Room Revenue

Definition of Room Revenue

In the context of hospitality-based commercial mortgages, Room Revenue is defined as the total income generated exclusively from the rental of guest rooms or suites within a lodging property. This figure represents the "top-line" earnings derived from the property’s core business—providing overnight accommodations—before any operating expenses, taxes, or additional service fees are deducted.

For lenders and underwriters, room revenue is the most critical component of a hotel’s Total Operating Revenue. Because it is the primary driver of cash flow, it serves as the foundational metric used to determine a property’s ability to service its debt and maintain its valuation.

Detailed Description and Importance in Commercial Mortgages

When evaluating a commercial mortgage application for a hotel, resort, or motel, lenders focus heavily on room revenue to assess risk and loan viability. Unlike other commercial assets with fixed long-term leases, hotel revenue fluctuates daily, making the analysis of room revenue patterns essential for the following reasons:

• Debt Service Coverage Ratio (DSCR): Lenders calculate the DSCR by comparing the Net Operating Income (NOI)—which is heavily dependent on room revenue—to the annual mortgage payments. A higher room revenue typically leads to a stronger DSCR, indicating a lower risk of default.
• Loan-to-Value (LTV) Calculation: The market value of a hospitality property is often determined using the Income Approach. By analyzing historical and projected room revenue, appraisers can establish a stabilized income stream to determine the property's worth and the maximum allowable loan amount.
• Market Positioning: Room revenue trends help lenders understand how a property competes within its "Comp Set" (comparable local hotels). Consistent growth in room revenue suggests a well-managed asset with a strong competitive advantage.

Key Metrics Influencing Room Revenue

To accurately assess room revenue, commercial mortgage professionals look at three primary performance indicators:

• Average Daily Rate (ADR): The average rental income per paid occupied room per day. It is calculated by dividing total room revenue by the number of rooms sold.
• Occupancy Rate: The percentage of available rooms that are occupied during a specific period. This helps lenders understand the demand for the property.
• Revenue Per Available Room (RevPAR): Considered the most vital metric in hotel lending, RevPAR is calculated by multiplying the ADR by the Occupancy Rate. It provides a comprehensive snapshot of a property’s ability to fill rooms at a profitable price point.

Exclusions from Room Revenue

It is important to note that room revenue only includes the price paid for the room itself. In a commercial mortgage analysis, lenders carefully separate room revenue from other income streams, such as:

• Food and Beverage (F&B): Income from restaurants, bars, and room service.
• Ancillary Services: Revenue from parking, spa treatments, laundry services, and gift shops.
• Meeting and Event Space: Fees generated from renting out ballrooms or conference rooms.

While these "other income" sources contribute to the total revenue, Room Revenue remains the primary metric for underwriting because it typically carries much higher profit margins than F&B or ancillary services, making it the most reliable source for mortgage repayment.