HVS Consulting and

Valuation
A Case in Hotel Feasibility
Presented by Jaime Law

HVS London – Investment Services

Hotel Operations
University of San Francisco
Wednesday, November 12, 2008
Overview
HVS Consulting and Valuation is a fully integrated consulting firm
focusing exclusively on the hotel industry, and provides a wide range of
services to hotel owners, lenders and operators throughout the world.

Founded in 1980 by Stephen Rushmore, HVS International is the world’s

leading specialist hotel consultancy. With 32 offices across the globe,
Four Seasons,
HVS offers unparalleled international hotel market expertise. Punta Mita

In all areas, the firm’s expertise is built on our detailed understanding

of the dynamics of hotel markets and operations.

Our approach has become recognized worldwide by leading banks, hotel

companies, investors and developers.
Savoy, London

Worldwide, the firm has acted on over 10,000 hotels in over 60 countries,
providing up-to-date knowledge of all of the world’s key markets.

Fairmont, San
Francisco
Consulting Services

Valuation
HVS is widely regarded as the leading provider
of specialist hotel valuations worldwide.

Arts, Barcelona
As pioneers of the discounted cash flow method, the firm
stands at the forefront of the industry in terms of degree of
analysis, depth and transparency of reporting and
sophistication of computer modeling.

HVS valuations are recognized and used by many of the

world’s leading banks, hotel owners and developers.
Valuation services can be provided for individual assets or JW Marriott, San
portfolios, and can range from limited service hotels through Francisco

to prestigious five-star properties.

For global acquisitions we can assemble the largest

worldwide team of specialist hotel valuers capable of
appraising the most sizeable groups/chains in the most
rapid timescale possible.

Claridge’s, London
Consulting Services

Development Feasibility Ritz-Carlton,

Sharm el Sheikh
HVS is a leading provider of development feasibility advice. Using the
same approach and methodology utilized in undertaking valuations,
feasibility studies are performed for hotel operators, developers, investors
and lenders. Feasibility studies provide detailed profit and cash flow
projections, valuation estimates and return on investment analyses.

Market Coverage
St Martin’s Lane,
London

HVS provides a truly global hotel consulting service. The firm

operates from 32 offices worldwide. The firm has worked in over 60
countries, advising on over 10,000 hotels. Our expertise extends from city
Paris Casino, Las
centre hotels to resorts, and from limited service properties to full service Vegas
five-star hotels. The San Francisco office has performed work in North and
South America, Asia, and Europe and we will be pleased to introduce you
to our worldwide partners should you have need of their assistance or that
of any of the HVS divisions and strategic alliances.
The Berkeley, London
Offices Worldwide

