THE HUBBART FORMULA
For Evaluating Rate Structures of Hotel Rooms
In recent years a definite need for a standard method for evaluating the proper rate structures of hotel rooms became obvious for two reasons. First, operating statistics developed through the trend studies by the firms of Horwath & Harris, Kerr, Forster & Company, and some of the state and city hotel associations, provided factual experience that made it apparent that hotel room rates were not properly calculated or kept abreast of economic conditions. Secondly, the unfortunate and trying experiences of many hotels under rent control forcibly brought to light unsound and inadequate rate structures.
In June 1947, at a meeting of the Residential Hotels Committee, Chairman J>Roy Hubben of the Sturm Bickel Corp, Chicago presented the question or adopting some standard formula for computing hotel rates and received the American Hotel Association’s authorization to work with the accounting firms of Harris, Kerr, Forster & Company and Horwath & Horwath toward that end. The formula which was produced was not entirely new, as it was based on sound principles. Also it was representation of the consensus of the best opinions of residential hotel operators who had been considering the problem individually. The plan was presented, discussed and approval at San Antonio in September, 198847, and sent to all residential hotel members.
The enthusiastic acceptance of the plan, then designed as the Hubbart Formula,” warranted is boarding to include transient an resort hotels. Following the American hotel Association’s 1948 Convention at Washington, D.C the formula was revised by the accounting consultants and a pamphlet, containing the forms adaptable to residential and transient hotels, was made available to the membership. The final step in broadening the formula was taken at a meeting of the Resort Hotels Committee at Buck Hill Falls in May, 1949. Under the chairman of Clifford Gillam, the Committee suggested that the principles of the Hubbart Formula be made applicable to American Plan resort hotels. This revision of the formula was mimeographed and disturbed to the resort hotel members.
In 1951, the American Hotel association was authorized to consolidate the three phases of the Hubbart Formula into this pamphlet for distribution. This pamphlet permits the formula’s principles and computation to become readily available to hotel operators of transients, residential or resorts properties. It is designed to be equally helpful to persons interested in the promotion, financing and investment of hotel properties.
The Hubbart Formula has been effective in establishing adequate and fair room rate structures in a number of cities encountering rent control problems. In many instances, it has provided a better approach to the problem of the construction of new hotels and the expansion of existing properties.
Under prevailing economic conditions it is imperative for successful operation that rates be adequate to cover operating costs and to provide a reasonable return on the fair value of the property. While it is recognized that room rates are primarily the result of competitive conditions, good business principles demand that room rate structures be established on a sound basis. It is suggested that computations under this formula be made by every hotel as a means of evaluating its own room rate position, and that these rests be represented from time to time as operating condition change.
I believe that every hotel operator will derive benefits from these computations.
DANIEL J. O’BRIEN
Chairman of the Board
American Hotel Association
EXPLANATION OF SCHEDULE I
Schedule 1 is to be used to determine the total room sales volume needed to cover costs and a reasonable return on the present fair value of the property. The figures used in the example which is naturally the figures will vary with each hotel, the same principles will be applicable to hotels of different types and sizes. The following explanations are given relative to the various classifications of items included in schedule 1.
The operating expenses as listed are in the groups which conform with the Uniform System of Accounts for Hotels. If your classification does not conform to the Uniform System, you can arrive at the same result by inserting on the line “Total Operating Expenses”, your own total for the items corresponding to those shown under the heading “Operating Expenses”, without attempting to break them down into classification given.
Taxes, Insurance, Etc.:
The items under this classification are self-explanatory. A blank line is provided for any other miscellaneous expenses which are not included under the operating expense classifications such as trustees’ fees, sundry corporate expenses, ets.
Under this heading a computation should be made of the depreciation application to the present fair value of the property at standard depreciation rates. However, if desired, it is optional to use the actual depreciation allowance currently being deducted for income tax purposes.
