METHODOLOGY GUIDE- VALUING HOTELS IN ONTARIO · METHODOLOGY GUIDE VALUING HOTELS IN ONTARIO...

METHODOLOGYGUIDE

VALUINGHOTELSINONTARIO

ValuationDate:January1,2016

AUGUST2016

August22,2016

TheMunicipalPropertyAssessmentCorporation(MPAC)isresponsibleforaccuratelyassessingandclassifyingpropertyinOntarioforthepurposesofmunicipalandeducationtaxes.

InOntario’sassessmentsystem,MPACassessesyourpropertyvalueeveryfouryears.Thisyear,MPACisupdatingthevalueofeverypropertyintheprovincetoreflectthelegislatedvaluationdateofJanuary1,2016.

MPACiscommittedtoprovideOntariopropertyowners,municipalitiesandallitsstakeholderswiththebestpossibleservicethroughtransparency,predictabilityandaccuracyinvalues.Aspartofthiscommitment,MPAChasdefinedthreelevelsofdisclosureofinformationinsupportofitsdeliveryofthisyear’sassessmentupdate.ThisMethodologyGuideisthefirstlevelofinformationdisclosure.

ThisguideprovidesanoverviewofthevaluationmethodologyundertakenbyMPACwhenassessinghotelpropertiesforthisyear’supdateensuringthemethodologyforvaluingthesepropertiesiswelldocumentedandinalignmentwithindustrystandards.

Propertyownerscanaccessadditionalinformationabouttheirownpropertiesthroughaboutmyproperty.ca.Logininformationforaboutmyproperty.caisprovidedoneachPropertyAssessmentNoticemailedthisyear.AdditionalinformationaboutMPACcanbeaccessedatmpac.ca.

AntoniWisniowski

PresidentandChiefAdministrativeOfficer

RoseMcLean,M.I.M.A.

ChiefOperatingOfficer

TableofContents

TABLEOFCONTENTS..............................................................................................................3

1.0INTRODUCTION................................................................................................................4

1.1PROPERTIESCOVEREDBYTHISMETHODOLOGYGUIDE.......................................................................4

1.2LEGISLATION.............................................................................................................................5

1.3CLASSIFICATION.........................................................................................................................5

1.4THEUSEOFTHISMETHODOLOGYGUIDE........................................................................................6

1.5CONSULTATIONANDDISCLOSURE..................................................................................................6

2.0THEVALUATIONPROCESS.................................................................................................8

2.1OUTLINE..................................................................................................................................8

2.2APPROACH.............................................................................................................................10

2.3DATACOLLECTION...................................................................................................................10

2.4DATAANALYSIS.......................................................................................................................12

2.5OTHERADJUSTMENTS...............................................................................................................15

2.6THECAPITALIZATIONRATE.........................................................................................................16

2.7VALUATION.............................................................................................................................17

2.8VALIDATINGTHERESULTS..........................................................................................................17

3.0THEVALUATION..............................................................................................................18

3.1EXCESSLAND..........................................................................................................................18

3.2SAMPLEVALUATION.................................................................................................................18

3.3QUALITYCONTROL...................................................................................................................19

3.4CONCLUSION...........................................................................................................................19

©MunicipalPropertyAssessmentCorporation2016Allrightsreserved 4

1.0Introduction

TheMunicipalPropertyAssessmentCorporation(MPAC)–mpac.ca–isresponsibleforaccuratelyassessingandclassifyingpropertyinOntarioforthepurposesofmunicipalandeducationtaxation.

InOntario,propertyassessmentsareupdatedonthebasisofafour-yearassessmentcycle.In2016,MPACwillupdatetheassessmentsofOntario’snearlyfivemillionpropertiestoreflectthelegislatedvaluationdateofJanuary1,2016.Assessmentsupdatedforthe2016baseyearareineffectforthe2017–2020propertytaxyears.

ThelastAssessmentUpdatewasbasedonaJanuary1,2012,valuationdate.Increasesarephasedinoverafour-yearperiod.Anydecreasesinassessmentareappliedimmediately.

Itisimportanttoensurethatthevaluationmethodologyappliediscapableofprovidingarealisticestimateofcurrentvalueattherelevantvaluationdate,which,inturn,enablesallstakeholderstounderstandthevaluationprocessandhaveconfidenceinthefairnessandconsistencyofitsoutcome.

