Hotels and Motels Last Document Review Date: October 9, 2014

TABLE OF CONTENTS Introduction ......................................................................................... 3 In Scope ..................................................................................... 3 Out of Scope ............................................................................... 3 Executive Summary .............................................................................. 3 Resources ............................................................................................ 3 Market Resources ......................................................................... 3 Hotel Industry Research ................................................................ 3 Compliance Checklist ............................................................................ 4 Hotel and Motel Properties ..................................................................... 6 General ............................................................................................ 6 Practices and Procedures .................................................................... 7 Valuation .......................................................................................... 8 Sales Edits – Considerations for Hotel/Motel Properties ........................... 9 Models .............................................................................................. 11 Model Rates .................................................................................... 11 Average Daily Rate (ADR) ................................................................. 11 Revenue per Available Room (RevPAR) ............................................... 12 Furniture, Fixtures and Equipment ..................................................... 12 EX/TX Codes ................................................................................... 12 Income and Expense Statements ....................................................... 12 Permits .......................................................................................... 12 Sales Edits ...................................................................................... 12 Appendix A: Frequently Asked Questions ............................................... 13 Appendix B: Definitions and Actual Use ................................................. 16 Examples of Hotels Contained in the Actual Use 230 Category ............... 16 Examples of Motels Contained in the Actual Use 232 Category .............. 23 Appendix C: Hotel Rating Classification ................................................. 26 Assessment Practices and Procedures

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CAA/AAA Diamond ........................................................................... 26 Canada Select Accommodations Rating Program (BC Lodging and Campgrounds Association) ................................................................ 27

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INTRODUCTION In Scope The following properties, identified by actual use, are within scope: o 230 – Hotel o 232 – Motel and Auto Court Out of Scope The following are not in scope for this document: o o o o

056 233 237 238

– – – –

Residential hotel – typically SRO type Strata hotels and motels Bed and breakfast with four or more units Seasonal resort

EXECUTIVE SUMMARY The purpose of this document is to provide valuation direction for the uniform assessment of single-title properties that offer short-term commercial overnight accommodation, including motels and hotels.

RESOURCES Market Resources Pannell Kerr Forster Hotel Trends Reports Hotel Industry Research HVS Canadian Lodging News HVS Weekly Lodging Outlook

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COMPLIANCE CHECKLIST The following is a list of items that must be completed in order to be considered compliant with this document: 1. With the exception noted above, hotels and motel properties will be valued on a capitalized NOI approach using market data, or where unavailable, market based research, available from AVS – Market Data. 2. Non-room rental areas will be valued using a market-based lease income approach. 3. Use a separate model for each significant non-room rental use. 4. Space/areas used for ancillary services/benefits included in room rent will not have separate rental rates applied. 5. A building residual will be used to determine improvement values except for: a. Air space parcels and designated heritage properties where land residual will be used. b. For designated heritage properties. c. If a cost approach is used. 6. Deductions for furniture, fixtures and equipment (FF&E) will be made at a fixed percentage of the hotel going-concern value and will be made in accordance with the Hotel Directives. 7. Market support must accompany any adjustments to the base rate or model for market influencing characteristics (attributes) at the model level. For example, adjustments to income, expense, vacancy, land, quality, view, etc., that varies from the base rate or model for the competitive market set. 8. Surplus or excess land will be valued through one or more additional land components (see ICI Land). 9. Classification will be Class 6 – business and other, except in the case of the manager/owner’s suite(s) or if rooms are rented out on a long-term stay basis and a long-term stay declaration has been submitted, in which case the property Assessment Practices and Procedures

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classification will be for these components with be Class 1 – residential.

