Rushmore methodolgoy "illegal"

[Brian Weaver]

The Appraisal Institute had an on-line webinar debate this last week between Rushmore, championing the Rushmore Approach, and Dave Lennhoff, arguing in favor of business enterprise valuation methodology.

I'm not lucky enough to get to appraise properly performing hotels. By the time I get sent, the hotel has either lost its franchise or else has closed. It has also lost substantial value from the time it was appraised as a "flagged" hotel going concern, making me appreciate the value of a nationaly known hotel franchise and its ability to draw customers through its reservation system, frequent stayer rewards program, and goodwill.

Perhaps I am oversimplifying (not that simplicity is necessarily bad), but wouldn't the difference in net income between the hotel as flagged and the hotel as unflagged be a useful method of quantifying business value? If done often enough on a national scale, maybe tables of data could be developed, if they haven't been developed already. Likewise, one could compare the sales of unflagged or recently closed hotels to sales of performing franchised hotels of similar quality, with most of the difference being business value. I haven't seen an appraiser do this and wonder why not, considering such an estimate of value might come closer to being "market-derived".

As for the debate between the Rushmore approach and the Business Enterprise approach, I choose no sides. It all seems so academic, and I don't get called in until the business enterprise is gone, whether it is a hotel, a gas station or a hospital, and then I find that the real property value is a smaller percentage of going concern value than previously thought.

I valued a hotel last week which was a failed Days Inn. I read an interesting feasibility study for its conversion to a Sheraton Suites hotel, with the analyst assigning a 30% premium in revenues due to the Starwood affiliation. The only problem was when I asked the owner to show me a copy of the Starwood management or franchise agreement, there was none, just a two-year-old letter about looking forward to working together with the hotel owner.

Is this "non-flagged" value the same as a "go-dark" value?

 

[CANative]

Rushmore's firm HVS, specializing in hospitality valuations, uses a system known as the "Simultaneous Valuation Formula", created by Suzanne R. Mellen, MAI, an HVS employee. It is explained in detail in an article in the April, 1983 edition of the Appraisal Journal, called "Simultaneous Valuation: A New Technique".

It's too large for me to attach, but a copy of the article is available if one were to google the phrase: "Simultaneous Valuation: A New Capitalization Technique for Hotel"

Suzanne was one of the speakers at the AI Fall Conference Denis and I attended. I've been trying to contact her.

 

[hastalavista]

Suzanne was one of the speakers at the AI Fall Conference Denis and I attended. I've been trying to contact her.

I haven't heard back from her yet (I emailed her Sunday).

Her presentation and command of the subject were impressive.

 

[CANative]

She's probably overwhelmed by appraisers wanting to talk to her as her presentation was very timely.

Oh well. That's what she gets for making such a good presentation.:laugh:

 

[Kali the Boston Terrier]

Is this "non-flagged" value the same as a "go-dark" value?

Not neccessarily, in our market a lot of the hotels are shedding the flags and still operating as a viable going-concern...albeit without the occupancy of a flag. But then again STAR Reports in my area show roughly the same occupancy for flagged vs. non flagged (43%).

 

[CANative]

One of the properties I'm working on is a Holiday Inn Express. The room rent revenue is $1.5mm and the franchies fees are $225k (14.5%).

Seems like that is a pretty hefty cut for the flag.

 

[Boonders]

Business Enterprise method is bunk. End of story.

On to my next beer.:new_all_coholic:

 

[Tim The Enchanter]

Feb 2009 is recent? I guess for government work.

Anyway, seems to me the Rushmore tech will result in a much lower value than the Bevmo, err BEV tech.
So, it's just political. :new_all_coholic::new_all_coholic:

Court Holds Assessor's Technique for Removing Hotel Intangibles Illegal

The Superior Court recently held that the Los Angeles County Assessor's technique for removing non-taxable intangible property from the value of
an operating hotel business, in order to determine the assessed value of the hotel's real property, violated California law. The Assessor had urged the county Assessment Appeals Board to accept the "Rushmore appraisal technique" for removing a Hilton franchise, hotel management and workforce, and other intangible assets and rights from the business enterprise value of a full-service hotel. Although the Board followed
the Assessor's suggestion, the court declined to do so. In its ruling, the court stated that the Assessor's "approach is improper" and that the "appraisal technique [used by the Assessor and adopted by the Board] violated California law." The court also said that the Assessor's
valuation method "impermissibly subjected intangible assets to taxation." (EHP Glendale, LLC v. County of Los Angeles, LASC No. BC385925, Feb. 18, 2009.)

 

[GCJim]

Funny, I thought the 'Rushmore Appraisal Method' was a way to reduce turnaround time, and turn over reports much more quickly and efficiently. (At least, that's what the seminar guy said).

 

[Phil McDonald]

Right on Target

wouldn't the difference in net income between the hotel as flagged and the hotel as unflagged be a useful method of quantifying business value? If done often enough on a national scale, maybe tables of data could be developed, if they haven't been developed already.

I often advise hotel owners who are considering dropping a flag due to a high upcoming PIP to use this exact approach. For $500 they can order a Trend Report from Smith Travel and include in the competitive set only unflagged hotels. Since they already have a STR report for their flagged hotel it is very easy to calculate the difference in income, provide their existing competitive set is made up of other flagged hotels.

From an appraisal standpoint, if you can quantify the difference in income, you can arrive at a difference in value.

Simple is better. If I sat in front of a hotel owner and depicted for them the Rushmore Approach they would reject everything I had to say because it isn't as simple, or practical. However, owners often appreciate the humor of the Coke can approach when I share with them this valuation method. I can not say that I have noticed any of them increasing the price on the soda machine.