Valuing a hotel: EBITDA multiples, cap rates and key money

A 250-room hotel generating $10 million in EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.View full definition → (earnings before interest, taxes, depreciation and amortization) could be worth $80 million or $150 million depending on which valuation lens you use, and which buyer is asking. That gap is not a rounding error. It is the difference between a private equity fund pricing risk and a brand paying to expand its footprint. Understanding all three lenses is what separates someone who can read a hotel deal from someone who just nods along.

Why hotels get valued three different ways

Hotels are operating businesses wrapped inside real estate. That dual nature is why practitioners triangulate value using at least three methods:

1. EBITDA multiple (an enterprise-value approach, common in corporate and portfolio transactions)
2. Cap rate on NOI (a real estate income approach, common in single-asset property deals)
3. Price-per-key (a comparables approach, used for quick sanity-checks and land/development economics)

Each answers a slightly different question. Multiples ask "what would a buyer of the whole business pay?" Cap rates ask "what yield does this property generate versus other real estate?" Price-per-key asks "how does this compare to what similar hotels sold for, per room?"

Method 1: EBITDA multiple

EBITDA strips out financing structure, taxes, and non-cash charges so you can compare operating performance across hotels with different capital structures. It is the hospitality industry's proxy for cash-generating power.

The EV/EBITDA multiple (enterprise value divided by EBITDA) tells you how many years of current cash flow a buyer is paying for the whole enterprise (equity plus debt, minus cash).

As of 2025 to 2026, single full-service hotel transactions in the US have typically traded in the 8x to 12x EBITDA range, with select luxury or trophy assets going higher, and limited-service or budget hotels often trading lower (roughly 7x to 10x), according to periodic transaction surveys from firms like CBRE Hotels Research and JLL Hotels. These are broad, cyclical estimates, not fixed rules.

Worked example:

• EBITDA = $10 million
• Applied multiple = 8x
• Enterprise value = $10M × 8 = $80 million

If the same hotel is a trophy, branded, luxury asset in a supply-constrained market (think a flagged property on the Amalfi Coast or in Manhattan), a buyer might apply 12x to 15x, pushing value to $120 million to $150 million. Same cash flow, very different price, because the multiple encodes growth expectations, brand strengthbrand strengthThe commercial value your brand adds beyond functional product attributes: the price premium, preference and loyalty it generates.View full definition →, and perceived risk.

Method 2: cap rate on NOI

NOI (net operating income) is EBITDA further adjusted for a reserve for capital expenditures, often called the FF&E reserve (furniture, fixtures and equipment), typically 3% to 5% of revenue. Hotels wear out fast (carpets, mattresses, HVAC), so real estate investors want cash flow net of that reinvestment.

The cap rate (capitalization rate) is NOI divided by property value. Rearranged, it gives you value: NOI ÷ cap rate = value.

Cap rates move inversely to price: a lower cap rate means investors accept a lower yield because they see less risk or more upside (prime London, prime New York). A higher cap rate means investors demand more yield to compensate for risk (secondary markets, older assets, uncertain renovation needs).

As estimates for late 2025, US hotel cap rates have generally sat in the 7% to 9% range for full-service assets, per CBRE and HVS surveys, while prime European gateway-city hotels (London, Paris) have traded tighter, often 5% to 6.5%, reflecting lower perceived risk and strong cross-border capital demand. Secondary European markets run wider.

Worked example:

• EBITDA = $10 million
• FF&E reserve (assume 4% of revenue, or here simplified to $1 million) → NOI = $9 million
• Applied cap rate = 7%
• Value = $9M ÷ 0.07 = ≈ $128.6 million

Notice this is close to the higher end of the EBITDA-multiple range above. That is not a coincidence: cap rates and EBITDA multiples are mathematically related (a 7% cap rate on NOI roughly corresponds to a low-double-digit multiple on EBITDA, once you account for the FF&E deduction). Analysts often cross-check one against the other.

Method 3: Price-per-key

Price-per-key (or price-per-room) divides total transaction value by room count. It is the crudest metric but the fastest for benchmarking.

Worked example:

• Using the $80 million EBITDA-multiple value ÷ 250 rooms = $320,000 per key
• Using the $128.6 million cap-rate value ÷ 250 rooms = ≈ $514,000 per key

As rough 2025 estimates, US full-service hotel transactions have often landed in the $150,000 to $400,000 per key range depending on market and brand tier, with luxury urban assets well above that, sometimes exceeding $1 million per key in markets like Manhattan or Miami Beach. European luxury gateway-city hotels frequently exceed €500,000 to €1 million per key. These figures are broad estimates and vary enormously by asset condition and location; treat any single number skeptically without knowing the comp set.

Price-per-key is most useful for a quick gut check: "is this deal wildly out of line with recent comparable sales?" It should never be the sole basis for a valuation.

Why brands pay key money

Here is where hotel valuation gets sector-specific. Major hotel companies (Marriott, Hilton, Accor, Hyatt, IHG) increasingly run asset-light models: they do not own most hotels, they manage or franchise them under long-term contracts, earning fees rather than owning real estate risk.

To win a coveted management or franchise contract, especially for a flagship or strategically important property, a brand will sometimes pay the owner an upfront cash incentive called key money. Think of it as a signing bonus that lowers the owner's effective net investment and locks the property into that brand's system, typically for 15 to 30 years.

Why would a brand pay to sign a contract instead of getting paid? Because a signed hotel generates a stream of management fees (commonly a base fee of 2% to 4% of total revenue, plus an incentive fee tied to profit, roughly 8% to 12% of NOI in many contracts) or franchise fees (royalty typically 4% to 6% of room revenue plus contribution to marketing/loyalty funds). Over a 20-year contract term, the present value of that fee stream can dwarf the key money paid upfront.

Simplified logic:

• Hotel revenue = $40 million/year
• Base management fee at 3% = $1.2 million/year
• Over 20 years, even before incentive fees or growth, that is $24 million in base fees alone (undiscounted)
• Paying $3 million to $5 million in key money to secure that contract looks cheap in comparison

Key money is most common in Europe and the Middle East for luxury urban and resort properties, and in the US for major gateway-city flagships, where brand competition for trophy addresses is intense. It is a real cash outflow for the brand and shows up on their balance sheet as an intangible asset amortized over the contract life.

🎬 [VIDEO: "How Hotels Make Money: Franchise vs Management Contracts" - youtube.com - search for recent hospitality-finance explainer channels covering brand fee structures and asset-light models, useful for seeing fee mechanics animated]

Putting it together

A real appraisal (often required for financing, per lender guidelines referencing the Appraisal Institute's standards in the US) will run all three methods and reconcile them, adjusting for renovation needs, brand strength, market cycle, and financing availability. Divergence between methods is a signal to dig deeper, not a flaw in the math.

Key Takeaways

• EBITDA multiples (roughly 7x to 12x+ for US and European full-service hotels, as of 2025 to 2026 estimates) value the whole operating business; higher multiples reflect brand strength, growth, and low perceived risk.
• Cap rates (roughly 5% to 9% depending on market tier and geography, as estimates) value hotels as income-producing real estate using NOI (EBITDA minus FF&E reserve); lower cap rates mean higher prices for the same income.
• Price-per-key is a fast comparability check, not a standalone valuation; ranges vary enormously by market and brand tier.
• Key money is an upfront payment brands make to secure long-term management or franchise contracts, rational because the present value of decades of fee income (base, incentive, or royalty fees) typically exceeds the upfront cost.
• Always triangulate: when the three methods disagree sharply, the gap usually points to a specific risk or growth assumption worth investigating before trusting any single number.