HomeMy WebLinkAbout20032145.tiff RESOLUTION
RE: THE BOARD OF EQUALIZATION, 2003, WELD COUNTY, COLORADO - DENY
PETITIONER'S APPEAL AND AFFIRM ASSESSOR'S VALUE
PETITION OF:
LONGMONT GROUP INC
9100 E PANORAMA DR #300
ENGLEWOOD, CO 80112-7207
DESCRIPTION OF PROPERTY: ACCOUNT #: R0085887 PARCEL #: 131310100039 -
PT NE4 10-2-68 BEG E4 COR N89D49'W 451.4' N0D24'E 1323.4' TO TPOB N0D24'E 525.03'
N89D36'W 299.99' S0D24'W 523.2' S89D15'E 300' TO POB EXC COMM E4 COR N89D49'W
451.4' N0D24'E 1323.4' TO TPOB N0D24'E 262.09' N89D23'W 299.96' S0D24'W 261.33'
S89D15
WHEREAS, the Board of County Commissioners of Weld County, Colorado, convened
as the Board of Equalization for the purpose of adjusting, equalizing, raising or lowering the
assessment and valuation of real and personal property within Weld County, fixed and made by
the County Assessor for the year 2003, and
WHEREAS, said petition has been heard before the County Assessor and due Notice of
Determination thereon has been given to the taxpayer(s), and
WHEREAS, the taxpayer(s) presented a petition of appeal of the County Assessor's
valuation for the year 2003, claiming that the property described in such petition was assessed
too high, as more specifically stated in said petition, and
WHEREAS, said petitioner being respresented by John Olson, Deloitte and Touche, LLP,
and
WHEREAS, the Board has made its findings on the evidence, testimony and
remonstrances and is now fully informed.
NOW, THEREFORE, BE IT RESOLVED by the Board of County Commissioners of
Weld County, acting as the Weld County Board of Equalization, that the evidence presented at
the hearing clearly supported the value placed upon the Petitioner's property, after review by the
Weld County Assessor. Such evidence indicated the value was reasonable, equitable, and
derived according to the methodologies, percentages, figures and formulas dictated to the Weld
County Assessor by law. The assessment and valuation of the Weld County Assessor shall be,
and hereby is, affirmed as follows:
2003-2145
AS0055
RE: BOE - LONGMONT GROUP INC
PAGE 2
ACTUAL VALUE
AS DETERMINED
BY ASSESSOR
Land $ 392,485
Improvements OR
Personal Property 987,515
TOTAL $ 1,380,000
BE IT FURTHER RESOLVED that a denial of a petition, in whole or in part, by the Board
of Equalization may be appealed by selecting one of the following three options; however, said
appeal must be filed within 30 days of the denial:
1. Board of Assessment Appeals: You have the right to appeal the County
Board of Equalization's (CBOE's) decision to the Board of Assessment
Appeals (BAA). Such hearing is the final hearing at which testimony, exhibits,
or any other evidence may be introduced. If the decision of the BAA is further
appealed to the Court of Appeals, only the record created at the BAA hearing
shall be the basis for the Court's decision. No new evidence can be
introduced at the Court of Appeals. (Section 39-8-108(10), C.R.S.)
Appeals to the BAA must be made on forms furnished by the BAA, and
should be mailed or delivered within thirty (30) days of denial by the
CBOE to:
Board of Assessment Appeals
1313 Sherman Street, Room 315
Denver, CO 80203
Phone: 303-866-5880
OR
2. District Court: You have the right to appeal the CBOE's decision to the
District Court of the county wherein your property is located. New testimony,
exhibits or any other evidence may be introduced at the District Court hearing.
For filing requirements, please contact your attorney or the Clerk of the
District Court. Further appeal of the District Court's decision is made to the
Court of Appeals for a review of the record. (Section 39-8-108(1), C.R.S.)
OR
3. Binding Arbitration: You have the right to submit your case to arbitration. If
you choose this option the arbitrator's decision is final and your right to appeal
your current valuation ends. (Section 39-8-108.5, C.R.S.)
2003-2145
AS0055
RE: BOE - LONGMONT GROUP INC
PAGE 3
Selecting the Arbitrator: In order to pursue arbitration, you must notify the
CBOE of your intent. You and the CBOE select an arbitrator from the official
list of qualified people. If you cannot agree on an arbitrator, the District Court
of the county in which the property is located will make the selection.
Arbitration Hearing Procedure: Arbitration hearings are held within sixty
days from the date the arbitrator is selected. Both you and the CBOE are
entitled to participate. The hearings are informal. The arbitrator has the
authority to issue subpoenas for witnesses, books, records, documents and
other evidence. He also has the power to administer oaths, and all questions
of law and fact shall be determined by him.
The arbitration hearing may be confidential and closed to the public, upon
mutual agreement. The arbitrator's written decision must be delivered to both
parties personally or by registered mail within ten (10) days of the hearing.
Such decision is final and not subject to review.
Fees and Expenses: The arbitrator's fees and expenses are agreed upon
by you and the CBOE. In the case of residential real property, such fees and
expenses cannot exceed $150.00 per case. The arbitrator's fees and
expenses, not including counsel fees, are to be paid as provided in the
decision.
The above and foregoing Resolution was, on motion duly made and seconded, adopted by
the following vote on the 28th day of July, A.D., 2003.
BOARD OF COUNTY COMMISSIONERS
Eg �``e ''/� t W ' CCOSORADO
1861 I � �"t'_ "\.
David E. Long, Chair
nt �''y to the Board
,r. jvR
�4 EXCUSED
®u /�� ) Robert D. Mas , Pro-Tem
B !aslau�.
Deputy Clerk to the Board (6,•
M. J. G e
APPROVED AS TO FORM:
' Willis H. Jerke
ss ant
�,n Attorney
U I Q/
Ass ant C my Attorney �/ '
Glenn Vaad
Date of signature: /-W
2003-2145
AS0055
NOTICE OF ADJUSTMENT OFFICE OF COUNTY AS ESSOR
1400 NORTH 17th AVE.
‘a( 61%11
PT NE4 1O-2-68 BEG E4 COR N89D49' W GREELEY,CO80631
V 451 .4 ' N0D24 ' E 1323 . 4 ' TO TPOB PHONE(970)353-3845,EXT.3650
N0D24' E 525 . 03 ' N89D36'W 299 . 99'
S0D24 'W 523 . 2 ' S89D15'E 3OO ' TO POE
EXCWIIIDc. 0D2 COMME E4 CO N89D49'W TPOBN 451 .4 '
D24 ' E
N0D24 ' E 1323 . 4 ' TO TPOB N0D24 ' E
COLORADO OWNER: LONGMONT GROUP INC
DELOITTE & TOUCHE LLP LOG 3075
555 SEVENTEENTH STREET SUITE 3600 PARCEL 131310100039
ACCOUNT R0085887
DENVER, CO 802023942 YEAR 2003
Owner: LONGMONT GROUP INC
The appraised value of property is based on the appropriate consideration of the approaches to value required by law. The Assessor has determined that
your property should be included in the following category(ies):
Commercial property is valued by considering the cost, market,
and income approaches .
If your concern is the amount of your property tax,local taxing authorities(county,city,fire protection,and other special districts)hold budget
hearings in the fall. Please refer to your tax bill or ask your Assessor for a listing of these districts,and plan to attend these budget hearings.
The Assessor has carefully studied all available information,giving particular attention to the specifics included on your protest, and has determined the
valuation(s)assigned to your property. The reasons for this determination of value are:
The actual valuation of your property has been adjusted based on new
information obtained. This may be information you have supplied or additional
sales which we have uncovered during the appeals process .
PETITIONER'S ASSESSOR'S VALUATION
PROPERTY CLASSIFICATION ESTIMATE
OF VALUE ACTUAL VALUE ACTUAL VALUE
PRIOR TO REVIEW AFTER REVIEW
COMMER6'IAL 1472000 1380000
U.]
11)-
y:i
TOTALS $ $ 1472000 $1380000
APPEAL DEADLINES: REAL PROPERTY-JULY 15,PERSONAL PROPERTY-JULY 21.
If you disagree with the Assessor's decision,you have the right to appeal to the County Board of Equalization for further consideration,39-8-
106(1)(a),C.R.S. Please see the back of this form for detailed information on filing your appeal.
By: StanlevF. Sessions 06/26/2003
WELD COUNTY ASSESSOR DATE
15-DPT-AR
Form PR-207-8743 ADDITIONAL INFORMATION ON REVERSE SIDE
YOU HAVE THE RIGHT TO APPEAL THE ASSESSOR'S DECISION
The County Board of Equalization will sit to hear appeals beginning July 1 and continuing through August 5 for real
property(land and buildings) and personal property(furnishings, machinery, and equipment) 39-8-104 and 39-8-.
107(2), C.R.S.
APPEAL PROCEDURES:
If you choose to appeal the Assessor's decision, mail or deliver one copy of this completed form to the County
Board of Equalization. To preserve your right to appeal, your appeal must be POSTMARKED OR DELIVERED
ON OR BEFORE JULY 15 FOR REAL PROPERTY, AND JULY 21 FOR PERSONAL PROPERTY.
WELD COUNTY BOARD OF EQUALIZATION
915 10th Street, P.O. Box 758
Greeley, Colorado 80632
Telephone (970)356-4000 Ext. 4225
NOTIFICATION OF HEARING:
You will be notified of the time and place set for the hearing of your appeal.
COUNTY BOARD OF EQUALIZATION'S DETERMINATION:
The County Board of Equalization must make a decision on your appeal and mail you a determination within '.i`.e
business days of that decision. The County Board must conclude its and render decisions by August 5.
TAXPAYER RIGHTS FOR FURTHER APPEALS:
If you are not satisfied with the County Board of Equalization's decision you must file within thirty days of the
County Board of Equalization's written decision with ONE of the following:
Board of Assessment Appeals (BAA):
Contact the BAA at 1313 Sherman, Room 315, Denver, Colorado 80203, (303)866-5880.
www.dola.colorado.gov/baa
District Court:
9th Avenue and 9th Street, P.O. Box C
Greeley, Colorado 80632
Telephone (970) 356-4000, Ext. 4520
Arbitration:
WELD COUNTY BOARD OF EQUALIZATION
915 10th Street, P.O. Box 758
Greeley, Colorado 80632
Telephone (970) 356-4000, Ext. 4225
If you do not receive a determination from the County Board of Equalization, you must file an appeal with the Board
of Assessment Appeals by September 11.
TO PRESERVE YOUR APPEAL RIGHTS, YOU MUST PROVE YOU HAVE FILED A TIMELY
APPEAL; THEREFORE, WE RECOMMEND ALL CORRESPONDENCE BE MAILED WITH PROOF
OF MAILING.
PETITION TO THE COUNTY BOARD OF EQUALIZATION
In the space below, please explain why you disagree with the Assessor's valuation. IN ACCORDANCE WITH 39-
8-106(1.5), C.R.S., IF YOU APPEAL INVOLVES REAL PROPERTY, YOU MUST STATE YOUR OPINION
OF VALUE IN TERMS OF A SPECIFIC DOLLAR AMOUNT. Attach additional documents as necessary.
THE PROPERTY IS VALUED IN EXCESS OF FAIR MARKET VALUE BASED ON THE THREE APPROACHES TO
VALUE. IN ADDITION,THE PROPE&TY IS VALUED IN EXCESS OF OTHER SIMILARLY SITUATED
PROPERTIES. Q th _ 4 /7o O f'
. 433
Mu A N IIIIUNER DA
LETTER OF AUTHORIZATION
To Whom It May Concern:
Property Owner Name: LONGMONT GROUP INC
Hereby appoints and authorizes Deloitte&Touche LLP as agent to represent our firm's property and all
property controlled by our firm or any of its subsidiaries of partnerships on all matters pertaining to ad
valorem taxes. Until written notice of termination is issued,they have the right to file returns,examine
records,obtain all tax statements,and discuss or appeal any tax assessments to the proper authorities when,
in their opinion,the assessment does not constitute fair market value. In addition they have the right to file
appeals to the appropriate jurisdiction,if authorized by law.
By:
Name: Navin C.Dimond
Title: President
Address: 9100 E.Panorama Dr., Englewood CO 80112
Phone Number: (303)785-3100
Parcel/Schedule Number(s):
R0085887
Subscribed and sworn before me this 27 day of May ay ,20 Q3 .
4,0;EA
Notary Public,State of e() Chin c
My commission expires •1% ,2007
LYNDA K. LAUGHLIN
NOTARY PUBLIC
STATE OF COLORADO
Stonebridge—Super 8 Motel
2003
WELD COUNTY BOE APPEALS
CERTIFIED MAIL TRACKING #7002-2410-0002-9990-6759
R0085887
R0073387
R0057193
R6940698
R2290986
R0273493
R7370898
R1165796
N
l'):J
7-15-2003
Deloitte&Touche LLP
Suite 3600
555 Seventeenth Street
Denver,Colorado 80202-3942
Tel:(303)292-5400
Fax:(303)312-4000
www.deloitte.com Deloitte
&Touche
Weld County, Colorado
Valuation Protest Information Submission
For:
STONEBRIDGE COMPANIES - LONGMONT GROUP, INC.
Longmont Group, Inc.
