News for the Hospitality Executive
A Developer’s Guide to New Ideas, Feasibility & Funding
By Jeff Coy, ISHC
November 2010 During the fourth quarter of 2010, it looked like the hotel and leisure industries were making an economic recovery in the USA and around the world.
Hotel occupancies were up over last year, but hotel room rates continued to drop --- indicating the road to recovery would be a long hard road. Museum and small attraction attendance was up but people were spending less money. Some major theme parks and regional outdoor waterparks reported gains in attendance, while others saw a decline.
The road to a rapid economic recovery was flawed by a lack of jobs and cautious consumer spending --- due to paying down credit card debt and building up saving accounts. Mistrust of major institutions, such as banks, Wall Street, corporations, unions and government, continued to anger many people who voted out incumbents at the ballot box.
Before the world’s travel industry can rebound, consumer confidence must return.
What’s the Market for Developing New Hotels and Waterparks?
Airlines continue to mothball their airplanes and offer fewer flights. Gasoline prices are stable for the foreseeable future, but families are taking shorter trips, staying closer to home.
Smaller attractions are doing better, but many hotels are near default. Hotel bankruptcies and foreclosures continue to rise. There is a TON OF MONEY sitting on the sidelines waiting for a green light (consumer confidence) to invest. New private equity funds are forming to buy troubled properties, but they extract a high price from sellers. Banks continue to say no to new hotel construction --- even to their well-known, credit-worthy customers.
So What’s the Good News?
Before Acquisition, Every Developer Needs Two Things
Whether you are building a new $50 million waterpark resort in boom times or adding an indoor waterpark to a hotel you bought for 50-cents on the dollar during the recession, you still need two major documents:
1. Market Analysis & Economic Feasibility Report
2. Request for Debt & Equity Funding
The market analysis quantifies the demand for what you want to do and shows you what the competition is offering. The economic feasibility report makes sure you understand all the risks and calculates your potential revenue, expenses and cash available for investors and lender. The request for debt & equity is a package that asks for the money, presents the project and shows how you are going to pay back the money you borrowed.
Both documents must be complete and professionally-prepared.
Market Analysis & Economic Feasibility Report
Most hotel waterpark developers understand the importance of having a feasibility report. But a few don’t. First of all, investors and almost all lenders are going to require a feasibility report from an objective, third-party source. The few developers that proclaim, “We don’t need a feasibility study!,” are most likely amateurs filled with both arrogance and ignorance --- like the accused acting as his own defense attorney in a trial.
Developer’s Feasibility Consultant vs Lender’s Appraiser
Oddly enough, the feasibility report is the one thing that protects the developer from unknown risks. To mitigate risk, the lender hires an appraiser to value the property. So why wouldn’t the developer hire an objective, independent consultant to determine economic feasibility of the project and reduce the developer’s risk of failure?
The developer need not hire an appraiser to do his feasibility study. The bank will hire an appraiser later at the developer’s expense when the loan is considered. The developer needs a feasibility report produced by a qualified consultant. The developer’s consultant and the lender’s appraiser should NOT be the same person or firm.
All-New Construction vs Expanding Existing Facilities
In the boom years, most feasibility reports involved a project that was all-new construction. But in today’s financial environment, any feasibility report is more likely to involve an existing property. In today’s market, for example, a developer would likely buy a hotel at auction for 50-cents of its value or outstanding loan. The developer might want to add a box (construct a new indoor waterpark on adjacent vacant land) and connect it to his existing hotel. Today, the developer requires a feasibility report that determines the impact of adding the new indoor waterpark on the existing hotel. Therefore, the feasibility consultant must first establish a baseline of performance for the existing hotel, then overlay the impact of adding the indoor waterpark upon revenues, expenses, net income and cash available for debt service on the new money borrowed.
Feasibility Reports for Outdoor vs Indoor Waterparks
While outdoor waterparks are very different from hotels with indoor waterparks, the feasibility process and the feasibility report are basically the same. While weather affects the outdoor waterpark more than an indoor waterpark, the same basic questions must be answered to determine the project’s financial success.
