How Seasonal Resorts & Lodges Are Appraised

Fishing Lodge Appraisals

Valuing Fishing & Hunting Lodges, Camps and Resorts

Seasonal Resort and Lodge owner’s that have been in the business for awhile may be considering how they will exit the business and enter retirement. It is important to have a clear plan for your retirement and having an appraisal completed will help you know the value of one of your largest assets.

A lodge and resort appraiser not only must know how to accurately assess a property’s physical qualities, but its operating value/potential as well. A lodge or resort’s financial viability is as much a function of it operating potential in a specific market as it is a function of the land, structures, economics and amenities. When you add a rapidly changing economic climate to the appraisal formula, determining accurate lodge and resort real estate valuations becomes one of the foremost challenges facing lodge, camp & resort property investors.

What is the first thing that comes to mind when you hear the phrase "Appraisal"?

Appraisals of Fishing & Hunting Lodges, Camps and Resorts seek to determine the “Business Enterprise Value (BEV)”

Business Enterprise Value is the total intangible assets such as marketing and management skill, assembled workforce, working capital, trade names, franchises, trademarks, contracts, leases, customer base, operating agreements and of course the real estate and chattels.

This is sometimes also referred to as the “Going-concern value” which is the market value of all tangible and intangible assets of an established and operating business.

Unique Factors That Drive Fishing & Hunting Lodge, Camp and Resort Values

These businesses have a number of characteristics that have a major impact on their value:

  • They share the features of both business and real estate investment.
  • The business tends to be quite labor intensive.
  • Multiple profit centers are very common. In addition to property rental, restaurants, gift shops, bait sale and guiding services are common.
  • Repeat and referral business is critical to revenue generation.
  • Rental rates are flexible and can be adjusted seasonally and even daily. Successful hospitality operators are quite skillfull in packaging their product to reduce vacancy rates.
  • Aggressive and continuous advertisement is essential.
  • Effective online presence is increasingly vital, including participation in reservation systems and membership in destination marketing organizations.
  • Capital requirements are quite high.
  • Businesses demand competent, hands-on management.

Buying or Selling a Lodge or Resort: Key Success Factors

If you review what makes business acquisitions in the hospitality industry successful, you will find that they tend to share a few traits in common:

  • Typical leverage is 30% buyer down payment the balance being financed by debt. Debt service of under 30% of gross rental income is industry norm. This effectively sets a safety ceiling on the acceptable cost of debt capital.
  • Ownership must allocate sufficient capital for hard asset replacement such as Furniture, Fixtures and Equipment.
  • Seller financing often makes or breaks a deal.

When valuing a business in this industry, you should consider these essential elements

  • Property expansion potential. In hospitality industry, business revenues are derived from rent, which is driven by property size.
  • Equipment condition and maintenance status. Watch our for deferred maintenance expenses.
  • Needless to say, this has direct impact on the business earning potential – both in terms of room revenue and vacancy rates.
  • Access to expansion capital.

That said, you have 3 ways to value a business in this industry

The Cost Approach

This method involves 2 primary steps:

  1. Determining the market value of the underlying land by applying the Direct Comparison Approach, which is the most often used approach for land valuation.
  2. Determining the cost of the buildings after consideration for depreciation. This estimate is then added to the market value of land.


Land value is typically estimated using the Direct Comparison Approach. Within this Approach a unit value is determined for comparative purposes, which in the case of land is most often a per square foot of surface basis. The per square foot of surface basis requires the appraiser to simply estimate the market value of the land based on the per square foot values of the comparable sales evidence relative to the Subject property.

There is never perfect sales data available, there will always be differences between parcels of land, thus adjustments to the sales data are required to varying degrees to reflect differences in: sale date; property size; zoning; location; etc.

Building cost is often estimated using a reliable cost manual system provided by an internationally recognized firm, such as Marshall & Swift. An important aspect about these costing manuals is that they attempt to estimate the replacement cost value of the improvements as opposed to the reproduction cost of the existing improvements. What this means is that the cost of improvements is based upon the cost (as of the effective date of the appraisal) to replace the utility of the improvements versus the cost to reproduce the existing improvements.

