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
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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.
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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.
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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
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• Level2–MarketValuationReportsexplaininghowthemethodologyoutlinedinLevel1hasbeenappliedatthesectorlevelforthepurposesofeachassessment
• Level3–PropertySpecificValuationInformationavailabletopropertytaxpayers,theirrepresentativesandmunicipalities
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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.
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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
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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)
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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.
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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
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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.
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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
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• 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.
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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%)
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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
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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.
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