Chapter 6: Developing an International Hotel Project

Chapter 6: Developing an International Hotel Project Nedith Rachelle L. Rocillo II-BS Travel Management

The Development Team • These may include developers, lenders, the host government, planners, landowners, anthropologists, environmentalists, architects, interior designers, builders and contractors, hotel operators, and more. • The titles do not differ much, but the constituency of each group may vary by country. • Groups work together as a team to resolve economic, social, environmental, architectural, engineering, and technical problems. • In an international project, it is • critical for all team members to • understand the regulations re- • garding the development process. • “Political correctness”

The Developer • The central figure who coordinates the groups of professionals from the various fields. • The deal-makers who conceive the project, initiate the development process, find the venture capital, and marshal the resources needed to complete the project. • Work with land, laws, capital, labor and materials within an environment they can influence, but never fully control. The Hotel Operator and Other Consultants • Usually national or international professional management companies – are today included on the development team early in the game for good reasons. • Can also provide important input in terms of the conceptual master plan, market feasibility studies, technical layouts and specifications, site and community evaluations, and operational considerations that help to ensure the long-term viability of the project. N: The composition of the development team and role of the hotel operator will vary from project to project, as will the responsibilities of the individual members.

Five Phases of Hotel Development • Conceptualization, Planning, Initiation • Define prohect objecives. • Define developmental issues. • Comply with local and national government regulations • Ascertain whether any restrictions on land use exist. • Determine the hotel configuration (number of services, rooms) • Develop a project flowchart. • Develop a preliminary master plan.

II. Feasibility Analysis • Select a qualified consultant to perform the study. • Identify and select elements to be covered in the study. • Use the results of the fesibility study. III. Commitment • Assemble the land or acquire the site. • Secure agreements from public entities for development and funding assistance. • Select and contract with a hotel operator for franchise rights, affiliation, and/or management assistance. • Obtain development rights for the site. • Develop overall land-use plan. • Select project architect and engineer. • Refine project development costs, schedules, and drawings. • Obtain necessary government approvals and documents. • Determine ownership structure and obtain financing.

IV. Design, Layout, and Construction • Conceptualize and complete architectural design and physical layout. • Allocate space. • Plan for energy and technical systems. • Construct the facility. • Interface architecture, landscaping, and interior design. V. Management/Operation • Initiate sales and marketing campaign. • Recruit and train staff. • Organize departments. • Maintain the facility.

----------Where to Develop---------- • Political Stability – the primary consideration in targeting a country for an international hotel project. • Developers typically determine opportunities in a foreign country using a four-step process • Analyzing the business environment • Determining market potential • Forecasting sales, and • Estimating and weighing prospective profitability versus risk

Business Environment Analysis • requires detailed study of the political, economic, social, and cultural aspects of the target country. • Similarities in culture and language between the home and host countries tend to make planning, developing, managing, and controlling foreign hotels easier. • Physical proximity to origin markets (selection of prospective guests) - important criterion in location selection. Although, today’s more frequent and faster air transportation and improved communication systems have reduced the significance of distance. • Prospective developers need to understand the attitude of the target country toward tourism and international hotel companies.

With changes in economic and political fortunes, government attitude may also change. • The flow of business across the national borders is affected by a number of government control mechanisms, including travel and trade barriers. • Legal problems in conducting international business are common. • The procedures and limitations regarding travel restrictions (if any), travel for employment, import and export duties, and government approval for normal business transactions should be investigated early on. • It might be useful to use a checklist when analyzing a country’s business environment. • Ratings and weights must be assigned to each variable to provide the decision-maker with a numerical score for comparing projects by country. • Each company must determine the actual rating scale and weights to be used according to its own investment philosophy, objectives, and policies.

Market Potential • Market viability is for owners the next most important consideration in a hotel project. • Owners must see long-term profit potential from operations and return on investment. • Real estate market, the cost of development, and the property’s sale potential upon its completion are prime criteria in pursuing a hotel project. • The higher the market potential, the more willing a developer or owner may be to put up with adversity to support a project from start to finish. • The preliminary demand or market analysis consists of identifying markets, analyzing present and anticipated market conditions, and estimating occupancy and rate potentials.

