IS IT TRUE? June 22, 2011 “The Hotel Appraisal”

8

IS IT TRUE? June 22, 2011 “The Hotel Appraisal”

IS IT TRUE that one of the documents that the CCO obtained by Freedom of Information Act is a Summary Appraisal Report issued to Martin Woodruff, CEO of Woodruff Hospitality LLC and dated September 20, 2010?…that this appraisal was made with respect to the Hyatt Place Hotel that was eventually chosen by the Evansville Redevelopment Commission as the winning response to their RFP?…that the appraisal did indeed specify that the hotel would be a Hyatt Place and would have 220 rooms, a gift shop, business center, pool, restaurant, bar, lounge, and fitness center?…that there is NO REFERENCE TO A PARKING FACILITY in the appraisal?

IS IT TRUE that as part of this appraisal that the real estate taxes on the completed hotel were estimated to be $260,000 per year?…that this amount of tax was estimated based upon an analysis done on eleven (11) newer hotels in the City of Evansville that range from 56 rooms to 250 rooms?…that this analysis resulted in an average assessment per room of $62,717 per room?…that the appraisal rounded this average up to $70,000 per room to estimate the assessment of the new 220 room Hyatt Place to be exactly $10,000,000?…that the math does not work ($70k x 220 > $10M) but that there was another assumption that the assessment would have a multiplier of 65%?…that an assessment of $10 Million was the basis to calculate the expected taxes of $260,000?…that the State of Indiana has a constitutional mandate for assessments to be at market value?

IS IT TRUE that there are typically three ways to arrive at an appraised value of a property?…that these are the COST APPROACH that is based on what it cost to build the hotel, the INCOME APPROACH based on the cash flow projections anticipated, and the COMPARABLE SALE APPROACH?…that the COMPARABLE SALE APPROACH is preferred because it reflects the current real estate market which does not always reflect the COST to build or the INCOME projections?

IS IT TRUE that the COST APPROACH appraisal of $33 Million must have been pretty easy to arrive at because the Project Uses and Sources Section of Woodruff Hospitality LLC’s bid document estimated that exactly $32,880,000 would be spent to get the hotel to opening day?…that this very same document did not include a parking garage and actually estimated the cost of a parking garage to meet City of Evansville codes to cost an additional $5 Million?…that those things alone now have the “official estimate” of the construction at $38 Million?…that when the miscellaneous other costs are included that this has been known to be over a $40M job for a long time now just as the CCO has published?

IS IT TRUE that the INCOME APPROACH yielded a stabilized (2 years after opening) appraised value of $34.8 Million entirely on the pro-forma that was part of the bid package?…that the projected occupancy rate used for this pro-forma was 68% occupancy at a nightly rate of $125 per room?…that this approach to valuation is very sensitive to initial assumptions and that if the assumptions would have been a more typical for the Evansville market of 60% and $99 that this approach would have yielded an appraisal of slightly under $25 Million?…that the appraisal reflects the calculation based on the input from the pro-forma which is dependent on the validity of the assumptions?…that there are plenty of market driven questions and uncertainties that could alter this method dramatically?…that the old adage of GIGO (garbage in = garbage out) applies?

IS IT TRUE that the best indicator of the market value of a piece of real estate is what the most recent sold comparable property actually sold for?…that this is why the COMPARABLE SALE APPROACH is the most sought after number for collateralization purposes?…that 14 sales were referenced in the appraisal as comparable?…that the sale dates of the properties ranged August of 2004 to November of 2006?…that the peak of the commercial real estate market came in 2006 and this appraisal was completed in 2010?…that confuses us because it seems to be common knowledge that the so called “real estate bubble” burst sometime between 2006 and 2010?…that we wonder why no more recent comparable sales were considered?…that given the date of the comps that the value of the COMPARABLE SALE APPROACH in this appraisal most likely reflects what the 2006 value may have been?…that this appraisal rejected the dollars per room approach and opted for a formula that simply multiplies the Gross Income PROJECTION from the pro-forma’s 3rd year and multiplies it by 4.15 to arrive at a value of $35,100,000?

