The mass appraisal of hotels

The Mass Appraisal of Hotels
BY TIM WILMATH, MAI, AND KEN ENGEL, CFE

T he mass appraisal technique was
developed to enable assessors to
accomplish the challenging task of esti-
is possible through the use of regression
analysis or ranking analysis.

mating a value for each of the thousands Hotel Segmentation
of properties in their jurisdictions. The The first step in the mass appraisal of
IAAO defines mass appraisal as: “The hotels is to segment them into different
process of valuing a group of properties categories. The best way to do this is to
as of a given date using common data, follow industry classifications. In general
standardized methods, and statistical all hotels can be put into one of the fol-
testing.” (IAAO 1999) In plain English, lowing categories:
mass appraisal is simply the automation
• Resort
of the single-property appraisal ap-
proach. Many property types are ideal for • Luxury
the application of mass appraisal, such as
• Full Service
single family homes. However, because
of the complexities involved in valuing • Limited Service
hotels, many assessors find themselves
• Extended Stay (also known as
performing single-property appraisals
all-suite)
rather than utilizing mass appraisal.
With reliable data, the assessor can • Convention Hotels
create mass appraisal models that incor-
porate all of the elements that make up Resort Hotels
a hotel’s value. Creating income models Resort hotels are generally distinguished
can be accomplished by utilizing local through their use of special recreational
data and industry sources. Cost models facilities. For example, a golf resort, as the
can be created using the Marshall & Swift name implies, would offer its guests access
cost manuals (annual). Creating sales to a golf course, a pro shop, and usually the
comparison approach models can be dif- option of taking lessons. A health resort
ficult due to the lack of sales; however, it may offer extensive facilities with exercise

Tim Wilmath, MAI, is Director of Valuation Process for the Hillsborough County Property
Appraiser’s Office in Tampa Florida.
Ken Engel, CFE, is a Commercial Analyst with the Hillsborough County Property Appraiser’s
Office.

Journal of Property Tax Assessment and Administration • Volume 2, Issue 1 15

themselves through impeccable facilities
and extensive concierge and personal
guest services.

Full Service Hotels

Photo courtesy of Saddlebrook Resort, Tampa, FL

equipment, trainers, therapeutic massages, Full service hotels differentiate them-
and various other health-related amenities. selves from limited service hotels by
The objective of these hotels is to make offering in-house dining facilities and
their facilities an end destination, and not cocktail lounges, and by providing a
necessarily dependent on other attractions wider range of amenities like swimming
in the area to draw guests. Most resort ho- pools and fitness centers. Many cater
tels offer extensive amenities in addition to business travelers and have on-site
to those that support their theme, such as meeting rooms or conference centers.
indoor and outdoor swimming pools, sau- Business amenities like desks and Inter-
nas, spas, exercise facilities, restaurants and net access may be provided in rooms.
lounges, and on-site retail shopping.
Limited Service Hotels
Luxury Hotels

The goal of limited service hotels is to
A luxury hotel is a full service hotel with provide a clean, comfortable room at
exceptional amenities, rooms, and service. an affordable rate. They do not provide
They generally are not theme oriented, but full dining facilities. Some have small
many offer day spas and tennis facilities kitchens and may offer free breakfast
as part of their amenity packages. They for guests. They cater to families, leisure
often provide a multitude of luxurious travelers, and budget conscious business
amenities including elegant rooms and travelers. Many are affiliated with a na-
fine dining opportunities. They usually tional chain. Amenities are limited but
contain a choice of restaurants and may may include a pool. These hotels usually
offer on-site shopping facilities as well. have fewer and smaller rooms than full
The finest of these hotels distinguish service hotels.

