Use Valuations of Hotels & Resorts
By Thomas E. Pastore CEO & Founder, Sanli Pastore & Hill | October 28, 2008
While motels and hotels are real property assets similar to commercial properties in terms of the location of the specific asset and long economic life (usually 20 to 50 years) they differ from typical commercial properties because:
In terms of financial operations, motels and hotels and commercial properties differ because:
In valuing a hotel or resort, it is important to determine which business operations are increasing business value and which operations are decreasing business value. A well-run hotel will have separate profit and loss statements for each of its business components. In fact, it is not unusual to have separate ownership for some or all of these components. For example, the hotel's real property owner may subcontract out lodging operations to a qualified management company and the spa may be part of a recognized health club chain.
Separating out the financial performance of each business component is essential to arriving at proper valuations for these components and the hotel itself. Net income (earnings) and cash flow are usually the preferred financial performance measures to determine value. A hotel appraiser must be able to identify the earnings and cash flow of each business component of the hotel to determine which operations are enhancing or detracting from value. The following provides a hypothetical example of two hotels identical in total overall annual revenues and number of rooms. We have furnished the annual earnings of each business component for the respective hotel.
If the above earnings for each business segment were expected to remain stable into the foreseeable future then we would expect Hotel Pinnacle to be more valuable than Hotel Grande. Hotel Grande's convention business losses are a drain on its cash flow. However, Hotel Grande's lodging and restaurant earnings exceed those of Hotel Pinnacle. If Hotel Grande could turn around its convention operations or divest them, it could have potentially greater value than Hotel Pinnacle.