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.

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

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.

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.

Market FeasibilityEconomic Feasibility

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

Statistics on visitor arrivalsSnapshot of local economy

Expected changes Average length of stay of visitors in

location

Is there adequate labor supply? especially at the middle-management or

supervisory levelQuality of laborLabor costs projections – wages,

benefits, Wage trends, etc. Unions? reasonable, flexible, and

prepared to bargain in good faith

LandConstruction Interest during constructionFurniture, fixtures, and equipmentOperating equipment InventoriesPre-opening expensesWorking capital

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.

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.

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)

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: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.

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 budgetDepends on the pre-opening

philosophies of the operator. $3,000 per room is considered

optimum

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.

If the project is a franchise, total cost and fee structure to be clear

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.

Net Operating IncomeOperating 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)

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.

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.

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