Physical, climatic, cultural, business and other attractions need to be identified, as does the condition of the infrastructure, superstracture (physical structures such as terminal buildings that are part of the infrastructure but usually privately owned), and transportation accessibility. • The economic environment of major outbound-traffic-generating countries and their trends with regard to the target country also need analysis. • Degree of development and competition, local arrival figures, and recent shifts in travel patterns. • Government publications, trade journals, interviews with travel industry representatives, trade and professional associations, government officials, and others experienced in the travel industry. – sources that can be helpful in identifying potential markets and assessing overall demand.

Forecasting Sales • Elements that affect the forecast include market trends, the number of hotels competing in the same category, the strength of competitors, potential market share, seasonality, anticipated average rates and occupancies, and planned sales and marketing programs. Profitability Versus Risk • When the preliminary profitability of the project has been assessed, the developer must weigh the potential profits of entering the foreign market against the risks involved. • Factors that could put the project at risk: political stability and government requirements. E.g. Japan = United States. • The developer who is a captive of his or her own culture may pay a dear tuition to learn the realities of private business elsewhere.

----------Infrastructure Requirements---------- The report indicates that the growing economies of Asia- in particular China, Japan, Korea, and Singapore – are spending a high proportion of their gross domestic product (9 percent in the case of China) on infrastructure including roads, airports, and next-generation mass- transportation networks. Australia, the United Kingdom, Canada and Western Europe are ahead of the United States in confronting their infrastructure needs and using private financing to fund improvements. United States spend over $112 billion per year on its infrastructure, this is less than one percent of its gross domestic product. The report concludes that an infrastructure crisis is looming in the United States. Maintaining an adequate infrastructure can be an issue even for well- developed countries. • Infrastructure generally comprises the system of services and utilities that are necessary to support development. • The developer should carefully evaluate the short- and long- term capacity of each infrastructure component in relation to the hotel’s requirements and the requirements of other planned developments. • A government’s provision of infrastructure can serve as an important incentive in attracting hotel investments. • A recent report on global infrastructure sponsored jointly by the Urban Land Institute and Ernst & Young provides a comprehensive look at the status of transportation infrastructure globally.

U. S. Infrastructure Report Card Roads D Power grid D Bridges C Drinking water D- Transit D+ Wastewater D- Rail C- Dams D Aviation D+ A = Exceptional; B = Good; C = Mediocre; D = Poor; F = Failing Insufficient public sector planning?? Provision of infrastructure?? The developer must work closely with the government to ensure that there will be infrastructure support for the project or be prepared to incure private costs in infrastructure.

----------Infrastructure Requirements---------- • Water • Power • Communication • Sewage and Drainage • Transportation • Health-Care Provisions • Labor Forcee • Security

--------Working with an Established Tourism Master Plan------- • Guide the development of resort destinations and tourism-related facilities, including hotels and recreation amenities. • The plan provides the basis for policies, procedures, and regulations governing development. • A tourism master plan usually begins by looking at the economic conditions, and investment climate of the destination. • This is followed by a synopsis of the area’s current status with respect to tourism development – its hotels, attractions, restaurants, nightlife, and visitor trends. • Next, the plan addresses infrastructure elements such as transportation and utilities and discusses opportunities, constraints, and requirements. • Plan will usually end with a statement of implementation. • A timetable for implementation typically accompanies the plan. Often used to describe or label the plan.

----------Identifying a Specific Site---------- • General criteria include location (as analyzed from various market and development cost-benefit perspectives), view, environmental suitability, and terrain. • Even the environmental impact statements (EIS) once unique to the United States are now more commonplace throughout the world as a prerequisite to development. A. Land Availability Before Land can be used, it must be acquired.

