The purpose of the opinion of value is to estimate the present market value “as-is” of the fee simple or leasehold interest in the Hotel on a cash basis.
The Income Approach to value is generally the most relevant approach in evaluation investment type properties. Investors tend to purchase this type of property based upon anticipated net income, as well as the potential benefits of sheltering personal income from taxation. The Direct Capitalization method is also relevant in this Opinion of Value.
The Direct Capitalization method involves estimating the stabilized net operating income for the Hotel. This is the cash flow before debt service and taxes, assuming the property has reached its optimal level of long term occupancy, and all significant capital outlays for building improvements have been absorbed. The stabilized net operating income is then capitalized by the appropriate overall rate extracted from the market to yield an unadjusted capital value. Finally, all costs (if any incurred to reach stabilized occupancy) are subtracted from the capital value to yield an “as-is” value estimated for the subject property.