16 Journal of Property Tax Assessment and Administration • Volume 2, Issue 1

Extended Stay or Suite Hotels Quality Classes
Individual hotels within each of these
segments can be further subdivided
into quality classes. These classes should
reﬂect location, condition, age, ameni-
ties, and overall quality. For example, a
class “A” property usually has the most
desirable location, generally receives the
highest income, is typically newer, and
contains extensive amenities and supe-
rior construction quality and condition.
A class “B” hotel may be slightly older
These hotels are designed to appeal to or less maintained, lack some of the
travelers who need accommodations amenities, and/or may have an inferior
for a week at a time. The amenities are location and income to its class “A” coun-
more like those found in an apartment terpart. A class “C” hotel may be another
such as fully equipped kitchens. They level lower in these attributes.
usually do not have a restaurant but may
have a small commercial kitchen for Approaches to Value—Mass
breakfast preparation. The better-quality
Appraisal
properties are generally afﬁliated with
a national chain. They typically charge Of the three approaches to value, the in-
weekly rates that are below those of com- come approach is the preferred method
parable full service hotels. to value hotels. The price a buyer is will-
ing to pay for a hotel property is directly
Convention Hotels tied to its income potential. Although
the sales comparison approach and cost
approach serve important functions in
the hotel valuation process, ultimately
the income approach is given the most
weight.
In mass appraisal, the three approach-
es to value are applied through the use of
“models.” Models are intended to simu-
late market behavior. After reviewing all
available data, these models are created
and then applied across classes of hotels.
This method of assigning models to hotel
Photo courtesy of Saddlebrook Resort, Tampa, FL properties can result in a reliable and
equitable assessment.
Convention hotels, as one might expect,
Income Approach
are usually located near convention cen-
ters. They generally have a large number For most commercial properties, the
of rooms. Since they are geared for meet- income approach can be used to esti-
ing groups, they usually contain ample mate value by capitalizing rental income.
meeting space and banquet facilities. However, capitalizing hotel rent is not
They typically have several restaurants possible because entire hotels are not
and lounges, with some providing leased. In addition, a hotel earns its rev-
nighttime entertainment. They gener- enue not only from room rental but also
ally provide ample business and leisure from food and beverage sales, and mis-
amenities. cellaneous services such as telephone,


laundry, and fitness centers, for example. accomplished within a mass appraisal
For hotels, these revenues and the asso- model.
ciated expenses can be used to measure To create mass appraisal models for
the value of the entire operation, or what hotels using the income approach, four
is known as the going concern. key items are required: an estimate of
The going concern includes the gross revenue, occupancy, expenses, and
value of the real estate, the value of the a capitalization rate. Once obtained, this
personal property, and the value of the data can be used for each of the five hotel
business. The real estate derives value classes. The following are sources that
from its location and ability to house can be employed to estimate income,
guests. The personal property derives occupancy, and expenses:
value by allowing the owner/manager to • Actual income submitted by the
generate revenue from its use, and the taxpayer
business derives value from its ability to
successfully run the entire operation. • PKF—Trends in the Hotel Industry
These three items are needed for a (annual)
hotel to operate successfully. Since busi- • Smith Travel Research (STR)—
ness value is not assessed and personal The Host Study (annual)
property is usually assessed separately, it
is necessary to exclude these items from • State sales tax records
the final assessment. To accomplish this,
the value of the entire going concern is Actual Income and Expenses
estimated and then allocated to each of Actual income and expense statements
its three components. This task can be submitted by the taxpayer are the best

Figure 1. Typical Hotel Income and Expense Statement


source of a hotel’s operating history. excluded from the direct capitalization
Care should be taken when reviewing approach, such as depreciation, interest,
a hotel’s actual income and expenses and capital expenditures. For property
because the goal when creating models assessment purposes, the expenses are
is an estimate of a “stabilized” income also adjusted to exclude property taxes.
stream. From year to year, a hotel’s ac- (This expense will be included by “load-
tual revenue and expenses may ﬂuctuate ing” the capitalization rate with the local
due to weather, poor versus superior tax rate.)
management, renovations, and other Many hotel operating statements do not
factors. Similarly, ﬁnancial statements include expenses that should be included
often include expenses that should be in a direct capitalization approach, such

Figure 2. Sample Page from PKF’s Trends in the Hotel Industry

© 2003 Pannell Kerr Forster. Reprinted with permission.


