Half Sized Blog Element (Single Author Style)
Half Sized Blog Element (Multi Author Style)
Full Sized Blog Element (Big Preview Pic)
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.
Office Property Appraisal and the Proper Valuation Techniques, Part 3
In the third part of our look into the appraisal of office building properties, we will focus on some important issues related to the selection of comparable rental properties within the Income Approach. In order to have a reliable valuation, it is important to select comparable properties that could be substituted as an alternative to the subject property. Not every office space is the same and it is important for the appraiser to select comparable properties that are similar to the subject in terms of expense structure, quality, condition, and utility.
It is common to find office properties that are close to each other in proximity, but are not comparable to each other in any other way. For example, in downtown business districts of some metropolitan areas it is common to have several different types of office properties. One office property may consist of a recently completed Class A LEED-certified high-rise office building while another office property two blocks away may consist of a single-family residential home built in 1925 that was converted into an office building. Both of the properties are close in proximity but it would be unlikely that both properties could be used as comparables in the same valuation due to their differences.
Another important consideration when choosing comparable office properties is expense structure. The expense structure of a lease determines who is responsible to pay the real estate expenses, including the real estate taxes, insurance, management, utilities, janitorial, repairs and maintenance. It is possible that the lease may be on a full-service (gross) basis with the owner paying all the expenses related to the real estate, a NNN (triple-net) basis with the tenant responsible for all the expenses related to the real estate, or a modified-gross basis with tenant responsible for some expenses and the owner responsible for some expenses. If the subject property is currently leased, the best comparables would be properties with the same expense structure as the subject. Any differences in lease structure would have to be accounted for through expense adjustments.
If either of these issues is overlooked within the Income Approach, it could limit the reliability of the valuation. It is important that an appraiser consider all the factors that make up an office building market when selecting comparable rentals. If one factor is ignored, it could have a significant impact on the subject property’s valuation. For more explanation on appraisal methodology, visit our website at www.commercial-appraisers.com.