OCCUPANCY RATES

Investment accommodation properties such as motels and private hotels are assessed by industry by way of occupancy rates. The most commonly used rates are:
• Room
• Bed
• Pillow
• Room density.
Occupancy rates can be used by the valuer to:
• Assess the motel/hotel's performance
• Determine the expected income of the property.
USE OF OCCUPANCY RATES A high occupancy rate are evidence of one or more of the following:
• That the tariff is too low
• That there is unusually high short run demand
• That there is unusually low short run supply
• That the management is above average
- and vice versa for a low occupancy rate. Therefore, a motel or hotel should never achieve a 100% occupancy rate over a full year. Occupancy rates are calculated over a full trading year and are based on a number of years operation to mitigate the effect of seasonal and unusual factors. This factor applies particularly to resort areas. Average ("indifferent") management, promotion and referral systems have stabilized occupancy rates to an industry and locality norm and when occupancy rates are outside that norm, the valuer should investigate and determine the reason why.

ROOM OCCUPANCY RATE (ROR)

The room occupancy rate is the simplest rate to calculate:
ROR = TL/TR * 100 Where: ROR = room occupancy rate as a % TL = the total number of rooms let over a year TR = the total number of rooms available for letting over the year.

EXAMPLE: A motel has 150 rooms and after analyzing its records it is found that 32 000 rooms were let out during the year. Therefore, room occupancy rate is:
ROR = 32000/(150*365) * 100/1 = 58.45%

BED OCCUPANCY RATE (BOR)

A problem with the room occupancy rate is that it does not take into account the number of guests per room. This can be important for the assessment of gross income as double and family tariffs provide a higher income than single tariffs. Knowing the number of beds per room and the number of guests who have stayed at the motel or hotel it is possible to calculate an average bed occupancy rate as follows:
BOR = AG/TB * 100/1 Where: BOR = bed occupancy rate as a % AG = actual number of guests per annum TB = total available beds per annum.

EXAMPLE: If the total number of guests for the above motel is 45 000 per annum and each room has 2 beds the BOR is:
BOR = 45000/(150*2*365) * 100/1 = 41.1%

PILLOW OCCUPANCY RATE (POR)

The pillow occupancy rate is a further refinement on the BOR and takes into account that a bed may be either a double or single. The POR is found as follows:
POR = AG/TP * 100/1 Where: POR = pillow occupancy rate as a % AG = actual number of guests per annum TP = total available pillows per annum EXAMPLE If each room has one double and one single bed the pillow occupancy rate for the example above is: POR = 45000/ (150*3*365) * 100/1 = 27.4% The POR shows a much lower occupancy rate than the BOR reflecting the fact that a large number of the guests were either singles or couples. The ratio is a measure against all the possible guests for one year.

ROOM DENSITY RATE (RDR)

The room density rate is the most useful of the measures as it allows the ready calculation of the gross income derived from the motel or hotel. It is calculated as follows:
RDR = AG/AR Where: RDR = room density rate AG = actual guests over the year AR = actual rooms let over the year EXAMPLE: For the motel above: RDR = 45000/32000 = 1.41 This shows that on average, 1.41 persons occupied each room over the year. The useful feature of this rate is that once the tariffs are known the gross annual income can be estimated.

GROSS INCOME

he RDR of 1.41 can be interpreted to mean that the motel at 100% room occupancy, would for each night and on average, have the following rooms occupied:
• 41% doubles and therefore (ie the excess of the RDR over 1 = .41)
• 59 % singles
• AVERAGE TARIFF PER NIGHT (ATN) The ATN is the gross income per night assuming 100% room occupancy. If the single tariff is 85 and the double tariff 150 per night the ATN for the above premises is: ATN = (0.41 * 150 * 150) + (0.59 * 85 * 150) = 16 747.5
DETERMINING MARKET VALUE

A motel is an investment property and therefore, should be valued with the "capitalization" method. If possible, the "initial yield" model should be used which requires an estimation of the rental value of the motel. Comparable rents and initial yield capitalization rates can be found or analyzed from:
• Long term leases and sales of single motels (the best evidence).
• "Rent" paid by franchise operators in a chain of motels (unreliable evidence of rental value)
• "Sale leaseback" or "purchase leaseback" arrangements. Also unreliable but market rent may be proxied with expert analysis.
In practice there is a dearth of rental evidence and therefore, the best method of valuation is to capitalize the expected net annual income. Therefore, this is the primary method as it takes into account any peculiar costs or outgoings associated with the subject property.

