This report proposes the development of a luxury hotel property in Quito, Ecuador. A Smith Travel Research (STR) classified Upper Upscale brand hotel property. There is a market trend analysis performed. It shows the proposed property would achieve a viable 73.9% occupancy with a projected 101.2$ average daily rate (ADR) in the first year. Occupancy and ADR are both projected to grow with the market trend at 1.65% and 6.4% respectively. A valuation and development feasibility analysis is performed. The estimated development budget for this proposed 220-room hotel would be $ $30,249,982. The value of the hotel, assuming a 11% going-cap rate would be $34,906,000. There would be an 18% internal rate of return (IRR) to the equity component, assuming a mortgage with a loan to value ratio of 55%. A 10% IRR to the mortgage component, and 15% IRR to the value of the property component. There are two proposed neighborhoods included in the report. The Mariscal neighborhood of Quito offers the central location and density of foot traffic to sustain a new LEED Certified property. The conversion of a colonial style building into a green hotel in Quito’s Centro Historico, would take advantage of the natural synergy that preservation has with sustainability. The report concludes with opposing viewpoints and project risks are identified
2. 2
Table of Contents
Introduction
1 Executive Summary
2Market Trend Analysis
3Projection of Market Occupancy and Average Rate
4 Forecast of income and expense statement
5 FeasibilityAnalysis
6 Valuation and Investor Returns
7 Proposed Neighborhoods for Green Hotel
8 Opposing Viewpoints and Risks
Appendix A: Investor Requirements Survey
Appendix B: Feasibility of New Hotel Projects, Steve Rushmore Sr.
Appendix C: Construction Budget Source
Appendix D: MasterCard Ranking of Cities with Highest Growth Rates in Tourist
Spending
Appendix E: Most Visited Sites in Quito, Ecuador
Appendix F: Green Building Cost Premium
4. 4
Introduction
Recently Quito, Ecuador received the World Travel Award (WTA) Best Travel
Destination for 2013 .The city has also been recognized by the New York Times,
National Geographic, and Trip Advisor as a top world tourist destination. The city is
developing its tourism infrastructure to further increase the growth of tourist
arrivals. This year a new airport in Quito was opened. The Mariscal Sucre
International Airport. A bigger airport that will support more flights arriving and
departing from Quito. The city of Quito has also initiated the largest urban
development project in recent years, the Quito Convention and Events Center
Complex, which will be created within 11 hectares of the land where the old airport
once operated. Since 2009 Quito has experienced 16% increase in inbound
tourism1. In the 2012 MasterCard ranking of cities with the highest growth rates of
tourist spending tourist spending, Quito ranked 3rd, behind only Rio de Janeiro and
Tokyo2. The increase in tourism has increased hotel occupancy levels past 72%.
From the table below we can see that Quito ranks 2nd behind Rio de Janiero in Latin
American hotel occupancy rates. Ahead of well know cities like Santiago de Chile,
Bogota, Colombia and Buenos Aires, Argentina.
1http://www.hotelesecuador.com.ec/downloads/12%20Eduardo%20Dousdebes%
20Quito.pdf
2 See Appendix D
5. 5
1.
Executive Summary
This report proposes the development of aluxury hotel property in Quito, Ecuador.
A Smith Travel Research (STR) classified Upper Upscale brand hotel property.
There is a market trend analysis performed. It shows the proposed property would
achieve a viable 73.9% occupancy with a projected 101.2$ average daily rate (ADR)
in the first year. Occupancy and ADR are both projected to grow with the market
trend at 1.65% and 6.4% respectively. A valuation and development feasibility
analysis is performed. The estimated development budget for this proposed 220room hotel would be $ $30,249,982. The value of the hotel, assuming a 11% goingcap rate would be $34,906,000. There would be an 18% internal rate of return (IRR)
to the equity component, assuming a mortgage with a loan to value ratio of 55%. A
10% IRR to the mortgage component, and 15% IRR to the value of the property
component. There are two proposed neighborhoods included in the report. The
Mariscal neighborhood of Quito offers the central location and density of foot traffic
to sustain a new LEED Certified property. The conversion of a colonial style building
into a green hotel in Quito’s Centro Historico, would take advantage of the natural
synergy that preservation has with sustainability. The report concludes with
opposing viewpoints and project risks are identified.
