CAP RATE – WHAT DOES IT MEAN TO A RESORT PRICE?

  • 11 months ago
  • 1

What is a CAP rate for Minnesota resorts?

Before we understand the answer to this question, buyers and sellers should understand there are many different standards that are used in commercial real estate valuation and appraisal.  There is the GIM (Gross Income Multiplier) approach, the NIM (Net Income Multiplier) approach, the replacement cost approach, the EMV (estimated market value) approach and the comparable sales approach – just to name a few.  The use of these standards varies by buyers, investors and banks varies throughout the country.

The most commonly used standard for Minnesota resorts however is the Capitalization (or CAP) Rate.  Before we discuss why it is the most commonly used standard, it is necessary to understand what it is.
Simply stated, the Capitalization Rate = (Resort Sales Price)/(Net Operating Income)
where:
Resort Sales Price = the asking price for the resort and
Net Operating Income = what it takes to run the resort

What is the Net Operating Income you ask? Excellent question.

Simply stated, the Net Operating Income = Gross Operating Income – Total Expenses + Seller Discretionary Expenses
where:
Gross Income = total Income taken in by the resort
Total Expenses = all resort expense that appear on the tax returns
Seller Discretionary Expenses: this requires a little more explanation

When looking a resort’s profit and loss (P & L) for the year, some expenses are not directly related to what it takes to run a resort and are largely determined by the current owner. These are legitimate business expenses, but are variable due to an owner’s personal needs and preferences. A common example of this is depreciation. Other expenses that may or may not show up on the P & L statement are owner health insurance expenses, vehicle expenses, rent payments to another entity controlled by the owner, owner salaries, and owner payroll expenses. This is not a complete list and buyers should know what a seller considers Seller Discretionary Expenses (SDE). Every resort owner and resort is different.

Why is CAP Rate the most common standard? Another excellent question.

First and foremost, this is a standard that is used and understood by investors throughout the United States and applied to lots of different properties.  Whether it is an apartment in Austin, Texas, a commercial high rise in Chicago, Illinois or a Starbucks store in Los Angeles, California, it is calculated the same way.  You can Google commercial properties for sale and see CAP rates for various properties.  In general, the “safest” (easiest to operate with the most reliable occupancy or lease) properties have the lowest CAP rates – and therefore these properties command the highest relative price.  The more “complicated” (more difficult to operate or the more variable it’s occupancy) a business becomes, the higher the CAP rate – and therefore the lower the relative price.

Secondly, as mentioned before, all resorts are different and SDE is different.  Some investors may consider the SDE part of what they will need to run the business because they are not interested in operating it themselves.  For buyers who are also operators, they realize the benefits of housing that is included along with the investment.  They also realize they can streamline the operation and the SDE (and other expenses) of a seller.  The calculation of Cash On Cash (COC) return is ultimately what everyone is interested in and everyone has different short and long term goals.  COC is different than CAP rate and I will cover that in another article.

So, what is a CAP Rate for Minnesota resorts?  Thank you for reading to the end.

In general, the industry standard CAP rate for Minnesota resorts is in the 9 – 15% range.  We understand that is quite a range, but we also understand there is quite a variable in the type of Minnesota resorts.  Some have multiple employees, restaurants, spas, property management, gas sales, cabins, houseboats, RV camping and are open all year round.  Some are owner operated, open one season a year and the cabins are all in tip top condition.  Those variables all drive the CAP rate that is appropriate to your resort’s sale price.  There are other variables too, but this is the starting point for most buyers.

If you are thinking about buying a resorts, let Lake Country Resort Sales help you find the right resort for you based upon your needs.  If you are thinking about selling, let us help you determine a reasonable selling price for your resort.  Maybe you are not ready to sell right now, but you need some Exit Planning to help maximize your return.  We are here to help.  It is never too early to start planning.

-David Moe, Broker/Owner

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