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Feasibility Studies Are Really Market Studies (And Where Are The Negative Ones?).
By Kirby D. Payne
Wednesday, 21st March 2007
 
Hotel development is on the upswing and the lenders are asking for "feasibility studies" - An independent analysis of a proposed hotel Development is supposed to lend an objective eye to 'what is being contemplated and augment the lender's hotel analysis experience.

Really Market Demand Studies

The studies commonly referred to as "feasibility studies" simply are not that. They are market demand studies with estimated operating results. Feasibility analyses are only undertaken by the consulting firms on a very, rare occasion and usually only on an informal consulting basis with no written report.

A feasibility analysis takes the information from the estimated operating results and applies it to the development cost information, the debt and equity scenarios and other information to see if there is a likelihood of achieving an adequate return on equity. Competent developers can and do complete this analysis on their own. It is fundamental to their calling!

Negative Studies Don't Pay

I've prepared a lot of market demand studies but I've never written a negative one! Consultants often hear about the paucity of negative hotel studies as a challenge to their credibility. Why haven't I written a negative study? Because I never had the audacity to think I could collect the fees for one. The fact is that negative studies are stopped before they become studies at all. Many potentially negative studies are eliminated simply by not accepting the assignment when it is obvious the site or market will not work for the hotel development contemplated.

The second, and largest, group of potential negative studies are eliminated shortly after the site and market analysis are undertaken and it becomes obvious that the proposed project is not viable. The consultant simply stops working and advises the client of the preliminary conclusions verbally. If the consultant, as a result of the conversation, agrees s/he missed or didn't consider something, the work resumes. Otherwise a client would usually ask for a brief letter outlining what was stated on the phone. No self-respecting developer would forward that letter on to anyone to further promote the fact they had a bad idea and had dropped thousands, if not tens of thousands, of dollars on that idea!

Some people feel market demand studies have a cookie cutter look and standard sections. That fact helps everyone: the consultants, to insure they covered subjects in an orderly and logical fashion; the reviewers, so in the quality control process they can insure the analysis and report are well thought out and complete; the users of more than one report, so they could find -things and not spend their time with each report looking for where the different types of cookies are hidden; and simply because the order of presentation made sense from a thought process perspective.

Shortcomings of Studies

There are a few alleged shortcomings in market demand studies:

1 . "Every year the occupancy and average daily rate go up."

This pattern probably is accurate during the first three to five years of a new hotel's life cycle, unless it opens into the Olympics! And anyone who tries to project more than five years is just kidding you.

2. "Food-and-beverage outlets are not well analyzed,"

That is right, F&B Departments generally don't get great analysis. Part of the reason was that regardless how much thought went into concept development, etc., there. wouldn't be a significant difference on the bottom line unless the hotel project was a convention hotel or had significant or unique F & B designed into it.

Remember we're discussing hotel studies not restaurant studies. The time spent on the F & B portion of a market analysis was probably commensurate with the relative importance of the rooms department's profit contribution relative to the F & B department's profit potential!

In most hotels, for which these studies are prepared, the F & B Department is in existence to generate room revenues. Even if you reallocated expenses to show a F&B operating loss that would not lead you to either eliminate F & B or not develop the hotel. The bottom line of the whole hotel is the only thing that really matters.

3. Some feel the "feasibility study" should analyze the alternatives of managing, leasing or franchising the F & B operation.

This doesn't seem like an integral part of a hotel market analysis, but if a client wanted the analysis, I'm sure someone would include it for an additional fee. Other than reducing a competent General Manager's workload, I'm not sure there is a bottom line impact of leasing F & B operations. All the same incomes and expenses are present regardless of who runs the F & B outlets except for one - the tenant's profit margin which the hotel owner foregoes!

Franchising the F & B operation is, of course, a marketing decision which is equally applicable to an operated or leased operation. While a decision to franchise a particular outlet would impact income and expense for that outlet, I believe my comment regarding the time spent on F & B analysis applies here also.

The space I have allocated here to F & B relative to any other is disproportionate to the relative profit contribution. Simply stated, F & B, whether it is a full department or a complimentary continental breakfast, exists first and foremost to help sell more rooms at higher rates!

4. Should a feasibility study analyze the "cost/benefit relationship of the franchise system"?

It would be inappropriate for the consultant to promote a particular franchise within a particular class over another so long as the franchises under consideration are appropriate for the facility and the market where that facility will be.

The individual or firm undertaking the study should not complete and issue a report for a proposed project with features clearly unsupportable by the estimated ADR and occupancy or one with a high ADR which does not have the necessary features to attract the clientele who will pay that rate. It almost goes without saying, that one should not issue a study with an ADR for which there is insufficient demand to generate the occupancy necessary to support the proposed development.

Studies Are Important

Market demand studies play an important role in the development process. Many are done internally by credible and experienced developers such as Tharaldson Enterprises which develops nearly 30 hotels a year. As previously stated, in some cases the simple refusal to accept an assignment is, in effect the negative study. Others are so easy they simply affirm the developer's ideas and provide third party unbiased confirmation.

Others play a significant role in the planning process and serve to help refine the developer's plan. In all cases only the most experienced developers should forego them when one is not required by the lender.

About the Author:
Kirby D. Payne, CHA, is president of Tiverton, RI-based HVS/American Hospitality Management Company, a full-service hotel-management company with offices in South Florida and staff in Minneapolis, MN. The company has operated hotels throughout the United States and served a multiplicity of clients, including lenders, airport authorities, law firms and individual investors.

Payne, a 30-plus-year hotel-industry veteran, served as the 2002 Chair of the American Hotel & Lodging Association (AH&LA), is a former director of the National Restaurant Association, and currently serves as a commissioner on the Certification Commission of the AH&LA's Educational Foundation. For more information about the company, visit www.HVSHotelManagement.com
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