hotel valuation - lessee & lessor interests

HOTEL VALUATION – LESSEE'S & LESSOR'S INTERESTS

LESSEE'S INTEREST

The valuer should examine the lease document to determine the terms and conditions and the breakup between the two parties of outgoings. A number of brewery owned hotels have a standard lease document which may guarantee goodwill. For brewery owned hotels the value of the lessee's interest can be required for:

The determination of the value of the lease to an incoming tenant.

Mortgage purposes.

In NSW the rent paid under a brewery lease is typically paid by way of a premium and then, the residue rent. The premium is expressed as a ratio of the "total rent" which is the annual rent multiplied by the number of years in the lease period.

EXAMPLE

The lease details for the above hotel are as follows:
Lease term: 5 years
Period remaining: 3 years
Base rent: 2000 per annum
Premium:1/ 3 of the total rent.
Total rent: 5 *12000 = 60 000
Premium: 1/3 * 60000 = 20000

Since the premium was paid 2 year ago it no longer affects the lessee's interest. The question of goodwill aside, the lessee's interest is the "profit rental" enjoyed for the residue term. lf the market rent is 5 000 per annum the profit rental:

15000 - (2/3 * 12000)=7000 per annum

Therefore, the lessee's interest is the present value of the profit rental for the residue term of 3 years.

Using 12% per annum:

PV.PMT{1) = 2.402
Lessee's interest = 2.402* 7000 = 16814 say $16 800

GOODWILL

The interest calculated above is the lessee's interest in the real estate only, however, it is common for the lessee of a brewery hotel to sell goodwill to the incoming tenant as well. The value of such goodwill is really a business valuation and is usually determined by some arbitrary formula for example, $10 000 for every $1 000 of weekly takings. Goodwill reflects the following:

Beer companies are better landlords (from a tenant's point of view) than private hotel owner.

Tax advantages from a cash business.

There is a strong and readily identifiable submarket in beer company hotel leases

In private hotel leases the owner is better able to clawback tax advantages by way of higher rents. Therefore, private leases are the best evidence of rental value but unfortunately for valuation purposes, there are not many available. If the valuer is called upon to value goodwill as well as real estate, it should be a separate part of the valuation report clearly stating that it is not part of the real estate.

It is better for the real estate valuer to leave the value of plant, equipment and goodwill to specialists in that area such as business brokers and plant and machinery valuers. Stock at hand is usually valued by way of agreement after the sale of the hotel – Stock at Value clause (SAV).

LESSOR`S INTEREST

The lessor's interest consists of 2 parts:

1. Present value of the current lease

The reversionary interest.

Present value of the current rent due:

2.402 * 8000 = 19216

If the expected market rent at the end of the lease period is $15 000 per annum and the capitalization rate is 8% the unencumbered value will be:

15000 * 100/8 =$187500

The reversionary value is the present value in 3 year time. Using 12% per annum:

0.7718 * 187500= 133459 say $134000

Therefore, the lessor's interest: =19216 + 134000 = 153 216

say $153 000