Valuation of Hotel Real Estate - beyond pure lease contracts

This paper is about the valuation of hotel real estate in Germany regarding the loss of market shares of pure lease contracts for hotel properties in favour of management or hybrid forms of operating agreements. Based on the theory of SOTELO, that lease contracts can be interpreted as financing contracts, it can be shown that the reason for the diversification of operating agreements can be explained by different forms of financing depending on the characteristics of the hotel property and the liquidity of the market for operating agreements. While pure lease contracts can be seen as debt financing, hybrid forms of operating agreements equal mezzanine financing, as well as management contracts are like equity financing. This diversification will on the one hand lead to an insufficient basis for gaining comparable leases as well as comparable cap rates for hotel real estate with the effect that the valuation of hotel properties by the standardised German income approach won¥t be preference free anymore. On the other hand, it can be shown that, assuming a lease contract for valuing a hotel property that is ideally operated by a management contract will result in wrong assumptions due to different forms of financing and probably not lead to the market value. Closing the gap in the German hotel real estate valuation the aim was a valuation method that will allow preference free hotel real estate valuation without comparable leases and comparable cap rates coincident with the German Valuation Guidelines. Therefore regional and national empirical analyses of hotel property purchase prices, based on the hedonic theory, were conducted. Based on the results of the regional analyses, a hotel valuation system was developed and verified regarding the accuracy of estimate. It was shown that a preference free valuation can be performed on this basis that is in line with the German Valuation Guidelines.