Net Operating Income (NOI)

The build runs from total revenue down. Start with rooms revenue, occupancy times ADR times keys times days in the year, add other revenue such as food and beverage, meeting space and parking, and that is total revenue. From there, subtract every operating expense to reach NOI.

What is in: departmental expenses (rooms, food and beverage, and other operated departments), undistributed expenses (administrative and general, sales and marketing, utilities, maintenance), franchise and brand fees under the Uniform System of Accounts for the Lodging Industry,^[1] a management fee, property taxes, insurance, and an FF&E reserve. What is out: debt service, depreciation, amortization, income taxes, and capital expenditures. Those excluded items sit below NOI in the capital structure and tax treatment, not in the operating performance NOI is meant to isolate. For scale on franchise fees, Hilton's 2025 Hampton disclosure document lists a 6% royalty and a 4% program fee on gross rooms revenue.^[2]

The two lines owners most often leave out are the management fee on a self-managed hotel and the FF&E reserve. An owner running the property personally, with no third-party management contract, often reports a P&L with no management fee at all, which overstates NOI relative to how the asset would perform under new ownership. The FF&E reserve gets skipped for a similar reason: an owner who has been deferring reserve funding shows a higher trailing NOI than the asset can sustain once a buyer, or the franchise agreement, requires the reserve to be funded. Buyers restore both lines during underwriting regardless of how the seller's books are kept.

Property tax reassessment at sale is the line that surprises sellers most. In many jurisdictions, a sale price becomes the new assessed value, producing a higher property tax bill than the seller has been paying. California, for example, requires the assessor to reassess to current market value when ownership changes.^[3] A buyer underwrites the reassessed number, not the current one, which means the seller's trailing NOI can overstate what the buyer will actually realize going forward, independent of any operational change.

Lenders and buyers do not always use the same NOI. A bridge lender financing a transitional asset often sizes to a pro forma, stabilized NOI that assumes a completed business plan; a permanent lender or a buyer valuing a stabilized asset more often uses trailing twelve months, sometimes adjusted for a documented one-time event. Normalizations, adding back a genuine one-time legal settlement or an insurance recovery, are legitimate when documented. Undocumented add-backs, personal expenses run through the business, related-party arrangements without support, do not survive a buyer's audit and are the most common source of a re-trade in due diligence.

NOI, not RevPAR, is the value driver, even though RevPAR is the number everyone quotes first. RevPAR measures revenue per available room; a cap rate is applied to NOI, the profit remaining after the full expense stack. Two hotels with identical RevPAR can have very different values if their expense structures differ, which is why a serious valuation conversation moves past RevPAR quickly and into the NOI build shown in the example below.