----------The Preliminary Site and Building Analysis---------- • B. Zoning • In many areas of the world, the zoning ordinance is one of the most significant regulatory powers; it is also one of the most popular and controversial uses of development power. • Dividing an area into districts and allowing only specified types of development in each district. The zoning ordinance spells out the restrictions on land use and development for each district type and identifies the procedural requirements of the zoning process. • Zoning Variances- Relaxations of zoning rules for cases in which the standard requirements would pose undue hardships on the property owners. • This cost-effective tool evaluates a site before the developer spends a lot for extensive design documents and drawings on a location that might not be economically feasible. • The developer can estimate an overall budget for construction and ascertain the long-term economic viability of the project with the following information. ->

Guide to the information that should be gathered in such an analysis: • The scope of the project (that is, the number of rooms, square footage per room, public areas) • Zoning ordinances and code requirements a. Property seatback requirements (distance from streets, coastal zones, or other areas) b. Height restrictions c. Parking requirements d. Retention of open areas (for density control) e. Needed variance requirements f. Floor area ratio requirements g. Architectural design requirements h. Construction materials requirements i. Safety and health standards • Legal and environmental restrictions • Utitlities • Geotechnical report covering topography, soil conditions, mineral content, water table, and other technical aspects of the land.

----------Market Feasibility Study---------- • An economic study that provides a full financial analysis of a proposed hotel, including return on investment; in a fuller sense, a market feasibility study determines whether or not a market exists for a proposed new hotel and what the financial consequences will be if the project is implemented. • Provides significant data to determine whether the preliminary master plan can be justified in economic terms. • Used to evaluate risk. It is an important requirement of potential investors and lenders. • Generally conducted by an independent third party who evaluates the project and the market. • Three factors should be considered in selecting the feasibility consulting company: (1) the international experience of the individual consultant assigned to the project, (2) the reputation of the company, and (3) the quality of the database the firm brings to the analysis.

Information Gathering A feasibility study for an international project will generally provide: • A detailed analysis of potential demand for the project (broken down by different segments) • An analysis of supply factors such as existing and proposed properties in the area • Detailed financial projections usually forecasted ten years from the estimated opening date The feasibility analysis can also assist in the development of a hotel’s positioning statement. Good sources of information include government agencies at various levels, local hotel and restaurant associations, tourism offices, local convention and visitors bureaus, local or regional branches of hotel accounting and consulting firms, academic institutions, local transportation companies, the local chamber of commerce or its equivalent, bankers, and prominent businesspersons.

----------The Approval Process---------- • It is important to develop an overall strategy for the approval process. • The process presents a complex web of permits, authorizations, and administrative procedures. • In an effort to attract foreign investment in the hotel sector, some governments are streamlining the approval process by eliminating overlapping or bureaucratic regulatory requirements and impediments for investment. • Others provide government assistance to guide investors through the approval process.

Environmental impact stability (EIS) – generally a written report that describes what may happen to the environment in both the short and long term if a specific project is carried out. Impact Fee Assessments – charges imposed by a government in anticipation of public costs that may occur as a result of the development, or charges imposed as a trade-off for some alternative use of the property may have higher public benefit. Impact Fee – a fee charged to private developers to cover the cost of infratsructure or services that must be provided by government as a consequence of development; may also mean a charge imposed on developments that may have negative environmental or social impacts which must be borne by the public sector. Working with Local Interests – Local issue interests are sometimes represented in the development process by individual citizens who speak at public hearings and who act independently of any larger organization.

----------Design Considerations---------- • The hotel design must take into account local planning requirements and building and zoning codes. Architecture is often a controversial subject where a new hotel is being developed. Responsible developers, owners, and operators attempt to achieve a design that complements the local environment and the host culture while being commercially viable. Architectural Themes – Architectural design can be used to create an image. Hotel designs and layouts are based on structural, physical, social, cultural, and psychological considerations. Structural considerations relate to the best use of the land and the choice of building materials and forms. Physical considerations pertain to the functions of the proposed structures and focus on the functional efficiency of the hotel’s operations. Unity in architectural style and appearance among hotels clustered in the same area, particularly when patterned upon the traditions and culture of the area, can help create an image of the destination in the minds of prospective visitors.

Design Trends- One major trend is to evaluate the significance of cultural and historical influences and how they can be integrated into design. In some areas, hotel architects draw on traditional forms of hospitality in developing an international hotel. Physical Surroundings- an important trend in non-urbanized area is designing hotels to fit in with the physical environment. Urban Design- city hotels are becoming more upscale and formal with grand porticos and entrances. Older Structures- Local governments often encourage the use of old buildings for hotels, especially those with historric or architectural merit. Some are protected by law.