Europe Asia North America Middle East

HVS London HVS Singapore HVS New York HVS Miami HVS Chicago HVS Dubai
14 Hallam Street 100 Beach Road 372 Willis Avenue Suite 216 Suite 1A Dubai Silicon Oasis
London W1W 6JG #32-04 Shaw Towers Mineola, NY, 11501 8925 SW 148th Street 445 West Erie Street Headquarters Building, 4th
UK 189702 USA Miami, FL, 33176 Chicago, IL, 60610 Floor, PO Box 341041
(44) 20 7878-7700 Singapore (516) 248-8828 USA USA Dubai, UAE
(44) 20 7436-3386 (fax) (65) 6293-4415 (516) 742-3059 (fax) (305) 378-0404 (312) 587-9900 (91) 45-015777 (fax)
(65) 6293-5426 (fax) (305) 378-4484 (fax) (312) 587-9908 (fax)
HVS Madrid HVS San Francisco
Paseo de la Castellana 93-2º HVS Hong Kong Suite 620 HVS Dallas HVS Phoenix
Madrid, 28046 183 Jade Villa 116 New Montgomery Street Suite 101 4913 E Mitchell Drive
Spain Ngau Liu Chuk Yeung Road San Francisco, CA, 94105 2601 Sagebrush Drive Phoenix, AZ, 85018
(34) 91 597-4635 Saikung USA Flower Mound, TX, 75028 USA
(34) 91 597-3054 (fax) China (415) 896-0868 USA (602) 667-6655
(852) 2791-5868 (415) 896-0516 (fax) (972) 899-5400 (602) 269-1864 (fax)
South America (852) 2792 2358 (fax) (972) 899-1022 (fax)
HVS Boulder HVS Weston, CT
HVS São Paulo 2229 Broadway HVS Denver 262 Lyons Plain Road
Av. Brig. Faria Lima HVS Beijing Suite 906 Riversbend
Boulder, CO, 80302
1912 cj.7F Level 16, Unit 16-21, 1777 South Harrison Street Weston, CT, 06883
USA
01452-001 São Paulo/SP Gemdale Plaza Tower A Denver, CO, 80210 USA
(303) 443-3933
Brazil No. 91 Jianguo Road, USA (203) 226-6000
(303) 443-4186 (fax)
(55) 11 3093-2743 Chaoyang District (303) 512-1222 (203) 221-0068 (fax)
(55) 11 3093-2783 (fax) Beijing, 100022 HVS Vancouver (303) 691-3799 (fax)
(86) 10 5920 8207/8/9 4235 Prospect Road HVS Mt Lakes, NJ
HVS Buenos Aires (86) 10 5920 8105 (fax) N. Vancouver, BC, V7N 3L6 HVS Washington DC Suite 203
San Martin 640 – 4° Piso Canada Suite 102 420 Boulevard
(1004) – Buenos Aires HVS New Delhi 1300 Piccard Drive Mountain Lakes, NJ, 07046
C-67, Anand Niketan (604) 988-9743
Argentina (604) 988-4625 (fax) Rockville, MD, 20850 USA
2nd Floor
(54) 11 4515-1461 New Delhi, ND, 110021 USA (973) 335-0871
(54) 11 4515-1462 (fax) HVS Toronto (240) 683-7123 (973) 335-0722 (fax)
India
Suite 202 (240) 683-7120 (fax)
(91) 11 2410-1005 HVS Boston
(91) 11 2410-1066 (fax) 2120 Queen Street East
Toronto, ON, M4E 1E2 4th Floor
Canada 607 Boylston Street
(416) 686-2260 Boston, MA, 02116
(416) 686-2264 (fax) USA
(617) 424-1515
Development Feasibility Case
Study
•What type of development can we build?
•What is the supply and demand relation in the
market?
•What are the equity and debt requirements?
•Is it feasible, can we build it?
•What will your roll be as future hotel managers?
 Types of Lodging Facilities
•Convention •Bed and Breakfast Inn
•Resort •Ma and Pa
•Suite •Health Spa
•Residence •Historic Rehab
•Conference Center •Ocean
•Microtel •Outer Space
•Casino
Convention Hotel
Resort
Bed and Breakfast Inn
Outer Space
 Hotel Chains and Brands
ABBA Hotels, AC Hotels, ACC-Nifos Hotels, ANA Hotels International, ARCOTEL Hotels & Resorts, Abacus Merchant, Accor Hotels, Adams Mark Hotels, Affinia
Hospitality, AmeriHost Inn, AmeriSuites, AmericInn, Atahotels, Atel Network, Axcess Hotels, Bachelor Quarters, Barcelo Hotels, Baymont Inn & Suites, Best Value Inn,
Best Western International, Boscolo Hotels, Bulgari Hotels And Resorts, C M NET Hotels, Caesar Park Hotels, Candlewood Suites, Charming Hotels, Clarion Hotels,
Classic British Hotels, Classic International, Club Quarters, ClubHouse Inn & Suites, Cmnet, Coast Hotels & Resorts, Columbus Reservation Service, Comfort Inns,
Comfort Suites, Concorde Hotels, Corus hotels, Country Hearth, Country Inns By Carlson, Courtyard by Marriott, Crowne Plaza Hotels, Days Inn, DeVere Hotels, Delta
Hotels, Derag Hotels, Design Hotels, Destination Hotels & Resorts, Destinations Unlimited, Distinguished Hotels, Dominia Hotels, Doral Resorts and Conference
Centers, Dorchester Group, Doubletree Hotels, Drury Hotels, Econo Lodge, Embassy Suites, Envergure Group, Epoque Hotels, Exclusive Hotels, Executive Hotels and
Resorts, Extended StayAmerica, Extra Holidays, Fairfield Inn by Marriott, Fairmont Hotels, Fiesta Americana, Flag Choice Hotels, Fontainebleau Resorts, Four Seasons