SLEEP INN - 10805 TURNER BOULEVARD
10805 Turner Boulevard
Weld County
Schedule #:
R0085887
Assessor's Actual Value:
$1,472,000
Taxpayer's Opinion of Value:
$1,172,000
Analysis Completed
5/23/2003
By: Matt Poling
Deloitte & Touche LLP
ph#: (303) 308-2191
Deloitte
Touche 1
Tohmatsu
Weld County, Colorado Page 1 of 2
Weld County, Colorado
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Identify Results Page 1 of 2
WELD COUNTY ASSESSOR
PROPERTY PROFILE
Account#: R0085887 Parcel#: 131310100039
Tax Area: 2341 Bordering County:
Acres: 0
Township Range Section Quart.Sec. Subdivison Name Block*Lot#
02-68 - 10- 1 - -
Owners Name&Address: Property Address:
LONGMONT GROUP INC Street: 10805 TURNER BLVD WELD
9100 E PANORAMA DR#300 City: WELD
ENGLEWOOD, CO 80112-7207
Business/Complex:
Sales Summary
Sale Date Sale Price Deed Type Reception #
6/23/1994 $1,300,000 02394749
Legal Descriptl-Qn
PT NE4 10-2-68 BEG E4 COR N89D49'W 451.4' NOD24'E 1323.4'TO TPOB NOD24'E 525,03' N89D36'W 299.99'S0D24'W 523.2' 589D15'E
300'TO POB EXC COMM E4 COR N89D49'W 451.4' NOD24'E 1323.4'TO TPOB NOD24'E 262.09' N89D23'W 299.96'SOD24'W 261.33'
S89D15
Land Valuation Summary
Land Type Abst Code Unit of Number of Actual Value Assessed
Measure Units Value
Commercial 2115 Square Feet 78497
Land Subtotal: 78497 $392,485 $113,820
Buildings Valuation Summary
Assessed
Bldg# Property Type Actual Value Value
1 Commercial
Improvements Subtotal: $987,515 $286,380
Total Property Value $1,380,000 $400,200
Building Details
Account#: R0085887 Parcel*: 131310100039
Owners Name&Address: Proper Address:_
LONGMONT GROUP INC Street: 10805 TURNER BLVD WELD
9100 E PANORAMA DR#300 City: WELD
ENGLEWOOD, CO 80112-7207
Blinding* Property Type
1 Commercial
Individual Built As Detail
Built As: Motel Year Built: 1986
3
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Identify Results Page 2 of 2
Exterior. HVAC: Heat Pump
Interior Finish: Built As SQ Ft: 17680
#of Baths: 0 Roof Type:
#of Bdrms: 0 Roof Cover:
#of Stades: 2
Rooms: 0 Units: 46
GRIMM
Attached SQ Ft: Detached SQ Ft:
Basement:
Total SQ Ft: Finished SQ Ft
4
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STONEBRIDGE COMPANIES - LONGMONT GROUP, INC.
SLEEP INN - 10805 TURNER BOULEVARD
SUMMARY OF SALIENT FACTS
Property Name: SLEEP INN-10805 TURNER BOULEVARD
Property Owners: Longmont Group, Inc.
ID Number R0085887
Building Type: Hotel/Motel
Location: 10805 Turner Boulevard
Weld County
County: Weld County,Colorado
Year Built: 1986
Number of Units: 48
Building Area Sq. Ft.: 17,680
Land Area: 78,497
Average Daily Rate: 2002 $53.21
Average Occupancy: 2002 57.69%
Rev Par 2002 $30.70
Indicated Value By:
Income Approach: $1,172,000
Market Approach: N/A
Cost Approach: N/A
2001/2002 Final Value: $1,472,000 $30,667 per room
2003 Initial Value: $1,472,000 $30,667 per room
2003 Final Value Estimate: $1,172,000 $24,417 per room
5
2003 VALUATION ANALYSIS
INCOME APPROACH
STONEBRIDGE COMPANIES-LONGMONT GROUP, INC.
SLEEP INN -10805 TURNER BOULEVARD
2001 2002 %Inc/Dec
Number of Rooms: 48 ADR: $5422 $5321 -1.86% 2003 Initial Value: $1,472,000 $30,667 per room
Overall Cap Rate: 12.20% Occ.% 65 49% 57.69% -11.91%
Effective Tax Rate: 2.29% REV PAR: $35.51 $30.70 -13.55% 2001/02 Final Value: $1,472,000 $30,667 per room
2003 TRENDS AVERAGE
12 MONTHS 12 MONTHS LIMITED SERVICE HOTELS
ENDED ENDED BY SIZE VALUE BY REGION VALUE
12/31/2001 12/31/2002 75-150 ROOMS ANALYSIS MTN&PACIFIC ANALYSIS
GROSS OPERATING REVENUE
Rooms Revenue $622,056 $537844 + k"
Food$Beverage Revenue $0 $0 '
Telecommunications $3,569 $1,739
Other Department Revenues $38 $0 r. { r
Other Revenues $19,984 $8,465 i 'r
ix
TOTAL GROSS OPERATING REVENUE $645,647 $548048 r : $548,048 2323t) $548,048
EXPENSES
Franchise Fee $41,324
Management Fee $27,000 $27,000 ;
Credit Card Fees $9,406 $7,861 N3
Payroll $167,421 $158,589 °i.k
Payroll Taxes/Benefits $28,178 $32,754
Traning/Meetingsrrravel $10,152 $1,128 '
Advertising 8 Marketing $5,554 $3,472 w. s
Legal and Accounting $1043 $780
Cable Television $6.599 $6 599
Repairs/Maintenance/Pool $11,381 $5,193 +, k
Hotel Supplies $8,775 $8,382
Utilities $31,311 $27,056 : Cir t.
Breakfast $9,124 $ff 574 ,Jy.
Insurance $5,864 $6532 �,�` •
Office Expense $6,139 $8233 P'
Vending/Movies $948 $352 �;;
Telephone $8,545
Travel Agent Commissions $238 $748 j
Miscellaneous Expense $66 $0 i.2,41,
TOTAL EXPENSES $379,068 $348488 T $340,886 ' tf $331,021
NET INCOME BEFORE ADJUSTMENTS $266,579 $199,560 A .a $207,162 );..k k,„ $217,027
REPLACEMENT RESERVE(2%) $12,913 $10,961 $10,961 $10,961
RETURN ON INVESTMENT IN PP $9,417 $9,417 $9,417 $9,417
NET INCOME TO REAL&PERSONAL $244,249 $179,182 $186,784 $196,649
CAPITALIZATION RATE(OAR+ETR) 14.49% 14 49% 14.49% 14.49%
INDICATED VALUE OF REAL Si PERSONAL $1,685,925 $1,236,801 $1.289,275 $1,357,367
LESS: Estimated Value of Personal Property $65,000 $65,000 $65,000 $65,000
INDICATED VALUE $1,620,925 $1,171,801 $1.224,275 $1,292,367
INDICATED VALUE PER ROOM $33,769 $24,413 $25,506 $26,924
5/23/2003
6
Longmont Group, Inc.
Sleep Inn
YTD Comparative Profit and Loss
For the Twelve Months Ending December 31,2002
12/31/01 12/31/02 Variance
Occupancy% 65.49% 57.69% -7.80%
ADR $54.22 $53.21 -$1.00
RevPar $35.51 $30.70 -$4.81
Rooms Sold 11,473 10,107 (1,366)
Rooms Available 17,520 17,520 0
Income
Room Revenue 622,056 537,844 (84,212)
Telephone Revenue 3,569 1,739 (1,830)
Meeting Room Rental 38 0 (38)
Other Income 19,984 8,465 (11,519)
Total Income 645,647 548,048 (97,599)
Expenses
Franchise Fee 41,324 37,650 (3,674)
Management Fee 27,000 27,000 0
Credit Card Fees 9,406 7,861 (1,545)
Payroll 167,421 158,589 (8,832)
Management 37,341 36,929 (412)
Front Desk 71,831 70,667 (1,164)
Housekeeping 56,482 48,354 (8,128)
Maintenance 1,767 2,640 873
Payroll Taxes/Benefits 28,178 32,754 4,576
Training/MeetingsfTravel 10,152 1,128 (9,024)
Advertising & Marketing 5,554 3,472 (2,082)
Legal and Accounting 1,043 780 (263)
Cable Television 6,599 6,599 0
Repairs/Maintenance/Pool 11,381 5,193 (6,188)
Hotel Supplies 8,775 8,382 (393)
Utilities 31,311 27,056 (4,255)
Continental Breakfast 9,124 8,574 (550)
Property/Liability Insurance 5,864 6,532 668
Office Expense 6,139 8,233 2,094
Vending/Movies 948 352 (596)
Telephone 8,545 7,585 (960)
Property Tax 27,635 33,824 6,189
Travel Agent Commissions 238 748 510
Miscellaneous Expense 66 0 (66)
Total Expenses 406,703 382,312 (24,391)
Net Operating Income 238,944 165,736 (73,208)
7
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In41.44AunNn •
COLORADO
110151 AND LODGING
ASSOCIATION
ROCKY MOUNTAIN LODGING REPORT
Denver Edition December 2002
'THE YEAR END EDITION OF THE ROCKY MOUNTAIN LODGING REPORT INCLUDES HOTELS
THAT DO NOT PARTICIPATE IN OUR MONTHLY SURVEY
OUR ANNUAL SURVEY FOR 2002 REPRESENTS APPROXIMATELY 30,000 HOTEL ROOMS,
OR APPROXIMATELY 82%OF THE DENVER METROPOLITAN SUPPLY
DEC 2002 2002• 2001• 2000•
OCC AVG OCC AVG OCC AVG OCC AVG
LOCATION PCTG RM RATF an RM RATE PCTG NA RAW ECM $M RATF
South 39.4% $10.71 53.3% 377.19 54.8% 380.16 65.8% - $80.46
1-225 Corridor 39.5% .$59.36 55.7% -363.80 63.4% 362.35 68.1% $64.32 •
SE Suburban I 48.9% 577.58 59.0% 389.22 60.1% 399.28 68.2% $104.37
SE Suburban II 37.8% 350.91 E4.e% 553.84 58.0% 969.38. ILEX =SI
TOTAL SOUTH 8 SE 42.6% $68.81 56.3% $77.04 59.0% 281.95 67.2% 386.02
MIDTOWN 40.3% S54.49 59.5% $63.25 61.7% $66.93: 62.9% $69.41
DOWNTOWN 51.8% $100.86 i 67.7% $123.42 67.0% .5125.92 72.1% $123.38 '
NE Denver
Old Stapleton -41.7% 358.33 58.8% $61.96 63.5% 362.54 67.8% - $61.33
Denver Intl Airport 61.Tx EEL12 11.6% 375,51 119% "T4.81 72.1% 314.13
TOTAL NE DENVER 50.7% $63.24 - 84.0% $68.12 57.0% $88.13 69.6% $66.79
WEST DENVER
Central West 44.1% $66.32 60.2% 373.36 60.3% $74.02 68.2% $74.54-
Southwest 44.2% $65.95 EWA 369.36 51.3% 365.10 EE n 311.00. •
TOTAL WEST DENVER 44.5% $66.29 59.1% $72.06 60.7% 371.03 67.3% S73.42
NORTH DENVER 34.2% $51.75 50.4% $62.30 56.5% $64.92 60.9% $64.41 .
HIGHWAY 36 CORRIDOR 41.2% $79.65 58.2%. 591.73 60.5% 695.85 68.5% 5102.56
BOULDER 15.371 =.D1 51.8% $104.72 54.5% $109.69 73.1% $105.60
COMBINED TOTALS 45.0% 374.96 60.3% $86.05 62.5% $88.52 68.6% $89.57
•
PERCENTAGES OF OCCUPANCY AVERAGE ROOM RATES
2032 VS.201 2002 VS.2001
ao 95
90
0
85 I
60
80
50
75
40 70
JAN MM MAY JUL SEPT NOV JAN MAR MAY JUL SEPT NOV •
FEB APRIL JUN AUG OCT DEC FEB , APRIL JUN AUG OCT DEC
-81-2002 OCCUPANCY -e-2001 OCCUPANCY -IF 2002 AVERAGE RATE y-2001 AVERAGE RATE
The Rocky Mountain Lodging Report is compiled by:Ehrhardt Keefe Steiner 8 Holtman,PC in cooperation with the
Colorado Hotel and Lodging Association,Robert S.Benton 8 Associates,Inc.and W.R.Hopping 8 CO. Readers are advised that the above
do not represent the data contained herein to be definitive.Neither should the contents of this publication be construed as a recommendation
on policies or actions. Quotation and reproduction of this material are permitted with credit to the Rocky Mountain Lodging Report.