The Cost Approach can be considered to be an inaccurate representation of market value due to the difficulty in estimating depreciation in older properties. This theory assumes the difference between market value of buildings and the replacement cost of buildings is depreciation.

Depreciation or obsolescence as it is known in appraisal circles is the loss in value of buildings over time due to wear and tear, physical deterioration, age, economic conditions and/or locational obsolescence. Estimating depreciation is difficult, arbitrary and unreliable. Consequently, if the objective of the appraisal is market value, then the cost approach should not be the only method to valuation used.

The Income Approach

The Income Approach is a preferred for income producing lodges and resorts. Within the Income Approach there is one commonly applied technique, the Direct Capitalization Method.

The Direct Capitalization Method (DCM) is considered to be a “snapshot” of a property’s income. The Direct Capitalization Method looks at a property’s income potential based on historical and current financial information as well as industry norms in order to stabilize the income for a one year period. Thereafter, the stabilized income is capitalized at an overall rate considered consistent with the market to yield an estimate of the Market Value of the property. The Direct Capitalization Method is frequently used, as it is relatively simple in application, particularly for smaller properties and for properties at normalized income levels.

Direct Capitalization method requires minimal forecasting, making it is less subjective than other methods. However, the weakness of the Direct Capitalization Method is that it does not fully consider the lodge or resort’s future income potential. As a result it does not consider market uncertainty, which would lead to fluctuations in the Subject’s income. For instance, the Direct Capitalization method would not have been the preferred valuation approach in 2008 following the 2008 United States economic collapse which greatly affected Canadian Lodge and Resort owners that relied on American guests and could easily have led to artificially low appraised values.

Within the Income Approach there are two key elements necessary for valuation: Net Operating Income (NOI) and Capitalization Rate. They are discussed as follows:

Net Operating Income (NOI) or Earnings Before Interest, Tax, Debt and Amortization (EBITDA)

The analysis and normalization (stabilization) of the lodge or resort financials is a critical aspect of valuation.

A typical lodge or resort financial statement for appraisal purposes has 4 distinct parts: Revenue, Expenses, Undistributed Expenses and Fixed Costs. A brief explanation of each category is provided:

Revenue: Include vacation package revenues, food & beverage revenues. Other revenues include miscellaneous items, such as bait, guiding, etc.

Expenses: Include room expenses, food & beverage expenses. These are expenses and costs that can be directly attributed to each related revenue department. For instance, housekeeping wages can be directly associated to vacation package sales.

Undistributed Expenses – Typically Include expenses which cannot be specifically or exclusively allocated to any of the noted Revenue sources. Included within this category are: management fees, administration and general expenses, marketing expenses, repairs & maintenances (property operations), energy costs and an allowance for reserve for capital improvements.

Fixed Costs – This cost typically just includes insurance and property taxes.

After the appraiser has normalized all revenues and expenses the final net number is: Revenues less Departmental Expenses, less Undistributed Expenses and less Fixed Costs. This net number is known as the net income or net operating income (NOI), or earnings before interest, tax (income), depreciation and amortization (EBITDA).

Once the NOI/EBITDA has been estimated the appraiser must then estimate and apply the appropriate capitalization rate.

Lodge/Resort Capitalization Rates

The single most important factor in applying the income approach is the selection of the capitalization rate. This is also the most debated matter when it comes to arbitration, assessment appeals or matters of conflict relating to lodge and resort values. The cap. rate is the yield rate that is anticipated in the market place. The anticipated yield rate is then applied to the stabilized net income of the lodge or resort in order to capitalize the net income into an opinion of market value. In Canada the most accepted method for determining cap. rates is to analyze comparable lodge/resort sales data.

Currently we are seeing an average of approximately a 13% capitalization rate for Northern Ontario, Saskatchewan and Manitoba Lodges and Resorts. The most important step in determining cap. rates is the stabilization of the net incomes (NOI or EBITDA) of the sales data in a manner consistent with how the Subject net income was stabilized.

