Hotel Management and Operations

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An ownership entity (note that this is different than and separate from the development company) must be created to hold title to the land—and the hotel, once it’s built. Considering the limitation of liability to the investors, tax consequences, estate implications for the investors, and potential requirements of the mortgage lender, a business structure is se- lected, normally in one of the following forms:

• Limited liability company (LLC)
• Limited partnership (LP)
• S corporation (formerly known as a  Sub-S corporation)
• C corporation

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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.

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The developer is the entrepreneur, the risk taker,who originates the idea for the hotel. Depending on the business structure selected, the developer often puts his or her personal wealth at risk when engaging in a hotel project. The developer, along with a small staff of people, networks with commercial real estate agents on the lookout for a suitable hotel site. De- pending on the type of hotel to be developed, a site of at least two to four acres is required (for comparison, an acre is roughly the size of a football field).This property must be zoned by the city for a hotel, be visible from a freeway or major street arterial, and have city approval for such construction activities as curb cuts, left- hand turn lanes, and delivery truck access.
Commercial realtors offer sites for the developer’s consideration that include maps, aerial photos, and proof of hotel zoning.

Sometimes the developer views potential sites by driving around the neighborhood within five miles of the site or touring multiple sites by helicopter, noting where the potential guests live and work and where potential competing hotels are located.

The price per square foot of the land is considered. The higher the cost of land, the higher the rates the hotel will need to charge.

Is the price too high for the average daily rate (ADR) in this particular market? Is it too low? Or is it acceptable? This is determined when the hotel financial pro forma budget document is created.

HOTEL - THE DEVELOPMENT COMPANY

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INTRODUCTION

The bulldozers are working and a construction crane is being erected on that vacant lot you pass each day going to and from home. The sign on the fence states that a new hotel is being built with a planned opening date of spring 2007. If you have ever wondered just how that hotel was created, you may have wondered about some or all of the following questions:

• How did someone select that particular vacant lot?
• Who actually creates a new hotel?
• Who owns it?
• Where did they get the money to build it?
• How long does the process take from idea to grand opening day?
• Who selects the architect, the engineers, and the interior designer?
• Who manages the myriad details that go into the development of a new hotel?
• Who will manage the hotel once it’s open?

We hope to address these and other questions you may have in this part.