For additional information,please contact Robert Benton at(303)840-1666,
Bill Hopping,MAI(303)7984045 or Bob Holtman at(303)740-9400
The Rocky Mountain Lodging Report P.O.Box 262242 Littleton,Colorado 80163
One Denver Place
730 17th Street,Suite 920
Denver.Colorado 80202
303/297-8335
FAX:297-8104
AFFILIATED WITH AMERICAN HOTEL
AND MOTEL ASSOCIATION 8 8
SUMMARY OF OCCUPANCY AND AVERAGE DAILY ROOM RATES
FOR DENVER
OCCUPANCY PERCFNTAGF AVERAGE ROOM RATF
2442 2001 2442 244],
JAN 50.8% 58.1% $79.47 ' $84.50
FEB 55.0% 63.1% $82.81 $88.06
MAR 56.4% 65.7% $81.07 $8578
APR 63.1% 61.7% :;.83 $86.05
MAY 62.4% 65.3% $85.24 $88.74
JUN 72.8% 76.3% $86.31 $90.51
JUL 70.8% 74.9% $86.52 $87.89
AUG 73.5% 74.2% $87.15 $85.75
SEPT 61.6% 57.8% $84.67 $84.89
OCT 59.9% 57.2% $86.48 $88.43
NOV 50.8% 51.1% $80.40 $85.47
DEC 45.0% 42.6% $74.96 $77.77
YTD 60.3% 62.5% $86.05 $88.52
'YTD FIGURES INCLUDE HOTELS THAT DO NOT PARTICIPATE IN MONTHLY SURVEY
9
Limited-Service Hotel
Ratios to Total Revenues
Figure Number 14
Geographic Divisions
-
New England Mountain
and Middle North South South and
Atlantic Central Atlantic Central Pacific
(%) (%) (%) (%) (%)
Revenues:
Rooms 95.9 96.6 96.8 96.7 95.3
Telecommunications 1.1 - 1.0 0"9 0.8 1.0
Other Operated Departments 2.5 1.6 1.5 1.3 2.1
Rentals and Other Income 0.6 0.9 0.8 - 1.2 1.6
Total Revenues 100.0 100.0 100,0 ` 100.0 100.0
Departmental Costs and Expenses:
Rooms 25.4 27.9 .26.6 25.1 25.6
Telecommunications 0.8 1.2 1.3 1.3 1.0
Other Operated Departments , 1.1 0.8 0.4 0.5 0.8
Total Costs and Expenses 27.3 29.8 28.3 26.9 27.4
Total Operated Departmental Income 72.7 70.2 71.7 73.2 72.6
Undistributed Operating Expenses:'
Administrative and General 8.5 10.0 10.1 9.7 9.7
Franchise Fees-Including Marketing Fees 7.1 7.7 5.7 5.6 4.8
Marketing - 3.0 2.9 32 2.6 2.6
Property Operation and Maintenance 4.8 5.4 6.0 5.8 ' 5.7
Utility Costs - 4.7 4.6 5.4 5.1 4.7
Other Unallocated Operated Departments
Total Undistributed Expenses 28.2 30.6 30.4 28.9 27.5
Income before Fixed Charges 44.5 39.6 41.3 44.3 45.1
Management Fees,Property Taxes,and Insurance:z
Management Fees 4.4 3.7 3.4 2.9 3.7
Property Taxes and Other Municipal Charges 3.4 6.5 4.3 4.6 4.3
Insurance 1.3 1.3 1.7 1.7 1.8
Total Management Fees,Property Taxes,
and Insurance 9.2 11.5 9.4 9.2 9.8
, Income before Other Fixed Charges' 35.4 28.1 31.9 35.1 35.3
Rooms Department:
Rooms Net Revenue 100.0 100.0 100.0 100.0 100.0
Departmental Expenses:
Salaries and Wages including Vacation 13.8 16.1 14.7 13.8 14.5
Payroll Taxes and Employee Benefits 3.5 3.5 3.2 2.9 3.4
Subtotal 17.4 19.6 17.9 16.6 17.8
Laundry,Linen,and Guest Supplies 1.6 1.8 1.6 1.6 ' 1.6
Commissions and Reservation Expenses 3.5 2.9 3.0 3.0 2.9
Complimentary Food and/or Beverage Expenses 2.1 2.4 2.6 2.4 2.1
All Other Expenses 2.0 2.2 2.4 2.3 2.3
Total Rooms Expense 26.5 28.9 27.5 25.9 26.8
Rooms Departmental Income 73.5 71.2 72.5 74.1 `.73.2
Percentage of Occupancy 67.7% 59.4% 61.1% 60.2% 62.1%
Average Daily Rate per Occupied Room $ 85.11 $63.69 $61.54 ' $60.27 $ 69.88
Average Size(Rooms) 106 119 125 124 109
Note: Payroll Taxes 8 Employee Benefits dishbuted lo each deperhnent 1 0
SOURCE: HRG/PKF Consulting Page 2 of 3
1
•
Limited-Service Hotel
Ratios to Total Revenues
Figure Number 14
Property Size Classifications
Under 75 to Over
75 150 150
Rooms Rooms Rooms
(%) l%) (%)
Revenues:
Rooms 97.0 96.5 95.3
Telecommunications 0.9 0.9 0.9
Other Operated Departments 1.6 1.6 2.2 •
Rentals and Other Income 0.4 1.1 1.6
Total Revenues 100.0 100.0 100.0
Departmental Costs and Expenses:
Rooms 24.7 26.3 24.3
Telecommunications 1.2 1.2 1.0
Other Operated Departments 0.6 0.6 1.0 - -
Total Costs and Expenses 26.5 28.1 26.2
Total Operated Departmental Income 73.6 71.9 73.8
Undistributed Operating Expenses:'
Administrative and General 8.9 9.8 9.7
Franchise Fees-including Marketing Fees 5.4 5.9 5.4
Marketing 2.9 2.7 3.2
Property Operation and Maintenance - 5.7 5.8 5.3
Utility Costs 5.1 5.0 5.1
Other Unallocated Operated Departments - - -
Total Undistributed Expenses 27.9 29.2 28.7
Income before Fixed Charges 45.7 42.7 45.1
Management Fees,Property Taxes,and Insurance:z -
Management Fees 5.2 3.3 3.3
Property Taxes and Other Municipal Charges' - , 3.1 4.8 4.6
Insurance 2.2 1.6 1.6
Total Management Fees,Property Taxes,
• and Insurance 10.5 9.7 9.5
Income before Other Fixed Charges' 35.2 33.0 35.6
Rooms Department:
Rooms Net Revenue 100.0 100.0 100.0
Departmental Expenses:
Salpnes and Wages including Vacation 13.9 14.8 13.0
Payroll Taxes and Employee Benefits 2.8 3.2 3.0
Subtotal 16.7 18.0 16.0
Laundry,Linen,and Guest Supplies 2.3 1.6 1.6
Commissions and Reservation Expenses - 2.3 3.0 3.3
Complimentary Food and/or Beverage Expenses 2.3 2.4 2.2
All Other Expenses 1.8 2.3 2.4
Total Rooms Expense 25.5 27.3 25.5
Rooms Departmental Income 74.5 72.7 74.5
Percentage of Occupancy 63.2% 60.7% 62.1%
Average Daily Rate per Occupied Room $71.66 $63.12 $67.13
Average Size(Rooms) 57 120 182
Note: Payroll Taxes 8 Employee Benefits distributed to each department • 11
SOURCE: HRG/PKF Consulting Page 3 of 3
1
Full Service Hotel Capitalization Rates Jump
by: David J. Sangree, MAI, CPA, ISHC
The Winter 2001/2002 USRC Hotel Investment Survey of 29 hotel
investors indicates that discount rates and capitalization rates, particularly
for full-service hotels, have increased since our 2000 survey. Limited
service hotels had a smaller increase in the discount rate with the direct
capitalization rate being stable. The increase has occurred despite the
decline in interest rates and the prime rate. The increases are due to the
higher risk associated with hotel investments particularly since the
terrorist attacks on September 11, 2001, which have caused travel and
usage of hotels to decline. Many markets have recorded declines in
occupancy levels and average daily rates as compared to previous years.
Hotel investors and lenders have become more cautious towards future
performance due to the economic recession. An increased number of
hotels are going into default with their lenders due to declining net
operating incomes to pay mortgage payments.
Capitalization Rates
Our 2001/2002 survey indicates that investors require higher
capitalization rates for full-service hotels while limited service hotel
figures have stayed relatively stable. The direct capitalization rate for
full-service hotels of 11.6% is 90 basis points higher than the average for
the 2000/2001 survey of 10.7%. The average for limited service hotels of
12.2% is the same as for last year's survey. The capitalization rate has
two components: equity and debt. With interest rates declining, and the
overall rates showing an increase for full-service properties and
remaining stable for limited service properties, this indicates that the
equity capitalization rates have risen strongly. The increase has occurred
due to the increased risk associated with hotel ownership because of the
changing occupancy levels of hotels, particularly during an economic
recession. The range for each was wide and depended upon the quality of
product and its location. Upper-end, luxury, full-service hotels in
locations with strong barriers to entry had capitalization rates of 9% to
11%. Terminal capitalization rates for both categories were similar to the
direct capitalization rates although these are utilized five to ten years in
the future. This similarity is due to the higher risks associated with hotels
currently because of the recession and lack of interest from buyers in
hotels.
12
USRC Hotel Divestment;Sufvey
b20¢2 'a Winter 2001/2002 W$EO 000/9210/ Winter 2000/2001
Full-Service• ... �' ` •�fi"mi}ed, ervi, k Full-Service
Direct Capitalization Rae
_Avenge -
11.6% 10.7%-ESRange _I 9.0%-16.0%). 9.0%-15.0% 11.0%-15.0% 8.0%-13.0%.
Terminal Capitalization Rate
Avenge 12.2% 11.6% 12.9% 11.0%
-Range 9.0%-15.0% 10.0-155% 11.0%-15.0% 9.0%-13.0%
Discount Rate
Average 14.9% 14.6% 14.5% 13.7%
Range 12.0%-20.0% 9.0%-20.0% 13.0%-18.0% 120%-17.0%
Selling Expense
Average 3.1% 2.3% 3.3% 2.3% _
Range 2.0%-6.0% l.0%-4.0% I.0%-5.0% 05%-4.0%
Management Fee Expense
Average 3.7% 3A% 3.6% 3.1%
• •
Range 2.5%-5.0% 2.5%-5.0% 3.0% - 5.0% 2.0%-4.0%
ADR Growth
Avenge ' 2.6% 1.4% 3.7% 3.6%
• Range -5.0%-3.0% -5.0%-5.0% 0.0%-6.0% 0.0%-6.0%
Expense Growth
Average 2.6% 2.6% 3.0% 3.2%
Range 0.0%-5.0% 1.0%-5.0%. 2.0%-4.0% 2.0%-4.0%
Holding Period
Average 7.6 7.6 6.5 7.0
Range 3-10 years - 3-12 year 3-10 years 3-30 yeah
Marketing Period
Avenge 7.4 8.3 7.4 9.3
Range - 3-12 months 4.12 months 3-12 months 3-36 months
Reserve for Replacement
Average 4.1% • 4.7% N/A N/A
Range 2.0%-7.0% 3.0%-7.0% N/A N/A
Rooms Revenue Multiplier
Average 3.0 2.5 2.9 3.1
Range 2.0-3.5 1.9-3.5 2.2-35 1.8-4
Source: US Really Consultants,Inc.
13
Discount Rates Higher for Limited Service Hotels
Discount rates for limited-service hotels averaged 14.9% and for full - service hotels
averaged 14.6%. Discount rates for full-service hotels showed a 90 basis point increase
over last year's survey due to uncertainty in the marketplace. The range is wide for
discount rates with respondents indicating from 9%to 20%. The holding period for users
utilizing a discounted cash flow analysis for both limited service and full-service hotels
was 7.6 years.
ADR Growth Limited
The investors surveyed indicated that they project that ADR growth rates to be lower than
operating expense growth rates for both categories of hotels. Some investors project ADR
growth rates to be negative in 2002 although the overall average was 1.4% for full-
service hotels and 2.6% for limited service hotels. The expense growth rates were higher
than the ADR growth rates as well as slightly higher than last year survey. The selling
expense ranged from 2% to 6% for limited-service hotels, and from 1% to 4% for full-
service hotels. The average selling expense was slightly lower for full-service hotels as
these transactions are typically for higher amounts, and brokers are willing,to reduce their
commission percentage.
Management Fee Expense Range
Management fee expenses averaged 3.7% of total hotel revenues for limited- service
hotels and 3.4% for full-service,hotels. Management fees are typically higher on a
percentage basis for limited service hotels due to the disparity in total revenues versus
full - service hotels.
Marketing Period Remaining Stable despite Change in Economy
The marketing period was 8.3 months for full-service hotels and 7.4 months for limited-
service hotels. The investors indicated that the marketing periods have not changed since
last year's survey although the number of transactions has declined since the September
11 terrorist attacks. The reserve for replacement as a percentage of total revenue for
limited service hotels was 4.1% while for full-service hotels was 4.7%. The higher rate
for full-service hotels is due to the larger size of building and increased amount of
amenities as compared to limited service properties. The room revenue multiplier was
typically used by limited-service hotels buyers and averaged 3.0 with a range of 2.0 to 3.5
times room revenue. Only a few of the investors utilized a mom revenue multiplier for
full-service hotels and this averaged 2.5 with a range of 1.9 to 3.5. This was highly
dependent upon the type of property.
14
Hotel Interest Rates Decrease
DEBT PARAMETERS
Winter 2001/2002 Winter 20(0/2001
/",",yq.�xk>u'-T'�'PF" err` y ar, S "17=P } ea a^rar'.,�' q-.
CS.' t� i2 •L k.} ah te,4 Sa >," ' rv •'.
Average 8.2% 9.5%
Range 6.0% -10.0% 8.0% - 13.0%
Average 95 99
Range 3-25 3- 25
,10 ,fOeiLitt„5 S a G`'j'' z �S'w�' rA d-ry.a.,, i ' £:✓fix, r.3
514% ,r F •b v..R sY. `5 e�hj f r` miE pty:ti'R,Y tp,i','
Average 22.3 22.0 •
Range 15 - 25 13 - 25
i$'oa qg"Yr7 ,1 'a � +v l' wtri'n i, ; ib T p : � r:t 'V I
Average 1.45 - 1.45
#Ranger, 1.25-1.75 1.2 - 2.0 -
�t$ t 4 tl #;1lT rFr /,II v 8, tt 1* 'S�S 4 y i i£
,,.fir• -r_ ♦t t e� d 7d`1'r `1� 3 ch f1 r _->..: `*fr� a$ -17.rj'}'ih
Average - 65% 66.5%
Range 50% - 80% - 50% - 80%
e
Source: US Realty Consultants,Inc.
The average interest rate of 8.2% for the Winter 2001/2002 survey decreased
from 9.5% as illustrated in Winter 2000/2001 survey. The range of rates from 6%
to 10% was lower than in last year's survey and is due to the dramatic decline in
the prime rate from 9.5% on January 1, 2001 to 5% on December 1, 2001. The
decline in hotel loan rates is lower than the decline in the prime rate and indicates
that banks are increasing their margins for hotel lending. The average term of 93
years was the same as our 2000 survey. The years amortized was 22.3 years with
the range from 15-25 years which was similar to the previous year's range. The
debt coverage ratio avenged 1.45 with a range from 1.25 to 1.75. The loan to -
value ratio was 65% with a range from 50% to 80%. Investors indicate that
financing is difficult for most new development projects around the nation.
Major Concerns
Additional terrorist attacks, economic concerns, enticing consumers to travel
again, and the credit crunch are the major concerns of the investors in the survey.
Additional terrorist attacks and their impact on the travel industry were echoed by
many of our respondents. The economic recession is reducing net operating
15
incomes at most hotels, which will translate into a decline in value for these hotels
as investors typically look most closely at the trailing 12 months of performance.
Enticing consumers to travel again is a major concern of many respondents due to
the falloff in travel since the terrorist attacks of September 11, 2001. The more
limited amount of financing available in the market and more stringent equity
requirements facing today's hotel investors are a top concern for hotel investors.
The various rate cuts by the Federal Reserve have allowed for lower interest rates,
but have not increased the amount of hotel lending.
Respondents to the survey include:
Boykin Lodging
Colliers International
Hotel Source,Inc.
Cornerstone Realty Advisers
Lend Lease
TIAA/CREF
Hunter Realty
Rockbridge Capital
Prime Hospitality
Wells Fargo
Six Continents Hotels
GMAC Commercial Mortgage Corp.
Forest City
UBS Realty Advisers
Molinero Koger
Continental Wingate
White Lodging •
Insignia Hotel Partners
Mid North Financial
David L.Babson&Co.
Postmark
Moms, Smith,And Feyh
Hotel Capital Advisors
Cendant
Capital Hotel Management
Mass Mutual
Coldwell Banker Commercial
US Bank
David J. Sangree, MAI, CPA, ISHC is Director of Hospitality Consulting for US
Realty Consultants, a national hospitality consulting and real estate valuation firm
with offices in Cleveland, Columbus, Chicago, and Atlanta. He can be reached at
216-221-9191 or at dsangree@usrc.com.
16
•
APPRAISAL 215
HOTEL MOTEL VALUATION
WORKSHOP
a — N
sirryi
-
State of Colorado
Division of Property Taxation
Appraisal Standards
Education Program
. - .
18
EDUCATION PROGRAM
GENERAL INFORMATION
The Division of Property Taxation's Education Program is designed for the new
employee and the employee with advanced training and experience. The program emphasizes
the application of appropriate administrative and appraisal skills within the assessor's office.