as reserves for replacement, manage- information is available to the assessor, it
ment expense, and franchise fee. Once can be extremely valuable in determin-
reviewed and adjusted, actual income ing a hotel’s actual revenue.
and expense data submitted by taxpayers
should be compiled and segregated by ho- PKF Trends
tel class. Figure 1 shows a typical income Another excellent source of hotel perfor-
and expense statement for a hotel. mance is PKF’s Trends in the Hotel Industry
In some states, assessors have access (annual). This yearly publication reports
to sales tax data from the government hotel revenue, expenses, and profit data
agency responsible for collecting sales for each of the five hotel categories with
tax. This data is typically confidential and further breakdowns for geographic re-
not available to the general public. If this gion. Data in each of these categories

Figure 3. A Sample Page from Smith Travel Research’s The Host Study

© 2003 Smith Travel Research. Reprinted with permission.


include average daily rates, number of Capitalization Rates
hotel rooms, and the top hotels versus An important component of the direct
average hotels. In addition, revenue is capitalization process is the estimate of
further stratified by room revenue, food the capitalization rate (cap rate). Two
and beverage income, telecommunica- techniques are suggested for estimating
tions income, and miscellaneous revenue. cap rates for hotels.
Expenses are similarly segregated.
For modeling purposes, the data • Extraction from sales
from PKF’s Trends should be adjusted to • Industry surveys
exclude property taxes and include an Extracting capitalization rates from
estimate of reserves for replacements. hotel sales provides a good indication
A sample page from the Trends report is of local activity. Sales of hotels are com-
shown in figure 2. plicated by the potential inclusion of
personal property and/or business value.
Smith Travel Research The recorded sales price may or may not
Smith Travel Research sells a variety of reflect consideration for the real estate
publications related to hotel performance. only. Often purchasers perform sales
One of the most helpful to appraisers is price allocations (separating real estate,
The Host Study. This report provides in- personal property, and business) for in-
come and expense items broken down by come tax purposes. Unfortunately, there
hotel type, geographic region, and other is rarely any indication on a deed whether
categories. A sample page from The Host a sales price has been allocated. Only
Study is shown in figure 3. through research and/or verification can
As with other income and expense in- the appraiser be sure what the recorded
formation, the data from The Host Study price included. Often these purchase
should be adjusted to exclude property details are reported in the Securities and
taxes. One difference between The Host Exchange Commission (SEC) filings or
Study and PKF’s Trends is that The Host a company’s annual report (such as the
Study includes a reserve for replacement excerpt from Highland Hospitality’s 2003
expense while Trends does not. annual report in figure 4).

Figure 4. Hotel Annual Report Describing Purchase Price Allocation


Industry publications provide an ex- the most knowledgeable and respected
cellent source of capitalization rates for appraisers disagree about the best way
hotels. A few of these sources include: to measure business value. Over time,
Korpacz Real Estate Investor Survey, CB several techniques have evolved that iso-
Richard Ellis National Investor Survey, Real- late business value. A summary of these
tyRates.com Investor Survey, and USRC Hotel methods follows:
Investment Survey. Capitalization rates
from these sources (such as the sample Cost Approach Method
report from RealtyRates.com in figure Since the cost approach inherently
5), along with extracted hotel sale cap excludes business value, it is an excel-
rates, provide the appraiser or assessor a lent approach for isolating the value of
reliable indication of overall rates. Simi- the real estate. Simply comparing the
lar to revenue and expenses, cap rates final value via the cost approach to the
vary depending on hotel type and class, value of the going concern (excluding
and should be stratified accordingly. personal property) could indicate the
presence of business value. The cost ap-
Business Value proach does have limitations, however.
In most jurisdictions, only real estate As properties get older, it can be difficult
and personal property are assessed. to measure depreciation. For new hotels,
However, a hotel is more than “sticks this approach is excellent and for older
and bricks.” It is an operating business ones it still provides an excellent check
that provides services to its customers on other methods.
above and beyond the rental of the real
estate. Consequently, the assessor must Rushmore Approach
understand both the hotel industry and This method was developed by Stephen
techniques for excluding or removing Rushmore, president of Hospitality
any business value in order to accu- Valuation Services International. In
rately estimate a hotel’s value. Some of this method, the management fee and

