1. Appraisal of Limited Service Hotels
– A Preamble toValuation of Intangibles
Bwembya Chikolwa - PTAD
Kevin Katsuda - Bexar CAD
Mike Swenson - Bexar CAD
David Oehler - Gillespie CAD
PTI Conference
University ofTexas at Austin, TX
December 11 – 12, 2012

2.  The statements made or opinions expressed by the
authors/presenters in this presentation or related materials do
not necessarily represent a policy position of the entities they
work for.
 As such, the material presented should not be quoted without
prior consent of the authors/presenters.
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3. 1. Rationale for adjustment of intangibles
2. Texas PropertyTax Code
3. General valuation model
4. Valuation methods
5. Valuation of technology and software
6. Valuation of trademarks, patents, copyrights & licenses
7. Valuation of name, reputation & flag
8. Valuation of assembled workforce
9. Adjustment for working capital
10. Controversies in valuation of hotel intangibles & open discussion
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4.  As an investment, a hotel fundamentally is a hospitality business whose largest
capital asset is real estate but whose important operating asset is a collection of
business resources and relationships that are classified as “intangible assets.”
Source: Business EnterpriseValue Anthology, Appraisal Institute, pp. 139
 Although the need to distinguish between tangible & intangible hotel value has
been well documented, there is no general agreement regarding how to do so.
Source:O'Neill, J.W. & E.E. Belfrage (2005), A Strategy for Estimating Identified Intangible AssetValue: Hotel
Affiliation Contribution, AppraisalJournal, pp. 78-86.
 Broadly, in order to be subject to financial valuation, an intangible asset must be
capable of being owned, is transferable and subject to legal existence and
protection.
Source: Royal Institution of Chartered Surveyors (2006),Valuation of Intangible Assets, pp. 5.
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5. TheTexas PropertyTax Code, Section 1.04 states intangible personal property:
Means a claim, interest (other than an interest in tangible property), right, or
other thing that has value but cannot be seen, felt, weighed, measured, or
otherwise perceived by the senses, although its existence may be evidenced by a
document. It includes a stock, bond, note or account receivable, franchise, license
or permit, demand or time deposit, certificate of deposit, share account share
certificate account, share deposit account, insurance policy, annuity, pension,
cause of action, contract, and goodwill.
Section 11.02 states:
(a) Except as provided by Subsection (b) of this section, intangible personal
property is not taxable.
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6.  General model for arriving at the “value of real property” for hotel properties:
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Business Value Enterprise or Going Concern Value
Less Furniture, Fixtures & Equipment (FF&E)
Less Profit Centres:
-Food & Beverage
-Telephone & Internet
-Business Centre
-Conferences/Seminars/Workshops
-Athletic Club
Less Intangibles:
-Workforce (if applicable)
-Name, Reputation & Flag*
-Software & Technology*
-Trademark/Tradename, Patents & Licenses
-Working Capital
Value of Real Property
*Customer relationships/goodwill, advance reservations & past
customer lists may be included in either one of these.

7. There are three internationally accepted, fundamental approaches used in
valuation:
 Cost Approach:
-Estimation of the cost to replace or recreate.
 Market Approach:
-Study of the market to create or discover guidelines. There must be
sufficient quantity of comparable or guide intangible transaction data.
 Income Approach:
-Valuation of earnings/income expected from exploitation of the subject
property. Income can be either ‘operating income’ or ‘ownership income’.
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8. Criteria for selection of valuation method:
- Quantity & quality of data.
- Access to available data.
- Supply of relevant transaction data.
- Type & nature of the subject asset.
- The particular bundle of rights represented in subject intangible asset.
- Statutory, judicial, contractual, and administrative requirements and
considerations.
- Informational needs of the particular audience for the valuation opinion.
- Purpose and objective of the appraisal.
- Compliance with professional standards.
- Professional judgment and technical expertise.
Source: Reilly, R.F. & R.P. Schweihs (1999), Valuing Intangible Assets, McGraw-Hill, London.
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9.  The cost approach is commonly used. The income approach can be used if an
identifiable income stream is available. Market transaction data is needed for
the market approach.
 Cost approach model:
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Replacement Cost New (RCN):
-Direct costs (materials & supplies)
-Indirect costs (engineering & design expenses, legal fees, etc.)
-Intangible asset devlper's profit
-Opportunity cost/enterpreneurial incentive
Less Physical Deterioration¹
Less Incurable Fuctional & Technological Obsolescence²
Less Economic Obsolescence³
Intangible Asset Value
Notes:
1 Unlikely for intangible assets.
2 Functional: inability to perform function.
3 Incurable, uncontrolable external economic effects, events or conditions:
-Locational
-Economic (inability to earn fair rate of return on ROI)
Technological: Design or engineering technology of new asset produces a greater
standardized measure of utility production.

