Hotel Underwriting: RevPAR, ADR, and the Departmental P&L That Drives Institutional Hotel Investment

Key Takeaways

RevPAR, ADR, and Occupancy

Hotel underwriting starts with three metrics. They are simple in formula and complex in application. Every institutional hotel analysis, every STR report, every lender sizing model, and every appraisal begins with these three numbers.

Average Daily Rate (ADR) is total rooms revenue divided by the number of rooms sold. If a 200-room hotel sells 144 rooms tonight and collects $25,920 in room revenue, ADR is $180. ADR measures pricing power. It tells you what the market will pay for a room at this hotel on a per-night basis. ADR does not account for unsold rooms. A hotel with 50% occupancy and a hotel with 95% occupancy can have the same ADR if they price identically on occupied nights.

Occupancy is rooms sold divided by rooms available. If that same 200-room hotel sells 144 rooms, occupancy is 72%. Occupancy measures demand capture. It tells you what share of available inventory the hotel is actually filling. Occupancy is bounded by zero and 100%. Stabilized occupancy varies by market and hotel type, and the national average is low: HVS, citing CoStar, reports 62.3% for year-end 2025. Occupancy that stays very high on a sustained basis can mean the hotel is underpricing its rooms and leaving rate on the table.

Revenue Per Available Room (RevPAR) combines the two. RevPAR equals ADR multiplied by Occupancy. Equivalently, RevPAR equals total rooms revenue divided by total available rooms. Using the example above: $180 ADR times 72% Occupancy equals $129.60 RevPAR. RevPAR is the single number that captures both pricing and demand. Two hotels can achieve the same RevPAR through different combinations: Hotel A at $200 ADR and 65% occupancy ($130 RevPAR) versus Hotel B at $160 ADR and 81.25% occupancy ($130 RevPAR). The RevPAR is identical but the operating profiles are different. Hotel A has rate upside but demand risk. Hotel B has occupancy stability but limited pricing power.

The formulas are worth stating explicitly because practitioners use them in two directions. Forward underwriting starts with occupancy and ADR assumptions to derive RevPAR and rooms revenue. Reverse underwriting starts with a target RevPAR (often derived from STR competitive set data) and tests which occupancy/ADR combinations achieve it.

Two related metrics appear in institutional hotel analysis. GOPPAR (Gross Operating Profit Per Available Room) divides GOP by the number of rooms available (STR's glossary defines it as Gross Operating Profit divided by Number of Rooms Available) and measures operating profitability after all departmental and undistributed expenses. The period must be stated: this article reports GOPPAR per available room-night, which is directly comparable to RevPAR, and shows the per-room annual figure alongside it. GOPPAR is what separates a well-managed hotel from a poorly managed one at the same RevPAR level. NRevPAR (Net Revenue Per Available Room) subtracts distribution costs (OTA commissions, loyalty program costs, travel agent fees) from rooms revenue before dividing by available rooms. NRevPAR captures the true net yield per room after customer acquisition costs, which can be a large share of rooms revenue at OTA-dependent properties.

The STR Competitive Set

Underwriting a hotel in isolation is guesswork. The STR STAR report is the institutional standard for benchmarking hotel performance against a defined competitive set. STR, now a division of CoStar Group, collects daily operating data from hotels worldwide and produces monthly and annual benchmarking reports that compare a subject hotel's performance to its comp set.

Constructing the competitive set is an underwriting judgment call, not a mechanical exercise. The comp set is a short list of hotels that compete directly with the subject property for the same demand. Selection criteria include chain scale (economy, midscale, upper midscale, upscale, upper upscale, luxury), service level (limited, select, full), geographic proximity (usually within a defined submarket or radius), age and condition, and meeting space capacity. A 150-room Courtyard by Marriott in a suburban office corridor competes with the Hilton Garden Inn, Hyatt Place, and Hampton Inn in the same submarket. It does not compete with the 400-room full-service Marriott downtown, even though both carry Marriott flags.

