AAHOA is the Asian American Hotel Owners Association. With more than 17,000 members, it is the largest hotel owners association in the world. The membership is largely made up of investors from Indian descent, but its platform and resources are of value to all hotel owners and service providers.
ADR – or average daily rate – is the total revenue divided by the number of occupied room nights. Detailed financial statements will show ADR for each revenue segment to further describe strength of each category.
AHLA is the American Hotel & Lodging Association. It is the premier lodging advocacy group in the United States. AHLA represents a variety of members, including private and institutional hotel owners, as well as industry partners that service hotel owners.
Airport is used to define hotels located near an airport, where most of the demand is associated with that airport. This demand primarily comes from airline crew lodging, passengers in waiting, and stranded passengers. Bigger hotels near major airline hub airports will also host training and conference groups.
- Association / Convention
- Balance Sheet Loan
Balance sheet loans are originated expressly to be kept on the lender’s balance sheet rather than sold to an investor.
BAR – or best available rate – is the lowest unrestricted nightly rate sold in the hotel. This is one of the main rate codes in the retail segment.
- Binary Risk
Binary risk is the potential that the return on your investment is some modeled financial payoff or nothing at all. New development is the most common CRE investment with high binary risk, as an unfinished building cannot be occupied. Therefore, it cannot generate cash flow and realize its full potential.
- Bridge Loan
A bridge loan is a temporary, short-term loan used by investors to complete a stated objective. A permanent loan takes the place of bridge financing upon completion. Bridge loans are employed in a time frame from a few weeks (e.g. in the case of a time-constrained closing) to a few years (e.g. in the case of a deep renovation).
- Budget Bridge
Budget bridge is a financial analysis tool that shows the difference between one budget and another. The bridge refers to a graphical representation that shows incremental changes from the base budget to the modified budget. In this case, the base and modified values are on opposite ends of the chart, and the area between shows material line item changes. A three-column table with side-by-side budgets and a variance column is the most effective non-graphical representation.
- Cap Rate
Cap Rate – or capitalization rate – is net operating income divided by purchase price. This is an objective measure of investment return that doesn’t get clouded by execution differences among investors.
- Capital Stack
Capital Stack is an intuitive representation of all the funding that goes into a deal. Sponsor equity is in the most at-risk position at the top of the stack, while the senior loan is at the bottom in the safest position. Investors will often want to know “how high in the capital stack” they are to judge relative risk.
- Chain Scale
Chain Scales slot brands into a peer group based on global average daily rates. This categorization is produced by STR annually. They are: Luxury, Upper Upscale, Upscale, Upper Midscale, Midscale, and Economy.
2018 Chain Scales: https://www.strglobal.com/Media/Default/Documents/STR-ChainScales2018.xlsx
Citywide refers to events that require more room nights than a single hotel can accommodate on its own. These events may be a single day, as with a major sporting event, or multiple days, as with a convention. Event planners engage hotels in the market to promote their property in exchange for a guaranteed room block.
CMBS – or commercial mortgage-backed security – is a structured finance product, like a bond, secured by a pool of mortgages on commercial property. Lenders originate the loan with the express intent to package them with other loans for an optimal risk and return profile. The bank sells securities for different risk and return tranches to institutional investors.
- Common Equity
Common equity is the most subordinate tranche in the capital stack. It consists of all common shareholders, including the sponsor and any joint venture or limited partners. Common equity has the lowest priority rights to cash flows and least secured position in the capital stack. However, these shareholders have full control of all major and minor decisions in the investment.
- Community Bank
A community bank is a commercial bank that operates within the municipality and/or state where it is located. These financial institutions are independent and not affiliated with national bank holding companies.
Contract is a segment of hotel guests that are booked as part of a pre-negotiated room contract. Airline crew is a common contract for hotels located near airports. This is one of three segments in the USALI room revenue category.
Core is the least risky of the four CRE investment risk categories. These investments have stable cash flow and little to no deferred maintenance. Core investments are similar to investing in a secured corporate bond. Very few hotels could be considered core investments.
- Core Plus
Core Plus is a low risk investment type of the four CRE investment risk categories. Operations are stable, and the physical asset is in good condition. There is potential upside in slight improvements to either aspect. Most REIT-quality hotels are core plus investments.