Course curriculum and examinations are developed to assist students in meeting state
certification and licensing requirements.
Division courses and workshops are designed to review and explain current Colorado
property tax law and present typical appraisal and management techniques useful to the assessor
and assessor staff. Continuing education workshops covering a variety of topics are frequently
offered. Refer to the Division's weekly bulletin for announcements of courses and workshops.
Enrollment in Division appraisal and administrative schools is for county personnel
employed in ad valorem taxation. Exceptions must be approved by the Property Tax
Administrator prior to attendance.
Division courses and workshops may have prerequisites that must be completed prior to
attendance. Specific requirements for individual classes are listed in the Division bulletin
announcement made for that school.
Students must pre-register for all schools. Registration forms are found with the
individual school announcements in weekly Division bulletins. Specific deadlines for
registration will be stated in the school or workshop announcement. For all Division schools in
2002 requiring classroom attendance, a fee of$5.00 per day is charged for each student
attending. Fees must be paid at the time of pre-registration. Fees are not collected at the school.
To receive credit for a class or workshop, classroom participation is required. The
Division reserves the right to deny certificates of completion if the student attends less than
eighty percent of the total class hours.
Final examinations are given for each five day course and many workshops presented by
the Division. Test results are mailed to all students at the address noted on the class registration
form. Each county assessor receives a list noting the pass/fail status of its employees. A retake
exam is available to students who fail the first examination. Challenge exams are not offered at
any time.
The Division of Property Taxation does not offer an assessment or appraisal certificate
program. However, individual certificates will be issued to all students successfully completing
Division courses. These certificates can be used as documentation for the Colorado Board of
Real Estate Appraisal licensing and certification requirements.
All lodging arrangements and meal expenses are the responsibility of the student.
Smoking is never allowed in the classroom.
If you have any questions regarding the Division's general education policies or
programs,please contact the Division, (303) 866-2371; FAX (303) 8664000.
19
Appraisal 215
Hotel / Motel Valuation Workshop
•
Section 1
Introduction
STATE OF COLORADO
DIVISION OF PROPERTY TAXATION
APPRAISAL STANDARDS
EDUCATIONAL PROGRAM
20
Appraisal 215: Hotel / Motel Workshop CATA 2002
PP
Section 1: Introduction Page 1
INTRODUCTION
PURPOSE OF COURSE
The purpose of this workshop is to:
Provide procedures to assist county assessors in the valuation of hotels and
motels for ad valorem taxation,
Encourage inter-county communication and sharing of information on hotels and
motels,
Promote state-wide property tax equalization through the use of similar
methodology.
H. TERMS AND DEFINITIONS
AVERAGE DAILY RATE: Total guest room revenue for a given period
divided by the total number of occupied rooms. It should be noted that the
overall average daily rate per occupied room does not include any occupancy
derived from complimentary rooms.
PERCENTAGE OF OCCUPANCY: The percentage of available rooms
occupied for a given period. It is computed by dividing the number of rooms
occupied for a period by the number of rooms available for the same period.
FRANCHISING: An agreement between a hotel/motel company (usually
between a national or regional chain) and an independent hostelry owner
whereby, for a fee, the owner is allowed to use the name, trademarks and
various services offered by the chain.
HOTEL CHAIN: Any group of three or more hotels, motels, or resorts
operated under a common name or by a single owner or operator.
MANAGEMENT CONTRACT: An agreement between a management
company and a property owner whereby the management company assumes
complete responsibility for managing the hostelry. For this service the operator
is paid a fee based on a prescribed formula.
ROOM NIGHT: One room occupied for one night.
21
Appraisal 215: Hotel / Motel Workshop CATA 2002
Section 1: Introduction Page 2
MOTEL: A building or group of buildings located on or near a highway and ,
designed to serve the needs of travelers by offering lodging and parking and ?
may also provide other services and amenities, e.g., telephones, food and
beverages, meeting and banquet rooms, recreational areas, swimming pools,
shops.
HOTEL: A facility that offers lodging accommodations and a wide range of
other services, e.g., restaurants, convention facilities, meeting rooms,
recreational facilities, and commercial shops.
RESORT HOTEL: A hotel, typically situated in a scenic area, that either
provides or is near activities that attract leisure travelers, e.g., swimming,
tennis, golf, boating, skiing, ice skating, riding, hiking, or sightseeing. Resort
hotels generally offer restaurants, lounge, and entertainment outlets; a fitness
center; concierge and valet services; and a limited amount of meeting and
banquet space. Seasonality often affects the level of occupancy.
BUDGET HOTEL: A motel that can offer substantially lower rates due to high
volume, lower initial investment costs, (land acquisition and construction costs)
and efficient operations.
TRANSIENT HOTEL: A hotel catering primarily to business and convention
guests, usually located in a metropolitan area.
ALL-SUITE HOTEL: A hotel in which space that could be allocated to
meeting, banquet, restaurant and lounge facilities is instead allocated to guest
suites that include separate living and sleeping areas. Most all-suite hotels offer
free breakfast and an evening cocktail hour. With only limited food and
beverage facilities, all-suite hotels are usually easier to operate and typically
have higher profit margins.
EXTENDED STAY HOTEL: A hotel designed for travelers who must stay in
an area for a prolonged period, typically five or more days; differs from a
standard hotel in that rooms and amenities have a more residential atmosphere.
Guest rooms have large living areas and full, eat-in kitchens; some have two
separate sleeping areas, individual dining rooms, and separate baths. The
exterior of an extended-stay hotel is similar to that of an apartment complex
with recreational facilities and even barbecue grills. Since extended-stay
travelers stay over the weekend; these hotels do not suffer normal weekend
declines in occupancy. Because they offer limited food and beverage service,
extended-stay hotels are usually easy to operate and have higher profit margins.
HOTEL/MOTEL UNIT: The smallest accommodations that can be sold to a
patron; must contain a full bath, sleeping accommodations, and an entrance
door with a key.
HOSTEL: A facility that provides lodging, generally for the budget conscious
travelers. The rooms may have a private bathroom or a shared bathroom.
22
Appraisal 215: Hotel /Motel Workshop CATA 2002
PP
Section 1: Introduction Page 3
RACK RATE: An undiscounted room rate generally given to anyone who does
not qualify or ask for a special discount rate. The term is derived from the
brochure rack at the front desk which contains information about each rooms
rate, including the highest rate that can be charged for that particular
accommodation. When a hotel is expected to be full during a certain period or
a guest arrives without a reservation, the rack rate is generally the only rate
available. The average room rate, for a given period, is always less than the
rack rate for the same period.
PUBLISHED RATE: The rate listed in directories and other publications.
This rate is usually quoted as a range (i.e., single: $70-$100) and represents the
various rack rates for specific types of accommodations.
COMMERCIAL RATE: A discounted room rate available to certain
commercial travelers. Some commercial hotels will charge any commercial
traveler a commercial rate upon request, while others offer it only to established
accounts. Commercial rates are always below rack and published rates.
REAL ESTATE INVESTMENT TRUST (REIT): A corporation or trust that
combines the capital of many investors to acquire or provide financing for all
forms of real estate. Its shares are freely traded, often on a major stock
exchange. To qualify for the favorable tax treatment currently accorded such
trusts, 95% of the taxable income of a REIT must be distributed among its
shareholders, who must number at least 100 investors; no fewer than five
• investors can own more than 50% of the value of the REIT. The Federal
Securities and Exchange Commission stipulates that REITs with over 300
investors have to make their financial statements public.
LIMITED SERVICE: A hotel or motel that is primarily a "rooms only"
operation, offering either no or limited food and beverage, conference rooms,
recreation rooms or other amenities.
FULL SERVICE: A hotel that offers a full range of amenities such as, food
and beverage operations, conference rooms retail space, recreational facilities
business centers, room service, etc.
III. HISTORY
Hotels and motels as we know them today evolved from small, one room,
private dwellings which served merchants in the sixth century B. C.
The English Inn, which came into prominence during the Industrial Revolution,
was the forerunner of the modern motel. Located on coach trails, inns provided
refuge and protection for travelers. Accommodations consisted of unheated
rooms with straw beds.
The American counterpart of the English inn was the colonial inn and tavern
which grew up in seaport towns and along stage coach roads.
23
1
Appraisal 215: Hotel /Motel Workshop CATA 2002
Section 1: Introduction Page 4
The first hotel constructed in the United States was the 73 room City Hotel built
in 1794 in New York City.
During the 1800's, hotels moved westward. As the number of hotels increased,
many properties faced the prospect of rapid obsolescence and a loss in value.
The City Hotel, for example, was made obsolete in 15 years due to competition
and was subsequently converted to an office building. Today hostelries face
similar problems because of constant change in modes of transportation,
customer preferences, and competition from newer properties.
The hotel of the mid 1880's followed the railroads westward and luxury
properties were constructed. Travelers who could not afford these luxury
accommodations were forced to stay at rundown properties such as
roominghouses. As travel became more affordable and a greater number of
middle-class people began to travel, a new type of hostelry was needed to fill
the gap between luxury hotels and roominghouses.
Due to rising occupancies, which exceeded 85% in 1920, one of the greatest
hotel building booms in the country's history took place. Some cities actually
doubled the number of available rooms.
The depression of the 1930's put an end to the new construction and sent more
than 80% of the nations hostelries into foreclosure.
Although the Depression forced many hostelries out of business, it offered
others the opportunity to expand their holdings by purchasing distressed
properties. During the depression years both Sheraton and Hilton acquired
numerous properties, which provided the impetus to start national chains.
The 1950's marked a change in transportation. The railroad began to lose
customers to the more economical automobile and the faster airplane. A mobile
society was born and more people welcomed the convenience of the nation's
highway and airlines.
The once prime hotel locations, across from downtown railway stations, became
less desirable and economically obsolete.
In the 50's a new kind,of lodging facility, which was highway oriented with
inexpensive, "no frills" accommodations began to develop. The modem motel
was born. Motels immediately started to capture the transient market that had
previously been monopolized by hotels.
Through a steady evolution process these highway motels began to offer more
amenities, such as, TV sets, air conditioning, telephones, swimming pools, 24
hour front desk attendants, acceptance of credit cards, wake-up calls, etc. By
the mid 1960's most new motels offered all of the facilities and amenities
available at hotels. These types of properties evolved into what is known as the
full service motor hotel.
•
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During the 50's and 60's, franchise lodging chains, such as Howard Johnson,
Ramada Inn, Radison, and Holiday Inn flourished.
As the motel evolved into the motor hotel, it also began to lose low price
competitive advantage. By providing more facilities and services, motels were
forced to charge higher rates. This created a void at the low end of the room-
rate scale and thus the creation of the "budget" or limited service motel.
Budget motels were introduced in the late 1960s and boomed in the early 70s.
The budget motels were able to offer lower room rates because their facilities
have smaller guest rooms, minimal public space, lower land costs and simple no
frill designs.
Guest rooms in budget hotels are generally small, while rooms in conventional
motor hotels are typically larger in size. Smaller rooms reduce construction
costs and interior decorating expenditures. Budget motels eliminate public areas
such as meeting and banquet rooms, large lobbies, food and beverage facilities
and interior corridors.
The main reason a traveler selects a budget hotel is price. Budget motels
typically have lower risk levels than conventional motor hotels. From a
valuation perspective, appraisers should consider this when determining the
capitalization rate.
During the 60s and 70s the lodging industry expanded. New construction was
fueled by the creation of the real estate investment trusts (REITS). During this
time period hotel industries were actively expanding their chains through
franchising. In the mid 70s, high interest rates, and the oil crisis reduced
travel, conferences, and conventions. Many of the marginal properties were
again forced into foreclosure.
In the 80s the lodging industry again boomed, aided by large amounts of
available financing and favorable income tax benefits designed to stimulate real
estate growth.
As the lodging industry moves into and through the 1990s, more consolidating
among hotel chains is expected. Globalization of the hotel industry should
intensify and more U. S. hotel companies may expand throughout the world.
More foreign hotel chains will probably seek opportunities in the United States.
From an appraisal point of view, a global knowledge of hotel trends and
valuation techniques will become necessary.
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IV. FUTURE TRENDS
A. FASTER TRANSPORTATION
The jet airplane revolutionized long-distance travel by allowing people to
cover more miles in shorter time periods. As the speed of transportation
increases, business meetings and trips will be shortened. This will
reduce over night stays away from home.
B. VIDEO COMMUNICATIONS
Before long, most homes and offices will be linked by a computer and
video communication system. The need for face to face meetings will be
reduced when this technology becomes commonplace. Many business
meetings, conferences, seminars, and conventions could be carried out
without incurring travel and hotel expenses.
C. GLOBALIZATION
Although faster transportation and advanced communication techniques
may have negative effects on the lodging industry, globalization of
businesses will create a need for business travel when face to face
interaction is needed. The major business centers throughout the world
will benefit from this travel.
D. INCREASED PLEASURE TRAVEL
As the number of affluent, double-income families increases and
transportation becomes faster, easier, and more affordable, the travel
industry has seen an increase in pleasure travel. This trend is likely to
continue with resort areas receiving the greatest benefit.
V. GENERAL INFORMATION
In performing hotel-motel valuations and feasibility studies, appraisers are
primarily interested in the micro, rather than the macro, aspect of demand.
Micro demand for transient accommodations refers to the competitive demand
within a limited geographic area such as a town, city or county. Macro demand
is much broader in scope and takes into account national and international travel
patterns. Macro demand usually only receives limited attention in most
appraisals, but it is an important consideration because it often foreshadows
changes in travel trends for micro areas.
In preparing a hotel market study and appraisal, accurate quantifications of
micro demand are needed. The unit of measurement commonly employed is the
room night.
A room night is defined as one room occupied by one or more persons
for one night.
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1 For example, a business traveler who stays at a motel for three nights
accounts for three room nights. A family that uses one room for three
nights also generates three room nights. If the family had occupied two
rooms during their three night stay, the demand generated would have
been six room nights.
A. CLASSIFICATION OF LODGING FACILITIES
Hotels and motels are designed and located to attract one or more
specific market segments. Because hotels differ in their design, physical
facilities, amenities, and locations, all of which directly impact financial
operating results, it is important to define and accurately classify the
different characteristics of lodging facilities. This establishes tiers of
comparability necessary to produce uniform values.
Hotels and motels can be classified using three categories:
1. Types of facilities offered
2. Class or quality of facilities and services
3. Location
1. Types of Facilities Offered
The type of facility refers to the physical hotel property as well
as the amenities and services offered to guests. The types of
lodging facilities commonly found in the United States include:
a. Commercial Hotels
Caters primarily to travelers who are conducting business
within the area around the hotel.