The STAR report produces three index values that are central to hotel underwriting. Each index compares the subject hotel's performance to the weighted average of its competitive set:

• Occupancy Index (also called MPI, or Market Penetration Index). Subject occupancy divided by comp set occupancy. An index above 100 means the hotel is capturing more than its fair share of demand. Below 100 means it is underperforming relative to the set.
• ADR Index (also called ARI, or Average Rate Index). Subject ADR divided by comp set ADR. An index above 100 means the hotel commands a rate premium versus comps. This premium may reflect better physical condition, stronger brand, better location, or superior revenue management.
• RevPAR Index (also called RGI, or Revenue Generation Index). Subject RevPAR divided by comp set RevPAR. This is the composite measure and the single most important index. An RGI above 100 means the hotel is generating more rooms revenue per available room than its competitive set average. The RGI captures both pricing power and demand capture in a single benchmark.

When underwriting an acquisition, the RGI tells you whether the hotel is punching above or below its weight. A hotel with a 95 RGI that you believe should be operating at 105 after a renovation and repositioning has identifiable upside. That 10-point RGI improvement, applied against the comp set's RevPAR trajectory, gives you the revenue growth assumption for your pro forma. A hotel already running a 115 RGI has limited upside from market share gains and must rely on absolute market RevPAR growth for revenue growth.

The comp set also anchors your seasonality assumptions. Monthly RevPAR for the comp set shows the demand pattern for the submarket. A hypothetical hotel in a beach resort market might show RevPAR of $220 in February and $85 in September. The subject hotel's monthly RevPAR pattern should track the comp set pattern, adjusted for its index position. If it deviates meaningfully from the comp set pattern (for example, outperforming in shoulder months but underperforming in peak months), that deviation needs an explanation and usually points to rate management or group booking patterns that are worth investigating.

The USALI Summary Operating Statement

The Uniform System of Accounts for the Lodging Industry, now in its 12th revised edition, is the standard chart of accounts for institutional hotel financial reporting. The 12th edition is published by Hospitality Financial and Technology Professionals (HFTP), was overseen by a Global Finance Committee jointly sponsored by the American Hotel & Lodging Association (AHLA) and HFTP, and has an adoption date of January 1, 2026. Every institutional hotel owner, operator, lender, appraiser, and buyer expects financial statements organized in this format. USALI is to hotel underwriting what the Form 1040 is to tax preparation: the structure through which all numbers flow.

The USALI summary operating statement follows a specific cascade. Revenue flows through three deduction steps (departmental expenses, undistributed expenses, and charges below GOP) across four levels (revenue, departmental profit, GOP, and NOI) to arrive at NOI. One naming caution: published summaries of the USALI statement show it running from departmental profit to undistributed expenses to gross operating profit (GOP), then management fees, then non-operating income and expenses such as insurance and property taxes, ending at EBITDA or net income depending on the presentation. "NOI" and the "fixed charges" grouping used in this article are investor and lender conventions layered on that structure, and this article also deducts an FF&E reserve to reach NOI. Understanding this cascade is the foundation of hotel underwriting.

The cascade works as follows. Total revenue includes all operated department revenue: rooms, food and beverage, and other operated departments (parking, spa, resort fees, telecommunications, and any other revenue-generating activity). From total revenue, you subtract departmental expenses (the direct costs of running each department: housekeeping labor and supplies for rooms, cost of goods sold and kitchen labor for F&B, and so on) to arrive at total departmental profit. From departmental profit, you subtract undistributed operating expenses (administrative and general, sales and marketing, property operations and maintenance, utilities, and information technology) to arrive at gross operating profit (GOP). From GOP, you subtract management fees, property taxes, insurance, and the FF&E (furniture, fixtures, and equipment) reserve to arrive at NOI, the investor convention used for cap rate and DSCR analysis.

This cascade is not just an accounting exercise. Each layer represents a different underwriting question. Departmental margins tell you whether the hotel is operationally efficient at the department level. Undistributed expenses tell you whether the hotel's overhead is appropriate for its size and complexity. Charges below GOP tell you what the hotel costs to hold, much of it independent of revenue performance (the management fee and FF&E reserve, by contrast, scale with revenue in this example). Separating these layers is what makes it possible to identify where value creation (or destruction) is happening.

