November 13, 2024 • 26 mins
Steve Rushmore can tell you everything, and I mean everything about your hotel. His "Rushmore Approach" for allocating a hotel’s total value is the stuff of lore, but how do you even begin to evaluate a hotel's worth? What are all the factors that go into it? What makes for a particularly difficult appraisal? Is the "income approach" really the best way to appraise a hotel? And is it true Steve can appraise a hotel in 60 seconds?
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Episode Transcript
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Matt Brown (00:24):
Thank you.
Hi everybody, welcome to noShow.
I'm Matt Brown, joined asalways by Jeff Borman.
Steve Rushmore can tell youeverything, and I mean
everything about your hotel.
Why?
Because he is a legendaryfigure in the hotel business.
That's legend in all caps.
He is the founder of HBS, aglobal hotel consulting
organization with more than 50offices around the world.
He is the founder of HVS, aglobal hotel consulting
(00:44):
organization with more than 50offices around the world.
He has provided consultationservices for more than 15,000
hotels during his 50-year careerand specializes in complex
issues involving hotelfeasibility, valuation and
financing.
He's a prolific author, speaker,idea generator and all-around
expert on how and why hotelswork the way they do.
(01:08):
His Rushmore approach forallocating a hotel's total value
is the stuff of legal lore.
His ownership, with his wife,of a Park Avenue co-op is an
epic some would sayShakespearean story of New York
City real estate.
He's a skier, he's a hiker,he's a pretty good cook, he's a
dog lover, arctic adventurer and, on top of it all, he has a
commercial pilot's license.
(01:29):
Steve Rushmore, it is ourabsolute privilege to have you
on no Show.
Welcome.
Steve Rushmore (01:35):
Wow, I've never had an introduction like that.
Thank you so much.
You covered all the highlights.
Matt Brown (01:42):
I find that hard to believe because you've had a lot
of introductions.
Each time a hotel is bought,sold, developed, financed,
refinanced, syndicated orassessed, parties to the
transaction may require sometype of market study and
valuation to indicate its futurefinancial performance.
In simple words, for civilians,what is a hotel?
(02:04):
Market analysis and valuation.
Steve Rushmore (02:07):
Good question.
A valuation is an estimate ofvalue and it can be an estimate
of market value.
It can be an estimate ofinvestment value, assessed
values.
There are all different typesof valuations, but you listed
all the reasons why somebodywould want to know how much
their hotel is worth.
(02:27):
Value is very simple it's thepresent worth of future benefits
.
So in a hotel, the futurebenefits of owning a hotel are
the cash flows every year goingout into the future and then the
sale price when you ultimatelysell the property.
So those are the futurebenefits, and present worth
(02:50):
means that you're going todiscount that back to the
present value at a discount rate.
So essentially, to value ahotel, you have to determine
three things.
You have to determine what thefuture benefits are, which, as I
said, are the cash flow andthen also the sale at the end of
(03:13):
the holding period, and thenyou have to forecast that out
into the future.
You have to determine what thehotel is going to sell for at
the end of the holding periodand then you have to have a
discount rate or really a costof capital that you discounted
(03:33):
back to the present value.
So doing an appraisal, the firststep is to determine what the
future benefits are, and to dothat you're going to be doing a
projection of income and expensefor the hotel.
And income and expense let'sfirst look at income.
(03:53):
Income is basically your incomefrom the sale of rooms.
If you have a restaurant, it'ssale of revenue for the
restaurant, the lounge, themeeting space.
All that depending on the typeof hotel that you have.
And so you have to determinewhat the revenue is going to be
going into the future.
(04:14):
And let's keep it simple.
Let's just say it's a roomsonly operation and so the
revenue is made up of the futureoccupancy of that hotel and the
future ADR.
And to come up with roomsrevenue you take the occupancy
times, the ADR times, the roomcount times, 365 days a year,
(04:37):
and that gives you your roomsrevenue.
So you have to come back to thebasics that make up that
equation, which is occupancy andthe ADR.
So the first thing you have todo in an appraisal is to project
what that occupancy is going tobe over the next three to five
years.
(04:58):
And occupancy doesn't stayconstant.
It constantly changes dependingon the supply dynamics of the
local market that you'reoperating in.
So if there's new demand cominginto the market.
For example, in Paris you hadthe Olympics and that was a huge
amount of demand coming duringa short period of time.
(05:19):
In other markets you have newbusinesses coming in, you have
new tourist attractions alldifferent reasons why a market
demand will increase.
And then there's markets wherethe demand decreases, where a
business gets relocated,manufacturing plant shuts down
(05:41):
many different reasons whydemand might actually go down.
