Most hotels are valued using a discounted cash flow procedure where the annual projected net incomes plus an assumed reversionary sale after the holding period is discounted to the present value at a defined discount rate.
While this procedure is widely used throughout the world by appraisers, it does not reflect the actions of typical hotel buyers who usually finance hotel investments with debt capital. The Hotel Mortgage Equity Valuation Model created by HVS produces a significantly more accurate valuation that takes into account the actual cost of debt and equity capital.
The model works by entering the terms of typical hotel financing, along with a forecast of revenue and expense. The software then determines the value which provides the stated returns to the mortgage and equity components. The complex algebraic equations produce a highly accurate valuation which includes a detailed proof showing how the value is calculated.
The Hotel Mortgage Equity Valuation Model is extremely flexible offering a number of valuation approaches.
-The assumed holding period can be either 5 or 10 years
-The valuation can utilize a loan-to-value ratio, in which the size of the mortgage is based on property value.
-The valuation can utilize a debt coverage ratio (also known as a debt-service coverage ratio), in which the size of the mortgage is based on property-level cash flow, mortgage interest rate, and mortgage amortization.
-The valuation can utilize a debt yield, in which the size of the mortgage is based on property-level cash flow.
While this software model was originally designed for hotel valuations it works for all forms of commercial real estate and other types of investments where the property is financed with a combination of debt and equity capital.
The output from the Hotel Mortgage Equity Valuation Model is extensive.
Download a free copy of the Hotel Market Analysis & Valuation Software Operating and Use Guide for details on the software’s output.