Corporate is a rate category in the group segment. Corporate groups are bookings of more than 10 room nights corporate guests. These bookings have a longer lead time and more restrictions, but they come at a negotiated discount to BAR.
- CRE Investment Risk
CRE Investment Risk – Commercial real estate investments are slotted into one of four categories depending on the riskiness of the business plan. As with any investment, returns are expected to be greatest from the riskiest investment. From least risky to most, these are:
Crowdfunding is a modern form of real estate syndication that relies on digital marketing and other technology to expand distribution. This technique leverages new rules enabled by the JOBS Act of 2012, which allow for general solicitation of investments for a deal.
- Customer Acquisition Cost
CAC – or customer acquisition cost – is the aggregated sum of all expenses to put heads in beds. This includes travel agent commissions, promotions, e-commerce, loyalty programs, and so on. Every dollar saved in customer acquisition falls straight to the bottom line.
- Debt Service
- Debt Yield
Debt yield is the net operating income divided by the loan amount. This is a common tool for lenders to determine the size of the loan and test for solvency. The debt yield gives an indication about the return on capital if the borrower defaults.
Discount is a rate category in the transient segment. Promotional criteria, like prepaid, non-refundable, or limited offer, restrict the guest flexibility in this segment.
- Double Loaded
Double loaded describes a hotel building with two rows of rooms in the building. Interior corridor buildings have rooms on the outside of the building and a hallway in between. Exterior corridor building have rooms backing up to each other and walkways on the outside.
- Double Occupancy
Double occupancy rooms have two beds of most standard sizes but rarely two king beds.
DSCR – or debt service coverage ratio – is net operating income divided by total debt service for a particular period. This metric measures the surplus (>1) or deficit (<1) in a property’s ability to repay periodic debt service. This is a common credit metric used in sizing and approving a loan.
- Due Diligence
Due diligence is the careful examination of all information available on a property prior to purchase. Due diligence is performed at any time before or after you are under contract to purchase the property. However, the most intensive examination usually occurs during the due diligence or inspection period while you are under contract to purchase a property.
EBITDA – or earnings before taxes, depreciation, and amortization – is a profitability metric that measures overall performance after subtracting fixed expenses from gross operating profit.
- Extended Stay
Extended stay describes hotels with room accommodations and amenities designed like an apartment for long occupancy periods. These often include large rooms with kitchenettes, limited food and beverage, fitness center, business center, and sundries shop. They can be anywhere on the chain scale, but extended stay hotels are usually economy, midscale, upper midscale, and upscale brands or independent equivalents.
- Exterior Corridor
Exterior corridor hotels provide access to rooms from outside the building. All hotel room doors are located via an outdoor walkway. Most rooms are designed with a window at the entrance and a bathroom at the opposite end of the room.
- Fam Trip
Fam Trip – or familiarization trip – is travel and lodging organized to promote a hotel or destination. These trips target any organization in the business of buying large hotel room blocks or representing buyers thereof. Organizers may include a hotel, brand, tourism board, or airline.
- Family Office
A family office is a financial advisory firm that manages investments for a wealthy individual and/or her family. A single family office serves one family, while a multi-family office manages wealth for more than one family. All family offices are different in their investment approach and services offered to the members of the family, which may include concierge-like services.
FF&E is an abbreviation for furniture, fixtures, and equipment that is not permanently affixed to the structure. Room FF&E packages consist of the bed set, nightstands, tables, sofas/chairs, and technology assets. Public space FF&E includes, among other things, gym equipment, computer systems, and banquet furniture.
FIT – or free and independent traveler – is a single traveler, couple, or family that purchase hotel nights from a travel agent but outside of a group package.
- Fixed Rate
Fixed rate describes a loan whose interest rate does not fluctuate with changes in the market.
- Floating Rate
Floating rate describes a loan that does not have a fixed interest rate. The rate adjusts periodically based on the spread on a defined interest rate index.
- Full Service
Full service describes hotels with a variety of on-property amenities. These often include a signature restaurant, bar, function space, spa, fitness center, business center, and sundries shop. They can be anywhere on the chain scale, but full service hotels are usually upscale, upper upscale, and luxury scale brands or independent equivalents.
GDS – or global distribution system – is a large network of travel-related businesses that contains inventory and rates for their products. GDS products include hotel room nights, airline seats, and car rentals, among others. Online and traditional travel agents use the GDS to create travel packages for their customers.