----------Building Requirements---------- Design and Construction in a Cross-Cultural Environment- actual construction of the facility can be difficult, because the many interdependent players sometimes have conflicting objectives and a number of timetables to coordinate. Understanding Foreign Business Practices Many international hotels are developed today as joint ventures. When business partners from different cultures collaborate, the undertaking will almost invariably prove to be a challenge. Patience, understanding, and most of all respect for the dissenting views of partners from diverse backgrounds are crucial to creating a harmonious working environment and a successful venture. It is essential that the architect and engineers study the codes, ordinances, and standards for a particular location and comply fully with all requirements. Individual properties must also satisfy the requirements stipulated by the hotel operating company, which can sometimes be more stringent than government regulations.

Regulatory Control While each country’s or host community’s requirements and ordinances will vary, the international hotel developer is likely to encounter seven basic categories of regulatory control. These categories deal with: The responsibility of the owner, the architect, and the contractor to comply with standards ensuring the constructional safety of the building and adequate provisions for sanitation – for example, building regulations, and building and sanitation codes. The obligations, whether specified or implied, of the hotel operator to maintain the premises in a safe condition. Provisions for the protection of the health, safety, and welfare of employees working on the premises. Specific requirements relating to fire protection and means of escape, food hygiene, and licensing for particular uses (for example, sale of liquor, assembly, entertainment). Conditions for grading, classification, financial subsidy, and/or mortgage for various types of hotels. Insurance requirements and conditions stipulated in insurance agreements. Standards of safety provided for in the installation of electrical and mechanical services, through engineering codes and regulations.

Fire Safety Fire protection and the provision of safe means of escape are shared responsibilities of the developer, architect, contractor, and operator. Penalties for fire code violations in some countries can be severe, especially when casualties are high. Fire safety comprises three main areas: Structural protection includes requirements for fire resistance of the building elements and components and limitations on the use of combustible materials and finishes that have a high rate of surface flame spread. There is an international trend toward uniformity in legal requirements based on structurally similar standards. Active protection covers automatic fire and smoke detection, warnings,, and fire-fighting equipment of various kinds. Means of escape for the occupants in the event of fire concern travel distances to safe exits, the identification and protection of escape routes, and evacuation from the building. In most countries, mandatory requirements in these areas influence both the planning and design of buildings.

Security • Involves the protection and control of property, safeguarding of guests and occupants, surveillance of persons and goods entering and leaving, and other responsibilities. Given the rising crime rates and terrorist activity in many parts of the world, security has become an important aspect of planning and management. • Security can be separated into the following areas of control: • Security of property to prevent unauthorized entry or exit • Controlled entry to individual guestrooms and apartments • Provision of strong rooms, safes, and secure stores for valuable items • Surveillance of persons, including employees, entering and leaving • Baggage handling and checking • Security of grounds Hygiene Failure to provide reasonable standards of hygiene in commercial hotels may be a statutory offense. Violations could result in closure of premises or cancellation of business registration in some countries. Areas subject to hygiene regulation includes: food purchase, storage, and preparation; staff accommodations (including overcrowding or lack of facilities); water supplies; sanitation and drainage (including disposal of waste); refuse storage and disposal; and the general cleanliness and upkeep of the premises. The architect must take all sanitary requirements into consideration, particularly when designing the back-of-the-house areas of the hotel.

Electricity and Gas Hotels may use natural gas (methane) or town gas (coal gas) supplied from mains, or liquified gas (propane, butane) from local storage in pressurized containers. Gas provides a fuel for combustion in boilers, heat exchanges, storage and instantaneous water heating systems, cooking equipment, and incinerators. Requirements for gas installations, including metering, control, safety, protection, air supply, and damper and flue arrangements, are all subject to local codes and regulations.

---------Global Initiatives for Sustainable Development--------- Sustainable development has become a significant issue with regard to hotel development and operations. Various global initiatives are underway to raise the level of education and communication on ways to reduce a hotel’s environmental footprint. Many environmental initiatives have been launched in recent years by governments, non-profit organizations, and multilateral development agencies. Many hotel companies on their own have tries to become more environmentally friendly organizations. Today there is investor interest in hotels that are developed based on sustainable building practices. As the economic benefits of these investments become more quantified, investor interest in “green” projects is expected to grow even greater in the years ahead.

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Chapter 6: Developing an International Hotel Project