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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. Lesson Objectives. Define what is a Hotel Feasibility Study

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hotel feasibility analysis

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
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
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
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.
two phases of a hotel feasibility study
Two Phases of a Hotel Feasibility Study
  • Market Feasibility
  • Economic Feasibility
site selection
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
the market
The Market
  • Statistics on visitor arrivals
  • Snapshot of local economy
    • Expected changes
  • Average length of stay of visitors in location
labor situation
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
The Hilton Garden Inn

cost elements of a project
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
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
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
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
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 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.
pre opening expenses
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
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
Franchising Fees
  • If the project is a franchise, total cost and fee structure to be clear
sources of financing
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
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 determinants41
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 determinants42
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.