Here is an outline of a typical Economic Feasibility Report:
The professionally-prepared Market Analysis & Economic Feasibility Report will summarize the results of each of the eight sections of the report in an Executive Summary of 8 pages or less --- including the financial spreadsheets. Investors and lenders will spend little time reading the developer’s feasibility report, so the consultant must convey all pertinent information (both the sizzle and the steak) in the Executive Summary.
Nature of the Assignment
There’s an old saying: “Find out what customers want and give it to them, and they will beat a path to your door!” If you want to have a successful family resort that appeals to Dad, Mom and the kids, add a golf simulator for Dad, a spa for Mom and an indoor waterpark for the kids. It means knowing your different customers and understanding their different needs and preferences. It means designing your product to satisfy those needs and preferences.
What happened to ski resorts when snowboarding became an Olympic sport?
What happened to hotel conferences since web-based, real-time video meetings emerged?
Business owners had to adapt their operations, marketing and even their facilities to meet new demands. Product features and benefits must satisfy customer needs and preferences or you will go out of business --- sooner or later. You must adapt and reposition your facilities to remain in business.
When the economy shifts, marketing and facilities must change. How can you anticipate a recession, deal with it and profit from it? Track future trends. Watch for changes in your customer mix and customer types. Experiment with new concepts and test the results. Put your plans into action. This is what this section of the feasibility report covers.
This is the final section of the feasibility report for a hotel waterpark resort. In today’s financial environment, you are probably buying a hotel at a bargain price rather than building a new hotel. Let’s say you want to build an indoor waterpark and attach it to an existing hotel. With a renovation, rebranding and repositioning, you envision a successful property with a balanced customer mix for higher revenues and a lower break-even point.
Your feasibility consultant has produced a daily occupancy calendar for the next 365 days of the year as well as the next five years. He has determined the impact of adding an indoor waterpark to your hotel’s P&L. Indoor waterparks have a positive impact on hotel room sales, room rates and room revenues as well as food & beverage revenues, snacks, gifts and souvenirs.
The feasibility report establishes your new waterpark department with projected revenues, payroll and aquatic supplies.
Indoor waterparks also generate additional expenses, especially for energy and maintenance and insurance. These undistributed expenses are carefully calculated using the resort P&L format.
Near the bottom line, you will find Amount Available for Debt Service. This is the amount of cash you have available to pay principal and interest on the money you borrowed to build the indoor waterpark you attached to the existing hotel you bought at auction for 50-cents on the dollar.
Next line is your annual debt service payment. Finally, the bottom line in the feasibility report is your debt coverage ratio --- the amount of cash available to pay your debt compared to your actual debt. In a recent survey of hotel lenders, they require debt coverage ratios from 1.4 to 1.5. This means you must generate one and one-half times the debt service payment in cash or the lender may require a cash infusion from the developer.
Hotels with indoor waterparks perform better in terms of occupancy, average room rates and RevPAR than hotels without indoor waterparks. If you have a lender that understands this, you can shift your strategy away from all-new construction. Find a bargain-priced hotel that lacks leisure demand and consider adding a box --- you know, attaching an indoor waterpark. With less money invested, you will have a better chance at success as you ride out the economic recovery. Hire a professional to produce your Market Analysis & Economic Feasibility Report.
Request for Debt & Equity Funding
With your feasibility report in hand, your next step is to prepare a Request for Debt & Equity Funding. It is the second major document you need before you start digging. Don’t go shopping for money without it! The secret to producing a great package is to include what investors and lenders want to see and leave out what they don’t want to see. Here is a sample outline of 13 things to include in your Request for Funding:
Scale down the size and scope of your project.
Find a great hotel at a bargain price and buy it.
Add an indoor waterpark or family entertainment center to capture the leisure market.
Renovate, rebrand and reposition.
Hire an objective, independent hospitality-leisure consultant to help you.
Get a Market Analysis & Economic Feasibility Report to prove your case.
Put together a Request for Funding.
Jeff Coy, ISHC, is president of JLC Hospitality Consulting based in Phoenix-Cave Creek AZ. He is certified by the International Society of Hospitality Consultants. For more about market research, economic feasibility and design-development services for all kinds of resorts, waterparks, adventure parks and sports facilities, call 480-488-3382 or email firstname.lastname@example.org or go to www.jeffcoy.com.
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