Hotel Feasibility Analysis

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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.

2
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

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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.

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Feasibility Studies

• Hotel feasibility entails three major components
• Preparation of a market feasibility study for the
  project
• Estimation of costs for all elements of the
  project and
• Determination of sources of financing.

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Two Phases of a Hotel Feasibility Study

• Market Feasibility
• Economic Feasibility

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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

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Competitive Area Property Spread
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Traffic Count of Competitive Market Area
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Why Location Size are important
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What todays travelers want
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The Market

• Statistics on visitor arrivals
• Snapshot of local economy
• Expected changes
• Average length of stay of visitors in location

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Market Breakdown Template
13
Construction Trends Template
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Area Lodging Facilities Property Analysis
15
Area Lodging FacilitiesRoom Rate Analysis
16
Rate Analysis Single and Double Occupancy
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Area Lodging FacilitiesAmenities Analysis-I
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Area Lodging FacilitiesAmenities Analysis-II
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Area Lodging FacilitiesOverall Property
Evaluation
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Segment Breakdown
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Area Lodging FacilitiesProperty Support Analysis
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Area Lodging FacilitiesSeasonal Occupancy
Analysis
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Estimated Area Occupancy Template
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Understanding Demand
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Projected Demand Breakdown
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Projected Occupancy Outline
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Projected Market Support
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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

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The Hilton Garden Inn

• http//www.hiltongardeninnfranchise.com/

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Cost Elements of a Project

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

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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.

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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
• Contractors profits are a percentage of the
  costs. Maximum ceiling on cost can be written
  into contract.

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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)

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Operating Equipment

• Linen, silver, china, glass ware, and, in some
  instances, uniforms.
• Back-up inventories must be acquired
• 8,000 per room is acceptable.

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Inventories

• Inventories can be broken down into the following
  categories
• Food
• Beverages
• Cleaning supplies
• Paper supplies
• Guest supplies
• Stationery
• 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.

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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

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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.

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Franchising Fees

• If the project is a franchise, total cost and fee
  structure to be clear
• http//hvs.hotelmotel.com/Intro.asp

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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 ExportImport 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.

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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)

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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.

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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.

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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 ThumbTotal Cost Per Key/1000) 73.84