Selecting the Right Appraiser
By Thomas E. Pastore CEO & Founder, Sanli Pastore & Hill | June 15, 2010
An interesting analogy can be drawn between hotels and oysters. Like an oyster, a hotel consists of several parts. The rock that the oyster lies on is analogous to the hotel's underlying land. The shell of an oyster is similar to the building of the hotel. Together, the land and building are the hotel's "commercial property." Finally, an oyster usually has no value without its pearl. Likewise, the combination of land and building in and of itself does not make a hotel. The value of the hotel is in the hotel's business, like the pearl to the oyster.
When valuing hotels, all three parts-the land, the building, and the business-need to be addressed. The land and building are usually appraised by real estate appraisers who utilize appraisal methods that are better suited for commercial properties. The business of the hotel needs to be valued by business valuation professionals, who are trained to appraise companies using approaches and methods that cater to the complexities and nuances of business operations.
This article focuses on three aspects important to hotel valuations: the differences between hotels and commercial properties; the approaches used to determine their respective values; and important considerations in choosing a qualified business valuation professional to appraise your hotel.
How Hotels Differ From Commercial Properties
A hotel with a going concern business should not be considered a commercial property. Significant differences exist between hotels and commercial properties that prevent them from being comparable. Hotels are actually more similar to service and retail businesses, such as restaurants and retail stores.
Consider the following differences between hotels and commercial properties. Hotels have short-term occupants, also referred to as "guests", who usually stay for a few nights or weeks (at most), while commercial property tenants reside for months or years. Hotel guests do not have the same rights as commercial property tenants, and these rights are usually inferior. Guests of hotels also cause hotel revenues to be much more volatile than commercial property revenues. In addition, hotel revenues come from a variety of sources, including laundry, catering, restaurant, bar, and miscellaneous room service. Hotel revenues are further supplemented by renting out facilities for conferences and banquets. These extra services provided by hotels are similar to other operating businesses, such as dry cleaners, restaurants, bars, cleaning businesses, and parking lot operations. Furthermore, hotel revenues are more volatile because hotel guests, unlike commercial property tenants, do not have leasehold rights to their rooms. Another important difference is that hotel guests come from all over the world, while commercial property tenants reside in neighboring areas. Hotel guests are thus attracted by brand names and management services provided by hotel management companies. These services result in extra expenses incurred by hotels that are not incurred by commercial properties. Commercial property expenses usually consist of maintenance, real property taxes, insurance, property management, and security costs. A hotel's additional operating costs include management salaries, advertising and marketing, wages for room cleaning and valet services, and other service costs. The intensive nature of a hotel operation results in volatile revenues and varied expenses-characteristics of operating businesses.
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