6. 6
2.
Market Area Analysis
Luxury Hotel Market Trends
Table 1
Market
Data
Competitive Set
Primary:
No. Rooms
2007
138
232
257
255
Sheraton
Swisshotel
JW Marriott
Hilton Colon
Average Occ. Primary set
Mercure
Secondary: Alameda
Le Parc
Dann Carlton
Patio Andaluz
Quito
Radisson
Total No Rooms
Secondary Set Average Occ. Rate
Total Average Occupancy Rate
Occupancy Growth Rate
1.65%
2008
Quito Ecuador
Occupancy
2009
2010
2011
2012
77.06%
70.13%
2013
74.58%
73.92%
147
30
212
32
215
112
748
71.18%
67.64%
70.68%
72.16%
75.95%
76.14%
71.50%
6.000%
62.90%
-13.67%
66.90%
5.98%
69.40%
3.60%
72.29%
74.1%
6.3%
Total Average Daily Rate (ADR)
$74.30 $80.90
$86.90
$89.50
$92.90 $101.20
% Change in ADR
8.90%
7.50%
2.90%
3.80%
8.90%
Average Yearly Growth Rate
6.40%
Source:
http://www.captur.travel/web2011/estadisticas_turisticas/documents/BOH77_78_79datosadiciembre2012.pdf
Luxury ranked hotels have the highest occupancy rate amongst all lodging facilities
in Quito, Ecuador. The table above shows the market trend in occupancy and
average daily rate in the luxury category. The competitive set of hotels used in the
analysis are full service hotels that are considered luxury facilities by the
Ecuadorian Ministry of Tourism or fall into the Smith Travel Research (STR) brand
classification as Upper Upscale and Luxury category. The competitive set is divided
7. 7
into primary competitive hotels, the hotels most alike in brand, service, and
amenities according to STR Global Chain Scales classification; and secondary
competitive hotels; hotels which might capture the same type of customer if the
primarily competitive hotels are fully occupied. The primary set includes the
Sheraton Hotel, Swisshotel, JW Marriott Hotel, and Hilton Colon Hotel. The
secondary competitive hotels include: Mercure Alameda Hotel, Le Parc Hotel, Dann
Carlton Hotel, Patio Andaluz Hotel, and the Radisson. From the table we can see that
the primary competitive set has the highest occupancy rate of 73.92%; compared to
72.3% occupancy for secondarily competitive hotels. The luxury hotel set as a whole
has grown 1.65% a year on average Since 2008, Steady occupancy growth has led to
a 6.4% average growth rate in ADR.
8. 8
3.
Projection of Market Occupancy and ADR
Forecast of Market Occupancy for Upper Upscale Brand Hotels
Table 2
Occupancy
Projections
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Secondary 74.25% 75.48%
Quito Hotel 74.28% 75.50%
Sheraton 77.75% 79.03%
Swisshotel 70.67% 71.84%
JW Marriott74.23% 75.45%
Hilton Colon
75.02% 76.26%
Proposed 1N/A
N/A
Proposed 2N/A
N/A
Proposed 3N/A
N/A
Proposed 4N/A
N/A
Proposed 5N/A
N/A
Proposed 6N/A
N/A
Proposed 7N/A
N/A
Proposed 8N/A
N/A
Proposed 9N/A
N/A
Long Term N/A
Supply Growth
N/A
76.72%
76.75%
80.34%
73.03%
76.70%
77.52%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
77.99%
78.01%
81.66%
74.23%
77.96%
78.80%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
79.28%
79.30%
83.01%
75.46%
79.25%
80.10%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
80.58%
80.61%
84.38%
76.70%
80.56%
81.42%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
81.91%
81.94%
85.77%
77.97%
81.89%
82.76%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
83.27%
83.29%
87.19%
79.25%
83.24%
84.13%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
84.64%
84.67%
88.62%
80.56%
84.61%
85.51%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
86.04%
86.06%
90.09%
81.89%
86.01%
86.92%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
10-Year Projected Market Occupancy
Market Occ. 4.15%
7
75.37% 76.62% 77.88% 79.17% 80.47%
81.80% 83.15%
84.52% 85.92%
To forecast how the addition of an Upper Upscale/Luxury branded full service hotel
in Quito would perform. A supply and demand analysis was performed using the
HVS build-up approach3. In the analysis, total room supply counts, occupancy, ADR,
and market segmentation are used to quantify both supply and demand in the
market. Total room nights accommodated in the sector is compared against the
Spreadsheet calculations can be found in the accompanying excel workbook in the
room night analysis spreadsheet
3
9. 9
total room nights available for the year. The market segments are divided into the
commercial traveler, meeting and group travelers, and the leisure travelers. The
total room nights for each market segment are allocated to each hotel in the primary
competitive set and to the aggregate of the secondary set using a subjective
competitive factor. A market area occupancy projection forecast is in table 2 above.
