Hotel feasibility study: what it costs and what is in it

A hotel feasibility study is the independent market evidence for whether a proposed hotel can fill its rooms at the rates the project needs. For a standard project in a well-documented market, expect to pay roughly 10,000 to 25,000 dollars for one.

Every firm that sells feasibility studies will explain why you need one. Very few will tell you what it costs, what is actually inside it, or which half of the work you could answer yourself before commissioning anything. That is what this page is for.

One note on the figures. The ranges below are what the market typically produces, not a quote. Scope, data availability and the standing of the firm signing the report all move the number, and the sections that follow set out which of those you control.

What a feasibility study is, and what it is not

Two documents sit under every hotel decision and they are constantly confused. The feasibility study answers the market question: is the demand there, who generates it, what already competes for it, and what will the market pay. The pro forma answers the financial question: given that demand, what does the hotel earn and what does the owner keep.

They are usually bound into one report, which is why they get treated as one thing. They fail differently. A feasibility error means the guests are not there. A pro forma error means the guests are there and the owner still loses money, usually because fees, reserves or capital were understated. The first failure kills the project. The second kills the returns while everyone congratulates themselves on the occupancy. The financial half is covered in full in the pro forma guide.

What it costs, and what moves the number

Published figures for this vary wildly, and most of the variation is people quoting different scopes as though they were the same product. A workable set of ranges:

• A pre-feasibility screen, enough to decide whether a site is worth pursuing at all: from about 6,000 dollars.
• A full study on a select-service or limited-service hotel in a market with good benchmarking coverage: roughly 10,000 to 25,000 dollars. A municipal tender in western Canada was quoted at exactly that range last year, which is a rare instance of the number being public.
• A full-service hotel, a resort, or anything with meeting space, several revenue streams or a mixed-use component: 50,000 dollars and upward.

Four things move the price. Scope, meaning how many revenue streams have to be modelled separately rather than as a percentage of rooms revenue. Data availability, because a market with thin benchmarking coverage requires primary research, and primary research is fieldwork. Purpose, because a study that has to satisfy a credit committee is a different document from one that only has to satisfy you. And the standing of the firm on the cover, which is not vanity: a lender may accept a study only from a firm on its approved list, and that constraint sets your price before you negotiate anything.

The arithmetic that answers whether it is worth it

The honest way to size the fee is against the thing it is testing, not against your budget.

Take a 100-key hotel projected at a 180 dollar average daily rate. One percentage point of stabilised occupancy is 365 room nights a year, or about 65,700 dollars of rooms revenue. Most of that falls a long way down the profit and loss account, because the marginal cost of selling one more room in a hotel that is already open and already staffed is small.

So a single point of stabilised occupancy, in a single year, is worth roughly three times the cost of the entire study. Across a ten-year hold, before any rate growth at all, it is more than twenty-five times. On a development costing 17 million dollars, a 20,000 dollar study is about one tenth of one per cent of the money at risk.

That is the comparison to make. The study is not competing with your budget. It is competing with the cost of being one point wrong about the assumption everything else rests on.

None of which means every study earns its fee. A bad one is worse than none, because it turns a guess into a document and people stop questioning documents. The two sections below are about telling them apart.

What is inside one

The core is the competitive set: a defined group of comparable hotels whose occupancy, average daily rate and RevPAR history anchor every projection in the report. Everything else is either building that set or arguing about where the subject hotel sits against it.

Around it sit the supply and demand analysis, meaning what exists, what is under construction, what has merely been announced, and which demand segments generate the room nights. Then the site and concept assessment, the projected positioning of the subject hotel, and the financial projection that follows from all of it.

The number that carries the argument is the penetration index: the hotel's share of the competitive set's business measured against its fair share by room count. An index of 100 means the hotel performs exactly in line with the set. A new hotel projected above 100 needs a specific, evidenced reason why it will outperform hotels that are already open and already known in that market.

The half you can answer before you commission anything

Here is the part the firms selling studies have no particular reason to tell you.

The market half genuinely requires the study. Competitive set performance data has to be bought, demand segmentation requires local work, and the independence is the entire point.

The financial half is a model, and its inputs are the market half's outputs. Which means you can run it backwards. Build the projection first, using the comparable hotel performance you can already observe, and solve for what the project would need in order to work: what stabilised occupancy, what rate, what penetration index.

Then ask whether that is a plausible thing for a new hotel to achieve in that market. If the deal only clears its return hurdle at a penetration index of 115, you have learned something worth several times the study fee, in an afternoon, before spending anything. If it clears comfortably at 95, you commission the study knowing what you are testing rather than waiting to be told.

That is the order experienced developers work in. The study confirms or kills a view. It should not be the thing that forms it.

Why you still cannot skip it

Because independence is the product, and you cannot supply it about your own project.

A credit committee is not evaluating your arithmetic. It is evaluating whether somebody with a reputation to lose has put their name to the demand assumption. That is what the fee buys, and a better spreadsheet does not substitute for it. If the project needs debt, treat the study as a cost of financing rather than a cost of analysis, and budget it accordingly.

The same holds with an operator, a joint venture partner or a board. Your own model persuades the people who already trust you. The study is for the ones who do not.

Where studies are usually weakest

If a study has been handed to you, five places to look before you accept what it says:

The competitive set. Who was left out, and would including them have pulled the average down. This is the most consequential judgement in the report and it is made on the first few pages, where it is easiest to skim past.

The penetration index. Anything above 100 for a new build needs a named reason with evidence behind it, not an assertion about product quality.

The ramp. No hotel opens stabilised. A study that reaches stabilised performance in year two, in a market with new supply coming, is telling you what you want to hear.

The fee and reserve treatment. Brand and distribution charges are deducted before gross operating profit; management fees and the FF&E reserve come after it. A study that puts them on the wrong lines produces a GOP that looks right and an owner return that is not. The line-by-line position is in GOP, EBITDA and the owner's bottom line.

The downside. If the report contains no case in which the project fails, it has not been tested. Ask for the occupancy and rate at which the deal breaks even, then check that against the worst year the competitive set has actually had.

What to ask before you sign the engagement letter

Which benchmarking data is included and who pays for it. Whether the competitive set is your choice or theirs, and what happens if you disagree. Whether the deliverable includes the working model or only the report, because the model is the thing you will still need in two years when the assumptions have moved. Whether the firm is accepted by your lender, which you confirm with the lender rather than with the firm. And what a revision costs, because the assumptions will change at least once.