ThisMethodologyGuidehasbeenpreparedforthebenefitofMPACassessors,propertyownersandtheirrepresentatives,municipalitiesandtheirrepresentatives,AssessmentReviewBoardmembers,provincialofficials,andthegeneralpublic.

Thisguideoutlinesthevaluationprocesstobefollowedbyanassessor,includingstepsthatrequireappraisaljudgment.Itisincumbentupontheassessortomakeinformeddecisionsthroughoutthevaluationprocesswhenarrivingatestimatesincurrentvalue.

1.1PropertiesCoveredbyThisMethodologyGuide

ThismethodologyguideappliestohotelsinOntario.Hotelsvaryfromsmallbudgethotelstoverylargeconventionhotels,luxuryhotelsandresorthotels.ThefollowingMPACpropertycodesareusedtocategorizethevarioustypesofhotelsinOntario:

• 444Fullservicehotel

• 445Limitedservicehotel

Itshouldbenotedthatthesearegeneralguidelinesthatvarydependingonthespecificcircumstancesofaparticularproperty.


Anassessormayalsomakereferencetoadditionalmethodologyguidesforpropertiesthatdonotfallpreciselywithinthedescriptionofoneofthepropertycodeslistedabove.

1.2Legislation

ThemainlegislationgoverningtheassessmentofpropertiesinOntarioforpropertytaxpurposesiscontainedintheAssessmentAct.

TheActcontainsimportantdefinitionsandstateswhatpropertyistaxableandhowitshouldbevalued.Section19(1)oftheActrequiresthatlandbeassessedatcurrentvalue,whichisdefinedtomean,inrelationtoland,“theamountofmoneythefeesimple,ifunencumbered,wouldrealizeifsoldatarm'slengthbyawillingsellertoawillingbuyer.”1

Indeterminingthecurrentvalueofhotels,Section45.3ofOntarioRegulation282/98providesthatifthelandisassessedusingtheproformincomecapitalizationapproach,theamountsdeductibleformanagementfeesandpersonalpropertyforayearshallnotexceed5%and15%respectively.2

1.3Classification

MPAC’sroleistoaccuratelyassessandclassifyallpropertiesinOntarioinaccordancewiththeAssessmentActanditsassociatedregulationsestablishedbytheGovernmentofOntario.Theclassificationofapropertywilldeterminewhichtaxratewillbeappliedbythemunicipalityortaxingauthority.Allpropertiesareclassifiedaccordingtotheiruse,andOntarioRegulation282/98oftheAssessmentActsetsouthowvariouspropertyusesareclassified.

TheclassificationofhotelsiscoveredinSection17(1)ofOntarioRegulation282/98.Thissectionoftheregulationprovidesthathotelsareincludedinthe“commercialpropertyclassandnotinanyotherpropertyclass.”Hotelsincludelandthatwouldotherwisebeinthemulti-residentialornewmulti-residentialpropertyclassthatmeetstherequirementssetoutinthelegislationorhotelasdefinedintheHotelRegistrationofGuestsAct.

Ifaportionofthepropertyisusedforotherpurposes,itmaybenecessarytovaluethosecomponentsseparatelyandsumthecomponentvaluestoachievethecorrecttotalcurrentvalue.Itmayalsobenecessarytoapportionthetotalvalueofthepropertybetweenthevarioususestoensurethattheappropriatetaxrateisappliedtotherelevantpartsoftheproperty.

1AssessmentAct,R.S.O1990,cA.31:https://www.ontario.ca/laws/statute/90a31.2OntarioRegulation282/98,GENERAL:https://www.ontario.ca/laws/regulation/980282.


1.4TheUseofThisMethodologyGuide

ThisMethodologyGuideisintendedto:

• EnsureMPAC’sassessedvaluesforthesepropertiesarefair,accurate,predictableandtransparent.

• Providedirectiontoassessorsandclearexplanationstomunicipalities,taxpayersandAssessmentReviewBoardmembers.

• EnsurethatMPAC’smethodologyforvaluingthesepropertiesiswelldocumentedandalignswithindustrystandards.

• Explainthethoughtprocess/decision-makingprocessthatanassessorshouldundertaketoapplythevaluationmethodology.

• Ensureaconsistentapproachtovaluingthesepropertytypes.

