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When a broker sends over an offering memorandum for a hotel, the numbers on the summary page almost always look great. You see strong trailing revenue, a healthy net operating income, and an asking price that seems reasonable on a cap rate basis.

Then you start digging into the actual financials, and a very different picture comes out.

When we look at potential acquisitions for our own portfolio or help an owner evaluate a deal, we spend just as much time looking for what is missing from the P&L as we do looking at what is included. Don’t be fooled by the apparent margin on a broker’s proforma. Here is how we run the numbers to see if a hotel deal actually makes sense.

This is the first thing we check on smaller select-service or independent hotels. Sometimes a property shows a great profit margin, but when you look closely at the payroll lines, there is no General Manager salary, no maintenance tech, or suspiciously low front desk wages.

Why? Because the current owner and their family are working 70 hours a week running the desk, doing the laundry, and fixing the toilets without paying themselves a market wage.

There is nothing wrong with an owner-operator running a hotel that way, but if you are an investor hiring a management team, it will cost you a big chunk of that “profit” just to replace the unpaid labor the previous owner was providing. Once you plug in a real GM salary, normal staffing levels, and a management fee, a 50% GOP margin can turn into 35% overnight.

A seller’s asking price might look like a solid 8.5% or 9% cap rate on trailing cash flow. That is great on paper, until you talk to the brand and price out the Property Improvement Plan (PIP) required to transfer the franchise license.

Construction, furniture, and contractor costs have not gotten any cheaper over the last few years. We look at deals all the time where the purchase price is $150,000 per key, which sounds reasonable. Then we price out the brand-mandated renovation and closing costs, and the all-in basis jumps past $200,000 per key.

At Crown, we have built many new hotels from the ground up, including our new Home2 Suites in Sneads Ferry and TownePlace Suites in Hickory. Because we know what it costs to build a brand-new hotel today, we have a hard baseline. If buying a 15-year-old hotel and completing the PIP is going to cost us more per key than building a brand-new hotel with zero deferred maintenance, then the property needs to be performing at a high enough level to justify the premium.

A trailing P&L shows what the current owner paid for property taxes and insurance last year. It does not show what you are going to pay next year.

In many counties, a sale triggers a property tax reassessment toward the purchase price. And if you own hotels anywhere near the coast in North Carolina or South Carolina, you already know what has happened to property, wind, and flood insurance rates. We never use the seller’s historical tax and insurance numbers in our underwriting. We get real quotes from our insurance brokers and calculate the tax bill based on the new basis.

If a hotel’s Repairs & Maintenance (R&M) line is unusually low for two years straight, that is rarely a sign of a well-run building. Usually, it means the owner knew they were going to sell and stopped fixing things.

When we walk a property, we look at the roof, the PTAC units, the commercial washers and dryers, the pool equipment, and the parking lot. Saving $30,000 on the R&M line over the last year helps the seller’s P&L look cleaner, but you are the one who will end up writing a $100,000 check for new equipment six months after closing.

Underwriting a hotel isn’t about making the spreadsheet work so you can win a bidding war. It is about knowing your real all-in basis and what the property will produce once it is properly staffed, renovated, and insured. We are long-term holders and operators, which means we would rather pass on ten overpriced deals than talk ourselves into one bad deal.