GOP – or gross operating profit – is a profitability metric that measures operating performance. It is calculated by subtracting Departmental Profit from Undistributed Expenses. GOP is helpful in determining operating efficiency before non-controllable fixed expenses.
GOPPAR – or gross operating profit per available room – is an emerging key performance indicator that shows profit that each room is generating before fixed expenses. Operators have enhanced control over all aspects of profitability above the GOP line, particularly customer acquisition cost. Owners are using this metric to build alignment in operating agreements.
Government is a rate category in the group segment. Government groups are bookings of more than 10 room nights with government guests. These bookings have a longer lead time, but they pay the prevailing government rate.
Group is a segment of hotel guests that book as part of an arranged group, which may be associated with banquet space rental and food & beverage packages. This is one of three segments in the USALI room revenue category.
GSA – or General Services Administration – is a federal government agency that supports basic functions of other government federal government departments. The GSA sets local per diem hotel rates for government travel annually based on a survey of competitive retail rates.
- Hard Costs
Hard costs in a new development project refers to the materials, labor, and general contractor costs associated with construction of the building. This includes general contractor overhead and profit as well as insurance and bonding.
Highway is used to define hotels located on or near a highway interchange. Highway hotels derive much of their demand from road warriors, budget conscious travelers, and a variety of business and leisure attractions in the area.
- Interest Rate Index
- Interior Corridor
Interior corridor hotels provide access to rooms from within the building. All hotel room doors are located within an interior hallway. Most rooms are designed with the bathroom at the entrance and a window at the opposite end of the room.
IRR – or internal rate of return – is a discounted cash flow approach to estimate the annual compounded return on equity including capital events. The figure represents the discount rate required for the net present value of all cash flows to equal zero.
- Joint Venture
A joint venture is a partnership involving two or more investors, where each investor retains negotiated rights over major asset management decisions. This is distinct from a syndication in that neither party in a joint venture is a purely passive investor.
LIBOR – or London Interbank Offered Rate – is the index interest rate on many floating rate loans. It is the average of interest rates estimated by the biggest banks in London. The Alternative Reference Rate Committee (ARRC) is working on a replacement for LIBOR in the United States.
- Limited Partner
Limited partners are passive investors in a real estate syndication. They have no control over major decisions related to asset management. However, material changes to the nature of the investment originally presented may require majority vote of the common shareholders. All private placements are different, and you should seek advice on shareholder rights from a qualified legal practitioner.
- Limited Service
Limited service describes hotels with basic room accommodations and minimal amenities on-property. Amenities often include complimentary breakfast, a fitness center, and business center. They can be anywhere on the chain scale, but limited service hotels are usually economy scale, midscale, and upper midscale brands or independent equivalents.
LTC – or loan-to-cost – is the ratio of the mortgage amount divided by the total cost of a deal expressed as a percentage. This is a common credit metric used in sizing and approving a loan on value-add and opportunistic deals.
LTV – or loan-to-value – is the ratio of the mortgage amount divided by the value of the appraised value of a property expressed as a percentage. This is a common credit metric used in sizing and approving a loan on core and core plus deals.
- Marketplace Loan
Marketplace loans are originated expressly to be sold to an investor, like a CMBS trust, rather than being kept on the lender’s balance sheet.
- Mezzanine Debt
Mezzanine debt is the note that is subordinate to any senior debt but senior to common equity. Typically, mezzanine lenders operate under an interagency agreement with the senior noteholder to clarify rights and responsibilities upon default.
MOE – or multiple on equity – is the sum of cash flows divided by equity invested. This is an elegant way to represent the absolute total proceeds from your investment.
Negotiated is a rate category in the transient segment. Companies and other frequent guests may negotiate a rate discount based on volume and stay patterns. On-property sales managers negotiate this discount with local organizations, or brand-affiliation passes through national and global contracts.
NOI – or net operating income – is a profitability metric that measures overall performance after subtracting fixed expenses and capital reserves from gross operating profit. USALI operating statements refer to NOI as EBITDA Less Replacement Reserve.
Non-opaque is a rate category in the transient segment. Non-opaque booking channels, like Expedia, advertise specific hotel rooms and allow guests to compare pricing and hotel offers prior to booking.
