A large part of a hotel's value is intangible and based on the goodwill of its brand name in the market. Intangible asset value, once referred to as business enterprise value, is important because hotel owners and operators should know the value of their properties' intangibles when making strategic decisions such as re-branding. Intangible value is also important because the government typically calculate hotel property taxes based on the estimated value of real estate, excluding intangible value. Hoteliers who can convincingly demonstrate the existence of intangible value can save thousands of dollars a year in property taxes.

Eric Belfrage, managing director of Integra Realty Resources, and I recently completed research that yielded what we believe is the state-of-the-art approach to calculate a hotel's intangible value. In our research, we address what we perceive to be limitations of the two most currently used approaches in estimating hotel intangible asset value. One approach estimates hotel intangible asset value based on the cost of franchise and management fees. We believe this approach may be contrary to the expectation of most hotel owners that management and franchise affiliation should generate greater revenues than costs.

Another approach asserts that intangible value is based on hotel premiums over market occupancy and average rate. We believe this approach has a shortcoming in its assumption that hotel performance premiums are strictly due to intangible assets. In fact, in our research we uncovered evidence that suggests that such premiums may be largely attributable to location, i.e., real estate, and thus, not intangible at all.

Our research suggests that, in many instances, actual hotel intangible value is probably greater than that estimated by the cost of franchise and management fees, but less than that estimated by hotel premiums over market occupancy and average rate. While the existing methodologies serve the benefit of framing an important topic of discussion and analysis, our research more precisely pinpoints a market-based estimate of intangible value.

Our research concludes that when sales (demand) attributable to franchise/brand distribution channels (e.g., toll-free system, Internet, frequent guest program, franchise-arranged guest distribution system, i.e., GDS placement) exceed the relative cost of affiliation, intangible asset value is generated. Conversely, when sales attributable to the franchisor are the same or less than the cost of affiliation, intangible asset value may be minimal or non-existent. To make this estimation, a hotelier calculates the sum total of the annual profit attributable to the brand minus total annual costs (e.g., franchise and management fees). To estimate the intangible value, one would divide the sum by a market-supported capitalization rate.

Now, on to the latest edition of the Penn State Index of Hotel Values: this year, average U.S. hotel values are expected to increase 8.7 percent to $79,557 per room. Luxury hotels are expected to show the greatest increases in value per room, or $22,976, to $294,028 per room, while economy hotels are expected to show the highest percentage increases, or 13.7 percent, to $20,885 per room. In 2006, overall U.S. hotel values are forecast to increase by a healthy 7.2 percent, and in 2007, a 6.3-percent increase is expected.

John W. O'Neill, MAI, CHE, Ph.D., is a professor in the School of Hospitality Management at The Pennsylvania State University and a licensed real estate appraiser. He previously held unit-level, regional-level, and corporate-level management positions with Hyatt and Marriott. He can be reached at jwo3@psu.edu or 814-863-8984.