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Underwriting a hotel — normalize the P&L before you believe the cap rate

A broker's package quotes a cap rate off the seller's own trailing-twelve statement — before it has been normalized to a standard accounting format and adjusted for management fees, reserves, and non-recurring items. On a worked property, five ordinary, fully disclosed adjustments moved the quoted 8.76% cap rate to a true 6.01%, a 31.45% haircut off the seller's reported NOI. That bridge, not the property tour, is what underwriting a hotel actually means.

Seller statements almost never arrive in USALI format, and almost always omit or understate a market-rate management fee, an FF&E reserve, and at least one non-recurring or owner-specific expense. Normalizing means rebuilding the statement to USALI, then deducting a market management fee, a stated reserve percentage, and any item that would not recur under new ownership — even when every one of those adjustments is individually small.

On a worked property, the seller's reported NOI of $1,289,911 normalized down to $884,236 after deducting a market-rate management fee ($71,803), an FF&E reserve ($136,872), and several smaller non-recurring items — $405,675 total, a 31.45% haircut. Against the same asking price, that moves the quoted 8.76% cap rate to a true 6.01%.

None of the five adjustments in a normalization bridge is exotic or aggressive — they are the standard, defensible ones any buyer's lender will also make. The mistake is not making them before forming a price opinion, and then discovering the real number at the appraisal instead of at the letter of intent.

#hotels#hospitality#underwriting#normalization

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