Figure 5. Cap Rate Indices from RealtyRates.com

*2nd Quarter 2004 Data © 2004 RealtyRates.com. Reprinted with permission.


franchise fee are deducted from the net generating capability is attributable to
operating income, and the capitalized the business, not the real estate. The
value of these two fees is considered busi- difficulty in applying this technique
ness value (more on this approach later). comes in selecting truly comparable
This technique to isolate intangibles has hotels for comparison and confidently
been used successfully in many court attributing revenue differences to man-
cases and, in the authors’ experience, is agement versus location, condition, or
the best approach for excluding business other factors.
value in a mass appraisal model.
Proxy Method
Business Start-up Costs Method This approach imputes a rent for the
Also known as the Business Enterprise various profit centers (rooms, restau-
Approach, this theory suggests that in rants, laundry, retail space, and such).
addition to deducting a management This rent is then capitalized to obtain an
fee and franchise fee, a deduction estimate of value for each of these vari-
should be made to reflect the original ous areas. These individual estimates are
“start-up” costs the hotel incurred when then summed to obtain a total real estate
it was built. Start-up costs include assem- value estimate. Since few, if any, hotels
bling and training staff and marketing are leased in this fashion, it would be
the new hotel. The premise is that an difficult, if not impossible, to obtain rent
owner expects to recapture these costs comparables for the various profit cen-
throughout the life of the property and ters. The use of rent comparables from
therefore they should be amortized and other property types would probably not
deducted annually. be very reliable either because of the
Critics of this method argue that there unique nature of these services within
is no indication that a buyer would pay an the hotel environment. Capitalization
owner an additional sum for these costs rates and expenses for the various profit
because they are already present in the centers (under this lease assumption)
annual operating statement. Moreover, would be equally difficult to estimate.
for many hotels, the original workforce
that was assembled when the hotel was Business Value Summary
new no longer exists. Hotels historically Of the various options to measure busi-
have a very high employee turnover rate ness value, the authors’ jurisdiction uses
and they must advertise for, hire, and the Rushmore approach. This method
train a large portion of their workforce was chosen to measure and exclude
every year. Since the existing workforce intangibles because it is straightforward,
was likely assembled through expendi- easy to understand, and, in the authors’
tures in the annual operating budget, experience, the most defendable.
and therefore, already accounted for in As indicated previously, this approach
the income approach, critics charge that capitalizes the management fee and
deducting the original operating costs franchise fee to isolate the business
would represent double counting. value. The premise is that no one would
pay more for the business portion of the
Excess Profits Method hotel than the cost to replace it. The cost
This approach says that if a value en- of replacing business aspects is the cost
hancement is created due to a hotel’s of hiring a hotel management company
superior management, it can be mea- to run the hotel and affiliating with a
sured by comparing its revenue per known “brand.” Many companies and
available room (RevPAR) against its hotel chains such as Marriott, Hyatt, and
competition. The premise is that two Hilton provide these services. The cost
hotels being equal, any superior revenue of hotel management and chain affilia-


tion currently ranges from 3% to 10% of revenues. Since management fees are
total revenue (Pannell Kerr Forster 2004; based on a percentage of revenue, higher
Smith Travel Research 2004). revenues result in higher management
Using the Rushmore method, re- fees and ultimately a higher business
moving the value of the business from value allocation. Conversely, declining
the going concern is accomplished by revenues would lower the management
capitalizing the management fee and cost resulting in a lower business value
franchise fee, then deducting that value estimate.
from the value of the going concern. An There are many techniques for mea-
alternative method that accomplishes suring and removing business value.
the same result is to simply include the Capitalizing the management fee and
management fee and franchise fee in franchise fee, in the authors’ view, results
the operating expenses of the income in a value that replicates what an investor
model. The inclusion of these costs will would pay for a business. This method
reduce the net operating income (NOI) has seen acceptance in the courts and is
and effectively remove the business value widely used in the appraisal industry. In
from the final value. addition, it is fairly straightforward to
These two techniques are demonstrat- apply in the income approach and in a
ed in figure 6. While Method 2 results mass appraisal model.
in the same value for the real estate as
Method 1, several steps are saved by us- Personal Property
ing Method 2. A hotel requires significant personal
Another benefit of the Rushmore property to operate. This includes room
approach is that the business value al- furnishings, restaurant fixtures, and
location rises and falls with the success other miscellaneous furniture, fixtures,
or failure of management. Superior and equipment (FF&E). Since most per-
management is rewarded with higher sonal property is assessed separately from

