Comps for a Downtown Hotel

By Joe J. Wallace, Hadannah Business Solutions
hadannahbusiness@aol.com

Economy Clobbers Hotel Prices: What is the Market Price for what Evansville Hopes to see Built?

Last week I submitted an article that was published by the City-County Observer that discussed what I referred to as the Executive Inn Dilemma. In that article my research and conclusions were predicated on two of the three most common ways to value a commercial property. In valuing income properties such as hotels, there are three approaches from which to select when conducting analysis: the income capitalization method, comparable sales comparison, and the construction cost approach. Although all three valuation approaches are generally given consideration, the inherent strengths of each approach and the nature of the hotel in question must be evaluated to determine which approach will provide supportable value estimates.

In “The Executive Inn Dilemma”, I chose to compare the income capitalization method to the forecasts that are available for the construction cost approach. As you may recall, the construction costs are estimated in the $40 Million dollar range while the value of a proposed hotel using the income capitalization method is closer to the $20 Million level. It is the difference in what the City of Evansville will have to attract or pay for a hotel versus the value of the cash stream generated by the hotel that created the Executive Inn Dilemma.

The third and typically preferred valuation method that is considered by lenders is the cost comparable method. In this method similar properties are used to compare the “market rate” for a particular property. The theory behind this method is basically the same method that is used to value residential housing. That is, if a 220 room three star hotel in a similar market has sold or is for sale at a particular price, then accounting for any obvious differences, an investment opportunity here should have that same value. Comparable properties are difficult to find in today’s market because a large number of distressed properties on the market or that have sold recently have downwardly biased the values. You see, the great recession has depressed commercial properties as much or more than it has reduced the values of houses.

I was able to access Loopnet (www.loopnet.com) that is a nationwide service for listing commercial property for sale. I was able to find three listed full service hotels all of which have restaurants, swimming pools, and exercise facilities. They are also in similar markets to Evansville from a room rate and occupancy perspective. All are currently operating and are not distressed sale situations. The tabulation of these properties along with the number of rooms, hotel list price, the list price per room and the comparable value of the recommended 220 room, three star hotel that the City of Evansville and Vanderburgh County aspire to see opened as close to the grand opening of the Arena as is possible.

Comparable Property Table
Location Rooms List Price $/Room Comparable Value
Norcross, GA 244 $4,950,000 $20,286.89 $4,463,115
Little Rock, AR 212 $3,500,000 $16,509.43 $3,632,075
Dayton, OH 235 $2,900,000 $12,340.43 $2,714,893
Average 230 $3,783,330 $16,449.28 $3,618,841

Using the list prices of these three hotels, and they did take some time to find, the average comparable value for the proposed Downtown Evansville Hotel is only $3,618,841. If one assigns a 100% premium for location and newness to the recommended hotel for being new the comparable value method still only yields a value of $7,237,682. That is somewhat distressing as that value is on the order of only 18% of the projected cost of construction.

I am not advocating that a state of the art Downtown Evansville Hotel will only be worth $7.2 Million. The message that I want to make clear is that the Request for Proposal that is being prepared by John Kish and his team will be competing for funds with opportunities like these comparables. The depressed state of the commercial real estate market has already created a “bottom feeder” mentality among investors in lodging. The “bottom feeders” that may be attracted by the Evansville RFP will be comparing us to these opportunities.

The current market has blunted the efforts that Browning Investments has expended in pursuit of financing. That market is not going to change substantially in the next couple of years. My caution to the people running the effort is to be realistic in your expectations. The City of Evansville does not have an opportunity to buy a hotel from the listings above. If that were possible then today’s buyers market would be of benefit. Evansville and Vanderburgh County will find a way for this to get built or there will be no hotel. The value of the cash stream is worth half of the construction cost and the depressed market has driven prices of comparable properties to lows that have not been seen for decades.

If Evansville is to have a Downtown Hotel, there will have to be significant incentives for the developers. The time is now to take control of this process and to put together a practical and realistic plan that has a chance to attract the investment that everyone agrees that will be needed. Be bold and try “Living Outside the Box©”. Conventional financing and conventional thinking will not yield the desired result

Submitted by Joe J. Wallace, Hadannah Business Solutions
Copyright applied for “Living Outside the Box” by Joe J. Wallace

For those who may be interested, here are the links to the properties that I used for comps.
http://www.loopnet.com/xNet/MainSite/Listing/Search/SearchResults.aspx?linkcode=13900&SCSN=SSCXml#/GA/Multiple-Types/For-Sale/c!ARUIBQnDAfoBAAABEwACARQB4AQ
http://www.loopnet.com/xNet/MainSite/Listing/Profile/Profile.aspx?LID=16387779&SRID=1060553733&StepID=101http://www.loopnet.com/xNet/MainSite/Listing/Profile/Profile.aspx?LID=15726719&SRID=1060564473&StepID=101