Hotel Valuation Questions

3 Replies

Greetings - I have a client whom is interested in potentially selling a large hotel (multiple buildings) located in the Downtown CBD Core of Eastern Washington (state). Sales comparable are not readily available for the hotel industry so I am curious as to how most investors are valuating these investments on both acquisition and disposition. There are obviously a lot of variables; however, I am just looking for some general guidance. I have a good grasp of valuation on most all other commercial asset classes, just not sure what I need to tweak to accommodate hotel type asset.

Thank You! 

Hi Zach,

Comparable sales are the best indicator; I also recommend speaking with a commercial broker who specializes in this area. My firm, Brown Harris Stevens, has a deep national and international sphere with thousands of affiliates- let me know if you'd like me to connect you to our partners in Washington State.

I studied Hotel & Restaurant Management in college- I recommend taking the total # of keys (rooms) in the hotel, multiply by 365, which leads you to the maximum number of stays per year, and find out the average cost per night, and the average rack rate (highest price someone is willing to pay) for the hotel. From there you'd find out the hotel's total expenses, and you'd get the fixed expenses, variable expenses and finally the net operating income. You'd also be factoring in the land, amenity spaces, etc into the mix.. the commercial broker will be able to lend best insight into your market. 



@ zach

Earlier in my career, I did hotel appraisals (market valuations) for two (2) of the largest hotel consulting companies in the world.

The short answer to your question which requires a lengthy explanation is:

(1)  Find recent hotel cap rates - Companies like Jones Lang LaSalle and others have quarterly/regular reports for hotels.  Cap rates are the single most important variable.  Type of hotel is important.  Type in Google "Hotel Cap rates 2015".  Here is one example.

(2)  Sales Comparables - Find similar quality/star hotels in the geographic area.  If limited service, then find limited service comps.  Look on a per rooms basis and cap rates if you can find them.

(3)  Back-of-the-envelope calculation (rough estimate):  Take the ADR (average daily rate) of the property (e.g. $120/night) and multiply by 1,000 (i.e. $120,000).  Take the number of rooms (e.g. 200 rooms) and multiply by the number above (i.e. $120,000) and get a rough estimate $24 MM.  This is a very rough estimate and there are very many factors, but that will start to get you in the ball park.  This method only considers revenue (ADR) and doesn't take into account operating expenses (i.e. profitability), so it is just a rough estimate.

I hope that is helpful.