Departmental Revenue and Margins

The rooms department is the engine of hotel profitability. The percentage ranges in this section and the next are illustrative underwriting assumptions for a branded select-service hotel, not published benchmarks. Replace them with the subject hotel's trailing financials and its comp set data. At a select-service hotel, rooms revenue is assumed here to represent 85% to 92% of total revenue. At a full-service hotel with significant food and beverage, meeting space, and ancillary revenue, rooms revenue may represent 55% to 70% of total revenue. Among the major operated departments, rooms produces the highest margin (parking and resort fee lines can be higher, but they are small).

Rooms Department

Rooms department revenue is straightforward: rooms sold multiplied by the average rate achieved per room-night. The departmental expenses are primarily labor (housekeeping, front desk, reservations) and operating supplies (linens, amenities, cleaning supplies). At a well-managed select-service hotel, this article assumes rooms department profit margins of 73% to 78% of rooms revenue. Full-service hotels with higher service standards (concierge staff, turndown service, more labor-intensive housekeeping) are assumed to run 68% to 74%.

The rooms department margin is sensitive to two variables: occupancy and labor cost per occupied room. Higher occupancy spreads fixed labor costs (front desk staff, maintenance, management) across more occupied rooms. But each incremental occupied room adds variable cost (housekeeping labor, linens, amenities, laundry). Because most of the rooms cost base is fixed, the marginal cost of filling one additional room is small relative to ADR, and incremental rooms revenue flows through at high margins. This is why hotel operators focus on occupancy at properties with unsold inventory: the marginal contribution to departmental profit is large.

Food and Beverage Department

Food and beverage (F&B) is the second-largest revenue department at full-service hotels and the most misunderstood line in hotel underwriting. F&B includes restaurant revenue, bar/lounge revenue, banquet and catering revenue, room service, and minibar. At a full-service hotel, F&B can represent 25% to 35% of total revenue in this article's assumptions. At a select-service hotel with a limited breakfast offering and perhaps a bar, F&B represents 5% to 12% of total revenue.

F&B margins are structurally lower than rooms margins. This article assumes departmental profit margins for F&B of 25% to 35%. The cost structure is fundamentally different from rooms. Cost of goods sold (food and beverage product costs) and labor are the two largest cost lines. By the time you add supplies, equipment, and contract services, the margin compresses to a level that would be unacceptable in any standalone restaurant business. Hotels operate F&B not for its stand-alone profitability but because it supports room rate and occupancy (group business requires meeting space and catering, business travelers expect an on-site restaurant, and resort guests expect dining options).

Banquet and catering revenue is the highest-margin subcategory within F&B. Banquet margins above the F&B average (assumed here at 35% to 45%) are achievable because banquet labor is largely variable (event staff hired per event), menu pricing has less price transparency than restaurant pricing, and the hotel captures both the food/beverage revenue and the meeting space rental. A hotel with strong group business and a catering-driven F&B operation will show meaningfully better F&B margins than one that relies on a la carte restaurant revenue.

Other Operated Departments

Other operated departments include parking, spa, golf, retail, telecommunications (now largely irrelevant), resort fees, and any other revenue-generating activity. Margins vary widely. In this article's assumptions, parking operations run 80% to 90% margins (essentially all flow-through after attendant labor) and spa margins run 20% to 35%. Resort fees, where applicable, run at a very high margin because the costs they nominally cover are already baked into base operating expenses. Golf course operations can be break-even or slightly negative on a direct departmental basis, justified by their contribution to room rate and real estate value.

In aggregate, other operated departments at a full-service resort may generate 10% to 15% of total revenue in this article's assumptions. At a select-service hotel, they are small (2.6% of revenue in the worked example below). The underwriting question is whether these departments are additive to value or just overhead masquerading as revenue. If parking revenue is $500K per year at 85% margin, it contributes meaningfully to NOI. If the spa generates $300K at 15% margin after a $2M buildout, the return on invested capital does not justify the space.

