Understanding Hotel Lingo: From ADR to Z Hotel
By Tara K. Gorman Partner, Perkins Coie LLP | November 25, 2012
Parlez vous hotel? Sprechen sie hotel? Habla hotel? Do you speak hotel? When you travel to a foreign land it's important to learn the key phrases that will help you transcend the barriers created by different cultures and languages and allow you to communicate with the locals more efficiently and effectively. Similarly, industries have their own jargon and key phrases. This article defines a few of the essential terms commonly used in the hospitality industry, from ADR to Z Hotel.
ADR: The Average Daily Rate, or ADR, is a fraction calculated by dividing the revenue generated from income from hotel rooms sold by the total number of rooms sold. For example, if the hotel sold 250 rooms and the hotel generated revenue from room sales in the amount of $200,000, the ADR would be $800. ($200,000 / 250 = $800).
AGOP: The Adjusted Gross Operating Profit, or AGOP, is equal to gross operating profit minus the hotel management Base Fee.
APR: APR stands for "Average Published Rate." The APR differs from ADR in that it is the rate obtained by taking the averages on all the types of hotel rooms throughout the year, for example, the average of all the single rooms, double rooms, suites, penthouses, over the course of the year – high, season, low season, etc. As you are no doubt aware, the pricing of a hotel room varies not only by size and location (i.e., the better the view the higher the rate) but also by the popularity of the location in any given season of the year or for special occasions. For example, during the presidential inauguration, rooms in Washington, D.C., are far more expensive than during the dog days of August. In fact, many hotels require a seven-day minimum during the inauguration. The APR takes all these rates into account when determining a single average rate for the hotel.
Base Fee: This is the agreed upon hotel management fee earned by the hotel operator. Typically, the base management fees are between two and four percent of the monthly gross revenues of the hotel. The base management fee is due monthly and considered an operating expense of the property.
Incentive Fee: An incentive management fee is provided to the manager for the incremental profitability of the hotel due to the manager's operational expertise. The incentive fee is due monthly, quarterly or annually, subject to a true-up at the end of the fiscal year. It can be structured in a variety of ways and is often complex as it is heavily negotiated in order to meet the specific requirements of both the owner and manager.