It displays the occupancy penetration of the proposed property over a 10-year
period.
The ADR for the primary competitive set is $101.2 and shows a 6.40% year over
year growth rate
10. 10
4.
Forecast of Income and Expense
A ten-year forecast of income and expense was performed and can be seen in the
table below. The projected revenues were calculated from projected occupancy,
ADR, of a standard 220-room hotel. Expenses were estimated using the historic
percentage expenses have to revenues in hotels. The historic percentages come
from Steve Rushmore Sr. CEO of HVS. The first years projected net operating income
after the base year of 2012 is $2,847000. The annual compound growth rate (CGR)
in NOI is 3.25%.
16. 16
5.
Valuation and Investor Returns
Assumptions:
Projected first year NOI: 3,311,000
Going in cap rate: 10%
LTV: 55%
Terminal cap rate 10%
Amortization period: 10 years
LTV Model:
Quito Hotel
Value of the Property
Value of the Mortgage Component
Value of the Equity Component
Cash Flows for IRR Calcs Year
Total Property
Mortgage
Equity
Debt Coverage Ratio
$
$
$
$
$
$
Proof of Value
Year
1
2
3
4
5
6
7
8
9
10
$(000)
27,370
15,054
12,317
3310
3311
(27,370) $ 3,311
(15,054) $ 2,387
(12,317) $
924
1.39
IRR
14.79%
10.00%
18.00%
$
$
$
3312
3,823
2,387
1,436
1.60
Total Property Present Value
Net Income
PV Factor @
Discounted
Before D.S.
14.8% Cash Flow
$
3,311 0.871171 $ 2,884
$
3,823 0.758938 $ 2,901
$
3,311 0.661165 $ 2,189
$
3,377 0.575987 $ 1,945
$
3,445 0.501783 $ 1,729
$
3,514 0.437139 $ 1,536
$
3,584 0.380823 $ 1,365
$
3,656 0.331762 $ 1,213
$
3,729 0.289021 $ 1,078
$
41,821 0.251787 $ 10,530
Total Property Value
$ 27,370
Year 10 Cash Flow Calculations
Year 10 net income of
plus reversion of
Reversion Calculations for Proof
3313
$ 3,311
$ 2,387
$
924
1.39
Year
1
2
3
4
5
6
7
8
9
10
Year 11 Net Income of $3879
capitalized at 10% equals $ 38,794
Less: Selling Expenses $
776
Equals: Net sales price $ 38,018
DCR Model:
Quito Hotel
Value of the Property
Value of the Mortgage Component
Value of the Equity Component
Cash Flows for IRR Calcs Year
Total Property
Mortgage
Equity
Debt Coverage Ratio
$
$
$
$
$
$
Proof of Value
Year
1
2
3
4
5
6
7
8
9
10
$ 3,803
$ 38,018
$(000)
27,330
14,914
12,416
3310
3311
(27,330) $ 3,311
(14,914) $ 2,365
(12,416) $
946
1.40
$
$
$
3314
3,377
2,387
990
1.41
$
$
$
3315
3,445
2,387
1,058
1.44
$
$
$
3316
3,514
2,387
1,126
1.47
3317
$ 3,584
$ 2,387
$ 1,197
1.50
Mortgage Component Present Value
Mortgage PV Factor @
Discounted
Payment
9.40% Cash Flow
$ 2,387
0.914069 $ 2,182
$ 2,387
0.835522 $ 1,995
$ 2,387
0.763724 $ 1,823
$ 2,387
0.698097 $ 1,666
$ 2,387
0.638108 $ 1,523
$ 2,387
0.583275 $ 1,392
$ 2,387
0.533153 $ 1,273
$ 2,387
0.487339 $ 1,163
$ 2,387
0.445461 $ 1,063
$ 2,387
0.407182 $
972
Mortgage Component Value15,054
$
Year 10 mort. payment of$
plus the RMB of
$
Year
1
2
3
4
5
6
7
8
9
10
2,387
0
$
$
$
3318
3,656
2,387
1,268
1.53
$
$
$
3319
3,729
2,387
1,342
1.56
$
$
$
3320
41,821
2,387
39,434
1.59
Equity Component Present Value
Net Income PV Factor @Discounted
to Equity
18.0%
Cash Flow
$
924
0.847458 $
783
$
1,436
0.718184 $
1,031
$
924
0.608631 $
562
$
990
0.515789 $
511
$
1,058
0.437109 $
462
$
1,126
0.370432 $
417
$
1,197
0.313925 $
376
$
1,268
0.266038 $
337
$
1,342
0.225456 $
302
$ 39,434
0.191064 $
7,534
Equity Component Value $
12,317
Year 10 net inc. to equity of
$
plus the equity residual of $
Net Sales Price (cell F37) $
Less: RMB
$
Equals: Equity Residual $
The reversion is the remaining mortgage
balance (RMB) of the loan in at the end
of year 10.