Undistributed Expenses and Fixed Charges

Undistributed operating expenses are costs that support the entire hotel but cannot be attributed to a single revenue-generating department. Under USALI, these include the categories below. The percentage ranges in this section are illustrative underwriting assumptions, not published benchmarks.

• Administrative and General (A&G). Back-office costs including accounting, human resources, legal, and general management salaries. Assumed here at 7% to 10% of total revenue.
• Sales and Marketing. Direct sales staff, advertising, and brand marketing and loyalty program assessments. Assumed here at 6% to 10% of total revenue. Distribution costs such as OTA commissions are a separate underwriting question (they reduce NRevPAR) and should be mapped to the correct schedule in the seller's statements. Hotels with strong brand direct booking channels run lower sales and marketing expense ratios.
• Property Operations and Maintenance (POM). Engineering staff, contract maintenance, supplies, and routine repairs. Assumed here at 4% to 6% of total revenue. Higher for older hotels and hotels with extensive mechanical systems (full-service hotels with pools, commercial kitchens, HVAC systems for meeting space).
• Utilities. Electric, gas, water, sewer. Assumed here at 3% to 5% of total revenue. Highly variable by geography and property type. Hotels with pools, laundry facilities, and large HVAC loads run at the upper end. The 12th edition of USALI replaced the Utilities schedule with an Energy, Water, and Waste (EWW) schedule, so expect that line to be labeled differently in current statements.
• Information Technology. Property management system (PMS), point-of-sale systems, guest Wi-Fi, and IT support. Assumed here at 2% to 3% of total revenue. Rising as hotels invest in mobile check-in, keyless entry, and revenue management systems.

In total, the component ranges above imply undistributed operating expenses of roughly 22% to 34% of total revenue. The GOP margin equals the total departmental margin minus the undistributed expense ratio. A hotel with a 71.7% departmental margin and a 27.1% undistributed expense ratio (the worked example below) produces a 44.6% GOP margin.

Fixed Charges

Charges below GOP sit between GOP and NOI. The older "fixed charges" label is still common in investor models, and this article uses it as shorthand. They include:

• Management fee. Assumed here at 3% to 4% of total revenue for a base management fee, plus an incentive fee calculated on GOP or NOI above a threshold (see the hotel management agreements article for structures). In institutional hotel underwriting, the base management fee is treated as an operating expense (above the NOI line). The incentive fee treatment varies by buyer and lender. Some treat it above the line (reducing NOI), some treat it below the line (reducing cash flow to equity but not NOI). Know your buyer's convention before quoting an NOI number.
• Property taxes. Highly variable by jurisdiction. Assumed here at 2% to 4% of total revenue. Hotels in high-tax jurisdictions (New York City, San Francisco, Chicago) run higher. Be aware that hotel assessments often include not just the real property but also personal property (FF&E), which is assessed separately in many states.
• Insurance. Assumed here at 1% to 2% of total revenue. Higher for hotels in hurricane-prone or earthquake-prone areas.
• FF&E Reserve. A reserve for the periodic replacement of furniture, fixtures, and equipment. This article assumes 4% of total revenue, though newer hotels may underwrite a lower percentage in the early years and older hotels may need more. The FF&E reserve is not a cash expense in the traditional sense. It is either deposited into an escrow account (if lender-required) or modeled as a deduction from NOI to reflect the true economic cost of maintaining the physical plant. This article deducts it before NOI, and the debt sizing below uses that NOI.

The component assumptions above sum to 10% to 14% of total revenue (3% + 2% + 1% + 4% at the low end, 4% + 4% + 2% + 4% at the high end), and the range widens based on management fee structure, tax jurisdiction, and insurance market conditions. Subtracting these charges from GOP produces NOI. For underwriting purposes, the NOI number is what flows into cap rate valuation, DSCR analysis, and return modeling.

