How hotel valuation actually works

01Start with the business, not the building

Most arguments about “the number” are arguments about next year’s operations wearing a real-estate costume. Rooms, occupancy, ADR, mix, labor, brand, and the management agreement decide the cash that can be capitalized. The limestone and the porte-cochère matter — they set replacement cost and the demand story — but they do not print a cap rate.

Harbor’s estimate engine is a teaching desk: it turns your occupancy, ADR, expense ratio, and a going-in cap into a direct-cap value, then cross-checks price per key against public comps and a published research band. It is not an appraisal. If a 50-basis-point move or a 10% ADR miss wrecks the deal, the deal was never a point estimate.

02Income capitalization (direct cap)

The sentence everyone quotes: Value = NOI ÷ going-in cap rate. The honesty is in the definitions. Hotel NOI is not a single object. USALI lets you stop before or after FF&E reserve, before or after incentive management fees, and before or after a ground-lease payment that behaves like debt. Two buyers can capitalize “the same hotel” and not be talking about the same dollars.

Direct cap is a snapshot. It assumes the NOI you typed is a fair proxy for a stabilized year. It is the right first pass on a select-service house with a boring story. It is a weak only-pass on a 40-key inn, a hotel in renovation, a trophy with a one-time event book, or anything whose next three years do not look like last year.

• Name the NOI definition on the same page as the value.
• If you cannot rebuild rooms revenue from the PMS, you do not have NOI. You have a CIM.
• A going-in cap is a price, expressed as a percentage. It is not a law of physics.

03Discounted cash flow

Hotels use DCF because the path matters. Occupancy ramps, PIP years, brand conversions, and group-pace recovery are not a single stabilized year. A five- or ten-year DCF with an explicit PIP, a terminal cap, and a discount rate is how a grown-up buyer writes “what has to be true.”

The terminal cap is not the going-in cap with a polite 50 basis points added by habit. It should reflect the risk of the residual — aging product, remaining franchise term, ground-lease clock, and the market you are exiting into. If your DCF only works because year ten is a miracle, you have written fiction.

04Sales comparison

Price per key is a conversation starter, not a conclusion. A $1.8 million-per-key Cosmopolitan tape includes gaming, assumed CMBS, and residual land. A $70,000-per-key economy sale in Houston is a different species. Harbor scores comps by segment, market, region, rooms band, recency, affiliation, and whether a public price exists — then refuses to treat an undisclosed sale as a number.

When the comparable set is three trophies and a rumor, say so. Thin comps are a finding. They are not a reason to invent a confidential price and call it research.

05Cost approach

Replacement cost minus depreciation plus land. Useful when the house is new, unique, or so thinly traded that income and sales lie. Historic palaces and 20-key cliff inns often live here. Insurance and construction-cost inflation have made this approach less academic than it was in 2016.

Cost is a floor more often than a verdict. Nobody pays replacement cost for a hotel whose NOI cannot service the building you just described — unless they are buying the option on a different use.

06What Harbor will not do

We will not call this an appraisal. We will not launder a paid survey’s proprietary bands as our own. We will not present a confidential deal price as a fact. We will label every assumption you did not type. If you need a licensed appraisal, hire one. If you need a broker opinion of value, hire a broker and read the engagement letter.