1,416
38,018
38,018
0
38,018
IRR
14.81%
10.00%
18.00%
$
$
$
3312
3,823
2,365
1,458
1.62
Total Property Present Value
Net Income
PV Factor @
Discounted
Before D.S.
14.81% Cash Flow
$
3,311 0.870970 $ 2,884
$
3,823 0.758590 $ 2,900
$
3,311 0.660709 $ 2,188
$
3,377 0.575458 $ 1,943
$
3,445 0.501207 $ 1,727
$
3,514 0.436537 $ 1,534
$
3,584 0.380210 $ 1,363
$
3,656 0.331152 $ 1,211
$
3,729 0.288424 $ 1,075
$
41,821 0.251209 $ 10,506
Total Property Value
$ 27,330
Year 10 Cash Flow Calculations
Year 10 net income of
plus reversion of
$ 3,803
$ 38,018
Reversion Calculations for Proof
Year 11 Net Income of $3879
capitalized at 10% equals $ 38,794
Less: Selling Expenses $
776
Equals: Net sales price $ 38,018
3313
$ 3,311
$ 2,365
$
946
1.40
Year
1
2
3
4
5
6
7
8
9
10
$
$
$
3314
3,377
2,365
1,012
1.43
$
$
$
3315
3,445
2,365
1,080
1.46
$
$
$
3316
3,514
2,365
1,149
1.49
3317
$ 3,584
$ 2,365
$ 1,219
1.52
Mortgage Component Present Value
Mortgage PV Factor @
Discounted
Payment
9.40% Cash Flow
$ 2,365
0.914069 $ 2,162
$ 2,365
0.835522 $ 1,976
$ 2,365
0.763724 $ 1,806
$ 2,365
0.698097 $ 1,651
$ 2,365
0.638108 $ 1,509
$ 2,365
0.583275 $ 1,379
$ 2,365
0.533153 $ 1,261
$ 2,365
0.487339 $ 1,153
$ 2,365
0.445461 $ 1,054
$ 2,365
0.407182 $
963
Mortgage Component Value14,914
$
Year 10 mort. payment of$
plus the RMB of
$
2,365
0
The reversion is the remaining mortgage
balance (RMB) of the loan in at the end
of year 10.
