102. The Feasibility Study
Hotels and motels are almost always available for purchase. Buyers want the minimum price possible; sellers the maximum price. The hotel buyer usually uses leveraged money, and the sophisticated lender wants to be sure that the money being loaned will be repaid. Both buyer and seller are almost certain to be biased. To help eliminate bias and arrive at a value that the lender will accept, a market and feasibility study can be called for whenever a hotel or motel is bought. The lender obtains an assurance that the property can generate enough income to service the debt. The buyer is shown that indeed there are sizeable number of potential guests and certainly enough of them to create a profit. Consultants and accounting firms are employed to conduct market and feasibility studies to forecast occupancy average daily rate, and net income. The studies and their forecasts have not been particularly accurate. A study of 35 hotel feasibility projections covering the period from 1981-1985 showed that the 65 % of the first-year occupancies that were too high. Of the feasibility studies covering the period from 1986 to 1988, there were roughly 50/50 chance that the occupancy forecast would be inaccurate. Holiday Inns had monitored the accuracy of over 300 feasibility studies done for the company both by outside sources as well as internally and the results were similar. Hotel feasibility studies are designed to forecast probabilities, not certainties, and are subject to analyst bias, information limitation, and in some cases distortions because of a desire to please a client. In other words, consultants may signal a "go" when the recommendation should be a "no go." In "doing the numbers," analysts consider debt structure (interest rate, loan-to-value ratio, and amortization period). The tax rate of the investor and the depreciation method to be used are considerations. Cash flow (the cash receipts or net income, reckoned after taxes and other disbursements) may be a critical figure in deciding on an investment.
Determining the feasibility of a hotel entails covering three major areas in detail: a. The preparation of a feasibility study for the project, b. the estimation of costs for all elements of the project, c. and sources of financing.
d. Type of operation…
Within these areas, many individual factors must be examined.
Steps in the Feasibility Study:
1. Identification of a potential market: the type of people who can be expected to patronize the proposed hotel, resort, etc. 2. Quantification of the market: how many people can be expected to patronize the hotel? 3. The kind of facility that will appeal to the market.
4. Estimation of the size of the facility needed for the market. 5. Estimation of the cost of the facility that will serve the market. 6. Estimation of the income and expense of operating the facility, itemized by department. 7. Estimated profit as a percentage of sales and as a percentage of investment. 8. Existing or planned hotels in the same area that cater to the same market.
The preparation of a feasibility study for the project
The feasibility study itself can be broken down into several segments, each of which has an impact on the potential success of the project. ▪ The market
▪ The Site
▪ The Settlement
▪ The supply of rooms
▪ Room Demand
▪ The facilities
▪ The labor situation
▪ Financial projection
o The future room demand
o The comparison of rates
o The combination of occupancy figures
o Estimating the payroll
▪ Cost elements of the project
o Interest during construction
o Preopening expenses
o Operating equipment
o Working capital
The most important factor is the...
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