Forecast of Revenue and Expense Besides Supply and Demand analysis which provides a general concept of measuring performance in the market share, revenues and expenses forecast gives the investors the overview of the future cash flow which reflects the return as the crucial metrics of the investment, helping investor to make a good decision. According to the proposal plan, the proposed hotel located in 22nd street will have following facilities: 238 hotel rooms, 53 off-street parking spaces in a valet-operated below-grade garage, a fitness center, a restaurant with an entrance on M street, an outdoor terrace and a roof-top LOL.
Based on the demand and supply analysis project, the proposed Hilton Garden Inn will open in the January, 2014 with 238 rooms opening 365 days, occupancy level of 75% and an average daily room rate of $168. To make a prediction of an existing hotel, appraiser need to look up demand and supply of local market and past financial statement in order to forecast future expenses and revenues accurately. In this case, because the Hilton Garden Inn is a proposed hotel so that more fieldwork are required for the precise prediction.
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To estimate expenses and revenues of a proposed hotel, the comparison between the reposed hotel and comparable hotels is very crucial. Additionally, the national averages which represent average operating performance and typical management ability may give investor a useful reference. The forecast of revenue and expense begins by converting the occupancy and average rate projections into an estimate of rooms revenue.
Analyzing data collected in the market and industry statistics, the appraiser can establish a forecast model of other revenue category such as food, beverage, telephone, and other income as well as normal hotel operating expenses. Before projecting individual items of hotel revenue and expense, the fixed and variable component approach is widely used, setting up a constant portion of expense or revenue and a variable component which is adjusted to reflect the percentage change between the projected occupancy and facility utilization and the actual occupancy and facility utilization that produced the known revenue or expense.
In this case, I decide to use the default fixed component provided by HAVE FIXER program because it can reflect the business operations of this proposed hotel. Furthermore, according to data from 2011 Trends in the Hotel industry report and STAR 2011 Full-service: Upper Upscale Chains Host report, the financial benchmark of Washington DC Upper-Price hotels which can be used for the Hilton Garden Inn shows that how each category weight in the total revenues and how each kind of expenses make up to the revenue. The following table shows hypothetical input in the base year based on this reasonable data.
Looking up the historical inflation rate since economy crisis in 2008, the inflation rate was stable in the past 4 years, in the range of 1. % to 2. 6%. In addition, because of data from STAR 2012 August Forecast, the GAP will have a 3% growth annually and the household disposable income has an approximate growth of 2. 5%. The other data in recovered gradually from the recession. Therefore, the inflation rate for next 5 years in the revenue is 2. 5%, which is calculated by average of inflation rate of past areas plus optimal index of 0. 5%. Moreover, the inflation rate of expenses is 0. % equaling to 1/5 of revenue inflation rate. The inflation rate of room revenue is 5%. Based on data from POKE econometric forecasts of US. Lodging industry, the ADAIR will have a 3% increase and occupancy will have a 1% increase in the upper-priced hotels. Utilizing above data, the occupancy level of Hilton Garden Inn will be stable at a level of 80% which surpasses the average performance of that location after 2019. Furthermore following the predicted path, the ADAIR of proposed hotel will increase to $219. 29 by the end of 2023. Moreover, the net income of Hilton Garden will increase from 2. 1 million to 6. 49 million in the ten years, proving that this proposed hotel will perform very well as a property worth to invest. Hotel Valuation and Return Analysis The market value of a lodging facility includes the value of its various components, which comprised by tangible assets like land, buildings, furniture, fixtures, and equipment; intangible assets such as human resource and reputation value. To estimate the market value of the real estate, the appraiser always utilize 3 approaches including the cost approach, the sales comparison approach and the income capitalization approach.
The income capitalization approach, which converts the anticipated future benefits of property ownership into an estimate of present alee, is generally the preferred and reliable technique for appraising income- producing properties because it closely simulates the investment rationale and strategies of knowledgeable buyers. Compared with office and retail buildings offering a long term and stable lease, hotels and motels offer 365 different lease in a year, taking such a high risk will become a challenge for investors.
Consequently, income capitalization approach consists of data from comparable market can reduce the instability of unsubstantiated, subjective Judgments. Capitalization rates used to invert expected future income into an indication of value is difficult to determine under volatile of current economic. Additionally, capitalization rate is a ratio used to estimate the value of income producing properties: the net operating income divided by the sales price or value of a property expressed a percentage. In this analysis, the capitalization rates condensed into cap rate is given as 9%.
Some procedures can be used to combine mortgage and equity data into a discount factor or capitalization rate that will convert a projected net income estimate into an indication of value. The election of discount factors and capitalization rates might be vary in many factors like the length of the income projection period, the age of the property and its stage in its life cycle. Instead of discount each year’s income over the full life cycle of the property, a single, stabilize estimate of net income can be capitalized at an appropriate rate.
The stabilized net income relates to a representative year or, more technically, it is the discounted average net income over the property economic life. In estimating stabilized earnings, the estimate income of the investment’s early years eight more because it is less affected by discounting. In this case, the forecast of income and expense developed for the proposed Hilton Garden Inn indicates that the hotel is expected to stabilize in its tenth year of operation. The proof of value for total the next 10 years which is equals to the total property value.
Since the property value of $53141 is made up by 40% equity and 60% mortgage, the value of the mortgage component is $31884 and value of the equity component is $21256. Market value is calculated by the net income divided by cap rate. The expected net income of year 1 1 is $6621 and cap rate is 9%. Therefore, $6621 divided by 9% is $73565. In addition, 3% selling expenses which equals to $2207 charged by broker will be subtract from the market value of year 11. Then we get the cash from sales proceeds which is $71358.
Year 10 net income plus the cash from sales proceeds is counted as net income of year 10 into the proof of value for total property. The following table shows the proof of value for total property yield. The following table shows the component of value of the property. Proof of value for mortgage yield interprets that how much the annually debt service the hotel should pay in the projection years. In the last year of projection which is year 10, the remaining mortgage balance of the loan should be added to mortgage payment of year 10.
In this case, the remaining mortgage balance of the loan is $23570 and the mortgage constant is around 7%. After plus annual payment of $2237 from year 1 to year 10, the total mortgage component value is $31884. The following table shows the proof of value for mortgage yield.. In this case, yearly net income deducted by mortgage will be counted as the equity. In addition, discounted equity accumulation for projection period will be the total equity. At the end of the projection year, sales price minus the remaining mortgage balance is the equity residual.
The equity residual plus the year 10 net income after debt service will be the net income to equity of year 10. The following table shows the proof value for equity yield. The benefits to the equity position include equity dividends from the net income remaining after debt service during the 10-year projection period and the gain or loss realized from the property’s assumed resale. The resale or reversionary benefits include the gain or loss caused by value appreciation of depreciation plus any Ortega amortization.