Worked Example: 200-Room Select-Service Acquisition

Consider the acquisition of a 200-room select-service hotel in a suburban Sun Belt MSA. The property is a 7-year-old Courtyard by Marriott adjacent to a corporate office park with secondary demand from a regional medical center. The asking price is $36M ($180,000 per key). The trailing 12-month financials are audited and presented in USALI format. Every input in this example (revenue, expense lines, price, comp set RevPAR, and the loan terms used later) is an illustrative assumption chosen to make the arithmetic traceable. Here is the restated P&L, showing both total dollars and per-available-room (PAR) metrics.

Revenue

Rooms revenue of $8.76M implies RevPAR of $120 on 73,000 available room-nights (200 rooms times 365 nights). Working backward: if occupancy is 73% (53,290 rooms sold) and rooms revenue is $8.76M, then ADR is $164.38. RevPAR is $164.38 multiplied by 73%, or $120.00. Assume the STR competitive set for this hotel shows a RevPAR of $115, giving the subject hotel a RevPAR index (RGI) of 104 ($120 divided by $115). The hotel is slightly outperforming its comp set.

F&B revenue of $784K reflects a limited-service F&B operation: a grab-and-go market pantry, a small bar/lounge, and complimentary hot breakfast (the cost of which is captured in F&B departmental expenses). Other operated department revenue of $256K includes parking ($180K), vending commissions, and sundry items.

Departmental Expenses and Profit

The rooms department margin of 76% is within the 73% to 78% range this article assumes for a well-run select-service hotel. Rooms departmental expenses of $2.10M break down to approximately $1.42M in labor (housekeeping, front desk, reservations, rooms management) and $680K in operating supplies, laundry, and contract services. On a per-occupied-room basis, rooms departmental expense is $39.45 ($2,102,400 divided by 53,290 rooms sold). This is a useful benchmark for comparison against the comp set and against brand standards.

F&B margin of 30% reflects the limited-service F&B model. A full-service hotel with restaurants, banquets, and room service would show a lower margin on much higher revenue. The 30% margin here sits inside the 25% to 35% range assumed earlier because the breakfast program has relatively low labor cost (one or two staff members) and the bar/lounge operation generates high-margin beverage revenue.

Undistributed Operating Expenses

Total undistributed expenses of $2.66M, or 27.1% of revenue, is within the 22% to 34% range implied by the component assumptions above. Full-service hotels with larger administrative staffs and higher sales costs would sit toward the upper end. The sales and marketing line of $735K (7.5% of revenue) includes brand marketing contribution fees and local advertising. At a branded select-service hotel like a Courtyard, a significant portion of this line is the brand's marketing and loyalty program assessment, which is non-negotiable under the franchise agreement.

Gross Operating Profit

GOP equals total departmental profit minus total undistributed expenses: $7,027,200 minus $2,655,800 equals $4,371,400. GOP margin is 44.6% of total revenue. GOPPAR is $59.88 per available room-night ($4,371,400 divided by 73,000 available room-nights), or $21,857 per available room per year ($4,371,400 divided by 200 rooms). The per-night figure is directly comparable with RevPAR of $120.00: GOPPAR is about half of RevPAR ($59.88 divided by $120.00 is 0.499). The 44.6% margin is an input of this illustrative example, not a market benchmark; test it against the comp set's operating statements before relying on a margin like it.

Charges Below GOP and NOI

NOI of $3.20M on a $36M purchase price implies a going-in cap rate of 8.9% ($3,195,400 divided by $36,000,000). That sits near the top of the 7.5% to 9.0% range this article assumes for select-service hotels (see the cap rate section below). A cap rate at the high end of the range can mean the property has issues not reflected in the trailing financials (deferred maintenance, upcoming PIP, brand risk) or that the seller is pricing for a market with limited buyer depth. The experienced underwriter does not stop at the cap rate calculation. The cap rate is an output, not an input. The right question is whether the NOI is sustainable and whether the comps support the implied valuation.

