Hotels are lodging businesses that provide accommodation, meals, and other services for travelers and tourists. Hotel owners may own both the building and the business and are responsible for all expenses related to business operations and building improvements. However, hotel owners may also own the building and hire a managing partner to operate the business.
Hotel financials, although an income property, are slightly different in terminology and account for additional revenue streams. For example, a hotel might offer a spa, restaurants, and other services that are calculated as “other revenue” in the back-of-envelope analysis.
Here’s a Glossary that will be useful when using our software to analyze hotel developments:
Hotel Average Daily Rate (ADR)
Hotel ADR is a performance metric that calculates the average price or rate for each hotel room sold on a given day. The ADR is often use to compare the success of performance against other similar hotel projects.
Hotel Revenue Per Available Room (RevPAR)
Hotel RevPAR is another important performance metric, calculated by dividing a hotel’s ADR by the occupancy rate.
Hotel Room Revenue
Hotel room revenue is the annual revenue generated by hotel room rentals, calculated by multiplying the RevPAR (which is the average daily rate times the occupancy rate) by the number of rooms, and then again by 365 days.
Other revenue refers to supplementary income such as parking, spa services, and restaurants in order to maximize net operating income and return on investment. Other revenue is generally calculated as a percentage of the total room revenue and the value is contingent on project-specific factors such as location, hotel type, and market conditions.
Hotel Occupancy Rate
Hotel occupancy rate is the percentage of the available rooms in the hotel that are rented at a given time. It is a key performance indicator (KPI) in the hotel industry.
Hotel Net Operating Income (NOI)
Hotel net operating income is the income remaining after vacancies and expenses are deducted, and is calculated by subtracting operating expenses from total revenue (which includes room and other revenue). It is important to note that in hotel analysis room revenue includes occupancy rate.
Other General Terms
Basic Types of Leases
Gross lease is the simplest. The tenant pays a stated amount of rent each month. This amount includes the basic expenses, such as maintenance, taxes, and insurance.
Triple Net lease (NNN)
Triple Net lease (NNN) is the reverse. The tenant pays a base rent but is responsible for the costs of using the space. This lease is generally used when there is only one tenant. If there are multiple tenants, an estimated percent of the expenses is included in the lease. If the expense payments exceed the estimated amount, this amount is reimbursed back to the landlord.
When a tenant is responsible for the operating expenses of a property, for example in a triple net lease (NNN), the landlord may choose to pay the operating expenses in advance and be reimbursed by the tenant at a later time.
Loss factor is the percentage of the leasable or rentable area that is not usable by the tenant, because it contains things like service closets, trash rooms, vertical and horizontal circulation such as corridors and passageways, lobbies, and the like.
This is the percentage of the units or space that is not expected to be rented or leased. Examples include the time between tenants or the time required to improve the unit or property.
Operating Expenses (OpEx)
OpEx generally includes maintenance, taxes, and insurance.
Net Operating Income (NOI)
Net operating income is the revenue from the property minus vacancy rates and operating expenses.
Hard cost is the cost of all physical assets plus labor associated with the construction of a project. Hard cost excludes land purchase, and in our software we have also excluded demolition cost. Demolition and land purchase are individual sliders in our project cost panel.
Our software breaks down hard costs by usage; for example, office and retail each have a dedicated cost slider. We also include a bolded value, to the right of the hard cost section of the project cost panel, which is the average cost per square foot for the entire project. This takes into account individual hard cost values and the square foot amount of each use.
Soft cost accounts for expense items that are not considered direct construction costs, such as architecture, engineering, financing, and legal.
Contingencies refers to the percentage of the total cost, including hard and soft costs, that is allocated for unexpected events during the course of construction. Common examples are construction cost overruns and change orders.
Total Project Cost
The project cost is to the total cost of the development project, including hard and soft costs, contingencies, demolition, purchase price, and parking reduction fees (if applicable).
All-In Cost Per Square Foot (PSF)
The all-in cost per square foot is a standard measure of the project cost in order to compare similar projects or different versions of the project. This number is calculated by dividing the total project cost by the total buildable area.
Return on Cost (ROC)
Return on Cost (ROC) is a performance metric used to evaluate or compare development projects. The most basic ROC calculation is income minus expenses and vacancies, also known as net operating income, divided by total project cost.
If the ROC of a development project is attractive, then it makes sense to dive deeper into the analysis process with a ten-year pro-forma. Deepblocks will integrate the ten-year pro-forma with later versions of the software.