Study of Tourism
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
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