Lodging Facilities and Average Daily Rate
When appraising a lodging facility such as a motel, hotel, extended-stay hotel, campground, or destination resort one of the key issues an appraiser faces is determining the potential gross income within the Income Approach to valuation. A lodging property can offer a wide variety of room configurations, stay lengths, and payment options. One of the most common ways for an appraiser to calculate potential gross income is to calculate and an average daily rate for the property. In this blog, the difficulties of finding the potential gross income of a lodging facility and how to calculate average daily rate is discussed.
Lodging facilities are typically comprised of rooms with varying sizes and varying nightly rates. Additionally, rooms may be offered nightly, weekly, monthly, or some other duration of time. Rooms rented for longer durations offer a discount when compared to the nightly rate. Additionally, rates may vary depending on things such as purchase date or if the room was purchased through a discount website. Due to these factors, it can be difficult to estimate the potential gross income for a property, since the percentage of stays for each category (nightly, weekly and monthly) and the rates paid for each night can be difficult to track. However, calculating an average daily rate (or ADR) is an acceptable way within the lodging industry to channel all of the room income into one rate for analysis.
Average daily rate is “the average rate per occupied room”. The average daily rate for a lodging facility is calculated by dividing the total room revenue achieved during a specified period by the number of rooms sold during that same period. For example, I recently appraised a small destination resort property that offered one bedroom, two bedroom, and three bedroom configurations on a nightly, monthly, and weekly basis. Based on the different room configurations and lengths of stay, there was not an easy way to calculate the potential gross income for the subject’s rooms. However, the owner of the property provided us with their room revenue and occupancy rates by room type. From the occupancy rates we were able to calculate the total number of rooms sold, which allowed me to find the property’s average daily rate by dividing the total room revenue by the number of rooms sold. Finally, I was able to estimate the property’s yearly potential gross income by multiplying the average daily rate by the total number of rooms by 365 days.