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  #1  
Old 10-05-2011, 04:29 PM
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CANative CANative is offline
 
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Default Value difference direct cap to yield cap

No big deal just wanted some input. Doing a economy/limited service motel. Direct cap indicates $3.7mm (rounded), yield cap indicates $4.1mm (rounded).

Is this too much of a difference? Direct cap is from 2009 revenues which are worse than 2008 and better than 2010. 2011 is turning out to be a better year and I'm projecting a revenue escalation of about 3% per year on a 10 year holding period.
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Old 10-05-2011, 08:32 PM
MAIorBust MAIorBust is offline
 
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A few things popped in my head when reading your post. First of all, why would you use 2009 income instead of the present year? You already said 2011 was (is) a better year so wouldn't that reflect in a higher value and thus more in line with the DCF?

I would personally steer clear of the DCF in this instance. History as shown that this property has a fluctuating income(which is very understandable in our current environment). So your projection of a 3% increase per year is really just a guess.

Why not just do a direct cap on 2011 income? Wouldn't that be much more indicative of its present value than guessing about the future or using income from 2 years ago?

Good luck!
  #3  
Old 10-05-2011, 09:02 PM
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Originally Posted by cmoneyt8ker View Post
A few things popped in my head when reading your post. First of all, why would you use 2009 income instead of the present year? You already said 2011 was (is) a better year so wouldn't that reflect in a higher value and thus more in line with the DCF?

I would personally steer clear of the DCF in this instance. History as shown that this property has a fluctuating income(which is very understandable in our current environment). So your projection of a 3% increase per year is really just a guess.

Why not just do a direct cap on 2011 income? Wouldn't that be much more indicative of its present value than guessing about the future or using income from 2 years ago?

Good luck!

Its a tax appeal ... they are using the income for the taxing year as authorized by law .. I am guessing. The assignment is most probably to establish market value as of 2009 ....

My question is does this segment of the market utilize yield capitalization when doing their due diligence or when making a decision to purchase?
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  #4  
Old 10-06-2011, 01:06 AM
PL1957 PL1957 is offline
 
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Originally Posted by PropertyEconomics View Post
My question is does this segment of the market utilize yield capitalization when doing their due diligence or when making a decision to purchase?
Yes it does. Unless the buyer is extremely unsophisticated, some type of DCF will be done, often incorporating whatever PIP would be necessary (assuming it's a flagged operation).
  #5  
Old 10-06-2011, 07:31 AM
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Quote:
Originally Posted by CANative View Post
No big deal just wanted some input. Doing a economy/limited service motel. Direct cap indicates $3.7mm (rounded), yield cap indicates $4.1mm (rounded).

Is this too much of a difference? Direct cap is from 2009 revenues which are worse than 2008 and better than 2010. 2011 is turning out to be a better year and I'm projecting a revenue escalation of about 3% per year on a 10 year holding period.
Given the relationship between a cap rate and a discount rate, does the cap rate reflect the anticipated 3% annual income growth? Generally speaking, if the cap rate and discount rate reflect similar expectations the results should be closer than your 10%+/- spread.
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  #6  
Old 10-06-2011, 09:00 AM
Denis DeSaix Denis DeSaix is offline
 
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I would think it to be relatively difficult to do a retrospective DCF for that period of volatility without having some kind of "source" to hang my hat on regarding the income growth rates that were used by market participants at that time.

Looking at some historic information (national survey, economy hotels) the OAR was 10.75 and the discount rate was about 2% higher (1Q2009). But the occupancy change from 2009 - 2010 was only +0.4%. For that same YOY, ADR declined (-1.5%) and nominal REVPAR was down (-1.3%).

Did market participants anticipate declining revenues from 2009-2010 at that time and then a recovery 2-3 years later (vs. 3% growth per year)? If so, that may explain the difference (at least that's what I think).

Last edited by Denis DeSaix : 10-06-2011 at 09:26 AM.
  #7  
Old 10-06-2011, 10:15 AM
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Yes. It is a tax appeal matter. The value date is January 1, 2010.

So it is like doing a retrospective appraisal. So, no a buyer would not know about the future but I already know the future. If my work had to comply with USPAP I probably wouldn't use the 2010 income data in the DCF model.

My RevPAR escalation assumption of 3% per year is based on several survey's I've read and take from numerous hotel appraisals I've studied from some of the top hotel appraisal companies. I also have inside information from my client that they think 2011 is going to be better than the years before so, to me, this kind of confirms that my assumptions are solid.


Quote:
My question is does this segment of the market utilize yield capitalization when doing their due diligence or when making a decision to purchase?
Yes. Except in my client's case he was a noob to the hotel business and and now states he wishes he understood this metric.

I have another hotel question but maybe I should start another thread. I'll put it here for now:

FFE. The income statement on this property I'm working has a line item for Equipment leasing/rental of just over $44,000. When I questioned him he stated it a lease on new in-room TV/Computer systems (61 total). It includes the television, a computer system, installation, etc. (a package.)

If the equipment is leased is this still FFE?
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  #8  
Old 10-06-2011, 01:34 PM
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I found an error in the expenses for years 1 and 2 (small percentage difference) and corrected the dcf model.

The two values are now virtually the same.
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  #9  
Old 10-06-2011, 07:47 PM
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Quote:
Originally Posted by Denis DeSaix View Post
I would think it to be relatively difficult to do a retrospective DCF for that period of volatility without having some kind of "source" to hang my hat on regarding the income growth rates that were used by market participants at that time.

Looking at some historic information (national survey, economy hotels) the OAR was 10.75 and the discount rate was about 2% higher (1Q2009). But the occupancy change from 2009 - 2010 was only +0.4%. For that same YOY, ADR declined (-1.5%) and nominal REVPAR was down (-1.3%).

Did market participants anticipate declining revenues from 2009-2010 at that time and then a recovery 2-3 years later (vs. 3% growth per year)? If so, that may explain the difference (at least that's what I think).

Denis .. when are you going to sit for the CG exam? Your knowledge is VERY VERY good ... the appraisal world needs a CG like you.
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  #10  
Old 10-06-2011, 08:43 PM
Denis DeSaix Denis DeSaix is offline
 
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Originally Posted by PropertyEconomics View Post
Denis .. when are you going to sit for the CG exam? Your knowledge is VERY VERY good ... the appraisal world needs a CG like you.
PE:

I very much appreciate your (and others on this forum) endorsement.

I had hoped to submit my hours by the end of this year. Still a chance... we'll see.

Its interesting when I chime in on CAN's questions regarding hospitality properties. I had the opportunity to go on one of his inspections of a very large (large in my view) facility in Oakland one day. It was a learning experience. Then, I had to bone-up on all these terms he was throwing out at me (REVPAR, ADR, etc.). I think he was gently trying to give me a crash-course in hotel valuation.

I have nothing but respect for appraisers like you, CAN, and others who swim in the commercial waters. From my perspective (20-years of residential appraising), the differences are significant: I'm good at residential, but rarely do the assignments require all the appraisal skills every appraiser is required to accumulate to obtain their license. My limited experience in the commercial waters is that each assignment requires application of those skills. Maybe if I become an old-hand, the commercial assignments will become mundane... though I doubt it!
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