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Syber Realty
201-1449 St. Paul Street
Kelowna, BC
Canada  V1Y 2E5

Phone 250.862.8100

Fax 250.862.8300

 email@syberrealty.com

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Appraising a Hotel or Motel

Hotel appraisals are required when a property is transacting or refinanced. Like most real estate investments, hotels and motels can be valued by the three common appraisal methods which include the Cost Approach, Direct Comparison Approach and the Income Approach. Hotels and motels are commonly bought and sold on their ability to generate income; therefore are most appropriately valued by the Income Approach.

The Cost Approach involves estimating the replacement cost of the building and deducting all forms of depreciation. The value of the land is then added to the depreciated value of the building to produce an estimate of value. This approach may provide a reliable estimate of value of new or proposed properties, as hotels are especially susceptible to economic depreciation, thus this approach is often met with scepticism from knowledgeable investors.

The Direct Comparison Approach can be used for small motels where, due to their size, they are often uneconomical operations, but they provide accommodation and employment for the owner and their family. For hotels and larger motels, this approach is often utilized as a secondary method that provides support for the Income Approach valuation.

Income Approach Methods

In general, there are two preferred methods available within the Income Approach. They are:

  • Direct capitalization method, and
  • Discounted cash flow analysis.

Both methods convert future income into a present value.

The Direct Capitalization Method

Direct capitalization converts or “capitalizes” a property’s net operating income into an estimate of market value using a capitalization rate. The capitalization rate is a reflection of the investor’s opinion about the risk associated with the investment and the characteristics offered by the property in comparison to other investment opportunities.

Market Value

=

Net Annual Operating Income

Capitalization Rate

The Discounted Cash Flow Method

This method converts future revenue into a present value by discounting each future benefit at an appropriate yield rate. 5 and 10 year investment horizons are the most common. The procedure utilized to convert annual income and reversion into present value is called discounting, while the required yield rate of return is called the discount rate. The discounting procedure presumes that the investor will receive a satisfactory return on the investment and complete recovery of the capital invested. Yield Capitalization is also called the Discounted Cash Flow method (DCF) because a discount rate is used to calculate the present value of anticipated future cash flows.

Hotel Values Rely Upon Actual Performance

Perhaps more than any other income producing property, the value of hotel real estate relates to its actual performance. While there are many hotels of similar nature, often they do not have the same type of attributes, room mix, room finishes, restaurants, franchise affiliations, labour arrangements, etc. Therefore, in this valuation procedure, actual historical income and expenses form the starting point in the appraisal process.

Stabilizing Income and Expense Figures

Since the hotel business has a tendency to fluctuate from year to year, hotel values are generally established on the basis of stabilized incomes and expenses. This procedure follows the steps that a prudent purchaser would take in considering the value of a hotel. The appraiser compares the actual performance of a hotel to industry norms and makes adjustments to actual performance where necessary.

Hotel Values are Sensitive to Market Changes

The market value of a hotel is sensitive to changes in the marketplace. As the revenue generated from a hotel relies upon short term stays, a drop or rise in occupancy produces an immediate and corresponding drop or rise in income. Furthermore, the hotel industry is cyclical in nature and therefore values can be expected to rise and fall over time. The rise of the Canadian dollar and significant events such as 9/11 and the SARS outbreak are examples of events that have affected the hospitality industry.

Analyzing Sales to Extract a Capitalization Rate

An accurate appraisal is contingent upon the appraiser having access to the financial performance of recently transacted comparable properties. It is critical that the same analysis utilized to derive a capitalization rate from the comparable sales is applied when valuing the subject hotel.  

Conclusion

The appraisal of a hotel is both interesting and challenging and is usually completed by an appraiser experienced in the analysis of the many variables that exist in a hospitality industry. Knowledge of industry performance and current transactions are essential elements of a well-prepared appraisal report.

Guest Contributor:

Adrian Rizzo, AACI, P. App is an associate with Kent-Macpherson in Kelowna, BC. He specializes in the valuation and assessment appeals of hotels and motels throughout B.C. He can be reached at 250-763-2236 or This email address is being protected from spambots. You need JavaScript enabled to view it.">This email address is being protected from spambots. You need JavaScript enabled to view it.