Natural Occupancy Rates in Hotels

Calculation of natural occupancy rates can assist market analysts in assessing the relationship between supply and demand in a market. In turn, this could help determine whether the market could absorb more supply in the short term and the long term. This paper outlines the procedure for estimating natural occupancy rates within the lodging industry

Development in the ’80s: The Facts of Life After Tax Reform

U.S. hotel development now consists of deals that are built to make money, not tax breaks. Here\u27s a look at the many complications that can beset hotel developers

An Estimate of the Value of a Hotel Management Agreement in Involuntary Termination Settings

The spreadsheet is prepared for use in conjunction with the Cornell University School of Hotel Administration Center for Hospitality Research Report entitled Calculating Damage Awards in Hotel Management Agreement Terminations by Jan A. deRoos and Scott D. Berman. The spreadsheet is provided as an example of an estimate of the value of a HMA as an academic exercise. The individual pages are a methodical approach that follows the outline of the article: Estimate hotel revenues and expenses into the future (first three tabs give 10-year proforma) Estimate fees (next three tabs) Present Value the fees (PV Calcs) Summarize and add any additional losses (last tab) The spreadsheet accommodates an HMA of up to 100 years duration and a termination date in any month

Investment Values of Lodging Property: Modeling the Effects of Income Taxes and Alternative Lender Criteria

When taxes and lender criteria are considered, the estimated value of a hotel property can change. The effect of taxes, for instance, may well be to increase to a potential buyer’s bid for a given property

Investment Values of Lodging Property: Proof of Value for Selected Models

In an earlier article the authors introduced two models that demonstrated the effects of taxes and lender criteria on a property estimated value. Here’s the proof of value for those models

Buying High and Selling Low Revisited: The “Quiet Industry”

In summary, while there may be some potential for extraordinary profits from investing in hotels, we believe that the ability to simply buy low and sell high as a result of lodging market cycles or capital market cycles will be greatly diminished in the future. Opportunities to take advantage of noise traders (that is, those whose motivations are based on factors other than the economics of the deal) are gone, and there is no evidence of distressed selling in the current environment, even though the challenges to the industry have been great. Disciplined equity and debt capital, smart underwriting, and broad capital markets will continue to weaken the ability for noise trading to exist in the market for hotels as investment property. Paraphrasing John Houseman’s words in the old Smith Barney advertisement, in today’s lodging market, you have to make money the old fashioned way, you have to earn it

The ADR Rule-Of-Thumb as Predictor of Lodging Property Values

In a positive context, asset valuation models may be judged on the basis of their predictive ability rather than on the number and elegance of the underlying assumptions. The Average Daily Rate (ADR) rule-of-thumb has been used for decades as a quick way of estimating hotel and motel room rates and, more recently, as a simple gross-income multiplier model for predicting values of lodging properties. This study examines how well the ADR rule-of-thumb model predicts property values. The results of our comparative analysis of estimates from the ADR model with those from a hedonic valuation model indicate that the ADR model performs well in the aggregate, but is an inconsistent estimator at various levels of disaggregation, such as when property subsamples were organized by number of rooms, age, occupancy rate and number of restaurants

Buying High and Selling Low in the Lodging-Property Market

[Excerpt] In this article we explore the idea that the transaction price may be different for a given lodging property in the case of one buyer and seller pair relative to another. The findings reported here are from a statistical exploration that is made possible by a large database of lodging-property transactions that occurred throughout the United States during the late 1980s and early 1990s. We begin with a discussion of previous research on the influence of buyers and sellers on property prices, then we present the findings from our study and their implications

Recovery of Real Estate Returns for Portfolio Allocation

Appraisal-based return indexes may not approximate the true real estate return distributions because of understated return volatility. Recovery of returns from reported, appraisal-based returns may be possible by evoking models to correct for appraisal-based smoothing of the second moment. Because recovery intentionally alters the volatility of the reported return distribution and the correlations among assets in the portfolio, the weights to real estate are likely affected. Our examination of the portfolio implications of altering the return distribution indicates that weights may be quite sensitive to the effects of recovery across a reasonable range of correlation regimes. A comparative analysis of several recovery models reveals that all models achieve the objective of inflating the volatility of reported returns. However, the models also change the mean of the return distribution, which either counteracts or magnifies the effect of the volatility change on allocations. These findings bring into question the applicability of recovery models in their current form

Calculating Damage Awards in Hotel Management Agreement Terminations

When a hotel management agreement is terminated without the consent of the manager, the law clearly allows the manager to recover damages (from the owner) as a result of the termination. In most cases, the owners and managers resolve their issues without litigation. For the substantial number that cannot agree and thus must be adjudicated, the courts have supported solid estimates of forgone fees for determining damage awards, based on careful, defensible calculations of the hotel’s performance during the prospective contractual period. The methodology outlined in this paper provides a way to establish with reasonable certainty the damages that occur from the involuntary termination of a hotel management agreement. While many hotel management agreements contain a liquidated damages clause that establishes the termination fee when the parties agree to terminate the contract, these liquidated damages clauses are not applicable in a situation where the hotel management agreement is terminated even though the manager has not breached the contract. This report provides a numerical example demonstrating that the actual damage amount is at least twice and potentially five times the amount of a typical termination fee. An analysis of recent court cases shows that the courts accept the methodology proposed here, although they may debate the assumptions that underlie the calculations (such as the anticipated inflation rate). What courts will not accept are unsupported estimates and certain expense claims not expressly found in the contract language