Pricing a Motel

[Winston Parks]

Hey BP,

I am looking for some input on how I may handle a current opportunity. There is a motel in a fairly nice area of town that is a total eyesore. It attracts unsavory guests and has obviously not received any investment for upkeep. Today I spoke with the owner via phone and he said he would sale and asked that I make an offer. I found that odd as I do not have any information to make an appropriate offer. Here are my questions:

1. Would I price this just like any other commercial property? (cash flow/CAP)

2. Does the land come with the business? It does in any other multifamily deal so I assume it would in this case.

3. Once I have the cash flow and cap rate for the area, how would I go about discounting the enormous amount of renovations that will need to be done?

4. Will I simply take the cash flow/cap and there is little negotiation? 

5. Is it customary for a buyer to ask for a higher cap rate due to the amount of future investment needed or should I plan on getting an inspector to give estimated costs of repair which will be taken from the price?

Any feedback or help is greatly appreciated!!

Thanks!

[Roy Oliphant]

@Winston Parks

Interesting question.  You asked how to value a motel then say you intend to convert the property to a different use.  I think the 2.5 - 3.5 x net revenue works for an operating hospitality property.  However, if you intend to convert the property, then you should probably look at a valuation based on After Conversion Value - Conversion Costs.