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Expensive errors in the planning of a new hotel

Expensive errors in the planning of a new hotel

 

Costs of the pre-opening and start-up phases are not planned and financed

Most of the time, start-up phases for hotel companies are about three to four years. The length of the starting phase depends on different factors. Building permits, tenders, planning changes and many other factors create unexpected delays. In this period before the opening, there are of course costs which must be covered through thorough financing.

Frequently, pre-opening costs, leases and capital services during the start-up phase can not be fully realized by the company. Fixed leases and high capital services often find no or too little consideration in the planning – but they can become a major burden. After all, once agreed, they are part of the monthly fixed contract debt – unlike the planned sales, which are initially only numbers. One could also say: facts make predictions – and these are to be secured in the best possible way!

Flexible financing concepts and dynamic leasing models help to secure the operation through the start-up phase. They should, however, be an integral part of the planning much farther in advance –  and not a means of limiting the damage if the “child is already on the way to the well”.

Therefore, the absolutely essential differentiated cost-benefit calculations must show opportunities and risks, and from alternative calculation models, the individually best suited ones are selected.

 

A serious cost-benefit calculation for a new hotel consists of:

  • pre-opening budgets, adjusted for operating type and individual framework conditions, including material and staff costs (divided into pre-opening periods), as well as determining the losses during the start-up phase
  • complete and conceptual construction cost estimation
  • detailed and segmented sales budgets on a daily basis (day by day)
  • full cost budgets at cost level
  • structured staff budgets with needs assessment
  • profit and loss calculation according to the “Uniform System of Accounts for the Lodging Industry (USALI) – a profit-and-loss calculation of the individual company divisions and of the company as a whole

Particularly for the phase of the pre-opening and the subsequent start-up phase, sufficient financial resources have to be planned in detail, which must be taken into account in the business plan or in the liquidity review (see also topic Liquidity).

 

Careful investigations of pre-opening costs are worthless if they are counteracted by incomplete plans and budgets.

In the case of the pre-opening and start-up costs which are sometimes high, the investor and operator must be able to conclude acceptable agreements which will ensure successful and secure start-up of the operation. Tenants / operators are generally neither willing nor able to accept these costs alone. Frequently applied practice is therefore that the investor / builder includes (at least notable) parts of the pre-opening and start-up costs in his financing. From the point of view of profitability, these costs determine the value of the property substantially, since they are what the hotel is made of.

 

Financial risks in hotel buildings

Inappropriate financing concepts can have fatal effects on the success of the planning project. Core indicators are here

Financing terms

  • Interest and amortization
  • Non-repayment-free periods of funding loans or KfW loans are finite

 Financing mix

  • Equity ratio and borrowing concept (funds, developer models [‘BGB-Gesellschaft’], etc.)
    • Financing of equipment, small inventories and equipment through expensive overdraft facilities

High property costs

  • lure of the low-interest phase

 

Estimate of investment costs and building budget

“Expensive errors” are often reflected in incomplete and / or totally unrealistic investment budgets for hotel projects – with a sustained negative impact on the liquidity situation of the operator. Two sources of error are to be named as examples:

  • hotel-specific equipment and incidental costs are not considered or underestimated
  • Operating Supplies & Equipment and Pre-Opening (pre-opening)
  • Construction costs are underestimated
  • 40% of the construction costs of a middle-class hotel

Misjudgments in the construction and investment budget are charged to the pre-opening, start-up costs – and thus the liquid funds of the hotel management.

As already mentioned, careful investigations of the pre-opening costs are worthless if they are counteracted by incomplete plans and budgets.

Keyword: “Profitability”

Investments must fit into the future market – high investment costs of the property can hardly be amortized in a low-price market, lease and capital services can not be generated. In order for a hotel property to function and be economically successful, our feasibility studies focus on the ability to develop results-based operating types for the existing location and the market to be expected, and not to be guided by supposed vanity or the prestige needs of an investor. The old marketing wisdom is valid here: “The bait must be tasteful for the fish, not the fisherman”

Hotel and catering real estates are ‘operational real estates’ (must function operationally) – professionalism, professional knowledge and discipline in planning and construction phase are essential in order to achieve the later lean organization and market stability. Incorrect planning with paths that are too long, incorrect locations for warehouses, etc. influence later staff costs, even before the first employee has been set up for operation.

Profitability projections for full hotels, which see lease or annuity beyond 25% of the total turnover expected, are to be classified as “critical” – in the case of restaurants this level is considered at 10-12% of the total turnover.

 

 

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