Hotel Online  Special Report

Don't Overpay For Hotel Sites
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Reprint - By: Steve Rushmore, February 2002 - 
HVS International - New York

CANADIAN LODGING OUTLOOK
August 2006


The Canadian Lodging Outlook is a joint monthly publication 
of Smith Travel Research and HVS International, 
Vancouver and Toronto, Canada
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Developing a new hotel is an exercise in balance. The cost of the land, building and furnishings must balance out with the ultimate value of the completed project. If one or more of the cost components is excessive, the entire hotel development might become unfeasible.

In a number of Asian cities, as well as Paris, London and New York, where land costs have been extremely high, it has often been difficult to justify new hotel development because the cost/feasibility balance is out of kilter.

What is meant by feasibility? To achieve economic feasibility, the hotelís value upon completion must be greater than the cost of developing the project. For example, if a 200-room hotel cost US$20-million to build, it would need a market value upon completion of more than US$20-million in order to be feasible. No developer would want to have to sell a hotel upon completion at a price less than the money expended to build it, plus a developerís profit.

The acquisition of the site is generally the first step in developing a hotel. Overpaying for land is one of the easiest ways to adversely affect the projectís overall feasibility. For example, when the land component in Hong Kong represented more than 50% of the hotel projectís cost, it should have been evident this type of improvement would not be viable.

There are ways to check to see how much a particular hotel project can afford to pay for land. The process starts with a calculation of the rooms revenue at the point in time when the hotel achieves a stabilized occupancy.

Using the 200-room hotel example described above, it was estimated that this property would have reached a stabilized occupancy of 72% with an average room rate of US$85 by its third year of operation. This calculates to a total rooms revenue of:

200 rooms x 365 days/year x 72% x US$85
= US$4,468,000 rooms revenue

The next step is to make a locational adjustment based on the desirability of the siteís location. The following percentages provide a range of locational adjustments that will then be multiplied by the projected rooms revenue:

Highway Location 3% to 4%
Suburban Location 4% to 8%
Center City Location 5% to 9%
Trophy City Location 6% to 10%

Letís assume that the subject property is situated in a good center city location and the appropriate locational adjustment is 7%. The adjusted rooms revenue would be:

US$4,468,000 x 7% = US$313,000 adjusted
rooms revenue

The land value is estimated next by dividing the adjusted rooms revenue by a percentage rate of return that generally approximates the interest rate for local hotel mortgages, In this example, the local hotel mortgage interest rates are 8%. The land value is calculated as follows:

US$313,000/.08 = US$3,900,000 land value 

If the developer is able to acquire the land at a price either equal to or below this value, then the land component is in balance. The developer should proceed with caution if the cost of land is significantly above US$3,900,000.

A rough rule of thumb for full-service hotels: Land should not comprise more than 15% to 20% of the project cost. For some limitedservice and extended-stay hotels, land can represent as much as 20% to 25% of the total cost. In this example, the land component is approximately 19% of the US$20-million cost, which is on the high side of the acceptable range.

As you can see, a hotelís rooms revenue is the deciding factor in this approach for balancing the land cost component. If a developer is faced with an out-of-balance land cost, the two logical options are to increase the number of rooms (if zoning and market conditions permit) or enhance the quality of the facilities and service so the property is able to achieve a higher average room rate (again if market conditions permit). These adjustments are evident in the Asian markets with their high land costs. There is an over abundance of 5-star hotels and practically no 2- or 3-star properties.

While location, location, location is considered one of the primary traits for a successful hotel, the economics of the land acquisition cost is an important factor that must be balanced before proceeding with a new hotel development. 

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CANADIAN LODGING OUTLOOK
HVS INTERNATIONAL - CANADA
August 2006

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CANADIAN LODGING OUTLOOK
HVS INTERNATIONAL - CANADA
August 2006 YTD

.© Smith Travel Research, 2005. Reproduction or quotation in whole or in part without permission is forbidden. *INS - Insufficient Data

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Contact:
Selina Lai
HVS International Ė Canada
2120 Queen St. East, Suite 202
Toronto, ON M42 1E2
(416) 686-2260, ext 21
(416) 686-2264 FAX
slai@hvsinternational.com
www.hvsinternational.com

