Hotel Feasibility Analysis

The goal of this lesson is to provide the learner with an understanding of the process of

performing a hotel feasibility study, as well as the importance of such a task.

Srikanth Beldona, Ph.D.

Lesson Objectives

□ Define what is a Hotel Feasibility Study

□ Describe the two phases of a Hotel Feasibility Study

□ Describe the three major components of a Hotel Feasibility Study

□ Demonstrate knowledge of important financial determinants

What is a Feasibility Study?

□ Investigates the need for the proposed hotel must be investigated, estimated, documented and supported, so that the client can be assured that the proposal is justified.

Feasibility Studies

□ Hotel feasibility entails three major components

(1) Preparation of a market feasibility study for the project

(2) Estimation of costs for all elements of the project and

(3) Determination of sources of financing.

Two Phases of a Hotel Feasibility Study

□Market Feasibility□ Economic Feasibility

Site Selection

□ Proximity □ Business and Trade Centers, Highways,

Traffic Levels, Key Attractions, Shopping Centers, Population Backup

□ Site Specific□ Size, Zoning Laws, height restrictions and

parking requirements, Visibility, Accessibility

Competitive Area Property Spread

Traffic Count of Competitive Market Area

Why Location & Size are important

What today’s travelers want

The Market

□ Statistics on visitor arrivals□ Snapshot of local economy□ Expected changes

□ Average length of stay of visitors in location

Market Breakdown Template

Construction Trends Template

Area Lodging Facilities Property Analysis

Area Lodging FacilitiesRoom Rate Analysis

Rate Analysis :Single and Double Occupancy

Area Lodging FacilitiesAmenities Analysis-I

Area Lodging FacilitiesAmenities Analysis-II

Area Lodging FacilitiesOverall Property Evaluation

Segment Breakdown

Area Lodging FacilitiesProperty Support Analysis

Area Lodging FacilitiesSeasonal Occupancy Analysis

Estimated Area Occupancy Template

Understanding Demand

Projected Demand Breakdown

Projected Occupancy Outline

Projected Market Support

Labor Situation

□ Is there adequate labor supply? □ especially at the middle-management or

supervisory level

□ Quality of labor□ Labor costs projections – wages,

benefits, Wage trends, etc. □ Unions? reasonable, flexible, and

prepared to bargain in good faith

The Hilton Garden Inn

http://www.hiltongardeninnfranchise.com/

Cost Elements of a Project

□ Land□ Construction□ Interest during construction□ Furniture, fixtures, and equipment□ Operating equipment□ Inventories□ Pre-opening expenses□ Working capital

Cost of Land

□ Depends on whether land is actually purchased or owned

□ Cost of land typically weighed based on the number of rooms in hotel. Can range from $500 per room to as high as $30,000 or $40,000

□ Taxes during construction and costs of clearing the land factored into overall cost.

Cost of Construction

□ Largest cost element in any hotel project□ If franchised, have to adhere to franchisor specs□ $60,000 per-room cost of construction is considered

satisfactory (Prevailing market scenario without interest).

□ Fixed-price contract □ Cost more controlled, difficult to get because of the

inflation prevalent both in labor and in construction materials, this is not often feasible.

□ Cost-plus contract□ Contractor’s profits are a percentage of the costs.

Maximum ceiling on cost can be written into contract.

Costs Pertaining to Furniture, Fixtures, and Equipment

□ Either developer buys from one-stop shop supplier or spreads out across several suppliers.

□ Front of house and back-of-the-house equipment.

□ air-conditioning or heating, is considered to be part of the construction cost.

□ $12,000 per room for furniture, fixtures, and equipment is considered acceptable (Of course depends on brand)

Operating Equipment

□ Linen, silver, china, glass ware, and, in some instances, uniforms.

□ Back-up inventories must be acquired□ $8,000 per room is acceptable.

Inventories

□ Inventories can be broken down into the following categories:1. Food2. Beverages3. Cleaning supplies4. Paper supplies5. Guest supplies6. Stationery7. Engineering supplies

□ Excessive inventories can tie up capital and create additional interest costs.

□ 6,000 per room of for operating inventories should be considered satisfactory.

Pre-opening Expenses

□ Prior to the opening of a hotel, expenses incurred for

□ Pre-opening payroll, training costs, advertising, and sales expenses and travel.

□ To be factored into overall budget□ Depends on the pre-opening

philosophies of the operator. □ $3,000 per room is considered

optimum

Working Capital

□ Funds required to meet early payrolls and operating expenses (unpredictable time period)

□ Determines cash flow health of the firm □ Should amount to at least $2,000 per

room.

Franchising Fees

□ If the project is a franchise, total cost and fee structure to be clear

□ http://hvs.hotelmotel.com/Intro.asp

Sources of Financing

□ Marginal support (reducing a lot) from banks, mortgage lenders, and insurance companies.

□ private groups of investors (Largest source of funding presently )

□ World Bank or the Export—Import Bank for hotel and tourism development in various areas

□ governmental or tourism bodies in an effort to promote tourism in a specific country.

□ Federal agencies, such as HUD, and state developmental agencies will provide financing.

□ Low-cost loans in the United States by state or city to assist in area development.

Important Financial Determinants

□ Net Operating Income□ Operating income is the profit realized

from a business' own operations□ NOI = Operating Income * (1-tax rate)□ NOI = EBIT * (1-tax rate)□ EBIT is Earnings before Interest and

Taxes (EBIT)

Important Financial Determinants

□ Interest Carry Ratio = Net Operating Income / Loan Amount ($100,000 / 750,000 = .13)

□ This ratio gives you an idea of the maximum interest rate that a loan's cash flow could carry. This example shows a 13% interest rate. The cash flow is great for this example.

Important Financial Determinants

□ Debt Service Coverage Ratio = Net Operating Income / Debt Service ($100,000 / 65,601.47 = 1.52)

□ The higher the debt service coverage, the less risky the loan. Typical debt service coverage requirements range from 1.1 to 1.25. A 1.52 ratio reflects a good investment.

Rule of Thumb

Total Building Cost $ 4,739,118.00

Total Non-building Costs $ 1,618,859.50

Total Soft Costs $ 861,151.50

Land Cost $ 164,550.82

Estimated Total Project Cost $ 7,383,679.82

Total Cost Per Room (Total Project Cost/100 Rooms)

$ 73,836.80

ADR to Determine Feasibility(Rule of Thumb=Total Cost Per Key/1000) $ 73.84