• SupportMPACassessorsinconductingtheirduediligencein:

Ø applyingOntario’slegislationandregulationsØ adheringtoindustrystandardsformarketvaluationinamassappraisal

environment

ItshouldbenotedthatthisMethodologyGuideisnotintendedtobeasubstituteforanassessor’sjudgmentinarrivingatamarketvalue–basedassessment(i.e.,currentvalue)foraparticularproperty.However,giventhattheMethodologyGuideexplainsindustrystandardsforpropertyassessment,conformstovaluationindustrynorms,andadherestoprovinciallegislationandregulation,MPACassessorsareexpectedtofollowtheproceduresintheMethodologyGuideandbeabletoclearlyandsatisfactorilyjustifyanydeviationsfromit.

1.5ConsultationandDisclosure

MPACiscommittedtoprovidingmunicipalities,taxpayersandallitsstakeholderswiththebestpossibleservicethroughtransparency,predictabilityandaccuracy.Insupportofthiscommitment,MPAChasdefinedthreelevelsofdisclosureaspartofitsdeliveryofthe2016province-wideAssessmentUpdate:

• Level1–MethodologyGuidesexplaininghowMPACapproachedthevaluationofparticulartypesofproperty


• Level2–MarketValuationReportsexplaininghowthemethodologyoutlinedinLevel1hasbeenappliedatthesectorlevelforthepurposesofeachassessment

• Level3–PropertySpecificValuationInformationavailabletopropertytaxpayers,theirrepresentativesandmunicipalities


2.0TheValuationProcess

Thevaluationprocessalwaysbeginswithadeterminationofthehighestandbestuseofthesubjectproperty.

Anyrelianceuponthisguideismadeonlyaftertheassessorhasdeterminedthatthehighestandbestuseofthesubjectpropertyisthatofahotel.

Assessorsdeterminethevalueofapropertyusingoneofthreedifferentapproaches:

• thedirect(sales)comparisonapproach

• theincomeapproach

• thecostapproach

2.1Outline

Inthedirect(sales)comparisonapproach,valueisindicatedbyrecentsalesofcomparablepropertiesinthemarket.Inconsideringanysalesevidence,itiscriticaltoensurethatthepropertysoldhasasimilaroridenticalhighestandbestuseasthepropertytobevalued.

Intheincomeapproach(or,moreaccurately,theincomecapitalizationapproach),valueisindicatedbyaproperty’srevenue-earningpower,basedonthecapitalizationofincome.Thismethodrequiresadetailedanalysisofbothincomeandexpenditure,bothforthepropertybeingvaluedandothersimilarpropertiesthatmayhavebeensold,inordertoascertaintheanticipatedrevenueandexpenses,alongwiththerelevantcapitalizationrate.

Inthecostapproach,valueisestimatedasthecurrentcostofreproducingorreplacingimprovementsoftheland(includingbuildings,structuresandothertaxablecomponents),lessanylossinvalueresultingfromdepreciation.Themarketvalueofthelandisthenadded.

MPACpredominantlyusestheincomeapproachtovaluehotels.Thevalueofanincome-producingpropertysuchasahotelisbasedonthepresentworthofanticipatedfutureincome.Theincomeapproachisacceptedbymarketparticipantsasanappropriatewayofestimatingthevalueofincome-producingproperties,includinghotels.

MPACusesthedirectcapitalizationmethodtoestablishcurrentvalueassessmentsinamassappraisalcontext.


Thismethodestimatesthestabilizedannualrevenuethatcanbegeneratedbythehotel,deductstheannualexpenditurereasonablyincurred,andthenappliesacapitalizationratetothenetincometoarriveatavalueforthehotel.

Thedirectcapitalizationmethodincludesthefollowingsteps:

1) Determinestabilizedroomandhoteldepartmentalrevenues.

2) Determinestabilizedexpensesforthehotel.

3) Determinenetoperatingincome(NOI)orearningsbeforeinterest,taxes,depreciation,andamortization(EBITDA).

4) CapitalizeNOIintovalue.

5) Deductthepersonalpropertyallowance.

6) Determinethecurrentvalueassessment.

TheincomereceivedandthecapitalizationrateusedintheprocessofvaluationareestablishedbyMPACthroughtheanalysisofpropertyspecificandmarketdata.

