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The Hotel Development Process

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on 24 June 2013

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Transcript of The Hotel Development Process

The Site:
Due diligence - existing operating hotel:
All property/s contracts, licenses, permits, franchises, commitments that could have potential legal or financial adverse impacts, or as impediments in closing the transaction,
Review by specialists or consultants on all major areas such as structural; fire; building code compliance; health and environmental regulations; major M&E systems and equipment, etc.,
All architectural and engineering plans and specifications; major capital expenditures for previous 5 years and projected expenditures; assess reliability on projected with specialists' report; assess other deferred maintenance estimates
Operation/financial due diligence reviews - external audit reports; tax filings; current years financial reports; listing of all o/s loans and mortgages; current and past years operation management reports, such as occupancy and segment room rates; future bookings, rates guarantees and deposits received, detail schedules of all insurance coverage,
Inventory of FF&E; supplies; consumables and other inventories; lists of suppliers; copies of service contracts, leases, franchises, licenses, permits; management agreements, union agreements and other commitments to be assumed,
Employees - list and details of employees, employment contracts and all related obligations, recorded or contingent,
Intangibles - copies of trademarks, trade names and copyrights;
- Understand the site
- Understand the site and surrounding area and the related hotel markets
- Market and financial feasibility studies
- Financing the project
- Acquisition contract negotiation


due deligence studies
- Finalizing hotel concepts

- Selecting Architects and designers
- Forming project management team and selection of general contractors and consultants
- Finalizing modes of operation-owner operated vs franchising vs management company operated
- Selecting franchising and/or management company and contract negotiation
- Pre-opening planning
Open for business and in operating mode and asset management


- Acquisition of existing hotel - the process

The Hotel Development Process:-
- Understand as much as practicable the current and the short, medium and long term development of the geo-political, economic, demographic conditions and the dynamics of the immediate environment as well as those of the vicinity, city and region.
- identify major existing and potential business "drivers" in the immediate vicinity and surrounding areas, and try as much as practicable the characteristics and the dynamics of these business segments industries.
- identify major existing and future development of attractions and activities that may also be key non-business "drivers" for guests to the hotel to be built. eg. tourist attractions, sports stadium, traffic hubs, etc.
- Review hotel industry information from published sources from tourism borad or local government agencies.
- Comprehensive reviews of competitors, both existing and planned; and as much as practicable, gather facility information; financial and performance statistics on existing hotels to develop a good grasp of realistic types and positioning of the hotel to be built.
The Feasibility Study:
- Market feasibility- gathering of more detailed data to develop a relatively more fine-tuned assessment as to the feasibility, current and/or future of having another hotel in the market. And if so, what would be the appropriate marketing positioning (types of hotels; styles and standards; general parameters on space planning with estimation of room counts; f/b facilities; other amenities and facilities, etc.); preliminary target market customer profiles (segments; orignins; seasonality; niches, etc.); most likely operational types (owner operated; international franchised; management company operated; etc.) . Very often, such market study would be done by professional consultants.
- Overlaying the above developed information together with estimated operating costs parameters to develop a financial feasibility study. In addition for decision maker to assess financial feasibility of the project, a well prepared financial feasibility could be used for fund raising, be it equity or loan financing
- Master area development plans; - Understand designated zone and the major parameters of attached terms. (eg. in HK - governed by CDA Zone - Comprehensive Development Area Zone
- This zoning is to facilitate appropriate planning controls over the development mix, scale - allowable GFA (Gross Floor Area), design and layout of development, taking account of various environmental, traffic, infrastructure, and other constraints. Would have to rely on professionals such as Chartered Surveyors and Architects for specific details;
- Site size to determine allowable build-able GFA of the hotel and/or annex;- Visibility and accessibility from roads; Traffic patterns and/or traffic study;- Proximity to target markets' needs (eg. businesses; offices; transportation hubs like airports; train stations or ferries;
- Barriers that discourage competitions to come into the markets;
- Nature of major nearby or adjacent properties and businesses that could be helpful or harmful;
- Local permitting process and degree of difficulty for attaining necessary permits and approvals;
- Other major fees to be charged by local authorities - eg. impact fees or utilities infrastructure lay out fees.
Due deligence study - raw land:
The process of investigation of with a certain standard of care.
the concept of standard of care is the degree of prudence and caution required of an individual who is under a duty of care.
Macro-environment due diligence review - Macro factors as discussed in previous lecture. Environmental generally carried out by Environmental consultants and/or engineer - minimum to identify existing and/or potential environmental hazards that may exist on or around the site, etc.
Legal due diligence review - legal property description; title search and any encumbrances or liens; ownership structure; previous transactions of site; property tax bills; sellers' credit ratings and review, etc
Financial due diligence review - past appraisals if available; own independent appraisal; existing or potential litigation; recorded and contingent loans and other liabilities; contingent commitments; insurance coverages; corporate tax review for o/s taxes or tax credits; impact fees o/s or credits. etc.
The Economy of the Area and its hotel market:
Upon completion of transaction - Finalizing preliminary hotel concepts:
Hotel type - business/leisure/blended; Convention/corporate conferences/meeting rooms- sizes? numbers?/F&B outlets- numbers? size? cuisines? banquets? private rooms? number? size? ; facilities, amenities - gym? spas? swimming pools - size? indoor/outdoor?; Other floor areas - allocations? offices? leased out entertainment venues? theater? exhibition hall? business center?shop arcades? hair salon? flower shops? gift shop? Entrance - sense of arrival? Back of house set up? locations? flows? Public space - size? usage? Garden - landscaping? multiple purpose? -
Hotel positioning - based on good understanding of characteristic of major customer segments (business/leisure? international/domestic/blended? customers' spending profile, their positioning profilea and Style profile? Hotel Star standing decision? Hotel style decision?
Some specifics for space planning - Rooms - room counts? configurations? sizes? ceiling height? preliminary in room style and facilities that may affect structural, engineering, construction and/or other planning stage concerns, eg. balcony? terraces? atrium space?
Plants and equipment and amenities - any special requirement, eg. Vertical garden feature, waterfall at entrance, roof top swimming pool or dining venues, - may affect loading and/or fire safety regulations and/or access and traffic flows.

