Every boutique hotel deal we underwrite begins the same way. A broker sends over an offering memorandum. We read it carefully. Then we throw out the NOI projection and start over.
That’s not cynicism. It’s discipline, and the data backs it up.
Across the deals we’ve reviewed in building Fund I, broker-stated NOI has consistently overstated our reconstructed NOI by meaningful margins. The gaps aren’t random errors. They follow predictable patterns: management fees excluded from expense lines, F&B losses buried in ownership entity pass-throughs, deferred maintenance ignored in CapEx modeling, and occupancy projections anchored to a single anomalous recovery year. The result is a pro forma that flatters the asset, compresses the going-in cap rate, and transfers risk to the buyer.
We call this the OM Variance Score: the gap, in dollars and percentage terms, between what the broker says the property earns and what it actually earns under a reconstructed operating statement. It’s the first number we calculate on every deal. It’s also one of the most useful.
Why brokers project the way they do
Brokers are not adversaries. They represent sellers, and their job is to present an asset in its best light within the bounds of what’s defensible. The structural incentive is to anchor valuation as high as possible. Pro forma NOI is the easiest lever. It determines the cap rate at the ask price, and the cap rate determines whether the deal looks reasonable or absurd on a first read.
The problem isn’t malice. It’s that the methodology is optimistic by design. Occupancy assumptions reflect the property’s best recent performance. Revenue projections assume rate improvement without modeling the operational investment required to achieve it. Expense assumptions are either flat or modestly growing, never acknowledging that a neglected property likely has deferred maintenance, underinvested systems, and staffing gaps that cost real money to fix.
What reconstruction looks like in practice
When we receive an OM on a boutique hotel, we rebuild the P&L from scratch using three sources: the actual trailing financials (12 and 24 months where available), STR market data for the submarket, and our own operational benchmarks for a self-managed independent property at the relevant key count.
We normalize for one-time items. We add back management fees if the seller was self-operating. We model F&B as a standalone unit, not as a consolidated line item that masks losses. We apply our actual debt cost at current market rates, not the seller’s existing financing. And we apply a California Prop 13 reassessment explicitly on any West Coast asset, because the property tax step-up on acquisition is automatic and non-discretionary. It belongs in Year 1 expenses every time.
The gap between that reconstructed NOI and the broker’s number is the OM Variance Score. A high variance doesn’t automatically kill a deal. It does tell us where the risk is concentrated, and it anchors our offer.
Why variance is an LP narrative asset, not just a risk metric
Here’s the counterintuitive part: a high OM Variance Score, properly managed, is actually attractive from a fund perspective. If a property is priced off an inflated NOI, and we can acquire it at a price that reflects reality, we’re buying operational upside that the market has misread as baseline performance.
The broker pro forma said the hotel earns $1.2M in NOI. We reconstruct it at $340K on a trailing basis. That’s not a reason to walk. That’s the thesis. The gap between $340K and a stabilized $900K under Beco management is where the return lives. The question is whether the operational path to close that gap is credible, executable, and priced correctly.
That analysis, not the broker number, is what we present to LPs.
What this means for investors
When you invest in a boutique hotel fund that does its own operational underwriting, you’re not just getting deal selection. You’re getting a systematic process for converting market mispricing into documented return potential. The OM Variance Score is one of the ways we make that process transparent and auditable, for ourselves and for the people whose capital we’re deploying.
We built the Beco Collective Intelligence Platform specifically to operationalize this. Every deal that enters our pipeline gets a full NOI reconstruction before any internal discussion of price or structure. The broker number never touches our model.
That’s the standard we hold ourselves to. We think it should be the standard for the asset class.
PivotPt Capital is a boutique hotel acquisition fund targeting independent properties with operational upside. Fund I is currently raising. For investor materials, visit pivotptcapital.com.