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Developing Hospitality

Developing Hospitality

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Published by: nghimba on Sep 06, 2010
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Very similar to a leased facility, except now the operator has to
acquire the land and build the structure. These costs make total
costs approximately €13000 to €20000 per seat. Debt capital is
available for seasoned chains at a cost of 8.0–10.0% on up to 70%
of total project costs. Equity funds the remainder of the costs and
requires a return of between 20% and 30%. Unit-level economics
work on a per seat basis as shown in Table 5.2.
As Table 5.2 shows, a chain restaurant offers the potential for
superior returns, relative to an independent operation. This is fun-
damentally due to the fact that rents for leased premises are priced
above the cost of building similar quality space. The problemfor
restaurateurs seeking urban locations is that there are very few
empty sites or buildings available for purchase in locations that
generate the business needed to support the operation.

Small hotel

Asmall hotel offers the potential for long-term returns if operated
properly. The example shown is a two-star operation without a
restaurant in an urban location. Costs per room will be in the range
of €50000 to €80000, depending on the city and the relative location.
The owner would be able to borrow up to 65% of project costs at
interest rates of between 7% and 9%. Equity would require a return
of between 14% and 20% on the remaining investment. Unit-level
economics work on a per room basis as shown in Table 5.3.
Note that 2.0% drop in revenues or a 1.0% drop in the operat-
ing margin completely eliminates the remainder; thus equity
returns are highly dependent on the operator’s ability to generate
revenues and operate the facility efficiently.

Full-service hotel

Consider a traditional 4-star hotel in a large urban setting. This
facility has guestrooms, several food and beverage outlets, meeting

Project finance

91 G G G G G

Overall cost

€18000 per seat

Debt capital

€12000 per seat,

9% cost of debt
Equity capital €6000 per seat,
25% cost of equity

Revenue per seat €20000

Net income before €3000 (15% operating
occupancy cost

margin)

Debt service

€1080 (9% of €12000)

Equity return

€1500 (25% of €6000)

Remainder

€420

Table 5.2

Chain restaurant – stand alone
facility

rooms, a business centre, and some recreational amenities. Acqui-
sition costs per room will be in a range from €100000 to €250000;
the reason for the wide range is that gateway cities (London, Paris,
Brussels) command significant premiums over similar hotels in
the secondary markets. The owner would be able to borrow up to
75% of project costs at interest rates of between 6% and 9%.
Equity would require a return of between 12% and 18% on the
remaining investment. Unit-level economics work as follows on a
per room basis as shown in Table 5.4.
Again, note from Table 5.4 that equity returns are highly depend-
ent on the operator’s ability to generate revenues and operate the
facility efficiently. Illustration 5.1 shows the Savoy Hotel, London,
which, at the time of writing is being marketed at one million
£UK (€1.3 million) per bedroom.

Refurbishment, defensive spending, and repositioning

The costs of renovation are not trivial, in a 4-star hotel it will
cost approximately €7000 to perform a full renovation of each
guestroom; this includes replacement of all furniture, renewal of
floor, wall and ceiling finishes, and a modest refreshing of the
toilet and bathroom facilities. Athorough renovation of a restaurant
dining room will cost approximately €2000 per seat to replace all

Developing Hospitality Properties and Facilities

92

G G G G G

Overall cost

€60000 per room

Debt capital

€36000 per room,

8% cost of debt
Equity capital €24000 per room,
14% cost of equity

Revenue per room €16500

Net income before €6600 (40% operating
occupancy cost

margin)

Debt service

€2880 (8% of €36000)

Equity return

€3600 (15% of €24000)

Remainder

€120

Table 5.3

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