Part of evaluating every hotel investment is figuring out what the property is worth.
You, as the owner, need to know the maximum you can invest and still earn your target return. It puts boundaries on your negotiations for the hotel. You must know when to walk away and when to pursue.
Lenders will need to know the value so they can decide how much money they can prudently lend on the hotel. If you can’t anticipate how a lender will value the hotel, you might be wasting your time.
Equity investors (the ones who help with the cash down payment) need to the know value so they can calculate their potential ROI (return on investment) and decide whether to take the risk. This will help you anticipate their questions and prepare your pitch to them.
Your decisions as owner also affect the value of the property. The valuation analysis lets you compare projections for choosing one brand over another or deciding on a high-end renovation or developing product for a more moderate market position.
Everyone involved in the project uses valuations. This includes you, investors, lenders, and management companies. They will start with your valuation but will do their own due diligence. They are also likely to run several scenarios to evaluate their risk. It’s common for owners to do their own valuation before having a consultant or accountant take an independent look. The consultant’s independent evaluation can also be shared with prospective investors.
Lenders study your valuation to decide if your business plan is carefully thought out and whether to do business with you. In addition, the lender’s underwriter commissions an independent state-certified appraiser to do a form of valuation called an Appraisal Report.