CHECK METHOD

The "check" or secondary method is the summation method using both units of production and land and building values. The units of production can be any one of the occupancy ratios illustrated above for example, a sale analyzed to \$x/pillow. If the check method supports the primary valuation then the primary valuation is adopted. If the check method does not support the primary method then the reason should be found. Possible problems with the income method are:
• Non average management
• The motel is not the "highest and best" use
• The use of inaccurate trading figures
• Inclusion of goodwill in the real estate valuation.
These problems are generally overcome with experience. Discounted cash flow generally, is not a suitable method as there is rarely a complex rental schedule unlike for example, a shopping centre. That is, the expected net annual income in the short run is the default, initial net rent or income. The example in table 7-1 is the valuation of a motel using the initial yield capitalization of the net income method: MOTEL

DEFINITION

A motel is a planned complex of facilities for the travelling public. They include offstreet parking and accommodation by way of serviced suites each with a bathroom and sleeping requirements.

See motel types

FACTORS AFFECTING VALUE

SURROUNDINGS

The entrance driveway should be no less than 5 metres wide and situated so as to permit easy ingress and egress from the street. Where controlled one way traffic is in operation, entrance driveways should not be less than 3 metres wide. Doorways to each suite must be protected from weather and there should be a covered walkway to the reception area.

PARKING

The parking area must have at least one carspace for each suite and with easy access to the suites. Access ways should be a minimum of 3 metres wide while the minimum carpark should be 14m2 with a width of 2.44 m. The maximum horizontal walking distance from car to suite or elevator should not be more than 18 metres. The maximum vertical walking distance from car to suite should not exceed 2.5 metres in height. For "terminal" motels, carspaces should be at least 50% of the number of suites.

LOCATION

Although locational or spatial factors are becoming less and less important in today's valuation system because of the importance of quality of tenant, franchises and goodwill they are still most important in the valuation of motels particularly in resort areas. Therefore, the valuer should investigate the following locational factors and comment on them in his/her valuation report:
• Is the site strategic as far as guest usage is concerned? Can it offer any particular local feature as a selling point?
• The best site for a "transit" motel is on the left hand side of the road entering a town. Can business be hurt by the construction of a median strip by the public road authority or local council? It should not be at the bottom of a hill.
• Will some future adjoining structure affect the view of the motel's entrance? A wide site is more visible than a narrow site.
• Check with the public road authority and council concerning the probability of some future traffic by-pass or road closure which may affect business.
• The site should be quiet. Should be near a railway station or an all night service station.
• Check with council and the local traffic committee concerning the likelihood of future expansion or development. This is usually difficult because a motel is a "traffic generator". An old motel although "non conforming" with current zoning will have "existing use" rights.
• Is the site above flood level? If not an expensive platform on high piers will be required however, in a number of flood prone country towns the only suitable and available sites are on the flood plain.
• Country towns may not have a sewerage system. If that is the case, the valuer should check whether or not the soil is suitable for a septic system.
• The site should be larger than that currently required because of the possible need for future expansion. The extra land can still be used for advertising, increases visibility, parking and landscaping.
VALUATION EXAMPLE

From the example above, the room occupancy rate is 58.45%. The actual gross income for the year is:

GAI = ATN * ROR * 365 = 16747.5 * 0.5845 * 365 = 3 572 954

NET INCOME

The expected net annual income is found by deducting the operating expenses:

 GROSS INCOME: 3 572 954 DEDUCT OUTGOINGS Advertising: (125 053) Power and lighting: (139 345) Laundry: (228 669) Repairs, maintenance & replacement (71 459) Telephone and FAX (75 032) Postage (3 573) Property taxes (214 377) Insurances (35 730) Sundries (107 189) Accountant (17 865) Food (357 295) Wages (1 071 886) ----------------- NET INCOME: 1 125 481

MARKET VALUE

The expected net annual income is capitalized at the capitalization rate derived from comparable sales, in this case 20%:

1125480 * 100/20 = 5627402 say 5 630 000

CHECK OR SECONDARY VALUATION

The primary valuation should be checked with the summation method of valuation as the motel may not be the highest and best use of the site. A higher use is a distinct possibility if for example, the land is zoned commercial and adjoins a busy shopping centre. The check in this case is as follows:

Number of occupied pillows per annum: 45 000
Value per pillow from comparable sales: 122
Market value using productive units: 122 * 45 000 = 5 490 000

This is close enough to the primary method therefore, the primary valuation of 5 630 000 stands.

8