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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 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 • 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 • 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
The Market • Statistics on visitor arrivals • Snapshot of local economy • Expected changes • Average length of stay of visitors in location
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: • 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 • 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.
