Appraising Properties of the Heart

Measure Once, Report Twice

While historical conventions dictate how to measure hotel occupancy, some properties don’t fit the mold. The same is true for the unique and unconventional property types that come across our desks. In all cases, the team at Argianas shows that working with a complex value premise is more about explaining the story for underwriting and removing the confusion that may arise when discussing unique property types.

Have a property that leaves others blushing? Regardless of the unique purpose the real estate serves, it is an asset, and assets need to be valued for estates, transactions, and informed decision-making. This month, known for lovers, we thought we’d touch on what we’re calling properties of the heart. In both instances, appearances were not what they first seemed to be. The assignment? Explaining the unusual in usual terms.

The case of the above-average average daily rate

It is not uncommon that we appraise hotels. The average daily rate (ADR) is a strong measure of income that such properties generate. This metric indicates the average revenue earned for an occupied room on any given day. The rate will fluctuate, but generally, an ADR above 64 percent indicates that the property is profitable. This is because all expenses are paid, and most likely there is excess revenue or profit. Multiplying the ADR by the occupancy rate will equal the revenue per available room. The revenue per available room is often a metric that banks are interested in when evaluating the financial lending risk associated with the property.

Even with the most profitable hotels, an ADR will only reach a certain threshold due to the natural constraints in operating a hotel or resort. For example, if you have a set number of rooms, and patrons occupy the room for one day, theoretically, the highest ADR achievable would be 100 percent. Most lenders understand this, and strong material deviations disclosed in our reporting efforts are often met with concern.

Bulging Profits | Your ADR is How Big?!

In one particular instance, Argianas was brought in to appraise a resort style hotel with one special caveat. The hotel’s patrons did not necessarily need a hotel room and amenities for the whole day. Instead, patrons would visit the hotel, spend time in their room, and leave. The hotel’s operations team understood the nuances of the hotel and unique needs of the guests. When guests would leave early on the same day they arrived, the hotel’s janitorial staff would clean the room and prepare it for another guest later in the day.

As a result of this high-efficiency room usage, the hotel’s ADR reflected above-average occupancy rates when operating history, income, and expenses were reviewed. So much so that the property in question was significantly over any comparable sales in the metro area. But is this above-average ADR suspect? Not at all. We were able to provide rationale for such strong operational income, and the lender was pleased to lend on a property with such stable revenues.

The case of the alternative entertainment venue with individual party rooms

The unique assignments don’t stop at unusual hotel arrangements. We’ve established a reputation of appraising unique properties that leave others stumped. We take pride that our clients trust us to approach each assignment and property with the critical thinking they deserve. In another appraisal of the heart, Argianas was called on to appraise an alternative entertainment venue with private party rooms. What may have stumped others provided an opportunity and a reminder, all assets at one time or another will need to be valued, and in appraisal, the value of real estate is of the land, structures and improvements. Regardless of what the real estate is used for, appraisals must first focus on the real estate.

A Bone to Pick with those Comparables

It’s fair to say that one of the most difficult aspects of appraising real estate is correctly identifying the property type. Unique assets often confound appraisers as they are uncommon and like-kind comparables may not be readily apparent. The property in question, had multiple levels, corridors, individual patron rooms, and a large hall/meeting space.

Put differently, it was an entertainment venue with individual party rooms. Explained in these terms comparable sales were easily identified, which simplified the whole process. Simple right? Find some comparable sales and complete the Sales Comparison Approach. Not so fast!

As is often the case, what can be perceived as the solution may not fully encompass and answer the issue at hand. After selecting comparable properties and reviewing local area land sales, the highest and best use of the property was as land value minus demolition. In our field, it’s easy to get lost at a granular level. But always remember, the data leads the appraisal.

I’ll Have What They’re Having

You’re in good company, there’s a reason our clients have come to trust us with the odd and unusual. From the simple or complex, to the mundane and more colorful, the team at Argianas understands that unique property types need love too; appraisals that asset managers, estate planning, banks, and accounting firms can rely on.

We’re passionate about real estate, do you have a property type that makes you blush? Call the team at Argianas today, we’ve seen it all and can resolve your real estate dilemmas in one call.