for replacement of reports all the latest news on hotels andthe FF&E and deducting the personal the lodging industry throughout theproperty assessment sufficiently excludes United States. The Web site providesthe FF&E from the income approach. news articles, classified ads, and links toOf the several methods presented for many other hotel-related Web sites. Thisestimating business value, the authors’ Web site is free.believe that the simplest and most effec- Korpacz Real Estate Investor Survey (www.tive method for ensuring that business provides capitalizationvalue is excluded from a hotel’s assess- rates and other market data, commentary,ment is to include a management fee and and analysis on a variety of commerciala franchise fee in the operating expenses properties including hotels. Publishedof the income approach. quarterly by PriceWaterhouseCoopers, an Uncredited photos and charts were provided annual subscription is $ the authors. CB Richard Ellis National Investor Survey ( is an annual publica-Hotel Data Sources tion that reports capitalization rates for 15 class A, B, and C income-producingThis list of hotel data sources is by no properties. The annual cost for the Inves-means exhaustive. However, these re- tor Survey is $100.00.sources have been most helpful to the is an Internetauthors in developing hotel assessments subscription service which publishesin their jurisdiction. All prices quoted several surveys with capitalization rates,were as of January 2005. rents, expenses, vacancies and other Hotels and Motels: Valuations and Market data for all major income-producingStudies by Stephen Rushmore, MAI, and commercial properties. The reports areErich Baum, is a publication of the Ap- published quarterly and are $79.00 forpraisal Institute (www.appraisalinstitute. an annual This book contains information on USRC Hotel Investment Survey (www.gauging hotel demand, site selection,, which is published by afacility financing, design, valuation, and group of hotel industry specialists, offersmanagement. The price for this book is cap rates and other hotel data. This Webapproximately $45.00. site is free. Pannell Kerr Forster Inc. (PKF) ( publishes a report en-titled PKF—Trends in the Hotel Industry.This is an annual report that detailsthe result of surveys of hotel revenue,Journal of Property Tax Assessment and Administration • Volume 2, Issue 1 29
  • 16. Glossary • Telecommunications Income – all • Average Daily Rate (ADR) – av- income generated through the use erage room income per occupied of in-room telephones for local and room. long distance calls as well as fax services and Internet connection • Departmental Expenses – expenses services. directly incurred by the operation of the different hotel “depart- • Undistributed Operating Expenses ments,” namely rooms, food and – Operating expenses not incurred beverage, telecommunications, by the specific departments. Gen- and miscellaneous. eral hotel operating expenses. For example, administrative, utilities, • Food and Beverage Income – all and marketing expense. income generated from the sale of food and beverages, including room service and alcoholic beverages. References • FF&E – the furniture, fixtures, and Appraisal Institute. 2001. Appraisal of equipment necessary to operate a real estate, 12th ed. Chicago: Appraisal hotel, typically a large investment Institute. for most hotels. These assets are International Association of Assessing excluded from the valuation of the Officers. 1999. Mass appraisal of real prop- real estate. erty. Chicago: International Association • Franchise Fees – payment that a of Assessing Officers. hotel makes to be affiliated with a Marshall & Swift. 2004. Marshall valua- national chain. This generally is an tion service book. Los Angeles. Marshall expense attributed to the business & Swift. concern of the hotel. O’Neill, J.W. 2004 An automated valu- • Management Fees – payment that ation model for hotels. Cornell Hotel a hotel owner makes to a manage- and Restaurant Administration Quarterly. ment company to run the day-to- August. day operation of the hotel. These Pannell Kerr Forster Inc. Annual. Trends fees are typically based on percent- in the hotel industry. New York: Pannell ages of revenue and represent the Kerr Forster Inc. total cost of running the business. 2004. Third quarter • Miscellaneous Income – revenue 2004 investor survey. Bradenton, FL: generated from retail space rent- als, meeting room rentals, parking, Smith Travel Research. Annual. The host laundry, and fees from ancillary study. Hendersonville, TN: Smith Travel services. Research. • Rack Rate – the advertised rate of the hotel. Usually the highest rate Additional Resources offered to someone who has no reservation. Case law on the Rushmore approach and business enterprise value • Room Revenue – all income gener- Dist. of Columbia v. Wash. Sheraton Corp., ated from room rentals. 499 A.2d 109 (D.C. 1985). • RevPAR (revenue per available Estate of Slutsky v. C.I.R., 1983 Tax Ct. room) – actual room income divid- Memo LEXIS 208 T.C. Memo 1983-578 ed by the total number of rooms. (U.S. Tax Ct. 1983).30 Journal of Property Tax Assessment and Administration • Volume 2, Issue 1
  • 17. Glen Pointe Assoc. v. Teaneck Township, 10 In re J.F.K. Acquisitions Group, 166 B.R. 207N.J. Tax 380 (1989). (Bankr. E.D. N.Y. 1994).Hilton Hotels Corporation v. Jackson County Marriott Corp. v. Bd. Of Cnty. Commission-Assessor, 2003 WL 21443402 (Or. Tax ers, 972 P.2d 793 (Ks. App. 1999).Magistrate Div.) Merle Hay Mall v. Polk County Board of Re-Hull Junction Holding Corp. v. Princeton view, 564 N.W. 2d 419 (Iowa 1997).Borough, 16 N.J. Tax 58 (1995). Prudential Ins. v. Township of Parsippany,In re Grand Traverse Development Co. Ltd. 16 N.J. Tax 58 (1995).Partnership, 150 B.R. 176 (Bankr. W.D.Mich. 1993).Journal of Property Tax Assessment and Administration • Volume 2, Issue 1 31
  • 18. 32 Journal of Property Tax Assessment and Administration • Volume 2, Issue 1