Usually located around offices, industrial properties,
restaurants, and entertainment outlets.
Amenities usually included restaurant, lounge,
recreational facilities (swimming pool, fitness center etc.)
meeting, and conference rooms and shops.
Services offered may include room service, secretarial
support, computer terminals, photocopy and fax services,
valet service, airport pickup and car rentals.
Typically experience high occupancy rates Monday
through Thursday night with a significant drop-off on
Friday, Saturday, and Sunday.
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b. Convention Hotels ,,,,—s\
Designed to accommodate large groups and functions.
Have large meeting and conference rooms, exhibit space
for trade shows, and extensive restaurant and lounge
capacity.
The key component is meeting space.
Convention hotels experience occupancy trends that are
generally strong Monday through Thursday nights and
drop off on weekends.
c. Resort Hotels
Oriented toward the leisure traveler and are located near
activities such as swimming, tennis, golf, skiing,
sightseeing and other recreational amusements.
Offer a limited amount of meeting or banquet space.
Often influenced by seasonality.
d. All Suite Hotels
Have guest rooms that include both a sleeping area and a
separate living area in a single unit.
The living room usually contains a couch that converts to
a bed, armchairs, coffee table, an eating table, and a
television. Most offer a kitchen with at least a micro
wave-oven and small refrigerator.
The economics of the all-suite concept are based on
eliminating or reducing a significant portion of the hotels
public space (restaurant, lounge, lobby area) and
transferring this space to the guest rooms.
All-suite hotels primarily cater to the commercial and
leisure travelers who do not have a need for a large
amount of public space.
The services and amenities of all-suite hotels are
comparable to commercial hotels, although they may be
downsized.
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e. Extended Stay Hotels
This facility is a cross between an apartment complex and
an all-suite hotel.
The guest rooms are typically larger than the rooms in a
standard all-suite hotel and contain more living space.
The guest units are designed to accommodate stays of
more than five days, therefore they are equipped with
larger kitchens containing full sized refrigerators, stoves
with ovens, microwaves, and dishwashers. They also
include cooking equipment, dishes and eating utensils.
The exterior of the property generally resembles an
apartment complex.
Some suggestions to help determine if a property with
extended stay tenants should be classified as a hotel or
apartment are; does the property have a hotel license and
who provides the linen.
f. Budget Motels
These were introduced in the late 1980s. Budget hotels
are a low end hotel based on the idea that much of the
floor area in a typical hotel room is unnecessary and can
be eliminated.
A budget hotel room usually includes a queen size bed,
dresser, night stand, desk and full bath with combination
tub and shower.
Microtel hotels typically offer limited amenities.
g. Conference Center Hotels
These are unique hotel products designed specifically to
accommodate small groups and meetings.
Attempts to create an ideal environment for productive,
successful meetings.
They offer high tech meeting space with the latest
audiovisual and computer equipment.
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h. Casino Hotels
( '
Casino hotels combine a transient hotel with a full casino
facility.
The guest rooms are an amenity to the casino and the
rooms, restaurants, and lounges are designed to keep or
attract the guest to the casino.
Casino hotels seek to attract leisure travelers who enjoy
gambling.
i. Health Spa
Health spa resorts cater almost exclusively to one market
segment - the health conscious leisure traveler.
These facilities generally offer an all-inclusive program
that includes accommodations, meals, a medical check-up,
individually designed related activities, usually an
exercise program, and various types of counseling.
Guest normally stay for three days to two weeks.
These facilities typically include fitness equipment,
exercise rooms, and other health related amenities.
Health spas require highly specialized marketing and
operating expertise, particularly in the area of exercise,
fitness, and health management.
2. Class or Quality of Facilities and Service
The class of a lodging facility is a way of describing the quality
of the property and the level of service provided by the staff.
Generally class is reflected in a hotels ability to achieve a
particular room rate.
The class of a hotel relates to its particular market area. The
facilities and level of service that might be considered first-class
in Leadville, may not get such a rating in Aspen.
The lodging industry in the United States does not recognize a
uniform system of hotel classes.
Hotel chains try to market their properties to a particular class of
traveler. Budget hotels cater to the very rate sensitive traveler
while the Ritz-Carlton attracts an upper-end, luxury-oriented
clientele. Most chains attempt to create and maintain a specific
image with respect to their class of facilities and service.
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3. Location
The third way to classify lodging facilities is based on location.
A property's location affects many factors including the market
segments served, the types of facilities and services required, and
occupancy cycles.
Hotel locations may be classified as airport, highway, center city,
suburban, convention center, and resort.
a. Airport Hotels -
Situated near a commercial airport and serves out of town
visitors.
Attracts those who use the airport, including airline
passengers and crews.
Designed to accommodate small and medium sized
meetings.
Usually provides passenger pick-up and delivery in a hotel
car, van, or shuttle service.
Generally experiences fairly stable year-round occupancy
patterns.
b. Highway Hotels
Located near a major travel route with high visibility and
easy access.
Generally attracts individual commercial and leisure
travelers.
Usually have small meeting rooms.
Either have their own restaurant or are located near a food
service facility that serves three meals a day.
The success of a highway hotel depends on auto travel.
This is part of the risk inherent in highway hotels as auto
travel can easily be influenced by shortage of fuel or
changes in highway traffic patterns brought about by new
roads, highways, and interchanges.
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•
c. Center City Hotel
Located in an urban downtown area.
Attracts commercial and leisure travelers, as well as
meeting and convention markets.
Center city hotels usually have hi-rise construction and
are more expensive to operate than their suburban
counterparts.
Characteristics are adequate parking, strong security,
quiet rooms away from the street noise, and room service.
d. Suburban Hotel
Located in commercial areas with a concentration of
offices, retail, and industrial businesses.
These properties cater to individual travelers, meeting and
convention demand, and some leisure business.
Many are constructed as mid-rise buildings and provide a
full range of amenities, including restaurants, lounges,
meeting and banquet rooms, swimming pools, health and
fitness clubs, and tennis courts.
Parking is generally free and readily available.
e. Convention Center Hotel
These hotels generally capture a large portion of the room
nights generated by a convention center.
The hotel may actually be attached to the convention
center.
f. Resort Hotels
Often offer one or more special recreation attraction such
as skiing, boating, scenic beauty, or a historic experience.
Also attract leisure-oriented meeting and convention
demand, but most are not frequented by commercial
travelers. Immediate site access and visibility are often
unimportant and can actually be detrimental to a resort
location.
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Other factors that can affect the desirability of resort
locations are: climate (especially adverse periods such as
hurricane season in the Caribbean), perceived safety and
guest comfort, political stability, and distance and travel
time from the point of origination to the resort
destination.
VI. HOTEL CHAINS vs INDEPENDENTS
A chain is defined as any group of three or more hotels, motels or resorts
operated under a common name or by a single owner or operator.
Generally a hotel chain is equated with a recognizable name such as Marriott,
Holiday Inn, or Howard Johnson rather than an independent hotel with no brand
name affiliation.
Over the past 20 years, the chain affiliation bas become increasingly prevalent
in the hotel industry. In 1970 approximately 35% of all United States hotels
had chain affiliations, by 1990 the market share had increased to 68%.
Trade names are used by individual lodging facilities in one of three ways.
First, a hotel may actually be owned by the hotel chain. For example, all Red
Roof Inns and Motel 6 hotels are owned by the chain; they do not franchise or
operate under management contracts.
Second, a hotel may be owned by an independent owner who uses the trade
name under a franchise arrangement with the hotel chain.
Third, a hotel may be owned by an independent owner and managed by the
hotel chain, which provides management service and the trade name
identification.
Most hotels in the United States are operated under a franchise arrangement.
Some may use a chain's management service, but very few hotels are actually
owned by the lodging chain. Since chain affiliations can have a direct impact
on a hotel's value, appraisers should be familiar with hotel franchising and
management contracts.
A. FRANCHISING
A franchise is an agreement between a hotel-motel company, usually a
national or regional chain, and an independent hostelry owner in which
the owner pays a fee to use the name, trademark, and various services
offered by the chain. One of the more important services received is the
national reservation service, which typically accounts for 20% -30% of a
hotel's reservations.
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Hotel motel chains dominate the supply of transient acconunodations. fir
The number of nonaffiliated hotels and motels has been declining.
The major problem facing most independent hostelries is the lack of
identity. Travelers usually prefer a known product. When valuing an
independent hotel or motel, the appraiser should be aware of the risk
factors involved. The market may reflect either a lower stabilized net
income or a higher capitalization rate for an independent hotel property.
A franchise creates certain benefits and costs for both the owner and the
chain.
1. Benefits to the Owner of a Franchise
a. Instant identity, recognition, and image
Every chain has its own image, which indicates its price
level and market.
b. Reservation or referral service
Most franchises have some type of central reservation
system that enables guests to reserve a room by calling a
toll-free number. A good reservation system generates
approximately 15% to 30% of a property's occupancy.
c. Chain advertising and sales
All major franchises publish a directory in which each
property is briefly described and location and rate
information are provided. The extent of media
advertising and actual sales solicitation varies from chain
to chain.
d. Procedures manual
Chains urge all their properties to follow standardized
systems and procedures. Operating manuals are provided
and each affiliated facility is inspected periodically to
ensure that policies are being observed. Some chains
have training schools to instruct management on basic
operational techniques.
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Th e. Management assistance
Most chains can provide franchises with specialized
assistance in the various aspects of hotel-motel
development and management such as planning,
operations, and marketing. These services generally are
not always covered in the normal franchising fees and are
contracted for separately.
f. Group purchasing
Chains require that affiliated properties use certain
identity items such as ashtrays, monogrammed towels,
silverware, china, and uniforms. They offer group
purchasing programs that reduce the cost of these items to
owners.
2. Costs to Owners of a Franchise
a. Required facilities
Most chains require that an affiliated property have a
minimum number of rooms and a food outlet on the
premise or next door. Approximately three-quarters of
the nation's chains also require a swimming pool.
b. Membership fees
Franchise chains require an initial fee, which is generally
determined by the size of the property. A continuing
royalty fee, based on a percentage of room sales, is then
paid each year. There are additional charges for chain
advertising and reservation services. Depending on the
individual franchise fee structure and the number of
rooms booked through the reservation system, the actual
cost of a franchise varies from about 2% to 8% of gross
room sales.
c. Required standards
Franchises must adhere to certain construction, design,
operational and maintenance standards. Standards are set
for building materials, heating and air conditioning
requirements, the size of guest rooms, the type of decor,
the hours of operation, minimum staffing, pricing,
advertising, and cleaning and maintenance. Failure to
follow the required standards can jeopardize the franchise.
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In granting a franchise, a chain offers no guarantee or financial
commitment to the success of the property. Should the property
fail, the chain can immediately withdraw its franchise and
demand that all forms of identity be removed. The owner
assumes all financial liabilities.
3. Benefit to Chain (Franchisor)
a. Inexpensive, low risk expansion
Franchising allows hostelry chains to expand their
operations with minimal capital and personnel investment.
Increased representation improves the chains recognition
which tends to increase the volume of sales.
b. Allied expansion
Some chains develop allied businesses to support their
franchises and other company owned operations. These
businesses include interior designers, building contractors,
furniture, equipment, and travel agencies.
4. Cost to chain (Franchisor)
a. Franchise services
Chains must provide the services described in the
franchise agreement. Maintaining the reservation system
and advertising the chain comprise the bulk of their
responsibility.
b. Quality control
Inspection, supervision, and enforcement of franchise
procedures and standards are necessary.
One neglected property can tarnish an entire chain. Some
chains have abandoned their franchising programs because
they found it impossible to enforce operational standards.
A franchise is neither a requirement nor a guarantee of
success. It is important to remember that franchises are
not permanent, and are terminated when sold. Most
franchises are for terms of 10-25 years. New owners
must apply for and be granted a new franchise.
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,;,^7,{ B. MANAGEMENT CONTRACTS
A management contract is an agreement between a management
company (operator) and a property owner (investor) whereby the
operator assumes complete responsibility for managing the hostelry. For
this service the operator is paid a fee based on a prescribed formula.
The owner has little say in the operational policies, procedures, and day
to day management.
1. Benefits to Investors
a. Professional management
Management contracts allow an inexperienced investor to
participate in the benefit of hostelry ownership without
becoming involved in the day to day management.
Management companies offer professional talent, proven
methods of operations, and relief from most of the
operational burden.
b. Profitable affiliation
Some chains do not franchise, so the only way an owner
can obtain the benefits of a potentially profitable
affiliation with such a chain is through a management
contract.
c. Borrowing power and possible operator investment
Many lenders are more willing to make loans on
hostelries that are managed by reputable management
companies rather than by individual operators.
2. Costs to Investors
a. Management fees
Management fees are typically negotiated by the
individual investor and operator. The fee for management
contracts is generally structured in one of several ways:
1. A percentage of a defined gross revenue (usually 2%-
6%)
2. A percentage of a defined gross as a basic fee, plus a
percentage of a defined operating income as an incentive
fee (usually 1%-4% of the gross and 5%-10% of the net)
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3. A percentage of a defined net operating income ,;.r
(usually 10%-25%).
4. Base management fee is often a percentage of gross
income.
5. An incentive management fee is often a percent of net
income.
b. Required facilities and standards
Management companies require that the properties they
operate to meet certain physical specifications pertaining
to size, layout, design and decor. The investor must
provide sufficient funds to properly maintain the property
and periodically replace short-lived items.
3. Benefits to Operators
a. Good profit potential
Management contracts offer good potential for profit,
especially with high volume operations. Because the
owner is responsible for all expenses, the financial risk to
the operator is minimal.
b. Inexpensive expansion with quality control
Hotel chains can expand with a low capital investment and
still keep quality under control with in-house
management.
4. Costs to Operators
a. Management services
In addition to providing the standard services of a
reservation system and chain advertising, the operator
employs a staff of regional managers, supervisors, and
specialists in food and beverage service, accounting,
marketing, and engineering.
38
&dsk k6F
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TT 1 Appraisal 215
Hotel / Motel Valuation Workshop
Section 2
Valuation
72
•
6-1sa
STATE OF COLORADO
DIVISION OF PROPERTY TAXATION
APPRAISAL STANDARDS
EDUCATIONAL PROGRAM
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VALUATION
INTRODUCTION
Lodging facilities are unique forms of real estate; in addition to land and
improvements, they are labor intensive, retail businesses that are dependent on the
management skills of a hotel operator. Unlike other forms of real estate such as
office buildings, which are typically encumbered by long term leases, lodging
facilities require the leasing of guest rooms on what is often a daily basis.