Hotels, Gaylord Entertainment, Genares Resrv Svc, Global Conextions, Golden Tulip Hotels, Grand Heritage Hotels, Grand Hospitality, Great Hotels of the World,
Guesthouse International, HAMPTON INN, Harrah's Hotels & Casinos, Harvey Hotels, Hawthorn Suites, Hilton Garden Inn, Hilton Hotel Brands, Hilton Hotels and
Resorts (U. S.), Hilton International, Historic Hotels of America, Holiday Inn Hotels and Resorts, Homewood Suites By Hilton, HotUSA, Hotel Camino Real, Hotel
Indigo, Hotel Port, Hotelred, Hotelrez, Hotels Gouverneur, Hotelzon, Howard Johnson, Hyatt Hotels and Resorts, Hyatt Place, Hyatt Vacations, Ian Schrager, Ihotelier,
Independent Hotels, Innadvance, Innlink, Innpoints, Innpoints Reserv, Inter-Continental Hotels and Resorts, Interstate Hotels & Resorts, Jameson Inns, Joie de Vivre,
Jolly Hotels, Jumeirah, Jumer Hotels, Jurys Doyle Hotel Group, KSL Resorts, Karyon, Kempinski Hotels & Resorts, Kerry Hotels, Keytel, Kimpton Hotels, Knights Inn,
LUXURY ACCOMMODATIONS, La Quinta Inns & Suites, Le Meridien, Leading Hotels of the World, LeisureLink, Lexington Collection, Loews Hotels, Luxe Hotels,
Luxury Resorts, MGM/Mirage Corp, MacDonald Hotels Group, Magellan Group, Magnolia Hotels, MainStay Suites, Malmaison Hotel Group, Mandarin Oriental Hotel
Group, Marco Polo Hotels, Maritim Hotels, Marriott Conference Center, Marriott Hotels and Resorts, Marriott Vacation Club International (VC), Masters Inn, Maybourne
Hotel Group, Meritus Hotels, Microtel Inns, Millennium & Copthorne Hotels, Moat House Hotels, Morgans Hotel Group, Motel 6, Movenpick Hotels & Resorts,
Myfidelio, N H Hotels, New Otani Hotels, Nikko Hotels International, Noble House Hotels, Oberoi Hotels, Okura Hotels & Resorts, Omni Hotels, Onetech Solution,
Orient-express Hotels Ltd, Otedis, Othon Hotels, Outrigger Hotels Hawaii, Pacific International, Pan Pacific Hotels and Resorts, Park Inn, Park Plaza International,
Peabody Hotels, Peninsula Hotels, Preferred Hotels ® and Resorts Worldwide, Preferredboutique, Prince Resorts, Protea Hotels, Qhotels, Quality Inns, Quality
Reservations, RIHGA Royal Hotels, Radisson Hotels, Raffles International Hotels and Resorts, Ramada International, Ramada Plazas Limiteds and Inns, Reconline, Red
Lion Hotels, Red Roof Inns, Regent International Hotels, Relais & Chateaux, Renaissance Hotels, Residence Inn by Marriott, Resort Bookings, ResortQuest International,
Resortquest Hawaii, Rezlink Intl, Ringhotels, Ritz-Carlton Hotels, Rock Resorts, Rodeway Inn, Romantik Hotels International, Rosewood Hotels, Rydges Hotel Group,
SORAT Hotels, Sabre Exclusives, Sandals Resorts, Sandman Hotels, Sarova Hotel, Scandic Hotels, Sceptre Hospitality Resources, Select Marketing, Sercotel Hotels,
Shangri-La Hotels and Resorts, Sheraton Hotels and Resorts, Shilo Inns, Sierra Suites Hotels, Sleep Inns, Small Luxury Hotels of the World, Sol Melia S.A., Sonesta
Hotels and Resorts, Southern Sun Hotels, Special Properties, SpringHill Suites by Marriott, Stamford Hotels & Resorts, StarHotels, Starwood Hotels Group, Staybridge
Suites, Steigenberger Hotel Group, Sterling Hotels and Resorts, Studio 6, Suburban Hotels, Suburban Lodge, Summerfield Suites ® Hotels, Summit Hotels and Resorts,
Super 8, Supranational, Sutton Place, Swissôtel, SynXis, TOP International Hotels, Taj Group of Hotels, The St Regis, Thistle Hotels, TownePlace Suites by Marriott,
TravAmerica, Travelodge, Travelodge UK and Europe, Unaffiliated Independent Hotels, Unirez, Universal Orlando, Univisit, Utell International, V.I.P. Reservations,
Vantis, Vantis/VIP, Villager, W Hotels, Walt Disney World ® Resorts, Warwick International Hotels, WebRes, Westcoast Partners, Westin Hotels and Resorts, Westmark
Hotels, Wingate Inns, Wizcom.trust, Woodfin Suite Hotels, World Hotels and Resorts, WorldRes, Wyndham Brands, Wyndham Hotels, XN Global Res, eRyokan,
 Hotel Valuation
•Nature of the Study/ Objective
•Description of the Real Estate
•Market Area and Supply and Demand Relation
•Occupancy and Average Rate Forecast
•Income and Expense Analysis and Forecast
 Nature/Objective of the Analysis
•The objective of the analysis is to develop an
opinion of market value when construction has been
completed and the improvements are operational.
 Description of the Land