Thedirectcapitalizationformulacanbeexpressedas:

MarketValue(MV)=NetOperatingIncome(NOI)/CapitalizationRate(R)

Forexample,giventhatthestabilizedNOIofaparticularhotelis$100,000andthecapitalizationrate(R)is8.00%,thevalueofthepropertyis:

$100,000/8.00%=$1,250,000

Fromthisvalue,thevalueofpersonalpropertyisdeductedat15.00%:

$1,250,000X15.00%=$187,500

Therefore,theassessedvalueoftheexamplepropertyis:

$1,250,000–$187,500=$1,062,500


2.2Approach

TherearethreemainphasesinthevaluationprocessusedbyMPAC:

• datacollection

• analysisofthedatacollected

• valuation

2.3DataCollection

Thedatarequiredforhotelvaluationscomefromanumberofsources:

• MPACconductsperiodicinspectionsofhotels.

• PropertyownersarerequiredtoprovideMPACwithdetailsincludingactualincomeandexpenses.

• MPACalsocollectsinformationaboutsalesandtransfersofhotels.

• Thereareanumberofguidesandotherpublishedinformationabouthotels.

MPACgenerallycollectsthefollowingtypesofdataforhotels:

• generaldata(numberofrooms,restaurants,meetingrooms,conventionspace,amenities,parking,etc.)

• financialdata

• propertydescription

• salesdata

• spaceandconcessiondata

• hotelimprovementdata

• landvaluationdata

• commercialrentaldata

• condominiumdata(hotelversusresidentialcondominiumunits)

• fixtures,furnishingsandequipmentdata(FF&E)


FinancialData

Ahotelowneroroperatoristhemainsourceofahotel’sfinancialdata.Awrittenrequestforthepertinentfinancialinformationismadetoeachhotelowner.Acopyofthepreviousyear’soperatingstatement,includingrevenueandexpenses,isrequiredannually.

Incomeandexpenseinformationincludes:

• occupancylevels

• averageroomrate

• foodandbeverage(F&B)outletincome

• otherincome(meetingroomrentals,parking,etc.)

• departmentaloperatingexpenses

• otheroperatingexpensesbrokendownbytypeofexpense

• managementcontractdetails

• fixedexpenses,includingpropertytaxandinsurance

• recordofexpendituresonFF&E

• recordofcapitalexpenditures

• reservesforreplacement

• recordofpropertyowner’spersonalproperty

HotelSalesData

MPACcollectsdatarelatingtothesaleofhotelstoanalysethepricepaidinrelationtothenetoperatingincomeinordertodeterminethecapitalizationrate.

ItisimportantforMPACtoascertainasmuchinformationaspossibleregardingeachsale,includinglocalmarketfactors.Hotelsalesmayincludenon-assessableitemssuchasinventory,FF&Eandintangibles.

MPACanalysessalesfromabroadgeographicalareatodetermineappropriatecapitalizationratesand,ultimately,values.MPACanalyseslocalmarketconditionstoreconcilesaleprices.


Confidentiality

Asoutlinedabove,itisimportanttobeawarethat,inordertoenableMPACtoproduceanaccuratevaluationofthepropertyconcerned,informationneedstobeobtainedfromavarietyofsources.

ThiswillincludeinformationfromMPAC’srecords,fromtheowneroroperatoroftheproperty,fromthemunicipalityinwhichthepropertyislocated,fromtheassessor’svisittotheproperty,andfromothersources.

AllstakeholdersinthepropertytaxsystemhaveaninterestinensuringthatthecurrentvalueprovidedbyMPACiscorrect;inordertoachievethis,itisnecessaryforallpartiestocooperateintheprovisionofinformation.

Itisappreciatedthatsomeoftheinformationoutlinedabovemaybeofacommerciallysensitivenature.MPACrecognizestheneedtoensurethatanyinformationprovidedtoitisproperlysafeguardedandonlyusedforthepurposeforwhichitissupplied.Assessorsmustappreciatethenatureofthisundertakingandensuredataistreatedaccordingly.

If,afteranappealhasbeenfiled,MPACreceivesarequestforthereleaseofactualincomeandexpenseinformation,orothersensitivecommercialproprietaryinformation,theusualpracticeistorequirethepersonseekingtheinformationtobringamotionbeforetheAssessmentReviewBoard(ARB),withnoticetothethirdparties,requestingthattheARBorderproductionoftherequestedinformation.ThereleaseofsuchinformationisatthediscretionoftheARBandcommonlyaccompaniedbyarequirementforconfidentiality.

