Hotel feasibility studies
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Transcript of Hotel feasibility studies
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
Area Lodging FacilitiesProperty Support Analysis
Area Lodging FacilitiesSeasonal Occupancy Analysis
Estimated Area Occupancy Template
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