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HOTEL AND MOTEL PROPERTIES General 1. Valuation method(s): a. Capitalized NOI – primary method b. Cost or DCA methods in rural and remote (unincorporated) areas only when information to support an income valuation is not available. Inability to obtain information in a local market should not be the deciding factor in selecting the cost or DCA methods. Market information for competitive properties in similar communities within the region should first be investigated. 2. Units of measure are MOT room type or HOT/MOT rooms. 3. A market-based lease income approach will be used to value non-room rental areas considered in excess of that required for general hotel operations. 4. A building residual approach will be used to determine the improvement value. 5. Actual use codes and valueBC occupancy descriptions (in this document) for hotels/motels will be applied. EXCEPTIONS: o The cost method will be used for properties for which the current use is not the HBU. o The land residual method will be used for value apportionment in the case of air-space parcels and designated heritage buildings. TIP When valuing a non-room rental use, such as a restaurant area, use the local model with local lease rates, vacancy and expenses. Note the incomeDCA ID number for the hotel (predominant use) and enter this number in the main ValueBC Property viewer/Commercial Building tab – Predominant Income. This will result in the valuation using the same CAP rate for the non-room rental component as is used for the hotel itself and will prevent an inaccurate, “blended” rate. Assessment Practices and Procedures

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Practices and Procedures 

Hotel or motel properties with one or more nonhotel/motel components (such as apartment, retail, or parking, etc.) will be valued through application of a separate model for each significant non-hotel/motel use within the property.

1. When completing the mandatory fields in the IncomeDCA Model viewer/Keypane, keep the following in mind: o Model Creation: a hotel-motel model should be designed to encompass the largest number of relatively similar properties, within the broadest possible competitive market set. valueBC provides provides considerable flexibility to account for the diversity of buildings within a specific model (e.g., income quality, size or suite mix, OCR adjustments). ▪ ▪

The starting point for development of the hotel-motel models will be occupancy and region. Separate retail general, office, or other model types and income records will be applied to non-room rental hotel-motel areas which generate income as appropriate.

o Method: select CAP Direct Capitalization o Model Type: select MOT – Motel (non-flagged), HOTMOT – Hotel/Motel (flagged or flaggable). ▪

Flagged and non-flagged refer to whether or not the extablishment is associated with a brand name {flag} hotel

o Primary Model Use: Motel occupancy: MOTxxxx (1700). Hotel/Motel: HOTMOTxxxxx (2700-2706). o Model Description: the model description will adequately describe the geographic area and physical description. ▪

Examples -

Motel-North Fraser Region – Budget Hotel-Motel – VSS Region – Full Service

o Additional information documenting the model should be placed in: ▪

IncomeDCA Model viewer/Notes tab/Category: 08 – General.

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TIP While it is not strictly necessary to identify the occupancy and geographic application of the model in the model name, addition of this information improves clarity when multiple models are open at the same time.

Valuation Leased Income (Below the Line) All properties (hotel and motel) where there are restaurants, bars, etc., which are clearly able to be delineated, will be done on a leased income approach. The caveat of an item being clearly delineated allows the appraiser to exclude upstairs lounges or meeting rooms that are integrated into the hotel operation but not areas that could reasonably be third-party tenanted with its own entrance. For example, if a restaurant does not have exterior access then it should be valued above the line. An example of leased income that is below the line is when the income associated with the area (restaurant, bar, etc.) is not integrated into the hotel revenues and is not capitalized with the hotel net operating income (NOI). Instead, it is valued below or after the NOI capitalization entry, as a separate line entry. An example of this would be a restaurant attached to a hotel that is valued on Income using a restaurant model (i.e., 1500 square feet x $20/square foot). Blended CAP Rate Both the main hotel/motel portion and any “other component” areas will have one predominant, single CAP rate applied. The only exception will be in unusual circumstances where the “other” income component, when capitalized, represents in excess of 25 percent of the total value Then the appraiser has the choice to use a different CAP on the office or to effectively line up in a blended OCR. Furniture, Fixtures and Equipment A deduction from the hotel-only value is required. This is not tied to cost but is a reflection of the “contributory value” of the FF&E in place – it will necessarily fluctuate with value. Assessment Practices and Procedures

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Ex Tax/Property Class The overnight accommodation components of hotel/motel properties must be coded 06/08. This ensures the Tourist Accommodation (Assessment Relief) Act (TAARA) calculates only on the overnight accommodation component. Additionally, a hotel/motel operation split over two or more roll numbers must have the corresponding TAARA exemption apportioned between the sites up to the maximum $150,000, so that the entire operation looked at as a single entity, does not receive more that the $150,000 maximum exemption.

