1. Chapter 17
Valuation of Hospitality
Real Estate

2. Objectives Define Market Value Describe the user of appraisals
Identify the major steps in the real estate valuation process
Describe the Cost approach to valuation
Explain the Sales Comparison approach to valuation
Outline the Income Capitalization approach to valuation

3. Valuation of Hospitality Real Estate
Of interest to both buyer and seller
Valuation is a subjective process
Valuation varies with the purpose of valuation
Many definitions of value

4. Market Value Definition
“The dollar amount a property should bring in a competitive market under conditions requisite to a fair sale, which would result from negotiations between a buyer and seller, each acting prudently with knowledge and without undue pressure.”
May Alice Henis, Real Estate Appraisal, (New York: MacMillien, 1981), p.53

5. Book Value The amount shown on the company’s books
No necessary relationship to market value

6. Assessed Value Value assigned to property for tax purposes
Often defined in terms of market value

7. Insurable Value Based on replacement cost
Market value of the property minus the land value

8. Liquidation Value is the value an owner is compelled to accept for a property in a forced or quick sale.
Revision Value refers to the market value of a property to the owner at the end of an investment holding period.

9. Market value is the objective of many real estate appraisals.
Appraisals are used:
Extensively in transfer of ownership
For property tax matters
For insurance purposes
For setting lease rates

10. Steps in the Valuation Process
Define Problem
Preliminary analysis and data selection and collection
Highest and best use analysis
Land value estimate
Application of appropriate approaches
Reconciliation of value indications
Report of defined value

11. Three Approaches to Valuation
Cost
Sales Comparison
Income Capitalization

12. Steps in the Cost Approach to Valuation
Estimate land value
Estimate value of FF&E
Estimate reproduction cost
Estimate amount of depreciation
Determine net reproduction cost
Add land value to net reproduction cost

13. Estimate Reproduction Cost =
Original cost X Current Index
Original Index
Example:
Original Cost = $2,500,000
Construction Index in 1992 = 100
Construction Index in 2006 = 150
Estimated reproduction cost = $2,500,000 x 150
100
= $3,750,000

14. Estimating Accrued Depreciation on Structure
Reproduction cost x years of estimated life
Assume:
Reproduction costs = $3,750,000
Life of property = 30 years
Appraisal performed at the end of the 10th year of property’s life
Accrued Depreciation = $3,750,000 x 10/30
= $1,250,000

15. Steps in Sales Comparison Approach
Obtain reliable current information of sales of similar properties
Determine relevant units of comparison
Compare subject property and make adjustments
Establish an appraisal value

16. Determining Appraisal Value Under Cost Approach
Reproduction cost $3,750,000
Accrued Depreciation (1,250,000)
Net Reproduction cost 2,500,000
Estimated FF&E Value ,000
Estimated land value ,000
Appraised Value $3,075,000

17. Sales Comparison Approach
Based on comparison of subject property to comparable recent sales
Key is finding the “Comparables”
Need for various adjustments

18. Income Capitalization Approach
Determine value of capitalizing the future income stream for the property

19. Steps in Income Capitalization Approach
Project property’s income stream over its life
Derive appropriate capitalization rate
Apply capitalization rate to income stream

20. Market value approach to capitalization rate using the recent sales of comparable properties
Annual Income Stream
Sale price of property
Example: $200,000 = 8%
$2,500,000

21. Bond of Investment Approach to Capitalization Rate
Rate = DF% x MC + (1-DF%) x ER
Example:
DF% (Debt financing rate) = 60%
MC (Mortgage Constant) =
ER (Required equity rate) = 16%
Capitalization rate = (.4 x )
+ (.6 x .16)
= 13.09%

22. Mortgage Constant is the capitalization rate for debt.
The ratio of annual debt to original loan payment.
Example: Original Loan = $2,000,000 with annual payment of 7% for 25 years
Mortgage Constant = $2,000,000 = $171,621
= $171, = .0858
$2,000,000

23. Comparison of the Three Approaches
Each has its limitations
No approach is perfect
Each method requires good judgment

24. Rushmore’s Approach Uses 2-5 year projection using equity divided
Uses simultaneous valuation formula

25. Gross Income Multiplier Approach
Multiplies annual sales by a multiplier
Multiplier derived from sales prices of comparable properties

26. Summary Many definitions of value exist Market value is the key
There are several approaches to market value
Valuation studies serve many purposes