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HOSP4040 Hotel Asset Management (Russell): Hotel Valuation

Types of Hotel Valuation

Income Capitalization

  • Capitalization rates are referenced for a wide range of hotel types within most geographical areas.” (The “cap rate” is expressed as a ratio comparing income and capital value.)
  • Discounted cash-flow analysis is also useful for major full-service hotel assets in large cities. It’s not as relevant for conventional limited-service hotels or for full-service hotels in secondary cities.
  • The gross-income multiplier method only considers revenue and not expenses and has some relevance for older motel properties in smaller communities, but little usefulness to most other hotels.

Direct-Comparison Approach

  • Establishes a comparison with the price per room paid for comparable properties in the same type of market.
  • This approach isn’t as accurate, because income is such a critical factor in hotel acquisition, but vendors and purchasers frequently speak about price-per-room, so it should be part of the conversation.

Cost Approach

  • Is an estimate of the current value of the land, the replacement cost of buildings and other structures and any potential loss in value from depreciation. This approach is irrelevant to hotel valuation, since vendors and purchasers don’t use this technique. In addition, the difficulties in determining developer profit, functional obsolescence, external depreciation and a variety of other factors make this valuation method a poor predictor of value.