Year
1
2
3
4
5
6
7
8
9
10
$
$
$
3318
3,656
2,365
1,291
1.55
$
$
$
3319
3,729
2,365
1,364
1.58
$
$
$
3320
41,821
2,365
39,456
1.61
Equity Component Present Value
Net Income PV Factor @Discounted
to Equity
18.00% Cash Flow
$
946
0.847458 $
802
$
1,458
0.718184 $
1,047
$
946
0.608631 $
576
$
1,012
0.515789 $
522
$
1,080
0.437109 $
472
$
1,149
0.370432 $
425
$
1,219
0.313925 $
383
$
1,291
0.266038 $
343
$
1,364
0.225456 $
307
$ 39,456
0.191064 $
7,539
Equity Component Value $
12,416
Year 10 net inc. to equity of
$
plus the equity residual of $
1,438
38,018
Net Sales Price (cell F72) $
Less: RMB
$
Equals: Equity Residual $
38,018
0
38,018
17. 17
Value conclusion:
1) A 10 year PV Factor of 14.79%(Projected IRR of property) was used
to discount projected net income before debt service. The 11th year
projected NOI was capitalized at 11% terminal cap rate to arrive at
The Value of the Property: $27,370,000
2) A 10 year PV Factor of 10%(projected IRR of the mortgage
component) was applied to discount the yearly mortgage payments to
arrive at the
Value of the Mortgage Component: $15,054,000
3) A PV factor of 18%(Projected IRR to the equity investor was applied
to the net income portion flowing to equity over 10 year period to arrive
at the:
Value of the Equity Component: $12,317,000
20. 20
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A construction budget was derived from the most recently developed Upper Upscale
brand hotel in Guayaquil, Ecuador, the Wyndham Guayaquil Hotel. It is a 180-room
hotel and the cost per room was $137,499. A similar type of hotel with 220 rooms
would cost approximately $30,249,000.
To test feasibility a NPV calculation was performed. The development cost and a 10year forecast of income and expense including the 11h year reversion value was
calculated. An 10% terminal cap rate was used to capitalize the 11th year NOI to
arrive at the reversion value. The NPV is positive. The project is feasible at an 11%
discount rate.
Green Building Premium:
There is ongoing debate whether building to LEED Certified standards cost more
than conventional construction. This report will assume the costliest scenario that
sustainable construction adds between 2% to 8% to development costs4.
4http://www.cconstruccion.net/portal/index.php/revista/articulos/118-articulo-
sostenibilidad (Spain Green Building Council®)
http://www.diariodelhotelero.com.ar/noticias/detalle/sustentabilidad-y-hoteleriacertificaciones-leed/Arq. Nicole Michel, LEED® AP, MiembroArgentinaGBC
21. 21
LEED Certification would increase the development budget to a range between
$30,854,981.86 to $32,669,980. This would reduce the NPV calculation slightly from
$60,425,715 to a range between $59,880,667 to $58,245,533.
22. 22
7.
Proposed Neighborhoods
Green Hotel
Total Hotel arrivals by Neighborhood
2007
2008
253.076
301.108
Mariscal
216.523
213.415
Norte
122.429
La Carolina 97.939
63.499
La Floresta 69.297
38.643
43.610
Centro
37.744
47.419
Centro
histórico
32.604
34.476
Santa
Clara
46.496
47.583
Sur
792.322
873.539
Total
2009
295.069
204.704
107.756
57.716
44.807
41.747
2010
285.046
201.263
109.339
76.075
49.509
31.595
2011
266.145
206.058
114.977
67.506
56.810
31.811
2012
289.390
208.474
141.243
74.938
51.464
30.573
31.882
32.571
26.084
29.908
38.637
822.318
30.151
815.549
31.606
800.997
29.103
855.093
ACCORDING TO TH HOTEL OCCUPANCY BULLETEIN PUBLISHED BY QUITO DISTRITO
METROPOLITANO. THE NEIGHBORHHOOD WITH THE HIGHEST YEARLY ARRIVALS TO HOTELS IS LA
MARISCAL. This area is considered the entertainment center of Quito. It is centrally
located and close El Centro Historico, the place visited most by tourist.5Mariscal has
the location and foot traffic to support a newly constructed LEED Certified hotel.
El Centro Historico de Quito has fewer hotels so receives fewer arrivals. But it is the
place most visited by tourist.Quito, along with Kraków, were the first World Cultural
Heritage Sites declared by UNESCO in 1978. There is a vibrant nightlife and the
Ecuadorian government is looking to convert many colonial era buildings to hotels.
The conversion of a colonial style building in El Centro Historico de Quito to a green
hotel would take advantage of the natural synergy that preservation has with
5
Appendix E
23. 23
sustainability. It would cost less than new development, be more environmentally
sound, and create a unique hotel property for authentic experiences that most
travelers look for now. The property would be similar to the recently developed JW
Marriott in Cusco, Peru’s Historic Center pictured below:
24. 24
Opposing viewpoints
Political risk:
Ecuadorian President Rafael Correa is a self-proclaimed socialist and perceived as
hostile toward international investment.
