Acquisitions · 2 min read
Hotel Feasibility Study: Essential Metrics and Common Pitfalls
I walk you through the data and cost elements that turn a hotel feasibility study from a spreadsheet exercise into a decision‑making tool.
Published
Why a Feasibility Study Matters
When I first started evaluating deals, the most common misstep was to rely on intuition or a single data point. A feasibility study forces you to test assumptions against market reality, financing constraints, and operational risk. It gives owners and investors a clear picture of whether a project can meet debt service, deliver a reasonable return, and survive market cycles.
“A solid feasibility study is the single most reliable compass for a hotel buyer.”
The Core Financial Pillars
I always begin with the three revenue drivers that most investors understand: average daily rate (ADR), occupancy, and RevPAR. From there I model gross operating profit (GOP) as the bridge to net operating income (NOI). The relationships are simple, but the nuance is in how each metric behaves under different market conditions. For example, a modest lift in ADR can be offset by a sharp dip in occupancy, leaving RevPAR flat and GOP unchanged.
Market Data and the STR Comp Set
STR data is the industry’s baseline for any feasibility. I pull the last 12‑month performance of the closest comp set, then adjust for seasonality, brand affiliation, and any recent renovations that might have shifted the set’s dynamics. The goal is to develop a realistic “what‑if” scenario for your property, not to chase the highest historical peaks. When the comp set shows a stable RevPAR trend, that stability becomes the anchor for your projections.
Capital and Operating Cost Drivers
The expense side is where most buyers underestimate risk. I look at three recurring buckets: staffing, FF&E reserves, and the inevitable PIP budget. Staffing costs are tied to occupancy levels and brand standards, so they should move proportionally in the model. FF&E reserves protect you against the inevitable wear‑and‑tear of guest rooms and public spaces; I treat them as a fixed percentage of room revenue based on asset class. Finally, any planned property improvement plan (PIP) must be phased, costed, and reflected in cash flow timing – otherwise the model will overstate early profitability.
Turning the Numbers Into Action
Once the spreadsheet is complete, I step back and compare the projected NOI to the financing structure you intend to use. If the debt service coverage ratio feels thin, that’s a red flag worth revisiting the assumptions. I also recommend a sensitivity analysis around ADR and occupancy to see how resilient the investment is to market swings. The last step is the most practical: pull your own recent P&L and STR reports, line them up with the model, and see where reality diverges from projection. That comparison tells you whether the deal is a fit for your risk appetite or if you need to renegotiate terms.