Chapter 18 Feasibility Studies

Objectives Understand the purpose of a feasibility study Identify the preparer’s and user’s of a feasibility study Describe the different types of feasibility studies Understand the major components of a feasibility study Explain the limitations of a feasibility study

Purpose of a Feasibility Study “To compare the costs and benefits of a hospitality project.” If the costs exceed the benefits, the project should be undertaken.

Major Entities that Would Require a Feasibility Study Financial institutions Franchisors Political entities such as city, townships, or county Developers

Characteristics of Good Feasibility Study Preparers Should be an expert in preparing feasibility studies Should have appropriate background in hotel operations Should have a measurable track record Should have a reputation for integrity

Best Known Preparers of Hospitality Feasibility Studies HVS International PKF Inc. E & Y Kenneth Laventhol Real Estate Group

Be Alert to Potential Bias in a Feasibility Study Conscious bias results from always giving the proposed property the benefit of the doubt when deciding which of the two occupancy percentage numbers, for example to include in the report Unconscious bias – the type of bias the preparer is unaware of

Major Types of Feasibility Studies Demand Analysis Lodging Feasibility Study Lodging Feasibility Study with Detailed Financial Analysis

Demand analysis – depicts the supply and demand for rooms of a given competitive type for an area Demand should be shown for the year Demand should also be subdivided by weekends and weekdays Demand should be shown by market segment – Transient (business) Group Pleasure

Major Elements of a Lodging Feasibility Study Demand analysis Estimated occupancy Estimated average room rates Recommendations about the physical amenities Forecasted departmental revenues and expenses Franchise affiliation

Major Characteristics of a Lodging Property Location Accessibility/Visibility Age Meeting room facilities Rate Structure Price/Value Quality of facilities Affiliation and reservation system Amenities

Fair Share – “The proposed property’s fair share of the market” Fair Share = Rooms in Proposed Property divided by the Competitive Rooms in area including Proposed Property Rooms

Example of Fair Share Computation Assume a 300-room hotel is proposed in an area that has 3 existing hotels with a total of 900 competitive rooms. If 950 rooms are expected to be sold in a given day, fair share would be: _300_ 1200 = .25 950 X .25 = 237 rooms

Assumptions that must be checked in the market data analysis and conclusion phases: Selection of the competition Present room demand level Demand growth by segment by year Recommended number and types of guestrooms Market penetration assumptions by segment Projected occupancy and average room rate by market segment

Major Sections of the Feasibility Study Report Introduction Summary of conclusions Site evaluation Market area analysis Supply and demand analysis Demand generator interviews Facilities review Estimated occupancy and average daily room rates Financial analysis

The Introduction to the Feasibility Study A brief overview of the study Scope of the study Major assumptions The project concept

Summary of Conclusions Preparer’s opinion Estimated market demand List of major existing and future competitors Estimated average annual growth rates List of facilities contemplated Estimated occupancy percentages Estimated average room rates Selected financial factors

Supply and Demand Analysis Supply identifies the existing and proposed properties that will compete with the proposed facility Demand analysis describes the market segments and forecasts future demand based on present demand and projected growth rates

Limitations of the Lodging Feasibility Study There is no assurance that the forecast will be realized Few studies include sensitivity analysis Useful life of a feasibility study is generally six months

Summary Economic studies are of 3 types Demand analysis Feasibility study without investment analysis Feasibility study with investment analysis Conducting an economic study is a science and an art Professional judgment is required when making projections