1. Chapter 18 Feasibility Studies

2. 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

3. 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.

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

5. 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

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

7. 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

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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

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

17. 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

18. 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

19. 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

20. 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