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 Feasibility  Economic 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 arrivals  Snapshot 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 level  Quality of labor  Labor costs projections – wages, benefits, Wage trends, etc.  Unions? reasonable, flexible, and prepared to bargain in good faith

 Land  Construction  Interest during construction  Furniture, fixtures, and equipment  Operating equipment  Inventories  Pre-opening expenses  Working 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. 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.

 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

 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 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)

 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, = 1.52)  The higher the debt service coverage, the less risky the loan. Typical debt service coverage requirements range from 1.1 to A 1.52 ratio reflects a good investment.

Total Building Cost$ 4,739, Total Non-building Costs$ 1,618, Total Soft Costs$ 861, Land Cost$ 164, Estimated Total Project Cost$ 7,383, Total Cost Per Room (Total Project Cost/100 Rooms) $ 73, ADR to Determine Feasibility (Rule of Thumb=Total Cost Per Key/1000)$ 73.84