With no long term leases to protect ownership and with tenancy turning over on a
daily basis, hotels are often the first form of real estate to show the effects of local
market trends on their income statement. This means that of all the commercial
real estate types, hotel values can fluctuate most rapidly.
Another difference between hotels and other forms of real estate investments is that,
unlike other commercial properties, lodging facilities generally derive income from
multiple revenue streams. In addition to the sale of guest rooms, a typical full
service lodging facility derives revenue from the sale of food and beverage items,
the resale of telephone service, and the sale of retail items in gift shops. Other
revenue sources may include commissions from vending machines located on the
premises, fees for laundry and dry cleaning, and charges for in-room movies.
Another unique factor in the operation of hotels and motels is the significant
amount of personal property, including furniture and equipment, that is required.
In determining market value for hotels, the appraiser usually considers the three
approaches to value: the cost, sales comparison, and the income capitalization
approach.
Market value is defined by the Appraisal Institute as:
The most probable price, as of a specified date, in cash, or in terms
equivalent to cash, or in other precisely revealed terms, for which the
specified property rights should sell after reasonable exposure in a
competitive market under all conditions requisite to a fair sale, with the
buyer and seller each acting prudently, knowledgeably, and for self interest,
and assuming that neither is under undue duress.
40
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The fundamental assumptions and conditions presumed in this definition are:
A. Buyer and seller are typically motivated.
B. Both parties are well informed or well advised and acting in what they consider
their best interest.
C. A reasonable time is allowed in the open market.
D. Payment is made in terms of cash in U.S. dollars or in terms of financial
arrangements comparable thereto.
E. The price represents the normal consideration for the property sold, unaffected
by special or creative financing or sales concessions granted by anyone associated
with the sale.
The market value of a lodging facility may include the value of the going concern,
which consists of the business value and the value of all furniture, fixtures, and
equipment. For the purpose of ad valorem valuation these items need to be
accounted for as only the real estate value is to be determined.
H. COST APPROACH
The cost approach is based on the assumption that an informed purchaser will pay
no more for a property than the cost of producing a substitute property with equal
utility.
A. IMPROVEMENTS
In the cost approach, market value is estimated by computing the current
cost of replacing a property and subtracting any accrued depreciation
resulting from one or more of the following factors:
1. Physical deterioration - the physical wearing out of the
property
2. Functional obsolescence - a lack of desirability in the layout,
style and design of the property as compared to a new property
serving the same function
3. External obsolescence - a loss in value from causes outside the
property itself
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The cost of replacing the property is generally estimated on a square foot ^. ...
basis using figures from a construction cost manual published by a 1
recognized cost reporting service, such as Marshall and Swift Valuation
Service or Boeckh's cost manual. The value of the land as if vacant and
available for development is then added to the depreciated value of the
improvements to produce a total value estimate.
B. LAND VALUE
HIGHEST AND BEST USE
The price paid represents the most profitable use is the fundamental concept
of highest and best use.
Highest and best use for vacant land is defined as:
The use that yields the highest present land value after labor,
management, and capital have been satisfied
After determining the appropriate improvement value for the subject
property the appraiser must then calculate the land value. There are six
methods in which to determine land values; sales comparison, abstraction,
allocation, anticipated use, capitalization of ground rent, and land residual.
1. Sales Comparison
The sales comparison method is the most reliable method of land
valuation. This method first compares comparable vacant land
parcels that have sold during the selected data collection period and
then appropriate adjustments are made to these sales prices to
determine the estimated value for the subject property.
The adjusted sales prices, of the comps, are then correlated to a
value indicator representing the estimated sales price for each subject
property.
In the reconciliation process, the greatest weight is given to those
sales that are the most comparable to the subject property and have
the least number of adjustments.
Generally the sales comparison method is preferred as it is the
method that most closely approximates the market. In the absence of
sales information, an alternative land valuation method can be
utilized.
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2. Abstraction
Abstraction is based on the principle that land has a defined
relationship to the total property value. This method involves
determination of the contributory value of the improvements as part
of the total sales price of an improved property. The balance of the
sales price is attributed to the land.
When there are no sales of similar vacant lots, the appraiser may
either apply land values established by comparable sales from similar
or comparable areas or abstract the value of the land from improved
sales. The abstraction procedure involves inspection, listing, and
grading the quality of the improvement and applying the appropriate
cost and depreciation schedules to arrive at the depreciated value of
the structure at the time of the sale.
By deducting the depreciated value of the improvements from the
sales price of the entire property, the appraiser can obtain the
abstracted value of the land.
Example:
Sales Price $550,000
Replacement Cost New $525,000
Depreciation (10%) -$52,500
RCNLD $472;500 -$472,500
Abstracted Land Value $77,500
This method should be used with caution. The accuracy of
the land value indicated by the use of this method depends
largely on the reliability of the market value of comparable
improvements. This method is most appropriate when the
improvements are new.
3. Allocation
In the allocation method, a portion of the total property value is
assigned to the land. Relationships between land and improvements
are usually determined from the following sources:
a. Site value in previous years
b. Land to building ratios in similar neighborhoods
c. Analysis of new construction on similarly classified sites
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Example:
You are trying to determine commercial land value in a
neighborhood where there are no commercial land sales.
Research in commercial neighborhoods similar to that of the
subject property indicates that a typical land to building ratio
is 1:9 (one part land to nine parts building), or the land value
is approximately 10% of the total value.
If the typical improved commercial sale for the neighborhood
is $1,400,000 then the indicated land value is:
$1,400,000 x .10 =1140,000
Caution must also be recognized when using this method.
There must be a high degree of comparability among the sites
and among the properties.
4. Anticipated Use or Developmental Cost Method
The anticipated use or development cost method may be considered
in cases where there are limited useful sales data. It is used
primarily to value land in transition from agriculture to residential or
commercial use.
For example, after the highest and best use has been established, the
appraiser "hypothetically" develops the site. The total developmental
costs are then subtracted from the projected sales prices of the
developed lots to indicate the value of the raw land.
For additional information on the developmental cost method for
valuing vacant land for ad valorem purposes, consult Volume 3 of
the assessors Reference Library.
5. Capitalization of Ground Rent
This method employs the income approach which is based on the
premise that value is the present worth of future benefits. This
method is reliable only if the estimate of income and the
capitalization rate are supportable and accurate.
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Example:
A vacant lot is leased for $1,000 a month. This rental
amount is determined to be market rent. The owner has no
expenses in maintaining the lot. A site value can be estimated
converting the income into value using capitalization.
$1,000 x 12 = $12,000 (income is based on annual amount)
$12,000 -:- .11 = $109,091 (assuming a land capitalization
rate of 11%) -
Estimated site value equals $109,091.
6 Land Residual
In order to use the residual method, the net operating income
attributable to the building is deducted from the net operating income
to the property, the remaining income is attributable to the land and
•
capitalized into value.
Example:
Net income to the property $120,000
Income to improvements -$96.000
Residual income to the land $24,000
Income to land $24.000
Capitalized into value -: - .11
Indicated site value $218,182
Site value equals $218,182 (assuming a land capitalization
rate of 11%)
C. WEAKNESSES OF THE COST APPROACH
Most appraisal literature recommends using the cost approach only
for new properties, which have not been affected by the various
forms of depreciation, and for unique or specialized improvements
that have no comparable market or income potential.
The cost approach is seldom used to value existing hotels and motels
because lodging facilities are particularly vulnerable to physical
deterioration, functional changes, and uncontrollable external factors.
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Sometimes a hostelry can suffer from functional and external
obsolescence before its construction is finished. As the building and
other improvements age and depreciate, the resultant loss in value
becomes difficult to quantify. Estimating the impact of even minor
forms of obsolescence may require insupportable judgments that
could undermine the credibility of the cost approach.
A more significant reason why this approach is not given more
consideration in the valuation of hotels and motels is that its
underlying assumptions do not reflect the investment rationale of
typical hostelry buyers. Lodging facilities are income-producing
properties that are purchased to realize future profits. Replacement
or reproduction cost has little bearing on an investment decision
when the buyer is primarily concerned with the potential return on
equity.
Because the cost approach does not reflect any of these income
related considerations, but may require a number of highly
speculative and unsubstantiated depreciation estimates, this approach
is usually given minimal weight in the hotel valuation process.
III. SALES COMPARISON APPROACH
The sales comparison approach is based on the assumption that an informed _
purchaser will pay no more for a property than the cost of acquiring an existing
property with equal utility.
The sales comparison approach estimates the value of a property by comparing it to
similar properties sold during the data collection period. To obtain a supportable
estimate of value, the sales prices of comparable properties must be adjusted to
reflect any dissimilarities between the comparables and the subject property.
The reliability of the sales comparison approach depends on three factors:
1. Availability of timely, comparable sales data.
2. Verification of sales data.
3. Degree of comparability, i.e. the extent of adjustment needed to account
for the differences between the subject and the comparable property.
The sales comparison approach provides a useful value estimate for simple forms of
real estate, such as vacant land and single family residences, where the properties
are homogeneous and the adjustments are few, relatively simple to compute, and
supported by market data. In the case of more complex investments such as
shopping centers, office building, restaurants, and lodging facilities, where the
adjustments are numerous and more difficult to quantify and support, the sales
comparison approach loses much of its reliability.
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Unlike office buildings and shopping malls, most hotels are essentially dissimilar
from one another in type of hotel operation, the quality and condition of physical
improvements, the locational attributes, and the character of the local hotel
market's supply and demand. Numerous adjustments thus are required to render a
sale comparable to a subject property. Most of these adjustments however, are
typically unsupported from the market and are difficult to estimate.
Several other circumstances can lessen the comparability of hotel sales data. For
example, the sale of a hotel property may include an assumption by the purchaser
of existing financing at nonmarket terms; a note may be taken back by a seller
under duress; cash flow, equity, or debt service guarantees may exist; a partial
interest in a property rather than an entire fee simple interest may be transferred; a
leasehold or leased fee interest in a property subject to a nonmarket lease may be
sold; and a property may be transferred as part of a package of several other
properties in which the sales price of the particular comparable property may be
merely an allocation of the whole.
Obtaining specific information on which to base adjustments for any of the
previously cited differences can be extremely difficult. Even if information is
available, attempts to derive market supported adjustments are, in general, merely
speculative.
Hotel investors typically do not employ the sales comparison approach in reaching
their final purchase decisions. Various factors, such as the lack of timely
comparable hotel sale data, the numerous unsupportable adjustments that are
necessary, and the general inability to determine the true financial terms and human
motivations of comparable transactions often make the results of the sales
comparison approach questionable. Although the sales comparison approach may
provide a range of values to bracket and support the fmal estimate of value, any
reliance beyond the establishment of broad perimeters generally is not normally
justified by the quality of data.
Because appraisers are obligated to mirror the actions of the marketplace, an
appraiser needs to be cautious when using the sales comparison approach to value
hotel properties. A good use of hotel sales, in the valuation of a hotel, would be for
bracketing the final estimate of value.
Example:
Assume the appraiser is valuing a mid-rate commercial hotel. The appraiser
has researched the market and discovered two recent sales. One sale
involved a first class hotel with a value of$90,000 per room. The other
sale was of a mid-rate hotel that was obviously less attractive than the
property being appraised; it has a sales price of$45,000 per room.
Although a value estimate based on these two sales would be difficult to
support, a range of values where the final estimate should fall could be
established. If the income capitalization approach results in a value
indication that is outside of this range, the appraiser should reevaluate the
data. ,
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For estimation of the market value of a hotel's real property components for ad
valorem purposes, the sales comparison approach is particularly cumbersome. ? `"
Typical hotel investors purchase hotels in anticipation of income from the real
property, personal property, and business components. Most sales of hotels include
the transfer of both the realty and the nonrealty components, and the per-room price
of even the most comparable sale is difficult to use as an indication of value for
another hotel's isolated real property component.
For example, hotels routinely sell with personal property in place; thus the sales
price for a typical hotel includes such relatively short lived items such as furniture,
fixtures, and equipment (FF&E), and an allocation must be made to the comparable
sales prices in order to adjust for the personalty's inclusion.
The same is true of the business housed within a typical hotel. Hotels routinely
transfer as going concerns, with buyers buying into the hotel business that is
operated on the premises and anticipating income from the continued operation of
the hotel business. This element of a hotel's value, like the personal property,
needs to be excluded from a hotel's value when only the real property elements are
to be considered, such as for ad valorem purposes. Another unsupportable
adjustment to the comparable sale price would be required to account for the
portion of the price that was paid for the going concern. As is the case for the
personal property element, virtually no market data exist that could be used as a
basis from which to derive an appropriate adjustment.
IV. INCOME CAPITALIZATION APPROACH
The income capitalisation approach converts the anticipated future benefits of
property ownership (dollar income) into an estimate of present value. In hotel-
motel valuation this approach involves direct capitalization or a discounting
procedure. For the purposes of this course the focus will be on the direct
capitalization technique and not the discounted cash flow. The discounted cash
flow procedure can be used to determine value and is often the income approach
used in fee appraising, but for the purposes of ad valorem valuation we recommend
using discounted cash flow only in conjunction with and as a check for the value
determined from the direct capitalization approach.
The income approach is generally the preferred technique for appraising income
producing properties because it closely simulates the investment rationale and
strategies of knowledgeable buyers. The approach is particularly relevant to hotel
and motel properties, which involve relatively high risks and are bought mostly for
investment purposes. Most of the data used in the income approach is derived from
the market, which reduces the need for unsupportable, subjective judgment.
The income capitalization approach for hotels and motels is applied in several steps.
1. Estimate the effective annual stabilized gross income based on conditions
existing during the base period. This includes the income generated from
rental of rooms, the food and beverage operation and any other source of
revenue.
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2. Deduct the appropriate expenses to determine the net operating income.
This would include recognition of management and franchising fees, if
appropriate, as well as the recognition for the return on and of personal
property when necessary.
3. Select and apply the proper capitalization rate.
4. Deduct personal property value if it was not recognized as an expense
item.
A. INCOME
Forecasts of income and expenses are usually based on competent
management because the quality of management plays an important role in
the profit potential of a lodging facility. The appraiser must equalize the
effects of varying managerial expertise by assuming that the property being
appraised will be managed competently.
In reality, management quality may be poor, competent, or superior. If the
subject property is currently under poor management, the appraiser is
justified in projecting improved operating results based on competent
management. If, on the other hand, the subject has superior management,
the income and expense used to estimate market value should reflect less
managerial skill - i.e., lower revenue and/or higher expenses.
Market value must represent the actions of typical buyers and reflect
average, competent management.