•Land Characteristics
•Regional and Local Access and Visibility
•Zoning Regulations
•Local Demand Generators
•Neighborhood: Locational Factors
Land Analysis Conclusion:

Beach frontage and direct access to the beach and

boardwalk.
Direct highway access three city blocks to the east side
of the subject site.
Allowable uses include hotels, motels, bed-and-
breakfast inns.
The site’s location benefits from the proximity to
regional and local demand generators.
The neighborhood is in the stable stage of its life cycle.
 Market Area Analysis
•Economic and Demographic Review
•Area Business, Industry, and Attractions
•Area Statistics
•Smith Travel Research (STR) Historical Supply and
Demand Data
•Supply and Demand Analysis: Market
Segmentation
•Forecast of Marketwide Occupancy
Market Segmentation Classification:

•Commercial •Incentive
•Meeting and Group •Government
•Leisure
•Extended-Stay
•Group Tour
•Military
•Contract
Projection of Occupancy and Average Rate

•Subject’s Competitive Position

•Hotel Market Segmentation
•Hotel Occupancy and Average Rate Forecast
Proposed Hotel Average Rate Positioning:

Es timate d 2006 Rooms Re ve nue

Ave rage Room Pe r Available
Prope rty Rate Room

Ups ca le $185.00 $120.25

Mids ca le 142.31 95.77
Mids ca le 133.00 103.74
Mids ca le 160.00 110.40
Mids ca le 132.00 104.28
Mids ca le 164.00 104.96
Mids ca le 161.00 111.09
Ultra -Luxury 220.00 158.40
Ultra -Luxury 235.00 141.00

Ave rage $173.89 $121.58

.
Proposed Hotel Average Rate Positioning:

Propos e d S ubje c t Prope rty

Rooms %of Total Re ve nue Ave rage Daily Rate
Le is ure 16,022 84.8 % $3,476,864 $217.00
Me e ting a nd Group 2,876 15.2 388,217 135.00

Tota l 18,898 100.0 % $3,865,080 $204.52

Forecast of Occupancy, Average Rate, and RevPAR
Conclusion:

Ave rage Rate Be fore Ave rage Rate Afte r

Ye ar Oc c upanc y Dis c ount Dis c ount Dis c ount Re vPAR

2009/10 64 % $243.10 5.0 % $230.94 $147.80

2010/11 69 256.27 3.0 248.58 171.52
2011/12 75 266.95 2.0 261.62 196.21
2012/13 75 274.96 0.0 274.96 206.22
2013/14 75 283.20 0.0 283.20 212.40
Proposed Hotel
 Development Budget
De ve lopme nt Cos t

Pre -De ve lopme nt Cos t Total Pe r Room

La nd Acquis ition $6,828,363 $98,962
P re -De ve lopm e nt Expe ns e 1,025,625 14,864
Le ga l Fe e s 983,940 14,260
S ta te Wa te r 224,331 3,251
S ite De ve lopm e nt 310,740 4,503
9,372,999 135,841
Dire c t Cons truc tion Cos t
Hote l/P a rking 7,887,528 114,312
Continge ncy Allowa nce 599,002 8,681
Adm inis tra tive Fe e s 733,049 10,624
Fina ncing Fe e s 3,224,429 46,731
P re -Ope ning, FF&E Expe ns e 3,503,336 50,773
15,947,344 231,121
Total De ve lopme nt Cos t $25,320,343 $366,961
 Is It Feasible?

Economic Market Value : $xx,xxx,xxx

(Less) Development Cost : $25,320,343

Economic
NotFeasibility
Feasible = Negative
Positive (+)
(-)
Forecast of Income and Expense
Statement
•Comparable Income and Expense Statement
•Volume Relationship
•Fixed and Variable Analysis
•Departmental Revenue Analysis
•Departmental Expense Analysis
•10-year Operating Cash Flow Analysis
Hotel Management Component
•Hotel Management Contract
•1st Tier Management Company VS. 2nd Tier
Management Company
•Advantages and Disadvantages to the Management
Company and Ownership
•Advantages and Disadvantages of a 1st Tier and 2nd
Tier Management Company
•Management Fee
•Hotel Franchise
Hotel Management Contract:
An agreement between a hotel management company and a
hotel property whereby the hotel management company
takes over the operational responsibility of managing the
hotel and its facilities. The owner assumes a passive
position with respect to operating decisions but is
financially responsible for all working capital, operating
expenses and debt service. The management company is
paid a fee for its services and the owner receives the
residual net income after all expenses.
1st Tier Management Company:
A hotel management company that operates lodging facilities for third
parties under management contracts and provides two types of services:
1) day-to-day operational supervision and property management, and
2) national or regional customer recognition through a chain affiliated
trade name.

2nd Tier Management Company:

A hotel management company that operates lodging facilities for third
parties under management contracts and provides day-to-day
operational supervision and property management but offers no
customer recognition through a chain affiliated brand. Second tier
management companies often utilize hotel franchises for identification.
Hotel Franchise:
An Agreement between a hotel chain and a hotel owner
whereby the hotel chain allows the owner to utilize the
chain’s name, identification and other services such as a
central reservation system. The hotel owner pays the hotel
chain a fee for the franchise identification and other
services. The chain has no ownership or financial interest
in the hotel and is not directly responsible for its
economic success.
Management Fee:
The fee paid to a hotel management company for providing
services pursuant to a management contract. Management
fees are generally tied to one or more financial indicators of
operational success. They typically take the form of a basic
and incentive management fee.
Management Fee (continued):
The basic management fee is normally tied to a specified
percentage of revenue. It rewards the operator for marketing
efforts and other activities related to the generating sales
volume. The basic fee provides no incentive to minimize
operating expenses.

