Thoughts on California’s $15/hour Minimum Wage

TRIGGER: http://www.nbclosangeles.com/news/local/California-Minimum-Wage-374470051.html

“It’s not the end of the struggle, but it’s a very important step forward. Let’s keep it going. We’re not stopping here.” – Governor Brown

$15/hour minimum wage. A worthy struggle to fight against the exploitative and evil hotel owners.

Something I wonder: is this minimum wage essentially a knock out against my bottom line? If so, does that essentially eliminate my hotel valuations based on the Net Income Approach? Or will this all be countered by me increasing my overall room rates?

The nice thing perhaps is that my hotel is deep in the coast of Southern California, hours away from the border, which will mean all my direct competitors will suffer alongside me.

I feel more sorry for those on the Californian border along a State that won’t be having these minimum wage increases.

What I can say as a direct result of this action is that I will most likely not be purchasing an additional hotel or labor intensive business in California due to the uncertainty this causes in my valuations of cash flow. At least until the $15/hour minimum wage is set and stabilized, or until the rest of the country follows and raises the federal minimum wage to $15/hour.

Should I purchase a hotel in the interim period as minimum wages increase, I would have to consider into the valuation of the hotel the loss of revenue from increased future payroll costs. I can’t imagine any Seller would allow that kind of valuation into decreasing the final price of their hotel.

The economic effects of a $15/hour minimum wage on a State level are relatively new, so the economic repercussions add an extra level of risk that I’m not sure the commercial real estate market will be able to properly adjust for. Just as the housing bubble of 2008 wasn’t properly calculated in, I don’t think any economist can properly predict what the economic consequences will be, let alone a limited-service hotel owner trying to sell their hotel.

Just trying to explain to most limited service sellers what a “Cap Rate” means is a challenge within itself. Trying to add on the complexities of future, guaranteed costs by Government fiat won’t make sense.

If I can make a prediction, I would say that the only buyers for California will be idiots who have no idea about the increasing minimum wage laws in California, or people who simply don’t care (ie. Chinese buyers).