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 todays 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 Facilities Room Rate Analysis

Rate Analysis : Single and Double Occupancy

Area Lodging Facilities Amenities Analysis-I

Area Lodging Facilities Amenities Analysis-II

Area Lodging Facilities Overall Property Evaluation

Segment Breakdown

Area Lodging Facilities Property Support Analysis

Area Lodging Facilities Seasonal 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.co m/

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
Contractors 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. Food 2. Beverages 3. Cleaning supplies 4. Paper supplies 5. Guest supplies 6. Stationery 7. 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 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.

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
Total Non-building Costs Total Soft Costs Land Cost Estimated Total Project Cost Total Cost Per Room (Total Project Cost/100 Rooms) ADR to Determine Feasibility (Rule of Thumb=Total Cost Per Key/1000)

$ 4,739,118.00
$ 1,618,859.50 $ 861,151.50 $ 164,550.82 $ 7,383,679.82 $ 73,836.80

$ 73.84