So that's the demand side.
Then you also, equallyimportant if not more important
you have to look at the supplyside, which is the competitive
supply of hotel rooms in thatmarket.
And is the supply increasing,stay the same, or is it
(06:02):
decreasing?
If it's increasing, then thatdilutes the market, which means
that your occupancy, if thedemand stays the same, will
decline.
So understanding what'shappening with supply and demand
is going to tell you what'sgoing to happen with occupancy.
(06:22):
Along with this, you have tolook at what's happening with
average rate.
Average rate in the market willtypically go up by inflation.
Sometimes it goes faster thaninflation, sometimes slower.
Sometimes it even declines,like during COVID.
(06:45):
So you have to project that out.
So if you have the projectionof occupancy and average rate,
then you can tell what therevenue projection would be for
the hotel.
The second component is that younow have to take that the
expenses and you come up with anet income.
You have to forecast out yourexpenses along with your revenue
(07:09):
to come up with what your netincome is.
That is part of the futurebenefits, the present worth of
future benefits and typically wedo that over a 10-year period
of time, but we're onlyestimating over probably three
to five years.
And then we assume that netincome will go up by inflation,
(07:31):
and so that gives us our 10-yearcash flow.
And then we assume that netincome will go up by inflation,
and so that gives us our 10-yearcash flow.
We then come up with a discountrate I like to use what's
called the mortgage equity,because most hotels are bought
with a mortgage or debtcomponent and then equity
component and that comes up witha discount rate that discounts
(07:54):
it back to the present value andthat is the value of your hotel
.
Matt Brown (08:02):
Sounds entirely simple.
No, it sounds very involved,and so much of hotel valuation
is in the numbers.
How do you account forintangibles in an appraisal?
Is there even such a thing asan intangible when you're doing
this work?
Steve Rushmore (08:24):
Sure, an intangible.
A good example would be afranchise affiliation with a
brand.
You can have the same box, thesame hotel right next to each
other and you put one brand onone hotel and another brand on
(08:45):
another hotel, or maybe not evenput a brand on the other hotel,
and that's going to have adifferent cash flow.
Some independent hotels arereally strong.
If they have a great location,you don't need a brand, but a
brand is a good example of it,intangible.
Jeff Borman (09:05):
We often hear the word unencumbered when we're
looking at the buying andselling, and it could be of a
management contract, you know, a20-year management contract
that the new owner would thentake, you know, possession of or
be encumbered by when they buythat hotel.
A brand could be the same way.
Is there a value positively tohaving unencumbered assets, like
(09:30):
what is the value of given toan independent hotel because it
does not have a branded flagthat it owes another decade to,
or a management company that itowns that it owes another decade
to?
Is there a bonus or a bump?
You give the appraisal of thatindependent asset because the
new owner can then go choose itspath?
Steve Rushmore (09:51):
independent asset because the new owner can
then go choose its path.
Yes, for a lot of differentreasons.
If it's unencumbered, ie anindependent hotel, or is it
easily to become unencumbered?
To become unencumbered likebuying out the brand or the
(10:18):
management company, or you havean agreement that if you sell
the property, the managementcompany or the brand doesn't
come along with it.
It could be as much as 20%difference in value.
Having some unencumbered.
The reason is is because itincreases the type of buyers
that would buy that property.
So, for example, let's say youhave a hotel that's managed by
(10:43):
XYZ hotel management company andyou can't get rid of them if
you sell the property.
Well, you can't sell that hotelto another management company
or another owner or anotherbrand if it's encumbered, so it
just cuts down your opportunityof selling it to somebody who
(11:07):
needs to take it unencumbered.
Jeff Borman (11:09):
You mentioned three methodologies to an appraisal
and you kind of address thefirst two and I'll share those,
but then you disregard them.
The first is the cost approach,essentially what it would take
to rebuild a hotel from scratchthe land, the FF&E, the
construction cost.
The second approach is then thesales comparison approach,
(11:33):
which I think you say isarbitrary, in your word, I
remember was to triangulatevalue through real transactions.
That was kind of interesting.
But then you disregard thosetwo for the method that
ultimately you've developed.
But why do you cast aside thosetwo methods?
I think most people think alongthose lines.
Steve Rushmore (11:54):
Basically, we're dealing with futures,
projecting things out in thefuture, and we're making
different types of assumptionsalong the way.
Along the way, we can makeassumptions based on facts and
(12:18):
then we can make assumptionsbased on gut feel.
An assumption based on gut feelwould be a very subjective
decision that you have to makealong the way and as appraisers,
we try to only deal with factsand we try to limit our
subjective decisions along theway.
