Challenges of Acquiring an Income-Producing Property and its Associated Business

Selling a Hotel isn’t as straightforward as finding comparables properties or solely calculating the value of the building through Income or Cost Approaches. For the former, there may not be anything to compare it to…  and for the latter, the approaches don’t take into consideration all of the factors at play relating to the Business itself.

Hotels are a very unique asset class in commercial real estate. And there exist many chains that operate in different niches, geographies, and for varying budgets.

When establishing the value of a hotel asset, a portion will be attributed to the physical property while another portion is related to the hotel business; and is a function of several inputs, such as the revenue, profitability, location, and brand.

Further, things such as cap rates in the area, the potential upside of the business, any potential to add more hotel units – as you’ll see in this case study – and the structural age of the property must all be considered. Finally, nearby competition (or lack thereof), market positioning, clientele, and specialty services can positively affect valuations beyond the intrinsic value of bricks, mortar, and beds.

Challenge 

Team Toronto was tasked with the sale of a hotel in Bracebridge, Ontario, a small town located 2 hours north in the Muskoka region; a popular summer cottage destination for many Torontonians and Southern Ontario residents.

The Hotel is a well-situated and self-described “charming country inn perfect for weddings or corporate retreats.” However, after decades of being in business, the Owner had made plans to redevelop the site for residential use. After winding down the business and then pivoting back to reopen the Hotel, the business had less than 1 year of financial records.

This made valuing the Asset accurately and marketing it to potential Buyers a challenge, as we would have to base our numbers off of projected income rather than a solid and continuous financial history. Ultimately, as you will see, we were able to position the Property and leverage the added-value potential; which was in the land it rested upon.

Features: 

  • 20 Unit Hotel Property
  • Approximately 1.5 Acres Total Lot Size
  • C3-8 Zoning

Transaction

Since, as mentioned, the previous plan was to redevelop the site, a planner had drafted a letter outlining the amount of lot coverage that could be developed on the existing parcel. The existing hotel only covered 30% of the total lot size, whereas the planner established that up to 80% could be utilized; resulting in the potential for a Purchaser to add significantly more hotel units.

We could then put a realistic dollar value per unit to the value-add opportunity.

With this strategy and positioning in hand, we were then able to run the Asset through our internal processes to prepare it for market. We listed the property to maximize exposure while identifying a list of suitable prospective Buyers in the neighbouring regions.

Results

Through approaching these qualified Parties and marketing the opportunity to our network, we were able to generate multiple offers. Despite the initial complexity of the Deal, we worked with the offers we received to get a deal done that matched the Seller’s expectations.

Bottom Line: In the end, we were able to negotiate a deal that was satisfactory to both the Seller and the Buyer.

If you are an Investor or Owner-Occupier looking to purchase or sell an investment property in the Greater Toronto Area, then contact us. Through our extensive network of Buyers and Sellers and our access to information from the street level, we can find or source opportunities for you. Contact us for a complimentary Valuation or consultation on your situation.

Jake Mondrow is a Senior Associate of Lee & Associates Toronto, specializing in the acquisition, disposition, and leasing of commercial properties, as well as providing Owners and Occupiers of commercial real estate with a full range of services.

ABOUT LEE & ASSOCIATES

Lee & Associates is a commercial real estate brokerage, management and appraisal services firm. Established in 1979, Lee & Associates has grown its service platform to include offices in the United States and Canada.

Lee & Associates provides superior market intelligence in office, industrial, retail, investment, and appraisal to meet the specialized needs of our clients. For the latest news from Lee & Associates, visit leetoronto.com.

To receive guidance on any of your commercial real estate needs, please contact Jake at 416.628.8201, email at jmondrow@lee-associates.com, or visit www.leetoronto.com