How to underwrite a hotel: from RevPAR to NOI, value, and loan size

Why a hotel is not an apartment building

An apartment building rents a unit for a year. A hotel rents the same room hundreds of times a year, at a price that changes daily. That makes hotel revenue fast to rise and fast to fall, and it means a hotel has the payroll, the fees, and the operating risk of a business on top of the building.

That is why hotel underwriting reads the full P&L instead of rent minus a few expenses. It is also why lenders look at hotels harder, and why the FF&E reserve, brand fees, and management fees show up in a hotel deal and nowhere in a rental.

Step 1: RevPAR to rooms revenue

Three inputs drive almost everything: rooms (also called keys), occupancy, and ADR, the average daily rate paid for each room sold. RevPAR, revenue per available room, ties them together: RevPAR = ADR × occupancy. It is the single number most hotel people quote, because it captures both how full the hotel is and what guests paid.

Rooms revenue = rooms × days open × occupancy × ADR, which is the same as available room nights × RevPAR. A 120-room hotel open all year has 43,800 room nights to sell. At 68% occupancy it sells 29,784 of them.

Two hotels can share a RevPAR and run very differently. One fills at a low rate and works its housekeeping staff hard. The other runs emptier at a higher rate. RevPAR tells you revenue, not profit, which is why the rest of the P&L matters.

Step 2: the USALI P&L down to GOP

Most hotel statements follow the Uniform System of Accounts for the Lodging Industry, or USALI. The current version is the 12th Revised Edition, published by HFTP in 2024, with an adoption date of January 1, 2026. Reading a hotel P&L is much easier once you know its order.

Operated departments come first. Rooms, food and beverage, and other operated departments each show their revenue and the direct costs of running them: housekeeping and front desk payroll, guest supplies, food cost, and so on. Revenue minus those costs is departmental profit.

Undistributed operating expenses come next: administrative and general, sales and marketing, property operations and maintenance, utilities (energy, water, and waste in the 12th edition), and information and telecommunications systems. They support the whole hotel, so they are not charged to one department. Departmental profit minus undistributed expenses is gross operating profit, or GOP.

USALI records franchise royalty and brand marketing and loyalty fees in sales and marketing, above GOP, and brand reservation fees in the rooms department. This guide and the calculator pull brand fees out onto their own line below GOP, the way many appraisers and lenders present a franchised hotel, so you can see what the flag costs. That makes GOP here read higher than on a USALI statement; NOI is the same either way. If you copy sales and marketing from a USALI P&L, take the franchise fees out of it first, or set the brand fee inputs to 0, so you do not count them twice.

Step 3: fees, fixed charges, and the FF&E reserve

Below GOP sit the costs of ownership. Management fees are usually a base fee on total revenue, and some agreements add an incentive fee on profit above a hurdle. Brand royalty and program fees are usually charged on rooms revenue. The franchise and management agreements set the real numbers, so read them instead of guessing.

Property tax and insurance are the fixed charges. A sale can trigger a reassessment, so underwrite the tax bill you will get, not the one the seller paid.

The FF&E reserve sets money aside every year to replace beds, carpet, televisions, and kitchen equipment. Franchise and loan agreements commonly require one. Leaving it out makes NOI look bigger than the hotel can really pay out, and any buyer or lender will take it out again.

Example

Illustrative example. These are example inputs so the math is visible, not a real hotel, a market average, or a benchmark. A 120-room hotel is open 365 days at 68% occupancy and a $145 ADR. RevPAR is $145 × 68% = $98.60. Rooms revenue is 29,784 room nights × $145 = $4,318,680.

Food and beverage adds 12% of rooms revenue, $518,241.60, and other revenue adds 4%, $172,747.20. Total revenue is $5,009,668.80.

Departmental expenses: rooms at 24% of rooms revenue is $1,036,483.20, F&B at 78% of F&B revenue is $404,228.45, and other departments at 45% of their revenue is $77,736.24. Together that is $1,518,447.89, leaving departmental profit of $3,491,220.91.

Undistributed expenses at 24.8% of total revenue (8.5% administrative, 6.5% sales and marketing, 4.5% maintenance, 3.8% utilities, 1.5% technology) total $1,242,397.86. GOP before brand fees is $2,248,823.05, a 44.9% margin. With the $410,274.60 of brand fees booked in sales and marketing, as USALI does, GOP would be $1,838,548.45, or 36.7%.

Below GOP: brand fees at 9.5% of rooms revenue are $410,274.60, the 3% base management fee is $150,290.06, and property tax and insurance are $305,000. That leaves EBITDA of $1,383,258.39. The 4% FF&E reserve is $200,386.75, so NOI is $1,182,871.63, about 23.6% of revenue.

Step 4: from NOI to value and loan size

Value is NOI divided by a cap rate. At 9%, $1,182,871.63 of NOI points to about $13,143,018, or $109,525 per key. If the price is $13,000,000, that is a going-in cap of 9.1%.

