Build monthly operating and liquidity schedules first, then derive annual investment returns. Do not begin with a desired purchase price and work backward until the assumptions support it.
Suggested workbook tabs
| Tab | Required contents |
|---|---|
| Control panel | Version, dates, scenario selector, investment definitions and checks |
| Evidence | Sources, confidence, verification and unresolved assumptions |
| Historical accounts | Reconciled monthly results and adjustment bridge |
| Rooms | Inventory, occupancy, ADR, segments and channels |
| Other departments | F&B, events, spa, parking and other activities separately |
| Staffing and operating costs | Coverage-based payroll, contracts and variable/fixed assumptions |
| Operator and affiliation | Fee bases, minimums, incentives and timing |
| Capital | Initial work, replacement schedule, downtime and draw timing |
| Debt | Advances, interest, amortization, fees, maturity and covenant calculations |
| Cash and reserves | Working capital, restricted balances and unrestricted liquidity |
| Returns and valuation | Unlevered/levered cash flows, exit, equity need and price sensitivity |
| Downside cases | Operating, capital, financing and combined stresses |
What is the bridge from RevPAR to owner cash?
The following constructed example is not a benchmark, valuation or forecast. Assume an 80-room hotel trades for 365 days at 65% occupancy and $240 ADR. Operating costs below include ordinary distribution costs but exclude the separately listed charges; no franchise or incentive fee is assumed.
| Annual item | Illustrative amount |
|---|---|
| Available room nights | 29,200 |
| Sold room nights | 18,980 |
| Room revenue | $4,555,200 |
| Other revenue | $900,000 |
| Total revenue | $5,455,200 |
| Departmental and undistributed operating costs | ($3,550,000) |
| Management base fee: assumed 3% of total revenue | ($163,656) |
| Separate central charges | ($60,000) |
| Property tax | ($200,000) |
| Insurance | ($140,000) |
| Cash before debt service and replacement funding | $1,341,544 |
| Replacement funding: assumed 4% of total revenue | ($218,208) |
| Cash after replacement funding, before debt service | $1,123,336 |
| Debt service | ($900,000) |
| Residual cash | $223,336 |
RevPAR is $156. Residual cash is $223,336 before income tax, additional owner costs, working-capital changes and capital needs beyond the assumed reserve. These are deliberately different measures.
How do you stress-test the forecast?
Use property-specific stresses. At minimum, test:
- Weaker occupancy and ADR together.
- Loss or repricing of a major group or corporate account.
- Higher payroll, insurance and property costs.
- Renovation cost escalation and delayed reopening.
- Slower operating improvement after an operator change.
- Lower debt proceeds or more expensive refinancing.
- A combined adverse case rather than isolated sensitivities only.
In the example, reduce occupancy from 65% to 60% and ADR from $240 to $228. Room revenue falls to $3,994,560, a $560,640 reduction. If operating costs fall by an assumed 30% of lost room revenue, while the 3% management charge and 4% reserve adjust with revenue and everything else remains unchanged, residual cash becomes approximately negative $129,867.
This arithmetic illustrates operating leverage; the assumed expense response is not a forecast. Rebuild it from the property’s staffing and contracts.
How do you calculate seasonal working capital?
Forecast collections and payments, not just accounting profit. Include guest deposits, refunds, merchant settlement timing, payroll, tax installments, annual insurance payments, capital deposits and debt service.
For each month:
Ending unrestricted cash = opening unrestricted cash + collections − cash operating payments − debt service − capital paid − reserve transfers + permitted reserve releases + new funding − distributions
Set opening liquidity to cover the deepest projected cumulative deficit plus a separately chosen contingency. Keep restricted replacement and lender reserves outside cash available for routine bills unless release is actually permitted.
Simple illustration: cumulative cash movements of negative $60,000, negative $140,000 and negative $210,000 in the first three months require at least $210,000 opening cash before any safety allowance—not merely the average monthly loss.
What cap rate should you use for a boutique hotel?
There is no defensible universal answer for this desk’s whole target market. Investigate relevant transactions and income definitions, then cross-check income-based analysis against comparable sales and cost information. HVS’s valuation guidance distinguishes those approaches and explains the role of projected cash flows. (publications.hvs.com)
Keep three outputs separate:
- Market-value analysis: what relevant market evidence supports.
- Buyer’s bid ceiling: the maximum price consistent with your assumptions, capital limits and investment criteria.
- Formal appraisal: the independently scoped professional conclusion required for its stated purpose.
For a simplified sensitivity only, $1.2 million of consistently defined annual income capitalized at a hypothetical 8% gives $15 million; at 9%, it gives approximately $13.33 million. Neither rate is a recommendation or current market quote.
Use a full cash-flow model where renovation, stabilization or uneven capital spending makes a single stabilized-income calculation misleading. Define the exit income period, sale costs, debt repayment and remaining capital obligations explicitly.
Gate 9: a deal that meets a return hurdle only through an unsupported exit assumption has not passed underwriting.