So let's look at each approach.
(12:38):
The cost approach sounds verysimple.
You just what is it going tocost you to build?
That's easy to find out.
What is the land value?
That's very easy to find out.
So to get to the total projectcost is very objective.
Okay, so we come up with thetotal project cost.
(13:01):
Let's say it's $20 million.
So that would be the value of abrand new hotel on that site.
However, let's assume mosthotels are not brand new hotels.
They're 3, 4, 5, 10, 20 yearsold and probably suffering from
(13:26):
different types of obsolescence,depreciation and so forth.
So, looking at a hotel that'snot brand new, how much do you
deduct because the roof is 15years old and it only has a
20-year life?
How much do you deduct becausethey just built a brand new
(13:48):
hotel across the street from you.
Because they just built a brandnew hotel across the street
from you.
That's called externalobsolescence.
How much do you deduct?
Because the bathrooms just haveone sink and every other hotel
in the market has two sinks.
So these are all adjustmentsthat you have to make and each
one of those adjustments aresubjective.
(14:10):
So the problem with the costapproach is that you have a
gazillion subjective decisionsthat you have to make.
Jeff Borman (14:19):
Each one could be wrong and therefore your value
doesn't stand up and stand up Ifyou were doing an appraisal or
evaluation of where you areactually building from scratch.
Are all the methods you justtalked about the right ones, or
(14:41):
would you discount them anddepreciate them?
Here is my brand new building.
Here is my brand new bed andsink, and we know what that is.
Today, it cost me to build it.
In 10 years it'll be worthsomething else and it'll
depreciate.
You would do that and haveconfidence in that exercise.
I would think why can't you dothat in the reverse?
Steve Rushmore (15:04):
No, you're absolutely right.
So for a brand new hotel, thecost approach is very important
to do so.
Feasibility is essentially thisIf a hotel is worth more by the
income approach than the costto build, it's feasible.
(15:27):
If it costs to build more thanit's worth when it opens, it's
not feasible.
When we do brand new hotelsthat haven't been built, we run
an income approach and let's saythe income approach comes out
to $20 million but it's going tocost you $25 million to build,
(15:53):
then it's not a feasible project.
And that is the time that thecost approach is very important
to do so.
The market, the sales comparisonapproach.
You go and get other sales ofother hotels in the market.
You look it up and find outit's sold for X dollars per room
(16:18):
.
And the problem is is how doyou adjust for differences
between the subject property anda sale?
You can't have an exactlocation, the same location, so
there's going to be, at theminimum, a locational difference
(16:40):
.
But then there's a gazillionother differences.
You could have different brandsthat have sold, you can have
different size of hotels, youcould have different condition
of the hotels, different ages ofthe hotel, and each one of
those differences you have toadjust to adjust the sale price
(17:06):
to reflect the characteristicsof the subject property.
Matt Brown (17:11):
You once wrote an article on how to value a hotel
in 60 seconds, and it's stunningto me that you could pack all
of this into 60 seconds.
I, I, it's stunning to me thatyou could pack all of this into
60 seconds.
Steve Rushmore (17:27):
How can you give us a clue on how one would go
about doing all of this within aminute?
The easiest way is is thevaluation thumb rule that, for
every dollar average ratecreates a thousand dollars of
value on a per room basis.
Creates a thousand dollars ofvalue on a per room basis.
So if you look in the marketand the average rate of your
Marriott is $250, then thathotel should be worth $250,000 a
(17:52):
room.
Just, it's a very rough rule ofthumb, but it's surprisingly
how often that works out.
So that is the valuation thumbrule.
Then I have another rule ofthumb for estimating what the
land value is, so you don't haveto go and pay too much for land
(18:14):
.
And essentially the way thatworks is you come up with the
room's revenue, you multiply itby a ground rent percentage
which varies somewhere between4% to 10% of room's revenue, and
then you divide that by yourlong-term mortgage rate, which
today would be like 7%, and thatgives you your land value.
(18:38):
And then you can quicklydetermine whether you're buying
the land too expensive or you'regetting a good price for your
land.
So those are two thumb rules,and the third thumb rule which I
came up with is called the sodacan thumb rule, which says you
go to the soda machine down thehall in a hotel A can of soda is
(19:02):
selling for $2 a can.
That hotel has to be worth$200,000 a room.
You go to a Four Seasons hotel.
They don't have a soda machine.
You've got to order throughroom service.
It's got to cost you $7, and soit's worth $700,000 a room.
Jeff Borman (19:29):
Steve, that was a minute and 55 seconds.
We're going to have to renameyour methodology, but I'm still
pretty damn impressed.
