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What is the Hotel Business Case?

Explainer by Gregory Autin

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Last updated on 3 November 2020Comments

Defining Project Opportunities

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The first step in the property development process is opportunity definition. This is when alternative projects are explored, identified and selected.

For any project, a business case must first be developed and presented in a carefully constructed document that describes, refines and defines a project concept. It justifies the project based on its expected commercial benefit and success and is used to determine the intended stakeholders and generate support and approvals.

The business case for a new project establishes the need, defines the nature of the business, justifies its financing and investment, provides a cost-benefit analysis, and estimates its potential profitability benefits. It also determines the most appropriate business model and leads to detailed financial modeling and analysis.

The business case examines alternative opportunities, the project's production and investment, and recommends the course of action that will create the most business value. It may result in the selection of an alternative project that meets the opportunity definition.

A preliminary feasibility analysis is generally conducted for the "go/no-go" decision to further pursue the project development concept. If favorable, a comprehensive market and financial feasibility study is generally undertaken as the basis for the business case and a full business plan is developed.

The preliminary funding analysis projects how much capital is needed, the sources of capital, returns on investment, and other financial considerations. It serves as the basis for the financing terms and conditions.

The resulting capital plan will explain financial risks and opportunities and the impact of proceeding or not proceeding with the project. Recommendations are made along with providing evidence that the proposed action is the optimal solution under the given circumstances.

The business case for sustainability establishes the business benefits to sustainable development and the "greening" of operations. The economic benefits include cost savings, competitive advantage, employee loyalty, customer retention, regulatory compliance, and risk management.

The Hotel Business Plan

The business plan provides a detailed summary of the objectives of an intended business undertaking and an outline of the actions required to achieve its operational and financial goals, growth targets, and strategic direction. It provides measures of revenues, margins and profits and is used to monitor the performance of the business.

The business plan of a project in a new market will normally include:

  1. Market-entry strategy - The plan to enter a new target market and consider entry barriers, the competitive environment, the project ownership structure, and the business model;
  2. Management and organization plan - The organization structure and arrangement of responsibilities, authority, rights and communication;
  3. Financial and investment plan - The details of the investment and financing requirements and the projected costs, operational expenses and revenue;
  4. Human resources plan - The current and future human resources requirements, areas where there will be staffing needs, and actions to fill the vacancies;
  5. Marketing and sales plan - An outline of the advertising, marketing and sales efforts to achieve the financial and sales goals;
  6. Risk management program - The procedures used to identify potential events that may negatively affect the organization and to protect and minimize these risks;
  7. Project exit strategy - The developer's plan to exit the project, generally either upon project completion or asset sale;
  8. Road map - A description of the project's strategic direction, for tracking the progress of initiatives; and.
  9. Action plan - The specified activity required to achieve the strategic objectives.

Business plans are subject to adaptation as business develops or objectives change and when new opportunities or threats arise. This necessitates that they are updated accordingly.

Sustainability calls for the planning of a prioritized set of actions that positively impacts the environment and society, while increasing the project's economic value. Sustainable development must consider the interests of all stakeholders.

The Project Development Strategy

Development strategy is a detailed plan outlining how an organization intends to succeed through development over time and used to gauge its overall success. For a hotel development project, it defines such internal and external issue as:

  • The objectives of the developer, its investors and the other stakeholders;
  • Control over the project's marketing and operations throughout its extended life cycle
  • The strengths, weaknesses, opportunities and threats of the development project;
  • The brands, products or services to be supplied;
  • The pricing policy and price sensitivity;
  • The competition, their strategies, and any competitive advantage of the project;
  • The profile of the prospective guests; and
  • External influences that are likely to affect the market.

Build-to-hold is a basic business strategy to develop income-producing property that the developer owns (holds), commonly with other investors, and to manage over the long-term. Build-to-sell is the other basic strategy where hotel property is developed, sold and transferred upon project completion, marking the developer's exit from the project.

Property development projects create value for developers through five basic operational strategies:

  1. Development or redevelopment - When the total cost is lower than the asset's market value upon project completion, profit is realized;
  2. Lower cost of capital - When financing is favorable, developers can outbid competitors while increasing leverage;
  3. Financial leverage - Through the use of debt funding to finance the business, the return on equity (ROI) increases;
  4. Superior investing skills - Using systematic selection procedures and market-timing strategies, good deals are sought and bad deals avoided; and
  5. Superior operating skills - When operated more efficiently than competitors, revenue is enhanced and superior net operating income (NOI) is produced.

The strategies are generally combined. Each requires different skill sets and has different implications for a project's overall risks and returns.

Sustainability as a business strategy calls for consideration of the prevailing and changing social and cultural norms, values and practices. Sustainable development is undertaken for the benefit of all stakeholders.

Copyright © 2020 Pecunica LLC. All rights reserved.

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