When valuing commercial real estate (NOI/cap rate), why are you valuing just the physical structure instead of the company that owns the property? For ex, if you're valuing a hotel, there are other assets on the BS that don't encompass the NOI/cap rate tied to the property..is that added on after the asset value of the bldg to compute total purchase price?
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Because you are buying the asset not the company?
no that's wrong there are intangible/other assets that go into the cash flows of NOI that wouldn't be captured in the NOI/cap rate..noi/cap rate is just the value of the bldg
Uhh, could you give an example of intangible/other assets that are tied to the building that go into the cash flow?
The only thing I could think of is, like, a franchise agreement with a hotel operator. But that's priced essentially into the cash flow model, i.e. your net revenues (revenues less vacancy) will be impacted by the brand name. I'm struggling to think of another example.
Business assets are just not really applicable to valuing a piece of property.
like what?
Purchasing a hotel is a little different than buying other asset classes because it is like buying a mini-operating company. When the NOI is calculated, it is calculated based on the operations of the hotel (includes room revenue, communications, food and bev, etc.), not just on the value of the shell of the building (unless it is a re-development play). Then you pick a cap rate that accounts for the intangibles (transfer of operating contracts/flags, position in the market, upcoming reservations/convention bookings, etc). So there is no need to add anything additional back to the equation.
Now, how you allocate back the various pieces (building, furniture, fixtures, intangibles, etc.) to the imputed purchase price is a different story - that is really more of a question for a tax professional.
Right. Further to that point, what about the cash and/or WK on the BS at the time of sale? Secondly, what if, say the hotel owns a shuttle bus that is transferring customers to/from the airport. The NOI/cap rate would not include the asset value of the shuttle bus to my understanding? Secondly, there are intangibles on the hotel BS. If the hotel were being sold in distress like a S363, you could say sell the hotel's customer list/info it had on customers as an intangible asset apart from the real estate of the building itself. All this to me seems to imply that CRE professionals are often undervaluing the remaining assets on the BS and too simply just assuming NOI/cap rate = EV of the business, which it does not. Probably, they do this because it's just easier for non-finance professionals to understand, but that remains conjecture.
Most hotel assets are held in SPEs to make lenders happy. As such, at the entity level (which is where an asset sale would occur), they distribute almost 100% of their earnings each month/quarter/year back up stream to their partners. Because of this, there is usually very little, if any extra cash sitting on the BS at the time of sale. As for things like a shuttle bus or pool equipment, etc.; it all gets wrapped into two places 1) the selection of the room rate (having these services generally allows for higher room rates) and 2) the pick of the cap rate.
On the customer list: As an operator under a national flag, you don't own that data. When you sign the agreement with Marriott/SPG/Hilton, etc., they are allowing you to use/store customer data, but they own it. Now if Marriott/SPG/Hilton was being liquidated, that would be a different story (they are going to hold the intangibles at the corporate level, not at the asset level). But you saw what happened with Radio Shack tried to sell their customer list - they got shot down (given, it was because their user agreement prohibited it); there is always value in that kind of stuff and I've seen it paid for on occasion, but in RE it isn't usually heavily valued. We like real assets.
Now, if you were independent and not operating under a national flag, then you might be able to eek out some cash for those intangibles; but again, this is CRE; we like real assets, so I kind of doubt it. Unless it is like Dollywood or Foxwoods.
While a hotel name might bring more customers, It is usually location. The building (usually) lasts longer than the hotel leasing it out.
BTW is there any other industry that does this asset instead of enterprise modelling? Coming from IB, I've never seen this type of model before, where you just compute the cash flows of the asset and perpetuize that for a value...curious if others have seen this type of approach taken in other industries (fixed income aside)..
thanks
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