The Mass Appraisal of Hotels in Florida


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This presentation discusses how mass appraisal can be applied in hotel valuation, particularly in Florida.

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The Mass Appraisal of Hotels in Florida

  1. 1. The Mass Appraisal of Hotels in Florida Presented By: Tim Wilmath, MAI & Ken Engel, CFE Hillsborough County Property Appraiser’s Office Prepared For: IAAO 71 st Annual International Conference September 19 th , 2005
  2. 2. <ul><li>How do you apply mass appraisal to hotels? </li></ul><ul><li>Classifying Hotels </li></ul><ul><li>Creating Income Models </li></ul><ul><li>What about business value? </li></ul><ul><li>Treatment of Personal Property </li></ul><ul><li>Cost Approach </li></ul><ul><li>Sales Comparison Approach </li></ul>Mass Appraisal of Hotels
  3. 3. 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”
  4. 4. 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
  5. 5. Classification of Hotels Resort Hotels Luxury Hotels Full Service Hotels Limited-Service Hotels Convention Hotels
  6. 6. Classification of Hotels Resort Hotels Recreational facilities Golf Resort Tennis Resort Health Resort Extensive amenities
  7. 7. Classification of Hotels Luxury Hotels Full Service Hotel Fine Dining On-site shopping Concierge & guest services Exceptional amenities
  8. 8. Classification of Hotels Full Service Hotels In-house dining & cocktail lounge Swimming Pool & Fitness Meeting rooms Conference centers Excellent amenities
  9. 9. Classification of Hotels Limited-Service Hotels Clean Comfortable room Affordable rate Continental breakfast Pool & fitness room Limited amenities
  10. 10. Classification of Hotels Extended Stay or Suite Hotels Week-long stay Apartment like Small kitchen Affordable rates Limited amenities
  11. 11. Classification of Hotels Convention Hotels Near convention center Large # rooms Ample meeting space Banquet facilities Restaurants and lounges
  12. 12. Income Approach <ul><li>Most widely used for valuing hotels </li></ul><ul><li>Reflects market behavior </li></ul><ul><li>reliable data readily available </li></ul><ul><li>results in equity </li></ul>
  13. 13. Income Approach <ul><li>Sources of Income Data </li></ul><ul><li>Actual I&E from surveys </li></ul><ul><li>PKF Trends in the Hotel Industry </li></ul><ul><li>STR The Host Study </li></ul><ul><li>Government Sales Tax Reports </li></ul>
  14. 14. Income Approach <ul><li>Actual Income & expenses </li></ul><ul><li>Ensure income is stabilized </li></ul><ul><li>Exclude certain expenses </li></ul><ul><li>Impute reserves </li></ul><ul><li>Impute mgt. & Franchise fee </li></ul>
  15. 15. Income Approach <ul><li>PKF’s Trends in the Hotel Industry </li></ul><ul><li>Select by region, age, etc. </li></ul><ul><li>Exclude property taxes </li></ul><ul><li>Impute reserves </li></ul><ul><li>Impute mgt. & Franchise fee </li></ul>
  16. 16. Income Approach <ul><li>Smith Travel Research The Host Study </li></ul><ul><li>Select by region, age, etc. </li></ul><ul><li>Exclude property taxes </li></ul><ul><li>Impute reserves </li></ul><ul><li>Impute mgt. & Franchise fee </li></ul>
  17. 17. Income Approach <ul><li>State Sales Tax Records </li></ul><ul><li>Actual gross income reported to state by hotels </li></ul><ul><li>Business name and address </li></ul><ul><li>Past years available </li></ul><ul><li>Non-taxable income not reported </li></ul>
  18. 18. Income Approach <ul><li>Capitalization Rate </li></ul><ul><li>Korpacz Real Estate Investor Survey </li></ul><ul><li>CB Richard Ellis National Investor Survey </li></ul><ul><li>Realty </li></ul><ul><li>USRC Hotel Investment Survey </li></ul><ul><li>Extraction from Comp Sales </li></ul>
  19. 19. Income Approach <ul><li>Reconciliation of income data </li></ul><ul><li>Income </li></ul><ul><li>Expenses </li></ul><ul><li>Capitalization rate </li></ul>
  20. 20. Income Approach
  21. 21. Cost Approach
  22. 22. Sales Comparison Approach <ul><li>Obtain information regarding the circumstances of sale </li></ul><ul><li>Obtain financial and physical aspects of the hotel </li></ul><ul><li>Allocate the price between real estate, FF&E, and business </li></ul><ul><li>Extract and apply appropriate adjustments </li></ul>
