Hotel Valuation Factors

Many factors contribute to the market value of a hotel or motel and these are different fromt the Valuation of an Inn. Different buyers use different formulas for the price they are willing to pay for a hotel or motel. Whatever formula used, everyone should take into account factors which may or may not be used by other buyers and lenders. One should consider:

the location, market conditions, current franchise or future franchise possibilities, age and condition and architecture, renovation and maintenance costs, reputation of the past management, future hotel or motel development in the area, future room night demand, barriers to entry, financing options, functional obsolescence, value of the land, and more. Each of these must be considered and in some cases one should be considered more heavily than all of the others. Risks will vary with every property. The following formulas are just some of the ways that you might arrive at a valuation.

Gross Room Revenue Multiplier
A popular formula used by buyers of motels and hotels generally under $10,000,000. This Multiplyer varies from region to region. from less than 2 times the gross room revenue to over 5 times the gross room revenue and makes using this method imprecise for valuation. It should be considered only as one of a the measures of value.

Capitalization Rate
R=I/V or Rate = Income (usually accepted as the Net Operating Income) divided by the Value; or to determine Value (V) = Income (I or NOI) divided by Rate. A good measure of value for a consistently performing investment property which the purchaser plans to maintain in the same manner.

Price Per Room
This is basically a cost of replacement comparison and a sales comparable method at the same time. If a new hotel or motel with the same construction and amenities costs $45,000./room and you can purchase an existing property for $25,000./room plus renovation costs of $5,000 per room and have a property equivalent to a new property, the savings of justifies the purchase of the existing property. With knowledge of the price per room of similar properties in the same or similar markets you could arrive at a price for the property you wished to purchase.