The incentive management fee is usually based on a specified

percentage of a defined net income. Since net income is the
result of sales volume and expense control, the incentive
management fee rewards the management company for
profitable operations.
 Advantag e s
to the Ho tel • Ine xpe ns ive a nd ra pid m e thod of cha in
e xpa ns ion - low le ve l of inve s tm e nt
Manag ement
Co mpany • Low downs ide ris k com pa re d to hote l le a s ing
a nd owne rs hip
• For public hote l com pa nie s - provide s m uch of
the ca s h flow of owne rs hip without the
de pre cia tion e xpe ns e tha t im pa cts the price
e a rning ra tio
• Provide s a bility to m a inta in control of both
phys ica l a nd ope ra tiona l qua lity
• Ma na ge m e nt fe e s a re a profita ble s ource of
re ve nue
to the Owner • Ability to a cquire ope ra tiona l e xpe rtis e without
re linquis hing owne rs hip be ne fits
• Us e of a 1s t tie r m a na ge m e nt com pa ny
include s na m e re cognition. Som e cha in
a ffilia tions a re only a va ila ble via m a na ge m e nt
contra cts (i.e ., Four Se a s ons a nd We s tin)
• Re te ntion of qua lity m a na ge m e nt is ge ne ra lly
a re quire m e nt of hote l le nde rs a nd inve s tors
Dis advantag es
• Pote ntia l for te rm ina tion of contra ct prior to or
a t the e nd of contra ctua l te rm
• Minim a l input in owne rs hip de cis ions s uch a s
the s a le of dis pos ition of the prope rty
• De pe nde nce on the owne r's fina ncia l s tre ngth
in the e ve nt the ca s h flow is ins ufficie nt to
cove r ope ra ting e xpe ns e s a nd ca s h flow
• Elim ina te s the re s idua l ups ide be ne fits of
hote l owne rs hip
• Los s of ope ra tiona l control
• Fina ncia lly lia ble for a ll ongoing cos ts a nd
e xpe ns e s
• The cos t of m a na ge m e nt ca n a bs orb a
s ubs ta ntia l portion of the ca s h flow
• Prope rty is m ore difficult to s e ll; fe we r pote ntia l
buye rs
• Difficult to te rm ina te ope ra tor
• High downs ide ris ks
• Ope ra tors m a y fa vor the ir own prope rtie s
 Advantages
of a 1s t Tier • Ofte n le s s e xpe ns ive tha n us ing a 2nd tie r
m a na ge m e nt com pa ny a nd fra nchis e a ffilia tion
Manag ement
Company • Som e cha in a ffilia tions a re only a va ila ble by
m a na ge m e nt contra cts (i.e ., Four Se a s ons a nd
Fa irm ont).
• Com bine s the ope ra ting com pa ny with e ntity
ha ving the na m e re cognition - te nds to be m ore
unifie d
• 1s t tie r m a na ge m e nt com pa nie s te nd to ha ve a
la rge r a nd m ore e ffe ctive conve ntion a nd group
s a le s infra s tructure
of a 2nd Tier • Ea s ie r to ne gotia te a n owne r-orie nte d
m a na ge m e nt contra ct
Manag ement
Company • Sm a lle r m a na ge m e nt com pa ny is like ly to give
a prope rty m ore individua l a tte ntion
• More like ly to m a na ge the m ore unique hote ls
hote ls : s m a ll, dis tre s s e d, s pe cia lize d m a rke t,
s e conda ry loca tion, s conda ry citie s
Dis advantages
• More difficult to obta in com pa ra ble ope ra ting
inform a tion during the s e le ction proce s s
• More difficult to ne gotia te a n owne r-orie nte d
m a na ge m e nt contra ct; you s e ldom ne gotia te
with the ultim a te de cis ion-m a ke r
• Som e tim e s not a va ila ble for s m a lle r
prope rtie s
• Te rm ina tion provis ions a re ofte n m ore difficult
to obta in
• Te rm of contra ct is like ly to be longe r
• Le s s like ly to m a na ge dis tre s s e d prope rtie s
• Mos t 2nd tie r m a na ge m e nt com pa nie s a re not
a s "fina nce a ble " a s a 1s t tie r com pa ny
• The "pe rce ive d" ris k of a 2nd tie r m a na ge m e nt
com pa ny is highe r
• Ca n be m ore e xpe ns ive whe n you a dd to the
m a na ge m e nt fe e a na tiona l fra nchis e fe e .
Som e 2nd tie r m a na ge m e nt com pa nie s
a tte m pt to ne gotia te a 1s t tie r fe e s tructure
Forecast of Income and Expense
Statement
•Comparable Income and Expense Statement
•Volume Relationship
•Fixed and Variable Analysis
•Departmental Revenue Analysis
•Departmental Expense Analysis
•10-year Operating Cash Flow Analysis
 Ho te l de l So ul
Numbe r of Ro o ms : 110
Oc c upie d Ro o ms : 27,853
Days Ope n: 365
Oc c upanc y: 69.4% Amo unt pe r Amo unt pe r
Ave rage Rate : $307.78 Perc e ntag e Available Oc c upie d
Re vPAR: $213.52 of Ro o m Ro o m
REVENUE
Room s $8,573 66.0 % $77,934 $307.78
Food 2,774 21.4 25,221 99.61
Bevera ge 1,140 8.8 10,368 40.94
Telephone 110 0.8 1,003 3.96
Ga ra ge/Pa rking 290 2.2 2,638 10.42
Other Incom e 97 0.8 886 3.50
Tota l 12,985 100.0 118,049 466.21
DEPARTMENTAL EXPENS ES
Room s 2,700 31.5 24,548 96.95
Food & Bevera ge 4,221 107.8 38,369 151.53
Telephone 183 165.9 1,664 6.57
Ga ra ge/Pa rking 257 88.6 2,337 9.23
Other Expens es 374 383.3 3,396 13.41
Tota l 7,735 59.6 70,314 277.69
DEPARTMENTAL INCOME 5,251 40.4 47,735 188.52
OPERATING EXPENS ES
Adm inis tra tive & General 2,095 16.1 19,049 75.23
Ma rketing 1,182 9.1 10,741 42.42
P roperty Opera tions & Ma intena nce 999 7.7 9,078 35.85
Utilities 558 4.3 5,075 20.04
Tota l 4,834 37.2 43,943 173.54
HOUSE PROFIT 417 3.2 3,792 14.98
Ma nagement Fee 390 3.0 3,541 13.99
INCOME BEFORE FIXED CHARGES 28 0.2 250 0.99
FIXED EXPENS ES
P roperty Ta xes 653 5.0 5,933 23.43
Ins ura nce 333 2.6 3,029 11.96
Res erve for Repla cement $519 4.0 $4,722 $18.65
Tota l 1,505 11.6 13,684 54.04
NET INCOME ($1,478) -11.4 % -$13,434 -$53.05
Volume
Relationship:
Departmental Revenue Analysis:
Departmental Expense Analysis:
10-year Operating Cash Flow:

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Num be r o f Ro o m s : 69 69 69 69 69 69 69
Occupie d Ro o m s : 16,118 17,378 18,889 18,889 18,889 18,889 18,889
Occupancy: 64% 69% 75% 75% 75% 75% 75%
Ave rag e Rate : $230.94 % o f $248.58 %o f $261.62 %of $274.96 %o f $283.21 %o f $291.70 %o f $300.45 %of
Gro s
Re vPAR: $147.80 $171.52 Gro s s $196.21 Gro s s $206.22 Gro s s $212.41 Gro s s $218.78 Gro s s $225.34 Gro s s
s
REVENUE
Rooms $3,722 90.3 % $4,320 91.0 % $4,942 91.6 % $5,194 91.7 % $5,349 91.7 % $5,510 91.7 % $5,675 91.7 %
Food & Beverage 111 2.7 121 2.6 133 2.5 137 2.4 141 2.4 145 2.4 149 2.4
Telephone 21 0.5 23 0.5 25 0.5 26 0.5 27 0.5 28 0.5 28 0.5
Convenience Store 199 4.8 210 4.4 221 4.1 228 4.0 235 4.0 242 4.0 249 4.0
Other Income 68 1.7 72 1.5 76 1.4 78 1.4 80 1.4 83 1.4 85 1.4
Total 4,121 100.0 4,745 100.0 5,397 100.0 5,662 100.0 5,831 100.0 6,007 100.0 6,187 100.0
DEPARTMENTAL EXPENSES*
Rooms 895 24.0 948 21.9 1,008 20.4 1,039 20.0 1,070 20.0 1,102 20.0 1,135 20.0
Food & Beverage 84 75.8 89 73.5 94 71.0 97 71.0 100 71.0 103 71.0 106 71.0
Telephone 29 143.0 31 137.1 33 131.0 34 131.0 35 131.0 36 131.0 37 131.0
Convenience Store 136 68.1 140 66.7 144 65.1 148 65.1 153 65.1 157 65.1 162 65.1
Total 1,144 27.8 1,208 25.5 1,280 23.7 1,318 23.3 1,358 23.3 1,398 23.3 1,440 23.3
DEPARTMENTAL INCOME 2,977 72.2 3,537 74.5 4,117 76.3 4,344 76.7 4,474 76.7 4,609 76.7 4,746 76.7
UNDISTRIBUTED OPERATING EXPENSES
Adminis trative & General 376 9.1 407 8.6 440 8.2 458 8.1 471 8.1 486 8.1 500 8.1
Marketing 210 5.1 221 4.7 233 4.3 241 4.3 249 4.3 256 4.3 264 4.3
Prop. Operations & Maint. 111 2.7 134 2.8 150 2.8 174 3.1 189 3.2 194 3.2 200 3.2
Utilities 123 3.0 130 2.7 137 2.5 141 2.5 146 2.5 150 2.5 155 2.5
Total 820 19.9 892 18.8 961 17.8 1,014 18.0 1,054 18.1 1,086 18.1 1,118 18.1
HOUSE PROFIT 2,157 52.3 2,645 55.7 3,156 58.5 3,330 58.7 3,420 58.6 3,523 58.6 3,628 58.6
Mana gement Fee 165 4.0 190 4.0 216 4.0 226 4.0 233 4.0 240 4.0 247 4.0
INCOME BEFORE FIXED CHARGES 1,993 48.3 2,455 51.7 2,941 54.5 3,103 54.7 3,186 54.6 3,282 54.6 3,381 54.6
FIXED EXPENSES
Property Taxes 300 7.3 306 6.4 312 5.8 318 5.6 324 5.6 330 5.5 337 5.4
Ins urance 57 1.4 59 1.2 60 1.1 62 1.1 64 1.1 66 1.1 68 1.1
Res erve for Replacement 165 4.0 190 4.0 216 4.0 226 4.0 233 4.0 240 4.0 247 4.0
Total 521 12.7 555 11.6 588 10.9 607 10.7 621 10.7 636 10.6 653 10.5
NET INCOME $1,471 35.6 % $1,901 40.1 % $2,352 43.6 % $2,497 44.0 % $2,565 43.9 % $2,646 44.0 % $2,728 44.1 %
1 1 1 1 1 1 1
Approaches to Valuation of Hotel
Real Estate

