Net operating income (NOI): what a hotel earns before loans and tax

1. 1Start from gross operating profit: total revenue, less the departments' costs and the costs of running the whole hotel.
2. 2Take off a management company's fee, if one runs the hotel for you.
3. 3Take off the costs of the building that are not loans: rent or lease payments for the land or the building, property tax, and insurance.
4. 4Take off a reserve for replacing furniture, fixtures and equipment, if the buyer, bank or valuer you are working with counts one. HOSPA says the reserve is commonly set as a share of the hotel's revenue.
5. 5Stop there. Loan interest and repayments, depreciation and income tax all come after net operating income.

Hotel accounts laid out the USALI way, the Uniform System of Accounts for the Lodging Industry, run from revenue down in a set order. HOSPA sets the lines out as total revenue; the departments' costs and their profit; the undistributed costs of running the whole hotel; gross operating profit; management fees; non-operating income and expenses, such as rents and insurance; EBITDA; and below it a replacement reserve.

• Gross operating profit: what running the hotel earns, the manager's figure.
• EBITDA: earnings before interest, tax, depreciation and amortisation. HSMAI says multiples of EBITDA are an industry standard for valuing hotels.
• Net operating income: operating income after operating expenses and before income tax and interest, as HSMAI's glossary defines it. For a hotel it lands at EBITDA, or just below it once a replacement reserve comes off.

So when someone asks for your NOI, ask which costs they want taken off. An accountant, a valuer and a bank can each mean a slightly different line, and the reserve is the usual difference.

• Valuing the hotel. Dividing a year's net operating income by a capitalisation rate, the yearly return buyers expect from a property like yours, gives an estimate of what it is worth.
• Borrowing. Lenders set net operating income against the loan's payments to see how comfortably the hotel can make them.
• Comparing properties. Because it leaves out how a hotel is financed and taxed, it compares hotels with different owners.
• Judging a lease or a management contract: what is left for the owner after the operator's fee.

That is why owners planning to sell or borrow look hard at every cost above the line: each rupee of yearly net operating income adds many rupees to what the hotel is worth.

• What the owner takes home. Loan payments and income tax come after it, and they can take most of it.
• What the building will need. Without a reserve for replacements, a year can look healthy while the rooms wear out.
• One good or bad year. Valuers and banks look at several years, and at what is coming, not at one month.
• How the hotel is run day to day. For that, read gross operating profit and GOPPAR, which leave out the owner's costs.

• Everything that raises gross operating profit raises net operating income: prices set for each night, more bookings on your own website, and running costs kept in step with the rooms sold.
• Check the costs of the building once a year: insurance quotes, the property tax assessment and the lease's terms.
• Keep the hotel in repair from the reserve, so it never needs a large one-off spend that a buyer or a bank will count against you.
• Keep clean monthly accounts with every line in the same place each month, so a valuer or a bank reads the figures as you do.