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 .

Traffic Levels. Visibility. height restrictions and parking requirements. Zoning Laws. Accessibility .Site Selection Proximity Business and Trade Centers. Highways. Population Backup Site Specific Size. Shopping Centers. Key Attractions.

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 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 ² wages. benefits. etc. Wage trends. and prepared to bargain in good faith . Unions? reasonable. flexible. m/ .The Hilton Garden Inn http://www.

Cost Elements of a Project Land Construction Interest during construction Furniture. fixtures. and equipment Operating equipment Inventories Pre-opening expenses Working capital .

000 or $40. Can range from $500 per room to as high as $30.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. .000 Taxes during construction and costs of clearing the land factored into overall cost.

have to adhere to franchisor specs $60.000 per-room cost of construction is considered satisfactory (Prevailing market scenario without interest). Cost-plus contract Contractor·s profits are a percentage of the costs. Maximum ceiling on cost can be written into contract. Fixed-price contract Cost more controlled. this is not often feasible. .Cost of Construction Largest cost element in any hotel project If franchised. difficult to get because of the inflation prevalent both in labor and in construction materials.

and equipment is considered acceptable (Of course depends on brand) . and Equipment Either developer buys from one-stop shop supplier or spreads out across several suppliers.Costs Pertaining to Furniture. fixtures. Front of house and back-of-the-house equipment. Fixtures. air-conditioning or heating. is considered to be part of the construction cost. $12.000 per room for furniture.

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

Food 2. Stationery 7.000 per room of for operating inventories should be considered satisfactory. Beverages 3.Inventories Inventories can be broken down into the following categories: 1. 6. . Cleaning supplies 4. Engineering supplies Excessive inventories can tie up capital and create additional interest costs. Paper supplies 5. Guest supplies 6.

advertising. To be factored into overall budget Depends on the pre-opening philosophies of the operator. $3.Pre-opening Expenses Prior to the opening of a hotel. training costs.000 per room is considered optimum . and sales expenses and travel. expenses incurred for Pre-opening payroll.

.000 per room.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.

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

. and state developmental agencies will provide financing. Federal agencies. Low-cost loans in the United States by state or city to assist in area development. mortgage lenders.Sources of Financing Marginal support (reducing a lot) from banks. and insurance companies. such as HUD. private groups of investors (Largest source of funding presently ) World Bank or the Export³Import Bank for hotel and tourism development in various areas governmental or tourism bodies in an effort to promote tourism in a specific country.

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) .

.000 / 750.Important Financial Determinants Interest Carry Ratio = Net Operating Income / Loan Amount ($100.13) 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.000 = . The cash flow is great for this example.

52 ratio reflects a good investment. A 1. Typical debt service coverage requirements range from 1.1 to 1.Important Financial Determinants Debt Service Coverage Ratio = Net Operating Income / Debt Service ($100.25.52) The higher the debt service coverage. . the less risky the loan.47 = 1.000 / 65.601.

550.00 $ 1.383.679.618.836.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) $ 4.82 $ 73.80 $ 73.82 $ 7.50 $ 164.50 $ 861.739.84 .118.859.151.

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