HAMG 1313 Front Office Procedures

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HAMG 1313-Front Office Procedures

• Developing and Opening a New Hotel

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Introduction

• Opening is the most crazy, time-consuming and
  frustrating periods of your life as a GM but it
  is also exceptionally rewarding and exciting
• The development of a hotel involves all work from
  concept to opening
• Generally, these are the five steps
• Defining the product concept
• Preparing an economic market study and appraisal
• Financing the project
• Site development
• Pre-opening planning

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Product Concept

• One option in developing a hotel is to consider a
  franchise product concept or an agreement with a
  national or international hotel company to manage
  a new property (management contract)
• Need to focus on the long-term economic trends
  and the potential for future supply and demand
• Median economic life of a lodging facility is
  about thirty-five to forty years

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Product Concept (continued)

• Must examine the following factors
• Characteristics of the existing lodging demand
• Features of the existing lodging supply
• Features of successful lodging enterprises in the
  target market
• A lodging product concept is more likely to be
  successful if one of the following market
  conditions exist
• Product does not currently exist but the
  potential demand is strong
• Product exists but there is a high level of
  demand and low levels of competition
• Product exists but increasing levels of future
  demand are foreseen
• Product exists but the existing product suffers
  from poor location, poor quality of facilities
  and/or poor management

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Economic Market Study and Appraisal

• Three main reasons projects fail
• Either the studies were incorrectly performed or
  incorrect recommendations were made
• Studies were performed correctly and the right
  recommendations were made, but the client was so
  enamored with the original concept he or she
  ignored them
• Studies were performed correctly, the client
  adjusted the project to the recommendations, but
  the project was unsuccessful because of one of a
  myriad of variables

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Economic Market Study and Appraisal (continued)

• To justify the amount of a loan, an appraisal is
  better performed by a member of the American
  Institute of Real Estate Appraisers
• Because the market study and appraisal are so
  important to the progress of the project, it is
  important to hire a qualified individual to
  perform these analyses
• The consultant should specialize in hotel-related
  studies, with exposure to multiple types of
  markets and products

• The consultant should have access to
  hotel-trained personnel for both the market study
  and the appraisal
• The appraisers must have adequate qualifications,
  background and experience to conduce an accurate
  assessment of the potential economic success of
  the project
• It is essential that the consultant take into
  account every category of expense in making
  financial projections

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Economic Market Study and Appraisal (continued)

• Evaluate the local market demand, the areas
  economic and demographic characteristics,
  attributes of the site, and competition
• Furnish estimates of future occupancy levels and
  room rates, 1, 3, 5 and 10 years
• Focus on a number of specific characteristics
  including site and surrounding land use,
  accessibility to transportation, economic and
  demographic base and competitive lodging
  facilities

• Project analysis consists of organizing the
  fieldwork data and stating conclusions regarding
  the most appropriate type of facility, occupancy
  and use projections of guestrooms, recommended
  food and beverage facilities and related
  amenities
• Economic Valuation compares the value of the
  project cash flow to the estimated total cost to
  determine economic feasibility
• Cost approach based on replacing a property with
  similar square footage
• Sale comparison approach compares the known sales
  prices of hotels with attributes similar to those
  of the hotel under consideration

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Financing

• Commercial bank, life insurance company, credit
  company, savings loan association, real estate
  investment trust or a pension fund
• Underwriters focus particularly on cash flow risk
  revenues will be insufficient to cover
  operating expenses, debt service, or ROI
• Also focus on the market value risk value of
  the property might decline to the extent that the
  sale of the property would be insufficient to
  cover mortgage obligation, total equity
  investment or inflationary value increases

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Site Development

• Acquisition
• Buyer and seller must agree on general terms
• Letter of intent is drawn up spells out basic
  terms of the agreement
• Buyer must obtain financing
• Content, structure and schedule of the
  transactions are agreed upon and the funds
  obtained then closing occurs
• Other ways to acquire include a long-term lease,
  barter and eminent domain

• Long-term Lease
• Owner retains ownership but rents it to the
  developer
• Barter
• Residential landowner may trade the property for
  another that is to be purchased or is already
  owned by the developer
• Eminent Domain
• Local government condemns an unoccupied property
  and sells it to the developer providing it can be
  shown that the public interest would be benefited
  to a greater extent than an individual

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Site Development (continued)

• Design is the responsibility of an architectural
  firm hired by the developer
• Key considerations
• Familiarity with trends of the target markets
• Thorough understanding of the geographic and
  climatic conditions that must be considered to
  maximize construction costs
• Knowledge of cultural and historic factors that
  are characteristic of the locale
• Construction
• Numerous state, local and other regulations
• Local contractors and firms may have a better
  handle on local regulations
• Once the design has been completed, construction
  manager takes over the project

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Pre-Opening Planning

• Opening day is the most important date
• On the construction side, important factors
  include climate, cost and availability of
  materials, accessibility to a workforce
• Financial factors range from budget and cost of
  labor and materials to inflation and debt
  repayment schedule
• Staffing, vendors, FFE, legal issues, regulatory
  compliance and certifications
• May take as long as two-three years to plan for
  the opening day of a large project

• Staffing plan must be designed
• First phase includes construction manager
• General Manager is usually first hired by hotel
  itself
• General counsel or law firm is retained
• Human resource managers role is to write
  handbook, job titles/descriptions, policies, etc.
• Other department heads come on as budget allows

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Pre-Opening Planning (continued)

• Personal reaction to opening new hotels is to
  stay focused, try not to get overwhelmed, start
  marketing efforts at least one year in advance
  for a small property and at last 2 years in
  advance for a large property
• Make sure in the final month that you are doing
  practice, training, working out kinks, using
  ghost guests, etc. It all depends on the
  certificate of occupancy and when you can get
  into the building
• PMS training is VERY important during this time

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Summary

• Define the product concept
• Do a thorough economic study and appraisal use a
  dependable, unbiased source
• Check all financing aspects thoroughly
• Hire a great contractor/construction firm
• Be very detail-oriented
• Allow for proper and sufficient pre-opening staff
  
• Make sure you have a well-used and accurate
  timeline during pre-opening