How do I evaluate hotels?

General Real Estate Investing
1

Hello

I have a potential hotel deal in the works…

How do you go about evaluating a hotel?

Are you simple evaluating a business?

2

depends on what use you intend to have for it. If it is to run it as a hotel, then you would evaluate it like a business.

We use to evaluate them as condo conversions, but those days are over.

I have saw some people recently evaluating them as apartment complexs where utilities are included

being an inkeeper is a tough business

3

Compare comparable sales on price per room or gross income multiplier (GIM) basis. Also you can determine an appropriate average daily rate (ADR) by historical income or comparable data, deduct expenses, and capitalize the net operating income by an appropriate cap rate. Expense ratios for hotels typically range from 50% - 75%. Hotel cap rates typically range from 10% - 15%. You would want to use a discounted cash flow (DCF) if the property were a proposed construction project.

The value you derive is a “going concern” value, which includes real estate value and business value or intangible value. There usually isn’t a separate business valuation, it’s all lumped together. Other properties with going concern values include restaurants, bowling alleys, golf courses, car washes, and lube centers. The idea is that if the business shuts down you would only be left with the real property, so it’s important to know how to separate the two values. That’s it in a nutshell.

4

I am a hotel broker with the largest investment real estate firm in the country.The best way to valuate the hotel would be like artyman said and to use a combination of a few methods. On the buy side, I would check local comps as to what similar hotels sold for on a per key basis. CAP rates for class A mid-upper tier flags are in the 6-9% range where older exterior corridor hotels are 10-15%. Ordering a STAR Report wouldnt be a bad idea either. Let me know if I can be of any help with your venture.
Regards,

5

Hi, I’m a business broker and I’ll tell you how we evaluate hotels.

  1. we evaluate the real estate independent of the business and determine a market lease rate if the property owner were leasing the building to someone else to operate. Might use a cap rate of 8%-10%.

  2. we evaluate the business based on a required cap rate with the after-lease cash flow. We would use a cap rate of 30-35% on this portion the add the fair market value of furniture, fixtures, equipment and wholesale value of any inventory.

Then you add the two parts.

dave

6

That sounds nice, but who is going to lease a hotel building? What kind of expenses are you deducting before applying the cap rate? How do you know a cap rate of 8% - 10% is accurate for a leased hotel? Do you have sales of leased hotel buildings? I have never seen a hotel valued this way and considering the real estate and business are almost always sold together it doesn’t make sense to take this approach. The parts don’t always equal the whole.

I’ll add and acknowledge that you might have seen some leased hotels with the business sold separately, but that’s not what the market does as a whole, therefore, it shouldn’t be the primary method you use to value a hotel.

7

It’s a business. Money in/ money out… is there enough left over after expenses are paid to make you happy?

Make allowances for the fact that the tourist industry is experiencing a slump due to the price of gasoline. Income on a motel is likely to be a lot less than in the previous few prosperous years.

8

As a commercial mortgage broker I have to say the reponses to this question were very good. I would only like to add that at this time many lenders are cutting back on financing for hotels. Most lenders are only doing max 65% LTV but, SBA will go higher for most projects.