Examples of Lodge/Resort Capitalization Rates:

Index 1: Northern Ontario Rural Motel 14.30%

Index 2: Northern Ontario Fishing Lodge 13.70%

Index 3: Manitoba Rural Motel 12.60%

Index 4: Manitoba Fishing Lodge 13.00%

Lodge Resort Value = Net Income / Capitalization Rate

Example: $100,000 net income / 0.13 capitalization rate = $769,231

The appraiser must be able to verify how the various net incomes have been stabilized, which will determine the integrity of the reported cap. rate. In conclusion, cap. rates must be applied with caution as they can greatly distort the market value.

The Direct Comparison Approach

This method relies on the assumption that a matrix of attributes or major features of a property can be analyzed in order to establish an estimate of value. With regards to lodges and resort, the most commonly used unit for comparison is the value per bed.

The obvious weakness of this approach is the fact that a range of dissimilarities are ignored. Although all lodges/resorts have beds, there are many other aspects that affect value including: food & beverage outlets, land size, and so forth. For this reason, the Direct Comparison Approach is not preferred when looking at an income producing property such as lodges or resorts. Rather it is considered to be a reasonable secondary guide to value, typically providing a range of value. It may be reasonable to rely upon this approach if you are appraising near identical properties. However, it should not be relied upon without also considering the Income Approach and or cost approach.

Other Factors

There are many other factors that directly influence the value of a lodge or resort. In particular, it is vital to grasp the nature of the subject business since there are many industry segments with various income sources, such as lodging and restaurants. On a site visit, the appraiser inspects the location of the subject lodge property, which can greatly affect its visibility and customer base.

When it comes to industry research, one of the most significant factors is competition. It is imperative for the appraiser to identify all the competitors within the market segment and assess their influence over industry dynamics. Some of this can be accomplished over the management interview. However, more often than not, rigorous independent market research and analysis prove to be necessary for the valuation process.

Other considerations for research on the lodge/resort industry include seasonal and regional trends, and growth outlooks.

The Canadian lodge/resort tourism industry is highly correlated with the condition of the U.S. economy. Therefore, when the valuation professional conducts an appraisal for a lodge or resort, he or she not only has to consider the forecast for the lodging industry, but also has to study the market interactions of other related businesses, and sometimes even the entire economy.

More so than most other industries, a lodge or resort’s revenue stream can be greatly influenced by broad market conditions. If the overall economy is healthy, more business deals are generated, and this translates into more travelers. At the same time, higher compensation as a consequence of higher business volume leads to more leisure travelers. Both of these results help to elevate the revenue of the lodge/resort industry as a whole. The opposite is painfully true in a bear market as seen in the data from 2008 to 2012.

Economic research should cover, but not be limited to, the following topics: GDP growth trends, unemployment figure, consumer confidence level, as well as regional outlooks. It is up to the appraiser to decipher all this information and put the numbers in context of the lodge/resort industry, and sometimes in company specific terms.

The field of lodge/resort valuation employs many different disciplines to achieve its objective, namely finance, market research, economics, mathematics and statistics. Proper research and due diligence blends these disciplines to obtain a logical valuation conclusion. Because of the nature of lodge/resort valuation, there is always a certain amount of subjectivity to the outcome of an appraisal. As a result, conducting due diligence research is of paramount importance to every single valuation professional out there. In order to defend the valuation, there needs to be enough evidence to support an appraiser’s assumptions. Without strong research backing the fundamentals, valuation conclusions are meaningless.

Only a professional lodge valuator should be relied upon to appraise your property, as this property type requires a special set of skills and experience, which are not universal among appraisal professionals.

Bryce Witherspoon

Bryce Witherspoon

Bryce is a Fishing & Hunting Lodge, Camp and Resort Appraisal Consultant. He serves owners, lenders, and public agencies across Canada and the United States. Bryce can be reached by email: bryce@frontierhospitality.ca or phone 1.800.592.1349

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