Sales Edits – Considerations for Hotel/Motel Properties Franchise Fees For analysis purposes if franchise fees are reported, then stabilize and allow as an expense item unless the amount reported is outside the norm for comparable properties. If not reported, do not add an allowance for franchise fees as they may have been included in other departmental expenses. CAP Rates When developing CAP rates the intention is to capture the going-concern value so sales should not be adjusted down for FF&E or goodwill or any other “intangible”. In many cases the price should be adjusted up to show the gross sale price – this is because the value recorded at LTSA will not include FF&E. valueBC should reflect both the gross sales price and the interim date. It is acknowledged that this can be difficult to verify and that sales information is increasingly difficult to ascertain, especially now when confidentiality agreements are prevalent. Share transfers are sometimes difficult to gather information on. Sales must be analyzed consistently – the aim is to record our defined “maintainable, stabilized NOI” – however actual income and expense should form the basis not economic or Pannell Kerr Forester (PKF) numbers.

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Manager’s Unit When doing sales edits on motels, ensure the manager’s suite/unit is included when estimating potential gross income. Also, include any separate houses or trailers on the property in an estimate of income. Do not value these ancillary buildings on cost.

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MODELS valueBC models have been developed to for the valuation of each of the above property types. For actual use 230, the following models are used: o HOTMOTxxxxx (full service) o HOTMOTxxxxx (limited service with food and beverage) o HOTMOTxxxxx (limited service without food and beverage) o HOTMOTxxxxx (economy) o HOTMOTxxxxx (extended stay) o HOTMOTxxxxx (resort) For actual use 232, the following model is used: o MOTxxxx (typical family run – non chain affiliated)

Model Rates The different regions will need to confirm that the various model rates are updated on an annual basis with market derived data. This includes room rates (average daily rate (ADR)), occupancy percent, CAP rates and the various expense rate inputs. TIP One of the variable expense inputs in the HOTMOT model is the annual property tax expense. Changes in tax rates from year to year will result in changes to the expense ratios and a corresponding change in overall value for properties using this model type. In order to accurately reflect this variable, new property tax values should be updated in the IncomeDCA Model viewer each year based on the most current tax information.

Average Daily Rate (ADR) The ADR represents the average room rental paid per occupied hotel room per day during a given period of time. It is a commonly used metric in the hospitality industry and when combined with other indicators such as occupancy, it helps to indicate financial performance and facilitates comparison with similar properties. Assessment Practices and Procedures

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Revenue per Available Room (RevPAR) RevPAR is calculated by multiplying a hotel’s ADR by its occupancy rate, or by dividing the hotel’s total room revenue by the total number of rooms and number of days in the period being measured.

Furniture, Fixtures and Equipment This must be deducted from the total capitalized NOI value. The IncomeDCA Valuation viewer/Keypane/FF&E field is reviewed and updated on an annual basis.

EX/TX Codes The hotel/motel components of the valuation will use ex/tx code 08 – tourist accommodation. valueBC will automatically calculate the TAARA exemption (if applicable).

Income and Expense Statements Requests for financial statements will be mailed annually, usually in May each year. The request letter and form can be obtained from the BCA Intranet site. Please maintain a spreadsheet with contact names, dates sent, dates returned, etc. In recent years, emailing and faxing have become the methods of choice for the exchange of this information.

Permits Servicing should be completed and updated on valueBC by November each year.

Sales Edits All sales must be kept up-to-date using the hotel sales form. The completed sales edit must be attached to valueBC. There is a central sales registry.

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APPENDIX A: FREQUENTLY ASKED QUESTIONS Question Some full service or flagged properties may provide a full range of food and beverage service for guests to meet their franchise requirements, maintain their market position, and/or room pricing. However, these hotel-motels rarely generate a positive return from non-room rental space. Is it realistic to apply the lease income approach in these scenarios? 1. Answer The appraiser will determine the appropriate economic rate to apply to non-room rental areas. In some cases, an entry in the IncomeDCA Valuation viewer/Valuation spreadsheet will not be created if the conclusion is that the area does not generate a return to the hotel operation. Question Should the owner’s suite be accounted for in the determination of total units, revenue or vacancy? 2. Answer Include the owner’s suite (if occupied by an owner/manager) in the count of total units and determination of gross income. Question How is the owner’s suite to be split out during value apportionment? 3. Answer Determine the percent of value contributed by the owner’s suite and key this amount in the IncomeDCA Valuation viewer/Valuation tab/Distribution spreadsheet (income record level) as Class 1. Question To what extent should a series of room closures for renovation/upgrade be reflected in the upcoming roll? 4. Answer Some of the issues that should be given consideration: 1. If self-imposed (i.e., an upgrade not a fire or leak situation) should it be recognized at all? 2. Could the reno’s take place but the number of decommissioned rooms be worked on without impacting Assessment Practices and Procedures

