TU ciobal update: fir
rH
1anc
(ENG keke kl
5
Hotel Valuation Thumb Rule
ne hotel industry has a rule of thumb that provides a rough
approximation ofa hotel's value based on its room rate This
‘thumb rule states: the value of a hotel can be estimated by multipying
the hotels average room rate by 1,000. The result isthe value of the
hotel on a per room basis, Thus, ia 100-room hotel has an average
room rate of USS8S, then its value per room is USS95,000 (USS8S5 x
1,000 = US$95,000). Tho total value of the hotel would be
{US$950,000 (USS95,000 x 100 = US$950,000).
Obvious, many factors go into estimating a hote's value, but over
the years this rule of thumb has been surprisingly accurate. use it each
time | review an appraisal to see whether the fina estimate of value
‘makes sense. For example fan appraisal ofthe property described
‘above came in ata valve of US$E00,000 on the low side or USS1.1 mit=
ion on the high side, | would review the appraisal analysis tharoughiy to
determine wy there was a discrepancy between the actual appraisal
‘andthe thumb rule. In most instances the diference can be attributed to
factors such an abnormally iow or high occupancy. highly efficent or
inefficient management, or unusual sources of ater revenues. These ait-
{erences often will skew the appraised value, making the rule of thumb
‘approach inaccurate.
This rule of thumb also is helpful in evaluating the initial feasibility
of a proposed hotel. Instead of comparing the results to market value,
‘the rule of thumb can be used to determine whother the total project
costs are inline and also how much can be paid to acquire the land
| Inte atove example ifthe estimated total project cost was sign-
canily more than USS950, 000, the overall project feasibility would bein
doubt n action, the land component should not be more than 20% ofthe
total project’ value. Thus, if te developer was going io pay much more
‘Smith Travel Resoarch). The data in the frst column isthe dolar
‘amount per available room, anc the data inthe second column is the
corresponding percentage of revenue. This typical hotel generates a
net income of USS12,049 per room. If an appropriate capitalization
rate is 11% then the value per room is US$110,000 (USS12,049/.11 =
'US$110,000). Using this hotel's average rate of US$128 and the hotel
valuation thumb rule, this hotel should be worth USS128,000 per
oom, not US$110,000 per room. The problem is that the occupancy
level (64.7%) for this typical ott is too low for the thumb rule to
work. | have, therefore, adjusted the occupancy upward until the net
Income is suficient to create a value of US$128,000 per room when
capitalized at 11% (right columns), For the rule of thumb to work at an
111% capitalization rate, the hote’s occupancy needs to be approxi-
‘mately 68%. A way to adjust for ciffering levels af occupancy is to use
an Average Rate Multiplier adjuster. For the typical hotel, this adjuster
's .860, So if you multiply the USS128 average rate by 860 you will
‘got an adjusted average rate of USS110, which when used inthe hotel
valuation thumb ule wll give the correct value,
Table 2 shows the Average Rate Multiplier adjuster for various lev-
‘ls of occupancies along with different mortgage interest rates, Since
‘a large component ofa capitalization rate Is mortgage interest, ! have
chasen this factor as a basis for selecting the muttipir.
Here is an example of how to use this table: Assume your hotel is oper-
ating at an average roam rate of USB100 and the occupancy is 75%. At the
‘time of your valuation hotel mortgage interest rates are 8%, Using Table 2,
the Average Rate Multiplier fr ths occupancy and mortgage interest rate Is
1.197. The adjusted average rate woule be USS100 x 1.197 = USS119.70,
and the value would be USS! 19,700 per room.
fre 00 held po fener tn as
(soon 20 eo ae sro anit it
Uss13000, tous mate. |Oxganey ai we thse toes ea
bly not work from a financial _| Average Rate $128.00 $128.00 approximation of value. Using
peach oer Se eight toe
‘to the pricing or deal structure Tr ea $51,362 100.0% | adjustment that factors in both
ene eee ee etme
cbse. | uptime icone” ————25500"—S0a—"angte eo | O26 noo
ee ‘Undistributed Operating Expenses 11,128 23.0 11,308 22 \ntereat further enhances Its
seta tunorae aaity | momen tnateree —tegre sept eg | ancy.»
works. hotel can be valued
by dividing the projcted net
Income by an appropriate cap-
italation rate. A caitalization
rato is a factor that combina
the cost ofthe debt and equity
capital used to finance a hte
TABLE 2
AVERAGE RATE MULTIPLIER
ce, 10.5% 10.0% 95%
Thelett side ofTable1 | goae Td ae Boe
shows an Income and 751.062.1087 _1.113_1.140
expense statement for a o (0.981
65 a5 0.823
typical full-service hotel in| By
the United States (cata from | 55. | 14830495
cee ase 1.000
Mortgage interest Rate
“0981 1.006 1.031 1.058 1.0
5a
14a
10.8
215
By Stephen Rushmore,
MACH, president and fonder
Of NS Internation, ines!
‘ote consulting fran wh ofcs
‘in NewYork, a, Done San
‘Praniso, vancouver, Metco Cy,
“728 000
‘ono Nee
Dey, sine
me 85% 80% 75% 7.0% 65% ore io Pat
1390 1.364 1.399 1.497 ie ara
Teme 282 inshore con
ta te conaced at
843 0.865
681 0.600 isteasasee
O51 O58 ex.204
22 - HOTELS + October 2003,