I have a question, though whatmakes for a particularly
difficult appraisal, the mostchallenging valuation you've
ever had?
What's the curveball?
The worst of them all.
Steve Rushmore (19:50):
Well, as I said, to do an appraisal you have to
do a market study in order toproject the occupancy.
So whenever you're working in amarket that doesn't have any
hotels and that seems impossible, but there are a lot of islands
in the Caribbean and so forththat don't have any hotels or
(20:14):
maybe just have one hotel toappraise that and try to
determine how much demand isgoing to come to that hotel
becomes very difficult.
I call it particularly aproposed hotel on an island that
doesn't have any hotels.
I call it a field of dreamsappraisal, in that you know
(20:40):
build it and they will come andyou hope they will come.
But those are tough and it'smore than just looking at where
the demand is coming from, iscan the demand get to your hotel
?
So those become really, reallytough.
Jeff Borman (21:00):
So those become really, really tough.
One of the things I loved inyour course and I did take the
course about maybe eight monthsago I love the way that you
highlight an exceptional hotelat the beginning of each chapter
, particularly the Oberoi UdeVillas in India.
I love that when I saw thatimage behind you.
(21:25):
I've been to that hotel and itwas a great memory for me, so I
love the way you tee that upwith great hotels around the
world.
Yeah, in that chapter youprioritize selecting comparable
hotels for the underwritingstudy with six criteria and what
struck me is that you list themin this priority ADR facilities
.
Me is that you list them inthis priority ADR facilities
room count, management, companyoccupancy and geographic
(21:51):
location.
The order is what wascounterintuitive to me.
I would have thought thephysical attributes of the
property to be more indicativethan ADR.
So what is it about ADR thatdrives that to the primary
position in your predictiveanalysis?
Steve Rushmore (22:01):
Okay, let me start off by telling you what
that sequence of decisions are.
I use it to determine acomparable financial statement
for the hotel that I'mappraising financial statement
(22:25):
for the hotel that I'mappraising.
I call it the comparablestatement selection order.
So let's say I'm appraising aproposed hotel.
It doesn't exist.
There's no operating history.
I have no idea of how well thishotel is going to do.
I do my market analysis.
I forecast out occupancy andADR.
(22:46):
Okay.
Now what I need to do isdetermine what the expenses are
going to be in order to come upwith the net income that I'm
going to do it this kind of cashflow line.
Okay, I have this stack ofsimilar financial statements for
hotels.
You can, if you do a lot ofappraisals of hotels, you get a
(23:11):
lot of financial statements, oryou can go to Smith Travel
Research and ask them to runsome comparable financial
statements.
Okay.
So you have this stack offinancial statements and what I
(23:37):
want to do is figure out whichfinancial statement is more like
the hotel that I'm appraisingthan all the other financial
statements, and to do thatthere's a selection order.
Okay.
So you might think why isoccupancy so far down the list?
The reason is is that thesoftware that I developed.
You can put in any occupancyand it will calculate, do the
(23:58):
correct calculation.
What it doesn't work well is ADR.
So it's very important thatwhen you're projecting out and
you're getting a financialstatement, you want that
financial statement to besimilar to the subject property,
with ADR being the number one.
(24:19):
So it's intuitive in that ifyou're appraising a Four Seasons
with an ADR of $500, you don'twant to select a financial
statement of a Hilton Garden Innthat's $250.
(24:39):
There are two different typesof hotels, two different levels
of profitability.
So you go through your pile offinancial statements and let's
say the subject property isgoing to have an ADR of $250.
Then you pull together all thefinancial statements that are
(25:00):
around $250.
And that is the first level ofcomparability After the ADR.
You have to remind me what thenext one is on the list.
Jeff Borman (25:16):
It is facilities and then room count, which I
think you accounted for in youranswer already, that you can
quite easily match those thingsup, yeah, so you know easily
matched and geographic locationmatched.
Actually, that all makesperfect sense, okay.
Steve Rushmore (25:35):
You can't compare a hotel with confection
space, with limited service,with not so you get rid of those
statements makes sense thankyou.
Matt Brown (25:47):
It's time for the mystery question.
Steve, you recently journeyedto the arctic circle.
You're one of the few people inthe world who's done this
actually throughout history oneof about 3 000 wow, amazing.
Now that you've done it, nowthat you've checked that box,
what's next?
What's next for steve rushmore?
Steve Rushmore (26:09):
travel wise well , next week, uh, I get on a
plane and we fly to bora bora infrench polynesia.
Stay, stay at the Four Seasons,one of those hotels over the
water, and then we fly on toPapua New Guinea.
