Hotel Management and Operations

When the developer selects a site, a feasibility study is often commissioned to obtain an analysis of the site by an objective third party.

Companies offer hotel feasibility studies for a fee and are experts in a particular market, or developers may use the consulting group of one of the major public accounting firms.

The company retained to do the feasibil- ity study can spend up to several months gathering detailed data to see if, in their opinion, it makes economic sense to build the hotel.

Their conclusion offers an objective third-party opinion as to whether the project is feasible, hence the term feasibility study. Generally, the feasibility study considers, evaluates, and makes recommendations about the project based on the following variables:

The Site
• Proper zoning
• Size in square feet/acres
• Visibility from arterials/freeways
• Traffic counts/patterns
• Accessibility from streets, freeways, airports, train stations, etc.
• Proximity to where potential guests live, travel, or work
• Barriers that discourage competition coming into the market, if any
• How adjacent property and businesses are utilized
• Master area development plans
• Local permitting process and the degree of difficulty for that particular city
• Impact fees charged by the city

The Economy of the Area
• Major employers, government agencies
• Business trends for each employer/agency
• Hotel needs and the demand for each
• Leisure travel demand in the area
• Nearby tourist attractions
• Visitor counts
• Conventions, trade shows, and meetings history

The Hotel Market
• The competitors, both existing and planned
• Historical occupancy of hotels in the area
• Historical average rate
• Proprietary data on area travel

Identification of Which Hotel Market 
Segment to Serve
• Full service
• Limited service
• Extended stay
• Luxury
• Midprice
• Economy
• Budget

Selection of Appropriate Hotel Design
• High-rise
• Midrise
• Garden apartment style
• Hybrid design

Selection of Appropriate Hotel Brand
• Franchised (Marriott, Sheraton, Hyatt, etc.)
• Licensed (Best Western, Guest Suites, etc.)
• Independent
• Independent with strategic market affiliation (Luxury Hotels of America, Historic Hotels of America, etc.)

Ten-year Projection
• Occupancy projection by year
• ADR by year
• Estimated cash generated for debt
• Estimated cash generated for distribution to investors
• Estimated cash-on-cash return (after-tax income divided by equity invested)
• Overall projected yield
• Projected internal rate of return
• Net present value of the project over each of the next ten years

Once the feasibility study is completed, the developer is prepared to move forward with the project. Often, at this stage of the process, the developer purchases an option on the land to tie it up until the remaining development steps can be completed—and to prevent the competition from purchasing it.