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occupancy (e.g., 100 room property, average occupancy 75 percent, 20 rooms closed for renovation so likely little or no impact other than, possibly, high season)? 3. If valuing at “end value” after reno’s, how to gauge the likely premium on room rates and/or occupancy? 4. How would the market see the property given the circumstances? 5. Was it all year or part of a year? In order to consistently deal with these situations where a property owner closes rooms in order to renovate, upgrade, or consolidate rooms/suites the following guidelines should be considered. From the Assessment Act : 18 (1) For the purpose of determining the actual value of property for an assessment roll, the valuation date is July 1 of the year during which the assessment roll is completed. (2) The actual value of property for an assessment roll is to be determined as if on the valuation date (a) the property and all other properties were in the physical condition that they are in on October 31 following the valuation date, and… This suggests the appraiser should take into account the physical condition as it existed on October 31 as it is a factor that would affect value and be a consideration for any potential purchaser. A test of HBU should be the starting point. At its most simplistic – is the continued use of the property as a hotel – if yes, value as hotel. In some markets given age, location, or changing economic factors, conversion to another use could be feasible. In most cases the permits issued and any development applications/zoning changes will guide you. Assuming the property is only being partly and temporarily affected the preferred method is to value the property as fully operational with the full compliment of rooms and make an Assessment Practices and Procedures

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adjustment to reflect that expenditures will have to be made to get the property to that condition. This will involve reviewing financial performance and occupancy levels for a number of years, asking for cost schedules and budgets associated with the renovation, and, ideally, a comprehensive pre-roll discussion to minimize the risk to completed roll. In some situations you may have good evidence to help determine whether the upgrades are going to mean a significant improvement to the bottom line or whether they are required just to maintain existing market share. Use your best available, and defendable, estimates to arrive at fully operational going-concern value then make allowances as required. In some cases you may have good evidence of the rates/occupancy that will apply once the work is complete, in others perhaps not – refer to the market and determine the strength of your assumptions. It is not appropriate to simply reduce the number of rooms used in the roll calculation as a means of adjusting the value. If the property was marketed with rooms incomplete/closed a potential purchaser would still use the full room count to estimate market value – BCA must reflect the same approach. Circumstances will vary and there is no set formula but use common sense and good appraisal practice. Discuss with a local manager and the hotel coordinator if you have concerns or questions.

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APPENDIX B: DEFINITIONS AND ACTUAL USE The following definitions clarify the terms used for hotel/motel properties contained within the scope of this document: Hotel Properties (Actual Use 230) These facilities include the chain/franchised hotels and larger independent properties that provide a range of hotel products including the following property types: o o o o

Full service hotels Limited service with food and beverage facilities Limited service without food and beverage facilities Economy/budget hotel

Valuation of these property types is by way of the more detailed HOT/MOT valuation models which have been developed to accommodate the ranges of services offered (predominant occupancy). Motel and Auto Court Properties (Actual Use 232) These facilities include the smaller independent motels which are typically owner managed and occupied, family run, ma/pa type properties. Services provided are typically limited with a reliance on off-site food and beverage services. Valuation of these property types is by way of the more basic MOT valuation models which have been developed for more simplified valuations where detailed income and expense information is not available.

Examples of Hotels Contained in the Actual Use 230 Category Product Defining Features

Full Service Hotel – including Boutique Hotel  chain/flag or independent  typically rated four to five stars (Canada Select) or three to five diamonds (CAA)  capacity of 80 to 650 hotel rooms in varying combinations of room types and suites with or without kitchenettes. Hotel rooms may be larger and more spacious.  multiple food and beverage venues (i.e.,

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    Other Features

licensed restaurant, café, lounge) 24-hour room service or limited room service from 6:00 am to 10:00 pm meeting/banquet/ballroom space(s) from 1,000 to 45,000 square feet recreational facilities: pool, spa, hot tub, sauna, exercise equipment Spacious amenities/public areas