TheAssessmentActoutlinesinsection53(2)thatdisclosedinformationmaybereleasedinlimitedcircumstances“(a)totheassessmentcorporationoranyauthorizedemployeeofthecorporation;or(b)byanypersonbeingexaminedasawitnessinanassessmentappealorinaproceedingincourtinvolvinganassessmentmatter.”

2.4DataAnalysis

Havingcarriedoutthedatacollectionoutlinedpreviously,theassessorneedstoanalyzethedataandreachaconclusionregardingtheappropriatevaluationmethodtouseandhowitshouldbeapplied.

AnalysisProcess

Theanalysisprocessinvolvesseveralsteps.Thefirsttaskistoqualifythedata(i.e.,checkforaccuracy)beforeitisusedtoestablishtheratesandfactorsthatwillbeusedtovaluetheproperties.ThesecondstepistoenterthedataintoMPAC’sdatabasesothatoneoranumber


ofdifferentpropertiescanbeanalyzedandcompared.Next,MPACclassifiesthedatasothatitcanbesortedintoappropriategroupsthatreflectconditionswheredatacomparisonscanbemadeandconclusionsdrawn.Finally,MPACdevelopscertainvaluationparameterstobeusedinthevaluationofhotels.

IndustryPerformanceStandards

Duetothewidevarietyofhotelattributesandcharacteristics,directcomparisonoftheiroverallperformanceshouldbemadeverycarefully,evenifthehotelsservesimilarneedsinthemarket.However,therearecertainperformancemetricstypicallycompared,suchasrevenueperavailableroom(REVPAR),theratioofroomoperatingcoststoroomrevenues,aswellasotherdepartmentalandoperatingexpenseratios.Overall,thesefactorsshouldbesimilarforsimilarhotels.

Toachieveanequitableassessmentbase,industryrevenueandexpensenormsneedtobereviewedbyMPAC.Thesenormscanthenbecomparedtotheactualoperatingandexpenseperformancesofthevarioustypesofhotels.

IndustryNorms–PointsofComparisonBetweenHotels

Eachtypeofhotelhasastandardrangeofrevenueandexpenseratios,whichareasonablyrunestablishmentwouldbeexpectedtofallwithin.Althoughanypartofahotel’sperformancecanbecomparedtotheperformanceofsimilarhotels,thedifferencesinthetypesofdatareportedandthedifferentcharacteristicsofthevarioushotelsnarrowthepointsofcomparisontothefollowing:

• revenuestandards

• expensesstandards

Moredetailsofeachofthesestandardsareshownbelow.

Whiletherearemanyhotelsofasimilarnature,theyhavedifferentlocationsandoftenhavedifferentattributes,roommix,roomfinishes,restaurants,franchiseaffiliations,labourarrangements,marketfocus,etc.Therefore,inthevaluationprocess,actualincomeandexpensesformthestartingpointintheprocess.Thisdataisthencomparedtotheperformancesofothercomparablehotelsandadjustedasappropriateinordertoestablishthecorrectassessmentvalue.


SensitivitytoChange

Therevenuegeneratedbyahotelreliesuponshort-termstaysandissensitivetochangesinthemarket.Assuch,theaveragedailyrate(ADR)andoccupancyahotelisabletoachieveishighlycorrelatedtoitsincomeand,therefore,toitsvalue.AchangeineitherADRoroccupancymayproduceanimmediateandcorrespondingfallorriseinincome.Thehotelindustryiscyclicalinnature;therefore,valuescanalsobeanticipatedtoriseandfallovertimeandasnewsupplycomesonstreamorolderpropertiesrenovateorconverttodifferentuses.

Inordertodealwithshort-termoranomalousfluctuations,stabilizedincomeandexpensesareusedbyMPACinthevaluationofhotels.

RevenueStandards

Hotelshaveanumberofsourcesofrevenue–rooms,meetingspace,foodandbeverageoutlets,leisurefacilities,spacerental–whichsupportthevalueoftheentirehotelenterprise.Ahotel’srevenuearisesasaresultofbothphysicalassets,suchasland,buildings,andFF&E,andasaresultofintangibleandtangiblepersonalproperty.Theincomederivedfromtheoperationofahotelisattributabletoallthesecomponentparts.Theassessmentofahotelforpropertytaxpurposesrequiresthattherealestateportionbeseparatedfromthevalueofthepersonalproperty,asonlytherealestateissubjecttopropertytax.

