Basic terms of hotel valuation

assessmentEstablish assessment task is the first step. This step is very important because it will affect the next steps. The question may be asked; where is the location of the property being assessed? What are the facilities available at the hotel? The effective date of valuation. What is the objective assessment? The ownership of the assessed. Is there excess land (surplus land)?. Who is going to manage the hotel? and others.

Collection Data. Determination of assessment tasks will determine what data is needed. Source of data: property owner or client, primary market research data (performed by the appraiser in field and property inspection and interview), secondary market research data (data in house from hotel comparison or other sources, note confidentiality agreement). The data collection process must be thorough and meticulous. Results of the assessment depend on the process.

Inspection Valuation In Hotel; Inspection carried out by the Chief Engineer who know the ins and outs of the  hotel. As far as possible, if not familiar with the hotel in question, stay at the hotel assessed will provide ‘first hand experience’. Is the water warm not warm shower? Why? Need to replace equipment? Restaurant not crowded? Retail stores rarely visitors? All will be seen in financial statements but necessary visualization. Inspection for Front of the House and Back of the House. Front of House: Inspection of all types of rooms, on several floors. Lobby, from office, restaurant, banquet rooms, commercial spaces and others. Back of the House: Office management, engineering, housekeeping, F & B, kitchen, laundry area, boiler, AHU, generator sets, and others. Record all observations during inspections, particularly on matters that will affect the value of:  Items of Deferred Maintenance: No tools are necessary to be replaced soon? Condition of the carpet? Furniture is too old? No flat screen TV? Management: many of the new employees? Less employees? Waiter above average? The front office is too slow? Layout hotel: Is functional? Not efficient because they are built gradually?

Data Inquiry List; Basic floor plans and site plan, data ownership / certificate, historic profit and loss of the last five years plus year to date, current and future year management forecast, monthly occupancy and average room rate, market segmentation report, competitive hotel occupancy and average room rate report, management report, copy of management agreement, license agreement, etc. last five year capital expenditure report, proposed capital expenditure plan, marketing brochure / marketing package and a list of rack rate, copy of tenant leases and historic gross sales if pertinent.

Analysis of data; Valuer analyzing the data collected in order to reach a conclusion (value). Three general procedures for analyzing the data from: Room Night Analysis: Measuring demand and projecting future demand. Market share is calculated based on the subject property relative competitive strength against another hotel. Projected occupancy obtained from the percentage market share of property are assessed and projected future demand.

Income and Expense Forecasting Models: To be discussed deep in the Income Approach. Mortgage Equity Valuation Model: Hotel investors usually make decisions by using mortgage equity technique where the projected net income before debt service and the residual value at the discount to present value at a discount rate that represents the cost of debts and capital.

Understand the basic terms of the property as: Available room, available room nights (ARN), occupied room nights (ORN), occupancy, average daily rate (ADR), revPAR, rack rate, fair share, market share, penetration rate. Revenue: rooms, food and beverage, other operated departments, rentals and other Income. Departmental expenses: rooms, food and beverage, other operated departments. Undistributed operating expenses: administrative and general, sales and marketing, property operations and maintenance, utilities. Management fees. Fixed charge: Rent, Property and Other Taxes Insurance. Net Operating Income. Less Replacement reserves. Adjusted net operating income.

The types of data; specific property: land, location, number of rooms, number of restaurants, information about banquet rooms, information on retail space, and list of facilities or other amenities. Specific assignment: objective assessment, the assessed property rights, valuation date, information on hotel management.

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