Legal risk:
Related to political risk, there is perceived corruption and low credibility of
Supreme Court judges. The executive branch of government exerts undue influence
and control over the judiciary.
Lack of Transparency: Ecuador is adeveloping nation. It lacks the history and data
used to quantify risks and audit information publicly.
Business Climate: The World Bank Doing Business Report in 2012 ranked Ecuador
130 out of 183 countries. The report cited burdensome regulatory procedures and
high corporate taxes.
Although investors are wary of anti-capitalist rhetoric from President Rafael Correa,
the president has become more practical on issues of foreign investment. The
Ecuadorian government is actively seeking foreign investment for strategic sectors
like tourism and mining. While Ecuador does not have a competitive business
climate, a group of leading international brands including IHG, Hilton, and Marriott
has successfully penetrated the market. In addition, Clay Dickinson of JLL Hotels and
Hospitality Group indicated that the poor perception that markets like Ecuador and
Bolivia have amongst international investors could serve as an advantage;
competitive barrier to entry for firms willing to invest in these markets. Lastly,
reduced international capital flows have keep costs and prices down. Compared to
Bogota, Lima, and Rio de Janeiro, hotel rates, food, and entertainment are less
expensive in Ecuador.
25. 25
Appendix A:
Recent stated investor requirements:
A) Cap rates/Yields around 10.2%; unleveraged IRR 20% to 17%; all dependent
on risk.
B) Buy 20-25% below replacement costs in urban settings
C) If land is too expensive for development, mixed use development will be
needed
Sources: Meridia Capital
26. 26
Appendix B: Feasibility of New Hotel Projects
By Steve Rushmore, HVS
When designing a hotel, the architect and development team need to create a
project that is ultimately economically feasible. Unless the hotel’s owner is ego
driven rather than economically motivated, most investors are looking for a return
on their invested capital. Since feasibility means different things to different
people, and as a hotel consultant having prepared thousands of feasibility studies, I
have been asked to provide my perspective on this topic.
The process I like to use for determining whether a proposed hotel is economically
feasible is to compare the total project cost (including land) with the hotel’s
estimated economic value on the date it opens. A feasible project is one where the
economic value is greater than the cost. Accurately estimating the total project
cost is a relatively simple process for the architect and development team.
However, determining the economic value is much more complicated.
The first step in the valuation process is to perform a market study where the local
hotel demand is quantified and allocated among the existing and proposed supply
of lodging facilities. The allocation of room night demand is based on the relative
competitiveness of all the hotels in the market. The end result is a projection of
demand captured by the proposed subject hotel, which is then converted into an
estimate of annual occupancy. A similar procedure is used to project the average
room rate.
The second step is to project the hotel’s operating revenue and expenses based on
the previously estimated occupancy and room rate. This results in an estimate of
annual net operating income. Most consultants use a five- to 10-year projection
period, so this process needs to be repeated for each year. The last step is to
convert the projected NOI into an estimate of value using a weighted cost of
capital discounted cash flow procedure. The end result is an estimate of economic
value that can be compared to the total project cost.
Some consultants will substitute a net present value calculation or determine the
internal rate of return (IRR) for the last step. However, I prefer using the economic
value approach because you end up comparing “apples with apples” — i.e. cost
with value.
As you can see, this process of determining economic value requires local market
knowledge, hotel financial expertise and experience with valuation methodology.
Luckily for architects and hotel developers, there are two simple rules of thumbs
that will provide a rough approximation as to whether a project is economically
feasible.
27. 27
The first thumb rule tests the cost of the land to determine whether it exceeds a
supportable economic land value. The following formula calculates economic land
value:
Occupancy x ADR x Rooms x 365 x .04 / .08 = Economic Land Value.
As example, a proposed hotel is being considered on a parcel of land that can be
acquired for $3,800,000. Zoning permits the development of 200 rooms. Based on
local market conditions, the proposed hotel should achieve a stabilized occupancy
of 70% and an average room rate of $150. Using these inputs the Economic Land
Value would be calculated as follows:
.70 Occupancy x $150 ADR x 200 Rooms x 365 x .04 / .08 = $3,832,500.
The calculation shows the Economic Land Value is above the cost of the land so
the developer is not overpaying for the land. If the land cost was $4,000,000 or
above, the developer needs to re-evaluate the project because the hotel does not
support it’s underlying economics. Perhaps additional rooms could be added,
which would increase the room count or a higher quality of hotel developed would
increase the average room rate. This Economic Land Value formula works well in
most markets. For prime center city locations the .04 factors can be moved up to
.08.