Figure 6. Two Techniques for Removing the Business Value from the Going Concern Value
Method 1. Capitalizing Management Fee and Franchise Fee
Total Revenue $1,000,000
Total Expenses (excluding mgt. and franchise fee) $ 700,000
Net Operating Income $ 300,000
Capitalization Rate (includes tax rate) 12.0 %
Total Property Value $2,500,000

Business Value Calculation
Mgt. and Franchise Fee–8% of Revenue $ 80,000
Capitalization Rate (includes tax rate) 12.0%
Business Value $ 667,000

Value of Real Estate & FF&E ($2,500,000 - $667,000) $1,833,000

Method 2. Including Management Fee and Franchise Fee in Expenses
Total Revenue $1,000,000
Total Expenses (including mgt. and franchise fee) $ 780,000
Net Operating Income $ 220,000
Capitalization Rate (includes tax rate) 12.0%
Value of Real Estate & FF&E $1,833,000


annual basis to replace these items as
they reach the end of their useful lives
(similar to reserves for short-lived real
estate items). Although many hotel own-
ers do not show this expense on their
income statement, the appraiser or
assessor should assume these expenses
exist by imputing them in the income
approach.
“Return Of” and “Return On” are
terms often used to describe techniques
Photo courtesy of Saddlebrook Resort, Tampa, FL for removing the personal property from
the income approach of a going con-
the real estate, the value of the personal cern. “Return Of” is simply recapturing
property must be excluded from the ﬁnal the FF&E through a reserve for replace-
assessment of the real estate. ment. If you have allowed an expense for
For states that assess personal prop- reserves of FF&E, you have accounted for
erty, allocating value to the personal the “Return Of.”
property is fairly easy, since it has already The “Return On” personal property is
been valued independently of the real a method of estimating the value of the
estate. Deducting the assessed value of FF&E by assigning a portion of the income
the FF&E from the income approach stream to the personal property and then
is appropriate and achieves the goal of capitalizing it to determine its contributory
separating its value from the real estate; value. For assessors, a quicker method to
however, one more step is required. remove the value of the personal property
A hotel’s personal property does not is to simply deduct its current assessment
last forever, and therefore, requires from the value of the going concern.
periodic replacement. A prudent Some practitioners argue that both the
owner would set aside monies on an assessed value of the FF&E and a “Return