Also See Canadian First Half of the Year Winners Are Calgary, Edmonton, Alberta North, and Downtown Vancouver with Occupancies Over 70% and Average Room Rates Exceeding $100 / Canadian Lodging Outlook / June 2006
A Simple Solution for Hotel Chains to Deal with the Impact Issue / Steve Rushmore / Canadian Lodging Outlook - May 2006 Year-to-Date
Some Long-term Trends that Might be Adverse to the Future of the Hotel Industry / Steve Rushmore / Canadian Lodging Outlook - April 2006 Year-to-Date
Hotel Feasibility/Market Demand/Valuations and Appraisals /Betsy MacDonald and Steve Rushmore / Canadian Lodging Outlook - March 2006 Year-to-Date
When Will The Bubble Burst? / Stephen Rushmore / Canadian Lodging Outlook - January 2006 Year-to-Date
Low Cap Rates Drive Gains in Hotel Values / Suzanne R. Mellen / Canadian Lodging Outlook - December 2005 Year-to-Date
Now Is The Time to Buy New Orleans Hotel / Stephen Rushmore / Canadian Lodging Outlook - September 2005 Year-to-Date
What Does a Hotel Franchise Cost? / Stephen Rushmore / Canadian Lodging Outlook - August 2005 Year-to-Date
Basic Concepts of Co-Branding, With Examples from the Hospitality Industry Could Co-branding Improve Your Bottomline? / Peggy Yip / Canadian Lodging Outlook - July 2005 Year-to-Date
Brand Equity: Raising the Flag / Theodore Noseworthy / Canadian Lodging Outlook - April 2005 Year-to-Date
Timeshare Cash-Flow Modeling and Market Feasibility / Canadian Lodging Outlook - March 2005 Year-to-Date
Low Interest Rates and High Demand for Hotel Assets Fuels Value Gains / Canadian Lodging Outlook - February 2005 Year-to-Date
A Crash Course In Cap Rates / Canadian Lodging Outlook - January 2005 Year-to-Date
2004 Canadian Hotel Transaction Survey / Canadian Lodging Outlook - November 2004 Year-to-Date
HVS International Hotel Development Cost Survey 2004 / Canadian Lodging Outlook - September 2004 Year-to-Date
Defining a Hotelier; The Hotel Professional Has Gone Through a Major Transition Over the Past 20 Years / Mark Keith / Canadian Lodging Outlook - August 2004 Year-to-Date
Hotel Investments; The Magic, Curse Of Leverage / Canadian Lodging Outlook - July 2004 Year-to-Date / September 2004
June Results Are In And.......Weíre Back! / Canadian Lodging Outlook - June 2004 Year-to-Date / Aug 2004
Hotel Life Expectancy / Canadian Lodging Outlook - March 2004 Year-to-Date / May 2004
European Hotel Transactions 2003 - Country Analysis / Canadian Lodging Outlook - February 2004 Year-to-Date / April 2004
2003 an Unbelievably Strong Year for US Hotel Sales / Canadian Lodging Outlook - December 2003 Year-to-Date / February 2004
2003 Canadian Hotel Transaction Survey / Canadian Lodging Outlook / January 2004
2002 Canadian Hotel Transaction Survey / Canadian Lodging Outlook / Feb 2003
How To Get The Best Sales Price; Positioning Your Hotel for Sell / Stephen Rushmore / Canadian Lodging Outlook - July 2003 YTD / September 2003
Lodging Market Impact of Hosting Olympic Winter Games; Will Salt Lake City Experience Apply to Vancouver and Whistler? / Canadian Lodging Outlook - June 2003 YTD / August 2003
Year-to-date Occupancy through April is 50.4% for all of Canada / Canadian Lodging Outlook - April 2003 YTD / June 2003
SARS and Its Impact on Tourism in Toronto / Canadian Lodging Outlook - March 2003 YTD / May 2003
Hotel Values in Europe - Current Trends / Canadian Lodging Outlook - December 2002 Year-to-Date / Feb 2003
2002 Canadian Hotel Transaction Survey / Canadian Lodging Outlook / Feb 2003
Performance Clauses Essential In Hotel Management Contract / Stephen Rushmore / Canadian Lodging Outlook / Dec 2002
Separating the Hotel Looker From the Hotel Buyer / Stephen Rushmore / Canadian Lodging Outlook / Sept 2002
Making The Ideal Hotel Investment / Stephen Rushmore / Canadian Lodging Outlook / Aug 2002
Reporting In at Six Months..../ Canadian Lodging Outlook / July 2002
The Global Approach To Hotel Valuations / Canadian Lodging Outlook / June 2002
Hotel Insurance Premiums on the Rise? / Canadian Lodging Outlook / May 2002 
Hotel Development Cost Can Determine Feasibility / Canadian Lodging Outlook / May 2002 
Hotel Internet Distribution Channels / January 2002 Month-to-Date Results / Canadian Lodging Outlook / April 2002 
2001 Was a Great Year If You Were in Edmonton! / December 2001 Year-to-Date Results / Canadian Lodging Outlook / Feb 2002
2001 Canadian Hotel Sales / Canadian Lodging Outlook / Jan 2002 
The Effect on Capitalization Rates and Discount Factors After September 11 / Canadian Lodging Outlook / Dec 2001 
So How Bad Was September for Canadian Hotels.. Pretty Bad! / Nov 2001
So How Bad Was September for Canadian Hotels.. Pretty Bad! / The Canadian Lodging Outlook / September 2001 
Have Hotel Values in Canada Declined Since September 11th? You Bet They Have / The Canadian Lodging Outlook / August 2001 
The Popularity of Boutique Hotels / The Canadian Lodging Outlook / July 2001 
Rising Energy Costs Cause Concern in the Lodging Industry / The Canadian Lodging Outlook / June 2001 
Niagara Falls: With Supply Comes Demand / The Canadian Lodging Outlook / May 2001
Does Supply Generate Demand? / The Canadian Lodging Outlook / May 2001 
Optimism With a Hint of Caution, As Analysts Predict a Softer Year for the Canadian Hotel Industry / Mar 2001 
Limited-Service Growth in Canada - Whereís it Going? / The Canadian Lodging Outlook / January 2001 
HVS Canada in Review - Year End 2000 / The Canadian Lodging Outlook / March 2001 
Canadian Lodging Outlook / May 2000 Year to Date Statistics / HVS International - Canada / July 2000 
The Rule of Thumb Method...Does It Still Hold Weight? / Elaine Sahlins - HVS / Oct 2000
Whatís Hot and Whatís Not in Western Canadian Hotel Markets / Mar 2000


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