May have: 

Moderate to full range of guest services: Concierge Spa Valet service Turndown Transportation: car service, airport shuttle service o In-room safe, bathrobe, higher-end toiletries, high thread count towels and linens, better quality and amount of FF&E o Exclusive club membership lounge o o o o o

Example

Product Defining Features

Resorts  Open year round  Large land area surrounding the resort

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 

 

 Other Features

(four acre or more) Typically 50 – 90 units in size with some exceptions Typically located in a rural or remote, attractive setting or destination area (lakefront, riverfront, oceanfront, floating on the ocean, ski hill, hot springs) Multitude services available such as restaurant, spa and or spa treatment range of amenities and facilities such as a large lounge with fireplace, fitness center, pool, jacuzzi, hot tub, sauna, kayaks, bikes, tennis courts, guest laundry Onsite restaurant food services

May have:            

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packages tailored to specific clientele (fishing, artists, spa treatments, storm watchers, honeymoon, weddings) two night or one week minimum stays chain affiliation room and valet service free wireless internet Spa treatment facility with massage and spa services Separate self contained rental cottages Access by boat float plane and or car Meeting rooms for small conferences and workshops Camping or RV sites available May be adjacent to ski hill, golf course or marina Airport shuttle service

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Example

Product Defining Features

Other Features

Limited Service With Food and Beverage Facilities  food and beverage facilities on-site that may be operated by the owner or leased to a third party on a rate per square foot basis or a percentage of gross sales.  capacity of 65 to 115 hotel rooms, possibly with a small number of suites  meeting space(s) available  room service provided between the typical hours of 7:00 am to 9:00 pm  Limited amenities/public areas May have:        

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chain or flag typical two to three and a half stars (Canada Select) or two to three diamond (CAA) rating laundry facilities business centre recreational facilities: pool, hot tub, sauna transportation/shuttle service complimentary continental breakfast, newspaper, local calls, parking coin-operated guest laundry facilities Hotels and Motels

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 

safety deposit boxes either in room or at the front desk FF&E is of average quality and amount

Example

Product Defining Features

Other Features

Limited Service Without Food and Beverage Facilities  limited or no meeting/banquet space  usually under 100 hotel room capacity with standard rooms  no food and beverage facilities May have:      

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chain/flag or be independent typical two to three and a half stars (Canada Select) or two diamond (CAA) rating or not rated breakfast room to serve Continental breakfast which may double as a meeting room recreational facilities: indoor pool with or without a waterslide, exercise room, hot tub limited amenities/public areas typically three to five storeys high with elevator service and interior hallways Hotels and Motels

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  

small or no meeting space minimal business centre facilities laundry facilities

Example

Product Defining Features

Extended Stay Hotels  fully equipped, full size kitchens with stove, fridge, microwave  in-suite washer and dryer  suites with separate bedroom, living room, dining areas. Suites range in size from 450 to 1,000 square feet

Other Features

May have:        

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no flag; typically not rated small amount of meeting space food and beverage facilities valet services limited concierge service from 7:00 am to 11:00 pm or 24 hours available recreational facilities: exercise room, sauna, pool, hot tub business centre Transportation: car service, airport shuttle service

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Example

Product Defining Features

Economy/Budget Hotel  Typically run by a manager and staff rather than a family operation  may have chain/flag  room capacity of under 100 hotel rooms. No suites generally but rooms may have kitchenettes.  Typically no food and beverage service beyond providing simple continental breakfast (coffee, toast, pastries, fruit, juice and cereal).  no meeting/banquet space  limited amenities/public areas  FF&E is adequate and minimally furnished  May or may not have outside entrances

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Other Features

May have:   

typical two to three stars (Canada Select) rating or one to two diamond (CAA) rating or not rated recreational facilities: exercise room, pool complimentary continental breakfast

Example

Examples of Motels Contained in the Actual Use 232 Category Product Defining

Motel property – no chain or franchise affiliation  Typically a run family operation with the

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Features          Other Features

owner/manager living on-site Outside entrance to rooms room capacity of under 100 hotel rooms Attached living quarters or separate residence for the manager/owner may have chain/flag No suites but rooms may have kitchenettes Typically no food or beverage service on-site but restaurant nearby Very limited amenities/public areas No elevator in the building Low quality and minimal FF&E

