Sheraton Hotel Redding At Sundial Bridge - Redding Record ...

10. Income Capitalization Approach
Methodology
The income capitalization approach is based on the principle that the value of a
property is indicated by its net return, or what is known as the present worth of
future benefits. The future benefits of income-producing properties, such as hotels,
are net income before debt service and depreciation (as estimated by a forecast of
income and expense) and any anticipated reversionary proceeds from a sale.
These future benefits can be converted into an indication of market value through
a capitalization process and discounted cash flow analysis.
Using the income capitalization approach, the proposed subject property has been
valued by analyzing the local market for transient accommodations, examining
future competition, and developing a forecast of income and expense that reflects
anticipated income trends and cost components through a stabilized year of
operation.
The forecast of income and expense is expressed in current dollars for each year.
The stabilized year is intended to reflect the anticipated operating results of the
property over its remaining economic life, given any or all applicable stages of
build-up, plateau, and decline in the life cycle of the hotel. Thus, income and
expense estimates from the stabilized year forward exclude from consideration
any abnormal relationship between supply and demand, as well as any
nonrecurring conditions that may result in unusual revenues or expenses. The
stabilized year's net income is then extended into an eleven-year forecast of
income and expense by applying the assumed underlying inflation rate to each
revenue and expense item from the stabilized year forward, unless otherwise
noted.
The eleven-year forecast of net income forms the basis of a mortgage-equity and
discounted cash flow analysis, where ten years of net income and a reversion
derived from the capitalized eleventh year's net income are discounted back to the
date of value and summed to derive an estimate of market value. The ten-year
period reflects the typical holding period of large real estate assets such as hotels.
In addition, the ten-year time frame provides for the stabilization of income
streams and comparison of yields with alternate types of real estate. The
forecasted income streams reflect the future benefits of owning specific rights in
income-producing real estate.
Because the value is unknown but the loan-to-value ratio and market rates of
return can be estimated, the value is computed by way of a linear algebraic
February-2011 Income Capitalization Approach
Sheraton Hotel Redding At Sundial Bridge – Redding, California 69