- Occupancy Rate
Occupancy rate is the occupied room nights divided by available room nights for a given period represented as a percentage. Occupancy rates for the industry have fluctuated between 59-66% since 2000. Strong markets tend to have occupancy in the high-70s percent.
Opaque is a rate category in the transient segment. Opaque booking channels, like Priceline or Hotwire, sell hotel rooms prior to revealing the identity of the hotel. Guests may narrow their booking preferences with respect to location, quality, and price, but they do not know the specific hotel until after the transaction is complete. These rates are, generally, non-refundable.
OS&E is an abbreviation for operating supplies and equipment. These are the smaller and often less durable items that are required for daily operation of the hotel. Some examples include vacuums, uniforms, guest supplies, bathroom accessories, china, silverware, and glassware.
OTA – or online travel agent – is one of many distribution channels for inventory of unsold room nights. This channel is divided into non-opaque and opaque OTAs, which means the buyer can or cannot, respectively, see the hotel before buying. Expedia is a non-opaque OTA, while Priceline is an opaque OTA.
P&L – or profit & loss – describes a hotel financial statement that periodically summarizes operating revenues and expenses. It may also be referred to as the income statement.
- Permanent Loan
A permanent loan is long-term financing used to replace a bridge loan usually upon completion of a deep renovation or new construction project. A variety of lenders provide these loans, and they are usually associated with long amortization and lockout periods.
- Preferred Equity
Preferred equity is senior to common equity but subordinate to any debt. Preferred equity is usually structured with a fixed dividend, which gets paid after debt and before any common equity distributions.
- Private Equity
Private equity is used to describe a fund manager that sponsors and asset manages a fund raised for a defined investment strategy. Common use of the term often refers to equity investors, but private equity debt funds have become a big part of the lending universe. Most private equity funds partner with (in a joint venture) or hire a third-party hotel operator to purchase a hotel.
Qualified is a rate category in the transient segment. These guests receive discounts based on group membership, like AAA or AARP. This segment may also include government business.
- Rate Parity
Rate parity is the practice of maintaining the same room rate across all distribution channels. Hotel agreements with online travel agents (OTAs) and country-specific antitrust laws usually preclude the hotel from offering a lower rate at their website. Hotels may offer value-added promotions, like free wi-fi, reduced ancillary fees, or complimentary food & beverage, to encourage direct booking.
Resort describes hotels with a variety of on-property amenities designed to appeal to primarily leisure guests. These often include multiple food and beverage outlets, function space, spa, fitness center, business center, and gift shop. They can be anywhere on the chain scale, but resort hotels are usually upscale, upper upscale, and luxury scale brands or independent equivalents.
Retail is a rate category in the transient segment. This is also known as best available rate (BAR). Retail customers book directly with the hotel via telephone, hotel website, or walk-in. Retail business has the lowest direct cost of customer acquisition.
- Revenue Management
Revenue management is a discipline of using guest and market data to manage distribution channels. Revenue managers work with advanced analysis tools to predict future guest demand and open and close different booking windows and channels accordingly.
RevPAR – or revenue per available room – is the standard key performance indicator for measuring hotel revenue. Pay attention to total RevPAR (TREVPAR), too. These measure the average nightly income that each room is generating. You can get revenue by multiplying RevPAR by the total number of days open.
- Room Night
Room night is the standard measurement for the hotel’s rentable inventory. Each room night equals a single room for a single night. Available room nights equal total room nights that a hotel can rent in a given period. Occupied room nights equal the number of room nights that are filled by paying or non-paying guests.
Segmentation refers to the source mix of guest bookings. Each business segment has different booking behavior and price sensitivity. Dividing the business helps revenue management, sales, and marketing coordinate efforts to maximize net revenue.
- Select Service
Select service describes hotels with basic room accommodations and minimal amenities on-property. Amenities often include a small food and beverage outlet, limited meeting space, fitness center, business center, and sundries shop. They can be anywhere on the chain scale, but select service hotels are usually midscale, upper midscale, and upscale brands or independent equivalents.
- Senior Debt
Senior debt is the note in the first lien position to benefit from any liquidation in the event of default. This is usually the most secure piece of the capital stack, and it usually comes with priority payment from operating cash flows.
- Service Level
The service level of a hotel defines the room configuration and amenities available to guests on-property. There is considerable overlap between the different service levels, but the major service levels for a hotel are:
- Single Loaded
Single loaded describes a hotel building with rooms on one side and a corridor on the other.