A lender sizes the loan more than one way and lends the smallest result. At 65% loan-to-value on the lower of price and value, the loan is $8,450,000. At a 1.45 minimum DSCR, NOI could carry debt service of $815,773.54 a year, which at 7.25% over 25 years supports about $9,405,158. The LTV test is lower, so the loan is $8,450,000.

That loan costs $61,077.18 a month, or $732,926.16 a year. The DSCR is $1,182,871.63 ÷ $732,926.16 = 1.61, and the debt yield, NOI divided by the loan, is 14.0%. Debt yield ignores the rate and the amortization, which is why lenders like it as a check on loan size.

Equity is the price plus 2% closing costs, $13,260,000, minus the loan: $4,810,000. Year-one cash flow after debt service is $449,945.47, a 9.4% cash-on-cash return.

Step 5: the hold, the exit, and the IRR

A single year is not the whole story. In the calculator's example, occupancy ramps from 68% to 72% over two years, ADR and expenses grow 3% a year, and the hotel sells after five years at a 9.5% cap on year-six NOI of about $1,557,457. That gives a sale price of about $16,394,280. After 2% selling costs and a loan payoff of about $7,727,611, the equity gets back about $8,338,783.

Put the five years of cash flow and the sale together and the example shows a 22.2% levered IRR and a 2.40x equity multiple. Those are outputs of example inputs, not a forecast. Move occupancy and the exit cap and watch how fast they change.

Common pitfalls

Underwriting the seller's pro forma. Start from what the hotel actually did over the last twelve months. A projection should explain every change from that history.

Missing the property improvement plan. A sale or a new franchise often comes with a brand-required renovation list. It belongs in your cost basis before you calculate any return.

Treating undistributed costs as variable. Sales, administration, and maintenance do not drop much when occupancy does. That is what makes hotel NOI fall faster than revenue in a bad year.

Annual numbers hiding a weak season. A hotel can cover its debt for the year and still come up short for several months in a row. Look at monthly statements and keep reserves.

Skipping the agreements. Fees, termination costs, and required reserves live in the franchise and management agreements. A buyer who has not read them does not know the NOI.

Run your own numbers

The hotel underwriting calculator loads with this exact example. Replace the inputs with the hotel's own numbers and it rebuilds the P&L, the value, the loan, the five-year projection, and the IRR, then prints the whole thing. For a quick check on one piece, the cap rate calculator turns NOI into value and the DSCR calculator checks coverage.

These pages run the math on the numbers you type. They do not supply market data, and nothing here is an appraisal, a loan offer, or financial or investment advice. Have a lender, an appraiser, and your own advisors review any hotel before you buy.

Sources

HFTP, Uniform System of Accounts for the Lodging Industry (accessed October 28, 2026), https://usali.hftp.org/. The 12th Revised Edition has a mandatory adoption date of January 1, 2026, and replaces the Utilities schedule with an Energy, Water, and Waste schedule.

HFTP, AHLA and GFC, HFTP, AHLA, and GFC Unveil Groundbreaking 12th Revised Edition of the Uniform System of Accounts for the Lodging Industry (July 11, 2024; accessed October 28, 2026), https://www.ahla.com/news/hftp-ahla-and-gfc-unveil-groundbreaking-12th-revised-edition-uniform-system-accounts-lodging. Published by HFTP, with the revision overseen by the Global Finance Committee sponsored by AHLA and HFTP.

HFTP, USALI Frequently Asked Questions, Sales and Marketing, Schedule 7, Question 4 (accessed October 28, 2026), https://www.hftp.org/downloads/documents/usali/usali_faqs.pdf. Confirms franchise royalty and marketing fees are recorded in sales and marketing.

Steps

1. Get the trailing twelve months

   Ask for the hotel's last twelve months of monthly P&Ls in USALI format, plus the occupancy and ADR by month. Underwrite from what the hotel did, then change only what you can explain.

2. Build rooms revenue from RevPAR

   RevPAR = ADR × occupancy. Rooms revenue = rooms × days open × RevPAR. Check it against the rooms revenue line on the P&L. If they do not match, find out why before going further.

3. Add the other departments

   Food and beverage, parking, meeting space, resort or amenity fees, and other income. Show each as a share of rooms revenue so it moves when occupancy moves.

4. Subtract departmental and undistributed expenses to reach GOP

   Departmental expenses follow the revenue they serve. Undistributed expenses (administrative and general, sales and marketing, maintenance, utilities, technology) keep the whole hotel running and do not fall much when occupancy drops.

5. Take off fees, fixed charges, and the FF&E reserve to reach NOI

   Brand royalty and program fees, the management fee, property tax, insurance, and a reserve for furniture, fixtures, and equipment. What is left is NOI.

6. Value it and size the loan

   Value = NOI ÷ cap rate. The lender tests the loan against value (LTV) and against cash flow (DSCR), and often checks debt yield. The smallest loan that passes every test is the one you get.

7. Stress the result

   Drop occupancy five points, hold ADR flat for a year, and raise the exit cap half a point. If the deal only works in the base case, it does not work.

Questions