Hotel market and feasibility studies, the basics

So you want to build a hotel. Or you think you want to. Questions among many that need answering are ‘will this project make financial sense giving me adequate returns; will my concept work; do I have adequate funds for this concept to work; how and will we be able to attract finance for this project of mine to work?’

Factors need assessing, among many other are ‘is my land suitable for this concept or idea to work? How do I get out once I am in? Does this idea suit my real estate sales program? Do I need a management company? Do I need a market study? (Yes) Will a management company invest in this? (NO, even if one would you do not want to do this as it would require some very unattractive clauses in any management contract) How do I attract a suitable management company and negotiate a good deal with them? (Get advice at the very beginning of your project on this one)’

A comment on concession land in Costa Rica, firstly find yourself an honest realtor and a good lawyer (yes there are a few realtors around you could trust) and ask them for their opinions. There are many articles by reputable real estate brokers commenting on the risks involved in developing, owning a hotel or creating a condo hotel structure on concession land in Costa Rica.

Feasibility Studies should have the following content.

  • An overview of the project, defined as what we call an Executive Summary
  • The project definition that is the number and market mix of rooms, what common facilities, what size and to what standard, proposed operating concepts and additional amenities like shops, entertainment areas and the like.
  • An overview of the local area and the region as related to this project.
  • An analysis of the lodging market as applicable to market drivers and growth or non growth patterns; what additional supply in demand and what other properties are in the pipeline to change demand characteristics.
  • An analysis of present occupancy and average room rate achieved within the local competition with a market mix study.
  • Development costs, that is all development costs and not just the build out costs.
  • 10 year financial projections with assumptions on revenue and costs with support documentation on pricing assumptions and the assumed markets that would drive revenues.
  • Conclusion with a ROI statement, supported by a realistic assessment of the attractiveness of such a project for the owner taking into account their unique circumstances.

That should give you an honest assessment of whether you have any chance to make this project work.

All too often I have requests to comment on the suitability of a piece of land to built this, or that, to comment on the attractiveness of this area as compared to others in this region for the project, to propose a hotel concept on this or that all without any formal contract agreement.

We do not give free advice, what we do deliver though are cost-effective reports along the lines as that detailed above that will save you substantial amounts of money in the long run if you do not go ahead with a project that is deemed too risky, and many thousands if you do go ahead as the advice we provide will put you on the correct road map for long-term success.

The minimum you will require before you get serious with any proposed project is a local market study to initially ascertain the suitability of your project in the proposed site and location, and this is what we can provide.

Value-added design in hotel development

Hotel development critical processes: value design, value engineering, value life cycle, what do they mean?

Value-added design is a process through the stages of the use of space program.

A project’s viability can be truly reflected after profound but minor economies. In the ‘Art of the Deal’ developer Donald Trump cited using three hinges on each ball room door, instead of four, thereby saving 25% of  installation and material costs.

The process, although based around common sense, requires an experienced development team, who can justify the use of all space as it relates to the unique market concept of the hotel.

Firstly they need to answer the questions, ‘is the space essential?’ and ‘how best do we use it?’

Value engineering involves the architects, engineers, manufacturers presenting a cost-benefit-analysis of the maintenance, reliability, durability of all major materials, systems and equipment being considered. Obvious aspects are hot water systems, elevators, air conditioning, communications, floor finishes, and kitchen equipment; this process also involves a life-cycle cost analysis estimating energy replacement and maintenance costs. The developer is then educated in the selection process. This takes time and perseverance, but the long-term viability of the hotel is often defined at this stage. Operating profits for years to come are defined, and a project manager experienced in the hotel field is an invaluable asset to this process.

Building safety codes, systems for exit due to smoke and fire, and fire resistance of construction elements, from doors in 3 hours walls, roofs, windows, to kitchen hoods, all need to be taken into consideration.

Obviously, cost management needs an effective and efficient system of control. Work scheduling, material and labour, technical aspects, quality standard control measures, all need to be monitored in detail so that any budget overruns can be managed well in advance.

It is in the planning stage that the major costs are reduced, the stage where the hoteliers, architects, interior designers, suppliers, lighting and acoustic consultants, etc., create value-design, which is then supported by value-engineering.