Therevenuedatarequiredfortheassessmentmayincludethefollowing:

• revenueperroom

• stratifiedbyhoteltype,size,age,amenities,location

• roomrevenueperavailableroom(REVPAR),whichiscalculatedasfollows:

NumberofRoomsxNumberofDaysOpen=TotalRoomRevenue

ExpenseStandards

Theexpensedatarequiredfortheassessmentmayincludethefollowing:

• expensesperroom

• stratifiedbyhoteltype,size,age,amenities,location

• roomexpensesasapercentageofroomrevenue

• foodandbeverageexpensesasapercentageoffoodandbeveragerevenue


• administrationandgeneralexpensesasapercentageoftotalrevenue

• marketingexpensesasapercentageoftotalrevenue

• propertyoperationandmaintenanceasapercentageoftotalrevenue

• heat,lightandpowerasapercentageoftotalrevenue

• otheroperatingexpensesasapercentageoftotalrevenue

StabilizingIncomeandExpenses

Hotelrevenuesandexpensescanvarysignificantlyfromoneyeartothenext.Becausethevaluationofhotelsconsiderstheincomeachievableinthelongerterm,itisappropriatetovaluehotelsbyexcludinganyabnormalrelationofsupplyanddemandoratransitoryornon-recurringcondition,whichmayresultinunusualrevenuesorexpensestotheproperty.

MPACreviewsseveralyearsofrevenueandexpensedatatostabilizetherevenueandexpensestoproduceanaccuratepictureofthehotel’sperformancethatcouldformthebasisofatransactionbetweenvendorandpurchaser.

2.5OtherAdjustments

ExpenseAttributabletoManagement

Inadditiontoexpensesrelatedtotheon-sitemanagementofahotel,theproformacapitalizednetincomeapproachassumesapassiveownerandinputsamanagementfeetoreflectacontributionofbusinessexpertisetothestabilizedincome.Thisexpense,attributabletoassetmanagementofthehotel,formspartoftheoperatingexpensesofthehotelandisfoundintheundistributedexpensesgroupofexpenses.Thisexpensecanalsoincludecostsrelatedtofranchiseorbrandaffiliation.InaccordancewithOntarioRegulation282/98,themanagementfeeexpenseissetat5%oftotalrevenuesforahotelvaluedusingtheproformaincomemethodoftheincomeapproachtovalue.

ReserveforReplacement

Duetothefactthathotelsoffertransientaccommodationandincurhightrafficinboththeirroomsandcommonareas,thereisaneedforregularreplacementofrelativelyshort-livedfurniture,fixtures,furnishingsandequipment(FF&E).Areserveforreplacementisadeductionfromthehotel’soperatingincome,whichcreatesafundfromwhichtodrawontokeepupwiththeongoingreplacementofshort-liveditems.


Typicallyestablishedunderthetermsofaproperty’sfinancingorbrandingrequirements,areserveforreplacementisdeductedasapercentageoftotalrevenue.Whileanownerfundsallexpenditures–whetherforrepairs,replacementorlarge-scalecapitalimprovements–thereserveforreplacementisdesignedtocaptureallsuchexpenses.

Typically,expensesgreaterthanathresholdareconsideredcapitalexpendituresanddonotappearasanexpenselineiteminanoperatingstatement.Capitalexpendituresincurredasaresultofalarge-scalerenovationprogramwouldaffectthecapitalizationrate,whichrelatestotheriskassociatedwithachievingananticipatedNOI.

MPACestablishesanappropriatereserveforreplacementpercentagethroughitsreviewoffinancialdataandgeneraltrendsinthemarketandappraisalpractice.Thispercentageadjustmenttakesintoaccountareturnonandreturnofinvestmentsinshort-liveditemsatahotel.

2.6TheCapitalizationRate

MPACanalyseshotelmarketdatatodeterminearangeofcapitalizationratesthatcanbeappliedtothedifferenttypesofhotelsineachmarket.

Thecapitalizationrateisfoundfromtheformula:

CapitalizationRate(R)=NetOperatingIncome(NOI)

SalePriceofHotel(SP)

Oncethenetoperatingincomehasbeendetermined,MPACusesthecapitalizationratetoconvertitintoanindicationofvalue.

