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

Terminal Capitalization
Rate
20% for aging assets with functional obsolescence and/or other challenging
property- or market-related issues.
The following table summarizes the range of equity yields indicated by hotel sales
and investor interviews. We note that there tends to be lag between the sales data
and current market conditions, and thus the full effect of the change in the
economy and capital markets may not yet be reflected.
FIGURE 10-8 SUMMARY OF EQUITY YIELD OR INTERNAL RATE OF RETURN
REQUIREMENTS
Source Data Point Range Average
HVS Hotel Sales - Full-Service 9.6% - 26.8% 19.00%
HVS Hotel Sales - Limited/Select-Service 11.3% - 24.6% 19.49%
HVS Investor Interviews 12% - 22%
Based on the assumed 65% loan-to-value ratio, the risk inherent in achieving the
projected income stream, and the age, condition, and anticipated market position
of the subject property, it is our opinion that an equity investor is likely to require
an equity yield rate of 17.0%. The lack of attainable yields on alternate
investments has continued to put downward pressure on equity yield rates,
despite the desire of investors to yield higher returns. Competition for quality
assets is increasing amongst all hotel asset types. These influences are keeping
equity yields from increasing significantly. Equity return requirements remain
elevated for the more challenged hotel assets.
Inherent in this valuation process is the assumption of a sale at the end of the tenyear
holding period. The estimated reversionary sales price as of that date is
calculated by capitalizing the projected eleventh-year net income by an overall
terminal capitalization rate. An allocation for the selling expenses is deducted from
this sales price, and the net proceeds to the equity interest (also known as the
equity residual) are calculated by deducting the outstanding mortgage balance
from the reversion.
We have reviewed several recent investor surveys. The following chart
summarizes the averages presented for terminal capitalization rates in various
investor surveys during the past decade. Note that survey data lag the market and
do not necessarily reflect the most current market conditions.
February-2011 Income Capitalization Approach
Sheraton Hotel Redding At Sundial Bridge – Redding, California 85