IS IT TRUE that this choice sort of negates the entire theory of the COMPARABLE SALE APPROACH and relies on the assumptions of the INCOME APPROACH for validity?…that if the real COMPS were used that the MEAN SALE PRICE per room of $93,144 would yield a valuation for the 220 room Hyatt Place hotel of exactly $20,491,168?…that this reflects what the comparable value WOULD HAVE BEEN IN 2006?…that one thing that everyone knows is that commercial real estate of all kinds is worth less in 2011 than it was in 2006?…that if a conservative discount were applied to the 2006 value of 25% that a current market value (that is the price this thing would sell for if placed on the market) is closer to $15 Million than it is to $30 Million?…that therein lies the financing quagmire that the ERC and the winning bidder find themselves in?

IS IT TRUE that John Kish stood before the Evansville City Council in May and opined that the assessment would be equal to the cost to build?…that this sort of blows the estimate of the real estate taxes off the table?…that if the constitution says that assessments shall be at market value that market value is what they shall be?…that if the construction price really reflects market value that the real estate tax estimate should triple?…that you really should not be able have it both ways?…that obtaining an appraisal for over $30 Million and then pleading with the tax man for an assessment of $10 Million in a state with market value assessments is really trying to have ones cake and eat it too?…that we surely hope that sanity and constitutional conformity will prevail?

Finally IS IT TRUE that the appraisal assumes a full tax abatement will be granted for 10 years?…that if it is not that the income figures on the pro-forma should be adjusted down to reflect the payment of real estate taxes?…that this will reduce the appraisal’s valuation?

RELATED ARTICLESMORE FROM AUTHOR

8 COMMENTS

  1. Ironic you mention, Constitutional conformity… when, the topic is a government funded hotel…

    • The subject of that term was market value assessment of the hotel. I guess if the government built it and owned it the taxes would be ZERO.

      • Not to play devils advocate but with 10 years of tax abatement doesn’t that make any assessment a mute point until the company actually has to start paying taxes? We can all see the shell game that is going on to paint a rosy picture for the financiers (public) who will ultimately be left holding the bag on the hotel when Kunkel (or whoever) folds and leaves town.

        • They are phased in over 10 years in this case. It is moot in the first year but not afterwards. Second year you pay on 10% of assessment, 3rd year 20% etc.

  2. CCO Staff: formidable analysis as always. The Minutes of the ERC for 1/4/2011 ,which include Resolution 11-ERC-01, said only that ” there MAY also be an application for abatement of Property Taxes”. The ERC approved this resolution (titled ” Direction to Move Forward . . . .”) without any specifics whatsoever about tax abatement. That smells like catfish caught yesterday. Two questions:

    1) Did Woodruff actually submit an application for tax abatement; and
    2) Given the three values shown in the Appraisal and ignoring the nonconforming $ 10 Million “wish” number, what would be the value to a contractor of a 10-Year Full Abatement vs. the 10-Year Property Tax Phase In previously reported ?

    • Easy Math: No abatement at all and a $33.3 Million assessment at 3% tax equals a million per year in taxes. At a P/E ratio of 10 that would reduce the value of the asset by $10 M. Indiana taxes a year in arrears so if the end date of the construction made the third year the first year of full abatement then the value based on that year would be $10M more than a hotel that did not get abated.

      Abatements are phased in over the term granted so the longer you keep the property the more your value gets hurt until at the end of the term you finally pay taxes at full rate. Of course depreciation will take its toll on the assessment by then.

      • Easy for you maybe, Mr. Editor ! Are we to interpret this as an annual cost to the City (of foregoing the taxes) of $ 300,000 ($ 10 MM less value x 3%)? And $ 300,000/year x 10 years means a $3,000,000 charge to the Arena/Hotel combined Budget ? A fella could catch a lot of fish with a-bait (ment) of this size.

  3. Wonder if APC will approve a site plan for a 220-room downtown hotel without code compliant parking facility? Or will this project be just another one to go to BAZA (Board of Automatic Zoning Approvals)?

Comments are closed.