EffectiveTaxRate

Anadjustmentmustbemadeinthevaluationtodealwiththepaymentofpropertytaxes.ThewayMPACdoesthisistodisregardpropertytaxesasanexpenseitem,determinetheeffectivetaxrate,andaddthisamounttothebasecapitalizationrate.Theeffectivetaxrateimputestheexpectedtaxburdenontheproperty.

Theeffectivetaxrateiscalculatedusingthefollowingformula:

EffectiveTaxRate=CommercialTaxRatex(100.00%–PersonalProperty%)

=CommercialTaxRatex(100.00%–15.00%)


Forexample,ifthebasecapitalizationrateis9%andthecommercialtaxrateforthemunicipalityconcernedis0.02897,thecalculationis:

0.02897x85.00%=0.0246(or2.46%)

Addthebaserateof9%;effectivepropertytaxrate=9%+2.46%=11.46%

ValueAttributabletoPersonalProperty

Partoftherevenuegeneratedinahotelisattributabletopersonalproperty,includingelementsofFF&Eandintangibles.Forahotelvaluedusingtheproformaincomemethodology,afinaldeductionof15%ofindicatedvalueissetinaccordancewithOntarioRegulation282/98.

2.7Valuation

Havingundertakenthenecessarystepsoutlinedabove,theassessorshouldnowbeinapositiontoapplytheappropriatevaluationmodel.

2.8ValidatingtheResults

Oncetheassessorhascompletedthevaluation,itisnecessarytocarryoutaseriesofcheckstoensurethatallrelevantpartsofthepropertyhavebeenincludedinthevaluation,therehasbeennodouble-countingofanyadjustmentsmadefordepreciation,theresultingvaluationhasbeencomparedwithanymarketevidencethatmaybeavailableinrelationtosimilarproperties,andthefinalvaluationisinlinewiththevaluationofothersimilarpropertiesinOntario.

3.0 The Valuation

3.1 Excess Land

Excess land is land that is distinct and over and above that required to operate according to the property’s zoning or other governmental control. The value of this land is not captured by the method described above, as the revenues used in the pro forma valuation relate only to the operation of the hotel. Land that is not required to operate the hotel is excess to current needs. The value of excess land depends on its location within the site and how well it suits future developments.

MPAC investigates the appropriateness of adding the value of excess land using on-site inspec-tion, a municipality’s graphic information system (GIS) and zoning information, and the current density and configuration of the property. The rate to be applied to value excess land is typically derived using market sales studies of vacant land sites. Excess land is valued separately and add-ed to the value arrived at for the hotel to determine the total assessed value of the property.

3.2 Sample Valuation

The following table provides an example of the way in which MPAC values a hotel with 75 rooms and the usual range of amenities for a hotel of its type and location. The figures used are illus-trative only.

Item Amount Per room

Number of rooms 100

Average daily rate $100.00

Occupancy 70%

Total revenue $2,555,000 $25,550

Less: Departmental expenses $1,000,000

Total operated dept. income $1,555,000 $15,550

Less: Undistributed expenses $555,000

Income before fixed charges $1,000,000 $10,000

© Municipal Property Assessment Corporation 2016 All rights reserved 18

Item Amount Per Room

Less: Insurance $10,000

Less: Reserve for replacement (4%) $102,200

Stabilized net operating income $887,800 $8,878

Base capitalization rate 8%

Effective tax rate 2%

Overall capitalization rate 10%

Indicated value $8,878,000 $88,780

Less: Personal property (15%) $1,331,700

Hotel value (rounded) $7,546,000 $75,460

3.3 Quality Control

Having arrived at the value of the hotel through the above process, MPAC will check the out-come of the valuation to ensure no errors have been made and that the value is in line with the valuation of similar hotels. This may involve an evaluation of income and expense projections against industry norms, an evaluation of values against market sales, and/or an evaluation of values against the values of other hotels.

3.4 Conclusion

This guide sets out how MPAC assessors approach the valuation of hotels for property assess-ment purposes.

Although it outlines the general approach adopted, it does not replace the assessor’s judgment and there may be some cases where the assessor adopts a different approach for justifiable reasons.

For further information, please visit mpac.ca.

© Municipal Property Assessment Corporation 2016 All rights reserved 19

METHODOLOGY GUIDE- VALUING HOTELS IN ONTARIO · METHODOLOGY GUIDE VALUING HOTELS IN ONTARIO...

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