Income Capitalization
Sales Comparison
Cost
Income Capitalization Approach:
The income capitalization approach analyzes a property's ability to
generate financial returns as an investment. Inherent to the income
approach is the capitalization of the resulting net operating income
of a property's operating cash flow, projecting revenue and
expenses. Using a mortgage-equity capitalization model, the
projected net income before debt service is allocated to the
mortgage and equity components based on market rates of return
and loan-to-value ratios. Through an income capitalization
procedure, the value of each component is calculated. The total of
the mortgage component and the equity component equals the value
of the property. The model reflects traditional analysis of return on
and return of capital. The value derived from the mortgage-equity
analysis is then compared to a conventional discounted cash flow
analysis as a final check.
The income approach is often selected as the preferred valuation
method for operating properties because it most closely reflects the
investment rationale of knowledgeable buyers.
Methodology:
•Based upon the premise of anticipation i.e., the expectation
of future benefits.
•Apply a discounted cash flow analysis where 10 years of
net income and a “reversion” (resale) derived from the
capitalized 11th year's net income are discounted back to the
date of value and summed to derive an estimate of market
value.
•The algebraic equation that solves for the total property
value using a 10-year mortgage and equity technique was
developed by Suzanne R. Mellen, CRE, MAI, managing
director of the San Francisco office of HVS Consulting and
Valuation. A complete discussion of the technique is
presented in her article entitled “Simultaneous Valuation: A
New Technique.” Appraisal Journal. April (1983).
Mortgage and Equity Components:
The conversion of the proposed hotel forecasted net income
into an estimate of value was based on the premise that
investors typically purchase real estate with a small amount
of equity cash (25% to 50%) and a large amount of
mortgage financing (50% to 75%). The amounts and terms
of available mortgage financing and the rates of return that
are required to attract sufficient equity capital formed the
basis for allocating the net income between the mortgage
and equity components and deriving a value estimate.
Investment Parameters:
Valuation Parame te rs
S tabilize d Ye ar 4
Inflation 3.0%
Loan/Value 80%
Amortization 30 Ye a rs
Te rm 10 Ye a rs
Inte re s t Rate 6.50%
Te rminal Cap Rate 8.00%
Trans ac tion Cos ts 1.0%
Equity Yie ld 18.0%
Tax Rate 1.03%
Tax Inflation Rate 2.0%
Inte re s t Monthly
Simultaneous Valuation Formula (SVF):

((NI1 - (f x M x V)) 1/S1) + ((NI2 - (f x M x V)) 1/S2) +

((NI3 - (f x M x V)) 1/S3) + ((NI4 - (f x M x V)) 1/S4) +
((NI5 - (f x M x V)) 1/S5) + ((NI6 - (f x M x V)) 1/S6) +
((NI7 - (f x M x V)) 1/S7) + ((NI8 - (f x M x V)) 1/S8) +
((NI9 - (f x M x V)) 1/S9) + ((NI10 - (f x M x V)) 1/S10) +
(((NI11/Rr) - (b (NI11/Rr)) - ((1 - P) x M x V)) 1/S10)
= (1 -M) V
The value is mathematically proven by calculating the yields to
the mortgage and equity components during the projection
period. If the mortgagee achieves a 6.50% yield and the equity
yield is 18%, then $29,000,000 is the correct rounded value by
the income capitalization approach. Using the assumed
financial structure set forth in the previous calculations, market
value can be allocated between the debt and equity as follows.

