Hotel Appraisal Analysis based on Tenure and Tenancy Structures

There are 2 key issues in appraisal of hotel assets. In income capitalization approach, the identification of Net Operating Income (NOI) according to the different tenure and tenancy structures is complicated. The value segregation between real estate value and the business value is also difficult. The objective of this paper is to introduce calculation techniques to modify NOI taking into account these issues and to propose an income capitalization approach in hotel appraisal. First of all, the hotel tenure and tenancy structures are classified into 3 types: Lease contract (LEASE), Management Contract (MC) and Direct Operation (DO). Secondary, the proposed techniques to modify NOI are explained. For the identification of NOI, an approach using Revenue Par Room (RevPar), one of the operational benchmarks, is implemented under LEASE. For value segregation, Economic Value Added (EVA) method, which assesses the value of a listed company based on the idea of corporate finance, is used under DO. Thirdly, applying these techniques to an appraisal case, modified NOI is capitalized to produce income values. Through interpretation of the results, advantages of MC, assessment of LEASE, and the effectiveness of PervPar as well as EVA methods are discussed. As final consideration, it is inferred that the proposed process can be used as a reference for investors to analyze strategies of hotel asset management. However, further analysis of Cap rates under MC, capturing hotel brand value under LEASE, assessing the enterprise value under DO are necessary for improving the applicability of this approach.