In order to determine the gross income of a hotel property the appraiser has
to first determine the stabilized average daily room rate and stabilized
annual occupancy rate. Based on this information, rooms' revenue and
other sources of income such as food and beverage sales can be computed.
Expense data can be obtained from actual operating statements or from
comparable properties or nationally published averages.
1. Room Revenue
The base room's revenue is calculated by multiplying the number of
rooms by the average daily room rate, times 365 (the number of days
in the year), times the annual stabilized occupancy rate.
For example, if a hotel has 180 rooms, an average daily room rate of
$95 and a stabilized annual occupancy of 65%, the base room
revenue would be calculated as follows.
180 x $95 x 365 x .65 = $4,057,000 (rounded)
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2. Food and Beverage Revenue
Food and beverage revenue is generated by a hotel's restaurants,
lounges, coffee shop, snack bar, banquet rooms, and room service.
These outlets are both revenue sources and necessary amenities for
the sale of guest rooms. Although some hotels have active lounges
and banquet facilities that draw local residents, in most hotels guests
represent a substantial portion of the food and beverage patrons.
The Uniform System of Accounts for Hotels defines food revenue as
"revenue derived from the sale of food, including coffee, milk, tea
and soft drinks. Food sales do not include meals charged on
employee's (staff) checks.
Beverage revenues are derived from the sale of all beverages not
served with meals. In addition to the revenue generated through the
sale of food and beverages, hotels normally produce other related
income derived from meeting room rental, cover charges, service
charges, and miscellaneous revenue. The combination of food
income, beverage income, and other food and beverage income
equals total food and beverage income.
Food and beverage revenue, if known, can be based on the actual
income received or can be determined based on a percentage of room
revenue that was determined from market studies of similar
properties or published national averages.
3. Telephone/Communication Revenue
Telephone revenue is generated from hotel guests charging local and
long distance calls to their rooms and from out of town patrons using
the howl's public phones. It may also include revenue generated
from other communication resources such as faxes, E-mail, or
modem use. Before deregulation of the telephone industry in the
early 1980s, hotels were limited to a 15% commission charge on
long distance calls. Today, however, the mark up at which hotels
can resell telephone service to guests is not regulated. Because of
this freedom the telephone department has become a profit center.
Telephone revenue varies directly with changes in occupancy.
Telephone revenue can be measured by using a hotel's actual phone
revenue received or can be estimated as a percent of room revenue
based on market studies made on similar local properties or from
national publications.
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4. Other Income
Other income represents revenue derived from sources other than the
sale of guest rooms, food and beverages, and telephone service.
Depending on the type of hotel and the facilities and amenities
offered, other income may include the following revenue items.
Rents charged for store, office, concession, club, or storage
space.
Commissions from auto rental, movie rentals, photography,
telegrams, and vending services.
Concession revenue paid by others for the privilege of
operating departments that might otherwise be operated by the
hotel itself. Gift shops, barbers, and beauty shops are typical
concessions.
Electronic games and pinball machines.
Forfeited advance deposits and guaranteed no-shows.
Interest income from hotel banking house accounts.
Salvage revenue from the sale of old and obsolete items.
Other income is highly sensitive to occupancy and only
slightly sensitive to food and beverage usage so the
appropriate units of comparison would be a percentage of
total room revenue.
When a hotel has extensive retail or office rental space,
recreational amenities, or other significant sources of other
income, a separate category may be used to show this
income.
5. Total Revenue
The base total revenue is calculated by adding the four revenue
components:
a. Rooms
b. Food and Beverage
c. Telephone
d. Other Income
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•
B. EXPENSES
1. Rooms Expenses
Room expenses consist of items relating to the sale and upkeep of
guest rooms and public space. According to the Uniform System of
Accountants for Hotels, the following components make up the room
expenses:
a. Salaries and wages
b. Employee benefits -
c. China, glassware, and linen
d. Contract cleaning
e. Laundry and dry cleaning
f. Operating supplies
g. Reservation expenses
h. Uniforms
Most of the categories comprising room expenses are moderately
occupancy sensitive and slightly rate sensitive, which indicates this
expense category is occupancy sensitive.
Salaries, wages and employee benefits account for a substantial
portion of the rooms' expenses. Because most of these payroll
expenses are dependent upon occupancy, the applicable unit of
comparison should be either a percentage of room's revenue or an
amount per occupied room.
2. Food and Beverage Expense
The food and beverage department expense consists of the combined
costs incurred for the operation of a hotel's food, beverage, and
banquet facilities.
Although food revenue and beverage revenue can be projected
separately, the expenses for these revenue sources are combined into
a single expense category called food and beverage expense.
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The components of the food and beverage department expense
category are:
a. Cost of food consumed
b. Cost of employee meals
c. Cost of beverage sales
d. Salaries and wages
e. Employee benefits
f. Contract cleaning
g. Laundry and dry cleaning
h. Licenses
i. Music and other entertainment
j. Operating supplies
k. Other operating expenses
I. Uniforms
The cost of sales, salaries, and wages comprise the major portion of
food and beverage expenses. These components are moderately to
highly food and beverage sensitive in that they vary directly with
changes in food and beverage volume.
Based on this, the appropriate unit of comparison is a percentage of
food and beverage revenue.
When using this unit of comparison, care must be taken since the
profit margin from the sale of beverages is considerably higher than
the profit from the sale of food. Therefore, a hotel with a higher
ratio of beverage to food sales should have a lower food and
beverage departmental expense ratio.
3. Telephone/Communication Expenses
Telephone expenses consist of all costs associated with the operation
of a hotel's telephone department. For hotels with automated phone
systems, the telephone department may be simply an additional
responsibility for the front desk personnel. In most large properties
the telephone department will have one or more full time telephone
operators to provide the necessary phone service to guests.
Telephone expenses consist of
a. Local calls
b. Long distance calls
c. Rental of equipment
d. Salaries and wages
e. Employee benefits
f. Equipment charges
g. Other operating expenses
h. Printing and stationary
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The bulk of telephone expense is attributable to the cost of local and
long distance calls billed by the telephone companies providing this
service.
Since most of these calls are made by in house guests, these expenses
are occupancy sensitive. Since telephone revenue is largely driven
by a hotel's occupancy, the appropriate unit of comparison would be
a percentage of telephone revenue.
4. Other Expenses
Other income expense covers all the expenses associated with other
income revenue. Typically the appropriate unit of comparison is a
percentage of other income.
The first four expenses listed, (rooms, food & beverage,
telephone/communication, and other) are typically matched to their
appropriate revenue source and can often times be calculated as a
percentage of their matching revenue category.
The remaining expenses are not matched to any specific revenue
source.
5. Administrative and General Expenses
The administrative and general expenses of a hotel include all the
managerial and operational expenses that can not be attributed to a
particular department. For example, the general manager might
work part of the day solving a problem in the rooms department and
then spend the remainder of the day on booking an important food
and beverage function. It would be difficult to allocate the
manager's salary to the individual departments served, so the
category of administrative and general is used.
The components that make up this expense category are:
Salaries and wages Employee benefits
Cash overages and shortages Donations
Commissions on credit cards Insurance
Credit and collection charges Internal audit
Internal communicating systems Data processing
Executive offices Loss and damages
Management fees Miscellaneous
Postage and telegrams Professional fees
Printing and stationary Trade publications
Trade association dues Traveling expenses
Human resources Security
Courtesy transportation Leasing expense
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Most administrative and general expenses are relatively stable.
Considering the components of administrative and general expenses,
the appropriate unit of comparison is a percentage of total revenue.
6. Property Operations and Maintenance Expenses
Property operations and maintenance is another expense that is
largely controlled by management.
Several factors influence the level of maintenance required for a
lodging facility: -
a. The age of the hotel
Some new hotels are protected for several years by the
manufacturer's warranties on new equipment, which
reduces PO&M costs during the initial years of
operation. As hotels age, maintenance costs tend to
escalate.
b. Use of a preventive maintenance system
Some hotel operators adopt preventive maintenance
programs, this allows management to anticipate
possible maintenance problems and correct them early
with a minor repair rather than a major overhaul.
c. Quality of facility
The quality and type of the initial construction can
have a direct impact on future maintenance
requirements. The use of quality building materials
and sound construction methods will generally reduce
maintenance expenditures over the long term. During
the physical inspection the appraiser should carefully
investigate the physical condition, and quality of the
original construction.
Property operations and maintenance are considered operating
expenses and, as such, must only contain components that can be
expensed rather than capitalized under IRS regulations. For
example, if a table leg breaks, repairing the leg would be considered
an expense chargeable to property operations and maintenance. If
the table is replaced, that becomes a capital expenditure that would
not fall into the property operations and maintenance category.
Capital replacement costs are recognized in either a replacement
reserve account or with an expense line item recognizing the return
of personal property. These expense items will be addressed later in
this section.
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•
Since the items in the property operations and maintenance category ?)
are slightly influenced by occupancy levels, the appropriate unit of
comparison is an amount per room.
Property operations and maintenance expenses typically include the
following:
Salaries and wages Employee benefits
Building Curtain and draperies
Electrical & mechanical Elevators
Engineering supplies Floor covering
Grounds and landscaping Furniture
Operating supplies Painting & decorating
Removal of waste matter Uniforms
Refrigeration supplies Miscellaneous
7. Energy\Utility Costs
Energy consumption within a lodging facility typically takes several
forms: water and space heating, air conditioning, lighting, cooking
fuel, and other miscellaneous power requirements.
Energy costs also include the cost of water service.
A large portion of a hotel's energy consumption varies little with
changes in occupancy. Restaurants, kitchens, public areas and
corridors must be continually lighted, heated, and air conditioned,
whether the hotel is full or nearly empty. The energy costs of an
additional occupied room is minimal. Therefore, the unit of
comparison is the total number of available rooms.
8. Business value
As previously noted the hotel business is a labor intensive, retail type
business that relies on customer acceptance and highly specialized
management. The tenants of an industrial property or office building
sign leases for one or more years, but a hostelry experiences a
complete turnover of patronage every two to four days. A bad
reputation spreads rapidly and can have an immediate impact on
occupancy. Further, in addition to the sale of guest rooms lodging
facilities typically derive income from several sources including the
sale of food, beverages, and telephone service, which requires
additional business and management expertise.
The business value of a hotel is also composed of the benefits that
accrue from an affiliation with a brand name hotel company either
through a franchise agreement or management contract. Typically,
chain affiliated lodging facilities outperform independent property
interests.
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The total market value of a hotel is considered to consist of four
components:
1. Value of the land
2. Value of the improvements
3. Value of the business or going concern and franchise
affiliation
4. Value of the FF & E (furniture, fixtures&
equipment; i.e., personal property)
The total of these four components equates to the total market value
of the hotel as a whole. For property tax purposes, for which only
the value of the real estate must be considered, the business value
and personal property value needs to be addressed.
Separating the value of a hotel's business from the value of the real
estate is difficult, but necessary for ad valorem purposes. Deducting
the income of the non-realty items from the property's total stabilized
net income leaves the income attributed to the real estate, which can
then be capitalized into an estimate of value.
The business value can be made up of two components, management
and franchise affiliation.
a. Management Fee
The process of isolating the value of a hotel's business is
based on the premise that, by employing a professional
management agent to handle the day to day operations of the
property, an owner maintains only a passive interest. The
income attributable to the business has been taken by the
managing agent in the form of a management fee.
Therefore, deduction of a management fee (base and
incentive), from the stabilized net income removes a portion
of the business component from the stabilized income stream.
Hotel management fees for an independent nonchain
management company typically run 2% to 4% of total
revenue.
Large chains and nationally recognized agents typically
charge 4% to 8% of total revenues.
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If a hotel is professionally managed, the appraiser should
request to see this contract to ensure that the correct and C
reasonable management deduction is made.
If both management and franchise fee are present, apply both.
b. Franchise Fee
Lodging facilities operated with a franchise affiliation are
subject to the payment of franchise fees. Deducting the
franchise fees from the stabilized net income removes the
remaining portion of the business component from the income
stream.
Chain hotels generally outperform independents, and the
additional value created by increased profits is exclusively
business related.
Franchise fees typically include payment for one or more of
the following: a royalty fee that represents compensation for
the use of the franchisor's name and logo, an advertising or
marketing fee for a chain's entire spectrum of advertising and
marketing services; and a reservation fee for the costs
associated with operating a central reservation system.
Franchising fees are structured based on varying formulas.
Some typical ranges for the fees associated with franchising
are listed below.
Royalty fees are most often based on a percentage of
room revenue and typically range from 3% to 6%.
Advertising and marketing fees, which are typically
based on a percentage of room revenues, may range
from 1% to 3%.
Reservation fees can range from 1% to 2.5% of room
revenue.
When all the fees associated with a hotel franchise company
are measured as a percentage of room revenue, they typically
range from 4% to 9%.
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If total property leases were still the norm, identifying the
income stream to the hotel's real estate component would not
be difficult. But the use of management contracts has
resulted in confusion as to how much of a hotel's income
stream represents the tenant's income, (i. e., income
attributable to the business or going concern), and how much
represents the income to property ownership (i. e., income
attributable to the real estate).
By failing to deduct all amounts payable to the management
company and franchisor from the hotel's income stream, an
appraiser would be valuing hotel properties based on income
attributable to the realty and nonrealty elements.
Appropriate deductions from a typical hotel's income stream
to account for income attributable to the going concern
include base and incentive management fees, royalty fees,
reservation fees, and advertising royalties. If these items are
included in the income stream and then capitalized into an
estimate of the property's value, then that value includes
nontaxable elements.
An example of the calculations of the business value
deduction for a hotel is:
Managed by a nationally recognized hotel chain
Total Revenue Management Fee Bsnss Income
$15,000,000 x 5% = $750,000
Managed by independent with franchise affiliation
Total Revenue Management Fee Bsnss Income
$15,000,000 x 3% = $450,000
Rooms Revenue Franchise Fee
$9,000,000 x 3.5% = $315,000
Total Business Income = $765,000
9. Personal Property Adjustment
Furniture, fixtures, and equipment, or FF&E as they are
called in the trade, are essential to the operation of a lodging
facility and their quality often influences the class of a
property.
FF&E includes, guest room, dining room, and lounge
furnishings; kitchen equipment; front office and
administrative equipment; and items of decor.