Alternatively, if we apply an assumed market cap rate of 8.5% to the $3.20M NOI, the indicated value is $37.6M, which is 4.4% above the $36M asking price and suggests modest acquisition upside. But this only holds if the NOI is real and repeatable. The underwriting must stress-test the assumptions: What happens if occupancy drops to 65%? What happens if ADR growth stalls? What happens if the property faces a PIP (property improvement plan) requiring $3M in capital expenditure within the next 18 months? These are the questions the departmental P&L equips you to answer.

Seasonality and Monthly RevPAR Modeling

Hotels are not multifamily. There is no annualized rent roll that locks in revenue for 12 months. Hotel revenue resets nightly. Every room is re-priced and re-sold (or left empty) every night. This nightly reset creates seasonality patterns that are more pronounced than in asset classes with multi-year leases.

Monthly RevPAR variation for the example Courtyard by Marriott might look like this. The monthly occupancy and ADR inputs below are illustrative assumptions chosen so that the twelve months sum exactly to the P&L above (53,290 rooms sold, $8,760,000 rooms revenue). The hotel is in a Sun Belt MSA with corporate demand drivers and secondary leisure demand. Peak months are March and October (mild weather, strong corporate travel). Trough months are December, February, and January (holiday and winter slowdown), with July a secondary soft month (summer slowdown in corporate travel, partially offset by leisure).

The peak-to-trough RevPAR ratio is 1.72x ($148.57 in October versus $86.14 in December). This is moderate seasonality for a corporate-driven suburban hotel. Resort and convention-driven hotels can show wider ratios, and extended-stay hotels in stable corporate markets can show narrower ones. Compare your subject hotel's ratio against its comp set's monthly pattern.

Why does monthly modeling matter for underwriting? Because debt service is monthly, not annual. The $23.4M loan sized in the debt section below (7.0% interest, 25-year amortization) carries debt service of $165,386 per month, or $1,984,636 per year, against annual NOI of $3,195,400. That is an annual DSCR of 1.61x, which clears a 1.50x floor. Now spread NOI across the months. Assume, as an illustrative flow-through assumption, that 80% of each month's difference in total revenue from the average month drops to NOI, with total revenue scaled from rooms revenue by the P&L ratio of 9.80 to 8.76 (STR defines flow through as the change in GOP divided by the change in total revenue; this article applies the percentage to NOI, and because the 3% management fee and 4% FF&E reserve scale with revenue, 80% at NOI is equivalent to roughly 87% at GOP). On that assumption, March and October together generate 26.8% of annual NOI while contributing 20.8% of rooms revenue. December NOI falls to about $91,000, a monthly DSCR of 0.55x. January is 0.95x and February is 0.88x. Only three months fall below 1.0x, but the cash shortfall in those months has to be funded. At 60% flow-through December is 0.81x and at 100% it is 0.28x. The hotel needs working capital reserves or a line of credit to cover debt service during trough months, and a lender can require a debt service reserve or seasonal operating reserve sized in the loan documents.

Seasonality also affects how sale-process financials should be read. A trailing 12-month statement contains each calendar month exactly once, whichever month it ends in, so it neither hides the weak months nor overweights the peak months. The distortion comes from partial periods. Annualizing a strong quarter overstates NOI: on the monthly NOI estimate above, March through May produces $1.14M, and multiplying by four gives $4.56M, which is 42.8% above the $3.20M annual figure. The reverse happens when a buyer annualizes the trough. Seasonality also shapes the first months of ownership. A buyer who closes in December owns the three weakest months first: December through February NOI is about $395,000 (12.4% of annual NOI) against $496,000 of debt service for those three months, a coverage ratio of 0.80x. That shortfall should be funded at closing, not discovered in the first quarter.

Hotel-Specific DSCR and Debt Sizing

Hotel lending is distinct from conventional commercial real estate lending in several respects. The operating volatility inherent in a nightly-reset revenue model, combined with the management-intensive nature of hotel operations and the cyclical sensitivity of travel demand, produces a risk profile that is typically addressed through higher coverage requirements, shorter loan terms, and tighter covenants. The coverage, debt yield, and loan term figures in this section are illustrative assumptions for the worked example, not published lender requirements.