10.  Cost approach based “Software Engineering” estimation models are
popular for valuing software:
- Constructive Cost Model (or COCOMO)
Amount of development effort required to recreate subject software,
taking into account size, characteristics and environment in which
program was developed.
- SPR Knowledge PLAN (or KPLAN)
Amount of development effort associated with a particular software
based on various parameters including: project classification,
complexity, size, language, & other attributes.
Both models arrive at a “full absorption cost per person-month,” used in
arriving at RCN.
Fair market value = RCN - Depreciation
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11.  Some sources of data:
- 10KWizard: Search engine of terms, e.g., brand, trademark ™, etc.
- Royalty Stat: Database of royalty rates & license agreements.
 Valuation:
- Profits generated by ™, Patents, © & Licenses captured by licensor &
licensee.
- Royalty rates charged to third parties for ™, Patents, © & Licenses , e.g.
2.5% - 4% of sales, to determine value accrued to licensor.
- Adjusting royalty rates to determine value accrual to licensee, e.g. “rule of
thumb”: licensor 1/3 & licensee 2/3.
- Multiplying royalty rate by projected revenues & then determining ATCF
using marginal tax rate (35%).
 The value of IP rights is the PV of the CF derived from the “Relief from Royalty
Approach” via the DCF methodology.
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12.  Name recognition, good reputation for high quality service & brand/flag
affiliating can add as much as 20% - 25% to going concern value of a
successful operating hotel.
Source:O'Neill, J.W. & E.E. Belfrage (2005),A Strategy for Estimating Identified IntangibleAsset Value:
HotelAffiliation Contribution, Appraisal Journal, pp. 78-86.
 REVPAR = Average Percent Occupancy (APO) X ADR
- Reflection/measure of both management effectiveness & appeal of
hotel name, reputation & flag.
 Requirements for customer relationships to be an intangible:
- Relationship between customer & vendor
- Data & documentation regarding relationship that would be useful to
the buyer (or the user).
 Components of goodwill:
- Existence of excess income.
- Expectation of future events not directly related to current
operations; a positive NPV of income associated with future events.
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13.  An example for determining the value of name, reputation & flag:
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Subject Property: 2008 2009 2010 2011 2012
(a) Room revenues ($000) $14,621 $14,864 $16,488 $17,266 $18,767
(b) Avg. daily rate ($) $113.77 $115.98 $121.30 $125.51 $124.61
(c') = (a)/(b) $128,514 $128,160 $135,927 $137,567 $150,606
(d) Occupancy (%) 60.20% 61.00% 64.80% 64.00% 71.60%
(f) = (a)/(b)/(c') Base figure $213,478 $210,098 $209,765 $214,948 $210,343
Local Submarket:
(g) Occupancy (%) 68.70% 66.70% 71.80% 71.50% 74.50%
(h) = (f)*(g) $146,659 $140,136 $150,611 $153,688 $156,706
(i) Avg. daily rate ($) $96.87 $98.99 $101.34 $105.58 $112.58
(j) = (h)*(i) $14,207 $13,872 $15,263 $16,226 $17,642
Value of Name,
Reputation &
Flag
(k) = (a) - (J) Rev, Differential ($000) $414 $992 $1,225 $1,040 $1,125
(l) Cap Rate 20% 20% 20% 20% 20%
(m) = (k)/(l) Value $2,070 $4,960 $6,125 $5,200 $5,625
Source: Adapted from Kinnard, W.N., et.al (2001), Intangible Assets in an Operating First-Class Downtown
Hotel, Appraisal Journal, pp. 68-83.

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An Example for Extraction of Intangible Asset Capitalization Rate
Position Percent of Value Capitalization
Rate
Product
Real estate 70% 8.5%¹ 5.95%
Personal property (TPP) 10% 15% 1.50%
Intangibles (IA) 20% (X) 3.50%
Total Rate (TAB) 100% 11.00%²
Solving for IA Cap Rate (X):
X = (R₀ - (RERE X %RE) - (RTPP x %TPP))/%IA
X = (11.0% - (8.5% x 70%) - (15% x 10%))/20%
X = (11.0% - (5.95%) - (1.5%))/20%
X = (11.0% - 7.45%)/20%
X = 3.55%/20%
X = 17.75%
X = 18.00% (rounded)
Notes:
1. Real Estate R₀ (Korpacz Real Estate Survey - Apartments).
2. Hotel R₀ (Korpacz Real Estate Survey - Full service hotels).
Source: O'Neill, J.W. & E.E. Belfrage (2005), A Strategy for Estimating Identified
Intangible Asset Value: Hotel Affiliation Contribution, Appraisal Journal, pp. 78-86.