Figure 7. 2004 Hillsborough County Hotel Models by Type and Quality


On” should be deducted in the income and overall quality should have similar
approach. The argument suggests that models assigned.
the FF&E contributes more than just its
assessed value because an owner expects Cost Approach
to make a profit on its use. However, this Although the income approach is the
profit has already been considered in the preferred method for estimating the
previous deduction for business value. value of a hotel, the cost approach still
The management fee and franchise fee serves an important function. For new
cover both the cost of operating the hotel hotels and as a check against other
and the personal property. Any business valuation methods, the cost approach
value resulting from the operation of provides the appraiser or assessor with
the FF&E has already been accounted an excellent alternative. The Marshall
for by capitalizing the management fee & Swift Valuation Service has a complete
and franchise fee. Deducting both the as- section on hotels, broken down by hotel
sessed value of the personal property and segment (limited service, full service,
a “Return On” that same property could and so on.) and quality class. Figure
be considered double counting. 8 is an excerpt from the commercial
In the authors’ opinion, imputing an manual.
expense for reserves for replacement of Most assessors’ Computer Assisted
the FF&E and deducting the personal Mass Appraisal systems (CAMA) utilize
property assessment sufficiently excludes the cost approach. In the authors’ ex-
the FF&E from the income approach. perience, the cost approach is the most
widely used approach in mass appraisal.
Reconciliation Critics of the cost approach will argue
Once all sources of income, occupancy, that depreciation is difficult to measure,
expenses, and capitalization rates have particularly in older buildings. Although
been compiled, models for each of the the measurement of depreciation can
classes of hotels can be created. Figure be challenging, the difficulties are not
7 provides an example of hotel models insurmountable. A significant differ-
for Hillsborough County, Florida, for the ence between the value calculated by the
2004 tax year. cost approach and that by the income
The total income for each of the mod- approach may indicate the presence of
els is intended to reflect what hotels in obsolescence.
each class would actually experience on One point worth mentioning—asses-
a stabilized basis. The expenses include sors should be wary of valuations that
reserves for replacement for both real es- contain external obsolescence in the
tate and personal property. The expenses cost approach and a deduction for busi-
also include a management fee and ness value in the income approach. It
franchise fee, which effectively removes is unlikely that an investor would pay a
any business value. After the models are premium for the business value of a hotel
applied, the personal property assess- suffering from external obsolescence.
ment should be deducted, resulting in
an estimate of only the real estate. Sales Comparison Approach
If available, using a hotel’s actual Aver- The sales comparison approach or
age Daily Room Rate (ADR) as a guide market approach is the most direct in-
will help the appraiser in assigning the dication of what a hotel would sell for.
correct model. Care should be taken However, it is probably the most difficult
to ensure a hotel’s actual ADR is stabi- of the three approaches to apply. Using
lized and is not affected by short-term this approach requires the appraiser or
issues such as remodeling. Hotels with assessor to:
similar locations, condition, amenities,


• Obtain information regarding sales comparison approach is the neces-
the circumstances surrounding sity to make adjustments for differences
the sale between amenities, location, physical
• Obtain financial and physical condition, and operating performance.
aspects of the hotel These adjustments are often subjective.
Since most hotels are bought on the basis
• Allocate the price between real of their earning power, access to actual fi-
estate, FF&E, and/or business nancial data would be extremely helpful
• Extract and apply appropriate in making these adjustments. However,
adjustments for differences these data are typically unavailable.
between the subject and com- Mass appraisal models for hotels using
parable properties stepwise regression have been created
by John W. O’Neill, MAI, CHE, PhD,
Applying mass appraisal techniques an assistant professor at the School
to hotels using the market approach of Hotel, Restaurant and Recreation
is particularly difficult due to a lack of at The Pennsylvania State University.
sufficient comparable sales. In Tampa, O’Neill created his regression model
a fairly large city (ranked 21st among using 327 sales nationwide spanning 12
all metropolitan statistical areas in the years (1990-2002). Since the sales data
United States), there were only 17 hotel used in O’Neill’s study (2004) is pro-
sales during the past three years. Strati- prietary and data on hotel sales outside
fying these sales by property type (full an assessor’s jurisdiction are typically
service, limited service, and so forth.) not available, it is unlikely that a similar
leaves very few sales for each category. analysis could be performed at the local
Further complicating the use of the level. However, the results of O’Neill’s

Figure 8. Marshall & Swift’s Hotel Cost Estimates by Segment and Class

© 2005 Marshall & Swift, L.P. Reprinted By Permission. Further Reproduction Is Expressly Prohibited.