Matt Brown (26:29):
Jeff, we need to be making changes right now so that
we can live Steve's life.
Steve, thank you very much forbeing part of no Show.
This is tremendous.
We appreciate the time.
Steve Rushmore (26:38):
My pleasure and good luck to you guys.
Thank you.
Hi everybody, welcome to noShow.
I'm Matt Brown, joined asalways by Jeff Borman.
Steve Rushmore can tell youeverything, and I mean
everything about your hotel.
Why?
Because he is a legendaryfigure in the hotel business.
That's legend in all caps.
He is the founder of HBS, aglobal hotel consulting
organization with more than 50offices around the world.
He is the founder of HVS, aglobal hotel consulting
(00:44):
organization with more than 50offices around the world.
He has provided consultationservices for more than 15,000
hotels during his 50-year careerand specializes in complex
issues involving hotelfeasibility, valuation and
financing.
He's a prolific author, speaker,idea generator and all-around
expert on how and why hotelswork the way they do.
(01:08):
His Rushmore approach forallocating a hotel's total value
is the stuff of legal lore.
His ownership, with his wife,of a Park Avenue co-op is an
epic some would sayShakespearean story of New York
City real estate.
He's a skier, he's a hiker,he's a pretty good cook, he's a
dog lover, arctic adventurer and, on top of it all, he has a
commercial pilot's license.
(01:29):
Steve Rushmore, it is ourabsolute privilege to have you
on no Show.
Welcome.
Steve Rushmore (01:35):
Wow, I've never had an introduction like that.
Thank you so much.
You covered all the highlights.
Matt Brown (01:42):
I find that hard to believe because you've had a lot
of introductions.
Each time a hotel is bought,sold, developed, financed,
refinanced, syndicated orassessed, parties to the
transaction may require sometype of market study and
valuation to indicate its futurefinancial performance.
In simple words, for civilians,what is a hotel?
(02:04):
Market analysis and valuation.
Steve Rushmore (02:07):
Good question.
A valuation is an estimate ofvalue and it can be an estimate
of market value.
It can be an estimate ofinvestment value, assessed
values.
There are all different typesof valuations, but you listed
all the reasons why somebodywould want to know how much
their hotel is worth.
(02:27):
Value is very simple it's thepresent worth of future benefits
.
So in a hotel, the futurebenefits of owning a hotel are
the cash flows every year goingout into the future and then the
sale price when you ultimatelysell the property.
So those are the futurebenefits, and present worth
(02:50):
means that you're going todiscount that back to the
present value at a discount rate.
So essentially, to value ahotel, you have to determine
three things.
You have to determine what thefuture benefits are, which, as I
said, are the cash flow andthen also the sale at the end of
(03:13):
the holding period, and thenyou have to forecast that out
into the future.
You have to determine what thehotel is going to sell for at
the end of the holding periodand then you have to have a
discount rate or really a costof capital that you discounted
(03:33):
back to the present value.
So doing an appraisal, the firststep is to determine what the
future benefits are, and to dothat you're going to be doing a
projection of income and expensefor the hotel.
And income and expense let'sfirst look at income.
(03:53):
Income is basically your incomefrom the sale of rooms.
If you have a restaurant, it'ssale of revenue for the
restaurant, the lounge, themeeting space.
All that depending on the typeof hotel that you have.
And so you have to determinewhat the revenue is going to be
going into the future.
(04:14):
And let's keep it simple.
Let's just say it's a roomsonly operation and so the
revenue is made up of the futureoccupancy of that hotel and the
future ADR.
And to come up with roomsrevenue you take the occupancy
times, the ADR times, the roomcount times, 365 days a year,
(04:37):
and that gives you your roomsrevenue.
So you have to come back to thebasics that make up that
equation, which is occupancy andthe ADR.
So the first thing you have todo in an appraisal is to project
what that occupancy is going tobe over the next three to five
years.
(04:58):
And occupancy doesn't stayconstant.
It constantly changes dependingon the supply dynamics of the
local market that you'reoperating in.
So if there's new demand cominginto the market.
For example, in Paris you hadthe Olympics and that was a huge
amount of demand coming duringa short period of time.
(05:19):
In other markets you have newbusinesses coming in, you have
new tourist attractions alldifferent reasons why a market
demand will increase.
And then there's markets wherethe demand decreases, where a
business gets relocated,manufacturing plant shuts down
(05:41):
many different reasons whydemand might actually go down.
So that's the demand side.
Then you also, equallyimportant if not more important
you have to look at the supplyside, which is the competitive
supply of hotel rooms in thatmarket.
And is the supply increasing,stay the same, or is it
(06:02):
decreasing?