May have:   

typical one to two stars (Canada Select) or not rated an outdoor pool and jacuzzi guest laundry

Example

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APPENDIX C: HOTEL RATING CLASSIFICATION CAA/AAA Diamond CAA/AAA is a not-for-profit organization of some 80 motor clubs, with over 1,100 branch offices serving more than 45 million members in the United States and Canada. The association is committed to providing its members peace of mind and provides a range of services such as tourism information including accommodation guides. The guides, or tour books, list CAA/AAA approved accommodation. The CAA/AAA approval and diamond rating is assigned when a facility inspection and evaluation are conducted. The evaluation covers six areas: o o o o o o

Exterior, grounds and public areas Bathrooms Housekeeping and maintenance Room décor, ambiance and amenities Management Guest services

CAA/AAA diamond ratings represent a combination of overall quality, the range of facilities, and the level of services offered by a property. These widely recognized and trusted symbols help members choose lodgings that will meet their needs and expectations. CAA/AAA diamond rating criteria are broad guidelines to designate what is typically found at each rating level. The size, age, and overall appeal of an establishment are considered, as well as regional architectural style and design. Diamonds are assigned based on the overall guest impression rather than on individual criteria. The following are the diamond rating descriptions: 1 Diamond

2 Diamond

These establishments typically appeal to the budget-minded traveller. They provide essential no-frills accommodations. They meet the basic requirements pertaining to comfort, cleanliness, and hospitality. These establishments appeal to the traveller seeking more than basic accommodation.

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3 Diamond

4 Diamond

5 Diamond

There are modest enhancements to the overall physical attributes, design elements, and amenities of the facility typically at a moderate price. These establishments appeal to the traveller with comprehensive needs. Properties are multifaceted with a distinguished style, including marked upgrades in the quality of physical attributes, amenities, and level of comfort provided. These establishments are upscale in all areas. Accommodations are progressively more refined and stylish. The physical attributes reflect an obvious enhanced level of quality throughout. The fundamental hallmarks at this level include an array of amenities combined with a high degree of hospitality, service, and attention to detail. These establishments reflect the characteristics of the ultimate in luxury and sophistication. Accommodations are first class. The physical attributes are extraordinary in every manner. The fundamental hallmarks at this level are to meticulously serve and exceed all guest expectations while maintaining an impeccable standard of excellence. Many personalized services and amenities enhance an unmatched level of comfort.

Canada Select Accommodations Rating Program (BC Lodging and Campgrounds Association) Canada Select is a voluntary fixed-roof accommodation-rating program that reflects the needs of the consumer. It provides the travelling public with a consistent and reliable rating standard that is nationally compatible and comparable coast to coast. The program is incorporated and managed nationally by the Canada Select Accommodation Rating Council. In BC the program is managed by Accommodations BC, an organization owned by the British Columbia Lodging and Campgrounds Association and the British Columbia and Yukon Hotels' Association. Assessment Practices and Procedures

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Once a property has been categorized, it is evaluated for physical quality of the property, content of facilities, services and amenities provided. All properties, regardless of their star level, must also meet stringent cleanliness and state of repair guidelines. Each category and star level has distinct criteria that must be achieved. A star-rating from one to five is awarded based on the results of the evaluation. A half-star rating from one and a half to four and a half is also awarded for superior quality. Each star level reflects specific consumer expectations. A one star rating reflects that a property is clean and comfortable and has met or exceeded nationally accepted criteria in the area of facilities, services, amenities and quality of the accommodation. The following are the Canada Select star rating descriptions: 1 Star 2 Star 3 Star 4 Star 5 Star

Modest accommodations meeting the Canada Select standards of cleanliness, comfort and safety. Moderate accommodations with additional facilities and some amenities. Above average accommodations with a greater range of facilities, guest amenities and services available. Exceptional accommodations with an extensive range of facilities, guest amenities and services. Luxurious properties. Among the very best in the country in terms of their outstanding facilities, guest services, and quality provided.

A half star is awarded where the overall quality of facilities significantly exceeds the specific category star rating. The majority of the physical plant in British Columbia is in the (two and a half) to (four) star ranges. There are only a handful of five star rated hotel/motel properties in all of Canada.

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