An Introduction to Hotel Valuation Methods

Over the course of his real estate investment career, Dr. Bharat Lall has purchased and sold more than 70 hotels. Bharat Lall, MD, closely follows hotel valuation trends and market changes in his role as founder and president of California-based Pinnacle Hotels.

The hospitality industry typically uses one of three approaches to determine the market value of a hotel. The most common, the income capitalization approach, operates on the underlying assumption that a hotel’s value stems from its ability to produce revenue. Appraisers who use this method may employ either the direct capitalization method, which looks at a property’s current income, or the discounted cash flow method, which analyzes income over a specified time frame. Because the hospitality industry can change dramatically from year to year, many experts strongly prefer discounted cash flow when estimating future value.

Appraisers may also determine the value of a property using the direct comparison approach, which looks at multiple hotels’ comparative values using a single data point. For example, an appraiser may use price per room to rank properties by sale value. This method tends to work best as a secondary technique, as hotels can differ widely in the features that contribute to value. Alternatively, the cost approach uses land and property values to estimate the capital value of a location. Because this total can change with altering depreciation, this method is more commonly used in determining value for insurance purposes rather than for investors, buyers, or sellers.

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