If it's increasing, then thatdilutes the market, which means
that your occupancy, if thedemand stays the same, will
decline.
So understanding what'shappening with supply and demand
is going to tell you what'sgoing to happen with occupancy.
(06:22):
Along with this, you have tolook at what's happening with
average rate.
Average rate in the market willtypically go up by inflation.
Sometimes it goes faster thaninflation, sometimes slower.
Sometimes it even declines,like during COVID.
(06:45):
So you have to project that out.
So if you have the projectionof occupancy and average rate,
then you can tell what therevenue projection would be for
the hotel.
The second component is that younow have to take that the
expenses and you come up with anet income.
You have to forecast out yourexpenses along with your revenue
(07:09):
to come up with what your netincome is.
That is part of the futurebenefits, the present worth of
future benefits and typically wedo that over a 10-year period
of time, but we're onlyestimating over probably three
to five years.
And then we assume that netincome will go up by inflation,
(07:31):
and so that gives us our 10-yearcash flow.
And then we assume that netincome will go up by inflation,
and so that gives us our 10-yearcash flow.
We then come up with a discountrate I like to use what's
called the mortgage equity,because most hotels are bought
with a mortgage or debtcomponent and then equity
component and that comes up witha discount rate that discounts
(07:54):
it back to the present value andthat is the value of your hotel
.
Matt Brown (08:02):
Sounds entirely simple.
No, it sounds very involved,and so much of hotel valuation
is in the numbers.
How do you account forintangibles in an appraisal?
Is there even such a thing asan intangible when you're doing
this work?
Steve Rushmore (08:24):
Sure, an intangible.
A good example would be afranchise affiliation with a
brand.
You can have the same box, thesame hotel right next to each
other and you put one brand onone hotel and another brand on
(08:45):
another hotel, or maybe not evenput a brand on the other hotel,
and that's going to have adifferent cash flow.
Some independent hotels arereally strong.
If they have a great location,you don't need a brand, but a
brand is a good example of it,intangible.
Jeff Borman (09:05):
We often hear the word unencumbered when we're
looking at the buying andselling, and it could be of a
management contract, you know, a20-year management contract
that the new owner would thentake, you know, possession of or
be encumbered by when they buythat hotel.
A brand could be the same way.
Is there a value positively tohaving unencumbered assets, like
(09:30):
what is the value of given toan independent hotel because it
does not have a branded flagthat it owes another decade to,
or a management company that itowns that it owes another decade
to?
Is there a bonus or a bump?
You give the appraisal of thatindependent asset because the
new owner can then go choose itspath?
Steve Rushmore (09:51):
independent asset because the new owner can
then go choose its path.
Yes, for a lot of differentreasons.
If it's unencumbered, ie anindependent hotel, or is it
easily to become unencumbered?
To become unencumbered likebuying out the brand or the
(10:18):
management company, or you havean agreement that if you sell
the property, the managementcompany or the brand doesn't
come along with it.
It could be as much as 20%difference in value.
Having some unencumbered.
The reason is is because itincreases the type of buyers
that would buy that property.
So, for example, let's say youhave a hotel that's managed by
(10:43):
XYZ hotel management company andyou can't get rid of them if
you sell the property.
Well, you can't sell that hotelto another management company
or another owner or anotherbrand if it's encumbered, so it
just cuts down your opportunityof selling it to somebody who
(11:07):
needs to take it unencumbered.
Jeff Borman (11:09):
You mentioned three methodologies to an appraisal
and you kind of address thefirst two and I'll share those,
but then you disregard them.
The first is the cost approach,essentially what it would take
to rebuild a hotel from scratchthe land, the FF&E, the
construction cost.
The second approach is then thesales comparison approach,
(11:33):
which I think you say isarbitrary, in your word, I
remember was to triangulatevalue through real transactions.
That was kind of interesting.
But then you disregard thosetwo for the method that
ultimately you've developed.
But why do you cast aside thosetwo methods?
I think most people think alongthose lines.
Steve Rushmore (11:54):
Basically, we're dealing with futures,
projecting things out in thefuture, and we're making
different types of assumptionsalong the way.
Along the way, we can makeassumptions based on facts and
(12:18):
then we can make assumptionsbased on gut feel.
An assumption based on gut feelwould be a very subjective
decision that you have to makealong the way and as appraisers,
we try to only deal with factsand we try to limit our
subjective decisions along theway.
So let's look at each approach.
(12:38):
The cost approach sounds verysimple.
You just what is it going tocost you to build?
That's easy to find out.
What is the land value?
That's very easy to find out.
So to get to the total projectcost is very objective.