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There are two deductions that need to be made to recognize
the personal property component that is included in a hotel's
total value; return of and return on the investment in the
FF&E.
a. Return of Personal Property Investment
A hotel's FF&E are a wasting asset exposed to heavy
use and must be replaced regularly. The periodic
replacement of furniture, futures, and equipment is
essential to maintain the quality, image, and income of
a lodging facility. Capitalized expenditures are not
included in the hotel's operating statement, but they
do effect an owner's cash flow, so an appraiser should
reflect these expenses in an appropriate reserve for
replacement. The reserve for replacement is most
often stated in the management contract or franchise
agreement.
This account, which reduces the hotel's cash flow in
annual installments, is set at the amount necessary to
replace all existing FF&E with new FF&E over an
assumed useful life.
A reserve for replacement allowance can be estimated
using one of two procedures; a percentage of the gross
revenue or as a lump sum deduction which is made
after the net operating income has been capitalized
into a value.
1. Percentage of Revenue Method
The industry norm for a reserve for
replacement; expressed as a constant
percentage, typically ranges from 3% to 5% of
total revenue.
Example:
Total Revenue x % of Revenue = Return of PP
$12,000,000 x 3% = $360,000
In using this approach the income attributable
to the FF&E is treated as an expense and
deducted from the income stream, so when the
net operating income is calculated it only
contains the income attributable to the real
estate.
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Therefore, when the appraiser capitalizes the
net income into a value estimate the resulting
value is only the value attributable to the real
estate component.
2. Lump Sum Deduction
Another way in which to account for the value
of the FF&E is with a lump sum deduction
made after the net operating income has been
capitalized into a final estimate of value.
When this method is employed, the personal
property replacement reserve account has not
been accounted for in the income stream. The
final value when capitalized includes the real
estate as well as the personal property
components.
In order to account for the value of the
personal property the appraiser must make an
adjustment to the final value conclusion.
This is done by making a deduction to the final
value. The lump sum deduction for the FF&E
is the depreciated value of the subject's
personal property that is reported on their
Personal Property Declaration Schedule.
Example:
N0I = $1,250,000
Cap rate = 13.5%
Declared P. P. = $450,000
N0I $1 ,250,000
Cap Rate - . 135
Total Value $9,259,000
Minus P.P. value -$450.000
Value of R.E. _ $8,809,000
In the lump sum deduction method, no deduction is
made in the income stream to reflect the return of
personal property (replacement reserve account).
Therefore, the value of the personal property has to be
removed after the total value (which includes personal
property) has been determined to get the value of only
the real estate.
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Appraisal 215: Hotel / Motel Workshop CATA 2002
Section 2 - Valuation Page 40
b. Return on Personal Property
[ r 41,
The return on personal property is the second
calculation required to estimate the income attributable
to personal property. This calculation is based on the
premise that a property component is entitled to an
annual return equal to the cost of the capital that
comprises that component. In this instance the
component consists of all FF&E currently in use at the
subject property.
The Dictionary of Real Estate Appraisal defines the
return on capital as "the additional amount received as
compensation (profit or reward) for use of an
investor's capital until it is recaptured."
The return on personal property is based on the theory
that a certain cost of capital is associated with the
ownership of personal property.
The rate of return to apply to determine the
recognition of the return on personal property is the
discount rate plus the effective tax rate.
The discount rate can be determined using the
summation method which is made up of four
components, the safe rate, the management rate, the
nonliquidity rate, and the risk rate.
The safe rate is considered to be the 90 day
Treasury Bill as of the valuation date.
The management rate is for the management of
the money, not of the property. Usually, this
rate is from 1% to 3% depending on the size
and complexity of the investment.
The nonliquidity rate accounts for the invested
dollar not being available for other investment
uses within a short period of time. The rate
typically used is the difference between the 90-
day Treasury Bill rate and the U.S. 30 year
Treasury Bond rate as of the valuation date.
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Appraisal 215: Hotel / Motel Workshop CATA 2002
Section 2 - Valuation Page 41
The risk rate provides for an annual return
which is commensurate with the risk assumed
by the investor. Risk rate is determined on an
individual basis depending on each marketing
area. If risk can not be locally determined, a
minimum risk rate can be related to the bond
market by comparing AAA rated Corporate
Bonds with higher risk BBB rated Corporate
Bonds.
Because the personal property taxes have not been
deducted from the stabilized statement of income and
expenses, the effective tax rate is added or "loaded" to
the required rate of return.
The American word mill comes from the Latin word
"mille" which means one-thousandth of a dollar.
To convert mills to decimal equivalents, simply move
the decimal point three places to the left (or divide by
1000).
The effective tax rate is computed by taking
the assessment ratio times the mill levy.
E.T.R. = assessment ratio x mill levy
If the mill levy is 85 mills then the effective
tax rate is:
E.T.R. = 29% x 85 mills, or .29 x .085 =
.0246 (rounded to 2.5%).
Example of the derivation for the rate of return on
Personal Property:
Discount Rate 10.5%
Effective Tax Rate 2.5%
Rate of Return on PP 13.0%
After the rate of return has been determined, it is then applied
to the value of the subject's personal property. The personal
property value is as of the same date as the appraisal. The
value of the personal property can be estimated in a couple of
ways. A personal property appraiser could inventory and
value each item. This procedure, although it would produce
an accurate and supportable value, is time consuming and
costly. A more efficient method is to use the personal
property value assigned by the assessor.
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Appraisal 215: Hotel / Motel Workshop CATA 2002
Section 2 - Valuation Page 42
Example:
If the value of personal property assigned to the subject
property was $900,000, the calculation for the return on
personal property would be:
Assigned Value of Personal Property $900.000
Rate of Return x .13
Return on Personal Property $117,000
The total income attributed to personal property is the
combination of the return of and the return on
personal property.
Return of personal property $360,000
Return on personal property $117 000
Income attributed to personal property $477.000
Deducting the income attributed to the business and
the income attributed to the personal property from the
stabilized net income before real estate taxes results in
the income attributed to the real property components
of the land and improvements.
C. CAPITALIZATION RATE
Capitalization rates are used to convert expected future income into an
estimate of value.
There are several ways to calculate a capitalization rate. Three of these
methods are; the summation method, derivation from market sales, and the
band of investment.
1. Summation Method
In the summation method the appraiser makes a series of upward
adjustments to the different components to reflect the different
elements of risk and the investment burden.
For example, adjustments might be made for the following factors:
Discount Rate
Safe Rate x
Risk Rate x
Non-Liquidity x
Management x
Recapture Rate x
Effective Tax Rate x
Final Capitalization Rate
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Appraisal 215: Hotel / Motel Workshop CATA 2002
Section 2 - Valuation Page 43
a. Discount Rate
The discount rate is defined as the annual percentage rate
reflecting the competitive return on an investment. The
discount rate is made up of four components, the safe rate,
the risk rate, non-liquidity rate and the management rate.
1. Safe Rate
The safe rate is the most obtainable with the most
safety and least risk. For the summation method, it
should be taken from investments having the least
risk. Ninety day U. S. Treasury Bills are one of the
safest investments.
2. Risk Rate
The risk rate is the return commensurate with the risk
assumed by the investor. It is a component because
the return on real estate is a desired return and may or
may not be realized by the investor. Also, the
property may depreciate resulting in a loss when the
property is sold.
If risk can not be locally determined, a minimum risk
rate can be related to the bond market by comparing
AAA rated Corporate Bonds with high risk BBB
Corporate Bonds.
3. Rate for Non-Liquidity
The rate for non-liquidity is necessary since an
investment in real estate ties up money which cannot
be quickly converted to cash. Therefore, real estate is
considered a non-liquid asset. The non-liquidity
portion of the discount rate is typically the difference
between the 90 day Treasury Bill rate and the 30 year
U. S. Bond rate.
4. Rate for Management
The rate for management is a necessary component in
order to compensate for the time and cost involved in
the real estate investment to coordinate the other three
agents of production, labor, capital, and land.
The management rate is for the management of the
money, not the real estate.
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Appraisal 215: Hotel. /Motel Workshop CATA 2002
Section 2 - Valuation Page 44
b. Recapture Rate
The recapture rate is the annual percentage requirement for
returning to the investor a sum equal to the property
improvements value by the end of a given period.
The calculation for computing the recapture rate is 1 divided
by the remaining economic life times the building ratio.
Recapture does not apply to the land component because the
return of the investment in the land occurs at the sale of the
ProPerty.
For example, if the remaining economic life of the subject is
40 years the recapture rate is (1 -:- 40 = .025) x .80,
assuming the building value is 80% of the total value..
2. Market Comparison
In order to develop a capitalization rate using this method you need a
sufficient number of sales where you also know the net income.
The capitalization formula using the market comparison method is:
Rate = Net Income -:- Value.
Income is the net income and value is the sales price.
Points to consider in the market comparison method are:
a. The sold properties must be reasonably comparable.
b. Sales prices and net incomes must be reliable. For hotels
this means the sold prices have to be adjusted to reflect only
the real estate, all of the non-realty value must be deducted.
c. There must be enough sales to reflect the market
conditions.
Example:
Property Sales Price = $3,200,000
Net Income = $410,000
Capitalization Rate = $410,000 -:- $3,200,000 = .128 = 12.8%
66
Appraisal 215: Hotel / Motel Workshop CATA 2002
Section 2 - Valuation Page 45
Market derived capitalization rates for hotels are susceptible
• to the same shortcomings inherent in the sales comparison
approach.
3. Band of Investment
Because most properties are purchased with debt and equity capital,
the overall capitalization rate must satisfy the market return
requirements of both investment positions. Lenders must anticipate
receiving a competitive interest rate commensurate with the
perceived risk of the investment or they will not make funds
available. Similarly, equity investors must anticipate receiving a
competitive equity cash return commensurate with the perceived risk
or they will invest their funds elsewhere.
The discount rate developed by the band of investment is a composite
rate, weighted in proportion to the total property investment
represented by debt and equity.
To develop a discount rate using the band of investment the appraiser
needs to research the cost of the debt component. One way to collect
this information is by surveying lenders who are actively making
hotel loans. Because this method is often difficult due to the inability
to fmd lenders who are knowledgeable and willing to share this
information, a better and more reliable approach is for the appraiser
to rely on sources that regularly collect, analyze and publish this
information.
One good source for this data is the American Council of Life
Insurance.
In the Band of Investment technique the capitalization rate is
computed as the weighed average of the returns required by the
mortgage and equity funds.
Example:
If a lender is willing to make a loan for 75% of a property's
value at 9.5% interest, and the equity investor demands a
return of 14% on the remaining 25% position, the indicated
discount rate would be
Position WeightRate Weighed Average
Mortgage .75 x .095 = 0.07125
Equity .25 x .14 = 0.03500
Indicated Discount Rate 0.10625 or 10.6%
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Appraisal 215: Hotel / Motel Workshop CA
TA TA 2002
Section 2 - Valuation Page 46
For ad valorem purposes the local effective tax rate as well as the recapture /,
rate would need to be added to the 10.6%
After the capitalization rate has been established the value of the subject can
be estimated by dividing the net income by the capitalization rate.
68
MAY-27-03 12:17 From: T-709 P.11/19 Job-305
LETTER OF AUTHORIZATION
To Whom It May Concern:
Property Owner Name: LONGMONT GROUP INC
Hereby appoints and authorizes Deloitte&Touche LLP as agent to represent our firm's property and all
property controlled by our firm or any of its subsidiaries of partnerships on all matters pertaining to ad
valorem taxes. Until written notice of termination is issued,they have the right to file returns,examine
records,obtain all tax statements,and discuss or appeal any tax assessments to the proper authorities when,
in their opinion,the assessment does not constitute fair market value. In addition they have the right to file
appeals to the appropriate jurisdiction,
jurisdiction,if authorized by law.
By:
r._ („A
Name: Navin C.Dimond
Title: President
Address: 9100 E.Pgnnrama Dr.,Englewood CO 30112
Phone Number: fja3.3100
Parcel/Schedule Number(s):
R0085887
Subscribed and sworn before me this 27 day of May ic{t/ ,20 Q3 .
Ac
Notary Public,State of ( D Ofl''p[C)
My commission ex ires 11Y ,20t / .
LYNDA K. LAUGHLIN
NOTARY PUBLIC 1/4
STATE OF COLORADO
Stnnebridge—Super S Motel
PAGE 11118'RCVD AT 51271200312:01:12 PM[Mountain Daylight Time'SVR96'DNIS:363'CSID:"DURATI0N pnm.ss):0440 6 9
a
l CLERK TO THE BOARD
PHONE (970) 0 EXT 4217
FM: (3(3033)352-0242
WEBSITE: www.co.weld.co.us
' 915 10TH STREET
P.O. BOX 758
Wa
C. GREELEY, COLORADO 80632
COLORADO
July 18, 2003
LONGMONT GROUP INC
9100 E PANORAMA DR #300
ENGLEWOOD CO 80112-7207
Parcel No.: 131310100039 Account No.: R0085887
Dear Petitioner(s):
The Weld County Board of Equalization has seta date of July 28,2003,at or about the hour of 4:00
PM, to hold a hearing on your valuation for assessment. This hearing will be held at the Weld
County Department of Public Health and Environment, Room 210, 1555 North 17th Avenue,
Greeley, Colorado.
You have a right to attend this hearing and present evidence in support of your petition. The Weld
County Assessor or his designee will be present. The Board will make its decision on the basis of
the record made at the aforementioned hearing, as well as your petition, so it would be in your
interest to have a representative present. If you plan to be represented by an agent or an attorney
at your hearing, prior to the hearing you shall provide, in writing to the Clerk to the Board's Office,
an authorization for the agent or attorney to represent you. If you do not choose to attend this
hearing,a decision will still be made by the Board by the close of business on August 5,2003,and
mailed to you on or before August 12, 2003.
Because of the volume of cases before the Board of Equalization, all cases shall be limited to 15
minutes. Also due to volume, cases cannot be rescheduled. It is imperative that you provide
evidence to support your position. This may include evidence that similar homes in your area are
valued less than yours or you are being assessed on improvements you do not have. Please note:
The fact that your valuation has increased cannot be your sole basis of appeal. Without
documented evidence as indicated above, the Board will have no choice but to deny your appeal.
If you wish to obtain the data supporting the Assessor's valuation of your property, please request
it directly from the Assessor's Office by fax (970) 304-6433, or by calling (970) 353-3845.
LONGMONT GROUP INC - R0085887
Page 2 •
Please advise me if you decide not to keep your appointment as scheduled. If you need any
additional information, please call me at your convenience.
Very truly yours,
BOARD OF EQUALIZATION
Carol A. Harding
Deputy Clerk to the Board
cc: Stanley Sessions, Assessor
DELOITTE &TOUCHE LLP
555 SEVENTEENTH STREET SUITE 3600
-DENVER CO 802023942
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