Start with total revenue, not just room revenue
Hotel revenue includes room revenue, food and beverage, and other operated departments (parking, spa, meeting/event space, retail). Lenders want a departmental breakdown (a 'USALI'-style statement, following the Uniform System of Accounts for the Lodging Industry) rather than a single top-line number, since different revenue streams carry different margin and risk profiles.
Deduct departmental operating expenses
Each revenue department carries its own direct costs — housekeeping and front desk labour against room revenue, food/beverage cost of goods and labour against F&B revenue — which nets down to departmental profit before undistributed expenses.
Deduct undistributed operating expenses
These are property-wide costs not tied to a single department:
- Administrative and general expenses
- Sales and marketing
- Property operations and maintenance
- Utilities
- Franchise/royalty and reservation fees
Deduct fixed charges and the FF&E reserve
After undistributed expenses, deduct property taxes, insurance, and a management fee (imputed at market rate even for owner-operated properties), followed by the FF&E reserve — typically 3%-5% of total revenue — to arrive at NOI. This reserve deduction is standard hospitality underwriting practice and one of the biggest differences from a typical commercial property NOI calculation.
What's excluded from NOI
Debt service, income taxes, depreciation and amortization, and any owner-specific discretionary expenses are excluded from NOI, since these vary by ownership structure and financing rather than reflecting the property's underlying operating performance.
Worked example
A 100-room hotel with $6,500,000 total revenue, $3,900,000 departmental expenses (60% of revenue), and $1,600,000 undistributed operating expenses leaves $1,000,000 of gross operating profit. Deducting $250,000 property tax and insurance, a $260,000 imputed management fee (4%), and a $260,000 FF&E reserve (4%) leaves NOI of roughly $230,000 — a useful illustration of how quickly reserves and fees compress the figure lenders actually underwrite against.
Frequently asked questions
- Why is hotel NOI calculated differently from other commercial real estate?
- Because a hotel is an operating business with departmental revenue and expenses, franchise fees, and an FF&E reserve requirement that don't exist in a typical single-tenant or multi-tenant commercial property NOI calculation.
- Should I include an imputed management fee even if I self-manage my hotel?
- Yes — lenders will impute a market-rate management fee (commonly 3%-5% of revenue) regardless of whether you self-manage, to normalize the property's NOI in case ownership or management changes.
- How much should I reserve for FF&E?
- Industry standard is 3%-5% of total revenue, and lenders will deduct this from NOI even if your actual reserve funding is lower, so funding it properly benefits both your operations and your financing outcomes.
Talk to a Toronto hotel financing specialist
We arrange hotel, motel and resort debt across Toronto, the GTA and Ontario — acquisitions, refinancing, construction and PIP capital, and short-term bridge loans — through banks, credit unions, secondary institutional and private lenders.