- Single Occupancy
Single occupancy rooms have one bed of any standard size – king, queen, full/double, or twin.
SMERF is a rate category in the group segment. SMERF – or social, military, education, religious, and fraternal – groups are bookings of more than 10 room nights with non-business-related organizations. Guests in this category tend to be budget conscious and usually pay for their own stay. However, a meeting planner (usually a volunteer in the group) coordinates a room block on behalf of the group.
- Soft Costs
Soft costs in a new development project refers to all costs not directly related to constructing the building. Some examples include planning and entitlement costs, project management, carrying costs, and pre-opening expenses. FF&E and OS&E may be included in the soft costs, but these costs are usually shown separately in a high-level summary.
- Sovereign Wealth Fund
A sovereign wealth fund (SWF) is an investment fund owned by a government and funded by reserves from a state’s surplus government funds. A SWF invests in direct real estate, stocks, bonds, and alternative investments, like private equity.
An investment sponsor is the leader of a CRE investment. The sponsor is responsible for directing asset management, which may include renovations, operations, and any contractual obligations. Sponsors typically invest a small amount of equity alongside a joint venture partner or limited partners. The sponsor is incentivized to seek outsized gains with a promoted equity position for good performance.
- STAR Report
The STAR – Smith Travel Accommodation Reports – is a monthly report that includes weighted average data from a management-selected set of competitive hotels. Initiated in 1988, these reports aggregate occupancy and revenue data from more than 60,000 hotels around the world.
STR – or Smith Travel Research – is a company based in Tennessee that produces a variety of market intelligence reports for the lodging industry. It is best known for it’s STAR Report, which tracks how a property is doing against its competitive set.
Suburban is used to define hotels located outside major metropolitan areas. Suburban hotels typically rely on one or two major demand drivers in the immediate submarket. These hotels also skim off spillover demand from nearby urban centers.
A real estate syndication is a structure where multiple investors pool funds to invest in a project that is larger than any one investor would pursue on her own. Syndications are led by a sponsor and most of the equity is funded by a pool of limited partners.
Temp-to-Perm describes a bridge loan that comes with a stated conversion option upon completion of the business plan objectives. This is common for new construction projects, where the bridge loan is with a private equity debt fund or on the bank’s balance sheet. In this case, the permanent loan may be securitized in a CMBS or sold to another investor.
- Tour Group / Wholesale
Tour Group / Wholesale is a rate category in the group segment. Wholesalers buy rooms to be resold to travel agents and other travel trades. The defining characteristic is that wholesale rooms are a B2B trade, and guests don’t buy directly from wholesalers. Wholesale in the group segment refers to guests that purchase hotel room nights as part of a tour package with other unrelated travelers.
Transient is a segment of hotel guests that book independently through a variety of distribution channels, including direct, OTA, government, and corporate. This is one of three segments in the USALI room revenue category.
Underwriting is the process of evaluating an opportunity for financial returns, risks, challenges, and attributes. The financial model is the most visible artifact from the underwriting process, but many other factors go into underwriting a deal.
Urban is used to define hotels located in dense metropolitan areas. Urban hotels typically have a variety of demand drivers, including business, leisure, tour and travel, convention, and government.
USALI – or the Uniform System of Accounts for the Lodging Industry – is the accounting standard for classifying income and expenses in a hotel operating statement. The USALI standard financial statement has one major category for revenue and three categories for expenses – departmental, undistributed, and fixed. The 11th Edition was released in Spring 2014.
- Value Add
Value add is a moderate- to high-risk investment of the four CRE investment risk categories. One or many aspects of the deal is unstable, including operations, capitalization, physical condition, or legal status. Upside is found in improvement and stabilization of the asset.
Wholesale is a rate category in the transient segment. Wholesalers buy rooms to be resold to travel agents and other travel trades. The defining characteristic is that wholesale rooms are a B2B trade, and guests don’t buy directly from wholesalers. Wholesale in the transient segment refers to free and independent travelers (FITs) that buy from the B2C endpoint.
- Yield Management
Yield management is the practice of maximizing the profitability of each room night in available inventory. This could result from increasing revenue, but it most commonly refers to improving operational efficiencies to bring more revenue to the bottom line.