In a previous column, I showed the development of a projection of revenue, expense and net income for five regions of the world: South America, China, Europe, India and the U.S. These projections were made under the assumption the hotel would be a 200-room Marriott type hotel with identical revenue per available year numbers for each of the five regions.

The resulting income for these five regions was as follows:

China: $5,086,000
Europe: $5,272,000
India: $9,602,000
South America: $4,904,000
U.S.: $6,351,000

India leads the list with a significantly higher net income of $9,602,000. South America is the lowest at $4,904,000. Even if you deduct an incentive management fee for the U.S., it would still be the second highest at $6,351,000. At least from a profit point of view, these results show why India has been getting so much attention from hotel companies looking to do business there. On the other hand, even with the growth of Brazil, South America is not as active in new development compared to India, U.S. and China. For a more thorough explanation, read the past column online at http://lhonline.com/development/realestate/rushmore_global_comparison_1007/index.html.

Let’s take these projections of net income and convert them into value estimates based on the valuation parameters utilized in their local regions. Hotel owners, operators, lenders and investors around the globe utilize the income approach for valuing hotels. In most parts of the world, hotel acquisitions are typically financed with mortgage and equity capital, which justifies the use of the mortgage-equity valuation methodology.

Using these 10-year projections, coupled with the mortgage-equity parameters utilized in these regions, will produce the value of the proposed Marriott assuming it was located in these areas. The following table shows the mortgage-equity parameters currently used in each region for valuing a hotel similar to the proposed Marriott.

The loan-to-value ratio varies from a low of 55% for South America and China to a high of 70% for the U.S. Lenders in the U.S. tend to offer larger mortgages than other parts of the world.

The amortization ranges from 10 years for South America, China and India, to 20 years for Europe and 25 years for the U.S. Amortization — in years — tends to be lower in regions where inflation rates are higher because the lender wants to be paid off quicker when the value of their money is eroding due to inflation.

Interest rates are also tied to inflation. South America has a 9% interest rate and India has 11.5%. Europe has the lowest rate at 6%, with the U.S. at 7% and China at 7.25%. Terminal capitalization rates range from a low of 7.0% for Europe to a high of 11.5% for the U.S. These rates tend to project the rate of return environment 10 years from now.

The transaction costs range from 1% in India to 2% in South America and the U.S. The equity yields show a fairly tight range from a low of 16% for China to a high of 18% for South America, India and the U.S.

Using these mortgage-equity parameters and the individually projected net incomes produced values that ranged in millions ($000) from a low of $41,100 for South America to a high of $86,500 for India. The U.S. was second highest with $63,000. China was second lowest with a value of $51,700. Europe was in the middle with a value almost equal to the U.S.

The total property yields (overall discount rate) coupled with the fourth year NOI tell the relationship between the projection of income and expense and the mortgage-equity parameters. While the total property yield for India at 16% was significantly higher than the other regions, its fourth year NOI at $9,546 ($000) was sufficiently high to give India the top spot for overall value.

The total property yield for South America was the second highest at 14.9%, but coupled with the lowest fourth year NOI at $4,972, it produced the lowest value. The three countries with 10-year amortization had the highest total property yields.

The NOI percent shows the net operating income as a percentage of total revenue. India had the highest at 8.8%. The incentive management fee line shows the U.S. was the only region where the incentive management fee was included in the equity yield as opposed to specifically showing the expense in the income and expense statement.

This table illustrates the valuation of a proposed Marriott hotel in five regions of the world using typical mortgage equity parameters at a given point in time. These specific inputs are likely to change and should not be relied upon when valuing a hotel. They demonstrate how a hotel can be valued in different economic environments using the mortgage equity valuation methodology.

Steve Rushmore is president and founder of HVS, a global hospitality consulting organization with offices around the world. Steve has provided consultation services for more than 12,000 hotels throughout the world during his 35-year career and specializes in complex issues involving hotel feasibility, valuations and financing. He can be reached at srushmore@hvs.com or 516 248-8828 ext. 204.