This article assumes a minimum DSCR of 1.50x on a trailing 12-month basis for a stabilized hotel loan. Compare this to assumed floors of 1.25x for multifamily and 1.30x for industrial and retail. A 1.50x floor means hotel NOI can decline 33% before debt service coverage drops below 1.0x (1 minus 1 divided by 1.50). The comparison that matters is NOI, not RevPAR, because hotel costs are largely fixed and NOI falls by a multiple of RevPAR. In the worked example, at an assumed 80% flow-through, a decline in total revenue of 13.6% removes the entire 33% cushion at a 1.50x loan (0.333 times $3,195,400, divided by 0.8 times $9.8M). For the sized loan, with its 1.61x DSCR and 37.9% NOI cushion, the break-even revenue decline is 15.4%. The 1.50x floor is therefore a starting point for downside testing, not a guarantee: run the revenue decline that exhausts coverage and ask whether it is plausible for the market.

Debt yield is the second sizing metric. It can become the binding constraint at lower cap rates. Debt yield equals NOI divided by the loan amount. This article tests a minimum debt yield of 10% to 12%. Using our 200-room example with $3.20M NOI:

• At a 10% debt yield floor: maximum loan = $3.20M / 10% = $31.95M (88.8% of the $36M purchase price, so the 65% LTV constraint is still binding)
• At a 12% debt yield floor: maximum loan = $3.20M / 12% = $26.63M (74.0% of purchase price, so the 65% LTV constraint is still binding)
• At 65% LTV (an assumed leverage level): loan amount = $36M x 65% = $23.4M. DSCR check: $3,195,400 NOI / debt service on $23.4M at 7.0% on 25-year amortization = $3,195,400 / $1,984,636 = 1.61x. This passes the 1.50x threshold.
• At a 1.50x DSCR: maximum loan = $25.12M (69.8% of purchase price), so 65% LTV is still the tighter constraint.
• Debt yield check: $3,195,400 / $23.4M = 13.7%. This passes the 10% to 12% threshold.

The loan sizes in every calculation. The binding constraint for this deal is LTV at 65%. In practice, the lender will size to the most restrictive of LTV, DSCR, and debt yield. The final loan amount is $23.4M, requiring $12.6M in equity (before closing costs and any PIP funding).

The example assumes a 3+1+1 structure: a 3-year initial term with two 1-year extension options subject to performance tests. Loan term and extension tests vary by lender type and loan program, and the extension tests (a minimum DSCR or debt yield at the extension date) belong in the downside case.

Interest-Only Period

A hotel loan may include an initial interest-only (IO) period, particularly for value-add acquisitions or newly developed hotels in their ramp-up period. During the IO period, debt service is lower, improving cash flow to equity during the period when the hotel is stabilizing or implementing operational improvements. But the IO period also means no principal amortization, so the loan balance does not decline. When IO burns off and amortization kicks in, debt service jumps. On the $23.4M example loan at 7.0%, IO debt service is $1,638,000 per year. Moving to a 25-year amortization schedule lifts it to $1,984,636 (+21.2%), a 30-year schedule to $1,868,169 (+14.1%), and a 20-year schedule to $2,177,039 (+32.9%). Underwriters must model this transition explicitly and test DSCR at both the IO and amortizing levels.

Cash Management and Lockbox

This article assumes the loan carries a hard lockbox (also called a cash management agreement). All hotel revenues are deposited into a lender-controlled account. The lender disburses funds in a specified waterfall: operating expenses first, then debt service, then required reserve deposits (FF&E reserve, tax and insurance escrow, capital improvement reserve), and finally any surplus to the borrower. This structure gives the lender real-time visibility into hotel cash flows and the ability to trap cash if performance deteriorates below specified thresholds (for example, an assumed trigger set below the closing DSCR or debt yield).

