The short answer
When an owner asks us whether their hotel will work, a feasibility study is how we answer. It looks at one hotel on one site and tells you whether it can earn enough to justify what it costs to build, buy, or reposition, and everything in the report, from traffic counts to the ten-year cash flow, is there to back that answer up for the people putting money in.
Since Majestic Hospitality opened in 2008, our team has run feasibility and site analysis on everything from ground-up resorts to established properties looking to expand, including the market study for Andaz Costa Rica at Peninsula Papagayo. The format barely changes from deal to deal, so what we watch is how honest the numbers are. (A study that only tells an owner what they want to hear is a brochure, and lenders can tell.)
What goes into the study?
Market area analysis
We always start with demand, meaning who’s going to stay here and where they’re coming from. That means the biggest employers, airport traffic, and tourism numbers, along with anything new on the way, like a convention center expansion. If the demand drivers are thin, nothing later in the report can fix that.
Site evaluation
We walk the site and look at it the way a guest would, starting with how you get there off the highway, what’s next door, and how far it is to whatever people are traveling to see. A good market won’t rescue a site guests have trouble finding, and this is usually where we turn up the problems nobody mentioned in the pitch.
Competitive supply
Next is the competitive set, usually five to ten hotels a traveler would weigh against yours. We look at each one’s size, rate, and occupancy, and we track what’s in the pipeline, because a hotel going up across the street changes the math before you’ve even opened.
Demand segmentation
We never treat demand as one number. It gets split into corporate, leisure, and group business (some markets add airline crews), because each segment grows at its own pace and pays a different rate.
Facility recommendation
Once we understand the market, we recommend how many rooms to build, how much meeting space you need, and which restaurants and bars will earn their square footage. Brand and management selection usually comes up here too, since the right flag depends on everything we’ve found so far. Plenty of developers change their plans at this stage, which is why we push clients to get here early.
Occupancy and rate projections
Then we project occupancy, average daily rate (ADR), and RevPAR year by year until the hotel stabilizes, usually in its third or fourth year. Those numbers come from a penetration analysis, our estimate of how much of each segment the new hotel can win from the competitors around it.
The financials lenders read first
The financial section turns those projections into a full operating statement, usually in USALI format (the Uniform System of Accounts for the Lodging Industry) so lenders, brands, and investors can line it up against other deals. It works down through departmental results, overhead, and fees and reserves to net operating income.
From there we build a five- to ten-year projection and an investment analysis showing value at stabilization, debt service coverage, and return on equity. The lenders we work with go straight to the coverage ratio and the assumptions behind it, so we put those assumptions in the body of the report where anyone can find them. We also show what happens if rates come in 10% low, construction runs over, or the opening slips a year, because a hotel that only pencils in the best case is a hard one to finance.
When to commission one
The best time to commission a study is before you’ve committed to a site, a brand, or a budget, while it can still change the plan. Most owners call us after they’ve found land and before they’ve sat down with a lender, and that timing leaves room to adjust. Feasibility is one part of what we do at Majestic, next to market assessment, financial projections, and brand and management selection, and the full list is on our services page.
If you’re at that stage, we’re glad to talk through what your study should cover (and what your lender will expect to see in it). Reach out to the team here.