  23. 23. Sales Comparison Approach <ul><li>O’Neill found four key variables </li></ul><ul><li>that explain hotel prices </li></ul><ul><li>Number of rooms </li></ul><ul><li>Net operating income </li></ul><ul><li>Average daily room rate </li></ul><ul><li>Occupancy </li></ul>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
  24. 24. Sales Comparison Approach <ul><li>Tampa - Hillsborough County </li></ul><ul><li>21st largest market in the United States </li></ul><ul><li>200+ hotels throughout the county </li></ul><ul><li>17 hotel sales since 9/11 </li></ul><ul><li>Approximately 6 sales per year </li></ul><ul><li>5 hotel categories (full service, limited service, etc) </li></ul>
  25. 25. Sales Comparison Approach <ul><li>Ranking Analysis </li></ul><ul><li>Comparable sales are ranked in descending or ascending order </li></ul><ul><li>Determine the relative position of the subject in the array </li></ul><ul><li>Comparables are identified as either inferior or superior to subject </li></ul><ul><li>Bracket the probable value range of the subject. </li></ul>
  26. 26. Sales Comparison Approach <ul><li>Extracting Cap Rates </li></ul><ul><li>Using market models - extract cap rates from sales </li></ul><ul><li>Considers the market approach without applying adjustments </li></ul>
  27. 27. 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
  28. 28. Business Value Real Estate Personal Property Business Value?
  29. 29. 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.
  30. 30. What is Business Value? <ul><li>Ways to measure business value </li></ul><ul><li>Cost Approach </li></ul><ul><li>Rushmore Method </li></ul><ul><li>Start-Up Cost Method </li></ul><ul><li>Excess Profit Method </li></ul><ul><li>Proxy Method </li></ul>
  31. 31. Cost Approach Method Comparing 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 : - 12,000,000 Indicated Value of the Business $ 2,000,000
  32. 32. Defense of the Cost Approach I nherently 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
  33. 33. Rushmore Method - Deducting Management Fee and Franchise Fee from Net Operating Income. Measuring Business Value Revenue $1,400,000 Management & Franchise Fee (8%) 112,000 Loaded Capitalization Rate 12.50% Indicated Value of the Business $ 896,000
  34. 34. Criticism of the Rushmore Method Management 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 Method The 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
  35. 35. 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
  36. 36. Criticism of the Start-Up Costs Method No 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 Method Start-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
  37. 37. 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
  38. 38. Criticism of the Excess Profits Method Difficult 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 Method If truly comparable properties can be identified, this method provides an excellent indication of the presence and amount of business value. Measuring Business Value
  39. 39. Proxy Rent Method - This approach imputes a “market rent” for the various profit centers. Measuring Business Value Rent?
  40. 40. Criticism of the Proxy Rent Method Difficult if not impossible to obtain the estimate of market rents for the various profit centers. Defense of the Excess Profits Method Using market rent isolates the real estate component, negating the need to measure business value. Measuring Business Value
  41. 41. Measuring Business Value <ul><li>Cost Approach - Inherently excludes business value, but just as weak as using it to arrive at value. </li></ul><ul><li>Rushmore Method - most widely accepted and easiest to apply. </li></ul><ul><li>Start-Up Cost Method - Controversial, no support for premise that buyers would pay seller for these costs. </li></ul><ul><li>Excess Profit Method - Good approach when applied correctly - however very easy to misinterpret/manipulate </li></ul><ul><li>Proxy Rent Method - Not reliable - no support data </li></ul>
  42. 42. 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.
  43. 43. Personal Property Deducting the TPP assessment and deducting a “Return On” is double-dipping!
  44. 44. 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
  45. 45. Conclusion