2026 Market Data and Market-Level Divergence

The U.S. hotel market in 2026 is growing, but the growth is uneven across markets. Understanding market-level divergence is essential for hotel underwriting because a single national RevPAR growth rate obscures very different trajectories in individual cities and submarkets.

HVS's 2026 U.S. Hotel Development Cost Survey, citing CoStar, reports that national RevPAR fell 0.3% in 2025 (occupancy of 62.3% and ADR of $160.54 at year-end), and that through the year-to-date period ending May 2026 occupancy was up 1.3%, ADR was up 2.7%, and RevPAR was up 4.0% compared with the same period in 2025. HVS describes occupancy as holding in the low-60% range and calls it a new normal below pre-pandemic levels. These are aggregate U.S. figures. The market-level data tells a different story.

HVS reports that in 2025 the primary markets (the top 25 U.S. cities) posted a 0.6% RevPAR decline against growth of 0.1% in all other markets, and that the pattern reversed in 2026: through May, primary markets were up 4.4% in RevPAR against 3.7% for all other markets. Beneath those averages, markets such as the San Francisco Bay Area, Minneapolis, and Miami posted double-digit RevPAR gains year-to-date while New Orleans, Tampa Bay, and Washington, D.C., posted notable declines. HVS attributes this to market-specific supply, demand, and group calendar shifts rather than a uniform national trend.

Costs are a second source of divergence. The American Hotel & Lodging Association's 2026 State of the Industry release states that rising operating expenses were a primary factor keeping GOPPAR at roughly 90% of 2019 levels. Revenue growth does not translate one for one into NOI growth. As a hypothetical on the worked example, if total revenue grows 3% while every cost line grows 6%, NOI falls from $3,195,400 to $3,093,124, a decline of 3.2%.

Supply is also a consideration. HVS reports that new supply growth slowed to 0.2% in 2023, 0.6% in 2024, and 0.7% in 2025, compared with an average supply increase of 1.4% in the years immediately preceding 2020, and forecasts 0.8% for 2026 and 1.1% for 2027. HVS attributes the slowdown to a combination of increasing construction costs and the rising cost of debt. On construction costs, HVS cites the Turner Building Cost Index rising 4.1% in 2025 and 4.8% over the 2026 trailing-twelve-month period, after increases of 8.0% in 2022 and 6.0% in 2023, and notes that tariff policy on imported metals is the primary catalyst behind renewed material cost pressure. Slow supply growth supports pricing power for existing hotels, but supply is a submarket question: underwrite the pipeline within the subject hotel's comp set, not the national average.

For the underwriter, market divergence means two things. First, RevPAR growth assumptions must be market-specific and segment-specific. A pro forma that applies the national growth rate to a market that HVS describes as declining will overestimate revenue, and one that applies it to a market with double-digit gains may underestimate it. Second, expense growth assumptions must be explicit and tested against revenue growth, as in the 3% revenue and 6% cost hypothetical above.

Cap Rate Environment

Hotel cap rates reflect both the income risk premium and the prevailing interest rate environment. The ranges in this paragraph are illustrative assumptions used in this article's examples, not published survey results: select-service hotels in top-50 MSAs at 7.5% to 9.0%, full-service hotels in gateway markets at 6.5% to 8.0%, and economy and midscale hotels at 9.0% to 11.0%. As an illustrative assumption, this article prices hotels at a premium to multifamily cap rates, reflecting the higher operating risk, management intensity, and revenue volatility of hotels relative to apartments. Replace these ranges with recent comparable sales and a current lender or broker survey when you underwrite a live deal.

The cap rate for any individual hotel depends on the stability and predictability of its cash flows. A 300-room Marriott with a long-term management agreement, a diversified demand mix (40% corporate, 30% group, 30% leisure), and a RevPAR index above 110 will trade at a lower cap rate than a 120-room independent hotel with 80% OTA-dependent transient demand and a 90 RevPAR index. The branded hotel's cash flows are more predictable, its demand more diversified, and its operating platform more scalable. The cap rate reflects this.

Model It in Apers

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