15.  Assembled workforce (WF), which is typically classified as part of goodwill, is
normally attributable to the cost that the company would incur should it have
to recruit, hire, and train new employees and the corresponding lost
productivity in learning a new job.
 The corresponding return to the company must ultimately be greater than the
cost of the employees in order to be consider an intangible.
 Although WF may not be separable from brand, often the brand is sold without
WF, & the WF can be valued as a separate asset.
 An assembled WF possesses expertise & knowledge specific to a company & is
important in sustaining the profitability & continued growth of the company.
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16. 16
Replacement Cost New
Assembled
Worforce
Employee
Component
No. of
Emp.'s
Avg Salary Other
Costs
Factor
Full
Absorpot
ion (FA)
Cost
Recruit
Empl.
Hire
Empl.
Train
Empl.
% of FA
Cost to
Replace
Empl.
Avg. RCN
Compo.
Total RCN
Compo.
Top Mgt 10 $180,000 1.6 $288,000 20% 20% 40% 80% 230,400 $2,304,000
Chefs 20 $60,000 1.5 $90,000 10% 50% 30% 50% 45,000 $900,000
Others 20 $40,000 1.4 $56,000 10% 40% 25% 40% 22,400 $448,000
Total Empl.'s 50
Total direct & indirect cost components $3,652,000
Add
Dvlper's profit cost component
Devlper's profit margin 10%
Devlper's profit cost component $365,200
Total direct & indirect cost components + Devlper's profit $4,017,200
Add
Enterpreneurial incentive
Est. total WF replacement period 6 weeks (6/52 weeks or 11.5%)
Est. avg. WF replacement cost (i.e., $4,017,000 total cost * 11.5%) $461,978
Req'd annual return on investment 16%
Req'd annual return on investment for 6 weeks replacement period 1.84%
Entrepreneurial incentive (i.e., $461,978 * 1.84%) $8,500 $8,500
Total replacement cost new $4,025,700
Source: Adapted from Holloway, B.P. & R.F. Reilly (2012), Intangible Asset Valuation Approcahes and Methods, Insights
magazine, pp. 13-33.
% of Total (FA) Cost
Reqd to

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Total replacement cost new 4,034,201
Physical Deteroration
Assembled
Worforce
Employee
Component
No. of
Emp.'s
Avg.
direct &
indirect
RCN
Dvlper's
profit &
Enterpre
neurial
Incentive
Compon
ents
Total
RCN
% Dep. Accum.
Dep.
Chefs 2 $45,000 $13,000 $103,000 100% $90,000
Others 1 $22,400 $3,200 $25,600 100% $22,400
Total $16,200 $128,600 $112,400 $128,600
Functional Obsolescence
Assembled
Worforce
Employee
Component
No. of
Emp.'s
Excess
Direct &
Indirect
RCN
Excess
Dvlper's
profit &
Enterpre
neurial
Incentive
Compon
ents
Total
Excess
RCN
Function
al
Obsolesc
ence
Chefs 18 $7,500 $1,100 $8,600 $154,800
Others 2 $22,400 $3,200 $25,600 $51,200
Total $206,000
RCN less total physical & functional obsolescence $3,699,601
20% $739,920
Assembled workforce value $2,959,681
Source: Adapted from Holloway, B.P. & R.F. Reilly (2012), Intangible Asset Valuation Approcahes
and Methods, Insights magazine, pp. 13-33.
Less Selected economic obsolescence (20%)

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EconomicObsolescence Data
Item LTM
Ended
12/31/12
Benchmark
Measure
LTM%
Shortfall
1 Average collectedrevenue perchef $340,000 $420,000 19%
2 No. of supportstaff perchef 4 3.2 25%
3 Annual growthrate incafeteriarevenue 3.50% 4.50% 22%
4 Returnonthe average assets 10% 12.50% 20%
5 Returnonthe average equity 20% 25% 20%
LTM% shortfall indications
Mean 21%
Median 20%
Mode 20%
Economcobsolescence indication 20%
Actual subjectaverage 2008-2014
Source:Adapted fromHolloway,B.P.& R.F.Reilly (2012),IntangibleAssetValuation Approcahes and Methods, Insights magazine,pp.13-
33.
Financial orOperational Performance
Metric
BenchmarkComparisonReference
Source
2012Local submarketaverage
2012Local submarketaverage
Actual subjectaverage 2008-2012
Actual subjectaverage 2008-2013

19.  Working Capital (WC) is capital required in the short term to run the business:
- Current ratio: Current Assets/Current Liabilities
- DCFValuation: ATCF considers change in WC
 WC adjustment practices:
- “1/8 Rule” or 45 days of O&M account (used by utility regulators in
consideration of the allowable rate of return)
- Cash & temporary cash investment accounts
- Accounts receivables
 WC is required for an operating hotel’s continued operation/liquidity and
solvency.
- e.g. two weeks of total revenue suggested for hotels
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20.  Some controversies and points of discussion:
- If franchise fees are the sole basis for estimating a hotel’s intangible
value, are they the most appropriate technique?
- Are advanced telephone reservation systems & established reputation
for high quality fully captured in the franchise fee?
- Should assembled workforce and customer relationships (e.g.
rewards/loyalty programs) be assessed as separate intangible assets?
- What are the appropriate items to deduct as working capital?
- What is the appropriate methodology for determining the cap rate for
intangible assets?
- If detailed information is difficult to obtain or model, is a rule of the thumb
such as “20% of BEV being attributable to intangibles” appropriate?
- Do locational attributes and selection of local comparables counter the need
for intangible value adjustment?
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