Okay, so we come up with thetotal project cost.
(13:01):
Let's say it's $20 million.
So that would be the value of abrand new hotel on that site.
However, let's assume mosthotels are not brand new hotels.
They're 3, 4, 5, 10, 20 yearsold and probably suffering from
(13:26):
different types of obsolescence,depreciation and so forth.
So, looking at a hotel that'snot brand new, how much do you
deduct because the roof is 15years old and it only has a
20-year life?
How much do you deduct becausethey just built a brand new
(13:48):
hotel across the street from you.
Because they just built a brandnew hotel across the street
from you.
That's called externalobsolescence.
How much do you deduct?
Because the bathrooms just haveone sink and every other hotel
in the market has two sinks.
So these are all adjustmentsthat you have to make and each
one of those adjustments aresubjective.
(14:10):
So the problem with the costapproach is that you have a
gazillion subjective decisionsthat you have to make.
Jeff Borman (14:19):
Each one could be wrong and therefore your value
doesn't stand up and stand up Ifyou were doing an appraisal or
evaluation of where you areactually building from scratch.
Are all the methods you justtalked about the right ones, or
(14:41):
would you discount them anddepreciate them?
Here is my brand new building.
Here is my brand new bed andsink, and we know what that is.
Today, it cost me to build it.
In 10 years it'll be worthsomething else and it'll
depreciate.
You would do that and haveconfidence in that exercise.
I would think why can't you dothat in the reverse?
Steve Rushmore (15:04):
No, you're absolutely right.
So for a brand new hotel, thecost approach is very important
to do so.
Feasibility is essentially thisIf a hotel is worth more by the
income approach than the costto build, it's feasible.
(15:27):
If it costs to build more thanit's worth when it opens, it's
not feasible.
When we do brand new hotelsthat haven't been built, we run
an income approach and let's saythe income approach comes out
to $20 million but it's going tocost you $25 million to build,
(15:53):
then it's not a feasible project.
And that is the time that thecost approach is very important
to do so.
The market, the sales comparisonapproach.
You go and get other sales ofother hotels in the market.
You look it up and find outit's sold for X dollars per room
(16:18):
.
And the problem is is how doyou adjust for differences
between the subject property anda sale?
You can't have an exactlocation, the same location, so
there's going to be, at theminimum, a locational difference
(16:40):
.
But then there's a gazillionother differences.
You could have different brandsthat have sold, you can have
different size of hotels, youcould have different condition
of the hotels, different ages ofthe hotel, and each one of
those differences you have toadjust to adjust the sale price
(17:06):
to reflect the characteristicsof the subject property.
Matt Brown (17:11):
You once wrote an article on how to value a hotel
in 60 seconds, and it's stunningto me that you could pack all
of this into 60 seconds.
I, I, it's stunning to me thatyou could pack all of this into
60 seconds.
Steve Rushmore (17:27):
How can you give us a clue on how one would go
about doing all of this within aminute?
The easiest way is is thevaluation thumb rule that, for
every dollar average ratecreates a thousand dollars of
value on a per room basis.
Creates a thousand dollars ofvalue on a per room basis.
So if you look in the marketand the average rate of your
Marriott is $250, then thathotel should be worth $250,000 a
(17:52):
room.
Just, it's a very rough rule ofthumb, but it's surprisingly
how often that works out.
So that is the valuation thumbrule.
Then I have another rule ofthumb for estimating what the
land value is, so you don't haveto go and pay too much for land
(18:14):
.
And essentially the way thatworks is you come up with the
room's revenue, you multiply itby a ground rent percentage
which varies somewhere between4% to 10% of room's revenue, and
then you divide that by yourlong-term mortgage rate, which
today would be like 7%, and thatgives you your land value.
(18:38):
And then you can quicklydetermine whether you're buying
the land too expensive or you'regetting a good price for your
land.
So those are two thumb rules,and the third thumb rule which I
came up with is called the sodacan thumb rule, which says you
go to the soda machine down thehall in a hotel A can of soda is
(19:02):
selling for $2 a can.
That hotel has to be worth$200,000 a room.
You go to a Four Seasons hotel.
They don't have a soda machine.
You've got to order throughroom service.
It's got to cost you $7, and soit's worth $700,000 a room.
Jeff Borman (19:29):
Steve, that was a minute and 55 seconds.
We're going to have to renameyour methodology, but I'm still
pretty damn impressed.
I have a question, though whatmakes for a particularly
difficult appraisal, the mostchallenging valuation you've
ever had?
What's the curveball?
The worst of them all.
Steve Rushmore (19:50):
Well, as I said, to do an appraisal you have to
do a market study in order toproject the occupancy.