study can be useful. Not surprisingly, against the value determined by the in-
O’Neill’s models indicated that four key come approach.
factors affect the selling price of a hotel:
number of rooms, net operating income, Conclusion
average daily room rate, and occupancy. Hotels are one of the most difficult
His analysis indicates the importance of properties to value for appraisers and
the income approach for valuing these assessors alike. These properties are
property types. complicated by the fact that they are
In the absence of sufficient sales to a combination of real estate, personal
create mass appraisal models for hotels, property, and an operating business.
many assessors resort to single-property This article focused on the creation of
appraisal—essentially valuing one hotel mass appraisal models to value hotels.
at a time. Although this method is ac- These models can be created utilizing
ceptable, it can be time-consuming and readily available data and can be struc-
difficult. Assessors should consider a tured to exclude business value.
technique known as “ranking analysis.” Because hotels are typically bought and
(Appraisal Institute 2001) In ranking sold on their ability to generate revenue,
analysis, comparable sales are ranked the income approach is the preferred
in descending or ascending order. An approach to value. Data concerning
example from Hillsborough County is average daily room rates, occupancy,
shown in figure 9. After reviewing the expenses, and capitalization rates can be
sales, the assessor then determines the obtained from company financial reports
relative position of the subject in the and industry publications. This data can
array. The comparables are identified as be used to create mass appraisal income
either inferior or superior to bracket the models. Although less reliable than the
probable value range of the subject. income approach, the cost approach
The sales comparison approach is provides a valuable check against other
typically the best method to determine valuation methods. The cost approach
the probable sales price of a property. is particularly useful in new hotels and
However, with the lack of sufficient hotel lends itself very well to mass appraisal.
sales, this method is best used as a check Because of a lack of sufficient sales, the

Figure 9. Comparable Sales of Limited Service Hotels Ranked by Price Per Room


sales comparison approach is the least expense, occupancies, and profit data
adaptable to mass appraisal. The assessor nationwide. The price for this publica-
can use the “ranking analysis” method tion is approximately $295.00
to array sales, then bracket the subject STR—Smith Travel Research (www.
accordingly. Again, this approach should smithtravelresearch.com) publishes a
probably only be used as a check against report entitled The Host Study. Similar to
income-approach results. PKF’s Trends report, the Host Study pub-
There is an ongoing debate about lication provides in-depth survey results
how to separate the three aspects of for hotel income, expense, and other
a hotel property’s value, that of real benchmarks. The price for this publica-
estate, personal property, and the ongo- tion is approximately $295.00.
ing business. For personal property, it is Hospitality Internet Media, L.L.C.’s
the authors’ opinion that imputing an www.hotel-online.com is a Web site that
expense for reserves for replacement of reports all the latest news on hotels and
the FF&E and deducting the personal the lodging industry throughout the
property assessment sufficiently excludes United States. The Web site provides
the FF&E from the income approach. news articles, classified ads, and links to
Of the several methods presented for many other hotel-related Web sites. This
estimating business value, the authors’ Web site is free.
believe that the simplest and most effec- Korpacz Real Estate Investor Survey (www.
tive method for ensuring that business korpacz.com) provides capitalization
value is excluded from a hotel’s assess- rates and other market data, commentary,
ment is to include a management fee and and analysis on a variety of commercial
a franchise fee in the operating expenses properties including hotels. Published
of the income approach. quarterly by PriceWaterhouseCoopers, an
Uncredited photos and charts were provided annual subscription is $375.00.
by the authors. CB Richard Ellis National Investor Survey
(www.CBRE.com) is an annual publica-
Hotel Data Sources tion that reports capitalization rates for
15 class A, B, and C income-producing
This list of hotel data sources is by no
properties. The annual cost for the Inves-
means exhaustive. However, these re-
tor Survey is $100.00.
sources have been most helpful to the
www.RealtyRates.com is an Internet
authors in developing hotel assessments
subscription service which publishes
in their jurisdiction. All prices quoted
several surveys with capitalization rates,
were as of January 2005.
rents, expenses, vacancies and other
Hotels and Motels: Valuations and Market
data for all major income-producing
Studies by Stephen Rushmore, MAI, and
commercial properties. The reports are
Erich Baum, is a publication of the Ap-
published quarterly and are $79.00 for
praisal Institute (www.appraisalinstitute.
an annual subscription.
org). This book contains information on
USRC Hotel Investment Survey (www.
gauging hotel demand, site selection,
USRC.com), which is published by a
facility financing, design, valuation, and
group of hotel industry specialists, offers
management. The price for this book is
cap rates and other hotel data. This Web
approximately $45.00.
site is free.
Pannell Kerr Forster Inc. (PKF) (www.
pkfonline.com) publishes a report en-
titled PKF—Trends in the Hotel Industry.
This is an annual report that details
the result of surveys of hotel revenue,