Mortgage Component (80%) $23,228,000

Equity Component (20%) 5,807,000
Total $29,035,000
Capitalization Rate (Cap Rate):
The rate of return that is considered a reasonable return on investment; the percentage (acceptable to
an average buyer) used to determine the value of an income producing property through capitalization.

Net Operating Income (NOI)/Market Value = Capitalization Rate

Stabilized Going In Cap Rate: $2,497,000(0.9151417)/$29,000,000 = 7.87%

 Summary of Market Derived Capitalization Rates
Ove rall Rate Bas e d on
Ne t Ope rating Inc ome
Total
Numbe r Date Prope rty Equity His toric al Proje c te d S tabilize d
Hote l Loc ation of Rooms of S ale Yie ld Yie ld Ye ar Ye ar One Ye ar

We s tin Airport Atla nta , GA 495 Aug-07 11.6 % 21.7 % 6.6 % 8.1 % 9.0 %
Holida y Inn LAX Los Ange le s , CA 405 Aug-07 13.8 26.8 6.9 7.7 10.2
Hilton Downtown S t. Louis , MO 195 Aug-07 11.3 20.8 6.8 7.8 8.6
Hote l P a lom a r S a n Fra ncis co, CA 195 Aug-07 11.1 21.0 5.0 7.6 8.8
S he ra ton Hote l Na s hua , NH 336 J un-07 13.2 25.2 5.5 8.0 10.4
S he ra ton Okla hom a City, OK 395 Apr-07 13.8 27.5 7.4 9.2 10.6
S he ra ton Hote l Be lle vue , WA 179 Ma y-07 11.0 20.0 5.6 6.7 8.3
Hote l J e rom e As pe n, CO 92 Ma y-07 11.1 22.2 1.9 6.5 7.5
Ra dis s on Love Fie ld Da lla s , TX 201 Apr-07 14.5 27.6 -- 4.5 11.6
S he ra ton Hote l Okla hom a City, OK 395 Apr-07 12.4 24.2 6.8 8.5 9.5
S he ra ton Okla hom a City, OK 395 Apr-07 13.8 27.5 7.4 9.2 10.6
S t. Louis Ma rriott We s t S t. Louis , MO 300 Ma r-07 10.2 18.2 5.8 6.8 8.0
Re na is s a nce Ma yflowe r Wa s hington, DC 657 Fe b-07 9.6 17.7 3.9 5.5 7.5
Villa Flore nce S a n Fra ncis co, CA 182 Fe b-07 9.1 15.1 3.5 5.2 7.0
Hilton We s tcha s e & Towe rs Hous ton, TX 297 Fe b-07 8.6 13.9 5.8 7.2 7.5
S he ra ton Aus tin Aus tin, TX 365 J a n-07 11.5 21.2 5.3 6.6 8.9
S ta nford Court Hote l S a n Fra ncis co, CA 393 De c-06 8.1 11.7 -- 1.4 8.0
S he ra ton Hote l North Cha rle s ton, NC 289 Nov-06 11.0 20.4 4.9 8.1 8.3
Hya tt Re ge ncy Le xington, KY 365 Nov-06 12.0 21.2 2.3 2.7 10.7
S he ra ton Da nbury, CT 242 Oct-06 9.8 16.3 3.9 4.0 8.2
Hilton Arlington Arlington, TX 308 Oct-06 10.0 17.5 4.8 7.2 8.3
We s tin S outhfie ld De troit S outhfie ld, MI 388 Oct-06 9.7 17.4 8.6 8.8 7.9
S he ra ton Colle ge P a rk, MD 462 Oct-06 12.5 23.7 7.7 7.5 9.6
We s tin Hote l S ta m ford, CT 462 Oct-06 9.3 15.1 4.1 4.0 7.9
S he ra ton Buckhe a d Atla nta , GA 369 Oct-06 11.3 21.0 7.1 6.9 8.7
Hilton S onom a County S a nta Ros a , CA 246 Oct-06 8.5 13.5 4.8 6.0 7.0

S ource : HVS
 Is It Feasible?
Economic Market Value : $29,000,000
(Less) Development Cost : $25,320,343
Economically Feasible = $3,679,657

The market value conclusion is higher than the developer's budget.

Since the estimated market value via upon completion of the
construction of the hotel is higher than the cost to develop the
proposed subject property, the economic feasibility of the project is
proven.