Please note: it's a preliminary concept finalization through a process of continuing modification and fine-tuning.
-Construction phase
-Fitting out phase
-Pre-opening phase- planning/implementation
-Hotel soft opening
-Hotel Grand opening
- financing the project
- Acquisition contract negotiation
- owner's assessment on ability to acquire expertise in fully operating and in marketing activities; willingness and building up capability in sales and in working with travel agencies (digital or otherwise); ambition/vision on building own brand;
- choices between owner operated vs professional management company - need to understand the complexity of operation.
- expertise and "proven" working systems provided by management company -
- On expertise, conceivably one can recruit....On systems, it'll take time to develop from scratch -
- Operating Systems - Front Office System, room inventory control system; mini-bar system; in-room infotainment system; Facility Management system;
- Marketing/Sales systems - Reservation system; Yield management system; CRS (Customer relation Service) system; Key account management system;
- F/B supporting systems - POS (Point of Sales) system; sales booking and support system; banquet management systems;
- Other Supporting system - Accounting and management reporting system; IT supporting expertise; Human resources and all related supporting systems; Ordering/Purchasing/receiving/warehousing systems;
- Other expertise and supporting systems - eg. spa operation; specialty restaurants;
Mode of operating - owner operate with/without brand franchising or management company with/without brand franchising or international/domestic brand with management?
Issues relating to management contracts;
- with brands - Terms in the use of Brands; scope limitation and latitude? degree of control/approval requirement? transitioning after termination? additional fees?
- With brand reservation system - track record of performance in delivery of room nights/segments/rates? Additional charges? Same brand in same market? use of impact study and reliability? equity ownership of such properties? Protection down the road?
- Pre-opening expertise? Specific scope? charges? preliminary working schedules? Staging of manpower plan? Training programs?
- Hiring and Firing of Key hotel executives - owners' right? control/approval? Processes?
- Financial management - Appointment of Controller/Treasurer? Budgeting and Reporting - Annual plan submission? Timing? Approval process? Financial and management reports? what? timing and frequency?
- Expenditure control - approval limits/procedures; reasonableness and feasible? Cash and funding control - Owner's role and rights/obligation?
- Capital plan, refurbishment provision, repair and maintenance provision and funding?
- Performance clause - how to assess? rewards and penalty?
- Event of Default - what constitute an event of default; remedy?
- Termination/renewal clause - terminate for cause? when? renewal provision? Terms upon renewal?
- Assignment rights - issues relating to change of control or outright sales?
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