by Lawrence E. Henry, MAI
May 2004

Increasing pressure on appraisers to value a property�s intangible assets is making hotel appraisals a trickier process. The difficulty springs from an inherent vagueness in the way the rules may be applied, since there is no consensus for quantifying the value of �Total Intangible Assets.� As always, hotel owners and lenders need to be aware of the role opinion may play in the value of their property.

As an old salt appraiser who has plied his trade for the past 25 years on the generally placid appraisal sea, I�ve learned to pay close attention to the winds of change. Few things are as annoying to old salt appraisers as having their boat swamped, or God forbid, capsized, by turbulent seas. The recent winds of change have been fairly moderate, including periodic revisions to the definition of Market Value (eventually we�ll get it right) and almost constant changes to the Uniform Standards of Professional Appraisal Practice, commonly, and cleverly, known as USPAP (�use-pap�). In other respects, things have been relatively constant. The three traditional approaches to value, fundamentally, have remained pretty much unchanged, and cap rates always seem to hover around 10 percent.

Lately, however, I�ve noticed some whitecaps chopping up our sea, having to do with value allocations within a Going-Concern or, as it�s increasingly called today, �Total Assets of the Business�, or TAB. This is particularly relevant to hotel valuations, since the TAB of an operating hotel includes more than simply real estate or real property (i.e., land and building(s)). There seems to be increasing pressure on all of us who value hotels to allocate our overall conclusion among the various components of the Going-Concern. These additional components include personal property (primarily FF&E and distinguished from real property) and business value, which is now called �Total Intangible Assets.�

This is all well and good, but as to how to actually accomplish it is another story entirely. There is no consensus, theoretical or practical, as to how one goes about quantifying the value contribution of �Total Intangible Assets�. The contribution from personal property isn�t quite as daunting, and is typically based on its estimated depreciated cost. But even that, technically, lacks some credibility and would most accurately be addressed by a personal property appraiser, or a machinery & equipment appraiser, which most real estate and hotel appraisers aren�t.

It�s clear that, in the real world, this allocation thing is most useful in tax assessment matters, most particularly in jurisdictions where only real estate or real property is assessable and therefore taxable. If it is held that the operating property (hotel) includes more than real estate in its TAB, as is increasingly the case, then these non-realty items must be extracted from the overall value of the TAB to arrive at the value of the real property only, for assessment and property tax purposes.

While this allocation approach is most relevant to real estate tax assessment matters, it has also worked its way into the general purpose appraisal milieu � the appraisal sea � creating the whitecaps. The Appraisal of Real Estate is published by the Appraisal Institute and considered �the bible� of real estate appraising. The most recent edition states that: �The reporting requirements of USPAP as well as certain assignments, such as appraisals for tax appeals or eminent domain, require that value be allocated among its various components, i.e., real estate, FF&E, business enterprise, and other intangibles. There are divergent methods of estimating business enterprise value and no single technique is universally accepted.� (pp 578-579).

In the 2003 edition of the USPAP, Standards Rule 1-2(e)(iii) states that: �In developing a real property appraisal, an appraiser must identify the characteristics of the property that are relevant to the purpose and intended use of the appraisal, including any personal property, trade fixtures, or intangible items that are not real property but are included in the appraisal.�

Interestingly, USPAP uses the word �identify� (not quantify), while the Appraisal of Real Estate text says ��[certain assignments] require that value be allocated among its component parts,� although it goes on to note that �there are divergent methods of doing this� and �no single technique is universally accepted�.

So, on one hand, appraisers are told to identify all TAB components, on another, at least for certain assignments, we�re required to allocate value among the components, and, lastly, we�re told that methods of doing so are divergent with no universally accepted technique.

It�s not easy to navigate these choppy waters, and the appraiser must be aware of the context in which the engagement lies. I find it interesting that something is said to be required, yet offers no consensus, actually stating that there IS no consensus � as to how to satisfy the requirement. Therefore, the successful hotel appraiser must be completely familiar with the �intangibility� factors associated with a hotel business, along with knowing how to interpret and apply the many layers of valuation rules. The appraiser�s goal is to steer a smooth course through the whitecaps for our clients.

Robert Mandelbaum
Director of Research Information Services
The Hospitality Research Group
3340 Peachtree Road, Suite 580
Atlanta, GA 30326
(404) 842-1150, ext 223
[email protected]
www.pkfc.com