Valuation basics
How hotels and motels are valued
The terms and formulas that buyers, brokers, lenders and appraisers use, explained so that you can follow the math when someone puts a number on your property.
Income is what a buyer is paying for
A hotel is an operating business inside a building. Its value comes mostly from the cash it produces, which is why two physically similar properties can be worth very different amounts. Appraisers call this the income approach. They cross-check it against sales of comparable hotels and, less often, against what it would cost to build the property new.
Occupancy, ADR and RevPAR: the top line
Occupancy
rooms sold ÷ rooms available
The share of available room nights that were sold in a period.
Average daily rate (ADR)
room revenue ÷ rooms sold
The average price actually collected for each occupied room night.
Revenue per available room (RevPAR)
room revenue ÷ rooms available = occupancy × ADR
Room revenue spread across every room night the property had to sell, occupied or not.
A worked example
Take an imaginary 50-room property over a 365-day year. Rooms available: 50 × 365 = 18,250 room nights. If 10,950 of them were sold, occupancy is 10,950 ÷ 18,250 = 60 percent. If room revenue was $876,000, ADR is $876,000 ÷ 10,950 = $80. RevPAR is $876,000 ÷ 18,250 = $48, which is the same as 60 percent × $80.
Why RevPAR is the number to watch
Occupancy and rate can each be pushed at the other's expense. Cut prices and the hotel fills; raise them and it empties. RevPAR captures both, which makes it the fairest single measure of how well the rooms are being sold.
The STR report
Many branded hotels, and some independents, subscribe to a benchmarking report commonly called an STR report. It compares the hotel's occupancy, ADR and RevPAR with a set of competing properties and expresses each as an index, where 100 means the hotel is getting its fair share. A buyer reads it to see whether a hotel is leading or trailing its competitors and in which direction it is moving. Hotels under a franchise nearly always have one. Motels without a brand usually do not, and tax filings and bank records fill the gap.
Trailing-twelve-month income and NOI
Buyers ask for the trailing twelve months, often shortened to TTM or T-12: the most recent twelve full months of revenue and expenses, by month. It is more current than last year's tax return and it shows a full cycle of seasons.
Net operating income (NOI)
total revenue − operating expenses
Operating expenses include payroll, utilities, repairs, supplies, franchise fees, marketing, insurance and property tax. NOI is measured before loan payments, depreciation and income tax.
Adjustments buyers make
The NOI on your statement is a starting point. A buyer restates it to reflect what the property would earn under new ownership:
- Management. A fee for professional management is added if the owner manages without one.
- Owner labor. Unpaid work by the owner or family is replaced with wages at market cost.
- Reserve for replacement. An annual allowance for furniture, fixtures and equipment is deducted, since those wear out whether or not money was set aside.
- Property tax. Many jurisdictions reassess after a sale, so the buyer uses the expected new bill.
- Insurance. Restated at a current quote.
- One-time items. Unusual income or expenses are removed, in both directions.
- Personal expenses. Costs run through the business that a new owner would not incur are added back, if they can be documented.
The result is sometimes called adjusted or stabilized NOI. Ask any buyer to show you their adjustments. We will show you ours.
Cap rate: turning income into a price
Capitalization rate (cap rate)
NOI ÷ price, so price = NOI ÷ cap rate
The yearly return a buyer would earn on the price if paying entirely with their own money.
The arithmetic
Suppose an imaginary property has adjusted NOI of $300,000. At a cap rate of 8 percent, the implied price is $300,000 ÷ 0.08 = $3,750,000. At 10 percent, it is $300,000 ÷ 0.10 = $3,000,000. Same income, different price. The percentages are for illustration only, and we are not suggesting that either one applies to any real hotel.
What moves a cap rate
A higher cap rate means a lower price for the same income, and it reflects more perceived risk. Buyers apply higher rates to older buildings, weaker locations, declining income, short remaining franchise terms and markets with new competition on the way, and lower rates to the opposite. Interest rates and the availability of loans move cap rates for everyone at once.
This is the number buyers and sellers most often disagree about, and no formula settles it. Comparable sales and current lending terms are the evidence.
Price per key and other cross-checks
Price per key
price ÷ number of rooms
A figure that can be compared with recent sales of similar hotels and with the cost of building new. It is a check on the income approach, not a substitute: two 60-room properties with different income are not worth the same per key.
Room revenue multiplier
price ÷ annual room revenue
Common for smaller motels where expense records are thin. It is quick and rough, because it ignores how much of the revenue the property keeps.
Capital needs come off the top
Whatever method produces the starting figure, a buyer then subtracts money that must be spent soon: deferred maintenance, a renovation, or a brand's required upgrades. The effect of a brand's plan is explained under selling with a PIP outstanding.
When the standard methods need adapting
Weekly and monthly guests
Long stays change both revenue and cost patterns, which is covered under extended-stay and weekly-rate properties.
Restaurants, bars and events
Each department is examined on its own profit, as described for inns and small boutique hotels.
No current income
A dark hotel is valued on what it could earn after reopening, less the cost of getting there, or on its real estate. See how a closed hotel is priced.
Debt on the property
A loan does not change what the hotel is worth, but it changes what you keep. Your proceeds are the price less the loan payoff, any prepayment charge and closing costs.
Appraisal, broker opinion and buyer's offer
Three different parties may put a number on your hotel, and they are not doing the same job. An appraiser gives an independent opinion of market value and is the right source for a formal figure. A broker gives an opinion of the price a marketing process might achieve. A buyer tells you what that buyer will pay.
We are the third kind. When we make an offer we explain the income, adjustments and rate behind it, in the order described in how our purchase process works. You are free to test it against a broker's view, and our page comparing a broker's process with a direct offer discusses how. Further questions are answered in our FAQ on selling a hotel.
Start with a confidential conversation
Tell us where the property is, how many keys it has and whether it carries a brand. We read every submission ourselves and call you back at the number you give.
Nothing you send is passed to a listing service, and sending it does not commit you to anything.
Tell us about the property
Read by the buyers. Never listed, never advertised.