1. 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.
2. 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
3. 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.
4. 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.
5. Two Phases of a Hotel Feasibility
Study
□ Market Feasibility
□ Economic Feasibility
6. 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
28. 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
30. Cost Elements of a Project
□ Land
□ Construction
□ Interest during construction
□ Furniture, fixtures, and equipment
□ Operating equipment
□ Inventories
□ Pre-opening expenses
□ Working capital
31. 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.
32. 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.
33. 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)
34. Operating Equipment
□ Linen, silver, china, glass ware, and, in
some instances, uniforms.
□ Back-up inventories must be acquired
□ $8,000 per room is acceptable.
35. 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.
36. 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
37. 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.
38. Franchising Fees
□ If the project is a franchise, total cost
and fee structure to be clear
□ http://hvs.hotelmotel.com/Intro.asp
39. 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.
40. 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)
41. 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.
42. 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.
43. 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
