The valuer shouted look at future competition from hotels, bottle shops, clubs and licensed restaurants. He/she should check council's development application register for any application lodged for the construction of licensed premises or a liquor outlet and also with the hotel controlling body.
The valuer should look at demographic trends. lf there is a trend of high growth an increase in competition from new premises can be expected but, this will be onset to some extent by the increase in trade caused by the new population.
RISK AND CAPITALIZATION RATE
The risk of a hotel investment and hence the Capitalization rate adopted is a function of:
The extent of seasonal trade, especially for hotels in reason areas.
A changing community profile for example, the clientele may be becoming older
Government changes such as more liberal drinking times which may or may not benefit the subject hotel.
Future competition. Hotels in established suburbs are safer than those in newer outlying suburbs.
The socio economic status of the clientele. Hotels in "good", prestigious suburbs show a lower capitalization rate than those hotels in "poorer' suburbs. Hoteliers will pay more for a "quiet" hotel than one which, although otherwise equal, requires greater supervision and management skills.
Opportunity cost of investment. This should also include other real estate investments.
CONDITION OF THE BUILDING
Hotel buildings should be inspected to determine whether or not they meet the prescribed health and licensing standards. The valuer should ascertain whether or not there is a "repair order' over the building or whether or not it may soon receive one. Any such capital cost required under a repair order is deducted from the valuation assuming good order to determine market value.
EFFICIENCY OF THE BAR
The efficiency of the bar operation should be analyzed. An efficient bar means for example, that only one barmaid is required instead of two.
Fire regulations such as required under the Building Act may have an important bearing on the economic viability of an old hotel. This factor is most important for old country weatherboard hotels. For leasehold hotels it is important to ascertain who is responsible for structural alterations, the lessee of the lessor. The breakup of costs must be known to determine the expected net annual income and lessee/lessor interests.
Under a typical brewery lease in NSW the company maintains the outside of the premises and the lessee the inside. In other states such as South Australia, the lessee pays all maintenance outgoings on the premises.
The type of entertainment will depend upon the type of hotel and it must have the appropriate permit. Large band entertainment is much more expensive than a small band or one musician. The valuer should investigate for unusually high over meals as the hotel may be "buying" it's trade. For example, hotels providing entertainment must have for example, a permit under s89 of the Liquor Act 1982 (NSW) or an Entertainment Venue Licence under the Liquor Act 1985 (SA). If only a small number of patrons are permitted, entertainment may be uneconomical.
The value of the hotel is largely a function of the trading figures (turnover} and the figures provided by the hotelier are often unreliable. Turnover figures can be obtained by way of a statutory declaration of purchases but such a declaration should be reconciled with beer companies' returns, licence fees, observation and checking.
The traditional valuation method requires the determination of expected net profits derived from the trading figures. This is because there is a dearth of "freehold" rental evidence so that the preferred capitalization of net rents method usually, cannot be directly applied.
There are industry standards which can be used to check trading figures against a datum. For example, small country hotels have a turnover of $300 000 - $340 000 which is the equivalent of about 3 kegs per week. Medium size hotels may be selling 8 kegs per week. If the subject hotel is greatly different from such "rules of thumb", the reason should be found. Other industry measures are:
Liquor sales: purchases
Gross: net profits
When the valuer is sure that the trading figures are correct, the revenue is dissected according to public, saloon, and lounge bars and the bottle department. The reason for this is that profitability must be taken into account as well as the overall trade - Dobrel Ltd v The Valuer-General (1990) The Valuer, August 1993, p544.
The prices charged for all sizes of beer and cartons of beer are found and the gross profit percentages are found. A check is then made with the liquor purchases to verify the sales figures.
Accommodation (if any) is difficult to ascertain however, an estimate of room turnover can be found from the number of sheets laundered.
LICENCE FEES AND LlQUOR PURCHASES
The annual licence fee is X% (in NSW 10%, SA 11%o, VICTt 11%) of the liquor purchases for the previous period; 1 July to 30 June. The valuer should analyze the liquor purchases for the past 5 years to ascertain whether or not there is a trend upwards or downwards. If there is a likely variation then the estimated licence fee should be determined by projecting from the historical data. Although it may be difficult to ascertain the purchases they can be estimated from the licence fee. For example, in South Australia multiply the licence fee * 100/11 (9.09} and in NSW by 10.
As with income, the valuer should check whether or not the outgoing9s are normal for the subject hotel. Again, this is best determine with the use of ratios and experience will indicate any out of line outgoing.
REPAIRS AND MAINTENANCE
An estimate of repairs and maintenance can be determined from inspection of the property. This should be sufficient to indicate whether or not there is or should be a
repair order from the relevant authorities.
GLASSES AND REPLACEMENTS
The valuer should check whether of not the allowance for glasses and replacements is a normal figure. If the allowance is unusually high it may be evidence of a poorly run hotel.