So whenever you're working in amarket that doesn't have any
hotels and that seems impossible, but there are a lot of islands
in the Caribbean and so forththat don't have any hotels or
(20:14):
maybe just have one hotel toappraise that and try to
determine how much demand isgoing to come to that hotel
becomes very difficult.
I call it particularly aproposed hotel on an island that
doesn't have any hotels.
I call it a field of dreamsappraisal, in that you know
(20:40):
build it and they will come andyou hope they will come.
But those are tough and it'smore than just looking at where
the demand is coming from, iscan the demand get to your hotel
?
So those become really, reallytough.
Jeff Borman (21:00):
So those become really, really tough.
One of the things I loved inyour course and I did take the
course about maybe eight monthsago I love the way that you
highlight an exceptional hotelat the beginning of each chapter
, particularly the Oberoi UdeVillas in India.
I love that when I saw thatimage behind you.
(21:25):
I've been to that hotel and itwas a great memory for me, so I
love the way you tee that upwith great hotels around the
world.
Yeah, in that chapter youprioritize selecting comparable
hotels for the underwritingstudy with six criteria and what
struck me is that you list themin this priority ADR facilities
.
Me is that you list them inthis priority ADR facilities
room count, management, companyoccupancy and geographic
(21:51):
location.
The order is what wascounterintuitive to me.
I would have thought thephysical attributes of the
property to be more indicativethan ADR.
So what is it about ADR thatdrives that to the primary
position in your predictiveanalysis?
Steve Rushmore (22:01):
Okay, let me start off by telling you what
that sequence of decisions are.
I use it to determine acomparable financial statement
for the hotel that I'mappraising financial statement
(22:25):
for the hotel that I'mappraising.
I call it the comparablestatement selection order.
So let's say I'm appraising aproposed hotel.
It doesn't exist.
There's no operating history.
I have no idea of how well thishotel is going to do.
I do my market analysis.
I forecast out occupancy andADR.
(22:46):
Okay.
Now what I need to do isdetermine what the expenses are
going to be in order to come upwith the net income that I'm
going to do it this kind of cashflow line.
Okay, I have this stack ofsimilar financial statements for
hotels.
You can, if you do a lot ofappraisals of hotels, you get a
(23:11):
lot of financial statements, oryou can go to Smith Travel
Research and ask them to runsome comparable financial
statements.
Okay.
So you have this stack offinancial statements and what I
(23:37):
want to do is figure out whichfinancial statement is more like
the hotel that I'm appraisingthan all the other financial
statements, and to do thatthere's a selection order.
Okay.
So you might think why isoccupancy so far down the list?
The reason is is that thesoftware that I developed.
You can put in any occupancyand it will calculate, do the
(23:58):
correct calculation.
What it doesn't work well is ADR.
So it's very important thatwhen you're projecting out and
you're getting a financialstatement, you want that
financial statement to besimilar to the subject property,
with ADR being the number one.
(24:19):
So it's intuitive in that ifyou're appraising a Four Seasons
with an ADR of $500, you don'twant to select a financial
statement of a Hilton Garden Innthat's $250.
(24:39):
There are two different typesof hotels, two different levels
of profitability.
So you go through your pile offinancial statements and let's
say the subject property isgoing to have an ADR of $250.
Then you pull together all thefinancial statements that are
(25:00):
around $250.
And that is the first level ofcomparability After the ADR.
You have to remind me what thenext one is on the list.
Jeff Borman (25:16):
It is facilities and then room count, which I
think you accounted for in youranswer already, that you can
quite easily match those thingsup, yeah, so you know easily
matched and geographic locationmatched.
Actually, that all makesperfect sense, okay.
Steve Rushmore (25:35):
You can't compare a hotel with confection
space, with limited service,with not so you get rid of those
statements makes sense thankyou.
Matt Brown (25:47):
It's time for the mystery question.
Steve, you recently journeyedto the arctic circle.
You're one of the few people inthe world who's done this
actually throughout history oneof about 3 000 wow, amazing.
Now that you've done it, nowthat you've checked that box,
what's next?
What's next for steve rushmore?
Steve Rushmore (26:09):
travel wise well , next week, uh, I get on a
plane and we fly to bora bora infrench polynesia.
Stay, stay at the Four Seasons,one of those hotels over the
water, and then we fly on toPapua New Guinea.
Matt Brown (26:29):
Jeff, we need to be making changes right now so that
we can live Steve's life.
Steve, thank you very much forbeing part of no Show.
This is tremendous.
We appreciate the time.
Steve Rushmore (26:38):
My pleasure and good luck to you guys.
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