week 8 - hotel vals

Question 1

explain freehold investment intrerest - landlords interest

Answer 1

Owns the land and buildings

Right to receive rental for the unexpired term of the lease

Typically responsible for structural repairs and maintenance and Land Tax

Reversionary right to the business at expiry of the lease

Liquor licence attached to the land

Question 2

explain lease hold going goncern - tennants interest

Answer 2

Business Interest subject to Lease agreement with Landlord
Market price a Tenant would be willing to pay in order to have the right to occupy the premises for the unexpired term of the lease
Pays rental to Landlord
Right to receive the business profits for the unexpired term of the lease
Saleable asset – option terms are usually exercised.
Interest usually includes all fittings, fixtures & equipment (FF&E) requisite for the ongoing operation of the business

Question 3

explain freehold going concern interest - land, buildings and business

Answer 3

No lease in place - no rent

Property and business are held together

The owner of the Freehold Going Concern has the rights to the profits/liability for the losses regarding the business

Tenant and Landlords interest combined

Question 4

major hotel interets include

Answer 4

Freehold Going Concern
Land, buildings and business held together.

Freehold Investment
Landlords interest, owns land and buildings and receives rent

Leasehold Going Concern
Business interest held subject to lease with Landlord.

Question 5

major valuation tecnahiques for hotels

Answer 5

Freehold Going Concern Interest – EBITDAR

Leasehold Interest – EBITDA

Freehold Investment – Net Market Rental

Question 6

explain ebitdar / ebitda

Answer 6

Earnings   -  Profit
Before  -  Ignore
Interest   -   Owners purchasing costs
Taxation  -  Income Tax
Depreciation   -  Capital Purchases
Amortisation    -    Capital Purchases
Rent     -   Rent paid to occupy premises

Stripping back the Net Profit to represent the operational income
Add back one off expenses and costs not directly related to the ongoing operation of the business

Question 7

Freehold Going Concern Val Methodology

Answer 7

methodology:
Assess EBITDAR
Capitalise EBITDAR in perpetuity

value drivers:
Business Trading History
Potential Trading Growth
Liquor Licence provisions
Underlying Land Value
Zoning
Redevelopment potential
Highest and Best Use

Question 8

value drivers of freehold going concern val methodology

Answer 8

Business Trading History
Potential Trading Growth
Liquor Licence provisions
Underlying Land Value
Zoning
Redevelopment potential
Highest and Best Use

Question 9

explain Freehold Investment Val Methodology

Answer 9

methodology:
Capitalise Net Market Rental in perpetuity
Rent less Landlords outgoings, usually Land Tax

Question 10

explain value drivers/determinants

Answer 10

Underlying Land Value
Zoning
Redevelopment potential
Strength of Tenant eg ASX listed company
Remaining tenure on lease
Rent review provisions
Over/under rented
Landlord outgoings

Question 11

explain leasehold going concern valuation methodology

Answer 11

Assess EBITDA

Capitalise EBITDA

Can use Discounted Cashflow Analysis where lease is close to expiration where value reverts to zero.

value drivers:
Business trading history
Potential trading growth
Liquor Licence provisions
Remaining tenure
Rent review provisions

Question 12

value drivers of leasehold going concern

Answer 12

Business trading history
Potential trading growth
Liquor Licence provisions
Remaining tenure
Rent review provisions

Question 13

what is marriage value

Answer 13

Marriage Value is essentially the combined value of the freehold investment and leasehold interests, and approximately equates to the value of the freehold going concern.

Any valuation of a freehold going concern should be checked or supported by a marriage value assessment of the freehold investment and leasehold going concerns

Question 14

explain existing use rights

Answer 14

Due to long historical trading at most hotels (many date back to the early 1900s), existing use rights apply.

If the hotel use is not permissible under the planning scheme, continued use is allowed providing proof of 15 years of continued use.

Existing Use Rights can be lost if the use ceases for more than two years

Question 15

explain clacluating the market rental

Answer 15

The market adopts the profits method in assessing rentals in the hotel industry whereby the rental is a product of EBITDAR
Through analysis of rentals struck in the open market, comparison can be drawn between the rental to EBITDAR ratio
It is common to see Rentals in the order of 35% to 40% of EBITDAR
Each hotel must be assessed on a case by case basis as there are different factors at play

Question 16

explain good averge management

Answer 16

In assessing EBITDAR and EBITDA we should assume Good Average Management principals eg. Industry benchmarks for wages, costs of goods sold, repairs and maintenance etc
Again, we are mirroring purchaser decision making – a purchaser is going to have regard to the profit THEY can obtain from the investment. If the incumbent operator appears to be exceptionally good, the purchaser is going to be wary of their ability to maintain profitability
Likewise if an incumbent operator is perceived to be very poor, the purchaser is going to factor into their assessment the likelihood of their ability to increase profitability.
In the instance of a Market Rent Review, good average management principals are important to ensure that an exceptionally good operator (eg Celebrity drawcard) is not penalised for their own talents via a higher assessed rental and conversely that a Landlords asset is not diminished by the Tenant being a poor operator through a lower assessed rental.
Our assessment under Good Average Management is driven by benchmarks with comparable venues.

Question 17

4 levels of profit and loss can include

Answer 17

revenue:
inceom received from sales (excludeds gst)
ideally per week basis

costs of goods sold:
represents the direct cost of the raw goods that are sold. Eg, Beer kegs, food, stock for bottle shop.
For a typical pub, bars might have a COGs 30%, so that means for a $10 G&T, the venue spends $3 on ingredients which leaves a $7 Gross Profit

expenses

addbacks
One Off Expenses
Consultant fees eg. Relating to a planning permit application
Purchase of new equipment
Fines or penalties

Question 18

explain hotel layout

Answer 18

Be careful with Benchmarking!
Each hotel must be assessed on a case by case basis taking into consideration the attributes of each
Eg. Hotel A would have a lower wage bill than Hotel B, benefitting from staffing efficiency via single service point for both food and beverage.