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 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 – 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. Food
2. Beverages
3. Cleaning supplies
4. Paper supplies
5. Guest supplies
6. Stationery
7. 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 $ 73,836.80
Cost/100 Rooms)
ADR to Determine Feasibility
(Rule of Thumb=Total Cost Per Key/1000) $ 73.84