Reasonable Return on Present Fair Value of Property
In evaluating a rate structure the hotel operator is entitled to a reasonable return on the present fair value of the property. The rate of return should be determined by each operator in the light of his own circumstances. As a rule of thumb, the rate of 10% has been used generally (10% has been used in the example). In some cities, in measuring hardship in rent control proceedings, the rate of 6% has been recognised as a minimum rate of return although most operators would expect a higher return on their equity. It must borne in mind that for purposes of this computation, the return is being computed on the entire present fair value and , as such, provides for interest on indebtedness, income taxes and a net profit return on the equity investment.
Credits from Sources Other than Rooms:
This section is designed to include income from all sources other than room operation, which income can be considered as an offsetting reduction to determine the net amount needed from room sales. In most hotels such offsetting income would consist of income from store rentals, from food and beverage operations, and from other operated departments and miscellaneous income with respect to credit with respect to credit from food and beverage operations to cover the space used and the services furnished, such as management, payroll taxes, advertising , heat, light, repairs, etc. , and for use of equipment, it will be in order for most hotels to use the departmental profit derived from the food and beverage department. However, in using the results of this department as a credit, caution must be exercised that such results are not inflated by an abnormal volume of business or other abnormal factors which could not be depended upon to continue. It is obviously unsound to reduce the amount to be recovered from room sales by any abnormal income from any other operations of the hotel, store rents, etc. If such operations result in a loss the amount thereof should be deducted from the other credits, and if the entire group is a net loss, the amount thereof should be added to arrive at the total amount to be realized from room sales.
COMPUTATION TO DETERMINE THE AVERAGE DAILY RATE REQUIRED PER OCCUPIED ROOM
YOUR HOTEL EXAMPLE
(1) Amount to be realized from guest room sales to cover cost and a
Reasonable return on a present fair value of property
(From Schedule 1).......................................................................... $____________ $147,403.00
(2) Number of guests available for rental............................................. 100
(3) Number of available rooms on annual basis (item 2 multiplied 100% 100% 36,500
(4) Less: allowance for average vacancies ........................................... _________%___________ __25% _____9125
(5) Number of rooms to be occupied at estimated average occupancy. % 75% 27,375
(6) Average daily rates per occupied room required to cover costs and $ $ 5.38
A reasonable return on present fair value(item 1 divided by item 5)
(7) Actual average rate per occupied room and prevailing occupancy.... $ 79% $ 4.95
EXPLANATION OF SCHEDULE II
Schedule II is a simple computation to determine the average daily rate per occupied room required to produce the amount to cover costs and a reasonable return on the present fair value of the property in order to arrive at the number of occupied rooms to be used as a basis for the computation of the required average rate per occupied room, a determination is first made of the number of rooms available for rental for a year (lines 2 and 3). From this total there is deduced an estimated percentage for average total vacancies (line 4), to determine the number of rooms to be occupied at the estimated average total occupancy. The estimate for vacancies and the tesulting estimate for average percentage of occupancy must be made by each hotel in consideration of the circumstances applying in each case. It must be borne in mind that as a basis for determining room rentals, the estimated occupancy level should be figured at what reasonably might be expected under more normal conditions and not at the abnormal levels of boom periods. In the cases of transient hotel, a reasonable occupancy level would normally be lower than in residential hotels where occupancies of from 85% to 90% might be expected to prevail. In the example, average occupancy has been figured at 75%.
It will be noticed in the sample computation, that when the number of rooms to be occupied at the estimated average occupancy of 75%, (line 5), is dlivided into the amount to be realized from guest room sales to cover cost and reasonable return on the present fair value of the property, (line 1), the required average rate per occupied room is $5.38. this compares with the actual average rate of $4.95 at 79% average occupancy. It is thus indicated that, subject to any reduction in net operating expenses as between the 79% and 75% occupancy levels, the present average rate is insufficient to produce the necessary amount to cover costs and a reasonable return at the 75% occupancy level.
Ofcourse, it will be understood that the average rate is the average of all the rooms occupied and is influenced by a number of factors, such as the proportion of rooms rented at the double occupancy rate, the frequency of renting the higher rated rooms, the extent of special rated discounts and concessions given for weekly, monthly, or long term occupancy, variations in services, furnishings, facilities, location, etc. Affecting the rate of each room.