The second rule of thumb is the Average Rate Multiplier formula. This is a very
simple way to approximate a hotel’s total economic value. The formula is as
follows:
ADR x Rooms x 1,000 = Economic Value
Using the numbers from the example above produces the following Economic
Value:
$150 x 200 x 1,000 = $30,000,000
If the hotel’s total development cost is over $30,000,000, there could be a
feasibility problem. In most cases where the development cost is significantly
higher than the economic value it is because the local market’s average room rate
is too low to support the contemplated improvements. In these situations the
proposed plans and specifications need to be scaled back in order to produce a
lower total project cost, which might then create a feasible project.
One additional point of reference looks at the percentage relationship between the
hotel’s land cost and the economic value. In this example, the value of the land is
approximately 13% of the overall economic value ($3,832,500/30,000,000 =
13%). This relationship should be no more than 15% to 20%. In other parts of the
world where labor cost is low, this percentage relationship can be higher.
28. 28
Using these hotel feasibility rules of thumb combined with a professionally
prepared study will insure the architect and developer are not creating a project
that has no economic viability. As with any rule of thumb, there are numerous
exceptions that need to be factored into the evaluation. Before abandoning a
project because the rules don’t produce the desired results, it is a good time to call
in a professional consultant to prepare a more in depth analysis to either verify or
dispute the conclusions produced by the rules of thumb.
Stephen Rushmore is president and founder of HVS, a global hospitality
consulting organization with offices around the world. Steve has provided
consultation services for more than 12,000 hotels throughout the world during his
35-year career and specializes in complex issues involving hotel feasibility,
valuations and financing. He can be reached at srushmore@hvs.com or 516 2488828 ext. 204.
www.hvs.com
Proposed Guayaquil Hotel:
Economic land value: Occupancy *ADR* Rooms*365*.04/. 08=Economic Land Value
.7*104*365*(.04/. 08)
Appendix C: Construction Budget
Budget Source:
Budget Estimate figures are drawn from
Fideicomiso Hotel Cuidad del Rio: Wynham Hotel,
The most recent comparable upper upscale hotel constructed in Guayaquil, Ecuador
http://www.bolsadequito.info/uploads/inicio/prospectos/titularizaciones
/110518163304-2dc4f9d0baf245539992c8ecd8c3099e_sic1.pdf
30. 30
Appendix E: Most visited sites in Quito
Fuente: Ministerio de Turismo Quito
31. 31
Appendix F: Green Building Cost Premium
http://www.cconstruccion.net/portal/index.php/revista/articulos/118-articulosostenibilidad
Por Aurelio RamírezZarzosa, Presidente del Consejo de la Construcción Verde
España® (Spain Green Building Council®)
http://www.diariodelhotelero.com.ar/noticias/detalle/sustentabilidad-y-hoteleriacertificaciones-leed/
Arq. Nicole Michel, LEED® AP, MiembroArgentinaGBCarq.nmichel@gmail.com
Ing. Carlos Grinberg, PresidenteArgentinaGBC
GF / EstudioGrinbergIngenierosConsultorescarlos@estudio-grinberg.com.ar
32. 32
International Appraisals is a global real estate, hospitality and sustainable
development consultancy specializing in hotels in Latin America.
We empower our clients with objective analysis, leading edge expertise, thorough
due diligence, and trusted advisement.
International Appraisals is especially dedicated to modernizing and developing the
hotel sector in South America.
We provide complete project proposals, LEED project management and consulting,
hotel valuation and investmentanalysis , and luxury spa training and consulting.
President/Founder Ivan Garay graduated with honors from Baruch College’s MBA
program in real estate. He holds a certification in hotel appraisal from HVS and is a
LEED AP BD&C. In addition, Ivan Garay has over 16 years of hotel operational
experience, both in food and beverage as well as spa and fitness. He has worked at
many five-star properties in New York including the Four Seasons Hotel, The
Carlyle, A Rosewood Hotel, and the Plaza Hotel. Ivan is a native of New York City and
keeps close ties with his family in Guayaquil, Ecuador. He is bilingual, he reads and
writes in both Spanish and English.
