Monday, November 22, 2010

Jerry's December Newsletter

Occasionally, I like to bring other perspectives to the Hospitality Industry. Obtaining viewpoints from other practitioners equips you with information to assist in your purchasing and selling decisions. I am pleased to introduce Adrian Rizzo from Kent MacPherson Appraisals offering a commentary on the appraiser’s view. I would like to thank Adrian for his contribution.

Appraising A Hotel
Hotel appraisals are required when a property is transacting or refinanced. As there have been very few transactions of hotels in B.C. since late 2008, most recent appraisals have been for re-financing purposes. Like most real estate investments, hotels and motels can be valued by the three common appraisal methods which include the Cost Approach, Direct Comparison Approach and the Income Approach. Hotels and motels are commonly bought and sold on their ability to generate income; therefore are most appropriately valued by the Income Approach.

The Cost Approach
involves estimating the replacement cost of the building and deducting all forms of depreciation. The value of the land is then added to the depreciated value of the building to produce an estimate of value. This approach may provide a reliable estimate of value of new or proposed properties, as hotels are especially susceptible to economic depreciation, thus this approach is often met with skepticism from knowledgeable investors.

The Direct Comparison Approach
can be used for small motels where, due to their size, they are often uneconomical operations, but they provide accommodation and employment for the owner and their family. For hotels and larger motels, this approach is often utilized as a secondary method that provides support for the Income Approach valuation.

Income Approach Methods
In general, there are two preferred methods available within the Income Approach. They are:

· Direct capitalization method, and

· Discounted cash flow analysis.

Both methods convert future income into a present value.

The Direct Capitalization Method
Direct capitalization converts or “capitalizes” a property’s net operating income into an estimate of market value using a capitalization rate. The capitalization rate is a reflection of the investor’s opinion about the risk associated with the investment and the characteristics offered by the property in comparison to other investment opportunities.

Market Value

=Net Annual Operating Income

Capitalization Rate

The Discounted Cash Flow Method
This method converts future revenue into a present value by discounting each future benefit at an appropriate yield rate. 5 and 10 year investment horizons are the most common. The procedure utilized to convert annual income and reversion into present value is called discounting, while the required yield rate of return is called the discount rate. The discounting procedure presumes that the investor will receive a satisfactory return on the investment and complete recovery of the capital invested. Yield Capitalization is also called the Discounted Cash Flow method (DCF) because a discount rate is used to calculate the present value of anticipated future cash flows.

Hotel Values Rely Upon Actual Performance
Perhaps more than any other income producing property, the value of hotel real estate relates to its actual performance. While there are many hotels of similar nature, often they do not have the same type of attributes, room mix, room finishes, restaurants, franchise affiliations, labour arrangements, etc. Therefore, in this valuation procedure, actual historical income and expenses from the starting point in the appraisal process.

Stabilizing Income and Expense Figures
Since the hotel business has a tendency to fluctuate from year to year, hotel values are generally established on the basis of stabilized incomes and expenses. This procedure follows the steps that a prudent purchaser would take in considering the value of a hotel. The appraiser compares the actual performance of a hotel to industry norms and makes adjustments to actual performance where necessary.

Hotel Values are Sensitive to Market Changes
The market value of a hotel is sensitive to changes in the marketplace. As the revenue generated from a hotel relies upon short term stays, a drop or rise in occupancy produces an immediate and corresponding drop or rise in income. Furthermore, the hotel industry is cyclical in nature and therefore values can be expected to rise and fall over time. The rise of the Canadian dollar and significant events such as 9/11 and the SARS outbreak are examples of events that have affected the hospitality industry.

Analyzing Sales to Extract a Capitalization Rate
An accurate appraisal is contingent upon the appraiser having access to the financial performance of recently transacted comparable properties. It is critical that the same analysis utilized to derive a capitalization rate from the comparable sales is applied when valuing the subject hotel.

The appraisal of a hotel is both interesting and challenging and is usually completed by an appraiser experienced in the analysis of the many variables that exist in a hospitality industry. Knowledge of industry performance and current transactions are essential elements of a well-prepared appraisal report.

Guest Contributor:
Adrian Rizzo, AACI, P. App is an associate with Kent-Macpherson Appraisals Ltd in Kelowna, BC. He specializes in the valuation and assessment appeals of hotels and motels throughout B.C. He can be reached at 250-763-2236 or

I have qualified buyers looking to purchase properties in Alberta and British Columbia. If you are thinking of selling your property, now may be the time. Please give me a call to discuss your requirements.

On behalf of myself and my family, I would like to take this opportunity to wish everyone a happy, joyous and peaceful holiday season.

For more information call:
Jerry Dombowsky
Address: #102-1180 Sunset Dr.,
Kelowna, BC V1Y 9W6
Phone: 250.717.1886
Toll-Free: 877.717.1886
Fax: 250.717.1889

Jerry Dombowsky
For 32 plus years Jerry has been in the Real Estate Industry in Alberta and British Columbia which has resulted in an outstanding record of sales.

He commenced his real estate career in Alberta, with the past 17 years located in the Okanagan Valley, selling Real Estate in Kelowna British Columbia and Alberta.

Jerry’s knowledge base of the total British Columbia market lends his expertise to sales of hotels and motels, small and large businesses, and commercial real estate. Having owned and operated ranches hotels and motels, in the past, gives Jerry Dombowsky a very good understanding of the effort needed to close the deal. Jerry is well versed in all aspects of the real estate market.

"We have known Jerry Dombowsky for over 25 years. During that time Jerry has helped us buy two businesses, including our present motel. He also helped in the sale of three businesses. Jerry assisted with all transactions upon the purchase and sale of each business detailing the documentation required to complete each stage. Jerry has always remained in constant contact with us and has made us feel more than just clients. With Jerry’s honesty and friendly disposition, we would not hesitate to recommend Jerry Dombowsky for someone’s real estate needs."
Steve and Julie Kim
Crossroads Motel Rycroft, Alberta

"When we were looking to purchase an income property, we contacted Jerry Dombowsky in regard to one of his properties. It wasn't what we really wanted but in discussing our needs, with Jerry, he found us a property that we were happy with. He helped us complete the sale and when it came to sell, he sold the property and helped us purchase another property. We have been satisfied with his service and we have recommended Jerry Dombowsky to our family and friends."
Mile & Diana Savic
Jerry Dombowsky Premier Hotels and Motels - The Connections to close the deal #102-1180 Sunset Drive, Kelowna, British Columbia V1Y 9W7 Phone: 250.717.1886 Fax: 250.765.0577 Toll-Free: 1.866.765.0579 Email: Web:

1 comment:

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