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Taking the First Step on the Road to Success Feasibility studies help hoteliers and lenders determine the viability of proposed and existing hotel projects.
Monday, August 29, 2005
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Riding the coattails of a slow, but sure, return to economic stability, the lodging industry is making a comeback. And we all know what that means — more and more developers and owners will be looking for real estate on which to build hotels. However, despite the upswing, lending institutions are still wary about loaning their money. Thus, before any funding will be approved, lending institutions will want to know detailed information about the investment they’re being asked to make — essentially they will want to know if such an investment will make money or lose money. In order to determine this many banks are requiring thorough feasibility studies on hotel projects.
Today’s lenders want experienced, knowledgeable feasibility consultants who will do a thorough, painstaking study that researches the market and its characteristics, the competition, business versus leisure travel, labor availability, and all the details that, taken together, can accurately forecast a project’s potential for success or failure. For developers, especially those new to the hotel business, the shortest route to success for a project is to retain an experienced, knowledgeable and thorough research team to do a feasibility study. This holds true not only for new construction projects, but also for purchasing existing properties. Professional feasibility consultants can assist new owners in analyzing a host of factors: identifying whether a hotel is reaching full yield and market penetration, determining whether it’s been missing business opportunities, and judging how well a hotel has maximized revenue through both traditional marketing and the increasingly crucial e-marketing efforts offered by the Internet.
A feasibility study is attained to reaffirm the hopes and dreams of an owner and to ensure other investors that the project will be a success. Whether a feasibility study is used to receive a loan from a bank or to convince your family or business associates to join you in your endeavor, it is an excellent way to assure everyone involved that the project will be a money-making development. A typical feasibility study paints a picture of the proposed development and the area around it. A study generally has the following five objectives:
Evaluate the market potential of a lodging facility on the proposed site.
Comment on the appropriate size of development that would best serve the needs of the market.
- Project the level of market penetration by analyzing proposed occupancy and average room rates for the first five years of operation.
- Prepare a detailed projection of cash flow from the operation before fixed charges for the first five years.
- Provide a written report with conclusions and the present financial projections for the proposed hotel.
To fulfill these objectives the Hospitality Solutions team takes the following steps:
- An economic evaluation of the market area is determined by interviewing area government officials and businessmen, compiling market data and reviewing relevant economic indexes.
- The suitability of the proposed site is determined by evaluating the site for accessibility, visibility and proximity to demand generators.
- The primary competition of the proposed hotel is determined by evaluating existing and proposed hotels in the area.
- The overall market demand, the number of rooms in the subject area and the share of the market demand that is generated by tourists, commercial travelers and group meetings or conventions is determined.
- The growth rates for that particular market are evaluated to determine the future demand for hotel rooms.
- An evaluation of the projected hotel supply and demand relationship is done to determine the market support for the proposed hotel.
- Comments are made on the proposed facility regarding types of guestrooms, number, mix, recreational amenities and the style and size of the facility.
- The occupancy, average room rates and the mix of guests are determined.
- The projected cash flow from the operation is determined before fixed charges for the first five years of operation.
The final report of the study sums up all of the information gathered and is broken down into the following categories:
- Market area analysis – community profile, business climate, transportation, education, attractions and the overall quality of life of the area.
- Site and area evaluation – maps, site pictures, traffic counts, accessibility and visibility.
- Supply and demand analysis – pictures of competitive hotels, occupancy graph, an ADR graph, trend graph, business traveler demand and leisure traveler demand.
- Proposed facilities and services – room mix, food and beverage facilities, meeting facilities, prototype rendering and fold-out drawing.
- Projected utilization of the proposed hotel – competitive set average room rate and projected average room rate.
- Financial analysis – financial proforma, costs of repairs, maintenance and utilities; and a proforma payroll recap.
- Brochure pouch and franchise information.
In today’s hotel industry, you can’t argue with results — and you certainly can’t afford to argue with lenders. Trust me, whether you’re a long-time hotelier looking to expand your existing operation or an industry newcomer looking to develop, a professional, thorough feasibility study is your first step on the road to success.
Steven Belmonte is the president and CEO of Hospitality Solutions LLC. For more information, call 973-598-0839, email stevenbelmonte@aol.com or visit www.stevenbelmonte.com.
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