Hotel Property Appraisal
The occupancy characteristics for hotels are very different than they are for other property types. Occupancy is measured in days instead of months or years. Levels of occupancy are greatly dependent on demand generators in the market area. Much like other commercial property types, however, a prime consideration for the valuation of a hotel property is its ability to generate net income.
Demand generators are facilities that draw business, convention, or leisure travelers who need to stay for one or more nights to an area. Business travelers might include corporate executives to local offices of a business, auditors, or any of a variety of consultants. These travelers will want to stay close to the offices where they are working while in town and are likely to want extended stay hotels.
Convention travelers will be visiting a convention center or similar facility appropriate for hosting a convention and are likely to visit various leisure attractions in the area. Leisure travelers might be visiting amusement parks, colleges, historic sites, museums, resorts, sports stadiums, theaters, or similar facilities. The revenue received from renting rooms to these visitors is referred to as rooms revenue.
In addition to rooms revenue, a hotel might earn revenue from various amenities such as dining facilities, meeting and banquet facilities, game rooms, business services, or accommodations for various athletic competitions.
This existing and prospective demand must be offset against the existing and prospective supply. The types of hotels include commercial, convention, resort, all suites, extended-stay, and micro-tels. Other hotel types include conference centers. casinos, bed and breakfasts, and health spas. These must be considered along with the class and quality of the facilities. In recent years Airbnb, which connects owners of empty bedrooms with guests, has created an additional source of potentially competitive supply. An appraisal might discover gaps in type or quality of service available in the market when offset against the available supply. This might be a gap that the appraised hotel can potentially fill.
The income and expenses of these competitive properties can be compared to that of the property being appraised. The data in this area is particularly rich because nearly every hotel reports their operating experience to private companies, which then produce reports that can be purchased.
An analysis of recent sales of comparable hotels serves two purposes. First, the purchase price per room can be taken into consideration. Secondly, the ratio of net operating income to sales price, known as the overall direct capitalization rate, can be adjusted to account for changes in available mortgage market and equity rate terms to reflect a reasonable rate for the subject. This type of analysis is highly technical and is not typically explained in an appraisal report, but the appraiser is carrying behind the scenes it out nonetheless.
A hotel appraisal provides much more than just a professional opinion of value. It can also reveal how the business of the hotel can be modified to better serve the market and generate more revenue, how to reduce expenses to provide more net operating income, and what amenities the hotel can provide to its guests that will benefit the hotel.