Glossary • Telecommunications Income – all
• Average Daily Rate (ADR) – av- income generated through the use
erage room income per occupied of in-room telephones for local and
room. long distance calls as well as fax
services and Internet connection
• Departmental Expenses – expenses services.
directly incurred by the operation
of the different hotel “depart- • Undistributed Operating Expenses
ments,” namely rooms, food and – Operating expenses not incurred
beverage, telecommunications, by the specific departments. Gen-
and miscellaneous. eral hotel operating expenses. For
example, administrative, utilities,
• Food and Beverage Income – all and marketing expense.
income generated from the sale of
food and beverages, including room
service and alcoholic beverages. References
• FF&E – the furniture, fixtures, and Appraisal Institute. 2001. Appraisal of
equipment necessary to operate a real estate, 12th ed. Chicago: Appraisal
hotel, typically a large investment Institute.
for most hotels. These assets are International Association of Assessing
excluded from the valuation of the Officers. 1999. Mass appraisal of real prop-
real estate. erty. Chicago: International Association
• Franchise Fees – payment that a of Assessing Officers.
hotel makes to be affiliated with a Marshall & Swift. 2004. Marshall valua-
national chain. This generally is an tion service book. Los Angeles. Marshall
expense attributed to the business & Swift.
concern of the hotel. O’Neill, J.W. 2004 An automated valu-
• Management Fees – payment that ation model for hotels. Cornell Hotel
a hotel owner makes to a manage- and Restaurant Administration Quarterly.
ment company to run the day-to- August.
day operation of the hotel. These Pannell Kerr Forster Inc. Annual. Trends
fees are typically based on percent- in the hotel industry. New York: Pannell
ages of revenue and represent the Kerr Forster Inc.
total cost of running the business.
RealtyRates.com. 2004. Third quarter
• Miscellaneous Income – revenue 2004 investor survey. Bradenton, FL:
generated from retail space rent- RealtyRates.com.
als, meeting room rentals, parking, Smith Travel Research. Annual. The host
laundry, and fees from ancillary study. Hendersonville, TN: Smith Travel
services. Research.
• Rack Rate – the advertised rate of
the hotel. Usually the highest rate Additional Resources
offered to someone who has no
reservation. Case law on the Rushmore approach and
business enterprise value
• Room Revenue – all income gener-
Dist. of Columbia v. Wash. Sheraton Corp.,
ated from room rentals.
499 A.2d 109 (D.C. 1985).
• RevPAR (revenue per available Estate of Slutsky v. C.I.R., 1983 Tax Ct.
room) – actual room income divid- Memo LEXIS 208 T.C. Memo 1983-578
ed by the total number of rooms. (U.S. Tax Ct. 1983).


Glen Pointe Assoc. v. Teaneck Township, 10 In re J.F.K. Acquisitions Group, 166 B.R. 207
N.J. Tax 380 (1989). (Bankr. E.D. N.Y. 1994).
Hilton Hotels Corporation v. Jackson County Marriott Corp. v. Bd. Of Cnty. Commission-
Assessor, 2003 WL 21443402 (Or. Tax ers, 972 P.2d 793 (Ks. App. 1999).
Magistrate Div.) Merle Hay Mall v. Polk County Board of Re-
Hull Junction Holding Corp. v. Princeton view, 564 N.W. 2d 419 (Iowa 1997).
Borough, 16 N.J. Tax 58 (1995). Prudential Ins. v. Township of Parsippany,
In re Grand Traverse Development Co. Ltd. 16 N.J. Tax 58 (1995).
Partnership, 150 B.R. 176 (Bankr. W.D.
Mich. 1993).


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