Hotel / Restaurant Valuation

[nelobynature]

I'm working on a case study and came across the the scenario below which I'm having trouble figuring out?

There's a mixed use property comprised of a hotel that is operated by a full-service hotel management company and a retail space that's occupied by a high-end name brand restaurant which is being operated by the brand's management co. The owner of the property has no lease in place with the restaurant operator but entered into a joint-venture with them to own 50% of the operation and therefore entitled to 50% of the income - also has a management agreement in place with them.

Upon exit, how would you value the property? The hotel's simple - but w/ regard to the restaurant, the value wouldn't be in the real estate (retail space) but in the restaurant operation. Would a potential buyer just look at the whole, whereby the owner's share of food & beverage income is part of the hotel income? Would the restaurant be valued as a separate component? - If so how do you even value a restaurant operation?

Thanks for the help

 

[sputnam]

Real estate appraisers value real property. Certainly some are qualified to value businesses as well. What does the case study ask for? Value of the property? or value of the businesses? The most straight forward approach would be current market value of the real estate. Find comparable sales/listings, develop market rents and expenses, and work through the Cost Approach for each section of the building. I would probably view the restaurant as owner occupied, since the owner of the building is a partner in the business occupying the space. I would not just lump the owner's share of the restaurant income into the hotel income. The cap rates are likely to be different for restaurant and hotel properties.

 

[Phil McDonald]

It is a full service hotel

In my opinion, the property is a full service hotel and the restaurant is part of the hotel. Treat the income from food and beverage as you would with any other full service hotel. Odds are that the food and beverage is a minimal part of income so it is more of a liability. Owners of hotels don't like F&B and an investor in this hotel would be required to assume an owner position in the restaurant.
Phil

 

[sputnam]

In my opinion, the property is a full service hotel and the restaurant is part of the hotel. Treat the income from food and beverage as you would with any other full service hotel. Odds are that the food and beverage is a minimal part of income so it is more of a liability. Owners of hotels don't like F&B and an investor in this hotel would be required to assume an owner position in the restaurant.
Phil

That approach makes sense too. As always, the devil is in the details.

 

[nelobynature]

This makes sense, and from a valuation perspective it would be the ideal scenario, but in this case the restaurant generates revenue that is comparable to room revenue - think top 3 restaurant in the city. I doubt an investor would look at capitalizing the income streams evenly. On a standalone basis i've read in an HVS report that the strongest of restaurants, on a cap rate basis, range in the mid to high teens - but again, in the end this is a hotel restaurant.

Phil i understand that investors don't like F&B for obvious reasons, so would they discount income attributable to f&b (room service, dining, banquet, etc.) if it was a substantial portion of revenue? I know that's generally not the case and it's more often than not a loss-leader ,but for arguments sake, i was curious on that point as well.

 

[CANative]

The only reason for restaurants in hotels is to get people to come to stay in the hotel. Why would you split up the cap rates between the two income streams? Use cap rates for full service hotels with flags that are competitive.

 

[DaveH]

you could breakout different cap rates based on the hotel stream and restaurant stream as the operating expenses differ, as well as other aspects. Then determine the market value for each less interest of the owner and give consideration that a buyer would be drawn to the property based on the income generated by both combined, and not individually.

 

[Phil McDonald]

It is in the data

This makes sense, and from a valuation perspective it would be the ideal scenario, but in this case the restaurant generates revenue that is comparable to room revenue - think top 3 restaurant in the city. I doubt an investor would look at capitalizing the income streams evenly. On a standalone basis i've read in an HVS report that the strongest of restaurants, on a cap rate basis, range in the mid to high teens - but again, in the end this is a hotel restaurant.

Phil i understand that investors don't like F&B for obvious reasons, so would they discount income attributable to f&b (room service, dining, banquet, etc.) if it was a substantial portion of revenue? I know that's generally not the case and it's more often than not a loss-leader ,but for arguments sake, i was curious on that point as well.

You can extract this by looking at the cap rates and expense ratios of limited service and full service hotels. You have a more limited pool of buyers for full service. It is the mgt intensity of full service investors don't like, but you can't treat it as seperate parts unless you can sell it as seperate parts.

There is a discount and risk premium to F&B income but it needs to be treated as part of the whole.

Phil

 

[Howard Klahr]

You can extract this by looking at the cap rates and expense ratios of limited service and full service hotels. You have a more limited pool of buyers for full service. It is the mgt intensity of full service investors don't like, but you can't treat it as seperate parts unless you can sell it as seperate parts.

While I agree with the last statement (cant treat separately), but in regards to comparing full service to limited service to extract differential for food service is not an apple to apples comparison. The differences between full service and limited service are much greater than just food service. In fact based on the description by the OP the subject property seems to most closely represent a limited service hotel with a joined restaurant space that most often is just leased to a third party as opposed to a joint venture partner.

What does the OP mean by high-end name brand restaurant? Does it refer to the national breadth of the restaurant chain or the segment of clientele targeted by the restaurant? Are the client segments of the restaurant and the hotel compatible or do they focus on different market segments?

 

[CANative]

I see a lot of 200 page hotel appraisals.

Last Wednesday I stayed in a 98 room full service, non-flagged hotel across the street from the County building I had business in the next day. The hotel had just changed hands about a month earlier. The lobby was reburbished and the restaurant remodeled just prior to the sale. The rooms were clean but a bit dated (built in '72, looks like '90 style updates.)

I paid for one night in advance in cash (they didn't have change for my $100 bill and had to take up a collection... lol)

While having dinner in their restaurant I casually punched some numbers in my pocket calculator and came up with a value of about $2.1M. I looked up the sale on NDC on Friday and it sold for $1,990,000. I was kind of stoked that my little calculator appraisal was pretty close but still $200k off. Then it hit me. The rooms needed new TV's and some better decorations. Maybe $2,000 per room?